FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

RECONCILIATION OF GAAP TO NON-GAAP

(UNAUDITED)

Three Months Ended December 31,

Twelve Months Ended December 31,

(dollars in thousands, except per share data)

2019

2018

2019

2018

Total sales, as reported

$

104,141

$

112,844

$

381,765

$

403,627

GSA sales adjustment ⁽¹⁾

—

4,789

5,840

4,789

Non-GAAP total sales

$

104,141

$

117,633

$

387,605

$

408,416

Gross profit, as reported

$

43,601

$

62,840

$

198,132

$

221,553

GSA sales adjustment ⁽¹⁾

—

4,789

5,840

4,789

Stock-based compensation ⁽²⁾

231

208

1,001

828

Inventory reserve charge ⁽³⁾

12,800

—

12,800

4,734

Product recall charge ⁽⁴⁾

1,328

—

1,328

—

Non-GAAP adjustments to gross profit

14,359

4,997

20,969

10,351

Non-GAAP gross profit

$

57,960

$

67,837

$

219,101

$

231,904

Gross margin, as reported

41.9

%

55.7

%

51.9

%

54.9

%

Non-GAAP gross margin

55.7

%

57.7

%

56.5

%

56.8

%

Operating expenses, as reported

$

91,809

$

56,994

$

256,766

$

215,799

Advisory fees for GSA Matter ⁽⁵⁾

—

—

(1,244)

—

Stock-based compensation ⁽²⁾

(2,137)

(1,696)

(10,068)

(6,793)

Executive severance costs

—

—

(1,217)

—

Executive sign-on bonuses & relocation costs

(215)

—

(1,060)

—

Strategic impairments and write-offs ⁽⁶⁾

(35,213)

—

(35,213)

—

Purchase accounting intangible amortization

(974)

(983)

(3,639)

(3,584)

Non-GAAP adjustments to operating expenses

(38,539)

(2,679)

(52,441)

(10,377)

Non-GAAP operating expenses

$

53,270

$

54,315

$

204,325

$

205,422

(Loss) Income from operations, as reported

$

(48,208)

$

5,846

$

(58,634)

$

5,754

Non-GAAP adjustments to gross profit

14,359

4,997

20,969

10,351

Non-GAAP adjustments to operating expenses

38,539

2,679

52,441

10,377

Non-GAAP income from operations

$

4,690

$

13,522

$

14,776

$

26,482

Other expense (income), net, as reported

$

(90)

$

533

$

2,380

$

1,196

Interest expense increase due to GSA sales adjustment ⁽¹⁾

(147)

(478)

(779)

(478)

Contingent consideration fair value adjustment

926

—

926

—

Present4D impairment ⁽⁷⁾

(617)

—

(2,152)

—

Non-GAAP adjustments to other expense (income), net

162

(478)

(2,005)

(478)

Non-GAAP other expense, net

$

72

$

55

$

375

$

718

Net (loss) income, as reported

$

(49,695)

$

5,758

$

(62,147)

$

4,930

Non-GAAP adjustments to gross profit

14,359

4,997

20,969

10,351

Non-GAAP adjustments to operating expenses

38,539

2,679

52,441

10,377

Non-GAAP adjustments to other expense (income), net

(162)

478

2,005

478

Income tax effect of non-GAAP adjustments

(6,180)

(2,137)

(10,665)

(4,263)

Other tax adjustments ⁽⁸⁾

6,209

(1,000)

8,628

(1,000)

Non-GAAP net income

$

3,070

$

10,775

$

11,231

$

20,873

Net (loss) income per share - Diluted, as reported

$

(2.85)

$

0.33

$

(3.58)

$

0.29

GSA sales adjustment ⁽¹⁾

—

0.27

0.34

0.27

Stock-based compensation ⁽²⁾

0.14

0.11

0.64

0.44

Product recall charge ⁽⁴⁾

0.08

—

0.08

—

Inventory reserve charge ⁽³⁾

0.73

—

0.73

0.27

Advisory fees for GSA Matter ⁽⁵⁾

—

—

0.07

—

Executive severance costs

—

—

0.07

—

Executive sign-on bonuses & relocation costs

0.01

—

0.06

—

Strategic impairments and write-offs ⁽⁶⁾

2.02

—

2.03

—

Purchase accounting intangible amortization

0.06

0.06

0.21

0.21

Interest expense increase due to GSA sales
adjustment ⁽¹⁾

0.01

0.03

0.04

0.03

Contingent consideration fair value adjustment

(0.05)

—

(0.05)

—

Present4D impairment ⁽⁷⁾

0.03

—

0.12

—

Income tax effect of non-GAAP adjustments

(0.36)

(0.12)

(0.61)

(0.25)

Other tax adjustments ⁽⁸⁾

0.36

(0.06)

0.50

(0.06)

Non-GAAP net income per share - Diluted

$

0.18

$

0.62

$

0.65

$

1.20

(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. 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 and recorded imputed interest expense of $0.1 million and $0.8 million related to the GSA Matter for the three and twelve months ended December 31, 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 $3.5 million for the twelve months ended December 31, 2019.

(3)

During the third quarter of 2018, we performed an analysis of our inventory reserves in connection with our new product introductions and acquisitions and recorded a charge of $4.7 million, 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. During the fourth quarter of 2019, we recorded a charge of $12.8 million, increasing our reserve for excess and obsolete inventory, based on our analysis of our inventory reserves in connection with our strategy to simplify our hardware product portfolio and cease selling certain products.     

(4)

During the fourth quarter of 2019, we accrued a recall charge for labor and parts related to a small portion of previously sold measurement devices that were outside the manufacturer's standard warranty due to safety concerns.

(5)

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 2019.

(6)

Because the historical and projected future performance of certain of our recently acquired operations were lower than our expectations, and due to changes in our go-forward strategy in connection with our new strategic plan, we incurred an impairment loss of $35.2 million during the fourth quarter of 2019, which included $21.2 million in goodwill, $10.5 million in intangible assets associated with recent acquisitions, $1.4 million in intangible assets related to capitalized patents and $2.1 million in other asset write-downs.

(7)

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. In July 2019, we originated a $0.5 million note with present4D, which we may convert into additional equity in present4D at our discretion in the event of a default. As we no longer intend to provide future support to present4D or obtain the aforementioned additional share capital in the future and no longer intend to use the perpetual and royalty-free, non-exclusive, transferable and sublicensable license granted to us to use present4D's software, we wrote off the investment in, and our note receivable with, present4D and recognized a total loss of $2.2 million during the twelve months ended December 31, 2019, which is included in Other expense, net.

(8)

Driven primarily by return-to-provision adjustments identified in the preparation of our 2018 U.S. tax return, an increase in our valuation allowance primarily related to foreign net operating loss carryforwards that, in the judgment of management, were not more likely than not to be realized, and changes in our reserve for uncertain tax positions due to a change in our judgment on the recognition of a tax position.