FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2006
Commission File Number 000-03718
PARK CITY GROUP, INC.
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(Exact name of small business issuer as specified in its charter)
Nevada 37-1454128
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
333 Main Street, P.O. Box 5000; Park City, Utah 84060
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(Address of principal executive offices)
(435) 649-2221
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(Registrant's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. [X] Yes [
] No Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class May 15, 2006
---------------------------- -----------------------
Common Stock, $.01 par value 355,300,496
2,425 shareholders
PARK CITY GROUP, INC.
Table of Contents to Quarterly Report on Form 10-QSB
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Condensed Balance Sheets as of March 31,
2006 (Unaudited) and June 30, 2005 3
Consolidated Condensed Statements of Operations for the
Quarters Ended March 31, 2006 and 2005 (Unaudited) 4
Consolidated Condensed Statements of Cash Flows for the
Quarters Ended March 31, 2006 and 2005 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis or Plan of Operation 10
Item 3 Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits 16
Exhibit 31 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
2
PARK CITY GROUP, INC.
Consolidated Condensed Balance Sheets
Assets March 31, 2006 June 30, 2005
(unaudited)
--------------- ---------------
Current Assets:
Cash $ 40,925 $ 209,670
Receivables, net of allowance $49,304 and $56,000 at March 31, 2006
and June 30, 2005, respectively 913,719 356,339
Prepaid expenses and other current assets 102,595 37,060
--------------- ---------------
Total current assets 1,057,239 603,069
--------------- ---------------
Property and equipment, net of accumulated depreciation of $1,647,823 and
$1,592,079 at March 31, 2006 and June 30, 2005, respectively 98,918 109,512
--------------- ---------------
Other assets:
Deposits and other assets 27,826 25,000
Capitalized software costs, net of accumulated amortization of $930,576 and
$731,167 at March 31, 2006 and June 30, 2005, respectively 132,940 332,349
--------------- ---------------
Total other assets 160,766 357,349
--------------- ---------------
Total assets $ 1,316,923 $ 1,069,930
=============== ===============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable $ 363,576 $ 628,398
Accrued liabilities 310,003 316,706
Deferred revenue 1,007,967 883,425
Current portion of capital lease obligations 19,289 23,159
Lines of credit 100,000 -
Related party payable 206,842 619,743
Related party accrued interest - 848,258
Related party notes payable, net of discount of $12,375 at June 30, 2005 - 332,625
Notes payable, net of discounts of $54,976 at June 30, 2005 - 1,945,024
--------------- ---------------
Total current liabilities 2,007,677 5,597,338
--------------- ---------------
Long-term liabilities
Long-term note payable, net of discount of $106,700 1,833,300 -
Long-term related party note payable, net of discount of $122,992
at June 30, 2005 - 3,173,414
Capital lease obligations, less current portion 8,295 2,127
--------------- ---------------
Total long-term liabilities 1,841,595 3,175,541
--------------- ---------------
Total liabilities 3,849,272 8,772,879
--------------- ---------------
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $0.01 par value, 30,000,000 shares authorized,
none issued - -
Common stock, $0.01 par value, 500,000,000 shares authorized; 354,522,720
and 282,555,885 issued outstanding at March 31, 2006 and June 30, 2005,
respectively 3,545,227 2,825,561
Additional paid-in capital 13,064,366 10,037,693
Accumulated deficit (19,141,942) (20,566,203)
--------------- ---------------
Total stockholders' deficit (2,532,349) (7,702,949)
--------------- ---------------
Total liabilities and stockholders' deficit $ 1,316,923 $ 1,069,930
=============== ===============
See accompanying notes to consolidated condensed financial statements.
3
PARK CITY GROUP, INC.
Consolidated Condensed Statements of Operations (Unaudited)
For the Three and Nine Months Ended March 31, 2006 and 2005
Three Months Ended Nine Months Ended
March 31, March 31,
2006 2005 2006 2005
-------------- --------------- -------------- ---------------
Revenues:
Software licenses $ 573,900 $ 149,760 $ 3,434,927 $ 453,615
Maintenance and support 535,311 531,682 1,750,068 1,793,215
ASP 48,525 28,950 147,675 61,100
Consulting and other 211,952 95,473 849,539 428,674
-------------- --------------- -------------- ---------------
1,369,688 805,865 6,182,209 2,736,604
Cost of revenues 396,976 394,192 1,219,048 1,046,117
-------------- --------------- -------------- ---------------
Gross margin 972,712 411,673 4,963,161 1,690,487
-------------- --------------- -------------- ---------------
Operating expenses:
Research and development 225,180 256,309 684,776 763,159
Sales and marketing 395,055 310,081 988,688 985,804
General and administrative 418,777 377,748 1,048,370 1,356,678
-------------- --------------- -------------- ---------------
Total operating expenses 1,039,012 944,138 2,721,834 3,105,641
-------------- --------------- -------------- ---------------
(Loss) income from operations (66,300) (532,465) 2,241,327 (1,415,154)
Other income (expense):
Interest expense (319,491) (300,517) (817,066) (863,049)
-------------- --------------- -------------- ---------------
(Loss) income before income taxes (385,791) (832,982) 1,424,261 (2,278,203)
(Provision) benefit for income taxes - - - -
-------------- --------------- -------------- ---------------
Net (loss) income $ (385,791) $ (832,982) $ 1,424,261 $ (2,278,203)
============== =============== ============== ===============
Weighted average shares, basic 286,477,000 277,374,000 284,201,000 272,281,000
============== =============== ============== ===============
Weighted average shares, diluted 286,477,000 277,374,000 292,496,000 272,281,000
============== =============== ============== ===============
Basic (loss) income per share $ (0.00) $ (0.00) $ 0.01 $ (0.01)
============== =============== ============== ===============
Diluted (loss) income per share $ (0.00) $ (0.00) $ 0.00 $ (0.01)
============== =============== ============== ===============
See accompanying notes to consolidated condensed financial statements.
4
PARK CITY GROUP, INC.
Consolidated Condensed Statements of Cash Flows (Unaudited)
For the Nine Months Ended March 31, 2006 and 2005
2006 2005
------------------ -------------------
Cash flows from operating activities:
Net income (loss) $ 1,424,261 $ (2,278,203)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 255,152 254,268
Bad debt expense (6,696) 104,417
Stock issued for services and expenses 139,849 508,694
Stock issued for interest 294,334 -
Amortization of discounts on debt 215,093 131,106
(Increase) decrease in:
Trade Receivables (550,681) (48,010)
Prepaids and other assets (68,361) 74,511
(Decrease) increase in:
Accounts payable (264,823) 152,183
Accrued liabilities (6,705) (219,456)
Deferred revenue 124,542 144,529
Related party payable 97,000 -
Accrued interest, related party (848,258) 361,009
------------------ -------------------
Net cash provided by (used in) operating activities 804,707 (814,952)
------------------ -------------------
Cash Flows From Investing Activities:
Purchase of property and equipment (20,445) (32,137)
Proceeds from disposal of property - 3,400
------------------ -------------------
Net cash used in investing activites (20,445) (28,737)
------------------ -------------------
Cash Flows From Financing Activities:
Net (decrease) increase in lines of credit (409,901) 544,815
Proceeds from issuane of stock - 150,000
Payment to extend note (9,000) (9,000)
Proceeds from debt 1,833,300 -
Payments on notes payable and capital leases (2,367,406) (33,007)
------------------ -------------------
Net cash (used in) provided by financing activities (953,007) 652,808
------------------ -------------------
Net decrease in cash (168,745) (190,881)
Cash at beginning of period 209,670 312,817
------------------ -------------------
Cash at end of period $ 40,925 $ 121,936
================== ===================
See accompanying notes to consolidated condensed financial statements.
5
PARK CITY GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2006
Note 1 - Unaudited Financial Statements
The accompanying unaudited financial statements have been prepared in accordance
with U.S. generally accepted accounting principles for quarterly financial
statements, and include all normal, recurring adjustments which in the opinion
of management are necessary in order to make the financial statements not
misleading. Although the Company believes that the disclosures in these
unaudited financial statements are adequate to make the information presented
for the interim periods not misleading, certain information and footnote
information normally included in quarterly financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission, and these financial statements should be read in conjunction with
the Company's audited annual financial statements included in the Company's June
30, 2005 Annual Report on Form 10-KSB.
Note 2 - Liquidity
Cash flow information for the nine months ended March 31, 2006 and March 31,
2005 was as follows:
March 31, March 31,
2006 2005
------------- -------------
Cash, cash equivalents, marketable securities and
long-term marketable securities $ 40,925 $ 121,936
------------- -------------
Net cash provided by operating activities $ 804,707 $ (814,952)
Net cash used in investing activities $ (20,445) $ (28,737)
Net cash provided by financing activities $ (953,007) $ 652,808
------------- -------------
Net increase/decrease in cash and cash equivalents $ (168,745) $ (190,881)
=========== ===========
As shown in the consolidated financial statements, the Company had a loss for
the three months ending March 31, 2006 and incurred a loss for the same quarter
in 2005. The Company did show a profit for the nine months ending March 31, 2006
verses an incurred loss for the same nine months in 2005. Current liabilities
are in excess of current assets at March 31, 2006, however deferred revenues
account for $1,007,967 of the current liabilities. These deferred revenues are
for maintenance fees paid annually by customers but recognized as revenues at a
rate of one-twelve per month. Current liabilities without this category are
slightly less than current assets. The company did generate positive cash flow
from operations during the nine months ended March 31, 2006 and was able to
retire a large amount of current debt. In addition the company converted roughly
3.2 million dollars of debt owed to Riverview Financial Corporation at a rate of
5.2 cents per share, or 66,234,658. In addition the company refinanced
$1,940,000 of short term liabilities with U.S. Bank at a significantly lower
interest rate. In total the company has lowered their expected interest expense
from $1,178,454 in fiscal year 2005 to an estimated $275,000 for the next twelve
months.
The Company believes that cash flows from sales, as well as the ability and
commitment of its majority shareholder to contribute funds necessary to continue
to operate, will allow the Company to fund its currently anticipated working
capital, capital spending and debt service requirements during the year ended
June 30, 2006. The financial statements do not reflect any adjustments should
the Company's operations not be achieved.
Off-Balance Sheet Arrangements.
Off-balance sheet arrangements, as defined by SEC, include certain transactions,
agreements, or other contractual arrangements pursuant to which a company has
any obligation under certain guarantee contracts, certain retained or contingent
interests in assets transferred to an unconsolidated entity, any obligation
under certain derivative investments, or any obligation under a material
variable interest in an unconsolidated entity that provides financing,
liquidity, market risk or credit risk support or engages in leasing, hedging or
research and development services with us.
Currently the company has no Off Balance Sheet Arrangements
6
Note 3 - Stock-Based Compensation
At March 31, 2006 and 2005, the Company has outstanding stock options to certain
of its employees. The Company accounts for these options under the recognition
and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net loss, as all options granted had an exercise price
equal to or greater than the market value of the underlying common stock on the
date of grant. Had compensation cost for the Company's stock option plans been
determined based on fair value consistent with the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income (loss) and
earnings (loss) per share would have been the pro forma amounts indicated below
for the three and nine months ended March 31, 2006 and 2005:
Three Months Ended Nine Months Ended
March 31, March 31,
2006 2005 2006 2005
---- ---- ---- ----
Net Loss available to common shareholders, as reported $ (354,763) $ (832,982) $ 1,460,263 $ (2,278,203)
Add: Stock-based employee compensation expense included in
reported net income, net of related tax effects - - - -
Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all awards,
net of related tax effects. - - (14,325) (14,325)
----------- ----------- ----------- ------------
Net (loss) income - pro forma $ (354,763) $ (832,982) $ 1,445,938 $ (2,292,528)
=========== =========== =========== ============
(Loss) income per share:
Basic - as reported $ (0.00) $ (0.00) $ 0.01 $ (0.01)
=========== =========== =========== ============
Diluted - as reported $ (0.00) $ (0.00) $ 0.00 $ (0.01)
=========== =========== =========== ============
Basic - pro forma $ (0.00) $ (0.00) $ 0.01 $ (0.01)
=========== =========== =========== ============
Diluted - pro forma $ (0.00) $ (0.00) $ 0.00 $ (0.01)
=========== =========== =========== ============
Park City Group has employment agreements with executives. One provision of
these agreements is for a stock bonus. 25% of these bonuses are to be paid on
each of their first four anniversary dates.
Agreement with Vice President of Professional Services, dated effective April
11, 2005 is payable in 500,000 share increments for a total of 2,000,000 shares.
Agreement with Vice President, dated effective December 28, 2005 is payable in
178,572 share increments for a total of 714,288 shares.
Agreement with Director of Marketing, dated effective January 1, 2006 is payable
in 178,572 share increments for a total of 714,288 shares.
Note 4 - Outstanding Stock Options
The following tables summarize information about fixed stock options and
warrants outstanding and exercisable at March 31, 2006:
Number of
Options Warrants Price per Share
------- -------- ---------------
Outstanding and exercisable at June 30, 2005 5,446,512 47,191,500 $0.03-0.14
Granted - - -
Exercised - (2,928,571) $0.04
Called - - -
Cancelled - - -
Expired (254,000) (12,511,905) $0.04-0.07
--------- ------------ ----------
Outstanding and exercisable at March 31, 2006 5,192,512 31,751,024 $0.03-0.14
========= ========== ==========
7
Options and Warrants Outstanding and Exercisable
at March 31, 2006
Weighted
average Weighted
Number remaining average
Range of Outstanding at contractual exercise
exercise prices March 31, 2006 life(years) price
--------------- -------------- ----------- ---------
$0.03 - $0.05 28,443,953 1.90 $ 0.04
$0.07 - $0.08 7,999,583 3.76 0.07
$0.14 500,000 .61 0.14
---------- ---- -------
36,943,536 2.28 $ 0.05
========== ==== =======
Note 5 - Related Party Transactions
In December 2005, the note payable funding from Riverview extended for 12 months
making the new maturity date December 24, 2006. The company issued 225,000
shares valued at $15,750 and $9,000 as consideration for the extension. This
consideration was recorded as a debt discount and will be amortized to interest
expense of the extended term of the note. This note payable was retired in March
2006. See Note 6.
In December 2005, the line of credit the company has with Riverview was
cancelled and reissued in the amount of $800,000. The reissued line of credit
carries an interest rate of 12% with a fee for draws on the line. All other
terms remained the same.
In February 2006, Riverview Financial converted 2,928,571 warrants at $0.04. The
equivalent cash value of $117,143 from this exercise was applied as a reduction
in the principal amount outstanding on the note payable funding from Riverview
reducing the principal balance to $3,179,263. See Note 6.
In March 2006, $3,473,597 of note payable funding and accrued interest from
Riverview Financial Corp. was converted into 66,234,658 shares of Park City
Group's common stock. See Note 6. An additional $1,930,300 of principal and
interest payable to Riverview Financial Corp. was repaid with cash in March 2006
with remaining principal and interest totalling $109,841 repaid subsequently
with cash in April 2006.
Note 6 - Supplemental Cash Flow Information
In connection with the note payable funding from a Shareholder of the Company
issued warrants and issued shares of common stock, which were recorded as a debt
discount. In June 2005 the note payable to the shareholder was extended and
ownership of the note payable was transferred to the shareholders company
Triplenet Investments. As consideration for the extension the Company issued
cash and shares. The fair value of the cash and shares issued in connection with
the extension was recorded as a discount to the note payable and added to the
previous discount to be amortized over the remaining life of the note as
extended. Of the debt discount amounts $54,976 and $79,048 was amortized to
interest expense during the nine months ended March 31, 2006 and 2005,
respectively.
The Triplenet Investments loan was retired in August 2005 with cash generated
from operations. The company did pay a pre-payment penalty fee of $30,000 or one
month interest on the loan.
The fair value of shares issued in connection with the $345,000 note payable
funding from Riverview obtained as a condition of the Whale Investment, Ltd.
Funding as well as the additional shares issued for extension of the due date
were recorded as a discount on the note payable, of which $43,313 and $10,473
was amortized into interest expense during the six months ended March 31, 2006
and 2005, respectively.
The Riverview note payable obtained as a condition of the Whale Investments
funding was retired in March 2006 with cash provided from a financing
transaction with US Bank.
Due to the funding transaction with US Bank the Company was able to repay
$981,149 of accrued interest due to Riverview Financial Corp.
The non-cash conversion of the senior debt with Riverview Financial Corp. on
March 30, 2006 resulted in the issuance of 66,234,658 shares of Park City Group
common stock to retire principal and current year accrued interest of $3,179,263
and $294,334, respectively. The conversion had an effective price of $0.0524 per
share representing fair value of the shares on the date of the conversion.
For the nine months ended March 31, 2006 and 2005 the Company paid cash for
interest expense of $1,028,888 and $350,600, respectively. No cash was paid for
income taxes.
8
Note 7 - Accrued liabilities
Accrued liabilities consist of the following as of March 31, 2006 and June 30,
2005:
3/31/06 6/30/05
------- -------
Accrued payroll $ 131,776 $ 156,300
Accrued vacation 125,155 112,722
Other accrued liabilities 41,405 47,684
Accrued stock compensation 11,667 -
---------- ----------
$ 310,003 $ 316,706
========== ==========
Note 8 - Net Income (Loss) Per Common Share
Basic net income (loss) per common share ("Basic EPS") excludes dilution and is
computed by dividing net income (loss) by the weighted average number of common
shares outstanding during the period. Diluted net income (loss) per common share
("Diluted EPS") reflects the potential dilution that could occur if stock
options or other contracts to issue common stock were exercised or converted
into common stock. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an anti-dilutive effect on net income
(loss) per common share.
For the three months ended March 31, 2006 and 2005 options and warrants to
purchase 36,943,536 and 51,584,500 shares of common stock, respectively, were
not included in the computation of diluted EPS due to the dilutive effect of a
net loss in both periods. The inclusion of the options would have been
anti-dilutive, thereby decreasing net loss per common share.
For the nine months ended March 31, 2006 and 2005 options and warrants to
purchase 8,499,583 and 51,584,500 shares of common stock, respectively, were not
included in the computation of diluted EPS due either to the dilutive effect
from a net loss or a strike price in excess of market price. Using the treasury
stock method 8,295,141 shares were assumed repurchased and added to shares
outstanding for the computation of Diluted EPS for the nine months ended March
31, 2006.
(Balance of page intentionally left blank)
9
Item 2. Management's Discussion and Analysis or Plan of Operation.
Form 10-KSB for the year ended June 30, 2005 incorporated herein by reference.
Forward-Looking Statements
This quarterly report on Form 10-QSB contains forward looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. 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" within the meaning of the Private
Securities Litigation Reform Act of 1995. Actual results could differ materially
from those projected in the forward looking statements as a result of a number
of risks and uncertainties, including those risks factors contained in our Form
10-KSB annual report at June 30, 2005, incorporated herein by reference.
Statements made herein are as of the date of the filing of this Form 10-QSB with
the Securities and Exchange Commission and should not be relied upon as of any
subsequent date. Unless otherwise required by applicable law, we do not
undertake, and specifically disclaim any obligation, to update any
forward-looking statements to reflect occurrences, developments, unanticipated
events or circumstances after the date of such statement.
Overview
Park City Group develops and markets patented computer software and profit
optimization consulting services that help its retail customers to reduce their
inventory and labor costs; the two largest controllable expenses in the retail
industry, while increasing the customer's sales and gross margin. The technology
has its genesis in the operations of Mrs. Fields Cookies co-founded by Randy
Fields, CEO of Park City Group, Inc. Industry leading customers such as The Home
Depot, Victoria's Secret, Limited Brands, Anheuser Busch Entertainment, Del
Monte, WaWa and Tesco Lotus benefit from the Company's software. Park City Group
products, Supply Chain Profit Link, C-Store Manager, Fresh Market Manager and
ActionManager are proven, patented technologies that address the needs of
retailers in store operations management, manufacturing and both durable goods
and perishable product management. Because the product concepts originated in
the environment of actual multi-unit-retail chain ownership, the products are
strongly oriented to an operation's bottom line results. The products are highly
pragmatic in their approach to standardizing and improving managerial actions.
The products use a fully developed, contemporary patented technology platform
that is not only capable of supporting existing offerings, but can also be
expanded to support related products.
The critical strength of the products is its artificial intelligence-like rules
based technology that allows customers to tailor the operating rules to
replicate the expert knowledge and practices of their most successful managers.
Rules based systems are applications in which the action to be taken is
determined by the rules defined by the user. As such, customers who use rules
based system determine what action the system will perform when an identified
condition occurs, usually based on the policies and procedures or "rules" of the
customer's business operations. In this way, the customer decomposes its
business operation into different rules or the way in which it wants certain
conditions or actions to be addressed. In comparison, in non-rules based
systems, the applications perform action as they have been designed and coded by
the vendor, regardless of the action the customer might wish to take.
Our corporate headquarters is located in Park City, Utah. All of our
development, and administrative activities are conducted at this location. We
sell our products through an internal sales team consisting of 9 people, which
includes all of the senior executives of the company.
We have experienced recent significant developments that we expect to have a
positive impact on our company, including the following:
o In March the company signed new Action Manager license
agreements with Kwik Trip an existing customer and RaceTrac
Petroleum Inc.
o In March the company signed an agreement to allow Oracle to
use one of the company's patents.
Three Months Ended March 31, 2006 and 2005
Total revenues were $1,369,689 and $805,865 for the quarters ended March 31,
2006 and 2005, respectively, a 70% increase. Software license revenues were
$573,900 and $149,760 for the quarters ended March 31, 2006 and 2005,
respectively, a 283% increase. This increase is primarily attributable to
software license sales to existing customers and a large agreement with Oracle,
during the quarter ended March 31, 2006. Maintenance and support revenues were
$535,312 and $531,682 for the quarters ended March 31, 2006 and 2005,
respectively, about even with last year. ASP revenues were $48,525 and $28,950,
respectively for the quarters ending March 31, 2006 and 2005; an increase of
68%. This increase was the result of our success in the Perishable Manufacturing
Channel where we have signed 6 new contracts in the last 8 months. Consulting
and other revenue was $211,952 and $95,473 for the quarters ended March 31, 2006
and 2005, respectively, a 122% increase. This increase is due to increased FMM
implementation services resulting from the Cannon Equipment agreements.
10
Cost of revenues, as a percent of total revenues was 29% and 49% for the
quarters ended March 31, 2006 and 2005, respectively. This decrease came from
the additional sales of licenses during the quarter.
Research and development expenses were $225,180 and $256,309 for the quarters
ended March 31, 2006 and 2005 respectively, an 12% decrease. This decreased
expense reflects the fact that both Action Manager and FMM software suites have
had major releases completed in addition to the streamlining of our development
process. The company has also started to utilize off-shore development
resources.
Sales and marketing expenses were $395,055 and $310,080 for the quarters ended
March 31, 2006 and 2005, respectively, a 27% increase over the previous year.
The company continues to deploy a commissioned based sales force which allows
them to maintain a lower fixed level of costs to generate sales however,
additional sales did increase costs slightly. The company also hired one
additional full time sales person during the quarter. General and administrative
expenses were $418,777 and $377,748 for the quarters ended March 31, 2006 and
2005, respectively a 11% increase. There was a $165,200 one time expense for the
settlement of a legal case in the 2005.
Nine Months Ended March 31, 2006 and 2005
Total revenues were $6,182,210 and $2,736,604 for the nine months ended March
31, 2006 and 2005, respectively, a 126% increase in 2006 over the comparable
period for 2005. Software license revenues were $3,434,927 and $453,615 for the
nine months ended December 31, 2005 and 2003, respectively, a 657% increase.
License sales in 2005 includes the Cannon Equipment license sale as referenced
in the companies 8K filed August 11, 2005. Maintenance and support revenues were
$1,750,069 and $1,793,215 for the nine months ended March 31, 2006 and 2005,
respectively, a 2% decrease. This decrease is primarily attributable to a two
existing Action Manager customers reducing their maintenance fees due to store
closures by a major customer. ASP revenues were $147,675 and $61,100 for the
nine months March 31, 2006 and 2005, respectively, a 142% increase in 2006 over
the comparable period for 2005. This increase is driven by the companies success
selling FMM Category Manager to perishable manufactures. Consulting and other
revenue was $849,539and $428,674 for the nine months ended March 31, 2006 and
2005, respectively, a 99% increase. This increase is driven by the Cannon
Equipment agreement and increased Action Manager consulting during the first
quarter of 2005
Cost of Goods for the nine months were 19.7% and 38% of total revenues for the
nine months ending March 31, 2006 and 2005 respectively. This decrease is
attributable to the increase in license sales in the two compared periods.
Research and development expenses were $684,766 and $763,159 for the nine months
ended March 31, 2006 and 2005 respectively, a 9% decrease. This decrease
represents the general stabilization of both the Fresh Market Manager and Action
Manager 4X software and the company's use of off-shore resources.
Sales and marketing expenses were $988,688 and $985,804 for the nine months
ended March 31, 2006 and 2005, respectively. Sales and marketing expenses are
even with last years costs although we have generated more sales. General and
administrative expenses were $1,048,370 and $1,356,678 for the nine months ended
March 31, 2006 and 2005, respectively, a 23% decrease. The 2005 expenses include
a $165,200 one time expense for the settlement of a legal case.
Liquidity and Capital Resources
The Company had a working capital deficit at March 31, 2006 of $950,438 verses
$4,129,588 at March 31, 2005.
The company had net loss of $385,789 versus a net loss of $832,982 for the
quarters ending March 31, 2006 and 2005 respectively. The Company had interest
expense of $319,491 and $300,517 for the quarters ending March 31, 2006 and 2005
respectively. This slight increase was caused by the company refinancing and
converting over $5,400,000 of debt during this quarter. The company has lowered
it notes payable debt by $4,876,922 during the last nine months which will lower
interest expense approximately $900,000 over the next twelve months. To date,
the Company has financed its operations through operating revenues, loans from
directors, officers and stockholders, loans from the CEO and majority
shareholder, and private placements of equity securities. The Company may be
unable to raise additional equity capital until it achieves profitable
operations and refinances its debt. The Company anticipates that it will meet
its working capital requirements primarily through increased revenue, while
controlling and reducing costs and expenses. However, no assurances can be given
that the Company will be able to meet its working capital requirements.
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:
11
Risk Factors Related to the Company's Operations
Continued net losses could impair the ability to raise capital.
The Company cannot accurately predict future revenues. The future marketing
strategy emphasizes sales activities for the Fresh Market Manager and
ActionManager applications, in the sales channels of Grocery, C-Store,
Specialty Retail, Financial Service and Food Manufactures. If this
marketing strategy fails, revenues and operations will be negatively
affected. All Park City Group applications are designed to be highly
flexible so that they can work in diverse business environments There is no
assurance that the markets will accept the Park City Group applications in
proportion to the increased marketing of these product lines, although
current business activity might suggest that the market opportunity and
acceptance of the Park City Group applications are positive. The Company
may face significant competition that may negatively affect demand for the
Park City Group applications. This includes the public's preference for
competitor's new product releases or updates over the Company's releases or
updates. The company is focusing our marketing effort on the development of
the new expanded sales channels, this will be increasing our marketing and
operational costs.
There can be no assurance that the Company will be able to generate significant
revenues or that it will achieve or maintain profitability, or generate revenues
from operations in the future. Management believes that success will depend upon
the ability to generate and retain new customers, which cannot be assured, and
in many circumstances, may be beyond the Company's control. The ability to
generate sales will depend on a variety of factors, including:
o Sales and marketing efforts as well as the co-marketing
efforts of strategic partners,
o The success of the new strategic sales channels
o The length of the sales cycle for our products
o The reliability and cost-effectiveness of services, and
o Customer service and support.
The Company faces competition from existing and emerging technologies that may
affect our profitability. The markets for our type of software products and that
of our competitors are characterized by: (i) Development of new software,
software solutions, or enhancements that are subject to constant change, (ii)
Rapidly evolving technological change, (iii) Unanticipated changes in customer
needs.
Because these markets are subject to such rapid change, the life cycle of the
products is difficult to predict; accordingly, the Company is subject to
following risks:
o Whether or how the Company will respond to technological
changes in a timely or cost-effective manner,
o Whether the products or technologies developed by competitors
will render the products and services less attractive to
potential buyers or shorten the life cycle of the Company's
products and services, and
o Whether products and services will achieve and sustain market
acceptance.
If the Company is unable to adapt to the constantly changing markets and to
continue to develop new products and technologies to meet customers' needs,
revenues and profitability will be negatively affected. Future revenues are
dependent on the successful development and licensing of new and enhanced
versions of the products and potential product offerings. If the Company fails
to successfully upgrade existing products and develop new products or the
product upgrades and new products do not achieve market acceptance, revenues
will be negatively impacted.
Operating results may fluctuate, which makes it difficult to predict future
performance.
Management expects a portion of the revenue stream to come from license sales,
maintenance and services charged to new customers, which will fluctuate in
amounts because software sales to retailers tend to be cyclical in nature. 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:
o Demand for and market acceptance of new products,
o Introduction or enhancement of products and services by the
Company or its competitors,
o Capacity utilization,
o Technical difficulties, system downtime,
o Fluctuations in data communications and telecommunications
costs,
o Maintenance subscriber retention,
o The timing and magnitude of capital expenditures and
requirements,
o Costs relating to the expansion or upgrading of operations,
facilities, and infrastructure,
o Changes in pricing policies and those of competitors,
o Changes in regulatory laws and policies, and
o General economic conditions, particularly those related to the
information technology industry.
12
Because of the foregoing factors, Management expects future operating results to
fluctuate. As a result of such fluctuations, it will be 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 relatively 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 may be unable to collect receivables in amounts previously
estimated.
In accordance with United States generally accepted accounting principles, the
Company has established allowances against its receivables for the estimated
uncollectible portion of receivables. However, the Company may experience
collection rates below its established allowances, which could reduce the amount
of available funds and require additional allowances. There can be no assurance
that the Company will be able to collect its receivables in sufficient amounts.
Failure to collect adequate amounts of its receivables could materially
adversely affect the business and results of operations.
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 the Company 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 our
offerings.
The Company needs to hire and retain qualified personnel to sustain its
business.
The Company is currently managed by a small number of key management and
operating personnel. There are no employment agreements with most of the
employees. Future success depends, in part, on the continued service of key
executive, management, and technical personnel, some of whom have only recently
been hired, and the ability to attract highly skilled employees. If key officers
or employees are unable or unwilling to continue in their present positions,
business could be harmed. From time to time, the Company has experienced, and
expects to continue to experience, difficulty in hiring and retaining highly
skilled employees. Competition for employees in the industry is intense. If the
Company is unable to retain key employees or attract, assimilate or retain other
highly qualified employees in the future, it may have a material adverse effect
on the business and results of operations.
The Company is dependent on the continued participation of certain key
executives and personnel to effectively execute its business plan and strategies
and must effectively integrate its management team. The business is dependent on
the continued services of its founder and Chief Executive Officer, Randall K.
Fields. Should the services of Mr. Fields be lost, operations will be negatively
impacted. The Company currently maintains three key man insurance policies on
Mr. Fields life in the amount of $10,000,000 each. The beneficiary of each
policy is (1) to the Fields Trust, (2) to Park City Group, Inc. and (3) to the
Fields Trust. The third policy is a new policy which will replace the first
policy as soon as all contingencies and waiting periods have been removed from
the new policy. The loss of the services of Mr. Fields would have a materially
adverse effect on the business.
The Company depends on the ability of its management team to effectively execute
its business plan and strategies. During the last year, key executives have had
to forgo a portion of their salary, and as such are at risk for their continued
commitment. If the management group is unable to effectively integrate its
activities, or if the Company is unable to integrate new employees into its
operations, its business plan and strategies will not be effectively executed
and operations could suffer.
The business is currently dependent on a limited customer base; should any of
these customer accounts be lost, revenues will be negatively impacted. The
Company expects that existing customers will continue to account for a
substantial portion of total revenues in future reporting periods. The ability
to retain existing customers and to attract new 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 customer accounts are lost or customer orders decrease, revenues
and operating results will be negatively impacted. The company has experienced
the loss of long term maintenance customers due to the high reliability of the
product, and in some cases, the customer deciding to replace Park City Group
applications. The company continues to focus on these long term clients to
provide new functionality and applications to meet their business needs. The
company also expects to 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 customers that will make purchases of its products and
services.
13
The Company may be unable to raise necessary funds for operations.
The Company anticipates that we need to raise additional funds to meet cash flow
and capital requirements. In the past, the Company has frequently experienced
cash flow shortages because not enough cash has been generated from operations
to cover expenses. Raising additional funds will be necessary to meet capital
needs. There can be no assurance that such financing will be available in
amounts or on acceptable terms, if at all. Further, the lack of tangible assets
to pledge could prevent the Company from establishing debt-based sources of
financing. The inability to raise necessary funding would adversely affect the
ability to successfully implement the business plan. There can be no assurance
that the Company will be able to obtain additional financing to meet the current
or future requirements on satisfactory terms, if at all. Failure to obtain
sufficient capital could materially adversely affect the business and results of
operations.
The Company faces risks associated with proprietary protection of its software.
The Company's success depends on its ability to develop and protect existing and
new proprietary technology and intellectual property rights. It seeks to protect
its software, documentation and other written materials primarily through a
combination of patents, trademark, and copyright laws, confidentiality
procedures and contractual provisions. While the Company has attempted to
safeguard and maintain its proprietary rights, there are no assurances there it
will be successful in doing so. Competitors may independently develop or patent
technologies that are substantially equivalent or superior.
Despite efforts to protect proprietary rights, unauthorized parties may attempt
to copy aspects of the Company's products or obtain and use information regarded
as proprietary. Policing unauthorized use of the Company's products is
difficult. While the Company is unable to determine the extent to which piracy
of its 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 its means of protecting its proprietary rights will be adequate
or that its competitors will not reverse engineer or independently develop
similar technology.
The Company incorporates third party software providers' licensed technologies
into its products; the loss of these technologies may prevent sales of its
products or lead to increased costs.
The Company now licenses, and in the future will license, technologies from
third party software providers that are incorporated into its products. The loss
of third-party technologies could prevent sales of products and increase costs
until substitute technologies, if available, are developed or identified,
licensed and successfully integrated into the 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 its reputation.
Non-conformities or bugs ("errors") may be found from time to time in the
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 its products and, as a result, has
experienced delays in the shipment of products. Errors in its products may be
caused by defects in third-party software incorporated into the products. If so,
these defects may not be able to be fixed without the cooperation of these
software providers. Since these defects may not be as significant to the
software provider as they are to the Company, it 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 it does have
access to the source code, it may not be able to fix the defect. Since its
customers use its products for critical business applications, any errors,
defects or other performance problems could result in damage to the customers'
business. These customers could seek significant compensation from the Company
for their losses. Even if unsuccessful, a product liability claim brought
against the Company would likely be time consuming and costly.
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14
Item 3 - Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Randall K. Fields who serves as Park City Group's chief executive officer and
William D. Dunlavy who serves as Park City Group's chief financial officer,
after evaluating the effectiveness of Park City Group's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) as of March
31, 2006 (the "Evaluation Date") concluded that as of the Evaluation Date, Park
City Group's disclosure controls and procedures were adequate and effective to
ensure that material information relating to Park City Group and its
consolidated subsidiaries would be made known to them by others within those
entities, particularly during the period in which this quarterly report was
being prepared. While the Company feels that the disclosure controls currently
in place are adequate to prevent material misstatements, the Company has found
significant internal control deficiencies in its accounting for property, plant
and equipment that they will work to rectify in the coming year in preparation
for section 404 of the Sarbanes Oxley Act of 2002. The Company is continually
evaluating and improving their internal control procedures.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls over
financial reporting or in other factors that could significantly affect these
internal controls subsequent to the date of their most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
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15
Part II - OTHER INFORMATION
Item 1 - Legal Proceedings
None
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
o In July 2005, 155,750 shares of common stock were issued per
anti-dilution agreement with the CEO.
o In August 2005, 134,411 shares of common stock were issued to
an employee in lieu of cash compensation.
o In November 2005, 733,338 shares of common stock were issued
to management in lieu of cash compensation.
o In November 2005, 525,000 shares of common stock were issued
to board members is lieu of cash compensation.
o In January 2006, 225,000 shares of common stock were issued as
a fee for extension of a note payable.
o In February 2006, 2,928,571 shares of common stock were issued
due to exercise of warrants.
o In March 2006, 125,001 shares of common stock were issued to
board members in lieu of cash compensation.
o In March 2006, 904,856 shares of common stock were issued to
management in lieu of cash compensation.
o In March 2006, 66,234,658 shares of common stock were issued
for conversion of a note payable.
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
Jim Horton resigned as President of the company effective April, 1, 2006
Item 6 - Exhibits
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbannes-Oxley Act of 2002.
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbannes-Oxley Act of 2002.
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbannes-Oxley Act of 2002.
Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbannes-Oxley Act of 2002.
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16
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PARK CITY GROUP, INC
Date: May 15, 2006 By /s/ Randall K. Fields
---------------------------
Randall K. Fields, Chairman
and Chief Executive Officer
Date: May 15, 2006 By /s/ William Dunlavy
---------------------------
William Dunlavy
Chief Financial Officer
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17