UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

———————————————

FORM10-Q

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(Mark One)




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

For the quarterly period ended ~~September~~June 30, ~~2017~~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

———————————————

FORESCOUT TECHNOLOGIES, ~~INC.~~INC.

(Exact name of registrant as specified in its charter)

———————————————



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

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

~~(408)~~ (408) 213-3191

(~~Registrant's~~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 x☒No ¨☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ such files). Yes x☒ No ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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. ~~(Check one):~~



Large accelerated filer	¨☒	Accelerated filer	¨☐
Non-accelerated filer	x☐	Smaller reporting company	¨☐
~~(Do not check if a smaller reporting company)~~		Emerging growth company	x☐
		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	x ☐

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

The number of shares outstanding of the registrant’s common stock as of ~~December 5, 2017~~July 31, 2020 was ~~37,906,920.~~49,712,035.

TABLE OF CONTENTS






		Page
	PART I - FINANCIAL INFORMATION	56
Item 1.	Financial Statements	5
	~~Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016~~	5
	~~Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Nine Months Ended September 30, 2017 and 2016~~	6
	Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019	6
	Condensed Consolidated Statements of ~~Cash Flows~~Operations for the ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019	7
	~~Notes to~~ Condensed Consolidated ~~Financial~~ Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2020 and 2019	8
	Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019	9
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019	10
	Notes to Condensed Consolidated Financial Statements	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1721
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3836
Item 4.	Controls and Procedures	3837

	PART II - OTHER INFORMATION	4038
Item 1.	Legal Proceedings	4038
Item 1A.	Risk Factors	40
~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	6441
Item 6.	Exhibits	6443
	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 ~~and~~ 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 ~~for services~~of Software Products subscription contracts and support and maintenance ~~by existing end-customers and growth of our recurring revenue retention;~~contracts (collectively known as “term contracts”) with end-customers;

our expectations regarding our relationships with third parties, including further development of our relationships with our manufacturer, value-added resellers and channel partners, alliance partners, and our technology and distribution partners;

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 ~~product~~license revenue, ~~and maintenance~~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 CounterACT, ForeScout Enterprise Manager,~~Forescout eyeSight, Forescout eyeControl, Forescout eyeExtend, SilentDefense, and ~~ForeScout Extended Modules~~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.~~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 our filings with the SEC and, in particular, those risks discussed in Part I, Item 1A of our Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2019 and in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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 and you~~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.




ITEM 1.	FINANCIAL STATEMENTS


	September 30, 2017			December 31, 2016			June 30, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	72,344		$	79,665		$	54,947		$	69,030
Marketable securities							2,021			29,181
Accounts receivable	49,080			44,694			63,924			84,168
Inventory	132			890			1,418			372
Deferred commissions - current							13,350			12,843
Prepaid expenses and other current assets	8,431			8,592			11,383			17,024
Total current assets	129,987			133,841			147,043			212,618
Deferred commissions - non-current							20,848			23,036
Property and equipment, net	23,264			24,536			20,718			23,835
Severance pay deposits	1,987			1,704
Restricted cash	4,137			4,011
Operating lease right-of-use assets							27,265			29,626
Restricted cash - non-current							1,554			1,555
Intangible assets, net							17,339			19,367
Goodwill							98,018			98,018
Other assets	4,951			3,334			6,946			8,172
Total assets	$	164,326		$	167,426		$	339,731		$	416,227

Liabilities, redeemable convertible preferred stock and stockholders' deficit
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,889		$	5,210		$	11,899		$	10,692
Accrued compensation	21,106			17,286			29,770			34,007
Accrued expenses	11,002			12,903			16,381			16,279
Customer deposits	6,506			718
Deferred revenue	91,216			68,844
Notes payable	7,224			7,163
Deferred revenue - current							104,191			112,232
Notes payable - current							4,550			8,248
Operating lease liabilities - current							5,812			5,840
Total current liabilities	138,943			112,124			172,603			187,298
Warrant liabilities	5,216			4,874
Deferred revenue - non-current	56,712			40,070			67,274			75,366
Notes payable - non-current	17,398			22,824
Accrued severance pay liability	2,524			2,033
Operating lease liabilities - non-current							29,211			32,125
Other liabilities	9,340			10,244			23,638			23,893
Total liabilities	230,133			192,169			292,726			318,682
Commitments and Contingencies
Redeemable convertible preferred stock	283,854			283,854
Stockholders' deficit:
Common stock, $0.001 par value; 50,000,000 shares authorized;
6,175,126 and 5,854,147 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively	6			6

Stockholders' equity:
Common stock, $0.001 par value; 1,000,000 shares authorized;
49,550 and 48,064 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively							50			48
Additional paid-in capital	98,555			84,792			762,187			727,922
Accumulated other comprehensive loss							(678		)	(633		)
Accumulated deficit	(448,222		)	(393,395		)	(714,554		)	(629,792		)
Total stockholders’ deficit	(349,661		)	(308,597		)
Total liabilities, redeemable convertible preferred stock and stockholders' deficit	$	164,326		$	167,426
Total stockholders’ equity							47,005			97,545
Total liabilities and stockholders' equity							$	339,731		$	416,227

See Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ~~AND COMPREHENSIVE LOSS~~

Other income (expense), net

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,
	2020			2019			2020			2019
Net loss	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
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		)
Comprehensive loss	$	(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, 2020
	Common Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Total Stockholders' Equity
Balance as of December 31, 2019	48,064	$	48	$	727,922	$	(633	)	$	(629,792	)	$	97,545
Other comprehensive loss, net of tax	—	—		—		(55		)	—			(55		)
Stock-based compensation	—	—		13,478		—			—			13,478
Issuance of common stock in connection with employee equity incentive plans	976	1		2,899		—			—			2,900
Net loss	—	—		—		—			(61,239		)	(61,239		)
Balance as of March 31, 2020	49,040	$	49	$	744,299	$	(688	)	$	(691,031	)	$	52,629
Other comprehensive income, net of tax	—	—		—		10			—			10
Stock-based compensation	—	—		12,522		—			—			12,522
Issuance of common stock in connection with employee equity incentive plans	510	1		5,366		—			—			5,367
Net loss	—	—		—		—			(23,523		)	(23,523		)
Balance as of June 30, 2020	49,550	$	50	$	762,187	$	(678	)	$	(714,554	)	$	47,005



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

See Notes to Condensed Consolidated Financial Statements.

FORESCOUT TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(InUnaudited, in thousands)

~~(Unaudited)~~

Nine Months Ended
September 30,
2017
2016
Cash flows from operating activities
Net loss $ (54,860 ) $ (57,960 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities

Stock-based compensation 12,060

12,862
Depreciation 4,264

2,279
Loss on disposal of property and equipment 187

19
Amortization of discount on debt 259

554
Change in fair value of warrant liabilities 342

(379 )
Changes in operating assets and liabilities
Accounts receivable (4,386 )
(2,562 )
Inventory 835

125
Prepaid expenses and other current assets 177

(4,516 )
Other assets (131 )
(1,723 )
Accounts payable (3,319 )
(1,630 )
Accrued compensation 3,820

4,725
Accrued expenses (567 )
1,855
Customer deposits 5,788

(709 )
Deferred revenue 39,014

10,085
Severance pay, net 208

151
Other liabilities (128 )
6,429
Net cash provided by (used in) operating activities 3,563

(30,395 )
Cash flows from investing activities
Purchases of property and equipment (3,386 )
(19,959 )
Purchases of short-term investments —

(23,983 )
Proceeds from maturities of short-term investments —

12,000
Proceeds from sales of short-term investments —

11,979
Change in restricted cash (126 )
(199 )
Net cash used in investing activities (3,512 )
(20,162 )
Cash flows from financing activities
Repayments of notes payable (5,624 )
—
Net proceeds from issuance of redeemable convertible preferred stock —

2,399
Proceeds from exercise of stock options 960

907
Payments of deferred offering costs (2,708 )
—
Net cash (used in) provided by financing activities (7,372 )
3,306
Net change in cash and cash equivalents for period (7,321 )
(47,251 )
Cash and cash equivalents at beginning of period 79,665

126,846
Cash and cash equivalents at end of period $ 72,344

$ 79,595
Noncash disclosure of investing and financing activities:

Change in liability for early exercise of stock options, net of vested portion $ 776

$ 812
Leasehold improvements paid by lessor $ —

$ 338
Purchases of property and equipment recorded in accounts payable and accrued expenses $ 144

$ 1,037
Deferred offering costs included in accrued expenses $ 501
$ —



	Six Months Ended June 30,
	2020			2019
Cash flows from operating activities:
Net loss	$	(84,762	)	$	(65,012	)
Adjustments to reconcile net loss to net cash used in operating activities
Stock-based compensation	25,625			27,893
Depreciation and amortization	6,465			5,790
Other	655			(8		)
Changes in operating assets and liabilities
Accounts receivable	20,244			12,177
Inventory	(1,293		)	(593		)
Deferred commissions	1,681			1,809
Prepaid expenses and other current assets	5,142			318
Other assets	536			551
Accounts payable	1,297			(2,509		)
Accrued compensation	(4,237		)	(905		)
Accrued expenses	152			407
Deferred revenue	(16,133		)	1,495
Other liabilities	(143		)	(160		)
Net cash used in operating activities	(44,771		)	(18,747		)
Cash flows from investing activities:
Purchases of property and equipment	(1,355		)	(3,402		)
Purchases of marketable securities	—			(63,569		)
Proceeds from maturities of marketable securities	27,000			53,354
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	(3,750		)	(3,749		)
Proceeds from sales of shares through employee equity incentive plans	11,583			20,726
Payment related to shares withheld for taxes on vesting of restricted stock units	(3,316		)	(4,302		)
Others	25			—
Net cash provided by financing activities	4,542			12,675
Effect of exchange rate changes on cash and cash equivalents	—			(4		)
Net change in cash, cash equivalents, and restricted cash for period	(14,584		)	(19,693		)
Cash, cash equivalents, and restricted cash at beginning of period	71,591			69,012
Cash, cash equivalents, and restricted cash at end of period	$	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	$	54,947	$	46,872
Restricted cash included in prepaid expenses and other current assets	506		1,154
Restricted cash - non-current	1,554		1,293
Total cash, cash equivalents, and restricted cash	$	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~~Forescout Technologies, Inc. (the “Company”) was incorporated in the State of Delaware and commenced operations in April 2000. The Company ~~provides an agentless approach~~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 ~~network security to protect organizations against the emerging threats that exploit billions of Internet of Things (“IoT”) devices connected to an organization’s networks.~~ mitigate both their cyber and operational risk.

The Company offers its solution across ~~three products:~~2 product groups: (i) ~~ForeScout CounterACT~~^®,products for visibility and control capabilities, and (ii) ~~ForeScout CounterACT Enterprise Manager and (iii) ForeScout Extended Modules.~~products for orchestration capabilities. The Company’s ~~CounterACT product provides~~products for visibility and ~~policy-based mitigation~~control capabilities consist of ~~security issues.~~eyeSight, eyeSegment, eyeControl, and SilentDefense; eyeSight, eyeSegment, and eyeControl provide for visibility and control capabilities across the extended enterprise, from campus to data center to hybrid cloud to operational technology (“OT”) devices, while SilentDefense provides for visibility and control capabilities deeper within the OT portion of the network. The Company’s ~~CounterACT Enterprise Manager is a centralized security management~~products for orchestration capabilities are comprised of its portfolio of eyeExtend family of products.

The Company offers its solution ~~for global control of all CounterACT~~across 2 product types: (i) software products and (ii) hardware products. The Company’s ~~Extended Modules expand CounterACT’s see~~software products include eyeSight, eyeSegment, eyeControl, eyeExtend, SilentDefense, and ~~control capabilities by sharing contextual device data~~SilentDefense Command Center (“Software Products”). The Company’s hardware products include hardware that is sold separately for use with ~~third-party systems~~the Company’s Software Products and ~~by automating policy enforcement across those disparate systems.~~appliances that are embedded with the Company’s software (“Hardware Products”).

The Company sells its ~~products,~~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.

~~Initial Public Offering~~Proposed Merger

On ~~October 31, 2017,~~February 6, 2020, the Company ~~closed its initial public offering~~entered into an Agreement and Plan of Merger (the “Original Merger Agreement”) with Ferrari Group Holdings, L.P., a Delaware limited partnership (“~~IPO”~~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 ~~which it~~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 ~~sold 6,072,000 shares~~outstanding share of the Company’s common stock ~~inclusive of the underwriters’ option to purchase additional shares that was exercised in full. The price~~for $29.00 per share, net to the ~~public was $22.00.~~seller in cash, without interest and subject to any withholding taxes (the “Offer Price”). The ~~Company received aggregate proceeds of $124.2 million from the IPO, net of underwriters’ discounts and commissions, and before deducting offering costs of approximately $3.5 million. Upon the~~ closing of the ~~IPO, all shares~~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~~Company’s issued and outstanding ~~redeemable convertible preferred~~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 ~~automatically~~(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 ~~25,370,616 shares of common stock. Total outstanding shares after closing~~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 ~~IPO and~~day, one minute after ~~conversion of all shares~~11:59 p.m., Eastern time, on August 14, 2020, unless the Offer is extended or earlier terminated.

Concurrently with the execution of the ~~Company's outstanding redeemable convertible preferred stock was 37,861,342 at October 31, 2017.~~Amended and Restated Merger Agreement, Forescout, Parent and Merger Sub entered into a settlement agreement to resolve pending litigation between them. Pursuant to the settlement agreement, the parties have agreed to release their respective claims made in connection with the litigation.

COVID-19

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

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared ~~in accordance with U.S. generally accepted accounting principles~~by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“~~GAAP”~~SEC”) ~~for interim financial information~~ 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, ~~2016. Our~~2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted as permitted by the SEC's rules and regulations. The Company’s condensed consolidated financial statements include the results of ~~ForeScout~~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 ~~our~~the Company’s quarterly results. The condensed consolidated balance sheet as of December 31, ~~2016~~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 ~~as of~~ and related notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, which are included in the Company’s prospectus related to the Company’s initial public offering, filed October 27, 2017 (the “Prospectus”), pursuant to Rule 424 (b) under the Securities Act of 1933, as amended (the “Securities Act”) with the Securities and Exchange Commission (the “SEC”).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 ~~allocation~~best estimate of ~~revenue in multiple element arrangements,~~standalone selling prices for license and related support, the period over which deferred sales ~~return reserve,~~commissions are amortized to expense, accruals, stock-based compensation, ~~including the fair value of common stock, redeemable convertible preferred stock warrant liabilities, and~~ provision for income taxes including related ~~reserves.~~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.

~~Reverse Stock Split~~

On October 16, 2017, the Company amended its amended and restated certificate of incorporation to effect a two-to-one reverse stock split of its common stock and convertible preferred stock (the “Reverse Stock Split”). Upon the filing of the amended and restated certificate of incorporation in the state of Delaware, (i) each two shares of outstanding convertible preferred stock and each two shares of outstanding common stock were exchanged and combined into one share of convertible preferred stock and one share of common stock, respectively; (ii) the number of shares of common stock issuable under each outstanding option to purchase common stock and issuable upon vesting under each restricted stock unit was proportionately reduced on a two-to-one basis; (iii) the exercise price of each outstanding option to purchase common stock was proportionately increased on a two-to-one basis; (iv) the number of shares of convertible preferred stock issuable under outstanding warrants was proportionally reduced on a two-to-one basis and the exercise price of such warrants was proportionally increased on a two-to-one basis; and (v) corresponding adjustments in the per share conversion prices, dividend rates and liquidation preferences of the convertible preferred stock were made on a two-to-one basis. Accordingly, all share and per share information presented in the condensed consolidated financial statements herein, and notes thereto, have been retroactively adjusted to reflect the Reverse Stock Split.

Summary of Significant Accounting Policies

~~There have been no material changes~~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 ~~our significant accounting policies~~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 ~~compared to those described~~restructuring charges in the ~~Prospectus.~~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.

~~Inventory~~

~~Inventory primarily consists~~Credit losses

Effective January 1, 2020, the Company adopted the requirements of finished goods hardware appliances and is stated at the lower of cost or market determined using the specific identification method. Inventory that is obsolete or in excess of forecasted demand is written down to its estimated realizable value. Inventory write-downs, once established, are not reversed as they establish a new cost basis for the inventory.

~~Recent Accounting Pronouncements~~

~~In May 2014, the Financial Accounting Standards Board (“FASB”) issued~~ Accounting Standards Update (“ASU”) No. ~~2014-09~~2016-13, Financial Instruments-Credit Losses (Topic ~~606)~~326): Measurement of Credit Losses on Financial Instruments, ~~Revenue from Contracts~~which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with ~~Customers~~ ~~(“ASU 2014-09”),~~an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to ~~revenue from contracts with customers, which, along with amendments issued~~available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in ~~2015 and 2016, will supersede nearly all current GAAP guidance on this topic and eliminate industry-specific guidance. Under~~ the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosureamortized cost basis of the ~~nature, amount, timing, and uncertainty~~securities. These changes will result in earlier recognition of ~~revenue and cash flows arising from contracts with customers.~~

credit losses. The ~~guidance permits two methods of adoption: retrospectively to each prior reporting period presented (“full retrospective method,”) or retrospectively~~Company adopted ASU 2016-13 effective January 1, 2020 with the cumulative effect of ~~applying the guidance recognized in~~adoption recorded as an adjustment to retained ~~earnings as of the date of adoption (“modified retrospective method”).~~earnings. The Company currently anticipates adopting the standard using the full retrospective method to restate each prior reporting period presented. The Company’s ability to adopt the full retrospective method is dependent upon system readiness and the Company’s ability to gather sufficient data to timely assess the impact on prior period financial statements. The Company plans to adopt the new standard effective January 1, 2018.

The Company is currently evaluating the impacts of the new standard on its accounting policies, processes, and system requirements and has assigned internal resources, in addition to the engagement of third party service providers, to assist in the evaluation. While the Company is continuing to assess all potential impacts of this standard, the Company currently believes that the most significant impacts relate to the accounting for Software Products, which include Virtual Appliances, Enterprise License Software sold without hardware, and Extended Modules as software deliverables, and

contract acquisition costs. For Software Products, sold prior to January 1, 2016, vendor-specific objective evidence of fair value (“VSOE”) for support and maintenance on Software Products was not established, and the Company recorded all Software Product related revenue ratably over the contractually committed support and maintenance period. Professional services sold in conjunction with such Software Products were also recognized ratably over the contractually committed support and maintenance period. Under the new standard the requirement to have VSOE for undelivered elements is eliminated and an entity may be required to recognize Software Product revenue at the time of delivery, and any related professional services revenue as services are provided to the customers. For contract acquisition costs, the new standard requires the capitalization of such costs, which is primarily sales commissions, and amortization of these costs over the contract period or estimated customer life, which will result in the recognition of a deferred charge on the Company’s balance sheets. The Company currently expenses all sales commissions and other incremental costs to acquire contracts as they are incurred. Additionally, the Company expects revenue allocated from future deliverables (primarily support and maintenance) to Physical Appliances, which include CounterACT and Enterprise Manager hardware appliances embedded with the Company’s software, to be recognized upon delivery under the new guidance when the standalone selling price is different from the contract price. Such differences are currently recognized over the contractual support and maintenance period.

~~While the Company continues to assess the potential impacts of the new standard, including the areas described above, and anticipates that this standard could have a material impact~~effect on its consolidated financial statements ~~it does~~and related disclosures is not ~~know or cannot reasonably estimate quantitative information related to~~material.

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

Recently Issued and Not Yet Adopted Accounting Pronouncements

In ~~February 2016,~~December 2019, the FASB issued ASU No. ~~2016-02 (Topic 842), Leases. The new guidance requires lessees~~2019-12, Simplifying the Accounting for Income Taxes that eliminates certain exceptions related to ~~recognize right-of-use assets~~the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and ~~lease~~the recognition of deferred tax liabilities for ~~those leases classified as operating leases under previous U.S. GAAP.~~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, ~~2018, and will be applied on a modified retrospective basis, with the option to elect certain practical expedients.~~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.

~~In March 2016, the FASB issued ASU No. 2016-09 (Topic 718),~~ ~~Improvements to Employee Share-Based Payment Accounting~~ ~~(“ASU 2016-09”). This standard is intended to simplify several areas~~

Note 2. Revenue, Deferred Revenue and Deferred Commissions

Disaggregation of accounting for stock-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU 2016-09 is effective for annual and interim periods within those fiscal years, beginning after December 15, 2016. Revenue

The Company ~~adopted this standard~~derives revenue from sale of Software Products, Hardware Products, term contracts, and professional services. All revenue recognized in the ~~first quarter~~condensed consolidated statements of ~~2017~~operations is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to revenue type and ~~elected~~is consistent with how the Company evaluates its financial performance (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Revenue:
License
Software Products
Perpetual license	$	12,167	$	20,675	$	21,526	$	46,434
Term license	19,167		11,190		19,820		11,514
Hardware Products	6,243		6,966		11,030		18,563
Subscription
Software as a service (“SaaS”)	167		—		293		—
Support and maintenance	37,445		34,822		74,845		68,621
Professional services	4,687		4,627		9,515		8,716
Total revenue	$	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 ~~account~~license within Software Products subscription contracts. License revenue is recognized at the time of transfer of control, which is generally upon delivery of access to software downloads or shipment, provided that all other revenue recognition criteria have been met.

Subscription Revenue

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

Professional Services Revenue

Professional services revenue is derived primarily from customer fees for ~~forfeitures~~optional installation of the Company’s products or training. Generally, the Company recognizes revenue for professional services as ~~they occur, rather than estimate expected forfeitures.~~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 ~~change~~Company’s payment terms typically range between 30 to 90 days. The Company has ~~been applied~~0 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 ~~modified retrospective~~contract-by-contract basis ~~that resulted~~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, 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, 2020
	Contract Liabilities
	Total
Balance as of December 31, 2019	$	188,907
Additions	119,939
License revenue recognized	(52,376		)
Subscription revenue recognized	(75,138		)
Professional services revenue recognized	(9,515		)
Balance as of June 30, 2020	$	171,817

For the three and six months ended June 30, 2020 and 2019, a ~~$34,000 cumulative-effect adjustment to accumulated deficit as~~vast majority of ~~January 1, 2017, the date~~subscription revenue and a minority of ~~adoption. The adoption of this guidance also requires that excess tax benefits~~license revenue and ~~tax deficiencies be recorded~~professional services revenue were included in the ~~statement~~contract liabilities balance at the beginning of ~~operations as opposed to additional paid-in capital when the awards vest or are settled, and has been applied on a prospective basis. As a result, deferred tax assets increased by $2.3~~each period.

Performance Obligations

Contracted not recognized revenue was $172.1 million as of ~~January 1, 2017, offset by valuation allowance, due~~June 30, 2020, of which the Company expects to ~~tax deductions related to equity compensation greater than compensation recognized for financial reporting.~~

~~In November 2016, the FASB issued ASU No. 2016-18 (Topic 230),~~ ~~Statement of Cash Flows: Restricted Cash~~. The new standard requires an entity to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows, and an entity will no longer present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. The standard is effective for annual and interim periods within those fiscal years, beginning after December 15, 2017, and should be applied retrospectively. Early adoption is permitted. The Company is currently evaluating the timing and impactrecognize approximately 61% of the ~~adoption of this standard on its consolidated financial statements.~~

~~In May 2017,~~revenue over the ~~FASB issued ASU 2017-09 (Topic 718),~~ ~~Compensation-Stock Compensation: Scope of Modification Accounting.~~ ~~This standard provides guidance on when to account for a change to~~next 12 months and the terms or conditions of a share-based payment award as a modification. Under this new standard, modification accounting is required only if the fair value, the vesting conditions or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This standard is effective for annual and interim periods within those

fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.remainder thereafter.

Note 2.3. Fair Value Measurements

Financial assets ~~and liabilities~~ 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.

Fair value reflects the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value measurements, the Company considers the principal or most advantageous market and also market-based risk.

The accounting guidance ~~for fair value measurements requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The accounting guidance also~~ 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 ~~and liabilities~~ according to the fair value hierarchy as of June 30, 2020 and December 31, 2019 (in thousands):



	June 30, 2020						December 31, 2019
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents:
Cash	$	40,752	$	—	$	—	$	62,188	$	—	$	—
Money market accounts	14,195		—		—		6,842		—		—
Total cash and cash equivalents	54,947		—		—		69,030		—		—
Marketable securities:
Commercial paper	—		—		—		—		1,998		—
Corporate debt securities	—		2,021		—		—		24,168		—
U.S. government securities	—		—		—		—		3,015		—
Total marketable securities	—		2,021		—		—		29,181		—
Restricted cash (current and non-current)	2,060		—		—		2,561		—		—
Total financial assets	$	57,007	$	2,021	$	—	$	71,591	$	29,181	$	—

September 30, 2017 December 31, 2016
Financial Assets   Level 1 Level 3   Level 1 Level 3
Cash and cash equivalents:

      Cash $ 34,986
$ —
$ 42,499
$ —
      Money market accounts 37,358
—
37,166
—
Total cash and cash equivalents 72,344
—
79,665
—
Restricted cash (current and non-current) 4,339
—
4,212
—
Total financial assets $ 76,683
$ —
$ 83,877
$ —
Financial Liabilities

Warrant liabilities $ —
$ 5,216
$ —
$ 4,874

~~The Company’s Level 3 financial liabilities consist of warrant liabilities on redeemable convertible preferred stock and common stock.~~

Note 4. Marketable Securities

The following table ~~presents~~summarizes the ~~activity for the warrant liabilities~~Company’s marketable securities by significant investment categories as of June 30, 2020 and December 31, 2019 (in thousands):



	June 30, 2020						December 31, 2019
	Amortized Cost		Unrealized Gains		Fair Value		Amortized Cost		Unrealized Gains		Fair Value
Marketable securities:
Available-for-sale:
Commercial paper	$	—	$	—	$	—	$	1,998	$	—	$	1,998
Corporate debt securities	2,017		4		2,021		24,122		46		24,168
U.S. government securities	—		—		—		3,012		3		3,015
Total marketable securities	$	2,017	$	4	$	2,021	$	29,132	$	49	$	29,181

Level 3
Balance as of December 31, 2016 $ 4,874
Change in fair value of warrant liabilities 342
Balance as of September 30, 2017 $ 5,216
The following table summarizes the amortized cost and fair value of the Company’s available-for-sale securities as of June 30, 2020 and December 31, 2019 by the contractual maturity date (in thousands):



	June 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due within one year	$	2,017	$	2,021	$	29,132	$	29,181
Total	$	2,017	$	2,021	$	29,132	$	29,181

The Company had 0 marketable securities in unrealized loss position as of June 30, 2020 and December 31, 2019.

Note 5. Restructuring

Q2 2020 Restructuring Plan

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

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

Q1 2020 Restructuring Plan

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

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



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

The accrued restructuring balance as at June 30, 2020 is included in accrued expenses on the Company’s condensed consolidated balance sheets.

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

Note 3.6. 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,
	2020		2019		2020		2019
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

Stock ~~Option Activity~~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 ~~share,~~ per share and contractual life amounts):



	Options Outstanding
	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Balance—December 31, 2019	3,066		$	12.33	5.6	$	62,759
Options exercised	(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

Options Outstanding
Number
of
Shares Weighted-
Average
Exercise
Price Weighted-
Average
Remaining
Contractual
Life (Years) Aggregate
Intrinsic
Value
Balance—December 31, 2016 9,587,515
$ 10.13
8.0 $ 61,865
     Options granted 458,099
$ 18.46

     Options exercised (222,447 ) $ 4.32

     Options forfeited (410,026 ) $ 14.31

Balance—September 30, 2017 9,413,141
$ 10.49
7.4 $ 87,637
Options vested and expected to vest—September 30, 2017 9,413,141
$ 10.49
7.4 $ 87,637
Options vested and exercisable—September 30, 2017 5,014,239
$ 8.34
6.8 $ 57,377

As of ~~September~~June 30, ~~2017,~~2020, the total unrecognized compensation cost related to unvested options was ~~$28.8~~$1.1 million, which ~~was~~is expected to be amortized on a straight-line basis over a weighted-average period of approximately ~~2.2~~0.9 years.

Restricted Stock ~~Unit~~Units (“~~RSU”~~RSUs”) ~~Activity~~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 ~~share,~~ per share and contractual life amounts):



	RSUs and PSUs Outstanding
	Number of Shares		Weighted- Average Grant Date Fair Value Per Share		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Balance—December 31, 2019	6,391		$	31.37	1.7	$	209,621
Granted	253		$	29.80
Vested	(816	)	$	29.41
Forfeited	(668	)	$	32.02
Balance—June 30, 2020	5,160		$	31.53	1.5	$	109,383

RSUs Outstanding
Number
of
Shares Weighted-
Average
Grant Date Fair Value Per Share Weighted-
Average
Remaining
Contractual
Life (Years) Aggregate
Intrinsic
Value
Balance—December 31, 2016 1,898,623
$ 14.83
1.7 $ 30,720
RSUs granted 1,155,350
$ 19.25

RSUs forfeited (22,750 ) $ 20.18

Balance—September 30, 2017 3,031,223
$ 16.48
1.8 $ 59,958
RSUs vested and expected to vest—September 30, 2017 3,029,970
$ 17.22
1.8 $ 59,933

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 ~~September~~June 30, ~~2017,~~2020, the total unrecognized compensation cost related to unvested RSUs and PSUs was ~~$2.5~~$118.8 million, ~~excluding RSUs with a performance condition, and are~~which is expected ~~to be amortized on a straight-line basis over a weighted-average period of approximately 1.4 years.~~

~~Stock-Based Compensation~~

~~Stock-based compensation expense for both employees and non-employees included in the accompanying condensed consolidated statements of operations and comprehensive loss is as follows (in thousands):~~

Three Months Ended September 30,
Nine Months Ended September 30,

2017
2016
2017
2016
Cost of revenue:
Product $ 19
$ 6
$ 60
$ 16
Maintenance and professional services 286
317
930
809
Research and development 630

613

2,043

1,645
Sales and marketing 1,602

1,543

4,868

6,469
General and administrative 1,372

1,339

4,159

3,923
Total $ 3,909

$ 3,818

$ 12,060

$ 12,862

As of September 30, 2017, the Company had a total of 294,160 options outstanding to employees and non-employees, with exercise prices ranging from $0.43 to $1.47, that will only vest upon the completion of an IPO or change in control. As of September 30, 2017, the Company had a total of 2,420,273 restricted stock units outstanding with a performance condition dependent upon completion of an IPO or a change in control. If an IPO or a change in control had occurred as of September 30, 2017, the Company would have recorded stock-based compensation expense of approximately $22.1 million and the unrecognized compensation cost related to these performance-based stock options and RSUs would have been $31.0 million to be amortized over a weighted-average period of approximately ~~1.9~~2.4 years. ~~Upon the closing of the IPO on October 31, 2017, the Company recognized stock-based compensation expense of approximately $24.1 million related to the performance-based stock options and RSUs.~~

In September 2017, the Company amended its Chief Executive Officer's (“CEO”) employment agreement to provide for accelerated vesting of all of the CEO’s equity awards upon his termination due to death or disability while executing his employment duties. As a result of this modification to the CEO’s vesting terms, the Company expects to record an incremental $7.6 million in stock-based compensation expense over the service period beginning in October 2017 following the completion of the Company's IPO.

~~Determining the Fair Value of Stock Options~~

~~The fair value of stock option awards is estimated using the Black-Scholes option-pricing model.~~

~~The assumptions used to determine the grant date fair value of employee stock options for the periods presented are as follows:~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Fair value of common stock $19.78 – $19.78 $18.18 – $19.56 $16.73 – $19.78 $15.78 – $19.56
Risk-free interest rate 1.9% – 2.0% 1.2% – 1.3% 1.9% – 2.1% 1.2% – 1.6%
Expected term (in years) 6.0 – 6.1 6.1 – 6.2 6.0 – 6.1 6.0 – 8.1
Volatility 47% – 48% 50% – 51% 47% – 49% 47% – 51%
Dividend yield —% —% —% —%

Note 4.7. Income Taxes

The Company estimates its annual effective tax rate each quarter and specific events are discretely recognized as they occur under the provisions of ASC ~~740-270.~~740-270, Income Taxes: Interim Reporting. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2020, the Company recorded a tax provision of ~~$412,000~~$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 ~~(6.1)~~(1.6)% and ~~(2.3)~~(1.9)%, respectively. The Company’s effective tax rates for these periods were negative as it has maintained a valuation allowance on the U.S. losses. The key components of the income tax provision primarily consist of foreign income taxes, ~~income~~unrecognized tax ~~reserves,~~benefits, and U.S. state minimum taxes. AsThe effective tax rate decreased for the three and six months ended June 30, 2020 as compared to the ~~same periods last year, the difference in the effective tax rate is~~three and six months ended June 30, 2019 primarily due to ~~change~~a decrease in worldwide loss before income taxes. The loss was primarily generated in the ~~uncertain tax positions as a result of a statutory~~United States and does not impact the provision for income ~~tax and withholding tax audit in one of our foreign subsidiaries.~~

For the three and nine months ended September 30, 2016, the Company recorded a tax provision of $157,000 and $517,000, respectively, representing an effective tax rate of (0.9)% for each period. The Company’s effective tax rates for these periods were negativetaxes as it ~~maintained~~was offset by a full valuation ~~allowance~~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 ~~U.S. losses. The key components of the income tax provision primarily consisted of foreign income taxes, income tax reserves, and U.S. state minimum taxes.~~Company’s consolidated financial statements.

Note 5.8. Net Loss Per Share

Net loss per share of common stock is computed using the two-class method required for participating securities based on their participation rights. All series of redeemable convertible preferred stock are participating securities as the holders are entitled to participate in common stock dividends with common stock on an as-converted basis. The holders of the Company’s redeemable convertible preferred stock are also entitled to noncumulative dividends prior and in preference to common stock and do not have a contractual obligation to share in the losses of the Company. In accordance with the two-class method, earnings allocated to these participating securities, which include participation rights in undistributed earnings with common stock, are subtracted from net loss to determine net loss attributable to common stockholders.

Basic net loss per share is computed by dividing net loss ~~attributable to common stockholders~~ by basic weighted-average shares outstanding during the period. All participating securities are excluded from basic weighted-average shares outstanding. In computing diluted net loss attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. Diluted net loss per share ~~attributable to common stockholders~~ is computed by dividing net loss ~~attributable to common stockholders~~ 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 ~~attributable to common stockholders~~ (in thousands, except ~~share and~~ per share amounts):



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net loss	$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
Weighted-average shares used to compute net loss per share, basic and diluted	49,371			45,494			48,982			44,848
Net loss per share, basic and diluted	$	(0.48	)	$	(0.68	)	$	(1.73	)	$	(1.45	)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016

Net loss attributable to common stockholders $ (7,165 ) $ (18,312 ) $ (54,860 ) $ (57,960 )
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted 6,139,876
5,749,930
6,032,427
5,539,012
Net loss per share attributable to common stockholders, basic and diluted $ (1.17 ) $ (3.18 ) $ (9.09 ) $ (10.46 )

The following securities were excluded from the computation of diluted net loss per share ~~attributable to common stockholders~~ for the periods presented because their inclusion would reduce the net loss per ~~share.~~

share (in thousands):



	As of June 30,
	2020	2019
Options to purchase common stock	2,398	4,282
Unvested early exercised common shares	—	—
Unvested restricted stock units	5,160	5,719
Employee Stock Purchase Plan	—	172

As of September 30,
2017 2016

Options to purchase common stock 9,413,141
9,403,045
Unvested early exercised common shares 231,423
364,800
Unvested restricted stock units 3,031,223
1,039,121
Warrants to purchase common stock 233,023
233,023
Redeemable convertible preferred stock 24,788,362
24,788,362
Warrants to purchase redeemable convertible preferred stock 292,862
292,862

Note ~~6. Segment Information~~

The Company’s business is conducted globally. The Company’s chief operating decision maker, who is the CEO, reviews financial information presented on a consolidated basis accompanied by information regarding revenue by geographic region for purposes of allocating resources and evaluating financial performance. There is one business activity and there are no segment managers who are held accountable for operations, operating results, and plans for levels, components, or types of products or services below the consolidated unit level. Accordingly, the Company has a single reporting segment and operating unit structure.

~~Revenue by geographic area is attributed based on the billing address of the customer and is as follows (in thousands):~~

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Revenue:
Americas
      United States $ 50,348
$ 39,877
$ 119,409
$ 92,486
      Other Americas 1,602
1,481
3,989
3,421
      Total Americas 51,950
41,358
123,398
95,907
Europe, Middle East, and Africa (“EMEA”) 8,071
4,350
21,275
13,820
Asia Pacific and Japan (“APJ”) 4,335
3,032
10,242
7,684
Total revenue $ 64,356
$ 48,740
$ 154,915
$ 117,411

~~Long-lived assets, net by geographic area are attributed based on legal entity structure and are as follows (in thousands):~~

As of
September 30, 2017 December 31, 2016
Long-lived assets, net:

United States $ 19,682
$ 21,141
Israel 3,034
3,051
Other 548
344
Total long-lived assets, net $ 23,264
$ 24,536

~~Note 7.~~9. Subsequent Events

On ~~October 16, 2017, as an inducement for~~February 6, 2020, the ~~holders~~Company entered into the Original Merger Agreement with Parent and Merger Sub. Parent and Merger Sub are affiliates of ~~Series G redeemable preferred stock~~Advent.

On July 15, 2020, the Company, Parent and Merger Sub entered into the Amended and Restated Merger Agreement in order to ~~convert their shares of Series G preferred stock into common stock immediately prior~~amend and restate the Original Merger Agreement. The Amended and Restated Merger Agreement provides that, subject to the IPO, the Company amended and restated its amended and restated certificate of incorporation to adjust the conversion rate for the Series G redeemable preferred stock in the event the IPO price was less than $29.66 per share. On October 31, 2017, based on an IPO price of $22.00 per share, the Company issued 582,254 additional shares of common stock to the holders of shares of Series G redeemable

~~preferred stock upon conversion of Series G redeemable preferred stock into shares of common stock immediately prior to the closing~~terms of the ~~IPO. The stock issuance was accounted for as a stock dividend at~~Amended and Restated Merger Agreement, Merger Sub will commence the ~~time of issuance.~~

~~On October 16, 2017, the Company’s stockholders approved the Company’ s 2017 Equity Incentive Plan (the “2017 Plan”),~~Offer to purchase each issued and the Company’ s 2017 Employee Stock Purchase Plan (the “ESPP”). The 2017 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance stock units, performance shares, and performance awards. A total of 3,800,000 sharesoutstanding share of the Company’s common stock ~~are reserved~~ for ~~future issuance pursuant to~~ the ~~2017 Plan. In addition, shares~~Offer Price. The closing of the Offer is subject to ~~outstanding awards granted under~~

certain limited customary conditions, including the Company’s 2000 Plan (the “2000 Plan”), that are canceled, expire, or otherwise terminate without having been exercised in full and shares previously issued under the 2000 Plan that are forfeited to thetender by Company ~~tendered to or withheld by the Company for the payment~~shareholders of an award’s exercise price or for tax withholding, or repurchased by the Company, may be added to the 2017 Plan (provided that the maximum number of shares that may be added to the Company’s 2017 Plan pursuant to the provision in this sentence is 12,500,000 shares). The number of shares available for future issuance under the Company’s 2017 Plan also includes automatic annual increases on the first dayat least one share more than 50% of the Company’s ~~fiscal year beginning with 2018, equal to~~issued and outstanding shares. If the ~~least of: 3,800,000 shares; 5%~~Offer is successful, then following consummation of the ~~outstanding shares~~Offer, Merger Sub will be merged with and into the Company, with the Company surviving as a wholly owned subsidiary of ~~common stock as~~Parent. The Amended and Restated Merger Agreement contemplates that the Merger will be effected pursuant to Section 251(h) of the ~~last day~~DGCL, which would not require a vote of the Company’s ~~immediately preceding fiscal year; or such lower number of shares as determined by~~stockholders in order to consummate the ~~administrator~~Merger. At the effective time of the ~~2017 Plan.~~

~~The ESPP allows eligible employees to purchase shares~~Merger, each issued and outstanding share of the Company’s common stock ~~through payroll deductions~~(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 ~~intended~~scheduled to ~~qualify under Section 423~~expire at the end of the ~~Internal Revenue Code. A total of 800,000 shares~~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 Company’s common stock are available for sale under the ESPP. The number of shares available for issuance under the Company’s ESPP will also include an automatic, annual increase on the first day of each fiscal year of the Company beginning in 2018, equalAmended and Restated Merger Agreement, Forescout, Parent and Merger Sub entered into a settlement agreement to resolve pending litigation between them. Pursuant to the ~~lesser of: 800,000 shares; 1% of~~settlement agreement, the total number of shares of the Company’s common stock outstanding on the last day of the Company’s immediately preceding fiscal year; or such lower number of shares as determined by the administrator of the ESPP. The ESPP provides for consecutive, overlapping six month offering periods. The offering periods are scheduledparties have agreed to start on the first trading day on or after May 20 and November 20 of each year, except for the first offering period which began on October 26, 2017 and will end on the first trading day on or after May 20, 2018. Participants may purchase the Company’s common stock through payroll deductions, of up to a maximum of 15% ofrelease their ~~eligible compensation. Participation will end automatically upon termination of employment~~respective claims made in connection with the ~~Company. The purchase price of the shares will be 85% of the lower of the fair market value of the Company’s common stock on the first trading day of each offering period or on the exercise date.~~litigation.

On October 24, 2017, Network Security Technologies, LLC, or NST, filed a lawsuit against the Company alleging patent infringement. NST is seeking compensatory damages and attorneys’ fees. The Company believes it has meritorious defenses and intends to vigorously defend the claims against the Company. This litigation is still in its early stages and the final outcome, including any estimated liability, if any, with respect to these claims, is uncertain. At present, the Company is unable to estimate a reasonably possible range of loss, if any, that may result from this matter.

On October 27, 2017 and November 1, 2017, warrants to purchase the Company's common stock were exercised for a total 442,648 shares at exercise prices of $6.00 and $6.62 per share. In lieu of payment of the aggregate warrant price, the warrant holders elected a "cashless exercise", whereby a portion of the shares equal to the aggregate warrant price were withheld. The average fair market value at the time exercise was $25.73, which resulted in 335,838 shares being issued by the Company.

ITEM 2.




~~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 ~~appearing~~thereto included elsewhere in this Quarterly Report on Form 10-Q, and ~~with our Management’s~~(2) audited consolidated financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations and financial statements~~Operations” for the year ended December 31, 2019 included in our ~~Prospectus filed~~Annual Report on ~~October 27, 2017, pursuant to Rule 424(b) under~~Form 10-K for the ~~Securities Act with the SEC.~~year ended December 31, 2019. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the section titled “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. See the section titled “Special Note Regarding Forward-Looking ~~Statements” above.~~

Statements.”

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

Overview

We ~~generate revenue~~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 ~~sales~~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 ~~associated maintenance~~(ii) hardware products. Our software products include eyeSight, eyeSegment, eyeControl, eyeExtend, SilentDefense, and ~~professional services.~~SilentDefense Command Center (“Software Products”). Our hardware products ~~include: ForeScout CounterACT, ForeScout Enterprise Manager,~~include hardware that is sold separately for use with our Software Products and ~~ForeScout Extended Modules. Our CounterACT and Enterprise Manager products~~appliances that are ~~sold as hardware appliances~~ embedded with our software ~~or Physical Appliances, or as software only, or Virtual Appliances.~~ (“Hardware Products”).

We ~~recently started offering, in limited quantities to a small number of large enterprises, CounterAct~~also offer our solution across license types and ~~Enterprise Manager together as a software-only license, or Enterprise License Software.~~increments. Our ~~Enterprise License~~ Software is either sold with separate hardware or without hardware, depending on the end-customer’s selection. Our Extended Modules are sold as software add-ons to the CounterACT and Enterprise Manager products. All of our productsProducts are sold with a perpetual license or a subscription license. ~~End-customers typically~~Customers can purchase maintenance and professional services when they purchase one or more of our products. Our support and maintenance contracts typically have a one-year or three-year term. We offer a portfolio of professional services and extended support contract options to assist with additional deployment and ongoing advanced technical support. We market and sell our products, maintenance, and professional services through a direct touch, channel-fulfilled model. Our direct sales force is responsible for cultivating relationships and selling solutions to enterprise and public sector accounts globally. We leverage the global breadth and reach of our channel ecosystem, including value-added resellers and distributors, to fulfill orders and sell to our mid-market end-customers.

Our CounterACT products are priced based on the number of devices managed on each Physical or Virtual Appliance. Our largest Physical and Virtual Appliance can manage up to 10,000 devices while our smallest Physical and Virtual Appliance can manage up to 100 devices. Our Enterprise License Software generally manages a minimum of 100,000 devices and increases the number of managed devices in license increments of 100 ~~depending on the end-customer’s requirements. Our Enterprise Manager is priced~~devices, with hardware sold separately based on ~~the number of CounterACT Physical and Virtual Appliances managed. Our high-end Enterprise Manager product~~customer deployment requirements. Customers can manage their own deployments of our products in varying options capable of scaling and managing deployments of up to ~~200 CounterACT Physical~~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 ~~Virtual Appliances while~~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 ~~low-end Enterprise Manager product can manage up~~common stock for $29.00 per share, net to ~~five Physical~~the seller in cash, without interest and ~~Virtual Appliances.~~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.

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.

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 ~~Extended Modules are sold~~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 ~~units~~revenue and improved profitability as compared to the first quarter of ~~100 managed devices today.~~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 will continue to evaluate the nature and extent of 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.

~~Third~~Second Quarter ~~2017~~2020 Financial Highlights

~~As of September~~Since our inception through June 30, ~~2017,~~2020, we have sold to ~~over 2,600~~more than 3,800 end-customers in 80nearly 100 countries, including ~~17%~~27% of the Global ~~2000, since our inception.~~2000. For the three months ended ~~September~~June 30, ~~2017~~2020 and ~~2016,~~2019, we sold to 6%8% and 5%8% of the Global 2000, respectively. Our end-customers represent a broad range of industries, including ~~public sector entities,~~government, financial, ~~services,~~technology, healthcare, ~~technology,~~energy, manufacturing, services, ~~energy,~~retail, education, and ~~retail.~~entertainment.

~~We have experienced rapid growth in recent periods. For the three months ended September 30, 2017 and 2016,~~The following table summarizes our revenue was $64.4 million and $48.7 million, respectively, representing period-over-period growth of 32%. For the nine months ended September 30, 2017 and 2016, our revenue was $154.9 million and $117.4 million, respectively, representing period-over-period growth of 32%.

~~Product revenue was $39.2 million~~key financial highlights for the ~~three months ended September 30, 2017, an increase~~periods presented in dollars and as a percentage of ~~27% from the three months ended September 30, 2016. Maintenance and professional services revenue was~~our total revenue.



	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	)

~~$25.2 million for the three months ended September 30, 2017, an increase of 40% from the three months ended September 30, 2016.~~

For the three months ended September 30, 2017, gross profit was $48.5 million, or 75% of total revenue, compared to $35.2 million, or 72% of total revenue in the three months ended September 30, 2016.

For the three months ended September 30, 2017, operating loss was $6.6 million, or 10% of total revenue, compared to an operating loss of $17.0 million, or 35% of total revenue in the three months ended September 30, 2016.

~~For the three months ended September 30, 2017, net loss was $7.2 million compared to a net loss of $18.3 million in three months ended September 30, 2016.~~

Net cash provided by operating activities was $2.3 million for the three months ended September 30, 2017, compared to $20.4 million net cash used in operating activities in the three months ended September 30, 2016.

~~Factors Affecting Our Performance~~

~~We believe that the growth of our business~~Continued Retention and our future success are dependent upon many factors, including our ability to extend the reach of our sales force footprint to engage more end-customers, to continue to increase the efficiency by which our sales force engages our end-customers and to retain and continue sales to existing end customers. 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.

~~Extending the Reach of Our Sales Footprint~~

We have made substantial investments in our sales force in recent periods in order to address the significant enterprise opportunity caused by an increase in unmanaged devices coming onto networks. We have almost tripled the size of our quota-bearing sales representatives from the beginning of 2015 to September 30, 2017. We expect to continue to make investments in our sales force to increase adoption within the Global 2000 and public sector.

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

We are focused on increasing the efficiency of our sales force. 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.

~~Retain and Continue~~ Sales to Existing End-Customers

We believe the net-recurring revenue retention rate over the trailing 12 month period on our ~~support~~subscription revenue and ~~maintenance contracts~~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 ~~on support and maintenance~~using the following formula:

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

where:

X = net-recurring revenue retention rate

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

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

C = trailing 12 month annualized value of new ~~support and maintenance~~term contracts from end-customers ~~acquired~~that have been end customers for more than one year ~~prior, in the aggregate, divided by the aggregate of the trailing~~

D = 12 months annualized value of ~~support and maintenance~~term contracts scheduled to terminate or renew during the trailing 12 period plus the trailing 12 month annualized value of support and maintenance contracts not subject to renewal because the scheduled expiration date of the multi-year support and maintenance contract falls outside of the 12 month period under ~~measurement.~~ 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 ~~on their existing IP-based devices~~ and ~~the expanded value to our end-~~

~~customers demonstrated by increases in the number of IP-based devices.~~Software Products subscription contracts. Our net-recurring revenue retention rate ~~on support and maintenance contracts~~ as of ~~September~~June 30, ~~2017, December 31, 2016,~~2020 and December 31, ~~2015~~2019 were ~~123%, 127%,~~110% and ~~116%~~122%, respectively. The 1,200 basis point decrease was primarily driven by the lack of new term contract from end-customers that have been end-customers for more than one year in the 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 ~~support and maintenance contracts for the designated set of support and maintenance~~term contracts used in the calculation, which includes scheduled expiration periods, stub periods, changes in pricing, additional products purchased, lost end-customers, early renewals, ~~decreases in the number of Physical or Virtual Appliances,~~and decreases in the number of devices ~~and hardware included in~~licensed to be managed by our ~~Enterprise Software License and Extended Modules~~license under contract. This metric does not take into account ~~product~~perpetual license revenue or professional services revenue. The annualized value of our ~~support and maintenance~~ contracts is a legal and contractual determination made by assessing the contractual terms with our end-customers. The annualized value of our ~~support and maintenance~~term contracts is not determined by reference to historical revenue, deferred revenue, or any other GAAP financial measure over any period.

~~Key Financial Metrics~~

~~Non-GAAP Operating Loss and Free Cash Flow~~

In addition to our results determined in accordance with U.S. generally accepted accounting principles, or GAAP, we monitor the non-GAAP financial metrics described below to evaluate growth trends, establish budgets, measure the effectiveness of our sales and marketing efforts and measure and assess operational efficiencies.Recurring Revenue Rate

We ~~define non-GAAP operating loss as loss~~are focused on providing our customers with more licensing and delivery options from ~~operations excluding stock-based compensation expense. We consider non-GAAP operating loss~~which to ~~be a useful metric for investors and other users of~~purchase 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. 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.products.

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 September 30, Nine Months Ended September 30,
2017
2016 2017
2016
(In thousands)
Non-GAAP operating loss:
Loss from operations $ (6,623 ) $ (17,003 ) $ (52,278 ) $ (55,396 )
Add: stock-based compensation expense 3,909
3,818
12,060
12,862
Non-GAAP operating loss $ (2,714 ) $ (13,185 ) $ (40,218 ) $ (42,534 )

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:

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
(In thousands)
Free cash flow (non-GAAP):
Net cash provided by (used in) operating activities $ 2,313
$ (20,411 ) $ 3,563
$ (30,395 )
Less: purchases of property and equipment (592 ) (5,855 ) (3,386 ) (19,959 )
Free cash flow (non-GAAP) $ 1,721
$ (26,266 ) $ 177
$ (50,354 )
Net cash used in investing activities $ (586 ) $ (3,866 ) $ (3,512 ) $ (20,162 )
Net cash (used in) provided by financing activities $ (1,918 ) $ 94
$ (7,372 ) $ 3,306

~~It is important to note that other companies, including companies~~Included 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 (used in) 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.

~~Components of Financial Performance~~

~~Revenue~~

We derive revenue from sales of our products, maintenance, and professional services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured.

~~Our~~license revenue is ~~comprised of~~ the ~~following:~~

•~~Product Revenue~~. ~~Our product revenue is derived from sales of~~value allocated to license within our ~~Physical Appliances, Virtual Appliances, Extended Modules, Enterprise License~~ Software ~~and hardware sold separately,~~Products subscription contracts, which is recognized either up-front or ratably depending on the terms of the agreement and the product composition. Hardware Product revenue, which includes our Physical Appliances and Enterprise License Software sold with separate hardware, 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. Software Product~~met or upon commencement of a renewed term contract.

Included in our subscription revenue which includes Virtual Appliances, Enterprise License Software sold without hardware and Extended Modules, is recognized at the time of delivery if VSOE is established for all undelivered related items. If VSOE does not exist for one or more undelivered items, revenue from the software portion of the arrangement is deferred until the delivery of all items has begun and is then recognized ratably over the longest remaining service period, which generally is the value allocated to support and maintenance ~~term. Beginning on January 1, 2016, we established VSOE for professional services, and support and maintenance on~~within our Software Products ~~except Extended Modules. As a percentage of total~~subscription contracts and revenue ~~we expect our product revenue to vary from quarter to quarter based on seasonal and cyclical factors.~~

•~~Maintenance and Professional Services Revenue~~. ~~Our maintenance revenue is~~ derived from support and maintenance ~~contracts with terms that are generally either one or three years. We typically bill for support and maintenance contracts upfront. We recognize~~contracts. Subscription revenue ~~from support and maintenance~~is recognized ratably over the ~~contractual service period. Our professional services~~term of the contract.

We believe this metric is an important metric in understanding the impact of customer buying preferences for the varying Software Products options upon our reported revenue. We calculate the recurring revenue rate as a subscription revenue plus the portion of license revenue that is ~~generally recognized as~~derived from the ~~services are rendered. We intend~~value allocated to ~~invest in~~license within our Software

~~professional services organization to improve the time to deliver these services. As~~Products subscription contracts (“term license”), collectively, as a ~~percentage~~percent of total revenue, ~~we expect our maintenance~~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 = term license revenue over the trailing 12 month period

C = total revenue

Our recurring revenue rate as of June 30, 2020 and December 31, 2019 were 57% and 49%, respectively. The 800 basis point increase primarily reflects the increased adoption of new subscription contracts in the six months ended June 30, 2020. The numerator does not take into account perpetual license revenue or professional services ~~revenue~~revenue. The numerator does include the value allocated to ~~vary from quarter to quarter based on seasonal and cyclical factors.~~

~~Cost of Revenue~~

•~~Cost of Product Revenue.~~ Cost of product revenue primarily consists of costs paid to our third-party contract manufacturer for our Physical Appliances and hardware sold with our Enterprise License Software. Our cost of product revenue also includes allocated costs, shipping costs, and personnel costs associated with logistics. There is no direct cost of revenue associated withlicense within our Software Products ~~because~~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 are delivered electronically. We expect our cost of product revenue to fluctuate from quarter to quarter based on product mix; however, over time, we expect our cost of product revenue to decline as a percentage of product revenue primarily due to a shiftsubscription contracts. As disclosed in ~~product mix towards increased sales of Software Products.~~

•~~Cost of Maintenance~~Note 2. Revenue, Deferred Revenue and ~~Professional Services Revenue.~~ Cost of maintenance and professional services revenue consists of personnel costs for our global customer support and professional services organization and costs paid to third-party contractors that deliver someDeferred Commissions of our ~~services. Over time, we expect our cost~~Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of ~~maintenance~~this Quarterly Report on Form 10-Q, within the Disaggregation of Revenue, term license revenue was $19.2 million and professional services revenue to decline as a percentage of our maintenance and professional services revenue as we expect to scale our customer support organization at a lower growth rate than our anticipated maintenance and 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 Hardware Products and Software Products; the mix of revenue between products, maintenance, and professional services; the average sales price of our products, maintenance and professional services; and manufacturing costs. Our gross margins vary by product, with gross margin on our high-end Physical Appliances ranging from 80% to 83% and our low-end Physical Appliances ranging from 59% to 62% from the beginning of 2015 to September 30, 2017. Gross margin on hardware sold with Enterprise License Software ranged from 14% to 30% for the nine months ended September 30, 2017. Gross margin on our Software Products was 99% for the nine months ended September 30, 2017 and 2016. Our gross margins will fluctuate depending on our product, maintenance and professional services mix and the types of products we sell in a given period. Over time, as Software Products become a greater percentage of product revenue, we expect our gross margins to increase.

~~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 consists 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 the near term 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.

~~Sales and Marketing~~. Sales and marketing expense consists primarily of personnel costs, including commission costs. We expense commission costs as incurred. Sales and marketing expense also includes costs for market development programs, promotional and other marketing costs, travel costs, professional services, and allocated costs including facilities and information technology related costs. 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, certain non-recurring general expenses, 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, 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.~~

~~Other Income (Expense), Net~~

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

~~Change in Fair Value of Warrant Liabilities~~

Change in fair value of warrant liabilities includes adjustments to the estimated fair value of the preferred and common stock warrants outstanding. We mark-to-market our warrant liabilities on a quarterly basis, and as such, we will have fluctuations in our consolidated financial statements.

~~Provision for Income Taxes~~

Provision for income taxes consists primarily of foreign income taxes and reserves, 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.

~~We recorded an income tax provision~~$19.8 million for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 due to foreign income taxes, income tax reserves~~2020, respectively, and ~~U.S. state minimum taxes.~~$11.2 million and $11.5 million for the three and six months ended June 30, 2019, respectively.

Results of Operations

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


													Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,						2020			2019			2020			2019
	2017			2016			2017			2016
	(Dollars in thousands)												(In thousands)
Condensed Consolidated Statements of Operations Data:
Revenue:
Product	$	39,192		$	30,799		$	83,889		$	68,861
Maintenance and professional services	25,164			17,941			71,026			48,550
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	64,356			48,740			154,915			117,411			79,876			78,280			137,029			153,848
Cost of revenue:
Product ⁽¹⁾	7,201			6,563			17,117			13,754
Maintenance and professional services ⁽¹⁾	8,688			6,945			25,662			19,304
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	15,889			13,508			42,779			33,058			19,471			17,456			39,068			36,456
Total gross profit	48,467			35,232			112,136			84,353			60,405			60,824			97,961			117,392
Operating expenses:
Research and development ⁽¹⁾	10,985			8,509			32,634			22,352			21,514			19,440			44,760			37,937
Sales and marketing ⁽¹⁾	34,957			35,759			104,515			94,316			38,988			56,173			86,276			112,096
General and administrative ⁽¹⁾	9,148			7,967			27,265			23,081			21,733			15,838			46,214			32,051
Restructuring													859			—			3,371			—
Total operating expenses	55,090			52,235			164,414			139,749			83,094			91,451			180,621			182,084
Loss from operations	(6,623		)	(17,003		)	(52,278		)	(55,396		)	(22,689		)	(30,627		)	(82,660		)	(64,692		)
Interest expense	(290		)	(702		)	(953		)	(2,072		)	(118		)	(142		)	(353		)	(235		)
Other income (expense), net	160			(226		)	(66		)	(354		)	572			505			(29		)	1,122
Change in fair value of warrant liabilities	—			(224		)	(342		)	379
Loss before income taxes	(6,753		)	(18,155		)	(53,639		)	(57,443		)	(22,235		)	(30,264		)	(83,042		)	(63,805		)
Income tax provision	412			157			1,221			517			1,288			496			1,720			1,207
Net loss and comprehensive loss	$	(7,165	)	$	(18,312	)	$	(54,860	)	$	(57,960	)
Net loss													$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)

_____________________

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

Comparison of the Three and Six Months Ended ~~September~~June 30, ~~2017~~2020 and ~~2016~~2019

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

~~Product~~License revenue ~~increased $8.4 million, or 27%,~~decreased for the three months ended ~~September~~June 30, ~~2017~~2020 compared to the three months ended ~~September~~June 30, ~~2016,~~2019, primarily due to a ~~$10.7 million increase in Enterprise License Software and hardware sold with Enterprise License Software, offset by a $1.3~~$0.5 million decrease in ~~Extended Modules,~~Software Products revenue, and a ~~$0.6~~$0.7 million decrease in ~~Virtual Appliances, and~~Hardware Products revenue. The decrease in Software Products revenue included a ~~$0.4~~$0.3 million decrease in ~~Physical Appliances.~~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.

~~Maintenance and professional services~~Subscription revenue increased ~~$7.2 million, or 40%,~~ for the three months ended ~~September~~June 30, ~~2017~~2020 compared to the three months ended ~~September~~June 30, ~~2016. $3.7~~2019, primarily due to a $2.5 million ~~of the~~ increase ~~in maintenance and professional services revenue was attributed to support and maintenance contract value associated with an initial product sale, $2.8 million was~~ attributed to support and maintenance contracts that were renewals, ~~and $0.7~~a $0.1 million ~~was~~increase attributed to ~~increased~~support and maintenance contracts associated with initial product sales, and a $0.2 million increase attributed to sale of ~~professional services.~~

~~Total cost of~~SaaS. Subscription revenue increased ~~$2.4~~for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, primarily due to a $5.6 million ~~or 18%,~~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 ~~September~~June 30, ~~2017~~2020 compared to the three months ended ~~September~~June 30, ~~2016.~~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.

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

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

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

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.

Cost of license revenue increased ~~$0.6 million, or 10%,~~ for the three months ended ~~September~~June 30, ~~2017~~2020 compared to the three months ended ~~September~~June 30, ~~2016~~2019, primarily due to a $1.0 million increase resulting from higher ~~volume of Hardware Products sold, consisting of $1.4 million~~quantities of hardware sold separately for use with ~~Enterprise License~~our Software Products, partially offset by a $0.5 million decrease due to lower quantities of ~~$0.8~~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 ~~Physical Appliances sold.~~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.

~~Maintenance and professional services cost~~Cost of subscription revenue increased ~~$1.7 million, or 25%,~~ for the three and six months ended ~~September~~June 30, ~~2017~~2020 compared to the three and six months ended ~~September~~June 30, ~~2016~~2019, primarily due to increases in personnel costs related to ~~increasing~~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 ~~organization. From September~~revenue remained relatively flat for the three months ended June 30, ~~2016~~2020 compared to ~~September~~the three months ended June 30, ~~2017, we increased our customer support and~~2019. Cost of professional services ~~organization’s~~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 ~~by 17%.~~in our professional services organization.

Gross Profit and Gross Margin

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

Three Months Ended September 30,
2017 2016 Change
Gross Profit
Gross Margin Gross Profit Gross Margin Gross Profit Gross Margin
(Dollars in thousands)
Gross profit:
Product $ 31,991
82 % $ 24,236
79 % $ 7,755
3 %
Maintenance and professional services 16,476
65 % 10,996
61 % 5,480
4 %
Total gross profit $ 48,467
75 % $ 35,232
72 % $ 13,235
3 %

~~Gross profit increased by $13.2 million, or 38%~~Margin on our Software Products was approximately 97% and 98% for the three months ended June 30, 2020 and 2019, respectively. Margin on our Hardware Products varies. The average margin on hardware sold separately for use with our Software Products was approximately 9% and 27% for the three months ended June 30, 2020 and 2019, respectively. Margin on appliances, which are the hardware appliances that are embedded with our software, varies. The average margin on our high-end appliances was approximately 66% and 75%, and the average margin on our low-end appliances was approximately 18% and 27%, for the three months ended ~~September~~June 30, ~~2017~~2020 and 2019, respectively.

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

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

Gross profit decreased for the three and six months ended June 30, 2020 compared to the three and six months ended ~~September~~June 30, ~~2016.~~2019. The ~~increase~~decrease is consistent with the ~~increases~~changes in our revenue and cost of revenue.

Gross margin ~~increased by 3%~~decreased for the three and six months ended ~~September~~June 30, ~~2017~~2020 compared to the three and six months ended ~~September~~June 30, ~~2016.~~ 2019.

The ~~increase of 3%~~decrease in ~~product~~ 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 ~~mix~~due to a lower concentration of high-end appliances revenue and higher concentration of revenue from hardware sold separately for use with ~~increased sales of~~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 ~~Hardware Products.~~ 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 ~~maintenance and~~margin on our professional services ~~margin~~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 ~~the improvement in margins for~~improvements made within professional ~~services.~~

services as we scale our professional services organizations at a lower growth rate than our anticipated professional services revenue growth rate.

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

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

Research and development expense increased ~~$2.5 million, or 29%,~~ for the three months ended ~~September~~June 30, ~~2017~~2020 compared to the three months ended ~~September~~June 30, ~~2016,~~2019, primarily due to an increase in personnel ~~and travel~~ costs of ~~$1.9~~$3.4 million ~~due to an~~resulting from a 13% increase in headcount, ~~of 11%, an increase~~partially offset by a decrease in allocated IT and facilities ~~costs of $0.4 million,~~cost. Research and ~~an increase of $0.2 million in professional fees and other operating costs.~~

~~Sales and marketing~~development expense ~~decreased $0.8 million, or 2%,~~increased for the ~~three~~six months ended ~~September~~June 30, ~~2017~~2020 compared to the ~~three~~six months ended ~~September~~June 30, 2016, primarily due to a decrease in commissions of $4.4 million due to accelerated commission expenses in the prior year related to a very large deal, offset by an increase in personnel costs of $2.4 million, due to an increase in headcount of 3%, an increase in travel and entertainment costs of $0.9 million, and an increase in allocated facilities costs of $0.3 million, all related to the increase in headcount.

~~General and administrative expense increased $1.2 million, or 15%, for the three months ended September 30, 2017 compared to the three months ended September 30, 2016,~~2019, primarily due to an increase in personnel ~~and travel~~ costs of ~~$0.7~~$8.0 million ~~largely due to an~~resulting from a 13% increase in headcount, ~~of 6%, an increase of $0.3 million~~partially offset by a decrease in ~~professional fees~~allocated IT and ~~an increase of $0.2 million in investor relations.~~facilities cost.

~~If the initial public offering had occurred on September 30, 2017, we would have recognized $22.1 million of stock-based compensation expense for all stock options~~Sales and RSUs with a performance condition that had satisfied the service-based vesting condition on that date and the remaining unrecognized compensation cost of approximately $31.0 million would be recognized over the remaining service period of 1.9 years.

~~Interest Expense~~

Three Months Ended September 30,
2017 2016 Change
Amount Amount Amount %
(Dollars in thousands)
Interest expense $ (290 ) $ (702 ) $ 412
(59 )%

~~Interest~~marketing expense decreased ~~$412,000, or 59%,~~ for the three months ended ~~September~~June 30, ~~2017~~2020 compared to the three months ended ~~September~~June 30, ~~2016,~~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.

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 ~~lower fixed interest rate per annum~~decreasing notes payable balance associated with our amended and restated loan and security agreement entered into on December 22, ~~2016,~~2016. Interest expense increased for the six months ended June 30, 2020 compared to ~~our previous loan and security agreement~~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 ~~paid off on December 1, 2016.~~fully repaid in the second quarter of 2020.

Other Income (Expense), Net

Three Months Ended September 30,
2017 2016 Change
Amount Amount Amount %
(Dollars in thousands)
Other income (expense), net
$ 160
$ (226 ) $ 386
171 %

Other income (expense), net ~~increased $386,000, or 171%, for the three months ended September 30, 2017 compared~~consists primarily of interest income earned on our cash, cash equivalents, and marketable securities, sublease income, and foreign currency exchange gains (losses) related to ~~the three months ended September 30, 2016, primarily due to a foreign exchange gain of $43,000 in the current period compared to a loss of $263,000in the prior period on~~ transactions denominated in currencies other than the U.S. ~~Dollar, and an increase in interest income from money market fund investments.~~

~~Change in Fair Value of Warrant Liabilities~~Dollar.

Three Months Ended September 30,
2017 2016 Change
Amount Amount Amount %
(Dollars in thousands)
Change in fair value of warrant liabilities $ —
$ (224 ) $ 224
(100 )%



	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	)%

~~Change in fair value of warrant liabilities decreased $224,000, or 100%~~Other income (expense), net remained relatively flat for the three months ended ~~September~~June 30, ~~2017~~2020 compared to the three months ended ~~September~~June 30, ~~2016 due~~2019. Other income (expense), net decreased for the six months ended June 30, 2020 compared to the ~~change~~six months ended June 30, 2019 primarily driven by a decrease in ~~estimated fair value of the preferred and common stock warrants outstanding.~~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.

We recorded an income tax provision for the three and six months ended ~~September~~June 30, ~~2017~~2020 due to foreign income taxes, ~~income~~unrecognized tax ~~reserves~~benefits, and U.S. state minimum taxes. The increase in ~~the~~income tax provision for the three and six months ended ~~September~~June 30, ~~2017~~2020 was primarily related to an increase in discrete tax expenses. The effective tax rate decreased for the three and six months ended June 30, 2020 compared to the three and six months ended ~~September~~June 30, 2016 was primarily due to an increase in pre-tax income related to international operations, and an increase in income tax reserves related to a statutory income tax and withholding tax audit in one of our foreign subsidiaries.

~~Comparison of the Nine Months Ended September 30, 2017and2016~~

Product revenue increased $15.0 million, or 22%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, due to a $16.9 million increase in Enterprise License Software and hardware sold with Enterprise License Software, and a $4.4 million increase in Physical Appliances, offset by a $3.8 million decrease in Virtual Appliance and a $2.5 million decrease in Extended Modules.

Maintenance and professional services revenue increased $22.5 million, or 46%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. $13.2 million of the increase in maintenance and professional services revenue was attributed to support and maintenance contract value associated with an initial product sale, $6.9 million was attributed to support and maintenance contracts that were renewals, and $2.4 million was attributed to increased sales of professional services.

~~Total cost of revenue increased $9.7 million, or 29%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.~~

Product cost of revenue increased $3.4 million, or 24%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 primarily due to a higher volume of Hardware Products sold, consisting of $2.7 million of hardware sold with Enterprise License Software, and $0.7 million of Physical Appliances.

Maintenance and professional services cost of revenue increased $6.4 million, or 33%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due to increases in personnel costs related to increasing headcount. From September 30, 2016 to September 30, 2017, we increased our customer support and professional services organization’s headcount by 17%.

~~Gross Profit and Gross Margin~~

Nine Months Ended September 30,
2017 2016 Change
Gross Profit
Gross Margin Gross Profit Gross Margin Gross Profit Gross Margin
(Dollars in thousands)
Gross profit:
Product $ 66,772
80 % $ 55,107
80 % $ 11,665
— %
Maintenance and professional services 45,364
64 % 29,246
60 % 16,118
4 %
Total gross profit $ 112,136
72 % $ 84,353
72 % $ 27,783
— %

Gross profit increased by $27.8 million, or 33% for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. The increase in gross profit is consistent with the increases in our revenue and cost of revenue.

Gross margin remained flat for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Product margins remained flat but were comprised of a 2% decline in Hardware Product margins being offset by higher sales of Software Products as a percentage of total product revenue. The increase in maintenance and professional services margin was driven by the improvement in margins for professional services.

~~Operating Expenses~~

Nine Months Ended September 30,
2017 2016 Change
Amount Amount Amount %
(Dollars in thousands)
Operating expenses:
Research and development $ 32,634
$ 22,352
$ 10,282
46 %
Sales and marketing 104,515
94,316
10,199
11 %
General and administrative 27,265
23,081
4,184
18 %
Total operating expenses $ 164,414
$ 139,749
$ 24,665
18 %

Research and development expense increased $10.3 million, or 46%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to an increase in personnel and travel costs of $7.6 million, due to an increase in headcount of 11%, an increase in allocated facilities and information technology related costs of $1.3 million, an increase in professional fees of $0.7 million, and an increase in equipment and other operating costs of $0.7 million.

Sales and marketing expense increased $10.2 million, or 11%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to an increase in personnel costs of $8.5 million, due to an increase in headcount of 3%, offset by a decrease in commissions of $2.9 million due to accelerated commission expenses in the prior year related to a very large deal. Additionally, there was an increase in travel and entertainment costs of $3.3 million, and an increase in allocated facilities and information technology costs of $1.3 million, all related to the increase in headcount.

General and administrative expense increased $4.2 million, or 18%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to an increase in personnel and travel costs of $3.3 million, due to an increase in headcount of 6%, an increase in professional fees of $1.2 million, an

~~increase in investor relation costs of $0.6~~million and an increase in allocated facilities and other operating costs of $0.4 million, offset by a decrease of $1.3 million due to a settlement in the prior year of a disagreement with one of our partners.

If the initial public offering had occurred on September 30, 2017, we would have recognized $22.1 million of stock-based compensation expense for all stock options and RSUs with a performance condition that had satisfied the service-based vesting condition on that date and the remaining unrecognized compensation cost of approximately $31.0 million would be recognized over the remaining service period of 1.9 years.

~~Interest Expense~~

Interest expense decreased $1.1 million, or 54%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, primarily due to the lower fixed interest rate per annum associated with our amended and restated loan and security agreement entered into on December 22, 2016, compared to our previous loan and security agreement which was paid off on December 1, 2016.

~~Other Income (Expense), Net~~

Nine Months Ended September 30,
2017 2016 Change
Amount Amount Amount %
(Dollars in thousands)
Other income (expense), net
$ (66 ) $ (354 ) $ 288
(81 )%

~~Other income (expense), net decreased $288,000, or 81%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016,~~2019 primarily due to a decrease in ~~foreign exchange~~worldwide loss before income taxes, which was largely generated in the United States and offset by a full valuation allowance.

~~Change in Fair Value~~interest deductions, temporary suspension of ~~Warrant Liabilities~~

~~Change in fair value of warrant liabilities decreased $0.7 million, or 190%,~~certain payment requirements for the ~~nine months ended September 30, 2017 compared to~~employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the ~~nine months ended September 30, 2016 due to the change in estimated fair value~~creation of certain refundable employee retention credits. The impact of the ~~preferred and common stock warrants outstanding.~~

~~Provision for Income Taxes~~

~~We recorded an income tax provision for the nine months ended September 30, 2017 due~~CARES Act does not have a material impact to income tax reserves, foreign income taxes, and U.S. state minimum taxes. The increase in the provision for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 was primarily due to an increase in income tax reserves related to a statutory income tax and withholding tax audit, and an increase in pre-tax income related to international operations.our consolidated financial statements.

Liquidity and Capital Resources

~~Historically, we have funded our business primarily through the issuance of our redeemable convertible preferred stock and debt financings.~~ The following ~~table presents~~data should be read in conjunction with our ~~capital resources:~~condensed consolidated statements of cash flows.

~~At September 30, 2017,~~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 ~~cash equivalents~~money market accounts. Our marketable securities are comprised of $72.3 million were held for general corporate purposes, of which approximately $11.1 million was held outside of the United States. Our current plans do not include repatriating these funds. There are no other restrictions on the use of these funds.corporate-debt securities. We do not provide for federal income taxes on the undistributed earnings of our foreign subsidiaries, all of which we expect to reinvest outside of the United States indefinitely. If we were to repatriate these earnings to the United States, any associated withholding tax and income tax liability would be insignificant.

The significant components of our working capital are cash and cash equivalents, accounts receivable, inventory, and prepaid expenses and other current assets, reduced by accounts payable, accrued compensation, accrued expenses, customer deposits, short-term deferred revenue, and short-term notes payable. Working capital decreased by $30.7 million during the nine months ended September 30, 2017, primarily due to cash used in investing and financing activities, an increase in current deferred revenue and an increase in customer deposits.

~~The following table summarizes our cash flows for the nine months ended September 30, 2017 and 2016.~~

~~Our sources of liquidity are our cash flow from operations and~~believe our existing cash, ~~and~~ cash equivalents, ~~which we believe~~and marketable securities will be sufficient to meet our ~~anticipated cash needs~~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.~~

~~Substantially all of our RSUs vest upon~~products as well as the satisfaction of both a service-based vesting condition and a performance-based vesting condition. The performance-based vesting condition will be satisfied on April 25, 2018, which is 181 days after October 26, 2017, the date the S-1 was effective with the SEC. As a result, an aggregate of approximately 876,442 shares underlying RSUs held by our directors and then current employees will vest and settle. We currently expect that the average withholding tax rate will be approximately 45%. We have not determined whether we will sell shares, or Sell to Cover, or withhold a portiontiming of the ~~vested shares, or Withhold~~closing of the Merger and the duration and extent of the COVID-19 pandemic and its effect on our business.

At June 30, 2020, our cash, cash equivalents, and marketable securities of $57.0 million were held for general corporate purposes, of which approximately $25.5 million was held outside of the United States. We will continue to ~~Cover, to satisfy~~reinvest our ~~tax obligations due at settlement.~~foreign cash outside of the United States. If we were to ~~elect Sell~~repatriate these earnings to ~~Cover, approximately 45%~~the United States, any associated withholding tax would not be material.

The significant components of our working capital are cash and cash equivalents, marketable securities, accounts receivable, current deferred commissions, and prepaid expenses and other current assets, reduced by accounts payable, accrued compensation, accrued expenses, current deferred revenue, current notes payable, and current operating lease liabilities. Working capital decreased by $50.9 million during the ~~vested shares would need~~six months ended June 30, 2020, primarily due to ~~be sold on~~lower billings, predominantly in the ~~settlement date~~three months ended March 31, 2020, and higher costs resulting from Merger-related expenses in connection with the ~~actual percentage dependent upon~~Merger. The following table summarizes our cash flows for the price received at settlement. If we were to elect Withhold to Cover, approximately 45% of the vested shares would be withheld on the settlement date, with the equivalent value being paid by us from a portion of the net proceeds from our IPO. If the price of our common stock at the time of settlement were equal to the initial public offering price of $22.00 per share, we estimate that this tax obligation would be approximately $8.7 million in the aggregate.six months ended June 30, 2020 and 2019.

At September 30, 2017, we owed $24.4 million on the term loan and had no balance outstanding on the line of credit. Our loan and security agreement requires us to pay equal monthly installments of principal of $625,000 and monthly interest payments at a fixed interest rate per annum of 3.25%. Concurrent with the final monthly installment payment on the maturity date, we will be required to pay an additional payment of $825,000. Refer to Note 5. Debt Agreements in the Notes to Consolidated Financial Statements in our Prospectus filed with the SEC on October 27, 2017.



	Six Months Ended June 30,
	2020			2019

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

Operating Activities

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

During the nine months ended September 30, 2017, operating activities provided $3.6 million in cash as a result of a net loss of $54.9 million adjusted by non-cash charges of $17.1 million and a net increase of $41.3 million in the net change of our operating assets and liabilities. The increase in the net change of our operating assets and liabilities was primarily the result of an increase of $5.8 million in customer deposits, a decrease of $4.4 million in accounts receivable resulting from increased collections, and an increase of $39.0 million in deferred revenue due to higher sales.

Cash used in operating activities ~~of $30.4~~was $44.8 million and $18.7 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016 was primarily due to a net loss of $58.0 million adjusted by non-cash charges of $15.3 million~~2020 and a net increase of $12.2 million in the net change of our operating assets and liabilities. The increase in the net change of our operating assets and liabilities was primarily the result of an increase of $10.1 million in deferred revenue due to higher sales, an increase of $6.4 million in other liabilities primarily related to the incentive for tenant improvements and an increase of $4.7 million in accrued compensation due to increased headcount and higher sales resulting in higher commission payable, offset by

2019, respectively, representing a decrease of ~~$4.4~~$26.0 million as compared to the six months ended June 30, 2019. The decrease in ~~prepaid expenses and other current assets, and a decrease~~generation of ~~$2.6 million~~cash during the six months ended June 30, 2020 was due primarily to lower billings, predominantly in ~~accounts receivable.~~the three months ended March 31, 2020, partially offset by proceeds from collections.

Investing Activities

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

Cash ~~used in~~provided by investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 was ~~$3.5~~$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 ~~and demonstration units~~ of ~~$3.4~~$1.4 million related to the continuing growth of our business.

Cash used in investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 was ~~$20.2~~$13.6 million, primarily resulting from purchases of marketable securities of $63.6 million and capital expenditures to purchase property and equipment ~~and demonstration units~~ of ~~$20.0~~$3.4 million ~~a large portion of which are~~ related to the ~~build-out~~continuing growth of our new corporate headquarters in San Jose, California. Additionally, there was an increase of $24.0 million in purchases of short-term investments due to proceeds from issuance of redeemable convertible preferred stock,business, partially offset by proceeds from maturities ~~and sales~~ of ~~short-term investments~~marketable securities of ~~$24.0~~$53.4 million.

Financing Activities

Our financing activities have consisted of proceeds from revolving credit facility, proceeds from the issuance of ~~redeemable convertible preferred~~common stock, ~~and exercise~~issuance of ~~employee stock options~~shares through our employee equity incentive ~~plans.~~

~~During the nine months ended September 30, 2017, financing activities used $7.4 million in cash, primarily due to the repayment~~plans, and repayments of ~~debt of $5.6 million and payments of $2.7 million for deferred offering costs related to our initial public offering, offset by $1.0 million from the exercise of employee stock options.~~notes payable.

Cash provided by financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2020 was ~~$3.3~~$4.5 million, primarily from ~~net~~the proceeds ~~of $2.4 million~~ from the ~~final close~~sales of shares through our employee equity incentive plans of $11.6 million, partially offset by the ~~Series G redeemable convertible preferred~~repayment of notes payable of $3.8 million and payments related to shares withheld for taxes on the vesting of restricted stock ~~offering and $0.9~~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 ~~exercise~~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 ~~options.~~units of $4.3 million, and the repayment of notes payable of $3.7 million.

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 ~~nine~~six months ended ~~September~~June 30, ~~2017~~2020 in our commitments under contractual obligations, as disclosed in our ~~Prospectus filed with~~Annual Report on Form 10-K for the ~~SEC on October 27, 2017.~~year ended December 31, 2019.

Off-Balance Sheet Arrangements

Through ~~September~~June 30, ~~2017,~~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~~See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates” in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosures. We base our ~~estimates~~Annual Report 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.

~~The critical accounting policies requiring estimates, assumptions, and judgments that we believe have the most significant impact on our consolidated financial statements are described below.~~

~~Revenue Recognition~~

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. However, determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.

For multiple element arrangements, the arrangement consideration is allocated to software deliverables as a group and non-software deliverables as a second group based on a relative selling price hierarchy. The relative selling price hierarchy is based on: (i) VSOE if available, (ii) third-party evidence of selling price, or TPE, if VSOE is not available, or (iii) best estimate of the selling price, or BESP, if neither VSOE nor TPE is available.

Hardware Product revenue is recognized at the time of delivery, provided that all other revenue recognition criteria have been met. Software Product revenue is recognized at the time of delivery if VSOE is established for all undelivered related items. If VSOE does not exist for one or more undelivered items, revenue from the software portion of the arrangement is deferred until the delivery of all items has begun and is then recognized ratably over the remaining related support and maintenance service period. Support and maintenance revenue is generally recognized ratably over the contractual service period, which is typically either one or three years, but can be up to five years. Professional services revenue is generally recognized as the services are rendered.

For Hardware Products, VSOE and TPE cannot be established, and we use BESP to determine the price at which a transaction would take place if the product was sold on a stand-alone basis. For Hardware Product related maintenance and professional services, we use either VSOE, or BESP when VSOE and TPE cannot be established. In determining the BESP for a product or service, we consider historical data including, but not limited to, product family, pricing practices, standalone sales, the nature and size of the end-customer, contractually stated prices, and geographical region. We limit the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or meeting of any specified performance conditions.

~~In multiple-element arrangements that include software, revenue is allocated to each separate unit of accounting~~Form 10-K for the non-software deliverables, as well as the software deliverables as a group, using the relative estimated selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. The arrangement consideration allocatedyear ended December 31, 2019. There were no changes to the software deliverables as a group is then allocated to each software deliverable separately using the residual method based on the fair value of each of the undelivered deliverables, using VSOE. We typically determine VSOE based on our ~~normal pricing~~Critical Accounting Policies and ~~discounting practices~~Estimates for the specific service when sold separately. We established VSOE on software-related support and maintenance using the bell-shaped curve approach. Under this approach, we concluded that VSOE exists if a substantial majority of recent stand-alone renewal transactions are priced within a narrow range. For Enterprise License Software, we established VSOE on support and maintenance prior to the occurrence of actual renewals, based on management’s ability to establish support and maintenance renewal rates. We ensure that such established VSOE is supported by contractually stated renewal rates. Beginning on January 1, 2016, we established VSOE for professional services, and support and maintenance on Software Products, except Extended Modules.

~~Stock-Based Compensation~~

Stock-based compensation expense is measured and recognized in the financial statements based on the grant date fair value of the award. The fair value of a stock option is estimated on the grant date using the Black-Scholes option-pricing model. The fair value of an RSU is measured using the fair value of our common stock on the date of the grant. Stock-based compensation expense is recognized over the requisite service periods of the awards, which is generally four years.

Our use of the Black-Scholes option-pricing model requires the input of highly subjective assumptions, including the fair value of our underlying common stock, expected term of the option, expected volatility of the price of our common stock, risk-free interest rates, and the expected dividend yield of our common stock. The assumptions used in our option-pricing model represent management’s best estimates. These estimates involve

inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future.

~~These assumptions and estimates are as follows:~~

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense.

~~See Note 3. Equity Award Plans for the assumptions used to determine the grant date fair value of employee stock options for the three and nine-month periods ending September~~six months ended June 30, ~~2017 and 2016.~~

~~Common Stock Valuations~~

The fair value of the common stock underlying our stock options was determined by our board of directors. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, ~~Valuation of Privately-Held-Company Equity Securities Issued as Compensation~~. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:

In valuing our common stock, the fair value of our business, or Enterprise Value, was determined using an income approach and a market approach, which are both considered highly complex and subjective valuation methodologies. The income approach estimates the fair value of a company based on the present value of our future estimated cash flows and our residual value beyond the forecast period. These future cash flows, including the cash flows beyond the forecast period for the residual value, are discounted to their present values, using an appropriate discount rate, to reflect the risks inherent in our achieving these estimated cash flows. We used the guideline public company method in applying the market approach. The guideline public company method is based upon the premise that indications of value for a given entity can be estimated based upon the observed valuation multiples of comparable public companies, the equity of which is freely traded by investors in the public securities markets. The Enterprise Value determined was then adjusted to: (i) add back cash on hand and (ii) remove interest-bearing debt in order to determine a value, or Equity Value.

The resulting Equity Value was then allocated to the various share classes, including the common stock, using a multi-scenario option pricing method, or OPM. The OPM entails allocating the total stockholders’ equity value to the various share classes based upon their respective claims on a series of call options with strike prices at various value levels depending upon the rights and preferences of each class. A Black-Scholes option-pricing model is employed to value the options, with an option term assumption consistent with our expected time to a liquidity event and a volatility assumption based on the estimated stock price volatility of a peer group of comparable public companies over a similar term. The OPM uses the preferred stockholders’ liquidation preferences, participation rights, dividend rights, and conversion rights to determine the value of each share class. A multi-scenario OPM was employed to value the common stock, giving specific consideration to the claims of each share class in initial public offering, or (“IPO”), and non-IPO scenarios, with the resulting common stock value indications weighted by our best estimate of a successful future IPO in order to arrive at the estimated value of the common stock.

After the Equity Value is determined and allocated to the various classes of shares, a discount for lack of marketability, or DLOM, is applied to arrive at the fair value of the common stock. A DLOM is applied based on the theory that as a private company, an owner of the stock has limited opportunities to sell company stock and any such sale would involve significant transaction costs, thereby reducing overall fair market value. Our assessments of the fair value of the common stock for grant dates between the dates of the valuations were based in part on the current available financial and operational information and the common stock value provided in the most recent valuation as compared to the timing of each grant. For financial reporting purposes, we considered the amount of time between the valuation date and the grant date to determine whether to use the latest common stock valuation or a straight-line interpolation between the two valuation dates. This determination included an evaluation of whether the subsequent valuation indicated that any significant change in valuation had occurred between the previous valuation and the grant date.

~~As a public company, we will rely on the closing price of our common stock as reported by The NASDAQ Global Market on the date of grant to determine the fair value of our common stock.~~

As of October 26, 2017, based on the initial public offering price of $22.00 per share, the aggregate intrinsic value of our outstanding stock options was $108.1 million, of which $69.4 million related to vested stock options and $38.7 million related to unvested stock options, and the aggregate intrinsic value of our outstanding RSUs was $66.7 million, of which $11.9 million related to vested RSUs and $54.8 million related to unvested RSUs.

Our assessments of the fair value of our common stock for financial reporting purposes for grant dates between the dates of the valuations were based in part on the current available financial and operational information and the common stock value provided in the most recent third-party valuation as compared to the timing of each grant.

~~Redeemable ConvertiblePreferred Stock Warrant Liabilities~~

Warrants to purchase shares of redeemable convertible preferred stock are classified as liabilities on the consolidated balance sheets at fair value upon issuance because the underlying shares of redeemable convertible preferred stock are redeemable at the option of the holders upon the occurrence of certain deemed liquidation events considered not solely within our control, which may therefore obligate us to transfer assets at some point in the future. The redeemable convertible preferred stock warrants are subject to remeasurement to fair value at each balance sheet date and any change in fair value is recognized in the consolidated statements of operations and comprehensive loss.

With the completion of our IPO in October 2017, the convertible preferred stock warrants outstanding automatically converted into common stock warrants and the preferred stock warrant liability will be reclassified to additional paid-in-capital.

We recognize deferred income taxes for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. We periodically evaluate the positive and negative evidence bearing upon realizability of our deferred tax assets. Based upon the weight of available evidence, which includes our historical operating performance, reported cumulative net losses since inception, and difficulty in accurately forecasting our future results, we maintained a full valuation allowance on the net deferred tax assets as of September 30, 2017 and December 31, 2016. We intend to maintain a full valuation allowance on the net U.S. deferred tax assets until sufficient positive evidence exists to support reversal of the valuation allowance.

We record unrecognized tax benefits as liabilities and adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

Under the Jumpstart Our Business Startups Act, we meet the definition of an “emerging growth company.” As such, we may avail ourselves of an extended transition period for complying with new or revised accounting standards. However, we have chosen to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.2020.

Recent Accounting Pronouncements

~~Refer to “Recent Accounting Pronouncements” in~~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.

~~Foreign Currency Exchange Risk~~

Our sales contracts are primarily denominated in U.S. ~~Dollars.~~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, particularly~~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 ~~Israeli Shekel, or NIS, and~~presentation set forth in Part II, Item 7A of our Annual Report on Form 10-K for the British Pound. Additionally, fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statements of operations and comprehensive loss. The effect of an immediate 10% adverse change in foreign exchange rates on foreign-denominated accounts as of September 30, 2017 andfiscal year ended December 31, ~~2016 would result in a $1.0 million and $985,000 loss, respectively,~~2019. See section titled “Risk Factors” for further discussion of the possible impact of COVID-19 on our condensed consolidated statements of operations and comprehensive loss. As our international operations grow, we will continue to reassess our approach to managing the risks relating to fluctuations in foreign currency.

~~Interest Rate Sensitivity~~

As of September 30, 2017, we had cash and cash equivalents of $72.3 million, which consisted primarily of bank deposits and money market funds. Such interest-earning instruments carry a degree of interest rate risk. To date, fluctuations in interest income have not been significant.business.

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 ~~Securities~~ Exchange Act ~~of 1934, as amended (the “Exchange Act”),~~ as of the end of the period covered by this ~~report.~~ 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 ~~& principal accounting officer~~ concluded that, as of ~~September~~June 30, ~~2017,~~2020, our disclosure controls and procedures ~~are designed at a reasonable assurance level and~~ 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 ~~SEC~~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 ~~September~~June 30, ~~2017~~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.

~~Limitations on Controls~~

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. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been or will be detected.




ITEM 1.	LEGAL PROCEEDINGS

From time to time, we ~~may be subject to~~are involved in claims and legal proceedings ~~and claims~~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 ~~may~~do not currently believe that it is reasonably possible that additional losses in connection with litigation arising in the ~~future receive claims~~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 ~~third parties asserting,~~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, ~~infringement~~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 ~~their intellectual property rights. Future litigation may be necessary to defend ourselves,~~ our ~~partners~~Board violated Sections 14(a) and ~~our customers or to establish our proprietary rights. The results of any current or future litigation cannot be predicted with certainty, and regardless~~20(a) of the ~~outcome, litigation can have~~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 ~~adverse impact~~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 ~~us because of defense and settlement costs, diversion of management resources, and other factors.~~

June 1, 2020. On ~~October 24, 2017, Network Security Technologies, LLC, or NST,~~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 ~~against us~~(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, ~~for the~~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 ~~infringe~~breached the Original Merger Agreement and that certain ~~patents held by it~~conditions to closing thereunder could not be met. Concurrently with the execution of the Amended and ~~seeking unspecified damages. Based upon our review of these patents, we believe we~~Restated Merger Agreement, Forescout, Parent and Merger Sub entered into a settlement agreement pursuant to which the parties have ~~meritorious defenses~~agreed to ~~NST’s~~release their respective claims made in connection with that litigation. On July 15, 2020, the parties submitted a stipulation dismissing all claims and ~~intend to vigorously defend~~counterclaims in the ~~lawsuit. However,~~action which the ~~outcome of any litigation~~Court granted the same day. The action is inherently unpredictable, and as a result of this litigation, we may be required to pay damages or seek a license or other right to continue to deliver an unmodified version of CounterAct, which may not be made available to us at all or which may require us to pay ongoing royalties and comply with unfavorable terms.now concluded.

~~You~~Refer to the description of the risk factors associated with our business in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Except as set forth below, there have been no material changes from the risk factors described under Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Before you buy our common stock, you should ~~carefully consider the following~~know that making such an investment involves some risks and uncertainties, including, but not limited to, the risks described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and the additional risk set forth below ~~together with all of the other information contained~~and elsewhere in this Quarterly Report on Form ~~10-Q, including the section titled “Management’s Discussion and Analysis~~10-Q. Additionally, any one of ~~Financial Condition and Results of Operations” and our financial statements and related notes. Any of the~~those risks ~~if realized,~~ could ~~have a material adverse effect on~~harm our business, financial condition and results of operations, ~~prospects, and financial condition, and~~which could cause ~~the trading~~our stock price ~~of our common stock~~ to ~~decline, which would cause you to lose all or part of your investment. The risks and uncertainties described below are not the only ones we face.~~decline. Additional risks and uncertainties not presently known to us or ~~deemed to be material by us~~that we currently deem immaterial may also impair our ~~operations~~business operations.

The recent global COVID-19 outbreak has adversely affected, and ~~performance.~~

~~Risks Related~~could continue to ~~Our Business~~

~~As a result of recent changes in~~adversely affect, our ~~market, sales organization,~~business and ~~go-to-market strategy, our ability to forecast our future~~ results of ~~operations~~operations. We are unable to predict the extent to which the pandemic and ~~plan for and model future growth is limited and subject to a number of uncertainties.~~

Although we were founded in 2000 and launched ForeScout CounterACT in 2006, much of our growth has occurred in recent periods. Our growth reflects a number of macro changes impacting the cyber security market, particularly through Bring Your Own Device, or BYOD, initiatives and the emergence of the Internet of Things, or IoT, both of which have contributed to a significant increase in the number of unmanaged devices accessing IT networks and resulted in growing demand for our products. To address this demand, we have made substantial investments in our sales force, which has almost tripled the size of our quota-bearing sales representatives from the beginning of 2015 to September 30, 2017. In addition, we have also recently begun to focus on building relationships with potential Alliance Partners, such as FireEye, Inc., or FireEye, to utilize their sales force resources to reach new end-customers. As a result of these recent changes in our market, sales organization and go-to-market strategies, coupled with our limited operating history, our ability to forecast our future results of operations and plan for and model future growth is limited and subject to a number of uncertainties. We have encountered andrelated impacts will continue to ~~encounter risks and uncertainties frequently encountered by rapidly growing companies in developing markets. If~~adversely affect our ~~assumptions regarding these risks and uncertainties are incorrect or change in response to~~

~~developments in the security market, our~~business operations, financial performance, results of operations, and financial ~~results could differ materially from our plans~~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 ~~forecasts. If~~is impacting worldwide economic activity and financial markets. As a result of COVID-19, we are ~~unable~~experiencing negative impacts on our sales and marketing efforts, along with delays to, ~~achieve~~and lengthening of, our ~~key objectives,~~sales cycles. Any of these could harm our business and results of operations. In addition, COVID-19 may disrupt the operations ~~will be~~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 ~~fair market value of our common stock could decline.~~

~~Our revenue growth rate in recent periods may not be indicative of our future performance.~~

~~Our revenue growth rate in recent periods should not be viewed as an indication of our future performance. For the years ended December 31, 2014, 2015,~~pandemic subsides, we will face longer sales cycles and ~~2016, our revenue was $71.1 million, $126.0 million,~~challenges attracting new customers and $166.8 million, respectively, representing year-over-year growth of 77% and 32%, respectively. For the nine months ended September 30, 2016 and 2017, our revenue was $117.4 million and $154.9 million, respectively, representing period-over-period growth of 32%. We may not achieve similar revenue growth rates in future periods. Factors that could impact our abilityclosing sales. Further, if we need to increase our revenue include our ability to increase the size or efficiency of our sales force, which has expanded rapidly in recent years, our ability to achieve repeat purchases by existing end-customers, and the extent to which we are successful in securing large scale deployments, particularly among Global 2000 enterprises and public sector organizations. If we are unable to maintain consistent revenue or revenue growth, our stock price could experience volatility, and our ability to achieve and maintain profitability could be adversely affected.

~~We have a history of losses and may be unable to achieve or maintain profitability in the future.~~

We have incurred significant net losses in each year since our inception, including net losses of $44.0 million, $27.3 million, and $74.8 million for the years ended December 31, 2014, 2015, and 2016, respectively, and net losses of $58.0 million and $54.9 million for the nine months ended September 30, 2016 and 2017, respectively. While we have experienced revenue growth over these same periods,raise capital, we may not be able to ~~sustain~~do so on terms that are favorable for us or ~~increase~~ our ~~growth~~stockholders, or ~~achieve profitability in~~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 ~~on a consistent basis. We expect~~seniority following the Acquisition. There can be no assurance that our ~~operating expenses~~employees, including key personnel, can be retained, or that we will be able to ~~increase over~~attract and retain employees to the ~~next several years as~~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, ~~substantial financial resources on, among other things, expanding and improving~~significant cash amounts, toward the functionality of our solution through the addition of new ForeScout Extended Modules, investments in research and development and sales and marketing, and the hiring of additional employees. The return on these investments, if any, will only be realized over time and may not result in increased revenue commensurate with increases in our expenses, or at all.

In addition, as a public company, we will incur significant accounting, legal, and other expenses that we did not incur as a private company. Achieving profitability will require us to increase revenue, manage our cost structure, and avoid significant liabilities. Revenue growth may slow, revenue may decline, or we may incur significant losses in the future for a number of reasons, including general macroeconomic conditions, increasing competition, a decrease in the growthcompletion of the ~~markets in~~Acquisition, which could adversely affect our business and operations. Parties with which we ~~operate, the inability to expand our sales force and increase its productivity, or if we fail for any reason to continue to capitalize on growth opportunities. Additionally, we~~do business may encounter unforeseen operating expenses, difficulties, complications, delays, and other unknown factors that may result in losses in future periods. If these losses exceed our expectations or our revenue growth expectations are not met in future periods, our financial performance will be harmed and our stock price could decline.

~~If we are unable to increase sales of our solution to large organizations and public sector entities, while mitigating the risks~~experience uncertainty associated with ~~serving such end-customers, our business, financial position, and results of operations may suffer.~~

Our growth strategy is dependent, in part, upon increasing sales of our solution to large organizations and public sector entities. Sales to large organizations and public sector entities involve risks that may not be present (or that are present to a lesser extent) with sales to smaller entities. These risks include:

~~In addition, because security breaches~~ with respect to ~~larger, high-profile organizations,~~current or ~~public sector entities are likely~~future business relationships with us. Uncertainty may cause customers to ~~be heavily publicized and because they are more likely to be targeted by cyberattackers, there is increased reputational risk associated~~refrain from doing business with serving such end-customers. If we are unable to increase sales of our solution and products to large organizations and public sector entities while mitigating the risks associated with serving such end-customers,us, which could adversely affect our business, results of operations ~~prospects,~~ 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 ~~suffer.~~


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016			2020			2019			2020			2019
Revenue:
Product	$	39,192		$	30,799		$	83,889		$	68,861
Maintenance and professional services	25,164			17,941			71,026			48,550
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	64,356			48,740			154,915			117,411			79,876			78,280			137,029			153,848
Cost of revenue:
Product	7,201			6,563			17,117			13,754
Maintenance and professional services	8,688			6,945			25,662			19,304
License													6,282			5,622			11,701			13,229
Subscription													7,041			5,599			14,054			10,806
Professional services													6,148			6,235			13,313			12,421
Total cost of revenue	15,889			13,508			42,779			33,058			19,471			17,456			39,068			36,456
Total gross profit	48,467			35,232			112,136			84,353			60,405			60,824			97,961			117,392
Operating expenses:
Research and development	10,985			8,509			32,634			22,352			21,514			19,440			44,760			37,937
Sales and marketing	34,957			35,759			104,515			94,316			38,988			56,173			86,276			112,096
General and administrative	9,148			7,967			27,265			23,081			21,733			15,838			46,214			32,051
Restructuring													859			—			3,371			—
Total operating expenses	55,090			52,235			164,414			139,749			83,094			91,451			180,621			182,084
Loss from operations	(6,623		)	(17,003		)	(52,278		)	(55,396		)	(22,689		)	(30,627		)	(82,660		)	(64,692		)
Interest expense	(290		)	(702		)	(953		)	(2,072		)	(118		)	(142		)	(353		)	(235		)
Other income (expense), net	160			(226		)	(66		)	(354		)	572			505			(29		)	1,122
Change in fair value of warrant liabilities	—			(224		)	(342		)	379
Loss before income taxes	(6,753		)	(18,155		)	(53,639		)	(57,443		)	(22,235		)	(30,264		)	(83,042		)	(63,805		)
Income tax provision	412			157			1,221			517			1,288			496			1,720			1,207
Net loss and comprehensive loss	$	(7,165	)	$	(18,312	)	$	(54,860	)	$	(57,960	)
Net loss per share attributable to common stockholders, basic and diluted	$	(1.17	)	$	(3.18	)	$	(9.09	)	$	(10.46	)
Weighted-average shares used to compute net loss per share attributable to common stockholders, basic and diluted	6,139,876			5,749,930			6,032,427			5,539,012
Net loss													$	(23,523	)	$	(30,760	)	$	(84,762	)	$	(65,012	)
Net loss per share, basic and diluted													$	(0.48	)	$	(0.68	)	$	(1.73	)	$	(1.45	)
Weighted-average shares used to compute net loss per share, basic and diluted													49,371			45,494			48,982			44,848



	September 30, 2017				December 31, 2016
Financial Assets	Level 1		Level 3		Level 1		Level 3
Cash and cash equivalents:
Cash	$	34,986	$	—	$	42,499	$	—
Money market accounts	37,358		—		37,166		—
Total cash and cash equivalents	72,344		—		79,665		—
Restricted cash (current and non-current)	4,339		—		4,212		—
Total financial assets	$	76,683	$	—	$	83,877	$	—
Financial Liabilities
Warrant liabilities	$	—	$	5,216	$	—	$	4,874



	Level 3
Balance as of December 31, 2016	$	4,874
Change in fair value of warrant liabilities	342
Balance as of September 30, 2017	$	5,216



	RSUs Outstanding
	Number of Shares		Weighted- Average Grant Date Fair Value Per Share		Weighted- Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Balance—December 31, 2016	1,898,623		$	14.83	1.7	$	30,720
RSUs granted	1,155,350		$	19.25
RSUs forfeited	(22,750	)	$	20.18
Balance—September 30, 2017	3,031,223		$	16.48	1.8	$	59,958
RSUs vested and expected to vest—September 30, 2017	3,029,970		$	17.22	1.8	$	59,933



	As of September 30,
	2017	2016

Options to purchase common stock	9,413,141	9,403,045
Unvested early exercised common shares	231,423	364,800
Unvested restricted stock units	3,031,223	1,039,121
Warrants to purchase common stock	233,023	233,023
Redeemable convertible preferred stock	24,788,362	24,788,362
Warrants to purchase redeemable convertible preferred stock	292,862	292,862



	As of
	September 30, 2017		December 31, 2016
Long-lived assets, net:
United States	$	19,682	$	21,141
Israel	3,034		3,051
Other	548		344
Total long-lived assets, net	$	23,264	$	24,536


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




~~ITEM 2.~~	~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~
	~~None.~~



Exhibit Number		Description
~~3.1~~		~~Amended and Restated Certificate of Incorporation of ForeScout Technologies, Inc.~~
~~3.2~~		~~Amended and Restated Bylaws of ForeScout Technologies, Inc.~~
31.1		Certification of the ~~Chief~~Principal Executive Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the ~~Chief~~Principal Financial Officer pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002.
32.1†		Certification of ~~Chief~~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 ~~Chief~~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.~~Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH		Inline XBRL Taxonomy Schema Linkbase Document.
101.CAL		Inline XBRL Taxonomy Calculation Linkbase Document.
101.DEF		Inline XBRL Taxonomy Definition Linkbase Document.
101.LAB		Inline XBRL Taxonomy Labels Linkbase Document.
101.PRE		Inline XBRL Taxonomy Presentation Linkbase Document.
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).



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



	FORESCOUT TECHNOLOGIES, INC.

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




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