PAR Technology Corporation — Q1 2020 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. PAR operates Restaurant/Retail, providing POS software, hardware and related services, and Government, providing defense and federal-agency solutions. The quarter included revenue from the 2019 Drive-Thru and Restaurant Magic acquisitions.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 or comparison |
|---|---|---|
| Revenue | $54.7 million | $44.7 million; up 22.4% |
| Gross profit / gross margin | $11.0 million / 20.2% | $9.5 million / 21.3% |
| Operating loss | $5.5 million | $2.1 million |
| Net loss / diluted loss per share | $10.9 million / $0.61 | $2.7 million / $0.17 |
| Cash from operations | $(15.1) million | $(3.2) million |
| Cash from investing | $(2.0) million | $(1.9) million |
| Cash from financing | $49.4 million | $5.8 million |
| Cash and equivalents at March 31 | $60.1 million | $28.0 million at Dec. 31, 2019 |
- Revenue increased in Restaurant/Retail to $37.4 million (up 27%) and Government to $17.3 million (up 15%). Restaurant/Retail operating loss widened to $6.1 million; Government operating income was $1.2 million, versus $1.4 million.
- Product, service and contract gross margins were 20.0%, 32.6% and 6.9%, respectively, versus 27.6%, 26.9% and 9.7% in Q1 2019. Overall gross margin declined to 20.2% from 21.3%.
- SG&A rose to $11.4 million from $8.6 million; R&D rose to $4.9 million from $3.1 million. Management cited sales and marketing, stock compensation, acquired Restaurant Magic costs, and increased product development investment.
- Long-term debt was $101.9 million, with $0.6 million current; outstanding convertible-note principal totaled $133.75 million, plus a $1.8 million Restaurant Magic subordinated note. The balance-sheet debt carrying value is lower than principal because of unamortized discounts and issuance costs.
- Current assets were $133.4 million and current liabilities $38.4 million at quarter-end. Management stated available cash should cover operating needs for the next 12 months.
Material changes and unusual items
- PAR issued $120 million of 2.875% convertible notes due 2026, receiving approximately $115.9 million net proceeds. It used approximately $66.3 million of proceeds and 722,423 treasury shares to repurchase approximately $66.3 million principal of 4.5% notes due 2024.
- The note repurchase generated an $8.1 million debt-extinguishment loss. Interest expense increased to $2.0 million from $0.1 million, including $1.0 million of noncash discount accretion and issuance-cost amortization.
- A $5.3 million income-tax benefit reflected release of a deferred-tax-asset valuation allowance associated with the convertible-note transaction; it partly offset the pretax loss.
- Revenue growth included acquisition contributions: $3.5 million from Drive-Thru and $2.2 million from Restaurant Magic. Brink-related revenue also grew; management attributed product growth partly to hardware attachments and service growth to recurring software and installations.
- Operating cash use increased, with management citing higher inventory and other working-capital needs, lower customer deposits, annual compensation and insurance prepayments. PAR said inventory was increased to support Brink projects and mitigate potential supply-chain disruption.
Outlook, risks and contingencies
- COVID-19 had no material adverse impact on reported Q1 results, but Restaurant/Retail effects began in late March: customer closures, changed offerings, and delayed adoptions and installations. PAR said the pandemic’s duration and financial impact were not predictable.
- Early in Q2, PAR reduced discretionary spending, froze nonessential hiring, reduced workforce, furloughed some employees and temporarily reduced some salaries. It also cited work-from-home measures, supply-chain precautions and new offerings intended to support social distancing.
- The CARES Act was expected to provide approximately $1.8–$2.2 million of additional liquidity in 2020, principally through deferral of employer Social Security taxes.
- Key risks include reduced restaurant demand, delayed or canceled deployments and purchases, customer payment defaults, supply-chain and operating disruptions, cybersecurity exposure, and potential impairment of goodwill or intangibles. Dairy Queen represented 16% and Yum! Brands 11% of Q1 consolidated revenue; the U.S. Department of Defense represented 32%.
- PAR disclosed a pending biometric-privacy lawsuit and continued cooperation with China and Singapore authorities following an investigation. The company said potential fines or penalties from those authorities could be material, but it could not estimate the range.
- Government contract value remaining to be recognized was approximately $136.1 million, of which $34.5 million was funded. This is not equivalent to guaranteed revenue.
Important facts for investors to verify
- How the pandemic affected Restaurant/Retail sales, customer deployments, collections and margins after quarter-end, and whether cost actions or new offerings offset those effects.
- Whether operating cash use and inventory growth normalized, and how much of the $60.1 million cash balance remained available after debt service and other obligations.
- The economics and potential dilution of the 2026 and remaining 2024 convertible notes, including conversion terms and future interest expense.
- Acquisition-related revenue, profitability, integration progress, and the Restaurant Magic earn-out, which had a $3.3 million recorded liability and no stated maximum payment.
- Potential outcomes of the biometric-privacy litigation and China/Singapore proceedings, along with any subsequent impairment indicators for goodwill or intangible assets.