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EX-32.2 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - PARK CITY GROUP INCex32-2.htm
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - PARK CITY GROUP INCex32-1.htm
EX-31 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - PARK CITY GROUP INCex31-2.htm
EX-31 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - PARK CITY GROUP INCex31-1.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 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
 
 
 
 
 
 
 
 
 
 
1
 
2
 
3
 
4
 
6
 
 
 
13
 
 
 
20
 
 
 
21
 
 
 
 
 
 
 
 
22


 
22


 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
22


 
22
 
 
 
23


 
23
 
 
 
 
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.
 
 
 
-10-
 
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.
 
 
 
-11-
 
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.
 
 
 
 
-12-
 
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.
 
 
 
-13-
 
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.
  
 
 
-14-
 
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%
    
    
 
General and administrative expense was $1,114,251 and $1,326,735 for the three months ended December 31, 2019 and 2018, respectively, a 16% decrease. General and administrative expense decreased in part by lower professional service fees, lower overhead costs and overall lower travel expense.
 
While no assurances can be given, management currently expects general and administrative expense to remain flat in subsequent periods and therefore fall as a percentage of total revenue as we benefit from our investments in automation and process optimization.
 
Depreciation and Amortization Expense
 
 
 
Fiscal Quarter Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Depreciation and amortization
 $222,499 
 $144,030 
 $78,469 
  54%
Percent of total revenue
  5%
  3%
    
    
 
Depreciation and amortization expense was $222,499 and $144,030 for the three months ended December 31, 2019 and 2018, respectively, an increase of 54%. This increase is due to the expansion of new equipment for the Company’s information technology infrastructure, buildout of our corporate headquarters, and expansion of our data center completed in June 2019.
 
Other Income and Expense
 
 
 
Fiscal Quarter Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Net other income (expense)
 $49,940 
 $49,150 
 $790 
  2%
Percent of total revenue
  1%
  1%
    
    
 
Net other income was $49,940 for the three months ended December 31, 2019 compared to $49,150 for the three months ended December 31, 2018. Other income increased due to higher interest income resulting from an increase of total cash held in short term investments offset in part by the increase in interest expense associated with financing arrangements for equipment purchased under a lease arrangement with a bank.
 
Preferred Dividends
 
 
 
Fiscal Quarter Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Preferred dividends
 $146,611 
 $146,611 
 $- 
  -%
Percent of total revenue
  3%
  3%
    
    
 
Dividends accrued on the Company’s Series B-1 Preferred was $146,611 for the three months ended December 31, 2019, compared to dividends accrued on the Series B-1 Preferred of $146,611 for the three months ended December 31, 2018. Dividends remained flat in the comparable periods.
 
Comparison of the Six Months Ended December 31, 2019 to the Six Months Ended December 31, 2018.
 
Revenue
 
 
 
Six Months Ended
December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Revenue
 $9,637,416 
 $11,507,231 
 $(1,869,815)
  -16%
 
Revenue was $9,637,416 and $11,507,231 for the six months ended December 31, 2019 and 2018, respectively, a 16% decrease. This 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 revenue.
 
 
 
-15-
 
Cost of Services and Product Support
 
 
 
Six Months Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Cost of services and product support
 $3,253,423 
 $2,999,185 
 $254,238 
  8%
Percent of total revenue
  34%
  26%
    
    
 
  Cost of services and product support was $3,253,423 and $2,999,185 for the six months ended December 31, 2019 and 2018, respectively, a 8% 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. 
 
Sales and Marketing Expense
 
 
 
Six Months Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Sales and marketing
 $2,861,380 
 $3,047,879 
 $(186,499)
  -6%
Percent of total revenue
  30%
  26%
    
    
 
Sales and marketing expense was $2,861,380 and $3,047,879 for the six months ended December 31, 2019 and 2018, respectively, a 6% decrease. This was due primarily to an decrease in variable compensation, a reduction in trade show expenses, and lower sales and marketing travel expense.
 
General and Administrative Expense
 
 
 
Six Months Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
General and administrative
 $2,336,462 
 $2,470,046 
 $(133,584)
  -5%
Percent of total revenue
  24%
  21%
    
    
 
General and administrative expense was $2,336,462 and $2,470,046 for the six months ended December 31, 2019 and 2018, respectively, a 5% decrease.  General and administrative expense decreased year over year due to lower administrative costs, accounting and other professional service fees, and lower compliance related costs.
 
Depreciation and Amortization Expense
 
 
 
Six Months Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Depreciation and amortization
 $416,177 
 $289,405 
 $126,772 
  44%
Percent of total revenue
  4%
  3%
    
    
 
Depreciation and amortization expense were $416,177 and $289,405 for the six months ended December 31, 2019 and 2018, respectively, an increase of 44%.  This increase is due to the expansion of new equipment for the Company’s information technology infrastructure, buildout of our corporate headquarters, and expansion of our data center completed in June 2019.
 
Other Income and Expense
 
 
 
Six Months Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Net other income (expense)
 $112,073 
 $73,801 
 $38,272 
  52%
Percent of total revenue
  1%
  1%
    
    
 
  Net other income was $112,073 for the six months ended December 31, 2019 compared to net other expense of $73,801 for the six months ended December 31, 2018. Other income increased due to higher interest income resulting from an increase of total cash held in short term investments offset in part by the increase in interest expense associated with financing arrangements for equipment purchased under a lease arrangement with a bank. 
 
 
 
-16-
 
Preferred Dividends
 
 
 
Six Months Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Preferred dividends
 $293,222 
 $293,222 
 $- 
  -%
Percent of total revenue
  3%
  3%
    
    
 
  Dividends accrued on the Company’s Series B-1 Preferred was $293,222 for the six months ended December 31, 2019 and 2018. Dividends remained flat in the comparable period.
 
Financial Position, Liquidity and Capital Resources
 
We believe that 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
 
 
Variance
 
 
 
December 31,
2019
 
 
June 30,
2019
 
 
Dollars
 
 
Percent
 
Cash and cash equivalents
 $18,968,775 
 $18,609,423 
 $359,352 
  2%
  
We have historically funded our operations with cash from operations, equity financings, and borrowings from the issuance of debt, including our existing line of credit with U.S. Bank N.A., which line of credit was amended during the quarter ended December 31, 2019 to, among other matters, extend the maturity date to December 31, 2020 and increase the interest rate in the event of a default to 5% per annum.
 
Cash was $18,968,775 and $18,609,423 at December 31, 2019 and June 30, 2019, respectively. This 2% increase is principally the result of collections.
 
Net Cash Flows from Operating Activities
 
 
 
  Six Months Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Cash provided by operating activities
 $2,671,585 
 $1,830,582 
 $841,003 
  46%
 
Net cash provided by operating activities is summarized as follows:
 
 
 
Six Months Ended
 December 31,
 
 
 
2019
 
 
2018
 
Net income
 $841,454 
 $2,652,017 
Noncash expense and income, net
 950,921
  812,678 
Net changes in operating assets and liabilities
 879,210
  (1,634,113)
 
 $2,671,585 
 $1,830,582 
 
Net cash provided by operating activities increased 46% primarily as a result of collections on existing accounts, annual subscriptions paid in advance, and lower cash operating expense. Noncash expense increased by $138,243 in the six months ended December 31, 2019 compared to December 31, 2018 as a result of an decrease in stock compensation and accrued liabilities offset by an increase in depreciation, accounts payable and deferred revenue.
 
 
 
-17-
 
Net Cash Flows Used in Investing Activities
 
 
 
  Six Months Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Cash used in investing activities
 $(581,750)
 $(3,547)
 $578,203 
  16301%
 
Net cash used in investing activities for the six months ended December 31, 2019 was $581,750 compared to net cash used in investing activities of $3,547 for the six months ended December 31, 2018. This increase in cash used in investing activities for the six months ended December 31, 2019 was primarily due to maintenance on equipment capitalized over the remaining life of the asset.
 
Net Cash Flows from Financing Activities
 
 
 
  Six Months Ended
 December 31,
 
 
Variance
 
 
 
2019
 
 
2018
 
 
Dollars
 
 
Percent
 
Cash used in financing activities
 $(1,730,483)
 $(37,192)
 $1,693,291 
  4553%
 
Net cash used in financing activities totaled $1,730,483 for the six months ended December 31, 2019 as compared to cash used in financing activities of $37,192 for the six months ended December 31, 2018. The increase in net cash used in financing activities is primarily attributable to an increase in the amount used for the buyback of Common Stock, offset by the decrease in payments in notes payable and proceeds from employee stock plan.
 
Working Capital
 
At December 31, 2019, the Company had working capital of $16,968,878, as compared to working capital of $17,746,257 at June 30, 2019. This $777,379 decrease in working capital is primarily due to the buyback of Common Stock.

 
 
As of
December 31,
 
 
As of
June 30,
 
 
Variance
 
 
 
2019
 
 
2019
 
 
 Dollars
 
 
 Percent
 
Current assets
 $26,437,093 
 $26,548,874 
 $(111,781)
 NM%
 
Current assets as of December 31, 2019 totaled $26,437,093, a decrease of $111,781, as compared to $26,548,874 as of June 30, 2019. The decrease in current assets is primarily attributable to cash used to buyback Company Common Stock, a decrease in prepaid expense, and cash, offset in part by an increase in accounts receivable and short-term contract assets.
  
 
 
As of
December 31,
 
 
  As of
June 30,
 
 
Variance
 
 
 
2019
 
 
 2019
 
 
 Dollars
 
 
 Percent  
 
Current liabilities
 $9,468,215 
 $8,802,617 
 $665,598 
  8%
 
Current liabilities totaled $9,468,215 as of December 31, 2019 as compared to $8,802,617 as of June 30, 2019. The comparative increase in current liabilities is primarily attributable to a increase of $30,456 in accrued liabilities and accounts payable, an increase in operating lease liability of $83,562 due to accounting changes, and an increase in deferred revenue and current portion notes payable of $551,580.
 
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, revenue, and results of operation, liquidity or capital expenditures.
 
 
 
-18-
 
Contractual obligations
 
Total contractual obligations and commercial commitments as of December 31, 2019 are summarized in the following table:
 
 
 
Payment Due by Year
 
 
 
Total
 
 
Less than 1 Year
 
 
1-3 Years
 
 
3-5 Years
 
 
More than 5 Years
 
Finance lease obligations
 $1,070,175 
 $302,611 
  652,376 
  115,188 
  - 
Operating lease obligation
  822,502 
  122,400 
  244,800 
  244,800 
  210,502 
 
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 expense 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.
 
Income Taxes