PAR Technology Corporation — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results. PAR operates Restaurant/Retail technology and Government solutions businesses. The April 8 acquisition of Punchh materially changed the company’s scale and financial profile.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $69.0M | $45.7M | $123.4M | $100.4M |
| Gross profit | $15.1M | $9.1M | $25.3M | $20.1M |
| Gross margin | 21.9% | 19.9% | 20.5% | 20.0% |
| Operating loss | $(17.0)M | $(5.7)M | $(23.0)M | $(11.2)M |
| Net loss | $(10.0)M | $(9.0)M | $(18.2)M | $(19.9)M |
| Net loss per diluted share | $(0.39) | $(0.49) | $(0.77) | $(1.10) |
Q2 revenue rose 51%; six-month revenue increased 23%. Restaurant/Retail revenue grew 85% in Q2 and 35% for the first half, while Government revenue was down 1% in Q2 and up 1% for the first half. Q2 Restaurant/Retail revenue included $8.1M from Punchh. Management also cited hardware refreshes, drive-thru and kitchen display demand, new Brink POS deployments, and comparison with COVID-affected 2020 volumes.
Q2 operating expenses increased to $32.1M from $14.8M, including higher Punchh-related costs, stock compensation, research and development, and acquired-intangible amortization. Q2 service margin declined to 30.3% from 35.2%, partly due to acquired technology amortization and field-operations transition costs; product margin improved to 22.8% from 19.1%. Contract margin was 7.9% versus 7.4%.
Six-month operating cash flow was $(33.1)M, compared with $(13.6)M a year earlier. Investing cash outflow was $(381.7)M, primarily the $377.3M net cash paid for Punchh; financing provided $319.3M. Cash declined to $85.2M from $180.7M at year-end 2020. Management said available cash was expected to meet operating needs for the next 12 months.
At June 30, cash was $85.2M, current assets $177.0M and current liabilities $60.4M. Total assets were $797.7M and shareholders’ equity $436.6M. Debt principal outstanding was $314.8M: $180.0M under the new term loan and $133.8M of convertible notes. The balance-sheet debt carrying amount was lower because of unamortized discounts and issuance costs. The term loan is secured, bears variable interest, matures in 2025, and includes minimum liquidity and leverage covenants; PAR reported compliance for the quarter.
Material changes and unusual items
- Punchh acquisition: Purchased for approximately $509.6M, consisting of about $400.9M cash and $108.7M equity consideration. The acquisition added $417.6M of preliminary goodwill and $88.2M of developed technology intangibles. Purchase accounting remains preliminary.
- Acquisition financing: PAR raised approximately $160.0M through a private stock placement and obtained a $180.0M term loan. It also issued Act III a warrant to purchase 500,000 shares at $76.50 per share.
- Tax benefit: A $12.3M tax benefit in Q2 and the first half resulted from a partial release of the deferred-tax valuation allowance associated with Punchh acquisition deferred tax liabilities; this materially reduced reported net loss.
- Insurance proceeds: First-half operating expenses included a $4.4M gain from settlement of a legacy insurance claim.
- Share issuance and dilution: Common shares issued increased materially, including shares issued for Punchh and the private placement. Convertible notes, options, restricted stock units and the warrant may also create future dilution.
Outlook, risks and controls
PAR provided no specific revenue or earnings guidance. Management’s liquidity statement was that cash should be sufficient for operating needs over the next 12 months, subject to factors including growth, product-development spending and market acceptance.
Management said COVID-19 continued to challenge Restaurant/Retail, while Government operations had not been materially affected. The filing highlights continuing hardware-component shortages, higher material and shipping costs, possible delivery delays, and risks from renewed COVID-19 restrictions, including the Delta variant. Hardware price increases intended to offset cost inflation could reduce competitiveness or sales.
Other notable risks include integrating Punchh and realizing expected benefits, servicing increased debt, variable-rate interest exposure, customer concentration (the U.S. Department of Defense represented 26% of Q2 revenue), and potential effects of government contract audits. PAR disclosed that its disclosure controls were not effective at quarter-end because previously identified material weaknesses in internal control over financial reporting remained under remediation; controls inherited with Punchh were also being evaluated.
The company said it had no off-balance-sheet arrangements. It described ordinary-course legal proceedings and a biometric-privacy lawsuit, which it considered without merit and not expected to have a material financial effect; it could not predict what action Chinese authorities might take following a prior internal investigation.
Key facts for investors to verify
- How much of reported growth is attributable to Punchh and to recovery from unusually weak COVID-affected comparisons, versus underlying organic growth.
- Whether Punchh integration, customer retention, synergies and acquisition-related costs develop as expected, and whether preliminary purchase-price allocations change.
- Cash burn, working-capital needs, debt service, variable interest costs, and continued compliance with the term-loan liquidity and leverage covenants.
- Whether component shortages, inflation and shipping delays affect hardware deliveries, margins, customer deployments or price competitiveness.
- Progress in remediating the disclosed material weaknesses and evaluating Punchh’s inherited controls.