Customers comprising 10% or more of the Company’s total revenues by reporting segment are summarized as follows:
The Company’s financial instruments have been recorded at fair value using available market information and valuation techniques. The fair value hierarchy is based upon three levels of input, which are:
Level 1 — quoted prices in active markets for identical assets or liabilities (observable)
Level 2 — inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable market data for essentially the full term of the asset or liability (observable)
Level 3 — unobservable inputs that are supported by little or no market activity, but are significant to determining the fair value of the asset or liability (unobservable)
The amounts owed to employees participating in the deferred compensation plan at March 31, 20202021 was $2.9$2.6 million compared to $3.2$2.8 million at December 31, 20192020 and is included in other long-term liabilities on the balance sheets.
The following table presents a summary of changes inprovides quantitative information associated with the fair value measurement of the Company’s Level 3 assetsliability for contingent consideration at March 31, 2021 and liabilitiesDecember 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contingency Type | | Maximum Payout (undiscounted) (in thousands) | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Weighted Average or Range |
Revenue-based payments | | $ | 1,965 | | | $ | 0 | | | Monte Carlo | | Revenue volatility | | 25.0 | % |
| | | | | | | | Discount rate | | 14.0 | % |
| | | | | | | | Projected year(s) of payment | | 2021-2022 |
Note 13 — Subsequent Event
On April 8, 2021, the Company, ParTech, Inc., and Sliver Merger Sub, Inc., a wholly owned subsidiary of ParTech, Inc. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Punchh Inc. (“Punchh”), and Fortis Advisors LLC (“Stockholder Representative”), solely in its capacity as the initial Stockholder Representative. The Merger was executed as part of the Company's strategy to be a unified commerce cloud platform for restaurants and retailers, and included the addition of Punchh's loyalty and customer engagement platform. Pursuant to the Merger Agreement, on April 8, 2021, Merger Sub merged with and into Punchh (the “Merger”), with Punchh surviving the Merger and becoming a wholly owned subsidiary of the Company. In connection with the Merger, the Company paid former Punchh stockholders approximately $500.0 million (including holders of vested options and warrants) consisting of approximately (i) $390.0 million in cash (the “Cash Consideration”), and (ii) 1,594,202 shares of the Company's common stock, in each case subject to certain adjustments (including customary adjustments for Punchh cash, debt, debt-like items, and net working capital at closing) for 100% of the equity interests in Punchh.
In connection with, and to partially fund the Cash Consideration for, the Merger, on April 8, 2021, the Company entered into (i) a credit agreement, as the borrower, with certain of its U.S. subsidiaries, as guarantors, the lenders that are measuredparty thereto, and Owl Rock First Lien Master Fund, L.P., as administrative agent and collateral agent, that provides for a term loan in an initial aggregate principal amount of $180.0 million; and (ii) securities purchase agreements with each of PAR Act III, LLC (“Act III”), and certain funds and accounts advised by T. Rowe Price Associates, Inc., acting as investment adviser, to raise approximately $160.0 million through a private placement of the Company's common stock. The Company also issued to Act III a warrant to purchase 500,000 shares of the Company's common stock with an exercise price of $76.50 per share.
The initial accounting for the business combination was incomplete at fair value on a recurring basis, and are recorded as a component of other long-term liabilities onMay 10, 2021; however, the consolidated balance sheet (in thousands):
|
| | | |
(in thousands) | Level 3 Inputs |
| Liabilities |
Balance at December 31, 2019 | $ | 3,340 |
|
New level 3 liability | — |
|
Total gains (losses) reported in earnings | — |
|
Settlement of Level 3 liabilities | — |
|
Balance at March 31, 2020 | $ | 3,340 |
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Note 14 — Subsequent Events
In March 2020, the World Health Organization characterized COVID-19 as a pandemic and President Trump declared the COVID-19 outbreak a national emergency. While the COVID-19 pandemic did not have a material adverse impact on our business, operations, andCompany's financial results for the three months endedthree-month period ending March 31, 2020, in late March 2020 our Restaurant/Retail reporting segment began experiencing2021 did include acquisition related costs of $0.7 million. The assets and liabilities of Punchh will be adjusted to their respective fair values as of April 8, 2021, the impactclosing date of the COVID-19 pandemic as a resulttransaction, including working capital, property, plant and equipment, and identifiable intangible assets acquired through the Merger. The excess of its impactthe purchase price over the fair value of net assets acquired will be recorded to goodwill. Intangible assets acquired include, but are not necessarily limited to, developed technology and customer relationships. The estimated acquisition date fair value of these and other acquired assets and liabilities assumed may ultimately be based, in part, on our restaurant and retail customers
and their response, including store closures; changes in product and service offerings and delivery formats, and delayed product adoptions and installations.
We have taken a number of actions to mitigate the impact. Earlyinputs that are unobservable. The Company's initial purchase price allocation will be presented in the secondCompany's Form 10-Q for the quarter of 2020, 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 corporate group.ending June 30, 2021.
The extent to which the COVID-19 pandemic will continue to impact our business, operations, and financial results will depend on future developments, which are uncertain and cannot be predicted, including the duration and severity of the pandemic, future government actions in response to the pandemic, how quickly and to what extent normal economic and operating conditions can resume in the United States and globally, and a potential resurgence of the pandemic. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including as a result of any recession that may occur. As of the date of this Quarterly Report, it is impossible to predict the overall impact of the COVID-19 pandemic on our business, operations and financial results, and there can be no assurance that the COVID-19 pandemic will not have a material and adverse effect on our business, operations, and financial results during any quarter or year in which we are affected.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
When used in this Quarterly Report on Form 10-Q (“Quarterly Report”), the terms “PAR”, “Company,“the Company,” “we,” “us” and “our” meanrefers to 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 unaudited interim condensed consolidated 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 ourthe Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.2020 filed with the SEC on March 16, 2021 (“2020 Annual Report”). 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, which could cause our actual results to differ materially from those expressed in, or implied by, the forward-looking statements. 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 - The Impact of COVID-19," in Part II, "Item 1A. Risk Factors" 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 in two distinct businesses: ourreporting segments: Restaurant/Retail businessand Government. Our Restaurant/Retail segment provides point-of-sale (POS)(“POS”) software and hardware, back-office software, and integrated technical solutions to the retail and restaurant industries; ourindustries. Our Government businesssegment provides intelligence, surveillance, and reconnaissance solutions (“ISR”) and mission systems support to the U.S. Department of Defense ("DoD"(“DoD”) and other Federal agencies.
We are
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 offersoffering customers anthe 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 providing access to industry trends and features,– 200+ partners across various product solution categories including mobile/on-lineonline ordering, self-ordering kiosks, loyalty programs, kitchen video systems, guest surveys, enterprise reporting, and other featuressolutions relevant to our customers’ businesses, including Restaurant Magic's cloud, SaaSour cloud-based back-office applicationssolution - Data Central. Data Central providesThese integration capabilities enables restaurants with the necessary tools to achieve peakincrease visits, customer check size, improve operational and financial 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.
integrates information from POS, inventory, supply, payroll, and accounting systems to provide a comprehensive view of a restaurant's operations.
We believe our cloudsoftware, hardware and integrated solutions hardware offerings and services uniquely positionsposition us to be a leader in helpingassisting customers to digitizeinnovate and improve their in-store operations in a rapidly changing and challenging market, particularly in light of the modern restaurant.continued impacts of the COVID-19 pandemic on the restaurant industry. Our continued success and growth will depend upon our ability to successfullyadvance and create new technology, products and services to meet customer demands, as well as deploy capital to where it earns its highest return.and resources that uniquely deliver customer value. This will includeincludes the development and introduction of new products and product enhancements,services, 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.
OurPAR's Government businesssegment provides technical expertise in contract development of advanced systems and software solutions for the U.S. 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. Our strategyThe Government segment is to build upon our Government business' sustained performancefocused on existing service contracts, coupledtwo principal offerings, intelligence solutions and mission systems contract support, with investmentsadditional revenue from a small number of licensed software products for use in enhanced business development capabilities. We believe we are well positioned to realize continued renewals of expiring contractsanalytic and extensions of existing contracts, and to secure service and solution contracts in expanded areas within the U.S. DoD and other Federal agencies.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 business.segment.
Recent Developments Affecting Our BusinessCOVID 19 Update
On February 10, 2020, the Company sold an aggregate principal amount of $120.0 million of 2.875% Convertible Senior Notes due 2026 (“2026 Notes”) and received net proceeds of approximately $115.9 million. Approximately $66.3 million (excluding cash payments relating to accrued interest and fractional shares) of the proceeds and 722,423 shares of the Company’s common stock were used to repurchase approximately $66.3 million in aggregate principal amount of the Company’s 2024 Notes through individually negotiated transactions.
The Impact of COVID-19
We are closely monitoring the impact of the novel coronavirus, or COVID-19, on all aspects of our business. In March 2020, the World Health Organization characterized COVID-19 as a pandemic and President Trump declared the COVID-19 outbreak a national emergency. While the COVID-19 pandemic did notcontinues to cause significant disruption to the U.S. and global economies. While certain foreign jurisdictions, such as Canada and Europe, have re-imposed lockdowns and curfews in 2021, a material adverse impact onnumber of localities in the U.S. have eased restrictions in the first quarter of 2021 and the U.S. economy continues to show signs of recovery. Although our business operations, and financial results for the three months ended March 31, 2020, in late March 2020 our Restaurant/Retail reporting segment began experiencing the impact of the COVID-19 in the second quarter of 2020, we have seen improvements in our financial results as markets have strengthened and businesses have gained confidence in the progress to control the pandemic duein the U.S. Beginning in the second half of 2020 through the quarter ended March 31, 2021, revenue has been in line with or above prior year results, our annual recurring revenue has increased quarter-over-quarter, and we have booked at least 1,181 new Brink POS sites in each of the last three quarters. Our Government business continues to its impact on our restaurant and retail customers and their response, including store closures; changes in product and service offerings and delivery formats, and delayed product adoptions and installations.not be materially impacted by the COVID-19 pandemic.
We have taken a number of actionscontinue to mitigatemonitor the impact of the virus on our employeeseffects and potential effects of the COVID-19 pandemic on our business. In March 2020, to support the health and safetyall aspects of our employees, we suspended all non-essential travel for our employees, implemented work-from-home for all non-manufacturing employees, and augmented shifts for our manufacturing employees;business, however it is difficult to mitigatepredict the full impact of the COVID-19 pandemic on our operations, we initiated operational initiatives,business in future periods. The pandemic may affect our Restaurant/Retail business in certain ways, including increasing safety stock inventory and the use of alternative sources when available; and to support our customers, we introduced new product offerings that promote social distancing, including PARkit, a virtual kiosk, virtual drive-thru and/or on-line ordering solution, and self-install hardware product configurations. 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 otherscausing disruptions in our Restaurant/Retail reporting segmentsupply chain, increasing payment defaults by customers, causing reductions or delays in software or hardware deployments and in the Company's corporate group.
While the COVID-19 pandemic has not had a material adversecurtailing customer demand, any of which could adversely impact on our Government reporting segment to date, we have implemented 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 reopen.
On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions addressing the carryback of net operating losses for specific periods, refunds of alternative minimum tax credits, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical
amendments for qualified improvement property. Additionally, the CARES Act, in support of efforts to enhance business’ liquidity, provides for the deferral of the employer-paid portion of social security taxes through the end of 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. As of March 31, 2020, these provisions are expected to provide us with approximately $1.8 to $2.2 million of additional liquidity during the current year.
Significant uncertainty exists regarding the magnitude 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, financial condition and financial resultsresults.
Recent Developments
•On April 8, 2021, we acquired Punchh Inc (“Punchh”) for approximately $500 million paid in future periods. Please see “Risk Factors” under Part II, Item 1A.cash and shares of this Quarterly ReportPAR common stock to Punchh shareholders. The cash consideration for further discussion regarding risks associatedthe acquisition was primarily financed with a combination of equity and debt. Refer to the COVID-19 pandemic.“Liquidity and Capital Resource” section of Management's Discussion
and Analysis for additional acquisition financing information. The acquisition enabled us to take an important step in executing our strategy to be the leading unified commerce cloud platform for restaurants and retailers. The addition of Punchh's loyalty and customer engagement platform positions us to offer integrated point-of-sale, back office, payment and customer engagement solutions across channels. Refer to Note 13 — “Subsequent Event” for additional information.
Condensed Consolidated Results of Operations —
Three months ended March 31, 20202021 Compared to Three months ended March 31, 20192020
We reported consolidated revenues of $54.7$54.5 million for the quarter ended March 31, 2020, an increase2021, a decrease of 22.4%0.5% from $44.7$54.7 million recorded for the quarter ended March 31, 2019.2020. Our net loss from continuing operations was $8.3 million, or $0.38 per diluted share, for the first quarter of 2021, compared to a net loss of $10.9 million, or $0.61 per diluted share, for the first quarter of 2020 versus net loss of $2.7 million, or $0.17 per diluted share, for the first quarter of 2019. Our year-over-year unfavorable performance was primarily driven by corporate financing charges, including an $8.1 million Loss on extinguishment of debt related to the partial repurchase of the 2024 Notes, an additional $1.8M of interest expense related to the 2024 Notes and 2026 Notes, and an increased investment in sales, marketing and research and development within the Restaurant/Retail operating segment.2020.
Operating segment revenue is set forth below:
|
| | | | | | | | | | | | |
| | Three Months Ended March 31, | $ | % |
(in thousands) | | 2020 | 2019 | variance | variance |
Restaurant/Retail | | | | |
Core * | $ | 19,869 |
| $ | 18,650 |
| 1,219 |
| 7 | % |
Brink ** | 17,540 |
| 9,477 |
| 8,063 |
| 85 | % |
SureCheck | — |
| 1,433 |
| (1,433 | ) | (100 | )% |
Total Restaurant Retail | $ | 37,409 |
| $ | 29,560 |
| $ | 7,849 |
| 27 | % |
| | | | | |
Government | | | | |
Intelligence, surveillance, and reconnaissance | $ | 8,772 |
| $ | 6,290 |
| 2,482 |
| 39 | % |
Mission Systems | 8,448 |
| 8,541 |
| (93 | ) | (1 | )% |
Product Sales | 103 |
| 291 |
| (188 | ) | (65 | )% |
Total Government | $ | 17,323 |
| $ | 15,122 |
| $ | 2,201 |
| 15 | % |
* CORE includes $3.5 million of Drive-Thru revenue for 2020
** Brink includes $2.2 million of Restaurant Magic revenue for 2020
Product revenues were $18.6 million for the quarter ended March 31, 2020, an increase of 20.0% from $15.52021, comparable with the $18.6 million recorded for the quarter ended March 31, 2019, primarily driven by increased hardware attachment associated with installations attributable to our Brink line of business ("Brink") and hardware sales from our new Drive-Thru product line. Product revenue related to Brink2020.
Service revenues were $18.0 million for the quarter ended March 31, 2020 was $6.7 million, an increase2021, a decrease of 49%4.3% from $4.5the $18.8 million recorded for the quarter ended March 31, 2019. Drive-thru2020, primarily driven by a $1.8 million decrease in implementation revenue partially offset by $0.9 million increase in software revenue.
Contract revenues were $17.9 million for the quarter ended March 31, 2021, an increase of 3.5% or $0.6 million from $17.3 million recorded for the quarter ended March 31, 2020. The favorable increase in contract revenue was driven by stronger backlog in our intelligence, surveillance, and reconnaissance (“ISR”) solutions product revenueline entering 2021.
Product margins for the quarter ended March 31, 2021 were 19.8%, compared to 20.0%, recorded for the quarter ended March 31, 2020. The decrease in margin is primarily due to increased overheads costs.
Service margins for the quarter ended March 31, 2021 were 29.6%,compared to 32.6% recorded for the quarter ended March 31, 2020, was $3.4 million.primarily driven by a decrease in implementation revenue and increase in software related costs.
ServiceContract margins for the quarter ended March 31, 2021 were 6.7%, compared to 6.9% for the quarter ended March 31, 2020, primarily due to reduced revenues were $18.8in Mission Systems and higher labor costs compared to the quarter ended March 31, 2020.
Selling, general, and administrative expenses increased to $14.5 million for the quarter ended March 31, 2021 from $11.6 million for the quarter ended March 31, 2020, an increase of 34.3% from $14.024.9%. The increase was primarily driven by a $1.1 million recorded for the quarter ended March 31, 2019, primarily dueincrease in variable compensation and $0.7 million in acquisition costs related to growth in recurring softwareour acquisition of Punchh, Inc on April 8th, 2021.
Research and hardware installation revenues. Service revenue associated with Brink includes recurring software revenue of $5.2 million, an increase of 40% from $3.7 million recorded for the quarter ended March 31, 2019. Restaurant Magic service revenue includes recurring software revenue of $2.0 million.
Contract revenuesdevelopment expenses were $17.3$5.8 million for the quarter ended March 31, 2020, a increase of 14.6% from $15.1 million recorded for the quarter ended March 31, 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 March 31, 2020 were 20.0%, compared to 27.6%, recorded for the quarter ended March 31, 2019, primarily due to unfavorable product mix shift, increased freight, and reserve costs.
Service margins for the quarter ended March 31, 2020 were 32.6%, compared to 26.9% recorded for the quarter ended March 31, 2019, primarily due to the continued shift in revenue mix to SaaS revenue with Brink and Restaurant Magic partially offset by $0.6 million increase in amortization expense of acquired developed technology costs resulting from the recent Restaurant Magic Acquisition.
Contract margins for the quarter ended March 31, 2020 were 6.9%, compared to 9.7% for the quarter ended March 31, 2019, primarily due to lower product services revenue and increased investment in product services reduced margin rates compared to the quarter ended March 31, 2019.
Selling, general and administrative ("SG&A") expenses increased to $11.4 million for the quarter ended March 31, 2020 from $8.6 million for the quarter ended March 31, 2019,2021, an increase of 32.6%. The increase was primarily driven by an additional $0.7$0.9 million of Brink sales and marketing expenses, an additional $0.8 million in stock-based compensation, and the inclusion of $0.7 million of SG&A expense from recently acquired Restaurant Magic.
Research and development ("R&D") expenses were $4.9 million for the quarter ended March 31, 2020, driven primarily by an increase in Brink POS and Data Central development.
For the quarters ended March 31, 2021 and March 31, 2020, we recorded $0.3 million and $0.2 million, respectively of 1.8amortization expense associated with acquired identifiable non-developed technology intangible assets and recorded as cost of sales within service costs of sales.
Also included in operating expense for the three-months ended March 31, 2021 was a $4.4 million from $3.1gain on insurance proceeds received in connection with the Company's settlement of a legacy claim. There was no comparable reduction to expense for the three months ended March 31, 2020.
In other expense, net, we recorded $0.1 million for the quarter ended March 31, 2019, driven by a $3.5 million investment in Brink development, an increase of $1.8 million and $0.3M investment in recently acquired Restaurant Magic development.
For the quarter ended March 31, 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 March 31, 2019. Amortization expense associated with identifiable developed technology intangible assets was accounted for as cost of sales within service.
In other expense, net, we recorded $0.6 million for the quarter ended March 31, 2020,2021, compared to other expense, net, of $0.4 million recorded for the quarter ended March 31, 2019. This increase was primarily by fair market value fluctuations of our deferred compensation plan, rental income and respective costs, and foreign currency fair value adjustments.2020.
In interest expense, net, we recorded $2.0$2.2 million for the quarter ended March 31, 2020,2021, compared to $0.1$2.0 million recorded for the quarter ended March 31, 2019.2020. This increase was primarily driven by an increase in the balance of convertible debt and associated interest expense related to the 2024 Notes and 2026 Notes whichissued in the first quarter of 2020. Interest expense, net includes $1.0$1.2 million of non-cash accretion of debt discount and amortization of issuance costs for the three months ended March 31, 2020.
Loss on extinguishment of debt of $8.12021 compared with $1.0 million for the quarter ended March 31, 2020, as a resultsame period last year.
Segment Revenue by Product Line are set forth below: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31 | | $ | | % |
(in thousands) | 2021 | | 2020 | | variance | | variance |
Restaurant/Retail | | | | | | | |
Hardware | $ | 17,835 | | | $ | 18,137 | | | $ | (302) | | | (2) | % |
Software | 7,876 | | | 6,944 | | | 932 | | | 13 | % |
Services | 10,873 | | | 12,328 | | | (1,455) | | | (12) | % |
Total Restaurant Retail* | $ | 36,584 | | | $ | 37,409 | | | $ | (825) | | | (2) | % |
| | | | | | | |
Government | | | | | | | |
Intelligence, surveillance, and reconnaissance | $ | 9,547 | | | $ | 8,772 | | | $ | 775 | | | 9 | % |
Mission systems | 8,131 | | | 8,448 | | | (317) | | | (4) | % |
Product sales | 205 | | | 103 | | | 102 | | | 99 | % |
Total Government | $ | 17,883 | | | $ | 17,323 | | | $ | 560 | | | 3 | % |
| | | | | | | |
Total Net Revenue | $ | 54,467 | | | $ | 54,732 | | | $ | (265) | | | (0.5) | % |
Liquidity and Capital Resources
For the three months ended March 31, 2020 the Company’s2021 our primary source of liquidity was its sale of the 2026 Notes.existing cash and cash equivalents generated through financing transactions in 2020. Cash used in operating activities was $3.4 million for the three months ended March 31, 2021, compared to $15.1 million for the three months ended March 31, 2020, compared to $3.2 million for quarter ended March 31, 2019. The2020. This variance was driven primarily by an increaseimprovements in net loss and net working capital needs as a result of an increase in inventory, annual variable compensation, prepaid assets for annual insurance premiums and strategic procurement of inventory, 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.requirements.
Cash used in investing activities was $1.7 million for the three months ended March 31, 2021 compared to $2.0 million for the three months ended March 31, 2020 compared to $1.9 million for the three months ended March 31, 2019.2020. Investing activities during the three months ended March 31, 20202021 included capital expenditures of $1.9$1.5 million infor developed technology costs associated with investments in our Restaurant/Retail reporting segment software platforms compared to $0.9$1.9 million and $1.0for software platforms for the quarter ended March 31, 2020.
Cash used in financing activities was $2.1 million respectively, for the three months ended March 31, 2019.
Cash2021, compared to cash provided by financing activities wasof $49.4 million for the three months ended March 31, 2020, compared to cash provided by financing activities of $5.8 million for2020. During the three months ended March 31, 2019. The increase was primarily driven by the
2020, we received net proceeds of $49.5 million from the sale$120.0 million issuance of the 2026 Notes net of issuance costs and offset by the settlementrepurchase of a portionmajority of the 2024 NotesNotes.
On April 8, 2021, we entered into a merger agreement with Punchh Inc., Punchh survived the merger becoming our wholly owned subsidiary. In connection with the merger, we paid former Punchh stockholders an aggregate of approximately (i) $390.0 million in privately negotiated transactions.cash (the “Cash Consideration”), and (ii) 1,594,202 shares of our common stock. To partially fund the Cash Consideration, we entered into a credit agreement with the lenders thereto and Owl Rock First Lien Master Fund, L.P. as administrative agent and collateral agent that provides for a term loan in an initial aggregate principal amount of $180.0 million, and securities purchase agreements with each of PAR Act III, LLC, and certain funds and accounts advised by T. Rowe Price Associates, Inc., acting as investment adviser to raise approximately $160.0 million through a private placement of our common stock. The credit facility matures four years from the date of the credit agreement, and the outstanding loans thereunder bear interest currently at a rate equal to the Eurocurrency rate plus a margin of 4.75%. The remainder of the Cash Consideration was provided from our cash and cash equivalent accounts. Total cash used from our balance sheet for the merger including transaction costs was approximately $66.0 million. Refer to Part I, Refer to Note 13 — “Subsequent Event” for additional information.
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, including 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, potential fines and penalties that may be imposed by Singapore/China authorities that are not currently estimable, but could be material, and the factors described above in this Part I, Item 2. "Management's“Management's Discussion and Analysis of Financial Condition and Results of Operations - The Impact of COVID-19," in Part II, "Item 1A. Risk Factors"Operations” and elsewhere in this Quarterly Report and in our Annual Report on Form 10-K for the fiscal yearperiod ended DecemberMarch 31, 20192021, and in the 2020 Annual Report and our other filings with the Securities and Exchange Commission.SEC.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or obligations.
Contractual Obligations
The following table summarizesAs of March 31, 2021, there were no material changes in our contractual obligations at March 31,from those reported in our 2020 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.Annual Report.
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(in thousands) | Payments Due by Period |
Total | | Less Than 1 Year | | 1-3 Years | | 4-5 Years | | More Than 5 Years |
Operating lease obligations | $ | 3,106 |
| | $ | 919 |
| | $ | 2,112 |
| | $ | 75 |
| | $ | — |
|
Other purchase obligations | 10,745 |
| | 10,745 |
| | | | | | |
Debt obligations | 135,595 |
| | 639 |
| | 1,206 |
| | 13,750 |
| | 120,000 |
|
| $ | 149,446 |
| | $ | 12,303 |
| | $ | 3,318 |
| | $ | 13,825 |
| | $ | 120,000 |
|
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 unaudited interim condensed consolidated financial statements are based on the application of U.S.accounting principles generally accepted accounting principlesin 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, 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 ourthe 2020 Annual Report on Form 10-K for the year ended December 31, 2019.Report.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not Required.Foreign Currency Exchange Risk
Our primary exposures relate to certain non-dollar denominated sales and operating expenses in Europe and Asia. These primary currencies are the Great British Pound, the Euro, the Australian dollar, the Singapore dollar and the Chinese Renminbi. Accordingly, changes in exchange rates may negatively affect our revenue and net income (loss) as expressed in U.S. dollars. We also have foreign currency risk related to foreign currency transactions and monetary assets and liabilities, including intercompany balances denominated in currencies that are not the functional currency. We have experienced and will continue to experience fluctuations in our net income (loss) as a result of gains (losses) on these foreign currency transactions and the remeasurement of monetary assets and liabilities. As of March 31, 2021, the impact of foreign currency exchange rate changes on our revenues and net income (loss) have not been material. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy.
Interest Rate Risk
As of March 31, 2021, we had $13.8 million and $120.0 million in aggregate principal amount of the 2024 Notes and 2026 Notes outstanding, respectively. We carry the Notes at face value less amortized discount on the consolidated balance sheet. Since the Notes bear interest at fixed rates, we have no financial statement risk associated with changes in interest rates. However, the fair value of the Notes changes when the market price of our stock fluctuates or interest rates change.
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Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2020.2021. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 31, 2020.such date due to material weaknesses in our internal control over financial reporting previously identified in Item 9A. “Controls and Procedures” of our 2020 Annual Report.
Remediation Efforts to Address the Material Weaknesses
Our remediation efforts previously identified in Item 9A. “Controls and Procedures” of our 2020 Annual Report to address the identified material weaknesses are ongoing as we continue to implement and document necessary policies, procedures, and internal controls. While we believe the steps taken to date and those planned for future implementation will improve the effectiveness of our internal control over financial reporting, we have not completed all remediation efforts. The material
weaknesses cannot be considered remediated until applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 20202021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As a result of the COVID-19 pandemic, the majority of our workforce began working remotely in March 2020. These changes to the working environment did not have a material adverse effect on our internal control over financial reporting during the quarter ended March 31, 2020.
Part II - Other Information
The information in Note 1110 – Contingencies, to the unaudited interim condensed consolidated financial statements, is responsive to this Item and is incorporated by reference herein.
The risks described in the “Risk Factors” section of our 2020 Annual Report, as amended and supplemented by this Quarterly Report, including the risks below, remain current in all material respects.
Servicing our debt may require a significant amount of cash, and we may not have sufficient cash flow from our operating subsidiaries to pay our debt.
In additionconnection with, and to partially fund the Risk Factors discussed inpurchase price of our Annual Reportacquisition of Punchh Inc., the Company, as the borrower, with certain of its U.S. subsidiaries, as guarantors, entered into a credit agreement on Form 10-K for the fiscal year ended December 31, 2019 and our other filingsApril 8, 2021 with the SEC, consideration should be givenlenders thereto and Owl Rock First Lien Master Fund, L.P., as the administrative agent and collateral agent, that provides for a term loan in an initial aggregate principal amount of $180.0 million. As of May 10, 2021, $180.0 million of the term loan are outstanding, and we had $180.0 million aggregate principal amount of the 2024 Notes and 2026 Notes outstanding.
Our ability to make scheduled payments on the following:
The COVID-19 pandemic has adversely affected,principal of, to pay interest on, or to refinance our debt, including our debt evidenced by the 2024 Notes and will continue to adversely affect, our business, operations2026 Notes and financial results forunder the foreseeable future.
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, we identified that the COVID-19 pandemic had caused disruption to our suppliers and their manufacturers located in China and elsewhere, and that we took steps to mitigate the impactterm loan, depends on our supply chain, including increasing safety stock inventoryfuture performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our operating subsidiaries may not generate sufficient cash flow from operations in the use of alternative sources when possible. In late March 2020,future to service our debt. If our operating subsidiaries are unable to generate such cash flow, we began seeing the impact of the COVID-19 pandemicmay be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on all aspects of our Restaurant/Retail reporting segment. While the COVID-19 pandemic did not have a material adverse impact on our business, operations, financial results or financial condition for the three months ended March 31, 2020, since then, it has caused significant economic disruption to our restaurant and retail customers, which has adversely affected our business and is expected to continue for at least the foreseeable future. Factors that have and will likely continue to adversely affect, and that could subsequently adversely impact, our business, operations, financial results and financial condition, include:
•As a result of the COVID-19 pandemic many of our customers have temporarily or permanently closed their restaurants and stores, reconfigured their product and service offerings, including closing dining rooms and only offering take-out and delivery services, or are operating at substantially reduced volumes;
•Due to the uncertainty surrounding the COVID-19 pandemic, including the duration of the pandemic, the severity of the virus and outbreak, future and ongoing actionsterms that may be taken by governmental authorities (including extended shelter-in-place orders, travel restrictions, and mandated business closures), and the length of the COVID-19 pandemic and its impact on the U.S. and global economies, we expect significant volatility in our currentonerous or prospective customers' investment decisions, resulting in decreased demand for our products and services; delayed or canceled store implementations, product adoptions and bookings, and hardware sales and installations; and delayed or a reprioritization of investments in technology or point-of-sale infrastructure;
•Payment delays or defaults by our customers as a result of the COVID-19, intensified by increased COVID-19 related bankruptcies and insolvencies;
•The COVID-19 pandemic could create business continuity issues and operational risks for us. Employees working remotely could increase our exposure to cybersecurity breaches and attacks; if our supply-chain is disrupted or a significant portion of our manufacturing and operations workforce were to become ill with the virus, we could experience a disruption or delay in product assembly and product fulfillment; travel restrictions have limited, and may continue to limit, our sales and marketing efforts; and our management team's focus on addressing the effects of the COVID-19 pandemic on our employees, business and customers, has required, and will continue to require, a large investment of time and resources, and may distract the team from executing our business and growth strategies;
•highly dilutive. Our success depends on our ability to hireraise funds through additional financing, such as the issuance of equity or debt securities, refinancing our debt, and retain highly skilled individuals. As a result ofotherwise accessing the COVID-19 pandemic employee morale may suffercredit and our ability to hire skilled individuals may be adversely impacted by limited employeecapital markets at the times and candidate engagement due to work-from-home arrangementsin the amounts needed and travel restrictions; and
•We could incur a material non-cash charge to our income statement for the impairment of goodwill and other intangible assets, if our financial performance significantly declines.
The extent to which the COVID-19 pandemic will continue to impact our business, operations, financial results and financial conditionon acceptable terms will depend on future developments,the capital markets and our financial condition at such time. We may not be able to engage in any of these activities on desirable terms or at all, which are uncertain and cannot be predicted, including the duration and severity of the pandemic, future government actionscould result in response to the pandemic, how quickly and to what extent normal economic and operating conditions can resume in the United States and globally, and a potential resurgence of the pandemic. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of its global economic impact, including as a result of any recession that may occur. As of the date of this Quarterly Report, it is impossible to predict the overall impact of the COVID-19 pandemicdefault on our business, results of operationsdebt obligations, and financial results, and there can be no assurance that the COVID-19 pandemic will not have a material and adverse effect on our financial results during any quarter or year in which we are affected.
Two customers account for a significant portion of our revenues in the first quarter of 2020 in the Restaurant/Retail reporting segment. The loss of one of these customers, or a significant reduction, delay, or cancellation of purchases by one of these customers, would materially adversely affect our business, financial condition, and results of operations.
Revenues from our Restaurant/Retail reporting segment constituted 68% of our total consolidated revenues for the first quarter of 2020. Aggregate sales attributable to our two largest customers in the first quarter of 2020 (which include sales to our customers' franchisees) - Dairy Queen and Yum! Brands, Inc., which consists of the Kentucky Fried Chicken, Taco Bell, and Pizza Hut brands, constituted consolidated revenues for the first quarter of 2020 of 16% (Dairy Queen) and 11% (Yum!). There were no other customers that comprised greater than 10% of our total consolidated revenues during the first quarter of 2020. Significant reductions, delays, or cancellation of orders by one of these customers, or the loss of one of these customers, would reduce our revenue and operating income and would materially and adversely affect our business,financial condition and restrict our operations.
The covenants in the credit agreement that govern our indebtedness under the term loan may limit our operating results, and financial condition.flexibility.
The covenants in the credit agreement limit our ability to:
•incur debt and liens;
•make investments, loans and advances;
•consummate a merger or consolidation;
•sell, lease, assign, transfer or otherwise dispose of property;
•declare or pay dividends;
•prepay, redeem or repurchase debt;
•engage in affiliate transactions;
•change our business; and
•terminate or modify our organizational documents.
Under the Credit Agreement, the Company is required to maintain liquidity of at least $20 million and a first lien net annual recurring revenue leverage ratio of no greater than the level set forth in the Credit Agreement for the relevant quarter, which starts at 2.60 to 1.00 and declines over time to 1.30 to 1.00.
These covenants may limit our ability to make strategic acquisitions, fund investments or otherwise engage in other business activities that could be in our interest.
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Item 2. | Unregistered Sales of Equity Securities and Use Ofof Proceeds |
Under our equity incentive plan, employees may elect to have us withhold shares to satisfy minimum statutory federal, state and local tax withholding obligations arising from the vesting of their restricted stock.stock and restricted stock units. When we withhold these shares, we are required to remit to the appropriate taxing authorities the market price of the shares withheld, which could be deemed a purchase of shares by us on the date of withholding. For the three months ended March 31, 2020, 30,3982021, 61,181 shares were purchasedwithheld at an average price of $17.22$74.88 per share.
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Exhibit Number | | Incorporated by reference into this Quarterly Report on Form 10-Q | Date Filed or Furnished |
Exhibit Description | Form | Exhibit No. |
2.1* | | Form 8-K (File No. 001-09720) | 2.1 | 4/8/2021 |
10.1†† | | Form 10-K (File No. 001-09720) | 10.24 | 3/16/2021 |
10.2 | | Form 8-K (File No. 001-09720) | 10.1 | 4/8/2021 |
10.3* | | Form 8-K (File No. 001-09720) | 10.2 | 4/8/2021 |
10.4* | | Form 8-K (File No. 001-09720) | 10.3 | 4/8/2021 |
10.5 | | Form 8-K (File No. 001-09720) | 10.7 | 4/8/2021 |
31.1 | | | | Filed herewith |
31.2 | | | | Filed herewith |
32.1 | | | | Furnished herewith |
32.2 | | | | Furnished herewith |
101.INS | XBRL Instance Document | | | Filed herewith |
101.SCH | XBRL Taxonomy Extension Schema Document | | | Filed herewith |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | Filed herewith |
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Exhibit Number | | Incorporated by reference into this Quarterly Report on Form 10-Q | Date Filed or Furnished |
Exhibit Description | Form | Exhibit No. |
| | | | |
3(ii) | | | | Filed herewith |
| | | | |
4.2 | | Form 8-K (File No. 001-09720) | 4.1 | 2/10/2020 |
| | | | |
10.1 †† |
| Form 10-K (File No. 001-09720)
| 10.15 | 3/16/2020 |
| | | | |
10.2 †† |
| Form 10-K (File No. 001-09720)
| 10.20 | 3/16/2020 |
| | | | |
31.1 | | | | Filed herewith |
| | | | |
31.2 | | | | Filed herewith |
| | | | |
32.1 | | | | Furnished herewith |
| | | | |
32.2 | | | | Furnished herewith |
| | | | |
101.INS | XBRL Instance Document | | | Filed herewith |
| | | | |
101.SCH | XBRL Taxonomy Extension Schema Document | | | Filed herewith |
| | | | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | Filed herewith |
| | | | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | Filed herewith |
| | | | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | Filed herewith |
| | | | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | Filed herewith |
* The schedules and exhibits to such agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K.†† Indicates management contract or compensatory plan or arrangement.
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Exhibit Number | | Incorporated by reference into this Quarterly Report on Form 10-Q | Date Filed or Furnished |
Exhibit Description | Form | Exhibit No. |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | Filed herewith |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | Filed herewith |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | Filed herewith |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | | | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | PAR TECHNOLOGY CORPORATION |
| | (Registrant) |
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Date: | May 11, 202010, 2021 | /s/ Bryan A. Menar |
| | Bryan A. Menar |
| | Chief Financial and Accounting Officer |
| | (Principal Financial and Accounting Officer) |