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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2020
OR
  TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From __________ to __________
Commission File Number: 1-09720

PAR TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware16-1434688
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
 
PAR Technology Park, 8383 Seneca Turnpike, New Hartford, New York 13413-4991
(Address of principal executive offices, including zip code)
(315) 738-0600
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common StockPARNew York Stock Exchange

    Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ☐

    Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ☐

    Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ☐
Accelerated Filer  þ
Non-Accelerated Filer  ☐
Smaller Reporting Company
 
Emerging Growth Company  




    If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No þ

As of November 1, 2020, 21,616,748 shares of the registrant’s common stock, $0.02 par value, were outstanding.




PAR TECHNOLOGY CORPORATION

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
Item
Number
 Page
   
Item 1.
   
 
   
 
   
 
   
 
   
 
   
Item 2.
   
Item 3.
   
Item 4.
   
PART II
OTHER INFORMATION
   
Item 1.
   
Item 1A.
   
Item 2.
   
Item 6.33
   
 

"PAR," "Brink POS®," "PixelPoint®," "PAR EverServ®," "Restaurant Magic®", and "Data Central®" are trademarks of PAR Technology Corporation. This report may also contain trade names and trademarks of other companies. Our use or reference to such other companies' trade names or trademarks is not intended to imply any endorsement or sponsorship by these companies of PAR Technology Corporation or its products or services.



Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 ("Quarterly Report") contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature, but rather are predictive of our future operations, financial condition, business strategies and prospects. Forward-looking statements are generally identified by words such as "anticipate," "believe," "belief," "continue," "could," "expect," "estimate," "intend," "may," "opportunity," "plan," "should," "will," "would," "will likely result," and similar expressions, and are based on current expectations and assumptions that are subject to risks and uncertainties, many of which are beyond our control, which could cause our actual results to differ materially from those expressed in or implied by the forward-looking statements, including forward-looking statements relating to our expectations regarding the impact of the COVID-19 pandemic on our business, operations, and financial results. While we have taken precautionary measures intended to minimize the impact of COVID-19 to our employees and to our business, there can be no assurances that these actions are sufficient and that additional actions will not be required. Factors that have and may continue to adversely affect, and that could subsequently adversely impact, our business, operations and financial results, due to the COVID-19 pandemic include: customer store closures, significant reductions or volatility in demand for our products and services, delayed or canceled store implementations, decreased product adoptions and bookings, reduced or delayed software or hardware deployments and a reprioritization of investments in technology or point-of-sale infrastructure; delayed or payment defaults by customers; business continuity risks due to our work-from-home arrangements and travel restrictions, including increased exposure to potential cybersecurity breaches and attacks, disruptions or delays in product assembly and fulfillment and limitations on our selling and marketing efforts; our ability to execute our business and growth strategies; the impact on our corporate culture and ability to attract, hire and retain necessary qualified employees to develop and expand our business; and the impairment of goodwill and other intangible assets in the event of a significant decline in our financial performance. The extent to which the COVID-19 pandemic will continue to impact our business, operations, and financial results is uncertain and cannot be predicted, and there can be no assurance that the COVID-19 pandemic will not continue to have a material and adverse effect on our business, operations and financial results during any quarter or year in which we are affected. Other factors, risks, trends and uncertainties that could cause our actual results to differ materially from those expressed in or implied by forward-looking statements are described below in this Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the Securities and Exchange Commission ("SEC") on March 16, 2020, and in our other filings with the SEC. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events, or otherwise, except as may be required under applicable securities law.

1


PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements (unaudited)
PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share and per share amounts)
AssetsSeptember 30, 2020December 31, 2019
Current assets:  
Cash and cash equivalents$55,755 $28,036 
Accounts receivable – net40,106 41,774 
Inventories – net27,113 19,326 
Other current assets3,438 4,427 
Total current assets126,412 93,563 
Property, plant and equipment – net13,810 14,351 
Goodwill41,214 41,386 
Intangible assets – net34,247 32,948 
Lease right-of-use assets2,351 3,017 
Other assets3,767 4,347 
Total Assets$221,801 $189,612 
Liabilities and Shareholders’ Equity  
Current liabilities:  
Current portion of long-term debt$657 $630 
Accounts payable16,372 16,385 
Accrued salaries and benefits9,730 7,769 
Accrued expenses2,549 3,176 
Lease liabilities - current portion1,132 2,060 
Customer deposits and deferred service revenue11,067 12,084 
Total current liabilities41,507 42,104 
Lease liabilities - net of current portion1,300 1,021 
Deferred service revenue – non current1,646 3,916 
Long-term debt104,867 62,414 
Other long-term liabilities5,706 7,310 
Total liabilities155,026 116,765 
Commitments and contingencies
Shareholders’ Equity:  
Preferred stock, $.02 par value, 1,000,000 shares authorized
  
Common stock, $.02 par value, 58,000,000 and 29,000,000 shares authorized, 19,315,272 and 18,360,205 shares issued, 18,263,416 and 16,629,177 outstanding at September 30, 2020 and December 31, 2019, respectively
386 367 
Additional paid in capital109,772 94,372 
Accumulated deficit(33,741)(10,144)
Accumulated other comprehensive loss(5,059)(5,368)
Treasury stock, at cost, 1,051,856 shares and 1,731,028 shares at September 30, 2020 and December 31, 2019, respectively
(4,583)(6,380)
Total shareholders’ equity66,775 72,847 
Total Liabilities and Shareholders’ Equity$221,801 $189,612 
See accompanying notes to unaudited interim condensed consolidated financial statements
2


PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)

Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net revenues:    
Product$20,470 $15,904 $51,437 $46,149 
Service16,877 13,937 50,952 41,514 
Contract17,500 15,539 52,881 46,646 
 54,847 45,380 155,270 134,309 
Costs of sales:    
Product15,995 12,259 40,882 34,912 
Service11,252 9,482 33,810 29,868 
Contract15,929 14,643 48,781 42,679 
 43,176 36,384 123,473 107,459 
Gross margin11,671 8,996 31,797 26,850 
Operating expenses:    
Selling, general and administrative10,512 9,539 31,988 27,162 
Research and development4,210 3,448 13,613 9,233 
Amortization of identifiable intangible assets257  677  
Adjustment to contingent consideration liability(2,310) (2,310) 
 12,669 12,987 43,968 36,395 
Operating loss(998)(3,991)(12,171)(9,545)
Other expense, net(486)(401)(1,250)(1,205)
Interest expense, net(2,235)(1,588)(6,318)(2,978)
Loss on extinguishment of debt  (8,123) 
Loss before benefit from income taxes(3,719)(5,980)(27,862)(13,728)
Benefit from income taxes8 78 4,265 3,988 
Net loss$(3,711)$(5,902)$(23,597)$(9,740)
Basic Earnings per Share:    
Net loss$(0.20)$(0.36)$(1.30)$(0.61)
Diluted Earnings per Share:
Net loss$(0.20)$(0.36)$(1.30)$(0.61)
Weighted average shares outstanding:    
Basic18,250 16,300 18,145 16,086 
Diluted18,250 16,300 18,145 16,086 
See accompanying notes to unaudited interim condensed consolidated financial statements

3


PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)

Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net loss$(3,711)$(5,902)$(23,597)$(9,740)
Other comprehensive (loss) income, net of applicable tax:    
Foreign currency translation adjustments(50)(357)309 (236)
Comprehensive loss$(3,761)$(6,259)$(23,288)$(9,976)
See accompanying notes to unaudited interim condensed consolidated financial statements
4


PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited, in thousands)
Common StockAdditional Paid in CapitalAccumulated deficitAccumulated
Other
Comprehensive
Loss
Treasury StockTotal
Shareholders’
Equity
SharesAmountSharesAmount
Balances at December 31, 201918,360 $367 $94,372 $(10,144)$(5,368)1,731 $(6,380)$72,847 
Net loss— — — (10,910)— — — (10,910)
Issuance of common stock upon the exercise of stock options2 — 30 — — — 30 
Net issuance of restricted stock awards21 — — — — —  
Treasury stock acquired from employees upon vesting or forfeiture of restricted stock— — — — — 38 (524)(524)
Issuance of restricted stock for acquisition908 19 — — — — — 19 
Equity component of redeemed 2024 convertible notes (net of deferred taxes of $1.8 million)
(7,988)(722)2,435 (5,553)
Equity component of issued 2026 convertible notes (net of deferred taxes of $6.2 million and issuance costs of $0.9 million)
— — 19,097 — — — — 19,097 
Stock-based compensation— — 1,089 — — — — 1,089 
Foreign currency translation adjustments— — — — 201 — — 201 
Balances at March 31, 202019,291 $386 $106,600 $(21,054)$(5,167)1,047 $(4,469)$76,296 
Net loss— — — (8,976)— — — (8,976)
Issuance of common stock upon the exercise of stock options4 — 12 — — — — 12 
Treasury stock acquired from employees upon vesting or forfeiture of restricted stock— — (195)— — 3 192 (3)
Stock-based compensation— — 1,123 — — — — 1,123 
Foreign currency translation adjustments— — — — 158— — 158 
Balances at June 30, 202019,295 $386 $107,540 $(30,030)$(5,009)1,050 $(4,277)$68,610 
Net loss— — — (3,711)— — — (3,711)
Issuance of common stock upon the exercise of stock options20 — 394 — — — — 394 
Net issuance of restricted awards— — 833 — — — — 833 
Treasury stock acquired from employees upon vesting or forfeiture of restricted stock— — — — — 2 (306)(306)
Stock-based compensation— — 1,005 — — — — 1,005 
Foreign currency translation adjustments— — — — (50)— — (50)
Balances at September 30, 202019,315 $386 $109,772 $(33,741)$(5,059)1,052 $(4,583)$66,775 
See accompanying notes to unaudited interim condensed consolidated financial statements
5


PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited, in thousands)
Common StockAdditional paid in capitalRetained
Earnings (accumulated deficit)
Accumulated
Other
Comprehensive
Loss
Treasury StockTotal
Shareholders’
Equity
SharesAmountSharesAmount
Balances at December 31, 201817,878 $357 $50,251 $5,427 $(4,253)1,708 $(5,836)$45,946 
Net loss— — — (2,729)— — — (2,729)
Issuance of common stock upon the exercise of stock options78 — 30 — — — — 30 
Stock-based compensation— — 248 — — — — 248 
Foreign currency translation adjustments— — — — (10)— — (10)
Balances at March 31, 201917,956 $357 $50,529 $2,698 $(4,263)1,708 $(5,836)$43,485 
Net loss— — — (1,109)— — — (1,109)
Issuance of common stock upon the exercise of stock options79 3 210 — — — — 213 
Stock-based compensation— — 602 — — — — 602 
Foreign currency translation adjustments— — — — 131 — — 131 
Convertible notes conversion discount (net of deferred taxes of $4.1 million and issuance costs of $1.1 million)
— — 12,465 — — — — 12,465 
Balances at June 30, 201918,035 $360 $63,806 $1,589 $(4,132)1,708 $(5,836)$55,787 
Net loss— — — (5,902)— — — (5,902)
Issuance of common stock upon the exercise of stock options18 2 38 — — — — 40 
Stock-based compensation— — 988 — — — — 988 
Foreign currency translation adjustments— — — — (357)— — (357)
Balances at September 30, 201918,053 $362 $64,832 $(4,313)$(4,489)1,708 $(5,836)$50,556 
See accompanying notes to unaudited interim condensed consolidated financial statements

6


PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
September 30,
 20202019
Cash flows from operating activities:  
Net loss$(23,597)$(9,740)
Adjustments to reconcile net loss to net cash used in operating activities:  
Depreciation, amortization and accretion10,152 4,993 
Current expected credit losses912 693 
Provision for obsolete inventory2,158 1,240 
Stock-based compensation3,217 1,838 
Loss on debt extinguishment8,123  
Adjustment to contingent consideration liability(2,310) 
Deferred income tax(4,372)(4,065)
Changes in operating assets and liabilities:  
Accounts receivable756 (3,318)
Inventories(9,945)1,466 
Other current assets989 (1,934)
Other assets597 158 
Accounts payable(655)(3,715)
Accrued salaries and benefits2,794 1,479 
Accrued expenses(627)2,936 
Customer deposits and deferred service revenue(3,287)1,107 
Other long-term liabilities706 (2,758)
Net cash used in operating activities(14,389)(9,620)
Cash flows from investing activities:  
Acquisitions, net of cash acquired (7,000)
Settlement of working capital for acquisitions191  
Capital expenditures(692)(2,352)
Capitalization of software costs(6,369)(2,283)
Net cash used in investing activities(6,870)(11,635)
Cash flows from financing activities:  
Payments of long-term debt(471) 
Payment of contingent consideration (2,550)
Payments of bank borrowings (17,459)
Proceeds from bank borrowings 9,640 
Payments for the extinguishment of notes payable(66,250) 
Proceeds from notes payable, net of issuance costs115,786 75,039 
Treasury stock acquired from employees upon vesting or forfeiture of restricted stock(829) 
Proceeds from exercise of stock options
436 283 
Net cash provided by financing activities48,672 64,953 
Effect of exchange rate changes on cash and cash equivalents306 (236)
Net increase in cash and cash equivalents27,719 43,462 
Cash and cash equivalents at beginning of period28,036 3,485 
Cash and equivalents at end of period$55,755 $46,947 
See accompanying notes to unaudited interim condensed consolidated financial statements
7



PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
September 30,
20202019
Supplemental disclosures of cash flow information:
Cash paid for interest1,339 153 
Income taxes, net of refunds184 125 
Capital expenditures recorded in accounts payable295  
Capitalized software recorded in accounts payable347  
See accompanying notes to unaudited interim condensed consolidated financial statements
8


PAR TECHNOLOGY CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Basis of presentation

The accompanying unaudited interim condensed consolidated financial statements ("financial statements") of PAR Technology Corporation and its consolidated subsidiaries (collectively, the “Company”, “PAR”, "we", "us" or "our Company") have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and the instructions to Form 10-Q and Regulation S-X pertaining to interim financial statements as promulgated by the Securities and Exchange Commission ("SEC"). In the opinion of management, the Company's financial statements include all normal and recurring adjustments necessary in order to make the financial statements not misleading and to provide a fair presentation of our financial results for the interim period included in this Quarterly Report on Form 10-Q (this “Quarterly Report”). Interim results are not necessarily indicative of results for the full year or any future periods. The information included in this Quarterly Report should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on March 16, 2020 ("2019 Annual Report").

The preparation of the 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, valuation allowances for receivables, inventories, and measurement of contingent consideration at fair value. Actual results could differ from those estimates.

The Company operates in two distinct reporting segments, Restaurant/Retail and Government. The Company’s chief operating decision maker is the Company’s Chief Executive Officer. The Restaurant/Retail reporting segment provides point-of-sale (POS) software and hardware, back-office software, and integrated technical solutions to the restaurant and retail industries. The Government reporting segment provides intelligence, surveillance, and reconnaissance solutions and mission systems support to the United States Department of Defense and other Federal agencies. In addition, the financial statements include corporate operations, which are comprised of enterprise-wide functional departments.

Additionally, the Company has reclassified certain costs and expenses in the condensed consolidated statement of operations for the three and nine months ended September 30, 2019, amounting to $0.2 million and $0.7 million, respectively, from amortization of intangible assets to cost of service to conform to current period presentation. These reclassifications had no effect on previously reported total costs and operating expenses or net losses.

Use of Estimates

Preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Our estimates are subject to uncertainties associated with the ongoing COVID-19 pandemic; the extent to which the COVID-19 pandemic will continue to impact these estimates is uncertain and cannot be predicted, and there can be no assurance that the COVID-19 pandemic will not have a material and adverse effect on these estimates.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update ("ASU") 2016-13, "Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date, based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The Company adopted ASU 2016-13 effective January 1, 2020, and the application of the standard had no material impact on the Company's financial statements for the three and nine months ended September 30, 2020.

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In January 2017, the FASB issued ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates Step 2 from the goodwill impairment test which requires entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company adopted ASU 2017-04 effective January 1, 2020, and the application of the standard had no material impact on the Company's financial statements for the three and nine months ended September 30, 2020.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the fair value measurement disclosures with the primary focus to improve effectiveness of disclosures in the notes to the financial statements that is most important to the users. ASU 2018-13 modifies the required disclosures related to the valuation techniques and inputs used, uncertainty in measurement, and changes in measurements applied. The Company adopted ASU 2018-13 effective January 1, 2020, and the application of the standard had no material impact on the Company's financial statements for the three and nine months ended September 30, 2020.

In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other (Topic 350) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” ASU 2018-15 provides guidance on the measurement of costs for internal-use software during the design, development, and implementation stages for customers in a cloud hosting arrangement. ASU 2018-15 also requires the capitalized costs associated with the design, development and implementation of cloud hosted arrangements to be amortized over the term of the hosting arrangement. The Company adopted ASU 2018-15 effective January 1, 2020, and the application of the standard had no material impact on the Company's financial statements for the three and nine months ended September 30, 2020.

Recently Issued Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", 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. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently assessing the impact of this standard on its financial statements.

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)”, which is intended to reduce the number of accounting models for convertible debt instruments and convertible preferred stock, and amend guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021, with early adoption permitted. The Company is currently assessing the impact of this standard on its financial statements.

With the exception of the new standards discussed above, there were no other recent accounting pronouncements or changes in accounting pronouncements during the three and nine months ended September 30, 2020 that are of significance or potential significance to the Company, as compared to the recent accounting pronouncements described in the 2019 Annual Report.

Note 2 - Revenue Recognition

Our revenue is derived from Software as a Service (SaaS), hardware and software sales, software activation, hardware support, installations, maintenance and professional services. Accounting Standards Codification ("ASC") 606: "Revenue from Contracts with Customers" requires us 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 non-distinct performance obligations, until the combined performance obligations are determined to be distinct and the combined performance obligation is then recognized as revenue over time or at a point in time depending on when control is transferred.

We evaluated the potential performance obligations within our Restaurant/Retail reporting segment and evaluated whether each performance obligation met the ASC 606 criteria to be considered distinct performance obligations. Revenue in the Restaurant/Retail reporting segment is recognized at a point in time for 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/
10


Retail reporting segment relating to SaaS, our hardware Advanced Exchange, 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. Our support services are stand-ready obligations that are provided over the life of the contract, generally 12 months. We offer installation services to our customers for hardware and software for which we primarily hire third-party contractors to install the equipment on our behalf. We pay third-party contractors installation service fees at mutually agreed rates. When third-party installers are used, we determine whether the nature of our performance obligations is to provide the specified goods or services ourselves (principal) or to arrange for a third-party to provide the goods or services (agent). In direct customer arrangements, we have discretion over our pricing; we are primarily responsible for providing a good or service; and we have inventory risk before the good or service is transferred to the customer. As a result, we have concluded that we are the principal in the arrangement and record installation revenue on a gross basis.

Our contracts typically require payment within 30 to 90 days from the shipping date or installation date. The primary method used to estimate stand-alone selling price, is by referring to the price that we charge for that good or service when we sell it separately under similar circumstances to similar customers. The Company determines stand-alone selling price as follows: hardware, software (on-premises and SaaS) and software activation (which is a one-time fee charged at the initial offering of software) 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, including Advanced Exchange, installation and maintenance; software upgrades; and professional services, including project management, is recognized by using an expected cost plus margin.

Our revenue in the Government reporting segment is generally recognized over time as control of products or services is generally transferred continuously to our customers. While revenue generated by the Government reporting segment is predominantly related to services, we do generate revenue from sales of materials, software, hardware, and maintenance. For the Government reporting segment, cost plus fixed fee contract portfolio revenue is recognized over time using costs incurred as of a determination date to measure progress toward satisfying our performance obligations. Incurred costs represent 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 and programs involve the use of various techniques to estimate total contract revenue and costs. For long-term fixed price contracts, we estimate the profit, as the difference between the total estimated revenue and expected costs to complete a contract, and recognize it 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; the cost and availability of materials; and the performance of subcontractors. Revenue and profit in future periods of contract performance are recognized using the same assumptions, adjusted for estimated costs to complete a contract. Once the services provided are determined to be distinct or not distinct, we evaluate how to allocate the transaction price. Generally, the Government reporting segment does not sell the same good or service to similar customers and the contract performance obligations are unique to each government contract. The performance obligations are typically not distinct; however, in cases where there are distinct performance obligations, the transaction price is allocated using the relative stand-alone selling price method, which is based upon the standalone selling price of each respective 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 determining when to recognize revenue, we analyze whether our performance obligations in our Government contracts are satisfied over a period of time or at a point in time. In general, our 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.

We generally anticipate receipt of payment within 30 to 90 days from satisfaction of a performance obligation. None of our contracts as of December 31, 2019 or September 30, 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 after September 30, 2020 and September 30, 2019, respectively, for work that has not yet been performed. The activity of outstanding performance obligations as is relates to customer deposits and deferred service revenue is as follows:
11


(in thousands)20202019
Beginning balance - January 116,000 14,258 
Change in deferred revenue(4,677)828 
Changes in customer deposits1,390 (115)
Ending balance - September 3012,713 14,971 
In the Restaurant/Retail reporting segment most performance obligations over one year are related to service and support contracts, approximately 87% of which we expect to fulfill within one year and 100% within 60 months. At September 30, 2020 and December 31, 2019, transaction prices allocated to future performance obligations were $9.9 million and $10.9 million, respectively.

During the three months ended September 30, 2020 and September 30, 2019, we recognized revenue of $2.2 million and $2.1 million, respectively, which are included in contract liabilities at the beginning of each such period. During the nine months ended September 30, 2020 and September 30, 2019, we recognized revenue of $9.9 million and $8.6 million, respectively, which are included in contract liabilities at the beginning of the respective period.

The value of existing contracts in the Government reporting segment at September 30, 2020, net of amounts relating to work performed to that date, was approximately $162.5 million, of which $36.0 million was funded, and at December 31, 2019, net of amounts relating to work performed to that date, was approximately $148.7 million, of which $32.8 million was funded. The value of existing contracts, net of amounts relating to work performed at September 30, 2020 are expected to be recognized as revenue over time as follows (in thousands):

Next 12 Months$66,666 
Months 13-2443,361 
Months 25-3631,156 
Thereafter21,272 
TOTAL$162,455 


Disaggregated Revenue
The Company disaggregates revenue from customer contracts by major product group for each reporting segment. The Company believes this method best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Disaggregation of revenue for the three and nine months ended September 30, 2020 and September 30, 2019 is as follows:
(in thousands)Three months ended September 30, 2020
Restaurant/Retail - Point in TimeRestaurant/Retail - Over TimeGovernment - Over Time
Restaurant/Retail$29,739 $7,608 $ 
Mission Systems$ $ $8,084 
ISR Solutions$ $ $8,943 
Product$ $ $473 
TOTAL$29,739 $7,608 $17,500 
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(in thousands)Three months ended September 30, 2019
Restaurant/Retail - Point in TimeRestaurant/Retail - Over TimeGovernment - Over Time
Restaurant/Retail$23,599 $5,508 $ 
Grocery335 399  
Mission Systems  8,444 
ISR Solutions  7,057 
Product  38 
TOTAL$23,934 $5,907 $15,539 
(in thousands)Nine months ended September 30, 2020
Restaurant/Retail - Point in TimeRestaurant/Retail - Over TimeGovernment - Over Time
Restaurant/Retail$77,373 $25,016 $ 
Mission Systems  24,620 
ISR Solutions  27,457 
Product  804 
TOTAL$77,373 $25,016 $52,881 

(in thousands)Nine months ended September 30, 2019
Restaurant/Retail - Point in TimeRestaurant/Retail - Over TimeGovernment - Over Time
Restaurant/Retail$65,849 $18,718 $ 
Grocery1,067 2,029  
Mission Systems  25,177 
ISR Solutions  20,603 
Product  866 
TOTAL$66,916 $20,747 $46,646 


The Company has reclassified certain revenue for the three and nine months ended September 30, 2019, amounting to $0.1 million and $0.9 million, respectively, from Mission Systems and ISR Solutions to Product to conform to current period presentation. These reclassifications had no effect on previously reported total "Government - Over Time" revenue.

Practical Expedients and Exemptions

The Company generally expenses sales commissions when incurred because the amortization period is less than one year or the total amount of commissions is immaterial. We record these expenses in selling, general and administrative ("SG&A") in the condensed consolidated statements of operations.

We elected to exclude from the transaction price measurement, all taxes assessed by a governmental authority 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 3 — Acquisitions

Drive-Thru Acquisition

Effective September 30, 2019, the Company, through its wholly-owned subsidiary ParTech, Inc. ("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 was $8.4 million
13


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 "Drive-Thru Acquisition").

Restaurant Magic Acquisition

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 (issued in January 2020) and $2.0 million was paid by delivery of a subordinated promissory note (the "Restaurant Magic Acquisition"). 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 (the “Earn-Out”). As of December 31, 2019, the value of the Earn-Out based on a Monte Carlo simulation was $3.3 million. During the three-months ended September 30, 2020, a $2.3 million fair value adjustment was recorded to earnings to reflect a reduction in the fair value of the Earn-Out to $1.0 million; see "Note 13 - Fair Value of Financial Instruments" for additional information. The adjustment was recorded as a component of Operating expense for the nine months ended September 30, 2020. 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.

The Company issued restricted stock units in connection with its assumption of awards granted by Restaurant Magic to its employees and contractors prior to the closing of the acquisition.

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
Developed technology$16,400 
Customer relationships1,100 
Trade name900 
Tangible assets1,344 
Goodwill27,773 
Total assets47,517 
Accounts payable and accrued expenses629 
Deferred revenue715 
Earn-Out liability3,340 
Consideration paid$42,833 


Unaudited Pro Forma Financial Information

For the three months ended September 30, 2020, the Drive-Thru Acquisition and the Restaurant Magic Acquisition resulted in additional revenues of $5.7 million and $2.2 million, respectively. For the nine months ended September 30, 2020, the Drive-Thru Acquisition and the Restaurant Magic Acquisition resulted in additional revenues of $13.2 million and $6.2 million, respectively. The Company determined it is impractical to report net loss for the Drive-Thru Acquisition and the Restaurant Magic Acquisition for the three and nine months ended September 30, 2020. The following unaudited pro forma financial information presents our results as if both acquisitions occurred January 1, 2019:
(in thousands)Three months ended September 30, 2019Nine months ended September 30, 2019
Total revenue$51,938 $154,211 
Net loss$(5,990)$(5,209)
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Note 4 — Divestiture

Sale of SureCheck

During the second quarter of 2019, ParTech entered into an asset purchase agreement to sell substantially all of the assets relating to the SureCheck product group within the Company's Restaurant/Retail reporting segment. The sale does not qualify for treatment as a discontinued operation, and therefore, the SureCheck product group is included in the Company’s continuing operations for all periods presented.

Note 5 — Accounts Receivable, Net

The Company’s accounts receivable, net, consists of:
(in thousands)September 30, 2020December 31, 2019
Government segment:  
Billed$8,460 $11,608 
Advanced billings(600)(608)
 7,860 11,000 
Restaurant/Retail segment:32,246 30,774 
Accounts receivable - net$40,106 $41,774 

At September 30, 2020 and December 31, 2019, the Company had current, expected credit loss of $1.9 million and $1.8 million, respectively, against accounts receivable for the Restaurant/Retail reporting segment. Changes in the current, expected credit loss during the nine months ended September 30, 2020 were as follows:
(in thousands)20202019
Beginning Balance - January 1$1,849 $1,351 
Provisions912 975 
Write-offs(881)(321)
Recoveries  
Ending Balance - September 30$1,880 $2,005 


All receivables recorded as of September 30, 2020 and December 31, 2019 represent unconditional rights to payments from customers.

Note 6 — Inventories

Inventories are primarily used in the manufacture, maintenance and service of products within the Restaurant/Retail reporting segment.  The components of inventories, net, consist of the following:
(in thousands)September 30, 2020December 31, 2019
Finished goods$14,055 $8,320 
Component parts7,681 6,768 
Service parts5,377 4,238 
 $27,113 $19,326 

At September 30, 2020 and December 31, 2019, the Company had inventory reserves of $12.1 million and $9.6 million, respectively, against inventories used in the Restaurant/Retail reporting segment, which primarily relate to service parts.

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Note 7 — Identifiable Intangible Assets and Goodwill

Identifiable intangible assets represent intangible assets acquired by the Company in connection with its acquisition of Brink Software Inc., the Drive-Thru Acquisition and the Restaurant Magic Acquisition, and software development costs.  The Company capitalizes certain software development costs for software used in its Restaurant/Retail reporting segment. Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development ("R&D") costs. The technological feasibility of a software product is established when the Company has completed all planning, designing, coding, and testing activities necessary to establish that the software product meets its design specifications, including functionality, features, and technical performance requirements. Software development costs incurred after establishing the technological feasibility of software sold as a perpetual license, as defined within ASC 985-20, "Software – Costs of Software to be sold, Leased, or Marketed", are capitalized and amortized on a product-by-product basis when the software product is available for general release to customers. Included in identifiable intangible assets are approximately $5.3 million and $