PAR Technology Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited. PAR provides restaurant and retail point-of-sale and management technology, and government-sector defense, ISR and mission-systems services. Unless noted, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $44.2 | $52.6 | $88.9 | $108.2 |
| Gross profit | $8.6 | $11.4 | $18.3 | $23.2 |
| Gross margin | 19.4% | 21.6% | 20.6% | 21.4% |
| Operating loss | $(3.5) | $(1.1) | $(5.6) | $(1.0) |
| Net loss | $(1.1) | $(1.3) | $(3.8) | $(1.3) |
| Diluted loss per share | $(0.07) | $(0.08) | $(0.24) | $(0.08) |
Q2 revenue fell 15.8%; first-half revenue declined 17.8%. Restaurant/Retail revenue was $28.3 million in Q2, down 18.9%, and Government revenue was $16.0 million, down 9.9%. First-half segment revenue declined 22.2% and 8.2%, respectively.
Product revenue declines were chiefly attributed to lower major hardware-project activity at a large CORE customer. Government contract revenue was affected by ISR funding and contract-ceiling limitations during an organizational funding transition. Brink showed growth: Q2 SaaS revenue rose 40% to $3.2 million, and first-half SaaS revenue rose 49% to $6.2 million.
Q2 net loss was narrower than the prior-year quarter despite a larger operating loss, primarily because of a $4.0 million tax benefit related to the convertible-note accounting. First-half net loss widened; interest expense rose to $1.4 million from $0.1 million, largely reflecting the notes and debt-discount accretion.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $58.7 million, compared with $3.5 million at December 31, 2018. Current assets were $114.1 million and current liabilities $30.3 million.
- Six-month operating cash use was $6.5 million, versus $0.6 million provided in the prior-year period. Investing cash use was $3.3 million, including $1.7 million of capital expenditures and $1.6 million of capitalized software costs.
- PAR issued $80 million of 4.5% convertible senior notes due 2024 in April. The balance sheet reports $59.3 million of long-term debt after discount and issuance costs; the notes’ estimated fair value was $97.8 million at June 30. Proceeds were partly used to repay and terminate the $25 million revolving credit facility; no line-of-credit borrowings remained at quarter-end.
- Management said operating cash flows and net proceeds from the notes should be sufficient for operating needs over the next 12 months. The filing does not provide formal revenue or earnings guidance.
Material changes, outlook and risks
- PAR entered an agreement to sell substantially all assets of the SureCheck product group, subject to closing conditions. The sale was not treated as a discontinued operation. The company recorded $1.4 million of related costs, including inventory and intangible-asset charges, and classified $2.5 million of net assets as held for sale.
- The notes carry a 4.5% coupon, with an estimated 10.24% effective rate for the liability component. They are convertible under specified conditions, with an initial conversion price of $28.55 per share. The filing describes customary covenants and default provisions.
- PAR continues cooperating with authorities in China and Singapore regarding an internal investigation into potential import/export and sales-documentation issues. In April 2019, the SEC said it did not intend to recommend enforcement action based on then-current information, and the DOJ said it did not intend to proceed separately. Outcomes with China and Singapore authorities remain uncertain; potential fines or penalties could be material and cannot currently be estimated.
- Customer concentration remains notable: the U.S. Department of Defense represented 36% of Q2 revenue; Yum! Brands 13%; and McDonald’s 10%. Management also cited uncertainty in defense workforce policy, procurement cycles and spending.
- PAR adopted the new lease standard in January 2019, recording about $4.0 million of operating lease right-of-use assets and liabilities. Management reported disclosure controls were effective at June 30, 2019, with no material quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the SureCheck asset sale closes on the expected terms and whether further costs or effects arise.
- Whether Brink SaaS growth and product investment can offset lower CORE hardware revenue and improve consolidated margins and cash generation.
- Progress on the ISR funding transition and related contract revenue and margin effects.
- Developments with China and Singapore authorities, including potential fines, penalties or other consequences.
- Convertible-note conversion, effective financing cost, dilution potential and liquidity needs, particularly if operating cash use continues.