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PARK CITY GROUP INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The Company's Annual Report on Form 10-K for the year ended June 30, 2011 is
incorporated herein by reference.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward looking statements. The
words or phrases "would be," "will allow," "intends to," "will likely result,"
"are expected to," "will continue," "is anticipated," "estimate," "project," or
similar expressions are intended to identify "forward-looking
statements." Actual results could differ materially from those projected in the
forward looking statements as a result of a number of risks and uncertainties,
including those risks factors contained in our June 30, 2011 Annual Report on
Form 10-K, incorporated herein by reference. Statements made herein are as of
the date of the filing of this Form 10-Q with the Securities and Exchange
Commission and should not be relied upon as of any subsequent date. Unless
otherwise required by applicable law, we do not undertake, and specifically
disclaim any obligation, to update any forward-looking statements to reflect
occurrences, developments, unanticipated events or circumstances after the date
of such statement.
Overview
Park City Group, Inc. (the "Company") is a Software-as-a-Service ("SaaS")
provider that brings unique visibility to the consumer goods supply chain,
delivering actionable information that ensures product is on the shelf when the
consumer expects it. Our service increases our customers' sales and
profitability while making lower inventory levels possible for both retailers
and their suppliers.
The Company is incorporated in the state of Nevada. The Company's 98.76% and
100% owned subsidiaries, Park City Group, Inc. and Prescient Applied
Intelligence, Inc. ("Prescient"), respectively, are incorporated in the state of
Delaware. All intercompany transactions and balances have been eliminated in
consolidation.
The Company designs, develops, markets and supports proprietary software
products. These products are designed to be used in businesses having multiple
locations to assist in the management of business operations on a daily basis
and communicate results of operations in a timely manner. In addition, the
Company has built a consulting practice for business process improvement that
centers around the Company's proprietary software products and through
establishment of a neutral and "trusted" third party relationship between
retailers and suppliers. The principal markets for the Company's products are
multi-store retail and convenience store chains, branded food manufacturers,
suppliers and distributors, and manufacturing companies which have operations in
North America, Europe, Asia and the Pacific Rim.
We market our products to businesses primarily on a subscription
basis. However, we also deliver our products on a license basis. Our efforts are
focused on a direct sales model and indirectly through qualified partners and
service providers.
The principal executive offices of the Company are located at 3160 Pinebrook
Road, Park City, Utah 84098. The telephone number is (435) 645-2000. The website
address is http://www.parkcitygroup.com.
-9-
--------------------------------------------------------------------------------Results of Operations
Comparison of the Three Months Ended December 31, 2011 to the Three Months Ended
December 31, 2010.
Revenues
Fiscal Quarter Ended December 31, Variance
2011 2010 Dollars Percent
Subscription $ 1,681,000 $ 1,595,345 $ 85,655 5.4 %
Maintenance 494,351 584,732 (90,381) -15.5 %
Professional services and other revenue 168,971 262,213 (93,242) -35.6 %
Software licenses 222,800 304,719 (81,919) -26.9 %
Total revenues $ 2,567,122 $ 2,747,009 $ (179,887) -6.6 %
Total revenues were $2,567,122 and $2,747,009 for the three months ended
December 31, 2011 and 2010, respectively, a 6.55% decrease. This $179,887
decrease in total revenues is principally due to a decrease in maintenance
revenues of $90,381, a decrease in professional services and other revenues of
$93,242, and a decrease in software license revenue of $81,919, partially offset
by an $85,655 increase in subscription revenues. The decrease in
non-subscription revenues was largely anticipated, and reflects management's
emphasis on growing subscription revenue in future periods. Management believes
that, as a percentage of total revenue, subscription revenue will continue to
increase and license and maintenance revenue will continue to decrease, or
remain volatile, as the Company continues its emphasis of marketing its services
based on the SaaS model.
Subscription Revenue
Subscription revenue was $1,681,000 and $1,595,345 for the three months ended
December 31, 2011 and 2010, respectively, an increase of 5.4% in the three
months ended December 31, 2011 when compared with the three months ended
December 31, 2010. The net increase of $85,655 is principally due to (i) the
increase of subscription customers added to the Company's customer base caused
by the expected addition of new contracts with suppliers ("spokes") connected to
existing retail clients acquired by the Company ("hubs") during the last fiscal
year, which contributed approximately $92,000 of new subscription revenue; and
(ii) a $149,000 increase attributable to the growth of existing retailer and
supplier subscriptions. The increase in subscription revenue was partially
offset by a decrease of approximately $154,000 resulting from the non-renewal of
existing customers primarily due to, among other factors, bankruptcy,
acquisitions, or no longer doing business with a retailer. While no assurances
can be given, the Company anticipates that revenue from subscription-based
services will continue to increase on a year-over-year basis, notwithstanding
attrition of subscription agreements in the ordinary course upon contract
expirations, which occurred in the quarter ended December 31, 2011. Management
currently anticipates that such attrition will be approximately 5% of
subscription revenue annually, including in the year ending June 30, 2012.
The Company continues to focus its strategic initiatives on increasing the
number of retailers, suppliers and manufacturers that use its software on a
subscription basis, as well as contracting with suppliers to connect to our
retail customers signed up in previous quarters, therefore leveraging our "hub
and spoke" business model. While management believes that marketing its suite of
software solutions as a renewable and recurring subscription is an effective
strategy, it cannot be assured that subscribers will renew the service at the
same level in future years, propagate services to new categories, or recognize
the need for expanding the service offering of the Company's suite of actionable
products and services.
Maintenance Revenue
Maintenance and support revenue was $494,351 and $584,732 for the three months
ended December 31, 2011 and 2010, respectively, a decrease of 15.5% in the three
months ended December 31, 2011 compared with the three months ended December 31,
2010. The net decrease of $90,381 is principally due to (i) the non-renewal of
maintenance contracts resulting in a reduction of maintenance revenue of
$115,000. This decrease in revenue was partially offset by the addition of
approximately $25,000 from new maintenance customers and net increases to
existing customers. Large one-time license sales and associated maintenance is
expected to continue to decline over time. The decrease in maintenance revenue
is due to the Company's emphasis on subscription-based sales. While management
believes maintenance and support services are essential to its customers, due to
macroeconomic conditions, business combinations, and the historical reliability
of the Company's suite of products, from time to time, customers may not
perceive the ongoing value of paying for maintenance when the frequency of
maintenance activities needed by a customer becomes infrequent.
-10-
--------------------------------------------------------------------------------Professional Services and Other Revenue
Professional services and other revenue was $168,971 and $262,213 for the
three months ended December 31, 2011 and 2010, respectively, a decrease of
35.6%. The $93,242 decrease in professional services revenue for the three
months ended December 31, 2011 when compared to the three months ended December
31, 2010 is due to a decrease in the average revenue per customer implementation
that occurred during the current quarterly period compared to the quarter ended
December 31, 2010. Management believes that professional services may
experience periodic fluctuations as a result of (i) timing of implementations,
(ii) scope of services to be provided, (iii) size of the retailer or supplier,
or (iv) the Company's analytics offerings and change-management services
becoming a natural addition to its software as a service (SaaS) product suite.
Software License Revenue
Software license revenues was $222,800 and $304,719 for the three months ended
December 31, 2011 and 2010, respectively, a decrease of 26.9%. The $81,919
decrease in license revenue for the three months ended December 31, 2011 when
compared to the three months ended December 31, 2010 is primarily due to lower
sales to existing customers during the three months ended December 31, 2011
compared to typically larger new customer sales during the same period last
year. While the Company continues its emphasis on the sale of subscription based
services, large one-time license sales and associated maintenance is expected to
continue to decline over time. Management believes that it is difficult to
predict and forecast future software license sales. The Company has not
eliminated the sale of its suite of products on a license basis and from time to
time it will sell additional licenses to new or existing customers; however, it
is difficult to ascertain the timing or the amount of the license.
Cost of Services and Product Support
Fiscal Quarter Ended
December 31, Variance
2011 2010 Dollars Percent
Cost of services and product support $ 1,115,113 $ 908,846 $ 206,267 22.7 %
Percent of total revenues 43.4 % 33.1 %
Cost of services and product support was $1,115,113 and $908,846 for the three
months ended December 31, 2011 and 2010, respectively, a 22.7% increase in the
three months ended December 31, 2011 compared with the three months ended
December 31, 2010. This increase of $206,267 for the quarter ended December 31,
2011 when compared with the same period ended December 31, 2010 is principally
due to (i) a $87,000 increase in payroll and other head count related expenses,
payroll taxes related to stock compensation, and an increase in benefit costs;
(ii) $108,000 of costs capitalized during the prior year; and (iii) an increase
of $14,000 from the use of contractors and outside consulting support. These
increases were partially offset by a decrease of approximately $3,000 in
software maintenance contracts and other facility related costs.
Sales and Marketing Expense
Fiscal Quarter Ended
December 31, Variance
2011 2010 Dollars Percent
Sales and marketing $ 568,797 $ 737,936 $ (169,139) -22.9 %
Percent of total revenues 22.2 % 26.9 %
Sales and marketing expense was $568,797 and $737,936 for the three months ended
December 31, 2011 and 2010, respectively, a 22.9% decrease. This $169,139
decrease over the comparable quarter was primarily the result of (i) a decrease
of approximately $106,000 in payroll and other head count related expenses; (ii)
a decrease in bonuses and commission expenses of $62,000; (ii) a decrease of
approximately $13,000 in advertising, marketing, and travel related
expenditures. These decreases were partially offset by an increase of $14,000 in
marketing allowances.
-11---------------------------------------------------------------------------------General and Administrative Expense
Fiscal Quarter Ended
December 31, Variance
2011 2010 Dollars Percent
General and administrative $ 790,855 $ 648,493 $ 142,362
22.0 %
Percent of total revenues 30.8 % 23.6 %
General and administrative expense was $790,855 and $648,493 for the three
months ended December 31, 2011 and 2010, respectively, a 22% increase in the
three months ended December 31, 2011 compared with the three months ended
December 31, 2010. This $142,362 increase when comparing expenditures for the
quarter ended December 31, 2011 with the same period ended December 31, 2010 is
principally due (i) an increase of approximately $135,000 in payroll, bonus, and
other compensation related expenses; and (ii) a $24,000 increase in bad debt
expense. These increases were partially offset by a decrease of $17,000 in
shareholder costs, professional fees, and facilities related expenses.
Depreciation and Amortization Expense
Fiscal Quarter Ended
December 31, Variance
2011 2010 Dollars PercentDepreciation and amortization $ 220,835 $ 182,492 $ 38,343
21.0 %
Percent of total revenues 8.6 % 6.6 %
Depreciation and amortization expense was $220,835 and $182,492 for the three
months ended December 31, 2011 and 2010, respectively, an increase of 21% in the
three months ended December 31, 2011 compared with the three months ended
December 31, 2010. This increase of $38,343 for the quarter ended December 31,
2011 when compared to the quarter ended December 31, 2010 is due to (i) a
$16,400 increase in amortization related to the completion of capitalized
software projects; and (ii) increased depreciation expense of $22,000.
Other Income and Expense
Fiscal Quarter Ended
December 31, Variance
2011 2010 Dollars Percent
Interest expense $ 47,394 $ 84,687 $ (37,293) -44.0 %
Percent of total revenues 1.8 % 3.1 %
Net interest expense was $47,394 and $84,687 for the three months ended December
31, 2011 and 2010, respectively. This $37,293 decrease is principally due to a
decrease in interest expense resulting from retirement of Prescient Notes in the
principal amount of approximately $1.5 million.
Preferred Dividends
Fiscal Quarter Ended
December 31, Variance
2011 2010 Dollars Percent
Preferred dividends $ 208,867 $ 206,975 $ 1,892 0.9 %
Percent of total revenues 8.1 % 7.5 %
Dividends accrued on the Company's Series A Preferred and Series B Preferred was
$208,867 and $206,975 for the three months ended December 31, 2011 and 2010,
respectively. Holders of Series A Preferred are entitled to a 5.00% annual
dividend payable quarterly in either cash or additional Series A Preferred at
the option of the Company with fractional shares paid in cash. Holders of Series
B Preferred are entitled to a 12.00% annual dividend payable quarterly in cash.
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--------------------------------------------------------------------------------
Comparison of the Six Months Ended December 31, 2011 to the Six Months Ended
December 31, 2010.
Revenues
Six Months Ended
December 31, Variance
2011 2010 Dollars Percent
Subscription $ 3,423,131 $ 3,144,892 $ 278,239 8.8 %
Maintenance 1,009,646 1,152,951 (143,305) -12.4 %
Professional services and other revenue 363,015 552,433 (189,418) -34.3 %
Software licenses 350,610 462,719 (112,109) -24.2 %
Total revenues $ 5,146,402 $ 5,312,995 $ (166,593) -3.1 %
Total revenues were $5,146,402 and $5,312,995 for the six months ended
December 31, 2011 and 2010, respectively, a 3.1% decrease. This $166,593
decrease in total revenues is principally due to a $143,305 decrease in
maintenance revenues, a $189,418 decrease in professional services and other
revenues, and a $112,109 decrease in software license revenues, partially offset
by a an increase in subscription revenues of $278,239. Management believes
that, as a percentage of total revenue, subscription revenue will continue to
increase and license and maintenance revenue will continue to decrease, or
remain volatile, as the Company continues its emphasis of marketing its services
based on the SaaS model.
Subscription Revenue
Subscription revenue was $3,423,131 and $3,144,892 for the six months ended
December 31, 2011 and 2010, respectively, an increase of 8.8% in the six months
ended December 31, 2011 when compared with the six months ended December 31,
2010. The net increase of $278,239 is principally due to (i) the increase of
subscription customers added to the Company's customer base caused by the
expected addition of new contracts with suppliers ("spokes") connected to
existing retail clients acquired by the Company ("hubs") during the last fiscal
year, which contributed approximately $147,000 of new subscription revenue; and
(ii) a $338,000 increase attributable to the growth of existing retailer and
supplier subscriptions. The increase in subscription revenue was partially
offset by a decrease of approximately $206,000 resulting from the non-renewal of
existing customers primarily due to bankruptcy, acquisitions, or no longer doing
business with a retailer. While no assurances can be given, the Company
anticipates that revenue from subscription-based services will continue to
increase on a year-over-year basis, notwithstanding attrition of subscription
agreements in the ordinary course upon contract expirations, which occurred in
the quarter ended December 31, 2011. Management currently anticipates that such
attrition will be approximately 5% of subscription revenue annually, including
in the year ending June 30, 2012.
The Company continues to focus its strategic initiatives on increasing the
number of retailers, suppliers and manufacturers that use its software on a
subscription basis, as well as contracting with suppliers to connect to our
retail customers signed up in previous quarters, therefore leveraging our "hub
and spoke" business model. While management believes that marketing its suite of
software solutions as a renewable and recurring subscription is an effective
strategy, it cannot be assured that subscribers will renew the service at the
same level in future years, propagate services to new categories, or recognize
the need for expanding the service offering of the Company's suite of actionable
products and services.
Maintenance Revenue
Maintenance and support revenue was $1,009,646 and $1,152,951 for the six
months ended December 31, 2011 and 2010, respectively, a decrease of 12.4% in
the six months ended December 31, 2011 compared with the six months ended
December 31, 2010. The net decrease of $143,305 is principally due to the
non-renewal of maintenance contracts resulting in a reduction of maintenance
revenue of $207,000. This decrease in revenue was partially offset by the
addition of approximately $18,000 in new maintenance revenue and approximately
$46,000 of net increases to existing customers. Large one-time license sales and
associated maintenance is expected to continue to decline over time. The
decrease in maintenance revenue is due to the Company's emphasis on
subscription-based sales. While management believes maintenance and support
services are essential to its customers, due to macroeconomic conditions,
business combinations, and the historical reliability of the Company's suite of
products, from time to time, customers may not perceive the ongoing value of
paying for maintenance when the frequency of maintenance activities needed by a
customer becomes infrequent.
-13---------------------------------------------------------------------------------Professional Services and Other Revenue
Professional services and other revenue was $363,015 and $552,433 for the six
months ended December 31, 2011 and 2010, respectively, a decrease of 34.3%. The
$189,418 decrease in professional services revenue for the six months ended
December 31, 2011 when compared to the six months ended December 31, 2010 is due
to a decrease in the average contract size of customer implementations that
occurred during the six months ended December 31, 2011 compared to the six
months ended December 31, 2010. Management believes that professional services
may experience periodic fluctuations as a result of (i) timing of
implementations, (ii) scope of services to be provided, (iii) size of the
retailer or supplier, or (iv) the Company's analytics offerings and
change-management services becoming a natural addition to its software as a
service (SaaS) product suite.
Software License Revenue
Software license revenue was $350,610 and $462,719 for the six months ended
December 31, 2011 and 2010, respectively, a decrease of 24.2%. The $112,109
decrease in license revenue for the six months ended December 31, 2011 when
compared to the six months ended December 31, 2010 is primarily due to sales to
existing customers during to the six months ended December 31, 2011 compared to
typically larger new customer sales during the same period last year. While the
Company continues its emphasis on the sale of subscription based services, large
one-time license sales and associated maintenance is expected to continue to
decline over time. Management believes that it is difficult to predict and
forecast future software license sales. The Company has not eliminated the sale
of its suite of products on a license basis and from time to time it will sell
additional licenses to new or existing customers; however, it is difficult to
ascertain the timing or the amount of the license.
Cost of Services and Product Support
Six Months Ended
December 31, Variance
2011 2010 Dollars Percent
Cost of services and product support $ 2,255,374 $ 1,800,401 $ 454,973
25.3 %
Percent of total revenues 43.8 % 33.9 %
Cost of services and product support was $2,255,374 and $1,800,401 for the six
months ended December 31, 2011 and 2010, respectively, a 25.3% increase in the
six months ended December 31, 2011 compared with the six months ended December
31, 2010. This increase of $454,973 for the six months ended December 31, 2011
when compared with the same period ended December 31, 2010 is principally due to
(i) a $169,000 increase in payroll and other head count related expenses,
payroll taxes related to stock compensation, and an increase in benefit costs;
(ii) $197,000 of costs capitalized during the prior year; (iii) a $47,000
increase related to employee stock grants and other stock-based compensation;
(iv) an increase of $31,000 from the use of contractors and outside consulting
support; and (v) a $12,000 increase in travel related expenditures.
Sales and Marketing Expense
Six Months Ended
December 31, Variance
2011 2010 Dollars Percent
Sales and marketing $ 1,230,545 $ 1,357,534 $ (126,989) -9.4 %
Percent of total revenues 23.9 % 25.6 %
Sales and marketing expense was $1,230,545 and $1,357,534 for the six months
ended December 31, 2011 and 2010, respectively, a 9.4% decrease. This $126,989
decrease over the comparable period ended December 31, 2010 was primarily the
result of (i) a decrease of approximately $107,000 in payroll and other head
count related expenses; and (ii) a decrease of $40,000 in travel and related
expenditures. These decreases were partially offset by an increase of
approximately $22,000 in advertising, marketing and tradeshow related expenses.
-14-
--------------------------------------------------------------------------------General and Administrative Expense
Six Months Ended
December 31, Variance
2011 2010 Dollars PercentGeneral and administrative $ 1,550,392 $ 1,712,815 $ (162,423)
-9.5 %
Percent of total revenues 30.1 % 32.2 %
General and administrative expense was $1,550,392 and $1,712,815 for the six
months ended December 31, 2011 and 2010, respectively, an 9.5% decrease in the
six months ended December 31, 2011 compared with the six months ended December
31, 2010. This $162,423 decrease when comparing expenditures for the six months
ended December 31, 2011 with the same period ended December 31, 2010 is
principally due to (i) the settlement of a lawsuit and related legal fees in the
prior year of $475,000, partially offset by (ii) an increase of $93,000 in bonus
expense; (iii) an increase of approximately $63,000 in payroll and other
compensation related expenses; (iv) a $66,000 increase in bad debt expense; (v)
an increase of $62,000 increase in shareholder costs and other professional
fees; and (vi) an increase of $29,000 in hosted software costs, facilities
related expenses, estimated state franchise tax payments, and travel related
expenses.
Depreciation and Amortization Expense
Six Months Ended
December 31, Variance
2011 2010 Dollars Percent
Depreciation and amortization $ 444,800 $ 376,606 $ 68,194
18.1 %
Percent of total revenues 8.6 % 7.1 %
Depreciation and amortization expense was $444,800 and $376,606 for the six
months ended December 31, 2011 and 2010, respectively, an increase of 18.1% in
the six months ended December 31, 2011 compared with the six months ended
December 31, 2010. This increase of $68,194 for the six months ended December
31, 2011 when compared to the six months ended December 31, 2010 is due to (i) a
$33,000 increase in amortization related to the completion of capitalized
software projects; and (ii) increased depreciation expense of $35,000.
Other Income and Expense
Six Months Ended
December 31, Variance
2011 2010 Dollars Percent
Interest expense $ 120,884 $ 183,177 $ (62,293) -34.0 %
Percent of total revenues 2.3 % 3.4 %
Net interest expense was $120,884 and $183,177 for the six months ended
December 31, 2011 and 2010, respectively. This $62,293 decrease is principally
due to a decrease in interest expense resulting from retirement of Prescient
Notes in the principal amount of approximately $1.5 million.
Preferred Dividends
Six Months Ended
December 31, Variance
2011 2010 Dollars Percent
Preferred dividends $ 417,220 $ 414,070 $ 3,150 0.8 %
Percent of total revenues 8.1 % 7.8 %
Dividends accrued on the Company's Series A Preferred and Series B Preferred was
$417,220 and $414,070 for the six months ended December 31, 2011 and 2010,
respectively. Holders of Series A Preferred are entitled to a 5.00% annual
dividend payable quarterly in either cash or additional Series A Preferred at
the option of the Company with fractional shares paid in cash. Holders of Series
B Preferred are entitled to a 12.00% annual dividend payable quarterly in cash.
-15-
--------------------------------------------------------------------------------Financial Position, Liquidity and Capital Resources
We believe our existing cash and short-term investments, together with funds
generated from operating activities, will be sufficient to fund operating and
investment requirements for at least the next twelve months, in addition to our
debt service requirements. Our future capital requirements will depend on many
factors, including our rate of revenue growth and expansion of our sales and
marketing activities, the timing and extent of spending required for research
and development efforts, the continuing market acceptance of our products, and
our ability to restructure certain of our notes payable. Although the Company
anticipates that available cash resources will be sufficient to meet its working
capital and debt service requirements, no assurances can be given. To the extent
that available funds are insufficient to fund our future activities, or satisfy
our short-term debt service requirements, or in the event we are unable to
restructure certain notes payable, we may need to raise additional funds through
public or private equity or debt financings. Additional equity or debt
financing may not be available on terms favorable to us, in a timely fashion or
at all.
We have historically funded our operations with cash from operating
activities, equity financings and debt borrowings. As set forth below, cash and
cash equivalents were $942,327 and $1,231,020 at December 31, 2011, and December
31, 2010, respectively. This decrease from December 31, 2011 to December 31,
2010 was principally the result of the use of cash to reduce short-term
indebtedness.
As of December 31, Variance
2011 2010 Dollars Percent
Cash and cash equivalents $ 942,327 $ 1,231,020 $ (288,693) -23.5 %
Net Cash Flows from Operating Activities
Six Months Ended
December 31, Variance
2011 2010 Dollars Percent
Cash provided by operating activities $ 391,860 $ 640,656 $ (248,796) -38.8 %
Net cash provided by operating activities is summarized as follows:
Six Months Ended
December 31,
2011 2010
Net income (loss) $ (455,593) $ (117,538)
Noncash expense and income, net 1,077,169 1,117,565
Net changes in operating assets and liabilities (229,716) (359,371)
$ 391,860 $ 640,656
Noncash expenses decreased by $40,396 in the six months ended December 31,
2011 compared to December 31, 2010. Noncash expenses decreased as a result of
the issuance of $375,000 shares of common stock in connection with a litigation
settlement during the three months ended September 30, 2010. This noncash
expense decrease was partially offset by a $200,000 increase in stock
compensation expense, a $66,000 increase in bad debt expense, and a $68,000
increase in depreciation and amortization.
The net changes in operating assets and liabilities resulted in the use of
$129,655 less cash in the six months ended December 31, 2011 compared to the
same period in 2010.
Net Cash Flows from Investing Activities
Six Months Ended
December 31, Variance
2011 2010 Dollars PercentCash used in investing activities $ (54,318) $ (222,024) $ 167,706 75.5 %
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Net cash used in investing activities for the six months ended December 31,
2011 was $54,318 compared to net cash used in investing activities of $222,024
for the six months ended December 31, 2010. This $167,706 decrease in cash used
in investing activities for the six months ended December 31, 2011 when compared
to the same period in 2010 was the result of capitalization of software costs in
2010 that did not recur in 2011.
Net Cash Flows from Financing Activities
Six Months Ended
December 31, Variance
2011 2010 Dollars Percent
Cash used in financing activities $ (2,013,444) $ (345,043) $ (1,668,401) -483.5 %
Net cash used in financing activities totaled $2,013,444 for the six months
ended December 31, 2011 as compared to cash flows provided by financing
activities of $345,043 for the six months ended December 31, 2010. The change in
net cash used in financing activities is attributable to (i) a $1.55 million
increase in cash used to pay on notes payable due to the retirement of the
Prescient Notes; (ii) an increase in cash used to pay dividends of $124,000; and
(iii) a decrease in cash from the issuance of common stock. The overall
comparative increase in cash used was partially offset by cash provided of
$150,000 from the issuance of notes and the exercise of warrants.
Working Capital
At December 31, 2011, the Company had negative working capital of $2,640,265
when compared with negative working capital of $2,395,501 at June 30, 2011. This
$244,764 decrease in working capital is principally the result of the use of
cash to retire certain indebtedness in the six months ended December 31, 2011, a
decrease in cash flow in the current period compared to the six months ended
December 31, 2010, the reclassification of certain notes payable from long-term
liabilities to amounts becoming due and payable during the next twelve months,
and a decrease in accounts receivable. In connection with the retirement of
certain indebtedness in the six months ended December 31, 2011, the Company
reduced its current and total liabilities by approximately $2.0 and $2.4
million, respectively, compared to current and total liabilities at June 30,
2011.
As of As of
December 31, June 30, Variance
2011 2011 Dollars Percent
Current assets $ 2,683,611 $ 4,943,820 $ (2,260,209) -45.7 %
Current assets as of December 31, 2011 totaled $2,683,611, a decrease of
$2,260,209 when compared to $4,943,820 as of June 30, 2011. This 45.7% decrease
in current assets is due primarily to the use of $1.9 million to pay certain
short-term indebtedness, and a $536,000 decrease in accounts receivable.
As of As of
December 31, June 30, Variance
2011 2011 Dollars Percent
Current liabilities $ 5,323,876 $ 7,339,321 $ (2,015,445) -27.5 %
Current liabilities totaled $5,323,876 as of December 31, 2011 as compared to
$7,339,321 as of June 30, 2011. The $2,015,445 comparative decrease in current
liabilities is principally due to a decrease of approximately $1.9 million in
certain notes payable during the six months ended December 31, 2011, as well as
a reduction in accounts payable of approximately $264,000, and deferred revenue
of approximately $536,000.
While no assurances can be given, management currently intends to continue to
reduce its indebtedness in subsequent periods utilizing existing cash resources
and projected cash flow from operations. In addition, management may also
continue to refinance or restructure certain of the Company's indebtedness to
extend the maturities of such indebtedness to address its short-term and
long-term working capital requirements. Management believes that these
initiatives will enable us to address our debt service requirements during the
next twelve months, as well as fund our currently anticipated operations and
capital spending requirements.
-17-
--------------------------------------------------------------------------------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 2011, the FASB issued ASU 2011-8, Intangibles-Goodwill and Other
(Topic 350): Testing Goodwill for Impairment, which amends previous guidance on
the testing of goodwill for impairment; the guidance is effective for annual and
interim goodwill impairment tests performed for fiscal years beginning after
December 15, 2011, with early adoption permitted. The new guidance provides
entities with the option of first assessing qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit is
less than its carrying amount. If it is determined, on the basis of qualitative
factors, that the fair value of the reporting unit is more likely than not less
than the carrying amount, the two-step impairment test would still be required.
The adoption of this updated authoritative guidance is not expected to have a
significant impact on the Company's Condensed Consolidated Financial Statements.
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities, an update to the
authoritative guidance which requires disclosure information about offsetting
and related arrangements for financial instruments and derivative instruments.
The guidance provided by this update becomes effective for the Company in the
first quarter of fiscal 2014. The adoption of this updated authoritative
guidance is not expected to have a significant impact on the Company's Condensed
Consolidated Financial Statements.
December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220):
Deferral of the Effective Date for Amendments to the Presentation of
Reclassifications of Items Out of Accumulated Other Comprehensive Income in
Accounting Standards Update No. 2011-05; an update to the authoritative guidance
which defers the effective date of the presentation of reclassification
adjustments out of accumulated other comprehensive income. The guidance provided
by this update becomes effective for the Company in the first quarter of fiscal
2013. The adoption of this updated authoritative guidance is not expected to
have a significant impact on the Company's Condensed Consolidated Financial
Statements.
Critical Accounting Policies
This Management's Discussion and Analysis of Financial Condition and Results
of Operations discuss the Company's financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles.
We commenced operations in the software development and professional services
business during 1990. The preparation of our financial statements requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an ongoing basis, management evaluates
its estimates and assumptions. Management bases its estimates and judgments on
historical experience of operations and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others,
will affect its more significant judgments and estimates used in the preparation
of our consolidated financial statements.
Deferred Income Taxes and Valuation Allowance
In determining the carrying value of the Company's net deferred income tax
assets, the Company must assess the likelihood of sufficient future taxable
income in certain tax jurisdictions, based on estimates and assumptions, to
realize the benefit of these assets. If these estimates and assumptions change
in the future, the Company may record a reduction in the valuation allowance,
resulting in an income tax benefit in the Company's statements of operations.
Management evaluates the realizability of the deferred income tax assets and
assesses the valuation allowance quarterly.
-18-
--------------------------------------------------------------------------------Revenue Recognition
We recognize revenue when all of the following conditions are satisfied: (i)
there is persuasive evidence of an arrangement; (ii) the service has been
provided to the customer; (iii) the collection of our fees is probable; and (iv)
the amount of fees to be paid by the customer is fixed or determinable.
We recognize subscription and hosting revenues ratably over the length of the
agreement beginning on the commencement dates of each agreement or when revenue
recognition conditions are satisfied based on their relative fair values. For a
fee, subscriptions provide the customer with access to the software and data
over the Internet, or on demand, and provide technical support services, premium
analytical services and software upgrades when and if available. Under
subscriptions, customers do not have the right to take possession of the
software and such arrangements are considered service contracts. Accordingly, we
recognize professional services as incurred based on their relative fair
values. In situations where we have contractually committed to an individual
customer specific technology, we defer all of the revenue for that customer
until the technology is delivered and accepted. Once delivery occurs, we then
recognize the revenue ratably over the remaining contract term. When
subscription service or hosting service is paid in advance, deferred revenue is
recognized and revenue is recorded ratably over the term as services are
consumed.
Set up fees paid by customers in connection with subscription services are
deferred and recognized ratably over the life of the applicable agreement.
Premium support and maintenance service revenues are derived from services
beyond the basic services provided in standard arrangements. We recognize
premium service and maintenance revenues ratably over the contract terms
beginning on the commencement dates of each contract or when revenue recognition
conditions are satisfied. Instances where these services are paid in advance,
deferred revenue is recognized and revenue is recorded ratably over the term as
services are consumed.
Professional services revenue consists primarily of fees associated with
application and data integration, data cleansing, business process
re-engineering, change management, and education and training services. Fees
charged for professional services are recognized when delivered. We believe the
fees for professional services qualify for separate accounting because: a) the
services have value to the customer on a stand-alone basis; b) objective and
reliable evidence of fair value exists for these services; and c) performance of
the services is considered probable and does not involve unique customer
acceptance criteria.
The Company's revenue, to a lesser extent, is earned under license
arrangements. Licenses generally include multiple elements that are delivered up
front or over time. Vendor specific objective evidence of fair value of the
hosting and support elements is based on the price charged at renewal when sold
separately, and the license element is recognized into revenue upon
delivery. The hosting and support elements are recognized ratably over the
contractual term.
Stock-Based Compensation
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.
Capitalization of Software Development Costs
The Company accounts for research costs of computer software to be sold,
leased, or otherwise marketed as expense until technological feasibility has
been established for the product. Once technological feasibility is established,
all software costs are capitalized until the product is available for general
release to customers. Judgment is required in determining when technological
feasibility of a product is established. We have determined that technological
feasibility for our software products is reached shortly after a working
prototype is complete and meets or exceeds design specifications including
functions, features, and technical performance requirements. Costs incurred
after technological feasibility is established have been and will continue to be
capitalized until such time as when the product or enhancement is available for
general release to customers.
-19-
--------------------------------------------------------------------------------Goodwill and Long-lived Assets
Goodwill is assigned to specific reporting units and is reviewed for possible
impairment at least annually or more frequently upon the occurrence of an event
or when circumstances indicate that a reporting unit's carrying amount is
greater than its fair value. Management reviews the long-lived tangible and
intangible assets for impairment when events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. Management
evaluates, at each balance sheet date, whether events and circumstances have
occurred which indicate possible impairment. The carrying value of a long-lived
asset is considered impaired when the anticipated cumulative undiscounted cash
flows of the related asset or group of assets is less than the carrying value.
In that event, a loss is recognized based on the amount by which the carrying
value exceeds the estimated fair market value of the long-lived asset. Economic
useful lives of long-lived assets are assessed and adjusted as circumstances
dictate.
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