Item 1A

Risk Factors

The Company operates in a dynamic and rapidly changing environment involving numerous risks and uncertainties that are difficult to predict and many of which are outside of the Company's control.  In addition to the other information in this report and the Company’s other filings the following section describes some, but not all, of the risks and uncertainties that could have a material adverse effect on our business, financial condition, results of operations and the market price of our common stock, and could cause our actual results to differ materially from those expressed or implied in our forward-looking statements.

 

Our future operating results, including revenues, gross margins, operating expenses and net income (loss), have fluctuated on a quarterly and annual basis, are difficult to predict, and may be materially affected by a number of factors, many of which are beyond our control, including:

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the dependency on business from major accounts which can, at will, reduce or eliminate on-going business

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the ability to hire, retain and motivate qualified employees to meet the demands of our business;

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the effects of adverse macroeconomic conditions in the United States and international markets, especially in light of the continued challenges in global credit and financial markets;

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the level of demand and purchase orders from our customers, and our ability to adjust to changes in demand and purchase order patterns;

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the timing of our new product announcements or introductions, as well as those by our competitors;

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the ability of our third party suppliers, subcontractors and manufactures to supply us with sufficient quantities of high quality products or components, on a timely basis;

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the effectiveness of our efforts to reduce product costs and manage operating expenses;

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changes in customer demand for our products;

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the ability to timely produce the products our customers seek to satisfy their technology requirements;

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potential significant litigation-related costs;

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intellectual property disputes;

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costs related to compliance with increasing worldwide environmental and other regulations; and

 

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the effects of public health emergencies, natural disasters, security risk, terrorist activities, international conflicts and other events beyond our control.

As a result of these and other factors, there can be no assurance that the Company will not experience significant fluctuations in future operating results on a quarterly or annual basis.  In addition, if our operating results do not meet the expectations of investors, the market price of our common stock may decline.

 

The trading price of our common stock has and may continue to fluctuate significantly.  Such fluctuations may be influenced by many factors, including:

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the concentration of beneficial ownership of our common stock by Dr. John W. Sammon, Director and of PAR’s Board of Directors.

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the liquidity of the market for our common stock;

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the limited availability of earnings estimates and supporting research by investment analysts;

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our performance and prospects;

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the performance and prospects of our major customers;

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investor perception of our company and the industry in which we operate;

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uncertainty regarding domestic and international political conditions, including tax policies; and

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the volatility of the financial markets;

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uncertainty regarding the prospects of domestic and foreign economies;

Public stock markets have recently experienced price and trading volume volatility.  This volatility significantly affected the market prices of securities of many technology companies and the return of such volatility could result in broad market fluctuations that could materially and adversely affect the market price of our common stock for indefinite periods.  In addition, fluctuations in our stock price, volume of shares traded, and changes in our trading multiples may make our stock attractive to certain categories of investors who often shift funds into and out of stocks rapidly, exacerbating price fluctuations in either direction.

 

A decline in the volume of purchases made by any one of the company’s major customers would materially adversely affect our business.

A small number of related customers have historically accounted for a majority of the Company’s net revenues in any given fiscal period.  For each of the fiscal years ended December 31,

2015 and 2014, aggregate sales to our top two Hospitality segment customers, McDonald’s Corporation and Yum! Brands, Inc., consisting of KFC, Taco Bell and Pizza Hut, amounted to 19% and 10% and 16% and 12% of total revenues from continuing operations, respectively.  Most of the Company’s customers are not obligated to provide us with any minimum level of future purchases or with binding forecasts of product purchases for any future period.  In addition, major customers may elect to delay or otherwise change the timing of orders in a manner that could adversely affect the Company’s quarterly and annual results of operations.  There can be no assurance our current customers will continue to place orders with us, or we will be able to obtain orders from new customers.

An inability to produce new products that keep pace with technological developments and changing market conditions could result in a loss of market share .

The products we sell are subject to continual changes and additions to our features and functionality.  Our traditional competitors offer products that have an increasingly wider range of features and capabilities.  A number of new competitors in our restaurant technology business are well funded and are adding features and functionality rapidly. We believe that in order to compete effectively, we must provide systems incorporating new technologies at competitive prices.  There can be no assurance we will be able to continue funding research and development at levels sufficient to enhance our current product offerings, or the Company will be able to develop and introduce on a timely basis, new products that keep pace with technological developments and emerging industry standards and address the evolving needs of customers.  There also can be no assurance we will not experience difficulties that will result in delaying or preventing the successful development, introduction and marketing of new products in our existing markets, or our new products and product enhancements will adequately meet the requirements of the marketplace or achieve any significant degree of market acceptance.  Likewise, there can be no assurance as to the acceptance of our products in new markets, nor can there be any assurance as to the success of our penetration of these markets, nor to the revenue or profit margins realized by the Company with respect to these products.  If any of our competitors were to introduce superior software products at competitive prices, or if our software products no longer meet the needs of the marketplace due to technological developments and emerging industry standards, our software products may no longer retain any significant market share.

 

We generate much of our revenue from the hospitality   industry and therefore are subject to decreased revenues in the event of a downturn in that industry.

For the fiscal years ended December 31, 2015 and 2014, we derived 62% and 60%, respectively, of our total revenues from continuing operations from the hospitality industry, primarily the QSR market.  Consequently, our hospitality technology product sales are dependent in large part on the health of the hospitality industry, which in turn is dependent on the domestic and international economy, as well as factors such as consumer buying preferences.  Instabilities or downturns in the hospitality market could disproportionately impact our revenues, as clients may exit the industry or delay, cancel or reduce planned expenditures for our products.  Although we believe we can succeed in the quick service restaurant sector of the hospitality industry in a competitive environment, given the cyclical nature of that industry, there can be no assurance our profitability and growth will continue.

we face extensive competition in the markets in which we operate, and our failure to compete effectively could result in price reductions and/or decreased demand for our products and services.

Several competing suppliers offer hospitality management systems similar to ours.  Some of these competitors are larger than PAR and have access to substantially greater financial and other resources and, consequently, may be able to obtain more favorable terms than we can for components and subassemblies incorporated into these hospitality technology products.  The rapid rate of technological change in the hospitality segment makes it likely we will face competition from new products designed by companies not currently competing with us.  These new products may have features not currently available from us.  We believe our competitive ability depends on our total solution offering, our experience in the industry, our product development and systems integration capability, our direct sales force and our customer service organization.  There is no assurance; however, we will be able to compete effectively in the hospitality technology market in the future.

Our government contracting business has been focused on niche offerings, reflecting our expertise, primarily in the areas of intelligence, surveillance and reconnaissance, systems engineering & evaluation, satellite and telecommunications services  and information technology/systems services.  Many of our competitors are larger and have substantially greater financial resources and broader capabilities in information technology.  We also compete with smaller companies, many of which are designated by the government for preferential “set aside” treatment, that target particular segments of the government market and may have superior capabilities in a particular segment.  These companies may be better positioned to obtain contracts through competitive proposals.  Consequently, there are no assurances we will continue to win government contracts as a direct contractor or indirect subcontractor.

 

ineffective internal controls could impact the company’s business and financial results

The Company's internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls, or fraud. Even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If the Company fails to maintain the adequacy of its internal controls, including any failure to implement required new or improved controls, or if the Company experiences difficulties in their implementation, the Company's business and financial results could be harmed and the Company could fail to meet its financial reporting obligations. Such as, in connection with management’s evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, management determined that the Company did not maintain effective controls over the pre-hiring diligence procedures which failed to require the completion of satisfactory background investigation, which should have included credit and other public record and media checks for accounting and financial hires to the extent permitted by applicable law.  In addition, our procedures relating to treasury transactions did not require sufficient sign-off documentation and review thereof with respect to approvals required prior to initiating treasury transactions, and as a result, documentation describing the transaction, confirming its execution and evidencing the required approvals did not exist or was significantly deficient, thus impeding prevention or early detection of the improper actions.  While the Company is in the process of improving its internal controls and the material weakness will continue to exist until the remediation actions described in Item 9A, Controls and Procedures, are fully implemented and tested. If the new controls being implemented to address the material weakness and to strengthen the overall internal control over onboarding and treasury transactions are not designed or do not operate effectively, if the Company is unsuccessful in implementing or following these new processes or is otherwise unable to remediate this material weakness, this may result in untimely or inaccurate reporting of the Company’s financial condition or results of operations.

 

We have identified that certain wire transfers were effected during the period between September 25, 2015 and November 6, 2015 involving the unauthorized transfer of Company funds, without documentation, in contravention of the Company’s policies and procedures.  The unauthorized investments occurred during the period between September 25, 2015 and November 6, 2015. The employment of Michael S. Bartusek, the Company’s Vice President and Chief Financial Officer was terminated effective March 14, 2016 for cause in connection with these unauthorized investments made in contravention of the Company’s policies and procedures.  Mr. Bartusek had been hired by the Company into those positions effective July 20, 2015.  These funds collectively total $776,000.  Upon evaluation of the circumstances under which such unauthorized investments were made, the Company determined that internal control weaknesses existed that permitted these wire transfers to be initiated, processed, and completed without obtaining necessary approvals.  This matter was reported by management to the Audit Committee of the Company’s Board of Directors, comprised solely of independent directors.  Under direction of the Audit Committee an investigation was commenced and completed.  The investigation was led by outside counsel, who engaged an independent forensic consultant to assist in the matter.  As directed by the Audit Committee, the Company has reported this matter to federal law enforcement agencies, including the U.S. Securities and Exchange Commission.

 The internal investigation is complete, although the Company continues to pursue recovery of the transferred funds.  We are presently unable to predict whether the SEC or other law enforcement agency will commence their own investigation or determine whether there have been violations of federal laws and regulations.  We have not to date determined whether any of the activities in question violated any applicable laws.  However, if any federal authorities were to ultimately determine that the Company violated any laws or regulations, the Company may be exposed to a broad range of civil and criminal sanctions including, but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to business practices including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee future compliance by the Company. These investigations and any potential proceedings resulting therefrom could be costly and burdensome to our management, and could adversely impact our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows. Even if an inquiry or investigation does not result in any adverse determinations, it potentially could create negative publicity and give rise to third-party litigation or other actions.

 

we may not be able to meet the unique operational, legal and financial challenges that relate to our international operations, which may limit the growth of our business.

For the fiscal years ended December 31, 2015, and 2014, our net revenues from sales outside the United States were 14% and 13%, respectively, of the Company’s total revenues from continuing operations.  We intend to continue to expand our operations outside the United States and to enter additional international markets, which will require significant management attention and financial resources.  Our operating results are subject to the risks inherent in international sales, including, but not limited to, regulatory requirements, political and economic changes and disruptions, geopolitical disputes and war, transportation delays, difficulties in staffing and managing foreign sales operations, and potentially adverse tax consequences.  In addition, fluctuations in exchange rates may render our products less competitive relative to local product offerings, or could result in foreign exchange losses, depending upon the currency in which we sell our products.  There can be no assurance these factors will not have a material adverse effect on our future international sales and, consequently, on our operating results.

Any failure by the Company to execute planned cost reduction measures timely and successfully could result in total costs and expenses that are greater than expected or the failure to meet operational goals as a result of such actions.

In April 2015, the Company announced restructuring actions primarily to reduce cost and expense structure in our hospitality segment and the Company’s corporate organization. The Company expects to realize cost savings now and in the future through these cost and expense actions and may announce future actions to further reduce its worldwide workforce and/or centralize its operations. The risks associated with these actions include potential delays in their implementation, particularly workforce reductions; increased costs associated with such actions; decreases in employee morale and the failure to meet operational targets due to unplanned departures of employees, particularly key employees and sales employees.

we derive a portion of our revenue from u.s. government contracts, which contain provisions unique to public sector customers, including the u.s. government’s right to modify or terminate these contracts at any time.

For the fiscal years ended December 31, 2015 and 2014, we derived 38% and 40%, respectively, of our total revenues from continuing operations from contracts to provide technical expertise to government organizations and prime contractors.  In any year, the majority of our government contracting activity is associated with the U.S. Department of Defense.  Contracts with the U.S. government typically provide that such contracts are terminable, in full or in part, at the convenience of the U.S. government.  If the U.S. government terminated a contract on this basis, we would be entitled to receive payment for our allowable costs and, in general, a proportionate share of our fee or profit for work actually performed.  Most U.S. government contracts are also subject to modification or termination in the event of changes in funding.  As such, we may perform work prior to formal authorization, or the contract prices may be adjusted for changes in scope of work.  Termination or modification of a substantial number of our U.S. government contracts could have a material adverse effect on our business, financial condition and results of operations.

 

In addition, the general uncertainty in U.S. defense total workforce policies (military, civilian and contract), procurement cycles and spending levels for the next several years may impact the performance of this business.  Specifically, the Company could experience reductions in revenue as a result of the U.S. government in-sourcing its current service contracts or the Company could experience a reduction of funding due to U.S. government sequester or other funding reductions.

We perform work for various U.S. government agencies and departments pursuant to fixed-price, cost-plus fixed fee and time-and-material prime contracts and subcontracts.  Approximately 45% of the revenue that we derived from government contracts for the year ended December 31, 2015 came from fixed-price or time-and-material contracts.  The balance of the revenue that we derived from government contracts in 2015 primarily came from cost-plus fixed fee contracts.  Most of our contracts are for one-year to five-year terms.

While fixed-price contracts allow us to benefit from cost savings, they also expose us to the risk of cost overruns.  If the initial estimates we use for calculating the contract price are incorrect, we can incur losses on those contracts.  In addition, some of our governmental contracts have provisions relating to cost controls, and audit rights and if we fail to meet the terms specified in those contracts, then we may not realize their full benefits.  Lower earnings caused by cost overruns would have an adverse effect on our financial results.

Under time-and-materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses.  Under cost-plus fixed fee contracts, we are reimbursed for allowable costs and paid a fixed fee.  However, if our costs under either of these types of contract exceed the contract ceiling or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursement for all of our costs.

 

If we are unable to control costs incurred in performing under each type of contract, such inability to control costs could have a material adverse effect on our financial condition and operating results.  Cost over-runs also may adversely affect our ability to sustain existing programs and obtain future contract awards.

 

a portion of our total assets consists of goodwill and identifiable intangible assets, which are subject to a periodic impairment analysis and a significant impairment determination in any future period, could have an adverse effect on our results of operations even without a significant loss of revenue or increase in cash expenses attributable to such period.