UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.   For the quarterly period ended December 31, 2019

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.   For the transition period from __________ to _________.

 

Commission File Number 001-34941

 

PARK CITY GROUP, INC.

(Exact name of small business issuer as specified in its charter)

 

Nevada		37-1454128
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

 

5282 South Commerce Drive, Suite D292, Murray, Utah 84107

(Address of principal executive offices)

(435) 645-2000

(Registrant’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒ Yes ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	[   ]	Accelerated filer	[X]
Non-accelerated filer	[   ]	Smaller reporting company	[X]
		Emerging growth company	[   ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  [ ] Yes   [X] No 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
common stock, par value $0.01 per share, (“Common Stock”)	PCYG	Nasdaq Capital Market

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

As of February 10, 2020, 19,579,989 shares of the registrant’s Common Stock, $0.01 par value, were issued and outstanding.

 

 

 

 

PARK CITY GROUP, INC.

 

TABLE OF CONTENTS

 

		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Condensed Balance Sheets as of December 31, 2019 and June 30, 2019 (Unaudited)	1
	Consolidated Condensed Statements of Operations for the Three and Six Months Ended December 31, 2019 and 2018 (Unaudited)	2
	Consolidated Condensed Statements of Cash Flows for the Six Months Ended December 31, 2019 and 2018 (Unaudited)	3
	Consolidated Statements of Stockholders’ Equity for December 31, 2019 and 2018 (Unaudited)	4
	Notes to Consolidated Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	21
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 5.	Other Information	23
Item 6.	Exhibits	23
Signatures		24

 

 

 

PARK CITY GROUP, INC.

Consolidated Condensed Balance Sheets (Unaudited)

 

 

Assets	December 31, 2019	June 30, 2019
Current assets
Cash	$18,968,775	$18,609,423
Receivables, net of allowance for doubtful accounts of $396,895 and $145,825 at December 31, 2019 and June 30, 2019, respectively	3,974,207	3,878,658
Contract asset – unbilled current portion	2,909,583	3,023,694
Prepaid expense and other current assets	584,528	1,037,099
Total current assets	26,437,093	26,548,874
Property and equipment, net	3,252,560	2,972,257
Other assets:
Deposits, and other assets	22,414	17,146
Contract asset – unbilled long-term portion	1,440,939	1,659,110
Operating lease-right-of-use asset	822,502	-
Customer relationships	722,700	788,400
Goodwill	20,883,886	20,883,886
Capitalized software costs, net	21,834	70,864
Total other assets	23,914,275	23,419,406
Total Assets	$53,603,928	$52,940,537
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$756,264	$530,294
Accrued liabilities	1,203,854	1,399,368
Contract liability - deferred revenue	2,461,924	1,917,787
Lines of credit	4,660,000	4,660,000
Operating lease liability - current	83,562	-
Current portion of notes payable	302,611	295,168
Total current liabilities	9,468,215	8,802,617
Long-term liabilities
Operating lease liability – less current portion	738,940	-
Notes payable, less current portion	767,564	920,754
Total liabilities	10,974,719	9,723,371
Commitments and contingencies
Stockholders’ equity:
Preferred Stock; $0.01 par value, 30,000,000 shares authorized;
Series B Preferred, 700,000 shares authorized; 625,375 shares issued and outstanding at December 31, 2019 and June 30, 2019;	6,254	6,254
Series B-1 Preferred, 550,000 shares authorized; 212,402 shares issued and outstanding at December 31, 2019 and June 30, 2019, respectively	2,124	2,124
Common Stock, $0.01 par value, 50,000,000 shares authorized; 19,579,989 and 19,793,372 issued and outstanding at December 31, 2019 and June 30, 2019, respectively	195,802	197,936
Additional paid-in capital	75,774,511	76,908,566
Accumulated deficit	(33,349,482)	(33,897,714)
Total stockholders’ equity	42,629,209	43,217,166
Total liabilities and stockholders’ equity	$53,603,928	$52,940,537

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

PARK CITY GROUP, INC.

Consolidated Condensed Statements of Operations (Unaudited)

 

	Three Months Ended December 31,		Six Months Ended December 31,
	2019	2018	2019	2018
Revenue	$4,837,332	$5,565,237	$9,637,416	$11,507,231
Operating expense:
Cost of services and product support	1,425,309	1,270,659	3,253,423	2,999,185
Sales and marketing	1,446,517	1,139,855	2,861,380	3,047,879
General and administrative	1,114,251	1,326,735	2,336,462	2,470,046
Depreciation and amortization	222,499	144,030	416,177	289,405
Total operating expense	4,208,576	3,881,279	8,867,442	8,806,515
Income from operations	628,756	1,683,958	769,974	2,700,716
Other income (expense):
Interest income	65,982	54,773	148,713	89,897
Interest expense	(16,042)	(5,623)	(36,640)	(16,096)
Income before income taxes	678,696	1,733,108	882,047	2,774,517
(Provision) for income taxes:	(15,593)	(47,500)	(40,593)	(122,500)
Net income	663,103	1,685,608	841,454	2,652,017
Dividends on preferred stock	(146,611)	(146,611)	(293,222)	(293,222)
Net income applicable to common shareholders	$516,492	$1,538,997	$548,232	$2,358,795
Weighted average shares, basic	19,741,000	19,822,000	19,775,000	19,804,000
Weighted average shares, diluted	20,052,000	20,375,000	20,033,000	20,474,000
Basic income per share	$0.03	$0.08	$0.03	$0.12
Diluted income per share	$0.03	$0.08	$0.03	$0.12

 

 

See accompanying notes to consolidated condensed financial statements.

 

 

 

PARK CITY GROUP, INC.

Consolidated Condensed Statements of Cash Flows (Unaudited)

 

	Six Months Ended December 31,
	2019	2018
Cash flows operating activities:
Net income	$841,454	$2,652,017
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	416,177	289,405
Amortization of operating right of use asset	40,239	-
Stock compensation expense	244,505	323,273
Bad debt expense	250,000	200,000
(Increase) decrease in:
Accounts receivables	(231,438)	208,051
Long-term receivables, prepaids and other assets	665,474	(1,892,581)
(Decrease) increase in:
Accounts payable	225,970	(652,283)
Operating lease liability	(40,239)	-
Accrued liabilities	(284,418)	366,966
Deferred revenue	543,861	335,734
Net cash provided by operating activities	2,671,585	1,830,582
Cash flows investing activities:
Purchase of property and equipment	(581,750)	(3,547)
Net cash used in investing activities	(581,750)	(3,547)
Cash flows financing activities:
Net increase in lines of credit	-	1,430,000
Proceeds from exercise of warrants	-	164,977
Common Stock buyback/retirement	(1,355,037)	-
Proceeds from employee stock plan	63,523	-
Dividends paid	(293,222)	(146,611)
Payments on notes payable and capital leases	(145,747)	(1,485,578)
Net cash used in financing activities	(1,730,483)	(37,192)
Net increase in cash and cash equivalents	359,352	1,789,843
Cash and cash equivalents at beginning of period	18,609,423	14,892,439
Cash and cash equivalents at end of period	$18,968,775	$16,682,282
Supplemental disclosure of cash flow information:
Cash paid for income taxes	$100,158	$47,500
Cash paid for interest	$16,042	$5,622
Supplemental disclosure of non-cash investing and financing activities:
Common stock to pay accrued liabilities	$155,325	$253,017
Dividends accrued on preferred stock	$293,222	$293,222
Right of use asset	$842,689	$-

 

  

See accompanying notes to consolidated condensed financial statements.

 

 

 

 

PARK CITY GROUP, INC.

Consolidated Statements of Stockholders’ Equity (Deficit) (Unaudited)

 

	Series B Preferred Stock		Series B-1 Preferred Stock		Common Stock		Additional Paid-In	Accumulated
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Deficit	Total
Balance, June 30, 2019	625,375	$6,254	212,402	$2,124	19,793,372	$197,936	$76,908,566	$(33,897,714)	$43,217,166
Stock issued for:
Accrued compensation	-	-	-	-	14,542	145	77,742	-	77,887
Employee stock plan	-	-	-	-	13,274	133	63,390	-	63,523
Stock buyback	-	-	-	-	(79,954)	(799)	(516,560)		(517,359)
Preferred dividends declared	-	-	-	-	-	-	-	(146,611)	(146,611)
Net income	-	-	-	-	-	-	-	178,351	178,351
Balance, September 30, 2019	625,375	$6,254	212,402	$2,124	19,741,234	$197,415	$76,533,138	$(33,865,974)	$42,872,957
Stock issued for:
Accrued compensation	-	-	-	-	13,370	134	77,304	-	77,438
Stock buyback	-	-	-	-	(174,615)	(1,747)	(835,931)	-	(837,678)
Preferred dividends declared	-	-	-	-	-	-	-	(146,611)	(146,611)
Net income	-	-	-	-	-	-	-	663,103	663,103
Balance, December 31, 2019	625,375	$6,254	212,402	$2,124	19,579,989	$195,802	$75,774,511	$(33,349,482)	$42,629,209

 

 

 

 

 

	Series B Preferred Stock		Series B-1 Preferred Stock		Common Stock		Additional Paid-In	Accumulated
	Shares	Amount	Shares	Amount	Shares	Amount	Capital	Deficit	Total
Balance, June 30, 2018	625,375	$6,254	212,402	$2,124	19,773,549	$197,738	$76,711,887	$(37,213,677)	$39,704,326
Stock issued for:
Accrued compensation	-	-	-	-	6,592	$66	$51,602	-	$51,668
Employee stock plan	-	-	-	-	12,333	$123	$82,755	-	$82,878
Preferred dividends declared	-	-	-	-	-	-	-	$(146,611)	$(146,611)
Net income	-	-	-	-	-	-	-	$966,409	$966,409
Balance, September 30, 2018	625,375	$6,254	212,402	$2,124	19,792,474	$197,927	$76,846,244	$(36,393,879)	$40,658,670
Stock issued for:
Accrued compensation	-	-	-	-	21,207	$212	$211,476	-	$211,688
Redemption	-	-	-	-	-	-	$(93,217)	-	$(93,217)
Preferred dividends declared	-	-	-	-	-	-	-	$(146,611)	$(146,611)
Exercise of option/warrant	-	-	-	-	25,581	$256	$164,741	-	$164,977
Net income	-	-	-	-	-	-	-	$1,685,608	1,685,608
Balance, December 31, 2018	625,375	$6,254	212,402	$2,124	19,839,262	$198,395	$77,129,244	$(34,854,882)	$42,481,135

 

 

 

 

 

PARK CITY GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.  OVERVIEW OF OPERATIONS AND BASIS FOR PRESENTATION

 

Overview

 

Park City Group, Inc. (“We”, “us”, “our” or the “Company”) is a Software-as-a-Service (“SaaS”) provider, and the parent company of ReposiTrak, Inc., which operates a business-to-business (“B2B”) e-commerce, compliance, and supply chain management platform that partners with retailers, wholesalers, and product suppliers to help them source, vet, and transact with their suppliers in order to accelerate sales, control risks, and improve supply chain efficiencies.

 

The Company’s services are grouped in three application suites: (i) ReposiTrak MarketPlace, encompassing the Company’s supplier discovery and B2B e-commerce solutions, which helps the Company’s customers find new suppliers, (ii) ReposiTrak Compliance and Food Safety solutions, which help the Company’s customers vet suppliers to mitigate the risk of doing business with these suppliers, and (iii) ReposiTrak’s Supply Chain solutions, which help the Company’s customers to more efficiently manage their various transactions with their suppliers.

 

The Company’s supply chain and MarketPlace services provide its customers with greater flexibility in sourcing products by enabling them to choose new suppliers and integrate them into their supply chain faster and more cost effectively, and it helps them to more efficiently manage these relationships, enhancing revenue while lowering working capital, labor costs and waste. The Company’s food safety and compliance solutions help reduce a company’s potential regulatory, legal, and criminal risk from its supply chain partners by providing a way for them to ensure these suppliers are compliant with food safety regulations, such as the Food Safety Modernization Act of 2011 (“FSMA”).

 

The Company’s services are delivered though proprietary software products designed, developed, marketed and supported by the Company. These products provide visibility and facilitate improved business processes among all key constituents in the supply chain, starting with the retailer and moving backwards to suppliers and eventually to raw material providers. The Company provides cloud-based applications and services that address e-commerce, supply chain, food safety and compliance activities. The principal customers for the Company’s products are household name multi-store food retail chains and their suppliers, branded food manufacturers, food wholesalers and distributors, and other food service businesses.

   

The Company has a hub and spoke business model. The Company is typically engaged by retailers and wholesalers (“Hubs”), which in turn require their suppliers (“Spokes”) to utilize the Company’s services.

 

The Company is incorporated in the state of Nevada and has three principal subsidiaries: PC Group, Inc., a Utah corporation (98.76% owned); Park City Group, Inc., a Delaware corporation (100% owned); and ReposiTrak, Inc., a Utah corporation (100% owned). All intercompany transactions and balances have been eliminated in the Company’s consolidated financial statements, which contain the operating results of the operations of Park City Group, Inc. (Delaware) and ReposiTrak, Inc. Park City Group, Inc. (Nevada) has no business operations separate from the operations conducted through its subsidiaries.

 

The Company’s principal executive offices are located at 5282 South Commerce Drive, Suite D292, Murray, Utah 84107. Its telephone number is (435) 645-2000. Its website address is www.parkcitygroup.com, and ReposiTrak’s website address is www.repositrak.com.

 

Recent Developments

 

In July 2019, we deployed InApp Pop Up and Online Chat. These applications provide account managers and sales staff with two additional real time means to facilitate farming of the network to cross sell with new and existing customers.

 

In August 2019, we released our new Out of Stock Management Solution (“OOS”). Eliminating out-of-stocks remains a critical challenge for food retailers as consumers turn to online retailers when their local store is out of a sought-after item. Previously, retailers had no viable solution to address this challenge. Our OOS is the industry’s first solution to address Direct Store Delivery out-of-stocks which enables retailers to retain customers and increase revenues.

 

In September 2019, we released the “Automated Buy Process”. This connection platform allows suppliers to sign up for compliance service, select the appropriate tier, and purchase the monthly Tier 2 subscription in real time. This is anticipated to expedite supplier onboarding and facilitate faster payment.

 

 

 

Basis of Financial Statement Presentation

 

The interim financial information of the Company as of December 31, 2019 and for the three and six months ended December 31, 2019 is unaudited, and the balance sheet as of June 30, 2019 is derived from audited financial statements. The accompanying condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial statements. Accordingly, they omit or condense notes and certain other information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles. The accounting policies followed for quarterly financial reporting conform with the accounting policies disclosed in the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended June 30, 2019. In the opinion of management, all adjustments necessary for a fair presentation of the financial information for the interim periods reported have been made. All such adjustments are of a normal recurring nature. The results of operations for the three and six months ended December 31, 2019 are not necessarily indicative of the results that can be expected for the fiscal year ending June 30, 2020. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2019. 

 

Effective July 1, 2019, the Company adopted the requirements of Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), as discussed further in Note 5. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with this new standard with results for reporting periods beginning after July 1, 2019 presented under ASU 2016-02, while prior period amounts and disclosures are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

  

NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The financial statements presented herein reflect the consolidated financial position of Park City Group, Inc. and our subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.  

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that materially affect the amounts reported in the consolidated financial statements. Actual results could differ from these estimates. The methods, estimates, and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results it reports in its financial statements. The Securities and Exchange Commission has defined the most critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results and require the Company to make its most difficult and subjective judgments, often because of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company’s most critical accounting policies include: revenue recognition, goodwill, other long-lived asset valuations, income taxes, stock-based compensation, and capitalization of software development costs.

 

Adoption of ASC 718, Compensation – Stock Compensation

From time to time, the Company issues shares of common stock as share-based compensation to employees and non-employees. The Company accounts for its share-based compensation to employees in accordance with FASB ASC 718, Compensation – Stock Compensation. Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service or vesting period.

In prior periods through September 30, 2019, the Company accounted for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50, Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.

The Company adopted the standard during the second quarter of fiscal year 2020. This standard did not have a material impact on the Company’s condensed consolidated financial statements.

Adoption of ASU 2016-02 “Leases (Topic 842)”

 

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”. Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

Effective July 1, 2019, the Company adopted the requirements of Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), as discussed further in Note 5. All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with this new standard with results for reporting periods beginning after July 1, 2019 presented under ASU 2016-02, while prior period amounts and disclosures are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

 

The Company adopted the requirements of ASU 2016-02 utilizing the modified retrospective method of transition to identified leases as of July 1, 2019 (the “effective date”). The recognition of additional operating lease liabilities was $82,517 for the current portion and $760,172 for the long-term portion and corresponding operating ROU assets were recorded in the amount of $842,689. This represents the operating lease existing as of the effective date which has a lease term of three years with the option for two additional three-year terms.

 

On June 21, 2018, the Company entered into an office lease at 5258 South Commerce Drive Suite D292, Murray, Utah 84107, providing for the lease of approximately 9,800 square feet, commencing on March 1, 2019. The monthly rent is $10,200. The initial term of the lease is three years. The Company has the option of renewing for an additional two three-year terms.

 

 

 

Revenue Recognition

 

We recognize revenue as we transfer control of deliverables (products, solutions and services) to our customers in an amount reflecting the consideration to which we expect to be entitled. To recognize revenue, we apply the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied. We account for a contract based on the terms and conditions the parties agree to, the contract has commercial substance and collectability of consideration is probable. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience.

 

We may enter into arrangements that consist of multiple performance obligations. Such arrangements may include any combination of our deliverables. To the extent a contract includes multiple promised deliverables, we apply judgment to determine whether promised deliverables are capable of being distinct and are distinct in the context of the contract. If these criteria are not met, the promised deliverables are accounted for as a combined performance obligation. For arrangements with multiple distinct performance obligations, we allocate consideration among the performance obligations based on their relative standalone selling price. Standalone selling price is the price at which we would sell a promised good or service separately to the customer. When not directly observable, we typically estimate standalone selling price by using the expected cost plus a margin approach. We typically establish a standalone selling price range for our deliverables, which is reassessed on a periodic basis or when facts and circumstances change.

  

For performance obligations where control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires judgment and is based on the nature of the deliverables to be provided. Revenue related to fixed-price contracts for application development and systems integration services, consulting or other technology services is recognized as the service is performed using the output method, under which the total value of revenue is recognized based on each contract’s deliverable(s) as they are completed and when value is transferred to a customer. Revenue related to fixed-price application maintenance, testing and business process services is recognized based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered, in accordance with the practical expedient in ASC 606-10-55-18.

 

If our invoicing is not consistent with the value delivered, revenue is recognized as the service is performed based on the method described above. The output method measures the results achieved and value transferred to a customer, which is updated as the project progresses to reflect the latest available information; such estimates and changes in estimates involve the use of judgment. The cumulative impact of any revision in estimates is reflected in the financial reporting period in which the change in estimate becomes known and any anticipated losses on contracts are recognized immediately. Revenue related to fixed-price hosting and infrastructure services is recognized based on our right to invoice for services performed for contracts in which the invoicing is representative of the value being delivered, in accordance with the practical expedient in ASC 606-10-55-18. If our invoicing is not consistent with value delivered, revenue is recognized on a straight-line basis unless revenue is earned and obligations are fulfilled in a different pattern. The revenue recognition method applied to the types of contracts described above provides the most faithful depiction of performance towards satisfaction of our performance obligations.

 

Revenue related to our software license arrangements that do not require significant modification or customization of the underlying software is recognized when the software is delivered as control is transferred at a point in time. For software license arrangements that require significant functionality enhancements or modification of the software, revenue for the software license and related services is recognized as the services are performed in accordance with the methods described above. In software hosting arrangements, the rights provided to the customer, such as ownership of a license, contract termination provisions and the feasibility of the client to operate the software, are considered in determining whether the arrangement includes a license or a service. Revenue related to software maintenance and support is generally recognized on a straight-line basis over the contract period.

 

Revenue related to transaction-based or volume-based contracts is recognized over the period the services are provided in a manner that corresponds with the value transferred to the customer to-date relative to the remaining services to be provided.

 

From time-to-time, we may enter into arrangements with third party suppliers to resell products or services. In such cases, we evaluate whether we are the principal (i.e. report revenue on a gross basis) or agent (i.e. report revenue on a net basis). In doing so, we first evaluate whether we control the good or service before it is transferred to the customer. If we control the good or service before it is transferred to the customer, we are the principal; if not, we are the agent. Determining whether we control the good or service before it is transferred to the customer may require judgment.

  

 

 

We provide customers with assurance that the related deliverable will function as the parties intended because it complies with agreed-upon specifications. General updates or patch fixes are not considered an additional performance obligation in the contract.

 

Variable consideration is estimated using either the sum of probability weighted amounts in a range of possible consideration amounts (expected value), or the single most likely amount in a range of possible consideration amounts (most likely amount), depending on which method better predicts the amount of consideration to which we may be entitled. We include in the transaction price variable consideration only to the extent it is probable that a significant reversal of revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price may involve judgment and are based largely on an assessment of our anticipated performance and all information that is reasonably available to us.

 

We assess the timing of the transfer of goods or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. As a practical expedient, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of finance to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set up or transition fees paid upfront by our customers to represent a financing component, as such fees are required to encourage customer commitment to the project and protect us from early termination of the contract.

 

Trade Accounts Receivable and Contract Balances

 

We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset (unbilled receivable). A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). For example, we recognize a receivable for revenue related to our transaction or volume-based contracts when earned regardless of whether amounts have been billed. We present such receivables in trade accounts receivable, net in our consolidated statements of financial position at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated number of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables, judgment, and other applicable factors.

  

A contract asset is a right to consideration that is conditional upon factors other than the passage of time. Contract assets are presented in current and other assets in our consolidated balance sheets and primarily relate to unbilled amounts on fixed-price contracts utilizing the output method of revenue recognition. The table below shows movements in contract assets:

 

	Contract assets
Balance – September 30, 2019	$4,513,131
Revenue recognized during the period but not billed	286,862
Amounts reclassified to accounts receivable	(449,471)
Other	-
Balance – December 31, 2019	$4,350,522(1)

 

(1)	Contract asset balances for December 31, 2019 include a current and a long-term contract asset, $2,909,583, and $1,440,939, respectively.

 

The table below shows movements in the deferred revenue balances (current and noncurrent) for the period:

 

	Contract liability
Balance – September 30, 2019	$1,955,425
Amounts billed but not recognized as revenue	(142,600)
Revenue recognized related to the opening balance of deferred revenue	649,099
Other	-
Balance – December 31, 2019	$2,461,924

 

Our contract assets and liabilities are reported in a net position on a contract by contract basis at the end of each reporting period. The difference between the opening and closing balances of our contract assets and deferred revenue primarily results from the timing difference between our performance obligations and the customer’s payment. We receive payments from customers based on the terms established in our contracts, which may vary generally by contract type.

 

 

 

Disaggregation of Revenue

 

The table below presents disaggregated revenue from contracts with customers by customer geography and contract-type. We believe this disaggregation best depicts the nature, amount, timing and uncertainty of our revenue and cash flows that may be affected by industry, market and other economic factors:

 

	For the Six Months Ended December 31, 2019
Geography	Subscription & support	Professional services	Transaction based	Total
North America	$8,029,104	$325,607	$1,256,763	9,611,474
International	25,942	-	-	25,942
Total	$8,055,046	$325,607	$1,256,763	$9,637,416

 

Earnings Per Share

 

Basic net income per share of Common Stock (“Basic EPS”) excludes dilution and is computed by dividing net income applicable to Common Stockholders by the weighted average number of Common Stock outstanding during the period. Diluted net income per share of Common Stock (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue shares of Common Stock were exercised or converted into Common Stock. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an antidilutive effect on net income per share of Common Stock.

 

The following table presents the components of the computation of basic and diluted earnings per share for the periods indicated:

 

	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2019	2018	2019	2018
Numerator
Net income applicable to common shareholders	$516,492	$1,538,997	$548,232	$2,358,795
Denominator
Weighted average common shares outstanding, basic	19,741,000	19,822,000	19,775,000	19,804,000
Warrants to purchase common stock	311,000	553,000	258,000	670,000
Weighted average common shares outstanding, diluted	20,052,000	20,375,000	20,033,000	20,474,000
Net income per share
Basic	$0.03	$0.08	$0.03	$0.12
Diluted	$0.03	$0.08	$0.03	$0.12

 

Reclassifications

 

            Certain prior year amounts have been reclassified to conform with the current year’s presentation. These reclassifications have no impact on the previously reported results.

  

NOTE 3.  EQUITY

 

Restricted Stock Units	Restricted Stock Units	Weighted Average Grant Date Fair Value ($/share)
Outstanding at September 30, 2019	852,688	$5.44
Granted	-	-
Vested and issued	(369)	9.08
Forfeited	-	-
Outstanding at December 31, 2019	852,319	$5.43

 

As of December 31, 2019, there were 4,156 stock units outstanding that had vested but for which shares of Common Stock had not yet been issued pursuant to the terms of the agreement.

 

As of December 31, 2019, there was approximately $4.6 million of unrecognized stock-based compensation expense under our equity compensation plans, which is expected to be recognized on a straight-line basis over a weighted average period of 4.09 years.

 

 

 

Warrants

 

 The following table summarizes information about warrants outstanding and exercisable at December 31, 2019:

 

Warrants Outstanding				Warrants Exercisable
at December 31, 2019				at December 31, 2019
Range of exercise prices Warrants	Number outstanding	Weighted average remaining contractual life (years)	Weighted average exercise price	Number exercisable	Weighted average exercise price
$4.00	1,085,068	3.10	$4.00	1,085,068	$4.00
$10.00	23,737	3.07	$10.00	23,737	$10.00
	1,108,805	3.10	$4.13	1,108,805	$4.13

During the quarter ended December 31, 2019, the Company’s Board of Directors approved the modification to extend the expiration dates of the Company's existing January 26, 2020 and February 5, 2020 warrants by an additional three years. Accordingly, all of the Company’s outstanding warrants are now set to expire in the quarter ending March 31, 2023.

Preferred Stock

 

The Company’s articles of incorporation, as amended, currently authorize the issuance of up to 30,000,000 shares of “blank check” preferred stock with designations, rights, and preferences as may be determined from time-to-time by the Company’s Board of Directors (the “Board”), of which 700,000 shares are currently designated as Series B Preferred Stock (“Series B Preferred”) and 550,000 shares are designated as Series B-1 Preferred Stock (“Series B-1 Preferred”). As of December 31, 2019, a total of 625,375 shares of Series B Preferred and 212,402 shares of Series B-1 Preferred were issued and outstanding, respectively. Both classes of Series B Preferred Stock pay dividends at a rate of 7% per annum if paid by the Company in cash, or 9% if paid by the Company in additional shares of Series B Preferred (“PIK Shares”), the Company may elect to pay accrued dividends on outstanding shares of Series B Preferred in either cash or by the issuance of PIK Shares.

 

The Company does business with some of the largest retailers and wholesalers in the world. Management believes the Series B-1 Preferred favorably impacts the Company’s overall cost of capital in that it is: (i) perpetual and, therefore, an equity instrument that positively impacts the Company’s coverage ratios, (ii) possesses a below market dividend rate relative to similar instruments, (iii) offers the flexibility of a paid-in-kind (“PIK”) payment option, and (iv) is without covenants. After exploring alternative options for redeeming the Series B-1 Preferred, management determined that alternative financing options were significantly more expensive or would negatively impact the Company’s net cash position, which management believes could cause customer concerns and weaken the Company’s ability to attract new business.

 

 

 

NOTE 4.  RELATED PARTY TRANSACTIONS

 

During the six months ended December 31, 2019, the Company continued to be a party to a Service Agreement with Fields Management, Inc. (“FMI”), pursuant to which FMI provides certain executive management services to the Company, including designating Randall K. Fields to perform the functions of President and Chief Executive Officer for the Company. Mr. Fields also serves as the Company’s Chair of the Board and controls FMI. The Company had payables of $0 and $316,539 to FMI at December 31, 2019 and June 30, 2019, respectively, under this Service Agreement. In addition, in July 2017, 20,000 shares of Series B-1 Preferred were paid to FMI in satisfaction of an accrued bonus payable to Mr. Fields.

  

NOTE 5.  RECENT ACCOUNTING PRONOUNCEMENTS

 

In August 2018, the FASB issued ASU 2018-15 – Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. The amendments in this update apply to an entity who is a customer in a hosting arrangement accounted for as a service contract. The update requires a customer in a hosting arrangement to capitalize certain implementation costs. Costs associated with the application development stage of the implementation should be capitalized and costs with the other stages should be expensed. For instance, costs for training and data conversion should be expensed. The capitalized implementation costs should be expensed over the term of the hosting arrangement, which is the noncancelable period plus periods covered by an option to extend if the customer is reasonably certain to exercise the option. Impairment of the capitalized costs should be considered similar to other intangibles. The effective date of this update is effective for annual reporting periods beginning after December 15, 2019 for public entities and after December 15, 2020 for all other entities with early adoption permitted. The Company is a customer in a hosting arrangement and may enter into new arrangements in the future. The Company will apply the guidance for implementation costs of new hosting arrangements once adopted.

  

In August 2018, the FASB issued ASU 2018-13 “Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”. This ASU eliminates, amends, and adds disclosure requirements for fair value measurements. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Although we are still evaluating the impact of this new standard, we do not believe that the adoption will materially impact our Condensed Consolidated Financial Statements and related disclosures.

 

In June 2018, the FASB issued ASU 2018-07 – Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting. The amendments in this update expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Prior to this update, equity-based payments to non-employees was accounted for under Subtopic 505-50 resulting in significant differences between the accounting for share-based payments to non-employees as compared to employees. One of the most significant changes is that non-employee share-based awards (classified as equity awards) may be measured at grant-date fair value and not have to be continually revalued until the service/goods are rendered. The update also indicates that share-based awards related to financing and awards granted to a customer in conjunction with selling goods or services are not included in Topic 718. This standard is effective for interim and annual reporting periods beginning after December 15, 2018 for public entities and December 15, 2019 for all other entities. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company adopted the standard during the first quarter of fiscal year 2020. This standard did not have a material impact on the Company’s condensed consolidated financial statements.

   

In January 2017, the FASB issued ASU 2017-04 “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”, which amends and simplifies the accounting standard for goodwill impairment. The new standard removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount a reporting unit’s carrying value exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit. The new standard is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. We are currently assessing the implication of our adoption as well as the potential impact that the standard will have on our consolidated financial statements.

  

In February 2016, the FASB issued ASU 2016-02 “Leases (Topic 842)”. Under the new guidance, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

 

Effective July 1, 2019, the Company adopted the requirements of Accounting Standards Update No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). All amounts and disclosures set forth in this Quarterly Report on Form 10-Q have been updated to comply with this new standard with results for reporting periods beginning after July 1, 2019 presented under ASU 2016-02, while prior period amounts and disclosures are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

 

NOTE 6.  SUBSEQUENT EVENTS

 

In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events, through the filing date and noted no subsequent events that are reasonably likely to impact the Company’s financial statements.

 

 

 

 

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements. The words or phrases “would be”, “will allow”, “intends to”, “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, or similar expressions are intended to identify “forward-looking statements”. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties, including those risks factors contained in our June 30, 2019 Annual Report on Form 10-K, incorporated by reference herein. Statements made herein are as of the date of the filing of this Quarterly Report on Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

 

Overview

 

Park City Group, Inc. (“We”, “us”, “our” or the “Company”) is a Software-as-a-Service (“SaaS”) provider, and the parent company of ReposiTrak, Inc., a business-to-business (“B2B”) e-commerce, compliance, and supply chain management platform company that partners with retailers, wholesalers, and product suppliers to help them source, vet, and transact with their suppliers in order to accelerate sales, control risks, and improve supply chain efficiencies.

 

The Company’s services are grouped in three application suites: (i) ReposiTrak MarketPlace, encompassing the Company’s supplier discovery and B2B e-commerce solutions, which helps the Company’s customers find new suppliers, (ii) ReposiTrak Compliance and Food Safety solutions, which help the Company’s customers vet suppliers to mitigate the risk of doing business with these suppliers, and (iii) ReposiTrak’s Supply Chain solutions, which help the Company’s customers to more efficiently manage their various transactions with their suppliers.

 

The Company’s supply chain and MarketPlace services provide its customers with greater flexibility in sourcing products by enabling them to choose new suppliers and integrate them into their supply chain faster and more cost effectively, and it helps them to more efficiently manage these relationships, enhancing revenue while lowering working capital, labor costs and waste. The Company’s food safety and compliance solutions help reduce a company’s potential regulatory, legal, and criminal risk from its supply chain partners by providing a way for them to ensure these suppliers are compliant with food safety regulations, such as the Food Safety Modernization Act of 2011 (“FSMA”).

 

The Company’s services are delivered though proprietary software products designed, developed, marketed and supported by the Company. These products are designed to provide transparency and to facilitate improved business processes among all key constituents in the supply chain, starting with the retailer and moving back to suppliers and eventually to raw material providers. The Company provides cloud-based applications and services that address e-commerce, supply chain, food safety and compliance activities. The principal customers for the Company’s products are multi-store food retail store chains and their suppliers, branded food manufacturers, food wholesalers and distributors, and other food service businesses.

 

The Company has a hub and spoke business model. The Company is typically engaged by retailers and wholesalers (“Hubs”), which in turn require their suppliers (“Spokes”) to utilize the Company’s services.

 

The Company is incorporated in the state of Nevada and has three principal subsidiaries: PC Group, Inc., a Utah corporation (98.76% owned); Park City Group, Inc., a Delaware corporation (100% owned); and ReposiTrak, Inc., a Utah corporation (100% owned). All intercompany transactions and balances have been eliminated in the Company’s consolidated financial statements, which contain the operating results of the operations of Park City Group, Inc. (Delaware) and ReposiTrak, Inc. Park City Group, Inc. (Nevada) has no business operations separate from the operations conducted through its subsidiaries.

 

The Company’s principal executive offices are located at 5282 South Commerce Drive, Suite D292, Murray, Utah 84107. Its telephone number is (435) 645-2000. Its website address is www.parkcitygroup.com, and ReposiTrak’s website address is www.repositrak.com.

 

 

 

Recent Developments

 

In July 2019, we deployed InApp Pop Up and Online Chat. These applications provide account managers and sales staff with two additional real time means to facilitate farming of the network to cross sell with new and existing customers.

 

In August 2019, we released our new Out of Stock Management Solution (“OOS”). Eliminating out-of-stocks remains a critical challenge for food retailers as consumers turn to online retailers when their local store is out of a sought-after item. Previously, retailers had no viable solution to address this challenge. Our OOS is the industry’s first solution to address Direct Store Delivery out-of-stocks which enables retailers to retain customers and increase revenues.

 

In September 2019, we released the “Automated Buy Process”. This connection platform allows suppliers to sign up for compliance service, select the appropriate tier, and purchase the monthly Tier 2 subscription in real time. This is anticipated to expedite supplier on boarding and facilitate faster payment.

 

Results of Operations

 

Comparison of the Three Months Ended December 31, 2019 to the Three Months Ended December 31, 2018.

 

Revenue

 

	Fiscal Quarter Ended December 31,		Variance
	2019	2018	Dollars	Percent
Revenue	$4,837,332	$5,565,237	$(727,905)	-13%

 

Revenue was $4,837,332 and $5,565,237 for the three months ended December 31, 2019 and 2018, respectively, a 13% decrease. This decrease was primarily due to a decrease in transactional one-time revenue that occurred in 2018 that did not occur in 2019. The decrease in one-time revenue was partially offset by an increase in professional services and MarketPlace.

 

Although no assurances can be given, we continue to focus our sales efforts on marketing our software services on a recurring subscription basis and placing less emphasis on transactional revenue. However, we believe there will continue to be a certain percentage of customers that will require buying a particular service outright (i.e. a license). We will continue to make our best effort to reduce this non-recurring transactional revenue when unnecessary.

 

Cost of Services and Product Support

 

	Fiscal Quarter Ended December 31,		Variance
	2019	2018	Dollars	Percent
Cost of services and product support	$1,425,309	$1,270,659	$154,650	12%
Percent of total revenue	29%	23%

 

Cost of services and product support was $1,425,309 and $1,270,659 for the three months ended December 31, 2019 and 2018, respectively, a 12% increase. This increase is primarily the result of (i) higher expenses associated to MarketPlace; and (ii) an increase in hardware/software non-capitalized items required for updating our information systems security, maintaining equipment licensing and other database systems.

 

While no assurance can be given, management currently expects cost of services to grow in both absolute terms, and as a percentage of revenue, as the Company continues to invest in MarketPlace.

 

Sales and Marketing Expense

 

	Fiscal Quarter Ended  December 31,		Variance
	2019	2018	Dollars	Percent
Sales and marketing	$1,446,517	$1,139,855	$306,662	27%
Percent of total revenue	30%	20%

 

Sales and marketing expense was $1,446,517 and $1,139,855 for the three months ended December 31, 2019 and 2018, respectively, a 27% increase. This increase in sales and marketing expense is due to an increase in sales compensation.

 

While no assurances can be given, management currently expects sales and marketing expense to be relatively flat in absolute value in subsequent periods, but to fall as a percentage of total revenue as we continue to executive our Success Team strategy.

  

 

 

General and Administrative Expense

 

	Fiscal Quarter Ended  December 31,		Variance
	2019	2018	Dollars	Percent
General and administrative	$1,114,251	$1,326,735	$(212,484)	-16%
Percent of total revenue	23%	24%