UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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(Mark One)




☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~March~~June 3130, 2020




☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number 001-38253

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FORESCOUT TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

———————————————



Delaware		51-0406800
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

190 West Tasman Drive
San Jose	California	95134
(Address of principal executive offices, including zip code)

(408) 213-3191

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	FSCT	The NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
		If an emerging growth company, indicate by checkmark if the registrant has not elected to use the extended transition period for complying with any new or revised financial accounting standards providing pursuant to Section 7(a)(2)(B) of the Securities Act	☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares outstanding of the registrant’s common stock as of ~~May~~July 131, 2020 was 49,~~264~~712,~~795~~035.

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION	6
Item 1.	Financial Statements	6
	Condensed Consolidated Balance Sheets as of March 31,2020 and December 31, 2019	6
	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	6
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019	7
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 and 2019	7
	Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019	8
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019	8
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019	9
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019	9
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019	10
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019	10
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1921
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3236
Item 4.	Controls and Procedures	3237
	PART II - OTHER INFORMATION	3438
Item 1.	Legal Proceedings	3438
Item 1A.	Risk Factors	3441
Item 6.	Exhibits	3543
	Signatures

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “would,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

• ~~the merger agreement and~~ our proposed acquisition by entities affiliated with Advent International Corporation (“Advent”), including the proposed tender offer in connection therewith;


•	the effect of the COVID-19 pandemic and related actions by individuals, governments, and private industry on our business, markets, and the economy


•	the evolution of the cyberthreat landscape facing enterprises in the United States and other countries;


•	developments and trends in the domestic and international markets for network security products and related services;


•	our expectations regarding the size of our target market;


•	our ability to educate prospective end-customers about our technical capabilities and the use and benefits of our products, and to achieve increased market acceptance of our solution;


•	our beliefs and objectives regarding our prospects and our future results of operations and financial condition;


•	the effects of increased competition in our target markets and our ability to compete effectively;


•	our business plan and our ability to manage our growth effectively;


•	our investment in our sales force and our expectations concerning the productivity and efficiency of our expanding sales force as our sales representatives become more seasoned;


•	our growth strategy to maintain and extend our technology leadership, expand and diversify our end-customer base, deepen our existing end-customer relationships, and attract and retain highly skilled security professionals;


•	our ability to enhance our existing products and technologies and develop or acquire new products and technologies;


•	our plans to attract new end-customers, retain existing end-customers, and increase our annual revenue;


•	our expectations concerning renewal rates of Software Products subscription contracts and support and maintenance contracts (collectively known as “term contracts”) with end-customers;


•	our plans to expand our international operations;


•	our expectations regarding future acquisitions of, or investments in, complementary companies, services, or technologies;


•	our ability to continue to generate a significant portion of our revenue from public sector customers;


•	the effects on our business of evolving information security and data privacy laws and regulations, government export or import controls and any failure to comply with the U.S. Foreign Corrupt Practices Act and similar laws;


•	our ability to maintain, protect, and enhance our brand and intellectual property;


•	fluctuations in our quarterly results of operations and other operating measures (including developments and volatility arising from COVID-19 and customer uncertainty related to the acquisition);


•	our expectations regarding changes in our cost of revenue, gross margins, and operating costs and expenses;


•	our expectations regarding the portions of our revenue represented by license revenue, subscription revenue, and professional services revenue;


•	our expectations concerning the impact on our results of operations of development of our distribution programs and sales through our channel partners;


•	our expectations of material future costs related to restructuring plans;


•	the impact on our revenue, gross margin, and profitability of future investments in the enhancement of Forescout eyeSight, Forescout eyeControl, Forescout eyeExtend, SilentDefense, and SilentDefense Command Center, and expansion of our sales and marketing programs;


•	the impact of the Tax Cuts and Jobs Act on our business;


•	our ability to successfully acquire and integrate companies and assets;


•	sufficiency of our existing liquidity sources to meet our cash needs; and


•	our potential use of foreign exchange forward contracts to hedge our foreign currency risk and our general use of our foreign currency.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this Quarterly Report on Form 10-Q.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this Quarterly Report on Form 10-Q primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, operating results, cash flows, or prospects. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors, including, but not limited to, those described in the section titled “Risk Factors” and elsewhere in ~~this~~our ~~Quarterly~~filings ~~Report~~with onthe ~~Form~~SEC ~~10-Q~~ and, in particular, ~~the~~those risks discussed in Part I, Item 1A of our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q ~~and those discussed in other documents we file with the SEC~~. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this Quarterly Report on Form 10-Q. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information, or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements. You should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments we may make.

PART I. FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except par value)

	March 31, 2020			December 31, 2019
	June 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	8354,~~795~~947		$	69,030
Marketable securities	162,~~126~~021			29,181
Accounts receivable	3963,~~650~~924			84,168
Inventory	~~377~~1,418			372
Deferred commissions - current	1213,~~854~~350			12,843
Prepaid expenses and other current assets	1211,~~867~~383			17,024
Total current assets	~~165~~147,~~669~~043			212,618
Deferred commissions - non-current	2120,~~294~~848			23,036
Property and equipment, net	2220,~~618~~718			23,835
Operating lease right-of-use assets	2827,~~326~~265			29,626
Restricted cash - non-current	1,~~530~~554			1,555
Intangible assets, net	1817,~~353~~339			19,367
Goodwill	98,018			98,018
Other assets	76,~~460~~946			8,172
Total assets	$	~~363~~339,~~268~~731		$	416,227
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	611,~~377~~899		$	10,692
Accrued compensation	2629,~~881~~770			34,007
Accrued expenses	1516,~~397~~381			16,279
Deferred revenue - current	~~111~~104,~~402~~191			112,232
Notes payable - current	64,~~402~~550			8,248
Revolving credit facility	16,000			—
Operating lease liabilities - current	5,812			5,840
Operating lease liabilities - current	5,704			5,840
Total current liabilities	172,603			187,298
Total current liabilities	188,163			187,298
Deferred revenue - non-current	67,274			75,366
Deferred revenue - non-current	68,438			75,366
Operating lease liabilities - non-current	29,211			32,125
Operating lease liabilities - non-current	30,333			32,125
Other liabilities	23,638			23,893
Other liabilities	23,705			23,893
Total liabilities	292,726			318,682
Total liabilities	310,639			318,682
Stockholders' equity:
Common stock, $0.001 par value; 1,000,000 shares authorized;
49,040 and 48,064 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively	49			48
49,550 and 48,064 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively	50			48
Additional paid-in capital	~~744~~762,~~299~~187			727,922
Accumulated other comprehensive loss	(~~688~~678		)	(633		)
Accumulated deficit	(~~691~~714,~~031~~554		)	(629,792		)
Total stockholders’ equity	5247,~~629~~005			97,545
Total liabilities and stockholders' equity	$	~~363~~339,~~268~~731		$	416,227

See Notes to Condensed Consolidated Financial Statements.

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share amounts)

	Three Months EndedMarch 31,
	Three Months EndedJune 30,						Six Months EndedJune 30,
	2020			2019			2020			2019
Revenue:
License	$	1437,~~799~~577		$	3738,~~680~~831		$	52,376		$	76,511
Subscription	37,~~526~~612			3334,~~799~~822			75,138			68,621
Professional services	4,~~828~~687			4,~~089~~627			9,515			8,716
Total revenue	5779,~~153~~876			7578,~~568~~280			137,029			153,848
Cost of revenue:
License	56,~~419~~282			75,~~607~~622			11,701			13,229
Subscription	7,~~013~~041			5,~~207~~599			14,054			10,806
Professional services	76,~~165~~148			6,~~186~~235			13,313			12,421
Total cost of revenue	19,~~597~~471			1917,~~000~~456			39,068			36,456
Total gross profit	3760,~~556~~405			5660,~~568~~824			97,961			117,392
Operating expenses:
Research and development	2321,~~246~~514			1819,~~497~~440			44,760			37,937
Sales and marketing	4738,~~288~~988			5556,~~923~~173			86,276			112,096
General and administrative	2421,~~481~~733			1615,~~213~~838			46,214			32,051
Restructuring	~~2,512~~859			—			3,371			—
Total operating expenses	9783,~~527~~094			9091,~~633~~451			180,621			182,084
Loss from operations	(5922,~~971~~689		)	(3430,~~065~~627		)	(82,660		)	(64,692		)
Interest expense	(~~235~~118		)	(93142		)	(353		)	(235		)
Other (expense) income, net	(601		)	617
Other income (expense), net	572			505			(29		)	1,122
Loss before income taxes	(6022,~~807~~235		)	(3330,~~541~~264		)	(83,042		)	(63,805		)
Income tax provision	~~432~~1,288			~~711~~496			1,720			1,207
Net loss	$	(6123,~~239~~523	)	$	(3430,~~252~~760	)	$	(84,762	)	$	(65,012	)
Net loss per share, basic and diluted	$	(10.2648	)	$	(0.7868	)	$	(1.73	)	$	(1.45	)
Weighted-average shares used to compute net loss per share, basic and diluted	4849,~~593~~371			4445,~~196~~494			48,982			44,848

See Notes to Condensed Consolidated Financial Statements.

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

	Three Months EndedMarch 31,
	Three Months EndedJune 30,						Six Months EndedJune 30,
	2020			2019			2020			2019
Net loss	$	(6123,~~239~~523	)	$	(3430,~~252~~760	)	$	(84,762	)	$	(65,012	)
Other comprehensive (loss) income, net of tax:
Change in fair value adjustment on marketable securities	~~(55~~10		)	7560			(45		)	135
Foreign currency translation adjustments	—			(21,~~054~~602		)	—			(452		)
Comprehensive loss	$	(6123,~~294~~513	)	$	(3629,~~231~~098	)	$	(84,807	)	$	(65,329	)

See Notes to Condensed Consolidated Financial Statements.

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)

	Three Months Ended March 31, 2020
	Six Months Ended June 30, 2020
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
	Shares	Amount
Balance as of December 31, 2019	48,064	$	48	$	727,922	$	(633	)	$	(629,792	)	$	97,545
Other comprehensive loss, net of tax	—	—		—		(55		)	—			(55		)
Stock-based compensation	—	—		13,478		—			—			13,478
Issuance of common stock in connection with employee equity incentive plans	976	1		2,899		—			—			2,900
Net loss	—	—		—		—			(61,239		)	(61,239		)
Balance as of March 31, 2020	49,040	$	49	$	744,299	$	(688	)	$	(691,031	)	$	52,629
Other comprehensive income, net of tax	—	—		—		10			—			10
Stock-based compensation	—	—		12,522		—			—			12,522
Issuance of common stock in connection with employee equity incentive plans	510	1		5,366		—			—			5,367
Net loss	—	—		—		—			(23,523		)	(23,523		)
Balance as of June 30, 2020	49,550	$	50	$	762,187	$	(678	)	$	(714,554	)	$	47,005

	Three Months Ended March 31, 2019
	Six Months Ended June 30, 2019
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
	Shares	Amount
Balance as of December 31, 2018	43,403	$	43	$	639,237	$	(302	)	$	(511,257	)	$	127,721
Other comprehensive loss, net of tax	—	—		—		(1,979		)	—			(1,979		)
Stock-based compensation	—	—		13,828		—			—			13,828
Issuance of common stock in connection with employee equity incentive plans	1,706	2		9,407		—			—			9,409
Vesting of early exercised stock options	24	—		202		—			—			202
Net loss	—	—		—		—			(34,252		)	(34,252		)
Balance as of March 31, 2019	45,133	$	45	$	662,674	$	(2,281	)	$	(545,509	)	$	114,929
Other comprehensive income, net of tax	—	—		—		1,662			—			1,662
Stock-based compensation	—	—		14,065		—			—			14,065
Issuance of common stock in connection with employee equity incentive plans	746	1		7,014		—			—			7,015
Vesting of early exercised stock options	24	—		204		—			—			204
Net loss	—	—		—		—			(30,760		)	(30,760		)
Balance as of June 30, 2019	45,903	$	46	$	683,957	$	(619	)	$	(576,269	)	$	107,115

See Notes to Condensed Consolidated Financial Statements.

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Three Months EndedMarch 31,
	Six Months EndedJune 30,
	2020			2019
Cash flows from operating activities:
Net loss	$	(6184,~~239~~762	)	$	(3465,~~252~~012	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation	1325,~~858~~625			1327,~~828~~893
Depreciation and amortization	36,~~056~~465			25,~~845~~790
Other	~~358~~655			(158		)
Changes in operating assets and liabilities
Accounts receivable	4420,~~518~~244			2212,~~227~~177
Inventory	(~~196~~1,293		)	~~253~~(593		)
Deferred commissions	1,~~731~~681			1,~~520~~809
Prepaid expenses and other current assets	45,~~168~~142			~~(203~~318		)
Other assets	~~328~~536			~~385~~551
Accounts payable	(41,~~274~~297		)	(2,~~705~~509		)
Accrued compensation	(74,~~126~~237		)	(~~4,512~~905		)
Accrued expenses	~~(1,715~~152		)	~~549~~407
Deferred revenue	(716,~~758~~133		)	61,~~559~~495
Other liabilities	(~~172~~143		)	(40160		)
Net cash (used in) provided by operating activities	(14,463		)	6,439
Net cash used in operating activities	(44,771		)	(18,747		)
Cash flows from investing activities:
Purchases of property and equipment	(~~823~~1,355		)	(13,~~589~~402		)
Purchases of marketable securities	—			(3763,~~651~~569		)
Proceeds from maturities of marketable securities	1327,000			2953,~~123~~354
Net cash provided by (used in) investing activities	1225,~~177~~645			(1013,~~117~~617		)
Cash flows from financing activities:
Proceeds from revolving credit facility	16,000			—
Repayments of notes payable	(1,875		)	(1,875		)
Repayment of revolving credit facility	(16,000		)	—
Proceeds from sales of shares through employee equity incentive plans	5,207			12,173
Repayments of notes payable	(3,750		)	(3,749		)
Payment related to shares withheld for taxes on vesting of restricted stock units	(2,319		)	(2,764		)
Proceeds from sales of shares through employee equity incentive plans	11,583			20,726
Others	13			—
Payment related to shares withheld for taxes on vesting of restricted stock units	(3,316		)	(4,302		)
Net cash provided by financing activities	17,026			7,534
Others	25			—
Effect of exchange rate changes on cash and cash equivalents	—			(70		)
Net cash provided by financing activities	4,542			12,675
Net change in cash, cash equivalents, and restricted cash for period	14,740			3,786
Effect of exchange rate changes on cash and cash equivalents	—			(4		)
Net change in cash, cash equivalents, and restricted cash for period	(14,584		)	(19,693		)
Cash, cash equivalents, and restricted cash at beginning of period	71,591			69,012
Cash, cash equivalents, and restricted cash at end of period	$	8657,~~331~~007		$	7249,~~798~~319

Reconciliation of cash, cash equivalents, and restricted cash within the condensed consolidated balance sheets to the amounts shown in the statements of cash flows above:
Cash and cash equivalents	$	8354,~~795~~947	$	7046,~~663~~872
Restricted cash included in prepaid expenses and other current assets	~~1,006~~506		~~852~~1,154
Restricted cash - non-current	1,~~530~~554		1,~~283~~293
Total cash, cash equivalents, and restricted cash	$	8657,~~331~~007	$	7249,~~798~~319

See Notes to Condensed Consolidated Financial Statements.

FORESCOUT TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of Business and Summary of Significant Accounting Policies

Company and Background

Forescout Technologies, Inc. (the “Company”) was incorporated in the State of Delaware and commenced operations in April 2000. The Company designs, develops, and markets device visibility, control, and orchestration software that helps organizations gain complete situational awareness of all devices in their interconnected environment and orchestrate actions to mitigate both their cyber and operational risk.

The Company offers its solution across two product groups: (i) products for visibility and control capabilities, and (ii) products for orchestration capabilities. The Company’s products for visibility and control capabilities consist of eyeSight, eyeSegment, eyeControl, and SilentDefense; eyeSight, eyeSegment, and eyeControl provide for visibility and control capabilities across the extended enterprise, from campus to data center to hybrid cloud to operational technology (“OT”) devices, while SilentDefense provides for visibility and control capabilities deeper within the OT portion of the network. The Company’s products for orchestration capabilities are comprised of its portfolio of eyeExtend family of products.

The Company offers its solution across two product types: (i) software products and (ii) hardware products. The Company’s software products include eyeSight, eyeSegment, eyeControl, eyeExtend, SilentDefense, and SilentDefense Command Center (“Software Products”). The Company’s hardware products include hardware that is sold separately for use with the Company’s Software Products and appliances that are embedded with the Company’s software (“Hardware Products”).

The Company sells its Software Products, Hardware Products, support and maintenance contracts, and professional services to end-customers through distributors and resellers, who are supported by the Company’s sales and marketing organization, and to a lesser extent directly to end-customers.

Proposed Merger

On February 6, 2020, the Company entered into an Agreement and Plan of Merger (the “Original Merger Agreement”) with Ferrari Group Holdings, L.P., a Delaware limited partnership (“Parent”), and Ferrari Merger Sub, Inc., a Delaware corporation and aan indirect wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are affiliates of Advent International Corporation (“Advent”).

~~The~~On ~~Merger~~July ~~Agreement~~15, ~~provides that~~2020, ~~subject to~~ the ~~terms~~Company, Parent and ~~conditions set forth in the~~ Merger ~~Agreement, Merger~~ Sub ~~will~~entered ~~merge with and~~ into ~~the~~an ~~Company~~Amended ~~(the~~and ~~“Merger”),~~Restated ~~with~~Agreement ~~the Company surviving the Merger~~ and ~~becoming~~Plan ~~a wholly owned subsidiary~~ of ~~Parent~~Merger (the “~~Surviving~~Amended ~~Corporation”).~~and ~~Under~~Restated ~~the~~ Merger Agreement,”) atin ~~the~~order ~~effective~~to ~~time~~amend ~~of the Merger, each issued~~ and ~~outstanding~~restate ~~share of~~ the ~~Company’s~~Original ~~common stock (except for certain shares specified in the~~ Merger Agreement~~) will be canceled and automatically converted into the right to receive cash in an amount equal to $33~~.~~00, without interest.~~

~~Consummation~~The ofAmended ~~the~~and Restated Merger isAgreement provides that, subject to the ~~satisfaction~~terms orof ~~waiver~~the ofAmended ~~customary~~and ~~closing~~Restated ~~conditions~~Merger Agreement, ~~including~~Merger Sub will commence a tender offer (1the “Offer”) ~~approval~~to ofpurchase ~~the~~each ~~Merger~~issued ~~Agreement~~and byoutstanding share of the Company’s ~~stockholders;~~common ~~(2)~~stock ~~the~~for ~~absence~~$29.00 ofper ~~any~~share, ~~law~~net orto ~~order~~the ~~restraining~~seller in cash, ~~enjoining~~without orinterest ~~otherwise~~and ~~prohibiting~~subject ~~the~~to ~~Merger;~~any ~~and~~withholding ~~(3)~~taxes (the ~~expiration~~“Offer orPrice”). ~~termination~~The closing of the ~~waiting~~Offer ~~period~~is ~~under~~subject ~~the~~to ~~United~~certain ~~States~~limited ~~Hart-Scott-Rodino~~customary ~~Antitrust~~conditions, ~~Improvements~~including ~~Act~~the oftender ~~1976,~~by asCompany ~~amended,~~shareholders ~~and~~of ~~clearance~~at ~~under~~least ~~the~~one ~~antitrust~~share ~~laws~~more than 50% of ~~certain~~the ~~non-United~~Company’s ~~States~~issued ~~jurisdictions~~and outstanding shares. OnIf ~~February~~the ~~24,~~Offer ~~2020~~is successful, then following consummation of the ~~U.S.~~Offer, ~~Federal~~Merger ~~Trade~~Sub ~~Commission~~will ~~granted~~be ~~early~~merged ~~termination~~with ofand into the ~~waiting~~Company, ~~period~~with ~~under~~ the ~~HSR~~Company ~~Act.~~surviving Onas ~~April~~a ~~23,~~wholly ~~2020,~~owned ~~our~~subsidiary ~~stockholders~~of ~~approved~~Parent (the “Merger ~~Agreement~~”). The Amended and Restated Merger isAgreement ~~expected~~contemplates that the Merger will be effected pursuant to ~~close~~Section in251(h) of the ~~second~~Delaware ~~fiscal~~General ~~quarter~~Corporation Law (the “DGCL”), which would not require a vote of ~~2020~~the Company’s stockholders in order to consummate the Merger. ~~Upon~~At ~~consummation~~the effective time of the Merger, each issued and outstanding share of the Company’s common stock ~~will~~(except nofor ~~longer~~certain shares specified in the Amended and Restated Merger Agreement), whether or not tendered in accordance with the Offer, will be ~~listed~~canceled onand ~~any~~converted ~~public~~into ~~market~~the right to receive the Offer Price.

COVID-19

On July 20, 2020, Merger Sub commenced the Offer. The Offer is scheduled to expire at the end of the day, one minute after 11:59 p.m., Eastern time, on August 14, 2020, unless the Offer is extended or earlier terminated.

Concurrently with the execution of the Amended and Restated Merger Agreement, Forescout, Parent and Merger Sub entered into a settlement agreement to resolve pending litigation between them. Pursuant to the settlement agreement, the parties have agreed to release their respective claims made in connection with the litigation.

COVID-19

Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets, which has decreased, and may further decrease, demand for a broad variety of goods and services, while also disrupting sales channels and marketing activities for an unknown period of time until the pandemic is contained. At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) using accounting policies that are consistent with those used in the preparation of the Company’s audited consolidated financial statements for the year ended December 31, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted as permitted by the SEC's rules and regulations. The Company’s condensed consolidated financial statements include the results of Forescout Technologies, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated financial statements are unaudited and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s quarterly results. The condensed consolidated balance sheet as of December 31, 2019 was derived from the audited consolidated financial statements at that date but does not include all the disclosures required by GAAP for the annual financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The preparation of interim condensed consolidated financial statements in conformity with GAAP requires management to make use of estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and accompanying notes, including but not limited to the potential impacts arising from the recent COVID-19 and public and private policies and initiatives aimed at reducing its transmission. These estimates form the basis of judgments made about carrying values of assets and liabilities, which are not readily apparent from other sources. The areas where management has made estimates requiring judgment include, but are not limited to, the best estimate of standalone selling prices for license and related support, the period over which deferred sales commissions are amortized to expense, accruals, stock-based compensation, provision for income taxes including related reserves, identified intangibles and goodwill, purchase price allocation of an acquired business, and incremental borrowing rate for operating leases. As the extent and duration of the impact from COVID-19 continue to evolve and additional information becomes available, the Company’s estimates and assumptions may change materially in future periods. Actual results could differ materially from those estimates.

Summary of Significant Accounting Policies

Restructuring cost

The Company records restructuring activities including costs for one-time termination benefits in accordance with ASC Topic 420 (“ASC 420”), Exit or Disposal Cost Obligations. A liability is recognized when management has committed to a restructuring plan and has communicated those actions to employees. Restructuring cost for employee workforce reductions are recorded upon employee notification for employees whose required continuing service period is 60 days or less and ratably over the employee’s continuing service period for employees whose required continuing service period is greater than 60 days. Employee termination benefits covered by existing benefit arrangements are recorded in accordance with ASC Topic 712, Non-retirement Post-employment Benefits. These costs are recognized as restructuring charges in the condensed consolidated statement of operations when management has committed to a restructuring plan and the severance costs are probable and estimable. Refer to Note 5 for further details.

Credit losses

~~which~~recorded ~~requires~~in ~~the~~accordance ~~measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model~~ with anASC ~~expected~~Topic ~~loss model which requires the use of forward~~712, Non-~~looking~~retirement Post-employment ~~information to calculate credit loss estimates~~Benefits. These Itcosts ~~also~~are ~~eliminates~~recognized ~~the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than~~ as arestructuring ~~reduction~~charges in the ~~amortized~~condensed ~~cost~~consolidated ~~basis~~statement of ~~the~~operations ~~securities.~~when ~~These~~management ~~changes~~has ~~will~~committed ~~result~~to ina ~~earlier~~restructuring ~~recognition~~plan ofand ~~credit losses. The Company adopted ASU 2016-13 effective January 1, 2020 with~~ the ~~cumulative~~severance ~~effect~~costs ofare ~~adoption~~probable ~~recorded~~and asestimable. anRefer ~~adjustment~~ to ~~retained~~Note ~~earnings.~~5 ~~The~~for ~~effect~~further ~~on its consolidated financial statements and related disclosures is not material~~details.

~~Except~~Credit for restructuring cost and the impact of the adoption of Topic 326, there have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2019 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.losses

Effective January 1, 2020, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. The Company adopted ASU 2016-13 effective January 1, 2020 with the cumulative effect of adoption recorded as an adjustment to retained earnings. The effect on its consolidated financial statements and related disclosures is not material.

Except for the impact of the adoption of Topic 326, there have been no changes to the Company’s significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2019 that have had a material impact on the Company’s condensed consolidated financial statements and related notes.

Recently Issued and Not Yet Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes that eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for annual and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the timing and impact of the adoption of this standard on its consolidated financial statements.

Note 2. Revenue, Deferred Revenue and Deferred Commissions

Disaggregation of Revenue

The Company derives revenue from sale of Software Products, Hardware Products, term contracts, and professional services. All revenue recognized in the condensed consolidated statements of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to revenue type and is consistent with how the Company evaluates its financial performance (in thousands):

	Three Months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Revenue:
License
Software Products
Perpetual license	$	912,~~359~~167	$	2520,~~759~~675	$	21,526	$	46,434
Term license	~~653~~19,167		~~324~~11,190		19,820		11,514
Hardware Products	46,~~787~~243		116,~~597~~966		11,030		18,563
Subscription
Software as a service (“SaaS”)	~~126~~167		—		293		—
Support and maintenance	37,~~400~~445		3334,~~799~~822		74,845		68,621
Professional services	4,~~828~~687		4,~~089~~627		9,515		8,716
Total revenue	$	5779,~~153~~876	$	7578,~~568~~280	$	137,029	$	153,848

License Revenue

License revenue consists of sales of Software Products and Hardware Products. Software Products are sold with either a perpetual license or a term license. License revenue includes the value allocated to license within Software Products subscription contracts. License revenue is recognized at the time of transfer of control, which is generally upon delivery of access to software downloads or shipment, provided that all other revenue recognition criteria have been met.

Subscription Revenue

Subscription revenue is derived from support and maintenance contracts, the value allocated to support and maintenance within Software Products subscription contracts, and software-as-a-service (“SaaS”) offering contracts. SaaS customers do not have the right to take possession of the cloud-based software. Subscription contracts have terms that are generally either one or three years, but can be up to five years. Subscription revenue is recognized ratably over the term of the contract and any unearned subscription revenue is included in deferred revenue.

Professional Services Revenue

Professional services revenue is derived primarily from customer fees for optional installation of the Company’s products or training. Generally, the Company recognizes revenue for professional services as the services are rendered.

Revenue from Contracts with Customers

Contract Assets and Contract Liabilities

A contract asset is a right to consideration in exchange for products or services that the Company has transferred to a customer when that right is conditional and is not just subject to the passage of time. The Company’s payment terms typically range between 30 to 90 days. The Company has no material contract assets. A contract liability is an obligation to transfer products or services for which the Company has received consideration, or for which an amount of consideration is due from the customer. Contract liabilities include customer deposits under non-cancelable contracts included in accrued expenses, and current and non-current deferred revenue balances. The Company’s contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.

Significant changes in contract liabilities during the periods presented are as follows (in thousands):

	Three Months Ended March 31, 2020
	Three Months Ended June 30, 2020
	Contract Liabilities
Balance as of December 31, 2019	$	188,907
	Total
Additions	48,920
Gross revenue recognized	(57,153		)
Balance as of March 31, 2020	$	180,674
Additions	71,019
License revenue recognized	(37,577		)
Subscription revenue recognized	(37,612		)
Professional services revenue recognized	(4,687		)
Balance as of June 30, 2020	$	171,817

During the three months ended March 31, 2020, the Company recognized revenue of $34.1 million that was included in the contract liabilities balance as of December 31, 2019. During the three months ended March 31, 2019, the Company recognized revenue of $31.5 million that was included in the contract liabilities balance as of December 31, 2018.



	Six Months Ended June 30, 2020
	Contract Liabilities
	Total
Balance as of December 31, 2019	$	188,907
Additions	119,939
License revenue recognized	(52,376		)
Subscription revenue recognized	(75,138		)
Professional services revenue recognized	(9,515		)
Balance as of June 30, 2020	$	171,817

For the three and six months ended June 30, 2020 and 2019, a vast majority of subscription revenue and a minority of license revenue and professional services revenue were included in the contract liabilities balance at the beginning of each period.

Performance Obligations

Contracted not recognized revenue was $~~180~~172.41 million as of ~~March~~June 3130, 2020, of which the Company expects to recognize approximately 6261% of the revenue over the next 12 months and the remainder thereafter.

Note 3. Fair Value Measurements

Financial assets are recorded at fair value on the condensed consolidated balance sheets and are categorized based upon the level of judgment associated with inputs used to measure their fair value.

The accounting guidance establishes a fair value hierarchy based on the independence of the source and objective evidence of the inputs used. There are three fair value hierarchies based upon the level of inputs that are significant to fair value measurement:

•Level 1—Observable inputs that reflect quoted prices in active markets for identical assets or liabilities.

•Level 2—Observable inputs that reflect quoted prices for identical assets and liabilities in markets that are not active, quoted prices for similar assets or liabilities in active markets, inputs other than quoted prices that are observable for the assets or liabilities, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

•Level 3—Inputs that are generally unobservable and are supported by little or no market activity, and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

There have been no transfers between fair value measurement levels during the periods presented. The following table presents the fair value of the Company’s financial assets according to the fair value hierarchy as of ~~March~~June 3130, 2020 and December 31, 2019 (in thousands):

	March 31, 2020						December 31, 2019
	June 30, 2020						December 31, 2019
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents:
Cash	$	6340,~~778~~752	$	—	$	—	$	62,188	$	—	$	—
Money market accounts	2014,~~017~~195		—		—		6,842		—		—
Total cash and cash equivalents	8354,~~795~~947		—		—		69,030		—		—
Marketable securities:
Commercial paper	—		—		—		—		1,998		—
Corporate debt securities	—		162,~~126~~021		—		—		24,168		—
U.S. government securities	—		—		—		—		3,015		—
Total marketable securities	—		162,~~126~~021		—		—		29,181		—
Restricted cash (current and non-current)	2,~~536~~060		—		—		2,561		—		—
Total financial assets	$	8657,~~331~~007	$	162,~~126~~021	$	—	$	71,591	$	29,181	$	—

Note 4. Marketable Securities

The following table summarizes the Company’s marketable securities by significant investment categories as of ~~March~~June 3130, 2020 and December 31, 2019 (in thousands):

	March 31, 2020									December 31, 2019
	June 30, 2020							December 31, 2019
	Amortized Cost		Unrealized Gains		~~Unrealized~~Fair ~~Losses~~Value			~~Fair~~Amortized ~~Value~~Cost		~~Amortized~~Unrealized ~~Cost~~Gains		~~Unrealized~~Fair ~~Gains~~Value		~~Fair Value~~
Marketable securities:
Available-for-sale:
Commercial paper	$	—	$	—	$	—		$	—1,998	$	~~1,998~~—	$	—1,998	$	~~1,998~~
Corporate debt securities	162,~~131~~017		34		(82,021		)	1624,~~126~~122		~~24,122~~46		4624,168		~~24,168~~
U.S. government securities	—		—		—			—3,012		3~~,012~~		3,015		~~3,015~~
Total marketable securities	$	162,~~131~~017	$	34	$	(82,021	)	$	1629,~~126~~132	$	~~29,132~~49	$	4929,181	$	~~29,181~~

The following table summarizes the amortized cost and fair value of the Company’s available-for-sale securities as of ~~March~~June 3130, 2020 and December 31, 2019 by the contractual maturity date (in thousands):

	March 31, 2020				December 31, 2019
	June 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	162,~~131~~017	$	162,~~126~~021	$	29,132	$	29,181
Total	$	162,~~131~~017	$	162,~~126~~021	$	29,132	$	29,181

The Company had 5no marketable securities in unrealized loss position as of ~~March~~June 3130, 2020. ~~The~~and ~~Company had no marketable securities in an unrealized loss position as of~~ December 31, 2019. For individual marketable securities that were in an unrealized loss position as of March 31, 2020, the fair value and gross unrealized loss for these securities aggregated by investment category and length of time in an unrealized loss position are presented in the following tables (in thousands):

	March 31, 2020
	Less Than 12 Months					Greater Than 12 Months				Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Corporate debt securities	$	8,058	$	(8	)	$	—	$	—	$	8,058	$	(8	)
Total	$	8,058	$	(8	)	$	—	$	—	$	8,058	$	(8	)

Unrealized losses related to these marketable securities were immaterial. The effect of COVID-19 on our impairment assessment requires significant judgment due to the uncertainty around the impact. The Company does not intend to sell and it is not likely that the Company would be required to sell these marketable securities before recovery of their amortized cost basis, which may be at maturity.

Note 5. Restructuring

Q2 2020 Restructuring Plan

In the second quarter of fiscal year 2020, the Company initiated a restructuring plan (the “Q2 2020 Restructuring Plan”) as the Company continues to make adjustments to its overall expense plan and workforce to further align with

its strategy and partially in response to the impact of COVID-19 on business operations. The Q2 2020 Restructuring Plan includes reductions in force of approximately 60 employees across various functions, of which a majority were notified by June 30, 2020 and is expected to be substantially completed by September 30, 2020.

Q1 2020 Restructuring Plan

In the first quarter of fiscal year 2020, the Company initiated a restructuring plan (the “Q1 2020 Restructuring Plan”) as part of the Company’s effort to realign its cost structure in both its go-to-market and engineering organizations. The Q1 2020 Restructuring Plan included ~~reduction~~reductions in force of approximately 90 employees within the sales, marketing, and engineering functions and was largely completed by March 31, 2020 with no material future costs expected to be incurred.

The following table summarizes the activity related to the accrual for restructuring charges (in thousands):

	Workforce Reduction Cost
Accrual balance as at December 31, 2019	$	—
Restructuring charges	23,~~512~~371
Cash payments	(12,~~343~~841		)
Accrual balance as at March 31, 2020	$	1,169
Accrual balance as at June 30, 2020	$	530

The accrued restructuring balance as at ~~March~~June 3130, 2020 is included in accrued expenses on the Company’s condensed consolidated balance sheets.

17For the three and six months ended June 30, 2020, the Company recognized restructuring charges of $0.9 million and $3.4 million.

Note 6. Equity Award Plans

Stock-Based Compensation

Stock-based compensation expense included in the accompanying condensed consolidated statements of operations is as follows (in thousands):

	Three Months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Cost of revenue:
License	$	~~122~~114	$	8389	$	236	$	172
Subscription	~~524~~482		~~443~~470		1,006		913
Professional services	~~516~~301		~~401~~421		817		822
Research and development	3,~~683~~417		32,~~078~~691		7,100		5,769
Sales and marketing	54,~~804~~795		67,~~486~~198		10,599		13,684
General and administrative	32,~~209~~658		3,~~337~~196		5,867		6,533
Total	$	1311,~~858~~767	$	1314,~~828~~065	$	25,625	$	27,893

Stock Options

The following table summarizes option activity under the Company’s 2000 Stock Option and Incentive Plan and the Company’s 2017 Equity Incentive Plan, and related information (in thousands, except per share and contractual life amounts):

	Options Outstanding
	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Balance—December 31, 2019	3,066		$	12.33	5.6	$	62,759
Options exercised	(~~450~~636	)	$	1112.6031
Options forfeited	(2532	)	$	2021.1146
Balance—March 31, 2020	2,591		$	12.39	5.3	$	49,762
Balance—June 30, 2020	2,398		$	12.22	5.2	$	22,035
Options vested and exercisable—March 30, 2020	2,425		$	11.79	5.2	$	48,022
Options vested and exercisable—June 30, 2020	2,287		$	11.77	5.1	$	21,874

As of ~~March~~June 3130, 2020, the total unrecognized compensation cost related to unvested options was $1.61 million, which is expected to be amortized on a straight-line basis over a weighted-average period of approximately 10.19 years.

Restricted Stock Units (“RSUs”) and Performance Based Stock Units (“PSUs”)

The following table summarizes RSU and PSU activity under the Company’s 2000 Stock Option and Incentive Plan and the Company’s 2017 Equity Incentive Plan (the “2017 Plan”), and related information (in thousands, except per share and contractual life amounts):

	RSUs and PSUs Outstanding
	Number of Shares		Weighted- Average Grant Date Fair Value Per Share		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Balance—December 31, 2019	6,391		$	31.37	1.7	$	209,621
Granted	~~178~~253		$	3029.80
Vested	(~~597~~816	)	$	3129.0141
Forfeited	(~~476~~668	)	$	3132.9402
Balance—March 31, 2020	5,496		$	31.35	1.6	$	173,622
Balance—June 30, 2020	5,160		$	31.53	1.5	$	109,383

The Company has issued PSUs to select executives under the 2017 Plan. The majority of the PSUs vest over a period of four years from the date of grant subject to both the continued employment of the participant with the Company and the achievement of one or more pre-established financial performance goals. Stock-based compensation expense for PSUs is recognized using the accelerated attribution method over the requisite service periods when it is probable that the performance condition will be achieved.

As of ~~March~~June 3130, 2020, the total unrecognized compensation cost related to unvested RSUs and PSUs was $~~134~~118.98 million, which is expected to be amortized over a weighted-average period of approximately 2.64 years.

Note 7. Income Taxes

The Company estimates its annual effective tax rate each quarter and specific events are discretely recognized as they occur under the provisions of ASC 740-270, Income Taxes: Interim Reporting. For the three and six months ended ~~March~~June 3130, 2020, the Company recorded a tax provision of $1.3 million and $1.7 million, respectively, representing an effective tax rate of (5.8)% and (2.1)%, respectively. For the three and six months ended June 30, 2019, the Company recorded a tax provision of $0.45 million and $01.72 million, respectively, representing an effective tax rate of (01.76)% and (2.1.9)%, respectively. The Company’s effective tax rates for these periods were negative as it has maintained a valuation allowance on the U.S. losses. The key components of the income tax provision primarily consist of foreign income taxes, unrecognized tax benefits, and U.S. state minimum taxes. The effective tax rate ~~increased~~decreased for the three and six months ended ~~March~~June 3130, 2020 as compared to the three and six months ended ~~March~~June 3130, 2019 primarily due to ana ~~increase~~decrease in worldwide loss before income taxes. The loss was primarily generated in the United States and does not impact the provision for income taxes as it was offset by a full valuation allowance.

In response to COVID-19, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) on March 27, 2020. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The impact of the CARES Act does not have a material impact toon the Company’s consolidated financial statements.

Note 8. Net Loss Per Share

Basic net loss per share is computed by dividing net loss by basic weighted-average shares outstanding during the period. Diluted net loss per share is computed by dividing net loss by diluted weighted-average shares outstanding, including potentially dilutive securities, unless anti-dilutive.

The following table presents the computation of basic and diluted net loss per share (in thousands, except per share amounts):

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net loss	$	(6123,~~239~~523	)	$	(3430,~~252~~760	)	$	(84,762	)	$	(65,012	)
Weighted-average shares used to compute net loss per share, basic and diluted	4849,~~593~~371			4445,~~196~~494			48,982			44,848
Net loss per share, basic and diluted	$	(10.2648	)	$	(0.7868	)	$	(1.73	)	$	(1.45	)

The following securities were excluded from the computation of diluted net loss per share for the periods presented because their inclusion would reduce the net loss per share (in thousands):

	As of March 31,
	As of June 30,
	2020	2019
Options to purchase common stock	2,~~591~~398	4,~~717~~282
Unvested early exercised common shares	—	24—
Unvested restricted stock units	5,~~496~~160	5,~~470~~719
Employee Stock Purchase Plan	~~196~~—	~~233~~172

~~ITEM~~Note 29. Subsequent Events

On February 6, 2020, the Company entered into the Original Merger Agreement with Parent and Merger Sub. Parent and Merger Sub are affiliates of Advent.

On July 15, 2020, the Company, Parent and Merger Sub entered into the Amended and Restated Merger Agreement in order to amend and restate the Original Merger Agreement. The Amended and Restated Merger Agreement provides that, subject to the terms of the Amended and Restated Merger Agreement, Merger Sub will commence the Offer to purchase each issued and outstanding share of the Company’s common stock for the Offer Price. The closing of the Offer is subject to

certain limited customary conditions, including the tender by Company shareholders of at least one share more than 50% of the Company’s issued and outstanding shares. If the Offer is successful, then following consummation of the Offer, Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of Parent. The Amended and Restated Merger Agreement contemplates that the Merger will be effected pursuant to Section 251(h) of the DGCL, which would not require a vote of the Company’s stockholders in order to consummate the Merger. At the effective time of the Merger, each issued and outstanding share of the Company’s common stock (except for certain shares specified in the Amended and Restated Merger Agreement), whether or not tendered in accordance with the Offer, will be canceled and converted into the right to receive the Offer Price.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our (1) unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2019 included in our Annual Report on Form 10-K for the year ended December 31, 2019. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. See the section titled “Special Note Regarding Forward-Looking Statements.”

Unless expressly indicated or the context requires otherwise, the terms “Forescout,” “we,” “us,” and “our” in this document refer to Forescout Technologies, Inc., a Delaware corporation, and, where appropriate, its wholly owned subsidiaries.

Overview

We offer our solution across two product groups: (i) products for visibility and control capabilities, and (ii) products for orchestration capabilities. Our products for visibility and control capabilities consist of eyeSight, eyeSegment, eyeControl, and SilentDefense. Our eyeSight, eyeSegment, and eyeControl products provide for visibility and control capabilities across the extended enterprise, from campus to data center to hybrid cloud to OT devices, while our SilentDefense product provides for visibility and control capabilities deeper within the OT portion of the network. Our products for orchestration capabilities are comprised of our portfolio of our eyeExtend family of products.

We offer our solution across two product types: (i) software products and (ii) hardware products. Our software products include eyeSight, eyeSegment, eyeControl, eyeExtend, SilentDefense, and SilentDefense Command Center (“Software Products”). Our hardware products include hardware that is sold separately for use with our Software Products and appliances that are embedded with our software (“Hardware Products”).

We also offer our solution across license types and increments. Our Software Products are sold with a perpetual license or a subscription license. Customers can purchase in license increments of 100 devices, with hardware sold separately based on customer deployment requirements. Customers can manage their own deployments of our products in varying options capable of scaling and managing deployments of up to 2,000,000 devices under a single console. Customers can purchase our SilentDefense products in license increments that are on a per sensor basis.

Proposed Merger

On February 6, 2020, we entered into an Agreement and Plan of Merger (the “Original Merger Agreement”) with Ferrari Group Holdings, L.P., a Delaware limited partnership (“Parent”), and Ferrari Merger Sub, Inc. ~~(“Merger Sub”)~~, a Delaware corporation and aan indirect wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are affiliates of Advent International Corporation (“Advent”).

On July 15, 2020, Forescout, Parent and Merger Sub entered into an Amended and Restated Agreement and Plan of Merger (the “Amended and Restated Merger Agreement”) in order to amend and restate the Original Merger Agreement. The Amended and Restated Merger Agreement provides that, subject to the terms ~~and~~of ~~conditions~~the ~~set~~Amended ~~forth~~and inRestated ~~the~~ Merger Agreement, Merger Sub will ~~merge~~commence ~~with~~a ~~and~~tender ~~into~~offer ~~Forescout~~ (the “~~Merger~~Offer”), ~~with~~to ~~Forescout~~purchase ~~surviving~~each ~~the~~issued ~~Merger~~ and ~~becoming~~outstanding ashare ~~wholly-owned~~of ~~indirect~~our ~~subsidiary~~common ofstock ~~Parent~~for $29.00 ~~Under~~per share, net to the ~~Merger~~seller ~~Agreement~~in cash, atwithout interest and subject to any withholding taxes (the ~~effective~~“Offer ~~time~~Price”). The closing of the ~~Merger~~Offer is subject to certain limited customary conditions, ~~each~~including the tender by Company shareholders of at least one share more than 50% of the Company’s issued and outstanding ~~share~~shares. If the Offer is successful, then following consummation of ~~our~~the ~~common~~Offer, ~~stock~~Merger ~~(except~~Sub ~~for~~will ~~certain~~be ~~shares~~merged ~~specified~~with inand into Forescout, with Forescout surviving as a wholly owned subsidiary of Parent (the “Merger”). The Amended and Restated Merger Agreement) contemplates that the Merger will be ~~canceled~~effected ~~and~~pursuant ~~automatically~~to ~~converted~~Section ~~into~~251(h) of the ~~right~~Delaware toGeneral ~~receive~~Corporation ~~cash~~Law, inwhich anwould ~~amount~~not ~~equal~~require a vote of our stockholders in order to ~~$33.00,~~consummate ~~without~~the ~~interest~~Merger. At

Consummation of the Merger is subject to the satisfaction or waiver of customary closing conditions, including (1) approval of the Merger Agreement by our stockholders; (2) the absence of any law or order restraining, enjoining or otherwise prohibiting the Merger; and (3) the expiration or termination of the waiting period under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and clearance under the antitrust laws of certain non-United States jurisdictions. On February 24, 2020, the U.S. Federal Trade Commission granted early termination of the waiting period under the HSR Act. On April 23, 2020, our stockholders approved the Merger Agreement. The Merger is expected to close in the second fiscal quarter of 2020. Upon consummation of the Merger, our common stock will no longer be listed on any public market.21

20the effective time of the Merger, each issued and outstanding share of our common stock (except for certain shares specified in the Amended and Restated Merger Agreement), whether or not tendered in accordance with the Offer, will be canceled and converted into the right to receive the Offer Price.

Impact of COVID-19 on our Results of Operations

In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic, which continues to spread throughout the U.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns.

The broader impact of COVID-19 on our results of operations and overall financial performance remains uncertain asbecause the extent and duration of the impact from COVID-19 continue to evolve ~~and additional information becomes available and will impact our business and consolidated results of operations and may impact our financial condition in the future~~. Our operations have been impacted by office closures globally and restrictions on employee travel and in-person meetings; however, we have generally been able to deliver our products and services remotely. To support the health and well-being of our employees, customers, partners and communities, a vast majority of our employees ~~are~~continue ~~working~~to work remotely as of ~~March~~June 1530, 2020. ~~The~~ ~~economic~~Despite ~~uncertainty~~the ~~from~~extent of the COVID-19 pandemic, ~~has~~we ~~also~~exited ~~impacted~~the ~~our~~second ~~customers~~quarter ~~and~~of ~~their~~2020 ~~available~~with ~~budgets~~a tostronger ~~spend~~growth ~~on our products and services, which has resulted~~ in ~~an unfavorable impact on our~~ revenue ~~growth~~ and ~~gross~~improved ~~margin~~profitability inas compared to the first quarter of 2020, ~~and~~driven ~~which~~by ~~may~~our ~~also~~continuous ~~delay~~effort ~~the~~in ~~timing~~closing ofstrategic ~~future~~deals ~~sales.~~with Weboth ~~will~~new ~~continue to evaluate the nature~~ and ~~extent~~existing ofcustomers ~~the~~as ~~impact~~well ofas ~~COVID-19~~continuous adjustments to our ~~business.~~overall Inexpense ~~addition,~~plan ~~during~~and ~~the~~workforce ~~first~~to ~~quarter~~further ofalign ~~fiscal~~with ~~2020,~~our ~~we borrowed $16~~strategy.0 ~~million~~We ~~under~~will ~~our~~continue ~~revolving credit facility as a precautionary measure~~ to ~~provide~~evaluate ~~additional~~the ~~liquidity~~nature inand ~~light~~extent of ~~global~~the ~~economic~~impact ~~uncertainty~~of ~~and financial market conditions caused by~~ COVID-19. ~~The~~on ~~amount~~our ~~borrowed has been gradually paid down and will be fully paid upon consummation of the Merger~~business. See section titled “Risk Factors” for further discussion of the possible impact of COVID-19 on our business.

~~First~~Second Quarter 2020 Financial Highlights

Since our inception through ~~March~~June 3130, 2020, we have sold to ~~nearly~~more than 3,800 end-customers in nearly 100 countries, including 2627% of the Global 2000. For the three months ended ~~March~~June 3130, 2020 and 2019, we sold to 98% and 8% of the Global 2000, respectively. Our end-customers represent a broad range of industries, including government, financial, ~~services~~technology, healthcare, ~~technology~~energy, manufacturing, ~~energy,~~ services, retail, ~~entertainment~~education, and ~~education~~entertainment.

The following table summarizes our key financial highlights for the periods presented in dollars and as a percentage of our total revenue.

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Total revenue	$	5779,~~153~~876		$	7578,~~568~~280		$	137,029		$	153,848
Total revenue year-over-year percentage growth	~~(24~~2		)%	2716		%	(11		)%	21		%
Gross margin	6676		%	7578		%	71		%	76		%
Loss from operations	$	(5922,~~971~~689	)	$	(3430,~~065~~627	)	$	(82,660	)	$	(64,692	)
Loss from operations as a percentage of total revenue	(~~105~~28		)%	(4539		)%	(60		)%	(42		)%
Net loss	$	(6123,~~239~~523	)	$	(3430,~~252~~760	)	$	(84,762	)	$	(65,012	)
Net cash (used in) provided by operating activities	$	(14,463	)	$	6,439
Net cash used in operating activities							$	(44,771	)	$	(18,747	)

Continued Retention and Sales to Existing End-Customers

We believe the net-recurring revenue retention rate over the trailing 12 month period on our subscription revenue and on the annualized value of our subscription license revenue is an important metric to measure our ability to retain and increase sales to our existing end-customers. We calculate the net-recurring revenue retention rate using the following formula:

X = (A + B + C)/(B + D)

where:

X = net-recurring revenue retention rate

A = annualized value of term contracts renewed over the trailing 12 month period

B = trailing 12 month annualized value of term contracts not subject to renewal because the scheduled expiration date of the multi-year contract falls outside of the 12 month period under measurement

C = trailing 12 month annualized value of new term contracts from end-customers that have been end customers for more than one year

D = 12 months annualized value of term contracts scheduled to terminate or renew during the 12 month period under measurement

We believe this metric is an indication of the continuing value we provide to our end-customers because it shows the renewal rate of their support and maintenance contracts and Software Products subscription contracts. Our net-recurring revenue retention rate as of ~~March~~June 3130, 2020 and December 31, 2019 were ~~121~~110% and 122%, respectively. The ~~100~~1,200 basis point decrease was primarily ~~reflects~~driven by the ~~decreased~~lack ~~adoption~~ of new ~~Software~~term ~~Products~~contract ~~subscription contracts~~ from end-customers that have been end-customers for more than one year ~~for~~in the ~~twelve~~trailing ~~months~~12 ~~ended~~month ~~March~~period ending June 3130, 2020 relative to the trailing 12 month period ending December 31, 2019. A net retention rate over 100% indicates that our products are expanding within our end-customer base, whereas a rate less than 100% indicates that our products are constricting within our end-customer base. Additionally, this calculation includes all changes to the annualized value of the recurring revenue from term contracts used in the calculation, which includes scheduled expiration periods, stub periods, changes in pricing, additional products purchased, lost end-customers, early renewals, and decreases in the number of devices licensed to be managed by our license under contract. This metric does not take into account perpetual license revenue or professional services revenue. The annualized value of our contracts is a legal and contractual determination made by assessing the contractual terms with our end-customers. The annualized value of our term contracts is not determined by reference to historical revenue, deferred revenue, or any other GAAP financial measure over any period.

Recurring Revenue Rate

We are focused on providing our customers with more licensing and delivery options from which to purchase our products. In the last 24 months, we introduced centralized licensing options as an alternative to our legacy options of licensing by individual units of physical and virtual appliances. We introduced Software Products subscription contracts in the first quarter of 2019 and began deriving revenue from these Software Products subscription contracts in the second quarter of 2019. In the future, we intend to offer our Software Products, in addition to our current on-premise offerings, in a form that also includes critical functionality being delivered from our cloud hosted facilities.

Included in our license revenue is the value allocated to license within our Software Products subscription contracts, which is recognized at the time of transfer of control, which is generally upon delivery of access to software downloads or shipment, provided that all other revenue recognition criteria have been met or upon commencement of a renewed term contract.

Included in our subscription revenue is the value allocated to support and maintenance within our Software Products subscription contracts and revenue derived from support and maintenance contracts. Subscription revenue is recognized ratably over the term of the contract.

We believe this metric is an important metric in understanding the impact of customer buying preferences for the varying Software Products options upon our reported revenue. We calculate the recurring revenue rate as a subscription revenue plus the portion of license revenue that is derived from the value allocated to license within our Software ~~Products subscription contracts, collectively, as a percent of total revenue, as measured over the trailing 12 month period. We calculate the recurring revenue rate using the following formula:~~

Products subscription contracts (“term license”), collectively, as a percent of total revenue, as measured over the trailing 12 month period. We calculate the recurring revenue rate using the following formula:

X = (A + B)/C

where:

X = recurring revenue rate

A = subscription revenue over the trailing 12 month period

B = ~~value~~term ~~allocated to~~ license revenue ~~within our Software Products subscription contracts~~ over the trailing 12 month period

C = total revenue

Our recurring revenue rate as of ~~March~~June 3130, 2020 and December 31, 2019 were 5357% and 49%, respectively. The ~~400~~800 basis point increase primarily reflects the increased adoption of new subscription contracts in the ~~three~~ six months ended ~~March~~June 3130, 2020. The numerator does not take into account perpetual license revenue or professional services revenue. The numerator does include the value allocated to license within our Software Products subscription contracts for all contract durations. Those contract durations that are greater than 12 months will raise the recurring revenue rate for the first 12 months of the contract duration and will lower the recurring revenue rate for the balance of the contract duration after the first 12 months relative to the annualized value of such Software Products subscription contracts. As disclosed in Note 2. Revenue, Deferred Revenue and Deferred Commissions of our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, within the Disaggregation of Revenue, term license revenue was $19.2 million and $19.8 million for the three and six months ended June 30, 2020, respectively, and $11.2 million and $11.5 million for the three and six months ended June 30, 2019, respectively.

Results of Operations

The following tables summarize our results of operations for the periods presented in dollars and as a percentage of our total revenue. The period-to-period comparison of results is not necessarily indicative of results for future periods.

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(In thousands)
Condensed Consolidated Statements of Operations Data:
Revenue:
License	$	1437,~~799~~577		$	3738,~~680~~831		$	52,376		$	76,511
Subscription	37,~~526~~612			3334,~~799~~822			75,138			68,621
Professional services	4,~~828~~687			4,~~089~~627			9,515			8,716
Total revenue	5779,~~153~~876			7578,~~568~~280			137,029			153,848
Cost of revenue:
License (1)	56,~~419~~282			75,~~607~~622			11,701			13,229
Subscription (1)	7,~~013~~041			5,~~207~~599			14,054			10,806
Professional services (1)	76,~~165~~148			6,~~186~~235			13,313			12,421
Total cost of revenue	19,~~597~~471			1917,~~000~~456			39,068			36,456
Total gross profit	3760,~~556~~405			5660,~~568~~824			97,961			117,392
Operating expenses:
Research and development (1)	2321,~~246~~514			1819,~~497~~440			44,760			37,937
Sales and marketing (1)	4738,~~288~~988			5556,~~923~~173			86,276			112,096
General and administrative (1)	2421,~~481~~733			1615,~~213~~838			46,214			32,051
Restructuring	~~2,512~~859			—			3,371			—
Total operating expenses	9783,~~527~~094			9091,~~633~~451			180,621			182,084
Loss from operations	(5922,~~971~~689		)	(3430,~~065~~627		)	(82,660		)	(64,692		)
Interest expense	(~~235~~118		)	(93142		)	(353		)	(235		)
Other (expense) income, net	(601		)	617
Other income (expense), net	572			505			(29		)	1,122
Loss before income taxes	(6022,~~807~~235		)	(3330,~~541~~264		)	(83,042		)	(63,805		)
Income tax provision	~~432~~1,288			~~711~~496			1,720			1,207
Net loss	$	(6123,~~239~~523	)	$	(3430,~~252~~760	)	$	(84,762	)	$	(65,012	)

2325

_____________________

(1) Includes stock-based compensation expense as follows:

	Three Months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(In thousands)
Cost of revenue:
License	$	~~122~~114	$	8389	$	236	$	172
Subscription	~~524~~482		~~443~~470		1,006		913
Professional services	~~516~~301		~~401~~421		817		822
Research and development	3,~~683~~417		32,~~078~~691		7,100		5,769
Sales and marketing	54,~~804~~795		67,~~486~~198		10,599		13,684
General and administrative	32,~~209~~658		3,~~337~~196		5,867		6,533
Total	$	1311,~~858~~767	$	1314,~~828~~065	$	25,625	$	27,893

	Three Months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(As a percentage of total revenue)
Condensed Consolidated Statements of Operations Data:
Revenue:
License	2647	%	50	%	38	%	50	%
Subscription	6647		4544		55		44
Professional services	86		56		7		6
Total revenue	100		100		100		100
Cost of revenue:
License	98		107		9		9
Subscription	129		7		10		7
Professional services	137		8		10		8
Total cost of revenue	3424		2522		29		24
Total gross profit	6676		7578		71		76
Operating expenses:
Research and development	4127		25		33		24
Sales and marketing	8349		7472		63		73
General and administrative	4327		2120		34		21
Restructuring	41		—		2		—
Total operating expenses	~~171~~104		~~120~~117		132		118
Loss from operations	(~~105~~28	)	(4539	)	(61	)	(42	)
Interest expense	—		—		—		—
Other (expense) income, net	(1	)	1
Other income (expense), net	1		—		—		1
Loss before income taxes	(~~106~~27	)	(4439	)	(61	)	(41	)
Income tax provision	12		1—		1		1
Net loss	(~~107~~29	)%	(4539	)%	(62	)%	(42	)%

2426

Comparison of the Three and Six Months Ended ~~March~~June 3130, 2020 and 2019

Revenue

Our revenue is comprised of license revenue, subscription revenue, and professional services revenue. License revenue is derived from sales of Software Products and Hardware Products, which includes the value allocated to license within our Software Products subscription contracts. Subscription revenue is derived from term contracts with terms that are generally either one or three years, but can be up to five years. Professional services revenue is generally recognized over time as the services are rendered. As a percentage of total revenue, we expect our license revenue, subscription revenue, and professional services revenue to vary from quarter to quarter based on seasonal and cyclical factors as well as the impact of COVID-19 and other factors that may impact customer behavior such as our pending ~~transaction~~acquisition ~~with~~by Advent.

	Three Months Ended March 31,
	Three Months Ended June 30,									Six Months Ended June 30,
	2020		2019		Change					2020		2019		Change
	Amount		Amount		Amount			%		Amount		Amount		Amount			%
	(Dollars in thousands)
Revenue:
License	$	1437,~~799~~577	$	3738,~~680~~831	$	(221,~~881~~254	)	(613	)%	$	52,376	$	76,511	$	(24,135	)	(32	)%
Subscription	37,~~526~~612		3334,~~799~~822		32,~~727~~790			118	%	75,138		68,621		6,517			9	%
Professional services	4,~~828~~687		4,~~089~~627		~~739~~60			181	%	9,515		8,716		799			9	%
Total revenue	$	5779,~~153~~876	$	7578,~~568~~280	$	~~(18~~1,~~415~~596	)	~~(24~~2	)%	$	137,029	$	153,848	$	(16,819	)	(11	)%

License revenue decreased for the three months ended ~~March~~June 3130, 2020 compared to the three months ended ~~March~~June 3130, 2019, primarily due to a $160.15 million decrease in Software Products revenue, and a $0.7 million decrease in Hardware Products revenue. The decrease in Software Products revenue included a $0.3 million decrease in the sales of eyeSight, eyeControl, and SilentDefense, and a $0.2 million decrease in the sale of eyeExtend. License revenue decreased for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to a $16.6 million decrease in Software Products revenue, and a $7.85 million decrease in Hardware Products revenue. The decrease in Software Products revenue included a $1011.80 million decrease in the sales of eyeSight, eyeControl, and SilentDefense, and a $5.36 million decrease in the sale of eyeExtend. The decrease in license revenue for the three and six months ended June 30, 2020 primarily resulted from the economic slowdown caused by the global impact of the COVID-19 pandemic, as well as customer uncertainty related to the Merger.

Subscription revenue increased for the three months ended ~~March~~June 3130, 2020 compared to the three months ended ~~March~~June 3130, 2019, primarily due to a $32.15 million increase attributed to support and maintenance contracts that were renewals, a $0.1 million increase attributed to support and maintenance contracts associated with initial product sales, and a $0.2 million increase attributed to sale of SaaS. Subscription revenue increased for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to a $5.6 million increase attributed to support and maintenance contracts that were renewals, a $0.6 million increase attributed to support and maintenance contracts associated with initial product sales, and a $0.3 million increase attributed to sale of SaaS.

Professional services revenue ~~increased~~remained relatively consistent for the three months ended ~~March~~June 3130, 2020 compared to the three months ended ~~March~~June 3130, 2019. Professional services revenue increased for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to an increase in the sale of optional installation and training services.

Cost of Revenue

Our cost of revenue is comprised of cost of license revenue, cost of subscription revenue, and cost of professional services revenue.

Cost of license revenue primarily consists of costs paid to our third-party contract manufacturer for our Hardware Products. Our cost of license revenue also includes allocated costs, shipping costs and personnel costs associated with logistics for our Hardware Products, and amortization of acquired developed technology. We expect our cost of license revenue to fluctuate from quarter to quarter based on product mix between Software Products and Hardware Products; however, over time, we expect our cost of license revenue to decline as a percentage of license revenue reflecting the continuing shift towards Software Products in our product mix.

Cost of subscription revenue consists of personnel costs for our global customer support organization and warranty-related hardware support costs. We expect our cost of subscription revenue to increase in absolute dollars over time as we grow our customer support organization to accommodate our anticipated subscription revenue growth rate. In addition, we also expect the cost of subscription revenue to increase in absolute dollars as costs of the infrastructure for our SaaS products increase.

addition, we also expect the cost of subscription revenue to increase in absolute dollars as costs of the infrastructure for our SaaS products increase.

Cost of professional services revenue consists of personnel costs for our global professional services organization and costs paid to third-party contractors that deliver some of our services. Although we are continuing to scale our organization and, therefore, expect that cost of professional services revenue will increase in absolute dollars, we expect our cost of professional services revenue to decline over the longer term as a percentage of our professional services revenue as we expect to scale our professional services organization at a lower growth rate than our anticipated professional services revenue growth rate.

	Three Months Ended March 31,
	Three Months Ended June 30,									Six Months Ended June 30,
	2020		2019		Change					2020		2019		Change
	Amount		Amount		Amount			%		Amount		Amount		Amount			%
	(Dollars in thousands)
Cost of revenue:
License	$	56,~~419~~282	$	75,~~607~~622	$	~~(2,188~~660	)	~~(29~~12	)%	$	11,701	$	13,229	$	(1,528	)	(12	)%
Subscription	7,~~013~~041		5,~~207~~599		1,~~806~~442			3526	%	14,054		10,806		3,248			30	%
Professional services	76,~~165~~148		6,~~186~~235		~~979~~(87		)	16(1	)%	13,313		12,421		892			7	%
Total cost of revenue	$	19,~~597~~471	$	1917,~~000~~456	$	~~597~~2,015		312	%	$	39,068	$	36,456	$	2,612		7	%

Cost of license revenue ~~decreased~~increased for the three months ended ~~March~~June 3130, 2020 compared to the three months ended ~~March~~June 3130, 2019, primarily due to a $1.0 million increase resulting from higher quantities of hardware sold separately for use with our Software Products, partially offset by a $0.5 million decrease due to lower quantities of appliances sold that are embedded with our software. ~~and~~Cost of license revenue decreased for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to a $02.70 million decrease due to lower quantities of appliances sold that are embedded with our software, partially offset by a $0.3 million increase due to higher quantities of hardware sold separately for use with our Software Products.

Cost of subscription revenue increased for the three and six months ended ~~March~~June 3130, 2020 compared to the three and six months ended ~~March~~June 3130, 2019, primarily due to increases in personnel costs related to an 115% increase in headcount in our customer support organization and an increase in cloud-based cost with the expansion of our SaaS offering.

Cost of professional services revenue ~~increased~~remained relatively flat for the three months ended ~~March~~June 3130, 2020 compared to the three months ended ~~March~~June 3130, 2019. Cost of professional services revenue increased for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to increases in personnel costs related to a 147% increase in headcount in our professional services organization.

Gross Profit and Gross Margin

Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the mix of products sold between Software Products and Hardware Products; the mix between high-margin and low-margin Hardware Products; the mix of revenue between license, subscription, and professional services; the average sales price of our Software Products, Hardware Products, support and maintenance contracts, and professional services; amortization of acquired developed technology; and manufacturing costs.

Margin on our Software Products was approximately 9497% and 98% for the three months ended ~~March~~June 3130, 2020 and 2019, respectively. Margin on our Hardware Products varies. The average margin on hardware sold separately for use with our Software Products was approximately ~~(8)~~9% and 2427% for the three months ended ~~March~~June 3130, 2020 and 2019, respectively. ~~The negative margin on hardware sold separately for use with our Software Products primarily reflects two large deals that were deeply discounted as a result of one off negotiations.~~ Margin on appliances, which are the hardware appliances that are embedded with our software, varies. The average margin on our high-end appliances was approximately 7166% and 8475%, and the average margin on our low-end appliances was approximately 2618% and 4227%, for the three months ended ~~March~~June 3130, 2020 and 2019, respectively.

26Margin on our Software Products was approximately 97% and 98% for the six months ended June 30, 2020 and 2019, respectively. Margin on our Hardware Products varies. The average margin on hardware sold separately for use with our Software Products was approximately 2% and 25% for the six months ended June 30, 2020 and 2019, respectively. Margin on appliances, which are the hardware appliances that are embedded with our software, varies. The average margin on our high-end appliances was approximately 69% and 82%, and the average margin on our low-end appliances was approximately 21% and 37%, for the six months ended June 30, 2020 and 2019, respectively.

We expect our margins to fluctuate from quarter to quarter based on product mix; however, over time, we expect our margins to increase as a percentage of license revenue primarily due to a shift in product mix towards increased sales of Software Products.

	Three Months Ended March 31,
	Three Months Ended June 30,										Six Months Ended June 30,
	2020					2019					~~Change~~2020					2019
	Gross Profit (Loss)			Gross Margin		Gross Profit (Loss)			Gross Margin		Gross Profit (Loss)			Gross Margin %		Gross Profit (Loss)			Gross Margin
	(Dollars in thousands)
Gross profit:
License	$	931,~~380~~295		6383	%	$	3033,~~073~~209		8086	%	$	~~(20~~40,~~693~~675	)	~~(17~~78	)%	$	63,282		83	%
Subscription	30,~~513~~571			81	%	2829,~~592~~223			8584	%	161,~~921~~084			(481	)%	57,815			84	%
Professional services	(21,~~337~~461		)	(4831	)%	(21,~~097~~608		)	(5135	)%	(~~240~~3,798		)	3(40	)%	(3,705		)	(43	)%
Total gross profit	$	3760,~~556~~405		6676	%	$	5660,~~568~~824		7578	%	$	~~(19~~97,~~012~~961	)	(971	)%	$	117,392		76	%

Gross profit decreased for the three and six months ended ~~March~~June 3130, 2020 compared to the three and six months ended ~~March~~June 3130, 2019. The decrease is consistent with the changes in our revenue and cost of revenue.

Gross margin decreased for the three and six months ended ~~March~~June 3130, 2020 compared to the three and six months ended ~~March~~June 3130, 2019.

The decrease in margin on our license revenue for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 was primarily driven by a shift in product mix within Hardware Products revenue due to a lower concentration of high-end appliances revenue and higher concentration of revenue from hardware sold separately for use with our Software Products for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. Within Hardware Products revenue, the mix among hardware sold separately for use with our Software Products, low-end appliances that are embedded with our software, and ~~high-end~~six ~~appliances that are embedded with our software shifted to 89:10:1 for the three~~ months ended ~~March~~June 3130, 2020, ~~from~~compared ~~57:22:21~~to ~~for~~ the three ~~months ended March 31, 2019. The mix between Software Products revenue~~ and ~~Hardware~~six ~~Products revenue was relatively consistent representing 68:32 for the three~~ months ended ~~March~~June 3130, ~~2020 and 69:31 for the three months ended March 31,~~ 2019.

~~The~~Within ~~decrease~~Hardware inProducts ~~margin on our subscription~~ revenue, ~~was~~the ~~due~~mix toamong ~~higher~~hardware ~~personnel~~sold ~~costs~~separately ~~related~~for touse ~~increased~~with ~~headcount in~~ our ~~support~~Software ~~organization~~Products, aslow-end ~~compared~~appliances tothat ~~our~~are ~~subscription~~embedded ~~revenue~~with ~~growth.~~our ~~The~~software, ~~decrease~~and ~~was~~high-end ~~further~~appliances ~~driven~~that byare anembedded ~~increase in cloud-based cost~~ with ~~the expansion of~~ our ~~SaaS~~software ~~offering.~~

The increase in margin on our professional services revenue was primarily driven by improvements made within professional services as we scale our professional services organizations at a lower growth rate than our anticipated professional services revenue growth rate.29

shifted to 89:10:1 for the three months ended June 30, 2020, from 76:19:5 for the three months ended June 30, 2019, and to 89:10:1 for the six months ended June 30, 2020 from 64:21:15 for the six months ended June 30, 2019. The mix between Software Products revenue and Hardware Products revenue shifted to 83:17 for the three months ended June 30, 2020, from 82:18 for the three months ended June 30, 2019, and to 79:21 for the six months ended June 30, 2020, from 75:25 for the six months ended June 30, 2019.

The decrease in margin on our subscription revenue for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 was due to higher personnel costs related to increased headcount in our support organization, as compared to our subscription revenue growth. The decrease was further driven by an increase in cloud-based cost with the expansion of our SaaS offering.

The increase in margin on our professional services revenue for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 was primarily driven by improvements made within professional services as we scale our professional services organizations at a lower growth rate than our anticipated professional services revenue growth rate.

Operating Expenses

Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel costs are the most significant component of operating expenses and consist of salaries, benefits, bonuses, stock-based compensation, and with regard to sales and marketing expense, sales commissions.

Research and development expense consists primarily of personnel costs. Research and development expense also includes consulting expense, amortization of acquired developed technology, and allocated costs including facilities and information technology related costs. Sales and marketing expense consists primarily of personnel costs. Sales and marketing expense also includes sales commissions, costs for market development programs, promotional and other marketing costs, travel costs, professional services, amortization of acquired customer relationships, and allocated costs including facilities and information technology related costs. Incremental commissions incurred to acquire customer contracts are deferred and recognized as we recognize the associated revenue or over the estimated customer life. General and administrative expense consists of personnel costs, professional services, and allocated costs including facilities and information technology related costs. General and administrative personnel include our executive, finance, human resources, and legal organizations. Professional services consist primarily of legal, auditing, accounting, and other consulting costs. We expect operating expenses to increase in absolute dollars as we continue to invest in our future products and services; however, we expect our operating expenses to decline as a percentage of total revenue in the long term as we scale the business.

	Three Months Ended March 31,
	Three Months Ended June 30,									Six Months Ended June 30,
	2020		2019		Change					2020		2019		Change
	Amount		Amount		Amount			%		Amount		Amount		Amount			%
	(Dollars in thousands)
Operating expenses:
Research and development	$	2321,~~246~~514	$	1819,~~497~~440	$	42,~~749~~074		2611	%	$	44,760	$	37,937	$	6,823		18	%
Sales and marketing	4738,~~288~~988		5556,~~923~~173		(817,~~635~~185		)	(1531	)%	86,276		112,096		(25,820		)	(23	)%
General and administrative	2421,~~481~~733		1615,~~213~~838		85,~~268~~895			5137	%	46,214		32,051		14,163			44	%
Restructuring	~~2,512~~859		—		~~2,512~~859			100	%	3,371		—		3,371			100	%
Total operating expenses	$	9783,~~527~~094	$	9091,~~633~~451	$	6(8,~~894~~357	)	8(9	)%	$	180,621	$	182,084	$	(1,463	)	(1	)%

Research and development expense increased for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, primarily due to an increase in personnel costs of $4.6 million resulting from 22% increase in headcount, net of 5% decrease in headcount attributable to the Q1 2020 Restructuring Plan.30

~~Sales~~Research and ~~marketing~~development expense ~~decreased~~increased for the three months ended ~~March~~June 3130, 2020 compared to the three months ended ~~March~~June 3130, 2019, primarily due to aan ~~decrease~~increase in personnel costs of $43.54 million resulting from a 1613% ~~decrease~~increase in headcount, ~~mainly~~partially ~~attributable~~offset toby ~~the~~a Q1decrease ~~2020~~in ~~Restructuring~~allocated ~~Plan~~IT and ~~includes~~facilities acost. ~~decrease~~Research inand ~~commissions~~development ofexpense ~~$2.3~~increased ~~million~~for ~~consistent~~the ~~with~~six ~~the~~months ~~decrease~~ended inJune 30, ~~revenue~~2020 ~~for~~compared to the ~~period.~~six ~~The~~months ~~decrease~~ended ~~was~~June 30, ~~further~~2019, ~~driven~~primarily bydue ~~decreases~~to an increase in ~~travel~~personnel ~~and~~costs ~~entertainment~~of ~~expenses~~$8.0 ~~and~~million ~~sales~~resulting ~~and~~from ~~marketing~~a ~~expenses~~13% asincrease ~~various~~in ~~marketing~~headcount, ~~events~~partially ~~and~~offset ~~travels~~by ~~were~~a ~~ceased~~decrease in ~~response~~allocated toIT ~~the~~and ~~COVID-19~~facilities ~~pandemic~~cost.

~~General~~Sales and ~~administrative~~marketing expense ~~increased~~decreased for the three months ended ~~March~~June 3130, 2020 compared to the three months ended ~~March~~June 3130, 2019, primarily due to ana ~~increase~~decrease in ~~professional~~personnel ~~fees~~costs of $9.13 million ~~which~~resulting from a 30% decrease in headcount mainly attributable to restructuring activities and includes ~~consulting~~a decrease in stock compensation expense of $2.4 million. The decrease was further driven by a decrease in travel and ~~legal~~entertainment ~~fees~~expense of $5.0 million and a decrease in ~~relation~~sales and marketing expense of $1.5 million as various marketing events and travels were ceased in response to the ~~Merger~~COVID-19 ~~Agreement~~pandemic. Sales and marketing expense decreased for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to a decrease in personnel costs of $13.8 million resulting from a 30% decrease in headcount mainly attributable to restructuring activities and includes a decrease in commissions of $3.4 million consistent with the decrease in revenue for the period and a decrease in stock compensation expense of $3.1 million. The decrease was further driven by a decrease in travel and entertainment expense of $6.7 million and a decrease in sales and marketing expense of $2.4 million as various in-person marketing events and travel were ceased in response to the COVID-19 pandemic.

~~Restructuring~~General and administrative expense increased for the three months ended ~~March~~June 3130, 2020 compared to the three months ended ~~March~~June 3130, 2019, primarily due to an increase in professional fees of $8.0 million and includes legal fees related to the Q1Merger, partially offset by a decrease in personnel cost of $1.9 million resulting from a 3% decrease in headcount mainly attributable to restructuring activities. General and administrative expense increased for the six months ended June 30, 2020 ~~Restructuring~~compared ~~Plan~~to ~~that~~the ~~resulted~~six months ended June 30, 2019, primarily due to an increase in professional fees of $17.1 million, which includes consulting and legal fees related to the Merger. The increase was partially offset by a ~~reduction~~decrease in ~~force~~personnel costs of ~~approximately~~$1.9 90million ~~employees~~resulting ~~worldwide~~from a 3% decrease in headcount mainly attributable to restructuring activities.

Restructuring expense increased for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019, primarily due to restructuring activities that resulted in a reduction in force as we realigned our cost structure and workforce to align with our near-term business and strategy in response to the impact of COVID-19 on our business operations and the plan to transition into a subscription and cloud-based product.

Interest Expense

Interest expense consists of interest on our outstanding indebtedness.



	Three Months Ended June 30,										Six Months Ended June 30,
	2020			2019			Change				2020			2019			Change
	Amount			Amount			Amount		%		Amount			Amount			Amount			%

	(Dollars in thousands)
Interest expense	$	(118	)	$	(142	)	$	24	(17	)%	$	(353	)	$	(235	)	$	(118	)	50	%

	Three Months Ended March 31,
	2020			2019			Change
	Amount			Amount			Amount			%
	(Dollars in thousands)
Interest expense	$	(235	)	$	(93	)	$	(142	)	153	%

Interest expense decreased for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to the decreasing notes payable balance associated with our amended and restated loan and security agreement entered into on December 22, 2016. Interest expense increased for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to a $16.0 million drawdown of revolving credit facility in the first quarter of 2020 which was fully repaid in the second quarter of 2020.

~~Interest expense increased for the three months ended March~~ 31~~, 2020 compared to the three months ended March 31, 2019, primarily due to a $16.0 million drawdown of revolving credit facility.~~

Other Income (Expense) ~~Income~~, Net

Other income (expense) ~~income~~, net consists primarily of interest income earned on our cash, cash equivalents, and marketable securities, sublease income, and foreign currency exchange gains (losses) related to transactions denominated in currencies other than the U.S. Dollar.

	Three Months Ended March 31,
	Three Months Ended June 30,										Six Months Ended June 30,
	2020			2019		Change					2020			2019		Change
	Amount			Amount		Amount			%		Amount			Amount		Amount			%
	(Dollars in thousands)
Other (expense) income, net	$	(601	)	$	617	$	(1,218	)	(197	)%
Other income (expense), net	$	572		$	505	$	67		13	%	$	(29	)	$	1,122	$	(1,151	)	(103	)%

Other income (expense), net remained relatively flat for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. Other income (expense), net decreased for the ~~three~~six months ended ~~March~~June 3130, 2020 compared to the ~~three~~six months ended ~~March~~June 3130, 2019 primarily driven by ~~foreign~~a ~~currency~~decrease ~~remeasurement~~in ~~and~~short-term ~~transaction losses~~investments.

Provision for Income Taxes

Provision for income taxes consists primarily of foreign income taxes, unrecognized tax benefits, withholding taxes, and U.S. state income taxes. We maintain a full valuation allowance for domestic net deferred tax assets. Our foreign deferred tax assets are immaterial.

	Three Months Ended March 31,
	Three Months Ended June 30,											Six Months Ended June 30,
	2020			2019			Change					2020			2019			Change
	Amount			Amount			Amount			%		Amount			Amount			Amount		%
	(Dollars in thousands)
Income tax provision	$	~~432~~1,288		$	~~711~~496		$	~~(279~~792	)	~~(39~~160	)%	$	1,720		$	1,207		$	513	43	%
Effective tax rate	(05.78		)%	(2.1.6		)%						(2.1		)%	(1.9		)%

We recorded an income tax provision for the three and six months ended ~~March~~June 3130, 2020 due to foreign income taxes, unrecognized tax benefits, and U.S. state minimum taxes. The ~~decrease~~increase in income tax provision for the three and six months ended ~~March~~June 3130, 2020 was primarily related to aan ~~decrease~~increase in discrete tax expenses. The effective tax rate ~~increased~~decreased for the three and six months ended ~~March~~June 3130, 2020 compared to the three and six months ended ~~March~~June 3130, 2019 primarily due to ana ~~increase~~decrease in worldwide loss before income taxes, which was largely generated in the United States and offset by a full valuation allowance.

Liquidity and Capital Resources

The following data should be read in conjunction with our condensed consolidated statements of cash flows.

	As of
	March 31, 2020			December 31, 2019
	June 30, 2020			December 31, 2019
	(In thousands)
Working capital	$	(2225,~~494~~560	)	$	25,320
Cash, cash equivalents, and marketable securities:
Cash and cash equivalents	$	8354,~~795~~947		$	69,030
Marketable securities	162,~~126~~021			29,181
Total cash, cash equivalents, and marketable securities	9956,~~921~~968			98,211
Total notes payable	64,~~402~~550			8,248
Revolving credit facility	16,000			—
Net cash, cash equivalents, and marketable securities	$	52,418		$	89,963
Net cash, cash equivalents, and marketable securities	$	77,519		$	89,963

Our liquidity and capital resources are derived from cash received from our initial public offering and follow-on offering, and cash flows from operations. Further, during the three months ended March 31, 2020, we elected to drawdown on the revolving credit facility available to us in light of the macro-economic conditions and its potential impact on credit market availability in the future. Our cash equivalents are comprised of cash and money market accounts. Our marketable securities are comprised of corporate-debt securities. We believe our existing cash, cash equivalents, and marketable securities will be sufficient to meet our projected operating requirements for at least the next 12 months. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the introduction of new and enhanced products and services offerings, and the continuing market acceptance of our products as well as the timing of the closing of the Merger and the duration and extent of the COVID-19 pandemic and its effect on our business.

At ~~March~~June 3130, 2020, our cash, cash equivalents, and marketable securities of $9957.90 million were held for general corporate purposes, of which approximately $2925.35 million was held outside of the United States. We will continue to reinvest our foreign cash outside of the United States. If we were to repatriate these earnings to the United States, any associated withholding tax would not be material.

The significant components of our working capital are cash and cash equivalents, marketable securities, accounts receivable, current deferred commissions, and prepaid expenses and other current assets, reduced by accounts payable, accrued compensation, accrued expenses, current deferred revenue, current notes payable, and current operating lease liabilities. Working capital decreased by $4750.89 million during the ~~three~~six months ended ~~March~~June 3130, 2020, primarily due to alower ~~decrease in accounts receivable~~billings, anpredominantly ~~increase~~ in the ~~revolving~~three ~~credit~~months ~~facility~~ended ~~($16~~March ~~million)~~31, ~~decrease in marketable securities~~2020, and ~~decrease~~higher incosts ~~prepaid~~resulting ~~expenses~~from ~~and~~Merger-related ~~other~~expenses ~~current assets, partially offset by increase~~ in ~~cash~~connection ~~and~~with ~~cash~~the ~~equivalents, decrease in accrued compensation, decrease in accounts payable, and decrease in current notes payable~~Merger. The following table summarizes our cash flows for the ~~three~~six months ended ~~March~~June 3130, 2020 and 2019.



	Six Months Ended June 30,
	2020			2019

	(In thousands)
Net cash used in operating activities	$	(44,771	)	$	(18,747	)
Net cash provided by (used in) investing activities	25,645			(13,617		)
Net cash provided by financing activities	4,542			12,675
Effect of exchange rate changes on cash and cash equivalents	—			(4		)
Net change in cash, cash equivalents, and restricted cash for period	$	(14,584	)	$	(19,693	)

	Three Months Ended March 31,
	2020			2019
	(In thousands)
Net cash (used in) provided by operating activities	$	(14,463	)	$	6,439
Net cash provided by (used in) investing activities	12,177			(10,117		)
Net cash provided by financing activities	17,026			7,534
Effect of exchange rate changes on cash and cash equivalents	—			(70		)
Net change in cash, cash equivalents, and restricted cash for period	$	14,740		$	3,786

Operating Activities

Our operating activities have consisted of net loss adjusted for certain non-cash items and changes in assets and liabilities.

Cash (used in) provided by operating activities was $(14.5) million and $6.4 million for the three months ended March 31, 2020 and 2019, respectively, representing a decrease of $20.9 million as compared to the three months ended March 31, 2019. The decrease in generation of cash during the three months ended March 31, 2020 was due primarily to lower billings and higher operating expenses as we continue to invest in the long-term growth of our business, partially offset by proceeds from collections.33

Cash used in operating activities was $44.8 million and $18.7 million for the six months ended June 30, 2020 and 2019, respectively, representing a decrease of $26.0 million as compared to the six months ended June 30, 2019. The decrease in generation of cash during the six months ended June 30, 2020 was due primarily to lower billings, predominantly in the three months ended March 31, 2020, partially offset by proceeds from collections.

Investing Activities

Our investing activities have consisted of financial instrument purchases and capital expenditures. We expect to continue such activities as our business grows.

Cash provided by investing activities during the ~~three~~six months ended ~~March~~June 3130, 2020 was $1225.26 million, primarily resulting from proceeds from maturities of marketable securities of $1327.0 million, partially offset by capital expenditures to purchase property and equipment of $01.84 million related to the continuing growth of our business.

Cash used in investing activities during the ~~three~~six months ended ~~March~~June 3130, 2019 was $1013.16 million, primarily resulting from purchases of marketable securities of $3763.76 million and capital expenditures to purchase property and equipment of $13.64 million related to the continuing growth of our business, partially offset by proceeds from maturities of marketable securities of $2953.14 million.

Financing Activities

Our financing activities have consisted of proceeds from revolving credit facility, proceeds from the issuance of common stock, issuance of shares through our employee equity incentive plans, and repayments of notes payable.

Cash provided by financing activities for the ~~three~~six months ended ~~March~~June 3130, 2020 was $174.05 million, primarily from the proceeds from ~~drawdown of revolving credit facility of $16.0 million and~~ the ~~proceeds from the~~ sales of shares through our employee equity incentive plans of $511.26 million, partially offset by the repayment of notes payable of $3.8 million and payments related to shares withheld for taxes on the vesting of restricted stock units of $23.3 million ~~and the repayment of notes payable of $1~~.~~9 million.~~

Cash provided by financing activities for the ~~three~~six months ended ~~March~~June 3130, 2019 was $712.57 million, primarily from the sale of shares through our employee equity incentive plans of $1220.27 million, partially offset by payments related to shares withheld for taxes on the vesting of restricted stock units of $24.83 million, and the repayment of notes payable of $13.97 million.

3134

Contractual Obligations and Commitments

During the three months ended March 31, 2020, we elected to drawdown $16.0 million on the revolving credit facility available to us ~~in light~~ of ~~the~~which ~~macro-economic~~we ~~conditions~~have ~~and~~fully ~~its~~repaid ~~potential~~by ~~impact~~June ~~on credit market availability in the future~~30, ~~if it were to be necessary~~2020. Aside from the drawdown and repayment of the revolving credit facility, there were no material changes outside the ordinary course of business during the ~~three~~six months ended ~~March~~June 3130, 2020 in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Off-Balance Sheet Arrangements

Through ~~March~~June 3130, 2020, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2019. There were no changes to our Critical Accounting Policies and Estimates for the ~~three~~six months ended ~~March~~June 3130, 2020.

Recent Accounting Pronouncements

See Note 1. Description of Business and Summary of Significant Accounting Policies of our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.




ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our sales contracts are primarily denominated in U.S. Dollar. A portion of our operating expenses are incurred outside of the United States, are denominated in foreign currencies, and are subject to fluctuations due to changes in foreign currency exchange rates. We performed a sensitivity analysis of these risks to our financial positions as of ~~March~~June 3130, 2020 to determine whether material changes in market risks pertaining to currency and interest rates have occurred as a result of COVID-19. Our assessment of our exposures to market risk have not changed materially since the presentation set forth in Part II, Item 7A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. See section titled “Risk Factors” for further discussion of the possible impact of COVID-19 on our business.




ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes 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 our evaluation, our principal executive officer and principal financial officer concluded that, as of ~~March~~June 3130, 2020, our disclosure controls and procedures are effective 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 the Securities and Exchange Commission (“SEC”) rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended ~~March~~June 3130, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As a result of COVID-19, our global workforce shifted to a primarily work from home environment beginning in March 2020. While our pre-existing controls were not specifically designed to operate in our current work from home operating environment, we believe that our internal controls over financial reporting continue to be effective.

3337

PART II. OTHER INFORMATION




ITEM 1.	LEGAL PROCEEDINGS

From time to time, we are involved in claims and legal proceedings that arise in the ordinary course of business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance.

To the extent there is a reasonable possibility that a loss exceeding amounts already recognized may be incurred, and the amount of such additional loss would be material, we will either disclose the estimated additional loss or state that such an estimate cannot be made. We do not currently believe that it is reasonably possible that additional losses in connection with litigation arising in the ordinary course of business would be material.

OnBetween ~~January~~March 13, 22020 and April 3, 2020, afour ~~complaint~~lawsuits ~~was~~were filed by purported stockholders of the Company challenging disclosures made by us in connection with the ~~United~~transactions ~~States~~contemplated ~~District~~by ~~Court,~~the ~~Northern~~Original ~~District~~Merger ofAgreement. ~~California~~Of those four lawsuits, three were brought by ~~Christopher~~plaintiffs Lindividually and are captioned Blackwell v. ~~Sayce~~Forescout Technologies, Inc., ~~individually~~et al., Case No. 1:20-cv-02267 (S.D.N.Y. filed Mar. 13, 2020); Bushansky v. Forescout Technologies, Inc., et al., Case No. 5:20-cv-01867-BLF (N.D. Cal. filed Mar. 17, 2020); and onWilliams ~~behalf~~v. ofForescout ~~all~~Technologies, ~~others~~Inc., ~~similarly~~et ~~situated~~al., ~~against~~Case No. 1:20-cv-02784-ALC (S.D.N.Y. filed April 3, 2020) (which we refer to collectively as the “Complaints”). The Complaints named as defendants the Company and ~~two~~the members of ~~its~~our ~~executive~~board ~~officers,~~of ~~for~~directors (the “Board”). The Complaints alleged violations of ~~the~~Section 14(a) ~~federal~~and ~~securities~~20(a) ~~laws~~of ~~following~~ the ~~Company’s~~Exchange ~~pre~~Act and Rule 14a-~~earnings~~9 ~~release~~promulgated ~~announcement~~thereunder. The onBlackwell ~~October~~and ~~10,~~Bushansky ~~2019~~complaints contended that our preliminary proxy statement omitted or misrepresented material information regarding the transactions contemplated by the Original Merger Agreement. The Williams complaint, ~~which~~contended ~~purports~~that toour bedefinitive ~~brought~~proxy onstatement ~~behalf~~omitted ofor amisrepresented ~~class~~material ofinformation ~~purchasers~~regarding ofthe transactions contemplated by the ~~Company’s~~Original ~~securities~~Merger ~~during~~Agreement. The allegations in the ~~period~~Complaints ~~from~~included ~~February~~that 7,material ~~2019~~information ~~through~~was ~~October~~misstated 9,or ~~2019~~omitted regarding our financial projections, ~~seeks~~the toanalyses ~~recover~~performed ~~damages~~by ~~for~~our ~~such~~investment ~~violations~~banker, and tocertain ~~pursue~~details ~~remedies~~about ~~under~~past ~~Sections~~services ~~10(b)~~that our investment banker provided to Advent and ~~20(~~its affiliates. The Blackwell complaint also alleged that the preliminary proxy statement omitted material information regarding the recusal of a) member of the ~~Securities~~Board ~~Exchange~~from ~~Act~~meetings of ~~1934.~~the ~~The~~Board ~~claim~~and ~~does~~its ~~not~~Strategic ~~state~~Committee arelating ~~value~~to ~~for~~the transactions contemplated by the Original Merger Agreement, as well as certain details of confidentiality agreements between ForeScout and ten potential ~~damages~~acquirors. ~~Based~~In onaddition, the ~~Company’s~~Bushansky complaint alleged that the preliminary ~~review~~proxy statement omitted material information regarding discussions of the potential continued employment, retention, or other benefits of our executive officers and/or directors following the ~~Company~~transactions ~~believes~~contemplated by the ~~claim~~Original toMerger beAgreement. ~~without~~The ~~merit~~Complaints ~~and~~sought, ~~plans~~among other things, to ~~vigorously~~(1) enjoin ~~defend~~the ~~itself~~defendants tofrom consummating the ~~maximum~~transactions ~~extent~~contemplated ~~allowed~~by the Original Merger Agreement; (2) cause the defendants to disseminate revised disclosures; and (3) rescind the transactions contemplated by the ~~law~~Original Merger Agreement or recover damages in the event that such transactions were completed.

~~Between~~The ~~March 13,~~Blackwell ~~2020~~action ~~and~~was ~~April~~voluntarily 3,dismissed ~~2020,~~without ~~one~~prejudice ~~putative~~on ~~class action,~~June ~~Smith v. Forescout Technologies~~8, ~~Inc.,~~ ~~et al~~2020., ~~No. 1:20-cv-00376,~~The ~~and~~Bushansky ~~three~~action ~~individual~~was ~~actions, Blackwell~~voluntarily v.dismissed ~~Forescout~~without ~~Technologies, Inc.,~~prejudice eton ~~al., No.~~June 1~~:20-cv-02267~~, ~~Bushansky~~ v2020. ~~Forescout~~The ~~Technologies, Inc., et al., No. 5:20-cv-01867, and~~ Williams ~~v. Forescout Technologies~~action, ~~Inc.,~~which etwas ~~al.,~~not ~~No. 1:20-cv-02784 (collectively~~served, ~~the “Complaints”) were filed by purported Company stockholders against the Company and the members of the Company’s board of directors (the “Board”). Smith~~ was ~~filed~~voluntarily indismissed ~~the~~without ~~U.S.~~prejudice ~~District~~on ~~Court for the District of Delaware;~~June Blackwell and Williams were filed in the U.S. District Court for the Southern District of New York; and Bushansky was filed in the U.S. District Court for the Northern District of California. The Complaints generally allege that the Company's preliminary proxy statement contained false or misleading statements regarding the merger in violation of Sections 14(a) and 20(a) of the Exchange Act. The Complaints each bring a claim for violation of Section 14(a) of the Exchange Act22, and Rule 14a-9 promulgated thereunder, against the Company and the members of the Board, and a claim for violation of Section 20(a) of the Exchange Act against the members of the Board as “controlling persons2020.” The actions seek, among other things, to (1) enjoin the defendants from consummating the merger; (2) cause the defendants to disseminate revised disclosures; and (3) rescind the merger or recover damages in the event that the merger is completed. The Company has not yet responded to any of the Complaints and, based on the Company’s preliminary review, the Company believes the claims to be without merit and plans to vigorously defend itself to the maximum extent allowed by law.

The fourth lawsuit, which was brought as a putative class action, was captioned Smith v. Forescout Technologies, Inc., et al., Case No. 1:20-cv-00376-CFC (D. Del. Filed Mar. 17, 2020). The Smith complaint alleged that we and members of our Board violated Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The Smith complaint contended that our preliminary proxy statement omitted or misrepresented material information regarding the transactions contemplated by the Original Merger Agreement and sought the remedies of injunctive relief, rescission or rescissory damages, and an award of plaintiffs’ costs, including attorneys’ fees and expenses. The Smith complaint also sought dissemination of a proxy statement with revised disclosures.

The Smith action was voluntarily dismissed without prejudice on June 1, 2020. On June 5, 2020, the plaintiff in the Blackwell action mentioned above filed a motion to be appointed as the lead plaintiff in the Smith action. On June 26,

2020, the same plaintiff filed a notice of non-opposition to his motion to be appointed lead plaintiff. That motion is currently pending.

On January 2, 2020, Christopher L. Sayce filed a class action lawsuit (which we refer to as the “Sayce action”) in the Northern District of California alleging that the Company, Michael DeCesare and Christopher Harms violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The purported class includes all persons who purchased or acquired our securities between February 7, 2019, and October 9, 2019. The lead plaintiff filed an amended complaint on May 22, 2020. The amended complaint purports to bring claims on behalf of a class of purchasers of our securities during the period from February 7, 2019 through May 15, 2020. On July 6, 2020, the defendants filed a motion to dismiss the amended complaint.

On June 10, 2020, a putative stockholder class action complaint (which we refer to as “The Arbitrage Fund action”) was filed in the United States District Court, Northern District of California by The Arbitrage Fund, Water Island LevArb Fund, L.P., Water Island Diversified Event-Driven Fund, Water Island Merger Arbitrage Institutional Comingled Master Fund LP and AltShares Merger Arbitrage ETF, alleging that Forescout, Michael DeCesare and Christopher Harms violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The purported class includes all persons who purchased or acquired our securities between February 6, 2020, and May 15, 2020, and generally alleges that the defendants made false and misleading statements and/or omitted material facts concerning our financial performance and the risk that the acquisition of Forescout by Advent would not close. On June 17, 2020, the Court granted an administrative motion to relate The Arbitrage Fund action and the Sayce action. On July 22, 2020, the Court entered an order consolidating the Sayce and The Arbitrage Fund actions. The Court also vacated its prior order appointing the lead plaintiff and appointing lead counsel and ordered the former lead plaintiff to republish notice under the Private Securities Litigation Reform Act by July 31, 2020, and that any member of the putative class seeking to be appointed lead plaintiff must file a lead plaintiff motion within 60 days thereafter. The former lead plaintiff republished notice on July 29, 2020. The Court also denied as moot defendants’ pending motion to dismiss without prejudice to refiling a motion to dismiss following the conclusion of the new lead plaintiff process.

On July 31, 2020, a purported class action complaint was filed in the United States District Court, Northern District of California, by Stephen Bushansky, individually, and on behalf of all others similarly situated against the Company and our Board for alleged violations of Delaware law and Section 14(e) and Section 20(a) of the Exchange Act related to the entry into the Amended and Restated Merger Agreement and the Schedule 14D-9. The complaint seeks to (1) enjoin the consummation of the tender offer contemplated by the Amended and Restated Merger Agreement (the “Offer”); (2) cause defendants to disseminate revised disclosures; and (3) rescind the transactions contemplated by the Amended and Restated Merger Agreement or recover damages in the event that such transactions were completed.

On July 31, 2020, a purported class action complaint was filed in the United States District Court, Southern District of New York, by Edward Smith, individually, and on behalf of all others similarly situated, against the Company and our Board for alleged violations of Section 14(d), Section 14(e) and Section 20(a) of the Exchange Act related to the Schedule 14D-9. Parent and Merger Sub are also named as defendants. The complaint seeks to (1) enjoin the consummation of the Offer; (2) cause defendants to disseminate revised disclosures; and (3) rescind the transactions contemplated by the Amended and Restated Merger Agreement or recover damages in the event that such transactions were completed.

On August 4, 2020, a purported class action complaint was filed in the United States District Court, Northern District of California, by Ronald Blackwell, individually, and on behalf of all others similarly situated, against the Company and our Board for alleged violations of Section 14(e) and Section 20(a) of the Exchange Act related to the Schedule 14D-9. The complaint seeks to (1) enjoin the consummation of the Offer; (2) cause defendants to disseminate revised disclosures; and (3) rescind the transactions contemplated by the Amended and Restated Merger Agreement or recover damages in the event that such transactions were completed.

On May 15, 2020, Fortinet, Inc. (“Fortinet”) filed a complaint in the United States District Court, Northern District of California, against the Company for alleged patent infringement. The complaint seeks legal and equitable relief against the Company’s purported unlawful infringement of three of Fortinet's United States Patents (Patent Nos. 8,458,314, 9,369,299, and 9,948,662). The claim does not state a value for potential damages. Based on the Company’s preliminary review, the Company believes the claims to be without merit and the Company plans to vigorously defend

itself to the maximum extent allowed by the law. On July 13, 2020, the Company filed a motion to dismiss Fortinet’s complaint citing multiple grounds for dismissing Fortinet’s complaint.

We believe that the claims asserted in all of the above-referenced actions are without merit.

On May 19, 2020, we filed an action in the Delaware Court of Chancery captioned Forescout Technologies, Inc. v. Ferrari Group Holdings, L.P., et al., C.A. No. 2020-0385-SG. This action alleged that Parent and Merger Sub breached the Original Merger Agreement. On May 30, 2020, Parent and Merger Sub filed counterclaims alleging that we breached the Original Merger Agreement and that certain conditions to closing thereunder could not be met. Concurrently with the execution of the Amended and Restated Merger Agreement, Forescout, Parent and Merger Sub entered into a settlement agreement pursuant to which the parties have agreed to release their respective claims made in connection with that litigation. On July 15, 2020, the parties submitted a stipulation dismissing all claims and counterclaims in the action which the Court granted the same day. The action is now concluded.




ITEM 1A.	RISK FACTORS

Refer to the description of the risk factors associated with our business in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Except as set forth below, there have been no material changes from the risk factors described under Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Before you buy our common stock, you should know that making such an investment involves some risks and uncertainties, including, but not limited to, the risks described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and the additional risk set forth below and elsewhere in this Quarterly Report on Form 10-Q. Additionally, any one of those risks could harm our business, financial condition and results of operations, which could cause our stock price to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

and results of operations, which could cause our stock price to decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

The recent global COVID-19 outbreak has adversely affected, and could continue to adversely affect, our business and results of operations. We are unable to predict the extent to which the pandemic and related impacts will continue to adversely affect our business operations, financial performance, results of operations, and financial position.

In March 2020 the World Health Organization declared COVID-19 to be a pandemic. This outbreak has continued to spread across the globe and is impacting worldwide economic activity and financial markets. As a result of COVID-19, we are experiencing negative impacts on our sales and marketing efforts, along with delays to, and lengthening of, our sales cycles. Any of these could harm our business and results of operations. In addition, COVID-19 may disrupt the operations of our customers and partners for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns, all of which could negatively impact our business and results of operations.

More generally, the outbreak of COVID-19 has adversely affected economies and financial markets globally, potentially leading to an economic downturn, which could decrease technology spending and adversely affect demand for our offerings and harm our business and results of operations. We expect that until the pandemic subsides, we will face longer sales cycles and challenges attracting new customers and closing sales. Further, if we need to raise capital, we may not be able to do so on terms that are favorable for us or our stockholders, or at all. It is not possible at this time to estimate the impact that COVID-19 could have on our business, as the impact will depend on future developments, which are highly uncertain and cannot be predicted.

The announcement and pendency of our agreement to be acquired by Advent could adversely affect our business.

On February 6, 2020, we announced that we had entered into a definitive agreement to be acquired by entities affiliated with Advent (such acquisition, the “Acquisition”). We amended the terms of that agreement on July 15, 2020. Uncertainty about the effect of the Acquisition on our end-customers, employees, partners, and other parties may adversely affect our business. Our employees may experience uncertainty about their roles or seniority following the Acquisition. There can be no assurance that our employees, including key personnel, can be retained, or that we will be able to attract and retain employees to the same extent that we have previously been able to. Any loss or distraction of such employees could adversely affect our business and operations. In addition, we have diverted, and will continue to divert, significant management resources, and have expended, and will continue to expend, significant cash amounts, toward the completion of the Acquisition, which could adversely affect our business and operations. Parties with which we do business may experience uncertainty associated with the Acquisition, including with respect to current or future business relationships with us. Uncertainty may cause customers to refrain from doing business with us, which could adversely affect our business, results of operations and financial condition.

The failure to complete the Acquisition could adversely affect our business.

Consummation of the Acquisition is subject to several conditions beyond our control that may prevent, delay, or otherwise adversely affect its completion, including the need for at least a majority of our stockholders to tender their shares of our common stock into the Offer. If any of these conditions are not satisfied or waived, it is possible that the Acquisition will not be consummated in the expected time frame (or at all) or that the definitive agreement may be terminated. If the Acquisition is not completed, the share price of our common stock may decrease to the extent that the current market price of our common stock reflects an assumption that the Acquisition will be completed. In addition, under circumstances specified in the Amended and Restated Merger Agreement, we may be required to pay a termination fee of $48.6 million to Advent. Further, a failed transaction may result in negative publicity and a negative impression of us in the investment community. Any disruption to our business resulting from the announcement and pendency of the Acquisition and from intensifying competition from our competitors, including any adverse changes in our

relationships with our customers, employees, partners and other parties, could continue or accelerate in the event of a failed transaction. There can be no assurance that our business, relationships with other parties, liquidity or financial condition will not be adversely affected, as compared to the condition prior to the announcement of the Acquisition, if the Acquisition is not consummated.

While the Acquisition is pending, we are subject to business uncertainties and contractual restrictions that could harm our operations and the future of our business or result in a loss of employees.

Pursuant to the terms of the Amended and Restated Merger Agreement, we are subject to certain restrictions on the conduct of our business. These restrictions subject us to a variety of specified limitations, including the ability in certain cases to enter into material contracts, acquire or dispose of assets, incur indebtedness or incur capital expenditures, until the Acquisition becomes effective or the Amended and Restated Merger Agreement is terminated. These restrictions may inhibit our ability to take actions that we may consider advantageous and may limit our ability to respond to future business opportunities and industry developments that may arise during such period. The pendency of the Acquisition has diverted, and may continue to divert, management’s attention and our resources from ongoing business and operations. Our end-customers, employees, partners, and other parties may have uncertainties about the effects of the Acquisition. In connection with the Acquisition, it is possible that some customers and other persons with whom we have a business relationship may delay or defer certain business decisions or might decide to seek to terminate, change or renegotiate their relationship with us as a result of the Acquisition. If any of these effects were to occur, it could materially and adversely impact our business, cash flow, results of operations or financial condition, as well as the market price of our common stock and our perceived value, regardless of whether the Acquisition is completed. In addition, whether or not the Acquisition is completed, while it is pending we will continue to incur costs, fees, expenses and charges related to the Acquisition, which may materially and adversely affect our financial condition.

The Amended and Restated Merger Agreement limits our ability to pursue alternatives to the Acquisition.

The Amended and Restated Merger Agreement contains provisions that make it more difficult for us to enter into alternative transactions. The Amended and Restated Merger Agreement contains certain provisions that restrict our ability to, among other things, solicit, initiate or knowingly encourage or knowingly facilitate the submission of inquiries, proposals or offers relating to or that would reasonably be expected to lead to any acquisition proposal from a third party. The Amended and Restated Merger Agreement also provides that the Board will not change its recommendation that our stockholders tender their shares into the Offer and will not approve any agreement with respect to an acquisition proposal, subject to limited exceptions.

While we believe that these provisions are reasonable, customary and not preclusive of other offers, they might discourage a third party that has an interest in acquiring all or a significant part of us from considering or proposing such acquisition, even if such party were prepared to pay consideration with a higher per-share value than the Offer Price. Furthermore, the requirement to pay a termination fee under certain circumstances may result in a third party proposing to pay a lower per-share price to acquire us than it might otherwise have proposed to pay because of the added expense of the $48.6 million termination fee that may become payable by us in certain circumstances.

Litigation may arise in connection with the Acquisition, which could be costly, prevent consummation of the Acquisition, divert management’s attention and otherwise materially harm our business.

Regardless of the outcome of any future litigation related to the Acquisition, such litigation may be time-consuming and expensive and may distract our management from running the day-to-day operations of our business. The litigation costs and diversion of management’s attention and resources to address the claims and counterclaims in any litigation related to the Acquisition may materially adversely affect our business, results of operations, prospects, and financial condition. If the Acquisition is not consummated for any reason, litigation could be filed in connection with the failure to consummate the Acquisition. Any litigation related to the Acquisition may result in negative publicity or an unfavorable impression of us, which could adversely affect the price of our common stock, impair our ability to recruit or retain employees, damage our relationships with our end-customers, manufacturers and other third-party providers, or otherwise materially harm our operations and financial performance.




ITEM 6.	EXHIBITS

The documents listed in the Exhibit Index of this Quarterly Report on Form 10-Q are herein incorporated by reference or are filed with this Quarterly Report on Form 10-Q, in each case as indicated therein (numbered in accordance with Item 601 of Regulation S-K).

3543

EXHIBIT INDEX

Exhibit Number		Description
2.1		Agreement and Plan of Merger, dated February 6, 2020, among Ferrari Group Holdings, L.P., Ferrari Merger Sub, Inc. and the Registrant (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 8-K (No. 001-38253), filed with the SEC on February 7, 2020).
31.1		Certification of the Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1†		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
32.2†		Certification of Principal 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		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 Schema Linkbase Document.
101.CAL		Inline XBRL Taxonomy Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Labels Linkbase Document.
101.PRE		Inline XBRL Taxonomy Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).



†	This certification is deemed not filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Forescout Technologies, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10‑Q, irrespective of any general incorporation language contained in such filing.

3644

SIGNATURES

Pursuant to the requirements 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.

	FORESCOUT TECHNOLOGIES, INC.
Dated: May 11, 2020	By: /s/ Darren J. Milliken
Dated: August 5, 2020	By: /s/ Darren J. Milliken
	Darren J. Milliken
	Senior Vice President, General Counsel, Corporate Secretary and Corporate Compliance Officer

Dated: May 11, 2020	By: /s/ Christopher Harms
Dated: August 5, 2020	By: /s/ Christopher Harms
	Christopher Harms
	Chief Financial Officer
	Principal Financial Officer

3745

Filing Compare · FORESCOUT TECHNOLOGIES, INC