PARK CITY GROUP, INC.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the issuer as of June 30, 2010,December 31, 2011, which is the last business day of the registrant’s most recently completed second fiscal year,quarter, was approximately $17,817,235 (at$14,998,000(at a closing price of $3.80$3.05 per share).
Park City Group, Inc. (the “Company”“Company”) is a Software-as-a-Service (“SaaS”SaaS”) provider that brings unique visibility to the consumer goods supply chain, delivering actionable information that ensures product is on the shelf when the consumer expects it. Our service increases our customers’ sales and profitability while enabling lower inventory levels for both retailers and their suppliers.
The Company is incorporated in the state of Nevada. The Company’s 98.76% and 100% owned subsidiaries, Park City Group, Inc. and Prescient Applied Intelligence, Inc. (“Prescient”), respectively, are incorporated in the state of Delaware. All intercompany transactions and balances have been eliminated in consolidation.
The Company designs, develops, markets and supports Our services are delivered principally though proprietary software products.products designed, developed, marketed and supported by the Company. These products are designed to be used to facilitate improved business processes betweenamong all key constituents in the supply chain, starting with the retailer and moving back to suppliers and eventually raw material providers. In addition, the Company has built a consulting practice for business process improvement that centers around the Company’s proprietary software products and through establishment of a neutral and “trusted” third party relationship between retailers and suppliers. The principal markets for the Company's products are multi-store retail and convenience store chains, branded food manufacturers, suppliers and distributors and manufacturing companies which have operationscompanies.
Historically, the Company offered applications and related maintenance contracts to new customers for a one-time, non-recurring up front license fee. Although not completely abandoning the license fee and maintenance model, since the acquisition of Prescient Applied Intelligience, Inc. ("Prescient") in North America, Europe, AsiaJanuary 2009, the Company has focused its strategic initiatives and resources to marketing and selling prospective customers a subscription for its product offerings. In support of this strategic shift toward a subscription-based model, the Pacific Rim.Company has scaled its contracting process, streamlined its customer on-boarding and implemented a financial package that integrates multiple systems in an automated fashion. As a result, subscription based revenue has grown from $203,000 for the 2008 fiscal year to $7.0 million this year. During that same period our revenue has transitioned from a 6% subscription revenue and 94% license and other revenue basis to 70% subscription revenue and 30% license and other revenue basis.
Nevada. The Company’s 98.76% and 100% owned subsidiaries, Park City Group, Inc. and Prescient, respectively, are incorporated in the state of Delaware. All intercompany transactions and balances have been eliminated in consolidation.
We market our services to businesses primarily on a subscription basis. However, we do deliver our services on a license basis. Our efforts are focused on a direct sales model and indirectly through qualified partners and service providers.
The principal executive offices of the Company are located at 3160 Pinebrook Road, Park City, Utah 84098. The telephone number is (435) 645-2000. The website address is http://www.parkcitygroup.com.
Recent Developments
ReposiTrakTM
On February 14, 2012 the Company announced a partnership with Levitt Partners, an internationally known health care and food safety-consulting firm. The Company's association with Levitt Partners resulted in the formation of Global Supply Chain Systems, Inc. (“Global Supply”), which will provide a targeted solution for improving supply chain visibility for food and drug safety. The solution, ResposiTrakTM, is powered by the Company’s technology and was developed in response to the passage of the Food Safety and Modernization Act in January of 2011. ResposiTrakTM enables grocery, supermarkets, packaged goods manufacturers, food processing facilities, drug stores and drug manufacturers, as well as logistics partners, to track and trace products and components to products throughout the food, drug and dietary supplement supply chains. In the event of a product recall, the solution quickly identifies the supply chain path taken by the recalled product or product component, and allows for the removal of affected products in a matter of minutes, rather than weeks. Additionally, ReposiTrakTM reduces risk of further contamination in the supply chain by identifying backward chaining sources and forward chaining recipients of affected products in near real time. On August 8, 2012, the Company announced that Global Supply had begun the first two implementations of ReposiTrakTM at a global grocery retailer and a major grocery wholesaler.
CVS Pharmacy, Inc.
On July 31, 2012, the Company announced a three-year service agreement to provide selected scan-based trading services to CVS Pharmacy, Inc. (“CVS”) through May 2015. The agreement reflects the Company's focus on increasing the number of retailers that use its software on a subscription basis, and marks the Company's progress towards contracting with major retailers outside of the grocery industry.
The Company expects the subscription revenue potential generated from these relationships to be significantly larger than any of the Company's existing client hubs within the grocery industry.
Company History
The 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 that help its retail clients reduce their inventory and labor cost - the two largest controllable expenses in the retail industry. Because the product concepts originated in the environment of actual multi-unit retail chain ownership, the products are strongly oriented to an operation’s bottom line results.
The Company was incorporated in the State of Delaware on December 8, 1964 as Infotec, Inc. From June 20, 1999 to approximately June 12, 2001, it was known as Amerinet Group.com, Inc. In 2001, the name was changed from Amerinet Group.com to Fields Technologies, Inc. On June 13, 2001, the Company entered into a “Reorganization Agreement” with Randall K. Fields and Riverview Financial Corporation whereby it acquired substantially all of the outstanding stock of Park City Group, Inc., a Delaware corporation, which became a 98.67% owned subsidiary. Operations are conducted through this subsidiary, which was incorporated in the State of Delaware in May 1990.
On August 7,July 25, 2002, Fields Technologies, Inc. changed its name from Fields Technologies, Inc. to Park City Group, Inc., through a merger with Park City Group, Inc., a Nevada corporation, which was organized for that purpose and reincorporatedwas also the surviving entity in Nevada.the merger. Therefore, both the parent-holding company (Nevada) and its operating subsidiary (Delaware) are named Park City Group, Inc. Park City Group, Inc. (Nevada) has no other business operations other than in connection with its subsidiaries, including Prescient.
Acquisition of Prescient Applied Intelligence, Inc.
On January 13, 2009, the Company merged PAII Transitory Sub,acquired 100% of Prescient Applied Intelligence, Inc., a wholly-owned subsidiary of the Company, with and into (“Prescient (the “Prescient Merger””). Prescient is a leading provider of on-demand solutions for the retail marketplace, including both retailers and suppliers. Its solutions capture information at the point of sale, provide greater visibility into real-time demand and turn data into actionable information across the entire supply chain. As a result of the Prescient Merger, revenue has increased substantially, to $10,874,560 for the year ended June 30, 2010, and the Company has increased considerably the number of active software implementations.
As a result of the Prescient Merger, the Company owns 100% of Prescient. The Company’s condensed consolidated financial statements contain the results of operations of Prescient, as well as the impact on the Company’s financial position resulting from the Prescient Merger subsequent to the date of acquisition.Prescient.
The Prescient Merger was accounted for as a business combination. The Company was the acquirer. The assets acquired and the liabilities assumed of Prescient have been recorded at their respective fair values. The total consideration paid to acquire Prescient was $11,391,318, $1,170,089 of which was for direct transaction costs. The acquisition cost includes $3,086,016 of cash acquired from Prescient. The acquisition cost, net of the $3,086,016 acquired cash, was $8,305,302.
Software-as-a-Service Delivery Model
Historically, the Company offered applications and related maintenance contracts to new customers for a one-time, non-recurring up front license fee and provided an option for annually renewing their maintenance agreements. As a result of the Prescient Merger,merger, Prescient’s reliance on subscription based revenue and the Company’s shift away from offering its solutions for a one-time licensing fee, the Company is now principally offering prospective customers monthly subscription based licensing of its products. Although not completely abandoning the license fee and maintenance model, the Company continues to focus its strategic initiatives on increasing the number of retailers, suppliers and manufacturers that use its software on a subscription basis.
Our on-demand, software-as-a-service delivery model enables our proprietary software solutions to be implemented, accessed and used by our customers remotely. Our solutions are hosted and maintained by us, thus significantly reducing costs by eliminating for our customers the time, risk and headcount associated with installing and maintaining applications within their own information technology infrastructures. As a result, we believe our solutions require significantly less capital to build and require less initial investment in third-party software, hardware and implementation services, and have lower ongoing support costs versus traditional enterprise software. The SaaS model also allows advanced information technology infrastructure management, security, disaster recovery and other best practices. Since updat eswe manage updates and upgrades to our solutions are managed by ussolution on behalf of our customers, we are able to implement improvements to our solutions in a more rapid and uniform way, effectively enabling us to take advantage of operational efficiencies.
Target Industries Overview
The Company develops and offers its software to supermarkets, convenience stores and other retailers. As a result of the acquisition of Prescient, we have expanded our offerings to include supply chain solutions focused on large manufacturers, distributors and suppliers in the consumer products industry. The Company also provides professional consulting services targeting implementation, assessments, profit optimization and support functions for its application and related products.
Supermarkets
The supermarket industry is under increased competitive pressure from mass market retailers such as Wal-Mart, Costco, Target, and other channels including extreme value (dollar stores), limited assortment (ALDI/Save-a-lot), and convenience (Sheetz,7/(Sheetz, 7/11) stores. One of the strategies that traditional supermarkets are implementing is to improve the demographic “mix” of products to match the unique needs of those consumers who shop at individual stores. Mix is most difficult to manage for those products that are delivered by Direct Store Delivery (DSD) suppliers such as carbonated beverages, bread, dairy, greeting cards, magazines and salty snacks. The Company’s software provides newfound visibility to the retailer as to specific itemsitem deliveries, in-stock status with item and category productivity. In addition, supermarkets are growing sales and consumer loyalty by developing and distributing their own brand or private label for all key categories within their stores. This proliferation of new items is creating a new set of challenges for both retailers and suppliers as they battle to find space to accommodate the new private label items at the expense of the incumbent or national brand supplier. The Company’s software and consulting services provide visibility tools to facilitate the decision making process by providing a shared and trusted view to information that helps the parties optimize item selection and shelf presence. Furthermore, supermarkets are under pressure to increase the quantity and quality of their perishable offerings. Perishable departments, such as bakery, meat and seafood, dairy, and deli have historically been loosely managed, but now have been forced to becomeare a focus for profitability improvement. The Company’s software and consulting services and change management resources are designed to address this specific business problem, increasing the profitability of perishable products at the department and store level.
Convenience Stores
For convenience stores, recent trends of contracting gasoline sales margins and declining tobacco sales further increases the need for improved cost controls, focus on product mix and better decision support. To intensify the focus on these issues, other industry segments such as value retailers and grocery stores have begunare cutting into the convenience store stronghold by offering gasoline, a product that once was almost solely offered by convenience store retailers. In response to declining gasoline sales and profits, the C-Store industry is pushing into fresh food as an avenue of increasedincreasing sales and profitability. Only the most progressive convenience store operations have automated systems to help store managers, leaving the majority of the operators without any technology to ease their administrative and op erationsoperational burdens.
Suppliers
As stated above, supermarkets and convenience stores are increasingly focused aroundon product and margin mix, improving sales thoroughthrough reduced out of stocks and increasing collaboration with their suppliers. Suppliers are increasingly pressured by retailers to provide consumer insights, innovative products that differentiate both the supplier and retailer while providing economic incentives or assistance. Park City Group hasThe Company’s solutions enablingenable suppliers to work with their retail partners to get alignment between their objectives of increasing sales through expanded distribution of their product offering and the objectives of the retailer to increase sales, reduce inventory carrying risk and minimizing out of stocks. Additionally, the Company is able to share the retailer scan sales data towith the supplier to assist t hemthem in improving forecasts and production planning by leveraging the most reliable demand signal in daily sales by store and item.
Specialty Retailers
Specialty retailers and their suppliers are faced with many of the same replenishment and forecasting challenges as other retailers, with the added complexity of managing an ever increasing imported versus domestic manufacturing model. The added manufacturing and transportation lead timelead-time puts an increased premium on both accurate and timely forecasting. Park City GroupThe Company has developed a suite of applications to facilitate collaborative analysis and forecasting. The specialty retailers are faced with strong competition for qualified managers and staff. Managers are time-constrained due to increased labor and inventory demands, margins are increasingly tight due to higher labor and lease costs and customer satisfaction demands are higher than ever before. Park City GroupThe Company has developed a range of applications that enable managers in specialty retail to improve their labor scheduling efficiency and reduce their total paperwork and administrative workload.
Benefits of our Solutions and Services
Our Supply Chain services bring unique visibility to the consumer goods supply chain, delivering actionable information that ensures product is on the shelf when the consumer expects it. Our service increases our customers’ sales and profitability while enabling lower inventory levels for both retailers and their suppliers.
Key advantages of our solution include:
· ● | Synchronizesynchronizing retailers and suppliers so they can actually exchange information; |
· ● | Alignaligning their financial interests with payment and invoicing protocols and systems; |
· ● | Enlistenlisting brain power of suppliers to help retailers manage complex businesses; |
· ● | Provideproviding information to each side to identify and fix out of stocks and overstocks; |
· ● | Provideproviding forecasting technology to improve store orders; |
· ● | Provideproviding forecasting to help suppliers replenish retailer warehouses; |
· ● | Provideproviding systems for suppliers to actually manage inventory flow to retailers; and |
· ● | Helphelping suppliers with overall demand planning and line sequencing. |
Ultimately, the Company’s products and services come together to create a true partnership between Retailersretailers and Suppliers.
Solutions and Services
Solutions
The Company’s primary solutions are Scan Based Trading, ScoreTracker, Vendor Managed Inventory, Store Level Replenishment, Enterprise Supply Chain Planning Suite, Fresh Market Manager and ActionManager®, Supply Chain Profit Line and ScoreTracker,all of which are designed to aid the retailer and supplier with managing inventory, product mix and labor while improving sales through reduced out of stocks by improving visibility and forecasting.
Scan Based Trading (SBT). Our SBT solution eliminates supply chain inefficiencies and helps retailers and suppliers get product to the store shelves more quickly, efficiently and profitably. SBT is an advanced commerce practice where the supplier retains ownership of the inventory until it scans at the cash register. Once the retailer and supplier have agreed to begin an SBT relationship, the first step is item and price authorization. This process matches retailer and supplier product data to eliminate invoice discrepancies at the point of sale. Our SBT system receives the scan sales data and maintains it in a repository to ensure that product movement data is available to all members of the trading community. Implementation creates increased demand visibility and improve dimproved forecast accuracy. Our SBT solution is offered as a hosted service, so implementation is immediate and always available.
ScoreTracker. Our ScoreTracker solution gives retailers and suppliers a clear view into critical aspects of their supply chain operations so that they can better serve the consumer. This visibility solution provides analysis of scan sales data by store, by day and by category. Retailers and suppliers better understand what is selling, the velocity at which a product is moving and how profitable it is. In addition, our solution helps analyze shrink and how to use that information to prevent out of stocks. This tool is provided to retailers and suppliers who provide additional data inputs valuable to operating their business such as routes, returns and credits. The ScoreTracker solution enables a true collaborative view to the Key Performance Indicators (KPI’s) for both retailers and suppliers. The Company is a neutral third party between the trading partners and the retailer and ScoreTracker delivers a trusted view to performance and actionable insights with respect to improving sales and item performance and reducing operational and shrink costs.
Vendor-Managed Inventory (VMI).VMI programs are gaining in popularity because suppliers have come to realize that VMI offers the opportunity to better align themselves with their trading partners and add value to those relationships. Our VMI solution provides collaborative tools that increase supply chain efficiencies, lower inventory and enhance trading partner relationships. The solution is pre-mapped to the specific requirements of each trading partner for the transfer of electronic data directly into our system. This enables suppliers to analyze retailer-supplied demand information, automatically generate orders for each customer, set inventory policy at the retailer’s distribution center and monitor on-going inventory levels, determine which items need to be repleni shed,replenished, and how to ship them most cost-effectively. Our VMI suite has the flexibility and functionality to scale to accommodate new trading partners. Our solution delivers real value for suppliers through fewer out-of-stocks, increased inventory turns, and increased customer satisfaction and loyalty.
Store Level Replenishment (SLR). Many retailers are placingshifting the responsibility of replenishing product at the store shelf onto the suppliers who bring that product into the store. Avoiding overstocks and understocks, particularly with highly promoted products such as ice cream or bread, has been a challenge for direct store delivery (DSD) suppliers. Our on-demand SLR solution provides these suppliers visibility into store level movement and activity, and generates replenishment orders based on point of sale data. Suppliers using this solution are able to optimize store-level demand forecasting and replenishment, resulting in fewer out of stocks and lost sales. Retailers benefit by having product on the shelf.
Enterprise Supply Chain Planning Suite (ESCP).Our ESCP suite includes a solution to help users analyze POS data and other demand signals to gain insight into customer demand. Suppliers have visibility into historical data – seasonal events, promotions and buying trends – to facilitate accurate forecasting. Our software assesses how inventory will be impacted, then calculates recommended stocking levels, considers service level goals and develops a time-phased replenishment plan. The solution brings demand data into one place and will determine whether orders should come from existing inventory or if new production or procurement is necessary. ESCP is extremely flexible and can be configured to meet the needs of any company’s supply cha in processes.
Our ESCP suite includes modules designed to help customers achieve balance between inventory investment and optimal customer service levels. In addition, it synchronizes all the elements affecting inventory to ensure product is available for timely distribution to customers. Userswhere users can easily manage the complex sets of data and parameters that impact their businesses, including seasonal builds, desired service levels, and manufacturing constraints. The solutionESCP considers consumption rates and inventory levels and automatically calculates time-phase safety stocks and replenishment quantities for each itemwhile being extremely flexible and each location.
Our ESCP suite also includes a module that facilitates new product introductions, conducts promotion analysis, and managescan be configured to meet the product lifecycle. By providing a detailed analysisneeds of past demand patterns and applying that data to similar products, these modules help customers understand what makes a product launch successful, how a promotion will impact demand forecasts and revenue streams, and how long a product is likely to be profitable. They also create seasonality profiles and help manage inventory pipeline fill requirements through increased visibility into consumer demand.any company’s supply chain processes.
Production line sequencing rounds out the ESCP suite. The production line sequencing module is a robust software application that enables more effective use of resources to meet customer demand and corporate goals. Production line sequencing works with existing enterprise resource planning (ERP) systems, combining master data with the latest forecasts, customer orders, on-hand inventories, and planned receipts to generate production plans and master production schedules.
The Company also offers a variety of other solutions that address the unique needs of its customers.
Fresh Market Manager.Addressing the inventory issues that plague today’s retailers, Fresh Market Manager is a suite of software product applications designed to help manage perishable food departments including bakery, deli, seafood, produce, meat, home meal replacement, dairy, frozen food, and floral. Although the supermarket and convenience store industries have invested substantial sums on Point-of-Sale (POS) and scanning systems, those systems are, almost without exception, limited to providing price look-up functions rather than decision support functions. These industries are a classic representation of “data rich” and “information poor”. Park City Group is capitalizing on that environment to bring together information f rom disparate legacy applications and databases to provide an end-to-end integrated merchandising, production planning, demand forecasting and perpetual inventory system to address the industry’s perishable department needs.
Fresh Market Manager helps identify true cost of goods and provides accurate and actionable profitability data on a corporate, regional, store-by-store and/or item-by-item basis. Fresh Market Manager also produces hour-by-hour forecasts, production plans, perpetual inventory and places/receivesplaced/received orders. Fresh Market Manager automates the majority of the planning, forecasting, ordering and administrative functions associated with fresh merchandise or products.
ActionManager®. The second most important cost element typically facing today’s retailers is labor. ActionManager® addresses labor needs by providing a suite of solutions that forecast labor demand, schedules staff resources and provides store managers with the necessary tools to keep labor costs under control while improving customer service, satisfaction, and sales. ActionManager applications provide an automated method for managers to plan, schedule and administer many of the administrative tasks including new hire, paperwork and time and attendance.attendance paperwork. In addition to automating most administrative processes, ActionManager provides the local manager with a “dashboard” view of the business. ActionManager als oalso has extensive reporting capabilities for corporate, field and store-level management to enable improved decision support.
ReposiTrakTM. On February 14, 2012 the Company announced a partnership with Levitt Partners, an internationally known health care and food safety-consulting firm. The Company's association with Levitt Partners resulted in the formation of Global Supply Chain Profit Link. Systems, Inc. (“Global SupplySupply Chain Profit Link (“SCPL””) allows suppliers an opportunity to work with their retail partners on optimizing profits, while reducing stock outs and minimizing shrink (or waste). SCPL provides hourly, daily, or weekly store-by-store item-level movement and profitability information to suppliers and retailers to facilitate decision support. SCPL allows suppliers and retailers opportunities to customize assortment plans, promotions, and pricing strategies on,which will provide a store-by-store basis.
ScoreTracker. Our ScoreTrackertargeted solution gives retailers a clear view into critical aspects of theirfor improving supply chain operations so that they can better servevisibility for food and drug safety. The solution, ResposiTrakTM, is powered by the consumer. Our solution provides analysisCompany’s technology and was developed in response to the passage of scan sales data by store, by day, by category,the Food Safety and by supplier so that retailers understand what is selling,Modernization Act in January of 2011. ResposiTrakTM enables grocery, supermarkets, packaged goods manufacturers, food processing facilities, drug stores and drug manufacturers, as well as logistics partners, to track and trace products and components to products throughout the velocity at whichfood, drug and dietary supplement supply chains. In the event of a product is moving,recall, the solution quickly identifies the supply chain path taken by the recalled product or product component, and how profitable it is. In addition, our solution helps retailers analyze shrink, which suppliers are betterallows for the removal of affected products in a matter of minutes, rather than weeks. Additionally, ReposiTrak reduces risk of further contamination in the supply chain by identifying backward chaining sources and forward chaining recipients of affected products in near real time. On August 8, 2012, the Company announced that Global Supply had begun the first two implementations of ReposiTrak at managing, and how to use that information to prevent out of stocks. This same solution is provided to the suppliers who provide additional data inputs valuable to operating their business such as routes, returns and credits. The ScoreTracker solution enables a true collaborative view to the Key Per formance Indicators (KPI’s) for both their business and the retailers. Park City Group is a “neutral” third party between the trading partners and theglobal grocery retailer and ScoreTracker delivers a “trusted” view to performance and actionable insights with respect to improving sales and item performance and reducing operational and shrink costs.major grocery wholesaler.
Services
Business Analytics. Park City Group’s Business Analytics Group offers business consultingbusiness-consulting services to suppliers and retailers in the grocery, convenience store and specialty retail industries. The Business Analytics Group mines store-level scan data to develop item-specific recommendations to improve customer satisfaction and profitability.
Professional Services. Our 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. In addition to implementation of our solutions, we have developed a portfolio of service offerings designed to deliver unparalleled performance throughout the lifecycle of the customer’s solution. Specific services are tailored to each customer and include the following: implementation, business optimization, technical services, education, business process outsourcing and advisory services. The intent of such services is to support our clients’ business operations by enabling them to maximize the speed, effectiveness and overall value of ou rour offerings. We believe that the ability to create value for our customers is critical to our long-term success.
Technology, Development and Operations
Product Development
The products sold by the Company are subject to rapid and continual technological change. Products available from the Company, as well as from its competitors, have increasingly offeredoffer a wider range of features and capabilities. The Company believes that in order to compete effectively in its selected markets, it must provide compatible systems incorporating new technologies at competitive prices. In order to achieve this, the Company has made a substantial commitment to on-going development.
Our product development strategy is focused on creating common technology elements that can be leveraged in applications across our core markets. Except for its supply chain application, which is based on a proprietary architecture, the Company’s software architecture is based on open platforms and is modular, thereby allowing it to be phased into a customer’s operations. In order to remain competitive, we are currently designing, coding and testing a number of new products and developing expanded functionality of our current products.
Operations
We currently serve our customers from a third-party data center hosting facility. TheAlong with the Company’s Statement on Standards for Attestation Engagements (SSAE) No. 16 certification Service Organization Control (SOC2 – formerly SAS 70), the third-party facility is also a Statement on Auditing Standards (SAS)SSAE No. 7016 – SOC2 certified location and is secured by around-the-clock guards, biometric access screening and escort-controlled access, and is supported by on-site backup generators in the event of a power failure. As part of our current disaster recovery arrangements, all of our customers’ data is currently backed-up in near real-time. This strategy is designed to both protect our customers’ data and ensure service continuity in the event of a major disaster. Even with the disaster recovery arrangements, our service could be interrupted.
Customers
We sell to business of all sizes. Our customers primarily include some offood related consumer goods retailers, suppliers and manufacturers. However, the most notable names in retailing, including: SUPERVALU, Tesco-Lotus, Circle K Midwest/Great Lakes, The Home Depot, Wawa, Williams-Sonoma, Ahold, CVS, Meijer, Rite-Aid, Schnuck Markets, Sunoco, WinCo Foods, Win-DixieCompany is opportunistic and others.
Our supplier customers include Allen’s Canning, Bimbo Bakeries, BIC Corporation, Boar’s Head, Bush Brothers, Churchill China, Cliffstar, Coors Brewing Company, Crayola, Dean Foods, Domino’s Pizza, Dreyer’s/ Edy’s Grand Ice Cream, Flowers Foods, General Nutrition Corporation, George Weston Bakeries, Hallmark, I & K Distributors, Interstate Brands, J.M. Smucker Co., NutriSystem, Pepperidge Farm, Perfection Bakeries, Ranir, Riviana Foods, Rhodes International, Russell Stover Candies, Sara Lee Bakery Group, Schwan’s Consumer Brands, Snyder’s of Berlin, Well’s Dairy, Wyeth, and Zondervan, and others.
will offer its supply chain solutions to non-food consumer goods related companies as well. None of our retailing or suppliessupplier customers accounted for more than ten percent of our revenuesrevenue in fiscal 20102012 or 2009.2011.
Sales, Marketing and Customer Support
Sales and Marketing
Through a focused and dedicated sales effort designed to address the requirements of each of its software and service solutions, we believe our sales force is positioned to understand our customers’ businesses, trends in the marketplace, competitive products and opportunities for new product development. Our deep industry knowledge enables the Company to take a consultative approach in working with our prospects and customers. Our sales personnel focus on selling our technology solutions to major customers, both domestically and internationally.
To date, our primary marketing objectives have been to increase awareness of our technology solutions, generate sales leads and develop new customer relationships. In addition, the sales effort has been directed toward developing existing customers by cross selling the newcross-selling Prescient solutions to legacy Park City Group accounts as well as introducing Park City solutions to legacy Prescient customers. To this end, we attend industry trade shows, conduct direct marketing programs, publish industry trade articles and white papers, participate in interviews and selectively advertise in industry publications.
Customer Support
Our global customer support group responds to both business and technical inquiresinquiries from our customers relating to how to use our products and is available to customers by telephone and email. Basic customer support during business hours is available at no charge to customers who purchase certain Company solutions. Premier customer support includes extended availability and additional services, such as an assigned support representative and/or administrator. Premier customer support is available for an additional fee. Additional support services include developer support and partner support.
Competition
The market for the Company’s products and services is very competitive. We believe the principal competitive factors include product quality, reliability, performance, price, vendor and product reputation, financial stability, features and functions, ease of use, quality of support and degree of integration effort required with other systems. While our competitors are often considerably larger companies in size with larger sales forces and marketing budgets, we believe that our deep industry knowledge and the breadth and depth of our offerings give us a competitive advantage. Our ability to continually improve our products, processes and services, as well as our ability to develop new products, enables the Company to meet evolving customer requirements. We compete with large enterprise-wide software vendors, , developers and integrators, such as Oracle, SAP and EDS; B2B exchanges, such as 1SYNC and Agentrics; consulting firms, such as Capgemini; focused solution providers, such as Workbrain, Radient Systems, Kronos, Tomax; and business intelligence technology platforms such as Microsoft, MicroStrategy, SAS and Cognos; and others.platforms. Our supply chain solution competitors include supply chain vendors, such as Logility/Demand Solutions; major enterprise resource planning (ERP) software vendors, such as SAP, Oracle, and JDA; mid-market ERP vendors such as Ross Systems and Infor; and niche players for VMI and SLR, such as IBM and Market6.SLR.
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. In addition,The Company’s patent portfolio has been transferred to an unrelated third party, although the Company has tworetains the right to use the licensed patents currently pending. The Company has 14 international patents and patent applications pending. The patents referred to above are continuously reviewed and renewed as their expiration dates come due. From time to time, the Company may reviewin connection with its portfolio of intellectual property including its patents and either lease or sell its intellectual property.
business. However, Company 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. The Company intends to vigorously defend its intellectual property rights to the extent its resources permit.permit
Future success may depend upon the strength of the Company’s intellectual property. Although management believes that the scope of patents/patent applications are sufficiently broad to prevent competitors from introducing products of similar novelty and design to compete with the Company’s current products and that such patents and patent applications are or will be valid and enforceable, there are no assurances that if such patents are challenged, this belief will prove correct. The Company has, however, successfully defended one of these patents in three separate instances and as such, has some level of confidence in the Company’s ability to maintain its patents. In addition, patent applications filed in foreign countries and patents granted in such countries are subject to laws, rules and procedures, which differ from those in the U.S. Patent protection in such countries may be different from patent protection provided by U.S. laws and may not be as favorable.
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, Company resources may be diverted from other planned activities, and while the outcome of any litigation is inherently uncertain, any litigation result may cause a materially adverse effect on the Company’s operations and financial condition.
Any intellectual property claims, with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing our business plan and could require us to alter our technology, change our business methods and/or pay monetary damages or enter into licensing agreements.
The Company relies on a combination of patent, copyright, trademark, and other laws to protect its proprietary rights. There are no assurances that the Company’s attempted compliance with patent, copyrights, trademark or other laws will adequately protect its proprietary rights or that there will be adequate remedies for any breach of our trade secrets. In addition, should the Company fail to adequately comply with laws pertaining to its proprietary protection, the Company may incur additional regulatory compliance costs.
Employees
As of September 15, 2010,21, 2012, the Company had 52has 48 employees, including 1311 software developers and programmers, 1112 sales, marketing and account management employees, 1914 software service and support employees, 4 network operations employees and 97 accounting and administrative employees. During 2010,2012, the Company contracted with 7five programmers and 2two business analysts in India. The Company is planningplans to continue to expandexpanding its Indianoffshore workforce to augment its analytics services offerings, expand its professional services and to provide additional programming resources. All of these employees and contractors work for the Company on a full time basis. 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. Accordingly, it files annual, quarterly and other reports and information with the Securities and Exchange Commission. You may read and copy these reports and other information at the Securities and Exchange Commission'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 Securities and Exchange Commission at 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.
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
The Company has incurred substantial indebtedness in connection with the Prescient Merger, and there can be no assurance that the Company will be able to pay such indebtedness when it comes due.
As a result of the Prescient Merger, theThe Company’s total liabilities increased toassets were approximately $12.5 million$11,936,230 at June 30, 2009. As2012 and total liabilities were approximately $6,626,109 at June 30, 2012, of June 30,which $1,510,275 represented notes payable. In addition, in July 2010, approximately $4.1 million of indebtedness was converted into a subscription payable for Series B Convertible Preferred Stock (“Series B Preferred”). The Series B Preferred Certificate of Designation was filed on July 21, 2010.”). The Series B Preferred are entitled to receive cash dividends out of funds legally available therefore at a rate of 12%, which rate increases to 15% beginning three years after the date of issuance, and 18% beginning five years after the date of issuance. No assurances can be given that the Company will be able to satisfy existing or additional liabilitiesits obligations when the same become due and payable.payable, or that the Company will be able to pay the cash dividends on the Series B Preferred.
The Company has incurred losses in the past and there can be no assurance that the Company will achieve profitability in the future.
The Company’s marketing strategy emphasizes sales to clients acquired as a result of the Prescient Merger, as well as sales of subscription based services instead of annual licenses.licenses, and contracting with suppliers (“spokes”) to connect to existing retail clients recently acquired by the Company (“hubs”) in connection with management’s recent emphasis on building the base of hubs for which to “connect” suppliers, thereby accelerating future growth. If this marketing strategy fails, revenuesrevenue and operations will be negatively affected.
For the fiscal year ended June 30, 2010,2012, the Company had a net incomeloss of $176,991$858,667 compared to a net loss of $4,041,377,$205,463, for the fiscal year ended June 30, 2009.2011. There can be no assurance that the Company will return to profitability, or reliably or consistently operate profitably during future fiscal years. If the Company does not operate profitably in the future the Company’s current cash resources will be used to fund the Company’s operating losses. If this were to continue, in order to continue the Company’s operations, the Company would need to raise additional capital. Continued losses would have an adverse effect on the long termlong-term value of the Company’s common stock and any investment in the Company. The Company cannot give any assurance that the Company will ever generate significant revenue or have su stainablesustainable profits.
The Company’s liquidity and capital requirements will be difficult to predict, which may adversely affect the Company’s cash position in the future.
Historically, the Company has been successful in raising capital when necessary, which includesincluding stock issuances, securing loans from its officers directors,and directors– including its Chief Executive Officer and majority stockholderstockholder– in order to pay its indebtedness and fund its operations in addition to proceeds collected from sales; however, there can be no assurances that it will be able to do so in the future. The Company anticipates that it will have adequate cash resources to fund its operations and satisfy its debt obligations for at least the next 12 months. Thereafter, its liquidity and capital requirements will depend upon numerous other factors, including the following:
·● | Thethe extent to which management can successfully execute its strategy of contracting with suppliers (spokes) to connect to existing retail clients recently acquired by the Company’s products and services gain market acceptance;Company (hubs); |
·● | Thethe progress and scope of product evaluations; |
·● | The timing and coststhe ability of acquisitions and product and services introductions;the Company to generate sufficient cash flow from operations to satisfy its debt obligations, or otherwise refinance or restructure such indebtedness; |
·● | Thethe extent of the Company’s ongoing research and development programs; and |
·● | Thethe costs of developing marketing and distribution capabilities. |
If in the future, the Company is required to seek additional financing in order to fund its operations, retire its indebtedness, and otherwise carry out its 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 the Company’s best interests.
Quarterly and Annual operating results may fluctuate, which makes it difficult to predict future performance.
Management expects a significant portion of the Company’s revenue stream to come from the sale of subscriptions, and to a lesser extent, license sales, maintenance and services charged to new customers thatcustomers. These amounts will fluctuate in amounts because predicting future sales is difficult and involveinvolves speculation. In addition, the Company may potentially experience significant fluctuations in future operating results caused by a variety of factors, many of which are outside of its control, including:
·● | Demandour ability to retain and increase sales to existing customers, attract new customers and satisfy our customers' requirements; |
| ● | the renewal rates for our service; |
| ● | the amount and market acceptancetiming of new products; |
· | Introduction or enhancement of productsoperating costs and services by the Company or its competitors; |
· | Technical difficulties, system downtime; |
· | Fluctuations in data communications and telecommunications costs; |
· | Maintenance subscriber retention; |
· | The timing and magnitude of capital expenditures and requirements; |
· | Costs relating to the expansion or upgrading of operations, facilities, and infrastructure; |
· | Changes in pricing policies and those of competitors; |
· | Composition and duration of product mix including license sales, consulting fees, and the timing of software rollouts; |
· | Changes in regulatory laws and policies; and |
· | General economic conditions, particularly those related to the information technology industry.operations and expansion of our business; |
| ● | 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 features to our service; |
| ● | 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 service, or delay a prospective customers' purchasing decision, or reduce the value of new subscription contracts or affect renewal rates; |
| ● | timing of additional investments in our enterprise cloud computing application and platform services and in our consulting service; |
| ● | 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; and |
| ● | the timing of stock awards to employees and the related financial statement impact. |
Because of the foregoing factors, future operating results may fluctuate. As a result of such fluctuations, it is 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 relatively large portion of the Company’s expenses will be fixed in the short-term, particularly with respect to facilities and personnel. Therefore, future operating results will be particularly sensitive to fluctuations in revenuesrevenue because of these and other short-term fixed costs.
The Company will need to effectively manage its growth in order to achieve and sustain profitability. The Company’s failure to manage growth effectively could reduce its sales growth and result in continued net losses.
To achieve continual and consistent profitable operations on a fiscal year on-going basis, the Company must have significant growth in its revenuesrevenue from the sale of its products and services, specifically subscription-based services. If the Company is able to achieve significant growth in future subscription sales and expands the scope of its operations, the Company’s management, financial condition, and operational capabilities, and procedures and controls could be strained. The Company cannot be certain that its existing or any additional capabilities, procedures, systems, or controls will be adequate to support the Company’s operations. The Company may not be able to design, implement or improve its capabilities, procedures, systems or controls in a timely and cost-effective manner. Failure to implement, improve and expand the Compa ny’sCompany’s capabilities, procedures, systems or controls in an efficient and timely manner could reduce the Company’s sales growth and result in a reduction of profitability or increase of net losses.
The Company’s officers and directors have significant control over it, which may lead to conflicts with other stockholders over corporate governance.
The Company’s officers and directors, including the Chief Executive Officer, control approximately 51.37%48.3% of the Company’s common stock. The Company’s Chief Executive Officer, Randall K. Fields, individually, controls 46.66%43.4% of the Company’s common stock.
Consequently, Mr. Fields individually, and the Company’s officers and directors, as stockholders acting together, will beare able to significantly influence all matters requiring approval by the Company’s stockholders, including the election of directors and significant corporate transactions, such as mergers or other business combination transactions.
The Company’s corporate charter contains authorized, unissued “blank check” preferred stock that can be issuedissuable without stockholder approval with the effect of diluting then current stockholder interests.
The Company’s certificate of incorporation currently authorizes the issuance of up to 30,000,000 shares of “blank check”‘blank check’ preferred stock with designations, rights, and preferences as may be determined from time to time by the Company’s boardBoard of directors.Directors. In June 2007, the Company completed the sale of 584,000 shares of its Series A Convertible Preferred Stock (“Series A Preferred”Preferred”),. This, together with subsequent issuance of which 648,396paid in kind dividends total 685,671 shares were issued and outstanding as of June 30, 2010. Effective June 30, 2010 the company authorized the issuance and right to sell Series B Convertible Preferred Stock. As of June 30,2012. In July 2010, the Company incurred a subscription payable for the issuance ofissued 411,927 shares of its newly created Series B Preferred in exchangeconsideration for and in satisfactionthe conversion of indebtedness of the Companycertain promissory notes totaling a pproximatelyapproximately $4.1 million. The Series B Preferred Certificate of Designation was filed on July 21, 2010. The Company’s 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, the Company’s 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.
Because the Company has never paid dividends on its common stock, youinvestors should exercise caution before making an investment in the Company.
The Company has never paid dividends on its common stock and does not anticipate the declaration of any dividends pertaining to its common stock in the foreseeable future. The Company intends to retain earnings, if any, to finance the development and expansion of the Company’s business. The Company’s board of directors will determine future dividend policy at their sole discretion and future dividends will be contingent upon future earnings, if any, obligations of the stock issued, Thethe Company’s 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 may be executed by the Company in the future. Therefore, there can be no assurance that dividends w illwill ever be paid on its common stock.
The Company’s business is dependent upon the continued services of the Company’s founder and Chief Executive Officer, Randall K. Fields; should the Company lose the services of Mr. Fields, the Company’s operations will be negatively impacted.
The Company’s business is dependent upon the expertise of its founder and Chief Executive Officer, Randall K. Fields. Mr. Fields is essential to the Company’s operations. Accordingly, an investor must rely on Mr. Fields’ management decisions that will continue to control the Company’s business affairs. The Company currently maintains key man insurance on Mr. Fields’ life in the amount of $10,000,000;$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 the Company’s business.
If the Company is unable to attract and retain qualified personnel, the Company may be unable to develop, retain or expand the staff necessary to support its operational business needs.
The Company’s current and future success depends on its ability to identify, attract, hire, train, retain and motivate various employees, including skilled software development, technical, managerial, sales, marketing and customer service personnel. Competition for such employees is intense and the Company may be unable to attract or retain such professionals. If the Company fails to attract and retain these professionals, the Company’s revenuesrevenue and expansion plans may be negatively impacted.
The Company’s officers and directors have limited liability and indemnification rights under the Company’s organizational documents, which may impact its results.
The Company’s officers and directors are required to exercise good faith and high integrity in the management of the Company’s affairs. The Company’s certificate 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. The Company’s certificate of incorporati onincorporation and bylaws also require it to indemnify the Company’s officers and directors against any losses or liabilities they may incur as a result of the manner in which they operate the Company’s business or conduct the Company’s internal affairs, provided that the officers and directors reasonably believe such actions to be in, or not opposed to, the Company’s best interests, and their conduct does not constitute gross negligence, misconduct or breach of fiduciary obligations.
Business Operations Risks
If the Company’s marketing strategy fails, its revenuesrevenue and operations will be negatively affected.
The Company plans to concentrate its future sales efforts towards marketing the Company’s applications and services.services, and specifically to contract with suppliers (“spokes”) to connect to our existing retail customers (“hubs”) previously signed up by the Company. These applications and services are designed to be highly flexible so that they can work in multiple retail and supplier environments such as grocery stores, convenience stores, specialty retail and route-based delivery environments. There is no assurance that the public will accept the Company’s applications and services in proportion to the Company’s increased marketing of this product line.line, or that the Company will be able to successfully leverage its hubs to increase revenue by connecting suppliers. The Company may face significant competition that may negatively affect demand for its applications and services, including the public’s preference for the Company’s competitors’ new product releases or updates over the Company’s releases or updates. If th ethe Company’s applications and services marketing strategies fail, the Company will need to refocus its marketing strategy toward other product offerings, which could lead to increased development and marketing costs, delayed revenue streams, and otherwise negatively affect the Company’s operations.
Because the Company’s emphasis is on the sale of subscription based services rather than annual license fees, the Company’s revenuesrevenue may be negatively affected.
Historically, the Company offered applications and related maintenance contracts to new customers for a one-time, non-recurring up front license fee and provided an option for annually renewing their maintenance agreements. As a result of the Prescient Merger, and Prescient’s reliance on subscription based revenue, and the Company’s shift away from offering its solutions for a one-time licensing fee, theThe Company is now principally offering prospective customers monthly subscription based licensing of its products. The Company’s customers may now choose to acquire a license to use the software on an Application Solution Provider basis (also referred to as ASP) resulting in monthly charges for use of the Company’s software products and maintenance fees. The Company’s convers ionconversion from a strategy of one-time, non-recurring licensing based model to a monthly recurring fees based approach is subject to the following risks:
·● | Thethe Company’s customers may prefer one-time fees rather than monthly fees; |
· | Because public awareness pertaining to the Company’s Application Solution Provider services will be delayed until the Company begins its marketing campaign to promote those services, the Company’s revenues may decrease over the short term; and |
·● | Therethere may be a threshold level (number of locations) at which the monthly based fee structure may not be economical to the customer, and a request to convert from monthly fees to an annual fee could occur. |
The Company faces threats from competing and emerging technologies that may affect its profitability.
The marketsMarkets for the Company’s type of software products and that of its competitors are characterized by:
·● | Developmentdevelopment of new software, software solutions or enhancements that are subject to constant change;
|
· | Rapidly |
| ● | rapidly evolving technological change; and |
·● | Unanticipatedunanticipated changes in customer needs. |
Because these markets are subject to such rapid change, the life cycle of the Company’s products is difficult to predict; accordingly,predict. As a result, the Company is subject to the following risks:
·● | Whetherwhether or how the Company will respond to technological changes in a timely or cost-effective manner;
|
·● | Whetherwhether the products or technologies developed by the Company’s competitors will render the Company’s products and services obsolete or shorten the life cycle of the Company’s products and services; and |
·● | Whetherwhether the Company’s products and services will achieve market acceptance. |
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. Companies and products added through acquisition may be temporarily served through an alternate facility. 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.
We cannot accurately predict subscription 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 sell additional features and services, more subscriptions or enhanced editions of our service to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors, including general economic conditions. If our efforts to upsell to our customers are not successful, our business may suffer.
Weakened global economic conditions may adversely affect our industry, business and results of operations.
Our overall performance depends in part on worldwide 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.
If the Company is unable to adapt to constantly changing markets and to continue to develop new products and technologies to meet the customers’ needs, the Company’s revenuesrevenue and profitability will be negatively affected.
The Company’s future revenues arerevenue is dependent upon the successful and timely development and licensing of new and enhanced versions of its products and potential product offerings suitable to the customer’s needs. If the Company fails to successfully upgrade existing products and develop new products, and those new products do not achieve market acceptance, the Company’s revenuesrevenue will be negatively impacted.
The Company faces risks associated with the loss of maintenance and other revenue.
The Company has historically experienced the loss of long termlong-term maintenance customers as a result of the reliability of some of its products. Some customers may not see the value in continuing to pay for maintenance that they do not need or use, and in some cases, customers have decided to replace the Company’s applications or maintain the system on their own. The Company continues to focus on these maintenance clients by providing new functionality and applicationsenhancements to meet their business needs. The Company also may lose some maintenance revenue due to consolidation of industries, macroeconomic conditions or customer operational difficulties that lead to their reduction of size. In addition, future revenuesrevenue will be negatively impacted if the Company fails to add new maintenance customers that wil lwill make additional purchases of the Company’s products and services.
The Company faces risks associated with new product introductions.
The Company commercialized its Supply Chain Profit Link productreceives and is continuing to receive and analyzeanalyzes market and product data. Additionally,Based on this data, the Company is scheduledmay endeavor to develop and commercialize ScoreTracker during the second fiscal quarter of the 2011 fiscal year.new product offerings. The following risks apply to both Supply Chain Profit Link and ScoreTracker:potential new product offerings:
·● | Itit may be difficult for the Company to predict the amount of service and technological resources that will be needed by customers of the new SCPL or ScoreTracker customers,offerings, and if the Company underestimates the necessary resources, the quality of its service will be negatively impacted thereby undermining the value of the product to the customer. |
·● | Thethe Company lacks the experience with thisthese new productproducts and itsthe market acceptance to accurately predict if it will be a profitable product. |
·● | Technologicaltechnological issues between the Company and the customer may be experienced in capturing data, and these technological issues may result in unforeseen conflicts or technological setbacks when implementing the software. This may result in material delays and even result in a termination of the engagement with the customer. |
·● | Thethe customer’s experience with SCPL or ScoreTracker,the new offerings, if negative, may prevent the Company from having an opportunity to sell additional products and services to that customer. |
·● | Ifif the customer does not use the product as the Company recommends and fails to implement any needed corrective action(s), it is unlikely that the customer will experience the business benefits from the software and may therefore be hesitant to continue the engagement as well as acquire any additional software products from the Company. |
·● | Delaysdelays in proceeding with the implementation of the SCPL or ScoreTracker productnew products by a new customer will negatively affect the Company’s cash flow and its ability to predict cash flow. |
The Company faces risks associated with proprietary protection of the Company’s software.
The Company’s success depends on the Company’s ability to develop and protect existing and new proprietary technology and intellectual property rights. The Company seeks to protect its 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 the Company has attempted to safeguard and maintain the Company’s proprietary rights, there are no assurances that the Company will be successful in doing so. The Company’s competitors may independently develop or patent technologies that are substantially equivalent or superior to the Company’s.
Despite the Company’s efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company’s products or obtain and use information that the Company regards as proprietary. In some types of situations, the Company may rely in part on “shrink wrap”‘shrink wrap’ or “point‘point and click”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 the Company’s products is difficult. While the Company is unable to determine the extent to which piracy of the Company’s 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. The Company can offer no assurance that the Company’s means of protecting its proprietary rights will be adequate or that the Company’s competitors will not reverse engineer or independently develop similar technology.
The Company incorporates a number of third party software providers’ licensed technologies into its products, the loss of which could prevent sales of the Company’s products or increase the Company’s costs due to more costly substitute products.
The Company licenses technologies from third party software providers, and such technologies are incorporated into the Company’s products. The Company anticipates that it will continue to license technologies from third parties in the future. The loss of these technologies or other third-party technologies could prevent sales of the Company’s products and increase the Company’s costs until substitute technologies, if available, are developed or identified, licensed and successfully integrated into the Company’s products. Even if substitute technologies are available, there can be no guarantee that the Company will be able to license these technologies on commercially reasonable terms, if at all.
The Company may discover software errors in its products that may result in a loss of revenues,revenue, injury to the Company’s reputation or subject us to substantial liability.
Non-conformities or bugs (“errors”errors”) may be found from time to time in the Company’s existing, new or enhanced products after commencement of commercial shipments, resulting in loss of revenuesrevenue or injury to the Company’s reputation. In the past, the Company has discovered errors in its products and as a result, has experienced delays in the shipment of products. Errors in the Company’s products may be caused by defects in third-party software incorporated into the Company’s products. If so, the Company may not be able to fix these defects without the cooperation of these software providers. Since these defects may not be as significant to the software provider as they are to us, the Company may not receive the rapid cooperation that may be required. &# 160;The Company may not have the contractual right to access the source code of third-party software, and even if the Company does have access to the code, the Company 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 the Company’s customers use the Company’s products for critical business applications, any errors, defects or other performance problems could hurt the Company’s reputation and may result in damage to the Company’s customers’ business. If that occurs, customers could elect not to renew, or 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 recei vablereceivable or the expense and risk of litigation. These potential scenarios, successful or otherwise, would likely be time consuming and costly.
Some competitors are larger and have greater financial and operational resources that may give them an advantage in the market.
Many of the Company’s competitors are larger and have greater financial and operational resources. 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. Any of these actions could have a significant effect on revenues.revenue. In addition, the 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 the Company’s product and service offerings less desirable to customers, again resulting in the loss of customers or a reduction in the price the Company can demand for the Company’s offerings.
Risks Relating to the Company’s Common Stock
The Company’s common stock ismay be subject to the “penny stock” rules of the SEC and the trading market in the Company’s securities is limited, which makes transactions in the Company’s stock cumbersome and may reduce the value of an investment in the Company.
The Securities and Exchange Commission (“Commission”Commission”) has adopted Rule 15g-9 under the Securities Exchange Act of 1934, as amended (“Exchange Act”Act”), which establishes the definition of a “penny stock,” for the purposes relevant to the Company, as any equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
·● | Thatthat a broker or dealer approve a person’s account for transactions in penny stocks; and
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·● | Thethe broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
·● | Obtainobtain financial information and investment experience objectives of the person; and
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·● | Makemake a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of valuating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
·● | Sets forth the basis on which the broker or dealer made the suitability determination; and |
·● | That the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of the Company’s common stock and cause a decline in the market value of the Company’s stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities, and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
The limited public market for the Company’s securities may adversely affect an investor’s ability to liquidate an investment in the Company.
Although the Company’s common stock is currently quoted on the OTC Bulletin Board (OTCBB),NYSE American Stock Exchange, there is limited trading activity. The Company can give no assurance that an active market will develop, or if developed, that it will be sustained. If you acquirean investor acquires shares of the Company’s common stock, youthe investor may not be able to liquidate the Company’s shares should youthere be a need or desire to do so.
Future issuances of the Company’s shares may lead to future dilution in the value of the Company’s common stock, will lead to a reduction in shareholder voting power and may prevent a change in Company control.
The shares may be substantially diluted due to the following:
·● | Issuanceissuance 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
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·● | Thethe 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 the Company issues 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.
Compliance with the rules established by the Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 will be complex. Failure to comply in a timely manner could adversely affect investor confidence and the Company’s stock price.
Rules adopted by the Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require the Company to perform an annual assessment of its internal controls over financial reporting, and certify the effectiveness of those controls. The standards that must be met for management to assess the internal controls over financial reporting as now in effect are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. The Company may encounter problems or delays in completing activities necessary to make an assessment of the Company’s internal controls over financial reporting. Due to the Company’s limited personnel resources and lack of experience, it may encounter problems or delays in completing the implementation of any requested improvements. If the Company cannot perform the assessment or certify that its internal controls over financial reporting are effective, investor confidence and share value may be negatively impacted.
The Company’s principal place of business operations is located at 3160 Pinebrook Road, Park City, Utah 84098. The Company leases approximately 10,000 square feet at this corporate office location, consisting primarily of office space, conference rooms and storage areas. The telephone number is (435) 645-2000. The website address is http://www.parkcitygroup.com.
On June 29, 2007, the Company was served with a complaint from two previous employees titled James D. Horton and Aaron Prevo v. Park City Group, Inc. and Randy Fields, Individually Case No. 070700333, which was filed in the Second Judicial District Court, Davis County, Utah and has since been moved to the Third Judicial District Court, Summit County, Utah. The plaintiffs’ complaint alleges that certain provisions of their employment agreements were not honored including breach of employer obligations, fraud, unjust enrichment, and breach of contract. The plaintiffs are seeking combined damages for alleged unpaid compensation and punitive damages of $520,650 and $2,603,250, respectively. The discovery phase of the case has recently been completed and the Company will continue to vigorously defend this matter. The Compa ny believes that there is no validity to this matter and that the possibility of any adverse outcome to the Company is remote.
We are, from time to time, involved in various additional legal proceedings incidental to the conduct of our business. We believe thatHistorically, the outcome of all such pending legal proceedings willhas not, in the aggregate, havehad a material adverse effect on our business, financial condition, results of operations or liquidity.
There are no pending or threatened legal proceedings at this time.
| ITEM 5. | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Share Price History
Our common stock is traded inon the over-the-counter market in what is commonly referred to as the “Electronic” or “OTC Bulletin Board” or the “OTCBB”NYSE American Stock Exchange under the trading symbol “PCYG.” The following table sets forth the high and low bid informationclosing sales prices of theour common stock’s closing pricestock for the periods indicated. The price information contained in the table was obtained from internetInternet sources considered reliable. Note that such over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and the quotations may not necessarily represent actual transactions in the common stock.
| | | Quarterly Common Stock Price Ranges | |
| | | 2010 | | | 2009 | |
| Fiscal Quarter | | High | | | Low | | | High | | | Low | |
| September 30 | | $ | 2.75 | | | $ | 1.40 | | | $ | 3.20 | | | $ | 2.25 | |
| December 31 | | | 3.60 | | | | 2.60 | | | | 2.60 | | | | 0.55 | |
| March 31 | | | 3.95 | | | | 3.25 | | | | 1.70 | | | | 1.10 | |
| June 30 | | | 4.50 | | | | 3.65 | | | | 1.55 | | | | 1.05 | |
| | | Quarterly Common Stock Price Ranges | |
| | | 2012 | | | 2011 | |
| Fiscal Quarter Ended | | High | | | Low | | | High | | | Low | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
(1) The markets were not open for trading on the last day of the Company’s second quarter- Saturday, December 31, 2011.
(2) The markets were not open for trading on the last day of the Company’s third quarter- Saturday, March 31, 2012.
(3) The markets were not open for trading on the last day of the Company’s fourth quarter- Saturday, June 30, 2012.
Dividend Policy
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.
The Series A Preferred issued in the June 2007 offering is entitled to receive, out of funds legally available therefore, dividends at a rate of 5%. Prior to June 1, 2010, preferred dividends can bepayable on the Series A Preferred were paid in cash oradditional shares of Series A Preferred at the option of the Company.Preferred. After June 1, 2010, the holders of the Series A Preferred may elect to have future dividends paid in cash in the event that during any sixty (60) trading day period commencing on or after June 1, 2010 the average closing price of the Company’s common stock shall be less than or equal to the Series A Preferred conversion price. Our present policy
The Dividend Rate with respect the Series A Preferred increases to 10% per annum in the event the average closing price of the Company’s common stock during the last thirty (30) trading days of any calendar quarter is to retain future earnings (if any) for use in our operations and the expansionless than $3.00 per share (a “Dividend Adjustment”). A holder of our business.
On July 21, 2010,Series A Preferred has notified the Company filedthat a CertificateDividend Adjustment is required as a result of Designation to designate 600,000 sharesthe average closing price of our preferredthe Company’s common stock $0.01 par value per share, as Series B Preferred. for the thirty-day period ended March 31, 2012. Management disagrees with the method of calculation used by the holder and believes that the Company’s calculation determining that a Dividend Adjustment is not required is reasonable, and that an ultimate determination that an alternative method should be employed is doubtful. The pro-forma effect of a Dividend Adjustment is set forth under the caption “Preferred Dividends” on page 21 of this Annual Report on Form 10-K.
The Series B Preferred issued in July 2010 is entitled to receive, out of funds legally available therefore, dividends at a rate of 12% per annum for the first three. Three years following the date of issuance, dividends payable on the Series B Preferred are paid at the rate of 15% per annum for the period beginning three years following the date of issuance and continuing until five years from the date of issuance, and 18% per annum beginning five years from the date of issuance. Dividends are payable quarterly in cash.
Holders of Record
At September 15, 201021, 2012 there were 615652 holders of record of our common stock, and 10,975,09012,239,257 shares were issued and outstanding. The number of holders of record and shares 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 and preferred stock in unregistered transactions during fiscal year 2010 and subsequently.2012. All of the shares of common and preferred stock issued were issued in non-registered transactions were issued in reliance on Section 3(a)(9) and/or Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”“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 Commission during the fiscal year ended June 30, 2010.2012; provided, however, during the year ended June 30, 2012, the Company issued (i) 74,470 shares of common stock to directors in lieu of board compensation otherwise payable to such directors; (ii) 18,915 shares of common stock to Randall Fields, the Company’s Chief Executive Officer, and Fields Management, in consideration for certain amounts otherwise payable to Mr. Fields or Fields Management, as the case may be; and (iii) 33,638 shares of Series A Convertible Preferred to certain holders of such securities in lieu of dividends otherwise payable on the Series A Preferred. No shares of common or preferred stock were issued subsequent to June 30, 2010,2012, that have not been previously reported.
The following selected consolidated financial data should be read in conjunction with our audited condensed consolidated financial statements and related notes thereto and with Management’s Discussion and Analysis of Financial Condition and Results of Operation, which are included elsewhere in this Form 10-K. The selected condensed consolidated statement of operations data for fiscal 20102012 and 2009,2011, and the selected condensed consolidated balance sheet data as of June 30, 20102012 and 20092011 are derived from, and are qualified by reference to, the audited condensed consolidated financial statements included in this Form 10-K.
| | Fiscal Year Ended June 30, | |
| Consolidated Statement of Operations Data | 2010 | | 2009 | |
| Revenue | | | | | | |
| Subscription | | $ | 6,048,318 | | | $ | 2,883,196 | |
| Maintenance | | | 2,501,511 | | | | 1,927,773 | |
| Professional services | | | 1,196,961 | | | | 899,800 | |
| License | | | 1,127,770 | | | | 253,998 | |
| Total revenues | | $ | 10,874,560 | | | $ | 5,964,767 | |
| Income (loss) from Operations | | | 841,692 | | | | (3,372,915 | ) |
| Net Income (loss) | | | 176,991 | �� | | | (4,041,377 | ) |
| | | | | | | |
| | | | June 30 | |
| Consolidated Balance Sheet Data | | | 2010 | | | 2009 | |
| Cash and cash equivalents | | $ | 1,157,431 | | | $ | 656,279 | |
| Working capital | | | (1,936,533 | ) | | | (4,516,614 | ) |
| Total Assets | | | 12,050,576 | | | | 12,046,958 | |
| Total Liabilities | | | 7,793,695 | | | | 12,549,030 | |
| Deferred Revenue | | | 1,364,390 | | | | 1,422,497 | |
| Total Debt (current and long-term) | | | 4,287,307 | | | | 8,678,712 | |
| Capital leases (current and long-term) | | | 280,933 | | | | 232,348 | |
| Stockholders' equity (deficit) | | | 4,256,881 | | | | -502,072 | |
| | | Fiscal Year Ended June 30, |
| Consolidated Statement of Operations Data | | 2012 | | | 2011 |
| Revenue | | | | | |
| | $ | 6,994,484 | | $ | 6,548,578 | |
| | | 3,104,063 | | | 4,203,554 | |
| | $ | 10,098,547 | | $ | 10,752,132 | |
(Loss) income from Operations | | $ | (972,712 | ) | $ | 141,241 | |
| | $ | (858,667 | ) | $ | (205,463 | ) |
| | | |
Consolidated Balance Sheet Data | | | 2012 | | | | 2011 | |
Cash and Cash Equivalents | | $ | 1,106,176 | | | $ | 2,618,229 | |
| | | (2,345,977 | ) | | | (2,395,501 | ) |
| | | 11,936,230 | | | | 13,976,151 | |
| | | 6,626,109 | | | | 8,652,214 | |
| | | 2,081,459 | | | | 1,663,232 | |
Total Debt (current and long-term) | | | 2,710,275 | | | | 4,886,544 | |
Capital Leases (current and long-term) | | | 41,201 | | | | 148,749 | |
Stockholders' Equity (deficit) | | | 5,310,121 | | | | 5,323,937 | |
| 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. This Form 10-K 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 Form 10-K 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 reve nues,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 deve lopmentsdevelopments may differ materially from those projected in such statements.
Overview
Park City Group, Inc. (the “Company”“Company”) is a Software-as-a-Service (“SaaS”SaaS”) provider that brings unique visibility to the consumer goods supply chain, delivering actionable information that ensures product is on the shelf when the consumer expects it. Our service increases our customers’ sales and profitability while enabling lower inventory levels for both retailers and their suppliers.
The Company designs, develops, markets and supports Our services are delivered principally though proprietary software products.products designed, developed, marketed and supported by the Company. These products are designed to be used to facilitate improved business processes betweenamong all key constituents in the supply chain, starting with the retailer and moving back to suppliers and eventually raw material providers. In addition, the Company has built a consulting practice for business process improvement that centers around the Company’s proprietary software products and through establishment of a neutral and “trusted” third party relationship between retailers and suppliers. The principal markets for the Company's products are multi-store retail and convenience store chains, branded food manufacturers, suppliers and distributors and manufacturing companiescompanies.
Historically, the Company offered applications and related maintenance contracts to new customers for a one-time, non-recurring up front license fee. Although not completely abandoning the license fee and maintenance model, since the acquisition of Prescient Applied Intelligience, Inc. ("Prescient") in January 2009, the Company has focused its strategic initiatives and resources to marketing and selling prospective customers a subscription for its product offerings. In support of this strategic shift toward a subscription-based model, the Company has scaled its contracting process, streamlined its customer on-boarding and implemented a financial package that integrates multiple systems in an automated fashion. As a result, subscription based revenue has grown from $203,000 for the 2008 fiscal year to $7.0 million this year. During that same period our revenue has transitioned from a 6% subscription revenue and 94% license and other revenue basis to 70% subscription revenue and 30% license and other revenue basis.
Recent Developments
ReposiTrakTM
On February 14, 2012 the Company announced a partnership with Levitt Partners, an internationally known health care and food safety-consulting firm. The Company's association with Levitt Partners resulted in the formation of Global Supply, which will provide a targeted solution for improving supply chain visibility for food and drug safety. The solution, ResposiTrakTM, is powered by the Company’s technology and was developed in response to the passage of the Food Safety and Modernization Act in January of 2011. ResposiTrakTM enables grocery, supermarkets, packaged goods manufacturers, food processing facilities, drug stores and drug manufacturers, as well as logistics partners, to track and trace products and components to products throughout the food, drug and dietary supplement supply chains. In the event of a product recall, the solution quickly identifies the supply chain path taken by the recalled product or product component, and allows for the removal of affected products in a matter of minutes, rather than weeks. Additionally, ReposiTrakTM reduces risk of further contamination in the supply chain by identifying backward chaining sources and forward chaining recipients of affected products in near real time. On August 8, 2012, the Company announced that Global Supply had begun the first two implementations of ReposiTrakTM at a global grocery retailer and a major grocery wholesaler.
CVS Pharmacy, Inc.
On July 31, 2012, the Company announced a three-year service agreement to provide selected scan-based trading services to CVS through May 2015. The agreement reflects the Company's focus on increasing the number of retailers that use its software on a subscription basis, and marks the Company's progress towards contracting with major retailers outside of the grocery industry. The Company expects the subscription revenue potential generated from these relationships to be significantly larger than any of the Company's existing client hubs within the grocery industry.
Fiscal Year
Our fiscal year ends on June 30. References to fiscal 2010, for example,2012 refer to the fiscal year ended June 30, 2010.2012.
Sources of Revenue
The Company derives revenue from four sources: (1) subscription fees, (2) hosting, premium support and maintenance service fees beyond the standard services offered, (3) license fees, and (4) professional services consisting of development services, consulting, training and education.
Subscription revenues arerevenue is driven primarily by the number of connections between suppliers and retailers, the number of stores and SKU’s. Subscription revenue contains arrangements with customers accessing our applications, which includes the use of the application, application and data hosting, subscription-based maintenance of the application and standard support included with the subscription.
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”‘hosted’ software and data through a secure Internetinternet connection. Premium support services include technical assistance for our software products and unspecified product upgrades and enhancements on a when and if available basis beyond what is offered with our basic subscription package.
License arrangements are a perpetual license. Software license maintenance updatesagreements are typically annual contracts with customers that are paid in advance or according to terms specified as terms in the contract. This provides the customer access to new software releases,enhancements, maintenance releases, patches, updates and technical support personnel.
Professional services revenue is comprised of revenue from development, consulting, education and training. Development services include customizations and integrations for a client’s specific business application. Consulting, education and training include implementation and best practices consulting. Our professional services fees are more frequently billed on a fixed price/fixed scope, but may also be billed on a time and materials basis. We have determined that the professional services element of our software and subscription arrangements is not essential to the functionality of the software.
Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discussdiscusses the Company’s financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.
We commenced operations in the software development and professional services business during 1990. The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amountsamount of revenuesrevenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions. Management bases its estimates and judgments on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, will affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.
Income Taxes
In determining the carrying value of the Company’s net deferred income tax assets, the Company must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets. If these estimates and assumptions change in the future, the Company may record a reduction in the valuation allowance, resulting in an income tax benefit in the Company’s statements of operations. Management evaluates whether or not to realize the deferred income tax assets and assesses the valuation allowance quarterly.
Goodwill and Other Long-Lived Asset Valuations
Goodwill is assigned to specific reporting units and is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit's carrying amount is greater than its fair value. Management reviews the long-lived tangible and intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Management evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the c arryingcarrying value exceeds the estimated fair market value of the long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as circumstances dictate.
Revenue Recognition
We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement;arrangement, (2) the service has been provided to the customer;customer, (3) the collection of our fees is reasonably assured;probable and (4) the amount of fees to be paid by the customer is fixed or determinable.
We recognize subscription revenuesrevenue ratably over the length of the agreement beginning on the commencement dates of each agreement or when revenue recognition conditions are satisfied. For a bundled fee, subscriptions provide the customer with access to the software and data over the Internet, or on demand, and provide technical support services and software upgrades when and if available. Under subscriptions, customers do not have the right to take possession of the software and such arrangements are considered service contracts. Accordingly, we recognize subscription revenue ratably over the length of the agreement and professional services are recognized as incurred based on their relative fair values. In situations where we have contractually committed to an individual customer specific technology, we defer all of the re venuerevenue for that customer until the technology is delivered and accepted. Once delivery occurs, we then recognize the revenue ratably over the remaining contract term. When subscription service is paid in advance, deferred revenue is recognized and revenue is recordingrecorded ratably over the term as services are consumed.
Set up fees paid by customers in connection with subscription services are deferred and recognized ratably over the life of the applicationapplicable agreement.
Hosting, premium support and maintenance service revenues arerevenue is derived from services beyond the basic services provided in standard arrangements. We recognize hosting, premium service and maintenance revenuesrevenue ratably over the contactcontract terms beginning on the commencement dates of each contact or when revenue recognition conditions are satisfied. Instances where hosting, premium support or maintenance service is paid in advance, deferred revenue is recognized and revenue is recording ratably over the term as services are consumed.
Professional services revenue consists primarily of fees associated with application and data integration, data cleansing, business process re-engineering, change management and education and training services. Fees charged for professional services are recognized when delivered. We believe the fees for professional services qualify for separate accounting because: a)(1) the services have value to the customer on a stand-alone basis; b)basis, (2) objective and reliable evidence of fair value exists for these services;services and c)(3) performance of the services is considered probable and does not involve unique customer acceptance criteria.
We also sell software licenses. For software license sales, we recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement;arrangement, (2) the service has been provided to the customer;customer, (3) the collection of our fees is probable;probable and (4) the amount of fees to be paid by the customer is fixed or determinable. Licenses generally include multiple elements that are delivered up front or over time. Vendor specific objective evidence of fair value of the hosting and support elements is based on the price charged at renewal when sold separately, and the license element is recognized into revenue upon delivery. The hosting and support elements are recognized ratably over the contractual term.
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, revenues,revenue and results of operation, liquidity or capital expenditures.
Results of Operations – Fiscal Years Ended June 30, 20102012 and 20092011
RevenuesRevenue
| | | Fiscal Year Ended June 30, | | Variance | | |
| | | 2010 | | 2009 | | Dollars | | Percent |
| Subscription | | $ | 6,048,318 | | $ | 2,883,196 | | $ | 3,165,122 | | 110% |
| Maintenance | | | 2,501,511 | | | 1,927,773 | | | 573,738 | | 30% |
| Professional services | | | 1,196,961 | | | 899,800 | | | 297,161 | | 33% |
| License | | | 1,127,770 | | | 253,998 | | | 873,772 | | 344% |
| Total revenues | | $ | 10,874,560 | | $ | 5,964,767 | | $ | 4,909,793 | | 82% |
| | | Fiscal Year Ended June 30, | | | Variance | |
| | | 2012 | | | 2011 | | | Dollars | | | Percent | |
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During the fiscal year ended June 30, 2010,2012, the Company had total revenuesrevenue of $10,874,560$10,098,547 when compared to $5,964,767$10,752,132 for the year ended June 30, 2009, an 82% increase.2011, a 6.1% decrease. This $4,909,793 increase$653,585 decrease in total revenues isrevenue was principally due to a decrease in other revenues of $1,099,491, as more particularly described below. The decrease was partially offset by an increase of $445,906 in subscription revenue.
While the Prescient Merger, which contributed approximately $4,785,000 duringCompany experienced a decrease in total revenue in the most recently completed fiscal year when compared to the fiscal year ended June 30, 2010.
In addition, significant changes occurred unrelated to the Prescient Merger during the year ended June 30, 2010. The following changes in the Company’s revenues exclude the impact of the Prescient Merger:
· | an increase in license sales of approximately $562,000; |
· | a decrease of $55,000 in subscription revenue; |
· | a decrease of $104,000 in maintenance revenue; |
· | a decrease of $278,000 in professional services revenue resulting from the completion of projects in 2009 that did not recur in the same period in 2010. |
Management2011, management believes that the Company has benefitted fromCompany’s strategy of pursuing contracts with suppliers (“spokes”) to connect to retail customers (“hubs”) that have been added in the product synergies resulting frommost recently completed fiscal year, including the Prescient Merger,recently announced service agreement with CVS Pharmacy, Inc., should result in increased revenue during the fiscal year ending June 30, 2013, and the Company continues its focus on marketing the Company’s combined products and services on a subscription basis. While no assurances can be given, management believes that total revenue will continue to be positively impacted as a result of the Prescient Merger.in subsequent periods.
Subscription Revenue
Subscription revenues were $6,048,318revenue was $6,994,484 and $2,883,196$6,548,578 in 20102012 and 20092011 respectively, an increase of 110%6.8%. This $3,165,122$445,906 increase in the year ended June 30, 20102012 when compared with the year ended June 30, 20092011 was principally due to (1) the Prescient Merger,increase of subscription customers added to the Company’s customer base which contributed $3,230,935approximately $499,000 in new subscription revenue and (2) a $664,000 increase attributable to the growth of existing retailer and supplier subscriptions. The increase in subscription revenue duringwas partially offset by a decrease of approximately $717,000 resulting from the year ended June 30, 2010. non-renewal of existing clients, including the non-renewal of a significant retail client and related connections in January 2012.
The Company continues to focus its strategic initiatives on increasing the number of retailers, suppliers and manufacturers that use its software on a subscription basis. However, while management believes that marketing its suite of software solutions as a renewable and recurring subscription is an effective strategy, it cannot be assured that subscribers will renew the service at the same level in future years, propagate services to new categories or recognize the need f orfor expanding the service offering of the Company’s suite of actionable products and services.
Other Revenue
Maintenance revenues were $2,501,511Other revenue was $3,104,063 and $1,927,773$4,203,554 in 20102012 and 20092011 respectively, an increasea decrease of 30%26.2%. This $573,738 increase$1,099,491 decrease in the year ended June 30, 20102012 when compared with the year ended June 30, 20092011 was principally due to (1) the Prescient Merger, which contributed $677,722 innon-renewal of maintenance revenue during the year ended June 30, 2010. The increase in maintenance revenue associated with the Prescient Merger wascontracts, partially offset by cancellationsincreases to existing contracts resulting in a net reduction of existing customers or reductionmaintenance revenue of approximately $223,000, (2) a decrease in the scopelicense revenue of maintenance. While management believes maintenance$450,000 and support services is essential to its customers, due to macroeconomic conditions and the historical reliability of the Company’s suite of products, from time to time, customers may not perceive the ongoing value of paying for maintenance when the frequency of mai ntenance activities needed by(3) a customer becomes infrequent.
Professional Services Revenue
Professional services revenues were $1,196,961 and $899,800 in 2010 and 2009 respectively, an increase of 33%. This $297,161 increase in the year ended June 30, 2010 when compared with the year ended June 30, 2009 was principally due to the Prescient Merger, which contributed $565,104 in professional services revenue during the year ended June 30, 2010. This was offset by a $278,500 decrease in professional services that was the resultservice revenue of the completion$361,000.
While these other sources of projectsrevenue will continue in the year ended June 30, 2009 which did not recur in the same period 2010. Management believes that professional services may experience periodic fluctuations as a result of (i) timing of implementations, (ii) scope offuture periods, management’s focus on recurring subscription-based revenue will cause license, maintenance and consulting services to fluctuate and be provided, (iii) size of the retailer or supplier, or (iv) the need for its analytics offerings and change-m anagement services becomes a natural additiondifficult to its software-as-a-service product suite.
predict.
Cost of Revenue and Product Support
-29-
| | Fiscal Year Ended June 30, | Variance |
| | 2012 | | 2011 | | Dollars | | | Percent | |
Cost of revenue and product support | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
License Revenue
License fees were $1,127,770revenue and $253,998product support was $4,581,765 or 45.4% of total revenue, and $4,028,222 or 37.5% of total revenue for the fiscal years ended June 30, 20102012 and 2009,2011, respectively, a 344%13.7% increase. This $873,772 increase in license revenueof $553,543 for the year ended June 30, 2010 when compared with the same period June 30, 2009 was principally the result of the sale of a new license of $490,000 during the most recently completed fiscal year, and an increase in additional license sales to existing customers during the year that did not occur during the year ended June 30, 2009. Management believes it is difficult to predict and forecast future software license sales. Therefore, the Company will continue to focus its resources on recurring subscription based revenues. The Company has not eliminated the sale of its suite of products on a license basis.
Cost of Services and Product Support
| | Fiscal Year Ended June 30, | | Variance | | | | |
| | 2010 | | 2009 | | Dollars | | | Percent | |
| Cost of services and product support | | $ | 4,428,481 | | | $ | 3,580,567 | | | $ | 847,914 | | | | 24 | % |
| Percent of total revenues | | | 41 | % | | | 60 | % | | | | | | | | |
Cost of services and product support were $4,428,481 or 41% of total revenues, and $3,580,567 or 60% of total revenues for the years ended June 30, 2010 and 2009, respectively; a 24% increase. This increase of $847,914 for the year ended June 30, 20102012 when compared with the same period ended June 30, 20092011 is principally due to (i) a $638,886$481,000 increase in salary, commission and payrollhead count related expense, principally attributable toincreased stock compensation, an increase in benefit costs, and the Prescient Merger,capitalization of software development costs in the prior year, (ii) a $164,498$82,000 increase in contractor,the use of outside consulting supportconsultants and recruiting expenses,contractors and (iii) $54,014 in travel related expenses, and (iv) a $183,156$19,000 increase in non-employee commissions incurred as a resultfrom an expansion of a license sale that did not occur in the comparable period in 2009.our data center. These increases were partially offset by a $28,000 decrease in overhead related expenses due to the consolidation of data centers related to the Prescient Merger. The Company continues to focus on rationalizing expenses while completing the final stages of its integration of operations with Prescient.network communication costs, hardware and software maintenance and support contracts, travel and related expenditures.
Sales and Marketing Expense
| | Fiscal Year Ended June 30, | | Variance | | | | | Fiscal Year Ended June 30, | | Variance |
| | 2010 | | 2009 | | Dollars | | | Percent | | 2012 | | 2011 | | Dollars | | Percent | |
| Sales and marketing | | $ | 1,602,231 | | | $ | 1,347,705 | | | $ | 254,526 | | | | 19 | % | | | | | | | | | | | | |
| Percent of total revenues | | | 15 | % | | | 23 | % | | | | | | | | | |
| | | | | | | | | | |
SalesThe Company’s sales and marketing expenses were $1,602,231,expense was $2,640,292, or 15%26.1% of total revenues,revenue, and $1,347,705$2,742,061 or 23%25.5% of total revenues,revenue, for the fiscal years ended June 30, 20102012 and 2009,2011, respectively, a 19% increase.3.7% decrease. This $254,526 increase$101,769 decrease over the previous year was primarily the result of (i) a $152,212 increasedecrease of approximately $226,000 in salary, employee benefits and training, stock-based compensation, and commission expense and payroll related expense, (ii) $115,203 increasea decrease of $46,000 in contractor,the use of outside consulting support and recruiting expenses, (iii) $59,694 in travel related expenses.sales contractors. These increasesdecreases were partially offset by a decreaseincreases of $43,839approximately (y) $165,000 in non-employee commissions primarily related to retailer marketing allowances and (z) an increase of approximately $6,000 in public relations, advertising, marketing and tradeshow expense, travel and conference related expenses. The increases were further offset by a reduction in overhead expenses allocated to sales and marketing due to consolidation and integration with Prescient.
General and Administrative Expense
| | Fiscal Year Ended June 30, | | Variance | | | | | Fiscal Year Ended June 30, | | Variance |
| | 2010 | | 2009 | | Dollars | | | Percent | | 2012 | | 2011 | | Dollars | | Percent | |
| General and administrative | | $ | 3,190,255 | | | $ | 2,225,960 | | | $ | 964,295 | | | | 43 | % | | | | | | | | | | | | |
| Percent of total revenues | | | 29 | % | | | 37 | % | | | | | | | | | |
| | | | | | | | | | |
GeneralThe Company’s general and administrative expenses were $3,190,255,expense was $2,949,108, or 29%29.2% of total revenues,revenue, and $2,225,960$3,053,818 or 37%28.4% of total revenuesrevenue for the years ended June 30, 20102012 and 2009,2011, respectively, a 43% increase.3.4% decrease. This $964,295 increase$104,710 decrease when comparing expenditures for the year ended June 30, 20102012 with the same period ended June 30, 20092011 is principally due to (i) an increasethe settlement of $452,803 in salary, bonuses, payrolla lawsuit and related expenseslegal fees in the prior year through the combination of which approximately $180,717 is attributable to the Prescient Merger,cash and equity and (ii) a $143,986 increase in non-capitalized computer equipment, computer hardware leases, software maintenance and support, and training as a resultdecrease of the acquisition of additional third party applications, (iii) a $229,602 increase in legal, accounting and professional fees, a (iv) $71,467 increase in board fees, (v) a $91,896 increase in ba d debt expense, (vi) a $29,009 increase in taxes, bank charges, and other miscellaneous overhead related expenses, and (vii) a $16,643 increaseapproximately $41,000 in travel expenses.and related expenditures. These increasesdecreases were partially offset by (w) a decrease$203,000 increase in bad debt expense, (x) a $124,000 increase in in salary, employee benefits, payroll taxes, bonuses, and compensation related expenditures such as stock-based compensation expense for certain employees and board members that are based on multi-year vesting schedules (y) an $89,000 increase in investor relations, shareholder cost, and shareholder costsother professional fees, and (z) a $33,000 increase in facility expenses.
Depreciation and Amortization Expense
| | Fiscal Year Ended June 30, | | Variance | | | | | Fiscal Year Ended June 30, | | Variance |
| | 2010 | | 2009 | | Dollars | | | Percent | | 2012 | | 2011 | | Dollars | | Percent | |
| Depreciation and amortization | | $ | 811,900 | | | $ | 726,067 | | | $ | 85,833 | | | | 12 | % | | | | | | | | | | | | |
| Percent of total revenues | | | 7 | % | | | 12 | % | | | | | | | | | |
| | | | | | | | | | |
DepreciationThe Company’s depreciation and amortization expenses were $811,900expense was $900,094 and $726,067$786,790 for the year ended June 30, 20102012 and 2009,2011, respectively, an increase of 12%14.4%. This increase of $85,833$113,304 for the year ended June 30, 20102012 when compared to the year ended June 30, 20092011 is partially due to the Prescient Merger, which resulted in(1) an additional $33,000increase in depreciation related to new capital hardware investments and amortization expense compared to the comparable period(2) an increase in 2009.
Impairment of Capitalized Software Costs
| | Fiscal Year Ended June 30, | | Variance | |
| | 2010 | | 2009 | | Dollars | |
| Impairment of software | | $ | - | | | $ | 1,457,383 | | | $ | (1,457,383 | ) |
| Percent of total revenues | | | 0 | % | | | 24 | % | | | | |
There was no impairmentamortization of capitalized software costs during therelated to a project capitalized in fiscal year ended June 30, 2010 compared to an impairment of capitalized software costs of $1,457,383 for the year ended June 30, 2009. During the three months ended March 31, 2009, the Company evaluated its intangible assets including the software technology platform acquired in the acquisition of Prescient. In conducting the assessment, Management determined that $310,517 of capitalized development costs were unlikely to be recovered, and such costs should be adjusted for impairment when evaluating its post-merger software offerings. In addition $1,146,866 of the acquired software technology through the Prescient Merger was determined by management to be impaired. Although the SmallTalk software platform it acquired from Prescient has high functionality, give n the development limitations of the technology, it was determined that the software code base has a significantly lower value and reduced expected life. Management determined that the software carrying value exceeded the fair value and was impaired by $1,457,383. No further impairment was required at June 30, 2010 and 2009.
Other Income and Expense
| | | Fiscal Year Ended June 30, | | | Variance | | | | |
| | | 2010 | | | 2009 | | | Dollars | | | Percent | |
| Equity in subsidiary loss | | $ | - | | | $ | (162,796 | ) | | $ | 162,796 | | | | -100 | % |
| Gain on refinance | | | 43,811 | | | | - | | | | 43,811 | | | | 100 | % |
| Other gains | | | 24,185 | | | | (520 | ) | | | 24,705 | | | | N/A | |
| Interest income (expense) | | | (732,698 | ) | | | (505,146 | ) | | | (227,552 | ) | | | 45 | % |
| Total other income and expense | | $ | (664,702 | ) | | $ | (668,462 | ) | | $ | 3,760 | | | | -1 | % |
| | | Fiscal Year Ended June 30, | | | Variance |
| | | 2012 | | | 2011 | | | Dollars | | | Percent | |
| | | | | | | | | | | | | | | | |
Interest income (expense) | | | | | | | | | | | | | | | | |
Total other income (expense) | | | | | | | | | | | | | | | | |
Net interest expenseother income (expense) was $732,698net other income of $114,045 when compared with net interestother expense of $505,146$346,704 for the year ended June 30, 20102012 and June 30, 2009,2011, respectively. This $227,552 increase$460,749 change is principally due to the Prescient Merger. In this regard, the Company incurred approximately (i) $78,784 of interest expense for(1) a note payable acquired in the course of the Prescient Merger, (ii) $488,394$141,477 decrease in interest expense onresulting from the retirement of certain notes payable issued in connection with financing arrangements associated with the Prescient Merger. These increases were partially offset by substantially lower interest rates achieved asJuly 2011 and January 2012 and (2) a resultgain on extinguishment of the debt restructuring described below under Working Capital and Debt Restructuring.current liabilities of $319,272.
Preferred Dividends
| | Fiscal Year Ended June 30, | | Variance | | | | | Fiscal Year Ended June 30, | | Variance |
| | 2010 | | 2009 | | Dollars | | | Percent | | 2012 | | 2011 | | Dollars | | Percent | |
| Preferred dividends | | $ | 326,385 | | | $ | 686,515 | | | $ | (360,130 | ) | | | -52 | % | | | | | | | | | | | | |
| Percent of total revenues | | | 3 | % | | | 12 | % | | | | | | | | | |
| | | | | | | | | | |
Dividends declared on preferred stock was $326,385$834,687 for the year ended June 30, 20102012 when compared with $686,515$826,411 accrued in the same period in 2009.
2011. The $8,276 increase in accrued dividends is principally the result of dividends accrued on the additional Series A Preferred issuedpaid in connection withkind in lieu of cash dividends. This increase has been partially offset by the June 2007 offering isconversion of shares of Series A Preferred to common stock. Holders of Series A Preferred are entitled to receive, out of funds legally available therefore, dividends at a rate of 5% per annum. Prior to June 1, 2010, preferred dividends can be paid5.00% annual dividend (“Dividend Rate”) payable quarterly in either cash or shares oradditional Series A Preferred at the option of the Company. After June 1, 2010, the holdersCompany with fractional shares paid in cash. Holders of Series B Preferred are entitled to a 12.00% annual dividend payable quarterly in cash.
The Dividend Rate with respect the Series A Preferred may electincreases to have future dividends paid in cash10% per annum in the event that during any sixty (60) trading day period commencing on or after June 1, 2010, the average closing price of the Company’s common stock shall beduring the last thirty (30) trading days of any calendar quarter is less than or equal to the$3.00 per share (a “Dividend Adjustment”). A holder of Series A Preferred conversion price. Our present policy is to retain future earnings (if any) for use in our operations and the expansion of our business.
On July 21, 2010,has notified the Company filedthat a CertificateDividend Adjustment is required as a result of Designation to designate 600,000 sharesthe average closing price of our preferredthe Company’s common stock $0.01 par value per share, as Series B Preferred. The Series B Preferred shall be entitled to receive, out of funds legally available therefore, dividends at a rate of 12% per annum for the first three years followingthirty-day period ended March 31, 2012. Management disagrees with the datemethod of issuance, 15% per annum forcalculation used by the period beginning three years followingholder and believes that the dateCompany’s calculation determining that a Dividend Adjustment is not required is reasonable, and that an ultimate determination that an alternative method should be employed is doubtful. The pro-forma effect of issuance and continuing until five years froma Dividend Adjustment is shown in the date of issuance, and 18% per annum beginning five years from the date of issuance. Dividends are payable quarterly in cash.table below:
| | Fiscal Year Ended June 30, 2012 | | Variance |
| | As Reported | | Pro-forma | | Dollars | | | Percent | |
Dividends on Series A Preferred | | | | | | | | | | | | | | | | |
Net loss applicable to common shareholders | | | | | | | | | | | | | | | | |
Basic and diluted loss per share | | | | | | | | | | | | | | | | |
Financial Position, Liquidity and Capital Resources
We believe our existing cash and short-term investments, together with funds generated from operations, should beare 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. To the extent that available funds are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financings. Additional equity or debt financing may not be available on terms favorable to us, in a timely fashion or at all.
| | | Fiscal Year Ended June 30, | | | Variance | | | | |
| | | 2010 | | | 2009 | | | Dollars | | | Percent | |
| Cash and Cash Equivalents | | $ | 1,157,431 | | | $ | 656,279 | | | $ | 501,152 | | | | 76 | % |
| | | Fiscal Year Ended June 30, | | | Variance |
| | | 2012 | | | 2011 | | | Dollars | | | Percent | |
Cash and Cash Equivalents | | | | | | | | | | | | | | | | |
We have historically funded our operations with cash from operations, equity financings and debt borrowings. Cash and cash equivalents was $1,157,431$1,106,176 and $656,279$2,618,229 at June 30, 2010,2012, and June 30, 2009,2011, respectively. This increase$1,512,053 decrease from June 30, 20092011 to June 30, 20102012 was the resultprincipally due to cash used in financing activities of increased collections from existing customers, expansion$2,281,736 and cash used in investing activities of customer base, a large license sale collected in Q4 2010, and borrowings from lines$238,760. These uses of credit.cash were partially offset by cash provided by operating activities of $1,008,443.
Net Cash Flows from Operating Activities
| | Fiscal Year Ended June 30, | | Variance | | | | |
| | 2010 | | 2009 | | Dollars | | | Percent | |
| Cash flows provided by (used in) operating activities | | $ | 947,306 | | | $ | (821,395 | ) | | $ | 1,768,701 | | | | 215 | % |
| | | | | | | | | | | | | | | | | |
| | | Fiscal Year Ended June 30, | | | Variance |
| | | 2012 | | | 2011 | | | Dollars | | | Percent | |
Cash flows provided by (used in) operating activities | | | | | | | | | | | | | | | | |
Net cash provided by operating activities for the year ended June 30, 2010 was $947,306is summarized as follows:
| | | 2012 | | | 2011 | |
| | | | | | | | |
Noncash expense and income, net | | | | | | | | |
Net changes in operating assets and liabilities | | | | | | | | |
| | | | | | | | | |
Noncash expense decreased by $167,460 in 2012 compared to 2011. Noncash expense decreased as a result of a $203,000 increase in bad debt expense, an $113,000 increase in depreciation and amortization and a $210,000 increase in stock compensation from 2011 to 2012. These noncash expense increases were offset by the issuance of $375,000 in Company common stock in a prior year litigation settlement and other gains of $319,000.
The net cash usedchanges in operating activities of $821,395 for the year ended June 30, 2009. The $1,768,701 increaseassets and liabilities used $382,321 less cash in net cash flows provided by operating activities for the year ended June 30, 2010 when2012 compared to the year ended June 30, 2009 was primarily the result of an increase in net income. The increase was offset by changes in (i) trade receivables, (ii) unbilled receivables, (iii) accounts payable, (iv) accrued liabilities, and (v) deferred revenue.2011.
Net Cash Flows from Investing Activities
| | Fiscal Year Ended June 30, | | Variance | | | | |
| | 2010 | | 2009 | | Dollars | | | Percent | |
| Cash flows (used in) provided by investing activities | | $ | (79,901 | ) | | $ | 193,407 | | | $ | (273,308 | ) | | | -141 | % |
| | | | | | | | | | | | | | | | | |
| | Fiscal Year Ended June 30, | | Variance |
| | 2012 | | 2011 | | Dollars | | | Percent | |
Cash flows (used in) provided by investing activities | | | | | | | | | | | | | | | | |
Net cash flows used in investing activities for the year ended June 30, 20102012 was $79,901$238,760 compared to net cash flows provided byused in investing activities of $193,407$555,617 for the year ended June 30, 2009.2011. This $273,308$316,857 decrease in cash flows fromused in investing activities June 30, 2010in 2012 when compared to the same period in 20092011 was the result of the releasea $197,000 capitalization of restricted cash and net cash paidsoftware development costs in the acquisitionprior year and a $120,000 decrease in purchases of Prescient that occurred in 2009 that did not reoccur in 2010.
Net Cash Flows from Financing Activities
| | | Fiscal Year Ended June 30, | | | Variance | | | | |
| | | 2010 | | | 2009 | | | Dollars | | | Percent | |
| Cash flows (used in) provided by financing activities | | $ | (366,253 | ) | | $ | 418,704 | | | $ | (784,957 | ) | | | -187 | % |
| | | Fiscal Year Ended June 30, | | | Variance |
| | | 2012 | | | 2011 | | | Dollars | | | Percent | |
Cash flows (used in) provided by financing activities | | | | | | | | | | | | | | | | |
Net cash flows used in financing activities totaled $366,253$2,281,736 for the year ended June 30, 2010 when2012 compared to cash flows provided by financing activities of $418,704$569,629 for the year ended June 30, 2009.2011. The change in net cash provided by (used in) provided by financing activities is attributable to the completion of the Prescient Merger that closed on January 13, 2009. This resulted(i) a $1,902,000 increase in fewer increases in lines of credit. There were also fewerprincipal payments on notes payable and capital leases.leases, (ii) a $600,000 decrease in advances from lines of credit, (iii) a $249,000 decrease in proceeds from the issuance of debt and (iv) $141,000 decrease in proceeds from the issuance of common stock. These uses of cash were partially offset by increases in cash provided by the exercise of options and warrants of $164,000.
Working Capital and Management’s Plan
At June 30, 2010,2012, the Company had negative working capital of $1,936,533$2,345,977 when compared with negative working capital of $4,516,614$2,395,501 at June 30, 2009.2011. This $2,580,081$49,524 increase in working capital is principally a result of an increase in deferred revenue:
| | | Fiscal Year Ended June 30, | | | Variance |
| | | 2012 | | | 2011 | | | Dollars | | | Percent | |
| | | | | | | | | | | | | | | | |
Current assets at June 30, 2012 totaled $3,568,561, a decrease of $1,375,259 when compared to $4,943,820 at June 30, 2011. This decrease in current assets is due primarily to decreases in (i) cash and cash equivalents and (ii) prepaid expense and other current assets. These decreases were partially offset by an increase in receivables.
| | | Fiscal Year Ended June 30, | | | Variance |
| | | 2012 | | | 2011 | | | Dollars | | | Percent | |
| | | | | | | | | | | | | | | | |
Current liabilities totaled $5,914,538 and $7,339,321 as of June 30, 2012 and 2011, respectively. The $1,424,783 comparative decrease in current liabilities is principally due to the subscriptionretirement of certain notes payable for Series B Preferred Stock. The Series B Preferred Certificate of Designation was filed on July 21, 2010 and describeda decrease in Note 15. Together withaccounts payable. These decreases were partially offset by increases in deferred revenue and accrued liabilities.
While no assurances can be given, management currently intends to continue to reduce its indebtedness in subsequent periods utilizing existing cash resources and projected cash flow from operations, we believeoperations. In addition, management may also refinance or restructure certain of the Company’s indebtedness to extend the maturities of such indebtedness to address its short- and long-term working capital requirements. Management believes that wethese initiatives will be ableenable us to address our debt service requirements during the next twelve months, as well as fund our currently anticipated operations and capital spending requirements. The financial statements do not reflect any adjustments should the Company’s working capitalcash flow from operations and other financing be insufficient to meet our spending and deb tdebt service requirements.requirements, and we are otherwise unable to refinance or restructure our indebtedness.
| | | Fiscal Year Ended June 30, | | | Variance | | | | |
| | | 2010 | | | 2009 | | | Dollars | | | Percent | |
| Current assets | | $ | 2,787,811 | | | $ | 2,131,223 | | | $ | 656,588 | | | | 31 | % |
Current assets at June 30, 2010 totaled $2,787,811, an increase of $656,588 when comparedWhile no assurances can be given, management currently intends to $2,131,223 at June 30, 2009. This increasecontinue to reduce its indebtedness in current assets is due primarilysubsequent periods utilizing existing cash resources and projected cash flow from operations. In addition, management may also continue to increases in (i) cash and cash equivalents, (ii) unbilled receivables and (iii) prepaid expenses and other current assets.
| | Fiscal Year Ended June 30, | | Variance | | | | |
| | 2010 | | 2009 | | Dollars | | | Percent | |
| Current liabilities | | $ | 4,724,344 | | | $ | 6,647,837 | | | $ | (1,923,493 | ) | | | -29 | % |
| | | | | | | | | | | | | | | | | |
Current liabilities totaled $4,724,344 and $6,647,837 as of June 30, 2010 and 2009, respectively. The $1,923,493 comparative decrease in current liabilities is principally due torefinance or restructure certain notes and lines of credit which were converted to equity and rate and term refinance of certain notes payable. See Working Capital and Debt Restructuring.
Debt Restructuring
On August 25, 2009, the Company issued a promissory note in favor of a lender in the principal amount of approximately $2.0 million. The note replaced a three year promissory note due August 25, 2009 originally issued by Prescient, and assumed by the Company in connection with the Prescient Merger. As a result of the restructuring,Company’s remaining indebtedness to extend the note is now due on August 1, 2012. The note requires monthly principal and interest payments in the amount of $60,419, with a final payment of unpaid principal and interest due August 1, 2012.
On September 30, 2009, the Company entered into certain loan modification agreements with its principal lender pursuant to which the maturity date of certain credit agreements (the “Notes”) providing for maximum borrowings of approximately $3.7 million, of which approximately $3.58 million was issued and outstanding at September 30, 2009, were extended from September 30, 2009 to September 30, 2010. The new Notes accrued interest at an annual rate of between 3.25% and 4.25%.
Effective June 30, 2010, the Company entered into a Stock Purchase Agreement, with certain holders of promissory notes of the Company and the Notes, aggregating approximately $4.1 million, pursuant to which the Company incurred a subscription payable for the issuance of 411,927 shares of its newly created Series B Preferred, in consideration for the surrender and terminationmaturities of such promissory notesindebtedness to address its short-term and long-term working capital requirements. Management believes that these initiatives will enable us to address our debt service requirements during the Notes (the "Series B Exchange").next twelve months, as well as fund our currently anticipated operations and capital spending requirements. The Series B Preferred Certificate of Designation was filed on July 21, 2010. The purchase price for the Series B Preferred was $10.00 per share. The Purchase Agreement contains various standard termsfinancial statements do not reflect any adjustments should cash flow from operations be insufficient to meet our spending and conditions. The Series B Preferred shall be entitleddebt service requirements, and we are otherwise unable to receive, out of funds lega lly available therefore, dividends at a rate of 12% per annum for the first three years following the date of issuance, 15% per annum for the period beginning three years following the date of issuance and continuing until five years from the date of issuance, and 18% per annum beginning five years from the date of issuance (see Note 15).refinance or restructure our indebtedness
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’sCompany’s sales.
Recent Accounting Pronouncements
In October 2009,December 2011, the FASB issued ASU 2009-13,2011-11, Multiple-Deliverable Revenue ArrangementsBalance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, an update to the authoritative guidance which requires disclosure information about offsetting and related arrangements for financial instruments and derivative instruments. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2014. The adoption of this updated authoritative guidance is not expected to have a significant impact on the Company’s Condensed Consolidated Financial Statements.
December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05; an update to the authoritative guidance which defers the effective date of the presentation of reclassification adjustments out of accumulated other comprehensive income. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2013. The adoption of this updated authoritative guidance is not expected to have a significant impact on the Company’s Condensed Consolidated Financial Statements.
In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"), which amends FASB Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, and ASU 2009-14, Certain Arrangements That Include Software Elements, which amends FASB ASC Topic 985, Software. ASU 2009-13 (1) eliminates the need for objective and reliable evidencepermits an entity to make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit's indefinite-lived intangible asset is less than the asset's carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that the fair value of a reporting unit's indefinite-lived intangible asset is more likely than not greater than the asset's carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. ASU 2012-02 is effective for the undelivered element in orderCompany for a delivered item to be treated as a separate unit of accountingannual and (2) requires entities to allocate revenue in an arrangement using estimated selling prices of the delivered goods and services based on a selling price hierarchy. The amendments eliminate the residual method of revenue allocation and require revenue to be allocated using the relative selling price method. ASU 2009-14 removes tangible products from the scope of software revenue guidance and provides guidance on determining whether software deliverables in an arrangement that includes a tangible product are covered by the scope of the software revenue guidance. ASU 2009-13 and ASU 2009-14 should be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal yearsinterim indefinite-lived intangible asset impairment tests performed beginning on or after June 15, 2010, withJuly 1, 2013, however, early adoption is permitted. The Company is currently evaluating the effects of the adoption ofimpact ASU 2009-13 or ASU 2009-14 and its potential affect on the Company’s results of operations or financial condition.
In December 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-17, Improvements to Financial Reporting Involved with Variable Interest Entities, which codifies SFAS No. 167, Amendments to FASB Interpretation No. 46(R) issued in June 2009. ASU 2009-17 requires a qualitative approach to identifying a controlling financial interest in a variable interest entity (“VIE”), and requires ongoing assessment of whether an entity is a VIE and whether an interest in a VIE makes the holder the primary beneficiary of the VIE. ASU 2009-17 is effective for annual reporting periods beginning after November 15, 2009. The Company does not expect the adoption of ASU 2009-17 to2012-02 will have a material impact on its consolidated financial statements.Condensed Consolidated Financial Statements.
In January 2010, the FASB issued ASU 2010-6, Improving Disclosures About Fair Value Measurements, which requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair- value measurements. ASU 2010-6 is effective for annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for annual periods beginning after December 15, 2010. The Company does not expect the adoption of ASU 2010-6 to have a material impact on its consolidated financial statements.
| QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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Foreign Currency Exchange Risk
Our business is currently conducted principally in the United States. As a result, our financial results are not affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. We do not engage in hedging transactions to reduce our exposure to changes in currency exchange rates, although if the geographical scope of our business broadens, we may do so in the future.
Interest Rate Sensitivity
Our exposure to interest rate changes related to borrowing has been limited by the use of fixed rate borrowings on the majority of our outstanding debt, and we believe the effect, if any, orof reasonably possible near-term changes in interest rates on our financial position, results of operations and cash flows should not be material. Interest rate risk is managed through the maintenance of a portfolio of variable and fixed-rate debt composed of short and long-term instruments. The objective is to maintain a cost-effective mix that management deems appropriate. At June 30, 2010,2012, the debt portfolio was composed of approximately 14% percent31% variable-rate debt and 86% percent69% fixed-rate debt.
The table that follows presents fair values of principal amounts and weighted average interest rates for our investment portfolio as of June 30, 2010.
| Cash and Cash Equivalents | | Aggregate Fair Value | | | Weighted Average Interest Rate | |
| Cash and Cash Equivalents | | $ | 1,157,431 | | | | 0.07 | % |
| Cash and Cash Equivalents | | Aggregate Fair Value | | | Weighted Average Interest Rate | |
Cash and Cash Equivalents | | | | | | | | |
The table that follows presents the principal amounts of our variable and fixed rate debt.
| Debt Summary | | Principal Amount | | | Weighted Average Interest Rate | | | % Mix | | Principal Amount | | Weighted Average Interest Rate | | % Mix |
| Variable rate debt | | $ | 600,000 | | | | 4.25 | % | | | 14.00 | % | | | | | | | | |
| Fixed rate debt | | $ | 3,687,307 | | | | 8.02 | % | | | 86.00 | % | | | | | | | | |
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The information required hereunder in this Annual Report on Form 10-K 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 |
Under the supervision and with the participation of our Management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of June 30, 2010.2012. 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 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.
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.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to an exemption for smaller reporting companies under Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
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.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our internal control over financial reporting as of June 30, 2010.2012. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2010,2012, our internal control over financial reporting was effective.
The Company’s Chief Executive Officer and Chief Financial Officer have determined that there have been no changes, in the Company’s internal control over financial reporting during the period covered by this report identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, Company’s internal control over financial reporting.
The Company had the following notes payable and capital lease obligations at June 30, 20102012 and 2009:2011:
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, 20102012 and 20092011 due to the following: