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 nine
months ended
September 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.
Going Concern Assessment
The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Management has evaluated whether relevant conditions or events, considered in the aggregate, indicate that there is substantial doubt about the Company's ability to continue as a going concern. Substantial doubt exists when conditions and events, considered in the aggregate, indicate it is probable that the Company will be unable to meet its obligations as they become due during the one-year period following the date of the Company's financial statements for the quarter ended
September 30, 2018
. The assessment is based on the relevant conditions that are known or reasonably knowable as of
November 9, 2018
.
As of
September 30, 2018
, the Company had a working capital surplus of
$20.0 million
. The Credit Agreement entered into on June 5, 2018 by the Company and certain of its U.S. subsidiaries with Citizens Bank, N.A., as lender thereunder, provides for revolving loans in an aggregate principal amount of up to
$25 million
, subject to affirmative and negative covenants, including certain financial maintenance covenants consisting of maximum leverage ratios and minimum consolidated EBITDA. Based on the Company’s current estimates, the Company anticipates that it will not meet the financial maintenance covenants for the quarter ending December 31, 2018. In the event of noncompliance and if the Company is unable to secure waivers or modifications to the Credit Agreement or alternative sources of capital to allow the Company to come into compliance with the covenants or allow the Company to repay or refinance the Credit Agreement, an event of default may occur under the Credit Agreement. If an event of default were to occur under the Credit Agreement, the lender may accelerate the payment of amounts outstanding and otherwise exercise any remedies to which it may be entitled. In addition, in such a case, the Company may no longer have access to the liquidity provided by the Credit Agreement and, as a result, the Company may not have sufficient liquidity to make the anticipated investments in the Brink business and satisfy operating expenses, capital expenditures and other cash needs. These conditions raise substantial doubt about our ability to continue as a going concern. However, the Company believes alternative sources of capital are available including from other sources of debt financings and/or future sales of its equity securities, and the equity value of the Company’s real estate holdings. Further, the Company can make reductions and reallocate its expenditures and investments to reduce near term cash requirements. One or more of these mitigating responses, together with anticipated revenues, are expected to provide the Company with sufficient liquidity to continue as a going concern. No assurances, however, can be given, in the event the Company is not successful in obtaining the necessary waivers or modifications to the Credit Agreement, that other sources of capital will be available, or, if available, the Company will be able to secure such capital on favorable terms. The Company’s failure to secure the necessary waivers or modifications, to generate enough revenue, control or further reduce
expenditures and/or to secure capital from other sources may result in an inability of the Company to continue as a going concern. Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
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 is recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s performance obligations. Our support services are stand-ready obligations that are provided over the life of the contract, 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 providing 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 general & administrative expenses. Profit is recognized on the fixed fee portion of the contract as costs are incurred and invoiced. Long-term fixed price contracts and programs involve the use of various techniques to estimate total contract revenue and costs. For long-term fixed price contracts, we estimate the profit 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 analyze whether our performance obligations in our contracts are satisfied over a period of time or at a point in time. In general, our performance obligations are satisfied over a period of time. However, there may be circumstances where the latter or both scenarios could apply to a contract.
We 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
September 30, 2018
contained a significant financing component.
There was
no
impact on retained earnings for the
nine months ended
September 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
September 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 September 30, 2018
|
|
Current - under one year
|
Non-current - over one year
|
Restaurant
|
$
|
10,188
|
|
$
|
4,641
|
|
Government
|
47
|
|
—
|
|
TOTAL
|
$
|
10,235
|
|
$
|
4,641
|
|
|
|
|
|
|
|
|
|
|
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 nine
months ended
September 30, 2018
, we recognized revenue of
$4.8 million
and
$7.7 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 nine
months ended
September 30, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2018
|
|
Restaurant/Retail - Point in Time
|
Restaurant/Retail - Over Time
|
Government - Over Time
|
Restaurant
|
21,761
|
|
5,727
|
|
—
|
|
Grocery
|
691
|
|
747
|
|
—
|
|
Mission Systems
|
—
|
|
—
|
|
8,283
|
|
ISR Solutions
|
—
|
|
—
|
|
9,153
|
|
TOTAL
|
22,452
|
|
6,474
|
|
17,436
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
Restaurant/Retail - Point in Time
|
Restaurant/Retail - Over Time
|
Government - Over Time
|
Restaurant
|
81,422
|
|
17,258
|
|
—
|
|
Grocery
|
2,251
|
|
2,342
|
|
—
|
|
Mission Systems
|
—
|
|
—
|
|
25,324
|
|
ISR Solutions
|
—
|
|
—
|
|
25,997
|
|
TOTAL
|
83,673
|
|
19,600
|
|
51,321
|
|
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 selling, general and administrative expenses (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
September 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
September 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 September 30,
|
Nine Months
Ended September 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 nine
months ended
September 30, 2017
, the Company recognized income on discontinued operations of
$0
(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 nine
months ended
September 30, 2018
.
Note 4 — Accounts Receivable
The Company’s accounts receivable, net consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Government segment:
|
|
|
|
Billed
|
$
|
8,712
|
|
|
$
|
9,028
|
|
Advanced billings
|
(729
|
)
|
|
(1,977
|
)
|
|
7,983
|
|
|
7,051
|
|
|
|
|
|
Restaurant/Retail segment:
|
19,167
|
|
|
23,026
|
|
Accounts receivable - net
|
$
|
27,150
|
|
|
$
|
30,077
|
|
At
September 30, 2018
and
December 31, 2017
, the Company had recorded allowances for doubtful accounts of
$1.4 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):
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Finished goods
|
$
|
12,952
|
|
|
$
|
9,535
|
|
Work in process
|
418
|
|
|
766
|
|
Component parts
|
5,425
|
|
|
5,480
|
|
Service parts
|
5,550
|
|
|
5,965
|
|
|
$
|
24,345
|
|
|
$
|
21,746
|
|
At
September 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 nine
months ended
September 30, 2018
were
$1.0 million
and
$3.1 million
, respectively. Software development costs capitalized within continuing operations during the
three and nine
months ended
September 30, 2017
were
$1.1 million
and
$3.3 million
, respectively.
Annual amortization, charged to cost of sales is computed using the straight-line method over the remaining estimated economic life of the product, generally
three
to
seven
years. Amortization of capitalized software development costs from continuing operations for the
three and nine
months ended
September 30, 2018
were
$0.9 million
and
$2.6 million
, respectively. Amortization of capitalized software development costs from continuing operations for the
three and nine
months ended
September 30, 2017
were
$0.4 million
and
$1.1 million
, respectively.
Amortization of intangible assets acquired in the Brink Acquisition amounted to
$0.2 million
and
$0.7 million
for the
three and nine
months ended
September 30, 2018
, respectively. Amortization of intangible assets acquired in the Brink Acquisition amounted to
$0.2 million
and
$0.7 million
for the
three and nine
months ended
September 30, 2017
, respectively.
The components of identifiable intangible assets, excluding discontinued operations, are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
Estimated
Useful Life
|
Acquired and internally developed software costs
|
$
|
22,736
|
|
|
$
|
19,670
|
|
|
3 - 7 years
|
Customer relationships
|
160
|
|
|
160
|
|
|
7 years
|
Non-competition agreements
|
30
|
|
|
30
|
|
|
1 year
|
|
22,926
|
|
|
19,860
|
|
|
|
Less accumulated amortization
|
(10,759
|
)
|
|
(8,190
|
)
|
|
|
|
$
|
12,167
|
|
|
$
|
11,670
|
|
|
|
Trademarks, trade names (non-amortizable)
|
400
|
|
|
400
|
|
|
N/A
|
|
$
|
12,567
|
|
|
$
|
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
|
$
|
1,107
|
|
2019
|
3,082
|
|
2020
|
2,640
|
|
2021
|
1,685
|
|
2022
|
692
|
|
Thereafter
|
2,961
|
|
Total
|
$
|
12,167
|
|
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 Company conducted a goodwill impairment test as of
September 30, 2018
and concluded there was
no
impairment as of that date. The amount of goodwill carried by the Restaurant/Retail and Government reporting units is
$10.3 million
and
$0.8 million
, respectively, at
September 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
$0.4 million
and
$0.8 million
for the
three and nine
month periods ended
September 30, 2018
, respectively. The Company recorded stock based compensation of
$0.1 million
and
$0.3 million
for the
three and nine
month periods ended
September 30, 2017
, respectively. The amount recorded for both the
three and nine
month periods ended
September 30, 2018
were net of benefits of
$18,000
as a result of forfeitures of unvested stock awards prior to completion of the requisite service period and/or failure to achieve performance criteria. The amount recorded for both the
three and nine
month periods ended
September 30, 2017
were net of benefits of
$1,000
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
September 30, 2018
, the aggregate unrecognized compensation expense related to unvested equity awards was
$2.2 million
(net of estimated forfeitures), which is expected to be recognized as compensation expense in fiscal years
2018
through
2020
.
For the
three and nine
month periods ended
September 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 — Debt
On June 5, 2018, we entered into a Credit Agreement (the “Credit Agreement”) with certain of our U.S. subsidiaries and Citizens Bank, N.A. The Credit Agreement provides for revolving loans in an aggregate principal amount of up to
$25.0 million
(the “Credit Facility”). The Credit Facility includes a
$15.0 million
accordion option, which we can request in
$5.0 million
increments. The accordion increase is uncommitted and is not available if an event of default exists. In connection with entering into the Credit Agreement, we repaid in full all outstanding obligations owed under the credit agreement dated November 29, 2016 (as subsequently amended, modified, and supplemented) with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), and terminated the JPMorgan Chase credit agreement and all commitments (other than an undrawn letter of credit) by JPMorgan Chase to extend further credit thereunder.
The Credit Facility matures
three
(3) years from the date of the Credit Agreement and is guaranteed by our U.S. subsidiaries that are parties thereto. The Credit Facility is secured by substantially all of our assets and the subsidiary guarantors. The Credit Agreement contains customary representations and warranties and affirmative and negative covenants, including certain financial maintenance covenants consisting of maximum consolidated leverage ratios and minimum consolidated EBITDA, and covenants that restrict our ability and our subsidiaries to incur additional indebtedness, incur or permit to exist liens on assets, make investments and acquisitions, consolidate or merge, engage in asset sales, pay dividends, and make distributions. The revolving loans bear interest at the LIBOR rate plus
1.5%
. Obligations under the Credit Agreement may be accelerated upon certain customary events of default (subject to grace or cure periods, as appropriate).
On
September 30, 2018
, the applicable rate under the Credit Facility was
1.5%
plus LIBOR. There was a
$7.0 million
outstanding balance and up to
$18.0 million
available under the Credit Facility as of
September 30, 2018
compared to
$1.0 million
outstanding under the JPMorgan Chase credit agreement as of
December 31, 2017
.
In addition to the Credit Facility, the Company had a loan, collateralized by a mortgage on certain real estate, with a balance of
$0.2 million
and
$0.4 million
as of
September 30, 2018
and
2017
, respectively. This loan matures on November 1, 2019. The interest rate is fixed at
4.00%
through the maturity date of the loan. The annual loan payment including interest through November 1, 2019 totals
$0.2 million
. On October 1, 2018, the Company finalized a sale of the real estate held as collateral and the remaining balance on the loan was paid in full.
Note 9 — Net (loss) income per share
(Loss) earnings 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
nine months ended
September 30, 2018
and
September 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 September 30,
|
|
2018
|
|
2017
|
Net loss from continuing operations
|
$
|
(16,704
|
)
|
|
$
|
(1,517
|
)
|
|
|
|
|
Basic:
|
|
|
|
|
|
Shares outstanding at beginning of period
|
15,993
|
|
|
15,907
|
|
Weighted average shares issued during the period, net
|
78
|
|
|
69
|
|
Weighted average common shares, basic
|
16,071
|
|
|
15,976
|
|
Net loss from continuing operations per common share, basic
|
$
|
(1.04
|
)
|
|
$
|
(0.10
|
)
|
Diluted:
|
|
|
|
|
|
Weighted average common shares, basic
|
16,071
|
|
|
15,976
|
|
Dilutive impact of stock options and restricted stock awards
|
—
|
|
|
—
|
|
Weighted average common shares, diluted
|
16,071
|
|
|
15,976
|
|
Net loss from continuing operations per common share, diluted
|
$
|
(1.04
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
Nine Months
Ended September 30,
|
|
2018
|
|
2017
|
Net (loss) income from continuing operations
|
$
|
(17,959
|
)
|
|
$
|
1,724
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Shares outstanding at beginning of period
|
15,949
|
|
|
15,771
|
|
Weighted average shares issued during the period, net
|
84
|
|
|
178
|
|
Weighted average common shares, basic
|
16,033
|
|
|
15,949
|
|
Net (loss) income from continuing operations per common share, basic
|
$
|
(1.12
|
)
|
|
$
|
0.11
|
|
Diluted:
|
|
|
|
|
|
Weighted average common shares, basic
|
16,033
|
|
|
15,949
|
|
Dilutive impact of stock options and restricted stock awards
|
—
|
|
|
311
|
|
Weighted average common shares, diluted
|
16,033
|
|
|
16,260
|
|
Net (loss) income from continuing operations per common share, diluted
|
$
|
(1.12
|
)
|
|
$
|
0.11
|
|
Note 10 - 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. Because of the complexity of the new Global Intangible Low-Taxed Income (GILTI) tax rules, the Company continues to evaluate this provision of the Tax Reform Act and the application of ASC 740, Income Taxes. Under U.S. GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the “deferred method”). The Company’s selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing its global income to determine whether it expects to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income related to GILTI depends on not
only the Company’s current structure and estimated future results of global operations, but also its intent and ability to modify its structure. The Company’s currently in the process of analyzing its structure and, as a result, is not yet able to reasonably estimate the effect of this provision of the Tax Reform Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its financial statements and has not made a policy decision regarding whether to record deferred tax on GILTI.
Deferred Tax Assets and Valuation Allowance
Management assesses available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets. The Company had deferred income tax assets of
$14.9 million
as of September 30, 2018 compared to
$13.9 million
as of December 31, 2017. Previously, based on information at the prior measurement dates, we did not have a valuation allowance for deferred tax assets arising from US federal income tax net operating loss carryforwards. FASB ASC 740-10-30 indicates that experiencing cumulative losses in recent years is a type of objectively verifiable negative evidence for entities to consider in evaluating the need for a valuation allowance on deferred tax assets. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. The Company has incurred losses in recent years and is in a loss position for the nine months ended September 30, 2018. Because of the impact of cumulative losses have on the determination of the recoverability of deferred tax assets through future earnings, the Company evaluated its ability to realize its deferred tax assets as it would require a substantial amount of objectively verifiable positive evidence of future income to support the realizability of the deferred tax assets. On the basis of this evaluation, the Company established a full valuation allowance as of September 30, 2018 for the full carrying value of deferred tax assets as it was concluded that the negative evidence now outweighs the positive evidence and thus it is more likely than not that the deferred tax assets will not be realized. Losses in the third quarter were greater than previously anticipated. The Company will continue to evaluate its position and the valuation allowance could be reversed in a future period if sufficient objectively verifiable positive evidence outweighs such negative evidence.
Note 11 — 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 and are fully cooperating with 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 investigation to the China and Singapore authorities and is fully cooperating. During the
three and nine
months ended
September 30, 2018
, we recorded
$0.3 million
and
$0.9 million
, respectively, of expenses relating to the internal investigation and the SEC subpoena, including expenses of outside legal counsel and forensic accountants, compared to
$0.7 million
and
$2.3 million
, respectively, for the
three and nine
months ended
September 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 12 — 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 September 30,
|
|
Nine Months
Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
|
|
|
|
Restaurant/Retail
|
$
|
28,926
|
|
|
$
|
34,023
|
|
|
$
|
103,273
|
|
|
$
|
133,288
|
|
Government
|
17,436
|
|
|
14,915
|
|
|
51,321
|
|
|
43,776
|
|
Total
|
$
|
46,362
|
|
|
$
|
48,938
|
|
|
$
|
154,594
|
|
|
$
|
177,064
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant/Retail
|
$
|
(3,836
|
)
|
|
$
|
(3,559
|
)
|
|
$
|
(7,244
|
)
|
|
$
|
603
|
|
Government
|
1,854
|
|
|
1,267
|
|
|
5,132
|
|
|
4,364
|
|
Other
|
(680
|
)
|
|
(304
|
)
|
|
(1,536
|
)
|
|
(2,568
|
)
|
|
(2,662
|
)
|
|
(2,596
|
)
|
|
(3,648
|
)
|
|
2,399
|
|
Other income (expense), net
|
455
|
|
|
(70
|
)
|
|
120
|
|
|
(264
|
)
|
Interest expense, net
|
(142
|
)
|
|
(39
|
)
|
|
(261
|
)
|
|
(84
|
)
|
(Loss) income before benefit from / (provision for) income taxes
|
$
|
(2,349
|
)
|
|
$
|
(2,705
|
)
|
|
$
|
(3,789
|
)
|
|
$
|
2,051
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation, amortization and accretion:
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant/Retail
|
$
|
1,215
|
|
|
$
|
886
|
|
|
$
|
3,014
|
|
|
$
|
2,481
|
|
Government
|
6
|
|
|
5
|
|
|
17
|
|
|
16
|
|
Other
|
157
|
|
|
62
|
|
|
460
|
|
|
308
|
|
Total
|
$
|
1,378
|
|
|
$
|
953
|
|
|
$
|
3,491
|
|
|
$
|
2,805
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures including software costs:
|
|
|
|
|
|
|
|
|
|
|
|
Restaurant/Retail
|
$
|
1,098
|
|
|
$
|
1,121
|
|
|
$
|
3,363
|
|
|
$
|
3,452
|
|
Government
|
67
|
|
|
—
|
|
|
104
|
|
|
7
|
|
Other
|
1,067
|
|
|
457
|
|
|
2,600
|
|
|
3,764
|
|
Total
|
$
|
2,232
|
|
|
$
|
1,578
|
|
|
$
|
6,067
|
|
|
$
|
7,223
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by country:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
43,183
|
|
|
$
|
44,418
|
|
|
$
|
144,706
|
|
|
$
|
163,606
|
|
Other Countries
|
3,179
|
|
|
4,520
|
|
|
9,888
|
|
|
13,458
|
|
Total
|
$
|
46,362
|
|
|
$
|
48,938
|
|
|
$
|
154,594
|
|
|
$
|
177,064
|
|
The following table represents identifiable assets by reporting segment, excluding discontinued operations (in thousands).
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
Restaurant/Retail
|
$
|
75,132
|
|
|
$
|
74,257
|
|
Government
|
9,518
|
|
|
8,714
|
|
Other
|
18,146
|
|
|
31,653
|
|
Total
|
$
|
102,796
|
|
|
$
|
114,624
|
|
The following table represents assets by country based on the location of the assets, excluding discontinued operations (in thousands).
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
United States
|
$
|
90,970
|
|
|
$
|
99,284
|
|
Other Countries
|
11,826
|
|
|
15,340
|
|
Total
|
$
|
102,796
|
|
|
$
|
114,624
|
|
The following table represents goodwill by reporting unit, excluding discontinued operations (in thousands).
|
|
|
|
|
|
|
|
|
|
September 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 September 30,
|
|
Nine Months
Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Restaurant/Retail segment
:
|
|
|
|
|
|
|
|
McDonald’s Corporation
|
15
|
%
|
|
23
|
%
|
|
20
|
%
|
|
35
|
%
|
Yum! Brands, Inc.
|
13
|
%
|
|
17
|
%
|
|
11
|
%
|
|
14
|
%
|
Government segment
:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Department of Defense
|
38
|
%
|
|
31
|
%
|
|
33
|
%
|
|
25
|
%
|
All Others
|
34
|
%
|
|
29
|
%
|
|
36
|
%
|
|
26
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
No other customer within All Others represented more than 10% of the Company’s total revenue for the
three and nine
months ended
September 30, 2018
and
2017
.
Note 13 — 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
September 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 at
September 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
September 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 amount owed to employees participating in the Deferred Compensation Plan at
September 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
September 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
|
(400
|
)
|
Transfers into or out of Level 3
|
—
|
|
Balance at September 30, 2018
|
$
|
2,600
|
|
Note 14 — 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
$0
and
$74,000
during the
three and nine
months ended
September 30, 2018
, respectively. Expenses incurred by the Company relating to the facility amounted to
$51,000
and
$174,000
during the
three and nine
months ended
September 30, 2017
, respectively. The Company recognized rental income from related parties of
$0
and
$39,100
, respectively, for the
three and nine
month periods ended
September 30, 2018
. The Company recognized rental income from related parties of
$29,325
and
$87,975
, respectively, for the
three and nine
month periods ended
September 30, 2017
. The rent receivable at
September 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
nine months ended
September 30, 2017
, we incurred approximately
$1,000,000
of expenses to Xpanxion, LLC under the SOW. The Company did
not
incur any expenses to Xpanxion during the
nine months ended
September 30, 2018
. Until his retirement on June 30, 2017, Paul Eurek, a former director of the Company, was President of Xpanxion LLC.
Note 15 — Subsequent Event
On October 1, 2018, the Company finalized a sale of real estate and other assets. The net book value of the assets as of
September 30, 2018
was
$901,000
and
$939,000
as of
September 30, 2017
and are classified as assets held for sale on the Company’s consolidated balance sheets. Proceeds from the sale of the real estate and other assets were
$1.1 million
as presented in the Company’s consolidated statement of cash flows as cash flow from investing activities.