Business Combinations

Acquisitions in 2014

On May 9, 2014, we acquired all outstanding shares of privately held nPulse Technologies, Inc. (“nPulse”), a performance leader in network forensics based in Charlottesville, Virginia. The acquisition of nPulse strengthens our position as a leader in advanced threat detection and incident response management solutions.

The total purchase consideration of $56.6 million consisted of $55.2 million in cash, $0.1 million of equity awards assumed, and 54,319 shares of our common stock, with a fair value of $1.3 million which will vest upon the achievement of milestones. The number of shares was fixed at the completion of the acquisition, and is the maximum number of shares that can vest over a period of approximately three and half years from the acquisition date.

The acquisition of nPulse 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 $0.5 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 purchase price was finalized during 2015. Total allocation of the purchase price is as follows (in thousands):



	Amount
Net tangible liabilities assumed	$	(1,833	)
Intangible assets	24,700
Deferred tax asset	442
Deferred tax liability	(8,368		)
Goodwill	41,671
Total purchase price allocation	$	56,612

None of the goodwill is deductible for U.S. federal income tax purposes.

Intangible assets consist primarily of developed technology, customer relationships and in-process research and development. Developed technology intangible includes 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 and services. Customer relationships intangible relates to nPulse’s ability to sell existing, in-process and future products and services to its existing and potential customers. The in-process research and development intangible represents the estimated fair value of acquired research projects which have not reached technological feasibility at acquisition date, but have since been developed into products and services. The estimated useful life and fair values of the identifiable intangible assets are as follows (in thousands):



	Estimated Useful Life (in years)	Amount
Developed technology	6	$	10,100
Customer relationships	8	8,000
In-process research and development	N/A	6,600
Total		$	24,700

The results of operations of nPulse have been included in our consolidated statements of operations from the acquisition date. Pro forma results of operations have not been presented because the acquisition was not material to our results of operations.

Acquisitions in 2013

On December 30, 2013, we acquired privately held Mandiant Corporation (“Mandiant”), a leading provider of advanced end point security products and security incident response management solutions. We believe this acquisition creates an advanced threat protection vendor with the ability to find and stop attacks at every stage of the attack life cycle.

At the closing on December 30, 2013, we acquired all the outstanding shares of capital stock of Mandiant for 16,123,011 shares of our common stock and $106.5 million in cash. Under the terms and conditions of the Merger Agreement, each outstanding share of Mandiant common stock was converted into the right to receive (a) $5.22 in cash, without interest, and subject to applicable withholding tax, and (b) 0.8126 of a share of our common stock. This transaction is referred to herein as the merger. In connection with the merger, all of the outstanding stock options and restricted stock awards of Mandiant were converted into stock options and restricted stock awards, respectively, denominated in shares of our common stock. The common stock issued, along with the fair value of vested equity awards assumed and cash payment, resulted in a purchase price of $900.8 million for accounting purposes. The total purchase consideration is as follows (in thousands):



	Amount
Cash	$	106,538
Fair value of common stock	704,414
Fair value of equity awards assumed	89,838
Total purchase consideration	$	900,790

The acquisition of Mandiant 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 in the amount of $8.5 million in general and administrative expenses. Under the acquisition method of accounting, the total purchase price as shown in the table above is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The total purchase price allocation was finalized in calendar year 2014. Total allocation of the purchase price is as follows (in thousands):



	Amount
Net tangible assets	$	10,797
Intangible assets	276,200
Deferred tax liability	(91,111		)
Goodwill	704,904
Total purchase price allocation	$	900,790

As noted above, in connection with the acquisition, we also assumed and exchanged Mandiant’s outstanding stock options and restricted stock awards. The assumed options and restricted stock awards continue to have the same terms and conditions as set forth in the original stock option and restricted stock award agreements. The fair values of the equity awards assumed were determined using a Black-Scholes-Merton option-pricing model. The fair values of unvested equity awards of $119.5 million is being recorded as operating expense over the remaining requisite service periods as they relate to post-combination services, while the fair values of vested equity based awards of $89.8 million were included in total purchase price as they relate to pre-combination services.

None of the goodwill recorded as part of the Mandiant acquisition is deductible for U.S. federal income tax purposes.

Intangible assets consist primarily of developed technology, content, customer relationship and other intangible assets. Content intangibles represent threat intelligence, which is continually gathered from ongoing monitoring of endpoints and by incident response and remediation teams. The intangible assets attributable to customer relationships relate to Mandiant’s ability to sell existing, in-process and future versions of its products and services to its existing customers. Developed technology intangibles includes a combination of patented and unpatented technology, trade secrets, and computer software and processes that represent the foundation for planned new products and services. The useful life and fair values of the identifiable intangible assets are as follows (in thousands):



	Useful Life (in years)	Amount
Developed technology	4 - 6	$	54,600
Customer relationships	8	65,400
In-process research and development	N/A	1,400
Content	10	128,600
Contract backlog	1 - 3	13,800
Trade names	4	12,400
Total		$	276,200

The results of operations of Mandiant have been included in our consolidated statements of operations from the acquisition date, though Mandiant operations made no material contribution to our revenue or expenses for the year ended December 31, 2013. The following table presents pro forma results of operations of the Company and Mandiant as if the companies had been combined as of January 1, 2012, and includes pro forma adjustments related to the amortization of acquired intangible assets and share-based compensation expense. Direct and incremental transaction costs are excluded from the year ended December 31, 2013 pro forma condensed combined financial information presented below.



	Year Ended December 31, 2013
Pro forma revenue	$	266,458
Pro forma loss from operations	(296,476		)
Pro forma net loss	$	(246,617	)

On September 3, 2013, we acquired all outstanding shares of Secure DNA Managed Services, Inc. and certain affiliated entities (collectively, “Secure DNA”), a security solutions provider based in Honolulu, Hawaii, focused on network monitoring and management, secured hosting, cloud e-mail protection, incident response and other network security related services. The acquisition of Secure DNA provides us with the developed technology platform that will facilitate the delivery of the advanced security services for all our products.

We accounted for the acquisition of Secure DNA as a purchase of a business. We expensed the related acquisition costs, consisting primarily of legal expenses in the amount of $0.2 million, and these expenses were presented as general and administrative expenses on the consolidated statements of operations for the year ended December 31, 2013. Under the acquisition method of accounting, the total purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed.

The total purchase consideration of $4.9 million consisted of $4.1 million in cash and the issuance of 50,000 shares of our common stock with a fair value of $16.00 per share on the acquisition date. We also assumed deferred tax liabilities related to the fair value of the developed technology and customer relationships we obtained in the acquisition as well as other assumed liabilities related to normal operations. Primarily as a result of the deferred tax liabilities assumed in the acquisition, we recognized goodwill of $2.3 million equal to the excess of the purchase consideration over the fair value of the assets acquired and the liabilities assumed. None of the goodwill is deductible for income tax purposes.

The acquisition also included a contingent obligation of up to $3.0 million, consisting of 190,000 shares of our common stock with a fair value of $16.00 per share on the acquisition date, to certain employees from Secure DNA if specified product and service milestones are met within the two years of the acquisition date. As the obligation is contingent upon their continuous employment with us, the contingent obligation is being recorded as compensation expense ratably over the respective service periods. As of December 31, 2015, all milestones had been achieved resulting in the vesting of these shares.

The following table summarizes the consideration paid and the fair values of the assets acquired and liabilities assumed at the acquisition date for the Secure DNA acquisition (in thousands):



	Amount
Developed technology	$	1,300
Customer relationships	1,900
Deferred tax liabilities	(1,290		)
Net assets acquired	665
Goodwill	2,302
Fair value of total consideration transferred	$	4,877

The results of operations of Secure DNA have been included in our consolidated statements of operations from the acquisition date. Pro forma results of operations have not been presented because the acquisition was not material to our results of operations.

Goodwill and Purchased Intangible Assets

There were no changes in the carrying amount of goodwill for the year ended December 31, 2015. The changes in the carrying amount of goodwill for the year ended December 31, 2014 are as follows (in thousands):



	Amount
Balance as of December 31, 2013	$	706,327
Goodwill acquired	41,538
Deferred tax adjustments	1,156
Other adjustments	1,267
Balance as of December 31, 2014	$	750,288

Intangible assets consist of the following (in thousands):



	As of December 31,
	2015			2014
Developed technology	$	78,193		$	78,193
Content	128,600			128,600
Customer relationships	75,300			75,300
Contract backlog	13,000			13,000
Trade names	12,400			12,400
Total intangible assets subject to amortization	307,493			307,493
Less: accumulated amortization	(92,933		)	(45,868		)
Net intangible assets subject to amortization	$	214,560		$	261,625

The developed technology, content and contract backlog is being amortized to cost of sales over the economic life of the related assets, which was estimated to be three to ten years as of the acquisition date. The customer relationships and trade names is being amortized to sales and marketing expense over the economic life of the related assets, which was estimated to be four to eight years as of the acquisition date. As of December 31, 2015, all in-process research and development obtained in our acquisitions of Mandiant and nPulse was completed. Amortization expense of intangible assets for the years ended December 31, 2015, 2014 and 2013 was $47.1 million, $45.2 million and $1.5 million, respectively.

The expected annual amortization expense of intangible assets as of December 31, 2015 is presented below (in thousands):



Years Ending December 31,	Amount
2016	$	46,448
2017	40,503
2018	29,346
2019	27,574
2020	22,635
2021 and thereafter	48,054
Total	$	214,560