NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
Nature of business
PAR Technology Corporation (the “Company” or “PAR,” “we,” or “us”), through its consolidated subsidiaries, operates in two segments - the Restaurant/Retail segment and the Government segment. The Restaurant/Retail segment provides enterprise restaurants, franchisees, and other restaurant outlets in the three major restaurant categories, quick service, fast casual, and table service, with operational efficiencies, offering them a fully integrated cloud solution by combining Brink POS cloud software for front-of-house, Data Central back-office cloud solution, PAR Pay and PAR Payment Services for payments, and Punchh loyalty and engagement solution on a unified commerce cloud platform. The Government segment provides technical expertise and development of advanced systems and software solutions for the DoD and other federal agencies, as well as satellite command and control, communication, and IT mission systems at several DoD facilities worldwide. The accompanying consolidated financial statements include the Company's accounts and those of its consolidated wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
COVID-19 continued to create significant uncertainty and worldwide economic disruption in 2021. The Company’s business continued to experience delays in customer orders and sales, restrictions on its employees ability to travel or work, increased costs for hardware, components and materials, and disruptions in its supply chain. The extent to which COVID-19 impacts the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including, among others, the duration and scope of the COVID-19 pandemic, the severity of COVID-19 variants and the actions, especially those taken by governmental authorities, to contain the pandemic or mitigate its impact and the impact on the businesses of our customers, partners, and suppliers. As pandemic-related events continue to evolve, additional impacts may arise that the Company is not aware of currently. Any prolonged material disruption of the Company’s business or the businesses of the Company's customers, partners, or suppliers could materially impact the Company's financial position, results of operations or cash flows.
Basis of presentation and use of estimates
The Company prepares its consolidated financial statements and related notes in accordance with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include revenue recognition, stock-based compensation, the recognition and measurement of assets acquired and liabilities assumed in business combinations at fair value, the carrying amount of property, plant and equipment including right-to-use assets and liabilities, identifiable intangible assets and goodwill, the measurement of liabilities and equity recognized for outstanding convertible notes, credit losses for receivables, valuation of excess and obsolete inventories, and measurement of contingent consideration at fair value. Actual results could differ from those estimates.
Business combinations
The Company accounts for business combinations pursuant to ASC Topic 805, Business Combinations, which requires that assets acquired and liabilities assumed be recorded at their respective fair values on the date of acquisition. The fair value of the consideration paid is assigned to the underlying net assets of the acquired business based on their respective fair values. Any excess of the purchase price over the estimated fair values of the net assets acquired is allocated to goodwill. The purchase price allocation process requires the Company to make significant assumptions and estimates in determining the purchase price and the assets acquired and liabilities assumed at the acquisition date. The Company’s assumptions and estimates are subject to refinement and, as a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon conclusion of the measurement period, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. The Company’s consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition.
Contingent consideration
The Company determined the acquisition date fair value of contingent consideration associated with the Restaurant Magic Acquisition in December 2019 using Monte-Carlo simulation valuation techniques, with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC Topic 820, Fair Value Measurement. This valuation technique is also used to determine current fair value of the contingent consideration. The simulation uses probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring. Significant increases or decreases to these inputs in isolation would result in a significantly higher or lower liability with a higher liability capped by the contractual maximum of the contingent post-closing revenue focused milestones obligation. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in the Company's consolidated statements of cash flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities. The Restaurant Magic Acquisition resulted in a liability for the contingent consideration recorded in the amount of $3.3 million during 2019. The liability for the contingent consideration was established at the time of the acquisition and is evaluated quarterly based on additional information as it becomes available; any change in the fair value adjustment is recorded in the earnings of that period. During 2020, the Company recorded a $3.3 million adjustment to decrease the fair value of the contingent consideration related to the Restaurant Magic Acquisition to zero as of December 31, 2020. No additional adjustments were made by the Company during 2021.
Revenue recognition policy
See “Note 3 – Revenue Recognition” – for revenue recognition policy and disclosures.
Warranty provisions
Warranty provisions for product warranties are recorded in the period in which the Company becomes obligated to honor the warranty, which generally is the period in which the related product revenue is recognized. The Company accrues warranty reserves based upon historical factors such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. When a sale is consummated, a warranty reserve is recorded based upon the estimated cost to provide the service over the warranty period which can range from 12 to 36 months and cost of replacement parts.
Activity related to warranty claims are as follows:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| | | | |
Beginning balance | | $ | 994 | | | $ | 1,490 | |
Adjustments to reserve | | (10) | | | (300) | |
Warranty claims settled | | (222) | | | (196) | |
| | | | |
Ending balance | | $ | 762 | | | $ | 994 | |
Cash and cash equivalents
The Company considers all highly liquid investments, purchased with a remaining maturity of three months or less, to be cash equivalents including money market funds.
The Company maintained bank balances that, at times, exceeded the federally insured limit during the years ended December 31, 2021 and 2020. The Company has not experienced losses relating to these deposits and management does not believe that the Company is exposed to any significant credit risk with respect to these amounts.
Cash and cash equivalents consist of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Cash and cash equivalents | | | |
Cash | $ | 69,249 | | | $ | 59,700 | |
Money market funds | 119,170 | | | 120,986 | |
Total cash and cash equivalents | $ | 188,419 | | | $ | 180,686 | |
Accounts receivable – current expected credit losses
The Company maintains a provision for accounts receivables that it does not expect to collect. In accordance with ASC Topic 326 Financial Instruments - Credit Losses, the Company accrues its estimated losses from uncollectable accounts receivable to the provision based upon recent historical experience, the length of time the receivable has been outstanding, other specific information as it becomes available, and reasonable and supportable forecasts not already reflected in the historical loss information. Provisions for current expected credit losses are charged to current operating expenses. Actual losses are charged against the provision when incurred.
Inventories
The Company’s inventories are valued at the lower of cost and net realizable value, with cost determined using the weighted average cost method. The Company uses certain estimates and judgments and considers several factors including product demand, changes in customer requirements and changes in technology to provide for excess and obsolescence reserves to properly value inventory.
Property, plant and equipment
Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to twenty-five years. Expenditures for maintenance and repairs are expensed as incurred.
Other assets
Other assets primarily consist of cash surrender value of life insurance related to the Company’s deferred compensation plan eligible to certain employees. The funded balance is reviewed on an annual basis. The balance of the life insurance policy was $3.7 million at December 31, 2021 and December 31, 2020, respectively.
Income taxes
The Company and its subsidiaries file a consolidated U.S. federal income tax return. State tax returns are filed on a combined or separate basis depending on the applicable laws in the jurisdictions where the tax returns are filed. The Company also files foreign tax returns on a separate company basis in the countries in which it operates. The provision for income taxes is based upon pretax loss with deferred income taxes provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The Company records a valuation allowance when necessary to reduce deferred tax assets to their net realizable amounts. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Other liabilities
Other liabilities represent amounts owed to employees that participate in the Company’s deferred compensation plan and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) deferred payroll taxes. Amounts owed to employees participating in the deferred compensation plan at December 31, 2021 were $2.4 million as compared to $2.8 million at December 31, 2020. In response to the COVID-19 pandemic, many governments enacted measures to provide aid and economic stimulus; these measures included the deferring the due dates of tax payments. The CARES Act enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. The CARES Act provides for deferred payment of the employer portion of social security taxes through the end of 2020, with 50% of the deferred
amount due December 31, 2021 and the remaining 50% due December 31, 2022. As allowed under the CARES Act, the Company deferred payment of the employer portion of social security taxes through the end of 2020. As of December 31, 2020, the Company had deferred a total of $2.8 million of payroll taxes during 2020, of which $1.9 million was paid in December 2021 and the remaining balance to be paid in December 2022. Deferred payroll taxes were $1.9 million at December 31, 2021 and were included within accrued salaries and benefits and on the consolidated balance sheet.
Foreign currency
The assets and liabilities for the Company’s international operations are translated into U.S. dollars using year-end exchange rates. Income statement items are translated at average exchange rates prevailing during the year. The resulting translation adjustments are recorded as a separate component of stockholders’ equity under the heading Accumulated Other Comprehensive Loss. Exchange gains and losses on intercompany balances of permanently invested long-term loans are also recorded as a translation adjustment and are included in Accumulated Other Comprehensive Loss. Foreign currency transaction gains and losses are recorded in other income, net in the accompanying statements of operations.
Other income (expense), net
The Company's foreign currency transaction gains and losses and rental income and losses are recorded in other income, net in the accompanying statements of operations.
Identifiable intangible assets
The Company's identifiable intangible assets represent intangible assets acquired in the acquisition of Brink Software, Inc in September 2014 (“Brink Acquisition”), the Drive-Thru Acquisition, the Restaurant Magic Acquisition, the Punchh Acquisition, and software development costs.
The Company capitalizes certain costs related to the development of its platform and other software applications for internal use in accordance with ASC Topic 350-40, Intangibles - Goodwill and Other - Internal - Use Software. The Company begins to capitalize its costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, and it is probable that the project will be completed and the software will be used as intended. The Company stops capitalizing these costs when the software is substantially complete and ready for its intended use, including the completion of all significant testing. These costs are amortized on a straight-line basis over the estimated useful life of the related asset, generally estimated to be three to seven years. The Company also capitalizes costs related to specific upgrades and enhancements when it is probable the expenditure will result in additional functionality and expense costs incurred for maintenance and minor upgrades and enhancements. Costs incurred prior to meeting these criteria together with costs incurred for training and maintenance are expensed as incurred and recorded within research and development expenses in the Company's consolidated statements of operations.
The Company exercises judgment in determining the point at which various projects may be capitalized, in assessing the ongoing value of the capitalized costs and in determining the estimated useful lives over which the costs are amortized. To the extent that the Company can change the manner in which new features and functionalities are developed and tested related to its platform, assessing the ongoing value of capitalized assets or determining the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs the Company capitalizes and amortizes could change in future periods.
Included in identifiable intangible assets are approximately $3.4 million and $6.5 million of costs related to software products that have not satisfied the general release threshold as of December 31, 2021 and December 31, 2020, respectively. These software products will be ready for their intended use within the next 12 months. Software costs placed into service during the years ended December 31, 2021 and 2020 were $9.3 million and $3.8 million, respectively. Annual amortization charged to cost of sales is computed using the straight-line method over the remaining estimated economic life of the product, generally three years.
Amortization expense for acquired developed technology and internally developed software was broken out as follows:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | 2019 |
Amortization of acquired developed technology | $ | 11,978 | | | $ | 3,457 | | | $ | 1,061 | |
Amortization of internally developed software | 5,411 | | | 3,269 | | | 4,470 | |
The components of identifiable intangible assets are:
| | | | | | | | | | | | | | | | | |
| December 31, | | |
(in thousands) | 2021 | | 2020 | Estimated Useful Life | Weighted-Average Amortization Period |
Acquired developed technology | $ | 109,100 | | | $ | 24,500 | | 3 - 7 years | 5.25 years |
Internally developed software costs | 25,735 | | | 15,670 | | 3 years | 2.90 years |
Customer relationships | 12,360 | | | 4,860 | | 7 years | 5.00 years |
Trade names | 1,410 | | | 1,410 | | 2 - 5 years | 3.00 years |
Non-compete agreements | 30 | | | 30 | | 1 year | 1.00 year |
| 148,635 | | | 46,470 | | | |
Less accumulated amortization | (39,479) | | | (20,265) | | | |
| $ | 109,156 | | | $ | 26,205 | | | |
Internally developed software costs not meeting general release threshold | 3,407 | | | 6,516 | | | |
Trade names (non-amortizable) | 6,200 | | | 400 | | Indefinite | |
| $ | 118,763 | | | $ | 33,121 | | | |
The expected future amortization of intangible assets, assuming straight-line amortization of capitalized software development costs and acquisition related intangibles, excluding software costs not meeting the general release threshold, is as follows (in thousands):
| | | | | |
2022 | $ | 22,247 | |
2023 | 20,308 | |
2024 | 17,417 | |
2025 | 16,343 | |
2026 | 16,091 | |
Thereafter | 16,750 | |
Total | $ | 109,156 | |
The Company tested its indefinite lived intangible assets for impairment during the fourth quarter of its fiscal years ended December 31, 2021 and 2020. To value indefinite lived intangible assets, the Company utilizes the relief from royalty method to estimate the fair values of trade names. There was zero impairment to indefinite lived intangible assets in 2021 or 2020.
Amortization expense for identifiable intangible assets was allocated as follows:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | 2019 |
Amortization of identifiable intangible assets recorded in cost of service | $ | 17,389 | | | $ | 6,726 | | | $ | 5,531 | |
Amortization expense allocated to intangible assets | 1,825 | | | 1,150 | | | 156 | |
Stock-based compensation
The Company measures and records compensation expense for all stock-based compensation to employees, including awards of employee stock options, restricted stock awards and restricted stock units (both time-vested and performance-based), in the financial statements as compensation cost over the applicable vesting
periods using a straight-line expense recognition method, based on their fair value on the date of grant. The fair value of stock-based awards is determined by using the Black-Scholes option valuation model for option awards and closing price on the date of grant for restricted stock awards and restricted stock units. The Black-Scholes valuation model incorporates assumptions as to the fair value of stock price, volatility, the expected life of options or awards, a risk-free interest rate and dividend yield. In valuing the stock options, significant judgment is required in determining the expected volatility of the Company's common stock and the expected life that individuals will hold their stock options prior to exercising. Expected volatility is based on the historical and implied volatility of the Company's common stock. The expected life of stock-based compensation is derived from the historical actual term of option grants and an estimate of future exercises during the remaining contractual period of the option. While volatility and estimated life are assumptions that do not bear the risk of change subsequent to the grant date of stock options, these assumptions may be difficult to measure, as they represent future expectations based on historical experience. Further, expected volatility and the expected life of options and awards may change in the future, which could substantially change the grant-date fair value of future awards and, ultimately, the expense the Company records. The Company elects to account for forfeitures based on recognition in the reporting period incurred. Compensation expense for awards with performance conditions is reassessed each reporting period and recognized based upon the probability that the performance targets will be achieved.
The Company expenses stock-based compensation for stock options, restricted stock awards, restricted stock units and performance awards over the requisite service period. For awards with only a service condition, the Company expenses stock-based compensation using the straight-line method over the requisite service period for the entire award. For awards with both performance and service conditions, the Company expenses the stock-based compensation on a straight-line basis over the requisite service period for each separately vesting portion of the award, taking into account the probability that the Company will satisfy the performance condition.
Net loss per share
Net loss per share is calculated in accordance with ASC Topic 260: Earnings per Share, which specifies the computation, presentation and disclosure requirements for earnings per shares (“EPS”). It requires the presentation of basic and diluted EPS. Basic EPS excludes all dilution and is based upon the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that would occur if convertible securities or other contracts to issue common stock were exercised. At December 31, 2021, there were 1,305,881 anti-dilutive stock options outstanding compared to 956,627 as of December 31, 2020 and 383,000 as of December 31, 2019. At December 31, 2021 there were 418,084 anti-dilutive restricted stock units compared to 426,632 and 67,000 as of December 31, 2020 and December 31, 2019, respectively. Due to their anti-dilutive nature, the potential effects of the 2024 Notes, 2026 Notes, and the 2027 Notes conversion features (refer to “Note 8 – Debt” for additional information) were excluded from the diluted net loss per share calculation as of December 31, 2021, December 31, 2020 and December 31, 2019. Potential shares resulting from 2024 Notes, 2026 Notes, and 2027 Notes conversion features at respective maximum conversion rates of 46.4037 per share 30.8356 per share, and 17.8571 per share are approximately 638,051, 3,700,272 and 4,732,132, respectively.
The following is a reconciliation of the weighted average shares outstanding for the basic and diluted loss per share computations (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | 2019 |
Net loss | $ | (75,799) | | | $ | (36,562) | | | $ | (15,571) | |
| | | | | |
Basic: | | | | | |
Weighted average common shares | 25,088 | | | 19,014 | | | 16,223 | |
Loss per common share, basic | $ | (3.02) | | | $ | (1.92) | | | $ | (0.96) | |
| | | | | |
Diluted: | | | | | |
Weighted average common shares | 25,088 | | | 19,014 | | | 16,223 | |
Loss per common share, diluted | $ | (3.02) | | | $ | (1.92) | | | $ | (0.96) | |
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. Goodwill is not amortized, but is tested for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. The Company's impairment tests are based on the Company's identified reporting units within those operating segments used in the test for goodwill impairment. If the carrying value of either reporting unit exceeds its fair value, an impairment charge is recognized for the excess of the carrying value of the reporting unit over its fair value.
The Company conducted its annual goodwill impairment test during the fourth quarter of 2021 and determined that the fair value for each of the reporting units significantly exceeded its respective carrying value. As such, goodwill was not impaired. No impairment charge was recorded in any of the periods presented in the accompanying consolidated financial statements.
The following table presents the goodwill activities for the periods presented (in thousands):
| | | | | | | | |
December 31, 2019 | | $ | 41,386 | |
Working capital adjustment | | (172) | |
December 31, 2020 | | 41,214 | |
Punchh Acquisition | | 417,559 | |
ASC 805 measurement period adjustment (Note 2) | | (1,467) | |
December 31, 2021 | | $ | 457,306 | |
Impairment of long-lived assets
The Company evaluates the accounting and reporting for the impairment of long-lived assets in accordance with the reporting requirements of ASC Topic 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company will recognize impairment of long-lived assets or asset groups if the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets. If the carrying value of a long-lived asset or asset group is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset or asset group for assets to be held and used, or the amount by which the carrying value exceeds the fair market value less cost to sell for assets to be sold. No impairment was recorded in 2021, 2020, or 2019.
Divestiture
Sale of SureCheck
In the second quarter of 2019, ParTech sold substantially all of the assets relating to the SureCheck product line within the Company's Restaurant/Retail segment. The sale did not qualify for treatment as a discontinued operation, and therefore, the SureCheck product line is included in the Company’s operations for the year ended December 31, 2019.
Related Party Transactions
Act III Management LLC (“Act III Management”), a service company to the restaurant, hospitality, and entertainment industries, provides software development and restaurant technology consulting services to the Company pursuant to a master development agreement. Keith Pascal, a director of the Company, is an employee of Act III Management and serves as its vice president. In the year ended December 31, 2021, the Company paid Act III Management $1.3 million in consideration for services performed under the master development agreement; as of December 31, 2021, there were no accounts payable owed by the Company to Act III Management.
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, ASU 2019-12 which is intended to simplify various requirements related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve
consistent application. The Company adopted ASU 2019-12 effective January 1, 2021. In the year ended December 31, 2021, application of the standard to the Company's September 2021 convertible note offering, the 2027 Notes, resulted in classification to stockholders' equity of a $14.9 million partial release of the Company's deferred tax asset valuation adjustment. Refer to “Note 8 – Debt” for additional information.
Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), the new guidance is intended to simplify the accounting for certain convertible instruments with characteristics of both liability and equity. The guidance removes certain accounting models which separate the embedded conversion features from the host contract for convertible instruments. As a result, after the adoption of this guidance, an entity’s convertible debt instrument will be wholly accounted for as debt. The guidance also expands disclosure requirements for convertible instruments and simplifies areas of the guidance for diluted earnings-per-share calculations by requiring the use of the if-converted method. The guidance is effective for fiscal years beginning after December 15, 2021 and can be adopted on either a fully retrospective or modified retrospective basis. The Company adopted the new standard as of January 1, 2022 under the modified transition method and expects that the adoption will have a material impact on its consolidated financial statements and related disclosures. For example, the Company currently anticipates that the guidance will result in the removal of the equity component related to its Senior Notes of $87.8 million; decrease its interest expense due to the removal of the amortization component of the debt discount related to the equity component. The Company is still evaluating the cumulative effect of the change on retained earnings and other components of equity for its opening balance adjustment.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which is intended to require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination. ASU 2021-08 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company expects to adopt ASU 2021-08 in the first quarter of 2023.
With the exception of the standards discussed above, there were no other recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2021 that are of significance or potential significance to the Company.
Note 2 — Acquisitions
Punchh Acquisition - 2021
On April 8, 2021 (the “Closing Date”), the Company, ParTech, Inc., and Sliver Merger Sub, Inc., a wholly owned subsidiary of ParTech, Inc. (“Merger Sub”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Punchh Inc. (“Punchh”), and Fortis Advisors LLC, solely in its capacity as the initial Stockholder Representative. Pursuant to the Merger Agreement, on April 8, 2021, Merger Sub merged with and into Punchh (the “Merger”), with Punchh surviving the Merger and becoming a wholly owned subsidiary of the Company. Punchh is a leader in SaaS-based customer loyalty and engagement solutions.
In connection with the Merger, the Company paid former Punchh equity holders approximately $507.7 million (including holders of vested options and warrants) consisting of approximately (i) $397.5 million in cash (the “Cash Consideration”), and (ii) 1,493,130 shares of the Company's common stock for 100% of the equity interests in Punchh; Cash Consideration continues to be subject to adjustments for pending settlement of the indemnification escrow fund one year from the acquisition date. Consideration of common shares issued was determined using an average share price of $68.00, representing consideration paid of $101.5 million. An additional 112,204 shares of the Company's common stock are reserved for options granted as replacement awards for fully vested unexercised option awards assumed in connection with the Merger. The fair value of fully vested option awards was determined using a Black-Scholes model to be $8.7 million as of acquisition date. As a result, the total fair value of common shares issued and reserved of 1,594,202 (“Equity Consideration”) was determined to be $110.2 million. Further, the Company incurred acquisition related expenses of approximately $3.6 million.
In connection with, and to partially fund the Cash Consideration for, the Merger, on April 8, 2021, the Company, together with certain of its U.S. Subsidiaries, as guarantors, entered into a credit agreement with the
lenders party thereto, and Owl Rock First Lien Master Fund, L.P., as administrative agent and collateral agent (the “Owl Rock Credit Agreement”), that provided for a term loan in an initial aggregate principal amount of $180.0 million (the “Owl Rock Term Loan”); and (ii) securities purchase agreements (the “Purchase Agreements”) with each of PAR Act III, LLC (“Act III”), and certain funds and accounts advised by T. Rowe Price Associates, Inc., acting as investment adviser (such funds and accounts being collectively referred to herein as “TRP”), to raise approximately $160.0 million through a private placement of the Company's common stock. The Company also issued to Act III a warrant to purchase 500,000 shares of common stock with an exercise price of $76.50 and a five year exercise period (the “Warrant”). In connection with the Company's September 2021 public offering of its common stock, as a result of anti-dilution provisions of the Warrant, an additional 3,975 shares of common stock are available for purchase under the Warrant, at an exercise price of $75.90 per share. Refer to “Note 9 – Common Stock”, for additional information about the offering.
Additionally, on the Closing Date approximately $6.0 million of the Cash Consideration was deposited into a indemnification escrow fund, to be held for up to 18 months following the Closing Date, to fund (i) potential payment obligations of Punchh equity holders with respect to post-closing adjustments to the Cash and Equity Consideration and (ii) potential post-closing indemnification obligations of Punchh equity holders, in each case in accordance with the terms of the Merger Agreement. During the year ended December 31, 2021, $3.8 million was distributed from the escrow accounts, of which, $3.5 million was received by the Company from the settlement of post-closing obligations of the Punchh equity holders resulting in a reduction of the Cash Consideration paid for the acquisition, and $0.3 million was released to former Punchh shareholders. As of December 31, 2021, the Company recorded remaining indemnification assets and liabilities of approximately $2.2 million to other assets and other long-term liabilities, respectively, to account for amounts deposited into the third-party escrow fund that will be settled one year from the acquisition date.
Allocation of Acquisition Consideration
The Punchh Acquisition was accounted for as a business combination in accordance with ASC Topic 805, Business Combinations. Accordingly, assets acquired and liabilities assumed in the Punchh Acquisition were accounted for at their preliminarily determined respective fair values as of April 8, 2021. The preliminary fair value determinations were based on management's best estimates and assumptions, and through the use of independent valuation and tax consultants. Identified preliminary fair values were subject to measurement period adjustments within the permitted measurement period (up to one year from the acquisition date) as management finalized its procedures and net working capital adjustments were settled. The measurement period for the Punchh Acquisition remained open as of December 31, 2021 pending settlement of the third-party escrow fund one year from the acquisition date; management has otherwise completed its valuation procedures and settled net working capital adjustments.
During the year, the preliminary fair values of assets and liabilities as of April 8, 2021 were adjusted to reflect the ongoing acquisition valuation analysis procedures and agreed upon net working capital adjustments. These adjustments included a $3.5 million reduction of Cash Consideration paid due to the release from escrow accounts. Additionally, the fair value of Equity Consideration increased $1.6 million as a result of the finalization of the number of fully vested options granted as replacement awards for fully vested unexercised awards assumed in connection with the Merger. Further, the fair value of developed technology was reduced by $3.6 million to reflect changes in the underlying fair value assumptions. The related change to amortization expense was not material to the results for the year. The reduction to developed technology, along with identified increases to Punchh acquisition related tax deductible temporary differences, resulted in a $3.1 million reduction to the preliminary net deferred tax liability recorded in purchase accounting. These adjustments resulted in a combined reduction to goodwill of $1.5 million during the year ended December 31, 2021.
The following table presents management's purchase price allocation:
| | | | | |
(in thousands) | Purchase price allocation |
Cash | $ | 22,714 | |
Accounts receivable | 10,214 | |
Property and equipment | 592 | |
Lease right-of-use assets | 2,473 | |
Developed technology | 84,600 | |
Customer relationships | 7,500 | |
Trade name | 5,800 | |
Indemnification assets | 2,224 | |
Prepaid and other acquired assets | 2,764 | |
Goodwill | 416,092 | |
Total assets | $ | 554,973 | |
Accounts payable and accrued expenses | 15,827 | |
Deferred revenue | 11,125 | |
Loan payables | 3,508 | |
Lease liabilities | 2,787 | |
Indemnification liabilities | 2,224 | |
Deferred taxes | 11,794 | |
Consideration paid | $ | 507,708 | |
Intangible Assets
The Company identified three acquired intangible assets in the Punchh Acquisition: developed technology; customer relationships; and, the Punchh trade name. The fair value of developed technology and customer relationship intangible assets were determined utilizing the “multi-period excess earnings method”, which is predicated upon the calculation of the net present value of after-tax net cash flows respectively attributable to each asset. The Company applied a seven-year economic life and discount rate of 11.0% in determining the Punchh developed technology intangible fair value. The Company applied a 5.0% estimated annual attrition rate and discount rate of 11.0% in determining the Punchh customer relationships intangible fair value. The fair value of the Punchh trade name intangible was determined utilizing the “relief from royalty” approach, which is a form of the income approach that attributes savings incurred from not having to pay a royalty for the use of an asset. The Company applied a fair and reasonable royalty rate of 1.0% and discount rate of 11.0% in determining the Punchh trade name intangible fair value. of the Punchh trade name intangible fair value The estimated useful life of these identifiable intangible assets was preliminarily determined to be indefinite for the Punchh trade name and seven years for both the developed technology and customer relationships intangible assets.
Goodwill
Goodwill represents the excess of consideration transferred for the fair value of net identifiable assets acquired and is tested for impairment at least annually. It is not deductible for income tax purposes.
Deferred Revenue
Deferred revenue acquired in the Punchh Acquisition was fair valued to determined allocation of consideration transferred to assume the liability. The preliminary fair value was determined utilizing the “bottom-up” approach, which is a form of the income approach that measures the liability as the direct, incremental costs to fulfill the legal obligation, plus a reasonable profit margin for the services being delivered.
Loans Payable
Loan liabilities assumed in the Punchh Acquisition were primarily comprised of Punchh's $3.3 million CARES Act Paycheck Protection Program loan. The Company extinguished all assumed loan payables, including the assumed CARES Act loan, through repayment of the loans on the Closing Date.
Right-of-Use Lease Assets and Lease Liabilities
The Company assumed real property leases in the Punchh Acquisition related to office space in California, Texas and India and have accounted for these leases as Operating Leases in accordance with ASC Topic 842, Leases. The assumed leases have lease terms that run through 2021 to 2026. Valuation specialists were utilized by the Company to appraise the assumed leases against competitive market rates to determine the fair value of the lease liabilities assumed, which identified a $0.3 million unfavorable lease liability that the Company recognized as part of the lease right-of-use asset. The income approach was applied to value the identified unfavorable lease liability.
Deferred Taxes
The Company determined the deferred tax position to be recorded at the time of the Punchh Acquisition in accordance with ASC Topic 740, Income Taxes, resulting in recognition of deferred tax liabilities for future reversing of taxable temporary differences primarily for intangible assets and deferred tax assets primarily relating to net operating losses as of the Closing Date. A valuation allowance was also recorded against certain recognized deferred tax assets based on an evaluation of the realizability of the identified assets. These recognized deferred tax assets, liabilities and valuation allowance resulted in a preliminary net deferred tax liability of $11.8 million relating to the Punchh Acquisition.
The net deferred tax liability relating to the Punchh Acquisition was determined by the Company to provide future taxable temporary differences that allow for the Company to utilize certain previously fully reserved deferred tax assets. Accordingly, the Company recognized a reduction to its valuation allowance in the year ended December 31, 2021, resulting in a net tax benefit of $10.4 million for the period.
Pro Forma Financial Information - unaudited
For the year ended December 31, 2021, the Punchh Acquisition resulted in additional revenues of $27.7 million. Punchh results are monitored by the Company as part of the broader Restaurant/Retail segment and as a result the Company determined it impractical to report net loss for the Punchh Acquisition for the three and nine months ended September 30, 2021. The unaudited pro forma results of operations are not necessarily indicative of the results that would have occurred had the Punchh Acquisition been consummated at January 1, 2020, nor are they necessarily indicative of any future consolidated operating results.
The following table summarizes the Company's unaudited pro forma operating results:
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands) | | 2021 | | 2020 |
Total revenue | | $ | 291,596 | | | $ | 241,015 | |
Net loss | | (79,079) | | | (49,370) | |
The unaudited pro forma results presented above are for illustrative purposes only and do not reflect the realization of potential cost savings, and any related integration costs. Certain cost savings may result from the Punchh Acquisition; however, there can be no assurance that these cost savings will be achieved. These unaudited pro forma results do not purport to be indicative of the results that would have been obtained, or to be a projection of results that may be obtained in the future. These unaudited pro forma results include certain adjustments, primarily due to increases in amortization expense due to the fair value adjustments of intangible assets, the increases to interest expense reflecting the amount borrowed in connection with the Punchh Acquisition, acquisition related costs and the impact of income taxes on the pro forma adjustments. $3.6 million of acquisition costs have been reflected in the 2020 pro forma results.
Restaurant Magic Acquisition - 2019
Effective December 18, 2019, the Company, through ParTech, acquired 100% of the limited liability company interests of AccSys LLC (f/k/a AccSys, Inc., and otherwise known as Restaurant Magic) in base consideration of approximately $42.8 million, of which approximately $12.8 million was paid in cash, which reflects a $0.2 million favorable working capital adjustment recognized in the second quarter of 2020, $27.5 million was paid in restricted shares of Company common stock and $2.0 million was paid by delivery of a subordinated promissory note. The sellers of Restaurant Magic have the opportunity through 2022 to earn additional purchase price consideration subject to the achievement of certain post-closing revenue focused milestones (“Earn-Out”). The
Earn-Out, if any, will be payable 50% in cash or subordinated promissory notes, or a combination of both, at the Company's election, and 50% in restricted shares of Company common stock; the equity component of the Earn-Out is classified as a liability on the Company's balance sheet as the quantity of restricted shares is variable subject to the final value of the Earn-Out. The Earn-Out has no maximum payment. As of December 31, 2019, the value of the Earn-Out based on the Monte Carlo simulation was $3.3 million. During the year ended December 31, 2020, $3.3 million of fair-value adjustments were recorded to earnings to reflect a reduction in the fair value of the Earn-Out to zero; see “Note 15 – Fair Value of Financial Instruments” for additional information. The adjustment was recorded as a component of operating expense for the year ended December 31, 2020, and there were no further adjustments made during the year ended December 31, 2021.
The Company issued $2.0 million of restricted stock units (“RSU”) in connection with its assumption of awards granted by Restaurant Magic to its employees and contractors prior to the closing of the acquisition. The cost of these RSUs are amortized over their vesting period and have been reflected in SG&A as part of stock-based compensation in the consolidated statements of operations.
Drive-Thru Acquisition - 2019
Effective September 30, 2019, the Company, through ParTech, acquired assets of 3M Company's Drive-Thru Communications Systems business, including the XT-1 and G5 headset systems, contracts and intellectual property associated with the business, for a purchase price of $8.4 million (total fair value of assets were $8.4 million including approximately $1.2 million of developed technology, $3.6 million of customer relationships, and $2.4 million of goodwill, net of warranty liability of $1.4 million, resulting in cash paid of $7.0 million).
The fair values assigned to the assets acquired and liabilities assumed in the Drive-Thru Acquisition and the Restaurant Magic Acquisition and presented in the table below were based on management's best estimates and assumptions at the conclusion of the measurement period for each respective transaction:
| | | | | | | | | | | | | | | | | |
(in thousands) | Purchase Price Allocation |
| Drive-Thru | | Restaurant Magic | | Total |
Developed technology | $ | 1,200 | | | $ | 16,400 | | | $ | 17,600 | |
Customer relationships | 3,600 | | | 1,100 | | | 4,700 | |
Trade name | — | | | 900 | | | 900 | |
Trademark | 510 | | | — | | | 510 | |
Tangible assets | — | | | 1,344 | | | 1,344 | |
Goodwill | 2,390 | | | 27,773 | | | 30,163 | |
Property, plant, and equipment - net | 712 | | | — | | | 712 | |
Total assets | 8,412 | | | 47,517 | | | 55,929 | |
Accounts payable and accrued expenses | — | | | 629 | | | 629 | |
Warranty liability | 1,412 | | | — | | | 1,412 | |
Deferred revenue | — | | | 715 | | | 715 | |
Earn-Out liability | — | | | 3,340 | | | 3,340 | |
Consideration paid | $ | 7,000 | | | $ | 42,833 | | | $ | 49,833 | |
The estimated fair values of the developed technology, customer relationships, and trade names were all based on the income approach, which estimates fair value based upon the present value of cash flows that the assets are expected to generate. Amortization of identifiable finite-lived intangible assets is computed using the straight-line method over the remaining estimated economic life of the asset. The acquired customer relationships, trade names, and developed technology assets are amortized over their estimated useful lives ranging from two to seven years, respectively.
Pro Forma Financial Information (unaudited)
For the year ended December 31, 2021, the Drive-Thru Acquisition and the Restaurant Magic Acquisition resulted in additional revenues of $18.1 million and $9.4 million, respectively. For the year ended December 31, 2020, the Drive-Thru Acquisition and the Restaurant Magic Acquisition resulted in additional revenues of $18.5 million and $8.4 million, respectively. For the year ended December 31, 2019, the Drive-Thru Acquisition and the Restaurant Magic Acquisition resulted in additional revenues of $3.2 million and $0.3 million, respectively. The Company determined it is impractical to report net loss for the Drive-Thru Acquisition for the year ended December 31, 2019, presentation of pro forma net loss has correspondingly been excluded from the below table of pro forma results of operations and pro forma net income (loss). Presented pro forma results of operations are not necessarily indicative of the results that would have occurred had the businesses acquired in 2019 been consummated at the beginning of the period presented, nor are they necessarily indicative of any future consolidated operating results. The following table summarizes the Company's unaudited pro forma operating results had the Restaurant Magic Acquisition and the Drive-Thru Acquisition each been consummated at January 1, 2019.
| | | | | | | | |
(in thousands) | | Year Ended December 31, 2019 |
Total revenue | | $ | 208,802 | |
This pro forma financial information does not give effect to any anticipated synergies, operating efficiencies or cost savings or any integration costs related to the Restaurant Magic Acquisition.
Note 3 - Revenue Recognition
Restaurant/Retail
The Company's revenue is derived from SaaS, hardware and software sales, software activation, hardware support, installations, maintenance and professional services. ASC Topic 606: Revenue from Contracts with Customers requires the Company to distinguish and measure performance obligations under customer contracts. Contract consideration is allocated to all performance obligations within the arrangement or contract. Performance obligations that are determined not to be distinct are combined with other performance obligations until the combined unit is determined to be distinct and that combined unit is then recognized as revenue over time or at a point in time depending on when control is transferred.
The Company evaluated the potential performance obligations within its Restaurant/Retail segment and evaluated whether each performance obligation met the ASC Topic 606 criteria to be considered a distinct performance obligation. Revenue in the Restaurant/Retail segment is recognized at a point in time for licensed software, hardware and installations. Revenue on these items are recognized when the customer obtains control of the asset. This generally occurs upon delivery and acceptance by the customer or upon installation or delivery to a third-party carrier for onward delivery to customer. Additionally, revenue in the Restaurant/Retail segment relating to SaaS, the Company's Advanced Exchange hardware service program, its on-site support and other services is recognized over time as the customer simultaneously receives and consumes the benefits of the Company’s performance obligations. The Company’s support services are stand-ready obligations that are provided over the life of the contract, generally 12 months. The Company offers installation services to its customers for hardware and software for which the Company primarily hires third-party contractors to install the equipment on the Company's behalf. The Company pays third-party contractors an installation service fee based on an hourly rate agreed to by the Company and contractor. When third-party installers are used, the Company determines whether the nature of its performance obligations is to provide the specified goods or services itself (principal) or to arrange for a third-party to provide the goods or services (agent). In the Company's customer arrangements, the Company is primarily responsible for providing a good or service, has inventory risk before the good or service is transferred to the customer, and discretion in establishing prices; as a result, the Company has concluded that it is the principal in the arrangement and records installation revenue on a gross basis.
The support services associated with hardware and software sales are “stand-ready obligations” satisfied over time on the basis that the customer consumes and receives a benefit from having access to the Company's support resources, when and as needed, throughout the contract term. For this reason, the support services are recognized ratably over the contract term since the Company satisfies its obligation to stand ready by performing these services each day. Contracts typically require payment within 30 to 90 days from the shipping date or
installation date, depending on the Company's terms with the customer. The primary method used to estimate a stand-alone selling price, is the price that the Company charges for the particular good or service sold by the Company separately under similar circumstances to similar customers. The Company determines stand-alone selling prices as follows: hardware, software and software activation performance obligations are recognized at a stand-alone selling price based on the price at which the Company sells the particular good or service separately in similar circumstances and to similar customers. The stand-alone selling price for all other performance obligations, including: pass-through hardware, such as terminals, printers, or card readers; hardware support (referred to as Advanced Exchange), installation, maintenance, licensed software upgrades, and professional services (project management) is recognized by using an expected cost plus margin.
Government
The Company's revenue in the Government segment is recognized over time as control is generally transferred continuously to its customers. Revenue generated by the Government segment is predominantly related to services; provided, however, revenue is also generated through the sale of materials, software, hardware, and maintenance. For the Government segment cost plus fixed fee contract portfolio, revenue is recognized over time using costs incurred to date to measure progress toward satisfying the Company's performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and general and administrative expenses. Profit is recognized on the fixed fee portion of the contract as costs are incurred and invoiced. Long-term fixed price contracts involve the use of judgment to estimate the total contract revenue and costs. For long-term fixed price contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete the contract, and recognize that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include: labor productivity and availability; the complexity of the work to be performed; and the performance of subcontractors. Revenue and profit in future periods of contract performance are recognized using the aforesaid assumptions, and adjusting the estimate of costs to complete a contract. Once the services provided are determined to be distinct or not distinct, the Company evaluates how to allocate the transaction price. Generally, the Government segment does not sell the same good or service to similar customers and the contract performance obligations are unique to each government solicitation. The performance obligations are typically not distinct. In cases where there are distinct performance obligations, the transaction price would be allocated to each performance obligation on a ratable basis based upon the stand-alone selling price of each performance obligation. Cost plus margin is used for the cost plus fixed fee contract portfolios as well as the fixed price and time and materials contracts portfolios to determine the stand-alone selling price.
In the Government segment, when determining revenue recognition, the Company analyzes whether its performance obligations under Government contracts are satisfied over a period of time or at a point in time. In general, the Company's performance obligations are satisfied over a period of time; however, there may be circumstances where the latter or both scenarios could apply to a contract.
The Company usually expects payment within 30 to 90 days from the date of service, depending on its terms with the customer. None of its contracts as of December 31, 2021 or December 31, 2020 contained a significant financing component.
Performance Obligations Outstanding
The Company's performance obligations outstanding represent the transaction price of firm, non-cancellable orders, with expected delivery dates to customers subsequent to December 31, 2021, for which work has not yet been performed. The aggregate uncompleted performance obligations attributable to each of the Company's reporting segments is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Current under one year | | Non-current over one year | | Current under one year | | Non-current over one year |
Restaurant/Retail | $ | 12,449 | | | $ | 7,597 | | | $ | 8,000 | | | $ | 3,082 | |
Government | — | | | — | | | — | | | — | |
Total | $ | 12,449 | | | $ | 7,597 | | | $ | 8,000 | | | $ | 3,082 | |
Most performance obligations greater than one year relate to service and support contracts, that the Company expects to fulfill within 36 months. Commissions related to service and support contracts are not significant.
Remaining Performance Obligations
Deferred revenue is recorded when cash payments are received or due in advance of revenue recognition from software licenses, professional services, and maintenance agreements. The timing of revenue recognition may differ from when customers are invoiced. The changes in deferred revenue, inclusive of both current and long-term, are as follows:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Beginning balance - January 1 | $ | 11,082 | | | $ | 12,486 | |
Acquired deferred revenue (Note 2) | 11,125 | | | — | |
Recognition of deferred revenue | (19,229) | | | (11,005) | |
Deferral of revenue | 17,068 | | | 9,601 | |
| | | |
Ending balance - December 31 | $ | 20,046 | | | $ | 11,082 | |
The above table excludes customer deposits of $1.9 million and $1.5 million as of December 31, 2021 and 2020, respectively. The majority of the deferred revenue balances above relate to professional services, maintenance agreements, and software licenses. These are recognized straight-line over the life of the contract, with the majority of the balance being recognized within the next twelve months.
In the Restaurant/Retail segment most remaining performance obligations relate to service and support contracts, approximately 62% of which the Company expects to fulfill within one year. The Company expects to fulfill 100% of support and service contracts within 60 months. At December 31, 2021 and December 31, 2020, transaction prices allocated to future performance obligations were $20.0 million and $11.1 million, respectively.
During the years ended December 31, 2021 and 2020, the Company recognized revenue included in contract liabilities at the beginning of each respective period of $8.0 million and $11.0 million.
Disaggregated Revenue
The Company disaggregates revenue from contracts with customers by major product line for each of its reporting segments because the Company believes it best depicts how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Disaggregated revenue is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Restaurant/Retail Point in Time | | Restaurant/Retail Over Time | | Government Over Time |
Hardware | $ | 102,066 | | | $ | — | | | $ | — | |
Software | 1,131 | | | 56,723 | | | — | |
Service | 19,983 | | | 30,448 | | | — | |
Mission systems | — | | | — | | | 38,311 | |
Intelligence, surveillance, and reconnaissance solutions | — | | | — | | | 33,188 | |
Product | — | | | — | | | 1,026 | |
Total | $ | 123,180 | | | $ | 87,171 | | | $ | 72,525 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Restaurant/Retail Point in Time | | Restaurant/Retail Over Time | | Government Over Time |
Hardware | $ | 72,029 | | | $ | — | | | $ | — | |
Software | 668 | | | 25,716 | | | — | |
Service | 16,523 | | | 27,576 | | | — | |
Mission systems | — | | | — | | | 37,448 | |
Intelligence, surveillance, and reconnaissance solutions | — | | | — | | | 32,947 | |
Product | — | | | — | | | 879 | |
Total | $ | 89,220 | | | $ | 53,292 | | | $ | 71,274 | |
Restaurant/Retail balances in the amount of $142.5 million presented across hardware, software and service was reclassified in the above table to conform with current year presentation.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Restaurant/Retail Point in Time | | Restaurant/Retail Over Time | | Government Over Time |
Hardware | $ | 63,811 | | | $ | — | | | $ | — | |
Software | 3,143 | | | 13,677 | | | — | |
Service | 26,903 | | | 15,773 | | | — | |
Mission systems | — | | | — | | | 29,541 | |
Intelligence, surveillance, and reconnaissance solutions | — | | | — | | | 33,513 | |
Product | — | | | — | | | 871 | |
Total | $ | 93,857 | | | $ | 29,450 | | | $ | 63,925 | |
Restaurant/Retail balances in the amount of $123.3 million presented across hardware, software and service was reclassified in the above table to conform with current year presentation.
Practical Expedients and Exemptions
The Company generally expenses sales commissions when incurred because the amortization period would be less than one year or the total amount of commissions are immaterial. Commissions are recorded in SG&A expenses. The Company elected to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (for example, sales, use, value added, and some excise taxes).
Note 4 — Leases
Effective January 1, 2019, the Company adopted the lease accounting standard, ASC Topic 842, Leases, using the modified retrospective method of applying the new standard at the adoption date. In addition, the Company elected to apply the package of practical expedients permitted under the transition guidance within the standard. This allowed the Company to carry forward historical lease classification. Adoption of the standard resulted in the recording of lease right-of-use assets and corresponding lease liabilities of approximately $4.0 million.
A significant portion of the Company's operating lease portfolio includes office space, research and development facilities, IT equipment, and automobiles. The majority of the Company's leases have remaining lease terms of one to four years. Substantially all lease expense is presented within SG&A in the consolidated statements of operations.
The number and corresponding value of operating leases increased in 2021 due to the Punchh Acquisition.
| | | | | | | | | | | | | | | | | |
(in thousands) | Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Total lease expense | $ | 2,350 | | | $ | 1,358 | | | $ | 1,632 | |
Supplemental cash flow information related to leases is as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from leases | $ | 2,322 | | | $ | 1,334 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 3,250 | | | $ | 801 | |
Supplemental balance sheet information related to leases is as follows:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Operating leases | | | |
Total lease right-of-use assets | $ | 4,348 | | | $ | 2,569 | |
| | | |
Lease liabilities - current portion | $ | 2,266 | | | $ | 1,200 | |
Lease liabilities - net of current portion | 2,440 | | | 1,462 | |
Total lease liabilities | $ | 4,706 | | | $ | 2,662 | |
Weighted-average remaining lease term | | | |
Operating leases | 2.7 years | | 2.6 years |
Weighted-average discount rate | | | |
Operating leases | 4.0 | % | | 4.0 | % |
The following table summarizes future lease payments for operating leases at December 31, 2021:
| | | | | |
(in thousands) | Operating leases |
2022 | $ | 2,386 | |
2023 | 1,361 | |
2024 | 630 | |
2025 | 566 | |
2026 | 120 | |
Thereafter | — | |
Total lease payments | 5,063 | |
Less: portion representing imputed interest | (357) | |
Total | $ | 4,706 | |
Note 5 — Accounts Receivable, Net
The Company's net accounts receivables consist of:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Government segment: | | | |
Billed | $ | 11,667 | | | $ | 11,225 | |
Advanced billings | — | | | (948) | |
| 11,667 | | | 10,277 | |
Restaurant/Retail segment: | | | |
Accounts receivable - net | 38,311 | | | 32,703 | |
| $ | 49,978 | | | $ | 42,980 | |
At December 31, 2021 and 2020, the Company had current, expected credit loss of $1.3 million and $1.4 million, respectively, against accounts receivable for the Restaurant/Retail segment. The following table presents changes in the current, expected credit loss during the years ended December 31:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Beginning balance - January 1 | $ | 1,416 | | | $ | 1,849 | |
Provisions | 1,290 | | | 540 | |
Write-offs | (1,386) | | | (969) | |
Recoveries | (14) | | | (4) | |
Ending balance - December 31 | $ | 1,306 | | | $ | 1,416 | |
Receivables recorded as of December 31, 2021 and 2020 all represent unconditional rights to payments from customers.
Note 6 — Inventories, Net
Inventories are used in the manufacture and service of Restaurant/Retail products. The components of inventory, net consist of the following:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Finished goods | $ | 17,528 | | | $ | 12,747 | |
Work in process | 688 | | | 16 | |
Component parts | 14,880 | | | 6,105 | |
Service parts | 1,982 | | | 2,770 | |
| $ | 35,078 | | | $ | 21,638 | |
At December 31, 2021 and 2020, the Company had excess and obsolescence reserves of $10.8 million and $12.0 million, respectively, against inventories.
Note 7 — Property, Plant and Equipment, Net
The components of property, plant and equipment, net, are:
| | | | | | | | | | | |
| December 31, |
(in thousands) | 2021 | | 2020 |
Land | $ | 199 | | | $ | 199 | |
Building and improvements | 7,822 | | | 7,805 | |
Rental property | 2,749 | | | 2,749 | |
Software | 12,100 | | | 12,099 | |
Furniture and equipment | 12,816 | | | 10,198 | |
Construction in process | 170 | | | 670 | |
| 35,856 | | | 33,720 | |
Less accumulated depreciation | (22,147) | | | (19,864) | |
| $ | 13,709 | | | $ | 13,856 | |
The estimated useful lives of buildings and improvements and rental property are 15 to 40 years. The estimated useful lives of furniture and equipment range from three to eight years. The estimated useful life on software is three to five years. Depreciation expense was $2.3 million and $2.0 million for 2021 and 2020, respectively.
The Company leases a portion of its headquarters facility to various tenants. Net rent received from these leases totaled $0.2 million, $0.2 million, and $0.3 million for 2021, 2020, and 2019 respectively, and is recorded in other income (expense) – net.
Note 8 — Debt
The following table summarizes information about the net carrying amounts of long-term debt as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2024 Notes | | 2026 Notes | | 2027 Notes | | Total |
Principal amount of notes outstanding | $ | 13,750 | | | $ | 120,000 | | | $ | 265,000 | | | $ | 398,750 | |
Unamortized discount and unamortized debt issuance cost | (1,904) | | | (21,853) | | | (69,148) | | | (92,905) | |
Total notes payable | $ | 11,846 | | | $ | 98,147 | | | $ | 195,852 | | | $ | 305,845 | |
The following table summarizes information about the net carrying amounts of long-term debt as of December 31, 2020:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2024 Notes | | 2026 Notes | | Total |
Principal amount of notes outstanding | $ | 13,750 | | | $ | 120,000 | | | $ | 133,750 | |
Unamortized discount and unamortized debt issuance cost | (2,619) | | | (25,986) | | | (28,605) | |
Total notes payable | $ | 11,131 | | | $ | 94,014 | | | $ | 105,145 | |
Convertible Senior Notes
On September 17, 2021, the Company sold $265.0 million in aggregate principal amount of 1.500% Convertible Senior Notes due 2027. The 2027 Notes were issued pursuant to an indenture, dated September 17, 2021 (the “2027 Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee. The 2027 Notes bear interest at a rate of 1.500% per year, which is payable semiannually in arrears on April 15 and October 15 of each year, beginning April 15, 2022. Interest accrues on the 2027 Notes from the last date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from September 17, 2021. Unless earlier converted, redeemed or repurchased, the 2027 Notes mature on October 15, 2027. The Company used net proceeds from the offering, in conjunction with net proceeds from the September 2021 common stock offering (Refer to “Note 9 – Common Stock”), to repay in full the Owl Rock Term Loan, which
had a principal amount of $180.0 million outstanding as of September 17, 2021. The Company intends to use the remaining net proceeds from the offering for general corporate purposes, including continued investment in the growth of the Company’s businesses and for other working capital needs. The Company may also use a portion of the net proceeds to acquire or invest in other assets complementary to the Company’s businesses or for repurchases of the Company’s other indebtedness.
On February 10, 2020, the Company sold $120.0 million in aggregate principal amount of 2.875% Convertible Senior Notes due 2026. The 2026 Notes were issued pursuant to an indenture, dated February 10, 2020 (the “2026 Indenture”), between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee. The 2026 Notes pay interest at a rate equal to 2.875% per year, payable semiannually in arrears on April 15 and October 15 of each year, beginning October 15, 2020. Interest accrues on the 2026 Notes from the last date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from February 10, 2020. Unless earlier converted, redeemed or repurchased, the 2026 Notes mature on April 15, 2026.
On April 15, 2019, the Company sold $80.0 million in aggregate principal amount of 4.500% Convertible Senior Notes due 2024. The 2024 Notes were issued pursuant to an indenture, dated April 15, 2019, between the Company and The Bank of New York Mellon Trust Company, N.A., as Trustee (the “2024 Indenture” and, together with the 2026 Indenture and the 2027 Indenture, the “Indentures”). The 2024 Notes pay interest at a rate equal to 4.500% per year, payable semiannually in arrears on April 15 and October 15 of each year, beginning October 15, 2019. Interest accrues on the 2024 Notes from the last date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from April 15, 2019. Unless earlier converted, redeemed or repurchased, the 2024 Notes mature on April 15, 2024.
The Company used approximately $66.3 million (excluding cash payments relating to accrued interest and fractional shares) from its sale of the 2026 Notes and issued 772,423 shares of common stock at $32.43 per share out of treasury stock with an average cost basis of $3.37 per share to repurchase approximately $66.3 million in aggregate principal amount of the 2024 Notes through individually negotiated transactions. Of the total price paid for the 2024 Notes, $59.0 million was allocated to the 2024 Notes settlement, $30.8 million was allocated to equity, and $1.0 million was used to pay off accrued interest on the 2024 Notes. The consideration transferred was allocated to the liability and equity components of the 2024 Notes using the equivalent rate that reflected the borrowing rate for a similar non-convertible debt instrument immediately prior to settlement. The transaction resulted in a loss on settlement of convertible notes of $8.1 million, which is recorded as a loss on extinguishment of debt in the Company’s consolidated statements of operations. The loss represents the difference between (i) the fair value of the liability component and (ii) the sum of the carrying value of the debt component and any unamortized debt issuance costs at the time of settlement.
The carrying amount of the liability component of the Senior Notes was calculated by estimating the fair value of similar notes that do not have associated convertible features. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the fair value amount of the Senior Notes. The valuation model used in determining the fair value of the liability component for the Senior Notes includes inputs, such as the implied debt yield within the nonconvertible borrowing rate. The implied estimated effective rate of the liability component of the 2024 Notes, 2026 Notes, and 2027 Notes was 10.2%, 7.3%, and 6.5% respectively.
The Senior Notes are senior, unsecured obligations of the Company. The 2024 Notes, the 2026 Notes, and the 2027 Notes are convertible, in whole or in part, at the option of the holder, upon the occurrence of specified events or certain fundamental changes set forth in the Indentures prior to the close of business on the business day immediately preceding October 15, 2023, October 15, 2025, and April 15, 2027, respectively; and, thereafter, at any time until the close of business on the second business day immediately preceding maturity. The 2024 Notes are convertible into Company common stock at an initial conversion rate of 35.0217 shares per $1,000 principal amount, the 2026 Notes are convertible into Company common stock at an initial conversion rate of 23.2722 shares per $1,000 principal amount, and the 2027 Notes are convertible into Company common stock at an initial conversion rate of 12.9870 shares per $1,000 principal amount. Upon conversion, the Company may elect to settle by paying or delivering either solely cash, shares of Company common stock or a combination of cash and shares of Company common stock.
In accordance with ASC Topic 470-20, Debt with Conversion and Other Options — Beneficial Conversion Features, the initial measurement of the 2024 Notes at fair value resulted in a liability of $62.4 million and as such, the calculated discount resulted in an implied value of the convertible feature recognized in additional paid in capital
of $17.6 million; the initial measurement of the 2026 Notes at fair value resulted in a liability of $93.8 million and as such, the calculated discount resulted in an implied value of the convertible feature recognized in additional paid in capital of $26.2 million; and the initial measurement of the 2027 Notes at fair value resulted in a liability of $199.2 million and as such, the calculated discount resulted in an implied value of the convertible feature recognized in additional paid in capital of $65.8 million. Issuance costs for the Notes amounted to $4.9 million, $4.2 million, and $8.3 million for the 2024 Notes, 2026 Notes, and 2027 Notes, respectively. These costs were allocated to debt and equity components on a ratable basis. For the 2024 Notes this amounted to $3.8 million and $1.1 million to the debt and equity components, respectively. For the 2026 Notes this amounted to $3.3 million and $0.9 million to the debt and equity components, respectively. For the 2027 Notes this amounted to $6.2 million and $2.1 million to the debt and equity components, respectively.
The Indentures contain covenants that, among other things, restrict the Company’s ability to merge, consolidate or sell, or otherwise dispose of, substantially all of its assets and customary Events of Default (as defined in the Indentures).
The Company recorded an income tax liability of $15.6 million during 2021 associated with the portion of the 2027 Notes that was classified within stockholders' equity. GAAP requires the offset of the deferred tax liability to be classified within stockholders' equity, consistent with the equity portion of the 2027 Notes. The creation of the deferred tax liability produced evidence of recoverability of the Company's net deferred tax assets, which resulted in the release of a valuation allowance, totaling $14.9 million, that was also classified within stockholders' equity pursuant to the adoption of ASU 2019-12 on January 1, 2021.
In connection with the sale of the 2026 Notes, the Company recorded an income tax benefit of $4.4 million during 2020 as a result of the creation of a deferred tax liability associated with the portion of the 2026 Notes that was classified within stockholders' equity. The creation of the deferred tax liability produced evidence of recoverability of the Company's net deferred tax assets which resulted in the release of a valuation allowance, totaling $4.4 million, reflected as an income tax benefit in 2020.
Credit Facility
In connection with, and to partially fund the Cash Consideration for the Punchh Acquisition, on April 8, 2021, the Company entered into the Owl Rock Credit Agreement. The Owl Rock Credit Agreement provides for a term loan in the initial aggregate principal amount of $180.0 million, the “Owl Rock Term Loan”. Issuance costs, which included a 2% Original Issue Discount, amounted to $9.3 million with net proceeds amounting to $170.7 million.
The Company used net proceeds from its offering of the 2027 Notes and its concurrent common stock offering (refer to “Note 9 – Common Stock”) to repay in full the Owl Rock Term Loan, including $1.8 million accrued interest and $3.6 million prepayment premium, on September 17, 2021. Following its repayment, the Owl Rock Credit Agreement was terminated. The transaction resulted in a loss on settlement of notes of $11.9 million, which is recorded as a loss on extinguishment of debt in the Company’s consolidated statements of operations. The loss represents the difference between (i) reacquisition price, including prepayment premium, and (ii) the sum of the carrying value of the debt component and any unamortized debt issuance costs at the time of settlement.
The following table summarizes interest expense recognized on the Senior Notes:
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2021 | | 2020 |
Contractual interest expense | $ | 9,420 | | | $ | 4,026 | |
Amortization of debt issuance costs and discount | 8,726 | | | 4,355 | |
Total interest expense | $ | 18,146 | | | $ | 8,381 | |
In connection with the Restaurant Magic Acquisition in December 2019, the Company entered into a $2.0 million subordinated promissory note which bears interest at 5.75% per annum, with monthly payments of principal and interest in the amount of $60.6 thousand payable beginning January 15, 2020 through maturity on December 15, 2022. As of December 31, 2021, the outstanding balance of the subordinated promissory note was $0.7 million.
The following table summarizes the future principal payments for the subordinated promissory note and Senior Notes as of December 31, 2020 (in thousands):
| | | | | |
2022 | $ | 705 | |
2023 | — | |
2024 | 13,750 | |
2025 | — | |
2026 | 120,000 | |
Thereafter | 265,000 | |
Total | $ | 399,455 | |
Note 9 — Common Stock
On September 17, 2021, the Company completed a public offering of its common stock in which the Company issued and sold 982,143 shares of common stock at a price of $56.00 per share. The Company received net proceeds of $52.5 million, after deducting underwriting discounts, commissions and other offering expenses.
In connection with, and to partially fund the Cash Consideration of the Punchh Acquisition, on April 8, 2021, the Company entered into Purchase Agreements with Act III and TRP to raise approximately $160.0 million through a private placement of the Company's common stock. Pursuant to the Purchase Agreements, the Company issued and sold (i) 73,530 shares of its common stock to Act III for a gross purchase price of approximately $5.0 million ($68.00 per share), and (ii) 2,279,412 shares of common stock to TRP for a gross purchase price of approximately $155.0 million ($68.00 per share) for an aggregate of 2,352,942 shares. The Company incurred $4.3 million of issuance costs in connection with the sale of its common stock. The Company also issued to Act III a fully-vested Warrant to purchase 500,000 shares of common stock with an exercise price of $76.50 per share and a five year exercise period. In connection with the Company's September 2021 public offering of its common stock, as a result of anti-dilution provisions within the Warrant, an additional 3,975 shares of the Company's common stock are available for purchase under the Warrant, at an exercise price of $75.90 per share. The Warrant is accounted for as an equity instrument pursuant to ASC Topic 815, Derivatives and Hedging, due to the Warrant contractually permitting only settlement in non-redeemable common shares upon exercise. Refer to “Note 8 – Debt” for additional information about the Warrant.
Issuance date fair value of the Warrant was determined to be $14.3 million based on using the Black-Scholes model with the following assumptions:
| | | | | |
Expected term | 5.0 years |
Risk free interest rate | 0.85 | % |
Expected volatility | 53.78 | % |
Expected dividend yield | None |
Fair value (per warrant) | $ | 28.65 | |
The Company also issued 1,493,130 of its common stock as part of the Equity Consideration of the Punchh Acquisition. Refer to “Note 2 – Acquisition” for additional information about the Punchh Acquisition.
On October 5, 2020, the Company completed a public offering of its common stock in which the Company issued and sold 3,616,022 shares of common stock at a price of $38.00 per share. The Company received net proceeds of $131.4 million after deducting underwriting discounts, commissions, and other offering expenses.
Note 10 — Stock-Based Compensation
The Company recognizes all stock-based compensation to employees and directors, including awards of stock options and restricted stock units or restricted stock awards, in the financial statements as compensation cost over the applicable vesting periods based on the fair value of the awards on the date of grant.
The Company recorded stock-based compensation expense to the following line items in the consolidated statements of operations for the years ended December 31:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | 2019 |
Cost of sales - contracts | $ | 340 | | | $ | 367 | | | $ | 234 | |
Selling, general and administrative | 14,275 | | | 3,884 | | | 2,472 | |
Total stock-based compensation expense | $ | 14,615 | | | $ | 4,251 | | | $ | 2,706 | |
As a result of forfeitures of non-vested stock awards prior to the completion of the requisite service period or failure to meet requisite performance targets, the Company recorded benefits for the years ended December 31, 2021, 2020, and 2019 of $0.5 million, $0.2 million, and $0.1 million respectively.
The Company has 2.7 million shares of common stock reserved for stock-based awards under its Amended and Restated PAR Technology Corporation 2015 Equity Incentive Plan (the “2015 Plan”). The 2015 Plan provides for the grant of several different forms of stock-based awards including:
•Stock options granted under the 2015 Plan, which enable the recipient to purchase shares of the Company's common stock may be incentive stock options or non-qualified stock options. Generally, stock options are nontransferable other than upon death. Stock options generally vest over a one to four year period and expire ten years after the date of the grant. The Compensation Committee has authority to administer the 2015 Plan and determine the material terms of option and other awards under the 2015 Plan.
•Restricted Stock Awards (“RSA”) and Restricted Stock Units (“RSU”) can have service-based and/or performance-based vesting. Grants of RSAs and RSUs with service-based vesting are subject to vesting periods ranging from one to three years. Grants of RSAs and RSUs with performance-based vesting are subject to a vesting period of one to four years and performance targets as defined by the Compensation Committee. The Company assesses the likelihood of achievement throughout the performance period and recognizes compensation expense associated with its performance awards based on this assessment in accordance with ASC Topic 718, Stock Compensation. Other terms and conditions applicable to any RSA or RSU award will be determined by the Compensation Committee and set forth in the agreement relating to that award.
Stock Options
The below tables presents information with respect to stock options:
| | | | | | | | | | | | | | | | | |
(in thousands, except for exercise price) | Number of Shares | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
Outstanding at Outstanding at December 31, 2020 | 957 | | | $ | 14.29 | | | |
Options granted | 564 | | | 7.88 | | | |
Options exercised | (104) | | | 11.01 | | | |
Options forfeited | (111) | | | 11.94 | | | |
Outstanding at Outstanding at December 31, 2021 | 1,306 | | | $ | 11.95 | | | $ | 54,443 | |
Vested and expected to vest at December 31, 2021 | 1,295 | | | $ | 11.95 | | | $ | 53,990 | |
Total shares exercisable at December 31, 2021 | 799 | | | $ | 11.72 | | | $ | 33,486 | |
Shares remaining available for future grant | 449 | | | | | |
| | | | | | | | | | | | | | | | | |
(in thousands, except for grant date fair value) | 2021 | | 2020 | | 2019 |
Option expense recorded, in thousands, for the year ended December 31, | $ | 9,585 | | | $ | 1,386 | | | $ | 456 | |
Weighted average grant date fair value | $ | 60.48 | | | $ | 13.82 | | | $ | 24.87 | |
Total intrinsic value of stock options exercised, in thousands, for the year ended December 31, | $ | 6,000 | | | $ | 1,900 | | | $ | 5,400 | |
Cash received for options exercised | $ | 1,156 | | | $ | 675 | | | $ | 1,433 | |
The fair value of options at the date of the grant was estimated using the Black-Scholes model with the following assumptions for the respective period ending December 31:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Expected option life | 3.1 years | | 4.4 years | | 3.0 years |
Weighted average risk-free interest rate | 0.4 | % | | 0.4 | % | | 2.0 | % |
Weighted average expected volatility | 56.5 | % | | 47.6 | % | | 35.0 | % |
Expected dividend yield | None | | None | | None |
For the years ended December 31, 2021, 2020, and 2019 the expected option life was based on the Company’s historical experience with similar type options. Expected volatility is based on historic volatility levels of the Company’s common stock over the preceding period of time consistent with the expected life. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life. Stock options outstanding at December 31, 2021 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
Range of exercise prices | | Number outstanding (in thousands) | | Weighted average remaining life | | Weighted average exercise price |
$0.73 - $35.17 | | 1,306 | | | 7.68 years | | $ | 11.95 | |
Restricted Stock Awards
Current year activity with respect to the Company’s non-vested RSAs is as follows:
| | | | | | | | | | | |
Non-vested RSAs | Shares (in thousands) | | Weighted average grant-date fair value |
Balance at January 1, 2021 | 61 | | $ | 25.62 | |
Granted | 2 | | 22.30 | |
Vested | (34) | | | 21.29 |
Forfeited | (2) | | | 24.87 |
Balance at December 31, 2021 | 27 | | 25.42 |
The below table presents information with respect to RSA:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | 2019 |
Service-based RSA | $ | 62 | | | $ | 210 | | | $ | 213 | |
Performance-based RSA | 776 | | | 786 | | | 2,012 | |
Total stock-based compensation related to RSA | $ | 838 | | | $ | 996 | | | $ | 2,225 | |
For the periods ended 2021, 2020, and 2019 the Company recognized compensation expense related to performance awards based on its estimate of the probability of achievement in accordance with ASC Topic 718. In 2021, the Company determined the achievement of performance based awards to be probable for both segments. In 2020, the Company recorded $0.1 million in compensation expense associated with performance based RSAs, as the performance based awards were achieved for the Government segment, but not for the Restaurant/Retail segment. For the year ended December 31, 2019, performance based awards were achieved for both the Government and Restaurant/Retail segments.
The fair value of RSAs is based on the closing price of the Company’s common stock on the date of grant. The below table presents information with respect to RSAs:
| | | | | | | | | | | | | | | | | |
(in thousands, except weighted average grant date fair value) | 2021 | | 2020 | | 2019 |
Weighted average grant date fair value of RSAs granted during the year | $ | 22.30 | | | $ | 30.96 | | | $ | 24.77 | |
Number of shares released during the year in accordance with the terms of the RSA agreements | 34 | | | 112 | | | 13 | |
Number of RSA shares canceled during the year | 2 | | | 5 | | | 53 | |
Number of above RSA shares canceled which were performance-based | 1 | | | 4 | | | 38 | |
Restricted Stock Units
Current year activity with respect to the Company’s non-vested RSUs is as follows:
| | | | | | | | | | | |
Non-vested RSUs | Shares (in thousands) | | Weighted Average grant- date fair value |
Balance at January 1, 2021 | 427 | | | $ | 15.46 | |
Granted | 203 | | | 66.42 | |
Vested | (176) | | | 18.71 | |
Forfeited | (36) | | | 72.33 | |
Balance at December 31, 2021 | 418 | | | $ | 34.08 | |
The below table presents information with respect to RSUs:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | 2019 |
Service-based RSU | $ | 3,353 | | | $ | 1,587 | | | $ | 25 | |
Performance-based RSU | 839 | | | 282 | | | — | |
Total stock-based compensation related to RSU | $ | 4,192 | | | $ | 1,869 | | | $ | 25 | |
At December 31, 2021, the aggregate unrecognized compensation cost of unvested equity awards, as determined using a Black-Scholes option valuation model for option awards and the closing stock price on the date of grant for RSAs and RSUs was $26.6 million, which is expected to be recognized as compensation expense in fiscal years 2022 to 2025.
Note 11 — Income Taxes
The benefit from for income taxes consists of:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
Current income tax: | | | | | |
Federal | $ | — | | | $ | — | | | $ | — | |
State | 408 | | | 179 | | | 182 | |
Foreign | 585 | | | (4) | | | 186 | |
| 993 | | | 175 | | | 368 | |
Deferred income tax: | | | | | |
Federal | (9,001) | | | (3,265) | | | (3,418) | |
State | (1,416) | | | 104 | | | (584) | |
| (10,417) | | | (3,161) | | | (4,002) | |
Benefit from income taxes | $ | (9,424) | | | $ | (2,986) | | | $ | (3,634) | |
The components of net loss before income taxes for fiscal years 2021, 2020, and 2019 consisted of the following:
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
United States | $ | (85,391) | | | $ | (39,390) | | | $ | (19,092) | |
International | 168 | | | (158) | | | (113) | |
Total net loss before income taxes | $ | (85,223) | | | $ | (39,548) | | | $ | (19,205) | |
Deferred tax (liabilities) assets are comprised of the following at: | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 | | |
Deferred tax liabilities: | | | | | |
Subordinated debt | $ | (19,998) | | | $ | (6,482) | | | |
Indefinite lived intangibles | — | | | (168) | | | |
Operating lease assets | (1,067) | | | (1,208) | | | |
Software development costs | (2,978) | | | (2,814) | | | |
Intangible assets | (21,839) | | | (281) | | | |
Depreciation on property, plant and equipment | (1,490) | | | (931) | | | |
Gross deferred tax liabilities | (47,372) | | | (11,884) | | | |
| | | | | |
Deferred tax assets: | | | | | |
Allowances for bad debts and inventory | 3,038 | | | 3,392 | | | |
Capitalized inventory costs | 223 | | | 185 | | | |
| | | | | |
Employee benefit accruals | 5,692 | | | 2,783 | | | |
Interest expense limitation under section 163 (j) | 4,812 | | | 2,798 | | | |
Operating lease liabilities | 1,155 | | | 1,208 | | | |
Federal net operating loss carryforward | 42,792 | | | 15,719 | | | |
State net operating loss carryforward | 10,353 | | | 3,569 | | | |
Federal and state tax credit carryforwards | 11,901 | | | 7,549 | | | |
| | | | | |
Other | 2,246 | | | 944 | | | |
Gross deferred tax assets | 82,212 | | | 38,147 | | | |
| | | | | |
Less valuation allowance | (37,157) | | | (26,431) | | | |
| | | | | |
Non-current net deferred tax liabilities | $ | (2,317) | | | $ | (168) | | | |
The Company has Federal tax credit carryforwards of $10.4 million that expire in various tax years from 2028 to 2041. The Company has a Federal operating loss carryforward of $36.2 million expiring from 2029 through 2037 and a Federal operating loss carryforward of $167.5 million with an unlimited carryforward period. The Company also has state tax credits of $1.7 million and net operating loss carryforwards that vary by jurisdiction, ranging from $0 to $46.1 million, and expire in various tax years through 2041. In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. A valuation allowance is required to the extent it is more likely than not that the future benefit associated with certain Federal and state tax loss carryforwards will not be realized
As a result of this analysis and based on the current year’s taxable income, and utilization of the Company's net deferred tax assets, management determined an increase in the valuation allowance in the current year to be appropriate.
In calculating the valuation allowance, the Company was not permitted to use its existing deferred tax liabilities related to its indefinite-lived intangible assets (i.e. “naked credit deferred tax liabilities”) as a source of taxable income to support the realization of its existing finite-lived deferred tax assets; however, the Company is permitted to use its existing deferred tax liabilities related to its indefinite-lived intangible assets as a source of taxable income to support the realization of its existing indefinite-lived deferred tax assets.
In the current year, the income tax provision includes a reduction of the Company’s valuation allowance due to the establishment of a deferred tax liability in connection with the Punchh Acquisition. The establishment of that deferred tax liability created “future taxable income”, partially utilizing existing deferred tax assets of the Company
and resulting in a $10.4 million reduction of the Company’s valuation allowance. The Punchh Acquisition resulted in a change in ownership for Punchh as defined by IRC Section 382; the Company determined the identified change in ownership should not limit the Company's ability to utilize Punchh net operating loss and credit carryforwards.
In 2020, the income tax provision included a reduction of the Company’s valuation allowance due to the establishment of a deferred tax liability in connection with the issuance of the 2026 Notes convertible debt. The establishment of that deferred tax liability created “future taxable income”, partially utilizing existing deferred tax assets of the Company and resulting in a $6.2 million reduction of the Company’s valuation allowance. In addition, the income tax provision included an increase of the Company’s valuation allowance due to the reversal of a deferred tax liability in connection with the retirement of a portion of the 2024 Notes issued in 2019. The reversal of that deferred tax liability eliminated future taxable income for the utilization of existing deferred tax assets of the Company, resulting in a $3.0 million increase to the Company’s valuation allowance.
In 2019, the income tax provision included a reduction of the Company’s valuation allowance due to the establishment of a deferred tax liability in connection with the issuance of the 2024 Notes. The establishment of that deferred tax liability created "future taxable income" for the utilization of existing deferred tax assets of the Company, resulting in the $4.1 million reduction of the Company’s valuation allowance.
The Company records the benefits relating to uncertain tax positions only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. At December 31, 2021, the Company had no reserve for uncertain tax positions and the Company believes the Company has adequately provided for its tax-related liabilities. The Company is no longer subject to federal income tax audits for years before 2018.
The following table reconciles the Company's effective tax rate from the U.S. federal statutory tax rate of 21% for each of 2021, 2020, and 2019:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
Federal statutory tax rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
State taxes, net of federal benefit | 1.3 | | | 2.8 | | | (4.5) | |
Nondeductible expenses | (0.8) | | | (0.2) | | | (0.3) | |
Tax credits (including R&D) | 1.7 | | | 4.5 | | | 4.0 | |
Foreign income tax rate differential | (0.5) | | | — | | | — | |
Expired tax credit | — | | | — | | | (1.3) | |
Deferred tax adjustment | — | | | 0.6 | | | (4.8) | |
Stock based compensation | (0.7) | | | 0.4 | | | 1.9 | |
Redemption of notes | — | | | (2.9) | | | — | |
Valuation allowance | (10.7) | | | (19.6) | | | 3.2 | |
| | | | | |
Other | (0.3) | | | 1.0 | | | (0.3) | |
| 11.0 | % | | 7.6 | % | | 18.9 | % |
The effective income tax rate was 11.0%, 7.6% and 18.9% during the years ended December 31, 2021, December 31, 2020, and December 31, 2019 respectively. The decrease in 2021 compared to the statutory tax rate of 21.0% was primarily due to the valuation allowance and nondeductible acquisition expenses, which were partially offset by tax credits. The decrease in 2020 compared to the statutory tax rate of 21.0% was primarily due to the valuation allowance, and only partially offset by tax credits. The decrease in 2019 compared to the statutory tax rate of 21.0% was primarily due to deferred tax adjustments related to state taxes, offset by changes in the valuation allowance and excess tax benefits resulting from the exercise of non-qualified stock options.
Note 12 — Employee Benefit Plans
The Company has a deferred profit-sharing retirement plan that covers substantially all employees. The Company’s annual contribution to the plan is discretionary. The Company did not make a contribution in 2021, 2020, or 2019. The plan also contains a 401(k) provision that allows employees to contribute a percentage of their salary up to the statutory limitation. These contributions were matched by the Company at the rate of 10.0% of employee's contribution From January 1, 2019 through June 30, 2019. These contributions were matched by the Company at the rate of 50.0% of employee's contributions from July 1, 2019 through December 31, 2021, up to 6.0% of employee's base salary. The Company’s matching contributions under the 401(k) component were $1.1 million, $0.9 million, and $0.8 million in 2021, 2020, and 2019 respectively.
The Company sponsors a deferred compensation plan for a select group of highly compensated employees. Participants may make elective deferrals of their salary to the plan in excess of tax code limitations that apply to the Company’s qualified plan. The Company invests the participants’ deferred amounts to fund these obligations. The Company has the sole discretion to make employer contributions to the plan on behalf of the participants. No employer contributions were made in 2021, 2020 or 2019.
Note 13 — Commitments and Contingencies
From time to time, the Company is party to legal proceedings arising in the ordinary course of business. Additionally, U.S. Government contract costs are subject to periodic audit and adjustment. Based on information currently available, and based on its evaluation of such information, the Company believes the legal proceedings in which it is currently involved are not material or are not likely to result in a material adverse effect on the Company’s business, financial condition or results of operations, or cannot currently be estimated.
On March 21, 2019, Kandice Neals on behalf of herself and others similarly situated (the “Neals Class”) filed a complaint against PAR Technology Corporation in the Circuit Court of Cook County, Illinois County Department, Chancery Division. The complaint asserted that PAR Technology Corporation violated the Illinois Biometric Information Privacy Act in the alleged collection, use, and storage of her and others' biometric data derived from fingerprint scans taken for authentication purposes on point-of-sale systems. On January 15, 2020, the Neals Class filed an amended complaint against ParTech, Inc. with the Federal District Court of the Northern District of Illinois. The Company’s accrued liability for this matter as of December 31, 2021 was $790 thousand.
Note 14 — Segment and Related Information
The Company is organized in two segments: Restaurant/Retail and Government. Management views the Restaurant/Retail and Government segments separately in operating its business, as the products and services are different for each segment. The Company’s chief operating decision maker is the Company’s Chief Executive Officer.
The Restaurant/Retail segment is a provider of software, hardware and services to the restaurant and retail industries. The Restaurant/Retail segment provides multi-unit and individual restaurants, franchisees, and enterprise customers in the three major restaurant categories (fast casual, quick serve, and table service), with operational efficiencies, offering them a fully integrated cloud solution with its Brink POS cloud software for front-of-house, Data Central back-office cloud solution, PAR Pay and PAR Payment Services for payment solutions, and Punchh loyalty and engagement solution, all which are combined on our unified commerce cloud platform. This segment also offers customer support, including field service, installation, depot repair, and 24-hour telephone support. The Government segment provides technical expertise and development of advanced systems and software solutions for the DoD, the intelligence community and other federal agencies. This segment also provides support services for satellite command and control, communication, and IT systems at several DoD facilities worldwide.
Information noted as “Other” primarily relates to the Company’s corporate, home office operations.
Information as to the Company’s segments is set forth below:
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| Year Ended December 31, |
(in thousands) | 2021 | | 2020 | | 2019 |
Revenues: | | | | | |
Restaurant/Retail | $ | 210,351 | | | $ | 142,512 | | | $ | 123,307 | |
Government | 72,525 | | | 71,274 | | | 63,925 | |
Total | $ | 282,876 | | | $ | 213,786 | | | $ | 187,232 | |
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Operating (loss) income : | | | | | |
Restaurant/Retail | $ | (58,262) | | | $ | (28,089) | | | $ | (18,481) | |
Government | 5,801 | | | 5,644 | | | 5,463 | |
Other | (1,420) | | | (1,501) | | | (1,167) | |
| (53,881) | | | (23,946) | | | (14,185) | |
Other income (expense) – net | (1,279) | | | 808 | | | (449) | |
Loss on extinguishment of debt | (11,916) | | | (8,123) | | | — | |
Interest expense – net | (18,147) | | | (8,287) | | | (4,571) | |
Loss before provision for income taxes | $ | (85,223) | | | $ | (39,548) | | | $ | (19,205) | |
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Depreciation, amortization and accretion: | | | | | |
Restaurant/Retail | $ | 19,656 | | | $ | 8,158 | | | $ | 3,858 | |
Government | 380 | | | 590 | | | 67 | |
Other | 10,110 | | | 5,704 | | | 3,330 | |
Total | $ | 30,146 | | | $ | 14,452 | | | $ | 7,255 | |
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Capital expenditures including software costs: | | | | | |
Restaurant/Retail | $ | 6,848 | | | $ | 7,245 | | | $ | 4,394 | |
Government | 711 | | | 1,239 | | | 258 | |
Other | 728 | | | 747 | | | 1,878 | |
Total | $ | 8,287 | | | $ | 9,231 | | | $ | 6,530 | |
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| Year Ended December 31, |
(in thousands) | 2021 | | 2020 | | |
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Total assets: | | | | | |
Restaurant/Retail | $ | 674,032 | | | $ | 140,606 | | | |
Government | 14,831 | | | 13,150 | | | |
Other | 199,286 | | | 189,993 | | | |
Total | $ | 888,149 | | | $ | 343,749 | | | |
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Goodwill: | | | | | |
Restaurant/Retail | $ | 456,570 | | | $ | 40,478 | | | |
Government | 736 | | | 736 | | | |
Total | $ | 457,306 | | | $ | 41,214 | | | |
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Revenues by country based on the location of the use of the product or services were:
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| December 31, |
| 2021 | | 2020 | | 2019 |
United States | $ | 262,164 | | | $ | 195,660 | | | $ | 175,180 | |
International | 20,712 | | | 18,126 | | | 12,052 | |
Total | $ | 282,876 | | | $ | 213,786 | | | $ | 187,232 | |
Assets by country based on the location of the asset were:
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| December 31, |
| 2021 | | 2020 | | |
United States | $ | 871,184 | | | $ | 322,065 | | | |
International | 16,965 | | | 21,684 | | | |
Total | $ | 888,149 | | | $ | 343,749 | | | |
Customers comprising 10% or more of the Company’s total revenues are summarized as follows:
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| December 31, |
| 2021 | | 2020 | | 2019 |
Restaurant/Retail segment: | | | | | |
Dairy Queen | 7 | % | | 13 | % | | 9 | % |
Yum! Brands, Inc. | 11 | % | | 11 | % | | 16 | % |
McDonald’s Corporation | 12 | % | | 7 | % | | 10 | % |
Government segment: | | | | | |
U.S. Department of Defense | 26 | % | | 33 | % | | 34 | % |
All Others | 44 | % | | 36 | % | | 31 | % |
| 100 | % | | 100 | % | | 100 | % |
No other customer within “All Others” represented more than 10% of the Company’s total revenue for the years ended 2021, 2020, and 2019.
Note 15 — Fair Value of Financial Instruments
The Company’s financial instruments have been recorded at fair value using available market information and valuation techniques. The fair value hierarchy is based upon three levels of input, which are:
Level 1 − quoted prices in active markets for identical assets or liabilities (observable)
Level 2 − inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable market data for essentially the full term of the asset or liability (observable)
Level 3 − unobservable inputs that are supported by little or no market activity, but are significant to determining the fair value of the asset or liability (unobservable)
The Company’s financial instruments primarily consist of cash and cash equivalents, trade receivables, trade payables, debt instruments and deferred compensation assets and liabilities. The carrying amounts of cash and cash equivalents, trade receivables and trade payables as of December 31, 2021 and December 31, 2020 were considered representative of their fair values because of their short term nature. The estimated fair value of the 2024 Notes, 2026 Notes, and 2027 Notes at December 31, 2021 was $27.2 million, $175.5 million, and $267.5 million, respectively. As of December 31, 2020 the fair value of the 2024 Notes and the 2026 Notes was $30.6 million and $195.4 million, respectively. The valuation techniques used to determine the fair values of 2024 Notes, 2026 Notes, and 2027 Notes are classified within Level 2 of the fair value hierarchy.
The deferred compensation assets and liabilities primarily relate to the Company’s deferred compensation plan, which allows for pre-tax salary deferrals for certain key employees. Changes in the fair value of the deferred compensation liabilities are derived using quoted prices in active markets of the asset selections made by the participants. The deferred compensation liabilities are classified within Level 2, the fair value classification as defined under FASB ASC Topic 820: Fair Value Measurements, because their inputs are derived principally from observable market data by correlation to the hypothetical investments. The Company holds insurance investments to partially offset the Company’s liabilities under its deferred compensation plan, which are recorded at fair value each period using the cash surrender value of the insurance investments.
The amounts owed to employees participating in the deferred compensation plan at December 31, 2021 was $2.4 million compared to $2.8 million at December 31, 2020 and is included in other long-term liabilities on the balance sheets.
The Company used a Monte-Carlo simulation to determine the fair value of the Earn-Out liability associated with the Restaurant Magic Acquisition. This simulation used probability distribution for each significant input to produce hundreds or thousands of possible outcomes and the results are analyzed to determine probabilities of different outcomes occurring, as such it is classified as Level 3. Significant increases or decreases to these inputs in isolation could result in a significantly higher or lower liability. Ultimately, the liability will be equivalent to the amount paid, and the difference between the fair value estimate and amount paid will be recorded in earnings. The amount paid that is less than or equal to the liability on the acquisition date is reflected as cash used in financing activities in the Company's consolidated statements of cash flows. Any amount paid in excess of the liability on the acquisition date is reflected as cash used in operating activities. The Restaurant Magic Acquisition resulted in a liability for the contingent consideration being recorded in the amount of $3.3 million during 2019. The liability for the contingent consideration was established at the time of the acquisition and is evaluated quarterly based on additional information as it becomes available. As a result, an adjustment of $3.3 million has been recorded during 2020 to reduce the liability to zero as of December 31, 2020. The fair value adjustment is recorded in the earnings as a component of operating expense in the consolidated financial statements. No additional adjustments were made by the Company during 2021. The contingent consideration expires on December 31, 2022.
The following table presents the changes in the estimated fair values of the Company’s liabilities for contingent consideration measured using significant unobservable inputs (Level 3) for fiscal years 2021 and 2020 (in thousands):
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Balance at December 31, 2019 | $ | 3,340 | |
New contingent consideration | — | |
Change in fair value of contingent consideration | (3,340) | |
Settlement of contingent consideration | — | |
Balance at December 31, 2020 | $ | — | |
New contingent consideration | — | |
Change in fair value of contingent consideration | — | |
Settlement of contingent consideration | — | |
Balance at December 31, 2021 | $ | — | |
The following tables provides quantitative information associated with the fair value measurement of the Company’s liabilities for contingent consideration:
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| | December 31, 2021 | | | | | | |
Contingency Type | | Maximum Payout (undiscounted) (in thousands) | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Weighted Average or Range |
Revenue-based payments | | $ | 1,965 | | | $ | — | | | Monte Carlo | | Revenue volatility | | 25.0 | % |
| | | | | | | | Discount rate | | 14.0 | % |
| | | | | | | | Projected year of payment | | 2022 |
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| | December 31, 2020 | | | | | | |
Contingency Type | | Maximum Payout (undiscounted) (in thousands) | | Fair Value | | Valuation Technique | | Unobservable Inputs | | Weighted Average or Range |
Revenue-based payments | | $ | 1,965 | | | $ | — | | | Monte Carlo | | Revenue volatility | | 25.0 | % |
| | | | | | | | Discount rate | | 14.0 | % |
| | | | | | | | Projected years of payment | | 2021-2022 |
(1) Maximum payout as determined by Monte Carlo valuation simulation; the disclosed contingency is not subject to a contractual maximum payout.