Notes to
Consolidated Financial Statements
June 30, 2017 and June 30, 2016
NOTE 1.
|
DESCRIPTION OF BUSINESS AND ACQUISITION OF REPOSITRAK,
INC.
|
Summary of Business
The
Company is incorporated in the state of Nevada. The
Company has three principal subsidiaries, PC Group, Inc. (formerly,
Park City Group, Inc.), a Utah Corporation (98.76% owned), and Park
City Group, Inc., (formerly, Prescient Applied Intelligence, Inc.),
a Delaware Corporation (100% owned) and ReposiTrak, Inc., a Utah
corporation (100% owned). All intercompany transactions
and balances have been eliminated in consolidation.
The
Company designs, develops, markets and supports proprietary
software products. These products are designed for businesses
having multiple locations to assist in the management of business
operations on a daily basis and communicate results of operations
in a timely manner. In addition, the Company has built a consulting
practice for business improvement that centers on the
Company’s proprietary software products. 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.
As a result of the
acquisition of ReposiTrak, Inc. (“
ReposiTrak
”)
in June 2015, as more particularly described below, the Company
also provides food, pharmaceutical, and dietary supplement
retailers and suppliers with a robust cloud-based solution to help
protect their brands and remain in compliance with business records
and regulatory requirements, such as the Food Safety Modernization
Act (“
FSMA
”)
.
NOTE 2.
|
SIGNIFICANT ACCOUNTING POLICIES
|
Principles of Consolidation
The
financial statements presented herein reflect the consolidated
financial position of Park City Group, Inc. and subsidiaries,
including ReposiTrak and Prescient. All inter-company
transactions and balances have been eliminated in
consolidation.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
U.S. generally accepted accounting principles requires management
to make estimates and assumptions that materially affect the
amounts reported in the consolidated financial
statements. Actual results could differ from these
estimates. The methods, estimates and judgments the
Company uses in applying its most critical accounting policies have
a significant impact on the results it reports in its financial
statements. The Securities and Exchange
Commission has defined the most critical accounting policies
as those that are most important to the portrayal of the
Company’s financial condition and results, and require the
Company to make its most difficult and subjective judgments, often
as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, the
Company’s most critical accounting policies
include: income taxes, goodwill and other long-lived
asset valuations, revenue recognition, stock-based compensation,
and capitalization of software development costs.
Concentration of Credit Risk and Significant Customers
The
Company maintains cash in bank deposit accounts, which, at times,
may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash
equivalents.
Financial
instruments, which potentially subject the Company to concentration
of credit risk, consist primarily of trade receivables. In the
normal course of business, the Company provides credit terms to its
customers. Accordingly, the Company performs ongoing evaluations of
its customers and maintains allowances for possible losses.
The provision is based on the overall composition of our
accounts receivable aging, our prior history of accounts receivable
write-offs, and our experience with specific customers. Other
factors indicating significant risk include customers that have
filed for bankruptcy or customers for which we have less payment
history to rely upon. We rely on historical trends of bad debt as a
percentage of total revenue and apply these percentages to the
accounts receivable which when realized have been within the range
of management's expectations. The Company does not require
collateral from its customers. We write off accounts
receivable when they are determined to be uncollectible. Changes in
the allowances for doubtful accounts are recorded as bad debt
expense and are included in general and administrative expense in
our consolidated financial statements.
The
Company's accounts receivable are derived from sales of products
and services primarily to customers operating multilocation retail
and grocery stores. Amounts that have been invoiced are recorded in
accounts receivable (current and long-term), and in deferred
revenue or revenue, depending on whether the revenue recognition
criteria have been met.
During the years ended June 30, 2017, the Company had one customer
that accounted for greater than 10% of accounts receivable.
Customer A had a balance of $403,000. During the years ended
June 30, 2016, there were two customers that accounted for greater
than 10% of accounts receivable. Customer B had a balance of
$343,000 and Customer C had a balance of $327,000.
During the years ended June 30, 2017 and 2016, there were no
customers that accounted for greater than 10% of total revenue.
During the year ended June 30, 2015, the Company had one customer,
ReposiTrak, Inc. (acquired on June 30, 2015) that accounted for
greater than 10% of total revenue.
Prepaid expense and other current assets
Prepaid expenses and other current assets include amounts for which
payment has been made but the services have not yet been
consumed. The Company’s prepaid expenses are made up
primarily of prepayments for hosted software applications used in
the Company’s operations, maintenance agreements on hardware
and software, and other miscellaneous amounts for insurance,
membership fees and professional fees. Prepaid expenses are
amortized on a pro-rata basis to various expense accounts as the
services are consumed typically by the passage of time or as the
prepaid service is used.
Depreciation and Amortization
Depreciation and
amortization of property and equipment is computed using the
straight line method based on the following estimated useful
lives:
|
|
Furniture and
fixtures
|
5-7
|
Computer
equipment
|
3
|
Equipment under
capital leases
|
3
|
Long-term use
equipment
|
10
|
Leasehold
improvements
|
|
Leasehold
improvements are amortized over the shorter of the remaining lease
term or the estimated useful life of the improvements.
Amortization of
intangible assets are computed using the straight-line method based
on the following estimated useful lives:
|
|
Customer
relationships
|
10
|
Acquired developed
software
|
5
|
Developed
software
|
3
|
Goodwill
|
|
Goodwill and
intangible assets deemed to have indefinite lives are subject to
annual impairment tests. Other intangible assets are amortized over
their useful lives.
Warranties
The
Company offers a limited warranty against software defects.
Customers who are not completely satisfied with their software
purchase may attempt to be reimbursed for their purchases outside
the warranty period. For the years ending June 30, 2017, 2016
and 2015, the Company did not incur any expense associated with
warranty claims.
Revenue Recognition
The
Company recognizes 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.
The
Company recognizes subscription, hosting, premium support, and
maintenance revenue ratably over the length of the agreement
beginning on the commencement dates of each agreement or when
revenue recognition conditions are satisfied. Revenue
from license and professional services agreements are recognized as
delivered.
Amounts that have
been invoiced are recorded in accounts receivable and in deferred
revenue or revenue, depending on whether the revenue recognition
criteria have been met.
Agreements with
multiple deliverables such as subscriptions, support, and
professional services, are accounted for separately if the
deliverables have standalone value upon
delivery. Subscription services have standalone value as
the services are typically sold separately. When
considering whether professional services have standalone value,
the Company considers the following factors: (i) availability of
services from other vendors, (ii) the nature and timing of
professional services, and (iii) sales of similar services sold
separately. Multiple deliverable arrangements are
separated into units of accounting and the total contract
consideration is allocated to each unit based on relative selling
prices.
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.
During
2017, 2016 and 2015 capitalized development costs of 45,736, $0 and
$0, respectively, were amortized into expense. The Company
amortizes its developed and purchased software on a straight-line
basis over three and five years, respectively.
Research and Development Costs
Research and
development costs include personnel costs, engineering, consulting,
and contract labor and are expensed as incurred for software that
has not achieved technological feasibility.
Advertising Costs
Advertising is
expensed as incurred. Advertising costs were approximately
$110,600, $113,000, and $21,000 for the years ended June 30, 2017,
2016 and 2015, respectively.
Income Taxes
The
Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between
tax bases and financial reporting bases of other assets and
liabilities.
Earnings Per Share
Basic
net income or loss per common share (“
Basic EPS
”) excludes
dilution and is computed by dividing net income or loss by the
weighted average number of common shares outstanding during the
period. Diluted net income or loss per common share
(“
Diluted
EPS
”) reflects the potential dilution that could
occur if stock options or other contracts to issue shares of 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 year ended June 30, 2016 and 2015 warrants to purchase
1,416,749 and 1,426,178 shares of common stock, respectively, were
not included in the computation of diluted EPS due to the
anti-dilutive effect. Warrants to purchase shares of
common stock were outstanding at prices ranging $3.50 from to $10
per share at June 30, 2017.
The
following table presents the components of the computation of basic
and diluted earnings per share for the periods
indicated:
|
|
|
|
|
|
Numerator
|
|
|
|
Net income (loss)
applicable to common shareholders
|
$
2,986,721
|
$
(62,785
)
|
$
(6,560,574
)
|
|
|
|
|
Denominator
|
|
|
|
Weighted average
common shares outstanding, basic
|
19,353,000
|
19,151,000
|
17,375,000
|
Warrants to
purchase common stock
|
911,000
|
-
|
-
|
|
|
|
|
Weighted average
common shares outstanding, diluted
|
20,264,000
|
19,151,000
|
17,375,000
|
|
|
|
|
Net income (loss)
per share
|
|
|
|
Basic
|
$
0.15
|
$
(0.00
)
|
$
(0.38
)
|
Diluted
|
$
0.15
|
$
(0.00
)
|
$
(0.38
)
|
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.
Cash and Cash Equivalents
The
Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Cash and cash equivalents are stated at fair value.
Marketable Securities
Management
determines the appropriate classification of marketable securities
at the time of purchase and reevaluates such determination at each
balance sheet date. Securities are classified as available for sale
and are carried at fair value, with the change in unrealized gains
and losses, net of tax, reported as a separate component on the
consolidated statements of comprehensive income. Fair value is
determined based on quoted market rates when observable or
utilizing data points that are observable, such as quoted prices,
interest rates and yield curves. The cost of securities
sold is based on the specific-identification method. Interest on
securities classified as available for sale is also included as a
component of interest income.
Fair Value of Financial Instruments
The
Company's financial instruments consist of cash, cash equivalents,
receivables, payables, accruals and notes payable. The
carrying amount of cash, cash equivalents, receivables, payables
and accruals approximates fair value due to the short-term nature
of these items. The notes payable also approximate fair
value based on evaluations of market interest rates.
Reclassifications
Certain prior-year
amounts have been reclassified to conform with the current year's
presentation.
Investee companies
that are not consolidated, but over which the Company exercises
significant influence, are accounted for under the equity method of
accounting. Whether or not the Company exercises significant
influence with respect to an investee depends on an evaluation of
several factors including, among others, representation on the
investee company’s board of directors and ownership level,
which is generally a 20% to 50% interest in the voting securities
of the investee company. Under the equity method of accounting, an
investee company’s accounts are not reflected within the
Company’s consolidated balance sheets and statements of
operations; however, the Company’s share of the earnings or
losses of the investee company is reflected in the consolidated
statements of operations. The Company’s carrying
value in an equity method investee company is reflected in the
caption ‘‘Investments’’ in the
Company’s consolidated balance sheets.
As of
June 30, 2017, investments represent a 36% ownership in a
privately-held corporation, and represents initial (January 2016)
and subsequent investments. There were nominal earnings for the
year ended June 30, 2017.
When
the Company’s carrying value in an equity method investee
company is reduced to zero, no further losses are recorded in the
Company’s consolidated financial statements unless the
Company guaranteed obligations of the investee company or has
committed additional funding. When the investee company
subsequently reports income, the Company will not record its share
of such income until it equals the amount of its share of losses
not previously recognized.
Accounts
receivable consist of the following:
|
|
|
Accounts
receivable
|
$
4,401,377
|
$
3,123,774
|
Allowance for
doubtful accounts
|
(392,250
)
|
(75,000
)
|
|
$
4,009,127
|
$
3,048,774
|
Accounts
receivable consist of trade accounts receivable and unbilled
amounts recognized as revenue during the year for which invoicing
occurs subsequent to year-end. Amounts that have been
invoiced are recorded in accounts receivable and in deferred
revenue or revenue, depending on whether the revenue recognition
criteria have been met.
NOTE 5.
|
PROPERTY AND EQUIPMENT
|
Property and
equipment are stated at cost and consist of the following at June
30:
|
|
|
Computer
equipment
|
$
2,951,179
|
$
3,350,390
|
Furniture and
equipment
|
1,634,081
|
260,574
|
Leasehold
improvements
|
245,835
|
231,782
|
|
4,831,095
|
3,842,746
|
Less accumulated
depreciation and amortization
|
(2,715,818
)
|
(3,373,363
)
|
|
$
2,115,277
|
$
469,383
|
Depreciation
expense for the years ended June 30, 2017 and 2016 was $308,887 and
$376,046, respectively.
NOTE 6.
|
CAPITALIZED SOFTWARE COSTS
|
Capitalized
software costs consist of the following at June 30:
|
|
|
Capitalized
software costs
|
$
2,626,070
|
$
2,626,070
|
Less accumulated
amortization
|
(2,488,865
)
|
(2,443,128
)
|
|
$
137,205
|
$
182,942
|
Amortization
expense for the years ended June 30, 2017 and 2016 was $45,737 and
$0, respectively.
NOTE 7.
|
ACQUISITION RELATED INTANGIBLE ASSETS, NET
|
Customer
relationships consist of the following at June 30:
|
|
|
Customer
relationships
|
$
5,537,161
|
$
5,537,161
|
Less accumulated
amortization
|
(4,485,961
)
|
(4,354,561
)
|
|
$
1,051,200
|
$
1,182,600
|
Amortization
expense for the years ended June 30, 2017 and 2016 was $131,400 and
$131,400, respectively.
Estimated
aggregate amortization expense per year are as
follows:
Years ending June
30:
|
|
2018
|
131,400
|
2019
|
131,400
|
2020
|
131,400
|
2021
|
131,400
|
Thereafter
|
525,600
|
NOTE 8.
|
ACCRUED LIABILITIES
|
Accrued
liabilities consist of the following at June 30, 2017 and
2016:
|
|
|
Accrued stock-based
compensation
|
$
1,054,828
|
$
768,055
|
Accrued
compensation
|
296,553
|
336,957
|
Accrued other
liabilities
|
265,521
|
19,872
|
Accrued
taxes
|
261,561
|
194,560
|
Accrued
dividends
|
206,522
|
182,759
|
|
$
2,084,980
|
$
1,502,203
|
The
Company had the following notes payable obligations at June 30,
2017 and 2016:
Notes Payable:
|
|
|
Note payable to a
bank, due in monthly installments of $7,860 bearing interest at
3.73% due February 9, 2017, this note is a conversion of a
multi-advance note payable initially put in place on February 19,
2012, secured by related capital equipment purchases.
|
-
|
62,445
|
Note payable to a
bank, due in monthly installments of $7,860 bearing interest at
4.17% due August 26, 2018, this note is a conversion of a
multi-advance note payable initially put in place on August 26,
2013, secured by related capital equipment purchases.
|
99,751
|
187,799
|
Note payable to a
bank, due in monthly installments of $4,932 bearing interest at
4.91% due March 18, 2018, secured by related capital equipment
purchases.
|
43,475
|
98,980
|
Note payable to an
entity, due in monthly installments of $4,009 bearing interest at
4.00% due July 1, 2019, secured by long-term
investments.
|
348,076
|
381,228
|
Note payable to a
bank, 12 month draw period interest only 2% + LIBOR, monthly
installments set after draw period, due March 31, 2021, secured by
related capital equipment purchase, NBV of approximately
$170,000
|
206,996
|
-
|
Note payable to a
bank, due in quarterly installments of $53,996 bearing interest at
4.21% balloon payment of $800,000 due July 28, 2022, secured by
related capital equipment, NBV of approximately
$1,550,000
|
1,617,271
|
-
|
|
$
2,315,569
|
$
730,452
|
Less current
portion notes payable
|
(318,616
)
|
(239,199
)
|
|
$
1,996,953
|
$
491,253
|
Maturities of
notes payable at June 30, 2017 are as follows:
Year ending June 30:
|
|
|
|
|
2018
|
|
|
$
|
318,616
|
|
2019
|
|
|
$
|
282,807
|
|
2020
|
|
|
$
|
269,932
|
|
2021
|
|
|
$
|
263,646
|
|
2022
|
|
|
$
|
1,180,568
|
|
The
Company’s lines of credit with a bank has an annual interest
rate of 2.5% plus the greater of zero percent or LIBOR and allows
for borrowings up to $6,000,000, $1,500,000 unsecured and
$4,500,000 secured by accounts receivable and certain deposit
accounts. The line of credit is scheduled to mature on
December 31, 2018. The balance on the line of credit was $2,850,000
and $2,500,000 at June 30, 2017 and June 30, 2016,
respectively.
NOTE 11.
|
DEFERRED REVENUE
|
Deferred revenue
consisted of the following at June 30:
|
|
|
Subscription
|
$
2,083,070
|
$
2,221,264
|
Other
|
267,776
|
495,830
|
|
$
2,350,846
|
$
2,717,094
|
Deferred taxes are
provided on a liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss
and tax credit carry forwards and deferred tax liabilities are
recognized for taxable differences. Temporary
differences are the differences between the reported amounts of
assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Net
deferred tax liabilities consist of the following components at
June 30:
|
|
|
Deferred tax
assets:
|
|
|
NOL
carryover
|
$
48,122,516
|
$
48,359,356
|
Allowance for bad
debts
|
152,978
|
29,250
|
Accrued
expense
|
365,370
|
254,971
|
Deferred
revenue
|
-
|
1,059,667
|
Deferred tax
liabilities:
|
|
|
Depreciation
|
(282,975
)
|
(88,495
)
|
Amortization
|
(335,797
)
|
(184,989
)
|
Valuation
allowance
|
(48,022,091
)
|
(49,429,760
)
|
Net deferred tax
asset
|
$
-
|
$
-
|
The
income tax provision differs from the amounts of income tax
determined by applying the US federal income tax rate to pretax
income from continuing operations for the years ended June 30, 2017
and 2016 due to the following:
|
|
|
Book income
(loss)
|
$
1,473,237
|
$
259,941
|
Stock for
services
|
(163,265
)
|
134,721
|
Change in accrual
stock
|
110,398
|
(394,664
)
|
Life
insurance
|
26,438
|
26,438
|
Meals &
entertainment
|
10,499
|
10,785
|
Change in deferred
revenue
|
-
|
383,528
|
Change in allowance
for doubtful accounts
|
123,728
|
(7,410
)
|
Change in
depreciation
|
(398,784
)
|
103,589
|
Loss on sale of assets
|
(18,852
)
|
-
|
NOL
utilization
|
(1,163,524
)
|
-
|
Valuation
allowance
|
-
|
(516,928
)
|
|
$
-
|
$
-
|
At
June 30, 2017, the Company had net operating loss carry-forwards of
approximately $123,391,100 that may be offset against past and
future taxable income from the year 2013 through
2035. No tax benefit has been reported in the June 30,
2017 consolidated financial statements since the potential tax
benefit is offset by a valuation allowance of the same
amount.
Due to
the change in ownership provisions of the Tax Reform Act of 1986,
net operating loss carryforwards for Federal income tax reporting
purposes are subject to annual limitations. In January
2009 the Company acquired Prescient Applied Intelligence, Inc.,
which had significant net operating loss carry-forwards. Due to
change in ownership, Prescient’s net operating loss
carryforwards may be limited as to use in future years. The
limitation will be determined on a year-to-year basis.
The
Company determines whether it is more likely than not that a tax
position will be sustained upon examination based upon the
technical merits of the position. If the
more-likely-than-not threshold is met, the Company measures the tax
position to determine the amount to recognize in the financial
statements. The Company performed a review of its
material tax positions in accordance with these recognition and
measurement standards.
The
Company has concluded that there are no significant uncertain tax
positions requiring disclosure, and there are not material amounts
of unrecognized tax benefits.
The
Company includes interest and penalties arising from the
underpayment of income taxes in the consolidated statements of
operations in the provision for income taxes. As of June
30, 2017, the Company had no accrued interest or penalties related
to uncertain tax positions.
The
Company files income tax returns in the U.S. federal jurisdiction
and various state jurisdictions. With few exceptions, the Company
is no longer subject to U.S. federal, state and local income tax
examinations by tax authorities for years before June 30,
2013.
NOTE 13.
|
COMMITMENTS AND CONTINGENCIES
|
Operating Leases
In
September 2012, the Company entered into an office lease at 299 So.
Main Street, Suite 2370, Salt Lake City, Utah, 84111, providing for
the lease of approximately 5,300 square feet for a period of seven
years, commencing on November 1, 2012. The monthly rent
is $13,122.
In February 2017,
the Company amended its office lease, as part of the amendment the
Company relocated to 6,700 square feet in Suite 2225. The new
monthly rent is $16,843.
Minimum future
rental payments under the non-cancelable operating leases are as
follows:
Year ending June
30:
|
|
2018
|
$
275,709
|
2019
|
$
163,016
|
2020
|
$
-
|
2021
|
$
-
|
2022
|
$
-
|
From
time to time the Company may enter into or exit from diminutive
operating lease agreements for equipment such as copiers, temporary
back up servers, etc. These leases are not of a material amount and
thus will not in the aggregate have a material adverse effect on
our business, financial condition, results of operation or
liquidity.
NOTE 14.
|
EMPLOYEE BENEFIT PLAN
|
The
Company offers an employee benefit plan under Benefit Plan Section
401(k) of the Internal Revenue Code. Employees who have
attained the age of 18 are eligible to participate. The
Company, at its discretion, may match employee’s
contributions at a percentage determined annually by the Board of
Directors. The Company does not currently match
contributions. There were no expenses for the years
ended June 30, 2017, 2016, and 2015.
NOTE 15.
|
STOCKHOLDERS EQUITY
|
Officers and Directors Stock Compensation
Effective November
2008, the Board of Directors approved the following compensation
for directors who are not employed by the Company:
●
Annual
cash compensation of $10,000 payable at the rate of $2,500 per
quarter. The Company has the right to pay this amount in the form
of shares of the Company’s common stock.
●
Upon
appointment, outside independent directors receive a grant of
$150,000 payable in shares of the Company’s restricted Common
Stock calculated based on the market value of the shares of Common
Stock on the date of grant. The shares vest ratably over a
five-year period.
●
Reimbursement of
all travel expenses related to performance of Directors’
duties on behalf of the Company.
Officers, Key Employees, Consultants and Directors Stock
Compensation.
In
January 2013, the Board of Directors approved the Second Amended
and Restated the 2011 Stock Plan (the “
Amended 2011 Plan
”), which
Amended 2011 Plan was approved by shareholders on March 29,
2013. Under the terms of the Amended 2011 Plan, all
employees, consultants and directors of the Company are eligible to
participate. The maximum aggregate number of shares of
common stock that may be granted under the 2011 Plan was increased
from 250,000 shares to 550,000 shares. A Committee of
independent members of the Company’s Board of Directors
administers the 2011 Plan. The exercise price for each
share of common stock purchasable under any incentive stock option
granted under the 2011 Plan shall be not less than 100% of the fair
market value of the common stock, as determined by the stock
exchange on which the common stock trades on the date of
grant. If the incentive stock option is granted to a
shareholder who possesses more than 10% of the Company's voting
power, then the exercise price shall be not less than 110% of the
fair market value on the date of grant. Each option
shall be exercisable in whole or in installments as determined by
the Committee at the time of the grant of such
options. All incentive stock options expire after 10
years. If the incentive stock option is held by a
shareholder who possesses more than 10% of the Company's voting
power, then the incentive stock option expires after five
years. If the option holder is terminated, then the
incentive stock options granted to such holder expire no later than
three months after the date of termination. For option
holders granted incentive stock options exercisable for the first
time during any fiscal year and in excess of $100,000 (determined
by the fair market value of the shares of common stock as of the
grant date), the excess shares of common stock shall not be deemed
to be purchased pursuant to incentive stock options.
During
the year ended June 30, 2017 and 2016 the Company issued 37,634 and
37,729 shares to its directors and 112,224 and 278,000 shares to
employees and consultants, respectively under these plans, 115,596
and 311,538, respectively are included in the rollforward of
Restricted Stock units below.
Restricted Stock Units
|
|
Weighted Average Grant Date Fair Value ($/share)
|
|
|
|
Outstanding at
July 1, 2015
|
1,350,970
|
$
5.51
|
Granted
|
48,228
|
10.51
|
Vested and
issued
|
(311,538
)
|
5.10
|
Forfeited
|
(36,516
)
|
6.51
|
Outstanding at
June 30, 2016
|
1,051,144
|
5.82
|
Granted
|
73,625
|
10.69
|
Vested and
issued
|
(115,596
)
|
6.28
|
Forfeited
|
(26,560
)
|
10.23
|
Outstanding at
June 30, 2017
|
982,613
|
$
6.01
|
The number
of restricted stock units outstanding at June 30, 2017 included
25,386 units that have vested but for which shares of common stock
had not yet been issued pursuant to the terms of the
agreement.
As of June
30, 2017, there was approximately $5.9 million of unrecognized
stock-based compensation expense under our equity compensation
plans, which is expected to be recognized on a straight-line basis
over a weighted average period of 4.6 years.
Warrants
Outstanding
warrants were issued in connection with private placements of the
Company's common stock and with the Series B Preferred Restructure.
The following table summarizes information about fixed stock
warrants outstanding at June 30, 2017:
|
Warrants Outstanding
at June 30, 2017
|
Warrants Exercisable
at June 30, 2017
|
|
|
Weighted average
remaining contractual life (years)
|
Weighted average exercise price
|
|
Weighted average
exercise price
|
$
3.45 – 4.00
|
1,271,618
|
2.32
|
$
3.94
|
1,271,618
|
$
3.94
|
$
6.45 – 10.00
|
100,481
|
1.49
|
$
7.29
|
100,481
|
$
7.29
|
|
1,372,099
|
2.26
|
$
4.18
|
1,372,099
|
$
2.26
|
Preferred Stock
The
Company’s certificate of incorporation currently authorizes
the issuance of up to 30,000,000 shares of ‘blank
check’ preferred stock with designations, rights, and
preferences as may be determined from time to time by the
Company’s Board of Directors, of which 700,000 shares are
currently designated as Series B Preferred Stock
(“
Series B
Preferred
”) and 550,000 shares are designated as
Series B-1 Preferred Stock (“
Series B-1 Preferred
”). As
of June 30, 2017, a total of 625,375 shares of Series B Preferred
and 285,859 shares of Series B-1 Preferred were issued and
outstanding. Both classes of Series B Preferred Stock pay
dividends at a rate of 7% per annum if paid by the Company in cash,
or 9% if paid by the Company in PIK Shares, the Company may elect
to pay accrued dividends on outstanding shares of Series B
Preferred in either cash or by the issuance of additional shares of
Series B Preferred (“
PIK
Shares
”).
During
the year ended June 30, 2017, the Company issued 75,646 shares for
dividends in kind and 30,000 shares in satisfaction of an
accrued bonus payable to the Company's Chief Executive
Officer.
On
June 30, 2015, the Company consummated the acquisition of 100% of
the outstanding capital stock of ReposiTrak, Inc. The
accompanying consolidated financial statements of the Company for
the year ended June 30, 2015 contain the results of operations of
ReposiTrak from June 30, 2015. We issued 873,438 shares
of our common stock in connection with this
acquisition.
Unaudited
pro-forma results of operations for the twelve months ended June
30, 2015, as though ReposiTrak had been acquired as of July 1,
2014, are as follows:
|
|
|
|
|
|
|
|
|
Revenue
|
$
2,826,813
|
$
2,932,825
|
$
2,870,646
|
$
2,941,511
|
$
11,571,795
|
Loss from
Operations
|
(1,046,986
)
|
(1,290,524
)
|
(1,302,437
)
|
(3,222,538
)
|
(6,862,485
)
|
Net
Loss
|
(1,049,834
)
|
(1,317,510
)
|
(1,317,858
)
|
(3,241,545
)
|
(6,926,747
)
|
Net Loss Applicable
to Common Shareholders
|
(1,204,307
)
|
(1,471,983
)
|
(3,595,537
)
|
(3,365,721
)
|
(9,637,548
)
|
Basic and Diluted
EPS
|
(0.07
)
|
(0.08
)
|
(0.20
)
|
(0.18
)
|
(0.53
)
|
NOTE 17.
|
RECENT ACCOUNTING PRONOUNCEMENTS
|
In January 2017, the FASB issued ASU
2017-04,
Intangibles—Goodwill and
Other (Topic 350), Simplifying the Test for Goodwill
Impairment.
The amendment
in this Update simplify how an entity is required to test goodwill
for impairment by eliminating Step 2 from the goodwill impairment
test. An entity should apply the amendments in this Update on a
prospective basis In January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350), Simplifying the
Test for Goodwill Impairment. The amendment in this Update simplify
how an entity is required to test goodwill for impairment by
eliminating Step 2 from the goodwill impairment test. An entity
should apply the amendments in this Update on a prospective basis.
The Company notes that this guidance applies to its reporting
requirements and will implement the new guidance
accordingly.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments. Historically, there has been a diversity in practice in
how certain cash receipts/payments are presented and classified in
the statement of cash flows under Topic 230. To reduce the existing
diversity in practice, this update addresses multiple cash flow
issues. The amendments in this update are effective for fiscal
years beginning after December 15, 2017, and interim periods within
those fiscal years. Early adoption is permitted. The Company notes
that this guidance applies to its reporting requirements and will
implement the new guidance accordingly.
Through December 2016, the Financial Accounting
Standards Board ("FASB") issued ASU 2014-09 (ASC Topic 606),
Revenue from Contracts with Customers, ASU 2015-14 (ASC Topic 606)
Revenue from Contracts with Customers, Deferral of the Effective
Date, ASU 2016-10 (ASC Topic 606) Revenue from Contracts with
Customers, Identifying Performance Obligations and Licensing, ASU
2016-12 (ASC Topic 606) Revenue from Contracts with Customers,
Narrow Scope Improvements and Practical Expedients, and ASU 2016-20
(ASC Topic 606) Technical Corrections and Improvements to Topic
606, Revenue from Contracts with Customers, respectively. ASC
Topic 606 outlines a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance, including
industry specific guidance. It also requires entities to disclose
both quantitative and qualitative information that enable financial
statements users to understand the nature, amount, timing, and
uncertainty of revenue and cash flows arising from contracts with
customers. The amendments in these ASUs are effective for the
Company’s fiscal year starting July 1, 2018. The two
permitted transition methods under the new standard are the full
retrospective method, in which case the standard would be applied
to each prior reporting period presented, or the modified
retrospective method, in which case the cumulative effect of
applying the standard would be recognized at the date of initial
application. The Company currently anticipates adopting the
standard using the full retrospective method. We are in the process
of completing our analysis on the impact this guidance will have on
our Consolidated Financial Statements and related disclosures, as
well as identifying the required changes to our policies, processes
and controls. The Company is still conducting its assessment and
will continue to evaluate the impact of this ASU on our financial
position and results of operation.
In
January 2017, the FASB issued ASU 2017-04,
Intangibles—Goodwill and Other (Topic
350), Simplifying the Test for Goodwill Impairment.
The
amendment in this Update simplify how an entity is required to test
goodwill for impairment by eliminating Step 2 from the goodwill
impairment test. An entity should apply the amendments in this
Update on a prospective basis In January 2017, the FASB issued ASU
2017-04, Intangibles—Goodwill and Other (Topic 350),
Simplifying the Test for Goodwill Impairment. The amendment in this
Update simplify how an entity is required to test goodwill for
impairment by eliminating Step 2 from the goodwill impairment test.
An entity should apply the amendments in this Update on a
prospective basis. The Company notes that this guidance applies to
its reporting requirements and will implement the new guidance
accordingly and does not expect the implementation to have a
material impact on its financial position or results of
operations.
In
August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments. Historically, there has been a diversity in practice in
how certain cash receipts/payments are presented and classified in
the statement of cash flows under Topic 230. To reduce the existing
diversity in practice, this update addresses multiple cash flow
issues. The amendments in this update are effective for fiscal
years beginning after December 15, 2017, and interim periods within
those fiscal years. Early adoption is permitted. The Company notes
that this guidance applies to its reporting requirements and will
implement the new guidance accordingly
and does not expect
the implementation to have a material impact on its financial
position or results of operations.
In
March 2016, the FASB issued ASU 2016-09 (ASC Topic 718), Stock
Compensation—Improvements to Employee Share-Based Payment
Accounting. The amendments in this ASU are intended to
simplify several areas of accounting for share-based compensation
arrangements, including the income tax consequences, classification
on the consolidated statement of cash flows and treatment of
forfeitures. The amendments in this ASU are effective for annual
periods beginning after December 15, 2016, and interim periods
within those annual periods. Early adoption is permitted. The
Company is in the process of assessing the impact, if any, of this
ASU on its consolidated financial statements.
In
February 2016, the FASB issued ASU 2016-02 (ASC Topic 842), Leases.
The ASU amends a number of aspects of lease accounting, including
requiring lessees to recognize operating leases with a term greater
than one year on their balance sheet as a right-of-use asset and
corresponding lease liability, measured at the present value of the
lease payments. The amendments in this ASU are effective for fiscal
years beginning after December 15, 2018, including interim
periods within those fiscal years. Early adoption is permitted. The
Company is in the process of assessing the impact on its
consolidated financial statements.
In
April 2015 and August 2015, the FASB issued ASU 2015-03 (ASC
Subtopic 835-30),
Interest-Imputation of Interest: Simplifying
the Presentation of Debt Issuance Costs
and ASU
2015-15 (ASC Subtopic 835-30),
Presentation and Subsequent Measurement of
Debt Issuance Costs Associated with Line-of-Credit Arrangements-
Amendments to SEC Paragraphs Pursuant to Staff Announcement at
June 18, 2015 EITF Meeting,
respectively.
The ASUs require that debt issuance costs related to a recognized
debt liability, with the exception of those related to
line-of-credit arrangements, be presented in the balance sheet as a
direct deduction from the carrying amount of that debt liability.
The amendments in these ASUs are effective for fiscal years, and
interim periods within those years, beginning after
December 15, 2015. Early adoption is permitted for financial
statements that have not been previously issued. The adoption of
this new guidance is not expected to have a material impact on the
Company's consolidated financial statements and
disclosures.
NOTE 18.
|
RELATED PARTY TRANSACTIONS
|
Series B Restructuring
On
February 4, 2015, holders of the Company’s Series B
Convertible Preferred Stock (“
Series B Preferred
”), consisting
of Randall K. Fields, the Company’s Chief Executive Officer,
his spouse, and Robert W. Allen, a director of the Company (the
“
Holders
”),
entered into a restructuring agreement (the “
Restructuring Agreement
”),
pursuant to which the Holders consented to the filing of an
amendment (the “
Series B
Amendment
”) to the Certificate of Designation of the
Relative Rights, Powers and Preference of the Series B Preferred
(the “
Series B Certificate
of Designation
”), pursuant to which (i) the rate at
which the Series B Preferred accrues dividends was lowered to 7%
per annum if paid by the Company in cash, or 9% if paid by the
Company in PIK Shares (as defined below), (ii) the Company may now
elect to pay accrued dividends on outstanding shares of Series B
Preferred in either cash or by the issuance of additional shares of
Series B Preferred (“
PIK
Shares
”), (iii) the conversion feature of the Series B
Preferred was eliminated, and (iv) the number of shares of the
Company's preferred stock designated as Series B Preferred was
increased from 600,000 to 900,000 shares (the “
Series B Restructuring
”). In
consideration for the Series B Restructuring, the Company issued to
the Holders: (y) an aggregate of 214,198 additional shares of
Series B Preferred, which shares had a stated value equal to the
amount that, but for the Series B Restructuring, would have been
paid to the Holders as dividends over the next five years
(“
Additional
Shares
”), and (z) five-year warrants to purchase an
aggregate of 1,085,068 shares of common stock for $4.00 per share
(“
Series B
Warrants
”), an amount and per share purchase price
equal to what the Holders would otherwise be entitled to receive
upon conversion of their shares of Series B Preferred
(“
Warrant
Shares
”).
The
terms of the Series B Restructuring were amended on March 31,
2015 as follows: (i) the Series B Certificate of Designation was
further amended (the “
Second Series B Amendment
”) to
(x) reduce the number of shares of the Company’s preferred
stock designated thereunder from 900,000 to 700,000, (y) require
that, should the Company pay dividends on the Series B Preferred in
PIK Shares, shares Series B-1 Preferred will be issued, rather than
shares of Series B Preferred, and (z) in the event any Holder
elects to exercise a Series B Warrant, one share of Series B
Preferred will be automatically converted into one share of Series
B-1 Preferred for every 2.5 Warrant Shares received by such Holder;
and (ii) the Restructuring Agreement was amended to substitute the
Additional Shares for shares of Series B-1 Preferred. The Second
Series B Amendment was filed with the Nevada Secretary of State on
March 31, 2015.
The
Company issued 58,103 and 7,910 PIK Shares to Messrs. Fields and
Allen in the year ended June 30, 2016, and 38,055, 5,488, and
657 PIK Shares to Messrs. Fields, Allen, and Ms.
Fields in the year ended June 30, 2015,
respectively.
Service Agreement.
During
the year ended June 30, 2017, the Company continued to be a party
to a Service Agreement with Fields Management, Inc.
(“
FMI
”),
pursuant to which FMI provided certain executive management
services to the Company, including designating Mr. Randall K.
Fields to perform the functions of President and Chief Executive
Officer for the Company. Randall K. Fields, FMI’s designated
Executive, who also serves as the Company’s Chairman of the
Board of Directors, controls FMI.
The
Company had payables of $77,628 and $32,253 to FMI at June 30, 2017
and 2016 respectively, under this Agreement. In addition, during
the year ended June 30, 2017, 30,000 shares of Series B-1 Preferred
were paid to FMI in satisfaction of an accrued bonus payable to Mr.
Fields. An additional 20,000 shares were issued in satisfaction of
an accrued bonus subsequent to June 30, 2017.
During
the year ended June 30, 2017, the Company also issued 75,646 PIK
Shares for accrued dividends payable with respect to the Series B
Preferred, of which 8,646 were issued to Robert W. Allen, a
director of the Company, and 67,000 were issued to Riverview
Financial Corp., an entity beneficially owned by Mr. Fields. In
addition, $10,576 was paid to Julie Fields, Mr. Fields spouse, as a
dividend paid with respect to the Series B Preferred beneficially
owned by Ms. Fields.
NOTE 19.
|
SUBSEQUENT EVENTS
|
Subsequent to June
30, 2017, on July 25, 2017, the Company filed Amendment No. 1 to
the First Amended and Restated Certificate of Designation of the
Relative Rights, Powers and Preferences of the Series B-1 Preferred
(the “
B-1
Amendment
”), which B-1 Amendment was effective July
21, 2017. The B-1 Amendment increased the number of shares of
Series B-1 Preferred from 400,000 to 550,000 shares.
In accordance with the Subsequent Events Topic of the FASB ASC 855,
we have evaluated subsequent events, through the filing date
and noted no additional subsequent events that are reasonably
likely to impact the financial statements.