JAGGED PEAK, INC. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - JAGGED PEAK, INC.	Financial_Report.xls
EX-32.2 - EXHIBIT 32.2 - JAGGED PEAK, INC.	ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - JAGGED PEAK, INC.	ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - JAGGED PEAK, INC.	ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - JAGGED PEAK, INC.	ex31-1.htm

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 March 29, 2013

[ ] 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) 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 þ No o

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 þ No o

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 o		Accelerated filer o
Non-accelerated filer o		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 had 16,279,074 shares of common stock, par value $0.001 per share, outstanding as of May 10, 2013.

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Jagged Peak, Inc.

Contents

Part I – Financial Information

Item 1.	Unaudited Consolidated 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

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Jagged Peak, Inc.

Consolidated Financial Statements (Unaudited)

Quarterly Report on Form 10-Q

For the Quarterly Period ended March 29, 2013

Contents

Unaudited 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	5-14

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Jagged Peak, Inc.

Consolidated Balance Sheets

	March 29, 2013 (Unaudited)			December 28, 2012 (Audited)
Assets
Current assets:
Cash	$	58,000		$	15,200
Accounts receivable, net of allowance for doubtful accounts of $404,400 and $432,000 at March 29, 2013 and December 28, 2012, respectively		4,385,000			4,185,400
Other receivables		520,400			584,800
Work in process		39,200			71,300
Deferred tax asset – current portion		462,400			462,400
Other current assets		468,100			321,500
Total current assets		5,933,100			5,640,600

Property and equipment, net of accumulated depreciation of $2,057,400 and $1,963,300 at March 29, 2013 and December 28, 2012, respectively		3,865,000			3,807,400

Other assets:
EDGE applications, net of accumulated amortization of $2,078,900 and $2,025,300 at March 29, 2013 and December 28, 2012, respectively		1,166,100			1,057,900
Deferred tax asset		641,600			689,500
Capitalized debt issuance costs		49,000			69,700
Total long-term assets		5,721,700			5,624,500
Total assets	$	11,654,800		$	11,265,100

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade	$	3,267,800		$	4,725,300
Accrued payroll and bonuses		247,100			556,200
Other accrued expenses		201,200			286,100
Deferred rent		20,200			18,800
Notes payable, current portion		1,799,400			119,400
Deferred revenue and customer deposits		2,968,100			1,958,300
Total current liabilities		8,503,800			7,664,100

Long-term liabilities:
Notes Payable		2,179,100			2,728,900
Total long-term liabilities		2,179,100			2,728,900

Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued or outstanding at March 29, 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 March 29, 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		(2,756,600	)		(2,854,900	)
Accumulated other comprehensive loss		(43,000	)		(44,500	)
Total stockholders' equity		971,900			872,100
Total liabilities and stockholders' equity	$	11,654,800		$	11,265,100

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

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Jagged Peak, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Thirteen Week Period Ended
	March 29, 2013			March 30, 2012

Revenue	$	10,351,700		$	8,421,800

Cost of revenue		8,200,600			6,848,100

Gross profit		2,151,100			1,573,700

Selling, general and administrative expenses		1,887,200			1,348,000

Income from operations		263,900			225,700

Other (expense) income, net		(29,800	)		3,000
Interest expense		(50,500	)		(129,600	)
Profit before tax expense		183,600			99,100

Provision for income tax expense		85,300			46,300

Net income	$	98,300		$	52,800

Other comprehensive income		2,400			0
Tax expense		(900	)		0
Other comprehensive income, net of tax		1,500			0

Comprehensive income	$	99,800		$	52,800

Weighted average number of common shares outstanding – basic		16,156,583			16,183,470

Net income per share – basic	$	0.01		$	0.00

Weighted average number of common shares outstanding – fully diluted		17,363,554			17,215,668

Net income per share – fully diluted	$	0.01		$	0.00

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

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Jagged Peak, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

13 Weeks Ended March 29, 2013 and March 30,2012

(Unaudited)

	Common Stock Shares		Common Stock Amount		Additional Paid in Capital		Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive Loss			Total
Balance, December 30, 2011		16,305,961	$	16,400	$	3,518,900	$	(9,000	)	$	(3,388,300	)	$	0		$	138,000

Stock option expense						33,500											33,500

Net income for the period											52,800						52,800

Balance, March 30, 2012		16,305,961	$	16,400	$	3,552,400	$	(9,000	)	$	(3,335,500	)	$	0		$	224,300

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														1,500			1,500

Net income for the period											98,300						98,300

Balance, March 29, 2013		16,279,074	$	16,400	$	3,764,100	$	(9,000	)	$	(2,756,600	)	$	(43,000	)	$	971,900

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

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Jagged Peak, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	13 Week Period Ended
	March 29, 2013			March 30, 2012
Operating activities
Net income	$	98,300		$	52,800
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and software amortization		147,600			91,300
Stock option expense		0			33,500
Amortization of debt costs		20,700			67,400
Bad debt expense		(27,600	)		0
Changes in:
Accounts receivable		(171,900	)		(564,200	)
Work-in-process		32,100			20,900
Other current assets		(146,600	)		(38,100	)
Other receivables		64,400			87,200
Deferred tax asset		47,900			(24,800	)
Accounts payable and accrued expenses		(1,850,000	)		(1,123,100	)
Deferred rent		1,400			15,300
Deferred revenue and customer deposits		1,009,800			296,000
Net cash flows used in operating activities		(773,900	)		(1,085,800	)

Investing activities
Acquisition of property and equipment		(151,700	)		(181,100	)
Acquisition/development of software - EDGE applications		(161,900	)		(141,500	)
Cash flows used in investing activities		(313,600	)		(322,600	)

Financing activities
Net proceeds on notes payable		1,160,100			500,100
Payments on term loan		(29,800	)		0
Payments on capital lease obligation		0			(239,500	)
Cash flows provided by financing activities		1,130,300			260,600

Net increase (decrease) in cash		42,800			(1,147,800	)

Cash, beginning of period		15,200			1,542,300

Cash, end of period	$	58,000		$	394,500

Supplemental disclosure of cash flow information:

Cash paid during the period for interest	$	30,000		$	112,600
Cash paid for taxes	$	38,000		$	0

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 Week Periods Ended March 29, 2013 and March 30, 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 20 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 March 29, 2013 and the period ended March 30, 2012 each consist of 13 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 March 29, 2013 and December 28, 2012, (b) the consolidated statements of comprehensive income for the 13-week periods ended March 29, 2013 and March 30, 2012, (c) the consolidated statements of changes in stockholders’ equity for the 13-week periods ended March 29, 2013 and March 30, 2012, and (d) the consolidated statements of cash flows for the 13-week periods ended March 29, 2013 and March 30, 2012 have been made.

All financial information has been rounded to the nearest hundred.

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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.

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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 until release to production are capitalized and amortized over their useful life. The Company capitalized approximately $161,900 and $141,500 during the 13-week periods ended March 29, 2013 and March 30, 2012, respectively. Amortization expense related to capitalized software and charged to operations for the 13-week periods ended March 29, 2013 and March 30, 2012 was approximately $53,500 and $32,300, 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 85% of total revenue, and approximately $7.3 million, or approximately 87% of total revenue, during the 13-week periods ended March 29, 2013 and March 30, 2012, respectively. Accounts receivable from this customer was approximately $2.6 million, or approximately 60% of total accounts receivable and approximately $2.5 million or approximately 61% of total accounts receivable, at March 29, 2013 and December 28, 2012, respectively. The risk of this concentration is mitigated as the deposits from this customer at March 29, 2013 and at March 30, 2012 were approximately $2.5 million and $1.5 million, respectively.

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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 $404,400 and $432,000 is considered necessary as of March 29, 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 $94,100 and $59,000 for the 13-week periods ended March 29, 2013 and March 30, 2012, respectively, and 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 $2,298,500 as of March 29, 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.

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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.

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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 13-week periods ended March 29, 2013 and March 30, 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.

Recently Issued Financial Accounting Standards

Recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force (“EITF”), the American Institute of Certified Public Accountants (“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.

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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.

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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		0			0			0
Outstanding at March 29, 2013		2,335,782	$	0.01	-	0.30	$	0.14

Exercisable at March 29, 2013		2,335,782	$	0.01	-	0.30	$	0.14
Exercisable at December 30, 2012		1,607,700	$	0.01	-	0.30	$	0.14

The following table summarizes information about options outstanding and exercisable as of March 29, 2013:

Outstanding and Exercisable Options
Exercise Price		Number Outstanding		Number Exercisable		Weighted Average Remaining Life (in years)	Weighted Average Price
$	0.01		10,782		10,782	37.7	$	0.01
$	0.30		75,000		75,000	0.1	$	0.30
$	0.13		2,150,000		2,150,000	3.1	$	0.13
$	0.25		100,000		100,000	8.7	$	0.25

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4. Debt

Notes payable consist of:

	March 29, 2013		December 28, 2012

5-year term loan related to purchase of warehouse	$	2,298,500	$	2,328,300

$3.0 million senior credit facility, two year revolving line of credit		1,680,000		520,000

Less current portion		1,799,400		119,400

Long-term portion of notes payable	$	2,179,100	$	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 0.20% as of March 29, 2013. The swap agreement qualifies as an “effective” hedge under U.S. GAAP. As of March 29, 2013, the fair market value of the interest rate swap included in other accrued expenses is approximately $69,000.

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 $1,320,000 and $220,000 as of March 29, 2013 and December 28, 2012.

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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 13-week period ended March 29, 2013 and March 30, 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.

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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 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 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. 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

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The Company operates on a 52/53 week reporting year. Therefore, the period ended March 29, 2013 and the period ended March 30, 2012 each consist of 13 weeks.

RESULTS OF OPERATIONS

For the 13-week period ended March 29, 2013 compared to the 13-week period ended March 30, 2012

Revenues increased $1,929,900, or 23%, to $10,351,700 for the 13-week period ended March 29, 2013, as compared to $8,421,800 for the 13-week period ended March 30, 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 $1,352,500 or 20%, to $8,200,600 for the 13-week period ended March 29, 2013, as compared to $6,848,100 for the 13-week period ended March 30, 2012. As a percentage of revenues, cost of revenue was 79% for the 13-week period ended March 29, 2013, as compared to 81% for the 13-week period ended March 30, 2012. The decrease in cost of revenue as a percentage of revenue was primarily the result of improved management of fulfillment operations and client e-commerce platform implementations.

Selling, general and administrative expense increased by $539,200, or 40%, to $1,887,200 for the 13-week period ended March 29, 2013, as compared to $1,348,000 for the 13-week period ended March 30, 2012. This increase was primarily related to hiring of additional project managers to oversee the increase in projects and client transactions.

Interest expense decreased by $79,100 to $50,500 for the 13-week period ended March 29, 2013, as compared to $129,600 for the 13-week period ended March 30, 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 $183,600 for the 13-week period ended March 29, 2013, as compared to $99,100 for the 13-week period ended March 30, 2012.

Income tax expense was $85,300 for the 13-week period ended March 29, 2013 compared to an income tax expense of $46,300 for the 13-week period ended March 30, 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 March 29, 2013, the Company had U.S. (federal and state) net operating loss carry forwards of $2,677,100 to reduce future taxable income, which will expire between 2024 and 2031. The Company also has a Canadian net operating loss carry forward of $776,200 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.

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The Company realized net income of $98,300 for the 13-week period ended March 29, 2013, compared with net income of $52,800 for the 13-week period ended March 30, 2012.

Basic income per share from continuing operations for the 13-week period ended March 29, 2013 was $0.01 per weighted average share, compared with basic income of $0.00 per weighted average share for the 13-week period ended March 30, 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 13-week period ended March 29, 2013, the Company’s operations used cash of approximately $773,900. 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 $313,600 for the 13-week period ended March 29, 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 $1,130,300 for the 13-week period ended March 29, 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 March 29, 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.

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The Company believes that, based on current operations and anticipated growth, cash flow from operations, together with the Facility, will be sufficient to fund anticipated capital expenditures, operating expenses and other anticipated liquidity needs for the next twelve months. Anticipated debt maturity 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 were not available in a timely manner or on satisfactory terms or are not permitted under the Facility and the Company defaulted on 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 March 29, 2013, the balance outstanding on the Facility and the Term Loan were approximately $1,680,000 and $2,298,500, respectively.

Critical Accounting Policies and Estimates

Use of Estimates

Revenue Recognition

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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.

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Accounts receivable result primarily from the sales of e-commerce and fulfillment services to a variety of consumers. 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 $404,400 and $432,000 is considered necessary as of March 29, 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

Put Options

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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 13-week period ended March 29, 2013 was approximately $381,700 compared to approximately $353,500 for the 13-week period ended March 30, 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 13-week period ended
	March 29, 2013		March 30, 2012
Net income as reported	$	98,300	$	52,800
Income tax expense		85,300		46,300
Interest expense		50,500		129,600
Depreciation and amortization		147,600		91,300
Stock option expense		0		33,500
Adjusted EBITDA	$	381,700	$	353,500

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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 March 29, 2013. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 29, 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 March 29, 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 March 29, 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.

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Item 6. Exhibits

(a)	Exhibits included herewith are:

31.1	Certification of the Chief Executive Officer dated May 10, 2013

31.2	Certification of the Chief Financial Officer dated May 10, 2013

32.1	Certification of the Chief Executive Officer, pursuant to 18 U.S.C. section 1350, dated May 10, 2013

32.2	Certification of the Chief Financial Officer, pursuant to 18 U.S.C. section 1350, dated May 10, 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		May 10, 2013
Paul B. Demirdjian		Date
Chairman of the Board of Directors, Chief Executive Officer (Principal Executive Officer)

/s/ Albert Narvades		May 10, 2013
Albert Narvades		Date
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary (Principal Financial Officer)

Attached files

JAGGED PEAK, INC. Reports

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