Greetings and welcome to Park City Group Fiscal Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note the conference is being recorded. It is now my pleasure to introduce your host Rob Fink with FNK IR. Mr. Fink, you may begin.

Thank you, operator, and good afternoon everyone. Thank you for joining us today for Park City Group's fiscal third quarter 2020 earnings call. Hosting the call today are Randy Fields, Park City Group's CEO and Chairman; and John Merrill, Park City Group's CFO. Before we begin, I would like to remind everyone that this 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 subject to historical facts. Such forward-looking statements are based upon current, beliefs and expectations. Park City Group management are subject to risks and uncertainties which could cause actual results to differ from those forward-looking statements. Such risks are 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 information contained in this conference call. Shortly after the market closed today the company issued a press release over viewing the financial results that we will discuss on today's call. Investors can visit the Investor Relations section of the company's website at parkcitygroup.com to access this press release. With all that said, I'd now like to turn the call over to John Merrill. John, the call is yours.

Thanks Rob and good afternoon everyone. For the last several conference calls we have focused on three core messages. First, we shifted our business to prioritize recurring revenue over non-recurring revenue. This is not changed in and the trend continued in the March quarter as a year-over-year decline in revenues was largely from non-recurring revenue. While we experienced delays in supply chain customer implementations and slower Tier 2 expansion due to COVID-19, we offset a portion of this customer driven slowdown with modest growth on our existing base of recurring revenue and increases in marketplace revenue. Second was our focus on strengthening our balance sheet, as I have said before our customers' demand it. This effort is critically important as PCG and global economies face the disruption and uncertainty associated with the pandemic. Preservation survivability are more vital now than ever before. Third was our focus on growing the network. We will not waver. However, that effort took a backseat in this quarter. We remain laser focused on growing our network. As you might expect, many of our target customers were busy with pandemic related disruptions and not able to focus on our offerings. There were other customer priorities in an environment none of us ever experienced before. I'm optimistic that we will see new and expanded opportunities as our customers and the consumers shift from triage and panic to stabilizing the supply chain and resume some sense of normalcy. I am confident that the grocery industry will focus on how to avoid these challenges in the future. When normalcy resume what is the new normal, it's anyone's guess. In the meantime, I believe our customers both large and small demand partners who will assist them through these uncertain and volatile times. I also anticipate they will be much more…

Like everyone we found ourselves in a unique and challenging position this quarter with the pandemic disrupting the way we do business. It impacted our customers, both large and small. It also impacted our employees with uncertainty and distraction. Thankfully, we were already largely a remote based organization with very strong collaboration. So the transition to a virtual environment was actually relatively smooth. We're fortunate that we are in the grocery supply chain. Many non-food retailers have faced abrupt and significant disruptions to their business, including for some, literally a total halt to revenues. Our grocery store customers faced a different set of challenges including new steps required to keep employees and customers safe. Indeed, the grocery industry may be the only industry to experience more muted consequences to the economic challenges all of us are facing. The worst things get economically, the more things become discretionary, but certainly not food. Supply chain challenges we've been talking about for years are now at the top of everyone's mind. Anyone who's been in the store in the last few weeks knows that some things like toilet paper and certain cleaning supplies are fully out of stock. And in addition to that, even some of the basics and essential ingredients for cooking and baking at home or equally out of stock. Other items are way over supplied. Indeed the supply chain has been challenged unlike ever before. And we're in the middle of that. Food Safety is critical even in more critical times of disruption and crisis. Compliance, although it remains critical, we're finding our sales cycle is being extended due to near term emergencies. We think this will only last a short while it's our customers deal with the immediacy of dressing the pandemic and these challenges. This will change as…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Ananda Baruah with Loop Capital Markets.

Hi, Randy, John. Good afternoon. Glad to hear that you guys sound like you're and you're doing well. And so that's good. And it sounds like you guys actually – it looks like you guys have had good execution this quarter as well. So congratulations on that. Randy a couple of things if I could, could you – you made a comment a moment ago and I just want to make sure I'm understanding it accurately about all the growth this quarter, all the revenue this quarter, the magnitude of it being recurring. And could you just tease at that a little bit because it also seems like he did really well with marketplace and I think of that as being distinct from the recurring, so I want to make sure that I'm understanding your comment accurately.

Good. Okay, Ananda, thank you. The way Ananda I think management looks at the business is this, we have three components. One is an old and fading component, which was licensing and services. That has been decreasing substantially over the course of the last year. The other piece of the business that we consider to be the most important piece is the recurring revenue subscription type business. That part of our business is growing. In other words, it went from 4 million prior year to about 4.2 million in the current quarter. And we then have the marketplace and the marketplace yes, was definitely up substantially in the quarter, especially in the last few weeks. So going forward as the old licensing services piece of our business fades, and we're pretty close to having pushed that behind us. Now what happens is you have two significant pieces of business, the recurring piece which is growing, and the marketplace, which at the moment also appears to be growing and growing at a pretty rapid rate. If anybody goes back a couple of years, that's really where we want it to be and now that we've got that third piece, the tail of the business, the licensing, et cetera, one time stuff behind us. It feels as if going forward, those two pieces should both do very well. Did that did that help?

It did. Yeah, that's great. That's very thorough. And so my next question then is are you – is that if – I'm understanding all the math accurately, does that mean that you stand a really good chance of generating year-over-year revenue growth in the June quarter, this current quarter? Given that the recurring revenue seems like it would get you almost back the flat June quarter last year, and then my hunch is you get some incremental marketplace this quarter, something like that. I just want to ask that question. And then I have a follow up as well.

Okay, yeah, let me – let me see if I can help again. Here's how we see things, in the current quarter last year, one year ago, same quarter that we're in – that we just finished. We had about $500,000, other than marketplace of one time revenue. So if you look at our revenue this quarter, you can quickly see that we did better than the number that you would expect from simply removing that one time revenue, which is what we did. So in other words, there was growth in the quarter and as we look out, it's really – Ananda it is – the environment we're in is, what do I say, it's once in a lifetime for sure. So we have a high degree of uncertainty. We're managing the business conservatively. But we feel as if just the way the numbers now are rolling out. We've achieved the reduction in one time revenue well ahead of plan, we would have guessed it would have taken nearly two years and now it appeared that is largely behind us at the end of a single year. So we feel pretty good because our recurring revenue is continuing to grow and improving. That's our focus and you don't have to be Einstein to figure out that helping people which marketplace, if you remember was intended to do is to find those things that are hard to find. And that are emergency fills, if you will. So you can probably figure out that marketplace is experiencing some growth here. So both pieces going forward feel very good at the moment, that's about the most that I can say, given the uncertainty.

That's super helpful. Randy. And then my last one for now, and I'll see before get back in the queue. It sounds like this is just based on some of the prepared remarks. Sounds like licensing and services, at least in March began to see the impact of businesses sort of having friction as being shut-down things like that. It sounded – well actually, I would love is any context there. Can you – is that accurate assessment? And then can you give us some sense of what April and the first couple weeks of may have looked like with regards to licensing and services. And really what I'm wondering is, if things in March really began to impact that? Did kind of April and May they look a lot like March for that business right now.

Yeah, I think the answer really is this, is that the environment is making it easier for us to reduce onetime revenue. In other words, historically, our customers who had been buying licenses now, obviously would like to conserve cash, so that makes it much better for us much easier to convert that into non-licensing or recurring revenue. So it's gotten easier we feel good about it. And I'm not sure there's much else to say. But I think the world now is in cash conservation mode. And that bodes well for recurring SAAS revenue versus licensing revenue.

Okay, that's great. That's really helpful. Thanks. Thank you, Randy.

You bet.

Our next question is from Thomas Forte with D.A. Davidson.

Great. So Randy and John, glad to hear you're doing well stay safe. I have four questions. I'll go one at a time. So first one is Randy and John, how should we think about the opportunity for you to add aisles for your scan based trading efforts from existing retailers?

Well, in a way, this – the whole supply chain now is up in the air, meaning, I think there's an opportunity to help reshape as we come out of this situation, reshape how retailers and their suppliers, think about our scan based trading or out of stock initiatives, et cetera. We feel very good. We've actually seen a modest amount of expansion. And interestingly more interest on the part of our existing customers in terms of thinking about these kinds of problems. So again, the uncertainty is high Tom, needless to say. But as the supermarket segment stabilizes, if you will, you're going to see, we think more interest in how do we fix this problem that got terrible in the last two months? How do we fix this out of stock problem? How do we watch the explosion of our balance sheet? And here's something to think about. Historically, 15 years ago, the supermarket industry would have had two to three months of inventory on hand in warehouse et cetera. As it leaned out the inventories over the last 10 years, hopefully reducing the cost of capital, they now caught themselves in a short inventory position. We think as they begin to envision a future that scan based trading feeds into that just perfectly and certainly our out of stock work. So we feel really good about where the world is for us right now. And in that respect, the uncertainty though is high.

Okay, and then my second question is, you touched upon this in your prepared remarks. It's the opportunity for marketplace to address out of stocks with basics, such as hand sanitizer and toilet paper. So my question is, why not? Why can't marketplace address those situations?

Well, you're asking a very interesting question. And as the management team talks to each other, certainly some of that has moved into our domain. So as hard as we've resisted it, people have come to us to help them source some of these difficult things like hand sanitizer and that kind of stuff. You're spot on. And the question is do we want to try and stay in that space, et cetera. I think I've mentioned in a previous call by this summer, we wanted to be able to make a decision about marketplace and its ongoing role. And obviously, something is happening out there. And do we know if this is a permanent change because we certainly established – and I think it's fair to say, we're establishing more new relationships in marketplace. And as you know, we are maniacal about our execution. Just we want our customers to feel like my god, these guys are the best at whatever we do. And we're maintaining that standard. So we're moving into that space very gently, Tom. And we're – again, so long as our execution remains as good as it has, we'll probably stay the course.

Okay, and then for the third one of the four, I wanted to go big picture. So, Randy, I'd love to hear your thoughts on the implications of COVID-19 when it comes to China's role in the global food supply chain.

Yeah, that's a really, really good question. Let me back up one step because there's a cross current going on. The cross current is this is that if you go back to the theory of supply chain began about 20 years ago with just in time inventory, et cetera and just in time manufacturing, people lengthened their supply chains. They leaned out their inventory levels, even though the cost of capital has fallen dramatically. So you could argue maybe that wasn't such a smart idea. And they lengthened the distance and therefore time over which replenishment could take place. And much of that ended up in Asia, you would be amazed at how much of our can goods for example, come from Southeast Asia. What's terribly clear to everyone in our industry, in the food industry is maybe that was not a great set of decisions. So I suspect several things are likely to happen. This is just our theory. It's a working theory. And candidly, it benefits us. So I'm guessing there's a bias in it, but I don't feel the bias. I think it just might be there. People single sourced their products. I think that's going to go away. I think people will now multi source their products in the event that a supplier can't fulfill. I think you're going to see a lot of stuff that in China come back. And really for a couple of reasons, the distance has been a problem. The interruption has been a problem. We see it with a number of our customers that the supply chain not just over the distance, but as you know, when the Chinese were at their peak of the COVID experience, they almost closed their ports, so lots of product on the ocean ended up…

Great. All right, so my last one, then I'll get back in the queue because I might have one or two more. How should we think about the financial health of your ecosystem, Tier 1, Tier 2 suppliers, and bad debt risk?

Yeah, that's another good question. I suppose if there is a place to be, in general, it's where we are. Food has always been considered to be defensive. As I said in my remarks, it's absolutely true. You may cut out your discretionary spending, but you will not cut out food. So food related activities, the food – retail food system is doing well. It's experiencing obviously – how do you expand, how do you keep product on the shelf? It's a high class problem in many respects. Having said that because of how they're doing their purchasing, there's clearly a pressure for everyone to strengthen their balance sheets. The consequence of everybody strengthening their balance sheet is that we're seeing our receivables move out a bit. We're seeing some smaller companies who are more discretionary spend have trouble. Here's an example. We do some work in cut flowers in grocery stores. I don't – again, you don't have to think too hard to realize that part of the business is probably soft for the flower guys and that's a true statement, so some of those are seeing contractions in their business. I think our receivables are very conservative. We do reserves. We’re pretty comfortable that bad debt is not going to be a growing problem for us, but we're approaching it conservatively. Did that answer that?

Thank you. I'm going to step back.

I guess that's a no from John.

Our next question is a follow up from Ananda Baruah with Loop Capital.

Hey, thanks, guys. Appreciate it. Hey, just a clarification for John around OpEx. And John, did I hear you accurately that you said net neutral OpEx for fiscal '20. And then that ends June and that's this quarter. So given that dynamics are somewhat unpredictable right now, what's the responsible way to think about OpEx for at least the beginning of fiscal '21 or how are you guys thinking about it?

Yeah, I mean, some of the projects were completed and so that's natural. Obviously, no one's travelling right now that will come back. But we've done some belt tightening and gone through every line item on our P&L to reduce the spend that I think can be about $100,000 a month going forward. And as I said, as far as the net neutral increase absent marketplace because obviously that has a lower margin, I do believe we'll be net flat for the year.

Actually, we think that – all things equal that kind of run rate going into fiscal '21.

I think it'll be lower because you're only picking up three months of the fourth quarter, and certain contracts will expire, certain things that we've implemented, cost cutting will start in July or August or September or October, but on an average over the forward 12 months, not making a prediction, but based on our numbers you'll see about a reduction of about 1.2 million absent the marketplace going forward.

Okay, that's helpful. And it sounds like – I mean, can you guys like – particularly once you get the cost reductions really kind of kicked in – can you guys – we talked about the cash neutral situation with you guys, meaning are the levels that you're sort of going to be at very sustainable, it seems like the recurring revenue is going to be pretty sticky. It almost feels like you could have flat revenues sequentially through this thing because of the recurring base you've put in. And so what I'm wondering is, I get the receivables is stretching out, but if you can – this is super rough. If you're offsetting that relatively speaking with cost reductions and just belt tightening. Can you guys be cash neutral or are there other moving parts that we should worry about or not worrying about, but be aware of?

You're asking a really tough – you're asking the tough question. Let's go back – let me – I'm going to dance around it – on the –be prepared. It is important to our customers because of this public trust issue that we be a profitable company that we be a cash flow positive company and we have a strong balance sheet. It's really significant to think about the fact that billions and billions a year of product couldn't get paid for, couldn't get invoiced if we didn't exist. So we've always talked about the need for the strong balance sheet. Now in a way more than ever our customers want us to be secure, want us to be here, want to be sure they can lean on us and we think there is an opportunity in the current environment that compliance is going to become very important that more of our supply chain activities will be absorbed by our existing customers and new customers and marketplace should be obvious. So we think that we wanted to be better than neutral. We've reduced our expenses significantly. We're watching every nickel and I think it's fair to say if we were only neutral, management would be disappointed. How's that for dancing? I think you get it.

That's pretty good. And what I realized was – and I just want to make sure that I'm not being too opaque in my use of the word neutral. Sort of current cash flow, free cash flow run rate, I guess is what I'm talking about, current cash generation run rate. I'm using that in terms of neutral meaning maintain current levels, despite going into a macro challenged dynamic is what I'm talking about, just to clarify that.

Yeah, we're comfortable that that's really the goal, but by reducing our cash spend, and by having our recurring revenue growing, if you subtract one for the other, it puts us in a shape that our customers want us to have.

Yeah, got it.

Was I being too indirect?

No, that's great. That's very helpful. Understood thanks.

That was an important decision by the board and management that we had to be in a place where our customers were not worried, they shouldn't be worried. So the cost now of the company, the ongoing cash cost, after the reductions, et cetera, is clearly below the anticipated rate of recurring revenue.

Yeah, that's great. Thanks. I appreciate all the contact.

You bet, absolutely.

Our next question is a follow up from Thomas Forte with D.A. Davidson.

Great. So last two for me. So first, Randy, seems like COVID-19 has been a catalyst for online grocery. Would you agree and what are the implications of that capacity build?

We certainly agree. But it's more mixed than I think most people think about because it hasn't been a terrific experience for customers trying to do it, meaning in many cases, they couldn't get the delivery slot, et cetera. Now remember, a core aspect of our business is maintaining inventories, meaning literally the inventory counts in the direct store delivery business. And about 30% of the sales inside of a supermarket are products that get to the store direct store delivery. Now the issue really is somebody goes online and wants to order milk or whatever. And the fact is that those inventories tend not to be correct. So there's a great opportunity for us to expand our footprint and hopefully we'll be able to take advantage of that, so that the online orders become more efficient. In other words, by count, less than 25% of all online orders are properly filled without substitution. If that were a manufacturing business, they would be broke. So the reality is the online ordering issues are enormous and we can help get that straightened out. So both the out of stock problem and what's the value of the inventories in terms of counts are right in our wheelhouse. So online ordering will grow, it will probably shrink actually, to a certain extent as a percentage of sales when COVID is gone, it probably almost certainly won't go back to where it was, it'll be higher, but what we do is needed more than ever to help people keep accurate counts of what's on the shelf. So again, we feel good about where we're positioned.

Great. So last question for me, with a strong balance sheet and cash flow generation, I would imagine you have a lot of opportunities on the M&A front. What would you – how would you characterize your current M&A strategy?

Well, candidly, the last six to eight weeks, we've been heads down in execution, looking at projects that we could wrap up, et cetera. There are still a couple of ongoing things that are critically important to us going forward in terms of our own technology. But we feel like the current environment probably creates some opportunities because of the financial pressure lots of people will be feeling. So our eyes are open and if were something to come along, we would certainly want to be able to take advantage of that.

Good. All right, thank you for taking my questions. Stay well.

Thank you.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And we're out of time for today's call. Park City Group thanks you for your time and participation. You may disconnect your lines at this time.