FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months Ended

Nine Months Ended

(in thousands, except share and per share data)

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

Sales

Product

$

63,641

$

75,817

$

200,434

$

222,118

Service

26,875

23,888

77,190

68,665

Total sales

90,516

99,705

277,624

290,783

Cost of Sales

Product

26,495

34,864

83,632

91,321

Service

13,249

14,229

39,461

40,750

Total cost of sales

39,744

49,093

123,093

132,071

Gross Profit

50,772

50,612

154,531

158,712

Operating Expenses

Selling and marketing

30,218

28,482

87,438

87,877

General and administrative

15,662

13,102

44,471

36,789

Research and development

10,783

11,740

33,048

34,138

Total operating expenses

56,663

53,324

164,957

158,804

Loss from operations

(5,891)

(2,712)

(10,426)

(92)

Other (income) expense

Interest (income) expense, net

(24)

(96)

72

(205)

Other expense, net

514

226

2,398

868

Loss before income tax (benefit) expense

(6,381)

(2,842)

(12,896)

(755)

Income tax (benefit) expense

(182)

(354)

(444)

73

Net loss

$

(6,199)

$

(2,488)

$

(12,452)

$

(828)

Net loss per share - Basic

$

(0.36)

$

(0.15)

$

(0.72)

$

(0.05)

Net loss per share - Diluted

$

(0.36)

$

(0.15)

$

(0.72)

$

(0.05)

Weighted average shares - Basic

17,367,228

17,122,705

17,352,386

16,976,459

Weighted average shares - Diluted

17,367,228

17,122,705

17,352,386

16,976,459

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

September 30, 2019 (unaudited)

December 31, 2018

ASSETS

Current assets:

Cash and cash equivalents

$

119,083

$

108,783

Short-term investments

24,868

24,793

Accounts receivable, net

64,708

88,927

Inventories, net

69,779

65,444

Prepaid expenses and other current assets

28,084

28,795

Total current assets

306,522

316,742

Property and equipment:

Machinery and equipment

82,578

76,048

Furniture and fixtures

6,172

6,749

Leasehold improvements

21,066

20,304

Property and equipment at cost

109,816

103,101

Less: accumulated depreciation and amortization

(81,411)

(72,684)

Property and equipment, net

28,405

30,417

Operating lease right-of-use asset

18,672

—

Goodwill

69,712

67,274

Intangible assets, net

27,530

33,054

Service and sales demonstration inventory, net

39,509

39,563

Deferred income tax assets, net

14,693

14,719

Other long-term assets

2,987

4,475

Total assets

$

508,030

$

506,244

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

11,705

$

20,093

Accrued liabilities

35,255

36,327

Income taxes payable

1,081

5,081

Current portion of unearned service revenues

35,273

32,878

Customer deposits

2,419

3,144

Lease liability

6,615

—

Total current liabilities

92,348

97,523

Unearned service revenues - less current portion

18,171

15,505

Lease liability - less current portion

13,922

—

Deferred income tax liabilities

2,466

736

Income taxes payable - less current portion

12,567

12,247

Other long-term liabilities

1,031

3,624

Total liabilities

140,505

129,635

Shareholders' equity:

Common stock - par value $.001, 50,000,000 shares authorized; 18,816,598 and 18,676,059 issued, respectively; 17,404,087 and 17,253,011 outstanding, respectively

19

19

Additional paid-in capital

260,737

251,329

Retained earnings

162,574

175,353

Accumulated other comprehensive loss

(24,430)

(18,483)

Common stock in treasury, at cost; 1,412,511 and 1,423,048 shares, respectively

(31,375)

(31,609)

Total shareholders' equity

367,525

376,609

Total liabilities and shareholders' equity

$

508,030

$

506,244

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Nine Months Ended

(in thousands)

September 30, 2019

September 30, 2018

Cash flows from:

Operating activities:

Net loss

$

(12,452)

$

(828)

Adjustments to reconcile net loss to net cash provided by operating activities:

Depreciation and amortization

14,203

13,467

Stock-based compensation

8,703

5,717

Provisions for bad debts, net of recoveries

1,000

360

Loss on disposal of assets

552

401

Provision for excess and obsolete inventory

2,431

5,357

Deferred income tax benefit

(69)

(161)

Impairment charge on equity method investment

1,535

—

Change in operating assets and liabilities:

Decrease (Increase) in:

Accounts receivable

21,883

(1,882)

Inventories

(9,471)

(12,104)

Prepaid expenses and other current assets

640

(4,257)

(Decrease) Increase in:

Accounts payable and accrued liabilities

(13,404)

569

General Services Administration liability

6,470

—

Income taxes payable

(3,679)

(5,082)

Customer deposits

(685)

(107)

Unearned service revenues

5,809

3,415

Net cash provided by operating activities

23,466

4,865

Investing activities:

Proceeds from sale of investments

33,700

22,000

Purchases of investments

(33,700)

(31,000)

Purchases of property and equipment

(5,922)

(6,895)

Payments for intangible assets

(2,035)

(1,716)

Acquisition of businesses

—

(27,638)

Loan originated to affiliate

(549)

—

Equity investments and advances to affiliates

—

(1,786)

Net cash used in investing activities

(8,506)

(47,035)

Financing activities:

Payments on finance leases

(273)

(84)

Payments of contingent consideration for acquisitions

(3,101)

(638)

Payments for taxes related to net share settlement of equity awards

(1,389)

—

Proceeds from issuance of stock related to stock option exercises

2,328

20,901

Net cash (used in) provided by financing activities

(2,435)

20,179

Effect of exchange rate changes on cash and cash equivalents

(2,225)

(3,871)

Increase (decrease) in cash and cash equivalents

10,300

(25,862)

Cash and cash equivalents, beginning of period

108,783

140,960

Cash and cash equivalents, end of period

$

119,083

$

115,098

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

Three Months Ended

Nine Months Ended

(in thousands)

September 30, 2019

September 30, 2018

September 30, 2019

September 30, 2018

Net loss

$

(6,199)

$

(2,488)

$

(12,452)

$

(828)

Currency translation adjustments

(5,646)

(4,911)

(5,947)

(9,074)

Comprehensive loss

$

(11,845)

$

(7,399)

$

(18,399)

$

(9,902)

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

UNAUDITED SUPPLEMENTAL SALES DATA

Three Months Ended

Nine Months Ended

(sales in thousands)

September 30, 2019

September 30, 2018

% Change

September 30, 2019

September 30, 2018

% Change

Reporting Segments

3D Manufacturing (1)

$

56,017

$

64,182

(12.7)

%

$

171,586

$

190,584

(10.0)

%

Construction BIM (2)

23,884

23,710

0.7

%

73,485

69,994

5.0

%

Emerging Verticals (3)

10,615

11,813

(10.1)

%

32,553

30,205

7.8

%

Total

$

90,516

$

99,705

(9.2)

%

$

277,624

$

290,783

(4.5)

%

(1)

The 3D Manufacturing reporting segment contains our 3D Manufacturing vertical

(2)

The Construction BIM reporting segment contains our Construction BIM vertical

(3)

The Emerging Verticals reporting segment includes our 3D Design, Public Safety Forensics, and Photonics verticals

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

DEPRECIATION AND AMORTIZATION EXPENSE RECLASSIFICATION

(UNAUDITED)

Commencing with the third quarter of 2019, depreciation and amortization expenses are being reported in the accompanying statements of operations to reflect departmental costs. Previously, those expenses were reported as a separate line item under operating expenses. Depreciation and amortization expenses were reclassified in prior periods to conform to the current period presentation, as follows:

Three months ended

(in thousands)

March 31, 2018

June 30, 2018

September 30, 2018

December 31, 2018

March 31, 2019

June 30, 2019

Product cost of sales as reported

$

26,884

$

27,878

$

34,004

$

36,036

$

26,128

$

29,037

Depreciation and amortization adjustment

853

842

860

851

1,176

796

Product cost of sales as adjusted

$

27,737

$

28,720

$

34,864

$

36,887

$

27,304

$

29,833

Service cost of sales as reported

$

12,164

$

12,675

$

13,384

$

12,257

$

12,470

$

12,135

Depreciation and amortization adjustment

826

856

845

860

824

783

Service cost of sales as adjusted

$

12,990

$

13,531

$

14,229

$

13,117

$

13,294

$

12,918

Selling and marketing as reported

$

28,271

$

30,084

$

27,811

$

30,754

$

26,753

$

29,124

Depreciation and amortization adjustment

512

528

671

689

466

876

Selling and marketing as adjusted

$

28,783

$

30,612

$

28,482

$

31,443

$

27,219

$

30,000

General and administrative as reported

$

11,073

$

11,320

$

12,496

$

12,763

$

13,224

$

14,424

Depreciation and amortization adjustment

690

604

606

846

578

583

General and administrative as adjusted

$

11,763

$

11,924

$

13,102

$

13,609

$

13,802

$

15,007

Depreciation and amortization as reported

$

4,343

$

4,377

$

4,747

$

4,846

$

4,749

$

4,573

Depreciation and amortization adjustment

(4,343)

(4,377)

(4,747)

(4,846)

(4,749)

(4,573)

Depreciation and amortization as adjusted

$

—

$

—

$

—

$

—

$

—

$

—

Research and development as reported

$

9,406

$

9,983

$

9,975

$

10,342

$

9,935

$

9,091

Depreciation and amortization adjustment

1,462

1,547

1,765

1,600

1,705

1,535

Research and development as adjusted

$

10,868

$

11,530

$

11,740

$

11,942

$

11,640

$

10,626

In the reconciliations that follow, the "as reported" amounts for prior periods reflect the above reclassification of depreciation and amortization expenses.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP

(UNAUDITED)

Three months ended September 30,

Nine months ended September 30,

(dollars in thousands, except per share data)

2019

2018

2019

2018

Total sales, as reported

$

90,516

$

99,705

$

277,624

$

290,783

GSA sales adjustment (1)

—

—

5,840

—

Non-GAAP total sales

$

90,516

$

99,705

$

283,464

$

290,783

Gross profit, as reported

$

50,772

$

50,612

$

154,531

$

158,712

GSA sales adjustment (1)

—

—

5,840

—

Stock-based compensation (2)

270

241

771

620

Inventory reserve charge (3)

—

4,734

—

4,734

Non-GAAP adjustments to gross profit

270

4,975

6,611

5,354

Non-GAAP gross profit

$

51,042

$

55,587

$

161,142

$

164,066

Gross margin, as reported

56.1

%

50.8

%

55.7

%

54.6

%

Non-GAAP gross margin

56.4

%

55.8

%

56.8

%

56.4

%

Operating expenses, as reported

$

56,663

$

53,324

$

164,957

$

158,804

Advisory fees for GSA Matter (4)

—

—

(1,244)

—

Stock-based compensation (2)

(3,117)

(1,925)

(7,932)

(5,097)

Executive severance costs

(1,217)

—

(1,217)

—

Executive sign-on bonuses & relocation costs

(270)

—

(845)

—

Purchase accounting intangible amortization

(924)

(1,131)

(2,665)

(2,601)

Non-GAAP adjustments to operating expenses

(5,528)

(3,056)

(13,903)

(7,698)

Non-GAAP operating expenses

$

51,135

$

50,268

$

151,054

$

151,106

Loss from operations, as reported

$

(5,891)

$

(2,712)

$

(10,426)

$

(92)

Non-GAAP adjustments to gross profit

270

4,975

6,611

5,354

Non-GAAP adjustments to operating expenses

5,528

3,056

13,903

7,698

Non-GAAP (loss) income from operations

$

(93)

$

5,319

$

10,088

$

12,960

Other expense, net, as reported

$

490

$

130

$

2,470

$

663

Interest expense increase due to GSA sales adjustment (1)

(145)

—

(632)

—

Present4D impairment (5)

—

—

(1,535)

—

Non-GAAP adjustments to other expense, net

(145)

—

(2,167)

—

Non-GAAP other expense, net

$

345

$

130

$

303

$

663

Net loss, as reported

$

(6,199)

$

(2,488)

$

(12,452)

$

(828)

Non-GAAP adjustments to gross profit

270

4,975

6,611

5,354

Non-GAAP adjustments to operating expenses

5,528

3,056

13,903

7,698

Non-GAAP adjustments to other expense, net

145

—

2,167

—

Income tax effect of non-GAAP adjustments

(1,452)

(1,084)

(4,484)

(2,126)

Other tax adjustments (6)

1,555

—

2,419

—

Non-GAAP net (loss) income

$

(153)

$

4,459

$

8,164

$

10,098

Net loss per share - Diluted, as reported

$

(0.36)

$

(0.15)

$

(0.72)

$

(0.05)

GSA sales adjustment (1)

—

—

0.34

—

Stock-based compensation (2)

0.19

0.12

0.50

0.34

Inventory reserve charge (3)

—

0.28

—

0.28

Advisory fees for GSA Matter (4)

—

—

0.07

—

Executive severance costs

0.07

—

0.07

—

Executive sign-on bonuses & relocation costs

0.02

—

0.05

—

Purchase accounting intangible amortization

0.05

0.07

0.15

0.15

Interest expense increase due to GSA sales adjustment (1)

0.01

—

0.04

—

Present4D impairment (5)

—

—

0.09

—

Income tax effect of non-GAAP adjustments

(0.08)

(0.06)

(0.26)

(0.13)

Other tax adjustments (6)

0.09

—

0.14

—

Non-GAAP net (loss) income per share - Diluted

$

(0.01)

$

0.26

$

0.47

$

0.59

(1)

Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the U.S. Government being overcharged under our General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the "GSA Matter"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million. We also retained outside legal counsel and forensic accountants to conduct a comprehensive review of our pricing and other practices under the Contracts (the "Review"). On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the Review. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million (the "GSA sales adjustment") and recorded imputed interest expense of $0.1 million and $0.6 million related to the GSA Matter for the three and nine months ended September 30, 2019, respectively.

(2)

We exclude stock-based compensation, which is non-cash, from the non-GAAP financial measures because the Company believes that such exclusion provides a better comparison of results of ongoing operations for current and future periods with such results from past periods. This adjustment includes accelerated vesting of equity awards in connection with the transition of our prior executives totaling $1.6 million and $3.5 million for the three and nine months ended September 30, 2019, respectively.

(3)

During the third quarter of 2018, we performed an analysis of our inventory reserves in connection with our recent new product introductions and acquisitions and recorded a charge of $4.7 million, or approximately 5% of total inventory, increasing our reserve for excess and obsolete inventory based on the determination that quantities on-hand for certain legacy products exceeded our revised sales projections.

(4)

In connection with the GSA Matter, we retained outside legal counsel and forensic accountants to conduct the Review, which resulted in $1.2 million in advisory fees incurred during the first nine months of 2019.

(5)

On April 27, 2018, we invested $1.8 million in present4D GmbH ("present4D"), a software solutions provider for professional virtual reality presentations and training environments, in the form of an equity capital contribution. During the second quarter of 2019, we determined it is more likely than not that we will not recover our cost basis in present4D and recorded an impairment charge of $1.5 million, which is included in Other expense, net.

(6)

Driven primarily by return-to-provision adjustments identified in the preparation of our 2018 U.S. tax return and changes in our reserve for uncertain tax positions due to a change in our judgment on the recognition of a tax position.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

QUARTERLY RECONCILIATION OF GAAP TO NON-GAAP FOR 2018 RESULTS

(UNAUDITED)

Three months ended

(dollars in thousands, except per share data)

March 31, 2018

June 30, 2018

September 30, 2018

December 31, 2018

Total sales, as reported

$

92,834

$

98,244

$

99,705

$

112,844

GSA sales adjustment (1)

—

—

—

4,789

Non-GAAP total sales

$

92,834

$

98,244

$

99,705

$

117,633

Gross profit, as reported

$

52,106

$

55,994

$

50,612

$

62,841

GSA sales adjustment (1)

—

—

—

4,789

Stock-based compensation (2)

169

210

241

208

Inventory reserve charge (3)

—

—

4,734

—

Non-GAAP adjustments to gross profit

169

210

4,975

4,997

Non-GAAP gross profit

$

52,275

$

56,204

$

55,587

$

67,838

Gross margin, as reported

56.1

%

57.0

%

50.8

%

55.7

%

Non-GAAP gross margin

56.3

%

57.2

%

55.8

%

57.7

%

Operating expenses, as reported

$

51,414

$

54,066

$

53,324

$

56,994

Stock-based compensation (2)

(1,382)

(1,790)

(1,925)

(1,696)

Purchase accounting intangible amortization

(698)

(772)

(1,131)

(983)

Non-GAAP adjustments to operating expenses

(2,080)

(2,562)

(3,056)

(2,679)

Non-GAAP operating expenses

$

49,334

$

51,504

$

50,268

$

54,315

Income (loss) from operations, as reported

$

693

$

1,927

$

(2,712)

$

5,846

Non-GAAP adjustments to gross profit

169

210

4,975

4,997

Non-GAAP adjustments to operating expenses

2,080

2,562

3,056

2,679

Non-GAAP income from operations

$

2,942

$

4,699

$

5,319

$

13,522

Other expense, net, as reported

$

111

$

422

$

130

$

533

Interest expense increase due to GSA sales adjustment (1)

—

—

—

(478)

Non-GAAP adjustments to other expense, net

—

—

—

(478)

Non-GAAP other expense, net

$

111

$

422

$

130

$

55

Net income (loss), as reported

$

455

$

1,205

$

(2,488)

$

5,758

Non-GAAP adjustments to gross profit

169

210

4,975

4,997

Non-GAAP adjustments to operating expenses

2,080

2,562

3,056

2,679

Non-GAAP adjustments to other expense, net

—

—

—

478

Income tax effect of non-GAAP adjustments

(490)

(552)

(1,084)

(2,137)

Other tax adjustments (4)

—

—

—

(1,000)

Non-GAAP net income

$

2,214

$

3,425

$

4,459

$

10,775

(1)

Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the U.S. Government being overcharged under our General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the "GSA Matter"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million and recorded imputed interest expense of $0.5 million related to the GSA Matter.

(2)

We exclude stock-based compensation, which is non-cash, from the non-GAAP financial measures because the Company believes that such exclusion provides a better comparison of results of ongoing operations for current and future periods with such results from past periods.

(3)

During the third quarter of 2018, we performed an analysis of our inventory reserves in connection with our recent new product introductions and acquisitions and recorded a charge of $4.7 million, or approximately 5% of total inventory, increasing our reserve for excess and obsolete inventory based on the determination that quantities on-hand for certain legacy products exceeded our revised sales projections.

(4)

During the fourth quarter of 2018. we completed our transition tax analysis, which resulted in an income tax benefit of $1.0 million related to adjustments to the transition tax on mandatory deemed repatriation of foreign earnings.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

QUARTERLY RECONCILIATION OF GAAP TO NON-GAAP FOR 2019 RESULTS

(UNAUDITED)

Three months ended

(dollars in thousands, except per share data)

March 31, 2019

June 30, 2019

September 30, 2019

Total sales, as reported

$

93,617

$

93,491

$

90,516

GSA sales adjustment (1)

35

5,805

—

Non-GAAP total sales

$

93,652

$

99,296

$

90,516

Gross profit, as reported

$

53,018

$

50,741

$

50,772

GSA sales adjustment (1)

35

5,805

—

Stock-based compensation (2)

233

268

270

Non-GAAP adjustments to gross profit

268

6,073

270

Non-GAAP gross profit

$

53,286

$

56,814

$

51,042

Gross margin, as reported

56.6

%

54.3

%

56.1

%

Non-GAAP gross margin

56.9

%

57.2

%

56.4

%

Operating expenses, as reported

$

52,661

$

55,633

$

56,663

Advisory fees for GSA Matter (3)

(591)

(653)

—

Stock-based compensation (2)

(2,331)

(2,484)

(3,117)

Executive severance costs

—

—

(1,217)

Executive sign-on bonuses & relocation costs

—

(575)

(270)

Purchase accounting intangible amortization

(852)

(889)

(924)

Non-GAAP adjustments to operating expenses

(3,774)

(4,601)

(5,528)

Non-GAAP operating expenses

$

48,887

$

51,032

$

51,135

Income (loss) from operations, as reported

$

358

$

(4,893)

$

(5,891)

Non-GAAP adjustments to gross profit

268

6,073

270

Non-GAAP adjustments to operating expenses

3,774

4,601

5,528

Non-GAAP income (loss) from operations

$

4,400

$

5,781

$

(93)

Other expense, net, as reported

$

51

$

1,929

$

490

Interest expense increase due to GSA sales adjustment (1)

(45)

(442)

(145)

Present4D impairment (4)

—

(1,535)

—

Non-GAAP adjustments to other expense, net

(45)

(1,977)

(145)

Non-GAAP other expense, net

$

6

$

(48)

$

345

Net income (loss), as reported

$

152

$

(6,405)

$

(6,199)

Non-GAAP adjustments to gross profit

268

6,073

270

Non-GAAP adjustments to operating expenses

3,774

4,601

5,528

Non-GAAP adjustments to other expense, net

45

1,977

145

Income tax effect of non-GAAP adjustments

(672)

(2,360)

(1,452)

Other tax adjustments (5)

—

864

1,555

Non-GAAP net income (loss)

$

3,567

$

4,750

$

(153)

(1)

Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the U.S. Government being overcharged under our General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the "GSA Matter"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million. We also retained outside legal counsel and forensic accountants to conduct a comprehensive review of our pricing and other practices under the Contracts (the "Review"). On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the Review. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million (the "GSA sales adjustment") and recorded imputed interest expense of less than $0.1 million during the first quarter of 2019, $0.4 million during the second quarter of 2019, and $0.1 million during the third quarter of 2019 related to the GSA Matter.

(2)

We exclude stock-based compensation, which is non-cash, from the non-GAAP financial measures because the Company believes that such exclusion provides a better comparison of results of ongoing operations for current and future periods with such results from past periods. This adjustment includes accelerated vesting of equity awards in connection with the transition of our prior executives totaling $1.6 million and $3.5 million for the three and nine months ended September 30, 2019, respectively.

(3)

In connection with the GSA Matter, we retained outside legal counsel and forensic accountants to conduct the Review, which resulted in $1.2 million in advisory fees incurred during the first nine months of 2019.

(4)

On April 27, 2018, we invested $1.8 million in present4D GmbH ("present4D"), a software solutions provider for professional virtual reality presentations and training environments, in the form of an equity capital contribution. During the second quarter of 2019, we determined it is more likely than not that we will not recover our cost basis in present4D and recorded an impairment charge of $1.5 million, which is included in Other expense, net.

(5)

Driven primarily by return-to-provision adjustments identified in the preparation of our 2018 U.S. tax return and changes in our reserve for uncertain tax positions due to a change in our judgment on the recognition of a tax position.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP

TOTAL SALES BY REPORTING SEGMENT

(UNAUDITED)

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands)

2019

2018

2019

2018

3D Manufacturing total sales, as reported

$

56,017

$

64,182

$

171,586

$

190,584

GSA sales adjustment (1)

—

—

3,315

—

Non-GAAP 3D Manufacturing total sales

$

56,017

$

64,182

$

174,901

$

190,584

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands)

2019

2018

2019

2018

Construction BIM total sales, as reported

$

23,884

$

23,710

$

73,485

$

69,994

GSA sales adjustment (1)

—

—

463

—

Non-GAAP Construction BIM total sales

$

23,884

$

23,710

$

73,948

$

69,994

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands)

2019

2018

2019

2018

Emerging Verticals total sales, as reported

$

10,615

$

11,813

$

32,553

$

30,205

GSA sales adjustment (1)

—

—

2,062

—

Non-GAAP Emerging Verticals total sales

$

10,615

$

11,813

$

34,615

$

30,205

(1)

Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the U.S. Government being overcharged under our General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million. We also retained outside legal counsel and forensic accountants to conduct a comprehensive review of our pricing and other practices under the Contracts (the "Review"). On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the Review. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million (the "GSA sales adjustment").

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF NET INCOME (LOSS) TO EBITDA AND ADJUSTED EBITDA

(UNAUDITED)

Three months ended

(in thousands)

March 31, 2018

June 30, 2018

September 30, 2018

December 31, 2018

Net income (loss)

$

455

$

1,205

$

(2,488)

$

5,758

Interest (income) expense, net

(73)

(87)

(96)

313

Income tax expense (benefit)

127

300

(354)

(445)

Depreciation and amortization

4,343

4,377

4,747

4,846

EBITDA

4,852

5,795

1,809

10,472

Loss on foreign currency transactions

184

509

226

220

Stock-based compensation

1,551

2,000

2,166

1,904

GSA sales adjustment (1)

—

—

—

4,789

Inventory reserve charge (2)

—

—

4,734

—

Adjusted EBITDA

$

6,587

$

8,304

$

8,935

$

17,385

(1)

Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the U.S. Government being overcharged under our General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the "GSA Matter"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million and recorded imputed interest expense of $0.5 million related to the GSA Matter.

(2)

During the third quarter of 2018, we performed an analysis of our inventory reserves in connection with our recent new product introductions and acquisitions and recorded a charge of $4.7 million, or approximately 5% of total inventory, increasing our reserve for excess and obsolete inventory based on the determination that quantities on-hand for certain legacy products exceeded our revised sales projections.

Three months ended

(in thousands)

March 31, 2019

June 30, 2019

September 30,2019

Net income (loss)

$

152

$

(6,405)

$

(6,199)

Interest (income) expense, net

(144)

240

(24)

Income tax expense (benefit)

155

(417)

(182)

Depreciation and amortization

4,749

4,573

4,798

EBITDA

4,912

(2,009)

(1,607)

Loss on foreign currency transactions

195

154

514

Stock-based compensation

2,564

2,752

3,387

GSA sales adjustment (1)

35

5,805

—

Advisory fees for GSA Matter (2)

591

653

—

Executive severance costs

—

—

1,217

Executive sign-on bonuses & relocation costs

—

575

270

Present4D impairment (3)

—

1,535

—

Adjusted EBITDA

$

8,297

$

9,465

$

3,781

(1)

Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the U.S. Government being overcharged under our General Services Administration ("GSA") Federal Supply Schedule contracts (the "Contracts") (the "GSA Matter"). In fourth quarter 2018, we reduced our total sales by an estimated cumulative adjustment of $4.8 million. We also retained outside legal counsel and forensic accountants to conduct a comprehensive review of our pricing and other practices under the Contracts (the "Review"). On July 15, 2019, we submitted a report to the GSA and its Office of Inspector General setting forth the findings of the Review. Based on the results of the Review, in second quarter 2019 we reduced our total sales by an incremental $5.8 million (the "GSA sales adjustment").

(2)

In connection with the GSA Matter, we retained outside legal counsel and forensic accountants to conduct the Review, which resulted in $1.2 million in advisory fees incurred during the first nine months of 2019.

(3)

On April 27, 2018, we invested $1.8 million in present4D GmbH ("present4D"), a software solutions provider for professional virtual reality presentations and training environments, in the form of an equity capital contribution. During the second quarter of 2019, we determined it is more likely than not that we will not recover our cost basis in present4D and recorded an impairment charge of $1.5 million, which is included in Other expense, net.