FARO TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)

Three Months Ended

Six Months Ended

(in thousands, except share and per share data)

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

Sales

Product

$

42,259

$

71,045

$

98,784

$

142,622

Service

18,305

22,446

41,295

$

44,486

Total sales

60,564

93,491

140,079

187,108

Cost of Sales

Product

21,333

30,505

44,399

$

58,456

Service

10,335

12,246

22,911

$

24,893

Total cost of sales

31,668

42,751

67,310

83,349

Gross Profit

28,896

50,740

72,769

103,759

Operating Expenses

Selling, general and administrative

30,036

45,007

$

66,360

$

86,027

Research and development

10,186

10,626

$

20,601

$

22,267

Restructuring costs

636

—

14,324

—

Total operating expenses

40,858

55,633

101,285

108,294

Loss from operations

(11,962)

(4,893)

(28,516)

(4,535)

Other expense

Interest expense, net

212

240

$

246

$

96

Other expense, net

117

1,689

$

590

1,884

Loss before income tax benefit

(12,291)

(6,822)

(29,352)

(6,515)

Income tax benefit

(3,359)

(417)

(5,597)

(262)

Net loss

$

(8,932)

$

(6,405)

$

(23,755)

$

(6,253)

Net loss per share - Basic

$

(0.50)

$

(0.37)

$

(1.34)

$

(0.36)

Net loss per share - Diluted

$

(0.50)

$

(0.37)

$

(1.34)

$

(0.36)

Weighted average shares - Basic

17,747,739

17,333,996

17,710,014

17,323,479

Weighted average shares - Diluted

17,747,739

17,333,996

17,710,014

17,323,479

FARO TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

June 30, 2020 (unaudited)

December 31,

2019

ASSETS

Current assets:

Cash and cash equivalents

$

173,700

$

133,634

Short-term investments

—

24,870

Accounts receivable, net

48,113

76,162

Inventories, net

53,425

58,554

Prepaid expenses and other current assets

20,795

28,996

Total current assets

296,033

322,216

Non-current assets:

Property, plant and equipment, net

22,507

26,954

Operating lease right-of-use asset

14,684

18,418

Goodwill

49,184

49,704

Intangible assets, net

12,744

14,471

Service and sales demonstration inventory, net

34,130

33,349

Deferred income tax assets, net

21,153

18,766

Other long-term assets

2,872

2,964

Total assets

$

453,307

$

486,842

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

12,067

$

13,718

Accrued liabilities

42,975

38,072

Income taxes payable

1,258

5,182

Current portion of unearned service revenues

36,480

39,211

Customer deposits

3,451

3,108

Lease liability

4,904

6,674

Total current liabilities

101,135

105,965

Unearned service revenues - less current portion

19,582

20,578

Lease liability - less current portion

11,651

13,698

Deferred income tax liabilities

285

357

Income taxes payable - less current portion

12,058

13,177

Other long-term liabilities

35

1,075

Total liabilities

144,746

154,850

Shareholders' equity:

Common stock - par value $.001, 50,000,000 shares authorized; 19,116,870 and 18,988,379 issued, respectively; 17,718,179 and 17,576,618 outstanding, respectively

19

19

Additional paid-in capital

273,325

267,868

Retained earnings

89,124

112,879

Accumulated other comprehensive loss

(22,865)

(17,399)

Common stock in treasury, at cost; 1,398,691 and 1,411,761 shares, respectively

(31,042)

(31,375)

Total shareholders' equity

308,561

331,992

Total liabilities and shareholders' equity

$

453,307

$

486,842

FARO TECHNOLOGIES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)

Six Months Ended

(in thousands)

June 30, 2020

June 30, 2019

Cash flows from:

Operating activities:

Net loss

$

(23,755)

$

(6,253)

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

Depreciation and amortization

7,209

9,322

Stock-based compensation

4,345

5,316

Provisions for bad debts, net of recoveries

680

2

Loss on disposal of assets

299

348

Provision for excess and obsolete inventory

479

1,481

Deferred income tax benefit

(2,404)

(11)

Impairment charge on equity method investment

—

1,535

Change in operating assets and liabilities:

Decrease (Increase) in:

Accounts receivable

26,180

14,442

Inventories

892

(9,687)

Prepaid expenses and other current assets

11,347

2,282

Increase (Decrease) in:

Accounts payable and accrued liabilities

(1,395)

(1,466)

Income taxes payable

(5,058)

(3,119)

Customer deposits

384

(446)

Unearned service revenues

(3,139)

3,998

Net cash provided by operating activities

16,064

17,744

Investing activities:

Proceeds from sale of investments

25,000

—

Purchases of property and equipment

(1,533)

(3,693)

Proceeds from asset sales

643

—

Payments for intangible assets

(673)

(1,233)

Net cash provided by (used in) investing activities

23,437

(4,926)

Financing activities:

Payments on finance leases

(160)

(187)

Payments of contingent consideration for acquisitions

—

(250)

Payments for taxes related to net share settlement of equity awards

(2,409)

(1,440)

Proceeds from issuance of stock related to stock option exercises

3,854

735

Net cash provided by (used in) financing activities

1,285

(1,142)

Effect of exchange rate changes on cash and cash equivalents

(720)

145

Increase in cash and cash equivalents

40,066

11,821

Cash and cash equivalents, beginning of period

133,634

108,783

Cash and cash equivalents, end of period

$

173,700

$

120,604

FARO TECHNOLOGIES, INC. AND SUBSIDIARIESRECONCILIATION OF GAAP TO NON-GAAP(UNAUDITED)

Three Months Ended June 30,

Six Months Ended June 30,

(dollars in thousands, except per share data)

2020

2019

2020

2019

Total sales, as reported

$

60,564

$

93,491

$

140,079

$

187,108

GSA sales adjustment (1)

608

5,805

608

5,840

Non-GAAP total sales

$

61,172

$

99,296

$

140,687

$

192,948

Gross profit, as reported

$

28,896

$

50,740

$

72,769

$

103,759

GSA sales adjustment (1)

608

5,805

608

5,840

Stock-based compensation (2)

93

268

364

501

Non-GAAP adjustments to gross profit

701

6,073

972

6,341

Non-GAAP gross profit

$

29,597

$

56,813

$

73,741

$

110,100

Gross margin, as reported

47.7

%

54.3

%

51.9

%

55.5

%

Non-GAAP gross margin

48.4

%

57.2

%

52.4

%

57.1

%

Operating expenses, as reported

$

40,858

$

55,633

$

101,285

$

108,294

Advisory fees for GSA Matter (3)

—

(653)

—

(1,244)

Stock-based compensation (2)

(2,076)

(2,484)

(3,981)

(4,815)

Restructuring costs (4)

(636)

—

(14,324)

—

Executive sign-on bonuses & relocation costs

—

(575)

—

(575)

Purchase accounting intangible amortization

(447)

(889)

(972)

(1,741)

Non-GAAP adjustments to operating expenses

(3,159)

(4,601)

(19,277)

(8,375)

Non-GAAP operating expenses

$

37,699

$

51,032

$

82,008

$

99,919

Loss from operations, as reported

$

(11,962)

$

(4,893)

$

(28,516)

$

(4,535)

Non-GAAP adjustments to gross profit

701

6,073

972

6,341

Non-GAAP adjustments to operating expenses

3,159

4,601

19,277

8,375

Non-GAAP (loss) income from operations

$

(8,102)

$

5,781

$

(8,267)

$

10,181

Other expense, net, as reported

$

329

$

1,929

$

836

$

1,980

Interest expense increase due to GSA sales adjustment (1)

(249)

(442)

(398)

(487)

Present4D impairment (5)

—

(1,535)

—

(1,535)

Non-GAAP adjustments to other expense, net

(249)

(1,977)

(398)

(2,022)

Non-GAAP other expense (income), net

$

80

$

(48)

$

438

$

(42)

Net loss, as reported

$

(8,932)

$

(6,405)

$

(23,755)

$

(6,253)

Non-GAAP adjustments to gross profit

701

6,073

972

6,341

Non-GAAP adjustments to operating expenses

3,159

4,601

19,277

8,375

Non-GAAP adjustments to other expense, net

249

1,977

398

2,022

Income tax effect of non-GAAP adjustments

(1,505)

(2,360)

(3,638)

(3,032)

Other tax adjustments (6)

—

864

—

864

Non-GAAP net (loss) income

$

(6,328)

$

4,750

$

(6,746)

$

8,317

Net loss per share - Diluted, as reported

$

(0.50)

$

(0.37)

$

(1.34)

$

(0.36)

GSA sales adjustment (1)

0.03

0.33

0.03

0.33

Stock-based compensation (2)

0.12

0.16

0.24

0.30

Advisory fees for GSA Matter (3)

—

0.04

—

0.08

Restructuring costs (4)

0.04

—

0.82

—

Executive sign-on bonuses & relocation costs

—

0.03

—

0.03

Purchase accounting intangible amortization

0.03

0.05

0.06

0.10

Interest expense increase due to GSA sales adjustment (1)

0.01

0.03

0.02

0.03

Present4D impairment (5)

—

0.09

—

0.09

Income tax effect of non-GAAP adjustments

(0.09)

(0.14)

(0.21)

(0.18)

Other tax adjustments (6)

—

0.05

—

0.05

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

$

(0.36)

$

0.27

$

(0.38)

$

0.47

(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"). We retained outside legal counsel and forensic accountants to conduct a comprehensive review of our pricing and other practices under the Contracts (the "Review"). During the six months ended June 30, 2020 and June 30, 2019, we reduced our total sales by $0.6million and $5.8 million, respectively, (the "GSA sales adjustment") and recorded imputed interest expense of $0.2 million and $0.5 million, respectively, 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)

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 six months ended June 30, 2019.

(4)

On February 14, 2020, our Board of Directors approved a global restructuring plan (the "Restructuring Plan"), which is intended to support our strategic plan in an effort to improve operating performance and ensure that we are appropriatelystructured and resourced to deliver increased and sustainable value to our shareholders and customers. In connectionwith the Restructuring Plan, we recorded a pre-tax charge of approximately $14.3 million during the first half of 2020 primarily consisting of severance and related benefits.

(5)

On April 27, 2018, we invested $1.8 million in present4D GmbH ("present4D"), a software solutions provider for professionalvirtual reality presentations and training environments, in the form of an equity capital contribution. During the second quarterof 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 inour reserve for uncertain tax positions due to a change in our judgment on the recognition of a tax position.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIESRECONCILIATION OF NET (LOSS) INCOME TO EBITDA AND ADJUSTED EBITDA(UNAUDITED)

Three Months Ended June 30,

Six Months Ended June 30,

(in thousands)

2020

2019

2020

2019

Net loss

$

(8,932)

$

(6,405)

$

(23,755)

$

(6,253)

Interest expense, net

212

240

246

96

Income tax benefit

(3,359)

(417)

(5,597)

(262)

Depreciation and amortization

3,520

4,573

7,279

9,322

EBITDA

(8,559)

(2,009)

(21,827)

2,903

Loss on foreign currency transactions

117

154

590

349

Stock-based compensation

2,169

2,752

4,345

5,316

GSA sales adjustment (1)

608

5,805

608

5,840

Advisory fees for GSA Matter (2)

—

653

—

1,244

Executive sign-on bonuses & relocation costs

—

575

—

575

Present4D impairment (3)

—

1,535

—

1,535

Restructuring costs (4)

636

—

14,324

—

Adjusted EBITDA

$

(5,029)

$

9,465

$

(1,960)

$

17,762

Adjusted EBITDA margin (5)

(8.2)

%

9.5

%

(1.4)

%

9.2

%

(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"). During the six months ended June 30, 2020 and June 30, 2019, we reduced our total sales by $0.6 million and $5.8 million, respectively, (the "GSA sales adjustment") and recorded imputed interest expenseof $0.2 million and $0.5 million, respectively, related to the GSA Matter.

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 six months ended June 30, 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.

(4)

On February 14, 2020, our Board of Directors approved a global restructuring plan (the "Restructuring Plan"), which is intended to support our strategic plan in an effort to improve operating performance and ensure that we are appropriately structured and resourced to deliver increased and sustainable value to our shareholders and customers. In connection with the Restructuring Plan, we recorded a pre-tax charge of approximately $14.3 million during the first half of 2020 primarily consisting of severance and related benefits.

(5)

Calculated as Adjusted EBITDA as a percentage of Non-GAAP total sales, which adjusts for the GSA sales adjustment.