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OFFON

PAR TECHNOLOGY CORPORATION

(PAR)
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PAR TECHNOLOGY : MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

03/16/2021 | 04:06pm EDT
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 the Department 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 the DoD and other Federal agencies,
as well as satellite, communication and IT mission systems support at a number
of U.S. Government facilities both in the U.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 the U.S.DoD and other Federal agencies. The general
uncertainty in U.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 the U.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, although the 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.
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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: On October 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,
on November 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: On February 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 ended December 31, 2020, 2019 and 2018 are
as follows:
For the Year Ended December 31, 2020 Compared to the Year Ended December 31,
2019
We reported revenues of $213.8 million for the year ended December 31, 2020, an
increase of 14.2% from $187.2 million for the year ended December 31, 2019. Our
net loss was $36.6 million or $1.92 loss per diluted share for the year ended
December 31, 2020 versus a net loss of $15.6 million or $0.96 loss per diluted
share for the year ended December 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 of AccSys, LLC in December 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 December 31, 2019 Compared to the Year Ended December 31, 2018


We reported revenues of $187.2 million for the year ended December 31, 2019, a
decrease of 7.0% from $201.2 million for the year ended December 31, 2018. Our
net loss was $15.6 million or $0.96 loss per diluted share for the year ended
December 31, 2019 versus a net loss of $24.1 million or $1.50 loss per diluted
share for the year ended December 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.

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Segment Revenue by Product Line for the Years Ended December 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 December 31, 2020 Compared to the Year Ended December 31, 2019


Product revenues were $73.2 million for the year ended December 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 on September 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 Ended December 31, 2019 Compared to the Year Ended December 31,
2018
Product revenues were $66.3 million for the year ended December 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 Ended December 31, 2020 Compared to the Year Ended December 31,
2019
Service revenues were $69.3 million for the year ended December 31, 2020, an
increase of 21.6% from $57.0 million reported for the year ended December 31,
2019, primarily due to an increase in revenue from Brink services of $8.7
million which includes an increase of $4.1 million in Brink 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 Ended December 31, 2019 Compared to the Year Ended December 31,
2018
Service revenues were $57.0 million for the year ended December 31, 2019, an
increase of 3.1% from $55.3 million recorded for the year ended December 31,
2018, primarily due to an increase in Brink services which includes a $3.9
million increase in
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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 Ended December 31, 2020 Compared to the Year Ended December 31,
2019
Contract revenues were $71.3 million for the year ended December 31, 2020, an
increase of 11.5% from the $63.9 million reported for the year ended
December 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 Ended December 31, 2019 Compared to the Year Ended December 31,
2018
Contract revenues were $63.9 million for the year ended December 31, 2019,
compared to $67.2 million reported for the year ended December 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 Ended December 31, 2020 Compared to the Year Ended December 31,
2019
Product margins for the year ended December 31, 2020, were 19.5%, compared to
22.8% for the year ended December 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 in September 2019 (the "Drive-Thru Acquisition").

For the Year Ended December 31, 2019 Compared to the Year Ended December 31,
2018
Product margins for the year ended December 31, 2019, were 22.8%, in line with
the 23.0% for the year ended December 31, 2018.
Service margins:
For the Year Ended December 31, 2020 Compared to the Year Ended December 31,
2019
Service margins for the year ended December 31, 2020, were 28.0%, compared to
29.1% recorded for the year ended December 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 Ended December 31, 2019 Compared to the Year Ended December 31,
2018
Service margins were 29.1% for the year ended December 31, 2019, compared to
22.1% recorded for the year ended December 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 Ended December 31, 2020 Compared to the Year Ended December 31,
2019
Contract margins were 7.9% for the year ended December 31, 2020, compared to
8.9% for the year ended December 31, 2019, primarily due to an increase in
investment in product services startup costs.
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For the Year Ended December 31, 2019 Compared to the Year Ended December 31,
2018
Contract margins were 8.9% for the year ended December 31, 2019, compared to
10.7% for the year ended December 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 Ended December 31, 2020 Compared to the Year Ended December 31,
2019
SGA expenses were $46.2 million for the year ended December 31, 2020, compared
to $38.1 million for the year ended December 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 Ended December 31, 2019 Compared to the Year Ended December 31,
2018
SGA expenses were $38.1 million for the year ending December 31, 2019, compared
to $35.8 million for the year ended December 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 Ended December 31, 2020 Compared to the Year Ended December 31,
2019
R&D expenses were $19.3 million for the year ended December 31, 2020, compared
to $13.4 million for the year ended December 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 Ended December 31, 2019 Compared to the Year Ended December 31,
2018
R&D expenses were $13.4 million for the year ended December 31, 2019, compared
to $12.4 million recorded for the year ended December 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 Ended December 31, 2020 Compared to the Year Ended December 31,
2019
During the year ended December 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 of Brink Software, Inc. in September 2014 (the
"Brink Acquisition") compared to $0.2 million of amortization expense recorded
during the year ended December 31, 2019 in connection to the same acquisitions.
For the Year Ended December 31, 2019 Compared to the Year Ended December 31,
2018
During the year ended December 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 ended December 31,
2018 in connection with the Brink Acquisition.
Adjustment to Contingent Consideration Liability
For the Year Ended December 31, 2020 Compared to the Year Ended December 31,
2019
During the year ended December 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 ended December 31,
2019 related to the termination of the Brink Acquisition post-closing revenue
focused milestones ("Earn-Out") agreement.
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For the Year Ended December 31, 2019 Compared to the Year Ended December 31,
2018
During the year ended December 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 ended December
31, 2020 related to the partial refinance of our 2024 Notes.
Other Income (Expense) - Net
For the year ended December 31, 2020 compared to the year ended December 31,
2019
Other income (expense) - net, was $0.8 million for the year ended December 31,
2020, as compared to ($0.4) million for the year ended December 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 ended December 31, 2019 compared to the year ended December 31,
2018
Other (expense) income - net, was ($0.4) million) for the year ended
December 31, 2019, as compared to other income, net of $0.7 million for the year
ended December 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 ended December 31, 2020 compared to the year ended December 31,
2019
Interest expense, net was $8.3 million for the year ended December 31, 2020, as
compared to $4.6 million for the year ended December 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 ended December 31, 2019 compared to the year ended December 31,
2018
Interest expense, net was $4.6 million for the year ended December 31, 2019, as
compared to interest expense, net of $0.4 million for the year ended
December 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 ended December 31, 2020 was driven
by the $3.3 million deferred tax benefit impact of the 2026 Notes issuance in
February 2020. The net tax benefit of $3.6 million for the year ended
December 31, 2019 was driven by the $4.1 million deferred tax benefit impact of
the 2024 Notes issuance in April 2019.
For the year ended December 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
ended December 31, 2020, compared to $16.1 million for the year ended
December 31, 2019 and $3.8 million for the year ended December 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.
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Cash used in investing activities was $9.0 million for the year ended
December 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 ended
December 31, 2019 compared to $6.7 million for the year ended December 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 ended
December 31, 2020 driven by net proceeds of $131.4 million from the Secondary
Offering and respective exercise of underwriter's option on November 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 ended
December 31, 2019 versus $7.3 million for the year ended December 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 at December 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 $ 2,772 $ 1,253

    $      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 our San Diego,
California office, Ontario, Canada office, our other United 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 in the 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.
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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
In May 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 after December 15, 2017.

We adopted ASC 606 effective January 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
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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 of
December 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
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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 of December
31, 2020.

Goodwill

Goodwill 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
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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 the U.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 of December 31, 2020 or
December 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.
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