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| EX-99 - EXHIBIT 99.2 - PARK CITY GROUP INC | ex99-2.htm |
| 8-K - CURRENT REPORT - PARK CITY GROUP INC | pcyg8k_may152020.htm |
Exhibit
99.1
C O R P O R A T E P A R T I C I P A N T S
Robert Fink, FNK IR,
LLC
John Merrill, Chief Financial
Officer
Randy Fields, Chairman and Chief Executive
Officer
C O N F E R E N C E C A L L P A R T I C I P A N T S
Ananda Baruah, Loop Capital
Markets
Thomas Forte, D.A.
Davidson
P R E S E N T A T I O N
Operator
Greetings
and welcome to Park City Group Fiscal Third Quarter 2020 Earnings
Call.
At this
time, all participants are in a listen-only mode. A
question-and-answer session will follow the formal presentation.
Should you require Operator assistance during the conference,
please press star, zero to signal an Operator. Please note, the
conference is being recorded.
It is
now my pleasure to introduce your host, Rob Fink with FNK IR. Mr.
Fink, you may begin.
Robert Fink
Thank
you, Operator, and good afternoon, everyone.
Thank
you for joining us today for Park City Group’s Fiscal Third
Quarter 2020 Earnings Call. Hosting the call today are Randy
Fields, Park City Group’s CEO and Chairman, and John Merrill,
Park City Group’s CFO.
Before
we begin, I would like to remind everyone that this call could
contain forward-looking statements about Park City Group within the
meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are statements that are not subject to
historical facts. Such forward-looking statements are based upon
current beliefs and expectations. Park City Group Management are
subject to risks and uncertainties which could cause actual results
to differ from those forward-looking statements. Such risks are
fully discussed in the Company’s filings with the Securities
and Exchange Commission. The information set forth herein should be
considered in light of such risk. Park City Group does not assume
any obligation to update information combined in this conference
call.
Shortly
after the market closed today, the Company issued a press release
overviewing the financial results that we will discuss on
today’s call. Investors can visit the Investor Relations
section of the Company’s website at parkcitygroup.com to
access this press release.
With
all that said, I’d now like to turn the call over to John
Merrill. John, the call is yours.
John Merrill
Thanks,
Rob, and good afternoon, everyone.
The
last several conference calls, we have focused on three core
messages:
First,
we shifted our business to prioritize recurring revenue over
nonrecurring revenue. This has not changed and the trend continued
in the March quarter as the year-over-year declined in revenues was
largely from nonrecurring revenue. While we experienced delays in
supply chain customer implementations and slower Tier 2 expansion
due to COVID-19, we offset a portion of this customer driven
slowdown with modest growth in our existing base of recurring
revenue and increases in MarketPlace revenue.
Second
was our focus on strengthening our balance sheet. As I have said
before, our customers demand it. This effort is critically
important as PCG and a global economy face the disruption and
uncertainty associated with the pandemic. Preservation and
survivability are more vital now than ever before.
Third
was our focus on growing the network. We will not waver. However,
that effort took a backseat in this quarter. We remain laser
focused on growing our network. As you might expect, many of our
target customers were busy with pandemic-related disruption and not
able to focus on our offerings. There were other customer
priorities in an environment none of us have ever experienced
before. I’m optimistic that we will see new and expanded
opportunities as our customers and the consumers shift from triage
and panic to stabilizing the supply chain and resume some sense of
normalcy.
I am
confident that the grocery industry will focus on how to avoid
these challenges in the future. When will normalcy resume? What is
the new normal? It’s anyone’s guess. In the meantime, I
believe our customers, both large and small, demand partners who
will assist them through these uncertain and volatile times. I also
anticipate they will be much more selective, working with companies
to position themselves financially to weather the
storm.
While
our profitability and cash generation declined in the quarter on a
sequential and year-over-year basis, the pandemic significantly
impacted the grocery supply chain and how our customers do
business. This situation may be short-term in nature. Nonetheless,
the services and peace of mind we provide our grocery customers and
U.S. consumers has never been more vital, particularly when it
comes to what we do: food safety compliance and supply chain
visibility.
In
early March 2020, as the depths of the pandemic unfolded, we took
steps to reduce costs. As I have said before, it takes $17 million
a year to run this place, absent MarketPlace. In response, we made
a defensive decision to tighten our belt and reduce cash operating
spend to less than $16 million, absent MarketPlace. Some of these
expenditures ceased naturally as a result of projects that were
completed or we halted, less business travel given the pandemic
related shut down, cancellation of tradeshows, and lower commission
due to lower revenue.
Keeping
our employees safe, we focused on other cost areas whereby we took
a more aggressive approach. This included, but was not limited to,
professional fees, consultants, software and maintenance contracts,
and across-the-board general overhead reduction. Although no
assurances can be given, this may reduce our monthly cash expenses
by $100,000 per month.
Also,
in March, we launched our FoodSourceUSA program. This unique online
platform utilizes our proprietary data to provide the Department of
Defense with information so they can proactively address chronic
imbalances in the food supply chain caused by COVID-19 and prepare
for other crisis situations in the future.
This
enables the DoD to visualize shifting surplus food in one part of
the country to another where such food may see a low supply. As
Randy will explain in more detail, we view our position in the
grocery industry as a public trust, helping to preserve food safety
and adequate supplies in the largest subset of the economy. This is
a prime example.
Our
MarketPlace offering is another example. MarketPlace revenue was up
66% in the March quarter. Most of that increase took place in the
last few weeks of March. This was the result of our customers
needing all sorts of hard to find items such as gloves, masks and
other items to facilitate stay at home and work from home mandates,
such as chest freezers, web cameras, microphones, portable
Bluetooth speakers and other such items. Our ability to connect
retailers with new suppliers helped our customers meet
unprecedented demand quickly and safely. As we have said,
MarketPlace generates lower margins than the other parts of our
business. This revenue mix contributed to our reduced
profitability. But this is a vital service that strengthens our
value with our customers.
Turning
to the numbers. We generated $2.3 million in cash from operations
for the first nine months of Fiscal 2020. This compares to $3.5
million that we generated in the first nine months of the prior
year. Total cash as of March 31, 2020 was $17.9 million, down 5.3%
sequentially from the $19 million at December 31, 2019. On March
17, we halted our stock buyback program for the foreseeable
future.
Deferred
revenues for the comparable period decreased by 11% or $213,000 due
to delays and implementations and completed contracts. Our accounts
receivable increased sequentially by 13% from $4 million to $4.5
million as our grocery customers and their suppliers opted to use
cash to order product, stocking shelves and keeping the supply
chain moving.
In the
third quarter of Fiscal 2020, total revenue was $4.63 million, down
7% from $5 million in the same quarter in 2019. Recurring revenue
grew 5% to $4.2 million for the third quarter of Fiscal 2020, up
from $4 million in the same quarter of Fiscal 2019. Year-over-year
recurring revenue as a percentage of total revenue increased from
80% to 90%. Year-to-date, Fiscal 2020 total revenue decreased from
$16.5 million to $14.3 million for the first nine months of Fiscal
2020, down 14% from the same period of Fiscal 2019. It should be
noted that last year’s nine-month revenue include $2.9
million of nonrecurring one-time revenue, most of which did not
occur in the nine months ending March 31, 2020.
Recurring
revenue for the first nine months of Fiscal 2020 grew 4.3% from
$11.8 million in Fiscal 2019 to $12.3 million in the same period of
Fiscal 2020. Recurring revenue for the first nine months of Fiscal
2020 as percentage of total revenue increased from 71% in Fiscal
2019 to 86% in Fiscal 2020.
In the
third quarter of Fiscal 2020, total operating expenses were $4.4
million, an increase of $408,000 or 10%, from $4 million in Q3 of
2019. This increase is largely a result of higher costs associated
with MarketPlace, higher depreciation associated with our 2019 cap
ex spend, and an increase in costs associated with telecommuting
due to the stay-at-home mandate.
Total
operating expenses for the first nine months of Fiscal 2020
increased to $13.3 million versus $12.8 million, up 4%. As I have
discussed previously, absent MarketPlace costs, our fixed operating
expenses are approximately $17 million per year to operate our
business. We anticipate reductions to offset the three sales
positions we hired in Q2 to accelerate our Tier 2 initiative and
maintain net neutral expenses for Fiscal 2020.
In the
third quarter of Fiscal Year 2020, net income to common
shareholders was $125,000 or $0.01 per diluted share, compared to
$921,000 or $0.05 per diluted share in the year ago quarter. The
decrease in net income to common shareholders, largely a result of
the decrease in one-time revenues of approximately $500,000, lower
than anticipated implementation fees due to customer disruption,
higher MarketPlace costs, increase in depreciation and
amortization, additional sales staff, and costs associated with the
stay-at-home mandate.
On the
year-to-date basis, net income to common shareholders for the first
nine months of Fiscal 2020 was $674,000 or $0.03 per diluted share
compared to $3.3 million or $0.16 per diluted share in the year-ago
period. The year-to-date decrease in net income to common
shareholders was largely the result of lower one-time revenues of
$2.7 million, higher MarketPlace costs and higher depreciation and
amortization due to our 2019 capital expenditures for our data
center.
Under
the current stock buyback authorization, we repurchased 157,616
shares of common stock at an average price of $5.10 per share in
the March 2020 quarter for a total of $803,000. To date, we have
repurchased a total of 499,786 shares of common stock at an average
price of $5.28 per share for a total of $2.6 million. As I
mentioned earlier, as the pandemic unfolded, we halted our
repurchase efforts on March the 17 and we do not plan to repurchase
any additional stock in the near term.
As
previously stated, the Company holds no treasury stock. The stock
purchased under the buyback plan is retired from issuance and hence
reduces the total amount of common stock outstanding. Since May
2019, the Company’s reduced its total net capitalization by
2%. The total amount remaining under the buyback plan for
purchasing retirement of common shares in the existing repurchase
plan if or when it resumes, is approximately $1.4
million.
At this
point, I will pass the call over to Randy.
Randy.
Randy Fields
Like
everyone, we found ourselves in a unique and challenging position
this quarter with the pandemic disrupting the way we do business.
It impacted our customers, both large and small. It also impacted
our employees with uncertainty and distraction. Thankfully, we were
already largely a remote-based organization with very strong
collaboration, so the transition to a virtual environment was
actually relatively smooth.
We’re
fortunate that we are in the grocery supply chain. Many nonfood
retailers have faced abrupt and significant disruptions to their
business, including, for some, literally a total halt to revenues.
Our grocery store customers faced a different set of challenges,
including new steps required to keep employees and customers safe.
Indeed, the grocery industry may be the only industry to experience
more muted consequences to the economic challenges all of us are
facing.
The
worse things get economically, the more things become
discretionary, but certainly not food. The supply chain challenges
we’ve been talking about for years are now at the top of
everyone’s mind. Anyone who’s been in a store in the
last two weeks knows that some things like toilet paper and certain
cleaning supplies are fully out of stock and in addition to that,
even some of the basics and essential ingredients for cooking and
baking at home are equally out of stock. Other items are way over
supplied.
Indeed,
the supply chain is being challenged unlike ever before, and
we’re in the middle of that. Food safety is critical, even in
more critical times of disruption and crisis. Compliance, although
it remains critical, we’re finding our sales cycle has been
extended due to near-term emergencies. We think this will only last
a short while as our customers deal with the immediacy of
addressing the pandemic-induced challenges.
This
will change as our customers adapt to the new normal and the supply
chain ultimately follows, but while uncertainty and volatility
exist in the short term, we think the long-term changes frankly
favor us and our abilities. We are not peripheral to the food
supply chain, we are essential. As John alluded, our customers rely
on our data and our efforts to help them navigate these uncharted
waters. To be sure, this wasn’t a great quarter in terms of
building out the network with our Tier 2 initiatives. Our customers
are focused, obviously, in their complete resource allocation and
attention to responding to the pandemic. Our efforts though will
restart sooner rather than later and we’ll begin to add many
more Tier 2’s to our system.
As John
said, what we do represent a public trust. We see our role as a
critical part of making sure the grocery supply chain continues to
function smoothly, with safe food, a stream lined compliance system
that doesn’t create headaches or overwhelm anyone with
paperwork and a platform to effectively connect suppliers with
retailers and retailers with suppliers.
In an
important way, this pandemic has reinforced how significant we are
to the whole of the ecosystem. Our customers know this now,
frankly, more than ever. Our position with our customers up and
down the supply chain has been reinforced and we will continue to
improve our strong competitive advantage once the normalcy
returns.
To
underscore how essential we are to the grocery supply chain,
I’d like to point out a few significant facts and I suspect
you may never have thought of us in this context. One, more than
half of all U.S. food safety audits are done on our platform. We
are certainly the largest compliance network in the world. These
two parts of our business are critical to keeping the food that all
of us eat safe. The Department of Defense thought we were essential
in helping to address the systemic food supply imbalances. In other
words, it’s not just our opinion, it’s the
government’s opinion that thinks that what we know and what
we can do is important.
Finally,
our platform enables buyers and sellers of perishable goods in
supermarkets and mass merchants to get paid. Without us, suppliers
don’t get paid and things like milk, bread, soda, snacks and
other perishable food will not be sold to the extent that it is in
the grocery industry, and certainly would be much harder to source.
In a sense, we’re vitally important to the safety and
availability of important foods in the supermarket supply chain.
Our customers and consumers therefore actually depend on us. That
is an important mantel and we don’t take it lightly. In fact,
it’s the definition of a public trust. We must protect the
business to maintain that trust and we are.
But
like everyone, our business has experienced disruptions due to the
pandemic. In this new environment, recurring revenue, obviously, is
increasingly important. This ties back to sustainability and
predictability of our business for our customers and having a large
growing base of recurring revenue certainly helps me to sleep at
night.
The
revenue this quarter incidentally was completely related to
non-recurring revenue that occurred last year. As the environment
stabilizes, we are still positioned for year-over-year recurring
growth and total topline growth now that we’ve reduced
nonrecurring revenue as much as we have. While this pandemic
reinforced the importance of out of stocks to our customers, the
challenges they face right now are well beyond our out of stock
offering. The lack of essential items such as eggs and toilet paper
were not due to an oversight or minor changes in buying patterns,
it was due to a line of customers around the block, buying up
supplies. I have no doubt that as things begin to return to a more
normal, retailers will be thinking about how to avoid out of stock
interruptions in the future and our offering will gain more
traction.
Looking
to the future, our customers require as part of their continued
trust in us that we maintain profitability and a strong balance
sheet. Without financial stability, they could easily lose
confidence and that would create ripples in the supply chain, not
just with us, but literally across the entire food supply chain. In
view of this need for us to remain strong, we’ve cut costs
out of the business, decreasing our risk, increasing our comfort
and therefore hopefully our customer’s comfort. We lack good
temporary visibility, everyone does. Decision-making is slower and
the implementation ability of our customers is reduced as they deal
with their supply chain, labor problems, etc., and basically all of
these woes that are brought upon them by the pandemic on a
day-to-day basis.
In the
intermediate term, we’ve reinforced our positive relationship
with our customers. We’ve demonstrated to them over and over
again our value. We are essential and we really mean that. Without
us, food would be less safe and harder to find. As a result, I
believe we have many more opportunities for our services and to our
customers when the pandemic is over.
With
that, I’d like to open the call for questions.
Operator.
Operator
Thank
you. At this time, we will be conducting a question-and-answer
session. If you would like to ask a question, please press star,
one on your telephone keypad. A confirmation tone will indicate
your line is in the question queue. If at any time you wish to
remove your question from the queue, please press star, two. For
participants using speaker equipment, it may be necessary to pick
up your handset before pressing the star key. One moment, please,
while we poll for questions.
Our
first question is from Ananda Baruah with Loop Capital
Markets.
Ananda Baruah
Hi,
Randy, John, good afternoon.
Glad to
hear that you guys sound like you’re safe and you’re
doing well and that’s good. It sounds like you guys—it
looks like you guys had good execution this quarter as well, so
congratulations on that.
Randy,
a couple things if I could. You made a comment a moment ago and I
just want to make sure I’m understanding it accurately, about
all the growth this quarter, all the revenue this quarter, the
magnitude of it being recurring. Could you just tease that out a
little bit Because it also seems like you did really well with
MarketPlace and I think of that as being distinct from the
recurring. I just want to make sure that I’m understanding
your comment accurately.
Randy Fields
Good,
okay, Ananda, thank you. The way (inaudible) and I think Management
looks at the business is this. We have three components. One is an
old and fading component, which was licensing and services. That
has been decreasing substantially over the course of the last year.
The other piece of the business that we consider to be the most
important piece is the recurring revenue subscription type
business. That part of our business is growing; in other words, it
went from $4 million in prior year to about $4.2 million in the
current quarter. We then have the MarketPlace and the MarketPlace,
yes, was definitely up substantially in the quarter, especially in
the last few weeks.
Going
forward, as the old licensing services piece of our business fades
and we’re pretty close to having pushed that behind us, now
what happens is you have two significant pieces of business. The
recurring piece which is growing and the MarketPlace which at the
moment also appears to be growing and growing at a pretty rapid
rate. If anybody goes back a couple of years, that’s really
where we wanted to be. Now that we’ve got that third piece,
the tail of the business, the licensing, etc., one-time stuff
behind us, it feels as if, going forward, those two pieces should
both do very well.
Did
that help?
Ananda Baruah
It did.
Yes, Randy, that’s great. That’s very thorough. My next
question then is are you—if I’m understanding all the
math accurately, does that mean that you stand a really good chance
of generating year-over-year revenue growth in the June quarter,
this current quarter? Given that the recurring revenue seems like
it would get you almost back to flat, June quarter last year and
then my hunch is you get some incremental MarketPlace this quarter.
Something like that. I just want to ask that question. Then I have
a follow-up as well.
Randy Fields
Okay,
yes, let me see if I can help again. Here’s how we see
things. In the current quarter last year, one year ago, same
quarter that we just finished, we had about $500,000 other than
MarketPlace of one-time revenue. If you look at our revenue this
quarter, you can quickly see that we did better than the number
that you would expect from simply removing that one-time revenue,
which is what we did. In other words, there was growth in the
quarter and as we look out, it’s really, Ananda, it
is—the environment we’re in is, what do I say,
it’s once-in-a-lifetime for sure.
We have
a high degree of uncertainty. We’re managing the business
conservatively, but we feel as if just the way the numbers now are
rolling out, we’ve achieved the reduction in one-time revenue
well ahead of the plan. We would’ve guessed it would’ve
taken nearly two years, and now it would appear that it’s
largely behind us at end of a single year. We feel pretty good
because our recurring revenue is continuing to grow and improving,
that’s our focus. You don’t have to be Einstein to
figure out that helping people, which MarketPlace, if you remember,
was intended to do, is to find those things that are hard to find
and that are emergency fills, if you will. You can probably figure
out that MarketPlace is experiencing some growth here. Both pieces
going forward feels very good at the moment. That’s about the
most that I can say, given the uncertainty.
Ananda Baruah
That’s
super helpful, Randy. Then my last one for now and I’ll cede
the floor and jump back in the queue, it sounds like—this is
just based on some of the prepared remarks. Sounds like licensing
and services, at least in March, began to see the impact of
businesses, some were having friction out of being shut down,
things like that. It sounded—well, actually, what I would
love is any context, can you—is that accurate assessment
Then, can you give us some sense of what April and the first couple
weeks of May have looked like with regards to licensing and
services Really, what I’m wondering is if things in March
really began to impact that, April and May, did they look a lot
like March in that business? Right now.
Randy Fields
Yes, I
think the answer really is this, is that the environment is making
it easier for us to reduce one-time revenue. In other words,
historically our customers who had been buying licenses now
obviously would like to conserve cash. That makes it much better
for us, much easier to convert that into non-licensing or recurring
revenue. It’s gotten easier, we feel good about it, and
I’m not sure there’s much else to say, but I think the
world now is in cash conservation mode and that bodes well for
recurring SaaS revenue versus licensing revenue.
Ananda Baruah
Okay,
that’s great, that’s really helpful.
Thanks.
Randy Fields
You
bet.
Operator
Our
next question is from Thomas Forte with D.A. Davidson.
Thomas Forte
Great,
so Randy and John, I’m glad to hear you’re doing well.
Stay safe.
I have
four questions; I’ll go one at a time. First one is, Randy
and John, how should we think about the opportunity for you to add
aisles for your stand-based trading efforts from existing
retailers?
Randy Fields
Well,
in a way this—the whole supply chain now is up in the air,
meaning I think there’s an opportunity to help reshape as we
come out of this situation, reshape how retailers and their
suppliers think about our scan-based trading, our out of stock
initiatives, etc. We feel very good. We’ve actually seen a
modest amount of expansion and interestingly, more interest on the
part of our existing customers in terms of thinking about these
kinds of problems.
Again,
the uncertainty is high, Tom, needless to say, but as the
supermarket segment stabilizes, if you will, you’re going to
see we think more interest in how do we fix this problem that got
terrible in the last two months How do we fix this out of stock
problem? How do we watch the explosion of our balance
sheets
Here’s
something to think about. Historically, 15 years ago the
supermarket industry would have had two to three months of
inventory on hand in warehouses, etc. As it leaned out the
inventories over the last 10 years, hopefully reducing the cost of
capital, they now caught themselves in a short inventory position.
We think as they begin to envision a future, that scan-based
trading feeds into that just perfectly and certainly our out of
stock work.
We feel
really good about where the world is for us right now in that
respect. The uncertainty though is high.
Thomas Forte
Okay,
then my second question is you touched upon this in your prepared
remarks. It’s the opportunity for MarketPlace to address out
of stocks and basics, such as hand sanitizer and toilet paper. My
question is, why not, why can’t the MarketPlace address those
situations
Randy Fields
Well,
you’re asking a very interesting question and as the
Management team talks to each other, certainly, some of that has
moved into our domain. As hard as we’ve resisted it, people
have come to us to help them source some of these difficult things
like hand sanitizer and that kind of stuff. You’re spot on.
The question is, do we want to try and stay in that space, etc.? I
think I’d mentioned in a previous call, by this summer we
wanted to be able to make a decision about MarketPlace and its
ongoing role. Obviously, something is happening out there. Do we
know if this is a permanent change Because we certainly
established, and I think it’s fair to say, we’re
establishing more new relationships in MarketPlace and as you know
we are maniacal about our execution. We want our customers to feel
like, my god, these guys are the best at whatever we do, and
we’re maintaining that standard.
We’re
moving into that space very gently, Tom. Again, so long as our
execution remains as good as it has, we’ll probably stay the
course.
Thomas Forte
Okay,
and then for the third one of the four, I wanted to go big picture.
Randy, I’d love to hear your thoughts on the implications of
COVID-19 when it comes to China’s role in the global food
supply chain.
Randy Fields
Yes,
that’s a—that’s a really, really good question.
Let me back up one step because there’s a cross current going
on. The cross current is this, is that if you go back to the theory
of supply chain that began about 20 years ago with Just in Time
Inventory, etc. and Just in Time Manufacturing, people linked in
their supply chains. They leaned out their inventory levels, even
though the cost of capital has fallen dramatically. You could argue
maybe that wasn’t such a smart idea, and they lengthened the
distance and therefore time over which replenishment could take
place. Much of that ended up in Asia. You would be amazed at how
much of our canned goods, for example, come from Southeast
Asia.
What’s
terribly clear to everyone in our industry—in the food
industry, is maybe that was not—maybe that was not a great
set of decisions. I suspect several things are likely to happen.
This is just our theory. It’s a working theory and candidly,
it benefits us, so I’m guessing there is a bias in it. I
don’t feel the bias. I think it just might be there. People
single sourced their products. I think that’s going to go
away. I think people will now multi-source their products in the
event that a supplier can’t fulfil. I think you’re
going to see a lot of stuff that’s in China come back and
really for a couple of reasons. The distance has been a problem.
The interruption has been a problem. We see it with a number of our
customers that the supply chain, not just over the distance, but as
you know, when the Chinese were at their peak of their COVID
experience, they almost closed their ports. Lots of product on the
ocean ended up being much delayed and I think all of these were
negative experiences. Not so much just about China, but about the
distance problem and the dependency on the slow freight
system.
We’re
seeing people beginning to address whether moving all of this
offshore was worth it. There were certainly cost advantages, but
the question is, in retrospect, was it worth it On the other hand,
that says I think there’s pressure here in in the U.S., and
even in food, to shorten the supply chain, begin to be, I
don’t want to use the term self-sufficient because I
don’t know that’s right, but more stuff produced in the
U.S. I think is definitely going to happen. Interestingly, though,
we’ve had a great deal of interest. We don’t know where
it’ll lead, no promises here, but we are exploring ReposiTrak
compliance management opportunities outside the U.S. We are looking
carefully at Mexico and frankly in China. Again, no promises about
how that might unfold.
On the
one hand, foreign countries are looking to our standards and
systems. On the other hand, I think the U.S. food supply chain is
going to become more U.S. dependent than foreign dependent over
time.
Thomas Forte
Great,
so my last one and then I’ll get back in the queue because I
might have one or two more. How should we think about the financial
health of your ecosystem, Tier 1 and Tier 2 suppliers and bad debt
risk?
Randy Fields
Yes,
that’s another good question. I suppose if there is a place
to be, in general, it’s where we are. Food has always been
considered to be defensive. As I said in my remarks, it’s
absolutely true. You may cut out your discretionary spending, but
you will not cut out food. Food-related activities, the
food—retail food system is doing well. It’s
experiencing, obviously, how do you expand, how do you keep product
on the shelf It’s a high-class problem in many respects.
Having said that, because of how they’re doing their
purchasing, there’s clearly a pressure for everyone to
strengthen their balance sheets.
The
consequence of everybody’s strengthening their balance sheet
is that we’re seeing our receivables move out a bit.
We’re seeing some smaller companies who are more
discretionary spend have trouble. Here’s an example, we do
some work in cut flowers in grocery stores. Again, you don’t
have to think too hard to realize, well that part of the business
is probably soft for the flower guys, and that’s a true
statement. Some of those are seen contractions in their business. I
think our receivables are very conservative. We do reserves,
we’re pretty comfortable that bad debt is not going to be a
growing problem for us, but we’re approaching it
conservatively.
John,
anything you want to add to that?
I guess
that’s a no from John.
Operator
Our
next question is a call from Ananda Baruah with Loop
Capital.
Ananda Baruah
Hey,
thanks, guys. Appreciate it. Just a clarification for John around
OpEx. John, did I hear you accurately that you said net neutral
OpEx for Fiscal ‘20 and then that ends June or at this
quarter. Given the dynamics are somewhat unpredictable right now,
what’s the responsible way to think about OpEx for at least
the beginning of Fiscal ’20, or how are you guys thinking
about it?
John Merrill
Yes, I
mean, some of the projects were completed, and so that’s
natural. Obviously, no one’s travelling right now, that will
come back. We’ve done some belt-tightening and gone through
every line item on our P&L to reduce the spend that I think
could be about $100,000 a month going forward. As I said, as far as
a net neutral increase absent MarketPlace, because obviously that
has a lower margin, I do believe we’ll be net flat for the
year.
Ananda Baruah
Can we
think of that,all things equal, that kind of run rate going into
Fiscal ‘21?
John Merrill
I think
it will be lower because you’re only picking up three months
of the fourth quarter and certain contracts will expire, certain
things that we’ve implemented. Cost-cutting will start in
July or August or September or October, but on an average over the
forward 12 months, not making a prediction, but based on our
numbers, you’ll see about a reduction of $1.2 million absent
MarketPlace costs going forward.
Ananda Baruah
Okay,
that’s helpful. It sounds like—can you guys,
particularly once you get the cost reductions really kicked in, can
you guys—are we talking about a cash neutral situation with
you guys? Meaning are the levels that you’re going to be at
very sustainable It seems like the recurring revenue is going to be
pretty sticky. It almost feels like you could have flat revenue
sequentially through this thing because of the recurring base
you’ve put in. What I’m wondering is, I get the
receivables are stretching out, but if you can—this is super
rough, if you’re offsetting that relatively speaking with
cost reductions and just belt-tightening, can you guys be cash
neutral or are there other moving parts that we should worry about?
Or not worry about, but be aware of.
Randy Fields
You’re
asking a really tough—you’re asking a tough question.
Let’s go back—let me—I’m going to dance
around it, Ananda. Be prepared. It is important to our
customers—to our customers because of this public trust
issue, that we be a profitable company, that we be a cash flow
positive company and that we have a strong balance sheet.
It’s really significant to think about the fact that billions
and billions a year of product couldn’t get paid for,
couldn’t get invoiced if we didn’t exist.
We’ve
always talked about the need for the strong balance sheet, now in a
way more than ever. Our customers want us to be secure. Want us to
be here, want to be sure they can lean on us and we think there is
an opportunity in the current environment that compliance is going
to become very important. That more of our supply chain activities
will be absorbed by our existing customers and new customers and
MarketPlace should be obvious.
We
think that we want it to be better than neutral. We’ve
reduced our expenses significantly. We’re watching every
nickel and I think it’s fair to say if we were only neutral,
Management would be disappointed. How’s that for dancing? I
think you get it.
Ananda Baruah
That’s
pretty good and what I realized—and I just want to make sure
that I’m not being too opaque in my use of the word neutral.
Current cash flows, free cash flow run rate, I guess is what
I’m talking about, current cash generation run rate,
I’m using that in terms of neutral, meaning maintain current
levels despite going into a macro challenge dynamic is what
I’m talking about. Just to clarify that.
Randy Fields
Yes,
you’re—we’re comfortable that—that’s
really the goal. By reducing our cash spend and by having our
recurring revenue growing, if you subtract one from the other, it
puts us in a shape that our customers will want us to
have.
Ananda Baruah
Yes,
got it.
Randy Fields
Was I
being too indirect?
Ananda Baruah
No, no,
that’s great. That’s very helpful.
Randy Fields
That
was an important decision by the Board and Management that we had
to be in a place where our customers were not worried. They
shouldn’t be worried. The cost now of the Company, the
ongoing cash cost after the reductions, etc., is clearly below the
anticipated rate of recurring revenue.
Ananda Baruah
Yes.
That’s great. Thanks, I appreciate all the
context.
Randy Fields
Oh, you
bet, absolutely.
Operator
Our
next question is a follow-up from Thomas Forte with D.A.
Davidson.
Thomas Forte
Great,
so last two for me. First, Randy, it seems like COVID-19 has been a
catalyst for online grocery. Would you agree and what are the
implications of that for Park City Group
Randy Fields
We
certainly agree, but it’s more mixed than I think most people
think about, because it hasn’t been a terrific experience for
customers trying to do it. Meaning, in many cases they
couldn’t get a delivery slot, etc. Now remember, a core
aspect of our business is maintaining inventories, meaning
literally the inventory counts in the direct store delivery
business. About 30% of the sales inside of a supermarket are
products that get to the store, direct store delivery.
The
issue really is somebody goes online and wants to order milk or
whatever and the fact is that those inventories tend not to be
correct. There’s a great opportunity for us to expand our
footprint and hopefully we’ll be able to take advantage of
that, so that the online orders become more efficient. In other
words, by count, less than 25% of all online orders are properly
filled without substitution. If that were a manufacturing business,
they would be broke.
The
reality is the online ordering issues are enormous and we can help
get that straightened out. Both the out of stock problem
and—what’s the value of the inventories in terms of
counts are right in our wheelhouse. Online ordering will grow;
it’ll probably shrink, actually, to a certain extent, as
percentage of sales when COVID is gone. It’ll almost
certainly won’t go back to where it was, it’ll be
higher, but what we do is needed more than ever to help people keep
accurate counts of what’s on the shelf. Again, we feel good
about where we’re positioned.
Thomas Forte
Great,
last question from me. With a strong balance sheet and cash flow
generation, I would imagine you have a lot of opportunity on the
M&A front. Where would you—how would you characterize
your current M&A strategy
Randy Fields
Well,
candidly, the last six to eight weeks, we’ve been heads down
in execution looking at the projects that we could wrap up, etc.
There’s still a couple of ongoing things that are critically
important to us going forward in terms of our own technology. We
feel like the current environment probably creates some
opportunities because of the financial pressure lots of people will
be feeling. Our eyes are open and were something to come along, we
would certainly want to be able to take advantage of
that.
Thomas Forte
Good.
All right, thank you for taking my questions. Stay
well.
Randy Fields
Thank
you.
Operator
Ladies
and gentlemen, we have reached the end of the question-and-answer
session and we’re out of time for today’s call. Park
City Group thanks you for your time and participation. You may
disconnect your lines at this time.