JAGGED PEAK, INC. - FORM 10-Q

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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 March 27, 2015

[ ] 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 ☑ 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 16,356,583 shares of common stock, par value $0.001 per share, outstanding as of May 11, 2015.

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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	15

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	21

Item 4.	Controls and Procedures	21

Part II - Other Information		21

Item 1.	Legal Proceedings	21

Item 1A.	Risk Factors	21

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 3.	Defaults Upon Senior Securities	21

Item 4.	Mine Safety Disclosures	22

Item 5.	Other Information	22

Item 6.	Exhibits	22

Signatures		22

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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 27, 2015

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	6-14

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Jagged Peak, Inc.

Consolidated Balance Sheets

	March 27, 2015 (Unaudited)			December 26, 2014 (Audited)
Assets
Current assets:
Cash	$	639,600		$	315,900
Accounts receivable, net of allowance for doubtful accounts of $563,100 and $513,100 at March 27, 2015 and December 26, 2014, respectively		11,332,400			12,171,400
Other receivables		36,800			54,600
Work in process		302,100			71,900
Deferred tax asset		935,500			792,200
Other current assets		798,900			529,500
Total current assets		14,045,300			13,935,500

Property and equipment, net of accumulated depreciation of $1,475,800 and $1,296,600 at March 27, 2015 and December 26, 2014, respectively		4,796,600			4,893,900

Other assets:
EDGE applications, net of accumulated amortization of $2,892,500 and $2,744,500 at March 27, 2015 and December 26, 2014, respectively		3,166,600			2,863,600
Capitalized debt issuance costs		29,200			38,100
Total long-term assets		7,992,400			7,795,600

Total assets	$	22,037,700		$	21,731,100

Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade	$	6,520,400		$	8,119,900
Accrued payroll and bonuses		588,500			895,700
Other accrued expenses		691,000			370,100
Deferred rent		323,100			184,800
Deferred revenue and customer deposits		3,449,600			3,488,400
Notes payable, current portion		619,400			619,400
Total current liabilities		12,192,000			13,678,300

Long-term liabilities:
Notes Payable, net of current portion		6,611,200			5,286,100
Deferred tax liability		870,600			585,000
Total long-term liabilities		7,481,800			5,871,100

Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued or outstanding at March 27, 2015 and December 26, 2014		0			0
Common stock, $.001 par value; 70,000,000 shares authorized; 16,479,074 shares issued at March 27, 2015 and December 26, 2014; 16,356,583 shares outstanding at March 27, 2015 and December 26, 2014		16,600			16,600
Additional paid-in capital		3,877,900			3,877,900
Treasury stock, 122,491 shares		(9,000	)		(9,000	)
Accumulated deficit		(1,656,000	)		(1,776,700	)
Accumulated other comprehensive income		134,400			72,900
Total stockholders' equity		2,363,900			2,181,700
Total liabilities and stockholders' equity	$	22,037,700		$	21,731,100

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

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Jagged Peak, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Thirteen Week Period Ended
	March 27, 2015			March 28, 2014

Revenue	$	16,151,300		$	14,090,700

Cost of revenue		12,745,400			11,773,800

Gross profit		3,405,900			2,316,900

Selling, general and administrative expenses		3,094,500			2,058,000

Income from operations		311,400			258,900

Other expense, net		(47,700	)		(92,800	)
Interest expense		(60,200	)		(46,800	)
Income before tax expense		203,500			119,300

Provision for income tax expense		(82,800	)		(59,100	)

Net income	$	120,700		$	60,200

Other comprehensive income		98,400			93,600
Tax expense		(36,900	)		(34,800	)
Other comprehensive income net of tax		61,500			58,800

Comprehensive Income	$	182,200		$	119,000

Weighted average number of common shares outstanding - basic	$	16,356,583		$	16,356,583

Net income per share - basic	$	0.01		$	0.00

Weighted average number of common shares outstanding and common equivalent shares outstanding		18,183,488			18,235,145

Diluted income per common share	$	0.01		$	0.00

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

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Jagged Peak, Inc.

Consolidated Statements of Changes in Stockholders' Equity

13 Weeks Ended March 27, 2015 and March 28, 2014

(Unaudited)

	Common Stock Shares		Common Stock Amount		Additional Paid in Capital		Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive Income/(Loss)			Total

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														2,400			2,400

Shares issued for ESOP contribution		200,000		200		113,800											114,000

Foreign currency translation adjustment														56,400			56,400

Net income for the period											60,200						60,200

Balance, March 28, 2014		16,479,074	$	16,600	$	3,877,900	$	(9,000	)	$	(1,947,400	)	$	38,000		$	1,976,100


Balance, December 26, 2014		16,479,074	$	16,600	$	3,877,900	$	(9,000	)	$	(1,776,700	)	$	72,900		$	2,181,700

Change in fair value of interest rate swap														4,000			4,000

Foreign currency translation adjustment														57,500			57,500

Net income for the period											120,700						120,700

Balance, March 27, 2015		16,479,074	$	16,600	$	3,877,900	$	(9,000	)	$	(1,656,000	)	$	134,400		$	2,363,900

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

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Jagged Peak, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	13 Week Period Ended
	March 27, 2015			March 28, 2014
Operating activities
Net income	$	120,700		$	60,200
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and software amortization		327,200			213,400
Amortization of debt costs		8,200			11,000
Non-cash compensation expense		77,200			0
Bad debt expense		50,000			0
Changes in:
Accounts receivable		1,083,500			168,300
Work in process		(230,200	)		1,500
Other current assets		(269,400	)		(281,100	)
Other receivables		17,800			(147,200	)
Deferred tax asset		(61,700	)		59,000
Deferred tax liability		285,600			0
Accounts payable and accrued expenses		(2,301,300	)		(1,575,200	)
Deferred rent		138,300			67,100
Deferred revenue and customer deposits		(38,800	)		867,000
Net cash flows used in operating activities		(792,900	)		(556,000	)

Investing activities
Acquisition of property and equipment		(81,900	)		(154,700	)
Acquisition/development of software - EDGE applications		(451,100	)		(221,400	)
Cash flows used in investing activities		(533,000	)		(376,100	)

Financing activities
Net proceeds on line of credit		1,480,000			760,000
Payments on loans		(154,900	)		(29,800	)
Cash flows provided by financing activities		1,325,100			730,200

Net decrease in cash		(800	)		(201,900	)

Cash, beginning of period		315,900			652,000
Effect of exchange rate changes on cash		324,500			(45,000	)

Cash, end of period	$	639,600		$	405,100

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	51,000		$	36,000
Cash paid during the period for taxes	$	2,200		$	33,000
Non-cash financing activities:
Issuance of stock to fund ESOP contribution	$	0		$	114,000

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

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Jagged Peak, Inc.

Notes to the Unaudited Consolidated Financial Statements

For the 13 Week Periods Ended March 27, 2015 and March 28, 2014

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 twenty-five fulfillment centers throughout the United States, Canada, and the United Kingdom; back office program management; payment processing; and a range of online marketing services.

Jagged Peak operates two warehouses in Florida, and utilizes an expandable network of twenty-two 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 March 27, 2015 and the period ended March 28, 2014 each consists 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 27, 2015 and December 26, 2014 and (b) the consolidated statements of comprehensive income, changes in stockholders' equity and cash flows for the 13-week periods ended March 27, 2015 and March 28, 2014 have been made.

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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 26, 2014.

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 and the United Kingdom. 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.

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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, is 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 $451,000 and $221,000 during the 13-week periods ended March 27, 2015 and March 28, 2014, respectively. Amortization expense related to capitalized software and charged to operations for the 13-week periods ended March 27, 2015 and March 28, 2014 was approximately $148,000 and $92,000, 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 $14.2 million, or approximately 88% of total revenue, and approximately $12.1 million, or approximately 86% of total revenue, during the 13-week periods ended March 27, 2015 and March 28, 2014, respectively. Accounts receivable from this customer were approximately $9.0 million, or approximately 80% of net accounts receivable and approximately $10.0 million, or approximately 82% of net accounts receivable, at March 27, 2015 and December 26, 2014, respectively. The risk of this concentration is mitigated as the deposits from this customer at March 27, 2015 and at December 26, 2014 were approximately $3.0 million and $2.8 million, respectively.

Accounts receivable result primarily from the sales of e-commerce and fulfillment services to a variety of customers. Accounts receivable are stated at cost less an allowance for doubtful accounts. The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts 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 $563,100 and $513,100 is considered necessary as of March 27, 2015 and December 26, 2014, 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 $179,200 and $121,400 for the 13-week periods ended March 27, 2015 and March 28, 2014, 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

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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 2029.

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 the Mortgage 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.

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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 and restricted stock 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 grants 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 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.

On November 18, 2014, the Company granted 1,850,000 restricted shares of Jagged Peak to five executives and one director. The restricted stock vests ratably on an annual basis over a three-year period. The fair value of the common stock is $0.65 per share, which was the market value of the common stock at the date of grant, and is recognized on a straight-line basis over the vesting period.

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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 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		0.0
Outstanding at December 26, 2014		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 March 27, 2015		2,260,782	$	0.01-0.25	$	0.13

Exercisable at March 27, 2015		2,260,782	$	0.01-0.25	$	0.13
Exercisable at December 26, 2014		2,260,782	$	0.01-0.25	$	0.13

The following table summarizes information about options outstanding and exercisable as of March 27, 2015:

Outstanding and Exercisable Options
Exercise Price		Number Outstanding		Number Exercisable		Weighted Average Remaining Life (years)		Weighted Average Price
$	0.01		10,782		10,782		35.7	$	0.01
$	0.13		2,150,000		2,150,000		1.1	$	0.13
$	0.25		100,000		100,000		6.7	$	0.25

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Debt

Notes payable consist of:

	March 27, 2015		December 26, 2014

5-year term loan related to purchase of warehouse	$	2,059,600	$	2,089,500

$5.0 million senior credit facility, two year revolving line of credit		3,421,000		1,941,000

$2.0 million, two year, term loan	$	1,750,000		1,875,000

Total notes payable		7,230,600		5,905,500

Less current portion		619,400		619,400

Long-term portion of notes payable	$	6,611,200	$	5,286,100

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 making investments and loans.

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 0.18% as of March 27, 2015. The swap agreement qualifies as an "effective" hedge under U.S. GAAP. As of March 27, 2015, the fair market value of the interest rate swap included in other accrued expenses was approximately $30,100.

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.

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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 0.18% as of March 27, 2015. Principal and interest are due monthly. The Term Loan matures in September 2018. The Term Loan and Mortgage are secured by a first priority lien on substantially all of the Company’s assets.

The amount available for borrowing under the Facility was $1,579,000 and $3,059,000 as of March 27, 2015 and December 26, 2014, respectively.

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5. Related Party Transactions

None.

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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

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, and utilizes an expandable network of twenty-two 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.

The Company operates on a 52/53 week reporting year. Therefore, the period ended March 27, 2015 and the period ended March 28, 2014 each consist of 13 weeks.

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RESULTS OF OPERATIONS

For the 13-week period ended March 27, 2015 compared to the 13-week period ended March 28, 2014

Revenues increased $2,060,600, or 15%, to $16,151,300 for the 13-week period ended March 27, 2015, as compared to $14,090,700 for the 13-week period ended March 28, 2014. 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 $971,600, or 8%, to $12,745,400 for the 13-week period ended March 27, 2015, as compared to $11,773,800 for the 13-week period ended March 28, 2014. As a percentage of revenue, cost of revenue was 79% for the 13-week period ended March 27, 2015, as compared to 84% for the 13-week period ended March 28, 2014. This decrease is primarily related to improved management of fulfillment labor utilizing less full time employees.

Selling, general and administrative expenses increased by $1,036,500, or 50%, to $3,094,500 for the 13-week period ended March 27, 2015, as compared to $2,058,000 for the 13-week period ended March 28, 2014. This increase was primarily related to accelerated hiring of experienced managers to support our current and expected growth.

Interest expense increased by $13,400 to $60,200 for the 13-week period ended March 27, 2015, as compared to $46,800 for the 13-week period ended March 28, 2014.

The Company realized income before the provision for income taxes of $203,500 for the 13-week period ended March 27, 2015, as compared to income before provision for income taxes of $119,300 for the 13-week period ended March 28, 2014.

Income tax expense was $82,800 for the 13-week period ended March 27, 2015 compared to an income tax expense of $59,100 for the 13-week period ended March 28, 2014. Differences between the taxable income and the effective tax rate used for 2015 and 2014, as compared to the U.S. federal statutory rate, are primarily due to permanent differences and taxes on foreign operations. As of the quarter ended March 27, 2015 the Company has a remaining U.S. (federal and state) net operating loss carry forwards of $1,370,700, which will expire between 2031 and 2033. The Company also has a Canadian net operating loss carry forward of $2,232,300 which does not begin to expire until 2029. Management believes there will be sufficient future earnings to support the more than likely realization of deferred tax assets in excess of existing taxable temporary differences. The amount of deferred tax assets considered realizable, however, could be reduced in the near-term if estimates of future taxable income are reduced.

The Company realized net income of $120,700 for the 13-week period ended March 27, 2015, compared with net income of $60,200 for the 13-week period ended March 28, 2014.

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 March 27, 2015 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 28, 2014.

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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 27, 2015, the Company's operations used cash of approximately $792,900. 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 primarily the result of timing of collections from clients and payments to vendors.

Net cash used in the Company's investing activities totaled $533,000 for the 13-week period ended March 27, 2015 consisting of acquisition of warehouse equipment, computer hardware, building improvements to the company-owned warehouse in St. Petersburg, and enhancements to the Company's software. The Company expects total capital expenditures for the year 2015 will be approximately $2,500,000 to $3,000,000.

The Company’s financing activities provided cash of $1,325,100 for the 13-week period ended March 27, 2015 consisting of net borrowings on the Fifth Third credit facility (the “Facility”) and Term Loan and payments on its Term Loan and Mortgage.

The Company’s primary sources of cash flow were from borrowings under the “Facility” and the Term Loan, and cash from operations.

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 approximately 0.18% as of March 27, 2015. The swap agreement qualifies as an "effective" hedge under U.S. GAAP. As of March 27, 2015, the fair market value of the interest rate swap included in other accrued expenses was approximately $30,100.

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 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. One-month LIBOR was approximately 0.18% as of March 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 provides for a principal amount of $2.0 million at an interest rate of one-month LIBOR plus 2.50% amortized over 4 years. One-month LIBOR was approximately 0.18% as of March 27, 2015. Principal and interest are due monthly. The Term Loan matures in September 2018. The Term Loan and Mortgage are secured by a first priority lien on substantially all of the Company’s assets.

At March 27, 2015, the balances outstanding on the Facility, Mortgage, and the Term Loan were $2,059,600, $3,421,000 and $1,750,000, respectively.

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 of the Facility 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.

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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

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.

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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.

Revenue from a single, multi-national customer with several brands amounted to approximately $14.2 million, or approximately 88% of total revenue, and approximately $12.1 million, or approximately 86% of total revenue, during the 13-week periods ended March 27, 2015 and March 28, 2014, respectively. Accounts receivable from this customer were approximately $9.0 million, or approximately 80% of total accounts receivable, and approximately $10.0 million, or approximately 82% of total accounts receivable, at March 27, 2015 and December 26, 2014, respectively. The risk of this concentration is mitigated as the deposits from this customer at March 27, 2015 and at December 26, 2014 were approximately $3.0 million and $2.8 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 $563,100 and $513,100 is considered necessary as of March 27, 2015 and December 26, 2014, 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.

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Income Taxes

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 13-week period ended March 27, 2015 was approximately $668,100 compared to approximately $379,500 for the 13-week period ended March 28, 2014. 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 13-week period ended
	March 27, 2015		March 28, 2014
Net income as reported in accordance with US GAAP	$	120,700	$	60,200
Income tax expense		82,800		59,100
Interest expense		60,200		46,800
Depreciation and software amortization		327,200		213,400
Non-cash compensation		77,200		0
Adjusted EBITDA	$	668,100	$	379,500

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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 27, 2015. 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 March 27, 2015.

(b)

Changes in Internal Control over Financial Reporting. No change in the Company's internal control over financial reporting occurred during the quarter ended March 27, 2015, 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.

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Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None.

Item 6. Exhibits

(a)	Exhibits included herewith are:

31.1		Certification of the Chief Executive Officer dated May 11, 2015

31.2		Certification of the Chief Financial Officer dated May 11, 2015

32.1		Certification of the Chief Executive Officer, pursuant to 18 U.S.C. section 1350, dated May 11, 2015

32.2		Certification of the Chief Financial Officer, pursuant to 18 U.S.C. section 1350, dated May 11, 2015

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		May 11, 2015
Paul B. Demirdjian		Date
Chairman of the Board of Directors, Chief Executive Officer (Principal Executive Officer)

/s/ Albert Narvades		May 11, 2015
Albert Narvades		Date
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary (Principal Financial Officer)

JAGGED PEAK, INC. - FORM 10-Q - May 11, 2015

Attached files

JAGGED PEAK, INC. Reports