NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Basis of presentation
The accompanying unaudited interim consolidated financial statements of PAR Technology Corporation (the “Company” or “PAR”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation S-X pertaining to interim financial statements. Accordingly, they do not include all information and footnotes required by GAAP for annual financial statements. In the opinion of management, such unaudited interim consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the results for the interim periods included in this Quarterly Report on Form 10-Q (“Quarterly Report”). Operating results for the
three and six
months ended
June 30, 2018
are not necessarily indicative of the results of operations that may be expected for any future period. Certain amounts for prior periods have been reclassified to conform to the current period classification.
The preparation of unaudited interim consolidated financial statements requires management of the Company to make a number of estimates, judgments and assumptions relating to the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited interim consolidated financial statements and the reported amount of revenues and expenses during the period. Primary areas where financial information is subject to the use of estimates, assumptions and the application of judgment include revenue recognition, accounts receivable, inventories, accounting for business combinations, contingent consideration, equity compensation, goodwill and intangible assets, and taxes. Actual results could differ from those estimates.
The unaudited interim consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
, filed with the Securities and Exchange Commission (“SEC”) on March 16, 2018.
Note 2 - Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers, codified as ASC Topic 606 (“ASC 606”). The FASB issued amendments to ASC 606 during 2016. ASC 606 requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and related cash flows arising from contracts with customers. ASC 606 is effective for annual and interim reporting periods beginning after December 15, 2017.
Two adoption methods are permitted under ASU 2014-09. The new standard may be adopted through either retrospective application to all periods presented in our 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 method. We reviewed significant open contracts with customers for each revenue source.
Our revenue is derived from Software as a Service (SaaS), hardware and software sales, software activation, hardware support, installations, maintenance, professional services, contracts and programs. ASC 606 requires us to distinguish and measure performance obligations under customer contracts. Transaction prices are allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Performance obligations are satisfied over time as work progresses or at a point in time.
We evaluated the potential performance obligations within our Restaurant/Retail reporting segment (Brink/POS, SureCheck, and PixelPoint) and evaluated whether each deliverable or promise met the ASC 606 criteria to be considered distinct performance obligations. Revenue in the Restaurant/Retail reporting segment is recognized at a point in time for software, manufactured or “purchased for re-sale” hardware (such as terminals, peripherals printers, card readers and other accessories), installations and “pass through licenses”. Revenue on these items are recognized when the customer obtains control of the asset. This generally occurs upon delivery and acceptance by the customer or upon installation or delivery to a third party carrier for onward delivery to customer. Additionally, revenue in the Restaurant/Retail reporting segment relating to subscription services for software, SaaS, Advanced Exchange, on-site support and other services are recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s performance obligations. Our support services are stand-ready obligations that are provided over the life of the contract, which typically ranges from
12
months to
60
months. We offer installation services to our customers for hardware and software for which we primarily hire third-party contractors to install the equipment on our behalf. We pay the third-party contractors an installation service fee based on an hourly rate as agreed upon between us and contractor. When third party installers are used, we determine whether the nature of our promises are performance obligations to provide the specified
goods or services ourselves (principal) or to arrange for the third party to provide the goods or services (agent). In our customer arrangements, we are primarily responsible for fulfilling the promise to provide a good or service, we have inventory risk before the good or service is transferred to the customer, and we have discretion in establishing prices. We are the principal in the arrangement and record installation revenue on a gross basis.
At times we will offer maintenance services at different prices for customers based on the life of the service, which typically ranges from
12
to
60
months. The support services are a ‘stand-ready obligation’ satisfied over time on the basis that customer consumes and receives a benefit from having access to our support resources, when and as needed, throughout the contract term. For this reason, the support services are recognized ratably over the term since we satisfy our obligation to stand ready by performing these services each day.
Our contracts typically require payment within
30
to
90
days from the shipping date or installation date, depending on our terms with the customer. For all sales not bundled with other performance obligations, the Company determines selling price based on the following table.
|
|
|
|
Restaurant and Retail
|
Performance Obligation
|
Stand-alone Selling Price
|
Cost Plus Margin
|
Hardware
|
X
|
|
Pass Thru Hardware (Terminals, Printers, Card Readers, etc.)
|
|
X
|
Hardware Support (i.e., Advanced Exchange)
|
|
X
|
Installation
|
|
X
|
Maintenance
|
|
X
|
Software
|
X
|
|
Software Updates
|
|
X
|
Professional Services / Project Management
|
|
X
|
Software Activation
|
|
X
|
Our revenue in the Government reporting segment is recognized over time as control is generally transferred continuously to our customers. Revenue generated by the Government reporting segment is predominantly related to services provided, however, revenue is also generated through the sale of materials, software, hardware, and maintenance. For the Government reporting segment cost plus fixed fee contract portfolio, revenue is recognized over time using costs incurred to date to measure progress toward satisfying our performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and G&A expenses. Profit is recognized on the fixed fee portion of the contract as costs are incurred and invoiced. Long-term fixed price contracts and programs involve the use of various techniques to estimate total contract revenue and costs. For long-term fixed price contracts, we estimate the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract and recognize that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include: labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; and the performance of subcontractors. Revenue and profit in future periods of contract performance are recognized using the aforesaid assumptions and adjusting the estimate. Allocating the transaction price varies based on the performance obligations within a specific contract as the stand-alone selling price of the software and maintenance/support is not always discernable. Once the services provided are determined to be distinct or not distinct, we evaluate how to allocate the transaction price. Generally, the Government reporting segment does not sell the same good or service to similar customers and the contract performance obligations are unique to each government solicitation. The performance obligations are typically not distinct. In cases where there are distinct performance obligations, the transaction price would be allocated to each performance obligation on a standalone basis. Cost plus margin is used for the cost plus fixed fee contract portfolios, and residual is used for the fixed price and time & materials contracts portfolios.
In determining when to recognize revenue, we have evaluated the goods/services provided in all contracts and considered two scenarios: Scenario One - The performance obligation is satisfied over time and Scenario Two - the performance obligation is satisfied at a point in time. We evaluated factors suggesting the aforementioned conclusions and generally, Scenario One applies to our portfolio of contracts. However, there may be circumstances where Scenario Two, or Scenario One and Two could apply.
We usually expect payment within
30
to
90
days from the date of service, depending on our terms with the customer. None of our contracts as of
June 30, 2018
contained a significant financing component.
There was
no
impact on retained earnings for the
six months ended
June 30, 2018
based on the adoption of ASC 606.
Performance Obligations Outstanding
Our performance obligations outstanding represent the transaction price of firm, non-cancellable orders, with expected delivery dates to customers subsequent to
June 30, 2018
, for which work has not yet been performed. The aggregate performance obligations attributable to each of our reporting segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
Current - under one year
|
Non-current - over one year
|
Restaurant
|
$
|
10,752
|
|
$
|
4,783
|
|
Government
|
484
|
|
—
|
|
TOTAL
|
$
|
11,236
|
|
$
|
4,783
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
Current - under one year
|
Non-current - over one year
|
Restaurant
|
$
|
6,199
|
|
$
|
2,668
|
|
Government
|
585
|
|
—
|
|
TOTAL
|
$
|
6,784
|
|
$
|
2,668
|
|
Most performance obligations over one year are related to service and support contracts, of which we expect to fulfill within
60
months.
During the
three and six
months ended
June 30, 2018
, we recognized revenue of
$6.5 million
and
$12.2 million
that was included in contract liabilities at the beginning of the period, respectively.
Disaggregated Revenue
We disaggregate revenue from contracts with customers by major product group for each of the reporting segments because we believe it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Disaggregated revenue for the
three and six
months ended
June 30, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018
|
|
Restaurant/Retail - Point in Time
|
Restaurant/Retail - Over Time
|
Government - Over Time
|
Restaurant
|
27,430
|
|
5,742
|
|
—
|
|
Grocery
|
873
|
|
782
|
|
—
|
|
Mission Systems
|
—
|
|
—
|
|
8,707
|
|
ISR Solutions
|
—
|
|
—
|
|
9,037
|
|
TOTAL
|
28,303
|
|
6,524
|
|
17,744
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
|
Restaurant/Retail - Point in Time
|
Restaurant/Retail - Over Time
|
Government - Over Time
|
Restaurant
|
59,594
|
|
11,599
|
|
—
|
|
Grocery
|
1,626
|
|
1,528
|
|
—
|
|
Mission Systems
|
—
|
|
—
|
|
17,041
|
|
ISR Solutions
|
—
|
|
—
|
|
16,844
|
|
TOTAL
|
61,220
|
|
13,127
|
|
33,885
|
|
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would be less than one year or the total amount of commissions would be immaterial. Commissions are recorded in SG&A. We elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (for example, sales, use, value added, and some excise taxes).
Note 3 — 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 (unaudited) and Consolidated Statements of Cash Flows (unaudited) 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 (unaudited). Total consideration to be received from the sale is
$16.6 million
in cash (the “Base Purchase Price”), with
$12.1 million
paid at the closing of the asset sale and up to
$4.5 million
payable
18 months
following the closing (the “Holdback Amount”). On May 5, 2017, the Company received payment of
$4.2 million
of the Holdback Amount, the unpaid balance is reflective of a negative purchase price adjustment based on the net tangible asset calculation provided under the PSMS APA. In addition to the Base Purchase Price, contingent consideration of up to
$1.5 million
(the “Earn-Out”) could be received by the Company based on the achievement of certain agreed-upon revenue and earnings targets for calendar years
2017
,
2018
and
2019
(up to
$500,000
per calendar year), subject to setoff for PSMS and ParTech, Inc. indemnification obligations thereunder and unresolved claims. The Company received no Earn-Out payment for calendar year
2017
and, as of
June 30, 2018
, the Company did not record any amount associated with calendar years
2018
and
2019
, as the Company does not believe achievement of the related revenue and earnings targets is probable.
As of
June 30, 2018
and
December 31, 2017
, the Company did not have any assets or liabilities from discontinued operations.
Summarized financial operating results for the Company’s discontinued operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
Six Months
Ended June 30,
|
|
2018
|
|
2017
|
2018
|
|
2017
|
Operations
|
|
|
|
|
|
|
Total revenues
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before income taxes
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
284
|
|
Provision for income taxes
|
—
|
|
|
—
|
|
—
|
|
|
(101
|
)
|
Income from discontinued operations, net of taxes
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
183
|
|
During the
three and six
months ended
June 30, 2017
, the Company recognized income on discontinued operations of
$0.0 million
(net of tax) and
$0.2 million
(net of tax), respectively, mainly due to an increase of the note receivable. The increase of the note receivable is reflected in the Company’s earnings for
2017
and was received by the Company on
May 5, 2017
.
No
amount was recorded for the
three and six
months ended
June 30, 2018
.
Note 4 — Accounts Receivable
The Company’s accounts receivable, net consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Government segment:
|
|
|
|
Billed
|
$
|
10,539
|
|
|
$
|
9,028
|
|
Advanced billings
|
(1,212
|
)
|
|
(1,977
|
)
|
|
9,327
|
|
|
7,051
|
|
|
|
|
|
Restaurant/Retail segment:
|
24,091
|
|
|
23,026
|
|
Accounts receivable - net
|
$
|
33,418
|
|
|
$
|
30,077
|
|
At
June 30, 2018
and
December 31, 2017
, the Company had recorded allowances for doubtful accounts of
$1.2 million
and
$0.9 million
, respectively, against Restaurant/Retail reporting segment accounts receivable.
Note 5 — Inventories
Inventories are primarily used in the manufacture, maintenance and service for Restaurant/Retail reporting segment products. The components of inventories, net, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Finished goods
|
$
|
13,457
|
|
|
$
|
9,535
|
|
Work in process
|
850
|
|
|
766
|
|
Component parts
|
6,266
|
|
|
5,480
|
|
Service parts
|
6,175
|
|
|
5,965
|
|
|
$
|
26,748
|
|
|
$
|
21,746
|
|
At
June 30, 2018
and
December 31, 2017
, the Company had recorded inventory reserves of
$11.0 million
and
$10.0 million
, respectively, against Restaurant/Retail reporting segment inventories, which relates primarily to service parts.
Note 6 — Identifiable Intangible Assets and Goodwill
Identifiable intangible assets represent intangible assets acquired by the Company in connection with its acquisition of Brink Software Inc. in 2014 ("Brink Acquisition") and software development costs. The Company capitalizes certain software development costs for software used in its Restaurant/Retail reporting segment. Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development costs. The technological feasibility of a software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary to establish that the product meets its design specifications, including functionality, features, and technical performance requirements. Software development costs incurred after establishing technological feasibility for software sold as a perpetual license, as defined within ASC 985-20 (Software – Costs of Software to be sold, Leased, or Marketed) 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. Software development costs capitalized within continuing operations during the
three and six
months ended
June 30, 2018
were
$1.1 million
and
$2.1 million
, respectively. Software development costs capitalized within continuing operations during the
three and six
months ended
June 30, 2017
were
$1.1 million
and
$2.1 million
, respectively.
Annual amortization, charged to cost of sales 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 the product bear to the total of current and anticipated future gross revenues for the product. Amortization of capitalized software development costs from continuing operations for the
three and six
months ended
June 30, 2018
were
$0.9 million
and
$1.7 million
, respectively. Amortization of capitalized software development costs from continuing operations for the
three and six
months ended
June 30, 2017
were
$0.4 million
and
$0.7 million
, respectively.
Amortization of intangible assets acquired in the Brink Acquisition amounted to
$0.2 million
and
$0.5 million
for the
three and six
months ended
June 30, 2018
, respectively. Amortization of intangible assets acquired in the Brink Acquisition amounted to
$0.2 million
and
$0.5 million
for each of the
three and six
months ended
June 30, 2017
, respectively.
The components of identifiable intangible assets, excluding discontinued operations, are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Estimated
Useful Life
|
Acquired and internally developed software costs
|
$
|
21,768
|
|
|
$
|
19,670
|
|
|
3 - 7 years
|
Customer relationships
|
160
|
|
|
160
|
|
|
7 years
|
Non-competition agreements
|
30
|
|
|
30
|
|
|
1 year
|
|
21,958
|
|
|
19,860
|
|
|
|
Less accumulated amortization
|
(9,854
|
)
|
|
(8,190
|
)
|
|
|
|
$
|
12,104
|
|
|
$
|
11,670
|
|
|
|
Trademarks, trade names (non-amortizable)
|
400
|
|
|
400
|
|
|
N/A
|
|
$
|
12,504
|
|
|
$
|
12,070
|
|
|
|
The expected future amortization of intangible assets, assuming straight-line amortization of capitalized software development costs and acquisition related intangibles, is as follows (in thousands):
|
|
|
|
|
2018
|
$
|
1,769
|
|
2019
|
3,140
|
|
2020
|
2,640
|
|
2021
|
1,927
|
|
2022
|
534
|
|
Thereafter
|
2,094
|
|
Total
|
$
|
12,104
|
|
The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. The Company operates in
two
reportable business segments, Restaurant/Retail and Government. Goodwill impairment testing is performed at the reporting 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. The amount of goodwill carried by the Restaurant/Retail and Government reporting units is
$10.3 million
and
$0.8 million
, respectively, at
June 30, 2018
and
December 31, 2017
.
Note 7 — Stock Based Compensation
The Company applies the fair value recognition provisions of ASC Topic 718. The Company recorded stock based compensation of
$0.3 million
and
$0.4 million
for the
three and six
month periods ended
June 30, 2018
, respectively. The Company recorded stock based compensation of
$0.1 million
and
$0.2 million
for the
three and six
month periods ended
June 30, 2017
, respectively. The amount recorded for both the
three and six
month periods ended
June 30, 2018
were not netted from any benefits as a result of forfeitures of unvested stock awards prior to completion of the requisite service period and/or failure to achieve performance criteria. The amount recorded for both the
three and six
month periods ended
June 30, 2017
were net of benefits of
$10,000
as a result of forfeitures of unvested stock awards prior to completion of the requisite service period and/or failure to achieve performance criteria.
At
June 30, 2018
, the aggregate unrecognized compensation expense related to unvested equity awards was
$1.4 million
(net of estimated forfeitures), which is expected to be recognized as compensation expense in fiscal years
2018
through
2020
.
For the
three and six
month periods ended
June 30, 2018
and
2017
, the Company recognized compensation expense related to performance awards based on its estimate of the probability of achievement in accordance with ASC Topic 718.
Note 8 — Net (loss) income per share
Earnings (loss) per share are calculated in accordance with ASC Topic 260, which specifies the computation, presentation and disclosure requirements for earnings per share (EPS). It requires the presentation of basic and diluted EPS. Basic EPS excludes all dilution and is based upon the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that would occur if convertible securities or other contracts to issue common stock were exercised. For the
six months ended
June 30, 2018
and
June 30, 2017
, there were
no
anti-dilutive stock options outstanding.
The following is a reconciliation of the weighted average of shares of common stock outstanding for the basic and diluted EPS computations (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
2018
|
|
2017
|
Net (loss) income from continuing operations
|
$
|
(1,323
|
)
|
|
$
|
1,977
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Shares outstanding at beginning of period
|
16,286
|
|
|
15,811
|
|
Weighted average shares (repurchased)/issued during the period, net
|
44
|
|
|
108
|
|
Weighted average common shares, basic
|
16,330
|
|
|
15,919
|
|
Net (loss) income from continuing operations per common share, basic
|
$
|
(0.08
|
)
|
|
$
|
0.12
|
|
Diluted:
|
|
|
|
|
|
Weighted average common shares, basic
|
16,330
|
|
|
15,919
|
|
Dilutive impact of stock options and restricted stock awards
|
—
|
|
|
260
|
|
Weighted average common shares, diluted
|
16,330
|
|
|
16,179
|
|
Net (loss) income from continuing operations per common share, diluted
|
$
|
(0.08
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Ended June 30,
|
|
2018
|
|
2017
|
Net (loss) income from continuing operations
|
$
|
(1,255
|
)
|
|
$
|
3,241
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Shares outstanding at beginning of period
|
15,969
|
|
|
15,771
|
|
Weighted average shares (repurchased)/issued during the period, net
|
24
|
|
|
122
|
|
Weighted average common shares, basic
|
15,993
|
|
|
15,893
|
|
Net (loss) income from continuing operations per common share, basic
|
$
|
(0.08
|
)
|
|
$
|
0.20
|
|
Diluted:
|
|
|
|
|
|
Weighted average common shares, basic
|
15,993
|
|
|
15,893
|
|
Dilutive impact of stock options and restricted stock awards
|
—
|
|
|
253
|
|
Weighted average common shares, diluted
|
15,993
|
|
|
16,146
|
|
Net (loss) income from continuing operations per common share, diluted
|
$
|
(0.08
|
)
|
|
$
|
0.20
|
|
Note 9 - Income Taxes
On December 22, 2017, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act ("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 accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which accounting under Accounting Standards Codification 740,
Income Taxes
("ASC 740") is complete. To the extent a company’s accounting
for certain income tax effects of the Tax Act is incomplete, but the company is able to determine a reasonable estimate, the company must record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate, 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 the corporate tax rate and the deemed repatriation transition tax, the final impact of the Tax Act may differ from our 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.
Note 10 — Contingencies
The Company is 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 third quarter of 2016, the Company's Audit Committee commenced an internal investigation into certain activities at our China and Singapore offices to determine whether certain import/export and sales documentation activities were improper and in violation of the U.S. Foreign Corrupt Practices Act ("FCPA") and other applicable laws and certain Company policies. We voluntarily notified the SEC and the U.S. Department of Justice ("DOJ") of the internal investigation. On May 1, 2017, the Company received a subpoena from the SEC for documents relating to the internal investigation. Following the conclusion of the Audit Committee's internal investigation, the Company voluntarily reported the relevant findings of the investigaton to the China and Singapore authorities. During the
three and six
months ended
June 30, 2018
, we recorded
$0.3 million
and
$0.6 million
, respectively, of expenses relating to the internal investigation and the SEC subpoena, including expenses of outside legal counsel and forensic accountants, compared to
$0.6 million
and
$1.6 million
, respectively, for the
three and six
months ended
June 30, 2017
. We are currently unable to predict what actions the SEC, DOJ, or other governmental agencies (including China and Singapore authorities) 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 operates in
two
distinct reportable segments, Restaurant/Retail and Government. The Company’s chief operating decision maker is the Company’s Chief Executive Officer. The Restaurant/Retail reporting segment offers point-of-sale ("POS"), food safety and management technology solutions to restaurants and retail, including in the fast casual, quick serve and table service restaurant categories, and specialty retail outlets. This segment also offers customer support including field service, installation, Advanced Exchange, and twenty-four-hour telephone support and depot repair. The Government reporting 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 reporting segments is set forth below, excluding discontinued operations (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
|
Restaurant/Retail
|
$
|
34,827
|
|
|
$
|
47,716
|
|
|
$
|
74,347
|
|
|
$
|
99,265
|
|
Government
|
17,744
|
|
|
14,545
|
|
|
33,885
|
|
|
28,861
|
|
Total
|
$
|
52,571
|
|
|
$
|
62,261
|
|
|
$
|
108,232
|
|
|
$
|
128,126
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant/Retail
|
$
|
(2,800
|
)
|
|
$
|
1,795
|
|
|
$
|
(3,408
|
)
|
|
$
|
4,161
|
|
Government
|
2,012
|
|
|
1,587
|
|
|
3,278
|
|
|
3,098
|
|
Other
|
(336
|
)
|
|
(628
|
)
|
|
(856
|
)
|
|
(2,264
|
)
|
|
(1,124
|
)
|
|
2,754
|
|
|
(986
|
)
|
|
4,995
|
|
Other (expense) income, net
|
(384
|
)
|
|
54
|
|
|
(335
|
)
|
|
(194
|
)
|
Interest expense, net
|
(78
|
)
|
|
(13
|
)
|
|
(119
|
)
|
|
(45
|
)
|
(Loss) income before provision for income taxes
|
$
|
(1,586
|
)
|
|
$
|
2,795
|
|
|
$
|
(1,440
|
)
|
|
$
|
4,756
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion:
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant/Retail
|
$
|
1,057
|
|
|
$
|
821
|
|
|
$
|
1,965
|
|
|
$
|
1,595
|
|
Government
|
6
|
|
|
4
|
|
|
11
|
|
|
11
|
|
Other
|
154
|
|
|
129
|
|
|
303
|
|
|
246
|
|
Total
|
$
|
1,217
|
|
|
$
|
954
|
|
|
$
|
2,279
|
|
|
$
|
1,852
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures including software costs:
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant/Retail
|
$
|
1,126
|
|
|
$
|
1,256
|
|
|
$
|
2,265
|
|
|
$
|
2,331
|
|
Government
|
37
|
|
|
7
|
|
|
37
|
|
|
7
|
|
Other
|
1,002
|
|
|
1,033
|
|
|
1,533
|
|
|
3,307
|
|
Total
|
$
|
2,165
|
|
|
$
|
2,296
|
|
|
$
|
3,835
|
|
|
$
|
5,645
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by country:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
48,845
|
|
|
$
|
57,621
|
|
|
$
|
101,523
|
|
|
$
|
119,188
|
|
Other Countries
|
3,726
|
|
|
4,640
|
|
|
6,709
|
|
|
8,938
|
|
Total
|
$
|
52,571
|
|
|
$
|
62,261
|
|
|
$
|
108,232
|
|
|
$
|
128,126
|
|
The following table represents identifiable assets by reporting segment, excluding discontinued operations (in thousands).
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Restaurant/Retail
|
$
|
82,813
|
|
|
$
|
74,257
|
|
Government
|
11,067
|
|
|
8,714
|
|
Other
|
33,335
|
|
|
31,653
|
|
Total
|
$
|
127,215
|
|
|
$
|
114,624
|
|
The following table represents assets by country based on the location of the assets, excluding discontinued operations (in thousands).
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
United States
|
$
|
113,612
|
|
|
$
|
99,284
|
|
Other Countries
|
13,603
|
|
|
15,340
|
|
Total
|
$
|
127,215
|
|
|
$
|
114,624
|
|
The following table represents goodwill by reporting unit, excluding discontinued operations (in thousands).
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Restaurant/Retail
|
$
|
10,315
|
|
|
$
|
10,315
|
|
Government
|
736
|
|
|
736
|
|
Total
|
$
|
11,051
|
|
|
$
|
11,051
|
|
Customers comprising 10% or more of the Company’s total revenues, excluding discontinued operations, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended June 30,
|
|
Six Months
Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Restaurant/Retail segment
:
|
|
|
|
|
|
|
|
McDonald’s Corporation
|
22
|
%
|
|
36
|
%
|
|
25
|
%
|
|
40
|
%
|
Yum! Brands, Inc.
|
12
|
%
|
|
14
|
%
|
|
12
|
%
|
|
13
|
%
|
Government segment
:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Department of Defense
|
34
|
%
|
|
23
|
%
|
|
31
|
%
|
|
23
|
%
|
All Others
|
32
|
%
|
|
27
|
%
|
|
32
|
%
|
|
24
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
No other customer within All Others represented more than 10% of the Company’s total revenue for the
three and six
months ended
June 30, 2018
and
2017
.
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 primarily consist of cash and cash equivalents, trade receivables, trade payables, debt instruments and deferred compensation assets and liabilities. The carrying amounts of cash and cash equivalents, trade receivables and trade payables as of
June 30, 2018
and
December 31, 2017
were considered representative of their fair values. The estimated fair value of the Company’s long-term debt and line of credit on
June 30, 2018
and
December 31, 2017
was based on variable and fixed interest rates on such respective dates and approximates their respective carrying values at
June 30, 2018
and
December 31, 2017
.
The deferred compensation assets and liabilities primarily relate to the Company’s deferred compensation plan, which allows for pre-tax salary deferrals for certain key employees. Changes in the fair value of the deferred compensation liabilities are derived using quoted prices in active markets of the asset selections made by the participants. The deferred compensation liabilities are classified within Level 2, the fair value classification as defined under FASB ASC 820,
"Fair Value Measurements"
, because their
inputs are derived principally from observable market data by correlation to the hypothetical investments. The Company holds insurance investments to partially offset the Company’s liabilities under its deferred compensation plan, which are recorded at fair value each period using the cash surrender value of the insurance investments.
The amounts owed to employees participating in the Deferred Compensation Plan at
June 30, 2018
was
$3.4 million
compared to
$3.9 million
at
December 31, 2017
and is included in other long-term liabilities on the consolidated balance sheets.
Under the stock purchase agreement governing the Brink Acquisition, in the event certain defined revenues are determined to have been achieved in 2015, 2016, 2017 and 2018 ("contingent consideration period"), the Company is obligated to pay additional purchase price consideration ("Brink Earn Out"). The fair value of the Brink Earn Out 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 Software Inc. during the contingent consideration period, appropriately discounted considering the uncertainties associated with the obligation. Any change in the fair value adjustment is recorded in the earnings of that contingent consideration period. Changes in the fair value of the Brink Earn Out may result from changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations. Significant increases or decreases in the inputs noted above in isolation would result in a significantly lower or higher fair value measurements.
The following table presents a summary of changes in fair value of the Company’s Level 3 assets and liabilities that are measured at fair value on a recurring basis, and are recorded as a component of other current liabilities as of
June 30, 2018
and other long-term liabilities as of
December 31, 2017
on the consolidated balance sheet (in thousands):
|
|
|
|
|
|
Level 3 Inputs
|
|
Liabilities
|
Balance at January 1, 2017
|
$
|
4,000
|
|
New level 3 liability
|
—
|
|
Total (gains) losses reported in earnings
|
(1,000
|
)
|
Transfers into or out of Level 3
|
$
|
—
|
|
Balance at December 31, 2017
|
$
|
3,000
|
|
New level 3 liability
|
—
|
|
Total (gains) losses reported in earnings
|
—
|
|
Transfers into or out of Level 3
|
—
|
|
Balance at June 30, 2018
|
$
|
3,000
|
|
Note 13 — Related Party Transactions
The Company leased its corporate wellness facility to related parties at a rate of
$9,775
per month. The Company received complimentary memberships to this facility which were provided to its local employees. Expenses incurred by the Company relating to the facility amounted to
$19,000
and
$74,000
during the
three and six
months ended
June 30, 2018
, respectively. Expenses incurred by the Company relating to the facility amounted to
$60,000
and
$123,000
during the
three and six
months ended
June 30, 2017
, respectively. The Company recognized rental income of
$9,775
and
$39,100
, respectively, for the
three and six
month periods ended
June 30, 2018
. The Company recognized rental income of
$29,325
and
$58,650
, respectively, for the
three and six
month periods ended
June 30, 2017
. The rent receivable at
June 30, 2018
and
December 31, 2017
was
zero
and
$59,000
, respectively. This arrangement between the Company and the related party terminated on April 30, 2018.
In October 2016, the Company entered into a statement of work (“SOW”) with Xpanxion LLC for software development services. For the six months ended
June 30, 2017
, we incurred approximately
$742,000
of expenses to Xpanxion, LLC under the SOW. The Company did
not
incur any expenses to Xpanxion during the six months ended
June 30, 2018
. Until his retirement on June 30, 2017, Paul Eurek, a former director of the Company, was President of Xpanxion LLC.