Park City Group, Inc.
Q3 2020 Earnings Call Transcript

Published: 16 May 2020

[Operator:]

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

[Rob Fink:]

Thank you, operator, and good afternoon everyone. Thank you for joining us today for Park City Group's fiscal third quarter 2020 earnings call. Hosting the call today are Randy Fields, Park City Group's CEO and Chairman; and John Merrill, Park City Group's CFO.Before we begin, I would like to remind everyone that this call could contain forward-looking statements about Park City Group within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that are not subject to historical facts. Such forward-looking statements are based upon current, beliefs and expectations.Park City Group management are subject to risks and uncertainties which could cause actual results to differ from those forward-looking statements. Such risks are fully discussed in the company's filings with the Securities and Exchange Commission. The information set forth herein should be considered in light of such risks.Park City Group does not assume any obligation to update information contained in this conference call. Shortly after the market closed today the company issued a press release over viewing the financial results that we will discuss on today's call. Investors can visit the Investor Relations section of the company's website at parkcitygroup.com to access this press release.With all that said, I'd now like to turn the call over to John Merrill. John, the call is yours.

[John Merrill:]

Thanks Rob and good afternoon everyone. For the last several conference calls we have focused on three core messages. First, we shifted our business to prioritize recurring revenue over non-recurring revenue. This is not changed in and the trend continued in the March quarter as a year-over-year decline in revenues was largely from non-recurring revenue. While we experienced delays in supply chain customer implementations and slower Tier 2 expansion due to COVID-19, we offset a portion of this customer driven slowdown with modest growth on our existing base of recurring revenue and increases in marketplace revenue.Second was our focus on strengthening our balance sheet, as I have said before our customers' demand it. This effort is critically important as PCG and global economies face the disruption and uncertainty associated with the pandemic. Preservation survivability are more vital now than ever before. Third was our focus on growing the network. We will not waver. However, that effort took a backseat in this quarter. We remain laser focused on growing our network. As you might expect, many of our target customers were busy with pandemic related disruptions and not able to focus on our offerings.There were other customer priorities in an environment none of us ever experienced before. I'm optimistic that we will see new and expanded opportunities as our customers and the consumers shift from triage and panic to stabilizing the supply chain and resume some sense of normalcy. I am confident that the grocery industry will focus on how to avoid these challenges in the future. When normalcy resume what is the new normal, it's anyone's guess. In the meantime, I believe our customers both large and small demand partners who will assist them through these uncertain and volatile times.I also anticipate they will be much more selective working with companies to position themselves financially to weather the storm. While our profitability and cash generation declined in the quarter on a sequential and year-over-year basis, the pandemic significantly impacted the grocery supply chain and how our customers do business. This situation may be short-term in nature. Nonetheless, the services and peace of mind we provide our grocery customers and US consumers has never been more vital, particularly when it comes to what we do, food safety, compliance and supply chain visibility.In early March 2020, as the depth of the pandemic unfolded, we took steps to reduce costs. As I have said before it takes 17 million a year to run this place absent marketplace. In response, we made a defensive decision to tighten our belt and reduce cash operating spend to less than 16 million absent marketplace. Some of these expenditures cease naturally as a result of projects that were completed or we halted. Less business travel given the pandemic related shut down, cancellation of trade shows and lower commission due to lower revenue. Keeping our employees safe, we focused on other cost areas whereby we took a more aggressive approach.This included but was not limited to professional fees, consultants, software and maintenance contracts and across the board general overhead reduction. Although no assurances can be given this may reduce our monthly cash expenses by $100,000 per month. Also in March, we launched our FoodSourceUSA program. This unique online platform utilizes our proprietary data to provide the Department of Defense with information so they can proactively address chronic imbalances in the food supply chain caused by COVID-19 and prepare for other crisis situations in the future.This enables the DOD to visualize shifting surplus food in one part of the country to another where such food may see a low supply. As Randy will explain in more detail, we view our position in the grocery industry as a public trust, helping to preserve food safety and adequate supplies in the largest subset of the economy. This is a prime example. Our marketplace offering is another example. Marketplace revenue was up 66% in the March quarter, most of that increase took place in the last few weeks of March.This was the result of our customers seeking all sorts of hard to find items such as gloves, masks and other items to facilitate stay at home and work from home mandate, such as chest freezers, web cameras, microphones, portable Bluetooth speakers, and other such items. Our ability to connect retails with new suppliers helped our customers meet unprecedented demand quickly and safely. As we have said marketplace generates lower margins than the other parts of our business. This revenue mix contributed to our reduced profitability. But this is a vital service that strengthens our value with our customers.Turning to the numbers, we generated 2.3 million in cash from operations for the first nine months of fiscal 2020. This compares to 3.5 million that we generated in the first nine months of the prior year. Total cash as of March 31, 2020, was 17.9 million down 5.3 sequentially from the 19 million at December 31, 2019. On March 17, we halted our stock buyback program for the foreseeable future.Deferred revenue for the comparable period decreased by 11% or $213,000 due to delays in implementations and completed contracts. Our accounts receivable increased sequentially by 13%, from 4 million to 4.5 million as our grocery customers and their suppliers offered to use cash to order product, stocking shelves, and keeping the supply chain moving.In the third quarter of fiscal 2020 total revenue was 4.63 million, down 7% from 5 million in the same quarter in 2019. Recurring revenue grew 5% to 4.2 million for the third quarter of fiscal 2020, up from 4 million in the same quarter of fiscal 2019. The year-over-year recurring revenue as a percentage of total revenue increased from 80% to 90%.Year-to-date, fiscal 2020 total revenue decrease from 16.5 million to 14.3 million for the first nine months of fiscal 2020, down 14% from the same period of fiscal 2019. It should be noted that last year's nine months revenue included 2.9 million of non-recurring onetime revenue, most of which did not occur in the nine month ending March 31, 2019.Recurring revenue for the first nine months of fiscal 2020 grew 4.3% from 11.8 million in fiscal 2019 to 12.3 million in the same period of fiscal 2020. Recurring revenue for the first nine months of fiscal 2020 as a percentage of total revenue increased from 71% in fiscal 2019 to 86% in fiscal 2020.In the third quarter of fiscal 2020, total operating expenses were 4.4 million, an increase of $408,000 or 10% from $4 million in Q3 of 2019. This increase is largely the result of higher costs associated with marketplace, higher depreciation associated with our 2019 CapEx spend and increase in costs associated with telecommuting due to the stay at home mandate.Total operating expenses for the first nine months of fiscal 2020 increased to $13.3 million versus $12.8 million, up 4%. As I've discussed previously, absent marketplace costs our fixed operating expenses are approximately $17 million per year to operate our business. We anticipate reductions to offset the three sales positions we hired in Q2 to accelerate our Tier 2 initiative and maintain net neutral operating expenses for fiscal 2020.In the third quarter of fiscal year 2020, net income to common shareholders was $125,000, or $0.01 per diluted share, compared to $921,000 or $0.05 per diluted share in the year ago quarter. The decrease in net income to common shareholders was largely a result of a decrease in one time revenues of approximately $500,000 lower than anticipated implementation fees due to customer disruptions, higher marketplace costs, increase in depreciation and amortization, additional sales staff and costs associated with a stay at home mandate.On a year-to-date basis, net income to common shareholders for the first nine months of fiscal 2020 was $674,000, or $0.03 per diluted share compared to $3.3 million or $0.16 per diluted share in the year ago period. The year-to-date decrease in net income to common shareholders was largely the result of lower one time revenues of $2.7 million, higher marketplace costs and higher depreciation and amortization due to our 2019 capital expenditures for a data center.Under the current stock buyback authorization, we repurchased 157,616 shares of common stock at an average price of $5.10 per share in the March 2020 quarter for a total of $803,000. To date, we have repurchased a total of 499,786 shares of common stock at an average price of $5.28 per share for a total of $2.6 million.As I mentioned earlier, as the pandemic unfolded, we halted our repurchase efforts on March 17 and we do not plan to repurchase any additional stock in the near term. As previously stated, the company holds no treasury stock. The stock purchased under the buyback plan is retired from issuance and hence reduces the total amount of common stock outstanding.Since May 2019, the company's reduced its total net capitalization by 2%. The total amount remaining under the buyback plan for purchase and retirement of common shares on the existing repurchase plan if or when it resumes is approximately $1.4 million.At this point, I will pass the call over to Randy. Randy?

[Randy Fields:]

Like everyone we found ourselves in a unique and challenging position this quarter with the pandemic disrupting the way we do business. It impacted our customers, both large and small. It also impacted our employees with uncertainty and distraction. Thankfully, we were already largely a remote based organization with very strong collaboration. So the transition to a virtual environment was actually relatively smooth. We're fortunate that we are in the grocery supply chain. Many non-food retailers have faced abrupt and significant disruptions to their business, including for some, literally a total halt to revenues.Our grocery store customers faced a different set of challenges including new steps required to keep employees and customers safe. Indeed, the grocery industry may be the only industry to experience more muted consequences to the economic challenges all of us are facing. The worst things get economically, the more things become discretionary, but certainly not food. Supply chain challenges we've been talking about for years are now at the top of everyone's mind. Anyone who's been in the store in the last few weeks knows that some things like toilet paper and certain cleaning supplies are fully out of stock.And in addition to that, even some of the basics and essential ingredients for cooking and baking at home or equally out of stock. Other items are way over supplied. Indeed the supply chain has been challenged unlike ever before. And we're in the middle of that. Food Safety is critical even in more critical times of disruption and crisis. Compliance, although it remains critical, we're finding our sales cycle is being extended due to near term emergencies. We think this will only last a short while it's our customers deal with the immediacy of dressing the pandemic and these challenges.This will change as our customers adapt to the new normal and the supply chain ultimately follows. But while uncertainty and volatility exist in the short-term, we think long-term changers, frankly, favor us and our abilities. We are not peripheral to the food supply chain, we are essential. As John alluded, our customers rely on our data and our efforts to help them navigate these uncharted waters. To be sure this wasn't a great quarter in terms of building out the network with our Tier 2 initiative. Our customers are focused, obviously, in their complete resource allocation and attention to responding to the pandemic.Our efforts, though, will restart sooner rather than later. And we'll begin to add many more Tier 2s to our system. As John said, what we do represent a public trust. We see our role as a critical part of making sure the grocery supply chain continues to function smoothly with safe food, a streamlined compliance system that doesn't create headaches or overwhelm anyone with paperwork and a platform to effectively connect suppliers with retailers and retailers with suppliers. In an important way, this pandemic is reinforced how significant we are to the whole of the ecosystem.Our customers know this now frankly more than ever. Our position with our customers up and down the supply chain has been reinforced, and we will continue to improve our strong competitive advantage once the normalcy returns. To underscore how essential we are to the grocery supply chain, I'd like to point out a few significant facts. And I suspect you may never have thought of us in this context. One, more than half of all US food safety audits are done on our platform. We are certainly the largest compliance network in the world. These two parts of our business are critical to keeping the food that all of us eat safe.The Department of Defense thought we were essential in helping to address the systemic food supply imbalances. In other words, it's not just our opinion, it's the government's opinion that thinks that what we know and what we can do is important. And finally, our platform enables buyers and sellers of perishable goods at supermarkets and mass merchant to get paid. Without us suppliers don't get paid and things like milk, bread, soda, snacks and other perishable food will not be sold to the extent that it is in the grocery industry, and certainly would be much harder to source.So in a sense, we're vitally important to the safety and availability of important foods in the supermarket supply chain. Our customers and consumers therefore, actually depend on us. That is an important mantle. So we don't take it lightly. In fact, it's the definition of a public trust. We must protect the business to maintain that trust and we are, but like everyone, our businesses experience disruptions due to the pandemic. In this new environment, recurring revenue obviously is increasingly important. This ties back to sustainability and predictability of our business for our customers. And having a large growing base of recurring revenue certainly helps me to sleep at night.The revenue this quarter incidentally was completely related to non-recurring revenue that occurred last year. As the environment stabilizes, we are still positioned for year-over-year recurring growth and total top line growth now that we've reduced non-recurring revenue as much as we have. While this pandemic reinforced the importance of out of stocks to our customers, the challenges they face right now are well beyond our out of stock offering. The lack of essential items such as eggs and toilet paper were not due to an oversight or minor changes in buying patterns, it was due to a line of customers around the block buying up supplies.But I have no doubt that as things begin to return to a more normal, retailers will be thinking about how to avoid out of stock interruptions in the future and our offering will gain more traction. Looking to the future our customers require as part of their continued trust in us that we maintain profitability and a strong balance sheet. Without financial stability, they could easily lose confidence and that would create ripples in the supply chain, not just with us, but literally across the entire food supply chain. In view of this need for us to remain strong, we've cut costs out of the business, decreasing our risk, increasing our comfort and therefore hopefully our customers comfort.We lacked good temporary visibility, everyone does. Decision making slower and the implementation ability of our customers is reduced as they deal with their supply chain, labor problems, et cetera and basically all of these blows that are brought upon them by the pandemic, on a day-to-day basis. In the intermediate term, we've reinforced our positive relationship with our customers. We've demonstrated to them over and over again, our value, we are essential and we really mean that without us who would be less safe and harder to find. As a result, we believe we have many more opportunities for our services, and to our customers when dependent because over.So with that, I'd like to open the call for questions. Operator?

[Operator:]

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

[Ananda Baruah:]

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

[Randy Fields:]

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

[Ananda Baruah:]

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

[Randy Fields:]

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

[Ananda Baruah:]

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

[Randy Fields:]

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

[Ananda Baruah:]

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

[Randy Fields:]

You bet.

[Operator:]

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

[Thomas Forte:]

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

[Randy Fields:]

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

[Thomas Forte:]

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

[Randy Fields:]

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

[Thomas Forte:]

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

[Randy Fields:]

Yeah, that's a really, really good question. Let me back up one step because there's a cross current going on. The cross current is this is that if you go back to the theory of supply chain began about 20 years ago with just in time inventory, et cetera and just in time manufacturing, people lengthened their supply chains. They leaned out their inventory levels, even though the cost of capital has fallen dramatically. So you could argue maybe that wasn't such a smart idea. And they lengthened the distance and therefore time over which replenishment could take place. And much of that ended up in Asia, you would be amazed at how much of our can goods for example, come from Southeast Asia. What's terribly clear to everyone in our industry, in the food industry is maybe that was not a great set of decisions. So I suspect several things are likely to happen. This is just our theory. It's a working theory. And candidly, it benefits us. So I'm guessing there's a bias in it, but I don't feel the bias. I think it just might be there.People single sourced their products. I think that's going to go away. I think people will now multi source their products in the event that a supplier can't fulfill. I think you're going to see a lot of stuff that in China come back. And really for a couple of reasons, the distance has been a problem. The interruption has been a problem. We see it with a number of our customers that the supply chain not just over the distance, but as you know, when the Chinese were at their peak of the COVID experience, they almost closed their ports, so lots of product on the ocean ended up being much delayed. And I think all of these were negative experiences not so much just about China, but about the distance problem and the dependency on the slow freight system. So we're seeing people beginning to address whether moving all of this offshore was worth it. There were certainly cost advantages. But the question is, in retrospect, was it worth it?On the other hand, so that says that I think there's pressure here in the US even in food to shorten the supply chain, begin to be – I don't want to use the term self-sufficient, because I don't know that that's right. But more stuff produced in the US, I think is definitely going to happen. Interestingly, though, we've had a great deal of interest. We don't know where to lead, no promises here. But we are exploring the positive track compliance management opportunities outside the US. We're looking carefully at Mexico and frankly, in China. Again, no promises about how that might unfold. So on the one hand, foreign countries are looking to our standards and systems on the other hand, I think the US food supply chain is going to become more US dependent than foreign dependent over time.

[Thomas Forte:]

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

[Randy Fields:]

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

[Thomas Forte:]

Thank you. I'm going to step back.

[Randy Fields:]

I guess that's a no from John.

[Operator:]

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

[Ananda Baruah:]

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

[John Merrill:]

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

[Ananda Baruah:]

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

[John Merrill:]

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

[Ananda Baruah:]

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

[Randy Fields:]

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

[Ananda Baruah:]

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

[Randy Fields:]

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

[Ananda Baruah:]

Yeah, got it.

[Randy Fields:]

Was I being too indirect?

[Ananda Baruah:]

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

[Randy Fields:]

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

[Ananda Baruah:]

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

[Randy Fields:]

You bet, absolutely.

[Operator:]

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

[Thomas Forte:]

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

[Randy Fields:]

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

[Thomas Forte:]

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

[Randy Fields:]

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

[Thomas Forte:]

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

[Randy Fields:]

Thank you.

[Operator:]

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