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Aug. 7, 2019, 4:36 p.m. EDT

10-Q: PAR TECHNOLOGY CORP

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

When used in this Quarterly Report on Form 10-Q ("Quarterly Report"), the terms "PAR", "Company," "we," "us" and "our" mean PAR Technology Corporation and its consolidated subsidiaries, unless the context indicates otherwise. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited interim consolidated financial statements and the notes thereto included under Part I, Item 1 of this Quarterly Report. See also, "Forward-Looking Statements" below.

Forward-Looking Statements

This Quarterly Report contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature, but rather are predictive of our future operations, financial condition, business strategies and prospects. Forward-looking statements are generally identified by words such as "anticipate", "believe," "belief," "continue," "could", "expect," "estimate," "intend," "may," "opportunity," "plan," "should," "will," "would," "will likely result," and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties, which could cause our actual results to differ materially from those expressed in, or implied by, the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K as filed on March 18, 2019 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2019 filed May 7, 2019. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities law.

Overview

Our Restaurant/Retail reporting segment provides point-of-sale ("POS") and management technology solutions; and our Government reporting segment provides intelligence, surveillance, and reconnaissance ("ISR") solutions and mission systems support.

We are a leading provider of POS technology solutions to restaurants and retail outlets and we expect our Brink line of business ("Brink"), including our Brink POS SaaS software solution, inclusive of related hardware, installation and technical support and other customer services, to be the primary focus and driver of growth in the Restaurant/Retail reporting segment. Our ability to grow and expand our presence as a cloud-based, software solutions leader requires that we strategically and effectively distribute and invest our capital in areas that will drive long-term growth, including product development, consisting primarily of expenses in research and development, software engineering and related personnel costs; strategic partnerships; customer support, consisting primarily of help-desk; and sales and marketing, consisting primarily of advertising, marketing, general promotional expenditures.

Our Government reporting segment provides technical expertise under contract in the development of advanced systems and software solutions for the U.S. Department of Defense and other federal agencies, as well as technology management and communications support services to the U.S. Department of Defense.

The strategy for our Government reporting segment is to build on our sustained performance on existing service contracts, coupled with investments in enhanced business development capabilities. We believe we are well positioned to realize continued renewals of expiring contracts and extensions of existing contracts, and secure service and solution contracts in expanded areas within the U.S. Department of Defense and other federal agencies. We believe our highly relevant technical competencies, intellectual property, and investments in new technologies provide opportunities to offer systems integration, products, and highly-specialized service solutions to the U.S. Department of Defense and other federal agencies. The general uncertainty in U.S. defense total workforce policies (military, civilian, and contract), procurement cycles, and spending levels for the next several years are factors we monitor as we develop and implement our business strategy for the Government reporting segment.

Results of Operations -

Three Months Ended June 30, 2019 Compared to Three Months Ended June 30, 2018

We reported revenues of $44.2 million for the quarter ended June 30, 2019, a decrease of 15.8% from $52.6 million reported for the quarter ended June 30, 2018. Our net loss from continuing operations was $1.1 million or $0.07 per diluted share for the second quarter of 2019 versus net loss of $1.3 million or $0.08 per diluted share for the same period in 2018. The second quarter

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of 2019 results included a tax benefit of $4.0 million related to a reduction of the deferred tax valuation allowance that arose due to the recording of a deferred tax liability created as a result of the accounting for the sale of $80 million aggregate principal amount of 4.500% Convertible Senior Notes due 2024 ("Notes"). The current period tax benefit was recorded to deferred tax asset to properly offset the deferred tax liability created when accounting for the equity component of the bifurcated Notes.

Operating segment revenues for the quarter ended June 30, 2019 were $28.3 million for Restaurant/Retail reporting segment, a decrease of 18.9% from $34.8 million reported for the quarter ended June 30, 2018 and $16.0 million for the Government reporting segment, a decrease of 9.9% from $17.7 million reported for the quarter ended June 30, 2018. Restaurant/Retail reporting segment revenue for the quarter ended June 30, 2019 by business line consisted of $18.0 million for our line of business comprised of non-Brink customers, primarily focused on hardware and respective services ("CORE"), $9.3 million for Brink, and $0.9 million for SureCheck, compared to revenue for the quarter ended June 30, 2018 by business line of $27.0 million for CORE, $6.1 million for Brink, and $1.7 million for SureCheck. Government revenue for the quarter ended June 30, 2019 by business line consisted of $7.3 million for ISR, $8.2 million for Mission Systems, and $0.5 million for Product Sales, compared to revenue for the quarter end June 30, 2018 by business line of $8.4 million for ISR, $8.7 million for Mission Systems, and $0.7 million for Product Sales.

Product revenues were $14.7 million for the quarter ended June 30, 2019, a decrease of 29.5% from $20.9 million recorded for the same period in 2018, primarily due to reduced major hardware project activity at a tier 1 CORE customer compared to the second quarter of 2018. Product revenue related to Brink was $4.2 million, an increase of 65% from $2.6 million for the same period in 2018.

Service revenues were $13.5 million for the quarter ended June 30, 2019, a decrease of 2.9% from $13.9 million reported for the same period in 2018, primarily due to decreased installation services related to CORE hardware projects offset by increased SaaS revenue. Brink service revenue includes SaaS revenue of $3.2 million, an increase of 40% from $2.3 million for the same period in 2018.

Contract revenues were $16.0 million for the quarter ended June 30, 2019, a decrease of 9.9% from $17.7 million reported for the same period in 2018. The decrease is primarily driven by a reduction in ISR solutions due to contract funding and ceiling limitations largely attributable to an ISR program that is currently undergoing an organizational funding transition.

Product margins for the quarter ended June 30, 2019 were 22.5%, compared to 26.6% for the same period in 2018. Product margins for the quarter ended June 30, 2019 included a $0.6 million reserve for SureCheck inventory related to the expected sale which resulted in a 4.0% negative impact on margins (see Note 3 - Asset Held for Sale to unaudited interim consolidated financial statements).

Service margins for the quarter ended June 30, 2019 were 27.0%, compared to 26.8% recorded for the same period in 2018. Service margins for the quarter ended June 30, 2019 included a $0.8 million charge of SureCheck intangible assets related to the expected sale; excluding this one time charge, service margins would have been 32.8% reflecting the increase in Brink SaaS revenue.

Contract margins for the quarter ended June 30, 2019 were 10.0%, compared to 11.7% for the same period in 2018 due primarily to lower margin in ISR solutions and a loss reserve adjustment in Mission Systems.

Selling, general and administrative (SG&A) expenses remained consistent for each of the quarters ended June 30, 2019 and 2018 at $9.1 million. The Company increased investment in Brink sales $0.3 million while offsetting G&A and cost of sales in other business lines. SG&A expenses associated with the internal investigation for the quarter ended June 30, 2019 were $0.1 million as compared to $0.3 million for the quarter ended June 30, 2018.

Research and development (R&D) expenses were $2.7 million for the quarter ended June 30, 2019, a decease of 15.4% from $3.2 million for the same period in 2018. A $0.3 million increase in Brink software development investment was more than offset by savings in other areas.

For each of the quarters ended June 30, 2019 and June 30, 2018, we recorded $0.2 million of amortization expense associated with identifiable intangible assets acquired in the Brink Acquisition.

Other expense, net, was $374,000 for the quarter ended June 30, 2019, compared to other expense, net, of $384,000 for the same period in 2018. Other expense, net, primarily includes, fair market value fluctuations of our deferred compensation plan, rental income, and foreign currency fair value adjustments.

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Interest expense, net, of $1.2 million for the quarter ended June 30, 2019 compared to $78,000 for the quarter ended June 30, 2018. The increase reflects the sale of the Notes and includes $0.6 million of accretion of debt discount for the quarter ended June 30, 2019 (see Note 8 - Convertible Senior Notes, to unaudited interim consolidated financial statements).

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018

We reported revenues of $88.9 million for the six months ended June 30, 2019, a decrease of 17.8% from $108.2 million reported for the six months ended June 30, 2018. Our net loss from continuing operations was $3.8 million or $0.24 per diluted share for the six months ended June 30, 2019 versus net loss of $1.3 million or $0.08 per diluted share for the same period in 2018. The results for the six months ended June 30, 2019, included a tax benefit of $4.0 million related to a reduction of the deferred tax valuation allowance that arose due to the recording of a deferred tax liability created as a result of the accounting for the sale of the Notes. The current period tax benefit was recorded to deferred tax asset to properly offset the deferred tax liability created when accounting for the equity component of the bifurcated Notes.

Operating segment revenues for the six months ended June 30, 2019 were $57.8 million for Restaurant/Retail reporting segment, a decrease of 22.2% from $74.3 million reported for the six months ended June 30, 2018, and $31.1 million for the Government reporting segment, a decrease of 8.2% from $33.9 million reported for the six months ended June 30, 2018. Restaurant/Retail revenue for the six months ended June 30, 2019 by business line consisted of $36.7 million for CORE, $18.8 million for Brink, and $2.4 million for SureCheck, compared to revenue for the six months ended June 30, 2018 by business line of $59.3 million for CORE, $11.9 million for Brink, and $3.2 million for SureCheck. Government revenue for the six months ended June 30, 2019 by business line consisted of $13.5 million for ISR, $16.8 million for Mission Systems, and $0.8 million for Product Sales, compared to revenue for the six months ended June 30, 2018 by business line of $16.1 million for ISR, $17.0 million for Mission Systems, and $0.7 million for Product Sales.

Product revenues were $30.2 million for the six months ended June 30, 2019, a decrease of 35.9% from $47.2 million recorded for the same period in 2018, primarily due to reduced major hardware project activity at a tier 1 CORE customer compared to the first 6 months of 2018. Product revenue related to Brink was $8.8 million, an increase of 68% from $5.2 million for the same period in 2018.

Service revenues were $27.6 million for the six months ended June 30, 2019, an increase of 1.6% from $27.1 million reported for the same period in 2018, primarily due to decreased installation services related to CORE hardware projects. Brink service revenue includes SaaS revenue of $6.2 million, an increase of 49% from $4.2 million for the same period in 2018.

Contract revenues were $31.1 million for the six months ended June 30, 2019, a decrease of 8.2% from $33.9 million reported for the same period in 2018. The decrease is primarily driven by a reduction in ISR solutions due to contract funding and ceiling limitations largely attributable to ISR programs that is currently undergoing an organizational funding transition.

Product margins for the six months ended June 30, 2019 were 25.1%, compared to 26.3% for the same period in 2018. Product margins for the six months ended June 30, 2019 included a $0.6 million reserve for SureCheck inventory related to the expected sale which resulted in a 1.9% negative impact on margins.

Service margins for the six months ended June 30, 2019 were 27.8%, compared to 27.2% recorded for the same period in 2018. Service margins for the six months ended June 30, 2019 included a $0.8 million charge of SureCheck intangible assets related to the expected sale; excluding this one time charge, service margins would have been 30.7% reflecting the increase in Brink SaaS revenues.

Contract margins for the six months ended June 30, 2019 were 9.9%, consistent with the 10.0% for the same period in 2018.

Selling, general and administrative (SG&A) expenses remained consistent for each of the six months ended June 30, 2019 and 2018 at $17.6 million. The Company increased investment in Brink sales $0.5 million while offsetting G&A and cost of sales in other business lines. SG&A expenses associated with the internal investigation for the six months ended June 30, 2019 were $0.3 million as compared to $0.6 million for the six months ended June 30, 2018.

Research and development (R&D) expenses were $5.8 million for the six months ended June 30, 2019, a decease of 5.0% from $6.1 million for the six months ended June 30, 2018. A $0.6 million increase in Brink software development investment was more than offset by savings in other areas.

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For each of the the six months ended June 30, 2019 and June 30, 2018, we recorded $0.5 million of amortization expense associated with identifiable intangible assets acquired in the Brink Acquisition.

Other expense, net, was $804,000 for the six months ended June 30, 2019, compared to other expense, net, of $335,000 for the same period in 2018. Other expense, net, primarily includes, fair market value fluctuations of our deferred compensation plan, rental income, and foreign currency fair value adjustments. For the six months ended June 30, 2019 the Company recorded an extra $0.2 million expense relative to the final payment of the Brink Acquisition and a $0.2 million increase in facilities expense driven by reduced rental income.

Interest expense, net, of $1.4 million for the six months ended June 30, 2019 compared to $119,000 for the six months ended June 30, 2018. The increase reflects the April 2019 sale of the Notes and includes $0.6 million of accretion of debt discount for the six months ended June 30, 2019.

Liquidity and Capital Resources

Our primary sources of liquidity are cash from operations and debt. Prior to April 15, 2019, we met our liquidity needs through borrowings under the Credit Agreement entered into between the Company, certain of its U.S. subsidiaries and Citizens Bank, N.A. (the "Credit Agreement") on June 5, 2018, which provided us with a revolving line of credit up to an aggregate principal amount of $25.0 million or a variable borrowing base. On April 15, 2019, the Company sold the Notes and used a portion of the proceeds to repay in full all amounts outstanding under the Credit Agreement and, in connection therewith, terminated the Credit Agreement.

Cash used in operating activities was $6.5 million for the six months ended June 30, 2019, compared to $0.6 million cash provided by operations for the same period in 2018. The variance is driven by a decrease in net income and additional net working capital requirements.

Cash used in investing activities was $3.3 million for the six months ended June 30, 2019 versus $3.8 million for the six months ended June 30, 2018. In the six months ended June 30, 2019, our capital expenditures of $1.7 million were primarily related to the implementation of our enterprise resource planning system compared to $1.7 million for the six months ended June 30, 2018. We capitalized $1.6 million in costs associated with investments in our Restaurant/Retail reporting segment software platforms during the six months ended June 30, 2019 compared to $2.1 million for the six months ended June 30, 2018.

Cash provided by financing activities was $64.9 million for the six months ended June 30, 2019 versus cash provided by financing activities of $5.5 million for the six months ended June 30, 2018. The increase was driven by the proceeds of the Notes net of issuance costs and repayment in full of all amounts outstanding under the Credit Agreement.

We expect our operating cash flows and net proceeds from the Notes will be sufficient to meet our operating needs for the next 12 months. Our actual cash needs will depend on many factors, including our rate of revenue growth, including growth of our SaaS revenues, the timing and extent of spending to support our product development efforts, the timing of introductions of new products and enhancements to existing products, market acceptance of our products, and potential fines and penalties that may be imposed by the China and/or Singapore authorities that are not currently estimable, but could be material.

Critical Accounting Policies and Estimates

Our unaudited interim consolidated financial statements are based on the application of U.S. generally accepted accounting principles ("GAAP"). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. Valuations based on estimates are reviewed for reasonableness and adequacy on a consistent basis. Primary areas where financial information is subject to the use of estimates, assumptions and the application of judgment include revenue recognition, accounts receivable, inventories, accounting for business combinations, contingent consideration, equity compensation, goodwill and intangible assets, and taxes. Our critical accounting policies have not changed materially from the discussion of those policies included under "Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2018 except as it relates to leases as a result of the adoption of ASC 842 as discussed in Note 4

Recently Issued Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date, based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendment is effective for the Company beginning with its fiscal year ending December 31, 2019, however early application is permitted for reporting periods beginning after December 15, 2018. The Company does not anticipate ASU 2016-13 will have a material impact to the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied

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fair value of goodwill. Under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 will be effective for us on January 1, 2020, with earlier adoption permitted; it is not expected to have a material impact on the Company's unaudited interim consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modifies the fair value measurements disclosures with the primary focus to improve effectiveness of disclosures in the notes to the financial statements that is most important to the users. The new guidance modifies the required disclosures related to the valuation techniques and inputs used, uncertainty in measurement, and changes in measurements applied. ASU 2018-13 is effective for the Company beginning with and including its fiscal year ending December 31, 2019 and each quarterly period thereafter. Early adoption is permitted. The Company is currently assessing the impact this new guidance may have on the Company's unaudited interim consolidated financial statements and footnote disclosures.

In August 2018, the FASB issued ASU 2018-15, "Intangibles - Goodwill and Other (Topic 350) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2018-15 provides guidance on the measurement of costs for internal-use software during the design, development and implementation stages for customers in a cloud based hosting arrangement. AU 2018-15 also requires the capitalized costs associated with the design, development and implementation of cloud based, hosted arrangements to be amortized over the term of the hosting arrangement. ASU 2018-15 will be effective for the Company on January 1, 2020, with earlier adoption permitted; it is not expected to have a material impact on the Company's unaudited interim consolidated financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, "Leases (Topic 842)", impacting the accounting for leases intending to increase transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. The revised standard will require entities to recognize a liability for its lease obligations and a corresponding asset representing the right to use the underlying asset over the lease term. Lease obligations are to be measured at the present value of lease payments and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the agreement is deemed to be a financing or operating lease. For finance leases, the leased asset is depreciated on a straight-line basis and recorded separately from the interest expense in the income statement resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. The ASU requires that assets and liabilities be presented or disclosed separately and classified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and quantitative information related to lease agreements. The new standard was effective for the Company beginning January 1, 2019 (see Note 4 - Leases, to the unaudited interim consolidated financial statements).

Aug 07, 2019

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