# PAR TECHNOLOGY CORP (PAR) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from PAR TECHNOLOGY CORP's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/708821/000070882124000014/par-20231231.htm
Accession: 0000708821-24-000014
Filing date: 2024-02-27
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/PAR/
All MD&A years: /company/PAR/mda/
Previous year: /company/PAR/mda/fy2022/ (FY 2022)
Next year: /company/PAR/mda/fy2024/ (FY 2024)

Item 7.     MANAGEMENT'S 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. Financial Statements and Supplementary Data" 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 "Forward-Looking Statements" and "Part I, Item 1A. Risk Factors" above.

The following section generally discusses year-over-year comparisons between 2023 and 2022. Discussions related to year-over-year comparisons between 2022 and 2021 are included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2022, filed with the SEC on March 21, 2023.

2023 Performance Highlights

•Annual Recurring Revenues ("ARR") grew to $136.9 million - a 22.8% increase from $111.4 million reported for the year ended December 31, 2022.

•Active sites expansion

◦Operator Solutions active sites expanded to 23.3 thousand - a 19.5% increase from the 19.5 thousand reported for the year ended December 31, 2022.

◦Back Office active sites expanded to 7.7 thousand - an 10.0% increase from the 7.0 thousand reported for the year ended December 31, 2022.

Refer to "Key Performance Indicators and Non-GAAP Financial Measures" below for important information on key performance indicators and non-GAAP financial measures, including ARR, active sites, and adjusted subscription service gross margin, used by us to evaluate Restaurant/Retail segment performance.

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RESULTS OF OPERATIONS

Results of operations for the years ended December 31, 2023, 2022, and 2021 were as follows:

Consolidated Results

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Net revenues:"],["Hardware","$","103,391","","","$","114,410","","","$","105,014","","","24.9","%","","32.2","%","","37.1","%","","(9.6)","%","","8.9","%"],["Subscription service","122,597","","","97,499","","","62,649","","","29.5","%","","27.4","%","","22.1","%","","25.7","%","","55.6","%"],["Professional service","50,726","","","50,438","","","42,688","","","12.2","%","","14.2","%","","15.1","%","","0.6","%","","18.2","%"],["Contract","139,109","","","93,448","","","72,525","","","33.5","%","","26.3","%","","25.6","%","","48.9","%","","28.8","%"],["Total revenues, net","$","415,823","","","$","355,795","","","$","282,876","","","100.0","%","","100.0","%","","100.0","%","","16.9","%","","25.8","%"],["Gross margin"],["Hardware","23,072","","","22,186","","","24,173","","","5.5","%","","6.2","%","","8.5","%","","4.0","%","","(8.2)","%"],["Subscription service","58,862","","","50,075","","","23,998","","","14.2","%","","14.1","%","","8.5","%","","17.5","%","","108.7","%"],["Professional service","7,512","","","9,456","","","8,113","","","1.8","%","","2.7","%","","2.9","%","","(20.6)","%","","16.6","%"],["Contract","8,864","","","7,576","","","5,837","","","2.1","%","","2.1","%","","2.1","%","","17.0","%","","29.8","%"],["Total gross margin","98,310","","","89,293","","","62,121","","","23.6","%","","25.1","%","","22.0","%","","10.1","%","","43.7","%"],["Operating expenses:"],["Sales and marketing","38,513","","","34,900","","","24,166","","","9.3","%","","9.8","%","","8.5","%","","10.4","%","","44.4","%"],["General and administrative","68,992","","","66,319","","","59,832","","","16.6","%","","18.6","%","","21.2","%","","4.0","%","","10.8","%"],["Research and development","58,356","","","48,643","","","34,579","","","14.0","%","","13.7","%","","12.2","%","","20.0","%","","40.7","%"],["Amortization of identifiable intangible assets","1,858","","","1,863","","","1,825","","","0.4","%","","0.5","%","","0.6","%","","(0.3)","%","","2.1","%"],["Adjustment to contingent consideration liability","(9,200)","","","(4,400)","","","\u2014","","","(2.2)","%","","(1.2)","%","","\u2014","%","","109.1","%","","N/A"],["Gain on insurance proceeds","(500)","","","\u2014","","","(4,400)","","","(0.1)","%","","\u2014","%","","(1.6)","%","","N/A","","(100.0)","%"],["Total operating expenses","158,019","","","147,325","","","116,002","","","38.0","%","","41.4","%","","41.0","%","","7.3","%","","27.0","%"],["Operating loss","(59,709)","","","(58,032)","","","(53,881)","","","(14.4)","%","","(16.3)","%","","(19.0)","%","","2.9","%","","7.7","%"],["Other expense, net","(489)","","","(1,224)","","","(1,279)","","","(0.1)","%","","(0.3)","%","","(0.5)","%","","(60.0)","%","","(4.3)","%"],["Loss on extinguishment of debt","(635)","","","\u2014","","","(11,916)","","","(0.2)","%","","\u2014","%","","(4.2)","%","","N/A","","(100.0)","%"],["Interest expense, net","(6,931)","","","(8,811)","","","(18,147)","","","(1.7)","%","","(2.5)","%","","(6.4)","%","","(21.3)","%","","(51.4)","%"],["Loss before (provision for) benefit from income taxes","(67,764)","","","(68,067)","","","(85,223)","","","(16.3)","%","","(19.1)","%","","(30.1)","%","","(0.4)","%","","(20.1)","%"],["(Provision for) benefit from income taxes","(1,988)","","","(1,252)","","","9,424","","","(0.5)","%","","(0.4)","%","","3.3","%","","58.8","%","","(113.3)","%"],["Net loss","$","(69,752)","","","$","(69,319)","","","$","(75,799)","","","(16.8)","%","","(19.5)","%","","(26.8)","%","","0.6","%","","(8.5)","%"]]
[[/GREPCENT_TABLE]]

Beginning with this Annual Report, we retroactively split our "Selling, general and administrative" financial statement line item ("FSLI") into two FSLIs, "Sales and marketing" and "General and administrative". Refer to "Note 1 - Summary of Significant Accounting Policies" within "Item 8. Financial Statements and Supplementary Data" for additional information.

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Segment Revenue by Product Line as Percentage of Total Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue"],["","","","Increase (decrease)"],["In thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Hardware","$","103,391","","","$","114,410","","","$","105,014","","","24.9","%","","32.2","%","","37.1","%","","(9.6)","%","","8.9","%"],["Subscription service","122,597","","","97,499","","","62,649","","","29.5","%","","27.4","%","","22.1","%","","25.7","%","","55.6","%"],["Professional service","50,726","","","50,438","","","42,688","","","12.2","%","","14.2","%","","15.1","%","","0.6","%","","18.2","%"],["Total Restaurant/Retail","$","276,714","","","$","262,347","","","$","210,351","","","66.5","%","","73.7","%","","74.4","%","","5.5","%","","24.7","%"],["Mission systems","35,583","","","35,458","","","38,311","","","8.6","%","","10.0","%","","13.5","%","","0.4","%","","(7.4)","%"],["ISR","102,153","","","56,141","","","33,188","","","24.6","%","","15.8","%","","11.7","%","","82.0","%","","69.2","%"],["Commercial software","1,373","","","1,849","","","1,026","","","0.3","%","","0.5","%","","0.4","%","","(25.7)","%","","80.2","%"],["Total Government","$","139,109","","","$","93,448","","","$","72,525","","","33.5","%","","26.3","%","","25.6","%","","48.9","%","","28.8","%"],["Total revenue","$","415,823","","","$","355,795","","","$","282,876","","","100.0","%","","100.0","%","","100.0","%","","16.9","%","","25.8","%"]]
[[/GREPCENT_TABLE]]

Revenues, Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Revenues, net:"],["Hardware","$","103,391","","","$","114,410","","","$","105,014","","","24.9","%","","32.2","%","","37.1","%","","(9.6)","%","","8.9","%"],["Subscription service","122,597","","","97,499","","","62,649","","","29.5","%","","27.4","%","","22.1","%","","25.7","%","","55.6","%"],["Professional service","50,726","","","50,438","","","42,688","","","12.2","%","","14.2","%","","15.1","%","","0.6","%","","18.2","%"],["Contract","139,109","","","93,448","","","72,525","","","33.5","%","","26.3","%","","25.6","%","","48.9","%","","28.8","%"],["Total revenues, net","$","415,823","","","$","355,795","","","$","282,876","","","100.0","%","","100.0","%","","100.0","%","","16.9","%","","25.8","%"]]
[[/GREPCENT_TABLE]]

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Total revenues were $415.8 million for the year ended December 31, 2023, an increase of $60.0 million or 16.9% compared to $355.8 million for the year ended December 31, 2022.

Hardware revenues were $103.4 million for the year ended December 31, 2023, a decrease of $11.0 million or 9.6% compared to $114.4 million for the year ended December 31, 2022. The decrease was substantially driven by decreases in hardware revenues from terminals of $6.7 million and kitchen display systems of $5.3 million, both substantially driven by a decrease in sales volume.

Subscription service revenues were $122.6 million for the year ended December 31, 2023, an increase of $25.1 million or 25.7% compared to $97.5 million for the year ended December 31, 2022. The increase was substantially driven by increased subscription service revenues from our Operator Solutions services of $13.5 million driven by a 19.5% increase in active sites and a 14.5% increase in average revenue per site. The residual increase was substantially driven by increased subscription service revenues from our Guest Engagement services of $10.0 million driven by a 1.3% increase in active sites and a 6.7% increase in average revenue per site.

Professional service revenues were $50.7 million for the year ended December 31, 2023, which remained relatively unchanged compared to $50.4 million for the year ended December 31, 2022.

Contract revenues were $139.1 million for the year ended December 31, 2023, an increase of $45.7 million or 48.9% compared to $93.4 million for the year ended December 31, 2022. The increase was substantially driven by Government segment's Intelligence, Surveillance, and Reconnaissance solutions ("ISR Solutions") product line revenues due to continued Counter small Unmanned Aircraft System tasks orders.

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Gross Margin

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Gross Margin Percentage","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Gross margin"],["Hardware","$","23,072","","","$","22,186","","","$","24,173","","","22.3","%","","19.4","%","","23.0","%","","4.0","%","","(8.2)","%"],["Subscription service","58,862","","","50,075","","","23,998","","","48.0","%","","51.4","%","","38.3","%","","17.5","%","","108.7","%"],["Professional service","7,512","","","9,456","","","8,113","","","14.8","%","","18.7","%","","19.0","%","","(20.6)","%","","16.6","%"],["Contract","8,864","","","7,576","","","5,837","","","6.4","%","","8.1","%","","8.0","%","","17.0","%","","29.8","%"],["Total gross margin","$","98,310","","","$","89,293","","","$","62,121","","","23.6","%","","25.1","%","","22.0","%","","10.1","%","","43.7","%"]]
[[/GREPCENT_TABLE]]

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Total gross margin as a percentage of total revenue for the year ended December 31, 2023, decreased to 23.6% as compared to 25.1% for the year ended December 31, 2022.

Hardware margin as a percentage of hardware revenue for the year ended December 31, 2023, increased to 22.3% as compared to 19.4% for the year ended December 31, 2022. The increase in margin was substantially driven by improved inventory management resulting in lower excess and obsolescent inventory charges during the year ended December 31, 2023.

Subscription service margin as a percentage of subscription service revenue for the year ended December 31, 2023, decreased to 48.0% as compared to 51.4% for the year ended December 31, 2022. The decrease was substantially driven by absorbing the initial growth of MENU and PAR Payment Services, which are both early stage products. Subscription service margin for the year ended December 31, 2023, included $22.2 million of amortization of acquired and internally developed technology compared to $21.4 million of amortization of acquired and internally developed technology for the year ended December 31, 2022. Excluding the amortization of acquired and internally developed technology, adjusted subscription service gross margin was 66.1% compared to 73.3% for the years ended December 31, 2023 and 2022, respectively (refer to "Non-GAAP Financial Measures" below for important information regarding adjusted subscription service gross margin, a non-GAAP financial measure).

Professional service margin as a percentage of professional service revenue for the year ended December 31, 2023, decreased to 14.8% as compared to 18.7% for the year ended December 31, 2022. The decrease was substantially driven by decreases in margins for implementation services and hardware service repair, partially offset by an increase in margin on our installation services.

Contract margin as a percentage of contract revenue for the year ended December 31, 2023, decreased to 6.4% compared to 8.1% for the year ended December 31, 2022. The decrease in contract margin was substantially driven by the Air Force Research Laboratory Counter-small Unmanned Aircraft System contract within the Government segment's ISR Solutions product line having a lower contracted margin than historical contracts.

Sales and Marketing Expenses ("S&M")

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Sales and marketing","$","38,513","","","$","34,900","","","$","24,166","","","9.3","%","","9.8","%","","8.5","%","","10.4","%","","44.4","%"]]
[[/GREPCENT_TABLE]]

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

S&M expenses were $38.5 million for the year ended December 31, 2023, an increase of $3.6 million or 10.4% compared to $34.9 million for the year ended December 31, 2022. The increase was substantially driven by a $1.9 million increase in sales and marketing efforts for MENU driven by the year ended December 31, 2022 only

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having approximately five months of post-acquisition MENU S&M expenses. The residual increase was substantially driven by an increase in purchased services and higher compensation costs associated with additional personnel as we continue to support the growth of our business.

General and Administrative Expenses ("G&A")

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["General and administrative","$","68,992","","","$","66,319","","","$","59,832","","","16.6","%","","18.6","%","","21.2","%","","4.0","%","","10.8","%"]]
[[/GREPCENT_TABLE]]

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

G&A expenses were $69.0 million for the year ended December 31, 2023, an increase of $2.7 million or 4.0% compared to $66.3 million for the year ended December 31, 2022. The increase was substantially driven by a $4.3 million increase in internal technology infrastructure costs substantially driven by an increase in purchased services as we continue to support the growth of our business, partially offset by a $1.3 million decrease in employee benefit expenses.

Research and Development Expenses

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Research and development","$","58,356","","","$","48,643","","","$","34,579","","","14.0","%","","13.7","%","","12.2","%","","20.0","%","","40.7","%"]]
[[/GREPCENT_TABLE]]

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

R&D expenses were $58.4 million for the year ended December 31, 2023, an increase of $9.7 million or 20.0% compared to $48.6 million for the year ended December 31, 2022. The increase was substantially driven by an increase in R&D expense related to our offerings for Guest Engagement of $9.4 million, of which $6.2 million was driven by higher compensation costs associated with additional personnel as we continue to improve and diversify our product and service offerings. The residual increase of $3.2 million was driven by the year ended December 31, 2022 only including approximately five months of post-acquisition MENU R&D expenses.

Other Operating Expenses: Amortization of Intangible Assets / Contingent Consideration / Insurance Proceeds

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Amortization of identifiable intangible assets","$","1,858","","","$","1,863","","","$","1,825","","","0.4","%","","0.5","%","","0.6","%","","(0.3)","%","","2.1","%"],["Adjustment to contingent consideration liability","(9,200)","","","(4,400)","","","\u2014","","","(2.2)","%","","(1.2)","%","","\u2014","%","","109.1","%","","N/A"],["Gain on insurance proceeds","$","(500)","","","$","\u2014","","","$","(4,400)","","","(0.1)","%","","\u2014","%","","(1.6)","%","","N/A","","(100.0)","%"]]
[[/GREPCENT_TABLE]]

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Amortization of identifiable intangible assets was $1.9 million for the year ended December 31, 2023, which remained relatively unchanged as compared to $1.9 million for the year ended December 31, 2022.

Included in operating expenses for the year ended December 31, 2023 was a $9.2 million reduction to the fair value of the contingent consideration liability for certain post-closing revenue focused milestones from the acquisition of MENU Technologies A.G. (the "MENU Acquisition") compared to a $4.4 million reduction for the year

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ended December 31, 2022.

Gain on insurance proceeds was $0.5 million for the year ended December 31, 2023, in connection with our settlement of a legacy claim. There was no comparable gain for the year ended December 31, 2022.

Other Expense, Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Other expense, net","$","(489)","","","$","(1,224)","","","$","(1,279)","","","(0.1)","%","","(0.3)","%","","(0.5)","%","","(60.0)","%","","(4.3)","%"]]
[[/GREPCENT_TABLE]]

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Other expense, net was $0.5 million for the year ended December 31, 2023, an increase of $0.7 million as compared to $1.2 million for the year ended December 31, 2022. Other expense, net substantially includes rental income, net of applicable expenses, foreign currency transactions gains and losses and other non-operating income (expense). The change was substantially driven by sales and use tax expense and other miscellaneous expenses.

Loss on Extinguishment of Debt

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Loss on extinguishment of debt","$","(635)","","","$","\u2014","","","$","(11,916)","","","(0.2)","%","","\u2014","%","","(4.2)","%","","N/A","","(100.0)","%"]]
[[/GREPCENT_TABLE]]

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Loss on extinguishment of debt was $0.6 million for the year ended December 31, 2023, related to the induced conversion of the 4.500% Convertible Senior Notes due 2024 (the "2024 Notes"). There was no comparable loss for the year ended December 31, 2022.

Interest Expense, Net

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Interest expense, net","$","(6,931)","","","$","(8,811)","","","$","(18,147)","","","(1.7)","%","","(2.5)","%","","(6.4)","%","","(21.3)","%","","(51.4)","%"]]
[[/GREPCENT_TABLE]]

For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Interest expense, net was $6.9 million for the year ended December 31, 2023, a decrease of $1.9 million or 21.3% as compared to $8.8 million for the year ended December 31, 2022. The change was substantially driven by a $1.7 million increase in interest revenue from our short-term investments during the year ended December 31, 2023.

Taxes

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Percentage of total revenue","","Increase (decrease)"],["in thousands","2023","","2022","","2021","","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["(Provision for) benefit from income taxes","$","(1,988)","","","$","(1,252)","","","$","9,424","","","(0.5)","%","","(0.4)","%","","3.3","%","","58.8","%","","(113.3)","%"]]
[[/GREPCENT_TABLE]]

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For the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

The provision for income taxes of $2.0 million for the year ended December 31, 2023 was substantially due to foreign jurisdiction tax obligations. The provision income taxes of $1.3 million for the year ended December 31, 2022 was substantially due to foreign jurisdiction tax obligations.

Key Performance Indicators and Non-GAAP Financial Measures:

We monitor certain key performance indicators and non-GAAP financial measures in the evaluation and management of our business; certain key performance indicators and non-GAAP financial measures are provided in this Annual Report because we believe they are useful in facilitating period-to-period comparisons of our business performance. Key performance indicators and non-GAAP financial measures do not reflect and should be viewed independently of our financial performance determined in accordance with GAAP. Key performance indicators 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.

Key Performance Indicators

Within this Annual Report, the Company makes reference to annual recurring revenue, or ARR, and active sites, which are both key performance indicators. The Company utilizes ARR and active sites as key performance indicators of the scale of our subscription services for both new and existing customers.

ARR is the annualized revenue from our subscription services, which includes subscription fees for our SaaS solutions, related support, and transaction-based fees for payment processing services. We calculate ARR by annualizing the monthly recurring revenue for all active sites as of the last day of each month for the respective reporting period. ARR is an operating measure, it does not reflect our revenue determined in accordance with GAAP, and ARR should be viewed independently of, and not combined with or substituted for, our revenue and other financial information determined in accordance with GAAP. Further, ARR is not a forecast of future revenue and investors should not place undue reliance on ARR as an indicator of our future or expected results.

Active sites represent locations active on our subscription services as of the last day of the respective reporting period.

Our key performance indicators ARR and active sites are organized in alignment with our three subscription service categories: Guest Engagement (Punchh and MENU), Operator Solutions (Brink POS, PAR Pay, and PAR Payment Services), and Back Office (Data Central).

Annual Recurring Revenue

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Increase (decrease)"],["In thousands","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Guest Engagement*","$","63,784","","","$","58,933","","","$","46,686","","","8.2","%","","26.2","%"],["Operator Solutions","60,159","","","41,614","","","32,120","","","44.6","%","","29.6","%"],["Back Office","12,960","","","10,896","","","9,390","","","18.9","%","","16.0","%"],["Total","$","136,903","","","$","111,443","","","$","88,196","","","22.8","%","","26.4","%"]]
[[/GREPCENT_TABLE]]

*Guest Engagement ARR includes MENU ARR only in the years ended December 31, 2023 and 2022.

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Active Sites

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Increase (decrease)"],["In thousands","2023","","2022","","2021","","2023 vs 2022","","2022 vs 2021"],["Guest Engagement*","70.8","","","69.9","","","56.1","","","1.3","%","","24.6","%"],["Operator Solutions","23.3","","","19.5","","","15.9","","","19.5","%","","22.6","%"],["Back Office","7.7","","","7.0","","","6.3","","","10.0","%","","11.1","%"]]
[[/GREPCENT_TABLE]]

*Guest Engagement active sites includes MENU active sites only in the years ended December 31, 2023 and 2022.

Non-GAAP Financial Measures

Within this Annual Report, the Company makes reference to adjusted subscription service gross margin, EBITDA, adjusted EBITDA, adjusted net loss, and adjusted diluted net loss per share which are non-GAAP financial measures. Adjusted subscription service gross margin represents subscription service gross margin adjusted to exclude amortization from acquired and internally developed software. 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. Adjusted net loss and adjusted diluted net loss per share represents net loss and net loss per share excluding 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.

The Company is presenting adjusted subscription service gross margin, adjusted EBITDA, adjusted net loss, and adjusted diluted net loss per share because we believe that these financial measures provide supplemental information that may be useful to investors in evaluating the Company's core business operating results and comparing such results to other similar companies. Management believes that adjusted subscription service gross margin, EBITDA, adjusted EBITDA, adjusted net loss, and adjusted diluted net loss per share, when viewed with the Company's results of operations in accordance with GAAP and the reconciliations to the most directly comparable GAAP measures provided in the tables below (refer to "Gross margin" discussion above for a reconciliation of subscription service gross margin to adjusted subscription service gross margin), provide useful information about operating performance and period-over-period growth, and provide additional information that is useful for evaluating the operating performance of the Company's core business without regard to potential distortions. Management also believes that adjusted EBITDA provides investors with insight into factors and trends that could affect the Company's ongoing cash earnings, from which capital investments are made and debt is serviced.

The Company's results of operations are impacted by certain non-cash and non-recurring charges, including stock-based compensation, acquisition related expenditures, and other non-recurring charges that may not be indicative of the Company’s on-going or long-term financial performance. Management believes that adjusting its net loss and diluted net loss per share to remove non-recurring charges provides a useful perspective with respect to the Company's results of operations and provides supplemental information to both management and investors by removing items that are difficult to predict and are often unanticipated.

Adjusted subscription service gross margin, EBITDA, adjusted EBITDA, adjusted net loss, and adjusted diluted net loss per share are not measures of financial performance under GAAP and should not be considered as alternatives to subscription service gross margin or net income (loss) as indicators of operating performance. Additionally, these measures may not be comparable to similarly titled measures disclosed by other companies. The tables below provide reconciliations between net loss and EBITDA, adjusted EBITDA, and adjusted net loss, as well as between diluted net loss per share and adjusted diluted net loss per share.

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["in thousands","2023","","2022","","2021"],["Reconciliation of Net Loss to EBITDA and Adjusted EBITDA"],["Net loss","$","(69,752)","","","$","(69,319)","","","$","(75,799)"],["Provision for (benefit from) income taxes","1,988","","","1,252","","","(9,424)"],["Interest expense","6,931","","","8,811","","","18,147"],["Depreciation and amortization","27,481","","","26,095","","","21,421"],["EBITDA","$","(33,352)","","","$","(33,161)","","","$","(45,655)"],["Stock-based compensation expense (1)","14,427","","","13,426","","","14,615"],["Regulatory matters (2)","\u2014","","","415","","","50"],["Contingent consideration (3)","(9,200)","","","(4,400)","","","\u2014"],["Litigation expense (4)","(808)","","","525","","","790"],["Transaction costs (5)","2,273","","","1,300","","","3,612"],["Gain on insurance proceeds (6)","(500)","","","\u2014","","","(4,400)"],["Severance (7)","253","","","525","","","\u2014"],["Loss on extinguishment of debt (8)","635","","","\u2014","","","11,916"],["Impairment loss (9)","\u2014","","","1,301","","","\u2014"],["Other expense \u2013 net (10)","489","","","1,224","","","1,279"],["Adjusted EBITDA","$","(25,783)","","","$","(18,845)","","","$","(17,793)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Adjustments reflect total stock-based compensation expense for the years ended December 31, 2023, 2022 and 2021 of $14.4 million, $13.4 million and $14.6 million, respectively."],["2","Adjustment reflects non-recurring expenses related to our efforts to resolve regulatory matters of $0.4 million and $0.1 million for the years ended December 31, 2022 and 2021, respectively."],["3","Adjustments reflect non-cash reductions to the fair market value of the contingent consideration liability of $9.2 million and $4.4 million related to the MENU Acquisition as of the years ended December 31, 2023 and 2022, respectively."],["4","Adjustment reflects the release of a loss contingency for a legal matter of $0.8 million for the year ended December 31, 2023 and settlement expenses for legal matters of $0.5 million and $0.8 million for the years ended December 31, 2022 and 2021, respectively."],["5","Adjustment reflects non-recurring professional fees incurred in transaction due diligence of $2.3 million for the year ended December 31, 2023, and acquisition expenses incurred in the MENU Acquisition of $1.3 million and Punchh Acquisition of $3.6 million for the years ended December 31, 2022 and 2021, respectively."],["6","Adjustment represents the gain on insurance stemming from a legacy claim of $0.5 million and $4.4 million for the years ended December 31, 2023 and 2021, respectively."],["7","Adjustment reflects the severance included in general and administrative expense and research and development expense of $0.3 million and $0.5 million for the years ended December 31, 2023 and 2022, respectively."],["8","Adjustment reflects loss on extinguishment of debt of $0.6 million related to the induced conversion of the 2024 Notes during the year ended December 31, 2023, and $11.9 million related to the repayment of the Owl Rock Term Loan during the year ended December 31, 2021."],["9","Adjustment reflects impairment loss included in research and development expense related to the impairment of internally developed software costs not meeting the general release threshold as a result of acquiring go-to-market software in the MENU Acquisition."],["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."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["in thousands","2023","","2022","","2021"],["Reconciliation of Net Loss/Diluted Net Loss per share to Adjusted Net Loss/Adjusted Diluted Loss per Share:"],["Net loss / diluted earnings per share","$","(69,752)","","","$","(2.53)","","","$","(69,319)","","","$","(2.55)","","","$","(75,799)","","","$","(3.02)"],["Provision for (benefit from) income taxes (1)","\u2014","","","\u2014","","","\u2014","","","\u2014","","","(10,417)","","","(0.42)"],["Non-cash interest expense (2)","2,093","","","0.08","","","1,997","","","0.07","","","8,727","","","0.35"],["Acquired intangible assets amortization (3)","18,074","","","0.66","","","17,111","","","0.63","","","13,802","","","0.55"],["Stock-based compensation expense (4)","14,427","","","0.52","","","13,426","","","0.49","","","14,615","","","0.58"],["Regulatory matters (5)","\u2014","","","\u2014","","","415","","","0.02","","","50","","","\u2014"],["Contingent consideration (6)","(9,200)","","","(0.33)","","","(4,400)","","","(0.16)","","","\u2014","","","\u2014"],["Litigation expense (7)","(808)","","","(0.03)","","","525","","","0.02","","","790","","","0.03"],["Transaction costs (8)","2,273","","","0.08","","","1,300","","","0.05","","","3,612","","","0.14"],["Gain on insurance proceeds (9)","(500)","","","(0.02)","","","\u2014","","","\u2014","","","(4,400)","","","(0.18)"],["Severance (10)","253","","","0.01","","","525","","","0.02","","","\u2014","","","\u2014"],["Loss on extinguishment of debt (11)","635","","","0.02","","","\u2014","","","\u2014","","","11,916","","","0.47"],["Impairment loss (12)","\u2014","","","\u2014","","","1,301","","","0.05","","","\u2014","","","\u2014"],["Other expense \u2013 net (13)","489","","","0.02","","","1,224","","","0.05","","","1,279","","","0.05"],["Adjusted net loss/diluted loss per share","$","(42,016)","","","$","(1.52)","","","$","(35,895)","","","$","(1.32)","","","$","(35,825)","","","$","(1.43)"],["Weighted average common shares outstanding","27,552","","","","","27,152","","","","","25,088"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Adjustment reflects a partial release of our deferred tax asset valuation allowance of $10.4 million related to the Punchh Acquisition for the year ended December 31, 2021. 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 2024 Notes, Senior Notes, and the Owl Rock Term Loan of $2.1 million, $2.0 million, and $8.7 million for the years ended December 31, 2023, 2022, and 2021, respectively."],["3","Adjustment reflects amortization expense of acquired developed technology within cost of sales of $16.2 million, $15.2 million, and $12.0 million for the years ended December 31, 2023, 2022, and 2021, respectively; and amortization expense of acquired intangible assets of $1.9 million, $1.9 million, and $1.8 million for the years ended December 31, 2023, 2022, and 2021, respectively."],["4","Adjustments reflect total stock-based compensation expense for the years ended December 31, 2023, 2022 and 2021 of $14.4 million, $13.4 million and $14.6 million respectively."],["5","Adjustment reflects non-recurring expenses related to our efforts to resolve regulatory matters of $0.4 million and $0.1 million for the years ended December 31, 2022 and 2021, respectively."],["6","Adjustments reflect non-cash reductions to the fair market value of the contingent consideration liability of $9.2 million and $4.4 million related to the MENU Acquisition for the years ended December 31, 2023 and 2022, respectively."],["7","Adjustment reflects the release of a loss contingency for a legal matter of $0.8 million for the year ended December 31, 2023 and settlement expenses for legal matters of $0.5 million and $0.8 million for the years ended December 31, 2022 and 2021, respectively."],["8","Adjustment reflects non-recurring professional fees incurred in transaction due diligence of $2.3 million for the year ended December 31, 2023 and acquisition expenses incurred in the MENU Acquisition of $1.3 million and Punchh Acquisition of $3.6 million for the years ended December 31, 2022 and 2021, respectively."],["9","Adjustment represents the gain on insurance stemming from a legacy claim of $0.5 million and $4.4 million for the years ended December 31, 2023 and 2021, respectively."],["10","Adjustment reflects the severance included in general and administrative expense and research and development expense of $0.3 million and $0.5 million for the years ended December 31, 2023 and 2022, respectively."],["11","Adjustment reflects loss on extinguishment of debt of $0.6 million related to the induced conversion of the 2024 Notes during the year ended December 31, 2023, and $11.9 million related to the repayment of the Owl Rock Term Loan during the year ended December 31, 2021."],["12","Adjustment reflects impairment loss included in research and development expense related to the impairment of internally developed software costs not meeting the general release threshold as a result of acquiring go-to-market software in the MENU Acquisition."],["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."]]
[[/GREPCENT_TABLE]]

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LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash and cash equivalents and short-term investments. As of December 31, 2023, we had cash and cash equivalents of $37.4 million and short-term investments of $37.2 million. Cash and cash equivalents consist of highly liquid investments with maturities of 90 days or less, including money market funds. Short-term investments are held-to-maturity investment securities consisting of investment-grade interest bearing instruments, primarily treasury bills and notes, which are stated at amortized cost.

Cash used in operating activities was $17.1 million for the year ended December 31, 2023, compared to $43.1 million for the year ended December 31, 2022. Cash used in operating activities for the year ended December 31, 2023, was substantially driven by a net loss from operations of $69.8 million, net of non-cash charges of $32.5 million, partially off-set by a reduction in net working capital requirements substantially driven by a decrease in inventory of $16.0 million, due to improved inventory management, and an increase in accounts payable of $6.3 million resulting from a growth in expenses and timing of payments.

Cash used in investing activities was $7.8 million for the year ended December 31, 2023, compared to $66.7 million for the year ended December 31, 2022. Cash used in investing activities for the year ended December 31, 2023, included $1.9 million of cash consideration, net of cash acquired, for the rights to ongoing payment facilitator referral commissions from a privately held restaurant technology company (the "Q4 2023 Acquisition") and capital expenditures of $5.5 million for internal use software and $5.3 million for developed technology costs associated with our Restaurant/Retail software platforms, partially off-set by $5.0 million of proceeds from net sales of short-term held-to-maturity securities.

Cash used in financing activities was $1.6 million for the year ended December 31, 2023, compared to cash provided by financing activities of $2.6 million for the year ended December 31, 2022. Cash used in financing activities for the year ended December 31, 2023, was substantially driven by stock based compensation related transactions. We do not have any off-balance sheet arrangements or obligations.

We expect our available cash and cash equivalents will be sufficient to meet our operating needs for at least the next 12 months. Over the next 12 months our total contractual obligations are $35.9 million, consisting of purchase commitments for normal operations (purchase of inventory, software licensing, use of external labor, and third-party cloud services) of $27.1 million, interest payments of $7.4 million related to the Senior Notes, and facility leases of $1.4 million. We expect to fund such commitments with cash provided by operating activities and our sources of liquidity.

Our non-current contractual obligations are $414.2 million, consisting of purchase commitments for normal operations (purchase of inventory, software licensing, use of external labor, and third-party cloud services) of $10.5 million, interest payments of $15.7 million and principal payments of $385.0 million related to the Senior Notes, and facility leases of $3.0 million. Refer to “Note 9 – Debt” of the notes to consolidated financial statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report for details.

Our actual cash needs will depend on many factors, including our rate of revenue and ARR growth, the timing and extent of spending to support our product development and corporate development efforts, the timing of introductions of new products and enhancements to existing products, market acceptance of our products, and the factors described above in this Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Annual Report and our other filings with the SEC.

From time to time, we may seek to raise additional capital through equity, equity-linked, and debt financing arrangements. In addition, our board of directors and management regularly evaluate our business, strategy, and financial plans and prospects. As part of this evaluation, the board of directors and management periodically consider strategic alternatives to maximize value for our shareholders, including strategic transactions such as an acquisition, or a sale or spin-off of non-strategic company assets or businesses, including a sale of PAR Government Systems Corporation and/or one or more of its subsidiaries. We cannot provide assurance that any additional financing or strategic alternatives will be available to us on acceptable terms or at all.

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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, valuation allowances for receivables, valuation of excess and obsolete 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. Refer to "Item 1A. Risk Factors" of this Annual Report for additional information. Refer to "Note 1 - Summary of Significant Accounting Policies" for additional information regarding our accounting policies and other disclosures required by GAAP.

Revenue Recognition

Restaurant/Retail

The Company's revenue in the Restaurant/Retail segment is derived from three types of revenue: hardware sales, subscription services, and professional services. ASC Topic 606: Revenue from Contracts with Customers requires the Company to distinguish and measure performance obligations under customer contracts. Contract consideration is allocated to all performance obligations within the arrangement or contract. Performance obligations that are determined not to be distinct are combined with other performance obligations until the combined unit is determined to be distinct and that combined unit is then recognized as revenue over time or at a point in time depending on when control is transferred. The Company evaluated the potential performance obligations within its Restaurant/Retail segment and evaluated whether each performance obligation met the ASC Topic 606 criteria to be considered a distinct performance obligation.

Amounts invoiced in excess of revenue recognized represent deferred revenue. Contracts typically require payment within 30 to 90 days from the shipping date or installation date, depending on the Company's terms with the customer. The primary method used to estimate a stand-alone selling price, is the price that the Company charges for the particular good or service sold by the Company separately under similar circumstances to similar customers. The Company determines stand-alone selling prices for hardware and subscription services based on the price at which the Company sells the particular good or service separately in similar circumstances and to similar customers. The Company determines stand-alone selling prices for professional services by using an expected cost plus margin.

Hardware

Hardware revenue consists of hardware product sales and is recognized as a point in time revenue. Revenue on these items are recognized when the customer obtains control of the asset in accordance with the terms of sale. This generally occurs upon delivery to a third-party carrier for onward delivery to customer. We accept returns for hardware sales and recognize them at the time of sale as a reduction to revenue based on historical experience.

Subscription Service

Our subscription services consist of revenue from our SaaS solutions, related software support, and transaction-based payment processing services.

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SaaS solutions

SaaS solution revenues consist of subscription fees from customers for access to our SaaS solutions and third party SaaS solutions and are recognized ratably over the contract period, commencing when the subscription service is made available to the customer, as the customer simultaneously receives and consumes the benefits of the Company’s performance obligations. Our contracts with customers are generally for a period ranging from 12 to 36 months. We determined we are the principal in transferring these services to the customer and recognize revenue on a gross basis. We control the services being provided to our customer, are responsible for fulfillment of the promise in our contract with the customer, and have discretion in setting the price with our customer.

Software support

Software support revenues include fees from customers from the sales of varying levels of basic support services which are “stand-ready obligations” satisfied over time on the basis that the customer consumes and receives a benefit from having access to the Company's support resources, when and as needed, throughout the contract term, which is generally 12 months. For this reason, the basic support services are recognized ratably over the contract term since the Company satisfies its obligation to stand ready by performing these services each day.

Transaction-based payment processing

Transaction-based payment processing revenues include transaction-based payment processing services for customers which are charged a transaction fee for payment processing. This transaction fee is generally calculated as a percentage of the total transaction amount processed plus a fixed per transaction fee. We satisfy our payment processing performance obligations and recognize the transaction fees as revenue net of refunds and reversals initiated by the restaurant upon authorization by the issuing bank and submission for processing. We allocate all variable fees earned from transaction-based revenue to this performance obligation on the basis that it is consistent with the ASC 606 allocation objectives.

Our transaction-based payment processing contracts are primarily layered rate contracts. In layered rate contracts, we pass through the costs of interchange and card assessment and network fees to our customers, which are recorded as a reduction to revenue, and we incur processing fees, which are recorded as cost of sales. For layered rate contracts, we have concluded we are generally the principal in the performance obligation to process payments because we control the payment processing services before the customer receives them, perform authorization and fraud check procedures prior to submitting transactions for processing in the payment network, have sole discretion over which third-party acquiring payment processors we will use and are ultimately responsible to the customers for amounts owed if those acquiring payment processors do not fulfill their obligations. We generally have full discretion in setting processing prices charged to the customers. Additionally, we are obligated to comply with certain payment card network operating rules and contractual obligations under the terms of our registration as a payment facilitator and as a master merchant under our third-party acquiring payment processor agreements which make us liable for the costs of processing the transactions for our customers and chargebacks and other financial losses if such amounts cannot be recovered from the restaurant. However, specifically as it relates to the costs of interchange and card assessment and network fees, we have concluded we are the agent because we do not control pricing for these services and the costs are passed through to our customers.

Professional Service

Professional service revenue consists of revenues from hardware support, installations, implementations, and other professional services.

Hardware support

Hardware support revenues consists of fees from customers from the Company's Advanced Exchange overnight hardware replacement program, on-site support and extended warranty repair service programs and are all “stand-ready obligations” satisfied over time on the basis that the customer consumes and receives a benefit from having access to the Company's support resources, when and as needed, throughout the contract term, which is generally 12 months. For this reason, the support services are recognized ratably over the contract term since the Company satisfies its obligation to stand ready by performing these services each day.

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Installations

Installation revenue is recognized point in time. Installation revenue is recognized when installation is complete and the customer obtains control of the related asset. The Company offers installation services to its customers for hardware for which the Company primarily hires third-party contractors to install the equipment on the Company's behalf. The Company pays third-party contractors an installation service fee based on an hourly rate agreed to by the Company and contractor. When third-party installers are used, the Company determines whether the nature of its performance obligations is to provide the specified goods or services itself (principal) or to arrange for a third-party to provide the goods or services (agent). In the Company's customer arrangements, the Company is primarily responsible for providing a good or service, has inventory risk before the good or service is transferred to the customer, and has discretion in establishing prices; as a result, the Company has concluded that it is the principal in the arrangement and records installation revenue on a gross basis.

Implementations

Implementation revenue includes set-up and activation fees from customers to implement our SaaS solutions. We have concluded that this service does not represent a stand-alone performance obligation and is instead tied to the performance obligation to provide the subscription service. As such, we defer and amortize related revenues and costs over the life of the contract, commencing when the subscription service is made available to the customer.

Other professional services

Other professional service revenue includes hardware repairs and maintenance not covered under hardware support, business process mapping, training, and other ad hoc professional services sold separately. Other professional service revenue is recognized point in time upon the completion of the service.

Government

PAR’s Government segment provides technical expertise and development of advanced systems and software solutions for the U.S. Department of Defense, the intelligence community and other federal agencies. Additionally, we provide support services for satellite command and control, communication, and information technology systems at several DoD facilities worldwide. The Government segment has three principal contract offerings: intelligence, surveillance, and reconnaissance solutions, mission systems operations and maintenance, and commercial software products for use in analytic and operational environments that leverage geospatial intelligence data.

The Company's revenue in the Government segment is recognized over time as control is generally transferred continuously to its customers, with the exception of certain commercial software products that are transferred point in time when control transfers. Revenue generated by the Government segment is predominantly related to services; provided, however, revenue is also generated through the sale of materials, software, hardware, and maintenance. For the Government segment cost plus fixed fee contract portfolio, revenue is recognized over time using costs incurred to date to measure progress toward satisfying the Company's performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and general and administrative expenses. Profit is recognized on the fixed fee portion of the contract as costs are incurred and invoiced. Long-term fixed price contracts involve the use of judgment to estimate the total contract revenue and costs. For long-term fixed price contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete the contract, and recognizes that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events. These assumptions include: labor productivity and availability; the complexity of the work to be performed; and the performance of subcontractors. Revenue and profit in future periods of contract performance are recognized using the aforesaid assumptions, and adjusting the estimate of costs to complete a contract. Once the services provided are determined to be distinct or not distinct, the Company evaluates how to allocate the transaction price. Generally, the Government segment does not sell the same good or service to similar customers and the contract performance obligations are unique to each government solicitation.

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In the Government segment, when determining revenue recognition, the Company analyzes whether its performance obligations under Government contracts are satisfied over a period of time or at a point in time. In general, the Company's performance obligations are satisfied over a period of time; however, there may be circumstances where the latter or both scenarios could apply to a contract.

The Company usually expects payment within 30 to 90 days from the date of service, depending on its terms with the customer. None of its contracts as of December 31, 2023 or December 31, 2022 contained a significant financing component.

Inventories

The Company’s inventories are valued at the lower of cost and net realizable value, with cost determined using the weighted average cost method. The Company uses certain estimates and judgments and considers several factors including hardware 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

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 flows, including revenue growth, operating income margin and discount rate. These assumptions vary between the

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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.

Restaurants/Retail:

We performed a quantitative assessment to test our Restaurant/Retail reporting unit impairment as of October 1, 2023. 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 $655 million by approximately 37% as of October 1, 2023.

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 subscription services.

We use total annual revenue growth rates for the reporting unit ranging between 8% and 18% for the years 2024 through 2033. The growth rate reflects our projected revenues from anticipated increases in active sites of our subscription services at new and existing customer locations. These subscription services 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%.

We use gross margin estimates that are reflective of expected increased recurring subscription service revenue 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 13% 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 goodwill impairment was recorded during the years ended December 31, 2023 or 2022.

Recent Accounting Pronouncements Not Yet Adopted

Refer to “Note 1 – Summary of Significant Accounting Policies” of the notes to consolidated financial statements in "Part II, Item 8. Financial Statements and Supplementary Data" of this Annual Report for details.

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