Good day, and welcome to the Park City Group Third Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Todd Mitchell. Please go ahead, sir.

Thank you, Bethany, and good afternoon, everybody. This is Todd Mitchell. Before we begin, I want to read our disclaimer statement. On today's call, we will be referring to today's earnings release, which can be downloaded from the Investor Relations page of the company's website at parkcitygroup.com. I also want to remind everybody 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 the current beliefs and expectations of Park City Group's management and are subject to risks and uncertainties, which could cause actual results to differ from the forward-looking statements. Such risks are more fully discussed in the company's filings with the Securities and Exchange Commission. Information set forth herein should be considered in light of such risks. Park City Group does not assume any obligation to update the information contained in this conference call. Moreover, in our earnings release and on this call, we may refer to both GAAP and non-GAAP financial results, including free cash flow, EBITDA, adjusted EBITDA and adjusted earnings per share, which are non-GAAP terms. We believe these non-GAAP terms are useful financial measures for the company primarily because of the significant non-cash charges in our operating statement. Reconciliation of GAAP and non-GAAP results are in the earnings release and on the Investor Relations website. Now with that done, I'm going to talk a little bit about the financials for the quarter, and then Randy's going to give you a more qualitative update. Let's specifically talk about the third quarter results. We have a strong quarter on many fronts. First, we are successfully launching MarketPlace ahead of schedule. Second, we are successfully growing the…

Todd, thank you. I want to actually begin today, we're going to go big picture down to micro so I can attach what it is that we're doing here within the quarter and ongoing to what's happening in the world in which we're doing business. There's been 2 huge megatrends that have emerged that have had a profound impact on the grocery business. The first of those is one you certainly know about which is the increased social attention on food safety, the resulting regulatory mandates of the Food Safety Modernization Act. And what that's really done is to increase the risk profile in the industry as a whole. Everybody is concerned about it. The second is the accelerating disruption from Amazon. And that's forcing the industry to think about technology differently than ever before and to adopt technology more rapidly than they ever have before. Mercifully, we're a major beneficiary of both of these megatrends. First, because our solution successfully offset the negative impact of these trends, but secondly, maybe at a more base level, there's an increased sense of urgency in the industry to adopt solutions such as ours not because of just ROI but, frankly, because it's increasingly a means to survival. What's the evidence, you might ask, about this set of assumptions and assertions? Well, last year, as a result of the first megatrend or increased concerns about food safety, we saw a dramatic acceleration in the adoption of ReposiTrak's compliance solution. And this year, as a result of the second megatrend, the Amazon, we're seeing an even faster adoption for MarketPlace relative to its stage of development and, in fact, please note, even compared to how ReposiTrak compliance started out years ago. Admittedly getting our customers' provision for these services because of the sheer number…

[Operator Instructions] And our first question will come from Tom Forte of D. A. Davidson.

The question I had was, how should we think about monetization, so your ability to monetize all three products and your ability to focus on one while also monetizing the other two.

Good, thank you. It was a little unclear, Tom, so let me make sure I understood the question, and I'll answer what I think you said and if I didn't, just reel me back in. To a certain extent, because we have a single point of focus with a customer, one sales organization that maintains our relationships with each of our customers, there's the appearance at any moment in time that we are, if you will, single threaded. The truth is that our customers want us to sequence them through our product set each time as they become successful and settled in. It would be no different than in the securities business if you had three or four people from the same firm calling on the same customer. It's annoying and it doesn't lead to more success. So we have a funnel, if you will, where individual owners of the accounts are responsible for moving customers from one activity to another. That's point one. But point two on the MarketPlace, there are several ways that we see to monetize it. At this point, we want market share utilization and success, and over the intermediate term, we think we will be able to share in incremental sales, one way or another, from the success of suppliers. In other words, if somebody is coming into the MarketPlace and they are able to sell more, we will have a participation in one form or another in those increased sales. So that will help us monetize, and we think there's several other ways to monetize that. But importantly, because it brings people into the whole of the network. In the longer term what happens is that when somebody becomes a user of MarketPlace, if that's the point of entry into our world, then we've got opportunities to sell them supply chain and, ultimately, to sell them on compliance capabilities as well. So the bigger the network, the more self-reinforcing each of the pieces becomes. And obviously, over time, as our sales force gets deeper and deeper into the customer relationships they're building, it will get easier and easier with time to sell more and more of the range of our products. So we are lucky. We are a company that has a profitable core. We know we are making investments in MarketPlace that the success tells us that we're doing the right thing, and pretty quickly, you will see us monetizing MarketPlace from both our revenue and, ultimately, our profitability. In the long run, I want to be clear, we think that MarketPlace is ultimately a somewhat lower-margin business than the rest of our core business but, ultimately, could be much higher volume. So it will be very accretive, if you will, to our dollars of earnings. Is that helpful? Is that the question you were asking?

[Operator Instructions] Our next question today will come from Ananda Baruah of Loop Capital.

Congratulations on the MarketPlace. It's actually pretty impressive, and it continues to surprise. So congrats on that. I have a few, if I could. I guess, the first one is Randy, you made mention of the expectation for MarketPlace to scale, I think you said dramatically in coming quarters. And you had given some metrics during the call as well from 250,000, I think you said, it's a 500,000 sort of intermediate-term, [indiscernible] there and then you made mention of 1 million. I guess, can you put some context around the scaling dramatically remarks then I have a couple of follow-ups.

Ananda, real quick. Just to make some clarity here. What we were referring to at 250,000 was the total connections across all of our platform for all of our services. The metrics we put forth for MarketPlace were 700 now suppliers in MarketPlace but I think the real impressive one is the 100,000 SKU. So here's what we're saying from an increasingly, a metric that others will start to follow, is how many connections across the whole of the MarketPlace. Less and less what we talk about individual pieces because as we're seeing more people are participating across the network, and it is the whole of the network that seems to interest our pipeline, companies in our pipeline. So what we're saying is, today, we have 250,000 connections in the whole of the network. Within 3 years, I want to be at 500,000 connections. And within 5 years, over 1 million connections. We see a road there and it requires all 3 of our activities to grow markedly and to be self-reinforcing. But we see no reason that we can't get from there -- get there from here. In terms of the scaling of MarketPlace, it caught us, and I think I've been candid about this, we anticipated a particular way that people would use MarketPlace. And we were fully prepared for it. But as it turns out, people had different uses in mind, and so we've been, in a sense, sort of we've been pleasantly surprised that the use of MarketPlace is greater than we imagined, more varied than we imagined, and is more appealing than we imagined, all of those things simultaneously. So even when we are doing, I want to be careful how I say this -- no, I won't be careful, just say it because that's…

[indiscernible] Yes, that's fantastic and it actually sticks right to the heart of the next question was so I appreciate it. And I guess just to follow on that, I believe that there is a comment that you expect to get back into your target range in coming quarters and maybe even the next quarter. Can you clarify that? And then just sort of remind us what the target range is and what should we think of as a target range?

Yes, I mean, I think that, and this is one man's view, of course. The most important thing in our business is our customers, clearly, and there's nobody has ever listened to one of these calls that hasn't heard us say that at least 3 or 4 times on every call. So our customers have pulled us in a particular set of directions involving MarketPlace, supply chain, et cetera, in terms of making connections with us. So we've been satisfying those demands. That's how we grew 20% in connections year-over-year from a 200,000 base. So what we want now to see, just like everybody else, now we want to see our revenue catch up with that, and we have enough larger deals in the pipeline that, in the course of the next few months, you'll hopefully see some announcements that, if they will allow us to publish them, of some relatively large supply chain deals, MarketPlace deals and compliance deals. So we feel pretty good about the revenue outlook from where we are as well as, more importantly, in the long run, just the growth and scale of all 3 pieces of the business across the network. And our target is still, our target hasn't really changed. Year to year, we want to see 25% to 35% top line and much of that come down as bottom line. We have also said, we will have years above that, and we have years that potentially could be below that. MarketPlace may, may, I want to say may 12 times here, but I won't bore you with it, may give us a little bit more upside than we would've otherwise thought we could execute at the same time, that we drive the customer success result. Remember, the constraint here is the quality of the result we deliver for the customer. And if I were listening to this call, the most important number Randy gave was an 18% improvement in compliance rates. At the same time, same time, we increased the size of that network by 50%. Getting bigger, getting better and going faster. That's what everybody should be watching. The gate is to make sure that we keep getting better and that lets us get bigger faster.

And our next question will come from [Herb Bucknonder] Stifel.

I've got two questions. Can you hear me?

Yes, we can hear you.

Okay, because I'm on a speakerphone. But do you need more people in your organization to handle all this because your first comment was that it sounds like you had to take people off maybe your basic compliance business to focus on MarketPlace, and I'm not sure how you're going to handle all this if it works out the way you want it to work out? Are you adding more people and specifically what people do you need? And the second question is if you're going to get some revenue in the fourth quarter from MarketPlace, I need you to explain how you're going to get it. To me, the obvious thing is if a transaction occurs, you can get a fee but I don't understand how you can actually get something based upon the revenue of that transaction, how you could even know what the revenue would ultimately be unless you can really control it. So those are two questions, I guess.

Okay, two good questions. We continue to add people at the point of customer contact, which is where we need them. So it really wasn't a case of, we didn't have enough people. It's that, you cannot -- it's hard -- well, but I mean, I'm speaking to somebody from [indiscernible]. You don't want multiple people calling on the same customer. You really want a point of contact and the truth is, we had to get to all of our suppliers, get them in the network, help them get onboarded, so it was just the change in emphasis in the middle of an environment where the demand for one of the products that we had was much greater than we anticipated. It was a stroke of -- I think we'll ultimately see, it was a stroke of good luck. We listen to the market, we listen to our customers, and we shifted what people were doing to accommodate them. But we continue to add to that activity, meaning more people in that particular function. But it's also critically important, Herb, that when we bring them in that they're well trained, they're well seasoned, but the team is incredible. They're really good, and we do not feel constrained on bringing people in. There's no sense of constraint on that. We bring in what's perceived to be needed.

Also, Herb if I could sort of elaborate on what Randy is saying. Look, if you look at what we've been doing over the last year, we've converged our product set, and we bought these three sort of application sets online on a single platform. Now we've always had the same technology backbone, right? But what we've done is we put them on -- and we always had the same technology backbone and largely the same customer base. But now they're on a single user interface, single source of data, single sales relationship. So as we brought that online, what we've done is essentially taken the supply chain business and build MarketPlace on top of the ReposiTrak compliance infrastructure. So we've taken those groups of individuals and, essentially, every two quarters said, here's a new product set for you to manage. Same customer, same user interface, but a more complex span of control. So we've really had to create the ideal Success Team member. And that's been -- that's a tremendous learning experience for us and for them. Once we get that right, once we get that span of control right, then we'll start cloning them. But we really have to get the activity set right before you just throw bodies at it.

But it's moving along, okay and the answer to your second question is, we believe the fees can be fees that are percentages of sales. So we don't just say it's $1 per transaction. We're not going to be the E*TRADE of the business. We will be somebody that says, we want 5% or 10% of the sales. So the higher the sales, the more money we will make. So there's certainly some very interesting opportunities. The buyers are approaching us from a variety of perspectives, too. So we're trying to put together how the buyers want to buy and how the sellers want to sell, again, somewhat surprising to us but, oh my God, have we responded. So the interest is far higher, and we just need to execute brilliantly. We are no...

I can't imagine how the initial contact you would know how much sales are going to be generated. Don't they have to ultimately get together one-on-one and talk to each other to determine what kind of [indiscernible].

No, no. Oh good, that's the best question I've had in a while. It's actually -- think of this as, it looks like Amazon. The orders are placed inside the system. So we see every dollar of order. We track the whole damn deal, that's our strength.

That answers the question.

How do we know it's going to grow next quarter? We have a request to get a gathering of suppliers for a group of product for a retailer that has a significant interest. We don't know exactly what they're going to buy, but they're eager to buy.

And I didn't explain it very well, Herb, so I'm going to hitchhike on your question, but we see the transactions. We watch it. We fulfill it. I mean, we know everything end-to-end. But here's what's happened. This initial retailer that works with us to try this idea. Initially, just one idea that we executed, now has four different programs by the end of June that will be up and running within the MarketPlace. So they love it. And they keep going, oh my God, here's another idea. In fact, they're doing -- one of these just boggled me. There's something going on in Omaha, Nebraska. I don't even know what it is. That's not too far from you. I think it's like the World Series of something.

Some weird sport event.

Yes, the College World Series is in Omaha.

Yes. Is that baseball?

Yes, college baseball, right.

Okay, got it, okay. Well, so how about this? So this company came to us the same company that's using us said wait a minute, could we target our Omaha stores and just have merchandise that would appeal to whoever goes to whatever that is? We said yes, yes. And they're doing it. So they are beginning to learn to use the tool in a way that drives their revenue, the suppliers' revenue, and thank you very much, our revenue. But we see the whole flow. So that's the beauty of what we really do is, you're right, we see the whole thing so it's not hard to put ourselves in the middle of the flow.

But you see what this use case is, right? It's a database of compliant suppliers that corporate can pre-approve and then let local store managers have the freedom to order specifically for their market where they have the intelligence for their market. It's resolving this age-old tension between the centralization and scale of these large retailers and the effectiveness of local management.

It's pretty -- when we run the idea by people, Herb, people just go, oh my God, I hadn't bought there was a solution to that. Because you can imagine, if you were in the headquarters of this retail company, how do you know that there is the World Series of whatever it was -- of college baseball in Omaha, Nebraska, how did you know that? So we've turned that whole problem on its head and we're solving it locally and to the credit of our amazing development staff, I mean, my God, the customers just love this.

But how are you going to figure out what's a fair amount to receive on a transaction? These are -- it's a very low-margin business, the supermarket business. So do you have to negotiate each individual deal or you're going to have a set schedule, a set fee schedule based upon the value of the transaction.

We don't know.

But don't you need to know that if the business is starting up right now?

Well, what you do is you do price exploration to find it. But what we're finding really is this, and it's intriguing. These are incremental sales to everybody. So we're in the incremental sales business. So your margins are higher on incremental sales than they are on the other sales. And without us, you wouldn't get the sale, so people are willing to pay more than you would think, and we're still exploring how it should work itself out.

Okay. Well, let us know how you do it when you do it.

We will. Herb, thank you. There were a couple of other questions. One question was, how are we coming with our blockchain effort in tracking and tracing? We're doing like 200 companies out there. We're doing the preliminary work to figure out how it might work, what it might do and does it do anything at a -- some higher benefit than the way we do it today. So we're really still in the early developmental stages of exploring it and understanding it, et cetera. And as you will, I promise start reading over the next year, a lot of the people experimenting this stuff are doing -- it's experimental. So we're in that experimental stage for sure. And then the question is where do we see the company in 2 to 3 years? Much bigger, much more profitable with a much larger network is probably the simplest explanation. And I wish I could be more definitive than that, but all the pieces are now working. For the first time in memory, several significant retailers have come to us in the last few months saying, we have checked in the market and you guys -- heck, let me tell you another story, I'm sorry. A retailer in the industry, well-known, 150 stores called us a few months ago, and said, we'd like to talk to you because we're trying to get our supply chain compliant, and we went out and hired some people and we're doing what we thought you did, we call and we do everything to get people compliant and after more than a year of effort, we're throwing our hands up and crying uncle. We can't do it. And so, we've checked around, you are the biggest network, many of our suppliers already know you, and they know how to use your system, and want to get on it with us. So we've reached the point where the scale of our network is making us more attractive to others who want to be part of that kind of a network. And that's a first for us. We're finally there. All the hard work is now beginning in and of itself to create that network effect. And as people experience MarketPlace, it won't happen in the next 6 months, but over the course of the next several years, people in MarketPlace will opt to use compliance and opt to use our supply chain applications because it's the biggest and the best. So we're just about to that tipping point, and maybe we are already in compliance, where the scale of what we do is such that it in and of itself will attract new users to it. I think that's it.

Bethany?

And ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.