Business Combinations

12 Months Ended

Dec. 31, 2019

Acquisition of The Email Laundry

On October 20, 2017, we acquired all of the outstanding shares of The Email Laundry, a privately held email security company, which is expected to enhance our current email offerings. In connection with this acquisition, we paid cash consideration of $4.3 million and issued 259,425 shares of our common stock with an estimated fair value of $4.4 million, resulting in total purchase consideration of $8.7 million. The purchase price is subject to customary working capital and related adjustments. The purchase price was allocated to intangible assets of $2.7 million, goodwill of $6.4 million and tangible net liabilities of $0.3 million. The intangible assets are composed of technology and customer relationships, each with an estimated weighted average useful life of 3 years. The goodwill is primarily attributable to the know-how of the workforce and is not expected to be deductible for U.S. federal income tax purposes. The results of operations of The Email Laundry have been included in our consolidated statements of operations from the acquisition date. Pro forma financial information has not been presented for this acquisition as the impact to our consolidated financial statements was not material.

Acquisition of X15

On January 11, 2018, we acquired all outstanding shares of privately held X15, a data management company. We expect that the X15 technology will be incorporated into our platform and analytics capabilities going forward. In connection with this acquisition, we paid cash consideration of $5.3 million and issued 1,016,334 shares of our common stock with an estimated fair value of $15.4 million, resulting in total purchase consideration of $20.7 million. The purchase price was allocated to intangible assets of $6.1 million, goodwill of $15.1 million and net tangible liabilities of $0.5 million. The intangible asset relates to developed technology with an estimated weighted average useful life of 3 years. The goodwill is primarily attributable to the know-how of the workforce and is not expected to be deductible for U.S. federal income tax purposes. The results of operations of X15 have been included in our consolidated statements of operations from the acquisition date. Pro forma financial information has not been presented for this acquisition as the impact to our consolidated financial statements was not material.

Acquisition of Verodin

On May 28, 2019, we acquired all outstanding shares of privately held Verodin, a security instrumentation platform company. We expect that the Verodin technology will be integrated with our platform and analytics capabilities, as well as some of our professional services offerings, going forward. In connection with this acquisition, we paid cash consideration of $143.7 million and issued 8,404,609 shares of our common stock with an estimated fair value of $119.7 million. We also assumed unvested stock options, which are now

exercisable for our common stock, of which $1.5 million of the fair value has been accounted for as consideration for assumed awards pertaining to pre-combination service prior to acquisition. Based on the above, total purchase consideration for Verodin was $264.9 million.

The acquisition of Verodin was accounted for in accordance with the acquisition method of accounting for business combinations with FireEye as the accounting acquirer. We expensed the related acquisition costs of $0.6 million in general and administrative expenses. Under the acquisition method of accounting, the total purchase consideration is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The total purchase price of $264.9 million was allocated using information currently available to us. As a result, we may continue to adjust the preliminary purchase price allocation after obtaining more information regarding asset valuations, liabilities assumed, and revisions of preliminary estimates. Pro forma financial information has not been presented for this acquisition as the impact to our consolidated financial statements was not material. Allocation of the preliminary purchase price is as follows (in thousands):



	Amount
Net tangible assets assumed	$	15,036
Intangible assets	45,200
Deferred tax liability	(886		)
Goodwill	205,532
Total preliminary purchase price allocation	$	264,882

The preliminary purchase price exceeded the fair value of the net tangible assets and identifiable intangible assets acquired, resulting in the recognition of goodwill. Goodwill is primarily attributable to expected synergies in our subscription offerings and cross-selling opportunities. None of the goodwill is expected to be deductible for U.S. federal income tax purposes.

Intangible assets consist primarily of developed technology, customer relationships, trade name and contract backlog. Intangible assets attributable to developed technology include a combination of patented and unpatented technology, trade secrets, computer software and research processes that represent the foundation for the existing and planned new products to facilitate the generation of new content. Customer relationship intangibles relate to Verodin's ability to sell current and future content, as well as products built around this content, to its existing customers. Trade name is attributable to marketing goods and services under the Verodin brand. Contract backlog pertains to unbilled and unrecognized contracts yet to be fulfilled.

The estimated useful life and fair values of the identifiable intangible assets are as follows (dollars in thousands):



	Preliminary Estimated Useful Life (in years)	Amount
Developed technology	5	$	38,300
Customer relationships	5	4,600
Trade name	5	1,600
Contract backlog	2	700
Total identifiable intangible assets		$	45,200

The value of developed technology was estimated using the excess earnings method, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contribute to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the acquired technology, which were discounted at a rate of 12% to determine the fair value.

The value of customer relationships was estimated using the cost savings method, an income level approach (Level 3), which estimates the value of an asset based upon costs avoided through ownership of the asset. Estimated costs on projected revenues, excluding acquired contract backlog, were made using historical data pertaining to sales to new and existing customers. The cash flow impact of projected cost savings, primarily avoidance of legal costs pertaining to new customers and lower commission rates applicable to existing customers than new customers, were discounted at a rate of 11% to determine the fair value.

The value of the trade name was estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangibles asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate was applied to the projected revenues associated with the intangible asset to determine the amount of savings, which was at a rate of 12% to determine the fair value.

The value of the contract backlog was estimated by discounting estimated cash flows from existing orders, an income level approach (Level 3). Using expected timing of backlog revenue realization by quarter, the cash flow estimates resulting therefrom were reduced by estimated fulfillment costs associated with completing the backlog obligations, and the net cash flows were then discounted at a rate of 8% to determine fair value.

Discount rates for each respective intangible asset were determined by accounting for the risk associated with each asset, including required technology development and customer acquisition required to support respective projections, the uncertainty of market success and the risk inherent with projected financial results. The estimated useful lives were determined by evaluating the expected economic and useful lives of the assets and of similar intangible assets from previous business combinations and adjusting accordingly after taking into account circumstances that may be unique to Verodin.

Acquisition of Cloudvisory LLC

On January 17, 2020, we acquired Cloudvisory LLC, a provider of cloud visibility and control solutions. As consideration for the acquisition, we paid approximately $13.5 million in cash. We are currently in the process of completing the preliminary purchase price allocation, which will be included in our Quarterly Report on Form 10-Q for the quarter ending March 31, 2020.

Goodwill and Purchased Intangible Assets

Changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 were as follows (in thousands):



	Amount
Balance as of December 31, 2017	$	984,661
Goodwill acquired	15,143
Balance as of December 31, 2018	$	999,804
Goodwill acquired	205,488
Balance as of December 31, 2019	$	1,205,292

Purchased intangible assets consisted of the following (in thousands):



	As of December 31,
	2019			2018
Developed technology	$	148,303		$	110,003
Content	158,700			158,700
Customer relationships	115,690			111,090
Contract backlog	13,200			12,500
Trade names	17,160			15,560
Non-competition agreements	1,400			1,400
Total intangible assets	$	454,453		409,253
Less: accumulated amortization	(320,033		)	(266,091		)
Total net intangible assets	$	134,420		$	143,162

Amortization expense of intangible assets during the years ended December 31, 2019, 2018 and 2017 was $53.9 million, $50.3 million and $59.3 million, respectively.

The expected future annual amortization expense of intangible assets as of December 31, 2019 is presented below (in thousands):



Years Ending December 31,	Amount
2020	$	43,154
2021	38,379
2022	27,109
2023	22,005
2024	3,692
2025 and thereafter	81
Total	$	134,420