pcg10ksb063008.htm
U. S. SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
Annual
Report Under
Section
13 or 15(d) of the
Securities
Exchange Act of 1934
For the
fiscal year ended
June 30,
2008
Commission
file number
000-03718
PARK CITY GROUP,
INC.
(Exact
name of registrant as specified in its charter)
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Nevada
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37-1454128
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(State
or other jurisdiction of incorporation)
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(IRS
Employer Identification No.)
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3160 Pinebrook Road, Park
City, Utah 84098
(Address
of principal executive offices)
(435)
645-2000
(Registrant's
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock ($0.01
par value per share
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Title
of each Class
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Name
of each exchange on which registered
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Common
Stock, $.01 Par Value
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Over-the-Counter
Bulletin Board
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Outstanding as of September
26, 2008
9,282,373
Shares
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities 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. (1) [ XX ] Yes [ ] No ; (2) [XX] yes [ ]
No.
Check if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form , and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
The
issuer’s revenues for the year ended June 30, 2008 were $3,344,973.
The
aggregate market value of the stock held by non-affiliates of the registrant is
approximately $13,569,901, calculated using a price of $2.75 per share on
September 26, 2008.
ON
FORM 10-KSB
YEAR
ENDED JUNE 30, 2008
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PART
I
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Item
1
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3
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Item
2
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6
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Item
3
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6
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Item
4
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6
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PART
II
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Item
5
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7
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Item
6
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9
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Item
7
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20
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Item
8
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20
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Item
8A
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20
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Item
8B
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21
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PART
III
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Item
9
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22
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Item
10
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24
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Item
11
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27
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Item
12
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28
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Item
13
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29
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Item
14
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30
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31
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F-1
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F-2
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F-3
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F-4
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F-5
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F-6
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Exhibit
31
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Exhibit
32
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(REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK)
Forward-Looking
Statements
This
annual report on Form 10-KSB 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 the risk factors set forth below and elsewhere in this
report. See “Risk Factors” and “Management's Discussion and Analysis
of Financial Condition and Results of Operations.” Statements made
herein are as of the date of the filing of this Form 10-KSB 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 disclaims any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
Item
1. Description of Business
Background
Information
Park City
Group develops and markets patented computer software and profit optimization
consulting services that are intended to help its retail customers to reduce
their inventory and labor costs; the two largest controllable expenses in the
retail industry. The technology has its genesis in the operations of
Mrs. Fields Cookies co-founded by Randall K. Fields, CEO of Park City Group,
Inc. Industry leading customers such as The Home Depot, Anheuser
Busch Entertainment, Perdue, Monterey Mushrooms, Pacific Sunwear, Wawa and Tesco
Lotus benefit from the Company’s software. Because the product
concepts originated in the environment of actual multi-unit retail chain
ownership, the products are strongly oriented to an operations’ bottom line
results.
The
Company was incorporated in the State of Delaware on December 8, 1964 as
Infotec, Inc. From June 20, 1999 to approximately June 12, 2001, it was known as
Amerinet Group.com, Inc. In 2001, the name was changed from Amerinet
Group.com to Fields Technologies, Inc. On June 13, 2001, the Company
entered into a “Reorganization Agreement” with Randall K. Fields and Riverview
Financial Corporation whereby it acquired substantially all of the outstanding
stock of Park City Group, Inc., a Delaware corporation, which became a 98.67%
owned subsidiary. Operations are conducted through this
subsidiary which was incorporated in the State of Delaware in May
1990.
On August
7, 2002, Fields Technologies, Inc., (OTCBB:FLDT) changed its name from Fields
Technologies, Inc., to Park City Group, Inc., and reincorporated in
Nevada. Therefore, both the parent-holding company (Nevada) and its
operating subsidiary (Delaware) are named Park City Group, Inc. Park
City Group, Inc. (Nevada) has no other business operations other than in
connection with its subsidiary. In this Annual Report Form 10KSB when the terms
“we”, “Company” or “Park City Group” are used, it is referring to the Park City
Group, Inc., a Delaware corporation, as well as to Fields Technologies, Inc.,
the Delaware Corporation, which was reincorporated in Nevada under the name of
the Park City Group, Inc. The stock trades under the symbol (OTC BB:
PCYG).
The
principal executive offices are located at 3160 Pinebrook Road, Park City, Utah
84098. The telephone number is (435) 645-2000. The website
address is http://www.parkcitygroup.com.
General
The
Company develops and licenses its software applications identified as “Fresh
Market Manager”, “Supply Chain Profit Link”, and “ActionManager®” to
supermarkets, convenience stores and other retailers. The Company also provides
implementation and profit optimization consulting services for its application
products.
Supermarket
The
supermarket industry is under increased competitive pressure from value
retailers such as Wal-Mart, Costco, Target, and others. One of the
strategies that traditional supermarkets are implementing is to increase the
quantity and quality of their perishable offerings. Perishable
departments, such as bakery, meat and seafood, dairy, and deli have historically
been loosely managed but now have been forced to become a focus for
profitability improvement. The Company’s software and consulting
services and change management resources are designed to address this specific
business problem; increasing the profitability of perishable products at the
department and store level.
Convenience
Store
For
convenience stores, recent trends of contracting gasoline sales margins and
declining tobacco sales further increases the need for improved cost controls,
focus on product mix, and better decision support. To intensify the
focus on these issues, other industry segments such as value retailers and
grocery stores have begun cutting into the convenience store stronghold by
offering gasoline, a product that once was almost solely offered by convenience
store retailers. In response to declining gasoline sales and profits,
the C-Store industry is pushing into Fresh Food as an avenue of increased sales
and profitability. Only the most progressive convenience store operations have
automated systems to help store managers, leaving the majority of the operators
without any technology to ease their administrative and operations
burdens.
Supplier
As stated
above, supermarkets and convenience stores are increasingly dependent upon
perishable departments and optimized inventory for increased profitability.
Suppliers are increasingly pressured by retailers to provide economic incentives
or assistance. Park City Group has developed Supply Chain Profit link
to enable suppliers to provide that assistance.
Specialty
Retail
Specialty
retailers are faced with a shrinking labor force and strong competition for
qualified managers and staff. Managers are time-constrained due to
increased labor and inventory demands, margins are increasingly tight due to
higher labor and lease costs, and customer satisfaction demands are higher than
ever before. Park City Group has developed a range of applications
that enable managers in specialty retail to improve their labor scheduling
efficiency and reduce their total paperwork and administrative
workload.
Products
The
Company’s primary products are Fresh Market Manager, Action Manager and Supply
Chain Profit Link. These products are designed to aid the retailer to
manage inventory, labor and suppliers.
Fresh Market Manager.
Addressing the inventory issues that plague today’s retailers, Fresh
Market Manager is a suite of software product applications designed to help
manage perishable food departments including bakery, deli, seafood, produce,
meat, home meal replacement, dairy, frozen food, and floral. Although the
supermarket and convenience store industries have invested substantial sums on
Point-of-Sale, scanning systems, etc., those systems are, almost without
exception, limited to proving price look-up functions rather than decision
support functions. These industries are a classic representation of
“data rich” and “information poor”. Park City Group is capitalizing
on that environment to bring together information from disparate legacy
applications and databases to provide an end-to-end integrated merchandising,
production planning, demand forecasting and perpetual inventory system to
address the industry’s perishable department needs.
Fresh
Market Manager helps identify true cost of goods and provides accurate and
actionable profitability data on a corporate, regional, store-by-store, and/or
item-by-item basis. Fresh Market Manager also produces hour-by-hour forecasts,
production plans, perpetual inventory, and places/receives orders. Fresh Market
Manager automates the majority of the planning, forecasting, ordering, and
administrative functions associated with fresh merchandise or
products.
ActionManager®. The second
most important cost element typically facing today’s retailers is
labor. ActionManager® addresses labor needs by providing a suite of
solutions that forecast labor demand, schedules staff resources, and provides
store managers with the necessary tools to keep labor costs under control while
improving customer service, satisfaction, and sales. ActionManager
applications provide an automated method for managers to plan, schedule, and
administer many of the administrative tasks including new hire paperwork and
time and attendance. In addition to automating most administrative
processes, ActionManager provides the local manager with a “dashboard” view of
the business. ActionManager also has extensive reporting capabilities
for corporate, field, and store-level management to enable improved decision
support.
Supply Chain Profit Link.
Supply Chain Profit Link (“SCPL”) allows suppliers an opportunity to work with
their retail partners on optimizing profits, while reducing stock outs and
minimizing shrink (or waste). SCPL provides hourly, daily, or weekly
store-by-store item-level movement and profitability information to suppliers
and retailers to facilitate decision support. SCPL allows suppliers
and retailers opportunities to customize assortment plans, promotions, and
pricing strategies on a store-by-store basis.
Services
Business
Analytics
Park City
Group’s Business Analytics Group offers business consulting services to
suppliers and retailers in the grocery, convenience store and specialty retail
industries. The Business Analytics Group mines store-level scan data
to develop item-specific recommendations to improve customer satisfaction and
profitability.
Sales
and Marketing
Through a
focused and dedicated sales effort designed to address the requirements of each
of its software and service solutions, Park City Group believes its sales force
is positioned to understand its customers’ businesses, trends in the
marketplace, competitive products and opportunities for new product development.
The Company’s deep industry knowledge enables it to take a consultative approach
in working with its prospects and customers. Park City Group’s sales
personnel focus on selling its technology solutions to major customers, both
domestically and internationally.
To date,
Park City Group’s primary marketing objectives have been to increase awareness
of Park City Group’s technology solutions and generate sales leads. To this end,
Park City Group attends industry trade shows, conducts direct marketing
programs, publishes industry trade articles and white papers, participates in
interviews, and selectively advertises in industry publications.
Customers
Our
customers include some of the most notable names in retailing, including:
Supervalu, Pathmark, Tesco-Lotus, Circle K Midwest/Great Lakes, The Home Depot,
Wawa, Williams-Sonoma, and others.
Competition
The
market for Park City Group’s products and services is very competitive. Park
City Group believes the principal competitive factors include product quality,
reliability, performance, price, vendor and product reputation, financial
stability, features and functions, ease of use, quality of support and degree of
integration effort required with other systems. While our competitors
are often considerably larger companies in size with larger sales forces and
marketing budgets, we believe that our deep industry knowledge and the breadth
and depth of our offerings give us a competitive advantage. Park City
Group’s ability to continually improve its products, processes and services, as
well as its ability to develop new products, enables the Company to meet
evolving customer requirements. Park City
Group competes with companies such as Workbrain, Radient Systems, Kronos, Tomax,
Capgemini, Electronic Data Systems, and others.
Product
Development
The
products sold by the Company are subject to rapid and continual technological
change. Products available from the Company, as well as from its competitors,
have increasingly offered a wider range of features and capabilities. The
Company believes that in order to compete effectively in its selected markets,
it must provide compatible systems incorporating new technologies at competitive
prices. In order to achieve this, the Company has made a substantial ongoing
commitment to research and development.
Park City
Group’s product development strategy is focused on creating common technology
elements that can be leveraged in applications across its core markets. The
Company’s software architecture is based on open platforms and is modular,
thereby allowing it to be phased into a customer’s operations. In order to
remain competitive, Park City Group is currently designing, coding and testing a
number of new products and developing expanded functionality of its current
products.
Patents
and Proprietary Rights
The
Company has been awarded nine U.S. patents, eight U.S. trademarks and 37 U.S.
copyrights relating to its software technology that are approved and issued. In
addition, the Company has two patents currently pending. The Company
has 14 international patents and patent applications pending. The
patents referred to above are continuously reviewed and renewed as their
expiration dates come due. From time to time, the Company may review its
portfolio of intellectual property including its patents and either lease or
sell it’s intellectual property.
Company
policy is to seek patent protection for all developments, inventions and
improvements that are patentable and have potential value to the Company and to
protect its trade secrets other confidential and proprietary
information. The Company intends to vigorously defend its
intellectual property rights to the extent its resources permit.
Future
success may depend upon the strength of the Company’s intellectual
property. Although management believes that the scope
of patents/patent applications are sufficiently broad to prevent
competitors from introducing devices of similar novelty and design to compete
with the Company’s current products and that such patents and patent
applications are or will be valid and enforceable, there are no assurances that
if such patents are challenged, this belief will prove correct. The
Company has, however, successfully defended one of these patents in three
separate instances and as such, has some level of confidence in the Company’s
ability to maintain its patents. In addition, patent applications
filed in foreign countries and patents granted in such countries are subject to
laws, rules and procedures, which differ from those in the
U.S. Patent protection in such countries may be different from patent
protection provided by U.S. laws and may not be as favorable.
The
Company is not aware of any patent infringement claims against it; however,
there are no assurances that litigation to enforce patents issued to the Company
to protect proprietary information, or to defend against the Company’s alleged
infringement of the rights of others will not occur. Should any such
litigation occur, the Company may incur significant litigation costs, the
Company’s resources may be diverted from other planned activities, and result in
a materially adverse effect on the Company’s operations and financial
condition.
The
Company relies on a combination of patent, copyright, trademark, and other laws
to protect its proprietary rights. There are no assurances that the
Company’s attempted compliance with patent, copyrights, trademark or other laws
will adequately protect its proprietary rights or that there will be adequate
remedies for any breach of our trade secrets. In addition, should the
Company fail to adequately comply with laws pertaining to its proprietary
protection, the Company may incur additional regulatory compliance
costs.
Government
Regulation and Approval
Like all
businesses, the Company is subject to numerous federal, state and local laws and
regulations, including regulations relating to patent, copyright, and trademark
law matters.
Cost
of Compliance with Environmental Laws
The
Company currently has no costs associated with compliance with environmental
regulations, and does not anticipate any future costs associated with
environmental compliance; however, there can be no assurance that it will not
incur such costs in the future.
Reports
to Security Holders
The
Company is subject to the informational requirements of the Securities Exchange
Act of 1934. Accordingly, it files annual, quarterly and other
reports and information with the Securities and Exchange
Commission. You may read and copy these reports and other information
at the Securities and Exchange Commission's public reference rooms in
Washington, D.C. and Chicago, Illinois. The Company’s filings are
also available to the public from commercial document retrieval services and the
Internet world wide website maintained by the Securities and Exchange Commission
at www.sec.gov.
Employees
As of
September 3, 2008, the Company had 36 employees, including 11 software
developers and programmers, 9 sales, marketing and account management employees,
8 software service and support employees and 8 accounting and administrative
employees. During 2008, the Company contracted with 5 programmers and
2 business analysts in India. The Company is planning to continue to
expand its Indian workforce to support sales and implementations in Asia and to
provide additional programming resources. All of these employees and
contractors work for the Company on a full time basis. The employees
are not represented by any labor union.
The
Company’s principal place of business operations is located at 3160 Pinebrook
Road, Park City, Utah 84098. The Company leases approximately 10,000 square feet
at this home office location, consisting primarily of office space, conference
rooms and storage areas. The telephone number is (435)
645-2000. The website address is http://www.parkcitygroup.com.
The
Company filed a lawsuit on January 29, 2007 against Application Development
Consultants (“ADC”) titled Park City Group, Inc. vs. Application
Development Consultants case No. 2:07 CV 00048-TS which is pending in
the Federal District Court for the District of Utah. The Company claims
that ADC infringing upon its patent # 5,299,115. The Company filed its
preliminary infringement contention with United States District Court of Utah
Central Division. Damages sought by the Company are to be determined
at trial. The Company and ADC are currently in the discovery phase of the
litigation. The Company will vigorously pursue this matter in defense of its
intellectual property.
On June
29, 2007, the Company was served with a complaint from two previous employees
titled James D. Horton and Aaron Prevo v. Park City Group, Inc. and Randy
Fields, Individually Case No. 070700333, which has been filed in the Second
Judicial District Court, Davis County, Utah. The plaintiffs’ complaint alleges
that certain provisions of their employment agreements were not honored
including breach of employer obligations, fraud, unjust enrichment, and breach
of contract. The plaintiffs are seeking combined damages for alleged
unpaid compensation and punitive damages of $520,650 and $2,603,250,
respectively. The case is currently in the discovery phase and the Company will
continue to vigorously defend this matter.
None
Item 5. Market
for Common Equity and Related Stockholder Matters
Dividend
Policy
To date,
the Company has not paid dividends on common stock. The Series A Convertible
Preferred Stock issued in the June 2007 offering has the right to a 5%
cumulative dividend. Prior to June 1, 2010, preferred dividends can be paid in
cash or Series A Convertible Preferred Stock at the option of the
Company. After June 1, 2010, the holders of the Series A Convertible
Preferred Stock may elect to have future dividends paid in cash in the event
that during any sixty (60) trading day period commencing on or after June 1,
2010, the average closing price shall be less than or equal to the Series A
Convertible Preferred stock conversion price. Our present policy is
to retain future earnings (if any) for use in our operations and the expansion
of our business.
Share
Price History
Common
stock (the “Common Stock”) is traded in the over-the-counter market in what is
commonly referred to as the “Electronic” or “OTC Bulletin Board” or the “OTCBB”
under the trading symbol “PCYG.” The following table sets forth the high and low
bid information of the Common Stock’s closing price for the periods
indicated. The price information contained in the table was obtained
from internet sources considered reliable. Note that such
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission and the quotations may not necessarily represent
actual transactions in the Common Stock.
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Fiscal Year
2007
September
30, 2006
December
31, 2006
March
31, 2007
June
30, 2007
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Low
$2.10
$2.30
$1.75
$2.15
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High
$5.00
$3.50
$3.25
$3.39
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Fiscal Year
2008
September
30, 2007
December
31, 2007
March
31, 2008
June
30, 2008
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$2.60
$2.80
$2.00
$2.20
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$3.30
$3.40
$3.39
$3.39
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Holders
of Record
At
September 26, 2008 there were 650 holders of record of Common Stock and common
shares issued and outstanding of 9,282,373. The number of holders of
record and shares issued and outstanding was calculated by reference to the
stock transfer agent's books.
Purchases
of Equity Securities by the Small Business Issuer and Affiliated
Purchasers
None
Equity
Compensation Plan Information
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Equity
Compensation Plan Information
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Plan
category
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Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
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Weighted-average
exercise price of outstanding options, warrants and rights
(b)
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Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
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Equity
compensation plans approved by security holders
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0
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0
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0
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Equity
compensation plans not approved by security holders
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95,250
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$2.54
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44,750
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Total
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95,250
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$2.54
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44,750
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The
Company has several different Equity Compensation Plans in effect at this
time. These include the following:
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·
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In
August 2003 the Company authorized 40,000 options for distribution to the
employees. These options had a strike price of
$2.50.
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·
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In
August 2003 the Company authorized 40,000 options for distribution to the
senior management. These options had a strike price of
$1.50.
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·
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In
September of 2005 the Company authorized to pay Senior Management 3
options for every share purchased at $3.50 for one
year. Starting October of 2006 Senior Management will get 2
options for every share purchased from the Company at market price or
$3.50 which ever is higher.
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Issuance
of Securities
We issued
shares of our common and preferred stock in unregistered transactions during
fiscal year 2008 and subsequently. All of the shares of common and preferred
stock issued were issued in non registered transactions in reliance on Section
4(2) of the Securities Act of 1933, as amended (the “Securities Act”). We report
shares issued on an annual basis. The shares of common and preferred stock
issued subsequent to June 30, 2007 were issued as follows:
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●
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In
October 2007, the Company issued 8,199 shares of Series A Convertible
preferred stock to preferred stock holders in lieu of cash dividends of
$81,990.
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●
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In
January 2008, the Company issued 7,341 shares of preferred stock to
preferred stock holders in lieu of cash dividends of $73,410 in accordance
with the provisions of the issuance of 584,000 shares of its Series A
Convertible Preferred Stock that occurred in June
2007.
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●
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In
February 2008, the Company issued 3,919 shares of common stock to board
members in lieu of cash compensation of
$12,500.
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In
February 2008, the Company issued 7,142 shares of common stock to members
of management in accordance with certain employment agreements. At
issuance these shares had a market value of
$22,676.
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●
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In
April 2008, the Company issued 9,753 shares of Series A Convertible
preferred stock to preferred stock holders in lieu of cash dividends of
$97,530.
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In
July 2008, the Company issued 31,314 shares of common stock to Robert
Allen in a non-public offering in exchange for
$100,002.
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In
July 2008, The Company issued 20,000 shares of common stock to James
Gillis in a non-public offering in exchange for
$53,600.
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●
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In
August 2008, the Company issued 7,520 shares of common stock to board
members in lieu of cash compensation of
$20,000.
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(REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK)
The
following discussion and analysis provides information that management believes
is relevant to an assessment and understanding of the consolidated results of
operations and financial condition. The terms “Company”, “we”, “our”
or “us” are used in this discussion to refer to Park City Group,
Inc. (formerly Fields Technologies, Inc.) along with Park
City Group, Inc.'s wholly owned subsidiary, Fresh Market Manager, LLC, on a
consolidated basis, except where the context clearly indicates
otherwise.
Overview
The
principal business is the design, development, marketing and support of
proprietary software products along with ongoing operational consulting
practice. These software products are designed to be used in retail
and grocery businesses having multiple locations by assisting individual store
locations and corporate management with managing daily business operations and
communicating results of those operations in a timely manner.
Through
June 30, 2008 the Company has accumulated aggregate consolidated losses totaling
$24,982,411 which includes a net loss applicable to common shareholders of
$3,199,016 and $3,011,627 for the years ended June 30, 2008, and 2007,
respectively.
Management’s
Discussion and Analysis
Years Ended June 30, 2008
and 2007
Total
Revenue
During
the year ended June 30, 2008, the Company had total revenues of $3,344,973 when
compared to $2,592,166 for the year ended June 30, 2007, a 29%
increase. This $752,807 increase in total revenues for the year ended
June 30, 2008 when compared with June 30, 2007 is the result of (1) an increase
of subscription revenues of $113,777 a 127% increase over prior year, (2) an
increase in professional services of $120,265, and (3) an increase in license
sales of $576,437 a 110% increase over prior year.
License
Revenue
License
fees were $1,101,904 and $525,503 for fiscal year ended 2008 and 2007,
respectively, a 110% increase. This $576,437 increase in license
revenue for the year ended June 30, 2008 when compared with the same period June
30, 2007 was primarily attributable to a $700,000 software license sale in the
fiscal quarter ended June 30, 2008 that did not occur in the same period then
ended in 2007. Historically, the Company has realized the majority of
its annual revenues through non-recurring software license fees. For the year
ended, June 30, 2008 and 2007, 33% and 20% of total revenue were based on
one-time non-recurring license revenue, respectively. In fiscal 2007,
the Company substantially changed its business initiative from a licensed based
approach to a monthly subscription based approach. While this software as a
service (SAAS) initiative is designed to reduce its historical reliance on
one-time license fees, management acknowledges that from time to time it will
still recognize a large portion of its revenues from license sales. Furthermore,
management believes that offering its suite of products and services in more
affordable units on a subscription basis will likely reduce proportionately the
one-time license fees to overall revenue.
Maintenance and Support
Revenue
Maintenance
and support revenues decreased by 4% to $1,455,344 in 2008 from $1,513,016 in
2007. The $57,672 decrease in maintenance and support revenue for the
year ended June 30, 2008 when compared with the same period ending June 30, 2007
is due to the following: 1) a $74,300 decrease that was the result of a Fresh
Market Manager maintenance customer who elected not to renew its maintenance
contract 2) an increase in maintenance fees associated with higher renewal
prices based on contract provisions; 3) the addition of a new maintenance
contract in fourth quarter 2008 in the amount of approximately
$11,560.
Subscription
Revenue
Subscription
revenues were $203,028 and $89,251 in 2008 and 2007 respectively; an increase of
127%. This $113,777 increase in June 30, 2008 when compared with the
same period ended June 30, 2007 was the result of the Company changing its
business initiative from a license based approach to a monthly subscription
model. Management believes that by focusing efforts to marketing its products on
a monthly subscription basis, the Company will increase its recurring revenues
while reducing its historical reliance on license fees. The Company
anticipates both an expansion of its existing customer base and further growth
and expansion in new customers who are anticipated to expand software and
services on a subscription basis in Fiscal 2009.
Professional Services
Revenue
Professional
services revenue increased by 26% to $584,661 in the year ending June 30, 2008
when compared to $464,396 in the same period ended at June 30,
2007. This $120,265 increase in professional services revenue for the
year ended, June 30, 2008 when compared to the same period ended June 30, 2007
was due to the completion of a large project for one existing customer. This
project was completed in the quarter ended June 30, 2008. This increase was
partially offset by higher services that occurred in 2007 that did not occur at
that same level in 2008.
Cost of Services and Product
Support Expense
Cost of
Services and Product Support expenditures were $2,419,227 and $1,717,793 for the
years ended June 30, 2008 and 2007, respectively; a 41% increase. This increase
of $701,434 for the year ended June 30 ,2008 when compared with the same period
ended June 30, 2007 is attributable to the completion of three capitalized
projects in Fiscal Year 2007 that have reduced the specific costs capitalized in
accordance with SFAS 86 “Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed.” The
comparative reduction of costs capitalized for research and development was
approximately $341,000. Additionally, the Company continues to expand its
development workforce in India.
Sales and Marketing
Expense
Sales and
marketing expenses were $1,843,912 and $1,508,276 for the year ended June 30,
2008 and 2007, respectively, a 22% increase over the previous
year. In conjunction with the release of a significant enhancement
(Service Release 5 “SR5” and Service Release 6 “SR6”) for its FMM suite of
products in 2007 and 2008, and the subscription offering of its SCPL tool, the
Company has proportionally increased its sales and marketing resources. As a
result, the Company has deployed additional sales staff and outside consultants
to target its current customer base and prospects to expand the market awareness
of its subscription based offering.
General and Administrative
Expense
General
and administrative expenses were $2,073,214 and $2,002,552 for 2008 and 2007,
respectively, a 4% increase. This $70,662 increase when comparing expenditures
for the year ending June 30, 2008 with the same period at June 30, 2008 is
attributable to an increase in healthcare costs of $11,303 and an increase in
compensation expenses of approximately $150,000. This additional expense is
partially offset by approximately $90,000 in reduced outsourced investor
relations and administrative services fees.
Depreciation and
Amortization Expense
Depreciation
and Amortization expenses were $505,539 and $368,636 for 2008 and 2007,
respectively, an increase of 37%. This increase of $136,903 for the
year ended June 30, 2008 when compared to the same period ended as of June 30,
2007 is attributable to the following; 1) the acquisition of certain additional
property plant and equipment during the fiscal year 2008 2) an increase in
capitalized software costs for significant enhancements to one of the Company’s
new products that was released during fiscal year 2008.
Other Income and
Expense
Net
interest income was $29,035 and net interest expense was $114,650 for 2008 and
2007, respectively, a 125% an increase in interest income. This $143,685
difference is attributable to favorable interest rates obtained at a bank on
restricted cash to offset a note payable to a bank. Additionally, the company
had other income from patent activities of $600,000 in 2008 while in 2007 other
income was attributable to a gain on derivate liability of $88,785 and a gain on
marketable securities of $18,386.
Financial
Position, Liquidity and Capital Resources
Years
Ended June 30, 2008 and 2007
Net Cash Flows From
Operating Activities
Net cash
used in operations for the year ended June 30, 2008, was $2,870,775 compared to
$2,948,063 for the year ended June 30, 2007. The $77,288 decrease in net cash
used in operations for the year ended June 30, 2008 when compared to the same
period in 2007 was the result of 1.) a decrease in receivables 2.) a
decrease in deferred revenue 3.) and, a lower level of accounts
payable .
Net Cash Flows From
Investing Activities
Net cash
flows provided by investing activities for the year ended June 30, 2008 was
$490,157 compared to cash flows used in investing activities of $2,538,650 for
the year ended June 30, 2007. This $3,028,807 comparable increase in
cash flows from investing activities June 30, 2008 when compared to the same
period in 2007 was the result of 1) the Company securing a $1.94 million
certificate of deposit in order to collateralize a note payable held by its bank
during fiscal year 2007 during 2007 which did not occur in 2008; 2) a decrease
of approximately $341,000 in capitalization of software costs for enhancements
to one of the Company’s new products that was completed and released earlier in
fiscal 2008; 3) proceeds from the sale of two of the Company’s patents; and 4) a
reduction of property plant and equipment purchases made during fiscal year 2008
when compared to purchases during fiscal year 2007 associated with the
relocation of the Company’s corporate facilities.
Net Cash Flows From
Financing Activities
Net cash
used in financing activities totaled $27,243 for the year ended June 30, 2008
when compared to cash flows provided by financing activities of $5,243,077 for
the year ended June 30, 2007. As previously stated, the Company issued 584,000
shares of its Series A Convertible Preferred Stock in June of 2007. See Note 14
for the terms and conditions of the Series A Convertible Preferred
Stock. In 2008, the Company utilized cash for payments on notes
payable and capital leases which was partially offset by the receipt of a
subscription receivable in the amount of $106,374.
Cash, Cash Equivalents &
Restricted Cash
Cash,
cash equivalents and restricted cash was $2,805,563 and $5,213,424 at June 30,
2008, and June 30, 2007, respectively This net decrease of $2,407,861
was the direct result of the Company’s use of cash to fund operations
and transitioning its business to a recurring revenue model and
instead of non-recurring license sales.
Liquidity and Capital
Resources
Current
assets at June 30, 2008 totaled $3,983,178 a decrease of $2,806,103 when
compared to June 30, 2007. The Company had $2,805,563 of cash, cash equivalents
and restricted cash as of June 30, 2008 which includes restricted cash in the
amount of $1,940,000 that collateralizes a note payable with its
bank. The collateralized note bears the same interest as the interest
received on its restricted cash. For the year ended, June 30, 2007 the Company
had $5,213,424 in cash, cash equivalents and restricted cash.
Current
liabilities totaled $3,401,779 and $3,615,929 as of June 30, 2008 and 2007,
respectively. The $214,150 comparative decrease in current
liabilities was the result of 1) a $39,370 increase in accounts payable, 2) an
increase of $123,282 in accrued liabilities 3) decrease of $449,149 in deferred
revenue; and, 4) an increase of $72,347 in current portion of capital leases
from a new lease obligation in fiscal year 2008.
Working
capital at June 30, 2008 was $581,399 when compared to $3,173,352 at June 30,
2007. The decrease in working capital is principally a result of
funding operations in fiscal year 2008.
Historically,
the Company has financed its operations through operating revenues, loans from
directors, officers, stockholders, loans from the CEO and majority shareholder,
and private placements of equity securities. Since 2006, the Company
has converted all loans and notes payable from its officers and directors to
stock. In 2007, due to its increase in financial position, the
Company was able to eliminate Riverview Financial Corp as its guarantor and
maintains its own collateralization of the note payable for $1.940 million. The
Company believes that anticipated revenue growth in combination with strict cost
control will allow the Company to meet its minimum operating cash requirements
for the next 12 months.
On August
28, 2008, the Company, PAII Transitory Sub, Inc., a Delaware corporation
(“Merger Sub”), a wholly-owned subsidiary of the Company and Prescient Applied
Intelligence, Inc. (“Prescient”) entered into an Agreement and Plan of Merger
(the “Merger Agreement”). The Merger Agreement is incorporated by reference in
an 8-K filed with the Securities and Exchange Commission on September 3,
2008.
The
Company is required, under the Merger Agreement, to make an initial deposit of $
2,500,000 into escrow at such time as the Securities and Exchange Commission has
no further comment of Prescient’s proxy statement/information statement related
to the Merger Transaction. The balance of the funds necessary to
complete the Merger (approximately $2,300,000) are required to be placed into
escrow at least one (1) business day prior to the date of the Prescient’s
shareholders’ meeting, anticipated before the end of the calendar year. Prior to
the execution of the Merger Agreement, the Company delivered to Prescient a
comfort letter from Taglich Brothers, its investment bankers, to the effect
that, when and as required under this Agreement, the Company shall have
available or have access to funds sufficient to perform its obligations under
this Agreement, including the consummation of the Merger.
The
required funds for the transaction will be raised through a series of private
transactions using a debt instrument containing conversion features into the
Company’s common stock, the details of which are currently pending.
The
financial statements do not reflect any adjustments should the Company’s
operations or anticipated merger not be achieved. Although the Company
anticipates that it will meet its working capital requirements and consummate
the merger, there can be no assurances that the Company will be able to meet its
working capital requirements. Should the Company desire to raise
additional equity or debt financing, there are no assurances that the Company
could do so on acceptable terms.
Inflation
The
impact of inflation may cause retailers to slow spending in the technology area,
which could have an impact on the company’s sales.
Risk
Factors
The
Company is subject to certain other risk factors due to the organization and
structure of the business, the industry in which it competes and the nature of
its operations. These risk factors include the
following:
Risks
Related To the Company
The
Company has incurred losses in the past and there can be no assurance that the
Company will operate continually or consistently at a profit in the future.
Resulting losses could cause a reduction in operations and could have a
detrimental effect on the long-term capital appreciation of the Company’s
stock.
The
Company’s marketing strategy emphasizes sales activities for the Fresh Market
Manager, ActionManager®, and Supply Chain Profit Link applications to
Supermarkets, Convenience Stores, Specialty Retail, and Food
Manufacturers. If this marketing strategy fails, revenues and
operations will be negatively affected. A reduction in revenues will
result in increases in operational losses.
For the
fiscal years ended June 30, 2008 and June 30, 2007, the Company had a net loss
of $2,868,179 and $3,011,627 respectively. There can be no assurance that the
Company will reliably or consistently operate profitably during future fiscal
years. 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. If this were to continue, in order to continue with the
Company’s operations, the Company would need to raise additional
capital. Continued losses would have an adverse effect on the long
term value of the Company’s common stock and an investment in the
Company. The Company cannot give any assurance that the Company will
ever generate significant revenue or have sustainable profits.
The
Company liquidity and capital requirements will be difficult to predict, which
may adversely affect the Company’s cash position in the future.
In June
of 2007, the Company completed the sale of shares of its Series A Convertible
Preferred Stock from which it received gross offering proceeds of
$5,840,000. Historically, the Company has been successful in
raising capital when necessary which includes stock issuances, securing loans
from its officers, directors, including the CEO and majority stockholder in
order to fund its operations in addition to proceeds collected from sales;
however, there can be no assurances that it will be able to do so in the future.
The Company anticipates that it will have adequate cash resources to fund its
operations for at least the next 12 months. Thereafter, its liquidity
and capital requirements will depend upon numerous other factors, including the
following:
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The
extent to which the Company’s products and services gain market
acceptance;
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The
progress and scope of product
evaluations;
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The
timing and costs of acquisitions and product and services
introductions;
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The
extent of the Company’s ongoing research and development programs;
and
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The
costs of developing marketing and distribution
capabilities.
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If in the
future, the Company is required to seek additional financing in order to fund
its operations and 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.
Operating
results may fluctuate, which makes it difficult to predict future
performance.
Management
expects a portion of the Company’s revenue stream to come from license sales,
maintenance and services charged to new customers, which will fluctuate in
amounts because software sales to retailers are difficult to
predict. 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:
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Demand
for and market acceptance of new
products;
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Introduction
or enhancement of products and services by the Company or its
competitors;
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Technical
difficulties, system downtime;
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Fluctuations
in data communications and telecommunications
costs;
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Maintenance
subscriber retention;
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The
timing and magnitude of capital expenditures and
requirements;
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Costs
relating to the expansion or upgrading of operations, facilities, and
infrastructure;
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Changes
in pricing policies and those of
competitors;
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Composition
and duration of product mix including license sales, consulting fees, and
the timing of software rollouts;
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Changes
in regulatory laws and policies,
and;
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General
economic conditions, particularly those related to the information
technology industry.
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Because
of the foregoing factors, future operating results may fluctuate. As
a result of such fluctuations, it is 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 revenues 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 revenues from the sale of
its products and services. If the Company is able to achieve
significant growth in future sales and to expand the scope of the Company’s
operations, and its management, financial, and other capabilities and existing
procedures and controls could be strained. The Company cannot be
certain that it’s 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, other than the Chief Executive Officer,
control approximately 7.79% of the Company’s common stock. The
Company’s Chief Executive Officer, Randall K. Fields, individually, controls
47.36% of the Company’s common stock.
Consequently,
Mr. Fields, individually, and the Company’s officers and directors, as
stockholders acting together, will be 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 that can be issued 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. In June 2007, the Company completed the sale of 584,000
shares of its Series A Convertible Preferred Stock. 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, you 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 after the offering. The Company currently maintains
key man insurance on Mr. Fields’ life in the amount of $10,000,000; 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 revenues 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 revenues and operations will be
negatively affected.
The
Company plans to concentrate its future sales efforts towards marketing the
Company’s applications and services. 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, quick service
restaurants, 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. 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 strategy fails, the Company will need to
refocus its marketing strategy to the Company’s other product offerings, which
could lead to increased marketing costs, delayed revenue streams, and otherwise
negatively affect the Company’s operations.
Because
the Company is changing the emphasis of its sales activities from an annual
license fee structure to a monthly fee structure, the Company’s revenues 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. Because
the Company’s one-time licensing fee approach was subject to inconsistent and
unpredictable revenues, the Company now offers prospective customers an option
for monthly subscription based licensing of these 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-based recurring fees based
approach is subject to the following risks:
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The
Company’s customers may prefer one-time fees rather than monthly
fees;
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Because
public awareness pertaining to the Company’s Application Solution Provider
services will be delayed until the Company begins its marketing campaign
to promote those services, the Company’s revenues may decrease over the
short term; and
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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.
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The Company faces competition from
competing and emerging technologies that may affect its
profitability.
The
markets for the Company’s type of software products and that of its competitors
are characterized by:
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Development
of new software, software solutions, or enhancements that are subject to
constant change;
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Rapidly
evolving technological change; and
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Unanticipated
changes in customer needs.
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Because
these markets are subject to such rapid change, the life cycle of the
Company’s products is difficult to predict; accordingly, the Company is
subject to the following risks:
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Whether
or how the Company will respond to technological changes in a timely or
cost-effective manner;
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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
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Whether
the Company’s products and services will achieve market
acceptance.
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If
the Company is unable to adapt to constantly changing markets and to continue to
develop new products and technologies to meet the Company’s customers’ needs,
the Company’s revenues and profitability will be negatively
affected.
The
Company’s future revenues are dependent upon the successful and timely
development and licensing of new and enhanced versions of its products and
potential product offerings suitable to the Company’s 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 revenues will be negatively impacted.
The
Company faces risks with attracting new first-time license clients from a
limited global prospect pool.
The
Company’s software licensing is currently reliant upon a limited number of
national and international prospect companies who require the Company’s unique
product and services as a result of consolidation in the global number of
retailers specifically in the grocery and retail industries. As a
consequence, future revenue may be significantly impacted if the Company is
unable to attract new license customers from this limited prospect
pool.
The
Company expects that as a result of further industry consolidation and the
limited customer pool from which the Company can attract new software license
prospects, a small number of the Company’s new customers may continue to account
for a substantial portion of current, non-recurring license revenues in future
reporting periods. In fiscal 2008, the Company’s new license customer
accounted for 64% of total non-recurring license revenue and 33% of total
revenue for fiscal 2008.
Historically,
a substantial portion of the Company’s annual revenue has been derived from a
one-time, non-recurring licensing fee for utilization of the Company’s patented
software
Historically,
a large portion of the Company’s customers rely on the Company’s patented
software for utilization during the normal course and scope of their business
operations. New customers are charged a license fee based on a
“blanket” license agreement fee for a particular software product or an initial
license fee that is based on a store by store opening basis. Although
results vary from period to period, in fiscal 2008, new non-recurring initial
license fee revenue equaled $1,101,940 or 33% of total
revenue. Historically, over 94% of new, first-time license customers
will not purchase products, license agreements, or services at the same
financial level in future periods as they do in the first year of
installation. While the company is not substantially dependent on any
one particular customer for providing a continued revenue stream, the Company is
dependent on attracting new first-time license clients in order to meet the
Company’s operating and capital cash flow needs since the initial fee
represents, in most cases, a substantial portion of revenue. If the
Company cannot attract new first-time license customers, the Company’s remaining
recurring revenue streams may not provide sufficient financial resources to
support capital and operating needs.
The
ability to attract new software license customers will depend on a variety of
factors, including the relative success of marketing strategies and the
performance, quality, features, and price of current and future
products. Accordingly, if the Company cannot attract new customer
licensing accounts or existing customer needs for the Company’s product and
services decrease, revenues and operating results will be negatively
impacted.
The
Company faces risks associated with the loss of maintenance and other
revenue
The
Company has experienced the loss of long term maintenance customers as a result
of the reliability of its product. 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 applications to meet
their business needs. The Company also may lose some maintenance
revenue due to consolidation of industries or customer operational difficulties
that lead to their reduction of size. In addition, future revenues
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 its new Supply Chain Profit Link
product.
Because
this is a new product offering there are risks associated with it, such
as:
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It
may be difficult for the Company to predict the amount of service and
technological resources that will be needed by new SCPL customers, 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.
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The
Company lacks the experience with this new product and its market
acceptance to accurately predict if it will be a profitable
product.
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Technological
issues between the Company and the customer may be experienced in
capturing data, and these technological issues may result in unforeseen
conflicts or technological setbacks when implementing the software. This
may result in material delays and even result in a termination of the
engagement with the customer.
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§
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The
customer’s experience with SCPL, if negative, may prevent the Company from
having an opportunity to sell additional products and services to that
customer.
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§
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If
the customer does not use the product as the Company recommends and fails
to implement any needed corrective action(s), it is unlikely that the
customer will experience the business benefits from the software and may
therefore be hesitant to continue the engagement as well as acquire any
additional software products from the
Company.
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§
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Delays
in proceeding with the implementation of the SCPL product by a new
customer will negatively affect the Company’s cash flow and its ability to
predict cash flow.
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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 the Company’s 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 incorporates a number of third party software providers’ licensed
technologies into its products, the loss of which could prevent sales of the
Company’s products or increase the Company’s costs due to more costly substitute
products.
The
Company licenses technologies from third party software providers, and such
technologies are incorporated into the Company’s products. The
Company anticipates that it will continue to license technologies from third
parties in the future. The loss of these technologies or other
third-party technologies could prevent sales of the Company’s products and
increase the Company’s costs until substitute technologies, if available, are
developed or identified, licensed and successfully integrated into the Company’s
products. Even if substitute technologies are available, there can be
no guarantee that the Company will be able to license these technologies on
commercially reasonable terms, if at all.
The
Company may discover software errors in its products that may result in a loss
of revenues or injury to the Company’s reputation in the software
industry.
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 revenues or injury to the Company’s reputation. In the past,
the Company has discovered errors in the it’s 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. Since the Company’s customers use the Company’s products for
critical business applications, any errors, defects or other performance
problems could result in damage to the Company’s customers’
business. These customers could seek significant compensation from us
for their losses. Even if unsuccessful, a product liability claim
brought against us 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 revenues. 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.
The
Company is in the process of acquiring and merging with Prescient Applied
Intelligence, Inc. (OTC BB: PPID) If the merger is not consummated, this could
result in a loss of the Company’s escrow deposits.
On August
28, 2008, the Company and Prescient Applied Intelligence, Inc. executed an
Agreement and Plan of Merger (“Merger Transaction”), pursuant to which the
Company intends to merge Prescient with and into a wholly-owned subsidiary of
the Company. The Company is required, under the Merger Agreement, to make
an initial deposit of $2,500,000 into escrow at such time as the Securities and
Exchange Commission has no further comment of Prescient’s proxy
statement/information statement related to the Merger Transaction. In
the event the Company fails to complete the Merger or breaches any provision of
the Agreement, after an opportunity to cure in some cases, after the initial
escrow deposit (i) the amount that has been placed into escrow, will be
transferred to Prescient and become its property; and (ii) Prescient will be
able to purchase from the Company, at a purchase price of $.001 per share, 100%
of the Series E Preferred Stock that it owns. This would result in a forfeit of
all of the Company’s escrow deposit.
In the
event the Company’s failure or breach, as described above, occurs after the
balance of the funds necessary to complete the Merger (approximately $2,300,000)
have been placed into escrow (i) the total amount that has been placed into
escrow (approximately $4.8 million), will be transferred to Prescient and become
its property; and (ii) Prescient will be able to purchase from the Company at a
purchase price of $.001 per share, 50% of the Series E Preferred Stock that it
owns.
Risks
Relating To The Company’s Common Stock
If
the Company fails to remain current on its reporting requirements, the Company
could be removed from the OTC Bulletin Board, which would limit the ability of
broker-dealers to sell the Company’s securities and the ability of stockholders
to sell their securities in the secondary market.
Companies
trading on the OTC Bulletin Board, like us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), and must be current in reports required under Section 13 to maintain
price quotation privileges on the OTC Bulletin Board. If the Company
fails to remain current on its reporting requirements, the Company could be
removed from the OTC Bulletin Board. As a result, the market
liquidity for the Company’s securities could be severely and adversely affected
by limiting the ability of broker-dealers to sell the Company’s securities and
the ability of stockholders to sell their securities in the secondary
market.
The
Company’s common stock is subject to the “penny stock” rules of the SEC and the
trading market in the Company’s securities is limited, which makes transactions
in the Company’s stock cumbersome and may reduce the value of an investment in
the Company.
The
Securities and Exchange Commission has adopted Rule 15g-9 under the Exchange
Act, which establishes the definition of a “penny stock,” for the purposes
relevant to the Company, as any equity security that has a market price of less
than $5.00 per share or an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require:
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§
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that
a broker or dealer approve a person’s account for transactions in penny
stocks; and
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§
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the
broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be purchased.
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In order
to approve a person’s account for transactions in penny stocks, the broker or
dealer must:
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§
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obtain
financial information and investment experience objectives of the person;
and
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§
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make
a reasonable determination that the transactions in penny stocks are
suitable for that person and the person has sufficient knowledge and
experience in financial matters to be capable of valuating the risks of
transactions in penny stocks.
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The
broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form:
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§
|
sets
forth the basis on which the broker or dealer made the suitability
determination; and
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§
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that
the broker or dealer received a signed, written agreement from the
investor prior to the transaction.
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Generally,
brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to
dispose of the Company’s common stock and cause a decline in the market value of
the Company’s stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities, and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
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 OTC Bulletin Board
(OTCBB), 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 you acquire shares of the Company’s common stock, you
may not be able to liquidate the Company’s shares should you 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:
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§
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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
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§
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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.
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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 shares may prevent a change in control or
management.
Compliance
with the rules established by the SEC pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 will be complex. Failure to comply in a timely manner
could adversely affect investor confidence and the Company’s stock
price.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of
2002 require the Company to perform an annual assessment of its internal
controls over financial reporting, certify the effectiveness of those controls
and secure an attestation of the Company’s assessment by its independent
registered public accountants. The standards that must be met for management to
assess the internal controls and secure an attestation from its independent
registered public accountant over financial reporting as now in effect are new
and complex, and require significant documentation, testing and possible
remediation to meet the detailed standards. The Company may encounter problems
or delays in completing activities necessary to make an assessment of the
Company’s internal controls over financial reporting and secure an attestation
from its independent registered public accountant. Due to the Company’s limited
personnel resources and lack of experience, it may encounter problems or delays
in completing the implementation of any requested improvements and receiving an
attestation of the assessment by its independent registered public accountants.
If the Company cannot perform the assessment or certify that its internal
controls over financial reporting are effective, and if the Company’s
independent registered public accountants are unable to provide an unqualified
attestation on such assessment, investor confidence and share value may be
negatively impacted.
Critical Accounting
Policies
This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations discuss the Company’s Financial Statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States.
We
commenced operations in the software development and professional services
business during 1990. The preparation of our financial statements requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, management evaluates
its estimates and assumptions, including those related to inventory, income
taxes, revenue recognition and restructuring initiatives. We anticipate that
management will base its estimates and judgments on historical experience of the
operations we may acquire 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 the realizability of the deferred income tax assets and assesses the
valuation allowance quarterly.
Goodwill and Other Long-Lived Asset
Valuations. Goodwill
and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
statements. Other intangible assets will continue to be amortized over their
useful lives.
Revenue
Recognition. The Company derives revenues from four primary
sources, software licenses, maintenance and support services, professional
services and software subscription. New software licenses include the sale
of software runtime license fees associated with deployment of the Company’s
software products. Software license maintenance updates and product
support are typically annual contracts with customers that are paid in advance
or specified as terms in the contract. This provides the customer access to new
software releases, maintenance releases, patches and technical support
personnel. Professional service sales are derived from the sale of
services to design, develop and implement custom software applications.
Subscription is derived from the sale of Supply Chain Profit Link, a category
management product that is sold on a subscription basis.
License
fees revenue from the sale of software licenses is recognized upon delivery of
the software unless specific delivery terms provide otherwise. If not
recognized upon delivery, revenue is recognized upon meeting specified
conditions, such as, meeting customer acceptance criteria. In no
event is revenue recognized if significant Company obligations remain
outstanding. Customer payments are typically received in part upon
signing of license agreements, with the remaining payments received in
installments pursuant to the agreements. Until revenue recognition
requirements are met, the cash payments received are treated as deferred
revenue.
Maintenance
and support services that are sold with the initial license fee are recorded as
deferred revenue and recognized ratably over the initial service
period. Revenues from maintenance and other support services provided
after the initial period are generally paid in advance and are recorded as
deferred revenue and recognized on a straight-line basis over the term of the
agreements.
Professional
Services revenues are recognized in the period that the service is provided or
in the period such services are accepted by the customer if acceptance is
required by agreement.
Subscription
revenues are recognized on a contractual basis, for one or more
years. These fees are generally collected in advance of the services
being performed and the revenue is recognized ratably over the respective
months, as services are provided.
Before
the Company recognizes revenue, the following criteria must be met:
1)
Evidence of a financial arrangement or agreement must exist between the Company
and its customer. Purchase orders, signed contracts, or electronic
confirmation are three examples of items accepted by the Company to meet this
criterion.
2)
Delivery of the products or services must have occurred. The Company
treats either physical or electronic delivery as having met this
requirement. The Company offers a 60-day free trial on beginning a
subscription engagement and revenue is not recognized during this time. After
the free trial ends the Company recognizes revenue ratably over the subscription
period.
3)
The price of the products or services is fixed and measurable.
4)
Collectability of the sale is reasonably assured and receipt is probable.
Collectability of a sale is determined on a customer-by-customer basis.
Typically the Company sells to large corporations which have demonstrated an
ability to pay. If it is determined that a customer may not have the
ability to pay, revenue is deferred until the payment is collected.
Stock-Based
Compensation. Prior to July 1, 2006, as permitted under
Statement of Financial Accounting Standards (“SFAS”) No. 123, the Company
accounted for its stock options, warrants and plans following the recognition
and measurement principles of Accounting Principles Board (“APB”) Opinion No.
25, “Accounting for Stock issued to Employees,” and related interpretations.
Accordingly, no stock-based compensation expense had been reflected in the
Company’s statements of operations as all options granted had an exercise price
equal to the market value of the underlying common stock on the date of grant
and the related number of shares granted was fixed at that point in
time.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123(R), “Share Based Payment.” This statement revised SFAS No. 123 by
eliminating the option to account for employee stock options under APB No. 25
and requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards.
Effective
July 1, 2006, the Company adopted the fair value recognition provisions of SFAS
No. 123(R) using the modified prospective application method. Under this
transition method, the Company recorded compensation expense on a straight-line
basis for the year ended June 30, 2007, for: (a) the vesting of options granted
prior to July 1, 2006 (based on the grant-date fair value estimated in
accordance with the original provisions of SFAS No. 123, and previously
presented in the pro-forma footnote disclosures), and (b) stock-based awards
granted subsequent to July 1, 2006 (based on the grant-date fair value estimated
in accordance with the provisions of SFAS No. 123(R)). In accordance with the
modified prospective application method, results for the year ended June 30,
2006 have not been restated.
Capitalization of Software
Development Costs. The Company accounts for research and development
costs in accordance with several accounting pronouncements, including SFAS
No. 2, Accounting for Research and Development Costs, and SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. SFAS No. 86 specifies that costs incurred internally in
researching and developing a computer software product should be charged to
expense until technological feasibility has been established for the product.
Once technological feasibility is established, all software costs should be
capitalized until the product is available for general release to customers.
Judgment is required in determining when technological feasibility of a product
is established. We have determined that technological feasibility for our
software products is reached shortly after a working prototype is complete and
meets or exceeds design specifications including functions, features, and
technical performance requirements. Costs incurred after
technological feasibility is established have been and will continue to be
capitalized until such time as when the product or enhancement is available for
general release to customers.
Off-Balance Sheet
Arrangements
None
See the
index to consolidated financial statements and consolidated financial statement
schedules included herein as Item 13.
None
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(a)
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Evaluation
of disclosure controls and
procedures.
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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 June 30, 2008. Based on this evaluation,
the Company’s Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures are effective to ensure that information
required to be disclosed in the reports submitted under the Securities and
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission (“SEC”) rules and
forms, including to ensure that information required to be disclosed by the
Company is accumulated and communicated to management, including the principal
executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure.
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(b)
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Management's
Annual Report on Internal Control over Financial
Reporting.
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We are
responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).
Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes of accounting
principles generally accepted in the United States.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered
public accounting firm pursuant to temporary rules of the SEC that permit us to
provide only management’s report in this annual report.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance of achieving their control
objectives.
Our Chief
Executive Officer and Chief Financial Officer evaluated the effectiveness of our
internal control over financial reporting as of June 30, 2008. In making this
assessment, we used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated
Framework. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of June 30, 2008, our internal control over
financial reporting was effective.
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(c)
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Changes
in internal controls over financial
reporting.
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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.
Not
applicable
(REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK)
Item
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance
With Section 16(a) of the
Exchange Act
The Board
of Directors and executive officers consist of the persons named in the table
below. Vacancies in the Board of Directors may only be filled by the
Board of Directors by majority vote at a Board of Director's meeting of which
stockholders holding a majority of the issued and outstanding shares of capital
stock are present. The directors are elected annually by the
stockholders at the annual meeting. Each director shall be elected
for the term of one year, and until his or her successor is elected and
qualified, or until earlier resignation or removal. The bylaws
provide for at least one director. The directors and executive
officers are as follows:
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Randall
K. Fields
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61
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Chief
Executive Officer
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Chairman
of the Board and Director
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Robert
Hermanns (1)
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64
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Director,
Senior Vice-President Sales
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John
R. Merrill (2)
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38
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Chief
Financial Officer and Treasurer
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Edward
L. Clissold (3)
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52
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Secretary
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Robert
W. Allen (4)
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65
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Director
and Compensation Committee Chairman
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Richard
S. Krause (5)
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46
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Director,
Audit Committee Chairman and Nominating / Governance Committee
Chairman
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James
R. Gillis (6)
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55
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Director
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(1)
Appointed Director and Senior Vice-President, Sales on
3/15/07
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(2)
Appointed CFO and Treasurer on 9/10/07
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(3)
Appointed Secretary on 9/10/07
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(4)
Appointed Director on 10/01/07
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(5)
Appointed Director on 1/04/08
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(6)
Appointed Director on 2/05/08
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Randall K. Fields has been the
Chief Executive Officer, and Chairman of the Board of Directors since June,
2001. Mr. Fields founded Park City Group, Inc., a software
development company based in Park City, Utah, in 1990 and has been its
President, Chief Executive Officer, and Chairman of the Board since its
inception in 1990. Mr. Fields has been responsible for the strategic
direction of Park City Group, Inc. since its inception. Mr. Fields
co-founded Mrs. Fields Cookies with his then wife, Debbi
Fields. He served as Chairman of the Board of Mrs. Fields Cookies
from 1978 to 1990. In the early 1970's Mr. Fields established a
financial and economic consulting firm called Fields Investment
Group. Mr. Fields received a Bachelor of Arts degree in 1968 and a
Masters of Arts degree in 1970 from Stanford University, where he was Phi Beta
Kappa, Danforth Fellow and National Science Foundation Fellow.
Robert P. Hermanns joined the
Company in March of 2007 as Senior Vice President. Mr. Hermanns is
responsible for U.S. customer relations and corporate development and also is an
acting member of the Park City Group Board of Directors. Mr. Hermanns has over
40 years experience in all phases of retail and wholesale grocery operations.
Mr. Hermanns was President and Chief Executive Officer and Vice Chairman of the
Board of Directors of Associated Grocers, Inc. from 2002 through 2005. He is
also the former Chief Operating Officer of Weis Markets, a $2 billion NYSE
company operating 163 retail food markets in the Mid-Atlantic States. Prior to
joining AG and Weis Markets, Mr. Hermanns enjoyed a 30-year career with American
Stores Company, an $18 billion food and drug retailer, where he held a number of
executive management positions including Chief Operating Officer for Procurement
and Logistics. A graduate of Western Michigan University with a BS degree in
Food Marketing, Mr. Hermanns also holds an MBA from the University of Southern
California.
John R. Merrill joined Park
City Group in August of 2006 as it’s’ Director of Finance, Accounting &
Administration. On September 10, 2007 he was promoted and appointed to Chief
Financial Officer and Treasurer. He has over 18 years experience in both the
public and private sectors of finance and accounting. Prior to
joining Park City Group, he was most recently Chief Financial Officer for Peak
Solutions Group a consulting firm focused on providing business solutions for
growth oriented small business. From 1998 to 2003, Mr. Merrill was
Controller for Clear Channel Communications, Inc., a $19 billion publicly traded
broadcasting and outdoor advertising company operating 1,200 radio stations in
the United States. Prior to joining Clear Channel, Mr. Merrill was the
Controller of the Academies Division of IMG, a $2 billion global leader in
professional athlete management whose clients included Tiger Woods, Venus
Williams, Pete Sampras and Anna Kournikova. Throughout his career,
Mr. Merrill has had significant exposure to various sectors of both sporting
goods retail and service industries. Mr. Merrill began his career
with KPMG and holds a Bachelors and a Masters degree in Accounting from the
University of South Florida.
Edward L. Clissold was
appointed Secretary on September 10, 2007. In January of 2007, Mr.
Clissold was hired as an employee of Park City Group, Inc as General
Counsel. Formerly, he was in private practice and was the Company’s
corporate counsel. Mr. Clissold has over 25 years experience in the legal
profession and has been affiliated with Park City Group, Inc and its
predecessors for over 20 years. He was also General Counsel for Mrs.
Fields Cookies, Inc. for approximately 10 years. Mr. Clissold received a
Bachelors of Science Degree in Finance from the University of Utah and a Juris
Doctorate from Brigham Young University.
Mr. Richard S. Krause joined
the Board of Directors in January, 2008. .Mr. Krause is a seasoned executive
with many years of experience in senior leadership roles with consumer packaged
goods manufacturers and marketers such as Procter & Gamble, Newell
Rubbermaid and ConAgra Foods. Mr. Krause has over twenty years of
experience in leading organizations through significant milestones and
inflection points by creating motivated, highly competitive, and winning
cultures. Mr. Krause is currently President and Chief Executive Officer of Elan
Nutrition, Inc. (an affiliate of Sun Capital Partners, Inc.) a major
manufacturer and formulator of sports-performance, weight management and healthy
lifestyle nutrition bars. Prior to this, he was President of Cannon
Solutions, Inc., a global operating group with businesses in the merchandising
systems, automated distribution and retail technologies sectors serving major
brand marketers and retailers. Throughout his career, Mr. Krause has
consistently developed and instituted share increasing, cost saving, and revenue
building programs for several well-known consumer packaged goods
brands.
Mr. Robert W. Allen joined the
Board of Directors in October, 2007. Mr. Allen is a seasoned executive with many
years experience as Chairman, President and Chief Executive Officer of
businesses ranging in size from $200 million to $2.5 billion. Mr.
Allen has over thirty years experience in the dairy industry, most notably as a
catalyst for developing companies and a turn-around agent for troubled companies
or divisions. Mr. Allen was most recently Chief Executive Officer of Southern
Belle Dairy where he established a leadership team to reposition the company and
developed a position in the market place for the branding of its
products. Prior to this, he was Executive Vice President of Borden,
Inc. where he was recruited to turn around the largest and most trouble division
of the Company. He is also the immediate past Chair of Kid Peace
International, a $160 million non- profit agency assisting children in
crises.
Mr. James R. Gillis joined the
Board of Directors in February, 2008 joined its Board of Directors.Mr. Gillis is
President, Chief Operating Officer and Co-CEO of Source Interlink Companies,
Inc., a premier marketing, merchandising and fulfillment company of
entertainment products where he has been instrumental in developing annual
revenues in excess of $1.9 billion and over 95 business units in the
US. While at Source Interlink, Mr. Gillis has also developed
and maintained relationships with public equity investors, hedge funds, stock
analysts, investment banks and private equity firms, both domestically and
internationally, while creating a marketing infrastructure to provide a
portfolio of fully integrated products and services in 110,000 locations for
more than 1,000 retail chains. Prior to his tenure with Source, he
was President, CEO, and Owner of Brand Manufacturing Corporation, a leading
designer and manufacturer of retail display systems. Previously, he was Managing
Partner of Aders, Wilcox, Gillis Group, a global developer of trade
relationships serving major brand marketers and retailers
worldwide.
Our
Executive Officers are elected by the Board on an annual basis and serve at the
discretion of the Board.
Compliance
with Section 16(a)
Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
directors and executive officers, and persons who beneficially own more than 10%
of a registered class of the Company’s equity securities, to file reports of
beneficial ownership and changes in beneficial ownership of the Company’s
securities with the SEC on Forms 3 (Initial Statement of Beneficial Ownership),
4 (Statement of Changes of Beneficial Ownership of Securities) and 5 (Annual
Statement of Beneficial Ownership of Securities). Directors,
executive officers and beneficial owners of more than 10% of the Company’s
Common Stock are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms that they file. The Company believes
that, during the year ended June 30, 2006, the Reporting Persons met all
applicable Section 16(a) filing requirements
Code
of Ethics and Business Conduct
In August
2008, the Company and its Board of Directors unanimously adopted a new Code of
Ethics and Business Conduct. This has replaced the 2005 adopted Code of Ethics
and is included by reference herein in Item 13, Exhibit 14.
Committees
of the Board of Directors
Our board
of directors has an audit committee, a compensation committee and a nominating
and corporate governance committee, each of which has the composition and
responsibilities described below:
Audit
Committee.
The audit
committee provides assistance to the board of directors in fulfilling its legal
and fiduciary obligations in matters involving our accounting, auditing,
financial reporting, internal control and legal compliance functions by
approving the services performed by our independent accountants and reviewing
their reports regarding our accounting practices and systems of internal
accounting controls. The audit committee also oversees the audit efforts of our
independent accountants and takes those actions as it deems necessary to satisfy
it that the accountants are independent of management. The audit committee
currently consists of Richard S. Krause (Chairman), Robert W. Allen, and James
R. Gillis, each of whom is a non-management member of our board of directors.
Richard S. Krause is also our audit committee financial expert as currently
defined under Securities and Exchange Commission rules. We believe
that the composition of our audit committee meets the criteria for independence
under, and the functioning of our audit committee complies with the applicable
requirements of, the Sarbanes-Oxley Act of 2002, the current rules of the
Over-the-Counter Bulletin Board Stock Market and Securities and Exchange
Commission rules and regulations. We intend to comply with future audit
committee requirements as they become applicable to us.
Compensation
Committee.
The
compensation committee determines our general compensation policies and the
compensation provided to our directors and officers. The compensation committee
also reviews and determines bonuses for our officers and other employees. In
addition, the compensation committee reviews and determines equity-based
compensation for our directors, officers, employees and consultants and
administers our stock option plans and employee stock purchase plan. The
compensation committee currently consists of Robert W. Allen (Chairman), Richard
S. Krause, and James R. Gillis, each of whom is a non-management member of our
board of directors. We believe that the composition of our compensation
committee meets the criteria for independence under, and the functioning of our
compensation committee complies with the applicable requirements of, the
Sarbanes-Oxley Act of 2002, the current rules of the Over-the-Counter Bulletin
Board Stock Market and Securities and Exchange Commission rules and regulations.
We intend to comply with future compensation committee requirements as they
become applicable to us.
Nominating and Corporate Governance
Committee.
The
nominating and corporate governance committee is responsible for making
recommendations to the board of directors regarding candidates for directorships
and the size and composition of the board. In addition, the nominating and
corporate governance committee is responsible for overseeing our corporate
governance guidelines and reporting and making recommendations to the board
concerning corporate governance matters. The current members of the nominating
and governance committee are Richard S. Krause (Chairman), James R. Gillis, and
Randall K. Fields. We believe that the composition of our nominating and
governance committee meets the criteria for independence under, and the
functioning of our nominating and corporate governance committee complies with
the applicable requirements of, the Sarbanes-Oxley Act of 2002, the current
rules of the Over-the-Counter Bulletin Board Stock Market and Securities and
Exchange Commission rules and regulations. We intend to comply with future
nominating and corporate governance committee requirements as they become
applicable to us.
The
following table sets forth information concerning the compensation paid to the
Company’s Chief Executive Officer, and all persons serving as the Company’s most
highly compensated executive officers other than its chief executive officer,
who were serving as executive officers as of June 30, 2008 and whose annual
compensation exceeded $100,000 during such year (collectively the “Named
Executive Officers”).
|
SUMMARY COMPENSATION
TABLE
|
|
|
Name
and Principal Position
|
Year
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards ($)
(1)
|
|
|
Options
Awards ($) (2)
|
|
|
All
Other Compensation ($)
|
|
|
Total
($)
|
|
|
Randall
K. Fields
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Executive Officer and Chairman of the Board
|
2008
|
|
|
350,000 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
52,167 |
(4) |
|
|
402,167 |
|
|
|
2007
|
|
|
350,000 |
(3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
63,535 |
(4) |
|
|
413,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
R. Merrill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief
Financial Officer
|
2008
|
|
|
165,000 |
|
|
|
|
|
|
|
0 |
(6) |
|
|
|
|
|
|
|
|
|
|
165,000 |
|
|
|
2007
|
|
|
80,000 |
(5) |
|
|
5,000 |
|
|
|
4,602 |
|
|
|
— |
|
|
|
|
|
|
|
89,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Dunlavy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Vice-President
|
2008
|
|
|
37,500 |
(7) |
|
|
|
|
|
|
40,000 |
|
|
|
|
|
|
|
80,673 |
(8) |
|
|
158,173 |
|
|
|
2007
|
|
|
225,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
225,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Hermanns
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior
Vice-President Sales
|
2008
|
|
|
225,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,855 |
(9) |
|
|
|
|
|
|
2007
|
|
|
64,167 |
(10) |
|
|
— |
|
|
|
— |
|
|
|
150,440 |
|
|
|
— |
|
|
|
214,607 |
|
|
(1)
|
Stock
awards consist solely of shares of restricted common stock. Amounts shown
do not reflect compensation actually received by the named executive
officer. Instead, the amounts shown are the compensation costs recognized
by the Company during the fiscal year for stock awards as determined
pursuant to FAS 123R.
|
|
(2)
|
Amounts
shown do not reflect compensation actually received by the named executive
officer. Instead, the amounts shown are the compensation costs recognized
by the Company during the fiscal year for option awards as determined
pursuant to FAS 123R. These compensation costs reflect option awards
granted in and prior to fiscal 2007. The assumptions used to calculate the
value of option awards are set forth under Note
1.
|
|
(3)
|
A
significant part of Mr. Fields compensation is paid to a management
company wholly owned by Mr. Fields.
|
|
(4)
|
These
amounts include premiums paid on Life Insurance policies of $25,344 and
$41,452 for 2008 and 2007, respectively; Company car related expenses of
$21,476 and $19,081 for 2008 and 2007, respectively; and medical premiums
of $5,346 and $3,002 for 2008 and 2007,
respectively.
|
|
(5)
|
Mr.
Merrill joined the Company in August
2006.
|
|
(6)
|
Mr.
Merrill was granted $100,000 of stock in November, 2007. This stock grant
has a vesting period of four years at 25% per
annum.
|
|
(7)
|
Mr.
Dunlavy resigned in August 2007.
|
|
(8)
|
This
amount includes accrued vacation of $7,213, $2,787 for supplemental work,
and $70,673 representing severance of two weeks for each year of
service.
|
|
(9)
|
Commissions
paid to Mr. Hermanns.
|
|
(10)
|
Mr.
Hermanns joined the Company in March
2007.
|
Employment
Agreements
Park City
Group has an employment agreement with its chief executive officer, Randall K.
Fields, dated July 1, 2005. The compensation for Mr. Fields, under the terms of
the agreement, provides for a portion of the compensation to be provided
pursuant to an employment agreement and the balance to be provided pursuant to
the terms of a services agreement between the Company and Fields Management,
Inc., an executive management services provider, a company wholly owned by Mr.
Fields. The term of the two agreements is five years ending June 30, 2008, with
automatic one-year renewals. The combined agreements provide
for:
|
|
·
|
An
annual base compensation of
$350,000,
|
|
|
·
|
Use
of a company vehicle,
|
|
|
·
|
Employee
benefits that are generally provided to Park City Group, Inc. employees,
and
|
|
|
·
|
A
bonus to be determined annually by the Compensation Committee of the Board
of Directors.
|
Park City
Group has an employment agreement with its Senior Vice-President of Sales,
Robert Hermanns, and dated effective March 15, 2007. This agreement
provides Mr. Hermanns with the following compensation:
|
|
·
|
Annual
base compensation of $220,000,
|
|
|
·
|
Employee
benefits that are generally provided to Park City Group, Inc.
employees,
|
|
|
·
|
A
bonus equal to 1% of annual salary for every 2% increase in gross revenues
over the previous year’s actual revenue with additional terms set forth in
Exhibit 10.16 attached hereto,
|
|
|
·
|
Stock
options equal to 2 to 1 for each share of stock
purchased.
|
Park City
Group has an employment with its Chief Financial Officer and Treasurer, John
Merrill, dated effective September 10, 2007. This agreement provides Mr. Merrill
with the following compensation:
|
|
·
|
Annual
base compensation of $165,000,
|
|
|
·
|
Employee
benefits that are generally provided to Park City Group, Inc.
employees,
|
|
|
·
|
Stock
grants equal to 2 for 1 for each share of stock
purchased.
|
(REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK)
The
following table sets forth information with respect to the value of all
outstanding equity awards held by our named executive officers at the end of
fiscal 2008.
|
OUTSTANDING
EQUITY AWARDS AT FISCAL 2008 YEAR-END
|
|
|
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options # Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options #
Unexercisable
|
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options (#)
|
|
|
Option
Exercise Price ($)
|
|
|
Option
Expiration Date
|
|
|
Number
of Shares or Units of Stock That Have Not Vested (#)
|
|
|
Market
Value of Units of Stock That Have Not Vested ($)
|
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
That Have Not Vested (#)
|
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or
Other Rights That Have Not Vested ($)
|
|
|
Randall
K. Fields
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Merrill
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
31,056 |
|
|
|
100,000 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Hermanns
|
|
|
74,000 |
|
|
|
— |
|
|
|
— |
|
|
|
2.76 |
|
|
6/29/10
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
Compensation
The
outside directors of the Company, James R. Gillis, Richard S. Krause, and Robert
W. Allen., receive the following compensation:
Annual
cash compensation of $10,000 payable at the rate of $2,500 per quarter. The
Company has the right to pay this amount in the form of shares of Company
Stock.
Annual
options to purchase $20,000 of the Company restricted common stock at the market
value of the shares on the date of the grant, which is to be the first day the
stock market is open in January of each year.
The
following table sets forth information concerning the compensation earned during
fiscal 2008 by our current directors:
|
DIRECTOR
COMPENSATION FOR FISCAL 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Fees
Earned or Paid in Cash ($)
|
|
|
Stock
Awards ($)
(1)
|
|
|
Option
Awards ($)
|
|
|
Non-equity
Incentive Plan Compensation ($)
|
|
|
Nonqualified
Deferred Compensation Earnings ($)
|
|
|
All
Other Compensation ($)
|
|
|
Total
($)
|
|
|
Edward
Dmytryk
|
|
|
— |
|
|
|
5,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,000 |
|
|
Thomas
Wilson
|
|
|
— |
|
|
|
5,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,000 |
|
|
James
R. Gillis
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Richard
S. Krause
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Robert
W. Allen
|
|
|
— |
|
|
|
2,500 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,500 |
|
|
(1)
|
Stock
awards consist solely of stock grants of fully vested Company common
stock. Amounts shown do not reflect compensation actually
received by the director. Instead, the amounts shown are the
compensation costs recognized by the Company during the fiscal year for
stock awards as determined pursuant to FAS
123R.
|
401(k) Retirement
Plan.
The
Company offers an employee benefit plan under Benefit Plan Section 401(k) of the
Internal Revenue Code. On May 1, 2007 the Company modified its
trustee and administrator of its 401(k) from Fiserv / Alliance Benefits to
Fidelity Investments. Employees who have attained the age of 18 are immediately
eligible to participate. The Company, at its discretion, may match
employee’s contributions at a percentage determined annually by the board of
directors. The Company does not currently match
contributions.
Indemnification
for Securities Act Liabilities
Nevada
law authorizes, and the Company's Bylaws and Indemnity Agreements provide for,
indemnification of the Company's directors and officers against claims,
liabilities, and amounts paid in settlement, and expenses in a variety of
circumstances. Indemnification for liabilities arising under the Act
may be permitted for directors, officers and controlling persons of the Company
pursuant to the foregoing or otherwise. However, the Company has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Stock
Options and Warrants
The
Company has stock option plans that enable it to issue to officers, directors,
consultants and employees nonqualified and incentive options to purchase common
stock. At June 30, 2008, a total of 95,250 of such options were
outstanding with exercise prices ranging from $1.50 to $2.76 per
share.
At June
30, 2008 a total of 922,193 warrants to purchase shares of common stock were
outstanding. Of those warrants, 128,571 were issued in connection
with an equity investment by an officer; 376,485 were issued as a commission for
placement of equity securities; and 417,137 were issued in connection with an
equity placement. These warrants have exercise prices ranging from $3.50 to
$4.00 per share and expire between August 26, 2009 and June 22,
2012.
Compensation
Committee Interlocks and Insider Participation
No
executive officers of the Company serve on the Compensation Committee (or in a
like capacity) for the Company or any other entity.
Security
Ownership of Certain Beneficial Owners
The
following table sets forth information regarding shares of our preferred stock
beneficially owned as of September 26, 2008 by: (i) each of our
officers and directors; (ii) all officers and directors as a group; and (iii)
each person known by us to beneficially own five percent or more of the
outstanding shares of our preferred stock. Percent ownership is
calculated based on 612,535 shares of Series A Convertible Preferred Stock
outstanding at September 26, 2008.
|
Name
|
|
Preferred
Stock
|
|
|
%
Ownership of Class
|
|
|
|
|
|
|
|
|
|
|
Hillson
Partners LP
|
|
|
52,818 |
|
|
|
8.62 |
% |
|
Meadowbrook
Opportunity Fund LLC
|
|
|
42,255 |
|
|
|
6.90 |
% |
|
London
Family Trust
|
|
|
31,690 |
|
|
|
5.17 |
% |
The
following table sets forth information regarding shares of our common stock
beneficially owned as of September 3, 2008 by: (i) each of our
officers and directors; (ii) all officers and directors as a group; and (iii)
each person known by us to beneficially own five percent or more of the
outstanding shares of our common stock.
|
Name
|
|
Common
Stock
|
|
|
Common
Stock Options Exercisable Within 60 Days
|
|
|
Common
Stock Purchase Warrant Exercisable Within 60 days
|
|
|
Total
Stock and Stock Based Holdings (1)
|
|
|
%
Ownership of Class (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Randall
K. Fields (2)(4)
|
|
|
3,976,867 |
|
|
|
- |
|
|
|
- |
|
|
|
3,978,867 |
|
|
|
42.84 |
% |
|
Riverview
Financial, Corp (3)
|
|
|
3,976,867 |
|
|
|
- |
|
|
|
- |
|
|
|
3,978,867 |
|
|
|
42.84 |
% |
|
Robert
Hermanns (4)
|
|
|
63,310 |
|
|
|
74,000 |
|
|
|
|
|
|
|
137,310 |
|
|
|
1.47 |
% |
|
John
R. Merrill (4)
|
|
|
2,223 |
|
|
|
- |
|
|
|
- |
|
|
|
2,223 |
|
|
|
* |
|
|
Thomas
W. Wilson (4)
|
|
|
238,253 |
|
|
|
- |
|
|
|
- |
|
|
|
238,253 |
|
|
|
2.57 |
% |
|
James
R. Gillis (4)
|
|
|
21,880 |
|
|
|
- |
|
|
|
- |
|
|
|
21,880 |
|
|
|
* |
|
|
Robert
W. Allen (4)
|
|
|
39,194 |
|
|
|
- |
|
|
|
- |
|
|
|
39,194 |
|
|
|
* |
|
|
Richard
S. Krause (4)
|
|
|
1,880 |
|
|
|
- |
|
|
|
- |
|
|
|
1,880 |
|
|
|
* |
|
|
Goldman
Capital Management
|
|
|
514,619 |
|
|
|
- |
|
|
|
- |
|
|
|
514,619 |
|
|
|
5.54 |
% |
* Less
than 1%
(1)
For purposes of this table “beneficial ownership” is determined in accordance
with Rule 13d-3 of the Securities Exchange Act of 1934, pursuant to which a
person or group of persons is deemed to have “beneficial ownership” of any
common shares that such person or group has the right to acquire within 60 days
after September 26, 2008. For purposes of computing the percentage of
outstanding common shares held by each person or group of persons named above,
any shares that such person or group has the right to acquire within 60 days
after September 26, 2008, are deemed outstanding but are not deemed to be
outstanding for purposes of computing the percentage ownership of any other
person or group. As of September 26, 2008, there were 9,282,373
shares of our common stock issued and outstanding. There were also
outstanding options, and warrants entitling the holders to purchase 74,000
shares of our common stock owned by officers and/or directors of Park City
Group.
(2)
Includes 3,486,974 shares of common stock held in the name of Riverview
Financial Corp. and 2,688 shares of common stock held in the name of Fields
Management, Inc. of which Randall K Fields is the beneficial owner.
(3)
Includes 487,206 shares of common stock held in the name of Randall K. Fields.
Riverview Financial Corp. and 2,688 shares of common stock held in the name of
Fields Management, Inc. which is beneficially controlled by Randall K.
Fields.
(4)
These are the officers and directors of Park City Group.
Change
in Control
The
Company is not currently engaged in any activities or arrangements that it
anticipates will result in a change in control of the Company.
Certain
Relationships and Related Transactions
On
September 2, 2008, Park City Group, Inc. (the “Company”) executed and delivered
three promissory notes in an aggregate amount of $2,200,000. Each of
such notes is unsecured, due on or before December 1, 2008 and bears interest at
the rate of 10% per annum. The lenders and the amount of each note
are as follows:
|
Lender
|
|
Principal
Amount
|
|
|
Riverview
Financial Corp*
|
|
$ |
1,500,000 |
|
|
Robert
K. Allen (Director of Company)
|
|
|
500,000 |
|
|
Robert
Hermanns (Director and Senior Vice President)
|
|
|
200,000 |
|
|
Total
|
|
$ |
2,200,000 |
|
*
Riverview Financial Corp is an affiliate of Randal Fields, the CEO and a
director of the Company.
The loan
proceeds were used by the Company to fund a portion of the purchase price of
shares of Series E Preferred Stock of Prescient Applied Intelligence, Inc.,
a Delaware corporation (“Prescient”) purchased by the Company. The purchase
transaction was the first step in a plan to acquire Prescient in a merger
transaction. The purchase transaction and the merger transaction are
described in a Form 8-K filed by the Company on September 3, 2008 and a Schedule
13D filed by the Company with the Securities and Exchange Commission on
September 15, 2008.
Director
Independence
Our Board
of Directors currently consists of Randall K. Fields, Robert P. Hermanns, Robert
W. Allen, Richard S. Krause and James R. Gillis. The Board has determined
that Robert W. Allen and Richard S. Krause qualify as independent
directors.
We
maintain separately designated audit, compensation and nominating committees. In
applying the independence standards applicable to audit, compensation and
nominating committee members, each of the members of such committees are
considered independent.
(REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK)
Exhibits,
Financial Statements and Schedules
The
Consolidated Financial Statements of the Company and its subsidiaries are filed
as part of this Report:
Exhibit
Number Description
|
|
2.1
|
Agreement
and Plan of Merger and Reorganization, Dated August 28, 2008
(1)
|
|
|
2.2
|
Form
of Stock Purchase Agreement (1)
|
|
|
2.3
|
Form
of Stock Voting Agreement (1)
|
|
|
2.4
|
Form
of Promissory Note (2)
|
|
|
3.1
|
Article
Of Incorporation (3)
|
|
|
3.2
|
Certificate
Of Amendment (4)
|
|
|
3.4
|
Certificate
of Amendment (5)
|
|
|
4.1
|
Certificate
of Designation (6)
|
|
|
10.1
|
Placement
Agent Agreement (7)
|
|
|
10.2
|
Warrant
To Purchase Common Stock, Dated June 14, 2006
(8)
|
|
|
10.3
|
Securities
Purchase Agreement (8)
|
|
|
10.4
|
Amended
Employment Agreement Randall K. Fields
(9)
|
|
|
10.5
|
Services
Agreement with Fields Management, Inc.
(9)
|
|
|
10.6
|
Commercial
Real Estate Lease – Pinebrook (5)
|
|
|
10.7
|
Warrant
to Purchase Common Stock, Dated June 30, 2006
(5)
|
|
|
|
Employment
Agreement with Robert Hermanns (10)
|
|
|
|
Stock
Purchase Agreement (6)
|
|
|
|
Warrant
to Purchase Common Stock, dated June 1-22, 2007
(6)
|
|
|
|
Warrant
to Purchase Common Stock, dated June 22, 2007
(6)
|
|
|
|
Employment
Agreement with John Merrill (11)
|
|
|
(1)
|
Incorporated
by reference from our Fork 8-K dated September 3,
2008.
|
|
|
(2)
|
Incorporated
by reference from our Form 8-K dated September 15,
2008.
|
|
|
(3)
|
Incorporated
by reference from our Form DEF 14C dated June 5,
2002.
|
|
|
(4)
|
Incorporated
by reference from our Form 10-QSB for the year ended Sept 30,
2005.
|
|
|
(5)
|
Incorporated
by reference from our Form 10-KSB dated September 29,
2006.
|
|
|
(6)
|
Incorporated
by reference from our Form 8-K dated June 27,
2007.
|
|
|
(7)
|
Incorporated
by reference from our Form 8-K dated June 14,
2006.
|
|
|
(8)
|
Incorporated
by reference from our Form SB-2/A dated October 20,
2006.
|
|
|
(9)
|
Incorporated
by reference from our Form 10KSA/A dated October 13,
2006.
|
|
|
(10)
|
Incorporated
by reference from our Form 8-K dated March 26,
2007.
|
|
|
(11)
|
Incorporated
by reference from out Form 8-K dated September 12,
2007.
|
The Audit
Committee has adopted policies and procedures to oversee the external audit
process including engagement letters, estimated fees and solely pre-approving
all permitted non-audit work performed by HJ & Associates, LLC. The
Committee has pre-approved all fees for work performed.
The Audit
Committee has considered whether the services provided by HJ & Associates,
LLC as disclosed below in the captions “Audit-Related Fee”, “Tax Fees” and “All
Other Fees” and has concluded that such services are compatible with the
independence of HJ & Associates, LLC as the Company’s principal
accountants.
For the
fiscal years 2008 and 2007, the Audit Committee pre-approved all services
described below in the captions “Audit Fees”, “Audit-Related Fees”, “Tax Fees”
and “All Other Fees”. For fiscal year 2008 and 2007, no hours expended on HJ
& Associates, LLC’s engagement to audit the Company’s financial statements
were attributed to work performed by persons other than full-time, permanent
employees of HJ & Associates, LLC.
The
aggregate fees billed for professional services by HJ & Associates, LLC in
fiscal year 2008 and 2007:
|
Type of
Fees
|
|
2008
|
|
|
2007
|
|
|
Audit Fees
|
|
$ |
54,500 |
|
|
$ |
59,900 |
|
|
Audit-Related Fees
|
|
|
- |
|
|
|
- |
|
|
Tax Fees
|
|
|
- |
|
|
|
- |
|
|
All Other Fees
|
|
|
- |
|
|
|
- |
|
|
Total
|
|
$ |
54,500 |
|
|
$ |
59,900 |
|
(REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK)
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PARK
CITY GROUP, INC.
(Registrant)
|
Date: September 29,
2008
|
___________________________
By /s/ Randall
K. Fields
Principal
Executive Officer,
Chairman
of the Board and Director
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
|
Signature
|
Title
|
Date
|
|
|
|
|
|
_______________________
/s/ Randall
K. Fields
Randall
K. Fields
|
Chief
Executive Officer,
Chairman
of the Board and Director
(Principal
Executive Officer)
|
September 29,
2008
|
|
_______________________
/s/ John R,
Merrill
John
R. Merrill
|
Chief
Financial Officer and Treasurer
(Principal
Financial Officer & Principal Accounting Officer)
|
September 29,
2008
|
|
|
|
|
|
_______________________
/s/ Robert W.
Allen
Robert W.
Allen
|
Director
and Compensation Committee Chairman
|
September 29,
2008
|
|
_______________________
/s/ James R.
Gillis
James R.
Gillis
|
Director
|
September 29,
2008
|
|
_______________________
s/ Richard S.
Krause
Richard S.
Krause
|
Director,
Audit Committee Chairman and Nominating / Governance Committee
Chairman
|
September 29,
2008
|
Board of Directors and Shareholders
of
Park City Group, Inc. and
Subsidiaries
Park City, Utah
We have audited the accompanying consolidated balance
sheets of Park City Group, Inc. and Subsidiaries as of June 30, 2008 and 2007,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinions.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of Park City Group, Inc. and Subsidiaries as of June 30, 2008
and 2007, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
We were
not engaged to examine management’s assertion about the effectiveness of Park
City Group. Inc. and subsidiaries' internal control over financial reporting as
of June 30, 2008 included in the accompanying Form 10-KSB and, accordingly, we
do not express an opinion thereon.
/s/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
September 26, 2008
(REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK)
Consolidated
Balance Sheets
|
Assets
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
865,563 |
|
|
$ |
3,273,424 |
|
|
Restricted
cash
|
|
|
1,940,000 |
|
|
|
1,940,000 |
|
|
Receivables,
net of allowance of $68,000 and $26,958, respectively
|
|
|
1,004,815 |
|
|
|
918,965 |
|
|
Unbilled
receivables
|
|
|
116,362 |
|
|
|
556,170 |
|
|
Prepaid
expenses and other current assets
|
|
|
56,438 |
|
|
|
100,722 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,983,178 |
|
|
|
6,789,281 |
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
494,459 |
|
|
|
481,533 |
|
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
|
Deposits
and other assets
|
|
|
47,667 |
|
|
|
27,738 |
|
|
Capitalized
software costs, net
|
|
|
660,436 |
|
|
|
914,967 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
other assets
|
|
|
708,103 |
|
|
|
942,705 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
5,185,740 |
|
|
$ |
8,213,519 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
427,582 |
|
|
$ |
388,212 |
|
|
Accrued
liabilities
|
|
|
410,396 |
|
|
|
287,114 |
|
|
Deferred
revenue
|
|
|
480,269 |
|
|
|
929,418 |
|
|
Current
portion of capital lease obligations
|
|
|
143,532 |
|
|
|
71,185 |
|
|
Notes
payable
|
|
|
1,940,000 |
|
|
|
1,940,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
3,401,779 |
|
|
|
3,615,929 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
Capital
lease obligations, less current portion
|
|
|
200,446 |
|
|
|
225,414 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
3,602,225 |
|
|
|
3,841,343 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value, 30,000,000 shares authorized; 605,036 and 584,000
shares of Series A Convertible Preferred issued and outstanding at June
30, 2008 and 2007 respectively
|
|
|
6,050 |
|
|
|
5,840 |
|
|
Common
stock, $0.01 par value, 50,000,000 shares authorized; 9,217,539 and
8,997,703 issued and outstanding at June 30, 2008 and 2007,
respectively
|
|
|
92,176 |
|
|
|
89,977 |
|
|
Additional
paid-in capital
|
|
|
26,467,700 |
|
|
|
26,166,128 |
|
|
Subscription
receivable
|
|
|
- |
|
|
|
(106,374 |
) |
|
Accumulated
deficit
|
|
|
(24,982,411 |
) |
|
|
(21,783,395 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
1,583,515 |
|
|
|
4,372,176 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$ |
5,185,740 |
|
|
$ |
8,213,519 |
|
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Operations
For
the Years Ended June 30, 2008 and 2007
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Subscriptions
|
|
$ |
203,028 |
|
|
$ |
89,251 |
|
|
Maintenance
and support
|
|
|
1,455,344 |
|
|
|
1,513,016 |
|
|
Professional
services
|
|
|
584,661 |
|
|
|
464,396 |
|
|
License
fees
|
|
|
1,101,940 |
|
|
|
525,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
3,344,973 |
|
|
|
2,592,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Cost
of services and product support
|
|
|
2,419,227 |
|
|
|
1,717,793 |
|
|
Sales
and marketing
|
|
|
1,843,912 |
|
|
|
1,508,276 |
|
|
General
and administrative
|
|
|
2,073,214 |
|
|
|
2,002,552 |
|
|
Depreciation
and amortization
|
|
|
505,539 |
|
|
|
368,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
6,841,892 |
|
|
|
5,597,257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(3,496,919 |
) |
|
|
(3,005,091 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
Gain
on derivative liability
|
|
|
- |
|
|
|
88,785 |
|
|
Gain
on marketable securities
|
|
|
- |
|
|
|
18,386 |
|
|
Gain
on disposition of assets
|
|
|
(295 |
) |
|
|
943 |
|
|
Income
from patent activities
|
|
|
600,000 |
|
|
|
- |
|
| Interest
income
(expense), net |
|
|
29,035 |
|
|
|
(114,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income (expense)
|
|
|
628,740 |
|
|
|
(6,536 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(2,868,179 |
) |
|
|
(3,011,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
(Provision)
benefit for income taxes
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(2,868,179 |
) |
|
|
(3,011,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on Preferred stock
|
|
|
(330,837 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common shareholders
|
|
$ |
(3,199,016 |
) |
|
$ |
(3,011,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares, basic and diluted
|
|
|
9,150,000 |
|
|
|
8,936,000 |
|
|
Basic
and diluted loss per share
|
|
$ |
(0.35 |
) |
|
$ |
(0.34 |
) |
See
accompanying notes to consolidated financial statements.
Consolidated Statements of
Stockholders’ Equity
For the Years
Ended June 30, 2008 and 2007
| |
|
Preferrred
Stock
|
|
|
Common
Stock
|
|
|
Subscription
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
|
|
| |
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Receivable
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance,
June 30, 2006
|
|
|
- |
|
|
$ |
- |
|
|
|
8,931,312 |
|
|
$ |
89,312 |
|
|
$ |
- |
|
|
$ |
20,564,933 |
|
|
$ |
(19,172,607 |
) |
|
$ |
1,481,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect
adjustment of adopting FSP EITF 00-19-2
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
400,839 |
|
|
|
400,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of partial shares
|
|
|
- |
|
|
|
- |
|
|
|
(546 |
) |
|
|
(4 |
) |
|
|
- |
|
|
|
(168 |
) |
|
|
- |
|
|
|
(172 |
) |
|
Stock
issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
- |
|
|
|
- |
|
|
|
29,937 |
|
|
|
299 |
|
|
|
- |
|
|
|
71,799 |
|
|
|
- |
|
|
|
72,098 |
|
|
Cash,
net of offering costs
|
|
|
584,000 |
|
|
|
5,840 |
|
|
|
37,000 |
|
|
|
370 |
|
|
|
(106,374 |
) |
|
|
5,379,124 |
|
|
|
- |
|
|
|
5,278,960 |
|
|
Share-based
compensation
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
150,440 |
|
|
|
- |
|
|
|
150,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,011,627 |
) |
|
|
(3,011,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2007
|
|
|
584,000 |
|
|
|
5,840 |
|
|
|
8,997,703 |
|
|
|
89,977 |
|
|
|
(106,374 |
) |
|
|
26,166,128 |
|
|
|
(21,783,395 |
) |
|
|
4,372,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Preferred stock
|
|
|
(4,257 |
) |
|
|
(43 |
) |
|
|
14,190 |
|
|
|
142 |
|
|
|
- |
|
|
|
(99 |
) |
|
|
- |
|
|
|
- |
|
|
Stock
issued for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
- |
|
|
|
- |
|
|
|
23,965 |
|
|
|
240 |
|
|
|
- |
|
|
|
74,936 |
|
|
|
- |
|
|
|
75,176 |
|
|
Exercise
of warrants
|
|
|
- |
|
|
|
- |
|
|
|
181,681 |
|
|
|
1,817 |
|
|
|
- |
|
|
|
(1,817 |
) |
|
|
- |
|
|
|
- |
|
|
Dividends
|
|
|
25,293 |
|
|
|
253 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
252,677 |
|
|
|
|
|
|
|
252,930 |
|
| Proceeds
from subscription receivable |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
106,374 |
|
|
|
- |
|
|
|
- |
|
|
|
106,374 |
|
| Stock
offering costs |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(24,125 |
) |
|
|
- |
|
|
|
(24,125 |
) |
|
Preferred
dividends - declared
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(330,837 |
) |
|
|
(330,837 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(2,868,179 |
) |
|
|
(2,868,179 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2008
|
|
|
605,036 |
|
|
$ |
6,050 |
|
|
|
9,217,539 |
|
|
$ |
92,176 |
|
|
$ |
- |
|
|
$ |
26,467,700 |
|
|
$ |
(24,982,411 |
) |
|
$ |
1,583,515 |
|
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Cash Flows
For
the Years Ended June 30, 2008 and 2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,868,179 |
) |
|
$ |
(3,011,627 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
505,539 |
|
|
|
278,609 |
|
|
Bad
debt expense
|
|
|
41,042 |
|
|
|
(47,022 |
) |
|
(Gain)
loss on derivative liability
|
|
|
- |
|
|
|
(88,785 |
) |
|
Stock
issued for services and expenses
|
|
|
75,176 |
|
|
|
222,539 |
|
|
Amortization
of discounts on debt
|
|
|
- |
|
|
|
97,404 |
|
|
Gain
on marketable securities
|
|
|
- |
|
|
|
(18,386 |
) |
|
Gain
on recovery of bad debt
|
|
|
- |
|
|
|
(52,344 |
) |
|
Gain
on sale of property
|
|
|
295 |
|
|
|
(943 |
) |
|
Income
from patent activities
|
|
|
(600,000 |
) |
|
|
- |
|
|
Sale
of marketable securities
|
|
|
- |
|
|
|
70,730 |
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
|
|
Trade
Receivables
|
|
|
(565,525 |
) |
|
|
(768,753 |
) |
|
Other
receivables
|
|
|
439,808 |
|
|
|
(318,530 |
) |
|
Prepaids
and other assets
|
|
|
24,355 |
|
|
|
75,185 |
|
|
(Decrease)
increase in:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
39,370 |
|
|
|
276,076 |
|
|
Accrued
liabilities
|
|
|
62,374 |
|
|
|
51,275 |
|
|
Deferred
revenue
|
|
|
(25,030 |
) |
|
|
280,732 |
|
|
Accrued
interest, related party
|
|
|
- |
|
|
|
5,777 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(2,870,775 |
) |
|
|
(2,948,063 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(34,787 |
) |
|
|
(182,297 |
) |
|
Capitalization
of software costs
|
|
|
(76,001 |
) |
|
|
(419,393 |
) |
|
Restricted
Cash
|
|
|
- |
|
|
|
(1,940,000 |
) |
|
Proceeds
from disposal of property
|
|
|
600,945 |
|
|
|
3,040 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
490,157 |
|
|
|
(2,538,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuances of stock
|
|
|
- |
|
|
|
5,835,573 |
|
|
Receipt
of subscription receivable
|
|
|
106,374 |
|
|
|
- |
|
| Stock
offering costs |
|
|
(24,125 |
) |
|
|
(556,785 |
) |
|
Dividends
paid
|
|
|
(2,485 |
) |
|
|
- |
|
|
Payments
on notes payable and capital leases
|
|
|
(107,007 |
) |
|
|
(35,711 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(27,243 |
) |
|
|
5,243,077 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(2,407,861 |
) |
|
|
(243,636 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
3,273,424 |
|
|
|
3,517,060 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
865,563 |
|
|
$ |
3,273,424 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
Cash
paid for interest
|
|
$ |
127,092 |
|
|
$ |
157,235 |
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
Dividends
accrued on preferred stock
|
|
$ |
75,422 |
|
|
$ |
- |
|
|
Dividends
paid with preferred stock
|
|
$ |
155,400 |
|
|
$ |
- |
|
|
Property
and equipment purchased by capital lease
|
|
$ |
154,386 |
|
|
$ |
310,587 |
|
See
accompanying notes to consolidated financial statements.
Notes to Consolidated Financial
Statements
June 30, 2008 and June 30,
2007
1.
Summary of Significant
Accounting Policies, Organization and Principles of
Consolidation
Business
Activity
The
Company designs, develops, markets and supports proprietary software
products. These products are designed to be used in retail businesses
having multiple locations to assist in the management of business operations on
a daily basis and communicate results of operations in a timely
manner. In addition the Company has built a consulting practice for
business improvement that centers around the companies proprietary software
products. The principal markets for the Company's products are retail companies,
suppliers, branded food manufacturers and display manufacturing companies which
have operations in North America and, to a lesser extent, in Europe and
Asia.
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 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 U.S. Securities
and Exchange Commission has defined the most critical accounting policies as the
ones 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: revenue
recognition, allowance for doubtful accounts, capitalization of software
development costs and impairment of long-lived assets.
Cash and Cash
Equivalents
The
Company considers all short-term instruments with an original maturity of three
months or less to be cash equivalents.
Concentration of Credit Risk
and Significant Customers
The
Company maintains cash in bank deposit accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses
in such accounts and believes it is not exposed to any significant credit risk
on cash and cash equivalents.
Financial
instruments which potentially subject the Company to concentration of credit
risk consist primarily of trade receivables. In the normal course of business,
the Company provides credit terms to its customers. Accordingly, the
Company performs ongoing credit evaluations of its customers and maintains
allowances for possible losses which when realized have been within the range of
management's expectations. The Company does not require collateral
from its customers.
The
Company's accounts receivable are derived from sales of products and services
primarily to customers operating multi-location retail and grocery
stores. At June 30, 2008 and June 30, 2007, net accounts receivable
includes amounts due from customers totaling $1,004,815 and $918,965,
respectively.
During
the years ended June 30, 2008 and June 30, 2007, the Company received revenues
from new customers of approximately $850,000 and $505,000, respectively and
revenues of approximately $2.5 million and $2.1 million, respectively from
existing customers for continued support and additional license
sales.
During
the years ended June 30, 2008 and 2007, the Company had sales to major customers
that exceeded 10 percent of revenues are as follows:
|
2008
|
|
|
|
|
Customer
A
|
|
$ |
700,000 |
|
|
Customer
B
|
|
|
438,425 |
|
|
Customer
C
|
|
|
359,835 |
|
|
Customer
D
|
|
|
349,998 |
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
Customer
E
|
|
$ |
453,625 |
|
|
Customer
D
|
|
|
342,748 |
|
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 require no collateral from
these customers. The Company performs ongoing credit evaluations of the
Company’s 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 June 30,
2008 and 2007, the allowance for doubtful accounts was $68,000 and $26,958
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
|
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.
Warranties
The
Company offers a limited warranty against software defects for a general period
of (90) ninety days. Customers who are not completely satisfied with
their software purchase may attempt to be reimbursed for their purchases outside
the warranty period. The Company accrues amounts for such warranty
settlements that are probable and can be reasonably estimated.
Revenue
Recognition
The
Company derives revenues from four primary sources, software licenses,
maintenance and support services, professional services and software
subscription. New software licenses include the sale of software runtime
license fees associated with deployment of the Company’s software
products. Software license maintenance updates and product support are
typically annual contracts with customers that are paid in advance or specified
as terms in the contract. This provides the customer access to new software
releases, maintenance releases, patches and technical support personnel.
Professional service sales are derived from the sale of services to design,
develop and implement custom software applications. Subscription is derived from
the sale of Supply Chain Profit Link, a category management product that is sold
on a subscription basis.
License
revenue from the sale of software licenses is recognized upon delivery of the
software unless specific delivery terms provide otherwise. If not
recognized upon delivery, revenue is recognized upon meeting specified
conditions, such as, meeting customer acceptance criteria. In no
event is revenue recognized if significant Company obligations remain
outstanding. Customer payments are typically received in part upon
signing of license agreements, with the remaining payments received in
installments pursuant to the agreements. Until revenue recognition
requirements are met, the cash payments received are treated as deferred
revenue.
Maintenance
and support services that are sold with the initial license fee are recorded as
deferred revenue and recognized ratably over the initial service
period. Revenues from maintenance and other support services provided
after the initial period are generally paid in advance and are recorded as
deferred revenue and recognized on a straight-line basis over the term of the
agreements.
Professional
services revenue is recognized in the period that the service is provided or in
the period such services are accepted by the customer if acceptance is required
by agreement.
Subscription
revenues are recognized on a contractual basis, for one or more
years. These fees are generally collected in advance of the services
being performed and the revenue is recognized ratably over the respective
months, as services are provided.
Before
the Company recognizes revenue, the following criteria must be met:
1)
Evidence of a financial arrangement or agreement must exist between the Company
and its customer. Purchase orders, signed contracts, or electronic
confirmation are three examples of items accepted by the Company to meet this
criterion.
2)
Delivery of the products or services must have occurred. The Company
treats either physical or electronic delivery as having met this
requirement. The Company offers a 60-day free trial on beginning a
subscription engagement and revenue is not recognized during this time. After
the free trial ends the Company recognizes revenue ratably over the subscription
period.
3)
The price of the products or services is fixed and measurable.
4)
Collectability of the sale is reasonably assured and receipt is probable.
Collectability of a sale is determined on a customer-by-customer basis.
Typically the Company sells to large corporations which have demonstrated an
ability to pay. If it is determined that a customer may not have the
ability to pay, revenue is deferred until the payment is collected.
Software Development
Costs
The
Company accounts for research and development costs in accordance with several
accounting pronouncements, including SFAS No. 2, Accounting for Research
and Development Costs, and SFAS No. 86, “Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed.” SFAS
No. 86 specifies that costs incurred internally in researching and
developing a computer software product should be charged to expense until
technological feasibility has been established for the product. Once
technological feasibility is established, all software costs should be
capitalized until the product is available for general release to
customers
From
inception through January 2001, the Company viewed the software as an evolving
product. Therefore, all costs incurred for research and development
of the Company's software products through January 2001 were expensed as
incurred. During January 2001, technological feasibility of a major
revision to the Company's Fresh Market Manager and the Company's ActionManager
4x development platform was established. Development costs for Fresh
Market Manager software incurred from January 2001 through September 2002,
totaling $1,063,515, were capitalized. These costs were amortized on
a straight-line basis over four years, beginning in September 2002 when the
product was available for general release to customers. During 2008
and 2007 capitalized development costs of $332,210 and $184,613, respectively
were amortized into expense.
In July
2005 and December 2006, the Company reached technological feasibility on 1 new
product and 2 major enhancements to existing product offerings. The
Company capitalized $76,001 and $419,393 of development costs associated with
these products and enhancements for 2008 and 2007,
respectively. These products were available for general release in
FY2008. We continued capitalization until that time.
Research and Development
Costs
Research
and development costs include personnel costs, engineering, consulting, and
contract labor and are expensed as incurred for software that has not achieved
technological feasibility.
Income
Taxes
The
Company accounts for income taxes under the provision of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. This
method requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between tax bases and
financial reporting bases of other assets and liabilities.
Earnings Per
Share
The
computation of basic and diluted loss per common share is based on the weighted
average number of shares outstanding during each year. Options and warrants to
purchase 1,017,443 and 1,634,517 shares of common stock at prices ranging from
$1.50 to $4.00 per share were outstanding at June 30, 2008 and 2007,
respectively. These options and warrants, were not included in the diluted
(loss) earnings per share calculation because the effect would have been
anti-dilutive.
The
shares used in the computation of the Company's basic and diluted earnings per
common share are reconciled as follows:
|
|
|
Year
ended
June 30,
2008
|
|
|
Year
ended
June 30,
2007
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares, basic
|
|
|
9,150,486 |
|
|
|
8,936,000 |
|
|
Dilutive
effect of options and warrants
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding assuming dilution
|
|
|
9,150,486 |
|
|
|
8,936,000 |
|
Prior to
July 1, 2006, as permitted under Statement of Financial Accounting Standards
(“SFAS”) No. 123, the Company accounted for its stock options, warrants and
plans following the recognition and measurement principles of Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock issued to
Employees,” and related interpretations. Accordingly, no stock-based
compensation expense had been reflected in the Company’s statements of
operations as all options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant and the related number
of shares granted was fixed at that point in time.
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123(R), “Share Based Payment.” This statement revised SFAS No. 123 by
eliminating the option to account for employee stock options under APB No. 25
and requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards.
Effective
July 1, 2006, the Company adopted the fair value recognition provisions of SFAS
No. 123(R) using the modified prospective application method. Under this
transition method, the Company recorded compensation expense on a straight-line
basis for the year ended June 30, 2007, for: (a) the vesting of options granted
prior to July 1, 2006 (based on the grant-date fair value estimated in
accordance with the original provisions of SFAS No. 123, and previously
presented in the pro-forma footnote disclosures), and (b) stock-based awards
granted subsequent to July 1, 2006 (based on the grant-date fair value estimated
in accordance with the provisions of SFAS No. 123(R)). In accordance with the
modified prospective application method, results for the year ended June 30,
2006 have not been restated.
The
weighted-average grant-date fair value of options granted during year ended June
30, 2007 was $3.07 per share. There were no stock options granted in the year
ended June 30, 2008. The fair value for the options granted in 2007 were
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions:
|
|
June 30,
2008
|
June 30,
2007
|
|
Risk-free
interest rate
|
-
|
4.89%
|
|
Expected
life (in years)
|
-
|
3
|
|
Expected
volatility
|
-
|
123.76%
|
|
Expected
dividend yield
|
-
|
0.00%
|
The
following table summarizes information about fixed stock options and warrants
outstanding at June 30, 2008:
| |
|
|
Options and Warrants
Outstanding
at June 30,
2008
|
|
|
Options
and Warrants
Exercisable at June
30, 2008
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range
of
exercise
prices
|
|
|
Number
Outstanding
at
June 30,
2008
|
|
|
Weighted
average
remaining
contractual
_____life(years)
|
|
|
Weighted
average
exercise
______price
|
|
|
Number
Exercisable
at
June 30,
2008
|
|
|
Weighted
average
exercise
______price
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
1.50
- $2.50 |
|
|
|
21,250 |
|
|
|
5.09 |
|
|
$ |
1.79 |
|
|
|
21,250 |
|
|
$ |
1.79 |
|
| $ |
2.76
- $3.50 |
|
|
|
202,571 |
|
|
|
1.46 |
|
|
|
3.23 |
|
|
|
202,571 |
|
|
|
3.23 |
|
| $ |
3.65
- $4.00 |
|
|
|
793,622 |
|
|
|
3.25 |
|
|
|
3.78 |
|
|
|
793,622 |
|
|
|
3.78 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
1,017,443 |
|
|
|
2.88 |
|
|
$ |
3.60 |
|
|
|
1,017,443 |
|
|
$ |
3.60 |
|
Fair Value of Financial
Instruments
The
Company's financial instruments consist of cash, cash equivalents, restricted
cash, receivables, payables, accruals and notes payable. The carrying
amount of cash, cash equivalents, restricted cash , receivables, payables and
accruals approximates fair value due to the short-term nature of these
items. The notes payable also approximate fair value based on
evaluations of market interest rates.
2.
Liquidity
As shown
in the consolidated financial statements, the Company had cash flow used in
operations in the amount $2,870,775 and 2,948,063 for the years ended, June 30,
2008 and June 30, 2007. This is a comparative decrease of $77,288 or
3% when comparing the results of the year ended June 30, 2008 to the same period
in 2007.
In June
2007, the Company issued 584,000 shares of its Series A Convertible Preferred
Stock. The Company received $5,278,788 net of offering costs
associated with the placement.. The Company utilized $1.94 million to
collateralize its note payable and eliminate Riverview Financial as its
guarantor in July 2008. The bank note and restricted cash
collateralizing the loan bear the same interest rate. The remaining $3.3 million
of cash and cash equivalents have been used to fund operations, capital
expansion, and other general corporate purposes.
Management
believes that in combination with its equity placement in June of 2007, its
evolution toward a subscription based model, and the release of 1 new product
and 2 significant enhancements, to existing products will provide current and
future operating cash flows. The Company believes that anticipated revenue
growth will allow the Company to meet its minimum operating cash requirements
for the next 12 months. The financial statements do not reflect any adjustments
should the Company’s operations not be achieved.
Although
the Company anticipates that it will meet its working capital requirements
primarily through increased revenue and strict cost control, there can be no
assurances that the Company will be able to meet its working capital
requirements. Should the Company desire to raise additional equity or
debt financing, there are no assurances that the Company could do so on
acceptable terms.
3.
Receivables
Trade
accounts receivable consist of the following at June 30, 2008 and
2007:
|
|
|
2008
|
|
|
2007
|
|
|
Trade
accounts receivable
|
|
$ |
1,072,815 |
|
|
$ |
945,923 |
|
|
Allowance
for doubtful accounts
|
|
|
(68,000 |
) |
|
|
(26,958 |
) |
|
|
|
$ |
1,004,815 |
|
|
$ |
918,965 |
|
Unbilled
receivables consists of amounts recognized as revenue during the year for which
invoices were sent subsequent to June 30, 2008
4.
Property
and Equipment
Property
and equipment are stated at cost and consist of the following at June 30, 2008
and 2007:
|
|
|
2008
|
|
|
2007
|
|
|
Computer
equipment
|
|
$ |
572,124 |
|
|
$ |
429,929 |
|
|
Furniture
and equipment
|
|
|
307,278 |
|
|
|
358,358 |
|
|
Leasehold
improvements
|
|
|
135,968 |
|
|
|
126,063 |
|
|
|
|
|
1,015,370 |
|
|
|
914,350 |
|
|
Less
accumulated depreciation and amortization
|
|
|
(520,911 |
) |
|
|
(432,817 |
) |
|
|
|
$ |
494,459 |
|
|
$ |
481,533 |
|
Depreciation
expense for the years ended June 30, 2008 and 2007 was $175,007 and $86,618,
respectively.
5.
Capitalized software
costs
Capitalized
software costs consist of the following at June 30, 2008 and 2007:
|
|
|
2008
|
|
|
2007
|
|
|
Capitalized
software costs
|
|
$ |
2,174,306 |
|
|
$ |
2,096,627 |
|
|
Less
accumulated amortization
|
|
|
(1,513,870 |
) |
|
|
(1,181,660 |
) |
|
|
|
$ |
660,436 |
|
|
$ |
914,967 |
|
Amortization
expense for the years ended June 30, 2008 and 2007 was $332,210 and $184,613,
respectively.
Estimated
aggregate amortization expenses for each of the next five years is as
follows:
|
Year
ending June 30:
|
|
|
|
|
2009
|
|
$ |
370,263 |
|
|
2010
|
|
|
252,120 |
|
|
2011
|
|
|
38,053 |
|
|
2012
|
|
|
- |
|
|
2013
|
|
$ |
- |
|
6.
Accrued
Liabilities
Accrued
liabilities consist of the following at June 30, 2007 and 2006:
|
|
|
2008
|
|
|
2007
|
|
|
Accrued
compensation
|
|
$ |
157,470 |
|
|
$ |
155,610 |
|
|
Accrued
stock grants
|
|
|
89,456 |
|
|
|
- |
|
|
Accrued
legal fees
|
|
|
9,580 |
|
|
|
45,274 |
|
|
Other
accrued liabilities
|
|
|
58,468 |
|
|
|
58,112 |
|
|
Accrued
dividends
|
|
|
75,422 |
|
|
|
28,118 |
|
|
Accrued
board compensation
|
|
|
20,000 |
|
|
|
- |
|
|
|
|
$ |
410,396 |
|
|
$ |
287,114 |
|
7.
Related party line of
credit
In
February 2006 the Company arranged an unsecured, revolving line of credit with
Riverview Financial Corp, a wholly owned affiliate of the Company’s
CEO. The line bore interest at 12% with a fee for advances, and is
repaid as funds availability permits. The line of credit expired on
June 15, 2007. The limit on this line of credit was $800,000. The
line was not renewed.
8.
Derivative
Liability
In
conjunction with raising capital through the issuance of convertible debt, the
Company has issued various warrants that have registration rights for the
underlying shares. As the contracts must be settled by the delivery
of registered shares and the delivery of the registered shares is not controlled
by the Company, pursuant to EITF 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s own
Stock,” the net value of the warrants at the date of issuance was
recorded as long-term derivative liability on the balance sheet as of June 30,
2006 of $489,624.
In
accordance with FSP EITF 00-19-2 the derivative liability as of March 31, 2007
of $400,839 was recorded as a cumulative adjustments and the change in fair
value from June 30, 2006 to March 31, 2007 of $88,785 has been included as a
gain on derivative liability on the Consolidated Statement of
Operations. The “cumulative adjustment” has been reflected as an
adjustment to accumulated deficit in the amount of $400,839.
9.
Notes payable and capital
leases obligations
The
Company had the following notes payable and capital lease obligations at June
30, 2008 and 2007:
|
|
|
2008
|
|
|
2007
|
|
|
Note
payable to a Bank bearing interest at 6.7%, due March 31, 2008. The note
was extended to June 30, 2008 and payable within 30 days. Subsequent to
year ended June 30, 2008 the note was paid off. The note is secured by a
certificate of deposit issued by the same bank, from inception through
June 2007 the certificate was issued in the name of Riverview Financial
corp. In June 2007 a new certificate in the name of Park City
Group was issued. The certificate of deposit is recorded as
restricted cash of $1,940,000 on the consolidated balance sheet and earns
interest at 6.7%.
|
|
$ |
1,940,000 |
|
|
$ |
1,940,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Lease Obligations:
|
|
|
|
|
|
|
|
|
|
Capital
lease on computer equipment, due in monthly installments of $9,609,
imputed interest rates of 10.9%
|
|
|
137,237 |
|
|
|
45,746 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease on computer equipment, due in monthly installments of $2,125,
imputed interest rate of 8.9%
|
|
|
77,193 |
|
|
|
94,986 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital
lease on furniture and equipment, due in monthly installments of $3,539,
imputed interest rate of 11.2%
|
|
|
129,548 |
|
|
|
155,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,283,978 |
|
|
|
2,236,599 |
|
|
Less
current portion of capital lease obligations and notes
payable
|
|
|
(2,083,532 |
) |
|
|
(2,011,185 |
) |
|
|
|
$ |
200,446 |
|
|
$ |
225,414 |
|
Maturities
of notes payable and capital leases at June 30, 2008 are as
follows:
|
Year
ending June 30:
|
|
|
|
|
2009
|
|
$ |
2,083,532 |
|
|
2010
|
|
|
96,690 |
|
|
2011
|
|
|
59,966 |
|
|
2012
|
|
|
43,790 |
|
|
|
|
$ |
2,283,979 |
|
Capital
Leases: Amortization expense related to capitalized leases is
included in depreciation expense and was $66,352 and $29,350 for the years ended
June 30, 2008 and 2007, respectively. Accumulated depreciation was
$146,237 at June 30, 2008. This amortized depreciation expenses
relates to $501,042 of equipment purchased under capital lease agreements of
which $416,221 is still under capital lease at June 30, 2008.
10. Deferred
Revenue
Deferred
revenue consisted of the following at June 30, 2008 and 2007:
|
|
|
2008
|
|
|
2007
|
|
|
Consulting
Services
|
|
$ |
650 |
|
|
$ |
9,675 |
|
|
Maintenance
and Support
|
|
|
479,619 |
|
|
|
919,743 |
|
|
|
|
$ |
480,269 |
|
|
$ |
929,418 |
|
11. Income
Taxes
Deferred
taxes are provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Net
deferred tax liabilities consist of the following components as of June 30, 2008
and 2007:
|
|
|
2008
|
|
|
2007
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
NOL
Carryover
|
|
$ |
4,559,703 |
|
|
$ |
3,306,400 |
|
|
Depreciation
|
|
|
15,700 |
|
|
|
- |
|
|
Allowance
for Bad Debts
|
|
|
26,520 |
|
|
|
10,514 |
|
|
Accrued
Expenses
|
|
|
34,888 |
|
|
|
197,067 |
|
| Deferred
Revenue |
|
|
140,051 |
|
|
|
- |
|
|
Deferred
tax liabilities
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
- |
|
|
|
(4,422 |
) |
|
Valuation
allowance
|
|
|
(4,776,862 |
) |
|
|
(3,509,559 |
) |
|
Net
deferred tax asset
|
|
$ |
- |
|
|
$ |
- |
|
The
income tax provision differs from the amounts of income tax determined by
applying the US federal income tax rate to pretax income from continuing
operations for the years ended June 30, 2008 and 2007 due to the
following:
|
|
|
2008
|
|
|
2007
|
|
|
Book
Income
|
|
$ |
(1,118,590 |
) |
|
$ |
(1,174,535 |
) |
|
Stock
for Services
|
|
|
15,600 |
|
|
|
86,790 |
|
|
Life
Insurance
|
|
|
15,478 |
|
|
|
23,290 |
|
|
Meals
& Entertainment
|
|
|
4,379 |
|
|
|
5,440 |
|
| Loss
on Sales of Assets |
|
|
(874 |
) |
|
|
- |
|
|
NOL
Utilization
|
|
|
- |
|
|
|
- |
|
|
Derivative
Liability
|
|
|
- |
|
|
|
(34,626 |
) |
|
Valuation
allowance
|
|
|
1,084,007 |
|
|
|
1,093,641 |
|
|
|
|
$ |
- |
|
|
$ |
- |
|
At June
30, 2008, the Company had net operating loss carryforwards of approximately
$11,600,000 that may be offset against future taxable income from the year 2008
through 2028. No tax benefit has been reported in the June 30, 2008
consolidated financial statements since the potential tax benefit is offset by a
valuation allowance of the same amount.
Due to
the change in ownership provisions of the Tax Reform Act of 1986, net operating
loss carryforwards for Federal income tax reporting purposes are subject to
annual limitations. Should a change in ownership occur, net operating
loss carryforwards may be limited as to use in future years.
The
Financial Accounting Standards Board ("FASB") has issued Financial
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes - An
Interpretation of FASB Statement No.109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
Accounting for Income
Taxes. FIN 48 requires a company to determine whether it is
more likely than not that a tax position will be sustained upon examination
based upon the technical merits of the position. If the
more-like1y-than-not threshold is met, a company must measure the tax position
to determine the amount to recognize in the financial statements. As a result of
the implementation of FIN 48, the Company performed a review of its material tax
positions in accordance with recognition and measurement standards established
by FIN 48.
At the
adoption date of July 1, 2007, the Company had no unrecognized tax benefit which
would affect the effective tax rate if recognized. There has been no
significant change in the unrecognized tax benefit during the year ended June
30, 2008.
The
Company includes interest and penalties arising from the underpayment of income
taxes in the consolidated statements of operations in the provision for income
taxes. As of June 30, 2008, the Company had no accrued interest or
penalties related to uncertain tax positions.
The
Company files income tax returns in the U.S. federal jurisdiction and various
state jurisdictions. With few exceptions the Company is no longer subject to
U.S. federal, state, and local income tax examination by tax authorities for
years before December 31, 2005.
12. Commitments
and Contingencies
Legal
Proceedings
On June
29, 2007, the Company was served with a complaint from two previous employees
titled James D. Horton and Aaron Prevo v. Park City Group, Inc. and Randy
Fields, Individually Case No. 070700333, which has been filed in the Second
Judicial District Court, Davis County, Utah. The plaintiffs’ complaint alleges
that certain provisions of their employment agreements were not honored
including breach of employer obligations, fraud, unjust enrichment, and breach
of contract. The plaintiffs are seeking combined damages for alleged
unpaid compensation and punitive damages of $520,650 and $2,603,250,
respectively. The case is currently in the discovery phase and the Company will
continue to vigorously defend this matter. The Company believes that there is no
validity to this matter and that the possibility of any adverse outcome to the
company is remote.
Operating
Leases
Under
terms originally entered into in September 1998 for office space the Company
paid $10,500 on a month-to-month basis through December 15,
2006. Total rent expense under this agreement for the year ended June
30, 2007 was $57,750.
The
Company has entered into a lease at 3160 Pinebrook Drive, Park City, UT,
84098. The Company will lease approximately 10,000 square feet for a
period of 3 years, with an option to renew for an additional 3 year
increments. Monthly rent is $12,665 with annual increases of
3%.
The
payment terms are based on a step-rate lease and results in rent expense of the
following:
|
Year
Ending June 30,
|
|
|
|
|
2009
|
|
$ |
145,565 |
|
|
2010 assumes
renewal option exercised
|
|
|
149,932 |
|
|
2011 assumes
renewal option exercised
|
|
|
154,430 |
|
13. Employee Benefit
Plan
The
Company offers an employee benefit plan under Benefit Plan Section 401(k) of the
Internal Revenue Code. In May of 2007, the Company changed its 401(k)
provider and trustee from Fiserv/Alliance Benefit Group to Fidelity Investments.
Employees who have attained the age of 18 are eligible to
participate. The Company, at its discretion, may match employee’s
contributions at a percentage determined annually by the board of
directors. The Company does not currently match
contributions. There were no expenses for the years ended June 30,
2008 and 2007.
14. Series A Convertible
Preferred Stock Offering
On June 8
and 22, 2007, Park City Group, Inc. completed the sale of 584,000 shares of its
Series A Convertible Preferred Stock (“Preferred Stock”) to certain
institutional and other accredited investors at $10.00 per share or
$5,840,000. These preferred shares carried with them registration
rights for the underlying shares of common stock upon conversion as well as the
common shares underlying the associated warrants, the registration statement was
completed and became effective on August 13, 2007. In connection with
its sale of Preferred Stock, the Company entered into a Stock Purchase Agreement
and Common Stock Purchase Warrant Agreement with each of the investors. Each of
the investors was also issued common stock purchase warrants to purchase 1,000
shares of the Company’s common stock for every $14,000 in the original issue
price of the preferred stock issued at the closing. The warrants have a four (4)
year term and will be exercisable at $4.00. Holders of the preferred stock are
entitled to a 5.00% annual dividend payable quarterly in either cash or
Preferred Stock at the option of the Company. Offering cost
associated with the placement included a commission paid to Taglich Brothers,
Inc of $455,200 in cash and a warrant to purchase 194,667 shares of common stock
and legal and other related fees of approximately $55,000.
15. Stock Compensation
Plans
Officers and Directors Stock
Compensation. In February 2004 to be
effective January 2004, the Board of Directors approved the following
compensation for directors who are not employed by the Company.
|
|
·
|
Annual
cash compensation of $10,000 payable at the rate of $2,500 per
quarter. The Company has the right to pay this amount in the
form of shares of common stock of the
Company.
|
|
|
·
|
Annual
options to purchase $20,000 of the Company restricted common stock at the
market value of the shares on the date of the grant, which is to be the
first day the stock market is open in January of each
year.
|
|
|
·
|
Reimbursement
of all travel expenses related to performance of Directors duties on
behalf of the Company.
|
Officers, Key Employees,
Consultants and Directors Stock Compensation. In January 2000,
the Company entered into a non-qualified stock option & stock incentive
plan. Officers, key employees, consultants and directors of the
Company are eligible to participate. The maximum aggregate number of
shares which may be granted under this plan was originally 20,000 and was
subsequently amended to 40,000 on March 8, 2000. The plan is
administered by a Committee. The exercise price for each share of
common stock purchasable under any incentive stock option granted under this
plan shall be not less than 100% of the fair market value of the common stock,
as determined by the stock exchange on which the common stock trades on the date
of grant. If the incentive stock option is granted to a shareholder
who possesses more than 10% of the Company's voting power,
then the
exercise price shall be not less than 110% of the fair market value on the date
of grant. Each option shall be exercisable in whole or in
installments as determined by the Committee at the time of the grant of such
options. All incentive stock options expire after 10
years. If the incentive stock option is held by a shareholder who
possesses more than 10% of the Company's
voting
power, then the incentive stock option expires after five years. If
the option holder is terminated, then the incentive stock options granted to
such holder expire no later than three months after the date of
termination. For options holders granted incentive stock options
exercisable for the first time during any fiscal year and in excess of $100,000
(determined by the fair market value of the shares of common stock as of the
grant date), the excess shares of common stock shall not be deemed to be
purchased pursuant to incentive stock options.
Effective
June 30, 2006 the board of directors authorized the granting to the Company’s
CFO warrants to acquire 80,000 shares of common stock at $3.25 per share with a
five year term. This warrant was cancelled as part of the CFO’s
termination agreement.
A
schedule of the options and warrants at June 30, 2008 and 2007 is as
follows:
|
|
|
Number
of
|
|
|
|
|
|
|
|
Options
|
|
|
Warrants
|
|
|
Prrice per Share
|
|
|
Outstanding
at
|
July
1, 2006
|
|
|
93,288 |
|
|
|
896,837 |
|
|
$ |
1.50-7.00 |
|
|
|
Granted
|
|
|
74,000 |
|
|
|
611,804 |
|
|
$ |
2.76-4.00 |
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Cancelled
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Expired
|
|
|
(41,412 |
) |
|
|
- |
|
|
$ |
2.00-7.00 |
|
|
Outstanding
at
|
June
30, 2007
|
|
|
125,876 |
|
|
|
1,508,641 |
|
|
$ |
1.50-4.00 |
|
|
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
Exercised
|
|
|
- |
|
|
|
(488,497 |
) |
|
$ |
2.00 |
|
|
|
Cancelled
|
|
|
- |
|
|
|
(80,000 |
) |
|
$ |
3.25 |
|
|
|
Expired
|
|
|
(30,626 |
) |
|
|
(17,951 |
) |
|
$ |
2.00 |
|
|
Outstanding
at
|
June
30, 2008
|
|
|
95,250 |
|
|
|
922,193 |
|
|
$ |
1.50-4.00 |
|
16. Related Party
Transactions
In March
2006, the Company obtained a Note Payable from a bank in the amount of
$1,940,000. Riverview Financial Corporation (Riverview), a wholly
owned affiliate of the Company’s CEO, was the guarantor on this note payable and
received a fee of 3% of the outstanding balance of the note payable as
consideration for the guarantee. In March 2007 the Company set aside cash in a
certificate of deposit to secure the note payable thus releasing Riverview
Financial Corp as guarantor. See note 9.
The
Company had a revolving Line of Credit with Riverview to cover short term cash
needs pursuant to a promissory note payable. The credit facility had
a maximum draw amount of $800,000 and bore interest at 12% with a fee for
advances. Repayments were made as funds were available, with a due
date of June 15, 2007. The revolving line of credit had no activity
in Fiscal Year 2007 and upon expiration was not renewed. See note
7.
17. Change in Accounting
Principle for Registration Payment Arrangements
In
December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position on Emerging Issues Task Force (“EITF”) No. 00−19−2, Accounting
for Registration Payment Arrangements (“FSP EITF 00−19−2”). FSP EITF 00−19−2
provides that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement should be
separately recognized and measured in accordance with Statement of Financial
Accounting Standards No. 5, Accounting for Contingencies, which provides that
loss contingencies should be recognized as liabilities if they are probable and
reasonably estimable. Subsequent to the adoption of FSP EITF 00−19−2,
any changes in the carrying amount of the contingent liability will result in a
gain or loss that will be recognized in the consolidated statement of operations
in the period the changes occur. The guidance in FSP EITF 00−19−2 is
effective immediately for registration payment arrangements and the financial
instruments subject to those arrangements that are entered into or modified
subsequent to the date of issuance of FSP EITF 00−19−2. For
registration payment arrangements and financial instruments subject to those
arrangements that were entered into prior to the issuance of FSP EITF 00−19−2,
this guidance is effective for our consolidated financial statements issued for
the interim period beginning January 1, 2007.
On
January 1, 2007, the Company adopted the provisions of FSP EITF 00−19−2 to
account for the registration payment arrangement associated with the Company’s
Offering and the Placement Agent warrants to purchase up to 181,818 shares of
the Company’s common stock. As of January 1, 2007 and March 31, 2007, management
determined that it was not probable that the Company would have any payment
obligation under the Registration Payment Arrangement; therefore, no accrual for
contingent obligation is required under the provisions of FSP EITF
00−19−2. Accordingly, the derivative liability account was
eliminated. $400,839 was recorded as a cumulative-effect change in
accounting principle against opening accumulated deficit. The
cumulative-effect adjustment was not recorded in the consolidated statement of
operations and prior periods were not adjusted.
18. Registration Payment
Obligation
In
connection with registration rights agreements entered into with the sale of
Common Stock in June 2006 and Series A Convertible Preferred Stock and warrants
in June 2007, the Company may be obligated to pay liquidated damages if it fails
to maintain the availability of the respective registration statements declared
effective in January 2007 and August 2007, respectively and the inability of the
Company to effectively complete and maintain the registration statements. The
liquidated damages are computed as two percent (2%) of the aggregate Original
Issue Price for each thirty (30) day period after a grace period of 45
days.
|
|
·
|
The
maximum contingent obligation under the June 2006 agreement, based on an
24% annual rate, is approximately $100,000 per month. This contingent
obligation reduces pro rata as registrable shares are sold by investors or
become eligible for sale under SEC Rule 144(k) without registration and
all contingent obligations terminate in June
2008.
|
|
|
·
|
The
maximum contingent obligation under the June 2007 agreement, based on a
24% annual rate, is approximately $116,800 per month, subject to maximum
liquidated damages of 12% or $700,800. The contingent obligation is
reduced pro rata as registrable shares are sold by investors and is
expected to terminate in June 2009 when the registrable shares may be sold
without registration under Rule
144(k)
|
Liquidated
damages are payable in cash. The company does not anticipate incurring such
damages.
19. Recent Accounting
Pronouncements
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”, and SFAS No. 160, “Non-controlling Interests in Consolidated
Financial Statements, an amendment of Accounting Research Bulletin No.
51.” SFAS No. 141R will change how business acquisitions are accounted for
and will impact financial statements both on the acquisition date and in
subsequent periods. SFAS No. 160 will change the accounting and reporting
for minority interests, which will be recharacterized as non-controlling
interests and classified as a component of equity. SFAS No. 141R and SFAS
No. 160 are effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Early adoption is not
permitted. The Company does not expect the adoption of these new standards
to have an impact on its financial statements.
In June
2007, the EITF reached a consensus on EITF Issue No. 07-03, “Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities” ("EITF 07-03"). EITF 07-03 concludes that
non-refundable advance payments for future research and development activities
should be deferred and capitalized until the goods have been delivered or the
related services have been performed. If an entity does not expect the goods to
be delivered or services to be rendered, the capitalized advance payment should
be charged to expense. This consensus is effective for financial statements
issued for fiscal years beginning after December 15, 2007, and interim
periods within those fiscal years. Earlier adoption is not permitted. The effect
of applying the consensus will be prospective for new contracts entered into on
or after that date. We are evaluating the implications of this
standard.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements",
which addresses how companies should measure fair value when they are required
to use a fair value measure for recognition or disclosure purposes under
U.S. generally accepted accounting principles. SFAS No. 157 is
effective for fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact SFAS No. 157 will have on the Company's
financial position, results of operations and liquidity and its related
disclosures.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("FAS 159"). SFAS No. 159
allows companies to make an election, on an individual instrument basis, to
report financial assets and liabilities at fair value. The election must be made
at the inception of a transaction and may not be reversed. The election may also
be made for existing financial assets and liabilities at the time of adoption.
Unrealized gains and losses on assets or liabilities for which the fair value
option has been elected are to be reported in earnings. SFAS No. 159
requires additional disclosures for instruments for which the election has been
made, including a description of management's reasons for making the election.
SFAS No. 159 is effective as of fiscal years beginning after
November 15, 2007 and is to be adopted prospectively and concurrent with
the adoption of SFAS No. 157. The Company is currently evaluating the
impact SFAS No. 159 will have on the Company's financial position, results
of operations and liquidity and its related disclosures.
20. Subsequent
Events
In July,
2008, a note payable to a bank in the amount of 1.940 million was retired with
restricted cash.
On August
28, 2008, the Company entered into two Stock Purchase Agreements (the “Purchase
Transaction”) relating to the acquisition by the Company of shares
of Series E Preferred Stock from existing stockholders of Prescient
Applied Intelligence, Inc., a Delaware corporation (“Prescient”) (the “Series E
Preferred Stock”) in exchange for cash.
As a
result of the Purchase Transaction, the Company now owns approximately 43% of
Prescient’s Series E Preferred Stock. The Purchase Transaction was consummated
contemporaneously with the execution of an Agreement and Plan of Merger (“Merger
Transaction”), pursuant to which the Company intends to merge Prescient with and
into a wholly-owned subsidiary of the Company. The Merger Transaction
provides that Prescient stockholders not parties to the Purchase Transaction
will receive cash for their shares of Prescient Common Stock, Series E Preferred
Stock and Series G Preferred Stock upon consummation of the merger
(“Merger”).
In
connection with the Purchase Transaction, the sellers of the Series E
Preferred Stock also entered into Lockup and Voting Agreements whereby they,
subject to certain limited exceptions, agreed (i) not to transfer any of their
shares of Prescient Common Stock or Series G Preferred Stock prior to completion
or termination of the Merger and (ii) to vote their shares of Prescient
Common Stock and Series G Preferred Stock in favor of the Merger.
Forms of
the Agreement and Plan of Merger, Stock Purchase Agreements and Lockup and
Voting Agreements have been filed together with form 8-K on September 3,
2008.
On
September 2, 2008, Park City Group, Inc. (the “Company”) executed and delivered
three promissory notes in an aggregate amount of $2,200,000. Each of
such notes is unsecured, due on or before December 1, 2008 and bears interest at
the rate of 10% per annum.
The loan
proceeds were used by the Company to fund a portion of the purchase price of
shares of Series E Preferred Stock of Prescient Applied Intelligence, Inc.,
a Delaware corporation (“Prescient”) purchased by the Company. The purchase
transaction was the first step in a plan to acquire Prescient in a merger
transaction. The purchase transaction and the merger transaction are
described in a Form 8-K filed by the Company on September 3, 2008 and a Schedule
13D filed by the Company with the Securities and Exchange Commission on
September 15, 2008.
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