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: January 31, 2001
[ ] 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 March 20,
2001 are 16,745,078.
JAGGED EDGE MOUNTAIN GEAR, INC.
Index to Form 10-QSB
January 31, 2001
Page
Part I. FINANCIAL INFORMATION
Item 1: Financial Statements (Unaudited)
Balance Sheets as of: F-1
January 31, 2001 and July 31, 2000
Statements of Operations for the Three and Six Month Ended F-2
January 31, 2001 and January 31, 2000
Statements of Cash Flows for the Six Months Ended F-3
January 31, 2001 and January 31, 2000
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
January 31, July 31,
2001 2000
----------- ----------
ASSETS
Current Assets:
Cash $111,257 $ 64,277
Accounts receivable, less allowance for
doubtful accounts of $10,000 and $10,000 187,189 28,854
Other receivables -0 29,341
Inventories 677,957 851,087
Prepaid expenses 11,510 2,977
--------- --------
Total Current Assets 987,913 976,536
Equipment and Leasehold Improvements, net 192,583 234,649
Other Assets:
Trade name, net 18,501 19,667
Deposits 22,951 22,951
---------- ----------
Total Assets $1,221,948 $1,253,803
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities $ 771,120 $ 526,909
Credit cards 77,082 70,461
Current portion of long-term debt 229,310 181,157
--------- ---------
Total Current Liabilities 1,077,512 778,527
Long-Term Debt, net of current portion 120,201 164,041
---------- ----------
Total Liabilities 1,197,713 942,568
---------- ----------
Stockholders' Equity:
Preferred stock $.001 par value;
10 million shares authorized, none issued
Common stock $.001 par value;
50 million shares authorized,
16,745,078 and 16,741,978 shares issued
and outstanding 16,745 16,742
Additional paid-in capital 2,208,777 2,208,262
Accumulated (deficit) (2,201,286) (1,913,769)
---------- ----------
Total Stockholders' Equity 24,235 311,235
---------- ----------
Total Liabilities and Stockholders' Equity $1,221,948 $1,253,803
========== ==========
See accompanying notes.
F-1
JAGGED EDGE MOUNTAIN GEAR, INC.
STATEMENTS OF OPERATIONS
For the Three Month and Six Month Periods Ended January 31, 2001 and 2000
Three Months Ended Six Months Ended
January 31, January 31,
2001 2000 2001 2000
---- ---- ---- ----
Sales $ 1,651,540 $ 671,138 $ 2,258,279 $ 1,478,439
Cost of Goods Sold 876,695 520,857 1,283,180 1,027,849
---------- ---------- ---------- ----------
GROSS PROFIT 774,845 150,282 975,099 450,590
Operating Expenses:
Selling 613,333 399,849 837,422 614,134
General, & Administrative 179,289 63,751 335,597 224,841
Depreciation & Amortization 21,366 9,135 43,232 16,865
---------- ---------- ---------- ----------
813,988 472,735 1,216,251 855,840
OPERATING LOSS (39,143) (322,453) (241,152) (405,250)
Other Income (Expense):
Interest Expense (31,053) (3,608) (46,390) (23,845)
Other Income -0 (1,561) -0 (623)
---------- ---------- ---------- ----------
NET LOSS BEFORE INCOME TAX (70,196) (327,622) (287,542) (429,718)
Provision for Income Tax -0 -0 -0 -0
---------- ---------- ---------- ----------
NET (LOSS) $ (70,196) $(327,622) $ (287,542) $(429,718)
========== ========== ========== ==========
BASIC AND DILUTED LOSS PER SHARE $ (0.00) $ (0.02) $ (0.02) $ (0.03)
========== ========== ========== ==========
Weighted Average Shares 16,743,153 14,369,175 16,741,978 14,036,697
========== ========== ========== ==========
See accompanying notes.
F-2
JAGGED EDGE MOUNTAIN GEAR, INC.
STATEMENTS OF CASH FLOWS For the Six Months Ended
January 31, 2001 and 2000
2001 2000
---------- ----------
Cash Flows from Operating Activities:
Net (loss) $ (287,542) $ (430,152)
Depreciation and amortization 43,232 14,000
Common stock issued as compensation -0 24,708
Common stock issued in lieu of interest 518 19,225
Expenses paid with common stock -0 2,160
Changes in assets and liabilities:
(Increase) / Decrease in accounts receivable (158,335) 48,588
Decrease in other accounts receivable 29,341 -0
(Increase) / Decrease in inventories 173,130 (59,799)
Increase in checks in excess of balance -0 2,974
(Increase) in prepaid expenses (8,533) -0
(Increase) in other assets -0 (91,688)
Increase / (Decrease) in accounts payable 244,211 269,946
and accrued liabilities
Increase / (Decrease) in credit cards 6,646 2,995
---------- ----------
Net Cash Used by Operating Activities 42,668 (197,043)
---------- ----------
Cash Flows from Investing Activities
Purchase of equipment -0 (26,693)
---------- ----------
Net Cash Used by Investing Activities -0 (26,693)
---------- ----------
Cash Flows from Financing Activities
Proceeds from short-term debt 487,285 40,011
Principal payments on short-term debt (482,972) (36,557)
Proceeds from long-term debt -0 10,000
Principle payments on long-term debt -0 (50,550)
Proceeds from issuance of stock -0 313,375
Repurchase of common stock -0 (500)
---------- ----------
Net Cash Provided by Financing Activities 4,313 275,779
---------- ----------
(Decrease) / Increase in Cash
and Cash Equivalents 46,981 52,043
Cash and Cash Equivalents - Beginning of Period 64,277 42,606
---------- ----------
Cash and Cash Equivalents - End of Period $ 111,257 $ 94,649
========== ==========
Supplemental disclosures:
Cash paid for interest $ 15,846 $ 20,240
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
six-month period ended on January 31, 2001. The results of operations for the
three-month and six-month periods ended on January 31, 2001 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 and
six-month periods 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
It's 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, during FY2001 and beyond 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 also 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 interest rate was
at 1 1/4% over the London Interbank Offer Rate, was due in 120 days, and 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.
The loan was due in December 2000, but the Company did not have the available
cash reserves to pay the loan. During January 2001 the loan, plus accrued
interest, was settled between the Company and the lender for a mutually
satisfactory amount of available inventory sold to the individual's corporation
at a price less than standard markup.
A loan currently carried on the books at $127,000 was renegotiated with the
maker, extending its due date one year. The note is now due in December 2001. As
part of this agreement, a principle payment of $20,000 was made on this note
during February 2001.
Note 4 - Stock Issued as Compensation:
During the current six month period ended January 31, 2001 no Company stock was
issued as compensation. During the comparative six month period ended January
31, 2000, the Company issued 3,333 shares of restricted common stock to
employees as compensation. During the current six month period the Company
issued a total of 3,100 shares of restricted common stock to comply with a
requirement of one of its loan agreements. The Company recorded $518 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 six-month period no
Company stock was issued as payment for miscellaneous expenses. During the
comparative six-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 for this
transaction was $24,708. Additionally, on November 10, 1999, The Company issued
9,000 of restricted, common stock for compensation of services consulting
services. These shares were valued at 80% of the fair market value of
unrestricted stock on November 10, 1999. The total expense recorded for in this
transaction was $2,160.
Note 5 - Stock Sales:
The Company did not sell any of its common stock during the current six-month
period ended January 31, 2001. During the comparative six-month period ended
January 31, 2000 the Company sold 1,005,834 shares of restricted common stock to
accredited investors for $313,375 cash.
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-month or
six-month periods ended January 31, 2001 and 2000 because the inclusion would be
anti-dilutive.
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 January 31, 2001 as compared
to the three months ended January 31, 2000 resulted in a net loss of ($70,196)
as compared to a net loss of ($327,622), respectively. Net loss per share for
the three-month periods were $(0.00) and $(0.02) respectively, based upon
weighted average shares outstanding of 16,743,153 and 14,369,175, respectively.
Net sales increased by $980,402 to $1,651,540 for the three-month period ended
January 31, 2001 from $671,138 during the comparative period of FY2000. Company
operations for the six-month period ended January 31, 2001 as compared to the
six-months ended January 31, 2000 resulted in a net loss of ($287,542) as
compared to a net loss of ($429,718), respectively. Net loss per share for the
six-month periods were $(0.02) and $(0.03), respectively, based upon weighted
average shares outstanding of 16,741,978 and 14,036,697, respectively. Net sales
increased by $779,840 to $2,258,279 for the six-month period ended January 31,
2001 from $1,478,439 during the comparative period of FY2000. Company Management
attributes the significant sales increase and reduced net loss for the period to
the following factors:
o A one-time sale to a company in the amount of $507,000. See revenue discussion
below.
o Mail Order Catalog sales of $587,890 for the period. See revenue
discussion below.
o Improved profit margins on the increased catalog sales.
Sales
The Company's total net product sales for all sales divisions during the
three-month periods ended January 31, 2001 and January 31, 2000 were $1,651,540
and $671,138, respectively, an increase in sales of $980,402 or 146%. Company
total net product sales for the six-month periods ended January 31, 2001 and
January 31, 2000 were $2,258,279 and $1,478,439, respectively, an increase in
sales of $779,840, or 53%.
Retail store gross sales for the three-month periods ended January 31, 2001 and
January 31, 2000 were $376,444 and $340,080, respectively, an increase in sales
of $36,364, or 11%. Retail store gross sales for the three-month period
comprised 23% and 49% of total gross product sales, respectively. Retail store
gross sales for the six-month periods ended January 31, 2001 and January 31,
2000 were $671,666 and $743,708, respectively, a decrease of $72,042, or 10%.
Retail store gross sales for the six-month period comprised 30% and 49% of total
gross product sales, respectively.
The Company attributes the increase in retail sales for the three-month period
to improved seasonal snow conditions in the resort towns coupled with strategic
sales offers in individual stores. For the six-month period, the decreased sales
were attributable to the closing of the Ouray and Mountain Village stores last
year and a slow start to retail during October and November 2000.
Wholesale gross sales for the three-month periods ended January 31, 2001 and
January 31, 2000 were $197,736 and $184,182, respectively, an increase of
$13,554, or 7%. Wholesale gross sales for the three-month period comprised 12%
and 26% of total gross product sales, respectively. Wholesale gross sales for
the six-month periods ended January 31, 2001 and January 31, 2000 were $493,355
and $564,270, respectively, a decrease of ($70,915), or (13%). Wholesale gross
sales for the six-month period comprised 22% and 37% of total gross product
sales, respectively.
Overall wholesale sales year-to-date were down primarily as a result of lost
sales opportunities resulting from Company difficulties getting overseas Jagged
Edge production shipped to the warehouse facility on a timely basis. Some of the
sales opportunities were recoverable (a timing difference), and are reflected in
the three-month sales figures, but are not quantifiable.
Catalog Mail Order gross sales for the three-month periods ended January 31,
2001 and January 31, 2000 were $564,797 and $177,416, respectively, an increase
of $387,381, or 218%. Catalog Mail Order gross sales for the three-month period
comprised 35% and 25% of total gross product sales, respectively. Catalog Mail
Order gross sales for the six-month periods ended January 31, 2001 and January
31, 2000 were $587,890 and $210,508, respectively, an increase of $377,382, or
179%. Catalog Mail Order gross sales for the six-month period comprised 26% and
14% of total gross product sales, respectively.
The Company's Management emphasized the catalog mail order division this current
fiscal year, mailing an estimated 475,000 catalogs during October and November
2000. The Company realized the bulk of these sales over the period from
Thanksgiving 2000 through January 2001, servicing an estimated 6,300 customers.
Catalog sales deliver premium gross margins to the Company.
Other Sales for the current fiscal year included $507,000 in discounted sales to
an unrelated Company as part of an agreed upon settlement for a note payable,
plus accrued interest. The Company feels that the terms of the sale were
favorable and arm's length, allowing the Company to reduce excess inventory
levels and settling the note in full.
Sales returns for the three-month periods ended January 31, 2001 and 2000 were
$40,886 and $42,746, respectively, a decrease in returns of $1,860 or 4%. Sales
returns for the six-month periods ended January 31, 2001 and 2000 were $56,785
and $57,331, respectively, a decrease in returns of $546 or 1%. Sales divisions
in this analysis do not break down data for sales returns.
Cost of Goods Sold
The Company's total product cost of sales for all sales divisions during the
three-month periods ended January 31, 2001 and 2000 were $876,695 and $520,857,
or 53% and 78% of net sales, respectively, an increase of
$355,838 or 68%. The Company's total product cost of sales for all sales
divisions during the six-month periods ended January 31, 2001 and 2000 were
$1,283,180 and $1,027,849, or 57.0% and 70.0% of net sales, respectively, an
increase of $255,331 or 25%.
Cost of sales as a percentage of total sales in the six-month period ended
January 31, 2001 decreased to 57% from 70% in the comparative period ended
January 31, 2000. This decrease was primarily the result of the higher margins
of Jagged Edge products sold in the retail store locations, and in particular,
on the "full-margin" catalog sales over the period.
Selling & Marketing Expenses
Selling and marketing expenses for the three-month periods ended January 31,
2001 and 2000 were $613,333 and $399,849, respectively, an increase of $213,484
or 53%. Selling and marketing expenses for the six-month periods ended January
31, 2001 and 2000 were $837,422 and $614,134, respectively, an increase of
$223,228 or 36%. Primary components of this increase were the catalog mail order
costs including printing, production, mailing, telephone, and associated labor
overhead required to ensure adequate customer servicing for the increased
catalog sales.
Smaller components of the increased selling and marketing expenses over the
comparable period of last year were 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 January
31, 2001 and 2000 were $179,289 and $63,751, respectively, an increase of
$115,538 or 181%. General and Administrative expenses for the six-month periods
ended January 31, 2001 and 2000 were $335,597 and $224,841, respectively, an
increase of $110,756 or 49%.
Liquidity and Capital Resources
During the six months ended January 31, 2001, the Company's current ratio
declined to .92 as compared to 1.25 at July 31, 2000. Net working capital
decreased $287,608 to ($89,599) at January 31, 2001 from $198,009 at July 31,
2000. The Company's cash balances increased to $111,257 at January 31, 2001,
from $64,277 at July 31, 2000.
Principal changes in the components of net working capital for the six-month
period ended January 31, 2001 as compared to fiscal year end July 31, 2000
consist of:
----------------------
Change From July 31,
2000 to January 31,
% % 2001
----------------------
Working Capital Components: Total January 31, Total July 31, $
----- ------------ ----- --------- -
2001 2000
---- ----
Cash & cash equivalents 11.3% 111,257 6.6% 64,277 $ 46,980
Trade receivables 18.9% 187,189 3.0% 28,854 $ 158,335
Other receivable 0.0% 0 3.0% 29,341 $ ( 29,341)
Inventories 68.6% 677,957 87.2% 851,087 $ (173,130)
Pre-paid expenses 1.2% 11,510 0.3% 2,977 $ 8,533
----------------------------------------------------------
Current Assets 100.0% 987,913 100.0% 976,536 11,377
Accounts payable and accrued liabilities 71.6% 771,120 67.7% 526,909 $ 244,211
Current maturities of notes payable 21.3% 229,310 23.3% 181,157 $ 48,153
Other current payables 7.2% 77,082 9.1% 70,461 $ 6,621
----------------------------------------------------------
Current Liabilities 100.0% 1,077,512 100.0% 778,527 298,985
-------------- -----------------------------
$ $
Working Capital (89,599) 198,009 $ (287,608)
============== =============================
- ----------------------------------------------------------------------------------------------------------------
Current Ratio 0.92 1.25 (0.34)
- ----------------------------------------------------------------------------------------------------------------
The principal reasons for the decrease in working capital during the period are
the following. Inventories decreased by $173,130. Trade accounts payable
increased by $244,211. Portions of the payables increases were used primarily
for operating expenses including payments on the fall/winter catalog mailing.
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's Management 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.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
A complaint was filed on January 24, 2001 by St. Ives, Inc. in the
Court of Common Pleas, Cuyahoga County, Ohio, for unpaid printing
costs associated with the Summer 2000 catalog. Unpaid invoices total
$56,330. Total damages requested are $75,106. The Company is
negotiating to settle the case.
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-month or six-month periods ended January 31, 2001.
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: March 28, 2001 By: /s/ Margaret A. Quenemoen
------------------------------
Margaret A. Quenemoen
President
Dated: March 28, 2001 By: /s/ Craig K. Carr
-------------------------------
Craig K. Carr
Chief Financial Officer