PAR TECHNOLOGY CORPORATION
When used in this Quarterly Report on Form 10-Q ("Quarterly Report"), the terms
"PAR", "Company," "we," "us" and "our" mean PAR Technology Corporation and its
consolidated subsidiaries, unless the context indicates otherwise. The following
discussion and analysis of our financial condition and results of operations
should be read in conjunction with our financial statements and the notes
thereto included under Part I, Item 1 of this Quarterly Report and our audited
consolidated financial statement and the notes thereto included under Part II,
Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31,
2019 . See also, "Forward-Looking Statements" below.
Forward-Looking Statements
This Quarterly Report contains "forward-looking statements" within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), Section 27A of the Securities Act of 1933, as amended ("Securities Act"),
and the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are not historical in nature, but rather are predictive of our future
operations, financial condition, business strategies and prospects.
Forward-looking statements are generally identified by words such as
"anticipate," "believe," "belief," "continue," "could," "expect," "estimate,"
"intend," "may," "opportunity," "plan," "should," "will," "would," "will likely
result," and similar expressions. Forward-looking statements are based on
current expectations and assumptions that are subject to risks and
uncertainties, many of which are beyond our control, which could cause our
actual results to differ materially from those expressed in, or implied by, the
forward-looking statements, including forward-looking statements relating to our
expectations regarding the impact of the COVID-19 pandemic on our business,
operations, financial condition, and financial results. Factors that could cause
or contribute to such differences include, but are not limited to, those
described below in this Part I, Item 2. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this Quarterly
Report and in our Annual Report on Form 10-K for the fiscal year ended December
31, 2019 and our other filings with the Securities and Exchange Commission . We
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events, or otherwise,
except as may be required under applicable securities law.
Overview
PAR Technology Corporation operates two distinct businesses: our Restaurant/Retail business provides point-of-sale (POS) software and hardware, back-office software, and integrated technical solutions to the retail and restaurant industries; our 21 -------------------------------------------------------------------------------- Government business provides intelligence, surveillance, and reconnaissance solutions and mission systems support to theU.S. Department of Defense ("DoD") and other Federal agencies. We are a leading provider of software, systems, and services to the restaurant and retail industries. 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® solution offers customers an integration ecosystem, providing access to industry trends and features, including mobile/on-line ordering, self-ordering kiosks, loyalty programs, kitchen video systems, guest surveys, enterprise reporting, and other features relevant to our customers' businesses, including Restaurant Magic's cloud, SaaS back-office applications - Data Central®. Data Central® provides restaurants with the necessary tools to achieve peak operational and financial efficiency and integrates information from POS, inventory, supply, payroll, and accounting systems to provide a comprehensive view of a restaurant's operations. We believe our cloud solutions, hardware offerings and services uniquely positions us to be a leader in helping to digitize the modern restaurant. Our continued success and growth will depend upon our ability to successfully deploy capital to where it earns its highest return. This includes the development and introduction of new products and product enhancements, targeted acquisitions and a constant review of internal spend. We have spent extensive time building a culture of intense rigor around capital allocation and we believe it will be a key part of our future success. Our Government business provides technical expertise in contract development of advanced systems and software solutions for theU.S. DoD 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. Our strategy is to build upon our Government business' sustained performance on existing service contracts, coupled with investments in enhanced business development capabilities. We believe we are well positioned to realize continued renewals of expiring contracts and extensions of existing contracts, and to secure service and solution contracts in expanded areas within theU.S. DoD and other Federal agencies. 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 business.
Recent Developments Affecting Our Business
COVID-19 Update
Over the past few months, the COVID-19 pandemic has continued to spread throughout theU.S. and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans, travel restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. We are unable to accurately predict the full impact that COVID-19 will have on our results of operations and financial condition due to numerous uncertainties, including the duration and severity of the pandemic and related containment measures. Our adherence to these containment measures has impacted our day-to-day operations and could disrupt our business and operations, as well as that of our key customers, suppliers (including contract manufacturers) and other counterparties, for an indefinite period of time. During the quarter, our Restaurant/Retail reporting segment began experiencing the impact of the COVID-19 pandemic due to its impact on our restaurant and retail customers and their response, including site closures, changes in product and service offerings and delivery formats, and delayed product adoptions and installations. April and May were impacted the most primarily due to a pause in a majority of the Brink POS® installations and temporary site closures. Monthly recurring software fees were not charged to sites that were temporarily closed. By June, installations commenced and as ofJuly 30, 2020 site closures were down to 6% when compared toMarch 15, 2020 . We continue to perform a number of actions to mitigate the impact of the virus on our employees and business. To support the health and safety of our employees, we suspended all non-essential travel for our employees, the vast majority of our non-manufacturing employees continue to work-from-home, and augmented shifts for our manufacturing employees are still in place. Additionally, early in the second quarter of 2020, we reduced discretionary costs, implemented a hiring freeze on non-essential positions, we reduced the size of our workforce, and temporarily furloughed employees and temporarily reduced the salaries of others in our Restaurant/Retail reporting segment and in 22 -------------------------------------------------------------------------------- the Company's corporate group. Hiring for critical roles commenced in June to support business demands as we exited the quarter. As allowed under the Coronavirus Aid, Relief and Economic Security Act, as amended (the "CARES Act"), we are deferring payment of the employer portion ofSocial Security taxes through the end of 2020. The amount of the cumulative deferral at the end of 2020 is currently estimated to be$1.8 million to$2.2 million , of which 50% is payable on each ofDecember 31, 2021 andDecember 31, 2022 . As ofJune 28, 2020 , we deferred$0.6 million of social security taxes, which is included in other long-term liabilities in the consolidated balance sheets While the COVID-19 pandemic has not had a material adverse impact on our Government reporting segment to date, we have continued our work-from-home for all non-essential employees and on-site operations are accomplished through telework and a staggered staffing approach that achieves the intent and benefits of social distancing. For contracts requiring specialized equipment, we established an off-site lab environment that permits the safe continuation of development and testing activities until government facilities fully reopen. Significant uncertainty still exists regarding the magnitude, phasing and duration of the impact of the COVID-19 pandemic; therefore, we cannot predict at this time the full extent of its impact on our business, operations, and financial condition in future periods.
Results of Operations -
Three months ended
We reported revenues of$45.7 million for the quarter endedJune 30, 2020 , an increase of 3.4% from$44.2 million recorded for the quarter endedJune 30, 2019 . Our net loss from continuing operations was$9.0 million , or$0.49 per diluted share, for the second quarter of 2020 versus net loss of$1.1 million , or$0.07 per diluted share, for the second quarter of 2019. The unfavorable comparison is driven mainly by a tax benefit recorded in 2019 of$4.0 million related to a reduction of the deferred tax valuation allowance that arose due to the recording of a deferred tax liability created as a result of the accounting for the sale of the 2024 Notes. Our year-over-year unfavorable performance was also driven by increased research & development ("R&D") spending, increased interest expense related to sale of the 2026 Notes and resulting refinance of the 2024 Notes, and increased depreciation and amortization expense related to the Restaurant Magic Acquisition and Drive-Thru Acquisition. Operating segment revenue is set forth below: Three Months Ended June 30, $ % (in thousands) 2020 2019 variance variance Restaurant/Retail Core *$ 15,394 $ 18,028 (2,634) (15) % Brink ** 12,235 9,304 2,931 32 % SureCheck 4 930 (926) (100) % Total Restaurant Retail$ 27,633 $ 28,262 $ (629) (2) % Government Intelligence, surveillance, and reconnaissance$ 9,741 $ 7,256 2,485 34 % Mission Systems 8,088 8,192 (104) (1) % Product Sales 229 537 (308) (57) % Total Government$ 18,058 $ 15,985 $ 2,073 13 %
* CORE includes
Product revenues were$12.3 million for the quarter endedJune 30, 2020 , a decrease of 16.3% from$14.7 million recorded for the quarter endedJune 30, 2019 , primarily driven by a decrease of$2.4 million in revenue driven from our Core customers, as hardware refreshment stalled as a result of COVID-19 responses. Drive-thru product revenue for the quarter endedJune 30, 2020 was$3.5 million . Product revenue related to Brink for the quarter endedJune 30, 2020 was$3.8 million , a decrease of 23 --------------------------------------------------------------------------------
10% from
Service revenues were$15.3 million for the quarter endedJune 30, 2020 , an increase of 13.3% or$1.8 million from$13.5 million recorded for the quarter endedJune 30, 2019 , primarily due to the addition of the Restaurant Magic business and the growth in Brink recurring software revenues. Service revenue associated with Brink includes recurring software revenue of$5.4 million , an increase of 35.0% from$4.0 million recorded for the quarter endedJune 30, 2019 . Restaurant Magic service revenue includes recurring software revenue of$2.1 million . Drive-thru service revenue for the quarter endedJune 30, 2020 was$0.4 million . Contract revenues were$18.1 million for the quarter endedJune 30, 2020 , an increase of 13.1% or$2.1 million from$16.0 million recorded for the quarter endedJune 30, 2019 . The favorable increase in revenue was driven by contracts entered into during the first quarter of 2020 relating to intelligence, surveillance, and reconnaissance ("ISR") solutions, with$8.0 million more in backlog compared to the first quarter of 2019.
Product margins for the quarter ended
Service margins for the quarter ended
Contract margins for the quarter ended
Selling, general and administrative ("SG&A") expenses increased to $10.0 million
for the quarter ended June 30, 2020 from $9.1 million for the quarter ended
June 30, 2019 , an increase of 9.9%. The increase was primarily driven by an
additional $0.7 million of SG&A expense from recently acquired Restaurant Magic
and Drive-Thru businesses.
R&D expenses were $4.5 million for the quarter ended June 30, 2020 , an increase
of $1.8 million from $2.7 million for the quarter ended June 30, 2019 , driven by
an increase of $3.2 million in Brink development and $0.5 million for Restaurant
Magic development, partially offset by the SureCheck divestiture and an increase
in capitalized software.
For the quarter ended June 30, 2020 , we recorded $0.2 million of amortization
expense associated with identifiable non-developed technology intangible assets
acquired in the Drive-Thru Acquisition and the Restaurant Magic Acquisition,
compared to $0.0 million for the quarter ended June 30, 2019 . Amortization
expense associated with identifiable developed technology intangible assets are
accounted for as cost of sales within service costs of sales.
In other expense, net, we recorded $0.1 million for the quarter ended June 30,
2020 , compared to other expense, net, of $0.4 million recorded for the quarter
ended June 30, 2019 . This decrease was driven by foreign currency fair value
adjustments.
In interest expense, net, we recorded $2.1 million for the quarter ended
June 30, 2020 , compared to $1.2 million recorded for the quarter ended June 30,
2019 . This increase was primarily driven by interest related to the 2024 Notes
and 2026 Notes, which includes $1.2 million of non-cash accretion of debt
discount and amortization of issuance costs for the three months ended June 30,
2020 .
Net tax provision of $1.0 million for the quarter ended June 30, 2020 is driven
by the $1.0 million adjustment to the deferred tax benefit recorded in the first
quarter for the 2026 Notes issuance. The net tax benefit of $4.0 million for the
quarter ended June 30, 2019 was driven by the $4.1 million deferred tax benefit
impact of the 2024 Notes issuance in April 2019 .
Six Months Ended
We reported revenues of$100.4 million for the six months endedJune 30, 2020 , an increase of 12.9% from$88.9 million recorded for the six months endedJune 30, 2019 . Our net loss from continuing operations was$19.9 million , or$1.10 per diluted share, for the six months endedJune 30, 2020 versus net loss of$3.8 million , or$0.24 per diluted share, for the six months endedJune 30, 2019 . Our year-over-year unfavorable performance was primarily driven by corporate financing 24 -------------------------------------------------------------------------------- charges, including an$8.1 million loss on extinguishment of debt related to the partial repurchase of the 2024 Notes, an additional$1.8 million of interest expense related to the 2024 and the 2026 Notes, increased investment in sales, marketing and R&D within the Restaurant/Retail operating segment, and increased depreciation and amortization expense related to the Restaurant Magic Acquisition and Drive-Thru Acquisition.
Operating segment revenue is set forth below:
Six months ended June
30, $ %
(in thousands) 2020 2019 variance variance
Restaurant/Retail
Core * $ 35,250 $ 36,679 (1,429) (4) %
Brink ** 29,775 18,781 10,994 59 %
SureCheck 17 2,363 (2,346) (99) %
Total Restaurant Retail $ 65,042 $ 57,823 $ 7,219 12 %
GovernmentIntelligence, surveillance, and
reconnaissance$ 18,514 $ 13,546 4,968 37 % Mission Systems 16,535 16,733 (198) (1) % Product Sales 332 828 (496) (60) % Total Government$ 35,381 $ 31,107 $ 4,274 14 %
* CORE includes
Product revenues were$31.0 million for the six months endedJune 30, 2020 , an increase of 2.6% from$30.2 million recorded for the six months endedJune 30, 2019 , primarily driven by increased hardware attachment associated with installations attributable to Brink and hardware sales from our new Drive-Thru product line. Product revenue related to Brink for the six months endedJune 30, 2020 was$10.5 million , an increase of 20% from$8.8 million recorded for the six months endedJune 30, 2019 . Drive-thru product revenue for the six months endedJune 30, 2020 was$4.0 million . Service revenues were$34.1 million for the six months endedJune 30, 2020 , an increase of 23.6% from$27.6 million recorded for the six months endedJune 30, 2019 , primarily due to growth in recurring software and hardware installation revenues. Service revenue associated with Brink includes recurring software revenue of$10.7 million , an increase of 37% from$7.8 million recorded for the six months endedJune 30, 2019 . Restaurant Magic service revenue includes recurring software revenue of$4.1 million . Contract revenues were$35.4 million for the six months endedJune 30, 2020 , an increase of 13.8% from$31.1 million recorded for the six months endedJune 30, 2019 . The favorable increase in revenue was driven by our intelligence, surveillance, and reconnaissance ("ISR") solutions line of business, with$8.0 million more in backlog at the beginning of the year compared to 2019. Product margins for the six months endedJune 30, 2020 were 19.6%, compared to 25.1%, recorded for the six months endedJune 30, 2019 , primarily due to unfavorable overhead absorption with reduced revenue and increased freight costs as we accelerated supply chain to accommodate strategic inventory. Service margins for the six months endedJune 30, 2020 were 33.8%, compared to 26.1% recorded for the six months endedJune 30, 2019 , primarily driven by a shift in mix that resulted from our M&A activity with the Restaurant Magic Acquisition, Drive-Thru Acquisition and divestment in Surecheck.
Contract margins for the six months ended
Selling, general and administrative ("SG&A") expenses increased to $21.5 million
for the six months ended June 30, 2020 from $17.6 million for the six months
ended June 30, 2019 , an increase of 22.2%. The increase was primarily driven by
$1.9 million
25
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of expenses associated with recently acquired Restaurant Magic and Drive-Thru
businesses and increased depreciation costs associated with recently implemented
enterprise resource planning ("ERP") system.
R&D expenses were $9.4 million for the six months ended June 30, 2020 , an
increase of $3.6 million from $5.8 million for the six months ended June 30,
2019 , driven by an increase of $5.0 million in Brink development and $0.9
million in Restaurant Magic development, partially offset by the divestiture of
SureCheck and an increase in capitalized software.
For the six months ended June 30, 2020 , we recorded $0.4 million of amortization
expense associated with identifiable non-developed technology intangible assets
acquired in the Drive-Thru Acquisition and the Restaurant Magic Acquisition,
compared to $0.0 million for the six months ended June 30, 2019 .
In interest expense, net, we recorded $4.1 million for the six months ended
June 30, 2020 , compared to $1.4 million recorded for the six months ended
June 30, 2019 . This increase was primarily driven by interest related to the
2024 Notes and the 2026 Notes, which includes $2.1 million of non-cash accretion
of debt discount and amortization of issuance costs for the six months ended
June 30, 2020 , compared to $0.6 million for the six months ended June 30, 2019 .
Loss on extinguishment of debt of $8.1 million for the six months ended June 30,
2020 , as a result of the settlement of $66.3 million of 2024 Notes in the first
quarter.
Net tax benefit of $4.3 million for the six months ended June 30, 2020 is driven
by the $4.4 million deferred tax benefit impact of the 2026 Notes issuance in
the first quarter. The net tax benefit of $3.9 million for the six months ended
June 30, 2019 was driven by the $4.1 million deferred tax benefit impact of the
2024 Notes issuance in April 2019 .
Liquidity and Capital Resources
For the six months endedJune 30, 2020 the Company's primary source of liquidity was its sale of the 2026 Notes. Cash used in operating activities was$13.6 million for the six months endedJune 30, 2020 , compared to$6.5 million for the six months endedJune 30, 2019 . The variance was driven by an increase in net loss and net working capital needs for the first quarter of 2020 as a result of an increase in strategic procurement of inventory, prepaid assets for annual insurance premiums, and annual variable compensation, and decrease in customer deposits. Inventory levels were strategically increased to support the roll out of projects for Brink and to mitigate risk of supply chain disruption due to the COVID-19 pandemic. Cash used in investing activities was$4.6 million for the six months endedJune 30, 2020 compared to$3.3 million for the six months endedJune 30, 2019 . Investing activities during the six months endedJune 30, 2020 included capital expenditures of$4.6 million in costs associated with investments in our Restaurant/Retail reporting segment software platforms compared to$1.6 million for software platforms and$1.7 million for implementation of our ERP system for the six months endedJune 30, 2019 . Cash provided by financing activities was$49.1 million for the six months endedJune 30, 2020 , compared to cash provided by financing activities of$64.9 million for the six months endedJune 30, 2019 . The six months endedJune 30, 2020 included the$120 million issuance of the 2026 Notes partially offset by the repurchase of a majority of the 2024 Notes. The six months endedJune 30, 2019 included the$80 million issuance of the 2024 Notes. We expect our available cash and cash equivalents will be sufficient to meet our operating needs for the next 12 months. Our actual cash needs will depend on many factors, including our rate of revenue growth, growth of our SaaS revenues, the timing and extent of spending to support our product development efforts, the timing of introductions of new products and enhancements to existing products, market acceptance of our products, and the factors described above in this Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and our other filings with theSecurities and Exchange Commission .
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or obligations.
Contractual Obligations 26
-------------------------------------------------------------------------------- The following table summarizes our contractual obligations atJune 30, 2020 and the effect such obligations are expected to have on our liquidity and cash flow in future periods. Payments Due by Period (in thousands) Total Less Than 1 Year 1-3 Years 4-5 Years More Than 5 Years Operating lease obligations$ 2,544 $ 505 $ 1,924 $ 75 $
40
Other purchase obligations 13,074 12,131 943
Debt obligations 135,440 647 1,043 13,750 120,000
$ 151,058 $ 13,283 $ 3,910 $ 13,825 $ 120,040
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 2024 Notes,
the 2026 Notes and the subordinated promissory note related to the Restaurant
Magic Acquisition. 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 financial statements are based on the application ofU.S. generally accepted accounting principles ("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, equity compensation, the recognition of right-to-use assets and liabilities, goodwill and intangible assets, the measurement of liabilities and equity recognized for outstanding convertible notes and taxes. Our critical accounting policies have not changed materially from the discussion of those policies included under "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
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