UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

☒☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 
For the Quarterly Period Ended September 30, 2017.

2020
OR

☐TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934


For the Transition Period From __________ to __________
Commission File NumberNumber: 1-09720


PAR TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)

Delaware16-1434688
Delaware16-1434688
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)No.)
PAR Technology Park,
8383 Seneca Turnpike,
New Hartford, New York13413-4991
(Address of principal executive offices)offices, including zip code)
(315) 738-0600
(Zip Code)Registrant’s telephone number, including area code)

Registrant’s telephone number, including area code:  (315) 738-0600

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common StockPARNew York Stock Exchange

Indicate by check mark whether the registrantregistrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒þ No ☐


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒þ No ☐


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):


Large Accelerated Filer  ☐
Accelerated Filer  ☐þ
Non AcceleratedNon-Accelerated Filer  ☐ (Do not check if a smaller reporting company)Smaller Reporting Company ☒☐
Emerging Growth Company   ☐




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒þ


As of November 10, 2017, 16,007,4471, 2020, 21,616,748 shares of the registrant’s common stock, $0.02 par value, were outstanding.



PAR TECHNOLOGY CORPORATION


TABLE OF CONTENTS


PART I
FINANCIAL INFORMATION

Item
Number
Page
Item 1.
2
2
1
3
2
4
3
5
4
7
5
9
Item 2.14
23
Item 3.22
29
Item 4.22
29
PART II
OTHER INFORMATION
Item 1.23
31
Item 1A.23
31
Item 2.23
31
Item 6.2433
25
Exhibit Index34
26

"PAR," "Brink POS®," "PixelPoint®," "PAR EverServ®," "Restaurant Magic®", and "Data Central®" are trademarks of PAR Technology Corporation. This report may also contain trade names and trademarks of other companies. Our use or reference to such other companies' trade names or trademarks is not intended to imply any endorsement or sponsorship by these companies of PAR Technology Corporation or its products or services.


Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 ("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, and 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, and financial results. While we have taken precautionary measures intended to minimize the impact of COVID-19 to our employees and to our business, there can be no assurances that these actions are sufficient and that additional actions will not be required. Factors that have and may continue to adversely affect, and that could subsequently adversely impact, our business, operations and financial results, due to the COVID-19 pandemic include: customer store closures, significant reductions or volatility in demand for our products and services, delayed or canceled store implementations, decreased product adoptions and bookings, reduced or delayed software or hardware deployments and a reprioritization of investments in technology or point-of-sale infrastructure; delayed or payment defaults by customers; business continuity risks due to our work-from-home arrangements and travel restrictions, including increased exposure to potential cybersecurity breaches and attacks, disruptions or delays in product assembly and fulfillment and limitations on our selling and marketing efforts; our ability to execute our business and growth strategies; the impact on our corporate culture and ability to attract, hire and retain necessary qualified employees to develop and expand our business; and the impairment of goodwill and other intangible assets in the event of a significant decline in our financial performance. The extent to which the COVID-19 pandemic will continue to impact our business, operations, and financial results is uncertain and cannot be predicted, and there can be no assurance that the COVID-19 pandemic will not continue to have a material and adverse effect on our business, operations and financial results during any quarter or year in which we are affected. Other factors, risks, trends and uncertainties that could cause our actual results to differ materially from those expressed in or implied by forward-looking statements are 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, filed with the Securities and Exchange Commission ("SEC") on March 16, 2020, and in our other filings with the SEC. 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.

Table of Contents
1

PART I – FINANCIAL INFORMATION


Item 1.
Financial Statements(unaudited)

PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSBALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)
(Unaudited)

  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Net revenues:            
Product $20,706  $25,757  $90,594  $69,285 
Service  13,317   12,620   42,694   36,128 
Contract  14,915   23,115   43,776   64,042 
   48,938   61,492   177,064   169,455 
Costs of sales:                
Product  15,861   18,433   67,822   51,012 
Service  10,102   8,969   29,753   25,787 
Contract  13,608   21,490   39,264   59,002 
   39,571   48,892   136,839   135,801 
Gross margin  9,367   12,600   40,225   33,654 
Operating expenses:                
Selling, general and administrative  9,054   8,672   27,581   23,271 
Research and development  2,668   2,866   9,521   8,421 
Amortization of identifiable intangible assets  241   241   724   724 
   11,963   11,779   37,826   32,416 
Operating (loss) income from continuing operations  (2,596)  821   2,399   1,238 
Other expense, net  (70)  (38)  (264)  (318)
Interest expense, net  (39)  (12)  (84)  20 
(Loss) income from continuing operations before provision for income taxes  (2,705)  771   2,051   940 
Benefits (provision) for income taxes  1,188   (253)  (327)  (306)
(Loss) income from continuing operations  (1,517)  518   1,724   634 
Discontinued operations                
Income (loss) from discontinued operations (net of tax)  -   -   183   (26)
Net (loss) income $(1,517) $518  $1,907  $608 
Basic Earnings per Share:                
(Loss) income from continuing operations  (0.10)  0.03   0.11   0.04 
(Loss) income from discontinued operations  (0.00)  (0.00)  0.01   (0.00)
Net (loss) income $(0.10) $0.03  $0.12  $0.04 
Diluted Earnings per Share:                
(Loss) income from continuing operations  (0.10)  0.03   0.11   0.04 
(Loss) income from discontinued operations  (0.00)  (0.00)  0.01   (0.00)
Net (loss) income $(0.10) $0.03  $0.12  $0.04 
Weighted average shares outstanding                
Basic  15,976   15,770   15,949   15,670 
Diluted  15,976   15,822   16,260   15,730 

AssetsSeptember 30, 2020December 31, 2019
Current assets:  
Cash and cash equivalents$55,755 $28,036 
Accounts receivable – net40,106 41,774 
Inventories – net27,113 19,326 
Other current assets3,438 4,427 
Total current assets126,412 93,563 
Property, plant and equipment – net13,810 14,351 
Goodwill41,214 41,386 
Intangible assets – net34,247 32,948 
Lease right-of-use assets2,351 3,017 
Other assets3,767 4,347 
Total Assets$221,801 $189,612 
Liabilities and Shareholders’ Equity  
Current liabilities:  
Current portion of long-term debt$657 $630 
Accounts payable16,372 16,385 
Accrued salaries and benefits9,730 7,769 
Accrued expenses2,549 3,176 
Lease liabilities - current portion1,132 2,060 
Customer deposits and deferred service revenue11,067 12,084 
Total current liabilities41,507 42,104 
Lease liabilities - net of current portion1,300 1,021 
Deferred service revenue – non current1,646 3,916 
Long-term debt104,867 62,414 
Other long-term liabilities5,706 7,310 
Total liabilities155,026 116,765 
Commitments and contingencies
Shareholders’ Equity:  
Preferred stock, $.02 par value, 1,000,000 shares authorized0 0 
Common stock, $.02 par value, 58,000,000 and 29,000,000 shares authorized, 19,315,272 and 18,360,205 shares issued, 18,263,416 and 16,629,177 outstanding at September 30, 2020 and December 31, 2019, respectively386 367 
Additional paid in capital109,772 94,372 
Accumulated deficit(33,741)(10,144)
Accumulated other comprehensive loss(5,059)(5,368)
Treasury stock, at cost, 1,051,856 shares and 1,731,028 shares at September 30, 2020 and December 31, 2019, respectively(4,583)(6,380)
Total shareholders’ equity66,775 72,847 
Total Liabilities and Shareholders’ Equity$221,801 $189,612 
See accompanying notes to unaudited interim condensed consolidated financial statements
2
1
Table of Contents

PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMEOPERATIONS
(Unaudited, in thousands)thousands, except per share amounts)
(Unaudited)

  
Three Months Ended
September 30,
  
Nine Months Ended
September 30,
 
  2017  2016  2017  2016 
Net (loss) income $(1,517) $518  $1,907  $608 
Other comprehensive (loss) income, net of applicable tax:                
Foreign currency translation adjustments  75   (148)  (81)  (298)
Comprehensive (loss) income $(1,442) $370  $1,826  $(310)

Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
Net revenues:    
Product$20,470 $15,904 $51,437 $46,149 
Service16,877 13,937 50,952 41,514 
Contract17,500 15,539 52,881 46,646 
 54,847 45,380 155,270 134,309 
Costs of sales:    
Product15,995 12,259 40,882 34,912 
Service11,252 9,482 33,810 29,868 
Contract15,929 14,643 48,781 42,679 
 43,176 36,384 123,473 107,459 
Gross margin11,671 8,996 31,797 26,850 
Operating expenses:    
Selling, general and administrative10,512 9,539 31,988 27,162 
Research and development4,210 3,448 13,613 9,233 
Amortization of identifiable intangible assets257 0 677 0 
Adjustment to contingent consideration liability(2,310)0 (2,310)0 
 12,669 12,987 43,968 36,395 
Operating loss(998)(3,991)(12,171)(9,545)
Other expense, net(486)(401)(1,250)(1,205)
Interest expense, net(2,235)(1,588)(6,318)(2,978)
Loss on extinguishment of debt0 0 (8,123)0 
Loss before benefit from income taxes(3,719)(5,980)(27,862)(13,728)
Benefit from income taxes8 78 4,265 3,988 
Net loss$(3,711)$(5,902)$(23,597)$(9,740)
Basic Earnings per Share:    
Net loss$(0.20)$(0.36)$(1.30)$(0.61)
Diluted Earnings per Share:
Net loss$(0.20)$(0.36)$(1.30)$(0.61)
Weighted average shares outstanding:    
Basic18,250 16,300 18,145 16,086 
Diluted18,250 16,300 18,145 16,086 
See accompanying notes to unaudited interim condensed consolidated financial statements

2
3
Table of Contents

PAR TECHNOLOGY CORPORATIONANDCORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands, except share amounts)thousands)
(Unaudited)
Assets 
September 30,
2017
  
December 31,
2016
 
Current assets:      
Cash and cash equivalents $1,173  $9,055 
Accounts receivable-net  28,392   30,705 
Inventories-net  26,716   26,237 
Note receivable  -   3,510 
Income taxes receivable  144   261 
Other current assets  4,048   4,027 
Assets of discontinued operations  -   462 
Total current assets  60,473   74,257 
Property, plant and equipment – net  9,999   7,035 
Deferred income taxes  17,002   17,417 
Goodwill  11,051   11,051 
Intangible assets – net  12,366   10,966 
Other assets  3,842   3,785 
Total Assets $114,733  $124,511 
Liabilities and Shareholders’ Equity        
Current liabilities:        
Current portion of long-term debt $195  $187 
Borrowings of line of credit  1,450   - 
Accounts payable  9,448   16,687 
Accrued salaries and benefits  5,911   5,470 
Accrued expenses  3,820   4,682 
Customer deposits and deferred service revenue  12,496   19,814 
Total current liabilities  33,320   46,840 
Long-term debt  233   379 
Other long-term liabilities  7,797   7,712 
Total liabilities  41,350   54,931 
Commitments and contingencies        
Shareholders’ Equity:        
Preferred stock, $.02 par value, 1,000,000 shares authorized  -   - 
Common stock, $.02 par value, 29,000,000 shares authorized; 17,715,556 and 17,479,454 shares issued, 16,007,447 and 15,771,345 outstanding at September 30, 2017 and December 31, 2016, respectively  354   350 
Capital in excess of par value  48,176   46,203 
Retained earnings  34,264   32,357 
Accumulated other comprehensive loss  (3,575)  (3,494)
Treasury stock, at cost, 1,708,109 shares  (5,836)  (5,836)
Total shareholders’ equity  73,383   69,580 
Total Liabilities and Shareholders’ Equity $114,733  $124,511 

Three Months Ended
September 30,		Nine Months Ended
September 30,
 2020201920202019
Net loss$(3,711)$(5,902)$(23,597)$(9,740)
Other comprehensive (loss) income, net of applicable tax:    
Foreign currency translation adjustments(50)(357)309 (236)
Comprehensive loss$(3,761)$(6,259)$(23,288)$(9,976)
See accompanying notes to unaudited interim condensed consolidated financial statements
4
3
Table of Contents

PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN SHAREHOLDERS' EQUITY
(Unaudited, in thousands)
(Unaudited)

  
Nine Months Ended
September 30,
 
  2017  2016 
Cash flows from operating activities:      
Net income $1,907  $608 
(Income) loss from discontinued operations  (183)  26
Adjustments to reconcile net income to net cash (used in) provided by operating activities:        
Depreciation, amortization and accretion  2,805   3,214 
Provision for bad debts  302   522 
Provision for obsolete inventory  1,543   1,891 
Equity based compensation  301   398 
Deferred income tax  415   317 
Changes in operating assets and liabilities, net of acquisitions:        
Accounts receivable  2,011   (3,840)
Inventories  (2,022)  (10,177)
Income tax receivable/(payable)  117   (749)
Other current assets  441   (1,379)
Other assets  (57)  (119)
Accounts payable  (7,239)  7,540 
Accrued salaries and benefits  441   34 
Accrued expenses  (862)  (1,650)
Customer deposits and deferred service revenue  (7,318)  1,076 
Other long-term liabilities  85   (81)
Deferred tax equity based compensation  -   (12)
Net cash (used in) operating activities-continuing operations  (7,313)  (2,381)
Net cash (used in) operating activities-discontinued operations  -   (436)
Net cash (used in) provided by operating activities  (7,313)  (2,817)
Cash flows from investing activities:        
Capital expenditures  (3,947)  (1,770)
Capitalization of software costs  (3,276)  (1,949)
Acquisition related consideration paid  -   (977)
Net cash used in investing activities  (7,223)  (4,696)
Cash flows from financing activities:        
Payments of long-term debt  (138)  (151)
Payments of other borrowings  (16,700)  (162,322)
Proceeds from other borrowings  18,150   167,117 
Proceeds from stock options  1,675   26 
Proceeds from note receivable  3,794   - 
Payments for deferred acquisition obligations  -    (2,000) 
Net cash provided by financing activities  6,781   2,670 
Effect of exchange rate changes on cash and cash equivalents  (127)  (298)
Net decrease in cash and cash equivalents  (7,882)  (5,141)
Cash and cash equivalents at beginning of period  9,055   8,024 
Cash and equivalents at end of period  1,173   2,883 
Less cash and cash equivalents of discontinued operations at end of period  -   - 
Cash and cash equivalents of continuing operations at end of period $1,173  $2,883 
       
Supplemental disclosures of cash flow information:      
Cash paid during the period for:      
Interest  102   49 
Income taxes, net of refunds 432   798 

Common StockAdditional Paid in CapitalAccumulated deficitAccumulated
Other
Comprehensive
Loss		Treasury StockTotal
Shareholders’
Equity
SharesAmountSharesAmount
Balances at December 31, 201918,360 $367 $94,372 $(10,144)$(5,368)1,731 $(6,380)$72,847 
Net loss— — — (10,910)— — — (10,910)
Issuance of common stock upon the exercise of stock options2 — 30 — — — 30 
Net issuance of restricted stock awards21 — — — — — 0 
Treasury stock acquired from employees upon vesting or forfeiture of restricted stock— — — — — 38 (524)(524)
Issuance of restricted stock for acquisition908 19 — — — — — 19 
Equity component of redeemed 2024 convertible notes (net of deferred taxes of $1.8 million)(7,988)(722)2,435 (5,553)
Equity component of issued 2026 convertible notes (net of deferred taxes of $6.2 million and issuance costs of $0.9 million)— — 19,097 — — — — 19,097 
Stock-based compensation— — 1,089 — — — — 1,089 
Foreign currency translation adjustments— — — — 201 — — 201 
Balances at March 31, 202019,291 $386 $106,600 $(21,054)$(5,167)1,047 $(4,469)$76,296 
Net loss— — — (8,976)— — — (8,976)
Issuance of common stock upon the exercise of stock options4 — 12 — — — — 12 
Treasury stock acquired from employees upon vesting or forfeiture of restricted stock— — (195)— — 3 192 (3)
Stock-based compensation— — 1,123 — — — — 1,123 
Foreign currency translation adjustments— — — — 158— — 158 
Balances at June 30, 202019,295 $386 $107,540 $(30,030)$(5,009)1,050 $(4,277)$68,610 
Net loss— — — (3,711)— — — (3,711)
Issuance of common stock upon the exercise of stock options20 — 394 — — — — 394 
Net issuance of restricted awards— — 833 — — — — 833 
Treasury stock acquired from employees upon vesting or forfeiture of restricted stock— — — — — 2 (306)(306)
Stock-based compensation— — 1,005 — — — — 1,005 
Foreign currency translation adjustments— — — — (50)— — (50)
Balances at September 30, 202019,315 $386 $109,772 $(33,741)$(5,059)1,052 $(4,583)$66,775 
See accompanying notes to unaudited interim condensed consolidated financial statements
45
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PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited, in thousands)
Common StockAdditional paid in capitalRetained
Earnings (accumulated deficit)		Accumulated
Other
Comprehensive
Loss		Treasury StockTotal
Shareholders’
Equity
SharesAmountSharesAmount
Balances at December 31, 201817,878 $357 $50,251 $5,427 $(4,253)1,708 $(5,836)$45,946 
Net loss— — — (2,729)— — — (2,729)
Issuance of common stock upon the exercise of stock options78 — 30 — — — — 30 
Stock-based compensation— — 248 — — — — 248 
Foreign currency translation adjustments— — — — (10)— — (10)
Balances at March 31, 201917,956 $357 $50,529 $2,698 $(4,263)1,708 $(5,836)$43,485 
Net loss— — — (1,109)— — — (1,109)
Issuance of common stock upon the exercise of stock options79 3 210 — — — — 213 
Stock-based compensation— — 602 — — — — 602 
Foreign currency translation adjustments— — — — 131 — — 131 
Convertible notes conversion discount (net of deferred taxes of $4.1 million and issuance costs of $1.1 million)— — 12,465 — — — — 12,465 
Balances at June 30, 201918,035 $360 $63,806 $1,589 $(4,132)1,708 $(5,836)$55,787 
Net loss— — — (5,902)— — — (5,902)
Issuance of common stock upon the exercise of stock options18 2 38 — — — — 40 
Stock-based compensation— — 988 — — — — 988 
Foreign currency translation adjustments— — — — (357)— — (357)
Balances at September 30, 201918,053 $362 $64,832 $(4,313)$(4,489)1,708 $(5,836)$50,556 
See accompanying notes to unaudited interim condensed consolidated financial statements

6

PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
September 30,
 20202019
Cash flows from operating activities:  
Net loss$(23,597)$(9,740)
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation, amortization and accretion10,152 4,993 
Current expected credit losses912 693 
Provision for obsolete inventory2,158 1,240 
Stock-based compensation3,217 1,838 
Loss on debt extinguishment8,123 0 
Adjustment to contingent consideration liability(2,310)0 
Deferred income tax(4,372)(4,065)
Changes in operating assets and liabilities:  
Accounts receivable756 (3,318)
Inventories(9,945)1,466 
Other current assets989 (1,934)
Other assets597 158 
Accounts payable(655)(3,715)
Accrued salaries and benefits2,794 1,479 
Accrued expenses(627)2,936 
Customer deposits and deferred service revenue(3,287)1,107 
Other long-term liabilities706 (2,758)
Net cash used in operating activities(14,389)(9,620)
Cash flows from investing activities:  
Acquisitions, net of cash acquired0 (7,000)
Settlement of working capital for acquisitions191 0 
Capital expenditures(692)(2,352)
Capitalization of software costs(6,369)(2,283)
Net cash used in investing activities(6,870)(11,635)
Cash flows from financing activities:  
Payments of long-term debt(471)0 
Payment of contingent consideration0 (2,550)
Payments of bank borrowings0 (17,459)
Proceeds from bank borrowings0 9,640 
Payments for the extinguishment of notes payable(66,250)0 
Proceeds from notes payable, net of issuance costs115,786 75,039 
Treasury stock acquired from employees upon vesting or forfeiture of restricted stock(829)0 
Proceeds from exercise of stock options
436 283 
Net cash provided by financing activities48,672 64,953 
Effect of exchange rate changes on cash and cash equivalents306 (236)
Net increase in cash and cash equivalents27,719 43,462 
Cash and cash equivalents at beginning of period28,036 3,485 
Cash and equivalents at end of period$55,755 $46,947 
See accompanying notes to unaudited interim condensed consolidated financial statements
7


PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
September 30,
20202019
Supplemental disclosures of cash flow information:
Cash paid for interest1,339 153 
Income taxes, net of refunds184 125 
Capital expenditures recorded in accounts payable295 0 
Capitalized software recorded in accounts payable347 0 
See accompanying notes to unaudited interim condensed consolidated financial statements
8

PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Note 1 — Basis of presentation


The accompanying unaudited interim condensed consolidated financial statements ("financial statements") of PAR Technology Corporation (theand its consolidated subsidiaries (collectively, the “Company”, “PAR”, "we", "us" or “PAR”"our Company") have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and the instructions to Form 10-Q and Article 8 of Regulation S-X pertaining to interim financial statements.  Accordingly, they do not include all informationstatements as promulgated by the Securities and footnotes required by GAAP for annual financial statements.Exchange Commission ("SEC"). In the opinion of management, such unaudited interim consolidatedthe Company's financial statements include all normal and recurring adjustments necessary forin order to make the financial statements not misleading and to provide a fair presentation of theour financial results for the interim periodsperiod included in this Quarterly Report on Form 10-Q (“Quarterly(this “Quarterly Report”). OperatingInterim results for the three and nine months ended September 30, 2017 are not necessarily indicative of results for the results of operations that may be expected forfull year or any future period.  Certain amountsperiods. The information included in this Quarterly Report should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for prior periods have been reclassified to conform to the current period classification.fiscal year ended December 31, 2019, filed with the SEC on March 16, 2020 ("2019 Annual Report").


The preparation of unaudited interim consolidatedthe financial statements requires management of the Company to make a number of estimates judgements and assumptions relating to the reported amountsamount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements and the reported amountamounts of revenues and expenses during the period.  Primary areas where financial information isSignificant items subject to the use ofsuch estimates assumptions and the application of judgmentassumptions include revenue recognition, accounts receivable, inventories, accounting forstock-based compensation, the recognition and measurement of assets acquired and liabilities assumed in business combinations contingent consideration, goodwillat fair value, the carrying amount of property, plant and equipment including right-to-use assets and liabilities, identifiable intangible assets and taxes.goodwill, the measurement of liabilities and equity recognized for outstanding convertible notes, valuation allowances for receivables, inventories, and measurement of contingent consideration at fair value. Actual results could differ from those estimates.


The unaudited interimCompany operates in 2 distinct reporting segments, Restaurant/Retail and Government. The Company’s chief operating decision maker is the Company’s Chief Executive Officer. The Restaurant/Retail reporting segment provides point-of-sale (POS) software and hardware, back-office software, and integrated technical solutions to the restaurant and retail industries. The Government reporting segment provides intelligence, surveillance, and reconnaissance solutions and mission systems support to the United States Department of Defense and other Federal agencies. In addition, the financial statements include corporate operations, which are comprised of enterprise-wide functional departments.

Additionally, the Company has reclassified certain costs and expenses in the condensed consolidated statement of operations for the three and nine months ended September 30, 2019, amounting to $0.2 million and $0.7 million, respectively, from amortization of intangible assets to cost of service to conform to current period presentation. These reclassifications had no effect on previously reported total costs and operating expenses or net losses.

Use of Estimates

Preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and related notes should be read in conjunctionthe reported amounts of revenue and expenses during the reporting period. Our estimates are subject to uncertainties associated with the Company’s audited consolidatedongoing COVID-19 pandemic; the extent to which the COVID-19 pandemic will continue to impact these estimates is uncertain and cannot be predicted, and there can be no assurance that the COVID-19 pandemic will not have a material and adverse effect on these estimates.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date, based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company adopted ASU 2016-13 effective January 1, 2020, and the application of the standard had no material impact on the Company's financial statements for the three and related notes includednine months ended September 30, 2020.

9

In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which requires entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted ASU 2017-04 effective January 1, 2020, and the application of the standard had no material impact on the Company's financial statements for the three and nine months ended September 30, 2020.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the fair value measurement disclosures with the primary focus to improve effectiveness of disclosures in the Company’s Annual Reportnotes to the financial statements that is most important to the users. ASU 2018-13 modifies the required disclosures related to the valuation techniques and inputs used, uncertainty in measurement, and changes in measurements applied. The Company adopted ASU 2018-13 effective January 1, 2020, and the application of the standard had no material impact on Form 10-Kthe Company's financial statements for the yearthree and nine months ended December 31, 2016,  filedSeptember 30, 2020.

In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other (Topic 350) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 provides guidance on the measurement of costs for internal-use software during the design, development, and implementation stages for customers in a cloud hosting arrangement. ASU 2018-15 also requires the capitalized costs associated with the Securitiesdesign, development and Exchange Commission (“SEC”)implementation of cloud hosted arrangements to be amortized over the term of the hosting arrangement. The Company adopted ASU 2018-15 effective January 1, 2020, and the application of the standard had no material impact on April 17, 2017.the Company's financial statements for the three and nine months ended September 30, 2020.


Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", which is intended to simplify various requirements related to accounting for income taxes. ASU  2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact of this standard on its financial statements.

In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40)”, which is intended to reduce the number of accounting models for convertible debt instruments and convertible preferred stock, and amend guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company is currently assessing the impact of this standard on its financial statements.

With the exception of the new standards discussed above, there were no other recent accounting pronouncements or changes in accounting pronouncements during the three and nine months ended September 30, 2020 that are of significance or potential significance to the Company, as compared to the recent accounting pronouncements described in the 2019 Annual Report.

Note 2 — Divestiture- Revenue Recognition

Our revenue is derived from Software as a Service (SaaS), hardware and Discontinued Operationssoftware sales, software activation, hardware support, installations, maintenance and professional services. Accounting Standards Codification ("ASC") 606: "Revenue from Contracts with Customers" 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 non-distinct performance obligations, until the combined performance obligations are determined to be distinct and the combined performance obligation is then recognized as revenue over time or at a point in time depending on when control is transferred.


On November 4, 2015,We evaluated the potential performance obligations within our Restaurant/Retail reporting segment and evaluated whether each performance obligation met the ASC 606 criteria to be considered distinct performance obligations. Revenue in the Restaurant/Retail reporting 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/
10

Retail reporting segment relating to SaaS, our hardware Advanced Exchange, on-site support and other services is recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s 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 third-party contractors installation service fees at mutually agreed rates. 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 a third-party to provide the goods or services (agent). In direct customer arrangements, we have discretion over our pricing; we are primarily responsible for providing a good or service; and we have inventory risk before the good or service is transferred to the customer. As a result, we have concluded that we are the principal in the arrangement and record installation revenue on a gross basis.

Our contracts typically require payment within 30 to 90 days from the shipping date or installation date. The primary method used to estimate stand-alone selling price, is by referring to the price that we charge for that good or service when we sell it separately under similar circumstances to similar customers. The Company determines stand-alone selling price as follows: hardware, software (on-premises and SaaS) and software activation (which is a one-time fee charged at the initial offering of software) performance obligations are recognized at a stand-alone selling price based on the price at which the Company soldsells 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, including Advanced Exchange, installation and maintenance; software upgrades; and professional services, including project management, is recognized by using an expected cost plus margin.

Our revenue in the Government reporting segment is generally recognized over time as control of products or services is generally transferred continuously to our customers. While revenue generated by the Government reporting segment is predominantly related to services, we do generate revenue from sales of materials, software, hardware, and maintenance. For the Government reporting segment, cost plus fixed fee contract portfolio revenue is recognized over time using costs incurred as of a determination date to measure progress toward satisfying our performance obligations. Incurred costs represent 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, as the difference between the total estimated revenue and expected costs to complete a contract, and recognize it 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 same assumptions, adjusted for estimated 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 reporting segment does not sell the same good or service to similar customers and the contract performance obligations are unique to each government contract. The performance obligations are typically not distinct; however, in cases where there are distinct performance obligations, the transaction price is allocated using the relative stand-alone selling price method, which is based upon the standalone selling price of each respective 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 generally anticipate receipt of payment within 30 to 90 days from satisfaction of a performance obligation. None of our contracts as of December 31, 2019 or September 30, 2020 contained a significant financing component.
Performance Obligations Outstanding

The Company's performance obligations outstanding represent the transaction price of firm, non-cancellable orders, with expected delivery dates to customers after September 30, 2020 and September 30, 2019, respectively, for work that has not yet been performed. The activity of outstanding performance obligations as is relates to customer deposits and deferred service revenue is as follows:
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(in thousands)20202019
Beginning balance - January 116,000 14,258 
Change in deferred revenue(4,677)828 
Changes in customer deposits1,390 (115)
Ending balance - September 3012,713 14,971 
In the Restaurant/Retail reporting segment most performance obligations over one year are related to service and support contracts, approximately 87% of which we expect to fulfill within one year and 100% within 60 months. At September 30, 2020 and December 31, 2019, transaction prices allocated to future performance obligations were $9.9 million and $10.9 million, respectively.

During the three months ended September 30, 2020 and September 30, 2019, we recognized revenue of $2.2 million and $2.1 million, respectively, which are included in contract liabilities at the beginning of each such period. During the nine months ended September 30, 2020 and September 30, 2019, we recognized revenue of $9.9 million and $8.6 million, respectively, which are included in contract liabilities at the beginning of the respective period.

The value of existing contracts in the Government reporting segment at September 30, 2020, net of amounts relating to work performed to that date, was approximately $162.5 million, of which $36.0 million was funded, and at December 31, 2019, net of amounts relating to work performed to that date, was approximately $148.7 million, of which $32.8 million was funded. The value of existing contracts, net of amounts relating to work performed at September 30, 2020 are expected to be recognized as revenue over time as follows (in thousands):

Next 12 Months$66,666 
Months 13-2443,361 
Months 25-3631,156 
Thereafter21,272 
TOTAL$162,455 


Disaggregated Revenue
The Company disaggregates revenue from customer contracts by major product group for each reporting segment. The Company believes this method best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Disaggregation of revenue for the three and nine months ended September 30, 2020 and September 30, 2019 is as follows:
(in thousands)Three months ended September 30, 2020
Restaurant/Retail - Point in TimeRestaurant/Retail - Over TimeGovernment - Over Time
Restaurant/Retail$29,739 $7,608 $0 
Mission Systems$0 $0 $8,084 
ISR Solutions$0 $0 $8,943 
Product$0 $0 $473 
TOTAL$29,739 $7,608 $17,500 
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(in thousands)Three months ended September 30, 2019
Restaurant/Retail - Point in TimeRestaurant/Retail - Over TimeGovernment - Over Time
Restaurant/Retail$23,599 $5,508 $0 
Grocery335 399 0 
Mission Systems0 0 8,444 
ISR Solutions0 0 7,057 
Product0 0 38 
TOTAL$23,934 $5,907 $15,539 
(in thousands)Nine months ended September 30, 2020
Restaurant/Retail - Point in TimeRestaurant/Retail - Over TimeGovernment - Over Time
Restaurant/Retail$77,373 $25,016 $0 
Mission Systems0 0 24,620 
ISR Solutions0 0 27,457 
Product0 0 804 
TOTAL$77,373 $25,016 $52,881 

(in thousands)Nine months ended September 30, 2019
Restaurant/Retail - Point in TimeRestaurant/Retail - Over TimeGovernment - Over Time
Restaurant/Retail$65,849 $18,718 $0 
Grocery1,067 2,029 0 
Mission Systems0 0 25,177 
ISR Solutions0 0 20,603 
Product0 0 866 
TOTAL$66,916 $20,747 $46,646 


The Company has reclassified certain revenue for the three and nine months ended September 30, 2019, amounting to $0.1 million and $0.9 million, respectively, from Mission Systems and ISR Solutions to Product to conform to current period presentation. These reclassifications had no effect on previously reported total "Government - Over Time" revenue.

Practical Expedients and Exemptions

The Company generally expenses sales commissions when incurred because the amortization period is less than one year or the total amount of commissions is immaterial. We record these expenses in selling, general and administrative ("SG&A") in the condensed consolidated statements of operations.

We elected to exclude from the transaction price measurement, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (for example, sales, use, value added, and some excise taxes).

Note 3 — Acquisitions

Drive-Thru Acquisition

Effective September 30, 2019, the Company, through its wholly-owned subsidiary ParTech, Inc. ("ParTech"), acquired assets of 3M Company's Drive-Thru Communications Systems business, including the XT-1 and G5 headset systems, contracts and intellectual property associated with the business, for a purchase price of $8.4 million (total fair value of assets was $8.4 million
13

including approximately $1.2 million of developed technology, $3.6 million of customer relationships, and $2.4 million of goodwill, net of warranty liability of $1.4 million, resulting in cash paid of $7.0 million) (the "Drive-Thru Acquisition").

Restaurant Magic Acquisition

Effective December 18, 2019, the Company, through ParTech, acquired 100% of the limited liability company interests of AccSys LLC (f/k/a AccSys, Inc., and otherwise known as Restaurant Magic) in base consideration of approximately $42.8 million, of which approximately $12.8 million was paid in cash, which reflects a $0.2 million favorable working capital adjustment recognized in the second quarter of 2020, $27.5 million was paid in restricted shares of Company common stock (issued in January 2020) and $2.0 million was paid by delivery of a subordinated promissory note (the "Restaurant Magic Acquisition"). The sellers of Restaurant Magic have the opportunity, through 2022, to earn additional purchase price consideration, subject to the achievement of certain post-closing revenue focused milestones (the “Earn-Out”). As of December 31, 2019, the value of the Earn-Out based on a Monte Carlo simulation was $3.3 million. During the three-months ended September 30, 2020, a $2.3 million fair value adjustment was recorded to earnings to reflect a reduction in the fair value of the Earn-Out to $1.0 million; see "Note 13 - Fair Value of Financial Instruments" for additional information. The adjustment was recorded as a component of Operating expense for the nine months ended September 30, 2020. The Earn-Out, if any, will be payable 50% in cash or subordinated promissory notes, or a combination of both, at the Company's election, and 50% in restricted shares of Company common stock; the equity component of the Earn-Out is classified as a liability on the Company's balance sheet as the quantity of restricted shares is variable subject to the final value of the Earn-out. The Earn-Out has no maximum payment.

The Company issued restricted stock units in connection with its assumption of awards granted by Restaurant Magic to its employees and contractors prior to the closing of the acquisition.

The fair values assigned to the assets acquired and liabilities assumed in the Drive-Thru Acquisition and the Restaurant Magic Acquisition and presented in the table below were based on management's best estimates and assumptions at the conclusion of the measurement period for each respective transaction:
(in thousands)Purchase price allocation
Developed technology$16,400 
Customer relationships1,100 
Trade name900 
Tangible assets1,344 
Goodwill27,773 
Total assets47,517 
Accounts payable and accrued expenses629 
Deferred revenue715 
Earn-Out liability3,340 
Consideration paid$42,833 


Unaudited Pro Forma Financial Information

For the three months ended September 30, 2020, the Drive-Thru Acquisition and the Restaurant Magic Acquisition resulted in additional revenues of $5.7 million and $2.2 million, respectively. For the nine months ended September 30, 2020, the Drive-Thru Acquisition and the Restaurant Magic Acquisition resulted in additional revenues of $13.2 million and $6.2 million, respectively. The Company determined it is impractical to report net loss for the Drive-Thru Acquisition and the Restaurant Magic Acquisition for the three and nine months ended September 30, 2020. The following unaudited pro forma financial information presents our results as if both acquisitions occurred January 1, 2019:
(in thousands)Three months ended September 30, 2019Nine months ended September 30, 2019
Total revenue$51,938 $154,211 
Net loss$(5,990)$(5,209)
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Note 4 — Divestiture

Sale of SureCheck

During the second quarter of 2019, ParTech entered into an asset purchase agreement to sell substantially all of the assets of its hotel/spa technology business operated by PAR Springer-Miller Systems, Inc., Springer-Miller International, LLC,relating to the SureCheck product group within the Company's Restaurant/Retail reporting segment. The sale does not qualify for treatment as a discontinued operation, and Springer-Miller Canada, ULC (collectively, “PSMS”) pursuant to an asset purchase agreement (the “PSMS APA”) dated on even date therewith among PSMS and Gary Jonas Computing Ltd., SMS Software Holdings LLC, and Jonas Computing (UK) Ltd. (the “Purchasers”). Accordingly,therefore, the results of operations of PSMS have been classified as discontinued operationsSureCheck product group is included in the Consolidated StatementsCompany’s continuing operations for all periods presented.

Note 5 — Accounts Receivable, Net

The Company’s accounts receivable, net, consists of:
(in thousands)September 30, 2020December 31, 2019
Government segment:  
Billed$8,460 $11,608 
Advanced billings(600)(608)
 7,860 11,000 
Restaurant/Retail segment:32,246 30,774 
Accounts receivable - net$40,106 $41,774 

At September 30, 2020 and December 31, 2019, the Company had current, expected credit loss of Operations (unaudited)$1.9 million and Consolidated Statements of Cash Flows (unaudited) in accordance with Accounting Standards Codification (“ASC”) ASC 205-20 (Presentation of Financial Statements – Discontinued Operations). Additionally,$1.8 million, respectively, against accounts receivable for the assets and associated liabilities have been classified as discontinued operationsRestaurant/Retail reporting segment. Changes in the Consolidated Balance Sheets (unaudited). Total consideration to be received fromcurrent, expected credit loss during the sale is $16.6 million in cash (the “Base Purchase Price”), with $12.1 million paid at the closing of the asset sale and up to $4.5 million payable 18nine months following the closing (the “Holdback Amount”).  On May 5, 2017, the Company received payment of $4.2 million of the Holdback Amount, the unpaid balance is reflective of a negative purchase price adjustment based on the net tangible asset calculation provided under the PSMS APA. In addition to the Base Purchase Price, contingent consideration of up to $1.5 million (the “Earn-Out”) could be received by the Company based on the achievement of certain agreed-upon revenue and earnings targets for calendar years 2016, 2017 and 2018 (up to $500,000 per calendar year), subject to setoff for PSMS and ParTech, Inc. indemnification obligations thereunder and unresolved claims. The Company received no Earn-Out payment for calendar year 2016 and,ended September 30, 2020 were as follows:
(in thousands)20202019
Beginning Balance - January 1$1,849 $1,351 
Provisions912 975 
Write-offs(881)(321)
Recoveries0 0 
Ending Balance - September 30$1,880 $2,005 


All receivables recorded as of September 30, 2017, the Company did not record any amount associated with calendar years 2017 and 2018, as the Company does not believe achievement of the related revenue and earnings targets is probable.
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Summarized financial position for the Company’s discontinued operations is as follows (in thousands):

  
September 30,
2017
  
December, 31
2016
 
Assets      
Other current assets $-  $462 
Assets of discontinued operations $-  $462 

Summarized financial operating results for the Company’s discontinued operations is as follows (in thousands):

  
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
 
  2017  2016  2017  2016 
Operations            
Total revenues $-  $-  $-  $- 
                 
Income (loss) from discontinued operations before income taxes $-  $-  $284  $(38)
(Provision for) benefit from income taxes  -   -   (101)  12 
Income (loss) from discontinued operations, net of taxes $-  $-  $183  $(26)

Note 3 — Accounts Receivable

The Company’s net accounts receivable consists of (in thousands):

  
September 30,
2017
  
December 31,
2016
 
Government segment:      
Billed $7,465  $6,779 
Advanced billings  (1,344)  (1,599)
   6,121   5,180 
         
Restaurant/Retail segment:  22,271   25,525 
Accounts receivable - net $28,392  $30,705 

At September 30, 20172020 and December 31, 2016, the Company had recorded allowances for doubtful accounts of $1.2 million and $0.9 million, respectively, against Restaurant/Retail segment accounts receivable.2019 represent unconditional rights to payments from customers.

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Note 46 — Inventories


Inventories are primarily used in the manufacture, maintenance and service of products within the Restaurant/Retail segment products.reporting segment.  The components of inventories, (net)net, consist of the following (in thousands):following:

(in thousands)September 30, 2020December 31, 2019
Finished goods$14,055 $8,320 
Component parts7,681 6,768 
Service parts5,377 4,238 
 $27,113 $19,326 
  
September 30,
2017
  
December 31,
2016
 
Finished goods $11,282  $9,423 
Work in process  742   443 
Component parts  8,378   10,386 
Service parts  6,314   5,985 
  $26,716  $26,237 


At September 30, 20172020 and December 31, 2016,2019, the Company had recorded inventory reserves of $9.0$12.1 million and $9.2$9.6 million, respectively, against inventories used in the Restaurant/Retail reporting segment, inventories, which relates primarily relate to service parts.


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Note 57 — Identifiable Intangible Assets and Goodwill


The Company’s identifiableIdentifiable intangible assets represent intangible assets acquired by the Company in connection with theits acquisition of Brink Software Inc. acquisition in 2014, the Drive-Thru Acquisition and internally developedthe Restaurant Magic Acquisition, and software development costs.  The Company capitalizes certain software development costs related to the development of computerfor software used in its Restaurant/Retail reporting segment. Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development ("R&D") costs. The technological feasibility of a computer software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary to establish that the software product meets its design specifications, including functionality, features, and technical performance requirements. Software development costs incurred after establishing the technological feasibility forof software sold as a perpetual license, as defined within ASC 985-20, (Software"Software – Costs of Software to be sold, Leased, or Marketed) and for software as a service (“SAAS”)Marketed", as defined within ASC-350-40 (Intangibles – Goodwill and Other – Internal – Use Software) are capitalized and amortized on a product-by-product basis when the software product is available for general release to customers. Included in identifiable intangible assets are approximately $5.3 million and $2.5 million of costs related to software products that have not satisfied the general release threshold as of September 30, 2020 and December 31, 2019, respectively. These software products are expected to satisfy the general release threshold within the next 12 months. Software development costs capitalized within continuing operations during the three months ended September 30, 2020 and September 30, 2019 were $2.4 million and $0.7 million, respectively.  Software development costs capitalized during the nine months ended September 30, 20172020 and September 30, 2019 were $1.1$6.7 million and $3.3$2.3 million, respectively. Software costs capitalized within continuing operations during the three and nine months ended September 30, 2016 were $0.7 million and $1.9 million, respectively.


Annual amortization, charged to cost of sales when a product is available for general release to customers, is computed using the greater of (a) the straight-line method over the remaining estimated economic life of the product,software products, generally three to seven years or (b) the ratio that current gross revenues for the product bear to the total of current and anticipated future gross revenues for the product.five years. Amortization of capitalized software development costs from continuing operations for the three and nine months ended September 30, 20172020 and September 30, 2019 were $0.4$1.7 million and $1.1$0.5 million, respectively. Amortization of capitalized software development costs from continuing operations for the three and nine months ended September 30, 20162020 and September 30, 2019 were $4.9 million and $1.5 million, respectively. 

For the three month period ended September 30, 2020, $1.6 million and $0.3 million of amortization of identifiable intangible assets was recorded in cost of service and $0.8 million, respectively.

Amortizationamortization of intangible assets, acquired fromrespectively, compared to $0.7 million in cost of service for the Brink Software Inc. acquisition amounted to $0.2three months ended September 30, 2019. For the nine month period ended September 30, 2020, $4.7 million and $0.7 million of amortization of identifiable intangible assets was recorded in cost of service and amortization of intangible assets, respectively, compared to $2.4 million in cost of service for the three and nine months ended September 30, 2017, respectively.2019. There was no comparable amortization recorded in amortization of intangible assets for the three or nine months ended September 30, 2019.
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The components of identifiable intangible assets excluding discontinued operations, are (in thousands):are:

(in thousands)September 30, 2020December 31, 2019Estimated
Useful Life
Acquired and internally developed software costs$40,011 $36,137 3 - 5 years
Customer relationships4,860 4,860 7 years
Non-competition agreements30 30 1 year
 44,901 41,027  
Less accumulated amortization(17,806)(12,389) 
 $27,095 $28,638  
Internally developed software costs not meeting general release threshold5,342 2,500 
Trademarks, trade names (non-amortizable)1,810 1,810 
 $34,247 $32,948    
  
September 30,
2017
  
December 31,
2016
   
Estimated
Useful Life
 
Acquired and internally developed software costs $19,152  $15,884   3 - 7 years 
Customer relationships  160   160   7 years 
Non-competition agreements  30   30   1 year 
   19,342   16,074     
Less accumulated amortization  (7,376)  (5,508)    
  $11,966  $10,566     
Trademarks, trade names (non-amortizable)  400   400   N/A 
  $12,366  $10,966       


The expected future amortization of intangible assets, assuming straight-line amortization of capitalized software development costs and acquisition related intangibles, excluding software costs not meeting the general release threshold, is as follows (in thousands):

2017 $618 
2018  2,379 
2019  1,905 
2020  1,487 
2021  1,031 
Thereafter  4,546 
Total $11,966 

2020, remaining$1,818 
20216,808 
20225,582 
20233,581 
20243,186 
Thereafter6,120 
Total$27,095 
16


The Company operates in 2 reporting segments, Restaurant/Retail and Government, which are also the Company's identified reporting units for purposes of evaluating goodwill impairment. The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment.  The Company operates in two reportable business segments, Restaurant/Retail and Government.  Goodwill impairment testing is performed at the reporting segment level.of goodwill. Goodwill is assigned to a specific reporting unit at the date the goodwill is initially recorded.  Oncerecorded; once assigned, goodwill has been assigned to a specific reporting unit, it no longer retains its association with a particular acquisition and all of the activities within athe reporting unit, whether acquired organically or organically grown,from a third-party, are available to support the value of the goodwill. The amount of goodwill carried by the Restaurant/Retail and Government reporting segments were $41.2 million and $41.4 million at September 30, 2020 and December 31, 2019, respectively. The Company recognized additions to goodwill as part of the Drive-Thru Acquisition and the Restaurant Magic Acquisition as indicated in Note 3 - Acquisitions; in June 2020, a $0.2 million favorable working capital adjustment was recognized related to the Restaurant Magic Acquisition. NaN impairment charges were recorded for the periods ended September 30, 2020 or September 30, 2019.

Note 8 — Debt

On April 15, 2019, the Company sold $80.0 million in aggregate principal amount of 4.500% Convertible Senior Notes due 2024 (the "2024 Notes"). The 2024 Notes were sold pursuant to an indenture, dated April 15, 2019 (the "2024 Indenture"), between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee. The 2024 Notes pay interest at a rate equal to 4.500% per year, payable semiannually in arrears on April 15 and October 15 of each year, beginning October 15, 2019. Interest accrues on the 2024 Notes from the last date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from April 15, 2019. Unless earlier converted, redeemed or repurchased, the 2024 Notes mature on April 15, 2024.

On February 10, 2020, the Company sold $120.0 million in aggregate principal amount of 2.875% Convertible Senior Notes due 2026 (the "2026 Notes" and, together with the 2024 Notes, the "Notes"). The 2026 Notes were sold pursuant to an indenture, dated February 10, 2020 (the "2026 Indenture" and, together with the 2024 Indenture, the "Indentures"), between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee. The 2026 Notes pay interest at a rate equal to 2.875% per year, payable semiannually in arrears on April 15 and October 15 of each year, beginning October 15, 2020. Interest accrues on the 2026 Notes from the last date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from April 15, 2020. Unless earlier converted, redeemed or repurchased, the 2026 Notes mature on April 15, 2026.

The Company used approximately $66.3 million (excluding cash payments relating to accrued interest and fractional shares) from its sale of the 2026 Notes and issued 722,423 shares of common stock at $32.43 per share out of treasury stock with an average cost basis of $3.37 per share to repurchase approximately $66.3 million in aggregate principal amount of the 2024 Notes through individually negotiated transactions. Of the total price paid for the 2024 Notes, $59.0 million was allocated to the 2024 Notes settlement, $30.8 million was allocated to the equity component, and $1.0 million was used to pay off accrued interest on the 2024 Notes. The consideration transferred was allocated to the liability and equity components of the 2024 Notes using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt instrument immediately prior to settlement. The transaction resulted in a loss on settlement of convertible notes of $8.1 million, which is $10.3recorded as a Loss on extinguishment of debt in the Company’s unaudited condensed consolidated statement of operations. The loss represents the difference between (i) the fair value of the liability component and (ii) the sum of the carrying value of the debt component and any unamortized debt issuance costs at the time of settlement.

The implied estimated effective rate of the liability component of the 2024 Notes and 2026 Notes is 10.24% and 7.33%, respectively.

The Notes are senior, unsecured obligations of the Company. The 2024 Notes and the 2026 Notes are convertible, in whole or in part, at the option of the holder, upon the occurrence of specified events or certain fundamental changes set forth in the Indentures prior to the close of business on the business day immediately preceding October 15, 2023 and October 15, 2025, respectively; and, thereafter, at any time until the close of business on the second business day immediately preceding maturity. The 2024 Notes are convertible into Company common stock at an initial conversion rate of 35.0217 shares per $1,000 principal amount and the 2026 Notes are convertible into Company common stock at an initial conversion rate of 23.2722 shares per $1,000 principal amount. Upon conversion, the Company may elect to settle by paying or delivering either solely cash, shares of Company common stock or a combination of cash and shares of Company common stock.

In accordance with ASC 470-20 "Debt with Conversion and Other Options — Beneficial Conversion Features", the initial measurement of the 2024 Notes at fair value resulted in a liability of $62.4 million and as such, the calculated discount resulted in an implied value of the convertible feature recognized in Additional Paid in Capital of $17.6 million; and the initial
17

measurement of the 2026 Notes at fair value resulted in a liability of $93.8 million and as such, the calculated discount resulted in an implied value of the convertible feature recognized in Additional Paid in Capital of $26.2 million. Issuance costs for the Notes amounted to $4.9 million and $4.2 million for the 2024 Notes and 2026 Notes, respectively. These costs were allocated to debt and equity components on a ratable basis. For the 2024 Notes this amounted to $3.8 million and $1.1 million to the debt and equity components, respectively. For the 2026 Notes this amounted to $3.3 million and $0.9 million to the debt and equity components, respectively.

The Indentures contain covenants that, among other things, restrict the Company’s ability to merge, consolidate or sell, or otherwise dispose of, substantially all of its assets and customary Events of Default (as defined in the Indentures).

As a result of the changes to the equity components of the Notes, the Company recognized a deferred income tax benefit of $4.4 million during the nine months ended September 30, 2020.

The following table summarizes information about the net carrying amounts of the Notes as of September 30, 2020:
(in thousands)2024 Notes2026 Notes
Principal amount of notes outstanding$13,750 $120,000 
Unamortized discount (including unamortized debt issuance cost)(2,787)(26,968)
Total long-term portion of notes payable$10,963 $93,032 

The following table summarizes interest expense recognized on the Notes for the three and nine months ended September 30, 2020 and 2019:
(in thousands)Three Months Ended September 30,
20202019
Contractual interest expense$1,017 $900 
Amortization of debt issuance costs and discount1,126 882 
Total interest expense$2,143 $1,782 
(in thousands)Nine Months Ended September 30,
20202019
Contractual interest expense$3,009 $1,650 
Amortization of debt issuance costs and discount3,205 1,628 
Total interest expense$6,214 $3,278 

The following table summarizes the future principal payments for the Notes as of September 30, 2020 (in thousands):
2020, remaining$0 
20210 
20220 
20230 
202413,750 
Thereafter120,000 
Total$133,750 

In connection with the Restaurant Magic Acquisition (see "Note 3 - Acquisitions"), $2.0 million of the purchase price was paid by delivery of a subordinated promissory note. The note bears interest at 4.5% per annum, with monthly payments of principal and interest in the amount of $60,391 payable beginning January 15, 2020 through maturity on December 15, 2022. As of September 30, 2020, the outstanding balance of the subordinated promissory note was $1.5 million of which $0.7 million was in the current portion of long-term debt. The Company's future minimum principal payments are $0.1 million, $0.7 million and $0.7 million respectively, at September 30, 2017for the remainder of 2020, 2021 and December 31, 2016.2022, respectively.



18

Note 69 — Stock Based Compensation


The Company applies the fair value recognition provisions of ASC Topic 718.718: "Stock Compensation". The Company recorded stock basedstock-based compensation of $63,000$3.2 million and $301,000$1.8 million for the three and nine monthsmonth periods ended September 30, 2017,2020 and September 30, 2019, respectively. The Company recorded stock basedstock-based compensation of $190,000$1.0 million and $398,000$0.9 million for the three and nine monthsmonth periods ended September 30, 2016, respectively.  The amount recorded for the three2020 and nine months ended September 30, 2017 was recorded net of benefits of $1,000 and $11,000, respectively, as a result of forfeitures of unvested stock awards prior to completion of the requisite service period and/or failure to achieve performance criteria.  The amount recorded for the three and nine months ended September 30, 2016 was recorded net of benefits of $0 and $48,000, respectively, as a result of forfeitures of unvested stock awards prior to completion of the requisite service period and /or failure to achieve performance criteria.2019, respectively. At September 30, 2017,2020, the aggregate unrecognized compensation expense related to non-vestedunvested equity awards was $0.3$9.1 million (net of estimated forfeitures), which is expected to be recognized as compensation expense in fiscal years 20172020 through 2019.2023.


ForA summary of stock option activity for the three and nine month periodsmonths ended September 30, 2017,2020 is below:
(in thousands, except for exercise price)Options OutstandingWeighted
Average
Exercise Price
Outstanding at January 1, 2020410 $14.50 
Granted619 13.82 
Exercised(25)10.29 
Canceled/forfeited(15)19.02 
Outstanding at September 30, 2020989 $14.11 

A summary of unvested restricted stock activity for the Company recognized compensation expense related to performance awards based on its estimatenine months ended September 30, 2020 is below:
(in thousands, except for award value)Restricted Stock AwardsWeighted
Average
Award Value
Outstanding at Balance at January 1, 2020171 $23.53 
Granted21 29.19 
Vested(28)24.37 
Forfeited and cancelled(77)24.16 
Outstanding at September 30, 202087 $24.09 

A summary of unvested restricted stock units ("RSU") activity for the probability of achievement in accordance with ASC Topic 718.nine months ended September 30, 2020 is below:
(in thousands, except for award value)RSU AwardsWeighted
Average
Award Value
Outstanding at Balance at January 1, 20200 $0 
Granted375 13.24 
Vested0 0 
Forfeited and cancelled0 0 
Outstanding at September 30, 2020375 $13.24 
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Note 710 — Net (loss) incomeloss per share


Earnings per share areis calculated in accordance with ASC Topic 260,260: "Earnings per Share", which specifies the computation, presentation and disclosure requirements for earnings per share (EPS).  It requires the presentation of basic and diluted EPS.  Basic EPS excludes all dilution and is based upon the weighted average number of shares of common stock outstanding during the period.  Diluted EPS reflects the potential dilution that would occur if convertible securities or other contracts to issue common stock were exercised or converted into common stock. Asexercised. At September 30, 2020, there were losses for the three months ended September 30, 2017 no common share equivalents are included in the diluted per share computation. For the nine months ended September 30, 2017 there were no989,000 anti-dilutive stock options outstanding. For the three and nine months endedoutstanding compared to 590,000 as of September 30, 20162019. At September 30, 2020 there were 914,000 and 470,000375,000 anti-dilutive restricted stock options outstanding.units compared to 0 as of September 30, 2019.


The following is a reconciliationpotential effects of 2024 Notes and 2026 Notes conversion features (See "Note 8 - Debt") were excluded from the weighted averagediluted net loss per share as of September 30, 2020 and September 30, 2019. Potential shares from 2024 Notes and 2026 Notes conversion features at respective maximum conversion rates of 46.40 and 30.84 shares of common stock outstanding for the basicper $1,000 principal amount of Notes are approximately 638,051 and diluted EPS computations (in thousands, except share and per share data):3,700,272, respectively.

19
  
Three Months
Ended September 30,
 
  2017  2016 
Net (loss) income from continuing operations $(1,517) $518 
         
Basic:        
Shares outstanding at beginning of period  15,907   15,770 
Weighted average shares issued during the period, net  69   - 
Weighted average common shares, basic  15,976   15,770 
Net (loss) income from continuing operations per common share, basic $(0.10) $0.03 
Diluted:        
Weighted average common shares, basic  15,976   15,770 
Dilutive impact of stock options and restricted stock awards  -   52 
Weighted average common shares, diluted  15,976   15,822 
Net (loss) income from continuing operations per common share, diluted $(0.10) $0.03 


  
Nine Months
Ended September 30,
 
  2017  2016 
Net income from continuing operations $1,724  $634 
         
Basic:        
Shares outstanding at beginning of period  15,771   15,645 
Weighted average shares issued during the period, net  178   25 
Weighted average common shares, basic  15,949   15,670 
Net income from continuing operations per common share, basic $0.11  $0.04 
Diluted:        
Weighted average common shares, basic  15,949   15,670 
Dilutive impact of stock options and restricted stock awards  311   60 
Weighted average common shares, diluted  16,260   15,730 
Net income from continuing operations per common share, diluted $0.11  $0.04 


Note 811 — Contingencies


TheFrom time to time, the Company is subjectparty to legal proceedings which arisearising in the ordinary course of business. Additionally, U.S. Government contract costs are subject to periodic audit and adjustment. Based on information currently available, and based on its evaluation of such information, the Company believes the legal proceedings in which it is currently involved are not material or are not likely to result in a material adverse effect on the Company’s business, financial condition or results of operations.

The Company is investigating whether certain import/exporta party to a proceeding filed by Kandice Neals on behalf of herself and sales documentation activitiesothers similarly situated (the "Neals Plaintiff") against the Company on March 21, 2019 in the Circuit Court of Cook County, Illinois County Department, Chancery Division. The complaint asserted that the Company violated the Illinois Biometric Information Privacy Act in the alleged collection, use, and storage of her and others' biometric data derived from fingerprint scans taken for authentication purposes on point-of-sale systems. The Neals lawsuit was removed to the Federal District Court for the Northern District of Illinois (the District Court") and was subsequently dismissed on December 19, 2019 without prejudice. On January 15, 2020, the Neals Plaintiff filed an amended complaint against ParTech, Inc. with the District Court. On January 29, 2020, ParTech, Inc. filed its answer and affirmative defenses to the amended complaint. The Company believes the Neals lawsuit is without merit. The Company does not currently believe an accrual is appropriate, but will continue to monitor the lawsuit to provide for probable and estimable losses.

In 2016, the Company's Audit Committee commenced an internal investigation into conduct at the Company’sCompany's China and Singapore offices were improper and in possible violation of the U.S. Foreign Corrupt Practices Act (“FCPA”) and other applicable laws and certain company policies. The Company voluntarily notified and is fully cooperating with, the SEC and the U.S. Department of Justice (“DOJ”("DOJ") of these activities. On May 1, 2017,the internal investigation. Following the conclusion of the Audit Committee's internal investigation, the Company received a subpoena fromvoluntarily reported the SEC for documents relatingrelevant findings of the investigation to the Company’s investigation. The SEC’s investigation is a non-public, fact-finding inquiry and it is not clear what action, if any, the SEC intends to take with respect to the information it gathers. If the SEC, DOJ, or other governmental agencies (including foreign governmental agencies) determine that violations of certain laws or regulations occurred, the Company could be exposed to a broad range of civil and criminal sanctions. The potential liability arising out of the China and Singapore matters orauthorities. In early April 2019, the SEC investigation cannot currently be reasonably estimated; however,notified the imposition of sanctions, fines or remedial measures couldCompany that based on current information, it did not intend to recommend an enforcement action against the Company; shortly thereafter, the DOJ advised that it did not intend to separately proceed. Based on discussions with Singaporean authority, a penalty related to this matter is probable; the Company’s estimated liability for this penalty is not material and related contingencies are not expected to have a material adverse effect on the Company’s business, prospects, reputation, financial condition, liquidity, results of operations or cash flows.statements.

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Note 912 — Segment and Related Information


The Company is organizedoperates in two reportable business2 distinct reporting segments, Restaurant/Retail and Government. The Company’s chief operating decision maker is the Company’s Chief Executive Officer. Management views the Restaurant/Retail and Government segments separately in operating its business, as the products and services are different for each segment. The Restaurant/Retail reporting segment offers management technologyprovides point-of-sale (POS) software and hardware, back-office software, and integrated technical solutions to restaurantsthe restaurant and retail includingindustries. The Government reporting segment provides intelligence, surveillance, and reconnaissance solutions and mission systems support to the United States Department of Defense and other Federal agencies. In addition, the financial statements include corporate operations, which are comprised of enterprise-wide functional departments.

Information as to the Company's reporting segments is set forth in the fast casual, quick serve and table service restaurant categories, and specialty retail outlets. These offerings include hardware and cloud and on-premise software applications utilized at the point-of-sale, back of store and corporate office, includes the Brink cloud-based point-of-sale software and the SureCheck solution, which provides food safety monitoring and intelligent checklist management." This segment also offers customer support including field service, installation, and twenty-four-hour telephone support and depot repair. The Government segment performs complex technical studies, analysis, and experiments, develops innovative solutions, and provides on-site engineering in support of advanced defense, security, and aerospace systems.  This segment also provides expert on-site services for operating and maintaining U.S. Government-owned communication assets.

Informationtables below; information noted as “Other” primarily relates to the Company’s corporate home office operations.

20

Information as to the Company’s segments is set forth below. Amounts below exclude discontinued operations (in thousands).
(in thousands)Three Months
Ended September 30,		Nine Months Ended
September 30,
 2020201920202019
Net Revenues:    
Restaurant/Retail$37,347 $29,841 $102,389 $87,663 
Government17,500 15,539 52,881 46,646 
Total$54,847 $45,380 $155,270 $134,309 
Operating loss:    
Restaurant/Retail$(2,763)$(4,432)$(16,530)$(12,029)
Government1,774 809 4,302 3,690 
Other(9)(368)57 (1,206)
Total(998)(3,991)(12,171)(9,545)
Other expense, net(486)(401)(1,250)(1,205)
Interest expense, net(2,235)(1,588)(6,318)(2,978)
Loss on extinguishment of debt0 0 (8,123)0 
Loss before benefit from income taxes$(3,719)$(5,980)$(27,862)$(13,728)
Depreciation, amortization and accretion:    
Restaurant/Retail$1,984 $824 $5,790 $2,893 
Government80 17 136 54 
Other1,388 1,031 4,226 2,046 
Total$3,452 $1,872 $10,152 $4,993 
Capital expenditures including software costs:    
Restaurant/Retail$1,324 $838 $5,814 $2,679 
Government415 0 849 176 
Other276 480 398 1,780 
Total$2,015 $1,318 $7,061 $4,635 
Revenues by country:    
United States$51,036 $44,380 $148,293 $127,962 
Other Countries3,811 1,000 6,977 6,347 
Total$54,847 $45,380 $155,270 $134,309 

  
Three Months
Ended September 30,
  
Nine Months
Ended September 30,
 
  2017  2016  2017  2016 
Revenues:            
Restaurant/Retail $34,023  $38,377  $133,288  $105,413 
Government  14,915   23,115   43,776   64,042 
Total $48,938  $61,492  $177,064  $169,455 
                 
Operating (loss) income:                
Restaurant/Retail $(3,559) $1,091  $603  $(209)
Government  1,267   1,417   4,364   4,720 
Other  (304)  (1,687)  (2,568)  (3,273)
   (2,596)  821   2,399   1,238 
Other expense, net  (70)  (38)  (264)  (318)
Interest (expense) income, net  (39)  (12)  (84)  20 
(Loss) income before provision for income taxes $(2,705) $771  $2,051  $940 
                 
Depreciation, amortization and accretion:                
Restaurant/Retail $886  $740  $2,481  $2,228 
Government  5   10   16   29 
Other  62   861   308   957 
Total $953  $1,611  $2,805  $3,214 
                 
Capital expenditures including software costs:                
Restaurant/Retail $1,121  $787  $3,452  $2,437 
Government  -   47   7   86 
Other  457   681   3,764   1,196 
Total $1,578  $1,515  $7,223  $3,719 
                 
Revenues by country:                
United States $44,418  $58,092  $163,606  $155,882 
Other Countries  4,520   3,400   13,458   13,573 
Total $48,938  $61,492  $177,064  $169,455 
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The following table represents identifiable long-lived tangible assets by businessreporting segment. Amounts below exclude discontinued operations (in thousands).

(in thousands)September 30, 2020December 31, 2019
Restaurant/Retail$1,822 $1,987 
Government226 272 
Other11,762 12,093 
Total$13,810 $14,352 
  
September 30,
2017
  
December 31,
2016
 
       
Restaurant/Retail $79,004  $87,672 
Government  7,679   6,504 
Other  28,050   29,873 
Total $114,733  $124,049 


The following table represents identifiable long-lived tangible assets by country based on the location of the assets. Amounts below exclude discontinued operations (in thousands).

(in thousands)September 30, 2020December 31, 2019
United States$13,736 $14,260 
Other Countries74 92 
Total$13,810 $14,352 
  
September 30,
2017
  
December 31,
2016
 
United States $100,932  $110,369 
Other Countries  13,801   13,680 
Total $114,733  $124,049 


The following table represents goodwill by reporting segment. Amounts below exclude discontinued operations (in thousands).

  
September 30,
2017
December 31,
2016
 
Restaurant/Retail $10,315  $10,315 
Government  736   736 
Total $11,051  $11,051 
11
21

(in thousands)September 30, 2020December 31, 2019
Restaurant/Retail$40,478 $40,650 
Government736 736 
Total$41,214 $41,386 
Table of Contents

Customers comprising 10% or more of the Company’s total revenues excluding discontinued operations,by reporting segment are summarized as follows:

Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Restaurant/Retail reporting segment:    
Dairy Queen13 %5 %13 %7 %
Yum! Brands, Inc.11 %14 %10 %14 %
McDonald’s Corporation6 %10 %7 %10 %
Government reporting segment: 
U.S. Department of Defense32 %34 %34 %35 %
All Others38 %37 %36 %34 %
 100 %100 %100 %100 %
  
Three Months
Ended September 30,
  
Nine Months
Ended September 30 ,
 
  2017  2016  2017  2016 
Hospitality segment:
            
McDonald’s Corporation  23%  26%  35%  23%
Yum! Brands, Inc.  17%  10%  14%  11%
Government segment:
                
U.S. Department of Defense  31%  38%  25%  38%
All Others  29%  26%  26%  28%
   100%  100%  100%  100%


No other customer within All Others represented 10% or more than 10% of the Company’s total revenue for the three and nine months ended September 30, 20172020 or 2016.2019. The above table should be read in conjunction with the revised table presented in the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on May 11, 2020.


Note 1013 — Fair Value of Financial Instruments


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 −Level 1 — quoted prices in active markets for identical assets or liabilities (observable)
Level 2 −  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 −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 Company’s financial instruments primarily consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments and deferred compensation assets and liabilities. ForThe carrying amounts of cash and cash equivalents, trade receivables and trade payables the carrying amounts of these financial instruments as of September 30, 20172020 and December 31, 20162019 were considered representative of their fair values.  The estimated fair value of the Company’s long-term debt2024 Notes and line of credit2026 Notes at September 30, 20172020 was $20.7 million and December 31, 2016 was based on variable$144.7 million, respectively. The valuation techniques used to determine the fair value of 2024 Notes and fixed interest rates at September 30, 2017 and December 31, 2016, respectively, for new issues with similar remaining maturities and approximates2026 Notes are classified within Level 2 of the respective carrying values at September 30, 2017 and December 31, 2016.fair value hierarchy.


The deferred compensation assets and liabilities primarily relate to the Company’s deferred compensation plan, which allows for pre-tax salary deferrals for certain key employees. Changes in the fair value of the deferred compensation liabilities are derived using quoted prices in active markets of the asset selections made by the participants. The deferred compensation liabilities are classified within Level 2, the fair value classification as defined under U.S. GAAP,FASB ASC 820: "Fair Value Measurements", because their inputs are derived principally from observable market data by correlation to the hypothetical investments. The Company holds insurance investments to partially offset the Company’s liabilities under its deferred compensation plan, which are recorded at fair value each period using the cash surrender value of the insurance investments.


The amounts owed to employees participating in the deferred compensation plan at September 30, 2020 was $3.0 million compared to $3.2 million at December 31, 2019 and is included in other long-term liabilities on the balance sheets.

The Company has obligations,uses a Monte-Carlo simulation to be paid in cash, todetermine the former owners of Brink Software Inc., based on the achievement of certain conditions defined in the September 18, 2014 stock purchase agreement governing the Brink Software, Inc. acquisition.  The fair value of this contingent consideration payable was estimated usingthe Earn-Out liability associated with the Restaurant Magic Acquisition. This simulation uses probability distribution for each significant input to produce hundreds or
22

thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring, as such it is classified as Level 3. Significant increases or decreases to these inputs in isolation could result in a discounted cash flow method, with significant inputs that are not observable insignificantly higher or lower liability. Ultimately, the marketliability will be equivalent to the amount paid, and thus represents a Level 3the difference between the fair value measurement as definedestimate and amount paid will be recorded in ASC 820, Fair Value Measurements and Disclosures.earnings. The significant inputs in the Level 3 measurement not supported by market activity included the Company’s probability assessments of expected future cash flows relatedamount paid that is less than or equal to the Company’sliability on the acquisition date is reflected as cash used in financing activities in our consolidated statements of Brink Software Inc. duringcash 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 period, appropriately discounted consideringbeing recorded in the uncertainties associated withamount of $3.3 million during 2019. The liability for the obligation, and calculated in accordance withcontingent consideration was established at the termstime of the definitive agreement.acquisition and is evaluated quarterly based on additional information as it becomes available. During the three and nine months ended September 30, 2020, an adjustment of $2.3 million was recognized to reduce the contingent consideration liability to $1.0 million. Any change in the fair value adjustment is recorded in the earnings for that period as a component of that period.  ChangesOperating expense in the fair value of the contingent consideration obligations may result from changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations. Significant increases or decreases in the inputs noted above in isolation would result in a significantly lower or higher fair value measurements.condensed consolidated financial statements.
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The following table presents a summary of changes in fair value of the Company’s Level 3 assets and liabilities that are measured at fair value on a recurring basis, (in thousands), and are recorded as a component of other long-term liabilities on the consolidated balance sheet:

(in thousands)Level 3 Inputs
Liabilities
Balance at December 31, 2019$3,340 
New level 3 liability0 
Total gains reported in earnings2,310 
Settlement of Level 3 liabilities0 
Balance at September 30, 2020$1,030 
  Level 3 Inputs 
  Liabilities 
Balance at December 31, 2016 $4,000 
New level 3 liability  - 
Total gains (losses) reported in earnings  - 
Transfers into or out of Level 3  - 
Balance at September 30, 2017 $4,000 


Note 1114 — Related Party TransactionsSubsequent Events


TheOn October 5, 2020, the Company leases its corporate wellness facilitycompleted an underwritten public offering (the "offering"), pursuant to related partiesthe Company's universal shelf registration statement filed with the SEC on September 30, 2020 (Registration No. 333-249142), of 3,350,000 shares of common stock at a current rateprice to the public of $9,775$38.00 per month. Theshare, resulting in $121.7 million of proceeds, net of underwriting discounts and commissions and offering expenses payable by the Company. In connection with the offering, the Company receives a complimentary membership to this facility which is provided to all employees.  The Company received rental income amounting to $29,325 and $87,975 for eachgranted Jeffries LLC, the underwriter of the threeoffering, a 30 day option to purchase up to an additional 502,500 shares of common stock at the same public offering price, less underwriting discounts and nine months ended September 30, 2017commissions. On November 3, 2020, Jeffries, LLC partially exercised its option and September 30, 2016.
In October 2016, the Company entered into a statementpurchased 266,022 shares of work (“SOW”) with Xpanxion LLC for software development services. For the nine months ended September 30, 2017 we incurred approximately $1.0common stock, resulting in an additional $9.6 million of proceeds, net of underwriting discounts and commissions and offering expenses to Xpanxion, LLC underpayable by the SOW. The Company did not incur any expenses to Xpanxion during the nine month period ended September 30, 2016. Until his retirement on June 30, 2017, Paul Eurek, a director of the Company, was President of Xpanxion LLC.Company.

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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 Technology Corporation,”“PAR”, “Company,” “we,” “us” and “our” mean PAR Technology Corporation and allits consolidated subsidiaries, included in our unaudited interim consolidated financial statements.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 Consolidated Financial Statementsfinancial statements and the Notesnotes thereto included under Part I, Item 1 of this Quarterly Report.  See also, “Forward-Looking Statements” below.

Forward-Looking Statements

This Quarterly Report contains “forward-looking statements” withinand our audited consolidated financial statement and the meaning of Section 21Enotes thereto included under Part II, Item 8 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the Private 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: delays in new product development and/or product introduction; changes in customer base; because a significant portion of our revenue is derived from two customers, a significant fluctuation in our product or service offerings to one or both of these customers; product and service demands and competition; risks associated with the ongoing investigation into possible violations of the U.S. Foreign Corrupt Practices Act (“FCPA”) and similar laws, including the cost of such investigation and any sanctions, fines or remedial measures that may be imposed by the U.S. Department of Justice (“DOJ”) or the U.S. Securities and Exchange Commission (“SEC”); expenses related to remedial measures; risks associated with our identified material weaknesses in internal control over financial reporting and any other failure to maintain effective internal controls; and the other risk factors discussed in our most recentCompany's Annual Report on Form 10-K and other filingsfor the fiscal year ended December 31, 2019 filed with the SEC. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities law.SEC on March 16, 2020 ("2019 Annual Report"). See also, “Forward-Looking Statements”.


Overview

Our management technology solutions for thePAR Technology Corporation operates two distinct reporting segments: our Restaurant/Retail segment, featureswhich provides point-of-sale (POS) software and hardware, back-office software, and integrated technical solutions to the retail and restaurant industries, and our Government segment, which provides intelligence, surveillance, and reconnaissance solutions and mission systems support to the U.S. Department of Defense ("DoD") and other Federal agencies.
Our Restaurant/Retail segment is a leading provider of software and hardware 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 on-premise software applications,our point-of-sale hardware platforms, and related installation, technical, and maintenance support services tailored for the needsfront-of-house, and our leading back-office cloud software - Data Central - for the back-of-house.
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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.

Our POS integrated solutions also includes a comprehensive offering of wireless headsets for drive-thru order taking. This product offering is of particular relevance during the COVID-19 pandemic as it provides our customers with another means to deliver their products and serve their customers, even in these uncertain times. Additionally, our recently released merchant services offering, PAR Payment Services, provides restaurants with card payment processing capabilities, which we service and retailers.  support.

We believe our cloud software solutions, hardware offerings and services uniquely position 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 segment provides technical expertise in contract development of advanced systems and software solutions for the U.S. Department of DefenseDoD and other federalFederal agencies, as well as management technologysatellite, communication, and communicationsIT mission systems support services toat a number of U.S. Government facilities both in the U.S. Department of Defense.

Our products sold in the Restaurant/Retail segment are utilized in a wide range of applications by customersand worldwide.  We face competition across all categories in the Restaurant/Retail segment in which we compete based on product design, innovative features and functionality, quality and reliability, price, customer service, and delivery capability. Our strategy is to provide complete integrated management technology solutions, supported by industry leading customer service.  Our research and development efforts are focusedbuild upon our Government segment's sustained performance on timely identifying changes in customer needs and/or relevant technologies, to rapidly and effectively develop innovative new products and enhancements to our existing products that meet and exceed customer requirements.

Our strategy is to expand our Restaurant/Retail business by continuing to invest in our existing products - Brink POS and SureCheck - including the development of enhancements to our existing software applications and hardware platforms and the development of new and innovative cloud based software applications. To support the growth of our products, we continue to expand our direct sales force and third-party channel partners.
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Currently, PAR’s primary market is the quick serve restaurant category and hardware sales to tier one customers in that category. Consistent with our strategy to expand our product offerings beyond the restaurant/retail markets, we continue to focus on growing and expanding our software offerings, including our cloud software as a service (SaaS) and related hardware and support services. As we implement our strategies, we continuously monitor the trends in the markets within which we currently operate and the markets in which we intend to operate. We know POS hardware is becoming a commodity, as more POS devices (tablets, kiosks and bring your own device) are introduced, competition will continue to increase, driven by pricing, scalability, functionality, and economies of scale, resulting in smaller margins. Our strategy acknowledges this trend, and we intend to grow our recurring revenues from software contracts, specifically SaaS, reducing the impact of this commoditization of POS hardware.

The strategy for our PAR Government segment is to build on our sustained outstanding performance of 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 the U.S. Department of DefenseDoD and other federalFederal 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 the U.S. Department of DefenseDoD and other federalFederal 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 the PARour Government segment.


Internal Investigation;Recent Developments Affecting Our Business - COVID 19 Update.


As previously disclosed,The COVID-19 pandemic continues to affect the U.S. and global economies affecting our Audit Committee has been overseeing an internal investigation by outside counsel into certain import/exportbusiness, operations, and sales documentation activities at our Chinafinancial results, and Singapore offices, and whether these activities were improper and in violationthe restaurant industry generally. The effects of the FCPACOVID-19 pandemic, including the effects of responses of governmental authorities and other applicable laws,companies to reduce the spread of the virus, such as shutdowns or reduced capacity restrictions, travel restrictions, and certainwork-from-home requirements or practices, are expected to continue for the foreseeable future as economies and businesses transition to a new normal.

Early in the COVID-19 pandemic, we took a number of actions to mitigate its impact on our employees and business, including limiting travel to essential-business only, implementing work-from-home policies and augmenting shifts for our production employees, and at the same time introduced new product offerings to promote social distancing, including PARkit, a virtual kiosk, virtual drive-thru and/or on-line ordering solution, and self-install hardware product configurations, offered subscription discounts and deferred payment arrangements to customers and continued to invest in our Code of Business ConductBrink POS platform and Ethics.adjacent opportunities to position our business to the new normal and seek new opportunities. We voluntarily notified,also implemented cost saving measures, including reductions in discretionary spending, a non-essential position hiring freeze, a reduction in workforce, employee furloughs and temporary salary reductions. While we continue to manage our business in response to the COVID-19 pandemic, we are fully cooperating with,unable to accurately predict the SEC andultimate impact that the DOJ of these activities. On May 1, 2017, we received a subpoena from the SEC for documents relating to the investigation. The SEC’s investigation is a non-public, fact-finding inquiry. During the nine months ended September 30, 2017, we recorded $2.3 million of expenses relating to our internal investigation and the SEC subpoena. It is not clear what action, if any, the SEC intends to take with respect to the information it gathers pursuant to its subpoena. If the SEC, or the DOJ or other governmental agency (including foreign governmental agencies) determine that violations of certain laws or regulations occurred, then we could be exposed to a broad range of civil and criminal sanctions, including injunctive relief, disgorgement, fines, penalties, modifications toCOVID-19 pandemic will have on our business, practices, includingoperations, financial condition, financial results or prospects. For additional information on the termination or modification of existing business relationships,various risks posed by the imposition of compliance programs andCOVID-19 pandemic, please read “Risk Factors” in Part II, "Item 1A. Risk Factors" in this Quarterly Report.

Further, the retention of a monitor to oversee our future compliance. While we cannot currently reasonably estimate the potential liability arising out of the China and Singapore matters or the SEC investigation, the imposition of sanctions, fines or remedial measures could haveCOVID-19 pandemic has not had a material adverse effectimpact on our Government business prospects, reputation, financial condition, liquidity, resultsto date. We have continued our work-from-home arrangements for non-essential employees and on-site operations continue to be accomplished through telework and a staggered staffing approach that achieves the intent and benefits of operations or cash flows.social distancing. For contracts requiring specialized equipment, we use our established off-site lab environment permitting the safe continuation of development and testing activities until government facilities reopen.



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Results of Operations —


Three Months Endedmonths ended September 30, 20172020 Compared to Three Months Endedmonths ended September 30, 20162019


We reported revenues of $48.9$54.8 million for the quarter ended September 30, 2017, a decrease2020, an increase of 20.4%20.7% from the $61.5$45.4 million reportedrecorded for the quarter ended September 30, 2016.2019.  Our net loss from continuing operations was $1.5$3.7 million, or ($0.10)$0.20 per diluted share, for the third quarter of 2017 versus2020, compared to a net incomeloss of $0.5$5.9 million, or $0.03$0.36 per diluted share, for the same periodthird quarter of 2019. The favorable comparison is primarily driven by a $2.3 million reduction in 2016.the Earn-Out liability associated with the Restaurant Magic Acquisition and inorganic growth resulting from the Drive-Thru and Restaurant Magic Acquisitions which absorbed an increase in research and development costs associated with our Restaurant/Retail segment software platforms and an increase in interest expense attributable to the 2026 Notes.


Operating segment revenue is set forth below:
Three Months Ended September 30,$%
(in thousands)20202019variancevariance
 Restaurant/Retail
Core *$20,967 $18,208 2,759 15 %
Brink **16,380 10,898 5,482 50 %
SureCheck— 734 (734)(100)%
 Total Restaurant Retail$37,347 $29,840 $7,507 25 %
 Government
Intelligence, surveillance, and reconnaissance$8,945 $7,057 1,888 27 %
Mission Systems8,083 8,444 (361)(4)%
Product Services472 37 435 1,176 %
 Total Government$17,500 $15,538 $1,962 13 %

* CORE includes $5.7 million of Drive-Thru revenue for 2020
** Brink includes $2.2 million of Restaurant Magic revenue for 2020

Product revenues were $20.7$20.5 million for the quarter ended September 30, 2017, a decrease2020, an increase of 19.6%28.9% from the $25.8$15.9 million recorded for the same period in 2016.  This decrease wasquarter ended September 30, 2019, primarily driven by an increase of $3.2 million in revenue from our Core customers, driven by drive-thru product revenue for the quarter ended September 30, 2020 of $5.3 million partially offset by a wind downreduction in legacy Core hardware sales. Product revenue related to Brink for the quarter ended September 30, 2020 was $6.7 million, an increase of major project installations31.2% from $5.1 million recorded for our hardware solutions, with a tier one customerthe quarter ended September 30, 2019. The favorable Brink product revenue results were driven by the increase in our Restaurant/Retail segment.site activations.
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Service revenues were $13.3$16.9 million for the quarter ended September 30, 2017,2020, an increase of 5.5%21.5% or $3.0 million from the $12.6$13.9 million reportedrecorded for the same period in 2016,quarter ended September 30, 2019, primarily due to the addition of revenues derived from the Restaurant Magic business and the growth in Brink recurring software revenues. Service revenue associated with Brink includes recurring software revenue of $5.6 million, an increase in installation services driven by an increase in tier one  productof 30.2% from $4.3 million recorded for the quarter ended September 30, 2019. Restaurant Magic service revenue and continued deploymentsincludes recurring software revenue of our Brink POS software.$2.2 million. Drive-thru service revenue for the quarter ended September 30, 2020 was $0.4 million.


Contract revenues were $14.9$17.5 million for the quarter ended September 30, 2017,2020, an increase of 12.9% or $2.0 million from $15.5 million recorded for the quarter ended September 30, 2019.  The favorable increase in contract revenue from our Government reporting segment was driven by contracts entered into during the first half of 2020 relating to intelligence, surveillance, and reconnaissance ("ISR") solutions, with $2.5 million more in backlog compared to $23.1 million reported for the same period in 2016, a decreasethird quarter of 35.5%.  The decrease reflects the execution of our transition away from high revenue, low margin awards associated with Project Management Office (“PMO”) contracts to move value-added contracts within the Intelligence, Surveillance, and Reconnaissance (“ISR”) line of business.2019.


Product margins for the quarter ended September 30, 20172020 were 23.4%21.9%, compared to 28.4% for the same period in 2016. Product margins22.9%, recorded for the quarter included inventory reserve adjustments of $0.7 million, unfavorably impacting margins by 360 basis points.ended September 30, 2019, primarily due to unfavorable product mix.


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Service margins for the quarter ended September 30, 20172020 were 24.1%33.3%, compared to 28.9%32.0% recorded for the same period in 2016. Service margins for the quarter ended September 30, 2017 included an adjustment to service costs of $0.4 million unfavorably impacting margin2019, primarily driven by 316 basis points.a shift in sales mix that resulted from our M&A activity, with the Restaurant Magic Acquisition and the Drive-Thru Acquisition.

Contract margins for the quarter ended September 30, 20172020 were 8.8%9.0%, compared to 7.0% for the same period in 2016.   Our favorable margin rate was primarily driven by a continued shift in revenues from PMO to the higher value added product offerings by our Government segment of ISR and Mission Support.
Selling, general and administrative (SG&A) expenses5.8% for the quarter ended September 30, 2017 were $9.1 million, an2019, primarily due to the increase of 4.4%in Product Services revenue and increased profitability across several contracts in Mission Systems compared to the $8.7quarter ended September 30, 2019.

Selling, General, and Administrative ("SG&A") expenses increased to $10.5 million for the quarter ended September 30, 2016. The increase is primarily due to investment in personnel to support the current and future growth in our Brink & SureCheck products.  SG&A expenses for the quarter ended September 30, 2017 included $0.7 million related to the investigation of conduct at our China and Singapore offices
Research and development (R&D) expenses were $2.72020 from $9.5 million for the quarter ended September 30, 2017, a decrease2019, an increase of 6.9%10.5%. The increase was primarily driven by an additional $0.9 million of SG&A expense from $2.9the Restaurant Magic and Drive-Thru Acquisitions.
Research and Development ("R&D") expenses were $4.2 million for the same period in 2016.

During each of the quartersquarter ended September 30, 2017 and2020, an increase of $0.8 million from $3.4 million for the quarter ended September 30, 2016,2019, driven by an increase of $1.5 million in Brink development and $0.6 million in Restaurant Magic development, partially offset by the SureCheck divestiture and an increase in capitalized software.

For the quarter ended September 30, 2020, we recorded $0.2 million of amortization expense associated with acquired identifiable non-developed technology intangible assets fromacquired in the 2014 acquisitionDrive-Thru Acquisition and the Restaurant Magic Acquisition; there was no comparable expense for the three months ended September 30, 2019. Amortization expense associated with identifiable developed technology intangible assets are accounted for as cost of Brink Software Inc.sales within service costs of sales.


OtherAlso included in Operating expense for the three-months ended September 30, 2020 is a $2.3 million reduction to the fair value of the Earn-Out liability associated with the Restaurant Magic Acquisition. There was no comparable reduction to expense for the three months ended September 30, 2019.

In other expense, net, was $70,000we recorded $0.5 million for the quarter ended September 30, 2017,2020, compared to other expense, net, of $38,000 for the same period in 2016.  Other income/expense primarily includes, fair market value fluctuations of our deferred compensation plan, rental income, and foreign currency fair value adjustments.

Interest expense, net, was interest expense of $39,000$0.4 million recorded for the quarter ended September 30, 2017 compared to $12,0002019. 

In interest expense, net, we recorded $2.2 million for the quarter ended September 30, 2016.
The Company's effective tax rate benefit2020, compared to $1.6 million recorded for the third quarter ended September 30, 2019. This increase was impactedprimarily driven by a reductionan increase in convertible debt and associated interest expense related to the 2026 Notes issued in the forecasted effective tax ratefirst quarter of 2020. Interest expense, net includes $1.1 million of non-cash accretion of debt discount and amortization of issuance costs for the year due to losses in the quarter, resulting in a reversal in the third quarter of the excess rate recorded through the second quarter. Additionally, the Company recorded a discrete benefit in its tax provisionthree months ended September 30, 2020 compared with $0.9 million for the third quarter associated with stock based compensation.same period last year.
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Nine Months Ended September 30, 20172020 Compared to Nine Months Ended September 30, 20162019


We reported total revenues of $177.1$155.3 millionfor the nine months ended September 30, 2017,2020, an increase of 4.5%15.6% from the $169.5$134.3 million reportedrecorded for the nine months ended September 30, 2016.   Net income2019.  Our net loss from continuing operations was $1.7$23.6 million, or $0.11$1.30 per diluted share, for the nine months ended September 30, 2017 versus $0.62020, compared to net loss of $9.7 million, or $0.04$0.61 per diluted share, for the same nine-month periodnine months ended September 30, 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 $3.3 million of interest expense related to the 2024 Notes and the 2026 Notes, increased investment in 2016.sales, marketing and R&D within the Restaurant/Retail reporting segment, and increased depreciation and amortization expense related to the Restaurant Magic Acquisition and Drive-Thru Acquisition.


Operating segment revenue is set forth below:
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Nine months ended September 30,$%
(in thousands)20202019variancevariance
 Restaurant/Retail
Core *$56,233 $54,886 1,347 2 %
Brink **46,156 29,679 16,477 56 %
SureCheck— 3,096 (3,096)(100)%
 Total Restaurant Retail$102,389 $87,661 $14,728 17 %
 Government
Intelligence, surveillance, and reconnaissance$27,459 $20,603 6,856 33 %
Mission Systems24,618 25,177 (559)(2)%
Product Services804 865 (61)(7)%
 Total Government$52,881 $46,645 $6,236 13 %
* CORE includes $13.2 million of Drive-Thru revenue for 2020
** Brink includes $6.2 million of Restaurant Magic revenue for 2020

Product revenues were $90.6$51.4 million for the nine months ended September 30, 2017,2020, an increase of 30.8%11.5% from the $69.3$46.1 million recorded for the same nine-month period in 2016.  This increase wasnine months ended September 30, 2019, primarily driven by high volume ofincreased hardware attachment associated with installations attributable to Brink and hardware sales tofrom our tier one customers in our domestic operationsnew Drive-Thru product line and new accounts won through deployments of Brink POS and related hardware.  The increase waspartially offset by lower sales volume by our channel partners selling our Pixel Point product.a $9.6 million reduction in legacy Core hardware sales. Product revenue related to Brink for the nine months ended September 30, 2020 was $17.2 million, an increase of 24.0% from $13.8 million recorded for the nine months ended September 30, 2019. Drive-Thru product revenue for the nine months ended September 30, 2020 was $12.2 million.


Service revenues were $42.7$51.0 million for the nine months ended September 30, 2017,2020, an increase of 18.2%22.9% from the $36.1$41.5 million reportedrecorded for the same nine-month period in 2016.  This increase isnine months ended September 30, 2019, primarily due to growth in Brink and growth resulting from our acquisition of Restaurant Magic. Service revenue associated with Brink includes recurring software revenue of $15.7 million, an increase in installation services driven by an increase in tier one productof 29.8% from $12.1 million recorded for the nine months ended September 30, 2019. Restaurant Magic service revenue continued deploymentincludes recurring software revenue of our Brink POS, and an increase in our depot repair services.$6.2 million.


Contract revenues were $43.8$52.9 million for the nine months ended September 30, 2017, compared to $64.02020, an increase of 13.5% from $46.6 million reportedrecorded for the nine months ended September 30, 2019.  The favorable increase in revenue was driven by ISR solutions, which was driven by a higher backlog at the beginning of this year, which has continued to grow and is now $30 million greater than the same nine-monthnine month period in 2016, a decrease of 31.6%.  The decrease reflects the execution of our transition away from high revenue, low margin awards associated with PMO contracts to move value-added contracts within the Government segment’s ISR line of business.ended September 30, 2019.

Product margins for the nine months ended September 30, 20172020 were 25.1%20.5%, compared to 26.4 % for the same nine-month period in 2016.

Service margins were 30.3%24.3%, recorded for the nine months ended September 30, 2017, compared to 28.6% for the same nine-month period in 2016.  This increase was2019, primarily driven by favorable fixed cost absorption on increased volumeunfavorable product mix.

Service margins for the nine months ended September 30, 2020 were 33.6%, compared to 28.1% recorded for the nine months ended September 30, 2019, primarily driven by a shift in sales mix that resulted from our M&A activity with the Restaurant Magic Acquisition and continued revenue shifting toDrive-Thru Acquisition, and our SaaS offering.divestiture of Surecheck.


Contract margins for the nine months ended September 30, 20172020 were 10.3%7.8%, compared to 7.9%8.5% for the same nine-month periodnine months ended September 30, 2019, primarily due to an increase in 2016.  This increase was primarily driven by a shiftbusiness development investment in revenue from PMO to higher volume added product offerings of ISR and Mission Support in our Government segment. In addition, on a year to date basis, Mission Support and PMO showed improved margins in comparisonservices compared to the prior year duenine months ended September 30, 2019.

SG&A expenses increased to revenue mix within those respective product lines.

Selling, general and administrative (SG&A) expenses were $27.6$32.0 million for the nine months ended September 30, 2017, an increase of 18.5%, compared to the $23.32020 from $27.2 million for the nine months ended September 30, 2016.  This2019, an increase is due to costsof 17.7%. The increase was primarily driven by investments in sales & marketing$2.8 million of expenses associated with the Restaurant Magic Acquisition and corporate support including information technology, financeDrive-Thru Acquisition and management.increased depreciation and hosting costs associated with the implementation of our enterprise resource planning ("ERP") system.
                                   
Research and development (R&D)R&D expenses were $9.5$13.6 million for the nine months ended September 30, 2017,2020, an increase of 13.1% compared to the $8.4$4.4 million for the same period in 2016.  The  increase was primarily due to our increased investment in software development costs for products associated with our Brink POS and SureCheck software applications in the Restaurant/Retail segment.

For each of the nine months ended September 30, 2017 and 2016, the Company recorded $724,000 of amortization expense associated with acquired identifiable intangible assets from the acquisition of Brink Software Inc.

Other expense, net, was $264,000$9.2 million for the nine months ended September 30, 20172019, primarily driven by a $5.0 million increase in spending in Brink
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development, $0.9 million in Restaurant Magic development, and $318,000 forpartially offset by less SureCheck R&D and increased capitalization of software development.

For the same periodnine months ended September 30, 2020, we recorded $0.6 million of amortization expense associated with identifiable non-developed technology intangible assets acquired in 2016.  Other expense/income primarily includes, fair market value fluctuations of our deferred compensation plan, rental income,the Drive-Thru Acquisition and foreign currency fair value adjustments.

Interest (expense) income, net,the Restaurant Magic Acquisition; there was interestno comparable expense of $84,000 for the nine months ended September 30, 2017 compared2019. Amortization expense associated with identifiable developed technology intangible assets are accounted for as cost of sales within service costs of sales.

Also included in Operating expense for the nine-months ended September 30, 2020 is a $2.3 million reduction to interest incomethe fair value of $20,000the Earn-Out liability associated with the Restaurant Magic Acquisition. There was no comparable reduction to expense for the nine months ended September 30, 2016. The 2016 interest2019.

In Other expense, net, we recorded $1.3 million other income, represents interest recorded on the note receivable related to the sale of PSMS’ assets in November 2015, offset by interest charged on our short-term borrowings and from long-term debt.

The Company’s effective tax ratenet, for the nine months (year-to-date)ended September 30, 2020, compared to other expense, net, of $1.2 million recorded for the nine months ended September 30, 2019. 

In interest expense, net, we recorded $6.3 million for the nine months ended September 30, 2020, compared to $3.0 million recorded for the nine months ended September 30, 2019. This increase was 15.9% dueprimarily driven by interest related to an increase in convertible debt as a discreteresult of the issuance of the 2026 Notes in the first quarter of 2020. Interest expense, net includes $3.2 million of non-cash accretion of debt discount and amortization of issuance costs for the nine months ended September 30, 2020, compared to $1.6 million for the nine months ended September 30, 2019.

We recorded a Loss on extinguishment of debt of $8.1 million for the nine months ended September 30, 2020, as a result of the repurchase of $66.3 million of 2024 Notes in the first quarter of this year.

Net tax benefit associated with stock based compensation.of $4.3 million for the nine months ended September 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 $4.0 million for the nine months ended September 30, 2019 was driven by the $4.1 million deferred tax benefit impact of the 2024 Notes issuance in April 2019.

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Liquidity and Capital Resources


OurFor the nine months ended September 30, 2020 the Company’s primary sourcessource of liquidity have been cash flow from operations and borrowings under our Credit Facility with JP Morgan Chase Bank, N.A.was its sale of the 2026 Notes. Cash used in operating activities from continuing operations was $7.3$14.4 million for the nine months ended September 30, 2017,2020, compared to cash used in operating activities from continuing operations of $2.4 million for the same period in 2016.  This increase in cash used in operating activities was primarily driven by third quarter hardware deployed during 2017 associated with customer deposits received in the fourth quarter of 2016 from one of our tier one accounts and a reduction in accounts payable. For the nine months ended September 30, 2016 cash used in operations was mostly due to changes in working capital requirements, primarily associated with increases in inventory procurement and offset by an increase in accounts payable.

Cash used in investing activities from continuing operations was $7.2$9.6 million for the nine months ended September 30, 2017 versus $4.7 million2019. 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 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 from continuing operations for the nine months ended September 30, 2016.  In the nine months ended September 30, 2017, our capital expenditures of $3.9 million were primarily related to the implementation of our enterprise resource planning system and capital improvements made to our owned and leased properties. We capitalized $3.3 million in costs associated with investments in our Restaurant/Retail segment software platforms.  In the nine months ended September 30, 2016, our capital expenditures of $1.8 million were primarily related to our enterprise resource planning system, capital improvements to leased properties, as well as purchases of computer equipment associated with our software support service offerings.  We capitalized $1.9 million in costs associated with investments in our Restaurant/Retail segment software platforms. Additionally, the Company made an agreed upon working capital payment of $1.0 million in regard to the sale of the hotel/spa technology business unit.

Cash provided by financing activities from continuing operations was $6.8$6.9 million for the nine months ended September 30, 2017 versus cash provided by financing activities of continuing operations of $2.72020 compared to $11.6 million for the nine months ended September 30, 2016.  This change was a result2019.  Investing activities during the nine months ended September 30, 2020 included capital expenditures of borrowings on$6.4 million for developed technology costs associated with our line of credit under our Credit Facility, proceeds from stock options,Restaurant/Retail reporting segment software platforms compared to $2.3 million for software platforms and receipt of $4.2$2.4 million related to the 2015 sale of hotel/spa technology business. See Note 2 - Divestiture and Discontinued Operations -for implementation of our unaudited interim consolidated financial statements.ERP system for the nine months ended September 30, 2019. The nine months ended September 30, 2019 included the $7.0 million investment for the Drive-Thru Acquisition.  

On November 29, 2016,Cash provided by financing activities was $48.7 million for the nine months ended September 30, 2020, compared to cash provided by financing activities of $65.0 million for the nine months ended September 30, 2019.  The nine months ended September 30, 2020 included the $120 million issuance of the 2026 Notes partially offset by the repurchase of a majority of the 2024 Notes. The nine months ended September 30, 2019 included the $80 million issuance of the 2024 Notes.

In the early part of the fourth quarter of 2020, we together with certainraised additional capital through the issuance of 3,616,022 shares of our U.S. subsidiaries entered into a three-year credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”). The Credit Agreement providescommon stock, resulting in $131.3 million of proceeds, net of underwriting discounts and commissions, and offering expenses payable by the Company. See "Note 14 -Subsequent Events" under Part I, Item 1 of this Quarterly Report for revolving loans in an aggregate principal amount of up to $15.0 million, with availability thereunder equal to the lesser of (i) $15.0 million and (ii) a borrowing base (equal to the sum of 80% eligible accounts, 50% eligible raw materials inventory and 35% eligible finished goods inventory, with no more than 50% of total eligible inventory included in the borrowing base), less the aggregate principal amount outstanding (the “Credit Facility”). Interest accruesadditional information on outstanding principal balances at an applicable rate per annum determined, as of the end of each fiscal quarter, by reference to the CBFR Spread or the Eurodollar Spread based on the Company’s consolidated indebtedness ratio as at the determination date. The Credit Agreement contains customary affirmative and negative covenants, including covenants that restrict the ability of the Company and its subsidiaries to incur additional indebtedness, incur or permit to exist liens on assets, make investments, loans, advances, guarantees and acquisitions, consolidate or merge, pay dividends and make distributions, and financial covenants, requiring that the Company’s consolidated indebtedness ratio not exceed 3.0 to 1.0 and, a fixed charge coverage ratio of not less than 1.25 to 1.0 for each fiscal quarter. In August 2017, we entered into an Omnibus Amendment Number 1 to Loan Documents with JPMorgan Chase to provide the Company with more flexibility in its use of its assets and a waiver of any default relating to the location of certain collateral.  We were in compliance with the Credit Agreement as of September 30, 2017. On September 30, 2017, there was $1.5 million outstanding and up to $13.5 million available under the Credit Agreement.such offering.
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In addition to the Credit Facility, the Company has a mortgage loan, collateralized by certain real estate, with a balance of $0.4 million and $0.6 million as of September 30, 2017 and 2016, respectively.  This loan matures on November 1, 2019.  Interest is fixed at 4.00% through maturity.  The annual loan payment, including interest through November 1, 2019, is $0.2 million.


We expect our operatingavailable cash flows and available capacity under our Credit Facilitycash 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, and potential finesthe factors described above in this Part I, Item 2.
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"Management's Discussion and penalties that, while currently inestimable, could be material (see Item 1A – “Risk Factors”Analysis of Financial Condition and Results of Operations" and elsewhere in our Annualthe Quarterly Report on Form 10-K for the fiscal yearperiod ended DecemberMarch 31, 2016 for further discussion about2020, and in the potential adverse2019 Annual Report and our other filings with the SEC.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or obligations.

Contractual Obligations

The following table summarizes our contractual obligations at September 30, 2020 and the effect of such fines and penaltiesobligations are expected to have on our business).  Ifliquidity and cash flow in future periods.
(in thousands)Payments Due by Period
TotalLess Than 1 Year1-3 Years4-5 YearsMore Than 5 Years
Operating lease obligations$2,432 $1,132 $1,300 $— $— 
Other purchase obligations20,175 19,691 484 — — 
Debt obligations158,562 4,796 26,866 126,900 — 
$181,169 $25,619 $28,650 $126,900 $— 

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. Debt obligations includes both principal and interest payments. 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 required or otherwise elect to seek additional funding, we cannot be certain that such additional funding will be available on terms and conditions acceptable to us, if at all.not included in the table above.


Critical Accounting Policies and Estimates


Our unaudited interim consolidated financial statements are based on the application of U.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 isSignificant items subject to the use ofsuch estimates assumptions and the application of judgmentassumptions include revenue recognition, accounts receivable, inventories, accounting forstock-based compensation, the recognition and measurement of assets acquired and liabilities assumed in business combinations contingent consideration, goodwillat fair value, the carrying amount of property, plant and equipment including right-to-use assets and liabilities, identifiable intangible assets and taxes.goodwill, the measurement of liabilities and equity recognized for outstanding convertible notes, valuation allowances for receivables, inventories, and measurement of contingent consideration at fair value. Actual results could differ from those estimates. Our critical accounting policies have not changed materially from the discussion of those policies included under “Critical Accounting Policies and Estimates” in ourthe 2019 Annual Report on Form 10-K for the year ended December 31, 2016.Report.


Recently Issued Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized.  The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers.  The new guidance will be effective for the Company beginning January 1, 2018.

The standard permits the use of either the full retrospective or modified retrospective transition method. The Company expects to adopt the standard under the modified retrospective transition method, which may result in an adjustment to retained earnings for the cumulative effect, if any, of applying the standard to active contracts as of the adoption date. As this method does not result in recast of the prior year financial statements, ASC 606 requires the Company to provide additional disclosures during the year of adoption for the amount by which each financial statement line item is affected by adoption of the new standard and explanation of the reasons for significant changes.
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In 2017, the Company has prioritized the evaluation of the impact of the new standard on its revenue contracts, including consideration of the application of the new standard’s five-step model on the Company’s current revenue contracts, evaluating the new enhanced disclosure requirements and the data required to prepare such disclosures, and identifying appropriate changes to business processes, information technology systems, and internal controls, where necessary, to support revenue recognition and disclosure requirements under the new guidance. We have been evaluating the impact of applying the new standard’s five-step model on our Restaurant/Retail and Government revenue contracts, including identifying the distinct performance obligations within such arrangements and evaluating the best-estimate of selling prices and the timing of recognizing revenue for such performance obligations.  We continue to evaluate the potential quantitative impacts of adoption of the standard to the cumulative adjustment to be recorded on January 1, 2018, as well as to our continuing operations in 2018; however, we currently do not believe there will be effects that significantly alter the timing of revenue recognition.  We believe the most significant impacts of adoption of the new standard will be the expanded qualitative and quantitative disclosures required. The Company has made progress in its assessment of the impact of the new revenue recognition standard; however, efforts to quantify the impact upon adoption remain ongoing.
In February 2016, the FASB issued ASU 2016-02 impacting the accounting for leases intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. The revised standard will require entities to recognize a liability for its lease obligations and a corresponding asset representing the right to use the underlying asset over the lease term. Lease obligations are to be measured at the present value of lease payments and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the agreement is deemed to be a financing or operating lease. For finance leases, the leased asset is depreciated on a straight-line basis and recorded separately from the interest expense in the income statement resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. The ASU requires that assets and liabilities be presented or disclosed separately and classified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and quantitative information related to lease agreements. The new standard is effective for the Company beginning in the first quarter of 2019. We are currently evaluating the impact of these amendments on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01 clarifying the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update affect all reporting entities that must determine whether they have acquired or sold a business.  This guidance clarifies that to be a business there must also be at least one substantive process, and narrows the definition of outputs by more closely aligning it with how outputs are described in the new revenue recognition standard. The amendments in this update should be applied prospectively on or after the annual periods beginning after December 15, 2017, including interim periods within those periods. The adoption of this standards update is not expected to have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04 intended to simplify the subsequent measurement of goodwill. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment.  The standards update is effective on a prospective basis for annual and interim goodwill impairment testing performed in fiscal years beginning after December 15, 2019. The adoption of this standards update is not expected to have a material impact on our consolidated financial statements.
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In May 2017, the FASB issued an accounting standards update which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.  This update requires modification only if the fair value, vesting conditions or the classification of the award changes as a result of the change in terms or conditions. This guidance is effective for fiscal years beginning after December 15, 2017, and interim periods therein, with early adoption permitted. The adoption of this standards update is not expected to have a material impact on our consolidated financial statements.

Recently Adopted Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09 to simplify several aspects of the accounting for employee share-based payment transactions standard, including the classification of excess tax benefits and deficiencies and the accounting for employee forfeitures. The guidance was effective for the Company beginning in the quarter ended March 31, 2017 2017 at which time we adopted this new standard.  The updates to the accounting standard include the following:

Excess tax benefits and deficiencies no longer are recognized as a change in additional paid-in-capital in the equity section of the balance sheet, instead they are recognized in the income statement as a tax expense or benefit. In the statement of cash flows, excess tax benefits and deficiencies are no longer classified as a financing activity, instead they are classified as an operating activity.

Entities have the option to continue to reduce share-based compensation expense during the vesting period of outstanding awards for estimated future employee forfeitures or they may elect to recognize the impact of forfeitures as they actually occur. The Company will continue to reduce the share based compensation expense during the vesting period of outstanding rewards for estimated future forfeitures.

The ASU also provides new guidance to other areas of the standard including minimum statutory tax withholding rules and the calculation of diluted common shares outstanding. The adoption of this provision will be reflected prospectively in the financial statements and did not have a material impact.

The adoption of the new standard in the first quarter of 2017 did not have a significant impact on our unaudited interim consolidated financial statements.

In November 2015, the FASB issued new guidance related to the balance sheet classification of deferred taxes.  This standard requires an entity to classify all deferred tax assets, along with any valuation allowance, as noncurrent on the balance sheet. As a result, each jurisdiction will have one net noncurrent deferred tax asset or liability.  The Company adopted this standard in the first quarter of 2017, which resulted in the Company’s reclassification of deferred tax assets from current assets to non-current assets in the amount of $7.8 million for the nine months ended September 30, 2017 and December 31, 2016.

In July 2015, the FASB issued new guidance related to the measurement of inventory.  This standard changes the inventory valuation method from the lower of cost or market to the lower of cost or net realizable value for inventory valued under the first-in, first-out or average cost methods.  The implementation of the amended accounting guidance did not have a significant impact on our consolidated financial statements.
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk


Not required.Required.


Item 4.
Controls and Procedures


Internal Investigation; Material Weaknesses

As previously disclosed, our Audit Committee has been overseeing an internal investigation by outside counsel focused on whether certain import/export and sales documentation activities at our China and Singapore offices were improper and in possible violation of the FCPA and other applicable laws, and certain of our policies, including our Code of Business Conduct and Ethics. Based on the investigation findings to date, we discovered that certain members of our China and Singapore staff participated in or were aware of improper activities in China and Singapore, involving the improper bypassing of applicable customs laws of various countries. Such activities in China and Singapore included the failure to properly label items for import into various non-U.S. countries and the failure to properly document the declared value of certain items exported to various non-U.S. countries, as well as questionable payments made to customs officials in China without sufficient documentation to evidence or confirm the legitimacy of their purpose. The investigation also revealed that certain members of upper management knew or should have known of the questionable conduct, but failed to take action to prevent or correct such conduct.

Notwithstanding remedial actions taken through September 30, 2017, our management concluded that the material weaknesses identified as a result of the investigation and described below, continue to exist as of September 30, 2017. Specifically,
·we did not maintain a control environment that effectively promoted, maintained, and/or supported the control consciousness of employees or a culture of adequate and prompt reporting of information internally;

·we failed to maintain sufficient monitoring activities to ensure compliant
Item 4.
Controls and consistent global practices and procedures and timely detection of deviations, allowing for timely corrective action; andProcedures

·our policies, procedures, and training were insufficient as to procurement and sales activities, including insufficient documentation involving arrangements with third parties, knowledge of, and compliance with, import/export, customs and similar laws and regulations of international jurisdictions and the FCPA, including deficiencies in our training.

Evaluation of Disclosure Controls and Procedures


Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the design and operating effectiveness of our disclosure controls and procedures (as defined in RuleRules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2017.2020. Based on that evaluation, and as a result of the material weaknesses in our internal control over financial reporting previously reported and described above, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2017. However, it has been determined that no material adjustments, restatements, or other amendments to our previously issued financial statements are required.2020.
Remediation Efforts to Address Material Weaknesses.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

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As we previously disclosed, we have developed and we have begun to implement

Changes in Internal Control Over Financial Reporting.

There were no changes in our internal control over financial reporting to remediate our material weaknesses;(as defined in Rules 13a-15(f) and we are currently implementing our comprehensive compliance program which is focused on both domestic and international anti-bribery, trade control, and other laws, rules, and regulations, and includes new and revised policies. These additional measures are intended to address15d-15(f) under the above deficiencies and ensure a continuous and effective control environment that not only encourages, but demands compliance and provides processes and procedures for the timely reporting of necessary and/or required information to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

We caution that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Controls Over Financial Reporting.

In evaluating whether there were any reportable changes in our internal control over financial reportingExchange Act) during the quarter ended September 30, 2017, we determined that, other than the changes described above under “Remediation Efforts to Address Material Weaknesses”, there were no changes in internal control over financial reporting during the quarter ended September 30, 20172020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, we do anticipate further changes will be implemented to remedy the material weaknesses identified above.




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Part II - Other Information


Item 1.
Legal Proceedings


The information in Note 811 – Contingencies, to the unaudited interim consolidated financial statements, is responsive to this Item and is incorporated by reference herein.


Item 1A.
Risk Factors


There have been no material changesThe risks described in the “Risk Factors” section of our risk factors from those disclosed2019 Annual Report, as amended and supplemented by the risks described in Part I, Item 1A. Risk Factors, inthe “Risk Factors” section of our AnnualQuarterly Report on Form 10-K10-Q for the fiscal yearquarter ended DecemberMarch 31, 2016, filed with2020, including the SEC on April 17, 2017,discussions of the COVID-19 pandemic, as further supplemented by the disclosure in Part II, Item 1A Risk Factors,risks described in our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, and as amended and supplemented by this Quarterly Report, including the risks below, remain current in all material respects.

The COVID-19 pandemic has had and is expected to continue to have a material adverse effect on our business, operations, financial condition and financial results for the foreseeable future.

As previously disclosed in our 2019 Annual Report and our other filings with the SEC, 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 impact on our supply chain, including increasing safety stock inventory and the use of alternative sources when possible. In late March 31, 2017, filed May 15, 2017.2020, we began seeing the impact of the COVID-19 pandemic on all aspects of our Restaurant/Retail reporting segment; and beginning the quarter ended June 30, 2020, we began to experience the adverse effects of the COVID-19 pandemic on our business, primarily due to customer store closures, changes in product and service offerings and delivery formats, delayed product adoptions, reduced or delayed software and hardware deployments, and customer payment delays or defaults.

We continue to actively manage our business to respond to the uncertainties and risks created by the COVID-19 pandemic and the continuously evolving science and government and consumer responses. The extent to which the COVID-19 pandemic will continue to impact our business, operations, financial condition and financial results depends on future developments that are highly uncertain and cannot be predicted, including the geographic spread of the virus, the overall severity of the disease, the duration of the pandemic, the measures taken, or to be taken, by various governmental authorities in response to the pandemic (such as quarantines, shelter-in-place orders and travel restrictions) and the possible further impacts on the global economy. There can be no assurance that the COVID-19 pandemic will not continue to have a material and adverse effect on our business and financial results during any quarter or year in which we are affected.

We may be subject to claims by third parties for breach of contract and infringement of intellectual property and/or proprietary rights.

Third parties may assert claims that our software, hardware platforms, or technology infringe, misappropriate, or otherwise violate their intellectual property or other proprietary rights. Third parties may also assert that our sale of certain products require the payment of license fees to them. Such claims may be made by our competitors seeking to obtain a competitive advantage or by other parties, including existing licensors. Additionally, in recent years, non-practicing entities have begun purchasing intellectual property assets for the purpose of making claims of infringement and attempting to extract settlements from companies. The risk of claims may increase as the number of software products - in particular POS cloud software products - that we offer and competitors in our market increase and overlaps occur. Any such claims, regardless of merit, resulting in litigation could result in substantial expenses, divert the attention of management, cause significant delays in introducing new or enhanced services or technology, materially disrupt the conduct of our business, and have a material adverse effect on our business, financial condition, and results of operations. In September 2020, we were notified by one of our business partners of a claim for non-payment of royalties due under an existing license agreement; while we believe we have paid all royalties due, we will need to allocate resources to resolve this claim.

Item 2.
Unregistered Sales of Equity Securities and Use Ofof Proceeds


Under our equity incentive plans, recipients of restricted stock grants must pay us, in cash, the par value for each share granted. If the vesting requirements are not satisfied, we will repurchase the forfeited shares at par value. In addition,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. When we withhold these shares, we are
31

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 nine months ended September 30, 2017, 1,7142020, 33,613 shares were purchased at an average price of $9.67$15.86 per share.


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Item 6.
Exhibits
Exhibit
Number		 
Incorporated by reference into
this Quarterly Report on Form 10-Q 
Date
Filed or
Furnished
Exhibit DescriptionFormExhibit No.
10.1 ††
Form 10-Q (File No. 00109720)10.28/7/2020
10.2 ††
Form 10-Q (File No. 00109720)10.38/7/2020
10.3Form 8-K (File No. 001-09720)1.110/1/2020
31.1  Filed herewith
31.2  Filed herewith
32.1  Furnished herewith
32.2  Furnished herewith
101.INSXBRL Instance Document  Filed herewith
101.SCHXBRL Taxonomy Extension Schema Document  Filed herewith
101.CALXBRL Taxonomy Extension Calculation Linkbase Document  Filed herewith
101.DEFXBRL Taxonomy Extension Definition Linkbase Document  Filed herewith
101.LABXBRL Taxonomy Extension Label Linkbase Document  Filed herewith
101.PREXBRL Taxonomy Extension Presentation Linkbase Document  Filed herewith
104Cover Page Interactive Data File (embedded within the Inline XBRL document)Filed herewith
Exhibit Index
Exhibit
Number
  
Incorporated by reference into
this Quarterly Report on Form 10-Q 
Date
Filed or
Furnished
Exhibit Description FormExhibit No.
      
10.1Omnibus Amendment Number 1 to Loan Documents dated August 10, 2017 among PAR Technology Corporation, ParTech, Inc., Ausable Solutions, Inc., PAR Government Systems Corporation, Rome Research Corporation, Brink Software, Inc and JPMorgan Chase Bank, N.A. 
Quarterly Report
on Form 10-Q
10.48/14/2017
      
31.1Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended   Filed herewith
      
31.2Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended   Filed herewith
      
32.1Certification of Principal Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350   Furnished herewith
      
32.2Certification of Principal Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350   Furnished herewith
      
101.INSXBRL Instance Document   Filed herewith
      
101.SCHXBRL Taxonomy Extension Schema Document   Filed herewith
      
101.CALXBRL Taxonomy Extension Calculation Linkbase Document   Filed herewith
      
101.DEFXBRL Taxonomy Extension Definition Linkbase Document   Filed herewith
      
101.LABXBRL Taxonomy Extension Label Linkbase Document   Filed herewith
      
101.PREXBRL Taxonomy Extension Presentation Linkbase Document   Filed herewith
†† Indicates management contract or compensatory plan or arrangement.
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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.

PAR TECHNOLOGY CORPORATION
(Registrant)
Date:November 13, 20176, 2020/s/ Bryan A. Menar
Bryan A. Menar
Chief Financial Officer
(PrincipalChief Financial and Accounting Officer
(Principal Financial Officer)

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Exhibit Index
Exhibit
Number
  
Incorporated by reference into
this Quarterly Report on Form 10-Q 
Date
Filed or
Furnished
Exhibit Description FormExhibit No.
      
10.1Omnibus Amendment Number 1 to Loan Documents dated August 10, 2017 among PAR Technology Corporation, ParTech, Inc., Ausable Solutions, Inc., PAR Government Systems Corporation, Rome Research Corporation, Brink Software, Inc and JPMorgan Chase Bank, N.A. 
Quarterly Report
on Form 10-Q
10.48/14/2017
      
31.1
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended   Filed herewith
      
31.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended   Filed herewith
      
32.1
Certification of Principal Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350   Furnished herewith
      
32.2
Certification of Principal Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350   Furnished herewith
      
101.INSXBRL Instance Document   Filed herewith
      
101.SCHXBRL Taxonomy Extension Schema Document   Filed herewith
      
101.CALXBRL Taxonomy Extension Calculation Linkbase Document   Filed herewith
      
101.DEFXBRL Taxonomy Extension Definition Linkbase Document   Filed herewith
      
101.LABXBRL Taxonomy Extension Label Linkbase Document   Filed herewith
      
101.PREXBRL Taxonomy Extension Presentation Linkbase Document   Filed herewith
26