Park City Group, Inc. (NASDAQ:PCYG)

Second Quarter 2014 Results

• Revenue for the second quarter 2014 were $3.0 million compared to $2.6 million in the prior year period.
• Non-GAAP EPS for the second quarter 2014 were $0.02 vs $0.01 in the prior year period.

During the quarter, ReposiTrak, the Company's food and drug safety venture with Leavitt Partners, announced a joint agreement with the Food Marketing Institute (FMI). This leading supermarket industry trade association has agreed to exclusively endorse and encourage the use of ReposiTrak among its food retail and wholesale members. "With a membership base of more than 40,000 food retailers and 25,000 pharmacies, the exclusive relationship with FMI, clearly positions ReposiTrak as the standard for food and drug safety tracking and tracing," said Mr. Fields. "ReposiTrak's base of customer connections is accelerating and its rapidly-growing pipeline already exceeds several thousand connections among its initial ROFDA wholesale customers."

During the second quarter, the Company continued to make progress with the test programs of large national retailers and suppliers. "Tests combining several of our subscription services are clearly demonstrating significant economic value to retailers and their suppliers and are beginning to transition into expanded relationships," said Mr. Fields. "In addition, these programs are raising our profile in the supermarket and consumer packaged goods industry, which also bodes well for the continued growth of our core supply chain business."

Park City Group (PCYG) describes itself as a “cloud-based, big data, SaaS software company” that sells inventory management and supply chain software.  Management has stated that PCYG’s future growth is centered on its relationship, executed on May 18, 2013, with ReposiTrak, its key “customer” that “pays” PCYG subscription fees for the EXCLUSIVE right to use some of its software.  We believe there is significant evidence that PCYG has been less than transparent about its growth engine and most important customer. Despite the fact that PCYG’s trailing non-GAAP net income is nil, its stock has nearly tripled since the consummation of the ReposiTrak deal and trades at 13x EV/Sales, 13x P/S, and 112x EV/EBITDA .  We will show why we believe that at most PCYG, currently trading near $9.00, should at a maximum be trading closer to $3.50 which is where it was before ReposiTrak was baked into the share price as the “key growth driver”.

Our research shows that:

1.       ReposiTrak, the source of meaningful annual license and management fees for PCYG during its Fiscal year ended June 30, 2013, is a development stage company that generates little or no revenue and is past due on the majority of these fees that have been booked as revenue.  Without ReposiTrak’s financial impact, PCYG’s stated revenue growth would decrease from positive 12% to Zero.  In fact,  PCYG has acknowledge ReposiTrak’s inability to cover its operating costs and other financial obligations with a disclosure in an exhibit of one of its SEC filings which includes the following passage (ReposiTrak was previously known as F&D):

“F&D is currently seeking financing necessary to adequately capitalize F&D and fund its operating expenses and financial commitments, including its subscription payments.”

2.       Management uses accounting practices, that are likely GAAP exceptions, to record uncollectable  subscription revenues and management fees and give the appearance that PCYG’s financial statements are sound despite the fact that disclosures in the most recent 10K clearly state that ReposiTrak is well past due on and unable to pay the majority of these fees.

3.       It is very likely that ReposiTrak should be considered a related or controlled entity and is not accounted for or disclosed as such. This tactic allows PCYG to keep booking revenues from ReposiTrak without recognizing its expenses or even disclosing ReposiTrak’s true revenues and expenses.  If ReposiTrak’s operating performance was made public we suspect the bloom would quickly come off this overhyped venture.

4.       PCYG has agreed to use its own shares to compensate ReposiTrak founders for their original investment in the company.

• PCYG has an option to acquire 75% of ReposiTrak’s issues and outstanding shares for just $100,000. As part of this agreement, the majority owner of ReposiTrak, Leavitt Partners, has agreed to dispose of at least 66% of its ownership interests for its share of the $100,000 consideration to be paid by PCYG.   The PCYG option implies the total grossed up value of ReposiTrak is $133,000.
• It looks like PCYG is essentially bailing out ReposiTrak’s seed investors for the value of their original investment ($1.0 million) only 15 months after the consummation of the software licensing deal.

5.       PCYG has conducted securities offerings with individuals (For example, Rodman and Renshaw) that have known connections to publicly traded companies that have previously been accused of fraud.

Please see Our full report here.

Please see the rest of our revealing report here. To be among the first to receive alerts like this, subscribe to our premium service!