Fortinet, Inc. 10-K

ITEM 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Annual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2020 to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management ’ s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act. Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) set forth by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2020. Management reviewed the results of its assessment with our Audit Committee. The effectiveness of our internal control over financial reporting as of December 31, 2020 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report, which appears in this Item under the heading “Report of Independent Registered Public Accounting Firm.” Changes in Internal Control over Financial Reporting In January 2019, we implemented certain internal controls over financial reporting in connection with our adoption of Topic 842. There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 108 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Fortinet, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Fortinet, Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control–Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control–Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 19, 2021, expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP San Jose, California February 19, 2021 109 Table of Contents ITEM 9B. Other Information None. 110 Table of Contents Part III ITEM 10. Directors, Executive Officers and Corporate Governance Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. As part of our system of corporate governance, our board of directors has adopted a code of business conduct and ethics. The code applies to all of our employees, officers (including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions), agents and representatives, including our independent directors and consultants, who are not our employees, with regard to their Fortinet-related activities. Our code of business conduct and ethics is available on our website at www.fortinet.com under “Corporate—Investor Relations—Corporate Governance.” We will post on this section of our website any amendment to our code of business conduct and ethics, as well as any waivers of our code of business conduct and ethics, that are required to be disclosed by the rules of the SEC or the Nasdaq Stock Market. ITEM 11. Executive Compensation Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 13. Certain Relationships and Related Transactions, and Director Independence Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. ITEM 14. Principal Accounting Fees and Services Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. 111 Table of Contents Part IV ITEM 15. Exhibits, Financial Statement Schedules (a) The following documents are filed as part of this Annual Report on Form 10-K: 1. Financial Statements: The information concerning Fortinet’s financial statements and the Report of Independent Registered Public Accounting Firm required by this Item 15(a)(1) is incorporated by reference herein to the section of this Annual Report on Form 10-K in Part II, Item 8, titled “Financial Statements and Supplementary Data.” 2. Financial Statement Schedule: The following financial statement schedule of Fortinet, Inc., for the fiscal years ended December 31, 2020, 2019 and 2018, is filed as part of this Annual Report on Form 10-K and should be read in conjunction with our consolidated financial statements. SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS Year Ended December 31, 2020 (1) 2019 (1) 2018 (1) (in millions) Sales Returns Reserve and Allowance for Credit Losses/Doubtful Accounts Beginning balance $ 1.2 $ 0.9 $ 14.5 Charged to expenses, net of deductions 1.3 0.3 — Reclassification due to adoption of Topic 606 (1) — — ( 13.6 ) Ending balance $ 2.5 $ 1.2 $ 0.9 (1) Effective January 1, 2018, we reclassified our sales returns reserve in the amount of $ 13.6 million from accounts receivable to accrued liabilities, in connection with the adoption of Topic 606. The ending balances for the years ended December 31, 2020 and 2019 consist only of the allowance for credit losses or doubtful accounts. Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the consolidated financial statements or notes thereto. 3. Exhibits : See Item 15(b) below. We have filed, or incorporated into this Annual Report on Form 10-K by reference, the exhibits listed on the accompanying Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K. (b) Exhibits: The exhibits listed on the Exhibit Index immediately preceding the signature page of this Annual Report on Form 10-K is incorporated herein by reference as the list of exhibits required by this Item 15(b). (c) Financial Statement Schedules: See Item 15(a) above. 112 Table of Contents EXHIBIT INDEX Exhibit Number Description Form Incorporated by reference herein Date Filed Exhibit Number 3.1 Amended and Restated Certificate of Incorporation Current Report on Form 8-K (File No. 001-34511) June 28, 2018 3.1 3.2 Amended and Restated Bylaws Current Report on Form 8-K (File No. 001-34511) July 21, 2020 3.1 4.1 Specimen common stock certificate of the Company Registration Statement on Form S-l, as amended (File No. 333-161190) November 2, 2009 4.1 4.2 * Description of Securities Registered Pursuant to Section 12 of the Exchange Act 10.1 † Forms of Indemnification Agreement between the Company and its directors and officers Registration Statement on Form S-l (File No. 333-161190) August 10, 2009 10.1 10.2 † Amended and Restated 2009 Equity Incentive Plan Quarterly Report on Form 10-Q (File No. 001-34511) August 1, 2019 10.1 10.3 † Forms of stock option agreement under Amended and Restated 2009 Equity Incentive Plan Annual Report on Form 10-K (File No. 001-34511) February 28, 2012 10.5 10.4 † Form of performance stock unit award agreement under Amended and Restated 2009 Equity Incentive Plan Quarterly Report on Form 10-Q (File No. 001-34511) August 6, 2013 99.1 10.5 † Forms of restricted stock unit award and performance stock unit award agreement under Amended and Restated 2009 Equity Incentive Plan (Additional Forms) Annual Report on Form 10-K (File No. 001-34511) March 2, 2015 10.7 10.6 † Form of restricted stock unit award agreement under Amended and Restated 2009 Equity Incentive Plan (Additional Form) Annual Report on Form 10-K (File No. 001-34511) February 26, 2020 10.6 10.7 † Form of stock option award agreement under Amended and Restated 2009 Equity Incentive Plan (Additional Form) Annual Report on Form 10-K (File No. 001-34511) February 26, 2020 10.7 10.8 †* Fortinet, Inc. Amended Bonus Plan 10.9 † Fortinet, Inc. Cash and Equity Incentive Plan Quarterly Report on Form 10-Q (File No. 001-34511) November 5, 2013 10.1 10.10 † Form of Change of Control Agreement between the Company and its directors Quarterly Report on Form 10-Q (File No. 001-34511) August 4, 2015 10.1 10.11 † Amended and Restated Change of Control Severance Agreement, effective as of August 7, 2019, between the Company and Ken Xie Quarterly Report on Form 10-Q (File No. 001-34511) August 1, 2019 10.2 10.12 † Amended and Restated Change of Control Severance Agreement, effective as of August 7, 2019, between the Company and Michael Xie Quarterly Report on Form 10-Q (File No. 001-34511) August 1, 2019 10.3 10.13 † Amended and Restated Change of Control Severance Agreement, effective as of August 7, 2019, between the Company and John Whittle Quarterly Report on Form 10-Q (File No. 001-34511) August 1, 2019 10.4 10.14 † Offer Letter, dated as of October 23, 2006, by and between the Company and John Whittle Registration Statement on Form S-l, as amended (File No. 333-161190) August 10, 2009 10.10 10.15 † Offer Letter, dated as of April 3, 2014, by and between the Company and Keith Jensen Annual Report on Form 10-K (File No. 001-34511) February 26, 2018 10.22 10.16 † Amended and Restated Change of Control Severance Agreement, effective as of August 7, 2019, between the Company and Keith Jensen Quarterly Report on Form 10-Q (File No. 001-34511) August 1, 2019 10.5 21.1 * List of subsidiaries 23.1 * Consent of Independent Registered Public Accounting Firm 24.1 * Power of Attorney (incorporated by reference to the signature page of this Annual Report on Form 10-K) 113 Table of Contents 31.1 * Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 * Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 ** Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS * Inline XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. 101.SCH * Inline XBRL Taxonomy Extension Schema Document 101.CAL * Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF * Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB * Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE * Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 * Cover Page Interactive Data File - the cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 is formatted in inline XBRL. ________________________________ † Indicates management compensatory plan, contract or arrangement. * Filed herewith. ** Furnished herewith. This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. 114 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 19, 2021. FORTINET, INC. By: /s/ Ken Xie Ken Xie, Chief Executive Officer and Chairman (Duly Authorized Officer and Principal Executive Officer) FORTINET, INC. By: /s/ Keith Jensen Keith Jensen, Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer and Principal Accounting Officer) 115 Table of Contents POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ken Xie and Keith Jensen, jointly and severally, his or her attorney-in-fact, with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Ken Xie Chief Executive Officer and Chairman February 19, 2021 Ken Xie (Principal Executive Officer) /s/ Keith Jensen Chief Financial Officer February 19, 2021 Keith Jensen (Principal Financial Officer and Principal Accounting Officer) /s/ Michael Xie President, Chief Technology Officer and Director February 19, 2021 Michael Xie /s/ Kelly Ducourty Director February 19, 2021 Kelly Ducourty /s/ Kenneth A. Goldman Director February 19, 2021 Kenneth A. Goldman /s/ Ming Hsieh Director February 19, 2021 Ming Hsieh /s/ Jean Hu Director February 19, 2021 Jean Hu /s/ William H. Neukom Director February 19, 2021 William H. Neukom /s/ Christopher B. Paisley Director February 19, 2021 Christopher B. Paisley /s/ Judith Sim Director February 19, 2021 Judith Sim 116