PAR Technology Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Although the request specifies 2019 Q4, this filing reports full-year results, with comparative FY2018 figures.
Business context
PAR operates Restaurant/Retail, supplying restaurant and retail POS hardware, software and services, and Government, providing technical, intelligence, surveillance and mission-support services to U.S. government agencies. Management is shifting Restaurant/Retail toward cloud and subscription software, particularly Brink POS.
Key financial metrics
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $187.2 million | $201.2 million |
| Gross profit / gross margin | $38.5 million / 20.5% | $38.5 million / 19.1% |
| Operating loss | $13.1 million | $9.9 million |
| Net loss / diluted loss per share | $15.6 million / $0.96 | $24.1 million / $1.50 |
| Cash used in operating activities | $16.1 million | $3.8 million |
| Cash used in investing activities | $23.9 million | $6.7 million |
| Cash provided by financing activities | $65.6 million | $7.3 million |
| Cash and cash equivalents at year-end | $28.0 million | $3.5 million |
| Total assets / shareholders’ equity | $189.6 million / $72.8 million | $94.7 million / $45.9 million |
Revenue fell 7.0%. Product revenue declined 15.8% to $66.3 million; service revenue rose 3.1% to $57.0 million; contract revenue declined 4.8% to $63.9 million. Product margin was 22.9% (23.0% in 2018), service margin 30.9% (23.8%), and contract margin 8.9% (10.7%). Overall gross margin improved, but operating loss widened as SG&A and R&D increased.
Restaurant/Retail revenue was $123.3 million, down 8%; Government revenue was $63.9 million, down 5%. Brink revenue grew 66% to $41.7 million, and its installed base reached 9,799 restaurants from 7,449. The company reported $148.7 million of Government contract backlog at year-end, of which $32.8 million was funded; approximately $56.5 million was expected to be completed in 2020 as funding is committed.
At December 31, 2019, the balance sheet showed $42.1 million of current liabilities and $63.0 million of current and long-term debt combined. The company had issued $80 million principal amount of 4.5% convertible notes due 2024; the reported carrying value was reduced by unamortized discount and issuance costs. The prior-year $7.8 million credit-line balance was repaid and the facility terminated.
Material changes and unusual items
- Revenue declines primarily reflected lower traditional hardware and related support sales after a large Tier 1 customer’s 2018 project was not repeated. Brink growth partially offset this decline.
- In September, PAR acquired 3M’s Drive-Thru Communications Systems assets for $7.0 million cash. In December, it acquired Restaurant Magic for approximately $43.0 million in cash, stock and a subordinated note, plus a potential revenue-based earn-out. Purchase accounting, including goodwill and intangible valuations, remained preliminary.
- PAR sold substantially all SureCheck assets in October. SureCheck-related impairment and other sale-related charges were recorded; the business was not classified as discontinued operations.
- The 2019 net loss included a $3.6 million income tax benefit; the 2018 net loss included a $14.1 million tax provision, principally reflecting a valuation allowance on deferred tax assets.
- Interest expense rose to $4.6 million, including $2.0 million of non-cash accretion of the 2024 notes’ debt discount. SG&A included $2.7 million of stock compensation, versus $1.0 million in 2018.
Outlook, risks and contingencies
Management expects Brink and integrated cloud solutions to be central to Restaurant/Retail growth, while investing in product development, sales, marketing and customer support. No quantified revenue, earnings or margin guidance is provided. Management stated that cash on hand and proceeds from the subsequent 2026 notes issuance were expected to fund operating needs for the next 12 months; actual needs depend on growth, investment and acquisition plans.
In February 2020, PAR issued $120 million principal amount of 2.875% convertible notes due 2026, receiving approximately $115.9 million net proceeds. It used approximately $66.25 million of proceeds and 722,423 common shares to repurchase $66.25 million principal amount of 2024 notes; $13.75 million principal amount of the 2024 notes remained outstanding afterward. These transactions occurred after year-end.
- Management identifies ongoing operating losses and the risk that Restaurant/Retail transformation investments may not achieve sustainable profitability.
- Customer concentration is significant: FY2019 revenue included McDonald’s 16%, Yum! Brands 25%, Dairy Queen 13%, and the U.S. Department of Defense 34%. Changes in large-customer purchases or government funding could materially affect results.
- PAR cited COVID-19-related supplier disruption, particularly in China, and said it was increasing safety stock and pursuing alternative sources where possible. The duration and financial effect were uncertain.
- A putative Illinois biometric-privacy lawsuit was refiled against ParTech, Inc. in January 2020. PAR disputes the claim; it had not accrued a loss and said insurance would not cover related litigation costs.
- PAR continued cooperating with China and Singapore authorities concerning a prior internal investigation. The SEC and DOJ said in 2019 they did not intend to pursue enforcement, but the company could not estimate possible foreign-authority outcomes or penalties.
- Government backlog includes unfunded amounts and may not convert to revenue. Contract termination, funding changes, cost overruns and procurement audits are additional risks. The ERP implementation began in October 2019; management reported effective financial reporting controls, and the auditor gave unqualified opinions on the financial statements and internal control.
Important facts for investors to verify
- Whether Brink and Restaurant Magic deliver sustained recurring-revenue growth and whether the acquired businesses integrate successfully.
- Customer concentration, Government contract funding and conversion of the $148.7 million backlog, particularly its unfunded portion.
- Cash consumption and liquidity after the 2026 notes issuance and 2024 note repurchase; distinguish year-end balances from post-year-end financing.
- Potential dilution, conversion terms and future cash obligations under the convertible notes and Restaurant Magic earn-out.
- Developments in the biometric-privacy case, China and Singapore authority inquiries, and COVID-19 supply-chain exposure.
- Whether operating losses narrow and margins improve as the business mix shifts toward SaaS; the filing provides no numerical forward guidance.