Net cash provided by operating activities is summarized as follows:
| | | Six Months Ended December 31, | |
| | | 2015 | | | 2014 | |
| | | | ) | | | | ) |
Noncash expense and income, net | | | | | | | | |
Net changes in operating assets and liabilities | | | | ) | | | | ) |
| | | | | | | | | |
| | Three Months Ended September 30, |
| | | |
| Net income (loss) | $614,453 | $(407,292) |
| Noncash expense and income, net | 436,335 | 424,507 |
| Net changes in operating assets and liabilities | (1,172,497) | (168,519) |
| | $(121,709) | $(151,304) |
Noncash expense decreasedincreased by $942,298 $11,828 in the sixthree months ended December 31, 2015September 30, 2016 compared to December 31, 2014.September 30, 2015. Noncash expense decreasedincreased as a result of a $765,000$47,000 increase in bad debt expense, offset by a $23,000 decrease in stock compensation expense an $118,000and a $13,000 decrease in depreciation and amortization expense, and a decrease of $58,500 in bad debt expense.
Net Cash Flows fromused in Investing Activities
| | | Six Months Ended December 31, | | | Variance | |
| | | 2015 | | | 2014 | | | Dollars | | | Percent | |
Cash used in investing activities | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | |
| | 2016 | 2015 | | |
| Cash used in investing activities | $(15,800) | $(4,657,622) | $4,641,822 | 100% |
Net cash used in investing activities for the sixthree months ended December 31, 2015September 30, 2016 was $4,105,287$15,800 compared to net cash used in investing activities of $1,408,625$4,657,622 for the sixthree months ended December 31, 2014.September 30, 2015. This $2,696,662 increase$4,641,822 decrease in cash used in investing activities for the sixthree months ended December 31, 2015 when compared to the same period in 2014 was the result of funds used to purchase short-term marketable securities. This increase was partially offset by funds loaned to ReposiTrak during the period ended December 31, 2014, which were eliminatedSeptember 30, 2016 is due to the acquisitionCompany’s purchase of ReposiTrak and consolidationshort-term marketable securities in the 2015 period.
Net Cash Flows from Financing Activities
| | | Six Months Ended December 31, | | | Variance | |
| | | 2015 | | | 2014 | | | Dollars | | Percent | |
Cash provided (used in) by financing activities | | | | | | | | ) | | | | | | |
| | | |
| | | | |
| | | | | |
| Cash provided by financing activities | $79,762 | $40,438 | $39,324 | 97% |
Net cash provided by financing activities totaled $8,481$79,762 for the sixthree months ended December 31, 2015September 30, 2016 as compared to cash flows used inprovided by financing activities of $195,775$40,438 for the sixthree months ended December 31, 2014.September 30, 2015. The changeincrease in net cash related toprovided by financing activities is primarily attributable to a decreasecash from the exercise of warrants and an increase in cash provided by employee stock plans, partially offset by an increase in payments on notes payable and a decrease in dividends paid in cash.payable. The Company has the option to pay quarterly preferred dividends in kind and has made this election for each quarter beginning with the six monthsquarter ended December 31, 2015.
Working Capital
At December 31, 2015,September 30, 2016, the Company had working capital of $6,191,290$9,148,575 when compared with working capital of $5,032,139$7,845,826 at June 30, 2015.2016. This $1,159,151$1,302,749 increase in working capital is principally due to a decreasean increase of $1,108,000 in accounts receivable, and decreases of $218,000 in accrued liabilities partially offset by increases and $77,000 in accounts receivable and deferred revenue. While no assurances can be given, management currently believes that the Company will increase its working capital position in subsequent periods, and thereby reduce its indebtedness utilizing existing cash resources and projected cash flow from operations.
| | | | |
| | | 2015
| | |
| Current assets | $16,361,236 | $15,384,631 | $976,605 | 6% |
| | | As of December 31, | | | As of June 30, | | | Variance | |
| | | 2015 | | | 2015 | | | Dollars | | | Percent | |
| | | | | | | | | | | | | | | | |
Current assets as of December 31, 2015September 30, 2016 totaled $14,287,601,$16,361,236, an increase of $858,011$976,605 when compared to $13,429,590$15,384,631 as of June 30, 2015.2016. The increase in current assets is attributable to an increase in accounts receivable.
| | | As of December 31, | | | As of June 30, | | | Variance | |
| | | 2015 | | | 2015 | | | Dollars | | | Percent | |
| | | | | | | | | | | | | | | | |
| | | | |
| | | | | |
| Current liabilities | $7,212,661 | $7,538,805 | $326,144 | 4% |
Current liabilities totaled $8,096,311$7,212,661 as of December 31, 2015September 30, 2016 as compared to $8,397,451$7,538,805 as of June 30, 2015.2016. The $301,140$326,144 comparative decrease in current liabilities is principally due to a decrease in accrued liabilities. This decrease was partially offset by an increase inliabilities and deferred revenue.
While no assurances can be given, management currently intends to continue to reduce its indebtedness in subsequent periods utilizing existing cash resources and projected cash flow from operations. In addition, management may also continue to pay down, pay off or refinance certain of the Company’s indebtedness. Management believes that these initiatives will enable us to address our debt service requirements during the next twelve months without negatively impacting our working capital, as well as fund our currently anticipated operations and capital spending requirements.
Off-Balance Sheet Arrangements
The Company does not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operation, liquidity or capital expenditures.
Recent Accounting Pronouncements
In September 2015,August 2016, the FASB issued ASU 2015-16, Business Combinations2016-15, Statement of Cash Flows (Topic 805)230): Simplifying the Accounting for Measurement-Period Adjustments. This update, which is partClassification of the FASB’s larger Simplification Initiative project aimed at reducing the costCertain Cash Receipts and complexity ofCash Payments. Historically, there has been a diversity in practice in how certain areas of the accounting codification, requires that an acquirer recognize adjustments to provisional amounts identified during the measurement periodcash receipts/payments are presented and classified in the reporting periodstatement of cash flows under Topic 230. To reduce the existing diversity in which the adjustment amountspractice, this update addresses multiple cash flow issues. The amendments in this update are determined. Furthermore, the acquirer should record in the same period’s financial statements, the effect on earnings from any changes in depreciation, amortization, or other items impacting income. These changes resulting from adjustments to provisional amounts should be calculated as if the accounting had been completed at the actual acquisition date. Lastly, the update requires the acquirer to present separately on the face of the income statement or in the footnote disclosures the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the actual acquisition date. This update is effective for fiscal years beginning after December 15, 2016. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application2017, and interim periods within those fiscal years. Early adoption is permitted. The Company notes that this guidance does applyapplies to its reporting requirements and will implement the new guidance accordingly.
In May 2014, August 2015, April 2016 and May 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2015-14,2014-09 (ASC Topic 606), Revenue from Contracts with Customers, (TopicASU 2015-14 (ASC Topic 606): Revenue from Contracts with Customers, Deferral of the Effective Date. This update was issuedDate, ASU 2016-10 (ASC Topic 606) Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing , and ASU 2016-12 (ASC Topic 606) Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients, respectively. ASC Topic 606 outlines a single comprehensive model for entities to use in responseaccounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. It also requires entities to feedback from preparers, practitioners,disclose both quantitative and users ofqualitative information that enable financial statements users to seeunderstand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective date of the new guidance on revenue recognition delayed in order to allow a smoother transition. This update pushes the effective date for the new guidance backfiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted for public entities, certain not-for-profit entities, and certain employee benefit plans to annual reporting periods beginning after December 15, 2017, along2016. This standard may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company is in the process of assessing the impact, if any, interim reporting periodson its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09 (ASC Topic 718), Stock Compensation—Improvements to Employee Share-Based Payment Accounting. The amendments in that same period. All other entities will be requiredthis ASU are intended to implementsimplify several areas of accounting for share-based compensation arrangements, including the new guidance to reportingincome tax consequences, classification on the consolidated statement of cash flows and treatment of forfeitures. The amendments in this ASU are effective for annual periods beginning after December 15, 20182016, and interim reporting periods within those annual reporting periodsperiods. Early adoption is permitted. The Company is in the process of assessing the impact, if any, of this ASU on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 (ASC Topic 842), Leases. The ASU amends a number of aspects of lease accounting, including requiring lessees to recognize operating leases with a term greater than one year on their balance sheet as a right-of-use asset and corresponding lease liability, measured at the present value of the lease payments. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019.2018, including interim periods within those fiscal years. Early adoption is permitted. The Company notes that this guidance does apply to its reporting requirements and will implement the new guidance accordingly; however, due to the extensive nature of the new revenue recognition standard, the Company is evaluating the impact this new guidance will have on its financials.
In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This Update clarifies the accounting for equity awards in which the performance target (i.e. an initial public offering) could be achieved after the requisite service period. The guidance requires a performance target that affects vesting and that could be achieved after the service period be treated as a performance condition and not be reflected in the fair valueprocess of assessing the award. Therefore, the compensation costs will begin to be recognized when it becomes probable that the performance target will be achieved. If the requisite service period is complete, the entire amount of compensation costs should be recognized at that time. This Update is effective for reporting periods beginning after December 15, 2015. The Company currently does not have any stock-based awards meeting the criteria noted so the Company doesn’t expect this Update to have a significant impact on its financials. However, it will evaluate new grants and ensure the guidance is followed if these types of grants are made.
consolidated financial statements.
Critical Accounting Policies
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses the Company’s financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.
We commenced operations in the software development and professional services business during 1990. The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions. Management bases its estimates and judgments on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, will affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.
Income Taxes
In determining the carrying value of the Company’s net deferred income tax assets, the Company must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets. If these estimates and assumptions change in the future, the Company may record a reduction in the valuation allowance, resulting in an income tax benefit in the Company’s statements of operations. Management evaluates whether or not to realize the deferred income tax assets and assesses the valuation allowance quarterly.
Revenue Recognition
We recognize revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement, (ii) the service has been provided to the customer, (iii) the collection of our fees is probable and (iv) the amount of fees to be paid by the customer is fixed or determinable.
We recognize subscription revenue ratably over the length of the agreement beginning on the commencement dates of each agreement or when revenue recognition conditions are satisfied. For a fee, subscriptions provide the customer with access to the software and data over the Internet, or on demand, and provide technical support services and software upgrades when and if available. Under subscriptions, customers do not have the right to take possession of the software and such arrangements are considered service contracts. Accordingly, we recognize subscription revenue ratably over the length of the agreement and professional services are recognized as incurred based on their relative fair values. In situations where we have contractually committed to an individual customer specific technology, we defer all of the revenue for that customer until the technology is delivered and accepted. Once delivery occurs, we then recognize the revenue ratably over the remaining contract term. When subscription service is paid in advance, deferred revenue is recognized and revenue is recorded ratably over the term as services are consumed.
Set up fees paid by customers in connection with subscription services are deferred and recognized ratably over the life of the applicable agreement.
Hosting, premium support and maintenance service revenue is derived from services beyond the basic services provided in standard arrangements. We recognize hosting, premium service and maintenance revenue ratably over the contract terms beginning on the commencement dates of each contact or when revenue recognition conditions are satisfied. In instances where hosting, premium support or maintenance service is paid in advance, deferred revenue is recognized and revenue is recording ratably over the term as services are consumed.
We also sell software licenses. For software license sales, we recognize revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement, (ii) the service has been provided to the customer, (iii) the collection of our fees is probable and (iv) the amount of fees to be paid by the customer is fixed or determinable. Licenses generally include multiple elements that are delivered up front or over time. Vendor specific objective evidence of fair value of the hosting and support elements is based on the price charged at renewal when sold separately, and the license element is recognized into revenue upon delivery. The hosting and support elements are recognized ratably over the contractual term.
Stock-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company records compensation expense on a straight-line basis. The fair value of options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate.
Goodwill and Other Long-Lived AssetsAsset Valuations
Goodwill is assigned to specific reporting units and is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit's carrying amount is greater than its fair value. Management reviews the long-lived tangible and intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Management evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair market value of the long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as circumstances dictate.
Revenue Recognition
We recognize revenue when all of the following conditions are satisfied: (i) there is persuasive evidence of an arrangement, (ii) the service has been provided to the customer, (iii) the collection of our fees is probable, and (iv) the amount of fees to be paid by the customer is fixed or determinable.
We recognize subscription, hosting, premium support, and maintenance revenue ratably over the length of the agreement beginning on the commencement dates of each agreement or when revenue recognition conditions are satisfied. Revenue from license and professional services agreements are recognized as delivered.
Amounts that have been invoiced are recorded in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Agreements with multiple deliverables such as subscriptions, support, and professional services, are accounted for separately if the deliverables have standalone value upon delivery. Subscription services have standalone value as the services are typically sold separately. When considering whether professional services have standalone value, the Company considers the following factors: (i) availability of services from other vendors, (ii) the nature and timing of professional services, and (iii) sales of similar services sold separately. Multiple deliverable arrangements are separated into units of accounting and the total contract consideration is allocated to each unit based on relative selling prices.
Stock-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company records compensation expense on a straight-line basis. The fair value of options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate.
Our business is currently conducted principally in the United States. As a result, our financial results are not affected by factors such as changes in foreign currency exchange rates or economic conditions in foreign markets. We do not engage in hedging transactions to reduce our exposure to changes in currency exchange rates, although if the geographical scope of our business broadens, we may do so in the future.
Our exposure to risk for changes in interest rates relates primarily to our investments in short-term financial instruments. Investments in both fixed rate and floating rate interest earning instruments carry some interest rate risk. The fair value of fixed rate securities may fall due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Partly as a result of this, our future interest income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that have fallen in estimated fair value due to changes in interest rates. However, as substantially all of our cash consist of bank deposits and short-term money market instruments, we do not expect any material change with respect to our net income as a result of an interest rate change.
Our exposure to interest rate changes related to borrowing has been limited, and we believe the effect, if any, of near-term changes in interest rates on our financial position, results of operations and cash flows should not be material. At December 31, 2015,September 30, 2016, the debt portfolio was composed of approximately 92%79% variable-rate debt and 8%21% fixed-rate debt.
| | | December 31, | | | | | |
| | | 2015 (unaudited) | | Percent of Total Debt | | | |
| | | | | | | $663,871 | 21% |
| | | | | | | | 2,500,000 | 79% |
| | | | | | | | $3,163,871 | 100% |
The table that follows presents fair values of principal amounts and weighted average interest rates for our investment portfolio as of December 31, 2015:September 30, 2016:
| Cash: | | Aggregate Fair Value | | Weighted Average Interest Rate | | | Weighted Average Interest Rate
|
| | | | | | | $11,385,641 | 0.2% |
Short-Term Marketable Securities | | | | | | | |
ITEM 4. CONTROLS AND PROCEDURES (a)
Evaluation of disclosure controls and procedures.Under the supervision and with the participation of our Management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of September 30, 2016. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, including to ensure that information required to be disclosed by the Company is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b)
Changes in internal controls over financial reporting.The Company’s Chief Executive Officer and Chief Financial Officer have determined that there have been no changes, in the Company’s internal control over financial reporting during the period covered by this report identified in connection with the evaluation described in the above paragraph that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
OTHER INFORMATION
We are, from time to time, involved in various legal proceedings incidental to the conduct of our business. Historically, the outcome of all such legal proceedings has not, in the aggregate, had a material adverse effect on our business, financial condition, results of operations or liquidity. There are currently no pending or threatened material legal proceedings at this time.that, in the opinion of management, could have a material adverse effect on our business or financial condition.
An investment in our common stock is subject to many risks. You should carefully consider the risks described below, together with all of the other information included in this Quarterly Report on Form 10-Q, including the financial statements and the related notes, before you decide whether to invest in our common stock. Our business, operating results and financial condition could be harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks, and you could lose all or part of your investment.
Risks Related to the Company
The Company has incurred losses in the past and there can be no assurance that the Company will operate profitably in the future.
The Company had net income of $281,183 for the quarter ended December 31, 2015, compared to a net loss of $540,876 for the same period ended December 31, 2014. Although the Company recorded net income during the quarter ended December 31, 2015, there can beThere are no assurance that the Company will reliably or consistently operate profitably in future periods. If the Company does not operate profitably in the future, the Company’s current cash resources will be used to fund the Company’s operating losses. Continued losses would have an adverse effect on the long-term value of the Company’s common stock and any investment in the Company. The Company cannot give any assurance that the Company will continue to generate revenue or have sustainable profits.
Although the Company’s cash resources are currently sufficient, the Company’s long-term liquidity and capital requirements may be difficult to predict, which may adversely affect the Company’s long-term cash position.
Historically, the Company has been successful in raising capital when necessary, including stock issuances and securing loans from its officers and directors, including its Chief Executive Officer and majority stockholder, in order to pay its indebtedness and fund its operations, in addition to cash flow from operations. The Company anticipates that it will have adequate cash resources to fund its operations and satisfy its debt obligations for at least the next 12 months, if not longer.
If the Company is required to seek additional financing in the future in order to fund its operations, retire its indebtedness and otherwise carry out its business plan, there can be no assurance that such financing will be available on acceptable terms, or at all, and there can be no assurance that any such arrangement, if required or otherwise sought, would be available on terms deemed to be commercially acceptable and in the Company’s best interests.
The Company faces risks associated with the acquisition of ReposiTrak.
Our recent acquisition of ReposiTrak may not achieve expected returns and other benefits as a result of variousrisk factors including adoption by food retailers and suppliers of ReposiTrak’s track and trace solution that enables traceability as products and their ingredients move between trading partners, as well as compliance with the Food Safety Modernization Act (“FSMA”). In addition, the first installations of ReposiTrak(TM) began in August 2012, and market and product data related to these implementations is still being analyzed. In the event the results fail to meet anticipated results, the market for ReposiTrak’s services may not materialize as currently anticipated.
The Company faces risks associated with new product introductions, including ReposiTrak.
The Company continually receives and analyzes market and product data on products being developed by the Company, and the Company may endeavor to develop and commercialize new product offerings based on this data. The following risks apply to potential new product offerings, including ReposiTrak:
| · | it may be difficult for the Company to predict the amount of service and technological resources that will be needed by customers of ReposiTrakTM or other new offerings, and if the Company underestimates the necessary resources, the quality of its service will be negatively impacted thereby undermining the value of the product to the customer;
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| · | the Company lacks experience with ReposiTrakTM and the market acceptance to accurately predict if it will be a profitable product;
|
| · | technological issues between the Company and customers may be experienced in capturing data, and these technological issues may result in unforeseen conflicts or technological setbacks when implementing additional installations of ReposiTrakTM. This may result in material delays and even result in a termination of the ReposiTrakTM engagement;
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| · | the customer’s experience with ReposiTrakTM and other new offerings, if negative, may prevent the Company from having an opportunity to sell additional products and services to that customer;
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| · | if customers do not use ReposiTrakTM as the Company recommends and fails to implement any needed corrective action(s), it is unlikely that customers will experience the business benefits from the software and may therefore be hesitant to continue the engagement as well as acquire any additional software products from the Company; and
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| · | delays in proceeding with the implementation of ReposiTrakTM or other new products for a new customer will negatively affect the Company’s cash flow and its ability to predict cash flow.
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Quarterly and annual operating results may fluctuate, which makes it difficult to predict future performance.
Management expects a significant portion of the Company’s revenue stream to come from the sale of subscriptions, and to a lesser extent, license sales, maintenance and services charged to new customers. These amounts will fluctuate because predicting future sales is difficult and involves speculation. In addition, the Company may potentially experience significant fluctuations in future operating results caused by a variety of factors, many of which are outside of its control, including:
| · | our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers' requirements; |
| · | the renewal rates for our service; |
| · | the amount and timing of operating costs and capital expenditures related to the operations and expansion of our business; |
| · | changes in our pricing policies whether initiated by us or as a result of competition; |
| · | the cost, timing and management effort for the introduction of new features to our service; |
| · | the rate of expansion and productivity of our sales force; |
| · | new product and service introductions by our competitors; |
| · | variations in the revenue mix of editions or versions of our service; |
| · | technical difficulties or interruptions in our service; |
| · | general economic conditions that may adversely affect either our customers' ability or willingness to purchase additional subscriptions or upgrade their service, or delay a prospective customers' purchasing decision, or reduce the value of new subscription contracts or affect renewal rates; |
| · | timing of additional investments in our enterprise cloud computing application and platform services and in our consulting service; |
| · | regulatory compliance costs; |
| · | the timing of customer payments and payment defaults by customers; |
| · | extraordinary expenses such as litigation or other dispute-related settlement payments; |
| · | the impact of new accounting pronouncements; and |
| · | the timing of stock awards to employees and the related financial statement impact. |
Future operating results may fluctuate because of the foregoing factors, making it difficult to predict operating results. Period-to-period comparisons of operating results are not necessarily meaningful and should not be relied upon as an indicator of future performance. In addition, a relatively large portion of the Company’s expenses will be fixed in the short-term, particularly with respect to facilities and personnel. Therefore, future operating results will be particularly sensitive to fluctuations in revenue because of these and other short-term fixed costs.
The Company will need to effectively manage its growth in order to achieve and sustain profitability. The Company’s failure to manage growth effectively could reduce its sales growth and result in continued net losses.
To achieve continual and consistent profitable operations on a fiscal year on-going basis, the Company must have significant growth in its revenue from its products and services, specifically subscription-based services. If the Company is able to achieve significant growth in future subscription sales, and expands the scope of its operations, the Company’s management, financial condition, operational capabilities, and procedures and controls could be strained. The Company cannot be certain that its existing or any additional capabilities, procedures, systems, or controls will be adequate to support the Company’s operations. The Company may not be able to design, implement or improve its capabilities, procedures, systems or controls in a timely and cost-effective manner. Failure to implement, improve and expand the Company’s capabilities, procedures, systems or controls in an efficient and timely manner could reduce the Company’s sales growth and result in a reduction of profitability or increase of net losses.
The Company’s officers and directors have significant control over it, which may lead to conflicts with other stockholders over corporate governance.
The Company’s officers and directors, including our Chief Executive Officer, Randall K. Fields, control approximately 33% of the Company’s common stock. Mr. Fields, individually, controls 27% of the Company’s common stock. Consequently, Mr. Fields individually, and the Company’s officers and directors, as stockholders acting together, are able to significantly influence all matters requiring approval by the Company’s stockholders, including the election of directors and significant corporate transactions, such as mergers or other business combination transactions.
The Company’s corporate charter contains authorized, unissued “blank check” preferred stock issuable without stockholder approval with the effect of diluting then current stockholder interests.
The Company’s certificate of incorporation currently authorizes the issuance of up to 30,000,000 shares of ‘blank check’ preferred stock with designations, rights, and preferences as may be determined from time to time by the Company’s Board of Directors. As of December 31, 2015, a total of 625,375 shares of Series B Preferred and 94,200 of Series B-1 Preferred were issued and outstanding. The Company’s board of directors is empowered, without stockholder approval, to issue one or more additional series of preferred stock with dividend, liquidation, conversion, voting, or other rights that could dilute the interest of, or impair the voting power of, the Company’s common stockholders. The issuance of an additional series of preferred stock could be used as a method of discouraging, delaying or preventing a change in control.
Because the Company has never paid dividends on its common stock, investors should exercise caution before making an investment in the Company.
The Company has never paid dividends on its common stock and does not anticipate the declaration of any dividends pertaining to its common stock in the foreseeable future. The Company intends to retain earnings, if any, to finance the development and expansion of the Company’s business. The Company’s board of directors will determine future dividend policy at their sole discretion and future dividends will be contingent upon future earnings, if any, obligations of the stock issued, the Company’s financial condition, capital requirements, general business conditions and other factors. Future dividends may also be affected by covenants contained in loan or other financing documents, which may be executedidentified 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 essentialaddition to the Company’s operations. Accordingly, an investor must relyrisk factors previously disclosed in Part I, Item 1A, “Risk Factors” in our Annual Report on Mr. Fields’ management decisions that will continue to control the Company’s business affairs. The Company currently maintains key man insurance on Mr. Fields’ life in the amount of $5,000,000; however, that coverage would be inadequate to compensateForm 10-K for the loss of his services. The loss of the services of Mr. Fields would have a materially adverse effect upon the Company’s business.
If the Company is unable to attract and retain qualified personnel, the Company may be unable to develop, retain or expand the staff necessary to support its operational business needs.
The Company’s current and future success depends on its ability to identify, attract, hire, train, retain and motivate various employees, including skilled software development, technical, managerial, sales, marketing and customer service personnel. Competition for such employees is intense and the Company may be unable to attract or retain such professionals. If the Company fails to attract and retain these professionals, the Company’s revenue and expansion plans may be negatively impacted.
The Company’s officers and directors have limited liability and indemnification rights under the Company’s organizational documents, which may impact its results.
The Company’s officers and directors are required to exercise good faith and high integrity in the management of the Company’s affairs. The Company’s certificate of incorporation and bylaws, however, provide, that the officers and directors shall have no liability to the stockholders for losses sustained or liabilities incurred which arise from any transaction in their respective managerial capacities unless they violated their duty of loyalty, did not act in good faith, engaged in intentional misconduct or knowingly violated the law, approved an improper dividend or stock repurchase or derived an improper benefit from the transaction. As a result, an investor may have a more limited right to action than he would have had if such a provision were not present. The Company’s certificate of incorporation and bylaws also require it to indemnify the Company’s officers and directors against any losses or liabilities they may incur as a result of the manner in which they operate the Company’s business or conduct the Company’s internal affairs, provided that the officers and directors reasonably believe such actions to be in, or not opposed to, the Company’s best interests, and their conduct does not constitute gross negligence, misconduct or breach of fiduciary obligations.
Business Operations Risks
If the Company’s marketing strategy fails, its revenue and operations will be negatively affected.
The Company plans to concentrate its future sales efforts towards marketing the Company’s applications and services, and specifically to contract with suppliers (“spokes”) to connect to our existing retail customers (“hubs”) previously signed up by the Company. These applications and services are designed to be highly flexible so that they can work in multiple retail and supplier environments such as grocery stores, convenience stores, specialty retail and route-based delivery environments. There is no assurance that the public will accept the Company’s applications and services in proportion to the Company’s increased marketing of this product line, or that the Company will be able to successfully leverage its hubs to increase revenue by connecting suppliers. The Company may face significant competition that may negatively affect demand for its applications and services, including the public’s preference for the Company’s competitors’ new product releases or updates over the Company’s releases or updates. If the Company’s applications and services marketing strategies fail, the Company will need to refocus its marketing strategy toward other product offerings, which could lead to increased development and marketing costs, delayed revenue streams, and otherwise negatively affect the Company’s operations.
Because the Company’s emphasis is on the sale of subscription based services, rather than annual license fees, the Company’s revenue may be negatively affected.
Historically, the Company offered applications and related maintenance contracts to new customers for a one-time, non-recurring up front license fee and provided an option for annually renewing their maintenance agreements. The Company is now principally offering prospective customers monthly subscription based licensing of its products. The Company’s customers may now choose to acquire a license to use the software on an Application Solution Provider basis (also referred to as “ASP”) resulting in monthly charges for use of the Company’s software products and maintenance fees. The Company’s conversion from a strategy of one-time, non-recurring licensing based model to a monthly recurring fees based approach is subject to the following risks:
| · | the Company’s customers may prefer one-time fees rather than monthly fees; and |
| · | there may be a threshold level (number of locations) at which the monthly based fee structure may not be economical to the customer, and a request to convert from monthly fees to an annual fee could occur. |
The Company faces threats from competing and emerging technologies that may affect its profitability.year ended June 30, 2016.
Markets for the Company’s type of software products and that of its competitors are characterized by:
| · | development of new software, software solutions or enhancements that are subject to constant change; |
| · | rapidly evolving technological change; and |
| · | unanticipated changes in customer needs. |
Because these markets are subject to such rapid change, the life cycle of the Company’s products is difficult to predict. As a result, the Company is subject to the following risks:
| · | whether or how the Company will respond to technological changes in a timely or cost-effective manner; |
| · | whether the products or technologies developed by the Company’s competitors will render the Company’s products and services obsolete or shorten the life cycle of the Company’s products and services; and |
| · | whether the Company’s products and services will achieve market acceptance. |
Interruptions or delays in service from our third-party data center hosting facility could impair the delivery of our service and harm our business.
We currently serve our customers from a third-party data center hosting facility located in the United States. Any damage to, or failure of, our systems generally could result in interruptions in our service. As we continue to add capacity, we may move or transfer our data and our customers' data. Despite precautions taken during this process, any unsuccessful data transfers may impair the delivery of our service. Further, any damage to, or failure of, our systems generally could result in interruptions in our service. Interruptions in our service may reduce our revenue, cause us to issue credits or pay penalties, cause customers to terminate their subscriptions and adversely affect our renewal rates and our ability to attract new customers. Our business will also be harmed if our customers and potential customers believe our service is unreliable.
As part of our current disaster recovery arrangements, our production environment and all of our customers' data is currently replicated in near real-time in a separate facility physically located in a different geographic region of the United States. Companies and products added through acquisition may be temporarily served through an alternate facility. We do not control the operation of these facilities, and they are vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunications failures and similar events. They may also be subject to break-ins, sabotage, intentional acts of vandalism and similar misconduct. Despite precautions taken at these facilities, the occurrence of a natural disaster or an act of terrorism, a decision to close the facilities without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in our service. Even with the disaster recovery arrangements, our service could be interrupted.
If our security measures are breached and unauthorized access is obtained to a customer's data, our data or our information technology systems, our service may be perceived as not being secure, customers may curtail or stop using our service and we may incur significant legal and financial exposure and liabilities.
Our service involves the storage and transmission of customers' proprietary information, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. These security measures may be breached as a result of third-party action, including intentional misconduct by computer hackers, employee error, malfeasance or otherwise during transfer of data to additional data centers or at any time, and result in someone obtaining unauthorized access to our customers' data or our data, including our intellectual property and other confidential business information, or our information technology systems. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers' data or our data, including our intellectual property and other confidential business information, or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in a loss of confidence in the security of our service, damage our reputation, disrupt our business, lead to legal liability and negatively impact our future sales.
We cannot accurately predict subscription renewal or upgrade rates and the impact these rates may have on our future revenue and operating results.
Our customers have no obligation to renew their subscriptions for our service after the expiration of their initial subscription period. Our renewal rates may decline or fluctuate as a result of a number of factors, including customer dissatisfaction with our service, customers' ability to continue their operations and spending levels, and deteriorating general economic conditions. If our customers do not renew their subscriptions for our service or reduce the level of service at the time of renewal, our revenue will decline and our business will suffer.
Our future success also depends in part on our ability to sell additional features and services, more subscriptions or enhanced editions of our service to our current customers. This may also require increasingly sophisticated and costly sales efforts that are targeted at senior management. Similarly, the rate at which our customers purchase new or enhanced services depends on a number of factors, including general economic conditions. If our efforts to upsell to our customers are not successful, our business may suffer.
Weakened global economic conditions may adversely affect our industry, business and results of operations.
Our overall performance depends in part on worldwide economic conditions. The United States and other key international economies have experienced in the past a downturn in which economic activity was impacted by falling demand for a variety of goods and services, restricted credit, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets, bankruptcies and overall uncertainty with respect to the economy. These conditions affect the rate of information technology spending and could adversely affect our customers' ability or willingness to purchase our enterprise cloud computing services, delay prospective customers' purchasing decisions, reduce the value or duration of their subscription contracts or affect renewal rates, all of which could adversely affect our operating results.
If the Company is unable to adapt to constantly changing markets and to continue to develop new products and technologies to meet the customers’ needs, the Company’s revenue and profitability will be negatively affected.
The Company’s future revenue is dependent upon the successful and timely development and licensing of new and enhanced versions of its products and potential product offerings suitable to the customer’s needs. If the Company fails to successfully upgrade existing products and develop new products, and those new products do not achieve market acceptance, the Company’s revenue will be negatively impacted.
The Company faces risks associated with the loss of maintenance and other revenue.
The Company has historically experienced the loss of long-term maintenance customers as a result of the reliability of some of its products. Some customers may not see the value in continuing to pay for maintenance that they do not need or use, and in some cases, customers have decided to replace the Company’s applications or maintain the system on their own. The Company continues to focus on these maintenance clients by providing new functionality and enhancements to meet their business needs. The Company also may lose some maintenance revenue due to consolidation of industries, macroeconomic conditions or customer operational difficulties that lead to their reduction of size. In addition, future revenue will be negatively impacted if the Company fails to add new maintenance customers that will make additional purchases of the Company’s products and services.
The Company faces risks associated with proprietary protection of the Company’s software.
The Company’s success depends on the Company’s ability to develop and protect existing and new proprietary technology and intellectual property rights. The Company seeks to protect its software, documentation and other written materials primarily through a combination of patents, trademarks, and copyright laws, trade secret laws, confidentiality procedures and contractual provisions. While the Company has attempted to safeguard and maintain the Company’s proprietary rights, there are no assurances that the Company will be successful in doing so. The Company’s competitors may independently develop or patent technologies that are substantially equivalent or superior to the Company’s.
Despite the Company’s efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company’s products or obtain and use information that the Company regards as proprietary. In some types of situations, the Company may rely in part on ‘shrink wrap’ or ‘point and click’ licenses that are not signed by the end user and, therefore, may be unenforceable under the laws of certain jurisdictions. Policing unauthorized use of the Company’s products is difficult. While the Company is unable to determine the extent to which piracy of the Company’s software exists, software piracy can be expected to be a persistent problem, particularly in foreign countries where the laws may not protect proprietary rights as fully as the United States. The Company can offer no assurance that the Company’s means of protecting its proprietary rights will be adequate or that the Company’s competitors will not reverse engineer or independently develop similar technology.
The Company may discover software errors in its products, errors in the reports generated by its products or errors in advice given by its employees about the products that may result in a loss of revenue, injury to the Company’s reputation or subject us to substantial liability.
Non-conformities or bugs (“errors”) may be found from time to time in the Company’s existing, new or enhanced products after commencement of commercial shipments, resulting in loss of revenue or injury to the Company’s reputation. In the past, the Company has discovered errors in its products and as a result, has experienced delays in the shipment of products. Errors in the Company’s products may be caused by defects in third-party software incorporated into the Company’s products. If so, the Company may not be able to fix these defects without the cooperation of these software providers. Since these defects may not be as significant to the software provider as they are to us, the Company may not receive the rapid cooperation that may be required. The Company may not have the contractual right to access the source code of third-party software, and even if the Company does have access to the code, the Company may not be able to fix the defect. In addition, our customers may use our service in unanticipated ways that may cause a disruption in service for other customers attempting to access their data. Output from the Company’s products could contain errors and advice from Company employees about the Company’s products could contain errors, either of which could lead customers to make incorrect decisions based on that wrong output or advice. Since the Company’s customers use the Company’s products for critical business applications, any errors, defects or other performance problems could hurt the Company’s reputation and may result in damage to the Company’s customers’ business. If that occurs, customers could elect not to renew, delay or withhold payment to us, we could lose future sales or customers may make warranty or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation. These potential scenarios, successful or otherwise, would likely be time consuming and costly.
Some competitors are larger and have greater financial and operational resources that may give them an advantage in the market.
Many of the Company’s competitors are larger and have greater financial and operational resources. This may allow them to offer better pricing terms to customers in the industry, which could result in a loss of potential or current customers or could force us to lower prices. Any of these actions could have a significant effect on revenue. In addition, the competitors may have the ability to devote more financial and operational resources to the development of new technologies that provide improved operating functionality and features to their product and service offerings. If successful, their development efforts could render the Company’s product and service offerings less desirable to customers, again resulting in the loss of customers or a reduction in the price the Company can demand for the Company’s offerings.
Risks Relating to the Company’s Common Stock
The limited public market for the Company’s securities may adversely affect an investor’s ability to liquidate an investment in the Company.
Although the Company’s common stock is currently quoted on the NASDAQ Capital Market, there is limited trading activity. The Company can give no assurance that an active market will develop, or if developed, that it will be sustained. If an investor acquires shares of the Company’s common stock, the investor may not be able to liquidate the Company’s shares should there be a need or desire to do so.
Future issuances of the Company’s shares may lead to future dilution in the value of the Company’s common stock, will lead to a reduction in shareholder voting power and may prevent a change in Company control.
The shares may be substantially diluted due to the following:
| · | issuance of common stock in connection with funding agreements with third parties and future issuances of common and preferred stock by the Board of Directors; and |
| · | the Board of Directors has the power to issue additional shares of common stock and preferred stock and the right to determine the voting, dividend, conversion, liquidation, preferences and other conditions of the shares without shareholder approval. |
Stock issuances may result in reduction of the book value or market price of outstanding shares of common stock. If the Company issues any additional shares of common or preferred stock, proportionate ownership of common stock and voting power will be reduced. Further, any new issuance of common or preferred stock may prevent a change in control or management.
ITEMTEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSNone.
None.
None.
ITEM 5. OTHER INFORMATION
None.
None.
| 10.1 | Fourth AmendedAmendment No. 1 to the Employment Agreement, by and Restated Certificate of Designation of the Relative Rights, Powers and Preferences of the Series B Preferred Stock ofbetween Park City Group, Inc.(, Randall K. Fields and Fields Management, Inc., dated July 1,)
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| 31.1 | First Amended and Restated Certificate of Designation of the Relative Rights, Powers and Preferences of the Series B-1 Preferred Stock of Park City Group, Inc. (1)
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| Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| XBRL Taxonomy Extension Schema |
| XBRL Taxonomy Extension Calculation Linkbase |
| XBRL Taxonomy Extension Definition Linkbase |
| XBRL Taxonomy Extension Label Linkbase |
| XBRL Taxonomy Extension Presentation Linkbase |
(1) | Incorporated by reference from our Current Report on Form 8-K, filed January 14, 2016. |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 8,November 7, 2016 | PARK CITY GROUP, INC. |
| | | |
| | By: | /s/ Randall K. Fields |
| | | Randall K. Fields Chief Executive Officer, Chairman and Director (Principal Executive Officer) |
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Date: February 8,November 7, 2016 | By: | /s/ Todd Mitchell |
| | | Todd Mitchell Chief Financial Officer (Principal Financial Officer & Principal Accounting Officer) |