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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 25, 2009

OR

 

¨ Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the transition period from              to             .

Commission file number: 000-31715

 

 

Jagged Peak, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Nevada   91-2007478

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3000 Bayport Drive, Suite 250, Tampa, FL 33607

(Address of principal executive offices, including zip code)

(813) 637-6900

(Registrant’s telephone number, including area code)

 

(Former name or former address, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  YES    ¨  NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ¨  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   ¨    Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The Registrant has 14,677,594 shares of common stock outstanding as of November 5, 2009.

 

 

 


Table of Contents

Table of Contents

Jagged Peak, Inc.

Contents

 

Part I – Financial Information   
Item 1.    Financial Statements    1
   Consolidated Balance Sheets for the periods ended September 25, 2009 (unaudited) and December 26, 2008 (audited)    2
   Consolidated Statements of Operations for the 13 and 39 week periods ended September 25, 2009 and September 26, 2008 (unaudited)    3
   Consolidated Statement of Changes in Stockholders’ Equity for the 39 week period ended September 25, 2009 (unaudited)    4
   Consolidated Statements of Cash Flows for the 39 week periods ended September 25, 2009 and September 26, 2008 (unaudited)    5
   Notes to the Unaudited Consolidated Financial Statements for the 13 and 39 week periods ended September 25, 2009 and September 26, 2008 (unaudited)    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    16
Item 3.    Quantitative and Qualitative Disclosure About Market Risk    23
Item 4(T).    Controls and Procedures    23
Part II – Other Information   
Item 1.    Legal Proceedings    23
Item 1A.    Risk Factors    23
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    23
Item 3.    Defaults Upon Senior Securities    23
Item 4.    Submission of Matters to a Vote of Security Holders    24
Item 5.    Other Information    24
Item 6.    Exhibits    24
Signatures    24


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

 

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Jagged Peak, Inc.

Consolidated Balance Sheets

 

     September 25,
2009
(Unaudited)
    December 26,
2008
(Audited)
 

Assets

    

Current assets:

    

Cash

   $ 149,200      $ 126,500   

Accounts receivable, net of allowance for doubtful accounts of $240,000 and $230,000 at September 25, 2009 and December 26, 2008, respectively

     1,671,000        1,923,800   

Other receivables

     123,000        135,000   

Work in process, net of allowance of $30,000 at September 25, 2009 and December 26, 2008

     109,100        149,700   

Deferred tax asset

     192,200        268,600   

Other current assets

     150,100        443,800   
                

Total current assets

     2,394,600        3,047,400   

Property and equipment, net of accumulated depreciation of $2,041,700 and $1,885,700 at September 25, 2009 and December 26, 2008, respectively

     243,900        327,400   

Other assets:

    

EDGE and other applications, net of accumulated amortization of $1,370,200 and $1,318,100 at September 25, 2009 and December 26, 2008, respectively

     353,100        79,400   

Deferred tax asset

     1,422,800        1,138,700   
                

Total long-term assets

     2,019,800        1,545,500   

Total assets

   $ 4,414,400      $ 4,592,900   
                

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Accounts payable, trade

   $ 1,551,000      $ 1,641,500   

Accrued payroll and bonuses

     374,800        407,800   

Other accrued expenses

     77,200        61,900   

Revolving Note, $80,900 and $1,000,000 was available at September 25, 2009 and December 26, 2008, respectively

     393,700        0   

Deferred rent

     34,900        34,900   

Notes payable

     1,010,000        1,415,000   

Deferred revenue and customer deposits

     937,800        600,200   
                

Total current liabilities

     4,379,400        4,161,300   

Long-term liabilities:

    

Deferred rent, long term

     29,200        57,200   
                

Total long-term liabilities

     29,200        57,200   

Stockholders’ equity:

    

Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued or outstanding at September 25, 2009 and December 26, 2008

    

Common stock, $.001 par value; 70,000,000 shares authorized; 14,677,594 shares issued and outstanding at September 25, 2009 and December 26, 2008

     14,800        14,800   

Additional paid-in capital

     3,391,400        3,388,400   

Accumulated deficit

     (3,400,400     (3,028,800
                

Total stockholders’ equity

     5,800        374,400   

Total liabilities and stockholders’ equity

   $ 4,414,400      $ 4,592,900   
                

The accompanying notes are an integral part of the financial statements.

 

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Jagged Peak, Inc.

Consolidated Statements of Operations (Unaudited)

 

     Thirteen Week Period Ended    Thirty-Nine Week Period Ended  
   September 25,
2009
    September 26,
2008
   September 25,
2009
    September 26,
2008
 

Revenue

   $ 4,097,400      $ 4,225,500    $ 11,700,900      $ 12,029,800   

Cost of revenues

     3,103,700        2,991,200      8,741,600        8,755,100   
                               

Gross profit

     993,700        1,234,300      2,959,300        3,274,700   
                               

Selling, general and administrative expenses

     1,026,700        1,081,700      3,190,000        3,076,700   
                               

Operating (loss) income

     (33,000     152,600      (230,700     198,000   
                               

Other expenses, net

     1,200           1,200     

Interest expense

     115,500        129,200      347,400        394,600   
                               

Profit (loss) before tax (benefit) expense

     (149,700     23,400      (579,300     (196,600
                               

Provision for income tax (benefit) expense

     (58,100     14,300      (207,700     (52,100
                               

Net (loss) income

   $ (91,600   $ 9,100    $ (371,600   $ (144,500
                               

Weighted average number of common shares outstanding – basic

     14,677,594        14,659,261      14,677,594        14,639,354   
                               

Weighted average number of common shares outstanding – fully diluted

     14,677,594        14,975,555      14,677,594        14,639,354   
                               

Net loss per share – basic & fully diluted

   $ (0.01   $ 0.00    $ (0.03   $ (0.01
                               

The accompanying notes are an integral part of the financial statements.

 

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Jagged Peak, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

39 Week Period Ended September 25, 2009 (Unaudited)

 

     Common Stock    Additional
Paid in
Capital
   Accumulated
Deficit
    Total  
   Shares    Amount        

Balance, December 26, 2008

   14,677,594    $ 14,800    $ 3,388,400    $ (3,028,800   $ 374,400   

Amortization of officer, director, consultant and employee equity compensation

           3,000        3,000   

Net loss for the period

              (371,600     (371,600
                                   

Balance, September 25, 2009

   14,677,594    $ 14,800    $ 3,391,400    $ (3,400,400   $ 5,800   
                                   

The accompanying notes are an integral part of the financial statements.

 

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Jagged Peak, Inc.

Consolidated Statements of Cash Flows (Unaudited)

 

     39 Week Period Ended  
   September 25,
2009
    September 26,
2008
 

Operating activities

    

Net loss

   $ (371,600   $ (144,500

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     208,100        209,800   

Non-cash consulting expense

       8,800   

Non-cash amortization of officers, director and employees equity compensation

     3,000        40,600   

Amortization of warrants related to long term debt

     241,000        241,000   

Adjustment to allowance for bad debt expense

     134,100        84,300   

Changes in:

    

Accounts receivable

     118,700        688,600   

Work-in-process

     40,600        (81,600

Other receivables

     12,000        13,000   

Other current assets

     52,700        (28,400

Deferred tax asset and liability, net

     (207,700     (52,100

Accounts payable

     (90,500     (252,000

Accrued payroll

     (33,000     9,500   

Accrued expenses

     15,300        (11,500

Deferred rent

     (28,000     (20,600

Other liabilities

     337,600        152,000   
                

Net cash provided by operating activities

     432,300        856,900   
                

Investing activities

    

Acquisition of property and equipment

     (72,500     (114,700

Acquisition/development of software/ Edge platform

     (325,800     (20,700
                

Cash flows used by investing activities

     (398,300     (135,400
                

Financing activities

    

Net proceeds and payments on the revolving note

     393,700        (165,300

Payments on notes payable

     (405,000     (405,000
                

Cash flows used by financing activities

     (11,300     (570,300
                

Net increase in cash

     22,700        151,200   

Cash, beginning of period

     126,500        74,000   
                

Cash, end of period

   $ 149,200      $ 225,200   
                

Supplemental disclosure of cash flow information

    

Cash paid during the period for taxes

   $        $     

Cash paid during the period for interest

   $ 106,400      $ 155,600   

The accompanying notes are an integral part of the financial statements.

 

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Jagged Peak, Inc.

Notes to the Unaudited Consolidated Financial Statements

For the 13 and 39-Week Periods Ended September 25, 2009 and the 13 and

39-Week Periods Ended September 26, 2008

 

1. General Background Information

Jagged Peak, Inc. (the “Company” or “Jagged Peak”) is an e-business software and services company headquartered in Tampa, Florida, providing Demand and Supply Chain management, CRM execution and e-Fulfillment solutions and services. The Company’s flagship product, EDGE (E-Business Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, and partners in real-time. The Company’s clients are able to build and operate custom branded portals such as e-commerce, incentive and rebate programs, customer service, repair and reverse logistics and automate other business processes through the use of the EDGE application and its related tools. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, distribution, travel and tourism and manufacturing.

Jagged Peak’s multi-channel, enterprise EDGE application provides a comprehensive, integrated platform for e-business management that supports a broad range of business and operational applications. Clients can use EDGE as an enterprise application or as an integrator and consolidator for multiple businesses, processes and applications. EDGE has built in tools to extend the application which enables clients to create complex and robust e-commerce, CRM related customer services and repair and reverse logistics solutions. The EDGE application permits users to manage order capturing, processing, tracking, fulfillment, settlement, creating and managing dynamic catalogs, customer relation management, marketing and reporting, all in real-time application. The EDGE application is built to industry-standard best practices. The application has been integrated seamlessly with legacy and back-office management systems as well as industry leading ERP, WMS, TMS and CRM software systems. In addition to the traditional software license sales model, Jagged Peak offers its software with a flexible managed services transaction based pricing model.

Jagged Peak provides outsourced e-commerce and supply chain solutions that enable manufacturers, distributors, and consumer brand companies the ability to quickly and cost effectively establish and operate a direct to customer online business that is fully integrated with their offline sales channels. Jagged Peak’s proven solutions provide companies the tools, expertise, infrastructure and scalability they need to create and maximize their direct to customer sales channel potential without the risk and burden of managing it themselves. The Company uniquely provides companies the benefit of maintaining complete control of the channel, ownership of the customer relationship and retention of the gross product margin normally lost to distributors, resellers and other trading partners.

Jagged Peak recently announced the launch of TotalCommerce™, a solution that includes everything a company needs to quickly and cost effectively launch a fully operational, best practices direct to consumer sales channel in less than 60 days. TotalCommerce™ is an outsourced “managed services” solution that leverages Jagged Peak’s extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a nationwide network of fulfillment centers; back office program management; and a range of online marketing services.

Jagged Peak has a network of independently owned fulfillment warehouses throughout North America that enables its clients to provide better service to their customers, while lowering their overall delivery costs. The EDGE application is able to automatically route the orders to the optimal warehouse based on an established set of factors such as service, cost and priority. This enables our clients to achieve their customer service goals while reducing cost and internal infrastructure.

 

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In July 2009, Jagged Peak began operations in Canada through its wholly owned subsidiary, Jagged Peak Canada, Inc. The operations provide similar services as in the United States through a network of independently owned fulfillment warehouses, which are managed through technology provided by Jagged Peak, Inc.

Effective January 1, 2003, the Company elected to change its fiscal year end to correspond to accounting periods based on a 52/53 week reporting year. Therefore, the periods ended September 25, 2009 and September 26, 2008 both consist of 13 and 39 weeks.

 

2. Significant Accounting Policies

Basis of Presentation

In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair statement of (a) the consolidated financial position at September 25, 2009, (b) the consolidated results of operations for the 13 and 39 weeks ended September 25, 2009 and September 26, 2008, (c) the consolidated statement of changes in stockholders’ equity for the 39 week period ended September 25, 2009, and (d) the consolidated cash flows for the 39 weeks ended September 25, 2009 and September 26, 2008, have been made.

The unaudited consolidated financial statements and notes are presented as permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the 52-week period ended December 26, 2008.

Use of Estimates

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates, including but not limited to, capitalization of software, work in process, recoverability of long-lived assets, recoverability of prepaid expenses, valuation on deferred tax assets and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made as information is available. Management believes that these estimates are reasonable and have been discussed with the audit committee; however, actual results could differ from these estimates.

Revenue Recognition

Revenue from software license agreements is recognized when an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. In software arrangements that include more than one element, the Company allocates the total arrangement fee among the elements based on the relative fair value of each of the elements. Maintenance and support agreement revenues are amortized over the contract period, which is usually one year.

Additional technology revenues are derived from software development services, managed services, transaction fees, and consulting and customized technology assignments. Revenue from technology service arrangements and software development services is

 

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recognized as services are provided or on the percentage of completion method for those arrangements with specified milestones. The percentage of completion is based on labor hours incurred to total labor hours expected to be incurred.

Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, shipping and handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. Work in process represents unbilled costs and services. Shipping and handling costs are classified as cost of revenue.

Software and Development Enhancements

Software development costs, including costs to develop software products or the software component of products to be marketed to external users, as well as software programs to be used solely to meet our internal needs, are accounted for in accordance with generally accepted accounting principles in the United States. Software and development enhancements expenses include costs such as payroll and employee benefit costs associated with product development. The EDGE product platform, including the order management, the warehouse management and the transportation management systems are continually being enhanced with new features and functions. Once technological feasibility of new features and functions is established, the cost incurred until release to production is capitalized and once in production the enhancements are amortized over a three-year useful life.

There was approximately $69,100 capitalized during the 13 week period ended September 25, 2009 and approximately $325,800 capitalized during the 39 week period ended September 25, 2009 and there was no amount capitalized during the 13 week period ended September 26, 2008 and approximately $20,700 capitalized during the 39 week period ended September 26, 2008. Amortization expense related to capitalized software and charged to operations for the 13 week and 39 week periods ended September 25, 2009 was approximately $29,800 and $52,100, respectively. Amortization expense related to capitalized software and charged to operations for the 13 week and 39 week periods ended September 26, 2008 was approximately $8,500 and $58,000, respectively.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, money in the process of being swept from the lockbox and investments in money market funds with high quality financial institutions. The Company considers all highly liquid instruments purchased with a remaining maturity of less than three months at the time of purchase as cash equivalents.

Concentration of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and cash equivalents and accounts receivables.

The majority of cash is maintained with a major financial institution in the United States. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.

During the 39-week periods ended September 25, 2009 and September 26, 2008, sales to one customer amounted to approximately $8,897,300 and $7,565,900, respectively, or 76% and 63% of total revenues, respectively. Accounts receivable from the same customer at September 25, 2009 amounted to approximately $1,111,000 or approximately 58% of the balance. Accounts receivable from two customers at September 26, 2008 amounted to approximately $772,000 or approximately 41% of the balance. This customer is a large international company with more than one hundred brands and we continue to expand services to additional brands. The Company classifies all business done for all of this customer’s brands as one single customer for the concentration of risk calculation.

 

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The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts receivables, customer’s payment history and the customer’s current ability to pay its obligation. Based on managements’ review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $240,000 and $230,000 is considered necessary as of September 25, 2009 and December 26, 2008, respectively. Although management believes that accounts receivable are recorded at their net realizable value, a 10% decline in historical collection rate would increase the current bad debt expense for the period ended September 25, 2009 by approximately $10,000. We do not accrue interest on past due receivables.

Identified Intangible Assets

The Company reviews long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. For the 39-week period ended September 25, 2009 and September 26, 2008, there was no impairment of long-lived or intangible assets.

Property and Equipment

Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, principally three to ten years. Accelerated methods are used for tax depreciation. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. Equipment held under capital leases is stated at the present value of the minimum lease payments and amortized on a straight-line basis over the estimated useful life of the asset.

Depreciation is calculated by the straight-line method over the following estimated useful lives of the related assets:

 

     Years

Furniture and equipment

   3-7

Computer equipment and software

   1-4

Warehouse equipment

   3-10

Leasehold improvements

   Lease term

Estimated Fair Value of Financial Instruments

The aggregated net fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and cash equivalents, receivables, payables, accrued expenses and short-term borrowings. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company’s debt is estimated based on the current rates offered to the Company for debt of the same remaining maturities.

 

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Income Taxes

Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date. Through its reverse acquisition of Absolute Glass, the Company acquired net operating losses for tax purposes of approximately $2.4 million or a deferred tax asset of approximately $900,000. Internal Revenue Code Sec. 382 places limitations on the utilization of the acquired net operating losses. Due to the possible limitation on taking advantage of these acquired net operating losses, the Company has placed a full valuation allowance against that asset of approximately $900,000

Stock-Based Compensation

Generally accepted accounting principles in the United States require all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The Company is required to measure the cost of employee services received in exchange for stock options and similar awards based on the grant-date fair value of the award and recognize this cost in the statement of operations over the period during which an employee is required to provide service in exchange for the award.

Companies must choose among alternative valuation models and amortization assumptions. After assessing alternative valuation models and amortization assumptions, the Company uses the Black-Scholes valuation model and has elected to use the ratable method to amortize compensation expense over the vesting period of the grant.

The value of each grant is estimated at the grant date using the Black-Scholes option model with the following weighted average assumptions for options granted in 2008: the historical dividend rate of 0%; the risk-free interest rate of approximately 4%, for periods within the contractual life of the option, based on the U.S. Treasury yield curve in effect at the time of grant; the expected term of 5 years, which was calculated based on the Company’s historical pattern of options granted and expected to be outstanding; and expected volatility of 175%, which was calculated by review of the Company’s historical activity as well as comparable peer companies; and an option exercise experience rate for employees of 50% based on the Company’s historical rate of employee options being forfeited prior to expiration or termination.

The value of each grant is estimated at the grant date using the Black-Scholes option model with the following weighted average assumptions for options granted in 2009: the historical dividend rate of 0%; the risk-free interest rate of between approximately 2.4% and 3.8%, for periods within the contractual life of the option, based on the U.S. Treasury yield curve in effect at the time of grant; the expected term of 5 years, which was calculated based on the Company’s historical pattern of options granted and expected to be outstanding; and expected volatility of between 195% and 160%, which was calculated by review of the Company’s historical activity as well as comparable peer companies; and an option exercise experience rate for employees of 50% based on the Company’s historical rate of employee options being forfeited prior to expiration or termination.

 

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There were 200,000 options granted during the 39-week period ended September 25, 2009 and 125,000 options granted during the 39-week period ended September 26, 2008. As of September 25, 2009, there was approximately $9,000 of unrecognized stock-based compensation expense related to nonvested stock options.

The following table represents our nonvested stock option activity for the 39-week period ended September 25, 2009:

 

     Number of
Options
   Weighted Average
Grant Date
Fair Value

Nonvested options – December 26, 2008

   50,000    $ 0.19

Granted

   200,000    $ 0.13

Vested

     

Expired

   50,000    $ 0.19
           

Nonvested options – September 25, 2009

   200,000    $ 0.13
           

There was no aggregate intrinsic value of options outstanding at September 25, 2009, based on the Company’s closing stock price of $0.14 as of the last business day of the period ended September 25, 2009, which would have been received by the optionees had all options been exercised on that date. There was no aggregate intrinsic value of options exercisable at September 25, 2009, based on the Company’s closing stock price of $0.14 as of the last business day of the period ended September 25, 2009, which would have been received by the optionees had all options exercisable been exercised on that date. There were no options exercised during the 39-weeks ended September 25, 2009 and September 26, 2008.

Foreign Currency

Generally, the functional currency of our international subsidiary is the local currency. The financial statements are translated to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs and expenses. Translation gains and losses are recorded in accumulated other comprehensive income as a component of stockholders’ equity. There was no recorded translation gains for the 13 and 39 week periods ended September 25, 2009. Net gains and losses resulting from foreign exchange transactions are recorded as a component of interest income and other, net. We recorded $1,200 of net losses for the 13 and 39 week periods ended September 25, 2009 from assets and liabilities denominated in a currency other than the local currency.

Earnings per Share

Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the related period. Diluted earnings per common share are computed by dividing net income by the weighted average number of shares of common stock outstanding and dilutive options outstanding during the year. The weighted average number of shares was approximately 14,677,594 and 14,639,354 for the 39-week periods ended September 25, 2009 and September 26, 2008, respectively. The diluted weighted average number of shares was approximately 14,990,647 and 14,958,084 for the 39-week periods ended September 25, 2009 and September 26, 2008, respectively.

 

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The weighted average number of shares was approximately 14,677,594 and 14,659,261 for the 13-week periods ended September 25, 2009 and September 26, 2008, respectively. The diluted weighted average number of shares was approximately 14,990,887 and 14,975,555 for the 13-week periods ended September 25, 2009 and September 26, 2008, respectively.

Common stock equivalents for the 39-week periods ended September 25, 2009 and September 26, 2008 were anti-dilutive due to the net losses sustained by the Company during these periods. Therefore, the diluted weighted average common shares outstanding for the dilutive weighted average share calculation in the 39-week periods ended September 25, 2009 and September 26, 2008 excludes approximately 313,053 and 318,730 shares that could dilute earnings per share in future periods, respectively.

Common stock equivalents for the 13-week period ended September 25, 2009 was anti-dilutive due to the net losses sustained by the Company during that period. Therefore, the diluted weighted average common shares outstanding for the dilutive weighted average share calculation in the 13-week period ended September 25, 2009 excludes approximately 313,293 shares that could dilute earnings per share in future periods, respectively.

Recently Issued Financial Accounting Standards

In October 2009, the Financial Accounting Standards Board (FASB) issued, “Multiple Deliverable Revenue Arrangements”, which modifies accounting for multiple element arrangements by requiring that the separation of the arrangements be based on estimated selling prices based on entity specific assumptions rather than fair value, eliminating the residual method of allocation and requiring additional disclosures related to such arrangements. The standard is effective prospectively for arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company has not yet evaluated the impact the adoption of the standard will have on its consolidated financial statements.

In October 2009, the FASB issued, “Certain Revenue Arrangements That Include Software Elements”, which amends software revenue recognition guidance to eliminate from its scope tangible products containing software components that function together to deliver the tangible product’s essential functionality and to provide guidance on how to allocate arrangement consideration to deliverables in an arrangement that contain both tangible products and software. The standard is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company has not yet evaluated the impact the adoption of the standard will have on its consolidated financial statements.

In August 2009, the FASB issued changes to fair value accounting for liabilities. These changes clarify existing guidance that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using either a valuation technique that uses a quoted price of either a similar liability or a quoted price of an identical or similar liability when traded as an asset, or another valuation technique that is consistent with the principles of fair value measurements, such as an income approach (e.g., present value technique). This guidance also states that both a quoted price in an active market for the identical liability and a quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. Management has determined that the adoption of these changes will not have an impact on the consolidated financial statements.

In June 2009, the FASB issued Codification and the Hierarchy of Generally Accepted Accounting Principles and establishes the FASB Accounting Standards Codification (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative

 

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GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the Codification. Management has determined that the adoption of these changes will not have an impact on the consolidated financial statements.

In June 2009, the FASB issued Amendments to Consolidation of Variable Interest Entities to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity; to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; to add an additional reconsideration event for determining whether an entity is a variable interest entity when any changes in facts and circumstances occur such that holders of the equity investment are at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. Management has determined that the adoption of these changes will not have an impact on the consolidated financial statements.

In May 2009, the FASB issued Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued (“subsequent events”). This requires disclosure of the date through which the entity has evaluated subsequent events and the basis for that date. For public entities, this is the date the financial statements are issued. This does not apply to subsequent events or transactions that are within the scope of other GAAP and will not result in significant changes in the subsequent events reported by the Company. The Company evaluated subsequent events through November 5, 2009, the issuance date of the Company’s consolidated financial statements.

Other recent accounting pronouncements issued by FASB (including EITF), the AICPA and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

 

3. Other Assets

Other assets consist of:

 

     September 25, 2009    December 26, 2008

Capitalized debt cost

   $ 67,000    $ $308,400

Current portion classified as other current asset

     67,000      308,400
             
   $ 0    $ 0
             

 

4. Equity

Common Stock

Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors (the “Board”), subject to the prior rights of the holders of all classes of stock outstanding. The Company records stock as issued when the consideration is received or the obligation is incurred.

 

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The Company’s 2005 Stock Incentive Plan, as amended in July 2008, (“the Plan”) grants the Board of Directors the authority to grant up to 5,000,000 options to key employees, officers, directors, and consultants. The aggregate fair market value of grants to one individual shall not exceed $100,000 during any one calendar year for grants of both incentive stock options and non-qualified stock options. Options granted under the Plan must be exercised within ten years of the date of grant. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, but with regards to Incentive Stock Options, shall not be less than the Fair Market Value of one share of Common Stock on the Date of Grant. The Option Price for Nonstatutory Options may be less than the Fair Market Value of Common Stock on the Date of Grant only if the Board determines that special circumstances warrant a lower exercise price.

The Company’s 2000 Stock Incentive Plan authorizes up to 100,000 shares of common stock to any employee or Consultant during any one calendar year for grants of both incentive stock options and non-qualified stock options to key employees, officers, directors, and consultants. Options granted under the Plan must be exercised within ten years of the date of grant. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, but shall in no event be less than the par value of Common Stock. The Option Price for Incentive Stock Options shall not be less than the Fair Market Value of one share of Common Stock on the Date of Grant. The Option Price for Nonstatutory Options may be less than the Fair Market Value of Common Stock on the Date of Grant only if the Board determines that special circumstances warrant a lower exercise price.

The following summarizes the Company’s stock option and warrant activity and related information:

 

     Shares     Range of Exercise
Prices
   Weighted Average
Exercise Price

Outstanding at December 28, 2007

   4,389,898      $ 0.01 - 2.50    $ 0.84

Warrants, Convertible Debt and options granted

   125,000      $ 0.30 - 0.50    $ 0.38

Warrants and options cancelled or expired

   (615,000   $ 0.55 - 1.00    $ 0.98
           

Outstanding at December 26, 2008

   3,899,898      $ 0.01 - 2.50    $ 0.80

Warrants, Convertible Debt and options granted

   200,000      $ 0.25    $ 0.25

Warrants and options cancelled or expired

   (502,058   $ 0.50 - 1.28    $ 0.98
           

Outstanding at September 25, 2009

   3,597,840      $ 0.01 - 2.50    $ 0.74

Exercisable at September 25, 2009

   3,397,840      $ 0.01 - 2.50    $ 0.77

Exercisable at December 26, 2008

   3,849,898      $ 0.01 - 2.50    $ 0.80

 

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The following table summarizes information about options and warrants outstanding and exercisable as of September 25, 2009:

 

Range of Exercise Price

   Outstanding Warrants and Options    Exercisable Warrants and Options
   Number
Outstanding
  

 

Weighted
Average
Remaining
Life

   Weighted
Average
Price
   Weighted
Average
Remaining Life
   Number
Exercisable
   Weighted
Average
Price

$0.01

   334,899    1.6 years    $ 0.01    1.6 years    334,899    $ 0.01

$0.25-0.77

   1,718,529    2.0 years    $ 0.59    1.9 years    1,518,529    $ 0.61

$1.00-2.50

   1,544,412    0.6 years    $ 1.10    0.6 years    1,544,412    $ 1.10

As of September 25, 2009 and December 26, 2008, there were 3,397,840 and 3,849,898 options exercisable at a weighted average exercise price of $0.77 and $0.80, respectively. The weighted average fair value of options at the date of grant of the options was $0.27 and $0.27 for 2009 and 2008, respectively.

 

5. Related Party Transaction

The Company contracted with Norco Accounting and Consulting Inc. (“Norco”) to provide accounting and consulting services. The Company spent approximately $12,900 and $24,500 during the 39-week periods ended September 25, 2009 and September 26, 2008, respectively. Norco is 50% owned by Andrew J. Norstrud, who joined the Company in October of 2005, as the Company’s Chief Financial Officer. The Company continues to occasionally use Norco for temporary accounting staffing needs under the contract signed prior to Andrew J. Norstrud joining the Company.

The above related party transactions are not necessarily indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent parties.

 

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PART I—FINANCIAL INFORMATION

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

THIS FILING CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS “ANTICIPATED,” “BELIEVE,” “EXPECT,” “PLAN,” “INTEND,” “SEEK,” “ESTIMATE,” “PROJECT,” “WILL,” “COULD,” “MAY,” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, OR OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS FILING ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE OF THE ACTUAL RESULTS OR DEVELOPMENTS.

The following discussion and analysis of our financial condition and plan of operations should be read in conjunction with our financial statements and related notes appearing elsewhere herein. This discussion and analysis contains forward-looking statements including information about possible or assumed results of our financial conditions, operations, plans, objectives and performance that involve risk, uncertainties and assumptions. The actual results may differ materially from those anticipated in such forward-looking statements. For example, when we indicate that we expect to increase our product sales and potentially establish additional license relationships, these are forward-looking statements. The words “expect”, “anticipate”, “estimate” or similar expressions are also used to indicate forward-looking statements. The following discussions should be read in conjunction with our financial statements and the notes thereto presented in “Item 1 – Financial Statements” and our audited financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our report on Form 10-K for the year ended December 26, 2008.

Background of our Company

Jagged Peak, Inc. (the “Company” or “Jagged Peak”) is an e-business software and services company headquartered in Tampa, Florida, providing Demand and Supply Chain management, CRM execution and e-Fulfillment solutions and services. The Company’s flagship product, EDGE (E-Business Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, and partners in real-time. The Company’s clients are able to build and operate custom branded portals such as e-commerce, incentive and rebate programs, customer service, repair and reverse logistics and automate other business processes through the use of the EDGE application and its related tools. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, distribution, travel and tourism and manufacturing.

Jagged Peak’s multi-channel, enterprise EDGE application provides a comprehensive, integrated platform for e-business management that supports a broad range of business and operational applications. Clients can use EDGE as an enterprise application or as an integrator and consolidator for multiple businesses, processes and applications. EDGE has built in tools to extend the application which enables clients to create complex and robust e-commerce, CRM related customer services and repair and reverse logistics solutions. The EDGE application permits users to manage order capturing, processing, tracking, fulfillment, settlement, creating and managing dynamic catalogs, customer relation management, marketing and reporting, all in real-time application. The EDGE application is built to industry-standard best practices. The application has been integrated seamlessly with legacy and back-office management systems as well as industry leading ERP, WMS, TMS and CRM software systems. In addition to the traditional software license sales model, Jagged Peak offers its software with a flexible managed services transaction based pricing model.

 

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Jagged Peak provides outsourced e-commerce and supply chain solutions that enable manufacturers, distributors, and consumer brand companies the ability to quickly and cost effectively establish and operate a direct to customer online business that is fully integrated with their offline sales channels. Jagged Peak’s proven solutions provide companies the tools, expertise, infrastructure and scalability they need to create and maximize their direct to customer sales channel potential without the risk and burden of managing it themselves. The Company uniquely provides companies the benefit of maintaining complete control of the channel, ownership of the customer relationship and retention of the gross product margin normally lost to distributors, resellers and other trading partners.

Jagged Peak recently announced the launch of TotalCommerce™, a solution that includes everything a company needs to quickly and cost effectively launch a fully operational, best practices direct to consumer sales channel in less than 60 days. TotalCommerce™ is an outsourced “managed services” solution that leverages Jagged Peak’s extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a nationwide network of fulfillment centers; back office program management; and a range of online marketing services.

Jagged Peak has a network of independently owned fulfillment warehouses throughout North America that enables its clients to provide better service to their customers, while lowering their overall delivery costs. The EDGE application is able to automatically route the orders to the optimal warehouse based on an established set of factors such as service, cost and priority. This enables our clients to achieve their customer service goals while reducing cost and internal infrastructure.

In July 2009, Jagged Peak began operations in Canada through its wholly owned subsidiary, Jagged Peak Canada, Inc. The operations provide similar services as in the United States through a network of independently owned fulfillment warehouses, which are managed through technology provided by Jagged Peak, Inc.

There are a variety of risks associated with the Company’s ability to achieve strategic objectives, including the ability to increase market penetration, acquire and profitably manage additional businesses, current reliance on key customers, the risks inherent in expanding, and the intense competition in the industry. For a more detailed discussion of these risks, see the section of our December 26, 2008 annual report filed with the SEC under Item 1A entitled “Risks Particular to The Company’s Business.”

RESULTS OF OPERATIONS

For the 13-week period ended September 25, 2009 compared to the 13-week period ended September 26, 2008

Revenues decreased approximately $128,100, or 3%, to approximately $4,097,400 for the 13-week period ended September 25, 2009, as compared to approximately $4,225,500 for the 13-week period ended September 26, 2008. The decrease in revenue primarily related to (i) the decline in the overall economy, (ii) distribution of transactions to network warehouses which lowers overall amounts charged to customers, and (iii) lower revenue from technology services. The newly operating Canadian operation had approximately $348,400 of revenue for the 13-week period ended September 25, 2009.

Costs of revenue, which consist primarily of labor, software amortization, technology, facilities, postage, freight, and packing supplies, increased by approximately $112,500, or 4%, to approximately $3,103,700 for the 13-week period ended September 25, 2009, as compared to approximately $2,991,200 for the 13-week period ended September 26, 2008. As a percentage of revenues, cost of revenue amounted to approximately 76% of related revenues for the 13-week period ended September 25, 2009, as compared with

 

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approximately 71% for the 13-week period ended September 26, 2008. The increase in cost of revenue and the increase as a percentage of revenue resulted primarily from (i) the decrease in revenue due to the decline in the overall economy, (ii) lower technology revenue, (iii) inefficiencies in the initial launch of the Canadian operations, and (iv) the costs related to the establishment of a new network warehouse. The newly operating Canadian operation had approximately $333,700 of cost of revenues for the 13-week period ended September 25, 2009. Management expects the Canadian operation to operate with similar cost of revenue margins as other network locations in 2010.

Selling, general and administrative expense decreased by approximately $55,000, or 5%, to approximately $1,026,700 for the 13-week period ended September 25, 2009 as compared to approximately $1,081,700 for the 13-week period ended September 26, 2008. The decrease was primarily related to (i) elimination of certain administrative costs, (ii) focusing marketing efforts on the core business, and (iii) adjustments in spending budgets to reflect the current revenue pattern. Management will continue to adjust administrative resources to focus on sales and marketing activities to enable the Company to grow without significant increases in general and administrative expenses. The newly operating Canadian operation had approximately $65,300 of administrative costs for the 13-week period ended September 25, 2009. The Canadian operation expensed approximately $61,000 of direct start-up related costs during the period ended September 25, 2009. Management expects administrative costs of the Canadian operation to be significantly less.

The Company realized a loss from continuing operations before provisions for income taxes of approximately $33,000 for the 13-week period ended September 25, 2009, compared with a profit from continuing operations before provisions for income taxes of approximately $152,600 for the 13-week period ended September 26, 2008. The loss from continuing operations primarily resulted from the decreased revenue and the significant start-up costs recognized during the period associated with the Canadian operation.

The income tax benefit was approximately $58,100 for the 13-week period ended September 25, 2009 compared to an income tax expense of approximately $14,300 for the 13-week period ended September 26, 2008. Differences between the effective tax rate used for 2009 and 2008, as compared to the U.S. federal statutory rate and the Canadian statutory rate are primarily due to permanent differences. As of September 25, 2009, the Company had federal and state net operating loss carry-forwards totaling approximately $4,089,600, which begin to expire in 2021.

Basic loss per share from continuing operations for the 13-week period ended September 25, 2009 was $0.01 per weighted average share, compared with basic loss of $0.00 per weighted average share for the 13-week period ended September 26, 2008.

For the 39-week period ended September 25, 2009 compared to the 39-week period ended September 26, 2008

Net revenues decreased approximately $328,900, or 3%, to approximately $11,700,900 for the 39-week period ended September 25, 2009, as compared to approximately $12,029,800 for the 39-week period ended September 26, 2008. The decrease in revenue primarily related to (i) the decline in the overall economy, (ii) distribution of transactions to network warehouses which lowers overall amounts charged to customers, and (iii) lower revenue from technology services. The newly operating Canadian operation had approximately $348,400 of revenue for the 39-week period ended September 25, 2009.

Costs of revenue, which consist primarily of labor, software amortization, technology, facilities, postage, freight, and packing supplies, decreased by approximately $13,500, or less than 1%, to approximately $8,741,600 for the 39-week period ended September 25, 2009, as compared to approximately $8,755,100 for the 39-week period ended September 26, 2008. As a percentage of revenues, cost of sales amounted to approximately 75% of related revenues for the 39-week period ended September 25, 2009, as

 

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compared with approximately 73% for the 39-week period ended September 26, 2008. The decrease in cost of revenue resulted primarily from (i) the decrease in overall revenue, and (ii) the decrease in technology revenue. The newly operating Canadian operation had approximately $333,700 of cost of revenue for the 39-week period ended September 25, 2009. Management expects the Canadian operation to operate with similar cost of revenue margins as other network locations in 2010.

Selling, general and administrative expense increased by approximately $113,300, or 4%, to approximately $3,190,000 for the 39-week period ended September 25, 2009 as compared to approximately $3,076,700 for the 39-week period ended September 26, 2008. The increase was primarily related to (i) increased staffing during the first quarter to support the expected continued growth in revenue, and (ii) increased marketing efforts. Management will continue to adjust administrative resources to focus on sales and marketing activities to enable the Company to grow without significant increases in general and administrative expenses.

The Company realized a loss from continuing operations before provisions for income taxes of approximately $230,700 for the 39-week period ended September 25, 2009, compared with a profit from continuing operations before provisions for income taxes of approximately $198,000 for the 39-week period ended September 26, 2008.

The income tax benefit was approximately $207,700 for the 39-week period ended September 25, 2009 compared to an income tax benefit of approximately $52,100 for the 39-week period ended September 26, 2008. Differences between the effective tax rate used for 2009, and 2008, as compared to the U.S. federal statutory rate and Canadian statutory rate are primarily due to permanent differences. As of September 25, 2009 the Company had federal and state net operating loss carry-forwards totaling approximately $4,089,600, which begin to expire in 2021.

Basic loss per share from continuing operations for the 39-week period ended September 25, 2009 was $0.03 per weighted average share, compared with basic loss of $0.01 per weighted average share for the 39-week period ended September 26, 2008.

Critical Accounting Policies and Estimates

Use of Estimates

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates, including but not limited to, capitalization of software, work in process, recoverability of long-lived assets, recoverability of prepaid expenses, valuation on deferred tax assets and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made, as information is available. Management believes that these estimates are reasonable and have been discussed with the audit committee; however, actual results could differ from these estimates.

Revenue Recognition

Revenue from software license agreements is recognized when an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. In software arrangements that include more than one element, the Company allocates the total arrangement fee among the elements based on the relative fair value of each of the elements. Maintenance and support agreement revenues are amortized over the contract period, which is usually one year.

 

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Additional technology revenues are derived from software development services, managed services, transaction fees, and consulting and customized technology assignments. Revenue from technology service arrangements and software development services is recognized as services are provided or on the percentage of completion method for those arrangements with specified milestones. The percentage of completion is based on labor hours incurred to total labor hours expected to be incurred.

Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, shipping and handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. Work in process represents unbilled costs and services. Shipping and handling costs are classified as cost of revenue.

Concentration of Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and cash equivalents and accounts receivables.

The majority of cash is maintained with a major financial institution in the United States. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.

During the 39-week periods ended September 25, 2009 and September 26, 2008, sales to one customer amounted to approximately $8,897,300 and $7,565,900, respectively, or 76% and 63% of total revenues, respectively. Accounts receivable from the same customer at September 25, 2009 amounted to approximately $1,111,000, or approximately 58% of the balance. Accounts receivable from two customers at September 26, 2008 amounted to approximately $772,000 or approximately 41% of the balance. This customer is a large international company with more than one hundred brands and we continue to expand services to additional brands. The Company classifies all business done for all of this customer’s brands as one single customer for the concentration of risk calculation.

The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts receivables, customer’s payment history and the customer’s current ability to pay its obligation. Based on managements’ review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $240,000 and $230,000 is considered necessary as of September 25, 2009 and December 26, 2008, respectively. Although management believes that accounts receivable are recorded at their net realizable value, a 10% decline in historical collection rate would have increased the current bad debt expense for the period ended September 25, 2009 by approximately $10,000. We do not accrue interest on past due receivables.

Income Taxes

Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the financial statements. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date. Through its reverse acquisition of Absolute Glass, the

 

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Company acquired net operating losses for tax purposes of approximately $2.4 million or a deferred tax asset of approximately $900,000. Internal Revenue Code Sec. 382 places limitations on the utilization of the acquired net operating losses. Due to the possible limitation on taking advantage of these acquired net operating losses, the Company has placed a full valuation allowance against that asset of approximately $900,000.

EBITDA

EBITDA for the 39-week period ended September 25, 2009 was negative by approximately $23,800 compared to positive EBITDA of approximately $407,800 in the comparable period of the prior year. The decrease in the EBITDA directly relates to the increase of selling, general and administrative expenses and decreased revenue. The Company defines EBITDA as earnings before interest, taxes, depreciation and amortization costs. The Company also excludes the cumulative effect of a change in accounting principle, discontinued operations, and the impact of restructuring and other charges from the computation, when applicable. The Company believes EBITDA is a useful measure of operating performance before the impact of investing and financing transactions, making comparisons between companies’ earnings power more meaningful and providing consistent comparisons of the Company’s performance. In order to provide consistent comparisons of year-over-year EBITDA, the following reconciliation is provided.

 

     For the 39-weeks ended  
     September 25, 2009     September 26, 2008  

Net loss as reported

   $ (371,600   $ (144,500

Income tax benefit

     (207,700     (52,100

Interest expense

     347,400        394,600   

Depreciation and amortization

     208,100        209,800   
                

EBITDA

   $ (23,800   $ 407,800   
                

USE OF GAAP AND NON-GAAP MEASURES

In addition to results presented in accordance with generally accepted accounting principles (“GAAP”), the Company has included in this report earnings “EBITDA,” with EBITDA being defined by the Company as earnings before interest, taxes, depreciation and amortization. The Company also excludes the cumulative effect of a change in accounting principle, discontinued operations, and the impact of restructuring and other charges from the computation of EBITDA, when applicable. For each non-GAAP financial measure, the Company has presented the most directly comparable GAAP financial measure and has reconciled the non-GAAP financial measure with such comparable GAAP financial measure.

These non-GAAP financial measures provide useful information to investors to assist in understanding the underlying operational performance of the Company. Specifically, EBITDA is a useful measure of operating performance before the impact of investing and financing transactions, making comparisons between companies’ earnings power more meaningful and providing consistent period-over-period comparisons of the Company’s performance. In addition, the Company uses these non-GAAP financial measures internally to measure its on-going business performance and in reports to bankers to permit monitoring of the Company’s ability to pay outstanding liabilities.

 

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LIQUIDITY AND CAPITAL RESOURCES

As of September 25, 2009, the Company had approximately $1,984,800 of negative working capital and had cash and cash equivalents of approximately $149,200, compared with approximately $126,500 of cash and cash equivalents at December 26, 2008. The primary reason for the negative working capital is the classification of the note payable as short term, the significant losses in the first and second quarter and the normal seasonality of our sales cycle. In addition, there was significant cash used in the set up of the Canadian operations, which management expects to be able to recover in the fourth quarter. The final payment of the note is due in December of 2009 and management expects to refinance this debt, however because of the pre-payment penalty, management does not believe it is in the best interest of the Company to complete this refinancing early. If management is unable to refinance this debt, the Company will be in default of the loan, however as the Company continues to be cash flow positive from operations, management believes it will be able to structure an arrangement to repay the debt.

During the 39-week period ended September 25, 2009, cash increased by approximately $22,700. This increase in cash was primarily the result of cash generated from operations of approximately $432,300 offset by cash used in investing activities of approximately $398,300 related to investment in new computer equipment and enhancements to the Company’s core applications as noted below. In addition, the Company used approximately $70,000 in the set up of the Canadian operations during the third quarter. Management expects to continue to have positive cash flow from operations going forward, except in periods when the accounts receivable and work in process balances significantly increase based on revenue growth. Management has approximately $80,900 on the line of credit available at September 25, 2009 for any short term cash needs.

The Company used approximately $398,300 in cash for investing activities during the 39-week period ended, September 25, 2009. The Company purchased approximately $72,500 of computer and warehouse equipment and invested approximately $325,800 in the development and enhancement of the Company’s core applications during the 39-week period ended September 25, 2009. In addition, the Company used approximately $11,300 in financing activities during the 39-week period ended, September 25, 2009.

Management expects that positive cash flow from operations will allow the Company to continue to make the regular monthly payments on the note payable according to the terms of the loan agreement. The Company will need to obtain additional financing to make the final balloon payment of $920,000, due in December of 2009. Management has initiated several meetings with potential investors with some positive results. Based on the cash flow from operations and the Company’s past history, management believes the Company will be able to obtain a term sheet for financing with reasonable terms. Management did not start the process of obtaining the additional debt until the fourth quarter, primarily due to the significant prepayment penalty of the current note payable. If the Company is unable to obtain the necessary financing from a conventional bank or other debt investor, it is highly likely that the current shareholders would be significantly diluted if the Company was required to refinance the debt with additional convertible debt at the current market price of the stock. In addition, if the Company is unable to secure the necessary financing, the Company might be required to seek protection under bankruptcy protection laws, which could have a significant impact to current shareholders; however if this occurs management believes that the Company could quickly emerge from bankruptcy, since the business fundamentals are strong and the Company continues to have positive cash flow from operations. Despite the Company’s positive cash flow, there can be no assurance that the Company could emerge from bankruptcy given the uncertainties in the financial markets and the world economy.

Our strategy is to continue to expand primarily through internal development, which will depend on a number of factors that are beyond our control. There can be no assurance that we will be successful in implementing our growth strategy or in obtaining adequate financing on favorable terms for these strategies.

 

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From time to time the Company may become a defendant in legal proceedings in the normal course of business. Since the Company has not established a reserve in connection with such claims or any general reserve for legal expenses or claims, any such liability, if at all, would be recorded as an expense in the period incurred or estimated. This amount, even if not material to the Company’s overall financial condition, could adversely affect the Company’s results of operations in the period recorded.

SEASONALITY

Historically, the Company’s revenues and profitability have been subject to moderate quarterly seasonal trends. The first quarter has traditionally been the weakest and the fourth quarter has traditionally been the strongest. Typically, this pattern has been the result of factors such as, national holidays, customer demand and economic conditions. Additionally, significant portions of the Company’s revenues are from clients whose business levels are impacted by seasonality and the economy.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not Applicable

Item 4(T). Controls and Procedures

 

  (a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of management, including the CEO and CFO, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 25, 2009. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective for timely gathering, analyzing, and disclosing the information we are required to disclose in our reports filed under the Securities Act of 1934, as amended.

 

  (b) Changes in Internal Control over Financial Reporting. There has been no significant change in the Company’s internal control over financial reporting during the fiscal quarter ended September 25, 2009 that materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

As of the date of this Quarterly Report, there are no material pending legal proceedings other than ordinary routine litigation to which the Company is a party or of which any of its property is subject.

Item 1A. Risk Factors

Not Applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There are no unregistered sales of equity securities that have not been previously filed or included in an 8-K report.

Item 3. Defaults Upon Senior Securities

None.

 

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Item 4. Submission of Matters to a Vote of Security Holders

During the 39-week period ended September 25, 2009, the Company did not submit any matters to a vote of its security holders.

Item 5. Other Information

None.

Item 6. Exhibits

 

(a) Exhibits included herewith are:

 

31.1    Certification of the Chief Executive Officer dated November 5, 2009
31.2    Certification of the Chief Financial Officer dated November 5, 2009
32.1    Written Statements of the Chief Executive Officer dated November 5, 2009
32.2    Written Statements of the Chief Financial Officer dated November 5, 2009

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

    Jagged Peak, Inc.

       
Registrant        

    /s/ Paul B. Demirdjian

  

    November 5, 2009

    
Paul B. Demirdjian    Date     
Chief Executive Officer        

    /s/ Andrew J. Norstrud

  

    November 5, 2009

    
Andrew J. Norstrud    Date     
Chief Financial Officer        

 

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