PARK CITY GROUP INC - Quarter Report: 2011 September (Form 10-Q)

pcg10qsept302011.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2011.

o	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

(Address of principal executive offices)

(435) 645-2000

(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. Yes þ No o

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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	o	Accelerated filer	o
Non-accelerated filer (Do not check if smaller reporting company)	o	Smaller reporting company	þ

Indicate by checkmark if whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.01 par value: 11,669,055 shares as of November 14, 2011.

PARK CITY GROUP, INC.

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Condensed Balance Sheets as of September 30, 2011 (Unaudited) and June 30, 2011	1

	Consolidated Condensed Statements of Operations for the Three Months Ended September 30, 2011 and 2010 (Unaudited)	2

	Consolidated Condensed Statements of Cash Flows for the Three Months Ended September 30, 2011 and 2010 (Unaudited)	3

	Notes to Consolidated Condensed Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17

Item 4.	Controls and Procedures	18

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3.	Defaults Upon Senior Securities	19

Item 5.	Other Information	19

Item 6.	Exhibits	19

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.

	Signatures

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PARK CITY GROUP, INC.

Consolidated Condensed Balance Sheets

	September 30,		June 30,
	2011		2011
Assets	(unaudited)
Current assets:
Cash and cash equivalents	$	996,344	$	2,618,229
Receivables, net of allowance of $46,803 and $15,581 at September 30, 2011
and June 30, 2011, respectively		1,556,894		2,059,773
Prepaid expenses and other current assets		230,634		265,818

Total current assets		2,783,872		4,943,820

Property and equipment, net		590,220		651,992

Other assets:
Deposits and other assets		24,026		24,026
Customer relationships		3,079,388		3,184,967
Goodwill		4,805,933		4,805,933
Capitalized software costs, net		328,872		365,413

Total other assets		8,238,219		8,380,339

Total assets	$	11,612,311	$	13,976,151

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	487,920	$	790,914
Accrued liabilities		1,240,472		1,162,775
Deferred revenue		1,342,614		1,663,232
Capital lease obligations		88,196		107,547
Lines of credit		1,200,000		1,200,000
Notes payable		912,362		2,414,853

Total current liabilities		5,271,564		7,339,321

Long-term liabilities:
Notes payable, less current portion		1,250,350		1,271,691
Capital lease obligations, less current portion		25,880		41,202

Total liabilities		6,547,794		8,652,214

Commitments and contingencies		-		-

Stockholders' equity:

Series A Convertible Preferred Stock, $0.01 par value, 30,000,000 shares authorized; 672,670 and 667,955 shares issued and outstanding at September 30, 2011 and June 30, 2011, respectively		6,727		6,680
Series B Convertible Preferred Stock, $0.01 par value, 30,000,000 shares authorized; 411,927 shares issued and outstanding at September 30, 2011 and June 30, 2011		4,119		4,119
Common stock, $0.01 par value, 50,000,000 shares authorized; 11,657,901 and 11,612,460 shares issued and outstanding at September 30, 2011 and June 30, 2011, respectively		116,579		116,125
Additional paid-in capital		36,316,737		36,088,584
Accumulated deficit		(31,379,645)		(30,891,571)

Total stockholders' equity		5,064,517		5,323,937

Total liabilities and stockholders' equity	$	11,612,311	$	13,976,151

See accompanying notes to consolidated condensed financial statements.

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PARK CITY GROUP, INC.

Consolidated Condensed Statements of Operations (unaudited)

For the Three Months Ended September 30, 2011 and 2010


		September 30,
		2011		2010
Revenues:
Subscription		$	1,742,131	$	1,549,547
Maintenance			515,295		568,219
Professional services and other revenue			194,044		290,220
Software licenses			127,810		158,000

	Total revenues		2,579,280		2,565,986

Operating expenses:
Cost of services and product support			1,140,261		891,555
Sales and marketing			661,748		619,598
General and administrative			759,537		1,064,322
Depreciation and amortization			223,965		194,113

	Total operating expenses		2,785,511		2,769,588

(Loss) income from operations			(206,231)		(203,602)

Other income (expense):
Interest expense			(73,490)		(98,491)

(Loss) income before income taxes			(279,721)		(302,093)

(Provision) benefit for income taxes			-		-

	Net (loss) income		(279,721)		(302,093)

	Dividends on preferred stock		(208,353)		(207,096)

	Net (loss) income applicable to common shareholders	$	(488,074)	$	(509,189)

Weighted average shares, basic and diluted			11,650,000		10,950,000
Basic and diluted (loss) income per share		$	(0.04)	$	(0.05)

See accompanying notes to consolidated condensed financial statements.

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PARK CITY GROUP, INC.

Consolidated Condensed Statements of Cash Flows (Unaudited)

For the Three Months Ended September 30,

	2011		2010
Cash Flows From Operating Activities:
Net (loss) income	$	(279,721)	$	(302,093)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		223,964		194,113
Bad debt expense		42,597		-
Stock compensation expense		252,767		143,210
Stock issued for litigation settlement		-		375,000
Decrease (increase) in:
Trade receivables		460,282		(60,211)
Prepaids and other assets		35,184		(37,490)
(Decrease) increase in:
Accounts payable		(302,994)		38,438
Accrued liabilities		(167,519)		(264,577)
Deferred revenue		(320,618)		(42,900)

Net cash (used in) provided by operating activities		(56,058)		43,490

Cash Flows From Investing Activities:
Purchase of property and equipment		(20,072)		(16,662)
Capitalization of software costs		-		(89,428)

Net cash used in investing activities		(20,072)		(106,090)

Cash Flows From Financing Activities:
Dividends paid		-		(123,578)
Proceeds from issuance of note payable		137,028		-
Proceeds from exercise of warrants		12,750		-
Payments on notes payable and capital leases		(1,695,533)		(200,141)

Net cash (used in) financing activities		(1,545,755)		(323,719)

Net decrease in cash		(1,621,885)		(386,319)

Cash and cash equivalents at beginning of period		2,618,229		1,157,431

Cash and cash equivalents at end of period	$	996,344	$	771,112

Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes	$	-	$	-
Cash paid for interest	$	133,350	$	112,948

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Common stock to pay accrued liabilities	$	133,154	$	212,872
Dividends accrued on preferred stock	$	208,353	$	207,096
Dividends paid with preferred stock	$	82,750	$	80,300

See accompanying notes to consolidated condensed financial statements.

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PARK CITY GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

NOTE 1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Park City Group, Inc. (the “Company”) is a Software-as-a-Service (“SaaS”) provider that brings unique visibility to the consumer goods supply chain, delivering actionable information that ensures product is on the shelf when the consumer expects it. Our service increases our customers’ sales and profitability while making lower inventory levels possible for both retailers and their suppliers.

The Company is incorporated in the state of Nevada. The Company’s 98.76% and 100% owned subsidiaries, Park City Group, Inc. and Prescient Applied Intelligence, Inc. (“Prescient”), respectively, are incorporated in the state of Delaware. All intercompany transactions and balances have been eliminated in consolidation.

The Company designs, develops, markets and supports 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 process improvement that centers around the Company’s proprietary software products and through establishment of a neutral and “trusted” third party relationship between retailers and suppliers. The principal markets for the Company's products are multi-store retail and convenience store chains, branded food manufacturers, suppliers and distributors, and manufacturing companies which have operations in North America, Europe, Asia and the Pacific Rim.

We market our services to businesses primarily on a subscription basis. However, we do deliver our services on a license basis. Our efforts are focused on a direct sales model and indirectly through qualified partners and service providers.

The principal executive offices of the Company are located at 3160 Pinebrook Road, Park City, Utah 84098. The telephone number is (435) 645-2000. The website address is http://www.parkcitygroup.com.

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−K, are adequate to make the information presented not misleading. Operating results for the three months ended September 30, 2011 are not necessarily indicative of the operating results that may be expected for the fiscal year ending June 30, 2012.

Reclassification

Certain amounts in the 2010 financial statements have been reclassified to conform to the 2011 presentation.

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Recent Accounting Pronouncements

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition – Milestone Method (Topic 605): Milestone Method of Revenue Recognition, a consensus of the FASB Emerging Issues Task Force, which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. ASU 2010-17 is effective for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The adoption of this standard did not have an impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-8, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which amends previous guidance on the testing of goodwill for impairment; the guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The new guidance provides entities with the option of first assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than the carrying amount, the two-step impairment test would still be required. The adoption of this updated authoritative guidance is not expected to have a significant impact on the company’s Condensed Consolidated Financial Statements.

Use of Estimates in the Preparation of Financial Statements

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 SEC 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.

Net Income and Income Per Common 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 three months ended September 30, 2011 and 2010 options and warrants to purchase 585,696 and 858,502 shares of common stock, respectively, were not included in the computation of diluted EPS due to the anti-dilutive effect. For three months ended September 30, 2011 and 2010, 3,272,051 and 3,217,904 shares of common stock issuable upon conversion of the Company’s Series A Convertible Preferred Stock (“Series A Preferred”) and Series B Convertible Preferred Stock (“Series B Preferred”), respectively, were not included in the diluted EPS calculation as the effect would have been anti-dilutive.

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NOTE 3. LIQUIDITY AND MANAGEMENT’S PLAN

Historically, the Company has financed its operations through operating revenues, loans from directors, officers and stockholders, loans from the Chief Executive Officer and majority shareholder, and private placements of equity securities.

At September 30, 2011, the Company had negative working capital of $(2,487,692) when compared with negative working capital of $(2,395,501) at June 30, 2011. This $92,191 decrease in working capital is principally the result of the use of cash to retire certain indebtedness in the quarter ended September 30, 2011, a decrease in cash flow in the current quarter compared to the quarter ended September 30, 2010, the reclassification of certain notes payable from long-term liabilities to amounts becoming due and payable during the next twelve months, and a decrease in accounts receivable.

In connection with the retirement of certain indebtedness in the quarter ended September 30, 2011, the Company reduced its current and total liabilities by approximately $2.1 million compared to current and total liabilities at June 30, 2011. The reduction in current and total liabilities consisted of the retirement of certain promissory notes in the principal amount of approximately $1.5 million, which notes were originally issued in January 2009 to certain investors to partially finance the acquisition of Prescient (the “Prescient Notes”). The Prescient Notes had a maturity date of July 12, 2011, and required payment of interest at 12% per annum payable quarterly. In connection with the retirement of certain of the Prescient Notes, the Company extended the maturity date of the remaining issued and outstanding Prescient Notes, totaling $249,700, from July 12, 2011 to January 12, 2012.

The retired Prescient Notes were paid from cash flow from operations and proceeds from the issuance of a new term note, dated June 28, 2011, in the principal amount of $350,000 (the “Term Note”) the Term Note bears interest at an annual rate of 3.95%. Principal and interest under the terms of the Term Note are payable in 35 installments of $10,355 each beginning August 15, 2011 and on the same date on each consecutive month thereafter until maturity, or July 15, 2014.

On September 12, 2011, the Company also entered into an Amendment to Loan Agreement and Note ("Second Amendment"), pursuant to which U.S. Bank National Association (the "Bank") has agreed to extend the maturity date of the Note. The Agreement permits borrowings of up to $1.2 million, of which $1.2 million was outstanding as of the date of the Second Amendment. Under the terms of the Second Amendment, the maturity date of the Note has been extended from September 30, 2011 to September 30, 2012 and the interest rate remained unchanged at 3.5% + LIBOR.

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 refinance or restructure certain of the Company’s remaining indebtedness to extend the maturities of such indebtedness to address its short-term and long-term working capital requirements. Management believes that these initiatives will enable us to address our debt service requirements during the next twelve months, as well as fund our currently anticipated operations and capital spending requirements. The financial statements do not reflect any adjustments should cash flow from operations be insufficient to meet our spending and debt service requirements, and we are otherwise unable to refinance or restructure our indebtedness.

NOTE 4. STOCK-BASED COMPENSATION

The Company has agreements with a number of employees to issue stock grants vesting over 3-10 year terms. The vested portions of these grants are to be paid on each anniversary of the grant dates. Total shares under these agreements vesting and payable annually to employees are 231,041. The stock grant agreements were dated effective between November 2, 2007 and September 29, 2011.

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NOTE 5. OUTSTANDING STOCK OPTIONS

The following tables summarize information about fixed stock options and warrants outstanding and exercisable at September 30, 2011:

		Options and Warrants			Options and Warrants
		Outstanding			Exercisable
		at September 30, 2011			at September 30, 2011

			Weighted
		Number	average	Weighted	Number	Weighted
		Outstanding at	remaining	average	Exercisable at	average
Range of		September 30,	contractual	exercise	September 30,	exercise
exercise prices		2011	life (years)	price	2011	price
Options
$	1.50 - 2.50	14,280	1.83	$1.73	14,280	$1.73
Warrants
$	1.80 - 4.25	571,416	0.54	$3.72	571,416	$3.72
		585,696	0.57	$3.68	585,696	$3.68

NOTE 6. RELATED PARTY TRANSACTIONS

In July 2010, the Company issued a total of 10,000, 349,626, and 52,301 shares of its Series B Preferred to Julie Fields, Riverview Financial, and Robert Allen, respectively (collectively, the “Related Parties”), in consideration for the termination of certain notes issued to the Related Parties by the Company in the amounts set forth below (the “Series B Exchange”), which amounts represent principal (the “Related Party Notes”) due and payable under the Related Party Notes. Ms. Fields is the spouse of Randy Fields, the Chief Executive Officer of the Company. Riverview Financial Corp. is an entity controlled my Mr. Fields. Robert Allen is a director of the Company.

The Related Party Notes were originally issued in September 2008, in the case of the Related Party Notes issued to Mr. Allen and Riverview Financial Corp., and December 2008 in the case of the Related Party Note issued to Ms. Fields, and were issued principally to finance a portion of the purchase price of shares of Series E Preferred Stock of Prescient purchased by the Company. The purchase transaction was the first step in a plan to acquire Prescient in a merger transaction consummated in January 2009. In addition, the Related Party Note issued to Riverview Financial Corp. partially reflected certain fees owed to Riverview by the Company in the amount of $35,124 for guaranteeing amounts owed by the Company under a line of credit with the Bank, and $5,263 representing certain late fees owed Riverview by the Company resulting from the failure by the Company to pay certain amounts to Riverview under the terms of a Services Agreement between the Company and Riverview, dated July 1, 2005. The amounts under the Related Party Notes that were terminated in consideration for the issuance of the Series B Preferred, and the number of shares of Series B Preferred issued in connection with the Series B Exchange, is set forth below:

	Principal		Shares of Series B Preferred
Julie Fields	$	100,000		10,000
Riverview Financial Corp.	$	3,496,260		349,626
Robert Allen	$	523,014		52,301
	$	4,119,274		411,927

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NOTE 7. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and consist of the following as of:

	September 30, 2011
	(unaudited)		June 30, 2011
Computer equipment	$	2,017,937	$	1,997,865
Furniture and fixtures		314,823		314,823
Leasehold improvements		141,043		141,043
		2,473,803		2,453,731
Less accumulated depreciation and amortization		(1,883,583)		(1,801,739)
	$	590,220	$	651,992

NOTE 8. CAPITALIZED SOFTWARE COSTS

Capitalized software costs consist of the following as of:

	September 30, 2011
	(unaudited)		June 30, 2011
Capitalized software costs	$	2,443,128	$	2,443,128
Less accumulated amortization		(2,114,256)		(2,077,715)
	$	328,872	$	365,413

NOTE 9. ACCRUED LIABILITIES

Accrued liabilities consist of the following as of:

	September 30, 2011
	(unaudited)		June 30, 2011
Accrued stock-based compensation	$	399,976	$	272,861
Unclaimed consideration related to Prescient Merger		263,277		263,714
Accrued compensation		232,840		244,490
Accrued dividends		214,724		212,699
Other accrued liabilities		107,578		87,068
Accrued interest		22,077		81,943
	$	1,240,472	$	1,162,775

NOTE 10. INCOME TAXES

The Company and 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 2006.

NOTE 11. SUBSEQUENT EVENTS

In accordance with the Subsequent Events Topic of the FASB ASC 855, we have evaluated subsequent events and have determined that there are no additional events that have or are reasonably likely to impact the financial statements.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s Annual Report on Form 10-K for the year ended June 30, 2011 is 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, 2010 Annual Report on Form 10-K, 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

The principal executive offices of the Company are located at 3160 Pinebrook Road, Park City, Utah 84098. The telephone number is (435) 645-2000. The website address is http://www.parkcitygroup.com.

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Results of Operations

Comparison of the Three Months Ended September 30, 2011 to the Three Months Ended September 30, 2010.

Revenues

	Fiscal Quarter Ended September 30,
	2011		2010		Variance			Percent
Subscription	$	1,742,131	$	1,549,547	$	192,584			12	%
Maintenance		515,295		568,219		(52,924	)		-9	%
Professional services and other revenue		194,044		290,220		(96,176	)		-33	%
Software licenses		127,810		158,000		(30,190	)		-19	%
Total revenues	$	2,579,280	$	2,565,986	$	13,294			0.5	%

Total revenues were $2,579,280 and $2,565,986 for the three months ended September 30, 2011 and 2010, respectively, a 0.5% increase. This $13,294 increase in total revenues is principally due to an increase in subscription revenues of $192,584, partially offset by a $52,924 decrease in maintenance revenue, a $96,176 decrease in professional services and other revenue and a $30,190 decrease in software license revenue. Management believes that, as a percentage of total revenue, subscription revenue will continue to increase and license and maintenance revenue will continue to decrease, or remain volatile, as the Company continues its emphasis of marketing its services based on the SaaS model.

Subscription Revenue

Subscription revenues were $1,742,131 and $1,549,547 for the three months ended September 30, 2011 and 2010, respectively, an increase of 12% in the three months ended September 30, 2011 when compared with the three months ended September 30, 2010. The net increase of $192,584 is principally due to (i) the increase of subscription customers added to the Company’s customer base caused by the expected addition of new contracts with suppliers (“spokes”) connected to existing retail clients acquired by the Company (“hubs”) during the last fiscal year, which contributed approximately $163,000 of new subscription revenue; and (ii) a $80,000 increase attributable to the growth of existing retailer and supplier subscriptions. The increase in subscription revenue was partially offset by a decrease of approximately $51,000 resulting from the non-renewal of existing customers primarily due to bankruptcy, acquisitions, or no longer doing business with a retailer. While no assurances can be given, the Company anticipates that revenue from subscription-based services will continue to increase on a year-over-year basis. However, future subscription revenue growth is expected to be offset by the anticipated attrition of subscription agreements in the ordinary course upon contract expirations, which management currently anticipates to be approximately 4-5% of subscription revenue annually.

The Company continues to focus its strategic initiatives on increasing the number of retailers, suppliers and manufacturers that use its software on a subscription basis, as well as contracting with suppliers to connect to our retail customers signed up in previous quarters, therefore leveraging our “hub and spoke” business model. While management believes that marketing its suite of software solutions as a renewable and recurring subscription is an effective strategy, it cannot be assured that subscribers will renew the service at the same level in future years, propagate services to new categories, or recognize the need for expanding the service offering of the Company’s suite of actionable products and services.

Maintenance Revenue

Maintenance and support revenues were $515,295 and $568,219 for the three months ended September 30, 2011 and 2010, respectively, a decrease of 9% in the three months ended September 30, 2011 compared with the three months ended September 30, 2010. The net decrease of $52,924 is principally due to (i) the non-renewal of maintenance contracts resulting in a reduction of maintenance revenue of $87,000. This decrease in revenue was partially offset by the addition of approximately $18,000 in new maintenance revenue and approximately $16,000 of net increases to existing customers. Large one-time license sales and associated maintenance is expected to continue to decline over time. The decrease in maintenance revenue is due to the Company's emphasis on subscription-based sales. While management believes maintenance and support services are essential to its customers, due to macroeconomic conditions, business combinations, and the historical reliability of the Company’s suite of products, from time to time, customers may not perceive the ongoing value of paying for maintenance when the frequency of maintenance activities needed by a customer becomes infrequent.

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Professional Services and Other Revenue

Professional services and other revenue were $194,044 and $290,220 for the three months ended September 30, 2011 and 2010, respectively, a decrease of 33%. The $96,176 decrease in professional services revenue for the three months ended September 30, 2011 when compared to the three months ended September 30, 2010 is due to a decrease in the average contract size of customer implementations that occurred during the current quarterly period compared to the quarter ended September 30, 2010. Management believes that professional services may experience periodic fluctuations as a result of (i) timing of implementations, (ii) scope of services to be provided, (iii) size of the retailer or supplier, or (iv) the Company’s analytics offerings and change-management services becoming a natural addition to its software as a service (SaaS) product suite.

Software Licenses Revenue

Software licenses revenues were $127,810 and $158,000 for the three months ended September 30, 2011 and 2010, respectively, a decrease of 19%. The $30,190 decrease in license revenue for the three months ended September 30, 2011 when compared to the three months ended September 30, 2010 is primarily due to sales to existing customers during to the 3 months ended September 30, 2011 compared to typically larger new customer sales during the same period last year. While the Company continues its emphasis on the sale of subscription based services, large one-time license sales and associated maintenance is expected to continue to decline over time. Management believes that it is difficult to predict and forecast future software license sales. The Company has not eliminated the sale of its suite of products on a license basis and from time to time it will sell additional licenses to new or existing customers; however, it is difficult to ascertain the timing or the amount of the license.

Cost of Services and Product Support

	Fiscal Quarter Ended						Variance
	September 30,
	2011			2010			Dollars		Percent
Cost of services and product support	$	1,140,261		$	891,555		$	248,706		28	%
Percent of total revenues		44	%		35	%

Cost of services and product support was $1,140,261 and $891,555 for the three months ended September 30, 2011 and 2010, respectively, a 28% increase in the three months ended September 30, 2011 compared with the three months ended September 30, 2010. This increase of $248,706 for the quarter ended September 30, 2011 when compared with the same period ended September 30, 2010 is principally due to (i) a $103,000 increase in payroll and other head count related expenses, payroll taxes related to stock compensation, and an increase in benefit costs; (ii) $88,000 of costs capitalized during the prior year; (iii) a $43,000 increase related to employee stock grants and other stock-based compensation; (iv) an increase of $7,000 from the use of contractors and outside consulting support, and (v) a $5,000 increase in hardware and software maintenance and support contracts.

Sales and Marketing Expense

	Fiscal Quarter Ended						Variance
	September 30,
	2011			2010			Dollars		Percent
Sales and marketing	$	661,748		$	619,598		$	42,150		7	%
Percent of total revenues		26	%		24	%

Sales and marketing expenses were $661,748 and $619,598 for the three months ended September 30, 2011 and 2010, respectively, a 7% increase. This $42,150 increase over the comparable quarter was primarily the result of (i) an increase of approximately $29,000 in advertising, marketing and tradeshow related expenses; (ii) an increase in bonuses, stipends, and commission expenses of $28,000; (iii) an increase of approximately $9,000 in payroll and other head count related expenses. These increases were partially offset by a decrease of $24,000 in travel and related expenditures.

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General and Administrative Expense

	Fiscal Quarter Ended						Variance
	September 30,
	2011			2010			Dollars		Percent
General and administrative	$	759,537		$	1,064,322		$	(304,785)		-29	%
Percent of total revenues		29	%		41	%

General and administrative expenses were $759,537 and $1,064,322 for the three months ended September 30, 2011 and 2010, respectively, a 29% decrease in the three months ended September 30, 2011 compared with the three months ended September 30, 2010. This $304,785 decrease when comparing expenditures for the quarter ended September 30, 2011 with the same period ended September 30, 2010 is principally due to settlement of a lawsuit and related legal fees in the prior year of $475,000. This decrease was partially offset by (i) an increase of $72,000 increase in shareholder costs and other professional fees; (ii) a $43,000 increase in bad debt due to increased collection efforts; (iii) an increase of approximately $29,000 in payroll and other compensation related expenses; (iv) and an increase of $26,000 in hosted software costs, facilities related expenses, and travel related expenses.

Depreciation and Amortization Expense

	Fiscal Quarter Ended						Variance
	September 30,
	2011			2010			Dollars		Percent
Depreciation and amortization	$	223,965		$	194,113		$	29,852		15	%
Percent of total revenues		9	%		8	%

Depreciation and amortization expenses were $223,965 and $194,113 for the three months ended September 30, 2011 and 2010, respectively, an increase of 15% in the three months ended September 30, 2011 compared with the three months ended September 30, 2010. This increase of $29,852 for the quarter ended September 30, 2011 when compared to the quarter ended September 30, 2010 is primarily due to (i) a $16,000 increase in amortization related to the completion of capitalized software projects; and (ii) increased depreciation expense of $14,000.

Other Income and Expense

	Fiscal Quarter Ended						Variance
	September 30,
	2011			2010			Dollars		Percent
Interest expense	$	(73,490)		$	(98,491	)	$	(25,001)		25	%
Percent of total revenues		3	%		4	%

Net interest expense was $73,490 and $98,491 for the three months ended September 30, 2011 and 2010, respectively. This $25,001 decrease is principally due to a decrease in interest expense resulting from retirement of Prescient Notes in the principal amount of approximately $1.5 million.

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Dividends on Preferred Stock

	Fiscal Quarter Ended						Variance
	September 30,
	2011			2010			Dollars		Percent
Dividends on preferred stock	$	208,353		$	207,096		$	1,257		0.6	%
Percent of total revenues		8	%		8	%

Dividends accrued on the Company’s Series A Preferred and Series B Preferred was $208,353 and $207,096 for the three months ended September 30, 2011 and 2010, respectively. Holders of Series A Preferred are entitled to a 5.00% annual dividend payable quarterly in either cash or additional Series A Preferred at the option of the Company with fractional shares paid in cash. Holders of Series B Preferred are entitled to a 12.00% annual dividend payable quarterly in cash.

Financial Position, Liquidity and Capital Resources

We believe our existing cash and short-term investments, together with funds generated from operating activities, will be sufficient to fund operating and investment requirements for at least the next twelve months, in addition to our debt service requirements. 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, the continuing market acceptance of our products, and our ability to restructure certain of our notes payable. Although the Company anticipates that available cash resources will be sufficient to meet its working capital and debt service requirements, no assurances can be given. To the extent that available funds are insufficient to fund our future activities, or satisfy our short-term debt service requirements, or in the event we are unable to restructure certain notes payable, we may need to raise additional funds through public or private equity or debt financings. Additional equity or debt financing may not be available on terms favorable to us, in a timely fashion or at all.

We have historically funded our operations with cash from operating activities, equity financings and debt borrowings. As set forth below, cash and cash equivalents were $996,344 and $771,112 at September 30, 2011, and September 30, 2010, respectively. This increase from September 30, 2010 to September 30, 2011 was principally the result of an increase in cash flow from operations throughout the fiscal year ended June 30, 2011, offset by the use of cash used to reduce short-term indebtedness.

	As of September 30,				Variance
	2011		2010		Dollars		Percent
Cash and Cash Equivalents	$	996,344	$	771,112	$	225,232		29	%

Net Cash Flows from Operating Activities

	Fiscal Quarter Ended September 30,				Variance
	2011		2010		Dollars		Percent
Cash provided by operating activities	$	(56,057)	$	43,490	$	(99,547)		229	%

Net cash provided by operating activities is summarized as follows:

	2011		2010
Net (loss) income	$	(279,721)	$	(302,093)
Noncash expense and income, net		519,329		712,323
Net changes in operating assets and liabilities		(295,665)		(366,740)
	$	(56,057)	$	43,490

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Noncash expenses decreased by $192,994 in the three months ended September 30, 2011 compared to September 30, 2010. Noncash expenses decreased as a result of the issuance of $375,000 in Company common stock in a litigation settlement during the 3 months ended September 30, 2010. This noncash expense decrease was partially offset by a $109,557 increase in stock compensation expense, a $42,597 increase in bad debt expense and a $29,852 increase in depreciation and amortization.

The net changes in operating assets and liabilities committed $71,075 less cash in three months ended September 30, 2011 compared to the same period in 2010. While decreases in operating assets provided $593,167 in cash, decreases in operating liabilities used cash of $522,092 in cash in 2011.

Net Cash Flows from Investing Activities

	Fiscal Quarter Ended September 30,					Variance
	2011		2010			Dollars		Percent
Cash used in investing activities	$	(20,073)	$	(106,090	)	$	(86,017)		-81	%

Net cash used in investing activities for the three months ended September 30, 2011 was $(20,073) compared to net cash used in investing activities of $(106,090) for the three months ended September 30, 2010. This $86,017 decrease in cash used in investing activities for the three months ended September 30, 2011 when compared to the same period in 2010 was the result of capitalization of software costs in 2010 that did not recur in 2011.

Net Cash Flows from Financing Activities

	Fiscal Quarter Ended September 30,					Variance
	2011		2010			Dollars		Percent
Cash used in financing activities	$	(1,545,755)	$	(323,719	)	$	1,222,036		-377	%

Net cash used in financing activities totaled $(1,545,755) for the three months ended September 30, 2011 when compared to cash flows used in financing activities of $(323,719) for the three months ended September 30, 2010. The change in net cash used in financing activities is attributable to a $1.5 million increase in cash used to pay on notes payable due to the retirement of the Prescient Notes. This increase in cash used was partially offset by (i) a decrease in cash used to pay dividends of $123,578; and (ii) an increase in cash from the issuance of notes and exercise of warrants.

Working Capital

	As of September 30,		As of June 30,		Variance
	2011		2011		Dollars		Percent
Current assets	$	2,783,872	$	4,943,820	$	(2,159,948)		44	%

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Current assets as of September 30, 2011 totaled $2,783,872, a decrease of $2,159,948 when compared to $4,943,820 as of June 30, 2011. This 44% decrease in current assets is due primarily to the use cash of $1.5 million to pay certain short-term indebtedness, and a $502,879 decrease in accounts receivable.

	As of September 30,		As of June 30,		Variance
	2011		2011		Dollars		Percent
Current liabilities	$	5,271,564	$	7,339,321	$	(2,067,757)		28	%

Current liabilities totaled $5,271,564 as of September 30, 2011 as compared to $7,339,321 as of June 30, 2011. The $2,067,757 comparative decrease in current liabilities is principally due to a decrease of approximately $1.5 million in certain notes payable during the quarter ended September 30, 2011, as well as a reduction in accounts payable of approximately $303,000 and deferred revenue of approximately $321,000.

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 refinance or restructure certain of the Company’s indebtedness to extend the maturities of such indebtedness to address its short-term and long-term working capital requirements. Management believes that these initiatives will enable us to address our debt service requirements during the next twelve months, as well as fund our currently anticipated operations and capital spending requirements.

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

Critical Accounting Policies

This Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss the Company’s financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.

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We commenced operations in the software development and professional services business during 1990. The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions. Management bases its estimates and judgments on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, will affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.

Deferred Income Taxes and Valuation Allowance

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 the realizability of the deferred income tax assets and assesses the valuation allowance quarterly.

Revenue Recognition

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the collection of our fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.

We recognize subscription and hosting revenues ratably over the length of the agreement beginning on the commencement dates of each agreement or when revenue recognition conditions are satisfied. For a fee, subscriptions provide the customer with access to the software and data over the Internet, or on demand, and provide technical support services and software upgrades when and if available. Under subscriptions, customers do not have the right to take possession of the software and such arrangements are considered service contracts. Accordingly, we recognize subscription revenue ratably over the length of the agreement and professional services are recognized as incurred based on their relative fair values. In situations where we have contractually committed to an individual customer specific technology, we defer all of the revenue for that customer until the technology is delivered and accepted. Once delivery occurs, we then recognize the revenue ratably over the remaining contract term. When subscription service or hosting service is paid in advance, deferred revenue is recognized and revenue is recorded ratably over the term as services are consumed.

Set up fees paid by customers in connection with subscription services are deferred and recognized ratably over the life of the applicable agreement.

Premium support and maintenance service revenues are derived from services beyond the basic services provided in standard arrangements. We recognize premium service and maintenance revenues ratably over the contract terms beginning on the commencement dates of each contract or when revenue recognition conditions are satisfied. Instances where premium support or maintenance service is paid in advance, deferred revenue is recognized and revenue is recorded ratably over the term as services are consumed.

Professional services revenue consists primarily of fees associated with application and data integration, data cleansing, business process re-engineering, change management, and education and training services. Fees charged for professional services are recognized when delivered. We believe the fees for professional services qualify for separate accounting because: a) the services have value to the customer on a stand-alone basis; b) objective and reliable evidence of fair value exists for these services; and c) performance of the services is considered probable and does not involve unique customer acceptance criteria.

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We also sell software licenses. For software license sales, we recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the collection of our fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable. Licenses generally include multiple elements that are delivered up front or over time. Vendor specific objective evidence of fair value of the hosting and support elements is based on the price charged at renewal when sold separately, and the license element is recognized into revenue upon delivery. The hosting and support elements are recognized ratably over the contractual term.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company records compensation expense on a straight-line basis. The fair value of options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate.

Capitalization of Software Development Costs

The Company accounts for research costs of computer software to be sold, leased, or otherwise marketed as expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached shortly after a working prototype is complete and meets or exceeds design specifications including functions, features, and technical performance requirements. Costs incurred after technological feasibility is established have been and will continue to be capitalized until such time as when the product or enhancement is available for general release to customers.

Goodwill and Long-lived Assets

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our business is currently conducted principally in the United States. As a result, our financial results are not affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. We do not engage in hedging transactions to reduce our exposure to changes in currency exchange rates, although if the geographical scope of our business broadens, we may do so in the future.

Our exposure to risk for changes in interest rates relates primarily to our investments in short-term financial instruments. Investments in both fixed rate and floating rate interest earning instruments carry some interest rate risk. The fair value of fixed rate securities may fall due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Partly as a result of this, our future interest income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that have fallen in estimated fair value due to changes in interest rates. However, as substantially all of our cash equivalents consist of bank deposits and short-term money market instruments, we do not expect any material change with respect to our net income as a result of an interest rate change.

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Our exposure to interest rate changes related to borrowing has been limited by the use of fixed rate borrowings on the majority of our outstanding debt, and we believe the effect, if any, or reasonably possible near-term changes in interest rates on our financial position, results of operations and cash flows should not be material. At September 30, 2011, the debt portfolio was composed of approximately 55% variable-rate debt and 45% fixed-rate debt.

	September 30, 2011		Percent of
	(unaudited)		total debt
Fixed rate debt	$	1,502,519		44.7	%
Variable rate debt		1,860,193		55.3	%
Total debt	$	3,362,712		100.00	%

The table that follows presents fair values of principal amounts and weighted average interest rates for our investment portfolio as of September 30, 2011:

Cash and Cash Equivalents:		Aggregate Fair Value				Weighted Average Interest Rate
Cash and cash equivalents		$	996,344				NA

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, 2011. 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)

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, the Company’s internal control over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are from time to time involved in various legal proceedings incidental to the conduct of our business. We do not have any ongoing legal proceedings at this time.

ITEM 1A. RISK FACTORS

There were no material changes from the risk factors previously disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2011.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit 31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*	XBRL Instance Document

101.SCH*	XBRL Taxonomy Extention Schema

101.CAL*	XBRL Taxonomy Extention Calculation Linkbase

101.DEF*	XBRL Taxonomy Extention Definition Linkbase

101.LAB*	XBRL Taxonomy Extention Label Linkbase

101.PRE*	XBRL Taxonomy Extention Presentation Linkbase

*Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities ct of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.

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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, 2011		PARK CITY GROUP, INC

		By: /s/ Randall K. Fields
		Randall K. Fields Chief Executive Officer, Chairman and Director (Principal Executive Officer)

Date: November 14, 2011		By /s/ David Colbert
		David Colbert Chief Financial Officer (Principal Financial and Accounting Officer)