Table Of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[x] QuarterlyReportPursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 27, 2014
OR
[ ]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission file number: 000-31715
Jagged Peak, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Nevada | | | 91-2007478 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
3000 Bayport Drive, Suite 250, Tampa, FL 33607
(Address of principal executive offices, including zip code)
(813) 637-6900
(Registrant’s telephone number, including area code)
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☐ | Smaller reporting company ☒ |
| | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐No ☒
The Registrant had 16,479,074 shares of common stock, par value $0.001 per share, outstanding as of August 11, 2014.
Tableof Contents
Jagged Peak, Inc.
Contents
PARTI—FINANCIAL INFORMATION
Item1. Financial Statements
Jagged Peak, Inc.
Consolidated Financial Statements (Unaudited)
Quarterly Report on Form 10-Q
For the Quarterly Period ended June 27, 2014
Contents
Unaudited Consolidated Financial Statements | |
| | |
Consolidated Balance Sheets | 1 |
Consolidated Statements of Comprehensive Income | 2 |
Consolidated Statements of Changes in Stockholders’ Equity | 3 |
Consolidated Statements of Cash Flows | 4 |
Notes to the Unaudited Consolidated Financial Statements | 5-14 |
Jagged Peak, Inc.
Consolidated Balance Sheets
| | | June 27, 2014 (Unaudited) | | | December 27, 2013 (Audited) | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash | | $ | 673,600 | | | $ | 652,000 | |
Accounts receivable, net of allowance for doubtful accounts of $179,000and $253,300 at June 27, 2014 and December 27, 2013, respectively | | | 5,962,400 | | | | 5,980,100 | |
Other receivables, net of allowance of $0 and $326,500 at June 27, 2014 and December 27, 2013, respectively | | | 284,500 | | | | 378,900 | |
Work in process | | | 150,900 | | | | 150,700 | |
Deferred tax asset – current portion | | | 383,400 | | | | 333,500 | |
Other current assets | | | 558,600 | | | | 273,300 | |
Total current assets | | | 8,013,400 | | | | 7,768,500 | |
| | | | | | | | | |
Property and equipment, net of accumulated depreciationof $941,100 and $2,393,800 at June 27, 2014 andDecember 27, 2013, respectively | | | 4,824,300 | | | | 4,092,100 | |
| | | | | | | | | |
Other assets: | | | | | | | | |
EDGE applications, net of accumulated amortization of$2,486,700 and $2,288,900 at June 27, 2014 andDecember 27, 2013, respectively | | | 2,384,800 | | | | 1,817,100 | |
Deferred tax asset | | | 307,500 | | | | 266,500 | |
Capitalized debt issuance costs | | | 36,000 | | | | 57,300 | |
Total long-term assets | | | 7,552,600 | | | | 6,233,000 | |
| | | | | | | | | |
Total assets | | $ | 15,566,000 | | | $ | 14,001,500 | |
| | | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable, trade | | $ | 4,609,500 | | | $ | 5,692,700 | |
Accrued payroll and bonuses | | | 587,200 | | | | 721,200 | |
Other accrued expenses | | | 396,700 | | | | 302,000 | |
Deferred rent | | | 99,500 | | | | 20,100 | |
Deferred revenue and customer deposits | | | 3,375,900 | | | | 2,733,500 | |
Notes payable, current portion | | | 119,400 | | | | 119,400 | |
Total current liabilities | | | 9,188,200 | | | | 9,588,900 | |
| | | | | | | | | |
Long-term liabilities: | | | | | | | | |
Notes Payable | | | 4,789,800 | | | | 2,669,500 | |
Total long-term liabilities | | | 4,789,800 | | | | 2,669,500 | |
| | | | | | | | | |
Stockholders' equity: | | | | | | | | |
Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issuedor outstanding at June 27, 2014 and December 27, 2013 | | | 0 | | | | 0 | |
Common stock, $.001 par value; 70,000,000 shares authorized;16,479,074 and 16,279,074 shares issued at June 27, 2014 and December 27, 2013, respectively; 16,356,583 and 16,156,583 shares outstanding at June 27, 2014 and December 27, 2013, respectively | | | 16,600 | | | | 16,400 | |
Additional paid-in capital | | | 3,877,900 | | | | 3,764,100 | |
Treasury stock, 122,491 shares | | | (9,000 | ) | | | (9,000 | ) |
Accumulated deficit | | | (2,314,800 | ) | | | (2,007,600 | ) |
Accumulated other comprehensive income/(loss) | | | 17,300 | | | | (20,800 | ) |
Total stockholders' equity | | | 1,588,000 | | | | 1,743,100 | |
| | | | | | | | | |
Total liabilities and stockholders' equity | | $ | 15,566,000 | | | $ | 14,001,500 | |
The accompanying notes are an integral part of the consolidated financial statements.
Jagged Peak, Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
| | | Thirteen Week Period Ended | | | Twenty-Six Week Period Ended | |
| | | June 27, 2014 | | | June 28, 2013 | | | June 27, 2014 | | | June 28, 2013 | |
| | | | | | | | | | | | | | | | | |
Revenue | | $ | 13,624,800 | | | $ | 10,716,600 | | | $ | 27,715,500 | | | $ | 21,068,300 | |
| | | | | | | | | | | | | | | | | |
Cost of revenue | | | 11,714,900 | | | | 8,560,300 | | | | 23,488,700 | | | | 16,760,900 | |
| | | | | | | | | | | | | | | | | |
Gross profit | | | 1,909,900 | | | | 2,156,300 | | | | 4,226,800 | | | | 4,307,400 | |
| | | | | | | | | | | | | | | | | |
Selling, general and administrative expenses | | | 2,410,600 | | | | 1,693,500 | | | | 4,468,600 | | | | 3,580,700 | |
| | | | | | | | | | | | | | | | | |
(Loss) income from operations | | | (500,700 | ) | | | 462,800 | | | | (241,800 | ) | | | 726,700 | |
| | | | | | | | | | | | | | | | | |
Other income (expense), net | | | 43,700 | | | | (32,100 | ) | | | (49,100 | ) | | | (61,900 | ) |
Interest expense | | | (47,800 | ) | | | (53,900 | ) | | | (94,600 | ) | | | (104,400 | ) |
(Loss) profit before tax expense | | | (504,800 | ) | | | 376,800 | | | | (385,500 | ) | | | 560,400 | |
| | | | | | | | | | | | | | | | | |
Provision for income tax benefit (expense) | | | 137,400 | | | | (152,300 | ) | | | 78,300 | | | | (237,600 | ) |
| | | | | | | | | | | | | | | | | |
Net (loss) income | | | (367,400 | ) | | | 224,500 | | | | (307,200 | ) | | | 322,800 | |
| | | | | | | | | | | | | | | | | |
Other comprehensive (loss) income | | | (32,700 | ) | | | 35,100 | | | | 60,900 | | | | 37,500 | |
Tax benefit (expense) | | | 12,000 | | | | (13,300 | ) | | | (22,800 | ) | | | (14,200 | ) |
Other comprehensive (loss) income, net of tax | | | (20,700 | ) | | | 21,800 | | | | 38,100 | | | | 23,300 | |
| | | | | | | | | | | | | | | | | |
Comprehensive (loss) income | | $ | (388,100 | ) | | $ | 246,300 | | | $ | (269,100 | ) | | $ | 346,100 | |
| | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding -basic | | | 16,356,583 | | | | 16,156,583 | | | | 16,356,583 | | | | 16,156,583 | |
| | | | | | | | | | | | | | | | | |
Net (loss) income per share – basic | | $ | (0.02 | ) | | $ | 0.01 | | | $ | (0.02 | ) | | $ | 0.02 | |
| | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding and common equivalent shares outstanding | | | 18,243,040 | | | | 17,626,466 | | | | 18,243,040 | | | | 17,626,466 | |
| | | | | | | | | | | | | | | | | |
Diluted (loss) income per common share | | $ | (0.02 | ) | | $ | 0.01 | | | $ | (0.02 | ) | | $ | 0.02 | |
The accompanying notes are an integral part of the consolidated financial statements.
Jagged Peak, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
26 Weeks Ended June 27, 2014 and June 28, 2013
(Unaudited)
| | | Common Stock Shares | | | Common Stock Amount | | | Additional Paid in Capital | | | Treasury Stock | | | Accumulated Deficit | | | Accumulated Other Compre- hensive Income/(Loss) | | | Total | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 28, 2012 | | | 16,279,074 | | | $ | 16,400 | | | $ | 3,764,100 | | | $ | (9,000 | ) | | $ | (2,854,900 | ) | | $ | (44,500 | ) | | $ | 872,100 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in fair value of interest rate swap | | | | | | | | | | | | | | | | | | | | | | | 23,300 | | | | 23,300 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income for the period | | | | | | | | | | | | | | | | | | | 322,800 | | | | | | | | 322,800 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 28, 2013 | | | 16,279,074 | | | $ | 16,400 | | | $ | 3,764,100 | | | $ | (9,000 | ) | | $ | (2,532,100 | ) | | $ | (21,200 | ) | | $ | 1,218,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | | | | | | | | | | | | | | | | | | | | | | (600 | ) | | | (600 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Shares issued for ESOP contribution | | | 200,000 | | | | 200 | | | | 113,800 | | | | | | | | | | | | | | | | 114,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | 38,700 | | | | 38,700 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net loss for the period | | | | | | | | | | | | | | | | | | | (307,200 | ) | | | | | | | (307,200 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, June 27, 2014 | | | 16,479,074 | | | $ | 16,600 | | | $ | 3,877,900 | | | $ | (9,000 | ) | | $ | (2,314,800 | ) | | $ | 17,300 | | | $ | 1,588,000 | |
The accompanying notes are an integral part of the financial statements.
Jagged Peak, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| | | 26 Week Period Ended | |
| | | June 27, 2014 | | | June 28, 2013 | |
Operating activities | | | | | | | | |
Net (loss) income | | $ | (307,200 | ) | | $ | 322,800 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | |
Depreciation and software amortization | | | 472,600 | | | | 309,600 | |
Amortization of debt costs | | | 11,000 | | | | 20,700 | |
Bad debt expense | | | 82,700 | | | | 70,200 | |
Changes in: | | | | | | | | |
Accounts receivable | | | 85,400 | | | | (572,500 | ) |
Work in process | | | (200 | ) | | | (8,800 | ) |
Other current assets | | | (242,700 | ) | | | (30,600 | ) |
Other receivables | | | (62,600 | ) | | | 43,600 | |
Deferred tax asset | | | (88,200 | ) | | | 214,400 | |
Accounts payable and accrued expenses | | | (1,005,000 | ) | | | (711,600 | ) |
Deferred rent | | | 79,400 | | | | 1,400 | |
Deferred revenue and customer deposits | | | 642,400 | | | | 293,800 | |
Net cash flows used in operating activities | | | (332,400 | ) | | | (47,000 | ) |
| | | | | | | | | |
Investing activities | | | | | | | | |
Acquisition of property and equipment | | | (1,006,900 | ) | | | (283,900 | ) |
Acquisition/development of software - EDGE applications | | | (765,600 | ) | | | (366,400 | ) |
Cash flows used in investing activities | | | (1,772,500 | ) | | | (650,300 | ) |
| | | | | | | | | |
Financing activities | | | | | | | | |
Net proceeds on notes payable | | | 2,180,000 | | | | 1,080,000 | |
Payments on term loan | | | (59,700 | ) | | | (59,600 | ) |
Cash flows provided by financing activities | | | 2,120,300 | | | | 1,020,400 | |
| | | | | | | | | |
Net increase in cash | | | 15,400 | | | | 323,100 | |
| | | | | | | | | |
Cash, beginning of period | | | 652,000 | | | | 15,200 | |
Effect of exchange rate changes on cash | | | 6,100 | | | | 0 | |
| | | | | | | | | |
Cash, end of period | | $ | 673,600 | | | $ | 338,300 | |
| | | | | | | | | |
Supplemental disclosure of cash flow information: | | | | | | | | |
Cash paid during the period for interest | | $ | 71,000 | | | $ | 63,000 | |
Cash paid during the period for taxes | | $ | 33,800 | | | $ | 38,000 | |
Non-cash financing activities: | | | | | | | | |
Issuance of stock to fund ESOP contribution | | $ | 114,000 | | | $ | 0 | |
The accompanying notes are an integral part of the consolidated financial statements.
Jagged Peak, Inc.
Notes to the Unaudited Consolidated Financial Statements
For the 13 and 26 Week Periods Ended June 27, 2014 and June 28, 2013
1. General Background Information
Jagged Peak, Inc. (the "Company" or "Jagged Peak") is a software and services company headquartered in Tampa, Florida, providing internally developed cloud-based enterprise e-commerce technology supporting the entire e-commerce life cycle including order, warehouse, and transportation management solutions. The Company's flagship product, EDGE™ (EDGE, Enterprise Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, locations, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, customer service, repair and reverse logistics, and marketing materials management, and automate other business processes through the use of the EDGE platform and its related software applications. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, healthcare, distribution, travel and tourism and manufacturing.
With the EDGE platform, Jagged Peak has continued to market the launch of TotalCommerce™ (TotalCommerce), an end-to-end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers. TotalCommerce is an outsourced "managed services" solution that leverages Jagged Peak's extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a network of fulfillment centers throughout the United States and Canada; back office program management; payment processing; and a range of online marketing services.
Jagged Peak operates two warehouses in Florida and an expandable network of 19 independently owned fulfillment warehouses throughout North America using the cloud-based EDGE platform. The EDGE application is able to automatically route the 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 June 27, 2014 and the period ended June 28, 2013 each consist of 26 weeks.
2. Significant Accounting Policies
Basis of Presentation
In the opinion of management, all adjustments consisting of normal recurring adjustments necessary for a fair presentation of (a) the consolidated financial position atJune 27, 2014 and December 27, 2013 and (b) the consolidated statements of comprehensive, changes in stockholders’ equity and cash flows for the 26-week periods ended June 27, 2014 and June 28, 2013 have been made.
All financial information has been rounded to the nearest hundred.
The unaudited consolidated financial statements and notes are presented as permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) have been omitted. The accompanying statements and notes should be read in conjunction with the audited financial statements and notes of the Company for the 52-week period ended December 27, 2013.
Use of Estimates
The Company prepares its financial statements in conformity with U.S. GAAP. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates, including but not limited to, capitalization of software, work in process, recoverability of long-lived assets, recoverability of prepaid expenses, valuation of deferred tax assets and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made, as information is available. Management believes that these estimates are reasonable however; actual results could differ from these estimates.
Revenue Recognition
There are multiple components in Jagged Peak's TotalCommerce solution, which are sold through a master agreement where each individual component is priced separately and distinctly from the other components, based on market prices at which we sell those services individually. The client is able to choose which services it wishes to purchase. The separate components can be added or deleted at any time during the contract period at pre-determined prices. The Company has a history of selling each element separately to establish the market price of each element.
Revenue from software development and technology services is recognized as services are provided or on the percentage of completion method for those arrangements with specified milestones. The percentage of completion is based on labor hours incurred to total labor hours expected to be incurred. Additional technology revenues are either paid monthly or on an annual basis. If paid on an annual basis, the revenue is recognized over the year, and if paid on a monthly basis, the revenue is recognized in the month in which the service was provided.
Hosting and managed services contracts range in length from one to three years, and are typically renewed annually after the initial term for subsequent one year periods. Revenue from hosting and managed services is recognized ratably over the period for which the services are provided. In most cases the fees are either a flat monthly fee or based on the client's use of the system (transactions).
The Company's EDGE software is a web-based product and is typically provided to its customers in a Software as a Service ("SaaS") model. Revenues are recognized ratably over the period the service is provided. The method of payment can be based on the clients' use of the system (transactions), a flat monthly fee or an annual fee. Revenue for all methods of payment is recognized over the period the software is available to the client and the Company is responsible for providing software updates.
The Company has established vendor specific objective evidence for the individually priced elements in its contracts through the use of the market as each element in its contracts is sold both as a package and individually with the same pricing. For any element delivered for which vendor specific objective evidence (“VSOE”) is not available it uses the residual method. When applying the residual method, VSOE of fair value is allocated to each of the undelivered elements and the remaining consideration is allocated to the delivered elements.
Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. These revenues are recognized based on the net value of the services provided.
Certain order processing services are contracted out by the Company to optimized independent distribution warehouses in North America. All of these services are managed by the Company through its order management platform. Because the Company has the exclusive responsibility to contract and to manage the services provided to its clients by these independent warehouses and the related transportation, the revenue and expenses are recognized based on the amount of services charged to the client and the related expenses are part of the Company's cost of services.
Work in process represents costs and services which have been provided and properly recognized based on the above policies, however have not been billed to the client.
Shipping and handling costs are classified as cost of revenues.
Software and Development Enhancements
Software and development enhancement expenses include costs such as payroll and employee benefit costs associated with product development. The EDGE product platform, including the e-commerce, order management, warehouse management and transportation management systems, are continually being enhanced with new features and functions. Once technological feasibility of new features and functions is established, the costs incurred from release to production are capitalized and amortized over their useful life. The Company capitalized approximately $544,200 and $204,500 during the 13-week periods ended June 27, 2014 and June 28, 2013, respectively. The Company capitalized approximately $765,600 and $366,400 during the 26-week periods ended June 27, 2014 and June 28, 2013, respectively. Amortization expense related to capitalized software and charged to operations for the 13-week periods ended June 27, 2014 and June 28, 2013 was approximately $105,900 and $59,500, respectively. Amortization expense related to capitalized software and charged to operations for the 26-week periods ended June 27, 2014 and June 28, 2013 was approximately $198,000 and $113,000, 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 $12.6 million, or approximately 93% of total revenue, and approximately $8.8 million, or approximately 82% of total revenue, during the 13-week periods ended June 27, 2014 and June 28, 2013, respectively. Revenue from a single, multi-national customer with several brands amounted to approximately $24.5 million, or approximately 88% of total revenue, and approximately $18.8 million, or approximately 89% of total revenue, during the 26-week periods ended June 27, 2014 and June 28, 2013, respectively. Accounts receivable from this customer were approximately $4.2 million, or approximately 71% of total accounts receivable and approximately $4.1 million or approximately 69% of total accounts receivable, at June 27, 2014 and December 27, 2013, respectively. The risk of this concentration is mitigated as the deposits from this customer at June 27, 2014 and at December 27, 2013 were approximately $2.9 million and $2.1 million, respectively.
Accounts receivable result primarily from the revenue from e-commerce and fulfillment services to a variety of customers. Accounts receivable are stated at cost less an allowance for doubtful accounts. The Company extends credit to its various customers based on evaluation of the customer's financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts receivables, the customer's payment history and the customer's current ability to pay its obligations. Based on management's review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $179,000 and $579,800 is considered necessary as of June 27, 2014 and December 27, 2013, respectively. The Company charges uncollectible accounts against the allowance account once the invoices are deemed unlikely to be collectible. The Company does not accrue interest on past due receivables.
Property and Equipment
Property and equipment are recorded at cost and depreciated on a straight-line basis over their estimated useful lives, principally one to ten years. Accelerated methods are used for tax depreciation. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations. Depreciation expense was $153,200 and $102,500 for the 13-week periods ended June 27, 2014 and June 28, 2013, respectively, and $274,600 and $196,600 for the 26-week periods ended June 27, 2014 and June 28, 2013, respectively. Depreciation expense is included in selling, general and administrative expenses.
Depreciation is calculated by the straight-line method over the following estimated useful lives of the related assets:
| | | Years | |
Building | | | 7 - 20 | |
Warehouse equipment | | | 3 - 10 | |
Furniture and equipment | | | 3 - 7 | |
Computer equipment and software | | | 1 - 7 | |
Leasehold improvements | | Lease term | |
Estimated Fair Value of Financial Instruments
The aggregated net fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include receivables, payables, accrued expenses and short-term borrowings. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company’s debt is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
Uncertain Tax Positions
The Company periodically assesses its tax positions taken for all open tax years and has not identified any uncertain tax positions. The Company is not subject to examination by taxing authorities for years prior to 2011.
Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.
The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. In conducting this assessment, management considered a variety of factors, including the Company's operating profits, the reasons for the Company's operating losses in prior years, management's judgment as to the likelihood of profitability and expectations of future performance, and other factors. Management does not believe that a valuation allowance is necessary; however, the amount of deferred tax asset realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. Net loss carry forwards do not begin to expire until 2027.
Interest Rate Swap
Derivative financial instruments are carried at fair value on the consolidated balance sheets. The Company's derivative instrument is an interest rate swap that hedges the interest payments of certain debt by effectively converting interest from a variable rate to a fixed rate. This instrument is considered fully effective and qualifies for hedge accounting with changes in the fair value recorded in other comprehensive income (loss). The Company does not enter into derivative agreements for trading purposes.
The swap agreement's fair value is calculated using Level 2 inputs. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are based on observable market inputs (other than those included in Level 1) and are provided by the Company's lender, Fifth Third Bank. Level 3 inputs include inputs that are not currently observable.
Stock-Based Compensation
The Company has stock option and stock incentive plans for employees and non-employee directors that provide for grants of restricted stock awards and options to purchase shares of Jagged Peak common stock at exercise prices generally equal to the fair values of such stock at the dates of grant. The Company recognizes the cost of all share-based payments in the financial statements using a fair-value based measurement method. The Company uses a Black-Scholes model to value its stock option grants and expenses the related compensation cost using the straight-line method over the vesting period. The fair value of the stock compensation is determined on the grant date using assumptions for the expected term, volatility, dividend yield and the risk free interest rate. The period expense is then determined based on the valuation of the options and on estimated forfeitures.
Foreign Currency
The functional currency of the Company’s Canadian subsidiary, Jagged Peak Canada, Inc., is the local currency. The financial statements are translated to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs and expenses. Foreign currency translation gains and losses are recorded as a component of other comprehensive income. Net gains and losses resulting from foreign exchange transactions are recorded as a component of other income (expenses).
Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur upon issuance of certain additional potential common stock shares. Potential common stock shares consist of shares that may arise from outstanding dilutive common stock options (the number of which is computed using the "treasury stock method"). Diluted earnings per share considers the potential dilution that could occur if the Company's outstanding common stock options were exercised for common stock that then shared in the Company's earnings.
Recently Issued Financial Accounting Standards
Recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force ("EITF"), the American Institute of Certified Public Accountants ("AICPA"), and the SEC did not or are not believed by management to have a material impact on the Company's present or future financial statements.
3. Equity
Common Stock
Each share of common stock is entitled to one vote. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors (the "Board"), subject to the prior rights of the holders of any outstanding senior classes of stock, of which there are currently none. The Company records stock as issued when the consideration is received or the obligation is incurred.
The following summarizes the Company’s stock option activity and related information:
| | | Shares | | | Range of Exercise
Prices | | | Weighted Average
Exercise Price | |
Outstanding at December 28, 2012 | | | 2,335,782 | | | | 0.01-0.30 | | | | 0.14 | |
Options granted | | | 0 | | | | 0 | | | | 0 | |
Options exercised | | | 0 | | | | 0 | | | | 0 | |
Options cancelled or expired | | | (75,000 | ) | | | 0.30 | | | | 0.30 | |
Outstanding at December 27, 2013 | | | 2,260,782 | | | $ | 0.01-0.25 | | | $ | 0.13 | |
Options granted | | | 0 | | | | 0 | | | | 0 | |
Options exercised | | | 0 | | | | 0 | | | | 0 | |
Options cancelled or expired | | | 0 | | | | 0 | | | | 0 | |
Outstanding at June 27, 2014 | | | 2,260,782 | | | $ | 0.01-0.25 | | | $ | 0.13 | |
| | | | | | | | | | | | | |
Exercisable at June 27, 2014 | | | 2,260,782 | | | $ | 0.01-0.25 | | | $ | 0.13 | |
Exercisable at December 27, 2013 | | | 2,260,782 | | | $ | 0.01-0.25 | | | $ | 0.13 | |
The following table summarizes information about options outstanding and exercisable as of June 27, 2014:
Outstanding and Exercisable Options | |
Exercise
Price | | | Number
Outstanding | | | Number
Exercisable | | Weighted
Average
Remaining
Life (years) | | Weighted
Average
Price | |
| $ | 0.01 | | | | 10,782 | | | | 10,782 | | 36.5 | | $ | 0.01 | |
| $ | 0.13 | | | | 2,150,000 | | | | 2,150,000 | | 1.9 | | $ | 0.13 | |
| $ | 0.25 | | | | 100,000 | | | | 100,000 | | 7.4 | | $ | 0.25 | |
Notes payable consist of:
| | | June 27, 2014 | | | December 27, 2013 | |
| | | | | | | | | |
5-year term loan related to purchase of warehouse | | $ | 2,149,200 | | | $ | 2,208,900 | |
| | | | | | | | | |
$5.0 million senior credit facility, two year revolving line of credit | | | 2,760,000 | | | | 580,000 | |
| | | | | | | | | |
Total notes payable | | | 4,909,200 | | | | 2,788,900 | |
| | | | | | | | | |
Less current portion | | | 119,400 | | | | 119,400 | |
| | | | | | | | | |
Long-term portion of notes payable | | $ | 4,789,800 | | | $ | 2,669,500 | |
On June 25, 2012, the Company purchased its previously leased warehouse facility for $3.0 million. The purchase was financed with a $2.388 million 5-year term loan (the "Term Loan") amortized over 20 years. Principal and interest are due monthly. Concurrent with the Term Loan, the Companyentered 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 0.15% as of June 27, 2014. The swap agreement qualifies as an "effective" hedge under U.S. GAAP. As of June 27, 2014, the fair market value of the interest rate swap included in other accrued expenses is approximately $34,100.
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 make investments and loans.
On March 22, 2013, the Company amended the Facility to reduce the interest rate to an applicable margin of one-month LIBOR plus 2.50%. Prior to this Amendment, borrowings under the Facility bore interest at a rate equal to an applicable margin of one-month LIBOR plus 3.00%. In addition to paying monthly interest on outstanding principal under the Facility, the Company is required to pay a quarterly unutilized 0.25% commitment fee to the lender, based on the daily unused balance of the Facility. The Company may voluntarily repay outstanding loans under the Facility at any time without premium or penalty.
On August 27, 2013, the Company amended the Facility to increase the borrowing capacity to $5.0 million and to extend the maturity date to August 27, 2015.
The amount available for borrowing under the Facility was $2,240,000 and $4,420,000 as of June 27, 2014 and December 27, 2013, respectively.
5. Related Party Transaction
Jagged Peak's Chief Executive Officer, Chief Operations Officer, Chief Sales and Marketing Officer, a Director of the Company and the Employee Stock Option Plan (ESOP) collectively hold a majority of the common stock in an entity that was spun-off from the Company in 2010 and is now a variable interest of the Company. See Note 11,Variable Interest Entity, in the report on Form 10-K for the year ended December 27, 2013.
PART I – FINANCIAL INFORMATION
Item2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion is intended to further the reader's understanding of the Company's financial condition and results of operations and should be read in conjunction with the Company's financial statements and related notes included elsewhere herein. This discussion also contains forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of the risks and uncertainties set forth elsewhere in this Quarterly Report and in the Company's other SEC filings. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. The Company is not party to any transactions that would be considered "off balance sheet" pursuant to disclosure requirements under the SEC's Item 303(c) of Regulation S-K.
Overview
Jagged Peak, Inc. (the "Company" or "Jagged Peak") is a software and services company headquartered in Tampa, Florida, providing internally developed cloud-based enterprise e-commerce technology supporting the entire e-commerce life cycle including order, warehouse, and transportation management solutions. The Company's flagship product, EDGE™ (EDGE, Enterprise Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, locations, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, customer service, repair and reverse logistics, and marketing materials management, and automate other business processes through the use of the EDGE platform and its related software applications. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, healthcare, distribution, travel and tourism and manufacturing.
With the EDGE platform, Jagged Peak has continued to market the launch of TotalCommerce™ (TotalCommerce), an end-to-end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers. TotalCommerce is an outsourced "managed services" solution that leverages Jagged Peak's extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a network of fulfillment centers throughout the United States and Canada; back office program management; payment processing; and a range of online marketing services.
Jagged Peak operates two warehouses in Florida and an expandable network of 19 independently owned fulfillment warehouses throughout North America using the cloud-based EDGE platform. The EDGE application is able to automatically route the 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 June 27, 2014 and the period ended June 28, 2013 each consist of 26 weeks.
RESULTS OF OPERATIONS
For the 13-week period ended June 27, 2014 compared to the 13-week period ended June 28, 2013
Revenues increased $2,908,200, or 27%, to $13,624,800 for the 13-week period ended June 27, 2014, as compared to $10,716,600 for the 13-week period ended June 28, 2013. Greater e-commerce order processing resulted in increases in both technology and fulfillment service revenues. Revenues from implementation of new client sites and on-going development for existing clients were consistent across these periods.
Cost of revenue, which consists primarily of labor, fulfillment operations and facilities costs, increased by $3,154,600, or 37%, to $11,714,900 for the 13-week period ended June 27, 2014, as compared to $8,560,300 for the 13-week period ended June 28, 2013. As a percentage of revenue, cost of revenue was 86% for the 13-week period ended June 27, 2014, as compared to 80% for the 13-week period ended June 28, 2013. This increase is primarily related to the increase in fulfillment employees, contract labor needed to manage order growth and fulfillment costs incurred as part of the expanded warehouse space. The Company expects the expanded warehouse space to be fully operational by the end of 2014 to support the increase in expected fulfillment orders shipped from our Florida facilities.
Selling, general and administrative expenses increased by $717,100, or 42%, to $2,410,600 for the 13-week period ended June 27, 2014, as compared to $1,693,500 for the 13-week period ended June 28, 2013. This increase was primarily related to increases in staff costs due to additional employees needed to grow client support teams and the expanded warehouse space.
Interest expense decreased by $6,100 to $47,800 for the 13-week period ended June 27, 2014, as compared to $53,900 for the 13-week period ended June 28, 2013.
The Company realized a loss before provision for income taxes of $504,800 for the 13-week period ended June 27, 2014, as compared to income before provision for income taxes of $376,800 for the 13-week period ended June 28, 2013.
Income tax benefit was $137,400 for the 13-week period ended June 27, 2014 compared to an income tax expense of $152,300 for the 13-week period ended June 28, 2013. Differences between the taxable income and the effective tax rate used for 2014 and 2013, as compared to the U.S. federal statutory rate, are primarily due to permanent differences and taxes on foreign operations. As of June 27, 2014, the Company had U.S. (federal and state) net operating loss carry forwards of $880,400 to reduce future taxable income, which will expire between 2027 and 2032. The Company also has a Canadian net operating loss carry forward of $1,649,600 which does not begin to expire until 2030. Management believes there will be sufficient future earnings to support the more than likely realization of deferred tax assets in excess of existing taxable temporary differences. The amount of deferred tax assets considered realizable, however, could be reduced in the near-term if estimates of future taxable income are reduced.
The Company realized a net loss of $367,400 for the 13-week period ended June 27, 2014, compared with net income of $224,500 for the 13-week period ended June 28, 2013.
Basic loss per share from operations for the 13-week period ended June 27, 2014 was $0.02 per weighted average share, compared with basic income of $0.01 per weighted average share for the 13-week period ended June 28, 2013.
For the 26-week period ended June 27, 2014 compared to the 26-week period ended June 28, 2013
Revenues increased $6,647,200, or 32%, to $27,715,500 for the 26-week period ended June 27, 2014, as compared to $21,068,300 for the 26-week period ended June 28, 2013. Greater e-commerce order processing resulted in increases in both technology and fulfillment service revenues. 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 $6,727,800, or 40%, to $23,488,700 for the 26-week period ended June 27, 2014, as compared to $16,760,900 for the 26-week period ended June 28, 2013. As a percentage of revenue, cost of revenue was 85% for the 26-week period ended June 27, 2014, as compared to 80% for the 26-week period ended June 28, 2013. This increase is primarily related to the increase in fulfillment employees, contract labor needed to manage order growth and fulfillment costs incurred as part of the expanded warehouse space. The Company expects the expanded warehouse space to be fully operational by the end of 2014 to support the increase in fulfillment orders shipped from our Florida facilities.
Selling, general and administrative expenses increased by $887,900, or 25%, to $4,468,600 for the 26-week period ended June 27, 2014, as compared to $3,580,700 for the 26-week period ended June 28, 2013. This increase was primarily related to increases in staff costs due to additional employees needed to grow client support teams and the expanded warehouse space.
Interest expense decreased by $9,800 to $94,600 for the 26-week period ended June 27, 2014, as compared to $104,400 for the 26-week period ended June 28, 2013.
The Company realized a loss from operations before provision for income taxes of $385,500 for the 26-week period ended June 27, 2014, as compared to income before provision for income taxes of $560,400 for the 26-week period ended June 28, 2013.
Income tax benefit was $78,300 for the 26-week period ended June 27, 2014 compared to an income tax expense of $237,600 for the 26-week period ended June 28, 2013. Differences between the taxable income and the effective tax rate used for 2014 and 2013, as compared to the U.S. federal statutory rate, are primarily due to permanent differences and taxes on foreign operations. As of June 27, 2014, the Company had U.S. (federal and state) net operating loss carry forwards of $880,400 to reduce future taxable income, which will expire between 2027 and 2032. The Company also has a Canadian net operating loss carry forward of $1,649,600 which does not begin to expire until 2030. Management believes there will be sufficient future earnings to support the more than likely realization of deferred tax assets in excess of existing taxable temporary differences. The amount of deferred tax assets considered realizable, however, could be reduced in the near-term if estimates of future taxable income are reduced.
The Company realized a net loss of $307,200 for the 26-week period ended June 27, 2014, compared with net income of $322,800 for the 26-week period ended June 28, 2013.
Basic loss per share from operations for the 26-week period ended June 27, 2014 was $0.02 per weighted average share, compared with basic income of $0.02 per weighted average share for the 26-week period ended June 28, 2013.
Liquidity and Capital Resources
The Company’s cash needs consist of working capital, capital expenditures and debt service. The Company’s working capital needs primarily depend on the timing of collections from customers and payments to vendors. Capital expenditures consist of building, computer, and warehouse equipment purchases and developer salaries for EDGE enhancements. The Company reduces capital expenditure requirements by utilizing independent fulfillment warehouses. Independent fulfillment warehouses typically provide their own equipment, which reduces capital investment requirements.
For the 26-week period ended June 27, 2014, the Company’s operations used cash of approximately $332,400. Cash used in operating activities increased due to timing of accounts payable and an increase in other prepaid assets.
Net cash used in the Company’s investing activities totaled $1,772,500 for the 26-week period ended June 27, 2014 consisting of acquisition of warehouse equipment, computer hardware, and building improvements to the company owned warehouse in St. Petersburg and enhancements to the Company’s software. The Company expects total capital expenditures for the year 2014 will be approximately $2,000,000 to $2,500,000 to complete the new warehouse infrastructure and continued software enhancements.
The Company’s financing activities provided cash of $2,120,300 for the 26-week period ended June 27, 2014 consisting of net borrowings on its line of credit and payments on its term loan.
The Company’s primary uses of cash flow were to fund operations and borrowings under the Fifth Third Bank credit facility.
On March 23, 2012, the Company entered into a Senior Credit Facility with Fifth Third Bank (the “Facility”). The Facility initially provided for a revolving line of credit with a maturity of two years and a maximum borrowing capacity of $3.0 million. The Facility is available for general corporate purposes. The Facility is secured by a first priority lien on substantially all of the Company’s assets. The Facility contains customary events of default and covenants including among other things, covenants that restrict but do not prevent the ability of the Company to incur certain additional indebtedness, create or permit liens on assets, pay dividends and repurchase stock, engage in mergers or acquisitions and make investments and loans.
On March 22, 2013, the Company amended the Facility to reduce the interest rate to an applicable margin of one-month LIBOR plus 2.50%. Prior to this Amendment, borrowings under the Facility bore interest at a rate equal to an applicable margin of one-month LIBOR plus 3.00%. In addition to paying monthly interest on outstanding principal under the Facility, the Company is required to pay a quarterly unused line fee of 0.25% to the lender, based on the average daily unused balance of the Facility. The Company may voluntarily repay outstanding loans under the Facility at any time without premium or penalty.
On August 27, 2013, the Company amended the Facility to increase the borrowing capacity to $5.0 million and to extend the maturity date to August 27, 2015. One-month LIBOR was approximately 0.15% as of June 27, 2014.
The Company believes that, based on current operations and anticipated growth, cash flow from operations, together with the Facility, will be sufficient to fund anticipated capital expenditures, operating expenses and other anticipated liquidity needs for the next twelve months. Anticipated debt maturity in 2015, and other unforeseen events may require the Company to seek alternative financing, such as restructuring or refinancing of its long-term debt, selling assets or operations or selling debt or equity securities. If these alternatives were not available in a timely manner or on satisfactory terms or are not permitted under the Facility and the Company defaulted on obligations, its debt could be accelerated and its lender may foreclose on its assets.
At June 27, 2014, the balance outstanding on the Facility was approximately $2,760,000.
CRITICALACCOUNTING POLICIES AND ESTIMATES
Use of Estimates
The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates, including but not limited to, capitalization of software, work in process, recoverability of long-lived assets, recoverability of prepaid expenses, valuation of deferred tax assets and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made, as information is available. Management believes that these estimates are reasonable however; actual results could differ from these estimates.
Revenue Recognition
There are multiple components in Jagged Peak's TotalCommerce solution, which are sold through a master agreement where each individual component is priced separately and distinctly from the other components, based on market prices at which we sell those services individually. The client is able to choose which services it wishes to purchase. The separate components can be added or deleted at any time during the contract period at pre-determined prices. The Company has a history of selling each element separately to establish the market price of each element.
Revenue from software development and technology services is recognized as services are provided or on the percentage of completion method for those arrangements with specified milestones. The percentage of completion is based on labor hours incurred to total labor hours expected to be incurred. Additional technology revenues are either paid monthly or on an annual basis. If paid on an annual basis, the revenue is recognized over the year, and if paid on a monthly basis, the revenue is recognized in the month in which the service was provided.
Hosting and managed services contracts range in length from one to three years, and are typically renewed annually after the initial term for subsequent one year periods. Revenue from hosting and managed services is recognized ratably over the period for which the services are provided. In most cases the fees are either a flat monthly fee or based on the client's use of the system (transactions).
The Company's EDGE software is a web-based product and is typically provided to its customers in a Software as a Service ("SaaS") model. Revenues are recognized ratably over the period the service is provided. The method of payment can be based on the clients' use of the system (transactions), a flat monthly fee or an annual fee. Revenue for all methods of payment is recognized over the period the software is available to the client and the Company is responsible for providing software updates.
The Company has established vendor specific objective evidence for the individually priced elements in its contracts through the use of the market as each element in its contracts is sold both as a package and individually with the same pricing. For any element delivered for which vendor specific objective evidence ("VSOE") is not available it uses the residual method. When applying the residual method, VSOE of fair value is allocated to each of the undelivered elements and the remaining consideration is allocated to the delivered elements.
Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. These revenues are recognized based on the net value of the services provided.
Certain order processing services are contracted out by the Company to optimized independent distribution warehouses in North America. All of these services are managed by the Company through its order management platform. Because the Company has the exclusive responsibility to contract and to manage the services provided to its clients by these independent warehouses and the related transportation, the revenue and expenses are recognized based on the amount of services charged to the client and the related expenses are part of the Company's cost of services.
Work in process represents costs and services which have been provided and properly recognized based on the above policies, however have not been billed to the client.
Shipping and handling costs are classified as cost of revenues.
Concentration of Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and accounts receivable.
Cash is maintained with one major financial institution in the United States and Canada. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.
Revenue from a single, multi-national customer with several brands amounted to approximately $12.6 million, or approximately 93% of total revenue, and approximately $8.8 million, or approximately 82% of total revenue, during the 13-week periods ended June 27, 2014 and June 28, 2013, respectively. Revenue from a single, multi-national customer with several brands amounted to approximately $24.5 million, or approximately 88% of total revenue, and approximately $18.8 million, or approximately 89% of total revenue, during the 26-week periods ended June 27, 2014 and June 28, 2013, respectively. Accounts receivable from this customer were approximately $4.2 million, or approximately 71% of total accounts receivable and approximately $4.1 million or approximately 69% of total accounts receivable, at June 27, 2014 and December 27, 2013, respectively. The risk of this concentration is mitigated as the deposits from this customer at June 27, 2014 and at December 27, 2013 were approximately $2.9 million and $2.1 million, respectively.
Accounts receivable result primarily from the revenue from e-commerce and fulfillment services to a variety of customers. Accounts receivable are stated at cost less an allowance for doubtful accounts. The Company extends credit to its various customers based on evaluation of the customer's financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts receivables, the customer's payment history and the customer's current ability to pay its obligations. Based on management's review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $179,000 and $579,800 is considered necessary as of June 27, 2014 and December 27, 2013, respectively. The Company charges uncollectible accounts against the allowance account once the invoices are deemed unlikely to be collectible. The Company does not accrue interest on past due receivables.
Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.
The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. In conducting this assessment, management considered a variety of factors, including the Company's operating profits, the reasons for the Company's operating losses in prior years, management's judgment as to the likelihood of profitability and expectations of future performance, and other factors. Management does not believe that a valuation allowance is necessary; however, the amount of deferred tax asset realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. Net loss carry forwards do not begin to expire until 2027.
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 26-week period ended June 27, 2014 was approximately $181,400 compared to approximately $974,400 for the 26-week period ended June 28, 2013. The Company defines Adjusted EBITDA as earnings before interest, taxes, and depreciation and amortization. To provide consistent comparisons of year-over-year Adjusted EBITDA, the following reconciliation is provided:
| | | For the 26-week period ended | |
| | | June 27, 2014
| | | June 28, 2013
| |
Net income (loss) as reported in accordance with US GAAP | | $ | (307,200 | ) | | $ | 322,800 | |
Income tax expense (benefit) | | | (78,300 | ) | | | 237,600 | |
Interest expense | | | 94,600 | | | | 104,400 | |
Depreciation and software amortization | | | 472,600 | | | | 309,600 | |
Adjusted EBITDA | | $ | 181,700 | | | $ | 974,400 | |
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.
Item3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
Item4. Controls and Procedures
| | (a) | Evaluation of disclosure controls and procedures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 27, 2014. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This conclusion by the Company’s Chief Executive Officer and Chief Financial Officer does not relate to reporting periods after June 27, 2014. |
| | (b) | Changes in Internal Control over Financial Reporting.No change in the Company’s internal control over financial reporting occurred during the quarter ending June 27, 2014, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. |
PARTII—OTHER INFORMATION
Item1. Legal Proceedings
None.
Item 1A. Risk Factors
Not Applicable.
Item2.Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item3. Defaults Upon Senior Securities
Not applicable
Item4. Mine Safety Disclosures
Not applicable
Item5. Other Information
None.
Item6. Exhibits
(a) | Exhibits included herewith are: |
31.1 | | Certification of the Chief Executive Officer dated August 11, 2014 |
| | |
31.2 | | Certification of the Chief Financial Officer dated August 11, 2014 |
| | |
32.1 | | Certification of the Chief Executive Officer, pursuant to 18 U.S.C. section 1350, dated August 11, 2014 |
| | |
32.2 | | Certification of the Chief Financial Officer, pursuant to 18 U.S.C. section 1350, dated August 11, 2014 |
| | |
| Exhibit 101.1 | | Interactive Data File: |
| | | |
101.1NS | | XBRL Instance Document |
| | | |
101.SCH | | XBRL Schema Document |
| | |
101.CAL | | XBRL Calculation Linkbase Document |
| | |
101.DEF | | XBRL Definition Linkbase Document |
| | |
101.LAB | | XBRL Label Linkbase Document |
| | |
101.PRE | | XBRL Presentation Linkbase Document |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| | | |
Jagged Peak, Inc. | | |
Registrant | | |
| | | |
/s/ Paul B. Demirdjian | | August 11, 2014 |
Paul B. Demirdjian | | Date |
Chairman of the Board of Directors, Chief Executive Officer (Principal Executive Officer) | | |
| | | |
/s/ Albert Narvades | | August 11, 2014 |
Albert Narvades | | Date |
Senior Vice President, Chief Financial Officer, | | |
Treasurer and Secretary (Principal Financial Officer) | | |
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