PAR TECHNOLOGY CORP (PAR) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and the notes thereto included under Part II, Item 8 of this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under “Risk Factors” in Part I, Item 1A above.
Overview
We, through our wholly owned subsidiaries - ParTech, Inc. and PAR Government Systems Corporation - operate in two distinct reporting segments, Restaurant/Retail and Government.
Our Restaurant/Retail segment is a leading provider of software, hardware, and services to the restaurant and retail industries, with more than 500 customers currently using our software products and more than 50,000 active restaurant locations. We provide 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 our Brink POS cloud software for front-of-house, our Data Central back-office cloud solution, our PAR Pay and PAR Payment Services for payment solutions, and our Punchh customer loyalty and engagement solution onto a unified commerce cloud platform. Our unified commerce cloud platform delivers an integrated suite of modern solutions that are extensible and built on open APIs that retain flexibility and the market optionality of an open platform.
Our 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 Government segment is focused on three principal offerings, ISR solutions and mission systems operations and maintenance, with additional revenue from a small number of licensed software products for use in analytic and operational environments that leverage geospatial intelligence data. We believe our highly relevant technical competencies, intellectual property, and investments in new technologies provide opportunities to offer systems integration, products, and highly-specialized service solutions to the DoD, intelligence community, and other federal agencies. The general uncertainty in U.S. defense total workforce policies (military, civilian, and contract), procurement cycles, and spending levels for the next several years are factors we monitor as we develop and implement our business strategy for our Government segment.
COVID-19 Update
The COVID-19 pandemic continues to have widespread, rapidly evolving and unpredictable impacts on global economies, inflation, supply chains, work force participation and wages, and has created significant volatility and disruption in financial markets. Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity. We have taken actions by continuing our work from home policy, permitting only critical business travel, maintaining safety stock inventory and, when possible sourcing materials and components from multiple suppliers, and regularly monitor pricing of our services and products. We continue to actively monitor the situation and will continue to adapt our business operations as necessary.
Further discussion of the potential impacts of the COVID-19 pandemic on our business can be found in the section titled "Risk Factors" included in Part I, Item 1A of this Annual Report.
Business Highlights and Recent Developments
•Punchh Acquisition: On April 8, 2021, we acquired Punchh, Inc. (the “Punchh Acquisition”) for approximately $507.7 million (“Purchase Consideration”). We financed a portion of the Purchase Consideration through a combination of equity and debt, which included proceeds from the sale of $160.0 million of our common stock and a $180.0 million term loan (the “Owl Rock Term Loan”) under 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”). With the extension of Punchh®, a SaaS customer loyalty and engagement solution, we launched our unified commerce cloud platform.
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•2021 Public Offering of Common Stock: On September 17, 2021, we sold 982,143 shares of common stock to the public at a price of $56.00 per share and recorded net proceeds of $52.5 million.
•1.50% Convertible Senior Notes Due 2027: On September 17, 2021, we sold $265.0 million of the 2027 Notes, and recorded net proceeds of approximately $256.8 million.
•Use of Proceeds from the 2027 Notes and Sale of Common Stock: We used the net proceeds from our September 2021 sale of 2027 Notes and common stock to repay in full and terminate the Owl Rock Term Loan. We intend to use the balance of the net proceeds for general corporate purposes, including continued investment in the growth of our businesses, through the acquisition or investment in complementary businesses or assets, and for other working capital purposes.
•The IDIQ Contract, the largest single contract award in PAR Government's History: In September 2021, the U.S. Air Force Research Laboratory Information Directorate awarded our Government segment a $490.4 million ceiling, single award, IDIQ contract with cost-plus-fixed-fee completion and firm-fixed-price type orders for Counter-small Unmanned Aircraft System software, hardware, and technical documentation. The value of this contract is dependent on those amounts committed under the contract by government agencies, and as of December 31, 2021, $42.8 million was committed of which $5.8 million was funded, net of amounts relating to work performed to that date.
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RESULTS OF OPERATIONS
Results of operations for the years ended December 31, 2021, 2020, and 2019 were as follows:
Consolidated Results
| Year Ended December 31, | Percentage of total revenue | Increase (decrease) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||||||||
| Net revenues: | ||||||||||||||||||||||||||
| Product | $ | 105,014 | $ | 73,228 | $ | 66,329 | 37.2 | % | 34.3 | % | 35.5 | % | 43.4 | % | 10.4 | % | ||||||||||
| Service | 105,337 | 69,284 | 56,978 | 37.2 | % | 32.4 | % | 30.4 | % | 52.0 | % | 21.6 | % | |||||||||||||
| Contract | 72,525 | 71,274 | 63,925 | 25.6 | % | 33.3 | % | 34.1 | % | 1.8 | % | 11.5 | % | |||||||||||||
| Total revenues, net | $ | 282,876 | $ | 213,786 | $ | 187,232 | 100.0 | % | 100.0 | % | 100.0 | % | 32.3 | % | 14.2 | % | ||||||||||
| Gross margin | ||||||||||||||||||||||||||
| Product | 24,173 | 14,341 | 15,140 | 8.5 | % | 6.7 | % | 8.1 | % | 68.6 | % | (5.3) | % | |||||||||||||
| Service | 32,111 | 19,351 | 16,589 | 11.4 | % | 9.1 | % | 8.9 | % | 65.9 | % | 16.6 | % | |||||||||||||
| Contract | 5,837 | 5,633 | 5,682 | 2.1 | % | 2.6 | % | 3.0 | % | 3.6 | % | (0.9) | % | |||||||||||||
| Total gross margin | 62,121 | 39,325 | 37,411 | 22.0 | % | 18.4 | % | 20.0 | % | 58.0 | % | 5.1 | % | |||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| Selling, general and administrative | 83,998 | 46,196 | 38,068 | 29.7 | % | 21.6 | % | 20.3 | % | 81.8 | % | 21.4 | % | |||||||||||||
| Research and development | 34,579 | 19,252 | 13,372 | 12.2 | % | 9.0 | % | 7.1 | % | 79.6 | % | 44.0 | % | |||||||||||||
| Amortization of identifiable intangible assets | 1,825 | 1,163 | 156 | 0.6 | % | 0.5 | % | 0.1 | % | 56.9 | % | 200 % | ||||||||||||||
| Adjustment to contingent consideration liability | — | (3,340) | — | — | % | (1.6) | % | — | % | (100.0) | % | N/A | ||||||||||||||
| Gain on insurance proceeds | (4,400) | — | — | (1.5) | % | — | % | — | % | N/A | N/A | |||||||||||||||
| Total operating expenses | 116,002 | 63,271 | 51,596 | 41.0 | % | 29.6 | % | 27.6 | % | 83.3 | % | 22.6 | % | |||||||||||||
| Operating loss | (53,881) | (23,946) | (14,185) | (19.0) | % | (11.2) | % | (7.6) | % | 125.0 | % | 68.8 | % | |||||||||||||
| Other (expense) income, net | (1,279) | 808 | (449) | (0.5) | % | 0.4 | % | (0.2) | % | (200)% | (200)% | |||||||||||||||
| Loss on extinguishment of debt | (11,916) | (8,123) | — | (4.2) | % | (3.8) | % | — | % | 46.7 | % | N/A | ||||||||||||||
| Interest expense, net | (18,147) | (8,287) | (4,571) | (6.4) | % | (3.9) | % | (2.4) | % | 119.0 | % | 81.3 | % | |||||||||||||
| Loss before benefit from income taxes | (85,223) | (39,548) | (19,205) | (30.1) | % | (18.5) | % | (10.3) | % | 115.5 | % | 105.9 | % | |||||||||||||
| Benefit from income taxes | 9,424 | 2,986 | 3,634 | 3.3 | % | 1.4 | % | 1.9 | % | 200 % | (17.8) | % | ||||||||||||||
| Net loss | $ | (75,799) | $ | (36,562) | $ | (15,571) | (26.8) | % | (17.1) | % | (8.3) | % | 107.3 | % | 134.8 | % |
Revenues, Net
| Year Ended December 31, | Percentage of total revenue | Increase (decrease) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||||||||
| Revenues, net: | ||||||||||||||||||||||||||
| Product | $ | 105,014 | $ | 73,228 | $ | 66,329 | 37.2 | % | 34.3 | % | 35.5 | % | 43.4 | % | 10.4 | % | ||||||||||
| Service | 105,337 | 69,284 | 56,978 | 37.2 | % | 32.4 | % | 30.4 | % | 52.0 | % | 21.6 | % | |||||||||||||
| Contract | 72,525 | 71,274 | 63,925 | 25.6 | % | 33.3 | % | 34.1 | % | 1.8 | % | 11.5 | % | |||||||||||||
| Total revenues, net | $ | 282,876 | $ | 213,786 | $ | 187,232 | 100.0 | % | 100.0 | % | 100.0 | % | 32.3 | % | 14.2 | % |
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Total product, service and contract revenues were $282.9 million for the year ended December 31, 2021, an increase of 69.1 million or 32.3% compared to $213.8 million for the year ended December 31, 2020.
Product revenues were $105.0 million for the year ended December 31, 2021, an increase of $31.8 million or 43.4% compared to $73.2 million for the year ended December 31, 2020. The increase was driven by continued growth in hardware refresh purchases by some of our legacy Tier 1 customers (in part from 2020 delayed hardware
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refresh due to COVID-19) and hardware revenue associated with our rollout of Brink POS to new customers. These hardware refreshes included $15.2 million of growth in terminals, $12.1 million of growth in kitchen display systems and $4.5 million in growth for other hardware (mobile, kiosk, drive-thru) and Pixel Software licenses.
Service revenues were $105.3 million for the year ended December 31, 2021, an increase of $36.0 million or 52.0% compared to $69.3 million for the year ended December 31, 2020. The increase was primarily driven by revenues from Punchh operations of $27.2 million an increase of $7.2 million for other software and services revenue and $1.7 million for hardware repair services.
Contract revenues were $72.5 million for the year ended December 31, 2021, an increase of $1.2 million or 1.8% compared to $71.3 million for the year ended December 31, 2020. The increase was driven by the Government segment's ISR solutions product line revenues.
For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Total revenues were $213.8 million for the year ended December 31, 2020, an increase of $26.6 million or 14.2% compared $187.2 million for the year ended December 31, 2019.
Product revenues were $73.2 million for the year ended December 31, 2020, an increase of $6.9 million or 10.4% compared to $66.3 million for the year ended December 31, 2019. This increase was driven by the acquisition of the assets of 3M Company's Drive-Thru Communications Systems business (the “Drive-Thru Acquisition”) with revenues of $14.6 million. Brink POS related hardware revenue saw an increase of $4.8 million. Partially offsetting these revenue gains were declines in other hardware revenue of $10.5 million, driven by the COVID-19 pandemic. Other decreases included PixelPoint license sales reduction of $1.3 million and SureCheck, our food safety and workforce product solution we sold in 2019 (“SureCheck”), product revenue decrease of $0.7 million as the divestiture of that product line closed during the fourth quarter of 2019.
Service revenues were $69.3 million for the year ended December 31, 2020, an increase of $12.3 million or 21.6% compared to $57.0 million for the year ended December 31, 2019. The increase was primarily due to an increase in revenue of $8.1 million related to the acquisition of AccSys, LLC (“Restaurant Magic”) in December 2019 (the “Restaurant Magic Acquisition”), and $8.7 million of service revenues of which $4.1 million was attributable to Brink POS. Partially offsetting these gains were declines of $2.7 million in SureCheck, product revenue as that product line was divested in fourth quarter 2019 and $1.8 million decline of Drive-Thru product and service revenue.
Contract revenues were $71.3 million for the year ended December 31, 2020, an increase of $7.4 million or 11.5% compared to $63.9 million for the year ended December 31, 2019. The increase was driven by a $7.9 million or a 26.8% increase in the Government segment's ISR solutions product line revenues.
Gross Margin
| Year Ended December 31, | Gross Margin Percentage | Increase (decrease) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||||||||
| Gross margin | ||||||||||||||||||||||||||
| Product | $ | 24,173 | $ | 14,341 | $ | 15,140 | 23.0 | % | 19.6 | % | 22.8 | % | 68.6 | % | (5.3) | % | ||||||||||
| Service | 32,111 | 19,351 | 16,589 | 30.5 | % | 27.9 | % | 29.1 | % | 65.9 | % | 16.6 | % | |||||||||||||
| Contract | 5,837 | 5,633 | 5,682 | 8.0 | % | 7.9 | % | 8.9 | % | 3.6 | % | (0.9) | % | |||||||||||||
| Total gross margin | $ | 62,121 | $ | 39,325 | $ | 37,411 | 22.0 | % | 18.4 | % | 20.0 | % | 58.0 | % | 5.1 | % |
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Total gross margin as a percentage of revenue for the year ended December 31, 2021 was 22.0% as compared to 18.4% for the year ended December 31, 2020.
Product margin for the year ended December 31, 2021 increased to 23.0% as compared to 19.6% for the year ended December 31, 2020. The increase in margin was primarily due to favorable product mix and favorable
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absorption of overhead costs due to a general increase in product sales. The favorable impact from absorption was partially offset by higher material costs from the inflationary impact of COVID-19 to the overall economy. We implemented hardware price increases at the end of the second quarter of 2021 to mitigate the impact of increased material costs.
Service margin for the year ended December 31, 2021 increased to 30.5% as compared to 27.9% for the year ended December 31, 2020. The increase was driven by a higher mix of SaaS software from the Punchh Acquisition and cost improvement initiatives with hosting costs and customer support service. Service margin during the year ended 2021 included $11.8 million of amortization of acquired developed technology compared to $3.3 million of amortization of acquired developed technology during the year ended December 31, 2020. Excluding the amortization of acquired developed technology, service margin was 41.7% compared to 32.7% year-over-year for the years ended December 31, 2021 and 2020, respectively.
Contract margin for the year ended December 31, 2021 was relatively unchanged at 8.0%, compared to 7.9% for the year ended December 31, 2020.
For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Total gross margin as a percentage of revenue for the year ended December 31, 2020 was 18.4% compared to 20.0% for the year ended December 31, 2019.
Product margin for the year ended December 31, 2020 decreased to 19.6% from 22.8% for the year ended December 31, 2019. The product margin decrease was caused by increased freight costs as we accelerated the purchase of inventory early in the COVID-19 pandemic and a $0.9 million disposal of inventory related to the Drive-Thru Acquisition.
Service margin for the year ended December 31, 2020 decreased to 27.9%, from 29.1% for the year ended December 31, 2019. The decrease in service margin was primarily driven by our increased investments in customer service, $0.4 million disposal of service inventory related to the acquisition of assets in the Drive-Thru Acquisition, partially offset by a favorable shift in sales mix that resulted from the Restaurant Magic Acquisition, the Drive-Thru Acquisition and our divestiture of SureCheck. Service margin during the year ended December 31, 2020 included $3.3 million of amortization of acquired developed technology compared to $1.0 million of amortization of acquired developed technology during the year ended December 31, 2019. Excluding the amortization of acquired developed technology, Service margin was 32.7% compared to 30.9% for the year ended December 31, 2020 versus the year ended December 31, 2019.
Contract margin for the year ended December 31, 2020 decreased to 7.9%, from 8.9% for the year ended December 31, 2019, primarily due to increased product services startup costs.
Selling, General and Administrative Expenses (“SG&A”)
| Year Ended December 31, | Percentage of total revenue | Increase (decrease) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||||||||
| Selling, general and administrative | $ | 83,998 | $ | 46,196 | $ | 38,068 | 29.7 | % | 21.6 | % | 20.3 | % | 81.8 | % | 21.4 | % |
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
SG&A expenses were $84.0 million for the year ended December 31, 2021, compared to $46.2 million, an increase of 37.8 million or 81.8% for the year ended December 31, 2020. The increase was primarily driven by $19.3 million of expenses excluding stock-based compensation incurred in the Punchh Acquisition. Other drivers were increases in stock-based compensation of $10.4 million of which $8.7 million was related to the Punchh Acquisition, $4.3 million in corporate expenses, $2.3 million in internal technology infrastructure costs, and $1.5 million for sales and marketing expenses.
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For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
SG&A expenses were $46.2 million for the year ended December 31, 2020, compared to $38.1 million and increase of $8.1 million or 21.4% for the year ended December 31, 2019. The increase was primarily driven by $3.9 million of expenses related to the Restaurant Magic Acquisition and Drive-Thru Acquisition, a $2.5 million increase in stock-based and incentive compensation and a $1.9 million increase in internal technology infrastructure costs.
Research and Development Expenses
| Year Ended December 31, | Percentage of total revenue | Increase (decrease) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||||||||
| Research and development | $ | 34,579 | $ | 19,252 | $ | 13,372 | 12.2 | % | 9.0 | % | 7.1 | % | 79.6 | % | 44.0 | % |
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
R&D expenses were $34.6 million for the year ended December 31, 2021, compared to $19.3 million for the year ended December 31, 2020, an increase of $15.3 million or 79.6%. Primary drivers of the increase include $9.1 million for R&D expense related to Punchh, $4.7 million related to additional investments in our existing software product development, and $1.5 million for product management.
For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
R&D expenses were $19.3 million for the year ended December 31, 2020, compared to $13.4 million for the year ended December 31, 2019 an increase of 5.9 million or 44.0%. The increase was driven by a $4.3 million increase in Brink POS related R&D, $1.9 million for Data Central software development investment, $1.1 million for hardware development and investment, partially offset by our divestiture of SureCheck in the fourth quarter of 2019.
Other Operating Expenses: Amortization of Intangible Assets / Contingent Consideration / Insurance Proceeds
| Year Ended December 31, | Percentage of total revenue | Increase (decrease) | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | |||||||||||||||||
| Amortization of identifiable intangible assets | $ | 1,825 | $ | 1,163 | $ | 156 | 0.6 | % | 0.5 | % | 0.1 | % | 56.9 | % | 200 % | ||||||||||
| Adjustment to contingent consideration liability | — | (3,340) | — | — | % | (1.6) | % | — | % | (100.0) | % | N/A | |||||||||||||
| Gain on insurance proceeds | $ | (4,400) | $ | — | $ | — | (1.6) | % | — | % | — | % | N/A | N/A |
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
During the year ended December 31, 2021, we recorded $1.8 million of amortization expense associated with other intangible assets, compared to $1.2 million of amortization expense recorded during the year ended December 31, 2020. The increase was driven by intangible assets from the Punchh Acquisition.
Also included in operating expense for the year ended December 31, 2021 was a $4.4 million gain on insurance proceeds received in connection with our settlement of a legacy claim. There was no comparable reduction to expense for the year ended December 31, 2020.
Also included in operating expense for the year ended December 31, 2020 was a $3.3 million reduction to the fair value of certain post-closing revenue focused milestones from the Restaurant Magic Acquisition. There was no comparable reduction to expense for the year ended December 31, 2021.
For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
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During the year ended December 31, 2020, we recorded $1.2 million of amortization expense associated with identifiable non-developed technology intangible assets acquired in the Drive-Thru Acquisition, Restaurant Magic Acquisition and our acquisition of Brink Software Inc. in 2014 (the “Brink Acquisition”) compared to $0.2 million of amortization expense recorded during the year ended December 31, 2019 in connection to the same acquisitions.
During the year ended December 31, 2020, we recorded a $3.3 million reversal of the contingent liability in connection with the Restaurant Magic Acquisition.
Other (Expense) Income, Net
| Year Ended December 31, | Percentage of total revenue | Increase (decrease) | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||||||
| Other (expense) income, net | $ | (1,279) | $ | 808 | $ | (449) | (0.5) | % | 0.4 | % | (0.2) | % | (200)% | (200)% |
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Other (expense) income, net, was ($1.3) million for the year ended December 31, 2021, as compared to $0.8 million for the year ended December 31, 2020. Other (expense) income, net primarily includes rental income, net of applicable expenses, foreign currency transactions gains and losses and other non-operating income (expense). The change year-over-year is primarily driven by sales and use tax expense and other miscellaneous expenses.
For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Other income (expense), net, was $0.8 million for the year ended December 31, 2020, as compared to ($0.4) million for the year ended December 31, 2019. Other income (expense), net primarily includes rental income, net of applicable expenses, foreign currency transactions gains and losses and other non-operating income/expenses. The change year-over-year is primarily driven by foreign exchange movements.
Interest Expense, Net
| Year Ended December 31, | Percentage of total revenue | Increase (decrease) | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||||||||
| Interest expense, net | $ | (18,147) | $ | (8,287) | $ | (4,571) | (6.4) | % | (3.9) | % | (2.4) | % | 119.0 | % | 81.3 | % |
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Interest expense, net was $18.1 million for the year ended December 31, 2021, as compared to $8.3 million for the year ended December 31, 2020. This increase was primarily driven by the payment of additional interest with respect to the Owl Rock Term Loan and the 2027 Notes. Interest expense, net includes $8.7 million of non-cash accretion of debt discount and amortization of issuance costs for the year ended December 31, 2021 compared with $4.4 million for the year ended December 31, 2020.
For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Interest expense, net was $8.3 million for the year ended December 31, 2020, as compared to $4.6 million for the year ended December 31, 2019. This increase was primarily driven by interest related to an increase in convertible debt as a result of the issuance of the 2026 Notes net of the partial repurchase of the 2024 Notes in the first quarter of 2020. Interest expense, net includes $4.4 million of non-cash accretion of debt discount and amortization of issuance costs for 2020, compared to $2.5 million for 2019.
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Loss on Extinguishment of Debt
| Year Ended December 31, | Percentage of total revenue | Increase (decrease) | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | |||||||||||||||||
| Loss on extinguishment of debt | $ | (11,916) | $ | (8,123) | $ | — | (4.2) | % | (3.8) | % | — | % | 46.7 | % | N/A |
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
Loss on extinguishment of debt was $11.9 million for the year ended December 31, 2021, related to the repayment of the Owl Rock Term Loan as compared to the loss on extinguishment of debt of $8.1 million related to the repurchase of the 2024 Notes for the year ended December 31, 2020.
For the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019
Loss on the extinguishment of debt was $8.1 million for the year ended December 31, 2020 related to the partial refinance of our 2024 Notes.
Taxes
| Year Ended December 31, | Percentage of total revenue | Increase (decrease) | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| in thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | |||||||||||||||||
| Benefit from income taxes | $ | 9,424 | $ | 2,986 | $ | 3,634 | 3.3 | % | 1.4 | % | 1.9 | % | 200 % | (17.8) | % |
For the Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
The net tax benefit of $9.4 million for the year ended December 31, 2021 was primarily due to a reduction of the Company’s deferred tax valuation allowance which resulted from the establishment of deferred tax liabilities related to the Punchh Acquisition. The net tax benefit of $3.0 million for the year ended December 31, 2020 was driven by the $3.3 million deferred tax benefit impact of the 2026 Notes issuance in February 2020.
Key Performance Indicators and Non-GAAP Financial Measures:
We monitor certain operating data and non-GAAP financial measures in the evaluation and management of our business; certain key operating data and non-GAAP financial measures are provided in this Annual Report as we believe they are useful in facilitating period-to-period comparisons of our business performance. Operating data and non-GAAP financial measures do not reflect and should be viewed independently of our financial performance determined in accordance with GAAP. Operating data and non-GAAP financial measures are not forecasts or indicators of future or expected results and should not have undue reliance placed upon them by investors.
Annual Recurring Revenue (“ARR”)
| Year Ended December 31, | Increase (decrease) | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In thousands | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||
| Brink POS* | $ | 32,120 | $ | 24,705 | $ | 19,220 | 30.0 | % | 28.5 | % | |||||||
| Data Central | 9,390 | 8,755 | — | 7.3 | % | N/A | |||||||||||
| Punchh | 46,686 | — | — | N/A | N/A | ||||||||||||
| Total | $ | 88,196 | $ | 33,460 | $ | 19,220 | 163.6 | % | 74.1 | % |
* Brink POS includes Par Payment Services
ARR is the annualized revenue from software as a service (“SaaS”) and related revenue of our software products. We calculate ARR by annualizing the monthly recurring revenue for all active sites as of the last day of
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each month for the respective reporting period. ARR also includes recurring payment processing services revenue, net of expenses. We charge a per-transaction fee each time a customer payment is processed electronically.
Active Sites
| Year Ended December 31, | Increase (decrease) | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| In thousands | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | |||||||||
| Brink POS* | 15,897 | 11,722 | 9,537 | 35.6 | % | 22.9 | % | |||||||
| Data Central | 6,320 | 5,892 | — | 7.3 | % | N/A | ||||||||
| Punchh | 56,096 | — | — | N/A | N/A |
* Brink POS includes Par Payment Services
Active sites represent locations active on our SaaS software as of the last day of the respective reporting period.
Segment Revenue by Product Line as Percentage of Total Revenue
| Year Ended December 31, | Percentage of total revenue | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (decrease) | ||||||||||||||||||||||||||
| In thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||||||||
| Hardware | $ | 102,066 | $ | 72,029 | $ | 63,811 | 36.1 | % | 33.7 | % | 34.1 | % | 41.7 | % | 12.9 | % | ||||||||||
| Software | 57,854 | 26,384 | 16,820 | 20.5 | % | 12.3 | % | 9.0 | % | 119.3 | % | 56.9 | % | |||||||||||||
| Services | 50,431 | 44,099 | 42,676 | 17.8 | % | 20.6 | % | 22.8 | % | 14.4 | % | 3.3 | % | |||||||||||||
| Total Restaurant/Retail | $ | 210,351 | $ | 142,512 | $ | 123,307 | 74.4 | % | 66.7 | % | 65.9 | % | 47.6 | % | 15.6 | % | ||||||||||
| ISR | 38,311 | 37,448 | 29,541 | 13.5 | % | 17.5 | % | 15.8 | % | 2.3 | % | 26.8 | % | |||||||||||||
| Mission systems | 33,188 | 32,947 | 33,513 | 11.7 | % | 15.4 | % | 17.9 | % | 0.7 | % | (1.7) | % | |||||||||||||
| Product services | 1,026 | 879 | 871 | 0.4 | % | 0.4 | % | 0.5 | % | 16.7 | % | 0.9 | % | |||||||||||||
| Total Government | $ | 72,525 | $ | 71,274 | $ | 63,925 | 25.6 | % | 33.3 | % | 34.1 | % | 1.8 | % | 11.5 | % | ||||||||||
| Total revenue | $ | 282,876 | $ | 213,786 | $ | 187,232 | 100.0 | % | 100.0 | % | 100.0 | % | 32.3 | % | 14.2 | % |
The above table includes 2021 Punchh revenues of $23.9 million for software and $3.3 million for services within the Restaurant/Retail segment.
Recurring and Non-Recurring Revenue as Percentage of Total Revenue
| Year Ended December 31, | Percentage of total revenue | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Increase (decrease) | ||||||||||||||||||||||||||
| In thousands | 2021 | 2020 | 2019 | 2021 | 2020 | 2019 | 2021 vs 2020 | 2020 vs 2019 | ||||||||||||||||||
| Recurring revenue | $ | 88,937 | $ | 54,911 | $ | 42,809 | 31.4 | % | 25.7 | % | 22.9 | % | 62.0 | % | 28.3 | % | ||||||||||
| Non-recurring revenue | 121,414 | 87,601 | 80,498 | 42.9 | % | 41.0 | % | 43.0 | % | 38.6 | % | 8.8 | % | |||||||||||||
| Total Restaurant/Retail | $ | 210,351 | $ | 142,512 | $ | 123,307 | 74.4 | % | 66.7 | % | 65.9 | % | 47.6 | % | 15.6 | % | ||||||||||
| Total Government | $ | 72,525 | $ | 71,274 | $ | 63,925 | 25.6 | % | 33.3 | % | 34.1 | % | 1.8 | % | 11.5 | % | ||||||||||
| Total revenue | $ | 282,876 | $ | 213,786 | $ | 187,232 | 100 | % | 100 | % | 100 | % | 32.3 | % | 14.2 | % |
The above table includes 2021 Punchh revenues of $26.3 million for recurring revenue and $0.9 million of non-recurring revenue within the Restaurant/Retail segment.
Recurring revenue represents all revenue from contracts where there is a predictable revenue pattern occurring in regular intervals with a relatively high degree of probability. This includes SaaS, hardware and software maintenance, and payment processing revenue and excludes the results from Punchh for the years ended December 31, 2020 and 2019, respectively.
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Adjusted EBITDA and Adjusted Net Loss/Adjusted Diluted Net Loss Per Share
We use the non-GAAP measures: EBITDA, adjusted EBITDA, adjusted net loss, and adjusted diluted net loss per share net of tax because we believe they provide useful information to investors as an indicator of the strength and performance of our ongoing business operations and relative comparisons to prior periods.
As used in this Annual Report, EBITDA represents net loss before income taxes, interest expense and depreciation and amortization; Adjusted EBITDA represents EBITDA as adjusted to exclude certain non-cash and non-recurring charges, including stock-based compensation, acquisition expenses, certain pending litigation expenses and other non-recurring charges that may not be indicative of our financial performance; and Adjusted net loss/adjusted diluted net loss per share, net of tax represents the exclusion of amortization of acquired intangible assets, certain non-cash and non-recurring charges, including stock-based compensation, acquisition expense, certain pending litigation expenses and other non-recurring charges that may not be indicative of our financial performance.
EBITDA, adjusted EBITDA, adjusted net loss net of tax, and adjusted diluted net loss per share net of tax are not measures of financial performance or liquidity under GAAP and, should not be considered as alternatives to net income (loss) or cash flow from operating activities as indicators of operating performance or liquidity. Also, these measures may not be comparable to similarly titled captions of other companies.
The tables below provide reconciliations between net loss and EBITDA, adjusted EBITDA and adjusted net loss net of tax.
| Year Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||
| Reconciliation of EBITDA and adjusted EBITDA: | ||||||||||
| Net loss | $ | (75,799) | $ | (36,562) | $ | (15,571) | ||||
| Benefit from income taxes | (9,424) | (2,986) | (3,634) | |||||||
| Interest expense | 18,147 | 8,287 | 4,571 | |||||||
| Depreciation and amortization | 21,421 | 10,097 | 4,726 | |||||||
| EBITDA | $ | (45,655) | $ | (21,164) | $ | (9,908) | ||||
| Stock-based compensation expense (1) | 14,615 | 4,251 | 2,706 | |||||||
| Regulatory matter (2) | 50 | 126 | 554 | |||||||
| Contingent Consideration (3) | — | (3,340) | — | |||||||
| Litigation expense (4) | 790 | — | — | |||||||
| Acquisition costs (5) | 3,612 | — | 600 | |||||||
| Gain on insurance proceeds (6) | (4,400) | — | — | |||||||
| Severance (7) | — | 359 | 497 | |||||||
| Loss on extinguishment of debt (8) | 11,916 | 8,123 | — | |||||||
| SureCheck (9) | — | — | 1,284 | |||||||
| Other expense – net (10) | 1,279 | (808) | 449 | |||||||
| Adjusted EBITDA | $ | (17,793) | $ | (12,453) | $ | (3,818) |
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| 1 | Adjustments reflect stock-based compensation expense within selling, general and administrative expenses and cost of contracts for the years ended December 31, 2021, 2020 and 2019 of $14.6 million, $4.3 million and $2.7 million respectively. |
|---|---|
| 2 | Adjustment reflects the expenses related to our efforts to resolve a regulatory matter and other non-recurring charges of $0.1 million for both the years ended December 31, 2021 and 2020, and $0.6 million for the year ended December 31, 2019. |
| 3 | Adjustment reflects the change to the fair market value of the contingent consideration liability related to the Restaurant Magic Acquisition. |
| 4 | Adjustment reflects expenses accrued for a legal matter of $0.8 million for the year ended December 31, 2021 |
| 5 | Adjustment reflects the expenses incurred in the acquisition of Punchh of $3.6 million and Restaurant Magic of $0.6 million for the years ended December 31, 2021 and 2019, respectively. |
| 6 | Adjustment represents the gain on insurance stemming from a legacy claim of $4.4 million for the year ended December 31, 2021. |
| 7 | Adjustment reflects the severance included in gross margin, selling, general and administrative expense and research and development expense of $0.4 million and $0.5 million for the years ended December 31, 2020 and December 31, 2019, respectively. |
| 8 | Adjustment reflects loss on extinguishment of debt of $11.9 million related to the settlement of debt for the year ended December 31, 2021, and $8.1 million to the repurchase of approximately $66.3 million of the 2024 Notes for the year ended December 31, 2020. |
| 9 | Adjustment reflects the non-cash expenses related to the sale of SureCheck for the year ended December 31, 2019. |
| 10 | Adjustment reflects foreign currency transaction gains and losses, rental income and losses, and other non-recurring expenses recorded in other expense, net in the accompanying statements of operations. |
| Year Ended December 31, | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | ||||||||||||||||||||
| Reconciliation of adjusted net loss/diluted loss per share: | ||||||||||||||||||||||
| Net loss / diluted earnings per share | $ | (75,799) | $ | (3.02) | $ | (36,562) | $ | (1.92) | $ | (15,571) | $ | (0.96) | ||||||||||
| Benefit from income taxes (1) | (10,417) | (0.42) | (3,265) | (0.17) | (4,065) | (0.25) | ||||||||||||||||
| Non-cash interest expense (2) | 8,727 | 0.35 | 4,355 | 0.23 | 2,528 | 0.16 | ||||||||||||||||
| Acquired intangible assets amortization (3) | 13,802 | 0.55 | 4,558 | 0.24 | 1,280 | 0.08 | ||||||||||||||||
| Stock-based compensation expense (4) | 14,615 | 0.58 | 4,251 | 0.22 | 2,706 | 0.17 | ||||||||||||||||
| Regulatory matter (5) | 50 | — | 126 | 0.01 | 554 | 0.03 | ||||||||||||||||
| Contingent Consideration (6) | — | — | (3,340) | (0.18) | — | — | ||||||||||||||||
| Pending litigation expense (7) | 790 | 0.03 | — | — | — | — | ||||||||||||||||
| Acquisition costs (8) | 3,612 | 0.14 | — | — | 600 | 0.04 | ||||||||||||||||
| Gain on insurance proceeds (9) | (4,400) | (0.18) | — | — | — | — | ||||||||||||||||
| Severance (10) | — | — | 359 | 0.02 | 497 | 0.03 | ||||||||||||||||
| Loss on extinguishment of debt (11) | 11,916 | 0.47 | 8,123 | 0.43 | — | — | ||||||||||||||||
| SureCheck (12) | — | — | — | — | 1,284 | 0.08 | ||||||||||||||||
| Other expense – net (13) | 1,279 | 0.05 | (808) | (0.04) | 449 | 0.03 | ||||||||||||||||
| Adjusted net loss/diluted loss per share | $ | (35,825) | $ | (1.43) | $ | (22,203) | $ | (1.17) | $ | (9,738) | $ | (0.60) | ||||||||||
| Weighted average common shares outstanding | 25,088 | 19,014 | 16,223 |
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| 1 | Adjustment reflects a partial release of our deferred tax asset valuation allowance of $10.4 million related to the Punchh Acquisition; and a reduction to the benefit of income taxes of $3.3 million for the year ended December 31, 2020 related to the issuance of the 2.875% Convertible Senior Notes due 2026 and partial repurchase of the 4.500% Convertible Senior Notes due 2024. The income tax effect of the below adjustments were not tax-effected due to the valuation allowance on all of our net deferred tax assets. |
|---|---|
| 2 | Adjustment reflects non-cash accretion of interest expense and amortization of issuance costs related to the Senior Notes and the Owl Rock Term Loan of $8.7 million, $4.4 million, and $2.5 million for the years ended December 31, 2021, 2020, and 2019, respectively. |
| 3 | Adjustment reflects amortization expense of acquired developed technology within gross margin of $12.0 million, $3.5 million, and $1.1 million for the years ended December 31, 2021, 2020, and 2019, respectively; and amortization expense of acquired intangible assets of $1.8 million, $1.1 million, and $0.2 million for the years ended December 31, 2021, 2020, and 2019, respectively. |
| 4 | Adjustments reflect stock-based compensation expense within selling, general and administrative expenses and cost of contracts for the years ended December 31, 2021, 2020 and 2019 of $14.6 million, $4.3 million and $2.7 million respectively. |
| 5 | Adjustment reflects the expenses related to our efforts to resolve a regulatory matter and other non-recurring charges of $0.1 million for both the years ended December 31, 2021 and 2020, and $0.6 million for the year ended December 31, 2019. |
| 6 | Adjustment reflects the change to the fair market value of the contingent consideration liability related to the Restaurant Magic Acquisition. |
| 7 | Adjustment reflects expenses accrued for a legal matter of $0.8 million for the year ended December 31, 2021 |
| 8 | Adjustment reflects the expenses incurred in the acquisition of Punchh of $3.6 million and Restaurant Magic of $0.6 million for the years ended December 31, 2021 and 2019, respectively. |
| 9 | Adjustment represents the gain on insurance stemming from a legacy claim of $4.4 million for the year ended December 31, 2021. |
| 10 | Adjustment reflects the severance included in gross margin, selling, general and administrative expense and research and development expense of $0.4 million and $0.5 million for the years ended December 31, 2020 and December 31, 2019, respectively. |
| 11 | Adjustment reflects loss on extinguishment of debt of $11.9 million related to the settlement of debt for the year ended December 31, 2021, and $8.1 million to the repurchase of approximately $66.3 million of the 2024 Notes for the year ended December 31, 2020. |
| 12 | Adjustment reflects the non-cash expenses related to the sale of the SureCheck for the year ended December 31, 2019. |
| 13 | Adjustment reflects foreign currency transaction gains and losses, rental income and losses, and other non-recurring expenses recorded in other expense, net in the accompanying statements of operations. |
LIQUIDITY AND CAPITAL RESOURCES
In 2021, our primary source of liquidity was cash provided by financing activities. Cash used in operating activities was $53.2 million for the year ended December 31, 2021, compared to $20.2 million for the year ended December 31, 2020. The increase in cash used in operating activities was driven by an increase in pre-tax net loss, net of non-cash charges and additional net working capital requirements primarily because of an increase in inventory and an increase in both other assets and other current assets as a result of the Punchh Acquisition.
Cash used in investing activities was $383.0 million for the year ended December 31, 2021, and $374.7 million of cash consideration in connection with the Punchh Acquisition (net of cash acquired), $6.9 million in capitalization of developed technology costs associated with our Restaurant/Retail segment software platforms and $1.4 million in capital expenditures. Cash used in investing activities was $9.0 million for the year ended December 31, 2020 driven by $7.9 million in capitalization of developed technology costs associated with our Restaurant/Retail segment software platforms and $1.3 million in capital expenditures.
Cash provided by financing activities was $443.6 million for the year ended December 31, 2021. On April 8, 2021, we received net proceeds of $155.7 million from the private placement of common stock to PAR Act III, LLC and certain funds and accounts advised by T. Rowe Price Associates, Inc., in addition to net proceeds of $170.7 million from the Owl Rock Term Loan. On September 17, 2021, we received net proceeds of $256.8 million from the sale of 2027 Notes and $52.5 million from the sale of common stock. We used $183.6 million of the proceeds to repay the Owl Rock Term Loan in full. Cash provided by financing activities was $180.7 million for the year ended December 31, 2020, primarily consisting of $131.4 million of net proceeds from the sale of common stock on October 5, 2020 and net proceeds of $49.5 million from the sale of $120.0 million of 2026 Notes offset by the repurchase of a majority of the 2024 Notes.
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We expect our current cash and cash equivalents will be sufficient to meet our operating needs for the next 12 months. Over the next 12 months our total purchase commitments are $50.8 million including $28.1 million for normal operations (purchase of inventory, software licensing, and use of external labor), $11.6 million for third-party cloud services, debt payments of $8.7 million and facility leases of $2.4 million.
We expect our non-current purchase commitments to include the normal operational expenses indicated above as well as the payments to service our Senior Notes. See “Note 8 – Debt” of the notes to consolidated financial statements (Part II, Item 8 of this Report) for details.
Our actual cash needs will depend on many factors, including the timing and rate of revenue growth, including the growth of SaaS revenues, and the timing and necessary capital requirements to finance our development efforts, planned introduction of new and enhanced products and services, or acquisitions of complementary businesses, technologies, products, or services.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are based on the application of accounting principles generally accepted in the United States of America. GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue, and expense amounts reported. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. Valuations based on estimates are reviewed for reasonableness and adequacy on a consistent basis. 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 these estimates. Our estimates are subject to uncertainties, including those associated with market conditions, risks and trends and the ongoing COVID-19 pandemic.
Convertible Senior Notes
In accounting for the issuance of our Notes, we separated each series of Notes into liability (debt) and equity components of the instrument. The carrying amount of the debt component was calculated by estimating the fair value of similar liabilities 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 debt component from the principal amount. The difference between the principal amount of each series of our Notes and its respective fair value of the debt component are amortized to interest expense over its respective term using the effective interest method. The equity component, net of issuance costs and deferred tax effects, of each series of our Notes is presented within additional paid-in-capital, and will not be remeasured as long as it continues to meet the requirements for equity classification. These assumptions involve inherent uncertainties and management judgment. In accounting for the issuance costs related to our Notes, the allocation of issuance costs incurred between the debt and equity components was based on their relative values.
Revenue Recognition Policy
Our revenue is derived from SaaS, hardware and software sales, software activation, hardware support, installations, maintenance and professional services. Accounting Standards Codification (“ASC”) Topic 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 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.
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We evaluated the potential performance obligations within our Restaurant/Retail segment and evaluated whether each performance obligation met the ASC Topic 606 criteria to be considered distinct performance obligations. 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, Advanced Exchange programs, on-site support and other services is recognized over time as the customer simultaneously receives and consumes the benefits of our 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 the third-party contractors an installation service fee based on an hourly rate as agreed upon between us and contractor. 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 the third-party to provide the goods or services (agent). In our customer arrangements, we are primarily responsible for providing a good or service, we have inventory risk before the good or service is transferred to the customer, and we have discretion in establishing prices. As a result, we have concluded we are the principal in the arrangement and record installation revenue on a gross basis.
The support services associated with hardware and software sales are a “stand-ready obligation” satisfied over time on the basis that customer consumes and receives a benefit from having access to our support resources, when and as needed, throughout the contract term. For this reason, the support services are recognized ratably over the term since we satisfy our obligation to stand ready by performing these services each day.
Our contracts typically require payment within 30 to 90 days from the shipping date or installation date, depending on our terms with the customer. The primary method used to estimate stand-alone selling price is the price that we charge for that good or service when we sell it separately under similar circumstances to similar customers. We determine stand-alone selling price as follows: Hardware, software, and software activation (one-time fee at the initial offering of software or SaaS) performance obligations are recognized at a stand-alone selling price based on the price at which we sell 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, software upgrades, and professional services (project management) is recognized by using an expected cost plus margin.
Our revenue in the Government segment is recognized over time as control is generally transferred continuously to our 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 our 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, we estimate 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, we evaluate 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, we analyze whether our performance obligations under Government contracts are satisfied over a period of time or at a point in time. In general, our
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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.
Inventories
Inventory is valued at the lower of cost and net realizable value, with cost determined using the weighted average cost method. We use 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.
Capitalized Software Development Costs
We capitalize certain costs related to the development of our platform and other software applications for internal use in accordance with ASC Topic 350-40, Intangibles - Goodwill and Other - Internal - Use Software. We begin to capitalize our 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. We stop 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 five years. We also capitalize 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 our consolidated statements of operations.
We exercise 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 we change the manner in which we develop and test new features and functionalities related to our platform, assess the ongoing value of capitalized assets or determine the estimated useful lives over which the costs are amortized, the amount of internal-use software development costs we capitalize and amortize could change in future periods
Accounting for Business Combinations
We account for acquired businesses using in accordance with ASC Topic 805, Business Combinations, which requires that acquired assets and assumed liabilities 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 recorded to goodwill. Intangible assets are amortized over the expected life of the asset. Fair value determinations and useful life estimates are based on, among other factors, estimates of expected future cash flows from revenues of the intangible assets acquired, estimates of appropriate discount rates used to present value expected future cash flows, estimated useful lives of the intangible assets acquired and other factors. Although we believe the assumptions and estimates it has made have been reasonable and appropriate, they are based, in part, on historical experience, information obtained from the management of the acquired companies and future expectations. For these and other reasons, actual results may vary significantly from estimated results.
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. It is not deductible for income tax purposes. 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. Our impairment tests are based on reportable operating segments and the 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.
Fair values of the reporting units are estimated using a weighted methodology considering the output from both the income and market approaches. The income approach incorporates the use of a DCF analysis. A number of significant assumptions and estimates are involved in the application of the DCF model to forecast operating cash
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flows, including revenue growth, operating income margin and discount rate. These assumptions vary between the reporting units. The market approach incorporates the use of the quoted price and public company methods utilizing public market data for our company and comparable companies for each of our two reporting segments.
We conducted our 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.
Restaurants/Retail:
We performed a quantitative assessment to test our Restaurant/Retail reporting unit impairment as of October 1, 2021. The excess of the estimated fair value over the carrying value (expressed as a percentage of carrying value) was in excess of its carrying value of $622 million by approximately 175% as of September 30, 2021.
In deriving our fair value estimates, we use key assumptions built on the current product portfolio mix adjusted to reflect continued revenue increases from our software products.
We use total annual revenue growth rates for the reporting unit ranging between 3.0% and 56.3%. The high-end growth rate reflects our projected revenues from anticipated increases in installations of our software platforms at new and existing customer locations. These software platforms are expected to expand our capabilities into new markets. We believe these estimates are reasonable given the size of the overall market, combined with the projected market share we expect to achieve. Overall, the projected revenue growth rates ultimately trend to an estimated long term growth rate of 3.0%.
We use gross margin estimates that are reflective of expected increased recurring SaaS revenue from that is expected to exceed historical gross margins. Estimates of operating expenses, working capital requirements and depreciation and amortization expense used for the Restaurant/Retail reporting unit are generally consistent with actual historical amounts, adjusted to reflect our continued investment and projected revenue growth from our core technology platforms. We believe utilization of actual historical results adjusted to reflect our continued investment in our products is an appropriate basis supporting the fair value of the Restaurant/Retail reporting unit.
Finally, we use a discount rate of approximately 13.5% for the Restaurant/Retail reporting unit. This estimate was derived through a combination of current risk-free interest rate data, financial data from companies that PAR considers to be our competitors and was based on volatility between our historical financial projections and actual results achieved.
The current economic conditions and the continued volatility in the U.S. and in many other countries in which we operate could contribute to decreased consumer confidence and continued economic uncertainty which may adversely impact our operating performance. Although we have seen an improvement in the markets it serves, continued volatility in these markets could have an impact on purchases of our products, which could result in a reduction in sales, operating income and cash flows. Such reductions could have a material adverse impact on the underlying estimates used in deriving the fair value of our reporting units used to support our annual goodwill impairment test or could result in a triggering event requiring a fair value re-measurement, particularly if we are unable to achieve the estimates of revenue growth indicated in the preceding paragraphs. These conditions may result in an impairment charge in future periods.
We reconciled the aggregate estimated fair value of the reporting units to our market capitalization noting no impairment as of December 31, 2021 or December 31, 2020 was recorded.
Deferred Taxes
Deferred tax assets are reviewed quarterly for recoverability and valued accordingly. The deferred tax assets are subject to a full valuation allowance. These deferred tax assets are evaluated by using estimates of future taxable income and the impact of tax planning strategies. Valuations related to tax accruals and deferred tax assets can be impacted by changes to tax codes, changes in statutory tax rates and our estimates of future taxable income levels.
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Recent Accounting Pronouncements Not Yet Adopted
See “Note 1 – Summary of Significant Accounting Policies” of the notes to consolidated financial statements (Part II, Item 8 of this Report) for details.