PAR Technology Corporation — Q1 2019 Form 10-Q
Business and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. PAR operates Restaurant/Retail (POS and related technology and services) and Government (defense, ISR and mission systems) segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $44.7 million | $55.7 million |
| Gross profit | $9.8 million | $11.8 million |
| Operating income (loss) | ($2.1) million | $0.1 million |
| Net income (loss) | ($2.7) million | $0.1 million |
| Diluted EPS | ($0.17) | $0.00 |
| Cash used in operating activities | $3.2 million | $2.5 million |
| Cash used in investing activities | $1.9 million | $1.7 million |
- Revenue fell 19.7% year over year. Restaurant/Retail revenue declined 25.2% to $29.6 million; Government revenue declined 6.3% to $15.1 million.
- By revenue type, product revenue decreased 41.1% to $15.5 million, service revenue increased 6.3% to $14.0 million, and contract revenue decreased 6.2% to $15.1 million.
- Product, service and contract gross margins were 27.6%, 28.6% and 9.7%, respectively, versus 26.2%, 27.7% and 8.1% in Q1 2018.
- Restaurant/Retail operating loss was $3.0 million, versus $0.6 million; Government operating income was $1.4 million, versus $1.3 million. Corporate/Other operating loss was $0.5 million.
- SG&A was $8.6 million, broadly unchanged. R&D rose 6.7% to $3.1 million, mainly reflecting Brink software development. Other expense was $0.4 million, including a $0.2 million adjustment related to the Brink acquisition; net interest expense was $0.1 million.
Financial position and liquidity
- At March 31, cash and equivalents were $4.1 million, current assets $61.2 million and current liabilities $51.4 million. Total assets were $105.0 million and total liabilities $61.6 million.
- The company had $16.1 million outstanding on its revolving credit line at quarter-end, up from $7.8 million at December 31, 2018. The credit agreement had a $25.0 million facility; a March amendment waived covenant noncompliance and provided temporary covenant relief through September 30, 2019.
- Q1 financing cash flow was positive $5.8 million, including borrowing proceeds; the company also paid $2.6 million of Brink earn-out consideration. Capital expenditures were $0.9 million and capitalized software costs were $1.0 million.
- Subsequent event: In April 2019, PAR issued $80.0 million of 4.5% convertible senior notes due 2024, receiving approximately $75.2 million net proceeds. It used proceeds to repay the approximately $16.1 million credit-line balance and terminate that facility; remaining proceeds were intended for general corporate purposes, including Brink investment and working capital. Management said operating cash flows and note proceeds were expected to cover operating needs for the next 12 months.
- PAR adopted ASC 842 leases on January 1, 2019, recognizing $3.7 million of operating lease right-of-use assets and $3.7 million of lease liabilities at quarter-end.
Changes, outlook and risks
- The product revenue decline primarily reflected reduced hardware projects with a tier-one customer in Q1 2018. Brink revenue increased: product revenue was $4.5 million, up 71%; Brink service revenue was $5.0 million, up 58%, including SaaS revenue of $3.1 million, up 64%. Management identified Brink SaaS and related investment as a key Restaurant/Retail growth focus.
- Government contract revenue was pressured by funding and ceiling limitations in an ISR program undergoing an organizational funding transition. Management cited uncertainty in defense workforce policy, procurement cycles and spending as factors it monitors.
- No specific revenue or earnings guidance was provided. Management’s liquidity outlook is subject to revenue growth, SaaS adoption, product-development and launch spending, market acceptance, and potential fines or penalties.
- In April 2019, the SEC said it did not intend to recommend enforcement action based on then-current information, and the DOJ advised it did not intend to proceed separately regarding the China and Singapore investigation. PAR continued cooperating with those countries’ authorities; possible actions and penalties remained uncertain and potentially material.
- A March 2019 Illinois lawsuit alleges violations of the Illinois Biometric Information Privacy Act relating to fingerprint data collected through POS authentication. PAR said it considers the suit without merit and intends to defend it.
- Debt-related risks include required interest and possible cash repurchases or cash settlement on conversion, potential dilution, and higher reported noncash interest expense from convertible-debt accounting. The filing also highlights privacy, cybersecurity, customer concentration and broader risks referenced in the 2018 Form 10-K.
Important facts for investors to verify
- Whether Brink SaaS growth can offset continuing weakness in legacy hardware and improve Restaurant/Retail profitability.
- Progress on Government/ISR funding transitions, contract renewals and customer concentration; the U.S. Department of Defense represented 34% of Q1 revenue, while McDonald’s and Yum! represented 10% and 13%, respectively.
- Use of convertible-note proceeds, future debt service, conversion terms and the effect of debt accounting on reported interest expense and EPS.
- Outcomes of the China and Singapore matters and the Illinois biometric-data lawsuit, including any material costs or penalties.
- Cash generation, working-capital needs and the effect of investment spending on the stated 12-month liquidity outlook.