NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
Nature of Business
PAR Technology Corporation ("we", "the Company"), together with its consolidated 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 consolidated 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. in September 2014 (the "Brink Acquisition") 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 governing the Brink Acquisition. The liability for the contingent consideration was established at the time of the acquisition and has been 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
2018
, we recorded a
$0.5 million
adjustment to decrease the fair value of the contingent consideration related to the acquisition of Brink Software Inc., versus a
$1.0 million
adjustment to decrease the fair value during
2017
. This reduction in expense is reflected within other income on the consolidated statements of operations.
Revenue recognition policy
See note 3 of the consolidated financial statements for revenue recognition policy and disclosures.
Warranty provisions
Warranty provisions for product warranties are recorded in the period in which the Company becomes obligated to honor the warranty, 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 which can range from
12
months to
36
months.
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 maintains 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 and 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 current liabilities
Other current liabilities represent the fair value of the contingent consideration payable related to the Brink Acquisition. At
December 31, 2018
, the amount in other current liabilities related to contingent consideration is
$2.5 million
compared to
$3.0 million
included in other long-term liabilities at
December 31, 2017
. This change in fair value is reflected within other income on the consolidated statements of operations.
Other long-term liabilities
Other long-term liabilities represent amounts owed to employees that participate in the Company’s Deferred Compensation Plan. Amounts owed to employees participating in the Deferred Compensation Plan at
December 31, 2018
were
$3.4 million
as compared to
$3.9 million
at
December 31, 2017
. During
2017
, we recorded an adjustment to decrease the fair value of the Brink Acquisition contingent consideration payable by
$1.0 million
.
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 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 Loss. Foreign currency transaction gains and losses are recorded in other income, net in the accompanying statements of operations.
Other income, net
The components of other income, net from continuing operations for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
Year ended December 31
(in thousands)
|
|
2018
|
|
2017
|
|
|
|
|
Foreign currency (loss) / gain
|
$
|
(258
|
)
|
|
$
|
39
|
|
Rental loss-net
|
(865
|
)
|
|
(683
|
)
|
Gain on sale of real estate
|
649
|
|
|
—
|
|
Fair value adjustment contingent consideration
|
450
|
|
|
1,000
|
|
Other
|
330
|
|
|
273
|
|
Other income, net
|
$
|
306
|
|
|
$
|
629
|
|
In
2018
, we recorded a
$0.5 million
adjustment to decrease the fair value of the Company's contingent consideration related to the acquisition of Brink Software Inc. Also, during
2018
, the Company incurred a net loss on rental contracts of approximately
$0.9 million
.
During
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
.
Identifiable intangible assets
The Company’s identifiable intangible assets represent intangible assets acquired from the Brink 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, "
Costs of Software to be Sold, Leased or Marketed" -
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
2018
and
2017
were $
3.9 million
and $
3.8 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
$3.5 million
and
$2.7 million
, in
2018
and
2017
, respectively.
The components of identifiable intangible assets, excluding discontinued operations, are:
|
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|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
|
2018
|
|
2017
|
Estimated Useful Life
|
Acquired and internally developed software costs
|
$
|
21,977
|
|
|
$
|
19,670
|
|
3 - 7 years
|
Customer relationships
|
160
|
|
|
160
|
|
7 years
|
Non-compete agreements
|
30
|
|
|
30
|
|
1 year
|
|
22,167
|
|
|
19,860
|
|
|
Less accumulated amortization
|
(11,708
|
)
|
|
(8,190
|
)
|
|
|
$
|
10,459
|
|
|
$
|
11,670
|
|
|
Trademarks, trade names (non-amortizable)
|
400
|
|
|
400
|
|
N/A
|
|
$
|
10,859
|
|
|
$
|
12,070
|
|
|
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):
|
|
|
|
|
2019
|
$
|
3,198
|
|
2020
|
2,698
|
|
2021
|
1,856
|
|
2022
|
879
|
|
2023
|
497
|
|
Thereafter
|
1,331
|
|
Total
|
$
|
10,459
|
|
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 to indefinite lived intangible assets in
2018
or
2017
. The Company recorded an impairment charge of
$1.6 million
on capitalized software related to its food safety software solution which had been included in costs of service for the year ended
December 31, 2018
.
No
impairment charges were recorded for the year ended 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 a straight-line expense recognition method, based on their fair value on the date of grant.
Earnings/Loss per share
Basic earnings/loss per share are computed based on the weighted average number of common shares outstanding during the period. Diluted earnings/loss 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/loss per share computations (in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Loss from continuing operations
|
$
|
(24,122
|
)
|
|
$
|
(3,610
|
)
|
|
|
|
|
Basic:
|
|
|
|
Weighted average shares outstanding at beginning of year
|
15,949
|
|
|
15,675
|
|
Weighted average shares issued during the year, net
|
92
|
|
|
274
|
|
Weighted average common shares, basic
|
16,041
|
|
|
15,949
|
|
Loss from continuing operations per common share, basic
|
$
|
(1.50
|
)
|
|
$
|
(0.23
|
)
|
|
|
|
|
Diluted:
|
|
|
|
Weighted average common shares, basic
|
16,041
|
|
|
15,949
|
|
Dilutive impact of stock options and restricted stock awards
|
—
|
|
|
—
|
|
Weighted average common shares, diluted
|
16,041
|
|
|
15,949
|
|
Loss from continuing operations per common share, diluted
|
$
|
(1.50
|
)
|
|
$
|
(0.23
|
)
|
At
2018
and
2017
there were
750,000
and
266,000
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
113,000
restricted stock awards excluded from the computation of diluted earnings per share for the fiscal year ended
2018
and
49,000
for the fiscal year ended
2017
.
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
14.0%
to
29.0%
. 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,
2018
and December 31,
2017
. There was
no
impairment of goodwill for the years ended December 31,
2018
or December 31,
2017
.
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
2018
, the Company recorded an impairment charge of
$1.6 million
to reduce the carrying value of two previously released versions of its food safety software no longer in service.
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.
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 next 12 months. The assessment is based on the relevant conditions that are known or reasonably knowable as of March 18, 2019.
The Company sustained a net loss of approximately
$24.1 million
in the year ended December 31, 2018. Cash flow from operations reflected a net cash outflow of approximately
$3.8 million
in the year ended December 31, 2018. As of December 31, 2018, the Company was not in compliance with the financial maintenance covenants contained in the Credit Agreement. On March 4, 2019, pursuant to an Amendment to the Credit Agreement, the Company obtained a waiver of the default from its lender. The Company’s continuation as a going concern is dependent on it having access to sufficient capital to meet its obligations during the next 12 months. In the absence of the Company generating sufficient cash flows from operations and obtaining alternative or additional sources of capital, including alternative sources of debt financings or future sales of equity or equity-linked securities, to fund its operations and either ensure continued compliance under the Credit Agreement or refinance and repay the current debt owed under the Credit Agreement or obtaining additional waivers or modifications, 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 satisfy operating expenses, capital expenditures and other cash needs. This raises substantial doubt about the Company's ability to continue as a going concern. However, the Company believes there are available sources of cash including, capital from other sources of debt financings and/or future sales of equity or equity-linked securities; operating efficiencies from strategic reductions and reallocations of expenditures and investments; and revenue growth, which will provide the Company with sufficient liquidity to
continue as a going concern. If the Company is unable to secure one or more of these sources of cash then there would be substantial doubt about the Company’s ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02,
"Leases (Topic 842)"
, impacting the accounting for leases intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. The revised standard will require entities to recognize a liability for its lease obligations and a corresponding asset representing the right to use the underlying asset over the lease term. Lease obligations are to be measured at the present value of lease payments and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the agreement is deemed to be a financing or operating lease. For finance leases, the leased asset is depreciated on a straight-line basis and recorded separately from the interest expense in the income statement resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. The ASU requires that assets and liabilities be presented or disclosed separately and classified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and quantitative information related to lease agreements. The new standard is effective for the Company beginning in the first quarter of 2019. In July 2018, the FASB issued new guidance that provided for a new optional transition method that allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to opening retained earnings. Under this approach, comparative periods are not restated.
The Company is finalizing its adoption of the new standard effective January 1, 2019 and will be adopting the standard using the optional transition method by recognizing a cumulative-effect adjustment to the balance sheet at January 1, 2019 and not revising prior period presented amounts. The processes that are in final refinement related to our full implementation of the standard include: i) finalizing our estimates related to the applicable incremental borrowing rate at January 1, 2019 and ii) process enhancements for refining our financial reporting procedures to develop the additional required qualitative and quantitative disclosures required beginning in 2019. The Company has elected the following practical expedients: i) it has not reassessed whether any expired or existing contracts are or contain leases, ii) it has not reassessed lease classification for any expired or existing leases, iii) it has not reassessed initial direct costs for any existing leases, and iv) it has not separated lease and nonlease components. In preparation for adoption of the standard, the Company has implemented internal controls to enable the preparation of financial information.
The standard will have a material impact on our consolidated balance sheets, but will not have a material impact on our consolidated statements of operations. The most significant impact will be the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases.
Adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases ranging between
$4.0 million
to
$4.5 million
each as of January 1, 2019.
In June 2016, the FASB issued ASU 2016-13, "
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
" ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date, based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendment is effective for the Company beginning with its fiscal year ending December 31, 2019, however early application is permitted for reporting periods beginning after December 15, 2018. The Company does not anticipate ASU 2016-13 will have a material impact to the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “
Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment
.” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which 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 the Company on January 1, 2020, with earlier adoption permitted; it is not expected to have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “
Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
.” ASU 2018-13 modifies the fair value measurements disclosures with the primary focus to improve effectiveness of disclosures in the notes to the financial statements that is most important to the users. The new guidance modifies the required
disclosures related to the valuation techniques and inputs used, uncertainty in measurement, and changes in measurements applied. ASU 2018-13 is effective for the Company beginning with and including its fiscal year ending December 31, 2019 and each quarterly period thereafter. Early adoption is permitted. The Company is currently assessing the impact this new guidance may have on the Company’s consolidated financial statements and footnote disclosures.
In August 2018, the FASB issued ASU 2018-15, “
Intangibles - Goodwill and Other (Topic 350) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
.” ASU 2018-15 provides guidance on the measurement of costs for internal-use software during the design, development and implementation stages for customers in a cloud based hosting arrangement. AU 2018-15 also requires the capitalized costs associated with the design, development and implementation of cloud based, hosted arrangements to be amortized over the term of the hosting arrangement. ASU 2018-15 will be effective for the Company on January 1, 2020, with earlier adoption permitted; it is not expected to have a material impact on the Company's consolidated financial statements.
Recently Adopted Accounting Pronouncements
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 requires additional disclosure regarding the nature, amount, timing and uncertainty of revenue and related cash flows arising from contracts with customers. This guidance became effective for annual and interim reporting periods beginning after December 15, 2017 and allows for either full retrospective adoption or modified retrospective adoption.
The Company adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective method. Under that method, we applied the standard to all contracts existing as of January 1, 2018. There was no impact to the Company’s retained earnings as a result of the adoption of ASC 606.
The Company assessed its control framework as a result of adopting the new standard and notes minimal changes to its systems and other control processes.
In August 2014, the FASB issued ASU No 2014-15. The amendments in ASU 2014-15 are intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Under GAAP, financial statements are prepared under the presumption that the reporting organization will continue to operate as a going concern, except in limited circumstances. The going concern basis of accounting is critical to financial reporting because it establishes the fundamental basis for measuring and classifying assets and liabilities. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnote disclosures. This ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes.
The Company adopted ASU 2014-15 in the quarter ended December 20, 2017. The provisions of ASU 2014-15 present that the Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations and obtain alternative financing to refund and repay the current debt owed under its Credit Agreement. Current conditions raise substantial doubt about the Company’s ability to continue as a going concern. See the above Going Concern Assessment in Note 1. Summary of Significant Accounting Policies for further discussion on the impact to the Company.
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 became effective for interim and annual reporting periods beginning after December 15, 2017. Entities are required to apply the guidance retrospectively; however, if it is impracticable to apply the guidance retrospectively for an issue, the amendments related to that issue are applied prospectively. As this guidance only affects the classification within the statement of cash flows, ASU 2016-15 did not 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 does 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 became effective for us on January 1, 2018 and 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 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 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
2018
, the Company has not received any Earn-Out payment and has not recorded any amount associated with this contingent consideration for any of the three target years 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)
|
|
2018
|
|
2017
|
|
|
|
|
Income from discontinued operations before income taxes
|
$
|
—
|
|
|
$
|
284
|
|
Provision for income taxes
|
—
|
|
|
(60
|
)
|
Income from discontinued operations, net of taxes
|
$
|
—
|
|
|
$
|
224
|
|
Note 3 - 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 arrangements 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. In evaluating the impact of adoption, we reviewed significant open arrangements with customers for each revenue source and adoption did not have a material impact.
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. Contract consideration is allocated to all performance obligations within the arrangement or contract. Performance obligations that are determined not to be distinct are combined with other performance obligations until the combined unit is determined to be distinct and that combined unit is then recognized as revenue over time or at a point in time depending on when control is transferred. Performance obligations that are determined to be non-distinct are recognized as revenue over time or at a point in time depending on when all performance obligations under the contract are met.
We evaluated the potential performance obligations within our Restaurant/Retail reporting segment 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, hardware, 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 SaaS, Advanced Exchange programs, on-site support and other services is recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s performance obligations. Our support services are stand-ready obligations that are provided over the life of the contract, generally
12
months. We offer installation services to our customers for hardware and software for which we primarily hire third-party contractors to install the equipment on our behalf. We pay 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, generally
12
months. The support services associated with hardware and software sales 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. The primary method used to estimate standalone selling price is the price that we charge for that good or service when we sell it separately under similar circumstances to similar customers. The Company determines standalone selling price as follows: Hardware, software, and software activation (one-time fee at the initial offering of software or SaaS) performance obligations are recognized at a stand-alone selling price through an observable price. All other performance obligations, including pass-through hardware (such as terminals, printers or card readers), hardware support (referred to as Advanced Exchange), installation, maintenance, software upgrades, and professional services (project management) are recognized at an expected cost plus margin.
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 contract consideration 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 ratable basis based upon the standalone selling price of each performance obligation. Cost plus margin is used for the cost plus fixed fee contract portfolios as well as 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
December 31, 2018
contained a significant financing component.
There was
no
impact on retained earnings for the
twelve months ended
December 31, 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
December 31, 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 December 31, 2018
|
|
Current - under one year
|
Non-current - over one year
|
Restaurant
|
$
|
9,320
|
|
$
|
4,407
|
|
Government
|
325
|
|
—
|
|
TOTAL
|
$
|
9,645
|
|
$
|
4,407
|
|
|
|
|
|
|
|
|
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 at a maximum of
60
months. Commissions related to service and support contracts are not significant.
During the three and twelve months ended
December 31, 2018
, we recognized service revenue of
$4.7 million
and
$6.8 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 twelve months ended
December 31, 2018
is as follows (in thousands)
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, 2018
|
|
Restaurant/Retail - Point in Time
|
Restaurant/Retail - Over Time
|
Government - Over Time
|
Restaurant
|
98,353
|
|
29,713
|
|
—
|
|
Grocery
|
2,907
|
|
3,096
|
|
—
|
|
Mission Systems
|
—
|
|
—
|
|
34,796
|
|
ISR Solutions
|
—
|
|
—
|
|
32,381
|
|
TOTAL
|
101,260
|
|
32,809
|
|
67,177
|
|
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 4 — Accounts Receivable, net
The Company’s net accounts receivable consists of:
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
2018
|
|
2017
|
Government segment:
|
|
|
|
Billed
|
$
|
9,100
|
|
|
$
|
9,028
|
|
Advanced billings
|
(563
|
)
|
|
(1,977
|
)
|
|
8,537
|
|
|
7,051
|
|
Restaurant/Retail segment:
|
|
|
|
Accounts receivable - net
|
17,682
|
|
|
23,026
|
|
|
$
|
26,219
|
|
|
$
|
30,077
|
|
At
December 31, 2018
and
2017
, the Company had recorded allowances for doubtful accounts of
$1.3 million
and
$0.9 million
, respectively, against Restaurant/Retail segment accounts receivable. Write-offs of accounts receivable during fiscal years
2018
and
2017
were
$0.4 million
and
$0.5 million
, respectively. The increase in bad debt expense which is recorded in the consolidated statements of operations was
$0.8 million
and
$0.3 million
in
2018
and
2017
, respectively.
Receivables recorded as of
December 31, 2018
and
2017
all represent unconditional rights to payments from customers.
Note 5 — Inventories, net
Inventories are used in the manufacture and service of Restaurant/Retail products. The components of inventory, net consist of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
2018
|
|
2017
|
Finished Goods
|
$
|
12,472
|
|
|
$
|
9,535
|
|
Work in process
|
67
|
|
|
766
|
|
Component parts
|
4,716
|
|
|
5,480
|
|
Service parts
|
5,482
|
|
|
5,965
|
|
|
$
|
22,737
|
|
|
$
|
21,746
|
|
At
December 31, 2018
and
2017
, the Company had recorded inventory write-downs of
$9.8 million
and
$10.0 million
, respectively, against Restaurant/Retail inventories, which relate primarily to service parts.
Note 6 — Property, Plant and Equipment, net
The components of property, plant and equipment, net, are:
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
2018
|
|
2017
|
Land
|
$
|
199
|
|
|
$
|
253
|
|
Building and improvements
|
6,444
|
|
|
6,205
|
|
Rental property
|
2,749
|
|
|
5,650
|
|
Furniture and equipment
|
21,558
|
|
|
18,196
|
|
|
30,950
|
|
|
30,304
|
|
Less accumulated depreciation
|
(18,375
|
)
|
|
(19,549
|
)
|
|
$
|
12,575
|
|
|
$
|
10,755
|
|
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
$1.2 million
and
$1.3 million
for
2018
and
2017
, respectively.
The Company leases a portion of its headquarters facility to various tenants. Net rent received from these leases totaled
$0.4 million
and
$0.3 million
for
2018
and
2017
, respectively. Future minimum rent payments due to the Company under these lease arrangements are approximately
$1.7 million
, and
$1.0 million
in 2019 and 2020, respectively.
The Company leases office space under various operating leases. Rental expense from continuing operations on operating leases was approximately
$1.9 million
and
$3.0 million
for
2018
and
2017
, respectively. Future minimum lease payments under all non-cancelable operating leases are (in thousands):
|
|
|
|
|
2019
|
1,652
|
|
2020
|
1,006
|
|
2021
|
902
|
|
2022
|
752
|
|
2023
|
574
|
|
Thereafter
|
75
|
|
|
$
|
4,961
|
|
Note 7 — 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.
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. (“Citizens Bank”). 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 applicable).
On March 4, 2019, the Company, together with its U.S. subsidiaries that are parties to the Credit Agreement, entered into a First Amendment to Credit Agreement with Citizens (the “Amendment”). Pursuant to the Amendment, Citizens waived the Company’s noncompliance with the financial maintenance covenants contained in the Credit Agreement for the fiscal quarter ended December 31, 2018. With the waiver, the Company was in compliance with the Credit Agreement at December 31, 2018. The Amendment provides the Company with temporary relief from the financial maintenance covenants contained in the Credit Agreement, including suspending application of the consolidated leverage ratio and consolidated EBITDA covenants until the fiscal quarter ending September 30, 2019. Beginning February 28, 2019 and for each calendar month thereafter through August 31, 2019, the Company must maintain a minimum liquidity and minimum unadjusted EBITDA based on the Company’s annual budget and annual consolidated forecasts submitted to Citizens on the Amendment date; and amends the Borrowing Base to include a portion of the value of our corporate headquarters as additional borrowing base collateral, which will be available upon the mortgage on such property being recorded.
There was a
$7.8 million
outstanding balance on the line of credit at
December 31, 2018
compared to
$1.0 million
outstanding amount as of
December 31, 2017
.
The Company previously had a loan, collateralized by a mortgage on certain real estate. 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. There is
no
amount outstanding on the loan as of
December 31, 2018
.
Note 8 — 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
2018
and
2017
was
$1.0 million
and
$0.7 million
, respectively. The amount recorded for the years ended December 31,
2018
and
2017
was recorded net of benefits of
$18,000
and
$21,000
, as the result of forfeitures of unvested stock awards prior to the completion of the requisite service period or failure to meet requisite performance targets. The amount of total stock based compensation includes
$0.7 million
and
$0.4 million
in
2018
and
2017
, respectively, relating to restricted stock awards.
No
compensation expense has been capitalized during
2018
and
2017
.
The Company has reserved
1.0 million
shares under its 2015 Equity Incentive Plan (“Plan”). The Plan provides for the grant of several different forms of stock-based compensation, including stock options to purchase shares of the Company's common stock. Stock options granted under the Plan may be incentive stock options or nonqualified stock options. The Plan also provides for restricted stock awards, including performance based awards. Generally, 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 Compensation Committee of the Board of Directors (Compensation Committee) has discretion to determine the material terms and conditions of option awards under the Plan. 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 and 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. Upon approval of the 2015 Plan, equity awards are not eligible for grant under the 2005 Plan and, as such,
no
new grants of stock options or restricted stock awards under the 2005 Plan were made in 2018 or 2017.
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, 2017
|
761
|
|
|
$
|
5.80
|
|
|
$
|
2,748
|
|
Options granted
|
101
|
|
|
19.36
|
|
|
|
Options exercised
|
(168
|
)
|
|
5.19
|
|
|
|
Forfeited and canceled
|
(16
|
)
|
|
13.93
|
|
|
|
Expired
|
—
|
|
|
—
|
|
|
|
Outstanding at December 31, 2018
|
678
|
|
|
$
|
7.89
|
|
|
|
|
Vested and expected to vest at December 31, 2018
|
674
|
|
|
$
|
7.71
|
|
|
|
|
Total shares exercisable as of December 31, 2018
|
497
|
|
|
$
|
5.62
|
|
|
|
|
Shares remaining available for grant
|
583
|
|
|
|
|
|
|
|
The weighted average grant date fair value of stock options granted during the years
2018
and
2017
was
$19.36
and
$3.26
, respectively. The total intrinsic value of stock options exercised during the year ended December 31,
2018
was
$1,552,000
. The total intrinsic value of stock options exercised during the year ended
December 31, 2017
was
$1,043,000
. New shares of the Company’s common stock are issued as a result of stock option exercises in
2018
and for options exercised in
2017
. 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:
|
|
|
|
|
|
|
2018
|
2017
|
Expected option life
|
3.7 years
|
|
3.7 years
|
|
Weighted average risk-free interest rate
|
2.2
|
%
|
2.2
|
%
|
Weighted average expected volatility
|
36
|
%
|
36
|
%
|
Expected dividend yield
|
0
|
%
|
0
|
%
|
For the years ended
2018
and
2017
, the expected option life was based on the Company’s historical experience with similar type options. Expected volatility is based on historic 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
December 31, 2018
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
Number
Outstanding
(in thousands)
|
|
Weighted
Average
Remaining Life
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
$4.72 - $22.18
|
|
678
|
|
|
6.96 years
|
|
$
|
7.89
|
|
At
2018
, the aggregate unrecognized compensation cost of unvested equity awards, as determined using a Black-Scholes option valuation model, was
$1.8 million
(net of estimated forfeitures) which is expected to be recognized as compensation expense in fiscal years
2019 through 2021
. 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, 2018
|
158
|
|
|
$
|
6.49
|
|
Granted
|
79
|
|
|
17.08
|
|
Vested
|
(31
|
)
|
|
10.81
|
|
Forfeited and canceled
|
(13
|
)
|
|
10.21
|
|
Balance at December 31, 2018
|
193
|
|
|
$
|
9.88
|
|
The Plan also provides for the issuance of restricted stock and restricted stock units. These types of awards can have service based and/or performance based vesting. 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 targets 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
2018
and
2017
, the Company granted
79,000
and
92,000
restricted stock awards, respectively, at a per share price of
$0.02
. For the periods ended
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.
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
2018
and
2017
was
$17.08
and
$8.61
, respectively. In accordance with the terms of the restricted stock award agreements, the Company released
31,000
and
75,000
shares during
2018
and
2017
, respectively. During
2018
, there were approximately
13,000
shares of restricted stock canceled,
12,000
of which were performance based restricted shares. During
2017
, there were
22,000
shares of restricted stock canceled, of which
12,000
were performance based restricted shares.
Note 9 — Income Taxes
The provision for income taxes from continuing operations consists of:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
(in thousands)
|
|
2018
|
|
2017
|
Current income tax:
|
|
|
|
Federal
|
$
|
—
|
|
|
$
|
—
|
|
State
|
293
|
|
|
122
|
|
Foreign
|
41
|
|
|
227
|
|
|
334
|
|
|
349
|
|
Deferred income tax:
|
|
|
|
Federal
|
12,004
|
|
|
4,029
|
|
State
|
1,805
|
|
|
(381
|
)
|
|
13,809
|
|
|
3,648
|
|
Provision for income taxes
|
$
|
14,143
|
|
|
$
|
3,997
|
|
The components of (loss) income before income taxes consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
United States
|
$
|
(9,820
|
)
|
|
$
|
2,314
|
|
Other Countries
|
(159
|
)
|
|
(1,927
|
)
|
Total
|
$
|
(9,979
|
)
|
|
$
|
387
|
|
The deferred tax expense related to discontinued operations was
zero
in fiscal year
2018
and an expense of
$0.1 million
recorded in fiscal year
2017
. Deferred tax (liabilities) assets are comprised of the following at:
|
|
|
|
|
|
|
|
|
|
December 31,
(in thousands)
|
|
2018
|
|
2017
|
Deferred tax (liabilities) assets:
|
|
|
|
Software development costs
|
$
|
(1,954
|
)
|
|
$
|
(2,119
|
)
|
Acquired intangible assets
|
(676
|
)
|
|
(913
|
)
|
Gross deferred tax liabilities
|
(2,630
|
)
|
|
(3,032
|
)
|
|
|
|
|
Allowances for bad debts and inventory
|
2,785
|
|
|
2,958
|
|
Capitalized inventory costs
|
116
|
|
|
109
|
|
Intangible assets
|
420
|
|
|
672
|
|
Employee benefit accruals
|
1,742
|
|
|
1,282
|
|
Federal net operating loss carryforward
|
6,512
|
|
|
4,941
|
|
State net operating loss carryforward
|
2,112
|
|
|
1,540
|
|
Tax credit carryforwards
|
6,176
|
|
|
6,064
|
|
Foreign currency
|
—
|
|
|
33
|
|
Depreciation on property, plant and equipment
|
373
|
|
|
168
|
|
Other
|
722
|
|
|
727
|
|
Gross deferred tax assets
|
20,958
|
|
|
18,494
|
|
|
|
|
|
Less valuation allowance
|
(18,328
|
)
|
|
(1,653
|
)
|
|
|
|
|
Net deferred tax assets
|
$
|
—
|
|
|
$
|
13,809
|
|
The Company has Federal tax credit carryforwards of
$5.8 million
that expire in various tax years from 2029 to 2038. The Company has a Federal operating loss carryforward of
$22.8 million
expiring from 2029 through 2037 and a Federal operating loss carryforward of
$8.2 million
with an unlimited carryforward period. 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
$0.1 million
that expire in various tax years through 2038. 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
$16.7 million
for
2018
.
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
$0.3 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
2018
, 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,
|
|
2018
|
|
2017
|
Federal statutory tax rate
|
21.0
|
%
|
|
34.0
|
%
|
State taxes
|
4.4
|
|
|
(0.9
|
)
|
Non deductible expenses
|
(0.6
|
)
|
|
19.4
|
|
Tax credits
|
4.6
|
|
|
(90.6
|
)
|
Expired tax credits
|
(3.9
|
)
|
|
—
|
|
Stock based compensation
|
0.8
|
|
|
(69.6
|
)
|
Foreign income tax rate differential
|
—
|
|
|
(14.0
|
)
|
Repatriation Tax
|
—
|
|
|
110.5
|
|
Impact of Tax Cuts and Jobs Act enactment
|
—
|
|
|
1,241.0
|
|
Valuation allowance
|
(167.0
|
)
|
|
—
|
|
Tax return and audit adjustments
|
—
|
|
|
(107.3
|
)
|
Contingent purchase revaluation
|
(1.0
|
)
|
|
(88.0
|
)
|
Other
|
(0.1
|
)
|
|
(1.7
|
)
|
|
(141.8
|
)%
|
|
1,032.8
|
%
|
The effective income tax rate was
(141.8)%
and
1,032.8%
during the years ended
December 31, 2018
and
December 31, 2017
, 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, 2018 was significantly impacted by recording a substantial increase in a valuation allowance on deferred tax assets.
Note 10 — 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
2018
or
2017
. 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
$0.4 million
and
$0.3 million
in
2018
and
2017
, respectively.
The Company 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
$0.3 million
and
$0.5 million
, in
2018
and
2017
, respectively.
The Company 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 has the sole discretion to make employer contributions to the plan on behalf of the participants.
No
employer contributions were made in
2018
or
2017
.
Note 11 — 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 third quarter of 2016, the Company's Audit Committee commenced an internal
investigation into certain activities at the Company's 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. The Company voluntarily notified the SEC and the U.S. Department of Justice ("DOJ") of the internal investigation and we are fully cooperating with these agencies. 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 with these authorities. During the year ended
December 31, 2018
, we recorded
$1.1 million
of expenses relating to the investigation, including expenses of outside legal counsel and forensic accountants compared to
$2.9 million
in
2017
. We are currently unable to predict what actions the SEC, the 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 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 Brink Acquisition. This segment also offers customer support including field service, installation, depot repair, and
twenty-four
-hour telephone support. 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)
|
|
2018
|
|
2017
|
Revenues:
|
|
|
|
Restaurant/Retail
|
$
|
134,069
|
|
|
$
|
171,593
|
|
Government
|
67,177
|
|
|
61,012
|
|
Total
|
$
|
201,246
|
|
|
$
|
232,605
|
|
|
|
|
|
Operating (loss) income :
|
|
|
|
Restaurant/Retail
|
$
|
(14,399
|
)
|
|
$
|
(2,761
|
)
|
Government
|
6,886
|
|
|
6,523
|
|
Other
|
(2,385
|
)
|
|
(3,883
|
)
|
|
(9,898
|
)
|
|
(121
|
)
|
Other income, net
|
306
|
|
|
629
|
|
Interest expense, net
|
(387
|
)
|
|
(121
|
)
|
Income from continuing operations before provision for income taxes
|
$
|
(9,979
|
)
|
|
$
|
387
|
|
|
|
|
|
Identifiable assets:
|
|
|
|
Restaurant/Retail
|
$
|
68,004
|
|
|
$
|
74,257
|
|
Government
|
9,867
|
|
|
8,714
|
|
Other
|
16,810
|
|
|
31,653
|
|
Total
|
$
|
94,681
|
|
|
$
|
114,624
|
|
|
|
|
|
Goodwill:
|
|
|
|
Restaurant/Retail
|
$
|
10,315
|
|
|
$
|
10,315
|
|
Government
|
736
|
|
|
736
|
|
Total
|
$
|
11,051
|
|
|
$
|
11,051
|
|
|
|
|
|
Depreciation, amortization and accretion:
|
|
|
|
Restaurant/Retail
|
$
|
4,109
|
|
|
$
|
3,469
|
|
Government
|
32
|
|
|
21
|
|
Other
|
589
|
|
|
543
|
|
Total
|
$
|
4,730
|
|
|
$
|
4,033
|
|
|
|
|
|
Capital expenditures including software costs:
|
|
|
|
Restaurant/Retail
|
$
|
4,307
|
|
|
$
|
3,994
|
|
Government
|
124
|
|
|
7
|
|
Other
|
3,409
|
|
|
4,856
|
|
Total
|
$
|
7,840
|
|
|
$
|
8,857
|
|
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,
|
|
2018
|
|
2017
|
United States
|
$
|
188,026
|
|
|
$
|
213,693
|
|
Other Countries
|
13,220
|
|
|
18,912
|
|
Total
|
$
|
201,246
|
|
|
$
|
232,605
|
|
The following table presents assets by country based on the location of the asset. Amounts below exclude discontinued operations.
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
United States
|
$
|
84,652
|
|
|
$
|
99,284
|
|
Other Countries
|
10,029
|
|
|
15,340
|
|
Total
|
$
|
94,681
|
|
|
$
|
114,624
|
|
Customers comprising 10% or more of the Company’s total revenues, excluding discontinued operations, are summarized as follows:
|
|
|
|
|
|
|
|
December 31,
|
|
2018
|
|
2017
|
Restaurant and Retail segment
:
|
|
|
|
McDonald’s Corporation
|
19
|
%
|
|
33
|
%
|
Yum! Brands, Inc.
|
13
|
%
|
|
14
|
%
|
Government segment
:
|
|
|
|
U.S. Department of Defense
|
33
|
%
|
|
26
|
%
|
All Others
|
35
|
%
|
|
27
|
%
|
|
100
|
%
|
|
100
|
%
|
No other customer within All Others represented more than 10% of the Company’s total revenue for the years ended
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 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
2018
, and
2017
were considered representative of their fair values. The estimated fair value of the Company’s long-term debt and line of credit at
2018
and
2017
was based on variable and fixed interest rates at
2018
and
2017
, respectively, for new issues with similar remaining maturities and approximates the respective carrying values at
2018
and
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 (see Note 10 – Employees Benefit Plans - of 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 - Contingent Consideration - of 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 Brink Acquisition 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, 2017
|
$
|
3,000
|
|
New level 3 liability
|
—
|
|
Change in fair value of contingent consideration liability
|
(450
|
)
|
Transfers into or out of Level 3
|
—
|
|
Balance at December 31, 2018
|
$
|
2,550
|
|
Note 14 — Related Party Transactions
Prior to April 30, 2018, 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 local employees. During
2018
and
2017
, the Company recognized rental income of
$39,100
and
$117,300
, respectively, for the lease of the facility in each year. Expenses relating to the facility amounted to
$74,000
and
$25,000
during
2018
and
2017
, respectively. The rent receivable at December 31, 2018 and 2017 was
$0
and
$59,000
, respectively. This arrangement between the Company and the related party terminated on April 30, 2018.
In October 2016, we entered into a statement of work ("SOW") with Xpanxion LLC for software development services.
No
fees were incurred or payments made in 2018 under the SOW. In
2017
, we incurred approximately
$1.0 million
of fees to Xpanxion under the SOW. In
2017
, we made payments of
$1.2 million
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.