10-Q 1 faro-20220930.htm 10-Q faro-20220930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
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,Florida32746
(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 LLC
Indicate by check mark whether the registrant: (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      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    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 “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
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  
x

There were 18,779,816 shares of the registrant’s common stock outstanding as of October 31, 2022.



FARO TECHNOLOGIES, INC.
Quarterly Report on Form 10-Q
Quarter Ended September 30, 2022
INDEX
 
  PAGE
PART I.
Item 1.
a)
b)
c)
d)
e)

f)
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2.
Item 6.

2

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)September 30, 2022 (unaudited)December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents$48,534 $121,989 
Accounts receivable, net75,347 78,523 
Inventories, net50,956 53,145 
Prepaid expenses and other current assets33,801 19,793 
Total current assets208,638 273,450 
Non-current assets:
Property, plant and equipment, net20,424 22,194 
Operating lease right-of-use assets18,404 22,543 
Goodwill101,279 82,096 
Intangible assets, net48,094 25,616 
Service and sales demonstration inventory, net28,249 30,554 
Deferred income tax assets, net18,092 21,277 
Other long-term assets2,047 2,010 
Total assets$445,227 $479,740 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable$17,546 $14,199 
Accrued liabilities22,881 28,208 
Income taxes payable6,421 4,499 
Current portion of unearned service revenues36,440 40,838 
Customer deposits5,873 5,399 
Lease liabilities5,532 5,738 
Total current liabilities94,693 98,881 
Unearned service revenues - less current portion20,868 22,350 
Lease liabilities - less current portion14,344 18,648 
Deferred income tax liabilities5,708 1,058 
Income taxes payable - less current portion10,131 11,297 
Other long-term liabilities19 1,047 
Total liabilities145,763 153,281 
Commitments and contingencies - See Note 12
Shareholders’ equity:
Common stock - par value $0.001, 50,000,000 shares authorized; 20,153,287 and 19,588,003 issued, respectively; 18,776,936 and 18,205,636 outstanding, respectively
20 20 
Additional paid-in capital325,244 301,061 
Retained earnings49,022 73,544 
Accumulated other comprehensive loss(44,165)(17,374)
Common stock in treasury, at cost - 1,376,351 and 1,382,367 shares held, respectively
(30,657)(30,792)
Total shareholders’ equity299,464 326,459 
Total liabilities and shareholders’ equity$445,227 $479,740 
The accompanying notes are an integral part of these condensed consolidated financial statements.
3

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 Three Months EndedNine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Sales
Product$65,581 $57,838 $182,015 $172,748 
Service19,751 21,331 59,891 64,862 
Total sales85,332 79,169 241,906 237,610 
Cost of sales
Product30,375 25,650 82,879 75,909 
Service11,692 11,188 34,299 33,481 
Total cost of sales42,067 36,838 117,178 109,390 
Gross profit43,265 42,331 124,728 128,220 
Operating expenses
Selling, general and administrative37,226 33,433 108,734 100,375 
Research and development12,586 12,731 36,756 36,464 
Restructuring costs580 1,376 2,512 3,679 
Total operating expenses50,392 47,540 148,002 140,518 
Loss from operations(7,127)(5,209)(23,274)(12,298)
Other (income) expense
Interest (income) expense, net(24)5 (28)54 
Other (income) expense, net(1,428)299 (3,077)(433)
Loss before income tax expense (benefit)(5,675)(5,513)(20,169)(11,919)
Income tax expense (benefit)586 (1,658)4,352 (3,667)
Net loss$(6,261)$(3,855)$(24,521)$(8,252)
Net loss per share - Basic$(0.34)$(0.21)$(1.34)$(0.45)
Net loss per share - Diluted$(0.34)$(0.21)$(1.34)$(0.45)
Weighted average shares - Basic18,436,615 18,194,960 18,336,537 18,166,930 
Weighted average shares - Diluted18,436,615 18,194,960 18,336,537 18,166,930 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
 
 Three Months EndedNine Months Ended
(in thousands)September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Net loss$(6,261)$(3,855)$(24,521)$(8,252)
Currency translation adjustments, net of income taxes(11,796)(328)(26,791)(5,635)
Comprehensive loss$(18,057)$(4,183)$(51,312)$(13,887)
The accompanying notes are an integral part of these condensed consolidated financial statements.
5

FARO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED) 
 Nine Months Ended
(in thousands)September 30, 2022September 30, 2021
Cash flows from:
Operating activities:
Net loss$(24,521)$(8,252)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization10,061 9,560 
Stock-based compensation10,024 8,657 
Provisions for bad debts, net of recoveries80 33 
Loss on disposal of assets356 130 
Provision for excess and obsolete inventory209 1,955 
Deferred income tax expense (benefit)568 (3,667)
Change in operating assets and liabilities:
Decrease (Increase) in:
Accounts receivable867 4,311 
Inventories2,129 (9,106)
Prepaid expenses and other current assets(14,566)(2,935)
(Decrease) Increase in:
Accounts payable and accrued liabilities(2,249)(14,153)
Income taxes payable1,008 (1,847)
Customer deposits588 1,966 
Unearned service revenues(2,710)(2,223)
Net cash used in operating activities(18,156)(15,571)
Investing activities:
Purchases of property and equipment(4,978)(4,845)
Cash paid for technology development, patents and licenses(9,154)(1,933)
Acquisition of business, net of cash acquired(29,068)(33,908)
Net cash used in investing activities(43,200)(40,686)
Financing activities:
Payments on finance leases(172)(229)
Payments for taxes related to net share settlement of equity awards(1,584)(4,137)
Proceeds from issuance of stock related to stock option exercises 5,835 
Net cash (used in) provided by financing activities(1,756)1,469 
Effect of exchange rate changes on cash and cash equivalents(10,343)(5,031)
Decrease in cash and cash equivalents(73,455)(59,819)
Cash and cash equivalents, beginning of period121,989 185,633 
Cash and cash equivalents, end of period$48,534 $125,814 
The accompanying notes are an integral part of these condensed consolidated financial statements.
6

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, 202218,205,636 $20 $301,061 $73,544 $(17,374)$(30,792)$326,459 
Net loss— — — (9,687)— — (9,687)
Currency translation adjustment— — — — (1,984)— (1,984)
Stock-based compensation — — 2,867 — — — 2,867 
Common stock issued, net of shares withheld for employee taxes55,041 — (1,051)— — 135 (916)
BALANCE MARCH 31, 202218,260,677 $20 $302,877 $63,857 $(19,358)$(30,657)$316,739 
Net loss— — — (8,574)— — (8,574)
Currency translation adjustment— — — — (13,011)— (13,011)
Stock-based compensation— — 3,491 — — — 3,491 
Common stock issued, net of shares withheld for employee taxes6,080 — (249)— — — (249)
BALANCE JUNE 30, 202218,266,757 $20 $306,119 $55,283 $(32,369)$(30,657)$298,396 
Net loss— — — (6,261)— — (6,261)
Currency translation adjustment— — — — (11,796)— (11,796)
Stock-based compensation— — 3,666 — — — 3,666 
Common stock issued, net of shares withheld for employee taxes4,617 — (418)— — — (418)
Acquisition of business495,562 — 15,878 — — — 15,878 
BALANCE SEPTEMBER 30, 202218,766,936 $20 $325,244 $49,022 $(44,165)$(30,657)$299,464 
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Loss
Common
Stock in
Treasury
Common StockRetained Earnings
(in thousands, except share data)SharesAmountsTotal
BALANCE JANUARY 1, 202117,990,707 $19 $287,979 $113,508 $(10,160)$(31,043)$360,303 
Net loss— — — (3,221)— — (3,221)
Currency translation adjustment— — — — (10,174)— (10,174)
Stock-based compensation — — 2,094 — — — 2,094 
Common stock issued, net of shares withheld for employee taxes163,457 — 1,530 — — 251 1,781 
BALANCE MARCH 31, 202118,154,164 $19 $291,603 $110,287 $(20,334)$(30,792)$350,783 
Net loss— — — (1,176)— — (1,176)
Currency translation adjustment— — — — 4,867 — 4,867 
Stock-based compensation— — 3,283 — — — 3,283 
Common stock issued, net of shares withheld for employee taxes20,709 1 (396)— — — (395)
BALANCE JUNE 30, 202118,174,873 $20 $294,490 $109,111 $(15,467)$(30,792)$357,362 
Net loss— — — (3,855)— — (3,855)
Currency translation adjustment— — — — (328)— (328)
Stock-based compensation— — 3,280 — — — 3,280 
Common stock issued, net of shares withheld for employee taxes27,543 — 312 — — — 312 
BALANCE SEPTEMBER 30, 202118,202,416 20 $298,082 $105,256 $(15,795)$(30,792)$356,771 
The accompanying notes are an integral part of these condensed consolidated financial statements.

7

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”) design, develop, manufacture, market and support software driven, three-dimensional (“3D”) measurement, imaging, and realization solutions for the 3D metrology, architecture, engineering and construction (“AEC”), Operations and Maintenance (“O&M”) and public safety analytics markets. We enable our customers to capture, measure, manipulate, interact with and share 3D and 2D data from the physical world in a virtual environment and then translate this information back into the physical domain. Our broad technology set equips our customers with a wide range of 3D capture technologies that range from ultra-high accuracy laser-scanner-based technology to lower accuracy, photogrammetry-based technology. Our FARO suite of 3D products and software solutions are used for inspection of components and assemblies, rapid prototyping, reverse engineering, documenting large volume or structures in 3D, surveying and construction, construction management, assembly layout, machine guidance as well as in investigation and reconstructions of crash and crime scenes. We sell the majority of our solutions through a direct sales force, with an increasing volume being sold through an indirect channel across a range of industries including automotive, aerospace, metal and machine fabrication, surveying, architecture, engineering and construction, public safety forensics and other industries.

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 coronavirus (“COVID-19”) pandemic that has surfaced in virtually every country of our global operating footprint. During 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.
During 2022, we continue to mitigate the ongoing impact of COVID-19 on our business results and we remain committed to taking actions to mitigate both the impact on the health and safety of our employees, as well as negative business effects resulting from demand disruption, material availability and potential production and shipment challenges, including, but not limited to, the following:
Operating our business with a focus on our employee health and safety, which includes minimizing travel, implementing remote work policies, maintaining employee distancing and enhancing the sanitation of all of our facilities;
Recommending that our employees receive vaccinations and vaccine boosters to help protect our colleagues, families, and communities;
Aggressively pursuing required raw materials to ensure continuity of supply and minimize material cost increases in collaboration with our third party manufacturer, Sanmina;
Aggressively pursuing alternative logistics paths when intermittent government-ordered shutdowns affect current logistics paths;
Monitoring our liquidity, disciplined inventory management, and scrutinizing our capital expenditures while executing our strategic plan; and
Continuously reviewing our financial strategy to enhance financial flexibility in these volatile financial markets.
We continue to maintain a strong capital structure with a cash balance of $48.5 million and no debt as of September 30, 2022. 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 and new actions taken by governments in response to future resurgence, are highly uncertain. Therefore, the Company is not able to predict the extent to which the COVID-19 outbreak continues to impact the Company’s results of operations and financial conditions.
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. 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 net loss.
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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 nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2022 or any future 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, 2021. The accompanying December 31, 2021 condensed consolidated balance sheet has been derived from those audited consolidated financial statements.
Stock-based compensation expense is allocated to the applicable departmental cost in our condensed consolidated financial statements. The following table summarizes total stock-based compensation expense for each of the line items on our condensed consolidated statements of operations:
Three Months EndedNine Months Ended
September 30, 2022September 30, 2021September 30, 2022September 30, 2021
Cost of sales
Product$231 $147 $635 $435 
Service42 43 121 $35 
Total cost of sales$273 $190 $756 $470 
Operating expenses
Selling, general and administrative$2,742 $2,581 $7,475 $6,789 
Research and development651 509 1,793 1,398 
Total operating expenses$3,393 $3,090 $9,268 $8,187 
9

NOTE 4 – IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Impact of Recently Adopted 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. We adopted ASU 2019-12 effective as of January 1, 2021, and the adoption of the new guidance did not have a material impact on our condensed consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Asset and Contract Liabilities from Contracts with Customers, which intends to simplify the accounting for acquired revenue contracts with customers in a business combination and to also remove inconsistencies in this topic related to recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. ASU No. 2021-08 allows an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in a similar manner to how they are recorded on the acquiree’s financial statements at book value. Early adoption is permitted and we early adopted ASU No. 2021-08 in the fourth quarter of 2021. As a result of the early adoption of ASU No.2021-08, we recorded the deferred revenue associated with the acquisition of Holobuilder in 2021 at its book value of approximately $4.0 million. Further, we recorded the deferred revenue associated with the acquisition of GeoSLAM in 2022 at its book value of approximately $1.3 million.
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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 timing of transfer of goods or services:
 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2022202120222021
Product sales
Product transferred to customers at a point in time$60,090 $53,536 $165,750 $161,080 
Product transferred to customers over time5,491 4,302 16,265 11,668 
Total product sales$65,581 $57,838 $182,015 $172,748 

 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2022202120222021
Service sales
Service transferred to customers at a point in time$8,651 $9,332 $25,973 $28,931 
Service transferred to customers over time11,100 11,999 33,918 35,931 
Total service sales$19,751 $21,331 $59,891 $64,862 

The following table presents our revenues disaggregated by geography, based on the billing addresses of our customers:
 For the Three Months Ended September 30,For the Nine Months Ended September 30,
 2022202120222021
Total sales to external customers
Americas (1)
$38,732 $33,944 $110,077 $100,195 
EMEA (1)
22,802 23,387 66,494 75,315 
APAC (1)
23,798 21,838 65,335 62,100 
$85,332 $79,169 $241,906 $237,610 

(1) Regions represent North America and South America (the “Americas”); Europe, the Middle East, and Africa (“EMEA”); and Asia-Pacific (“APAC”).
For revenue related to our measurement and imaging equipment and related software, we allocate the contract price to performance obligations based on our best estimate of the standalone selling price. We make this allocation estimate utilizing data from the sale of our applicable products and services to customers separately in similar circumstances. Revenue related to our measurement and imaging equipment and related software is generally 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 title and control has passed to the customer. Software arrangements generally include short-term maintenance that is considered post-contract support (“PCS”), which is considered to be product transferred to the customer over time and a separate performance obligation. We generally establish a standalone sales price for this PCS component based on our maintenance renewal rate. Maintenance renewals are recognized on a straight-line basis over the term of the maintenance agreement. Payments 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 hardware service contracts with the purchase of measurement equipment and related software. Hardware service contracts are considered a performance obligation when services are transferred to a customer over time, and, as such, we recognize revenue on a straight-line basis over the contractual term. Hardware service contracts include contract periods that extend between one month to three years.
We capitalize commission expenses related to deliverables transferred to a customer over time and amortize such costs ratably over the term of the contract. As of September 30, 2022, the deferred cost asset related to deferred commissions was approximately $3.1 million. For classification purposes, $2.1 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 September 30, 2022. As of December 31, 2021, the deferred cost asset related to deferred commissions was approximately $3.5 million. For classification purposes, $2.3 million and $1.2 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, 2021.
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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, subscription-based software and software maintenance. The current portion of unearned service revenues on our condensed consolidated balance sheets is what we expect to recognize as revenue within twelve months after the applicable balance sheet date relating to extended warranties, subscription-based software and software maintenance contract liabilities. The unearned service revenues less the current portion on our condensed consolidated balance sheets is what we expect to recognize as revenue extending beyond twelve months after the applicable balance sheet date relating to extended warranties, subscription-based software and software maintenance contract liabilities. Customer deposits on our condensed consolidated balance sheets represent customer prepayments on contracts for performance obligations that we must satisfy in the future to recognize the related contract revenue. These amounts are generally related to performance obligations which are delivered in less than 12 months. During the three and nine months ended September 30, 2022, we recognized $8.7 million and $29.1 million of revenue that was deferred on our condensed consolidated balance sheet as of December 31, 2021. During the three and nine months ended September 30, 2021, we recognized $7.6 million and $29.2 million of revenue that was deferred on our condensed consolidated balance sheet as of December 31, 2020.
The nature of certain of our contracts gives rise to variable consideration, primarily related to an allowance for sales returns. 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 for September 30, 2022 and September 30, 2021 was approximately $0.2 million, and $0.1 million, respectively.
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 Sales any value-added sales and other taxes that we collect concurrently with revenue-producing activities.

NOTE 6 – ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
As of September 30, 2022As of December 31, 2021
Accounts receivable$77,591 $80,754 
Allowance for credit losses(2,244)(2,231)
Total$75,347 $78,523 

Activity related to the allowance for credit losses was as follows:
Nine Months Ended September 30, 2022
Beginning balance of the allowance for credit losses$(2,231)
Current period provision for expected credit losses, net of recoveries(80)
Charge-offs of amounts previously expensed67 
Ending balance of the allowance for credit losses$(2,244)

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NOTE 7 – INVENTORIES
Inventories are stated at the lower of cost or net realizable value using the first-in first-out (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 held for sale; and 3) service inventory - completed product and parts used to support our service department and held for sale. Shipping and handling costs are classified as a component of Cost of Sales 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. We expect these refurbished units to remain in finished goods inventory and sold within 12 months at prices that 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 the remaining life, typically three years.
Inventories consist of the following:
As of September 30, 2022As of December 31, 2021
Raw materials$30,440 $34,617 
Finished goods20,516 18,528 
Inventories, net$50,956 $53,145 
Service and sales demonstration inventory, net$28,249 $30,554 

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NOTE 8 – NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted average number of shares outstanding. Diluted net loss per share is computed by also considering the impact of potential common stock on both net loss and the weighted average number of shares outstanding. Our potential common stock consists of employee stock options, restricted stock units and market-based awards. Our potential common stock is included in the diluted earnings per share calculation when adding such potential common stock would not be anti-dilutive. Market-based awards are included in the computation of diluted earnings per share only to the extent that the underlying 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 for the 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 nine months ended September 30, 2022, there were approximately 578,121 shares issuable upon the exercise of options, the vesting of time-based restricted stock and the contingent vesting of market-based restricted stock units that were excluded from the dilutive calculations, as they were anti-dilutive. For the three months and nine months ended September 30, 2021, there were approximately 393,995 issuable upon the exercise of options that were excluded from the dilutive calculations, as they were anti-dilutive.
A reconciliation of the number of common shares used in the calculation of basic and diluted net loss per share is presented below:
 Three Months Ended
 September 30, 2022September 30, 2021
SharesPer-Share
Amount
SharesPer-Share
Amount
Basic net loss per share18,436,615 $(0.34)18,194,960 $(0.21)
Effect of dilutive securities    
Diluted net loss per share18,436,615 $(0.34)18,194,960 $(0.21)


 Nine Months Ended
 September 30, 2022September 30, 2021
SharesPer-Share
Amount
SharesPer-Share
Amount
Basic net loss per share18,336,537 $(1.34)18,166,930 $(0.45)
Effect of dilutive securities    
Diluted net loss per share18,336,537 $(1.34)18,166,930 $(0.45)
14

NOTE 9 – ACCRUED LIABILITIES
Accrued liabilities consist of the following:
As of September 30, 2022As of December 31, 2021
Accrued compensation and benefits$15,310 $15,723 
Accrued restructuring costs520 3,919 
Accrued warranties2,192 1,880 
Professional and legal fees1,386 2,053 
Taxes other than income194 3,674 
Other accrued liabilities3,279 959 
Total accrued liabilities$22,881 $28,208 

Activity related to accrued warranties was as follows:
 Nine Months Ended
 September 30, 2022September 30, 2021
Balance, beginning of period$1,880 $1,683 
Provision for warranty expense2,548 1,941 
Fulfillment of warranty obligations(2,236)(1,951)
Balance, end of period$2,192 $1,673 

NOTE 10 – FAIR VALUE MEASUREMENTS
Our financial instruments include cash and cash equivalents, 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.
Liabilities 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, 2022
 Level 1Level 2Level 3
Liabilities:
Contingent consideration (1)
$ $ $881 
Total$ $ $881 
 As of December 31, 2021
 Level 1Level 2Level 3
Liabilities:
Contingent consideration (1)
$ $ $1,028 
Total$ $ $1,028 

(1)Contingent consideration liability represents arrangements to pay the former owners of certain companies we acquired based on the attainment of future product release milestones and is reported in Other long-term 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 $1.0 million as of September 30, 2022. We expect to make payments earned by former owners under these arrangements on August 31, 2023.
15

NOTE 11 – RESTRUCTURING
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 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 included a planned decrease of total headcount upon the completion of the Restructuring Plan.
On July 15, 2021, we entered into a manufacturing services agreement (the “Agreement”) with Sanmina Corporation (Nasdaq: SANM) (“Sanmina”), in connection with the Restructuring Plan. Under the Agreement, Sanmina will provide manufacturing services for the Company’s measurement device products previously manufactured by the Company at the Company’s Lake Mary, Florida, Exton, Pennsylvania, and Stuttgart, Germany manufacturing sites. This phased transition to a Sanmina production facility was completed at the beginning of the third quarter of 2022 as part of our cost reduction initiative. We are currently evaluating these manufacturing sites with the intention to reduce our leased floor space. However, all of these facilities are mixed-use spaces shared with our service, research and development, or sales teams who continue to use these spaces. The Company, in collaboration with third party lessors and architectural resources, intends to conduct studies over the feasibility of abandoning or demising leased floor space against our current needs. Our current needs continue to include access to existing spaces previously constructed to closely monitor temperature and vibration for our service and research and development teams. The conclusion of this evaluation and any subsequent approval to abandon or reduce these leased spaces would be considered as a change in the manner of the use of these corresponding assets, and thereby will be evaluated for impairment. We expect to complete this evaluation before the first half of fiscal year 2023. As of September 30, 2022, the remaining value of leasehold improvements for these facilities is approximately $3 million and a portion of this may be impaired, if the Company decides to reduce or abandon the leased space. Separately, we may also incur additional charges for the modification of leases for these facilities.
In connection with the Restructuring Plan, we paid $5.9 million during the nine months ended September 30, 2022, primarily consisting of severance and related benefits. Since the approval of the Restructuring Plan, we have paid $24.8 million, primarily consisting of severance and related benefits. Activity related to the accrued restructuring charge and cash payments during the nine months ended September 30, 2022 and September 30, 2021 was as follows:

Severance and other benefitsProfessional fees and other related chargesTotal
Balance at December 31, 2021$3,442 $477 $3,919 
Additions charged to expense1,439 1,072 2,511 
Cash payments(4,619)(1,291)(5,910)
Balance at September 30, 2022$262 $258 $520 
Balance at December 31, 2020$1,481 $867 $2,348 
Additions charged to expense2,515 1,164 3,679 
Cash payments(2,784)(1,750)(4,534)
Balance at September 30, 2021$1,212 $281 $1,493 

Substantially all of our planned activities under the Restructuring Plan are complete and as part of our final steps, we expect to potentially incur remaining pre-tax charges in the range of $1.5 million to $3.5 million through the first half of fiscal year 2023. We have reduced our total headcount by approximately 390 employees. The Company expects to make concluding cash payments of approximately $1.5 million in the remainder of fiscal year 2022, primarily consisting of remaining severance and related benefits.

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NOTE 12 – COMMITMENTS AND CONTINGENCIES
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 September 30, 2022, we had approximately $46.2 million in purchase commitments that are expected to be delivered within the next 12 months. To ensure adequate component availability, as of September 30, 2022, we also had $6.6 million in long-term commitments for purchases to be delivered after 12 months.
Legal Proceedings — We are not involved in any legal proceedings, including routine litigation arising in the normal course of business, that 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.
Late in the fourth quarter of 2018, during an internal review we preliminarily determined that certain of our pricing practices may have resulted in the Government being overcharged under the Price Reduction Clauses of the GSA Contracts (the “GSA Matter”). As a result, we performed remediation efforts, including but not limited to, the identification of 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 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.
Effective as of February 25, 2021, as a result of the review, we entered into a settlement agreement with the GSA. Pursuant to the settlement agreement, we agreed to, among other things, pay to the GSA $12.3 million in full and final satisfaction of any and all claims, causes of actions, appeals and the like, including damages, costs, attorney’s fees and interest arising under or related to the GSA Matter. As of September 30, 2022, we no longer have any outstanding liability related to this matter.
17

NOTE 13 – 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 ten years, some of which include options to extend the leases for up to fifteen years, and some of which include options to terminate the leases within three months. We do not participate in any material subleasing.
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 balance 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 September 30, 2022Three Months Ended September 30, 2021Nine Months Ended September 30, 2022Nine Months Ended
September 30, 2021
Operating lease cost$1,805 $2,010 $5,453 $5,901 
Finance lease cost:
Amortization of ROU assets18 60 $96 $221 
Interest on lease liabilities4 5 $15 $14 
Total finance lease cost$22 $65 $111 $235 

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 costs for the three months ended September 30, 2022 and September 30, 2021 were both less than $0.1 million. Our short-term lease costs for the nine months ended September 30, 2022 and September 30, 2021 were both $0.1 million.
18

Supplemental balance sheet information related to leases was as follows:
As ofAs of
September 30, 2022December 31, 2021
Operating leases:
Operating lease right-of-use assets$18,404 $22,543 
Current operating lease liabilities</