PARK CITY GROUP INC - Quarter Report: 2008 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the quarterly period ended September 30, 2008.
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934.
|
For
the transition period from
to .
Commission
File Number 000-03718
PARK
CITY GROUP, INC.
(Exact
name of small business issuer as specified in its charter)
|
Nevada
|
37-1454128
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
|
3160
Pinebrook Road; Park City, UT 84098
|
(435)
645-2000
|
|
(Address of
principal executive offices)
|
(Registrant's
telephone number)
|
Indicate
by check market whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
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 ¨ Accelerated filer ¨
Non-accelerated
filer ¨ Smaller
reporting company [X]
(Do not check if smaller reporting
company)
Indicate
by checkmark if whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ]
Yes [X] No
State the
number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date.
|
Class
|
Outstanding as of November 13, 2008
|
|
Common
Stock, $.01 par value
|
9,434,903
|
PARK
CITY GROUP, INC.
Table of Contents to Quarterly Report on Form 10-Q
|
1
|
||||
| Consolidated Condensed Statements of Operations for the Three Months Ended September 30, 2008 and 2007 (Unaudited) |
2
|
|||
| Consolidated Condensed Statements of Cash Flows for the Three Months Ended September 30, 2008 and 2007 (Unaudited) |
3
|
|||
| Notes to Consolidated Condensed Financial Statements |
4
|
|||
|
9
|
||||
|
18
|
||||
|
19
|
||||
|
20
|
||||
|
20
|
||||
|
20
|
||||
|
20
|
||||
|
20
|
||||
|
20
|
||||
|
21
|
||||
|
Exhibit
31
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|||
|
Exhibit
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|||
-i-
PARK
CITY GROUP, INC.
Consolidated Condensed Balance Sheets
|
Assets
|
September 30, 2008 (unaudited)
|
June 30, 2008
|
||||||
|
Current
Assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 321,873 | $ | 865,563 | ||||
|
Restricted
cash
|
-
|
1,940,000 | ||||||
|
Receivables,
net of allowance of $68,000 at September 30, 2008 and June 30,
2008
|
795,803 | 1,004,815 | ||||||
|
Unbilled
receivables
|
77,052 | 116,362 | ||||||
|
Prepaid
expenses and other current assets
|
68,416 | 56,438 | ||||||
|
Total
current assets
|
1,263,144 | 3,983,178 | ||||||
|
Property
and equipment, net
|
452,405 | 494,459 | ||||||
|
Other
assets:
|
||||||||
|
Equity
method investment
|
2,569,981 | - | ||||||
|
Deposits
and other assets
|
122,391 | 47,667 | ||||||
|
Capitalized
software costs, net
|
567,870 | 660,436 | ||||||
|
Total
other assets
|
3,260,242 | 708,103 | ||||||
|
Total
assets
|
$ | 4,975,791 | $ | 5,185,740 | ||||
|
Liabilities
and Stockholders'
Equity
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$ | 468,191 | $ | 427,582 | ||||
|
Accrued
liabilities
|
421,160 | 410,396 | ||||||
|
Deferred
revenue
|
256,933 | 480,269 | ||||||
|
Current
portion of capital lease obligations
|
141,731 | 143,532 | ||||||
|
Line
of credit
|
700,000 | - | ||||||
|
Note
payable - related party
|
2,199,000 | - | ||||||
|
Note
payable
|
- | 1,940,000 | ||||||
|
Total
current liabilities
|
4,187,015 | 3,401,779 | ||||||
|
Long-term
liabilities
|
||||||||
|
Capital
lease obligations, less current portion
|
166,553 | 200,446 | ||||||
|
Total
liabilities
|
4,353,568 | 3,602,225 | ||||||
|
Commitments
and contingencies
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock, $0.01 par value, 30,000,000 shares authorized; 612,535 and 605,036
shares of Series A Convertible Preferred issued and outstanding at
September 30, 2008 and June 30, 2008, respectively
|
6,125 | 6,050 | ||||||
|
Common
stock, $0.01 par value, 50,000,000 shares authorized; 9,432,373 and
9,217,539 issued and outstanding at September 30, 2008 and June 30, 2008,
respectively
|
94,324 | 92,176 | ||||||
|
Additional
paid-in capital
|
27,066,569 | 26,467,700 | ||||||
|
Subscriptions
receivable
|
(352,500 | ) | - | |||||
|
Accumulated
deficit
|
(26,192,295 | ) | (24,982,411 | ) | ||||
|
Total
stockholders' equity
|
622,223 | 1,583,515 | ||||||
|
Total
liabilities and stockholders' equity
|
$ | 4,975,791 | $ | 5,185,740 | ||||
See
accompanying notes to consolidated condensed financial statements.
PARK
CITY GROUP, INC.
Consolidated
Condensed Statements of Operations
(Unaudited)
For
the Three Months Ended September 30, 2008 and 2007
|
Three
Months Ended September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues:
|
||||||||
|
Subscriptions
|
$ | 58,104 | $ | 85,917 | ||||
|
Maintenance
|
288,632 | 378,806 | ||||||
|
Professional
services and other revenue
|
145,302 | 126,472 | ||||||
|
Software
licenses
|
38,240 | 263,069 | ||||||
|
Total
revenues
|
530,278 | 854,264 | ||||||
|
Operating
expenses:
|
||||||||
|
Cost
of services and product support
|
580,544 | 579,854 | ||||||
|
Sales
and marketing
|
300,472 | 419,301 | ||||||
|
General
and administrative
|
415,241 | 621,539 | ||||||
|
Depreciation
and amortization
|
135,563 | 111,969 | ||||||
|
Total
operating expenses
|
1,431,820 | 1,732,663 | ||||||
|
Loss
from operations
|
(901,542 | ) | (878,399 | ) | ||||
|
Other
income (expense):
|
||||||||
|
Income
from patent activities
|
- | 200,000 | ||||||
|
Loss
on equity method investment
|
(197,205 | ) | - | |||||
|
Interest
(expense) income
|
(22,741 | ) | 23,675 | |||||
|
Loss
before income taxes
|
(1,121,488 | ) | (654,724 | ) | ||||
|
(Provision)
benefit for income taxes
|
- | - | ||||||
|
Net
loss
|
(1,121,488 | ) | (654,724 | ) | ||||
|
Dividends
on preferred stock
|
(88,396 | ) | (82,492 | ) | ||||
|
Net
loss applicable to common shareholders
|
$ | (1,209,884 | ) | $ | (737,216 | ) | ||
|
Weighted
average shares, basic and diluted
|
9,303,000 | 9,022,000 | ||||||
|
Basic
and diluted loss per share
|
$ | (0.13 | ) | $ | (0.08 | ) | ||
See
accompanying notes to consolidated condensed financial statements.
PARK
CITY GROUP, INC.
Consolidated
Condensed Statements of Cash Flows
(Unaudited)
For
the Three Months Ended September 30, 2008 and 2007
|
Three
Months Ended September 30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$ | (1,121,488 | ) | $ | (654,724 | ) | ||
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
|
Depreciation
and amortization
|
135,563 | 111,969 | ||||||
|
Bad
debt expense
|
- | 30,042 | ||||||
|
Stock
issued for services and expenses
|
20,000 | 40,000 | ||||||
|
Loss
on equity method investment
|
197,205 | - | ||||||
|
Decrease
(increase) in:
|
||||||||
|
Trade
Receivables
|
209,012 | (501,368 | ) | |||||
|
Unbilled
receivables
|
39,310 | (4,394 | ) | |||||
|
Prepaids
and other assets
|
(86,702 | ) | (26,784 | ) | ||||
|
(Decrease)
increase in:
|
||||||||
|
Accounts
payable
|
40,610 | 238,502 | ||||||
|
Accrued
liabilities
|
(2,643 | ) | (27,482 | ) | ||||
|
Deferred
revenue
|
(223,336 | ) | (256,550 | ) | ||||
|
Net
cash used in operating activities
|
(792,469 | ) | (1,050,789 | ) | ||||
|
Cash
Flows From Investing Activities:
|
||||||||
|
Purchase
of equity method investment
|
(2,767,186 | ) | - | |||||
|
Proceeds
from sale of patent
|
- | 200,000 | ||||||
|
Purchase
of property and equipment
|
(943 | ) | (274,102 | ) | ||||
|
Release
of restricted cash
|
1,940,000 | - | ||||||
|
Capitalization
of software costs
|
- | (62,598 | ) | |||||
|
Net
cash used in investing activities
|
(828,129 | ) | (136,700 | ) | ||||
|
Cash
Flows From Financing Activities:
|
||||||||
|
Net increase in lines of credit
|
700,000 | - | ||||||
|
Offering costs associated with issuance of stock
|
- | (24,125 | ) | |||||
|
Proceeds from issuance of stock
|
153,602 | - | ||||||
|
Receipt of subscription receivable
|
- | 106,374 | ||||||
|
Proceeds from issuance of notes payable
|
2,199,000 | - | ||||||
|
Payments on notes payable and capital leases
|
(1,975,694 | ) | (19,097 | ) | ||||
|
Net
cash provided by financing activities
|
1,076,908 | 63,152 | ||||||
|
Net
decrease in cash
|
(543,690 | ) | (1,124,337 | ) | ||||
|
Cash
and cash equivalents at beginning of period
|
865,563 | 3,273,424 | ||||||
|
Cash
and cash equivalents at end of period
|
$ | 321,873 | $ | 2,149,087 | ||||
|
Supplemental
Disclosure of Cash Flow Information:
|
||||||||
|
Cash paid for income taxes
|
$ | - | $ | - | ||||
|
Cash paid for interest
|
$ | 33,637 | $ | 42,581 | ||||
|
Supplemental
Disclosure of Non-Cash Investing and Financing Activities:
|
||||||||
|
Dividends accrued on preferred stock
|
$ | 88,396 | $ | 82,492 | ||||
|
Dividends paid with preferred stock
|
$ | 74,990 | $ | - | ||||
See
accompanying notes to consolidated condensed financial statements.
PARK
CITY GROUP, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
September
30, 2008
NOTE 1 – ORGANIZATION AND DESCRIPTION
OF BUSINESS
Park City
Group, Inc. (the "Company") is incorporated in the state of Nevada, and the
Company’s 98.76% owned subsidiary Park City Group, Inc. is incorporated in the
state of Delaware. All intercompany transactions and balances have
been eliminated in consolidation.
The
Company designs, develops, markets and supports proprietary software products.
These products are designed to be used in 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 around 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 distributers, and manufacturing companies which
have operations in North America, Europe, Asia and the Pacific Rim.
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
Basis
of Presentation
The
accompanying unaudited consolidated condensed financial statements of the
Company have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission (“SEC”) on a basis consistent with the
Company’s audited annual financial statements and, in the opinion of management,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial information set forth therein. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have
been condensed or omitted pursuant to SEC rules and regulations, although the
Company believes that the following disclosures, when read in conjunction with
the audited annual financial statements and the notes thereto included in the
Company’s most recent annual report on Form 10−KSB, are adequate to make the
information presented not misleading. Operating results for the three months
ended September 30, 2008 are not necessarily indicative of the operating results
that may be expected for the fiscal year ending June 30, 2009.
Recent
Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”, and SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements, an amendment of Accounting Research Bulletin No.
51.” SFAS No. 141R will change how business acquisitions are accounted for
and will impact financial statements both on the acquisition date and in
subsequent periods. SFAS No. 160 will change the accounting and reporting
for minority interests, which will be recharacterized as non-controlling
interests and classified as a component of equity. SFAS No. 141R and SFAS
No. 160 are effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Early adoption is not
permitted. The Company is evaluating the impact of SFAS No. 141(R) on its
condensed consolidated financial statements. The Company does not expect the
adoption of these new standards to have an impact on its financial
statements.
In June
2007, the EITF reached a consensus on EITF Issue No. 07-03, “Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities” ("EITF 07-03"). EITF 07-03 concludes that
non-refundable advance payments for future research and development activities
should be deferred and capitalized until the goods have been delivered or the
related services have been performed. If an entity does not expect the goods to
be delivered or services to be rendered, the capitalized advance payment should
be charged to expense. This consensus is effective for financial statements
issued for fiscal years beginning after December 15, 2007, and interim
periods within those fiscal years. Earlier adoption is not permitted. The effect
of applying the consensus will be prospective for new contracts entered into on
or after that date. We are evaluating the implications of this
standard.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which addresses how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under
U.S. generally accepted accounting principles. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact SFAS No. 157 will have on the Company's
financial position, results of operations and liquidity and its related
disclosures.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("FAS 159"). SFAS No. 159 allows companies to make an election, on an individual instrument basis, to report financial assets and liabilities at fair value. The election must be made at the inception of a transaction and may not be reversed. The election may also be made for existing financial assets and liabilities at the time of adoption. Unrealized gains and losses on assets or liabilities for which the fair value option has been elected are to be reported in earnings. SFAS No. 159 requires additional disclosures for instruments for which the election has been made, including a description of management's reasons for making the election. SFAS No. 159 is effective as of fiscal years beginning after November 15, 2007 and is to be adopted prospectively and concurrent with the adoption of SFAS No. 157. The Company is currently evaluating the impact SFAS No. 159 will have on the Company's financial position, results of operations and liquidity and its related disclosures.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from these estimates. The Company’s
critical accounting policies and estimates include, among others, valuation
allowances against deferred income tax assets, revenue recognition, stock-based
compensation, capitalization of software development costs and impairment and
useful lives of long-lived assets.
Net
Loss Per Common Share
Basic net
loss per common share ("Basic EPS") excludes dilution and is computed by
dividing net loss by the weighted average number of common shares outstanding
during the period. Diluted net 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
three months ended September 30, 2008 and 2007 options and warrants to purchase
1,017,443 and 1,447,517 shares of common stock, respectively, were not included
in the computation of diluted EPS due to the dilutive effect. For
three months ended September 30, 2008, 2,041,579 shares of common stock issuable
upon conversion of the Company’s Series A Convertible Preferred stock were not
included in the diluted EPS calculation as the effect would have been
anti-dilutive.
Use
of Equity Method on Investment
The
Company accounts for its investments in companies subject to significant
influence using the equity method of accounting, under which, the Company’s
pro-rata share of the net income (loss) of the affiliate is recognized as income
(loss) in the Company’s income statement and the Company’s share of the equity
of the affiliate is reflected in the Company’s capital stock account and added
to the investment on the balance sheet.
For the
three months ended September 30, 2008 the Company recognized a $197,205 loss on
equity method investment calculated using its 8% ownership of the fully
converted amount of common shares outstanding that the Company
owns.
NOTE 3 –
LIQUIDITY
As shown
in the consolidated condensed financial statements, the Company had losses
applicable to common shareholders of $1,209,884 and $737,216 for the three
months ending September 30, 2008 and 2007, respectively. The increase
in the applicable loss to common shareholders is the result of: (1) a $324,000
decrease in total revenues, (2) the $200,000 loss received in conjunction with
the Company’s investment in Prescient Applied Intelligence, Inc. (“Prescient”) ,
(3) a decrease in income from patent activities of $200,000, and (4) net
interest expense increase of $46,000. This increase in loss applicable to common
shareholders was partially offset by a decrease of $300,000 in total operating
expenses for the three months ended, September 30, 2008 when compared with the
same period in 2007. The Company had negative cash flow from operations during
the three months ended September 30, 2008 in the amount of
$792,469.
The Company believes that
current cash flows from operations will allow the Company to fund its currently
anticipated operations, capital spending and debt service requirements during
the year ending June 30, 2009. The financial statements do not
reflect any adjustments should the Company’s working capital operations and
other financing be insufficient to meet spending and debt service
requirements.
NOTE 4 – STOCK-BASED
COMPENSATION
Park City
Group has agreements with a number of employees to issue stock grants vesting
over a four year term. 25% of these bonuses are to be paid on each anniversary
of the grant dates.
Total
shares under these agreements vesting and payable annually to employees is
110,210. The stock grant agreements were dated effective between November 2,
2007 and July 1, 2008.
NOTE 5 – OUTSTANDING STOCK
OPTIONS
The
following tables summarize information about fixed stock options and warrants
outstanding and exercisable at September 30, 2008:
|
Options and Warrants
Outstanding
at September 30, 2008
|
Options
and Warrants Exercisable
at September 30, 2008
|
||||||||||||||||||||
|
Range
of exercise prices
|
Number
Outstanding
at September
30, 2008
|
Weighted
average
remaining
contractual
life (years)
|
Weighted
average
exercise
price
|
Number
Exercisable
at September 30, 2008
|
Weighted
average
exercise
price
|
||||||||||||||||
| $ | 1.50 - $2.76 | 95,250 | 2.44 | $ | 2.54 | 95,250 | $ | 2.54 | |||||||||||||
| $ | 3.30 - $4.00 | 922,193 | 2.65 | 3.71 | 922,193 | 3.71 | |||||||||||||||
| 1,017,963 | 2.63 | $ | 3.60 | 1,017,963 | $ | 3.60 | |||||||||||||||
NOTE 6 – RELATED PARTY
TRANSACTIONS
On August
28, 2008, the Company entered into two Stock Purchase Agreements (the “Purchase
Transaction”) relating to the acquisition by the Company of shares
of Series E Preferred Stock from existing stockholders of Prescient
Applied Intelligence, Inc., a Delaware corporation (“Prescient”) (the “Series E
Preferred Stock”) in exchange for cash.
In
connection with the acquisition of Prescient, on September 2, 2008, Park City
Group, Inc. (the “Company”) executed and delivered three promissory notes with
officers and directors of the Company including its Chief Executive Officer in
an aggregate amount of $2,199,000. Each of such notes is unsecured,
due on or before December 1, 2008 and bears interest at the rate of 10% per
annum.
The loan
proceeds were used by the Company to fund a portion of the purchase price of
shares of Series E Preferred Stock of Prescient Applied Intelligence, Inc.,
a Delaware corporation (“Prescient”) purchased by the Company. The purchase
transaction was the first step in a plan to acquire Prescient in a merger
transaction. The purchase transaction and the merger transaction are
described in a Form 8-K filed by the Company on September 3, 2008 and a Schedule
13D filed by the Company with the Securities and Exchange Commission on
September 15, 2008. See note 11.
In
March 2006, the Company obtained a note payable from a bank in the amount of
$1,940,000. Riverview Financial Corporation (Riverview), a wholly
owned affiliate of the Company’s CEO, guaranteed this note payable from
inception through June 2007 and received a fee of 3% per annum of the
outstanding balance of the note payable paid monthly as consideration for the
guarantee. In June 2007, using a portion of the proceeds from the
sale of its Series A Convertible Preferred Stock, the Company collateralized the
note payable from its bank and eliminated its guarantor Riverview. The $1.94
million of collateral was reflected on the balance sheet as restricted
cash. In March 2008 the note was extended. The extended
maturity date for the note payable was June 30, 2008 and the note was retired in
July 2008 with restricted cash.
NOTE 7 – PROPERTY AND
EQUIPMENT
Property
and equipment are stated at cost and consist of the following as
of:
|
September
30, 2008 (Unaudited)
|
June
30, 2008
|
|||||||
|
Computer
equipment
|
$ | 573,067 | $ | 572,123 | ||||
|
Furniture
and equipment
|
307,278 | 307,278 | ||||||
|
Leasehold
improvements
|
135,968 | 135,968 | ||||||
| 1,016,313 | 1,015,369 | |||||||
|
Less
accumulated depreciation and amortization
|
(563,908 | ) | (520,910 | ) | ||||
| $ | 452,405 | $ | 494,459 | |||||
NOTE 8 – CAPITALIZED
SOFTWARE COSTS
Capitalized
software costs consist of the following as of:
|
September
30, 2008 (Unaudited)
|
June
30, 2008
|
|||||||
|
Capitalized
software costs
|
$ | 2,174,305 | $ | 2,174,305 | ||||
|
Less
accumulated amortization
|
(1,606,435 | ) | (1,513,869 | ) | ||||
| $ | 567,870 | $ | 660,436 | |||||
NOTE 9 – ACCRUED
LIABILITIES
| Company Accrued liabilities consist of the following as of: | ||||||||
|
September
30, 2008 (Unaudited)
|
June
30, 2008
|
|||||||
|
Accrued
compensation
|
$ | 145,211 | $ | 157,470 | ||||
|
Other
accrued liabilities
|
90,298 | 58,468 | ||||||
|
Preferred
dividends payable
|
88,828 | 75,422 | ||||||
|
Accrued
stock compensation
|
84,784 | 89,456 | ||||||
|
Accrued
board compensation
|
7,500 | 20,000 | ||||||
|
Accrued
legal fees
|
4,539 | 9,580 | ||||||
| $ | 421,160 | $ | 410,396 | |||||
NOTE 10 – INCOME
TAXES
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction, and various states. 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 2000.
The
Internal Revenue Service (IRS) commenced an examination of the Company’s U.S.
income tax returns for 2004 in July 2007. The examination was completed in July
2008 and resulted in a proposed adjustment of $446,681 and $46,478 to the
Company’s net operating loss (NOL) carryforward for 2004 and 2005, respectively.
The proposed adjustment was the result of interest that was accrued
by the Company in accordance with certain related party debt with Riverview
Financial but was never required to be paid in subsequent years. The Company
agreed with the proposed adjustment resulting in a reduction of its NOL in the
amount of $493,159. The accrued interest adjustments do not result
in a material change to the Company’s financial position given the amount of its
net operating loss carryforward.
The
Company adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting
for Uncertainty in Income Taxes, on July 1, 2007. The Company did not
record any amounts as a result of the implementation of FIN 48.
Included
in the balance at September 30, 2008 are nominal amounts of tax positions for
which the ultimate deductibility is highly certain but for which there is
uncertainty about the timing of such deductibility. Because of the
impact of deferred tax accounting, other than interest and penalties, the
disallowance of the shorter deductibility period would not affect the annual
effective tax rate but would accelerate the payment of cash to the taxing
authority to an earlier period.
The
Company’s policy is to recognize interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating
expenses. During the three months ended September 30, 2008 and 2007,
the Company did not recognize any interest or penalties. The Company
does not have any interest and penalties accrued at September 30, 2008, and June
30, 2008.
NOTE 11 – EQUITY METHOD
INVESTMENT
On August
28, 2008, the Company entered into two Stock Purchase Agreements (the “Purchase
Transaction”) relating to the acquisition by the Company of shares
of Series E Preferred Stock from existing stockholders of Prescient
Applied Intelligence, Inc., a Delaware corporation (“Prescient”) (the “Series E
Preferred Stock”) in exchange for cash.
As a
result of the Purchase Transaction, the Company now owns approximately 43% of
Prescient’s Series E Preferred Stock or 8% of the total outstanding common
shares on a fully converted basis. The Purchase Transaction was consummated
contemporaneously with the execution of an Agreement and Plan of Merger (“Merger
Transaction”), pursuant to which the Company intends to merge Prescient with and
into a wholly-owned subsidiary of the Company. The Merger Transaction
provides that Prescient stockholders not parties to the Purchase Transaction
will receive cash for their shares of Prescient Common Stock, Series E Preferred
Stock and Series G Preferred Stock upon consummation of the merger
(“Merger”).
In
connection with the Purchase Transaction, the sellers of the Series E
Preferred Stock also entered into Lockup and Voting Agreements whereby they,
subject to certain limited exceptions, agreed (i) not to transfer any of their
shares of Prescient Common Stock or Series G Preferred Stock prior to completion
or termination of the Merger and (ii) to vote their shares of Prescient
Common Stock and Series G Preferred Stock in favor of the Merger.
Forms of
the Agreement and Plan of Merger, Stock Purchase Agreements and Lockup and
Voting Agreements have been filed together with form 8-K on September 3,
2008. Based on these agreements, the Company’s voting control of
approximately 43% of Prescient’s common stock and the Company's president
and CEO now serving as Prescient's CEO, the Company has accounted for its
investment in Prescient using the equity method.
Item
2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Form
10-KSB for the year ended June 30, 2008 incorporated herein by
reference.
Forward-Looking
Statements
This
quarterly report on Form 10-Q contains forward looking
statements. The words or phrases "would be," "will allow," "intends
to," "will likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," or similar expressions are intended to identify
"forward-looking statements." Actual results could differ materially
from those projected in the forward looking statements as a result of a number
of risks and uncertainties, including those risks factors contained in our June
30, 2008 Form 10-KSB annual report, incorporated herein by
reference. Statements made herein are as of the date of the filing of
this Form 10-Q with the Securities and Exchange Commission and should not be
relied upon as of any subsequent date. Unless otherwise required by
applicable law, we do not undertake, and specifically disclaim any obligation,
to update any forward-looking statements to reflect occurrences, developments,
unanticipated events or circumstances after the date of such
statement.
Overview
Park City
Group develops and markets patented computer software and profit optimization
consulting services that help its retail customers to reduce their inventory and
labor costs; the two largest controllable operating expenses in the retail
industry, while increasing the customer’s sales, reducing shrink, increasing
gross margin, contribution margin, and thus improving the bottom line
results. Our suite of products, Fresh Market Manager, ActionManager™
and Supply Chain Profit Link (“SCPL”) are designed to address the needs of
multi-store retailers and suppliers in store operations management,
manufacturing, and both durable goods and perishable product
management.
Because
the product concepts originated in the environment of actual multi-unit retail
chain ownership, the products are strongly oriented to an operation’s bottom
line results. The products use a contemporary technology platform
that is capable of supporting existing product lines and can also be expanded to
support related products. The Company continues to transition its
software business from a licensed based approach to its new subscription based
model through its targeted Supply Chain Profit Link (“SCPL”) strategy. The
subscription based SCPL tool and analytics group focuses on leveraging
multi-store retail chains, C-Store Chains, and their respective suppliers in
order to reduce shrink, labor costs, and increase profitability.
We have
experienced recent significant developments that we expect to have a positive
impact on the company, although there is no assurance that the expected positive
impact will take place. Recent developments that occurred as of and
during the three months ended, September 30, 2008 included the
following:
|
·
|
The
Company currently has 6 active software implementations in process as of
September 30, 2008.
|
|
·
|
The
Company is currently in the process of acquiring and merging with
Prescient Applied Intelligence, Inc. (OTCBB: PPID) and believes the
resultant merger will significantly increase its scale and access to both
suppliers and leading industry
retailers.
|
Results of Operations For
The Three Months Ended September 30, 2008 and 2007
Total
Revenues
Total
revenues were $530,278 and $854,264 for the three months ended September 30,
2008 and 2007, respectively, a 38% decrease. This $323,986 decrease
in total revenues is the result of (1) a $224,829 decrease in license revenues,
and, (2) an $18,830 increase in professional services and other revenues and,
(3) a $27,813 decrease in subscriptions revenue, and (4) a $90,174 decrease in
maintenance revenue. This decrease was primarily made up of the $224,829
decrease in license revenues that was further impacted as a result of two
maintenance customers who did not renew for fiscal 2009. Management
believes that as their focus continues to be aimed at marketing the Company’s
products and services on a subscription basis, there may be periodic impacts to
the Company’s software sales on a license basis. Furthermore, given
the historical stability of the Company’s software products, customers who have
utilized the software for some time may not perceive the ongoing value of
renewing maintenance contracts annually in advance.
Subscription
Revenue
Subscription
revenues were $58,104 and $85,917, for the three months ended September 30, 2008
and 2007 respectively; a decrease of 32% in the three months ended, September
30, 2008 when compared with the three months ended, September 30,
2007. This $27,813, decrease was the result of two customers that did
not renew their annual subscriptions or who did not gain acceptance from their
supplier sponsor. The Company continues to focus its strategic
initiatives to increase the number of retailers, suppliers and manufacturers
that use its software on a subscription basis using a introductory trial to
illustrate results to its prospects. However, while Management believes that
marketing its Supply Chain Profit Link (SCPL) software as a renewable and
recurring subscription is an effective strategy, it cannot be assured that
subscribers will renew the service at the same level in future years, propagate
services to new categories, or recognize the need for expanding the service
offering to the Company’s suite of actionable products and
services.
Maintenance
Revenue
Maintenance
revenues were $288,632 and $378,806 for the three months ended September 30,
2008 and 2007, respectively, a decrease of 24% in the three months ended,
September 30, 2008 compared with the three months ended, September 30,
2007. The $90,174 decrease is primarily due to the loss of two
customer maintenance agreements. Due to the historical reliability of the
Company’s suite of products, from time to time, customers may not perceive the
ongoing value of paying for maintenance when the frequency of maintenance
activities needed by a customer becomes infrequent.
Professional
Services and Other Revenue
Professional
Services and other revenue were $145,302 and $126,472 for the three months ended
September 30, 2008 and 2007, respectively, an increase of 15%. This
$18,830 increase is due to the increase in analytics services provided to one
national retail grocer chain to analyze its shrink, out-of-stocks, and other key
performance indicators. Management believes that professional
services may experience periodic fluctuations as the need for its analytic’s
offerings and change-management services becomes a natural addition to its
software as a service (SaaS) offerings.
License
Revenue
Software
license revenues were $38,240 and $263,069 for the three months ended September
30, 2008 and 2007, respectively, a decrease of 85%. This $224,829 decrease in
license revenues in the three months ended September 30, 2008 when compared with
the same period ended September 2007 is the result of the Company’s efforts to
focus its resources on recurring subscription based revenues. Although the
Company has not eliminated the sale of its suite of products on a license basis,
it is difficult to predict and forecast future software license
sales.
Cost
of Services and Product Support
Cost of
services and product support were $580,544 and $579,854 for the three months
ended September 30, 2008 and 2007 respectively, a 0.12% increase in the three
months ended September 30, 2008 compared with the three months ended September
30, 2007. In fiscal 2008, the Company has put in place the necessary
resources and staff in order to address its business strategy of software on a
subscription. This modification of its business strategy has resulted
in the automation of certain IT data gathering and processing which has resulted
in a nominal growth in its expenditures related to ongoing product support and
IT services.
Sales
and Marketing Expense
Sales
and marketing expenses were $300,472 and $419,301 for the three months ended
September 30, 2008 and 2007, respectively, a 28% decrease. This
$118,829 decrease in the three months ended September 30, 2008 when compared
with the three months ended September 30, 2007 is attributable to: (1) a $57,000
decrease in reliance on outside service consultants, (2) a $22,000 decrease in
sales related travel costs as a result of contacting prospects and customers
through web-conferencing and other telecom means, and (3) a $40,000 reduction in
indirect sales staff and fewer trade shows.
General
and Administrative Expense
General
and administrative expenses were $415,241 and $621,539 for the three months
ended September 30, 2008 and 2007, respectively, a 33% decrease in the three
months ended September 30, 2008 compared with the three months ended September
30, 2007. This $206,298 decrease is due to the following: (1) a
$106,000 decrease in legal fees associated with the Company’s defense of its
patents, (2) a $80,000 decrease in stock compensation expense under FAS 123R,
and, (3) a $20,000 decrease in consulting costs associated with compliance with
the 2002 Sarbanes Oxley Act.
Depreciation
and Amortization Expense
Depreciation
and Amortization expenses were $135,563 and $111,969 for the three months ended
September 30, 2008 and 2007, respectively, an increase of 21% in the three
months ended September 30, 2008 compared with the three months ended September
30, 2007. This increase of $23,594 is attributable to software costs
capitalized in prior years and the resultant amortization due to the completion
of the significant enhancements and the release of the developed
product.
Other
Income and Expense
There was
no income from patent activities for the three months ended September 30, 2008
when compared with income from patent activities of $200,000 for the three
months ended September 30, 2007. As a result of the Company’s ownership of
approximately 8% of the fully converted outstanding common shares of Prescient
Applied Intelligence, Inc. (“Prescient”) and voting control of 43% of
Prescient’s common stock, and in accordance with the Equity Method of accounting
for investment, the Company recognized a loss of $197,205 for the three months
ended September 30, 2008 (See Note 11.) Net interest expense was $22,741 for the
three months ended September 30, 2008 compared with net interest income of
$23,675 for the three months ended September 30, 2007. This $46,416
change in net interest income in the three months ended September 30, 2008 when
compared with the three months ended September 30, 2007 is the result of (1)
interest expenses on short term notes payable with directors and officers issued
in connection with financing arrangements associated with the acquisition of
Prescient (See Note 6.), and (2) the Company using its restricted cash to pay
off a note payable with its bank in July 2008.
Preferred
Dividends
Dividends
accrued on preferred stock was $88,396 for the three months ended September 30,
2008 when compared with $82,492 accrued in the same period in 2007. The
preferred dividends are the result of the issuance of 584,000 shares of the
Company’s Series A Convertible Preferred Stock that occurred in June 2007.
Holders of the preferred stock are entitled to a 5.00% annual dividend payable
quarterly in either cash or preferred stock at the option of the Company with
fractional shares paid in cash.
Liquidity and Capital
Resources
Net
Cash Used in Operating Activities
Net cash
used in operations for the three months ended September 30, 2008, was $792,469
when compared with $1,050,789 for the same period in 2007. The
decrease in cash flows used in operations was the result of (1) a decrease it
trade receivables from collecting outstanding accounts., (2) a decrease in
accounts payable as the company has continued to focus efforts of reducing
costs, and (3) an increase in loss from subsidiary that was not
applicable in the same period in 2007,
Net
Cash Flows from Investing Activities
Net cash
used in investing activities for the three months ended September 30, 2008 was
$828,129 compared with net cash used in investing activities of $136,700 during
the three months ended September 30, 2007. The comparative increase in cash used
in investing activities was primarily due to an investment by the Company in a
portion of Series E Preferred Stock in conjunction with the acquisition and
merger of Prescient Applied Intelligence, Inc., This reduction was partially
offset by (1) a decrease in capital expenditures, (2) a reduction of software
development costs capitalized under FAS 86, and (3) no income from the sale of
patents recorded in the current period that were recorded in the same period
2007.
Net
Cash Flows from Financing Activities
Net
cash provided by financing activities was $1,076,908 and $63,152 for the three
months ended September 30, 2008 and 2007 respectively. The change in net cash
provided by financing activities is attributable to draws from a line of credit
with the Company’s bank and proceeds raised through placement of certain notes
payable with the Company’s officers and directors in conjunction with financing
the initial step of acquiring Prescient Applied Intelligence, Inc. The increase
in the financing of the target acquisition was partially offset by the repayment
of a $1.94 million note payable with the Company’s bank using restricted cash of
the same amount.
Cash,
Cash Equivalents and Restricted Cash
Cash,
cash equivalents, and restricted cash was $321,873 at September 30, 2008, a
decrease of $2,483,690 over the $2,805,563 of cash, cash equivalents and
restricted cash June 30, 2008. This comparative decrease from June
30, 2008 to September 30, 2008 is primarily the result of restricted cash
utilized to retire a note payable and cash used to fund
operations.
Current
Assets
Current
assets at September 30, 2008 totaled $1,263,144, a 68% decrease from current
assets on hand of $3,983,178 at June 30, 2008. The $2,720,034
decrease in current assets is due in part to; (1) $1.94 million of restricted
cash used in the period to retire a note payable with a bank of the same amount,
and (2) cash used by the Company in order to fund operations, and (3) a decrease
in accounts receivable.
Current
Liabilities
Current
liabilities as of September 30, 2008 and September 30, 2007 were $4,187,015 and
$3,401,779 respectively. This 23% increase in current liabilities for
the three months ended September 30, 2008 when compared with the same period in
2007 is due to the Company’s use of a line of credit and issuance of notes
payable to certain officers and directors to raise the necessary funds in order
to fund the acquisition of Prescient Applied Intelligence, Inc. This
increase in current liabilities was partially offset by the retirement of a note
payable with the Company’s bank in the amount of $1.94 million.
Working
Capital
At
September 30, 2008, the Company had negative working capital of $2,923,871, as
compared with working capital of $581,399 at June 30, 2008. This
$3,505,270 decrease in working capital is due to the Company securing both notes
payable and using a line of credit to facilitate an investment in Prescient
Applied Intelligence, Inc.
Liquidity
and Capital Resources General
Historically,
the Company has financed its operations through operating revenues, loans from
directors, officers and stockholders, loans from banks, loans from the CEO and
majority shareholder, and private placements of equity securities. In
July 2007, the sale of 584,000 shares of Series A Convertible Preferred Stock,
the Company was able to eliminate Riverview Financial Corp as its guarantor and
maintained its own collateralization of the note payable for $1.940 million. The
note payable was retired in July 2008. In August, 2008, the Company secured
notes payable from officers and directors in the amount of $2,199,000 and used
lines of credit to facilitate an investment in Prescient Applied Intelligence,
Inc. in the amount of approximately $2.767 million.
On August
28, 2008, the Company, PAII Transitory Sub, Inc., a Delaware corporation
(“Merger Sub”), a wholly-owned subsidiary of the Company and Prescient Applied
Intelligence, Inc. (“Prescient”) entered into an Agreement and Plan of Merger
(the “Merger Agreement”). The Merger Agreement is incorporated by reference in
an 8-K filed with the Securities and Exchange Commission on September 3,
2008.
The
Company is required, under the Merger Agreement, to make an initial deposit of
$2,500,000 into escrow at such time as the Securities and Exchange Commission
has no further comment of Prescient’s proxy statement related to the Merger
Transaction. The balance of the funds necessary to complete the
Merger (approximately $2,300,000) are required to be placed into escrow at least
one (1) business day prior to the date of the Prescient’s shareholders’ meeting,
anticipated before the end of the calendar year. In
the event the Company fails to complete the Merger or breaches any provision of
the Agreement, after an opportunity to cure in some cases, after the initial
escrow deposit (i) the amount that has been placed into escrow, will be
transferred to Prescient and become its property; and (ii) Prescient will be
able to purchase from the Company, at a purchase price of $.001 per share, 100%
of the Series E Preferred Stock that it owns. This would result in a forfeit of
all of the Company’s escrow deposit.
In the
event the Company’s failure or breach, as described above, occurs after the
balance of the funds necessary to complete the Merger (approximately $2,300,000)
have been placed into escrow (i) the total amount that has been placed into
escrow (approximately $4.8 million), will be transferred to Prescient and become
its property; and (ii) Prescient will be able to purchase from the Company at a
purchase price of $.001 per share, 50% of the Series E Preferred Stock that it
owns.
The
required funds for the transaction will be raised through a series of private
transactions using bank debt, Company cash, and other debt instruments
containing conversion features into the Company’s common stock, the details of
which are currently pending.
The
Company believes that anticipated revenue growth, consummation of the merger,
and cost control will allow the Company to meet its minimum operating cash
requirements for the next twelve months.
The
financial statements do not reflect any adjustments should the Company’s pending
merger or operational objectives not be achieved. Although the Company
anticipates that it will meet its working capital requirements, there can be no
assurances that the Company will be able to meet its working capital
requirements. Should the Company desire to raise additional equity or
debt financing, there are no assurances that the Company could do so on
acceptable terms.
Off-Balance Sheet
Arrangements
The
Company does not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
and results of operation, liquidity or capital expenditures.
Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations,” and SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements,” an amendment of Accounting Research Bulletin No.
51. SFAS No. 141R will change how business acquisitions are accounted for
and will impact financial statements both on the acquisition date and in
subsequent periods. SFAS No. 160 will change the accounting and reporting
for minority interests, which will be recharacterized as non-controlling
interests and classified as a component of equity. SFAS 141R and SFAS 160
are effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Early adoption is not
permitted. The Company does not expect the adoption of these new standards
to have an impact on its financial statements.
In June
2007, the EITF reached a consensus on EITF Issue No. 07-03, “Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities” ("EITF 07-03"). EITF 07-03 concludes that
non-refundable advance payments for future research and development activities
should be deferred and capitalized until the goods have been delivered or the
related services have been performed. If an entity does not expect the goods to
be delivered or services to be rendered, the capitalized advance payment should
be charged to expense. This consensus is effective for financial statements
issued for fiscal years beginning after December 15, 2007, and interim
periods within those fiscal years. Earlier adoption is not permitted. The effect
of applying the consensus will be prospective for new contracts entered into on
or after that date. We are evaluating the implications of this
standard.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which addresses how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under
generally accepted accounting principles. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. The Company is currently
evaluating the impact SFAS No. 157 will have on the Company's financial
position, results of operations and liquidity and its related
disclosures.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("FAS 159"). SFAS No. 159
allows companies to make an election, on an individual instrument basis, to
report financial assets and liabilities at fair value. The election must be made
at the inception of a transaction and may not be reversed. The election may also
be made for existing financial assets and liabilities at the time of adoption.
Unrealized gains and losses on assets or liabilities for which the fair value
option has been elected are to be reported in earnings. SFAS No. 159
requires additional disclosures for instruments for which the election has been
made, including a description of management's reasons for making the election.
SFAS No. 159 is effective as of fiscal years beginning after
November 15, 2007 and is to be adopted prospectively and concurrent with
the adoption of SFAS No. 157. The Company is currently evaluating the
impact SFAS No. 159 will have on the Company's financial position, results
of operations and liquidity and its related disclosures.
Critical Accounting
Policies
Critical
accounting policies are those that Management believes are most important to the
portrayal of our financial condition and results of operations and also require
our most difficult, subjective or complex judgments. Judgments or
uncertainties regarding the application of these policies may result in
materially different amounts being reported under various conditions or using
different assumptions.
The
Company’s critical accounting policies include the following:
|
·
|
Deferred
income tax assets and related valuation
allowances
|
|
·
|
Revenue
Recognition
|
|
·
|
Stock-Based
Compensation
|
|
·
|
Capitalization
of Software Development Costs
|
|
·
|
Impairment
and Useful Lives of Long-Lived
Assets
|
Deferred
Income Taxes and Valuation Allowance
In
determining the carrying value of the Company’s net deferred 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 the realizability of the deferred tax assets and assesses the
valuation allowance quarterly.
Revenue
Recognition
The
Company derives revenues from four primary sources, software licenses,
maintenance and support services, professional services and software
subscription. New software licenses include the sale of software
runtime license fees associated with deployment of the Company’s software
products. Software license maintenance updates and product support
are typically annual contracts with customers that are paid in advance or
specified as terms in the contract. Maintenance provides the customer access to
software service releases, bug fixes, patches and technical support
personnel. Professional service revenues are derived from the sale of
services to design, develop and implement custom software applications.
Subscription revenues are derived from the sale of the Company’s products on a
subscription basis. Supply Chain Profit Link, is a category
management product that is sold on a subscription basis. The Company intends to
offer all of its software solutions on a subscription basis in fiscal
2009.
|
1.
|
Subscription
revenues are recognized ratably over the contractual term, for one or more
years. These fees are generally collected in advance of the
services being performed and the revenue is recognized ratably over the
respective months, as services are
provided.
|
|
2.
|
Maintenance
and support services that are sold with the initial license fee are
recorded as deferred revenue and recognized ratably over the initial
service period. Revenues from maintenance and other support
services provided after the initial period are generally paid in advance
and are recorded as deferred revenue and recognized on a straight-line
basis over the term of the
agreements.
|
|
3.
|
Professional
services revenues are recognized in the period that the service is
provided or in the period such services are accepted by the customer if
acceptance is required by
agreement.
|
|
4.
|
License
fees revenue from the sale of software licenses is recognized upon
delivery of the software unless specific delivery terms provide
otherwise. If not recognized upon delivery, revenue is
recognized upon meeting specified conditions, such as, meeting customer
acceptance criteria. In no event is revenue recognized if
significant Company obligations remain outstanding. Customer
payments are typically received in part upon signing of license
agreements, with the remaining payments received in installments pursuant
to the terms and conditions of the agreement. Until revenue
recognition requirements are met, the cash payments received are treated
as deferred revenue.
|
Stock-Based
Compensation
The
Company values and accounts for the issuance of equity instruments to employees
and non−employees to acquire goods and services based on the fair value of the
goods and services or the fair value of the equity instrument at the time of
issuance, whichever is more reliably measurable. The fair value of stock issued
for goods or services is determined based on the quoted market price on the date
the commitment to issue the stock has occurred. The fair value of stock options
or warrants granted to employees and non−employees for goods or services is
calculated on the date of grant using the Black−Scholes options pricing
model.
Capitalization of Software
Development Costs
The
Company accounts for research and development costs in accordance with several
accounting pronouncements, including SFAS No. 2, Accounting for Research and
Development Costs, and SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed. SFAS No. 86 specifies
that costs incurred internally in researching and developing a computer software
product should be charged to expense until technological feasibility has been
established for the product. Once technological feasibility is established, all
software costs should be 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 or meets or exceeds design specifications including
functions, features, and technical performance requirements. Costs
incurred after technological feasibility is established are capitalized until
such time as when the product or enhancement is available for general release to
customers.
Impairment
and Useful Lives of Long-lived Assets
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.
Item
3 - Quantitative and Qualitative Disclosures about Market
Risk
Our
exposure to market risk relates primarily to the potential change in the value
of our investment portfolio as a result of fluctuations in interest rates. The
primary purpose of our investment activities is to preserve principal while
maximizing the income we receive from our investments without significantly
increasing risk of loss. Historically, our investment portfolio consists of a
variety of financial instruments, including, but not limited to, money market
securities, floating rate securities, and certificates of deposit. As of
September 30, 2008, our investment portfolio consisted of only
cash.
It is our
intent to ensure the safety and preservation of our invested principal funds by
limiting default risk, market risk and reinvestment risk. We do not hold
financial instruments for trading or other speculative purposes.
Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate securities may have their fair market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectation due to changes in interest rates or we may suffer losses in
principal if forced to sell securities which have declined in market value due
to changes in interest rates.
We
believe that the market risk arising from our holdings of these financial
instruments is minimal. We do not utilize derivative financial instruments to
manage our interest rate risks.
The table
that follows presents fair values of principal amounts and weighted average
interest rates for our investment portfolio as of September 30,
2008.
|
Cash
and Cash Equivalents:
|
Aggregate
Fair
Value
|
Weighted
Average Interest Rate
|
||||||
|
Cash
|
$ | 321,873 | 1.50 | % | ||||
|
Money
market funds
|
- | - | ||||||
|
Certificates
of deposit
|
- | - | ||||||
|
Total
cash and cash equivalents
|
$ | 321,873 | ||||||
Item
4 - 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 September 30, 2008. Based on this
evaluation, the Company’s Chief Executive Officer and Chief Financial and
Principal Accounting 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
Securities and Exchange Commission (“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 and Accounting Officer, as appropriate to allow timely
decisions regarding required disclosure.
|
(b)
|
Changes
in internal controls over financial
reporting.
|
The
Company’s Chief Executive Officer and Chief Financial Officer have determined
that there have been no changes, in the Company’s internal control over
financial reporting during the period covered by this report identified in
connection with the evaluation described in the above paragraph that have
materially affected, or are reasonably likely to materially affect, Company’s
internal control over financial reporting.
PART
II – OTHER INFORMATION
Item 1 –
Legal Proceedings
On June
29, 2007, the Company was served with a complaint from two previous employees
titled James D. Horton and Aaron Prevo v. Park City Group, Inc. and Randy
Fields, Individually Case No. 070700333, which has been filed in the Second
Judicial District Court, Davis County, Utah. The plaintiffs’ complaint alleges
that certain provisions of their employment agreements were not honored
including breach of employer obligations, fraud, unjust enrichment, and breach
of contract. The plaintiffs are seeking combined damages for alleged
unpaid compensation and punitive damages of $520,650 and $2,603,250,
respectively. The case is currently in the discovery phase and the Company will
continue to vigorously defend this matter. The Company believes that there is no
validity to this matter and that the possibility of any adverse outcome to the
Company is remote
Item 1A
- Risk Factors
There
were no material changes from the risk factors previously disclosed in Part II,
Item 6. “Risk Factors” in our Annual Report on Form 10-KSB for the year ended
June 30, 2008.
Item 2 –
Unregistered Sales of Equity Securities and Use of
Proceeds
In July
2008, the Company issued 31,314 shares of common stock to Robert Allen in a
non-public offering in exchange for $100,002.
In July
2008, The Company issued 20,000 shares of common stock to James Gillis in a
non-public offering in exchange for $53,600.
In August
2008, the Company issued 7,520 shares of common stock to board members in lieu
of cash compensation of $20,000.
In
September 2008, the Company issued 45,000 shares of common stock to T. MacInnis
in a non-public offering in exchange for $105,750 as a subscription
receivable.
In
September 2008, the Company issued 105,000 shares of common stock to H. Bibicoff
in a non-public offering in exchange for $246,750 as a subscription
receivable.
Such
shares of stock were not registered and were issued in reliance on Section 4(2)
of the Securities Act of 1933, as amended.
Item
3 – Defaults
upon Senior Securities
None
Item
4 – Submission of Matters to a Vote of Security
Holders
None
Item 5 –
Other Information
None
Item 6 – Exhibits
|
Exhibit
31.1
|
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbannes-Oxley Act of 2002. | |
|
Exhibit
31.2
|
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbannes-Oxley Act of 2002. | |
| Exhibit 32.1 | Certification of Principal Executive and Principal Financial Officer pursuant to 18 U.S.C. Section 1350. |
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
Date: November
14, 2008
|
PARK
CITY GROUP, INC
|
|
| By /s/ Randall K. Fields | ||
|
Randall
K. Fields, Chief Executive Officer, Chairman and Director (Principal
Executive Officer)
|
||
|
Date: November
14, 2008
|
By /s/ John R. Merrill | |
|
|
John
R. Merrill,
Chief
Financial Officer and Treasurer (Principal Financial and Accounting
Officer)
|