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Radisys Reports Third Quarter 2018 Results

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Radisys Corporation (NASDAQ:RSYS), a global leader of open telecom
solutions, today announced financial results for the third quarter ended
September 30, 2018.

Third Quarter Summary

  • Consolidated revenue of $27.0 million, with Software-Systems revenue
    growth of 24% year-over-year;
  • GAAP gross margin of 43.4% and non-GAAP gross margin of 43.6%;
  • GAAP loss of ($0.05) per share and non-GAAP earnings of $0.05 per
    diluted share; and
  • Exited the quarter with $14.1 million of consolidated cash, cash
    equivalents and restricted cash, an increase of $4.5 million over
    prior quarter.

"Our third quarter results reflect continued strength across our
business, and although we incurred a net loss on a GAAP basis, we
achieved a second consecutive quarter of non-GAAP profitability," said
Brian Bronson, Radisys President and Chief Executive Officer. "Our
Software-Systems segment delivered another quarter of above 20%
year-over-year revenue growth while demand for our Hardware Solutions
products continues to exceed our near-term expectations.

"Additionally, we continue to work towards obtaining the final
regulatory approvals required for closing our acquisition by Reliance
before year-end. As we previously stated, we expect the addition of
Reliance's visionary leadership and strong market position to further
enhance our ability to develop and integrate large-scale, disruptive,
open-centric end-to-end solutions."

Software-Systems Results

For the third quarter of 2018, Software-Systems revenue was $14.1
million, compared to $13.7 million in the prior quarter and $11.3
million in the third quarter of 2017.

Gross margin was 59.6%, compared to 64.6% in the prior quarter and 47.9%
in the third quarter of 2017. Operating income was breakeven, compared
to operating income of $0.9 million in the prior quarter and an
operating loss of $2.4 million in the third quarter of 2017.

Hardware Solutions Results

For the third quarter of 2018, Hardware Solutions revenue was $12.9
million, compared to $10.7 million in the prior quarter and $17.5
million in the third quarter of 2017.

Gross margin was 26.2%, compared to 20.9% in the prior quarter and
(13.2)% in the third quarter of 2017. Operating income was $1.8 million,
compared to operating income of $0.8 million in the prior quarter and an
operating loss of $7.9 million in the third quarter of 2017.

Consolidated Results

For the third quarter of 2018, consolidated revenue was $27.0 million,
compared to $24.4 million in the prior quarter and $28.8 million in the
third quarter of 2017.

On a GAAP basis, gross margin in the third quarter of 2018 was 43.4%,
compared to 37.5% in the prior quarter and 4.2% in the third quarter of
2017. Third quarter 2018 research and development and selling, general,
and administrative expenses on a GAAP basis were $10.2 million, compared
to $9.7 million in the prior quarter and $13.5 million in the third
quarter of 2017.

On a non-GAAP basis, third quarter 2018 gross margin was 43.6%, compared
to 45.3% in the prior quarter and 10.8% in the third quarter of 2017.
Third quarter 2018 research and development and selling, general and
administrative expenses on a non-GAAP basis were $10.0 million, compared
to $9.4 million in the prior quarter and $13.4 million in the third
quarter of 2017.

For the third quarter of 2018, the Company recorded a GAAP net loss of
$1.9 million, or ($0.05) per share, compared to a GAAP net loss of $4.6
million, or ($0.12) per share, in the prior quarter and a GAAP net loss
of $15.4 million, or ($0.39) per share, in the third quarter of 2017. On
a non-GAAP basis, the Company recorded net income of $2.0 million, or
$0.05 per diluted share, in the third quarter of 2018, compared to net
income of $2.2 million, or $0.06 per diluted share, in the prior quarter
and a net loss of $11.0 million, or ($0.28) per share, in the third
quarter of 2017.

Proposed Acquisition of Radisys by Reliance

As previously announced on June 29, 2018, Radisys Corporation and
Reliance Industries entered into a definitive agreement under which
Reliance will acquire Radisys for US$1.72 per share in cash. The
transaction is subject to certain customary closing conditions,
including regulatory approvals, and is expected to close in the fourth
quarter of 2018. Due to the pending acquisition, the Company will not be
hosting a conference call or providing guidance on anticipated financial
results for future periods.

About Radisys

Radisys (NASDAQ:RSYS), a global leader in open telecom solutions,
enables service providers to drive disruption with new open architecture
business models. Radisys' innovative disaggregated and virtualized
enabling technology solutions leverage open reference architectures and
standards, combined with open software and hardware to power business
transformation for the telecom industry, while its world-class services
organization delivers systems integration expertise necessary to solve
communications and content providers' complex deployment challenges. For
more information, visit www.Radisys.com.

Forward-Looking Statements

Certain statements contained in this communication may constitute
"forward-looking statements." Forward-looking statements can usually be
identified by the use of words such as "aim," "anticipate," "believe,"
"continue," "could," "estimate," "evolve," "expect," "forecast,"
"intend," "looking ahead," "may," "opinion," "plan," "possible,"
"potential," "project," "should," "will" and other expressions which
indicate future events or trends. Such statements include statements as
to the expected timing of completion of the merger, the expected
benefits and costs of the transaction, management plans relating to the
transaction and the satisfaction of all closing conditions to the
transaction, including the ability to obtain regulatory approvals.

These forward-looking statements are based upon certain expectations and
assumptions and are subject to risks and uncertainties. Actual results
could differ materially from those anticipated as a result of various
factors, including the following: conditions to the closing of the
transaction, including receipt of required regulatory approvals, may not
be satisfied timely, if at all; the transaction may involve unexpected
costs, liabilities or delays; revenues following the transaction may be
lower than expected; operating costs, customer loss and business
disruption (including, without limitation, difficulties in maintaining
relationships with employees, customers, clients or suppliers) may be
greater than expected following the transaction; uncertainties
surrounding the transaction; the outcome of any legal proceedings
related to the transaction; Radisys may be adversely affected by other
economic, business, and/or competitive factors; risks that the pending
transaction disrupts current plans and operations; the retention of key
employees of Radisys; other risks to consummation of the transaction,
including circumstances that could give rise to the termination of the
merger agreement and the risk that the transaction will not be
consummated within the expected time period or at all; and the other
risks described from time to time in Radisys' reports filed with the
Securities and Exchange Commission (the "SEC") under the heading "Risk
Factors," including the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2017, subsequent Quarterly Reports on
Form 10-Q and in other of Radisys' filings with the SEC.

All forward-looking statements are qualified by, and should be
considered in conjunction with, such cautionary statements. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date on which such statements
were made. Except as required by applicable law, Radisys undertakes no
obligation to update forward-looking statements to reflect events or
circumstances arising after such date.

Non-GAAP Financial Measures

To supplement its consolidated financial statements in accordance with
generally accepted accounting principles (GAAP), the Company's earnings
release contains non-GAAP financial measures that exclude certain
expenses, gains and losses, such as the effects of (a) amortization of
acquired intangible assets, (b) stock-based compensation expense, (c)
restructuring and other charges, net, (d) non-cash income tax expense,
(e) restructuring inventory adjustment, (f) amortization of financing
activities expenses, (g) change in fair value of warrants, and (h) loss
(gain) on the liquidation of foreign subsidiaries. The Company believes
that the use of non-GAAP financial measures provides useful information
to investors to gain an overall understanding of its current financial
performance and its prospects for the future. Specifically, the Company
believes the non-GAAP results provide useful information to both
management and investors by excluding certain expenses, gains and losses
that the Company believes are not indicative of its core operating
results. In addition, non-GAAP financial measures are used by management
for budgeting and forecasting as well as subsequently measuring the
Company's performance, and the Company believes that it is providing
investors with financial measures that most closely align to its
internal measurement processes. These non-GAAP measures are considered
to be reflective of the Company's core operating results as they more
closely reflect the essential revenue-generating activities of the
Company and direct operating expenses (resulting in cash expenditures)
needed to perform these revenue-generating activities. The Company also
believes, based on feedback provided to the Company during its earnings
calls' Q&A sessions and discussions with the investment community, that
the non-GAAP financial measures it provides are necessary to allow the
investment community to construct their valuation models to better align
its results and projections with its competitors and market sector, as
there is significant variability and unpredictability across companies
with respect to certain expenses, gains and losses.

The non-GAAP financial information is presented using a consistent
methodology from quarter-to-quarter and year-to-year. These measures
should be considered in addition to results prepared in accordance with
GAAP. In addition, these non-GAAP financial measures are not based on
any comprehensive set of accounting rules or principles. The Company
believes that non-GAAP financial measures have limitations in that they
do not reflect all of the amounts associated with the Company's results
of operations as determined in accordance with GAAP and that these
measures should only be used to evaluate the Company's results of
operations in conjunction with the corresponding GAAP financial measures.

A reconciliation of non-GAAP information to GAAP information is included
in the tables below. The non-GAAP financial measures disclosed by the
Company should not be considered a substitute for or superior to
financial measures calculated in accordance with GAAP, and
reconciliations between GAAP and non-GAAP financial measures included in
this earnings release should be carefully evaluated. The non-GAAP
financial measures used by the Company may be calculated differently
from, and therefore may not be comparable to, similarly titled measures
used by other companies.

Radisys® is a registered trademark of Radisys

   
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts, unaudited)
 
Three Months Ended Nine Months Ended
September 30, September 30,
  2018       2017     2018       2017  
Revenues
Product $ 17,907 $ 20,641 $ 50,775 $ 75,680
Service   9,116     8,132     26,851     25,796  
Total revenues   27,023     28,773     77,626     101,476  
Cost of sales:
Product 9,743 20,361 30,457 60,450
Service 5,314 5,291 15,229 15,821
Amortization of purchased technology   226     1,926     4,080     5,780  
Total cost of sales   15,283     27,578     49,766     82,051  
Gross margin 11,740 1,195 27,860 19,425
Operating expenses:
Research and development 3,467 5,639 10,388 18,113
Selling, general and administrative 6,758 7,849 20,546 25,445
Intangible assets amortization 197 289 593 2,809
Restructuring and other charges, net   1,130     1,344     3,990     2,814  
Income (loss) from operations 188 (13,926 ) (7,657 ) (29,756 )
Change in fair value of warrant liability (599 ) (1,102 )
Interest expense (1,411 ) (431 ) (4,206 ) (927 )
Other income (expense), net   1,447     (116 )   2,700     (543 )
Income (loss) before income tax expense (375 ) (14,473 ) (10,265 ) (31,226 )
Income tax expense   1,498     938     2,687     1,747  
Net loss $ (1,873 ) $ (15,411 ) $ (12,952 ) $ (32,973 )
 
Net loss per share:
Basic $ (0.05 ) $ (0.39 ) $ (0.33 ) $ (0.85 )
Diluted $ (0.05 ) $ (0.39 ) $ (0.33 ) $ (0.85 )
Weighted average shares outstanding
Basic   39,616     39,087     39,496     38,922  
Diluted   39,616     39,087     39,496     38,922  
   
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, unaudited)
 

September 30,
2018

December 31,
2017

ASSETS
Current assets:
Cash and cash equivalents $ 10,094 $ 8,124
Restricted cash 4,000
Accounts receivable, net 31,130 32,820
Inventories, net 2,156 4,265
Other current assets   2,970     6,607  
Total current assets 50,350 51,816
Property and equipment, net 3,242 4,728
Intangible assets, net 2,189 6,862
Other assets, net   2,054     2,623  
Total assets $ 57,835   $ 66,029  
 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 8,060 $ 18,297
Deferred revenue 6,495 4,200
Other accrued liabilities 12,115 14,116
Line of credit 11,989 16,000
Short term obligations 9,000
Warrant liability   4,960      
Total current liabilities 52,619 52,613
Long term debt obligations, net 5,647
Other long-term liabilities   7,119     6,866  
Total liabilities   65,385     59,479  
Shareholders' equity:
Common stock 343,280 342,219
Accumulated deficit (349,134 ) (336,182 )
Accumulated other comprehensive income (loss)   (1,696 )   513  
Total shareholders' equity (deficit)   (7,550 )   6,550  
Total liabilities and shareholders' equity $ 57,835   $ 66,029  
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
   
Three Months Ended Nine Months Ended
September 30, September 30,
  2018       2017     2018       2017  
Cash flows from operating activities:
Net loss $ (1,873 ) $ (15,411 ) $ (12,952 ) $ (32,973 )
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 936 3,551 6,459 12,396
Amortization of debt discount and issuance costs 807 2,465
Stock-based compensation expense 250 124 957 1,816
Inventory valuation allowance 350 7,041 (24 ) 7,900
Change in fair value of warranty liability 599 1,102
Other 789 885 1,082 1,056
Changes in operating assets and liabilities:
Accounts receivable (816 ) 9,737 1,695 4,530
Inventories and deferred cost of sales 1,389 (2,071 ) (457 ) 2,732
Other receivables 144 39 1,902 (44 )
Accounts payable 76 (3,181 ) (10,369 ) (26 )
Deferred revenue (26 ) (3,067 ) 1,546 (1,157 )
Other operating assets and liabilities   2,246     (48 )   2,497     (2,813 )
Net cash provided by (used in) operating activities   4,871     (2,401 )   (4,097 )   (6,583 )
Cash flows from investing activities:
Capital expenditures   (129 )   (1,386 )   (530 )   (4,544 )
Net cash used in investing activities   (129 )   (1,386 )   (530 )   (4,544 )
Cash flows from financing activities:
Borrowings on line of credit, net (187 ) (30,000 ) (4,011 ) (10,000 )
Proceeds from borrowings on senior notes 17,000
Payments of debt issuance costs (20 ) (2,390 )
Other financing activities, net   (6 )   209     104     295  
Net cash provided by (used in) financing activities   (213 )   (29,791 )   10,703     (9,705 )
Effect of exchange rate changes on cash and cash equivalents   (34 )   12     (106 )   427  
Net increase (decrease) in cash and cash equivalents   4,495     (33,566 )   5,970     (20,405 )
Cash and cash equivalents, beginning of period 5,599 46,248 8,124 33,087
Restricted cash and cash equivalents, beginning of period   4,000              
Cash, cash equivalents, and restricted cash, beginning of period   9,599     46,248     8,124     33,087  
Cash and cash equivalents, end of period 10,094 12,682 10,094 12,682
Restricted cash and cash equivalents, end of period   4,000         4,000      
Cash, cash equivalents, and restricted cash, end of period $ 14,094   $ 12,682   $ 14,094   $ 12,682  
   
REVENUES, GROSS MARGIN AND INCOME (LOSS) FROM OPERATIONS BY
OPERATING SEGMENT
(In thousands, unaudited)
 
Three Months Ended Nine Months Ended
September 30, September 30,
  2018       2017     2018       2017  
Revenue
Software-Systems $ 14,073 $ 11,306 $ 38,884 $ 32,943
Hardware Solutions   12,950     17,467     38,742     68,533  
Total revenues $ 27,023   $ 28,773   $ 77,626   $ 101,476  
 
Three Months Ended Nine Months Ended
September 30, September 30,
  2018     2017     2018     2017  
Gross margin
Software-Systems $ 8,390 $ 5,420 $ 22,699 $ 17,128
Hardware Solutions 3,387 (2,302 ) 8,737 8,211
Corporate and other   (37 )   (1,923 )   (3,576 )   (5,914 )
Total gross margin $ 11,740   $ 1,195   $ 27,860   $ 19,425  
 
Three Months Ended Nine Months Ended
September 30, September 30,
  2018     2017     2018     2017  
Income (loss) from operations
Software-Systems $ 39 $ (2,358 ) $ (2,159 ) $ (7,574 )
Hardware Solutions 1,751 (7,885 ) 3,547 (8,963 )
Corporate and other   (1,602 )   (3,683 )   (9,045 )   (13,219 )
Total income (loss) from operations $ 188   $ (13,926 ) $ (7,657 ) $ (29,756 )
   
REVENUES BY GEOGRAPHY
(In thousands, unaudited)
 
Three Months Ended Nine Months Ended
September 30, September 30,
2018     2017   2018     2017  
North America $ 12,675   46.9 % $ 11,492   39.9 % $ 31,956   41.2 % $ 49,854   49.1 %
Asia Pacific 2,822 10.4 5,703 19.8 12,267 15.8 17,819 17.6
Europe, the Middle East and Africa   11,526   42.7     11,578   40.3     33,403   43.0     33,803   33.3  
Total $ 27,023   100.0 % $ 28,773   100.0 % $ 77,626   100.0 % $ 101,476   100.0 %
   
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES AND AS A
PERCENT OF REVENUES
(In thousands, except per share amounts, unaudited)
 
Three Months Ended Nine Months Ended
September 30,   September 30,
2018   2017 2018   2017
GROSS MARGIN:        
GAAP gross margin $ 11,740     43.4 % $ 1,195     4.2 % $ 27,860     35.9 % $ 19,425     19.1 %
(a) Amortization of acquired intangible assets 227 1,926 4,081 5,780
(b) Stock-based compensation 12 (3 ) 70 134
(e) Restructuring inventory adjustment   (201 )             $ (575 )            
Non-GAAP gross margin $ 11,778     43.6 % $ 3,118     10.8 % $ 31,436     40.5 % $ 25,339     25.0 %
 
RESEARCH AND DEVELOPMENT:
GAAP research and development $ 3,467     12.8 % $ 5,639     19.6 % $ 10,388     13.4 % $ 18,113     17.8 %
(b) Stock-based compensation   35         23         155         366      
Non-GAAP research and development $ 3,432     12.7 % $ 5,616     19.5 % $ 10,233     13.2 % $ 17,747     17.5 %
 
SELLING, GENERAL AND ADMINISTRATIVE:
GAAP selling, general and administrative $ 6,758     25.0 % $ 7,849     27.3 % $ 20,546     26.5 % $ 25,445     25.1 %
(b) Stock-based compensation   202         105         731         1,317      
Non-GAAP selling, general and administrative $ 6,556     24.3 % $ 7,744     26.9 % $ 19,815     25.5 % $ 24,128     23.8 %
 
INCOME (LOSS) FROM OPERATIONS:
GAAP income (loss) from operations $ 188     0.7 % $ (13,926 )   (48.4 )% $ (7,657 )   (9.9 )% $ (29,756 )   (29.3 )%
(a) Amortization of acquired intangible assets 423 2,214 4,673 8,588
(b) Stock-based compensation 250 125 957 1,817
(c) Restructuring and other charges, net 1,130 1,344 3,990 2,814
(e) Restructuring inventory adjustment   (201 )               (575 )            
Non-GAAP income (loss) from operations $ 1,790     6.6 % $ (10,243 )   (35.6 )% $ 1,388     1.8 % $ (16,537 )   (16.3 )%
 
NET INCOME (LOSS):
GAAP net loss $ (1,873 )   (6.9 )% $ (15,411 )   (53.6 )% $ (12,952 )   (16.7 )% $ (32,973 )   (32.5 )%
(a) Amortization of acquired intangible assets 423 2,214 4,673 8,588
(b) Stock-based compensation 250 125 957 1,817
(c) Restructuring and other charges, net 1,130 1,344 3,990 2,814
(d) Income taxes 850 460 1,329 693
(e) Restructuring Inventory adjustment (201 ) (575 )
(f) Amortization of financing activities 780 2,383
(g) Change in fair value of warrants 599 1,102
(h) Loss (gain) on the liquidation of foreign subsidiaries           313               313      
Non-GAAP net income (loss) $ 1,958     7.2 % $ (10,955 )   (38.1 )% $ 907     1.2 % $ (18,748 )   (18.5 )%
 
GAAP weighted average diluted shares 39,616 39,087 39,496 38,922
Dilutive equity awards included in
non-GAAP earnings per share   3,362                 740              
Non-GAAP weighted average diluted shares   42,978         39,087         40,236         38,922      
GAAP net loss per share (diluted) $ (0.05 ) $ (0.39 ) $ (0.33 ) $ (0.85 )
Non-GAAP adjustments detailed above   0.10         0.11         0.35         0.37      
Non-GAAP net income (loss) per share (diluted) $ 0.05       $ (0.28 )     $ 0.02       $ (0.48 )    
 

Non-GAAP financial measures includes the performance of Software-Systems
and Embedded Products and Hardware Services.

The Company excludes the following corporate and other expenses,
reversals, gains and losses from its non-GAAP financial measures, when
applicable:

(a) Amortization of acquired intangible assets: Amortization of
acquisition-related intangible assets primarily relate to core and
existing technologies, trade name and customer relationships that were
acquired with the acquisitions of Continuous Computing and Pactolus. The
Company excludes the amortization of acquisition-related intangible
assets because it does not reflect the Company's ongoing business and it
does not have a direct correlation to the operation of the Company's
business. In addition, in accordance with GAAP, the Company generally
recognizes expenses for internally-developed intangible assets as they
are incurred, notwithstanding the potential future benefit such assets
may provide. Unlike internally-developed intangible assets, however, and
also in accordance with GAAP, the Company generally capitalizes the cost
of acquired intangible assets and recognizes that cost as an expense
over the useful lives of the assets acquired. As a result of their GAAP
treatment, there is an inherent lack of comparability between the
financial performance of internally-developed intangible assets and
acquired intangible assets. Accordingly, the Company believes it is
useful to provide, as a supplement to its GAAP operating results,
non-GAAP financial measures that exclude the amortization of acquired
intangibles in order to enhance the period-over-period comparison of its
operating results, as there is significant variability and
unpredictability across companies with respect to this expense.

(b) Stock-based compensation: Stock-based compensation consists
of expenses recorded under GAAP, in connection with stock awards such as
stock options, restricted stock awards and restricted stock units
granted under the Company's equity incentive plans and shares issued
pursuant to the Company's employee stock purchase plan. The Company
excludes stock-based compensation from non-GAAP financial measures
because it is a non-cash measurement that does not reflect the Company's
ongoing business and because the Company believes that investors want to
understand the impact on the Company of the adoption of the applicable
GAAP surrounding share based payments; the Company believes that the
provision of non-GAAP information that excludes stock-based compensation
improves the ability of investors to compare its period-over-period
operating results, as there is significant variability and
unpredictability across companies with respect to this expense.

(c) Restructuring and other charges, net: Restructuring and other
charges, net relates to costs associated with non-recurring events.
These include costs incurred for employee severance, acquisition or
divestiture activities, excess facility costs, certain legal costs,
asset related charges and other expenses associated with business
restructuring activities. Restructuring and other charges are excluded
from non-GAAP financial measures because they are not considered core
operating activities. Although the Company has engaged in various
restructuring activities over the past several years, each has been a
discrete event based on a unique set of business objectives. The Company
does not engage in restructuring activities in the ordinary course of
business. As such, the Company believes it is appropriate to exclude
restructuring charges from its non-GAAP financial measures because it
enhances the ability of investors to compare the Company's
period-over-period operating results.

(d) Income taxes: Non-GAAP income tax expense is equal to the
Company's projected cash tax expense. Adjustments to GAAP income tax
expense are required to eliminate the recognition of tax expense from
profitable entities where we utilize deferred tax assets to offset
current period tax liabilities. We believe that providing this non-GAAP
figure is useful to our investors as it more closely represents the true
economic impact of our tax positions.

(e) Restructuring inventory adjustment: Includes inventory
write-downs and benefits associated with non-recurring events,
predominantly tied to the Company's decision to end-of-life or
discontinue certain products for which the Company has no future ongoing
demand. During 2017, the Company recorded such charges tied to discrete
product decisions within its Hardware-Solutions segment associated with
its DCEngine and certain legacy embedded products. Restructuring
inventory write-downs and benefits are excluded from non-GAAP financial
measures because they are not considered core operating activities.
Although the Company has incurred various inventory write-downs over the
past several years, they have generally been associated with ongoing
business activities. As such, the Company believes it is appropriate to
exclude end-of-life and product discontinuance inventory write-downs and
benefits related to those write-downs from its non-GAAP financial
measures because it enhances the ability of investors to compare the
Company's period-over-period operating results.

(f) Amortization of financing activities: Amortization of
financing activities consists of expenses recorded under GAAP related to
the amortization of debt issuance costs, the amortization of warrant
issuance costs, and terminations costs related to previous unamortized
debt issuance costs from terminated financing agreements. The Company
excludes amortization of financing activities because they are not
considered to reflect the core cash-generating performance of the
business and therefore is excluded from our non-GAAP results.

(g) Change in fair value of warrants: Represents the change to
the current fair value of the warranty liability. The Company excludes
the change in fair value of warrants from non-GAAP financial measures
because it is a non-cash measurement that does not reflect the Company's
ongoing business. The Company believes that the provision of non-GAAP
information that excludes changes in fair value of warrants improves the
ability of investors to compare its period-over-period operating
results, as there is significant variability and unpredictability based
on the current fair value of the underlying warrants.

(h) Loss (gain) on the liquidation of foreign subsidiaries: On a
non-recurring basis we have recorded a gain or loss to reflect the
realization of accumulated foreign currency translation adjustments upon
the liquidation of certain international subsidiaries. This gain or loss
represents the net unrealized foreign currency translation gains or
losses accumulated from changes in exchange rates and the related
effects from the translation of assets and liabilities of these
entities. The liquidation of foreign subsidiaries occurs on an
infrequent basis and management does not view the impact of this
non-cash charge as indicative of the ongoing performance of the Company.
As such, the Company believes it is appropriate to exclude this gain
from its non-GAAP financial measures because it enhances the ability of
investors to compare the Company's period-over-period operating results.

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