10-Q 1 jpi_10q-092812.htm FORM 10-Q jpi_10q-092812.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

 
FORM 10-Q
     


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

For the quarterly period ended September 28, 2012
 
OR

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

For the transition period from                  to                  .
 
Commission file number: 000-31715
 

Jagged Peak, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Nevada
91-2007478
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
3000 Bayport Drive, Suite 250, Tampa, FL 33607
 (Address of principal executive offices, including zip code)

 (813) 637-6900
(Registrant’s telephone number, including area code)
 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ     No o

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

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨No x
The Registrant had 16,305,961 shares of common stock, par value $0.001 per share, outstanding as of  November 7, 2012.
 


 
 
Page 1 of 28

 

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

 
Page 2 of 28

 

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 28, 2012

Contents
 
 

Unaudited Consolidated Financial Statements
 
 
Consolidated Balance Sheets
1
Consolidated Statements of Comprehensive Income
2
Consolidated Statement of Changes in Stockholders’ Equity
3
Consolidated Statements of Cash Flows
4
Notes to the Unaudited Consolidated Financial Statements
5-14
 
 
Page 3 of 28

 

Jagged Peak, Inc.
Consolidated Balance Sheets
   
September 28,
2012
(Unaudited)
   
December 30, 2011
(Audited)
 
Assets
           
Current assets:
           
Cash
  $ 344,400     $ 1,542,300  
Accounts receivable, net of allowance for doubtful accounts of $302,400 at September 28, 2012 and $298,000 at December 30, 2011
    3,673,900       2,825,700  
Other receivables, net of allowance of $0 and $35,000 at September 28, 2012 and December 30, 2011
    336,500       468,200  
Work in process, net of allowance of $30,000 at September 28 , 2012 and December 30, 2011
    62,600       120,400  
Deferred tax asset – current portion
    447,300       423,000  
Other current assets
    349,700       358,400  
Total current assets
    5,214,400       5,738,000  
                 
Property and equipment, net of accumulated depreciation of $1,878,200 and $1,932,200 at September 28, 2012 and December 30, 2011, respectively
    3,780,200       631,900  
                 
Other assets:
               
EDGE applications, net of accumulated amortization of $1,977,400 and $1,864,800 at September 28, 2012 and December 30, 2011, respectively
    937,400       627,000  
Deferred tax asset
    976,100       1,129,800  
Total long-term assets
    5,693,700       2,388,700  
Total assets
  $ 10,908,100     $ 8,126,700  
                 
Liabilities and Stockholders' Equity
               
Current liabilities:
               
Accounts payable, trade
  $ 3,271,200     $ 3,731,100  
Accrued payroll and bonuses
    230,900       608,900  
Other accrued expenses
    312,600       67,400  
Deferred rent
    16,700       22,800  
Notes payable, current portion
    119,400       1,350,000  
Deferred revenue and customer deposits
    2,009,200       1,799,000  
Capital lease
    0       239,500  
Total current liabilities
    5,960,000       7,818,700  
                 
Long-term liabilities:
               
Long-term debt
    4,198,800       0  
Total long-term liabilities
    4,198,800       0  
                 
Temporary equity – Common stock, subject to put rights, 0 shares at September 28, 2012 and 1,000,000 shares at December 30, 2011 respectively
    0       170,000  
                 
Stockholders' equity:
               
Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued or outstanding at September 28, 2012 and December 30, 2011
    0       0  
Common stock, $.001 par value; 70,000,000 shares authorized; 16,305,961 shares issued and 16,183,470 outstanding at September 28, 2012 and December 30, 2011
    16,400       16,400  
Additional paid-in capital
    3,764,100       3,518,900  
Treasury stock, 122,491 shares
    (9,000 )     (9,000 )
Accumulated deficit
    (2,972,800 )     (3,388,300 )
Accumulated other comprehensive loss
    (49,400 )     0  
Total stockholders' equity
    749,300       138,000  
Total liabilities and stockholders' equity
  $ 10,908,100     $ 8,126,700  

The accompanying notes are an integral part of the financial statements.
 
 
Page 4 of 28

 
 
Jagged Peak, Inc.
 
Consolidated Statements of Comprehensive Income (Unaudited)

   
Thirteen Week Period Ended
   
Thirty-Nine Week Period Ended
 
   
September 28,
2012
   
September 30,
2011
   
September 28,
2012
   
September 30,
2011
 
                         
 
                       
Revenue
  $ 8,717,800     $ 8,064,900     $ 25,488,700     $ 21,905,400  
                                 
Cost of revenue
    6,656,300       6,339,800       20,109,200       17,313,600  
                                 
Gross profit
    2,061,500       1,725,100       5,379,500       4,591,800  
                                 
 
                               
Selling, general and administrative expenses
    1,613,800       1,584,800       4,403,800       4,170,800  
                                 
Income from operations
    447,700       140,300       975,700       421,000  
                                 
Other income
    (28,000 )     (4,900 )     (3,300 )     (4,900 )
Interest expense
    58,400       106,700       221,900       315,800  
Profit before tax expense
    417,300       38,500       757,100       110,100  
                                 
Provision for income tax expense
    163,100       21,200       341,600       65,300  
                                 
Net income
  $ 254,200     $ 17,300     $ 415,500     $ 44,800  
                                 
Other comprehensive loss      (13,200     0        (79,000     0  
Tax benefit
     4,900       0        29,600       0  
Other comprehensive loss, net of tax benefit
    (8,300 )     0       (49,400 )     0  
                                 
Comprehensive income
  $ 245,900     $ 17,300     $ 366,100     $ 44,800  
                                 
                                 
Weighted average number of common shares outstanding – basic
    16,305,961       16,245,961       16,305,961       16,175,178  
                                 
Net income per share – basic
  $ 0.02     $ 0.00     $ 0.03     $ 0.00  
                                 
Weighted average number of common shares outstanding – fully diluted
    17,659,459       17,497,846       17,485,199       16,738,747  
                                 
Net income per share – fully diluted
  $ 0.01     $ 0.00     $ 0.02     $ 0.00  


The accompanying notes are an integral part of the financial statements.
 
Page 5 of 28

 



Jagged Peak, Inc.

        Consolidated Statement of Changes in Stockholders’ Equity
 
39 Weeks Ended September 28, 2012 (Unaudited)



   
Common Stock
   
Additional
                Accumulated        
               
Paid in
    Treasury     Accumulated     Other    
Total
 
   
Shares
   
Amount
   
Capital
   
Stock
   
Deficit
    Compre-        
                                  hensive        
         
 
                     
Loss
       
Balance, December 30, 2011
    16,305,961     $ 16,400     $ 3,518,900     $ (9,000 )   $ (3,388,300 )   $ 0     $ 138,000  
                                                         
Reclassification of temporary equity
                    170,000                               170,000  
                                                         
Stock option expense
                    75,200                               75,200  
                                                         
Change in fair value of interest rate swap
                                            (49,400 )     (49,400 )
                                                         
Net income for the period
                                    415,500               415,500  
                                                         
Balance, September 28, 2012
    16,305,961     $ 16,400     $ 3,764,100     $ (9,000 )   $ (2,972,800 )   $ (49,400 )   $ 749,300  




The accompanying notes are an integral part of the financial statements.
 
 
Page 6 of 28

 
 
Jagged Peak, Inc.

Consolidated Statements of Cash Flows (Unaudited)

    39 Weeks Ended  
   
September 28,
2012
   
September 30,
2011
 
Operating activities
           
Net income
  $ 415,500     $ 44,800  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and software amortization
    322,300       382,400  
Stock option expense
    75,200       48,000  
Amortization of debt costs
    85,000       79,600  
Bad debt expense
    4,200       21,200  
Changes in:
               
Accounts receivable
    (852,400 )     (502,700 )
Work-in-process
    57,800       (79,900 )
Other current assets
    0       131,300  
Other receivables
    131,700       0  
Deferred tax asset
    129,400       65,400  
Other assets
    (76,400 )     (113,900 )
Accounts payable and accrued expenses
    (642,100 )     (177,800 )
Deferred rent
    (6,100 )     (1,600 )
Deferred revenue and customer deposits
    210,200       92,100  
                 
Net cash flows used in operating activities
    (145,700 )     (11,100 )
                 
Investing activities
               
Acquisition of property and equipment
    (970,000 )     (536,600 )
Acquisition/development of software - EDGE applications
    (422,900 )     (294,300 )
Cash flows used in investing activities
    (1,392,900 )     (830,900 )
                 
Financing activities
               
Net proceeds on notes payable
    580,200       500,800  
Payments on capital lease obligation
    (239,500 )     0  
Cash flows provided by financing activities
    340,700       500,800  
                 
Net decrease in cash
    (1,197,900 )     (341,200 )
                 
Cash, beginning of period
    1,542,300       550,800  
                 
Cash, end of period
  $ 344,400     $ 209,600  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for interest
  $ 142,700     $ 91,600  
                 
Supplemental disclosure of noncash investing and financing information:
               
Purchase of building with term note
  $ 2,388,000     $ 0  
 
The accompanying notes are an integral part of the financial statements.
 
 
Page 7 of 28

 
 
Jagged Peak, Inc.

Notes to the Unaudited Consolidated Financial Statements

For the 13 and 39 Week Periods Ended September 28, 2012 and the 13 and
39 Week Periods Ended September 30, 2011

1.      General Background Information

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

Jagged Peak has continued to market the launch of TotalCommerce™ (TotalCommerce), an end-to-end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers.  TotalCommerce is an outsourced “managed services” solution that leverages Jagged Peak’s extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a nationwide network of fulfillment centers; back office program management; and a range of online marketing services.

Jagged Peak operates two warehouses in Florida and a network of 20 independently owned fulfillment warehouses throughout North America that enable its clients to provide faster delivery to their customers, while lowering overall delivery costs.  The EDGE application is able to automatically route the orders to the optimal warehouse based on an established set of factors such as service, cost and priority.  This enables the Company’s clients to achieve their customer service goals while reducing cost and internal infrastructure.

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

The Company operates on a 52/53 week reporting year.  Therefore, the period ended September 28, 2012 and the period ended September 30, 2011 each consist 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 statement of (a) the consolidated financial position at September 28, 2012, (b) the consolidated statement of comprehensive income for the 13-week and 39-week periods ended September 28, 2012 and September 30, 2011, (c) the consolidated statement of changes in stockholders’ equity for the 39-week period ended September 28, 2012 and (d) consolidated cash flows for the 39-week periods ended September 28, 2012 and September 30, 2011 have been made.
 
 
Page 8 of 28

 

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 30, 2011.

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 from pre-determined prices.  The company has a history of selling each element separately to establish the market price of each element.

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

Revenue from software development and technology services is recognized as services are provided or on the percentage of completion method for those arrangements with specified milestones. The percentage of completion is based on labor hours incurred to total labor hours expected to be incurred.  Additional technology revenues are either paid monthly or on an annual basis. If paid on an annual basis, the revenue is recognized over the year, and if paid on a monthly basis, the revenue is recognized in the month in which the service was provided.

Hosting and managed services contracts range in length from one to three years, and are typically renewed annually after the initial term for subsequent one year periods.  Revenue from hosting and managed services is recognized ratably over the period for which the services are provided.  In most cases the fees are either a flat monthly fee or based on the client’s use of the system (transactions).
 
 
Page 9 of 28

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

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

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

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

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

Shipping and handling costs are classified as cost of revenues.

Software and Development Enhancements

Software and development enhancements primarily include payroll and employee benefit costs associated with product development. The EDGE product platform, including the order management, the warehouse management and the transportation management systems, are continually being enhanced with new features and functions. Once technological feasibility of new features and functions is established, the costs incurred until release to production are capitalized and amortized over the estimated useful life of the software. Effective October 1, 2011, the Company determined that the estimated useful life of the EDGE product platform is seven years. Previously, the Company used a three-year life. There was approximately $131,700 capitalized during the 13-week period ended September 28, 2012 and $423,000 capitalized during the 39-week period ended September 28, 2012.  There was approximately $68,900 capitalized during the 13-week period ended September 30, 2011 and approximately $294,300 capitalized during the 39-week period ended September 30, 2011.   Amortization expense related to capitalized software and charged to operations for the 13-week and 39-week periods ended September 28, 2012 was approximately $43,200 and $112,600, respectively.  Amortization expense related to capitalized software and charged to operations for the 13-week and 39-week periods ended September 30, 2011 was approximately $86,500 and $228,200, respectively.
 
 
Page 10 of 28

 

Concentration of Risk
 
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and accounts receivables.
 
Cash is maintained with one major financial institution in the United States and Canada. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.

Sales to a single, multi-national customer with several brands amounted to approximately $7.2 million and $7.4 million, or approximately 83% and 84%, of total revenue during the 13-week periods ended September 28, 2012 and September 30, 2011, respectively. Sales to the same customer amounted to approximately $21.5 million, and $18.0 million, or approximately 85% and 82%, of total revenue during the 39-week periods ended September 28, 2012 and September 30, 2011, respectively. Accounts receivable from the single customer was approximately $2.0 million, or approximately 54% of accounts receivable, as of September 28, 2012, and approximately $2.2 million, or approximately 94% of accounts receivable, as of September 30, 2011. The Company classifies all revenues from this customer’s brands as one single customer for the concentration of risk calculation.

The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts receivable, the customer’s payment history and the customer’s current ability to pay its obligation. Based on management’s review of accounts receivable, an allowance for doubtful accounts of approximately $302,400 and $298,000 is considered necessary as of September 28, 2012 and December 30, 2011, 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 twenty years.  Maintenance and repairs are charged to operations when incurred.  Betterments and renewals are capitalized.  When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.  Equipment held under capital leases is stated at the present value of the minimum lease payments and amortized on a straight-line basis over the estimated useful life of the asset.

Depreciation is calculated by the straight-line method over the following estimated useful lives of the related assets:
 
  Years
Building
 
20
 
Warehouse equipment
3
-
10
Furniture and equipment
3
-
7
Computer equipment and software
1
-
7
Leasehold improvements
 
Lease term
 

On June 25, 2012, the Company purchased its previously leased warehouse located in St. Petersburg, Florida for $3.0 million with the proceeds of a 5-year term loan.  At the date of purchase, the values of the warehouse building and related land were approximately $1,433,000 and $1,567,000, respectively. The 5-year term loan balance was approximately $2,358,200 as of September 28, 2012.

 
Page 11 of 28

 

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

The Company periodically assesses its tax positions taken for all open tax years and has not identified any uncertain tax positions.  The Company is not subject to examination by taxing authorities for years prior to 2008.

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 carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.

The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets.  In conducting this assessment, management considered a variety of factors, including the Company’s operating profits, the reasons for the Company’s operating losses in prior years, and 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 2021.

Put Options

In 2009, the Company issued 775,000 restricted common shares as partial consideration for a loan obtained from Moriah Capital L.P. (“Moriah”).  Pursuant to the terms and conditions of the governing Securities Issuance Agreement, the holder of such shares had the right, but not the obligation, to put the shares back to the Company at a fixed price of $0.21 per common share on March 18, 2011.   The Company accounted for these shares as a reclassification of the value of the shares from permanent to temporary equity. Pursuant to the 2010 amendment to the Securities Issuance Agreement, Moriah put the 775,000 shares of common stock back to Jagged Peak for the redemption price of $162,750 at a fixed price of $0.21 per common share in March 2011.
 
 
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In 2011, the Company amended its agreement with Moriah and issued Moriah 1,000,000 restricted common shares as collateral for the redemption premium Moriah received related to the refinancing of the loan.  Moriah had the option until March 31, 2012 to retain the collateral shares or put the shares to Jagged Peak for the redemption price of $170,000.  On March 31, 2012, Moriah chose to retain the 1,000,000 collateral shares and the put option expired.  On March 31, 2012, the Company accounted for these shares as a reclassification of the value of the shares from temporary to permanent equity.      

Interest Rate Swap

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

The swap agreement's fair value is calculated using Level 2 inputs. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are inputs, other than quoted market prices, included within Level 1 that are observable for the asset or liability, either directly or indirectly.

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 awards in the financial statements using a fair-value based measurement method. The Company uses a Black-Scholes model to value its stock option grants and expenses the related compensation cost using the straight-line method over the vesting period. The fair value of the stock compensation is determined on the grant date using assumptions for the expected term, volatility, dividend yield and the risk free interest rate. The period expense is then determined based on the valuation of the options and on estimated forfeitures.

Foreign Currency
 
Generally, the functional currency of the Company’s international subsidiary is the local currency. The financial statements are translated to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs and expenses. There were no recorded translation gains or losses for the 39-week periods ended September 28, 2012 and September 30, 2011.  Net gains and losses resulting from foreign exchange transactions are recorded as a component of other expenses.

Earnings per Share
 
Basic earnings per share includes no dilution and 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 of securities that could share in the earnings of the Company. Potential common stock shares consist of shares that may arise from outstanding dilutive common stock options and warrants (the number of which is computed using the “treasury stock method”). Diluted EPS 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.

 
Page 13 of 28

 
 
Recently Issued Financial Accounting Standards

There are no recently issued financial accounting standards applicable to Jagged Peak.


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 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 Company's 2005 Incentive Stock Plan as amended in July 2008 (the “Plan”) authorizes the Board to grant up to 5,000,000 options to key employees, officers, directors, and consultants.  The aggregate fair market value of grants to one individual shall not exceed $100,000 during any one calendar year for grants of both incentive stock options and non-qualified stock options. Options granted under the Plan must be exercised within ten years of the date of grant.  The option price payable for the shares of common stock covered by any option shall be determined by the Board but with regards to incentive stock options, shall not be less than the fair market value of one share of common Stock on the date of grant.  The option price for nonstatutory options may be less than the fair market value of common stock on the date of grant only if the Board determines that special circumstances warrant a lower exercise price.  As of September 28, 2012, 2,750,000 options remain available for grant under the Plan.

The Company's 2000 Incentive Stock Plan (the “2000 Plan”) authorizes the grant of up to 100,000 shares of common stock during any one calendar year for grants of both incentive stock options and non-qualified stock options to key employees, officers, directors, and consultants.  Options granted under the 2000 Plan must be exercised within ten years of the date of grant.  The option price payable for the shares of Common Stock covered by any option shall be determined by the Board, but shall in no event be less than the par value of the common stock.  The option price for incentive stock options shall not be less than the fair market value of one share of common stock on the date of grant.  The option price for nonstatutory options may be less than the fair market value of Common Stock on the date of grant only if the Board determines that special circumstances warrant a lower exercise price. The 2000 Plan and all options issued under it have expired.

 
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The following summarizes the Company’s stock option activity and related information:
 
 
   
Shares
   
Range of Exercise
Prices
   
Weighted Average
Exercise Price
 
Outstanding at December 30, 2010
    1,500,782     $ 0.01 - 2.50     $ 0.68  
Options granted
    2,150,000     $   0.13       $ 0.13  
Options exercised
    0     $   0       $ 0  
Options cancelled or expired
    1,415,000     $ 0.08 - 2.50     $ 0.50  
                             
Outstanding at December 30, 2011
    2,235,782     $ 0.01 - 0.30     $ 0.13  
Options granted
    100,000     $   0.25       $ 0.25  
Options exercised
    0     $   0       $ 0  
Options cancelled or expired
    0     $   0       $ 0  
Outstanding at September 28, 2012
    2,335,782     $ 0.01 - 0.30     $ 0.14  
                             
Exercisable at September 28, 2012
    2,315,171     $ 0.01 - 0.30     $ 0.14  
Exercisable at December 30, 2011
    1,607,700     $ 0.01 - 0.30     $ 0.14  
 

 
 
The following table summarizes information about options outstanding and exercisable as of September 28, 2012:


   
Outstanding Options
   
Exercisable Options
 
                                     
Exercise
Price
 
Number
Outstanding
   
Weighted
Average
Remaining
Life
(years)
   
Weighted
Average
Price
   
Weighted
Average
Remaining Life
(years)
   
Number
Exercisable
   
Weighted
Average
Price
 
$0.01
    10,782       38.2     $ 0.01       38.2       10,782     $ 0.01  
$0.30
    75,000       0.6     $ 0.30       0.6       75,000     $ 0.30  
$0.13
    2,150,000       3.6     $ 0.13       3.6       2,150,000     $ 0.13  
$0.25
    100,000       9.2     $ 0.25       9.2       79,389     $ 0.25  
 
 
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4.         Debt
 
Notes payable consist of:
   
September 28, 2012
   
December 30, 2011
 
             
5-year term loan related to purchase of warehouse
  $ 2,358,200     $ 0  
                 
$3.0 million senior credit facility, two year revolving line of credit
    1,960,000       0  
                 
Moriah note payable
    0       1,350,000  
                 
Less current portion
    119,400       1,350,000  
                 
Long-term portion of notes payable
  $ 4,198,800     $ 0  

On June 25, 2012, the Company purchased its previously leased warehouse facility for $3.0 million. The purchase was financed with a $2.388 million 5-year term loan (the “Term Loan”) amortized over 20 years. Principal and interest are due monthly. Concurrent with the Term Loan, the Company entered into an interest rate swap agreement that expires in June 2017 concurrent with the maturity of the Company's Term Loan. The interest rate swap agreement has an initial notional amount of $2.388 million and provides for the Company to pay interest at a fixed rate of 1.43% while receiving interest for the same period at the one-month LIBOR rate on the same notional principal amount.  The Company entered into the interest rate swap agreement to hedge against LIBOR movements on current variable rate indebtedness totaling $2.388 million at one-month LIBOR plus 2.50%, thereby fixing the Company's effective rate on the notional amount at 3.93%. One-month LIBOR was 0.22% as of September 28, 2012. The swap agreement qualifies as an “effective” hedge under U.S. GAAP. As of September 28, 2012, the fair market value of the interest rate swap included in other accrued expenses is approximately $79,000.

On March 23, 2012, the Company entered into the senior credit facility (the “Facility”) with Fifth Third Bank. The Facility provides for a revolving line of credit with a maturity of two years and a maximum borrowing capacity of $3.0 million. The proceeds of the Facility were used to repay all outstanding indebtedness and fees under the Moriah loan. The Facility is available for general corporate purposes. The Facility is secured by a first priority lien on substantially all of the Company’s assets. The Facility contains customary events of default and covenants including among other things, covenants that restrict but do not prevent the Company from incurring certain additional indebtedness, creating or permitting liens on assets, paying dividends and repurchasing stock, engaging in mergers or acquisitions and make investments and loans.
 
Borrowings under the Facility bear interest at a rate equal to an applicable margin of LIBOR plus 3.00%. In addition to paying monthly interest on outstanding principal under the Facility, the Company is required to pay a quarterly unutilized 0.25% commitment fee to the lender, based on the daily unused balance of the Facility. The Company may voluntarily repay outstanding loans under the Facility at any time without premium or penalty.

 
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5.  Related Party Transaction

In 2011, subsequent to the lease expiration and to ensure Jagged Peak’s ability to renew the warehouse lease under similar terms, Ridge Rock Partners, LLC, (“Ridge Rock”) which is owned by a group of investors, including officers, directors and former officers of Jagged Peak, purchased the warehouse building from the bank that had taken ownership of it from the previous landlord. Ridge Rock entered into a lease with Jagged Peak on substantially the same terms as Jagged Peak had with its former landlord. Rent expense related to this lease agreement was approximately $0 for the 13-week period and $202,000 for the 39-week period ended September 28, 2012.
 
On June 25, 2012, the Company purchased its previously leased warehouse building, located in St. Petersburg, Florida, from Ridge Rock for the appraised value of $3.0 million. The Company financed the purchase with a $2.388 million, 5-year term loan that is secured by the purchased property and amortized over 20 years.

In addition, Jagged Peak’s Chief Executive Officer, Chief Operations Officer, Chief Sales and Marketing Officer, a Director of the Company and the Employee Stock Option Plan (ESOP) hold a majority ownership share in an entity that was spun-off from the company in 2010 and is now a variable interest of the Company, as detailed in the Variable Interest Entity disclosure in Section 11, Variable Interest Entity   of the Company’s report on form 10-K for the year ended December 30, 2011.

 
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PART I – FINANCIAL INFORMATION
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
THIS FILING CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS “ANTICIPATED,” “BELIEVE,” “EXPECT,” “PLAN,” “INTEND,” “SEEK,” “ESTIMATE,” “PROJECT,” “WILL,” “COULD,” “MAY,” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN FOREIGN, POLITICAL, SOCIAL, AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE FURTHER MARKET PENETRATION AND ADDITIONAL CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES OCCUR, OR SHOULD UNDERLYING ASSUMPTIONS PROVE TO BE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY AND ADVERSELY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, OR OTHERWISE INDICATED. CONSEQUENTLY, ALL OF THE FORWARD-LOOKING STATEMENTS MADE IN THIS FILING ARE QUALIFIED BY THESE CAUTIONARY STATEMENTS AND THERE CAN BE NO ASSURANCE OF THE ACTUAL RESULTS OR DEVELOPMENTS.
 
The following discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s financial statements and related notes appearing elsewhere herein. This discussion and analysis contains forward-looking statements including information about possible or assumed results of the Company’s financial condition, operations, plans, objectives and performance that involve risk, uncertainties and assumptions. The actual results may differ materially from those anticipated in such forward-looking statements. For example, when we indicate that we expect to increase the Company’s product sales and potentially establish additional license relationships, these are forward-looking statements. The words “expect”, “anticipate”, “estimate” or similar expressions are also used to indicate forward-looking statements. The following discussions should be read in conjunction with the Company’s financial statements and the notes thereto presented in "Item 1 – Financial Statements" and the Company’s audited financial statements and the related Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s report on Form 10-K for the year ended December 30, 2011.

 
Overview
 
 
Jagged Peak, Inc. (the “Company” or “Jagged Peak”) is an e-commerce software and services company headquartered in Tampa, Florida, providing Enterprise e-Commerce technology and related fulfillment services. The Company’s flagship product, EDGE, is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, incentive and rebate programs, customer service, repair and reverse logistics, marketing materials management, and automate other business processes through the use of the EDGE application and its related tools. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, healthcare, distribution, travel and tourism and manufacturing.
 
Jagged Peak continues to market 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 North American network of fulfillment centers; back office program management; and a range of online marketing services.
 
 
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Jagged Peak operates two fulfillment warehouses in Florida and has a network of 20 independently owned fulfillment warehouses throughout North America that enable its clients to provide faster delivery service to their customers, while lowering their overall delivery costs. The EDGE application is able to automatically route the orders to the optimal warehouse based on an established set of factors such as service, cost and priority. This enables the Company’s clients to achieve their customer service goals while reducing cost and internal infrastructure.
 
In July 2009, Jagged Peak began operations in Canada through its wholly owned subsidiary, Jagged Peak Canada, Inc. The operations provide similar services as in the United States through a network of independently owned fulfillment warehouses, which are managed through technology provided by Jagged Peak, Inc.

There are a variety of risks associated with the Company’s ability to achieve its strategic objectives, including the ability to increase market penetration, acquire and profitably manage additional businesses, reliance on key customers, the risks inherent in expanding, and the intense competition in the industry. For a more detailed discussion of these risks, see the section of the Company’s December 30, 2011 annual report filed on form 10-K with the SEC under Item 1A entitled “Risks Factors.”


RESULTS OF OPERATIONS
 
For the 13-week period ended September 28, 2012 compared to the 13-week period ended September 30, 2011
 
Revenues increased approximately $652,900, or 8.1%, to approximately $8,717,800 for the 13-week period ended September 28, 2012, as compared to approximately $8,064,900 for the 13-week period ended September 30, 2011. Greater e-commerce order volume for existing customers and the addition of new customers resulted in increases in the Company’s primary sources of revenue: fulfillment, technology fees, and implementation of client’s e-commerce sites.
 
Cost of revenue, which consists primarily of labor, fulfillment operational and facilities costs and freight increased by approximately $316,500 or 5%, to approximately $6,656,300 for the 13-week period ended September 28, 2012, as compared to approximately $6,339,800 for the 13-week period ended September 30, 2011. As a percentage of revenues, costs of revenue were approximately 76% for the 13-week period ended September 28, 2012 and 79% for the 13-week period ended September 30, 2011. The decrease in cost as a percent of revenues was primarily the result of improved management of fulfillment operations and implementation of client’s e-commerce sites.
 
Selling, general and administrative expense increased by approximately $29,000 or 2%, to approximately $1,613,800 for the 13-week period ended September 28, 2012 as compared to approximately $1,584,800 for the 13-week period ended September 30, 2011 due to the increase in fulfillment employees offset by the Company’s improved cost management activities around overhead costs during the current period.
 
Interest expense decreased by approximately $48,300 to approximately $58,400 for the 13-week period ended September 28, 2012 as compared to approximately $106,700 for the 13-week period ended September 30, 2011 due to the new, lower cost, credit facility from Fifth Third, bank which bears  interest at LIBOR plus 3.00%. This compares to the Moriah Loan and Security Agreement utilized in 2011 which had an interest rate of six percent (6%) above prime with a floor of ten percent (10%).  The cost savings from the new credit facility were partially offset by the interest on the new $2.388 million, 3.93% 5-year Term Loan, entered into on June 25, 2012 to finance the purchase of the Company’s previously leased warehouse facility in St. Petersburg, Florida.
 
The Company realized a profit from continuing operations before provision for income taxes of approximately $417,300 for the 13-week period ended September 28, 2012, compared with a profit from continuing operations before provision for income taxes of approximately $38,500 for the 13-week period ended September 30, 2011 as a result of the above-mentioned items.
 
 
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Income tax expense was approximately $163,100 for the 13-week period ended September 28, 2012 compared to an income tax expense of approximately $21,200 for the 13-week period ended September 30, 2011.  Differences between the taxable income and the effective tax rate used for 2012 and 2011, as compared to the U.S. federal statutory rate, are primarily due to permanent differences. At December 30, 2011 the Company had estimated federal and state net operating loss carryforwards totaling approximately $4,500,000, which begin to expire in 2021. Management believes that 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 approximately $254,200 for the 13-week period ended September 28, 2012, compared with a net income of approximately $17,300 for the 13-week period ended September 30, 2011.
 
Basic income per share from continuing operations for the 13-week period ended September 28, 2012 was $0.02 per weighted average share, compared with a basic income of $0.00 per weighted average share for the 13-week period ended September 30, 2011.


For the 39-week period ended September 28, 2012 compared to the 39-week period ended September 30, 2011
 
Revenues increased approximately $3,583,300, or 16%, to approximately $25,488,700 for the 39-week period ended September 28, 2012, as compared to approximately $21,905,400 for the 39-week period ended September 30, 2011. Greater e-commerce order volume for existing customers and the addition of new customers resulted in increases in the Company’s primary sources of revenue: fulfillment, technology fees, and new client implementations.
 
Cost of revenue, which consists primarily of labor, fulfillment operational and facilities costs and freight increased by approximately $2,795,600 or 16%, to approximately $20,109,200 for the 39-week period ended September 28, 2012, as compared to approximately $17,313,600 for the 39-week period ended September 30, 2011. As a percentage of revenues, costs of revenue were approximately 79% for the 39-week periods ended September 28, 2012 and September 30, 2011.
 
Selling, general and administrative expense increased by approximately $233,000, or 6%, to approximately $4,403,800 for the 39-week period ended September 28, 2012 as compared to approximately $4,170,800 for the 39-week period ended September 30, 2011. This increase was primarily related to additional fulfillment employees hired to manage the increase in client orders processed.
 
Interest expense decreased by approximately $93,900 to approximately $221,900 for the 39-week period ended September 28, 2012 as compared to approximately $315,800 for the 39-week period ended September 30, 2011 due to the new, lower cost, credit facility from Fifth Third bank, which bears interest at LIBOR plus 3.00%. This compares to the Moriah Loan and Security Agreement utilized in 2011, which had an interest rate of six percent (6%) above prime with a floor of ten percent (10%).  The cost savings from the new credit facility were partially offset by the interest on the new $2.388 million, 3.93% 5-year Term Loan, entered into on June 25, 2012 to finance the purchase of the Company’s previously leased warehouse facility in St. Petersburg, Florida.
 
The Company realized a profit from continuing operations before provision for income taxes of approximately $757,100 for the 39-week period ended September 28, 2012, compared with a profit from continuing operations before provision for income taxes of approximately $110,100 for the 39-week period ended September 30, 2011 as a result of the above-mentioned items.
 
 
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Income tax expense was approximately $341,600 for the 39-week period ended September 28, 2012 compared to an income tax expense of approximately $65,300 for the 39-week period ended September 30, 2011.  Differences between the taxable income and the effective tax rate used for 2012 and 2011, as compared to the U.S. federal statutory rate, are primarily due to permanent differences. At December 30, 2011, the Company had estimated federal and state net operating loss carryforwards totaling approximately $4,500,000, which begin to expire in 2021. Management believes that 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 approximately $415,500 for the 39-week period ended September 28, 2012, compared with a net income of approximately $44,800 for the 39-week period ended September 30, 2011.
 
Basic income per share from continuing operations for the 39-week period ended September 28, 2012 was $0.03 per weighted average share, compared with a basic income of $0.00 per weighted average share for the 39-week period ended September 30, 2011.


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 30, 2012 the Company used cash of $145.7 thousand to fund its operations compared to $11.1 thousand for the 39-week period ended September 30, 2011. The $134.6 thousand increase in cash used in operating activities primarily reflects an increase in accounts receivable and a decrease in accounts payable and accrued liabilities offset by the increase in deferred revenue and customer deposits due to timing of cash receipts and payments.
 
Net cash used in the Company’s investing activities totaled $1,392.9 thousand for the 39-week period ended September 30, 2012 consisting of equipment and improvements for the Company’s warehouses, the purchase of the St. Petersburg warehouse as well as the development of the Company’s software. The Company expects total capital expenditures for the year 2012 to be $1.6 million to $1.8 million.
 
The Company’s financing activities provided cash of $340.7 thousand for the 39-week period ended September 30, 2012 consisting of net proceeds from the refinancing of its line of credit offset by the payments on its capital lease obligation.
 
The Company’s primary sources of cash flow were from operations and borrowings under the Fifth Third credit facility and the Secured Revolving Term Note with Moriah Capital (the “Moriah Note”).
 
The Moriah Note was entered into  in December 2009 and amended in March 2011. The note had up to $1,500,000 of availability based in certain criteria. Availability under the loan was based on 85% of eligible accounts receivable, in addition to other collateral.  The interest rate on the note was 10% and was paid on a monthly basis. Principal payments were not required until the final balloon payment was paid in  March 2012.
 
On March 23, 2012, the Company entered into a Senior Credit Facility with Fifth Third bank (the “Facility”). The Facility provides for a revolving line of credit with a maturity of two years and a maximum borrowing capacity of $3.0 million. The proceeds of the Facility were used to repay all outstanding indebtedness under the Moriah note payable, and to pay related fees and expenses. The Facility is available for general corporate purposes. The Facility is secured by a first priority lien on substantially all of the Company’s assets. The Facility contains customary events of default and covenants including among other things, covenants that restrict but do not prevent the ability of the Company to incur certain additional indebtedness, create or permit liens on assets, pay dividends and repurchase stock, engage in mergers or acquisitions and make investments and loans.
 
 
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Borrowings under the Facility bear interest at a rate equal to an applicable margin of LIBOR plus 3.00%. LIBOR was approximately 0.22% as of September 28, 2012.  In addition to paying monthly interest on outstanding principal under the Facility, the Company is required to pay a quarterly unutilized 0.25% commitment fee to the lender, based on the average daily unused balance of the Facility. The Company may voluntarily repay outstanding loans under the Facility at any time without premium or penalty.
 
The Company believes that, based on current operations and anticipated growth, cash flow from operations, together with the Facility, will be sufficient to fund anticipated capital expenditures, operating expenses and other anticipated liquidity needs for the next twelve months. Anticipated debt maturity in 2014, and other unforseen 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 were not permitted under the the Facility and the Company defaulted on obligations, its debt could be accelerated and its lender may forclose on its assets.
 
On June 25, 2012, the Company purchased a previously leased warehouse facility for $3.0 million. The purchase was financed with a $2.388 million 5-year Term Loan (the “Term Loan”) amortized over 20 years and an approximately $612,000 down payment provided by the Facility. Principal and interest are due monthly. Concurrent with the Term Loan, the Company entered into an interest rate swap thereby fixing its effective rate on the Term Loan at 3.93%
 
The Company expects net capital expenditures to decline from the first half of 2012. The Company expects net capital expenditures to be approximately $1.6 million to $1.8 million for the 2012 year, of which approximately $0.6 million is for the purchase of its St. Petersburg warehouse and $0.6 million is for the acquisition and development of software.
 
At September 28, 2012, the balance outstanding on the Term Loan and the Facility were approximately $2.358 million and $1.960 million, respectively.  
 
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 deferred tax assets and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions.  These evaluations are performed and adjustments are made, as information is available.  Management believes that these estimates are reasonable and have been discussed with the audit committee; however, actual results could differ from these estimates.

Revenue Recognition

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 from pre-determined prices.  We have past history of selling each element separately to establish the market price of each element.

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

 
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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).

Jagged Peak’s EDGE software is a web-based product and provided to its customers in software as a service 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 we are responsible for providing software updates.

Jagged Peak 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 the Company 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 us to optimized independent distribution warehouses in North America.  All of these services are managed by Jagged Peak through its order management platform.   Since Jagged Peak 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 its client and the related expenses are part of its cost of services.

Work in process represents costs and services which have been provided and properly recognized based on the above policy, however have not been billed to the client.
 
 
Shipping and handling costs are classified as cost of revenues.

Concentration of Risk
 
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and accounts receivables.
 
 
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Cash is maintained with one major financial institution in the United States and Canada. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.

Sales to a single, multi-national customer with several brands amounted to approximately $7.2 million and $7.4 million, or approximately 83% and 84%, of total revenue during the 13-week periods ended September 28, 2012 and September 30, 2011, respectively. Sales to the same customer amounted to approximately $21.5 million, and $18.0 million, or approximately 85% and 82%, of total revenue during the 39-week period ended September 28, 2012 and September 30, 2011, respectively. Accounts receivable from the single customer was approximately $2.0 million, or approximately 54% of accounts receivable as of September 28, 2012, and approximately $2.2 million, or approximately 94% of accounts receivable as of September 30, 2011. The Company classifies all revenues from this customer’s brands as one single customer for the concentration of risk calculation.

The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts receivable the customer’s payment history and the customer’s current ability to pay its obligation. Based on management’s review of accounts receivable, an allowance for doubtful accounts of approximately $302,400 and $298,000 is considered necessary as of September 28, 2012 and December 30, 2011, respectively. The Company charges uncollectible accounts against the allowance account once the invoices are deemed unlikely to be collectible.  The Company does not accrue interest on past due receivables. 
 
Income Taxes
 
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.

The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets.  In conducting this assessment, management considered a variety of factors, including the Company’s operating profits, the reasons for the Company’s operating losses in prior years, and management’s judgment as to the likelihood of continued 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 carryforwards do not begin to expire until 2021.

Put Options

In 2009, the Company issued 775,000 restricted common shares as partial consideration for a loan obtained from Moriah Capital L.P. (“Moriah”).  Pursuant to the terms and conditions of the governing Securities Issuance Agreement, the holder of such shares had the right, but not the obligation, to put the shares back to the Company at a fixed price of $0.21 per common share on March 18, 2011.   The Company accounted for these shares as a reclassification of the value of the shares from permanent to temporary equity. Pursuant to the 2010 amendment to the Securities Issuance Agreement, Moriah put the 775,000 shares of common stock back to Jagged Peak for the redemption price of $162,750 at a fixed price of $0.21 per common share in March 2011.
 
 
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In 2011, the Company amended its agreement with Moriah and issued to Moriah 1,000,000 restricted common shares as collateral for the redemption premium Moriah received related to the refinancing of the loan.  Moriah had the option until March 31, 2012 to retain the collateral shares or put the shares to Jagged Peak for the redemption price of $170,000.  On March 31, 2012, Moriah chose to retain the 1,000,000 collateral shares and the put option expired.  Effective, March 31, 2012, the Company accounted for these shares as a reclassification of the value of the shares from temporary to permanent equity.      
 
 
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USE OF GAAP AND NON-GAAP MEASURES
 
In addition to results presented in accordance with generally accepted accounting principles (“GAAP”), the Company has included in this report “Adjusted EBITDA,” with Adjusted EBITDA being defined by the Company as earnings before interest, taxes, depreciation and amortization, and stock option expense. For each non-GAAP financial measure, the Company has presented the most directly comparable GAAP financial measure and has reconciled the non-GAAP financial measure with such comparable GAAP financial measure.
 
These non-GAAP financial measures provide useful information to investors to assist in understanding the underlying operational performance of the Company. Specifically, Adjusted EBITDA is a useful measure of operating performance before the impact of investing and financing transactions, making comparisons between companies’ earnings power more meaningful and providing consistent period-over-period comparisons of the Company’s performance. In addition, the Company uses this non-GAAP financial measure internally to measure its on-going business performance and in reports to bankers to permit monitoring of the Company’s ability to pay outstanding liabilities.

ADJUSTED EBITDA
 
Adjusted EBITDA for the 39-week period ended September 28, 2012 was approximately $1,376,400 compared to approximately $856,300 in the comparable period of the prior year. The increase in the Adjusted EBITDA primarily relates to the increase in sales, improved operating margins from improved management of fulfillment operations and client implementation of customer’s e-commerce sites and lower borrowing costs. The Company defines Adjusted EBITDA as earnings before interest, taxes, and depreciation and amortization, and stock option expense. The Company believes Adjusted EBITDA is a useful measure of operating performance before the impact of investing and financing transactions, making comparisons between companies’ earnings power more meaningful and providing consistent comparisons of the Company’s performance. In order to provide consistent comparisons of year-over-year Adjusted EBITDA, the following reconciliation is provided.
 
 
 
  
For the 39-weeks ended
 
 
  
September 28, 2012
   
September 30, 2011
 
Net income as reported
  
$
415,400
   
$
44,800
 
Income tax expense
  
 
341,600
     
65,300
 
Interest expense
  
 
221,900
     
315,800
 
Depreciation and amortization
  
 
322,300
     
382,400
 
Stock option expense
   
75,200
     
48,000
 
Adjusted EBITDA
  
$
1,376,400
   
$
856,300
 
 
 
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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. Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, we conducted an evaluation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 28, 2012. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that as of September 28, 2012 the Company’s disclosure controls and procedures were effective as required under Rules 13a-15(e) and 15d-15(e) of the Exchange Act.
 
 
(b)
Changes in Internal Control over Financial Reporting. There has been no significant change in the Company’s internal control over financial reporting during the fiscal quarter ended September 28, 2012 that materially affected or is reasonably likely to materially affect the Company’s internal control over financial reporting. 
 
(a)  
 
PART II—OTHER INFORMATION
 
Item 1. Legal Proceedings
 
As of the date of this Quarterly Report, there are no material pending legal proceedings other than ordinary routine litigation to which the Company is a party or of which any of its property is subject.
 
Item 1A. Risk Factors
 
Not Applicable.

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

Not applicable

Item 3. Defaults Upon Senior Securities
 
Not applicable
 
Item 4. Mine Safety Disclosures

Not applicable
 
Item 5. Other Information
 
None.
 
 
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Item 6. Exhibits
 
(a)
Exhibits included herewith are:
 
31.1          Certification of the Chief Executive Officer dated November 9, 2012
   
   
31.2          Certification of the Chief Financial Officer dated November 9, 2012
   
   
32.1          Certification of the Chief Executive Officer, pursuant to 18 U.S.C. section 1350, dated November 9, 2012
 
 
     
32.2          Certification of the Chief Financial Officer, pursuant to 18 U.S.C. section 1350, dated November 9, 2012
   
 
Exhibit 101.1 Interactive Data File:
 
101.INS     XBRL Instance Document
   
   
101.SCH   XBRL Schema Document
   
   
101.CAL   XBRL Calculation Linkbase Document
 
 
     
101.DEF    XBRL Definition Linkbase Document
   
     
101.LAB   XBRL Label Linkbase Document
   
     
101.PRE    XBRL Presentation Linkbase Document
   

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
Jagged Peak, Inc.
     
Registrant
     
       
/s/ Paul B. Demirdjian
 
November 9, 2012
 
Paul B. Demirdjian
 
Date
 
Chairman of the Board of Directors,
     
Chief Executive Officer
     
(Principal Executive Officer)
     
       
/s/ Albert Narvades
 
November 9, 2012
 
Albert Narvades
 
Date
 
Senior Vice President, Chief Financial Officer,
     
Treasurer and Secretary
     
(Principal Financial Officer)
     
 
 
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