Business Combinations

Acquisition of iSIGHT

On January 14, 2016, we acquired all of the outstanding shares of privately held iSIGHT, one of the world’s leading providers of cyber threat intelligence for global enterprises. The acquisition extends our intelligence network to create an advanced and comprehensive private cyber threat intelligence operation, providing customers with higher fidelity alerts, context to prioritize threats and the strategic insights to proactively prepare for threats that might target their industry or region.

In connection with this acquisition, we paid upfront cash consideration of $192.8 million, incurred liabilities of $35.6 million contingent upon the achievement of a threat intelligence bookings target on or before the end of the second quarter of 2018, and issued 1,793,305 shares of our common stock with an estimated fair value of $28.2 million, which will be released to former stockholders of iSIGHT upon the achievement of the same threat intelligence bookings target stated above. This resulted in total purchase consideration of $256.6 million. The number of shares was fixed at the completion of the acquisition and is the maximum number of shares that can be released. The contingent earn-out liability of $35.6 million is included in accrued compensation on the condensed consolidated balance sheet as of March 31, 2016, and will result in a cash payment of $41.3 million, if and when the threat intelligence bookings target is achieved.

The acquisition of iSIGHT 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 $1.9 million in general and administrative expenses. We also assumed and paid liabilities of $7.0 million for transaction costs incurred by iSIGHT prior to acquisition, which were accounted for separate from consideration transferred. 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 $256.6 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. Allocation of the preliminary purchase price is as follows (in thousands):



	Amount
Net tangible liabilities assumed	$	(18,366	)
Intangible assets	82,800
Deferred tax liability	(10,328		)
Goodwill	202,532
Total preliminary purchase price allocation	$	256,638

The preliminary purchase price exceeded the fair value of the net tangible 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 customer relationships, content, developed technology and other intangible assets. Customer relationship intangibles relate to iSIGHT's ability to sell current and future content, as well as products built around this content, to its existing customers. Content intangibles represent threat intelligence data gathered through the analysis of cyber-crimes, cyber-attacks, hacking, and cyber criminals. 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. The estimated useful life and fair values of the identifiable intangible assets are as follows (in thousands):



	Preliminary Estimated Useful Life (in years)	Amount
Customer relationships	8	$	32,600
Content	4	28,900
Developed technology	4-6	17,100
Trade name	5	3,100
Non-competition agreements	2	1,100
Total identifiable intangible assets		$	82,800

The value of customer relationships and content 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 customer relationships and content, which were discounted at rates of 15% and 14%, respectively.

The value of developed technology and 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 is applied to the projected revenues associated with the intangible asset to determine the amount of savings, which is then discounted to determine the fair value. The developed technology and trade name were valued using royalty rates of 10% and 1%, respectively, and discounted at rates of 14% and 15%, respectively.

The results of operations of iSIGHT have been included in our condensed consolidated statements of operations from the acquisition date, and contributed $9.4 million to our consolidated revenues and $2.3 million to our consolidated net loss during the three months ended March 31, 2016. Pro forma results of operations have not been presented because the acquisition was not material to our results of operations.

Acquisition of Invotas

On February 1, 2016, we acquired all of the outstanding shares of privately held Invotas, a provider of security automation and orchestration technology. This acquisition enables us to deliver a premier security orchestration capability as part of our global threat management platform to unify cyber attack detection results, threat intelligence and incident response elements of an organization’s security program into a single console, giving enterprises the ability to respond more quickly to attacks through automation.

In connection with this acquisition, we paid upfront cash consideration of $17.7 million and issued 742,026 shares of our common stock with an estimated fair value of $11.1 million. This resulted in total purchase consideration of $28.8 million. Additionally, we replaced unvested option awards with grants of 95,614 restricted stock units which will vest over the requisite service period of four years, and granted an additional 1,002,748 restricted stock units which will vest upon the achievement of stated performance milestones over a period of approximately three years, subject to continuing service during that time. These awards are being recognized as operating expense over the requisite service periods as they relate to post-combination services.

The acquisition of Invotas 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. We also assumed and paid liabilities of $0.7 million for transaction costs incurred by Invotas prior to acquisition, which were accounted for separate from consideration transferred. 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 $28.8 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. Allocation of the preliminary purchase price is as follows (in thousands):



	Amount
Net tangible liabilities assumed	$	(306	)
Intangible assets	8,400
Deferred tax liability	(703		)
Goodwill	21,364
Total preliminary purchase price allocation	$	28,755

The preliminary purchase price exceeded the fair value of the net tangible and identifiable intangible assets acquired, resulting in the recognition of goodwill. Goodwill is primarily attributable to increased 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, in-process research and development and other intangible assets. Developed technology intangibles 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 product offerings. The in-process research and development intangible represents the estimated fair value of acquired research projects which had not reached technological feasibility at acquisition date, but have since been developed into products. The estimated useful life and fair values of the identifiable intangible assets are as follows (in thousands):



	Preliminary Estimated Useful Life (in years)	Amount
Developed technology	4	$	4,500
In-process research and development	N/A	2,800
Customer relationships	10	800
Non-competition agreements	3	300
Total identifiable intangible assets		$	8,400

The value of developed technology and in-process research and development (IPR&D) was estimated using the excess earnings method, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect that 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 developed technology and IPR&D, which were discounted at rates of 16% and 17.3%, respectively.

The results of operations of Invotas have been included in our condensed consolidated statements of operations from the acquisition date, although such results did not have a material impact on our consolidated revenues or net loss during the three months ended March 31, 2016. 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

Changes in the carrying amount of goodwill for the three months ended March 31, 2016 are as follows (in thousands):



	Amount
Balance as of December 31, 2015	$	750,288
Goodwill acquired	223,896
Balance as of March 31, 2016	$	974,184

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



	As of March 31, 2016			As of December 31, 2015
Developed technology	$	99,793		$	78,193
Content	157,500			128,600
Customer relationships	108,700			75,300
Contract backlog	12,500			12,500
Trade names	15,500			12,400
Non-competition agreements	1,400			—
Total intangible assets subject to amortization	395,393			306,993
Less: accumulated amortization	(107,598		)	(92,433		)
Net intangible assets subject to amortization	287,795			214,560
In-process research and development	2,800			—
Total net intangible assets	$	290,595		$	214,560

Amortization expense of intangible assets for the three months ended March 31, 2016 and 2015 was $15.2 million and $11.8 million, respectively.

The expected annual amortization expense of intangible assets as of March 31, 2016 is presented below (in thousands):



Years Ending December 31,	Amount
2016 (remaining nine months)	$	47,401
2017	57,378
2018	45,694
2019	43,808
2020	30,186
2021 and thereafter	63,328
Total intangible assets subject to amortization	287,795
Total intangible assets with indefinite lives	2,800
Total	$	290,595