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PCYG > SEC Filings for PCYG > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for PARK CITY GROUP INC

Form 10-Q for PARK CITY GROUP INC


8-Nov-2012

Quarterly Report


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

The Company's Annual Report on Form 10-K for the year ended June 30, 2012 is incorporated herein by reference.

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, 2012 Annual Report on Form 10-K, incorporated herein by reference. Statements made herein are as of the date of the filing of this 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. (the "Company") is a Software-as-a-Service ("SaaS") provider that brings unique visibility to the consumer goods supply chain, delivering actionable information that ensures product is on the shelf when the consumer expects it. Our service increases our customers' sales and profitability while making lower inventory levels possible for both retailers and their suppliers.

The Company is incorporated in the state of Nevada. The Company's 98.76% and 100% owned subsidiaries, Park City Group, Inc. and Prescient Applied Intelligence, Inc. ("Prescient"), respectively, are incorporated in the state of Delaware. All intercompany transactions and balances have been eliminated in consolidation.

The Company designs, develops, markets and supports proprietary software products. These products are designed for use in businesses having multiple locations to assist in the management of business operations on a daily basis and communicate results of operations in a timely manner. In addition, the Company has built a consulting practice for business process improvement that centers around the Company's proprietary software products and through establishment of a neutral and "trusted" third party relationship between retailers and suppliers. The principal markets for the Company's products are multi-store retail and convenience store chains, branded food manufacturers, suppliers and distributors, and manufacturing companies, which have operations in North America, Europe, Asia and the Pacific Rim.

The Company has also established a partnership with Levitt Partners, an internationally known health care and food safety-consulting firm, to form ReposiTrak, Inc., formerly Global Supply Chain Systems, Inc. ("ReposiTrak"), which provides a targeted solution for improving supply chain visibility for food and drug safety. The solution, ResposiTrakTM, is powered by the Company's technology and was developed in response to the passage of the Food Safety and Modernization Act in January of 2011. ResposiTrakTM enables grocery, supermarkets, packaged goods manufacturers, food processing facilities, drug stores and drug manufacturers, as well as logistics partners, to track and trace products and components to products throughout the food, drug and dietary supplement supply chains. In the event of a product recall, the solution quickly identifies the supply chain path taken by the recalled product or product component, and allows for the removal of affected products in a matter of minutes, rather than weeks. Additionally, ResposiTrakTM reduces risk of further contamination in the supply chain by identifying backward chaining sources and forward chaining recipients of affected products in near real time. On August 8, 2012, the Company announced that ReposiTrak had begun the first two implementations of ResposiTrakTM at a global grocery retailer and a major grocery wholesaler.

We market our products to businesses primarily on a subscription basis. However, we also deliver our products on a license basis. Our efforts are focused on a direct sales model and indirectly through qualified partners and service providers.

The principal executive offices of the Company are located at 3160 Pinebrook Road, Park City, Utah 84098. The telephone number is (435) 645-2000. The website address is http://www.parkcitygroup.com.

Recent Developments

On September 4, 2012, the Company announced that its Board of Directors had approved a share repurchase program (the "Repurchase Program") of up to $2.0 million of the Company's common stock over the next two years, or such other date, which ever is earlier, when the Repurchase Program is revoked or varied by the Board of Directors. The Repurchase Program does not obligate the Company to acquire any particular number of shares of common stock, and is contingent on the redemption by the Company of its Series A Convertible Preferred Stock. The Repurchase Program may be suspended, modified or discontinued at any time at the Company's discretion without prior notice.

-8-

Results of Operations

Comparison of the Three Months Ended September 30, 2012 to the Three Months
Ended September 30, 2011.

Revenue

                   Fiscal Quarter Ended
                       September 30,                    Variance
                   2012            2011          Dollars        Percent
Subscription    $ 1,954,595     $ 1,742,131     $  212,464          12.2 %
Other revenue       758,232         837,149       (78,917)          -9.4 %
Total revenue   $ 2,712,827     $ 2,579,280     $  133,547           5.2 %

Total revenue was $2,712,827 and $2,579,280 for the three months ended September 30, 2012 and 2011, respectively, a 5.2% increase. This $133,547 increase in total revenue was principally due to an increase of $212,464 in subscription revenue, offset by a decrease of $78,917 in other revenue, as more particularly described below.

Management believes that the Company's strategy of pursuing contracts with suppliers ("spokes") to connect to retail customers ("hubs") that have been added in the most recently completed fiscal year, including the recently announced service agreement with CVS Pharmacy, Inc., should result in increased revenue during the fiscal year ending June 30, 2013, and in subsequent periods. In addition, management believes that revenue in subsequent periods will increase as a result of the receipt of subscription payments from ReposiTrak resulting from the license of the Company's technology from ReposiTrak necessary to power ResposiTrakTM, ReposiTrak's solution to enable grocery, supermarkets, packaged goods manufacturers, food processing facilities, drug stores and drug manufacturers, as well as logistics partners, to track and trace products and components to products throughout the food, drug and dietary supplement supply chains.

Subscription Revenue

Subscription revenue was $1,954,595 and $1,742,131 for the three months ended September 30, 2012 and 2011, respectively, a 12.2% increase in the three months ended September 30, 2012 when compared with the three months ended September 30, 2011. The net increase of $212,464 is principally due to (i) the increase of subscription customers added to the Company's customer base which contributed approximately $322,000 in new subscription revenue and (ii) a $175,000 increase attributable to the growth of existing retailer and supplier subscriptions. The increase in subscription revenue was partially offset by a decrease of approximately $285,000 resulting from the non-renewal of existing clients, including the non-renewal of a significant retail client and related connections in January 2012.

The Company continues to focus its strategic initiatives on increasing the number of retailers, suppliers and manufacturers that use its software on a subscription basis. However, while management believes that marketing its suite of software solutions as a renewable and recurring subscription is an effective strategy, it cannot be assured that subscribers will renew the service at the same level in future years, propagate services to new categories or recognize the need for expanding the service offering of the Company's suite of actionable products and services.

Other Revenue

Other revenue was $758,232 and $837,149 for the three months ended September 30, 2012 and 2011, respectively, a decrease of 9.4% in the three months ended September 30, 2012 compared with the three months ended September 30, 2011. The net decrease of $78,917 is principally due to (i) the non-renewal of maintenance contracts, partially offset by increasing existing contracts resulting in a net reduction of maintenance revenue of approximately $35,000; (ii) a decrease in license revenue of $109,000; and (iii) a decrease in professional service revenue of $108,000. These decreases were partially offset by an increase in other revenue related to a management agreement with ReposiTrak.

While these other sources of revenue will continue in future periods, management's focus on recurring subscription-based revenue will cause license, maintenance, and consulting services to fluctuate and be difficult to predict.

-9-

Cost of Services and Product Support

                                              Fiscal Quarter Ended
                                                  September 30,                    Variance
                                              2012            2011          Dollars        Percent
Cost of services and product support       $ 1,080,484     $ 1,140,261     $ (59,777)           -5.2 %
Percent of total revenue                          39.8 %          44.2 %

Cost of services and product support was $1,080,484 and $1,140,261 for the three months ended September 30, 2012 and 2011, respectively, a 5.2% decrease in the three months ended September 30, 2012 compared with the three months ended September 30, 2011. This decrease of $59,777 for the quarter ended September 30, 2012 when compared with the same period ended September 30, 2011 is principally due to a $80,000 decrease in salary, employee benefits, stock-based compensation, and other head count related expenses. This decrease was partially offset by increases related to (i) data center expansion of $12,000, (ii) and increase of $8,000 for hardware and software maintenance and support contracts, contractors for system upgrade and travel and related expenditures.

Sales and Marketing Expense

                             Fiscal Quarter Ended
                                 September 30,                  Variance
                              2012           2011         Dollars       Percent
Sales and marketing        $   580,356     $ 661,748     $ (81,392)        -12.3 %
Percent of total revenue          21.4 %        25.7 %

Sales and marketing expense was $580,356 and $661,748 for the three months ended September 30, 2012 and 2011, respectively, a 12.3% decrease. This $81,392 decrease over the comparable quarter was primarily the result of (i) a decrease of approximately $125,000 in salary, employee benefits and training, stock-based compensation, and commission expense, (ii) a decrease of $15,000 in the use of outside sales contractors, and (ii) a decrease of $13,000 in public relations, advertising, marketing and tradeshow expense, and travel related expenditures. These decreases were partially offset by an increase of approximately $71,000 in non-employee commissions primarily related to retailer marketing allowances.

General and Administrative Expense

                               Fiscal Quarter Ended
                                   September 30,                   Variance
                                2012           2011          Dollars       Percent
General and administrative   $   574,094     $ 759,537     $ (185,443)        -24.4 %
Percent of total revenue            21.2 %        29.4 %

General and administrative expense was $574,094 and $759,537 for the three months ended September 30, 2012 and 2011, respectively, a 24.4% decrease in the three months ended September 30, 2012 compared with the three months ended September 30, 2011. This $185,443 decrease when comparing expenditures for the quarter ended September 30, 2012 with the same period ended September 30, 2011 is principally due (i) a decrease of approximately $107,000 in investor relations, shareholder costs, and other professional fees, (ii) a decrease of $43,000 in bad debt expense, (iii) a decrease of $24,000 in facility related costs, (iv) a decrease of $11,000 resulting from lower estimated tax payment in the current year, (v) a $10,000 decrease in head count related expense, and (vi) a $10,000 decrease in travel and related expenditures. These decreases were partially offset by a $20,000 increase in insurance costs related to a workers compensation refund in the prior year and an increase in life insurance costs related to renewal of a key man policy.

Depreciation and Amortization Expense

                                  Fiscal Quarter Ended
                                      September 30,                  Variance
                                   2012           2011        Dollars       Percent
Depreciation and amortization   $   230,068     $ 223,965     $  6,103           2.7 %
Percent of total revenue                8.5 %         8.7 %

Depreciation and amortization expense was $230,068 and $223,965 for the three months ended September 30, 2012 and 2011, respectively, an increase of 2.7% in the three months ended September 30, 2012 compared with the three months ended September 30, 2011. This increase of $6,103 for the quarter ended September 30, 2012 when compared to the quarter ended September 30, 2011 is due to an increase in depreciation expense related to new equipment.

-10-

Other Income and Expense

                             Fiscal Quarter Ended
                                 September 30,                  Variance
                              2012           2011         Dollars       Percent
Interest expense           $ (43,433)     $ (73,490)     $ (30,057)        -40.9 %
Percent of total revenue          1.6 %          2.8 %

Interest expense was $43,433 and $73,490 for the three months ended September 30, 2012 and 2011, respectively, a decrease of 40.9% in the three months ended September 30, 2012 compared with the three months ended September 30, 2011. This decrease of $30,057 for the quarter ended September 30, 2012 when compared to the quarter ended September 30, 2011 is due to reduced principal balances in the current year.

Preferred Dividends

                             Fiscal Quarter Ended
                                 September 30,                  Variance
                              2012           2011        Dollars       Percent
Preferred dividends        $   209,980     $ 208,353     $  1,627           0.8 %
Percent of total revenue           7.7 %         8.1 %

Dividends accrued on the Company's Series A Preferred and Series B Preferred was $209,980 and $208,353 for the three months ended September 30, 2012 and 2011, respectively. Holders of Series A Preferred are entitled to a 5.00% annual dividend payable quarterly in either cash or additional Series A Preferred at the option of the Company with fractional shares paid in cash. Holders of Series B Preferred are entitled to a 12.00% annual dividend payable quarterly in cash.

The dividend rate with respect the Series A Preferred increases to 10% per annum in the event the average closing price of the Company's common stock during the last thirty (30) trading days of any calendar quarter is less than $3.00 per share (a "Dividend Adjustment"). A holder of Series A Preferred has notified the Company that a Dividend Adjustment is required as a result of the average closing price of the Company's common stock for the thirty-day period ended March 31, 2012. Management disagrees with the method of calculation used by the holder and believes that the Company's calculation determining that a Dividend Adjustment is not required is reasonable, and that an ultimate determination that an alternative method should be employed is doubtful. The pro-forma effect of a Dividend Adjustment is shown in the table below:

                                               Fiscal Quarter Ended
                                                September 30, 2012                  Variance
                                            As Reported     Pro-forma        Dollars         Percent
Dividends on Series A Preferred               $   86,402     $  177,095     $    90,693           105 %
Net loss applicable to common shareholders    $  (5,588)     $ (96,281)     $  (90,693)        -1,623 %
Basic and diluted loss per share              $   (0.00)     $   (0.01)     $    (0.01)        -1,623 %

Financial Position, Liquidity and Capital Resources

We believe our existing cash and short-term investments, together with funds generated from operating activities, will be sufficient to fund operating and investment requirements for at least the next twelve months, in addition to our debt service requirements. Our future capital requirements will depend on many factors, including our rate of revenue growth and expansion of our sales and marketing activities, the timing and extent of spending required for research and development efforts, the continuing market acceptance of our products, and our ability to restructure certain of our notes payable. Although the Company anticipates that available cash resources will be sufficient to meet its working capital and debt service requirements, no assurances can be given. To the extent that available funds are insufficient to fund our future activities, or satisfy our short-term debt service requirements, or in the event we are unable to restructure certain notes payable, we may need to raise additional funds through public or private equity or debt financings. Additional equity or debt financing may not be available on terms favorable to us, in a timely fashion or at all.

We have historically funded our operations with cash from operating activities, equity financings and debt borrowings. As set forth below, cash was $1,088,387 and $996,344 at September 30, 2012, and September 30, 2011, respectively. This increase from September 30, 2012 to September 30, 2011 was principally the result of reduced debt payments in the current year. A significant amount of outstanding debt was retired in the September 30, 2011 period.

-11-

As of September 30, Variance 2012 2011 Dollars Percent Cash $ 1,088,387 $ 996,344 $ 92,043 9.2 %

Net Cash Flows from Operating Activities

                                           Three Months Ended
                                             September 30,                  Variance
                                          2012           2011         Dollars      Percent
Cash provided by operating activities   $ 270,545     $ (56,058)     $ 326,603        582.6 %



 Net cash provided by operating activities is summarized as follows:

                                                      Three Months Ended
                                                         September 30,
                                                     2012            2011
Net income (loss)                                 $   204,392     $ (279,721)
Noncash expense and income, net                       465,290         519,328
Net changes in operating assets and liabilities     (399,137)       (295,665)
                                                  $   270,545     $  (56,058)

Noncash expense decreased by $54,038 in the three months ended September 30, 2012 compared to September 30, 2011. Noncash expense decreased as a result of a $17,545 decrease in the use of stock based compensation and the $42,597 of bad debt expense. These decreases were partially offset by an increase in depreciation.

The net changes in operating assets and liabilities resulted in the use of $103,472 more cash in the three months ended September 30, 2012 compared to the same period in 2011.

Net Cash Flows from Investing Activities

Three Months Ended
September 30, Variance
2012 2011 Dollars Percent
Cash used in investing activities $ (48,826 ) $ (20,072) $ (28,754) 143.3 %

Net cash used in investing activities for the three months ended September 30, 2012 was $48,826 compared to net cash used in investing activities of $20,072 for the three months ended September, 2011. This $28,754 increase in cash used in investing activities for the three months ended September 30, 2012 when compared to the same period in 2011 was the result of increased purchases of property and equipment.

Net Cash Flows from Financing Activities

Three Months Ended
September 30, Variance
2012 2011 Dollars Percent
Cash used in financing activities $ (239,508) $ (1,545,755) $ 1,306,247 84.5 %

Net cash used in financing activities totaled $239,508 for the three months ended September 30, 2012 as compared to cash flows used in financing activities of $1,545,755 for the three months ended September 30, 2011. The change in net cash used in financing activities is attributable to (i) $1,484,000 decrease in cash used for payments on notes payable and capital leases; (ii) a $13,000 decrease in proceeds from the issuance of common stock for cash and exercise of options and warrants, (iii) a $41,000 decrease in proceeds from the issuance of notes payable and (iv) a $124,000 increase in cash used to pay dividends.

Working Capital

At September 30, 2012, the Company had negative working capital of $1,919,099 when compared with negative working capital of $2,345,977 at June 30, 2012. This $426,878 increase in working capital is principally due to a decrease in accounts payable, accrued liabilities and deferred revenue. While no assurances can be given, management currently believes that the Company will continue to increase its working capital position, and thereby reduce its indebtedness in subsequent periods utilizing existing cash resources and projected cash flow from operations.

-12-

                      As of             As of
                  September 30,       June 30,              Variance
                      2012              2012         Dollars       Percent

Current assets $ 3,547,656 $ 3,568,561 $ 20,905 0.6 %

Current assets as of September 30, 2012 totaled $3,547,656, a decrease of $20,905 when compared to $3,568,561 as of June 30, 2012. This 0.6% decrease in current assets is due primarily to normal fluctuations in operating assets.

                           As of             As of
                       September 30,       June 30,               Variance
                           2012              2012          Dollars        Percent

Current liabilities $ 5,466,755 $ 5,914,538 $ (447,783 ) -7.6 %

Current liabilities totaled $5,466,755 as of September 30, 2012 as compared to $5,914,538 as of June 30, 2012. The $447,783 comparative decrease in current liabilities is principally due to decreases in the current portion of notes and capital leases of $6,000, deferred revenue of $162,000, accounts payable of $87,000, and accrued liabilities of $193,000.

While no assurances can be given, management currently intends to continue to reduce its indebtedness in subsequent periods utilizing existing cash resources and projected cash flow from operations. In addition, management may also continue to refinance or restructure certain of the Company's indebtedness to extend the maturities of such indebtedness to address its short-term and long-term working capital requirements. Management believes that these initiatives will enable us to address our debt service requirements during the next twelve months, as well as fund our currently anticipated operations and capital spending requirements.

Off-Balance Sheet Arrangements

The Company does not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operation, liquidity or capital expenditures.

Recent Accounting Pronouncements

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities, an update to the authoritative guidance which requires disclosure information about offsetting and related arrangements for financial instruments and derivative instruments. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2014. The adoption of this updated authoritative guidance is not expected to have a significant impact on the Company's Condensed Consolidated Financial Statements.

December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220):
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05; an update to the authoritative guidance which defers the effective date of the presentation of reclassification adjustments out of accumulated other comprehensive income. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2013. The adoption of this updated authoritative guidance is not expected to have a significant impact on the Company's Condensed Consolidated Financial Statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"), which permits an entity to make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit's indefinite-lived intangible asset is less than the asset's carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that the fair value of a reporting unit's indefinite-lived intangible asset is more likely than not greater than the asset's carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. ASU 2012-02 is effective for the Company for annual and interim indefinite-lived intangible asset impairment . . .

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