The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto included under Part II, Item 8 of this Annual Report. Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in "Risk Factors" included elsewhere in this Annual Report on Form 10-K.
Overview
PAR Technology Corporation , operates in two distinct reporting segments, Restaurant/Retail and Government. Our Restaurant/Retail segment provides point-of-sale ("POS") software, hardware, back-office software and integrated technical solutions to the restaurant and retail industries. Our Government segment provides intelligence, surveillance, and reconnaissance solutions ("ISR") and mission systems support to theDepartment of Defense ("DoD") and other Federal agencies. Our Restaurant/Retail segment is a leading provider of POS software, systems, and services to the restaurant and retail industries. Our promise is to deliver the solutions that connect people to the restaurants, meals, and moments they love. We provide multi-unit and individual restaurants, franchisees, and enterprise customers in the three major restaurant categories: fast casual, quick serve, and table service, a fully integrated cloud solution, with our leading Brink POS cloud software and our point-of-sale hardware for the front-of-house, our leading back-office cloud software - Data Central - for the back-of-house, and our wireless headsets for drive-thru order taking. The Brink POS is an open solution offering customers the opportunity to integrate with third party products and in-house systems. In support of our customers need to quickly adapt to changing market conditions, we claim the largest integration ecosystem - 200+ partners across various product solution categories including: mobile/online ordering, self-ordering kiosks, loyalty programs, kitchen video systems, guest surveys, enterprise reporting, and other solutions relevant to our customers' businesses, including our cloud-based back-office solution - Data Central. These integration capabilities enables restaurants to increase visits, customer check size, improve operational efficiency, and most importantly, position them to win in an ever changing and challenging market. Our open architecture POS platforms are optimized to host our POS software applications, as well as many third-party POS applications, and are compatible with a variety of peripheral devices. We partner with numerous vendors that offer complementary in-store peripherals, such as cash drawers, card readers and printers and kitchen video systems, allowing us to deliver a completely integrated solution through one vendor. We believe our software, hardware and integrated solutions uniquely position us to be a leader in assisting customers to innovate and improve their in-store operations in a rapidly changing and challenging market, particularly in light of the continued impacts of the COVID-19 pandemic on the restaurant industry. Our continued success and growth will depend upon our ability to advance and create new technology, products and services to meet customer demands, as well as deploy capital and resources that uniquely deliver customer value. This includes the development and introduction of new products and services, targeted acquisitions and a constant review of internal spend. PAR's Government segment provides technical expertise in contract development of advanced systems and software solutions for theDoD and other Federal agencies, as well as satellite, communication and IT mission systems support at a number ofU.S. Government facilities both in theU.S. and worldwide. The Government segment is focused on two principal offerings, intelligence solutions and mission systems contract support, with additional revenue from a small number of licensed software products for use in analytic and operational environments that leverage geospatial intelligence data. We believe our highly relevant technical competencies, intellectual property, and investments in new technologies provide opportunities to offer systems integration, products, and highly-specialized service solutions to theU.S. DoD and other Federal agencies. The general uncertainty inU.S. defense total workforce policies (military, civilian, and contract), procurement cycles, and spending levels for the next several years are factors we monitor as we develop and implement our business strategy for our Government segment. COVID-19 Update The COVID-19 pandemic has caused and continues to cause significant disruption to theU.S. and global economies, including the impact of government and company actions to reduce the spread of the virus and consumer behavior in response to the same; and, althoughthe United States and other countries have begun to roll out vaccinations, it is uncertain how quickly and effectively such vaccinations will be distributed or help to control the spread of COVID-19 and its variants. 21
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Table of Contents
Early on in the COVID-19 pandemic, we took a number of actions to mitigate the impact of the pandemic on our employees and business. We implemented temporary cost saving measures, which resulted in over$10 million of savings to our 2020 operating plan, and we introduced new product offerings to promote social distancing, offered subscription discounts and deferred payment arrangements to customers and continued to invest in our software products. While our 2020 reported revenues increased year-over-year despite the COVID-19 pandemic and the pandemic did not have a material adverse impact on our Government business in 2020, we cannot know the extent COVID-19 actually impacted our business, results of operations, and financial condition in 2020; and the ultimate extent to which the COVID-19 pandemic will continue to impact our business, results of operations and financial condition is uncertain and cannot be predicted with confidence. See "Risk Factors" for further discussion on the impact of the COVID-19 pandemic. We will continue to actively manage our business to respond to the uncertainties and risks created by the pandemic throughout its duration, including evaluating our remote working plans on a regular basis and monitoring the health, safety, morale, and productivity of our employees. We believe the COVID-19 pandemic has highlighted the importance of digitizing the modern restaurant, and we believe that our cloud solutions, hardware offerings and services uniquely positions us to be a leader in digital technology offerings to restaurants. We will continue to invest in product offerings and solutions to meet the digital needs of our customers by offering transformative technologies. Recent Developments •2020 Public Offering of Common Stock: OnOctober 5, 2020 , we completed an underwritten public offering of 3,350,000 shares of common stock at a price to the public of$38.00 per share, resulting in$121.8 million of proceeds, net of underwriting discounts and commissions and offering expenses payable by the Company (the "Secondary Offering"). In connection with the Secondary Offering, onNovember 3, 2020 ,Jeffries, LLC , the underwriter, partially exercised its option and purchased 266,022 shares of common stock, resulting in an additional$9.6 million of proceeds, net of underwriting discounts and commissions and offering expenses payable by us. •2.875% Convertible Senior Notes Due 2026: OnFebruary 10, 2020 , we sold an aggregate principal amount of$120.0 million of 2.875% Convertible Senior Notes due 2026 (the "2026 Notes") and received proceeds net of offering expenses of approximately$115.8 million . We used a portion of the proceeds to repurchase approximately$66.3 million in aggregate principal amount of the 4.500% Convertible Senior Notes due 2024 (the "2024 Notes" and together with the 2026 Notes, the ("Notes"). Results of operations for the years endedDecember 31, 2020 , 2019 and 2018 are as follows: For the Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 We reported revenues of$213.8 million for the year endedDecember 31, 2020 , an increase of 14.2% from$187.2 million for the year endedDecember 31, 2019 . Our net loss was$36.6 million or$1.92 loss per diluted share for the year endedDecember 31, 2020 versus a net loss of$15.6 million or$0.96 loss per diluted share for the year endedDecember 31, 2019 . Our year-over-year unfavorable performance was primarily driven by an$8.1 million increase in selling, general and administrative ("SG&A") expenses, driven by increased costs related to the acquisition ofAccSys, LLC inDecember 2019 (the "Restaurant Magic Acquisition") and investments in Brink, a$5.9 million increase in research and development ("R&D") mostly in Brink and Data Central and, a$3.7 million increase in interest expense, partially offset by a$1.9 million increase in margin and$3.3 million gain from the revaluation of contingent consideration liability.
For the Year Ended
We reported revenues of$187.2 million for the year endedDecember 31, 2019 , a decrease of 7.0% from$201.2 million for the year endedDecember 31, 2018 . Our net loss was$15.6 million or$0.96 loss per diluted share for the year endedDecember 31, 2019 versus a net loss of$24.1 million or$1.50 loss per diluted share for the year endedDecember 31, 2018 . Our year-over-year unfavorable performance was primarily driven by lower Restaurant/Retail hardware revenue and corresponding hardware support service revenue from our traditional tier 1 customers as one of these customers completed significant projects in 2018 which were not repeated in 2019. We partially offset these reductions with continued growth in Brink POS revenue, including related Software as a Service ("SaaS"), hardware and support services revenue. The 2018 net loss include a valuation allowance of$14.9 million to reduce the carrying value of our deferred tax assets. 22 -------------------------------------------------------------------------------- Table of Contents Segment Revenue by Product Line for the Years EndedDecember 31, 2020 , 2019 and 2018 are as follows: Year Ended December 31, 2019 to 2020 2018 to 2019 (in thousands) 2020 2019 2018 % Change % Change Restaurant/Retail Core*$ 79,192 $ 78,238 $ 102,877 1.2 % (23.9) % Brink ** 63,316 41,689 25,189 51.9 % 65.5 % SureCheck 4 3,380 6,003 (99.9) % (43.7) % Total Restaurant Retail$ 142,512 $ 123,307 $ 134,069 15.6 % (8.0) % Government Intelligence, surveillance, and reconnaissance$ 37,448 $ 29,541 $ 30,888 26.8 % (4.4) % Mission Systems 32,947 33,513 35,082 (1.7) % (4.5) % Product Sales 879 871 1,207 0.9 % (27.8) % Total Government$ 71,274 $ 63,925 $ 67,177 11.5 % (4.8) % * Core includes$18.5 million and$3.2 million of Drive-Thru product and service revenue for 2020 and 2019 respectively. ** Brink includes$8.4 million and$0.3 million of Restaurant Magic revenue for 2020 and 2019 respectively. Revenue Product revenue:
For the Year Ended
Product revenues were$73.2 million for the year endedDecember 31, 2020 , an increase of 10.4% from$66.3 million recorded in 2019. This increase was primarily driven by the acquisition of the Drive-Thru product line and continued Brink growth. The Drive-Thru product line brought an additional$14.6 million in revenue in 2020 compared to partial year of performance in 2019 as we acquired the product line onSeptember 30, 2019 . Brink related hardware revenue saw an increase of$4.8 million compared to 2019. Partially offsetting these revenue gains were declines in other Core hardware revenue of$10.5 million , driven by the COVID-19 pandemic, PixelPoint license sales decline of$1.3 million , and SureCheck product revenue of$0.7 million as the divestiture of the product line closed during the fourth quarter of 2019. For the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 Product revenues were$66.3 million for the year endedDecember 31, 2019 , a decrease of 15.8% from$78.8 million reported in 2018. This decrease was primarily driven by lower revenues from our tier 1 customers and by a decrease in our international business. Our hardware sales in the Restaurant/Retail segment were down versus prior year as we completed hardware project installations with a large domestic customer during the first half of 2018 which was not recurring in 2019. Additionally, international sales were down in 2019 and SureCheck was divested. SureCheck product revenue was$0.7 million in 2019 versus$2.0 million in 2018. Service revenue: For the Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 Service revenues were$69.3 million for the year endedDecember 31, 2020 , an increase of 21.6% from$57.0 million reported for the year endedDecember 31, 2019 , primarily due to an increase in revenue from Brink services of$8.7 million which includes an increase of$4.1 million inBrink SaaS service revenue, and$8.1 million revenue related to the Restaurant Magic Acquisition. Partially offsetting these gains were declines of$2.7 million in SureCheck product revenue as the product line was divested in fourth quarter 2019 and$1.8 million decline of Core services. For the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 Service revenues were$57.0 million for the year endedDecember 31, 2019 , an increase of 3.1% from$55.3 million recorded for the year endedDecember 31, 2018 , primarily due to an increase in Brink services which includes a$3.9 million increase in 23 -------------------------------------------------------------------------------- Table of Contents Brink POS SaaS revenue and partially offset by reduction in services to our traditional tier 1 customers and SureCheck services. Surecheck service revenue was$2.7 million in 2019 versus$4.0 million in 2018. Contract revenue: For the Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 Contract revenues were$71.3 million for the year endedDecember 31, 2020 , an increase of 11.5% from the$63.9 million reported for the year endedDecember 31, 2019 . The increase in contract revenue from our Government segment was driven by a$7.9 million or 27% increase in ISR product line revenues with several contracts benefitting from increased funding. For the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 Contract revenues were$63.9 million for the year endedDecember 31, 2019 , compared to$67.2 million reported for the year endedDecember 31, 2018 , a decrease of 4.8%. This decrease was driven by a 4% decrease in our Mission Systems revenue due to reduction of revenue on contracts and a 4% reduction in ISR revenues due to ceiling limitations in a large customer's funding. Gross Margins Product margins: For the Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 Product margins for the year endedDecember 31, 2020 , were 19.5%, compared to 22.8% for the year endedDecember 31, 2019 . This decrease was due to increased freight as we expedited procurement of inventory in the early phase of the COVID-19 pandemic and a$0.9 million disposal of inventory related to the acquisition of the assets of 3M Company's Drive-Thru Communications Systems business that was effective inSeptember 2019 (the "Drive-Thru Acquisition"). For the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 Product margins for the year endedDecember 31, 2019 , were 22.8%, in line with the 23.0% for the year endedDecember 31, 2018 . Service margins: For the Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 Service margins for the year endedDecember 31, 2020 , were 28.0%, compared to 29.1% recorded for the year endedDecember 31, 2019 , a 1.1% decline primarily driven by increased investments in customer service,$0.4 million disposal of inventory related to the acquisition of the assets from the Drive-Thru Acquisition, partially offset by a favorable shift in sales mix that resulted from the Restaurant Magic Acquisition, the Drive-Thru Acquisition and our divestiture of Surecheck. For the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 Service margins were 29.1% for the year endedDecember 31, 2019 , compared to 22.1% recorded for the year endedDecember 31, 2018 . Service margins increased primarily due to Brink POS SaaS and the increase in profitability in our field service business. During 2018 and 2019, impairment charges were recorded for SureCheck capitalized software of$1.6 million and$0.7 million , respectively. Contract margins: For the Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 Contract margins were 7.9% for the year endedDecember 31, 2020 , compared to 8.9% for the year endedDecember 31, 2019 , primarily due to an increase in investment in product services startup costs. 24 -------------------------------------------------------------------------------- Table of Contents For the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 Contract margins were 8.9% for the year endedDecember 31, 2019 , compared to 10.7% for the year endedDecember 31, 2018 . The decrease in margin was primarily driven by decreased activity in Mission Systems' higher margin contracts. Selling, General and Administrative Expenses For the Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 SGA expenses were$46.2 million for the year endedDecember 31, 2020 , compared to$38.1 million for the year endedDecember 31, 2019 . The increase was primarily driven by$3.9 million of expenses related to the Restaurant Magic Acquisition and Drive-Thru Acquisition,$2.5 million increase in equity and incentive compensation and$1.9 million increased internal technology infrastructure costs. For the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 SGA expenses were$38.1 million for the year endingDecember 31, 2019 , compared to$35.8 million for the year endedDecember 31, 2018 . The increase was due to additional investments in Brink POS sales and marketing and increased equity and incentive compensation, partially offset by savings in other departments. SG&A expenses associated with the internal investigation for 2019 were$0.6 million as compared to$1.1 million in 2018. Research and Development Expenses For the Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 R&D expenses were$19.3 million for the year endedDecember 31, 2020 , compared to$13.4 million for the year endedDecember 31, 2019 . The increase was driven by a$7.1 million gross increase in software development investments for Brink which included$1.9 million for Restaurant Magic R&D, partially offset by SureCheck divestment and additional$2.7 million of software capitalized. For the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 R&D expenses were$13.4 million for the year endedDecember 31, 2019 , compared to$12.4 million recorded for the year endedDecember 31, 2018 . The increase was primarily related to a$2.1 million increase in software development investments for Brink offset by decreases in other product lines. Amortization of Identifiable Intangible assets For the Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 During the year endedDecember 31, 2020 , we recorded$1.2 million of amortization expense associated with identifiable non-developed technology intangible assets acquired in the Drive-Thru Acquisition, Restaurant Magic Acquisition and our acquisition ofBrink Software, Inc. inSeptember 2014 (the "Brink Acquisition") compared to$0.2 million of amortization expense recorded during the year endedDecember 31, 2019 in connection to the same acquisitions. For the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 During the year endedDecember 31, 2019 , we recorded$0.2 million of amortization expense associated with acquired identifiable intangible assets in connection with the Drive-Thru Acquisition, Restaurant Magic Acquisition, and Brink Acquisition compared to$22.0 thousand for the year endedDecember 31, 2018 in connection with the Brink Acquisition. Adjustment to Contingent Consideration Liability For the Year EndedDecember 31, 2020 Compared to the Year EndedDecember 31, 2019 During the year endedDecember 31, 2020 , we recorded a$3.3 million reversal of the contingent liability in connection with the Restaurant Magic Acquisition compared to the$0.2 million expense recorded during the year endedDecember 31, 2019 related to the termination of the Brink Acquisition post-closing revenue focused milestones ("Earn-Out") agreement. 25 -------------------------------------------------------------------------------- Table of Contents For the Year EndedDecember 31, 2019 Compared to the Year EndedDecember 31, 2018 During the year endedDecember 31, 2019 , we recorded a$0.2 million expense for the termination of the Brink Acquisition Earn-Out agreement compared to 2018 when we recorded a$0.5 million reversal of the of contingent liability related to the Brink Acquisition. Loss on Extinguishment of Debt Loss on the extinguishment of debt was$8.1 million for the year endedDecember 31, 2020 related to the partial refinance of our 2024 Notes. Other Income (Expense) - Net For the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 Other income (expense) - net, was$0.8 million for the year endedDecember 31, 2020 , as compared to($0.4) million for the year endedDecember 31, 2019 . Other income (expense) primarily includes rental income, net of applicable expenses, foreign currency transactions gains and losses and other non-operating income/expenses. In 2020, we recorded$1.2 million in transaction gains. For the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 Other (expense) income - net, was ($0.4) million) for the year endedDecember 31, 2019 , as compared to other income, net of$0.7 million for the year endedDecember 31, 2018 . Other income/expense primarily rental income, net of applicable expenses, foreign currency transactions gains and losses and other non-operating income/expense. In 2018, a$0.5 million gain was recorded for the sale of real estate. Interest Expense For the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 Interest expense, net was$8.3 million for the year endedDecember 31, 2020 , as compared to$4.6 million for the year endedDecember 31, 2019 . This increase was primarily driven by interest related to an increase in convertible debt as a result of the issuance of the 2026 Notes net of the partial repurchase of the 2024 Notes in the first quarter of 2020. Interest expense, net includes$4.4 million of non-cash accretion of debt discount and amortization of issuance costs for 2020, compared to$2.5 million for 2019. For the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 Interest expense, net was$4.6 million for the year endedDecember 31, 2019 , as compared to interest expense, net of$0.4 million for the year endedDecember 31, 2018 . The increase reflects$2.6 million of interest expense related to the sale of the 2024 Notes as well as$2.0 million of accretion of 2024 notes debt discount for 2019. Income taxes Net tax benefit of$3.0 million for the year endedDecember 31, 2020 was driven by the$3.3 million deferred tax benefit impact of the 2026 Notes issuance inFebruary 2020 . The net tax benefit of$3.6 million for the year endedDecember 31, 2019 was driven by the$4.1 million deferred tax benefit impact of the 2024 Notes issuance inApril 2019 . For the year endedDecember 31, 2018 , we recorded a tax provision of$14.1 million which was driven by the full valuation allowance of$14.9 million to reduce the carrying value of our deferred tax assets. Liquidity and Capital Resources In 2020, our primary source of liquidity was cash provided by financing activities. Cash used in operating activities was$20.2 million for the year endedDecember 31, 2020 , compared to$16.1 million for the year endedDecember 31, 2019 and$3.8 million for the year endedDecember 31, 2018 . The increase in cash used in operating activities was driven by an increase in pre-tax loss and additional net working capital needs. 26 -------------------------------------------------------------------------------- Table of Contents Cash used in investing activities was$9.0 million for the year endedDecember 31, 2020 driven by$7.9 million in capitalization of developed technology costs associated with our Restaurant/Retail segment software platforms and$1.3 million in capital expenditures. Cash used in investing activities was$23.9 million for the year endedDecember 31, 2019 compared to$6.7 million for the year endedDecember 31, 2018 . The increase was driven by business development activities in 2019 with$7.0 million in cash for the Drive-Thru Acquisition and$13 million in cash for the Restaurant Magic Acquisition partially offset by cash proceeds of$2.5 million for the divestiture of SureCheck. Additional cash used for investing activities were capital expenditures of$2.5 million and$3.9 million for 2019 and 2018 respectively and capitalized software for developed technology in Restaurant/Retail software platforms of$4.1 million and$3.9 million for 2019 and 2018, respectively. During 2018, we also received proceeds of$1.1 million related to the sale of rental property at our headquarters. Cash provided by financing activities was$180.7 million for the year endedDecember 31, 2020 driven by net proceeds of$131.4 million from the Secondary Offering and respective exercise of underwriter's option onNovember 3, 2020 in addition to net proceeds of$49.5 million from the$120.0 million issuance of the 2026 Notes offset by the repurchase of a majority of the 2024 Notes. Cash provided by financing activities was$65.6 million for the year endedDecember 31, 2019 versus$7.3 million for the year endedDecember 31, 2018 . The increase was primarily driven by the proceeds of the 2024 Notes net of issuance costs and repayment in full of all amounts outstanding under the indenture governing the 2024 Notes partially offset by the final payment related to the conclusion of the Brink Acquisition Earn-Out period. We expect our current cash and cash equivalents will be sufficient to meet our operating needs for the next 12 months. Our actual cash needs will depend on many factors, including the timing and rate of revenue growth, including the growth of SaaS revenues, and the timing and necessary capital requirements to finance our development efforts, planned introduction of new and enhanced products and services, or acquisitions of complementary businesses, technologies, products, or services. Contractual Obligations The following table summarizes our contractual obligations atDecember 31, 2020 and the effect such obligations are expected to have on our liquidity and cash flow in future periods. Payments Due by Period (in thousands) Total Less than 1 year 1 - 3 Years 3 - 5 Years More than 5 Years
Operating lease obligations
$ 1,519 $ - $ - Non-cancellable purchase obligations 29,166 28,682 484 - - Debt obligations 156,255 4,770 26,310 125,175 -$ 188,193 $ 34,705$ 28,313 $ 125,175 $ - The commitments in the table above consist of lease payments for ourSan Diego, California office,Ontario, Canada office, our otherUnited States locations, and our international locations. The debt obligations include the payments to service the 2024 Notes, the 2026 Notes and the subordinated promissory note related to the Restaurant Magic Acquisition. Debt obligations includes both principal and interest payments. Other purchase obligations are non-cancellable purchase orders outstanding. The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without significant penalty are not included in the table above. Critical Accounting Policies and Estimates Our consolidated financial statements are based on the application of accounting principles generally accepted inthe United States of America ("GAAP"). GAAP requires the use of estimates, assumptions, judgments, and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue, and expense amounts reported. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. Valuations based on estimates are reviewed for reasonableness and adequacy on a consistent basis. Primary areas where financial information is subject to the use of estimates, assumptions and the application of judgment include revenue recognition, accounts receivable, inventories, accounting for business combinations, contingent consideration, goodwill and intangible assets, and taxes. 27 -------------------------------------------------------------------------------- Table of Contents Convertible Senior Notes In accounting for the issuance of our Notes, we separated each series of Notes into liability (debt) and equity components of the instrument. The carrying amount of the debt component was calculated by estimating the fair value of similar liabilities that do not have associated convertible features. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the debt component from the principal amount. The difference between the principal amount of each series of our Notes and its respective fair value of the debt component are amortized to interest expense over its respective term using the effective interest method. The equity component, net of issuance costs and deferred tax effects, of each series of our Notes is presented within additional paid-in-capital, and will not be remeasured as long as it continues to meet the requirements for equity classification. These assumptions involve inherent uncertainties and management judgment. In accounting for the issuance costs related to our Notes, the allocation of issuance costs incurred between the debt and equity components was based on their relative values. Revenue Recognition Policy InMay 2014 , FASB issued ASU 2014-09, Revenue from Contracts with Customers, codified as ASC Topic 606 ("ASC 606"). The FASB issued amendments to ASC 606 during 2016. ASC 606 requires additional disclosures regarding the nature, amount, timing, and uncertainty of revenue and related cash flows arising from arrangements with customers. ASC 606 is effective for annual and interim reporting periods beginning afterDecember 15, 2017 . We adopted ASC 606 effectiveJanuary 1, 2018 using the modified retrospective method. In evaluating the impact of adoption, we reviewed significant open arrangements with customers for each revenue source and adoption did not have a material impact. Our revenue is derived from SaaS, hardware and software sales, software activation, hardware support, installations, maintenance and professional services. ASC 606 requires us to distinguish and measure performance obligations under customer contracts. Contract consideration is allocated to all performance obligations within the arrangement or contract. Performance obligations that are determined not to be distinct are combined with other performance obligations until the combined unit is determined to be distinct and that combined unit is then recognized as revenue over time or at a point in time depending on when control is transferred. We evaluated the potential performance obligations within our Restaurant/Retail segment and evaluated whether each performance obligation met the ASC 606 criteria to be considered distinct performance obligations. Revenue in the Restaurant/Retail segment is recognized at a point in time for software, hardware and installations. Revenue on these items are recognized when the customer obtains control of the asset. This generally occurs upon delivery and acceptance by the customer or upon installation or delivery to a third party carrier for onward delivery to customer. Additionally, revenue in the Restaurant/Retail segment relating to SaaS, Advanced Exchange programs, on-site support and other services is recognized over time as the customer simultaneously receives and consumes the benefits of our performance obligations. Our support services are stand-ready obligations that are provided over the life of the contract, generally 12 months. We offer installation services to our customers for hardware and software for which we primarily hire third party contractors to install the equipment on our behalf. We pay the third party contractors an installation service fee based on an hourly rate as agreed upon between us and contractor. When third party installers are used, we determine whether the nature of our performance obligations is to provide the specified goods or services ourselves (principal) or to arrange for the third party to provide the goods or services (agent). In our customer arrangements, we are primarily responsible for providing a good or service, we have inventory risk before the good or service is transferred to the customer, and we have discretion in establishing prices. As a result, we have concluded we are the principal in the arrangement and record installation revenue on a gross basis. The support services associated with hardware and software sales are a "stand-ready obligation" satisfied over time on the basis that customer consumes and receives a benefit from having access to our support resources, when and as needed, throughout the contract term. For this reason, the support services are recognized ratably over the term since we satisfy our obligation to stand ready by performing these services each day. Our contracts typically require payment within 30 to 90 days from the shipping date or installation date, depending on our terms with the customer. The primary method used to estimate stand-alone selling price is the price that we charge for that good or service when we sell it separately under similar circumstances to similar customers. We determine stand-alone selling price as follows: Hardware, software, and software activation (one-time fee at the initial offering of software or SaaS) performance obligations are recognized at a stand-alone selling price based on the price at which we sell the particular good or service separately in similar circumstances and to similar customers. The stand-alone selling price for all other performance obligations, including pass-through hardware (such as terminals, printers, or card readers), hardware support (referred to as 28 -------------------------------------------------------------------------------- Table of Contents Advanced Exchange), installation, maintenance, software upgrades, and professional services (project management) is recognized by using an expected cost plus margin. Our revenue in the Government segment is recognized over time as control is generally transferred continuously to our customers. Revenue generated by the Government segment is predominantly related to services provided, however, revenue is also generated through the sale of materials, software, hardware, and maintenance. For the Government segment cost plus fixed fee contract portfolio, revenue is recognized over time using costs incurred to date to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and general and administrative expenses. Profit is recognized on the fixed fee portion of the contract as costs are incurred and invoiced. Long-term fixed price contracts and programs involve the use of various techniques to estimate total contract revenue and costs. For long-term fixed price contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include: labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; and the performance of subcontractors. Revenue and profit in future periods of contract performance are recognized using the aforesaid assumptions and adjusting the estimate of costs to complete a contract. Once the services provided are determined to be distinct or not distinct, we evaluate how to allocate the transaction price. Generally, the Government segment does not sell the same good or service to similar customers and the contract performance obligations are unique to each government solicitation. The performance obligations are typically not distinct. In cases where there are distinct performance obligations, the transaction price would be allocated to each performance obligation on a ratable basis based upon the stand-alone selling price of each performance obligation. Cost plus margin is used for the cost plus fixed fee contract portfolios as well as the fixed price and time and materials contracts portfolios to determine the stand-alone selling price. In determining when to recognize revenue, we analyze whether our performance obligations in our Government contracts are satisfied over a period of time or at a point in time. In general, our performance obligations are satisfied over a period of time. However, there may be circumstances where the latter or both scenarios could apply to a contract. We usually expect payment within 30 to 90 days from the date of service, depending on our terms with the customer. None of our contracts as ofDecember 31, 2020 contained a significant financing component. Inventories Inventory is valued at the lower of cost and net realizable value, with cost determined using the weighted average cost method. We use certain estimates and judgments and considers several factors, including product demand, changes in customer requirements and changes in technology to provide for excess and obsolescence reserves to properly value inventory. Capitalized Software Development Costs We capitalize certain costs related to the development of our platform and other software applications for internal use in accordance with ASC 350-40, Intangibles -Goodwill and Other - Internal -Use Software . We begin to capitalize our costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. We stop capitalizing these costs when the software is substantially complete and ready for its intended use, including the completion of all significant testing. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three to five years. We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded within research and development expenses in our consolidated statements of operations. We exercise judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that we change the manner in which we develop and test new features and functionalities related to our platform, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods 29 -------------------------------------------------------------------------------- Table of Contents Accounting for Business Combinations We account for acquired businesses using the Acquisition Method, which requires that acquired assets and assumed liabilities be recorded at their respective fair values on the date of acquisition. The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded to goodwill. Intangible assets are amortized over the expected life of the asset. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future cash flows from revenues of the intangible assets acquired, estimates of appropriate discount rates used to present value expected future cash flows, estimated useful lives of the intangible assets acquired and other factors. Although we believe the assumptions and estimates it has made have been reasonable and appropriate, they are based, in part, on historical experience, information obtained from the management of the acquired companies and future expectations. For these and other reasons, actual results may vary significantly from estimated results. Contingent Consideration We determine the acquisition date fair value of contingent consideration using a discounted cash flow method, with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820, Fair Value Measurement. As it relates to the contingent consideration associated with the Restaurant Magic Acquisition we may use various valuation techniques depending on the terms and conditions of the contingent consideration, including a Monte-Carlo simulation. This simulation uses probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring. Significant increases or decreases to these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent Earn-Out obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of cash flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities. The Restaurant Magic Acquisition resulted in a liability for the contingent consideration being recorded in the amount of$3.3 million during 2019. The liability for the contingent consideration was established at the time of the acquisition and is evaluated quarterly based on additional information as it becomes available; any change in the fair value adjustment is recorded in the earnings of that period. During 2020, adjustments of$3.3 million were recorded to decrease the fair value of the contingent consideration related to the Restaurant Magic Acquisition to zero as ofDecember 31, 2020 . GoodwillGoodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination.Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. Our impairment tests are based on two reportable operating segments and the reporting units used in the test for goodwill impairment. If the carrying value of either reporting unit exceeds its fair value, an impairment charge is recognized for the excess of the carrying value of the reporting unit over its fair value. Fair values of the reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of a discounted cash flow ("DCF") analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash flows, including revenue growth, operating income margin and discount rate. These assumptions vary between the reporting units. The market approach incorporates the use of the quoted price and public company methods utilizing public market data for our company and comparable companies for each of our two reporting segments. We conducted our annual goodwill impairment test during the fourth quarter of 2020 and determined that the fair value for each of the reporting units significantly exceeded its respective carrying value. As such, goodwill was not impaired. No impairment charge was recorded in any of the periods presented in the accompanying consolidated financial statements. Restaurants/Retail: In deriving our fair value estimates, we use key assumptions built on the current product portfolio mix adjusted to reflect continued revenue increases from our software products. We use total annual revenue growth rates for the reporting units ranging between 3.0% and 23.0%. The high-end growth rate reflects our projected revenues from anticipated increases in installations of our software platforms at new customer locations. These software platforms are expected to expand our capabilities into new markets. We believe these estimates are reasonable 30 -------------------------------------------------------------------------------- Table of Contents given the size of the overall market, combined with the projected market share we expect to achieve. Overall, the projected revenue growth rates ultimately trend to an estimated long term growth rate of 3.0%. We use gross margin estimates that are reflective of expected increased recurring SaaS revenue from that is expected to exceed historical gross margins. Estimates of operating expenses, working capital requirements and depreciation and amortization expense used for the Restaurant/Retail reporting unit are generally consistent with actual historical amounts, adjusted to reflect our continued investment and projected revenue growth from our core technology platforms. We believe utilization of actual historical results adjusted to reflect our continued investment in our products is an appropriate basis supporting the fair value of the Restaurant/Retail reporting unit. Finally, we use a discount rate of approximately 21.5% for the Restaurant/Retail reporting unit. This estimate was derived through a combination of current risk-free interest rate data, financial data from companies that PAR considers to be our competitors and was based on volatility between our historical financial projections and actual results achieved. The current economic conditions and the continued volatility in theU.S. and in many other countries in which we operate could contribute to decreased consumer confidence and continued economic uncertainty which may adversely impact our operating performance. Although we have seen an improvement in the markets it serves, continued volatility in these markets could have an impact on purchases of our products, which could result in a reduction in sales, operating income and cash flows. Such reductions could have a material adverse impact on the underlying estimates used in deriving the fair value of our reporting units used to support our annual goodwill impairment test or could result in a triggering event requiring a fair value re-measurement, particularly if we are unable to achieve the estimates of revenue growth indicated in the preceding paragraphs. These conditions may result in an impairment charge in future periods. Government: The estimated fair value of the Government segment is substantially in excess of its carrying value. Consistent with prior year methodology, in deriving our fair value estimates, we have used key assumptions built on the current core business. These assumptions, specifically those included within the discounted cash flow estimate, are comprised of the revenue growth rate, gross margin, operating expenses, working capital requirements, and depreciation and amortization expense. We reconciled the aggregate estimated fair value of the reporting units to our market capitalization noting no impairment as ofDecember 31, 2020 orDecember 31, 2019 was recorded. Deferred Taxes Deferred tax assets are reviewed quarterly for recoverability and valued accordingly. The deferred tax assets are subject to a full valuation allowance. These deferred tax assets are evaluated by using estimates of future taxable income and the impact of tax planning strategies. Valuations related to tax accruals and deferred tax assets can be impacted by changes to tax codes, changes in statutory tax rates and our estimates of future taxable income levels. Recent Accounting Pronouncements Not Yet Adopted See "Note 1 - Summary of Significant Accounting Policies" of the notes to consolidated financial statements (Part II, Item 8 of this Report) for details. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. 31
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