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PARK CITY GROUP INC - Quarter Report: 2016 March (Form 10-Q)

parkcitygroup10q_mar312016.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 March 31, 2016
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the transition period from __________ to _________.
 
Commission File Number 001-34941

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 South 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 o 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 (Sec.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 o 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
o
 Accelerated filer
x
 Non-accelerated filer
o
 Smaller reporting company
o
 
Indicate by checkmark if whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o 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, 19,220,051 shares as of May 9, 2016.
 
 
 
 


 
 
PARK CITY GROUP, INC.
 
TABLE OF CONTENTS

     
Page
 
 
PART I -  FINANCIAL INFORMATION
     
         
    1  
         
      1  
         
      2  
         
      3  
         
      4  
         
      5  
         
    12  
         
    20  
         
    21  
         
 
PART II – OTHER INFORMATION
     
         
    22  
         
    22  
         
    30  
         
    30  
         
    30  
         
    30  
         
    31  
         
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.
     
 

 PARK CITY GROUP, INC.
Consolidated Condensed Balance Sheets
 
Assets
 
March 31,
2016
   
June 30,
2015
 
Current Assets:
 
(unaudited)
         
Cash and cash equivalents
 
$
11,333,020
   
$
11,325,572
 
Receivables, net of allowance of $50,000 and $94,000 at March 31, 2016 and June 30, 2015, respectively
   
2,830,361
     
1,640,591
 
Prepaid expense and other current assets
   
414,040
     
463,427
 
                 
Total current assets
   
14,577,421
     
13,429,590
 
                 
Property and equipment, net
   
512,526
     
764,442
 
                 
Other assets:
               
Deposits and other assets
   
14,866
     
14,866
 
Investments
   
471,584
     
-
 
Capitalized software costs, net
   
109,895
     
-
 
Customer relationships
   
1,215,450
     
1,314,000
 
Goodwill
   
20,883,886
     
20,883,886
 
                 
Total other assets
   
22,695,681
     
22,212,752
 
                 
Total assets
 
$
37,785,628
   
$
36,406,784
 
                 
Liabilities and Stockholders' Equity (Deficit)
               
Current liabilities:
               
Accounts payable
 
$
646,383
   
$
817,119
 
Accrued liabilities
   
1,476,750
     
2,521,111
 
Deferred revenue
   
2,551,844
     
2,331,920
 
Line of credit
   
2,500,000
     
2,500,000
 
Note payable
   
260,091
     
227,301
 
                 
Total current liabilities
   
7,435,068
     
8,397,451
 
                 
Long-term liabilities:
               
Notes payable, less current portion
   
536,249
     
349,192
 
Other long-term liabilities
   
65,944
     
75,518
 
                 
Total liabilities
   
8,037,261
     
8,822,161
 
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Series B Preferred stock, $0.01 par value, 700,000 shares authorized; 625,375 shares issued and outstanding at March 31, 2016 and June 30, 2015
   
6,254
     
6,254
 
Series B-1 Preferred stock, $0.01 par value, 300,000 shares authorized; 152,819 and 74,200 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively
   
1,528
     
742
 
Common stock, $0.01 par value, 50,000,000 shares authorized; 19,206,994 and 18,875,586 issued and outstanding at March 31, 2016 and June 30, 2015, respectively
   
192,073
     
188,759
 
Additional paid-in capital
   
72,833,717
     
70,296,496
 
Accumulated deficit
   
(43,285,205
   
(42,907,628
  
               
Total stockholders’ equity
   
29,748,367
     
27,584,623
 
                 
Total liabilities and stockholders’ equity
 
$
37,785,628
   
$
36,406,784
 
 
See accompanying notes to consolidated condensed financial statements.

 
 
-1-

 
PARK CITY GROUP, INC.
Consolidated Condensed Statements of Operations (unaudited)
 
   
 
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2016
   
2015
   
2016
   
2015
 
                                 
Revenues
 
$
3,580,329
   
$
3,390,933
   
$
10,215,752
   
$
10,204,456
 
                                 
Operating expenses:
                               
Cost of services and product support
   
1,050,074
     
1,245,353
     
3,223,548
     
3,949,136
 
Sales and marketing
   
1,264,036
     
1,547,553
     
4,107,676
     
4,419,384
 
General and administrative
   
807,542
     
1,026,751
     
2,317,316
     
2,908,653
 
Depreciation and amortization
   
125,939
     
190,041
     
382,453
     
564,800
 
                                 
Total operating expenses
   
3,247,591
     
4,009,698
     
10,030,993
     
11,841,973
 
                                 
Income (loss) from operations
   
332,738
     
  (618,765
   
184,759
     
  (1,637,517
)
                                 
Other expense:
                               
Interest income (expense)
   
(10,986
   
68,911
     
10,328
     
170,724
 
Gain (loss) on disposition of investment
   
(26,684
)       -      
(26,128
)       -  
                                 
Income (loss) before income taxes
   
295,068
     
(549,854
   
168,959
     
(1,466,793
                                 
(Provision) benefit for income taxes:
   
-
     
  -
     
-
     
  -
 
Net income (loss)
   
295,068
     
(549,854
   
168,959
     
(1,466,793
                                 
Dividends on preferred stock
   
(176,588
   
(135,699
   
(546,536
   
(444,645
Series B Restructure
   
-
     
(2,141,980
)
    -
 
   
(2,141,980
)
                                 
Net income (loss) applicable to common shareholders
 
$
118,480
   
$
(2,827,533
)
 
$
(377,577
 
$
(4,053,418
                                 
Weighted average shares, basic
   
19,196,000
     
17,334,000
     
19,128,000
     
17,204,000
 
Weighted average shares, diluted
   
19,963,000
     
17,334,000
     
19,128,000
     
17,204,000
 
Basic income (loss) per share
 
$
0.01
   
$
(0.16
 
$
(0.02
 
$
(0.24
)
Diluted income (loss) per share
 
$
0.01
   
$
(0.16
 
$
(0.02
 
$
(0.24
)

See accompanying notes to consolidated condensed financial statements.

 
 
-2-


PARK CITY GROUP, INC.
Consolidated Condensed Statements of Comprehensive Income (unaudited)
 
   
 
Three Months Ended
March 31,
   
Nine Months Ended
March 31,
 
   
2016
   
2015
   
2016
   
2015
 
                                 
Net income (loss) 
 
 $
118,480
   
$
(2,827,533)
   
$
(377,577
 
$
(4,053,418
Other Comprehensive Income (Loss):
                               
  Unrealized gain (loss) on marketable securities
   
(26,684
   
-
     
(26,128
   
-
 
  Reclassification adjustment
   
26,684
     
-
     
26,128
     
-
 
  Net income (loss) on marketable securities
   
-
     
-
     
-
     
-
 
Comprehensive income (loss)
 
$
118,480
   
$
(2,827,533
 
$
(377,577
 
$
(4,053,418

See accompanying notes to consolidated condensed financial statements.
 
 
 
-3-


PARK CITY GROUP, INC.
Consolidated Condensed Statements of Cash Flows (Unaudited)

   
Nine Months
Ended March 31,
   
2016
   
2015
 
Cash Flows From Operating Activities:
           
Net income (loss)
 
$
168,959
   
$
(1,466,793
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
   
382,453
     
564,800
 
Bad debt expense
   
43,140
     
124,982
 
Charitable non-cash donations
   
-
     
157,950
 
Stock compensation expense
   
775,202
     
1,796,386
 
Loss on short-term marketable securities
   
26,128
     
-
 
(Increase) decrease in:
               
Trade receivables
   
(1,232,910
   
(114,988
Prepaids and other assets
   
49,387
     
(419,887
(Decrease) increase in:
               
Accounts payable
   
(170,736
   
84,713
 
Accrued liabilities
   
(59,270
   
26,004
 
Deferred revenue
   
219,924
     
(244,391
                 
Net cash provided by operating activities
   
202,277
     
508,776
 
                 
Cash Flows From Investing Activities:
               
Purchase of marketable securities
   
(4,639,036
   
-
 
               Sale of marketable securities     4,612,908       -  
Cash advanced on note receivable
   
-
     
(1,059,460
Purchase of property and equipment
   
(31,987
   
(362,089
Capitalization of software costs
   
(109,895
   
-
 
Purchase of long-term investments
   
(471,584
   
-
 
Net cash used in investing activities
   
(639,594
   
(1,421,549
                 
Cash Flows From Financing Activities:
               
Proceeds from issuance of note payable
   
396,000
     
172,795
 
Proceeds from employee stock plans
   
199,848
     
203,211
 
Proceeds from exercise of warrants
   
33,002
     
-
 
Proceeds from issuance of stock
   
-
     
903,469
 
Series B preferred redemption
   
-
     
(7,500
)
Dividends paid
   
(7,932
   
(154,473
Payments on notes payable and capital leases
   
(176,153
   
(190,127
                 
Net cash provided by financing activities
   
444,765
     
927,375
 
                 
Net increase in cash and cash equivalents
   
7,448
     
14,602
 
                 
Cash and cash equivalents at beginning of period
   
11,325,572
     
3,352,559
 
                 
Cash and cash equivalents at end of period
 
$
11,333,020
   
$
3,367,161
 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid for income taxes
 
$
-
   
$
-
 
Cash paid for interest
 
$
16,761
   
$
55,122
 
                 
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
               
Common stock to pay accrued liabilities
 
$
1,522,281
   
$
1,619,962
 
Preferred stock to pay accrued liabilities
 
$
300,000
   
$
300,000
 
Dividends accrued on preferred stock
 
$
546,536
   
$
444,645
 
Dividends paid with preferred stock
 
$
486,190
   
$
291,385
 
Series B Restructure
 
$
-
   
$
2,141,980
 
 
See accompanying notes to consolidated condensed financial statements.

 
 
-4-


PARK CITY GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)

NOTE 1.  DESCRIPTION OF BUSINESS
 
The Company is incorporated in the state of Nevada.  The Company has three subsidiaries, PC Group, Inc. (formerly, Park City Group, Inc., a Delaware corporation), a Utah corporation (98.76% owned), Park City Group, Inc., (formerly, Prescient Applied Intelligence, Inc.), a wholly owned Delaware corporation, and ReposiTrak, Inc., a wholly owned Utah corporation (“ReposiTrak”).  All intercompany transactions and balances have been eliminated in consolidation.

The Company designs, develops, markets and supports proprietary software products. These products are designed for businesses that need assistance improving their inventory management. As a result of the acquisition of ReposiTrak in June 2015, the Company also provides food retailers and suppliers with a robust solution to help them protect their brands and remain in compliance with the rapidly evolving regulations under the Food Safety Modernization Act (“FSMA”). Additionally, ReposiTrak enables the tracking and traceability of products and their ingredients as they move between trading partners. In many instances, subscription to our supply chain and ReposiTrak food safety applications are mandated by retail, wholesale and suppliers (“hubs”) to their suppliers and sub-suppliers as a condition of their business relationship. Payment for the subscription to these services may come from either the hub, or the supplier, or both parties.
 
Our services are delivered through proprietary software products designed, developed, marketed and supported by the Company.  These products are designed to facilitate improved business processes among all key constituents in the supply chain, starting with the retailer and moving back to suppliers and eventually raw material providers.  In addition, the Company has also built a consulting practice for business improvement that centers on 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.

Recent Developments
  
During the year ended June 30, 2015, the Company entered into agreements with each of the stockholders of ReposiTrak, including Leavitt Partners, LP and LP Special Asset 4, LLC, to acquire all of the outstanding capital stock of ReposiTrak (the “ReposiTrak Shares”) in exchange for shares of the Company’s common stock (the “ReposiTrak Acquisition”).   On June 30, 2015, the Company consummated the ReposiTrak Acquisition.  As a result, ReposiTrak became a 100% owned subsidiary of the Company. Management believes the ReposiTrak Acquisition creates an opportunity for the Company to enhance its business by offering the services it offers to its existing supply chain customer base to ReposiTrak customers, and by offering ReposiTrak’s food safety applications to its existing supply chain customer base.

We have accounted for the acquisition of ReposiTrak as the purchase of a business.  The assets acquired and the liabilities assumed of ReposiTrak have been recorded at their respective fair values.  The excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill.  Goodwill is attributed to buyer-specific value resulting from expected synergies, including long-term cost savings, as well as industry relationships, which are not included in the fair values of assets.  Goodwill will not be amortized but will be tested for impairment at least annually or upon a material change that may impact the carrying value.
 
The purchase price consisted of 873,438 shares of our common stock.  The fair value of the shares issued was $10,821,897 and was determined using the closing price of our common stock on June 30, 2015.  The price paid to acquire ReposiTrak was $10,830,897, approximately $9,000 of which was for direct transaction costs associated with the issuance of equity. The net acquisition cost of $10,799,778, which excludes $31,119 of cash acquired from ReposiTrak, was allocated based on their estimated fair value of the assets acquired and liabilities assumed, as follows:
 
   
Originally Filed
   
Adjustments*
   
Finalized Values
 
Receivables
 
$
152,340
   
$
-
   
$
152,340
 
Prepaid expenses
   
17,500
     
-
     
17,500
 
Customer relationships
   
2,006,951
     
(692,951
   
1,314,000
 
Goodwill
   
15,385,002
     
692,951
     
16,077,953
 
Accounts payable
   
(128,126
   
-
     
(128,126
Deferred revenue
   
(598,232
   
-
     
(598,232
Net assets acquired
   
16,835,435
     
-
     
16,835,435
 
Common stock issued
   
10,821,897
     
-
     
10,821,897
 
Receivables eliminated in consolidation
   
6,035,657
     
-
     
6,035,657
 
                         
Cash received in acquisition
 
$
22,119
   
$
-
   
$
22,119
 
 
*Adjustments due to finalization of valuation. The adjusted values are reflected retrospectively in the balance sheet for the period ended June 30, 2015. 
 
 
Unaudited pro-forma results of operations for the three and nine months ended March 31, 2015, as though ReposiTrak had been acquired as of July 1, 2014, are as follows:
 
   
Three Months Ended
   
Nine Months Ended
 
   
March 31,
2015
   
March 31,
2015
 
Revenue
 
$
2,870,646
   
$
8,630,284
 
Loss from Operations
 
$
(1,302,437
 
$
(3,639,947
)
Net Loss
 
$
(1,317,858
 
$
(3,685,202
)
Net Loss Applicable to Common Shareholders
 
$
(3,595,537
 
$
(6,271,827
)
Basic and Diluted EPS
 
$
(0.20
 
$
(0.35
)
 
Basis of Financial Statement Presentation

The interim financial information of the Company as of March 31, 2016 and for the three and nine months ended March 31, 2016 and 2015 is unaudited, and the balance sheet as of June 30, 2015 is derived from audited financial statements. The accompanying condensed consolidated financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial statements. Accordingly, they omit or condense notes and certain other information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles. The accounting policies followed for quarterly financial reporting conform with the accounting policies disclosed in Note 2 to the Notes to Financial Statements included in our Annual Report on Form 10-K for the year ended June 30, 2015. In the opinion of management, all adjustments necessary for a fair presentation of the financial information for the interim periods reported have been made. All such adjustments are of a normal recurring nature. The results of operations for the three and nine months ended March 31, 2016 are not necessarily indicative of the results that can be expected for the fiscal year ending June 30, 2016. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2015.
 
NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
 
The financial statements presented herein reflect the consolidated financial position of Park City Group, Inc. and subsidiaries.  All inter-company transactions and balances have been eliminated in consolidation.

Use of Estimates
 
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that materially affect the amounts reported in the condensed consolidated financial statements.  Actual results could differ from these estimates.  The methods, estimates and judgments the Company uses in applying its most critical accounting policies have a significant impact on the results it reports in its financial statements.  The Securities and Exchange Commission has defined the most critical accounting policies as those that are most important to the portrayal of the Company’s financial condition and results, and require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain.  Based on this definition, the Company’s most critical accounting policies include:  income taxes, goodwill and other long-lived asset valuations, revenue recognition, and stock-based compensation.

Receivables
 
                The Company's accounts receivable are derived from sales of products and services primarily to customers operating multi-location retail and grocery stores.  Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
 
Trade account receivables are stated at the amount the Company expects to collect. Receivables are reviewed individually for collectability. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, allowances may be required.  
 
 
Allowance for Doubtful Accounts Receivable

The Company offers credit terms on the sale of the Company’s products to a significant majority of the Company’s customers and requires no collateral from these customers. The Company performs ongoing credit evaluations of customers’ financial condition and maintains an allowance for doubtful accounts receivable based upon the Company’s historical experience and a specific review of accounts receivable at the end of each period. As of March 31, 2016 and June 30, 2015 the allowance for doubtful accounts was $50,000 and $94,000, respectively.
 
Depreciation and Amortization

Depreciation and amortization of property and equipment is computed using the straight line method based on the following estimated useful lives:
 
   
Years
 
Furniture and fixtures
   
5-7
 
Computer Equipment
   
3
 
Equipment under capital leases
   
3
 
Leasehold improvements
 
See below
 
 
Leasehold improvements are amortized over the shorter of the remaining lease term or the estimated useful life of the improvements.
 
Amortization of intangible assets are computed using the straight line method based on the following estimated useful lives:
 
   
Years
 
Customer relationships
   
10
 
Acquired developed software
   
5
 
Developed software
   
3
 
Goodwill
 
See below
 
 
Goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. Other intangible assets are amortized over their useful lives.
 
Warranties
 
 The Company offers a limited warranty against software defects. For the three and nine months ended March 31, 2016 and 2015, the Company did not incur any expense associated with warranty claims and no accrual for warranty claims is included in the financial statements.
 
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 revenue 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 revenue is derived from services beyond the basic services provided in standard arrangements.  We recognize premium service and maintenance revenue 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, system orientation, 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: (i) the services have value to the customer on a stand-alone basis, (ii) objective and reliable evidence of fair value exists for these services and (iii) performance of the services is considered probable and does not involve unique customer acceptance criteria.
 
    The Company's revenue, is also 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

               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. 

Earnings Per Share
 
Basic earnings per share has been computed using the weighted average number of shares of common stock outstanding during each period.  Diluted earnings per share also includes the impact of our outstanding potential common shares, including warrants and in the comparable period, convertible preferred stock. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net income per share.
 
The following table presents the components of the computation of basic and diluted earnings per share for the periods indicated:
 
 
  
Three Months Ended
 
  
Nine Months Ended
 
 
  
March 31,
 
  
March 31,
 
 
  
2016
 
  
2015
 
  
2016
 
  
2015
 
Numerator
  
     
  
     
  
     
  
     
Net income (loss) applicable to common shareholders
  
$
118,480
  
  
$
(2,827,533
  
$
(377,577
  
$
(4,053,418
         
Denominator
  
     
  
     
  
     
  
     
Weighted average common shares outstanding, basic
  
 
19,196,000
  
  
 
17,334,000
 
  
 
19,128,000
 
  
 
17,204,000
 
Warrants to purchase common stock
  
 
767,000
  
  
 
-
 
  
 
-
 
  
 
-
 
 
  
     
  
     
  
     
  
     
Weighted average common shares outstanding, diluted
  
 
19,963,000
  
  
 
17,334,000
 
  
 
19,128,000
 
  
 
17,204,000
 
 
  
     
  
     
  
     
  
     
         
Net income (loss) per share
  
     
  
     
  
     
  
     
Basic
  
$
0.01
  
  
$
(0.16
  
$
(0.02
  
$
(0.24
Diluted
  
$
0.01
  
  
$
(0.16
  
$
(0.02
  
$
(0.24
)
 
The effect of approximately 1,426,000 outstanding potential shares of common stock were excluded from the calculation of diluted earnings per share for the three months ended March 31, 2015, and 1,417,000 and 1,426,000 outstanding potential shares of common stock were excluded from the calculation of diluted earnings per share for the nine months ended March 31, 2016 and 2015, respectively, as they were anti-dilutive.
 
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are stated at fair value.

Marketable Securities
 
Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such determination at each balance sheet date. Securities are classified as available for sale and are carried at fair value, with the change in unrealized gains and losses, net of tax, reported as a separate component on the condensed consolidated statements of comprehensive income. Fair value is determined based on quoted market rates when observable or utilizing data points that are observable, such as quoted prices, interest rates and yield curves.  The cost of securities sold is based on the specific-identification method. Interest on securities classified as available for sale is also included as a component of interest income.

Fair Value Measurement
 
The Company measures its cash equivalents, marketable securities, and foreign currency derivative contracts at fair value. The additional disclosures regarding the Company’s fair value measurements are included in Note 3 “Investments.”
 
NOTE 3.  INVESTMENTS 
             
Investments at March 31, 2016 consisted of the following:
 
   
Amortized Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
   Investments classified as marketable securities                        
       Corporate Bonds
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
   Investments classified as equity method investments
 
$
470,584
   
$
-
   
$
-
   
$
470,584
 
                                 
   Investments classified as available-for-sale
 
$
1,000
   
$
-
   
$
-
   
$
1,000
 
                                 
 
The contractual maturities of the marketable securities are 1-5 years as of March 31, 2016.  The Company accounts for its marketable securities portfolio as available for sale investments.  All marketable securities are recorded as current regardless of contractual maturities.   All other securities are recorded long-term.
 
        All of the Company’s fair value measurements for cash equivalents and marketable securities are classified within Level 1 because the Company’s cash equivalents and marketable securities are valued using quoted market prices. Long-term investments are classified within Level 3, as the fair value in not easily determinable. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
 
Level 1.   Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2.   Other inputs that are directly or indirectly observable in the marketplace.
Level 3.   Unobservable inputs which are supported by little or no market activity.
 
Investment Income

Investment income consists of interest income, realized gains, and realized losses on the Company’s cash, cash equivalents and marketable securities. The components of investment income are presented below:

 
Three Months Ended
  
Nine Months Ended
 
March 31,
  
March 31,
 
2016
 
2015
  
2016
 
2015
Interest income
$
  7,023
 
$
2,698
  
$
45,140
 
  9,867
Realized gains
 
313
  
 
-
  
 
1,101
   
-
Realized losses
 
(26,997)
   
-
 
(27,229)
   
-
Total investment income
$
(19,661)
 
$
2,698
  
$
19,012
 
$
9,867
                       

Reclassification adjustments out of accumulated other comprehensive loss into net income (loss) were $26,684  and $0 for the three months and $26,128  and $0 for the nine months ended March 31, 2016 and 2015, respectively.

 
NOTE 4.  WARRANTS
 
 The following tables summarize information about warrants outstanding and exercisable at March 31, 2016:

     
Warrants
   
Warrants
 
     
Outstanding
   
Exercisable
 
     
at March 31, 2016
   
at March 31, 2016
 
Range of
exercise prices
Warrants
   
Number
outstanding at
March 31,
2016
   
Weighted
 average
remaining
contractual
life (years)
   
Weighted
average
exercise
price
   
Number
exercisable at
March 31,
2016
   
Weighted
average
exercise
price
 
$
3.50 – 4.00
     
1,316,268
     
3.51
   
$
3.92
     
1,316,268
   
$
3.92
 
$
6.45 – 10.00
     
100,481
     
2.74
   
$
7.29
     
100,481
   
$
7.29
 
         
1,416,749
     
3.46
   
$
4.16
     
1,416,749
   
$
4.16
 
 
NOTE 5.  RELATED PARTY TRANSACTIONS
 
 Services Agreement with Fields Management, Inc.
 
During the three months ended March 31, 2016, the Company continued to be a party to a Service Agreement with Fields Management, Inc. (“FMI”), pursuant to which FMI provided certain executive management services to the Company, including designating Mr. Randall K. Fields to perform the functions of President and Chief Executive Officer for the Company. Randall K. Fields also serves as the Company’s Chairman of the Board of Directors and controls FMI.
 
The Company had payables of $32,253 and $37,893 to FMI at March 31, 2016 and June 30, 2015, respectively, under this agreement.
 
NOTE 6.  PROPERTY AND EQUIPMENT
 
 Property and equipment are stated at cost and consist of the following as of:
 
   
March 31, 2016
(unaudited)
   
June 30,
2015
 
Computer equipment
 
$
3,301,390
   
$
3,269,403
 
Furniture and fixtures
   
260,574
     
260,574
 
Leasehold improvements
   
231,782
     
231,782
 
     
3,793,746
     
3,761,759
 
Less accumulated depreciation and amortization
   
(3,281,220
   
(2,997,317
   
$
512,526
   
$
764,442
 
 
NOTE 7.  CAPITALIZED SOFTWARE COSTS
 
 Capitalized software costs consists of the following as of:
 
   
March 31, 2016
(unaudited)
   
June 30,
2015
 
Capitalized software costs
 
$
109,895
   
$
2,443,128
 
Less accumulated amortization
   
-
     
(2,443,128
   
$
109,895
   
$
-
 
 
 
NOTE 8.  ACCRUED LIABILITIES
 
 Accrued liabilities consist of the following as of:
 
   
March 31, 2016
(unaudited)
   
June 30,
2015
 
Accrued stock-based compensation
 
$
721,659
   
$
1,665,731
 
Accrued compensation
   
370,305
     
506,064
 
Accrued other liabilities
   
208,196
     
225,140
 
Accrued dividends
   
176,590
     
124,176
 
   
$
1,476,750
   
$
2,521,111
 

NOTE 9.  PREFERRED DIVIDENDS
 
The Company's Series B Preferred Stock (“Series B Preferred”) is held by certain affiliates of the Company, consisting of the Chief Executive Officer, his spouse, and a director. Prior to February 2015, holders of Series B Preferred were entitled to a 15.00% annual dividend payable quarterly in cash, which would have increased to 18.00% effective July 1, 2015.

In February 2015, the Company amended the Certificate of Designation of the Relative Rights, Powers and Preference of the Series B Preferred (the “Certificate of Designation”) to decrease the rate at which the Series B Preferred accrues dividends to 7% per annum, if such dividends are paid by the Company in cash, and to 9% if the Company elects to pay such dividends by the issuance of additional shares of Series B Preferred (“PIK Shares”).  In March 2015, the Company modified the Certificate of Designation to allow for the issuance of non-voting, non-convertible shares of Series B-1 Preferred Stock ("Series B-1 Preferred"), rather than Series B Preferred, as PIK Shares.

NOTE 10.  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 11.  SUBSEQUENT EVENTS
 
Subsequent to March 31, 2016, the Company issued 13,057 shares of common stock in connection with issuances under the Company's Employee Stock Purchase Plan for the vesting of employee stock grants. The Company also issued 27,394 shares of Series B-1 Preferred for dividends paid in kind on the outstanding shares of Series B Preferred and for an accrued bonus.

We have evaluated subsequent events through the date of this filing in accordance with the Subsequent Events Topic of the FASB ASC 855, and have determined that no additional subsequent events are reasonably likely to impact the financial statements.

 
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, 2015 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, 2015 Annual Report on Form 10-K, incorporated herein by reference.  Statements made herein are as of the date of the filing of this Form 10-Q with the Securities and Exchange Commission and should not be relied upon as of any subsequent date.  Unless otherwise required by applicable law, we do not undertake, and specifically disclaim any obligation, to update any forward-looking statements to reflect occurrences, developments, unanticipated events or circumstances after the date of such statement.

Overview
 
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 enabling lower inventory levels for both retailers and their suppliers.  As a result of the acquisition of ReposiTrak in June 2015, the Company also provides food retailers and suppliers with a robust solution to help them protect their brands and remain in compliance with the rapidly evolving regulations in the Food Safety Modernization Act (“FSMA”). Additionally, ReposiTrak enables the tracking and traceability of products and their ingredients as they move between trading partners. In many instances, subscription to our supply chain and ReposiTrak food safety applications are mandated by retail, wholesale and suppliers (“hubs”) to their suppliers and sub-suppliers as a condition of their business relationship. Payment for the subscription to these services may come from either the hub, or the supplier, or both parties.
 
Our services are delivered through proprietary software products designed, developed, marketed and supported by the Company.  These products are designed to facilitate improved business processes among all key constituents in the supply chain, starting with the retailer and moving back to suppliers and eventually raw material providers.  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.
 
The Company is incorporated in the state of Nevada.  The Company has three subsidiaries, PC Group, Inc. (formerly, Park City Group, Inc., a Delaware corporation), a Utah corporation (98.76% owned), Park City Group, Inc., (formerly, Prescient Applied Intelligence, Inc.), a Delaware corporation, and ReposiTrak, Inc., a Utah corporation.  Both Park City Group, Inc. and ReposiTrak, Inc. are wholly owned subsidiaries of the Company.  All intercompany transactions and balances have been eliminated in consolidation. 

Our principal executive offices of the Company are located at 299 South Main Street, Suite 2370, Salt Lake City, Utah 84111.  Our telephone number is (435) 645-2000.  Our website address is http://www.parkcitygroup.com.
 
Recent Developments
  
During the year ended June 30, 2015, the Company entered into agreements with each of the stockholders of ReposiTrak, including Leavitt Partners, LP and LP Special Asset 4, LLC, to acquire all of the outstanding capital stock of ReposiTrak (the “ReposiTrak Shares”) in exchange for shares of the Company’s common stock (the “ReposiTrak Acquisition”). On June 30, 2015, the Company consummated the ReposiTrak Acquisition and issued an aggregate total of 873,438 shares of its common stock in exchange for the ReposiTrak Shares. Immediately following the completion of the ReposiTrak Acquisition, ReposiTrak became a wholly owned subsidiary of the Company.

 
 
-12-

 
Results of Operations

Comparison of the Three Months Ended March 31, 2016 to the Three Months Ended March 31, 2015.
 
Revenue

   
Fiscal Quarter Ended
March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Revenues
 
$
3,580,329
   
$
3,390,933
   
$
189,396
     
6
%
 
 Revenue was $3,580,329 and $3,390,933 for the three months ended March, 2016 and 2015, respectively, a 6% increase.  This $189,396 increase in revenue was due to revenue growth attributable to both our supply chain applications and revenue growth attributable to ReposiTrak from signing up new suppliers (“connections”) for subscriptions to our food safety applications.  Higher subscription revenue was offset by the elimination of subscription and management fees for ReposiTrak as a result of the acquisition of ReposiTrak in June 2015.  

The Company expects revenue to continue to increase as the Company recognizes revenue from the addition of the new ReposiTrak connections from suppliers mandated to use the service by existing and new hubs, and as subscriptions to our supply chain applications increase.

Cost of Services and Product Support
 
   
Fiscal Quarter Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Cost of services and product support
 
$
1,050,074
   
$
1,245,353
   
$
(195,279
   
-16
%
Percent of total revenue
   
29
%
   
37
%
               
 
 Cost of services and product support was $1,050,074 and $1,245,353 for the three months ended March 31, 2016 and 2015, respectively, a 16% decrease.  The $195,279 decrease is principally due to lower employee related expense of $150,000, capitalization of software development costs of $32,500 and reductions in infrastructure and other costs of $13,000.
 
Sales and Marketing Expense
 
   
Fiscal Quarter Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Sales and marketing
 
$
1,264,036
   
$
1,547,553
   
$
(283,517
   
-18
%
Percent of total revenue
   
35
%
   
46
%
               
 
Sales and marketing expense was $1,264,036 and $1,547,553 for the three months ended March 31, 2016 and 2015, respectively, an 18% decrease.  This $283,517 decrease over the comparable quarter was primarily the result of a $258,000 decrease in marketing and promotional expense and reduced travel expenses of $25,000.
    
 
General and Administrative Expense

   
Fiscal Quarter Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
General and administrative
 
$
807,542
   
$
1,026,751
   
$
(219,209
   
-21
%
Percent of total revenue
   
23
%
   
30
%
               
 
 General and administrative expense was $807,542 and $1,026,751 for the three months ended March 31, 2016 and 2015, respectively, a 21% decrease in the three months ended March 31, 2016 compared with the three months ended March 31, 2015.  This $219,209 decrease is primarily related to a $160,000 decrease in employee related expense, as well as a decrease of approximately $37,000 in facility and professional fees and a decrease of $23,000 in bad debt expense.
 
Depreciation and Amortization Expense

   
Fiscal Quarter Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Depreciation and amortization
 
$
125,939
   
$
190,041
   
$
(64,102
   
-34
%
Percent of total revenue
   
4
%
   
6
%
               
 
 Depreciation and amortization expense was $125,939 and $190,041 for the three months ended March 31, 2016 and 2015, respectively, a decrease of 34%.  This comparative decrease of $64,102 is related to decreased customer list amortization due to the charge taken in the fiscal year ended June 30, 2015.
 
Other Income and Expense

   
Fiscal Quarter Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Net other (expense) income
 
$
(37,670
 
$
68,911
   
$
(106,581
   
NM
%
Percent of total revenue
   
-1
%
   
2
%
               
 
 Net other expense was $37,670 for the three months ended March 31, 2016 compared to net other income of $68,911 for the three months ended March 31, 2015.  This change of $106,581 was due to interest income on notes receivable during the 2015 that were eliminated as a result of the consolidation of ReposiTrak, and a loss on the disposition of investments of $26,684 for the three months ended March 31, 2016.
 
Preferred Dividends

   
Fiscal Quarter Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Preferred dividends
 
$
176,588
   
$
135,699
   
$
40,889
     
30
%
Percent of total revenue
   
5
%
   
4
%
               

 Dividends accrued on the Company’s Series B Preferred was $176,588 for the three months ended March 31, 2016, compared to dividends accrued on the Series B Preferred of $135,699 for the quarter ended March 31, 2015. The increase was primarily due to a larger number of shares of the Series B Preferred outstanding, as the Company chose to pay the dividend in kind, rather than in cash and therefore more shares were outstanding on which dividends were paid.
 
 
Comparison of the Nine Months Ended March 31, 2016 to the Nine Months Ended March 31, 2015.
 
Revenue

   
Nine Months Ended
March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Revenue
 
$
10,215,752
   
$
10,204,456
   
$
11,296
     
0
%
 
 Revenue was $10,215,752 and $10,204,456 for the nine months ended March 31, 2016 and 2015, respectively.  This $11,296 period over period increase in revenue is primarily due to an increase in subscription revenue attributable principally to increased revenue from our supply chain applications, and revenue growth attributable to ReposiTrak from signing up new suppliers (“connections”) for subscriptions to our food safety applications. The increase is offset by the elimination of licensing and management fees for ReposiTrak as a result of the acquisition of ReposiTrak in June 2015.  

 The Company expects revenue to increase in subsequent quarters as the Company recognizes revenue from the addition of the new ReposiTrak connections from suppliers mandated to use the service by existing and new hubs, and as subscriptions to our supply chain applications increase.

Cost of Services and Product Support

   
Nine Months Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Cost of services and product support
 
$
3,223,548
   
$
3,949,136
   
$
(725,588
   
-18
%
Percent of total revenue
   
32
%
   
39
%
               
 
 Cost of services and product support was $3,223,548 and $3,949,136 for the nine months ended March 31, 2016 and 2015, respectively, an 18% decrease.  This period over period decrease of $725,588 is principally due to a $608,000 decrease in employee related expense as well as capitalization of software development costs of $110,000 in the second and third quarters of fiscal 2016.

Sales and Marketing Expense
 
   
Nine Months Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Sales and marketing
 
$
4,107,676
   
$
4,419,384
   
$
(311,708
   
-7
%
Percent of total revenue
   
40
%
   
43
%
               
 
 Sales and marketing expense was $4,107,676 and $4,419,384 for the nine months ended March 31, 2016 and 2015, respectively, a 7% decrease.   Sales and marketing expense decreased principally due to a decrease in marketing and promotional expenses of $300,000 and a decrease of $73,000 in employee related costs and travel expenses.  These decreases were partially offset by an increase in facility related costs of $62,000.

General and Administrative Expense

   
Nine Months Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
General and administrative
 
$
2,317,316
   
$
2,908,653
   
$
(591,337
   
-20
%
Percent of total revenue
   
23
%
   
29
%
               
 
 General and administrative expense was $2,317,316 and $2,908,653 for the nine months ended March 31, 2016 and 2015, respectively, a 20% decrease.  This $591,337 decrease is principally due to reduction in employee related costs, as well as decreases in travel expense of approximately $35,000.  These decreases were partially offset by increases in facility costs of $76,000 and professional fees of $41,000 incurred in connection with the acquisition of ReposiTrak.
 
 
Depreciation and Amortization Expense

   
Nine Months Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Depreciation and amortization
 
$
382,453
   
$
564,800
   
$
182,347
     
-32
%
Percent of total revenue
   
4
%
   
6
%
               
 
 Depreciation and amortization expense was $382,453 and $564,800 for the nine months ended March 31, 2016 and 2015, respectively, a decrease of 32% in the nine months ended March 31, 2016 compared with the nine months ended March 31, 2015.  This comparative decrease of $182,347 is related to decreased customer list amortization due to the charge taken in the fiscal year ended June 30, 2015.

Other Income and Expense

   
Nine Months Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Net other (expense) income
 
$
(15,800
 
$
170,724
   
$
(186,524
   
NM
%
Percent of total revenue
   
0
%
   
2
%
               
 
Net other expense was $15,800 for the nine months ended March 31, 2016 compared to net interest income of $170,724 for the nine months ended March 31, 2015.  This change of $186,524 was due to interest income on notes receivable during the 2015 period that were eliminated as a result of the consolidation of ReposiTrak for the same period in 2016 and a loss on the disposition of investments of $26,128 for the nine months ended March 31, 2016.
 
Preferred Dividends

   
Nine Months Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Preferred dividends
 
$
546,536
   
$
444,645
   
$
101,891
     
23
%
Percent of total revenue
   
5
%
   
4
%
               

 Dividends accrued on the Company’s Series B Preferred was $546,536 for the nine months ended March 31, 2016, compared to dividends accrued on the Company’s Series A Preferred and Series B Preferred of $444,645 for the nine months ended March 31, 2015. This $101,891 increase is primarily attributable to the determination by the Company to pay dividends in kind for the quarter ended June 30, 2015, which resulted in an adjustment to dividends in the current period. All dividends accrued were paid through the issuance of 78,619 shares of Series B-1 Preferred. 

Financial Position, Liquidity and Capital Resources
 
We believe our existing cash and short-term investments, together with funds generated from operations, are sufficient to fund operating and investment requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including our rate of revenue growth and expansion of our sales and marketing activities, the timing and extent of spending required for research and development efforts and the continuing market acceptance of our products.
 
   
As of March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Cash
 
$
11,333,020
   
$
3,367,161
   
$
7,965,859
     
237
%
  
 We have historically funded our operations with cash from operations, equity financings and debt borrowings. Cash was $11,333,020 and $3,367,161 at March 31, 2016 and 2015, respectively.  This $7,965,859 increase from March 31, 2015 to March 31, 2016 was principally the result of the receipt of net proceeds of approximately $6.7 million received from the registered direct offering completed in April 2015.
  
 
Net Cash Flows from Operating Activities

   
Nine Months Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Cash provided by operating activities
 
$
202,277
   
$
508,776
   
$
(306,499
   
-60
%
 
 Net cash provided by operating activities is summarized as follows:
 
   
Nine Months Ended
 March 31,
 
   
2016
   
2015
 
Net loss
 
$
168,959
   
$
(1,466,793
Noncash expense and income, net
   
1,226,923
     
2,644,118
 
Net changes in operating assets and liabilities
   
(1,193,605
   
(668,549
   
$
202,277
   
$
508,776
 
 
 Noncash expense decreased by $1,417,195 in the nine months ended March 31, 2016 compared to March 31, 2015.  Noncash expense decreased as a result of a $1,021,184 decrease in stock compensation expense, a $182,347 decrease in depreciation and amortization expense, a $157,950 decrease in charitable non-cash donations, and a decrease of $81,842 in bad debt expense, offset by a $26,128 increase on the loss of short-term marketable securities.

Net Cash Flows from Investing Activities

   
Nine Months Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Cash used in investing activities
 
$
639,594
   
$
1,421,549
   
$
(781,955
   
-55
%
 
 Net cash used in investing activities for the nine months ended March 31, 2016 was $639,594 compared to net cash used in investing activities of $1,421,549 for the nine months ended March 31, 2015.  This $781,955 decrease in cash used in investing activities for the nine months ended March 31, 2016 when compared to the same period in 2015 was the result of funds loaned to ReposiTrak during the period ended March 31, 2015, which were eliminated due to the acquisition of ReposiTrak and consolidation of the Company's financial statements. This decrease was partially offset by the investment in long-term investments.
 
Net Cash Flows from Financing Activities

   
Nine Months Ended
 March 31,
   
Variance
 
   
2016
   
2015
   
Dollars
 
Percent
 
Cash provided by financing activities
 
$
444,765
   
$
927,375
   
$
(482,610
-52
%
 
 Net cash provided by financing activities totaled $444,765 for the nine months ended March 31, 2016 as compared to cash flows used in financing activities of $927,375 for the nine months ended March 31, 2015.  The change in net cash related to financing activities is primarily attributable to cash from the issuance of stock during the nine months ended March 31, 2015, partially offset by (i) increased proceeds from issuance of notes payable, (ii) a decrease in payments on notes payable and (iii) a decrease in dividends paid in cash.  The Company has the option to pay quarterly preferred dividends in kind and has made this election for each quarter beginning with the quarter ended December 31, 2015.

 
Working Capital
 
 At March 31, 2016, the Company had working capital of $7,142,353 when compared with working capital of $5,032,139 at June 30, 2015.  This $2,110,214 increase in working capital is principally due to an increase in accounts receivable and decreases in accounts payable and accrued liabilities.  These changes were partially offset by an increase in deferred revenue and a decrease in prepaid expenses.  While no assurances can be given, management currently believes that the Company will increase its working capital position in subsequent periods, and thereby reduce its indebtedness utilizing existing cash resources and projected cash flow from operations. 
 
   
As of
March 31,
   
As of
June 30,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Current assets
 
$
14,577,421
   
$
13,429,590
   
$
1,147,831
     
9
%
 
 Current assets as of March 31, 2016 totaled $14,577,421, an increase of $1,147,831 when compared to $13,429,590 as of June 30, 2015.  The increase in current assets is attributable to an increase in accounts receivable.
 
   
As of
March 31,
   
As of
June 30,
   
Variance
 
   
2016
   
2015
   
Dollars
   
Percent
 
Current liabilities
 
$
7,435,068
   
$
8,397,451
   
$
(962,383
   
-12
%

 Current liabilities totaled $7,435,068 as of March 31, 2016 as compared to $8,397,451 as of June 30, 2015.  The $962,383 comparative decrease in current liabilities is principally due to a decrease in accrued liabilities.  This decrease was partially offset by an increase in deferred revenue.
 
While no assurances can be given, management currently intends to continue to reduce its indebtedness in subsequent periods utilizing existing cash resources and projected cash flow from operations.  In addition, management may also continue to pay down, pay off or refinance certain of the Company’s indebtedness.  Management believes that these initiatives will enable us to address our debt service requirements during the next twelve months without negatively impacting our working capital, 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  
 
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This update, which is part of the FASB’s larger Simplification Initiative project aimed at reducing the cost and complexity of certain areas of the accounting codification, requires that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustment amounts are determined.  Furthermore, the acquirer should record in the same period’s financial statements, the effect on earnings from any changes in depreciation, amortization, or other items impacting income. These changes resulting from adjustments to provisional amounts should be calculated as if the accounting had been completed at the actual acquisition date. Lastly, the update requires the acquirer to present separately on the face of the income statement or in the footnote disclosures the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the actual acquisition date. This update is effective for fiscal years beginning after December 15, 2016. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly.
 
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This update was issued in response to feedback from preparers, practitioners, and users of financial statements to see the effective date of the new guidance on revenue recognition delayed in order to allow a smoother transition. This update pushes the effective date for the new guidance back for public entities, certain not-for-profit entities, and certain employee benefit plans to annual reporting periods beginning after December 15, 2017, along with any interim reporting periods in that same period. All other entities will be required to implement the new guidance to reporting periods beginning after December 15, 2018 and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly; however, due to the extensive nature of the new revenue recognition standard, the Company is evaluating the impact this new guidance will have on its financials.
 
 
In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This Update clarifies the accounting for equity awards in which the performance target (i.e. an initial public offering) could be achieved after the requisite service period. The guidance requires a performance target that affects vesting and that could be achieved after the service period be treated as a performance condition and not be reflected in the fair value of the award. Therefore, the compensation costs will begin to be recognized when it becomes probable that the performance target will be achieved.  If the requisite service period is complete, the entire amount of compensation costs should be recognized at that time. This Update is effective for reporting periods beginning after December 15, 2015. The Company currently does not have any stock-based awards meeting the criteria noted so the Company doesn’t expect this Update to have a significant impact on its financials. However, it will evaluate new grants and ensure the guidance is followed if these types of grants are made.

Critical Accounting Policies
 
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. 
 
We commenced operations in the software development and professional services business during 1990.  The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and 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.

Income Taxes
 
In determining the carrying value of the Company’s net deferred income tax assets, the Company must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets.  If these estimates and assumptions change in the future, the Company may record a reduction in the valuation allowance, resulting in an income tax benefit in the Company’s statements of operations. Management evaluates whether or not to realize the deferred income tax assets and assesses the valuation allowance quarterly.

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 revenue ratably over the length of the agreement beginning on the commencement dates of each agreement or when revenue recognition conditions are satisfied.  For a fee, subscriptions provide the customer with access to the software and data over the Internet, or on demand, and provide technical support services and software upgrades when and if available. Under subscriptions, customers do not have the right to take possession of the software and such arrangements are considered service contracts. Accordingly, we recognize subscription revenue ratably over the length of the agreement and professional services are recognized as incurred based on their relative fair values.  In situations where we have contractually committed to an individual customer specific technology, we defer all of the revenue for that customer until the technology is delivered and accepted. Once delivery occurs, we then recognize the revenue ratably over the remaining contract term. When subscription service 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.
 
Hosting, premium support and maintenance service revenue is derived from services beyond the basic services provided in standard arrangements.  We recognize hosting, premium service and maintenance revenue ratably over the contract terms beginning on the commencement dates of each contact or when revenue recognition conditions are satisfied. In instances where hosting, premium support or maintenance service is paid in advance, deferred revenue is recognized and revenue is recording ratably over the term as services are consumed.
 
We also sell software licenses.  For software license sales, 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.  Licenses generally include multiple elements that are delivered up front or over time. Vendor specific objective evidence of fair value of the hosting and support elements is based on the price charged at renewal when sold separately, and the license element is recognized into revenue upon delivery.  The hosting and support elements are recognized ratably over the contractual term.

Stock-Based Compensation
 
The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards.  The Company records compensation expense on a straight-line basis.  The fair value of options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate.
 
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, and we believe the effect, if any, of near-term changes in interest rates on our financial position, results of operations and cash flows should not be material.  At March 31, 2016, the debt portfolio was composed of approximately 82% variable-rate debt and 18% fixed-rate debt.

   
March 31,
       
   
2016
(unaudited)
   
Percent of
 Total Debt
 
Fixed rate debt
 
$
587,469
     
18
%
Variable rate debt
   
2,708,871
     
82
%
Total debt
 
$
3,296,340
     
100
%
 
The table that follows presents fair values of principal amounts and weighted average interest rates for our investment portfolio as of March 31, 2016:

Cash:
 
Aggregate
Fair Value
   
Weighted Average Interest Rate
 
  Cash
 
$
11,333,020
     
0.2
%
  Short-Term Marketable Securities
 
$
-
     
NM
%

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 March 31, 2016. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission 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.
 
 
 
-21-

 
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. Historically, the outcome of all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition, results of operations or liquidity.  There is currently a case pending in the Utah 3rd District Court filed by a former employee for breach of his employment agreement.  The Company is defending the case vigorously and feels that the claims are without merit and even if liable, the amount is not material.

ITEM 1A.  RISK FACTORS

An investment in our common stock is subject to many risks. You should carefully consider the risks described below, together with all of the other information included in this Quarterly Report on Form 10-Q, including the financial statements and the related notes, before you decide whether to invest in our common stock. Our business, operating results and financial condition could be harmed by any of the following risks.  The trading price of our common stock could decline due to any of these risks, and you could lose all or part of your investment.

Risks Related to the Company

The Company has incurred losses in the past and there can be no assurance that the Company will operate profitably in the future.
 
 The Company had net income of $295,068 for the quarter ended March 31, 2016, compared to a net loss of $549,854 for the same period ended March 31, 2015.  Although the Company recorded net income during the quarter ended March 31, 2016, there can be no assurance that the Company will reliably or consistently operate profitably in future periods. If the Company does not operate profitably in the future, the Company’s current cash resources will be used to fund the Company’s operating losses.  Continued losses would have an adverse effect on the long-term value of the Company’s common stock and any investment in the Company.  The Company cannot give any assurance that the Company will continue to generate revenue or have sustainable profits.
 
Although the Company’s cash resources are currently sufficient, the Company’s long-term liquidity and capital requirements may be difficult to predict, which may adversely affect the Company’s long-term cash position.
 
 Historically, the Company has been successful in raising capital when necessary, including stock issuances and securing loans from its officers and directors, including its Chief Executive Officer and majority stockholder, in order to pay its indebtedness and fund its operations, in addition to cash flow from operations. The Company anticipates that it will have adequate cash resources to fund its operations and satisfy its debt obligations for at least the next 12 months, if not longer.
 
 If the Company is required to seek additional financing in the future in order to fund its operations, retire its indebtedness and otherwise carry out its business plan, there can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in the Company’s best interests.  

The Company faces risks associated with the acquisition of ReposiTrak.
 
 Our recent acquisition of ReposiTrak may not achieve expected returns and other benefits as a result of various factors, including adoption by food retailers and suppliers of ReposiTrak’s track and trace solution that enables traceability as products and their ingredients move between trading partners, as well as compliance with the Food Safety Modernization Act (“FSMA”).  In addition, the first installations of ReposiTrakTM began in August 2012, and market and product data related to these implementations is still being analyzed.  In the event the results fail to meet anticipated results, the market for ReposiTrak’s services may not materialize as currently anticipated.

 
The Company faces risks associated with new product introductions, including ReposiTrak.
 
            The Company continually receives and analyzes market and product data on products being developed by the Company, and the Company may endeavor to develop and commercialize new product offerings based on this data.  The following risks apply to potential new product offerings, including ReposiTrak:

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

 
the Company lacks experience with ReposiTrakTM and the market acceptance to accurately predict if it will be a profitable product;
 
 
technological issues between the Company and customers may be experienced in capturing data, and these technological issues may result in unforeseen conflicts or technological setbacks when implementing additional installations of ReposiTrakTM. This may result in material delays and even result in a termination of the ReposiTrakTM engagement;
 
 
the customer’s experience with ReposiTrakTM and other new offerings, if negative, may prevent the Company from having an opportunity to sell additional products and services to that customer;

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

 
delays in proceeding with the implementation of ReposiTrakTM or other new products for a new customer will negatively affect the Company’s cash flow and its ability to predict cash flow.
   
 
Quarterly and annual operating results may fluctuate, which makes it difficult to predict future performance.

            Management expects a significant portion of the Company’s revenue stream to come from the sale of subscriptions, and to a lesser extent, license sales, maintenance and services charged to new customers.  These amounts will fluctuate because predicting future sales is difficult and involves speculation.  In addition, the Company may potentially experience significant fluctuations in future operating results caused by a variety of factors, many of which are outside of its control, including:

 
our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers' requirements;

 
the renewal rates for our service;

 
the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business;

 
changes in our pricing policies whether initiated by us or as a result of competition;

 
the cost, timing and management effort for the introduction of new features to our service;

 
the rate of expansion and productivity of our sales force;

 
new product and service introductions by our competitors;
 
 
variations in the revenue mix of editions or versions of our service;
 
 
technical difficulties or interruptions in our service;

 
general economic conditions that may adversely affect either our customers' ability or willingness to purchase additional subscriptions or upgrade their service, or delay a prospective customers' purchasing decision, or reduce the value of new subscription contracts or affect renewal rates;

 
timing of additional investments in our enterprise cloud computing application and platform services and in our consulting service;

 
regulatory compliance costs;

 
the timing of customer payments and payment defaults by customers;

 
extraordinary expenses such as litigation or other dispute-related settlement payments;

 
the impact of new accounting pronouncements; and

 
the timing of stock awards to employees and the related financial statement impact.

Future operating results may fluctuate because of the foregoing factors, making it difficult to predict operating results.  Period-to-period comparisons of operating results are not necessarily meaningful and should not be relied upon as an indicator of future performance.  In addition, a relatively large portion of the Company’s expenses will be fixed in the short-term, particularly with respect to facilities and personnel.  Therefore, future operating results will be particularly sensitive to fluctuations in revenue because of these and other short-term fixed costs.

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

The Company’s officers and directors, including our Chief Executive Officer, Randall K. Fields, control approximately 33% of the Company’s common stock.  Mr. Fields, individually, controls 27% of the Company’s common stock. Consequently, Mr. Fields individually, and the Company’s officers and directors, as stockholders acting together, are able to significantly influence all matters requiring approval by the Company’s stockholders, including the election of directors and significant corporate transactions, such as mergers or other business combination transactions.
 
The Company’s corporate charter contains authorized, unissued “blank check” preferred stock issuable without stockholder approval with the effect of diluting then current stockholder interests.

The Company’s certificate of incorporation currently authorizes the issuance of up to 30,000,000 shares of ‘blank check’ preferred stock with designations, rights, and preferences as may be determined from time to time by the Company’s Board of Directors.  As of March 31, 2016, a total of 625,375 shares of Series B Preferred and 152,819 of Series B-1 Preferred were issued and outstanding.  The Company’s board of directors is empowered, without stockholder approval, to issue one or more additional series of preferred stock with dividend, liquidation, conversion, voting, or other rights that could dilute the interest of, or impair the voting power of, the Company’s common stockholders.  The issuance of an additional series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control.

Because the Company has never paid dividends on its common stock, investors should exercise caution before making an investment in the Company.
 
The Company has never paid dividends on its common stock and does not anticipate the declaration of any dividends pertaining to its common stock in the foreseeable future. The Company intends to retain earnings, if any, to finance the development and expansion of the Company’s business.  The Company’s board of directors will determine future dividend policy at their sole discretion and future dividends will be contingent upon future earnings, if any, obligations of the stock issued, the Company’s financial condition, capital requirements, general business conditions and other factors.  Future dividends may also be affected by covenants contained in loan or other financing documents, which may be executed by the Company in the future.  Therefore, there can be no assurance that dividends will ever be paid on its common stock.
  
The Company’s business is dependent upon the continued services of the Company’s founder and Chief Executive Officer, Randall K. Fields; should the Company lose the services of Mr. Fields, the Company’s operations will be negatively impacted.
 
The Company’s business is dependent upon the expertise of its founder and Chief Executive Officer, Randall K. Fields.  Mr. Fields is essential to the Company’s operations.  Accordingly, an investor must rely on Mr. Fields’ management decisions that will continue to control the Company’s business affairs.  The Company currently maintains key man insurance on Mr. Fields’ life in the amount of $5,000,000; however, that coverage would be inadequate to compensate for the loss of his services. The loss of the services of Mr. Fields would have a materially adverse effect upon the Company’s business.
 
 
If the Company is unable to attract and retain qualified personnel, the Company may be unable to develop, retain or expand the staff necessary to support its operational business needs.
 
The Company’s current and future success depends on its ability to identify, attract, hire, train, retain and motivate various employees, including skilled software development, technical, managerial, sales, marketing and customer service personnel. Competition for such employees is intense and the Company may be unable to attract or retain such professionals. If the Company fails to attract and retain these professionals, the Company’s revenue and expansion plans may be negatively impacted.
 
The Company’s officers and directors have limited liability and indemnification rights under the Company’s organizational documents, which may impact its results.
 
The Company’s officers and directors are required to exercise good faith and high integrity in the management of the Company’s affairs.  The Company’s certificate of incorporation and bylaws, however, provide, that the officers and directors shall have no liability to the stockholders for losses sustained or liabilities incurred which arise from any transaction in their respective managerial capacities unless they violated their duty of loyalty, did not act in good faith, engaged in intentional misconduct or knowingly violated the law, approved an improper dividend or stock repurchase or derived an improper benefit from the transaction. As a result, an investor may have a more limited right to action than he would have had if such a provision were not present. The Company’s certificate of incorporation and bylaws also require it to indemnify the Company’s officers and directors against any losses or liabilities they may incur as a result of the manner in which they operate the Company’s business or conduct the Company’s internal affairs, provided that the officers and directors reasonably believe such actions to be in, or not opposed to, the Company’s best interests, and their conduct does not constitute gross negligence, misconduct or breach of fiduciary obligations.

Business Operations Risks

If the Company’s marketing strategy fails, its revenue and operations will be negatively affected.
 
The Company plans to concentrate its future sales efforts towards marketing the Company’s applications and services, and specifically to contract with suppliers (“spokes”) to connect to our existing retail customers (“hubs”) previously signed up by the Company. These applications and services are designed to be highly flexible so that they can work in multiple retail and supplier environments such as grocery stores, convenience stores, specialty retail and route-based delivery environments.  There is no assurance that the public will accept the Company’s applications and services in proportion to the Company’s increased marketing of this product line, or that the Company will be able to successfully leverage its hubs to increase revenue by connecting suppliers.  The Company may face significant competition that may negatively affect demand for its applications and services, including the public’s preference for the Company’s competitors’ new product releases or updates over the Company’s releases or updates.  If the Company’s applications and services marketing strategies fail, the Company will need to refocus its marketing strategy toward other product offerings, which could lead to increased development and marketing costs, delayed revenue streams, and otherwise negatively affect the Company’s operations.

Because the Company’s emphasis is on the sale of subscription based services, rather than annual license fees, the Company’s revenue may be negatively affected.
 
Historically, the Company offered applications and related maintenance contracts to new customers for a one-time, non-recurring up front license fee and provided an option for annually renewing their maintenance agreements.  The Company is now principally offering prospective customers monthly subscription based licensing of its products.  The Company’s customers may now choose to acquire a license to use the software on an Application Solution Provider basis (also referred to as “ASP”) resulting in monthly charges for use of the Company’s software products and maintenance fees.  The Company’s conversion from a strategy of one-time, non-recurring licensing based model to a monthly recurring fees based approach is subject to the following risks:

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

 
there may be a threshold level (number of locations) at which the monthly based fee structure may not be economical to the customer, and a request to convert from monthly fees to an annual fee could occur.
  
 
The Company faces threats from competing and emerging technologies that may affect its profitability.
 
Markets for the Company’s type of software products and that of its competitors are characterized by:

 
development of new software, software solutions or enhancements that are subject to constant change;
 
    rapidly evolving technological change; and
 
     unanticipated changes in customer needs.
 
 
Because these markets are subject to such rapid change, the life cycle of the Company’s products is difficult to predict. As a result, the Company is subject to the following risks:
     
 
whether or how the Company will respond to technological changes in a timely or cost-effective manner;

 
whether the products or technologies developed by the Company’s competitors will render the Company’s products and services obsolete or shorten the life cycle of the Company’s products and services; and

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

Interruptions or delays in service from our third-party data center hosting facility could impair the delivery of our service and harm our business.
 
We currently serve our customers from a third-party data center hosting facility located in the United States. Any damage to, or failure of, our systems generally could result in interruptions in our service. As we continue to add capacity, we may move or transfer our data and our customers' data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Further, any damage to, or failure of, our systems generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
  
As part of our current disaster recovery arrangements, our production environment and all of our customers' data is currently replicated in near real-time in a separate facility physically located in a different geographic region of the United States. Companies and products added through acquisition may be temporarily served through an alternate facility. We do not control the operation of these facilities, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service. Even with the disaster recovery arrangements, our service could be interrupted.
  
If our security measures are breached and unauthorized access is obtained to a customer's data, our data or our information technology systems, our service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.

Our service involves the storage and transmission of customers' proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. These security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise during transfer of data to additional data centers or at any time, and result in someone obtaining unauthorized access to our customers' data or our data, including our intellectual property and other confidential business information, or our information technology systems. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers' data or our data, including our intellectual property and other confidential business information, or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in a loss of confidence in the security of our service, damage our reputation, disrupt our business, lead to legal liability and negatively impact our future sales.
 
 
We cannot accurately predict subscription renewal or upgrade rates and the impact these rates may have on our future revenue and operating results.

Our customers have no obligation to renew their subscriptions for our service after the expiration of their initial subscription period. Our renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction with our service, customers' ability to continue their operations and spending levels, and deteriorating general economic conditions. If our customers do not renew their subscriptions for our service or reduce the level of service at the time of renewal, our revenue will decline and our business will suffer.

Our future success also depends in part on our ability to sell additional features and services, more subscriptions or enhanced editions of our service to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors, including general economic conditions. If our efforts to upsell to our customers are not successful, our business may suffer.
 
Weakened global economic conditions may adversely affect our industry, business and results of operations.

Our overall performance depends in part on worldwide economic conditions. The United States and other key international economies have experienced in the past a downturn in which economic activity was impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These conditions affect the rate of information technology spending and could adversely affect our customers' ability or willingness to purchase our enterprise cloud computing services, delay prospective customers' purchasing decisions, reduce the value or duration of their subscription contracts or affect renewal rates, all of which could adversely affect our operating results.
 
If the Company is unable to adapt to constantly changing markets and to continue to develop new products and technologies to meet the customers’ needs, the Company’s revenue and profitability will be negatively affected.

The Company’s future revenue is dependent upon the successful and timely development and licensing of new and enhanced versions of its products and potential product offerings suitable to the customer’s needs.  If the Company fails to successfully upgrade existing products and develop new products, and those new products do not achieve market acceptance, the Company’s revenue will be negatively impacted.
 
The Company faces risks associated with the loss of maintenance and other revenue.

            The Company has historically experienced the loss of long-term maintenance customers as a result of the reliability of some of its products. Some customers may not see the value in continuing to pay for maintenance that they do not need or use, and in some cases, customers have decided to replace the Company’s applications or maintain the system on their own.  The Company continues to focus on these maintenance clients by providing new functionality and enhancements to meet their business needs.  The Company also may lose some maintenance revenue due to consolidation of industries, macroeconomic conditions or customer operational difficulties that lead to their reduction of size.  In addition, future revenue will be negatively impacted if the Company fails to add new maintenance customers that will make additional purchases of the Company’s products and services.
 
The Company faces risks associated with proprietary protection of the Company’s software.
 
The Company’s success depends on the Company’s ability to develop and protect existing and new proprietary technology and intellectual property rights.  The Company seeks to protect its software, documentation and other written materials primarily through a combination of patents, trademarks, and copyright laws, trade secret laws, confidentiality procedures and contractual provisions.  While the Company has attempted to safeguard and maintain the Company’s proprietary rights, there are no assurances that the Company will be successful in doing so.  The Company’s competitors may independently develop or patent technologies that are substantially equivalent or superior to the Company’s.
 
 
Despite the Company’s efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company’s products or obtain and use information that the Company regards as proprietary.  In some types of situations, the Company may rely in part on ‘shrink wrap’ or ‘point and click’ licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions.  Policing unauthorized use of the Company’s products is difficult.  While the Company is unable to determine the extent to which piracy of the Company’s software exists, software piracy can be expected to be a persistent problem, particularly in foreign countries where the laws may not protect proprietary rights as fully as the United States.  The Company can offer no assurance that the Company’s means of protecting its proprietary rights will be adequate or that the Company’s competitors will not reverse engineer or independently develop similar technology.
 
The Company may discover software errors in its products, errors in the reports generated by its products or errors in advice given by its employees about the products that may result in a loss of revenue, injury to the Company’s reputation or subject us to substantial liability.
 
Non-conformities or bugs (“errors”) may be found from time to time in the Company’s existing, new or enhanced products after commencement of commercial shipments, resulting in loss of revenue or injury to the Company’s reputation.  In the past, the Company has discovered errors in its products and as a result, has experienced delays in the shipment of products.  Errors in the Company’s products may be caused by defects in third-party software incorporated into the Company’s products.  If so, the Company may not be able to fix these defects without the cooperation of these software providers.  Since these defects may not be as significant to the software provider as they are to us, the Company may not receive the rapid cooperation that may be required.  The Company may not have the contractual right to access the source code of third-party software, and even if the Company does have access to the code, the Company may not be able to fix the defect. In addition, our customers may use our service in unanticipated ways that may cause a disruption in service for other customers attempting to access their data. Output from the Company’s products could contain errors and advice from Company employees about the Company’s products could contain errors, either of which could lead customers to make incorrect decisions based on that wrong output or advice. 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.
   
Some competitors are larger and have greater financial and operational resources that may give them an advantage in the market.

Many of the Company’s competitors are larger and have greater financial and operational resources.  This may allow them to offer better pricing terms to customers in the industry, which could result in a loss of potential or current customers or could force us to lower prices.  Any of these actions could have a significant effect on revenue.  In addition, the competitors may have the ability to devote more financial and operational resources to the development of new technologies that provide improved operating functionality and features to their product and service offerings.  If successful, their development efforts could render the Company’s product and service offerings less desirable to customers, again resulting in the loss of customers or a reduction in the price the Company can demand for the Company’s offerings.
 
Risks Relating to the Company’s Common Stock

The limited public market for the Company’s securities may adversely affect an investor’s ability to liquidate an investment in the Company.

Although the Company’s common stock is currently quoted on the NASDAQ Capital Market, there is limited trading activity.  The Company can give no assurance that an active market will develop, or if developed, that it will be sustained.  If an investor acquires shares of the Company’s common stock, the investor may not be able to liquidate the Company’s shares should there be a need or desire to do so.
 
 
Future issuances of the Company’s shares may lead to future dilution in the value of the Company’s common stock, will lead to a reduction in shareholder voting power and may prevent a change in Company control.
 
The shares may be substantially diluted due to the following:

 
issuance of common stock in connection with funding agreements with third parties and future issuances of common and preferred stock by the Board of Directors; and

 
the Board of Directors has the power to issue additional shares of common stock and preferred stock and the right to determine the voting, dividend, conversion, liquidation, preferences and other conditions of the shares without shareholder approval. 

Stock issuances may result in reduction of the book value or market price of outstanding shares of common stock.  If the Company issues any additional shares of common or preferred stock, proportionate ownership of common stock and voting power will be reduced.  Further, any new issuance of common or preferred stock may prevent a change in control or management.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None.

ITEM 5.  OTHER INFORMATION
 
None.
 
ITEM 6.  EXHIBITS
 
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Principal Financial Officer 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
 
 
 
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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:  May 9, 2016
PARK CITY GROUP, INC.
     
 
By:
 /s/  Randall K. Fields
   
Randall K. Fields
Chief Executive Officer, Chairman and Director
(Principal Executive Officer)
     
Date: May 9, 2016
By:
 /s/  Todd Mitchell
   
Todd Mitchell
Chief Financial Officer
(Principal Financial Officer & Principal Accounting Officer)
 
-31-