UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2016
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
001-34941
(Commission file number)
PARK CITY GROUP, INC.
(Exact name of registrant as specified in its charter)
Nevada
State or other jurisdiction of incorporation
299 South Main Street, Suite 2370
Salt Lake City, Utah 84111
(Address of principal executive offices)
37-1454128
(IRS Employer Identification No.)
(435) 645-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Common Stock, $0.01 Par Value
Name of each exchange on which registered
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. [ ]
Yes [X] No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. [ ]
Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [X] Yes [
] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
[ ]
[ ]
Accelerated filer
Smaller reporting company
[X]
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
[ ] Yes [X] No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the issuer as of December 31,
2015, which is the last business day of the registrant’s most recently completed second fiscal quarter, was approximately
$153,106,000 (at a closing price of $11.91 per share).
As of September 7, 2016, 19,286,430 shares of the Company’s common stock, par value $0.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, 13 and 14 of Part III incorporate by reference certain information from Park City Group, Inc.’s definitive proxy
statement, to be filed with the Securities and Exchange Commission on or before October 28, 2016.
Item 1. Business
Item 1A. Risk Factors
Item 2.
Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
ON FORM 10-K
YEAR ENDED JUNE 30, 2016
PART I
PART II
Selected Financial Data
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits, Financial Statement Schedules
Signatures
PART IV
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2016 and 2015
Consolidated Statements of Operations for the Years Ended June 30, 2016, 2015 and 2014
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended June 30, 2016, 2015 and 2014
Consolidated Statements of Cash Flows for the Years Ended June 30, 2016, 2015 and 2014
Notes to Consolidated Financial Statements
Exhibit 31Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32Certifications pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements. The words or phrases “would be,” “will allow,”
“intends to,” “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” or similar expressions
are intended to identify “forward-looking statements.” Actual results could differ materially from those projected in the forward
looking statements as a result of a number of risks and uncertainties, including the risk factors set forth below and elsewhere in this
Report.
See “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of
Operations.” Statements made herein are as of the date of the filing of this Form 10-K with the Securities and Exchange
Commission and should not be relied upon as of any subsequent date. Unless otherwise required by applicable law, we do not
undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments,
unanticipated events or circumstances after the date of such statement.
PART I
BUSINESS
Overview
Park City Group, Inc. (the “Company”) is a Software-as-a-Service (“SaaS”) provider. The Company’s technology helps
companies to synchronize their systems with those of their trading partners to make more informed business decisions. We provide
companies with greater flexibility in sourcing products by enabling them to choose new suppliers and integrate them into their supply
chain faster and more cost effectively, and we help them to more efficiently manage these relationships to “stock less and sell more”,
enhancing revenue while lowering working capital, labor costs and waste. Through our subsidiary, ReposiTrak, Inc.
(“ReposiTrak”), we also help reduce a company’s potential regulatory, legal, and criminal risk from its supply chain partners by
providing a way for them to ensure these suppliers are compliant with food and drug safety regulations, such as the Food Safety
Modernization Act (“FSMA”) and the Drug Quality and Security Act (“DQSA”).
The Company’s services are delivered though proprietary software products designed, developed, marketed and supported
by the Company. These products are designed to provide transparency and facilitate improved business processes among all key
constituents in the supply chain, starting with the retailer and moving back to suppliers and eventually to raw material providers. We
provide cloud-based applications and services that address e-commerce, supply chain, and compliance activities. The principal
customers for the Company's products are multi-store food retail store chains and their suppliers, branded food manufacturers, food
wholesalers and distributors, and other food service businesses.
The Company has a hub and spoke business model. We are typically engaged by retailers and distributors (“Hubs”), which
in turn have us engage their suppliers (“Spokes”) to sign up for our services. The bulk of the Company’s revenue is from recurring
subscription payments typically based on a monthly volume metric between the Hub and the Spoke. We also have a Professional
Services business, which conducts customization, implementation, and training, for which revenue is recognized on a percentage-of-
completion or pro rata over the life of the subscription, depending on the nature of the engagement. In a few instances the Company
will also sell its software in the form of a license.
The Company is incorporated in the state of Nevada. The Company has three subsidiaries: PC Group, Inc. (formerly, Park
City Group, Inc., a Delaware corporation), a Utah corporation (98.76% owned), Park City Group, Inc. (formerly, Prescient Applied
Intelligence, Inc.), a Delaware corporation (100% owned) and ReposiTrak, Inc., a Utah corporation (100% owned). All
intercompany transactions and balances have been eliminated in consolidation.
Our principal executive offices of the Company are located at 299 South Main Street, Suite 2370, Salt Lake City, Utah
84111. Our telephone number is (435) 645-2000. Our website address is http://www.parkcitygroup.com, and ReposiTrak’s
website address is http://repositrak.com.
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Acquisition of ReposiTrak
On June 30, 2015, the Company consummated the acquisition of 100% of the outstanding capital stock of ReposiTrak. The
accompanying audited consolidated financial statements of the Company as of and for the year ended June 30, 2015 contain the
results of operations of ReposiTrak from June 30, 2015. We issued 873,438 shares of our common stock in connection with this
acquisition. As a result of the acquisition of ReposiTrak, we significantly expanded the services we can offer to our customer base.
We have accounted for the acquisition as the purchase of a business. The assets acquired and the liabilities assumed of
ReposiTrak have been recorded at their respective fair values. The excess of the purchase price over the fair value of net tangible
and identifiable intangible assets acquired was recorded as goodwill. Goodwill is attributed to buyer-specific value resulting from
expected synergies, including long-term cost savings, as well as industry relationships that are not included in the fair values of
assets. Goodwill will not be amortized.
The purchase price consisted of the 873,438 shares of our common stock. The fair value of the shares issued was
$10,821,897 and was determined using the closing price of our common stock on June 30, 2015. The price paid to acquire
ReposiTrak was $10,830,897, approximately $9,000 of which was for direct transaction costs associated with the issuance of
equity. The net acquisition cost of $10,799,778, which excludes $31,119 of cash acquired from ReposiTrak, were allocated based
on their estimated fair value of the assets acquired and liabilities assumed, as follows:
Receivables
Prepaid expense
Customer relationships
Goodwill
Accounts payable
Deferred revenue
Net assets acquired
Common stock issued
Receivables eliminated in consolidation
Cash received in acquisition
Finalized
Values
$
152,340
17,500
1,314,000
16,077,953
(128,126)
(598,232)
16,835,435
10,821,897
6,035,657
$
22,119
Unaudited pro-forma results of operations for the twelve months ended June 30, 2015, as though ReposiTrak had been acquired
as of July 1, 2013, are as follows:
Sep 30,
2014
Three Months Ended
Dec 31,
2014
Mar 31,
2015
Jun 30,
2015
Year
Ended
2015
Year
Ended
2014
$ 2,826,813 $ 2,932,825 $ 2,870,646 $ 2,941,511 $ 11,571,795 $ 9,777,431
(1,046,986) (1,290,524) (1,302,437) (3,222,538) (6,862,485) (5,232,552)
(1,049,834) (1,317,510) (1,317,858) (3,241,545) (6,926,747) (5,303,773)
(1,204,307) (1,471,983) (3,595,537) (3,365,721) (9,637,548) (5,921,664)
(0.34)
(0.53)
(0.08)
(0.07)
(0.20)
(0.18)
Revenue
Loss from Operations
Net Loss
Net Loss Applicable to Common
Shareholders
Basic and Diluted EPS
Company History
The Company’s technology has its genesis in the operations of Mrs. Fields Cookies co-founded by Randall K. Fields, the
Company’s Chief Executive Officer. The Company began operations utilizing patented computer software and profit optimization
consulting services to help its retail clients reduce their inventory and labor costs - 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.
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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.
On 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 was also the
surviving entity in the merger. As a result, both the parent-holding company (Nevada) and its operating subsidiary (Delaware) were
named Park City Group, Inc. In February 2014, Park City Group, Inc. (Delaware) was domesticated in Utah and changed its name
to PC Group, Inc. Park City Group, Inc. (Nevada) has no business operations separate from the operations conducted through its
subsidiaries, including ReposiTrak, Inc. and Park City Group, Inc., a Delaware corporation, (formerly Prescient Applied Intelligence,
Inc. (“Prescient”).
On January 13, 2009, the Company acquired 100% of Prescient, 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. In February 2014, Prescient changed its
name to Park City Group, Inc. The Company’s consolidated financial statements contain the results of operations of Park City
Group, Inc. (Delaware). Operations are conducted through this subsidiary.
ReposiTrak was founded by Leavitt Partners, LP. It was originally incorporated as Global Supply Chain Systems, Inc. on May
17, 2012 and on November 8, 2012 changed its name to ReposiTrak. ReposiTrak became a wholly owned subsidiary of Park City
Group, Inc. on June 30, 2015. ReposiTrak was developed in response to the passage of the FSMA. ReposiTrak helps a company
protect its brand and mitigate potential regulatory, legal and criminal risk from its supply chain by helping to ensure that all parties are
compliant with best practices and food and drug safety regulations.
Target Industries Overview
The Company initially developed its software for supermarkets, convenience stores and other retailers. Following the
acquisition of Prescient in 2009, we expanded our offerings to include supply chain solutions focused on large manufacturers,
distributors and suppliers in the consumer products industry. With the acquisition of ReposiTrak in 2015, this group was expanded to
include manufacturers, distributors and suppliers in the food industry. The Company also provides professional consulting services
targeting implementation, assessments, profit optimization and support functions for its application and related products.
Backdrop
The U.S. consumer retail sector has faced competitive pressure from a number of significant forces including the rise of
online retailers with lower fixed operating costs as well as sector consolidation in many categories. Retailers have responded to these
pressures in a number of ways including putting a greater emphasis on specialization within their product mix through initiatives such
as local sourcing or the development of in-store brands or private labels. Retailers have also attempted to lower their fixed cost by
shifting a greater percentage of their product mix to Direct Store Delivery (“DSD”). In addition to differentiated products and
increased logistics support, retailers are also increasingly pressuring suppliers to provide direct economic incentives or assistance.
More recently, there has been a sweeping change in the regulatory environment in which food growers, processors,
distributors and retailers compete. The law also provides the U.S. Food and Drug Administration (“FDA”) with new enforcement
authorities, it also sets cause for a whole host of potential civil claims. In short, the degree to which the retail food business has
moved toward a highly regulated industry is substantial.
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The Company’s software and consulting services are designed to address the business problems faced by our customers. Our
technology helps retailers to synchronize their business systems with those of their suppliers in order to give a cohesive view of their
entire supply chain so as to enable them to make more informed business decisions. Through our cloud-based infrastructure we
provide retailers with greater flexibility in sourcing products by enabling them to choose new suppliers and integrate them into their
supply chain faster and more cost effectively, and we help retailers to more efficiently manage their relationships with these suppliers
so that they can “stock less and sell more” lowering working capital and labor costs while also increasing revenue.
ReposiTrak was developed in response to the passage of the FSMA, and the then pending DWSA. ReposiTrak helps a
company to protect its brand from the degradation of value that typically results from an outbreak of contamination or other incidents
adversely affecting the supply chain as well as mitigates potential regulatory, legal and criminal risk from its supply chain by helping a
company to ensure that all parties in its supply chain are compliant with best practices and food and drug safety regulations.
Solutions and Services
Advanced Commerce and Supply-Chain Solutions
The Company’s primary advanced commerce and supply-chain solutions are Scan Based Trading, ScoreTracker, Vendor
Managed Inventory, Store Level Replenishment, Enterprise Supply Chain Planning, Fresh Market Manager and ActionManager®, 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.
Food Safety Solutions
ReposiTrak leverages the technology developed to help a company protect its brand and mitigate potential regulatory, legal and
criminal risk from its supply chain by helping to ensure that all parties are compliant with best practices and food and drug safety
regulations imposed by the FSMA and DWSA. ReposiTrak™, is powered by the Company’s technology, and currently includes three
main applications: Vendor Validation, Compliance Management, and Track & Trace.
Services
The Company has two services groups: The Business Analytics Group offers business-consulting services to suppliers and
retailers in the grocery, convenience store and specialty retail industries. The Professional Services Group provides consulting
services to ensure that our solutions are seamlessly integrated into our customers’ business processes as quickly and efficiently as
possible.
During the year ending June 30, 2016, the Company began to embark on a process of converging our legacy Park City supply-
chain business with our ReposiTrak food safety business.
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, increasingly offer 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.
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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. Along with the Company’s Statement on
Standards for Attestation Engagements (“SSAE”) No. 16 certification Service Organization Control (“SOC2”), the third-party facility
is also a SSAE No. 16 – SOC2 certified location and is secured by around-the-clock guards, biometric screening and escort-
controlled access, and is supported by on-site backup generators in the event of a power failure. As part of our current disaster
recovery arrangements, all of our customers’ data is currently backed-up in near real-time. Even with the disaster recovery
arrangements, our service could be interrupted.
Customers
We are currently engaged by customers of all sizes. Our customers primarily include food related consumer goods retailers,
suppliers, processors and manufacturers. However, the Company is opportunistic and will offer its solutions to non-food consumer
goods related companies as well. No single customers accounted for more than 10% percent of our revenue in fiscal 2016.
Prior to the acquistion of ReposiTrak, our contractual relationship with ReposiTrak generated approximately $3.0 million in
subscription revenue and management fees during the year ended June 30, 2015, which amount constituted approximately 21% of
the Company’s total revenue in such year. After acquiring ReposiTrak on June 30, 2015 we fully consolidated its financial results
into our financial results. As such, we ceased to recognize subscription revenue and management fees from ReposiTrak, and instead
began to recognize ReposiTrak revenue from customer connections directly. ReposiTrak generated $2.2 million in revenue from
customer connections during the year ended June 30, 2016.
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 ReposiTrak food safety services to legacy Park City Group accounts as well as introducing our solutions to ReposiTrak
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.
During the year ending June 30, 2016 the Company began to embark on a process of converging our legacy supply-chain
business with our ReposiTrak food safety business. As part of this process, we have begun to reorganize our sale force and reorient
our marketing efforts. This process has involved stream lining the sales force in an effort to enable cross-selling by reducing regional
account managers and shifting our sales emphasis towards ReposiTrak’s inside sales team located at our corporate headquarters in
Salt Lake City, Utah. We are also considering rebranding some of our services to better reflect the consolidated offering.
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Customer Support
Our global customer support group responds to both business and technical inquiries 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. Our supply chain solution competitors include supply
chain vendors, major enterprise resource planning (“ERP”) software vendors, mid-market ERP vendors and niche players for VMI
and SLR. ReposiTrak’s competitors include a variety of food safety consultants who may help a potential customer build their own
in-house solution as well as certain technology component providers.
We compete with large enterprise-wide software vendors, developers and integrators, business-to-business exchanges,
consulting firms, focused solution providers, and business intelligence technology platforms. While our competitors are often
considerably larger companies in size with larger sales forces and marketing budgets, we believe that our deep industry knowledge,
the breadth and depth of our offerings, and our relationships with key industry, wholesaler, and other trade groups and associations,
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.
Patents and Proprietary Rights
The Company relies on a combination of trademark, copyright, trade secret and patent laws in the United States and other
jurisdictions as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our name. We
also enter into confidentiality agreements with our employees, consultants and other third parties and control access to software,
documentation and other proprietary information.
The Company has been awarded nine U.S. patents, eight U.S. registered trademarks and has 37 U.S. copyrights relating to its
software technology and solutions. The Company’s patent portfolio has been transferred to an unrelated third party, although the
Company retains the right to use the licensed patents in connection with its business. 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.
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.
Employees
As of June 30, 2016, the Company employed a total of 66 employees. Of these employees, ten are located overseas. The
Company plans to continue expanding its offshore workforce to augment its analytics services offerings, expand its professional
services and to provide additional programming resources. The employees are not represented by any labor union.
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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 http://www.sec.gov.
Government Regulation and Approval
Like all businesses, the Company is subject to numerous federal, state and local laws and regulations, including regulations
relating to patent, copyright, and trademark law matters.
Cost of Compliance with Environmental Laws
The Company currently has no costs associated with compliance with environmental regulations, and does not anticipate any
future costs associated with environmental compliance; however, there can be no assurance that it will not incur such costs in the
future.
RISK FACTORS
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 losses in the past and there can be no assurance that the Company will operate profitably in the
future.
The Company’s marketing strategy emphasizes sales of subscription-based services, instead of annual licenses, and
contracting with suppliers (“Spokes”) to connect to our clients (“Hubs”). This strategy has resulted in the development of a
foundation of hubs to which suppliers can be “connected”, thereby accelerating future growth. If, however, this marketing strategy
fails, revenue and operations will be negatively affected.
The Company had net income of $666,503 for the year ended June 30, 2016, compared to a net loss of $3,849,773 for the
year ended June 30, 2015. Although the Company generated net income in the year ended June 30, 2016, there can be no assurance
that the Company will achieve profitability in future periods. 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. Continued losses would have an adverse effect on the
long-term value of the Company’s common stock and any investment in the Company. The Company cannot give any assurance
that the Company will continue to generate revenue or have sustainable profits.
Although the Company’s cash resources are currently sufficient, the Company’s long-term liquidity and capital requirements
may be difficult to predict, which may adversely affect the Company’s long-term cash position.
Historically, the Company has been successful in raising capital when necessary, including private placements, a registered
direct offering, and stock issuances from its officers and directors, including its Chief Executive Officer and majority stockholder, in
order to pay its indebtedness and fund its operations, in addition to cash flow from operations. As a result of the consummation of
the registered direct offering on April 15, 2015, resulting in net proceeds of approximately $6.7 million we have adequate cash
resources to fund our operations and satisfy our debt obligations for at least the next 12 months.
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If the Company is required to seek additional financing in the future 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. These amounts will fluctuate because predicting
future sales is difficult and involves 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:
●
●
●
●
●
●
our 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 timing of operating costs and capital expenditures related to the 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.
Future operating results may fluctuate because of the foregoing factors, making it difficult to predict operating
results. Period-to-period comparisons of operating results are not necessarily meaningful and should not be relied upon as an
indicator of future performance. In addition, a 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
revenue because of these and other short-term fixed costs.
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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 revenue from 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, 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 Company’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 our Chief Executive Officer, Randall K. Fields, control approximately
33% of the Company’s common stock. Mr. Fields, individually, controls 27% of the Company’s common stock. Consequently, Mr.
Fields individually, and the Company’s officers and directors, as stockholders acting together, are 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 issuable 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’
preferred stock with designations, rights, and preferences as may be determined from time to time by the Company’s Board of
Directors, of which 700,000 shares are currently designated as Series B Convertible Preferred Stock (“Series B Preferred ”) and
300,000 shares are designated as Series B-1 Preferred Stock (“Series B-1 Preferred ”). As of June 30, 2016, a total of 625,375
shares of Series B Preferred and 180,213 shares of Series B-1 Preferred were issued and outstanding. 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, investors 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, the 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 will 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 $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.
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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 revenue 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 incorporation 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.
Risks Related to the ReposiTrak
The Company faces risks associated with new product introductions of ReposiTrak™.
The first installations of ReposiTrak™ began in August 2012, and market and product data related to these implementations
is still being analyzed. The Company also continually receives and analyzes market and product data on other products, and the
Company may endeavor to develop and commercialize new product offerings based on this data. The following risks apply to
ReposiTrak™ and other potential new product offerings:
●
●
●
●
●
●
it may be difficult for the Company to predict the amount of service and technological resources that will be needed by
customers of ReposiTrak™ or other new 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;
the Company’s experience with ReposiTrak™ and its market acceptance is limited, and we therefore cannot accurately
predict if it will be a profitable product;
technological issues between the Company and customers may be experienced in capturing data, and these technological
issues may result in unforeseen conflicts or technological setbacks when implementing additional installations of
ReposiTrak™. This may result in material delays and even result in a termination of the ReposiTrak™ engagement;
the customer’s experience with ReposiTrak™ and other new offerings, if negative, may prevent the Company from having
an opportunity to sell additional products and services to that customer;
if customers do not use ReposiTrak™ as the Company recommends and fails to implement any needed corrective
action(s), it is unlikely that customers will experience the business benefits from the software service and may therefore be
hesitant to continue the engagement as well as acquire any additional software services from the Company; and
delays in proceeding with the implementation of ReposiTrak™ or other new products for a new customer will negatively
affect the Company’s cash flow and its ability to predict cash flow.
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Approximately 15% of our total revenue during 2016 was attributable to ReposiTrak. In the event the market for ReposiTrak’s
services fails to develop as anticipated, our results of operations may be materially and adversely affected.
The Company recognized approximately $2.2 million in revenue during the year ended June 30, 2016 from ReposiTrak,
which amount constituted approximately 15% of the Company’s total revenue in 2016. In the event the market for ReposiTrak’s
services fails to develop as anticipated, or ReposiTrak, or we are otherwise unable to capitalize on the opportunities presented by the
adoption of Food Safety Modernization Act (“FSMA”), the Company’s financial results, including its financial condition, may be
adversely and materially affected.
If our products do not perform as expected, whether as a result of operator error or otherwise, it would impair our operating
results and reputation.
Our success depends on the food safety market’s confidence that we can provide reliable, high-quality reporting for our
customers. We believe that our customers are likely to be particularly sensitive to product defects and operator errors, including if
our systems fail to accurately report issues that could reduce the liability of our clients in the event of a product recall. In addition,
our reputation and the reputation of our products can be adversely affected if our systems fail to perform as expected.
However, if our customers or potential customers fail to implement and use our systems as suggested by us, they may not
be in a position to deal with a recall as effectively as they could have. As a result, the failure or perceived failure of our products to
perform as expected, could have a material adverse effect on our revenue, results of operations and business.
If a customer is sued because of a recalled product we could be joined in that suit, the defense of which would impair our
operating results.
We believe our products would be helpful in the event of a recall. However, their ultimate efficacy is dependent on how the
customer uses our products which is in many ways out of our control. Similarly, a customer which is a defendant in a product
liability case could claim that had our services performed as represented the extent of potential liability would have been minimized
and therefore the Company should have some contributory liability in the case. Defending such a claim could have a material adverse
effect on our revenue, results of operations and business.
The deployment of the Company’s services, or consultation provided by Company personnel, could result in litigation naming the
Company as a party, which litigation could result in a material and adverse effect on the Company, and its results from
operations.
Certain of the Company’s services are marketed to potential customers based, in part, on our service’s ability to reduce a
company’s potential regulatory, legal, and criminal risk from its supply chain partners. In the event litigation is commenced against a
customer based on issues caused by a constituent in the supply chain, or consultation provided by Company personnel, the Company
could be joined or named in such litigation. As a result, the Company could face substantial defense costs. In addition, any adverse
determination resulting in such litigation could have a material and adverse effect on the Company, and its results from operations.
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Business Operations Risks
If the Company’s marketing strategy fails, its revenue and operations will be negatively affected.
The Company plans to concentrate its future sales efforts towards marketing the Company’s applications and services, and
specifically to contract with suppliers, our Spokes, to connect to our existing 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, 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 the 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
revenue 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. The 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 conversion from a strategy of
one-time, non-recurring licensing based model to a monthly recurring fees based approach is subject to the following risks:
●
●
the Company’s customers may prefer one-time fees rather than monthly fees; and
there 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.
Markets for the Company’s type of software products and that of its competitors are characterized by:
development of new software, software solutions or enhancements that are subject to constant change;
rapidly evolving technological change; and
unanticipated changes in customer needs.
●
●
●
Because these markets are subject to such rapid change, the life cycle of the Company’s products is difficult to predict. As
a result, the Company is subject to the following risks:
●
●
●
whether or how the Company will respond to technological changes in a timely or cost-effective manner;
whether 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
whether 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.
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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.
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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 revenue and profitability will be negatively affected.
The Company’s future revenue 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 revenue 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-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 enhancements 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 revenue will be negatively impacted if the Company fails
to add new maintenance customers that will make additional purchases of the Company’s products and services.
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’ or ‘point and click’ licenses that are not signed by the end user and, therefore, may be
unenforceable under the laws of certain jurisdictions. Policing unauthorized use of 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 may discover software errors in its products that may result in a loss of revenue, injury to the Company’s
reputation or subject us to substantial liability.
Non-conformities or bugs (“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 revenue 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. 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, delay or withhold payment to us, we could lose future sales or customers may make warranty
or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles
for accounts receivable or the expense and risk of litigation. These potential scenarios, successful or otherwise, would likely be time
consuming and costly.
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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 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 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 NASDAQ Capital Market, 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 an
investor acquires shares of the Company’s common stock, the investor may not be able to liquidate the Company’s shares should
there 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:
● issuance of common stock in connection with funding agreements with third parties and future issuances of common and
preferred stock by the Board of Directors; and
● the Board of Directors has the power to issue additional shares of common stock and preferred stock and the right to
determine the voting, dividend, conversion, liquidation, preferences and other conditions of the shares without shareholder
approval.
Stock issuances may result in reduction of the book value or market price of outstanding shares of common stock. If 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.
PROPERTIES
Our principal place of business operations is located at 299 South Main Street, Suite 2370, Salt Lake City, UT 84111. We
lease approximately 5,300 square feet at this corporate office location, consisting primarily of office space, conference rooms and
storage areas. Our telephone number is (435) 645-2000. Our website address is http://www.parkcitygroup.com.
LEGAL PROCEEDINGS
We are, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the
outcome of all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition,
results of operations or liquidity. There are no pending or threatened material legal proceedings at this time.
MINE SAFETY DISCLOSURES
Not applicable.
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PART II
MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Share Price History
Our common stock is traded on the NASDAQ Capital Market under the trading symbol “PCYG.” The following table sets
forth the high and low sales prices of our common stock for the periods indicated.
Fiscal Quarter Ended
September 30
December 31
March 31
June 30
Stock Performance Graph
Quarterly Common Stock Price Ranges
2015
2016
High
Low
High
Low
$
$
$
$
13.99 $
12.27 $
11.82 $
10.00 $
10.01 $
9.87 $
5.98 $
8.30 $
11.48 $
10.14 $
14.87 $
14.25 $
9.31
6.75
8.62
9.74
The following graph compares the cumulative total shareholder return on our common stock over the five-year period
ending June 30, 2016, with the cumulative total returns during the same period on the NASDAQ Composite Index and the Russell
2000 Index. The graph assumes that $100 was invested on June 30, 2011 in our common stock and in the shares represented by
each of the other indices, and that all dividends were reinvested.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
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Park City Group, Inc.
NASDAQ Composite
Russell 2000 Index
Value of Investment ($)
06/30/11
06/30/12
06/30/13
06/30/14
06/30/15
$
$
$
100.00 $
100.00 $
100.00 $
83.16 $
105.82 $
96.50 $
159.58 $
122.71 $
118.13 $
229.26 $
158.94 $
144.18 $
258.74 $
179.80 $
151.55 $
06/30/16
188.84
174.60
139.22
The stock performance graph above shall not be deemed incorporated by reference into any filing by us under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate such
information by reference, and shall not otherwise be deemed filed under such Acts.
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.
Outstanding shares of Series B Preferred and Series B-1 Preferred each accrue dividends at the rate per share of 7% per
annum if paid by the Company in cash, and 9% per annum if paid by the Company in additional shares of Series B-1 Preferred.
Dividends on the Series B Preferred and Series B-1 Preferred are payable quarterly.
Holders of Record
At September 7, 2016 there were 660 holders of record of our common stock, and 19,286,430 shares were issued and
outstanding, three holders of Series B Preferred and 625,375 shares issued and outstanding, and four holders of Series B-1 Preferred
and 208,224 shares issued and outstanding. The number of holders of record and shares of common stock issued and outstanding
was calculated by reference to the books and records of the Company’s transfer agent.
Issuance of Securities
We issued shares of our common stock in unregistered transactions during fiscal year 2016. All of the shares of common
stock issued in non-registered transactions were issued in reliance on Section 3(a)(9) and/or Section 4(2) of the Securities Act of
1933, as amended (the “Securities Act”), and were reported in our Quarterly Reports on Form 10-Q and in our Current Reports on
Form 8-K filed with the Securities and Exchange Commission during the fiscal year ended June 30, 2016. 57,117 shares of common
and 28,011 shares of preferred stock were issued subsequent to June 30, 2016.
SELECTED FINANCIAL DATA
The following data has been derived from our audited financial statements, including the consolidated balance sheets at June
30, 2016 and 2015 and the related consolidated statements of operations for the three years ended June 30, 2016 and related notes
appearing elsewhere in this report. The statement of operations data for the years ended June 30, 2013 and 2012 and the balance
sheet data as of June 30, 2014, 2013 and 2012 are derived from our audited consolidated financial statements that are not included in
this report. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and our financial statements and related notes included elsewhere in this report.
Consolidated Statement of Operations Data
Revenue
Operating expense (1)(2)
Income (loss) from Operations
Net income (loss)
2015
2016
Fiscal Year Ended June 30,
2014
$ 14,010,693 $ 13,648,715 $ 11,928,416 $ 11,318,574 $ 10,098,547
13,323,252 17,741,109 14,521,141 10,920,375 11,071,259
(972,712)
(858,667)
(4,092,394) (2,592,725)
(3,849,773) (2,490,145)
687,441
666,503
398,199
257,487
2013
2012
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Consolidated Balance Sheet Data
Cash and Cash Equivalents
Working Capital
Total Assets
Total Liabilities
Deferred Revenue
Total Debt (current and long-term)
Capital Leases (current and long-term)
Stockholders' Equity (deficit)
Operating Data
Adjusted EBITDA (3)
Non-GAAP income per diluted common share (4)
2016
2015
2013
5,032,139
7,845,826
As of June 30
2014
$ 11,443,388 $ 11,325,572 $ 3,352,559 $ 3,616,585 $ 1,106,176
1,124,476 (2,354,977)
38,589,892 36,406,784 16,937,632 15,932,898 11,936,230
6,626,109
2,081,459
2,710,275
41,201
5,310,121
5,691,526
8,822,161
1,777,326
2,331,920
2,062,063
3,076,493
-
-
30,502,559 27,584,623 10,619,081 10,241,372
8,087,333
2,717,094
3,230,452
-
6,318,551
1,840,811
1,849,148
-
654,042
2012
2016
$ 2,273,339 $ 1,118,583 $
0.01 $
$
0.06 $
2015
Fiscal Year Ended June 30
2014
192,719 $ 2,287,868 $ 1,098,877
(0.05)
(0.05) $
0.05 $
2013
2012
(1) Includes stock-based compensation expense as follows:
Stock-based compensation expense
2016
2015
$ 1,010,312 $ 2,760,329 $ 1,719,375 $
2013
843,645 $
2012
911,094
Fiscal Year Ended June 30
2014
(2) For 2015, there was a one-time impairment of intangibles charge of $1,495,703, related to the customer list acquired in the
Prescient acquisition.
(3) Adjusted EBITDA consists of net income plus depreciation and amortization, interest expense, interest income, stock-based
compensation expense and other adjustments as necessary for a fair presentation. We use Adjusted EBITDA as a measure of
operating performance because it assists us in comparing performance on a consistent basis, as it removes the impact of our
capital structure from our operating results. We believe Adjusted EBITDA is useful to an investor in evaluating our operating
performance because it is widely used to measure a company’s operating performance without regard to items such as
depreciation and amortization, which can vary depending upon accounting methods and the book value of assets, and to
present a meaningful measure of corporate performance exclusive of our capital structure. The following table provides a
reconciliation of net income to Adjusted EBITDA:
Net income (loss)
Depreciation and amortization
Interest (income) loss, net
Other
EBITDA
Stock-based compensation expense
Adjusted EBITDA
Fiscal Year Ended June 30
2014
$
2015
2012
2016
666,503 $ (3,849,773) $ (2,490,145) $
879,329
768,165
507,446
(102,580)
(242,621)
186,740
1,682,483
2013
257,487 $ (858,667)
900,093
901,407
205,227
140,712
(58,870)
144,617
187,783
1,263,027 (1,641,746) (1,526,656) 1,444,223
2,760,329 1,719,375
1,010,312
911,094
843,645
192,719 $ 2,287,868 $ 1,098,877
$ 1,118,583 $
$ 2,273,339
(5,190)
94,268
(4) Non-GAAP income per share consists of net income plus stock-based compensation expense and amortization expense
related to intangible assets divided by the weighted average number of shares of common stock outstanding during each
period. We believe non-GAAP income per share is useful to an investor because it is widely used to measure a company’s
operating performance. The following table provides a reconciliation of net income to non-GAAP income per share:
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Net income (loss)
Stock-based compensation expense
Acquisition related amortization
Other
Preferred Dividends
Non-GAAP net income to common
shareholders
Non-GAAP income per share
Basic
Diluted
Shares used to compute non-GAAP income per
share
Fiscal Year Ended
June 30, 2016
2014
2015
2016
666,503 $ (3,849,773) $ (2,490,145) $
2,760,329 1,719,375
462,557
1,918,019
-
-
(617,891)
(568,821)
$
1,010,312
131,400
26,128
(729,288)
2012
2013
257,487 $ (858,667)
911,094
843,645
502,798
502,798
(319,272)
-
(834,687)
(911,580)
$ 1,105,055
$
259,754 $ (926,104) $
692,350 $ (598,734)
19,151,000
19,332,000
17,375,000 16,710,000 13,246,000 11,780,000
18,253,000 16,710,000 13,253,000 11,780,000
Basic
Diluted
$
$
0.06
0.06
$
$
0.01 $
0.01 $
(0.06) $
(0.06) $
0.05 $
0.05 $
(0.05)
(0.05)
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 revenue, our ability to fund our operations and repay debt, business strategies, expansion and growth of
operations and other such matters, are forward-looking statements. These statements are based on certain assumptions and analyses
made by our management in light of its experience and its perception of historical trends, current conditions, expected future
developments, and other factors it believes are appropriate in the circumstances. These statements are subject to a number of
assumptions, risks and uncertainties, including general economic and business conditions, the business opportunities (or lack thereof)
that may be presented to and pursued by us, our performance on our current contracts and our success in obtaining new contracts,
our ability to attract and retain qualified employees, and other factors, many of which are beyond our control. You are cautioned
that these forward-looking statements are not guarantees of future performance and those actual results or developments may differ
materially from those projected in such statements.
Overview
Park City Group, Inc. (the “Company”) is a Software-as-a-Service (“SaaS”) provider. The Company’s technology helps
companies to synchronize their systems with those of their trading partners to make more informed business decisions. We provide
companies with greater flexibility in sourcing products by enabling them to choose new suppliers and integrate them into their supply
chain faster and more cost effectively, and we help them to more efficiently manage these relationships to “stock less and sell more”,
enhancing revenue while lowering working capital, labor costs and waste. Through our subsidiary, ReposiTrak, Inc.
(“ReposiTrak”), we also help reduce a company’s potential regulatory, legal, and criminal risk from its supply chain partners by
providing a way for them to ensure these suppliers are compliant with food and drug safety regulations, such as the Food Safety
Modernization Act (“FSMA”) and the Drug Quality and Security Act (“DQSA”).
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Fiscal Year
Our fiscal year ends on June 30. References to fiscal 2016 refer to the fiscal year ended June 30, 2016.
Sources of Revenue
The Company derives revenue from four sources: (i) subscription fees, (ii) hosting, premium support and maintenance service
fees beyond the standard services offered, (iii) professional services consisting of development services, consulting, training and
education, and (iv) license fees.
Subscription revenue is driven primarily by the number of connections between retailers and suppliers, the number of stores
and SKU’s, or the volume of economic activity between a retailer and its suppliers. 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’ software and data through a secure Internet 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.
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.
License arrangements are a time-specific and perpetual license. Software license maintenance agreements are typically annual
contracts with customers that are paid in advance or according to terms specified in the contract. These agreements provide the
customer with access to new software enhancements, maintenance releases, patches, updates and technical support personnel.
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Other Metrics – Non-GAAP Financial Measures
To supplement our financial statements, we also provide investors with Adjusted EBITDA and non-GAAP income per share,
both of which are non-GAAP financial measures. We believe that these non-GAAP measures provide useful information to
management and investors regarding certain financial and business trends relating to our financial condition and results of operations.
Our management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analyses
and planning purposes. These measures are also presented to our Board of Directors.
These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in
accordance with generally accepted accounting principles in the United States of America. These non-GAAP financial measures
exclude significant expenses and income that are required by GAAP to be recorded in the company’s financial statements and are
subject to inherent limitations. Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP
financial measures that are included in this “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s
financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.
We commenced operations in the software development and professional services business during 1990. The preparation of
our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue
and expense during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions. Management
bases its estimates and judgments on historical experience of operations and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions.
Management believes the following critical accounting policies, among others, will affect its more significant judgments and
estimates used in the preparation of our consolidated financial statements.
Income Taxes
In determining the carrying value of the Company’s net deferred income tax assets, the Company must assess the likelihood
of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these
assets. If these estimates and assumptions change in the future, the Company may record a reduction in the valuation allowance,
resulting in an income tax benefit in the Company’s statements of operations. Management evaluates whether or not to realize the
deferred income tax assets and assesses the valuation allowance quarterly.
Goodwill and Other Long-Lived Asset Valuations
Goodwill is assigned to specific reporting units and is reviewed for possible impairment at least annually or more frequently
upon the occurrence of an event or when circumstances indicate that a reporting unit's carrying amount is greater than its fair
value. Management reviews the long-lived tangible and intangible assets for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. Management evaluates, at each balance sheet date, whether
events and circumstances have occurred which indicate possible impairment. The carrying value of a long-lived asset is considered
impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying
value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair market value of
the long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as circumstances dictate. See Note 7
regarding impairment charges for the year ended June 30, 2016.
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Revenue Recognition
We recognize revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement, (ii)
the service has been provided to the customer, (iii) the collection of our fees is probable, and (iv) the amount of fees to be paid by
the customer is fixed or determinable.
We recognize subscription, hosting, premium support, and maintenance revenue ratably over the length of the agreement
beginning on the commencement dates of each agreement or when revenue recognition conditions are satisfied. Revenue from
license and professional services agreements are recognized as delivered.
Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on
whether the revenue recognition criteria have been met.
Agreements with multiple deliverables such as subscriptions, support, and professional services, are accounted for separately
if the deliverables have standalone value upon delivery. Subscription services have standalone value as the services are typically sold
separately. When considering whether professional services have standalone value, the Company considers the following factors: (i)
availability of services from other vendors, (ii) the nature and timing of professional services, and (iii) sales of similar services sold
separately. Multiple deliverable arrangements are separated into units of accounting and the total contract consideration is allocated to
each unit based on relative selling prices.
Stock-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards. The Company records compensation expense on a straight-line basis. The fair value of
options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free
interest rate, expected life, volatility, dividend yield and forfeiture rate.
Capitalization of Software Development Costs
The Company accounts for research costs of computer software to be sold, leased or otherwise marketed as expense until
technological feasibility has been established for the product. Once technological feasibility is established, all software costs are
capitalized until the product is available for general release to customers. Judgment is required in determining when technological
feasibility of a product is established. We have determined that technological feasibility for our software products is reached shortly
after a working prototype is complete and meets or exceeds design specifications including functions, features, and technical
performance requirements. Costs incurred after technological feasibility is established have been and will continue to be capitalized
until such time as when the product or enhancement is available for general release to customers.
Off-Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements that are reasonably likely to have a current or future effect
on our financial condition, revenue and results of operation, liquidity or capital expenditures.
Results of Operations – Fiscal Years Ended June 30, 2016, 2015 and 2014
Revenue
Revenue
Revenue
Year Ended
June 30,
2016
$ 14,010,693 $
$
Change
%
Change
Year Ended
June 30,
2015
$
Change
%
Change
Year Ended
June 30,
2014
361,978
3% $ 13,648,715 $ 1,720,299
14% $ 11,928,416
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During the fiscal year ended June 30, 2016, the Company had revenue of $14,010,693 compared to $13,648,715 for the
year ended June 30, 2015, a 3% increase. This $361,978 increase in total revenue was principally due to $550,000 net decrease in
revenue attributable to ReposiTrak offset by a $912,000 increase in other revenue. The decrease in the revenue attributable to
ReposiTrak was due to the acquisition of ReposiTrak which resulted in the elimination of subscription and management fees. The
decreased fees from ReposiTrak as a customer were partially offset by revenue generated by the ReposiTrak foods safety offerings.
During the fiscal year ended June 30, 2015, the Company had total revenue of $13,648,715 compared to $11,928,416 for
the year ended June 30, 2014, a 14% increase. This $1,720,299 increase in total revenue was principally due to an increase of
$1,478,699 in subscription revenue, and an increase of $241,600 in other revenue. Total revenue recorded for the fiscal year ended
June 30, 2015 included approximately $3.0 million received from ReposiTrak license and management fees. Approximately $2.3
million was advanced to ReposiTrak for working capital purposes during the year ended June 30, 2015, which amount was
evidenced by the issuance of promissory notes by ReposiTrak to the Company. The notes were eliminated in connection with the
consolidation of ReposiTrak following the ReposiTrak Acquisition.
Management believes that revenue will increase in subsequent periods primarily as a result of growth in ReposiTrak
customers and revenue, and secondarily due to the Company’s strategy of pursuing new contracts with suppliers (“Spokes”) to
connect to retail customers (“Hubs”).
Cost of Services and Product Support
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
2015
$
Change
%
Change
Year Ended
June 30,
2014
Cost of service and
product support
Percent of total
revenue
$ 4,279,724
$
(976,527)
-19% $ 5,256,251
$
168,278
3% $ 5,087,973
31%
39%
43%
Cost of services and product support was $4,279,724 or 31% of total revenue, and $5,256,251 or 39% of total revenue for
the years ended June 30, 2016 and 2015, respectively, a 19% decrease. This period over period decrease of $976,527 is principally
due to (i) a $752,000 decrease in employee related expense, (ii) capitalization of software development costs of $183,000 in the
second, third, and fourth quarters of fiscal 2016, and (iii) a $42,000 decrease in other product support costs.
Cost of services and product support was $5,256,251 or 39% of total revenue, and $5,087,973 or 43% of total revenue for
the years ended June 30, 2015 and 2014, respectively, a 3% increase. This increase of $168,278 for the year ended June 30, 2015
when compared with the same period ended June 30, 2014 is principally due to a $244,000 increase in employee related expense,
partially offset by a decrease of $76,000 in travel related expense and other product support costs.
Management expects service and a product support to increase in absolute value in subsequent periods, but to continue to fall
as a percentage of total revenue.
Sales and Marketing Expense
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
2015
$
Change
%
Change
Year Ended
June 30,
2014
Sales and
marketing
Percent of total
revenue
$ 5,371,005
$
(570,344)
-10% $ 5,941,349
$ 1,199,775
25% $ 4,741,574
38%
44%
40%
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The Company’s sales and marketing expense was $5,371,005, or 38% of total revenue, and $5,941,349 or 44% of total
revenue, for the fiscal years ended June 30, 2016 and 2015, respectively, a 10% decrease. Sales and marketing expense decreased
principally due to (i) a decrease in marketing and promotional expense of $411,000, and (ii) a decrease of $230,000 in employee
related costs and travel expense, which were partially offset by an increase in other sales related costs of $70,000.
The Company’s sales and marketing expense was $5,941,349, or 44% of total revenue, and $4,741,574 or 40% of total
revenue, for the fiscal years ended June 30, 2015 and 2014, respectively, a 25% increase. This $1,199,775 increase over the
previous year was primarily the result of (i) an increase of approximately $708,000 in marketing expense, and (ii) an increase in
salary and sales consulting and related expenses of $513,000, which were partially offset by a decrease of $21,000 in travel related
expense.
Management expects sales and marketing expense to increase in absolute value in subsequent periods, but to continue to fall as
a percentage of total revenue.
General and Administrative Expense
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
2015
$
Change
%
Change
Year Ended
June 30,
2014
General and
administrative
Percent of total
revenue
$ 3,165,077
$ (1,114,564)
-26% $ 4,279,641
$
467,376
12% $ 3,812,265
23%
31%
32%
The Company’s general and administrative expense was $3,165,077, or 23% of total revenue, and $4,279,641 or 31% of total
revenue for the years ended June 30, 2016 and 2015, respectively, a 26% decrease. This $1,114,564 decrease is principally due to
(i) reductions in employee related costs, and travel expense of approximately $1.2 million, and (ii) decreased bad debt expense of
$119,000. These decreases were partially offset by increases in facility costs of $97,000 and professional fees of $108,000 incurred
in connection with the acquisition of ReposiTrak.
The Company’s general and administrative expense was $4,279,641, or 31% of total revenue, and $3,812,265 or 32% of total
revenue for the years ended June 30, 2015 and 2014, respectively, a 12% increase. This $467,376 increase when comparing
expenditures for the year ended June 30, 2015 with the same period ended June 30, 2014 is principally due to (i) an increase in stock
compensation, bonus and salary expense of approximately $378,000, and (ii) an increase of $158,000 in travel, professional fees,
other facility related expense, offset by a decrease of $69,000 in estimated taxes.
Management expects general and administrative expense to increase in absolute value in subsequent periods, but to continue to
fall as a percentage of total revenue.
Depreciation and Amortization Expense
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
2015
$
Change
%
Change
Year Ended
June 30,
2014
Depreciation and
amortization
Percent of total
revenue
$
507,446
$
(260,719)
-34% $
768,165
$
(111,164)
-13% $
879,329
4%
6%
7%
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Table of Contents
The Company’s depreciation and amortization expense was $507,446 and $768,165 for the year ended June 30, 2016 and
2015, respectively, a 34% decrease. Depreciation and amortization expense decreased by $260,719 for the year ended, June 30,
2016 when compared to the year ended June 30, 2015 due to decreased customer list amortization due to the impairment charge
taken in the fiscal year ended June 30, 2015.
The Company’s depreciation and amortization expense was $768,165 and $879,329 for the year ended June 30, 2015 and
2014, respectively, a 13% decrease. Depreciation and amortization expense decreased by $111,164 for the year ended, June 30,
2015 when compared to the year ended June 30, 2014 due to the amortization of capitalized software costs. This decrease is
partially offset by an increase in depreciation related to new hardware purchases during the year ended June 30, 2015.
Impairment and Other Charges
The Company recognized a non-cash impairment charge of $1.5 million during the year ended June 30, 2015, due principally
to decreased margins on customers acquired in connection with the Prescient acquisition. In management’s determination, the
carrying value of these relationships exceeded their estimated fair values as determined by future discounted cash flow
projections. When projecting the stream of future cash flows for purposes of determining long-lived asset recoverability,
management makes assumptions, incorporating market conditions, sales growth rates, and operating expense.
Other Income and Expense
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
20015
$
Change
%
Change
Year Ended
June 30,
2014
Other (expense) and
income
Percent of total
revenue
$
(20,938) $
(263,559)
-109% $
242,621
$
140,041
137% $
102,580
>0 %
2%
1%
Net other income (expense) was net other expense of $20,938 when compared with net other income of $242,621 for the
year ended June 30, 2016 and June 30, 2015, respectively. This decrease of $263,559 for the year ended June 30, 2016 when
compared to the year ended June 30, 2015 is primarily due to interest income on notes receivable during the 2015 period that were
eliminated as a result of the consolidation of ReposiTrak for the same period in 2016 and a loss on the disposition of investments of
$26,128 for the year ended June 30, 2016.
Net other income (expense) was net other income of $242,621 when compared with net other income of $102,580 for the
year ended June 30, 2015 and June 30, 2014, respectively. This change of $140,041 for the year ended June 30, 2015 when
compared to the year ended June 30, 2014 is due to interest income on notes receivable of $151,000.
Preferred Dividends
Year Ended
June 30,
2016
729,288
$
Change
%
Change
$
160,467
Year Ended
June 30,
2015
568,821
28% $
$
Change
%
Change
$
(49,070)
Year Ended
June 30,
2014
617,891
-8% $
5%
4%
5%
Preferred dividends $
Percent of total
revenue
Dividends accrued on the Company’s Series B Preferred and Series B-1 Preferred was $729,288 for the year ended June 30,
2016, compared to dividends accrued on the Series B Preferred of $568,821 for the year ended June 30, 2015. This $160,467
increase is primarily attributable to the determination by the Company to pay dividends in kind for the year ended June 30, 2015,
which resulted in an adjustment to dividends in the current period. All dividends accrued were paid through the issuance of 66,013
shares of Series B-1 Preferred.
Dividends accrued on the Company’s Series B Preferred and Series B-1 Preferred was $568,821 for the year ended June 30,
2015, compared to dividends accrued on the Series B Preferred of $617,891 for the year ended June 30, 2014. This $49,070
decrease is primarily attributable to the decrease of the dividend rate on the Series B Preferred as a result of the Series B Amendment.
Of the dividends accrued during the year ended June 30, 2015, $442,002 was paid by the issuance of 44,200 shares of Series B-1
Preferred. Prior to the Series B Restructuring, holders of Series B Preferred were entitled to a 15.00% annual dividend, payable
quarterly in cash.
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Financial Position, Liquidity and Capital Resources
We believe our existing cash and short-term investments, together with funds generated from operations, are sufficient to
fund operating and investment requirements for at least the next twelve months. Our future capital requirements will depend on many
factors, including our rate of revenue growth and expansion of our sales and marketing activities, the timing and extent of spending
required for research and development efforts and the continuing market acceptance of our products.
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
2015
$
Change
%
Change
Year Ended
June 30,
2014
Cash and Cash
Equivalents
$ 11,443,388 $
117,816
1% $ 11,325,572 $ 7,973,013
238% $ 3,352,559
We have historically funded our operations with cash from operations, equity financings and debt borrowings. Cash and cash
equivalents was $11,443,388 and $11,325,572 at June 30, 2016, and June 30, 2015, respectively, a 1.0% increase, and $11,325,572
and $3,352,559 at June 30, 2015, and June 30, 2014, respectively, a 238% increase. The $117,816 increase during the year ended
June 30, 2016 when compared to the year ended June 30, 2015 is principally the result of cash flow from operations, while the
$7,973,013 increase from the year ended June 30, 2015 to the comparable period ended June 30, 2014 is principally the result of the
net proceeds of $6.7 million received from the registered direct offering completed in April 2015 and the $900,000 net proceeds from
the private offering in January 2015, offset, in part, by the use of cash in operations.
Net Cash Flows from Operating Activities
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
2015
$
Change
%
Change
Year Ended
June 30,
2014
Cash flows provided
by (used in)
operating activities
$
503,223 $ (1,204,374)
-71% $ 1,707,597 $ 1,800,131
N/A% $
(92,534)
Net cash provided by (used in) operating activities is summarized as follows:
Net income (loss)
Noncash expense and income, net
Net changes in operating assets and liabilities
$
2014
2015
2016
666,503 $ (3,849,773) $ (2,490,145)
2,882,344
5,368,927
(484,733)
188,443
(92,534)
503,223 $ 1,707,597 $
1,612,026
(1,775,306)
$
Noncash expense decreased by $3,756,901 in the year ended June 30, 2016 compared to June 30, 2015. Noncash
expense decreased as a result of a $1,750,000 decrease in stock compensation expense, a $1,756,000 decrease in depreciation and
amortization expense, which includes a $1,496,000 impairment charge, a $158,000 decrease in charitable non-cash donations, and a
decrease of $119,000 in bad debt expense, offset by a $26,000 increase on the loss of short-term marketable securities.
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Noncash expense increased by $2,486,583 in the year ended June 30, 2015 compared to June 30, 2014. Noncash expense
increased as a result of an impairment charge of $1,496,000, a $1,041,000 increase in stock compensation expense, and a
$61,000 increase in stock issued as a charitable contribution.
Net Cash Flows used in Investing Activities
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
2015
$
Change
%
Change
Year Ended
June 30,
2014
Cash flows used in
investing activities
$
365,641 (2,241,236)
-86% $ 2,606,877 $
954,152
58% $ 1,652,725
Net cash flows used in investing activities for the year ended June 30, 2016 was $365,641 compared to net cash flows used in
investing activities of $2,606,877 for the year ended June 30, 2015. This $2,241,236 decrease in cash used in investing activities for
the year ended June 30, 2016 when compared to the same period in 2015 was the result of funds loaned to ReposiTrak during the
year ended June 30, 2015, which were eliminated due to the acquisition of ReposiTrak and consolidation of the Company's financial
statements. This decrease was partially offset by the investment in long-term investments and capitalization of software cost.
Net cash flows used in investing activities for the year ended June 30, 2015 was $2,606,877 compared to net cash flows used
in investing activities of $1,652,725 for the year ended June 30, 2014. This $954,152 increase in cash used in investing activities for
2015 when compared to the same period in 2014 was the result of additional funds loaned under notes receivable.
Net Cash Flows from Financing Activities
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
2015
$
Change
%
Change
Year Ended
June 30,
2014
Cash flows (used
in) provided by
financing activities
$
(19,766) $ (8,892,059)
-100% $ 8,872,293 $ 7,391,060
499% $ 1,481,233
Net cash flows used in financing activities totaled $19,766 for the year ended June 30, 2016 compared to cash flows provided
by financing activities of $8,872,293 for the year ended June 30, 2015. The change in net cash related to financing activities is
primarily attributable to cash from the issuance of stock during the year ended June 30, 2015 and increased proceeds from lines of
credit, partially offset by (i) a decrease in payments on notes payable, and (ii) a decrease in dividends paid in cash. The Company
has the option to pay quarterly preferred dividends in kind and has made this election for each quarter beginning with the quarter
ended December 31, 2015.
Net cash flows provided by financing activities totaled $8,872,293 for the year ended June 30, 2015 compared to cash flows
used in financing activities of $1,481,233 for the year ended June 30, 2014. The change in net cash related to financing activities is
primarily attributable to the increases in (i) stock issued for cash of $6.1 million, (ii) proceeds from an increase in lines of credit of
$1.3 million, (iii) a decrease in cash paid for dividends of $430,000, (iv) a decrease in payments on notes payable of $306,000, and
(v) increased proceeds from employee stock plans of $49,000. These items were partially offset by a decrease of $633,000 in cash
from the exercise of options and warrants and a $165,000 decrease in proceed for the issuance of notes payable.
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Table of Contents
Liquidity and Working Capital
At June 30, 2016, the Company had positive working capital of $7,845,826, as compared with positive working capital of
$5,032,139 at June 30, 2015, and positive working capital of $654,042 at June 30, 2014. This $2,813,687 increase in working
capital is principally due to the receipt of cash flow from operations, and an increase of $1,907,377 in accounts receivable, and a
decrease of $236,810 in accounts payable and $1,018,908 in accrued liabilities. The substantial increase in accounts receivable in the
year ended June 30, 2016 compared to the year ended June 30, 2015 is principally due to extended payment terms and deals closing
in the quarter ended June 30, 2016. The substantial decrease in accrued liabilities in the year ended June 30, 2016 compared to the
year ended June 30, 2015 is principally due to decreased accruals related to stock based compensation and other compensation based
accruals.
Working capital at June 30, 2015 reflected the receipt of $7.6 million in proceeds received from the registered direct offering
completed in April 2015 and private offering completed in January 2015, partially offset by the use of cash during the year ended
June 30, 2015 caused by the increase in net loss during the period. While no assurances can be given, management currently
believes that the Company will increase its working capital position in subsequent periods, and thereby reduce its indebtedness
utilizing existing cash resources and projected cash flow from operations.
Management anticipates that it will have adequate cash resources to fund its operations and satisfy its debt obligations for at
least the next 12 months.
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
2015
$
Change
%
Change
Year Ended
June 30,
2014
Current assets
$ 15,384,631 $ 1,955,041
15% $ 13,429,590 $ 6,968,193
108% $ 6,461,397
Current assets as of June 30, 2016 totaled $15,384,631, an increase of $1,955,041 when compared to $13,429,590 as of June
30, 2015. The increase in current assets is attributable to an increase in accounts receivable.
Current assets at June 30, 2015 totaled $13,429,590, an increase of $6,968,193 when compared to $6,461,397 at June 30,
2014. This 108% increase in cash from the proceeds of the registered direct offering completed in April 2015 and the private
offering complete in January 2015.
Year Ended
June 30,
2016
$ 7,538,805 $
$
Change
%
Change
Year Ended
June 30,
2016
$
Change
%
Change
Year Ended
June 30,
2014
(858,646)
-10% $ 8,397,451 $ 2,590,096
45% $ 5,807,355
Current liabilities
Current liabilities totaled $7,538,805 and $8,397,451 as of June 30, 2016 and 2015, respectively. The $858,646 comparative
decrease in current liabilities is principally due to a decrease in accrued liabilities. This decrease was partially offset by an increase in
deferred revenue.
Current liabilities totaled $8,397,451 and $5,807,355 as of June 30, 2015 and 2014, respectively. The $2,590,096 comparative
increase in current liabilities is principally due to increases lines of credit and accrued liabilities as well as increases in accounts
payable and deferred revenue acquired in connection with the acquisition of ReposiTrak.
While no assurances can be given, management currently intends to continue to reduce its indebtedness in subsequent periods
utilizing existing cash resources and projected cash flow from operations. In addition, management may also continue to pay down,
pay off or refinance certain of the Company’s indebtedness. Management believes that these initiatives will enable us to address our
debt service requirements during the next 12 months without negatively impacting our working capital, as well as fund our currently
anticipated operations and capital spending requirements.
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Contractual Obligations
Total contractual obligations and commercial commitments as of June 30, 2016 are summarized in the following table:
Payment Due by Year
Operating lease obligations
Inflation
Total
736,931
$
Less than
1 Year
1-3 Years 3-5 Years
59,078
441,069
236,784
More than
5 Years
-
The impact of inflation has historically not had a material effect on the Company’s financial condition or results from
operations; however, higher rates of inflation may cause retailers to slow their spending in the technology area, which could have an
impact on the Company’s sales.
Recent Accounting Pronouncements
In May 2014, August 2015, April 2016 and May 2016, the Financial Accounting Standards Board ("FASB") issued ASU
2014-09 (ASC Topic 606), Revenue from Contracts with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with
Customers, Deferral of the Effective Date, ASU 2016-10 (ASC Topic 606) Revenue from Contracts with Customers, Identifying
Performance Obligations and Licensing , and ASU 2016-12 (ASC Topic 606) Revenue from Contracts with Customers, Narrow-
Scope Improvements and Practical Expedients, respectively. ASC Topic 606 outlines a single comprehensive model for entities to
use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance,
including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable
financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The amendments in these ASUs are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. This standard
may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in
the year of adoption. The Company is in the process of assessing the impact, if any, on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09 (ASC Topic 718), Stock Compensation—Improvements to Employee Share-
Based Payment Accounting. The amendments in this ASU are intended to simplify several areas of accounting for share-based
compensation arrangements, including the income tax consequences, classification on the consolidated statement of cash flows and
treatment of forfeitures. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. Early adoption is permitted. The Company is in the process of assessing the impact, if
any, of this ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 (ASC Topic 842), Leases. The ASU amends a number of aspects of lease
accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a
right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The amendments in this ASU
are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is
permitted. The Company is in the process of assessing the impact on its consolidated financial statements.
In April 2015 and August 2015, the FASB issued ASU 2015-03 (ASC Subtopic 835-30), Interest-Imputation of Interest:
Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15 (ASC Subtopic 835-30),Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements- Amendments to SEC Paragraphs Pursuant to
Staff Announcement at June 18, 2015 EITF Meeting, respectively. The ASUs require that debt issuance costs related to a
recognized debt liability, with the exception of those related to line-of-credit arrangements, be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability. The amendments in these ASUs are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have
not been previously issued. The adoption of this new guidance is not expected to have a material impact on the Company's
consolidated financial statements and disclosures.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Each of our contracts require payment in U.S. dollars. We therefore do not engage in hedging transactions to reduce our
exposure to changes in currency exchange rates, although in the event any future contracts are denominated in a foreign currency,
we may do so in the future. As a result, our financial results are not affected by factors such as changes in foreign currency
exchange rates.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Effective January 1, 2016 (the “Effective Date”) all of the assets of HJ & Associates, LLC (“HJ”) were acquired by Haynie
& Company, Salt Lake City, Utah, and, as a result, HJ resigned as the Company’s independent registered public accounting firm
because the firm is no longer be an active entity. Therefore, on January 1, 2016, the Company engaged Haynie & Company, Salt
Lake City, Utah, as its new independent registered public accounting firm. The engagement of Haynie & Company was unanimously
approved by the Company’s audit committee.
The reports of HJ regarding the Company’s consolidated financial statements for the two most recent fiscal years did not
contain an adverse or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting
principles.
During the two most recent fiscal years and through the Effective Date, there were (i) no disagreements between the
Company and HJ on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures,
which disagreement, if not resolved to the satisfaction of HJ, would have caused HJ to make reference thereto in their reports on the
consolidated financial statements for such years, and (ii) no “reportable events” as that term is defined in Item 304(a)(1)(v) of
Regulation S-K.
During the Company’s two most recent fiscal years and in the subsequent interim period through the Effective Date, the
Company has not consulted with Haynie & Company regarding either (i) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated
financial statements, and neither a written report nor oral advice was provided to the Company that Haynie & Company concluded
was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue;
or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related
instructions) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).
The Company disclosed the change in auditors in a Current Report on Form 8-K filed with the Securities and Exchange
Commission on January 7, 2016.
CONTROLS AND PROCEDURES
(a)
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our Management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of June 30, 2016. 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.
(b) Management's Annual Report on Internal Control over Financial Reporting.
We are responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of
accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the
Company. With our participation, an evaluation of the effectiveness of our internal control over financial reporting was conducted as
of June 30, 2016, based on the framework and criteria established in Internal Control Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that our internal control over financial reporting was effective as of June 30, 2016.
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Table of Contents
Haynie and Company, our independent registered public accounting firm that audited our consolidated financial statements
included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over
financial reporting, which report is included in Part IV below.
(c)
Changes in Internal Controls over Financial Reporting.
Our Chief Executive Officer and Chief Financial Officer have determined that there 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.
OTHER INFORMATION
None.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this item will be incorporated by reference from Park City Group, Inc.’s definitive proxy
statement, to be filed with the Securities and Exchange Commission on or before October 28, 2016.
EXECUTIVE COMPENSATION
The information required by this item will be incorporated by reference from Park City Group, Inc.’s definitive proxy
statement, to be filed with the Securities and Exchange Commission on or before October 28, 2016.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item will be incorporated by reference from Park City Group, Inc.’s definitive proxy
statement, to be filed with the Securities and Exchange Commission on or before October 28, 2016.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item will be incorporated by reference from Park City Group, Inc.’s definitive proxy
statement, to be filed with the Securities and Exchange Commission on or before October 28, 2016.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be incorporated by reference from Park City Group, Inc.’s definitive proxy
statement, to be filed with the Securities and Exchange Commission on or before October 28, 2016.
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Table of Contents
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits, Financial Statements and Schedules
PART IV
Exhibit
Number
2.1
2.2
2.3
2.4
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
14.1
21
23
31.1
31.2
32.1
Description
Agreement and Plan of Merger and Reorganization, Dated August 28, 2008 (1)
Form of Stock Purchase Agreement (1)
Form of Stock Voting Agreement (1)
Form of Promissory Note (2)
Articles Of Incorporation (3)
Certificate Of Amendment (4)
Certificate of Amendment (5)
Bylaws (3)
Certificate of Designation of the Series A Convertible Preferred Stock (6)
Certificate of Designation of the Series B Convertible Preferred Stock (7)
Fourth Amended and Restated Certificate of Designation of the Relative Rights, Powers and Preferences of the Series
B Preferred Stock of Park City Group, Inc. (17)
First Amended and Restated Certificate of Designation of the Relative Rights, Powers and Preferences of the Series B-
1 Preferred Stock of Park City Group, Inc. (18)
Subordinated Promissory Note, dated April 1, 2009, issued to Riverview Financial Corporation (8)
Amendment to Loan Agreement and Note, by and between U.S. Bank National Association and the Company, dated
September 15, 2009 (9)
Term Loan Agreement, by and between U.S. Bank National Association and the Company, dated May 5, 2010 (10)
Amendment to Loan Agreement and Note, by and between U.S. Bank National Association and the Company,
dated May 5, 2010 (10)
Promissory Note, dated August 25, 2009, issued to Baylake Bank (10)
ReposiTrak Omnibus Subscription Agreement (11)
ReposiTrak Promissory Note (11)
Fields Employment Agreement(14)
Services Agreement(14)
Form of Securities Purchase Agreement (15)
Employment Agreement by and between Todd Mitchell and Park City Group, Inc., dated September 28, 2015 (16)
Code of Ethics and Business Conduct (12)
List of Subsidiaries (13)
Consent of Haynie & Company, dated September 7, 2016 *
Certification of Principal Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002
Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
*
Incorporated by reference from our Form 8-K dated September 3, 2008.
Incorporated by reference from our Form 8-K dated September 15, 2008.
Incorporated by reference from our Form DEF 14C dated June 5, 2002.
Incorporated by reference from our Form 10-QSB for the year ended Sept 30, 2005.
Incorporated by reference from our Form 10-KSB dated September 29, 2006.
Incorporated by reference from our Form 8-K dated June 27, 2007.
Incorporated by reference from our Form 8-K dated July 21, 2010.
Incorporated by reference from our Form 8-K dated September 30, 2009.
Incorporated by reference from our Form 8-K dated October 1, 2009.
Incorporated by reference from our Form 8-K dated August 25, 2009.
Incorporated by reference from our Annual Report on Form 10-K dated September 23, 2014.
Incorporated by reference from our Form 10-KSB dated September 30, 2008.
Incorporated by reference from our Form 10-K dated September 13, 2011.
Incorporated by reference from our Form 10-K dated September 11, 2014.
Incorporated by reference from our Form 8-K dated May 13, 2015.
Incorporated by reference from our Form 8-K dated September 30, 2015.
Incorporated by reference from our Form 8-K dated January 14, 2016.
Incorporated by reference from our Form 8-K dated January 14, 2016.
Filed herewith
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Table of Contents
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: September 7, 2016
PARK CITY GROUP, INC.
(Registrant)
By: /s/ Randall K. Fields
Principal Executive Officer,
Chairman of the Board and Director
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature
Title
/s/ Randall K. Fields
Randall K. Fields
/s/ Todd Mitchell
Todd Mitchell
/s/ Robert W. Allen
Robert W. Allen
/s/ William S. Kies, Jr.
William S. Kies, Jr.
/s/ Richard Juliano
Richard Juliano
/s/ Austin F. Noll, Jr.
Austin F. Noll, Jr.
/s/ Ronald C. Hodge
Ronald C. Hodge
Chairman of the Board and Director,
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer &
Principal Accounting Officer)
Director, and Compensation
Committee Chairman
Director
Director
Director
Date
September 7, 2016
September 7, 2016
September 7, 2016
September 7, 2016
September 7, 2016
September 7, 2016
Director, and Audit Committee Chairman
September 7, 2016
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Table of Contents
To the Board of Directors
Park City Group, Inc.
Salt Lake City, Utah
We have audited the accompanying consolidated balance sheet of Park City Group, Inc. and subsidiaries as of June 30, 2016, and the
related consolidated statements of operations, comprehensive income, stockholders' equity, and cash flows for the period ended June
30, 2016. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Park City Group, Inc. and subsidiaries as of June 30, 2016, and the results of their operations and their cash flows for the period
ended June 30, 2016, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Park
City Group, Inc. and subsidiaries’ internal control over financial reporting as of June 30, 2016, based on criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in
2013, and our report dated September 7, 2016 expressed an unqualified opinion on the effectiveness of Park City Group, Inc. ’s
internal control over financial reporting.
Haynie and Company
Salt Lake City, Utah
September 7, 2016
F-1
Table of Contents
To the Board of Directors
Park City Group, Inc.
Salt Lake City, Utah
We have audited Park City Group, Inc. and Subsidiaries’ internal control over financial reporting as of June 30, 2016, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013. Park City Group, Inc. and Subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion
on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those policies and procedures that (a) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (c) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Park City Group, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of June 30, 2016, based on criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements of Park City Group, Inc. and Subsidiaries and our report dated September 7, 2016 expressed an
unqualified opinion.
Haynie and Company
Salt Lake City, Utah
September 7, 2016
F-2
Table of Contents
To the Board of Directors
Park City Group, Inc.
Salt Lake City, Utah
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying consolidated balance sheet of Park City Group, Inc. and Subsidiaries as of June 30, 2015 and the
related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the two years in the period
ended June 30, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and schedules based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Park City Group, Inc. and Subsidiaries as of June 30, 2015, and the results of their operations and their cash flows for each of the
two years in the period ended June 30, 2015, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Park
City Group, Inc. and Subsidiaries’ internal control over financial reporting as of June 30, 2015, based on criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in
2013, and our report dated September 14, 2015 expressed an unqualified opinion on the effectiveness of Park City Group, Inc.’s
internal control over financial reporting.
HJ & Associates, LLC
Salt Lake City, Utah
September 14, 2015
F-3
Table of Contents
PARK CITY GROUP, INC.
Consolidated
Assets
Current Assets
Cash
Receivables, net allowance
Prepaid expense and other current assets
Total Current Assets
Property and equipment, net
Other Assets:
Deposits and other assets
Investments
Customer relationships
Goodwill
Capitalized software costs, net
Total Other Assets
Total Assets
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable
Accrued liabilities
Deferred revenue
Lines of credit
Current portion of notes payable
Total current liabilities
Long-term liabilities
Notes payable, less current portion
Other long term liabilities
Total liabilities
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 30,000,000 shares authorized;
625,375 and 625,375 shares of Series B Preferred issued and outstanding at June 30, 2016
and 2015 respectively
180,213 and 74,200 shares of Series B1 Preferred issued and outstanding at June 30, 2016
and 2015 respectively
Common stock, $0.01 par value, 50,000,000 shares authorized; 19,229,313 and 18,875,586
issued and outstanding at June 30, 2016 and 2015, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders equity
Total liabilities and stockholders' equity
See accompanying notes to consolidated financial statements.
June 30,
2016
June 30,
2015
$ 11,443,388 $ 11,325,572
1,640,591
463,427
3,547,968
393,275
15,384,631 13,429,590
469,383
764,442
14,866
471,584
1,182,600
14,866
-
1,314,000
20,883,886 20,883,886
-
182,942
22,735,878 22,212,752
$ 38,589,892 $ 36,406,784
$
580,309 $
1,502,203
2,717,094
2,500,000
239,199
817,119
2,521,111
2,331,920
2,500,000
227,301
7,538,805
8,397,451
491,253
57,275
349,192
75,518
8,087,333
8,822,161
6,254
6,254
1,802
742
192,296
188,759
73,272,620 70,296,496
(42,970,413) (42,907,628)
30,502,559 27,584,623
$ 38,589,892 $ 36,406,784
F-4
Table of Contents
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated
For the Years Ended June 30,
2015
2016
2014
Revenue
Operating expense:
Cost of revenue and product support
Sales and marketing
General and administrative
Depreciation and amortization
Impairment of intangibles
Total operating expense
Income (loss) from operations
Other (expense) income:
Interest income (expense), net
Loss on disposition of Investment
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Dividends on preferred stock
Restructuring of Series B Preferred
$ 14,010,693 $ 13,648,715 $ 11,928,416
4,279,724
5,371,005
3,165,077
507,446
-
5,087,973
4,741,574
3,812,265
879,329
-
13,323,252 17,741,109 14,521,141
5,256,251
5,941,349
4,279,641
768,165
1,495,703
687,441 (4,092,394) (2,592,725)
5,190
(26,128)
242,621
-
102,580
-
666,503 (3,849,773) (2,490,145)
-
-
-
666,503 (3,849,773) (2,490,145)
(729,288)
(568,821)
- (2,141,980)
(617,891)
-
Net loss applicable to common shareholders
$
(62,785) $ (6,560,574) $ (3,108,036)
Weighted average shares, basic and diluted
Basic and diluted loss per share
F-5
19,151,000 17,375,000 16,710,000
(0.19)
$
(0.00) $
(0.38) $
Table of Contents
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
For the Years Ended June 30,
2015
2016
2014
Net income (loss)
Other Comprehensive Income (Loss):
Unrealized loss on marketable securities
Reclassification adjustment
Net income (loss) on marketable securities
Comprehensive income (loss)
$
666,503 $(3,849,773) $(2,490,145)
(26,128)
26,128
-
-
-
-
666,503 $(3,849,773) $(2,490,145)
-
-
-
$
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of
Series B
Series B-1
Preferred Stock
Preferred Stock
Shares Amount Shares Amount
Common Stock
Shares
Additional
Paid-In
Amount Capital
Accumulated
Deficit
Total
Balance, June 30,
2013
411,927 4,119
-
- 16,128,530 $ 161,285 $43,314,986 $(33,239,018) $10,241,372
Stock issued for:
Compensation
Cash
Charitable
Contribution
Preferred
Dividends-
Declared
Exercise of
Options/Warrants
Net loss
Balance, June 30,
2014
Series B
Restructure
Series B
Redemption
Stock issued for:
-
-
-
-
-
-
-
-
-
-
-
-
411,927 4,119
214,198 2,142
(750)
(7)
-
-
-
-
-
-
-
-
-
-
-
-
-
312,364
277,092
3,124 1,089,574
2,771 1,659,922
- 1,092,698
- 1,662,693
15,000
150
96,750
-
96,900
-
-
-
(617,891)
(617,891)
-
195,039
1,950
631,504
-
633,454
-
-
-
-
(2,490,145) (2,490,145)
- 16,928,025 169,280 46,792,736 (36,347,054) 10,619,081
-
-
-
-
- 2,139,838
(2,141,980)
-
)
(7,493
-
-
(7,500)
Accrued
compensation
Cash
Charitable
Contribution
Preferred
Dividends-PIK
Acquisition
Preferred
Dividends-
Declared
-
-
-
-
-
- 30,000
-
-
300
-
366,033
693,090
3,664 2,156,229
6,931 7,802,664
- 2,160,193
- 7,809,595
-
-
-
15,000
150
157,800
-
157,950
- 44,200
-
-
442
-
-
873,438
-
441,560
8,734 10,813,162
442,002
-
- 10,821,896
(568,821)
(568,821)
Net loss
Balance, June 30,
2015
Stock issued for:
-
-
-
-
-
-
-
(3,849,773) (3,849,773)
625,375 6,254 74,200
742 18,875,586 188,759 70,296,496 (42,907,628) 27,584,623
Accrued
compensation
Cash
Preferred
Dividends-PIK
Preferred
Dividends-
Declared
Exercise of
Option/Warrant
Net income
Balance, June 30,
2016
-
-
-
-
-
-
- 40,000
-
-
400
-
320,770
23,528
3,208 2,084,133
199,613
235
- 2,087,741
199,848
-
- 66,013
660
-
-
-
-
-
-
-
-
-
-
-
-
659,470
-
660,130
-
-
(729,288)
(729,288)
9,429
94
32,908
-
33,002
-
-
-
666,503
666,503
625,375 $ 6,254 180,213 $ 1,802 19,229,313 $ 192,296 $73,272,620 $(42,970,413) $30,502,559
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
PARK CITY GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of
For the Years Ended June 30,
2015
2016
2014
666,503 $ (3,849,773) $ (2,490,145)
$
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization
Impairment of intangibles
Bad debt expense
Stock compensation expense
Charitable non-cash donations
Loss on short-term marketable securities
Decrease (increase) in:
Trade receivables
Prepaids and other assets
Increase (decrease) in:
Accounts payable
Accrued liabilities
Deferred revenue
507,446
-
68,140
1,010,312
-
26,128
(236,810)
(18,305)
385,174
(1,975,517)
70,152
768,165
1,495,703
186,780
2,760,329
157,950
-
879,329
-
186,740
1,719,375
96,900
-
710,302
(501,957)
(661,357)
(20,747)
(49,296)
136,517
(107,123)
84,634
49,252
63,485
Net cash provided by (used in) operating activities
503,223
1,707,597
(92,534)
Cash flows from investing activities:
Cash from sale of marketable securities
Payments received on notes receivable
Net cash received in acquisition
Cash advanced on Note Receivable
Cash from sale of property & equipment
Purchase of property and equipment
Capitalization of software costs
Purchase of long-term investments
Purchase of marketable securities
-
300,000
22,119
-
4,612,908
-
-
-
-
- (2,559,460) (1,200,000)
6,505
-
(459,230)
(369,536)
-
-
-
-
-
-
-
(80,987)
(182,942)
(75,584)
(4,639,036)
Net cash used in investing activities
(365,641) (2,606,877) (1,652,725)
Cash flows from financing activities:
Proceeds from employee stock plans
Proceeds from exercises of options and warrants
Proceeds from issuance of note payable
Proceeds from issuance of stock
Net increase in lines of credit
Preferred stock redemption
Dividends paid
Payments on notes payable and capital leases
199,848
33,002
-
-
-
-
(10,575)
(242,041)
203,211
-
172,795
7,606,384
1,300,000
(7,500)
(157,147)
(245,450)
153,875
633,454
338,287
1,493,818
-
-
(586,999)
(551,202)
Net cash (used in) provided by financing activities
(19,766)
8,872,293
1,481,233
Net increase (decrease) in cash and cash equivalents
117,816
7,973,013
(264,026)
Cash and cash equivalents at beginning of period
11,325,572
3,352,559
3,616,585
Cash and cash equivalents at end of period
$ 11,443,388 $ 11,325,572 $ 3,352,559
Supplemental Disclosure of Cash Flow Information
Cash paid for income taxes
Cash paid for interest
$
$
- $
46,508 $
- $
80,534 $
6,634
75,343
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Preferred Stock to pay accrued liabilities
Common Stock to pay accrued liabilities
Dividends accrued on preferred stock
400,000 $
$
-
$ 1,687,741 $ 1,860,191 $ 1,107,698
617,891
$
729,288 $
568,821 $
300,000 $
Dividends paid with preferred stock
Conversion of accounts receivable into notes receivable
Series B restructure
Note payable for long-term investment
$
$
$
$
442,002 $
660,130 $
- $
- $ 2,141,980 $
- $
-
- $ 1,622,863
-
-
396,000 $
See accompanying notes to consolidated financial statements.
F-8
Table of Contents
Supplemental Disclosure of Non-Cash Investing and Financing Activities, continued
On June 30, 2015, the Company purchased 100% of the outstanding common stock of ReposiTrak, Inc. The fair values
of ReposiTrak’s assets and liabilities at the date of acquisition and the consideration paid, net of cash acquired, are as follows:
Receivables
Prepaid expense
Customer relationships
Goodwill
Accounts payable
Deferred revenue
Net assets acquired
Common stock issued
Receivables eliminated in consolidation
Cash received in acquisition
See accompanying notes to consolidated financial statements.
F-9
$
152,340
17,500
1,314,000
16,077,953
(128,126)
(598,232)
16,835,435
10,821,897
6,035,657
$
22,119
Table of Contents
PARK CITY GROUP, INC. AND SUBSIDIARIES
to Consolidated Financial Statements
June 30, 2016 and June 30, 2015
NOTE 1.
DESCRIPTION OF BUSINESS AND ACQUISITION OF REPOSITRAK, INC.
Summary of Business
The Company is incorporated in the state of Nevada. The Company has three subsidiaries, PC Group, Inc. (formerly, Park
City Group, Inc.), a Utah Corporation (98.76% owned), and Park City Group, Inc., (formerly, Prescient Applied Intelligence, Inc.), a
Delaware Corporation (100% owned) and ReposiTrak, Inc., a Utah corporation (100% owned). All intercompany transactions and
balances have been eliminated in consolidation.
The Company designs, develops, markets and supports proprietary software products. These products are designed for
businesses having multiple locations to assist in the management of business operations on a daily basis and communicate results of
operations in a timely manner. In addition, the Company has built a consulting practice for business improvement that centers on the
Company’s proprietary software products. The principal markets for the Company's products are multi-store retail and convenience
store chains, branded food manufacturers, suppliers and distributors, and manufacturing companies, which have operations in North
America, Europe, Asia and the Pacific Rim. As a result of the acquisition of ReposiTrak, Inc. (“ReposiTrak”) in June 2015, as more
particularly described below, the Company also provides food, pharmaceutical, and dietary supplement retailers and suppliers with a
robust cloud-based solution to help protect their brands and remain in compliance with business records and regulatory requirements,
such as the Food Safety Modernization Act (“FSMA”) and the Drug Quality and Security Act (“DQSA”).
NOTE 2.
SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The financial statements presented herein reflect the consolidated financial position of Park City Group, Inc. and subsidiaries,
including ReposiTrak and Prescient. All inter-company transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that materially affect the amounts reported in the consolidated financial
statements. Actual results could differ from these estimates. The methods, estimates and judgments the Company uses in applying
its most critical accounting policies have a significant impact on the results it reports in its financial statements. The Securities and
Exchange Commission has defined the most critical accounting policies as those that are most important to the portrayal of the
Company’s financial condition and results, and require the Company to make its most difficult and subjective judgments, often as a
result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company’s most critical
accounting policies include: income taxes, goodwill and other long-lived asset valuations, revenue recognition, stock-based
compensation, and capitalization of software development costs.
F-10
Table of Contents
Concentration of Credit Risk and Significant Customers
The Company maintains cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company
has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash
equivalents.
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of trade
receivables. In the normal course of business, the Company provides credit terms to its customers. Accordingly, the Company
performs ongoing credit evaluations of its customers and maintains allowances for possible losses which when realized have been
within the range of management's expectations. The Company does not require collateral from its customers.
The Company's accounts receivable are derived from sales of products and services primarily to customers operating multi-
location retail and grocery stores. Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or
revenue, depending on whether the revenue recognition criteria have been met.
During the years ended June 30, 2016, there were no customers that accounted for greater than 10% of total
revenue. During the years ended June 30, 2015 and 2014, the Company had one customer, ReposiTrak, Inc. (acquired on June 30,
2015) that accounted for greater than 10% of total revenue in both years.
Receivables
Trade account and notes receivable are stated at the amount the Company expects to collect. Receivables are reviewed individually
for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make
payments, allowances may be required.
Allowance for Doubtful Accounts Receivable
The Company offers credit terms on the sale of the Company’s products to a significant majority of the Company’s
customers and requires no collateral from these customers. The Company performs ongoing credit evaluations of customers’
financial condition and maintains an allowance for doubtful accounts receivable based upon the Company’s historical experience and
a specific review of accounts receivable at the end of each period. As of June 30, 2016, 2015 and 2014, the allowance for doubtful
accounts was $75,000, $94,000, and $70,000, respectively.
Depreciation and Amortization
Depreciation and amortization of property and equipment is computed using the straight line method based on the following
estimated useful lives:
Furniture and fixtures
Computer Equipment
Equipment under capital leases
Leasehold improvements
Years
5-7
3
3
See below
Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful life of the
improvements.
Amortization of intangible assets are computed using the straight line method based on the following estimated useful lives:
Customer relationships
Acquired developed software
Developed software
Goodwill
F-11
Years
10
5
3
See below
Table of Contents
Goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. Other intangible assets
are amortized over their useful lives. See Note 7 regarding impairment charges for the year ended June 30, 2015.
Warranties
The Company offers a limited warranty against software defects. Customers who are not completely satisfied with their
software purchase may attempt to be reimbursed for their purchases outside the warranty period. For the years ending June 30,
2016, 2015 and 2014, the Company did not incur any expense associated with warranty claims.
Revenue Recognition
The Company recognizes revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an
arrangement, (ii) the service has been provided to the customer, (iii) the collection of our fees is probable and (iv) the amount of fees
to be paid by the customer is fixed or determinable.
The Company recognizes subscription, hosting, premium support, and maintenance revenue ratably over the length of the
agreement beginning on the commencement dates of each agreement or when revenue recognition conditions are satisfied. Revenue
from license and professional services agreements are recognized as delivered.
Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on
whether the revenue recognition criteria have been met.
Agreements with multiple deliverables such as subscriptions, support, and professional services, are accounted for separately
if the deliverables have standalone value upon delivery. Subscription services have standalone value as the services are typically sold
separately. When considering whether professional services have standalone value, the Company considers the following factors: (i)
availability of services from other vendors, (ii) the nature and timing of professional services, and (iii) sales of similar services sold
separately. Multiple deliverable arrangements are separated into units of accounting and the total contract consideration is allocated to
each unit based on relative selling prices.
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.
During 2016, 2015 and 2014 capitalized development costs of $0, $0, and $73,082 respectively, were amortized into
expense. The Company amortizes its developed and purchased software on a straight-line basis over three and five years,
respectively.
Research and Development Costs
Research and development costs include personnel costs, engineering, consulting, and contract labor and are expensed as
incurred for software that has not achieved technological feasibility.
F-12
Table of Contents
Advertising Costs
Advertising is expensed as incurred. Advertising costs were approximately $113,000, $21,000, and $14,000 for the years
ended June 30, 2016, 2015 and 2014, respectively.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of temporary differences
between tax bases and financial reporting bases of other assets and liabilities.
Earnings Per Share
Basic net income or loss per common share (“Basic EPS”) excludes dilution and is computed by dividing net income or loss
by the weighted average number of common shares outstanding during the period. Diluted net income or loss per common share
(“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue shares of common stock
were exercised or converted into common stock. The computation of Diluted EPS does not assume exercise or conversion of
securities that would have an anti-dilutive effect on net income (loss) per common share.
For the year ended June 30, 2016, 2015 and 2014 warrants to purchase 1,416,749, 1,426,178 and 317,373 shares of
common stock, respectively, were not included in the computation of diluted EPS due to the anti-dilutive effect. Warrants to
purchase shares of common stock were outstanding at prices ranging from $3.50 to $10.00 per share at June 30, 2016.
1,029,818 shares of common stock issuable upon conversion of the Company’s Series B Preferred were not included in the
diluted EPS calculation for the year ended June 30, 2014, as the effect would have been anti-dilutive. Series B Preferred was no
longer convertible to common stock for the year ended June 30, 2016 and 2015.
Year ended
June 30,
2016
Year ended
June 30,
2015
Year ended
June 30,
2014
Dilutive effect of warrants
Weighted average shares outstanding assuming dilution
Stock-Based Compensation
-
19,151,000 17,375,000 16,710,000
-
-
The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the
grant-date fair value of those awards. The Company records compensation expense on a straight-line basis. The fair value of
options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free
interest rate, expected life, volatility, dividend yield and forfeiture rate.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash
equivalents. Cash and cash equivalents are stated at fair value.
Marketable Securities
Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such
determination at each balance sheet date. Securities are classified as available for sale and are carried at fair value, with the change in
unrealized gains and losses, net of tax, reported as a separate component on the consolidated statements of comprehensive income.
Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted
prices, interest rates and yield curves. The cost of securities sold is based on the specific-identification method. Interest on
securities classified as available for sale is also included as a component of interest income.
F-13
Table of Contents
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, cash equivalents, receivables, payables, accruals and notes
payable. The carrying amount of cash, cash equivalents, receivables, payables and accruals approximates fair value due to the short-
term nature of these items. The notes payable also approximate fair value based on evaluations of market interest rates.
Reclassifications
Certain prior-year amounts have been reclassified to conform with the current year's presentation.
NOTE 3.
INVESTMENTS
Investee companies that are not consolidated, but over which the Company exercises significant influence, are accounted for
under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee
depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and
ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under the equity method
of accounting, an investee company’s accounts are not reflected within the Company’s consolidated balance sheets and statements
of operations; however, the Company’s share of the earnings or losses of the investee company is reflected in the consolidated
statements of operations. The Company’s carrying value in an equity method investee company is reflected in the caption
‘‘Investments’’ in the Company’s consolidated balance sheets.
As of June 30, 2016, investments represent a 36% ownership in a privately-held corporation, and represents initial (January
2016) and subsequent investments. There were nominal earnings for the year ended June 30, 2016.
When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded
in the Company’s consolidated financial statements unless the Company guaranteed obligations of the investee company or has
committed additional funding. When the investee company subsequently reports income, the Company will not record its share of
such income until it equals the amount of its share of losses not previously recognized.
NOTE 4.
RECEIVABLES
Accounts receivable consist of the following:
Accounts receivable
Allowance for doubtful accounts
2016
2015
$ 3,622,968 $ 1,734,591
(94,000)
$ 3,547,968 $ 1,640,591
(75,000)
Accounts receivable consist of trade accounts receivable and unbilled amounts recognized as revenue during the year for
which invoicing occurs subsequent to year-end. Amounts that have been invoiced are recorded in accounts receivable and in
deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
F-14
Table of Contents
NOTE 5.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following at June 30:
2016
2015
Computer equipment
Furniture and fixtures
Leasehold improvements
Less accumulated depreciation and amortization
$ 3,350,390 $ 3,269,403
260,574
260,574
231,782
231,782
3,842,746
3,761,759
(3,373,363) (2,997,317)
764,442
469,383 $
$
Depreciation expense for the years ended June 30, 2016 and 2015 was $376,046 and $345,847, respectively.
NOTE 6.
CAPITALIZED SOFTWARE COSTS
Capitalized software costs consist of the following at June 30:
Capitalized software costs
Less accumulated amortization
2016
2015
$ 2,626,070 $ 2,443,128
(2,443,128) (2,443,128)
-
$
182,942 $
Amortization expense for the years ended June 30, 2016 and 2015 was $0 and $0, respectively.
NOTE 7.
ACQUISITION RELATED INTANGIBLE ASSETS, NET
Customer relationships consist of the following at June 30:
Customer relationships
Less accumulated amortization
Less impairment charge
2016
2015
$ 5,537,161 $ 5,537,161
(4,354,561) (2,727,458)
- (1,495,703)
$ 1,182,600 $ 1,314,000
Amortization expense for the years ended June 30, 2016 and 2015 was $131,400 and $422,316, respectively.
The Company recognized a non-cash impairment charge of $1.5 million during the year ended June 30, 2015, due principally
to decreased margins on customers acquired in connection with the Prescient acquisition. In management’s determination, the
carrying value of these relationships exceeded their estimated fair values as determined by future discounted cash flow
projections. When projecting the stream of future cash flows for purposes of determining long-lived asset recoverability,
management makes assumptions, incorporating market conditions, sales growth rates, and operating expense.
Estimated aggregate amortization expense per year are as follows:
Years ending June 30:
2017
2018
2019
2020
Thereafter
NOTE 8.
ACCRUED LIABILITIES
Accrued liabilities consist of the following at June 30, 2016 and 2015:
Accrued stock-based compensation
Accrued compensation
Accrued other liabilities
Accrued dividends
131,400
131,400
131,400
131,400
657,000
$
2015
2016
768,055 $ 1,665,731
506,064
336,957
225,140
214,432
124,176
182,759
$ 1,502,203 $ 2,521,111
F-15
Table of Contents
NOTE 9.
NOTES PAYABLE
The Company had the following notes payable obligations at June 30, 2016 and 2015:
Notes Payable:
Note payable to a bank, due in monthly installments of $7,860 bearing interest at 3.73% due
February 9, 2017, this note is a conversion of a multi-advance note payable initially put in place on
February 19, 2012, secured by related capital equipment purchases.
Note payable to a bank, due in monthly installments of $7,860 bearing interest at 4.17% due August
26, 2018, this note is a conversion of a multi-advance note payable initially put in place on August
26, 2013, secured by related capital equipment purchases.
Note payable to a bank, due in monthly installments of $4,932 bearing interest at 4.91% due March
18, 2018, secured by related capital equipment purchases.
Note payable to an entity, due in monthly installments of $4,009 bearing interest at 4.00% due July
1, 2019, secured by long-term investments.
Less current portion notes payable
$
Maturities of notes payable and capital leases at June 30, 2016 are as follows:
2016
2015
62,445
152,530
187,799
272,191
98,980
151,772
381,228
730,452
(239,199)
491,253 $
-
576,493
(227,301)
349,192
Year ending June 30:
2017
2018
2019
2020
2021
NOTE 10. LINES OF CREDIT
$
$
$
$
$
239,199
170,232
44,200
276,821
-
The Company’s line of credit with a bank has an annual interest rate of 1.71% + the greater of zero percent or LIBOR. The
line of credit is scheduled to mature on December 27, 2016. The balance on the line of credit was $2,500,000 at June 30, 2016 and
June 30, 2015.
NOTE 11. DEFERRED REVENUE
Deferred revenue consisted of the following at June 30:
Subscription
Other
F-16
2016
2015
$ 2,221,264 $ 1,742,909
589,011
$ 2,717,094 $ 2,331,920
495,830
Table of Contents
NOTE 12.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for
deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities
are recognized for taxable differences. Temporary differences are the differences between the reported
amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
Net deferred tax liabilities consist of the following components at June 30:
Deferred tax assets:
NOL carryover
Amortization
Allowance for bad debts
Accrued expense
Deferred revenue
Deferred tax liabilities:
Depreciation
Amortization
Valuation allowance
Net deferred tax asset
2016
2015
$ 48,359,356 $ 45,886,227
21,115
-
19,500
29,250
649,635
254,971
676,138
1,059,667
(88,495)
(184,989)
(140,838)
-
(49,429,760) (47,211,777)
-
- $
$
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, 2016 and
2015 due to the following:
Book income (loss)
Stock for services
Stock for charity
Intangible impairment
Change in accrual stock
Life insurance
Meals & entertainment
Change in deferred revenue
Change in allowance for doubtful accounts
Change in depreciation
NOL utilization
Valuation allowance
2015
2016
259,941 $ (1,500,591)
172,502
134,721
61,601
-
583,324
-
211,982
(394,664)
26,438
26,438
12,885
10,785
(41,778)
383,528
(7,800
(7,410)
(137,747)
103,589
(516,928)
-
619,719
-
-
- $
$
$
At June 30, 2016, the Company had net operating loss carry-forwards of approximately $123,998,300 that may be offset
against past and future taxable income from the year 2013 through 2035. No tax benefit has been reported in the June 30, 2016
consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net operating loss carryforwards for Federal
income tax reporting purposes are subject to annual limitations. In January 2009 the Company acquired Prescient Applied
Intelligence, Inc., which had significant net operating loss carry-forwards. Due to change in ownership, Prescient’s net operating
loss carryforwards may be limited as to use in future years. The limitation will be determined on a year-to-year basis.
The Company determines whether it is more likely than not that a tax position will be sustained upon examination based
upon the technical merits of the position. If the more-likely-than-not threshold is met, the Company measures the tax position to
determine the amount to recognize in the financial statements. The Company performed a review of its material tax positions in
accordance with these recognition and measurement standards.
F-17
Table of Contents
The Company has concluded that there are no significant uncertain tax positions requiring disclosure, and there are not
material amounts of unrecognized tax benefits.
The Company includes interest and penalties arising from the underpayment of income taxes in the consolidated statements
of operations in the provision for income taxes. As of June 30, 2016, the Company had no accrued interest or penalties related to
uncertain tax positions.
The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions,
the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before June 30,
2012.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Operating Leases
In September, 2012, the Company entered into an office lease at 299 So. Main Street, Suite 2370, Salt Lake City, Utah,
84111, providing for the lease of approximately 5,300 square feet for a period of seven years, commencing on November 1,
2012. The monthly rent is $13,122.
Minimum future rental payments under the non-cancelable operating leases are as follows:
Year ending June 30:
2017
2018
2019
2020
2021
$
$
$
$
$
165,024
169,993
73,847
-
-
From time to time the Company may enter into or exit from diminutive operating lease agreements for equipment such as
copiers, temporary back up servers, etc. These leases are not of a material amount and thus will not in the aggregate have a material
adverse effect on our business, financial condition, results of operation or liquidity.
NOTE 14. EMPLOYEE BENEFIT PLAN
The Company offers an employee benefit plan under Benefit Plan Section 401(k) of the Internal Revenue Code. Employees
who have attained the age of 18 are eligible to participate. The Company, at its discretion, may match employee’s contributions at a
percentage determined annually by the Board of Directors. The Company does not currently match contributions. There were no
expenses for the years ended June 30, 2016 and 2015.
NOTE 15.
STOCKHOLDERS EQUITY
Officers and Directors Stock Compensation
Effective November 2008, the Board of Directors approved the following compensation for directors who are not employed
by the Company:
● Annual cash compensation of $10,000 payable at the rate of $2,500 per quarter. The Company has the right to pay this
amount in the form of shares of the Company’s common stock.
● Upon appointment, outside independent directors receive a grant of $150,000 payable in shares of the Company’s
restricted Common Stock calculated based on the market value of the shares of Common Stock on the date of grant. The
shares vest ratably over a five-year period.
●
Reimbursement of all travel expenses related to performance of Directors’ duties on behalf of the Company.
Officers, Key Employees, Consultants and Directors Stock Compensation.
In January 2013, the Board of Directors approved the Second Amended and Restated the 2011 Stock Plan (the “ Amended
2011 Plan”), which Amended 2011 Plan was approved by shareholders on March 29, 2013. Under the terms of the Amended 2011
Plan, all employees, consultants and directors of the Company are eligible to participate. The maximum aggregate number of shares
of common stock that may be granted under the 2011 Plan was increased from 250,000 shares to 550,000 shares. A Committee of
independent members of the Company’s Board of Directors administers the 2011 Plan. The exercise price for each share of
common stock purchasable under any incentive stock option granted under the 2011 Plan shall be not less than 100% of the fair
market value of the common stock, as determined by the stock exchange on which the common stock trades on the date of
grant. If the incentive stock option is granted to a shareholder who possesses more than 10% of the Company's voting power, then
the exercise price shall be not less than 110% of the fair market value on the date of grant. Each option shall be exercisable in whole
or in installments as determined by the Committee at the time of the grant of such options. All incentive stock options expire after 10
years. If the incentive stock option is held by a shareholder who possesses more than 10% of the Company's voting power, then the
incentive stock option expires after five years. If the option holder is terminated, then the incentive stock options granted to such
holder expire no later than three months after the date of termination. For option holders granted incentive stock options exercisable
for the first time during any fiscal year and in excess of $100,000 (determined by the fair market value of the shares of common
stock as of the grant date), the excess shares of common stock shall not be deemed to be purchased pursuant to incentive stock
options.
During the year ended June 30, 2016 the Company issued 37,729 shares to its directors and 278,000 shares to employees and
consultants under these plans, 311,538 of which are included in the rollforward of Restricted Stock units below.
F-18
Table of Contents
Restricted Stock Units
Outstanding at July 1, 2014
Granted
Vested and issued
Forfeited
Outstanding at June 30, 2015
Granted
Vested and issued
Forfeited
Outstanding at June 30, 2016
Weighted
Average
Grant Date
Fair Value
($/share)
5.05
9.54
4.74
9.35
5.51
10.51
5.10
6.51
5.82
Restricted
Stock Units
1,586,964 $
145,339
(348,186)
(33,147)
1,350,970
48,228
(311,538)
(36,516)
1,051,144 $
The number of restricted stock units outstanding at June 30, 2016 included 2,000 units that have vested but for which
shares of common stock had not yet been issued pursuant to the terms of the agreement.
As of June 30, 2016, there was approximately $6.1 million of unrecognized stock-based compensation expense under our
equity compensation plans, which is expected to be recognized on a straight line basis over a weighted average period of 5.19 years.
Warrants
Outstanding warrants were issued in connection with private placements of the Company's common stock and with the
Series B Preferred Restructure. The following table summarizes information about fixed stock warrants outstanding
at June 30, 2016:
Range of
exercise prices
Number
Outstanding
Warrants Outstanding
at June 30, 2016
Weighted average
remaining
contractual life
(years)
Warrants Exercisable
at June 30, 2016
Weighted average
exercise price
Number
exercisable
Weighted average
exercise price
$
$
3.50 – 4.00
6.45 – 10.00
1,316,268
100,481
1,416,749
3.26 $
2.49 $
3.21 $
3.92
7.29
4.16
1,316,268 $
100,481 $
1,416,749 $
3.92
7.29
4.16
Preferred Stock
The Company’s certificate of incorporation currently authorizes the issuance of up to 30,000,000 shares of ‘blank check’
preferred stock with designations, rights, and preferences as may be determined from time to time by the Company’s Board of
Directors, of which 700,000 shares are currently designated as Series B Preferred Stock (“Series B Preferred ”) and 300,000 shares
are designated as Series B-1 Preferred Stock (“Series B-1 Preferred ”). As of June 30, 2016, a total of 625,375 shares of Series B
Preferred and 180,213 shares of Series B-1 Preferred were issued and outstanding. Both classes of Series B Preferred Stock pay
dividends at a rate of 7% per annum if paid by the Company in cash, or 9% if paid by the Company in PIK Shares, the Company
may elect to pay accrued dividends on outstanding shares of Series B Preferred in either cash or by the issuance of additional shares
of Series B Preferred (“PIK Shares”).
During the year ended June 30, 2016, the Company issued 66,013 shares for dividends in kind and 40,000 shares in
satisfaction of an accrued bonus payable to the Company's CEO.
NOTE 16. ACQUISITION OF REPOSITRAK
On June 30, 2015, the Company consummated the acquisition of 100% of the outstanding capital stock of ReposiTrak, Inc.
The accompanying audited consolidated financial statements of the Company as of and for the year ended June 30, 2015 contain the
results of operations of ReposiTrak from June 30, 2015. We issued 873,438 shares of our common stock in connection with this
acquisition.
We have accounted for the acquisition as the purchase of a business. The assets acquired and the liabilities assumed of
ReposiTrak have been recorded at their respective fair values. The excess of the purchase price over the fair value of net tangible
and identifiable intangible assets acquired was recorded as goodwill. Goodwill is attributed to buyer-specific value resulting from
expected synergies, including long-term cost savings, as well as industry relationships that are not included in the fair values of
assets. Goodwill will not be amortized, but tested annually for impairment.
F-19
Table of Contents
The purchase price consisted of the 873,438 shares of our common stock. The fair value of the shares issued
was $10,821,897 and was determined using the closing price of our common stock on June 30, 2015. The
price paid to acquire ReposiTrak was $10,830,897, approximately $9,000 of which was for direct transaction
costs associated with the issuance of equity. The net acquisition cost of $10,799,778 which excludes $31,119
of cash acquired from ReposiTrak were allocated based on their estimated fair value of the assets acquired and
liabilities assumed, as follows:
Receivables
Prepaid expense
Customer relationships
Goodwill
Accounts payable
Deferred revenue
Net assets acquired
Common stock issued
Receivables eliminated in consolidation
Cash received in acquisition
$
152,340
17,500
1,314,000
16,077,953
(128,126)
(598,232)
16,835,435
10,821,897
6,035,657
$
22,119
Unaudited pro-forma results of operations for the twelve months ended June 30, 2015 and 2014, as though ReposiTrak had
been acquired as of July 1, 2013, are as follows:
Revenue
Loss from Operations
Net Loss
Net Loss Applicable to Common
Shareholders
Basic and Diluted EPS
Sep 30,
2014
Three Months Ended
Dec 31,
2014
Mar 31,
2015
Jun 30,
2015
Year Ended
2015
Year Ended
2014
$ 2,826,813 $ 2,932,825 $ 2,870,646 $ 2,941,511 $ 11,571,795 $ 9,777,431
(1,290,524) (1,302,437) (3,222,538) (6,862,485) (5,232,552)
(1,317,510) (1,317,858) (3,241,545) (6,926,747) (5,303,773)
(1,046,986)
(1,049,834)
(1,204,307)
(0.07)
(1,471,983) (3,595,537) (3,365,721) (9,637,548) (5,921,664)
(0.34)
(0.53)
(0.18)
(0.08)
(0.20)
NOTE 17. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, August 2015, April 2016 and May 2016, the Financial Accounting Standards Board ("FASB") issued ASU
2014-09 (ASC Topic 606), Revenue from Contracts with Customers, ASU 2015-14 (ASC Topic 606) Revenue from Contracts with
Customers, Deferral of the Effective Date, ASU 2016-10 (ASC Topic 606) Revenue from Contracts with Customers, Identifying
Performance Obligations and Licensing , and ASU 2016-12 (ASC Topic 606) Revenue from Contracts with Customers, Narrow-
Scope Improvements and Practical Expedients, respectively. ASC Topic 606 outlines a single comprehensive model for entities to
use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance,
including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable
financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The amendments in these ASUs are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2017. Early adoption is permitted for annual periods beginning after December 15, 2016. This standard
may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in
the year of adoption. The Company is in the process of assessing the impact, if any, on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09 (ASC Topic 718), Stock Compensation—Improvements to Employee Share-
Based Payment Accounting. The amendments in this ASU are intended to simplify several areas of accounting for share-based
compensation arrangements, including the income tax consequences, classification on the consolidated statement of cash flows and
treatment of forfeitures. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and
interim periods within those annual periods. Early adoption is permitted. The Company is in the process of assessing the impact, if
any, of this ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 (ASC Topic 842), Leases. The ASU amends a number of aspects of lease
accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a
right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The amendments in this ASU
are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is
permitted. The Company is in the process of assessing the impact on its consolidated financial statements.
F-20
Table of Contents
In April 2015 and August 2015, the FASB issued ASU 2015-03 (ASC Subtopic 835-30), Interest-Imputation of Interest:
Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15 (ASC Subtopic 835-30),Presentation and Subsequent
Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements- Amendments to SEC Paragraphs Pursuant to
Staff Announcement at June 18, 2015 EITF Meeting, respectively. The ASUs require that debt issuance costs related to a
recognized debt liability, with the exception of those related to line-of-credit arrangements, be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability. The amendments in these ASUs are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2015. Early adoption is permitted for financial statements that have
not been previously issued. The adoption of this new guidance is not expected to have a material impact on the Company's
consolidated financial statements and disclosures.
NOTE 18. RELATED PARTY TRANSACTIONS
Series B Restructuring
On February 4, 2015, holders of the Company’s Series B Convertible Preferred Stock (“Series B Preferred ”), consisting of
Randall K. Fields, the Company’s Chief Executive Officer, his spouse, and Robert W. Allen, a director of the Company (the
“Holders”), entered into a restructuring agreement (the “Restructuring Agreement”), pursuant to which the Holders consented to the
filing of an amendment (the “Series B Amendment”) to the Certificate of Designation of the Relative Rights, Powers and Preference
of the Series B Preferred (the “Series B Certificate of Designation”), pursuant to which (i) the rate at which the Series B Preferred
accrues dividends was lowered to 7% per annum if paid by the Company in cash, or 9% if paid by the Company in PIK Shares (as
defined below), (ii) the Company may now elect to pay accrued dividends on outstanding shares of Series B Preferred in either cash
or by the issuance of additional shares of Series B Preferred (“PIK Shares”), (iii) the conversion feature of the Series B Preferred
was eliminated, and (iv) the number of shares of the Company's preferred stock designated as Series B Preferred was increased from
600,000 to 900,000 shares (the “Series B Restructuring”). In consideration for the Series B Restructuring, the Company issued to the
Holders: (y) an aggregate of 214,198 additional shares of Series B Preferred, which shares had a stated value equal to the amount
that, but for the Series B Restructuring, would have been paid to the Holders as dividends over the next five years (“Additional
Shares”), and (z) five-year warrants to purchase an aggregate of 1,085,068 shares of common stock for $4.00 per share (“Series B
Warrants”), an amount and per share purchase price equal to what the Holders would otherwise be entitled to receive upon
conversion of their shares of Series B Preferred (“Warrant Shares”).
The terms of the Series B Restructuring were amended on March 31, 2015 as follows: (i) the Series B Certificate of
Designation was further amended (the “Second Series B Amendment”) to (x) reduce the number of shares of the Company’s
preferred stock designated thereunder from 900,000 to 700,000, (y) require that, should the Company pay dividends on the Series B
Preferred in PIK Shares, shares Series B-1 Preferred will be issued, rather than shares of Series B Preferred, and (z) in the event any
Holder elects to exercise a Series B Warrant, one share of Series B Preferred will be automatically converted into one share of Series
B-1 Preferred for every 2.5 Warrant Shares received by such Holder; and (ii) the Restructuring Agreement was amended to
substitute the Additional Shares for shares of Series B-1 Preferred. The Second Series B Amendment was filed with the Nevada
Secretary of State on March 31, 2015.
The Company issued 58,103 and 7,910 PIK Shares to Messrs. Fields and Allen in the year ended June 30, 2016, and 38,055,
5,488, and 657 PIK Shares to Messrs. Fields, Allen, and Ms. Fields in the year ended June 30, 2015, respectively.
Service Agreement. During the year ended June 30, 2016, the Company was a party to a Service Agreement with Fields
Management, Inc. (“FMI”), pursuant to which FMI provided certain executive management services to the Company, including
designating Mr. Randall K. Fields to perform the functions of President and Chief Executive Officer for the Company. Randall K.
Fields, FMI’s designated Executive, who also serves as the Company’s Chairman of the Board of Directors, controls FMI.
The Company had payables of $32,253 and $37,893 to FMI at June 30, 2016 and 2015 respectively, under this Agreement.
NOTE 19.
SUBSEQUENT EVENTS
Subsequent to June 30, 2016, the Company issued 57,117 shares of common stock in connection with issuances under the
Company's Employee Stock Purchase Plan and for the vesting of employee stock grants. The Company also issued 28,011 shares of
Series B-1 Preferred for dividends paid in kind on the outstanding shares of Series B Preferred, and for an accrued bonus.
In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events, through the
filing date and noted no additional subsequent events that are reasonably likely to impact the financial statements.
F-21
Park City Group, Inc. & Subsidiaries
Exhibit 31.1
Certification of Principal Executive and Principal Financial Officer
Pursuant To Section 302 of The Sarbanes-Oxley Act Of 2002
I, Randall K. Fields, certify that:
1.
2.
3.
4.
5.
I have reviewed this annual report on Form 10-K for the period ended June 30, 2016 of Park City Group, Inc.;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under my supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: September 7, 2016
/s/ Randall K. Fields
Principal Executive Officer, CEO
Park City Group, Inc. & Subsidiaries
Certification of Principal Executive and Principal Financial Officer
Pursuant To Section 302 of the Sarbanes-Oxley Act Of 2002
Exhibit 31.2
I, Todd Mitchell, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K for the period ended June 30, 2016 of Park City Group, Inc.;
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made,
not misleading with respect to the period covered by this annual report;
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under my supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual
report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d. Disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
5.
a. All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably
likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: September 7, 2016
/s/ Todd Mitchell
Principal Financial Officer, CFO
Park City Group, Inc. & Subsidiaries
Certification Pursuant To
18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 of The Sarbanes-Oxley Act Of 2002
Exhibit 32.1
In connection with the Annual Report of Park City Group, Inc. (the “Company”) on Form 10-K for the year ending June
30, 2016 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Randall K. Fields, Principal
Executive Officer of the Company and I, Todd Mitchell, Principal Financial Officer of the Company, do hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
2.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of
operations of the Company.
Dated: September 7, 2016
/s/ Randall K. Fields
Principal Executive Officer, CEO
Dated: September 7, 2016
/s/ Todd Mitchell
Principal Financial Officer, CFO