Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
fiscal year ended June 30, 2018
or
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[
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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001-34941
(Commission
file number)
PARK CITY GROUP, INC.
(Exact
name of registrant as specified in its charter)
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Nevada
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37-1454128
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State
or other jurisdiction of incorporation
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(IRS
Employer Identification No.)
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299
South Main Street, Suite 2225
Salt Lake City,
Utah 84111
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(435)
645-2000
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(Address
of principal executive offices)
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(Registrant's
telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the
Act:
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Title of each
Class
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Name of each
exchange on which registered
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Common
Stock, $0.01 Par Value
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NASDAQ
Capital Market
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ]
Yes [X] No
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ]
Yes [X] No
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
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. [X] 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 (§ 229.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files).
[X] Yes [ ] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
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.
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Large
accelerated filer
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[
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Accelerated
filer
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[X]
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Non-accelerated
filer
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[
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Smaller
reporting company
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[X]
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Emerging
Growth Company
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[
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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. [
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act).
[
] Yes [X] No
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the issuer as of December 31, 2017,
which is the last business day of the registrant’s most
recently completed second fiscal quarter, was approximately
$117,465,000 (at a closing price of $9.55 per
share).
As of
September 12, 2018, 19,792,473 shares of the Company’s common
stock, par value $0.01 per share, were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10,
11, 12, 13 and 14 of Part III incorporate by reference certain
information from Park City Group, Inc.’s definitive proxy
statement, to be filed with the Securities and Exchange Commission
on or before October 28, 2018.
TABLE OF CONTENTS TO ANNUAL
REPORT
ON FORM 10-K
YEAR ENDED JUNE 30, 2018
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Exhibit
31
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Certifications
of the Principal Executive Officer and Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
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Exhibit
32
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Certifications
pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 the risk factors set
forth below and elsewhere in this Report. See “Risk
Factors” and “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations.” Statements made herein are as of the date
of the filing of this Form 10-K 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.
PART I
Overview
Park City Group, Inc. (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 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
principal customers for the Company’s services are
multi-store retail chains, wholesalers and distributors, and their
suppliers. The Company’s services are delivered though
proprietary software products derived from a cloud-based technology
platform capable of interacting with a wide variety of business and
information systems.
The
Company’s services are grouped in three application suites,
which enable the Company’s customers to better manage the
activities of their supply chains: (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 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 majority of the Company’s revenue is from its Supply
Chain and Compliance and Food Safety solutions in the form of
recurring subscription payments. Revenue from the Company’s
MarketPlace sourcing solutions is transactional, based on the
volume of products sourced via the application. The Company
also provides professional consulting services, and in some instances will license its software,
usually with an associated maintenance and/or hosting
agreement.
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
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.
Our principal executive offices 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.
Company History
The
Company’s technology has its genesis in the operations of
Mrs. Fields Cookies co-founded by Randall K. Fields, the
Company’s Chief Executive Officer. The Company began
operations utilizing patented computer software and profit
optimization consulting services to help its retail clients reduce
their inventory and labor costs.
On
January 13, 2009, the Company acquired 100% of Prescient Applied
Intelligence, Inc., a Delaware corporation (“Prescient”), a provider of
solutions for retailers which, amongst other things, captured
information about transactions between retailers and their
suppliers.
In
February 2014, Prescient changed its name to Park City Group, Inc.
As a result, both the parent-holding company (Nevada) and its
operating subsidiary (Delaware) were named Park City Group,
Inc.
In June
2015, the Company elected to exercise an option to acquire a 75%
interest in ReposiTrak from Leavitt Partners, LP for a cash payment
and negotiated the purchase of the remaining 25% with an exchange
of shares of the Company. As a result, ReposiTrak became a wholly
owned subsidiary of the Company.
As of
June 30, 2018, the Company had substantially completed the
convergence of its Supply Chain and Compliance and Food Safety
businesses and launched its MarketPlace supplier discovery and B2B e-commerce solution. As
a result, the Company is now largely capable of delivering its
services through a single ReposiTrak branded user
interface.
Target Industries Overview
The
Company develops its software and services for multi-store retail chains, wholesalers and
distributors, and their suppliers. The bulk of the
Company’s customers are in the U.S. consumer retail sector
for food and general merchandise, although the Company’s
software and services are not sold exclusively to this customer
base, and the Company believes that its software and services are
also applicable to a wide variety of other potential customers
domestically and abroad.
Backdrop
The
U.S. consumer retail sector in general, and food and general
merchandise retailers more acutely, are facing pressure from
several significant forces. These include (i) increased competitive
pressures from the rise of online retailers, (ii) increased
regulatory and tort risks, particularly for food retailers, as a
result of the passage of the Food Safety Modernization Act
(“FSMA”) which
placed greater responsibility for the safety of products on the
participants in the food supply chain, and (iii) the pressure from
consumers to increase product diversity, and in particular, the
number of smaller, localized vendors
Solutions and Services
The
Company’s software and services are designed to address the
business problems faced by our customers. These solutions are
delivered via a cloud-based infrastructure and grouped in three product application suites that
mirror the workflow of the Company’s customers as they manage
the activities of their supply chain.
Key Application Suites
●
ReposiTrak
MarketPlace is the
Company’s supplier discovery and B2B e-commerce solution.
MarketPlace provides the Company’s customers with greater
flexibility in sourcing products by enabling them to screen and
choose suppliers based on a wide variety of criteria, including,
but not limited to, predetermined compliance characteristics, and
then to integrate these suppliers into their supply chain faster
and more cost effectively. MarketPlace helps the Company’s
customers respond to competitive pressures from online
retailers by providing them with greater capabilities to increase
local sourcing, tailor their product offering to local market
tastes, and stock their stores appropriately for local events.
MarketPlace is also beneficial to suppliers connected to ReposiTrak’s platform
in that they can use MarketPlace to highlight the products that
they sell to generate incremental sales. The business model for
MarketPlace is evolving as the Company’s customers help to
develop new use cases for the application. In some situations, the
Company acts as an agent for suppliers or provides supply chain
technology services. In other situations, at the customer’s
request, the Company may act as the supplier for certain
products.
●
ReposiTrak
Compliance and Food Safety Solutions help the Company’s customers reduce
potential regulatory and legal risk from their supply chain
partners. The Company does this by providing a way of gathering the
array of documents that may be needed for the customer to determine
that its suppliers are compliant with a wide variety of criteria
including, but not limited to, food safety regulations, such as
those required by the FMSA and
general business compliance standards such as adequate liability
insurance. The Company’s Compliance and Food Safety
solutions currently include four main applications: Vendor
Validation, Compliance Management, Quality Management Systems
(“QMS”) and
Track & Trace. ReposiTrak also hosts and is integrated with the
food safety audit database of the Safe Quality Food Institute
(“SQFI”). SQFI
is one of the leading schemas for certifying that a food
retailer’s suppliers are compliant with Global Food Safety
Initiative (“GFSI”) standards, which many food
retailers require of their suppliers as a condition of doing
business. SQFI is owned and operated by the Food Marketing
Institute (“FMI”), one of the food
industry’s largest trade associations.
●
ReposiTrak
Supply Chain Solutions
help the Company’s customers to
more efficiently manage relationships with suppliers so that
they can “stock less and sell more” by reducing
inventory, labor costs and waste while also increasing
revenue. The Company is a leader in
helping its customers to manage their relationship with
Direct Store Delivery (“DSD”) suppliers. The Company has observed that its
customers are shifting a greater percentage of their product
mix to DSD suppliers to lower their operating costs. Through a process known as Scan Based Trading
(“SBT”)
the Company enables its customers to sell products from DSD
suppliers on a consignment basis, which lowers their working
capital requirements by shifting the financial burden of the
inventory to the supplier. Other Supply Chain solutions
include ScoreTracker, Vendor Managed Inventory, Store Level
Ordering and Replenishment, Enterprise Supply Chain Planning, Fresh
Market Manager and ActionManager®, all of which are
designed to aid the Company’s customer in managing inventory,
product mix and labor while improving sales through the reduction
of out of stocks by improving visibility and
forecasting.
Professional Services
The
Company has two professional services groups: (i) the Business
Analytics Group offers business-consulting services to suppliers
and retailers in the grocery, convenience store and specialty
retail industries, and (ii) the Professional Services Group
provides consulting services to ensure that our solutions are
seamlessly integrated into our customers’ business processes
as quickly and efficiently as possible.
Technology, Development and Operations
Product Development
The
Company’s product development strategy is focused on creating
common technology elements that can be leveraged in multiple
applications across our core markets. To remain competitive, the
Company is currently designing, coding and testing new products and
developing expanded functionality of its current
products.
Operations
We
currently serve our customers from a third-party data center
hosting facility. Along with the Company’s Statement on
Standards for Attestation Engagements (“SSAE”) No. 16 certification
Service Organization Control (“SOC2”), the third-party facility
is also a SSAE No. 16 – SOC2 certified location and is
secured by around-the-clock guards, biometric screening and
escort-controlled access, and is supported by on-site backup
generators in the event of a power failure.
Customers
The
Company is currently engaged primarily by food related consumer
goods retailers, wholesalers, and their suppliers. The bulk of the
Company’s customers are in the U.S. consumer retail sector
for food and general merchandise. However, the Company is
opportunistic and will offer its solutions to a wide variety of
other potential customers. Target Corporation accounted for
approximately 13% of the Company’s total revenue in the
fiscal year ended June 30, 2018.
Sales, Marketing and Customer Support
Sales and Marketing
Through
a focused and dedicated sales effort designed to address the
requirements of each of its solutions, the Company believes it is
well positioned to understand its customers’ businesses,
trends in the marketplace, competitive products and opportunities
for new product development.
The
Company’s primary marketing objectives have been to increase
awareness of our solutions, generate sales leads and develop new
customer relationships. To this end, the Company attends industry
trade shows, conducts direct marketing programs, publishes industry
trade articles, participates in interviews and selectively
advertises in industry publications.
In
fiscal 2016 the Company embarked on a process of repurposing the
Company’s supply chain applications so that they can be
delivered via ReposiTrak’s highly scalable online
infrastructure and launching its MarketPlace supplier discovery and B2B e-commerce solution on
this same infrastructure. As a result, the Company is now largely
capable of delivering its services through a single ReposiTrak
branded user interface.
With
the convergence of the Company’s solutions to a single
delivery platform, the Company also reorganized its sale force and
reoriented its marketing efforts. This process involved stream
lining the sales force to enable cross-selling by reducing
regional account managers and shifting our sales emphasis towards
the Company’s inside sales team located at its corporate
headquarters in Salt Lake City, Utah.
Customer Support
The
Company’s global customer support group responds to both
business and technical inquiries from its customers relating to how
to use its solutions and is available to customers by telephone and
email. Basic customer support during business hours is available to
customers. Premier customer support includes extended availability
and additional services, and is available along with additional
support services such as developer support and partner support for
an additional fee.
Competition
The
Company competes with a myriad of software vendors, developers and
integrators, business-to-business exchanges, consulting firms,
focused solution providers, and business intelligence technology
platforms. Although our competitors are often considerably larger
companies in size with larger sales forces and marketing budgets,
the Company believes that its deep industry knowledge, the breadth
and depth of our offerings, and our relationships with key
industry, wholesaler, and other trade groups and associations,
gives it a competitive advantage.
Patents and Proprietary Rights
The
Company relies on a combination of trademark, copyright, trade
secret and patent laws in the United States and other jurisdictions
as well as confidentiality procedures and contractual provisions to
protect our proprietary technology and our name. We also enter into
confidentiality agreements with our employees, consultants and
other third parties and control access to software, documentation
and other proprietary information.
The
Company has been awarded nine U.S. patents, eight U.S. registered
trademarks and has 37 U.S. copyrights relating to its software
technology and solutions. The Company’s patent portfolio has
been transferred to an unrelated third party, although the Company
retains the right to use the licensed patents in connection with
its business. The Company’s policy is to continue to seek
patent protection for all developments, inventions and improvements
that are patentable and have potential value to the Company and to
protect its trade secrets and other confidential and proprietary
information, and the Company intends to defend its intellectual
property rights to the extent its resources
permit.
The
Company is not aware of any patent infringement claims against it;
however, there are no assurances that litigation to enforce patents
issued to the Company to protect proprietary information, or to
defend against the Company’s alleged infringement of the
rights of others will not occur. Should any such litigation
occur, the Company may incur significant litigation costs, and it
may result in resources being diverted from other planned
activities, which may have a materially adverse effect on the
Company’s operations and financial condition.
Employees
As of
June 30, 2018, the Company employed a total of 77
employees. Of these employees, 11 are located
overseas. The Company plans to continue expanding its offshore
workforce to augment its analytics services offerings, expand its
professional services and to provide additional programming
resources. The employees are not represented by any labor
union.
Reports to Security Holders
The
Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the
“Exchange
Act”). Accordingly, it files annual, quarterly
and other reports and information with the Securities and Exchange
Commission (“SEC”). You may read and copy
these reports and other information at the SEC’s public
reference rooms in Washington, D.C. and Chicago, Illinois. The
Company’s filings are also available to the public from
commercial document retrieval services and the website maintained
by the SEC at http://www.sec.gov.
Government Regulation and Approval
Like
all businesses, the Company is subject to numerous federal, state
and local laws and regulations, including regulations relating to
patent, copyright, and trademark law matters.
Cost of Compliance with Environmental Laws
The
Company currently has no costs associated with compliance with
environmental regulations and does not anticipate any future costs
associated with environmental compliance; however, there can be no
assurance that it will not incur such costs in the
future.
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ITEM 1A.
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RISK FACTORS
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An investment in our common stock is subject to many risks. You
should carefully consider the risks described below, together with
all of the other information included in this Annual Report on Form
10-K, including the financial statements and the related notes,
before you decide whether to invest in our common stock. Our
business, operating results and financial condition could be harmed
by any of the following risks. The trading price of our common
stock could decline due to any of these risks, and you could lose
all or part of your investment.
Risks Related to the Company
We have incurred losses in the past and there can be no assurance
that we will operate profitably in the future.
Our
marketing strategy emphasizes sales of subscription-based services,
instead of annual licenses, and contracting with suppliers
(“Spokes”) to
connect to our clients (“Hubs”). This strategy has
resulted in the development of a foundation of retail and wholesale
Hubs to which suppliers can be “connected,”
thereby accelerating future growth. If, however, this marketing
strategy fails, revenue and operations will be negatively affected.
We had net income of $3,408,783 for the year ended June 30, 2018,
compared to a net income of $3,777,532 for the year ended June 30,
2017. Although we generated net income in the year ended June 30,
2018, there can be no assurance that we will achieve profitability
in future periods. We cannot give any assurance that we will
continue to generate revenue or have sustainable profits. If we do
not operate profitably in the future, our current cash resources
will be used to fund our operating losses. Continued losses would
have an adverse effect on the long-term value of our common stock
and any investment in the Company.
Although our cash resources are currently sufficient, our long-term
liquidity and capital requirements may be difficult to predict,
which may adversely affect our long-term cash
position.
Historically, we
have been successful in raising capital when necessary, including
through private placements, a registered direct offering, and stock
issuances to our officers and directors, including our Chief
Executive Officer, to pay our indebtedness and fund our operations,
in addition to cash flow from operations. If we are required
to seek additional financing in the future in order to fund our
operations, retire our indebtedness and otherwise carry out our
business plan, there can be no assurance that such financing will
be available on acceptable terms, or at all, and there can be no
assurance that any such arrangement, if required or otherwise
sought, would be available on terms deemed to be commercially
acceptable and in our best interests.
Our business is dependent upon the continued services of our
founder and Chief Executive Officer, Randall K. Fields. Should
we lose the services of Mr. Fields, our operations will be
negatively impacted.
Our
business is dependent upon the expertise and continued service of
our founder and Chief Executive Officer, Randall K. Fields. Mr.
Fields is essential to our operations. Accordingly, an investor
must rely on Mr. Fields’ management decisions that will
continue to control our business affairs. We currently maintain key
man insurance on Mr. Fields’ life in the amount of
$5,000,000; however, that coverage would be inadequate to
compensate for the loss of his services. The loss of the services
of Mr. Fields would have a materially adverse effect upon our
business.
Risk Relating to Business Operations
Quarterly and annual operating results may fluctuate, which makes
it difficult to predict future performance.
Management expects
a significant portion of our revenue stream to come from the sale
of subscriptions, and to a lesser extent, transactions processed
though MarketPlace, license sales, maintenance and professional
services charged to new customers. These amounts will
fluctuate and are uncertain because predicting future sales is
difficult and involves speculation. In addition, we may
potentially experience significant fluctuations in future operating
results caused by a variety of factors, many of which are
outside of our control, including:
●
our ability to retain and increase
sales to existing customers, attract new customers and satisfy our
customers’ requirements;
●
the renewal rates for our
subscriptions and other services;
●
changes in our pricing policies,
whether initiated by us or as a result of
competition;
●
the cost, timing and management
effort for the introduction of new services, including new features
to our existing services;
●
the rate of expansion and
productivity of our sales force;
●
new product and service
introductions by our competitors;
●
variations in the revenue mix of
editions or versions of our service;
●
technical difficulties or
interruptions in our service;
●
general economic conditions that
may adversely affect either our customers’ ability or
willingness to purchase additional subscriptions or upgrade their
services, or delay a prospective customer’s purchasing
decision, or reduce the value of new subscription contracts or
affect renewal rates;
●
timing of additional expenses and
investments in infrastructure to support growth in our
business;
●
regulatory compliance
costs;
●
the timing of customer payments and
payment defaults by customers;
●
extraordinary expenses such as
litigation or other dispute-related settlement
payments;
●
the impact of new accounting
pronouncements;
●
the timing of stock awards to
employees and the related financial statement impact;
and
●
system or service failures, security breaches or
network downtime.
Future
operating results may fluctuate because of the foregoing factors,
making it difficult to predict operating
results. Period-to-period comparisons of operating results are
not necessarily meaningful and should not be relied upon as an
indicator of future performance. In addition, a large portion
of our expense will be fixed in the short-term, particularly with
respect to facilities and personnel making future operating results
sensitive to fluctuations in revenue.
We face threats from competing and
emerging technologies that may affect our profitability, as well as
competitors that are larger and have greater financial and
operational resources that may give them an advantage in the
market.
Markets
for our type of software products and that of our competitors are
characterized by: development of new software, software solutions
or enhancements that are subject to constant change; rapidly
evolving technological change; and unanticipated changes in
customer needs. Because these markets are subject to such rapid
change, the life cycle of our products is difficult to
predict. As a result, we are subject to the following risks:
whether or how we will respond to technological changes in a timely
or cost-effective manner; whether the products or technologies
developed by our competitors will render our products and services
obsolete or shorten the life cycle of our products and services;
and whether our products and services will achieve market
acceptance.
Moreover,
many of our competitors are larger and have greater financial and
operational resources than we do. This may allow them to offer
better pricing terms to customers in the industry, which could
result in a loss of potential or current customers or could force
us to lower prices. Our competitors may have the ability to
devote more financial and operational resources to the development
of new technologies that provide improved operating functionality
and features to their product and service offerings. If
successful, their development efforts could render our product and
service offerings less desirable to customers, again resulting in
the loss of customers or a reduction in the price we can demand for
our offerings. Any of these actions could have a significant effect
on revenue.
We face risks associated with new product
introductions.
Our
future revenue is dependent upon the successful and timely
development and licensing of new and enhanced versions of our
products and potential product offerings suitable to the
customers’ needs. If we fail to successfully upgrade
existing products and develop new products, and those new products
do not achieve market acceptance, our revenue will be negatively
impacted.
It may
be difficult for us to assess risks associated with potential new
product offerings:
●
It may
be difficult for us to predict the amount of service and
technological resources that will be needed by customers of new
offerings, and if we underestimate the necessary resources, the
quality of our service will be negatively impacted, thereby
undermining the value of the product to the customer;
●
technological
issues between us and our customers may be experienced in capturing
data necessary for new product offerings, and these technological
issues may result in unforeseen conflicts or technological setbacks
when implementing these products, which could result in material
delays and even result in a termination of the
engagement;
●
a
customer’s experience with new offerings, if negative, may
prevent us from having an opportunity to sell additional products
and services to that customer;
●
if
customers do not use our products as recommends and/or fail to
implement any needed corrective action(s), it is unlikely that
customers will experience the business benefits from these products
and may, therefore, be hesitant to continue the engagement as well
as acquire any other products from us; and
●
delays
in proceeding with the implementation of new products for a new
customer will negatively affect our cash flow and our ability to
predict cash flow.
We cannot accurately predict renewal or upgrade rates and the
impact these rates may have on our future revenue and operating
results.
Our
customers have no obligation to renew their subscriptions for our
service after the expiration of their initial subscription period.
Our renewal rates may decline or fluctuate as a result of a number
of factors, including customer dissatisfaction with our service,
customers’ ability to continue their operations and spending
levels, and deteriorating general economic conditions. If our
customers do not renew their subscriptions for our service or
reduce the level of service at the time of renewal, our revenue
will decline, and our business will suffer.
Our
future success also depends in part on our ability to increase
rates, sell additional features and services, or addition
subscriptions to our current customers. This may also require
increasingly sophisticated and costly sales and marketing efforts
that are targeted at senior management. If these strategies fail,
we will need to refocus our efforts toward other solutions, which
could lead to increased development and marketing costs, delayed
revenue streams, and otherwise negatively affect our
operations.
If our Compliance and Food Safety solutions do not perform as
expected, whether as a result of operator error or otherwise, it
could impair our operating results and reputation.
Our
success depends on the food safety market’s confidence that
we can provide reliable, high-quality reporting for our customers.
We believe that our customers are likely to be particularly
sensitive to product defects and operator errors, including if our
systems fail to accurately report issues that could reduce the
liability of our clients in the event of a product recall. In
addition, our reputation and the reputation of our products can be
adversely affected if our systems fail to perform as expected.
However, if our customers or potential customers fail to implement
and use our systems as suggested by us, they may not be in a
position to deal with a recall as effectively as they could have.
As a result, the failure or perceived failure of our products to
perform as expected, could have a material adverse effect on our
revenue, results of operations and business.
If a customer is sued because of a recalled product we could be
joined in that suit, the defense of which would impair our
operating results.
We
believe our Compliance and Food Safety solutions would be helpful
in the event of a recall. However, their ultimate efficacy is
dependent on how the customer uses our products, which is in many
ways out of our control. Similarly, a customer which is a defendant
in a product liability case could claim that had our services
performed as represented the extent of potential liability would
have been minimized and therefore we should have some contributory
liability in the case. Defending such a claim could have a
material adverse effect on our revenue, results of operations and
business.
The deployment of our services, or consultation provided by our
personnel, could result in litigation naming us as a party, which
litigation could result in a material and adverse effect on us, and
our results of operations.
Certain
of our Compliance and Food Safety solutions are marketed to
potential customers based, in part, on our service’s ability
to reduce a company’s potential regulatory, legal, and
criminal risk from its supply chain partners. In the event
litigation is commenced against a customer based on issues caused
by a constituent in the supply chain, or consultation provided by
our personnel, we could be joined or named in such litigation. As a
result, we could face substantial defense costs. In addition, any
adverse determination resulting in such litigation could have a
material and adverse effect on us, and our results of
operations.
We face risks relating to the sale and delivery of merchandise to
customers.
We
depend on a number of other companies to perform functions critical
to our ability to deliver products to our customers, including
maintaining inventory, preparing merchandise for shipment to our
customers and delivering purchased merchandise on a timely basis.
We also depend on the delivery services that we and they utilize.
We also depend on our partners to ensure proper labelling of
products. Issues or concerns regarding, product safety, labelling,
content or quality could result in consumer or governmental claims.
In limited circumstances, we sell merchandise that we have
purchased. In these instances, we assume the risks related to
inventory.
We face risks associated with proprietary protection of our
software.
Our
success depends on our ability to develop and protect existing and
new proprietary technology and intellectual property
rights. We seek to protect our software, documentation
and other written materials primarily through a combination of
patents, trademarks, and copyright laws, trade secret laws,
confidentiality procedures and contractual provisions. While
we have attempted to safeguard and maintain our proprietary rights,
there are no assurances that we will be successful in doing
so. Our competitors may independently develop or patent
technologies that are substantially equivalent or superior to
ours.
Despite
our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or obtain and use
information that we regard as proprietary. In some types of
situations, we may rely in part on ‘shrink wrap’ or
‘point and click’ licenses that are not signed by the
end user and, therefore, may be unenforceable under the laws of
certain jurisdictions. Policing unauthorized use of our
products is difficult. While we are unable to determine the
extent to which piracy our software exists, software piracy can be
expected to be a persistent problem, particularly in foreign
countries where the laws may not protect proprietary rights as
fully as the United States. We can offer no assurance that our
means of protecting our proprietary rights will be adequate or that
our competitors will not reverse engineer or independently develop
similar technology.
We may discover software errors in our products that may result in
a loss of revenue, injury to our reputation or subject us to
substantial liability.
Non-conformities or
bugs (“errors”)
may be found from time to time in our existing, new or enhanced
products after commencement of commercial shipments, resulting in
loss of revenue or injury to our reputation. In the past, we
have discovered errors in our products and as a result, have
experienced delays in the shipment of products. Errors in our
products may be caused by defects in third-party software
incorporated into our products. If so, we may not be able to
fix these defects without the cooperation of these software
providers. Because these defects may not be as significant to
the software provider as they are to us, we may not receive the
rapid cooperation that may be required. We may not have the
contractual right to access the source code of third-party
software, and even if we do have access to the code, we may not be
able to fix the defect. In addition, our customers may use our
service in unanticipated ways that may cause a disruption in
service for other customers attempting to access their
data. Since our customers use our products for critical
business applications, any errors, defects or other performance
problems could hurt our reputation and may result in damage to our
customers’ business. If that occurs, customers could
elect not to renew, delay or withhold payment to us, we could lose
future sales or customers may make warranty or other claims against
us, which could result in an increase in our provision for doubtful
accounts, an increase in collection cycles for accounts receivable
or the expense and risk of litigation. These potential scenarios,
successful or otherwise, would likely be time consuming and
costly.
Interruptions or delays in service from our third-party data center
hosting facility could impair the delivery of our service and harm
our business.
We
currently serve our customers from a third-party data center
hosting facility located in the United States. Any damage to, or
failure of, our systems generally could result in interruptions in
our service. As we continue to add capacity, we may move or
transfer our data and our customers’ data. Despite
precautions taken during this process, any unsuccessful data
transfers may impair the delivery of our service. Further, any
damage to, or failure of, our systems generally could result in
interruptions in our service. Interruptions in our service may
reduce our revenue, cause us to issue credits or pay penalties,
cause customers to terminate their subscriptions and adversely
affect our renewal rates and our ability to attract new customers.
Our business will also be harmed if our customers and potential
customers believe our service is unreliable.
As part
of our current disaster recovery arrangements, our production
environment and all of our customers’ data is currently
replicated in near real-time in a separate facility physically
located in a different geographic region of the United States. We
do not control the operation of these facilities, and they are
vulnerable to damage or interruption from earthquakes, floods,
fires, power loss, telecommunications failures and similar events.
They may also be subject to break-ins, sabotage, intentional acts
of vandalism and similar misconduct. Despite precautions taken at
these facilities, the occurrence of a natural disaster or an act of
terrorism, a decision to close the facilities without adequate
notice or other unanticipated problems at these facilities could
result in lengthy interruptions in our service. Even with the
disaster recovery arrangements, our service could be
interrupted.
If our security measures are breached and unauthorized access is
obtained to a customer’s data, our data or our information
technology systems, our service may be perceived as not being
secure, customers may curtail or stop using our service and we may
incur significant legal and financial exposure and
liabilities.
Our
service involves the storage and transmission of customers’
proprietary information, and security breaches could expose us to a
risk of loss of this information, litigation and possible
liability. These security measures may be breached as a result of
third-party action, including intentional misconduct by computer
hackers, employee error, malfeasance or otherwise during transfer
of data to additional data centers or at any time, and result in
someone obtaining unauthorized access to our customers’ data
or our data, including our intellectual property and other
confidential business information, or our information technology
systems. Additionally, third parties may attempt to fraudulently
induce employees or customers into disclosing sensitive
information, such as user names, passwords or other information in
order to gain access to our customers’ data or our data,
including our intellectual property and other confidential business
information, or our information technology systems. Because the
techniques used to obtain unauthorized access, or to sabotage
systems, change frequently and generally are not recognized until
launched against a target, we may be unable to anticipate these
techniques or to implement adequate preventative measures. Any
security breach could result in a loss of confidence in the
security of our service, damage our reputation, disrupt our
business, lead to legal liability and negatively impact our future
sales.
Weakened global economic conditions may adversely affect our
industry, business and results of operations.
The
rate at which our customers purchase new or enhanced services
depends on a number of factors, including general economic
conditions. The United States and other key international economies
have experienced in the past a downturn in which economic activity
was impacted by falling demand for a variety of goods and services,
restricted credit, poor liquidity, reduced corporate profitability,
volatility in credit, equity and foreign exchange markets,
bankruptcies and overall uncertainty with respect to the economy.
These conditions affect the rate of information technology spending
and could adversely affect our customers’ ability or
willingness to purchase our enterprise cloud computing services,
delay prospective customers’ purchasing decisions, reduce the
value or duration of their subscription contracts or affect renewal
rates, all of which could adversely affect our operating
results.
Risks Relating to Our Common Stock
Our quarterly results of operations may fluctuate in the future,
which could result in volatility in our stock price.
Our
quarterly revenue and results of operations have varied in the past
and may fluctuate as a result of a variety of factors. If our
quarterly revenue or results of operations fluctuate, the price of
our common stock could decline substantially. Fluctuations in our
results of operations may be due to a number of factors, including,
but not limited to, those listed and identified throughout this
“Risk Factors”
section.
The limited public market for our stock may adversely affect an
investor’s ability to liquidate an investment in
us.
Although our common
stock is currently quoted on the NASDAQ Capital Market, there is
limited trading activity. We can give no assurance that an
active market will develop, or if developed, that it will be
sustained. If an investor acquires shares of our common stock,
the investor may not be able to liquidate our shares should there
be a need or desire to do so.
Future issuances of our shares may lead to future dilution in the
value of our common stock, will lead to a reduction in shareholder
voting power and may prevent a change in control.
The
shares may be substantially diluted due to the
following:
●
issuance
of common stock in connection with funding agreements with third
parties and future issuances of common and preferred stock by the
Board of Directors; and
●
the
Board of Directors has the power to issue additional shares of
common stock and preferred stock and the right to determine the
voting, dividend, conversion, liquidation, preferences and other
conditions of the shares without shareholder approval.
Stock
issuances may result in reduction of the book value or market price
of outstanding shares of common stock. If we issue any
additional shares of common or preferred stock, proportionate
ownership of common stock and voting power will be
reduced. Further, any new issuance of common or preferred
stock may prevent a change in control or
management.
Our officers and directors have significant control over us, which
may lead to conflicts with other stockholders over corporate
governance.
Our
officers and directors, including our Chief Executive Officer,
Randall K. Fields, control approximately 33% of our common
stock. Mr. Fields, individually controls 26% of our
common stock. Consequently, Mr. Fields individually, and our
officers and directors, as stockholders acting together, can
significantly influence all matters requiring approval by our
stockholders, including the election of directors and significant
corporate transactions, such as mergers or other business
combination transactions.
Our corporate charter contains authorized, unissued “blank
check” preferred stock issuable without stockholder approval
with the effect of diluting then current stockholder
interests.
Our
articles of incorporation 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 our Board of Directors, of which 700,000 shares are
currently designated as Series B Convertible Preferred Stock
(“Series B
Preferred”) and 550,000 shares are designated as
Series B-1 Preferred Stock (“Series B-1 Preferred”). As
of June 30, 2018, a total of 625,375 shares of Series B
Preferred and 212,402 shares of Series B-1 Preferred were issued
and outstanding.
Our
Board of Directors is empowered, without stockholder approval, to
issue one or more additional series of preferred stock with
dividend, liquidation, conversion, voting, or other rights that
could dilute the interest of, or impair the voting power of, our
common stockholders. The issuance of an additional series of
preferred stock could be used as a method of discouraging, delaying
or preventing a change in control.
We have never paid dividends on our common stock, and investors
should consider the potential for us to pay dividends on our common
stock as a factor when determining whether to invest in
us.
We have
never paid dividends on our common stock and do not anticipate the
declaration of any dividends pertaining to our common stock in the
foreseeable future. We intend to retain earnings, if any, to
finance the development and expansion of our business. Our
Board of Directors will determine our future dividend policy at
their sole discretion, and future dividends will be contingent upon
future earnings, if any, obligations of the stock issued, our
financial condition, capital requirements, general business
conditions and other factors. Future dividends may also be
affected by covenants contained in loan or other financing
documents, which we may executed in the future. Therefore,
there can be no assurance that dividends will ever be paid on our
common stock.
Our officers and directors have limited liability and
indemnification rights under our organizational documents, which
may impact our results.
Our
officers and directors are required to exercise good faith and high
integrity in the management of our affairs. Our articles of
incorporation and bylaws, however, provide that the officers and
directors shall have no liability to the stockholders for losses
sustained or liabilities incurred which arise from any transaction
in their respective managerial capacities unless they violated
their duty of loyalty, did not act in good faith, engaged in
intentional misconduct or knowingly violated the law, approved an
improper dividend or stock repurchase or derived an improper
benefit from the transaction. As a result, an investor may have a
more limited right to action than he would have had if such a
provision were not present. Our articles of incorporation and
bylaws also require us to indemnify our officers and directors
against any losses or liabilities they may incur as a result of the
manner in which they operate our business or conduct our internal
affairs, provided that the officers and directors reasonably
believe such actions to be in, or not opposed to, our best
interests, and their conduct does not constitute gross negligence,
misconduct or breach of fiduciary obligations.
|
ITEM 2.
|
PROPERTIES
|
Our
principal place of business operations is located at 299 South Main
Street, Suite 2225, Salt Lake City, UT 84111. We
lease approximately 6,700 square feet at this corporate office
location, consisting primarily of office space, conference rooms
and storage areas. Our telephone number is (435)
645-2000. Our website address is http://www.parkcitygroup.com.
|
ITEM 3.
|
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 no pending or
threatened material legal proceedings at this time.
|
ITEM 4.
|
MINE SAFETY
DISCLOSURES
|
Not
applicable.
PART II
|
ITEM 5.
|
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Share Price History
Our
common stock is traded on the NASDAQ Capital Market under the
trading symbol “PCYG.” The following table sets forth
the high and low sales prices of our common stock for the
periods indicated.
|
|
Quarterly Common
Stock Price Ranges
|
|||
|
|
2018
|
2017
|
||
|
Fiscal Quarter
Ended
|
High
|
Low
|
High
|
Low
|
|
September
30
|
$14.80
|
$10.80
|
$12.49
|
$8.87
|
|
December
31
|
$12.50
|
$9.50
|
$15.35
|
$11.60
|
|
March
31
|
$11.70
|
$8.65
|
$17.00
|
$11.55
|
|
June
30
|
$9.70
|
$6.75
|
$13.45
|
$11.70
|
Dividend Policy
Outstanding shares
of Series B Preferred and Series B-1 Preferred each accrue
dividends at the rate per
share of 7% per annum if paid by the Company in cash, and 9% per
annum if paid by the Company in additional shares of Series B-1
Preferred. Dividends on the Series B Preferred and Series B-1
Preferred are payable quarterly. To date, the Company has
not paid dividends on its common stock. Our present policy is to
retain future earnings (if any) for use in our operations and the
expansion of our business.
Holders of Record
At June
30, 2018 there were 649 holders of record of our common stock, and
19,773,549 shares were issued and outstanding, three holders of
Series B Preferred and 625,375 shares issued and outstanding, and
four holders of Series B-1 Preferred and 212,402 shares issued and
outstanding. The number of holders of record and shares of
common stock issued and outstanding was calculated by reference to
the books and records of the Company’s transfer
agent.
Issuance of Securities
We
issued shares of our common stock in unregistered transactions
during fiscal year 2018. All of the shares of common stock issued
in non-registered transactions were issued in reliance on Section
3(a)(9) and/or Section 4(a)(2) of the Securities Act and were
reported in our Quarterly Reports on Form 10-Q and in our Current
Reports on Form 8-K filed with the Securities and Exchange
Commission during the fiscal year ended June 30, 2018. 18,925
shares of common stock were issued subsequent to June 30,
2018.
|
ITEM 6.
|
SELECTED FINANCIAL
DATA
|
The disclosures in
this section are not required because we qualify as a smaller
reporting company under federal securities
laws.
|
ITEM 7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following Management’s Discussion
and Analysis is intended to assist the reader in understanding our
results of operations and financial
condition. Management’s Discussion and Analysis is
provided as a supplement to, and should be read in conjunction
with, our audited consolidated financial statements beginning on
page F-1 of this Annual Report on Form 10-K (the “Annual
Report”). This Annual
Report includes certain statements that may be deemed to be
“forward-looking statements” within the meaning of
Section 27A of the Securities Act. All statements, other than
statements of historical fact, included in this Annual Report that
address activities, events or developments that we expect, project,
believe, or anticipate will or may occur in the future, including
matters having to do with expected and future revenue, our ability
to fund our operations and repay debt, business strategies,
expansion and growth of operations and other such matters, are
forward-looking statements. These statements are based on
certain assumptions and analyses made by our management in light of
its experience and its perception of historical trends, current
conditions, expected future developments, and other factors it
believes are appropriate in the circumstances. These
statements are subject to a number of assumptions, risks and
uncertainties, including general economic and business conditions,
the business opportunities (or lack thereof) that may be presented
to and pursued by us, our performance on our current contracts and
our success in obtaining new contracts, our ability to attract and
retain qualified employees, and other factors, many of which are
beyond our control. You are cautioned that these
forward-looking statements are not guarantees of future performance
and those actual results or developments may differ materially from
those projected in such statements.
Overview
Park City Group, Inc. (the
“Company”) is a Software-as-a-Service (SaaS)
provider, and the parent company of ReposiTrak Inc., a 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 upstream suppliers in
order to accelerate sales, control risks, and improve supply chain
efficiencies. The Company’s fiscal year ends on June
30. References to fiscal 2018 refer to the fiscal year ended
June 30, 2018.
Sources of Revenue
The principal customers for the Company’s
products are multi-store retail chains, wholesalers and
distributors, and their suppliers. 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 derives revenue from five sources: (i)
Subscription Fees, (ii) Transaction Based Fees, (iii) Professional
Services Fees, (iv) License Fees, and (v) Hosting and Maintenance
Fees
The majority of the Company’s revenue is
generated from its Supply Chain and Compliance and Food Safety
solutions in the form of recurring subscription payments from the
suppliers. Subscription fees can be based on a negotiated
flat fee per supplier, or some volumetric metric, such as the
number of stores, or the volume of economic activity between a
retailer and its suppliers. Subscription revenue contains
arrangements with customers for use of the application, application
and data hosting, maintenance of the application, and standard
support.
Revenue
from the Company’s MarketPlace sourcing solution is
transactional, based on the volume of products sourced via the
application. MarketPlace revenue can come from several sources
depending on the customer’s specific requirements. These
include acting as an agent for a supplier, providing supply chain
technology services, and enabling a Hub to reduce its number of new
suppliers by acting as the supplier for any number of
products.
The
Company also provides professional consulting services targeting
implementation, assessments, profit optimization and support
functions for its applications and related products, for which revenue is recognized on a
percentage-of-completion or pro rata basis over the life of the
subscription, depending on the nature of the engagement.
Premier customer support includes extended availability and
additional services and is available along with additional support
services such as developer support and partner support for an
addition fee.
In some instances, the Company will sell its
software in the form of a license. License arrangements are
a time-specific and perpetual license. Software license maintenance
agreements are typically annual contracts, paid in advance or
according to terms specified in the contract. When sold as a license, the Company’s
software, is usually accompanied by a corresponding Maintenance
and/or Hosting agreement to support the
service.
Software
maintenance agreements provide the customer with access to new
software enhancements, maintenance releases, patches, updates and
technical support personnel. Our hosting services provide
remote management and maintenance of our software and
customers’ data, which is physically located in third-party
facilities. Customers access ‘hosted’ software and
data through a secure internet connection.
Revenue Recognition
The
Company recognizes revenue when 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.
The
Company recognizes 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 are accounted for separately if the
deliverables have standalone value upon delivery. When considering
whether professional services have standalone value, the Company
considers: (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.
The
business model for the Company’s MarketPlace supplier
sourcing and B2B e-commerce solution is still evolving as the
Company introduces the platforms capabilities to its customers. In
some situations, the Company acts as an agent for suppliers or
provides supply chain technology services. In other situation the
Company may act as the supplier for certain products. In these
transactions the Company recognizes revenue based on the Gross
Merchandise Value (“GMV”) of the
transaction.
Other Metrics – Non-GAAP Financial Measures
To
supplement our financial statements, we also provide investors with
Adjusted EBITDA and non-GAAP income per share, both of which are
non-GAAP financial measures. We believe that these non-GAAP
measures provide useful information regarding certain financial and
business trends relating to our financial condition and operations.
Our management uses these non-GAAP measures to compare the
Company’s performance to that of prior periods for trend
analyses and planning purposes. These measures are also presented
to our Board of Directors.
These
non-GAAP measures should not be considered a substitute for, or
superior to, financial measures calculated in accordance with
generally accepted accounting principles in the United States of
America. These non-GAAP financial measures exclude significant
expenses and income that are required by GAAP to be recorded in the
Company’s financial statements and are subject to inherent
limitations. Investors should review the reconciliations of
non-GAAP financial measures to the comparable GAAP financial
measures that are included in this “Management’s Discussion and Analysis of
Financial Condition and Results of
Operations.”
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 GAAP. 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
based 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.
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 quarterly whether to
realize the deferred income tax assets and assesses the valuation
allowance.
Goodwill and Other Long-Lived Asset Valuations
Goodwill is
assigned to specific reporting units and is reviewed for possible
impairment at least annually or 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.
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.
Capitalization of Software Development Costs
The
Company accounts for research costs of computer software to be
sold, leased or otherwise marketed as expense until technological
feasibility has been established for the product. Once
technological feasibility is established, all software costs are
capitalized until the product is available for general release to
customers. Judgment is required in determining when technological
feasibility of a product is established.
We have
determined that technological feasibility for our software products
is reached shortly after a working prototype is complete and meets
or exceeds design specifications including functions, features, and
technical performance requirements. Costs incurred after
technological feasibility is established have been and will
continue to be capitalized until such time as when the product or
enhancement is available for general release to
customers.
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.
Recent Accounting Pronouncements
In May 2014, August 2015, April 2016, May 2016,
September 2017 and November 2017, 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, ASU 2016-12 (ASC
Topic 606) Revenue from Contracts with
Customers, Narrow Scope Improvements and Practical
Expedients, ASU
2017-14, Income Statement - Reporting
Comprehensive Income (ASC
Topic 606), Revenue
Recognition (ASC Topic
606), and Revenue from Contracts with
Customers (ASC Topic 606):
Amendments to SEC Paragraphs pursuant to Staff Accounting Bulletin
No. 116 and SEC Release No. 33-10403, 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 currently anticipates adopting the standard
using the full retrospective method. We are in the process of
completing our analysis on the impact this guidance will have on
our Consolidated Financial Statements and related disclosures, as
well as identifying the required changes to our policies, processes
and controls. The Company is conducting its assessment in order to
be able to state the impact of this ASU on our financial position
and results of operation.
In January 2017, the FASB issued ASU
2017-04, Intangibles—Goodwill and
Other (Topic 350), Simplifying the Test for Goodwill
Impairment. The amendments
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
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.
Results of Operations – Fiscal Years Ended June 30, 2018 and
2017
Revenue
|
Revenue
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Revenue
|
$22,036,278
|
$3,097,015
|
16%
|
$18,939,263
|
During
the fiscal year ended June 30, 2018, the Company had revenue of
$22,036,278 compared to $18,939,263 for the year ended June 30,
2017, a 16% increase. This $3,097,015 increase in total revenue
was driven by growth in all services,
and the addition of revenue from the Company’s MarketPlace
B2B e-commerce solutions. By revenue type, recurring subscription
revenue and the sale of licenses grew year-over-year and were
enhanced by the addition of MarketPlace transaction fees, while
one-time professional service fees were down versus the comparable
period.
The
Company believes that revenue will continue to increase in
subsequent periods primarily due to growth in new customers for all
of the Company’s services, and in particular the
Company’s MarketPlace B2B e-commerce services, and
secondarily due to the Company’s strategy of cross-selling
existing customers other services.
Cost of Services and Product Support
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Cost of service and
product support
|
$6,587,486
|
$1,269,444
|
24%
|
$5,318,042
|
|
Percent of total
revenue
|
30%
|
|
|
28%
|
Cost of
services and product support was $6,587,486 or 30% of total
revenue, and $5,318,042 or 28% of total revenue for the years ended
June 30, 2018 and 2017, respectively, a 24%
increase. This period
over period increase of $1,269,444 is primarily attributable to costs
related to an increase in cost of goods sold associated with
new product introductions, including
MarketPlace and expansion of ReposiTrak compliance capabilities to
include new attributes, as well as higher development costs
associated with the convergence of the Company’s service
offerings.
Management expects service and a
product support to increase in value in subsequent periods and notes that
new services, while accretive to earnings, make have a dilutive
impact on gross margin.
Sales and Marketing Expense
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Sales and
marketing
|
$6,403,343
|
$1,306,271
|
26%
|
$5,097,072
|
|
Percent of total
revenue
|
29%
|
|
|
27%
|
The
Company’s sales and marketing expense was $6,403,343, or 29%
of total revenue, and $5,097,072, or 27% of total revenue, for the
fiscal years ended June 30, 2018 and 2017, respectively, a 26%
increase. This increase in sales
and marketing is due to an increase in salaries, commission, and
other costs associated with the expansion of the Company’s
sales team, and an increase in marketing expense associated with
the introduction of new services.
Management expects sales and marketing
expense to continue to increase in absolute
value in
subsequent periods, but to fall as a percentage of total revenue as
it continues to transition to an inside sales
model.
General and Administrative Expense
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
General and
administrative
|
$4,894,746
|
$757,750
|
18%
|
$4,136,996
|
|
Percent of total
revenue
|
22%
|
|
|
22%
|
The
Company’s general and administrative expense was $4,894,746,
or 22% of total revenue, and $4,136,996 or 22% of total revenue for
the years ended June 30, 2018 and 2017, respectively, a 18%
increase. This
$757,750 increase is primarily
attributable to an increase in employee related expenses, an
increase in third-party software expense and professional fees
associated with the execution of the Company’s plan to
automate and optimize processes to accommodate growth, and an
increase in bad debt expenses, offset in part by lower stock
compensation expense.
Management expects general and
administrative expense to increase in absolute
value in
subsequent periods, but to fall as a percentage of total revenue as
it benefits from investments in automation and process
optimization.
Depreciation and Amortization Expense
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Depreciation and
amortization
|
$633,854
|
$147,830
|
30%
|
$486,024
|
|
Percent of total
revenue
|
3%
|
|
|
3%
|
The
Company’s depreciation and amortization expense was $633,854
and $486,024 for the years ended June 30, 2018 and 2017,
respectively, a 30% increase. This increase is primarily due to the purchase of
fixed assets in the quarter ended September 30, 2017 to support the
growth of the business.
Other Income and Expense
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Other (expense) and
income
|
$(2,671)
|
$13,357
|
-83%
|
$(16,028)
|
|
Percent of total
revenue
|
<1%
|
|
|
<1%
|
Other expense
of $2,671 compared to $16,028 for the year ended June 30, 2017.
This decrease of $13,357 for the year ended June 30, 2018 when
compared to the year ended June 30, 2017 was due to a higher cash balance and an increase
in interest income on that cash balance due to higher yields, and
lower fees on equipment financing, versus the comparable period a
year ago.
Preferred Dividends
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Preferred
dividends
|
$573,348
|
$217,463
|
-27%
|
$790,811
|
|
Percent of total
revenue
|
3%
|
|
|
4%
|
Dividends accrued
on the Company’s Series B Preferred and Series B-1 Preferred
was $573,348 for the year ended June 30, 2018, compared to
dividends accrued on the Series B Preferred of $790,811 for the
year ended June 30, 2017. This $217,463 decrease
was due to
the Company’s redemption of $1.0 million of the
Company’s Series B-1 Preferred in the period as well as the
Company’s decision to begin paying the dividend related to
its Series B-1 Preferred in cash as opposed to shares of Series B-1
Preferred.
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.
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Cash and Cash
Equivalents
|
$14,892,439
|
$838,433
|
6%
|
$14,054,006
|
Cash
and cash equivalents was $14,892,439 and $14,054,006 at June 30,
2018, and June 30, 2017, respectively, a 6% increase. The $838,433
increase during the year ended June 30, 2018 when compared to the
year ended June 30, 2017 is principally the
result of the payment of $999,990 for the redemption of Series B-1
Preferred.
Net Cash Flows from Operating Activities
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Cash flows provided
by operating activities
|
$2,179,486
|
$(77,652)
|
-3%
|
$2,257,138
|
Net
cash provided by operating activities is summarized as
follows:
|
|
2018
|
2017
|
|
Net
income
|
$3,408,783
|
$3,777,532
|
|
Noncash expense and
income, net
|
1,687,888
|
2,088,149
|
|
Net changes in
operating assets and liabilities
|
(2,917,185)
|
(3,608,543)
|
|
|
$2,179,486
|
$2,257,138
|
Non-cash expense
decreased by $400,261 in the year ended June 30, 2018 compared to
June 30, 2017. Non-cash expense decreased due
to a decrease in stock
compensation, offset in part by an increase in bad debt accrual.
The reduction in operating assets fell versus the comparable period
due to an increase in accounts receivables and a decrease in
accrued liabilities, offset in part by a decrease in long-term
receivable and an increase in accounts payable.
Net Cash Flows used in Investing Activities
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Cash flows (used
in) investing activities
|
$(315,246)
|
1,635,456
|
84%
|
$(1,950,702)
|
Net
cash flows used in investing activities for the year ended June 30,
2018 was $315,246 compared to net cash flows used in investing
activities of $1,950,702 for the year ended June 30, 2017. This
$1,635,456 decrease in cash used in investing activities for the
year ended June 30, 2018 when compared to the same period in 2017
was due to a decrease in fixed asset
purchases offset in part by the capitalization of software
costs.
Net Cash Flows from Financing Activities
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Cash flows provided
by (used in) financing activities
|
$(1,025,807)
|
$3,329,989
|
145%
|
$2,304,182
|
Net
cash used in financing activities totaled $1,025,807 for the
year ended June 30, 2018 compared to cash flows provided by
financing activities of $2,304,182 for the year ended June 30,
2017. The decrease in net
cash related to financing activities is primarily attributable to a
$2,090,000 reduction of cash received from borrowing versus the
comparable period, the
redemption of $1.0
million of the Company’s Series B-1
Preferred as well as the
payment of $782,000 in dividends on the Series B-1 Preferred in
cash versus payment in kind in the comparable period, offset in
part by a $511,000 increase in proceeds from the exercise of
warrants, and a $21,000 increase in proceeds from employ stock
plans.
Liquidity and Working Capital
At June
30, 2018, the Company had positive working capital of $15,743,569,
as compared with positive working capital of $10,536,804 at June
30, 2017. This $5,206,765 increase in working capital is
principally due to an
increase of $3,715,508 in accounts receivable, an increase of
$838,433 in cash, an increase of $472,787 in prepaid expense
and other current assets, a reduction of $1,339,286 in accrued
liabilities, a reduction of $130,138 in the current portion of
notes payable, and a reduction of $15,560 in deferred revenue,
offset in part by an increase of $924,947 in accounts payable,
and an increase of $380,000 in lines of
credit.
While no assurances can be given,
management currently believes that the Company will continue to
increase its working capital position in subsequent periods and
that projected cash flow from operations, and that it will
have adequate cash resources to fund its operations and satisfy its
debt obligations for at least the next 12 months.
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Current
assets
|
$23,733,461
|
$5,026,728
|
27%
|
$18,706,733
|
Current assets as of June 30, 2018,
totaled $23,733,461,
an increase of $5,026,728 when compared to $18,706,733 as of June
30, 2017. The increase in current assets is attributable to
an increase of
$3,715,508
in accounts receivable, an increase in
cash of $838,433 in cash, and an increase of $472,787 in prepaid expense and other current
assets.
|
|
Year
Ended
June
30, 2018
|
$
Change
|
%
Change
|
Year
Ended
June
30, 2017
|
|
Current
liabilities
|
$7,989,892
|
$(180,037)
|
-2%
|
$8,169,929
|
Current
liabilities totaled $7,989,892 and $8,169,929 as of June 30, 2018,
and 2017, respectively. The $180,037 comparative decrease in current
liabilities is principally due to a decrease of $1,339,286 in accrued liabilities, a
decrease of $130,138 of notes payable, and a decrease of $15,560 of
deferred revenue, offset in part by an increase of $924,947
in accounts payable, and an increase
of $380,000 in lines of
credit.
While
no assurances can be given, management believes cash resources and
projected cash flow from operations will be sufficient to enable
the Company to fund currently anticipated operations and capital
spending requirements and to address debt service requirements
during the next 12 months without negatively impacting working
capital.
Redemption of Shares of Series B Preferred Stock
On January 27, 2018, the Company’s Board of
Directors approved the redemption of 93,457 of the 305,859 issued
and outstanding shares of the Company’s Series B-1 Preferred
(the “Redemption
Shares”), and on February
6, 2018, the Company delivered a Notice to the holders of the
Series B-1 Preferred notifying the holders of the Company’s
intent to redeem the Redemption Shares, on a pro rata basis, on
February 7, 2018 (the “Redemption
Date”) (the
“Series B-1
Redemption”). On the
Redemption Date, the Company paid an aggregate total of $1.0
million to the holders of shares of Series B-1 Preferred for the
redemption of a total of 93,457 shares of Series B-1
Preferred. Following the Series
B-1 Redemption, a total of 212,402 shares of Series B-1 Preferred
remain issued and outstanding.
Contractual Obligations
Total
contractual obligations and commercial commitments as of June 30,
2018, 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
|
|
Operating lease
obligations
|
$163,016
|
$163,016
|
$-
|
$-
|
$-
|
Inflation
The
impact of inflation has historically not had a material effect on
the Company’s financial condition or results from operations;
however, higher rates of inflation may cause retailers to slow
their spending in the technology area, which could have an impact
on the Company’s sales.
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
|
Each of our contracts require payment in U.S. dollars. We therefore
do not engage in hedging transactions to reduce our exposure to
changes in currency exchange rates, although in the event any
future contracts are denominated in a foreign currency, we may do
so in the future. As a result, our financial results are not
affected by factors such as changes in foreign currency exchange
rates.
|
ITEM 8.
|
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
|
The
information required hereunder in this Annual Report is set forth
in the financial statements and the notes thereto beginning on Page
F-1.
|
ITEM 9.
|
CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
None.
|
ITEM 9A.
|
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 amended, as of June 30, 2018. 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 and
Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in SEC
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)
|
Management’s Annual Report on Internal Control over Financial
Reporting.
|
We are
responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act). Our internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes of
accounting principles generally accepted in the United
States.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Therefore, even
those systems determined to be effective can provide only
reasonable assurance of achieving their control
objectives.
Management is
responsible for establishing and maintaining adequate internal
control over financial reporting for the Company. With our
participation, an evaluation of the effectiveness of our internal
control over financial reporting was conducted as of June 30, 2018,
based on the framework and criteria established in Internal Control
Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded
that our internal control over financial reporting was effective as
of June 30, 2018.
Haynie and Company, our independent registered public
accounting firm, audited our consolidated financial statements
included in this Annual Report, has issued an attestation report on
the effectiveness of our internal control over financial reporting,
which report is included in Part IV below.
|
(c)
|
Changes in Internal Controls over Financial
Reporting.
|
Our
Chief Executive Officer and Chief Financial Officer have determined
that there has been no change, 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, Company’s internal
control over financial reporting.
|
ITEM 9B.
|
OTHER INFORMATION
|
None.
PART III
|
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The
information required by this item will be incorporated by reference
from Park City Group, Inc.’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
October 28, 2018.
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The
information required by this item will be incorporated by reference
from Park City Group, Inc.’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
October 28, 2018.
|
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
The
information required by this item will be incorporated by reference
from Park City Group, Inc.’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
October 28, 2018.
|
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The
information required by this item will be incorporated by reference
from Park City Group, Inc.’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
October 28, 2018.
|
ITEM 14.
|
PRINCIPAL ACCOUNTING FEES AND
SERVICES
|
The
information required by this item will be incorporated by reference
from Park City Group, Inc.’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
October 28, 2018.
|
ITEM 15.
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
Exhibits, Financial Statements and Schedules
|
Exhibit
Number
|
|
Description
|
|
|
Agreement
and Plan of Merger and Reorganization, Dated August 28, 2008
(1)
|
|
|
|
Form of
Stock Purchase Agreement (1)
|
|
|
|
Form of
Stock Voting Agreement (1)
|
|
|
|
Form of
Promissory Note (2)
|
|
|
|
Articles
of Incorporation (3)
|
|
|
|
Certificate
of Amendment (4)
|
|
|
|
Certificate
of Amendment (5)
|
|
|
|
Certificate
of Amendment (21)
|
|
|
|
Bylaws
(3)
|
|
|
|
Amended
and Restated Bylaws (19)
|
|
|
|
Certificate
of Designation of the Series A Convertible Preferred Stock
(6)
|
|
|
|
Certificate
of Designation of the Series B Convertible Preferred Stock
(7)
|
|
|
|
Fourth
Amended and Restated Certificate of Designation of the Relative
Rights, Powers and Preferences of the Series B Preferred Stock of
Park City Group, Inc. (17)
|
|
|
|
First
Amended and Restated Certificate of Designation of the Relative
Rights, Powers and Preferences of the Series B-1 Preferred Stock of
Park City Group, Inc. (18)
|
|
|
|
Subordinated
Promissory Note, dated April 1, 2009, issued to Riverview Financial
Corporation (8)
|
|
|
|
Amendment
to Loan Agreement and Note, by and between U.S. Bank National
Association and the Company, dated September 15, 2009 (9)
|
|
|
|
Term
Loan Agreement, by and between U.S. Bank National Association and
the Company, dated May 5, 2010 (10)
|
|
|
|
Amendment
to Loan Agreement and Note, by and between U.S. Bank National
Association and the Company, dated May 5, 2010 (10)
|
|
|
|
Promissory
Note, dated August 25, 2009, issued to Baylake Bank (11)
|
|
|
|
ReposiTrak
Omnibus Subscription Agreement (12)
|
|
|
|
ReposiTrak
Promissory Note (12)
|
|
|
|
Fields
Employment Agreement (14)
|
|
|
|
Services
Agreement (14)
|
|
|
|
Form of
Securities Purchase Agreement (15)
|
|
|
|
Employment
Agreement by and between Todd Mitchell and Park City Group, Inc.,
dated September 28, 2015 (16)
|
|
|
|
Amendment
No. 1 to the Employment Agreement, by and between Park City Group,
Inc., Randall K. Fields and Fields Management, Inc., dated July 1,
2016 (20)
|
|
|
|
Amendment
to Services Agreement
(23)
|
|
|
|
Code of
Ethics and Business Conduct (13)
|
|
|
21
|
|
List of
Subsidiaries (22)
|
|
23
|
|
Consent
of Haynie & Company, dated September 13, 2018 *
|
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of Sarbanes
Oxley Act of 2002 *
|
|
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of Sarbanes
Oxley Act of 2002 *
|
|
|
|
Certification
of Principal Executive Officer and Principal Financial Officer
pursuant to 18 U.S.C. Section 1350 *
|
|
(1)
|
Incorporated
by reference from our Form 8-K dated September 3,
2008.
|
|
(2)
|
Incorporated
by reference from our Form 8-K dated September 15,
2008.
|
|
(3)
|
Incorporated
by reference from our Form DEF 14C dated June 5, 2002.
|
|
(4)
|
Incorporated
by reference from our Form 10-QSB for the year ended Sept 30,
2005.
|
|
(5)
|
Incorporated
by reference from our Form 10-KSB dated September 29,
2006.
|
|
(6)
|
Incorporated
by reference from our Form 8-K dated June 27, 2007.
|
|
(7)
|
Incorporated
by reference from our Form 8-K dated July 21, 2010.
|
|
(8)
|
Incorporated
by reference from our Form 8-K dated June 5, 2009.
|
|
(9)
|
Incorporated
by reference from our Form 8-K dated September 30,
2009.
|
|
(10)
|
Incorporated
by reference from our Form 8-K dated May 6, 2010.
|
|
(11)
|
Incorporated
by reference from our Form 8-K dated August 25, 2009.
|
|
(12)
|
Incorporated
by reference from our Annual Report on Form 10-K dated September
23, 2013.
|
|
(13)
|
Incorporated
by reference from our Form 10-KSB dated September 29,
2008.
|
|
(14)
|
Incorporated
by reference from our Form 10-K dated September 11,
2014.
|
|
(15)
|
Incorporated
by reference from our Form 8-K dated May 13, 2015.
|
|
(16)
|
Incorporated
by reference from our Form 8-K dated September 30,
2015.
|
|
(17)
|
Incorporated
by reference from our Form 8-K dated January 14, 2016.
|
|
(18)
|
Incorporated
by reference from our Form 8-K dated January 14, 2016.
|
|
(19)
|
Incorporated
by reference from our Form 8-K dated October 21, 2016.
|
|
(20)
|
Incorporated
by reference from our Form 10-Q dated November 7,
2016.
|
|
(21)
|
Incorporated
by reference from our Form 8-K dated July 28, 2017.
|
|
(22)
|
Incorporated
by reference from our Form 10-K dated September 13,
2017.
|
|
(23)
|
Incorporated by
reference from our Form 10-Q dated May 10, 2018.
|
|
*
|
Filed
herewith
|
SIGNATURES
In accordance
with Section 13 or 15(d) 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.
|
|
|
(Registrant)
|
|
Date:
September 13, 2018
|
By: /s/
Randall K. Fields
|
|
|
Principal
Executive Officer,
Chairman
of the Board and Director
|
In
accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
/s/ Randall
K. Fields
|
Chairman
of the Board and Director,
|
September
13, 2018
|
|
Randall
K. Fields
|
Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
/s/ Todd
Mitchell
|
Chief
Financial Officer
|
September
13, 2018
|
|
Todd
Mitchell
|
(Principal
Financial Officer &
Principal
Accounting Officer)
|
|
|
/s/ Robert W.
Allen
|
Director,
and Compensation
|
September
13, 2018
|
|
Robert
W. Allen
|
Committee
Chairman
|
|
|
/s/ William S.
Kies, Jr.
|
Director
|
September
13, 2018
|
|
William
S. Kies, Jr.
|
|
|
|
/s/ Richard
Juliano
|
Director
|
September
13, 2018
|
|
Richard
Juliano
|
|
|
|
/s/ Austin F. Noll,
Jr.
|
Director
|
September
13, 2018
|
|
Austin
F. Noll, Jr.
|
|
|
|
/s/ Ronald C.
Hodge
|
Director,
and Audit Committee Chairman
|
September
13, 2018
|
|
Ronald
C. Hodge
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Park City Group, Inc.
Opinion on the
Financial Statements
We have
audited the accompanying balance sheets of Park City Group, Inc.
(the Company) as of June 30, 2018 and 2017, and the related
statements of income, comprehensive income, stockholders’
equity, and cash flows for each of the years in the two-year period
ended June 30, 2018, and the related notes (collectively referred
to as the financial statements). In our opinion, the financial
statements present fairly, in all material respects, the financial
position of the Company as of June 30, 2018 and 2017, and the
results of its operations and its cash flows for each of the years
in the two-year period ended June 30, 2018, in conformity with
accounting principles generally accepted in the United States of
America.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of
June 30, 2018, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated September 13, 2018, expressed an unqualified
opinion.
Basis for
Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the PCAOB and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Haynie
& Company
Salt
Lake City, Utah
September
13, 2018
We have
served as the Company’s auditor since
2016.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and
Stockholders
of Park City Group, Inc.
Opinion on Internal Control over Financial Reporting
We have
audited Park City Group, Inc. and Subsidiaries’ internal
control over financial reporting as of June 30, 2018, based on
criteria established in Internal
Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of
June 30, 2018, based on criteria established in Internal Control—Integrated Framework
(2013) issued by COSO.
We also
have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States) (PCAOB), the
balance sheets and the related statements of income, comprehensive
income, stockholders’ equity, and cash flows of the Company,
and our report dated September 13, 2018, expressed an unqualified
opinion.
Basis for Opinion
The
Company’s management is responsible for maintaining effective
internal control over financial reporting, and for its assessment
of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting
firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial
Reporting
A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with
authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Haynie
& Company
Salt
Lake City, Utah
September
13, 2018
Consolidated Balance Sheets
|
Assets
|
June
30,
2018
|
June
30,
2017
|
|
Current
Assets
|
|
|
|
Cash
|
$14,892,439
|
$14,054,006
|
|
Receivables, net
allowance for doubtful accounts of $153,220 and $392,250 at June
30, 2018 and 2017, respectively
|
7,724,635
|
4,009,127
|
|
Prepaid expense and
other current assets
|
1,116,387
|
643,600
|
|
|
|
|
|
Total
Current Assets
|
23,733,461
|
18,706,733
|
|
|
|
|
|
Property
and equipment, net
|
1,896,348
|
2,115,277
|
|
|
|
|
|
Other
Assets:
|
|
|
|
Long-term
receivables, deposits, and other assets
|
1,213,265
|
2,540,291
|
|
Investments
|
477,884
|
477,884
|
|
Customer
relationships
|
919,800
|
1,051,200
|
|
Goodwill
|
20,883,886
|
20,883,886
|
|
Capitalized
software costs, net
|
168,926
|
137,205
|
|
|
|
|
|
Total
Other Assets
|
23,663,761
|
25,090,466
|
|
|
|
|
|
Total
Assets
|
$49,293,570
|
$45,912,476
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
$1,490,434
|
$565,487
|
|
Accrued
liabilities
|
745,694
|
2,084,980
|
|
Deferred
revenue
|
2,335,286
|
2,350,846
|
|
Lines of
credit
|
3,230,000
|
2,850,000
|
|
Current portion of
notes payable
|
188,478
|
318,616
|
|
|
|
|
|
Total
current liabilities
|
7,989,892
|
8,169,929
|
|
|
|
|
|
Long-term
liabilities
|
|
|
|
Notes payable, less
current portion
|
1,592,077
|
1,996,953
|
|
Other long-term
liabilities
|
7,275
|
36,743
|
|
|
|
|
|
Total
liabilities
|
9,589,244
|
10,203,625
|
|
|
|
|
|
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 issued and
outstanding at June 30, 2018 and 2017;
|
6,254
|
6,254
|
|
Series
B-1 Preferred, 550,000 shares authorized; 212,402 and 285,859
shares issued and outstanding at June 30, 2018 and 2017,
respectively
|
2,124
|
2,859
|
|
Common stock, $0.01
par value, 50,000,000 shares authorized; 19,773,549 and 19,423,821
issued and outstanding at June 30, 2018 and 2017,
respectively
|
197,738
|
194,241
|
|
Additional paid-in
capital
|
76,711,887
|
75,489,189
|
|
Accumulated
deficit
|
(37,213,677)
|
(39,983,692)
|
|
|
|
|
|
Total
stockholders’ equity
|
39,704,326
|
35,708,851
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$49,293,570
|
$45,912,476
|
See
accompanying notes to consolidated financial
statements.
Consolidated Statements of Operations
|
|
For
the Years Ended June 30,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Revenue
|
$22,036,278
|
$18,939,263
|
|
|
|
|
|
Operating
expense:
|
|
|
|
Cost of revenue and
product support
|
6,587,486
|
5,318,042
|
|
Sales and
marketing
|
6,403,343
|
5,097,072
|
|
General and
administrative
|
4,894,746
|
4,136,996
|
|
Depreciation and
amortization
|
633,854
|
486,024
|
|
Total operating
expense
|
18,519,429
|
15,038,134
|
|
|
|
|
|
Income from
operations
|
3,516,849
|
3,901,129
|
|
|
|
|
|
Other
income:
|
|
|
|
Interest
expense
|
(2,671)
|
(26,408)
|
|
Gain (loss) on
disposition of investment
|
-
|
10,380
|
|
|
|
|
|
Income before
income taxes
|
3,514,178
|
3,885,101
|
|
|
|
|
|
(Provision) for
income taxes
|
(105,395)
|
(107,569)
|
|
|
|
|
|
Net
income
|
3,408,783
|
3,777,532
|
|
|
|
|
|
Dividends on
preferred stock
|
(573,348)
|
(790,811)
|
|
|
|
|
|
Net income (loss)
applicable to common shareholders
|
$2,835,435
|
$2,986,721
|
|
|
|
|
|
Weighted average
shares, basic
|
19,581,000
|
19,353,000
|
|
Weighted average
shares, diluted
|
20,280,000
|
20,264,000
|
|
Basic earnings
(loss) per share
|
$0.14
|
$0.15
|
|
Diluted earnings
(loss) per share
|
$0.14
|
$0.15
|
See
accompanying notes to consolidated financial
statements.
PARK CITY GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Comprehensive Income
|
|
For
the Years Ended June 30,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Net
income
|
$3,408,783
|
$3,777,532
|
|
Other Comprehensive
Income:
|
|
|
|
Unrealized loss on
marketable securities
|
-
|
-
|
|
Reclassification
adjustment
|
-
|
-
|
|
Net income on
marketable securities
|
|
-
|
|
Comprehensive
income
|
$3,408,783
|
$3,777,532
|
See
accompanying notes to consolidated financial
statements.
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
(Deficit)
|
|
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,
2016
|
625,375
|
$6,254
|
180,213
|
$1,802
|
19,229,313
|
$192,296
|
$73,272,620
|
$(42,970,413)
|
$30,502,559
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued
for:
|
|
|
|
|
|
|
|
|
|
|
Accrued
compensation
|
-
|
-
|
30,000
|
300
|
120,791
|
1,208
|
1,081,850
|
-
|
1,083,358
|
|
Cash
|
-
|
-
|
-
|
-
|
29,067
|
291
|
223,175
|
-
|
223,466
|
|
Preferred
Dividends-PIK
|
-
|
-
|
75,646
|
757
|
-
|
-
|
755,715
|
-
|
756,472
|
|
Preferred
Dividends-Declared
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(790,811)
|
(790,811)
|
|
Exercise of
Option/Warrant
|
-
|
-
|
-
|
-
|
44,650
|
446
|
155,829
|
-
|
156,275
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,777,532
|
3,777,532
|
|
Balance, June 30,
2017
|
625,375
|
$6,254
|
285,859
|
$2,859
|
19,423,821
|
$194,241
|
$75,489,189
|
$(39,983,692)
|
$35,708,851
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued
for:
|
|
|
|
|
|
|
|
|
|
|
Accrued
compensation
|
-
|
-
|
20,000
|
200
|
136,160
|
1,361
|
1,247,149
|
-
|
1,248,710
|
|
Cash
|
-
|
-
|
-
|
-
|
27,018
|
270
|
244,147
|
-
|
244,417
|
|
Preferred
Dividends-Declared
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(573,348)
|
(573,348)
|
|
Exercise of
Option/Warrant
|
-
|
-
|
-
|
-
|
186,550
|
1,866
|
665,037
|
-
|
666,903
|
|
Redemption
|
-
|
-
|
(93,457)
|
(935)
|
-
|
-
|
(933,635)
|
(65,420)
|
(999,990)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
|
|
|
|
|
3,408,783
|
3,408,783
|
|
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
|
See
accompanying notes to consolidated financial
statements.
PARK CITY GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
For
the Years Ended June 30,
|
|
|
|
2018
|
2017
|
|
Cash flows from
operating activities:
|
|
|
|
Net
income
|
$3,408,783
|
$3,777,532
|
|
Adjustments to
reconcile net income to net cash provided by operating
activities:
|
|
|
|
Depreciation and
amortization
|
633,854
|
486,024
|
|
Stock compensation
expense
|
588,984
|
1,266,805
|
|
Bad debt
expense
|
465,050
|
345,700
|
|
Gain on sale of
fixed assets
|
-
|
(10,380)
|
|
Decrease (increase)
in:
|
|
|
|
Trade
receivables
|
(4,180,558)
|
(2,325,075)
|
|
Long-term
receivables, prepaids and other assets
|
854,239
|
(1,257,534)
|
|
Increase (decrease)
in:
|
|
|
|
Accounts
payable
|
924,947
|
(14,822)
|
|
Accrued
liabilities
|
(500,253)
|
355,136
|
|
Deferred
revenue
|
(15,560)
|
(366,248)
|
|
|
|
|
|
Net cash provided
by operating activities
|
2,179,486
|
2,257,138
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
Cash
from sale of property & equipment
|
-
|
13,000
|
|
Purchase
of property and equipment
|
(204,005)
|
(1,957,402)
|
|
Capitalization of software costs
|
(111,241)
|
-
|
|
Purchase of long-term investments
|
-
|
(6,300)
|
|
|
|
|
|
Net
cash used in investing activities
|
(315,246)
|
(1,950,702)
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
Proceeds
from employee stock purchase plans
|
244,417
|
223,465
|
|
Proceeds
from exercises of options and warrants
|
666,903
|
156,176
|
|
Proceeds from issuance of note payable
|
56,078
|
1,824,617
|
|
Net
increase in lines of credit
|
380,000
|
350,000
|
|
Redemption
of Series B-1 Preferred
|
(999,990)
|
-
|
|
Dividends
paid
|
(782,123)
|
(10,576)
|
|
Payments
on notes payable and capital leases
|
(591,092)
|
(239,500)
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
(1,025,807)
|
2,304,182
|
|
|
|
|
|
Net increase in
cash and cash equivalents
|
838,433
|
2,610,618
|
|
|
|
|
|
Cash and cash
equivalents at beginning of period
|
14,054,006
|
11,443,388
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
$14,892,439
|
$14,054,006
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
Cash paid for
income taxes
|
$75,714
|
$66,163
|
|
Cash paid for
interest
|
$166,888
|
$22,452
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing and Financing
Activities
|
|
|
|
Preferred Stock to
pay accrued liabilities
|
$200,000
|
$300,000
|
|
Common Stock to pay
accrued liabilities
|
$1,048,710
|
$783,457
|
|
Dividends accrued
on preferred stock
|
$573,532
|
$790,811
|
|
Dividends paid with
preferred stock
|
$-
|
$756,473
|
See
accompanying notes to consolidated financial
statements.
PARK CITY GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2018 and June 30, 2017
|
NOTE 1.
|
DESCRIPTION OF BUSINESS
|
Summary of Business
Park City Group, Inc. (the
“Company”) is a Software-as-a-Service (SaaS)
provider, and the parent company of ReposiTrak Inc., a 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 upstream suppliers in
order to accelerate sales, control risks, and improve supply chain
efficiencies. The Company is incorporated in the state of Nevada.
The Company 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 consolidation.
|
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,
including ReposiTrak and Prescient. 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 which 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, and the capitalization of software
development costs.
Concentration of Credit Risk and Significant Customers
The
Company maintains cash in bank deposit accounts, which, at times,
may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash
equivalents. Financial instruments,
which potentially subject the Company to concentration of credit
risk, consist primarily of trade receivables. In the normal course
of business, the Company provides credit terms to its customers.
Accordingly, the Company performs ongoing evaluations of its
customers and maintains allowances for possible losses. The
provision is based on the overall composition of our accounts
receivable aging, our prior history of accounts receivable
write-offs, and our experience with specific
customers.
Other
factors indicating significant risk include customers that have
filed for bankruptcy or customers for which we have less payment
history to rely upon. We rely on historical trends of bad debt as a
percentage of total revenue and apply these percentages to the
accounts receivable which when realized have been within the range
of management’s expectations. The Company does not require
collateral from its customers.
The
Company’s accounts receivable are derived from sales of
products and services primarily to customers operating
multilocation retail and grocery stores. The Company writes off
accounts receivable when they are determined to be uncollectible.
Changes in the allowances for doubtful accounts are recorded as bad
debt expense and are included in general and administrative expense
in our consolidated financial statements. Amounts that have been
invoiced are recorded in accounts receivable (current and
long-term), and in deferred revenue or revenue, depending on
whether the revenue recognition criteria have been
met.
During the year ended June 30, 2018, the Company
had one customer that accounted for greater than 10% of accounts
receivable. Customer A had a balance of
$1,288,980. During the year ended June 30, 2017, the Company
had one customer that accounted for greater than 10% of accounts
receivable. Customer B had a balance of
$403,000.
Prepaid Expense and Other Current Assets
Prepaid
expense and other current assets include amounts for which payment
has been made but the services have not yet been consumed. The
Company’s prepaid expense is made up primarily of prepayments
for hosted software applications used in the Company’s
operations, maintenance agreements on hardware and software, and
other miscellaneous amounts for insurance, membership fees and
professional fees. Prepaid expense is amortized on a pro-rata
basis to expense accounts as the services are consumed typically by
the passage of time or as the service is used.
Depreciation
and Amortization
Depreciation and
amortization of property and equipment is computed using the
straight-line method based on the following estimated useful
lives:
|
|
Years
|
|
Furniture and
fixtures
|
5-7
|
|
Computer
equipment
|
3
|
|
Equipment under
capital leases
|
3
|
|
Long-term use
equipment
|
10
|
|
Leasehold
improvements
|
See
below
|
Leasehold
improvements are amortized over the shorter of the remaining lease
term or the estimated useful life of the improvements.
Amortization of
intangible assets are computed using the straight-line method based
on the following estimated useful lives:
|
|
Years
|
|
Customer
relationships
|
10
|
|
Acquired developed
software
|
5
|
|
Developed
software
|
3
|
|
Goodwill
|
See
below
|
Goodwill and
intangible assets deemed to have indefinite lives are subject to
annual impairment tests. Other intangible assets are amortized over
their useful lives.
Warranties
The
Company offers a limited warranty against software defects.
Customers who are not completely satisfied with their software
purchase may attempt to be reimbursed for their purchases outside
the warranty period. For the years ending June 30, 2018 and 2017,
the Company did not incur any expense associated with warranty
claims.
Revenue Recognition
The
Company recognizes revenue when 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.
The
Company recognizes 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 are accounted for separately if the
deliverables have standalone value upon delivery. When considering
whether professional services have standalone value, the Company
considers: (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.
The
business model for the Company’s MarketPlace supplier
sourcing and B2B e-commerce solution is still evolving as the
Company introduces the platforms capabilities to its customers. In
some situations, the Company acts as an agent for suppliers or
provides supply chain technology services. In other situation the
Company may act as the supplier for certain products. In these
transactions the Company recognizes revenue based on the Gross
Merchandise Value (“GMV”) of the
transaction.
Software Development Costs
The
Company accounts for research costs of computer software to be
sold, leased or otherwise marketed as expense until technological
feasibility has been established for the product. Once
technological feasibility is established, the company will
occasionally capitalize software costs until the product is
available for general release to customers. In these instances, the
Company determines technological feasibility for its software
products to have been reached when a working prototype is complete
and meets or exceeds design specifications including functions,
features, and technical performance requirements.
During
the 2018 and 2017 fiscal years, capitalized development costs of
$65,505 and $45,736, respectively, were amortized into expense. The
Company amortizes its developed and purchased software on a
straight-line basis over three and five years,
respectively.
Research and Development Costs
Research and
development costs include personnel costs, engineering, consulting,
and contract labor and are expensed as incurred for software that
has not achieved technological feasibility.
Advertising Costs
Advertising is
expensed as incurred. Advertising costs were approximately $107,656
and $110,600 for the years ended June 30, 2018 and 2017,
respectively.
Income Taxes
The
Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between
tax bases and financial reporting bases of other assets and
liabilities.
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
year ended June 30, 2018 and 2017 warrants to purchase 1,185,549
and 1,372,099 shares of common stock, respectively, were not
included in the computation of diluted EPS due to the anti-dilutive
effect. Warrants to purchase shares of common stock were
outstanding at prices ranging $4.00 from to $10.00 per share at
June 30, 2018.
The
following table presents the components of the computation of basic
and diluted earnings per share for the periods
indicated:
|
|
Year
ended June 30,
|
|
|
|
2018
|
2017
|
|
Numerator
|
|
|
|
Net income (loss)
applicable to common shareholders
|
$2,835,435
|
$2,986,721
|
|
|
|
|
|
Denominator
|
|
|
|
Weighted average
common shares outstanding, basic
|
19,581,000
|
19,353,000
|
|
Warrants to
purchase common stock
|
699,000
|
911,000
|
|
|
|
|
|
Weighted average
common shares outstanding, diluted
|
20,280,000
|
20,264,000
|
|
|
|
|
|
Net income (loss)
per share
|
|
|
|
Basic
|
$0.14
|
$0.15
|
|
Diluted
|
$0.14
|
$0.15
|
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.
Cash and Cash Equivalents
The
Company considers all highly liquid investments purchased with an
original maturity of twelve months or less to be cash equivalents.
Cash and cash equivalents are stated at fair value.
Marketable Securities
Management
determines the appropriate classification of marketable securities
at the time of purchase and reevaluates such determination at each
balance sheet date. Securities are classified as available for sale
and are carried at fair value, with the change in unrealized gains
and losses, net of tax, reported as a separate component on the
consolidated statements of comprehensive income. Fair value is
determined based on quoted market rates when observable or
utilizing data points that are observable, such as quoted prices,
interest rates and yield curves. The cost of securities sold
is based on the specific-identification method. Interest on
securities classified as available for sale is also included as a
component of interest income.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash, cash
equivalents, receivables, payables, accruals and notes
payable. The carrying amount of cash, cash equivalents,
receivables, payables and accruals approximates fair value due to
the short-term nature of these items. The notes payable also
approximate fair value based on evaluations of market interest
rates.
Reclassifications
Certain
prior-year amounts have been reclassified to conform with the
current year’s presentation. Net income was not affected by
these reclassifications.
|
NOTE 3.
|
INVESTMENTS
|
As of
June 30, 2018, investments represent a 36% ownership in a
privately-held corporation and represents initial (January 2016)
and subsequent investments. There were nominal earnings for the
year ended June 30, 2018.
Investee companies
that are not consolidated, but over which the Company exercises
significant influence, are accounted for under the equity method of
accounting. Whether or not the Company exercises significant
influence with respect to an investee depends on an evaluation of
several factors including, among others, representation on the
investee company’s board of directors and ownership level,
which is generally a 20% to 50% interest in the voting securities
of the investee company.
Under
the equity method of accounting, an investee company’s
accounts are not reflected within the Company’s consolidated
balance sheet and statements of operations; however, the
Company’s share of the earnings or losses of the investee
company is reflected in the consolidated statements of operations.
The Company’s carrying value in an equity method investee
company is reflected in the caption
‘‘Investments’’ in the Company’s
consolidated balance sheet.
When
the Company’s carrying value in an equity method investee
company is reduced to zero, no further losses are recorded in the
Company’s consolidated financial statements unless the
Company guaranteed obligations of the investee company or has
committed additional funding. When the investee company
subsequently reports income, the Company will not record its share
of such income until it equals the amount of its share of losses
not previously recognized.
|
NOTE 4.
|
RECEIVABLES
|
Accounts receivable
consist of the following:
|
|
2018
|
2017
|
|
Accounts
receivable
|
$7,877,855
|
$4,401,377
|
|
Allowance for
doubtful accounts
|
(153,220)
|
(392,250)
|
|
|
$7,724,635
|
$4,009,127
|
Accounts receivable
consist of trade accounts receivable and unbilled amounts
recognized as revenue during the year for which invoicing occurs
subsequent to year-end. 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.
|
NOTE 5.
|
PROPERTY AND EQUIPMENT
|
Property and
equipment are stated at cost and consist of the following at June
30:
|
|
2018
|
2017
|
|
Computer
equipment
|
$2,920,180
|
$2,951,179
|
|
Furniture and
equipment
|
1,703,586
|
1,634,081
|
|
Leasehold
improvements
|
245,835
|
245,835
|
|
|
4,869,601
|
4,831,095
|
|
Less accumulated
depreciation and amortization
|
(2,973,253)
|
(2,715,818)
|
|
|
$1,896,348
|
$2,115,277
|
Depreciation
expense for the years ended June 30, 2018 and 2017 was $422,933 and
$308,887, respectively.
|
NOTE 6.
|
CAPITALIZED SOFTWARE COSTS
|
Capitalized
software costs consist of the following at June 30:
|
|
2018
|
2017
|
|
Capitalized
software costs
|
$2,737,312
|
$2,626,070
|
|
Less accumulated
amortization
|
(2,568,386)
|
(2,488,865)
|
|
|
$168,926
|
$137,205
|
Amortization
expense for the years ended June 30, 2018 and 2017 was $79,521 and
$45,737, respectively.
|
NOTE 7.
|
ACQUISITION RELATED INTANGIBLE ASSETS, NET
|
Customer
relationships consist of the following at June 30:
|
|
2018
|
2017
|
|
Customer
relationships
|
$5,537,161
|
$5,537,161
|
|
Less accumulated
amortization
|
(4,617,361)
|
(4,485,961)
|
|
|
$919,800
|
$1,051,200
|
Amortization
expense for the years ended June 30, 2018 and 2017 was $131,400 and
$131,400, respectively.
Estimated aggregate
amortization expense per year are as follows:
|
Years ending June
30:
|
|
|
2019
|
$131,400
|
|
2020
|
$131,400
|
|
2021
|
$131,400
|
|
2022
|
$131,400
|
|
Thereafter
|
$394,200
|
|
NOTE 8.
|
ACCRUED LIABILITIES
|
Accrued
liabilities consist of the following at June 30, 2018 and
2017:
|
|
2018
|
2017
|
|
Accrued stock-based
compensation
|
$347,971
|
$1,054,828
|
|
Accrued
compensation
|
300,571
|
296,553
|
|
Accrued other
liabilities
|
(199,564)
|
265,521
|
|
Accrued
taxes
|
298,965
|
261,561
|
|
Accrued
dividends
|
(2,249)
|
206,522
|
|
|
$745,694
|
$2,084,980
|
|
NOTE 9.
|
NOTES PAYABLE
|
The
Company had the following notes payable obligations at June 30,
2018 and 2017:
|
Notes
Payable:
|
2018
|
2017
|
|
Note payable to a
bank, due in monthly installments of $7,860 bearing interest at
4.17% due August 26, 2018, this note is a conversion of a
multi-advance note payable initially put in place on August 26,
2013, secured by related capital equipment purchases.
|
-
|
99,751
|
|
Note payable to a
bank, due in monthly installments of $4,932 bearing interest at
4.91% due March 18, 2018, secured by related capital equipment
purchases.
|
-
|
43,475
|
|
Note payable to an
entity, due in monthly installments of $4,009 bearing interest at
4.00% due July 1, 2019, secured by long-term
investments.
|
312,456
|
348,076
|
|
Note payable to a
bank, 12 month draw period interest only 2% + LIBOR, monthly
installments set after draw period, due March 31, 2021, secured by
related capital equipment purchase, NBV of approximately
$170,000
|
-
|
206,996
|
|
Note payable to a
bank, due in quarterly installments of $53,996 bearing interest at
4.21% balloon payment of $800,000 due July 28, 2022, secured by
related capital equipment, NBV of approximately
$1,550,000
|
1,467,599
|
1,617,271
|
|
|
$1,780,555
|
$2,315,569
|
|
Less current
portion notes payable
|
(188,478)
|
(318,616)
|
|
|
$1,592,077
|
$1,996,953
|
Maturities of notes
payable at June 30, 2018 are as follows:
|
Year
ending June 30:
|
|
|
2019
|
$188,478
|
|
2020
|
$200,220
|
|
2021
|
$208,944
|
|
2022
|
$217,903
|
|
Thereafter
|
$965,010
|
|
NOTE 10.
|
LINES OF CREDIT
|
The
Company’s line of credit with a bank has an annual interest
rate of 2.5% plus the greater of zero percent or LIBOR and allows
for borrowings up to $5,000,000. The line of credit is
scheduled to mature on December 31, 2018. The balance on the line
of credit was $3,230,000 and $2,850,000 at June 30, 2018 and June
30, 2017, respectively.
|
NOTE 11.
|
DEFERRED REVENUE
|
Deferred revenue
consisted of the following at June 30:
|
|
2018
|
2017
|
|
Subscription
|
$2,056,796
|
$2,083,070
|
|
Other
|
278,490
|
267,776
|
|
|
$2,335,286
|
$2,350,846
|
|
NOTE 12.
|
INCOME TAXES
|
Deferred
taxes are provided on a liability method whereby deferred tax
assets are recognized for deductible temporary differences and
operating loss and tax credit carry forwards and deferred tax
liabilities are recognized for taxable
differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment. Due to the tax rates being changed
in the current year, we have used a blended rate of 32.5% compared
to 39% as a tax rate.
Net
deferred tax liabilities consist of the following components at
June 30:
|
|
2018
|
2017
|
|
Deferred
tax assets:
|
|
|
|
NOL
Carryover
|
$31,664,500
|
48,122,516
|
|
Allowance
for Bad Debts
|
39,800
|
152,978
|
|
Accrued
Expenses
|
70,400
|
365,370
|
|
Deferred
Revenue
|
-
|
(1)
|
|
Depreciation
|
(274,500)
|
(282,975)
|
|
Amortization
|
(337,000)
|
(335,797)
|
|
|
|
|
|
Valuation
allowance
|
(31,163,200)
|
(48,022,091)
|
|
Net
deferred tax asset
|
$-
|
-
|
The
income tax provision differs from the amounts of income tax
determined by applying the US federal income tax rate to pretax
income from continuing operations for the years ended June 30, 2018
and 2017 due to the following:
|
|
2018
|
2017
|
|
Book
Income
|
$1,107,856
|
1,473,237
|
|
Stock
for Services
|
(88,504)
|
(163,265)
|
|
Change
in accrual
|
(216,453)
|
110,398
|
|
Life
Insurance
|
26,438
|
26,438
|
|
Meals
& Entertainment
|
9,562
|
10,499
|
|
Change
in Allowance
|
(77,685)
|
123,728
|
|
Change
in Depreciation
|
(248,647)
|
(398,784)
|
|
Loss
on Sale of Assets
|
-
|
(18,852)
|
|
NOL
Utilization
|
(512,567)
|
(1,163,399)
|
|
Valuation
allowance
|
|
|
|
|
$-
|
-
|
At
June 30, 2018, the Company had net operating loss carry-forwards of
approximately $121,787,000 that may be offset against past and
future taxable income from the year 2016 through 2038. A
significant portion of the net operating loss carryforwards will
begin to expire in 2019. No tax benefit has been
reported in the June 30, 2018 consolidated financial statements
since the potential tax benefit is offset by a valuation allowance
of the same amount.
Due
to the change in ownership provisions of the Tax Reform Act of
1986, net operating loss carryforwards for Federal income tax
reporting purposes are subject to annual limitations. In January of
2009 the Company acquired Prescient Applied Intelligence, Inc.
which had significant net operating loss carry-forwards. Due to the
change in ownership, Prescient's net operating loss
carryforwardsmay be limited as to use in future years. The
limitation will be determined on a year-to-year basis. In June of
2015 the Company acquired Repositrak, Inc. which had significant
net operating loss carryforwards. Due to the change in ownership,
Repositrak's net operating loss carryforwards may be limited as to
use in future years. The limitation will be determined on a year to
year basis.
The
Company determines whether it is more likely than not that a tax
position will be sustained upon examination based upon the
technical merits of the position. If the
more-likely-than-not threshold is met, the Company measures the tax
position to determine the amount to recognize in the financial
statements. The Company performed a review of its
material tax positions in accordance with these recognition and
measurement standards.
The
Company has concluded that there are no significant uncertain tax
positions requiring disclosure, and there are not material amounts
of unrecognized tax benefits.
The
Company includes interest and penalties arising from the
underpayment of income taxes in the consolidated statements of
operations in the provision for income taxes. As of June
30, 2018, the Company had no accrued interest or penalties related
to uncertain tax positions.
|
NOTE 13.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
In
September 2012, the Company entered into an office lease at 299 So.
Main Street, Suite 2370, Salt Lake City, Utah, 84111, providing for
the lease of approximately 5,300 square feet for a period of seven
years, commencing on November 1, 2012. The monthly rent was
$13,122. In February 2017, the Company amended its office lease, as
part of the amendment the Company relocated to 6,700 square feet in
Suite 2225. The new monthly rent is $16,843.
Minimum
future rental payments under the non-cancelable operating leases
are as follows:
|
Year ending June
30:
|
|
|
2019
|
$163,016
|
|
2020
|
$-
|
|
2021
|
$-
|
|
2022
|
$-
|
|
2023
|
$-
|
From
time to time the Company may enter into or exit from diminutive
operating lease agreements for equipment such as copiers, temporary
back up servers, etc. These leases are not of a material amount and
thus will not in the aggregate have a material adverse effect on
our business, financial condition, results of operation or
liquidity.
|
NOTE 14.
|
EMPLOYEE BENEFIT PLAN
|
The
Company offers an employee benefit plan under Benefit Plan Section
401(k) of the Internal Revenue Code. Employees who have
attained the age of 18 are eligible to participate. The
Company, at its discretion, may match employee’s
contributions at a percentage determined annually by the Board of
Directors. The Company does not currently match
contributions. There were no expenses for the years ended June
30, 2018 and 2017.
|
NOTE 15.
|
STOCKHOLDERS EQUITY
|
Officers and Directors Stock Compensation
Effective November
2008, the Board of Directors approved the following compensation
for directors who are not employed by the Company:
●
Annual
cash compensation of $10,000 payable at the rate of $2,500 per
quarter. The Company has the right to pay this amount in the form
of shares of the Company’s common stock.
●
Upon
appointment, outside independent directors receive a grant of
$150,000 payable in shares of the Company’s restricted Common
Stock calculated based on the market value of the shares of Common
Stock on the date of grant. The shares vest ratably over a
five-year period.
●
Reimbursement
of all travel expense related to performance of Directors’
duties on behalf of the Company.
Officers, Key Employees, Consultants and Directors Stock
Compensation.
In
January 2013, the Board of Directors approved the Second Amended
and Restated 2011 Stock Plan (the “Amended 2011 Plan”), which
Amended 2011 Plan was approved by shareholders on March 29,
2013. Under the terms of the Amended 2011 Plan, all employees,
consultants and directors of the Company are eligible to
participate. The maximum aggregate number of shares of common
stock that may be granted under the 2011 Plan was increased from
250,000 shares to 550,000 shares. On November 9, 2017, the Company
amended the Amended 2011 Plan to increase the maximum aggregate
number of shares from 550,000 shares to 675,000
shares.
A
Committee of independent members of the Company’s Board of
Directors administers the 2011 Plan. The exercise price for
each share of common stock purchasable under any incentive stock
option granted under the 2011 Plan shall be not less than 100% of
the fair market value of the common stock, as determined by the
stock exchange on which the common stock trades on the date of
grant. If the incentive stock option is granted to a
shareholder who possesses more than 10% of the Company’s
voting power, then the exercise price shall be not less than 110%
of the fair market value on the date of grant. Each option
shall be exercisable in whole or in installments as determined by
the Committee at the time of the grant of such options. All
incentive stock options expire after 10 years. If the
incentive stock option is held by a shareholder who possesses more
than 10% of the Company's voting power, then the incentive stock
option expires after five years. If the option holder is
terminated, then the incentive stock options granted to such holder
expire no later than three months after the date of
termination. For option holders granted incentive stock
options exercisable for the first time during any fiscal year and
in excess of $100,000 (determined by the fair market value of the
shares of common stock as of the grant date), the excess shares of
common stock shall not be deemed to be purchased pursuant to
incentive stock options.
During
the years ended June 30, 2018 and 2017 the Company issued 27,880
and 37,634 shares to its directors and 127,161 and 112,224 shares
to employees and consultants, respectively under these plans,
119,597 and 115,596, respectively are included in the rollforward
of Restricted Stock units below.
Restricted Stock Units
|
|
Restricted
Stock Units
|
Weighted
Average Grant Date Fair Value ($/share)
|
|
|
|
|
|
Outstanding at July
1, 2016
|
1,051,144
|
$5.82
|
|
Granted
|
73,625
|
10.69
|
|
Vested and
issued
|
(115,596)
|
6.28
|
|
Forfeited
|
(26,560)
|
10.23
|
|
Outstanding at June
30, 2017
|
982,613
|
6.01
|
|
Granted
|
23,085
|
10.50
|
|
Vested and
issued
|
(119,597)
|
7.38
|
|
Forfeited
|
(28,487)
|
10.96
|
|
Outstanding at
June 30, 2018
|
857,614
|
$6.46
|
The
number of restricted stock units outstanding at June 30, 2018
included 18,925 units that have vested but for which shares of
common stock had not yet been issued pursuant to the terms of the
agreement.
As of
June 30, 2018, there was approximately $4.93 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 4.2
years.
Warrants
Outstanding
warrants were issued in connection with private placements of the
Company’s common stock and with the Series B Preferred
Restructure. The following table summarizes information about fixed
stock warrants outstanding at June 30, 2018:
|
|
Warrants
Outstanding
at
June 30, 2018
|
Warrants
Exercisable
at
June 30, 2018
|
|||
|
Range
of
exercise
prices
|
Number
Outstanding
|
Weighted
average
remaining
contractual life (years)
|
Weighted
average exercise price
|
Number
exercisable
|
Weighted average
exercise price
|
|
$3.45 – 4.00
|
1,085,068
|
1.60
|
$3.94
|
1,085,068
|
$3.94
|
|
$6.45 –
10.00
|
100,481
|
.88
|
$7.29
|
100,481
|
$7.29
|
|
|
1,185,549
|
1.50
|
$4.18
|
1,185,549
|
$4.18
|
Preferred Stock
The
Company’s articles 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 550,000
shares are designated as Series B-1 Preferred Stock
(“Series B-1
Preferred”). 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 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
additional shares of Series B Preferred (“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 materially more expensive, or would impair the Company’s
net cash position, which management believes could cause customer
concerns and negatively impact the Company’s ability to
attract new business.
Section 4 of the Company’s First Amended and
Restated Certificate of Designation of the Relative Rights, Powers
and Preferences of the Series B-1 Preferred Stock, as amended (the
“Series B-1
COD”) provides the
Company’s Board of Directors with the right to redeem any or
all of the outstanding shares of the Company’s Series B-1
Preferred for a cash payment of $10.70 per share at any time upon
providing the holders of Series B-1 Preferred at least ten days
written notice that sets forth the date on which the redemption
will occur (the “Redemption
Notice”).
In
July 2017, the Company issued 20,000 shares of Series B-1 Preferred
in satisfaction of an accrued bonus payable to the Company’s
Chief Executive Officer.
On January 27, 2018, the Company’s Board of
Directors approved the redemption of 93,457 of the 305,859 issued
and outstanding shares of the Company’s Series B-1 Preferred
(the “Redemption
Shares”), and on February
6, 2018, the Company delivered a Redemption Notice to the holders
of the Series B-1 Preferred notifying the holders of the
Company’s intent to redeem the Redemption Shares, on a pro
rata basis, on February 7, 2018 (the “Redemption
Date”) (the
“Series B-1
Redemption”). On the
Redemption Date, the Company paid an aggregate total of $1.0
million to the holders of shares of Series B-1 Preferred for the
redemption of a total of 93,457 shares of Series B-1
Preferred. Following the Series
B-1 Redemption, a total of 212,402 shares of Series B-1 Preferred
remain issued and outstanding.
As of
June 30, 2018, a total of 625,375 shares of Series B Preferred and
212,402 shares of Series B-1 Preferred were issued and
outstanding.
|
NOTE 16.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
In May 2014, August 2015, April 2016, May 2016,
September 2017 and November 2017, 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, ASU 2016-12 (ASC
Topic 606) Revenue from Contracts with
Customers, Narrow Scope Improvements and Practical
Expedients, ASU
2017-14, Income Statement - Reporting
Comprehensive Income (ASC
Topic 606), Revenue
Recognition (ASC Topic
606), and Revenue from Contracts with
Customers (ASC Topic 606):
Amendments to SEC Paragraphs pursuant to Staff Accounting Bulletin
No. 116 and SEC Release No. 33-10403, 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 currently anticipates adopting the standard
using the full retrospective method. We are in the process of
completing our analysis on the impact this guidance will have on
our Consolidated Financial Statements and related disclosures, as
well as identifying the required changes to our policies, processes
and controls. The Company is conducting its assessment in order to
be able to state the impact of this ASU on our financial position
and results of operation.
In January 2017, the FASB issued ASU
2017-04, Intangibles—Goodwill and
Other (Topic 350), Simplifying the Test for Goodwill
Impairment. The amendments
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
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 17.
|
RELATED PARTY TRANSACTIONS
|
The Company issued
66,868 and 8,778 PIK Shares to Messrs. Fields and Allen,
respectively, in the year ended June 30,
2017.
Service Agreement. During
the year ended June 30, 2018, 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 Mr. Randall K.
Fields to perform the functions of President and Chief Executive
Officer for the Company. Randall K. Fields, FMI’s designated
Executive, who also serves as the Company’s Chairman of the
Board of Directors, controls FMI.
The
Company had payables of $316,539 and $77,628 to FMI at June 30,
2018 and 2017 respectively, under this Agreement. In addition,
during the years ended June 30, 2018 and 2017, 20,000 shares and
30,000 shares of Series B-1 Preferred were paid to FMI in
satisfaction of an accrued bonus payable to Mr. Fields,
respectively
Randall
K. Fields and Robert W. Allen each beneficially own Series B-1
Preferred. As a result of the Series B-1 Redemption, the Company
paid an aggregate of $889,159 and $110,831 to Messrs. Fields and
Allen, respectively, in consideration for the redemption of 83,099
and 10,358 shares of Series B-1 Preferred. See Note
15.
|
NOTE 18.
|
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 financial statements.
F-19