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Item 5
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Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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Our common stock is listed on the New York Stock Exchange under the symbol “PAR”. According to the records of our transfer agent, as of March 13, 2018, there were 364 holders of record of our common stock. A substantially greater number of holders of our common stock are held in "street name" or by beneficial holders, whose shares of common stock of record are held by brokers, banks, and other financial institutions.The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported by the New York Stock Exchange:
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2017
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2016
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High
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Low
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High
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Low
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First Quarter
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$7.34
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$5.48
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$6.63
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$5.04
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Second Quarter
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9.19
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|
7.08
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|
6.86
|
|
4.35
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Third Quarter
|
11.09
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|
8.30
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|
5.52
|
|
4.83
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Fourth Quarter
|
11.79
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|
7.31
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5.58
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4.71
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We have never declared or paid cash dividends on our common stock. We currently intend to retain any future earnings for use in the operation of our business and do not intend to declare or pay any cash dividends in the foreseeable future. Any determination to pay dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors considers relevant, including any restrictive covenants in our credit facility that restrict the payment of dividends under certain circumstances.
Recipients of restricted stock awards have paid us cash equal to the par value of each share awarded. If the vesting requirements are not satisfied, we repurchase the forfeited shares at par value. In addition, employees may elect to have shares withheld 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 required to remit to the appropriate taxing authorities the market price of the shares withheld, which could be deemed a purchase of shares by us on the date of withholding. For the three months ended December 31, 2017, 2,294 shares were purchased at an average price of $9.37 per share.
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Item 6.
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Selected Financial Data
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Not Required.
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Item 7
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the Notes thereto included under Part II, Item 8 of this Annual Report. See also, “Forward-Looking Statements” in this Annual Report.
Overview
PAR’s management technology solutions for the Restaurant/Retail segment features cloud-based and on-premise software applications, hardware platforms, and related installation, technical, and maintenance support services tailored for the needs of restaurants and retailers. Our Government segment provides technical expertise in contract development of advanced systems and software solutions for the U.S. Department of Defense and other federal agencies, as well as management technology and communications support services to the U.S. Department of Defense.
Our products sold in the Restaurant/Retail segment are utilized in a wide range of applications by customers 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 focused 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 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.
Currently, PAR’s primary market is the quick serve restaurant category and hardware sales to tier 1 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 strategy, we continuously monitor the trends in the markets within which we currently operate and the markets in which we intend to operate.
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 secure service and solution contracts in expanded areas within the U.S. Department of Defense and other federal agencies. We believe our highly relevant technical competencies, intellectual property, and investments in new technologies provide opportunities to offer systems integration, products, and highly-specialized service solutions to the U.S. Department of Defense and other federal agencies. The general uncertainty in U.S. defense total workforce policies (military, civilian, and contract), procurement cycles, and spending levels for the next several years are factors we monitor as we develop and implement our business strategy for the PAR Government segment.
Results of Operations for the Years Ended December 31, 2017 and December 31, 2016
We reported revenues of $
232.6 million
for the year ended
December 31, 2017
, up 1.3% from
$229.7 million
reported for the year ended December 31,
2016
. Revenues from our Restaurant/Retail segment were $
171.6 million
for the year ended
December 31, 2017
, a 14.9% increase, compared to $
149.3 million
reported for the year ended December 31,
2016
. PAR’s Government segment reported revenues of $
61.0 million
for the year ended
December 31, 2017
, a decrease of
24.0%
from $
80.3 million
reported for the year ended December 31,
2016
. We reported a net loss from continuing operations of $
3.6 million
or $
0.23
per diluted share for the year ended
December 31, 2017
versus net income of $
2.5 million
or $
0.16
per diluted share for the year ended December 31,
2016
. For
2017
and
2016
, we reported net income from discontinued operations of $
0.2 million
or $
0.01
per share versus a loss of $
0.7 million
or $
0.05
loss per share, respectively. 2017 results of operations include a one-time adjustment to the value of the Company's deferred tax asset of $4.5 million due to the corporate income tax rate change included in the Tax Cuts and Jobs Act.
Product revenues were $
115.1 million
for the year ended
December 31, 2017
, an increase of
14.8%
from $
100.3 million
recorded in
2016
. This increase was primarily driven by higher revenues from our tier 1 customers in the first half of 2017.
Service revenues were $
56.5 million
for the year ended
December 31, 2017
, an increase of
15.1%
from $
49.1 million
reported for the year ended December 31,
2016
. The increase is attributable to the diversification of our revenue base, with higher recurring revenue from our software contracts; specifically, SaaS, installation services related to product sales, and other revenue streams generated from post contract support (“PCS”) offerings.
Contract revenues were $
61.0 million
for the year ended
December 31, 2017
, compared to $
80.3 million
reported for the year ended December 31,
2016
, a decrease of
24.0%
. This decrease was driven by lower volume within our PMO and Mission Systems' (MS) contracts, offset by an increase in value-added revenue on our Intelligence, Surveillance, and Reconnaissance (ISR), contracts.
Product margins for the year ended
December 31, 2017
, were
25.4%
, a decrease from
26.2%
for the year ended December 31,
2016
. The decrease in product margin was primarily due to an unfavorable product mix, as a result of increased peripheral hardware sales related to projects from tier 1 customers.
Service margins were
29.8%
for the year ended
December 31, 2017
, an increase from
27.4%
recorded for the year ended December 31,
2016
. This increase was primarily due to a favorable product mix shift to SaaS resulting from Brink's continued growth.
Contract margins were
11.0%
for the year ended
December 31, 2017
, compared to
8.1%
for the year ended December 31,
2016
. This increase was primarily driven by product mix shifting from PMO to the Company's value added business lines of ISR and Mission Systems in addition to improved margin rates in both ISR and Mission Systems.
Selling, general and administrative expenses were $
38.2 million
for the year ending
December 31, 2017
, compared to $
31.4 million
for the year ended December 31,
2016
. The increase is primarily attributable to investments in sales and support services infrastructure to support the growth of Brink and reinforcement of our corporate structure in IT, finance, and corporate management.
Research and development expenses were $
13.8 million
for the year ended
December 31, 2017
, compared to $
11.6 million
recorded for the year ended December 31,
2016
. This increase was primarily related to increased software development investments for Brink and SureCheck.
During the year ended
December 31, 2017
, we recorded $1.0 million of amortization expense associated with acquired identifiable intangible assets in connection with our acquisition of Brink Software, Inc. in September 2014. We recorded $1.0 million of amortization expense associated with these assets for the year ended December 31,
2016
.
Other income, net, was $
0.6 million
for the year ended
December 31, 2017
compared to other income, net of $
1.3 million
for the year ended December 31,
2016
. Other income/expense primarily includes fair value adjustments on contingent considerations, rental income, net of applicable expenses, foreign currency transactions gains and losses, fair value adjustments, fair value fluctuations of our deferred compensation plan and other non-operating income/expense. The primary driver of the decrease in other income is a $0.8 million insurance recovery in the fourth quarter 2016 related to the Company's former chief financial officer’s unauthorized transfers of funds.
Interest income (expense), net, represents interest charged on our short-term borrowings and from long-term debt. Interest expense, net was $
0.1 million
for the year ended
December 31, 2017
, as compared to interest income, net of $
0.1 million
for the year ended December 31,
2016
. This decrease is primarily associated with the accreted interest income of $0.2 million in 2016 related to the note receivable in connection with the Company's sale of its hotel/spa technology business operated by PAR Springer-Miller Systems, Inc., Springer-Miller International, LLC, and Springer-Miller Canada, ULC (collectively, “PSMS”) in November 2015 and higher interest expense as compared to
2016
, which is due to higher outstanding borrowings under the Credit Facility.
For the year ended
December 31, 2017
, our effective income tax rate was an expense of
1,032.8%
, mainly due to the one-time deferred tax asset adjustment for the rate change under the Tax Cuts and Jobs Act of 2017, compared to an expense of
31.4%
for the year ended December 31,
2016
. The variances from the federal statutory rate for
2017
were due to the mix of taxable income from the Company’s domestic and foreign jurisdictions, which is consistent with the variance in
2016
, and the impact of the adjustment for the rate change under the Tax Cuts and Jobs Act of 2017. Benefits from stock compensation and fair value adjustments on contingent consideration impacted the variance from the federal statutory rate for
2017
as well.
Liquidity and Capital Resources
The Company’s primary sources of liquidity have been cash flow from operations and borrowings under its Credit Facility with JP Morgan Chase Bank, N.A. Cash used in operating activities from continuing operations was
$0.1 million
for the year ended
December 31, 2017
, compared to cash generated of $
11.4 million
for the year ended December 31,
2016
. The change in cash activities resulted primarily from the $6.9 million of customer deposits in the fourth quarter 2016 being applied to revenue generated in 2017.
Cash used in investing activities from continuing operations was $
8.9 million
for the year ended
December 31, 2017
versus $
7.1 million
provided by investing activities for the year ended December 31,
2016
. In
2017
, capital expenditures of $
5.1 million
were primarily for PAR’s new ERP system and capital improvements made to our owned and leased properties. Capitalized software was $
3.8 million
and was associated with investments in Restaurant/Retail software platforms.
Cash provided by financing activities from continuing operations was $
6.1 million
for the year ended
December 31, 2017
versus cash used of $
2.2 million
for the year ended December 31,
2016
. In
2017
, the Company received proceeds from stock activity of
$
1.5 million
and $3.8 million related to the final installment of the 2015 sale of its hotel/spa technology business and borrowed a net of $0.8 million. In
2016
, the Company paid the third installment associated with its purchase of Brink Software, Inc. of $2.0 million.
On November 29, 2016, the Company, together with certain of its U.S. subsidiaries entered into a three-year credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”). The Credit Agreement provides 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 accrues 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. In March 2018, JPMorgan Chase granted the Company a Waiver of an event of default under the Credit Agreement due to its failure to meet the required fixed charge coverage ratio for the fiscal quarter ended December 31, 2017.
On
December 31, 2017
, the applicable rate under the Credit Facility was 3.25% plus the CBFR Spread or LIBOR plus the Eurodollar Spread based on the Company’s consolidated indebtedness ratio. There was $0.95 million outstanding and up to $14.05 million available under the Credit Agreement as of
December 31, 2017
.
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
December 31, 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.
In connection with the Company's acquisition of Brink Software, Inc. in September 2014, the Company has recorded contingent consideration that may be payable to the former owners of Brink Software, Inc. based on future performance metrics. As of December 31, 2017, the fair value of the contingent consideration included within the Company's consolidated balance sheets is $3.0 million.
We expect our operating cash flows and available capacity under our Credit Facility 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 fines and penalties that, while currently inestimable, could be material (see Item 1A – “Risk Factors” for further discussion about the potential adverse effect of such fines and penalties on our business). If we 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.
Our future principal payments under the mortgage loan and operating leases are as follows (in thousands):
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|
|
|
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|
|
|
|
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|
|
|
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Total
|
|
Less
Than
1 Year
|
|
1-3 Years
|
|
3 - 5
Years
|
|
More than 5
Years
|
Debt obligations
|
$
|
380
|
|
|
$
|
195
|
|
|
$
|
185
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Operating leases
|
14,690
|
|
|
2,936
|
|
|
4,943
|
|
|
4,124
|
|
|
2,687
|
|
Total
|
15,070
|
|
—
|
|
3,131
|
|
—
|
|
5,128
|
|
—
|
|
4,124
|
|
—
|
|
2,687
|
|
Critical Accounting Policies and Estimates
Our 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 is subject to the use of estimates, assumptions and the
application of judgment include revenue recognition, accounts receivable, inventories, accounting for business combinations, contingent consideration, goodwill and intangible assets, and taxes.
Revenue Recognition Policy
Restaurant/Retail Contracts
Our Restaurant/Retail segment’s revenues consist of sales of our POS systems. We derive revenue from the following sources: (1) hardware sales, (2) software license agreements, including perpetual licenses and SaaS, (3) professional services, (4) hosting services and (5) post-contract customer support (“PCS”).
Subject to the multiple element arrangements discussion below, we recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is reasonably assured. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
Hardware
Revenue recognition on hardware sales occurs upon installation at the customer site (or when shipped for systems that are not installed by us) when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured.
Software
Revenue recognition on software sales generally occurs upon delivery to the customer, when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured. For software sales sold as a perpetual license, typically our Pixel software offering, where we are the sole party that has the proprietary knowledge to install the software, revenue is recognized upon installation and when the system is ready to go live.
Service
Service revenue consists of installation and training services, field and depot repair, subscription software products, associated software maintenance, and software related hosting services. Installation and training service revenue are based upon standard hourly/daily rates as well as contracted prices with the customer, and revenue is recognized as the services are performed. Support maintenance and field and depot repair are provided to customers either on a time and materials basis or under a maintenance contract. Services provided on a time and materials basis are recognized as the services are performed. Service revenues from maintenance contracts are recorded as deferred revenue when billed to and collected from the customer and are recognized ratably over the underlying contract period. Software sold as a service with our Brink and SureCheck software offerings, is recorded as deferred revenue when billed and collected and recognized ratably over the contract term.
The Company frequently enters into multiple-element arrangements with our customers including hardware, software, professional consulting services and maintenance support services. For arrangements involving multiple deliverables, when deliverables include software and non-software products and services, we evaluate and separate each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) the delivered item has value to the customer on a stand-alone basis; and (b) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the control of PAR.
Multiple Element Arrangements
Multiple element arrangements that include hardware, service, and software offerings are separated based upon the stand-alone price for each individual hardware, service, or software sold in the arrangement irrespective of the combination of products and services which are included in a particular arrangement. As such, overall consideration is allocated to each unit of accounting based on the unit’s relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to each deliverable: (i) vendor-specific objective evidence of selling price (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of selling price (BESP). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. The Company uses BESP to allocate revenue when we are unable to establish VSOE or TPE of selling price. BESP is primarily used for elements such as products that are not consistently priced within a narrow range. The Company determines BESP for a deliverable by considering
multiple factors including product and customer class, geography, average discount, and management’s historical pricing practices. Amounts allocated to the delivered hardware and software elements are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the undelivered maintenance and other services elements are recognized as the services are provided or on a straight-line basis over the service period. In certain instances, customer acceptance is required prior to the passage of title and risk of loss of the delivered products. In such cases, revenue is not recognized until the customer acceptance is obtained. Delivery and acceptance generally occur in the same reporting period.
Software elements, generally software PCS, and professional services revenue are recognized in accordance with authoritative guidance on software revenue recognition. For the software and software-related elements of such transactions, revenue is allocated based on the relative fair value of each element, and fair value is determined by vendor specific objective evidence, where available. If VSOE is not available for all elements, we use the residual method to separate the elements as long as we have VSOE for the undelivered elements. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, we defer the revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
Government Contracts
The Company’s contract revenues generated by the Government segment result primarily from contract services performed for the U.S. Government under a variety of cost-plus fixed fee, time-and-material, and fixed-price contracts. Revenue on cost-plus fixed fee contracts is recognized based on allowable costs for labor hours delivered, as well as other allowable costs plus the applicable fee. Revenue on time and material contracts is recognized by multiplying the number of direct labor hours delivered in the performance of the contract by the contract billing rates and adding other direct costs as incurred. Revenue from fixed-price contracts is recognized as labor hours are delivered which approximates the straight-line basis of the life of the contract. The Company’s obligation under these contracts is to provide labor hours to conduct research or to staff facilities with no other deliverables or performance obligations. Anticipated losses on all contracts are recorded in full when identified. Unbilled accounts receivable is stated in the Company’s consolidated financial statements at their estimated realizable value. Contract costs, including indirect expenses, are subject to audit and adjustment through negotiations between the Company and U.S. Government representatives.
Accounts Receivable-Allowance for Doubtful Accounts
Allowances for doubtful accounts are based on estimates of probable losses related to accounts receivable balances. The establishment of allowances requires the use of judgment and assumptions regarding probable losses on receivable balances. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based on our historical experience and any specific customer collection issues that we have identified. Thus, if the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required.
Inventories
Our inventory is valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out (“FIFO”) method. We use certain estimates and judgments and consider several factors, including product demand, changes in customer requirements and changes in technology to provide for excess and obsolescence reserves to properly value inventory.
Capitalized Software Development Costs
We capitalize certain costs related to the development of computer software used in our Restaurant/Retail segment. Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development costs. The technological feasibility of a computer software product is established when we have completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. Software development costs incurred after establishing feasibility (as defined within ASC 985-20 for software cost related to sold as a perpetual license) are capitalized and amortized on a product-by-product basis when the product is available for general release to customers. Annual amortization, charged to cost of sales when the 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, which is generally three to seven years or (b) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product. Software development is also capitalized in accordance with ASC 350-40, “Intangibles - Goodwill and Other - Internal - Use Software,” and is amortized over the expected benefit period, which generally ranges from three to seven years. Long-lived assets are tested for impairment when events or conditions indicate that the carrying value of an asset may not be fully recoverable from future cash flows.
Accounting for Business Combinations
We account for acquired businesses using the acquisition method of accounting, which requires that acquired assets and assumed liabilities be recorded at their respective fair values on the date of acquisition. The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is recorded to goodwill. Intangible assets are amortized over the expected life of the asset. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future cash flows from revenues of the intangible assets acquired, estimates of appropriate discount rates used to present value expected future cash flows, estimated useful lives of the intangible assets acquired and other factors. Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based, in part, on historical experience, information obtained from the management of the acquired companies and future expectations. For these and other reasons, actual results may vary significantly from estimated results.
Contingent Consideration
We determine the acquisition date fair value of contingent consideration using a discounted cash flow method, with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC Topic 820, Fair Value Measurement. The significant inputs in the Level 3 measurement not supported by market activity include our probability assessments of expected future cash flows related to our acquisition of Brink Software Inc. in 2014, during the contingent consideration period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the definitive agreement. The liabilities for the contingent consideration is established at the time of the acquisition and will be evaluated on a quarterly basis based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of the period in which the evaluation is made. During
2017
, we recorded a $1.0 million adjustment to decrease the fair value of the Company's contingent consideration related to its acquisition of Brink Software Inc., versus a $1.1 million adjustment to decrease the fair value during
2016
. These adjustments are reflected within other expense on the consolidated statement of operations. Changes 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 measurement.
Goodwill
We test goodwill for impairment on an annual basis on the first day of the fourth quarter, or more often if events or circumstances indicate there may be impairment. We operate in two reportable operating segments, which are the reporting units used in the test of goodwill for impairment - Restaurant/Retail and Government. Goodwill is tested at the reporting unit level. Goodwill is assigned to a specific reporting unit at the date the goodwill is initially recorded. Once 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 a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill.
Goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of a reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment, at which time a second step would be performed to measure the amount of impairment. The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated an impairment.
We utilize different methodologies in performing the goodwill impairment test for each reporting unit. For both the Restaurant/Retail and Government reporting units, these methodologies include an income approach, namely a discounted cash flow method, and multiple market approaches and the guideline public company method and quoted price method. The valuation methodologies and weightings used in the current year are generally consistent with those used in our past annual impairment tests.
The discounted cash flow method derives a value by determining the present value of a projected level of income stream, including a terminal value. This method involves the present value of a series of estimated future cash flows at the valuation date by the application of a discount rate that a prudent investor would require before making an investment in our equity. We consider this method to be most reflective of a market participant’s view of fair value given the current market conditions, as it is based on our forecasted results and, therefore, established this method's weighting at 80% of the fair value calculation.
Key assumptions within our discounted cash flow model include projected financial operating results, a long-term growth rate of 3% and, depending on the reporting unit, discount rates ranging from 14.5% to 27.0%. As stated above, because the discounted cash flow method derives value from the present value of a projected level of income stream, a modification to our projected
operating results, including changes to the long-term growth rate, could impact the fair value. The present value of the cash flows is determined using a discount rate based on the capital structure and capital costs of comparable public companies, as well as company-specific risk premium, as identified by us. A change to the discount rate could impact the fair value determination.
The market approach is a generally-accepted way of determining a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the reporting unit to similar businesses, business ownership interests, securities or intangible assets that have been sold. There are two methodologies considered under the market approach: the public company method and the quoted price method.
The public company method and quoted price method of valuation are based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing closely held companies. The mechanics of the two methods require the use of the stock price in conjunction with other factors to create a pricing multiple that can be used, with certain adjustments, to apply against the reporting unit’s similar factor to determine an estimate of value for the subject company. We consider these methods appropriate because they provide an indication of fair value supported by current market conditions. We established our weighting at 10% of the fair value calculation for the public company method and quoted price method for both the Restaurant/Retail and Government, reporting units.
The most critical assumption underlying the market methods we use are the comparable companies selected. Each market approach described above estimates revenue and earnings multiples based on the comparable companies selected. As such, a change in the comparable companies could have an impact on the fair value determination.
The amount of goodwill carried by the Restaurant/Retail and Government reporting units is $10.3 million and $0.7 million, respectively. The estimated fair value of the Restaurant/Retail reporting unit is substantially in excess of its carrying value as a result of the Step 1 analysis performed to assess if the fair value of the reporting units is lower than their carrying value. The estimated fair value of the Government reporting unit is substantially in excess of its carrying value as a result of the Step 1 analysis performed. There were no goodwill impairment charges recorded for the Restaurant/Retail reporting unit or the Government reporting unit for the years ended December 31, 2017 or December 31, 2016.
Restaurants / Retail:
In deriving our fair value estimates, we utilized key assumptions built on the current product portfolio mix adjusted to reflect continued revenue increases from Brink and SureCheck. These assumptions, specifically those included within the discounted cash flow estimate, include revenue growth rate, gross margin, operating expenses, working capital requirements, and depreciation and amortization expense.
We utilize annual revenue growth rates ranging between 3% and 32%. The high-end growth rate reflects our projected revenues from anticipated increases in installations of Brink and SureCheck at new customer locations. These software platforms are expected to expand our capabilities into new markets. We believe these estimates are reasonable given the size of the overall market which we will enter, combined with the projected market share we expect to achieve. Overall, the projected revenue growth rates ultimately trend to an estimated long term growth rate of 3%.
We utilize gross margin estimates that are reflective of expected increased recurring SaaS revenue from software sold as a service that is expected to exceed historical gross margins. Estimates of operating expenses, working capital requirements and depreciation and amortization expense utilized for the Restaurant/Retail reporting unit are generally consistent with actual historical amounts, adjusted to reflect its continued investment and projected revenue growth from our core technology platforms. We believe utilization of actual historical results adjusted to reflect our continued investment in our products is an appropriate basis supporting the fair value of the Restaurant/Retail reporting unit.
Finally, we utilize a discount rate of approximately 27.0% for the Restaurant/Retail reporting unit. This estimate was derived through a combination of current risk-free interest rate data, financial data from companies that PAR considers to be its competitors, and was based on volatility between our historical financial projections and actual results achieved.
The current economic conditions and the continued volatility in the U.S. and in many other countries in which we operate could contribute to decreased consumer confidence and continued economic uncertainty which may adversely impact our operating performance. Although we have seen an improvement in the markets which we serve, continued volatility in these markets could have an impact on purchases of our products, which could result in a reduction of sales, operating income and cash flows. Such reductions could have a material adverse impact on the underlying estimates used in deriving the fair value of our reporting units used to support our annual goodwill impairment test or could result in a triggering event requiring a fair value re-measurement,
particularly if we are unable to achieve the estimates of revenue growth indicated in the preceding paragraphs. These conditions may result in an impairment charge in future periods.
Government:
The estimated fair value of the Government segment is substantially in excess of its carrying value. Consistent with prior year methodology, in deriving our fair value estimates, we have utilized key assumptions built on the current core business. These assumptions, specifically those included within the discounted cash flow estimate, are comprised of the revenue growth rate, gross margin, operating expenses, working capital requirements, and depreciation and amortization expense.
We have reconciled the aggregate estimated fair value of the reporting units to the market capitalization of the consolidated Company, including a reasonable control premium noting no impairment as of December 31, 2017 or December 31, 2016 was recorded.
Deferred Taxes
We have $13.8 million of deferred tax assets that are reviewed quarterly for recoverability and valued accordingly. These deferred tax assets are evaluated by using estimates of future taxable income and the impact of tax planning strategies. Valuations related to tax accruals and deferred tax assets can be impacted by changes to tax codes, changes in statutory tax rates and our estimates of future taxable income levels.
New Accounting Pronouncements Not Yet Adopted
See Note 1 – Summary of Significant Accounting Principles - of the Notes to Consolidated Financial Statements (Part II, Item 8 of this Report) for details.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
|
|
Item 7A
.
|
Quantitative and Qualitative Disclosures about Market Risk.
|
Not required.
|
|
Item 8
.
|
Financial Statements and Supplementary Data
.
|
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
PAR Technology Corporation
New Hartford, New York
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of PAR Technology Corporation (the “Company”) and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 16, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2012.
New York, NY
March 16, 2018
PAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
December 31,
|
Assets
|
2017
|
|
2016
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
6,600
|
|
|
$
|
9,055
|
|
Accounts receivable-net
|
30,077
|
|
|
30,705
|
|
Inventories-net
|
21,746
|
|
|
26,237
|
|
Note receivable
|
—
|
|
|
3,510
|
|
Income taxes receivable
|
—
|
|
|
261
|
|
Deferred income taxes
|
—
|
|
|
7,767
|
|
Other current assets
|
4,209
|
|
|
4,027
|
|
Assets of discontinued operations
|
—
|
|
|
462
|
|
Total current assets
|
62,632
|
|
|
82,024
|
|
Property, plant and equipment - net
|
10,755
|
|
|
7,035
|
|
Deferred income taxes
|
13,809
|
|
|
9,650
|
|
Goodwill
|
11,051
|
|
|
11,051
|
|
Intangible assets - net
|
12,070
|
|
|
10,966
|
|
Other assets
|
4,307
|
|
|
3,785
|
|
Total Assets
|
$
|
114,624
|
|
|
$
|
124,511
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
195
|
|
|
$
|
187
|
|
Borrowings on line of credit
|
950
|
|
|
—
|
|
Accounts payable
|
14,332
|
|
|
16,687
|
|
Accrued salaries and benefits
|
6,275
|
|
|
5,470
|
|
Accrued expenses
|
3,926
|
|
|
4,682
|
|
Customer deposits and deferred service revenue
|
12,909
|
|
|
19,814
|
|
Total current liabilities
|
38,587
|
|
|
46,840
|
|
Long-term debt
|
185
|
|
|
379
|
|
Other long-term liabilities
|
6,866
|
|
|
7,712
|
|
Total liabilities
|
45,638
|
|
|
54,931
|
|
Shareholders’ Equity:
|
|
|
|
|
|
Preferred stock, $.02 par value, 1,000,000 shares authorized
|
—
|
|
|
—
|
|
Common stock, $.02 par value, 29,000,000 shares authorized; 17,677,161 and 17,479,454 shares issued; 15,969,052 and 15,771,345 outstanding at December 31, 2017 and December 31, 2016, respectively
|
354
|
|
|
350
|
|
Capital in excess of par value
|
48,349
|
|
|
46,203
|
|
Retained earnings
|
29,549
|
|
|
32,357
|
|
Accumulated other comprehensive loss
|
(3,430
|
)
|
|
(3,494
|
)
|
Treasury stock, at cost, 1,708,109 shares
|
(5,836
|
)
|
|
(5,836
|
)
|
Total shareholders’ equity
|
68,986
|
|
|
69,580
|
|
Total Liabilities and Shareholders’ Equity
|
$
|
114,624
|
|
|
$
|
124,511
|
|
See accompanying Notes to Consolidated Financial Statements
PAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
Net revenues:
|
|
|
|
Product
|
$
|
115,126
|
|
|
$
|
100,271
|
|
Service
|
56,467
|
|
|
49,070
|
|
Contract
|
61,012
|
|
|
80,312
|
|
Total net revenues
|
232,605
|
|
|
229,653
|
|
Costs of sales:
|
|
|
|
Product
|
85,850
|
|
|
73,976
|
|
Service
|
39,626
|
|
|
35,647
|
|
Contract
|
54,299
|
|
|
73,830
|
|
Total costs of sales
|
179,775
|
|
|
183,453
|
|
Gross margin
|
52,830
|
|
|
46,200
|
|
Operating expenses:
|
|
|
|
Selling, general and administrative
|
38,171
|
|
|
31,440
|
|
Research and development
|
13,814
|
|
|
11,581
|
|
Amortization of identifiable intangible assets
|
966
|
|
|
966
|
|
Total operating expenses
|
52,951
|
|
|
43,987
|
|
|
|
|
|
Operating (loss) income from continuing operations
|
(121
|
)
|
|
2,213
|
|
Other income, net
|
629
|
|
|
1,316
|
|
Interest (expense) income, net
|
(121
|
)
|
|
121
|
|
Income from continuing operations before provision for income taxes
|
387
|
|
|
3,650
|
|
Provision for income taxes
|
(3,997
|
)
|
|
(1,147
|
)
|
(Loss) income from continuing operations
|
(3,610
|
)
|
|
2,503
|
|
Discontinued operations
|
|
|
|
Income (loss) on discontinued operations (net of tax)
|
224
|
|
|
(720
|
)
|
Net (loss) income
|
$
|
(3,386
|
)
|
|
$
|
1,783
|
|
Basic Earnings per Share:
|
|
|
|
(Loss) income from continuing operations
|
(0.23
|
)
|
|
0.16
|
|
Income (loss) from discontinued operations
|
0.01
|
|
|
(0.05
|
)
|
Net (loss) income
|
$
|
(0.22
|
)
|
|
$
|
0.11
|
|
Diluted Earnings per Share:
|
|
|
|
(Loss) income from continuing operations
|
(0.23
|
)
|
|
0.16
|
|
Income (loss) from discontinued operations
|
0.01
|
|
|
(0.05
|
)
|
Net (loss) income
|
$
|
(0.22
|
)
|
|
$
|
0.11
|
|
Weighted average shares outstanding
|
|
|
|
Basic
|
15,949
|
|
|
15,675
|
|
Diluted
|
15,949
|
|
|
15,738
|
|
See accompanying Notes to Consolidated Financial Statements
PAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
|
|
|
|
Net (loss) income
|
$
|
(3,386
|
)
|
|
$
|
1,783
|
|
Other comprehensive income (loss) net of applicable tax:
|
|
|
|
Foreign currency translation adjustments
|
64
|
|
|
(716
|
)
|
Comprehensive (loss) income
|
$
|
(3,322
|
)
|
|
$
|
1,067
|
|
See accompanying Notes to Consolidated Financial Statements
PAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Common Stock
|
Capital in
excess of
Par Value
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Loss
|
Treasury Stock
|
Total
Shareholders’
Equity
|
Shares
|
Amount
|
Shares
|
Amount
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2015
|
17,352
|
|
$
|
347
|
|
$
|
45,753
|
|
$
|
30,574
|
|
$
|
(2,778
|
)
|
(1,708
|
)
|
$
|
(5,836
|
)
|
$
|
68,060
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
1,783
|
|
|
|
|
1,783
|
|
Issuance of common stock upon the exercise of stock options
|
5
|
|
1
|
|
26
|
|
|
|
|
|
27
|
|
Net issuance of restricted stock awards
|
122
|
|
2
|
|
|
|
|
|
|
2
|
|
Equity based compensation
|
|
|
|
|
469
|
|
|
|
|
|
469
|
|
Stock options and awards tax benefits
|
|
|
(45
|
)
|
|
|
|
|
(45
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
(716
|
)
|
|
|
(716
|
)
|
Balances at December 31, 2016
|
17,479
|
|
$
|
350
|
|
$
|
46,203
|
|
$
|
32,357
|
|
$
|
(3,494
|
)
|
(1,708
|
)
|
$
|
(5,836
|
)
|
$
|
69,580
|
|
|
|
|
|
|
|
|
|
|
Adoption of accounting standard
|
|
|
|
|
|
|
578
|
|
|
|
|
|
|
|
578
|
|
Net loss
|
|
|
|
|
|
|
(3,386
|
)
|
|
|
|
|
|
|
(3,386
|
)
|
Issuance of common stock upon the exercise of stock options
|
271
|
|
5
|
|
1,495
|
|
|
|
|
|
|
|
|
|
1,500
|
|
Repurchase of common stock
|
(54
|
)
|
(1
|
)
|
|
|
|
|
|
(1
|
)
|
Net issuance of restricted stock awards
|
(19
|
)
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Equity based compensation
|
|
|
|
|
651
|
|
|
|
|
|
|
|
|
|
651
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
64
|
|
Balances at December 31, 2017
|
17,677
|
|
$
|
354
|
|
$
|
48,349
|
|
$
|
29,549
|
|
$
|
(3,430
|
)
|
(1,708
|
)
|
$
|
(5,836
|
)
|
$
|
68,986
|
|
See accompanying Notes to Consolidated Financial Statements
PAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
Net (loss) income
|
$
|
(3,386
|
)
|
|
$
|
1,783
|
|
(Income) loss from discontinued operations
|
(224
|
)
|
|
720
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
Insurance recovery of investment
|
—
|
|
|
(771
|
)
|
Depreciation, amortization, and accretion
|
4,033
|
|
|
4,624
|
|
Provision for bad debts
|
303
|
|
|
401
|
|
Provision for obsolete inventory
|
1,543
|
|
|
1,249
|
|
Equity based compensation
|
651
|
|
|
469
|
|
Change in fair value of contingent consideration
|
(1,000
|
)
|
|
(1,130
|
)
|
Deferred income tax
|
4,159
|
|
|
708
|
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
Accounts receivable
|
325
|
|
|
(1,576
|
)
|
Inventories
|
2,948
|
|
|
(5,987
|
)
|
Income tax receivable/(payable)
|
261
|
|
|
(540
|
)
|
Other current assets
|
(182
|
)
|
|
(248
|
)
|
Other assets
|
(522
|
)
|
|
(194
|
)
|
Accounts payable
|
(2,355
|
)
|
|
4,958
|
|
Accrued expenses
|
49
|
|
|
(2,023
|
)
|
Customer deposits and deferred service revenue
|
(6,905
|
)
|
|
8,995
|
|
Other long-term liabilities
|
154
|
|
|
(41
|
)
|
Deferred tax equity based compensation
|
—
|
|
|
(45
|
)
|
Net cash (used in) provided by operating activities-continuing operations
|
(148
|
)
|
|
11,352
|
|
Net cash provided by (used in) operating activities-discontinued operations
|
462
|
|
|
(356
|
)
|
Net cash provided by operating activities
|
314
|
|
|
10,996
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Capital expenditures
|
(5,071
|
)
|
|
(3,433
|
)
|
Capitalization of software costs
|
(3,786
|
)
|
|
(2,685
|
)
|
Working capital adjustment paid
|
—
|
|
|
(977
|
)
|
Net cash used in investing activities
|
(8,857
|
)
|
|
(7,095
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
Payments of long-term debt
|
(187
|
)
|
|
(181
|
)
|
Payments of other borrowings
|
(22,200
|
)
|
|
(214,980
|
)
|
Proceeds from other borrowings
|
23,150
|
|
|
214,980
|
|
Payments for deferred acquisition obligations
|
—
|
|
|
(2,000
|
)
|
Proceeds from note receivable
|
3,794
|
|
|
—
|
|
Proceeds from stock awards
|
1,500
|
|
|
27
|
|
Net cash provided by (used in) financing activities
|
6,057
|
|
|
(2,154
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
31
|
|
|
(716
|
)
|
Net (decrease) increase in cash and cash equivalents
|
(2,455
|
)
|
|
1,031
|
|
Cash and cash equivalents at beginning of period
|
9,055
|
|
|
8,024
|
|
Cash and cash equivalents at end of period
|
6,600
|
|
|
9,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
Interest
|
$
|
152
|
|
|
$
|
94
|
|
Income taxes, net of refunds
|
$
|
20
|
|
|
$
|
714
|
|
|
|
|
|
Supplemental disclosures of non-cash information:
|
|
|
|
|
|
Adoption of accounting standard on deferred taxes
|
$
|
578
|
|
|
$
|
—
|
|
See accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
Nature of Business
PAR Technology Corporation, together with its subsidiaries, provides management technology solutions, including software, hardware, and related services, integral to the point-of-sale (“POS”) infrastructure and task management, information gathering, assimilation and communications services. We deliver our management technology solutions through
two
operating segments – our Restaurant/Retail segment and our Government segment. In addition, the consolidated financial statements include Corporate and Eliminations, which is comprised of enterprise-wide functional departments.
Basis of consolidation
The consolidated financial statements include the accounts of PAR Technology Corporation and its subsidiaries (ParTech, Inc., ParTech (Shanghai) Company Ltd., PAR Springer-Miller Systems, Inc., Springer-Miller Canada, ULC, PAR Canada ULC, Brink Software, Inc., PAR Government Systems Corporation and Rome Research Corporation), collectively referred to as the “Company”. All significant intercompany transactions have been eliminated in consolidation.
During fiscal year
2015
, the Company entered into an asset purchase agreement to sell substantially all of the assets of its Hotel/Spa technology business operated under PAR Springer-Miller Systems, Inc. (“PSMS”). The transaction closed on November 4, 2015. Accordingly, the results of operations of PSMS have been classified as discontinued operations in accordance with Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements – Discontinued Operations. See Note 2 – Divestiture and Discontinued Operations - in the Notes to Consolidated Financial Statements for further discussion.
Business combinations
The Company accounts for business combinations pursuant ASC 805, Business Combinations, which requires that assets acquired and liabilities assumed be recorded at their respective fair values on the date of acquisition. The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is allocated to goodwill (the “Acquisition Method”). The purchase price allocation process requires the Company to make significant assumptions and estimates in determining the purchase price and the assets acquired and liabilities assumed at the acquisition date. The Company’s assumptions and estimates are subject to refinement and, as a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon conclusion of the measurement period, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. The Company’s consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition.
Contingent
c
onsideration
The Company determines the acquisition date fair value of contingent consideration using a discounted cash flow method, with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC Topic 820, Fair Value Measurement. The significant inputs in the Level 3 measurement not supported by market activity included the Company’s probability assessments of expected future cash flows related to the Company’s acquisition of Brink Software Inc. during the contingent consideration period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the definitive agreement. The liabilities for the contingent consideration are established at the time of the acquisition and will be evaluated on a quarterly basis based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of that period. During
2017
, we recorded a
$1.0 million
adjustment to decrease the fair value of our contingent consideration related to the acquisition of Brink Software Inc., versus a
$1.1 million
adjustment to decrease the fair value during
2016
. This reduction in expense is reflected within other income on the statements of operations. Changes 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 measurement.
Revenue recognition policy
Restaurant/Retail Contracts
Our Restaurant/Retail segment’s revenues consist of sales of the Company’s standard POS system to the Restaurant/Retail segment. We derive revenue from the following sources: (1) hardware sales, (2) software license agreements, including perpetual licenses and software as a service, (3) professional services, (4) hosting services and (5) post-contract customer support (“PCS”).
We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
Hardware
Revenue recognition on hardware sales occurs upon installation at the customer site (or when shipped for systems that are not installed by the Company) when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured.
Software
Revenue recognition on software sales generally occurs upon delivery to the customer, when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured. For software sales sold as a perpetual license, typically our Pixel software offering, where the Company is the sole party that has the proprietary knowledge to install the software, revenue is recognized upon installation and when the system is ready to go live.
Service
Service revenue consists of installation and training services, field and depot repair, subscription software products, associated software maintenance, and software related hosted services. Installation and training service revenue are based upon standard hourly/daily rates as well as contracted prices with the customer, and revenue is recognized as the services are performed. Support maintenance and field and depot repair are provided to customers either on a time and materials basis or under a maintenance contract. Services provided on a time and materials basis are recognized as the services are performed. Service revenues from maintenance contracts are recorded as deferred revenue when billed to and collected from the customer and are recognized ratably over the underlying contract period. Software sold as a service with our Brink and SureCheck software offerings, is recorded as deferred revenue when billed and collected and recognized ratably over the contract term.
The Company frequently enters into multiple-element arrangements with our customers including hardware, software, professional consulting services and maintenance support services. For arrangements involving multiple deliverables, when deliverables include software and non-software products and services, we evaluate and separate each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) the delivered item has value to the customer on a stand-alone basis; and (b) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the control of PAR.
Multiple element arrangements which include hardware, service, and software offerings are separated based upon the stand-alone price for each individual hardware, service, or software sold in the arrangement irrespective of the combination of products and services which are included in a particular arrangement. As such, overall consideration is allocated to each unit of accounting based on the unit’s relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to each deliverable: (i) vendor-specific objective evidence of selling price (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of selling price (BESP). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. The Company uses BESP to allocate revenue when we are unable to establish VSOE or TPE of selling price. BESP is primarily used for elements such as products that are not consistently priced within a narrow range. The Company determines BESP for a deliverable by considering multiple factors including product and customer class, geography, average discount, and management’s historical pricing practices. Amounts allocated to the delivered hardware and software elements are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the undelivered maintenance and other services elements are recognized as the services are provided or on a straight-line basis over the service period. In certain instances, customer acceptance is required prior to the passage of title and risk of loss of the delivered products. In such cases, revenue is not recognized until the customer acceptance is obtained. Delivery and acceptance generally occur in the same reporting period.
Software elements, generally software PCS, and professional services revenue are recognized in accordance with authoritative guidance on software revenue recognition. For the software and software-related elements of such transactions, revenue is allocated based on the relative fair value of each element, and fair value is determined by vendor specific objective evidence, where available. If VSOE is not available for all elements, we will use the residual method to separate the elements as long as we have VSOE for the undelivered elements. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, we defer the revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
Government Contracts
The Company’s contract revenues generated by the Government segment result primarily from contract services performed for the U.S. Government under a variety of cost-plus fixed fee, time-and-material, and fixed-price contracts. Revenue on cost-plus fixed fee contracts is recognized based on allowable costs for labor hours delivered, as well as other allowable costs plus the applicable fee. Revenue on time and material contracts is recognized by multiplying the number of direct labor hours delivered in the performance of the contract by the contract billing rates and adding other direct costs as incurred. Revenue from fixed-price contracts is recognized as labor hours are delivered which approximates the straight-line basis of the life of the contract. The Company’s obligation under these contracts is to provide labor hours to conduct research or to staff facilities with no other deliverables or performance obligations. Anticipated losses on all contracts are recorded in full when identified. Unbilled accounts receivable is stated in the Company’s consolidated financial statements at their estimated realizable value. Contract costs, including indirect expenses, are subject to audit and adjustment through negotiations between the Company and U.S. Government representatives.
Warranty provisions
Warranty provisions for product warranties are recorded in the period in which the Company becomes obligated to honor the related right, which generally is the period in which the related product revenue is recognized. The Company accrues warranty reserves based upon historical factors such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. When a sale is consummated, a warranty reserve is recorded based upon the estimated cost to provide the service over the warranty period.
Cash and cash equivalents
The Company considers all highly liquid investments, purchased with a remaining maturity of three months or less, to be cash equivalents.
Accounts receivable – Allowance for doubtful accounts
Allowances for doubtful accounts are based on estimates of probable losses related to accounts receivable balances. The establishment of allowances requires the use of judgment and assumptions regarding probable losses on receivable balances. The Company continuously monitors collections and payments from our customers and maintain a provision for estimated credit losses based on our historical experience and any specific customer collection issues that we have identified. Thus, if the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required.
Inventories
The Company’s inventories are valued at the lower of cost or net realizable value, with cost determined using the first-in, first-out (“FIFO”) method. The Company uses certain estimates and judgments and considers several factors including product demand, changes in customer requirements and changes in technology to provide for excess and obsolescence reserves to properly value inventory.
Property, plant and equipment
Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from
three
to
twenty-five years
. Expenditures for maintenance and repairs are expensed as incurred.
Other assets
Other assets primarily consist of cash surrender value of life insurance related to the Company’s Deferred Compensation Plan eligible to certain employees. The funded balance is reviewed on an annual basis.
Income taxes
The provision for income taxes is based upon pretax earnings with deferred income taxes provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The Company records a valuation allowance when necessary to reduce deferred tax assets to their net realizable amounts. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Other long-term liabilities
Other long-term liabilities represent amounts owed to employees that participate in the Company’s Deferred Compensation Plan and the estimated fair value of the contingent consideration payable related to the Brink Software Inc. acquisition. The amount of the amounts owed to employees participating in the Deferred Compensation Plan at
December 31, 2017
was
$3.9 million
compared to
$3.8 million
at
December 31, 2016
. During
2017
, we recorded a
$1.0 million
adjustment to decrease the fair value of our contingent consideration related to the acquisition of Brink Software Inc. compared to an adjustment to decrease the fair value of
$1.1 million
in 2016. At December 31, 2017, the amount remaining in other long-term liabilities related to contingent consideration is
$3.0 million
compared to
$4.0 million
at December 31, 2016. This is reflected within other income on the statements of operations. Changes 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.
Foreign currency
The assets and liabilities for the Company’s international operations are translated into U.S. dollars using year-end exchange rates. Income statement items are translated at average exchange rates prevailing during the year. The resulting translation adjustments are recorded as a separate component of shareholders’ equity under the heading Accumulated Other Comprehensive Income (Loss). Exchange gains and losses on intercompany balances of permanently invested long-term loans are also recorded as a translation adjustment and are included in Accumulated Other Comprehensive Income (Loss). Foreign currency transaction gains and losses are recorded in other income in the accompanying statements of operations.
Other income (expense)
The components of other income (expense) from continuing operations for the years ending December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
Foreign currency loss
|
$
|
39
|
|
|
$
|
(24
|
)
|
Rental (loss) income-net
|
(683
|
)
|
|
(662
|
)
|
Insurance recovery / investment write off
|
—
|
|
|
771
|
|
Fair value adjustment contingent consideration
|
1,000
|
|
|
1,130
|
|
Other
|
273
|
|
|
101
|
|
Other income
|
$
|
629
|
|
|
$
|
1,316
|
|
In
2017
, we recorded a
$1.0 million
adjustment to decrease the fair value of the Company's contingent consideration related to the acquisition of Brink Software Inc. Also, during
2017
, the Company incurred a net loss on rental contracts of approximately
$0.7 million
.
During
2016
, we recorded a
$1.1 million
adjustment to decrease the fair value of the Company's contingent consideration related to the acquisition of Brink Software Inc. In addition, we recorded an insurance recovery of
$0.8 million
in
2016
relating to the unauthorized transfers of the Company's funds by its former chief financial officer. Also, during
2016
, the Company incurred a net loss on rental contracts of approximately
$0.7 million
.
Identifiable intangible assets
The Company’s identifiable intangible assets represent intangible assets acquired from the 2014 Brink Software Inc. acquisition and internally developed software costs. The Company capitalizes certain costs related to the development of computer software used in its Restaurant/Retail segment. Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development 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 product can be produced to meet its design specifications including functions, features, and technical performance requirements. Software development costs incurred after establishing feasibility (as defined within ASC 985-20 for software cost related to sold as a perpetual license) are capitalized and amortized on a product-by-product basis when the product is available for general release to customers. Software development is also capitalized in accordance with ASC 350-40, “Intangibles - Goodwill and Other - Internal - Use Software,” and is amortized over the expected benefit period, which generally ranges from
three
to
seven
years. Long-lived assets are tested for impairment when events or conditions indicate that the carrying value of an asset may not be fully recoverable from future cash flows. Software costs capitalized within continuing operations during the periods ended
2017
and
2016
were $
3.8 million
and $
2.7 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, generally
three
to
seven
years or (b) the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product. Amortization of capitalized software costs from continuing operations amounted to
$2.7 million
and
$1.1 million
, in
2017
and
2016
, respectively. There was no impairment charge recorded as of
December 31, 2017
. In 2016, the Company assessed its recoverability of capitalized software assets noting an impairment charge of
$0.5 million
to accelerate one of its software modules.
The components of identifiable intangible assets, excluding discontinued operations, are:
|
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
|
2017
|
|
2016
|
Estimated Useful Life
|
Acquired and internally developed software costs
|
$
|
19,670
|
|
|
$
|
15,884
|
|
3 - 7 years
|
Customer relationships
|
160
|
|
|
160
|
|
7 years
|
Non-compete agreements
|
30
|
|
|
30
|
|
1 year
|
|
19,860
|
|
|
16,074
|
|
|
Less accumulated amortization
|
(8,190
|
)
|
|
(5,508
|
)
|
|
|
$
|
11,670
|
|
|
$
|
10,566
|
|
|
Trademarks, trade names (non-amortizable)
|
400
|
|
|
400
|
|
N/A
|
|
$
|
12,070
|
|
|
$
|
10,966
|
|
|
The expected future amortization of these intangible assets assuming straight-line amortization of capitalized software costs and acquisition related intangibles is as follows (in thousands):
|
|
|
|
|
2018
|
$
|
2,773
|
|
2019
|
2,300
|
|
2020
|
1,800
|
|
2021
|
1,534
|
|
2022
|
507
|
|
Thereafter
|
2,756
|
|
Total
|
$
|
11,670
|
|
The Company has elected to test for impairment of indefinite lived intangible assets during the fourth quarter of its fiscal year. To value the indefinite lived intangible assets, the Company utilizes the royalty method to estimate the fair values of the trademarks and trade names. There was no impairment charge recorded as of
December 31, 2017
.
Stock-based compensation
The Company recognizes all stock-based compensation to employees, including awards of employee stock options and restricted stock, in the financial statements as compensation cost over the applicable vesting periods using an accelerated expense recognition method, based on their fair value on the date of grant.
Earnings per share
Basic earnings per share are computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the dilutive impact of outstanding stock options and restricted stock awards.
The following is a reconciliation of the weighted average shares outstanding for the basic and diluted earnings per share computations (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
(Loss) income from continuing operations
|
$
|
(3,610
|
)
|
|
$
|
2,503
|
|
|
|
|
|
Basic:
|
|
|
|
Weighted average shares outstanding at beginning of year
|
15,675
|
|
|
15,645
|
|
Weighted average shares issued during the year, net
|
274
|
|
|
30
|
|
Weighted average common shares, basic
|
15,949
|
|
|
15,675
|
|
(Loss) income from continuing operations per common share, basic
|
$
|
(0.23
|
)
|
|
$
|
0.16
|
|
|
|
|
|
Diluted:
|
|
|
|
Weighted average common shares, basic
|
15,949
|
|
|
15,675
|
|
Dilutive impact of stock options and restricted stock awards
|
—
|
|
|
63
|
|
Weighted average common shares, diluted
|
15,949
|
|
|
15,738
|
|
(Loss) income from continuing operations per common share, diluted
|
$
|
(0.23
|
)
|
|
$
|
0.16
|
|
At
2017
and
2016
there were
265,000
and
38,000
incremental shares, respectively, from the assumed exercise of stock options that were excluded from the computation of diluted earnings per share because of the anti-dilutive effect on earnings per share. There were
no
restricted stock awards excluded from the computation of diluted earnings per share for each of the fiscal years ended
2017
and
2016
.
Goodwill
The Company tests goodwill for impairment on an annual basis, which is on the first day of the fourth quarter, or more often if events or circumstances indicate there may be impairment. The Company operates in
two
reportable operating segments, which are the reporting units used in the test for goodwill impairment - Restaurant/Retail and Government. Goodwill impairment testing is performed at the sub-segment level (referred to as a reporting unit). The
two
reporting units utilized by the Company are: Restaurant/Retail and Government. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to a reporting unit, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill. Goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’s fair value to its carrying value including goodwill. If the fair value of an reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment, at which time a second step would be performed to measure the amount of impairment. The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated an impairment. We utilize different methodologies in performing the goodwill impairment test for each reporting unit. For both the Restaurant/Retail and Government reporting units, these methodologies include an income approach, namely a discounted cash flow method, and multiple market approaches and the guideline public company method and quoted price method. The valuation methodologies and weightings used in the current year are generally consistent with those used in our past annual impairment tests.
The discounted cash flow method derives a value by determining the present value of a projected level of income stream, including a terminal value. This method involves the present value of a series of estimated future cash flows at the valuation date by the application of a discount rate, one which a prudent investor would require before making an investment in our equity. We consider this method to be most reflective of a market participant’s view of fair value given the current market conditions, as it is based on our forecasted results and, therefore, established this method's weighting at
80%
of the fair value calculation. Key assumptions within our discounted cash flow model include projected financial operating results, a long-term growth rate of
3%
and, depending on the reporting unit, discount rates ranging from
14.5%
to
27.0%
. As stated above, because the discounted cash flow method derives value from the present value of a projected level of income stream, a modification to our projected operating results, including changes to the long-term growth rate, could impact the fair value. The present value of the cash flows is determined using a discount rate based on the capital structure and capital costs of comparable public companies, as well as company-specific risk premium, as identified by us. A change to the discount rate could impact the fair value determination.
The market approach is a generally-accepted way of determining a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the reporting unit to similar businesses, business ownership interests, securities or intangible assets that have been sold. There are two methodologies considered under the market approach: the public company method and the quoted price method. The public company method and quoted price method of valuation are based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing closely held companies. The mechanics of the methods require the use of the stock price in conjunction with other factors to create a pricing multiple that can be used, with certain adjustments, to apply against the reporting unit’s similar factor to determine an estimate of value for the subject company. We consider these methods appropriate because they provide an indication of fair value supported by current market conditions. We established our weighting at
10%
of the fair value calculation for the public company method and quoted price method for both the Restaurant/Retail and Government reporting units. The most critical assumption underlying the market approaches we use are the comparable companies selected. Each market approach described above estimates revenue and earnings multiples based on the comparable companies selected. As such, a change in the comparable companies could have an impact on the fair value determination.
The amount of goodwill within continuing operations was
$11.1 million
at December 31,
2017
and December 31,
2016
. There was
no
impairment of goodwill for the years ending December 31,
2017
or December 31,
2016
.
Impairment of long-lived assets
The Company evaluates the accounting and reporting for the impairment of long-lived assets in accordance with the reporting requirements of ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company will recognize impairment of long-lived assets or asset groups if the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets. If the carrying value of a long-lived asset or asset group is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset or asset group for assets to be held and used, or the amount by which the carrying value exceeds the fair market value less cost to sell for assets to be sold. There was no impairment charge in 2017. During
2016
, the Company recorded an impairment charge of
$0.5 million
to accelerate one of its software modules.
Use of estimates
The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include revenue recognition, stock based compensation, the recognition and measurement of assets acquired and liabilities assumed in business combinations at fair value, the carrying amount of property, plant and equipment, identifiable intangible assets and goodwill, valuation allowances for receivables, inventories and deferred income tax assets, and measurement of contingent consideration at fair value. Actual results could differ from those estimates.
Recently Issued Accounting Pronouncements Not Yet Adopted
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 2019 and early adoption is permitted, although unlikely at this time. We are currently evaluating the impact of these amendments on our financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, codified as ASC Topic 606. The FASB issued amendments to ASC Topic 606 during 2016. The guidance will require additional disclosures regarding the nature, amount, timing and uncertainty of revenue and related cash flows arising from contracts with customers. This guidance is effective for annual and interim reporting periods beginning after December 15, 2017 and allows for either full retrospective adoption or modified retrospective adoption.
We performed an evaluation of the new standard and assessed the impact of adoption on our consolidated financial statements. We reviewed significant open contracts with customers for each revenue stream. While we continue to perform our assessment, based on the contracts reviewed to date we do not expect a material impact on the Company’s consolidated financial statements because: i) product sales and software sales revenue will be recognized when control of the goods is transferred to the customer, which is consistent with the Company’s current revenue recognition at the date of delivery; ii) Fixed Price, Cost Plus Fixed Fee and Time and Materials contracts with the Government are recognized the same under current standards and the new standard; and iii) SaaS revenue recognition will continue to be accounted for ratably upon adoption of the new standard. We continue to analyze commissions that we pay, which may need to be recorded as a contract liability under the new standard. In addition, the Company is in the process of quantifying the adjustment for certain performance obligations that under the current standard are recognized upon delivery and under the new standard are expected to be recognized over time. We will finalize our assessment prior to filing our Form 10-Q for the quarter ending March 31, 2018. The Company has also assessed its control framework as a result of adopting the new standard and notes minimal changes to its systems and other controls processes.
The new standard permits two adoption methods under ASU 2014-09. The guidance may be adopted through either retrospective application to all periods presented in the consolidated financial statements (full retrospective) or through a cumulative effect adjustment to retained earnings at the effective date (modified retrospective). The Company adopted the new standard effective January 1, 2018 using the modified retrospective transition method. Under that method, we will apply the rules to all contracts existing as of January 1, 2018. The cumulative effect will be recorded to the opening balance of retained earnings beginning with our quarterly report on Form 10-Q for the quarter ending March 31, 2018.
The disclosures in our notes to the consolidated financial statements related to revenue recognition will be expanded under the new standard, specifically around the quantitative and qualitative information about performance obligations, changes in contract assets and liabilities, and disaggregation of revenue. The Company will make these enhanced disclosures in its interim financial statements for the first quarter of 2018.
In August 2016
,
the Financial Accounting Standards Board (FASB) issued ASU 2016-15, "
Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments
." ASU 2016-15 is intended to reduce diversity in practice in how eight particular transactions are classified in the statement of cash flows. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, provided that all of the amendments are adopted in the same period. Entities will be required to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue would be applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU 2016-15 is not expected to have a material impact on the Company's Consolidated Financial Statements
In January 2017
,
the Financial Accounting Standards Board (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 required 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. ASU 2017-04 will be effective for us on January 1, 2020, with earlier adoption permitted and is not expected to have a material impact on the Company's Consolidated Financial Statements
In May 2017
,
the Financial Accounting Standards Board (FASB) issued ASU 2017-09
, “Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting.”
ASU 2017-09 clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under ASU 2017-09, an entity will not apply modification
accounting to a share-based payment award if all of the following are the same immediately before and after the change: (i) the award's fair value, (ii) the award's vesting conditions and (iii) the award's classification as an equity or liability instrument. ASU 2017-09 will be effective for us on January 1, 2018 and is not expected to have a material impact on the Company's 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 first quarter of 2017 at which time we adopted. The updates to the accounting standard included the following:
|
|
•
|
Excess tax benefits and deficiencies will no longer be recognized as a change in additional paid-in-capital in the equity section of the balance sheet, instead they are to be recognized in the income statement as a tax expense or benefit. In the statement of cash flows, excess tax benefits and deficiencies will no longer be classified as a financing activity, instead they will be classified as an operating activity. The Company recognized a
$578,000
adjustment to Retained Earnings for excess tax benefits not previously recognized. This adjustment is included in the statements of changes in shareholders' equity.
|
|
|
•
|
Entities will 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 awards 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.
|
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 new standard is effective for the Company for fiscal years beginning after December 15, 2016. The adoption of this standard in the quarter ended March 31, 2017, which is applied prospectively.
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 new standard was effective for the Company beginning in the quarter ended March 31, 2017, and requires prospective adoption. The adoption did not have a material impact on the Company’s consolidated financial statements.
Note 2 — Divestiture and Discontinued Operations
On November 4, 2015, the Company sold substantially all of the assets of its hotel/spa technology business operated by PAR Springer-Miller Systems, Inc., Springer-Miller International, LLC, 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, the results of operations of PSMS have been classified as discontinued operations in the consolidated statements of operations and consolidated statements of cash flows in accordance with Accounting Standards Codification (“ASC”) ASC 205-20 (Presentation of Financial Statements – Discontinued Operations). Additionally, the assets and associated liabilities have been classified as discontinued operations in the consolidated balance sheets. Total consideration to be received from the sale is
$16.6 million
in cash (the “Base Purchase Price”), with
$12.1 million
received at the time of closing, and
$4.5 million
payable eighteen months after the closing (the "Holdback Amount"). On May 5, 2017, the Company received payment of
$4.2 million
of the Holdback Amount, the unpaid balance reflecting a negative purchase price adjustment based on the net tanigble 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 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. As of
2017
, the Company has not received any Earn-Out payment and has not recorded any amount associated with this contingent consideration for years 2017 and 2018 as the Company does not believe achievement of the related targets is probable.
Summarized financial information for the Company’s discontinued operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
2017
|
|
2016
|
Assets
|
|
|
|
Other current assets
|
$
|
—
|
|
|
$
|
462
|
|
Assets of discontinued operations
|
$
|
—
|
|
|
$
|
462
|
|
|
|
|
|
Summarized financial information for the Company’s discontinued operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
2017
|
|
2016
|
|
|
|
|
Income (loss) from discontinued operations before income taxes
|
$
|
284
|
|
|
$
|
(1,131
|
)
|
(Provision for) benefit from income taxes
|
(60
|
)
|
|
411
|
|
Income (loss) from discontinued operations, net of taxes
|
$
|
224
|
|
|
$
|
(720
|
)
|
Note 3 — Accounts Receivable, net
The Company’s net accounts receivable consists of, excluding discontinued operations:
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
2017
|
|
2016
|
Government segment:
|
|
|
|
Billed
|
$
|
9,028
|
|
|
$
|
6,779
|
|
Advanced billings
|
(1,977
|
)
|
|
(1,599
|
)
|
|
7,051
|
|
|
5,180
|
|
Restaurant/Retail segment:
|
|
|
|
Accounts receivable - net
|
23,026
|
|
|
25,525
|
|
|
$
|
30,077
|
|
|
$
|
30,705
|
|
At
2017
and
2016
, the Company had recorded allowances for doubtful accounts of
$0.9 million
and
$0.9 million
, respectively, against Restaurant/Retail segment accounts receivable. Write-offs of accounts receivable during fiscal years
2017
and
2016
were
$0.5 million
and
$0.4 million
, respectively. The increase in bad debt expense which is recorded in the consolidated statements of operations was
$0.3 million
and
$0.4 million
in
2017
and
2016
, respectively.
Note 4 — Inventories, net
Inventories are used in the manufacture and service of Restaurant/Retail products. The components of inventory, net consist of the following, excluding discontinued operations:
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
2017
|
|
2016
|
Finished Goods
|
$
|
9,535
|
|
|
$
|
9,423
|
|
Work in process
|
766
|
|
|
443
|
|
Component parts
|
5,480
|
|
|
10,386
|
|
Service parts
|
5,965
|
|
|
5,985
|
|
|
$
|
21,746
|
|
|
$
|
26,237
|
|
At
December 31, 2017
and
2016
, the Company had recorded inventory reserves of
$10.0 million
and
$9.2 million
, respectively, against Restaurant/Retail inventories, which relate primarily to service parts.
Note 5 — Property, Plant and Equipment, net
The components of property, plant and equipment, net, excluding discontinued operations, are:
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
2017
|
|
2016
|
Land
|
$
|
253
|
|
|
$
|
253
|
|
Building and improvements
|
6,205
|
|
|
5,816
|
|
Rental property
|
5,650
|
|
|
5,345
|
|
Furniture and equipment
|
18,196
|
|
|
13,890
|
|
|
30,304
|
|
|
25,304
|
|
Less accumulated depreciation
|
(19,549
|
)
|
|
(18,269
|
)
|
|
$
|
10,755
|
|
|
$
|
7,035
|
|
The estimated useful lives of buildings and improvements and rental property are
twenty
to
twenty-five years
. The estimated useful lives of furniture and equipment range from
three
to
eight years
. Depreciation expense from continuing operations was
$1.3 million
and
$2.1 million
for
2017
and
2016
, respectively.
The Company leases a portion of its headquarters facility to various tenants. Net rent received from these leases totaled
$0.3 million
and
$0.3 million
for
2017
and
2016
, respectively. Future minimum rent payments due to the Company under these lease arrangements are approximately
$0.2 million
, and
$0.1 million
in 2018 and 2019, respectively.
The Company leases office space under various operating leases. Rental expense from continuing operations on operating leases was approximately
$3.0 million
and
$1.6 million
for
2017
and
2016
, respectively. Future minimum lease payments under all non-cancelable operating leases are (in thousands):
|
|
|
|
|
2018
|
2,936
|
|
2019
|
2,726
|
|
2020
|
2,217
|
|
2021
|
2,062
|
|
2022
|
2,062
|
|
Thereafter
|
2,687
|
|
|
$
|
14,690
|
|
Note 6 — Debt
On
November 29, 2016
, we, together with certain 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 provides 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 accrues 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. In March 2018, JPMorgan Chase granted the Company a Waiver of an event of default under the Credit Agreement due to its failure to meet the required fixed charge coverage ratio for the fiscal quarter ended December 31, 2017.
There was a
$950,000
outstanding balance on the line of credit at
December 31, 2017
compared to
no
outstanding amount as of December 31, 2016.
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
December 31, 2017
and
2016
, respectively. This loan matures on
November 1, 2019
. The Company’s interest rate is fixed at
4.00%
through the maturity date of the loan. The annual mortgage payment including interest through
November 1, 2019
totals
$0.2 million
.
The Company’s future principal payments under the mortgage loan are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less
Than
1 Year
|
|
1-3 Years
|
|
3 - 5
Years
|
|
More than 5
Years
|
Debt obligations
|
$
|
380
|
|
|
$
|
195
|
|
|
$
|
185
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 7 — Stock Based Compensation
The Company recognizes all stock-based compensation to employees and directors, including awards of stock options and restricted stock awards, in the financial statements as compensation cost over the applicable vesting periods based on their fair value on the date of grant. Total stock-based compensation expense included in selling, general and administrative expense in
2017
and
2016
was
$0.7 million
and
$0.5 million
, respectively. The amount recorded for the years ended December 31,
2017
and
2016
was recorded net of benefits of
$21,000
and
$0.3 million
, as the result of forfeitures of unvested stock awards prior to the completion of the requisite service period or failure of the Company to meet certain performance measures. The amount of total stock based compensation includes
$0.4 million
and
$0.2 million
in
2017
and
2016
, respectively, relating to restricted stock awards. No compensation expense has been capitalized during
2017
and
2016
.
The Company has reserved
1.0 million
shares under its 2015 Equity Incentive Plan (“Plan”). Stock options under this Plan may be incentive stock options or nonqualified stock options. The Plan also provides for restricted stock awards, including performance based awards. Stock options are nontransferable other than upon death. Option grants generally vest over a
one
to
three
year period after the grant and typically expire
ten years
after the date of the grant. The Plan provides for the grant of several different forms of stock-based compensation, including stock options to purchase shares of PAR common stock. The Compensation Committee of the Board of Directors (Compensation Committee) has discretion to determine the material terms and conditions of option awards under the Plan, provided that (i) the exercise price must be no less than the fair market value of PAR common stock (defined as the closing price) on the date of grant, (ii) the term must be no longer than
ten years
, and (iii) in no event shall the normal vesting schedule provide for vesting in less than
one
year. Other terms and conditions of an award of stock options will be determined by the Compensation Committee as set forth in the agreement relating to that award. The Compensation Committee has authority to administer the Plan.
Prior to the Plan, the Company reserved
1.0 million
shares under its 2005 Equity Incentive Plan (the “2005 Plan”). Stock options available for grant under the 2005 Plan were incentive stock options or nonqualified stock options. The 2005 Plan also provided for restricted stock awards, including both time and performance vesting awards. Stock options granted under the 2005 Plan are nontransferable other than upon death, generally vest over a one to three year period after grant and typically expire ten years from grant. No new grants of stock options or restricted stock awards under the 2005 Plan were made in 2017 or 2016.
The below table presents information with respect to stock options under the Plan and the 2005 Plan
:
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of Shares
(in thousands)
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic Value (in
thousands)
|
Outstanding at December 31, 2016
|
949
|
|
|
$
|
5.22
|
|
|
$
|
264
|
|
Options granted
|
149
|
|
|
8.82
|
|
|
|
Options exercised
|
(271
|
)
|
|
9.06
|
|
|
|
Forfeited and canceled
|
(31
|
)
|
|
5.64
|
|
|
|
Expired
|
(35
|
)
|
|
5.17
|
|
|
|
Outstanding at December 31, 2017
|
761
|
|
|
$
|
5.80
|
|
|
$
|
2,748
|
|
Vested and expected to vest at December 31, 2017
|
272
|
|
|
$
|
7.30
|
|
|
$
|
558
|
|
Total shares exercisable as of December 31, 2017
|
41
|
|
|
$
|
5.46
|
|
|
$
|
159
|
|
Shares remaining available for grant
|
687
|
|
|
|
|
|
|
|
The weighted average grant date fair value of stock options granted during the years
2017
and
2016
was
$3.26
and
$1.81
, respectively. The total intrinsic value of stock options exercised during the year ended December 31,
2017
was
$1,043,000
. The total intrinsic value of stock options exercised during the year ended
December 31, 2016
was
$5,800
. New shares of the Company’s common stock are issued as a result of stock option exercises in
2017
and for options exercised in
2016
. The fair value of options at the date of the grant was estimated using the Black-Scholes model with the following assumptions for the respective period ending December 31:
|
|
|
|
|
|
|
2017
|
2016
|
Expected option life
|
3.7 years
|
|
5.7 years
|
|
Weighted average risk-free interest rate
|
2.2
|
%
|
1.3
|
%
|
Weighted average expected volatility
|
36
|
%
|
33
|
%
|
Expected dividend yield
|
0
|
%
|
0
|
%
|
For the years ended
2017
and
2016
, the expected option life was based on the Company’s historical experience with similar type options. Expected volatility is based on historical volatility levels of the Company’s common stock over the preceding period of time consistent with the expected life. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life. Stock options outstanding at
2017
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
(in thousands)
|
|
Weighted
Average
Remaining Life
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
$7.15 - $11.01
|
|
761
|
|
|
7.41 years
|
|
$
|
5.80
|
|
At
2017
, the aggregate unrecognized compensation cost of unvested equity awards, as determined using a Black-Scholes option valuation model, was
$1.0 million
(net of estimated forfeitures) which is expected to be recognized as compensation expense in fiscal years
2018 through 2020
. The Company has not paid cash dividends on its common stock, and the Company presently intends to continue to retain earnings for reinvestment in growth opportunities. Accordingly, it is anticipated no cash dividends will be paid in the foreseeable future.
Current year activity with respect to the Company’s non-vested restricted stock awards is as follows:
|
|
|
|
|
|
|
|
Non-vested restricted stock awards (in thousands)
|
Shares
|
|
Weighted
Average grant-
date fair value
|
Balance at January 1, 2017
|
163
|
|
|
$
|
5.22
|
|
Granted
|
92
|
|
|
8.61
|
|
Vested
|
(75
|
)
|
|
8.42
|
|
Forfeited and canceled
|
(22
|
)
|
|
8.34
|
|
Balance at December 31, 2017
|
158
|
|
|
$
|
6.49
|
|
The Plan also provides for the issuance of restricted stock, as well as restricted stock units. These types of awards can have either service based or performance based vesting with performance goals being established by the Compensation Committee. Grants of restricted stock with service based vesting are subject to vesting periods ranging from
1
to
3 years
. Grants of restricted stock with performance based vesting are subject to a vesting period of
1
to
3 years
and performance conditions as defined by the Compensation Committee. The Company assesses the likelihood of achievement throughout the performance period and recognizes compensation expense associated with its performance awards based on this assessment. Other terms and conditions applicable to any award of restricted stock will be determined by the Compensation Committee and set forth in the agreement relating to that award.
During
2017
and
2016
, the Company issued
92,000
and
168,000
restricted stock awards, respectively, at a per share price of
$0.02
. For the periods ended
2017
and
2016
, the Company recognized compensation expense related to the performance awards based on its estimate of the probability of achievement in accordance with ASC Topic 718.
The fair value of restricted stock awards is based on the average price of the Company’s common stock on the date of grant. The weighted average grant date fair value of restricted stock awards granted during the years
2017
and
2016
was
$8.61
and
$5.23
, respectively. In accordance with the terms of the restricted stock award agreements, the Company released
75,000
and
85,000
shares during
2017
and
2016
, respectively. During
2017
, there were approximately
22,000
shares of restricted stock canceled,
12,000
of which were performance based restricted shares. During
2016
, there were
46,000
shares of restricted stock canceled, of which
45,000
were performance based restricted shares.
Note 8 — Income Taxes
The provision for income taxes from continuing operations consists of:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
(in thousands)
|
|
2017
|
|
2016
|
Current income tax:
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
61
|
|
State
|
122
|
|
|
167
|
|
Foreign
|
227
|
|
|
211
|
|
|
349
|
|
|
439
|
|
Deferred income tax:
|
|
|
|
Federal
|
4,029
|
|
|
768
|
|
State
|
(381
|
)
|
|
(60
|
)
|
|
3,648
|
|
|
708
|
|
Provision for income taxes
|
$
|
3,997
|
|
|
$
|
1,147
|
|
The deferred tax expense related to discontinued operations was
$0.1 million
in fiscal year
2017
and a benefit of
$0.4 million
recorded in fiscal year
2016
. Deferred tax liabilities (assets) are comprised of the following at:
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
2017
|
|
2016
|
Deferred tax liabilities:
|
|
|
|
Software development costs
|
$
|
2,119
|
|
|
$
|
2,223
|
|
Acquired intangible assets
|
913
|
|
|
1,731
|
|
Gross deferred tax liabilities
|
3,032
|
|
|
3,954
|
|
|
|
|
|
Allowances for bad debts and inventory
|
(2,958
|
)
|
|
(4,505
|
)
|
Capitalized inventory costs
|
(109
|
)
|
|
(104
|
)
|
Intangible assets
|
(672
|
)
|
|
(1,388
|
)
|
Employee benefit accruals
|
(1,282
|
)
|
|
(2,089
|
)
|
Federal net operating loss carryforward
|
(4,941
|
)
|
|
(5,820
|
)
|
State net operating loss carryforward
|
(1,540
|
)
|
|
(1,085
|
)
|
Tax credit carryforwards
|
(6,064
|
)
|
|
(6,888
|
)
|
Foreign currency
|
(33
|
)
|
|
(33
|
)
|
Other
|
(895
|
)
|
|
(1,333
|
)
|
Gross deferred tax assets
|
(18,494
|
)
|
|
(23,245
|
)
|
|
|
|
|
Less valuation allowance
|
1,653
|
|
|
1,874
|
|
|
|
|
|
Net deferred tax assets
|
$
|
(13,809
|
)
|
|
$
|
(17,417
|
)
|
The Company has Federal tax credit carryforwards of
$5.7 million
that expire in various tax years from 2018 to 2036. The Company has a Federal operating loss carryforward of
$5.0 million
that expires in various tax years through 2034. None of the operating loss carryforward will result in a benefit within additional paid in capital when realized. The Company also has state tax credit carryforwards of
$0.3 million
and state net operating loss carryforwards of
$1.5 million
that expire in various tax years through 2034. In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As a result of this analysis and based on the current year’s taxable income, and utilization of certain carryforwards management determined an increase in the valuation allowance in the current year to be appropriate. A valuation allowance is still required to the extent it is more likely than not that the future benefit associated with the foreign tax credit carryforwards and certain state tax loss carryforwards will not be realized. The Company recorded a tax expense associated with an increase of the deferred tax asset valuation allowance of
$25,000
for
2017
.
Included in the Company's consolidated statement of operations is a one-time adjustment to the value of the deferred tax asset of
$4.5 million
related to the decrease in the corporate tax rate included in the Tax Cuts and Jobs Act of 2017. On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Act. While we are able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions we may take. We are continuing to gather additional information to determine the final impact.
The Tax Act includes a mandatory one-time tax on accumulated earnings of foreign subsidiaries, and as a result all previously unremitted earnings for which no U.S. deferred liability has been accrued is now subject to U.S. tax. As a result, the Company
recorded a one-time reduction of the deferred tax asset of
$0.4 million
related to the one-time mandatory tax of previously deferred foreign earnings which is payable over an 8-year period.
The Company records the benefits relating to uncertain tax positions only when it is more likely than not (likelihood of greater than
50%
), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than
50%
likely of being realized upon settlement. At
2017
, the Company’s reserve for uncertain tax positions is not material and we believe we have adequately provided for its tax-related liabilities. The Company is no longer subject to United States federal income tax examinations for years before 2013. The provision for income taxes differed from the provision computed by applying the Federal statutory rate to income (loss) from continuing operations before taxes due to the following:
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2017
|
|
2016
|
Federal statutory tax rate
|
34.0
|
%
|
|
34.0
|
%
|
State taxes
|
(0.9
|
)
|
|
1.4
|
|
Non deductible expenses
|
19.4
|
|
|
2.7
|
|
Tax credits
|
(90.6
|
)
|
|
(6.7
|
)
|
Stock based compensation
|
(69.6
|
)
|
|
—
|
|
Foreign income tax rate differential
|
(14.0
|
)
|
|
(2.1
|
)
|
Repatriation Tax
|
110.5
|
|
|
—
|
|
Impact of Tax Cuts and Jobs Act enactment
|
1,241.0
|
|
|
—
|
|
Valuation allowance
|
—
|
|
|
0.1
|
|
Tax return and audit adjustments
|
(107.3
|
)
|
|
—
|
|
Contingent purchase revaluation
|
(88.0
|
)
|
|
—
|
|
Other
|
(1.7
|
)
|
|
2.0
|
|
|
1,032.8
|
%
|
|
31.4
|
%
|
The effective income tax rate was
1,032.8%
and
31.4%
during the years ended
December 31, 2017
and
December 31, 2016
, respectively. The effective tax rate in any reporting period can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.
The effective tax rate for the year ended
December 31, 2017
was significantly impacted by recording the impact of the Tax Cuts and Jobs Act (the “Tax Act”) of 2017. Impacts on the Company's effective tax rate from the Tax Act include a
$4.5 million
or
1,241.0%
increase for the federal income tax rate change from 34% to 21% as well as a
$0.4 million
or
110.5%
increase for the one-time repatriation tax on accumulated foreign earnings.
Note 9 — Employee Benefit Plans
The Company has a deferred profit-sharing retirement plan that covers substantially all employees. The Company’s annual contribution to the plan is discretionary. The Company did not make a contribution in
2017
or
2016
. The plan also contains a 401(k) provision that allows employees to contribute a percentage of their salary up to the statutory limitation. These contributions are matched at the rate of
10%
by the Company. The Company’s matching contributions under the 401(k) component were
$0.3 million
and
$0.3 million
in
2017
and
2016
, respectively.
The Company also maintains an incentive-compensation plan. Participants in the plan are key employees as determined by the Board of Directors and executive management. Compensation under the plan is based on the achievement of predetermined financial performance goals of the Company and its subsidiaries. Awards under the plan are payable in cash. Awards under the plan totaled
$0.5 million
and
$0.5 million
, in
2017
and
2016
, respectively.
The Company also sponsors a deferred compensation plan for a select group of highly compensated employees. Participants may make elective deferrals of their salary to the plan in excess of tax code limitations that apply to the Company’s qualified plan. The Company invests the participants’ deferred amounts to fund these obligations. The Company also has the sole discretion to
make employer contributions to the plan on behalf of the participants, though we did not make any employer contributions in
2017
or
2016
.
Note 10 — Contingencies
We are subject to legal proceedings which arise in the ordinary course of business. Additionally, U.S. Government contract costs are subject to periodic audit and adjustment. In the fourth quarter of 2016, the Company voluntarily notified the SEC and the U.S. Department of Justice ("DOJ") that our Audit Committee was overseeing an internal investigation by outside counsel into certain import/export and sales documentation activities at our China and Singapore offices to determine whether such activities were improper and in violation of the U.S. Foreign Corrupt Practices Act ("FCPA") and other applicable laws and certain company policies. On May 1, 2017, the Company received a subpoena from the SEC for documents relating to the Company's investigation. During the year ended December 31, 2017, we recorded
$2.9 million
of expenses relating to the investigation, including expenses of outside legal counsel and forensic accountants compared to
$1.3 million
in
2016
. We are currently unable to predict what actions the SEC, the DOJ, or other governmental agencies (including foreign governmental agencies) might take, or what the likely outcome of any such actions might be, or estimate the range of reasonably possible fines or penalties, which may be material. The SEC, DOJ, and other governmental authorities have a broad range of civil and criminal sanctions, and the imposition of sanctions, fines or remedial measures could have a material adverse effect on the Company’s business, prospects, reputation, financial condition, liquidity, results of operations or cash flows.
Note 11 — Segment and Related Information
The Company is organized in
two
segments: Restaurant/Retail and Government. Management views the Restaurant/Retail and Government segments separately in operating its business, as the products and services are different for each segment. The Company’s chief operating decision maker is the Company’s Chief Executive Officer. The hotel/spa reporting unit was sold as of November 4, 2015, and is classified as discontinued operations (see Note 2 – Divestiture and Discontinued Operations - of the Notes to Consolidated Financial Statements).
The Restaurant/Retail segment offers integrated solutions to the restaurant and retail industry consisting of restaurants,-grocery stores-and specialty retail outlets. These offerings include industry leading hardware and software applications utilized at the point-of-sale, back of store and corporate office and includes the acquisition of Brink Software, Inc. This segment also offers customer support including field service, installation, and
twenty-four
-hour telephone support and depot repair. With our SureCheck solution, we continue to expand our business into retail, big box retailers, grocery stores, and contract food management organizations. 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.
Information noted as “Other” primarily relates to the Company’s corporate, home office operations.
Information as to the Company’s segments is set forth below. Amounts below exclude discontinued operations.
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
(in thousands)
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
Restaurant/Retail
|
$
|
171,593
|
|
|
$
|
149,341
|
|
Government
|
61,012
|
|
|
80,312
|
|
Total
|
$
|
232,605
|
|
|
$
|
229,653
|
|
|
|
|
|
Operating (loss) income :
|
|
|
|
Restaurant/Retail
|
$
|
(2,761
|
)
|
|
$
|
825
|
|
Government
|
6,523
|
|
|
6,160
|
|
Other
|
(3,883
|
)
|
|
(4,772
|
)
|
|
(121
|
)
|
|
2,213
|
|
Other income, net
|
629
|
|
|
1,316
|
|
Interest (expense) income
|
(121
|
)
|
|
121
|
|
Income from continuing operations before provision for income taxes
|
$
|
387
|
|
|
$
|
3,650
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
Restaurant/Retail
|
$
|
74,257
|
|
|
$
|
87,672
|
|
Government
|
8,714
|
|
|
6,504
|
|
Other
|
31,653
|
|
|
29,873
|
|
Total
|
$
|
114,624
|
|
|
$
|
124,049
|
|
|
|
|
|
Goodwill:
|
|
|
|
Restaurant/Retail
|
$
|
10,315
|
|
|
$
|
10,315
|
|
Government
|
736
|
|
|
736
|
|
Total
|
$
|
11,051
|
|
|
$
|
11,051
|
|
|
|
|
|
Depreciation, amortization and accretion:
|
|
|
|
Restaurant/Retail
|
$
|
3,469
|
|
|
$
|
3,479
|
|
Government
|
21
|
|
|
38
|
|
Other
|
543
|
|
|
1,107
|
|
Total
|
$
|
4,033
|
|
|
$
|
4,624
|
|
|
|
|
|
Capital expenditures including software costs:
|
|
|
|
Restaurant/Retail
|
$
|
3,994
|
|
|
$
|
3,285
|
|
Government
|
7
|
|
|
41
|
|
Other
|
4,856
|
|
|
2,792
|
|
Total
|
$
|
8,857
|
|
|
$
|
6,118
|
|
The following table presents revenues by country based on the location of the use of the product or services. Amounts below exclude discontinued operations.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
United States
|
$
|
213,693
|
|
|
$
|
210,821
|
|
Other Countries
|
18,912
|
|
|
18,832
|
|
Total
|
$
|
232,605
|
|
|
$
|
229,653
|
|
The following table presents assets by country based on the location of the asset. Amounts below exclude discontinued operations.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
United States
|
$
|
99,284
|
|
|
$
|
110,369
|
|
Other Countries
|
15,340
|
|
|
13,680
|
|
Total
|
$
|
114,624
|
|
|
$
|
124,049
|
|
Customers comprising 10% or more of the Company’s total revenues, excluding discontinued operations, are summarized as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Restaurant and Retail segment
:
|
|
|
|
McDonald’s Corporation
|
33
|
%
|
|
25
|
%
|
Yum! Brands, Inc.
|
14
|
%
|
|
11
|
%
|
Government segment
:
|
|
|
|
U.S. Department of Defense
|
26
|
%
|
|
35
|
%
|
All Others
|
27
|
%
|
|
29
|
%
|
|
100
|
%
|
|
100
|
%
|
No other customer within All Others represented more than 10% of the Company’s total revenue for the years ended
2017
and
2016
.
Note 12 — 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 − quoted prices in active markets for identical assets or liabilities (observable)
Level 2 − inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable market data for essentially the full term of the asset or liability (observable)
Level 3 − unobservable inputs that are supported by little or no market activity, but are significant to determining the fair value of the asset or liability (unobservable)
The Company’s financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments and deferred compensation assets and liabilities. For cash and cash equivalents, trade receivables and trade payables, the carrying amounts of these financial instruments as of
2017
, and
2016
were considered representative of their fair values. The estimated fair value of the Company’s long-term debt and line of credit at
2017
and
2016
was based on variable and fixed interest rates at
2017
and
2016
, respectively, for new issues with similar remaining maturities and approximates the respective carrying values at
2017
and
2016
.
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 (see Note 9 – Employees Benefit Plans - of the Notes to Consolidated Financial Statements). 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, as defined under U.S. GAAP, 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 the deferred compensation plan, which are recorded at fair value each period using the cash surrender value of the insurance investments.
The Company has obligations, to be paid in cash, to the former owners of Brink Software, based on the achievement of certain conditions as defined in the definitive agreement (see Note 1 – Summary of Significant Accounting Policies - sub-footnote Contingent Consideration - of the Notes to Consolidated Financial Statements).
The fair value of this contingent consideration payable, included in other long-term liabilities on the consolidated balance sheets, was estimated using a discounted cash flow method, with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820, fair value measurements and disclosures. The significant inputs in the Level 3 measurement not supported by market activity included the Company’s probability assessments of expected future cash flows related to the Company’s acquisition of Brink during the contingent consideration period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the definitive agreement. The liabilities for the contingent consideration were established at the time of the acquisition and are evaluated on a quarterly basis based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of that period. Changes 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 measurement.
The following table presents a summary of changes in fair value of the Company’s Level 3 liabilities that are measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
Level 3 Inputs
|
|
Liabilities
|
Balance at December 31, 2016
|
$
|
4,000
|
|
New level 3 liability
|
—
|
|
Change in fair value of contingent consideration liability
|
(1,000
|
)
|
Transfers into or out of Level 3
|
—
|
|
Balance at December 31, 2017
|
$
|
3,000
|
|
Note 13 — Related Party Transactions
The Company leases its corporate wellness facility to related parties at a current rate of
$9,775
per month. The Company receives complimentary memberships to this facility which are provided to local employees. During
2017
and
2016
, the Company recognized rental income of
$117,300
for the lease of the facility in each year. Ongoing expenses relating to the facility amounted to
$25,000
and
$83,000
during
2017
and
2016
, respectively. The rent receivable at December 31, 2017 and 2016 was
$59,000
and
$29,000
, respectively. The amount of the rent receivable was collected in full subsequent to each respective year end.
In October 2016, we entered into a statement of work ("SOW") with Xpanxion LLC for software development services. In 2017 and
2016
, we incurred approximately
$1.0 million
and
$0.2 million
of fees, respectively, to Xpanxion under the SOW. In 2017 and 2016, we made payments of
$1.2 million
and
zero
, respectively, to Xpanxion under the SOW. Until his retirement on June 30, 2017, Paul Eurek, a former director of the Company, was President of Xpanxion LLC.