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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

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FORM 10-Q

     

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

 

For the quarterly period ended June 28, 2013

 

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

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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)

 

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. 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 ☒

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

 

The Registrant had 16,156,583 shares of common stock, par value $0.001 per share, outstanding as of August 9, 2013.

 

 

 

  Table of Contents

Jagged Peak, Inc.

 

Contents

 

Part I – Financial Information
Item 1.		Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosure About Market Risk
Item 4.		Controls and Procedures
Part II – Other Information
Item 1.		Legal Proceedings
Item 1A.		Risk Factors
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.		Defaults Upon Senior Securities
Item 4.		Mine Safety Disclosures
Item 5.		Other Information
Item 6.		Exhibits
Signatures

  

 

 

Table of Contents

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

 

 

Jagged Peak, Inc.

 

Consolidated Financial Statements

 

26 Week Period Ended June 28, 2013 (Unaudited), the

26 Week Period Ended June 29, 2012 (Unaudited) and

December 28, 2012 (Audited)

 

Contents

 

 

Consolidated Financial Statements

 

 

Consolidated Balance Sheets		1
Consolidated Statements of Comprehensive Income		2
Consolidated Statement of Changes in Stockholders’ Equity		3
Consolidated Statements of Cash Flows		4
Notes to the Unaudited Consolidated Financial Statements		5-13

 

 

  

 

Jagged Peak, Inc.

Consolidated Balance Sheets

		June 28, 2013 (Unaudited)				December 28, 2012 (Audited)
Assets
Current assets:
Cash		$	338,300			$	15,200
Accounts receivable, net of allowance for doubtful accounts of $502,200 and $432,000 at June 28, 2013 and December 28, 2012, respectively			4,687,700				4,185,400
Other receivables			541,200				584,800
Work in process			80,100				71,300
Deferred tax asset			462,400				462,400
Other current assets			373,100				321,500
Total current assets			6,482,800				5,640,600
Property and equipment, net of accumulated depreciation of $2,159,900 and $1,963,300 at June 28, 2013 and December 28, 2012, respectively			3,894,700				3,807,400
Other assets:
EDGE applications, net of accumulated amortization of $2,138,300 and $2,025,300 at June 28, 2013 and December 28, 2012, respectively			1,311,200				1,057,900
Deferred tax asset			475,100				689,500
Capitalized debt issuance costs			28,000				69,700
Total long-term assets			5,709,000				5,624,500
Total assets		$	12,191,800			$	11,265,100
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade		$	4,057,100			$	4,725,300
Accrued payroll and bonuses			480,200				556,200
Other accrued expenses			295,400				286,100
Deferred rent			20,200				18,800
Notes payable, current portion			1,719,400				119,400
Deferred revenue and customer deposits			2,252,100				1,958,300
Total current liabilities			8,824,400				7,664,100
Long-term liabilities:
Long-term debt			2,149,200				2,728,900
Total long-term liabilities			2,149,200				2,728,900
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued or outstanding at June 28, 2013 and December 28, 2012			0				0
Common stock, $.001 par value; 70,000,000 shares authorized; 16,279,074 shares issued and 16,156,583 outstanding at June 28, 2013 and December 28, 2012			16,400				16,400
Additional paid-in capital			3,764,100				3,764,100
Treasury stock, 122,491 shares			(9,000	)			(9,000	)
Accumulated deficit			(2,532,100	)			(2,854,900	)
Accumulated other comprehensive loss			(21,200	)			(44,500	)
Total stockholders' equity			1,218,200				872,100
Total liabilities and stockholders' equity		$	12,191,800			$	11,265,100

 

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

 

 

Jagged Peak, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

 

		Thirteen Week Period Ended								Twenty-Six Week Period Ended
		June 28, 2013				June 29, 2012				June 28, 2013				June 29, 2012
Revenue		$	10,716,600			$	8,349,100			$	21,068,300			$	16,770,900
Cost of revenue			8,560,300				6,604,800				16,760,900				13,452,900
Gross profit			2,156,300				1,744,300				4,307,400				3,318,000
Selling, general and administrative expenses			1,693,500				1,442,000				3,580,700				2,790,000
Income from operations			462,800				302,300				726,700				528,000
Other expense			32,100				27,700				61,900				24,700
Interest expense			53,900				33,900				104,400				163,500
Profit before tax expense			376,800				240,700				560,400				339,800
Provision for income tax expense			152,300				132,200				237,600				178,500
Net income		$	224,500			$	108,500			$	322,800			$	161,300
Other comprehensive income (loss)			35,100				(65,800	)			37,500				(65,800	)
Tax benefit (expense)			(13,300	)			24,700				(14,200	)			24,700
Other comprehensive income (loss), net of tax			21,800				(41,100	)			23,300				(41,100	)
Comprehensive income		$	246,300			$	67,400			$	346,100			$	120,200
Weighted average number of common shares outstanding – basic			16,156,583				16,183,470				16,156,583				16,183,470
Net income per share – basic		$	0.01			$	0.01			$	0.02			$	0.01
Weighted average number of common shares outstanding – fully diluted			17,626,466				17,252,884				17,626,466				17,252,884
Net income per share – fully diluted		$	0.01			$	0.01			$	0.02			$	0.01

 

 

  

 

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

 

 

 

Jagged Peak, Inc.

        Consolidated Statement of Changes in Stockholders’ Equity

26 Weeks Ended June 28, 2013

(Unaudited)

 

 

		Common Stock Shares				Common Stock Amount				Additional Paid in Capital				Treasury Stock				Accumulated Deficit				Accumulated Other Compre- hensive Loss				Total
Balance, December 28, 2012			16,279,074			$	16,400			$	3,764,100			$	(9,000	)		$	(2,854,900	)		$	(44,500	)			872,100
Change in fair value of interest rate swap																							23,300				23,300
Net income for the period																			322,800								322,800
Balance, June 28, 2013			16,279,074			$	16,400			$	3,764,100			$	(9,000	)		$	(2,532,100	)		$	(21,200	)		$	1,218,200

 

 

 

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

 

  

 

Jagged Peak, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		26 Weeks Ended
		June 28, 2013				June 29, 2012
Operating activities
Net income		$	322,800			$	161,300
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and software amortization			309,600				192,300
Stock option expense			0				75,200
Amortization of debt costs			20,700				67,400
Bad debt expense			70,200				(149,200	)
Changes in:
Accounts receivable			(572,500	)			(304,400	)
Work in process			(8,800	)			(12,800	)
Other current assets			(30,600	)			(123,700	)
Other receivables			43,600				68,200
Deferred tax asset			214,400				129,400
Accounts payable and accrued expenses			(711,600	)			(627,100	)
Deferred rent			1,400				(8,100	)
Deferred revenue and customer deposits			293,800				330,100
Net cash flows used in operating activities			(47,000	)			(201,400	)
Investing activities
Acquisition of property and equipment			(283,900	)			(925,900	)
Acquisition/development of software - EDGE applications			(366,400	)			(291,300	)
Cash flows used in investing activities			(650,300	)			(1,217,200	)
Financing activities
Net proceeds from notes payable			1,080,000				200,100
Payments on term loan			(59,600	)			0
Payments on capital lease obligation			0				(239,500	)
Cash flows provided by (used in) financing activities			1,020,400				(39,400	)
Net increase (decrease) in cash			323,100				(1,458,000	)
Cash, beginning of period			15,200				1,542,300
Cash, end of period		$	338,300			$	84,300
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	63,000			$	117,600
Cash paid during the period for taxes		$	38,000			$	0
Purchase of building with term note		$	0			$	2,388,000

  

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

 

 

 

Jagged Peak, Inc.

 

Notes to the Unaudited Consolidated Financial Statements

 

For the 13 and 26 Week Periods Ended June 28, 2013 and

the 13 and 26 Week Periods Ended June 29, 2012

 

1.     General Background Information

 

Jagged Peak, Inc. (the “Company” or “Jagged Peak”) is an e-commerce software and services company headquartered in Tampa, Florida, providing enterprise e-commerce technology and related fulfillment services. The Company's flagship product, EDGE™ (EDGE, Enterprise 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 enables clients to build and operate custom branded portals such as e-commerce, incentive and rebate programs, customer service, repair and reverse logistics, and marketing materials management, 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, healthcare, distribution, travel and tourism and manufacturing.

 

Jagged Peak has continued to market the launch of TotalCommerce™ (TotalCommerce), an end-to-end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers. 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 operates two warehouses in Florida and a network of 21 independently owned fulfillment warehouses throughout North America that enable its clients to provide faster delivery to their customers, while lowering 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 the Company’s 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.

 

The Company operates on a 52/53 week reporting year. Therefore, the period ended June 28, 2013 and the period ended June 29, 2012 each consist of 26 weeks.

 

2.     Significant Accounting Policies

 

Basis of Presentation

 

In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of (a) the consolidated financial position at June 28, 2013 and December 28, 2012, (b) the consolidated statements of comprehensive income for the 13 and 26-week periods ended June 28, 2013 and June 29, 2012, (c) the consolidated statements of changes in stockholders’ equity for the 26-week periods ended June 28, 2013 and June 29, 2012, and (d) the consolidated statements of cash flows for the 26-week periods ended June 28, 2013 and June 29, 2012, and have been made.

 

 

 

All financial information has been rounded to the nearest hundred.

 

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 (U.S. GAAP) 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 28, 2012.

 

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 of 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 however; actual results could differ from these estimates.

 

Revenue Recognition 

 

There are multiple components in Jagged Peak’s TotalCommerce solution, which are sold through a master agreement where each individual component is priced separately and distinctly from the other components, based on market prices at which we sell those services individually. The client is able to choose which services it wishes to purchase. The separate components can be added or deleted at any time during the contract period at pre-determined prices. The Company has a history of selling each element separately to establish the market price of each element.

 

Software development services include activation, e-commerce site development, application and e-commerce site enhancements, consulting services and other development activities. Additional technology revenue is derived from help desk support, maintenance, general support, active monitoring and training.

 

Revenue from software development and technology 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. Additional technology revenues are either paid monthly or on an annual basis. If paid on an annual basis, the revenue is recognized over the year, and if paid on a monthly basis, the revenue is recognized in the month in which the service was provided.

 

Hosting and managed services contracts range in length from one to three years, and are typically renewed annually after the initial term for subsequent one year periods. Revenue from hosting and managed services is recognized ratably over the period for which the services are provided. In most cases the fees are either a flat monthly fee or based on the client’s use of the system (transactions).

 

The Company’s EDGE software is a web-based product and is typically provided to its customers in a Software as a Service (“SaaS”) model. Revenues are recognized ratably over the period the service is provided. The method of payment can be based on the clients’ use of the system (transactions), a flat monthly fee or an annual fee. Revenue for all methods of payment is recognized over the period the software is available to the client and the Company is responsible for providing software updates.

 

 

 

The Company has established vendor specific objective evidence for the individually priced elements in its contracts through the use of the market as each element in its contracts is sold both as a package and individually with the same pricing. For any element delivered for which vendor specific objective evidence (“VSOE”) is not available it uses the residual method. When applying the residual method, VSOE of fair value is allocated to each of the undelivered elements and the remaining consideration is allocated to the delivered elements.

 

Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. These revenues are recognized based on the net value of the services provided.

 

Certain order processing services are contracted out by the Company to optimized independent distribution warehouses in North America. All of these services are managed by the Company through its order management platform. Because the company has the exclusive responsibility to contract and to manage the services provided to its clients by these independent warehouses and the related transportation, the revenue and expenses are recognized based on the amount of services charged to the client and the related expenses are part of the Company’s cost of services.

 

Work in process represents costs and services which have been provided and properly recognized based on the above policy, however have not been billed to the client.

 

Shipping and handling costs are classified as cost of revenues.

 

Software and Development Enhancements

 

Software and development enhancement expenses include costs such as payroll and employee benefit costs associated with product development. The EDGE product platform, including the e-commerce, order management, warehouse management and transportation management systems, are continually being enhanced with new features and functions. Once technological feasibility of new features and functions is established, the costs incurred from release to production are capitalized and amortized over their useful life. The Company capitalized approximately $204,500 and $149,800 during the 13-week periods ended June 28, 2013 and June 29, 2012, respectively. The Company capitalized approximately $366,400 and $291,300 during the 26-week periods ended June 28, 2013 and June 29, 2012, respectively. Amortization expense related to capitalized software and charged to operations for the 13-week periods ended June 28, 2013 and June 29, 2012 was approximately $59,500 and $37,100, respectively. Amortization expense related to capitalized software and charged to operations for the 26-week periods ended June 28, 2013 and June 29, 2012 was approximately $113,000 and $69,400, respectively.

 

Concentration of Risk

 

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

 

Cash is maintained with one major financial institution in the United States and Canada. 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.

 

  

Sales to a single, multi-national customer with several brands amounted to approximately $8.8 million, or approximately 82% of total revenue, and approximately $7.0 million, or approximately 84% of total revenue, during the 13-week periods ended June 28, 2013 and June 29, 2012, respectively. Sales to a single, multi-national customer with several brands amounted to approximately $18.8 million, or approximately 89% of total revenue, and approximately $14.3 million, or approximately 85% of total revenue, during the 26-week periods ended June 28, 2013 and June 29, 2012, respectively. Accounts receivable from this customer was approximately $2.6 million, or approximately 56% of net accounts receivable and approximately $2.5 million, or approximately 61% of net accounts receivable, at June 28, 2013 and December 28, 2012, respectively. The risk of this concentration is mitigated as the deposits from this customer at June 28, 2013 and at December 28, 2012 were approximately $1.8 million and $1.5 million, respectively.

 

Accounts receivable result primarily from the sales of e-commerce and fulfillment services to a variety of customers. Accounts receivable are stated at cost less an allowance for doubtful accounts. 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, the customer’s payment history and the customer’s current ability to pay its obligations. Based on management’s review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $502,200 and $432,000 is considered necessary as of June 28, 2013 and December 28, 2012, respectively. The Company charges uncollectible accounts against the allowance account once the invoices are deemed unlikely to be collectible. The Company does not accrue interest on past due receivables.

 

Property and Equipment

 

Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, principally one 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 expense was $102,500 and $59,000 for the 13-week periods ended June 28, 2013 and June 29, 2012, respectively, and $196,600 and $122,900 for the 26-week periods ended June 28, 2013 and June 29, 2012, respectively. Depreciation expense is included in selling, general and administrative expenses.

 

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

 

		Years
Building				20
Warehouse equipment			3	-	10
Furniture and equipment			3	-	7
Computer equipment and software			1	-	7
Leasehold improvements				Lease term

 

On June 25, 2012, the Company purchased its previously leased warehouse located in St. Petersburg, Florida for $3.0 million with the proceeds of a 5-year term loan. At the date of purchase, the recorded values of the warehouse building and related land were approximately $1,433,000 and $1,567,000, respectively. The 5-year term loan balance was approximately $2,268,600 as of June 28, 2013 and $2,328,300 as of December 28, 2012.

 

 

 

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 upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.  

  

 

Uncertain Tax Positions

 

The Company periodically assesses its tax positions taken for all open tax years and has not identified any uncertain tax positions. The Company is not subject to examination by taxing authorities for years prior to 2009.

 

Income Taxes

 

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. 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.

 

The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. In conducting this assessment, management considered a variety of factors, including the Company’s operating profits, the reasons for the Company’s operating losses in prior years, management’s judgment as to the likelihood of profitability and expectations of future performance, and other factors. Management does not believe that a valuation allowance is necessary; however, the amount of deferred tax asset realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. Net loss carry forwards do not begin to expire until 2024.

 

Put Options

 

In 2009, the Company issued 775,000 restricted common shares as partial consideration for a loan obtained from Moriah Capital L.P. (“Moriah”). Pursuant to the terms and conditions of the governing Securities Issuance Agreement, the holder of such shares had the right, but not the obligation, to put the shares back to the Company at a fixed price of $0.21 per common share on March 18, 2011. The Company accounted for these shares as a reclassification of the value of the shares from permanent to temporary equity. Pursuant to the 2010 amendment to the Securities Issuance Agreement, Moriah put the 775,000 shares of common stock back to Jagged Peak for the redemption price of $162,750 at a fixed price of $0.21 per common share in March 2011.

 

In 2011, the Company amended its agreement with Moriah and issued Moriah 1,000,000 restricted common shares as collateral for the redemption premium Moriah received related to the refinancing of the loan. Moriah had the option until March 31, 2012 to retain the collateral shares or put the shares to Jagged Peak for the redemption price of $170,000. On March 31, 2012, Moriah chose to retain the 1,000,000 collateral shares and the put option expired. The Company accounted for these shares as a reclassification of the value of the shares from temporary to permanent equity.

 

 

 

Interest Rate Swap

 

Derivative financial instruments are carried at fair value on the consolidated balance sheets. The Company’s derivative instrument is an interest rate swap that hedges the interest payments of certain debt by effectively converting interest from a variable rate to a fixed rate. This instrument is considered fully effective and qualifies for hedge accounting with changes in the fair value recorded in other comprehensive income (loss). The Company does not enter into derivative agreements for trading purposes.

 

The swap agreement's fair value is calculated using Level 2 inputs. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are based on observable market inputs (other than those included in Level 1) and are provided by the Company’s lender, Fifth Third Bank.

 

Stock-Based Compensation

 

The Company has stock option and stock incentive plans for employees and non-employee directors that provide for grants of restricted stock awards and options to purchase shares of Jagged Peak common stock at exercise prices generally equal to the fair values of such stock at the dates of grant. The Company recognizes the cost of all share-based payments in the financial statements using a fair-value based measurement method. The Company uses a Black-Scholes model to value its stock option grants and expenses the related compensation cost using the straight-line method over the vesting period. The fair value of the stock compensation is determined on the grant date using assumptions for the expected term, volatility, dividend yield and the risk free interest rate. The period expense is then determined based on the valuation of the options and on estimated forfeitures.

 

Foreign Currency

 

Generally, the functional currency of the Company’s 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. There were no recorded translation gains or losses for the 26-week periods ended June 28, 2013 and June 29, 2012. Net gains and losses resulting from foreign exchange transactions are recorded as a component of other expenses.

 

Earnings per Share

 

Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur upon issuance of certain additional potential common stock shares. Potential common stock shares consist of shares that may arise from outstanding dilutive common stock options (the number of which is computed using the “treasury stock method”). Diluted earnings per share considers the potential dilution that could occur if the Company’s outstanding common stock options were exercised for or converted into common stock that then shared in the Company’s earnings. 

 

Recently Issued Financial Accounting Standards

 

 

 

Recent accounting pronouncements issued by the Financial Accounting Standards Board, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

 

3.     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 any outstanding senior classes of stock, of which there are currently none. The Company records stock as issued when the consideration is received or the obligation is incurred.

 

 

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

 

		Shares				Range of Exercise Prices						Weighted Average Exercise Price
Outstanding at December 30, 2011			2,235,782				0.01	-	0.30				0.13
Options granted			100,000					0.25					0.25
Options exercised			0					0					0
Options cancelled or expired			0					0					0
Outstanding at December 28, 2012			2,335,782			$	0.01	-	0.30			$	0.14
Options granted			0					0					0
Options exercised			0					0					0
Options cancelled or expired			(75,000	)				.30					.30
Outstanding at June 28, 2013			2,260,782			$	0.01	-	0.25			$	0.13
Exercisable at June 28, 2013			2,260,782			$	0.01	-	0.25			$	0.13
Exercisable at December 28, 2012			2,335,782			$	0.01	-	0.30			$	0.14

 

 

 

 

 

The following table summarizes information about options outstanding and exercisable as of June 28, 2013:

 

	Outstanding and Exercisable Options
	Exercise Price				Number Outstanding				Number Exercisable			Weighted Average Remaining Life (years)		Weighted Average Price
	$	0.01				10,782				10,782		37.5		$	0.01
	$	0.13				2,150,000				2,150,000		2.9		$	0.13
	$	0.25				100,000				100,000		8.4		$	0.25

 

  

 

 

4.  Debt 

 

 

Notes payable consist of:

 

		June 28, 2013				December 28, 2012
5-year Term Loan related to purchase of warehouse		$	2,268,600			$	2,328,300
$3.0 million Senior Credit Facility, two year revolving line of credit			1,600,000				520,000
Total			3,868,600				2,848,300
Current portion			(1,719,400	)			(119,400	)
Long-term portion of notes payable		$	2,149,200			$	2,728,900

 

On June 25, 2012, the Company purchased its previously leased warehouse facility for $3.0 million. The purchase was financed with a $2.388 million 5-year term loan (the “Term Loan”) amortized over 20 years. Principal and interest are due monthly. Concurrent with the Term Loan, the Company entered into an interest rate swap agreement that expires in June 2017 concurrent with the maturity of the Company's Term Loan. The interest rate swap agreement has an initial notional amount of $2.388 million and provides for the Company to pay interest at a fixed rate of 1.43% while receiving interest for the same period at the one-month LIBOR rate on the same notional principal amount. The Company entered into the interest rate swap agreement to hedge against LIBOR movements on current variable rate indebtedness totaling $2.388 million at one-month LIBOR plus 2.50%, thereby fixing the Company's effective rate on the notional amount at 3.93%. One-month LIBOR was 0.19% as of June 28, 2013. The swap agreement qualifies as an “effective” hedge under U.S. GAAP. As of June 28, 2013, the fair market value of the interest rate swap included in other accrued expenses is approximately $33,900.

 

On March 23, 2012, the Company entered into the senior credit facility (the “Facility”) with Fifth Third Bank. The Facility provides for a revolving line of credit with a maturity of two years and a maximum borrowing capacity of $3.0 million. The proceeds of the Facility were used to repay all outstanding indebtedness and fees under the Moriah loan. The Facility is available for general corporate purposes. The Facility is secured by a first priority lien on substantially all of the Company’s assets. The Facility contains customary events of default and covenants including among other things, covenants that restrict but do not prevent the Company from incurring certain additional indebtedness, creating or permitting liens on assets, paying dividends and repurchasing stock, engaging in mergers or acquisitions and make investments and loans.

 

On March 22, 2013, the Company amended the Facility to reduce the interest rate to an applicable margin of LIBOR plus 2.50%. Prior to this Amendment, borrowings under the Facility bore interest at a rate equal to an applicable margin of LIBOR plus 3.00%. In addition to paying monthly interest on outstanding principal under the Facility, the Company is required to pay a quarterly unutilized 0.25% commitment fee to the lender, based on the daily unused balance of the Facility. The Company may voluntarily repay outstanding loans under the Facility at any time without premium or penalty. The amount available for borrowing under the Facility was $1,400,000 and $2,480,000 as of June 28, 2013 and December 28, 2012, respectively. As of June 28, 2013, the current portion of notes payable includes all amounts due under the Facility.

 

 

 

5. Related Party Transaction

 

In 2011, subsequent to the lease expiration and to ensure Jagged Peak’s ability to renew the warehouse lease under similar terms, Ridge Rock Partners, LLC, (“Ridge Rock”) which is owned by a group of investors, including officers, directors and former officers of Jagged Peak, purchased the warehouse building from the bank that had taken ownership of it from the previous landlord. Ridge Rock entered into a lease with Jagged Peak on substantially the same terms as Jagged Peak had with its former landlord. Rent expense related to this lease agreement was approximately $0 and $101,000 for the 26-week periods ended June 28, 2013 and June 29, 2012, respectively. This lease was terminated on June 25, 2012.

 

On June 25, 2012, the Company purchased its previously leased warehouse building located in St. Petersburg, Florida, from Ridge Rock for the appraised value of $3.0 million. The Company financed the purchase with a $2.388 million, 5-year term loan that is secured by the purchased property and amortized over 20 years.

 

In addition, Jagged Peak’s Chief Executive Officer, Chief Operations Officer, Chief Sales and Marketing Officer, a Director of the Company and the Employee Stock Option Plan (ESOP) collectively hold a majority of the common stock in an entity that was spun-off from the Company in 2010 and is now a variable interest of the Company. See Note 11, Variable Interest Entity, in the report on Form 10-K for the year ended December 28, 2012.

 

 

 

 

PART I – FINANCIAL INFORMATION

 

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

 

The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s financial statements and related notes appearing elsewhere herein. This discussion and analysis contains forward-looking statements including information about possible or assumed results of the Company’s financial condition, operations, plans, objectives and performance that involve risks, 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 the Company’s 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. You should not rely on any forward-looking statements which speak only as of the date hereof. The following discussions should be read in conjunction with the Company’s financial statements and the notes thereto presented in "Item 1 – Financial Statements" and the Company’s audited financial statements and the related Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s report on Form 10-K for the year ended December 28, 2012.

 

Overview

 

Jagged Peak, Inc. (the “Company” or “Jagged Peak”) is an e-commerce software and services company headquartered in Tampa, Florida, providing enterprise e-commerce technology and related fulfillment services. The Company's flagship product, EDGE™ (EDGE, Enterprise 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 enables clients to build and operate custom branded portals such as e-commerce, incentive and rebate programs, customer service, repair and reverse logistics, and marketing materials management, 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, healthcare, distribution, travel and tourism and manufacturing.

 

Jagged Peak has continued to market the launch of TotalCommerce™ (TotalCommerce), an end-to-end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers. 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 operates two warehouses in Florida and a network of 21 independently owned fulfillment warehouses throughout North America that enable its clients to provide faster delivery to their customers, while lowering 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 the Company’s 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.

 

 

 

The Company operates on a 52/53 week reporting year. Therefore, the period ended June 28, 2013 and the period ended June 29, 2012 each consist of 26 weeks.

 

 

RESULTS OF OPERATIONS

 

For the 13-week period ended June 28, 2013 compared to the 13-week period ended June 29, 2012

 

 

Revenues increased $2,367,500, or 28%, to $10,716,600 for the 13-week period ended June 28, 2013, as compared to $8,349,100 for the 13-week period ended June 29, 2012. Greater e-commerce order volume for existing customers and the addition of new customers resulted in increases in the Company’s primary sources of revenue: fulfillment, technology fees, and implementation of clients’ e-commerce sites.

 

Cost of revenue, which consists primarily of labor, fulfillment operations and facilities costs and freight, increased by $1,955,500 or 30%, to $8,560,300 for the 13-week period ended June 28, 2013, as compared to $6,604,800 for the 13-week period ended June 29, 2012. As a percentage of revenue, cost of revenue was 80% for the 13-week period ended June 28, 2013, as compared to 79% for the 13-week period ended June 29, 2012.

 

Selling, general and administrative expense increased by $251,500, or 17%, to $1,693,500 for the 13-week period ended June 28, 2013, as compared to $1,442,000 for the 13-week period ended June 29, 2012. This increase was primarily related to hiring of additional personnel to support new and existing customers.

 

Interest expense increased by $20,000 to $53,900 for the 13-week period ended June 28, 2013, as compared to $33,900 for the 13-week period ended June 29, 2012, due to interest on the $2.388 million, 3.93% 5-year Term Loan, entered into on June 25, 2012 to finance the purchase of the Company’s previously leased warehouse facility in St. Petersburg, Florida.

 

The Company realized a profit from continuing operations before provision for income taxes of $376,800 for the 13-week period ended June 28, 2013, as compared to $240,700 for the 13-week period ended June 29, 2012.

 

Income tax expense was $152,300 for the 13-week period ended June 28, 2013 compared to an income tax expense of $132,200 for the 13-week period ended June 29, 2012. Differences between the taxable income and the effective tax rate used for 2013 and 2012, as compared to the U.S. federal statutory rate, are primarily due to permanent differences and taxes on foreign operations. As of June 28, 2013, the Company had U.S. (federal and state) net operating loss carry forwards of $2,195,200 to reduce future taxable income, which will expire between 2024 and 2031. The Company also has a Canadian net operating loss carry forward of $903,500 which does not begin to expire until 2029.

 

Management believes there will be sufficient future earnings to support the more than likely realization of deferred tax assets in excess of existing taxable temporary differences. The amount of deferred tax assets considered realizable, however, could be reduced in the near-term if estimates of future taxable income are reduced.

 

The Company realized net income of $224,500 for the 13-week period ended June 28, 2013, compared with net income of $108,500 for the 13-week period ended June 29, 2012.

 

Basic income per share from continuing operations for the 13-week period ended June 28, 2013 was $0.01 per weighted average share, compared with basic income of $0.01 per weighted average share for the 13-week period ended June 29, 2012.

 

 

 

For the 26-week period ended June 28, 2013 compared to the 26-week period ended June 29, 2012

 

Revenues increased $4,297,400, or 26%, to $21,068,300 for the 26-week period ended June 28, 2013, as compared to $16,770,900 for the 26-week period ended June 29, 2012. Greater e-commerce order volume for existing customers and the addition of new customers resulted in increases in the Company’s primary sources of revenue: fulfillment, technology fees, and implementation of clients’ e-commerce sites.

 

Cost of revenue, which consists primarily of labor, fulfillment operations and facilities costs and freight, increased by $3,308,000 or 25%, to $16,760,900 for the 26-week period ended June 28, 2013, as compared to $13,452,900 for the 26-week period ended June 29, 2012. As a percentage of revenue, cost of revenue was 80% for the 26-week period ended June 28, 2013, as compared to 80% for the 26-week period ended June 29, 2012.

 

Selling, general and administrative expense increased by $790,700, or 28%, to $3,580,700 for the 26-week period ended June 28, 2013, as compared to $2,790,000 for the 26-week period ended June 29, 2012. This increase was primarily related to hiring of additional personnel to support new and existing customers.

 

Interest expense decreased by $59,100 to $104,400 for the 26-week period ended June 28, 2013, as compared to $163,500 for the 26-week period ended June 29, 2012, due to the new, lower cost, credit facility from Fifth Third Bank, which bore interest at LIBOR plus 3.00% through March 22, 2013 and LIBOR plus 2.50% thereafter. This compares to the Moriah Loan and Security Agreement utilized in the first quarter of 2012, which had an interest rate of six percent (6%) above prime with a floor of ten percent (10%). The cost savings from the new credit facility were partially offset by the interest on the new $2.388 million, 3.93% 5-year Term Loan, entered into on June 25, 2012 to finance the purchase of the Company’s previously leased warehouse facility in St. Petersburg, Florida.

 

The Company realized a profit from continuing operations before provision for income taxes of $560,400 for the 26-week period ended June 28, 2013, as compared to $339,800 for the 26-week period ended June 29, 2012.

 

Income tax expense was $237,600 for the 26-week period ended June 28, 2013 compared to an income tax expense of $178,500 for the 26-week period ended June 29, 2012. Differences between the taxable income and the effective tax rate used for 2013 and 2012, as compared to the U.S. federal statutory rate, are primarily due to permanent differences and taxes on foreign operations. As of June 28, 2013, the Company had U.S. (federal and state) net operating loss carry forwards of $2,195,200 to reduce future taxable income, which will expire between 2024 and 2031. The Company also has a Canadian net operating loss carry forward of $903,500 which does not begin to expire until 2029.

 

Management believes there will be sufficient future earnings to support the more than likely realization of deferred tax assets in excess of existing taxable temporary differences. The amount of deferred tax assets considered realizable, however, could be reduced in the near-term if estimates of future taxable income are reduced.

 

The Company realized net income of $322,800 for the 26-week period ended June 28, 2013, compared with net income of $161,300 for the 26-week period ended June 29, 2012.

 

Basic income per share from continuing operations for the 26-week period ended June 28, 2013 was $0.02 per weighted average share, compared with basic income of $0.01 per weighted average share for the 26-week period ended June 29, 2012.

 

 

 

Liquidity and Capital Resources

 

The Company’s cash needs consist of working capital, capital expenditures and debt service. The Company’s working capital needs primarily depend on the timing of collections from customers and payments to vendors. Capital expenditures consist of building, computer, and warehouse equipment purchases and developer salaries for EDGE enhancements. The Company reduces capital expenditure requirements by utilizing independent fulfillment warehouses. Independent fulfillment warehouses typically provide their own equipment, which reduces capital investment requirements.

 

For the 26-week period ended June 28, 2013, the Company’s operations used cash of approximately $47,000. Cash used by operating activities reflects changes in the various operating assets and liabilities, primarily accounts payable, accrued liabilities and client deposits.

 

Net cash used in the Company’s investing activities totaled $650,300 for the 26-week period ended June 28, 2013 consisting of equipment and development of the Company’s software. The Company expects total capital expenditures for the year 2013 to be approximately $1,000,000 to $1,500,000.

 

The Company’s financing activities provided cash of $1,020,400 for the 26-week period ended June 28, 2013 consisting of net borrowings on its line of credit and payments on its term loan.

 

The Company’s primary sources of cash flow after March 2012 were from operations and borrowings under the Fifth Third credit facility. The Secured Revolving Term Note with Moriah Capital (the “Moriah Note”) was the primary source of cash flow for the first quarter of 2012.

 

The Moriah Note was entered into in December 2009 and amended in March 2011. The note had up to $1,500,000 of availability based on eligible assets. Availability under the loan was based on 85% of eligible accounts receivable, in addition to other collateral. The interest rate on the note was 10% and was paid on a monthly basis. Principal payments were not required until the final balloon payment was paid in March 2012.

 

On March 23, 2012, the Company entered into a Senior Credit Facility with Fifth Third Bank (the “Facility”). The Facility provides for a revolving line of credit with a maturity of two years and a maximum borrowing capacity of $3.0 million. The proceeds of the Facility were used to repay all outstanding indebtedness under the Moriah note payable, and to pay related fees and expenses. The Facility is available for general corporate purposes. The Facility is secured by a first priority lien on substantially all of the Company’s assets. The Facility contains customary events of default and covenants including among other things, covenants that restrict but do not prevent the ability of the Company to incur certain additional indebtedness, create or permit liens on assets, pay dividends and repurchase stock, engage in mergers or acquisitions and make investments and loans.

 

Borrowings under the Facility bear interest at a rate equal to an applicable margin of LIBOR plus 2.50%. LIBOR was approximately 0.20% as of June 28, 2013. In addition to paying monthly interest on outstanding principal under the Facility, the Company is required to pay a quarterly unutilized 0.25% commitment fee to the lender, based on the average daily unused balance of the Facility. The Company may voluntarily repay outstanding loans under the Facility at any time without premium or penalty.

 

The Company believes that, based on current operations and anticipated growth, cash flow from operations, together with the Facility, will be sufficient to fund working capital needs, anticipated capital expenditures and other anticipated liquidity needs for the next twelve months. The anticipated maturity of the Facility in 2014 and other unforeseen events may require the Company to seek alternative financing, such as restructuring or refinancing of its long-term debt, selling assets or operations or selling debt or equity securities. If these alternatives are not available in a timely manner or on satisfactory terms or are not permitted under the Facility and the Company defaulted on its obligations, its debt could be accelerated and its lender may foreclose on its assets.

 

 

 

On June 25, 2012, the Company purchased a previously leased warehouse facility for $3.0 million. The purchase was financed with a $2,388,000 5-year Term Loan (the “Term Loan”) amortized over 20 years and an approximately $612,000 down payment provided by the Facility. Principal and interest are due monthly. Concurrent with the Term Loan, the Company entered into an interest rate swap thereby fixing its effective rate on the Term Loan at 3.93%.

 

At June 28, 2013, the balance outstanding on the Facility and the Term Loan were approximately $1,600,000 and $2,268,600, respectively. As of June 28, 2013, the current portion of notes payable includes all amounts due under the Facility.

 

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 of 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 however; actual results could differ from these estimates.

 

Revenue Recognition 

 

There are multiple components in Jagged Peak’s TotalCommerce solution, which are sold through a master agreement where each individual component is priced separately and distinctly from the other components, based on market prices at which we sell those services individually. The client is able to choose which services it wishes to purchase. The separate components can be added or deleted at any time during the contract period at pre-determined prices. The Company has a history of selling each element separately to establish the market price of each element.

 

Software development services include activation, e-commerce site development, application and e-commerce site enhancements, consulting services and other development activities. Additional technology revenue is derived from help desk support, maintenance, general support, active monitoring and training.

 

Revenue from software development and technology 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. Additional technology revenues are either paid monthly or on an annual basis. If paid on an annual basis, the revenue is recognized over the year, and if paid on a monthly basis, the revenue is recognized in the month in which the service was provided.

 

Hosting and managed services contracts range in length from one to three years, and are typically renewed annually after the initial term for subsequent one year periods. Revenue from hosting and managed services is recognized ratably over the period for which the services are provided. In most cases the fees are either a flat monthly fee or based on the client’s use of the system (transactions).

 

 

 

The Company’s EDGE software is a web-based product and is typically provided to its customers in a Software as a Service (“SaaS”) model. Revenues are recognized ratably over the period the service is provided. The method of payment can be based on the clients’ use of the system (transactions), a flat monthly fee or an annual fee. Revenue for all methods of payment is recognized over the period the software is available to the client and the Company is responsible for providing software updates.

 

The Company has established vendor specific objective evidence for the individually priced elements in its contracts through the use of the market as each element in its contracts is sold both as a package and individually with the same pricing. For any element delivered for which vendor specific objective evidence (“VSOE”) is not available it uses the residual method. When applying the residual method, VSOE of fair value is allocated to each of the undelivered elements and the remaining consideration is allocated to the delivered elements.

 

Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. These revenues are recognized based on the net value of the services provided.

 

Certain order processing services are contracted out by the Company to optimized independent distribution warehouses in North America. All of these services are managed by the Company through its order management platform. Because the Company has the exclusive responsibility to contract and to manage the services provided to its clients by these independent warehouses and the related transportation, the revenue and expenses are recognized based on the amount of services charged to the client and the related expenses are part of the Company’s cost of services.

 

Work in process represents costs and services which have been provided and properly recognized based on the above policy, however have not been billed to the client.

 

Shipping and handling costs are classified as cost of revenues.

 

Concentration of Risk

 

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

 

Cash is maintained with one major financial institution in the United States and Canada. 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.

 

Sales to a single, multi-national customer with several brands amounted to approximately $8.8 million, or approximately 82% of total revenue, and approximately $7.0 million, or approximately 84% of total revenue, during the 13-week periods ended June 28, 2013 and June 29, 2012, respectively. Sales to a single, multi-national customer with several brands amounted to approximately $18.8 million, or approximately 89% of total revenue, and approximately $14.3 million, or approximately 85% of total revenue, during the 26-week periods ended June 28, 2013 and December 28, 2012, respectively. Accounts receivable from this customer was approximately $2.6 million, or approximately 56% of net accounts receivable and approximately $2.5 million, or approximately 61% of net accounts receivable, at June 28, 2013 and December 28, 2012, respectively. The risk of this concentration is mitigated as the deposits from this customer at June 28, 2013 and at December 28, 2012 were approximately $1.8 million and $1.5 million, respectively.

 

Accounts receivable result primarily from the sales of e-commerce and fulfillment services to a variety of customers. Accounts receivable are stated at cost less an allowance for doubtful accounts. 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, the customer’s payment history and the customer’s current ability to pay its obligations. Based on management’s review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $502,200 and $432,000 is considered necessary as of June 28, 2013 and December 28, 2012, respectively. The Company charges uncollectible accounts against the allowance account once the invoices are deemed unlikely to be collectible. The Company does not accrue interest on past due receivables.

 

 

 

Income Taxes

 

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. 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.

 

The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. In conducting this assessment, management considered a variety of factors, including the Company’s operating profits, the reasons for the Company’s operating losses in prior years, management’s judgment as to the likelihood of profitability and expectations of future performance, and other factors. Management does not believe that a valuation allowance is necessary; however, the amount of deferred tax asset realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. Net loss carry forwards do not begin to expire until 2024.

 

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 “Adjusted EBITDA,” with Adjusted EBITDA being defined by the Company as earnings before interest, taxes, depreciation and amortization, and stock option expense. 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, Adjusted 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 this non-GAAP financial measure 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.

 

 

 

ADJUSTED EBITDA 

 

Adjusted EBITDA for the 26-week period ended June 28, 2013 was approximately $974,400 compared to approximately $770,800 for the 26-week period ended June 29, 2012. The increase in the Adjusted EBITDA primarily relates to the increase in sales, improved operating margins from improved management of fulfillment operations, implementation of clients’ e-commerce sites and lower borrowing costs. These improvements were partially offset by higher salaries and wages. The Company defines Adjusted EBITDA as earnings before interest, taxes, and depreciation and amortization, and stock option expense. The Company believes Adjusted 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. To provide consistent comparisons of year-over-year Adjusted EBITDA, the following reconciliation is provided:

 

 

		For the 26-weeks ended
		June 28, 2013				June 29, 2012
Net income as reported		$	322,800			$	161,300
Income tax expense			237,600				178,500
Interest expense			104,400				163,500
Depreciation and amortization			309,600				192,300
Stock option expense			0				75,200
Adjusted EBITDA		$	974,400			$	770,800

 

 

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 Disclosures about Market Risk

 

Not Applicable

 

Item 4. Controls and Procedures

  

 

 

(a)

Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 28, 2013. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of June 28, 2013, the Company’s disclosure controls and procedures were effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This conclusion by the Company’s Chief Executive Officer and Chief Financial Officer does not relate to reporting periods after June 28, 2013.

 

(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 June 28, 2013 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

 

Not applicable

 

Item 3. Defaults Upon Senior Securities

 

Not applicable

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

(a)	Exhibits included herewith are:

 

31.1      Certification of the Chief Executive Officer dated August 9, 2013
31.2      Certification of the Chief Financial Officer dated August 9, 2013
32.1      Certification of the Chief Executive Officer, pursuant to 18 U.S.C. section 1350, dated August 9, 2013
32.2      Certification of the Chief Financial Officer, pursuant to 18 U.S.C. section 1350, dated August 9, 2013

 

Exhibit 101.1 Interactive Data File:
101.INS     XBRL Instance Document
101.SCH   XBRL Schema Document
101.CAL   XBRL Calculation Linkbase Document
101.DEF    XBRL Definition Linkbase Document
101.LAB   XBRL Label Linkbase Document
101.PRE    XBRL Presentation Linkbase Document

 

 

 

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		August 9, 2013
Paul B. Demirdjian		Date
Chairman of the Board of Directors, Chief Executive Officer (Principal Executive Officer)
/s/ Albert Narvades		August 9, 2013
Albert Narvades		Date
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer)

 

 

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