UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended: October 31, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to _________________
Commission file number: 000-28499
JAGGED EDGE MOUNTAIN GEAR, INC.
(Exact name of small business issuer as specified in its charter)
COLORADO 84-144-8778
(State or other jurisdiction of
incorporation or organization) (IRS Employer Identification No.)
52 PILOT KNOB LANE, TELLURIDE, CO 81435
(Address of principal executive offices)
970-728-0175
(Registrant's telephone number)
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 the filing
requirements for at least the past 90 days.
Yes X No
----- ------
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
SHARES OUTSTANDING of common stock, $0.001 par value per share, as of December
15, 2000 are 16,743,578.
JAGGED EDGE MOUNTAIN GEAR, INC.
Index to Form 10-QSB
October 31, 2000
Page
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Balance Sheets as of: F-3
October 31, 2000 and July 31, 2000
Statements of Operations for the Three Months Ended F-4
October 31, 2000 and 1999
Statements of Cash Flows for the Three Months Ended F-5
October 31, 2000 and 1999
Notes to Financial Statements F-6, F-7
Item 2: Management's Discussion and Analysis of Financial Condition F-8, F-10
And Results of Operations
Item 3: Quantitative and Qualitative Disclosure About Market Risk F-11
Part II. OTHER INFORMATION:
Item 1: Legal Proceedings 12
Item 6: Exhibits and Reports on Form 8-K 12
Signature Page 13
2
Part I
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
JAGGED EDGE MOUNTAIN GEAR, INC.
BALANCE SHEETS
October 31, July 31,
2000 2000
----------- ----------
ASSETS
Current Assets:
Cash $ 57,536 $ 64,277
Accounts receivable, less allowance for
doubtful accounts of $10,000 and $10,000 163,973 28,854
Other receivables -0 29,341
Inventories 1,257,280 851,087
Prepaid expenses 89,701 2,977
--------- --------
Total Current Assets 1,568,490 976,536
Equipment and Leasehold Improvements, net 216,137 234,649
Other Assets:
Trade name, net 18,834 19,667
Deposits 22,951 22,951
---------- ----------
Total Assets $1,826,412 $1,253,803
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 854,069 $ 526,909
Credit cards 62,760 70,461
Current portion of long-term debt 672,055 181,157
--------- ---------
Total Current Liabilities 1,588,884 778,527
Long-Term Debt, net of current portion 143,272 164,041
---------- ----------
Total Liabilities 1,732,156 942,568
---------- ----------
Stockholders' Equity:
Preferred stock $.001 par value;
10 million shares authorized, none issued
Common stock $.001 par value;
50 million shares authorized,
16,743,578 and 16,741,978 shares issued
and outstanding 16,744 16,742
Additional paid-in capital 2,208,628 2,208,262
Accumulated (deficit) (2,131,115) (1,913,769)
---------- ----------
Total Stockholders' Equity 94,257 311,235
---------- ----------
Total Liabilities and Stockholders' Equity $1,826,412 $1,253,803
========== ==========
See accompanying notes.
F-1
JAGGED EDGE MOUNTAIN GEAR, INC.
STATEMENTS OF OPERATIONS
For the Three Months Ended October 31, 2000 and 1999
2000 1999
---------- ----------
Sales $ 606,739 $ 807,301
Cost of Goods Sold 406,485 506,992
---------- ----------
Gross Profit 200,254 300,309
Operating Expenses:
Selling 224,089 214,285
General and administrative 156,308 163,051
Depreciation and amortization 21,866 7,730
---------- ----------
402,263 385,066
Operating loss (202,009) (84,757)
Other Income (Expense):
Interest expense (15,337) (20,237)
Other income -0 2,464
---------- ----------
Net Loss Before Income Tax (217,346) (102,530)
Provision for Income Tax -0 -0
---------- ----------
Net (Loss) $(217,346) $(102,530)
========== ==========
Basic and Diluted (Loss) Per Share $ (0.01) $ (0.01)
========== ==========
Weighted Average Shares 16,741,978 13,893,420
========== ==========
See accompanying notes.
F-2
JAGGED EDGE MOUNTAIN GEAR, INC.
STATEMENTS OF CASH FLOWS
For the Three Months Ended October 31, 2000 and 1999
2000 1999
---------- ----------
Cash Flows from Operating Activities:
Net (loss) $ (217,346) $ (102,530)
Depreciation and amortization 21,866 7,730
Common stock issued as compensation -0 24,708
Common stock issued in lieu of interest 368 19,225
Changes in assets and liabilities
(Increase) in accounts receivable (105,778) (128,752)
(Increase) / Decrease in inventories (406,193) 40,954
(Increase) in prepaid expenses (86,724) -0
(Increase) in other assets 0- (23,477)
Increase / (Decrease) in accounts payable 327,160 (61,523)
and accrued liabilities
Increase / (Decrease) in credit cards (7,701) 2,825
---------- ----------
Net Cash Used by Operating Activities (474,348) (220,840)
---------- ----------
Cash Flows from Investing Activities
Purchase of equipment (2,359) (4,157)
---------- ----------
Net Cash Used by Investing Activities (2,359 (4,157)
---------- ----------
Cash Flows from Financing Activities
Proceeds from short-term debt 487,285 -
Principal payments on short-term debt (17,318) (99,284)
Proceeds from long-term debt 0- 52,121
Proceeds from issuance of stock 0- 313,375
---------- ----------
Net Cash Provided by Financing Activities 469,967 266,212
---------- ----------
(Decrease) / Increase in Cash
and Cash Equivalents (6,741) 41,215
Cash and Cash Equivalents - Beginning of Period 64,277 42,606
---------- ----------
Cash and Cash Equivalents - End of Period $ 57,536 $ 83,821
========== ==========
Supplemental disclosures:
Cash paid for interest $ 6,513 $ 9,357
See accompanying notes.
F-3
Notes to Financial Statements:
Note 1 - Management's Representation:
The management of Jagged Edge Mountain Gear, Inc. (JEMG, "The Company") without
audit, has prepared the attached financial statements pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in annual financial statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. Accordingly, the interim,
unaudited financial statements should be read in conjunction with the financial
statements included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended July 31, 2000 (the Form "10-KSB").
These financial statements have been prepared by the Company in a manner
consistent with that used in the preparation of the financial statements
included in the Form 10-KSB. In the opinion of Management, the accompanying
financial statements reflect all adjustments considered necessary for fair
presentation of financial position and results of operations and cash flows for
the periods presented. All adjustments were of a normal recurring nature, and
the attached financial statements present fairly the financial position for the
three-month period ended on October 31, 2000. The results of operations for the
three-month period ended on October 31, 2000 are not necessarily indicative of
the results to be expected for the fiscal year ending July 31, 2001. Certain
amounts recorded in the fiscal year 2000 (FY2000) three-month period have been
reclassified to conform to the fiscal year 2001 (FY2001) presentation.
Note 2 - Basis of Presentation:
Going Concern Consideration. The Company has incurred significant losses since
its inception, and this, coupled with a shortage of liquidity, raises
substantial doubt about its ability to continue as a going concern. These
conditions are partially the result of less than expected sales volumes during
fiscal 2000 and 1999; in addition, the Company incurred substantial cost
inefficiencies associated with rapid expansion in fiscal 2000 and 1999. The
Company hopes to achieve increased future sales volume by substantially
increasing the distribution of their mail order catalog and adding a new product
brand targeted at younger customers. Management hopes to improve the gross
margin by increasing sales prices and controlling discounting. The success of
these plans will directly affect the Company's ability to meet its short-term
obligations.
Note 3 - Debt:
During August and September 2000, the Company borrowed $475,000 from an
individual through a corporation controlled by him. The loan bears interest at 1
1/4% over the London Interbank Offer Rate, is due in 120 days and is secured by
inventory. As consideration for making the loan, the lender was granted options
to purchase 400,000 shares of common stock at $.28 per share for three years. As
of October 31, 2000 no principle payments have been made on this loan. The loan
is due in December 2000, but company managment feels confident that the due date
will be renegotiated although no assurances can be given.
Note 4 - Stock Issued as Compensation:
During the current three-month period ended October 31, 2000 no Company stock
was issued as compensation. During the comparative three-month period ended
October 31, 1999, the Company issued 3,333 shares of restricted common stock to
employees as compensation. During the current three-month period the company
issued 1,600 shares of restricted common stock to comply with a requirement of
one of its loan agreements. The Company recorded $368 of interest expense
related to this transaction. During the comparative period, the Company issued
27,250 shares of restricted common stock valued at $19,225 as compensation for
accrued interest. During the current three-month period no Company stock was
issued as payment for miscellaneous expenses. During the comparative three-month
period the Company issued 2,750 shares of restricted common stock as
compensation for miscellaneous expenses. Total expense recognized and recorded
by the Company during the comparative period was $24,708.
Note 5 - Stock Sales:
The Company did not sell any of its common stock during the current three-month
period ended October 31, 2000. During the comparative three-month period ended
October 31, 1999 the Company sold 1,005,834 shares of restricted common stock to
accredited investors for $313,375 cash.
F-4
Note 6 - Earnings Per Share:
Basic earnings per share (EPS) are computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted EPS
is computed by dividing net income by the diluted weighted average number of
common shares outstanding during the period. Dilutive EPS reflects the potential
dilution that could occur upon exercise of dilutive instruments, such as stock
options. The Company does not present dilutive EPS for the three months ended
October 31, 2000 and 1999 because the inclusion would be anti-dilutive.
F-5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
As discussed in Note 2 to the financial statements, the Company has suffered
recurring losses, negative cash flows from operations and resulting working
capital shortages. Unless the Company can raise additional equity or obtain
additional debt, there is substantial doubt as to the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Results of Operations
- ---------------------
Company operations for the three-month period ended October 31, 2000 as compared
to three months ended October 31, 1999 resulted in a net loss of approximately
$217,346 as compared to a net loss of $102,530, respectively. Net loss per share
for the periods was $(0.01) and $(0.01), based upon weighted average shares
outstanding of 16,741,978 and 13,893,420, respectively. Net sales decreased by
$(200,561) to $606,739 for the three-month period ended October 31, 2000 from
$807,301 during the comparative period of 1999. Company Management attributes
the reduced sales and increased loss during the period primarily to the
following factors.
o Reduced retail sales volumes. The Company currently owns and
operates three retail store locations. During last years
comparative period the Company had five retail locations. Net
retail store sales were down $(108,406) from the comparative
period. See revenue discussion below.
o Reduced wholesale sales volumes. Company wholesale volumes were
down $(93,907) from the comparative three-month period. See
revenue discussion below.
o Company difficulties getting overseas Jagged Edge production
shipped to the warehouse facility and retail locations on a
timely basis. Management believes the latenessof some ship-
ments, and resultant availability, had a detrimental effect
on sales volumes, both retail and wholesale.
o Increased depreciation and amortization expense to $21,866 dur-
ing the current three-month period from $7,730 recognized in
the comparative period.
Revenues
- --------
The Company's total net product sales for all sales divisions during the
three-month periods ended October 31, 2000 and October 31, 1999 were
approximately $606,739 and $807,301 respectively, for a decrease of $(200,561)
or (24.8)%.
Retail store gross sales for the three-month periods ended October 31, 2000 and
1999 were approximately $295,222 and $403,628 respectively, for a decrease of
$(108,406) or (26.9)%. Retail store gross sales comprised 48.7% and 50.0% of
total net product sales, respectively. The primary reason retail sales were down
during the current period is the retail store closings of the Ouray and Mountain
Village, Colorado locations during March and April 2000. Additionally, as
mentioned above, the Company had difficulty receiving certain product to support
sales efforts.
Wholesale division gross sales for the three-month periods ended October 31,
2000 and 1999 were approximately $286,180 and $380,087 respectively, for a
decrease of $(93,907) or (24.7)%. Wholesale gross sales comprised 47.2% and
47.1% of total net product sales, respectively. Wholesale sales were down
primarily as a result of lost sales resulting from Company difficulties getting
overseas Jagged Edge production shipped to the warehouse facility on a timely
basis.
Catalog and Mail Order division gross sales for the three-month periods ended
October 31, 2000 and 1999 were approximately $36,661 and $33,092 respectively,
for an increase of $3,569 or 10.8%. Catalog and Mail Order gross sales comprised
6.0% and 4.1% of total net product sales, respectively.
3
Sales returns for the three-month periods ended October 31, 2000 and 1999 were
approximately $15,897 and $14,584 respectively, for an increase in returns of
$1,313 or 9.0%. Sales divisions in this analysis do not break down data for
sales returns.
The following table is provided as an aid to further understand Company sales.
---------------------------
% Three Months % Three Months Change From October 31,
thru thru 1999 to October 31, 2000
---------------------------
Revenues: Total October 31, Total October 31, % $
----- ------------ ----- ------------
2000 1999
---- ----
Retail Division 48.7% $ 295,222 50.0% $ 403,628 -26.9% $ (108,406)
Wholesale Division 47.2% 286,180 47.1% 380,087 -24.7% $ (93,907)
Catalog Mail Order Division 6.0% 36,661 4.1% 33,092 10.8% $ 3,569
---------------------------------------------------------------------
Total Gross Sales Revenues 101.9% 618,063 101.2% 816,807 -24.3% -198,744
Less: Returns -2.6% (15,897) -1.8% (14,584) 9.0% (1,313)
---------------------------------------------------------------------
Net Sales Revenues 99.2% 602,166 99.4% 802,223 -24.9% -200,057
Shipping & Freight Collected 0.8% 4,574 0.6% 5,078 -9.9% -504
---------------------------------------------------------------------
Total Net Revenues 100.0% $ 606,739 100.0% $ 807,301 -24.8% $ (200,561)
=====================================================================
Management believes that some, but not all, of the sales losses attributable to
late shipments may be timing differences and will be recovered in the next
financial quarter, although the materiality of, and eventual sales dollars
recognized are not measurable at this time. There can be no assurance these
sales recoveries will occur.
Cost of Goods Sold
- ------------------
The Company's total product cost of sales for all sales divisions during the
three-month periods ended October 31, 2000 and 1999 were approximately $406,485
and $506,992 or 67.0% and 62.8% of net sales respectively, for a decrease of
$(100,507) or (20)%.
Cost of sales as a percentage of total sales in the three-month period ended
October 31, 2000 increased to 67.0% from 62.8% in the comparative period ended
October 31, 1999. This increase was primarily the result of the higher cost of
non-Jagged Edge products sold in the retail locations, as overseas shipments of
Jagged Edge product were not received and available for sale in a timely manner.
When desired Jagged Edge product is unavailable, the sales mix of Jagged Edge
versus non-Jagged Edge product is changed, typically resulting in higher overall
cost of sales and overall lower margins. Small surplus inventory sales,
primarily via the internet, below standard markup price, also contributed to the
increased cost percentages.
Selling & Marketing Expenses
- ----------------------------
Selling and marketing expenses for the three-month periods ended October 31,
2000 and 1999 were approximately $224,089 and $214,285, respectively, for an
increase of $9,804 or 4.6%.
The small increase in selling and marketing expenses over the comparable period
of last year was attributable to the addition of key sales/marketing personnel,
and an increase in national magazine print advertisements.
General & Administrative Expenses
- ---------------------------------
General and Administrative expenses for the three-month periods ended October
31, 2000 and 1999 were approximately $156,308 and $163,051, respectively, for a
decrease of $(6,743) or (4.1)%. The decrease in general & administrative
expenses is consistent with fixed G&A costs within the organization.
4
Interest Expense
- ----------------
Interest expense for the three-month periods ended October 31, 2000 and 1999 was
approximately $15,337 and $20,237 respectively, or a decrease of $(4,900) or
(24)%. Interest expense decreased due to fewer non-cash charges for the fair
market value of stock issued as payment for interest expense.
Liquidity and Capital Resources
- --------------------------------
During the three months ended October 31, 2000, the Company's current ratio
Declined to .99 as compared to 1.25 at July 31, 2000. Net working capital
decreased $218,403 to $(20,394) at October 31, 2000 from $198,009 at July 31,
2000. The Company's cash balances decreased to $57,536 at October 31, 2000, from
$64,277 at July 31, 2000.
Principal changes in the components of net working capital for the three-month
period ended October 31, 2000 as compared to fiscal year end July 31, 2000
consist of:
----------------------
% % Change From July 31,
2000 to October 31,
2000
----------------------
Working Capital Components: October 31, July 31, 2000 $
------------ ------------- -
Total 2000 Total 2000
Cash 3.7% 57,536 6.6% 64,277 $ (6,741)
Account receivable 10.5% 163,973 3.0% 28,854 $ 135,119
Other receivable 0.0% 0 3.0% 29,341 $ (29,341)
Inventories 80.2% 1,257,280 87.2% 851,087 $ 406,193
Prepaid expenses 5.7% 89,701 0.3% 2,977 $ 86,724
---------------------------------------------- ---------------------
Current Assets 100.0% 1,568,490 100.0% 976,536 $ 591,954
Accounts payable and accrued liabilities 53.8% 854,069 67.7% 526,909 $ 327,160
Current maturities of notes payable 42.3% 672,055 23.3% 181,157 $ 490,898
Other current payables 3.9% 62,760 9.1% 70,461 $ (7,701)
---------------------------------------------- ---------------------
Current Liabilities 100.0% 1,588,884 100.0% 778,527 $ 810,357
---------------- -------------- ---------------------
Working Capital $ (20,394) $198,009 $ (218,403)
================ ============== =====================
The principal reasons for the decrease in working capital during the period are
the following. The Company increased short-term borrowings by receiving a
120-day loan of $475,000. Trade accounts payable increased by $327,000. The loan
proceeds and increases in accounts payable were used primarily to release
overseas goods and increase inventory levels in anticipation of expected fall
and winter sales seasons. Other portions of the proceeds were used primarily for
operating expenses including prepayments on the fall/winter catalog mailing.
5
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The company is exposed to market risks, which include foreign currency risks,
interest rate risks, and inflation risk. The Company does not engage in
financial transactions for trading or speculative purposes.
Foreign Currency Exchange Rate Risk
- -----------------------------------
The Company's inventory purchases from contract manufacturers in the Far East
are denominated in United States dollars; however, purchase prices for the
Company's products may be impacted by fluctuations in the exchange rate between
the United States dollar and the local currencies of the contract manufacturers,
which may have the effect of increasing the Company's cost of goods in the
future.
In addition, the Company's sales in Japan and Canada are denominated at the time
of order commitment, in the United States dollar, which may have a negative
impact on order completion or fulfillment or the rate of growth of sales in
those countries if the U.S. dollar were to strengthen significantly versus the
related foreign currency. Due to the number of foreign currencies involved and
the fact that not all of these foreign currencies fluctuate in the same manner
against the United States dollar, the Company cannot quantify in any meaningful
way the potential effect of such fluctuations on future income.
Furthermore, the Company may be affected by economic and political conditions in
each of the countries in which it transacts business. Risks associated with
operating in the international arena include: o Economic instability, including
the possible revaluation of currencies.
o Extreme currency exchange fluctuations where the Company has not
entered into foreign currency forward and option contracts to
manage exposure to certain foreign currency commitments hedged
any forward transactions.
o Changes to import or export regulations (including quotas).
o Labor or civil unrest.
o In certain parts of the world, political instability.
The Company has not as yet been materially affected by any such risks, but
cannot predict the likelihood of such developments occurring or the impact of
any such risks to the future profitability of the Company.
Interest Rate Risk
- -------------------
The interest payable on some of the Company's loans is based on variable
interest rates and therefore affected by changes in market interest rates. If
interest rates on existing variable rate debt rises due to increases in the
prime rate, the Company's results from operations and cash flows would be
impacted, although the Company believes, not materially.
Inflation Risk
- --------------
The Company believes that the relatively moderate rates of inflation over the
last three years in the United States, where it primarily competes, have not had
a significant effect on its net sales or results of operations. Higher rates of
inflation have been experienced in a number of foreign countries in which the
Company's products are manufactured, but this has not had a material effect on
the Company's net sales or results of operations. In the past, the Company has
been able to offset its cost increases by negotiation or changing suppliers.
6
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information on legal proceedings, see Item 3 of the July 31, 2000
Form 10-KSB.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on form 8-K were filed by the Company during the three
months ended October 31, 2000.
7
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Jagged Edge Mountain Gear, Inc.
(Registrant)
Dated: December 15, 2000 By: /s/ Margaret A. Quenemoen
-----------------------------
Margaret A. Quenemoen
President
Dated: December 15, 2000 By: /s/ Craig K. Carr
-------------------------------
Craig K. Carr
Chief Financial Officer
8