PARK CITY GROUP INC - Quarter Report: 2012 December (Form 10-Q)

pcg10q12312012.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2012.

[ ]	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.)

	299 S Main Street, Suite 2370, Salt Lake City, UT 84111
	(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. [X] Yes [ ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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). [X] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large-accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer	[ ]	Smaller reporting company	[X]

Indicate by checkmark if whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, $0.01 par value: 12,515,776 shares as of February 1, 2013.

Table of Contents

PARK CITY GROUP, INC.

TABLE OF CONTENTS

		Page
	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Condensed Balance Sheets as of December 31, 2012 (Unaudited) and June 30, 2012	1

	Consolidated Condensed Statements of Operations for the Three and Six Months Ended December 31, 2012 and 2011 (Unaudited)	2

	Consolidated Condensed Statements of Cash Flows for the Six Months Ended December 31, 2012 and 2011 (Unaudited)	3

	Notes to Consolidated Condensed Financial Statements	4

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	20

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	20

Item 5.	Other Information	21

Item 6.	Exhibits	21

Exhibit 31	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

Exhibit 32	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	Signatures

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PARK CITY GROUP, INC.

Consolidated Condensed Balance Sheets

	December 31,		June 30,
	2012		2012
Assets	(unaudited)
Current assets:
Cash	$	1,111,404	$	1,106,176
Receivables, net of allowance of $140,624 and $220,000 at December 31, 2012 and June 30, 2012, respectively		2,499,835		2,290,859
Prepaid expenses and other current assets		238,364		171,526

Total current assets		3,849,603		3,568,561

Property and equipment, net		680,284		559,140

Other assets:
Deposits and other assets		35,466		20,697
Customer relationships		2,551,493		2,762,651
Goodwill		4,805,933		4,805,933
Capitalized software costs, net		146,165		219,248

Total other assets		7,539,057		7,808,529

Total assets	$	12,068,944	$	11,936,230

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	769,098	$	550,846
Accrued liabilities		1,177,546		1,242,328
Deferred revenue		1,866,525		2,081,459
Capital lease obligations		10,404		41,201
Lines of credit		1,200,000		1,200,000
Notes payable		695,697		798,704

Total current liabilities		5,719,270		5,914,538

Long-term liabilities:
Notes payable, less current portion		515,750		711,571
Other long-term liabilities		102,550		-

Total liabilities		6,337,570		6,626,109

Commitments and contingencies		-		-

Stockholders' equity:

Series A Convertible Preferred Stock, $0.01 par value, 30,000,000 shares authorized; 657,481 and 685,671 shares issued and outstanding at December 31, 2012 and June 30, 2012, respectively		6,575		6,857
Series B Convertible Preferred Stock, $0.01 par value, 30,000,000 shares authorized; 411,927 shares issued and outstanding at December 31, 2012 and June 30, 2012, respectively		4,119		4,119
Common Stock, $0.01 par value, 50,000,000 shares authorized; 12,468,154 and 12,087,431 shares issued and outstanding at December 31, 2012 and June 30, 2012, respectively		124,681		120,874
Additional paid-in capital		38,539,673		37,763,196
Accumulated deficit		(32,943,674)		(32,584,925)

Total stockholders' equity		5,731,374		5,310,121

Total liabilities and stockholders' equity	$	12,068,944	$	11,936,230

See accompanying notes to consolidated condensed financial statements.

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PARK CITY GROUP, INC.

Consolidated Condensed Statements of Operations (unaudited)

		Three Months Ended				Six Months Ended
		December 31,				December 31,
	2012		2011			2012		2011
Revenues:
Subscription	$	1,955,562	$	1,681,000	$	3,910,157	$	3,423,131
Other Revenue		703,340		886,122		1,461,572		1,723,271

Total revenues		2,658,902		2,567,122		5,371,729		5,146,402

Operating expenses:
Cost of services and product support		1,099,165		1,115,113		2,179,649		2,255,374
Sales and marketing		763,301		568,797		1,343,657		1,230,545
General and administrative		595,407		790,855		1,169,501		1,550,392
Depreciation and amortization		230,455		220,835		460,523		444,800

Total operating expenses		2,688,328		2,695,600		5,153,330		5,481,111

Income (loss) from operations		(29,426)		(128,478)		218,399		(334,709)

Other income (expense):
Interest expense		(34,435)		(47,394)		(77,868)		(120,884)

Income (loss) before income taxes		(63,861)		(175,872)		140,531		(455,593)

(Provision) benefit for income taxes:		-		-		-		-
Net income (loss)		(63,861)		(175,872)		140,531		(455,593)

Dividends on preferred stock		(289,300)		(208,867)		(499,280)		(417,220)

Net income (loss) applicable to common shareholders	$	(353,161)	$	(384,739)	$	(358,749)	$	(872,813)

Weighted average shares, basic and diluted		12,303,000		11,698,000		12,259,000		11,674,000
Basic and diluted loss per share	$	(0.03)	$	(0.03)	$	(0.03)	$	(0.07	)

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 Six Months Ended December 31,

	2012			2011
Cash Flows From Operating Activities:
Net income (loss)	$	140,531		$	(455,593	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		460,523			444,800
Bad debt expense		-			69,194
Stock compensation expense		525,329			563,175

(Increase) decrease in:
Receivables		(208,976	)		466,520
Prepaids and other assets		(81,607	)		48,593
(Decrease) increase in:
Accounts payable		218,252			(264,310	)
Accrued liabilities		40,317			54,985
Deferred revenue		(214,934	)		(535,504	)

Net cash provided by operating activities		879,435			391,860

Cash Flows From Investing Activities:
Purchase of property and equipment		(297,426	)		(54,318	)
Net cash used in investing activities		(297,426	)		(54,318	)

Cash Flows From Financing Activities:
Proceeds from issuance of notes		95,548			137,028
Proceeds from exercise of options and warrants		-			12,749
Dividends paid		(247,156	)		(247,156	)
Payments on notes payable and capital leases		(425,173	)		(1,916,065	)

Net cash used in financing activities		(576,781	)		(2,013,444	)

Net increase (decrease) in cash		5,228			(1,675,902	)

Cash at beginning of period		1,106,176			2,618,229

Cash at end of period	$	1,111,404		$	942,327

Supplemental Disclosure of Cash Flow Information:
Cash paid for income taxes	$	-		$	-
Cash paid for interest	$	79,118		$	180,943

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Common stock to pay accrued liabilities	$	608,802		$	418,434
Dividends accrued on preferred stock	$	499,280		$	417,220
Dividends paid with preferred stock	$	171,200		$	167,060

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

Overview

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 for use 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.

The Company has also established a relationship with Levitt Partners, an internationally known health care and food safety-consulting firm, which formed ReposiTrak, Inc., formerly, Global Supply Chain Systems, Inc. (“ReposiTrak”). ReposiTrak provides a targeted solution for improving supply chain visibility for food and drug safety. ResposiTrak’s solution, similarly called 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, ResposiTrakTM 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.

We market our products to businesses primarily on a subscription basis. However, we also deliver our products 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 299 S Main Street, Suite 2370, Salt Lake City, Utah 84111. The telephone number is (435) 645-2000. The website address is http://www.parkcitygroup.com.

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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 and six months ended December 31, 2012 are not necessarily indicative of the operating results that may be expected for the fiscal year ending June 30, 2013.

Recent Accounting Pronouncements

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.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, an update to the authoritative guidance which requires disclosure information about offsetting and related arrangements for financial instruments and derivative instruments. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2014. The adoption of this updated authoritative guidance is not expected to have a significant impact on the Company’s Condensed Consolidated Financial Statements.

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05; an update to the authoritative guidance which defers the effective date of the presentation of reclassification adjustments out of accumulated other comprehensive income. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2013. The adoption of this updated authoritative guidance is not expected to have a significant impact on the Company’s Condensed Consolidated Financial Statements.

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.

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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 December 31, 2012 and 2011 options and warrants to purchase 62,300 and 251,529 shares of common stock, respectively, were not included in the computation of diluted EPS due to the anti-dilutive effect. For the three and six months ended December 31, 2012 and 2011, 3,221,421 and 3,285,648 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.

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 December 31, 2012, the Company had negative working capital of $1,869,667 when compared with negative working capital of $2,345,977 at June 30, 2012. This $476,310 increase in working capital is principally due to an increase in accounts receivable, and decreases in deferred revenue and current notes payable during the period ended December 31, 2012. While no assurances can be given, management currently believes that the Company will continue to increase its working capital position, and thereby reduce its indebtedness in subsequent periods utilizing existing cash resources and projected cash flow from operations. In addition, management may also refinance or restructure certain of the Company’s indebtedness to extend the maturities of such indebtedness to address its short- and long-term working capital requirements. Management believes that 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.

On September 4, 2012, the Company announced that its Board of Directors had approved a share repurchase program (the "Repurchase Program") of up to $2.0 million of the Company's common stock over the next two years, or such other date, which ever is earlier, when the Repurchase Program is revoked or varied by the Board of Directors. The Repurchase Program does not obligate the Company to acquire any particular number of shares of common stock, and is contingent on the redemption by the Company of its Series A Convertible Preferred Stock. The Repurchase Program may be suspended, modified or discontinued at any time at the Company's discretion without prior notice.

NOTE 4. 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.

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NOTE 5. OUTSTANDING STOCK OPTIONS

The following tables summarize information about fixed stock options and warrants outstanding and exercisable at December 31, 2012:

		Options and Warrants						Options and Warrants
		Outstanding						Exercisable
		at December 31, 2012						at December 31, 2012
Range of exercise prices		Number outstanding at December 31, 2012		Weighted average remaining contractual life (years)		Weighted average exercise price		Number exercisable at December 31, 2012		Weighted average exercise price
Options
$	1.50 - 2.50		12,300		0.57	$	1.61		12,300	$	1.61
Warrants
$	1.80		50,000		1.03	$	1.80		50,000	$	1.80
			62,300		0.94	$	1.76		62,300	$	1.76

NOTE 6. RELATED PARTY TRANSACTIONS

None.

NOTE 7. PROPERTY AND EQUIPMENT

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

	December 31, 2012 (unaudited)		June 30, 2012
Computer equipment	$	2,302,270	$	2,236,625
Furniture and fixtures		314,823		314,823
Leasehold improvements		231,782		141,043
		2,848,875		2,692,491
Less accumulated depreciation and amortization		(2,168,591)		(2,133,351)
	$	680,284	$	559,140

NOTE 8. CAPITALIZED SOFTWARE COSTS

Capitalized software costs consist of the following as of:

	December 31, 2012 (unaudited)		June 30, 2012
Capitalized software costs	$	2,443,128	$	2,443,128
Less accumulated amortization		(2,296,963)		(2,223,880)
	$	146,165	$	219,248

NOTE 9. ACCRUED LIABILITIES

Accrued liabilities consist of the following as of:

	December 31, 2012 (unaudited)		June 30, 2012
Accrued stock-based compensation	$	351,757	$	506,677
Accrued dividends		297,617		347,554
Accrued compensation		288,325		216,694
Taxes payable		231,983		165,502
Other accrued liabilities		7,864		5,901
	$	1,177,546	$	1,242,328

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NOTE 10. PREFERRED DIVIDENDS

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.

The Dividend Rate with respect the Series A Preferred increased to 10% per annum for the quarter ended December 31, 2012 since the average closing price of the Company’s common stock during the last thirty (30) trading days of the quarter was less than $3.00 per share (a “Dividend Adjustment”). A holder of Series A Preferred has notified the Company that a Dividend Adjustment was required as a result of the average closing price of the Company’s common stock for the thirty-day period ended March 31, 2012, and subsequent quarters. Management disagrees with the method of calculation used by the holder and believes that the Company’s calculation determining that a Dividend Adjustment was not required during the quarters ended March 31 and September 30, 2012 is reasonable, and that an ultimate determination that an alternative method should be employed is doubtful. The pro-forma effect of a Dividend Adjustment for the six months ended December 31, 2012 is shown in the table below:

	Six Months Ended December 31, 2012						Variance
	As Reported			Pro-forma			Dollars			Percent
Dividends on Series A Preferred		$	252,123		$	342,816		$	90,693		36.0	%
Net loss applicable to common shareholders		$	(358,749)		$	(449,442)		$	(90,693)		25.4	%
Basic and diluted loss per share		$	(0.03)		$	(0.04)		$	(0.01)		25.4	%

NOTE 11. INCOME TAXES

The Company and its subsidiaries file 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 2009.

NOTE 12. 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 subsequent events that require disclosure.

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, 2012 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, 2012 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.

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Overview

Results of Operations

Comparison of the Three Months Ended December 31, 2012 to the Three Months Ended December 31, 2011.

Revenue

	Fiscal Quarter Ended December 31,				Variance
	2012		2011		Dollars		Percent
Subscription	$	1,955,562	$	1,681,000	$	274,562		16.3	%
Other revenue		703,340		886,122		(182,782)		-20.6	%
Total revenue	$	2,658,902	$	2,567,122	$	91,780		3.6	%

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Total revenue was $2,658,902 and $2,567,122 for the three months ended December 31, 2012 and 2011, respectively, a 3.6% increase. This $91,780 increase in total revenue was principally due to an increase of $274,562 in subscription revenue, partially offset by a decrease of $182,782 in other revenue, as more particularly described below.

Management believes that the Company’s strategy of pursuing contracts with suppliers (“spokes”) to connect to retail customers (“hubs”) that have been added in the most recently completed fiscal year, including the service agreement with CVS Pharmacy, Inc., announced in July 2012, should result in increased revenue during the fiscal year ending June 30, 2013, and in subsequent periods. In addition, management believes that revenue in subsequent periods will increase as a result of the receipt of subscription payments from ReposiTrak resulting from the license of the Company’s technology necessary to power ResposiTrakTM. 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.

Subscription Revenue

Subscription revenue was $1,955,562 and $1,681,000 for the three months ended December 31, 2012 and 2011, respectively, a 16.3% increase in the three months ended December 31, 2012 when compared with the three months ended December 31, 2011. The net increase of $274,562 is principally due to (i) the increase of subscription customers added to the Company’s customer base which contributed approximately $330,000 in new subscription revenue and (ii) a $172,000 increase attributable to the growth of existing retailer and supplier subscriptions. The increase in subscription revenue was partially offset by a decrease of approximately $228,000 resulting from the non-renewal of existing clients, including the non-renewal of a significant retail client and related connections in January 2012.

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

Other Revenue

Other revenue was $703,340 and $886,122 for the three months ended December 31, 2012 and 2011, respectively, a decrease of 20.6% in the three months ended December 31, 2012 compared with the three months ended December 31, 2011. The net decrease of $182,782 is principally due to (i) the non-renewal of maintenance contracts, partially offset by increasing existing contracts resulting in a net reduction of maintenance revenue of approximately $32,000; (ii) a decrease in license revenue of $204,000; and (iii) a decrease in professional service revenue of $63,000. These decreases were partially offset by an increase in other revenue related to a management agreement with ReposiTrak.

While these other sources of revenue will continue in future periods, management’s focus on recurring subscription-based revenue will cause license, maintenance, and consulting services to fluctuate and be difficult to predict.

Cost of Services and Product Support

	Fiscal Quarter Ended December 31,						Variance
	2012			2011			Dollars		Percent
Cost of services and product support	$	1,099,165		$	1,115,113		$	(15,948)		-1.4	%
Percent of total revenue		41.3	%		43.4	%

Cost of services and product support was $1,099,165 and $1,115,113 for the three months ended December 31, 2012 and 2011, respectively, a 1.4% decrease in the three months ended December 31, 2012 compared with the three months ended December 31, 2011. This decrease of $15,948 for the quarter ended December 31, 2012 when compared with the same period ended December 31, 2011 is principally due to a $54,000 decrease in employee related expenses. This decrease was partially offset by a $38,000 increase in infrastructure expansion and upgrades.

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Sales and Marketing Expense

	Fiscal Quarter Ended
	December 31,						Variance
	2012			2011			Dollars		Percent
Sales and marketing	$	763,301		$	568,797		$	194,504		34.2	%
Percent of total revenue		28.7	%		22.2	%

Sales and marketing expense was $763,301 and $568,797 for the three months ended December 31, 2012 and 2011, respectively, a 34.2% increase. This $194,504 increase over the comparable quarter was primarily the result of (i) an increase of approximately $138,000 in employee related expenses, (ii) an increase of $68,000 in marketing costs. These increases were partially offset by a decrease of approximately $12,000 in other selling expenses.

General and Administrative Expense

	Fiscal Quarter Ended
	December 31,						Variance
	2012			2011			Dollars		Percent
General and administrative	$	595,407		$	790,855		$	(195,448)		-24.7	%
Percent of total revenue		22.4	%		30.8	%

General and administrative expense was $595,407 and $790,855 for the three months ended December 31, 2012 and 2011, respectively, a 24.7% decrease in the three months ended December 31, 2012 compared with the three months ended December 31, 2011. This $195,448 decrease when comparing expenditures for the quarter ended December 31, 2012 with the same period ended December 31, 2011 is principally due (i) a decrease of approximately $154,000 in employee related expenses, (ii) a decrease of $27,000 in bad debt expense, and (iii) a decrease of approximately $24,000 in other professional fees. These decreases were partially offset by an increase of $10,000 in other operational expenses.

Depreciation and Amortization Expense

	Fiscal Quarter Ended
	December 31,						Variance
	2012			2011			Dollars		Percent
Depreciation and amortization	$	230,455		$	220,835		$	9,620		4.4	%
Percent of total revenue		8.7	%		8.6	%

Depreciation and amortization expense was $230,455 and $220,835 for the three months ended December 31, 2012 and 2011, respectively, an increase of 4.4% in the three months ended December 31, 2012 compared with the three months ended December 31, 2011. This increase of $9,620 for the quarter ended December 31, 2012 when compared to the quarter ended December 31, 2011 is due to an increase in depreciation expense related to new equipment.

Other Income and Expense

	Fiscal Quarter Ended
	December 31,						Variance
	2012			2011			Dollars		Percent
Interest expense	$	34,435		$	47,394		$	(12,959)		-27.3	%
Percent of total revenue		1.3	%		1.8	%

Interest expense was $34,435 and $47,394 for the three months ended December 31, 2012 and 2011, respectively, a decrease of 27.3% in the three months ended December 31, 2012 compared with the three months ended December 31, 2011. This decrease of $12,959 for the quarter ended December 31, 2012 when compared to the quarter ended December 31, 2011 is due to reduced principal balances in the current year.

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Preferred Dividends

	Fiscal Quarter Ended
	December 31,						Variance
	2012			2011			Dollars		Percent
Preferred dividends	$	289,300		$	208,867		$	80,433		38.5	%
Percent of total revenue		10.9	%		8.1	%

Dividends accrued on the Company’s Series A Preferred and Series B Preferred was $289,300 and $208,867 for the three months ended December 31, 2012 and 2011, respectively. Through the quarter ended September 30, 2012, holders of Series A Preferred were 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. The dividend rate with respect the Series A Preferred increased to 10% per annum as a result of the average closing price of the Company’s common stock during the last thirty (30) trading days of the quarter ending December 31, 2012 being less than $3.00 per share (a “Dividend Adjustment”). A holder of Series A Preferred has notified the Company that a Dividend Adjustment was required as a result of the average closing price of the Company’s common stock for the thirty-day period ended March 31, 2012, and subsequent quarters. Management disagrees with the method of calculation used by the holder and believes that the Company’s calculation determining that a Dividend Adjustment was not required during the quarters ended March 31 and September 30, 2012, is reasonable, and that an ultimate determination that an alternative method should be employed is doubtful. The pro-forma effect of a Dividend Adjustment for the six months ended December 31, 2012 is shown in the table below:

	Six Months Ended December 31, 2012						Variance
	As Reported			Pro-forma			Dollars			Percent
Dividends on Series A Preferred		$	252,124		$	342,817		$	90,693		36.0	%
Net loss applicable to common shareholders		$	(358,749)		$	(449,442)		$	(90,693)		25.4	%
Basic and diluted loss per share		$	(0.03)		$	(0.04)		$	(0.01)		25.4	%

Comparison of the Six Months Ended December 31, 2011 to the Six Months Ended December 31, 2010.

Revenues

	Six Months Ended December 31,				Variance
	2012		2011		Dollars		Percent
Subscription	$	3,910,157	$	3,423,131	$	487,026		14.2	%
Other revenue		1,461,572		1,723,271		(261,699)		-15.2	%
Total revenue	$	5,371,729	$	5,146,402	$	225,327		4.4	%

Total revenue was $5,371,729 and $5,146,402 for the six months ended December 31, 2012 and 2011, respectively, a 4.4% increase. This $225,327 increase in total revenues is principally due to an increase of $487,026 in subscription revenue, partially offset by a decrease of $261,699 in other revenue, as more particularly described below. 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 revenue was $3,910,157 and $3,423,130 for the six months ended December 31, 2012 and 2011, respectively, an increase of 14.2% in the six months ended December 31, 2012 when compared with the six months ended December 31, 2011. The net increase of $487,026 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”), which contributed approximately $647,000 of new subscription revenue; and (ii) a $383,000 increase attributable to the growth of existing retailer and supplier subscriptions. The increase in subscription revenue was partially offset by a decrease of approximately $543,000 resulting from the non-renewal of existing customers, including the non-renewal of a significant retail client and related connections in January 2012. 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.

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Other Revenue

Other revenue was $1,461,572 and $1,723,271 for the six months ended December 31, 2012 and 2011, respectively, a decrease of 15.2% in the six months ended December 31, 2012 compared with the six months ended December 31, 2011. The net decrease of $261,699 is principally due to (i) the non-renewal of maintenance contracts, partially offset by increasing existing contracts resulting in a net reduction of maintenance revenue of approximately $67,000; (ii) a decrease in license revenue of $312,000; and (iii) a decrease in professional service revenue of $172,000. These decreases were partially offset by an increase in other revenue related to a management agreement with ReposiTrak.

Cost of Services and Product Support

	Six Months Ended December 31,						Variance
	2012			2011			Dollars		Percent
Cost of services and product support	$	2,179,649		$	2,255,374		$	(75,725)		-3.4	%
Percent of total revenue		40.6	%		43.8	%

Cost of services and product support was $2,179,649 and $2,255,374 for the six months ended December 31, 2012 and 2011, respectively, a 3.4% decrease in the six months ended December 31, 2012 compared with the six months ended December 31, 2011. This decrease of $75,725 for the six months ended December 31, 2012 when compared with the same period ended December 31, 2011 is principally due to a $137,000 decrease in employee related expenses. This decrease was partially offset by a $61,000 increase in infrastructure expansion and upgrades.

Sales and Marketing Expense

	Six Months Ended
	December 31,						Variance
	2012			2011			Dollars		Percent
Sales and marketing	$	1,343,657		$	1,230,545		$	113,112		9.2	%
Percent of total revenue		25.0	%		23.9	%

Sales and marketing expense was $1,343,657 and $1,230,545 for the six months ended December 31, 2012 and 2011, respectively, a 9.2% increase. This $113,112 increase over the comparable period ended December 31, 2011 was primarily the result of (i) an increase of $117,000 in marketing costs and (ii) an increase of approximately $12,000 in employee related expenses. These increases were partially offset by a decrease of approximately $16,000 in other selling expenses.

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General and Administrative Expense

	Six Months Ended
	December 31,						Variance
	2012			2011			Dollars		Percent
General and administrative	$	1,169,501		$	1,550,392		$	(380,891)		-24.6	%
Percent of total revenue		21.8	%		30.1	%

General and administrative expense was $1,169,507 and $1,550,392 for the six months ended December 31, 2012 and 2011, respectively, a 24.6% decrease in the six months ended December 31, 2012 compared with the six months ended December 31, 2011. This $380,891 decrease when comparing expenditures for the six months ended December 31, 2012 with the same period ended December 31, 2011 is principally due to (i) a decrease of approximately $136,000 in employee related expenses; (ii) a decrease in professional fees of $135,000; (iii) a $69,000 decrease in bad debt due to increased collection efforts; and (iv) a decrease of $41,000 in other operational expenses.

Depreciation and Amortization Expense

	Six Months Ended
	December 31,						Variance
	2012			2011			Dollars		Percent
Depreciation and amortization	$	460,523		$	444,800		$	15,723		3.5	%
Percent of total revenue		8.6	%		8.6	%

Depreciation and amortization expense was $460,523 and $444,800 for the six months ended December 31, 2012 and 2011, respectively, an increase of 3.5% in the six months ended December 31, 2012 compared with the six months ended December 31, 2011. This increase of $15,723 for the six months ended December 31, 2012 when compared to the six months ended December 31, 2011 is due to increased depreciation expense related to new hardware.

Other Income and Expense

	Six Months Ended
	December 31,						Variance
	2012			2011			Dollars		Percent
Interest expense	$	77,868		$	120,884		$	(43,016)		-35.6	%
Percent of total revenue		1.4	%		2.3	%

Net interest expense was $77,868 and $120,884 for the six months ended December 31, 2012 and 2011, respectively. This $43,016 decrease is principally due to reduced note payable balances in the current year.

Preferred Dividends

	Six Months Ended
	December 31,						Variance
	2012			2011			Dollars		Percent
Preferred dividends	$	499,280		$	417,220		$	82,060		19.7	%
Percent of total revenue		9.3	%		8.1	%

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Dividends accrued on the Company’s Series A Preferred and Series B Preferred was $499,280 and $417,220 for the six months ended December 31, 2012 and 2011, respectively. Through the quarter ended September 30, 2012, holders of Series A Preferred were 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. The dividend rate with respect the Series A Preferred increased to 10% per annum as a result of the average closing price of the Company’s common stock during the last thirty (30) trading days of the quarter ending December 31, 2012 being less than $3.00 per share (a “Dividend Adjustment”). A holder of Series A Preferred has notified the Company that a Dividend Adjustment was required as a result of the average closing price of the Company’s common stock for the thirty-day period ended March 31, 2012. Management disagrees with the method of calculation used by the holder and believes that the Company’s calculation determining that a Dividend Adjustment was not required during the quarters ended March 31 and September 30, 2012, is reasonable, and that an ultimate determination that an alternative method should be employed is doubtful. The pro-forma effect of a Dividend Adjustment for the six months ended December 31, 2012 is shown in the table below:

	Six Months Ended December 31, 2012						Variance
	As Reported			Pro-forma			Dollars			Percent
Dividends on Series A Preferred		$	252,123		$	342,816		$	90,693		36.0	%
Net loss applicable to common shareholders		$	(358,749)		$	(449,442)		$	(90,693)		25.4	%
Basic and diluted loss per share		$	(0.03)		$	(0.04)		$	(0.01)		25.4	%

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 was $1,111,404 and $942,327 at December 31, 2012, and December 31, 2011, respectively. This increase from December 31, 2011 to December 31, 2012 was principally the result of reduced debt payments in the current year.

	As of December 31,				Variance
	2012		2011		Dollars		Percent
Cash	$	1,111,404	$	942,327	$	169,077		17.9	%

Net Cash Flows from Operating Activities

	Six Months Ended December 31,				Variance
	2012		2011		Dollars		Percent
Cash provided by operating activities	$	879,435	$	391,860	$	487,575		124.4	%

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Net cash provided by operating activities is summarized as follows:

	Six Months Ended December 31,
	2012		2011
Net income (loss)	$	140,531	$	(455,593	)
Noncash expense and income, net		985,852		1,077,169
Net changes in operating assets and liabilities		(246,948)		(229,716	)
	$	879,435	$	391,860

Noncash expense decreased by $91,317 in the six months ended December 31, 2012 compared to December 31, 2011. Noncash expense decreased as a result of a $38,000 decrease in the use of stock based compensation and $69,000 of bad debt expense in the prior year. These decreases were partially offset by an increase in depreciation.

The net changes in operating assets and liabilities resulted in the use of $17,232 more cash in the six months ended December 31, 2012 compared to the same period in 2011.

Net Cash Flows from Investing Activities

	Six Months Ended December 31,				Variance
	2012		2011		Dollars		Percent
Cash used in investing activities	$	297,426	$	54,318	$	243,108		447.6	%

Net cash used in investing activities for the six months ended December 31, 2012 was $297,426 compared to net cash used in investing activities of $54,318 for the six months ended December 31, 2011. This $243,108 increase in cash used in investing activities for the six months ended December 31, 2012 when compared to the same period in 2011 was the result of capitalization of leasehold improvements for the Company’s new corporate office.

Net Cash Flows from Financing Activities

	Six Months Ended December 31,				Variance
	2012		2011		Dollars		Percent
Cash used in financing activities	$	576,781	$	2,013,444	$	(1,436,663)		-71.4	%

Net cash used in financing activities totaled $576,781 for the six months ended December 31, 2012 as compared to cash flows used in financing activities of $2,013,444 for the six months ended December 31, 2011. The change in net cash used in financing activities is attributable to (i) $1.49 million decrease in cash used for payments on notes payable and capital leases; (ii) a $13,000 decrease in proceeds from the issuance of common stock for cash and exercise of options and warrants, and (iii) a $41,000 decrease in proceeds from the issuance of notes payable.

Working Capital

	As of December 31,		As of June 30,		Variance
	2012		2012		Dollars		Percent
Current assets	$	3,849,603	$	3,568,561	$	281,042		7.9	%

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Current assets as of December 31, 2012 totaled $3,849,603, an increase of $281,042 when compared to $3,568,561 as of June 30, 2012. This 7.9% increase in current assets is due primarily to normal fluctuations in operating assets, primarily accounts receivable.

	As of December 31,		As of June 30,		Variance
	2012		2012		Dollars		Percent
Current liabilities	$	5,719,270	$	5,914,538	$	(195,268)		3.3	%

Current liabilities totaled $5,719,270 as of December 31, 2012 as compared to $5,914,538 as of June 30, 2012. The $195,268 comparative decrease in current liabilities is principally due to decreases in the current portion of notes and capital leases of $103,000, deferred revenue of $215,000, and accrued liabilities of $65,000. These decreases were partially offset by an increase in accounts payable of $218,000.

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

December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05; an update to the authoritative guidance which defers the effective date of the presentation of reclassification adjustments out of accumulated other comprehensive income. The guidance provided by this update becomes effective for the Company in the first quarter of fiscal 2013. The adoption of this updated authoritative guidance is not expected to have a significant impact on the Company’s Condensed Consolidated Financial Statements.

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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.

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: (i) there is persuasive evidence of an arrangement; (ii) the service has been provided to the customer; (iii) the collection of our fees is probable; and (iv) the amount of fees to be paid by the customer is fixed or determinable.

We recognize subscription 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 based on their relative fair values. 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, premium analytical 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 professional services 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 these services are 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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The Company's revenue, to a lesser extent, is earned under license arrangements. 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

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 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.

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 December 31, 2012, the debt portfolio was composed of approximately 77.4% variable-rate debt and 22.6% fixed-rate debt.

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	December 31,
	2012 (unaudited)		Percent of Total Debt
Fixed rate debt	$	545,064		22.6	%
Variable rate debt		1,866,383		77.4	%
Total debt	$	2,411,447		100.0	%

The table that follows presents fair values of principal amounts and weighted average interest rates for our investment portfolio as of December 31, 2012:

Cash and Cash Equivalents:		Aggregate Fair Value				Weighted Average Interest Rate
Cash		$	1,111,404				N/A

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 December 31, 2012. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports submitted under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, including to ensure that information required to be disclosed by the Company is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(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.

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, 2012.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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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 Extension Schema

101.CAL*	XBRL Taxonomy Extension Calculation Linkbase

101.DEF*	XBRL Taxonomy Extension Definition Linkbase

101.LAB*	XBRL Taxonomy Extension Label Linkbase

101.PRE*	XBRL Taxonomy Extension 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 Act 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: February 14, 2012		PARK CITY GROUP, INC

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

Date: February 14, 2012		By: /s/ Edward L. Clissold
		Edward L. Clissold Chief Financial Officer (Principal Financial Officer & Principal Accounting Officer)