Manufacturing and Suppliers
The Company sources and/or assemblesWe assemble our ES 8000 series of hardware internally as well as source hardware products and hardware related components from third parties. Although we purchase most of itsthe materials, supplies, product sub-assemblies and full assemblies for our internal assembling of products from standard electronicseveral suppliers, we do rely on sole sources for certain of our assembly components fabricated parts such as printed circuit boards, and mechanical components. Many assemblieshardware products. As a result, we periodically review and components are manufactured by third partiesevaluate potential risks of disruption to our supply chain operations in the Company’s specifications. PAR depends on outside suppliers for the continued availability of its assemblies and components. Although most items are generally available from a number of different suppliers, PAR purchases certain final assemblies and components from single sources. Items purchased from single sources include certain POS devices, peripherals, custom molded and tooled components, electronic assemblies and components. If such aevent one or more supplier should ceasefail to supply an item, PAR believes new sources could be found to provide the components. However, added cost and manufacturing delays could result and adversely affect the Company’s performance. The Company has not experienced significant delays of this nature in the past, but there can be no assurance that delays in delivery due to supply shortages will not occur in the future.
Intellectual Property
The Company owns or has rights to certain patents, copyrights and trademarks. PAR relies upon non-disclosure agreements, license agreements and applicable domestic and foreign patent, copyright and trademark laws for protection of our intellectual property. To the extent such protective measures are unsuccessful, or the Company needs to enter into protracted litigation to enforce such rights, the Company’s business could be adversely impacted. Similarly, there is no assurance that the Company’s products will not become the subject of a third-party claim of infringement or misappropriation. To the extent such claims result in costly litigation or force the Company to enter into royalty or license agreements, rather than enter into a prolonged dispute, our performance could be adversely impacted. The Company also licenses certain third-party patents and software with its products. While PAR maintains strong relationships with its licensors, there is no assurance such relationships will continue or that the licenses will be continued under fees and terms acceptable to the Company.perform.
Government SegmentSegment:
PAR’s Government businesssegment provides a range of technicalsolutions and services for the DoDU.S. Department of Defense (“DoD”) and federal agencies. This segmentIt is dedicated to serving ISR customers, through specialized developmentfocused on two principal offerings – Solutions and Services; and Mission Support.
Solutions and Services
Intelligence, Surveillance, and Reconnaissance (“ISR”). We provide a variety of advanced signal and image processing and management systems with a focus on geospatial intelligence geographic informationand situational awareness solutions for mobile and data center offerings. Our substantive, in depth expertise in these domains enable us to provide our government customers and large systems integrators with key technologies to support a variety of applications ranging from strategic enterprise systems to tactical in the field dismounted users. Additionally, we have developed a number of solutions relative to these advanced technologies and commandwe provide integration and control applications. Additionally, this business provides mission critical telecommunications, satellite command and control, and information technology operations and maintenance services worldwidetraining support with respect to the U.S. DoD.these solutions.
The business is organized in two operating sectors that provide comprehensive service offerings across their customer base ISR Solutions and mission systems.
The ISR solutions sector provides systems engineering support and software-based solutions. Expertisesolutions to DoD research and development laboratories as well as operational commands. Our internal expertise ranges from theoretical and experimental studies to development and fielding of operational prototypes. PAR’scapabilities. Our employees are:
| · | experienced developers and subject-matter experts in DoD Full Motion Video (“FMV”) formats include MPEG-2, H.264, and standard/high definition (“SD/HD”) support; developers and subject-matter experts in DoD Full Motion Video (“FMV”); |
| · | developers of geospatial and imagery data management, visualization, and exploitation solutions; |
| · | major contributors to radar systems from inception to operational capabilities; |
| · | developers of mobile computing applications for Android, iOS, and Windows; and |
| · | developers of geospatial information system (“GIS”) solutions. |
We are actively engaged in the development of mobility applications that support the needs of mobile teams with real-time situation awareness and distributed communications. The ISR solutions sector has a strong legacy in the advanced research, development and productization of geospatial information assurance (“GIA”) technology involving steganography, steganalysis,steg analysis, digital watermarking, and image forensics. These enabling technologies have been used to provide increased protection and security of geospatial data. The ISR Solutions SectorIntelligence, Surveillance, and Reconnaissance also provides scientific and technical support to the USU.S. Intelligence Community.
The mission systems sector includes three distinct lines of business: telecommunications, satellite control, and information technology services. The telecommunication services include satellite and terrestrial communications operations and maintenance services, which operate elements of the US DoD’s global information grid (“GIG”) in support of the national command authority (President & joint chiefs of staff) and Department of Defense. Additionally, PAR operates the U.S. navy’s only satellite operations center providing tracking, telemetry and control of several space-based satellite communication constellations. Finally, the Company’s mission systems sector provides IT services ranging from advanced systems management to help desk support. Approximately 50% of this sector’s global footprint is outside the continental US with contracts in Europe, Africa, Australia, and US Commonwealths and Territories in the Pacific and Caribbean. The Company has strong and enduring relationships with a diverse set of customers throughout the U.S. DoD and federal government. PAR’s track record delivering mission critical services to their government customers spans decades, and includes contracts continuing 15 years or more. The Company works closely with its customers, with the vast majority of the mission systems sector employees co-located at customer sites. PAR’s strong relationships and on-site presence with customers enable the Company to develop deep customer and technical domain knowledge, and translate mission understanding into exemplary program execution and continued demand for its services.
PAR focuses its business in five service areas:
ISR:
Intelligence, Surveillance and Reconnaissance: The Company provides a variety of geospatial intelligence solutions including full motion video, geospatial information assurance, raster imagery, and LiDAR. In depth expertise in these domains provides government customers and large systems integrators with key technologies supporting a range of applications from strategic enterprise systems to tactical individual users. Furthermore, PAR has developed a number of products relative to these advanced technologies and provides integration and training support.
Mission Systems:
Systems Engineering & Evaluation:Evaluation The Company integrates. We integrate and tests EO, IR, Radar, and multi/hyper-spectral sensor systems fortest a broad range of government and industry surveillance applications.research and development solutions. The Company designs and integrates radar sensor systems including experimentation, demonstration, and test support. The CompanyWe also providesprovide scientific and technical engineering and analysis to intelligence community customers, as well as program management services for the acquisition, development, and deployment of advanced prototypes and quick reaction systems.
Satellite & Telecommunications ServicesSupport.: The Company provides We provide a wide range of technical and support services to sustain mission critical components of the DoD’s global information grid (“GIG”)Department of Defense Information Network (DoDIN). These services include continuous 24/7/365 operations, system enhancements and associated maintenance of very low frequency (“VLF”)(VLF), high frequency (“HF”)(HF) and very high frequency (“VHF”)(VHF) ground-based radio transmitter/receiver facilities. Additionally, the Company operates and maintains several extremely high frequency (“EHF”)(EHF) and super high frequency (“SHF”)(SHF) satellite communication earth terminals and teleport facilities. The DoD communications earth stations operated by the CompanyPAR is the primary communications infrastructure utilized by the national command authority and military services to exercise command and control of the nation’s air, land and naval forces and provide support to allied coalition forces.
Space & Satellite Control Services:Support The Company provides. We provide satellite operation, management, and maintenance services into support of satellite control center operations. Primary services include satellite telemetry monitoring, tracking and command support, and satellite control in order to provide reliable space-based satellite services conducting command, control, communications, computers, intelligence, surveillance, and reconnaissance (“C4ISR”)(C4ISR) operations. The CompanyPAR delivers services in support of satellite telemetry, tracking, control, and remote terminal operations from 7 locations worldwide.
Information Technology/Management technology/Systems Services: Support The Company provides information. We provide management technology services to the DoD and federal agencies. These services include helpdesk services, systems administration, network administration, information assurance and systems security, database administration, telephone systems management, testing and testbed management, and ITIL-based service management.
Government ContractsTelecommunication services include satellite and terrestrial communications operations and maintenance services, which operate elements of the DoDIN to support the National Command Authority (President & Joint Chiefs of Staff), DoD and other government agencies. The Company provides IT support services ranging from advanced systems management to help desk support—with more than 50% of its global footprint outside the continental U.S. with contracts in Europe, Africa, Australia, and U.S. commonwealths and territories in the Pacific and Caribbean.
The Company performsPAR has strong and enduring relationships with a diverse set of customers throughout the U.S. DoD and federal government, and our track record of delivering mission critical services to our government customers spans decades, and includes contracts continuing 15 years or more. We work for U.S. Government agencies under firm fixed-price, cost-plus-fixed-fee, and time-and-material contracts. Theclosely with our customers, with the vast majority of these contracts have a period of performance of oneour mission system employees co-located at customer sites. Our strong relationships and on-site presence with our customers enable PAR to five years. There are several risks associated with government contracting. For instance, contracts may be reduced in size, scopedevelop substantive customer and value, as well as modified, delayed and/or cancelled depending upon the government’s requests, budgets, policies and/or changes in regulations. Contracts can also be terminatedtechnical domain knowledge, and translate mission understanding into exemplary program execution and continued demand for the convenience of the government at any time the government believes that such termination would be in its best interests. In this circumstance, the Company is entitled to receive payments for its allowable costs and, in general, a proportionate share of its fee or profit for the work actually performed. The Company may also perform work prior to formal authorization or prior to adjustment of the contract price for increased work scope, change orders and other funding adjustments. In this situation, the Company is performing the work under our own risk and would be responsible for any costs incurred during this time. Additionally, the defense contract audit agency regularly audits the financial records of the Company. Such audits can result in adjustments to contract costs and fees. Audits have been completed through the Company’s fiscal year 2013 and have not resulted in any material adjustments.PAR’s services.
Marketing and Competition
Contracts are obtained principallyWe obtain contracts primarily through competitive proposals in response to solicitations from government organizations and prime contractors. In addition, the CompanyPAR sometimes obtains contracts by submitting unsolicited proposals. Although the Company believes it iswe believe we are well positioned in itsour business areas, competition for government contracts is intense. Many of the Company’sour competitors are major corporations, or subsidiaries thereof, that are significantly larger and have substantially greater financial resources. The CompanyWe also competescompete with many smaller, economically disadvantaged companies, many of which are designated by the government for preferential “set aside” treatment, that target particular segments of the government contract market. The principal competitive factors are past performance, the ability to perform the statement of work, price, technological capabilities, management capabilities and service. Many of the Company’sour department of defense customers are now migrating to low-price/technically acceptable procurements while leveraging commercial software standards, applications, and solutions.
Backlog
The value of existing Government contracts at December 31, 2016, net of amounts relating to work performed to that date, was approximately $126.0 million, of which $36.4 million was funded. The value of existing Government contracts at December 31, 2015, net of amounts relating to work performed to that date, was approximately $101.2 million, of which $48.4 million was funded. The value of existing Government contracts at December 31, 2014, net of amounts relating to work performed to that date was approximately $100.4 million, of which $53.9 million was funded. Funded amounts represent those amounts committed under contract by Government agencies and prime contractors. The December 31, 20152016 Government contract backlog of $101.2$126.0 million represents firm, existing contracts. Of this backlog amount, approximately $64.8$55.4 million is expected to be completed in calendar year 2016,2017, as funding is committed.
EmployeesIntellectual Property and Other Rights
We develop a substantial amount of our products internally as original developments, discoveries and know-how or based on existing copyrighted works and/or patents issued or pending of PAR or third party licensors. We have a number of U.S. and foreign patents and patents pending and trademarks, as well as copyrights that relate to internally developed software, various distinctive characteristics of our products, including certain attributes, functionality, and brand association and goodwill. In addition to our publicly available intellectual property, we possess competitive confidential information and trade secrets. We protect our intellectual property and other proprietary information by actively pursuing U.S. and foreign patent and trademark protection of our proprietary product developments, discoveries and know-how and our brands and logos, and by entering into license agreements and non-disclosure and confidentiality agreements.
Employees
As of December 31, 2015, the Company had 1,0102016, we employed approximately 1,002 full-time employees, including approximately 54% of whom were engaged56% in the Company’s Hospitalityour Restaurant/Retail segment, 41% of whom were38% in theour Government segment and 5%(27% of whom were corporate employees.
Due to the highly technical nature of the Company’s business, the Company’s future can be significantly influenced by its ability to attract and retain its technical staff. The Company believes it has and will be able to continue to fulfill its near-term needs for technical staff.
Approximately 13% of the Company’s employeeswhich are covered by collective bargaining agreements. The Company considers its employee relationsagreements), and 6% who are corporate employees. We consider our relationship with our employees to be good.
Available Information
16Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our website at www.partech.com “About Us - Investors, SEC Filings”, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (“SEC”). The information posted on or accessible through our website is not incorporated into this Annual Report on Form 10-K.
The Company operates in a dynamic and rapidly changing environment involving numerousOur business is subject to certain risks and uncertainties, that are difficult to predict and manyeach of which are outside of the Company's control. In addition to the other information in this reportcould materially 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 onadversely affect our business, financial condition, results of operations, cash flows and the markettrading price of our common stock.
Our yearly results of operations may fluctuate significantly due to the timing of our revenue recognition and our ability to accurately forecast sales, including subscription software sales and renewals.
Our revenues and other results of operations have fluctuated from quarter to quarter in the past and could continue to fluctuate in the future as our business model continues to evolve from hardware and related services to a management technology solutions provider, including offering and delivering our software as a service – SaaS. As revenues from our cloud offerings increase, we may experience volatility in our reported revenues and operating results due to the differences in timing of revenue recognition between our SaaS offerings and our traditional on-premises software and hardware sales. The SaaS delivery model is subscription based; accordingly, SaaS revenues are generally recognized ratably over the life of the subscription. In contrast, revenue from our on-premises software and hardware sales is generally recognized in full at the time of delivery. Accordingly, the SaaS business model creates certain risks related to the timing of revenue recognition not associated with our traditional on-premises delivery model. A portion of our quarterly SaaS based revenue results from the recognition of deferred revenue relating to subscription agreements entered into during previous quarters. A decline in new or renewed subscriptions in any period may not be immediately reflected in our reported financial results for that period, but may result in a decline in our revenue in future quarters. If any of our assumptions about revenue from our SaaS business model prove incorrect, our actual results may vary materially from those anticipated, estimated or projected.
If our technical and maintenance support services are not satisfactory to our customers, they may not renew their services agreements or buy future products, which could adversely affect our future results of operations, financial condition, and cash flows.
Our business relies on our customers’ satisfaction with the technical and maintenance support services we provide to support our products. If we fail to provide technical and maintenance support services that are responsive, satisfy our customers’ expectations and resolve issues that they encounter with our products, then they may not purchase additional products or services from us in the future.
If we are unable to recruit and retain qualified employees, our business may be harmed.
Much of our future success depends on hiring qualified employees and the continued service of our senior management. Experienced personnel in the management technology industry are in high demand and competition for their talents is intense in the skill-set we require. Moreover, we believe that a critical contributor to our success is our corporate culture and values. We must not only successfully attract and retain qualified business, technical, product development and other employees that contribute to our business, we must attract and retain qualified employees who embrace and reflect our culture and values. Our failure to do so, could adversely affect our ability to innovate, to rapidly and effectively change and introduce new products, and to provide timely and effective installation, technical and maintenance support services, and our financial condition and results of operations may suffer.
The price of our common stock and could causemay be negatively impacted by factors that are unrelated to our actual results to differ materially from those expressed or implied inoperating performance.
The trading price of our forward-looking statements.
Our future operating results are difficult to predict and are subject to fluctuations.
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 maycommon stock could be materially affectedimpacted by a number of factors, many of which are beyondoutside our control, including:control. Although our stock has been listed on NYSE for many years, trading in our stock does not generally occur in high volumes and the market for our stock cannot always be characterized as active. Thin trading in our stock may exaggerate fluctuations in the stock’s value, leading to price volatility in excess of that which would occur in a more active trading market. In addition, the stock market in general is subject to fluctuations that affect the share prices and trading volumes of many companies, and these broad market fluctuations could adversely affect the market price of our common stock. Factors that could affect our common stock price in the future include but are not necessarily limited to the following:
| —· | the dependency on business from major accounts which can, at will, reduceactual or eliminate on-going businessanticipated fluctuations in our operating results and financial condition; |
| — | the ability to hire, retain and motivate qualified employees to meet the demands of our business; |
| — | 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; |
| — | the level of demand and purchase orders from our customers, and our ability to adjust to changes in demand and purchase order patterns; |
| — | the timing of our new product announcements or introductions, as well as those by our competitors; |
| — | 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; |
| — | the effectiveness of our efforts to reduce product costs and manage operating expenses; |
| — | changes in customer demand for our products; |
| — | the ability to timely produce the products our customers seek to satisfy their technology requirements; |
| — | potential significant litigation-related costs; |
| — | intellectual property disputes; |
| — | costs related to compliance with increasing worldwide environmental and other regulations; and |
| — | 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.
Our stock price has been volatile and may fluctuate in the future.
The trading price of our common stock has and may continue to fluctuate significantly. Such fluctuations may be influenced by many factors, including:
| — | the concentration of beneficial ownership of our common stock by Dr. John W. Sammon, Director and of PAR’s Board of Directors. |
| — | the liquidity of the market for our common stock; |
| — | the limited availability of earnings estimates and supporting research by investment analysts; |
| — | our performance and prospects; |
| —· | the performance and prospects of our major customers; |
| —· | fluctuations in the trading volume of our common stock; |
| · | the concentrated beneficial ownership of our common stock by our founder, Dr. John W. Sammon; |
| · | actual or anticipated regulatory action against us; |
| · | the lack of earnings guidance and securities analysts following us; |
| · | investor perception of our companyus and the industryindustries in which we operate; |
| —· | uncertainty regarding domestic and international political conditions, including tax policies; and |
| — | the volatility of the financial markets; |
| —· | uncertainty regarding the prospects of domestic and foreign economies;economies. |
Public stock markets have recently experienced priceTwo customers account for a significant portion of our revenues. The loss of one of these customers, or a significant reduction, delay, or cancellation of purchases by one of these customers would materially adversely affect our business, financial condition, and trading volume volatility. This volatility significantly affectedresults of operations.
Revenues from our Restaurant/Retail segment constituted 65% and 62% of our total consolidated revenues for 2016 and 2015, respectively; and, aggregate sales to our two largest customers, which include sales to these two customers’ respective franchisees - McDonald’s Corporation and Yum! Brands, Inc., which consists of the market pricesKentucky Fried Chicken, Taco Bell and Pizza Hut brands – constituted 25% (McDonald’s) and 11% (Yum!) and 19% (McDonald’s) and 10% (Yum!) of securitiestotal consolidated revenues for 2016 and 2015, respectively. There were no other customers that comprised greater than 10% of many technology companiesour total consolidated revenues during these years. A loss of McDonald’s or Yum! Brands as a customer, or a significant reduction, delay, or cancellation of orders by one of these customers would reduce our revenue and the return of such volatility could result in broad market fluctuations that couldoperating income and would 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,business, operating results 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.financial condition.
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 theour 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.products.
Several competing suppliersThe markets for our POS software and hardware products are characterized by rapid technological advances, intense competition among existing and emerging competitors, evolving industry standards, emerging business, distribution and support models, disruptive technology developments, and frequent new product introductions.
While we think our POS software and hardware products offer hospitality management systems similar to ours. Somecompetitive, innovative features and functionality, any one of these competitorsfactors could create downward pressure on pricing and gross margins and could adversely affect sales to our existing customers, as well as our ability to attract and sell to new customers. Our future success will depend on our ability to anticipate and identify changes in customer needs and/or relevant technologies and to rapidly and effectively change and improve our products in response, including changes in operating systems, application software and computer and communications hardware, with which our products interoperate or their performance and functionality are larger than PARotherwise affected. If we fail to anticipate and/or identify changes in customer needs and/or emerging relevant technological trends, our business, results of operations 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 changeconditions could suffer. Additionally, any delay in the hospitality segment makes it likely we will face competition fromdevelopment, marketing, or launch of new products designed by companies not currently competing with us. Theseor enhancements to our existing products could result in customer attrition or impede our ability to attract new products may have features not currently available from us. We believecustomers, causing a decline in our revenue, earnings or stock price and weakening 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.position.
Our government contracting business has been focused on niche offerings, reflecting our expertise, primarily in the areas of intelligence, surveillanceIntelligence, Surveillance and reconnaissance,Reconnaissance, systems engineering & evaluation, satellite and telecommunications services and informationmanagement technology/systems services. Many of our competitors in the Government segment are larger and have substantially greater financial resources and broader capabilities in informationmanagement 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 directprime contractor or indirect subcontractor.subcontractor, and our failure to do so, would reduce our revenue and operating income and could adversely affect our business, operating results and financial condition.
ineffectiveour internal controlsinvestigations could impact the company’shave a material adverse effect on our business and financial resultscould subject us to regulatory scrutiny.
The Company's internal control over financial reporting may not prevent or detect misstatements becauseUnder the oversight 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 isAudit Committee, in the processfirst quarter 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 conductED2016, we conducted an internal investigation intoof our former chief financial officer’s unauthorized investment activities and, we are currently conducting an internal investigation to determine whether certain unauthorized transactions,import/export and may become subject to regulatory scrutinysales documentation activities at our China and Singapore offices were improper and in possible violation of the U.S. Foreign Corrupt Practices Act, or FCPA, and other applicable laws, and certain of our policies, including our Code of Business Conduct and Ethics.
We voluntarily notified the SEC of our investigation (and our findings and conclusions) of our former chief financial officer; and, we have identified that certain wire transfers were effected duringvoluntarily notified the period between September 25, 2015SEC 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 internalDepartment of Justice, or DOJ, of our 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 authoritiesconcerning China and Singapore, and we are fully cooperating with these agencies. If the SEC, DOJ, or other governmental agencies (including foreign governmental agencies) were to ultimately determine that the Company violated anyviolations of certain laws or regulations the Company mayoccurred, then we could be exposed to a broad range of civil and criminal sanctions, including but not limited to, injunctive relief, disgorgement, fines, penalties, modifications to our business practices, including the termination or modification of existing business relationships, the imposition of compliance programs and the retention of a monitor to oversee our future compliance bycompliance. While we are currently unable to predict what actions the Company. These investigations andSEC, DOJ, or other governmental agencies (including foreign governmental agencies) might take, or what the likely outcome of any potential proceedings resulting therefromsuch actions might be, or estimate the range of reasonably possible fines or penalties, such actions, fines and/or penalties could be costly and burdensome to our management, and could adversely impactmaterial, resulting in a material adverse effect on our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows. Even if an inquiry or investigation does not result in anyan adverse determinations, it potentiallydetermination, our business, prospects, reputation, financial condition, liquidity, results of operations or cash flows could create negative publicity and give rise to third-party litigation or other actions.still be adversely impacted.
If we fail to correct the identified material weaknesses, and maintain appropriate internal controls, our business, results of operations and financial condition could be adversely affected.
As described in “Item 9A - Controls and Procedures” of this Annual Report during the third quarter of 2016, we identified material weaknesses in our internal control over financial reporting. We previously disclosed identified material weaknesses in our hiring and treasury procedures, which have been remedied. If we fail to correct our current material weaknesses; or, if we are unable to maintain appropriate internal controls in the future, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC could be adversely affected, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our common stock to decline, and we may not be ablesubject to meetinvestigation or sanctions by the unique operational, legalSEC. Any such consequence or other negative effect could adversely affect our business, results of operations and financial challenges that relatecondition.
We are subject to risks associated with compliance with international laws and regulations which may harm our business
Although only 8% for 2016 and 14% for 2015 of our total consolidated revenues were derived from sales outside of the U.S., we have operations across the globe, and our international operations which may limit the growthsubject us to a variety of our business.risks and challenges, including:
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. | · | compliance with foreign laws and regulations, including the FCPA, the U.K. Bribery Act of 2010, import and export control laws, tariffs, trade barriers, economic sanctions and other regulatory or contractual limitations on our ability to sell our software and hardware in certain foreign markets, and the risks and costs of non-compliance with such laws and regulations, including fines, penalties, criminal sanctions against us, our officers or employees, prohibitions on the conduct of our business and damage to our reputation; |
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. | · | increased risks of unfair or corrupt business practices in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of financial statements and irregularities in financial statements; |
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. | · | reduced protection of our intellectual property rights in certain countries and practical difficulties and costs of enforcing rights abroad; |
we derive | · | compliance with the laws of numerous foreign taxing jurisdictions and overlapping of different tax regimes; |
| · | uncertainty around a potential reverse or renegotiation of international trade agreements and partnerships under President Donald J. Trump’s administration; |
| · | sales and customer service challenges associated with operating in different countries; |
| · | difficulties in receiving payments from different geographies, including difficulties associated with currency fluctuations, payment cycles, transfer of funds or collecting accounts receivable, especially in emerging markets; |
| · | variations in economic or political conditions between each country or region; |
| · | economic uncertainty around the world and adverse effects arising from economic interdependencies across countries and regions; |
| · | uncertainty around how the United Kingdom’s recent decision to exit the European Union (“Brexit”) will impact its access to the European Union Single Market, the related regulatory environment, the global economy, and the resulting impact on our business; and |
| · | increased infrastructure and legal compliance costs. |
A portion of ourGovernment segment revenue is derived from u.s.U.S. government contracts, which contain provisions unique to public sector customers, including the u.s.U.S. government’s right to modify or terminate these contracts at any time.
For the fiscal years ended December 31,In 2016 and 2015 and 2014, we derived 38%35% and 40%38%, respectively, of our total consolidated revenues from continuing operations from contracts to provide technical expertise to government organizations and prime contractors. In any given 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 fullwhole or in part, at the convenience of the U.S. government. If the U.S. government terminatedterminates 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%55% of the revenue that werevenues derived from government contracts for the year ended December 31, 2015 came from2016, was based on fixed-price or time-and-material contracts. Thetime-and- material contracts, and the balance (approximately 45% of the revenue that we derived fromtotal government contracts in 2015 primarily came fromrevenues) was based on 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 theirthe full benefits.benefit of the contracts. 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, ifIf our costs under either of these types of contractcontracts were to exceed the contract ceiling, or are not allowable under the provisions of the contract or applicable regulations, we may not be able to obtain reimbursementreimbursed for all100% of our associated costs.
If we are unable to control costs incurred in performing under each type of contract, such Our inability to control our costs under either a time-and-materials contract or a cost-plus fixed fee contract 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.
aA portion of our total assets consists of goodwill and identifiable and 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 our revenue or increase in cash expenses attributable to such period.
We haveOur goodwill and identifiable intangible assetswas approximately $11.1 million at December 31, 2016 and December 31, 2015, totaling approximately $11.1and our intangibles were $11.0 million at December 31, 2016 and $10.9 million respectively; resultingat December 31, 2015. Identifiable intangible assets were, primarily froma result of business acquisitions and internally developed capitalized software. The Company testsWe test our goodwill and identifiable intangible assets for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We describe the impairment testing process and results of this testing more thoroughly herein in Item 7 under the heading “Management’s“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.” If we determine an impairment has occurred at any point in time, we will be required to reduce goodwill or identifiable intangible assets on our balance sheet.
Item 1B: | Unresolved Staff Comments |
None.
The following are the principal facilities (by square footage) Additional information about our impairment testing is contained in Note 1 – Summary of Significant Accounting Policies - of the Company:Notes to Consolidated Financial Statements (Part IV, Item 15 of this Annual Report).
Location
| Industry Segment
| Floor Area Principal Operations
| Number of Sq. Ft.
|
| | | |
New Hartford, NY | Hospitality | Principal executive offices,
manufacturing, research and
development laboratories, sales,
service, wellness, and
computing facilities
| 216,800
|
Rome, NY | Government | Research and development | 30,800 |
| | | |
Sydney, Australia | Hospitality | Sales and service | 14,400 |
Boca Raton, FL | Hospitality | Research and development | 11,470 |
Markham, Ontario | Hospitality | Research and development | 11,100 |
Boulder, CO | Hospitality | Service | 10,700 |
The Company’s| Item 1B. | Unresolved Staff Comments. |
We do not have any unresolved comments from the SEC staff.
Our corporate headquarters and principal business facility is located inat PAR Technology Park, 8383 Seneca Turnpike, New Hartford, NY, which is near Utica,New York. We own our corporate headquarters – both the building and land. We lease all our other properties for varying terms. We believe our existing properties, both owned and leased, are in central New York State. good condition and are suitable for the conduct of our business for the foreseeable future.
The following table sets forth the location, the operating segment (if applicable) that uses and the use of each of our principal properties and each properties’ approximate square footage:
Location | | Operating Segment | | Use | | Approximate Square Footage |
| New Hartford, NY | | Corporate/ Restaurant / Retail | | Corporate headquarters, assembly, research and development laboratories, sales, service, wellness, and computing facilities | | 216,800 |
| Rome, NY | | Government | | Research, product development, sales | | 30,800 |
| Sydney, Australia | | Restaurant / Retail | | Sales and service | | 14,400 |
| Boca Raton, FL | | Restaurant / Retail | | Research and product development | | 11,470 |
| Markham, Ontario | | Restaurant / Retail | | Research and product development | | 11,100 |
| Boulder, CO | | Restaurant / Retail | | Service | | 10,700 |
In addition to those notedthe properties identified above, the Company maintains smaller facilitieswe have leasehold interests in small office spaces located in San Diego, California (use: research, product development, sales and administration) and Shanghai, People’s Republic of China,China; Singapore; Staines, United Kingdom,Kingdom; Dubai, United Arab Emirates; and Paris, France.France (use: sales and administration).
The Company owns its principal facility and adjacent space in New Hartford. All15
The Company is subjectWe are not currently a party to any material litigation.
See Note 10 – Contingencies - of the Notes to Consolidated Financial Statements (Part IV, Item 15 of this Annual Report) for information regarding legal proceedings which arisearising in the ordinary course of business. Inour business, and a discussion about our current internal investigation into import/export and sales documentation activities at our China and Singapore offices, and the opinion of management,civil and criminal sanctions available to the ultimate liability, if any, with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company.SEC, DOJ, and other governmental agencies (including foreign governmental agencies).
Not Applicable.
PART II
Item 5:5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
The Company’sOur common stock par value $0.02 per share, tradesis listed on the New York Stock Exchange (NYSEunder the symbol - PAR)“PAR”. At December 31, 2015,On March 28, 2017, there were approximately 424 owners411 holders of record of the Company’sour common stock, plus those owners whose stock certificates are held by brokers.
stock. The following table showssets forth, for the periods indicated, the high and low stocksales prices for the two years ended December 31, 2015our common stock as reported by the New York Stock Exchange:
| | | 2015 | | | 2014 | |
Period | | Low | | | High | | | Low | | | High | |
| | | | | | | | | | | | | |
| First quarter | | $ | 4.03 | | | $ | 6.04 | | | $ | 4.65 | | | $ | 5.50 | |
| Second quarter | | $ | 3.80 | | | $ | 4.98 | | | $ | 4.12 | | | $ | 4.99 | |
| Third quarter | | $ | 4.11 | | | $ | 5.29 | | | $ | 3.78 | | | $ | 5.24 | |
| Fourth quarter | | $ | 5.12 | | | $ | 7.39 | | | $ | 4.28 | | | $ | 6.18 | |
| | | 2016 | | | 2015 | |
| | | High | | | Low | | | High | | | Low | |
| First Quarter | | $6.63 | | | $5.04 | | | $6.04 | | | $4.03 | |
| Second Quarter | | 6.86 | | | 4.35 | | | 4.98 | | | 3.80 | |
| Third Quarter | | 5.52 | | | 4.83 | | | 5.29 | | | 4.11 | |
| Fourth Quarter | | 5.58 | | | 4.71 | | | 7.39 | | | 5.12 | |
The Company has notWe have never declared or paid cash dividends on itsour common stock, and the Company presently intends to continuestock. We currently intend to retain any future earnings for reinvestmentuse in growth opportunities. Accordingly, it is anticipated nothe operation of our business and do not intend to declare or pay any cash dividends will be paid in the foreseeable future. Any further determination to pay dividends on our common stock will be at the discretion of our board of directors, subject to applicable laws, and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors considers relevant.
Under our equity incentive plans, in consideration for grants of performance vesting restricted stock, recipients must pay PAR par value for each share granted; if the performance vesting requirements are not satisfied, PAR repurchases the forfeited shares at par value. In addition, employees may elect to have us withhold shares to satisfy minimum statutory federal, state and local tax withholding obligations arising from the vesting of restricted stock. When we withhold these shares, we are required to remit to the appropriate taxing authorities the market price of the shares withheld, which could be deemed a purchase of shares by us on the date of withholding.
Not Required.
Item 7:7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements. |
This document contains “forward-looking statements” within the meaningThe following discussion and analysis of Section 27A of the Securities Act of 1933, as amended,our financial condition and Section 21E of the Securities Exchange Act of 1934. Any statements in this document that do not describe historical facts are forward-looking statements. Forward-looking statements in this document (including forward-looking statements regarding the continued health of segments of the hospitality industry, future information technology outsourcing opportunities, an expected increase or decrease in contract funding by the U.S. Government, the impact of current world events on our results of operations the effects of inflation onshould be read in conjunction with our margins,Consolidated Financial Statements and the effectsNotes thereto included under Part IV, Item 15 of interest rate and foreign currency fluctuations on our results of operations) are made pursuant to the safe harbor provisions of the private securities litigation reform act of 1995. When we use words such as “intend,” “anticipate,” “believe,” “estimate,” “plan,” “will,” or “expect”, we are making forward-looking statements. We believe the assumptions and expectations reflectedthis Annual Report. See also, “Forward-Looking Statements” in such forward-looking statements are reasonable based on information available to us on the date hereof, but we cannot assure you these assumptions and expectations will prove to have been correct or we will take any action that we presently may be planning. We have disclosed certain important factors that could cause our actual future results to differ materially from our current expectations, including: a decline in the volume of purchases made by one or a group of our major customers; risks in technology development and commercialization; risks of downturns in economic conditions generally, and in the quick-service sector of the hospitality market specifically; risks associated with government contracts; risks associated with competition and competitive pricing pressures; and risks related to foreign operations. Forward-looking statements made in connection with this report are necessarily qualified by these factors. We are not undertaking to update or revise publicly any forward-looking statements if we obtain new information or upon the occurrence of future events or otherwise.Annual Report.
Overview
PAR'sPAR’s management technology solutions for the hospitalityRestaurant/Retail segment featurefeatures cloud and on-premise software applications, hardware platforms, and related installation, technical, and maintenance support services tailored for the needs of restaurants and retailers. The Company's governmentOur Government segment provides technical expertise in the contract development of advanced systems and software solutions for the U.S. Department of Defense and other federal agencies, as well as informationmanagement technology and communications support services to the U.S. Department of Defense.
The Company'sOur products sold in the hospitalityRestaurant/Retail segment are utilized in a wide range of applications by thousands of customers. The Company facescustomers worldwide. We face competition across all of its markets withincategories in the hospitalityRestaurant/Retail segment competingin which we compete based on the basis of product design, innovative features and functionality, quality and reliability, price, customer service, and delivery capability. PAR's continuingOur strategy is to provide complete integrated management technology solutions, withsupported by industry leading customer service in the markets in which it participates. The Company conducts itsservice. Our research and development efforts are focused on timely identifying changes in customer needs and/or relevant technologies, to createrapidly and effectively develop innovative technology offeringsnew products and enhancements to our existing products that meet and exceed customer requirementsrequirements.
Our strategy is to expand our Restaurant/Retail business by continuing to invest in our existing products - Brink and also have a high probability for broader market appeal and success.
The Company is focused on expanding its hospitality businesses through its product investments and continuedSureCheck - including the development of itsenhancements to our existing software applications and hardware platforms and the development of new and innovative cloud based software applications. These products include its Brink POS software within the fast casual market, with integrated features that include loyalty, mobile online ordering, kitchen video system, guest surveys, enterprise reporting, mobile dashboard, and much more. In addition, the Company is investing in the enhancement of existing software applications and the development of the Company's SureCheck® solution for food safety and task management applications. To support the growth of theseour products, the Company continueswe continue to expand itsour direct sales force and third-party distribution channels.channel partners.
Currently, PAR’s primary market is the quick serve restaurant category and hardware sales to tier 1 customers in that category. Our strategy continues to focus on growth of our software offerings, including our cloud software as a service (SaaS) and related hardware and support services, consistent with our strategy to expand our product offerings beyond restaurant and retail markets. As we implement our strategies, we continuously monitor the trends in the markets we currently operate and the markets we intend to operate in the future. We know POS hardware is becoming a commodity, as more POS devices (tablets, kiosks and bring your own device) are introduced, competition will increase, driven by pricing, scalability, functionality, and economies of scale, resulting in smaller margins. Our strategy acknowledges this trend, and we intend to grow our recurring revenues from software contracts, specifically SaaS, reducing the impact of this eventual commoditization of POS hardware.
The Quick Serve Restaurant market, PAR's primary market, continues to perform wellstrategy for the majority of large, international companies.our PAR primarily sells its hardware platforms to this market, specifically, within our Tier 1 clients.
The focus of the Company’s Government businesssegment is to expand its services and solutions business lines. Throughbuild on our sustained outstanding performance of existing service contracts, and investingcoupled with investments in enhancing itsenhanced business development capabilities, the Company is ablecapabilities. We believe we are well positioned to consistently win renewalrealize continued renewals of expiring contracts extendand extensions of existing contracts, and secure additional new business. With itsservice and solution contracts in expanded areas within the U.S. Department of Defense and other federal agencies. We believe our highly relevant technical competencies, intellectual property, and investmentinvestments in new technologies the Company providesprovide opportunities to offer systems integration, products, and highly-specialized service solutions to the U.S. Department of Defense and other federal/state agencies with systems integration, products and highly-specialized services.federal agencies. The general uncertainty in U.S. defense total workforce policies (military, civilian, and contract), procurement cycles, and spending levels for the next several years may impactare factors we monitor as we develop and implement our business strategy for the performance of this business.PAR Government segment.
Results of Operations — 20152016 Compared to 20142015
During the year endingended December 31, 2015, the Company performed a strategic analysis of its current product and business unit offerings and as a result, entered into an asset purchase agreement to sellwe sold substantially all of the assets of itsour hotel/spa technology business operated under PAR Springer-Miller Systems, Inc. (“PSMS”). See Note 2 – Divestiture and Discontinued Operations - of the Notes to affiliates of Constellation Software Inc. This transaction closed on November 4, 2015. Accordingly, the results of operations of PSMS have been classified as discontinued operations in the Consolidated Statements of Operation and Cash Flows in accordance with Accounting Standards Codification (“ASC”) ASC 205-20, Presentation of Financial Statements – Discontinued Operations. Additionally, the assets and associated liabilities have been classified as discontinued operations in the Consolidated Balance Sheets. All prior period amounts have been reclassified to conform to the current period presentation. Refer to Note 3 “Discontinued Operations” in the notes to the Consolidated Financial Statements for further discussion, including the terms of the transaction.
We reported revenues of $229.7 million for the year ended December 31, 2016, flat from the $229.0 million reported for the year ended December 31, 2015. Revenues from our Restaurant/Retail segment of $149.3 million for the year ended December 31,2016, increased 5.8%, compared to $141.2 million reported for the year ended December 31, 2015. PAR’s Government segment reported revenues of $80.3 million for the year ended December 31, 2016, a decrease of 8.6% from $87.9 million reported for the year ended December 31, 2015. We reported net income from continuing operations of $2.5 million or $0.16 per diluted share for the year ended December 31, 2016 versus $4.0 million or $0.26 per diluted share for the same period in 2015. For 2016 and 2015, we reported a net loss from discontinued operations of $0.7 million or $0.05 loss per share versus a loss of $4.9 million or $0.32 loss per share, respectively.
The Company reportedProduct revenues of $229.0were $100.3 million for the year ended December 31, 2015,2016, an increase of 5.1%6.2% from the $217.9 million reported for the year ended December 31, 2014. PAR’s revenue from its hospitality segment of $141.2 million for the year ended December 31, 2015, an increase of 8.4% compared to the $130.2 million reported for the year ended December 31, 2014. PAR’s government segment reported revenues of $87.9 million for the year ended December 31, 2015, a slight increase from the $87.7 million reported for the year ended December 31, 2014. PAR reported net income from continuing operations of $4.0 million or $0.26 per diluted share for the year ended December 31, 2015 versus $71,000 or $0.00 per diluted share for the same period in 2014. For fiscal year 2015 and 2014, the Company reported a net loss from discontinued operations of $4.9 million or $0.32 loss per share versus a loss of $3.7 million or $0.24 loss per share, respectively.
Product revenues were $94.4 million for the year ended December 31, 2015, an increase of 11.7% from the $84.5 million recorded in 2014.2015. This increase was primarily driven by higher revenues generated from the Company’shardware attachments associated with Brink deployments and hardware sold to global tier 1 accounts. In addition, growth withinOffsetting the Company’s domestic tier one accounts and new accounts established through the acquisition of Brink contributed to the revenue increase as compared to prior year.was a decrease in revenues driven by our global channel partners.
Service revenues were $46.8$49.1 million for the year ended December 31, 2015,2016, an increase of 2.3%5.0% from the $45.7$46.8 million reported for the same period in 2014.2015. The increase is attributable to the resultdiversification of the Company diversifying itsour revenue base, with a higher recurring revenue base through itsfrom our software contracts,contracts; specifically, software sold as a service, SaaS, and other revenue streams generated throughfrom post contract support (“PCS”) offerings.
Contract revenues were $87.9$80.3 million for the year ended December 31, 2015,2016, compared to $87.7$87.9 million reported for the same period in 2014,2015, a decrease of 8.6%. This decrease was driven by lower volume within our PMO services contracts, offset by an increase of 0.2%. This increase is driven by increased activity within the Company’s intelligence, surveillancein value-added revenue on our Intelligence, Surveillance, and reconnaissance contracts slightly offset by a reduction in revenue generated from mission systemsReconnaissance (ISR), contracts.
Product margins for the year ended December 31, 20152016, were 27.8%26.2%, a decrease from 30.3%27.7% for the same period in 2014. During the year negatively impacting the overall2015. Overall, product margins weremargin decreased primarily due to unfavorable product mix, as a high volumeresult of lower margin peripheral devices sold to our largest hospitalityhigher than anticipated project work from tier 1 customers, and a larger deploymentlower sales of higher margin perpetual software for a specific rollout in 2014 that did not recur in 2015.licenses.
Service margins were 29.8%27.4% for the year ended December 31, 2015, an increase2016, a decrease from the 23.4%27.5% recorded for the same period in 2014.2015. The decrease was primarily due to an increase isin costs to support our hardware support contracts, and $0.5 million was due to accelerated amortization related to discontinued development of a resultsoftware module. Offsetting these increases was a favorable product mix with a higher content of favorable service revenue mix during the year. The primary driver is the continued growth of revenue streams within the Company’s software platforms sold as a service. In addition, the Company experienced a high volume of its timeSaaS and material revenue within PAR’s repair center.other software related revenues.
Contract margins were 6.8%8.1% for the year ended December 31, 2015,2016, compared to 6.1%6.8% for the same period in 2014.2015. This variance is the result ofincrease was due to a favorable performance in fixed price contracts and lower product development costs in 2015.more profitable contract mix, associated with higher margin on value-added revenues.
Selling, general and administrative expenses were $28.3$31.4 million for the year ending December 31, 2015,2016, compared to $29.0$27.3 million for the year ended December 31, 2014.2015. The decreaseincrease is primarily attributable to lower equity based compensation expense$1.5 million of expenses related to the investigation of our former chief financial officer’s unauthorized transfers of funds, $1.3 million of expenses related to our internal investigation of conduct at our China and Singapore offices, a write-off of $0.8 million relating to our human capital management system, and $0.6 million of expenses related to the Company’s executionimplementation of cost reduction initiatives within its hospitality segment operations. The Company continues to monitor its cost structure, including strategic initiatives to reduce its fixed costs. Partially offsetting the decrease was severance related expense.initial phase of our new enterprise resource system.
Research and development expenses were $10.2$11.6 million for the year ended December 31, 2015,2016, compared to $8.9$10.1 million recorded for the same period in 2014.2015. This increase was primarily related to increased software development costs for products within the hospitalityRestaurant/Retail segment, primarily R&D associated with the Company’s Brink POSand SureCheck software application.applications.
During the year ended December 31, 2015, the Company2016, we recorded $987,000$1.0 million of amortization expense associated with acquired identifiable intangible assets from thein connection with our acquisition of Brink, that was acquiredwhich closed on September 18, 2014. The CompanyWe recorded $279,000$1.0 million of amortization expense associated with acquired identifiable intangiblethese assets for the year ended December 31, 2014.2015.
Other income, net, was $1.3 million for the year ended December 31, 2016 compared to other expense, net of $0.8 million for the same period in 2015. Other income/expense primarily includes fair value adjustments on contingent consideration, rental income, net of applicable expenses, foreign currency fair value adjustments, fair market value fluctuations of our deferred compensation plan and other non-operating income/expense. The primary drivers of the increase in other income, net, relates to a $1.1 million decrease of contingent consideration liability related to our acquisition of Brink in the third quarter 2014 and an insurance recovery of $0.8 million relating to our former chief financial officer’s unauthorized transfers of funds.
Other expense, net was $800,000 for the year ended December 31, 2015 compared to other income, net of $485,000 for the same period in 2014. Other income/expense primarily includes fair market value fluctuations of the Company's deferred compensation plan, rental income, net, foreign currency fair value adjustments, and other non-operating income/expense. The decrease primarily relates to a write off of $776,000 for investments, and lower rental income received during the year. The investment write-off of $776,000 in fiscal year 2015 represents the write-off of unauthorized investments that were made in contravention of the Company’s policies and procedures involving the Company’s funds. The unauthorized investments occurred during the period between September 25, 2015 and November 6, 2015. As of December 31, 2015, the Company is uncertain of the collectability relating to these investments and as a result, reduced its fair value to zero. The write-off of the investment resulted in the Company identifying a material weakness over financial reporting as described in Item 9A and also described in footnote 1.
Interest expenseincome (expense), net, represents accreted increased from the note receivable related to the sale of PSMS and interest charged on the Company'sour short-term borrowings and from long-term debt. Interest expenseincome was $308,000$0.1 million for the year ended December 31, 20152016, as compared to $136,000an interest expense of $0.3 million for the same period in 2014.2015. This increase is associated with higher outstanding borrowingthe accreted interest income of $0.2 million related to the note receivable in 2015connection with the sale of PSMS and lower interest expense as compared to 2015, which is due to lower outstanding borrowings on the same period in 2014.line of credit.
For the year ended December 31, 2015, the Company’s2016, our effective income tax rate was an expense of 27.2%31.4%, compared to an expense of 98.1%27.2% in 2014.2015. The variances from the federal statutory rate for 20152016 were due to the mix of taxable income from the Company'sCompany’s domestic and foreign jurisdictions. In 2014,jurisdictions, which is consistent with the Company repatriated earnings through the payment of a $5.0 million dividend by its Chinese subsidiary to its domestic parent company, resultingvariance in income tax expense of $2.2 million on those earnings. The Company considers this a one-time repatriation which helped finance the Brink acquisition and further earnings are considered permanently re-invested.2015.
Liquidity and Capital Resources
The Company’s primary sources of liquidity have been cash flow from operations and a line of credit with its bank. Cash generated from operating activities offrom continuing operations was $2.2$11.4 million for the year ended December 31, 20152016, compared to cash providedgenerated of $9.6$2.6 million for the same period in 2014.2015.
non-cash charges and changes in working capital. Net changes in operating assets and liabilities was $3.0 million primarily as a result of customer deposits, offset by an increase in inventory. In 2015, cash provided by continuing operations was $2.6 million, cash was generated from the Company’sour operating results plus the add-back of non-cash expenses and a reduction of inventory. Offsetting significant operating cash flow components include a decrease in accounts payable primarily due to the timing of vendor payments and a decrease in customer deposits associated with the Company’s hospitality segment. In 2014, cash generated from operations was mostly due to the add back of non-cash charges and changes in working capital. Significant operating cash flow components include cash used to procure inventory required for planned deployments in 2015, as well as cash used through an increase in receivables resulting from significant sales volume recorded late in fiscal year 2014. Operating cash flow was generated by an increase in accounts payable and accrued expenses mainly due to the timing of vendor payments associated with the aforementioned growth in inventory and other amounts owed to vendors. Cash was also generated through the increase in customer deposits associated with the Company’s hospitalityour Restaurant/Retail segment.
Cash generated fromused in investing activities from continuing operations was $7.5$7.1 million for the year ended December 31, 20152016 versus cash used of $8.2$7.5 million provided by investing activities for the same periodyear ended December 31, 2015. In 2016, capital expenditures of $3.4 million were primarily for PAR’s new ERP system and capital improvements made to our owned and leased properties. Capitalized software was $2.7 million and was associated with investments in 2014.Restaurant/Retail software platforms. In 2015, the Companywe received cash proceeds of $12.1 million related to the sale of its hotel/spa technologythe PSMS business. This was offset by the Company wrote-off $776,000a $0.8 million write-off related to our former chief financial officer’s unauthorized transfers of unauthorized investments that were made in contravention of the Company’s policies and procedures involving the Company’s funds. Capital expenditures of $1.7 million were primarily forrelated to capital improvements made to the Company’s leased properties as well as purchases of computer equipment associated with the Company’sour software support service offerings. Capitalized software was $2.1 million and was used for investments in many of the Company’s hospitality software platforms. In 2014, the first installment payment associated with the purchase of Brink Software Inc. which accounted for use of approximately $5.0 million of the investing capital. Capital expenditures of $1.5 million were primarily for capital improvements made to the Company’s leased properties as well as purchases of computer equipment associated with the Company’s software support service offerings. Capitalized software was $1.7 million and was used for investments in many of the Company’s hospitalityour Restaurant/Retail software platforms.
Cash used in financing activities from continuing operations was $2.2 million for the year ended December 31, 2016 versus $7.7 million for the year ended December 31, 2015 versus cash generated2015. In 2016, we paid the third installment associated with our purchase of $4.8Brink of $2.0 million, for the same period in 2014.addition to payments on long-term debt of $0.2 million, and proceeds from stock activity of $27,000. In 2015, the Company decreased borrowings on its credit facility by $5.0 million, net and decreased borrowings on its long-term debt by $0.2 million, and benefited $0.5 million from the exercise of employee stock options. Additionally, the second installment payment associated with the purchaseour acquisition of Brink Software Inc. accounted for approximately $3.0 million was made. In 2014,of the cash used in financing activities during 2015.
On November 29, 2016, the Company, borrowed $5.0 million, net ontogether with certain of its credit facility in connectionU.S. subsidiaries, as “Loan Guarantors” (together with the purchaseCompany, the “Loan Parties”) entered into a Credit Agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as the “Lender”. The Credit Agreement provides for revolving loans in an aggregate principal amount of Brink Software Inc.up to $15.0 million to be made available to the Company; availability at any time being equal to the lesser of (i) $15.0 million and (ii) a borrowing base (equal to the sum of 80% eligible accounts, 50% eligible raw materials inventory and 35% eligible finished goods inventory, with no more than 50% of total eligible inventory included in the borrowing base), less the aggregate principal amount outstanding (the “Credit Facility”). Interest accrues on outstanding principal balances at an applicable rate per annum determined, as of the end of each fiscal quarter, by reference to the CBFR Spread or the Eurodollar Spread based on the Company’s consolidated indebtedness ratio as at the determination date. The Credit Facility replaces the Company’s asset-based credit agreement dated September 9, 2014 with JPMorgan Chase, N.A. (the “2014 ABL Credit Agreement”) and decreased its long term borrowings by $0.2 million.a portion of the proceeds of the Credit Facility were used to pay-off all indebtedness outstanding under the 2014 ABL Credit Agreement.
Through June 4, 2014,The Credit Facility matures three (3) years from the Company maintained a credit facility with J.P. Morgan Chase, N.A. and NBT Bank, N.A. (on behalf of itself and as successor by merger to Alliance Bank, N.A.) consisting of $20.0 million in working capital lines of credit (with the option to increase to $30.0 million), which expired in June 2014. This agreement allowed the Company, at its option, to borrow funds at the LIBOR rate plus the applicable interest rate spread or at the bank's prime lending rate. This credit facility was secured by certain assets of the Company.
On June 5, 2014, the Company executed an amendment to its then existing credit facility to provide for the renewal of the facility through June 2017, with terms generally consistent to those of its prior facility. This facility provided the Company with capital of up to $20.0 million (with the option to increase to $30.0 million) in the form of a revolving line of credit. This agreement allowed the Company, at its option, to borrow funds at the LIBOR rate plus the applicable interest rate spread or at the bank's prime lending rate.
On September 9, 2014, the Company terminated its existing credit facilities with J.P. Morgan Chase, N.A. and NBT Bank, N.A. (on behalf of itself and as successor by merger to Alliance Bank, N.A.) consisting of $20.0 million in working capital lines of credit, and the Company and its domestic subsidiaries entered into a new three-year credit facility with J.P. Morgan Chase, N.A (the Credit Facility). The termsdate of the Credit Agreement and is guaranteed by the Loan Guarantors. The Credit Facility provide for up to $25 millionis secured by substantially all of a line of credit, with borrowing availability based on a percentage of value of variousthe assets of the Company and itsof the other Loan Parties; provided, that the Credit Facility is not secured by any liens on more than 65% of the voting stock of the Company’s foreign subsidiaries. The new agreement bears interestCredit Agreement contains representations and warranties and affirmative and negative covenants that are usual and customary, including representations, warranties and covenants that, among other things, restrict the ability of the Company and its subsidiaries to incur additional indebtedness, incur or permit to exist liens on assets, make investments, loans, advances, guarantees and acquisitions, consolidate or merge with or into any other company, engage in asset sales and pay dividends and make distributions. The Credit Agreement requires that the Company’s consolidated indebtedness ratio at the applicable bank rate (3.25% at December 31, 2015) or, at the Company's option, at the LIBOR rate plus the applicable interest rate spread (rangeend of 1.5% – 2.0%). At December 31, 2015, the Company did not have any outstanding balance on this lineeach of credit. The weighted average interest rate paid by the Company was approximately 3.50% duringits fiscal year 2015. The new agreement contains traditional asset based loan covenantsquarters to be greater than 3.0 to 1.0 and includes covenants regarding earnings before interest, tax, depreciation & amortization (“EBITDA”) andmaintain a fixed charge coverage ratio of not less than 1.15 to 1.0 for the Company’s fiscal quarter ended December 31, 2016 (to be tested only in the event the Company’s total consolidated indebtedness equaled or exceeded $5 million at the end of such fiscal quarter) and provides1.25 to 1.0 for accelerationthe quarter ending March 31, 2017 and each quarter thereafter. Obligations under the Credit Agreement may be accelerated upon the occurrence ofcertain customary events of defaults.
On March 19, 2015,default (subject to grace periods, as appropriate), including among others: nonpayment of principal, interest or fees; breach of the affirmative or negative covenants; breach of the representations or warranties in any material respect; event of default under, or acceleration of, other material indebtedness; bankruptcy or insolvency; material judgments entered against the Company amendedor any of its subsidiaries; invalidity or unenforceability of any collateral documentation associated with the Credit Facility to reduceFacility; and a change of control of the EBITDA requirement and extend the fixed charge coverage ratio. The amendment provides the Company flexibility to continue investingCompany. We were in the Company’s future product offerings while maintaining certain covenant thresholds as defined in the amendment. On March 16, 2016, the Company received a notice of defaults under its current Credit Facility due to unauthorized investments made during 2015 by the company’s former Chief Financial Officer, which were not permitted investments as defined in the lending agreement. See Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for further discussion oncompliance with these unauthorized investments. These unauthorized investments involved cash transfers totaling $776,000, which amounts have been written off by the Companycovenants as of December 31, 2015 (the “Unauthorized Transactions”). 2016.
On March 24,December 31, 2016, the lender provided waivers ofapplicable rate under the defaults, subject to certain terms and conditions contained inCredit Facility was 3.25% plus the waiver, including entry byCBFR Spread or LIBOR plus the Company into a fourth amendment to the Company’s Credit Agreement.
On March 24, 2016,Eurodollar Spread based on the waiver received,Company’s consolidated indebtedness ratio. There were no outstanding balances under the Company executed the fourth amendmentCredit Facility as of December 31, 2016, as such we had borrowing availability of up to its existing Credit Agreement. Under the terms and conditions of this amendment, the Company has undertaken to engage, and has engaged, an independent consultant to review its internal controls relating to financial reporting and authorization procedures for financial transactions (including, without limitation, investments) initiated by the Company’s officers (the “Internal Control Review”). The company has agreed to deliver to the lender a report prepared by Company’s consultant that sets forth, in reasonable detail, the results of the Internal Control Review, together with a summary of any recommended changes to the Company’s internal control procedures (the “ICR Report”). To the extent the ICR Report sets forth recommended changes to Borrowers’ internal control procedures (“IC Recommendations”), The Company has agreed to promptly take steps to implement the IC Recommendations in all material respects. The Company has agreed to provide periodic updates to the lender relating to the Internal Control Review, implementation of IC Recommendations and any ongoing investigations related to the Unauthorized Transactions$15.0 million.
In addition to the credit facility described above,Credit Facility, the Company has a mortgage loan, collateralized by certain real estate, with a balance of $746,000$0.6 million and $919,000 at$0.7 million as of December 31, 20152016 and 2014,2015, respectively. This mortgage matures on November 1, 2019. The Company'sInterest is fixed interest rate was 4.05% through October 1, 2014. Beginning on October 1, 2014, the fixed rate was converted to a new rate equal to the then-current five year fixed advanced rate charged by the New York Federal Home Loan bank, plus 225 basis points. Effective November 1, 2014, the Company entered into an agreement that fixed the interest rate at 4.00% through the maturity date of the loan.maturity. The annual mortgage payment, including interest through November 1, 2019, totals $206,000.is $0.2 million.
In connection with theour acquisition of Brink Software Inc. on September 18, 2014, the Companywe recorded indebtedness to theBrink’s former owners of Brink Software Inc. under the stock purchase agreement. AtAs of December 31, 20152016 and 2014,2015, the principal balance of the note payable was zero and $2.0 million, and $5.0 millionrespectively, and it had a carrying value of $1.9 millionzero and $4.8$1.9 million, respectively. The carrying value was based on the note’s estimated fair value at the time of the acquisition. The note does not bear interest, and repayment terms are $3.0 million, which was paid on the first anniversary of close, September 18, 2015, and $2.0 million payable on the second anniversary of close, which was paid in September 18, 2016.
During fiscal year 2016, the Company anticipates that its capital requirements will not exceed approximately $3.0 million to $5.0 million. The Company does not routinely enter into long term contracts with its major hospitality segment customers. The Company commits to purchasing inventory from its suppliers based on a combination of internal forecasts and actual orders from customers. This process, along with good relations with suppliers, supports the working capital investment required by the Company. Although the Company lists two major customers, McDonald’s and Yum! Brands, it sells to hundreds of individual franchisees of these corporations, each of which is individually responsible for its own debts. These broadly made sales substantially reduce the impact on the Company’s liquidity if one individual franchisee reduces the volume of its purchases from the Company in a given year. The Company, based on internal forecasts, believes its existing cash, line of credit facilities and its anticipatedWe expect our operating cash flowflows and available capacity under our Credit Facility will be sufficient to meet its cash requirements throughour operating needs for the next twelve12 months. However, the Company may be required, or could elect, to seek additional funding prior to that time. The Company’s future capital requirementsOur actual cash needs will depend on many factors, including itsour rate of revenue growth, including growth of our SaaS revenues, the timing and extent of spending to support our product development efforts, potential growth through strategic acquisition, expansion of sales and marketing, the timing of introductions of new products and enhancements to existing products, and market acceptance of its products. The Companyour products, and potential fines and penalties that, while currently inestimable, could be material (see Item 1A – “Risk Factors” for further discussion about the potential adverse effect of such fines and penalties on our business). If we are required or otherwise elect to seek additional funding, we cannot assurebe certain that such additional equity or debt financingfunding will be available on terms and conditions acceptable terms orto us, if at all. The Company’s sources of liquidity beyond twelve months, in management’s opinion, will be its cash balances on hand at that time, funds provided by operations, funds available through its lines of credit and the long-term credit facilities that it can arrange.
The Company’sOur future principal payments under its stock purchase agreement with Brink,our mortgage and operating leases are as follows (in thousands):
| | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 3 - 5 Years | | | More than 5 Years | |
| Debt obligations | | $ | 2,669 | | | $ | 2,103 | | | $ | 383 | | | $ | 183 | | | $ | - | |
| Operating lease | | | 5,462 | | | | 1,456 | | | | 2,073 | | | | 1,195 | | | | 738 | |
| Total | | $ | 8,131 | | | $ | 3,559 | | | $ | 2,456 | | | $ | 1,378 | | | $ | 738 | |
| | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 3 - 5 Years | | | More than 5 Years | |
| Debt obligations | | $ | 566 | | | $ | 187 | | | $ | 379 | | | $ | - | | | $ | - | |
| Operating lease | | | 4,403 | | | | 1,360 | | | | 2,004 | | | | 536 | | | | 503 | |
| Total | | $ | 4,969 | | | $ | 1,547 | | | $ | 2,383 | | | $ | 536 | | | $ | 503 | |
35
Critical Accounting Policies and Estimates
The Company’s consolidated financial statementsOur Consolidated Financial Statements are based on the application of U.S. generally accepted accounting principles (“GAAP”). 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. The Company believes itsWe 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 throughout the Company.basis. Primary areas where financial information of the Company is subject to the use of estimates, assumptions and the application of judgment include revenue recognition, accounts receivable, inventories, accounting for business combinations, contingent consideration, goodwill and intangible assets, and taxes.
Revenue Recognition Policy
HospitalityRestaurant/Retail Contracts
Our hospitality Restaurant/Retail segment’s revenues consist of sales of the Company’sour standard POS system to the hospitalityRestaurant/Retail segment. We derive revenue from the following sources: (1) hardware sales, (2) software license agreements, including perpetual licenses and software as a service, SaaS, (3) professional services, (4) hosting services and (5) post-contract customer support ("PCS"(“PCS”).
We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.reasonably assured. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
Hardware
Revenue recognition on hardware sales occurs upon delivery to the customer site (or when shipped for systems that are not installed by the Company)us) when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is reasonably assured.
Software
Revenue recognition on software sales generally occurs upon delivery to the customer, when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is probable.reasonably assured. For software sales sold as a perpetual license, typicaltypically our Pixel software offering, where the Company iswe are the sole party that has the proprietary knowledge to install the software, revenue is recognized upon installation and when the system is ready to go live.
Service
Service revenue consists of installation and training services, field and depot repair, subscription software products, associated software maintenance, and software related hosted services. Installation and training service revenue are based upon standard hourly/daily rates as well as contracted prices with the customer, and revenue is recognized as the services are performed. Support maintenance and field and depot repair are provided to customers either on a time and materials basis or under a maintenance contract. Services provided on a time and materials basis are recognized as the services are performed. Service revenues from maintenance contracts are recorded as deferred revenue when billed to and collected from the customer and are recognized ratably over the underlying contract period. Software sold as a service with our Brink and SureCheck software offerings, is recorded as deferred revenue when billed and collected and recognized based onratably over the contracted price over its contract term.
PARWe frequently entersenter into multiple-element arrangements with itsour customers including hardware, software, professional consulting services and maintenance support services. For arrangements involving multiple deliverables, when deliverables include software and non-software products and services, PAR evaluateswe evaluate and separatesseparate each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) the delivered item has value to the customer on a stand-alone basis; and (b) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the control of PAR.
our control.
Multiple element arrangements which include hardware, service, and software offerings are separated based upon the stand alonestand-alone selling price for each individual hardware, service, or software sold in the arrangement irrespective of the combination of products and services which are included in a particular arrangement. As such, overall consideration is allocated to each unit of accounting based on the unit'sunit’s relative selling prices. In such circumstances, the Company useswe use a hierarchy to determine the selling price to be used for allocating revenue to each deliverable: (i) vendor-specific objective evidence of selling price (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of selling price (BESP). VSOE generally exists only when the Company sellswe sell the deliverable separately and is the price actually charged by the Companyus for that deliverable. The Company usesWe use BESP to allocate revenue when we are unable to establish VSOE or TPE of selling price. BESP is primarily used for elements such as products that are not consistently priced within a narrow range. The Company determinesWe determine BESP for a deliverable by considering multiple factors including product and customer class, geography, average discount, and management'smanagement’s historical pricing practices. Amounts allocated to the delivered hardware and software elements are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the undelivered maintenance and other services elements are recognized as the services are provided or on a straight-line basis over the service period. In certain instances, customer acceptance is required prior to the passage of title and risk of loss of the delivered products. In such cases, revenue is not recognized until the customer acceptance is obtained. Delivery and acceptance generally occur in the same reporting period.
In situations where PAR’s solutions contain23
Software elements, generally software related services (generally PCS, and professional services),services revenue isare recognized in accordance with authoritative guidance on software revenue recognition. For the software and software-related elements of such transactions, revenue is allocated based on the relative fair value of each element, and fair value is determined by vender specific objective evidence, where available. If VSOE is not available for all elements, we will use the residual method to separate the elements as long as we have VSOE for the undelivered elements. If the Companywe cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, the Company deferswe defer the revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
Government Contracts
The Company’sOur contract revenues generated by the Government segment result primarily from contract services performed for the U.S. Government under a variety of cost-plus fixed fee, time-and-material, and fixed-price contracts. Revenue on cost-plus fixed fee contracts is recognized based on allowable costs for labor hours delivered, as well as other allowable costs plus the applicable fee. Revenue on time and material contracts is recognized by multiplying the number of direct labor hours delivered in the performance of the contract by the contract billing rates and adding other direct costs as incurred. Revenue from fixed-price contracts is recognized as labor hours are delivered which approximates the straight-line basis of the life of the contract. The Company’sOur obligation under these contracts is to provide labor hours to conduct research or to staff facilities with no other deliverables or performance obligations. Anticipated losses on all contracts are recorded in full when identified. Unbilled accounts receivable are stated in the Company’sour consolidated financial statements at their estimated realizable value. Contract costs, including indirect expenses, are subject to audit and adjustment through negotiations between the Companyus and U.S. Government representatives.
Accounts Receivable-Allowance for Doubtful Accounts
Allowances for doubtful accounts are based on estimates of probable losses related to accounts receivable balances. The establishment of allowances requires the use of judgment and assumptions regarding probable losses on receivable balances. The CompanyWe continuously monitorsmonitor collections and payments from our customers and maintain a provision for estimated credit losses based on our historical experience and any specific customer collection issues that we have identified. Thus, if the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required.
Inventories
The Company’s inventories areOur inventory is valued at the lower of cost or market, with cost determined using the first-in, first-out (“FIFO”) method. The Company usesWe use certain estimates and judgments and considers several factors including product demand, changes in customer requirements and changes in technology to provide for excess and obsolescence reserves to properly value inventory.
Capitalized Software Development Costs
The Company capitalizes
We capitalize certain costs related to the development of computer software used in its hospitalityRestaurant/Retail 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 computer software product is established when the Company haswe have completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. Software development costs incurred after establishing feasibility ((as(as defined within ASC 985-20 for software cost related to sold as a perpetual license and ASC-350-40 for software sold as a service) are capitalized and amortized on a product-by-product basis when the product is available for general release to customers. Annual amortization, charged to cost of sales when the product is available for general release to customers, 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 a product bear to the total of current and anticipated future gross revenues for that product.
Accounting for Business Combinations
The Company accountsWe account for acquired businesses using the acquisition method of accounting, which requires that assets acquired and liabilities assumed 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 the Company believeswe believe the assumptions and estimates it haswe have 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.
Contingent Consideration
The Company determinesWe determine the acquisition date fair value of contingent consideration 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 Topic 820, Fair Value Measurement. The significant inputs in the Level 3 measurement not supported by market activity included the Company’sour probability assessments of expected future cash flows related to the Company’sour acquisition of Brink Software Inc. in 2014, during the contingent consideration period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the definitive agreement. The liabilities for the contingent consideration areis established at the time of the acquisition and will be evaluated on a quarterly basis based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of that period. During fiscal year 2015, the Company2016, we recorded a $90,000$1.1 million adjustment to increasedecrease the fair value of its contingent consideration related to the acquisition of Brink Software Inc.. This isInc., versus a $0.1 million adjustment to increase the fair value during 2015. These adjustments are reflected within other expense on the statement of operations. Changes in the fair value of the contingent consideration obligations may result from changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations.Significant increases or decreases in the inputs noted above in isolation would result in a significantly lower or higher fair value measurement.
Goodwill
The Company testsWe test goodwill for impairment on an annual basis on the first day of the fourth quarter, or more often if events or circumstances indicate there may be impairment. The Company operatesWe operate in two businessreportable operating segments hospitality- Restaurant/Retail and government. Goodwill impairment testingGovernment - and goodwill is performedtested at the sub-segment level (referred to as a reporting unit). For fiscal year 2015, the two reporting units utilized by the Company for its impairment testing are: restaurants and government as compared to three reporting units tested in 2014 or restaurants, hotel/spa and government.this level. Goodwill is assigned to a specific reporting unitoperating segment at the date the goodwill is initially recorded. Once goodwill has been assigned to a specific reporting unit,operating segment, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit,an operating segment, whether acquired or organically grown, are available to support the value of the goodwill.
Goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit’soperating segment’s fair value to its carrying value including goodwill. If the fair value of a reporting unitan operating segment exceeds its carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication of impairment, at which time a second step would be performed to measure the amount of impairment. The second step involves calculating an implied fair value of goodwill for each reporting unitoperating segment for which the first step indicated impairment.
The Company utilizesWe utilize different methodologies in performing its goodwill impairment test. For both the government and restaurant reporting units,operating segments, these methodologies include both an income approach, namely a discounted cash flow method, and multiple market approaches and the guideline public company method and quoted price method. The valuation methodologies and weightings used in the current year are generally consistent with those used in the Company’sour past annual impairment tests.
The discounted cash flow method derives a value by determining the present value of a projected level of income stream, including a terminal value. This method involves the present value of a series of estimated future cash flows at the valuation date by the application of a discount rate, one which a prudent investor would require before making an investment in the equity of the Company. The Company considersour equity. We consider this method to be most reflective of a market participant’s view of fair value given the current market conditions, as it is based on the Company’sour forecasted results and, therefore, established its weighting at 80% of the fair value calculation.
Key assumptions within the Company’sour discounted cash flow model utilized for its annual impairment test included projected financial operating results, a long termlong-term growth rate of 3% and discount rates ranging from 17.5%17.0% to 21%23.5%, depending on the reporting unit.operating segment. As stated above, as the discounted cash flow method derives value from the present value of a projected level of income stream, a modification to the Company’sour projected operating results including changes to the long termlong-term growth rate could impact the fair value. The present value of the cash flows is determined using a discount rate based on the capital structure and capital costs of comparable public companies, as well as company-specific risk premium, as identified by the Company.us. A change to the discount rate could impact the fair value determination.
The market approach is a generally-accepted way of determining a value indication of a business, business ownership interest, security or intangible asset by using one or more methods that compare the subject to similar businesses, business ownership interests, securities or intangible assets that have been sold. There are two methodologies considered under the market approach: the public company method and the quoted price method.
The public company method and quoted price method of appraisal are based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing closely held companies. The mechanics of the method require the use of the stock price in conjunction with other factors to create a pricing multiple that can be used, with certain adjustments, to apply against the subject’s similar factor to determine an estimate of value for the subject company. The CompanyWe considered these methods appropriate as they provide an indication of fair value as supported by current market conditions. The CompanyWe established itsour weighting at 10% of the fair value calculation for the public company method and quoted price method for both the governmentRestaurant/Retail and restaurant reporting unit.Government, operating segments.
The most critical assumption underlying the market approaches we utilized by the Company are the comparable companies utilized. Each market approach described above estimates revenue and earnings multiples for the Company based on itsour comparable companies. As such, a change to the comparable companies could have an impact on the fair value determination.
The amount of goodwill carried by the restaurantRestaurant/Retail and government reporting unitsGovernment segments is $10.3 million and $0.7 million, respectively. The estimated fair value of the restaurant reporting unitRestaurant/Retail segment exceeds its carrying value by approximately 18%. The estimated fair value of the government reporting unit is substantially in excess of its carrying value. There were no goodwill impairment charges recorded for the restaurant and government reporting units for the years ended December 31, 20152016 or 2014.2015.
During fiscalthe year ended December 31, 2015, the Company performed a strategic analysis of its current product and business unit offerings and as a result, entered into an asset purchase agreement to sellwe sold substantially all of the assets of itsour hotel/spa technology business operated under PAR Springer-Miller Systems, Inc. (“PSMS”) to affiliates of Constellation Software Inc. This. The transaction closed on November 4, 2015. Accordingly, the results of operations of PSMS have been classified as discontinued operations in accordance with Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements – Discontinued Operations. All prior period amounts have been reclassified to conform to the current period presentation. Refer toSee Note 3 “Discontinued Operations” in2 – Divestiture and Discontinued Operations - of the Notes to the Consolidated Financial Statements for further discussion. At the time of sale, the hotel/spa reporting unit carried approximately $6.1 million of goodwill. Based on the purchase price, the Companywe recorded a $2.4 million impairment of the goodwill to write down the net assets to its fair value. In connection with the sale, the Companyvalue and we wrote-off the remaining goodwill balance associated with the hotel/spa reporting unit.goodwill.
Restaurants:
In deriving itsour fair value estimates, the Company haswe utilized key assumptions built on the current core business adjusted to reflect anticipated revenue increases from continued investment in itsour next generation software. These assumptions, specifically those included within the discounted cash flow estimate, are comprised of the revenue growth rate, gross margin, operating expenses, working capital requirements, and depreciation and amortization expense.
The Company hasWe utilized annual revenue growth rates ranging between 7%3% and 15%23%. The high endhigh-end growth rate reflects the Company’sour projected revenues resulting from the increased install base of Brink POS and SureCheck customers. These software platforms will expand the Company’sour capabilities into new markets. The Company believesWe believe these estimates are reasonable given the size of the overall market which itwe will enter, combined with the projected market share the Company expectswe expect to achieve. Overall, the projected revenue growth rates ultimately trend to an estimated long term growth rate of 3%.
The Company hasWe utilized gross margin estimates that are reflective of increased recurring revenue from software sold as a service that will exceed historical gross margins achieved. Estimates of operating expenses, working capital requirements and depreciation and amortization expense utilized for this reporting unit are generally consistent with actual historical amounts, adjusted to reflect its continued investment and projected revenue growth from the Company’sour core technology platforms. The Company believesWe believe utilization of actual historical results adjusted to reflect itsour continued investment in itsour products is an appropriate basis supporting the fair value of the restaurant reporting unit.
Lastly, the Companywe utilized a discount rate of approximately 21%23.5% for this reporting unit. This estimate was derived through a combination of current risk-free interest rate data, financial data from companies that PAR has deemed as its competitors, and was based on volatility between the Company’sour 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 the Company operateswe operate could contribute to decreased consumer confidence and continued economic uncertainty which may adversely impact the Company’sour operating performance. Although the Company haswe have seen an improvement in the markets which it serves,we serve, the continued volatility in these markets could have an impact on purchases of the Company’sour products, which could result in a reduction of sales, operating income and cash flows. Reductions in these results could have a material adverse impact on the underlying estimates used in deriving the fair value of the Company’sour reporting units used in support of itsour annual goodwill impairment test or could result in a triggering event requiring a fair value re-measurement, particularly if the Company iswe 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.
Government:
The estimated fair value of the governmentGovernment reporting unit is substantially in excess of its carrying value. Consistent with prior year methodology, in deriving itsour fair value estimates, the Company haswe have utilized key assumptions built on the current core business. These assumptions, specifically those included within the discounted cash flow estimate, are comprised of the revenue growth rate, gross margin, operating expenses, working capital requirements, and depreciation and amortization expense.
The Company hasWe reconciled the aggregate estimated fair value of the reporting units to the market capitalization of the consolidated Company, including a reasonable control premium noting no impairment as of December 31, 20152016, or 20142015 was recorded.
Deferred Taxes
The Company has significant amountsWe have $17.4 million of deferred tax assets that are reviewed for recoverability and valued accordingly. These assets are evaluated by using estimates of future taxable income and the impact of tax planning strategies. Valuations related to tax accruals and assets can be impacted by changes to tax codes, changes in statutory tax rates and the Company’sour estimates of its future taxable income levels.
New Accounting Pronouncements Not Yet Adopted
See Note 1 – Summary of Significant Accounting Principles - of the Notes to the Consolidated Financial Statements included in Part(Part IV, Item 15 of this ReportReport) for details of New Accounting Pronouncements Not Yet Adopted.details.
Off-Balance Sheet Arrangements
The Company doesWe do not have any off-balance sheet arrangements.
Item 7A.7A. | Quantitative and Qualitative Disclosures about Market RiskRisk. |
inflationNot required.
Inflation had little effect on revenues
PAR’s Consolidated Financial Statements and related costs during 2015. Management anticipates that margins will be maintained at acceptable levelsNotes thereto, together with the report of BDO USA, LLP, are included in Part IV, Item 15 of this Annual Report in response to minimize the effects of inflation, if any.this Item.
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
interest rates
As of December 31, 2015, the Company does not have any variable debt. The Company believes that an adverse change in interest rates of 100 basis points would not have a material impact on PAR’s business, financial condition, results of operations or cash flows.
foreign currency
The Company's primary exposures relate to certain non-dollar denominated sales and operating expenses in Europe and Asia. These primary currencies are the Great British Pound, the Euro, the Australian dollar, the Singapore dollar and the Chinese Renminbi. Accordingly, changes in exchange rates may negatively affect our revenue and net income (loss) as expressed in U.S. dollars. We also have foreign currency risk related to foreign currency transactions and monetary assets and liabilities, including intercompany balances denominated in currencies that are not the functional currency. We have experienced and will continue to experience fluctuations in our net income (loss) as a result of gains (losses) on these foreign currency transactions and the remeasurement of monetary assets and liabilities. To date, the impacts of foreign currency exchange rate changes on our revenues and net income (loss) have not been material. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy.
Item 8:9A. | Financial StatementsControls and Supplementary DataProcedures. |
The Company’s 2015 consolidated financial statements, together with the report thereonEvaluation of BDO USA, LLP dated March 30, 2016, are included elsewhere herein. See Part IV, Item 15 for a list of Financial Statements.Disclosure Controls and Procedures.
Item 9: | Changes in and Disagreements With Accounting and Financial Disclosure |
None.
Item 9A: | Controls and Procedures |
| 1. | Evaluation of Disclosure Controls and Procedures. |
Based on an evaluation of the Company’sWe maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of December 31, 2015, the end of the period covered by this Annual Report on Form 10-K (the “Evaluation Date”)Act), conducted under the supervision of and with the participation of the Company’s chief executive officer and chief accounting officer, performing the function of the principal financial officer, such officers have concluded that the Company’s disclosure controls and procedures, which are designed to ensureprovide reasonable assurances that information we are required to be disclosed by the Companydisclose in the reports that it fileswe file or submitssubmit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and designed to ensure that such information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including the chiefour principal executive officer (Chief Executive Officer) and principal financial officers,officer (Chief Financial Officer), as appropriate, to allow timely decisions regarding required disclosures, aredisclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective becauseas of December 31, 2016, as a result of the material weaknessweaknesses in our internal control over financial reporting previously disclosed in our Quarterly Report on Form 10-Q filed on November 14, 2016, for the fiscal quarter ended September 30, 2016 and described below, which were not remediated as of the Evaluation Date described below.December 31, 2016. However, it has been determined that no material adjustments, restatements or other amendments to our previously issued financial statements are required.
| 2. | Management’s Report on Internal Control over Financial Reporting. |
a private investigator to conduct background checks of executive officer candidates; and we implemented new treasury policies that, among other things, require the prior approval of the Board of Directors of all investments, and outline required review and approval procedures for anticipated wire transfers, prior to wire initiation. We tested our new policies, and based on the test results, management concluded the material weaknesses have been remediated.
PAR’sManagement’s Annual Report on Internal Control Over Financial Reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting as such term is(as defined in Rule 13a-15(f) underof the Exchange Act. The Company’s internal control system has been designed to provide reasonable assurance toAct). Our management andconducted an evaluation of the Boardeffectiveness of Directors regarding the preparation and fair presentation of published financial statements in accordance with U.S. generally accepted accounting principles.
A company’sour internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effectbased on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparationframework and presentation. Because of inherent limitations due to, for example, the potential for human error or circumvention of controls, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changescriteria established in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PAR’s management, under the supervision of and with the participation of the Company’s chief executive officer and chief accounting officer, performing the function of the principal financial officer, assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. Management based this assessment on criteria for effective internal control over financial reporting described in the 2013 “InternalInternal Control –- Integrated Framework” Framework (2013) issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. Based on its assessment, based on those criteria,evaluation, our management believesconcluded that as of December 31, 2015, the Company’sour internal control over financial reporting was ineffective and anot effective as of December 31, 2016, due to the material weakness existed.weaknesses in our internal control over financial reporting discussed below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’scompany’s annual or interim financial statements will not be prevented or detected on a timely basis.
Internal Investigation; Material Weaknesses.
As previously disclosed, our Audit Committee has been overseeing an internal investigation by outside counsel into import/export and sales documentation activities at our China and Singapore offices. The existenceinvestigation, with its fact finding phase substantially complete, is focused on whether certain import/export and sales documentation activities at our China and Singapore offices were improper and in possible violation of onethe U.S. Foreign Corrupt Practices Act, or moreFCPA, and other applicable laws, and certain of our policies, including our Code of Business Conduct and Ethics. Based on the investigation findings to date, we discovered that certain members of our China and Singapore staff participated in or were aware of improper activities in China and Singapore, involving the improper bypassing of applicable customs laws of various countries. Those activities included the failure to properly label items for import into various non-U.S. countries, the failure to properly document the declared value of certain items exported to various non-U.S. countries, and questionable payments made to customs officials in China without sufficient documentation to evidence or confirm the legitimacy of their purpose. The investigation also revealed that certain members of upper management knew or should have known of the questionable conduct in 2015 and early 2016, but failed to take action to prevent or correct such conduct. Our management identified material weaknesses precludes a conclusion by management that a corporation’sin our internal controls with respect to oversight of our operations in China and Singapore. Such material weaknesses include:
| · | a control environment that did not effectively promote, maintain, or support the control consciousness of employees or a culture of adequate and prompt reporting of information internally; |
| · | the failure to maintain sufficient monitoring activities of consistent global practices and procedures to ensure deviations are detected and corrected on a timely basis; and |
| · | insufficient policies, procedures, and training with respect to procurement and sales activities, including insufficient documentation involving arrangements with third parties, the import/export and customs laws of international jurisdictions and the FCPA, including deficiencies in our FCPA compliance policy and training program. |
Remediation Efforts to Address Material Weaknesses.
As we disclosed in our Form 10-Q for the fiscal quarter ended September 30, 2016, we developed and had begun to implement changes in our internal control over financial reporting is effective.to remediate the material weaknesses described above. Since identifying the material weaknesses in our internal controls, we have:
As mentioned | · | made, and will continue to make, as appropriate, personnel changes; |
| · | begun revamping, updating, and expanding PAR’s Code of Business Conduct and Ethics and overall compliance policies and procedures; |
| · | begun enhancements to the substance and regularity of our ethics and compliance training both in the U.S. and our foreign offices, including the initiation of company-wide, training of our personnel in applicable laws, rules, and regulations, to be supplemented by global training on our new compliance program once adopted; |
| · | established regular channels of communication between senior management and local offices; |
| · | begun to enhance our control environment with respect to sales, procurement, and reporting activities at local offices; and |
| · | further revised and updated, and we continue to revise and update (as needed), our quarterly accounting and operations questionnaire/certifications. |
In addition to the above, we are in Note 1the process of developing and implementing a comprehensive compliance program; with the Notes to Consolidated Financial Statements, the Company identified certain wire transfers made in connection with unauthorized investments involving Company funds that were in contraventionassistance 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 the necessary approvals. This matter was reported by managementspecial counsel to the Audit Committee, that is designed to be appropriate for us in light of our worldwide operations, particularly in geographical areas that present the greatest challenges to regulatory compliance, focused on applicable domestic and international anti-bribery, trade control, and other laws, rules, and regulations; we are enhancing our due diligence process for third party intermediaries, which will include the assistance of an outside vendor; and we are implementing monitoring procedures, including periodic global risk assessments and compliance audits, along with other testing.
While our remediation efforts are well underway, the process requires additional time and resources to complete. We currently plan to have the new compliance program adopted and rolled out in the second fiscal quarter of 2017. Our goal is to complete remedial efforts, including the baseline global risk assessment, in their entirety by the end of the Company’s Boardthird fiscal quarter of Directors, comprised solely of independent directors. Under the direction2017, and to begin testing of the Independent Audit Committee, an investigation was commenced and completed, although the Company continues to pursue recovery of the funds. The investigation was led by outside counsel, and they 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.enhanced controls immediately thereafter.
We believecaution that a numberany controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of weaknessesachieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Controls Over Financial Reporting.
In evaluating whether there were any reportable changes in our internal controlscontrol over financial reporting enabled these unauthorized transactions to be effected. In particular, we have identified that our pre-hiring diligence procedures failed to requireduring the completion of a 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. Whilequarter ended December 31, 2016, we determined that, no material adjustment was required to our previously reported consolidated financial statements, we determined thatother than the aggregation of these internal control deficiencies, combined with the influence and span of control of our former Chief Financial Officer, while such influence and control was limited, resulted in a material weakness in the Company’s internal control environment. To remediate the material weakness, the Company’s President and Chief Executive Officer has engaged an outside consulting firm to perform a thorough review of its internal controls over financial reporting, specifically, onboarding of new employees and controls over treasury transactions. The Company will begin to implement the recommendations from the consulting firm during 2016 and anticipates making material changes to such controls to strengthen its internal control environment.
| 3. | Remediation of the Material Weakness. |
The Company is evaluating the material weakness and developing a plan of remediation to strengthen our overall internal control. The remediation plan will include the following actions:
| · | We have engaged a consulting firm to perform a thorough review of internal controls over financial reporting, with specific attention given to onboarding of new employees and controls over treasury transactions |
| · | We expect to design and implement new onboarding procedures over financial executives and those employees who are responsible for treasury transactions |
| · | We expect that the plan of remediation will enhance the formality and rigor of review and approval procedures. |
The Company is committed to strengthening its internal control environment and believes that these remediation efforts will represent significant improvements in our controls. The Company has started to implement these steps, however, some of these steps will take time to be fully integrated and confirmed to be effective and sustainable. Additional controls may also be required over time. Until the remediation steps set forth above are fully implemented and tested, the material weakness described above will continueunder “Remediation Efforts to exist.
| 4. | Changes in Internal Controls over Financial Reporting. |
During the Company’s last fiscal quarter of 2015 (the fourth fiscal quarter)Address Material Weaknesses”, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13 a-15(f))during the quarter ended December 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’sour internal control over financial reporting. However, we do anticipate further changes will be implemented to remedy the material weaknesses identified above.
PART III
Item 10:10. | Directors, Executive Officers and Corporate Governance |
.The information required by this item will appear under the caption “Directors, Executive Officers and Corporate Governance” in our 2016 definitive proxy statement for the annual meeting of stockholders on May 18, 2016, to be filed under Schedule 14A, and is incorporated herein by reference.
Item 11: | Executive Compensation |
The information required by this item will appear under the caption “Executive Compensation”be included in our 2016 definitive proxy statement for the annual meetingwith respect to our 2017 Annual Meeting of stockholders on May 18, 2016,Stockholders to be filed under Schedule 14A,with the SEC and is incorporated herein by reference.reference as it appears under the headings, “Proposal 1: Election of Directors”, “Directors and Executive Officers”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Corporate Governance – Code of Business Conduct and Ethics” and “Corporate Governance – Committees – Audit Committee”.
The information required by this item will be included in our definitive proxy statement with respect to our 2017 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference as it appears under the headings, “Director Compensation” and “Executive Compensation”.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The information required by this item will appear under the caption “Security Ownership of Management and Certain Beneficial Owners”be included in our 2016 definitive proxy statement for the annual meetingwith respect to our 2017 Annual Meeting of stockholders on May 18, 2016,Stockholders to be filed under Schedule 14A,with the SEC and is incorporated herein by reference.reference as it appears under the headings, “Executive Compensation – Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management”.
Item 13:13. | Certain Relationships and Related Transactions, and Director Independence. |
The information required by this item will appear under the caption “Executive Compensation”be included in our 2016 definitive proxy statement for the annual meetingwith respect to our 2017 Annual Meeting of stockholders on May 18, 2016,Stockholders to be filed under Schedule 14A,with the SEC and is incorporated herein by reference.reference as it appears under the headings, “Transactions with Related Persons” and “Corporate Governance – Director Independence”.
Item 14:14. | Principal Accounting Fees and Services. |
The response toinformation required by this item will appearbe included in our definitive proxy statement with respect to our 2017 Annual Meeting of Stockholders to be filed with the SEC and is incorporated herein by reference as it appears under the captionheading, “Principal Accounting Fees and Services” in our 2016 definitive proxy statement for the annual meeting of stockholders on May 18, 2016, to be filed under Schedule 14A, and is incorporated herein by reference..
PART IV
Item15:Item 15. | Exhibits and Financial Statement Schedules |
| (a) | Documents filed as a part of the Form 10-Kthis Annual Report |
| | Report of Independent Registered Public Accounting Firm | 5334 |
| | Consolidated Balance Sheets at December 31, 20152016 and 20142015 | 5435 |
| | Consolidated Statements of Operations for the years ended December 31, 20152016 and 20142015 | 5536 |
| | Consolidated Statements of Comprehensive LossIncome (Loss) for the years ended December 31, 20152016 and 20142015 | 5637 |
| | Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 20152016 and 20142015 | 5738 |
| | Consolidated Statements of Cash Flows for the years ended December 31, 20152016 and 20142015 | 5839 |
| | Notes to Consolidated Financial Statements | 5940 |
| 2. | Financial Statement Schedules. Schedules are omitted because they are not required under the applicable accounting regulations of the SEC. |
See listThe information required by the Item is set forth in the Exhibit Index that follows the signature page of exhibits on page 90.this Annual Report.
52None
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
PAR Technology Corporation
New Hartford, New York
We have audited the accompanying consolidated balance sheets of PAR Technology Corporation and subsidiaries (the “Company”) as of December 31, 20152016, and 2014,2015, and the related consolidated statements of operations, comprehensive loss, changes in shareholders’ equity, and cash flowsflow for each of the two years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PAR Technology Corporation and subsidiaries at December 31, 20152016 and 2014,2015, and the results of their operations and their cash flows for each of the two years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
New York, New York
March 30, 2016April 17, 2017
PAR TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
| | | December 31, | | | |
| Assets | | 2015 | | | 2014 | | | December 31, 2016 | | | December 31, 2015 | |
| Current assets: | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 8,024 | | | $ | 9,867 | | | $ | 9,055 | | | $ | 8,024 | |
| Accounts receivable-net | | | 29,530 | | | | 29,674 | | | | 30,705 | | | | 29,530 | |
| Inventories-net | | | 21,499 | | | | 25,928 | | | | 26,237 | | | | 21,499 | |
| Note receivable | | | | 3,510 | | | | - | |
| Income taxes receivable | | | | 261 | | | | - | |
| Deferred income taxes | | | 6,741 | | | | 4,512 | | | | 7,767 | | | | 6,741 | |
| Other current assets | | | 3,808 | | | | 4,018 | | | | 4,027 | | | | 3,431 | |
| Assets of discontinued operations | | | - | | | | 22,119 | | | | 462 | | | | 377 | |
| Total current assets | | | 69,602 | | | | 96,118 | | | | 82,024 | | | | 69,602 | |
| Property, plant and equipment - net | | | 5,716 | | | | 5,148 | | | | 7,035 | | | | 5,716 | |
| Note receivable | | | 3,320 | | | | - | | | | - | | | | 4,259 | |
| Deferred income taxes | | | 11,038 | | | | 11,357 | | | | 9,650 | | | | 11,038 | |
| Goodwill | | | 11,051 | | | | 11,051 | | | | 11,051 | | | | 11,051 | |
| Intangible assets - net | | | 10,898 | | | | 10,580 | | | | 10,966 | | | | 10,898 | |
| Other assets | | | 3,687 | | | | 3,043 | | | | 3,785 | | | | 3,687 | |
| Total Assets | | $ | 115,312 | | | $ | 137,297 | | | $ | 124,511 | | | $ | 116,251 | |
| Liabilities and Shareholders’ Equity | | | | | | | | | | | | | | | | |
| Current liabilities: | | | | | | | | | | | | | | | | |
| Current portion of long-term debt | | $ | 2,103 | | | $ | 3,173 | | | $ | 187 | | | $ | 2,103 | |
| Borrowings under line of credit | | | - | | | | 5,000 | | |
| Accounts payable | | | 11,729 | | | | 19,258 | | | | 16,687 | | | | 11,729 | |
| Accrued salaries and benefits | | | 5,727 | | | | 5,726 | | | | 5,470 | | | | 5,727 | |
| Accrued expenses | | | 6,705 | | | | 6,492 | | | | 4,682 | | | | 7,644 | |
| Customer deposits | | | 180 | | | | 1,242 | | |
| Deferred service revenue | | | 10,639 | | | | 10,388 | | |
| Customer deposits and deferred service revenue | | | | 19,814 | | | | 10,819 | |
| Income taxes payable | | | 279 | | | | 475 | | | | - | | | | 279 | |
| Liabilities of discontinued operations | | | 441 | | | | 4,617 | | | | - | | | | 441 | |
| Total current liabilities | | | 37,803 | | | | 56,371 | | | | 46,840 | | | | 38,742 | |
| Long-term debt | | | 566 | | | | 2,566 | | | | 379 | | | | 566 | |
| Other long-term liabilities | | | 8,883 | | | | 8,847 | | | | 7,712 | | | | 8,883 | |
| Total liabilities | | | 47,252 | | | | 67,784 | | | | 54,931 | | | | 48,191 | |
| Commitments and contingencies | | | | | | | | | | | | | | | | |
| Shareholders’ Equity: | | | | | | | | | | | | | | | | |
| Preferred stock, $.02 par value, 1,000,000 shares authorized | | | - | | | | - | | | | - | | | | - | |
| Common stock, $.02 par value, 29,000,000 shares authorized; 17,352,198 and 17,274,708 shares issued, 15,644,729 and 15,566,599 outstanding at December 31, 2015 and 2014, respectively | | | 347 | | | | 346 | | |
| Common stock, $.02 par value, 29,000,000 shares authorized; 17,479,454 and 17,352,838 shares issued; 15,771,345 and 15,644,729 outstanding at December 31, 2016 and December 31, 2015, respectively | | | | 350 | | | | 347 | |
| Capital in excess of par value | | | 45,753 | | | | 44,854 | | | | 46,203 | | | | 45,753 | |
| Retained earnings | | | 30,574 | | | | 31,465 | | | | 32,357 | | | | 30,574 | |
| Accumulated other comprehensive loss | | | (2,778 | ) | | | (1,316 | ) | | | (3,494 | ) | | | (2,778 | ) |
| Treasury stock, at cost, 1,708,109 shares | | | (5,836 | ) | | | (5,836 | ) | | | (5,836 | ) | | | (5,836 | ) |
| Total shareholders’ equity | | | 68,060 | | | | 69,513 | | | | 69,580 | | | | 68,060 | |
| Total Liabilities and Shareholders’ Equity | | $ | 115,312 | | | $ | 137,297 | | | $ | 124,511 | | | $ | 116,251 | |
See accompanying notesNotes to consolidated financial statementsConsolidated Financial Statements
PAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| | Year ended December 31, | | | Year ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Net revenues: | | | | | | | | | | | | |
| Product | | $ | 94,397 | | | $ | 84,484 | | | $ | 100,271 | | | $ | 94,397 | |
| Service | | | 46,754 | | | | 45,690 | | | | 49,070 | | | | 46,754 | |
| Contract | | | 87,852 | | | | 87,689 | | | | 80,312 | | | | 87,852 | |
| | | | 229,003 | | | | 217,863 | | | | 229,653 | | | | 229,003 | |
| Costs of sales: | | | | | | | | | | | | | | | | |
| Product | | | 68,192 | | | | 58,889 | | | | 73,976 | | | | 68,223 | |
| Service | | | 32,824 | | | | 35,011 | | | | 35,647 | | | | 33,875 | |
| Contract | | | 81,848 | | | | 82,347 | | | | 73,830 | | | | 81,848 | |
| | | | 182,864 | | | | 176,247 | | | | 183,453 | | | | 183,946 | |
| Gross margin | | | 46,139 | | | | 41,616 | | | | 46,200 | | | | 45,057 | |
| Operating expenses: | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 28,276 | | | | 28,974 | | | | 31,440 | | | | 27,374 | |
| Research and development | | | 10,247 | | | | 8,947 | | | | 11,581 | | | | 10,067 | |
| Amortization of identifiable intangible assets | | | 987 | | | | 279 | | | | 966 | | | | 987 | |
| | | | 39,510 | | | | 38,200 | | | | 43,987 | | | | 38,428 | |
| | | | | | | | | | | | | | | | | |
| Operating income from continuing operations | | | 6,629 | | | | 3,416 | | | | 2,213 | | | | 6,629 | |
| Other (expense) income, net | | | (800 | ) | | | 485 | | |
| Interest expense | | | (308 | ) | | | (136 | ) | |
| Other income (expense), net | | | | 1,316 | | | | (800 | ) |
| Interest income (expense) | | | | 121 | | | | (308 | ) |
| Income from continuing operations before provision for income taxes | | | 5,521 | | | | 3,765 | | | | 3,650 | | | | 5,521 | |
| Provision for income taxes | | | (1,500 | ) | | | (3,694 | ) | | | (1,147 | ) | | | (1,500 | ) |
| Income from continuing operations | | | 4,021 | | | | 71 | | | | 2,503 | | | | 4,021 | |
| Discontinued operations | | | | | | | | | | | | | | | | |
| Loss on discontinued operations (net of tax) | | | (4,912 | ) | | | (3,722 | ) | | | (720 | ) | | | (4,912 | ) |
| Net loss | | $ | (891 | ) | | $ | (3,651 | ) | |
| Net income (loss) | | | $ | 1,783 | | | $ | (891 | ) |
| Basic Earnings per Share: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | 0.26 | | | | 0.00 | | | | 0.16 | | | | 0.26 | |
| Loss from discontinued operations | | | (0.32 | ) | | | (0.24 | ) | | | (0.05 | ) | | | (0.32 | ) |
| Net Loss | | $ | (0.06 | ) | | $ | (0.24 | ) | |
| Net income (loss) | | | $ | 0.11 | | | $ | (0.06 | ) |
| Diluted Earnings per Share: | | | | | | | | | | | | | | | | |
| Income from continuing operations | | | 0.26 | | | | 0.00 | | | | 0.16 | | | | 0.26 | |
| Loss from discontinued operations | | | (0.32 | ) | | | (0.24 | ) | | | (0.05 | ) | | | (0.32 | ) |
| Net loss | | $ | (0.06 | ) | | $ | (0.24 | ) | |
| Net income (loss) | | | $ | 0.11 | | | $ | (0.06 | ) |
| Weighted average shares outstanding | | | | | | | | | | | | | | | | |
| Basic | | | 15,562 | | | | 15,501 | | | | 15,675 | | | | 15,562 | |
| Diluted | | | 15,666 | | | | 15,582 | | | | 15,738 | | | | 15,666 | |
See accompanying notesNotes to consolidated financial statementsConsolidated Financial Statements
PAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSSINCOME (LOSS)
(in thousands)
| | Year ended December 31, | | | Year ended December 31, | |
| | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | |
| Net loss | | $ | (891 | ) | | $ | (3,651 | ) | |
| Net income (Loss) | | | $ | 1,783 | | | $ | (891 | ) |
| Other comprehensive loss net of applicable tax: | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | (1,462 | ) | | | (777 | ) | | | (716 | ) | | | (1,462 | ) |
| Comprehensive loss | | $ | (2,353 | ) | | $ | (4,428 | ) | |
| Comprehensive income (Loss) | | | $ | 1,067 | | | $ | (2,353 | ) |
See accompanying notesNotes to consolidated financial statementsConsolidated Financial Statements
PAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'SHAREHOLDERS’ EQUITY
(in thousands)
| | Common Stock | | | Capital in excess of | | | Retained | | | Accumulated Other Comprehensive | | | Treasury Stock | | | Total Shareholders’ | | | Common Stock | | | Capital in excess of | | | Retained | | | Accumulated Other Comprehensive | | | Treasury Stock | | | Total Shareholders’ | |
| (in thousands) | | Shares | | | Amount | | | Par Value | | | Earnings | | | Loss | | | Shares | | | Amount | | | Equity | | | Shares | | | Amount | | | Par Value | | | Earnings | | | Loss | | | Shares | | | Amount | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balances at December 31, 2013 | | | 17,302 | | | $ | 344 | | | $ | 43,635 | | | $ | 35,116 | | | $ | (539 | ) | | | (1,708 | ) | | $ | (5,836 | ) | | $ | 72,720 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | (3,651 | ) | | | | | | | | | | | | | | | (3,651 | ) | |
| Net issuance of restricted stock awards | | | (27 | ) | | | 2 | | | | | | | | | | | | | | | | | | | | | | | | 2 | | |
| Equity based compensation | | | | | | | | | | | 1,185 | | | | | | | | | | | | | | | | | | | | 1,185 | | |
| Stock options and awards tax benefits | | | | | | | | | | | 34 | | | | | | | | | | | | | | | | | | | | 34 | | |
| Translation adjustments, net of tax of $476 | | | | | | | | | | | | | | | | | | | (777 | ) | | | | | | | | | | | (777 | ) | |
| Balances at December 31, 2014 | | | 17,275 | | | | 346 | | | | 44,854 | | | | 31,465 | | | | (1,316 | ) | | | (1,708 | ) | | | (5,836 | ) | | | 69,513 | | | | 17,275 | | | $ | 346 | | | $ | 44,854 | | | $ | 31,465 | | | $ | (1,316 | ) | | | (1,708 | ) | | $ | (5,836 | ) | | $ | 69,513 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | | | | (891 | ) | | | | | | | | | | | | | | | (891 | ) | | | | | | | | | | | | | | | (891 | ) | | | | | | | | | | | | | | | (891 | ) |
| Issuance of common stock upon the exercise of stock options | | | 94 | | | | 2 | | | | 472 | | | | | | | | | | | | | | | | | | | | 474 | | | | 94 | | | | 2 | | | | 472 | | | | | | | | | | | | | | | | | | | | 474 | |
| Net issuance of restricted stock awards | | | (17 | ) | | | (1 | ) | | | | | | | | | | | | | | | | | | | | | | | (1 | ) | | | (17 | ) | | | (1 | ) | | | | | | | | | | | | | | | | | | | | | | | (1 | ) |
| Equity based compensation | | | | | | | | | | | 487 | | | | | | | | | | | | | | | | | | | | 487 | | | | - | | | | - | | | | 487 | | | | | | | | | | | | | | | | | | | | 487 | |
| Stock options and awards tax benefits | | | | | | | | | | | (60 | ) | | | | | | | | | | | | | | | | | | | (60 | ) | | | | | | | | | | | (60 | ) | | | | | | | | | | | | | | | | | | | (60 | ) |
| Translation adjustments, net of tax of $476 | | | | | | | | | | | | | | | | | | | | (1,462 | ) | | | | | | | | | | | (1,462 | ) |
| Balances at December 31, 2015 | | | | 17,352 | | | $ | 347 | | | $ | 45,753 | | | $ | 30,574 | | | $ | (2,778 | ) | | | (1,708 | ) | | $ | (5,836 | ) | | $ | 68,060 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | | | | | | | | | | | | | | 1,783 | | | | | | | | | | | | | | | | 1,783 | |
| Issuance of common stock upon the exercise of stock options | | | | 5 | | | | 1 | | | | 26 | | | | | | | | | | | | | | | | | | | | 27 | |
| Net issuance of restricted stock awards | | | | 122 | | | | 2 | | | | | | | | | | | | | | | | | | | | | | | | 2 | |
| Equity based compensation | | | | | | | | | | | | 469 | | | | | | | | | | | | | | | | | | | | 469 | |
| Stock options and awards tax benefits | | | | | | | | | | | | (45 | ) | | | | | | | | | | | | | | | | | | | (45 | ) |
Translation adjustments, net of tax of $944 | | | | | | | | | | | | | | | | | | | (1,462 | ) | | | | | | | | | | | (1,462 | ) | | | | | | | | | | | | | | | | | | | (716 | ) | | | | | | | | | | | (716 | ) |
| Balances at December 31, 2015 | | | 17,352 | | | $ | 347 | | | $ | 45,753 | | | $ | 30,574 | | | $ | (2,778 | ) | | | (1,708 | ) | | $ | (5,836 | ) | | $ | 68,060 | | |
| Balances at December 31, 2016 | | | | 17,479 | | | $ | 350 | | | $ | 46,203 | | | $ | 32,357 | | | $ | (3,494 | ) | | | (1,708 | ) | | $ | (5,836 | ) | | $ | 69,580 | |
See accompanying notesNotes to consolidated financial statementsConsolidated Financial Statements
PAR TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | Year ended December 31, | | | Year ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net loss | | $ | (891 | ) | | $ | (3,651 | ) | |
| Net income (Loss) | | | $ | 1,783 | | | $ | (891 | ) |
| Loss from discontinued operations | | | 4,912 | | | | 3,722 | | | | 720 | | | | 4,912 | |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | | | | | | | | | | | | |
| Loss on investment | | | 776 | | | | - | | |
| Depreciation, amortization and accretion | | | 3,070 | | | | 2,007 | | |
| Insurance (recovery) loss on investment | | | | (771 | ) | | | 776 | |
| Depreciation, amortization, and accretion | | | | 4,624 | | | | 3,070 | |
| Provision for bad debts | | | 772 | | | | 340 | | | | 401 | | | | 772 | |
| Provision for obsolete inventory | | | 1,293 | | | | 2,232 | | | | 1,249 | | | | 1,293 | |
| Equity based compensation | | | 487 | | | | 1,185 | | | | 469 | | | | 487 | |
| Change in fair value of contingent consideration | | | 90 | | | | - | | | | (1,130 | ) | | | 90 | |
| Deferred income tax | | | (1,910 | ) | | | 516 | | | | 708 | | | | (1,910 | ) |
| Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | | | | | | | | |
| Accounts receivable | | | (628 | ) | | | (700 | ) | | | (1,576 | ) | | | (628 | ) |
| Inventories | | | 3,136 | | | | (3,826 | ) | | | (5,987 | ) | | | 3,136 | |
| Income tax receivable/(payable) | | | (196 | ) | | | 290 | | | | (540 | ) | | | (196 | ) |
| Other current assets | | | 210 | | | | (1,129 | ) | | | (248 | ) | | | 587 | |
| Other assets | | | (644 | ) | | | (368 | ) | | | (194 | ) | | | (644 | ) |
| Accounts payable | | | (7,529 | ) | | | 3,022 | | | | 4,958 | | | | (7,529 | ) |
| Accrued salaries and benefits | | | 1 | | | | (425 | ) | |
| Accrued expenses | | | 213 | | | | 4,572 | | | | (2,023 | ) | | | 214 | |
| Customer deposits | | | (1,062 | ) | | | 1,060 | | | | 9,032 | | | | (1,062 | ) |
| Deferred service revenue | | | 251 | | | | 645 | | | | (37 | ) | | | 251 | |
| Other long-term liabilities | | | (54 | ) | | | 93 | | | | (41 | ) | | | (54 | ) |
| Deferred tax equity based compensation | | | (60 | ) | | | - | | | | (45 | ) | | | (60 | ) |
| Net cash provided by operating activities-continuing operations | | | 2,237 | | | | 9,585 | | | | 11,352 | | | | 2,614 | |
| Net cash used in operating activities-discontinued operations | | | (1,643 | ) | | | (3,324 | ) | | | (356) | | | | (2,020 | ) |
| Net cash provided by operating activities | | | 594 | | | | 6,261 | | | | 10,996 | | | | 594 | |
| Cash flows from investing activities: | | | | | | | | | | | | | | | | |
| Capital expenditures | | | (1,705 | ) | | | (1,536 | ) | | | (3,433 | ) | | | (1,705 | ) |
| Capitalization of software costs | | | (2,148 | ) | | | (1,650 | ) | | | (2,685 | ) | | | (2,148 | ) |
| Investment expenditure | | | (776 | ) | | | - | | | | - | | | | (776 | ) |
| Payments for acquisition, net of cash acquired | | | - | | | | (5,000 | ) | |
| Proceeds from sale of business | | | 12,100 | | | | - | | | | - | | | | 12,100 | |
| Net cash provided by (used in) investing activities-continuing operations | | | 7,471 | | | | (8,186 | ) | |
| Working capital adjustment paid | | | | (977 | ) | | | - | |
| Net cash (used in) provided by investing activities-continuing operations | | | | (7,095 | ) | | | 7,471 | |
| Net cash used in investing activities-discontinued operations | | | (1,046 | ) | | | (1,816 | ) | | | - | | | | (1,046 | ) |
| Net cash provided by (used in) investing activities | | | 6,425 | | | | (10,002 | ) | |
| Net cash (used in) provided by investing activities | | | | (7,095 | ) | | | 6,425 | |
| Cash flows from financing activities: | | | | | | | | | | | | | | | | |
| Payments of long-term debt | | | (173 | ) | | | (165 | ) | | | (181 | ) | | | (173 | ) |
| Payments of other borrowings | | | (222,156 | ) | | | (39,771 | ) | | | (214,980 | ) | | | (222,156 | ) |
| Proceeds from other borrowings | | | 217,156 | | | | 44,771 | | | | 214,980 | | | | 217,156 | |
| Payments for deferred acquisition obligations | | | (3,000 | ) | | | - | | | | (2,000 | ) | | | (3,000 | ) |
| Proceeds from stock awards | | | 473 | | | | 2 | | | | 27 | | | | 473 | |
| Net cash (used in) provided by financing activities | | | (7,700 | ) | | | 4,837 | | |
| Net cash used in financing activities | | | | (2,154 | ) | | | (7,700 | ) |
| Effect of exchange rate changes on cash and cash equivalents | | | (1,462 | ) | | | (944 | ) | | | (716 | ) | | | (1,462 | ) |
| Net (decrease) increase in cash and cash equivalents | | | (2,143 | ) | | | 152 | | |
| Net increase (decrease) in cash and cash equivalents | | | | 1,031 | | | | (2,143 | ) |
| Cash and cash equivalents at beginning of period | | | 10,167 | | | | 10,015 | | | | 8,024 | | | | 10,167 | |
| Cash and cash equivalents at end of period | | | 8,024 | | | | 10,167 | | | | 9,055 | | | | 8,024 | |
| Less cash and cash equivalents of discontinued operations at end of period | | | - | | | | 300 | | | | - | | | | - | |
| Cash and cash equivalents of continuing operations at end of period | | $ | 8,024 | | | $ | 9,867 | | | $ | 9,055 | | | $ | 8,024 | |
| | | | | | | | | | | | | | | | | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | | | | | | | |
| Cash paid during the period for: | | | | | | | | | | | | | | | | |
| Interest | | $ | 206 | | | $ | 129 | | | $ | 94 | | | $ | 206 | |
| Income taxes, net of refunds | | $ | 310 | | | $ | 722 | | | $ | 714 | | | $ | 310 | |
| | | | | | | | | | | | | | | | | |
| Supplemental disclosures of non-cash information: | | | | | | | | | | | | | | | | |
| Acquisition through notes payable | | $ | - | | | $ | 4,820 | | |
| Contingent consideration payable in connection with acquisition | | $ | - | | | $ | 5,040 | | |
| Sale of business through note receivable | | $ | 3,320 | | | $ | - | | | $ | | | | $ | 4,259 | |
See accompanying notesNotes to consolidated financial statementsConsolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
Basis of consolidation
The consolidated financial statements include the accounts of PAR Technology Corporation and its subsidiaries (ParTech, Inc., ParTech (Shanghai) Company Ltd., PAR Springer-Miller Systems, Inc., Springer-Miller Canada, ULC, PAR Canada ULC, Brink Software, Inc., PAR Government Systems Corporation and Rome Research Corporation, Brink Software, Inc.)Corporation), collectively referred to as the “Company.” All significant intercompany transactions have been eliminated in consolidation.
During the third quarter of fiscal year 2015, the Company performed a strategic analysis of its current product and business unit offerings and as a result, entered into an asset purchase agreement to sell substantially all of the assets of its hotel/spaour Hotel/Spa technology business operated under PAR Springer-Miller Systems, Inc. (“PSMS”) to affiliates of Constellation Software Inc. This. The transaction closed on November 4, 2015. Accordingly, the results of operations of PSMS have been classified as discontinued operations in accordance with Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements – Discontinued Operations. All prior period amounts have been reclassified to conform to the current period presentation. Refer toSee Note 3 “Discontinued Operations”2 – Divestiture and Discontinued Operations - in the Notes to the Consolidated Financial Statements for further discussion.
Business combinations
The Company accounts for business combinations pursuant ASC 805, Business Combinations, which requires that assets acquired and liabilities assumed 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 allocated to goodwill (the “Acquisition Method”). The purchase price allocation process requires the Company to make significant assumptions and estimates in determining the purchase price and the assets acquired and liabilities assumed at the acquisition date. The Company’s assumptions and estimates are subject to refinement and, as a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon conclusion of the measurement period, any subsequent adjustments are recorded to the Company’s consolidated statements of operations. The Company’s consolidated financial statements and results of operations reflect an acquired business after the completion of the acquisition.
Contingent Consideration
The Company determines the acquisition date fair value of contingent consideration 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 Topic 820, Fair Value Measurement. 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, and calculated in accordance with the terms of the definitive agreement. The liabilities for the contingent consideration are established at the time of the acquisition and will be evaluated on a quarterly basis based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of that period. During fiscal year 2015, the Company2016, we recorded a $90,000$1.1 million adjustment to increasedecrease the fair value of itsour contingent consideration related to the acquisition of Brink Software Inc., versus a $0.1 million adjustment to increase the fair value during 2015. This is reflected within other expense on the statement of operations. Changes in the fair value of the contingent consideration obligations may result from changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations.Significant increases or decreases in the inputs noted above in isolation would result in a significantly lower or higher fair value measurement.
Revenue recognition policy
HospitalityRestaurant/Retail Contracts
Our hospitalityRestaurant/Retail segment’s revenues consist of sales of the Company’s standard POS system to the hospitalityRestaurant/Retail segment. We derive revenue from the following sources: (1) hardware sales, (2) software license agreements, including perpetual licenses and software as a service, (3) professional services, (4) hosting services and (5) post-contract customer support ("PCS"(“PCS”).
We recognize revenue when all four revenue recognition criteria have been met: persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report.
Hardware
Revenue recognition on hardware sales occurs upon delivery to the customer site (or when shipped for systems that are not installed by the Company) when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectability is reasonably assured.
Software
Revenue recognition on software sales generally occurs upon delivery to the customer, when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectability is probable.reasonably assured. For software sales sold as a perpetual license, typicaltypically our Pixel software offering, where the Company is the sole party that has the proprietary knowledge to install the software, revenue is recognized upon installation and when the system is ready to go live.
Service
Service revenue consists of installation and training services, field and depot repair, subscription software products, associated software maintenance, and software related hosted services. Installation and training service revenue are based upon standard hourly/daily rates as well as contracted prices with the customer, and revenue is recognized as the services are performed. Support maintenance and field and depot repair are provided to customers either on a time and materials basis or under a maintenance contract. Services provided on a time and materials basis are recognized as the services are performed. Service revenues from maintenance contracts are recorded as deferred revenue when billed to and collected from the customer and are recognized ratably over the underlying contract period. Software sold as a service with our Brink and SureCheck software offerings, is recorded as deferred revenue when billed and collected and recognized based onratably over the contracted price over its contract term.
The Company frequently enters into multiple-element arrangements with itsour customers including hardware, software, professional consulting services and maintenance support services. For arrangements involving multiple deliverables, when deliverables include software and non-software products and services, PAR evaluateswe evaluate and separatesseparate each deliverable to determine whether it represents a separate unit of accounting based on the following criteria: (a) the delivered item has value to the customer on a stand-alone basis; and (b) if the contract includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in the control of PAR.
Multiple element arrangements which include hardware, service, and software offerings are separated based upon the stand alonestand-alone price for each individual hardware, service, or software sold in the arrangement irrespective of the combination of products and services which are included in a particular arrangement. As such, overall consideration is allocated to each unit of accounting based on the unit'sunit’s relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to each deliverable: (i) vendor-specific objective evidence of selling price (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of selling price (BESP). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. The Company uses BESP to allocate revenue when we are unable to establish VSOE or TPE of selling price. BESP is primarily used for elements such as products that are not consistently priced within a narrow range. The Company determines BESP for a deliverable by considering multiple factors including product and customer class, geography, average discount, and management'smanagement’s historical pricing practices. Amounts allocated to the delivered hardware and software elements are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the undelivered maintenance and other services elements are recognized as the services are provided or on a straight-line basis over the service period. In certain instances, customer acceptance is required prior to the passage of title and risk of loss of the delivered products. In such cases, revenue is not recognized until the customer acceptance is obtained. Delivery and acceptance generally occur in the same reporting period.
In situations where PAR’s solutions containSoftware elements, generally software related services (generally PCS, and professional services),services revenue isare recognized in accordance with authoritative guidance on software revenue recognition. For the software and software-related elements of such transactions, revenue is allocated based on the relative fair value of each element, and fair value is determined by vender specific objective evidence, (VSOE), where available. If VSOE is not available for all elements, we will use the residual method to separate the elements as long as we have VSOE for the undelivered elements. If the Companywe cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, the Company deferswe defer the revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
Government Contracts
The Company’s contract revenues generated by the Government segment result primarily from contract services performed for the U.S. Government under a variety of cost-plus fixed fee, time-and-material, and fixed-price contracts. Revenue on cost-plus fixed fee contracts is recognized based on allowable costs for labor hours delivered, as well as other allowable costs plus the applicable fee. Revenue on time and material contracts is recognized by multiplying the number of direct labor hours delivered in the performance of the contract by the contract billing rates and adding other direct costs as incurred. Revenue from fixed-price contracts is recognized as labor hours are delivered which approximates the straight-line basis of the life of the contract. The Company’s obligation under these contracts is to provide labor hours to conduct research or to staff facilities with no other deliverables or performance obligations. Anticipated losses on all contracts are recorded in full when identified. Unbilled accounts receivable areis stated in the Company’s consolidated financial statements at their estimated realizable value. Contract costs, including indirect expenses, are subject to audit and adjustment through negotiations between the Company and U.S. Government representatives.
Warranty Provisions
Warranty provisions for product warranties are recorded in the period in which PARthe Company becomes obligated to honor the related right, which generally is the period in which the related product revenue is recognized. The Company accrues warranty reserves based upon historical factors such as labor rates, average repair time, travel time, number of service calls per machine and cost of replacement parts. When a sale is consummated, a warranty reserve is recorded based upon the estimated cost to provide the service over the warranty period.
Cash and cash equivalents
The Company considers all highly liquid investments, purchased with a remaining maturity of three months or less, to be cash equivalents.
Accounts receivable – Allowance for doubtful accounts
Allowances for doubtful accounts are based on estimates of probable losses related to accounts receivable balances. The establishment of allowances requires the use of judgment and assumptions regarding probable losses on receivable balances. The Company continuously monitors collections and payments from our customers and maintain a provision for estimated credit losses based on our historical experience and any specific customer collection issues that we have identified. Thus, if the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required.
Inventories
The Company’s inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out (“FIFO”) method. The Company uses certain estimates and judgments and considers several factors including product demand, changes in customer requirements and changes in technology to provide for excess and obsolescence reserves to properly value inventory.
Property, plant and equipment
Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets, which range from three to twenty-five years. Expenditures for maintenance and repairs are expensed as incurred.
Other assets
Other assets primarily consist of cash surrender value of life insurance related to the Company’s Deferred Compensation Plan eligible to certain employees. The funded balance is reviewed on an annual basis.
Income taxes
The provision for income taxes is based upon pretax earnings with deferred income taxes provided for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities. The Company records a valuation allowance when necessary to reduce deferred tax assets to their net realizable amounts. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Other long-term liabilities
Other long-term liabilities represent amounts owed to certain employees who are participants in the Company’s Deferred Compensation Plan and the estimated fair value of the contingent consideration payable related to the Brink Software Inc. acquisition. During 2016, we recorded a $1.1 million adjustment to decrease the fair value of our contingent consideration related to the acquisition of Brink Software Inc., versus a $0.1 million adjustment to increase the fair value during 2015. This is reflected within other expense on the statement of operations. Changes in the fair value of the contingent consideration obligations may result from changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations.
Foreign currency
The assets and liabilities for the Company’s international operations are translated into U.S. dollars using year-end exchange rates. Income statement items are translated at average exchange rates prevailing during the year. The resulting translation adjustments are recorded as a separate component of shareholders’ equity under the heading Accumulated Other Comprehensive Loss.Income (Loss). Exchange gains and losses on intercompany balances of permanently invested long-term loans are also recorded as a translation adjustment and are included in Accumulated Other Comprehensive Loss. Foreign currency transaction gains and losses are recorded in other income in the accompanying statements of operations.
Other income (expense) income
The components of other (expense) income from continuing operations for the two years ending December 31 are as follows:
| | Year ended December 31 (in thousands) | |
| | 2015 | | | 2014 | |
| | | | | | | |
| Foreign currency loss | | $ | (193 | ) | | $ | (115 | ) |
| Rental income-net | | | 264 | | | | 359 | |
| Investment write-off | | | (776 | ) | | | - | |
| Other | | | (95 | ) | | | 241 | |
| | | $ | (800 | ) | | $ | 485 | |
| | | Year ended December 31 (in thousands) | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| Foreign currency loss | | $ | (24 | ) | | $ | (193 | ) |
| Rental (loss) income-net | | | (662 | ) | | | 264 | |
| Insurance recovery / investment write off | | | 771 | | | | (776 | ) |
| Fair value adjustment contingent consideration | | | 1,130 | | | | (90 | ) |
Other | | | 101 | | | | (5 | ) |
| Income (expense) | | $ | 1,316 | | | $ | (800 | ) |
TheDuring 2016, we recorded a $1.1 million adjustment to decrease the fair value of its contingent consideration related to the acquisition of Brink Software Inc. In addition, we recorded an insurance recovery of $0.8 million in 2016 relating to the unauthorized transfers of the Company's funds by its former chief financial officer. Also, during 2016, the Company incurred a net loss on rental contracts of approximately $0.7 million. During 2015, the investment write-off of $776,000 in fiscal year 2015$0.8 million represents the write-off of unauthorized investments that were made in contravention of the Company’s policies and procedures involving the Company’s funds. The unauthorized investments occurred during the period between September 25, 2015 and November 6, 2015. As of December 31, 2015, the Company is uncertain of the collectability of funds relating to these investments and as a result, reduced its fair value to zero. The write-off of the investment resulted in the Company identifying a material weakness over financial reporting as described in Item 9A.
Identifiable intangible assets
The Company’s identifiable intangible assets represent intangible assets acquired from the Brink Software Inc. acquisition as well as internally developed software costs. The Company capitalizes certain costs related to the development of computer software used in its hospitalityRestaurant/Retail 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 computer software product is established when the Company has completed all planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications including functions, features, and technical performance requirements. Software development costs incurred after establishing feasibility (as defined within ASC 985-20 for software cost related to sold as a perpetual license and ASC-350-40 for software sold as a service) are capitalized and amortized on a product-by-product basis when the product is available for general release to customers. Software costs capitalized within continuing operations during the periods ended December 31, 2016 and 2015 and 2014 were $2.1$2.7 million and $1.7$2.1 million, respectively.
Annual amortization, charged to cost of sales when the product is available for general release to customers, 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 a product bear to the total of current and anticipated future gross revenues for that product. Amortization of capitalized software costs from continuing operations amounted to $843,000$1.1 million and $673,000,$0.8 million, in 20152016 and 2014,2015, respectively. The Company assessed its recoverability of capitalized software assets noting an impairment charge of $0.5 million to accelerate one of its software modules. There was no impairments wereimpairment charge recorded in 2015 or 2014.as of December 31, 2015.
In 2014, the Company acquired identifiable intangible assets in connection with its acquisition45
The components of identifiable intangible assets, excluding discontinued operations, are:
| | December 31, (in thousands) | | | | |
| | | 2015 | | | 2014 | | | Estimated Useful Life | |
| Acquired and internally developed software costs | | $ | 12,725 | | | $ | 10,577 | | | 3 - 7 years | |
| Customer relationships | | | 160 | | | | 160 | | | 7 years | |
| Non-competition agreements | | | 30 | | | | 30 | | | 1 year | |
| | | | 12,915 | | | | 10,767 | | | | |
| Less accumulated amortization | | | (2,417 | ) | | | (587 | ) | | | |
| | | $ | 10,498 | | | $ | 10,180 | | | | |
| Trademarks, trade names (non-amortizable) | | | 400 | | | | 400 | | | N/A | |
| | | $ | 10,898 | | | $ | 10,580 | | | | |
66| | | December 31, (in thousands) | | | | |
| | | 2016 | | | 2015 | | | Estimated Useful Life | |
| Acquired and internally developed software costs | | $ | 15,884 | | | $ | 13,702 | | | 3 - 7 years | |
| Customer relationships | | | 160 | | | | 160 | | | 7 years | |
| Non-compete agreements | | | 30 | | | | 30 | | | 1 year | |
| | | | 16,074 | | | | 13,892 | | | | |
| Less accumulated amortization | | | (5,508 | ) | | | (3,394 | ) | | | |
| | | $ | 10,566 | | | $ | 10,498 | | | | |
| Trademarks, trade names (non-amortizable) | | | 400 | | | | 400 | | | N/A | |
| | | $ | 10,966 | | | $ | 10,898 | | | | |
The expected future amortization of these intangible assets assuming straight-line amortization of capitalized software costs and acquisition related intangibles is as follows (in thousands):
| | | | | |
| 2016 | | $ | 2,012 | | |
| 2017 | | | 1,911 | | | $ | 2,219 | |
| 2018 | | | 1,747 | | | | 2,054 | |
| 2019 | | | 1,350 | | | | 1,616 | |
| 2020 | | | 1,174 | | | | 1,396 | |
| 2021 | | | | 1,031 | |
| Thereafter | | | 2,304 | | | | 2,250 | |
| Total | | $ | 10,498 | | | $ | 10,566 | |
The Company has elected to test for impairment of indefinite lived intangible assets during the fourth quarter of its fiscal year. To value the indefinite lived intangible assets, the Company utilizes the royalty method to estimate the fair values of the trademarks and trade names. As a resultDuring 2016, the Company recorded an impairment charge of the testing, there$0.5 million to accelerate one of its software modules. There was no related impairment charge recorded for the periods endedas of December 31, 2015 and 2014.2015.
Stock-based compensation
The Company recognizes all stock-based compensation to employees, including grants of employee stock options and restricted stock awards, in the financial statements as compensation cost over the vesting period using an accelerated expense recognition method, based on their fair value on the date of grant.
Earnings per share
Basic earnings per share are computed based on the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the dilutive impact of outstanding stock options and restricted stock awards.
The following is a reconciliation of the weighted average shares outstanding for the basic and diluted earnings per share computations (in thousands, except share and per share data):
67| | | December 31, | |
| | | 2016 | | | 2015 | |
| Income from continuing operations | | $ | 2,503 | | | $ | 4,021 | |
| | | | | | | | | |
| Basic: | | | | | | | | |
| Shares outstanding at beginning of year | | | 15,645 | | | | 15,592 | |
| Weighted average shares issued (cancelled) during the year, net | | | 30 | | | | (30 | ) |
| Weighted average common shares, basic | | | 15,675 | | | | 15,562 | |
| Income from continuing operations per common share, basic | | $ | 0.16 | | | $ | 0.26 | |
| | | | | | | | | |
| Diluted: | | | | | | | | |
| Weighted average common shares, basic | | | 15,675 | | | | 15,562 | |
| Dilutive impact of stock options and restricted stock awards | | | 63 | | | | 104 | |
| Weighted average common shares, diluted | | | 15,738 | | | | 15,666 | |
| Income from continuing operations per common share, diluted | | $ | 0.16 | | | $ | 0.26 | |
| | December 31, | |
| | | 2015 | | | 2014 | |
| Income from continuing operations | | $ | 4,021 | | | $ | 71 | |
| | | | | | | | | |
| Basic: | | | | | | | | |
| Shares outstanding at beginning of year | | | 15,592 | | | | 15,473 | |
| Weighted average shares (cancelled) issued during the year, net | | | (30 | ) | | | 28 | |
| Weighted average common shares, basic | | | 15,562 | | | | 15,501 | |
| Income from continuing operations per common share, basic | | $ | 0.26 | | | $ | 0.00 | |
| | | | | | | | | |
| Diluted: | | | | | | | | |
| Weighted average common shares, basic | | | 15,562 | | | | 15,501 | |
| Dilutive impact of stock options and restricted stock awards | | | 104 | | | | 81 | |
| Weighted average common shares, diluted | | | 15,666 | | | | 15,582 | |
| Income from continuing operations per common share, diluted | | $ | 0.26 | | | $ | 0.00 | |
At December 31, 20152016 and 20142015 there were 112,00038,000 and 215,000112,000 incremental shares, respectively, from the assumed exercise of stock options that were excluded from the computation of diluted earnings per share because of the anti-dilutive effect on earnings per share. There were no restricted stock awards excluded from the computation of diluted earnings per share for each of the fiscal years ended December 31, 20152016 and 2014.2015.
Goodwill
The Company tests goodwill for impairment on an annual basis, which is on the first day of the fourth quarter, or more often if events or circumstances indicate there may be impairment. The Company operates in two reportable operating segments referred to as business segments, Hospitality- Restaurant/Retail and Government. Goodwill impairment testing is performed at the sub-segment level (referred to as a reporting unit). The two reporting units utilized by the Company are: RestaurantRestaurant/Retail, and Government. The Hotel/Resort/Spa reporting unit was sold on November 4, 2015 and included within discontinued operations. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, 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 outstanding for goodwill within continuing operations was $11.1 million at December 31, 20152016 and 2014. During fiscal 2015, the decrease was a result of the divestiture of the hotel/resort/spa reporting unit. As a result of the fair value received for the Hotel/Resort/Spa divestiture, the Company recorded an impairment charge within discontinued operations of $2.4 million. During fiscal 2014, the increase was a result of $10.3 million of goodwill recorded by the Restaurant reporting unit from the acquisition of Brink Software Inc.2015. There was no impairment of goodwill for the periods ending December 31, 2014 when testing the restaurant and government reporting units.2016 or 2015.
The changes and carrying amounts of goodwill by reporting unit were as follows (in thousands):
| | | Restaurants | | | Hotel/Resort/ Spa | | | Government | | | Total | |
| | | | | | | | | | | | | |
| Net Balances at December 31, 2013 | | $ | - | | | $ | 6,116 | | | $ | 736 | | | $ | 6,852 | |
| Goodwill | | | 12,433 | | | | 13,946 | | | | 736 | | | | 27,115 | |
| Accumulated Impairment charge | | | (12,433 | | | | (7,830 | ) | | | - | | | | (20,263 | ) |
| Acquisition | | | 10,315 | | | | - | | | | - | | | | 10,315 | |
| Reclassified to Discontinued Operations | | | - | | | | (6,116 | ) | | | - | | | | (6,116 | ) |
| Net balance at December 31, 2014 | | | 10,315 | | | | - | | | | 736 | | | | 11,051 | |
| Goodwill | | | 22,748 | | | | 13,946 | | | | 736 | | | | 37,430 | |
| Accumulated Impairment charge | | | (12,433 | | | | (10,238 | ) | | | - | | | | (22,671 | ) |
| Divestiture | | | - | | | | (3,708 | ) | | | - | | | | (3,708 | ) |
| Net balance at December 31, 2015 | | $ | 10,315 | | | $ | - | | | $ | 736 | | | $ | 11,051 | |
Impairment of long-lived assets
The Company evaluates the accounting and reporting for the impairment of long-lived assets in accordance with the reporting requirements of ASC 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company will recognize impairment of long-lived assets or asset groups if the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets. If the carrying value of a long-lived asset or asset group is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset or asset group for assets to be held and used, or the amount by which the carrying value exceeds the fair market value less cost to sell for assets to be sold. NoDuring 2016, the Company recorded an impairment charge of $0.5 million to accelerate one of its software modules. There was identified during 2015 or 2014.no impairment charge recorded as of December 31, 2015.
Reclassifications
Amounts in prior years’ consolidated financial statements are reclassified whenever necessary to conform to the current year’s presentation. The results of operations of PSMS have been classified as discontinued operations in accordance with Accounting Standards Codification (“ASC”) 205-20, Presentation of Financial Statements – Discontinued Operations. All prior period amounts have been reclassified to conform to the current period presentation. Refer toSee Note 3 “Discontinued Operations”– Discontinued Operations - in the Notes to the Consolidated Financial Statements for further discussion.
Use of estimates
The preparation of the 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.
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09 to simplify several aspects of the accounting for employee share-based payment transactions standard, including the classification of excess tax benefits and deficiencies and the accounting for employee forfeitures. The guidance is effective for the Company beginning in the first quarter of 2017 at which time we will adopt. The updates to the accounting standard will include the following:
Excess tax benefits and deficiencies will no longer be recognized as a change in additional paid-in-capital in the equity section of the balance sheet, instead they are to be recognized in the income statement as a tax expense or benefit. In the statement of cash flows, excess tax benefits and deficiencies will no longer be classified as a financing activity, instead they will be classified as an operating activity. The impact of this change in accounting to future periods cannot be estimated, as it is dependent upon several variables not in control of the Company, such as the future timing and amount of employee option exercises, restricted stock vesting and the Company’s future stock price.
Entities will have the option to continue to reduce share-based compensation expense during the vesting period of outstanding awards for estimated future employee forfeitures or they may elect to recognize the impact of forfeitures as they actually occur. The Company will continue to reduce the share-based compensation expense during the vesting period of outstanding awards for estimated future forfeitures.
The ASU also provides new guidance to other areas of the standard including minimum statutory tax withholding rules and the calculation of diluted common shares outstanding.
Adoption approach varies based on the amendment topic and the Company does not expect a significant impact at this time.
In February 2016, the FASB issued new guidance relatedASU 2016-02 impacting the accounting for leases intending to leases. Thisincrease transparency and comparability of organizations by requiring balance sheet presentation of leased assets and increased financial statement disclosure of leasing arrangements. The revised standard requires an entitywill require entities to recognize a liability for its lease obligations and a corresponding asset representing the right to use the underlying asset over the lease term. Lease obligations are to be measured at the present value of lease payments and accounted for using the effective interest method. The accounting for the leased asset will differ slightly depending on whether the agreement is deemed to be a financing or operating lease. For finance leases, the leased asset is depreciated on a straight-line basis and recorded separately from the interest expense in the income statement resulting in higher expense in the earlier part of the lease term. For operating leases, the depreciation and interest expense components are combined, recognized evenly over the term of the lease, and presented as a reduction to operating income. The ASU requires that assets and liabilities arising from a lease for both financingbe presented or disclosed separately and operating leases, along withclassified appropriately as current and noncurrent. The ASU further requires additional disclosure of certain qualitative and quantitative disclosures.information related to lease agreements. The new standard is effective for the Company forbeginning in the fiscal years beginning after December 15, 2018, withfirst quarter 2019 and early adoption permitted. The Company is permitted, although unlikely at this time. We are currently evaluating the impact the adoption of this standard will havethese amendments on its consolidatedour financial statements.
In November 2015, the FASB issued new guidance related to the balance sheet classification of deferred taxes. This standard requires an entity to classify all deferred tax assets, along with any valuation allowance, as noncurrent on the balance sheet. As a result, each jurisdiction will have one net noncurrent deferred tax asset or liability. The new standard is effective for the Company for fiscal years beginning after December 15, 2016. The adoption of this standard in Q1 2017, which maywill be applied either prospectively, or retrospectively, is not expected to have a material impact on the Company’s consolidated financial statements.
In July 2015, the FASB issued new guidance related to the measurement of inventory. This standard changes the inventory valuation method from the lower of cost or market to the lower of cost or net realizable value for inventory valued under the first-in, first-out or average cost methods. The new standard is effective for the Company beginning in its first quarterQ1 of fiscal 2017, and requires prospective adoption with early adoption permitted. The Company is evaluating the impactadoption. We do not anticipate the adoption of this standard will have on its consolidated financial statements.
In April 2015, the FASB issued new guidance related to the presentation of debt issuance costs, which amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability, consistent with debt discounts, instead of a deferred charge asset. The new standard is effective for the Company beginning in its first quarter of fiscal 2016, with early adoption permitted. The Company is evaluating the impact the adoption of this standard and it is not expected to have a material impact on our consolidated financial statements.
In April 2015, the FASB issued new guidance related to accounting for the fees paid in a cloud computing arrangement, which provides guidance to customers about whether a cloud computing arrangement includes a software license. If considered a software license, the arrangement should be accounted for as an acquisition of a software license. If not considered a software license, the arrangement should be accounted for as a service contract. The new standard is effective for the Company beginning in its first quarter of fiscal 2016, with early adoption permitted. The Company is evaluating the impact the adoption of this standard and it is not expected to have a material impact on our consolidated financial statements
In September 2014, the FASB issued amended guidance on the accounting for certain share-based employee compensation awards. The amended guidance requires that share-based employee compensation awards with terms of a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award and compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. The Company is required to adopt this guidance for its annual and interim periods beginning March 1, 2016. The Company does not expect the adoption of this guidance to have a material impact on itsCompany’s consolidated financial statements.
In August 2014, the FASB issued new guidance related to disclosures around going concern, including management'smanagement’s responsibility to evaluate whether there is substantial doubt about an entity'sentity’s ability to continue as a going concern and to provide related disclosures when conditions or events raise substantial doubt about an entity'sentity’s ability to continue as a going concern. The new standard is effective for the Company beginning in its first quarter of fiscalQ1 2017, with early adoption permitted.permitted although the Company did not early adopt. The impact of adopting this guidance on January 1, 2017 is not expected to have a material impact on our consolidated financial statements.
In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In July 2015, the FASB affirmed its proposal of a one-year deferral of the effective date of the new revenue standard. As a result, the new guidance will be effective for the Company beginning in its first quarter of fiscalQ1 2018. The amendments may be applied retrospectively to each prior period presented or with the cumulative effect recognized as of the date of initial application. PAR is currently evaluating the impact of these amendments and plans not to early adopt and to adopt in 2018. In the second quarter of 2017, we will commence a project to assess the potential impact of the new standard on our consolidated financial statements and related disclosures. This project will also include the assessment and enhancement of our internal processes and systems to address the new standard. At this time, we have not yet selected a transition alternatives on PAR's financial statements.method.
Recently Adopted Accounting Pronouncements
In April 2014, the FASB issued guidance that raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and other disposals that do not meet the definition of a discontinued operations. The new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The new guidance is effective on January 1, 2015, with early adoption permitted. The adoption of this amendment on January 1, 2015 did not have a significant impact on the Company's financial position or results of operations.None noted in prior two years.
Note 2 — Acquisition
On September 18, 2014, PAR Technology Corporation (the "Company") and its wholly-owned subsidiary, ParTech, Inc. ("ParTech"), entered into and closed a definitive agreement with Brink Software Inc. ("Brink") and all the shareholders of Brink pursuant to which ParTech has purchased the equity interest of Brink in a two-step closing. This acquisition was to expand the Company’s cloud based POS software offerings. The guaranteed portion of the purchase price for Brink’s shares will total $10 million in cash, which is payable over a period of three years with $5.0 million paid at closing, $3.0 million paid on the first year anniversary of close, and $2.0 million payable on the second year anniversary of close. In addition to the guaranteed payments, there is a contingent consideration of up to $7.0 million payable to the former owners of Brink based on the achievement of certain conditions as defined in the definitive agreement.
The payment of $5.0 million on September 18, 2014, was for the purchase of 51% of Brink’s outstanding shares. The remaining 49% was purchased and transferred on September 18, 2015, the first anniversary of the initial closing date, for a purchase price of $5.0 million, $3.0 million of which was paid on the second closing and the $2.0 million balance will be payable on September 18, 2016. The estimated fair value of the remaining portion of the note payable due on September 18, 2016 is approximately $1.9 million and is included within current debt in PAR’s consolidated balance sheets. Per the stock purchase agreement, Brink shareholders assigned their voting rights of the remaining 49% of Brink shares to PAR. As a result, PAR controlled 100% of the Brink shares prior to the transfer on September 18, 2015 and fully consolidated the financial results of Brink in accordance with ASC Topic 805. The agreement also provided up to $1.0 million of the purchase price to be delivered into escrow if one or more claims arise within the first twelve months of the transaction. Such escrow served as a source of payment for any indemnification obligations that may arise. No such claims arose within the first twelve months of the transaction.
The contingent purchase price maximum of $7.0 million can be earned through fiscal year 2018, based upon the achievement of certain conditions as defined in the definitive agreement. These conditions have separate targets as defined in the definitive agreement, which began on December 31, 2015. The targets for fiscal year 2015 were not met, however, the total earning potential has a cumulative effect ending fiscal year 2018. The estimated fair value of this contingent consideration is approximately $5.1 million and is included within non-current liabilities in PAR’s consolidated balance sheets (see note 13).
In determining the purchase price allocation, the Company considered, among other factors, market participants’ intentions to use the acquired assets and the historical and estimated future demand for the acquired Brink POS cloud based point of sale application.As of September 18, 2014, the Company recorded an aggregate purchase price of $14.9 million, including a cash payment of $5.0 million, net of cash acquired of $184,000, plus additional estimated cash payments of $9.9 million, which represents the fair value of the remaining consideration.
The total purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed by the Company based on their fair values as of the closing date of the acquisition. The excess of the purchase price over those fair values was recorded to goodwill. The following table summarizes our allocation of purchase price (in thousands) at the measurement date, September 18, 2014:
| Accounts receivable | | $ | 83 | |
| Inventories | | | 116 | |
| Intangible assets | | | 7,190 | |
| Goodwill | | | 10,315 | |
| Other assets | | | 90 | |
| Total assets acquired | | $ | 17,794 | |
| | | | | |
| Accounts payable | | $ | 124 | |
| Other current liabilites | | | 365 | |
| Deferred Tax Liabilities | | | 2,445 | |
| Total liabilities assumed | | $ | 2,934 | |
| | | | | |
| Purchase price | | $ | 14,860 | |
The identifiable intangible assets acquired and their estimated useful lives (based on third party valuations) are as follows (in thousands):
| | | Fair Value | | |
| Trade name | | $ | 400 | | Indefinite |
| Developed technology | | | 6,600 | | 7 Years |
| Customer relationships | | | 160 | | 7 Years |
| Non-competition agreements | | | 30 | | 1 Year |
| | | $ | 7,190 | | |
The intangible assets are being amortized on a straight line basis, which is consistent with the pattern that the economic benefits of the intangible assets are expected to be utilized based on the estimated cash flows generated from such assets. The Company recognized approximately $987,000 and $279,000 of amortization expense related to the amortizable intangible assets at December 31, 2015 and 2014, respectively, based on the aforementioned estimates.
On an unaudited proforma basis, assuming the completed acquisition had occurred as of the beginning of the periods presented, the consolidated results from continuing operations of the Company would have been as follows (in thousands, except per share amounts):
| | | (Unaudited) Year ended December 31, 2014 | |
| Revenues | | $ | 219,328 | |
| Net loss | | $ | (559 | ) |
| | | | | |
| Earnings per share: | | | | |
| Basic | | $ | (0.04 | ) |
| Diluted | | $ | (0.04 | ) |
The unaudited proforma financial information presented above gives effect to purchase accounting adjustments which have resulted or are expected to result from the acquisition. This proforma information is not necessarily indicative of the results that would actually have been obtained had the companies combined for the periods presents.
The Company has recognized transaction, integration, and other acquisition related costs of approximately $163,000 through December 31, 2014, which have been recorded within sales, general, and administration expense within the Company’s consolidated statements of operations. Additionally, the results of the Brink acquisition acquired in 2014 contributed $832,000 to PAR’s revenue and reduced PAR’s net income from continuing operations by $145,000 in 2014. The results of operations of the Brink acquisition is reported in the Company’s consolidated results of operations of the Company from the date of acquisition.
Note 3 — Divestiture and Discontinued Operations
On November 4, 2015, ParTech, Inc. (“PTI”), a wholly owned subsidiary of PAR Technology Corporation, PAR Springer-Miller Systems, Inc. (“PSMS”), Springer-Miller International, LLC (“SMI”), and Springer-Miller Canada, ULC (“SMC”) (PTI, PSMS, SMI and SMC are collectively referred to herein as the “Group”), entered into an asset purchase agreement (the “APA”) with Gary Jonas Computing Ltd., SMS Software Holdings LLC, and Jonas Computing (UK) Ltd. (the “Purchasers”), each of which is an affiliate of the Jonas Software Group of Constellation Software Inc. of Toronto, Ontario, for the sale of substantially all of the assets of PSMS. Total consideration to be received from the sale is $16.6 million in cash (the “Base Purchase Price”), with $12.1 million received at the time of closing, and $4.5 million receivable eighteen months after the closing date, a portion of which amount will be available to pay certain indemnification obligations of the group.group, and/or adjusted based on the net tangible asset calculation, as defined in the APA The estimated fair value of the remaining portion of the note receivable, less any estimated working capital adjustments, due on May 4, 2017 is approximately $3.3$3.5 million and is included within noncurrentcurrent assets in PAR’sthe Company consolidated balance sheets. During 2016, the Company reduced the receivable by $0.9 million based on the terms of the net tangible asset calculation as the working capital shortfall was greater than previously estimated.
In addition to the base purchase price, contingent consideration of up to $1,500,000 is receivable$1.5 million could be received by PARthe Company based on achievement of certain agreed-upon revenue and earnings targets for calendar years 2016 through 2018, as set forth in the APA. As of December 31, 2015,2016, the Company has not recorded any amount associated with this contingent consideration as it doeswe do not believe achievement of the related targets is probable.
Summarized financial information for the Company’s discontinued operations is as follows (in thousands):
| | | | | | | |
| Assets | | | | | | |
| Cash | | $ | - | | | $ | 300 | |
| Accounts receivable - net | | | - | | | | 1,771 | |
| Other current assets | | | - | | | | 574 | |
| Property, plant and equipment - net | | | - | | | | 986 | |
| Goodwill | | | - | | | | 6,116 | |
| Intangible assets - net | | | - | | | | 12,372 | |
| Assets of discontinued operation | | $ | - | | | $ | 22,119 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Accounts Payable | | $ | - | | | $ | 417 | |
| Accrued salaries and benefits | | | 441 | | | | 703 | |
| Accrued expenses | | | - | | | | 87 | |
| Customer Deposits | | | - | | | | 1,103 | |
| Deferred service revenue | | | - | | | | 2,307 | |
| Liabilities of discontinued operation | | $ | 441 | | | $ | 4,617 | |
Summarized financial information for the Company’s discontinued operations is as follows (in thousands):
| | | December 31, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Total revenues | | $ | 14,545 | | | $ | 15,746 | |
| | | | | | | | | |
| Loss from discontinued operations before income taxes | | $ | (5,702 | ) | | $ | (5,816 | ) |
| Loss on disposition | | | (2,408 | ) | | | - | |
| Benefit from income taxes | | | 3,198 | | | | 2,094 | |
| Loss from discontinued operations, net of taxes | | $ | (4,912 | ) | | $ | (3,722 | ) |
| | | December 31, (in thousands) | |
| | | 2016 | | | 2015 | |
| Assets | | | | | | |
| Other current assets | | $ | 462 | | | $ | 377 | |
| Assets of discontinued operation | | $ | 462 | | | $ | 377 | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| Accrued salaries and benefits | | $ | - | | | $ | 441 | |
| Liabilities of discontinued operation | | $ | - | | | $ | 441 | |
Summarized financial information for the Company’s discontinued operations is as follows (in thousands):
| | | December 31, (in thousands) | |
| | | 2016 | | | 2015 | |
| | | | | | | |
| Total revenues | | $ | - | | | $ | 14,545 | |
| | | | | | | | | |
| Loss from discontinued operations before income taxes | | $ | (1,131 | ) | | $ | (5,702 | ) |
| Loss on disposition | | | - | | | | (2,408 | ) |
| Benefit from income taxes | | | 411 | | | | 3,198 | |
| Loss from discontinued operations, net of taxes | | $ | (720 | ) | | $ | (4,912 | ) |
During 2016, the Company recognized a loss on discontinued operations of $0.7 million (net of tax) mainly due to a reduction of the note receivable of $0.6 million (net of tax) and $0.1 million (net of tax) adjustment due to a loss on foreign currency exposure. The reduction of the note receivable is reflected in the Company’s earnings for 2016 and will reduce the amount the Company aniticipates collecting on May 4, 2017 to $3.5 million.
In addition to the adjustments above, the Company paid a $1.0 million working capital adjustment, of which $0.9 million was included in accrued expenses at December 31, 2015, that resulted in a loss (net of tax) of $26,000. The working capital payment was estimated and paid as it was defined in the Springer-Miller APA.
Note 43 — Accounts Receivable, net
The Company’s net accounts receivable consistconsists of, excluding discontinued operations:
| | | December 31, (in thousands) | | | December 31, (in thousands) | |
| | | 2015 | | | 2014 | | | 2015 | | | 2015 | |
| Government segment: | | | | | | | | | | | | |
| Billed | | $ | 9,400 | | | $ | 9,340 | | | $ | 6,779 | | | $ | 9,400 | |
| Advanced billings | | | (1,266 | ) | | | (450 | ) | | | (1,599 | ) | | | (1,266 | ) |
| | | | 8,134 | | | | 8,890 | | | | 5,180 | | | | 8,134 | |
| Hospitality segment: | | | | | | | | | | | | | | | | |
| Accounts receivable - net | | | 21,396 | | | | 20,784 | | | | 25,525 | | | | 21,396 | |
| | | $ | 29,530 | | | $ | 29,674 | | | $ | 30,705 | | | $ | 29,530 | |
At December 31, 2015,20142016 and 2013,2015, the Company had recorded allowances for doubtful accounts of $875, 000, $484,000$0.9 million and $422,000,$0.9 million, respectively, against hospitalityRestaurant/Retail segment accounts receivable. Write-offs of accounts receivable during fiscal years 2016 and 2015 were $0.3 million and 2014 were $382,000 and $278,000,$0.4 million, respectively. The provision for doubtful accounts recorded in the consolidated statements of operations was $772,000$0.4 million and $340,000$0.8 million in 20152016 and 2014,2015, respectively.
Note 54 — Inventories, net
Inventories are used in the manufacture and service of hospitalityRestaurant/Retail products. The components of inventory, net consist of the following, excluding discontinued operations:
| | | December 31, (in thousands) | |
| | | 2015 | | | 2014 | |
| Finished Goods | | $ | 8,775 | | | $ | 13,615 | |
| Work in process | | | 402 | | | | 457 | |
| Component parts | | | 5,068 | | | | 3,748 | |
| Service parts | | | 7,254 | | | | 8,108 | |
| | | $ | 21,499 | | | $ | 25,928 | |
| | | December 31, (in thousands) | |
| | | 2016 | | | 2015 | |
| Finished Goods | | $ | 9,423 | | | $ | 8,775 | |
| Work in process | | | 443 | | | | 402 | |
| Component parts | | | 10,386 | | | | 5,068 | |
| Service parts | | | 5,985 | | | | 7,254 | |
| | | $ | 26,237 | | | $ | 21,499 | |
At December 31, 20152016 and December 31, 2014,2015, the Company had recorded inventory reserves of $8.6$9.2 million and $7.9$8.8 million, respectively, against HospitalityRestaurant/Retail inventories, which relates primarily to service parts.
Note 65 — Property, Plant and Equipment
The components of property, plant and equipment, excluding discontinued operations, are:
| | | December 31, (in thousands) | | | December 31, (in thousands) | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Land | | $ | 253 | | | $ | 253 | | | $ | 253 | | | $ | 253 | |
| Building and improvements | | | 5,645 | | | | 5,645 | | | | 5,816 | | | | 5,645 | |
| Rental property | | | 5,330 | | | | 5,308 | | | | 5,345 | | | | 5,330 | |
| Furniture and equipment | | | 11,804 | | | | 10,160 | | | | 13,890 | | | | 11,804 | |
| | | | 23,032 | | | | 21,366 | | | | 25,304 | | | | 23,032 | |
| Less accumulated depreciation | | | (17,316 | ) | | | (16,218 | ) | | | (18,269 | ) | | | (17,316 | ) |
| | | $ | 5,716 | | | $ | 5,148 | | | $ | 7,035 | | | $ | 5,716 | |
The estimated useful lives of buildings and improvements and rental property are twenty to twenty-five years. The estimated useful lives of furniture and equipment range from three to eight years. Depreciation expense from continuing operations was $1,137,000$2.1 million and $1,052,000$1.1 million for 20152016 and 2014,2015, respectively.
The Company leases a portion of its headquarters facility to various tenants. Net rent received from these leases totaled $264,000$0.3 million and $359,000$0.3 million for 20152016 and 2014,2015, respectively. Future minimum rent payments due to the Company under these lease arrangements are approximately $306,000, $246,000$0.2 million, and $57,000 in 2016,$0.1 million 2017 and 2018, respectively.
The Company leases office space under various operating leases. Rental expense from continuing operations on operating leases was approximately $1.6 million and $1.4 million for 2016 and $1.3 million for 2015, and 2014, respectively. Future minimum lease payments under all non-cancelable operating leases are (in thousands):
| 2016 | | | 1,466 | | |
| 2017 | | | 1,149 | | | | 1,360 | |
| 2018 | | | 924 | | | | 1,109 | |
| 2019 | | | 860 | | | | 895 | |
| 2020 | | | 336 | | | | 328 | |
| 2021 | | | | 208 | |
| Thereafter | | | 738 | | | | 503 | |
| | | $ | 5,473 | | | $ | 4,403 | |
Note 76 — Debt
Through June 4, 2014,On November 29, 2016, the Company maintainedentered into a credit facility with J.P. Morgan Chase, N.A.Credit Agreement (the “Credit Agreement”) by and NBT Bank, N.A. (on behalf of itself and as successor by merger to Alliance Bank, N.A.) consisting of $20.0 million in working capital lines of credit (with the option to increase to $30.0 million), which expired in June 2014. This agreement allowedamong the Company, at its option, to borrow funds atas the LIBOR rate plus the applicable interest rate spread or at the bank's prime lending rate. This credit facility was secured byBorrower thereunder, together with certain assets of the Company.
On June 5, 2014,Company’s US subsidiaries, as “Loan Guarantors” (together with the Company, executedthe “Loan Parties”), and JPMorgan Chase Bank, N.A., as the “Lender”. The Credit Agreement provides for revolving loans in an amendment to its then existing credit facility to provide for the renewal of the facility through June 2017, with terms generally consistent to those of its prior facility. This facility provided the Company with capitalaggregate principal amount of up to $20.0$15.0 million (withto be made available to the optionCompany; availability at any time being equal to increasethe lesser of (i) $15.0 million and (ii) a borrowing base (equal to $30.0 million)the sum of 80% eligible accounts, 50% eligible raw materials inventory and 35% eligible finished goods inventory, with no more than 50% of total eligible inventory included in the formborrowing base), less the aggregate principal amount outstanding (the “Credit Facility”). Interest accrues on outstanding principal balances at an applicable rate per annum determined, as of a revolving linethe end of credit. This agreement allowedeach fiscal quarter of the Company, at its option,by reference to borrow fundsthe CBFR Spread or the Eurodollar Spread based on the Company’s consolidated indebtedness ratio as at the LIBOR rate plusdetermination date. The Credit Facility replaces the applicable interest rate spread or atCompany’s asset-based credit agreement dated September 9, 2014 with JPMorgan Chase, N.A. (the “2014 ABL Credit Agreement”) and a portion of the bank's prime lending rate.proceeds of the Credit Facility were used to pay-off all indebtedness outstanding under the Company’s 2014 ABL Credit Agreement.
On September 9, 2014,The Credit Facility matures three (3) years from the Company terminated its existing credit facilities with J.P. Morgan Chase, N.A. and NBT Bank, N.A. (on behalf of itself and as successor by merger to Alliance Bank, N.A.) consisting of $20.0 million in working capital lines of credit, and the Company and its domestic subsidiaries entered into a new three-year credit facility with J.P. Morgan Chase, N.A (the Credit Facility). The termsdate of the Credit Agreement and is guaranteed by the Loan Guarantors. The Credit Facility provide for up to $25 millionis secured by substantially all of a line of credit, with borrowing availability based on a percentage of value of variousthe assets of the Company and itsof the other Loan Parties; provided, that the Credit Facility is not secured by any liens on more than 65% of the voting stock of the Company’s foreign subsidiaries. The new agreement bears interestCredit Agreement contains representations and warranties and affirmative and negative covenants that are usual and customary, including representations, warranties and covenants that, among other things, restrict the ability of the Company and its subsidiaries to incur additional indebtedness, incur or permit to exist liens on assets, make investments, loans, advances, guarantees and acquisitions, consolidate or merge with or into any other company, engage in asset sales and pay dividends and make distributions. The Credit Agreement requires that the Company’s consolidated indebtedness ratio at the applicable bank rate (3.25% at December 31, 2015) or, at the Company's option, at the LIBOR rate plus the applicable interest rate spread (rangeend of 1.5% – 2.0%). At December 31, 2015, the Company did not have any outstanding balance on this lineeach of credit. The weighted average interest rate paid by the Company was approximately 3.50% duringits fiscal year 2015. The new agreement contains traditional asset based loan covenantsquarters to be greater than 3.0 to 1.0 and includes covenants regarding earnings before interest, tax, depreciation & amortization (“EBITDA”) andmaintain a fixed charge coverage ratio of not less than 1.15 to 1.0 for the Company’s fiscal quarter ending December 31, 2016 (to be tested only in the event the Company’s total consolidated indebtedness equaled or exceeded $5.0 million at the end of such fiscal quarter) and provides1.25 to 1.0 for accelerationthe quarter ending March 31, 2017 and each quarter thereafter. Obligations under the Credit Agreement may be accelerated upon the occurrence ofcertain customary events of defaults.
On March 19, 2015,default (subject to grace periods, as appropriate), including among others: nonpayment of principal, interest or fees; breach of the affirmative or negative covenants; breach of the representations or warranties in any material respect; event of default under, or acceleration of, other material indebtedness; bankruptcy or insolvency; material judgments entered against the Company amendedor any of its subsidiaries; invalidity or unenforceability of any collateral documentation associated with the Credit Facility to reduce the EBITDA requirementFacility; and extend the fixed charge coverage ratio. The amendment providesa change of control of the Company flexibility to continue investingthere was no outstanding balance on the line of credit at December 31, 2016. The Company was in the Company’s future product offerings while maintaining certain covenant thresholds as defined in the amendment. On March 16, 2016, the Company received a notice of defaults under its current Credit Facility due to unauthorized investments made during 2015 by the company’s former Chief Financial Officer, which were not permitted investments as defined in the lending agreement. See Note 1, “Summary of Significant Accounting Policies,” to the Consolidated Financial Statements for further discussion oncompliance with these unauthorized investments. These unauthorized investments involved cash transfers totaling $776,000, which amounts have been written off by the Companycovenants as of December 31, 2015 (the “Unauthorized Transactions”). On March 24, 2016 the lender provided waivers of the defaults, subject to certain terms and conditions contained in the waiver, including entry by the Company into a fourth amendment to the Company’s Credit Agreement.2016.
On March 24, 2016, based on the waiver received, the Company executed the fourth amendment to its existing Credit Agreement. Under the terms and conditions of this amendment, the Company has undertaken to engage, and has engaged, an independent consultant to review its internal controls relating to financial reporting and authorization procedures for financial transactions (including, without limitation, investments) initiated by the Company’s officers (the “Internal Control Review”). The company has agreed to deliver to the lender a report prepared by Company’s consultant that sets forth, in reasonable detail, the results of the Internal Control Review, together with a summary of any recommended changes to the Company’s internal control procedures (the “ICR Report”). To the extent the ICR Report sets forth recommended changes to Borrowers’ internal control procedures (“IC Recommendations”), The Company has agreed to promptly take steps to implement the IC Recommendations in all material respects. The Company has agreed to provide periodic updates to the lender relating to the Internal Control Review, implementation of IC Recommendations and any ongoing investigations related to the Unauthorized Transactions
In addition to the credit facility described above,Credit Facility, the Company has a mortgage loan, collateralized by certain real estate, with a balance of $746,000$0.6 million and $919,000 at$0.7 million as of December 31, 20152016 and 2014,2015, respectively. This mortgage matures on November 1, 2019. The Company's fixedCompany’s interest rate was 4.05% through October 1, 2014. Beginning on October 1, 2014, theis fixed rate was converted to a new rate equal to the then-current five year fixed advanced rate charged by the New York Federal Home Loan bank, plus 225 basis points. Effective November 1, 2014, the Company entered into an agreement that fixed the interest rate at 4.00% through the maturity date of the loan. The annual mortgage payment including interest through November 1, 2019 totals $206,000.$0.2 million.
In connection with the acquisition of Brink Software on September 18, 2014, the Company recorded indebtedness to the former owners of Brink under the stock purchase agreement. AtAs of December 31, 20152016 and 2014,2015, the principal balance of the note payable was $2.0 millionzero and $5.0$2.0 million and it had a carrying value of $1.9 millionzero and $4.8 million, respectively. The carrying value was based on the note’s estimated fair value at the time of acquisition. The note doesdid not bear interest and repayment terms are $3.0 million, which was paid on the first anniversary of close, September 18, 2015, and $2.0 million payable on the second anniversary of close, which was paid in September 18, 2016.
The Company’s future principal payments under the stock purchase agreement and itsour mortgage are as follows (in thousands):
| 2016 | | $ | 2,103 | |
| 2017 | | | 188 | |
| 2018 | | | 195 | |
| 2019 | | | 183 | |
| | | $ | 2,669 | |
| | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 3 - 5 Years | | | More than 5 Years | |
| Debt obligations | | $ | 566 | | | $ | 187 | | | $ | 379 | | | $ | - | | | $ | - | |
| Operating lease | | | 4,403 | | | | 1,360 | | | | 2,004 | | | | 536 | | | | 503 | |
| Total | | $ | 4,969 | | | $ | 1,547 | | | $ | 2,383 | | | $ | 536 | | | $ | 503 | |
Note 87 — Stock Based Compensation
The Company recognizes all stock-based compensation to employees and directors, including grants of employee stock options and restricted stock awards, in the financial statements as compensation cost over the vesting period based on their fair value on the date of grant. Total stock-based compensation expense included in selling, general and administrative expense in 2016 and 2015 was $0.5 million and 2014 was $487,000 and $1,185,000,$0.5 million, respectively. The amount recorded for the twelve months ended December 31, 20152016 and 20142015 was recorded net of benefits of $197,000$0.3 million and $114,000,$0.2 million, as the result of forfeitures of unvested stock awards prior to the completion of the requisite service period. The amount of total stock based compensation includes $182,000$0.1 million and $608,000$0.2 million in 20152016 and 2014,2015, respectively, relating to restricted stock awards. No compensation expense has been capitalized during 20152016 and 2014.2015.
The Company has reserved 1,000,0001.0 million shares under its 2015 Equity Incentive Plan (“EIP”). Stock options under this Plan may be incentive stock options or nonqualified stock options. The Plan also provides for restricted stock awards, including performance based awards. Stock options are nontransferable other than upon death. Option grants generally vest over a one to fivethree year period after the grant and typically expire ten years after the date of the grant. The EIP provides for the grant of several different forms of stock-based compensation, including stock options to purchase shares of PAR common stock. The Compensation Committee of the Board of Directors (Compensation Committee) has discretion to determine the material terms and conditions of option awards under the EIP, provided that (i) the exercise price must be no less than the fair market value of PAR common stock (defined as the closing price) on the date of grant, (ii) the term must be no longer than ten years, and (iii) in no event shall the normal vesting schedule provide for vesting in less than one year. Other terms and conditions of an award of stock options will be determined by the Compensation Committee as set forth in the agreement relating to that award. The Compensation Committee has authority to administer the EIP.
Information with respect to stock options included within this plan is as follows:
| | | No. of Shares (in thousands) | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value (in thousands) | | | No. of Shares (in thousands) | | | Weighted Average Exercise Price | | | Aggregate Intrinsic Value (in thousands) | |
| | | | | | | | | | | |
| Outstanding at December 31, 2014 | | | 1,240 | | | $ | 5.28 | | | $ | 1,264 | | |
| Outstanding at December 31, 2015 | | | | 933 | | | $ | 5.14 | | | $ | 1,579 | |
| Options granted | | | 118 | | | | 4.90 | | | | | | | | 133 | | | | 5.48 | | | | | |
| Options exercised | | | (94 | ) | | | 5.04 | | | | | | | | (5 | ) | | | 5.32 | | | | | |
| Forfeited and cancelled | | | (211 | ) | | | 5.09 | | | | | | | | (82 | ) | | | 4.85 | | | | | |
| Expired | | | (120 | ) | | | 6.50 | | | | | | | | (30 | ) | | | 4.63 | | | | | |
| Outstanding at December 31, 2015 | | | 933 | | | $ | 5.14 | | | $ | 1,579 | | |
| Vested and expected to vest at December 31, 2015 | | | 905 | | | $ | 5.14 | | | $ | 1,532 | | |
| Total shares exercisable as of December 31, 2015 | | | 302 | | | $ | 5.14 | | | $ | 512 | | |
| Outstanding at December 31, 2016 | | | | 949 | | | $ | 5.22 | | | $ | 264 | |
| Vested and expected to vest at December 31, 2016 | | | | 1,062 | | | $ | 5.26 | | | $ | 260 | |
| Total shares exercisable as of December 31, 2016 | | | | 397 | | | $ | 5.22 | | | $ | 111 | |
| Shares remaining available for grant | | | 1,000 | | | | | | | | | | | | 701 | | | | | | | | | |
The weighted average grant date fair value of options granted during the years 2016 and 2015 was $1.81 and 2014$1.44, respectively. The total intrinsic value of options exercised during the year ended December 31, 2016 was $1.44 and $1.68, respectively.$5,800. The total intrinsic value of options exercised during the year ended December 31, 2015 was $119,000. There were no options exercised during the year ended December 31, 2014. New shares of the Company’s common stock are issued as a result of stock option exercises in 2016 and for options exercised in 2015. The fair value of options at the date of the grant was estimated using the Black-Scholes model with the following assumptions for the respective period ending December 31:
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | |
| Expected option life | | 5.1 years | | | 5.9 years | | | 5.7 years | | | 5.1 years | |
| Weighted average risk-free interest rate | | | 1.6 | % | | | 1.7 | % | | | 1.3 | % | | | 1.6 | % |
| Weighted average expected volatility | | | 30 | % | | | 31 | % | | | 33 | % | | | 30 | % |
| Expected dividend yield | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
For the years ended December 31, 20152016 and 2014,2015, the expected option life was based on the Company’s historical experience with similar type options. Expected volatility is based on historical volatility levels of the Company’s common stock over the preceding period of time consistent with the expected life. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected life. Stock options outstanding at December 31, 20152016 are summarized as follows:
Range of Exercise Prices | Range of Exercise Prices | | | Number Outstanding (in thousands) | | Weighted Average Remaining Life | | Weighted Average Exercise Price | | Range of Exercise Prices | | | Number Outstanding (in thousands) | | Weighted Average Remaining Life | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | | | | | | |
| $ | 4.31 - $6.47 | | | | 933 | | 8.10 years | | $ | 5.14 | | 4.72 - $7.08 | | | | 1,082 | | 7.52 years | | $ | 5.26 | |
At December 31, 20152016, the aggregate unrecognized compensation cost of unvested equity awards, as determined using a Black-Scholes option valuation model, was $758,000$0.5 million (net of estimated forfeitures) which is expected to be recognized as compensation expense in fiscal years 20162017 through 2018.2019. The Company has not paid cash dividends on its common stock, and the Company presently intends to continue to retain earnings for reinvestment in growth opportunities. Accordingly, it is anticipated no cash dividends will be paid in the foreseeable future.
Current year activity with respect to the Company’s non-vested restricted stock awards is as follows:
Non-vested restricted stock awards (in thousands) | | Shares | | | Weighted Average grant- date fair value | | | Shares | | | Weighted Average grant- date fair value | |
| | | | | | | | | | |
| Balance at January 1, 2015 | | | 273 | | | $ | 4.68 | | |
| Balance at January 1, 2016 | | | | 85 | | | $ | 5.13 | |
| Granted | | | 34 | | | | 4.67 | | | | 168 | | | | 5.23 | |
| Vested | | | (110 | ) | | | 4.71 | | | | (44 | ) | | | 4.94 | |
| Forfeited and cancelled | | | (112 | ) | | | 3.95 | | | | (46 | ) | | | 5.31 | |
| Balance at December 31, 2015 | | | 85 | | | $ | 5.13 | | |
| Balance at December 31, 2016 | | | | 163 | | | $ | 5.22 | |
The EIP also provides for the issuance of restricted stock, as well as restricted stock units. These types of awards can have either service based or performance based vesting with performance goals being established by the Compensation Committee. Grants of restricted stock with service based vesting are subject to vesting periods ranging from zero1 to 60 months.3 years. Grants of restricted stock with performance based vesting are subject to a vesting period of 121 to 36 months3 years and performance conditions as defined by the Compensation Committee. The Company assesses the likelihood of achievement throughout the performance period and recognizes compensation expense associated with its performance awards based on this assessment. Other terms and conditions applicable to any award of restricted stock will be determined by the Compensation Committee and set forth in the agreement relating to that award.
During 20152016 and 2014,2015, the Company issued 34,000168,000 and 170,00034,000 restricted stock awards, respectively, at a per share price of $0.02. Included within the equity grants of 2014 were approximately 109,000 performance based restricted stock awards which vest upon the achievement of business unit and consolidated financial goals relative to fiscal years 2014 through 2016. These equity awards are forfeited if the performance conditions are not achieved for each fiscal year. For the periods ended December 31, 20152016 and 2014,2015, the Company recognized compensation expense related to the performance awards based on its estimate of the probability of achievement in accordance with ASC Topic 718.
The fair value of restricted stock awards is based on the average price of the Company’s common stock on the date of grant. The weighted average grant date fair value of restricted stock awards granted during the years 2016 and 2015 was $5.23 and 2014 was $4.67, and $5.24, respectively. In accordance with the terms of the restricted stock award agreements, the Company released 110,00085,000 and 112,000110,000 shares during 2016 and 2015, and 2014, respectively. During 2016, there were approximately 46,000 shares of restricted stock cancelled, of which 45,000 were performance based restricted shares. During 2015, there were 112,000 shares of restricted stock cancelled, of which 102,000 were performance based restricted shares. During 2014, there were 62,000 shares
57
Note 9—8 — Income Taxes
The provision for income taxes from continuing operations consists of:
| | | Year ended December 31, (in thousands) | | | Year ended December 31, (in thousands) | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | |
| Current income tax: | | | | | | | | | | | | |
| Federal | | $ | 221 | | | $ | 115 | | | $ | 61 | | | $ | 221 | |
| State | | | 141 | | | | 212 | | | | 167 | | | | 141 | |
| Foreign | | | 267 | | | | 757 | | | | 211 | | | | 267 | |
| | | | 629 | | | | 1,084 | | | | 439 | | | | 629 | |
| Deferred income tax: | | | | | | | | | | | | | | | | |
| Federal | | | 816 | | | | 2,238 | | | | 768 | | | | 816 | |
| State | | | 55 | | | | 372 | | | | (60 | ) | | | 55 | |
| | | | 871 | | | | 2,610 | | | | 708 | | | | 871 | |
| Provision for income taxes | | $ | 1,500 | | | $ | 3,694 | | | $ | 1,147 | | | $ | 1,500 | |
The deferred tax benefit related to discontinued operations was $3.2$0.4 million in fiscal year 20152016 and $2.1$3.2 million recorded in fiscal year 2014.2015.
Deferred tax liabilities (assets) are comprised of the following at:
| | | December 31, (in thousands) | | | December 31, (in thousands) | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Deferred tax liabilities: | | | | | | | | | | | | |
| Software development costs | | $ | 1,841 | | | $ | 4,984 | | | $ | 2,223 | | | $ | 1,841 | |
| Acquired intangible assets | | | 2,088 | | | | 2,350 | | | | 1,731 | | | | 2,088 | |
| Gross deferred tax liabilities | | | 3,929 | | | | 7,334 | | | | 3,954 | | | | 3,929 | |
| | | | | | | | | | | | | | | | | |
| Allowances for bad debts and inventory | | | (4,804 | ) | | | (4,524 | ) | | | (4,505 | ) | | | (4,804 | ) |
| Capitalized inventory costs | | | (75 | ) | | | (114 | ) | | | (104 | ) | | | (75 | ) |
| Intangible assets | | | (1,747 | ) | | | (2,100 | ) | | | (1,388 | ) | | | (1,747 | ) |
| Employee benefit accruals | | | (2,050 | ) | | | (1,715 | ) | | | (2,089 | ) | | | (2,050 | ) |
| Federal net operating loss carryforward | | | (6,215 | ) | | | (9,249 | ) | | | (5,820 | ) | | | (6,215 | ) |
| State net operating loss carryforward | | | (1,111 | ) | | | (1,104 | ) | | | (1,085 | ) | | | (1,111 | ) |
| Tax credit carryforwards | | | (8,760 | ) | | | (7,809 | ) | | | (6,888 | ) | | | (8,760 | ) |
| Foreign currency | | | (33 | ) | | | (33 | ) | | | (33 | ) | | | (33 | ) |
| Other | | | (334 | ) | | | (502 | ) | | | (1,333 | ) | | | (334 | ) |
| Gross deferred tax assets | | | (25,129 | ) | | | (27,150 | ) | | | (23,245 | ) | | | (25,129 | ) |
| | | | | | | | | | | | | | | | | |
| Less valuation allowance | | | 3,421 | | | | 3,947 | | | | 1,874 | | | | 3,421 | |
| | | | | | | | | | | | | | | | | |
| Net deferred tax assets | | $ | (17,779 | ) | | $ | (15,869 | ) | | $ | (17,417 | ) | | $ | (17,779 | ) |
The Company has Federal tax credit carryforwards of $8.7$6.7 million that expire in various tax years from 20162017 to 2035.2036. The Company has a Federal operating loss carryforward of $19.9$18.8 million that expires in various tax years through 2035.2034. Of the operating loss carryforward, $1.6$1.7 million will result in a benefit within additional paid in capital when realized. The Company also has state tax credit carryforwards of $210,000$0.2 million and state net operating loss carryforwards of $8.0$7.2 million that expire in various tax years through 2034. In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As a result of this analysis and based on the current year’s taxable income, and utilization of certain carryforwards management determined that itwe should reduce itour valuation allowance in the current year. A valuation allowance is still required to the extent it is more likely than not that the future benefit associated with the foreign tax credit carryforwards and certain state tax loss carryforwards will not be realized. As a result, the Company recorded a tax benefitexpense associated with a reductionan increase of the deferred tax asset valuation allowance of $0.5$0.1 million for 2015. The Company recorded tax expense in 2015 associated with an increase in the valuation allowance in 2014 in the amount of $1.6 million for 2014.2016.
The Company records the benefits relating to uncertain tax positions only when it is more likely than not (likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. At December 31, 2015,2016, the Company’s reserve for uncertain tax positions is not material and the Company believes it haswe believe we have adequately provided for its tax-related liabilities. The Company is no longer subject to United States federal income tax examinations for years before 2012.2013. The provision for (benefit from) income taxes differed from the provision computed by applying the Federal statutory rate to income (loss) from continuing operations before taxes due to the following:
| | | | Year ended December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Federal statutory tax rate | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % |
| State taxes | | | 5.8 | | | | 11.5 | | | | 1.4 | | | | 5.8 | |
| Non deductible expenses | | | 1.0 | | | | 4.6 | | | | 2.7 | | | | 1.0 | |
| Tax credits | | | (4.8 | ) | | | (11.7 | ) | | | (6.7 | ) | | | (4.8 | ) |
| Repatriation of foreign earnings | | | 0.0 | | | | 59.8 | | |
| Foreign income tax rate differential | | | (1.3 | ) | | | (43.2 | ) | | | (2.1 | ) | | | (1.3 | ) |
| Valuation allowance | | | (9.5 | ) | | | 41.7 | | | | 0.1 | | | | (9.5 | ) |
| Tax return and audit adjustments | | | 3.8 | | | | 0.0 | | | | 0.0 | | | | 3.8 | |
| Other | | | (1.8 | ) | | | 1.4 | | | | 2.0 | | | | (1.8 | ) |
| | | | 27.2 | % | | | 98.1 | % | | | 31.4 | % | | | 27.2 | % |
Note 109 — Employee Benefit Plans
The Company has a deferred profit-sharing retirement plan that covers substantially all employees. The Company’s annual contribution to the plan is discretionary. The Company’s did not make a contribution in 20152016 or 2014.2015. The plan also contains a 401(k) provision that allows employees to contribute a percentage of their salary up to the statutory limitation. These contributions are matched at the rate of 10% by the Company. The Company’s matching contributions under the 401(k) component were $359,000$0.3 million and $318,000$0.4 million in 20152016 and 2014,2015, respectively.
The Company also maintains an incentive-compensation plan. Participants in the plan are key employees as determined by the Board of Directors and executive management. Compensation under the plan is based on the achievement of predetermined financial performance goals of the Company and its subsidiaries. Awards under the plan are payable in cash. Awards under the plan totaled $776,000$0.5 million and $656,000,$0.8 million, in 20152016 and 2014,2015, respectively.
The Company also sponsors a deferred compensation plan for a select group of highly compensated employees. Participants may make elective deferrals of their salary to the plan in excess of tax code limitations that apply to the Company’s qualified plan. The Company invests the participants’ deferred amounts to fund these obligations. The Company also has the sole discretion to make employer contributions to the plan on behalf of the participants, though itwe did not make any employer contributions in 20152016 or 2014.2015.
Note 1110 — Contingencies
The Company isWe are 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. InFurther, as disclosed in “Item 9A. Controls and Procedures”, we are currently conducting an internal investigation into import/export and sales documentation activities at our China and Singapore offices. The investigation is being conducted under the opinionoversight of management,our Audit Committee, with the ultimate liability, ifassistance of outside counsel, and is focused on compliance with provisions of the U.S. Foreign Corrupt Practices Act, or FCPA, and other applicable laws, and certain of our policies, including our Code of Business Conduct and Ethics. We have voluntarily notified the U.S. Securities and Exchange Commission (“SEC”) and the U.S. Department of Justice (“DOJ”) of these matters, and are fully cooperating with these agencies. During the year ended December 31, 2016, we recorded $1.3 million of expenses relating to the investigation, including expenses of outside legal counsel and forensic accountants. We are currently unable to predict what actions the SEC, the DOJ, or other governmental agencies (including foreign governmental agencies) might take, or what the likely outcome of any with respect to thesesuch actions will not materially affectmight be, or estimate the range of reasonably possible fines or penalties, which may be material. The SEC, DOJ, and other governmental authorities have a broad range of civil and criminal sanctions, and the imposition of sanctions, fines or remedial measures could have a material adverse effect on the Company’s business, prospects, reputation, financial position,condition, liquidity, results of operations or cash flows of the Company.flows.
Note 1211 — Segment and Related Information
The Company is organized in threetwo reporting units: restaurant/retail, hotel/spa,Restaurant/Retail, and government. The Company has identified government as a separate reportable segment and has aggregated its two restaurant/retail/hotel/spa reporting units into one reportable segment, hospitality, as the reporting units share many similar economical characteristics.Government. Management views the governmentRestaurant/Retail and hospitalityGovernment segments separately in operating its business, as the products and services are different for each segment. The Company’s chief operating decision maker is the Company’s Chief Executive Officer. The hotel/spaHotel/Spa reporting has beenwas sold as of November 4, 2015, and is included withinclassified as discontinued operations (see note 3)Note 2 – Divestiture and Discontinued Operations - of the Notes to Consolidated Financial Statements).
The Company has two reportable business segments hospitality- Restaurant/Retail segment and government.Government segment. The hospitalityRestaurant/Retail segment offers integrated solutions to the hospitalityrestaurant and retail industry consisting of restaurants, grocery stores and specialty retail outlets. These offerings include industry leading hardware and software applications utilized at the point-of-sale, back of store and corporate office and includes the acquisition of Brink Software. This segment also offers customer support including field service, installation, and twenty-four hourtwenty-four-hour telephone support and depot repair. With our SureCheck solution, we continue to expand our business into retail, big box retailers, grocery stores, and contract food management organizations. The government 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 segments is set forth below. Amounts below exclude discontinued operations.
| | | Year ended December 31, (in thousands) | | | Year ended December 31, (in thousands) | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| Revenues: | | | | | | | | | | | | |
| Hospitality | | $ | 141,151 | | | $ | 130,174 | | |
| Restaurant/Retail | | | $ | 149,341 | | | $ | 141,151 | |
| Government | | | 87,852 | | | | 87,689 | | | | 80,312 | | | | 87,852 | |
| Total | | $ | 229,003 | | | $ | 217,863 | | | $ | 229,653 | | | $ | 229,003 | |
| | | | | | | | | | | | | | | | | |
| Operating income (loss) : | | | | | | | | | | | | | | | | |
| Hospitality | | $ | 1,721 | | | $ | 323 | | |
| Restaurant/Retail | | | $ | 825 | | | $ | 1,721 | |
| Government | | | 5,365 | | | | 4,883 | | | | 6,160 | | | | 5,365 | |
| Other | | | (457 | ) | | | (1,790 | ) | | | (4,772 | ) | | | (457 | ) |
| | | | 6,629 | | | | 3,416 | | | | 2,213 | | | | 6,629 | |
| Other income, net | | | (800 | ) | | | 485 | | | | 1,316 | | | | (800 | ) |
| Interest expense | | | (308 | ) | | | (136 | ) | |
| Interest income (expense) | | | | 121 | | | | (308 | ) |
| Income from continuing operations before provision for income taxes | | $ | 5,521 | | | $ | 3,765 | | | $ | 3,650 | | | $ | 5,521 | |
| | | | | | | | | | | | | | | | | |
| Identifiable assets: | | | | | | | | | | | | | | | | |
| Hospitality | | $ | 72,948 | | | $ | 81,269 | | |
| Restaurant/Retail | | | $ | 87,672 | | | $ | 72,948 | |
| Government | | | 10,052 | | | | 11,221 | | | | 6,504 | | | | 10,052 | |
| Other | | | 32,312 | | | | 22,688 | | | | 29,873 | | | | 32,874 | |
| Total | | $ | 115,312 | | | $ | 115,178 | | | $ | 124,049 | | | $ | 115,874 | |
| | | | | | | | | | | | | | | | | |
| Goodwill: | | | | | | | | | | | | | | | | |
| Hospitality | | $ | 10,315 | | | $ | 10,315 | | |
| Restaurant/Retail | | | $ | 10,315 | | | $ | 10,315 | |
| Government | | | 736 | | | | 736 | | | | 736 | | | | 736 | |
| Total | | $ | 11,051 | | | $ | 11,051 | | | $ | 11,051 | | | $ | 11,051 | |
| | | | | | | | | | | | | | | | | |
| Depreciation, amortization and accretion: | | | | | | | | | | | | | | | | |
| Hospitality | | $ | 2,673 | | | $ | 1,678 | | |
| Restaurant/Retail | | | $ | 3,479 | | | $ | 2,673 | |
| Government | | | 48 | | | | 50 | | | | 38 | | | | 48 | |
| Other | | | 349 | | | | 279 | | | | 1,107 | | | | 349 | |
| Total | | $ | 3,070 | | | $ | 2,007 | | | $ | 4,624 | | | $ | 3,070 | |
| | | | | | | | | | | | | | | | | |
| Capital expenditures including software costs: | | | | | | | | | | | | | | | | |
| Hospitality | | $ | 3,645 | | | $ | 2,181 | | |
| Restaurant/Retail | | | $ | 3,285 | | | $ | 3,645 | |
| Government | | | - | | | | 36 | | | | 41 | | | | - | |
| Other | | | 208 | | | | 969 | | | | 2,792 | | | | 208 | |
| Total | | $ | 3,853 | | | $ | 3,186 | | | $ | 6,118 | | | $ | 3,853 | |
The following table presents revenues by country based on the location of the use of the product or services. Amounts below exclude discontinued operations.
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| United States | | $ | 197,303 | | | $ | 189,845 | | | $ | 210,821 | | | $ | 197,303 | |
| Other Countries | | | 31,700 | | | | 28,018 | | | | 18,832 | | | | 31,700 | |
| Total | | $ | 229,003 | | | $ | 217,863 | | | $ | 229,653 | | | $ | 229,003 | |
The following table presents assets by country based on the location of the asset. Amounts below exclude discontinued operations.
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
| United States | | $ | 100,021 | | | $ | 93,825 | | | $ | 110,369 | | | $ | 100,583 | |
| Other Countries | | | 15,291 | | | | 21,353 | | | | 13,680 | | | | 15,291 | |
| Total | | $ | 115,312 | | | $ | 115,178 | | | $ | 124,049 | | | $ | 115,874 | |
Customers comprising 10% or more of the Company'sCompany’s total revenues, excluding discontinued operations, are summarized as follows:
| | | December 31, | | | December 31, | |
| | | 2015 | | | 2014 | | | 2016 | | | 2015 | |
Hospitality segment: | | | | | | | |
Restaurant and Retail segment: | | | | | | | |
| McDonald’s Corporation | | | 19 | % | | | 16 | % | | | 25 | % | | | 19 | % |
| Yum! Brands, Inc. | | | 10 | % | | | 12 | % | | | 11 | % | | | 10 | % |
Government segment: | | | | | | | | | | | | | | | | |
| U.S. Department of Defense | | | 38 | % | | | 40 | % | | | 35 | % | | | 38 | % |
| All Others | | | 33 | % | | | 32 | % | | | 29 | % | | | 33 | % |
| | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
No other customer within All Others represented more than 10% of the Company’s total revenue for the years ended December 31, 20152016 and 2014.2015.
Note 1312 — 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 consist primarily of cash and cash equivalents, trade receivables, trade payables, debt instruments and deferred compensation assets and liabilities. For cash and cash equivalents, trade receivables and trade payables, the carrying amounts of these financial instruments as of December 31, 20152016, and 20142015 were considered representative of their fair values. The estimated fair value of the Company’s long-term debt and line of credit at December 31, 20152016 and 20142015 was based on variable and fixed interest rates at December 31, 20152016 and 2014,2015, respectively, for new issues with similar remaining maturities and approximates the respective carrying values at December 31, 20152016 and 2014.2015.
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 (see note 10)Note 9 – Employees Benefit Plans - of the Notes to Consolidated Financial Statements). 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, as defined under U.S. GAAP, 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 the deferred compensation plan, which are recorded at fair value each period using the cash surrender value of the insurance investments.
The Company has obligations, to be paid in cash, to the former owners of Brink Software, based on the achievement of certain conditions as defined in the definitive agreement (see note 2)Note 1 – Summary of Significant Accounting Policies - sub-footnote Contingent Consideration - of the Notes to Consolidated Financial Statements).
The fair value of this contingent consideration payable 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 during the contingent consideration period, appropriately discounted considering the uncertainties associated with the obligation, and calculated in accordance with the terms of the definitive agreement. The liabilities for the contingent consideration were established at the time of the acquisition and are evaluated on a quarterly basis based on additional information as it becomes available. Any change in the fair value adjustment is recorded in the earnings of that period. Changes in the fair value of the contingent consideration obligations may result from changes in probability assumptions with respect to the likelihood of achieving the various contingent payment obligations.Significant increases or decreases in the inputs noted above in isolation would result in a significantly lower or higher fair value measurement.
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 (in thousands):
| | | Level 3 Inputs | | | Level 3 Inputs | |
| | | Liabilities | | | Liabilities | |
| Balance at December 31, 2014 | | $ | 5,040 | | |
| Balance at December 31, 2015 | | | $ | 5,130 | |
| New level 3 liability | | | - | | | | - | |
| Change in fair value of contingent consideration liability | | | 90 | | | | (1,130 | ) |
| Transfers into or out of Level 3 | | | - | | | | - | |
| Balance at December 31, 2015 | | $ | 5,130 | | |
| Balance at December 31, 2016 | | | $ | 4,000 | |
Note 1413 — Related Party Transactions
The Company leases its corporate wellness facility to related parties at a current rate of $9,775 per month. The Company receives a complimentary membership to this facility which is provided to all employees. During 20152016 and 20142015 the Company received rental income amounting to $117,300 for the lease of the facility in each year.
Our director, Paul D. Eurek, is President of Xpanxion LLC. In October 2016, we entered into a software development agreement with Xpanxion. In 2016, we incurred approximated $0.2 million of fees to Xpanxion under the software development agreement, but made no payments. Mr. Eurek's successor has been announced, and he intends to be fully retired from Xpanxion on June 30, 2017.
Note 1514 — Subsequent Events
On March 24, 2016, the Company amended its credit facility with J.P. Morgan Chase, N.A. See Note 7 for further details.None noted
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | PAR TECHNOLOGY CORPORATION | |
| | | |
March 30, 2016April 17, 2017 | /s/ Karen E. Sammon Donald H. Foley | |
| | Karen E. SammonDonald H. Foley | |
| | Chief Executive Officer & President | |
| (Principal Executive Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantRegistrant and in the capacities and on the dates indicated.
| /s/ Donald H. Foley | | Chief Executive Officer, President & Director | | |
| Donald H. Foley | | (Principal Executive Officer) | | April 17, 2017 |
| | | | | |
/s/ Karen E. Sammon Bryan A. Menar | | Chief Financial Officer | | |
Karen E. SammonBryan A. Menar | Chief Executive Officer &
President
| March 30, 2016(Principal Financial Officer) | | April 17, 2017 |
| | | | | |
| /s/ Cynthia A. Russo | | | | |
| Cynthia A. Russo | | Director | March 30, 2016 | April 17, 2017 |
| | | | |
| /s/ Paul D. Eurek | | | | |
| Paul D. Eurek | | Director | March 30, 2016 | April 17, 2017 |
| | | | |
| /s/ Todd E. Tyler | | | | |
| Todd E. Tyler | | Director | March 30, 2016 | April 17, 2017 |
| | | | |
| /s/ John W. Sammon | | | | |
| John W. Sammon | Director | March 30, 2016 |
| Director | | |
/s/ Ronald J. Casciano | | |
Ronald J. Casciano | Director | March 30, 2016 |
| | |
/s/ Donald H. Foley | | |
Donald H. Foley | Director | March 30, 2016 |
| | |
/s/ Matthew J. Trinkaus | | |
Matthew J. Trinkaus | Controller and
Chief Accounting Officer
| March 30, 2016April 17, 2017 |
List of Exhibits
Exhibit Index
Exhibit No.
| Description of Instrument
| | |
| | | | |
3.(i) | Certificate of Incorporation, as amended May 22, 2014. | | Filed as Exhibit 3(i) to Form 8-K filed May 29, 2014 of PAR Technology Corporation and incorporated hereinIncorporated by reference. |
| | | |
3.(ii) | By-laws, as amended May 22, 2014. | | Filed as Exhibit 3.(ii) to Form 8-K filed May 29, 2014 of PAR Technology Corporation incorporated herein byreference into this Annual
reference.
|
| | | |
4 | Specimen Certificate representing the Common Stock. | | Filed as Exhibit 4 to Registration StatementReport on Form S-2 (Registration No. 333-04077) of PAR Technology
Corporation incorporated herein by reference.10-K
|
| | | |
10.1 | Letter of Agreement with Sanmina– SCI Corporation. | | Filed as Exhibit 10.1 to Form S-3/A (Registration No. 333-102197) of PAR Technology Corporation incorporated herein by reference. |
| | | |
10.2 | 2005 Equity Incentive Plan of PAR Technology Corporation. | | Filed as Exhibit 4.2 to Form S-8 (Registration No. 333-137647) of PAR Technology Corporation and incorporated herein by reference. |
| | | |
10.3 | 2005 Equity Incentive Plan, as amended. | | Filed as Exhibit 4.1 to Registration Statement on Form S-8 (Registration No. 333-187246) of PAR Technology Corporation incorporated herein by reference. |
| | | |
10.4 | Form of Restricted Stock Award Agreement Pursuant
|
Exhibit Number | Exhibit Description | | Form (File No.) | Exhibit | Date Filed/Furnished |
| | | | | | |
| | | | | | |
2(i) *** | Stock Purchase Agreement, dated as of September 18, 2014, among Brink Software Inc., the Shareholders, ParTech, Inc. and PAR Technology Corporation | | Quarterly Report on Form 10-Q (File No. 001-09720) | 10.3 | 11/14/2014 |
| | | | | | |
2(ii) | Asset Purchase Agreement, dated as of November 4, 2015, among Gary Jonas Computing Ltd., SMS Software Holdings LLC, Jonas Computing (UK) Ltd., PAR Springer-Miller Systems, Inc., Springer-Miller International, LLC, Springer- Miller Canada, ULC, Partech, Inc., and Constellation Software, Inc. | | Annual Report on Form 10-K (File No. (001-09720) | 10.26 | 3/30/2016 |
| | | | | | |
| 3(i) | Certificate of Incorporation, as amended May 22, 2014 | | Current Report on Form 8-K (File No. 001-09720) | 3(i) | 5/29/2014 |
| | | | | | |
3(ii) | By-laws, as amended May 22, 2014 | | Current Report on Form 8-K (001-09720) | 3(ii) | 5/29/2014 |
| | | | | | |
4 | Specimen Certificate for shares of common stock | | Registration Statement on Form S-2 (File No. 333-04077) | 4 | 5/20/1996 |
| | | | | | |
| 10.1 | PAR Technology Corporation 2005 Equity Incentive Plan | | Registration Statement on Form S-8 (File No. 333-137647) | 4.2 | 9/28/2006 |
to the 2005 Equity Incentive Plan.
| Filed as Exhibit 10.1 to Form 10-Q as for the quarter ended June 30, 2013 and incorporated by reference.
| 10.5 | Pledge and Security Agreement with JP Morgan Chase. | | Filed as Exhibit 10.2 to Form 8-K dated June 16, 2008 of PAR Technology Corporation and incorporated herein by reference. |
| | | |
10.6 | June 2011 – Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A; NBT Bank, N.A.; Alliance Bank, N.A. | | Filed as an Exhibit 10.1 to Form 8-K dated June 6, 2011 of PAR Technology Corporation and incorporated herein by reference. |
| Incorporated by reference into this Annual Report on Form 10-K |
Exhibit Number | Exhibit Description | | Form | Exhibit | Date Filed |
| | | | | | |
10.2 | PAR Technology Corporation 2005 Equity Incentive Plan, as amended | | Registration Statement on Form S-8 (File No. 333-187246) | 4.1 | 3/14/2013 |
| | | | | | |
10.3 | PAR Technology Corporation Restricted Stock Agreement pursuant to the 2005 Equity Incentive Plan (Form) | | Quarterly Report on Form 10-Q (File No. 001-09720) | 10.1 | 8/8/2013 |
| | | | | | |
10.4 | PAR Technology Corporation 2005 Equity Incentive Plan Notice of Award (Form) | | Annual Report on Form 10-K (File No. 001-09720) | 10.17 | 3/14/2014 |
| | | | | | |
| 10.5 †† | PAR Technology Corporation 2005 Equity Incentive Plan Outside Director Notice of Restricted Stock Award and Agreement (Form) | | Annual Report on Form 10-K (File No. 001-09720) | 10.21 | 3/31/2015 |
| | | | | | |
| 10.6 | PAR Technology Corporation 2005 Equity Incentive Plan Notice of Award and Agreement (Form) | | Annual Report on Form 10-K (File No. 001-09720) | 10.23 | 3/31/2015 |
| | | | | | |
10.7 *** | Credit Agreement, dated as of September 9, 2014, among PAR Technology Corporation, the other Loan Parties, and JPMorgan Chase Bank, N.A. | | Quarterly Report on Form 10-Q (File No. 001-09720) | 10.1 | 11/14/2014 |
| | | | | | |
| 10.8 | Pledge and Security Agreement entered into as of September 9, 2014, among PAR Technology Corporation, Ausable Solutions Inc., PAR Government Systems Corporation, PAR Springer-Miller Systems, Inc., Rome Research Corporation, Springer-Miller International, LLC, ParTech, Inc., and JPMorgan Chase Bank, N.A. | | Quarterly Report on Form 10-Q (File No. 001-09720) | 10.2 | 11/14/2014 |
List of Exhibits (Continued) | Incorporated by reference into this Annual Report on Form 10-K |
Exhibit Number | Exhibit Description | | Form | Exhibit | Date Filed |
| | | | | | |
| 10.9 *** | Second Amendment to Credit Agreement and Other Loan Documents, dated as of March 19, 2015, among PAR Technology Corporation, Ausable Solutions Inc., PAR Government Systems Corporation, PAR Springer-Miller Systems, Inc., Rome Research Corporation, Springer-Miller International, LLC, ParTech, Inc., Brink Software, Inc, and JPMorgan Chase Bank, N.A. | | Annual Report on Form 10-K (File No. 001-09720) | 10.24 | 3/31/2015 |
| | | | | | |
| 10.10 | Fourth Amendment to Credit Agreement, dated as of March 24, 2016, among PAR Technology Corporation, the other Loan Parties (as defined in the Credit Agreement dated September 9, 2014 (as amended)) and JPMorgan Chase Bank, N.A. | | Annual Report on Form 10-K (File No. 001-09720) | 10.29 | 3/30/2016 |
| | | | | | |
| 10.11 | Fifth Amendment to Credit Agreement, dated as of August 5, 2016, among PAR Technology Corporation, the other Loan Parties (as defined in the Credit Agreement dated September 9, 2014 (as amended)) and JPMorgan Chase Bank, N.A. | | Quarterly Report on Form 10-Q (File No. 001-09720) | 10.1 | 8/8/2016 |
| | | | | | |
| 10.12 | Sixth Amendment to Credit Agreement, dated as of November 14, 2016, among PAR Technology Corporation, the other Loan Parties (as defined in the Credit Agreement dated September 9, 2014 (as amended)) and JPMorgan Chase Bank N.A. | | Quarterly Report on Form 10-Q (File No. 001-09720) | 10.1 | 11/14/2016 |
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| 10.13 | PAR Technology Corporation 2015 Equity Incentive Plan | | Registration Statement on Form S-8 (File No. 333-208063) | 4.2 | 11/16/2015 |
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| 10.14 | PAR Technology Corporation 2015 Equity Incentive Plan Notice of Award (Form) | | Registration Statement on Form S-8 (File No. 333-208063) | 4.3 | 11/16/2015 |
| Incorporated by reference into this Annual Report on Form 10-K |
Exhibit Exhibit No.Number
| Exhibit Description of Instrument | | Form | Exhibit | Date Filed |
| | | | |
10.7
| June 2011 - Amendment No. 1 to Pledge and Security Agreement with JPMorgan Chase Bank, N.A. | |
Filed as an Exhibit 10.2 to Form 8-K dated June 6, 2011 of 10.15 †† | PAR Technology Corporation 2015 Equity Incentive Plan Outside Director Notice of Restricted Stock Award and incorporated herein by reference.Agreement (Form) | | Registration Statement on Form S-8 (File No. 333-208063) | 4.4 | 11/16/2015 |
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10.8*** | December 2011 - Asset Purchase and Sale Agreement by and between PAR Technology Corporation, PAR Government Systems Corporation, PAR Logistics Management Systems Corporation and ORBCOMM Inc. and PLMS Acquisition, LLC. | | Filed as an Exhibit 10.13 to Form 10-K dated April 4, 2012 of PAR Technology Corporation and incorporated herein by reference. |
| | | |
10.9
| February 2013 - Amendment No. 2 to Pledge and Security Agreement with JPMorgan Chase Bank, N.A.
| | Filed as an Exhibit 10.14 to Form 10-K dated March 13, 2013 of PAR Technology Corporation and incorporated herein by reference. |
| | | |
10.10
10.16†† | Employment Offer Letter, dated March 21, 2013, between Registrant and Ronald J. Casciano.Casciano and PAR Technology Corporation | | Filed as an Exhibit 10.1*+ toQuarterly Report on Form 10-Q for the quarter ended March 31, (File No. 001-09720) | 10.1 | 5/9/2013 and incorporated herein by reference. |
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10.11 10.17†† | Employment Offer Letter, dated March 21, 2013, between RegistrantKaren E. Sammon and Robert P. Jerabeck.PAR Technology Corporation | | Filed as an Exhibit 10.2*+ toQuarterly Report on Form 10-Q for the quarter ended March 31, (File No. 001-09720) | 10.3 | 5/9/2013 and incorporated herein by reference. |
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10.12 | Employment Offer Letter dated March 21, 2013 between Registrant and Karen E. Sammon. | | Filed as an Exhibit 10.3*+ to Form 10-Q for the quarter ended March 31, 2013 and incorporated herein by reference. |
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10.13 | Form of Notice of Equity Award and Agreement Pursuant to the 2005 Equity Incentive Plan. | | Filed as an Exhibit 10.17 to Form 10-K dated March 14, 2014 of Par Technology Corporation and incorporated herein by reference. |
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10.14
| June 2014 – Amendment No. 3 to Pledge and Security Agreement with JPMorgan Chase Bank, N.A. | | Filed as an Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2014 and incorporated herein by reference. |
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10.15 *** | Credit Agreement with JPMorgan Chase Bank, N.A. dated as of September 9, 2014. | | Filed as an Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by reference. |
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10.16 | Pledge and Security Agreement with JPMorgan Chase Bank, N.A. dated as of September 9, 2014. | | Filed as an Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by reference. |
List of Exhibits (Continued)
Exhibit No.
| Description of Instrument
| | |
| | | |
10.17 *** | Stock Purchase Agreement by and among Brink Software, Inc., the Shareholders, ParTech, Inc., and PAR Technology Corporation dated as of September 18, 2014. | | Filed as an Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2014 and incorporated herein by reference. |
| | | |
10.18 | Form of Outside Director Notice of Restricted Stock Award and Agreement Pursuant to the 2005 Equity Incentive Plan. | | Filed as an Exhibit 10.21 to Form 10-K dated March 31, 2015 of Par Technology Corporation and incorporated herein by reference. |
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10.19 | Form of Notice of Award and Agreement Pursuant to the 2005 Equity Incentive Plan. | | Filed as an Exhibit 10.23 to Form 10-K dated March 31, 2015 of Par Technology Corporation and incorporated herein by reference. |
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10.20 *** | Second Amendment to Credit Agreement and Other Loan Documents with JPMorgan Chase Bank, N.A. dated as of March 19, 2015 | | Filed as an Exhibit 10.24 to Form 10-K dated March 31, 2015 of Par Technology Corporation and incorporated herein by reference |
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10.21 | Separation Agreement between PAR Technology Corporation and Stephen P. Lynch dated August 31, 2015. | | Filed as an Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2015 and incorporated herein by reference. |
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10.22 | 2015 Equity Incentive Plan of PAR Technology Corporation. | | Filed as Exhibit 4.2 to Form S-8 (Registration No. 333-208063) of PAR Technology Corporation and incorporated herein by reference. |
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10.23 | Form of Notice of Award Pursuant to the 2015 Equity Incentive Plan | | Filed as Exhibit 4.3 to Form S-8 (Registration No. 333-208063) of PAR Technology Corporation and incorporated herein by reference. |
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10.24 | Form of Outside Director Notice of Restricted Stock Award and Agreement Pursuant to the 2015 Equity Incentive Plan | | Filed as Exhibit 4.4 to Form S-8 (Registration No. 333-208063) of PAR Technology Corporation and incorporated herein by reference. |
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| 10.18†† | Employment Offer Letter, dated July 13, 2015, between RegistrantMichael Bartusek and Michael BartusekPAR Technology Corporation | | Annual Report on Form 10-K (File No. 001-09720) | 10.25 | 3/30/2016 |
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| November 2015 – Asset Purchase Agreement by and among Gary Jonas Computing Ltd., SMS Software Holdings LLC, Jonas Computing (UK) Ltd., PAR Springer-Miller Systems, Inc., Springer-Miller International, LLC, Springer-Miller Canada, ULC, ParTech, Inc., and Constellation Software Inc. | | |
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| 10.19 †† | Employment Offer Letter, dated November 16, 2015, between RegistrantKaren E. Sammon and Karen SammonPAR Technology Corporation | | |
List of Exhibits (Continued)
ExhibitAnnual Report on Form 10-K (File No.
001-09720) | Description of Instrument
10.27 | 3/30/2016 |
| | | | | | |
| 10.20 †† | Employment Offer Letter, dated December 10, 2015, between RegistrantMatthew Cicchinelli and Matthew CicchinelliPAR Technology Corporation | | Annual Report on Form 10-K (File No. 001-09720) | 10.28 | 3/30/2016 |
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| Fourth Amendment to Credit Agreement withdated as of November 29, 2016, among PAR Technology Corporation, the other Loan Parties (as defined in the Credit Agreement) and JPMorgan Chase Bank N.A. dated as of March 24, 2016 | | | | Filed herewith |
| | | | | |
| Subsidiaries of the registrant.Employment Offer Letter, dated November 14, 2016, between Bryan Menar and PAR Technology Corporation | | | | Filed herewith |
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| Subsidiaries of PAR Technology Corporation | | | | Filed herewith |
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| Consent of Independent Registered Public Accounting Firm.BDO USA, LLP | | | | Filed herewith |
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| Certification of ChiefPrincipal Executive Officer & President Pursuantpursuant to Section 302Rule 13a-14(a) of the Sarbanes-OxleySecurities Exchange Act of 2002.1934, as amended | | | | Filed herewith |
| | | | | |
| Certification of Controller and Chief AccountingPrincipal Financial Officer Pursuantpursuant to Section 302Rule 13a-14(a) of the Sarbanes-OxleySecurities Exchange Act of 2002.1934, as amended | | | | Filed herewith |
| Incorporated by reference into this Annual Report on Form 10-K |
Exhibit Number | Exhibit Description | | Form | Exhibit | Date Filed |
| | | | | |
| Certification of Chief ExecutivePrincipal Financial Officer & President Pursuantpursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | Furnished herewith |
| | | | | |
| Certification of ControllerPrincipal Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and Chief Accounting Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | | | Furnished herewith |
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***
| Portions of this Exhibit were omitted pursuant to a request for confidential treatment. The omitted portions have been separately filed with the Securities and Exchange Commission. | |
| 101.INS | XBRL Instance Document | | | | Filed herewith |
| | | | | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | | | | Filed herewith |
| | | | | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | | | | Filed herewith |
| | | | | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | | | | Filed herewith |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | | | | Filed herewith |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | | | | Filed herewith |
†† Indicates management contract or compensatory plan or arrangement.
*** Portions of this Exhibit were omitted pursuant to a request for confidential treatment. The omitted portions have been separately filed with the Securities and Exchange Commission.