Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172020
OR
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-23081
  
FARO TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
  

Florida59-3157093
(State or other Jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification No.)
250 Technology Park,Lake Mary, FloridaFlorida32746
(Address of Principal Executive Offices)(Zip Code)
(407) 333-9911
(Registrant’s Telephone Number, including Area Code)
   

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $.001FARONasdaq Global Select Market
Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” “and emergingand “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Large accelerated filerxAccelerated filero
Non-accelerated filero☐(Do not check if a smaller reporting company)Smaller reporting companyo☐
Emerging growth companyo☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
YES  ¨    NO  Yes ☐ No  x

There were 16,711,15217,782,205 shares of the registrant’s common stock outstanding as of October 24, 2017.
July 31, 2020.



Table of Contents
FARO TECHNOLOGIES, INC.
Quarterly Report on Form 10-Q
Quarter Ended SeptemberJune 30, 20172020
INDEX
 
PAGE
PART I.
PAGE
PART I.Item 1.
Item 1.
Financial Statements
a)
3
b)
4
c)
5
d)
6
e)
7

f)
78
Item 2.
2025
Item 3.
3336
Item 4.
3437
PART II.
Item 1.
3538
Item 1A.
3538
Item 2.
3539
Item 6.
3640
3741



2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)September 30,
2017
(unaudited)		 December 31,
2016
(in thousands, except share and per share data)(in thousands, except share and per share data)June 30, 2020 (unaudited)December 31, 2019
ASSETS   ASSETS
Current assets:   Current assets:
Cash and cash equivalents$129,841
 $106,169
Cash and cash equivalents$173,700  $133,634  
Short-term investments10,970
 42,942
Short-term investments—  24,870  
Accounts receivable, net60,449
 61,364
Accounts receivable, net48,113  76,162  
Inventories, net59,044
 51,886
Inventories, net53,425  58,554  
Prepaid expenses and other current assets20,919
 16,304
Prepaid expenses and other current assets20,795  28,996  
Total current assets281,223
 278,665
Total current assets296,033  322,216  
Property and equipment:   
Machinery and equipment66,049
 57,063
Furniture and fixtures6,863
 6,099
Leasehold improvements19,588
 18,778
Property and equipment, at cost92,500
 81,940
Less: accumulated depreciation and amortization(60,189) (50,262)
Property and equipment, net32,311
 31,678
Non-current assets:Non-current assets:
Property, plant and equipment, netProperty, plant and equipment, net22,507  26,954  
Operating lease right-of-use assetOperating lease right-of-use asset14,684  18,418  
Goodwill52,567
 46,744
Goodwill49,184  49,704  
Intangible assets, net22,983
 22,279
Intangible assets, net12,744  14,471  
Service and sales demonstration inventory, net35,250
 29,136
Service and sales demonstration inventory, net34,130  33,349  
Deferred income tax assets, net14,498
 14,307
Deferred income tax assets, net21,153  18,766  
Other long-term assets1,049
 905
Other long-term assets2,872  2,964  
Total assets$439,881
 $423,714
Total assets$453,307  $486,842  
LIABILITIES AND SHAREHOLDERS’ EQUITY   LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:   Current liabilities:
Accounts payable$11,964
 $11,126
Accounts payable$12,067  $13,718  
Accrued liabilities22,507
 24,572
Accrued liabilities42,975  38,072  
Income taxes payable—
 618
Income taxes payable1,258  5,182  
Current portion of unearned service revenues29,080
 27,422
Current portion of unearned service revenues36,480  39,211  
Customer deposits3,065
 2,872
Customer deposits3,451  3,108  
Lease liabilityLease liability4,904  6,674  
Total current liabilities66,616
 66,610
Total current liabilities101,135  105,965  
Unearned service revenues - less current portion12,665
 13,813
Unearned service revenues - less current portion19,582  20,578  
Lease liability - less current portionLease liability - less current portion11,651  13,698  
Deferred income tax liabilities1,683
 1,409
Deferred income tax liabilities285  357  
Income taxes payable - less current portionIncome taxes payable - less current portion12,058  13,177  
Other long-term liabilities2,191
 2,225
Other long-term liabilities35  1,075  
Total liabilities83,155
 84,057
Total liabilities144,746  154,850  
Commitments and contingencies - See Note 16
 
Commitments and contingencies - See Note 13Commitments and contingencies - See Note 13
Shareholders’ equity:   Shareholders’ equity:
Common stock - par value $.001, 50,000,000 shares authorized; 18,197,628 and 18,170,267 issued, respectively; 16,711,152 and 16,680,791 outstanding, respectively18
 18
Common stock - par value $0.001, 50,000,000 shares authorized; 19,168,021 and 18,988,379 issued, respectively; 17,769,580 and 17,576,618 outstanding, respectivelyCommon stock - par value $0.001, 50,000,000 shares authorized; 19,168,021 and 18,988,379 issued, respectively; 17,769,580 and 17,576,618 outstanding, respectively19  19  
Additional paid-in capital218,242
 212,602
Additional paid-in capital273,325  267,868  
Retained earnings179,682
 183,436
Retained earnings89,124  112,879  
Accumulated other comprehensive loss(9,387) (24,561)Accumulated other comprehensive loss(22,865) (17,399) 
Common stock in treasury, at cost; 1,486,476 and 1,489,476 shares, respectively(31,829) (31,838)
Common stock in treasury, at cost; 1,398,441 and 1,411,761 shares, respectivelyCommon stock in treasury, at cost; 1,398,441 and 1,411,761 shares, respectively(31,042) (31,375) 
Total shareholders’ equity356,726
 339,657
Total shareholders’ equity308,561  331,992  
Total liabilities and shareholders’ equity$439,881
 $423,714
Total liabilities and shareholders’ equity$453,307  $486,842  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 Three Months Ended Nine Months Ended
(in thousands, except share and per share data)September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Sales       
Product$68,563
 $61,280
 $193,476
 $182,232
Service21,687
 18,320
 61,018
 51,654
Total sales90,250
 79,600
 254,494
 233,886
Cost of Sales       
Product26,673
 25,880
 78,186
 74,938
Service11,543
 11,042
 33,765
 29,665
Total cost of sales (exclusive of depreciation and amortization, shown separately below)38,216
 36,922
 111,951
 104,603
Gross Profit52,034
 42,678
 142,543
 129,283
Operating Expenses:       
Selling and marketing25,990
 19,781
 74,884
 56,399
General and administrative10,307
 10,747
 32,883
 31,139
Depreciation and amortization4,368
 3,381
 12,075
 9,733
Research and development9,019
 7,928
 26,530
 22,344
Total operating expenses49,684
 41,837
 146,372
 119,615
Income (loss) from operations2,350
 841
 (3,829) 9,668
Other (income) expense       
Interest income, net(78) (21) (249) (119)
Other (income) expense, net(147) (167) 320
 824
Income (loss) before income tax expense (benefit)2,575
 1,029
 (3,900) 8,963
Income tax expense (benefit)947
 (61) (442) 1,401
Net income (loss)$1,628
 $1,090
 $(3,458) $7,562
Net income (loss) per share - Basic$0.10
 $0.07
 $(0.21) $0.45
Net income (loss) per share - Diluted$0.10
 $0.07
 $(0.21) $0.45
Weighted average shares - Basic16,708,446
 16,674,176
 16,697,729
 16,647,662
Weighted average shares - Diluted16,796,518
 16,701,617
 16,697,729
 16,669,550
 Three Months EndedSix Months Ended
(in thousands, except share and per share data)June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Sales
Product$42,259  $71,045  $98,784  $142,622  
Service18,305  22,446  41,295  44,486  
Total sales60,564  93,491  140,079  187,108  
Cost of Sales
Product21,333  30,505  44,399  58,456  
Service10,335  12,246  22,911  24,893  
Total cost of sales31,668  42,751  67,310  83,349  
Gross Profit28,896  50,740  72,769  103,759  
Operating Expenses
Selling, general and administrative30,036  45,007  66,360  86,027  
Research and development10,186  10,626  20,601  22,267  
Restructuring costs636  —  14,324  —  
Total operating expenses40,858  55,633  101,285  108,294  
Loss from operations(11,962) (4,893) (28,516) (4,535) 
Other expense
Interest expense, net212  240  246  96  
Other expense, net117  1,689  590  1,884  
Loss before income tax benefit(12,291) (6,822) (29,352) (6,515) 
Income tax benefit(3,359) (417) (5,597) (262) 
Net loss$(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 - Basic17,747,739  17,333,996  17,710,014  17,323,479  
Weighted average shares - Diluted17,747,739  17,333,996  17,710,014  17,323,479  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS
(UNAUDITED)
 
 Three Months Ended Nine Months Ended
(in thousands)September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Net income (loss)$1,628
 $1,090
 $(3,458) $7,562
Currency translation adjustments, net of income tax3,875
 1,339
 15,174
 6,165
Comprehensive income$5,503
 $2,429
 $11,716
 $13,727
 Three Months EndedSix Months Ended
(in thousands)June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Net loss$(8,932) $(6,405) $(23,755) $(6,253) 
Currency translation adjustments, net of income taxes(1,688) 1,263  (5,466) (301) 
Comprehensive loss$(10,620) $(5,142) $(29,221) $(6,554) 
The accompanying notes are an integral part of these condensed consolidated financial statements.

5
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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended Six Months Ended
(in thousands)September 30, 2017 September 30, 2016(in thousands)June 30, 2020June 30, 2019
Cash flows from:   Cash flows from:
Operating activities:   Operating activities:
Net (loss) income$(3,458) $7,562
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:   
Net lossNet loss$(23,755) $(6,253) 
Adjustments to reconcile net loss to net cash provided by operating activities:Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization12,075
 9,733
Depreciation and amortization7,209  9,322  
Stock-based compensation4,823
 4,068
Stock-based compensation4,345  5,316  
Provision for bad debts321
 727
Provisions for bad debts, net of recoveriesProvisions for bad debts, net of recoveries680  2  
Loss on disposal of assets263
 814
Loss on disposal of assets299  348  
Provision for excess and obsolete inventory1,271
 2,937
Provision for excess and obsolete inventory479  1,481  
Deferred income tax expense (benefit)224
 (734)
Income tax benefit from exercise of stock options—
 (354)
Deferred income tax benefitDeferred income tax benefit(2,404) (11) 
Impairment charge on equity method investmentImpairment charge on equity method investment—  1,535  
Change in operating assets and liabilities:   Change in operating assets and liabilities:
Decrease (increase) in:   
Decrease (Increase) in:Decrease (Increase) in:
Accounts receivable3,701
 12,850
Accounts receivable26,180  14,442  
Inventories(11,450) (8,689)Inventories892  (9,687) 
Prepaid expenses and other current assets(3,834) (995)Prepaid expenses and other current assets11,347  2,282  
(Decrease) increase in:   
Increase (Decrease) in:Increase (Decrease) in:
Accounts payable and accrued liabilities(2,774) 1,128
Accounts payable and accrued liabilities(1,395) (1,466) 
Income taxes payable(598) —
Income taxes payable(5,058) (3,119) 
Customer deposits(6) (1,155)Customer deposits384  (446) 
Unearned service revenues(1,326) 559
Unearned service revenues(3,139) 3,998  
Net cash (used in) provided by operating activities(768) 28,451
Net cash provided by operating activitiesNet cash provided by operating activities16,064  17,744  
Investing activities:   Investing activities:
Purchases of property and equipmentPurchases of property and equipment(1,533) (3,693) 
Proceeds from sale of investments32,000
 11,000
Proceeds from sale of investments25,000  —  
Purchases of property and equipment(6,081) (5,272)
Proceeds from asset salesProceeds from asset sales643  —  
Payments for intangible assets(1,345) (1,440)Payments for intangible assets(673) (1,233) 
Acquisition of business(5,496) (20,911)
Net cash provided by (used in) investing activities19,078
 (16,623)Net cash provided by (used in) investing activities23,437  (4,926) 
Financing activities:   Financing activities:
Payments on capital leases(6) (6)
Payment of contingent consideration for acquisitions(521)
(434)
Income tax benefit from exercise of stock options—
 354
Proceeds from issuance of stock387
 519
Net cash (used in) provided by financing activities(140) 433
Payments on finance leasesPayments on finance leases(160) (187) 
Payments of contingent consideration for acquisitionsPayments of contingent consideration for acquisitions—  (250) 
Payments for taxes related to net share settlement of equity awardsPayments for taxes related to net share settlement of equity awards(2,409) (1,440) 
Proceeds from issuance of stock related to stock option exercisesProceeds from issuance of stock related to stock option exercises3,854  735  
Net cash provided by (used in) financing activitiesNet cash provided by (used in) financing activities1,285  (1,142) 
Effect of exchange rate changes on cash and cash equivalents5,502
 1,732
Effect of exchange rate changes on cash and cash equivalents(720) 145  
Increase in cash and cash equivalents23,672
 13,993
Increase in cash and cash equivalents40,066  11,821  
Cash and cash equivalents, beginning of period106,169
 107,356
Cash and cash equivalents, beginning of period133,634  108,783  
Cash and cash equivalents, end of period$129,841
 $121,349
Cash and cash equivalents, end of period$173,700  $120,604  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(UNAUDITED)

Additional
Paid-in
Capital		Retained EarningsAccumulated
Other
Comprehensive
Loss		Common
Stock in
Treasury
Common Stock
(in thousands, except share data)SharesAmountsTotal
BALANCE JANUARY 1, 202017,576,618  $19  $267,868  $112,879  $(17,399) $(31,375) $331,992  
Net loss(14,823) (14,823) 
Currency translation adjustment(3,778) (3,778) 
Stock-based compensation2,178  2,178  
Common stock issued, net of shares withheld for employee taxes141,561  894  327  1,221  
BALANCE MARCH 31, 202017,718,179  $19  $270,940  $98,056  $(21,177) $(31,048) $316,790  
Net loss(8,932) (8,932) 
Currency translation adjustment(1,688) (1,688) 
Stock-based compensation2,167  2,167  
Common stock issued, net of shares withheld for employee taxes51,401  218  6  224  
BALANCE JUNE 30, 202017,769,580  $19  $273,325  $89,124  $(22,865) $(31,042) $308,561  

Additional
Paid-in
Capital		Accumulated
Other
Comprehensive
Loss		Common
Stock in
Treasury
Common StockRetained Earnings
(in thousands, except share data)SharesAmountsTotal
BALANCE JANUARY 1, 201917,253,011  $19  $251,329  $175,353  $(18,483) $(31,609) $376,609  
Net income152  152  
Currency translation adjustment(1,564) (1,564) 
Stock-based compensation2,564  2,564  
Common stock issued, net of shares withheld for employee taxes64,864  (1,053) 207  (846) 
Cumulative effect of the adoption of ASU 2014-09
(327) (327) 
BALANCE MARCH 31, 201917,317,875  $19  $252,840  $175,178  $(20,047) $(31,402) $376,588  
Net income(6,405) (6,405) 
Currency translation adjustment1,263  1,263  
Stock-based compensation2,752  2,752  
Common stock issued, net of shares withheld for employee taxes21,187  114  27  141  
BALANCE JUNE 30, 201917,339,062  $19  $255,706  $168,773  $(18,784) $(31,375) $374,339  
The accompanying notes are an integral part of these condensed consolidated financial statements.

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FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(in thousands, except share and per share data, or as otherwise noted)
NOTE 1 – DESCRIPTION OF BUSINESS
FARO Technologies, Inc. and its subsidiaries (collectively “FARO,” the “Company,” “us,” “we” or “our”) is a global technology company that designs, develops, manufactures, marketsdesign, develop, manufacture, market and supportssupport software driven, three-dimensional (“3D”) measurement and imaging and realization systems.solutions. This technology permits high-precision 3D measurement, imaging and comparison of parts and complex structures within production and quality assurance processes. Our devices are used for inspection of components and assemblies, rapid prototyping, reverse engineering, documenting large volume or structures in 3D, surveying and construction, as well as for investigation and reconstruction of accident sites or crime scenes. We sell the majority of our products through a direct sales force across a broad number of customers in a range of manufacturing, industrial, architecture, surveying, building information modeling, construction, public safety forensics, cultural heritage, and other applications. Our FaroArm®, FARO Laser ScanArm®, FARO Gage®, FARO Laser TrackerTM, FARO Laser Projector, FARO Cobalt Array Imager, and their companion CAM2®, BuildIT, and BuildIT Projectorsoftware solutions, provide for Computer-Aided Design (“CAD”) based inspection, factory-level statistical process control, high-density surveying, and laser-guided assembly and production. Together, these products integrate the measurement, quality inspection, and reverse engineering functions with CAD and 3D software to improve productivity, enhance product quality, and decrease rework and scrap in the manufacturing process, mainly supporting applications in our Factory Metrology vertical.the automotive, aerospace, metal and machine fabrication and other industrial manufacturing markets. Our FARO Focus and FARO Scanner Freestyle3DX laser scanners,ScanPlan, and their companion FARO SCENE, BuildIT, FARO PointSense,As-BuiltTM, and FARO Zone public safety forensics software offerings, are utilized for a wide variety of 3D modeling, documentation and high-density surveying applications primarily in our Construction Building Information Modeling-Construction Information Management (“Construction BIM-CIM”)the architecture, engineering and Public Safety Forensics verticals.construction and public safety markets. Our FARO Laser ScanArm®, FARO Cobalt Array Imager, FARO Scanner Freestyle3DX laser scanners and theirits companion SCENE software also enable a fully digital workflow used to capture real world geometry for the purpose of empowering design, enabling innovation, and speeding up the design cycle, supporting our Productcycle.
Since the fourth quarter of 2016 to the fourth quarter of 2019, we had operated in 5 verticals—3D Manufacturing, Construction Building Information Modeling (“Construction BIM”), Public Safety Forensics, 3D Design vertical. FARO Visual InspectTM enables large, complex and Photonics—and had three reporting segments—3D CAD data to be transferred to a tablet deviceManufacturing, Construction BIM and then used for mobile visualization and comparison to real world conditions, facilitating in-process inspection, assembly, guidance and positioning for applicationsEmerging Verticals. As discussed in our Factory MetrologyQuarterly Report on Form 10-Q for the third quarter of 2019, our new management team, led by our new Chief Executive Officer (“CEO”), formulated and Construction BIM-CIM verticals.began to implement a new comprehensive strategic plan for our business. As part of our strategic planning process, we identified areas of our business that needed enhanced focus or change in order to improve our efficiency and cost structure. In the fourth quarter of 2019, we reassessed and redefined our go-to-market strategy, refocused our marketing engagement with our customers and re-evaluated our hardware product portfolio. In the second quarter of 2020, we disposed of our Photonics business and 3D Design related assets obtained from our acquisition of Opto-Tech SRL and its subsidiary Open Technologies SRL (collectively, “Open Technologies”).
As part of our new strategic plan, and based on the recommendation of our CEO, who is also our Chief Operating Decision Maker (“CODM”), in the fourth quarter of 2019, we eliminated our vertical structure and began reorganizing the Company into a functional structure. Our lineexecutive leadership team is now comprised of galvanometer-based scan headsfunctional leaders in areas such as sales, marketing, operations, research and laser scan controllersdevelopment and general and administrative, and resources are used inallocated to each function at a consolidated unit level. We no longer have separate business units, or segment managers or vertical leaders who report to the CODM with respect to operations, operating results or planning for levels or components below the total Company level. Instead, our CODM now allocates resources and evaluates performance on a Company-wide basis. Based on these changes, commencing with the fourth quarter of 2019, we are now reporting as 1 reporting segment that develops, manufactures, markets, supports and sells CAD-based quality assurance products integrated with CAD-based inspection and statistical process control software and 3D documentation systems. Our reporting segment sells into a variety of laser applicationsend markets, including automotive, aerospace, metal and are integrated into larger componentsmachine fabrication, architecture, engineering, construction and systems.public safety.
We report our segment informationReclassification and Related Changes to Presentation
Certain prior year amounts have been reclassified in accordancethe accompanying condensed consolidated financial statements to conform to the current period presentation:
•Commencing with the provisionsthird quarter of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting (“FASB ASC Topic 280”). During fiscal 2016, we evaluated our reportable segments based on our new internal management structure organized around operating activities2019, depreciation and the changes implemented in connection with our initiatives to reorganize our business around certain vertical markets. We evaluate business performance based upon several metrics, using revenue growth and segment profit as the primary financial measures. As a result of this assessment, we now report our activitiesamortization expenses are being reported in the following three reportable segments:
The Factory Metrology reporting segment provides solutions for manual and automated measurement and inspection in an industrial or manufacturing environment. Applications include alignment, part inspection, dimensional analysis, first article inspection, incoming and in-process inspection, machine calibration, non-contact inspection, robot calibration, tool building and set-up, and assembly guidance.
The Construction BIM-CIM reporting segment provides solutions for as-built data capturing and 3D visualization in building information modeling and construction information management applications, allowing our customers in the architecture, engineering and construction markets to quickly and accurately extract two-dimensional (“2D”) and 3D measurement points. Applications include as-built documentation, construction monitoring, surveying, asset and facility management, and heritage preservation.
The Other reporting segment includes our Product Design, Public Safety Forensics and 3D Machine Vision (formerly known as 3D Solutions) operating segments. Our Product Design operating segment provides advanced 3D solutions to assist in the engineering or design of a movable object, enabling a full digital workflow for applications that include reverse engineering and virtual simulation. Our Public Safety Forensics operating segment provides solutions to public safety officials and professionals to capture environmental or situational scenes in 2D and 3D for crime, crash and fire scene investigations and environmental safety evaluations. Our 3D Machine Vision operating segment provides solutions to customers who require customized 3D measurement and realization solutions not otherwise addressed by our off-the-shelf product offerings.

All operating segments that do not meet the criteria to be reportable segments are aggregated in the Other reporting segment and have been combined based on the aggregation criteria and quantitative thresholds in accordance with the provisions of FASB ASC Topic 280. There has been no change in our total consolidated financial condition or resultsaccompanying statements of operations previouslyto reflect departmental costs. Previously, those expenses were reported as a result of the change in our reportable segments. The amountsseparate line item under operating expenses. Amounts related to our segment informationdepreciation and amortization expenses for the three and ninesix months ended SeptemberJune 30, 20162019 have been restatedreclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of depreciation and amortization expenses and to conform to the changecurrent period presentation, as set forth in reporting segments. Eachthe following table;
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•Selling and marketing expenses and general and administrative expenses are now being reported in the accompanying statements of operations together in one line as Selling, general and administrative. Previously, those expenses were reported as two separate line items under operating expenses. Amounts related to selling, general and administrative expenses for the three and six months ended June 30, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of selling, general and administrative expenses and to conform to the current period presentation, as set forth in the following table;
•Software maintenance revenue is now being reported in the accompanying statements of operations as a component of product sales. Previously, these revenues were reported in service sales. Amounts related to software maintenance revenue for the three and six months ended June 30, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of software maintenance revenue and to conform to the current period presentation, as set forth in the following table; and
•Software maintenance cost of sales is now being reported in the accompanying statements of operations as a component of product cost of sales. Previously, these cost of sales was reported in service cost of sales. Amounts related to software maintenance cost of sales for the three and six months ended June 30, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of software maintenance cost of sales and to conform to the current period presentation, as set forth in the following table.

For the three months ended, June 30, 2019
As ReportedDepreciation and Amortization AdjustmentSelling, General and Administrative AdjustmentSoftware Maintenance and Other AdjustmentsAs Adjusted
Sales
Product$67,992  $—  $—  $3,053  $71,045  
Service25,499  —  —  (3,053) 22,446  
Total sales$93,491  $—  $—  $—  $93,491  
Cost of Sales
Product$29,037  $796  $—  $672  $30,505  
Service12,135  783  —  (672) 12,246  
Total cost of sales$41,172  $1,579  $—  $—  $42,751  
Operating Expenses
Selling, general and administrative$—  $1,459  $43,548  $—  $45,007  
Selling and marketing29,124  —  (29,124) —  —  
General and administrative14,424  —  (14,424) —  —  
Depreciation and amortization4,573  (4,573) —  —  —  
Research and development9,091  1,535  —  —  10,626  
Total operating expenses$57,212  $(1,579) $—  $—  $55,633  

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For the six months ended, June 30, 2019
As ReportedDepreciation and Amortization AdjustmentSelling, General and Administrative AdjustmentSoftware Maintenance and Other AdjustmentsAs Adjusted
Sales
Product$136,792  $—  $—  $5,830  $142,622  
Service50,316  —  —  (5,830) 44,486  
Total sales$187,108  $—  $—  $—  $187,108  
Cost of Sales
Product$55,165  $1,972  $—  $1,319  $58,456  
Service24,605  1,607  —  (1,319) 24,893  
Total cost of sales$79,770  $3,579  $—  $—  $83,349  
Operating Expenses
Selling, general and administrative$—  $2,502  $83,525  $—  $86,027  
Selling and marketing55,877  — ��(55,877) —  —  
General and administrative27,648  —  (27,648) —  —  
Depreciation and amortization9,322  (9,322) —  —  —  
Research and development19,026  3,241  —  —  22,267  
Total operating expenses$111,873  $(3,579) $—  $—  $108,294  

The following table summarizes total stock-based compensation expense for each of the line items on our condensed consolidated statement of operations:
Three Months EndedSix Months Ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Cost of Sales
Product$41  $160  $195  $313  
Service52  108  169  188  
Total cost of sales$93  $268  $364  $501  
Operating Expenses
Selling, general and administrative$1,617  $2,172  $3,140  $4,306  
Research and development459  312  841  509  
Total operating expenses$2,076  $2,484  $3,981  $4,815  

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COVID-19 and Impact On Our Business
Our business is significantly vulnerable to the economic effects of pandemics and other public health crises, including the ongoing novel coronavirus (“COVID-19”) outbreak that has surfaced in virtually every country of our reporting segments employs consistent accounting policies.global operating footprint. During the second quarter of 2020, we experienced a significant decline in the demand for our products and services across all of our served markets as a result of the impact of the spread of COVID-19. Although COVID-19 has negatively impacted demand for our products and services overall, the global pandemic also has provided us with the opportunity to adapt to a virtual environment and to capitalize on our existing virtual sales demonstration infrastructure which we have had in place for several years. There has been an increase in the attendance of our virtual training and product information seminars as our customers take advantage of the opportunity to remotely participate and to better understand the capabilities of our products and software offerings.
We continue to assess the ongoing impact of COVID-19 on our business results and remain committed to taking actions to address the health and safety of our employees and customers, as well as the negative effects from demand disruption and production impacts, including, but not limited to, the following:
•Operating our business with a focus on our employee health and safety, which includes minimizing travel, remote work policies, maintaining employee distancing and enhanced sanitation of all of our facilities;
•Monitoring of our liquidity, reduction of supply flows into our manufacturing facilities, disciplined inventory management, and scrutinization of our capital expenditures; and
•Continuously reviewing our financial strategy to strengthen financial flexibility in these volatile financial markets.
We continue to maintain a strong capital structure with a cash balance of $173.7 million and no debt as of June 30, 2020. We believe that our liquidity position is adequate to meet our projected needs in the reasonably foreseeable future.
Future developments, such as the potential resurgence of COVID-19 in countries that have begun to recover from the early impact of the pandemic and actions taken by governments in response to future resurgence, that are highly uncertain and not able to be predicted will determine the extent to which the COVID-19 outbreak continues to impact the Company’s results of operations and financial conditions. See Note 15 – Segment ReportingItem 1A, Risk Factors, included in Part II of this Quarterly Report on Form 10-Q for further information.an additional discussion of risks related to COVID-19.
NOTE 2 – PRINCIPLES OF CONSOLIDATION
Our condensed consolidated financial statements include the accounts of FARO Technologies, Inc. and its subsidiaries, all of which are wholly owned.wholly-owned. All intercompany transactions and balances have been eliminated. The financial statements of our foreign subsidiaries are translated into U.S. dollars using exchange rates in effect at period-end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from financial statement translations are reflected as a separate component of accumulated other comprehensive loss. Foreign currency transaction gains and losses are included in income.net loss.
NOTE 3 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements and notes thereto have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements include all normal recurring accruals and adjustments considered necessary by management for a fair presentation in conformity with U.S. GAAP. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. The condensed consolidated results of operations for the three and ninesix months ended SeptemberJune 30, 20172020 are not necessarily indicative of results that may be expected for the year ending December 31, 20172020 or any future interim period.
The information included in this Quarterly Report on Form 10-Q, including the interim condensed consolidated financial statements and the accompanying notes, should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.2019. The accompanying December 31, 20162019 condensed consolidated balance sheet has been derived from those audited consolidated financial statements.

NOTE 4 – RECLASSIFICATIONS
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Certain prior period amounts have been reclassified in the accompanying condensed consolidated financial statements to conform to the current period presentation. Certain prior period stock compensation expenses were reclassified between cost
Table of product sales, cost of service sales, selling and marketing, general and administrative, and research and development expenses in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2016 to reflect the appropriate departmental costs. In addition, deferred income tax assets, net were reclassified from current to non-current in our condensed consolidated balance sheet as of December 31, 2016 as a result of adopting Accounting Standards Update ("ASU") No. 2015-17, Income Taxes (Topic 740: Balance Sheet Classification of Deferred Taxes ("ASU 2015-17"). See Note 5 – Impact of Recently Issued Accounting Pronouncements for further details.Contents
NOTE 54 – IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Impact of Recently Issued Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes which amends and aims to simplify accounting disclosure requirements regarding a number of topics including: intraperiod tax allocation, accounting for deferred taxes when there are changes in consolidation of certain investments, tax basis step up in an acquisition and the application of effective rate changes during interim periods, amongst other improvements. This standard is effective for fiscal years beginning after December 15, 2020 and allows for early adoption. We are currently assessing the impact of this new standard on our condensed consolidated financial statements.
Impact of Recently Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, was issued by the FASB in July 2018 and allows for a cumulative-effect adjustment transition method of adoption. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those years. We adopted ASU 2016-02 effective as of January 1, 2019 utilizing the cumulative-effect adjustment transition method of adoption, which resulted in the recognition on our condensed consolidated balance sheet as of March 31, 2019 of $18.9 million of right-of-use assets for operating leases, $19.9 million of lease liability for operating leases, $0.9 million of property and equipment, net for finance leases and $0.9 million of lease liability for finance leases under which we function as a lessee. We elected certain practical expedients available under the transition provisions to (i) allow aggregation of non-lease components with the related lease components when evaluating accounting treatment, (ii) apply the modified retrospective adoption method, utilizing the simplified transition option, which allows us to continue to apply the legacy guidance in FASB ASC Topic 840, including its disclosure requirements, in the comparative periods presented in the year of adoption, and (iii) use hindsight in determining the lease term (that is, when considering our options to extend or terminate the lease and to purchase the underlying asset) and in assessing impairment of our right-of-use assets. The adoption of ASU 2016-02 also required us to include any initial direct costs, which are incremental costs that would not have been incurred had the lease not been obtained, in the right-of-use assets. The recognition of these costs in connection with our adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13, and subsequent related amendments to ASU 2016-13, replaced the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. We performed an analysis to identify the Company's financial instruments which would be impacted by the promulgated amendment and identified both our trade receivables and our U.S. Treasury Bill investments. We adopted ASU 2016-13 prospectively, effective January 1, 2020, by evaluating the qualitative and quantitative characteristics of our credit-based customer portfolio. We extend credit to a customer based on an evaluation of the customer’s financial condition and, generally, collateral is not required. Trade receivables are generally due within 30 to 90 days and accounts outstanding longer than the contractual payment terms are considered past due. As part of our analysis, we calculated an allowance for all trade receivables based on our review of historical trends and future expectations for the regions we sell within, current outstanding customer balances, and the length of time balances have been outstanding. We also evaluated an allowance for our U.S. Treasury Bill investments but as they were low risk and short-term, these allowances were approximated to be zero. The adoption of ASU 2016-13 did not have a material impact on our condensed consolidated financial statements.
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In January 2017, the FASB issued ASU No. 2017-04,Intangible Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment(“ (“ASU 2017-04”), which is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the current guidance, performance of Step 2 requires us to calculate the implied fair value of goodwill by following procedures that would be required in determiningto determine the fair value of assets acquired and liabilities assumed in a business combination. Under the new guidance, we will perform our goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value up to the amount of the goodwill allocated to the reporting unit. The new guidance also eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test if it fails the qualitative assessment. As a result, all reporting units will be subject to the same impairment assessment. We will still have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

We early adopted this guidance in fiscal 2019. The adoption of ASU 2017-04 becomes effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted for annual or any interim goodwill impairment tests after January 1, 2017. The amendments in this ASU will be applied on a prospective basis. Disclosure of the nature and reason for the change in accounting principle is required upon transition. This disclosure is required in the first annual period and in the interim period within the first annual period when we initially adopt the amendments in this ASU. We dodid not expect that the adoption of this guidance willdid not have a material impact on our condensed consolidated financial statements.
In January 2017,
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NOTE 5 – REVENUES
The following tables present our revenues by sales type as presented in our condensed consolidated statements of operations disaggregated by the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definitiontiming of a Business (“ASU 2017-01”)in order to clarify the definition of a business and provide additional guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Currently, ASC Topic 805 recognizes three elements of a business: inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. Additionally, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. ASU 2017-01 provides a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the new guidance (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace missing elements. The new guidance provides a framework to assist entities in evaluating whether both an input and a substantive process are present. This framework includes two sets of criteria to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally are a key element of a business. ASU 2017-01 provides more stringent criteria for sets without outputs and more narrowly defines the term output.
ASU 2017-01 becomes effective for annual periods beginning after December 15, 2017, including interim periods within those periods, and will be applied prospectively commencing on the effective date. No disclosures are required at transition. Early application is permitted under certain circumstances. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory (“ASU 2016-16”), which removes the prohibition in ASC Topic 740, Income Taxes, against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. This ASU requires the tax effects of intra-entity transactions, other than sales of inventory, to be recognized when the transfer occurs, instead of deferred until the transferred asset is sold to a third party or otherwise recovered through use of the asset. The new guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption and is effective for annual periods beginning after December 15, 2017, and interim periods therein, with early adoption permitted. Currently, we do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements. We will continue to monitor our business for changes that could be impacted due to the adoption of this guidance.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which clarifies how companies present and classify certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted. We do not expect that the adoption of this guidance will have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”), which is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 must be applied on a modified retrospective basis and is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We are currently evaluating the impact of adopting this standard on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: (Topic 606) (“ASU 2014-09”), amending its accounting guidance related to revenue recognition. Under this ASU and subsequently issued amendments, revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects(in thousands, unaudited):

 For the Three Months Ended June 30,
 20202019
Product sales
Product transferred to customers at a point in time$39,209  $68,202  
Product transferred to customers over time3,050  2,843  
$42,259  $71,045  

 For the Six Months Ended June 30,
 20202019
Product sales
Product transferred to customers at a point in time$92,764  $137,176  
Product transferred to customers over time6,020  5,446  
$98,784  $142,622  

 For the Three Months Ended June 30,
 20202019
Service sales
Service transferred to customers at a point in time$6,649  $11,609  
Service transferred to customers over time11,656  10,837  
$18,305  $22,446  

 For the Six Months Ended June 30,
 20202019
Service sales
Service transferred to customers at a point in time$17,644  $23,290  
Service transferred to customers over time23,651  21,196  
$41,295  $44,486  

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The following table presents our revenues disaggregated by geography, based on the consideration to which the entity expects to be entitled in exchange for those goods or services. Additional disclosures are required to provide the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The ASU and subsequently issued amendments to it are effective for us on January 1, 2018 and permit the use of either the full retrospective or modified retrospective method.


We are currently evaluating the effect that this guidance will have on our consolidated financial statements by analyzing both transactional and analytical data for eachbilling addresses of our revenue streams. The following is a status of our evaluation of impacts by significant revenue stream:customers (in thousands, unaudited):


•Measurement equipment
 For the Three Months Ended June 30,
 20202019
Total sales to external customers
United States$24,445  $35,161  
EMEA (1)
16,720  30,030  
Other APAC (1)
10,582  15,387  
China7,485  8,961  
Other Americas (1)
1,332  3,952  
$60,564  $93,491  

 For the Six Months Ended June 30,
 20202019
Total sales to external customers
United States$57,536  $71,009  
EMEA (1)
40,410  61,130  
Other APAC (1)
26,069  30,429  
China12,233  17,256  
Other Americas (1)
3,831  7,284  
$140,079  $187,108  

(1) Regions represent Europe, the Middle East, and related software: Under current accounting guidance, sales of measurement, imagingAfrica (EMEA); Asia-Pacific, excluding China (Other APAC); and realization equipmentCanada, Mexico, and related software sales are generally recognized upon shipment, as we consider the earnings process complete as of the shipping date. The related software sold with our measurement, imaging and realization equipment functions together with such equipment to deliver the tangible product’s essential functionality. Upon adopting the new guidance, we do not expect material changes to our accounting forBrazil (Other Americas).
For revenue related to our measurement imaging and realizationimaging equipment and related software.
•Extended warranties: Under current accounting guidance, extended warranty sales are recognizedsoftware, we allocate the contract price to performance obligations based on a straight-line basis over the termour best estimate of the warranty. Upon adoptingstandalone selling price. We make this allocation estimate utilizing data from the new guidance,sale of our applicable products and services to customers separately in similar circumstances, with the exception of software licenses. With respect to software licenses, we do not expect material changesuse the residual method for allocating the contract price to performance obligations. Revenue related to our accounting for revenuemeasurement and imaging equipment and related to extended warranties.
•Software: Under current accounting guidance, software only sales are recognized when no further significant production, modification or customization of the software is requiredgenerally recognized upon shipment from our facilities or when delivered to the customer location, as determined by the agreed upon shipping terms, at which time we are entitled to payment and whentitle and control has passed to the following criteria are met: persuasive evidence of a sales agreement exists, delivery has occurred, and the sales price is fixed or determinable and deemed collectible. These softwarecustomer. Software arrangements generally include short-term maintenance that is considered post-contract support.support (“PCS”), which is considered to be a separate performance obligation. We generally establish a standalone sales price for this PCS component based on our maintenance renewal rate. Maintenance renewals, when sold, are recognized on a straight-line basis over the term of the maintenance agreement.  Upon adoptingPayments for products and services are collected within a short period of time following transfer of control or commencement of delivery of services, as applicable.
Further, customers frequently purchase extended warranties with the new guidance,purchase of measurement equipment and related software. Warranties are considered a performance obligation when services are transferred to a customer over time, and, as such, we do not expect material changes to our accounting forrecognize revenue on a straight-line basis over the warranty term. Extended warranty sales primarily include contract periods that extend between one month and three years.
We capitalize commission expenses related to software only sales and maintenance renewals.
Currently, we recognize sales commission expense as incurred. Under the new guidance, we expectdeliverables transferred to capitalize the commission expense for those sales arrangements that extend beyond one yeara customer over time and amortize such costs ratably over the term of the contract. As a result,of June 30, 2020, the deferred cost asset related to deferred commissions was approximately $3.0 million. For classification purposes, $2.0 million and $1.0 million are comprised within the Prepaid expenses and other current assets and Other long-term assets, respectively, on our condensed consolidated balance sheet as of June 30, 2020. As of December 31, 2019, the deferred cost asset related to deferred commissions was approximately $3.1 million. For classification purposes, $2.1 million and $1.0 million were comprised within the Prepaid expenses and other current assets and Other long-term assets, respectively, on our condensed consolidated balance sheet as of December 31, 2019.
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The unearned service revenue liabilities reported on our condensed consolidated balance sheets reflect the contract liabilities to satisfy the remaining performance obligations for extended warranties and software maintenance. The current portion of unearned service revenues on our condensed consolidated balance sheets is what we expect to have an increase inrecognize to revenue within twelve months after the applicable balance sheet date relating to extended warranty and software maintenance contract liabilities. The unearned service revenues - less current portion on our condensed consolidated balance sheets is what we expect to recognize to revenue extending beyond twelve months after the applicable balance sheet date relating to extended warranty and software maintenance contract liabilities. During the three and six months ended June 30, 2020, we recognized $9.8 million and $22.0 million of revenue that was deferred costson our condensed consolidated balance sheet as of December 31, 2019. During the three and six months ended June 30, 2019, we recognized $8.8 million and $19.7 million of revenue that was deferred on our consolidated balance sheet upon the adoption of the new guidance; however, we are still evaluating the expected impact of this change on our consolidated balance sheet. We do not expect that this will result in a material change to our results of operations or cash flows.
We plan to adopt this guidance utilizing the modified retrospective method and plan to apply the modified retrospective method only to contracts that are not completed as of the date of initial adoption, an option that is available under ASC Topic 606.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), simplifying several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 became effective for annual periods beginning after December 15, 2016, and interim periods therein (our fiscal year 2017). We adopted ASU 2016-09 effective January 1, 2017. Under the new guidance, excess tax benefits that were not previously recognized because the related tax deduction had not reduced current taxes payable are to be recorded on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period in which the new guidance is adopted. Historically, we recognized all excess tax benefits when an option was exercised or a share vested since we did not have a U.S. net operating loss carryforward. Therefore, no adjustment to retained earnings for prior excess tax benefits was required upon adoption.
Under the new guidance, all tax-related cash flows resulting from share-based payments are reported as operating activities in the statement of cash flows. This approach incorporates the net of the inflow and outflow from all tax-related cash flows resulting from share-based payments in the deferred income tax expense (benefit) line item and presents it along with other income tax cash flows as operating activities in the statement of cash flows. Effective January 1, 2017, we adopted this portion of the guidance on a prospective basis and therefore did not restate the prior period's condensed consolidated statement of cash flows. 
We also elected to account for forfeitures related to the service condition-based awards as they occur effective January 1, 2017, which is a change from previous guidance that required an estimate of forfeitures. However, we continue to assess performance condition-based awards quarterly as required. In adopting the new policy using a modified retrospective approach, we assessed the cumulative effect adjustment and recorded to retained earnings the difference between the amount of compensation cost previously recorded and the amount that would have been recorded without assuming forfeitures. The cumulative effect adjustment recorded to retained earnings, net of income tax benefit, was not material.
In November 2015, the FASB issued ASU 2015-17, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. ASU 2015-17 became effective for us on January 1, 2017. We adopted this guidance on

a retrospective basis, which resulted in the reclassification of current deferred tax assets totaling approximately $7.6 million as of December 31, 20162018.
The nature of certain of our contracts gives rise to variable consideration, which may be constrained, primarily related to an allowance for sales returns and contracts with certain government customers. We are required to estimate the contract asset related to sales returns and record a corresponding adjustment to Cost of Sales. Our allowance for sales returns was approximately $0.1 million as of both June 30, 2020 and June 30, 2019.
Shipping and handling fees billed to customers in a sales transaction are recorded in Product Sales and shipping and handling costs incurred are recorded in Cost of Sales. We exclude from current to non-current in these condensed consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”), which changes the measurement principle for inventory from the lower of cost or market to the lower of cost or net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and became effective for fiscal years beginning after December 15, 2016 (i.e., our fiscal year 2017), and interim periods within those years, with early adoption permitted. We adopted ASU 2015-11 effective January 1, 2017. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
NOTE 6 – STOCK-BASED COMPENSATION
Stock-based compensation expense reflects the fair value of stock-based awards measured at the grant date and is recognized over the requisite service period.
We have three compensation plans that provide for the granting of stock optionsSales any value-added sales and other share-based awards to key employees and non-employee members of the Board of Directors (the “Board”). The 2004 Equity Incentive Plan (“2004 Plan”), the 2009 Equity Incentive Plan (“2009 Plan”), and the 2014 Equity Incentive Plan (“2014 Plan”) provide for granting options, restricted stock, restricted stock units or stock appreciation rights to employees and non-employee directors. In May 2014, our shareholders approved the 2014 Plan, authorizing us to grant awards for up to 1,974,543 shares of common stock, as well as any shares underlying awards outstanding under the 2004 Plan and 2009 Plan as of the effective date of the 2014 Plan that thereafter terminate or expire unexercised or are canceled, forfeited or lapse for any reason. Under the terms of the 2014 Plan, we are not permitted to make any further grants under the 2004 Plan or the 2009 Plan.
Upon election to the Board, each non-employee director receives an initial equity grant of shares of restricted common stock with a value equal to $100,000, calculated using the closing share price on the date of the non-employee director’s election to the Board. The initial restricted stock grant vests on the third anniversary of the grant date, subject to the non-employee director’s continued membership on the Board. Annually, the non-employee directors are granted restricted shares with a value equal to $100,000 on the first business day following the annual meeting of shareholders, calculated using the closing price of our common stock on that day. In addition, the Lead Director is annually granted restricted shares with a value equal to $40,000 on the first business day following the annual meeting of shareholders, calculated using the closing price of our common stock on that day. The shares of restricted stock granted annually to our non-employee directors and our Lead Director vest on the day prior to the following year’s annual meeting date, subject to the non-employee director’s continued membership on the Board. We record compensation cost associated with our restricted stock grants on a straight-line basis over the vesting term.
Annually, upon approval by our Compensation Committee, we grant stock options and restricted stock units to certain employees. We also grant stock options and restricted stock units to certain new employees throughout the year. The fair value of these stock-based awards is determined by using (a) the current market price of our common stock on the grant date in the case of restricted stock units or (b) the Black-Scholes option valuation model in the case of stock options.
Our annual grants in March 2017 and March 2016 consisted of stock options and restricted stock units that are subject to only time-based vesting. The number of stock options and/or restricted stock units granted was based on the employee’s individual objectives, performance against operational metrics assigned to the employee and overall contribution over the last year. The stock options vest in three equal annual installments beginning one year after the grant date. The restricted stock unit awards vest in full on the three-year anniversary of the grant date. The fair value of these stock-based awards is determined by using (a) the Black-Scholes option valuation model in the case of stock options or (b) the current market price of our common stock on the grant date in the case of restricted stock units.
In 2015, we granted performance-based stock options and restricted stock units to certain executives. These awards vest in three annual installments beginning one year after the grant date if the applicable performance measures or strategic objectives are achieved. The related stock-based compensation expense is recognized over the requisite service period, taking into account the probabilitytaxes that we will satisfy the performance measures or strategic objectives. In addition to certain strategic objectives, the performance-based stock options and restricted stock units granted in 2015 are earned and vest based upon (1) our achievement of specified revenue and earnings per share targets, and (2) our total shareholder return (“TSR”) relative to the TSR attained by companies within our defined peer group.collect concurrently with revenue-producing activities.
Due to the application of TSR to certain performance-based grants, the fair value of these awards is determined using the Monte Carlo Simulation valuation model. We expense these market condition awards over the three-year vesting period regardless of the value the award recipients ultimately receive. In February 2017, our Compensation Committee determined that 9,616 performance-based stock options and 300 restricted stock units were earned for the 2016 performance period and 19,362 stock options and 604 restricted stock units were unearned, as the required metrics were not achieved.

The Black-Scholes option valuation model incorporates assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. The weighted-average grant-date fair value of the stock options that were granted during the nine months ended September 30, 2017 and September 30, 2016 and valued using the Black-Scholes option valuation model was $14.51 and $12.42 per option, respectively. For stock options granted during the nine months ended September 30, 2017 and September 30, 2016 valued using the Black-Scholes option valuation model, we used the following assumptions:
 Nine Months Ended
 September 30,
2017		 September 30,
2016
Risk-free interest rate1.88% - 2.02%
 1.06% - 1.21%
Expected dividend yield—% —%
Expected term of option5 years
 4 years
Expected volatility45.2% 46.7% - 47.0%
Weighted-average expected volatility45.2% 46.7%
Historical information was the primary basis for the selection of the expected dividend yield, expected volatility and the expected lives of the options. The risk-free interest rate was based on the yields of U.S. zero coupon issues and U.S. Treasury issues, with a term equal to the expected life of the option being valued.
A summary of stock option activity and weighted-average exercise prices during the nine months ended September 30, 2017 follows:
 Options 
Weighted-
Average
Exercise Price
 
Weighted-Average
Remaining
Contractual Term
(Years)
 Aggregate Intrinsic
Value as of
September 30, 2017
Outstanding at January 1, 20171,090,160
 $48.02
    
Granted267,039
 34.79
    
Forfeited or expired(72,015) 44.39
    
Exercised(14,520) 26.68
    
Unearned performance-based options(19,362) 59.97
    
Outstanding at September 30, 20171,251,302
 $45.47
 4.2 $2,235
Options exercisable at September 30, 2017963,891
 $42.82
 3.0 $612
The total intrinsic value of stock options exercised during each of the three months ended September 30, 2017 and September 30, 2016 was less than $0.1 million. For the nine months ended September 30, 2017 and September 30, 2016, the total intrinsic value of stock options exercised in the respective periods was $0.1 million and $1.7 million.
The fair value of stock options vested during each of the three months ended September 30, 2017 and September 30, 2016 was less than $0.1 million. The fair value of stock options vested during the nine months ended September 30, 2017 and September 30, 2016 was $3.0 million and $3.5 million, respectively.
The following table summarizes the restricted stock and restricted stock unit activity and weighted average grant-date fair values for the nine months ended September 30, 2017:
 Shares 
Weighted-Average
Grant Date
Fair Value
Non-vested at January 1, 2017150,682
 $33.39
Granted152,207
 35.42
Forfeited(20,844) 33.84
Vested(21,101) 33.65
Unearned performance-based awards(604) 52.83
Non-vested at September 30, 2017260,340
 $34.60
We recorded total stock-based compensation expense of $1.6 million and $1.4 million for the three months ended September 30, 2017 and September 30, 2016, respectively, and $4.8 million and $4.1 million for the nine months ended September 30, 2017 and September 30, 2016, respectively.

As of September 30, 2017, there was $11.0 million of total unrecognized stock-based compensation expense related to non-vested stock-based compensation arrangements. The expense is expected to be recognized over a weighted average period of 2.0 years.
NOTE 7 – CASH AND CASH EQUIVALENTS
We consider cash on hand and all short-term, highly liquid investments that have original maturities of three months or less at the time of purchase to be cash and cash equivalents.
NOTE 86 – SHORT TERMSHORT-TERM INVESTMENTS
Short-termWe carried no short-term investments at SeptemberJune 30, 2017 consisted of U.S Treasury Bills totaling $11.0 million that mature through January 11, 2018.2020. Short-term investments at December 31, 2016 consisted2019 were composed of U.S. Treasury Bills totaling $42.9$24.8 million, consisting of $8.9 million that matured throughon March 12, 2020 and $15.9 million that matured on June 15, 2017.11, 2020. The interest raterates on the U.S. Treasury Bills is less than one percent. The investments are classified as held-to-maturity and recorded at cost plus accrued interest, which approximates fair value. The fair value of the U.S. Treasury Bills at September 30, 2017 andheld on December 31, 20162019 that matured on March 12, 2020 and June 11, 2020 were classed as Level 1, as they are traded with sufficient frequency1.8%, and volume to enable us to obtain pricing information on an ongoing basis. For further discussion of fair value, refer to Note 14 – Fair Value of Financial Instruments.1.4%, respectively.
NOTE 97 – ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
As of As of
June 30, 2020		As of As of
December 31, 2019
Accounts receivable$52,151  $79,611  
Allowance for credit losses(4,038) (3,449) 
Total$48,113  $76,162  

Activity related to the allowance for credit losses was as follows:
Six Months Ended June 30, 2020
Beginning balance of the allowance for credit losses$(3,449)
Current period provision for expected credit losses(1,237)
Recoveries of amounts previously written off648 
Ending balance of the allowance for credit losses$(4,038)

16
 As of
September 30, 2017		 As of
December 31, 2016
Accounts receivable$62,489
 $63,193
Allowance for doubtful accounts(2,040) (1,829)
Total$60,449
 $61,364
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NOTE 108 – INVENTORIES
Inventories are stated at the lower of cost or net realizable value using the first-in first-out (FIFO)("FIFO") method. We have three principal categories of inventory: 1) manufactured product to be sold; 2) sales demonstration inventory - completed product used to support our sales force for demonstrations and demonstrations;held for sale; and 3) service inventory - completed product and parts used to support our service department.department and held for sale. Shipping and handling costs are classified as a component of costCost of salesSales in our condensed consolidated statements of operations.
Sales demonstration inventory is held by our sales representatives for up to three years, at which time it would be refurbished and transferred to finished goods as used equipment, stated at the lower of cost or net realizable value. Management expectsWe expect these refurbished units to remain in finished goods inventory and to be sold within 12 months at prices that may produce reduced gross margins.
Service inventory is used to provide a temporary replacement product to a customer covered by a premium warranty when the customer’s unit requires service or repair and as training equipment. Service inventory is available for sale; however, management does not expect service inventory to be sold within 12 months and, as such, classifies this inventory as a long-term asset. Service inventory that we utilize for training or repairs and which we deem as no longer available for sale is transferred to fixed assets at the lower of cost or net realizable value and depreciated over theits remaining life, typically three years.
Inventories consist of the following:
As of June 30, 2020As of December 31, 2019
Raw materials$33,151  $36,956  
Finished goods20,274  21,598  
Inventories, net$53,425  $58,554  
Service and sales demonstration inventory, net$34,130  $33,349  
 As of
September 30, 2017		 As of
December 31, 2016
Raw materials$39,285
 $36,760
Finished goods19,759
 15,126
Inventories, net$59,044
 $51,886
    
Service and sales demonstration inventory, net$35,250
 $29,136



NOTE 119 – EARNINGSLOSS PER SHARE
Basic earningsloss per share is computed by dividing net (loss) or incomeloss by the weighted average number of shares outstanding. Diluted earningsloss per share is computed by also considering the impact of potential common stock on both net incomeloss and the weighted average number of shares outstanding. Our potential common stock consists of employee and director stock options, restricted stock units and performance-based awards. Our potential common stock is included in the diluted earnings per share calculation when doing soadding such potential common stock would not be anti-dilutive. Performance-based awards are included in the computation of diluted earnings per share only to the extent that the underlying performance conditions (and any applicable market condition) (i) are satisfied as of the end of the reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period and the result would be dilutive under the treasury stock method. When we report a net loss which we did for the nine months ended September 30, 2017,period presented, the calculation of diluted net loss per share excludes our potential common stock, as the effect would be anti-dilutive.
For the three and ninesix months ended SeptemberJune 30, 2017,2020, there were approximately 1,143,523 and 1,145,632767,458 shares respectively, issuable upon the exercise of options and the contingent vesting of performance-based awardsrestricted stock units that were excluded from the dilutive calculations, as they were anti-dilutive. For the three and ninesix months ended SeptemberJune 30, 2016,2019, there were approximately 1,002,856 and 1,042,366, respectively,702,202 shares issuable upon the exercise of options and the contingent vesting of performance-based awards that were excluded from the dilutive calculations, as they were anti-dilutive.
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A reconciliation of the number of common shares used in the calculation of basic and diluted earningsloss per share (“EPS”) is presented below:
 Three Months Ended
 June 30, 2020June 30, 2019
SharesPer-Share
Amount		SharesPer-Share
Amount
Basic loss per share17,747,739  $(0.50) 17,333,996  $(0.37) 
Effect of dilutive securities—  —  —  —  
Diluted loss per share17,747,739  $(0.50) 17,333,996  $(0.37) 
 Six Months Ended
 June 30, 2020June 30, 2019
 SharesPer-Share
Amount		SharesPer-Share
Amount
Basic loss per share17,710,014  $(1.34) 17,323,479  $(0.36) 
Effect of dilutive securities—  —  —  —  
Diluted loss per share17,710,014  $(1.34) 17,323,479  $(0.36) 



 Three Months Ended
 September 30, 2017 September 30, 2016
 Shares 
Per-Share
Amount
 Shares 
Per-Share
Amount
Basic EPS16,708,446
 $0.10
 16,674,176
 $0.07
Effect of dilutive securities88,072
 —
 27,441
 —
Diluted EPS16,796,518
 $0.10
 16,701,617
 $0.07

 Nine months ended
 September 30, 2017 September 30, 2016
 Shares 
Per-Share
Amount
 Shares 
Per-Share
Amount
Basic EPS16,697,729
 $(0.21) 16,647,662
 $0.45
Effect of dilutive securities—
 —
 21,888
 —
Diluted EPS16,697,729
 $(0.21) 16,669,550
 $0.45

NOTE 1210 – ACCRUED LIABILITIES
Accrued liabilities consist of the following:

As of
September 30, 2017		 As of
December 31, 2016		As of June 30, 2020As of December 31, 2019
Accrued compensation and benefits$12,347
 $13,649
Accrued compensation and benefits$12,501  $15,366  
Accrued restructuring costsAccrued restructuring costs7,072  —  
Accrued warranties2,584
 2,594
Accrued warranties1,622  2,090  
Professional and legal fees1,442
 1,775
Professional and legal fees2,220  1,793  
Taxes other than income2,697
 4,026
Taxes other than income2,765  4,077  
General services administration contract contingent liability (see Note 13)General services administration contract contingent liability (see Note 13)12,891  11,886  
Other accrued liabilities3,437
 2,528
Other accrued liabilities3,904  2,860  
$22,507
 $24,572
$42,975  $38,072  


Activity related to accrued warranties was as follows:

 Six Months Ended
 June 30, 2020June 30, 2019
Balance, beginning of period$2,090  $2,571  
Provision for warranty expense1,174  1,855  
Fulfillment of warranty obligations(1,642) (1,982) 
Balance, end of period$1,622  $2,444  

18
 Nine Months Ended
 September 30, 2017 September 30, 2016
Balance, beginning of period$2,594
 $2,309
Provision for warranty expense2,606
 2,292
Fulfillment of warranty obligations(2,616) (1,925)
Balance, end of period$2,584
 $2,676
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NOTE 13 – INCOME TAXES
For the three months ended September 30, 2017, we recorded income tax expense of $0.9 million compared with an income tax benefit of $0.1 million for the three months ended September 30, 2016. Our effective tax rate was 36.8% for the three months ended September 30, 2017 compared with a 5.9% benefit in the prior year period. The change in our income tax expense (benefit) and the increase in our effective tax rate were primarily due to a shift in the geographic mix of pretax income expected for the full year 2017. 
For the nine months ended September 30, 2017, we recorded an income tax benefit of $0.4 million compared with income tax expense of $1.4 million for the nine months ended September 30, 2016. This change of $1.8 million was due to a pretax loss during the nine months ended September 30, 2017 compared to pretax income in the same period of 2016. Our effective tax rate decreased by 4.3 percentage points to 11.3% for the nine months ended September 30, 2017 from 15.6% for the same period of 2016. The change was primarily due to the pretax loss during the nine months ended September 30, 2017 compared with pretax income during the same period of 2016 and a shift in the geographic mix of pretax income expected for the full year 2017. Our effective tax rate continued to be lower than the statutory tax rate in the United States, mainly due to our global footprint in foreign jurisdictions with lower tax rates. However, our effective tax rate could be impacted positively or negatively by geographic changes in the manufacturing or sales of our products and the resulting effect on taxable income in each jurisdiction.
NOTE 1411 – FAIR VALUE OF FINANCIAL INSTRUMENTSMEASUREMENTS
Our financial instruments include cash and cash equivalents, short-term investments, accounts receivable, customer deposits, accounts payable and accrued liabilities. The carrying amounts of such financial instruments approximate their fair value due to the short-term nature of these instruments.
Assets and liabilitiesLiabilities measured at fair value on a recurring basis are categorized in the tables below based upon the lowest level of significant input to the valuations:

 As of September 30, 2017
 Level 1 Level 2 Level 3
Assets:     
Short-term investments (1)$10,970
 $—
 $—
Total$10,970
 $—
 $—
Liabilities:     
Contingent consideration (2)$—
 $—
 $1,742
Total$—
 $—
 $1,742
 
As of December 31, 2016
 Level 1 Level 2 Level 3
Assets:     
Short-term investments (1)$42,942
 $—
 $—
Total$42,942
 $—
 $—
Liabilities:     
Contingent consideration (2)$—
 $—
 $2,100
Total$—
 $—
 $2,100
(1)Short-term investments in the accompanying consolidated balance sheets are six-month U.S. Treasury Bills. The fair valuesAs of these assets are based on Level 1 inputs in the fair value hierarchy.June 30, 2020

(2)Level 1Level 2Level 3
Liabilities:
Contingent consideration liability represents arrangements to pay the former owners(1)
$— $— $733 
Total$— $— $733 
As of certain companies we acquired. The remaining undiscounted maximum payment under the arrangements is $5.6 million. We estimated the fair value of the contingent consideration using a Monte Carlo Simulation, which is based on significant inputs, primarily forecasted future results of the acquired businesses not observable in the market, and thus represents a Level 3 measure. During the three and nine months ended September 30, 2017, we paid $0.5 million as part of these arrangements. During the three and nine months ended September 30, 2016, we paid $0.3 million and $0.4 million, respectively, as part of these arrangements. The remaining change in the fair value of the contingent consideration from December 31, 2016 to September 30, 2017 is related to changes in foreign currency rates.2019
Level 1Level 2Level 3
Liabilities:
Contingent consideration (1)
$— $— $733 
Total$— $— $733 

(1)Contingent consideration liability represents arrangements to pay the former owners of certain companies we acquired based on the former owners attaining future product release milestones and is reported in current accrued liabilities. We use a probability-weighted discounted cash flow model to estimate the fair value of contingent consideration liabilities. These probability weightings are developed internally and assessed on a quarterly basis. The remaining undiscounted maximum payment under these arrangements was $1.2 million as of June 30, 2020.
NOTE 1512 – SEGMENT REPORTINGRESTRUCTURING
We have three reportable segments; Factory Metrology, Construction BIM-CIM,In the first quarter of 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 Other. These segmentsensure that we are basedappropriately structured and resourced to deliver increased and sustainable value to our shareholders and customers. Key activities under the Restructuring Plan include a continued focus on efficiency and cost-saving efforts, which includes decreasing total headcount by approximately 500 employees upon the vertical markets that we currently serve. Businesscompletion of the Restructuring Plan.
These activities that do not meet the criteriaare expected to be reportable segments are aggregatedsubstantially completed by the end of 2021. Pre-tax charges of approximately $49 million were recorded in the Other category.fourth quarter of 2019 in connection with the implementation of our new strategic plan and included the following:
•$21.2 million impairment of goodwill;
•$12.8 million charge, increasing our reserve for excess and obsolete inventory;
•$10.5 million impairment of intangible assets associated with recent acquisitions;
•$1.4 million impairment of intangible assets related to capitalized patents;
•$3.4 million impairment of other assets and other charges.
In connection with the Restructuring Plan, we recorded a pre-tax charge of approximately $13.7 million during the first quarter 2020 and $0.6 million during the second quarter primarily consisting of severance and related benefits, professional fees and other related charges and costs related to the disposal of our Photonics business and 3D Design related assets. We develop, manufacture, market, supportreceived $0.6 million in cash payments for the disposal of our Photonics business and sell CAD-based quality assurance products integrated with CAD-based inspection and statistical process control software and three-dimensional documentation systems3D Design related assets in eachthe current quarter. We estimate total additional pre-tax charges of these reportable segments. These activities represent more than 99%$12 million to $22 million for the remainder of consolidated sales.fiscal year 2020.
Our Chief Operating Decision Maker (CODM), our Chief Executive Officer, evaluates segment performance and allocates resources based upon profitable growth. We use segment profitAt this time, we are continuing to evaluate the performancefuture key activities by which these additional charges will originate. Actual results, including the costs of the Restructuring Plan, may differ materially from our reportable segments. Segment profit is calculated as gross profit, netexpectations, resulting in our inability to realize the expected benefits of sellingthe Restructuring Plan and marketing expenses,our new strategic plan and negatively impacting our ability to execute our future plans and strategies, which could have a material adverse effect on our business, financial condition and results of operations.
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In connection with the Restructuring Plan, we paid $0.9 million during the first quarter 2020 and $4.5 million during the second quarter of 2020 primarily consisting of severance and related benefits. We expect an additional $11 million to $15 million of cash payments to be made for the reporting segment. Our definitionremainder of segment profit may not be comparable to similarly-titled measures reported by other companies.
Our segment structure presented below represents a change from geographic segments duefiscal year 2020 related to the reorganization which took place inRestructuring Plan. Activity related to the year ended December 31, 2016. The amounts foraccrued restructuring charge and cash payments during the three and nine months ended September 30, 2016 have been restated to reflect the change in reporting segments. Eachfirst half of our segments employs consistent accounting policies.2020 was as follows:
The following tables present information about our reportable segments, including a reconciliation of total segment profit to Income (Loss) from Operations included in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016:
Severance and other benefitsProfessional fees and other related chargesTotal
Balance at February 14, 2020$—  $—  $—  
Additions charged to expense12,400  1,574  13,974  
Cash payments(5,379) (1,523) (6,902) 
Balance at June 30, 20207,021  51  7,072  

  Factory Metrology Construction BIM-CIM Other Total
Three Months Ended September 30, 2017        
         
Total sales $59,339
 $22,751
 $8,160
 $90,250
Segment profit $20,144
 $5,407
 $493
 $26,044
General and administrative       10,307
Depreciation and amortization       4,368
Research and development       9,019
Income from operations       $2,350
  Factory Metrology Construction BIM-CIM Other Total
Three Months Ended September 30, 2016        
         
Total sales $58,310
 $15,925
 $5,365
 $79,600
Segment profit $16,305
 $4,704
 $1,888
 $22,897
General and administrative       10,747
Depreciation and amortization       3,381
Research and development       7,928
Income from operations       $841

  Factory Metrology Construction BIM-CIM Other Total
Nine Months Ended September 30, 2017        
         
Total sales $173,531
 $60,550
 $20,413
 $254,494
Segment profit $53,497
 $13,799
 $363
 $67,659
General and administrative       32,883
Depreciation and amortization       12,075
Research and development       26,530
Loss from operations       $(3,829)

  Factory Metrology Construction BIM-CIM Other Total
Nine Months Ended September 30, 2016        
         
Total sales $168,418
 $47,529
 $17,939
 $233,886
Segment profit $53,034
 $12,868
 $6,982
 $72,884
General and administrative       31,139
Depreciation and amortization       9,733
Research and development       22,344
Income from operations       $9,668


NOTE 1613 – COMMITMENTS AND CONTINGENCIES
Leases — We lease buildings and equipment in the normal course of business under non-cancellable operating and capital leases that expire in or before 2026. Total obligations under these leases are approximately $7.1 million for 2017.
Purchase Commitments — We enter into purchase commitments for products and services in the ordinary course of business. These purchases generally cover production requirements for 60 to 120 days as well as materials necessary to service customer units through the product lifecycle and for warranty commitments. As of SeptemberJune 30, 2017,2020, we had approximately $44.6$48.1 million in purchase commitments that are expected to be delivered within the next 12 months. To ensure adequate component availability in preparation for new product introductions, as of September 30, 2017, we also had $0.6 million in long-term commitments for purchases to be delivered after 12 months.
Legal Proceedings — We are not involved in any legal proceedings, other thanincluding routine litigation arising in the normal course of business, none of whichthat we believe will have a material adverse effect on our business, financial condition or results of operations.
U.S. Government Contracting Matter — We have sold our products and related services to the U.S. Government (the “Government”) under General Services Administration (“GSA”) Federal Supply Schedule contracts (the “GSA Contracts”) since 2002 and are currently selling our products and related services to the Government under two such GSA Contracts. Each GSA Contract is subject to extensive legal and regulatory requirements and includes, among other provisions, a price reduction clause (the “Price Reduction Clause”), which generally requires us to reduce the prices billed to the Government under the GSA Contracts to correspond to the lowest prices billed to certain benchmark customers.
NOTE 17 – BUSINESS COMBINATIONS

In April 2017,Late in the fourth quarter of 2018, during an internal review we completedpreliminarily determined that certain of our pricing practices may have resulted in the acquisition of substantially allGovernment being overcharged under the Price Reduction Clauses of the assetsGSA Contracts (the “GSA Matter”). As a result, we performed remediation efforts, including but not limited to, the identification of Instrument Associates, LLC d/b/additional controls and procedures to ensure future compliance with the pricing and other requirements of the GSA Contracts. We also retained outside legal counsel and forensic accountants to assist with these efforts and to conduct a Nutfield Technology (“Nutfield”comprehensive review of our pricing and other practices under the GSA Contracts (the “Review”),. On February 14, 2019, we reported the GSA Matter to the GSA and its Office of Inspector General.
As a component technology business locatedresult of the GSA Matter, for the fourth quarter 2018, we reduced our total sales by a $4.8 million estimated cumulative sales adjustment, representative of the last six years of estimated overcharges to the Government under the GSA Contracts. In addition, for the fourth quarter of 2018, we recorded $0.5 million of imputed interest related to the estimated cumulative sales adjustment, which increased Interest expense, net and resulted in Hudson, New Hampshire, which specializesan estimated total liability of $5.3 million for the GSA Matter. This adjustment was based on our preliminary review as of February 20, 2019, the date of our Annual Report on Form 10-K for the year ended December 31, 2018. In addition, in first quarter 2019, we recorded an additional $0.1 million of imputed interest related to the designestimated cumulative sales adjustment.
On July 15, 2019, we submitted a report to the GSA and manufactureits Office of advanced galvanometer-based optical scanners, scan headsInspector General setting forth the findings of the Review conducted by our outside legal counsel and laser kits, for a total purchase price of approximately $5.5 million. This acquisition supports our long-term strategy to expand our presence in key markets and

improve our existing product lines with innovative technology. Theforensic accountants. Based on the results of the acquired business’ operations asReview, we reduced our total sales for second quarter 2019 by an incremental $5.8 million sales adjustment, reflecting an estimated aggregate overcharge of $10.6 million under the GSA Contracts for the period from July 2011 to March 2019. In addition, we recorded an incremental $0.7 million of imputed interest related to the estimated cumulative sales adjustment for the remainder of 2019, which increased Interest expense, net and afterresulted in a $6.5 million total incremental increase in the estimated total liability for the GSA Matter.
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In January 2020, we received requests for additional information from the GSA and its Office of Inspector General to which we corresponded through June 2020. As a result of this continuing investigation, we reduced our total sales for the second quarter 2020 by an incremental $0.6 million sales adjustment, reflecting an estimated aggregate overcharge of $11.2 million under the GSA Contracts for the period from July 2011 to June 2020. We are working with the GSA in responding to any additional inquiries arising from the investigation. We recorded an incremental $0.2 million of imputed interest related to the estimated cumulative sales adjustment for the second quarter of 2020. As of the date of acquisitionthe filing of this Quarterly Report on Form 10-Q, we have beenrecorded an aggregate estimated total liability for the GSA Matter of $12.9 million.
We intend to cooperate fully with this and any other Government inquiries. The Government’s review of, or investigation into, this matter could result in civil and criminal penalties, administrative sanctions, and contract remedies being imposed on us, including but not limited to, termination of the GSA Contracts, repayments of amounts already received under the GSA Contracts, forfeiture of profits, damages, suspension of payments, fines, and suspension or debarment from doing business with the Government and possibly U.S. state and local governments. We may also be subject to litigation and recovery under the federal False Claims Act and possibly similar state laws, which could include claims for treble damages, penalties, fees and costs. As a result, we cannot reasonably predict the outcome of the Government’s review of, or investigation into, this matter at this time or the resulting future financial impact on us. Any of these outcomes could have a material adverse effect on our reputation, our sales, results of operations, cash flows and financial condition, and the trading price of our common stock. In addition, we have incurred, and will continue to incur, legal and related costs in connection with the Review and the Government’s response to this matter.
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NOTE 14 – LEASES
We have operating and finance leases for manufacturing facilities, corporate offices, research and development facilities, sales and training facilities, vehicles, and certain equipment under which we assume the role of lessee. We do not lease assets as a lessor. Our leases have remaining lease terms of less than one year to approximately seven years, some of which include options to extend the leases for up to eight years, and some of which include options to terminate the leases within three months. We do not participate in any material subleasing activity.
We determine if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use (“ROU”) asset, Lease liability, and Lease liability - less current portion in our condensed consolidated financial statementsbalance sheets. Finance leases are included in Property and equipment, net, Lease liability, and Lease liability - less current portion in our condensed consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and lease liabilities are recognized on the commencement date of the lease based on the present value of lease payments over the lease term. Variable lease payments that depend on an index or rate include the variable portion when calculating ROU assets and lease liabilities. Variable lease payments that do not depend on an index or rate are expensed as incurred. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available on the commencement date of the lease to determine the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU assets also include any lease payments made and lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option at the time the lease is commenced. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
While we have lease agreements with lease and non-lease components, we account for the lease and non-lease components as a single lease component.
The components of lease expense were as follows:
 Three Months Ended
June 30, 2020		Three Months Ended
June 30, 2019		Six Months Ended
June 30, 2020		Six Months Ended
June 30, 2019
Operating lease cost$2,006  $2,029  $4,061  $3,997  
Finance lease cost:
Amortization of ROU assets$78  $98  $160  $190  
Interest on lease liabilities$8  $12  $17  $24  
Total finance lease cost$86  $110  $177  $214  

We recognize lease payments made for short-term leases where terms are 12 months or less as the payments are incurred. Our short-term lease cost for the three and nine months ended SeptemberJune 30, 2017.
In December 2016, we acquired MWF-technology, GmbH (“MWF”) for a purchase price, net of cash acquired, of approximately $6.6 million, paid with cash on hand. MWF, an innovator in mobile augmented reality solutions located near Frankfurt, Germany, provides technology that enables large, complex 3D CAD data to be transferred to a tablet device for use in mobile visualization2020 and comparison to real world conditions. This enables real time, actionable manufacturing insight for in-process inspection, assembly, guidance and positioning.
In August 2016, we acquired Laser Projection Technologies, Inc. (“LPT”) for a purchase price, net of cash acquired, of approximately $17.2 million, paid with cash on hand. LPT, located in Londonderry, New Hampshire, specializes in laser projection and measurement systems used throughout manufacturing environments around the globe to maximize productivity and efficiency. The acquisition enhances our portfolio of 3D measurement solutions and supports our long-term strategy to expand our presence in key markets.
In July 2016, we acquired BuildIT Software & Solutions Ltd. (“BuildIT”) for a purchase price, net of cash acquired, of approximately $3.9 million, paid with cash on hand. BuildIT, a software solutions business located in Montreal, Canada, specializes in process-configurable 3D metrology software solutions with hardware agnostic interfaces. The addition of BuildIT enhances our metrology portfolio, providing customers greater software options to use in a variety of applications to reduce inspection and assembly times and increase productivity.
The acquisitions of Nutfield, MWF, LPT, and BuildIT constitute business combinations as defined by FASB ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumedJune 30, 2019 were recorded at their fair values on the date of acquisition.
Following is a summary of our final allocations of the purchase price to the fair values of the assets acquired and liabilities assumed as of the date of each acquisition:
  BuildIT LPT MWF Nutfield
 Accounts receivable $237
 $54
 $150
 $160
 Inventory —
 322
 —
 539
 Other assets 36
 160
 666
 96
 Deferred income tax assets —
 1,112
 —
 —
 Intangible assets 1,015
 5,474
 1,816
 2,329
 Goodwill (1) 3,393
 11,922
 5,364
 2,488
 Accounts payable and accrued liabilities (95) (747) (700) (12)
 Other liabilities (471) (1,086) (345) (104)
 Deferred income tax liabilities (205) —
 (364) —
Total purchase price, net of cash acquired $3,910
 $17,211
 $6,587
 $5,496

(1)The goodwill arising from the acquisitions is not expected to be tax deductible.

Following are the details of the purchase price allocated to the intangible assets acquiredboth less than $0.1 million. Our short-term lease cost for the acquisitions noted above:six months ended June 30, 2020 and June 30, 2019 was less than $0.1 million and $0.1 million, respectively.
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  BuildIT LPT MWF Nutfield
  Amount Weighted Average Life (Years) Amount Weighted Average Life (Years) Amount Weighted Average Life (Years) Amount Weighted Average Life (Years)
 Trade name $346
 7 $64
 1 $36
 1 $29
 1
 Non-competition agreement 31
 5 —
 0 3
 2 144
 5
 Technology 361
 7 4,260
 7 951
 5 1,970
 10
 Customer relationship 277
 7 1,150
 7 826
 5 95
 10
 Favorable in-place lease —
 0 —
 0 —
 0 91
 12
 Fair value of intangible assets acquired $1,015
 7 $5,474
 7 $1,816
 5 $2,329
 10
Supplemental balance sheet information related to leases was as follows:

As ofAs of
June 30, 2020December 31, 2019
Operating leases:
Operating lease right-of-use asset$14,684  $18,418  
Current operating lease liability$4,591  $6,349  
Operating lease liability - less current portion11,422  13,272  
     Total operating lease liability$16,013  $19,621  
Finance leases:
Property and equipment, at cost$1,786  $1,870  
Accumulated depreciation(1,301) (1,150) 
     Property and equipment, net$485  $720  
Current finance lease liability$313  $325  
Finance lease liability - less current portion229  426  
     Total finance lease liability$542  $751  
Weighted Average Remaining Lease Term (in years):
     Operating leases4.414.48
     Finance leases2.122.48
Weighted Average Discount Rate:
     Operating leases5.31 %5.10 %
     Finance leases5.06 %5.09 %
The goodwill for the Nutfield acquisition has been allocated
Supplemental cash flow information related to the Factory Metrology reporting segment. The goodwill for the BuildIT, LPT and MWF acquisitionsleases was allocated in connection with our organizational structure realignment during 2016 using the relative fair value approach.as follows:
Acquisition and integration costs
Six Months Ended
June 30, 2020		Six Months Ended
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$4,141  $4,110  
Operating cash flows from finance leases$17  $24  
Financing cash flows from finance leases$160  $187  
ROU assets obtained in exchange for lease obligations:
Operating leases$424  $5,916  








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Maturities of lease liabilities are not included as componentsfollows:
Year Ending December 31,Operating leasesFinance leases
2020 (excluding the first 6 months)$3,354  $168  
20214,203  300  
20223,269  82  
20232,886  38  
20242,699  12  
Thereafter2,354  —  
Total lease payments$18,765  $600  
Less imputed interest(2,752) (58) 
Total$16,013  $542  


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Table of consideration transferred, but are recorded as expense in the period in which such costs are incurred. To date, we have incurred approximately $0.9 million in acquisition and integration costs for the BuildIT, LPT, MWF and Nutfield acquisitions.Contents
Pro forma financial results for BuildIT, LPT, MWF and Nutfield have not been presented because the effects of these transactions, individually and in the aggregate, were not material to our consolidated results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the Condensed Consolidated Financial Statements,condensed consolidated financial statements, including the notes thereto, included elsewhere in this Form 10-Q and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
FARO Technologies, Inc. (“FARO,” the “Company,” “us,” “we” or “our”) has made “forward-looking statements” in this report (within the meaning of the Private Securities Litigation Reform Act of 1995). Statements that are not historical facts or that describe our plans, beliefs, goals, intentions, objectives, projections, expectations, assumptions, strategies, or future events are forward-looking statements. In addition, words such as “may,” “might,” “would,” “will,” “will be,” “future,” “strategy,” “believe,” “plan,” “should,” “could,” “seek,” “expect,” “anticipate,” “intend,” “estimate,” “goal,” “objective,” “project,” “forecast,” “target” and similar words identify forward-looking statements.
Forward-looking statements are not guarantees of future performance and are subject to a number of known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Consequently, undue reliance should not be placed on these forward-looking statements. We do not intend to update any forward-looking statements, whether as a result of new information, future events, or otherwise, unless otherwise required by law. Important factors that could cause actual results to differ materially from those contemplated in such forward-looking statements include, among others, the following:
 
•an economic downturn in the manufacturing industry or the domestic and international economies in the regions of the world where we operate;
•the effect of the COVID-19 pandemic, including on our business operations, as well as its impact on general economic and financial market conditions;
•our inability to realize the intended benefits of our undertaking to transition to a company that is reorganized around functions to improve the efficiency of our sales organization and to improve operational effectiveness;
•our inability to successfully execute our new strategic plan and restructuring plan, including but not limited to additional impairment charges and/or higher than expected severance costs and exist costs, and our inability to realize the expected benefits of such plans;
•our inability to further penetrate our customer base and target markets;
•development by others of new or improved products, processes or technologies that make our products less competitive or obsolete;
•our inability to maintain what we believe to be our technological advantage by developing new products and enhancing our existing products;
•the outcome of the U.S. Government’s review of, or investigation into, our potential overcharging of the U.S. Government under our General Services Administration Federal Supply Schedule contracts, any resulting penalties, damages or sanctions imposed on us and the outcome of any resulting litigation to which we may become a party, loss of future government sales and potential impacts on customer and supplier relationships and our reputation;
•risks associated with expanding international operations, such as fluctuations in currency exchange rates, difficulties in staffing and managing foreign operations, increased political and economic instability, compliance with potentially evolving import and export regulations, and the burdens and potential exposure of complying with a wide variety of U.S. and foreign laws and labor practices;
•changes in trade regulation, which result in rising prices of imported steel, steel byproducts, aluminum and aluminum byproducts and various other raw materials that we use in the production of measurement devices, and our ability to pass those costs on to our customers or require our suppliers to absorb such costs;
•changes in foreign regulation which may result in rising prices of our measurement devices sold as exports to our international customers, our customers’ willingness to absorb incremental import tariffs, and the corresponding impact on our profitability;
•our inability to successfully identify and acquire target companies and achieve expected benefits from, and effectively integrate, acquisitions that are consummated;
•the cyclical nature of the industries of our customers and material adverse changes in our customers’ access to liquidity and capital;
change•changes in the potential for the computer-aided measurement (“CAM2”) market and the potential adoption rate for our products, which are difficult to quantify and predict;
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•our inability to protect our patents and other proprietary rights in the United States and foreign countries;
•our inability to adequately establish and maintain effective internal controls over financial reporting;
•fluctuations in our annual and quarterly operating results and the inability to achieve our financial operating targets as a result of a number of factors including, without limitation (i) litigation and regulatory action brought against us, (ii) quality issues with our products, (iii) excess or obsolete inventory, shrinkage or other inventory losses due to product obsolescence, change in demand for our products, scrap or material price changes, (iv) raw material price fluctuations and other inflationary pressures, (v) expansion of our manufacturing capability, (vi) the size and timing of customer orders, (vii) the amount of time that it takes to fulfill orders and ship our products, (viii) the length of our sales cycle to new customers and the time and expense incurred in further penetrating our existing customer base, (ix) increases in operating expenses required for product development andmanufacturing inefficiencies associated with new product marketing,introductions, (x) costs associated with new product introductions, such as product development, marketing, assembly line start-up costs and low introductory period production volumes, (xi) the timing and market acceptance of new products and product enhancements, (xii) customer order deferrals in anticipation of new products and product enhancements, (xiii) the inability of our sales and marketing programs to achieve their sales targets, (xiv) start-up costs associated with opening new sales offices outside of the United States, (xv) fluctuations in revenue without proportionate adjustments in fixed costs, (xvi) inefficiencies in the management of our inventories and fixed assets, (xvii) compliance with government regulations including health, safety, and environmental matters, and (xviii) investment costs associated with the training and ramp-up time for new sales people, and (xix) manufacturing inefficiencies associated with new product introductions;people;

our ability to achieve profitability;
•changes in gross margins due to a changing mix of products sold and the different gross margins on different products and sales channels;
•changes in applicable laws, rules or regulations, or their interpretation or enforcement, or the enactment of new laws, rules or regulations that apply to our business operations or require us to incur significant expenses for compliance;
•our inability to successfully comply with the requirements of the Restriction of Hazardous Substances Directive and the Waste Electrical and Electronic Equipment Directive in the European Union;
•the inability of our products to displace traditional measurement devices and attain broad market acceptance;
•the impact of competitive products and pricing on our current offerings;
•our ability to successfully complete our executive officer transitions and the loss of any of our Chief Executive Officerexecutive officers or other key personnel;
•difficulties in recruiting research and development engineers and application engineers;
•the failure to effectively manage the effects of ourany future growth;
•the impact of reductions or projected reductions in government spending, or uncertainty regarding future levels of government expenditures, particularly in the defense sector;
•variations in theour effective income tax rate, and the difficulty in predicting thewhich makes it difficult to predict our effective income tax rate on a quarterly and annual basis;basis, and the impact of the U.S. Tax Cuts and Jobs Act of 2017 on the global intangible low-taxed income of foreign subsidiaries;
•the loss of key suppliers and the inability to find sufficient alternative suppliers in a reasonable period of time or on commercially reasonable terms;
•the impact of fluctuations in exchange rates;
•the effect of estimates and assumptions with respect to critical accounting policies and the impact of the adoption of recently issued accounting pronouncements;
the impact of changes in technologies on the competitiveness of our products or their components;
the impact of new product introductions;
•the magnitude of increased warranty costs from new product introductions and enhancements to existing products;
•the sufficiency of our plants to meet manufacturing requirements;
•the continuation of our share repurchase program;
•the sufficiency of our working capital and cash flow from operations to fund our long-term liquidity requirements;
•the impact of geographic changes in the manufacturing or sales of our products on our effective income tax rate;
•our ability to comply with the requirements for favorable tax rates in foreign jurisdictions; and
•other risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2016,2019 and in Part II, Item 1A. Risk Factors in therisks identified on this Quarterly ReportsReport on Form 10-Q for the quarterly periods ended March 31, 2017 and June 30, 2017.10-Q.
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Moreover, new risks and uncertainties emerge from time to time, and we undertake no obligation to update publicly or review the risks and uncertainties included in this Quarterly Report on Form 10-Q, unless otherwise required by law.
Overview
We are a global technology company that designs, develops, manufactures, markets and supports software driven, three-dimensional (“3D”) measurement and imaging and realization systems.solutions. This technology permits high-precision 3D measurement, imaging and comparison of parts and complex structures within production and quality assurance processes. Our devices are used for inspection of components and assemblies, rapid prototyping, reverse engineering, documenting large volume or structures in 3D, surveying and construction, as well as for investigation and reconstruction of accident sites or crime scenes. We sell the majority of our products through a direct sales force across a broad number of customers in a range of manufacturing, industrial, architecture, surveying, building information modeling, construction, public safety forensics, cultural heritage, and other applications. Our FaroArm®FaroArm®, FARO Laser ScanArm®, FARO Gage®ScanArm®, FARO Laser TrackerTM, FARO Laser Projector, FARO Cobalt Array Imager, and their companion CAM2®CAM2®, BuildIT, and BuildIT Projector software solutions, provide for Computer-Aided Design (“CAD”) based inspection, factory-level statistical process control, high-density surveying, and laser-guided assembly and production. Together, these products integrate the measurement, quality inspection, and reverse engineering functions with CAD and 3D software to improve productivity, enhance product quality, and decrease rework and scrap in the manufacturing process, mainly supporting applications in our Factory Metrology vertical.the automotive, aerospace, metal and machine fabrication and other industrial manufacturing markets. Our FARO Focus and FARO Scanner Freestyle3DXScanPlan laser scanners, and their companion FARO SCENE, BuildIT, FARO PointSense,As-BuiltTM, and FARO Zone public safety forensics software offerings, are utilized for a wide variety of 3D modeling, documentation and high-density surveying applications primarily in our Construction Building Information Modeling - Construction Information Management (“Construction BIM-CIM”)the architecture, engineering, and Public

Safety Forensics verticals.construction and public safety markets. Our FARO Laser ScanArm®, FARO Cobalt Array Imager, FARO Scanner Freestyle3DX laser scannersScanArm® and theirits companion SCENE software also enable a fully digital workflow used to capture real world geometry for the purpose of empowering design, enabling innovation, and speeding up the design cycle, supporting our Product Design vertical. FARO Visual Inspect enables large, complex 3D CAD data to be transferred to a tablet device and then used for mobile visualization and comparison to real world conditions, facilitating in-process inspection, assembly, guidance and positioning for applications in our Factory Metrology and Construction BIM-CIM verticals. Our line of galvanometer-based scan heads and laser scan controllers are used in a variety of laser applications and are integrated into larger components and systems.cycle.
We derive our revenues primarily from the sale of our measurement equipment and related multi-faceted software programs. Revenue related to these products is generally recognized upon shipment. In addition, we sell extended warranties and training and technology consulting services relating to our products. We recognize the revenue from extended warranties on a straight-line basis over the term of the warranty, and revenue from training and technology consulting services when the services are provided.
We operate in international markets throughout the world and maintain sales offices in Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Malaysia, Mexico, the Netherlands, Poland, Portugal, Singapore, South Korea, Spain, Switzerland, Thailand, Turkey, the United Kingdom, and the United States and Vietnam.States.
We manufacture our FaroArm®, FARO Laser ScanArm®, FARO Gage,FaroArm® and FARO Laser TrackerTMScanArm® products in our manufacturing facility located in Switzerland for customer orders from Europe, the Middle East and Africa (“EMEA”), in our manufacturing facility located in Singapore for customer orders from the Asia-Pacific region, and in our manufacturing facilitiesfacility located in Florida and Pennsylvania for customer orders from the Americas. We manufacture our FARO Focus3D in our manufacturing facilities located in Germany and Switzerland for customer orders from Europe, the Middle East, AfricaEMEA and the Asia-Pacific region, and in our manufacturing facility located in Pennsylvania for customer orders from the Americas. We manufacture our FARO FreestyleLaser Tracker3DTMX products in our facility located in Germany. We manufacture and our FARO Laser ProjectionProjector products in our facility located in Pennsylvania. We expect all of our existing plantsmanufacturing facilities to have the production capacity necessary to support our volume requirements through the remainder of 2017.during 2020.
We account for wholly ownedwholly-owned foreign subsidiaries in the currency of the respective foreign jurisdiction; therefore, fluctuations in exchange rates may have an impact on the value of the intercompany account balances denominated in different currencies and reflected in our condensed consolidated financial statements. We are aware of the availability of off-balance sheet financial instruments to hedge exposure to foreign currency exchange rates, including cross-currency swaps, forward contracts and foreign currency options. However, we have not used such instruments in the past, and none were utilized in 20162019 or the ninesix months ended SeptemberJune 30, 2017.2020.
OverCOVID-19 and Impact On Our Business
Our business is significantly vulnerable to the past decade,economic effects of pandemics and other public health crises, including the ongoing novel coronavirus (“COVID-19”) outbreak that has surfaced in virtually every country of our global operating footprint. During the second quarter of 2020, we have achieved profitability on an annual basis, withexperienced a significant decline in the exceptiondemand for our products and services across all of a loss in 2009 that resulted primarily from the decline of the global economy that year. Historically, our sales have grownserved markets as a result of continuing marketthe impact of the spread of COVID-19. Although COVID-19 has negatively impacted demand for our products and acceptanceservices overall, the global pandemic also has provided us with the opportunity to adapt to a virtual environment and to capitalize on our existing virtual sales demonstration infrastructure which we have had in place for several years. There has been an increase in the attendance of our virtual training and product information seminars as our customers take advantage of the opportunity to remotely participate and to better understand the capabilities of our products increased sales activity in part through additional sales staff worldwide, new product launches or enhancements, and acquisitions. Our historical financial performance is not indicativesoftware offerings.

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We continue to assess the ongoing impact of COVID-19 on our business results and remain committed to taking actions to address the health and safety of our futureemployees and customers, as well as the negative effects from demand disruption and production impacts, including, but not limited to, the following:
•Operating our business with a focus on our employee health and safety, which includes minimizing travel, remote work policies, maintaining employee distancing and enhanced sanitation of all of our facilities;
•Monitoring of our liquidity, reduction of supply flows into our manufacturing facilities, disciplined inventory management, and scrutinization of our capital expenditures; and
•Continuously reviewing our financial performance.strategy to strengthen financial flexibility in these volatile financial markets.
We began undertaking several important strategic initiativescontinue to maintain a strong capital structure with a cash balance of $173.7 million and no debt as of June 30, 2020. We believe that our liquidity position is adequate to meet our projected needs in 2016the reasonably foreseeable future.
Future developments, such as the potential resurgence of COVID-19 in countries that we believe will drive our long-term growth and profitability, including:
reorganizing our businesshave begun to align our sales, marketing, product management and research and development around specific vertical markets and to better define our end market applications;
modernizing our sales process to improverecover from the efficiency of our sales organization by supplementing our current direct sales approach of conducting on-site demonstrations with multimedia, web-based demonstrations and cloud-based customer relations development;
accelerating and maintaining a consistent schedule of new product introductions; and
reorganizing all functions, processes and people to a harmonized global mindset from our historically regional business structure to improve operational efficiencies.     
We successfully completed these primary initiatives during the first half of 2017, including the reorganization of our business to align around specific vertical markets.
As a resultearly impact of the reorganization discussed above, we realigned our business into three segments: Factory Metrology, Construction BIM-CIMpandemic and Other, as further discussedactions taken by governments in Note 1 – Descriptionresponse to future resurgence, that are highly uncertain and not able to be predicted will determine the extent to which the COVID-19 outbreak continues to impact the Company’s results of Businessoperations and financial conditions. See Item 1A, Risk Factors, included in Part I, Item 1II of this Quarterly Report on Form 10-Q. The presentation10-Q for an additional discussion of risks related to COVID-19.
Change in Organizational Structure and Segment Reporting
From the fourth quarter of 2016 through the fourth quarter of 2019, we operated in five market verticals—3D Manufacturing, Construction Building Information Modeling (“Construction BIM”), Public Safety Forensics, 3D Design and Photonics—and had three reporting segments—3D Manufacturing, Construction BIM and Emerging Verticals. As discussed in our Quarterly Report on Form 10-Q for the third quarter of 2019, our new management team, led by our new Chief Executive Officer (“CEO”), formulated and began to implement a new comprehensive strategic plan for our business. As part of our strategic planning process, we identified areas of our business that needed enhanced focus or change in order to improve our efficiency and cost structure. In the fourth quarter of 2019, we reassessed and redefined our go-to-market strategy, refocused our marketing engagement with our customers and re-evaluated our hardware product portfolio. We also began to focus on other organizational optimization efforts, including the simplification of our overly complex management structure.
As part of our new strategic plan, and based on the recommendation of our CEO, who is also our Chief Operating Decision Maker (“CODM”), in the fourth quarter of 2019, we eliminated our vertical operating structure and reorganized the Company into a functional structure. Our executive leadership team is now comprised of global functional leaders in areas such as sales, marketing, operations, research and development and general and administrative, and resources are allocated to each function at a consolidated unit level. We no longer have separate business units, or segment managers or vertical leaders who report to the CODM with respect to operations, operating results or planning for levels or components below the total Company level. Instead, our CODM now allocates resources and evaluates performance on a Company-wide basis. Based on these changes, commencing with the fourth quarter of 2019, we now report as one reporting segment that develops, manufactures, markets, supports and sells CAD-based quality assurance products integrated with CAD-based inspection and statistical process control software and 3D documentation systems. Our reporting segment sells into a variety of end markets, including automotive, aerospace, metal and machine fabrication, architecture, engineering, construction and public safety.
New Strategic Plan and Restructuring Plan
In addition to the reorganization of the Company’s structure, as part of our strategic planning process, we also evaluated our hardware product portfolio and the operations of certain of our recent acquisitions. As a result of this evaluation, we are simplifying our hardware product portfolio, ceasing to sell certain products and disposed of certain of our recent acquisitions.
In addition to the implementation of our new strategic plan, 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. Key activities under the Restructuring Plan include a continued focus on efficiency and cost-saving efforts, which includes decreasing total headcount by approximately 500 employees upon the completion of the Restructuring Plan.
These activities are expected to be substantially completed by the end of 2021. Pre-tax charges of approximately $49 million were recorded in the fourth quarter of 2019 in connection with the implementation of our new strategic plan and included the following:
•$21.2 million impairment of goodwill;
•$12.8 million charge, increasing our reserve for excess and obsolete inventory;
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•$10.5 million impairment of intangible assets associated with recent acquisitions;
•$1.4 million impairment of intangible assets related to capitalized patents;
•$3.4 million impairment of other assets and other charges.
In connection with the Restructuring Plan, we recorded a pre-tax charge of approximately $13.7 million during the first quarter 2020 and $0.6 million during the second quarter primarily consisting of severance and related benefits. We estimate total additional pre-tax charges of $12 million to $22 million for the remainder of fiscal year 2020.
Actual results, including the costs of the Restructuring Plan, may differ materially from our expectations, resulting in our inability to realize the expected benefits of the Restructuring Plan and our new strategic plan and negatively impacting our ability to execute our future plans and strategies, which could have a material adverse effect on our business, financial condition and results of operations.
Reclassification and Related Changes to Presentation
Certain prior year amounts have been reclassified in the accompanying condensed consolidated financial statements to conform to the current period presentation:
•Commencing with the third quarter of 2019, depreciation and amortization expenses are being reported in our statements of operations to reflect departmental costs. Previously, those expenses were reported as a separate line item under operating expenses. Amounts related to depreciation and amortization expenses for the three and six months ended June 30, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of depreciation and amortization expenses and to conform to the current period presentation.
•Selling and marketing expenses and general and administrative expenses are now being reported in the accompanying statements of operations together in one line as Selling, general and administrative. Previously, those expenses were reported as two separate line items under operating expenses. Amounts related to selling, general and administrative expenses for the three and ninesix months ended SeptemberJune 30, 2016 has2019 have been restatedreclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of selling, general and administrative expenses and to conform to the changecurrent period presentation, as set forth in reporting segments.the following tables;

•Software maintenance revenue is now being reported in the accompanying statements of operations as a component of product sales. Previously, these revenues were reported in service sales. Amounts related to software maintenance revenue for the three and six months ended June 30, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of software maintenance revenue and to conform to the current period presentation, as set forth in the following tables; and
•Software maintenance cost of sales is now being reported in the accompanying statements of operations as a component of product cost of sales. Previously, these cost of sales was reported in service cost of sales. Amounts related to software maintenance cost of sales for the three and six months ended June 30, 2019 have been reclassified throughout this Quarterly Report on Form 10-Q to reflect this reclassification of software maintenance cost of sales and to conform to the current period presentation, as set forth in the following tables.


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For the three months ended, June 30, 2019
As ReportedDepreciation and Amortization AdjustmentSelling, General and Administrative AdjustmentSoftware Maintenance and Other AdjustmentsAs Adjusted
Sales
Product$67,992  $—  $—  $3,053  $71,045  
Service25,499  —  —  (3,053) 22,446  
Total sales$93,491  $—  $—  $—  $93,491  
Cost of Sales
Product$29,037  $796  $—  $672  $30,505  
Service12,135  783  —  (672) 12,246  
Total cost of sales$41,172  $1,579  $—  $—  $42,751  
Operating Expenses
Selling, general and administrative$—  $1,459  $43,548  $—  $45,007  
Selling and marketing29,124  —  (29,124) —  —  
General and administrative14,424  —  (14,424) —  —  
Depreciation and amortization4,573  (4,573) —  —  —  
Research and development9,091  1,535  —  —  10,626  
Total operating expenses$57,212  $(1,579) $—  $—  $55,633  



For the six months ended, June 30, 2019
As ReportedDepreciation and Amortization AdjustmentSelling, General and Administrative AdjustmentSoftware Maintenance and Other AdjustmentsAs Adjusted
Sales
Product$136,792  $—  $—  $5,830  $142,622  
Service50,316  —  —  (5,830) 44,486  
Total sales$187,108  $—  $—  $—  $187,108  
Cost of Sales
Product$55,165  $1,972  $—  $1,319  $58,456  
Service24,605  1,607  —  (1,319) 24,893  
Total cost of sales$79,770  $3,579  $—  $—  $83,349  
Operating Expenses
Selling, general and administrative$—  $2,502  $83,525  $—  $86,027  
Selling and marketing55,877  —  (55,877) —  —  
General and administrative27,648  —  (27,648) —  —  
Depreciation and amortization9,322  (9,322) —  —  —  
Research and development19,026  3,241  —  —  22,267  
Total operating expenses$111,873  $(3,579) $—  $—  $108,294  
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Amounts reported in millions within this Quarterly Report on Form 10-Q are computed based on the amounts in thousands. As a result, the sum of the components reported in millions may not equal the total amount reported in millions due to rounding. Certain columns and rows within the tables that follow may not add due to the use of rounded numbers. Percentages presented are calculated based on the respective amounts in thousands.

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Results of Operations
The following table sets forth, for the periods indicated, our unaudited results of operations expressed as dollar amounts and as a percentage of total sales.
Three months ended June 30,Six Months Ended June 30,
(dollars in thousands)2020% of Sales2019% of Sales2020% of Sales2019% of Sales
Sales
Product$42,259  69.8 %$71,045  76.0 %$98,784  70.5 %$142,622  76.2 %
Service18,305  30.2 %22,446  24.0 %41,295  29.5 %44,486  23.8 %
Total sales60,564  100.0 %93,491  100.0 %140,079  100.0 %187,108  100.0 %
Cost of Sales
Product21,333  35.2 %30,505  32.6 %44,399  31.7 %58,456  31.2 %
Service10,335  17.1 %12,246  13.1 %22,911  16.4 %24,893  13.3 %
Total cost of sales31,668  52.3 %42,751  45.7 %67,310  48.1 %83,349  44.5 %
Gross Profit28,896  47.7 %50,740  54.3 %72,769  51.9 %103,759  55.5 %
Operating Expenses
Selling, general and administrative30,036  49.6 %45,007  48.1 %66,360  47.4 %86,027  46.0 %
Research and development10,186  16.8 %10,626  11.4 %20,601  14.7 %22,267  11.9 %
Restructuring costs636  1.1 %—  — %14,324  10.2 %—  — %
Total operating expenses40,858  67.5 %55,633  59.5 %101,285  72.3 %108,294  57.9 %
Loss from operations(11,962) (19.8)%(4,893) (5.2)%(28,516) (20.4)%(4,535) (2.4)%
Other (income) expense
Interest expense, net212  0.4 %240  0.3 %246  0.2 %96  0.1 %
Other expense, net117  0.2 %1,689  1.8 %590  0.4 %1,884  1.0 %
Loss before income tax benefit(12,291) (20.3)%(6,822) (7.3)%(29,352) (21.0)%(6,515) (3.5)%
Income tax benefit(3,359) (5.5)%(417) (0.4)%(5,597) (4.0)%(262) (0.1)%
Net loss$(8,932) (14.7)%$(6,405) (6.9)%$(23,755) (17.0)%$(6,253) (3.3)%
 Three months ended September 30, Nine months ended September 30,
(dollars in thousands)2017 % of Sales 2016 % of Sales 2017 % of Sales 2016 % of Sales
Sales               
Product$68,563
 76.0 % $61,280
 77.0 % $193,476
 76.0 % $182,232
 77.9 %
Service21,687
 24.0 % 18,320
 23.0 % 61,018
 24.0 % 51,654
 22.1 %
Total sales90,250
 100.0 % 79,600
 100.0 % 254,494
 100.0 % 233,886
 100.0 %
Cost of Sales               
Product26,673
 29.6 % 25,880
 32.5 % 78,186
 30.7 % 74,938
 32.0 %
Service11,543
 12.8 % 11,042
 13.9 % 33,765
 13.3 % 29,665
 12.7 %
Total cost of sales38,216
 42.3 % 36,922
 46.4 % 111,951
 44.0 % 104,603
 44.7 %
Gross Profit52,034
 57.7 % 42,678
 53.6 % 142,543
 56.0 % 129,283
 55.3 %
Operating Expenses:               
Selling and marketing25,990
 28.8 % 19,781
 24.9 % 74,884
 29.4 % 56,399
 24.1 %
General and administrative10,307
 11.4 % 10,747
 13.5 % 32,883
 12.9 % 31,139
 13.3 %
Depreciation and amortization4,368
 4.8 % 3,381
 4.2 % 12,075
 4.7 % 9,733
 4.2 %
Research and development9,019
 10.0 % 7,928
 10.0 % 26,530
 10.4 % 22,344
 9.6 %
Total operating expenses49,684
 55.1 % 41,837
 52.6 % 146,372
 57.5 % 119,615
 51.1 %
Income (loss) from operations2,350
 2.6 % 841
 1.1 % (3,829) (1.5)% 9,668
 4.1 %
Other (income) expense               
Interest income, net(78) (0.1)% (21) — % (249) (0.1)% (119) (0.1)%
Other (income) expense, net(147) (0.2)% (167) (0.2)% 320
 0.1 % 824
 0.4 %
Income (loss) before income tax expense (benefit)2,575
 2.9 % 1,029
 1.3 % (3,900) (1.5)% 8,963
 3.8 %
Income tax expense (benefit)947
 1.0 % (61) (0.1)% (442) (0.2)% 1,401
 0.6 %
Net income (loss)$1,628
 1.8 % $1,090
 1.4 % $(3,458) (1.4)% $7,562
 3.2 %


Consolidated Results
Three Months Ended SeptemberJune 30, 20172020 Compared to the Three Months Ended SeptemberJune 30, 20162019
Sales. Total sales increased $10.7decreased by $32.9 million, or 13.4%35.2%, to $90.3$60.6 million for the three months ended SeptemberJune 30, 20172020 from $79.6$93.5 million for the three months ended SeptemberJune 30, 2016.2019. Total product sales increaseddecreased by $7.3$28.7 million, or 11.9%40.5%, to $68.6$42.3 million for the three months ended SeptemberJune 30, 20172020 from $61.3$71.0 million for the three months ended SeptemberJune 30, 2016.2019. Our product sales increaseddecreased primarily due to increased unit sales in our Construction BIM-CIM vertical and in our other segment, which includes our Public Safety Forensics and Product Design verticals, and higher average selling prices in our Factory Metrology vertical.the unfavorable impact of end market demand softness related to the COVID-19 pandemic. Service revenue increaseddecreased by $3.4$4.1 million, or 18.4%, to $21.7 million for the three months ended September 30, 2017 from $18.3 million for the three months ended SeptemberJune 30, 2016,2020 from $22.4 million for the three months ended June 30, 2019, primarily due to an increase in warranty and customer service revenue driven by the growthunfavorable impact of our installed, serviceable base and focused sales initiatives.end market demand softness related to the COVID-19 pandemic. Foreign exchange rates had a positivenegative impact on total sales of $0.7$0.9 million, increasing the percent that our overall sales growth ratedeclined by approximately 0.91.0 percentage points, primarily due to the strengtheningweakening of the Euro, partially offset by the decline of the Japanese yen,Chinese Yuan, and Brazilian Real relative to the U.S. dollar.
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Gross profit. Gross profit increased $9.3decreased by $21.8 million, or 21.9%43.1%, to $52.0$28.9 million for the three months ended SeptemberJune 30, 20172020 from $42.7$50.7 million for the three months ended SeptemberJune 30, 2016. Gross2019, and gross margin increaseddecreased to 57.7%47.7% for the three months ended SeptemberJune 30, 20172020 from 53.6% in54.3% for the prior year period.three months ended June 30, 2019, primarily due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic which adversely affected our product fixed cost absorption. Gross margin from product revenue increaseddecreased by 3.37.6 percentage points to 61.1%49.5% for the three months ended SeptemberJune 30, 20172020 from 57.8% in the prior year period. This increase was primarily due to higher average selling prices in our Factory Metrology vertical as a result of new product introductions. Gross margin from service revenue increased by 7.1 percentage points to 46.8% for the three months ended September 30, 2017 from 39.7%57.1% for the prior year period primarily as a resultdue to the unfavorable impact of higherend market demand softness related to the COVID-19 pandemic which adversely affected our product fixed cost absorption. Gross margin from service revenue.revenue decreased by 1.9 percentage pointsto 43.5% for the three months ended June 30, 2020 from 45.4% for the prior year period, primarily due to the aforementioned decrease in service revenue due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic with relatively consistent fixed costs.

Selling, general and Marketing Expensesadministrative expenses. Selling, general and marketingadministrative expenses increaseddecreased by $6.2$15.0 million, or 31.4%33.3%, to $26.0$30.0 million for the three months ended SeptemberJune 30, 20172020 from $19.8$45.0 million for the three months ended SeptemberJune 30, 2016.2019. This increasedecrease was driven primarily by higher compensation expense, reflecting an increasedecreased salaries and wages and other cost savings initiatives to reduce non-personnel costs that resulted from the Restructuring Plan. Additionally, a decrease in selling headcount as part of our strategic initiatives to drivecommission expense and travel expense was driven by reduced global sales growth.and pandemic stay-at-home orders, respectively. Selling, general and marketingadministrative expenses as a percentage of sales were 28.8%increased to 49.6% for the three months ended SeptemberJune 30, 2017,2020, compared with 24.9%48.1% of sales for the three months ended SeptemberJune 30, 2016. 2019. Our worldwide period-ending selling, general and administrative headcount increaseddecreased by 133,370, or 26.5%35.1%, to 635684 at SeptemberJune 30, 2017,2020, from 5021,054 at SeptemberJune 30, 2016.2019.
GeneralResearch and administrativedevelopment expenses. GeneralResearch and administrativedevelopment expenses decreased by $0.4 million, or 4.1%, to $10.3$10.2 million for the three months ended SeptemberJune 30, 20172020 from $10.7$10.6 million for the three months ended SeptemberJune 30, 2016.2019. This decrease was mainly driven primarily by a decrease in compensation and travel expenses. General and administrative expenses decreased to 11.4%purchased technology intangible amortization expense as a result of sales for the three months ended September 30, 2017 from 13.5%impairment of sales for the three months ended September 30, 2016.
Depreciation and amortization expenses. Depreciation and amortization expenses increased by $1.0 million, or 29.2%, to $4.4 million for the three months ended September 30, 2017 from $3.4 million for the three months ended September 30, 2016. This increase was driven primarily by higher amortization ofcertain intangible assets related to acquisitions and new production tooling for the manufacture of new products.
Research and development expenses. Research and development expenses increased by $1.1 million, or 13.8%, to $9.0 million for the three months ended September 30, 2017 from $7.9 million for the three months ended September 30, 2016. This increase was mainly due to higher compensation expense resulting from increased headcount in connection with our acquisitions.the Restructuring Plan. Research and development expenses as a percentage of sales was 10.0%increased to 16.8% for the three months ended SeptemberJune 30, 20172020 from 11.4% for the three months ended June 30, 2019.
Restructuring costs. In February 2020, we initiated the Restructuring Plan to improve business effectiveness, streamline operations and Septemberachieve a stated target cost level for the Company as a whole. Restructuring costs included in operating expenses for the three months ended June 30, 2016.2020 were $0.6 million primarily consisting of legal and consulting expenses.
Other (income)Interest expense, net. We recorded interest expense, net of less than $0.2 million for both of the three month periods ended June 30, 2020 and June 30, 2019.
Other expense, net. For the three months ended June 30, 2020, other expense decreased by $1.6 million to $0.1 million from $1.7 million for the three months ended June 30, 2019. The decrease is primarily driven by the $1.5 million impairment charge related to our equity investment in present4D recorded in the second quarter of 2019.
Income tax benefit. For the three months ended SeptemberJune 30, 2017, other2020, we recorded an income net, which is largely driven by the effecttax benefit of foreign exchange rates, remained unchanged when$3.4 million compared to the three months ended September 30, 2016.
Incomewith income tax expense (benefit). Income tax expense was $0.9benefit of $0.4 million for the three months ended SeptemberJune 30, 2017, compared with an income2019. Our effective tax benefit of $0.1 millionrate was (27.3%) for the three months ended SeptemberJune 30, 2016. Our effective tax rate was 36.8% for the three months ended September 30, 20172020 compared with a 5.9% benefit(6.1%) in the prior year period. The change in our income tax expense (benefit) andbenefit was primarily due to the increase in our pretax loss during the second quarter of 2020 compared to the same period of 2019. The change in our effective tax rate werewas primarily due to the impact of a shift$0.9 million increase in our reserve for uncertain tax positions in the geographicsecond quarter of 2019.
Our quarterly estimate of our annual effective tax rate and our quarterly provision for income tax (benefit) expense are subject to significant variation due to numerous factors, including variability in accurately predicting our pretax and taxable income or loss and the mix of jurisdictions to which they relate, as well as the amount of pretax income expected foror loss recognized during the full year 2017. Our effective tax rate could be impacted positively or negatively by geographic changes in the manufacturing or sales of our products and the resulting effect on taxable income in each jurisdiction, as well as by any change in statutory tax rates in a jurisdiction.quarter.
Net incomeloss. Our net incomeloss was $1.6$8.9 million for the three months ended SeptemberJune 30, 20172020 compared to $1.1with net loss of $6.4 million for the prior year period, reflecting the impact of the factors described above.


Nine
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Six Months Ended SeptemberJune 30, 20172020 Compared to the NineSix Months Ended SeptemberJune 30, 20162019
Sales. Total sales increased $20.6decreased by $47.0 million, or 8.8%25.1%, to $254.5$140.1 million for the ninesix months ended SeptemberJune 30, 20172020 from $233.9$187.1 million for the ninesix months ended SeptemberJune 30, 2016.2019. Total product sales increaseddecreased by $11.3$43.8 million, or 6.2%30.7%, to $193.5$98.8 million for the ninesix months ended SeptemberJune 30, 20172020 from $182.2$142.6 million for the ninesix months ended SeptemberJune 30, 2016.2019. Our product sales increase reflected higher unit sales, especially indecreased primarily due to the Construction BIM-CIM vertical.unfavorable impact of end market demand softness related to the COVID-19 pandemic. Service revenue increaseddecreased by $9.3$3.2 million, or 18.1%7.2%, to $61.0$41.3 million for the ninesix months ended SeptemberJune 30, 20172020 from $51.7$44.5 million for the ninesix months ended SeptemberJune 30, 2016,2019, primarily due to an increase in warranty and customer service revenue driven by the growthunfavorable impact of our installed, serviceable base and focused sales initiatives.end market demand softness related to the COVID-19 pandemic. Foreign exchange rates had a negative impact on total sales of $2.0$2.1 million, decreasingincreasing the percent that our overall sales growth ratedeclined by approximately 0.91.1 percentage points, primarily due to the declineweakening of the Japanese yen,Euro, Chinese yuan renminbi,Yuan, and British pound sterlingBrazilian Real relative to the U.S. dollar.dollar.
Gross profit. Gross profit increased $13.2decreased by $31.0 million, or 10.3%29.9%, to $142.5$72.8 million for the ninesix months ended SeptemberJune 30, 20172020 from $129.3$103.8 million for the ninesix months ended SeptemberJune 30, 2016. Gross2019, and gross margin increaseddecreased to 56.0%51.9% for the ninesix months ended SeptemberJune 30, 20172020 from 55.3% in55.5% for the prior year period.six months ended June 30, 2019, primarily due to the unfavorable impact of end market demand softness related to the COVID-19 pandemic which adversely affected our product fixed cost absorption. Gross margin from product revenue increaseddecreased by 0.73.9% percentage points to 59.6%55.1% for the ninesix months ended SeptemberJune 30, 20172020 from 58.9% in59.0% for the prior year period. This increase wasperiod primarily due to slightly higher average selling prices and an improvement inthe unfavorable impact of end market demand softness related to the COVID-19 pandemic which adversely affected our manufacturing costs, particularly in our Factory Metrology vertical.product fixed cost absorption. Gross margin from service revenue increased by 2.10.5% percentage pointsto 44.7%44.5% for the ninesix months ended SeptemberJune 30, 20172020 from 42.6%44.0% for the prior year period, as a result of higher service revenue, partially offset by increased costsprimarily due to higher service-related headcount.an increase in recurring service contracts revenue and corresponding decrease in service contracts expenses due to the impact of the COVID-19 pandemic.
Selling, general and Marketing Expensesadministrative expenses. Selling, general and marketingadministrative expenses increaseddecreased by $18.5$19.6 million, or 32.8%22.9%, to $74.9$66.4 million for the ninesix months ended SeptemberJune 30, 20172020 from $56.4$86.0 million for the ninesix months ended SeptemberJune 30, 2016.2019. This

increase decrease was driven primarily by higher compensation expense, reflecting an increasedecreased salaries and wages and other cost savings initiatives to reduce non-personnel costs that resulted from the Restructuring Plan. Additionally, a decrease in selling headcount as part of our strategic initiatives to drivecommission expense and travel expense was driven by reduced global sales growth.and pandemic stay-at-home orders, respectively. Selling, general and marketingadministrative expenses as a percentage of sales were 29.4%increased to 47.4% for the ninesix months ended SeptemberJune 30, 2017,2020, compared with 24.1%46.0% of sales for the ninesix months ended SeptemberJune 30, 2016. 2019. Our worldwide period-ending selling, general and administrative headcount increaseddecreased by 133,370, or 26.5%35.1%, to 635684 at SeptemberJune 30, 2017,2020, from 5021,054 at SeptemberJune 30, 2016.2019.
General and administrative expenses. General and administrative expenses increased by $1.8 million, or 5.6%, to $32.9 million for the nine months ended September 30, 2017 from $31.1 million for the nine months ended September 30, 2016. This increase was driven primarily by higher compensation, advisory services, and global system expenses. General and administrative expenses decreased to 12.9% of sales for the nine months ended September 30, 2017 from 13.3% of sales for the nine months ended September 30, 2016, primarily due to the higher sales in the nine months ended September 30, 2017.
Depreciation and amortization expenses. Depreciation and amortization expenses increased by $2.4 million, or 24.1%, to $12.1 million for the nine months ended September 30, 2017 from $9.7 million for the nine months ended September 30, 2016. This increase was driven primarily by higher amortization of intangible assets related to acquisitions and new production tooling for the manufacture of new products.
Research and development expenses. Research and development expenses increaseddecreased by $4.2$1.7 million, or 18.7%7.5%, to $26.520.6 million for the ninesix months ended SeptemberJune 30, 20172020 from $22.3 million for the ninesix months ended SeptemberJune 30, 2016.2019. This increasedecrease was mainly due to higher compensationdriven by a decrease in purchased technology intangible amortization expense resulting from increased headcountas a result of the impairment of certain intangible assets in connection with our acquisitions.the Restructuring Plan. Research and development expenses as a percentage of sales increased to 10.4%14.7% for the ninesix months ended SeptemberJune 30, 20172020 from 9.6%11.9% for the ninesix months ended SeptemberJune 30, 2016.2019.
Other (income) expense, netRestructuring costs. ForIn February 2020, we initiated the nineRestructuring Plan to improve business effectiveness, streamline operations and achieve a stated target cost level for the Company as a whole. Restructuring costs included in operating expenses for the six months ended SeptemberJune 30, 2017, other2020 were $14.3 million primarily consisting of severance and related benefits charges.
Interest expense, net. We recorded interest expense, net decreased by $0.5 million to $0.3 million from $0.8of $0.2 million for the ninesix months ended SeptemberJune 30, 2016. This change was2020 compared to expense of $0.1 million for the six months ended June 30, 2019.
Other expense, net. For the six months ended June 30, 2020, other expense decreased by $1.3 million to $0.6 million from $1.9 million for the six months ended June 30, 2019. The decrease is primarily driven by the effect$1.5 million impairment charge related to our equity investment in present4D recorded in the second quarter of foreign exchange rates on the value of intercompany account balances of our subsidiaries denominated in other currencies.2019.
Income tax expense (benefit). Income tax benefit was $0.4 million for. For the ninesix months ended SeptemberJune 30, 2017,2020, we recorded an income tax benefit of $5.6 million compared with income tax expensebenefit of $1.4$0.3 million for the ninesix months ended SeptemberJune 30, 2016. This change of $1.8 million was due to a pretax loss during the nine months ended September 30, 2017 compared to pretax income in the same period of 2016.2019. Our effective tax rate was 11.3%(19%) for the ninesix months ended SeptemberJune 30, 20172020 compared with 15.6%(4%) in the prior year period. The change in our income tax benefit expense was primarily due to the increase in our pretax loss during the six months ended June 30, 2020 compared to the same period of 2019. The change in our effective tax rate was primarily due to the pretax loss during the nine months ended September 30, 2017 compared with pretax income during the same periodimpact of 2016 and a shift$0.9 million increase in our reserve for uncertain tax positions in the geographicalsecond quarter of 2019.
Our quarterly estimate of our annual effective tax rate and our quarterly provision for income tax (benefit) expense are subject to significant variation due to numerous factors, including variability in accurately predicting our pretax and taxable income or loss and the mix of jurisdictions to which they relate, as well as the amount of pretax income or loss expected forrecognized during the full year 2017. Our effective tax rate continued to be lower than the statutory tax rate in the United States, mainly due to our global footprint in foreign jurisdictions with lower tax rates. Our effective tax rate could be impacted positively or negatively by geographic changes in the manufacturing or sales of our products and the resulting effect on taxable income in each jurisdiction, as well as by any change in statutory tax rates in a jurisdiction.quarter.
Net (loss) incomeloss. Our net loss was $3.5$23.8 million for the ninesix months ended SeptemberJune 30, 20172020 compared towith net incomeloss of $7.6$6.3 million for the prior year period, reflecting the impact of the factors described above.

Segment Results
Three Months Ended September 30, 2017 Compared to the Three Months Ended September 30, 2016
Total sales by segment for the three months ended September 30, 2017 and September 30, 2016 were as follows (in thousands):
34
 Three Months Ended
 September 30, 2017 
% of
Total
 September 30, 2016 
% of
Total
Factory Metrology$59,339
 65.8% $58,310
 73.3%
Construction BIM-CIM22,751
 25.2% 15,925
 20.0%
Other8,160
 9.0% 5,365
 6.7%
Total sales$90,250
   $79,600
  

We use segment profit to evaluate the performanceTable of our reportable segments, which are Factory Metrology, Construction BIM-CIM and Other. Segment profit is calculated as gross profit, net of selling and marketing expenses, for the reporting segment. The discussion of segment results for the three months ended September 30, 2017 and 2016 presented below is based on segment profit, as described above, and segment profit as a percent of sales, which is calculated as segment profit divided by net sales for such reporting segment, which we believe will aid investors in understanding and analyzing our operating results. Our definition of segment profit may not be comparable to similarly-titled measures reported by other companies. For additional information, including a reconciliation of total segment profit to income (loss) from operations, see Note 15 – Segment Reporting, in Part I, Item 1 of this Quarterly Report on Form 10-Q.Contents
Factory Metrology    
(dollars in thousands) Three Months Ended
  September 30, 2017 September 30, 2016
Total sales $59,339
 $58,310
Segment profit $20,144
 $16,305
Segment profit as a % of Factory Metrology segment sales 33.9% 28.0%
Sales.Total sales in our Factory Metrology segment increased $1.0 million, or 1.8%, to $59.3 million for the three months ended September 30, 2017 from $58.3 million in the prior year period. The increase was driven by higher average selling prices and growth in service revenue, partially offset by a reduction in product unit sales.
Segment profit. Segment profit in our Factory Metrology segment increased $3.8 million, or 23.5%, to $20.1 million for the three months ended September 30, 2017 from $16.3 million in the prior year period. This increase was primarily due to higher average selling prices, growth in service revenue and an improvement in manufacturing costs, partially offset by a reduction in product unit sales and higher selling and marketing expenses resulting from an increase in selling headcount as part of our strategic initiatives to drive sales growth.
Construction BIM-CIM    
(dollars in thousands) Three Months Ended
  September 30, 2017 September 30, 2016
Total sales $22,751
 $15,925
Segment profit $5,407
 $4,704
Segment profit as a % of Construction BIM-CIM segment sales 23.8% 29.5%
Sales. Total sales in our Construction BIM-CIM segment increased $6.9 million, or 42.9%, to $22.8 million for the three months ended September 30, 2017 from $15.9 million in the prior year period, primarily reflecting an increase in product unit sales and service revenue.
Segment profit. Segment profit in our Construction BIM-CIM segment increased $0.7 million, or 14.9%, to $5.4 million for the three months ended September 30, 2017 from $4.7 million in the prior year period, primarily driven by an increase in product unit sales and service revenue, partially offset by an increase in selling headcount as part of our strategic initiatives to drive sales growth.
Other  
(dollars in thousands) Three Months Ended
  September 30, 2017 September 30, 2016
Total sales $8,160
 $5,365
Segment profit $493
 $1,888
Segment profit as a % of Other segment sales 6.0% 35.2%
Sales. Total sales in our Other segment increased $2.8 million, or 52.1%, to $8.2 million for the three months ended September 30, 2017 from $5.4 million in the prior year period, primarily due to higher product unit sales in our Public Safety Forensics and Product Design verticals as we continue to strategically invest in new markets.
Segment profit. Segment profit in our Other segment was $0.5 million for the three months ended September 30, 2017 compared to $1.9 million in the prior year period. This decrease of $1.4 million was primarily due to higher selling and

marketing expense resulting from an increase in selling headcount as part of our strategic initiatives to staff emerging verticals with a dedicated sales force to drive sales growth.

Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
Total sales by segment for the nine months ended September 30, 2017 and September 30, 2016 were as follows (in thousands):
 Nine Months Ended
 September 30, 2017 
% of
Total
 September 30, 2016 
% of
Total
Factory Metrology$173,531
 68.2% $168,418
 72.0%
Construction BIM-CIM60,550
 23.8% 47,529
 20.3%
Other20,413
 8.0% 17,939
 7.7%
Total sales$254,494
   $233,886
  

Factory Metrology    
(dollars in thousands) Nine Months Ended
  September 30, 2017 September 30, 2016
Total sales $173,531
 $168,418
Segment profit $53,497
 $53,034
Segment profit as a % of Factory Metrology segment sales 30.8% 31.5%
Sales.Total sales in our Factory Metrology segment increased $5.1 million, or 3.0%, to $173.5 million for the nine months ended September 30, 2017 from $168.4 million in the same prior year period, mostly driven by higher product unit sales and growth in service revenue.
Segment profit. Segment profit in our Factory Metrology segment increased $0.5 million, or 0.9%, to $53.5 million for the nine months ended September 30, 2017 from $53.0 million in the same prior year period. This increase was primarily due to the higher product unit sales and growth in service revenue, partially offset by higher selling and marketing expenses resulting from an increase in selling headcount as part of our strategic initiatives to drive sales growth.
Construction BIM-CIM    
(dollars in thousands) Nine Months Ended
  September 30, 2017 September 30, 2016
Total sales $60,550
 $47,529
Segment profit $13,799
 $12,868
Segment profit as a % of Construction BIM-CIM segment sales 22.8% 27.1%
Sales. Total sales in our Construction BIM-CIM segment increased $13.1 million, or 27.4%, to $60.6 million for the nine months ended September 30, 2017 from $47.5 million in the prior year period, primarily reflecting an increase in product unit sales and higher service revenue.
Segment profit. Segment profit in our Construction BIM-CIM segment increased $0.9 million to $13.8 million for the nine months ended September 30, 2017 from $12.9 million in the prior year period, primarily driven by the increase in sales, partially offset by higher selling and marketing expenses resulting from an increase in selling headcount as part of our strategic initiatives to drive sales growth.

Other  
(dollars in thousands) Nine Months Ended
  September 30, 2017 September 30, 2016
Total sales $20,413
 $17,939
Segment profit $363
 $6,982
Segment profit as a % of Other segment sales 1.8% 38.9%
Sales. Total sales in our Other segment increased $2.5 million, or 13.8%, to $20.4 million for the nine months ended September 30, 2017 from $17.9 million in the prior year period, primarily due to higher product unit sales in our Public Safety Forensics and 3D Machine Vision verticals.
Segment profit. Segment profit in our Other segment decreased $6.6 million to $0.4 million for the nine months ended September 30, 2017 from $7.0 million in the prior year period. This decrease of $6.6 million was primarily due to higher selling and marketing expense resulting from an increase in selling headcount as part of our strategic initiatives to staff emerging verticals with a dedicated sales force to accelerate the pace of sales growth.

Liquidity and Capital Resources
Cash and cash equivalents increased by $23.6$40.1 million to $129.8$173.7 million at SeptemberJune 30, 20172020 from $106.2$133.6 million at December 31, 2016.2019. The increase was primarily driven by the maturity of U.S. Treasury Bills that were not re-invested, partially offsetnet cash provided by cash paid for acquisitions of $5.5 million, propertyoperating and equipment purchases of $6.1 million and $0.8 million of cash used ininvesting activities. Cash provided by operating activities during the nine months ended September 30, 2017.
Cash flows from operating activities provide our primary sources of liquidity. Cash used in operations was $0.8$16.1 million during the ninesix months ended SeptemberJune 30, 2017,2020, compared to $17.7 million of cash provided by operations of $28.5 million during the ninesix months ended SeptemberJune 30, 2016.2019. The changedecrease was mainly due to oura larger net loss in the nine months ended September 30, 2017, an increase in inventory to support new product introductions and a lower reduction in accounts receivable primarily due to higher sales during the three months ended September 30, 2017 compared to the same period in the prior year.current period.
Cash provided by investing activities during the ninesix months ended SeptemberJune 30, 20172020 was $19.1$23.4 million compared to $16.6 million of cash used in investing activities of $4.9 million during the ninesix months ended SeptemberJune 30, 2016.2019. The change was primarily due to the maturity of U.S. Treasury Bills in 2017 that were not re-invested, partially offsetamounting to $25.0 million during the six months ended June 30, 2020 without such activity during the six months ended June 30, 2019.
Cash provided by $5.5financing activities was $1.3 million in cash paid forduring the acquisition of Instruments Associates, LLC d/b/a Nutfield Technology in April 2017six months ended June 30, 2020 compared to $20.9 million in cash paid for acquisitions during the nine months ended September 30, 2016.
Cash flows used in financing activities was $0.1 million during the nine months ended September 30, 2017, compared to cash provided by financing activities of $0.4$1.1 million for the ninesix months ended SeptemberJune 30, 2016.2019. The change was primarily due to no income tax benefit$3.9 million in cash received from the exercise of employee stock options recognized during the ninesix months ended SeptemberJune 30, 2017 as a result of our prospective adoption of ASU 2016-09 and a decrease in the proceeds from issuances of stock2020 compared to $0.7 million during the ninesix months ended SeptemberJune 30, 2017 compared to the prior year period.2019.
Of our cash and cash equivalents, $99.8$84.2 million was held by foreign subsidiaries. Oursubsidiaries as of June 30, 2020. On December 22, 2017, the United States enacted the U.S. Tax Cuts and Jobs Act, resulting in significant modifications to existing tax law, which included a transition tax on the mandatory deemed repatriation of foreign earnings. Despite the changes in U.S. tax law, our current intent is to indefinitely reinvest these funds in our foreign operations, as the cash is needed to fund on-goingongoing operations. In the event circumstances change, leading to the conclusion that these funds will not be indefinitely reinvested, we would need to accrue at the time of such determination for the income taxes that would be triggered upon their repatriation.
On November 24, 2008, our Board of Directors approved a $30.0 million share repurchase program. Acquisitions for the share repurchase program may be made from time to time at prevailing prices, as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The share repurchase program may be discontinued at any time. There is no expiration date or other restriction governing the period over which we can repurchase shares under the program. In October 2015, our Board of Directors authorized an increase to the existing share repurchase program from $30.0 million to $50.0 million. We made no stock repurchases during the ninesix month period ended SeptemberJune 30, 20172020 under this program. As of SeptemberJune 30, 2017,2020, we had remaining authorization to repurchase $18.3 million remaining under the repurchase program.
We believe that our working capital and anticipated cash flow from operations will be sufficient to fund our long-term liquidity operating requirements for at least the foreseeable future.next 12 months.
We have no off balanceoff-balance sheet arrangements.

Contractual Obligations and Commercial Commitments
We enter into purchase commitments for products and services in the ordinary course of business. These purchases generally cover production requirements for 60 to 120 days as well as materials necessary to service customer units through the product lifecycle and for warranty commitments. As of SeptemberJune 30, 2017,2020, we had $44.6$48.1 million in purchase commitments that are expected to be delivered within the next 12 months. To ensure adequate component availability in preparation for new product introductions, as of September 30, 2017, we also had $0.6 million in long-term commitments for purchases to be delivered after 12 months. Other than as described in the preceding sentences, there have been no material changes to the contractual obligations and commercial commitments table included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
Critical Accounting Policies
The preparation of our condensed consolidated financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as disclosure of contingent assets and liabilities. We base our estimates on historical experience, along with various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Some of these judgments can be subjective and complex and, consequently, actual results may differ from these estimates under different assumptions or conditions. While for any given estimate or assumption made by our management there may be other estimates or assumptions that are reasonable, we believe that, given the current facts and circumstances, it is unlikely that applying any such other reasonable estimate or assumption would materially impact our condensed consolidated financial statements.
In response to the Securities and Exchange Commission’s (“SEC”) financial reporting release, FR-60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” we have selectedA discussion of our critical accounting policies for purposes of explaining the methodology used in our calculation, in addition to any inherent uncertainties pertaining to the possible effects on our financial condition. The critical policies discussed below are our processes of recognizing revenue, the reserve for excess and obsolete inventory, income taxes, the reserve for warranties, goodwill impairment, business combinations, and stock-based compensation. These policies affect current assets and operating results and are therefore critical in assessing our financial and operating status. These policies involve certain assumptions that, if incorrect, could have an adverse impact on our operations and financial position.
Revenue Recognition
Revenue is recognized when the price is fixed, collectability is reasonably assured, the title and risks and rewards of ownership have passed to the customer, and the earnings process is complete. Revenue related to our measurement, imaging, and realization equipment and related software is generally recognized upon shipment, as we consider the earnings process complete as of the shipping date. Fees billed to customers associated with the distribution of products are classified as revenue. We warrant our products against defects in design, materials and workmanship for one year. A provision for estimated future costs relating to warranty expense is recorded when products are shipped. We separately sell extended warranties. Extended warranty revenues are recognized on a straight-line basis over the term of the warranty. Costs relating to extended warranties are recognized as incurred. Revenue from sales of software only is recognized when no further significant production, modification or customization of the software is required and when the following criteria are met: persuasive evidence of a sales agreement exists, delivery has occurred, and the sales price is fixed or determinable and deemed collectible. These software arrangements generally include short-term maintenance that is considered post-contract support (“PCS”). We generally establish vendor-specific objective evidence of fair value for this PCS component based on our maintenance renewal rate. Maintenance renewals, when sold, are recognized on a straight-line basis over the term of the maintenance agreement. Revenues resulting from sales of comprehensive support, training and technology consulting services are recognized as such services are performed and are deferred when billed in advance of the performance of services. Revenues are presented net of sales-related taxes.
Reserve for Excess and Obsolete Inventory
Because the value of inventory that will ultimately be realized cannot be known with exact certainty, we rely upon both past sales history and future sales forecasts to provide a basis for the determination of the reserve. Inventory is considered potentially obsolete if we have withdrawn those products from the market or had no sales of the product for the past 12 months and have no sales forecasted for the next 12 months. Inventory is considered potentially excess if the quantity on hand exceeds 12 months of expected remaining usage. The resulting obsolete and excess parts are then reviewed to determine if a substitute usage or a future need exists. Items without an identified current or future usage are reserved in an amount equal to 100% of the first-in first-out (“FIFO”) cost of such inventory. Our products are subject to changes in technologies that may make certain of our products or their components obsolete or less competitive, which may increase our historical provisions to the reserve.
Income Taxes

We review our deferred tax assets on a regular basis to evaluate their recoverability based upon expected future reversals of deferred tax liabilities, projections of future taxable income over a two-year period, and tax planning strategies that we might employ to utilize such assets, including net operating loss carryforwards. Based on the positive and negative evidence of recoverability, we establish a valuation allowance against the net deferred assets of a taxing jurisdiction in which we operate, unless it is “more likely than not” that we will recover such assets through the above means. In the future, our evaluation of the need for the valuation allowance will be significantly influenced by our ability to achieve profitability and our ability to predict and achieve future projections of taxable income over at least a two-year period.
Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of operating a global business, there are many transactions for which the ultimate tax outcome is uncertain. We establish provisions for income taxes when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold as described by FASB Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, which is a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority. In the ordinary course of business, we are examined by various federal, state, and foreign tax authorities. We regularly assess the potential outcome of these examinations and any future examinations for the current or prior years in determining the adequacy of our provision for income taxes. We assess the likelihood and amount of potential adjustments and adjust the income tax provision, the current tax liability and deferred taxes in the period in which the facts that gave rise to a revision become known.
Reserve for Warranties
We establish at the time of sale a liability for the one-year warranty included with the initial purchase price of equipment, based upon an estimate of the repair expenses likely to be incurred for the warranty period. The warranty period is measured in installation-months for each major product group. The warranty reserve is included in accrued liabilitiesPart II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the accompanying condensed consolidated balance sheets. The warranty expense is estimated by applying the actual total repair expenses for each product group in the prior period and determining a rate of repair expense per installation-month. This repair rate is multiplied by the number of installation-months of warranty for each product group to determine the provision for warranty expenses for the period. We evaluate our exposure to warranty costs at the end of each period using the estimated expense per installation-month for each major product group, the number of units remaining under warranty and the remaining number of months each unit will be under warranty. We have a history of new product introductions and enhancements to existing products, which may result in unforeseen issues that increase our warranty costs. While such expenses have historically been within expectations, we cannot guarantee this will continue in the future.
Goodwill Impairment
Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. We do not amortize goodwill; however, we perform an annual review in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine if the carrying value of the recorded goodwill or indefinite lived intangible assets is impaired. If an asset is impaired, the difference between the value of the asset reflected in the financial statements and its current fair value is recognized as an expense in the period in which the impairment occurs.
Each period, and for any of our reporting units, we can elect to initially perform a qualitative assessment to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If we believe, as a result of our qualitative assessment, that it is more likely than not that the fair value of a reporting unit containing goodwill is less than the carrying amount, then the first and second steps of the quantitative goodwill impairment test are unnecessary. If we elect to bypass the qualitative assessment option, or if the qualitative assessment was performed and resulted in us being unable to conclude that it is not more likely than not that the fair value of a reporting unit containing goodwill is greater than the carrying amount, we will perform the two-step quantitative goodwill impairment test. We perform the first step of the two-step quantitative goodwill impairment test by calculating the fair value of the reporting unit using a discounted cash flow method, and then comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of the reporting unit exceeds the fair value, we perform the second step of the quantitative goodwill impairment test to measure the amount of the impairment loss, if any. Management has concluded there were no goodwill impairment indicators for the nine months ended September 30, 2017. There was no goodwill impairmentAnnual Report on Form 10-K for the year ended December 31, 2016.
Business Combinations
We allocate2019, as filed with the fair valueSecurities and Exchange Commission on February 19, 2020. As of purchase consideration to the assets acquired and liabilities assumed basedJune 30, 2020, our critical accounting policies have not changed from those described in our Annual Report on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of the assets acquired and liabilities assumed is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which include consideration of future growth rates and margins, customer attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Fair value estimates are based on the assumptions management believes a market participant would use in

pricing the asset or liability. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
Stock-Based Compensation
We measure and record compensation expense using the applicable accounting guidance for share-based payments related to stock options, restricted stock, restricted stock units and performance-based awards granted to our directors and employees. The fair value of stock options, including performance awards, without a market condition is determined by using the Black-Scholes option valuation model. The fair value of restricted stock units and stock options with a market condition is estimated, at the date of grant, using the Monte Carlo Simulation valuation model. The Black-Scholes and Monte Carlo Simulation valuation models incorporate assumptions as to stock price volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. In valuing our stock options, significant judgment is required in determining the expected volatility of our common stock and the expected life that individuals will hold their stock options prior to exercising. Expected volatility for stock options is based on the historical and implied volatility of our own common stock while the volatility for our restricted stock units with a market condition is based on the historical volatility of our own common stock and the stock of companies within our defined peer group. The expected life of stock options is derived from the historical actual term of option grants and an estimate of future exercises during the remaining contractual period of the option. While volatility and estimated life are assumptions that do not bear the risk of change subsequent to the grant date of stock options, these assumptions may be difficult to measure, as they represent future expectations based on historical experience. Further, our expected volatility and expected life may change in the future, which could substantially change the grant-date fair value of future awards of stock options and, ultimately, the expense we record. The fair value of restricted stock and restricted stock units, including performance awards, without a market condition is estimated using the current market price of our common stock on the date of grant.
We expense stock-based compensation for stock options, restricted stock, restricted stock units and performance awards over the requisite service period. For awards with only a service condition, we expense stock-based compensation, adjusted for actual forfeitures, using the straight-line method over the requisite service periodForm 10-K for the entire award. For awards with both performance and service conditions, we expense the stock-based compensation, adjusted for actual forfeitures, on a straight-line basis over the requisite service period for each separately vesting portionyear ended December 31, 2019.
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Table of the award, taking into account the probability that we will satisfy the performance condition. Furthermore, we expense awards with a market condition over the three-year vesting period regardless of the value that the award recipients ultimately receive. Excess tax benefits or deficits upon exercise of stock options or vesting of restricted stock or restricted stock units are recorded to income tax benefit or expense, respectively. All tax-related cash flows resulting from stock-based compensation cost are classified as operating activities in the condensed consolidated statements of cash flows.Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Exchange Exposure
We conduct a significant portion of our business outside the United States. As of and for the ninesix months ended SeptemberJune 30, 2017, 61%2020, 59% of our revenue was invoiced, and a significant portion of our operating expenses were paid, in foreign currencies, and 59%37% of our assets were denominated in foreign currencies. Fluctuations in exchange rates between the U.S. dollar and such foreign currencies may have a material effect on our results of operations and financial condition and could specifically result in foreign exchange gains and losses. The impact of future exchange rate fluctuations on the results of our operations cannot be accurately predicted due to our constantly changing exposure to various currencies, and the fact that all foreign currencies do not react in the same manner in relation to the U.S. dollar. Our most significant exposures are to the Euro, British pound sterling, Swiss franc,Franc, Japanese yen,Yen, Chinese yuan renminbi, Mexican pesoYuan and Brazilian real.Real. To the extent that the percentage of our non-U.S. dollar revenues derived from international sales increases in the future, our exposure to risks associated with fluctuations in foreign exchange rates may increase. We are aware of the availability of off-balance sheet financial instruments to hedge exposure to foreign currency exchange rates, including cross-currency swaps, forward contracts and foreign currency options. However, we have not used such instruments in the past, and none were utilized in 20162019 or the ninesix months ended SeptemberJune 30, 2017.2020.

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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We are responsible for establishing and maintaining disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’sSecurities and Exchange Commission’s (the “SEC”) rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures that are designed to provide reasonable assurance that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of SeptemberJune 30, 2017.2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of SeptemberJune 30, 20172020 to provide reasonable assurance that information required to be disclosed in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended SeptemberJune 30, 2017,2020, there was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION


Item 1. Legal Proceedings
We are not involved in any legal proceedings, other thanincluding routine litigation arising in the normal course of business, none of whichthat we believe will have a material adverse effect on our business, financial condition or results of operations.


Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under “Risk Factors” in this Item 1A and in our Annual Report on Form 10-K for the year ended December 31, 2016,2019, as updated by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, each as filed with the SEC, our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2017 and June 30, 2017, as filed with the SEC, and in this Item 1A before deciding to invest in, or retain, shares of our common stock. These risks could materially and adversely affect our business, financial condition, and results of operations. The risks described in our Annual Report on Form 10-K for the year ended December 31, 20162019 and our Quarterly Reports on Form 10-Q forin subsequent periodic reports filed with the quarterly periods ended March 31, 2017 and June 30, 2017SEC are not the only risks we face. Our operations could also be affected by additional factors that are not presently known by us or by factors that we currently consider to be immaterial to our business. As of September 30, 2017, thereThere have been no material changes in our risk factors from those set forth in our Annual Report on Form 10-K for the year ended December 31, 2016 and2019, other than as updated by our Quarterly Reportssubsequent quarterly reports on Form 10-Q, including as set forth below.
The risk factor entitled “Our operations are vulnerable to the effects of epidemics, such as the coronavirus, which could materially disrupt our business.” has been updated to read as follows:
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. Our operations are significantly vulnerable to the effects of pandemics, such as COVID-19, which have, and could continue to materially impact our business.
We are significantly vulnerable to the economic effects of pandemics and other public health crises, including the ongoing COVID-19 outbreak that has surfaced in every country of our global operating footprint. The impact of COVID-19 including the severity of a “second wave” or other additional periods of increases or spikes in the number of COVID-19 cases in areas in which we operate, disruptions to our business, changes in consumer behaviors, restrictions on individual and business activities, changes in consumer behavior, and financial liquidity concerns, has created significant volatility in the macro-economic environment and led to reduced economic activity. There have been and continues to be material actions taken by global government authorities to contain and slow the spread of COVID-19, including travel bans, quarantines, and stay-at-home orders to restrict activities for individuals and businesses.
Most of our non-manufacturing and technical service personnel continue to work from home, which began in March 2020. Our global manufacturing operations, including facilities located in Exton, Pennsylvania, Lake Mary, Florida, Germany, Switzerland and Singapore continue to be designated as essential business and therefore continue to operate. To protect our employees in facilities in which our teams operate, we have and continue to employ significant preventative measures to ensure the health and safety of our employees, including temperature screenings prior to entering our plants, enforcement of safe distancing between employees within our plants, encouragement that employees wash hands often, and stay-at-home measures if symptoms of COVID-19 arise during work hours or prior to entering our plants.
The full impact of the COVID-19 pandemic on our financial condition and results of operations will depend on future events and developments, such as the duration and magnitude of the outbreak and future possible subsequent outbreaks. The impacts of the pandemic include, but are not limited to, the following:
•Potential production slowdowns of our factories in impacted countries or potential supply and distribution chain disruption, which could in the future result in increased costs and decreased efficiency, and which have and could impact our ability to respond to rapid changes in demand;
•The demand for our products and services, and whether the pandemic leads to recessionary conditions in any of our key markets, including potential trade customer financial restructuring or insolvency and increases in accounts receivable balances with our trade customer base;
•Potential future impairment in value of our tangible or intangible assets could be recorded as a result of weaker economic conditions;
•Potential significant disruption of global financial markets, which could have a negative impact on our ability to access capital in the future, and which has, together with operational impacts noted above, necessitated certain recent liquidity creation and preservation actions as a precautionary measure;
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•Fluctuations in forecasted earnings before tax and corresponding volatility in our effective tax rate;
•Potential operational disruption if key employees terminate their employment or become ill, as well as diversion of our management team's attention from non-COVID-19 related matters; and
•Potential investigations, legal claims or litigation against us for actions we have taken or may take, or decisions we have made or may make, as a consequence of the pandemic;
As such, the ultimate impact on our financial condition and results of operations cannot be determined at this time. In 2020, we have been adversely affected and continue to expect our business, financial condition and results of operations to be adversely affected.
In addition, we cannot predict the impact that COVID-19 will have on our trade customers, suppliers, consumers, and each of their financial conditions; however, any material effect on these parties could adversely impact us. The impact of COVID-19 may also exacerbate other risks discussed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the quarterly periodsyear ended MarchDecember 31, 20172019, any of which could have a material adverse effect on our business, financial condition and June 30, 2017.results of operations.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities by the Issuer Under the Share Repurchase Plan
On November 24, 2008, our Board of Directors approved a $30.0 million share repurchase program. Acquisitions for the share repurchase program may be made from time to time at prevailing prices, as permitted by securities laws and other legal requirements, and subject to market conditions and other factors. The share repurchase program may be discontinued at any time. There is no expiration date or other restriction governing the period over which we can repurchase shares under the program. In October 2015, our Board of Directors authorized an increase to the existing share repurchase program from $30.0 million to $50.0 million. We made no stock repurchases during the ninesix month period ended SeptemberJune 30, 20172020 under this program. As of SeptemberJune 30, 2017,2020, we had authorization to repurchase $18.3 million remaining under the repurchase program.

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Item 6. Exhibits
 
INDEX TO EXHIBITS
101.INS101.SCHXBRL Instance Document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Presentation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB104Cover Page Interactive Data File (formatted as inline XBRL Taxonomy Labels Linkbase Documentwith applicable taxonomy extension information contained in Exhibits 101.*)
101.PREXBRL Taxonomy Presentation Linkbase Document
* This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by reference into such filing.


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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


FARO Technologies, Inc.
(Registrant)
Date: August 4, 2020By:FARO Technologies, Inc./s/ Allen Muhich
(Registrant)Name: Allen Muhich
Date: October 26, 2017By:/s/ Robert Seidel
Name: Robert Seidel
Title: Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)



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