ReposiTrak, Inc. (TRAK)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis is intended to assist the reader in understanding our results of operations and financial condition. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K (this "Annual Report"). This Annual Report includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). All statements, other than statements of historical fact, included in this Annual Report that address activities, events or developments that we expect, project, believe, or anticipate will or may occur in the future, including matters having to do with expected and future revenue, our ability to fund our operations and repay debt, business strategies, expansion and growth of operations and other such matters, are forward-looking statements. These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. These statements are subject to a number of assumptions, risks and uncertainties, including general economic and business conditions, the business opportunities (or lack thereof) that may be presented to and pursued by us, our performance on our current contracts and our success in obtaining new contracts, our ability to attract and retain qualified employees, and other factors, many of which are beyond our control. You are cautioned that these forward-looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in such statements.

Overview

ReposiTrak, Inc. is a SaaS which operates a B2B e-commerce, compliance & traceability, and supply chain management platform that partners with retailers, wholesalers, distributors and their product suppliers to (a) help them manage specific programs, such as out-of-stock management and scan-based trading; (b) reduce risk in their supply chain by managing compliance documents and data; ensure compliance with new regulatory requirements supporting traceability; and (c) improve product ordering and forecasting in order to accelerate sales, control risks, and improve supply chain efficiencies. The Company’s fiscal year ends on June 30. References to fiscal 2024 refer to the fiscal year ended June 30, 2024, and references to fiscal 2023 refer to the fiscal year ended June 30, 2023.

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Sources of Revenue

The principal customers for the Company’s products are multi-store retail chains, wholesalers and distributors, and their suppliers. The Company has a hub and spoke business model, whereby the Company is typically engaged by Hubs, which in turn require their Spokes to utilize the Company’s services. The Company’s services are grouped in three application suites:

ReposiTrak Compliance Management (“Compliance”) solutions, which helps the Company’s customers vet suppliers and reduce a company’s potential regulatory, legal, and criminal risk from its supply chain partners by providing a way for them to ensure these suppliers are compliant with food safety regulations, such as the Food Safety Modernization Act of 2011 (“FSMA”);

ReposiTrak Traceability Network (“Traceability” or “RTN”), which helps the Company’s customers comply with federal regulatory requirements of traceability and provides the lowest cost, easiest to use way to manage the capture and sharing of key data elements (“KDEs”) now required by Section 204d of FSMA 2011 as designated products move through the supply chain at each ‘event’ known as a ‘critical tracking event’ or “CTE”, which includes tracking from farm to shelf; and

ReposiTrak Supply Chain Solutions (“Supply Chain”), which help the Company’s customers to more efficiently manage various interactions with their suppliers. In other words, it provides customers with greater flexibility in sourcing products by enabling them to choose new suppliers and integrate them into their supply chain faster and more cost effectively, and it helps them to manage these relationships more efficiently, enhancing revenue while lowering working capital, labor costs and reducing waste.

The Company derives revenue from five sources: (i) subscription fees, (ii) transaction-based fees, (iii) professional services fees, (iv) license fees, and (v) hosting and maintenance fees.

A significant portion of the Company’s revenue is generated from its Compliance and Supply Chain Food Safety solutions, with a growing portion of the revenue derived from its newest Traceability solution. The revenue generated is primarily in the form of a recurring subscription payment from the suppliers. Subscription fees can be based on a negotiated flat fee per supplier, or some volumetric metric, such as the number of stores, or the volume of economic activity between a retailer and its suppliers. Subscription revenue contains arrangements with customers for use of the application, application and data hosting, maintenance of the application, and standard support.

The Company also provides professional consulting services targeting implementation, assessments, profit optimization and support functions for its applications and related products, for which revenue is recognized on a percentage-of-completion or pro rata basis over the life of the subscription, depending on the nature of the engagement. Premier customer support includes extended availability and additional services and is available along with additional support services such as developer support and partner support for an additional fee.

In rare instances, the Company may sell its software in the form of a license. License arrangements are a time-specific and perpetual license. Software license maintenance agreements are typically annual contracts, paid in advance or according to terms specified in the contract. When sold as a license, the Company’s software is usually accompanied by a corresponding maintenance and/or hosting agreement to support the service.

Software maintenance agreements provide the customer with access to new software enhancements, maintenance releases, patches, updates and technical support personnel. Our hosting services provide remote management and maintenance of our software and customers’ data, which is physically located in third-party facilities. Customers access “hosted” software and data through a secure internet connection.

Revenue Recognition

Effective July 1, 2018, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2014-09: Revenue from Contracts with Customers (Topic 606), and its related amendments (“ASU 2014-09”). ASU 2014-09 provides a unified model to determine when and how revenue is recognized and enhances certain disclosure around the nature, timing, amount and uncertainty of revenue and cash flows arising from customers.

ASU 2014-09 represents a change in the accounting model utilized for the recognition of revenue and certain expense arising from contracts with customers. We adopted ASU 2014-09 using a “modified retrospective” approach and, accordingly, revenue and expense totals for all periods before July 1, 2018 reflect those previously reported under the prior accounting model and have not been restated.

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Other Metrics – Non-GAAP Financial Measures

To supplement our financial statements, historically we have provided investors with adjusted EBITDA and non-GAAP income per share, both of which are non-GAAP financial measures. We believe that these non-GAAP measures may provide useful information regarding certain financial and business trends relating to our financial condition and operations. Our management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analyses and planning purposes. These measures are also presented to our Board of Directors.

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the U.S. (“GAAP”). These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in the Company’s financial statements and are subject to inherent limitations. Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Critical Accounting Policies

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses the Company’s financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expense during the reporting period.

On an ongoing basis, management evaluates its estimates and assumptions based on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Income Taxes

In determining the carrying value of the Company’s net deferred income tax assets, the Company must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets. If these estimates and assumptions change in the future, the Company may record a reduction in the valuation allowance, resulting in an income tax benefit in the Company’s statements of operations. Management evaluates quarterly whether to realize the deferred income tax assets and assesses the valuation allowance.

Goodwill and Other Long-Lived Asset Valuations

Goodwill is assigned to specific reporting units and is reviewed for possible impairment at least annually or upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. Management reviews the long-lived tangible and intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Management evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment.

The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair market value of the long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as circumstances dictate.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company records compensation expense on a straight-line basis. The fair value of any options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate.

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Capitalization of Software Development Costs

The Company accounts for research costs of computer software to be sold, leased or otherwise marketed as expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established.

We have determined that technological feasibility for our software products is reached shortly after a working prototype is complete and meets or exceeds design specifications including functions, features, and technical performance requirements. Costs incurred after technological feasibility is established have been and will continue to be capitalized until such time as when the product or enhancement is available for general release to customers.

Available-for-Sale Debt Investments

We classify our investments in fixed income securities as available-for-sale debt investments. Our available-for-sale debt investments primarily consist of U.S. government, U.S. government agency, non-U.S. government and agency, corporate debt, U.S. agency mortgage-backed securities, commercial paper and certificates of deposit. These available-for-sale debt investments are primarily held in the custody of a major financial institution. A specific identification method is used to determine the cost basis of available-for-sale debt investments sold. These investments are recorded in the Consolidated Balance Sheets at fair value. Unrealized gains and losses on these investments are included as a separate component of accumulated other comprehensive income (“AOCI”). We classify our investments as current based on the nature of the investments and their availability for use in current operations.

Impairment Consideration of Investments

For our available-for-sale debt securities in an unrealized loss position, we determine whether a temporary or permanent credit loss exists. In this assessment, which requires judgment, among other factors, we consider the extent to which the fair value is less than the amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security. If factors indicate a permanent credit loss exists, an allowance for credit loss is recorded to other income (loss), net, limited by the amount that the fair value is less than the amortized cost basis. The amount of fair value change relating to all other factors will be recognized in other comprehensive income (“OCI”).

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenue and results of operation, liquidity or capital expenditures.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Effective July 1, 2019, the Company adopted the requirements of ASU 2016-02. All amounts and disclosures set forth in this Annual Report have been updated to comply with ASU 2016-02, with results for reporting periods beginning after July 1, 2019 presented under ASU 2016-02, while prior period amounts and disclosures are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

Results of Operations – Fiscal Years Ended June 30, 2024 and 2023

Revenue

During the fiscal year ended June 30, 2024, the Company had revenue of $20,453,320 as compared to $19,098,910 for the year ended June 30, 2023, an increase of 7%. The increase in revenue was due to growth in recurring subscription revenue, in all lines of business, which includes compliance, supply chain and traceability. This is the result of growing industry and consumer response to food contaminations and food safety hazards, whether biological, chemical, physical, or allergenic. The risks have elevated regulatory requirements, documentation requisites, and principally “where does your food come from” transparency on grocery retailers and their suppliers. As more and more retailers, wholesalers and distributors adopt the increased regulatory disclosure requirements, the Company has seen a corresponding rise in demand for its services.

Although no assurances can be given, we continue to focus our sales efforts on marketing our software services on a recurring subscription basis and placing less emphasis on transactional revenue. However, we believe there will continue to be a small percentage of customers that will, from time to time, require buying a particular service outright (i.e., a license). Nonetheless, we will continue to deemphasize non-recurring transactional revenue when we are able.

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Cost of Services and Product Support

Cost of services and product support was $3,416,450, or 17% of total revenue, and $3,309,345 or 17% of total revenue for the years ended June 30, 2024 and 2023, respectively, an increase of 3%. This increase is primarily the result of cybersecurity spending and increased offshore developer headcount and support services in effort to support the acceleration and expansion of the FSMA 204 initiative. Given the demand in traceability the Company has also expended additional resources on further upgrading its information security services and confidentiality protocols to increase protection of customer data.

Sales and Marketing Expense

The Company’s sales and marketing expense was $5,492,719, or 27% of total revenue, as compared to $4,933,405, or 26% of total revenue, for the fiscal years ended June 30, 2024 and 2023, respectively, an increase of 11%. The increase in sales and marketing expense was primarily the result of an increase in commission, trade show expense, investment in FSMA 204 traceability marketing, and higher sales travel expense. As the pandemic concerns have been reduced, customers and prospects are returning to in person meetings and participation in large tradeshows. The largest contributors to the increase in sales and marketing expense has been an increase in commission and FSMA 204 traceability marketing. We believe the uptick in marketing costs will flatten over the next twelve months as awareness of the 2026 traceability regulatory deadline approaches.

General and Administrative Expense

The Company’s general and administrative expense was $5,330,437, or 26% of total revenue, and $4,685,783 or 25% of total revenue for the years ended June 30, 2024 and 2023, respectively, an increase of 14%. The increase in general and administrative expense was primarily due to refund of payroll taxes associated with the Employee Retention Credit (“ERC”) that occurred in the prior fiscal year that did not reoccur in fiscal 2024. The ERC was a refund of certain payroll taxes for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts. During the prior fiscal year, the Company received approximately $1.175 million in payroll tax refunds, net of fees. The ERC credit was partially offset by increases in bad debt expense and increases in cost of benefits for employees.

Depreciation and Amortization Expense

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The Company’s depreciation and amortization expense was $1,189,483 and $1,079,799 for the years ended June 30, 2024 and 2023, respectively, an increase of 10%. The increase was due to additional assets acquired in the prior fiscal year. Given the rising global hacks on software companies, banks, and financial institutions, we spent approximately $440,000 on security, backup, storage, and redundancy. The upgrades were financed through a leasing agent with an effective APR rate of 4.78%.

Other Income and Expense

Net other income was $1,308,550 compared to net other income of $821,082 for the years ended June 30, 2024 and 2023, respectively. Other income increased due to higher cash balances and an increase in interest income attributable to higher interest rates on fixed income instruments. As the Federal Reserve begins to cut rates in the future, it is unlikely the Company will be able to maintain the same interest income on its existing cash balances without taking additional credit risk.

Preferred Dividends

Dividends accrued on the Company’s Series B Preferred and Series B-1 Preferred was $549,645 and $586,444 for the years ended June 30, 2024 and 2023, respectively, a decrease of 6%. Dividends decreased due to the redemption and retirement of Preferred Stock. Although no assurances can be given, the Company announced that it intends to redeem all of the Series B and B-1 Preferred stock over three years which commenced August of 2023.

Financial Position, Liquidity and Capital Resources

We believe that our existing cash and short-term investments, together with funds generated from operations, are sufficient to fund operating and investment requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including macroeconomic conditions, our rate of revenue growth, sales and marketing activities, the timing and extent of spending required for research and development efforts and the continuing market acceptance of our products and services.

We have historically funded our operations with cash from operations, equity financings, and borrowings from our existing line of credit with U.S. Bank N.A. (the “Bank”), which was revised on October 6, 2021, and again in 2022. In March 2024, given our strong financial position, we terminated the credit facility with our bank.

Cash was $25,153,862 and $23,990,879 at June 30, 2024 and 2023, respectively. This 5% increase is primarily the result of higher revenue and the corresponding cash receipts from customers. It also includes higher interest income earnings associated with growing cash balances.

Net Cash Flows from Operating Activities

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Net cash provided by operating activities is summarized as follows:

Net cash provided by operating activities for the year ended June 30, 2024 was $6,694,401 compared to net cash provided by operating activities of $8,860,019 for the year ended June 30, 2023. Net cash provided by operating activities decreased 21% due principally to the receipt of the ERC refund in fiscal 2023, that did not reoccur in fiscal 2024, an increase in accounts receivable due to an increase in subscription sales, and a decrease in accounts payable and other obligations that had become due. Noncash expense decreased by $836,111 for the year ended June 30, 2024 compared to the year ended June 30, 2023 as a result of a decrease in bad debt expense and stock compensation expense offset by an increase in depreciation and amortization.

Net Cash Flows Used in Investing Activities

Net cash used in investing activities for the year ended June 30, 2024 was $100,007 compared to net cash used in investing activities of $903,187 for the year ended June 30, 2023. This decrease in cash used in investing activities for the for fiscal 2024 was due to capitalization of certain software costs and purchases of property and equipment in the prior fiscal year that did not occur in the current fiscal year.

Net Cash Flows from Financing Activities

Net cash used in financing activities totaled $5,700,711 for the year ended June 30, 2024 compared to net cash used in financing activities of $5,426,901 for the year ended June 30, 2023. The increase in net cash used in financing activities is due to the payment of higher Common Stock dividends, the purchase of Common Stock under the Share Repurchase Program, and the redemption and retirement of shares of Preferred Stock.

Liquidity and Working Capital

At June 30, 2024, the Company had positive working capital of $24,757,025, as compared with positive working capital of $23,042,199 at June 30, 2023. This $1,714,826 increase in working capital is primarily due to an increase in accounts receivable and decrease in prepaid and other assets offset by a decrease in contract liabilities and an increase in deferred revenue. Cash and cash equivalents also increased due to cash receipts from customers who have signed up for, among other offerings, the ReposiTrak Traceability Network.

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Current assets totaled $29,300,167 as of June 30, 2024, as compared to $27,274,620 as of June 30, 2023. The increase in current assets is primarily attributable to the increase in cash and accounts receivables offset by a decrease of prepaid expense and other current assets.

Current liabilities totaled $4,543,142 as of June 30, 2024 as compared to $4,232,421 as of June 30, 2023. The increase in current liabilities is primarily attributable to the increase in deferred revenue offset by a decrease in accrued liabilities and financing lease liabilities due to capital expenditures on cybersecurity, storage and other information technology services. As of June 30, 2024, the Company had zero bank debt.

On October 6, 2021, the Company and the Bank executed a Revolving Credit Agreement (the "Revolving Credit Agreement”) and accompanying addendum (the "Addendum"), and Stand-Alone Revolving Note (the "Note" and collectively with the Revolving Credit Agreement and Addendum, the "Credit Agreement"), with an effective date of September 30, 2021. The Credit Agreement replaced the Company’s prior $6.0 million Revolving Credit Agreement and Stand-Alone Revolving Note between the Company and the Bank, as amended and revised on January 9, 2019, and provided the Company with a $10.0 million revolving line of credit that matured on March 31, 2023. The Credit Agreement contained customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. Among other things, the Company must maintain liquid assets equal to $12 million and maintain a Senior Funded Debt (as defined in the Credit Agreement) to EBITDA Ratio (as defined in the Credit Agreement) of not more than 3:1.

On April 28, 2023, the Company and the Bank executed an amendment to the Credit Agreement (the “Amendment”), with an effective date of March 31, 2023. The Amendment sets forth that (1) the Company will increase its liquidity requirement from $10 million to $12 million, which the Company currently maintains over $22 million in cash and a current ratio of over 6:1, and (2) draws on the facility accrue interest at the annual rate, equal to 1.75% plus the one-month SOFR rate, instead of the previous LIBOR rate. As of March 31, 2024, the balance of the facility was zero. The Company had zero bank debt at June 30, 2024.

On March 15, 2024, given its strong financial position, the Company chose not to renew the Revolving Credit Agreement.  There were no amounts due at the time of renewal.

While no assurances can be given, management currently believes that the Company will continue to increase its cash flow from operations and working capital position in subsequent periods. The Company’s increase in anticipated cash flow from operations and working capital position is expected to be offset by the use of cash required to fund the Company’s quarterly cash dividends of $0.015 per share, announced on September 28, 2022, December 30, 2022, February 10, 2023, March 21, 2023, June 20, 2023, September 19, 2023, and of $0.0165 per share, announced on December 12, 2023, March 18, 2024 and June 18, 2024, as well as the  redemption and retirement of the Company’s Series B Convertible Preferred Stock and Series B-1 Preferred Stock (together, the “Preferred Stock”) for their stated value, or $10.70 for each share of Preferred Stock, resulting in an aggregate purchase price of $8,964,214.

Contractual Obligations

Total contractual obligations and commercial commitments as of June 30, 2024 are summarized in the following table:

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Inflation

The impact of inflation has historically not had a material effect on the Company’s financial condition or results from operations; however, higher rates of inflation may cause retailers to slow their spending in the technology area, which could have an impact on the Company’s sales.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis is intended to assist the reader in understanding our results of operations and financial condition. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K (this "Annual Report"). This Annual Report includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). All statements, other than statements of historical fact, included in this Annual Report that address activities, events or developments that we expect, project, believe, or anticipate will or may occur in the future, including matters having to do with expected and future revenue, our ability to fund our operations and repay debt, business strategies, expansion and growth of operations and other such matters, are forward-looking statements. These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. These statements are subject to a number of assumptions, risks and uncertainties, including general economic and business conditions, the business opportunities (or lack thereof) that may be presented to and pursued by us, our performance on our current contracts and our success in obtaining new contracts, our ability to attract and retain qualified employees, and other factors, many of which are beyond our control. You are cautioned that these forward-looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in such statements.

Overview

Park City Group, Inc., a Nevada corporation (“Park City Group”, “we”, “us”, “our” or, the “Company”) is a Software-as-a-Service (“SaaS”) provider, and the parent company of ReposiTrak, Inc. a Utah corporation (“ReposiTrak”), a business-to-business (“B2B”) e-commerce, compliance, and supply chain management platform company that partners with retailers, wholesalers, and product suppliers to help them source, vet, and transact with their suppliers in order to accelerate sales, control risks, and improve supply chain efficiencies. The Company’s fiscal year ends on June 30. References to fiscal 2023 refer to the fiscal year ended June 30, 2023, and references to fiscal 2022 refer to the fiscal year ended June 30, 2022.

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Sources of Revenue

The principal customers for the Company’s products are multi-store retail chains, wholesalers and distributors, and their suppliers. The Company has a hub and spoke business model, whereby the Company is typically engaged by retailers and wholesalers (“Hubs”), which in turn require their suppliers (“Spokes”) to utilize the Company’s services. The Company’s services are grouped in three application suites: (i) ReposiTrak MarketPlace (“MarketPlace”), encompassing the Company’s supplier discovery and B2B e-commerce solutions, which helps the Company’s customers find new suppliers; (ii) ReposiTrak Compliance and Food Safety (“Compliance and Food Safety”) solutions, which help the Company’s customers vet suppliers to mitigate the risk of doing business with these suppliers; and (iii) ReposiTrak’s Supply Chain (“Supply Chain”) solutions, which help the Company’s customers to more efficiently manage their various transactions with their suppliers. The Company derives revenue from five sources: (i) subscription fees, (ii) transaction-based fees, (iii) professional services fees, (iv) license fees, and (v) hosting and maintenance fees.

A significant portion of the Company’s revenue is generated from its Supply Chain solutions and Compliance and Food Safety solutions in the form of recurring subscription payments from the suppliers. Subscription fees can be based on a negotiated flat fee per supplier, or some volumetric metric, such as the number of stores, or the volume of economic activity between a retailer and its suppliers. Subscription revenue contains arrangements with customers for use of the application, application and data hosting, maintenance of the application, and standard support.

Revenue from the Company’s MarketPlace sourcing solution historically has been transactional, based on the volume of products sourced via the application. MarketPlace revenue can come from several sources depending on the customer’s specific requirements. These include acting as an agent for a supplier, providing supply chain technology services, and enabling a Hub to reduce its number of new suppliers by acting as the supplier for any number of products.

The Company also provides professional consulting services targeting implementation, assessments, profit optimization and support functions for its applications and related products, for which revenue is recognized on a percentage-of-completion or pro rata basis over the life of the subscription, depending on the nature of the engagement. Premier customer support includes extended availability and additional services and is available along with additional support services such as developer support and partner support for an additional fee.

In some instances, the Company will sell its software in the form of a license. License arrangements are a time-specific and perpetual license. Software license maintenance agreements are typically annual contracts, paid in advance or according to terms specified in the contract. When sold as a license, the Company’s software is usually accompanied by a corresponding maintenance and/or hosting agreement to support the service.

Software maintenance agreements provide the customer with access to new software enhancements, maintenance releases, patches, updates and technical support personnel. Our hosting services provide remote management and maintenance of our software and customers’ data, which is physically located in third-party facilities. Customers access “hosted” software and data through a secure internet connection.

Revenue Recognition

Effective July 1, 2018, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2014-09: Revenue from Contracts with Customers (Topic 606), and its related amendments (“ASU 2014-09”). ASU 2014-09 provides a unified model to determine when and how revenue is recognized and enhances certain disclosure around the nature, timing, amount and uncertainty of revenue and cash flows arising from customers.

ASU 2014-09 represents a change in the accounting model utilized for the recognition of revenue and certain expense arising from contracts with customers. We adopted ASU 2014-09 using a “modified retrospective” approach and, accordingly, revenue and expense totals for all periods before July 1, 2018 reflect those previously reported under the prior accounting model and have not been restated.

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Other Metrics – Non-GAAP Financial Measures

To supplement our financial statements, historically we have provided investors with Adjusted EBITDA and non-GAAP income per share, both of which are non-GAAP financial measures. We believe that these non-GAAP measures may provide useful information regarding certain financial and business trends relating to our financial condition and operations. Our management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analyses and planning purposes. These measures are also presented to our Board of Directors.

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in the Company’s financial statements and are subject to inherent limitations. Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Critical Accounting Policies

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses the Company’s financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expense during the reporting period.

On an ongoing basis, management evaluates its estimates and assumptions based on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Income Taxes

In determining the carrying value of the Company’s net deferred income tax assets, the Company must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets. If these estimates and assumptions change in the future, the Company may record a reduction in the valuation allowance, resulting in an income tax benefit in the Company’s statements of operations. Management evaluates quarterly whether to realize the deferred income tax assets and assesses the valuation allowance.

Goodwill and Other Long-Lived Asset Valuations

Goodwill is assigned to specific reporting units and is reviewed for possible impairment at least annually or upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. Management reviews the long-lived tangible and intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Management evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment.

The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair market value of the long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as circumstances dictate.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company records compensation expense on a straight-line basis. The fair value of any options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate.

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Capitalization of Software Development Costs

The Company accounts for research costs of computer software to be sold, leased or otherwise marketed as expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established.

We have determined that technological feasibility for our software products is reached shortly after a working prototype is complete and meets or exceeds design specifications including functions, features, and technical performance requirements. Costs incurred after technological feasibility is established have been and will continue to be capitalized until such time as when the product or enhancement is available for general release to customers.

Available-for-Sale Debt Investments

We classify our investments in fixed income securities as available-for-sale debt investments. Our available-for-sale debt investments primarily consist of U.S. government, U.S. government agency, non-U.S. government and agency, corporate debt, U.S. agency mortgage-backed securities, commercial paper and certificates of deposit. These available-for-sale debt investments are primarily held in the custody of a major financial institution. A specific identification method is used to determine the cost basis of available-for-sale debt investments sold. These investments are recorded in the Consolidated Balance Sheets at fair value. Unrealized gains and losses on these investments are included as a separate component of accumulated other comprehensive income (“AOCI”). We classify our investments as current based on the nature of the investments and their availability for use in current operations.

Impairment Consideration of Investments

For our available-for-sale debt securities in an unrealized loss position, we determine whether a temporary or permanent credit loss exists. In this assessment, which requires judgment, among other factors, we consider the extent to which the fair value is less than the amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security. If factors indicate a permanent credit loss exists, an allowance for credit loss is recorded to other income (loss), net, limited by the amount that the fair value is less than the amortized cost basis. The amount of fair value change relating to all other factors will be recognized in other comprehensive income (“OCI”).

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenue and results of operation, liquidity or capital expenditures.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Effective July 1, 2019, the Company adopted the requirements of ASU 2016-02. All amounts and disclosures set forth in this Annual Report have been updated to comply with ASU 2016-02, with results for reporting periods beginning after July 1, 2019 presented under ASU 2016-02, while prior period amounts and disclosures are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

Results of Operations – Fiscal Years Ended June 30, 2023 and 2022

Revenue

During the fiscal year ended June 30, 2023, the Company had revenue of $19,098,910 as compared to $18,046,941 for the year ended June 30, 2022, an increase of 6%. The increase in revenue during the period was due to revenue growth in subscription, services and other recurring revenue in all areas of the business, particularly compliance and supply chain. This is the result of growing industry and consumer concern of food contaminations and food safety hazards whether biological, chemical, physical, or allergenic. The risks have elevated regulatory requirements, documentation requisites, and principally “where does your food come from?” transparency on grocery retailers and their suppliers.  As more and more retailers, wholesalers and distributors adopt the risk concerns and disclosure requirements, the Company has seen a rising demand for its services.

During fiscal 2022, as COVID-19 disrupted supply chains and generated shortages in products, our ability to source hard to find items for our customers resulted in increased revenue attributable to MarketPlace. These products largely consisted of personal protective equipment (“PPE”) which includes nitrile gloves, masks, freezers and telecommunication equipment. While the Company experienced a significant increase in MarketPlace revenue for PPE during the height of COVID-19, it is uncertain what or if any demand for PPE will continue in fiscal 2024. As a result, we may experience significant swings in MarketPlace revenue as the pandemic continues to abate.

Although no assurances can be given, we continue to focus our sales efforts on marketing our software services on a recurring subscription basis and placing less emphasis on transactional revenue, including MarketPlace revenue. However, we believe there will continue to be a small percentage of customers that will require buying a particular service outright (i.e., a license). We will continue to make our best effort to reduce this non-recurring transactional revenue when we are able.

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Cost of Services and Product Support

Cost of services and product support was $3,309,345 or 17% of total revenue, and $3,186,712 or 18% of total revenue for the years ended June 30, 2023 and 2022, respectively, an increase of 4%. This increase is primarily the result of (1) increased salary and IT support and maintenance costs. Given the rise in cyber-attacks around the globe, we continue to expand our cyber security infrastructure which includes expenditures on; (1) identification (2) protection (3) detection (4) response, and, (5) recovery. We increased spending by $72,112 in the areas of detection, response and recovery during the period.

Sales and Marketing Expense

The Company’s sales and marketing expense was $4,933,405, or 26% of total revenue, as compared to $4,853,926, or 27% of total revenue, for the fiscal years ended June 30, 2023 and 2022, respectively, an increase of 2%. This increase in sales and marketing expense is primarily due to an increase in trade show expense, investment in FSMA 204 traceability marketing, and higher sales travel expense. As the pandemic continues to abate, many customers and prospects are returning to the “new normal” requiring in person meetings. The largest contributor to the increase in sales and marketing expense has been an increase in travel cost and trade shows. We believe this trend will continue as many of our trading partners, industry associations will continue to require our assistance in addressing their compliance and supply chain needs “in-person.”  Given the complexity of FSMA 204 requirements, our customers require additional assistance in evaluating their locations for onboarding.  In many cases, this requires multiple onsite meetings with distribution centers, warehouse operations, and store locations.

General and Administrative Expense

The Company’s general and administrative expense was $4,685,783, or 25% of total revenue, and $4,716,131 or 26% of total revenue for the years ended June 30, 2023 and 2022, respectively, a decrease of 1%. The decrease in general and administrative expense is primarily due to a refund of payroll taxes associated with the Employee Retention Credit (“ERC”). The ERC is a refund or certain payroll taxes for businesses that continued to pay employees while shut down temporarily due to the COVID-19 pandemic or had significant declines in gross receipts. During fiscal 2023, the Company received approximately $1.175 million in payroll tax refunds, net of fees.  The ERC refund was offset by increases in bad debt expense, increase costs of benefits for employees, and higher payroll costs due to a tight labor market.

Depreciation and Amortization Expense

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The Company’s depreciation and amortization expense was $1,079,799 and $875,551 for the years ended June 30, 2023 and 2022, respectively, an increase of 23%. This increase is due to additional assets acquired in fiscal year 2023. As previously stated in Cost of Services and Product Support, we expend resources on both services and technology infrastructure.  Historically, we spend between $250-$500k per annum on updating our hardware and cybersecurity infrastructure.  During the period, we expended an additional $327,323 on hardware and software for both our Murray, UT datacenter and our Las Vegas data center to further provide redundancy and bolster our technology infrastructure to defend against cyber-attacks.

Other Income and Expense

Net other income was $821,082 compared to net other expense of $281,558 for the years ended June 30, 2023 and 2022, respectively. Other income increased due to (1) an increase in interest income due to rising interest rates on fixed income instruments on excess cash; and (2) offset by realized losses of certain short-term investments held in U.S. treasuries and other securities that occurred in prior fiscal year. Although rising interest rates provided additional interest income, the Company recognized a decline in its bond portfolio and other fixed income instruments on excess cash. The Company has zero bank debt.  However, the Company does recognize interest expense associated with employee credit cards and financing arrangements due to leases or other payment arrangements.

Preferred Dividends

Dividends accrued on the Company’s Series B Preferred and Series B-1 Preferred was $586,444 and $586,444 for the years ended June 30, 2023 and 2022, respectively. Dividends remained flat in the comparable periods.

Financial Position, Liquidity and Capital Resources

We believe that our existing cash and short-term investments, together with funds generated from operations, are sufficient to fund operating and investment requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including macroeconomic conditions, our rate of revenue growth, sales and marketing activities, the timing and extent of spending required for research and development efforts and the continuing market acceptance of our products and services.

We have historically funded our operations with cash from operations, equity financings, and borrowings from our existing line of credit with U.S. Bank N.A., which was revised on October 6, 2021 and again in 2022.

Cash was $23,990,879 and $21,460,948 at June 30, 2023 and 2022, respectively. This 12% increase is principally the result of (1) sales growth, (2) collections of accounts receivable, (3) offset by paying down over $2.6 million of our existing line of credit, and (3) the purchase of common stock under our existing buyback plan, and (4) payment of dividends on both the preferred stock and common stock.   Cash was also impacted by lower overall cash operating expense, receiving cash in advance on subscriptions, and the previously disclosed $1.1 million received in conjunction with the ERC.

Net Cash Flows from Operating Activities

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Net cash provided by operating activities is summarized as follows:

Net cash provided by operating activities for the year ended June 30, 2023 was $8,860,019 compared to net cash provided by operating activities of $6,101,617 for the year ended June 30, 2022. Net cash provided by operating activities increased 45% due largely to (1) higher revenue and collection of monthly subscription fees paid annually in advance, (2) collection of outstanding receivables, (3) an increase in prepaids and other assets and (3) an increase in deferred revenue offset by a decrease in accounts payable. Noncash expense increased by $498,971 for the year ended June 30, 2023 compared to the year ended June 30, 2022 as a result of increased depreciation and amortization of certain assets and an increase in bad debt expense.

Net Cash Flows Used in Investing Activities

Net cash used in investing activities for the year ended June 30, 2023 was $903,187 compared to net cash provided by investing activities of $1,323,262 for the year ended June 30, 2022. This increase in cash used in investing activities for the year ended June 30, 2023 was due to the sale of property and equipment in prior fiscal year and the capitalization of software costs incurred in development of the ReposiTrak Traceability Network® (“RTN”).

Net Cash Flows from Financing Activities

Net cash used in financing activities totaled $5,426,901 for the year ended June 30, 2023 compared to net cash used in financing activities of $10,034,253 for the year ended June 30, 2022. The decrease in net cash used in financing activities is primarily attributable to the $2.6 million payoff of our line of credit arrangement with a bank in prior fiscal year and the purchase of stock under the Share Repurchase Program. This was partially offset with the quarterly payment of cash dividends on common stock declared in prior fiscal year.

Liquidity and Working Capital

At June 30, 2023, the Company had positive working capital of $23,042,199, as compared with positive working capital of $20,485,875 at June 30, 2022. This $2,556,324 increase in working capital is primarily due to a decrease in liability as a result of the payoff of a financing arrangement with a bank. Cash and cash equivalents also increased due to higher sales, cash-in-advance customers, higher rate of return on excess capital and the receipt of the previously disclosed $1.1 million in conjunction of the ERC.

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Current assets as of June 30, 2023 totaled $27,274,620, an increase of $691,911, as compared to $26,582,709 as of June 30, 2022. The increase in current assets is primarily attributable to a net increase in cash and cash equivalents offset with a decrease in contract assets and prepaid expense of $1,195,839 and a decrease in accounts receivable of $642,181.

Current liabilities totaled $4,232,421 as of June 30, 2023 as compared to $6,096,834 as of June 30, 2022. The decrease in current liabilities is primarily attributable to the corresponding payoff of $2.6 million in our line of credit. As of June 30, 2023, the Company has zero bank debt.

On October 6, 2021, the Company and the Bank executed the Credit Agreement, with an effective date of September 30, 2021 which is amended annually to reflect the needs of the Company.

The Credit Agreement replaces the Company’s prior $6.0 million Revolving Credit Agreement and Stand-Alone Revolving Note between the Company and the Bank, as amended and revised on January 9, 2019, and provides the Company with a $10.0 million revolving line of credit that matures on March 31, 2023.

On April 28, 2023, the Company and the Bank executed an Amendment to the existing $10.0 million Credit Agreement, with an effective date of March 31, 2023. The new amendment provisions to the existing $10 million facility are (1) the Company will increase its liquidity requirement from $10 million to $12 million. Currently the Company maintains over $22 million in cash and a current ratio of over 6:1. (2) Draws on the facility accrue interest at the annual rate equal to 1.75% plus the one-month SOFR rate instead of the previous LIBOR rate. As of June 30, 2023, the balance of the facility was zero. The Company has zero bank debt.

Furthermore, the Credit Agreement contains customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. Among other things, the Company must maintain liquid assets equal to $12 million and maintain a Senior Funded Debt (as defined in the Credit Agreement) to EBITDA Ratio (as defined in the Credit Agreement) of not more than 3:1.

While no assurances can be given, management currently believes that the Company will continue to increase its cash flow from operations and working capital position in subsequent periods. The Company’s increase in anticipated cash flow from operations and working capital position is expected to be offset by the use of cash required to fund the Company’s quarterly cash dividends of $0.015 per share, announced on September 28, 2022, December 30, 2022, February 10, 2023, March 21, 2023, June 20, 2023 and September 19, 2023, as well as the  redemption and retirement of the Company’s Series B Convertible Preferred Stock and Series B-1 Preferred Stock (together, the “Preferred Stock”) for their stated value, or $10.70 for each share of Preferred Stock, resulting in an aggregate purchase price of $8,964,214 (the “Preferred Redemption”).  The Preferred Redemption is to occur over the next three years from September 12, 2023. The Company believes it will have adequate cash resources to fund its operations, satisfy its debt obligations, and fund its anticipated quarterly cash dividends and Preferred Redemption for at least the next 12 months.

Contractual Obligations

Total contractual obligations and commercial commitments as of June 30, 2023 are summarized in the following table:

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Inflation

The impact of inflation has historically not had a material effect on the Company’s financial condition or results from operations; however, higher rates of inflation may cause retailers to slow their spending in the technology area, which could have an impact on the Company’s sales.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management’s Discussion and Analysis is intended to assist the reader in understanding our results of operations and financial condition. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements beginning on page F-1 of this Annual Report on Form 10-K (this "Annual Report"). This Annual Report includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). All statements, other than statements of historical fact, included in this Annual Report that address activities, events or developments that we expect, project, believe, or anticipate will or may occur in the future, including matters having to do with expected and future revenue, our ability to fund our operations and repay debt, business strategies, expansion and growth of operations and other such matters, are forward-looking statements. These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. These statements are subject to a number of assumptions, risks and uncertainties, including general economic and business conditions, the business opportunities (or lack thereof) that may be presented to and pursued by us, our performance on our current contracts and our success in obtaining new contracts, our ability to attract and retain qualified employees, and other factors, many of which are beyond our control. You are cautioned that these forward-looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in such statements.

Overview

Park City Group, Inc., a Nevada corporation (“Park City Group”, “we”, “us”, “our” or, the “Company”) is a Software-as-a-Service (“SaaS”) provider, and the parent company of ReposiTrak, Inc. a Utah corporation (“ReposiTrak”), a business-to-business (“B2B”) e-commerce, compliance, and supply chain management platform company that partners with retailers, wholesalers, and product suppliers to help them source, vet, and transact with their suppliers in order to accelerate sales, control risks, and improve supply chain efficiencies. The Company’s fiscal year ends on June 30. References to fiscal 2022 refer to the fiscal year ended June 30, 2022.

Sources of Revenue

The principal customers for the Company’s products are multi-store retail chains, wholesalers and distributors, and their suppliers. The Company has a hub and spoke business model, whereby the Company is typically engaged by retailers and wholesalers (“Hubs”), which in turn require their suppliers (“Spokes”) to utilize the Company’s services. The Company’s services are grouped in three application suites: (i) ReposiTrak MarketPlace (“MarketPlace”), encompassing the Company’s supplier discovery and B2B e-commerce solutions, which helps the Company’s customers find new suppliers; (ii) ReposiTrak Compliance and Food Safety (“Compliance and Food Safety”) solutions, which help the Company’s customers vet suppliers to mitigate the risk of doing business with these suppliers; and (iii) ReposiTrak’s Supply Chain (“Supply Chain”) solutions, which help the Company’s customers to more efficiently manage their various transactions with their suppliers. The Company derives revenue from five sources: (i) subscription fees, (ii) transaction-based fees, (iii) professional services fees, (iv) license fees, and (v) hosting and maintenance fees.

A significant portion of the Company’s revenue is generated from its Supply Chain solutions and Compliance and Food Safety solutions in the form of recurring subscription payments from the suppliers. Subscription fees can be based on a negotiated flat fee per supplier, or some volumetric metric, such as the number of stores, or the volume of economic activity between a retailer and its suppliers. Subscription revenue contains arrangements with customers for use of the application, application and data hosting, maintenance of the application, and standard support.

Revenue from the Company’s MarketPlace sourcing solution historically has been transactional, based on the volume of products sourced via the application. MarketPlace revenue can come from several sources depending on the customer’s specific requirements. These include acting as an agent for a supplier, providing supply chain technology services, and enabling a Hub to reduce its number of new suppliers by acting as the supplier for any number of products.

The Company also provides professional consulting services targeting implementation, assessments, profit optimization and support functions for its applications and related products, for which revenue is recognized on a percentage-of-completion or pro rata basis over the life of the subscription, depending on the nature of the engagement. Premier customer support includes extended availability and additional services and is available along with additional support services such as developer support and partner support for an additional fee.

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In some instances, the Company will sell its software in the form of a license. License arrangements are a time-specific and perpetual license. Software license maintenance agreements are typically annual contracts, paid in advance or according to terms specified in the contract. When sold as a license, the Company’s software is usually accompanied by a corresponding maintenance and/or hosting agreement to support the service.

Software maintenance agreements provide the customer with access to new software enhancements, maintenance releases, patches, updates and technical support personnel. Our hosting services provide remote management and maintenance of our software and customers’ data, which is physically located in third-party facilities. Customers access “hosted” software and data through a secure internet connection.

Revenue Recognition

Effective July 1, 2018, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) 2014-09: Revenue from Contracts with Customers (Topic 606), and its related amendments (“ASU 2014-09”). ASU 2014-09 provides a unified model to determine when and how revenue is recognized and enhances certain disclosure around the nature, timing, amount and uncertainty of revenue and cash flows arising from customers.

ASU 2014-09 represents a change in the accounting model utilized for the recognition of revenue and certain expense arising from contracts with customers. We adopted ASU 2014-09 using a “modified retrospective” approach and, accordingly, revenue and expense totals for all periods before July 1, 2018 reflect those previously reported under the prior accounting model and have not been restated.

Other Metrics – Non-GAAP Financial Measures

To supplement our financial statements, historically we have provided investors with Adjusted EBITDA and non-GAAP income per share, both of which are non-GAAP financial measures. We believe that these non-GAAP measures may provide useful information regarding certain financial and business trends relating to our financial condition and operations. Our management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analyses and planning purposes. These measures are also presented to our Board of Directors.

These non-GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”). These non-GAAP financial measures exclude significant expenses and income that are required by GAAP to be recorded in the Company’s financial statements and are subject to inherent limitations. Investors should review the reconciliations of non-GAAP financial measures to the comparable GAAP financial measures that are included in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Critical Accounting Policies

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses the Company’s financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expense during the reporting period.

On an ongoing basis, management evaluates its estimates and assumptions based on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Income Taxes

In determining the carrying value of the Company’s net deferred income tax assets, the Company must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets. If these estimates and assumptions change in the future, the Company may record a reduction in the valuation allowance, resulting in an income tax benefit in the Company’s statements of operations. Management evaluates quarterly whether to realize the deferred income tax assets and assesses the valuation allowance.

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Goodwill and Other Long-Lived Asset Valuations

Goodwill is assigned to specific reporting units and is reviewed for possible impairment at least annually or upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. Management reviews the long-lived tangible and intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Management evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment.

The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair market value of the long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as circumstances dictate.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company records compensation expense on a straight-line basis. The fair value of any options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate.

Capitalization of Software Development Costs

The Company accounts for research costs of computer software to be sold, leased or otherwise marketed as expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established.

We have determined that technological feasibility for our software products is reached shortly after a working prototype is complete and meets or exceeds design specifications including functions, features, and technical performance requirements. Costs incurred after technological feasibility is established have been and will continue to be capitalized until such time as when the product or enhancement is available for general release to customers.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenue and results of operation, liquidity or capital expenditures.

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Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842) (“ASU 2016-02”). Under ASU 2016-02, lessees will be required to recognize for all leases (with the exception of short-term leases) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Effective July 1, 2019, the Company adopted the requirements of ASU 2016-02. All amounts and disclosures set forth in this Annual Report have been updated to comply with ASU 2016-02, with results for reporting periods beginning after July 1, 2019 presented under ASU 2016-02, while prior period amounts and disclosures are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

Results of Operations – Fiscal Years Ended June 30, 2022 and 2021

Revenue

During the fiscal year ended June 30, 2022, the Company had revenue of $18,046,941 as compared to $21,007,076 for the year ended June 30, 2021, a decrease of 14%. The decrease in revenue was due to significant MarketPlace revenue contribution during the height of COVID-19 that occurred in fiscal 2021 that did not reoccur in 2022. Given its volatility and non-recurring nature, the Company’s strategic plan is to eliminate all non-core non-recurring revenue. Year to date, this includes approximately $3,600,000, in non- recurring Marketplace revenue, and $600,000 in recurring revenue for products and services that had little upside and very low margin. This was partially offset by revenue growth in compliance subscription, supply chain services and other recurring revenue.

During fiscal 2021, as COVID-19 disrupted supply chains and generated shortages in products, our ability to source hard to find items for our customers resulted in increased revenue attributable to MarketPlace. These products largely consisted of personal protective equipment used in connection with COVID-19 (“PPE”). While the Company experienced a significant increase in MarketPlace revenue for PPE during the height of COVID-19, that demand significantly decreased in 2022, and future demand is uncertain.  The uncertainty regarding future demand for MarketPlace is heightened due to recent geopolitical conflicts, including the current war in Ukraine. While we don’t currently anticipate that such uncertainties will materially affect our future results from operations, no assurances can be given.

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Although no assurances can be given, we continue to focus our sales efforts on marketing our software services on a recurring subscription basis and placing less emphasis on transactional revenue. However, we believe there will continue to be a small percentage of customers that will require buying a particular service outright (i.e., a license). We will continue to make our best effort to reduce this non-recurring transactional revenue when we are able.

Cost of Services and Product Support

Cost of services and product support was $3,186,712 or 18% of total revenue, and $6,884,647 or 33% of total revenue for the years ended June 30, 2022 and 2021, respectively, a decrease of 54%. This decrease is the result of planned elimination of low margin products, services and ongoing cost control. We eliminated high cost, low margin MarketPlace transactional revenue which significantly reduced procurement costs. With lower MarketPlace transactions, we realized significantly less Cost of Services.  In addition, we sunsetted two vendor managed pricing products and the associated headcount which also contributed to lower Cost of Services. We also eliminated certain 3rd party vendor software services which contributed to the reduction.

While we experienced a significant increase in MarketPlace costs and corresponding revenue during fiscal 2021 due to demand in PPE, those costs and corresponding revenue were not continued in fiscal 2022. It is uncertain what Marketplace transactional revenue, if any, we can expect going forward since the Company has chosen to eliminate all non-core non-recurring revenue.

Sales and Marketing Expense

The Company’s sales and marketing expense was $4,853,926, or 27% of total revenue, and $4,995,578, or 24% of total revenue, for the fiscal years ended June 30, 2022 and 2021, respectively, a decrease of 3%. This was due primarily to a decrease in variable compensation, a reduction in trade show expense, and lower sales and marketing travel expense.

General and Administrative Expense

The Company’s general and administrative expense was $4,716,131, or 26% of total revenue, and $5,214,936 or 25% of total revenue for the years ended June 30, 2022 and 2021, respectively, a decrease of 10%. The decrease in general and administrative expense is primarily due to the termination of hosted software applications including its CRM provider, employee expense management software, and a decrease in maintenance costs associated with certain fixed assets.

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Depreciation and Amortization Expense

The Company’s depreciation and amortization expense was $875,551 and $1,019,515 for the years ended June 30, 2022 and 2021, respectively, a decrease of 14%. This decrease is due to the disposal of certain assets in the current fiscal year.

Other Income and Expense

Net other expense was $281,558 compared to net other income of $1,301,892 for the years ended June 30, 2022 and 2021, respectively.  The change in other income (expense) was due to (1) recognition of a gain on debt extinguishment for the Company’s PPP loan in fiscal 2021 that did not occur in fiscal 2022; (2) an increase in interest expense associated with financing arrangements with a bank for the Company’s stock repurchase plan; and (3) realized losses of certain short-term investments held in U.S. treasuries and other securities. Given rising interest rates, the Company recognized a decline in its bond portfolio and other fixed income instruments on excess cash.

Preferred Dividends

Dividends accrued on the Company’s Series B Preferred and Series B-1 Preferred was $586,444 and $586,444 for the years ended June 30, 2022 and 2021, respectively. Dividends remained flat in the comparable periods.

Financial Position, Liquidity and Capital Resources

We believe that our existing cash and short-term investments, together with funds generated from operations, are sufficient to fund operating and investment requirements for at least the next twelve months. Our future capital requirements will depend on many factors, including macroeconomic conditions, our rate of revenue growth, sales and marketing activities, the timing and extent of spending required for research and development efforts and the continuing market acceptance of our products and services.

We have historically funded our operations with cash from operations, equity financings, and borrowings from the issuance of debt, including our Credit Agreement with U.S. Bank N.A., which was revised on October 6, 2021 (See Note 8 Notes to Consolidated Financial Statements contained within this Annual Report).

Cash was $21,460,948 and $24,070,322 at June 30, 2022 and 2021, respectively. This 11% decrease is principally the result of a $6.0 million payoff of financing arrangements with a bank, cash used for the Share Repurchase Program, partially offset by lower overall cash operating expense and collections on accounts receivable.

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Net Cash Flows from Operating Activities

Net cash provided by operating activities is summarized as follows:

Net cash provided by operating activities for the year ended June 30, 2022 was $6,101,617 compared to net cash provided by operating activities of $5,401,815 for the year ended June 30, 2021. Net cash provided by operating activities increased 13% due largely to elimination of low margin products, services, and overall cost control. Noncash expense increased by $940,429 in the year ended June 30, 2022 compared to the year ended June 30, 2021 as a result of loss on sale of property and equipment, a modification of an operating lease resulting in a decrease of a right-of-use asset and an increase in stock compensation expense. Additionally, a gain on debt extinguishment occurred in the year ended June 30, 2021 that did not recur in the year ended June 30, 2022.

Net Cash Flows Used in Investing Activities

Net cash provided by investing activities for the year ended June 30, 2022 was $1,323,262 compared to net cash used in investing activities of $318,873 for the year ended June 30, 2021. This increase in cash provided by investing activities for the fiscal year was due to the sale of property and equipment.

Net Cash Flows from Financing Activities

Net cash used in financing activities totaled $10,034,253 for the year ended June 30, 2022 compared to net cash used in financing activities of $1,357,950 for the year ended June 30, 2021. The increase in net cash used in financing activities is primarily attributable to our line of credit arrangement with a bank and purchase of stock under the Share Repurchase Program.

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Liquidity and Working Capital

At June 30, 2022, the Company had positive working capital of $20,485,875, as compared with positive working capital of $20,400,991 at June 30, 2021.  This $84,884 increase in working capital is primarily due to a decrease in cash as a result of the $6.0 million payoff of a financing arrangement with a bank and purchase of stock under the Share Repurchase Program.

Current assets as of June 30, 2022 totaled $26,582,709, a decrease of $3,119,065, as compared to $29,701,774 as of June 30, 2021.  The decrease in current assets is primarily attributable to a net decrease in cash of $2,609,374 from paying off a credit arrangement, an increase in contract assets and prepaid expense of $216,808 and a decrease in accounts receivable of $726,499.

Current liabilities totaled $6,096,834 as of June 30, 2022 as compared to $9,300,783 as of June 30, 2021. The comparative decrease in current liabilities is primarily attributable to the corresponding payoff of $6.0 million in our line of credit, as discussed below.

On October 6, 2021, the Company and the Bank executed the Credit Agreement, with an effective date of September 30, 2021. The Credit Agreement replaces the Company’s prior $6.0 million Revolving Credit Agreement and Stand-Alone Revolving Note between the Company and the Bank, as amended and revised on January 9, 2019, and provides the Company with a $10.0 million revolving line of credit that matures on March 31, 2023. Any amounts drawn down by the Company under the Credit Agreement accrue interest at an annual rate equal to 1.75% plus the one-month LIBOR rate. In addition, the Credit Agreement contains customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. Among other things, the Company must maintain liquid assets equal to the outstanding balance of the Note and maintain a Senior Funded Debt (as defined in the Credit Agreement) to EBITDA Ratio (as defined in the Credit Agreement) of not more than 3:1.

While no assurances can be given, management currently believes that the Company will continue to increase its cash flow from operations and working capital position in subsequent periods.  The Company’s increase in anticipated cash flow from operations and working capital position is expected to be offset by the use of cash required to fund the Company’s quarterly cash dividend announced on September 28, 2022, of $0.015 per share.   The Company believes it will have adequate cash resources to fund its operations, satisfy its debt obligations, and fund its anticipated quarterly cash dividend for at least the next 12 months.

Contractual Obligations

Total contractual obligations and commercial commitments as of June 30, 2022 are summarized in the following table:

Inflation

The impact of inflation has historically not had a material effect on the Company’s financial condition or results from operations; however, higher rates of inflation may cause retailers to slow their spending in the technology area, which could have an impact on the Company’s sales.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
following Management’s Discussion and Analysis is intended to
assist the reader in understanding our results of operations and
financial condition. Management’s Discussion and
Analysis is provided as a supplement to, and should be read in
conjunction with, our audited consolidated financial statements
beginning on page F-1 of this Annual Report on Form 10-K (this
"Annual Report"). This Annual Report includes certain statements
that may be deemed to be “forward-looking statements”
within the meaning of Section 27A of the Securities Act. All
statements, other than statements of historical fact, included in
this Annual Report that address activities, events or developments
that we expect, project, believe, or anticipate will or may occur
in the future, including matters having to do with expected and
future revenue, our ability to fund our operations and repay debt,
business strategies, expansion and growth of operations and other
such matters, are forward-looking statements. These statements
are based on certain assumptions and analyses made by our
management in light of its experience and its perception of
historical trends, current conditions, expected future
developments, and other factors it believes are appropriate in the
circumstances. These statements are subject to a number of
assumptions, risks and uncertainties, including general economic
and business conditions, the business opportunities (or lack
thereof) that may be presented to and pursued by us, our
performance on our current contracts and our success in obtaining
new contracts, our ability to attract and retain qualified
employees, and other factors, many of which are beyond our
control. You are cautioned that these forward-looking
statements are not guarantees of future performance and those
actual results or developments may differ materially from those
projected in such statements.

Overview

The Company is a SaaS provider, and the parent
company of ReposiTrak, a B2B e-commerce, compliance, and supply
chain management platform company that partners with retailers,
wholesalers, and product suppliers to help them source, vet, and
transact with their suppliers in order to accelerate sales, control
risks, and improve supply chain efficiencies. The
Company’s fiscal year ends on June 30. References to
fiscal 2021 refer to the fiscal year ended June 30,
2021.

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Sources of Revenue

The principal customers for the Company’s
products are multi-store retail chains, wholesalers and
distributors, and their suppliers. The Company has a Hub and Spoke
business model, whereby the Company is typically engaged by Hubs,
which in turn require Spokes to utilize the Company’s
services. The Company derives revenue from five sources: (i)
subscription fees, (ii) transaction based fees, (iii) professional
services fees, (iv) license fees, and (v) hosting and maintenance
fees

A significant portion of the Company’s
revenue is generated from its Supply Chain solutions and Compliance
and Food Safety solutions in the form of recurring subscription
payments from the suppliers. Subscription fees can be based
on a negotiated flat fee per supplier, or some volumetric metric,
such as the number of stores, or the volume of economic activity
between a retailer and its suppliers. Subscription revenue contains
arrangements with customers for use of the application, application
and data hosting, maintenance of the application, and standard
support.

Revenue
from the Company’s MarketPlace sourcing solution is
transactional, based on the volume of products sourced via the
application. MarketPlace revenue can come from several sources
depending on the customer’s specific requirements. These
include acting as an agent for a supplier, providing supply chain
technology services, and enabling a Hub to reduce its number of new
suppliers by acting as the supplier for any number of
products.

The Company
also provides professional consulting services targeting
implementation, assessments, profit optimization and support
functions for its applications and related products, for which revenue is recognized on a
percentage-of-completion or pro rata basis over the life of the
subscription, depending on the nature of the engagement.
Premier customer support includes extended availability and
additional services and is available along with additional support
services such as developer support and partner support for an
addition fee.

In some instances, the Company will sell its
software in the form of a license. License arrangements are
a time-specific and perpetual license. Software license maintenance
agreements are typically annual contracts, paid in advance or
according to terms specified in the contract. When sold as a license, the Company’s
software, is usually accompanied by a corresponding Maintenance
and/or Hosting Agreement to support the
service.

Software
maintenance agreements provide the customer with access to new
software enhancements, maintenance releases, patches, updates and
technical support personnel. Our hosting services provide
remote management and maintenance of our software and
customers’ data, which is physically located in third-party
facilities. Customers access ‘hosted’ software and
data through a secure internet connection.

Revenue Recognition

Effective July
1, 2018, we adopted the Financial Accounting Standards
Board’s Accounting Standards Update 2014-09: Revenue from Contracts with Customers
(Topic 606), and its related amendments (“ASU 2014-09”). ASU 2014-09
provides a unified model to determine when and how revenue is
recognized and enhances certain disclosure around the nature,
timing, amount and uncertainty of revenue and cash flows arising
from customers.

ASU 2014-09
represents a change in the accounting model utilized for the
recognition of revenue and certain expense arising from contracts
with customers. We adopted ASU 2014-09 using a “modified
retrospective” approach and, accordingly, revenue and expense
totals for all periods before July 1, 2018 reflect those previously
reported under the prior accounting model and have not been
restated.

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Other Metrics – Non-GAAP Financial Measures

To supplement
our financial statements, historically we have provided investors
with Adjusted EBITDA and non-GAAP income per share, both of which
are non-GAAP financial measures. We believe that these non-GAAP
measures may provide useful information regarding certain financial
and business trends relating to our financial condition and
operations. Our management uses these non-GAAP measures to compare
the Company’s performance to that of prior periods for trend
analyses and planning purposes. These measures are also presented
to our Board of Directors.

These non-GAAP
measures should not be considered a substitute for, or superior to,
financial measures calculated in accordance with generally accepted
accounting principles in the United States of America
(“GAAP”). These
non-GAAP financial measures exclude significant expenses and income
that are required by GAAP to be recorded in the Company’s
financial statements and are subject to inherent limitations.
Investors should review the reconciliations of non-GAAP financial
measures to the comparable GAAP financial measures that are
included in this “Management’s Discussion and Analysis of
Financial Condition and Results of
Operations.”

Critical Accounting Policies

This
Management’s Discussion and Analysis of Financial Condition
and Results of Operations discusses the Company’s financial
statements, which have been prepared in accordance with GAAP. The
preparation of our financial statements requires management to make
estimates and assumptions that affect reported amounts of assets
and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amount of revenue and expense during the reporting
period.

On an ongoing
basis, management evaluates its estimates and assumptions based on
historical experience of operations and on various other factors
that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Income Taxes

In determining
the carrying value of the Company’s net deferred income tax
assets, the Company must assess the likelihood of sufficient future
taxable income in certain tax jurisdictions, based on estimates and
assumptions, to realize the benefit of these assets. If these
estimates and assumptions change in the future, the Company may
record a reduction in the valuation allowance, resulting in an
income tax benefit in the Company’s statements of operations.
Management evaluates quarterly whether to realize the deferred
income tax assets and assesses the valuation
allowance.

Goodwill and Other Long-Lived Asset Valuations

Goodwill is
assigned to specific reporting units and is reviewed for possible
impairment at least annually or upon the occurrence of an event or
when circumstances indicate that a reporting unit’s carrying
amount is greater than its fair value. Management reviews the
long-lived tangible and intangible assets for impairment when
events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. Management evaluates, at each
balance sheet date, whether events and circumstances have occurred
which indicate possible impairment.

The carrying
value of a long-lived asset is considered impaired when the
anticipated cumulative undiscounted cash flows of the related asset
or group of assets is less than the carrying value. In that event,
a loss is recognized based on the amount by which the carrying
value exceeds the estimated fair market value of the long-lived
asset. Economic useful lives of long-lived assets are assessed and
adjusted as circumstances dictate.

Stock-Based Compensation

The Company
recognizes the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of
those awards. The Company records compensation expense on a
straight-line basis. The fair value of any options granted are
estimated at the date of grant using a Black-Scholes option pricing
model with assumptions for the risk-free interest rate, expected
life, volatility, dividend yield and forfeiture rate.

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Capitalization of Software Development Costs

The Company
accounts for research costs of computer software to be sold, leased
or otherwise marketed as expense until technological feasibility
has been established for the product. Once technological
feasibility is established, all software costs are capitalized
until the product is available for general release to customers.
Judgment is required in determining when technological feasibility
of a product is established.

We have
determined that technological feasibility for our software products
is reached shortly after a working prototype is complete and meets
or exceeds design specifications including functions, features, and
technical performance requirements.  Costs incurred after
technological feasibility is established have been and will
continue to be capitalized until such time as when the product or
enhancement is available for general release to customers. The
Company capitalized software development costs of $171,733 in the
fiscal year ended June 30, 2021.

Off-Balance Sheet Arrangements

The Company
does not have any off-balance sheet arrangements that are
reasonably likely to have a current or future effect on our
financial condition, revenue and results of operation, liquidity or
capital expenditures.

Recent Accounting Pronouncements

In August 2018,
the FASB issued ASU 2018-15 Intangibles – Goodwill and Other
Internal-Use Software (Subtopic 350-40) – Customer’s
Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That is a Service Contract. The amendments in
this update apply to an entity who is a customer in a hosting
arrangement accounted for as a service contract. The update
requires a customer in a hosting arrangement to capitalize certain
implementation costs. Costs associated with the application
development stage of the implementation should be capitalized and
costs with the other stages should be expensed. For instance, costs
for training and data conversion should be expensed. The
capitalized implementation costs should be expensed over the term
of the hosting arrangement, which is the noncancelable period plus
periods covered by an option to extend if the customer is
reasonably certain to exercise the option. Impairment of the
capitalized costs should be considered similar to other
intangibles. The effective date of this update is effective for
annual reporting periods beginning after December 15, 2019 for
public entities and after December 15, 2020 for all other entities
with early adoption permitted. The Company is a customer in a
hosting arrangement and may enter into new arrangements in the
future. The Company adopted the standard during the second quarter
of fiscal year 2020. This standard did not have a material impact
on the Company’s consolidated financial
statements.

In August 2018,
the FASB issued ASU 2018-13 Fair
Value Measurement (Topic 820) Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement. This ASU
eliminates, amends, and adds disclosure requirements for fair value
measurements. The new standard is effective for fiscal years
beginning after December 15, 2019, including interim periods within
those fiscal years. The Company adopted the standard during the
second quarter of fiscal year 2020. This standard did not have a
material impact on the Company’s consolidated financial
statements.

In June 2018,
the FASB issued ASU 2018-07 Compensation – Stock Compensation (Topic
718), Improvements to Nonemployee Share-Based Payment
Accounting. The amendments in this update expand the scope
of Topic 718 to include share-based payment transactions for
acquiring goods and services from nonemployees. Prior to this
update, equity-based payments to non-employees was accounted for
under Subtopic 505-50 resulting in significant differences between
the accounting for share-based payments to non-employees as
compared to employees. One of the most significant changes is that
non-employee share-based awards (classified as equity awards) may
be measured at grant-date fair value and not have to be continually
revalued until the service/goods are rendered. The update also
indicates that share-based awards related to financing and awards
granted to a customer in conjunction with selling goods or services
are not included in Topic 718. This standard is effective for
interim and annual reporting periods beginning after December 15,
2018 for public entities and December 15, 2019 for all other
entities. Early adoption is permitted, but no earlier than an
entity’s adoption date of Topic 606. The Company adopted the
standard during the first quarter of fiscal year 2020. This
standard did not have a material impact on the Company’s
consolidated financial statements.

In
January 2017, the FASB issued ASU 2017-04 Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment, which amends
and simplifies the accounting standard for goodwill impairment. The
new standard removes Step 2 of the goodwill impairment test, which
requires a hypothetical purchase price allocation. A goodwill
impairment will now be the amount a reporting unit’s carrying
value exceeds its fair value, limited to the total amount of
goodwill allocated to that reporting unit. The new standard is
effective for annual and any interim impairment tests for periods
beginning after December 15, 2019. The Company adopted the standard
during the fourth quarter of fiscal year 2020. This standard did
not have a material impact on the Company’s consolidated
financial statements.

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In February
2016, the FASB issued ASU 2016-02 Leases (Topic 842). Under the new
guidance, lessees will be required to recognize for all leases
(with the exception of short-term leases) a lease liability, which
is a lessee’s obligation to make lease payments arising from
a lease, measured on a discounted basis and a right-of-use asset,
which is an asset that represents the lessee’s right to use,
or control the use of, a specified asset for the lease
term.

Effective July
1, 2019, the Company adopted the requirements of Accounting
Standards Update No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). All amounts and
disclosures set forth in this Annual Report on Form 10-K have been
updated to comply with this new standard with results for reporting
periods beginning after July 1, 2019 presented under ASU 2016-02,
while prior period amounts and disclosures are not adjusted and
continue to be reported under the accounting standards in effect
for the prior period.

Results of Operations – Fiscal Years Ended June 30, 2021 and
2020

Revenue

During the
fiscal year ended June 30, 2021, the Company had revenue of
$21,007,076 compared to $20,038,054 for the year ended June 30,
2020, a 5% increase. The increase in
revenue was due to growth in both subscription revenue and
Marketplace revenue, partially offset by approximately $145,500 in
one-time license revenue that occurred in 2020 that did not reoccur
in 2021.

During fiscal
2021, as COVID-19 disrupted supply chains and generated shortages
in products, our ability to source hard to find items for our
customers resulted in increased revenue attributable to
MarketPlace. These products largely consisted of personel
protective equipment ("PPE") which includes nitrile gloves,
masks, freezers and telecommunication equipment. While the Company
has experienced a significant increase in Marketplace revenue for
PPE during the height of COVID-19, it is uncertain whether demand
for PPE will continue at the same level. As a result, we may
experience reduced demand for MarketPlace attributable to PPE as
the pandemic begins to abate.

Cost of Services and Product Support

Cost of
services and product support was $6,884,647 or 33% of total
revenue, and $6,997,424 or 35%
of total revenue for the years ended June 30, 2021 and 2020,
respectively, a 2% decrease.
This decrease is primarily the result
of (i) higher expense associated to MarketPlace and the sales of
PPE; and (ii) an increase in hardware/software non-capitalized
items required for updating our information systems security,
maintaining equipment licensing and other database
systems.

While we have
experienced a significant increase in Marketplace costs and
corresponding revenue during the pandemic due to demand in PPE, it
is unclear what level of ongoing Marketplace costs we may
experience as the pandemic begins to abate.

Sales and Marketing Expense

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The
Company’s sales and marketing expense was $4,995,578, or
24% of total revenue, and
$5,775,309, or 29% of total revenue, for the fiscal years ended
June 30, 2021 and 2020, respectively, a 14% decrease. This decrease in sales and marketing expense is
due primarily to a decrease in variable compensation, a reduction
in trade show expense, and lower sales and marketing travel
expense.

General and Administrative Expense

The
Company’s general and administrative expense was
$5,214,936, or 25% of total
revenue, and $4,948,443 or 25%
of total revenue for the years ended June 30, 2021 and 2020,
respectively, a 5%
increase. General and
administrative expense increased year over year due to an increase
in bad debt expense and higher insurance
costs. These increases
were partially offset by lower general overhead due to cost cutting
measures and natural reductions due to our “work from
home” status since April of 2020.

Depreciation and Amortization Expense

The
Company’s depreciation and amortization expense was
$1,019,515 and $838,866 for the years ended June 30, 2021 and 2020,
respectively, a 22%
increase. This increase is due to
the expansion of new equipment for the Company’s information
technology infrastructure, buildout of our corporate headquarters,
and expansion of our data center completed in June
2020.

Other Income and Expense

Other income
was $1,301,892 compared to $157,176 for the years ended June 30,
2021, and 2020, respectively, a 728% increase. Other income increased due to recognition of a
gain on debt extinguishment and higher interest income resulting
from an increase of total cash held in short term investments
offset in part by the increase in interest expense associated with
financing arrangements for equipment purchased under a lease
arrangement with a bank.  The financing arrangement was paid
off in August 2020.

Preferred Dividends

Dividends
accrued on the Company’s Series B Preferred and Series B-1
Preferred was $568,444 for the years ended June 30, 2021 and 2020,
respectively. Dividends remained flat
in the comparable periods.

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Financial Position, Liquidity and Capital Resources

We believe
that our existing cash and short-term investments, together with
funds generated from operations, are sufficient to fund operating
and investment requirements for at least the next twelve months.
Our future capital requirements will depend on many factors,
including macroeconomic conditions, our rate of revenue growth,
sales and marketing activities, the timing and extent of spending
required for research and development efforts and the continuing
market acceptance of our products and services.

We have
historically funded our operations with cash from operations,
equity financings, and borrowings from the issuance of debt,
including our existing line of credit with U.S. Bank
N.A.

Cash was $24,070,322 and $20,345,330 at June 30,
2021 and 2020, respectively. This 18% increase
is
principally the result of growth in both software and MarketPlace
revenue, collection of accounts receivable, and extinguished
debt.

Net Cash Flows from Operating Activities

Net cash
provided by operating activities is summarized as
follows:

Net cash provided by operating activities for
the year ended June 30, 2021 was $5,401,815 compared to net cash provided by in
operating activities of $4,916,139 for the year ended June 30,
2020. Net cash provided by operating
activities increased 29% due largely to higher revenues and lower
operating costs. Noncash expense decreased by $695,456 in
the year ended June 30, 2021 compared to June 30, 2020
as a result of gain on debt
extinguishment and an increase in depreciation and amortization
offset by a decrease in stock compensation
expense.

Net Cash Flows Used in Investing Activities

Net cash used in investing activities for
the year ended June 30, 2021 was $318,873 compared to net cash used in
investing activities of $650,422 for the year ended June 30,
2020. This decrease in cash used in
investing activities for the year ended June 30, 2021 was primarily
due to the buildout of new Murray, UT headquarters and expansion of
our data center that was completed in 2020 that did not occur in
the same period in 2021.

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Net Cash Flows from Financing Activities

Net cash used
in financing activities totaled $1,357,950 for the year ended June
30, 2021 compared to net cash used in financing activities of
$1,809,810 for the year ended
June 30, 2020. The decrease in net
cash used in financing activities is primarily attributable to the
August 2020 payoff of a financing arrangement with a bank partially
offset by a decrease in our stock buyback
program.

Liquidity and Working Capital

At June 30,
2021, the Company had positive working capital of $20,400,991, as compared with positive
working capital of $18,236,664
at June 30, 2020.  This $2,164,327 increase in working capital is
primarily due to an increase in cash
resulting from higher revenue.

Current assets as of June 30, 2021 totaled
$29,701,774, an increase of
$2,552,863, as compared to
$27,148,911 as of June 30, 2020. The increase in current
assets is primarily attributable to an increase in cash of
$3,724,992, a decrease in contract assets and prepaid expense of
$1,056,512 and a decrease in accounts receivable of
$115,617.

Current liabilities totaled $9,300,783 as of June
30, 2021 as compared to $8,912,247 as of June 30, 2020. The
comparative increase in current liabilities is primarily
attributable to an increase of $1,340,000 in our line of
credit, $161,356 decrease comprised of accrued liabilities and accounts payable, offset
by a decrease of $790,108 of current portion of the notes payable
and extinguished
debt.

While no
assurances can be given, management currently believes that the
Company will continue to increase its cash flow from operations and
working capital position in subsequent periods, and that it will
have adequate cash resources to fund its operations and satisfy its
debt obligations for at least the next 12 months.

Contractual Obligations

Total
contractual obligations and commercial commitments as of June 30,
2021 are summarized in the following table:

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Inflation

The impact of
inflation has historically not had a material effect on the
Company’s financial condition or results from operations;
however, higher rates of inflation may cause retailers to slow
their spending in the technology area, which could have an impact
on the Company’s sales.