PARK CITY GROUP INC - Annual Report: 2012 (Form 10-K)

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[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[   ]

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

Nevada		37-1454128
State or other jurisdiction of incorporation		(IRS Employer Identification No.)
3160 Pinebrook Road, Park City, Utah 84098		(435) 645-2000
(Address of principal executive offices)		(Registrant's telephone number, including area code)

Title of each Class		Name of each exchange on which registered
Common Stock, $0.01 Par Value		Over-the-Counter Bulletin Board

[  ] Yes    [X] No

[  ] Yes    [X] No

Large accelerated filer	[  ]	Accelerated filer	[  ]
Non-accelerated filer (Do not check if a smaller reporting company)	[  ]	Smaller reporting company	[X]

 

[  ] Yes   [X] No

PART 1
Item 1.	Description of Business	1
Item 1A.	Risk Factors	7
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
PART II
Item 5.	Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6.	Selected Financial Data	16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 8.	Financial Statements and Supplementary Data	24
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	24
Item 9A.	Controls and Procedures	24
Item 9B.	Other Information	25
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	26
Item 11.	Executive Compensation	29
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	31
Item 13.	Certain Relationships and Related Transactions, and Director Independence	32
Item 14.	Principal Accounting Fees and Services	32
	PART IV
Item 15.	Exhibits, Financial Statement Schedules	33
	Signatures	35
	Report of Independent Registered Public Accounting Firm	F-1
	Condensed Consolidated Balance Sheets as of June 30, 2012 and 2011	F-2
	Condensed Consolidated Statements of Operations for the Years Ended June 30, 2012 and 2011	F-3
	Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended June 30, 2012 and 2011	F-4
	Condensed Consolidated Statements of Cash Flows for the Years Ended June 30, 2012 and 2011	F-5
	Notes to Condensed Consolidated Financial Statements	F-6
Exhibit 31	Certifications of the Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Certifications pursuant to 18 U.S.C. Sec. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

ITEM I.

BUSINESS

 

 

The Company expects the subscription revenue potential generated from these relationships to be significantly larger than any of the Company's existing client hubs within the grocery industry.

The supermarket industry is under increased competitive pressure from mass market retailers such as Wal-Mart, Costco, Target, and other channels including extreme value (dollar stores), limited assortment (ALDI/Save-a-lot), and convenience (Sheetz, 7/11) stores.  One of the strategies traditional supermarkets are implementing is to improve the demographic “mix” of products to match the unique needs of those consumers who shop at individual stores. Mix is most difficult to manage for those products that are delivered by Direct Store Delivery (DSD) suppliers such as carbonated beverages, bread, dairy, greeting cards, magazines and salty snacks. The Company’s software provides newfound visibility to the retailer as to specific item deliveries, in-stock status with item and category productivity. In addition, supermarkets are growing sales and consumer loyalty by developing and distributing their own brand or private label for all key categories within their stores. This proliferation of new items is creating a new set of challenges for both retailers and suppliers as they battle to find space to accommodate the new private label items at the expense of the incumbent or national brand supplier.  The Company’s software and consulting services provide visibility tools to facilitate the decision making process by providing a shared and trusted view to information that helps the parties optimize item selection and shelf presence.  Furthermore, supermarkets are under pressure to increase the quantity and quality of their perishable offerings.  Perishable departments, such as bakery, meat and seafood, dairy, and deli have historically been loosely managed, but now are a focus for profitability improvement.  The Company’s software and consulting services and change management resources are designed to address this specific business problem, increasing the profitability of perishable products at the department and store level.

 

●	synchronizing retailers and suppliers so they can actually exchange information;
●	aligning their financial interests with payment and invoicing protocols and systems;
●	enlisting brain power of suppliers to help retailers manage complex businesses;
●	providing information to each side to identify and fix out of stocks and overstocks;
●	providing forecasting technology to improve store orders;
●	providing forecasting to help suppliers replenish retailer warehouses;
●	providing systems for suppliers to actually manage inventory flow to retailers; and
●	helping suppliers with overall demand planning and line sequencing.

Scan Based Trading (SBT). Our SBT solution eliminates supply chain inefficiencies and helps retailers and suppliers get product to the store shelves more quickly, efficiently and profitably. SBT is an advanced commerce practice where the supplier retains ownership of the inventory until it scans at the cash register. Once the retailer and supplier have agreed to begin an SBT relationship, the first step is item and price authorization. This process matches retailer and supplier product data to eliminate invoice discrepancies at the point of sale. Our SBT system receives the scan sales data and maintains it in a repository to ensure that product movement data is available to all members of the trading community. Implementation creates increased demand visibility and improved forecast accuracy. Our SBT solution is offered as a hosted service, so implementation is immediate and always available.

 

ReposiTrakTM. On February 14, 2012 the Company announced a partnership with Levitt Partners, an internationally known health care and food safety-consulting firm.  The Company's association with Levitt Partners resulted in the formation of Global Supply Chain Systems, Inc. (“Global Supply”),which will provide a targeted solution for improving supply chain visibility for food and drug safety.  The solution, ResposiTrakTM, is powered by the Company’s technology and was developed in response to the passage of the Food Safety and Modernization Act in January of 2011.  ResposiTrakTM enables grocery, supermarkets, packaged goods manufacturers, food processing facilities, drug stores and drug manufacturers, as well as logistics partners, to track and trace products and components to products throughout the food, drug and dietary supplement supply chains. In the event of a product recall, the solution quickly identifies the supply chain path taken by the recalled product or product component, and allows for the removal of affected products in a matter of minutes, rather than weeks.  Additionally, ReposiTrak reduces risk of further contamination in the supply chain by identifying backward chaining sources and forward chaining recipients of affected products in near real time. On August 8, 2012, the Company announced that Global Supply had begun the first two implementations of ReposiTrak at a global grocery retailer and a major grocery wholesaler.

 

To date, our primary marketing objectives have been to increase awareness of our technology solutions, generate sales leads and develop new customer relationships.  In addition, the sales effort has been directed toward developing existing customers by cross-selling Prescient solutions to legacy Park City Group accounts as well as introducing Park City solutions to legacy Prescient customers. To this end, we attend industry trade shows, conduct direct marketing programs, publish industry trade articles and white papers, participate in interviews and selectively advertise in industry publications.

 

 

ITEM 1A.

RISK FACTORS

●	the extent to which management can successfully execute its strategy of contracting with suppliers (spokes) to connect to existing retail clients recently acquired by the Company (hubs);

●	the progress and scope of product evaluations;

●	the ability of the Company to generate sufficient cash flow from operations to satisfy its debt obligations, or otherwise refinance or restructure such indebtedness;

●	the extent of the Company’s ongoing research and development programs; and

●	the costs of developing marketing and distribution capabilities.

If in the future, the Company is required to seek additional financing in order to fund its operations, retire its indebtedness, and otherwise carry out its business plan, there can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in the Company’s best interests.

 

●	our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers' requirements;
●	the renewal rates for our service;
●	the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;
●	changes in our pricing policies whether initiated by us or as a result of competition;
●	the cost, timing and management effort for the introduction of new features to our service;
●	the rate of expansion and productivity of our sales force;

●	new product and service introductions by our competitors;
●	variations in the revenue mix of editions or versions of our service;
●	technical difficulties or interruptions in our service;
●	general economic conditions that may adversely affect either our customers' ability or willingness to purchase additional subscriptions or upgrade their service, or delay a prospective customers' purchasing decision, or reduce the value of new subscription contracts or affect renewal rates;
●	timing of additional investments in our enterprise cloud computing application and platform services and in our consulting service;
●	regulatory compliance costs;
●	the timing of customer payments and payment defaults by customers;
●	extraordinary expenses such as litigation or other dispute-related settlement payments;
●	the impact of new accounting pronouncements; and
●	the timing of stock awards to employees and the related financial statement impact.

To achieve continual and consistent profitable operations on a fiscal year on-going basis, the Company must have significant growth in its revenue from its products and services, specifically subscription-based services.  If the Company is able to achieve significant growth in future subscription sales and expands the scope of its operations, the Company’s management, financial condition, operational capabilities, and procedures and controls could be strained.  The Company cannot be certain that its existing or any additional capabilities, procedures, systems, or controls will be adequate to support the Company’s operations.  The Company may not be able to design, implement or improve its capabilities, procedures, systems or controls in a timely and cost-effective manner.  Failure to implement, improve and expand the Company’s capabilities, procedures, systems or controls in an efficient and timely manner could reduce the Company’s sales growth and result in a reduction of profitability or increase of net losses.

 

The Company’s officers and directors are required to exercise good faith and high integrity in the management of the Company’s affairs.  The Company’s certificate of incorporation and bylaws, however, provide, that the officers and directors shall have no liability to the stockholders for losses sustained or liabilities incurred which arise from any transaction in their respective managerial capacities unless they violated their duty of loyalty, did not act in good faith, engaged in intentional misconduct or knowingly violated the law, approved an improper dividend or stock repurchase or derived an improper benefit from the transaction. As a result, an investor may have a more limited right to action than he would have had if such a provision were not present. The Company’s certificate of incorporation and bylaws also require it to indemnify the Company’s officers and directors against any losses or liabilities they may incur as a result of the manner in which they operate the Company’s business or conduct the Company’s internal affairs, provided that the officers and directors reasonably believe such actions to be in, or not opposed to, the Company’s best interests, and their conduct does not constitute gross negligence, misconduct or breach of fiduciary obligations.

●	the Company’s customers may prefer one-time fees rather than monthly fees; and

●	there may be a threshold level (number of locations) at which the monthly based fee structure may not be economical to the customer, and a request to convert from monthly fees to an annual fee could occur.

●	development of new software, software solutions or enhancements that are subject to constant change;
●	rapidly evolving technological change; and

●	unanticipated changes in customer needs.

●	whether or how the Company will respond to technological changes in a timely or cost-effective manner;
●	whether the products or technologies developed by the Company’s competitors will render the Company’s products and services obsolete or shorten the life cycle of the Company’s products and services; and

●	whether the Company’s products and services will achieve market acceptance.

  As part of our current disaster recovery arrangements, our production environment and all of our customers' data is currently replicated in near real-time in a separate facility physically located in a different geographic region of the United States. Companies and products added through acquisition may be temporarily served through an alternate facility. We do not control the operation of these facilities, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service. Even with the disaster recovery arrangements, our service could be interrupted.

 

 

●

it may be difficult for the Company to predict the amount of service and technological resources that will be needed by customers of the new offerings, and if the Company underestimates the necessary resources, the quality of its service will be negatively impacted thereby undermining the value of the product to the customer.

●	the Company lacks the experience with these new products and the market acceptance to accurately predict if it will be a profitable product.

●

technological issues between the Company and the customer may be experienced in capturing data, and these technological issues may result in unforeseen conflicts or technological setbacks when implementing the software. This may result in material delays and even result in a termination of the engagement with the customer.

●	the customer’s experience with the new offerings, if negative, may prevent the Company from having an opportunity to sell additional products and services to that customer.

●

if the customer does not use the product as the Company recommends and fails to implement any needed corrective action(s), it is unlikely that the customer will experience the business benefits from the software and may therefore be hesitant to continue the engagement as well as acquire any additional software products from the Company.

●	delays in proceeding with the implementation of the new products by a new customer will negatively affect the Company’s cash flow and its ability to predict cash flow.

Non-conformities or bugs (“errors”) may be found from time to time in the Company’s existing, new or enhanced products after commencement of commercial shipments, resulting in loss of revenue or injury to the Company’s reputation.  In the past, the Company has discovered errors in its products and as a result, has experienced delays in the shipment of products.  Errors in the Company’s products may be caused by defects in third-party software incorporated into the Company’s products.  If so, the Company may not be able to fix these defects without the cooperation of these software providers.  Since these defects may not be as significant to the software provider as they are to us, the Company may not receive the rapid cooperation that may be required.  The Company may not have the contractual right to access the source code of third-party software, and even if the Company does have access to the code, the Company may not be able to fix the defect. In addition, our customers may use our service in unanticipated ways that may cause a disruption in service for other customers attempting to access their data. Since the Company’s customers use the Company’s products for critical business applications, any errors, defects or other performance problems could hurt the Company’s reputation and may result in damage to the Company’s customers’ business.  If that occurs, customers could elect not to renew, delay or withhold payment to us, we could lose future sales or customers may make warranty or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation. These potential scenarios, successful or otherwise, would likely be time consuming and costly.

 

●	that a broker or dealer approve a person’s account for transactions in penny stocks; and
●	the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

●	obtain financial information and investment experience objectives of the person; and

●	make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of valuating the risks of transactions in penny stocks.

●	Sets forth the basis on which the broker or dealer made the suitability determination; and
●	That the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Although the Company’s common stock is currently quoted on the NYSE American Stock Exchange, there is limited trading activity.  The Company can give no assurance that an active market will develop, or if developed, that it will be sustained.  If an investor acquires shares of the Company’s common stock, the investor may not be able to liquidate the Company’s shares should there be a need or desire to do so.

 

●	issuance of common stock in connection with funding agreements with third parties and future issuances of common and preferred stock by the Board of Directors; and
●	the Board of Directors has the power to issue additional shares of common stock and preferred stock and the right to determine the voting, dividend, conversion, liquidation, preferences and other conditions of the shares without shareholder approval.

ITEM 2.

PROPERTIES

ITEM 3.

LEGAL PROCEEDINGS

 

PART II

ITEM 5.

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

		Quarterly Common Stock Price Ranges
		2012								2011
Fiscal Quarter Ended		High				Low				High				Low
September 30		$	4.20			$	4.10			$	4.75			$	3.50
December 30 (1)		$	3.09			$	3.04			$	5.45			$	4.45
March 30 (2)		$	3.10			$	3.05			$	5.79			$	5.35
June 29 (3)		$	3.97			$	3.92			$	5.59			$	4.03

 

 

ITEM 6.

SELECTED FINANCIAL DATA

		Fiscal Year Ended June 30,
Consolidated Statement of Operations Data		2012				2011
Revenue
Subscription		$	6,994,484		$	6,548,578
Other Revenues			3,104,063			4,203,554
Total Revenue		$	10,098,547		$	10,752,132
(Loss) income from Operations		$	(972,712	)	$	141,241
Net (loss) income		$	(858,667	)	$	(205,463		)
		June 30
Consolidated Balance Sheet Data			2012				2011
Cash and Cash Equivalents		$	1,106,176			$	2,618,229
Working Capital			(2,345,977	)			(2,395,501	)
Total Assets			11,936,230				13,976,151
Total Liabilities			6,626,109				8,652,214
Deferred Revenue			2,081,459				1,663,232
Total Debt (current and long-term)			2,710,275				4,886,544
Capital Leases (current and long-term)			41,201				148,749
Stockholders' Equity (deficit)			5,310,121				5,323,937

ITEM 7.

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

 

 

 

Professional services revenue is comprised of revenue from development, consulting, education and training.  Development services include customizations and integrations for a client’s specific business application.  Consulting, education and training include implementation and best practices consulting.  Our professional services fees are more frequently billed on a fixed price/fixed scope, but may also be billed on a time and materials basis. We have determined that the professional services element of our software and subscription arrangements is not essential to the functionality of the software.

 

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: (1) the services have value to the customer on a stand-alone basis, (2) objective and reliable evidence of fair value exists for these services and (3) performance of the services is considered probable and does not involve unique customer acceptance criteria.

 

		Fiscal Year Ended June 30,								Variance
		2012				2011				Dollars				Percent
Subscription		$	6,994,484			$	6,548,578			$	445,906				6.8	%
Other revenues			3,104,063				4,203,554				(1,099,491)				-26.2	%
Total revenue		$	10,098,547			$	10,752,132			$	(653,585)				-6.1	%

The Company continues to focus its strategic initiatives on increasing the number of retailers, suppliers and manufacturers that use its software on a subscription basis. However, while management believes that marketing its suite of software solutions as a renewable and recurring subscription is an effective strategy, it cannot be assured that subscribers will renew the service at the same level in future years, propagate services to new categories or recognize the need for expanding the service offering of the Company’s suite of actionable products and services.

 

 

	Fiscal Year Ended June 30,							Variance
	2012				2011				Dollars					Percent
Cost of revenue and product support		$	4,581,765			$	4,028,222			$	553,543				13.7	%
Percent of total revenue			45.4%				37.5%

	Fiscal Year Ended June 30,								Variance
	2012				2011				Dollars					Percent
Sales and marketing		$	2,640,292			$	2,742,061			$	(101,769)				-3.7	%
Percent of total revenue			26.1%				25.5%

	Fiscal Year Ended June 30,								Variance
	2012				2011				Dollars					Percent
General and administrative		$	2,949,108			$	3,053,818			$	(104,710)				-3.4	%
Percent of total revenue			29.2%				28.4%

The Company’s general and administrative expense was $2,949,108, or 29.2% of total revenue, and $3,053,818 or 28.4% of total revenue for the years ended June 30, 2012 and 2011, respectively, a 3.4% decrease. This $104,710 decrease when comparing expenditures for the year ended June 30, 2012 with the same period ended June 30, 2011 is principally due to (i) the settlement of a lawsuit and related legal fees in the prior year through the combination of cash and equity and (ii) a decrease of approximately $41,000 in travel and related expenditures.  These decreases were partially offset by (w) a $203,000 increase in bad debt expense, (x) a $124,000 increase in in salary, employee benefits, payroll taxes, bonuses, and compensation related expenditures such as stock-based compensation expense for certain employees and board members that are based on multi-year vesting schedules (y) an $89,000 increase in investor relations, shareholder cost, and other professional fees, and (z) a $33,000 increase in facility expenses.

 

	Fiscal Year Ended June 30,								Variance
	2012				2011				Dollars					Percent
Depreciation and amortization		$	900,094			$	786,790			$	113,304				14.4	%
Percent of total revenue			8.9%				7.3%

		Fiscal Year Ended June 30,								Variance
		2012				2011				Dollars				Percent
Other gains		$	319,272			$	-			$	319,272					%
Interest income (expense)			(205,227)				(346,704)				(141,477)				-40.8	%
Total other income (expense)		$	114,045			$	(346,704)			$	460,749				132.9	%

	Fiscal Year Ended June 30,								Variance
	2012				2011				Dollars					Percent
Preferred dividends		$	834,687			$	826,411			$	8,276				1.0	%
Percent of total revenue			8.3%				7.7%

 

	Fiscal Year Ended June 30, 2012								Variance
	As Reported				Pro-forma				Dollars					Percent
Dividends on Series A Preferred		$	340,375			$	512,802			$	172,427				50.7	%
Net loss applicable to common shareholders		$	(1,693,354)			$	(1,865,781)			$	(172,427)				-10.2	%
Basic and diluted loss per share		$	(0.14)			$	(0.16)			$	(0.02)				-10.2	%

 

 

		Fiscal Year Ended June 30,								Variance
		2012				2011				Dollars				Percent
Cash and Cash Equivalents		$	1,106,176			$	2,618,229			$	(1,512,053)				57.8	%

 

		Fiscal Year Ended June 30,								Variance
		2012				2011				Dollars				Percent
Cash flows provided by (used in) operating activities		$	1,008,443			$	1,446,786			$	(438,343)				30.3	%

		2012				2011
Net (loss) income		$	(858,667)			$	(205,463)
Noncash expense and income, net			1,914,302				2,081,762
Net changes in operating assets and liabilities			(47,192)				(429,513)
		$	1,008,443			$	1,446,786

 

	Fiscal Year Ended June 30,								Variance
	2012				2011				Dollars					Percent
Cash flows (used in) provided by investing activities		$	(238,760)			$	(555,617)			$	(316,857)				-57.0	%

		Fiscal Year Ended June 30,								Variance
		2012				2011				Dollars				Percent
Cash flows (used in) provided by financing activities		$	(2,281,736)			$	569,629			$	(2,851,365)				-500.6	%

Net cash flows used in financing activities totaled $2,281,736 for the year ended June 30, 2012 compared to cash flows provided by financing activities of $569,629 for the year ended June 30, 2011. The change in net cash provided by (used in) financing activities is attributable to (i) a $1,902,000 increase in principal payments on notes payable and capital leases, (ii) a $600,000 decrease in advances from lines of credit, (iii) a $249,000 decrease in proceeds from the issuance of debt and (iv) $141,000 decrease in proceeds from the issuance of common stock.  These uses of cash were partially offset by increases in cash provided by the exercise of options and warrants of $164,000.

 

		Fiscal Year Ended June 30,								Variance
		2012				2011				Dollars				Percent
Current assets		$	3,568,561			$	4,943,820			$	(1,375,259)				-27.8	%

		Fiscal Year Ended June 30,								Variance
		2012				2011				Dollars				Percent
Current liabilities		$	5,914,538			$	7,339,321			$	(1,424,783)				-19.4	%

In July 2012, the FASB issued ASU 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"), which permits an entity to make a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit's indefinite-lived intangible asset is less than the asset's carrying value before applying the two-step goodwill impairment model that is currently in place. If it is determined through the qualitative assessment that the fair value of a reporting unit's indefinite-lived intangible asset is more likely than not greater than the asset's carrying value, the remaining impairment steps would be unnecessary. The qualitative assessment is optional, allowing companies to go directly to the quantitative assessment. ASU 2012-02 is effective for the Company for annual and interim indefinite-lived intangible asset impairment tests performed beginning July 1, 2013, however, early adoption is permitted. The Company is currently evaluating the impact ASU 2012-02 will have on its Condensed Consolidated Financial Statements.

 

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Cash and Cash Equivalents		Aggregate Fair Value				Weighted Average Interest Rate
Cash and Cash Equivalents		$	1,106,176				NM

Debt Summary		Principal Amount				Weighted Average Interest Rate				% Mix
Variable rate debt		$	1,877,664				4.26%				69.3%
Fixed rate debt		$	832,611				4.16%				30.7%

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

          None.

 

ITEM 9A.

CONTROLS AND PROCEDURES

(a)	Evaluation of disclosure controls and procedures.

(b)	Management's Annual Report on Internal Control over Financial Reporting.

 

ITEM 9B.

OTHER INFORMATION

 

 

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Name of Nominee		Age		Title
Randall K. Fields		65		President, Chief Executive Officer and Chairman
Robert P. Hermanns		68		Director
Edward L. Clissold		56		Chief Financial Officer, General Counsel
Robert W. Allen		69		Director
James R. Gillis		59		Director
Peter T. Brennan		64		Director
William S. Kies, Jr.		60		Director

 

 

ITEM 11.

EXECUTIVE COMPENSATION

(1)		Stock awards consist solely of shares of restricted common stock. Amounts shown do not reflect compensation actually received by the Named Executive Officer. Instead, the amounts shown are the compensation costs recognized by the Company during the fiscal year for stock awards as determined pursuant to FAS 123R.
(2)		$325,000 of Mr. Fields’ cash compensation was paid to Fields Management, Inc., a management company wholly-owned by Mr. Fields, during 2012 and 2011, respectively.  2011 amount includes $50,000 of compensation paid in shares of the Company’s common stock in lieu of cash compensation.
(3)		$71,875 represents the value of 18,915 shares of Common Stock, which vested during the reporting period. The shares were originally issued in June 2010, and are valued as of the date of issuance, or $3.80 per share.
(4)		Represents the value of 60,000 shares of common stock issued to Fields Management, Inc. which vested during the reporting period.  The shares were originally issued in July 2009 under the terms of a Services Agreement between the Company and Fields Management, Inc., and are valued as of the date of issuance, or $1.10 per share.
(5)		These amounts include premiums paid on life insurance policies of $25,344 for each of 2012 and 2011; computer related expenses of $7,113 and $6,000 for 2012 and 2011, respectively; Company car related expenses of $18,363 and $19,920 for 2012 and 2011, respectively; medical premiums of $9,651 and $10,601 for 2012 and 2011, respectively; and reimbursement for certain accounting services of $12,000 for each of 2012 and 2011, respectively.
(6)		Mr. Colbert resigned on August 2, 2012.

●	an incentive bonus based upon the Company’s achievement of performance goals determined each year by the Compensation Committee of the Company’s Board of Directors;
●	up to $1,200 per month for reimbursement of a vehicle of Executive’s choice;
●	an annual allowance of up to $6,000 for computer equipment;
●	600,000 shares of common stock of the Company, subject to a pro-rata (10) ten-year vesting schedule;
●	payment of premiums for health insurance; and
●	reimbursement for certain accounting expense.

 

●	annual cash compensation of $10,000 payable at the rate of $2,500 per quarter. The Company has the right to pay this amount in the form of shares of common stock, and did so for all compensation owed directors during fiscal year 2012; and

●	upon appointment, outside independent directors receive a grant of $75,000 payable in shares of the Company’s restricted common stock calculated based on the market value of the shares of common stock on the date of grant. The shares vest ratably over a five-year period.

Name	Stock Awards ($) (1)		Total ($)
James R. Gillis	25,000			25,000
Richard S. Krause (2)	21,250			21,250
Robert W. Allen	25,000			25,000
Peter Brennan	25,000			25,000
C. Manly Molpus (3)	9,167			9,167
Robert P. Hermanns	10,000			10,000
William S. Kies, Jr.	6,250			6,250

(1)	Stock awards consist solely of stock grants of fully vested common stock.  Amounts shown do not reflect compensation actually received by the director.  Instead, the amounts shown reflect the compensation costs recognized by the Company during the fiscal year for stock awards as determined pursuant to FAS 123R.
(2) (3)	Mr. Krause resigned from the Company’s Board of Directors on February 7, 2012. Mr. Molpus did not stand for re-election at the Company’s annual meeting, held on May 25, 2012.

 

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Name		Series A Convertible Preferred Stock				% Ownership of Class				Series B Convertible Preferred Stock				% Ownership of Class
Hillson Partners LP			68,456				9.96	%			-				N/A
Paul Seid			34,904				5.08	%			-				N/A
Robert W. Allen			34,217	(1)			4.98	%			52,301				12.70	%
Riverview Financial Corp.			6,842	(2)			*				359,626	(3)			87.30	%
Randall K. Fields			6,842				*				359,626	(4)			87.30	%

(1)	Includes 17,109 shares of Series A Preferred held by Susan M. Allen, Mr. Allen’s spouse.
(2)	Includes 6,842 shares of Series A Preferred held in the name Randall K. Fields, Mr. Fields is the beneficial owner of Riverview Financial Corp.
(3)	Includes 10,000 shares of Series B Preferred held in the name Julie Fields, Mr. Fields spouse.
(4)	Includes 349,626 shares of Series B Preferred held in the name of Riverview Financial Corp. and 10,000 shares of Series B Preferred in the name of Julie Fields. Mr. Fields is the beneficial owner of Riverview Financial Corp.and spouse of Mrs. Fields.

Name		Common Stock				Common Stock Options Exercisable Within 60 Days			Common Stock Warrants Exercisable Within 60 Days		Total Stock and Stock Based Holdings(1)			% Ownership of Class
Randall K. Fields(2)			5,714,557	(3)(4)			-		-			5,714,557		43.42	%
Edward L. Clissold(2)			2,863				4,000					2,863		*
Robert Hermanns(2)			71,372				-		-			71,372		*
James R. Gillis(2)			91,426				-		-			91,426		*
Robert W. Allen(2)			529,694	(5)			-		-			529,694		4.24	%
Peter Brennan(2)			57,786				-		-			57,786		*
William S. Kies, Jr.(2)			3,841				-		-			3,841		*
Goldman Capital Management			1,363,007				-		-			1,309,469		11.14	%
Directors Group (7 persons)			6,471,539				4,000		-			6,475,539		48.29	%

(1)	For purposes of this table “beneficial ownership” is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, pursuant to which a person or group of persons is deemed to have “beneficial ownership” of any shares that such person or group has the right to acquire within 60 days after September 21, 2012. For purposes of computing the percentage of outstanding common shares held by each person or group of persons named above, any shares that such person or group has the right to acquire within 60 days after September 21, 2012, are deemed outstanding but are not deemed to be outstanding for purposes of computing the percentage ownership of any other person or group.  As of September 21, 2012, there were 12,239,257 shares of our common stock issued and outstanding.  There were also outstanding options and warrants entitling the holders to purchase 4,000 shares of our common stock owned by officers and/or directors of the Company.
(2)	Officers and directors of the Company.
(3)	Includes 166,860 shares of common stock held in the name of Fields Management, Inc., of which Mr. Fields is the beneficial owner, 651,152 shares of common stock held in the name of Riverview Financial Corp., of which Mr. Fields is the beneficial owner, and 30,667 held by Mr. Fields’spouse, Julie Fields.
(4)	Includes 22,807 shares issuable upon conversion of 6,842 shares of Series A Preferred held by Mr. Fields, 874,065 shares issuable upon conversion of 349,626 shares of Series B Preferred held by Riviervew Financial Corp., of which Mr. Fields is the beneficial owner, and 25,000 shares issuable upon conversion of 10,000 shares of Series B Convertible Preferred held Mr. Fields’ spouse, Julie Fields.
(5)	Includes 46,243 shares of common stock held in trust, in which Mr. Allen is the trustee.  Includes 57,028 and 57,030 shares issuable upon conversion of 17,108 and 17,109 shares of Series A Preferred for Mr. and Mrs. Allen, respectively. Includes 130,753 shares issuable upon conversion of 52,301 shares of Series B Preferred held by Mr. Allen.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

●	Report of Independent Registered Public Accounting Firm
●	Condensed Consolidated Balance Sheets as of June 30, 2012 and June 30, 2011
●	Condensed Consolidated Statements of Operations for the years ended June 30, 2012 and 2011
●	Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the years ended June 30, 2012 and 2011
●	Condensed Consolidated Statements of Cash Flows for the years ended June 30, 2012 and 2011
●	Notes to Condensed Consolidated Financial Statements

Exhibit Number		Description
2.1		Agreement and Plan of Merger and Reorganization, Dated August 28, 2008 (1)
2.2		Form of Stock Purchase Agreement (1)
2.3		Form of Stock Voting Agreement (1)
2.4		Form of Promissory Note (2)
3.1		Articles Of Incorporation (3)
3.2		Certificate Of Amendment (4)
3.3		Certificate of Amendment (5)
3.4		Bylaws (3)
4.1		Certificate of Designation of the Series A Convertible Preferred Stock (6)
4.2		Certificate of Designation of the Series B Convertible Preferred Stock (7)
10.1		Placement Agent Agreement (8)
10.2		Warrant to Purchase Common Stock, Dated June 14, 2006 (9)
10.3		Securities Purchase Agreement  (9)
10.4		Employment Agreement with Randall K. Fields (10)
10.5		Services Agreement with Fields Management, Inc. (10)
10.6		Warrant to Purchase Common Stock, Dated June 30, 2006 (5)
10.7		Stock Purchase Agreement (6)
10.8		Warrant to Purchase Common Stock, dated June 1-22, 2007 (6)
10.9		Warrant to Purchase Common Stock, dated June 22, 2007 (6)
10.10		Warrant to Purchase Common Stock issued to Taglich Brothers, Inc. (10)
10.11		Form of Securities Purchase Agreement, dated January 12, 2009 (10)
10.12		Securities Purchase Agreement, dated January 12, 2009, by and between the Company and Robert W. Allen (10)
10.13		Securities Purchase Agreement, dated January 12, 2009, by and between the Company and Taglich Brothers, Inc. (10)
10.14		Subordinated Promissory Note, dated April 1, 2009, issued to Riverview Financial Corporation (10)
10.15		Amendment to Loan Agreement and Note, by and between U.S. Bank National Association and the Company, dated September 15, 2009 (11)
10.16		Term Note, dated September 30, 2009(11)
10.17		Amendment to Loan Agreement and Note, by and between U.S. Bank National Association and the Company, dated September 30, 2009 (12)
10.18		Term Loan Agreement, by and between U.S. Bank National Association and the Company, dated May 5, 2010 (13)
10.19		Amendment to Loan Agreement and Note, by and between U.S. Bank National Association and the Company, dated May 5, 2010 (13)
10.20		Promissory Note, dated August 25, 2009, issued to Baylake Bank (14)
14.1		Code of Ethics and Business Conduct (15)
21		List of Subsidiaries(16)
23		Consent of HJ & Associates, LLC, dated September 25, 2012
31.1		Certification of Principal Executive Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002
31.2		Certification of Principal Financial Officer pursuant to Section 302 of Sarbanes Oxley Act of 2002
32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350