PAR Technology Corporation — FY2020 Form 10-K
Business context and period. This filing covers the fiscal year ended December 31, 2020; it is an annual report, not a standalone fourth-quarter report. PAR operates Restaurant/Retail, selling POS software, hardware and services, and Government, providing defense and federal technology and mission-support services.
Key financial results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $213.8 million | $187.2 million |
| Gross profit / gross margin | $39.3 million / approximately 18.4% | $37.4 million / approximately 20.0% |
| Operating loss | $23.9 million | $14.2 million |
| Net loss / diluted loss per share | $36.6 million / $1.92 | $15.6 million / $0.96 |
| Cash used in operating activities | $20.2 million | $16.1 million |
| Cash and cash equivalents at year-end | $180.7 million | $28.0 million |
| Long-term debt, net carrying amount | $105.8 million | $62.4 million |
Revenue increased 14.2%. Restaurant/Retail revenue grew 15.6% to $142.5 million, while Government revenue rose 11.5% to $71.3 million. Brink revenue increased 51.9% to $63.3 million. The company remained loss-making; consolidated gross margin declined, and operating loss widened. Product, service and contract margins were 19.5%, 28.0% and 7.9%, respectively, versus 22.8%, 29.1% and 8.9% in 2019.
Liquidity was strengthened by financing: 2020 financing activities provided $180.7 million, including $131.4 million net proceeds from the common-stock offering and proceeds from convertible notes, partly offset by $66.3 million used to repurchase 2024 notes. Management said cash on hand was expected to meet operating needs for the next 12 months. Year-end cash was $180.7 million; outstanding note principal was $133.8 million, plus a $1.4 million acquisition-related subordinated note. The filing reports no off-balance-sheet arrangements.
Material changes and unusual items
- Revenue growth reflected Brink expansion, the acquired Drive-Thru business and Restaurant Magic, and increased Government ISR activity. Other core hardware revenue and certain traditional customer activity weakened.
- Net loss increased by $21.0 million year over year. Drivers included higher SG&A and R&D, increased interest expense, and an $8.1 million loss on extinguishment of debt. A $3.3 million reversal of Restaurant Magic contingent consideration partly offset expenses.
- Operating cash outflow increased to $20.2 million, driven by the higher pretax loss and working-capital needs. Investing cash outflow was $9.0 million, including $7.9 million of capitalized software development costs.
- PAR issued $120.0 million of 2.875% convertible notes due 2026 and repurchased $66.3 million principal of its 4.5% notes due 2024. The notes’ conversion-related accounting includes non-cash interest expense; total net interest expense was $8.3 million in 2020.
- The October 2020 stock offering and partial underwriter option exercise issued approximately 3.6 million shares in total, producing $131.4 million net proceeds.
Outlook, risks and contingencies
- Outlook: No specific revenue or earnings guidance is provided. Management expects to continue investing in software and digital restaurant solutions and to manage costs and pandemic-related uncertainty. It states that 2020 revenue increased despite COVID-19, but the pandemic’s continuing effect cannot be reliably predicted.
- COVID-19: Risks include restaurant closures or reduced demand, delayed deployments and payments, supply-chain disruption, and impairment risk. Management reported more than $10 million in temporary cost savings to its 2020 operating plan.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2020 due to material weaknesses in control execution, documentation, monitoring and timely communication. Deloitte issued an adverse opinion on internal control. Remediation actions had begun, but the weaknesses were not yet considered remediated.
- Customer concentration: The three largest customers, including their franchisees, represented 31.0% of consolidated revenue. The U.S. Department of Defense accounted for 33% of revenue; Yum! Brands 11%; Dairy Queen 13%.
- Government backlog: Contract backlog was approximately $150.5 million at year-end, of which $27.8 million was funded; about $74.0 million was expected to be completed in 2021. Unfunded backlog may not convert to revenue and is subject to appropriations, options and contract changes.
- Legal and other contingencies: A putative class action alleges violations of Illinois biometric privacy law; PAR says it believes the claim is without merit and has not accrued a loss. A Singapore-related penalty was considered probable but not material; the company could not predict possible action by Chinese authorities. PAR also disclosed a business partner’s royalty non-payment claim, which it is seeking to resolve.
- Other significant risks include competition, sole-source suppliers, cybersecurity and privacy, government contract cost overruns or termination, convertible-note cash and dilution exposure, and potential goodwill or intangible-asset impairment. No goodwill impairment was recorded in 2020.
Important facts for investors to verify
- Progress and independent confirmation of remediation of the material weaknesses in financial reporting controls.
- Whether Brink and other recurring software and service revenue can grow sufficiently to improve margins and reduce operating losses.
- Cash burn, working-capital requirements, and ability to service or settle convertible debt; compare the $180.7 million cash balance with $133.8 million note principal and contractual payments.
- Conversion terms, potential dilution and fair value of the 2024 and 2026 notes; the filing estimates their year-end fair values at $30.6 million and $195.4 million, respectively.
- Customer retention and concentration, Government contract funding and backlog conversion, and developments in the biometric privacy lawsuit, royalty claim and China/Singapore matters.