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 June 30, ~~2019~~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)

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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 ~~August 1, 2019~~July 31, 2020 was ~~46,210,958.~~49,712,035.

TABLE OF CONTENTS






		Page
	PART I - FINANCIAL INFORMATION	56
Item 1.	Financial Statements	56
	Condensed Consolidated Balance Sheets as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019	56
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	67
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	78
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	89
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, ~~2019~~2020 and ~~2018~~2019	910
	Notes to Condensed Consolidated Financial Statements	1011
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1921
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	3637

	PART II - OTHER INFORMATION	38
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	3841
Item 6.	Exhibits	3843
	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:

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;~~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 Quarterly Report on Form 10-Q~~our filings with the SEC 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, ~~2018~~2019 and ~~those discussed~~ in ~~other documents we file with the SEC.~~Part II, Item 1A of this Quarterly Report on Form 10-Q. 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)


	June 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	46,872		$	66,895		$	54,947		$	69,030
Marketable securities	58,065			47,632			2,021			29,181
Accounts receivable	66,903			79,255			63,924			84,168
Inventory	2,093			1,501			1,418			372
Deferred commissions - current	11,716			12,543			13,350			12,843
Prepaid expenses and other current assets	13,180			13,353			11,383			17,024
Total current assets	198,829			221,179			147,043			212,618
Deferred commissions - non-current	21,848			22,831			20,848			23,036
Property and equipment, net	23,701			24,349			20,718			23,835
Operating lease right-of-use assets	22,271			—			27,265			29,626
Restricted cash - non-current	1,293			1,266			1,554			1,555
Intangible assets, net	17,369			19,002			17,339			19,367
Goodwill	92,045			92,482			98,018			98,018
Other assets	6,889			7,369			6,946			8,172
Total assets	$	384,245		$	388,478		$	339,731		$	416,227

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	9,563		$	12,118		$	11,899		$	10,692
Accrued compensation	31,739			32,649			29,770			34,007
Accrued expenses	14,087			14,558			16,381			16,279
Deferred revenue - current	103,365			101,900			104,191			112,232
Notes payable - current	7,375			7,331			4,550			8,248
Operating lease liabilities - current	5,240			—			5,812			5,840
Total current liabilities	171,369			168,556			172,603			187,298
Deferred revenue - non-current	69,779			69,618			67,274			75,366
Notes payable - non-current	4,550			8,248
Operating lease liabilities - non-current	24,376			—			29,211			32,125
Other liabilities	7,056			14,335			23,638			23,893
Total liabilities	277,130			260,757			292,726			318,682

Stockholders' equity:
Common stock, $0.001 par value; 1,000,000 shares authorized;
45,903 and 43,403 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively	46			43
49,550 and 48,064 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively							50			48
Additional paid-in capital	683,957			639,237			762,187			727,922
Accumulated other comprehensive loss	(619		)	(302		)	(678		)	(633		)
Accumulated deficit	(576,269		)	(511,257		)	(714,554		)	(629,792		)
Total stockholders’ equity	107,115			127,721			47,005			97,545
Total liabilities and stockholders' equity	$	384,245		$	388,478		$	339,731		$	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 Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Revenue:
License	$	38,831		$	34,323		$	76,511		$	64,103		$	37,577		$	38,831		$	52,376		$	76,511
Subscription	34,822			28,986			68,621			55,345			37,612			34,822			75,138			68,621
Professional services	4,627			4,285			8,716			7,843			4,687			4,627			9,515			8,716
Total revenue	78,280			67,594			153,848			127,291			79,876			78,280			137,029			153,848
Cost of revenue:
License	5,622			4,919			13,229			12,055			6,282			5,622			11,701			13,229
Subscription	5,599			3,732			10,806			7,533			7,041			5,599			14,054			10,806
Professional services	6,235			6,062			12,421			11,611			6,148			6,235			13,313			12,421
Total cost of revenue	17,456			14,713			36,456			31,199			19,471			17,456			39,068			36,456
Total gross profit	60,824			52,881			117,392			96,092			60,405			60,824			97,961			117,392
Operating expenses:
Research and development	19,440			14,803			37,937			29,490			21,514			19,440			44,760			37,937
Sales and marketing	56,173			45,039			112,096			87,318			38,988			56,173			86,276			112,096
General and administrative	15,838			13,260			32,051			26,992			21,733			15,838			46,214			32,051
Restructuring													859			—			3,371			—
Total operating expenses	91,451			73,102			182,084			143,800			83,094			91,451			180,621			182,084
Loss from operations	(30,627		)	(20,221		)	(64,692		)	(47,708		)	(22,689		)	(30,627		)	(82,660		)	(64,692		)
Interest expense	(142		)	(225		)	(235		)	(468		)	(118		)	(142		)	(353		)	(235		)
Other income, net	505			513			1,122			1,175
Other income (expense), net													572			505			(29		)	1,122
Loss before income taxes	(30,264		)	(19,933		)	(63,805		)	(47,001		)	(22,235		)	(30,264		)	(83,042		)	(63,805		)
Income tax provision	496			473			1,207			1,601			1,288			496			1,720			1,207
Net loss	$	(30,760	)	$	(20,406	)	$	(65,012	)	$	(48,602	)	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
Net loss per share, basic and diluted	$	(0.68	)	$	(0.50	)	$	(1.45	)	$	(1.23	)	$	(0.48	)	$	(0.68	)	$	(1.73	)	$	(1.45	)
Weighted-average shares used to compute net loss per share, basic and diluted	45,494			40,457			44,848			39,394			49,371			45,494			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 Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Net loss	$	(30,760	)	$	(20,406	)	$	(65,012	)	$	(48,602	)	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on marketable securities	60			76			135			(170		)
Other comprehensive (loss) income, net of tax:
Change in fair value adjustment on marketable securities													10			60			(45		)	135
Foreign currency translation adjustments	1,602			—			(452		)	—			—			1,602			—			(452		)
Comprehensive loss	$	(29,098	)	$	(20,330	)	$	(65,329	)	$	(48,772	)	$	(23,513	)	$	(29,098	)	$	(84,807	)	$	(65,329	)

See Notes to Condensed Consolidated Financial Statements.

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands)


	Six Months Ended June 30, 2019																	Six Months Ended June 30, 2020
	Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Loss				Accumulated Deficit				Total Stockholders' Equity			Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
	Shares	Amount					Accumulated Other Comprehensive Loss				Accumulated Deficit			Shares					Amount			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
Balance as of December 31, 2018	43,403	$	43	Additional Paid-In Capital	$	639,237		$	(302	)		$	(511,257	)	Total Stockholders' Equity		$	127,721
Balance as of December 31, 2019																		48,064		$	48	$	727,922	$	(633	)	$	(629,792	)	$	97,545
Other comprehensive loss, net of tax	—	—		—			(1,979		)		—				(1,979		)	—		—		—		(55		)	—			(55		)
Stock-based compensation	—	—		13,828			—				—				13,828			—		—		13,478		—			—			13,478
Issuance of common stock in connection with employee equity incentive plans	1,706	2		9,407			—				—				9,409			976		1		2,899		—			—			2,900
Vesting of early exercised stock options	24	—		202			—				—				202
Net loss	—	—		—			—				(34,252		)		(34,252		)	—		—		—		—			(61,239		)	(61,239		)
Balance as of March 31, 2019	45,133	$	45	$	662,674		$	(2,281	)		$	(545,509	)		$	114,929
Balance as of March 31, 2020																		49,040		$	49	$	744,299	$	(688	)	$	(691,031	)	$	52,629
Other comprehensive income, net of tax	—	—		—			1,662				—				1,662			—		—		—		10			—			10
Stock-based compensation	—	—		14,065			—				—				14,065			—		—		12,522		—			—			12,522
Issuance of common stock in connection with employee equity incentive plans	746	1		7,014			—				—				7,015			510		1		5,366		—			—			5,367
Vesting of early exercised stock options	24	—		204			—				—				204
Net loss	—	—		—			—				(30,760		)		(30,760		)	—		—		—		—			(23,523		)	(23,523		)
Balance as of June 30, 2019	45,903	$	46	$	683,957		$	(619	)		$	(576,269	)		$	107,115
Balance as of June 30, 2020																		49,550		$	50	$	762,187	$	(678	)	$	(714,554	)	$	47,005


	Six Months Ended June 30, 2018																	Six Months Ended June 30, 2019
	Common Stock			Additional Paid-In Capital			Accumulated Other Comprehensive Loss				Accumulated Deficit				Total Stockholders' Equity			Common Stock				Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
	Shares	Amount					Accumulated Other Comprehensive Loss				Accumulated Deficit			Shares					Amount			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
Balance as of December 31, 2017	38,122	$	38	Additional Paid-In Capital	$	551,986		$	(112	)		$	(436,421	)	Total Stockholders' Equity		$	115,491
Balance as of December 31, 2018																		43,403		$	43	$	639,237	$	(302	)	$	(511,257	)	$	127,721
Other comprehensive loss, net of tax	—	—		—			(246		)		—				(246		)	—		—		—		(1,979		)	—			(1,979		)
Stock-based compensation	—	—		13,590			—				—				13,590			—		—		13,828		—			—			13,828
Issuance of common stock in connection with employee equity incentive plans	567	1		3,621			—				—				3,622			1,706		2		9,407		—			—			9,409
Issuance of common stock in connection with public offering, net of underwriter discounts and commissions and offering costs	500	—		12,572			—				—				12,572
Vesting of early exercised stock options	25	—		219			—				—				219			24		—		202		—			—			202
Net loss	—	—		—			—				(28,196		)		(28,196		)	—		—		—		—			(34,252		)	(34,252		)
Balance as of March 31, 2018	39,214	$	39	$	581,988		$	(358	)		$	(464,617	)		$	117,052
Balance as of March 31, 2019																		45,133		$	45	$	662,674	$	(2,281	)	$	(545,509	)	$	114,929
Other comprehensive income, net of tax	—	—		—			76				—				76			—		—		—		1,662			—			1,662
Stock-based compensation	—	—		12,936			—				—				12,936			—		—		14,065		—			—			14,065
Issuance of common stock in connection with employee equity incentive plans	2,256	3		4,606			—				—				4,609			746		1		7,014		—			—			7,015
Vesting of early exercised stock options	24	—		210			—				—				210			24		—		204		—			—			204
Issuance of common stock upon exercise of common stock warrants	67	—		—			—				—				—
Net loss	—	—		—			—				(20,406		)		(20,406		)	—		—		—		—			(30,760		)	(30,760		)
Balance as of June 30, 2018	41,561	$	42	$	599,740		$	(282	)		$	(485,023	)		$	114,477
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)


	Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2020			2019
Cash flows from operating activities:
Net loss	$	(65,012	)	$	(48,602	)	$	(84,762	)	$	(65,012	)
Adjustments to reconcile net loss to net cash provided by operating activities
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation	27,893			26,526			25,625			27,893
Depreciation and amortization	5,790			3,529			6,465			5,790
Other	(8		)	28			655			(8		)
Changes in operating assets and liabilities
Accounts receivable	12,177			30,442			20,244			12,177
Inventory	(593		)	1,887			(1,293		)	(593		)
Deferred commissions	1,809			506			1,681			1,809
Prepaid expenses and other current assets	318			(2,208		)	5,142			318
Other assets	551			(41		)	536			551
Accounts payable	(2,509		)	(6,006		)	1,297			(2,509		)
Accrued compensation	(905		)	143			(4,237		)	(905		)
Accrued expenses	407			(685		)	152			407
Deferred revenue	1,495			12,281			(16,133		)	1,495
Other liabilities	(160		)	1,236			(143		)	(160		)
Net cash (used in) provided by operating activities	(18,747		)	19,036
Net cash used in operating activities							(44,771		)	(18,747		)
Cash flows from investing activities:
Purchases of property and equipment	(3,402		)	(4,832		)	(1,355		)	(3,402		)
Purchases of marketable securities	(63,569		)	(46,121		)	—			(63,569		)
Proceeds from maturities of marketable securities	53,354			49,400			27,000			53,354
Net cash used in investing activities	(13,617		)	(1,553		)
Net cash provided by (used in) investing activities							25,645			(13,617		)
Cash flows from financing activities:
Proceeds from revolving credit facility							16,000			—
Repayment of revolving credit facility							(16,000		)	—
Repayments of notes payable	(3,749		)	(3,750		)	(3,750		)	(3,749		)
Proceeds from sales of shares through employee equity incentive plans	20,726			17,823			11,583			20,726
Payment related to shares withheld for taxes on vesting of restricted stock units	(4,302		)	(9,592		)	(3,316		)	(4,302		)
Proceeds from public offerings, net	—			13,818
Payments of deferred offering costs	—			(1,542		)
Others							25			—
Net cash provided by financing activities	12,675			16,757			4,542			12,675
Effect of exchange rate changes on cash and cash equivalents	(4		)	—			—			(4		)
Net change in cash, cash equivalents, and restricted cash for period	(19,693		)	34,240			(14,584		)	(19,693		)
Cash, cash equivalents, and restricted cash at beginning of period	69,012			67,357			71,591			69,012
Cash, cash equivalents, and restricted cash at end of period	$	49,319		$	101,597		$	57,007		$	49,319


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	$	46,872	$	99,560	$	54,947	$	46,872
Restricted cash included in prepaid expenses and other current assets	1,154		351		506		1,154
Restricted cash - non-current	1,293		1,686		1,554		1,293
Total cash, cash equivalents, and restricted cash	$	49,319	$	101,597	$	57,007	$	49,319

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~~2 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.~~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~~2 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 an indirect wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are affiliates of Advent International Corporation (“Advent”).

On July 15, 2020, the Company, 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 of the Amended and Restated Merger Agreement, Merger Sub will commence a tender offer (the “Offer”) to purchase each issued and outstanding share of the Company’s common stock for $29.00 per share, net to the seller in cash, without interest and subject to any withholding taxes (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 “Merger”). The Amended and Restated Merger Agreement contemplates that the Merger will be effected pursuant to Section 251(h) of the Delaware General Corporation Law (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.

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 ~~are unaudited and~~ 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, ~~2018.~~2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles ~~("GAAP"~~(“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, ~~2018~~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, ~~2018.~~

Prior to the first quarter of fiscal 2019, the Company presented revenue and cost of revenue on the condensed consolidated statements of operations as (i) product and (ii) maintenance and professional services. Under the new presentation of revenue and cost of revenue included in the condensed consolidated statements of operations beginning in the first quarter of fiscal 2019, product has been retitled as license revenue, and maintenance and professional services is now presented as two separate line items on the condensed consolidated statements of operations as (i) subscription and (ii) professional services. The related prior period financial data were adjusted to reflect the new presentation of the Company’s revenue and cost of revenue. There is no impact on total revenue and total cost of revenue.

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.~~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

Effective January 1, ~~2019,~~2020, the Company adopted the requirements of Accounting Standards Update (“ASU”) No. ~~2016-02,~~2016-13, ~~Leases~~ 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 ~~2016-02”), ASU No. 2018-10,~~ ~~Codification Improvements~~2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to ~~Topic 842, Leases~~ ~~(“ASU 2018-10”),~~calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and ~~ASU No. 2018-11,~~ ~~Targeted Improvements~~ ~~(“ASU 2018-11”), (collectively “Topic 842”),~~requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as ~~discussed~~a reduction in ~~detail~~the amortized cost basis of the securities. These changes will result in ~~Note 5. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with Topic 842.~~earlier recognition of credit losses. The Company adopted ~~Topic 842~~ASU 2016-13 effective January 1, ~~2019 using~~2020 with the ~~transition method to apply the new lease standards at the~~cumulative effect of adoption ~~date and recognized a cumulative-effect~~recorded as an adjustment to ~~the opening balance of~~ retained ~~earnings in the period of adoption.~~earnings. The ~~adoption had a material impact~~effect on ~~the total assets~~its consolidated financial statements and total liabilities reported on the Company’s condensed consolidated balance sheets resulting in an increase in long-term assets and total liabilities of approximately $20.3 million as of January 1, 2019. The adoption of this standard didrelated disclosures is not ~~have a material impact on the Company’s condensed consolidated statements of operations.~~material.

Except for the impact of the adoption of Topic ~~842,~~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, ~~2018~~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 ~~generates~~derives revenue from ~~the~~ sale of Software Products, Hardware Products, ~~support and maintenance~~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 June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Revenue:
License
Software Products
Perpetual license	$	20,675	$	24,493	$	46,434	$	40,295	$	12,167	$	20,675	$	21,526	$	46,434
Term license	11,190		—		11,514		—		19,167		11,190		19,820		11,514
Hardware Products	6,966		9,830		18,563		23,808		6,243		6,966		11,030		18,563
Subscription	34,822		28,986		68,621		55,345
Software as a service (“SaaS”)									167		—		293		—
Support and maintenance									37,445		34,822		74,845		68,621
Professional services	4,627		4,285		8,716		7,843		4,687		4,627		9,515		8,716
Total revenue	$	78,280	$	67,594	$	153,848	$	127,291	$	79,876	$	78,280	$	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, ~~and~~ the value allocated to support and maintenance within Software Products subscription contracts, and software-as-a-service (“SaaS”) offering contracts. ~~Support and maintenance~~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. Software Products subscription contracts are available in terms of either one or three~~ 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 no0 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 June 30, 2019
Contract Liabilities
Balance as of March 31, 2019 $ 178,785
Additions 73,328
Gross revenue recognized (78,280 )
Balance as of June 30, 2019 $ 173,833



	Three Months Ended June 30, 2020
	Contract Liabilities
	Total
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

Six Months Ended June 30, 2019
Contract Liabilities
Balance as of December 31, 2018 $ 172,031
Additions 155,650
Gross revenue recognized (153,848 )
Balance as of June 30, 2019 $ 173,833

~~During~~



	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, ~~the Company recognized~~a vast majority of subscription revenue and a minority of ~~$33.9 million that was~~license revenue and professional services revenue were included in the contract liabilities balance asat the beginning of ~~March 31, 2019. During the six months ended June 30, 2019, the Company recognized revenue of $59.4 million that was included in the contract liabilities balance as of December 31, 2018.~~

During the three months ended June 30, 2018, the Company recognized revenue of $43.3 million that was included in the contract liabilities balance as of March 31, 2018. During the six months ended June 30, 2019, the Company recognized revenue of $47.9 million that was included in the contract liabilities balance as of December 31, 2017.each period.

Performance Obligations

Contracted not recognized revenue was ~~$174.0~~$172.1 million as of June 30, ~~2019,~~2020, of which the Company expects to recognize approximately ~~60%~~61% 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 June 30, 2020 and December 31, 2019 (in thousands):


	June 30, 2019						December 31, 2018						June 30, 2020						December 31, 2019
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial Assets
Financial assets
Cash and cash equivalents:
Cash	$	36,459	$	—	$	—	$	46,017	$	—	$	—	$	40,752	$	—	$	—	$	62,188	$	—	$	—
Money market accounts	10,413		—		—		20,878		—		—		14,195		—		—		6,842		—		—
Total cash and cash equivalents	46,872		—		—		66,895		—		—		54,947		—		—		69,030		—		—
Marketable securities:
Commercial paper	—		15,894		—		—		3,991		—		—		—		—		—		1,998		—
Corporate debt securities	—		30,182		—		—		35,640		—		—		2,021		—		—		24,168		—
U.S. government securities	—		11,989		—		—		8,001		—		—		—		—		—		3,015		—
Total marketable securities	—		58,065		—		—		47,632		—		—		2,021		—		—		29,181		—
Restricted cash (current and non-current)	2,447		—		—		2,117		—		—		2,060		—		—		2,561		—		—
Total financial assets	$	49,319	$	58,065	$	—	$	69,012	$	47,632	$	—	$	57,007	$	2,021	$	—	$	71,591	$	29,181	$	—

Note 4. Marketable Securities

The following table summarizes the ~~amortized cost, unrealized gains and losses, and fair value of the~~ Company’s marketable securities by significant investment categories as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (in thousands):


	June 30, 2019								December 31, 2018									June 30, 2020						December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Gains		Fair Value		Amortized Cost		Unrealized Gains		Fair Value
Marketable securities:
Available-for-sale:
Commercial paper	$	15,894	$	—	$	—	$	15,894	$	3,991	$	—	$	—		$	3,991	$	—	$	—	$	—	$	1,998	$	—	$	1,998
Corporate debt securities	30,118		64		—		30,182		35,730		—		(90		)	35,640		2,017		4		2,021		24,122		46		24,168
U.S. government securities	11,974		15		—		11,989		8,012		—		(11		)	8,001		—		—		—		3,012		3		3,015
Total marketable securities	$	57,986	$	79	$	—	$	58,065	$	47,733	$	—	$	(101	)	$	47,632	$	2,017	$	4	$	2,021	$	29,132	$	49	$	29,181

The following table summarizes the amortized cost and fair value of the Company’s available-for-sale securities as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 by the contractual maturity date (in thousands):


	June 30, 2019				December 31, 2018				June 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	55,963	$	56,041	$	47,733	$	47,632	$	2,017	$	2,021	$	29,132	$	29,181
Due between one and five years	2,023		2,024		—		—
Total	$	57,986	$	58,065	$	47,733	$	47,632	$	2,017	$	2,021	$	29,132	$	29,181

The Company had no0 marketable securities in an unrealized loss position as of June 30, ~~2019. The Company had 13 marketable securities in an unrealized loss position as of~~2020 and December 31, 2018. For individual marketable securities that were in an unrealized loss position as of December 31, 2018, the fair value and gross unrealized loss for these securities aggregated by investment category and length of time in a continuous unrealized loss position are presented in the following table (in thousands):

December 31, 2018
Less Than 12 Months Greater Than 12 Months Total
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
Corporate debt securities $ 4,020
$ (3 ) $ 31,620
$ (87 ) $ 35,640
$ (90 )
U.S. government securities —
—
8,001
(11 ) 8,001
(11 )
Total $ 4,020
$ (3 ) $ 39,621
$ (98 ) $ 43,641
$ (101 )

Unrealized losses related to these marketable securities are due to interest rate fluctuations as opposed to credit quality. In addition, 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. As a result, there are no other-than-temporary impairments for these marketable securities as of June 30, 2019 or December 31, 2018.2019.

Note 5. ~~Leases~~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 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 ~~Company has operating leases~~following table summarizes the activity related to the accrual for ~~corporate offices, vehicles, and office equipment.~~ restructuring charges (in thousands):



	Workforce Reduction Cost
Accrual balance as at December 31, 2019	$	—
Restructuring charges	3,371
Cash payments	(2,841		)
Accrual balance as at June 30, 2020	$	530

The ~~leases have remaining lease terms of up to seven years, some of which may include options to extend the leases for up to five years.~~

~~Leases with an initial term of 12 months or less are not recorded~~accrued restructuring balance as at June 30, 2020 is included in accrued expenses on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company elected the practical expedients to combine the lease components (e.g., fixed payments including rent, real estate taxes, and insurance costs) and the non-lease components (e.g., common-area maintenance costs) for all classes of underlying assets, and to not reassess prior conclusions related to contracts containing leases, lease classification, and initial direct costs.

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, current operating lease liabilities, and non-current operating lease liabilities on ourCompany’s condensed consolidated balance sheets. ~~Operating lease ROU assets~~

For the three and ~~operating lease liabilities are recognized based on the present value of the lease payments over the lease term at commencement date. As most of the Company’s leases do not provide an implicit rate,~~six months ended June 30, 2020, the Company ~~uses an incremental borrowing rate based on the information available at commencement date in determining the present value~~recognized restructuring charges of ~~future payments. The operating lease ROU asset also includes any lease payments made~~$0.9 million and excludes lease incentives and initial direct costs incurred. The lease terms may include options to extend the lease when it is reasonably certain that the Company will exercise that option. Lease expense is recognized on a straight-line basis over the lease term.

Lease Cost (in thousands) Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
Operating lease cost ⁽¹⁾
$ 2,030
$ 4,473

~~_____________________~~

~~(1) Includes short-term leases and variable lease costs, which are immaterial.~~$3.4 million.

~~Maturities of lease liabilities as of June 30, 2019 were as follows (in thousands):~~

Years Ending December 31,
Operating Leases^(a)
2019 (excluding the six months ended June 30, 2019) $ 3,759
2020 6,701
2021 5,349
2022 4,576
2023 4,540
Thereafter 11,933
Total lease payments $ 36,858
Less: Imputed interest 7,242
Present value of lease liabilities $ 29,616

~~_____________________~~

~~(a) Operating lease payments exclude $4.7 million of legally binding minimum lease payments for leases signed but not yet commenced.~~



~~Lease Term and Discount Rate~~	~~June 30, 2019~~
~~Operating leases~~
~~Weighted-average remaining lease term~~	~~6 years~~
~~Weighted-average discount rate~~	~~7.1~~	%

Other information (in thousands) Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases $ 1,961
$ 3,779
Leased assets obtained in exchange for new operating lease liabilities $ 2,785
$ 4,402

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 June 30,				Six Months Ended June 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018		2020		2019		2020		2019
Cost of revenue:
License	$	89	$	54	$	172	$	107	$	114	$	89	$	236	$	172
Subscription	470		371		913		750		482		470		1,006		913
Professional services	421		352		822		746		301		421		817		822
Research and development	2,691		2,513		5,769		4,860		3,417		2,691		7,100		5,769
Sales and marketing	7,198		5,850		13,684		12,030		4,795		7,198		10,599		13,684
General and administrative	3,196		3,796		6,533		8,033		2,658		3,196		5,867		6,533
Total	$	14,065	$	12,936	$	27,893	$	26,526	$	11,767	$	14,065	$	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, 2018 6,013
$ 11.65
6.4 $ 86,624
Options exercised (1,586 ) $ 10.20

Options forfeited (145 ) $ 18.31

Balance—June 30, 2019 4,282
$ 11.96
5.9 $ 93,774
Options vested and exercisable—June 30, 2019 3,633
$ 10.85
5.6 $ 83,580



	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	(636	)	$	12.31
Options forfeited	(32	)	$	21.46
Balance—June 30, 2020	2,398		$	12.22	5.2	$	22,035
Options vested and exercisable—June 30, 2020	2,287		$	11.77	5.1	$	21,874

As of June 30, ~~2019,~~2020, the total unrecognized compensation cost related to unvested options was ~~$5.5~~$1.1 million, which is expected to be amortized on a straight-line basis over a weighted-average period of approximately ~~1.2~~0.9 years.

The fair value of stock option awards granted to employees is estimated using the Black-Scholes option-pricing model. No stock option awards were granted during the three and six months ended June 30, 2019 and three months ended June 30, 2018. The assumptions used to determine the grant date fair value of employee stock options for the periods presented are as follows:



	~~Six Months Ended June 30,~~
	~~2018~~
~~Fair value of common stock~~	~~$29.92 – $30.97~~
~~Risk-free interest rate~~	~~2.4% – 2.8%~~
~~Expected term (in years)~~	~~6.1~~
~~Volatility~~	~~48%~~
~~Dividend yield~~	—%

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							RSUs and PSUs Outstanding
	Number of Shares		Weighted- Average Grant Date Fair Value Per Share		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value		Number of Shares		Weighted- Average Grant Date Fair Value Per Share		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Balance—December 31, 2018	5,709		$	28.01	1.8	$	148,389
Balance—December 31, 2019								6,391		$	31.37	1.7	$	209,621
Granted	1,151		$	35.51				253		$	29.80
Vested	(763	)	$	26.25				(816	)	$	29.41
Forfeited	(378	)	$	28.67				(668	)	$	32.02
Balance—June 30, 2019	5,719		$	29.71	1.7	$	193,647
Balance—June 30, 2020								5,160		$	31.53	1.5	$	109,383

~~Beginning in 2019, the~~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 June 30, ~~2019,~~2020, the total unrecognized compensation cost related to unvested RSUs and PSUs was ~~$131.5~~$118.8 million, which is expected to be amortized over a weighted-average period of approximately ~~2.6~~2.4 years.

Note 7. Income Taxes

The Company estimates its annual effective tax rate each quarter and specific events are discretely recognized as they ~~occur.~~occur under the provisions of ASC 740-270, Income Taxes: Interim Reporting. For the three and six months ended June 30, 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 $0.5 million and $1.2 million, respectively, representing an effective tax rate of (1.6)% and (1.9)%, respectively. For the three and six months ended June 30, 2018, the Company recorded a tax provision of $0.5 million and $1.6 million, respectively, representing an effective tax rate of (2.4)% and (3.4)%, 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 June 30, ~~2019~~2020 as compared to the three and six months ended June 30, ~~2018~~2019 primarily due to ~~an increase~~a 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 on 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 June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Net loss	$	(30,760	)	$	(20,406	)	$	(65,012	)	$	(48,602	)	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
Weighted-average shares used to compute net loss per share, basic and diluted	45,494			40,457			44,848			39,394			49,371			45,494			48,982			44,848
Net loss per share, basic and diluted	$	(0.68	)	$	(0.50	)	$	(1.45	)	$	(1.23	)	$	(0.48	)	$	(0.68	)	$	(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 June 30,		As of June 30,
	2019	2018	2020	2019
Options to purchase common stock	4,282	7,355	2,398	4,282
Unvested early exercised common shares	—	96	—	—
Unvested restricted stock units	5,719	4,100	5,160	5,719
Shares estimated under Employee Stock Purchase Plan	172	126
Employee Stock Purchase Plan			—	172

Note 9. ~~Related Party Transactions~~Subsequent Events

On ~~June 5, 2019,~~February 6, 2020, the Company entered into ~~a consulting agreement (the “Consulting Agreement”)~~the Original Merger Agreement with ~~Night Dragon II, LLC (“Night Dragon”). One~~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 ~~board of directors (“~~Amended and Restated Merger Agreement, Merger Sub will commence the ~~Board”)~~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 ~~a principal~~successful, then following consummation of the Offer, Merger Sub will be merged with and ~~the chief executive officer of Night Dragon and will personally provide services to~~into the Company, ~~under~~with the ~~Consulting Agreement.~~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.

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 ~~Consulting Agreement, Night Dragon will provide consulting and business development services~~settlement agreement, the parties have agreed to release their respective claims made in connection with the Company, including customer engagement, speaking activities, competitive and market analysis, business development assistance and expertise and other services as described in the Consulting Agreement. In consideration for the consulting and business development services to the Company, the Board granted the director a number of performance stock units (“PSUs”) with a grant date fair value of $2.1 million. The PSUs will vest on the achievement of certain milestones detailed in the Consulting Agreement, in each case, so long as the Consulting Agreement remains in effect. The term of the Consulting Agreement commenced on June 5, 2019 and will continue for two years or until terminated in accordance with its terms.

For the three and six months ended June 30, 2019, the stock-based compensation expense related to the Consulting Agreement was included in general and administrative expense and was immaterial. The balance of approximately $2.1 million will be recorded over the remaining two years.litigation.

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, ~~2018~~2019 included in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~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., a Delaware corporation and an 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 of the Amended and Restated Merger Agreement, Merger Sub will commence a tender offer (the “Offer”) to purchase each issued and outstanding share of our common stock for $29.00 per share, net to the seller in cash, without interest and subject to any withholding taxes (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 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 effected pursuant to Section 251(h) of the Delaware General Corporation Law, which would not require a vote of our stockholders in order to consummate the Merger. At

the 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.

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.

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 because the extent and duration of the impact from COVID-19 continue to evolve. 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 continue to work remotely as of June 30, 2020. Despite the extent of the COVID-19 pandemic, we exited the second quarter of 2020 with a stronger growth in revenue and improved profitability as compared to the first quarter of 2020, driven by our continuous effort in closing strategic deals with both new and existing customers as well as continuous adjustments to our overall expense plan and workforce to further align with our strategy.We ~~generate revenue from sales~~will continue to evaluate the nature and extent of ~~Software Products, Hardware Products, support and maintenance contracts, and professional services.~~the impact of COVID-19 on our business. See section titled “Risk Factors” for further discussion of the possible impact of COVID-19 on our business.

Second Quarter ~~2019~~2020 Financial Highlights

Since our inception through June 30, ~~2019,~~2020, we have sold to ~~nearly 3,500~~more than 3,800 end-customers in ~~over 80~~nearly 100 countries, including ~~24%~~27% of the Global 2000. For the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, we sold to 8% and 6%8% of the Global 2000, respectively. Our end-customers represent a broad range of industries, including government, financial, ~~services,~~ technology, healthcare, energy, manufacturing, services, ~~energy,~~ 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 June 30, Six Months Ended June 30,
2019 2018 2019 2018

(Dollars in thousands)
License revenue $ 38,831
$ 34,323
$ 76,511
$ 64,103
License revenue year-over-year percentage growth 13 % 28 % 19 % 36 %
Subscription revenue $ 34,822
$ 28,986
68,621
55,345
Subscription revenue year-over-year percentage growth 20 % 45 % 24 % 42 %
Professional services revenue $ 4,627
$ 4,285
8,716
7,843
Professional services revenue year-over-year percentage growth 8 % 37 % 11 % 28 %
Total revenue $ 78,280
$ 67,594
153,848
127,291
Total revenue year-over-year percentage growth 16 % 35 % 21 % 38 %
Gross profit $ 60,824
$ 52,881
117,392
96,092
Gross margin 78 % 78 % 76 % 75 %
Loss from operations $ (30,627 ) $ (20,221 ) (64,692 ) (47,708 )
Loss from operations as a percentage of total revenue (39 )% (30 )% (42 )% (37 )%
Net loss $ (30,760 ) $ (20,406 ) (65,012 ) (48,602 )
Net cash (used in) provided by operating activities (18,747 ) 19,036



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019

	(Dollars in thousands)
Total revenue	$	79,876		$	78,280		$	137,029		$	153,848
Total revenue year-over-year percentage growth	2		%	16		%	(11		)%	21		%
Gross margin	76		%	78		%	71		%	76		%
Loss from operations	$	(22,689	)	$	(30,627	)	$	(82,660	)	$	(64,692	)
Loss from operations as a percentage of total revenue	(28		)%	(39		)%	(60		)%	(42		)%
Net loss	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
Net cash used in operating activities							$	(44,771	)	$	(18,747	)

~~Factors Affecting Our Performance~~

We believe that the growth of our business and our future success are dependent upon many factors, including our ability to continue to increase the efficiency by which our sales force engages our end-customers, to extend the reach of our sales force footprint to engage more end-customers, to retain and increase sales to existing end-customers, and to provide our customers with more licensing and delivery options from which to purchase our products. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must successfully address in order to sustain the growth of our business and improve our results of operations.

~~Increasing the Efficiency by which Our Sales Force Engages Our End-Customers~~

We are focused on increasing the efficiency of our sales force. Over the last 12 months, we have increased hiring in sales enablement and marketing, enhanced sales training activities, and implemented company-wide standards for product positioning in order to instill a culture of success and discipline in our sales organization. Our sales strategy depends on attracting top talent from security organizations, expanding our sales coverage, increasing our pipeline of business, and enhancing productivity. We focus on productivity per quota-carrying sales representative across different levels within the sales organization, and the time it takes our sales representatives to reach productivity. We manage our pipeline on a quarterly basis by sales representative to ensure sufficient coverage of our bookings targets. Our ability to manage our sales productivity and pipeline are important factors to the success of our business.

~~Extending the Reach of Our Sales Force Footprint~~

We have made substantial investments in our sales force in recent periods in order to address the significant opportunity created primarily by the increase in the attack surface within organizations driven by the influx of the Internet of Things in the campus and data centers, the digital transformation from data centers to third party hosted cloud providers, and the emergence of the critical need to secure OT networks. We expect to continue to make substantial investments in our sales force to capitalize on the market opportunity for device visibility and control.

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 June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were ~~121%~~110% and ~~117%~~122%, respectively. The ~~400~~1,200 basis point ~~increase~~decrease was primarily ~~reflects~~driven by the ~~increased adoption~~lack of new ~~Software Products subscription contracts~~term contract from end-customers that have been end-customers for more than one year ~~for~~in the ~~twelve months ended~~trailing 12 month period ending June 30, 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 ~~introduced the recurring revenue rate~~believe this metric ~~in the second quarter of 2019 since we believe it~~ 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 (“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 allocated to~~term license revenue ~~within our Software Products subscription contracts~~ over the trailing 12 month period

C = total revenue

Our recurring revenue rate as of June 30, ~~2019~~2020 and December 31, ~~2018~~2019 were ~~44%~~57% and ~~40%~~49%, respectively. The ~~400~~800 basis point increase primarily reflects the increased adoption of new subscription contracts in the ~~three month period ending~~six months ended June 30, ~~2019.~~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.

~~Key Financial Metrics~~

~~Non-GAAP Operating Loss~~ As disclosed in Note 2. Revenue, Deferred Revenue and ~~Free Cash Flow~~

~~In addition to our results determined in accordance with GAAP, we monitor the non-GAAP financial metrics described below to evaluate growth trends, establish budgets, measure the effectiveness~~Deferred Commissions of our ~~sales~~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 ~~marketing efforts~~$19.8 million for the three and ~~measure~~six months ended June 30, 2020, respectively, and ~~assess operational efficiencies.~~

~~We define non-GAAP operating loss as loss from operations excluding stock-based compensation expense, acquisition-related expenses,~~$11.2 million and ~~amortization of acquired intangible assets. Acquisition-related expenses include transaction costs such as accounting~~$11.5 million for the three and legal fees, and other employee retention expenses arising from the acquisition. We consider non-GAAP operating loss to be a useful metric for investors and other users of our financial information in evaluating our operating performance because it excludes the impact of stock-based compensation, a non-cash charge that can vary from period to period for reasons that are unrelated to our core operating performance, and non-recurring and non-operating acquisition-related expenses. This metric also provides investors and other users of our financial information with an additional tool to compare business performance across companies and periods, while eliminating the effects of items that may vary for different companies for reasons unrelated to core operating performance.

We define free cash flow as net cash (used in) provided by operating activities less purchases of property and equipment. We consider free cash flow to be an important metric because it measures the amount of cash we use or generate and reflects changes in working capital.

~~A reconciliation of non-GAAP operating loss to loss from operations, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below:~~

Three Months Ended June 30, Six Months Ended June 30,
2019
2018 2019
2018

(In thousands)
Non-GAAP operating loss:
Loss from operations $ (30,627 ) $ (20,221 ) $ (64,692 ) $ (47,708 )
Add:
Stock-based compensation expense 14,065
12,936
27,893
26,526
Acquisition-related expenses 1,058
—
2,696
—
Amortization of acquired intangible assets 771
—
1,542
—
Non-GAAP operating loss $ (14,733 ) $ (7,285 ) $ (32,561 ) $ (21,182 )

A reconciliation of free cash flow to net cash (used in) provided by operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP, is provided below:

Six Months Ended June 30,
2019
2018

(In thousands)
Free cash flow (non-GAAP):

Net cash (used in) provided by operating activities $ (18,747 )
$ 19,036
Less: purchases of property and equipment (3,402 )
(4,832 )
Free cash flow (non-GAAP) $ (22,149 )
$ 14,204
Net cash used in investing activities $ (13,617 )
$ (1,553 )
Net cash provided by financing activities $ 12,675

$ 16,757

It is important to note that other companies, including companies in our industry, may not use non-GAAP operating loss or free cash flow, may calculate these metrics differently, or may use other financial measures to evaluate their performance, all of which could reduce the usefulness of these non-GAAP metrics as comparative measures.

~~As a result, our non-GAAP operating loss and free cash flow should be considered in addition to, not as substitutes for or in isolation from, measures prepared in accordance with GAAP.~~

We compensate for these limitations by providing investors and other users of our financial information, reconciliations of non-GAAP operating loss to the corresponding GAAP financial measure, operating loss, and reconciliations of free cash flow to the corresponding GAAP financial measure, cash flow provided by operating activities. We encourage investors and others to review our financial information in its entirety, not to rely on any single financial measure, and to view non-GAAP operating loss and free cash flow in conjunction with the corresponding GAAP financial measure.six months ended June 30, 2019, respectively.

~~Components~~Results of ~~Financial Performance~~Operations

~~Revenue~~

~~We derive revenue from sales~~The following tables summarize our results of operations for the periods presented in dollars and as a percentage of our ~~Software Products, Hardware Products, support~~total revenue. The period-to-period comparison of results is not necessarily indicative of results for future periods.



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019

	(In thousands)
Condensed Consolidated Statements of Operations Data:
Revenue:
License	$	37,577		$	38,831		$	52,376		$	76,511
Subscription	37,612			34,822			75,138			68,621
Professional services	4,687			4,627			9,515			8,716
Total revenue	79,876			78,280			137,029			153,848
Cost of revenue:
License ⁽¹⁾	6,282			5,622			11,701			13,229
Subscription ⁽¹⁾	7,041			5,599			14,054			10,806
Professional services ⁽¹⁾	6,148			6,235			13,313			12,421
Total cost of revenue	19,471			17,456			39,068			36,456
Total gross profit	60,405			60,824			97,961			117,392
Operating expenses:
Research and development ⁽¹⁾	21,514			19,440			44,760			37,937
Sales and marketing ⁽¹⁾	38,988			56,173			86,276			112,096
General and administrative ⁽¹⁾	21,733			15,838			46,214			32,051
Restructuring	859			—			3,371			—
Total operating expenses	83,094			91,451			180,621			182,084
Loss from operations	(22,689		)	(30,627		)	(82,660		)	(64,692		)
Interest expense	(118		)	(142		)	(353		)	(235		)
Other income (expense), net	572			505			(29		)	1,122
Loss before income taxes	(22,235		)	(30,264		)	(83,042		)	(63,805		)
Income tax provision	1,288			496			1,720			1,207
Net loss	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)

_____________________

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019

	(In thousands)
Cost of revenue:
License	$	114	$	89	$	236	$	172
Subscription	482		470		1,006		913
Professional services	301		421		817		822
Research and development	3,417		2,691		7,100		5,769
Sales and marketing	4,795		7,198		10,599		13,684
General and administrative	2,658		3,196		5,867		6,533
Total	$	11,767	$	14,065	$	25,625	$	27,893



	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	47	%	50	%	38	%	50	%
Subscription	47		44		55		44
Professional services	6		6		7		6
Total revenue	100		100		100		100
Cost of revenue:
License	8		7		9		9
Subscription	9		7		10		7
Professional services	7		8		10		8
Total cost of revenue	24		22		29		24
Total gross profit	76		78		71		76
Operating expenses:
Research and development	27		25		33		24
Sales and marketing	49		72		63		73
General and administrative	27		20		34		21
Restructuring	1		—		2		—
Total operating expenses	104		117		132		118
Loss from operations	(28	)	(39	)	(61	)	(42	)
Interest expense	—		—		—		—
Other income (expense), net	1		—		—		1
Loss before income taxes	(27	)	(39	)	(61	)	(41	)
Income tax provision	2		—		1		1
Net loss	(29	)%	(39	)%	(62	)%	(42	)%

Comparison of the Three and ~~maintenance contracts,~~Six Months Ended June 30, 2020 and ~~professional services.~~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 ~~following:~~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 acquisition by Advent.

•

~~License Revenue.~~ Our 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. We recognize license revenue 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. As a percentage of total revenue, we expect our license revenue to vary from quarter to quarter based on seasonal and cyclical factors.



	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	$	37,577	$	38,831	$	(1,254	)	(3	)%	$	52,376	$	76,511	$	(24,135	)	(32	)%
Subscription	37,612		34,822		2,790			8	%	75,138		68,621		6,517			9	%
Professional services	4,687		4,627		60			1	%	9,515		8,716		799			9	%
Total revenue	$	79,876	$	78,280	$	1,596		2	%	$	137,029	$	153,848	$	(16,819	)	(11	)%

License revenue decreased for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to a $0.5 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 $7.5 million decrease in Hardware Products revenue. The decrease in Software Products revenue included a $11.0 million decrease in the sales of eyeSight, eyeControl, and SilentDefense, and a $5.6 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 June 30, 2020 compared to the three months ended June 30, 2019, primarily due to a $2.5 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 remained relatively consistent for the three months ended June 30, 2020 compared to the three months ended June 30, 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.


•	~~Subscription Revenue.~~ Our subscription revenue is derived from term contracts with terms that are generally either one or three years, but can be up to five years. We recognize revenue from subscription over the contractual service period. As a percentage of total revenue, we expect our subscription revenue to vary from quarter to quarter based on seasonal and cyclical factors.


•	~~Professional Services Revenue~~. Our professional services revenue is generally recognized over time as the services are rendered. As a percentage of total revenue, we expect our professional services revenue to vary from quarter to quarter based on seasonal and cyclical factors.

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 ~~following:~~continuing shift towards Software Products in our product mix.

•

~~Cost of License 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~~

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.

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 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	$	6,282	$	5,622	$	660		12	%	$	11,701	$	13,229	$	(1,528	)	(12	)%
Subscription	7,041		5,599		1,442			26	%	14,054		10,806		3,248			30	%
Professional services	6,148		6,235		(87		)	(1	)%	13,313		12,421		892			7	%
Total cost of revenue	$	19,471	$	17,456	$	2,015		12	%	$	39,068	$	36,456	$	2,612		7	%

Cost of license revenue increased for the three months ended June 30, 2020 compared to the three months ended June 30, 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. 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 $2.0 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 June 30, 2020 compared to the three and six months ended June 30, 2019, primarily due to increases in personnel costs related to an 5% 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 remained relatively flat for the three months ended June 30, 2020 compared to the three months ended June 30, 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 7% increase in headcount in our professional services organization.

Gross Profit 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.~~ 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 slightly over time as we grow our customer support organization to accommodate our anticipated subscription revenue growth rate.

•

~~Cost of Professional Services Revenue.~~ 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. We expect our cost of professional services revenue to decline over time 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.

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 ~~98%~~97% and ~~99%~~98% for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Margin on our Hardware Products ~~vary.~~varies. The average margin on hardware sold separately for use with our Software Products was approximately ~~27%~~9% and ~~29%~~27% for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Margin on appliances, which are the hardware appliances that are embedded with our software, ~~vary.~~varies. The average margin on our high-end appliances was approximately ~~75%~~66% and ~~79%~~75%, and the average margin on our low-end appliances was approximately ~~27%~~18% and ~~47%~~27%, for the three months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively.

Margin on our Software Products was approximately ~~98%~~97% and ~~99%~~98% for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Margin on our Hardware Products ~~vary.~~varies. The average margin on hardware sold separately for use with our Software Products was approximately ~~25%~~2% and 25% for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively. Margin on appliances, which are the hardware appliances that are embedded with our software, ~~vary.~~varies. The average margin on our high-end appliances was approximately ~~82%~~69% and ~~80%~~82%, and the average margin on our low-end appliances was approximately ~~37%~~21% and ~~52%~~37%, for the six months ended June 30, ~~2019~~2020 and ~~2018,~~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 June 30,										Six Months Ended June 30,
	2020					2019					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	$	31,295		83	%	$	33,209		86	%	$	40,675		78	%	$	63,282		83	%
Subscription	30,571			81	%	29,223			84	%	61,084			81	%	57,815			84	%
Professional services	(1,461		)	(31	)%	(1,608		)	(35	)%	(3,798		)	(40	)%	(3,705		)	(43	)%
Total gross profit	$	60,405		76	%	$	60,824		78	%	$	97,961		71	%	$	117,392		76	%

Gross profit decreased for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 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 June 30, 2020 compared to the three and six months ended June 30, 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 and six months ended June 30, 2020 compared to the three and six months ended June 30, 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 appliances that are embedded with our software

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~~. Research and development expense consists primarily of personnel costs. Research and development expense also includes consulting expense and allocated costs including facilities and information technology related costs. We expect research and development expense to increase in absolute dollars as we continue to invest in our future products and services; however, we expect our research and development expense to decline as a percentage of total revenue in the long term as we scale the business.

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 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	$	21,514	$	19,440	$	2,074		11	%	$	44,760	$	37,937	$	6,823		18	%
Sales and marketing	38,988		56,173		(17,185		)	(31	)%	86,276		112,096		(25,820		)	(23	)%
General and administrative	21,733		15,838		5,895			37	%	46,214		32,051		14,163			44	%
Restructuring	859		—		859			100	%	3,371		—		3,371			100	%
Total operating expenses	$	83,094	$	91,451	$	(8,357	)	(9	)%	$	180,621	$	182,084	$	(1,463	)	(1	)%

Research and development expense increased for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to an increase in personnel costs of $3.4 million resulting from a 13% increase in headcount, partially offset by a decrease in allocated IT and facilities cost. Research and development expense increased for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to an increase in personnel costs of $8.0 million resulting from a 13% increase in headcount, partially offset by a decrease in allocated IT and facilities cost.

Sales and marketing expense decreased for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to a decrease in personnel costs of $9.3 million resulting from a 30% decrease in headcount mainly attributable to restructuring activities and includes a decrease in stock compensation expense of $2.4 million. The decrease was further driven by a decrease in travel and entertainment expense of $5.0 million and a decrease in sales and marketing expense of $1.5 million as various marketing events and travels were ceased in response to the COVID-19 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.

General and administrative expense increased for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to an increase in professional fees of $8.0 million and includes legal fees related to the Merger, 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 compared to the 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 decrease in personnel costs of $1.9 million resulting 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.

•

~~Sales and Marketing~~. 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. We expect sales and marketing expense to continue to increase in absolute dollars as we increase the size of our sales and marketing organizations; however, we expect our sales and marketing expense to decline as a percentage of total revenue in the long term as we scale the business.

•

~~General and Administrative.~~ 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 general and administrative expense to increase in absolute dollars due to additional costs associated with accounting, compliance, insurance, and investor relations as we continue to support our growth; however, we expect our general and administrative expense to decline as a percentage of total revenue in the long term as we scale the business.

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	%

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.

Other Income (Expense), Net

Other income (expense), 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 June 30,								Six Months Ended June 30,
	2020		2019		Change				2020			2019		Change
	Amount		Amount		Amount		%		Amount			Amount		Amount			%

	(Dollars in thousands)
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 six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily driven by a decrease in short-term 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.

~~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 June 30, Six Months Ended June 30,
2019 2018 2019
2018

(In thousands)
Condensed Consolidated Statements of Operations Data:
Revenue:
License $ 38,831
$ 34,323
$ 76,511
$ 64,103
Subscription 34,822
28,986
68,621
55,345
Professional services 4,627
4,285
8,716
7,843
Total revenue 78,280
67,594
153,848
127,291
Cost of revenue:
License ⁽¹⁾
5,622
4,919
13,229
12,055
Subscription ⁽¹⁾
5,599
3,732
10,806
7,533
Professional services ⁽¹⁾
6,235
6,062
12,421
11,611
Total cost of revenue 17,456
14,713
36,456
31,199
Total gross profit 60,824
52,881
117,392
96,092
Operating expenses:
Research and development ⁽¹⁾
19,440
14,803
37,937
29,490
Sales and marketing ⁽¹⁾
56,173
45,039
112,096
87,318
General and administrative ⁽¹⁾
15,838
13,260
32,051
26,992
Total operating expenses 91,451
73,102
182,084
143,800
Loss from operations (30,627 ) (20,221 ) (64,692 ) (47,708 )
Interest expense (142 ) (225 ) (235 ) (468 )
Other income, net 505
513
1,122
1,175
Loss before income taxes (30,264 ) (19,933 ) (63,805 ) (47,001 )
Income tax provision 496
473
1,207
1,601
Net loss $ (30,760 ) $ (20,406 ) $ (65,012 ) $ (48,602 )

~~_____________________~~

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

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019
2018

(In thousands)
Cost of revenue:
License $ 89
$ 54
$ 172
$ 107
Subscription 470
371
913
750
Professional services 421
352
822
746
Research and development 2,691
2,513
5,769
4,860
Sales and marketing 7,198
5,850
13,684
12,030
General and administrative 3,196
3,796
6,533
8,033
Total $ 14,065
$ 12,936
$ 27,893
$ 26,526

Three Months Ended June 30, Six Months Ended June 30,
2019 2018 2019 2018

(As a percentage of total revenue)
Condensed Consolidated Statements of Operations Data:
Revenue:
License 50 % 51 % 50 % 50 %
Subscription 44
43
44
44
Professional services 6
6
6
6
Total revenue 100
100
100
100
Cost of revenue:
License 7
7
9
10
Subscription 7
6
7
6
Professional services 8
9
8
9
Total cost of revenue 22
22
24
25
Total gross profit 78
78
76
75
Operating expenses:
Research and development 25
21
24
23
Sales and marketing 72
67
73
69
General and administrative 20
20
21
21
Total operating expenses 117
108
118
113
Loss from operations (39 ) (30 ) (42 ) (38 )
Interest expense —
—
—
—
Other income, net —
1
1
1
Loss before income taxes (39 ) (29 ) (41 ) (37 )
Income tax provision —
1
1
1
Net loss (39 )% (30 )% (42 )% (38 )%

~~Comparison of the Three Months Ended June 30, 2019 and 2018~~

~~Revenue~~

Three Months Ended June 30,
2019 2018 Change
Amount Amount Amount %

(Dollars in thousands)
Revenue:
License $ 38,831
$ 34,323
$ 4,508
13 %
Subscription 34,822
28,986
5,836
20 %
Professional services 4,627
4,285
342
8 %
Total revenue $ 78,280
$ 67,594
$ 10,686
16 %

License revenue increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to a $7.4 million increase in Software Products revenue, which was partially offset by a $2.9 million decrease in Hardware Products revenue. The increase in Software Products revenue included a $15.4 million increase in the sale of eyeSight and eyeControl (functionalities generally purchased together), which was partially offset by a $8.7 million decrease in the sale of eyeExtend.

Subscription revenue increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to $3.1 million increase attributed to support and maintenance contracts associated with initial product sales and a $2.7 million increase attributed to support and maintenance contracts that were renewals.

Professional services revenue increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to an increase in the sale of optional installation and training services.

~~Cost of Revenue~~

Three Months Ended June 30,
2019 2018 Change
Amount Amount Amount %
��
(Dollars in thousands)
Cost of revenue:
License $ 5,622
$ 4,919
$ 703
14 %
Subscription 5,599
3,732
1,867
50 %
Professional services 6,235
6,062
173
3 %
Total cost of revenue $ 17,456
$ 14,713
$ 2,743
19 %

Cost of license revenue increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to $0.5 million in amortization expense associated with acquired developed technology and a $2.0 million increase due to higher quantities of hardware sold separately for use with our Software Products, partially offset by a $1.8 million decrease due to lower quantities of appliances sold that are embedded with our software.

Cost of subscription revenue increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to increases in personnel costs related to a 45% increase in headcount in our customer support organization.

Cost of professional services revenue increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to increases in personnel costs related to a 4% increase in headcount in our professional services organization.

~~Gross Profit and Gross Margin~~

Three Months Ended June 30,
2019 2018 Change
Gross Profit (Loss)
Gross Margin Gross Profit (Loss) Gross Margin Gross Profit (Loss) Gross Margin %

(Dollars in thousands)
Gross profit:
License $ 33,209
86 % $ 29,404
86 % $ 3,805
— %
Subscription 29,223
84 % 25,254
87 % 3,969
(3 )%
Professional services (1,608 ) (35 )% (1,777 ) (41 )% 169
6 %
Total gross profit $ 60,824
78 % $ 52,881
78 % $ 7,943
— %

~~Gross profit increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The increase is consistent with the changes in our revenue and cost of revenue.~~

~~Gross margin remained relatively flat for the three months ended June 30, 2019 compared to the three months ended June 30, 2018.~~

The margin on our license revenue remained relatively flat for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. The mix between Software Products revenue and Hardware Products revenue shifted to 82:18 for the three months ended June 30, 2019, from 71:29 for the three months ended June 30, 2018. 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 appliances that are embedded with our software shifted to 76:19:5 for the three months ended June 30, 2019, from 27:43:30 for the three months ended June 30, 2018.

~~The decrease in margin on our subscription revenue was due to higher personnel costs related to increased headcount in our support organization, as compared to our subscription revenue growth.~~

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.

~~Operating Expenses~~

Three Months Ended June 30,
2019 2018 Change
Amount Amount Amount %

(Dollars in thousands)
Operating expenses:
Research and development $ 19,440
$ 14,803
$ 4,637
31 %
Sales and marketing 56,173
45,039
11,134
25 %
General and administrative 15,838
13,260
2,578
19 %
Total operating expenses $ 91,451
$ 73,102
$ 18,349
25 %

Research and development expense increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to an increase in personnel costs of $3.1 million resulting from a 36% increase in headcount.

Sales and marketing expense increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to an increase in personnel costs of $10.5 million resulting from a 23% increase in headcount, which includes an increase in stock-based compensation expense of $1.3 million and an increase in commissions expense of $2.5 million. The increase was further driven by an increase in travel and entertainment cost of $1.3 million.

General and administrative expense increased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to an increase in personnel costs of $2.0 million resulting from an 8% increase in headcount.

~~Interest Expense~~

Three Months Ended June 30,
2019 2018 Change
Amount Amount Amount %

(Dollars in thousands)
Interest expense $ (142 ) $ (225 ) $ 83
(37 )%

Interest expense decreased for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, primarily due to the decreasing notes payable balance associated with our amended and restated loan and security agreement entered into on December 22, 2016.

~~Other Income, Net~~

Three Months Ended June 30,
2019 2018 Change
Amount Amount Amount %

(Dollars in thousands)
Other income, net
$ 505
$ 513
$ (8 ) (2 )%

~~Other income, net remained relatively flat for the three months ended June 30, 2019 compared to the three months ended June 30, 2018.~~

~~Provision for Income Taxes~~


	Three Months Ended June 30,										Three Months Ended June 30,										Six Months Ended June 30,
	2019			2018			Change				2020			2019			Change				2020			2019			Change
	Amount			Amount			Amount		%		Amount			Amount			Amount		%		Amount			Amount			Amount		%

	(Dollars in thousands)										(Dollars in thousands)
Income tax provision	$	496		$	473		$	23	5	%	$	1,288		$	496		$	792	160	%	$	1,720		$	1,207		$	513	43	%
Effective tax rate	(1.6		)%	(2.4		)%					(5.8		)%	(1.6		)%					(2.1		)%	(1.9		)%

We recorded an income tax provision for the three and six months ended June 30, ~~2019~~2020 due to foreign income taxes, unrecognized tax benefits, and U.S. state minimum taxes. The increase in income tax provision for the three and six months ended June 30, 2020 was primarily related to an increase in discrete tax expenses. The effective tax rate ~~increased~~decreased for the three and six months ended

June 30, ~~2019~~2020 compared to the three and six months ended June 30, ~~2018~~2019 primarily due to ~~an increase~~a decrease in worldwide loss before income taxes, which was largely generated in the United States and offset by a full valuation allowance.

~~Comparison~~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 ~~Six Months Ended June 30, 2019 and 2018~~

~~Revenue~~

Six Months Ended June 30,
2019 2018 Change
Amount Amount Amount %

(Dollars in thousands)
Revenue:
License $ 76,511
$ 64,103
$ 12,408
19 %
Subscription 68,621
55,345
13,276
24 %
Professional services 8,716
7,843
873
11 %
Total revenue $ 153,848
$ 127,291
$ 26,557
21 %

~~License revenue increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to~~CARES Act does not have a $17.6 million increase in Software Products revenue, which was partially offset by a $5.2 million decrease in Hardware Products revenue. The increase in Software Products revenue included a $21.0 million increase in the sale of eyeSight and eyeControl (functionalities generally purchased together), which was partially offset by a $5.4 million decrease in the sale of eyeExtend.

Subscription revenue increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to a $8.3 million increase attributed to support and maintenance contracts associated with initial product sales and a $5.0 million increase attributed to support and maintenance contracts that were renewals.

Professional services revenue increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to an increase in the sale of optional installation and training services.

~~Cost of Revenue~~

Six Months Ended June 30,
2019 2018 Change
Amount Amount Amount %

(Dollars in thousands)
Cost of revenue:
License $ 13,229
$ 12,055
$ 1,174
10 %
Subscription 10,806
7,533
3,273
43 %
Professional services 12,421
11,611
810
7 %
Total cost of revenue $ 36,456
$ 31,199
$ 5,257
17 %

Cost of license revenue increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to $0.9 million in amortization expense associated with acquired developed technology and a $2.3 million increase due to higher quantities of hardware sold separately for use with our Software Products, partially offset by a $2.4 million decrease due to lower quantities of appliances sold that are embedded with our software.

Cost of subscription revenue increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to increases in personnel costs related to a 45% increase in headcount in our customer support organization.

Cost of professional services revenue increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to increases in personnel costs related to a 4% increase in headcount in our professional services organization.

~~Gross Profit and Gross Margin~~

Six Months Ended June 30,
2019 2018 Change
Gross Profit (Loss) Gross Margin Gross Profit (Loss) Gross Margin Gross Profit (Loss) Gross Margin %

(Dollars in thousands)
Gross profit:
License $ 63,282
83 % $ 52,048
81 % $ 11,234
2 %
Subscription 57,815
84 % 47,812
86 % 10,003
(2 )%
Professional services (3,705 ) (43 )% (3,768 ) (48 )% 63
5 %
Total gross profit $ 117,392
76 % $ 96,092
75 % $ 21,300
1 %

~~Gross profit increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The increase is consistent with the changes in our revenue and cost of revenue.~~

~~Gross margin increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018.~~

The increase in margin on our license revenue was due to a higher concentration of Software Products revenue compared to Hardware Products revenue, which was principally driven by a shift in product mix towards increased sales of eyeSight, eyeControl, and eyeExtend. The mix between Software Products revenue and Hardware Products revenue shifted to 75:25 for the six months ended June 30, 2019, from 63:37 for the six months ended June 30, 2018. 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 appliances that are embedded with our software shifted to 64:21:15 for the six months ended June 30, 2019, from 37:35:28 for the six months ended June 30, 2018.

~~The decrease in margin on our subscription revenue was due to higher personnel costs related to increased headcount in our support organization, as compared~~material impact to our ~~subscription revenue growth.~~

~~Operating Expenses~~

Six Months Ended June 30,
2019 2018 Change
Amount Amount Amount %

(Dollars in thousands)
Operating expenses:
Research and development $ 37,937
$ 29,490
$ 8,447
29 %
Sales and marketing 112,096
87,318
24,778
28 %
General and administrative 32,051
26,992
5,059
19 %
Total operating expenses $ 182,084
$ 143,800
$ 38,284
27 %

Research and development expense increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to an increase in personnel costs of $5.7 million resulting from a 36% increase in headcount. The increase was further driven by an increase in allocated IT and facilities cost of $1.2 million.

Sales and marketing expense increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to an increase in personnel costs of $20.7 million resulting from a 23% increase in headcount, which includes an increase in commissions expense of $4.4 million and an increase in stock-based compensation expense of $1.7 million. The increase was further driven by an increase in travel and entertainment cost of $2.8 million and an increase in other marketing activities costs of $1.7 million, partially offset by a decrease in allocated IT and facilities cost of $1.7 million.

General and administrative expense increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to an increase in personnel costs of $3.9 million resulting from a 8% increase in headcount. The increase was further driven by an increase in professional fees of $1.8 million.

~~Interest Expense~~

Six Months Ended June 30,
2019 2018 Change
Amount Amount Amount %

(Dollars in thousands)
Interest expense $ (235 ) $ (468 ) $ 233
(50 )%

Interest expense decreased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018, primarily due to the decreasing notes payable balance associated with our amended and restated loan and security agreement entered into on December 22, 2016.

~~Other Income, Net~~

Six Months Ended June 30,
2019 2018 Change
Amount Amount Amount %

(Dollars in thousands)
Other income, net
$ 1,122
$ 1,175
$ (53 ) (5 )%

~~Other income, net remained relatively flat for the six months ended June 30, 2019 compared to the six months ended June 30, 2018.~~

~~Provision for Income Taxes~~

Six Months Ended June 30,
2019 2018 Change
Amount Amount Amount %

(Dollars in thousands)
Income tax provision $ 1,207
$ 1,601
$ (394 ) (25 )%
Effective tax rate (1.9 )% (3.4 )%

We recorded an income tax provision for the six months ended June 30, 2019 due to foreign income taxes, unrecognized tax benefits, and U.S. state minimum taxes. The decrease in the provision for the six months ended June 30, 2019 was primarily due to income tax benefit associated with amortization of intangible assets in a non-U.S. jurisdiction. The effective tax rate increased for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily due to an increase in worldwide loss before income taxes, which was largely generated in the United States and offset by a full valuation allowance.consolidated financial statements.

Liquidity and Capital Resources

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


	As of				As of
	June 30, 2019		December 31, 2018		June 30, 2020			December 31, 2019

	(In thousands)				(In thousands)
Working capital	$	27,460	$	52,623	$	(25,560	)	$	25,320
Cash, cash equivalents, and marketable securities:
Cash and cash equivalents	$	46,872	$	66,895	$	54,947		$	69,030
Marketable securities	58,065		47,632		2,021			29,181
Total cash, cash equivalents, and marketable securities	104,937		114,527		56,968			98,211
Total notes payable	11,925		15,579		4,550			8,248
Net cash, cash equivalents, and marketable securities	$	93,012	$	98,948	$	52,418		$	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. Our cash equivalents are comprised of cash and money market accounts. Our marketable securities are comprised of ~~commercial paper,~~ corporate-debt ~~securities, and U.S. government~~ 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.~~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 June 30, ~~2019,~~2020, our cash, cash equivalents, and marketable securities of ~~$104.9~~$57.0 million were held for general corporate purposes, of which approximately ~~$26.2~~$25.5 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, ~~inventory,~~ 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 ~~$25.2~~$50.9 million during the six months ended June 30, ~~2019,~~2020, primarily due to ~~a decrease~~lower billings, predominantly in ~~cash~~the three months ended March 31, 2020, and ~~cash equivalents, a decrease~~higher costs resulting from Merger-related expenses in accounts receivable, an increase in current operating lease liabilities, and an increase in current deferred revenue, partially offset by an increase in marketable securities and a decrease in accounts payable.connection with the Merger. The following table summarizes our cash flows for the six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.


	Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2020			2019

	(In thousands)						(In thousands)
Net cash (used in) provided by operating activities	$	(18,747	)	$	19,036
Net cash used in investing activities	(13,617		)	(1,553		)
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	12,675			16,757			4,542			12,675
Effect of exchange rate changes on cash and cash equivalents	(4		)	—			—			(4		)
Net change in cash, cash equivalents, and restricted cash for period	$	(19,693	)	$	34,240		$	(14,584	)	$	(19,693	)

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~~used in operating activities was ~~$(18.7)~~$44.8 million and ~~$19.0~~$18.7 million for the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, respectively, representing a decrease of ~~$37.8~~$26.0 million as compared to the six months ended June 30, ~~2018.~~2019. The decrease in generation of cash during the six months ended June 30, ~~2019~~2020 was due primarily to lower billings, ~~and higher operating expenses as we continue to invest~~predominantly in the ~~long-term growth of our business,~~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 six months ended June 30, 2020 was $25.6 million, primarily resulting from proceeds from maturities of marketable securities of $27.0 million, partially offset by capital expenditures to purchase property and equipment of $1.4 million related to the continuing growth of our business.

Cash used in investing activities during the six months ended June 30, 2019 was $13.6 million, primarily resulting from purchases of marketable securities of $63.6 million and capital expenditures to purchase property and equipment of $3.4 million related to the continuing growth of our business, partially offset by proceeds from maturities of marketable securities of $53.4 million.

Cash used in investing activities during the six months ended June 30, 2018 was $1.6 million, primarily resulting from purchases of marketable securities of $46.1 million and capital expenditures to purchase property and equipment of $4.8 million related to the continuing growth of our business, partially offset by proceeds from maturities of marketable securities of $49.4 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 six months ended June 30, ~~2019~~2020 was ~~$12.7~~$4.5 million, primarily from the proceeds from the sales of shares through our employee equity incentive plans of $11.6 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 $3.3 million.

Cash provided by financing activities for the six months ended June 30, 2019 was $12.7 million, primarily from the sale of shares through our employee equity incentive plans of $20.7 million, partially offset by payments related to shares withheld for taxes on the vesting of restricted stock units of $4.3 million, and the repayment of notes payable of $3.7 million.

Cash provided by financing activities for the six months ended June 30, 2018 was $16.8 million, primarily from the sale of shares through our employee equity incentive plans of $17.8 million and proceeds from our follow-on

offering of $13.8 million, partially offset by payments related to shares withheld for taxes on the vesting of restricted stock units of $9.6 million, the repayment of notes payable of $3.8 million, and payments of $1.5 million for deferred offering costs related to the follow-on offering.

Contractual Obligations and Commitments

~~There~~During the three months ended March 31, 2020, we elected to drawdown $16.0 million on the revolving credit facility available to us of which we have fully repaid by June 30, 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 six months ended June 30, ~~2019~~2020 in our commitments under contractual obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

Off-Balance Sheet Arrangements

Through June 30, ~~2019,~~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

~~Our condensed consolidated financial statements have been prepared in accordance with GAAP. The preparation~~See Part II, Item 7, “Management’s Discussion and Analysis of ~~these condensed consolidated financial statements requires us to make estimates~~Financial Condition and ~~assumptions that affect the reported amounts~~Results of ~~assets, liabilities, revenue, expenses,~~Operations-Critical Accounting Policies and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates. To the extent that there are material differences between these estimates and our actual results, our future financial statements will be affected.

~~There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described~~Estimates” in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019. There were no changes to our Critical Accounting Policies and Estimates for the six months ended June 30, 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 June 30, 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, ~~2018.~~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 June 30, ~~2019,~~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.

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 June 30, ~~2019~~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.

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.

Between March 13, 2020 and April 3, 2020, four lawsuits were filed by purported stockholders of the Company challenging disclosures made by us in connection with the transactions contemplated by the Original Merger Agreement. Of those four lawsuits, three were brought by plaintiffs individually and are captioned Blackwell v. Forescout Technologies, Inc., 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 Williams v. Forescout Technologies, Inc., et al., 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 the members of our board of directors (the “Board”). The Complaints alleged violations of Section 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated thereunder. The Blackwell and Bushansky complaints contended that our preliminary proxy statement omitted or misrepresented material information regarding the transactions contemplated by the Original Merger Agreement. The Williams complaint contended that our definitive proxy statement omitted or misrepresented material information regarding the transactions contemplated by the Original Merger Agreement. The allegations in the Complaints included that material information was misstated or omitted regarding our financial projections, the analyses performed by our investment banker, and certain details about past services that our investment banker provided to Advent and its affiliates. The Blackwellcomplaint also alleged that the preliminary proxy statement omitted material information regarding the recusal of a member of the Board from meetings of the Board and its Strategic Committee relating to the transactions contemplated by the Original Merger Agreement, as well as certain details of confidentiality agreements between ForeScout and ten potential acquirors. In addition, the Bushansky complaint alleged that the preliminary 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 transactions contemplated by the Original Merger Agreement. The Complaints sought, among other things, to (1) enjoin the defendants from consummating the transactions contemplated by the Original Merger Agreement; (2) cause the defendants to disseminate revised disclosures; and (3) rescind the transactions contemplated by the Original Merger Agreement or recover damages in the event that such transactions were completed.

The Blackwell action was voluntarily dismissed without prejudice on June 8, 2020. The Bushansky action was voluntarily dismissed without prejudice on June 1, 2020. The Williams action, which was not served, was voluntarily dismissed without prejudice on June 22, 2020.

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, ~~2018. There~~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, ~~2018.~~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, ~~2018.~~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.

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 2.~~	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

~~None.~~




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).

EXHIBIT INDEX



Exhibit Number		Description
10.1*		~~Form of 2017 Equity Incentive Plan Performance-Based Restricted Stock Unit Grant Agreement.~~
10.2*		~~Amendment One to Forescout Technologies, Inc. Employment Agreement between Registrant and Pedro Abreu, dated May 24, 2019.~~
10.3*		Consulting Agreement by and between the Company and Night Dragon II, LLC dated as of June 5, 2019 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s current report on Form 8-K (File No. 001-38253) filed on June 7, 2019).
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).



*	~~Indicates a management or compensatory plan.~~
†	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.

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: August ~~7, 2019~~5, 2020	By: /s/ Darren J. Milliken
	Darren J. Milliken
	Senior Vice President, General Counsel, Corporate Secretary and Corporate Compliance Officer




Dated: August ~~7, 2019~~5, 2020	By: /s/ Christopher Harms
	Christopher Harms
	Chief Financial Officer
	Principal Financial Officer

4045



	Three Months Ended June 30, 2019
	Contract Liabilities
Balance as of March 31, 2019	$	178,785
Additions	73,328
Gross revenue recognized	(78,280		)
Balance as of June 30, 2019	$	173,833



	December 31, 2018
	Less Than 12 Months					Greater Than 12 Months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Corporate debt securities	$	4,020	$	(3	)	$	31,620	$	(87	)	$	35,640	$	(90	)
U.S. government securities	—		—			8,001		(11		)	8,001		(11		)
Total	$	4,020	$	(3	)	$	39,621	$	(98	)	$	43,641	$	(101	)



Lease Cost (in thousands)	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease cost ⁽¹⁾	$	2,030	$	4,473



Years Ending December 31,	Operating Leases^(a)
2019 (excluding the six months ended June 30, 2019)	$	3,759
2020	6,701
2021	5,349
2022	4,576
2023	4,540
Thereafter	11,933
Total lease payments	$	36,858
Less: Imputed interest	7,242
Present value of lease liabilities	$	29,616



Other information (in thousands)	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,961	$	3,779
Leased assets obtained in exchange for new operating lease liabilities	$	2,785	$	4,402