FARO Announces Third Quarter Financial Results

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)	2020			2019			2020			2019
Total sales, as reported	$	70,736		$	90,516		$	210,815		$	277,624
GSA sales adjustment⁽¹⁾	—			—			608			5,840
Non-GAAP total sales	$	70,736		$	90,516		$	211,423		$	283,464

Gross profit, as reported	$	36,298		$	50,772		$	109,067		$	154,531
GSA sales adjustment ⁽¹⁾	—			—			608			5,840
Stock-based compensation ⁽²⁾	127			270			491			770
Non-GAAP adjustments to gross profit	127			270			1,099			6,610
Non-GAAP gross profit	$	36,425		$	51,042		$	110,166		$	161,141
Gross margin, as reported	51.3		%	56.1		%	51.7		%	55.7		%
Non-GAAP gross margin	51.5		%	56.4		%	52.1		%	56.8		%

Operating expenses, as reported	$	41,156		$	56,663		$	142,441		$	164,957
Advisory fees for GSA Matter ⁽³⁾	—			—			—			(1,244)
Stock-based compensation ⁽²⁾	(1,957)			(3,117)			(5,937)			(7,933)
Restructuring costs ⁽⁴⁾	(239)			—			(14,563)			—
Executive severance costs	—			(1,217)			—			(1,217)
Executive sign-on bonuses & relocation costs	—			(270)			—			(845)
Purchase accounting intangible amortization	(493)			(924)			(1,465)			(2,665)
Non-GAAP adjustments to operating expenses	(2,689)			(5,528)			(21,965)			(13,904)
Non-GAAP operating expenses	$	38,467		$	51,135		$	120,476		$	151,053

Loss from operations, as reported	$	(4,858)		$	(5,891)		$	(33,374)		$	(10,426)
Non-GAAP adjustments to gross profit	127			270			1,099			6,610
Non-GAAP adjustments to operating expenses	2,689			5,528			21,965			13,904
Non-GAAP (loss) income from operations	$	(2,042)		$	(93)		$	(10,310)		$	10,088

Other (income) expense, net, as reported	$	(95)		$	490		$	741		$	2,470
Interest expense increase due to GSA sales adjustment ⁽¹⁾	(161)			(145)			(559)			(632)
Present4D impairment ⁽⁵⁾	—			—			—			(1,535)
Non-GAAP adjustments to other expense, net	(161)			(145)			(559)			(2,167)
Non-GAAP other (income) expense, net	$	(256)		$	345		$	182		$	303

Net loss, as reported	$	(3,024)		$	(6,199)		$	(26,779)		$	(12,452)
Non-GAAP adjustments to gross profit	127			270			1,099			6,610
Non-GAAP adjustments to operating expenses	2,689			5,528			21,965			13,904
Non-GAAP adjustments to other expense, net	161			145			559			2,167
Income tax effect of non-GAAP adjustments	(1,292)			(1,452)			(4,930)			(4,484)
Other tax adjustments ⁽⁶⁾	—			1,555			—			2,419
Non-GAAP net (loss) income	$	(1,339)		$	(153)		$	(8,086)		$	8,164

Net loss per share - Diluted, as reported	$	(0.17)		$	(0.36)		$	(1.51)		$	(0.72)
GSA sales adjustment ⁽¹⁾	—			0.00			0.03			0.34
Stock-based compensation ⁽²⁾	0.12			0.19			0.36			0.50
Advisory fees for GSA Matter ⁽³⁾	—			—			—			0.07
Restructuring costs ⁽⁴⁾	0.01			—			0.82			—
Executive severance costs	—			0.07			—			0.07
Executive sign-on bonuses & relocation costs	—			0.02			—			0.05
Purchase accounting intangible amortization	0.03			0.05			0.08			0.15
Interest expense increase due to GSA sales adjustment ⁽¹⁾	0.01			0.01			0.03			0.04
Present4D impairment ⁽⁵⁾	—			—			—			0.09
Income tax effect of non-GAAP adjustments	(0.08)			(0.08)			(0.27)			(0.26)
Other tax adjustments ⁽⁶⁾	—			0.09			—			0.14
Non-GAAP net (loss) income per share - Diluted	$	(0.08)		$	(0.01)		$	(0.46)		$	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 nine months ended September 30, 2020 and September 30, 2019, we reduced our total sales by $0.6 million and $5.8 million, respectively, (the "GSA sales adjustment") and recorded imputed interest expense of $0.6 million and $0.6 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 nine months ended September 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 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 $14.6 million during the first nine months 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 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.

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