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Edited Transcript of PAR earnings conference call or presentation 15-Mar-18 8:30pm GMT

Q4 2017 PAR Technology Corp Earnings Call

NEW HARTFORD Mar 20, 2018 (Thomson StreetEvents) -- Edited Transcript of PAR Technology Corp earnings conference call or presentation Thursday, March 15, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan A. Menar

PAR Technology Corporation - CFO, VP and Principal Financial & Accounting Officer

* Christopher R. Byrnes

PAR Technology Corporation - VP of Business & Financial Relations

* Donald H. Foley

PAR Technology Corporation - CEO, President & Director

* Karen E. Sammon

PAR Technology Corporation - Chief of Staff & Strategy

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Conference Call Participants

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* Edward William Wedbush

Wedbush Securities Inc. - President & Director

* Joseph Vidich

* Walter Schenker

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to PAR Technology Corporation 2017 Fourth Quarter and Year-end Financial Results. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Chris Byrnes, Vice President of Business and Financial Relations. Sir, you may begin.

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Christopher R. Byrnes, PAR Technology Corporation - VP of Business & Financial Relations [2]

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Thank you, Victor. Good afternoon, everyone. I'd like to take this opportunity to welcome you today for the call for PAR's 2017 fourth quarter and year-end financial results review. The complete disclosure of our results can be found in our press release issued today at 4:00 p.m. as well as in our related Form 8-K furnished to the SEC. To access the press release and the financial details, please see the Investor Relations and News section of our website at www.partech.com.

At this time, I'd like to take care of certain details in regards to the call today. Participants on the call should be aware that we are recording the call this afternoon, and it will be available for playback. Also, we are broadcasting the conference call via the World Wide Web. So please be advised, if you ask a question, it will be included in both our live conference and any future use of the recording.

I'd like to remind participants that this conference call includes forward-looking statements that reflect management's expectations based on currently available data. However, actual results are subject to future events and uncertainties. The information on this conference call related to projections or other forward-looking statements may be relied upon and subject to the safe harbor statement included in our earnings release this afternoon and in our annual and quarterly filings with the SEC.

Joining me on the call today is PAR's President and CEO, Dr. Donald Foley; Bryan Menar, PAR's Chief Financial Officer; and Karen Sammon, the company's Chief of Staff.

I'd now like to turn the call over to Don for the formal remarks portion of the call, which will be followed by general Q&A. Don?

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [3]

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Thank you, Chris. Good afternoon to each of you. I'll begin today by highlighting our financial results for the fourth quarter, by providing an overview of our business and by discussing our strategy for 2018. I'll then turn the call over to our CFO, Bryan, who will take a closer look at the numbers. We'll conclude the call as usual by taking your questions.

Fourth quarter revenues were $55.5 million, a decrease of 7.8% compared to the fourth quarter last year. This decrease is attributed to the large hardware projects for a specific Tier 1 restaurant customer in the fourth quarter of 2016. These projects were completed in the first half of 2017. I am pleased to report that sequentially, revenues rose $6.6 million, a 13.5% increase from the third quarter, primarily due to the higher adoption of our EverServ terminals by both our Tier 1 and Brink customers.

On a GAAP basis, we reported a net loss of $5.3 million and $0.33 loss per share in the fourth quarter compared to net income of $1.9 million and $0.12 earnings per share in Q4 2016. Our GAAP results included a total of $5.2 million of nonoperating charges dominated by a noncash deferred tax asset adjustment of $4.5 million associated with the recently passed Tax Cuts and Jobs Act. Bryan will add additional details later on the call.

On an non-GAAP basis, we reported a net loss of $59,000 in the quarter and an earnings per share of 0. We remain focused on execution, while balancing expense management and simultaneously making important and necessary investments in our strategic initiatives, especially our software solutions. Brink is the cornerstone of the strategy and by far, our most important initiative.

In the fourth quarter, we added 522 new Brink customers and for 2017, a total of 1,922 new stores were activated. We ended the year with approximately 4,200 clients, an increase of 70%, let me repeat that, an increase of 70% over 2016. New Brink bookings in the fourth quarter totaled 1,467 restaurants as compared with only 426 restaurants in Q3. Let me repeat that. New bookings in the fourth quarter were 1,467 restaurants. We started 2018 with a backlog of 1,317 stores.

As a software-led solutions company, it's important to note that our Brink business includes significant attachment of hardware and service revenues. In 2017, our Brink hardware attachment was approximately 70%. Brink's recurring software revenue model with pull-through Hardware as a Service is our strategy to annuitize our business, creating stickiness with our customers.

Now turning to SureCheck. Monetizing SureCheck, PAR's food safety and digital task management solution remains a strategic initiative. In 2017, market adoption was slower than we had anticipated and several new competitors entered the market space. While we remain confident in the value of our SureCheck platform, we have reduced our investment in SureCheck to concentrate our resources on Brink opportunities. That said, SureCheck has 2 large anchor customers that contribute significant recurring revenues through annual hosting and software maintenance fees. Other customers in grocery, casinos, restaurants, subscribe to our software platform on a monthly Software as a Service basis as well as are committed to our hardware devices.

In the fourth quarter, we announced that Oneida Nations' Turning Stone Resort Casino, a premier 4-season destination resort, had deployed PAR SureCheck, food safety and task management system. SureCheck is being implemented in their on-site restaurants, catering kitchens, with plans to expand into other commercial properties owned by The Oneida Nation.

Now to review our Government segment performance. I am pleased to report that we have now lapped our deliberate transition away from our low-margin program management office primarily pass-through revenue by focusing on our Intel solutions in our mission systems business lines. This quarter's Government contract revenues grew 6% when compared to the same period last year, even with a 52% decline in PMO-associated revenues. Our Intel solution revenues grew by 79% in the quarter and was a key driver of our contract margin expansion.

Our margin expansion was 12.8 -- our margin was 12.8% for the quarter, a 55% increase from a year ago. We do not expect to maintain this margin level in 2018. It should return to the more normal range of 8% to 10%.

Our Government closed 2017 with a multiyear contract, backlog of over $111 million. We are confident that our Government segment will continue to drive success as they continue to secure additional value-added contracts.

Before turning the call over to Bryan for a closer look at the numbers, I would like to recap some general observations and reiterate our priorities for the coming year. Having been CEO now for 11 months, it is clear that our greatest opportunity for increasing shareholder value is through investment in our future, ensuring that our strategic initiatives in Cloud-based software solutions continue to have the necessary resources to succeed.

These investments include increasing R&D spend for our market-leading Cloud POS restaurant platform, building the customer success organization to ensure that our valued customers are maximizing our solutions for their operations and by investing in our internal IT systems infrastructure to enable process improvement and cost-efficient automation of workflows. Along with these necessary investments, we are taking steps required for our transition with enhanced focus on execution.

In the fourth quarter as part of that transition strategy, we announced a reduction in our domestic and international workforce. The estimated annual operating savings of $3.5 million will be reinvested in the initiatives previously described. Our company is in a solid position to deliver upon our strategy of accelerated customer adoption and in growing our monthly recurring revenue rates with our software offerings.

I want to reiterate 2 important leading indicators. First, PAR's Government segment returned to revenue growth in the quarter, while continuing to increase profits. Second, our -- I'll repeat this number. Our Brink bookings increased from 426 in Q3 to over 1,400 in Q4. Secondly, 70% of those bookings in the fourth quarter were tied to major accounts captured in 2017. This is evidenced of the success of our Brink strategy to invest in the development of our solution for multiunit operators.

In closing, I would like to thank the men and women of PAR for their commitment, their hard work and their sacrifices during this period of our company's transition. Our people are our most important asset, and it is because of them and only them, and the opportunities that they have created that I am bullish about PAR's feature.

I would now like to ask Bryan to give some details on the financials.

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Bryan A. Menar, PAR Technology Corporation - CFO, VP and Principal Financial & Accounting Officer [4]

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Thank you, Don, and good afternoon, everyone. Product revenue for the quarter was $24.5 million, down $6.5 million, a 20.8% decrease compared to Q4 2016. During the quarter, the decrease in product revenue was primary driven by a lapping of major project installations in Q4 2016 for our hardware solutions with our Tier 1 customers in our Restaurant/Retail segment. Additionally, the hardware associated with deployment of Brink POS decreased approximately 800,000 versus Q4 2016, as we lapped in active installation period with Five Guys.

Service revenue for the quarter was $13.8 million, up $0.8 million, a 6.4% increase compared to Q4 of 2016. We continue to expand our recurring revenue base, which includes both software-related services and the hardware support contracts. Recurring revenue for the quarter was $9.4 million, up approximately $0.6 million, a 7.1% increase compared to Q4 2016 due to an increase in software of $1 million, offset by hardware support contracts, down $0.4 million.

Momentum continued with our deployments of Brink and SureCheck, noting a 90% increase of Software as a Service compared to prior year. We exited the quarter with approximately $7.5 million of annual recurring revenue from Software as a Service contracts.

Contracts revenue from our Government business was $17.2 million, up $1 million, a 5.9% increase compared to Q4 2016. This increase was driven by a $3.5 million increase in our Intelligence Surveillance and Reconnaissance, ISR business line, partially offset by a $2.4 million decrease in our PMO business line as we wound down a large multiyear contract earlier in 2017. Contract backlog continues to be healthy, as Don noted, total backlog of over $111 million as of December 31, 2017.

In regards to margin performance for the quarter. Product margin for the quarter was 26.5% compared to 25.9% in Q4 2016. As a product mix and the respective margin rates for the underlying products was relatively consistent year-over-year.

Service margin for the quarter was 28.3% compared to 23.8% in Q4 2016. This favorable improvement in margin rates year-over-year are driven by product mix shifting with the growth of Brink SaaS outpacing other service offerings.

Government contract margin for the quarter was 12.8% compared to 8.9% in Q4 2016. The favorable variance of the result of the shift that Don noted in our revenue mix from the PMO, the higher value added product offerings of ISR and mission systems. In addition, to improve margin rates in both ISR and mission systems.

Now to review operating expenses. GAAP SG&A was $10.6 million, up $2.4 million versus Q4 2016. The increase was primarily due to investment in personnel to support the current and future growth in our Brink and SureCheck products, in addition to corporate investments to support the improvements in compliance and financial controls.

Non-GAAP SG&A was $9.1 million, up $2.5 million versus Q4 2016. Non-GAAP SG&A adjustments for Q4 2017 included $0.7 million related to the China-Singapore investigation, $0.5 million for severance and $0.3 million for equity-based compensation.

Research and development expenses were $4.2 million, up $1 million versus Q4 2016 primarily driven by investments to support the current and future growth in Brink.

Now to provide information on the company's cash flow and balance sheet position. For the year ended December 31, 2017, cash provided by operations was $0.3 million and included $6.9 million of net amortization of deferred revenue, primarily driven by customer deposits received in Q4 2016 related to 2017 deployments. Cash used in investing activities was $8.9 million for the 12 months ended December 31, 2017, versus cash used of $7.1 million for the 12 months ended December 31, 2016.

In the 12 months ended December 31, 2017, our capital expenditures of $5.1 million were primarily related to the implementation of our enterprise resource planning system, information systems infrastructure and capital improvements made to our owned and leased properties. We capitalized $3.8 million in costs associated with investments in our Restaurant/Retail segment and software platforms.

Cash provided by financing activities was $6.1 million for the 12 months ended December 31, 2017, primarily driven by receipt of the final installment related to the 2015 sale of the hotel business unit, proceeds from exercise of employee stock options and borrowings under our line of credit. As of December 31, 2017, the inventory balance was $21.7 million, a decrease of $4.5 million for the 12 months ended December 31, 2017. Inventory turns were 4x for the quarter.

Accounts receivable decreased $0.6 million or 2% compared to December 31, 2016. Restaurant/Retail DSO increased to 57 days as of December 2017 versus 55 days as of December 2016. Government DSO was 37 days versus 44 days as of December 2016.

This concludes my formal remarks, and we would now like to open the call to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Joe Vidich from Manalapan Oracle.

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Joseph Vidich, [2]

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My first question has to do with SureCheck, and just if you could perhaps elaborate a little bit on whether you're going to just -- what you're going to do with that business, whether you're looking to sell it or just keeping it sort of as is mode?

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [3]

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Well, we're going to -- we're looking at -- in all options, obviously, we want to monetize it for our shareholders. We do have our 2 anchored customers who provide a lot of revenue. We are still investing. When I said we were reducing the investment, that does not mean we are abandoning the investment. It has potential. We're seeing new competitors, which is, in one sense, a bad time, but in another sense, a good time. As the market matures, we're -- there's still some real opportunity for us, and we're going to use 2018 to judge what that opportunity is.

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Joseph Vidich, [4]

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Okay. I guess my -- just diving a little bit deeper into it. My assumption is that you've got limited resources and you've got this massive opportunity with Brink, and it seems like what you're saying is that you're really going to -- you want to take advantage of that and in the meantime -- is that sort of how you look at it?

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [5]

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Yes, I think you nailed it.

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Joseph Vidich, [6]

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Okay then, that's great. The other question I had is just with regard -- this quarter, you guys had the professional service charges of $2.7 million, and I was wondering if you had any idea if those chargers are going to start to diminish going forward, or if you could -- if you're able to talk a little bit more about what the status of that investigation is?

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Bryan A. Menar, PAR Technology Corporation - CFO, VP and Principal Financial & Accounting Officer [7]

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Sure. What we saw during last year, we saw a phasing of those charges during last year diminish -- or we reduced as each quarter progressed. Obviously, we're in a farther long stages within that, to be able to predict exactly where we're going to come out. In regards to the go-forward phasing, we are not predicting, we're kind of predicting the consistent of what we've seen play out in '17 into '18 as we get to the latter stages and hopefully, get through this within this first half of the year, but we're not having definitive deadlines on that.

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Joseph Vidich, [8]

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Do you think that those -- that type of -- those type of charges will continue or -- to that level? Or would you expect some sort of moderation?

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Bryan A. Menar, PAR Technology Corporation - CFO, VP and Principal Financial & Accounting Officer [9]

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As I said, where we are in the process is in the latter stages so there's a heavier activity earlier last year as we did a lot of the work and using outside advisers and doing the internal investigation that we're doing for our self-reporting purposes. We've gone through that phase and now, we are in the latter phases. So that activity has diminished, and we -- that's what we project as we finish out to this year.

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Operator [10]

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(Operator Instructions) And our next question comes from the line of Walter Schenker from MAZ Partners.

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Walter Schenker, [11]

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A couple of questions on Brink. At what point will there be more information as to which larger chains you're doing business with, if I understood the release for the fourth quarter, about 2/3 of the new orders came from large change, is that correct?

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [12]

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Karen, you want to take that one?

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Karen E. Sammon, PAR Technology Corporation - Chief of Staff & Strategy [13]

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Sure. So the large number of bookings in the fourth quarter were largely related to 3 of our major customers. We have mentioned them in the past in the call, however, we're looking to do a formal release with each of these customers. One customer, in particular, is in the process of doing a rollout over the next 7 months, and they contributed about 70% of those bookings for the fourth quarter.

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Walter Schenker, [14]

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Okay. So there will be, as you continue to install through these customers, further information identifying -- I actually remember one being identified, being identified as to who they may be?

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Karen E. Sammon, PAR Technology Corporation - Chief of Staff & Strategy [15]

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Yes, that's correct.

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Walter Schenker, [16]

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Okay. And since I've got you, historically, in talking about Brink, the company has not forecast, but has set targets, multiyear targets going out a number of years for what they would hope or expect, whatever the right term is, the potential for Brink installations to be. Have you changed materially those expectations?

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [17]

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I don't think they -- we only have -- we grew 70% in the number of new stores last year, that is something to be really proud of. Our bookings that are outstanding that have yet to be activated is what our largest number. We are really proud of the growth.

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Walter Schenker, [18]

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I believe, Bryan, you mentioned that our Software as a Service revenue increased almost 90%?

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Bryan A. Menar, PAR Technology Corporation - CFO, VP and Principal Financial & Accounting Officer [19]

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Correct. And AR increasing to 70%.

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [20]

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So we are very proud of those numbers and we're going to stick with giving you numbers like that as we go forward in the future.

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Operator [21]

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(Operator Instructions) Our next question comes from the line of Edward Wedbush from Wedbush Securities.

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Edward William Wedbush, Wedbush Securities Inc. - President & Director [22]

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Yes. Are you able to give any economic forecast for the current quarter and for the current annual 2018 year?

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [23]

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I'll repeat the policy of our board. We do not give guidance.

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Edward William Wedbush, Wedbush Securities Inc. - President & Director [24]

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All right. Second question I have. As I got acquainted with the founder of your company and I've momentarily forgotten his name. Can you bring any update as to how he stands?

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [25]

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Well, you mean Dr. John W. Sammon, Jr?

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Edward William Wedbush, Wedbush Securities Inc. - President & Director [26]

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Yes.

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [27]

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How he stand -- help me just to what you're looking for.

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Edward William Wedbush, Wedbush Securities Inc. - President & Director [28]

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Well, I'm looking for his health condition and any other information about him?

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Karen E. Sammon, PAR Technology Corporation - Chief of Staff & Strategy [29]

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He's well. He remains active on the board. He's engaged with the business and the health and growth of the business and the investments in our software as we work through our transformation. So he's -- thank you for asking, he is doing well.

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [30]

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And I can tell you one -- I can tell you two things, Edward. We have a very active board, includes Dr. Sammon, includes Dr. James Stoffel, includes Cynthia Russo, it includes Doug Rauch. They are all extremely active. They all give me and our whole management team here, extraordinarily useful guidance and advice and support. And I think as a management team, including all of our board members, and Dr. John Sammon, who is my thesis adviser many years ago, I have great respect for him, it's a very active board, including Dr. John.

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Edward William Wedbush, Wedbush Securities Inc. - President & Director [31]

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Well Dr. Sammon and I got involved a long time ago, a couple of decades ago perhaps when the net worth of PAR was below $50 million, it was, I think, approximately $38 million, and our firm, and myself, we bought stock from the PAR treasury to get it up to $50 million, so the company would not be suspended from listing on the New York Stock Exchange, and that's where our relationship between him and ourselves got started, just as an information.

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [32]

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Well, thank you. Thank you very much.

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Operator [33]

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And I'm showing no further questions at this time. I'd now like to turn the call back to Mr. Don Foley for closing remarks.

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Donald H. Foley, PAR Technology Corporation - CEO, President & Director [34]

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Now, just one more time, I really thank you for your time. And as we go through this transition, I'll repeat, I have great faith in our people, and I'm bullish on the future. Thank you very much.

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Operator [35]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.