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Park City Group Inc. (NASDAQ:PCYG)

Q3 2014 Results Earnings Conference Call

May 12, 2014 4:15 PM ET

Executives

Dave Mossberg - Investor Relations Representative

Randy Fields - Chairman and CEO

Ed Clissold - Chief Financial Officer

Analysts

Robert Kecseg - Las Colinas Capital

Quinn Goldman - Park City Capital

Operator

Good day, ladies and gentlemen. And welcome to the Park City Group’s Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today’s conference, Dave Mossberg, Investor Relations Representative. Please begin.

Dave Mossberg

Thank you, [Sway] (ph). Before we begin, we will be referring to today’s earnings release, which can be downloaded from the Investor Relations page of the company’s website at parkcitygroup.com.

This conference call could contain forward-looking statements about Park City Group within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not historical fact.

Such forward-looking statements are based upon the current belief and expectation of Park City Group’s management and are subject to risk and uncertainties, which could cause actual results to differ from the forward-looking statements.

Such risks are more fully discussed in the company’s filings with the Securities and Exchange Commission. The information set forth herein should be considered in light of such risk. Park City Group does not assume any obligation to update the information contained in this conference call.

Throughout today’s conference call, we may be referring to both GAAP and non-GAAP financial results, including the terms free cash flow, EBITDA, adjusted EBITDA, net debt, net income loss and earnings per share, which are non-GAAP terms.

We believe these non-GAAP terms are useful financial measure for our company primarily because of the significant non-cash charges in our operating statement. There is a reconciliation of non-GAAP results in earnings release and on the Investor Relations section of the website.

Our speakers today will be Randy Fields, Park City Group’s Chairman and CEO; and Ed Clissold, Park City Group’s CFO. Ed?

Ed Clissold

Thanks, Dave. Good afternoon, everyone, and thank you for joining us on the call today. My remarks will cover our consolidated operating results for our third quarter ended March 31. I will also comment on certain cash flow and balance sheet items, and then I will turn the call over to Randy for his comments.

For the third quarter ended March 31, 2014, we are pleased to be able to report that subscription revenue increased 24% to $2.5 million, which was a record for the company. Other revenue was $599,000 for the third quarter, which is a decrease from the $1 million we posted during the same period last year.

We have some legacy customers that still purchase licenses on a one-off basis and together with our decision to transition to a subscription-based recurring revenue model make comparisons in the other revenue category less important due to its relative size.

Overall, we expect contribution from other revenue will remain at approximately 20% to 30% of our overall revenue. As a result, going forward total revenue comparisons should more closely mirror that of subscription revenue intermixed with the occasional lumpiness of one-time license sales and consulting agreements. Overall, total revenue increased 1% to $3.1 million.

Moving on to operating expenses, as we said last quarter, in anticipation of the expected acceleration in growth, we have increased investment in sales, marketing and account management staff levels during the first half of the year. This increase in staffing is reflected in the $723,000 increase in operating expenses. By comparison total operating expenses were $3.5 million versus $2.8 million last year.

At the end of March, our headcount was 63, which is up six from the end of June. With these additions, we feel that current staffing levels are adequate to support our anticipated growth in the near-term.

Overall, we expect to show very modest increases in operating expenses over the next several quarters. Below the operating line interest expenses changed to interest income and show a $66,000 improvement, which reflects the increase in cash and decrease in debt levels.

Regarding profitability, GAAP net loss for the third fiscal quarter ended March 31, 2014 was $566 -- $561,000, as compared to a net loss of $79,000 during the prior year period. Non-GAAP earnings per share -- common share for the third quarter was breakeven compared to income of $0.02 a share during the same period last year.

That brings us to our cash flows and financial position. Free cash flow during the quarter was a negative $256,000 versus negative cash flow of $898,000 for the same period last year.

As of March 31, 2014, the company had a cash balance of approximately $3.4 million, compared to $3.6 million at the beginning of the fiscal year. Debt levels are $2 million versus $2.1 million at the beginning of the year.

Notable changes to our balance sheet include increases in our account receivable and note receivable lines. The AR balance reflects the DSO of 88 days versus 72 days last year and mainly reflects the timing of business booked late in the quarter and that's not tied to any single customer.

Our note receivable balance of $2.4 million relates to notes due from ReposiTrak. As we’ve discussed in prior calls in exchange for these notes from ReposiTrak we negotiated an increase subscription fee, which gives Park City Group greater participation in ReposiTrak revenue. We also received the fixed cost option to purchase a much larger ownership stake in ReposiTrak.

Since that time, ReposiTrak has continued to make significant progress in establishing itself as the industry standard for tracking and tracing food and drugs through the global supply chain. And we are even more confident that this decision was in the best interest of our shareholders.

ReposiTrak has continued to onboard new customers at an increasing rate. And based on its current pipeline of connections, the venture has a clear path to meaningful cash flow generation over the next 12 months, which will reduce our note receivable. As of March 31, our total outstanding share count was 16.9 million.

As we've said before, we expect to be modest net users of cash this year. However, as our revenue and earnings continue to ramp, we expect to be cash flow generators next year. And our current strength of our -- and with the current strength of our balance sheet, we have more than adequate liquidity to fund the cash used this year.

That concludes my review of the financials for the fiscal third quarter. And I’ll now turn the call over to Randy.

Randy Fields

Ed, thank you. Appreciate it. Obviously, we’re terribly proud and the team has done an unbelievably good job this quarter, hence the 24% year-over-year increase. As Ed mentioned that’s both a record rate of growth as well as record levels. We have been suggesting for some time that as the years go on, we would anticipate continued acceleration of our growth. And obviously, we’re very pleased that that is now coming true at the revenue line.

Few things in terms of strategic initiatives that went on over the course of not just the quarter but frankly I’ll be talking about year-to-date. Extremely importantly as we mentioned a couple of years ago that we would be shifting our focus from small and medium-sized retailers to larger retailers, meaning that we will go from people with a few hundred doors or stores as one would call them to several thousand.

Doing that has had a salutary impact obviously on our revenue and our growth rate. And we anticipate over the next several years that would continue to be true. I think what I would like to do given that there are new people on the call is give you some terms of ours as we use them in our conversation. It’s easier to understand.

We refer to our business model as hub and spoke. And hub is normally the retailer or wholesaler who engages us. That’s the hub. The spoke would then be a supplier that does business with that hub and a connection is the data exchange for which we are actually paid.

So connections will exceed the number of suppliers if you will or vendors, virtue of fact that the vendor could be connected to multiple retailers or wholesalers. So it’s important to understand when we talk about connection that number will be a bigger number than the number of suppliers and certainly a much big number than the number of hubs.

So let me move on from what seems to be guiding our business. As we have continued to focus on our brand promise inside Park City Group which is to help our customers to sell more, stock less but see every thing. Frankly there is a bit of a buzz which is very exciting to us turned around the industry. And the result of that probably is that we’re getting more enquiries. There are more tests and trials that I’ll talk about in a few minutes. The benefit is that things are obviously going very, very well.

The value to some of these larger accounts on which we currently are spending the rate field of our time and focus is that it gives us a lot of operational leverage and operational leverage with us translates into margin leverage ultimately. One of the things that now happens is with larger suppliers, larger retailers, word is spreading little bit more rapidly that gives us the network effect amongst retailers and amongst wholesalers. But it also gives us network effect frankly amongst other suppliers.

One of the things we’ve also seen is as we’ve moved up, if you will, from intended food chain in terms of the size of the account with which we’re dealing is there is greater appreciation for the full length and breadth of our service offerings. So that we’re seeing a greater uptake of the end-to-end or nearly end-to-end solutions that we can provide.

To be a little bit more specific, as everybody knows we are doing business with several large retailers, as we’ve mentioned, one of whom is a drug chain that continues to go very well. It is a significant contributor now and is in fact, accelerating to become one of our largest accounts here over the course of the next year.

The continued growth of the large national changes I mentioned over the next several years will continue to impact, how we do from a financial sense and I think everybody will be pleased with that result. Interestingly, we are seeing additional trials by several of these national retailers with whom we’ve been doing business. Trials meaning they are testing what we're doing beyond the initial engagement in several other areas of interest, both for them and to us.

Hopefully, those trials will go well and that that leads us to additional categories of merchandise and then expansion of the revenue base that we have with these larger accounts. The fact is, however, the most import thing to our business is the result that our customers derive from using Park City equipped services. Again, the brand promise being to sell more, stock less and see everything.

And we’ve had some tremendous successes here over the course of the last year too. Some of which we’ve pointed out in press release is directed to the industry. For example, we had a large national baker grow sales by nearly 42% with the large regional retailer. We had another regional retailer sales increased by 7% and returns decreased by 20% in the commercial bread category.

We helped a large regional dairy supplier show a year-over-year sales increases of nearly 8%. The fact is that when our customers experienced success as you would expect, they use our services on a broader scale and frankly from a buzz perspective, it certainly helps us.

Now, little bit about ReposiTrak, the food and drug safety venture that we have with Leavitt Partners. It’s been a great quarter for us. In that regard, I want to go back a little bit and give you some background on why we consider the food and drug safety business as a business opportunity to be significant.

First, if you are not aware, there's been a very substantial increase in regulation potential around both food and frankly drug. The Food Safety Modernization Act that was signed into law in January of 2011 is beginning to show up in the form of regulations and to certainly into thousands of pages of regulations.

It will create a much greater burden on suppliers and wholesalers in particular, in terms of the practices that they have and frankly, we call it, becoming your brother’s keeper, more and more the reliability rest with people in the supply chain, not necessarily the perpetrator of the problems.

Beyond that, there was actually another piece of legislation that was passed toward the end of last year that is going to require tracking and tracing in the drug industry as well. So the opportunity is vast. There are literally millions of participants in the global food drug and supplement supply chain that end up being ingested by America. So the opportunity for us is terrific and frankly, the association with Leavitt has been mutually helpful.

We know in terms of becoming this industry standard that we were hoping for. The fact of the matter is that ReposiTrak is an extension of our core technology. We’ve made some amazing enhancements over the course of the last quarter that I'm very proud of it and a glance who let somebody in the supply-chain know what they are in compliance with what the supply chain partners that they have are requiring of the grants.

There is the dashboard that will tell people that they are either in or out of compliance and lead them down the path as how to get into appropriate compliance. Just a little bit of anecdotal information that’s interesting about ReposiTrak, is that we are finding, if you will, the validation for the need to have the system and that validation is becoming more and more evident to the participant.

We are seeing, for example, upwards of 30% of the participant don't have their insurance properly in force. Nearly half of either have not had safety -- I'm sorry, health and safety audits that they should have or have failed. So what we are finding is there are more problems in the global food supply chain that require compliance adherence than we would have guessed certainly. We are very surprised by it and that reinforces in the people that were using the system that it was a good decision. So, ReposiTrak is going very, very well.

We mentioned that the goal during the first quarter was to enhance our -- we call it onboarding process of getting new connections made inside of ReposiTrak, and that has gone very, very well. We are beginning to see a much more rapid ramp of participants in the system. And I think two noteworthy facts from an investor’s perspective taking a look out over the next year.

In our last conference call, we said that we would expect a year from then to have a several thousand connections made within ReposiTrak. We still feel very good about that number. And in fact, the number of suppliers in our pipeline onboard continues to increase rapidly and there are indeed several thousand suppliers in that queue. In addition, we are adding additional numbers of ROFDA, so that we would anticipate both higher retail, and more importantly for us, wholesale utilization of ReposiTrak over the course of the next year.

So we certainly agree with Ed’s statement that it’s perfectly reasonable to assume positive cash flow on the part of the ReposiTrak and a very rapid growth rate over the course of the next several years. I know a number of conversations that we’ve had with investors have asked about analysts coverage to Park City Group and we have had conversations with several analysts on Wall Street and there are no promises that we can make which are certainly not under our control, but hopefully that will lead to some coverage from the sell-side.

We’ve also announced an Analyst Day for June 16th that will be [a maiden voyage] (ph). We are doing something like that. We are obviously very excited about it and anticipate that being the successful event.

So let me just wrap up, things are great. I don’t know what else to say at the moment. They are very, very good. I couldn’t be happier. The team has performed really remarkably, I would say finding it easier and easier to work with larger and larger customers, that’s a terrific thing.

One note of caution remember we are not, not, not a quarterly business, we are an annual business. Some quarters will be up a lot, some quarter not as much, but year to year our trend should continue to accelerate at the topline and that has a magnified effect on our bottom line and cash flow.

So I think the summary is that the team has done a stellar performance job this quarter and this year. We are all feeling very, very optimistic about how the next year or two are laying out. We are in the process, if you will, of bringing on some of these larger accounts and it will have a meaningful impact on our topline and bottom line. So that’s about it, all good, and appreciate you paying attention during the conversation.

[Sway] (ph), can you poll for questions please?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Robert Kecseg from Las Colinas Capital. Please go ahead.

Robert Kecseg - Las Colinas Capital

Hi, Randy.

Randy Fields

Hi, Bob.

Robert Kecseg - Las Colinas Capital

So finally on the guy that goes back away with the hubs and spokes, could you just talk about how many hubs we had? And I know that was back in the regional days, maybe hasn’t changed that much, but what do we have for the hub count now for up to this point?

Randy Fields

Bob, we just stopped talking in the core business about connections, hubs, and spokes for a very good reason. The difference in our revenue generation per hub, per spoke, per everything is so significantly different than it was that you end up in these [tiering of] (ph) averages. So we deliberately stayed from it.

We are continuing to add hubs both large, small, and medium, that’s continuing. And so the number is going up, I am deliberately vague and I apologize, but I am afraid of giving numbers because averages and modeling just absolutely will not work. If I thought I were a meaningful number, we would still get it.

The number of connections continues to go up. We paid more per connections. The number of hubs is going up and the number of suppliers is going up. All those numbers are continuing to grow.

Robert Kecseg - Las Colinas Capital

And on the national retailer that you mentioned, you said that there is an acceleration of checkup getting suppliers connected, is that kind of might...

Randy Fields

Yeah. Let me clarify that. We have several tests with several national retailers. In the case of this very large retailer that is doing the test, that test continues. It is expanding. We’re hoping for rollout decision soon, but we’re not in control of that. The results are really, really, really good as our view of it. But equally, importantly, that same company is now in the process of talking to us about two or three other tests to get going.

So that’s one of the things you expect with large companies is, they don’t jump into a growth fee, but at some point or some of like stopping a locomotive, once they get going, they go very well and the one very large national account that we’ve been working with now, nearly two years, I think its exemplary of that. It’s going extremely well. So, all is good on the western front as they say.

Robert Kecseg - Las Colinas Capital

Okay. Great. Thank you.

Randy Fields

Okay. Thank you, Bob.

Operator

Thank you. (Operator Instructions) And our next question comes from Quinn Goldman from Park City Capital. Please go ahead.

Randy Fields

Quinn.

Quinn Goldman - Park City Capital

Just wanted kind of get your perspective, I think, you mentioned kind of ReposiTrak ramping up over the next couple of years. Can you speak a little bit to how you are going to monetize that and I know its tough kind of with this test pilot you’re working on, but just how you envision that that transition happening maybe with that potential customer and just kind of the long-term opportunity there?

Randy Fields

It’s not a test of ReposiTrak and I -- you cut out in the very beginning Quinn. The test we’re talking about is not ReposiTrak. It’s something else, did I misunderstand?

Quinn Goldman - Park City Capital

Okay. Well, can you clarify that a big great.

Randy Fields

Okay.

Quinn Goldman - Park City Capital

I guess, I’m just wondering the monetization of ReposiTrak.

Randy Fields

Yeah. Nobody is testing ReposiTrak at this point, everybody is doing ReposiTrak whose in ReposiTrak and the pipeline of suppliers that we've been given to, as we call it, get on the system or on-board as our term of art is in the thousands. So we have a mountain to claim, that is for sure.

And we’re feeling very good about how that's going because it’s both accelerating just exactly as we had expected. But more importantly the technology is getting better and more usable and the factors that people are concerned about of regulation, reputation and financial risks are continuing to bring people to the table.

So, I’m feeling very good at the moment about ReposiTrak. Remembering at the moment is just a customer. At some future date, if it makes a business sense for us, we do have an option to acquire 74%, 75-ish kind of percent for fixed price $200,000 and that could happen. But should it just remain a customer we both have a fixed and variable fee that will grow as that business grow. So no matter what is ReposiTrak continues to get bigger and better, if you will, we have a seat at the table.

In terms of the other test I was talking about are tests would these large national retailers. Maybe the best metric is to how we're doing? Is not at the level of that retailer but one of the suppliers who is part of test got so excited about their results with that retailer that they’ve taken us to another retailer, one of the best-known names in retailing, certainty in the United States and they’re initiating our service through them with that new retail.

So it is gone very well. We have been -- again, I could not be more proud of the team. We’re generating terrific economic results and the hope, obviously, is overtime as those results continue our business, our revenue grows as our customers revenue grows.

Quinn Goldman - Park City Capital

Okay. Great. Perfect. Thanks, guys.

Randy Fields

Thanks Quinn.

Operator

Thank you. And I’m showing further question in queue. I’d like to turn the call back over to Mr. Randy Fields for any closing remarks.

Randy Fields

Nothing much to say other than, obviously, we feel terrific about the quarter, about the year. We’ve said in the beginning of the year, this would be a record year. Obviously, that looks very good from where we are. We anticipate year-over-year. We’ll see a continued acceleration of our topline for some period of time and most importantly, for everyone our team continues to execute to a fairly well. So ReposiTrak going well, the core business is doing very well and at the moment your CEO couldn’t be happy about how we’re performing. So, thank you guys for the support and talk to you soon.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a great day.

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