Table Of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

     

 

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

 

For the quarterly period ended September 26, 2014

 

OR 

 

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

 

For the transition period from ______ to ______

 

Commission file number: 000-31715

 

 

Jagged Peak, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada			91-2007478
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

 

3000 Bayport Drive, Suite 250, Tampa, FL 33607

(Address of principal executive offices, including zip code)

 

(813) 637-6900

(Registrant's telephone number, including area code)

 

 

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

 

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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 16,479,074 shares of common stock, par value $0.001 per share, outstanding as of November 10, 2014.

 

 

  

Table of Contents

Jagged Peak, Inc.

 

Contents

 

Part I - Financial Information		1
Item 1.	Unaudited Consolidated Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	23
Item 4.	Controls and Procedures	23
Part II - Other Information		23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	23
Item 4.	Mine Safety Disclosures	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
Signatures		24

 

 

  

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 September 26, 2014

 

Contents

 

Unaudited Consolidated Financial Statements
Consolidated Balance Sheets	2
Consolidated Statements of Comprehensive Income	3
Consolidated Statements of Changes in Stockholders' Equity	4
Consolidated Statements of Cash Flows	5
Notes to the Unaudited Consolidated Financial Statements	6-15

 

 

 

Jagged Peak, Inc.

Consolidated Balance Sheets 

 

		September 26, 2014 (Unaudited)				December 27, 2013 (Audited)
Assets
Current assets:
Cash		$	317,200			$	652,000
Accounts receivable, net of allowance for doubtful accounts of $279,000 and $253,300 at September 26, 2014 and December 27, 2013, respectively			8,336,500				5,980,100
Other receivables, net of allowance of $0 and $326,500 at September 26, 2014 and December 27, 2013, respectively			4,900				378,900
Work in process			242,600				150,700
Deferred tax asset - current portion			382,900				333,500
Other current assets			506,000				273,300
Total current assets			9,790,100				7,768,500
Property and equipment, net of accumulated depreciation of $1,116,000 and $2,393,800 at September 26, 2014 and December 27, 2013, respectively			4,964,700				4,092,100
Other assets:
EDGE applications, net of accumulated amortization of $2,609,200 and $2,288,900 at September 26, 2014 and December 27, 2013, respectively			2,622,500				1,817,100
Deferred tax asset			56,600				266,500
Capitalized debt issuance costs			47,000				57,300
Total long-term assets			7,690,800				6,233,000
Total assets		$	17,480,900			$	14,001,500
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade		$	5,194,400			$	5,692,700
Accrued payroll and bonuses			235,900				721,200
Other accrued expenses			298,200				302,000
Deferred rent			175,400				20,100
Deferred revenue and customer deposits			3,343,000				2,733,500
Notes payable, current portion			619,400				119,400
Total current liabilities			9,866,300				9,588,900
Long-term liabilities:
Notes Payable			5,621,000				2,669,500
Total long-term liabilities			5,621,000				2,669,500
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued or outstanding at September 26, 2014 and December 27, 2013			0				0
Common stock, $.001 par value; 70,000,000 shares authorized; 16,479,074 and 16,279,074 shares issued at September 26, 2014 and December 27, 2013, respectively; 16,356,583 and 16,156,583 shares outstanding at September 26, 2014 and December 27, 2013, respectively			16,600				16,400
Additional paid-in capital			3,877,900				3,764,100
Treasury stock, 122,491 shares			(9,000	)			(9,000	)
Accumulated deficit			(1,943,200	)			(2,007,600	)
Accumulated other comprehensive income/(loss)			51,300				(20,800	)
Total stockholders' equity			1,993,600				1,743,100
Total liabilities and stockholders' equity		$	17,480,900			$	14,001,500

 

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

 

  

Jagged Peak, Inc.

 Consolidated Statements of Comprehensive Income

(Unaudited)

 

		Thirteen Week Period Ended								Thirty-Nine Week Period Ended
		September 26, 2014				September 27, 2013				September 26, 2014				September 27, 2013
Revenue		$	15,141,000			$	11,319,900			$	42,856,500			$	32,388,200
Cost of revenue			12,333,700				8,982,300				35,822,400				25,743,200
Gross profit			2,807,300				2,337,600				7,034,100				6,645,000
Selling, general and administrative expenses			2,099,700				1,851,900				6,568,300				5,432,600
Income from operations			707,600				485,700				465,800				1,212,400
Other (expense) income, net			(53,900	)			23,900				(103,000	)			(38,000	)
Interest expense			(56,200	)			(51,300	)			(150,800	)			(155,700	)
Income before tax expense			597,500				458,300				212,000				1,018,700
Provision for income tax expense			(225,900	)			(179,000	)			(147,600	)			(416,600	)
Net income		$	371,600			$	279,300			$	64,400			$	602,100
Other comprehensive income (loss)			52,800				(6,500	)			113,700				31,000
Tax (expense) benefit			(18,800	)			2,400				(41,600	)			(11,800	)
Other comprehensive income (loss), net of tax			34,000				(4,100	)			72,100				19,200
Comprehensive Income		$	405,600			$	275,200			$	136,500			$	621,300
Weighted average number of common shares outstanding -basic			16,356,583				16,156,583				16,356,583				16,156,583
Net income per share - basic		$	0.02			$	0.02			$	0.00			$	0.04
Weighted average number of common shares outstanding and common equivalent shares outstanding			18,221,396				17,750,829				18,221,396				17,665,156
Diluted income per common share		$	0.02			$	0.02			$	0.00			$	0.03

 

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

  

 

  

Jagged Peak, Inc.

Consolidated Statements of Changes in Stockholders' Equity

39 Weeks Ended September 26, 2014 and September 27, 2013

(Unaudited) 

 

		Common Stock Shares				Common Stock Amount				Additional Paid in Capital				Treasury Stock				Accumulated Deficit				Accumulated Other Compre- hensive Income/(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																							19,200				19,200
Net income for the period																			602,100								602,100
Balance, September 27, 2013			16,279,074			$	16,400			$	3,764,100			$	(9,000	)		$	(2,252,800	)		$	(25,300	)		$	1,493,400
Balance, December 27, 2013			16,279,074			$	16,400			$	3,764,100			$	(9,000	)		$	(2,007,600	)		$	(20,800	)		$	1,743,100
Change in fair value of interest rate swap																							8,000				8,000
Shares issued for ESOP contribution			200,000				200				113,800																114,000
Foreign currency translation adjustment																							64,100				64,100
Net income for the period																			64,400								64,400
Balance, September 26, 2014			16,479,074			$	16,600			$	3,877,900			$	(9,000	)		$	(1,943,200	)		$	51,300			$	1,993,600

  

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

  

 

 Jagged Peak, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

		39 Week Period Ended
		September 26, 2014				September 27, 2013
Operating activities
Net income		$	64,400			$	602,100
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and software amortization			770,000				490,800
Amortization of debt costs			32,100				55,400
Bad debt expense			216,600				24,300
Changes in:
Accounts receivable			(2,417,500	)			(866,100	)
Work in process			(91,900	)			(112,700	)
Other current assets			(212,200	)			(37,000	)
Other receivables			183,100				38,800
Deferred tax asset			156,400				389,700
Accounts payable and accrued expenses			(756,900	)			(479,200	)
Deferred rent			155,300				1,400
Deferred revenue and customer deposits			609,500				528,000
Net cash flows (used in) provided by operating activities			(1,291,100	)			635,500
Investing activities
Acquisition of property and equipment			(1,322,300	)			(558,200	)
Acquisition/development of software - EDGE applications			(1,125,700	)			(659,600	)
Cash flows used in investing activities			(2,448,000	)			(1,217,800	)
Financing activities
Net proceeds on term loan			2,000,000				0
Net proceeds on notes payable			1,541,000				780,000
Payments on term loan			(89,600	)			(89,500	)
Cash flows provided by financing activities			3,451,400				690,500
Net (decrease) increase in cash			(287,700	)			108,200
Cash, beginning of period			652,000				15,200
Effect of exchange rate changes on cash			(47,100	)			0
Cash, end of period		$	317,200			$	123,400
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	118,000			$	94,000
Cash paid during the period for taxes		$	33,800			$	38,000
Non-cash financing activities:
Issuance of stock to fund ESOP contribution		$	114,000			$	0

 

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

 

  

Jagged Peak, Inc.

Notes to the Unaudited Consolidated Financial Statements

For the 13 and 39 Week Periods Ended September 26, 2014 and September 27, 2013

 

 

1.     General Background Information

 

Jagged Peak, Inc. (the "Company" or "Jagged Peak") is a software and services company headquartered in Tampa, Florida, providing internally developed cloud-based enterprise e-commerce technology supporting the entire e-commerce life cycle including order, warehouse, and transportation management solutions. 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, locations, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, customer service, repair and reverse logistics, and marketing materials management, and automate other business processes through the use of the EDGE platform and its related software applications. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, healthcare, distribution, travel and tourism and manufacturing.

 

With the EDGE platform, 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 network of fulfillment centers throughout the United States and Canada; back office program management; payment processing; and a range of online marketing services.

 

Jagged Peak operates two warehouses in Florida, an expandable network of twenty independently owned fulfillment warehouses throughout North America, and one warehouse in the United Kingdom using the cloud-based EDGE platform. The EDGE application is able to automatically route orders to the optimal warehouse and transportation provider based on an established set of factors such as service, inventory, cost and priority. This enables the Company's clients to reduce customer wait times, while lowering overall delivery costs.

 

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 use the cloud-based EDGE platform to process orders for Jagged Peak clients.

 

The Company operates on a 52/53 week reporting year. Therefore, the period ended September 26, 2014 and the period ended September 27, 2013 each consists of 39 weeks.

 

2.     Significant Accounting Policies

 

Basis of Presentation

 

In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of (a) the consolidated financial position at September 26, 2014 and December 27, 2013 and (b) the consolidated statements of comprehensive income, changes in stockholders' equity and cash flows for the 39-week periods ended September 26, 2014 and September 27, 2013 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 27, 2013.

 

Use of Estimates

 

The Company prepares its financial statements in conformity with U.S. GAAP. 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.

 

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 policies, 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 $360,200 and $293,200 during the 13-week periods ended September 26, 2014 and September 27, 2013, respectively. The Company capitalized approximately $1,125,700 and $659,600 during the 39-week periods ended September 26, 2014 and September 27, 2013, respectively. Amortization expense related to capitalized software and charged to operations for the 13-week periods ended September 26, 2014 and September 27, 2013 was approximately $122,400 and $68,800, respectively. Amortization expense related to capitalized software and charged to operations for the 39-week periods ended September 26, 2014 and September 27, 2013 was approximately $320,300 and $181,800, respectively.

  

Concentration of Risk

 

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

  

 

Revenue from a single, multi-national customer with several brands amounted to approximately $12.9 million, or approximately 85% of total revenue, and approximately $9.6 million, or approximately 85% of total revenue, during the 13-week periods ended September 26, 2014 and September 27, 2013, respectively. Revenue from a single, multi-national customer with several brands amounted to approximately $37.6 million, or approximately 88% of total revenue, and approximately $28.3 million, or approximately 87% of total revenue, during the 39-week periods ended September 26, 2014 and September 27, 2013, respectively. Accounts receivable from this customer were approximately $6.5 million, or approximately 78% of total accounts receivable, and approximately $3.4 million or approximately 68% of total accounts receivable, at September 26, 2014 and December 27, 2013, respectively. The risk of this concentration is mitigated as the deposits from this customer at September 26, 2014 and at December 27, 2013 were approximately $2.8 million and $1.9 million, respectively.

 

Accounts receivable result primarily from the revenue from 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 $279,000 and $579,800 is considered necessary as of September 26, 2014 and December 27, 2013, 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. Depreciation expense was $175,100 and $112,400 for the 13-week periods ended September 26, 2014 and September 27, 2013, respectively, and $449,700 and $309,000 for the 39-week periods ended September 26, 2014 and September 27, 2013, 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			7 - 20
Warehouse equipment			3 - 10
Furniture and equipment			3 - 7
Computer equipment and software			1 - 7
Leasehold improvements			Lease term

  

  

Estimated Fair Value of Financial Instruments  

 

The aggregated net fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include 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 2011.

 

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 considers 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 2030.

 

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. Level 3 inputs include inputs that are not currently observable.

  

 

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

 

The functional currency of the Company's Canadian subsidiary, Jagged Peak Canada, Inc., 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. Foreign currency translation gains and losses are recorded as a component of other comprehensive income. Net gains and losses resulting from foreign exchange transactions are recorded as a component of other income (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 common stock that then shared in the Company's earnings. 

 

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.

 

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 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	)			0.30				0.30
Outstanding at December 27, 2013			2,260,782			$	0.01-0.25			$	0.13
Options granted			0				0				0
Options exercised			0				0				0
Options cancelled or expired			0				0				0
Outstanding at September 26, 2014			2,260,782			$	0.01-0.25			$	0.13
Exercisable at September 26, 2014			2,260,782			$	0.01-0.25			$	0.13
Exercisable at December 27, 2013			2,260,782			$	0.01-0.25			$	0.13

 

 The following table summarizes information about options outstanding and exercisable as of September 26, 2014:

 

	Outstanding and Exercisable Options
	Exercise Price				Number Outstanding				Number Exercisable				Weighted Average Remaining Life (years)				Weighted Average Price
	$	0.01				10,782				10,782				36.2			$	0.01
	$	0.13				2,150,000				2,150,000				1.6			$	0.13
	$	0.25				100,000				100,000				7.2			$	0.25

  

  

4.      Debt 

 

Notes payable consist of:

 

		September 26, 2014				December 27, 2013
5-year term loan related to purchase of warehouse		$	2,119,400			$	2,208,900
$5.0 million senior credit facility, two year revolving line of credit			2,121,000				580,000
$2.0 million, two year, term loan		$	2,000,000				-
Total notes payable			6,240,400				2,788,900
Less current portion			619,400				119,400
Long-term portion of notes payable		$	5,621,000			$	2,669,500

  

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 (“Mortgage”) amortized over 20 years. Principal and interest are due monthly. The Mortgage is secured by a first priority lien on substantially all of the Company’s assets. Concurrent with the Mortgage, the Company entered into an interest rate swap agreement that expires in June 2017 concurrent with the maturity of the Company's Mortgage. 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 0.15% as of September 26, 2014. The swap agreement qualifies as an "effective" hedge under U.S. GAAP. As of September 26, 2014, the fair market value of the interest rate swap included in other accrued expenses was approximately $21,400.

 

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 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 one-month LIBOR plus 2.50%. Prior to this Amendment, borrowings under the Facility bore interest at a rate equal to an applicable margin of one-month 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.

  

  

On August 27, 2013, the Company amended the Facility to increase the borrowing capacity to $5.0 million and to extend the maturity date to August 27, 2015.

 

On September 5, 2014, the Company amended the Facility to extend the maturity date to September 5, 2016.

 

On September 5, 2014 the Company entered into a term loan with Fifth Third Bank to fund operations. The term loan (“Term Loan”) provides for $2.0 million at an interest rate of one-month LIBOR plus 2.50% amortized over 4 years. One-month LIBOR was 0.15% as of September 26, 2014. Principal and interest are due monthly. The Term Loan matures in September 2018. The Term Loan is secured by a first priority lien on substantially all of the Company’s assets.

 

The amount available for borrowing under the Facility was $2,879,000 and $4,420,000 as of September 26, 2014 and December 27, 2013, respectively.

  

  

5.    Related Party Transaction

 

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 27, 2013.

  

 

PART I - FINANCIAL INFORMATION

 

 

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

 

This discussion is intended to further the reader's understanding of the Company's financial condition and results of operations and should be read in conjunction with the Company's financial statements and related notes included elsewhere herein. This discussion also contains forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of the risks and uncertainties set forth elsewhere in this Quarterly Report and in the Company's other SEC filings. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. The Company is not party to any transactions that would be considered "off balance sheet" pursuant to disclosure requirements under the SEC's Item 303(c) of Regulation S-K.

 

Overview

 

Jagged Peak, Inc. (the "Company" or "Jagged Peak") is a software and services company headquartered in Tampa, Florida, providing internally developed cloud-based enterprise e-commerce technology supporting the entire e-commerce life cycle including order, warehouse, and transportation management solutions. 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, locations, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, customer service, repair and reverse logistics, and marketing materials management, and automate other business processes through the use of the EDGE platform and its related software applications. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, healthcare, distribution, travel and tourism and manufacturing.

 

With the EDGE platform, 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 network of fulfillment centers throughout the United States and Canada; back office program management; payment processing; and a range of online marketing services.

 

Jagged Peak operates two warehouses in Florida, an expandable network of twenty independently owned fulfillment warehouses throughout North America, and one warehouse in the United Kingdom using the cloud-based EDGE platform. The EDGE application is able to automatically route orders to the optimal warehouse and transportation provider based on an established set of factors such as service, inventory, cost and priority. This enables the Company's clients to reduce customer wait times, while lowering overall delivery costs.

 

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 use the cloud-based EDGE platform to process orders for Jagged Peak clients.

 

The Company operates on a 52/53 week reporting year. Therefore, the period ended September 26, 2014 and the period ended September 27, 2013 each consist of 39 weeks.

  

  

RESULTS OF OPERATIONS

For the 13-week period ended September 26, 2014 compared to the 13-week period ended September 27, 2013

 

Revenues increased $3,821,100, or 34%, to $15,141,000 for the 13-week period ended September 26, 2014, as compared to $11,319,900 for the 13-week period ended September 27, 2013. This increase is the result of higher e-commerce order processing volume. Revenues from implementation of new client sites and on-going development for existing clients were consistent across these periods.

 

Cost of revenue, which consists primarily of labor, fulfillment operations and facilities costs, increased by $3,351,400, or 37%, to $12,333,700 for the 13-week period ended September 26, 2014, as compared to $8,982,300 for the 13-week period ended September 27, 2013. As a percentage of revenue, cost of revenue was 81% for the 13-week period ended September 26, 2014, as compared to 79% for the 13-week period ended September 27, 2013. This increase is primarily related to the increase in fulfillment employees and contract labor needed to manage order growth and fulfillment-related costs incurred as part of the expanded warehouse space. 

 

Selling, general and administrative expenses increased by $247,800, or 13%, to $2,099,700 for the 13-week period ended September 26, 2014, as compared to $1,851,900 for the 13-week period ended September 27, 2013. This increase was primarily related to increases in staff costs due to additional employees needed to grow client support teams and the rent of the expanded warehouse space.

 

Interest expense increased by $4,900 to $56,200 for the 13-week period ended September 26, 2014, as compared to $51,300 for the 13-week period ended September 27, 2013.

 

The Company realized income before the provision for income taxes of $597,500 for the 13-week period ended September 26, 2014, as compared to income before provision for income taxes of $458,300 for the 13-week period ended September 27, 2013.

 

Income tax expense was $225,900 for the 13-week period ended September 26, 2014 compared to an income tax expense of $179,000 for the 13-week period ended September 27, 2013. Differences between the taxable income and the effective tax rate used for 2014 and 2013, as compared to the U.S. federal statutory rate, are primarily due to permanent differences and taxes on foreign operations. During the quarter ended September 26, 2014 the Company evaluated the availability of the net operating loss carryforward balance. Based on this evaluation, the Company made a redetermination of amounts available and the related valuation allowance. As of the quarter ended September 26, 2014, the Company has a remaining U.S. (federal and state) net operating loss carry forwards of 1,326,600 which does not begin to expire until 2033. This net operating loss carry forward is fully reserved. The Company also has a Canadian net operating loss carry forward of $1,962,300 which does not begin to expire until 2030. 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 $371,600 for the 13-week period ended September 26, 2014, compared with net income of $279,300 for the 13-week period ended September 27, 2013.

 

Other income and expense consists of foreign currency gain or losses on transactions. Other Comprehensive income and loss is the result of changes in the value of the swap agreement and foreign currency translation gain or losses.

 

Basic income per share from operations for the 13-week period ended September 26, 2014 was $0.02 per weighted average share, compared with basic income of $0.02 per weighted average share for the 13-week period ended September 27, 2013.

  

  

For the 39-week period ended September 26, 2014 compared to the 39-week period ended September 27, 2013

 

Revenues increased $10,468,300, or 32%, to $42,856,500 for the 39-week period ended September 26, 2014, as compared to $32,388,200 for the 39-week period ended September 27, 2013. This increase is the result of higher e-commerce order processing volume. Revenues from implementation of new client sites and on-going development for existing clients were consistent across these periods.

 

Cost of revenue, which consists primarily of labor, fulfillment operations and facilities costs, increased by $10,079,200, or 39%, to $35,822,400 for the 39-week period ended September 26, 2014, as compared to $25,743,200 for the 39-week period ended September 27, 2013. As a percentage of revenue, cost of revenue was 84% for the 39-week period ended September 26, 2014, as compared to 79% for the 39-week period ended September 27, 2013. This increase is primarily related to the increase in fulfillment employees and contract labor needed to manage order growth and fulfillment-related costs incurred as part of the expanded warehouse space. 

 

Selling, general and administrative expenses increased by $1,135,700, or 21%, to $6,568,300 for the 39-week period ended September 26, 2014, as compared to $5,432,600 for the 39-week period ended September 27, 2013. This increase was primarily related to increases in staff costs due to additional employees needed to grow client support teams and the rent of the expanded warehouse space. 

 

Interest expense decreased by $4,900 to $150,800 for the 39-week period ended September 26, 2014, as compared to $155,700 for the 39-week period ended September 27, 2013.

 

The Company realized income from operations before provision for income taxes of $212,000 for the 39-week period ended September 26, 2014, as compared to income before provision for income taxes of $1,018,700 for the 39-week period ended September 27, 2013.

 

Income tax expense was $147,600 for the 39-week period ended September 26, 2014 compared to an income tax expense of $416,600 for the 39-week period ended September 27, 2013. The decrease in income tax expense is a function of the Company’s pre-tax net income. Differences between the taxable income and the effective tax rate used for 2014 and 2013, as compared to the U.S. federal statutory rate, are primarily due to permanent differences and taxes on foreign operations. During the quarter ended September 26, 2014 the Company evaluated the availability of the net operating loss carryforward balance. Based on this evaluation, the Company made a redetermination of amounts available and the related valuation allowance. As of quarter ended September 26, 2014 the Company has a remaining U.S. (federal and state) net operating loss carry forwards of $1,326,600 which does not begin to expire until 2033. The Company also has a Canadian net operating loss carry forward of $1,962,300 which does not begin to expire until 2030. 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 $64,400 for the 39-week period ended September 26, 2014, compared with net income of $602,100 for the 39-week period ended September 27, 2013.

 

Other income and expense consists of foreign currency gain or losses on transactions. Other comprehensive income and loss is the result of changes in the value of the swap agreement and foreign currency translation gain or losses.

 

Basic income per share from operations for the 39-week period ended September 26, 2014 was $0.00 per weighted average share, compared with basic income of $0.04 per weighted average share for the 39-week period ended September 27, 2013.

 

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 39-week period ended September 26, 2014, the Company's operations used cash of approximately $1,291,300. Cash used in operating activities increased primarily due to an increase in the accounts receivable balance and a decrease in the accounts payable and accrued liabilities balances. The increase in accounts receivable and decrease in accounts payable are the primarily result of timing of collections from clients and payments to vendors.

 

Net cash used in the Company's investing activities totaled $2,448,000 for the 39-week period ended September 26, 2014 consisting of acquisition of warehouse equipment, computer hardware, and building improvements to the company owned warehouse in St. Petersburg and enhancements to the Company's software. The Company expects total capital expenditures during the fourth quarter of the year 2014 will be approximately $0.5 million to complete the new warehouse infrastructure and additional software enhancements.

 

The Company's financing activities provided cash of $3,451,000 for the 39-week period ended September 26, 2014 consisting of net borrowings on its line of credit and the $2.0 million term loan. The term loan and borrowings on the line of credit were used to fund operations.

 

The Company's primary uses of cash flow were to fund operations and borrowings under the Fifth Third Bank credit facility.

 

On September 5, 2014 the Company entered into a term loan with Fifth Third Bank. The term loan provides for $2.0 million at an interest rate of LIBOR plus 2.5%. The term loan matures in September 2018.

 

On March 23, 2012, the Company entered into a Senior Credit Facility with Fifth Third Bank (the "Facility"). The Facility initially provided for a revolving line of credit with a maturity of two years and a maximum borrowing capacity of $3.0 million. 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.

 

On March 22, 2013, the Company amended the Facility to reduce the interest rate to an applicable margin of one-month LIBOR plus 2.50%. Prior to this Amendment, borrowings under the Facility bore interest at a rate equal to an applicable margin of one-month LIBOR plus 3.00%. In addition to paying monthly interest on outstanding principal under the Facility, the Company is required to pay a quarterly unused line fee of 0.25% 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.

 

On August 27, 2013, the Company amended the Facility to increase the borrowing capacity to $5.0 million and to extend the maturity date to August 27, 2015. On September 5, 2014, the Company amended the Facility to extend the maturity date to September 5, 2016.

 

One-month LIBOR was approximately 0.15% as of September 26, 2014.

 

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. The anticipated debt maturity in 2016, 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.

 

At September 26, 2014, the balance outstanding on the Facility was approximately $2,121,000.

  

 

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.

 

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 policies, 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 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.

 

Revenue from a single, multi-national customer with several brands amounted to approximately $12.9 million, or approximately 85% of total revenue, and approximately $9.6 million, or approximately 85% of total revenue, during the 13-week periods ended September 26, 2014 and September 27, 2013, respectively. Revenue from a single, multi-national customer with several brands amounted to approximately $37.6 million, or approximately 88% of total revenue, and approximately $28.3 million, or approximately 87% of total revenue, during the 39-week periods ended September 26, 2014 and September 27, 2013, respectively. Accounts receivable from this customer were approximately $6.5 million, or approximately 78% of total accounts receivable, and approximately $3.4 million, or approximately 68% of total accounts receivable, at September 26, 2014 and December 27, 2013, respectively. The risk of this concentration is mitigated as the deposits from this customer at September 26, 2014 and at December 27, 2013 were approximately $2.8 million and $1.9 million, respectively.

 

Accounts receivable result primarily from the revenue from 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 receivable, 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 $279,000 and $579,800 is considered necessary as of September 26, 2014 and December 27, 2013, 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 considers 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 2030.

 

USE OF U.S. GAAP AND NON-GAAP MEASURES

 

In addition to results presented in accordance with U.S. 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 non-cash compensation expense. For each non-GAAP financial measure, the Company has presented the most directly comparable U.S. GAAP financial measure and has reconciled the non-GAAP financial measure with such comparable U.S. 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 39-week period ended September 26, 2014 was approximately $1,132,800 compared to approximately $1,665,200 for the 39-week period ended September 27, 2013. The Company defines Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization and non-cash compensation. To provide consistent comparisons of year-over-year Adjusted EBITDA, the following reconciliation is provided:

 

		For the 39-week period ended
		September 26, 2014				September 27, 2013
Net income as reported in accordance with US GAAP		$	64,400			$	602,100
Income tax expense			147,600				416,600
Interest expense			150,800				155,700
Depreciation and software amortization			770,000				490,800
Non-cash compensation			0				0
Adjusted EBITDA		$	1,132,800			$	1,665,200

 

 

  

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 September 26, 2014. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, 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 September 26, 2014.

 

(b)

Changes in Internal Control over Financial Reporting. No change in the Company's internal control over financial reporting occurred during the quarter ended September 26, 2014, 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

 

None.

 

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:

 

10.29		Loan Agreement – Two year term loan dated September 5, 2014 between the Company and Fifth Third Bank
31.1		Certification of the Chief Executive Officer dated November 10, 2014
31.2		Certification of the Chief Financial Officer dated November 10, 2014
32.1		Certification of the Chief Executive Officer, pursuant to 18 U.S.C. section 1350, dated November 10, 2014
32.2		Certification of the Chief Financial Officer, pursuant to 18 U.S.C. section 1350, dated November 10, 2014
Exhibit 101.1		Interactive Data File:
101.1NS		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		November 10, 2014
Paul B. Demirdjian		Date
Chairman of the Board of Directors, Chief Executive Officer (Principal Executive Officer)
/s/ Albert Narvades		November 10, 2014
Albert Narvades		Date
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary (Principal Financial Officer)

 

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