Park City Group Inc (PCYG) 2010 Q2 法說會逐字稿

Good afternoon. My name is Angelia and I will be your conference operator today. At this time, I would like to welcome everyone to the Park City Group conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Darrow, you may begin your conference.

Thank you, Operator. Good afternoon, everyone. I'm Jordan Darrow of Darrow Associates, and I welcome you to Park City Group's fiscal 2010 second quarter financial results conference call. For those who have not had a chance to review the earnings release, it's been issued by the wire services and may also be viewed on the Company's website at www.parkcitygroup.com.

On the call from Park City Group are Randall Fields, Chairman and Chief Executive Officer, and John Merrill, Chief Financial Officer. Management will review the financial results and other recent developments in their formal remarks. The formal portion of the presentation will be followed by a question-and-answer session.

Before I proceed with formal remarks, please be advised that statements made during this presentation that are not historical facts are forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements may include, but are not limited to, revenue and earnings projections; statements of business, plans, and objectives; prior development and time-to-market issues; and capital structure and other financial matters.

Forward-looking statements may differ from actuality and relying on them is subject to risk. Factors causing forward-looking statements in this presentation to differ from results are discussed in the Company's Form 10-K and 10-Q filings with the Securities and Exchange Commission. The Company is not necessarily obligated to update forward-looking statements, whether as a result of new information, future events or otherwise.

I will now turn the call over to Park City Group's Chairman and Chief Executive Officer, Randy Fields.

Thanks, Jordan. Good afternoon, everybody. I very much appreciate your joining us for the fiscal 2010 second quarter financial results conference call.

30 Eastern time.

So, the pattern that we are hopefully setting up is one that's convenient for you as shareholders. And if there's any changes that you'd like to suggest, please do so and we'll take that into consideration.

We had a terrific year so far in 2010, both looking back over the last 12 months after the acquisition of Prescient, and looking forward from a how-is-the-business-doing perspective.

From a series of strategic initiatives that we put forward at the beginning of the year and from my perspective, we've made some pretty remarkable progress. We reported revenue of $2.5 million in the second quarter of this fiscal year ended in December, which is up over 400% from the comparable period in the prior year. We were able to achieve about $560,000 of adjusted EBITDA in that quarter, which is an increase of about 350% to the comparable quarter in the prior year.

Our cash flow was strong. It's growing. We announced a EBITDA goal of the year of about $2.3 million. We are past the halfway mark. We're obviously doing better than that for the first half of the year. And seasonally, the first half of the year is not strong as the second half of the year.

We delivered our fifth consecutive quarter of positive EBITDA. And most importantly, from a going-forward perspective, last year January, we said that the goal in the calendar year 2009 was to add six new retail hubs to our business. We, in fact, added seven hubs, which brings us now to a total of 15. We are on track for the year of increased positive cash flow from operations and positive earnings per share.

These are just some of the financial highlights. John, in a minute, will provide more during his formal remarks. And then I'll address guidance and expectations for the balance of the year later in the phone call.

As we look back on the second quarter, this was a quarter that was a little bit difficult for us to forecast, largely because, as those of you who have known us for some time, appreciate the fact that retailers do not do implementations of any sort for almost half of that quarter. Starting around mid-November through the end of the calendar year, retailers basically bring things to a halt to address the holidays. We were actually pleasantly surprised that the quarter was as good as it was from a pipeline perspective, appointments and whatnot. It was certainly stronger than we anticipated going into the quarter.

I think over time, it's reasonable that the quarters will begin to smooth themselves out. So I think as we look forward for the next two to three years, I think we'll see that seasonality of our second quarter decline just a bit from what we've historically experienced.

Over the next few months, I think you'll see us make some announcements about some new customer wins. We certainly have some other developments from a product perspective that we'll be announcing. And the fact of the matter is that our pipeline has expanded dramatically in the last three or four months, and we would expect that to continue.

We are certainly gaining a great deal of market credibility. Our customers think well of us. We have an excellent market reputation. And frankly, from a how-I-see-it-from-here perspective, we are better positioned than we've ever been. So we're certainly optimistic about how the balance of this fiscal year ended in June should unfold.

At this point, if I can, let me turn it over to John, our CFO, and he'll tell you a little bit more detail about the quarter and six months we just finished.

Thanks, Randy, and good afternoon, everyone. I'll now review our fiscal 2010 second quarter and year-to-date consolidated operating results for the Company. I'll also comment on certain cash flow and balance sheet items.

Before I begin my discussion of the financial results, I believe it is important to speak to the presentation of Park City Group's second quarter results. It should be noted that the operating results as presented in our second quarter 10-Q, and the unaudited, consolidated and condensed financial statements incorporated therein for the three and six months ending December 31, 2009, contain the results of both Park City Group and Prescient Applied Intelligence, Inc. as a result of the merger that was completed on January 13, 2009.

It is also important to note that in accordance with Generally Accepted Accounting Principles, or GAAP, the fiscal 2010 results for the three and six months ended December 31, 2009 include the combined results of Prescient and Park City Group. Conversely, the fiscal 2009 results for the three and six-month period of 2008 do not include the pro forma aggregate of historical results of both companies, as if the merger had been completed on July 1, 2008.

For the second quarter of fiscal 2010, the Company's total revenues increased 450% to $2.5 million when compared with $454,000 for the same period last year. The approximate $2 million increase in total revenues were principally the result of the Prescient acquisition in addition to organic growth.

Fiscal 2010 year-to-date total revenues increased to $5.2 million when compared to approximately $984,000 for the same six-month period of fiscal 2009. The increase in revenues during the first six months of fiscal 2010 was 428%. The $4.2 million increase in total revenue is principally the result of higher revenues resulting from the acquisition of Prescient in January 2009, and expanding base of retail hub customers, including their suppliers.

At this time, I will cover our operating expenses for the second quarter and six-month periods ending December 31, 2009. For the second quarter of fiscal 2010, the Company's total operating expenses increased 79% to $2.39 million when compared with $1.33 million for the same period last year. The approximate $1 million increase in total operating expenses was principally due to the addition of Prescient employees and other operating expenses, including headcount additions for expansion of our internal sales and account management staff.

This increase in total operating expenses has been offset by an approximate $2 million decrease in closure of certain acquired corporate facilities, data center costs, reduced admin personnel, and termination of certain leases and other unnecessary obligations, including duplicative public company costs as a result of the acquisition of Prescient.

Breaking down the operating expenses for the quarter -- costs of services and product support increased 118% to $990,000 or 40% of revenue in the second quarter of fiscal 2010, when compared with $455,000 or 100% of revenue in the same period of 2008. The improvement in margin principally is the result of an increase in topline revenue and the rationalization of personnel, data center, and other cost of services reductions as a result of the Prescient acquisition.

Sales and marketing expenses were approximately $408,000 or 16% of revenue. Second quarter of 2010 compared with $233,000 or 75% of revenue in the prior-year period. The difference in sales expenses is due to the increase in sales personnel, account management, and other costs as a result of the Prescient acquisition, in addition to expansion of new executive sales personnel and account management, as a result of growth of new retailers and their respective suppliers.

General and administrative expenses increased 75% to $791,000, but declined as a percentage of total revenue to 32% in the second quarter of 2010 when compared with $509,000 or 112% of revenue in the prior-year period. The improvement in margin reflects the reduction in total management and administrative staff across the combined Company; the closure of corporate facilities; and decreases in auditing and other professional fees as a result of the Prescient acquisition.

Year-to-date, total operating expenses increased 79% to approximately $4.8 million when compared with $2.8 million reported for the same period in fiscal 2009. The increase of total operating expenses is principally the result of the acquisition of Prescient.

Depreciation and amortization expense in the second quarter and first half of fiscal 2010 was $204,000 and $410,000, respectively, as compared with $138,000 and $273,000 in second quarter of fiscal 2009. The higher depreciation and amortization expense in the three and six-month periods are principally a result of the amortization of certain software and customer lists acquired from Prescient.

The Company reported income from operations of $106,000 for the quarter ended December 31, 2009, compared with a loss from operations of $880,000 in the same period in 2008. The Company reported income from operations of $417,000 for the first half of fiscal 2010, compared with a loss from operations of $1.8 million in the same period of fiscal 2009.

Turning to earnings before interest, taxes, depreciation and amortization, or EBITDA, for moment -- with respect to the Company's use of EBITDA as an added metric to supplement the traditional GAAP measurements, I won't recite the entire disclaimer and conditions other than to note that we provide a reconciliation of non-GAAP financial measures to comparable GAAP financial measures in our quarterly press release and SEC filings, which are available on the Company's website.

Park City Group utilizes adjusted EBITDA not as an alternative to GAAP measurements, but rather for investors to benefit from supplemental measures through the eyes of management. Adjusted EBITDA exclude certain non-cash items such as non-cash stock compensation, allowance for doubtful accounts, non-cash impairment charges, and acquisition-related costs.

Adjusted EBITDA increased to $567,000 for the quarter ended December 31, 2009, compared with an adjusted EBITDA loss of $733,000 in the same period of 2008. On a pro forma basis, adjusted EBITDA increased to approximately $567,000 for the quarter ended December 31, 2009, compared with pro forma adjusted EBITDA of $124,000 for the prior year's second quarter when considering the Prescient acquisition.

Year-to-date, adjusted EBITDA increased to $1.3 million for the six months ended December 31, 2009 from an adjusted EBITDA loss of $1.4 million in the same period of fiscal 2009. On a pro forma basis, adjusted EBITDA increased to approximately $1.3 million for the six months ended December 31, 2009, compared with pro forma adjusted EBITDA loss of $473,000 for the prior fiscal year period. Once again, the reconciliation of GAAP and non-GAAP financial measures are available on the Company's website.

The net loss applicable to common shareholders for the quarter ended December 31, 2009 was approximately $150,000 or a $0.01 loss per common share, compared with a net loss of $1.2 million in the prior year's second quarter or a $0.12 loss per common share. Year-to-date, the net loss applicable to common shareholders was $64,000 or a $0.01 loss per common share compared with a net loss of $2.4 million in the prior year's six-month, or a $0.25 loss per common share.

In addressing our financial position, the increased revenues and margins associated with the Company's expanded base of Software as a Service customers, along with the continued effective management of expenses, as we scale the business, resulted in a substantial improvement in operating cash flow. We reported positive operating cash flow of $309,000 in the fiscal 2010 second quarter and $317,000 for the first six months of the year, as compared with pro forma negative operating cash flow of $900,000 for the same six-month period in 2008.

As of December 31, 2009, the Company had a cash balance of $1.07 million and long-term debt of approximately $7.1 million. The long-term portion of debt is comprised of a $2.8 million line of credit; $1.6 million in unsecured loans; and $2.7 million in loans provided by certain officers and directors in order to finance the Prescient acquisition. The Company is currently paying down debt principal at the rate of about $200,000 per quarter, and anticipates accelerating its debt reduction payments over the next six to 12 months.

The Company maintains it will not carry large balances of cash until such time as it significantly reduces its long-term debt obligations. Interest rates on these long-term debt obligations vary from approximately 3.5% to 12%, and have between a one and 2.5-year term.

That concludes my review of the financials for the second quarter and first half of fiscal year 2010. At this point, I will now turn the call back over to Randy.

Thank you, John. Before we open it up to questions, I'd like to comment on our outlook for the balance of the fiscal year ending June 2010.

I think first and foremost, our second quarter results have kept us on track with the annual performance goals that we set last year. The goals are -- one, that revenues would be somewhere in the range of $11 million for the fiscal year ended 2010, which would be an increase of nearly 100% from the prior year. Given the economic environment and the kinds of results that others are generating, we're certainly proud of that effort on our part.

We anticipated an increase in the number of hubs to 18 by the end of the fiscal year, up from 10 at the beginning of the fiscal year. As I mentioned earlier, we currently have 15, so it seems still quite reasonable for us to achieve that objective of 18 operating hubs before June of this year. And this will certainly be a breakout year in terms of EBITDA. We're projecting adjusted EBITDA to be in excess of $2.3 million for fiscal 2010, which would represent about a 500% increase from the prior year.

Overall, we have certainly only begun to capitalize on what we think is a very leverageable business model. We're pleased with where we are. We're comfortable with our outlook going forward. And hopefully, our stock, although it's essentially undiscovered at this point, will begin to get the recognition on Wall Street that I think as shareholders we would all like to see.

The pieces for the investment story for Park City Group are certainly falling into place. I think it makes it an exciting place for people to work, and I think it will also make for an interesting opportunity for better recognition amongst the investment community.

So, at that point, let me turn it back to Jordan and let's see if we can have some questions.

Okay, Operator, would you please introduce the Q&A polling process and take it from there?

(Operator Instructions). Mark Stafford, Stafford Capital.

I missed a good part of the call, so excuse me if I'm asking something that you already covered. Going forward, do you anticipate keeping the same kind of pace finding these hubs? Or do you think it will slow down a little bit?

Good question. Let me add a little color. To be sure that the quality of what we do, and for those of you who have heard us or know us, the quality of what we do is absolutely paramount culturally. We are big believers that quantity will follow quality. Our customers have high expectations of our performance and we certainly want to achieve that.

So, the bulk of the hubs that we added in the last year are relatively small hubs in relationship to what we think the average hub will be going forward. We are now comfortable enough with our ability to implement, given the growth rate that we -- and we've added resource to that function, that we're now accelerating the number of hubs that we can implement in any given time period.

So, I think it's reasonable to assume that where last year, we had a goal in the calendar year -- and I apologize for the confusion of calendar year versus fiscal year -- but from a calendar year perspective, last year, we wanted to do six hubs. I believe that it is a reasonable objective this year to do eight, possibly even nine hubs in this calendar year, which certainly suggests an acceleration. And as our pipeline builds and our ability to implement the quality level that we seek continues to improve, there's certainly opportunity to accelerate that as well.

Is that the answer to the question you were looking for, Mark?

Yes. Okay, I'll keep listening.

(Operator Instructions). Michael Fox, Park City Capital.

With regard to the hub and spoke, could you talk a little bit about the momentum from the spokes? And as the hubs continue to increase, just the -- I imagine the momentum with the spokes will continue to drive that?

Yes, I think you phrased it well. In a sense, as we add more retail hubs to our mix, the interest that the spokes will have in connecting to all of those hubs goes up. The fact of the matter is, our resource currently is primarily focused on the addition of new hubs.

In the next fiscal year ending June of 2011, more of our resource and focus will be on plugging spokes, if you will, to use that term, plugging spokes into the hubs. So, we're really still focused on hub acquisition at this point. That doesn't mean next year we're going to abandon hub acquisition; it just means it will be sort of like patting your head and rubbing your tummy at the same time.

But for now, we're definitely focused on the addition of hubs because that does, as you pointed out, make us more and more attractive to the spokes that we're working with.

Right, okay. Great. Congratulations on a good quarter.

Neal Goldman, Goldman Capital Management.

You said that these are smaller hubs, these 18. What are they averaging around now, in terms of volume?

They're smaller from a store -- number of stores perspective. In other words, of the seven that we added last year, I would say five of those are relatively small hubs, meaning fewer than 100 stores in their retail system. We've now begun to add what I would call the medium-sized hub, more the regional sort of player in the supermarket industry. So more of those will be near 100 stores. And I would guess that the average this year will move up significantly, in terms of the new hubs that we add.

And averaging about how many stores on average, the new ones?

I would guess that this year, the average will be over 100. So the average size of a hub will have probably moved up by 30% or 40%. And that's a guess -- 30% or 40% over the last calendar year.

Okay. What's been the response of the supplier side?

The current economic environment, interestingly, has been very good on both the retailer side, where you would expect them to be thrilled with the opportunity; but the suppliers very badly need the kind of information that we provide. So there's been little, if any, resistance. And we have a number of significant suppliers that are pushing us to connect them to additional hubs.

One of the nomenclature issues that we have is that unless the retailer has signed up with us and is paying us the subscription, we don't call that retailer a hub. But we do have some examples where we are providing data to the suppliers -- we call it simulation -- as if they were a hub, but we're being paid, in that case, by the supplier only, to behave in a way that gives them the information that they need to reduce out-of-stocks, improve the customer service levels that they want to achieve.

So, the reception from the supplier community has been excellent. I would say that to criticize us, I think, historically, we have not been as strategic to the suppliers as we have to the retailers. And it's certainly our business objective over the next 18 to 24 months to become far more strategic to our supplier community than we have. I think when they've experienced the kind of information that we can give them, they can do better demand planning, factory line sequencing, et cetera. Our economic value to the supplier is really remarkable.

We're going to be working on an entire new Software as a Service delivery platform that we hope to have as a deliverable in calendar 2011. I think it's the most exciting piece of technology that we've ever conceived. We'll be talking about this to the marketplace here over the course of the next year. I think it is a game-changer. I think this is more exciting than what we do today. I think it adds significant value to the suppliers. And I think that it will accelerate what we're doing in the marketplace for sure.

Could you give more focus on what kind of software it is, when you say it's an SAS type of thing? What will it do?

I'd rather not talk about it at this point. It's just -- it's highly proprietary in terms of the idea. It's a very big idea, though. It's a big idea. It's an end-to-end capability from literally point of sale to the factory floor for a supplier. It's based on very sophisticated forecasting. It will enable a supplier to work with a single vendor, not try and put together pieces of technology.

And the net of it would be that we'll be able to aggregate point of sale information, and literally, go all the way through store level replenishment, vendor-managed inventory, demand forecasting, right down to line sequencing. It's never been done before in this kind of a way. I think it's within our grasp to do it. And I think it's a game-changer for the relationship between suppliers and retailers. It really creates an end-to-end, unobstructed view for the supplier from point of sale back to his factory floor. I think this is a whole different way for suppliers to do business.

How much are you going to invest in this kind of software to get it where it's truly functional?

There's no incremental development cost, if you will. It's hard to explain. We're not going to be adding development resource to any significant degree. We're just refocusing the people we have on this platform. So --

It's nothing revolutionary; it's more evolutionary?

I think it's revolutionary.

In terms of what it does; but in terms of getting the product out (multiple speakers) --?

For us, knowing what we know and with the skill set and knowledge that we have, it's not a huge leap. It's not a huge leap.

Okay. One last question, I guess, John, you indicated at the current rate, you're paying off $200,000 a quarter of debt. But you said it will start accelerating. In what time frame and how big do you think that cash flow will start being in the course of the next fiscal year?

Yes, good question. Like Randy said, seasonally, the first half of the year is lighter than the last half. And given the fact that we're a largely fixed cost business, adding on an additional supplier to a retailer is the cost of electricity. So our margins, obviously, would be higher, given a higher revenue base of our fixed cost.

So, obviously, we're not going to keep large amounts of cash when we have the opportunity to pay down the debt. So, I would see that starting as we come into this quarter and certainly by March 31, and accelerating through June 30.

Okay. And then next year, a major leap forward, right?

That's correct.

Okay. Do you want to just -- one last question -- do you want to just reiterate your goals -- you know, you've given us this year; what were the goals you had set for the next two years after?

Our goal for the -- hold just a second here -- it's actually on our website. (multiple speakers) Yes, by fiscal year '12, our goal would be to do about $25 million and to do about $13 million of pretax earnings in that fiscal year. And next year is just about the midpoint. I think we're looking next year at about $16 million of revenue as a goal. And as I remember, EBITDA goal in the year was somewhere between $4 million and $5 million.

Okay, thank you.

[Gale Litzow], a private investor.

I feel good about what's going on. It's kind of interesting watching this price of the stock. It kind of goes from the higher $3-some number to $4 and over, and then back down again. The interesting thing was when Associated joined up here a few days ago -- weeks ago, the stock price dropped pretty substantially. And I just wonder, what are we looking at here as far as the number of shares that are authorized and outstanding?

Well, I think the indirect question there, Gale, is are we in the market for a financing? Are we going to be out raising equity? And the answer at this point is no, we don't anticipate any equity raises unless we see the need for capital for any acquisitions that might present themselves. But there's certainly nothing in the hopper at this point. Our cash flow is adequate to support the operations and growth that we see from where we are today.

Incidentally, I don't think the change in stock price has anything to do with Associated. In fact, I think one day, Associated will be one of our larger customers. We have lots of opportunity with them. They are a wholesaler in addition to being a retailer, meaning they own retail stores. So there's some opportunities that are pretty exciting to expand what we're doing within their wholesale world.

Well, I'm looking forward to continuation of being with you guys.

Thank you, Gale, and thanks for the support.

Thank you.

Michael Fox, Park City Capital.

Just as a follow-up on the -- you mentioned that the five hubs you added this year were about 100 locations?

Yes.

Are you right away in all 100 locations? And if not, can you talk about how it ramps up? And can you remind us how on the way they pay you, if that ramps up or if it starts off right away and the bill will be down the road?

That's -- it's an interesting question. From a revenue perspective, it doesn't really matter how many of the stores we're working in. Although from a technical implementation perspective, we do set it up in a very few stores when we first start, just to make sure everything is working properly, getting data, et cetera. And then it's very quickly rolled to the entire system.

In fact, for one of our retail customers, it would be too complex to not have us deployed across all of their stores and instead, in only a few of their stores.

From a revenue perspective, it doesn't matter. The subscription cost is the subscription cost -- period, over and out. So, we're indifferent to it from a revenue perspective; but it is true that they implement -- the first few stores, just five or 10 stores for a period of a few weeks, make sure everything is going and then it's rolled to all of the stores.

So it will not change our revenue as we add stores from any given retailer to his subscription, but it will make a difference as we add suppliers to that retailer. So as we add spokes, it changes our revenue; as we add stores to a given retailer, it doesn't really change the equation from the initial contract.

But services would certainly add (multiple speakers).

Yes, there might be additional professional services and whatnot, but by and large, I think it doesn't change the subscription cost.

Okay. And then when you do add suppliers to any given hub, is it normally more gradual? Or is it also you would do it to the whole store base of a particular supplier -- or a particular hub at once?

The answer to that is a little bit more complex -- I apologize; probably more information than you wanted -- but there's a regionality to it. So if you were a supplier that only works in a given region, but that retailer is more geographically dispersed than that region, then it might only be as a supplier, a connection to a certain percentage of that retailer's stores. Does that make sense?

Yes.

But putting it differently, from the supplier's perspective, if you do business with 100 stores of one of our customers, you will be connected to all 100 stores almost certainly. You would not want to do business with less than the whole of your opportunity.

Now it is interesting that -- I know you didn't ask this question, but I'm going to segueway -- I'm going to hitchhike on it -- we are definitely seeing more of our suppliers see us -- and I mentioned this earlier -- strategically. So -- and I could be wrong about this number, but I believe the last time I checked, we had seven or eight retailers in our pipeline with whom we were engaged in the sales process, that were brought to us by our supplier community. And that's obviously terrific news.

And we would expect that to grow over time also. Does that get to your question, Mike?

It definitely does, and it also kind of just -- thanks for all the color and the info, and it kind of leads to the -- down the road, the growth rate -- the potential growth rate with the suppliers and the retailers kind of driving it from both sides.

Absolutely. And as I say, I think the moderation on growth continues to be what I hope is our long-term cultural obsession with doing it right.

We did a major implementation for one of the best-known consumer packaged goods companies in the world, and certainly one of the largest companies on planet Earth. And we did that for the supplier and connected them in a very interesting way to one of the world's largest retailers. And we'd gotten a letter from them just saying that it was as good a project as their company had ever undertaken.

And that's what we live for internally. The fact is, when our customers think well of us because of the quality of what we do, we know that over time, referentially, they will talk about us, bring us more business themselves, et cetera. So, we're going a little bit slower than perhaps the world would like, but we're doing it at a pace that assures that the quality of what we're doing is being maintained.

Right. Great. Well, keep up the good work.

George Marshall, Monarch Capital.

Foreign -- it would seem as you get bigger and bigger, that the Carrefour's and the Tesco's, and the [expletive], and the Marks & Spencer's seem to be a natural to bring people who are far-flung closer together. Are you going international?

We already do some work internationally. The truth is we are pretty laser-focused at the current moment on the US. And the reason for that is that it's where we're very well-connected via our Board and our management. And interestingly, the midsize companies are simply faster in terms of time-to-market sales process to work with.

As you know, larger companies, even when they get excited about something, tend to move a little bit more slowly than midsize companies. So the answer is, over the next certainly 12 months, possibly longer, we're going to be primarily focused here in the US. Although, yes, it is very reasonable to assume that we're attractive to the international supermarket chains as well.

Several of the companies with whom we do business here in the US are international, so we certainly have the opportunity to go with them abroad. Plus we already have several companies that operate primarily outside the US, and we do business with them there. So it's a reasonable expectation over the next several years, we will work outside the US; but for now, we are, hopefully, laser-focused on this market.

Thank you.

[James Koss], a private investor.

As I understand your business model, you really have two distinct clients -- the retailer and the supplier. I'm wondering if you'd spend a minute or two talking about how you see them measuring their return on the invested dollar that they have with you?

Oh, yes. It's -- yes, we can be very, very pragmatic about that without any of the -- any guesswork. We have measured the economic return of what we do at the base level -- think of our initial product as called scan-based trading.

If you just look at that one product alone, which is almost an entry point to Park City Group and what we do, the following, I think, would be reasonable to assume. Inventories get reduced by up to 30% -- 30%. Sales go up from 3% to 20%. Working capital improves. Margins improve because both [in the lean] costs decline, and equally importantly, the amount of what's called Street Money, or money that suppliers often need to use to move their goods to retailers, can decline because they are maintaining the control of that inventory through the entire supply chain.

So, from an economic perspective, what we do is extremely compelling. And I am anticipating, with the addition of the products that we've brought to the marketplace here in the last year -- which is Deep Dive Analytics, helping our customers better identify when they're out of stock, lost sales, et cetera -- there's every reason to believe that our customers will experience higher levels of sales increases than they've seen historically, which means the return on investment will go up even further.

We're a very quick payback. So, fortunately, in the sales process, this isn't something we have to -- we don't have to go overboard in proving this. The CFO of the retailer inevitably looks at what we do and gives his nod. But we do do, interestingly, a return on investment analysis upfront in the process of obtaining the new customer, so that we set expectations as to what they can expect and what we need to deliver. And we are -- we're committed to making sure that our customers get superb rates of return.

That's very interesting. It would seem to me that you'd be having them knock down your door here trying to gain access to the systems.

We do very little marketing. It's really direct sales. And I wouldn't say that they're knocking our door down, but I will say that our pipeline is certainly expanding quite rapidly. Over the last 12 months, our pipeline has changed very significantly.

And it's never easy to sell anything; but again, the quality of what we do is the ultimate gate, if you will, to how much we do. And I'm personally thrilled with our team. They have done a superb job in the last 12 months of ramping up the business. And I think all of us are pretty excited about it.

I've been an investor for probably the last nine years and -- so I followed the history for a long period of time.

Thank you.

Very impressed with it.

Thank you. Thanks very much.

(Operator Instructions). Harvey Bibicoff, Bibicoff & McInnis.

Congratulations on a great quarter. You mentioned earlier that you have -- your debt ranges in interest rates from the low to the high, high being around 12%. When you're reducing the debt, do you have the ability to go after that high-cost debt? Or is that pretty much fixed so that you can pay it all down?

That's a really good question, Harvey. The answer is that the higher cost debt was a placement by our investment banker. And I think that we're certainly going to be capable of taking that down by maturity. And if some excess cash comes up, we would probably prematurely retire that debt.

In the meantime, what we've done with our -- the financial institutions, primarily banks -- the bulk of the debt, in fact, of the $7 million of debt, I think there's only $1.5 million of that that's -- that was investment banker-raised. The balance is with banks. So I'll call those proper financial institutions; not casting aspersions, but let's call them the proper financial institution.

What we've actually done is to set up amortization schedules. So we're simply demonstrating our capacity with our banks. Our banks are, at this point, pleased with us, so that's going to give us more capacity, et cetera. So we always want to be in a position where, if we need to do something, we have a friendly bank around who will help us. But yes, we would like to take that higher-priced debt out. Thank you.

There are no further questions at this time. I would now like to turn the call back over to the management for any closing remarks.

Well, I want to thank all of you for taking the time this afternoon for our second quarter call. As I mentioned earlier in the conversation, we'll follow this pattern in the future, where we'll announce the call, release results, and have the call shortly thereafter.

As you know, if you have questions, et cetera, feel free to contact me or John. And we'll cross our fingers and hope that the year moves as we're all expecting it to. Thanks very much for taking your time this afternoon. Bye bye.

This concludes today's conference call. You may now disconnect.