NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Basis of presentation
The accompanying unaudited interim consolidated financial statements of PAR Technology Corporation (the “Company” or “PAR”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and the instructions to Form 10-Q and Article 8 of Regulation S-X pertaining to interim financial statements. Accordingly, they do not include all information and footnotes required by GAAP for annual financial statements. In the opinion of management, such unaudited interim consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the results for the interim periods included in this Quarterly Report on Form 10-Q (“Quarterly Report”). Operating results for the
three
months ended
March 31, 2019
are not necessarily indicative of the results of operations that may be expected for any future period.
The preparation of the unaudited interim consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include revenue recognition, stock based compensation, the recognition and measurement of assets acquired and liabilities assumed in business combinations at fair value, the carrying amount of property, plant and equipment, identifiable intangible assets and goodwill, valuation allowances for receivables, inventories and deferred income tax assets, and measurement of contingent consideration at fair value. Actual results could differ from those estimates.
The unaudited interim consolidated financial statements and related notes should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
, filed with the Securities and Exchange Commission (“SEC”) on March 18, 2019.
Note 2 - Revenue Recognition
Beginning on January 1, 2018, the Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company applies the five-step model, as described in ASU 2014-09 Revenue from Contracts with Customers, to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods and services transferred to the customer. The following steps are applied to achieve that principle:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when the company satisfies a performance obligation
The Company’s performance obligations are satisfied at the point in time when products are shipped or services are received by the customer, which is when the customer has the title and has assumed the significant risks and rewards of ownership.
Performance Obligations Outstanding
Our performance obligations outstanding represent the transaction price of firm, non-cancellable orders, with expected delivery dates to customers subsequent to
March 31, 2019
and
December 31, 2018
, respectively, for work that has not been performed. The aggregate performance obligations attributable to our two reporting segments, Restaurant/Retail and Government, is as follows (in thousands):
|
|
|
|
|
|
|
As of March 31, 2019
|
|
Current - under one year
|
Non-current - over one year
|
Restaurant
|
11,198
|
|
4,807
|
|
Government
|
337
|
|
—
|
|
TOTAL
|
11,535
|
|
4,807
|
|
|
|
|
|
|
|
|
As of December 31, 2018
|
|
Current - under one year
|
Non-current - over one year
|
Restaurant
|
9,320
|
|
4,407
|
|
Government
|
325
|
|
—
|
|
TOTAL
|
9,645
|
|
4,407
|
|
Most performance obligations over one year are related to service and support contracts, approximately
70%
of which we expect to fulfill within the one-year period and 100% within
60
months.
During the three months ended
March 31, 2019
, we recognized revenue of
$5.7 million
that was included in contract liabilities at the beginning of the period.
Disaggregated Revenue
We disaggregate revenue from contracts from customers by major product group for each of the reporting segments as we believe it best depicts how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Disaggregation of revenue for the three months ended
March 31, 2019
and
March 31, 2018
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2019
|
|
Restaurant/Retail - Point in Time
|
Restaurant/Retail - Over Time
|
Government - Over Time
|
Restaurant
|
22,336
|
|
5,790
|
|
—
|
|
Grocery
|
490
|
|
944
|
|
—
|
|
Mission Systems
|
—
|
|
—
|
|
8,546
|
|
ISR Solutions
|
—
|
|
—
|
|
6,576
|
|
TOTAL
|
22,826
|
|
6,734
|
|
15,122
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
Restaurant/Retail - Point in Time
|
Restaurant/Retail - Over Time
|
Government - Over Time
|
Restaurant
|
32,164
|
|
5,857
|
|
—
|
|
Grocery
|
753
|
|
746
|
|
—
|
|
Mission Systems
|
—
|
|
—
|
|
8,334
|
|
ISR Solutions
|
—
|
|
—
|
|
7,807
|
|
TOTAL
|
32,917
|
|
6,603
|
|
16,141
|
|
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period is less than one year or the total amount of commissions is immaterial. We record these costs within selling, general and administrative expenses.
We elected to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the Company from a customer (for example, sales, use, value added, and some excise taxes).
Note 3 — Leases
Adoption
Effective January 1, 2019, the Company adopted the new lease accounting standard, ASC 842, Leases, using the modified retrospective method of applying the new standard at the adoption date. In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard. This allowed us to carry forward the historical lease classification. Adoption of this standard resulted in the recording of operating lease right-of-use (ROU) assets and corresponding operating lease liabilities of approximately
$4.0 million
. The Company's financial position for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance.
A significant portion of our operating and finance lease portfolio includes corporate offices, research and development facilities, information technology (IT) equipment, and automobiles. The majority of our leases have remaining lease terms of
1 year
to
5 years
. Substantially all lease expense is presented within selling, general and administrative expenses on the Consolidated Statements of Operations.
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2019
|
March 31, 2018
|
Operating lease cost
|
$
|
546
|
|
$
|
457
|
|
Total lease cost
|
$
|
546
|
|
$
|
457
|
|
Supplemental cash flow information related to leases was as follows:
|
|
|
|
|
|
Three Months Ended
March 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows paid for operating leases
|
$
|
546
|
|
Supplemental balance sheet information related to leases was as follows:
|
|
|
|
|
March 31, 2019
|
Operating leases
|
|
Operating lease right-of-use assets
|
3,697
|
|
Operating lease liabilities - current portion
|
1,540
|
|
Operating lease liabilities - net of current portion
|
2,177
|
|
Total operating lease liabilities
|
3,717
|
|
Weighted-average remaining lease term
|
|
Operating leases
|
3.4 years
|
|
Weighted-average discount rate
|
|
Operating leases
|
4
|
%
|
Future minimum lease payments are as follows:
|
|
|
|
|
|
Operating Leases
|
2019
|
$
|
1,652
|
|
2020
|
1,006
|
|
2021
|
902
|
|
2022
|
752
|
|
2023
|
574
|
|
Thereafter
|
75
|
|
Total lease payments
|
4,961
|
|
Less: interest
|
(1,244
|
)
|
Total
|
$
|
3,717
|
|
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining noncancellable lease terms in excess of one year would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less
Than
1 Year
|
|
1-3 Years
|
|
3 - 5
Years
|
|
More than 5
Years
|
Operating leases
|
$
|
4,961
|
|
|
|
$
|
1,652
|
|
|
|
$
|
1,908
|
|
|
$
|
1,326
|
|
|
$
|
75
|
|
Total
|
$
|
4,961
|
|
—
|
|
$
|
1,652
|
|
—
|
|
$
|
1,908
|
|
|
$
|
1,326
|
|
|
$
|
75
|
|
Note 4 — Accounts Receivable
The Company’s accounts receivable, net, consists of (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Government reporting segment:
|
|
|
|
Billed
|
$
|
10,428
|
|
|
$
|
9,100
|
|
Advanced billings
|
(243
|
)
|
|
(563
|
)
|
|
10,185
|
|
|
8,537
|
|
|
|
|
|
Restaurant/Retail reporting segment:
|
19,126
|
|
|
17,682
|
|
Accounts receivable - net
|
$
|
29,311
|
|
|
$
|
26,219
|
|
At
March 31, 2019
and
December 31, 2018
, the Company recorded allowances for doubtful accounts of
$1.4 million
and
$1.3 million
, respectively, against Restaurant/Retail reporting segment accounts receivable.
Note 5 — Inventories
Inventories are primarily used in the manufacture, maintenance and service of Restaurant/Retail reporting segment products. The components of inventories, net, consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Finished goods
|
$
|
11,312
|
|
|
$
|
12,472
|
|
Work in process
|
452
|
|
|
67
|
|
Component parts
|
4,522
|
|
|
4,716
|
|
Service parts
|
6,353
|
|
|
5,482
|
|
|
$
|
22,639
|
|
|
$
|
22,737
|
|
At
March 31, 2019
and
December 31, 2018
, the Company recorded inventory reserves of
$10.4 million
and
$9.8 million
, respectively, against Restaurant/Retail reporting segment inventories, which relate primarily to service parts.
Note 6 — Identifiable Intangible Assets and Goodwill
Identifiable intangible assets represent intangible assets acquired by the Company in connection with its acquisition of Brink Software Inc. in 2014 ("Brink Acquisition") and software development costs. The Company capitalizes certain software development costs for software used in its Restaurant/Retail reporting segment. Software development costs incurred prior to establishing technological feasibility are charged to operations and included in research and development costs. The technological feasibility of a software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary to establish that the product meets its design specifications, including functionality, features, and technical performance requirements. Software development costs incurred after establishing technological feasibility for software sold as a perpetual license, as defined within ASC 985-20 (Software – Costs of Software to be sold, Leased, or Marketed) are capitalized and amortized on a product-by-product basis when the product is available for general release to customers. Software development is also capitalized in accordance with ASC 350-40, “Intangibles - Goodwill and Other - Internal - Use Software,” and is amortized over the expected benefit period, which generally ranges from
three
to
seven
years. Software development costs capitalized within continuing operations during the
three
months ended
March 31, 2019
and
March 31, 2018
were
$1.0 million
and
$1.1 million
, respectively.
Annual amortization, charged to cost of sales is computed using the greater of (a) the straight-line method over the remaining estimated economic life of the product, generally
three
to
seven
years or (b) the ratio that current gross revenues for the product bear to the total of current and anticipated future gross revenues for the product. Amortization of capitalized software development
costs from continuing operations for the
three
months ended
March 31, 2019
and
2018
were
$0.5 million
and
$0.8 million
, respectively.
Amortization of intangible assets acquired in the Brink Acquisition amounted to
$0.2 million
for each of the
three
month periods ended
March 31, 2019
and
2018
.
The components of identifiable intangible assets are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Estimated
Useful Life
|
Acquired and internally developed software costs
|
$
|
23,013
|
|
|
$
|
21,977
|
|
|
3 - 7 years
|
Customer relationships
|
160
|
|
|
160
|
|
|
7 years
|
Non-competition agreements
|
30
|
|
|
30
|
|
|
1 year
|
|
23,203
|
|
|
22,167
|
|
|
|
Less accumulated amortization
|
(12,427
|
)
|
|
(11,708
|
)
|
|
|
|
$
|
10,776
|
|
|
$
|
10,459
|
|
|
|
Trademarks, trade names (non-amortizable)
|
400
|
|
|
400
|
|
|
N/A
|
|
$
|
11,176
|
|
|
$
|
10,859
|
|
|
|
The expected future amortization of intangible assets, assuming straight-line amortization of capitalized software development costs and acquisition related intangibles, is as follows (in thousands):
|
|
|
|
|
2019
|
$
|
2,046
|
|
2020
|
2,653
|
|
2021
|
1,549
|
|
2022
|
649
|
|
2023
|
365
|
|
Thereafter
|
3,514
|
|
Total
|
$
|
10,776
|
|
The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate that there may be impairment. The Company operates in
two
reporting segments, Restaurant/Retail and Government. Goodwill impairment testing is performed at the reporting unit level. Goodwill is assigned to a specific reporting unit at the date the goodwill is initially recorded. Once goodwill has been assigned to a specific reporting unit, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or organically grown, are available to support the value of the goodwill. The amount of goodwill carried by the Restaurant/Retail and Government reporting units is
$10.3 million
and
$0.8 million
, respectively, at
March 31, 2019
and
December 31, 2018
. No impairment charges were recorded for the periods ended
March 31, 2019
and
December 31, 2018
.
Note 7 — Stock Based Compensation
The Company applies the fair value recognition provisions of ASC Topic 718. The Company recorded stock based compensation of
$0.2 million
for each of the
three
month periods ended
March 31, 2019
and
March 31, 2018
. The amount recorded for the
three
months ended
March 31, 2019
was net of benefits of
$27,000
and
March 31, 2018
was
zero
which was the result of forfeitures of unvested stock awards prior to completion of the requisite service period and/or failure to achieve performance criteria. At
March 31, 2019
, the aggregate unrecognized compensation expense related to unvested equity awards was
$1.9 million
(net of estimated forfeitures), which is expected to be recognized as compensation expense in fiscal years
2019
through
2021
.
For the
three
month periods ended
March 31, 2019
and
2018
, the Company recognized compensation expense related to performance awards based on its estimate of the probability of achievement in accordance with ASC Topic 718.
Note 8 — Net (loss) income per share
Earnings per share are calculated in accordance with ASC Topic 260, which specifies the computation, presentation and disclosure requirements for earnings per share (EPS). It requires the presentation of basic and diluted EPS. Basic EPS excludes all dilution and is based upon the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that would occur if convertible securities or other contracts to issue common stock were exercised. For the
three months ended
March 31, 2019
, there were
486,000
anti-dilutive stock options outstanding compared to
none
as of
March 31, 2018
.
The following is a reconciliation of the weighted average of shares of common stock outstanding for the basic and diluted EPS computations (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31,
|
|
2019
|
|
2018
|
Net (loss) income
|
$
|
(2,729
|
)
|
|
$
|
68
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
Shares outstanding at beginning of period
|
16,041
|
|
|
15,949
|
|
Weighted average shares issued/(repurchased) during the period, net
|
3
|
|
|
(1
|
)
|
Weighted average common shares, basic
|
16,044
|
|
|
15,948
|
|
Net (loss) income per common share, basic
|
$
|
(0.17
|
)
|
|
$
|
—
|
|
Diluted:
|
|
|
|
|
|
Weighted average common shares, basic
|
16,044
|
|
|
15,948
|
|
Dilutive impact of stock options and restricted stock awards
|
—
|
|
|
338
|
|
Weighted average common shares, diluted
|
16,044
|
|
|
16,286
|
|
Net (loss) income per common share, diluted
|
$
|
(0.17
|
)
|
|
$
|
—
|
|
Note 9 — Contingencies
The Company is subject to legal proceedings, which arise in the ordinary course of business. Additionally, U.S. Government contract costs are subject to periodic audit and adjustment. In the third quarter of 2016, the Company's Audit Committee commenced an internal investigation into conduct at the Company's China and Singapore offices to determine whether certain import/export and sales documentation activities were improper and in violation of the U.S. Foreign Corrupt Practices Act ("FCPA") and other applicable laws and certain Company policies. In the fourth quarter of 2016, the Company voluntarily notified the SEC and the U.S. Department of Justice ("DOJ") of the internal investigation, and on May 1, 2017 the Company received a document subpoena from the SEC for documents relating to the internal investigation. Following the conclusion of the Audit Committee's internal investigation, the Company voluntarily reported the relevant findings of the investigation to the China and Singapore authorities and is fully cooperating with these authorities. During the three months ended
March 31, 2019
, we recorded
$0.2 million
of expenses relating to the internal investigation, including expenses of outside legal counsel and forensic accountants, compared to
$0.3 million
for the three months ended
March 31, 2018
.
As described in Note 13 - Subsequent Events, to the unaudited interim consolidated financial statements, in early April 2019, the SEC notified the Company that based on current information, it did not intend to recommend an enforcement action against the Company; shortly, thereafter, the DOJ advised that it did not intend to separately proceed. As stated above, we continue to cooperate with the China and Singapore authorities; we are currently not able to predict what actions these authorities might take, or what the likely outcome of any such actions might be, or estimate the range of reasonably possible fines or penalties, which may be material. The China and Singapore authorities have a broad range of civil and criminal sanctions, and the imposition of fines or penalties could have a material adverse effect on the Company’s business, prospects, reputation, financial condition, results of operations or cash flows.
Note 10 — Segment and Related Information
The Company operates in
two
distinct reporting segments, Restaurant/Retail and Government. The Company’s chief operating decision maker is the Company’s Chief Executive Officer. The Restaurant/Retail reporting segment offers point-of-sale ("POS") and management technology solutions to restaurants and retail, including in the fast casual, quick serve and table service restaurant categories. This segment also offers customer support including field service, installation, Advanced Exchange, and twenty-four-
hour telephone support and depot repair. The Government reporting segment performs complex technical studies, analysis, and experiments, develops innovative solutions, and provides on-site engineering in support of advanced defense, security, and aerospace systems. This segment also provides expert on-site services for operating and maintaining U.S. Government-owned communication assets.
Information noted as “Other” primarily relates to the Company’s corporate, home office operations.
Information as to the Company’s reporting segments is set forth below (in thousands).
|
|
|
|
|
|
|
|
|
|
Three Months
Ended March 31,
|
|
2019
|
|
2018
|
Revenues:
|
|
|
|
Restaurant/Retail
|
$
|
29,560
|
|
|
$
|
39,520
|
|
Government
|
15,122
|
|
|
16,141
|
|
Total
|
$
|
44,682
|
|
|
$
|
55,661
|
|
|
|
|
|
Operating (loss) income:
|
|
|
|
|
|
Restaurant/Retail
|
$
|
(2,982
|
)
|
|
$
|
(608
|
)
|
Government
|
1,363
|
|
|
1,266
|
|
Other
|
(482
|
)
|
|
(520
|
)
|
|
(2,101
|
)
|
|
138
|
|
Other (expense) income, net
|
(430
|
)
|
|
49
|
|
Interest expense, net
|
(146
|
)
|
|
(41
|
)
|
(Loss) income before provision for income taxes
|
$
|
(2,677
|
)
|
|
$
|
146
|
|
|
|
|
|
Depreciation, amortization and accretion:
|
|
|
|
|
|
Restaurant/Retail
|
$
|
868
|
|
|
$
|
908
|
|
Government
|
19
|
|
|
5
|
|
Other
|
125
|
|
|
149
|
|
Total
|
$
|
1,012
|
|
|
$
|
1,062
|
|
|
|
|
|
Capital expenditures including software costs:
|
|
|
|
|
|
Restaurant/Retail
|
$
|
1,063
|
|
|
$
|
1,139
|
|
Government
|
176
|
|
|
—
|
|
Other
|
684
|
|
|
531
|
|
Total
|
$
|
1,923
|
|
|
$
|
1,670
|
|
|
|
|
|
Revenues by country:
|
|
|
|
|
|
United States
|
$
|
41,925
|
|
|
$
|
52,678
|
|
Other Countries
|
2,757
|
|
|
2,983
|
|
Total
|
$
|
44,682
|
|
|
$
|
55,661
|
|
The following table represents identifiable assets by reporting segment (in thousands).
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Restaurant/Retail
|
$
|
73,255
|
|
|
$
|
68,004
|
|
Government
|
13,487
|
|
|
9,867
|
|
Other
|
18,306
|
|
|
16,810
|
|
Total
|
$
|
105,048
|
|
|
$
|
94,681
|
|
The following table represents assets by country based on the location of the assets (in thousands).
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
United States
|
$
|
95,105
|
|
|
$
|
84,652
|
|
Other Countries
|
9,943
|
|
|
10,029
|
|
Total
|
$
|
105,048
|
|
|
$
|
94,681
|
|
The following table represents goodwill by reporting unit (in thousands).
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Restaurant/Retail
|
$
|
10,315
|
|
|
$
|
10,315
|
|
Government
|
736
|
|
|
736
|
|
Total
|
$
|
11,051
|
|
|
$
|
11,051
|
|
Customers comprising 10% or more of the Company’s total revenues are summarized as follows:
|
|
|
|
|
|
|
|
Three Months
Ended March 31,
|
|
2019
|
|
2018
|
Restaurant/Retail reporting segment:
|
|
|
|
McDonald’s Corporation
|
10
|
%
|
|
27
|
%
|
Yum! Brands, Inc.
|
13
|
%
|
|
11
|
%
|
Government reporting segment:
|
|
|
|
|
|
U.S. Department of Defense
|
34
|
%
|
|
29
|
%
|
All Others
|
43
|
%
|
|
33
|
%
|
|
100
|
%
|
|
100
|
%
|
No other customer within All Others represented more than 10% of the Company’s total revenue for the
three
months ended
March 31, 2019
and
2018
.
Note 11 Fair Value of Financial Instruments
The Company’s financial instruments have been recorded at fair value using available market information and valuation techniques. The fair value hierarchy is based upon three levels of input, which are:
Level 1 — quoted prices in active markets for identical assets or liabilities (observable)
Level 2 — inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in inactive markets, or other inputs that are observable market data for essentially the full term of the asset or liability (observable)
Level 3 — unobservable inputs that are supported by little or no market activity, but are significant to determining the fair value of the asset or liability (unobservable)
The Company’s financial instruments primarily consist of cash and cash equivalents, trade receivables, trade payables, debt instruments and deferred compensation assets and liabilities. The carrying amounts of cash and cash equivalents, trade receivables and trade payables as of
March 31, 2019
and
December 31, 2018
were considered representative of their fair values. The estimated fair value of the Company’s long-term debt and line of credit on
March 31, 2019
and
December 31, 2018
was based on variable and fixed interest rates on such respective dates and approximates their respective carrying values at
March 31, 2019
and
December 31, 2018
.
The deferred compensation assets and liabilities primarily relate to the Company’s deferred compensation plan, which allows for pre-tax salary deferrals for certain key employees. Changes in the fair value of the deferred compensation liabilities are derived using quoted prices in active markets of the asset selections made by the participants. The deferred compensation liabilities are classified within Level 2, the fair value classification as defined under FASB ASC 820,
"Fair Value Measurements"
, because their inputs are derived principally from observable market data by correlation to the hypothetical investments. The Company holds insurance investments to partially offset the Company’s liabilities under its deferred compensation plan, which are recorded at fair value each period using the cash surrender value of the insurance investments.
The amounts owed to employees participating in the Deferred Compensation Plan at
March 31, 2019
was
$3.2 million
compared to
$3.6 million
at
December 31, 2018
and is included in other long-term liabilities on the consolidated balance sheets.
Under the stock purchase agreement governing the Brink Acquisition, in the event certain defined revenues were determined to have been achieved in 2015, 2016, 2017 and 2018 ("contingent consideration period"), the Company would be obligated to pay additional purchase price consideration ("Brink Earn Out"). The fair value of the Brink Earn Out was estimated using a discounted cash flow method, with significant inputs that are not observable in the market and thus represents a Level 3 fair value measurement as defined in ASC 820, Fair Value Measurements and Disclosures. The significant inputs in the Level 3 measurement not supported by market activity included the Company’s probability assessments of expected future cash flows related to the Company’s acquisition of Brink Software Inc. during the contingent consideration period, appropriately discounted considering the uncertainties associated with the obligation. Any change in the fair value adjustment had been recorded in the earnings of that contingent consideration period. For the
$2.6 million
of Brink Earn Out targets achieved during the 2018 period, the Company paid the amount in full in March 2019. No Brink Earn Out targets had been achieved for the 2015, 2016, or 2017 years.
.
The following table presents a summary of changes in fair value of the Company’s Level 3 assets and liabilities that are measured at fair value on a recurring basis, and are recorded as a component of other long-term liabilities on the consolidated balance sheet (in thousands):
|
|
|
|
|
|
Level 3 Inputs
|
|
Liabilities
|
Balance at December 31, 2018
|
$
|
2,550
|
|
New level 3 liability
|
—
|
|
Total gains (losses) reported in earnings
|
—
|
|
Settlement of Level 3 liabilities
|
(2,550
|
)
|
Balance at March 31, 2019
|
$
|
—
|
|
Note 12 — Related Party Transactions
The Company leased its corporate wellness facility to related parties at a rate of
$9,775
per month. The Company received complimentary memberships to this facility which were provided to local employees. Expenses incurred by the Company relating to the facility amounted to
$0
and
$55,000
during the three months ended
March 31, 2019
and
2018
, respectively. The Company did
not
recognize any rental income from the related party during the three months ended March 31, 2019 and recognized
$29,325
for the three month period ended March 31, 2018. Additionally, the Company did not have any rent receivable from the related party for the periods ended March 31, 2019 or December 31, 2018.
Note 13 — Subsequent Events
Convertible Notes
On April 10, 2019, the Company entered into a Purchase Agreement with Jefferies LLC, (the “Initial Purchaser”), relating to its issuance and sale of
$80.0 million
in aggregate principal amount, including the simultaneous closing of the full exercise on April 11, 2019 of the Initial Purchaser’s option to purchase additional notes, of
4.5%
Convertible Senior Notes due 2024 (the “notes”). The notes were issued pursuant to an indenture, dated April 15, 2019, between the Company and The Bank of New York Mellon Trust Company, N.A. (“Trustee”), referred to herein as the “Indenture.”
The Company received net proceeds from its sale of the notes, including net proceeds from the option to purchase additional notes, of approximately
$75.2 million
. A portion of the proceeds was used to repay in full amounts outstanding under the Credit Agreement, dated June 5, 2018, among the Company, as borrower, with certain of its U.S. subsidiaries, and Citizens Bank, N.A., as lender (as amended by the First Amendment thereto, dated March 4, 2019, the “Credit Agreement), which were approximately
$16.1 million
as of March 31, 2019, and terminate the Credit Agreement. the Company intends to use the remaining proceeds for general corporate purposes, including funding investment in the Company’s Brink business and for other working capital needs. The Company may also use a portion of the proceeds to acquire or invest in other assets complementary to its business. The notes are senior, unsecured obligations of the Company and bear interest at a rate equal to
4.500%
per year. Interest on the notes is payable semiannually in arrears on April 15 and October 15 of each year, beginning October 15, 2019. Interest will accrue on the notes from the last date to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from April 15, 2019. Unless earlier converted, redeemed or repurchased, the notes will mature on April 15, 2024.
The notes are convertible, at the option of the holder, at any time prior to the close of business on the business day immediately preceding October 15, 2023, but only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2019 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for each of at least
20
trading days (whether or not consecutive) during the
30
consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than
130%
of the conversion price on such trading day; (2) during the
five
consecutive business day period immediately after any
five
consecutive trading day period (the five consecutive trading day period being referred to as the ‘‘measurement period’’) in which the trading price (as defined in the offering memorandum) per $1,000 principal amount of the notes, as determined following a request by a holder of the notes, for each trading day of the measurement period was less than
98%
of the product of the last reported sale price of the Company’s common stock and the conversion rate on such trading day; (3) upon the occurrence of certain specified corporate events; or (4) if the Company has called the notes for redemption. In addition, regardless of the foregoing circumstances, holders may convert their notes at any time on or after October 15, 2023 until the close of business on the second business day immediately preceding the maturity date. Upon conversion, the Company may satisfy its conversion obligation by paying or delivering, as the case may be, cash, shares of the Company common stock or a combination of cash and shares of the Company common stock, at its election.
The Indenture contains covenants that, among other things, restrict the Company’s ability to merge, consolidate or sell, or otherwise dispose of, substantially all of its assets. These limitations are subject to a number of important qualifications and exceptions. The Indenture contains customary Events of Default (as defined in the Indenture), including default for
30
days in the payment when due of interest on the notes; default in the payment when due (at maturity, upon redemption or otherwise) of the principal of the notes; failure to comply with covenants and other obligations under the Indenture, including delivery of required notices and obligations in connection with conversion, in certain cases subject to notice and grace periods; payment defaults and accelerations with respect to other indebtedness of the Company and its significant subsidiaries in the aggregate principal amount of
$10.0 million
or more; failure by the Company or its significant subsidiaries to pay certain final judgments aggregating in excess of
$10.0 million
within
60
consecutive days of such final judgment; and specified events involving bankruptcy, insolvency or reorganization of the Company or its significant subsidiaries.
Upon an Event of Default, the trustee or the holders of at least
25%
in aggregate principal amount of the notes then outstanding may declare all the notes to be due and payable immediately. In the case of Events of Default relating to bankruptcy, insolvency or reorganization, all outstanding notes will become due and payable immediately without further action or notice.
Termination of Citizens Bank Credit Agreement
In connection with its issuance of the notes, on April 15, 2019, the Company repaid all amounts outstanding under, and terminated, the Credit Agreement. The Credit Agreement had provided for revolving loans in an aggregate principal amount of up to
$25.0 million
, or, during any Borrowing Base Period (as defined in the Credit Agreement), up to the lesser of
$25.0 million
and the Borrowing Base (as defined in the Credit Agreement), less any principal amount outstanding. Borrowings under the Credit Agreement were scheduled to fully mature on June 5, 2021.
Internal Investigation
On April 10, 2019, the SEC notified the Company that based on current information, it did not intend to recommend enforcement against the Company; shortly, thereafter, the DOJ advised that it did not intend to proceed.