⁽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.