FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

Three Months Ended

Twelve Months Ended

(in thousands, except share and per share data)

December 31,2020

December 31,2019

December 31,2020

December 31,2019

Sales

Product

$

71,721

$

80,267

$

218,587

$

289,679

Service

21,232

23,874

85,181

92,086

Total sales

92,953

104,141

303,768

381,765

Cost of Sales

Product

32,052

47,706

98,864

133,246

Service

10,121

12,834

45,057

50,387

Total cost of sales

42,173

60,540

143,921

183,633

Gross Profit

50,780

43,601

159,847

198,132

Operating Expenses

Selling, general and administrative

35,304

45,469

131,827

177,378

Research and development

11,541

11,127

42,896

44,175

Restructuring costs

1,243

—

15,806

—

Impairment loss

—

35,213

—

35,213

Total operating expenses

48,088

91,809

190,529

256,766

Income (loss) from operations

2,692

(48,208)

(30,682)

(58,634)

Other (income) expense

Interest income

(747)

(155)

(340)

(714)

Other expense (income), net

97

(85)

431

2,313

Interest expense

—

150

—

781

Income (loss) before income tax expense (benefit)

3,342

(48,118)

(30,773)

(61,014)

Income tax (benefit) expense

(24,066)

1,577

(31,402)

1,133

Net income (loss)

$

27,408

$

(49,695)

$

629

$

(62,147)

Net income (loss) per share - Basic

$

1.53

$

(2.85)

$

0.04

$

(3.58)

Net income (loss) per share - Diluted

$

1.52

$

(2.85)

$

0.04

$

(3.58)

Weighted average shares - Basic

17,872,307

17,427,143

17,769,958

17,383,415

Weighted average shares - Diluted

18,064,754

17,427,143

17,926,324

17,383,415

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share data)

December 31,2020

December 31,2019

ASSETS

Current assets:

Cash and cash equivalents

$

185,633

$

133,634

Short-term investments

—

24,870

Accounts receivable, net

64,616

76,162

Inventories, net

47,391

58,554

Prepaid expenses and other current assets

26,295

28,996

Total current assets

323,935

322,216

Non-current assets:

Property, plant and equipment, net

23,091

26,954

Operating lease right-of-use asset

26,107

18,418

Goodwill

57,541

49,704

Intangible assets, net

13,301

14,471

Service and sales demonstration inventory, net

31,831

33,349

Deferred income tax assets, net

47,450

18,766

Other long-term assets

2,336

2,964

Total assets

$

525,592

$

486,842

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:

Accounts payable

$

14,121

$

13,718

Accrued liabilities

42,593

38,072

Income taxes payable

3,442

5,182

Current portion of unearned service revenues

39,149

39,211

Customer deposits

2,807

3,108

Lease liability

5,835

6,674

Total current liabilities

107,947

105,965

Unearned service revenues - less current portion

21,757

20,578

Lease liability - less current portion

22,131

13,698

Deferred income tax liabilities

787

357

Income taxes payable - less current portion

11,583

13,177

Other long-term liabilities

1,084

1,075

Total liabilities

165,289

154,850

Shareholders' equity:

Common stock - par value $0.001, 50,000,000 shares authorized; 19,382,430 and 18,988,379  issued; 17,983,989 and 17,576,618 outstanding, respectively

19

19

Additional paid-in capital

287,979

267,868

Retained earnings

113,508

112,879

Accumulated other comprehensive loss

(10,160)

(17,399)

Common stock in treasury, at cost - 1,411,761 shares and 1,411,761, respectively

(31,043)

(31,375)

Total shareholders' equity

360,303

331,992

Total liabilities and shareholders' equity

$

525,592

$

486,842

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

Years Ended December 31,

(in thousands)

2020

2019

CASH FLOWS FROM:

OPERATING ACTIVITIES:

Net income (loss)

$

629

$

(62,147)

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization

14,239

18,516

Compensation for stock options and restricted stock units

8,314

11,071

Provision for bad debts (net of recoveries)

440

2,090

Loss on disposal of assets

383

2,639

Provision for excess and obsolete inventory

1,349

16,886

Impairment of goodwill

—

21,233

Impairment of acquired intangibles

—

10,548

Impairment of loan to affiliate

—

549

Deferred income tax benefit

(28,444)

(6,304)

Change in operating assets and liabilities:

(Increase) decrease in:

Accounts receivable, net

12,346

10,406

Inventories

10,343

(4,136)

Prepaid expenses and other assets

3,862

1,188

Increase (decrease) in:

Accounts payable and accrued liabilities

2,390

(2,518)

Income taxes payable

(3,357)

1,041

Customer deposits

(374)

(30)

Unearned service revenues

(726)

11,436

Net cash provided by operating activities

21,394

32,468

INVESTING ACTIVITIES:

Purchases of investments

—

(50,000)

Proceeds from sale of investments

25,000

50,000

Purchases of property and equipment

(4,774)

(6,675)

Payments for internally capitalized patents

(1,298)

(2,118)

Acquisition of business, net of cash received

(6,036)

—

Other

1,015

(549)

Net cash provided by (used in) investing activities

13,907

(9,342)

FINANCING ACTIVITIES:

Payments on capital leases

(338)

(358)

Payments of contingent consideration for acquisitions

(733)

(3,101)

Payments for taxes related to net share settlement of equity awards

(2,602)

(2,199)

Proceeds from issuance of stock related to stock option exercises

14,731

7,901

Net cash provided by financing activities

11,058

2,243

EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS

5,640

(518)

INCREASE IN CASH AND CASH EQUIVALENTS

51,999

24,851

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

133,634

108,783

CASH AND CASH EQUIVALENTS, END OF YEAR

$

185,633

$

133,634

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)

2020

2019

2020

2019

Total sales, as reported

$

92,953

$

104,141

$

303,768

$

381,765

GSA sales adjustment (1)

—

—

608

5,840

Non-GAAP total sales

$

92,953

$

104,141

$

304,376

$

387,605

Gross profit, as reported

$

50,780

$

43,601

$

159,847

$

198,132

GSA sales adjustment (1)

—

—

608

5,840

Stock-based compensation (2)

211

231

702

1,001

Inventory reserve charge (3)

—

12,800

—

12,800

Product recall charge (4)

—

1,328

—

1,328

Non-GAAP adjustments to gross profit

211

14,359

1,310

20,969

Non-GAAP gross profit

$

50,991

$

57,960

$

161,157

$

219,101

Gross margin, as reported

54.6

%

41.9

%

52.6

%

51.9

%

Non-GAAP gross margin

54.9

%

55.7

%

52.9

%

56.5

%

Operating expenses, as reported

$

48,088

$

91,809

$

190,529

$

256,766

Advisory fees for GSA Matter (5)

—

—

—

(1,244)

Stock-based compensation (2)

(1,675)

(2,137)

(7,612)

(10,068)

Restructuring costs (6)

(1,243)

—

(15,806)

—

Other product charge (4)

(1,644)

—

(1,644)

—

Executive severance costs

—

—

—

(1,217)

Executive sign-on bonuses & relocation costs

—

(215)

—

(1,060)

Strategic impairments and write-offs (7)

—

(35,213)

—

(35,213)

Purchase accounting intangible amortization

(604)

(974)

(2,069)

(3,639)

Non-GAAP adjustments to operating expenses

(5,166)

(38,539)

(27,131)

(52,441)

Non-GAAP operating expenses

$

42,922

$

53,270

$

163,398

$

204,325

Income (loss) from operations, as reported

$

2,692

$

(48,208)

$

(30,682)

$

(58,634)

Non-GAAP adjustments to gross profit

211

14,359

1,310

20,969

Non-GAAP adjustments to operating expenses

5,166

38,539

27,131

52,441

Non-GAAP income (loss) from operations

$

8,069

$

4,690

$

(2,241)

$

14,776

Other (income) expense, net, as reported

$

(650)

$

(90)

$

91

$

2,380

Interest adjustment due to GSA sales adjustment (1)

727

(147)

168

(779)

Contingent consideration fair value adjustment

—

926

—

926

Present4D impairment (8)

—

(617)

—

(2,152)

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

727

162

168

(2,005)

Non-GAAP other expense, net

$

77

$

72

$

259

$

375

Net income (loss), as reported

$

27,408

$

(49,695)

$

629

$

(62,147)

Non-GAAP adjustments to gross profit

211

14,359

1,310

20,969

Non-GAAP adjustments to operating expenses

5,166

38,539

27,131

52,441

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

(727)

(162)

(168)

2,005

Income tax effect of non-GAAP adjustments

(2,305)

(6,180)

(7,235)

(10,665)

Other tax adjustments (9)

(23,501)

6,209

(23,501)

8,628

Non-GAAP net income (loss)

$

6,252

$

3,070

$

(1,834)

$

11,231

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

$

1.52

$

(2.85)

$

0.04

$

(3.58)

GSA sales adjustment (1)

—

—

0.03

0.34

Stock-based compensation (2)

0.11

0.14

0.46

0.64

Product recall and other product charges (4)

0.09

0.08

0.09

0.08

Inventory reserve charge (3)

—

0.73

—

0.73

Advisory fees for GSA Matter (5)

—

—

—

0.07

Restructuring costs (6)

0.07

—

0.88

—

Executive severance costs

—

—

—

0.07

Executive sign-on bonuses & relocation costs

—

0.01

—

0.06

Strategic impairments and write-offs (7)

—

2.02

—

2.03

Purchase accounting intangible amortization

0.03

0.06

0.12

0.21

Interest expense increase due to GSA sales adjustment (1)

(0.04)

0.01

(0.01)

0.04

Contingent consideration fair value adjustment

—

(0.05)

—

(0.05)

Present4D impairment (8)

—

0.03

—

0.12

Income tax effect of non-GAAP adjustments

(0.13)

(0.36)

(0.40)

(0.61)

Other tax adjustments (9)

(1.30)

0.36

(1.31)

0.50

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

$

0.35

$

0.18

$

(0.10)

$

0.65

(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 twelve months ended December 31, 2019, we reduced our total sales $5.8 million (the "GSA sales adjustment") 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. During the twelve months ended December 31, 2020, we reduced our total sales $0.6 million. During the first nine months of 2020 we recorded an incremental $0.6 million of imputed interest related to the estimated cumulative sales adjustment and in the fourth quarter of 2020 we determined that an adjustment to reduce imputed interest by $0.7 million was required.

(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 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. During the fourth quarter of 2020, we recognized a charge related to the replacement of a prior generation product that was exhibiting lower than desired reliability as part of our ongoing focus on customer satisfaction.

(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) 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 $15.8 million during the twelve months ended December 31, 2020 primarily consisting of severance and related benefits.

(7) 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.

(8) 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.

(9) The 2019 tax adjustments were 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. The 2020 tax adjustments were driven primarily by the establishment of deferred tax assets in relation to intra-entity transfers of certain intellectual property rights in December 2020.

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES

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

(UNAUDITED)

Three Months Ended December 31,

Twelve Months Ended December 31,

(in thousands)

2020

2019

2020

2019

Net income (loss)

$

27,408

$

(49,695)

$

629

$

(62,147)

Interest (income) expense, net

(747)

(5)

(340)

67

Income tax benefit

(24,066)

1,577

(31,402)

1,133

Depreciation and amortization

3,608

4,428

14,239

18,548

EBITDA

6,203

(43,695)

(16,874)

(42,399)

Loss (Gain) on foreign currency transactions

97

224

431

1,087

Stock-based compensation

1,886

2,368

8,314

11,071

GSA sales adjustment (1)

—

—

608

5,840

Advisory fees for GSA Matter (2)

—

—

—

1,244

Inventory reserve charge (3)

—

12,800

—

12,800

Product recall and other product charges (4)

1,644

1,328

1,644

1,328

Executive severance costs

—

215

—

1,432

Executive sign-on bonuses & relocation costs

—

—

—

845

Present4D impairment (5)

—

617

—

2,152

Restructuring costs (6)

1,243

—

15,806

—

Strategic impairments and write-offs (7)

—

35,213

—

35,213

Contingent consideration fair value adjustment

—

(926)

—

(926)

Adjusted EBITDA

$

11,073

$

8,144

$

9,929

$

29,687

Adjusted EBITDA margin (8)

11.9

%

7.8

%

3.3

%

7.7

%

(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 twelve months ended December 31, 2020 and December 31, 2019, we reduced our total sales by $0.6 million and $5.8 million, respectively (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 2019.

(3) 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. During the fourth quarter of 2020, we recognized a charge related to the replacement of a prior generation product that was exhibiting lower than desired reliability as part of our ongoing focus on customer satisfaction. 

(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. 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.

(6) 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 $15.8 million during the twelve months ended December 31, 2020 primarily consisting of severance and related benefits.

(7) 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.

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