PARK CITY GROUP INC - FORM 10-Q

Attached files

file	filename
EX-32.2 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, - PARK CITY GROUP INC	ex32-2.htm
EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, - PARK CITY GROUP INC	ex32-1.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARB - PARK CITY GROUP INC	ex31-2.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARB - PARK CITY GROUP INC	ex31-1.htm

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 March 31, 2017

☐	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.)

299 South Main Street, Suite 2225 Salt Lake City, UT 84111

(Address of principal executive offices)

(435) 645-2000

(Registrant's telephone number)

Indicate by check market 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		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 checkmark if whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Common Stock, $0.01 par value, 19,412,911 shares as of May 10, 2017.

PARK CITY GROUP, INC.

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Condensed Balance Sheets as of March 31, 2017 (Unaudited) and June 30, 2016	1

	Consolidated Condensed Statements of Operations for the Three and Nine Months Ended March 31, 2017 and 2016 (Unaudited)	2

	Consolidated Condensed Statements of Comprehensive Income for the Three and Nine Months Ended March 31, 2017 and 2016 (Unaudited)	3

	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended March 31, 2017 and 2016 (Unaudited)	4

	Notes to Consolidated Condensed Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4.	Controls and Procedures	16

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	17

Item 1A.	Risk Factors	17

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17

Item 3.	Defaults Upon Senior Securities	17

Item 5.	Other Information	17

Item 6.	Exhibits	17

Signature		18

Exhibit 31	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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PARK CITY GROUP, INC.

Consolidated Condensed Balance Sheets

Assets	March 31, 2017			June 30. 2016
Current Assets:	(unaudited)
Cash and cash equivalents	$	13,542,542		$	11,443,388
Receivables, net of allowance of $278,129 and $75,000 at March 31, 2017 and June 30, 2016, respectively		3,262,096			3,048,774
Prepaid expense and other current assets		525,324			393,275

Total current assets		17,329,962			14,885,437

Property and equipment, net		599,862			469,383

Other assets:
Long-term receivables, deposits, and other assets		2,104,373			514,060
Investments		474,734			471,584
Customer relationships		1,084,050			1,182,600
Goodwill		20,883,886			20,883,886
Capitalized software costs, net		152,451			182,942

Total other assets		24,699,494			23,235,072

Total assets	$	42,629,318		$	38,589,892

Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable	$	749,813		$	580,309
Accrued liabilities		1,517,666			1,502,203
Deferred revenue		2,158,518			2,717,094
Lines of credit		2,630,432			2,500,000
Current portion of notes payable		182,712			239,199

Total current liabilities		7,239,141			7,538,805

Long-term liabilities:
Notes payable, less current portion		560,546			491,253
Other long-term liabilities		44,110			57,275

Total liabilities		7,843,797			8,087,333

Commitments and contingencies		-			-

Stockholders' equity:
Series B Preferred stock, $0.01 par value, 700,000 shares authorized;625,375 shares issued and outstanding at March 31, 2017 and June 30, 2016		6,254			6,254
Series B-1 Preferred stock, $0.01 par value, 300,000 shares authorized; 265,920 and 180,213 shares issued and outstanding at March 31, 2017 and June 30, 2016, respectively		2,659			1,802
Common stock, $0.01 par value, 50,000,000 shares authorized; 19,412,911 and 19,229,313 issued and outstanding at March 31, 2017 and June 30, 2016, respectively		194,132			192,296
Additional paid-in capital		75,242,946			73,272,620
Accumulated deficit		(40,660,470	)		(42,970,413	)

Total stockholders’ equity		34,785,521			30,502,559

Total liabilities and stockholders’ equity	$	42,629,318		$	38,589,892

See accompanying notes to consolidated condensed financial statements.

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PARK CITY GROUP, INC.

Consolidated Condensed Statements of Operations (unaudited)

	Three Months Ended March 31,						Nine Months Ended March 31,
	2017			2016			2017			2016

Revenues	$	4,748,652		$	3,580,329		$	13,750,786		$	10,215,752

Operating expenses:
Cost of services and product support		1,342,772			1,050,074			3,736,691			3,223,548
Sales and marketing		1,350,726			1,264,036			3,702,975			4,107,676
General and administrative		1,006,605			807,542			2,967,842			2,317,316
Depreciation and amortization		106,899			125,939			336,340			382,453

Total operating expenses		3,807,002			3,247,591			10,743,848			10,030,993

Income from operations		941,650			332,738			3,006,938			184,759

Other expense:
Interest (expense) income		(4,729	)		(10,986	)		(18,052	)		10,328
Loss on disposition of investment		-			(26,684	)		-			(26,128	)

Income before income taxes		936,921			295,068			2,988,886			168,959

(Provision) for income taxes:		(35,471	)		-			(94,655	)		-
Net income		901,450			295,068			2,894,231			168,959

Dividends on preferred stock		(202,036	)		(176,588	)		(584,288	)		(546,536	)

Net income (loss) applicable to common shareholders	$	699,414		$	118,480		$	2,309,943		$	(377,577	)

Weighted average shares, basic		19,390,000			19,196,000			19,331,000			19,128,000
Weighted average shares, diluted		20,353,000			19,963,000			20,251,000			19,128,000
Basic income (loss) per share	$	0.04		$	0.01		$	0.12		$	(0.02	)
Diluted income (loss) per share	$	0.03		$	0.01		$	0.11		$	(0.02	)

See accompanying notes to consolidated condensed financial statements.

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PARK CITY GROUP, INC.

Consolidated Condensed Statements of Comprehensive Income (unaudited)

	Three Months Ended March 31,					Nine Months Ended March 31,
	2017		2016			2017		2016

Net income (loss) applicable to common shareholders	$	699,414	$	118,480		$	2,309,943	$	(377,577	)
Other Comprehensive Income (Loss):
Unrealized loss on marketable securities		-		(26,684	)		-		(26,128	)
Reclassification adjustment		-		26,684			-		26,128
Net loss on marketable securities				-					-
Comprehensive income (loss)	$	699,414	$	118,480		$	2,309,943	$	(377,577	)

See accompanying notes to consolidated condensed financial statements.

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PARK CITY GROUP, INC.-

Consolidated Condensed Statements of Cash Flows (Unaudited)

	Nine Months Ended March 31,
	2017			2016
Cash Flows from Operating Activities:
Net income	$	2,894,231		$	168,959
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		336,340			382,453
Bad debt expense		230,700			43,140
Stock compensation expense		961,589			775,202
Loss on short-term marketable securities		-			26,128
(Increase) decrease in:
Trade receivables		(444,022	)		(1,232,910	)
Long-term receivables, prepaids and other assets		(1,722,362	)		49,387
(Decrease) increase in:
Accounts payable		169,504			(170,736	)
Accrued liabilities		92,281			(59,270	)
Deferred revenue		(558,576	)		219,924

Net cash provided by operating activities		1,959,685			202,277

Cash Flows From Investing Activities:
Purchase of marketable securities		-			(4,636,036	)
Sale of marketable securities		-			4,612,908

Capitalization of software costs		-			(109,895	)
Purchase of property and equipment		(337,777	)		(31,987	)
Purchase of long-term investments		(3,150	)		(471,584	)

Net cash used in investing activities		(340,927	)		(639,594	)

Cash Flows From Financing Activities:
Proceeds from employee stock plans		223,465			199,848
Proceeds from issuance of note payable		207,345			396,000
Net increase in lines of credit		130,432
Proceeds from exercise of warrants		121,625			33,002
Dividends paid		(7,932	)		(7,932	)
Payments on notes payable and capital leases		(194,539	)		(176,153	)

Net cash provided by financing activities		480,396			444,765

Net increase in cash and cash equivalents		2,099,154			7,448

Cash and cash equivalents at beginning of period		11,443,388			11,325,572

Cash and cash equivalents at end of period	$	13,542,542		$	11,333,020

Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes	$	64,655		$	-
Cash paid for interest	$	31,004		$	16,761

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Common stock to pay accrued liabilities	$	770,858		$	1,522,281
Preferred stock to pay accrued liabilities	$	300,000		$	300,000
Dividends accrued on preferred stock	$	584,288		$	546,536
Dividends paid with preferred stock	$	557,071		$	486,190

See accompanying notes to consolidated condensed financial statements.

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PARK CITY GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. DESCRIPTION OF BUSINESS

The Company is incorporated in the state of Nevada. The Company has three 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) (“ReposiTrak”). 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 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 improvement that centers on the Company’s proprietary software products. 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. As a result of the acquisition of ReposiTrak in June 2015, the Company also provides food, pharmaceutical, and dietary supplement retailers and suppliers with a robust cloud-based solution to help protect their brands and remain in compliance with business records and regulatory requirements, such as the Food Safety Modernization Act (“FSMA”) and the Drug Quality and Security Act (“DQSA”).

Our services are delivered through proprietary software products designed, developed, marketed and supported by the Company. These products are designed to facilitate improved business processes among all key constituents in the supply chain, starting with the retailer and moving back to suppliers and eventually raw material providers. In addition, the Company has also built a consulting practice for business improvement that centers on the Company’s proprietary software products and through establishment of a neutral and “trusted” third party relationship between retailers and suppliers.

Basis of Financial Statement Presentation

The interim financial information of the Company as of March 31, 2017 and for the three and nine months ended March 31, 2017 and 2016 is unaudited, and the balance sheet as of June 30, 2016 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 Note 2 to the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended June 30, 2016. 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 nine months ended March 31, 2017 are not necessarily indicative of the results that can be expected for the fiscal year ending June 30, 2017. 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, 2016.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The financial statements presented herein reflect the consolidated financial position of Park City Group, Inc. and 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 as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company’s most critical accounting policies include: income taxes, goodwill and other long-lived asset valuations, revenue recognition, stock-based compensation, and capitalization of software development costs.

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Earnings Per Share

Basic net income or loss per common share (“Basic EPS”) excludes dilution and is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted net income or loss per common share (“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 anti-dilutive effect on net income (loss) per common share.

For the nine months ended March 31, 2016, warrants to purchase approximately 1,417,000 shares of common stock, were not included in the computation of diluted EPS due to the anti-dilutive effect. Such warrants were outstanding at prices ranging from $3.50 to $10.00 per share.

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

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2017		2016		2017		2016
Numerator
Net income (loss) applicable to common shareholders	$	699,414	$	118,480	$	2,309,943	$	(377,577	)

Denominator
Weighted average common shares outstanding, basic		19,390,000		19,196,000		19,331,000		19,128,000
Warrants to purchase common stock		963,000		767,000		920,000		-

Weighted average common shares outstanding, diluted		20,353,000		19,963,000		20,251,000		19,128,000


Net income (loss) per share
Basic	$	0.04	$	0.01	$	0.12	$	(0.02	)
Diluted	$	0.03	$	0.01	$	0.11	$	(0.02	)

Reclassifications

Certain prior-year amounts have been reclassified to conform with the current year's presentation.

NOTE 3. EQUITY

During the nine months ended March 31, 2017, the Company issued 36,624 shares to its directors and 112,224 shares to employees and consultants under the Company’s stock compensation plans, 115,596 of which are included in the rollforward of Restricted Stock units below.

Restricted Stock Units

	Restricted Stock Units			Weighted Average Grant Date Fair Value ($/share)

Outstanding at June 30, 2016		1,051,144			5.82
Granted		72,387			10.67
Vested and issued		(115,596	)		6.28
Forfeited		(26,560	)		10.23
Outstanding at March 31, 2017		981,375			6.00

As of March 31, 2017, there was approximately $5.9 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 4.82 years.

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Warrants

The following tables summarize information about warrants outstanding and exercisable at March 31, 2017:

		Warrants						Warrants
		Outstanding						Exercisable
		at March 31, 2017						at March 31, 2017
Range of exercise prices Warrants		Number outstanding at March 31, 2017		Weighted average remaining contractual life (years)		Weighted average exercise price		Number exercisable at March 31, 2017		Weighted average exercise price
$	3.5-4.00		1,281,518		2.56	$	3.93		1,281,518	$	3.93
$	6.45-10.00		100,481		1.74	$	7.29		100,481	$	7.29
			1,381,999		2.50	$	4.18		1,381,999	$	4.18

Preferred Stock

The Company’s certificate of incorporation currently authorizes 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, of which 700,000 shares are currently designated as Series B Preferred Stock (“Series B Preferred”) and 300,000 shares are designated as Series B-1 Preferred Stock (“Series B-1 Preferred”). Both classes of Series B Preferred Stock, which are treated as permanent pieces of our capital structure due to the fact that they are nonredeemable and nonconvertible, 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-1 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.

During the nine months ended March 31, 2017, the Company issued 55,707 PIK Shares for accrued dividends payable with respect to the Series B Preferred, and 30,000 shares of Series B-1 Preferred in satisfaction of an accrued bonus payable to the Company's CEO.

NOTE 4. RELATED PARTY TRANSACTIONS

During the nine months ended March 31, 2017, the Company continued to be a party to a Service Agreement with Fields Management, Inc. (“FMI”), pursuant to which FMI provided 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 Chairman of the Board of Directors and controls FMI. The Company had payables of $49,153 and $32,253 to FMI at March 31, 2017 and June 30, 2016, respectively, under this agreement. In addition, during the nine months ended March 31, 2017, 30,000 shares of Series B-1 Preferred were paid to FMI in satisfaction of an accrued bonus payable to Mr. Fields.

During the nine months ended March 31, 2017, the Company also issued 55,707 PIK Shares for accrued dividends payable with respect to the Series B Preferred, of which 6,412 were issued to Robert W. Allen, a director of the Company, and 49,295 were issued to Riverview Financial Corp., an entity beneficially owned by Mr. Fields. In addition, $7,932 was paid to Julie Fields, Mr. Fields spouse, as a dividend paid with respect to the Series B Preferred beneficially owned by Ms. Fields.

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NOTE 5. RECENT ACCOUNTING PRONOUNCEMENTS

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The amendment in this Update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. An entity should apply the amendments in this Update on a prospective basis In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The amendment in this Update simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. An entity should apply the amendments in this Update on a prospective basis. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. Historically, there has been a diversity in practice in how certain cash receipts/payments are presented and classified in the statement of cash flows under Topic 230. To reduce the existing diversity in practice, this update addresses multiple cash flow issues. The amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company notes that this guidance applies to its reporting requirements and will implement the new guidance accordingly.

In May 2014, August 2015, April 2016 and May 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 (ASC Topic 606), Revenue from Contracts with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with Customers, Deferral of the Effective Date, ASU 2016-10 (ASC Topic 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing , and ASU 2016-12 (ASC Topic 606) Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, respectively. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company is in the process of assessing the impact, if any, on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09 (ASC Topic 718), Stock Compensation—Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU are intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax consequences, classification on the consolidated statement of cash flows and treatment of forfeitures. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 (ASC Topic 842), Leases. The ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is in the process of assessing the impact on its consolidated financial statements.

NOTE 6. SUBSEQUENT EVENTS

In April 2017, the Company organized a new 100% owned subsidiary, Shared Equip, LLC (“SEQ”). This entity was used to purchase equipment valued at approximately $1.6 million. The equipment will be used for internal use as well as leased out to unrelated 3rd parties.

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

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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, 2016 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. The Company’s technology helps companies to synchronize their systems with those of their trading partners to make more informed business decisions. We provide companies 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 we help them to more efficiently manage these relationships to “stock less and sell more”, enhancing revenue while lowering working capital, labor costs and waste. Through our subsidiary, ReposiTrak, we also 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 and drug safety regulations, such as the Food Safety Modernization Act (“FSMA”) and the Drug Quality and Security Act (“DQSA”).

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 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. We provide cloud-based applications and services that address e-commerce, supply chain, 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. We are typically engaged by retailers and distributors (“Hubs”), which in turn have us engage their suppliers (“Spokes”) to sign up for our services. The bulk of the Company’s revenue is from recurring subscription payments typically based on a monthly volume metric between the Hub and the Spoke. We also have a professional services business, which conducts customization, implementation, and training, for which revenue is recognized on a percentage-of-completion or pro rata over the life of the subscription, depending on the nature of the engagement. In a few instances the Company will also sell its software in the form of a license.

The Company is incorporated in the state of Nevada. The Company has three 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 consolidation.

Our principal executive offices of the Company are located at 299 South Main Street, Suite 2225, Salt Lake City, Utah 84111. Our telephone number is (435) 645-2000. Our website address is http://www.parkcitygroup.com, and ReposiTrak’s website address is http://repositrak.com.

Results of Operations

Comparison of the Three Months Ended March 31, 2017 to the Three Months Ended March 31, 2016.

Revenue

	Fiscal Quarter Ended March 31,				Variance
	2017		2016		Dollars		Percent
Revenues	$	4,748,652	$	3,580,329	$	1,168,323		33	%

Revenue was $4,748,652 and $3,580,329 for the three months ended March 31, 2017 and 2016, respectively, a 33% increase. This increase was due primarily to an increase in revenue attributable, in part, to new applications including ReposiTrak, our Vendor Portal, and related services and subscriptions. Increases in the number of new customers, both retailers and wholesalers and their suppliers, and an acceleration of the rate at which the Company was able to convert these suppliers into connections as a result of improved processes and execution also contributed to this increase.

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Cost of Services and Product Support

	Fiscal Quarter Ended March 31,						Variance
	2017			2016			Dollars		Percent
Cost of services and product support	$	1,342,772		$	1,050,074		$	292,698		28	%
Percent of total revenue		28	%		29	%

Cost of services and product support was $1,342,772 and $1,050,074 for the three months ended March 31, 2017 and 2016, respectively, a 28% increase. This increase is primarily attributable to an increase in employee headcount and employee related expense, capitalization of software development costs in the prior year, costs related to a new product, and a small increase in infrastructure costs.

Sales and Marketing Expense

	Fiscal Quarter Ended March 31,						Variance
	2017			2016			Dollars		Percent
Sales and marketing	$	1,350,726		$	1,264,036		$	86,690		7	%
Percent of total revenue		28	%		35	%

Sales and marketing expense was $1,350,726 and $1,264,036 for the three months ended March 31, 2017 and 2016, respectively, a 7% increase. This increase in sales and marketing expense is mainly due to an increase in head count and employee related expenses and an increase in travel expenses. These were partially offset by a small decrease in advertising and other promotional expenses.

General and Administrative Expense

	Fiscal Quarter Ended March 31,						Variance
	2017			2016			Dollars		Percent
General and administrative	$	1,006,605		$	807,542		$	199,063		25	%
Percent of total revenue		21	%		23	%

General and administrative expense was $1,006,605 and $807,542 for the three months ended March 31, 2017 and 2016, respectively, a 25% increase in the three months ended March 31, 2017 compared with the three months ended March 31, 2016. This increase is primarily attributable to (i) an increase in compensation related expenses, (ii) an increase to bad debt expense, (iii) an increase in public relations and professional fees and (iv) an increase in facility expense related to the relocation of the Company’s corporate office. The increase was offset by a decrease in travel expense.

Depreciation and Amortization Expense

	Fiscal Quarter Ended March 31,						Variance
	2017			2016			Dollars			Percent
Depreciation and amortization	$	106,899		$	125,939		$	(19,040	)		-15	%
Percent of total revenue		2	%		4	%

Depreciation and amortization expense was $106,899 and $125,939 for the three months ended March 31, 2017 and 2016, respectively, a decrease of 15%. This decrease is primarily due to the full amortization of many assets, partially offset by amortization of capitalized software costs.

Other Income and Expense

	Fiscal Quarter Ended March 31,						Variance
	2017			2016			Dollars			Percent
Net other expense	$	4,729		$	37,670		$	(32,941	)		-87	%
Percent of total revenue		NM	%		1	%

Net other expense was $4,729 for the three months ended March 31, 2017 compared to net other expense of $37,670 for the three months ended March 31, 2016. This decrease in other expense was due to a loss on disposition of investments in the prior year.

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Preferred Dividends

	Fiscal Quarter Ended March 31,						Variance
	2017			2016			Dollars		Percent
Preferred dividends	$	202,036		$	176,588		$	25,448		14	%
Percent of total revenue		4	%		5	%

Dividends accrued on the Company’s Series B Preferred and Series B-1 Preferred was $202,036 for the three months ended March 31, 2017, compared to dividends accrued on the Series B Preferred of $176,588 for the year ended March 31, 2016. This increase is due to the payment of PIK Shares.

Comparison of the Nine Months Ended March 31, 2017 to the Nine Months Ended March 31, 2016.

Revenue

	Nine Months Ended March 31,				Variance
	2017		2016		Dollars		Percent
Revenue	$	13,750,786	$	10,215,752	$	3,535,034		35	%

Revenue was $13,750,786 and $10,215,752 for the nine months ended March 31, 2017 and 2016, respectively, a 35% increase. This $3,535,034 period over period increase in revenue is primarily due to an increase in revenue attributable, in part, to new applications including ReposiTrak, our Vendor Portal, and related services and subscriptions. Increases in the number of new customers, both retailers and wholesalers and their suppliers, and an acceleration of the rate at which the Company was able to convert these suppliers into connections as a result of improved processes and execution, also contributed to this increase.

Cost of Services and Product Support

	Nine Months Ended March 31,						Variance
	2017			2016			Dollars		Percent
Cost of services and product support	$	3,736,691		$	3,223,548		$	513,143		16	%
Percent of total revenue		27	%		32	%

Cost of services and product support was $3,736,691 and $3,223,548 for the nine months ended March 31, 2017 and 2016, respectively, a 16% increase compared with the nine months ended March 31, 2016. This period over period increase is principally due to an increase in employee related expense, an increase related to the capitalization of software development costs in the prior year, and an increase in infrastructure costs.

Sales and Marketing Expense

	Nine Months Ended March 31,						Variance
	2017			2016			Dollars			Percent
Sales and marketing	$	3,702,975		$	4,107,676		$	(404,701	)		-10	%
Percent of total revenue		27	%		40	%

Sales and marketing expense was $3,702,975 and $4,107,676 for the nine months ended March 31, 2017 and 2016, respectively, a 10% decrease. This period over period decrease is due to a decrease in employee related expense, a decrease in marketing and promotional expense and a reduction in travel related expense.

General and Administrative Expense

	Nine Months Ended March 31,						Variance
	2017			2016			Dollars		Percent
General and administrative	$	2,967,842		$	2,317,316		$	650,556		28	%
Percent of total revenue		22	%		23	%

General and administrative expense was $2,967,842 and $2,317,316 for the nine months ended March 31, 2017 and 2016, respectively, a 28% increase. This increase is principally due to an increase in headcount costs, an increase in bad debt expense, and an increase to other facility related costs.

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Depreciation and Amortization Expense

	Nine Months Ended March 31,						Variance
	2017			2016			Dollars			Percent
Depreciation and amortization	$	336,340		$	382,453		$	(46,113	)		-12	%
Percent of total revenue		2	%		4	%

Depreciation and amortization expense was $336,340 and $382,453 for the nine months ended March 31, 2017 and 2016, respectively, a decrease of 12%. This comparative decrease is related to the full amortization of many assets partially offset by amortization of capitalized software development costs.

Other Income and Expense

	Nine Months Ended March 31,						Variance
	2017			2016			Dollars		Percent
Net other expense	$	18,052		$	15,800		$	2,252		14	%
Percent of total revenue		NM	%		NM	%

Net other expense was $18,052 for the nine months ended March 31, 2017 an increase in net other expense of $2,252 when compared to net other expense of $15,800 for the nine months ended March 31, 2016. This increase in other expense is due to interest income on investments during the prior year.

Preferred Dividends

	Nine Months Ended March 31,						Variance
	2017			2016			Dollars		Percent
Preferred dividends	$	584,288		$	546,536		$	37,752		7	%
Percent of total revenue		4	%		5	%

Dividends accrued on the Company’s Series B Preferred was $584,288 for the nine months ended March 31, 2017, compared to dividends accrued on the Company’s Series B Preferred and Series B-1 Preferred of $546,536 for the nine months ended March 31, 2015. This increase is due to the payment of PIK dividends.

Financial Position, Liquidity and Capital Resources

We believe our existing cash and short-term investments, together with funds generated from operations, are sufficient to fund operating and investment requirements for at least the next twelve months. 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 and the continuing market acceptance of our products.

	As of March 31,				Variance
	2017		2016		Dollars		Percent
Cash and cash equivalents	$	13,542,542	$	11,333,020	$	2,209,522		19	%

We have historically funded our operations with cash from operations, equity financings and debt borrowings. Cash was $13,542,542 and $11,333,020 at March 31, 2017 and 2016, respectively. This $2,209,522 increase is principally the result of increased cash flows from operations, due to increase net income. There has also been a decrease in cash used in investing activities during the current year.

Net Cash Flows from Operating Activities

	Nine Months Ended March 31,				Variance
	2017		2016		Dollars		Percent
Cash provided by operating activities	$	1,959,685	$	202,277	$	1,757,408		869	%

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Net cash provided by operating activities is summarized as follows:

	Nine Months Ended March 31,
	2017			2016
Net Income	$	2,894,231		$	168,959
Noncash expense and income, net		1,528,629			1,226,923
Net changes in operating assets and liabilities		(2,463,175	)		(1,193,605	)
	$	1,959,685		$	202,277

Noncash expense increased by $301,706 in the nine months ended March 31, 2017 compared to March 31, 2016. Noncash expense increased as a result of an increase in bad debt expense, and an increase in stock compensation offset by a $46,113 decrease in depreciation and amortization expense.

Net Cash Flows used in Investing Activities

	Nine Months Ended March 31,				Variance
	2017		2016		Dollars			Percent
Cash used in investing activities	$	340,927	$	639,594	$	(298,667	)		-47	%

Net cash used in investing activities for the nine months ended March 31, 2017 was $340,927 compared to net cash used in investing activities of $639,594 for the nine months ended March 31, 2016. This decrease in cash used in investing activities for the nine months ended March 31, 2017 is due to the Company’s purchase of long-term investments in the 2016 period.

Net Cash Flows from Financing Activities

	Nine Months Ended March 31,				Variance
	2017		2016		Dollars		Percent
Cash provided by financing activities	$	480,396	$	444,765	$	35,631		8	%

Net cash provided by financing activities totaled $480,396 for the nine months ended March 31, 2017 as compared to cash flows provided by financing activities of $444,765 for the nine months ended March 31, 2016. The increase in net cash provided by financing activities is primarily attributable to cash drawn on the line of credit and cash from the exercise of warrants, these were partially offset by decrease in proceeds from notes payable.

Working Capital

At March 31, 2017, the Company had working capital of $10,090,821 when compared with working capital of $7,346,632 at June 30, 2016. This $2,744,189 increase in working capital is principally due to an increase of $2,099,154 in cash and an increase of $213,322 in accounts receivable, together with decreases of $558,576 in deferred revenue. The working capital increases were partially offset by an increase in accounts payable and an increase in the line of credit. While no assurances can be given, management currently believes that the Company will increase its working capital position in subsequent periods, and thereby reduce its indebtedness utilizing existing cash resources and projected cash flow from operations.

	As of March 31,		As of June 30,		Variance
	2017		2016		Dollars		Percent
Current assets	$	17,329,962	$	14,885,437	$	2,444,525		16	%

Current assets as of March 31, 2017 totaled $17,329,962 an increase of $2,444,525 when compared to $14,885,437 as of June 30, 2016. The increase in current assets is attributable to (i) an increase in cash due to increased collections, and an advance on the line of credit, and (ii) an increase in accounts receivable.

	As of March 31,		As of June 30,		Variance
	2017		2016		Dollars			Percent
Current liabilities	$	7,239,141	$	7,538,805	$	(299,664	)		-4	%

Current liabilities totaled $7,239,141 as of March 31, 2017 as compared to $7,538,805 as of June 30, 2016. The comparative decrease in current liabilities is principally due to a decrease in deferred revenue and partially offset by an increase in accounts payable and an increase in the line of credit.

In April 2017, SEQ borrowed approximately $1.6 million from a bank for the purchase of equipment. The note has a rate of 4.21% and matures July 2021. See Note 6.

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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 pay down, pay off or refinance certain of the Company’s indebtedness. Management believes that these initiatives will enable us to address our debt service requirements during the next twelve months without negatively impacting our working capital, 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

Critical Accounting Policies

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.

We commenced operations in the software development and professional services business during 1990. The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions. Management bases its estimates and judgments on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, will affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.

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Income Taxes

In determining the carrying value of the Company’s net deferred income tax assets, the Company must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets. If these estimates and assumptions change in the future, the Company may record a reduction in the valuation allowance, resulting in an income tax benefit in the Company’s statements of operations. Management evaluates whether or not to realize the deferred income tax assets and assesses the valuation allowance quarterly.

Goodwill and Other Long-Lived Asset Valuations

Goodwill is assigned to specific reporting units and is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit's carrying amount is greater than its fair value. Management reviews the long-lived tangible and intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Management evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair market value of the long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as circumstances dictate.

Revenue Recognition

We recognize revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement, (ii) the service has been provided to the customer, (iii) the collection of our fees is probable, and (iv) the amount of fees to be paid by the customer is fixed or determinable.

We recognize subscription, hosting, premium support, and maintenance revenue ratably over the length of the agreement beginning on the commencement dates of each agreement or when revenue recognition conditions are satisfied. Revenue from license and professional services agreements are recognized as delivered.

Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.

Agreements with multiple deliverables such as subscriptions, support, and professional services, are accounted for separately if the deliverables have standalone value upon delivery. Subscription services have standalone value as the services are typically sold separately. When considering whether professional services have standalone value, the Company considers the following factors: (i) availability of services from other vendors, (ii) the nature and timing of professional services, and (iii) sales of similar services sold separately. Multiple deliverable arrangements are separated into units of accounting and the total contract consideration is allocated to each unit based on relative selling prices.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company records compensation expense on a straight-line basis. The fair value of options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our business is currently conducted principally in the United States. As a result, our financial results are not affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. We do not engage in hedging transactions to reduce our exposure to changes in currency exchange rates, although if the geographical scope of our business broadens, we may do so in the future.

Our exposure to risk for changes in interest rates relates primarily to our investments in short-term financial instruments. Investments in both fixed rate and floating rate interest earning instruments carry some interest rate risk. The fair value of fixed rate securities may fall due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Partly as a result of this, our future interest income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that have fallen in estimated fair value due to changes in interest rates. However, as substantially all of our cash consist of bank deposits and short-term money market instruments, we do not expect any material change with respect to our net income as a result of an interest rate change.

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Our exposure to interest rate changes related to borrowing has been limited, and we believe the effect, if any, of near-term changes in interest rates on our financial position, results of operations and cash flows should not be material. At March 31, 2017, the debt portfolio was composed of approximately 89% variable-rate debt and 11% fixed-rate debt.

	March 31,
	2017 (unaudited)		Percent of Total Debt
Fixed rate debt	$	356,557		11	%
Variable rate debt		3,017,133		89	%
Total debt	$	3,373,690		100	%

The table that follows presents fair values of principal amounts and weighted average interest rates for our investment portfolio as of March 31, 2017:

Cash:		Aggregate Fair Value				Weighted Average Interest Rate
Cash		$	13,542,542				0.3	%

ITEM 4. CONTROLS AND PROCEDURES

(a)

Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our Management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of March 31, 2017. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, including to ensure that information required to be disclosed by the Company is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)

Changes in internal controls over financial reporting. The Company’s Chief Executive Officer and Chief Financial Officer have determined that there have been no changes, in the Company’s internal control over financial reporting during the period covered by this report identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition, results of operations or liquidity. There are currently no pending or threatened material legal proceedings that, in the opinion of management, could have a material adverse effect on our business or financial condition.

ITEM 1A. RISK FACTORS

There are no risk factors identified by the Company in addition to the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PARK CITY GROUP, INC.

Date: May 10, 2017	By:	/s/ Randall K. Fields
		Randall K. Fields
		Chief Executive Officer, Chairman and Director (Principal Executive Officer)


Date: May 10, 2017	By:	/s/ Todd Mitchell
		Todd Mitchell
		Chief Financial Officer (Principal Financial Officer & Principal Accounting Officer)

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PARK CITY GROUP INC - FORM 10-Q - May 10, 2017

Attached files

PARK CITY GROUP INC Reports