Good day, ladies and gentlemen and welcome to Park City Group Second Quarter 2015 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 be given at that time. [Operator Instructions] As a reminder, today’s program is being recorded. I would now like to introduce your host for today’s program, Mr. Dave Mossberg, Investor Relations representative. Please go ahead.

Thanks, Jonathan. Before we begin, we will be referring to today’s earnings release, which can be downloaded from the Investor Relations page on the company’s website at parkcitygroup.com. I also want to remind everyone that 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 risks and uncertainties, which could cause actual result to differ from 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 risks. 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 and loss and earnings per share, which are non-GAAP terms. We believe these non-GAAP terms are a 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 our website. Our speakers today will be Randy Fields, Park City Group’s Chairman and CEO and Ed Clissold, Park City Group’s CFO. Ed?

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 fiscal second quarter ended December 31. And I will also comment on certain cash flow and balance sheet items and then I will turn the call over to Randy for his concluding comments. I will begin my comments by discussing revenue trends. For the second quarter ended December 31, subscription revenue increased 16% to $2.7 million, which was another record for the company. Breaking out ReposiTrak related revenue from the comparison, our supply chain management services business grew 19% year-over-year, also reaching a record level. Other revenue was $759,000 for the quarter, which is a 12% increase from the same period last year and represented almost – or represented approximately 22% of total revenue. We continue to expect contribution from other revenue will remain at approximately 20% to 30% of our total revenue. Overall, total revenue increased 15% to $3.5 million, which is also a quarterly record. Moving on to operating expenses, total operating expenses were $4.1 million, which was an increase of $470,000 or 13% year-over-year. This increase in cost was primarily related to an increase in sales and marketing expense. The increase was above our targeted range for the quarter, but was 6% for the first half of the year, which is in line with our expectation of a 5% to 7% increase this year. At the end of December, our headcount was 71 which is up from 66 the same period a year ago. Now, touching on profitability, on a non-GAAP basis, which excludes non-cash related expenses, we posted net income of $120,000 or $0.01 per share versus a non-GAAP net loss of $99,000 or $0.01 per share during the same period…

Thank you, Ed. Lot of ground to cover today, lots of I think interesting information, especially if you saw our press release and we know that there will be a lot of questions at the end. So, to make sure that I cover everything I am supposed to, I am going to diverge from my usual and actually follow a bit of a script. So, here we go, fasten your seatbelts potentially because of the amount of information to be covered, pull up your futons, this may take a while. Okay. What you could see from the numbers that were in the press release, our core business, our supply chain business as we call it for the first six months of the year was up 24% year-on-year. Obviously, we are excited about that. I think two interesting points to make about it, which there I think on what our future looks like. Almost all of our growth comes from our existing customers. So, what that means is if you think about it is our customers like what we are doing for them. It means that it’s producing returns for them and they are expanding the scope of what we do for them. So, that’s a really good sign from your CEO’s perspective. It also means that we are becoming more and more successful with driving into our culture that is customer first attitude, which is helping our customers to achieve an economic return and we would refer to it as sell more, stock less, see everything in our tag line is in fact working. I want to give you a couple of examples of the kind of work that we have done in this most recent period. We have been working with a very large international retailer in one of…

[Operator Instructions] And our first question comes from the line of Amit Dayal from H.C. Wainwright. Your question please.

Congratulations, Randy on the great progress and on getting closer to bringing ReposiTrak under PCYG. In regards to – you emphasized in regards to your core supply chain business, you emphasized increasing business with existing customers, what are we doing about trying to get new customers on board? Could you give us a sense of the number of new customers added for that particular business in this quarter?

Yes, actually I probably wouldn’t break it out for the quarter, but I think it’s fair to say that looking forward I would expect to see the number of retailers, remember, we continued to do our business on the hub and spoke basis, but some of the suppliers that we now work with are in the process of taking us to additional retailers. So, that’s the reverse of how this usually works. Normally, retailers bring us their suppliers. In this case, our suppliers are taking us to more retailers, because they like what we are doing for them. So, I would actually guess the number of retailers with whom we do some kind of business over the next two years will go up by 6% to 10%, which is a pretty significant delta from where we are. So, our objective really is to say every year we want to add more stores to our network and we want to add more suppliers to those stores with whom we work and we want to add more services that those suppliers and those retailers use from us. So, mathematically what that would do and we are considering giving some form of guidance on this going forward, but that would mean that each year, you would be able to take a stab at guessing unless we gave you more comfort than that. How many stores will they add to their system? And so if we add a chain that has 2,000 stores, you would know our average revenue per store, average revenue from all the suppliers we work with in services. And then what would you think the next year’s addition in terms of suppliers and services would be? So, we are going to give – we are working with it internally to see how accurate it is, we want to follow it ourselves for a couple of quarters, but what is happening to the core business is the number of stores will be going up from we call those new customers and the number of suppliers with whom we work will also be going up pretty dramatically over the next several years. So, you will see our growth rate continue to accelerate from where it’s been. Honestly, I think it just gets to be very hard in a business like this in the supply chain business to grow much more than 30%, maybe 35% at the outside and continued to touch your customers as much as they deserve than you should. So, I’d recognize that ambiguous answer, but for the moment, it’s about all I can do.

Appreciate it. And in regards to starting to penetrate the nonperishable supply chain, is this one of your first wins outside of the retail space, are we going to see more of this type of business coming into the company?

I think the answer to that is absolutely we are doing some things that have been unusual like that. Now, that is a supplier rather than a retailer. So what they have done is they really like how we have improved their inventory turns. They like the fact that their out of stocks have gone down and that their sales gone up. So last year we did this in a category called reading glasses or readers. Recently we have done it in the cell phone accessories. We have two or three other categories that we are going to try this year. So the progress of the business will be each year add a few more categories of merchandise where we have demonstrated success, where we can prove, absolutely prove in the case study that it works. Then take that to other suppliers in that category and take it to other retailers who carry that category of merchandise. So what that does is it kind of allows us to have this portfolio of customers where it becomes an opportunity for us to sell more and that’s frankly the reason that the growth rate will accelerate. Each time we discover one of these successes on our part or by the way we have never that I can remember actually had a failure in a category yet. We are pretty conservative about this. But this opens the door to doing that with other kinds of products like cell phone accessories. So we are very excited about it.

Got it. And just lastly on the ReposiTrak news, what percentage was outstanding that you require it now, that you already didn’t have an option on?

Well, the way to think about it is as these agreements are structured it will account for all of the stock other than the stock that we had under option, so that means it will be at or near 100% of ReposiTrak.

Great. I am just trying to get a sense of what was…?

Well, the way to think about it was that if we had for all intents and purposes 75% under option.

Right.

That means that there was only 25% not under option.

No I get that, but is that 25% number that was remaining?

Yes.

Okay, so that was...?

Yes, that’s probably the way to think about it. We used to refer to what is the stub. And so it would all of the – this just means that the company want these agreements and transaction are finalized and closed.

And this will show up in your books after July this year?

Well, yes, that’s safe to say the date by which it has to close is July 1, beginning of our new fiscal year.

So we could potentially start accounting for all of this for the next fiscal, immediately…?

Correct.

Okay, got it. And is there a price level for the 900,000 PCYG shares that they receive that we should be aware of or is that something that is to be determined?

Well, the price has been set with each investor. So it’s – so in other words the impact it’s a set number of shares. And so it’s done if you will that is…

Like at current levels, like…?

Yes, correct absolutely.

Okay, got it. Thank you. I will get back in queue. Thanks Randy.

Okay. Any time, thank you.

Thank you. [Operator Instructions] And our next question comes from the line of Todd Mitchell from Brean Capital, your question please.

Congratulations on the consolidations.

Thank you.

90,000 shares is far lower than I thought it would be.

Thank you.

I want to ask you kind of about some of these operating metrics around ReposiTrak. So 1,500 total signups, can you tell me how long you have been signing people up?

I think it’s fair to say about a year.

Okay. So there is nothing we can derive in terms of a run rate at this point, can you talk maybe then a little bit about scalability in terms of what could be a potential run rate for the infrastructure that you have in place. And how should we think about increasing that run-rate in terms of how I say it, I mean, there is millions of opportunities. You can’t be doing 2,000 a year. So, how should we think about the scalability both in terms of capacity and in terms of incremental cost?

Well, I think first of all in terms of millions of opportunities, there is a reality here, which is most of those millions don’t know that they are my opportunity, right. So, we need to let them know and let me describe one other, I think will be a very important relationship it’s about to evolve. So, I apologize for using you as a springboard here. In our last call, we mentioned the fact that we were in conversations with a large insurance company that might offer opportunities around ReposiTrak. I would say, we are far enough down the line that we have begun to set timetables jointly and that if everything moves as planned and as you know with these kinds of things, problems can arise, who knows, but it’s reasonably safe to say that we will be entering into a relationship with one of the largest insurance companies in the world and possibly to the net effect of which will be that for users of ReposiTrak so long as they are compliant that these insurance companies will be willing to pay the cost of ReposiTrak. So, I think in the not too distant future, ReposiTrak will end up being a free service so long as you are a good citizen and however that’s defined, but for now let’s just leave it at that.

Well, that’s great, but I mean that sort of speaks to my question. When they rush the door, how are you not going to get overwhelmed and how are you going to fully leverage this opportunity because they are going to rush the door? And so how can we think about your ability to scale this both in terms of as I said in terms of capacity and in terms of what that means for the operating margins of this business?

Yes. I think there is – now that we are consolidating it, it gives us a higher level of administrative control, which will improve efficiencies. Two elements to the friction associated with on-boarding. The first is technical. So, one question I can parse your question into two. Will ReposiTrak scale technologically? Yes, no problem, no problem, scale technically very, very well, very easy, because it’s just an adjunct to our current systems. The question then comes down to the inside sales people and your ability to talk to as many people as you need to talk to. And we are scaling that up. We are adding people to it. The cost of which is not a significant margin impingement. So, I think everybody will be very pleased with how that works. So, I think it’s comfortable for us to think of sales cost, if you will, which of these on-boarding costs in the 10% to 15% of sales area going forward. We will know more as we get to it. We are scaling. We are adding some people to it. And honestly, there is much thought as I would like to look at my crystal ball and know how big the door we have to cut in front of the building is to let everybody in as FSMA rolls out I don’t know. I actually have no idea. We are building some capacity. I hate that just by nature I don’t like getting too far ahead of our interference here. Our insurance company partner is talking to us about many, many, many, many, many thousands of possible customers as well. So between us, we will find a way.

So, I mean, conceivably though I mean conceivably looking out 24 months from now, there is not a need to onboard a few thousand a quarter, there is the need to onboard a few 10,000 a quarter. I mean, is that the way we should think about the scalability of this opportunity?

I don’t think it will go that fast. I think the way it will actually work is as the FSMA rolls out, as compliance increases, as people get more fearful, there will be just constant pressure. So, this year as we said a couple of thousand, it’s going to be, let’s guess, 5,000 to 7,000 the following year, maybe 10,0000 or 15,000 or 20,000 the year after that. It’s going to be over the next 5 years a very significant ramp. Could it go faster? Yes, it certainly could. And there is just no way of knowing it. I don’t know of anyone that has ever tried to connect the entire global food supply chain before. So, here we go. We are trying to do it. And I think we have the technology for it. And I don’t think that the people part of it is terribly difficult. I am more worried about the communication piece, how do we let the world know they have to do this. We are getting more involved with FMI in getting the message to the food community. We are stunned at how little compliance that there is in relation to what’s needed. So, there is a lot of work to be done. And I think it will scale as fast as we can continue to do a superb job at it. That’s publicly, that’s a standard Randy answer to any question about that. So, did I totally avoid answering your question?

Pretty much. So, I guess the last thing I will ask about this is I will ask two questions, but the last thing I will ask on this matter is like, so do you feel that the opportunities out there, did your market talent intelligence tell you of any alternative solutions to your own out there and is there going to be an issue here where if you don’t scale it fast enough, it’s going to increase the opportunity for somebody else to come in?

I think the answer to the second question is actually no. First of all, this is an incredibly difficult piece of technology to do. So, 9 women in a room for a month will not make the baby. That means we will have to be able to provide the service and the alternative are simply manual systems that are used today. Those are inadequate. They are incomplete. They don’t allow people to know where they really are. That’s why we uncover so many holes when we work with someone, always to their surprise. But here is why it’s harder to answer than you would like, Todd? If let’s suppose we have 100 different retailers and wholesalers using the system, if all of the suppliers that want to come on this system are connected to those 100, it’s actually pretty easy. So, I sign up a new supplier. He goes into the system and says oh, wow, here is 99 other retailers with whom I do business click, click, click, click, click 99 more times. That one is easy. I just got 99 connections simple, but the odds are reasonably good that there is holes in the supply chains, not everybody is connected to everybody. So, I just don’t know when that magic moment will occur when people sign on and everybody they want to do business with is already in the network. And then it will go like crazy. Is that magic moment when essentially 75% or 80% of new sign-ups are just connecting to people we already have? Wow, it will really be slick and it will be I think we could do 10,000 in a day technically.

But there is not a linear relationship between capacity and sign-ups?

No, no.

Okay.

Sometimes, somebody signs on and right now we have announced that we have at least 7 different hubs. Sometimes somebody does business with all 7, check, check, check, check, check, check, check, check, check.

Okay. And are you now – is the signing – the rate of signing up generating enough cash flow that ReposiTrak as it is currently structured now is no longer building on their debt that they owe to Park City Group?

Well, I think what we said earlier is still true. That before the end of the fiscal year, the level of debt will exceed and it will have begun to pay it down. So, we still believe that to be the case, because we see the sign-ups accelerated.

And is there any difference in the pricing model that you have previously articulated?

Not currently, but we are – going forward, there will certainly be some changes, but for now, it’s still the same. There is still a small sign-up fee, a small monthly fee depending on where you are in the supply chain. If you are connected to a retailer, it’s one feed. One cost of doing business if you are connected to a manufacturer to lower cost that further you are in the supply chain down to farmer. The closer you are to farmer the cheaper it is.

Okay. And with this – and then finally, you have also sort of articulated in your prior comments at this point given your need to scale the business, given the need – the ability to consolidate with shares, do you consider yourself fully funded?

Yes.

Okay. Last question, whatever I missed that I should have asked?

No, I think those are good questions. And look I hate sounding stupid. We just don’t know what 3 years looks like from ReposiTrak. We are working with – this insurance company says we have 100,000 customers. And I think about that and then I suddenly think what if they want to put all those on the system? So, the opportunity as we get into it and I like businesses like this gets larger and larger and larger. At the same time, our scaling ability is going up. The smoothness of the process is going up. The sign-ups are going up. So, it means that I referred to it as the Men to Match My Mountains problem. The team is doing a great job. The friction is going down. We will be able to deal with. Now, if tomorrow morning 200,000 companies that we want to get on the system, I can’t handle it, right. You have to scale the business. If you can do 2,000 in a year, you can probably pretty easily scale it to do 10,000 in a year. And if you have done 10,000 in a year, you can probably scale it to do 40,000 or 50,000, but when you try and go 500%, 600%, 700%, 800% a year, again you run the risk that the quality of what you provide by way of the service will suffer. And that is – that’s unacceptable. So, we are scaling it. We are – internally, the level of excitement is awfully high.

Great, that’s good to hear. I am going to jump out, because I hate my peers [indiscernible] and I have done that. So, thanks.

Thank you.

Thank you. [Operator Instructions] I think we have a follow-up question from the line of Todd Mitchell.

I have a couple of more questions. So, you have decided to consolidate it and that I have noted there were other options on the table. So, I am assuming that there is a rationale between consolidating these communities under one eye. I think probably I would agree, but can you articulate a little bit to that rationale? And if there are potential synergies between the two businesses what they are and when they will materialize?

Yes. I think we are increasingly of the belief that as we talk to the customers of ReposiTrak that many of them that we have talked to just getting to know them have need as we put out a press release on the little pie companies [indiscernible] enough with my last name. Could you imagine that? No relation. That was talking about – they have talked to us about supply chain issues that they have in their business, perfect candidate for the kind of stuff that Park City Group can do for them. So, we are seeing a number of potential, I don’t think them so much of synergies as cross-selling opportunities between the businesses. A couple of the retail customers that we have today in the supply chain business are exploring ReposiTrak and so on and so forth. So, I think over the next year, we will have our first one or two or three cross sales that will be very exciting and then we have to figure out how do you merge those two sales teams, so that they know what each other does. Here is an example that the efficiencies that we have gotten in ReposiTrak with regard to self, we call it, self implementation or you do it all by yourself at a web portal. Well, we have some application of that within Park City Group. One of our customers in Park City Group’s supply chain business has a list of hundreds of customers that it wants to onboard. The Park City Group way would have been more laborious, more handholding. All of a sudden this idea opens up, but why can’t they self-implement if you will from the same kind of a portal. So, we think that’s very interesting synergies that we are going to come out in putting the two businesses together. So, the drive to do it now really is it will not be any easier to do it 2 years from now, it’s easiest to do it now as the business is scaling before it scaled. And this just appeared to be the right moment.

Great, thank you very much.

You bet.

Thank you. Our next question comes from the line of Steve Bell from Wells Fargo Advisors. Your question please.

Hi, Randy. Good quarter.

Hi, Steve. Only good?

Great.

Thank you.

Very good. On the scalability side, aren’t you using for ReposiTrak a third-party group to conduct your webinars and customer interactions?

The answer to that is we tried and it failed.

Okay, okay.

So, it’s us. We are building out the team. Yes, you have known the company a long time. We have an enormous amount of pride about what we do and we have a quality standard that’s incredible. And we just didn’t like the way others were doing it. So, we care about it.

Yes. You would have Jennifer McEntire train the people up there and sign off on it, but additionally, I think recently you mentioned on the technology front that you are now using optical standards. How does that help you scale the input of information on ReposiTrak system?

Well, we are really just doing OCR, so that just allows us when we get documents that are electronically transmitted to us to look inside those documents, find out what the hell is there. So, it’s just an adjunct to our technology.

But it does allow for a quicker scaling of information on all of it?

All of these things, everything we do it’s a big piece of my time and my focus. We are nothing as a company, if we aren’t focused on, how do you lighten the touch, how do you make the customer experience better. And it’s my goal one year from now to have another 50% reduction in the touch that’s required with a new ReposiTrak customer.

And I know that Leavitt obviously has been very instrumental in bringing us into the doors with various insurance companies. Can you talk about how they might be assisting ReposiTrak in the foreign supplier verification as two ingredients that are imported to the United States and how they might help bring that area of business?

Well, you have touched on what is going to be an extremely big problem for the food industry. That’s part of the Food Safety Modernization Act. And going forward, we have a couple of more business ideas with Leavitt around food safety that would become – think of them as additional products that could become part of the ReposiTrak offering. Right now, there are two pieces in the ReposiTrak offering. There is a piece that does track and trace and there is a piece that looks at documents and confirms them and verifies them and think of it as compliance management. And so you could imagine that the ReposiTrak safety and compliance system, the platform could have several other modules or offerings that increases the opportunity with our existing customers. So, that’s coming, more work to be done.

When is the drop-dead date for the foreign supplier verification? I know that October is the supposed drop-dead date for just track and trace if you are in the United States, but when is the – what month is the….

I can’t remember which one it is. It’s either August or October.

Okay, okay.

So, yes, and I don't think we should refer to it as a drop-dead date to that. And you are talking about food safety?

Terrible pun and I was not intended obviously.

I am sorry. Thank you, Steve.

Okay. I am off the call. Thanks.

Okay, bye-bye.

Thank you. And this does conclude the question-and-answer session of today’s program. I would like to hand the program back to management for any further remarks.

Yes, I think just in some wow, obviously we are feeling very good about how things are going. There is a lot of work to get these two businesses together in a way that produces synergies for both. And both have terrific opportunities lie ahead. So, a promised management and all of us at Park City Group, ReposiTrak are committed to putting smiles on your faces, the shareholders. Remember, all of us, all of the directors, all of the employees own stock. So, we are as interested in how this all develops as you are. Thank you, guys. Thanks for taking time this afternoon.

Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.