Item 1. Business
OVERVIEW
Jagged Peak, Inc. (the “Company” or “Jagged Peak”) is an e-commerce software and services company headquartered in Tampa, Florida, providing Demand and Supply Chain management, CRM execution and e-Fulfillment solutions and services. The Company’s flagship product, EDGE (E-Business Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, incentive and rebate programs, customer service, repair and reverse logistics, marketing materials management, and automate other business processes through the use of the EDGE application and its related tools. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, distribution, travel and tourism and manufacturing.
Jagged Peak’s multi-channel, enterprise EDGE application provides a comprehensive, integrated platform for e-commerce management that supports a broad range of business and operational applications. Clients can use EDGE as an enterprise application or as an integrator and consolidator for multiple businesses, processes and applications. EDGE has built in tools to extend the application which enables clients to create complex and robust e-commerce, CRM related customer services and repair and reverse logistics solutions. The EDGE application permits users to manage order capturing, processing, tracking, fulfillment, settlement, creating, and managing dynamic catalogs, customer relation management, marketing and reporting, all in real-time application. The EDGE application is built to industry-standard best practices. The application has been integrated seamlessly with legacy and back-office management systems as well as industry leading ERP, WMS, TMS and CRM software systems. In addition to the traditional software license sales model, Jagged Peak offers its software with a flexible managed services transaction based pricing model.
Jagged Peak provides outsourced e-commerce and supply chain solutions that enable manufacturers, distributors, and consumer brand companies the ability to quickly and cost effectively establish and operate a direct to customer online business that is fully integrated with their offline sales channels. Jagged Peak’s proven solutions provide companies the tools, expertise, infrastructure and scalability they need to create and maximize their direct to customer sales channel potential without the risk and burden of managing it themselves. The Company uniquely provides companies the benefit of maintaining complete control of the channel, ownership of the customer relationship and retention of the gross product margin normally lost to distributors, resellers and other trading partners.
Jagged Peak has continued to market the launch of TotalCommerce™, an end to end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers. TotalCommerce™ is an outsourced “managed services” solution that leverages Jagged Peak’s extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a nationwide network of fulfillment centers; back office program management; and a range of online marketing services.
Jagged Peak has a network of independently owned fulfillment warehouses throughout North America that enables its clients to provide better service to their customers, while lowering their overall delivery costs. The EDGE application is able to automatically route the orders to the optimal warehouse based on an established set of factors such as service, cost and priority. This enables our clients to achieve their customer service goals while reducing cost and internal infrastructure.
In July 2009, Jagged Peak began operations in Canada through its wholly owned subsidiary, Jagged Peak Canada, Inc. The operations provide similar services as in the United States through a network of independently owned fulfillment warehouses, which are managed through technology provided by Jagged Peak, Inc.
In addition to application software and demand execution, Jagged Peak also focuses on e-marketing and e-channel management to provide a holistic e-commerce solution for its clients. The Company’s approach to e-marketing is to build marketing programs and systems that elevate client’s sites to be viewed by leading search engines as “authorities” within a particular product niche or keyword search term. Our services help companies excel in online retailing through the management, development, and optimization of e-commerce stores. Jagged Peak’s e-marketing services achieve superior results by utilizing a mix of traditional and emerging strategies and industry best practices. The Company’s e-channel management services help protect clients’ online pricing and intellectual property policies by utilizing an automated system and business process to identify, notify and potentially enforce violations. Jagged Peak’s holistic approach to e-commerce provides its clients with assurance that their e-business is performing at its highest level.
There are a variety of risks associated with the Company’s ability to achieve strategic objectives, including the ability to increase market penetration, acquire and profitably manage additional businesses, current reliance on key customers, the risks inherent in expanding, and the intense competition in the industry. For a more detailed discussion of these risks, see Item 1A
Item 1A entitled “Risks Factors.”
INDUSTRY OVERVIEW
According to most market indicators, e-commerce sales continue to grow at a rapid pace. Many industry analysts predict strong e-commerce growth rates to continue in the U.S., with even higher expected growth rates in European and Asia-Pacific markets. There are a number of growth factors to be considered: (i) continued adoption of the Internet as a means of commerce; (ii) increase in users with high speed internet connection, which enables providers to create more interactive and customer specific web portals; (iii) Internet users like the convenience of buying products online and the ability to have that product delivered to their destination of choice; (iv) enhancements to online store functionality, enabling not only the user additional purchase options, it also enables sellers ability to quickly take advantage of market fluctuations through immediate price changes and adjustments to sales promotions; (v) the sellers are able to better track customer buying habits and Internet activity, which enables them to focus marketing efforts and costs on the ideal customer group; and (vi) businesses are placing increased emphasis on their online business.
Despite the fact that large companies have become more reliant on sophisticated software applications to run their businesses, many enterprises have been dissatisfied with the return on their investments. Deploying new business applications and keeping them up and running has taken them more time, effort and money than anticipated. Most companies today have a variety of order management systems, which are segregated based on different channels, verticals, and/or lines of business. Each system typically has different workflows and order cycles to accomplish the requirements of the business. This leads to a lack of visibility into customer interactions across the enterprise, and an inability to optimize orders across multiple order systems. For most companies, managing order-to-delivery is largely a manual process that requires numerous staff to pull information from multiple systems and coordinate order fulfillment with suppliers and logistics providers using phone, fax, e-mail, and Electronic Data Interchange (EDI) messages. These manual systems are expensive to manage, error-prone, not scalable, and typically break down under the real-time demands and compressed business cycles of today’s environment.
COMPETITIVE ADVANTAGES
The Company provides a suite of services to help businesses worldwide grow their revenues and avoid the costs and risks associated with running a global technology operation in-house. The Company provides vertically integrated e-commerce solutions that include e-commerce, order management, CRM, digital and physical product fulfillment, e-mail marketing, business process automation and strategic marketing services. At the core of these services is the Company’s proprietary EDGE software. The EDGE application provides a complete multi-channel, multi-distribution center, multi-enterprise, highly functional software solution that can be deployed in minimal time, requires a lower upfront purchase cost or activation fee, and is easy to use and maintain. As a result, Jagged Peak believes it is able to deliver a complete enterprise commerce management software solution faster and at a lower cost than the competition. Jagged Peak offers its clients an end-to-end web based order management software solution that has a compelling return-on-investment proposition that is the result of an attractive and flexible transaction-based pricing model coupled with reduced implementation requirements. The Company believes its EDGE application maintains additional advantages relative to the competition such as complete web-native architecture, platform or vendor independence, highly scalable solution, role-based hierarchical security, real-time order visibility and ease of use. We believe that we are uniquely positioned to assist our clients accelerate and manage their growth.
Jagged Peak’s web to fulfillment services is what makes the Company unique. Orders captured through the order portal may be processed directly through the EDGE application (no FTP process) and transmitted to Jagged Peak’s warehouse management system in real time for order processing. Transaction data contains all necessary information and instructions to facilitate a fully “executable” order. This “frictionless” processing environment ensures prompt and accurate order fulfillment and data integrity. Order status, inventory activity and carrier shipping manifest data will be automatically uploaded from Jagged Peak’s Warehouse and Transportation management systems to EDGE. Clients may view and download activity information from the EDGE user interface in Excel format.
GROWTH STRATEGY
The Company’s growth strategy includes:
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Increasing Market Share - Jagged Peak believes that it can leverage its success with existing clients to obtain new clients. The Company has a proven ability to add new client relationships by utilizing its scalable business model to increase its client base while maintaining its ability to provide a high quality software product.
In addition, the Company believes that current clients will continue to increase their spending on technology solutions in an effort to update legacy order capture and order management applications that are no longer efficient and will ultimately become obsolete. Jagged Peak expects that its growing number of new client relationships, combined with its proven ability to expand its revenue base with existing clients, will enable the Company to capture a greater portion of its clients’ global outsourced e-commerce related expenditures.
Jagged Peak believes that significant opportunities exist to leverage its current client base to increase its penetration in attractive end markets such as consumer retail, financial services & insurance, healthcare & pharmaceutical, travel & tourism, general manufacturing, and government.
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Developing Brand Recognition - The Company must continue to incur expenses to develop the brand of “Jagged Peak” and “EDGE”. The Company intends to leverage the Company’s broader set of capabilities with the goal of capturing business opportunities, which would not normally be available to smaller companies.
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Expanding EDGE Application Offerings - Jagged Peak has a proven ability to identify and develop new applications for its EDGE product offering to meet the needs of the marketplace. The Company plans to continue to diversify its EDGE software platform by adding capabilities such as demand forecasting, marketing data mining, analytical tools and communications, as well as multi-vendor selection and permissions for purchasing and procurement.
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Expanding the Sales Force and Investment in Marketing - Jagged Peak has achieved an impressive customer base without the efforts of a large dedicated sales force. Client referrals and prior client relationships have fueled the growth of the Company to date. Management believes, however, in order to fully capitalize on the market opportunity, a direct sales force and marketing organization needs to be established and complimented with focused channel partners. The Company began to recruit direct salespeople with enterprise software sales experience and long-standing relationships in various targeted vertical markets in 2007. The Company has not recognized a significant benefit from those efforts; however it will continue its efforts to build an impactful sales and marketing organization.
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Future Software Product Development - The EDGE application was first released in January of 2000 and has been under continual development. Significant functionality has been added over the years and the current product is highly functional and robust, yet easy to use and rapidly deployed. Features have been added based on real world demand from clients. The Company plans to continuously invest in and enhance the EDGE product.
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Mergers and Acquisitions - Jagged Peak has a strong management team with extensive experience in mergers and acquisitions. The Company is looking for strategic acquisitions that will expand Jagged Peak’s web-based technology services and its clientele.
OPERATIONS AND SERVICES
Software Product and Technology
Jagged Peak’s proprietary EDGE application is a highly scalable e-commerce platform that empowers companies to effectively conduct business and communicate with their customers, on-line business, suppliers, employees and distribution partners. The EDGE application is a web-based, end-to-end transaction processing and information management system that enables companies to achieve complete automation and total integration of their demand management, e-commerce and related processes. EDGE is comprised of integrated modules that work together seamlessly in real-time.
Custom Software Development
Jagged Peak offers proficiency and demonstrated capability in all aspects of custom software development, which typically is integrated into our EDGE application. We can confidently provide consulting, analysis, design and architecture, computer programming and development, installation and long term technical support.
Fulfillment Services
Jagged Peak leads its sales and marketing of new business development efforts with its EDGE application. It also offers customers a complete turnkey solution, if desired, which can include both physical and digital fulfillment services. EDGE is used for our fulfillment, which includes reporting, warehouse optimization, order fulfillment, return authorizations, back order processing, and full transaction auditing capabilities.
E-Services
Jagged Peak utilizes a mix of traditional and emerging strategies and techniques to elevate our client’s sites to be viewed by leading search engines as “authorities” within a particular product niche so as to build high quality, sustainable traffic. The Company’s team of industry experts determines the most advantageous strategy to enhance websites’ overall optimality.
Hosting and Managed Services (ASP)
Jagged Peak’s hosting and managed services (ASP) transaction pricing model provides a strong recurring revenue stream for the Company as it builds its customer base. Managed services contracts are typically three years in length with minimum transaction volumes guaranteed. The managed services model provides a lower initial cost, a turnkey outsourced solution with a very rapid path to deployment, which requires less of our clients’ internal resources.
INFORMATION SYSTEMS
A key component of the Jagged Peak growth strategy is the significant capital, planning and corporate intelligence that is deployed towards technology as we deliver our solution primarily through the EDGE application. To remain competitive, we must continue to enhance and improve the responsiveness, features and functionality of the EDGE application and the underlying network infrastructure. We are continuously working to improve our infrastructure, core applications and software products.
EDGE is a highly available, scalable platform that is designed to handle an unlimited number of stores and products. An EDGE cluster consists of a configurable number of redundant web servers configured to J2EE standards that serve data from a cluster of Microsoft SQL or similar database servers. Part of our standard architecture includes the use of a sophisticated database configured and designed to maintain flexibility and speed. Due to the programming architecture and network design of the EDGE platform, it can seamlessly be extended with additional modules and components. The EDGE administrative system allows instantaneous system wide changes to be implemented and administrated by the end user to support rapid response to industry changes, including business logic changes, payment processing changes, warehouse and logistics concerns, requirements for taxes, and pricing rules. EDGE allows the end user to create dynamic, time sensitive business rules to control what items are available to specific users, based upon a highly configurable set of data. EDGE also supports real time based transactions in all instances as opposed to a batching process, enabling our clients’ inventory and orders to have real-time accuracy and to be in synch with external systems.
Our environment architecture consists of multiple layers to ensure smooth operation with minimal interruption. By co-locating our mission critical systems, we enable ourselves to separate our web accessible systems from those that support our internal functions. Each network is protected using industry standard encryption, authentication, firewalls, and anti-virus software. With dependant clients spanning the entire globe, state of the art monitoring is used to provide alerting, logging, and the timely notifications needed to support a twenty-four hour, three hundred and sixty-five day operation. Whenever possible we continue to improve and implement the latest in best-practices to ensure that our system infrastructure remains current and up-to-date, allowing us to keep sensitive information safe and our systems secure while meeting the changing demands of our clients and an always evolving industry.
In executing this strategy, the Company has and will continue to invest significant management and financial resources to deliver these technologies. The Company believes these technologies will provide financial and competitive advantages in the years ahead and will increase our sustainable competitive advantages in the marketplace.
CUSTOMERS, SALES AND MARKETING
Jagged Peak’s EDGE application addresses the large market opportunity for e-commerce software applications that can integrate across Supply Chain Management (SCM) and Customer Relationship Management (CRM) systems. Since 2000, the generally accepted definition of SCM has expanded to include all applications relating to demand management, e-commerce, and order execution. Many companies today are trying to cost effectively and rapidly web enable their legacy order managements systems. Larger corporations have many departments, divisions, or subsidiary companies that are seeking to optimally manage their demand chain. In general, companies are attempting to enhance communications and create more efficient business processes and visibility within an enterprise and across customers, vendors, suppliers or other external relationships. EDGE facilitates the integration of multiple applications across the Web, while providing companies a way to effectively manage transactions of every nature with multiple parties. The market for SCM software is expected to be more than $3 billion in the next few years. Factors contributing to the historical and projected growth in the SCM software market include: increased emphasis on the customer - and supplier-centric approach to managing revenues and expenses, increasing profits, and expanding overall competitive positioning. In addition, current economic conditions have increased companies’ requirements for short-term Return-On-Investment (ROI) and proof of value.
A significant portion of the Company’s revenue comes from a few customers. (See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies, Concentration of Risk.)
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.
PERSONNEL
At December 31, 2010, the Company had approximately 91 full time employees. At this time, none of the Company’s employees are covered by a collective bargaining agreement. The Company recognizes the employees as one of its most valuable asset and provides above industry average compensation and benefits. The recruitment, training and retention of qualified employees are essential to support continued growth and to meet the service requirements of our clients.
RISK MANAGEMENT
The Company maintains general liability, errors and omissions, property, property of others and workers’ compensation insurance. The Company could incur claims in excess of the policy limits or incur claims not covered by the insurance policy.
CORPORATE INFORMATION
Compass Marketing Services, Inc. (“Compass”), a Florida corporation, was formed in 1990. On August 22, 2000, Compass merged with IBIS Business Internet Solutions, Inc., a Florida corporation, in a merger of equals and amended its name to Jagged Peak, Inc. In July 2005, Jagged Peak, Inc. merged with a subsidiary of Absolute Glass Inc., which was incorporated in Nevada in November of 1999. Absolute Glass, Inc. subsequently amended its articles of incorporation and changed its name to Jagged Peak, Inc. (the “Company”). The Company’s principal executive offices are located at 3000 Bayport Drive, Tampa, Florida 33607. The telephone number is (813) 637-6900 and the Internet website address is www.JaggedPeak.com.
Item 1A. Risks Factors
OUR ABILITY TO COMPETE AND PURSUE STRATEGIC ALTERNATIVES COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners and control access to and distribution of our products, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete and pursue strategic alternatives effectively could be harmed. Litigation may be necessary to enforce our intellectual property rights. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse affect on our business, operating results and financial condition.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property rights. In the course of our business, we may receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses or cross-licenses to incorporate or use the proprietary technologies in our products.
Any parties asserting that our products infringe upon their proprietary rights would require us to defend ourselves, and possibly our customers, manufacturers or suppliers against the alleged infringement. Regardless of their merit, these claims could result in costly litigation and subject us to the risk of significant liability for damages. Such claims would likely be time consuming and expensive to resolve, would divert management time and attention and would put us at risk to:
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Stop selling, incorporating or using our products that incorporate the challenged intellectual property;
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Obtain from the owner of the intellectual property right, a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all;
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Redesign those products that use such technology; or
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Accept a return of products that use such technologies.
If we are forced to take any of the foregoing actions, our business may be seriously harmed.
In addition, we license public domain software and proprietary technology from third parties for use in our existing products, as well as new product development and enhancements. We cannot be assured that such licenses will be available to us on commercially reasonable terms in the future, if at all. The inability to maintain or obtain any such license required for our current or future products and enhancements could require us to substitute technology of lower quality or performance standards or at greater cost, either of which could adversely impact the competitiveness of our products.
RECENT GLOBAL ECONOMIC TRENDS COULD ADVERSELY AFFECT OUR BUSINESS, LIQUIDITY AND FINANCIAL RESULTS
Recent global economic conditions, including disruption of financial markets, could adversely affect our business and results of operations, primarily through limiting our access to credit, our ability to refinance debt and disrupting our customers’ business, which is heavily dependent on retail and e-commerce transactions. Although we currently believe that we will be able to obtain the necessary financing in the future, there is no assurance that these institutions will be able to loan us the necessary capital, which could have a material adverse impact on our business. In addition, continuation or worsening of general market conditions in the United States economy or other national economies important to our businesses may adversely affect our customers’ level of spending, ability to obtain financing for purchases and ability to make timely payments to us for our services, which could require us to increase our allowance for doubtful accounts, negatively impact our days sales outstanding and adversely affect our results of operations.
OUR LIMITED OPERATING HISTORY
The Company is in the expansion stage and accordingly, the Company’s business is subject to the risks inherent in the transition to a large-scale business. Failure by the Company to develop the ability to consistently provide high quality products and services to its clients would have a material adverse effect on the Company’s business, operating results and financial condition. To address these risks, the Company must, among other things, respond to competitive developments, attract and motivate qualified personnel, develop market acceptance for its products, establish effective distribution channels, effectively manage growth and continue to improve its proprietary technologies and successfully commercialize products incorporating such technologies. In addition, the Company’s limited operating history makes forecasting difficult.
OUR OFFICERS AND DIRECTORS OWN A CONTROLLING INTEREST IN OUR STOCK AND INVESTORS HAVE A LIMITED VOICE IN OUR MANAGEMENT
The Company’s executive officers and directors and their affiliates together control more than 50% of the Company’s voting shares outstanding. As a result, these stockholders, if they act together, will be able to control all matters requiring the Company’s stockholders’ approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may delay, prevent or deter a change in control, and could deprive the Company’s stockholders of an opportunity to receive a premium for their common stock as part of a sale of the Company or its assets.
WE HAVE EXPERIENCED LOSSES FROM OPERATIONS AND MAY NOT BE PROFITABLE IN THE FUTURE
Jagged Peak had a profit before tax expense of approximately $196,800 for the fiscal year ended December 31, 2010; however had losses before tax benefit of approximately $338,800 for the fiscal year ended December 25, 2009, and there can be no assurance that the Company will not incur additional losses in the future. The Company’s operating expenses have increased as the business has grown and can be expected to increase significantly because of expansion efforts. There is no assurance that the Company will be able to generate sufficient revenue to meet its operating expenditures or to continue to operate profitably.
WE ARE DEPENDENT ON A SMALL NUMBER OF CLIENTS FOR A LARGE PORTION OF OUR SALES AND A LOSS OF ANY CLIENT THAT ACCOUNTS FOR A LARGE PORTION OF OUR REVENUE WOULD CAUSE OUR REVENUE TO DECLINE
Sales to one of our clients, Nespresso USA, a division of Nestle, accounted for approximately 82% of our revenue in 2010, an increase of approximately 5% since 2009. A significant reason for the increase was the opening of our Canadian operation. Contracts with our clients are generally two to three years in length. If any one of these key contracts is not renewed or otherwise terminates, particularly this contract, or if revenues from this or other key clients decline for any other reason (such as competitive developments), our revenue would decline and our ability to obtain profitability would be impaired. It is important to our ongoing success that we maintain these key client relationships and at the same time develop new client relationships.
COMPETITION
Competition in the market for providing transaction management software is intense. The Company’s software products face competition from many larger, more established companies. In addition, other companies could seek to introduce competing products or services and increased competition could result in a decrease in the price charged by the Company’s competitors for their products and services or reduce demand for the Company’s products and services, which would have a material adverse effect on the Company’s business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully with its existing or potential competitors, which may have substantially greater financial, technical, and marketing resources, longer operating histories, greater name recognition or more established relationships in the industry than the Company. If any of these competitors provide competitive software products and services to the marketplace in the future, the Company cannot be sure that it will have the resources or expertise to compete successfully.
LACK OF MARKET ACCEPTANCE FOR PRODUCTS
The market for the Company’s software may develop at a slower pace than expected as a result of lack of acceptance by companies involved in implementing a supply-chain execution software system for their business processes. If the market develops more slowly than expected, or if the Company’s software products do not achieve significant market acceptance, the Company’s business, operating and financial condition would be materially adversely affected.
NEED FOR FURTHER PRODUCT DEVELOPMENT
Although the Company currently has the capability to achieve installation of its software products for enterprise initiatives, additional ongoing development is necessary to continue to enhance the quality, efficiency and reliability of the Company’s software product offerings. If the Company were unable to continue to develop and install market leading software products, then the Company’s business, operating results and financial condition would be materially adversely affected.
INTERNATIONAL OPERATIONS
In the normal course of business, the Company may enter into contractual relationships with companies located worldwide. Accordingly, the Company may be subject to general geopolitical risks in connection with some of its contracts, such as political, social and economic instability, changes in diplomatic and trade or business relationships and other factors beyond the Company’s control. There can be no assurance that such factors will not impact the Company’s operations in the future or require the Company to modify its anticipated research practices.
WE MAY BECOME LIABLE TO CLIENTS WHO ARE DISSATISFIED WITH OUR SERVICES
We design, develop, implement and manage e-commerce solutions that are crucial to the operation of our clients’ businesses. Defects in the solutions we develop could result in delayed or lost revenue, adverse end-user reaction, and/or negative publicity, which could require expensive corrections. As a result, clients who experience these adverse consequences either directly or indirectly as a result of our services could bring claims against us for substantial damages. Any claims asserted could exceed the level of any insurance coverage that may be available to us. Moreover, the insurance we carry may not continue to be available on economically reasonable terms, or at all. The successful assertion of one or more large claims that are uninsured, that exceed insurance coverage or that result in changes to insurance policies (including premium increases) could adversely affect our operating results or financial condition.
CHANGES IN GOVERNMENT REGULATION COULD LIMIT OUR INTERNET ACTIVITIES OR RESULT IN ADDITIONAL COSTS OF DOING BUSINESS OVER THE INTERNET
We are subject to the same federal, state and local laws as other companies conducting business over the Internet. Today, there are relatively few laws specifically directed towards conducting business over the Internet. The adoption or modification of laws related to the Internet could harm our business, operating results and financial condition by increasing our costs and administrative burdens. Due to the increasing popularity and use of the Internet, many laws and regulations relating to the Internet are being debated at the international, federal and state levels.
Applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy could also harm our operating results and substantially increase the cost to us of doing business.
LAWS RELATING TO USER INFORMATION AND ONLINE PRIVACY MAY LIMIT THE COLLECTION AND USE OF END-USER DATA FOR OUR CLIENTS
We collect and maintain end-user data for our clients, which subjects us to increasing international, federal and state regulation related to online privacy and the use of personal user information. For instance Congress has enacted anti-SPAM legislation with which we must comply when providing e-mail campaigns for our clients. Bills are pending in Congress and in various states that address online privacy protections. Several states have proposed, and some have enacted, legislation that would limit the use of personal user information or require online services to establish privacy policies. In addition, the U.S. Federal Trade Commission, or FTC, has urged Congress to adopt legislation regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites.
Even in the absence of laws requiring companies to establish these procedures, the FTC has settled several proceedings resulting in consent decrees in which Internet companies have been required to establish programs regarding the manner in which personal information is collected from users and provided to third parties. We could become a party to a similar enforcement proceeding. These regulatory and enforcement efforts could limit our collection of demographic and personal information from end-users, which could adversely affect our ability to comprehensively serve our clients.
INTERNET-RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY DEPRESS OUR STOCK PRICE OR CAUSE IT TO FLUCTUATE SIGNIFICANTLY
The stock market and the trading prices of Internet-related companies in particular, have been notably volatile. This volatility is likely to continue in the short-term and is not necessarily related to the operating performance of affected companies. This broad market and industry volatility could significantly reduce the price of our common stock at any time, without regard to our operating performance.
INTERRUPTION OF BUSINESS DUE TO INCREASED SECURITY MEASURES IN RESPONSE TO TERRORISM
The continued threat of terrorism within the United States and the ongoing military action and heightened security measures in response to such threat has and may cause significant disruption to commerce. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities. Any economic downturn could adversely impact the Company’s results of operations, impair the Company’s ability to raise capital or otherwise adversely affect the Company’s ability to grow the business. It is impossible to predict how this may affect the Company’s business or the economy in the U.S. and in the world, generally. In the event of further threats or acts of terrorism, the Company’s business and operations may be severely and adversely affected or destroyed.
REGULATION
The Company’s operations are subject to various federal, state and local laws and regulations. Although compliance with these laws and regulations has not had a material effect on the Company’s operations or financial condition, there is no assurance that additions or changes to current laws or regulations will not have a material effect on us, the Company’s profitability and financial condition.
SUBSTANTIAL ALTERATION OF THE COMPANY’S CURRENT BUSINESS AND REVENUE MODEL
The Company’s present business and revenue model represents the current view of the optimal business and revenue structure, which is to derive revenues and achieve profitability in the shortest period. There can be no assurance that current models will not be altered significantly or replaced with an alternative model that is driven by motivations other than near-term revenues and/or profitability (for example, building market share before the Company’s competitors). Any such alteration or replacement of the business and revenue model may ultimately result in the deferring of certain revenues in favor of potentially establishing larger market share. The Company cannot assure that any adjustment or change in the business and revenue model will prove to be successful.
INABILITY TO MANAGE GROWTH AND INTERNAL EXPANSION
The Company has not yet undergone the significant managerial and internal expansion that the Company expects will occur, and the Company’s inability to manage growth could hurt the results of operations. Expansion of operations will be required to address anticipated growth of the Company’s customer base and market opportunities. Expansion will place a significant strain on the Company’s management, operational and financial resources. Currently, the Company has a limited number of employees. The Company will need to improve existing procedures and controls as well as implement new transaction processing, operational and financial systems, procedures and controls to expand, train and manage the Company’s employee base. The Company’s failure to manage growth effectively could have a damaging effect on the Company’s business, results of operations and financial condition.
DEPENDENCE ON KEY MANAGEMENT; LOSS OF KEY MANAGEMENT COULD HAVE A MATERIAL ADVERSE EFFECT ON OPERATIONS
The Company’s success depends in part upon retaining the services of certain executive officers, software developers and other key employees. In addition, because of the Company’s rapid pace of growth, the Company is also dependent on its ability to recruit, retain and motivate personnel with technical, marketing, sales and managerial skills. If the Company loses key personnel or is unable to recruit qualified personnel, the ability to manage the day-to-day aspects of the business will be weakened. The Company’s operations and prospects depend in large part on the performance of the senior management team. The loss of the services of one or more members of the senior management team could have a material adverse effect on the business, financial condition and results of operation. Because the senior management team has exceptional experience with the Company and in the industry, it would be difficult to replace them without adversely effecting the Company’s business operations.
WE ARE NOT REQUIRED TO MEET OR MAINTAIN ANY LISTING STANDARDS FOR OUR COMMON STOCK TO BE QUOTED ON THE OTC BULLETIN BOARD, WHICH COULD AFFECT OUR STOCKHOLDERS’ ABILITY TO ACCESS TRADING INFORMATION ABOUT OUR COMMON STOCK
The OTCBB market is separate and distinct from the Nasdaq Stock Market and any national stock exchange, such as the New York Stock Exchange or the American Stock Exchange. Although the OTC Bulletin Board is a regulated quotation service operated by the Financial Industry Regulatory Authority (“FINRA”), that displays real-time quotes, last sale prices, and volume information in over-the-counter (“OTC”) equity securities like our common stock, we are not required to meet or maintain any qualitative or quantitative standards for our common stock to be quoted on the OTCBB. Our common stock does not presently meet the minimum listing standards for listing on the Nasdaq Capital Market or any national securities exchange, which could affect our stockholders’ ability to access trading information about our common stock.
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD, WHICH WOULD LIMIT THE ABILITY OF BROKER-DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS’ TO SELL THEIR SECURITIES IN THE SECONDARY MARKET
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
VOLATILITY OF THE MARKET PRICE OF THE COMPANY’S STOCK
The market price of the Company’s common stock may be volatile, which could cause the value of your investment to decline. Any of the following factors could affect the market price of our common stock:
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Changes in earnings estimates and outlook by financial analysts;
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Our failure to meet investors’ performance expectations;
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Changes in market valuations of other transportation and logistics companies; or
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General market and economic conditions.
•
Our small trading volume.
ACCORDING TO THE SEC, THE MARKET FOR PENNY STOCKS HAS SUFFERED FROM PATTERNS OF FRAUD AND ABUSE
Such patterns include:
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Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;
•
Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
•
“Boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons;
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Excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and
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The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the inevitable collapse of those prices with consequent investor losses.
In addition, many of the risks described elsewhere in this “Risk Factors” section could adversely affect the stock price. The stock markets have experienced price and volume volatility that have affected many companies’ stock prices. Stock prices for many companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These types of fluctuations may affect the market price of our common stock.
APPLICABILITY OF LOW PRICED STOCK RISK DISCLOSURE REQUIREMENTS
The Company’s common stock may be considered a low priced security under rules promulgated under the Securities Exchange Act of 1934 (“Exchange Act”). Under these rules, broker-dealers participating in transactions in low priced securities must first deliver a risk disclosure document which describes that risks associated with such stock, the broker-dealer’s duties, the customer’s rights and remedies, and certain market and other information, and make a suitability determination approving the customer for low priced stock transactions based on the customer’s financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing and provide monthly account statements to the customer, and obtain specific written consent of the customer. With these restrictions, the likely effect of designation as a low price stock would be to decrease the willingness of broker-dealers to make a market for the stock, to decrease the liquidity of the stock and to increase the transaction costs of sales and purchase of such stocks compared to other securities.
NO DIVIDENDS ANTICIPATED
The Company intends to retain all future earnings for use in the development of the Company’s business and does not anticipate paying any cash dividends on the Common Stock in the near future.
IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURITY AND PURCHASE AGREEMENT, OUR LENDER COULD TAKE POSSESSION OF ALL OUR ASSETS
In connection with the security and purchase agreement entered into in December, 2009, we granted to Moriah Capital L.P. (“Moriah”) a first priority security interest in our assets. The security and purchase agreement provides that upon the occurrence of an event of default under the agreement, Moriah shall have the right to take possession of the collateral, to operate our business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy our obligations under these agreements. Any attempt by Moriah to foreclose on our assets could likewise cause us to curtail our current operations.
Item 1B.
Item 1B. Unresolved Staff Comments
Not Applicable
Item 2.
Item 2. Properties
The Company’s executive offices are located in 12,000 square feet of leased office space located at 3000 Bayport Drive, Tampa, Florida 33607. Monthly rent expense is approximately $24,000 per month under a lease that expires January of 2015. In addition, the Company leases approximately 90,000 square feet of warehouse space at 1701 3rd Ave. South, St. Petersburg, Florida. The monthly rent expense is approximately $32,000 per month under a lease that expires in May 2011. Subsequent to year end and to ensure Jagged Peak’s ability to renew this lease under similar terms, a group of investors, including officers of Jagged Peak, purchased the building from the bank that had taken ownership of the building from the previous landlord.
The following is an annual schedule of approximate future minimum rental payments required under operating facilities leases that have an initial or remaining non-cancelable lease term in excess of one year as of December 31, 2010 (no longer includes the warehouse lease):
The Company believes the facilities are in reasonable condition, the correct size, adequately insured and adequately provide for the Company’s immediate and foreseeable needs.
Item 3.
Item 3. Legal Proceedings
None.
Item 4.
Item 4. (Removed and Reserved)
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the OTC bulletin board under the symbol “JGPK.” The table below sets forth the high and low bid prices for the Company’s common stock for the quarters within 2009 and 2010. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
The Company has approximately 85 stockholders of record as of March 24, 2011. The Company has never paid cash dividends on the Company’s common stock. The Company intends to keep future earnings, if any, to finance the expansion of the Company’s business, and the Company does not anticipate that any cash dividends will be paid in the near future. The Company’s future payment of dividends will depend on the Company’s earnings, capital requirements, expansion plans, financial condition and other relevant factors.
In 2010 the Company’s Board of Directors authorized stock option awards for certain employees to purchase up to 400,000 shares of Jagged Peak common stock with a weighted average exercise price of $0.08 per common share, which represents the fair market value on date of grant and an aggregate market value of approximately $27,200. The options have a term of five years and vests over a two year period.
Subsequent to yearend, and as part of the refinancing agreement, Moriah Capital L.P. put the 775,000 shares of common stock back to Jagged Peak at a fixed price of $0.21 per common share. The Company also issued 1,000,000 restricted common shares, without registration under the Securities Act of 1933, as amended, as collateral for the redemption premium related to the refinancing of the loan obtained from Moriah Capital L.P. (“Moriah”). The value of the shares was approximately $90,000 based on a market price of $0.09 on March 25, 2011. Moriah has the option, at March 31, 2012 to retain the collateral shares or return the shares to Jagged Peak for the redemption premium of $170,000.
Item 6.
Item 6. Selected Financial Data
Not Applicable
Item 7.
Item 7. 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 Annual 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 Item 303(c) of Regulation S-K.
OVERVIEW
Jagged Peak, Inc. (the “Company” or “Jagged Peak”) is an e-commerce software and services company headquartered in Tampa, Florida, providing Demand and Supply Chain management, CRM execution and e-Fulfillment solutions and services. The Company’s flagship product, EDGE (E-Business Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, incentive and rebate programs, customer service, repair and reverse logistics, marketing materials management, and automate other business processes through the use of the EDGE application and its related tools. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, distribution, travel and tourism and manufacturing.
Jagged Peak’s multi-channel, enterprise EDGE application provides a comprehensive, integrated platform for e-commerce management that supports a broad range of business and operational applications. Clients can use EDGE as an enterprise application or as an integrator and consolidator for multiple businesses, processes and applications. EDGE has built in tools to extend the application which enables clients to create complex and robust e-commerce, CRM related customer services and repair and reverse logistics solutions. The EDGE application permits users to manage order capturing, processing, tracking, fulfillment, settlement, creating, and managing dynamic catalogs, customer relation management, marketing and reporting, all in real-time application. The EDGE application is built to industry-standard best practices. The application has been integrated seamlessly with legacy and back-office management systems as well as industry leading ERP, WMS, TMS and CRM software systems. In addition to the traditional software license sales model, Jagged Peak offers its software with a flexible managed services transaction based pricing model.
Jagged Peak provides outsourced e-commerce and supply chain solutions that enable manufacturers, distributors, and consumer brand companies the ability to quickly and cost effectively establish and operate a direct to customer online business that is fully integrated with their offline sales channels. Jagged Peak’s proven solutions provide companies the tools, expertise, infrastructure and scalability they need to create and maximize their direct to customer sales channel potential without the risk and burden of managing it themselves. The Company uniquely provides companies the benefit of maintaining complete control of the channel, ownership of the customer relationship and retention of the gross product margin normally lost to distributors, resellers and other trading partners.
Jagged Peak has continued to market the launch of TotalCommerce™, an end to end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers. TotalCommerce™ is an outsourced “managed services” solution that leverages Jagged Peak’s extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a nationwide network of fulfillment centers; back office program management; and a range of online marketing services.
Jagged Peak has a network of independently owned fulfillment warehouses throughout North America that enables its clients to provide better service to their customers, while lowering their overall delivery costs. The EDGE application is able to automatically route the orders to the optimal warehouse based on an established set of factors such as service, cost and priority. This enables our clients to achieve their customer service goals while reducing cost and internal infrastructure.
In July 2009, Jagged Peak began operations in Canada through its wholly owned subsidiary, Jagged Peak Canada, Inc. The operations provide similar services as in the United States through a network of independently owned fulfillment warehouses, which are managed through technology provided by Jagged Peak, Inc.
In addition to application software and demand execution, Jagged Peak also focuses on e-marketing and e-channel management to provide a holistic e-commerce solution for its clients. The Company’s approach to e-marketing is to build marketing programs and systems that elevate client’s sites to be viewed by leading search engines as “authorities” within a particular product niche or keyword search term. Our services help companies excel in online retailing through the management, development, and optimization of e-commerce stores. Jagged Peak’s e-marketing services achieve superior results by utilizing a mix of traditional and emerging strategies and industry best practices. The Company’s e-channel management services help protect clients’ online pricing and intellectual property policies by utilizing an automated system and business process to identify, notify and potentially enforce violations. Jagged Peak’s holistic approach to e-commerce provides its clients with assurance that their e-business is performing at its highest level.
There are a variety of risks associated with the Company’s ability to achieve strategic objectives, including the ability to increase market penetration, acquire and profitably manage additional businesses, current reliance on key customers, the risks inherent in expanding, and the intense competition in the industry. For a more detailed discussion of these risks, see section entitled “Risks Factors.”
Effective January 1, 2003, the Company elected to change its fiscal year end to correspond to accounting periods based on a 52/53 week reporting year. Therefore, the periods ended December 31, 2010 and December 25, 2009 consisted of 53 and 52 weeks, respectively.
CRITICAL ACCOUNTING POLICIES
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 on deferred tax assets and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made, as information is available. Management believes that these estimates are reasonable and have been discussed with the audit committee; however, actual results could differ from these estimates.
Revenue Recognition
There are multiple components in our TotalCommerce solution, which are sold through a master agreement where each individual component is priced separately and distinctly from the other components, based on market prices at which we sell those services individually. The client is able to choose which services it wishes to purchase. The separate components can be added or deleted at any time during the contract period from pre-determined prices. We have past history of selling each element separately to establish the market price of each element.
Software development services include activation, e-commerce site development, application and e-commerce site enhancements, consulting services and other development activities. Additional technology revenue is derived from help desk support, maintenance, general support, active monitoring and training.
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).
Our EDGE software is a web-based product and provided to our customers in software as a service model. Revenues are recognized ratably over the period the service is provided. The method of payment can be based on the clients’ use of the system (transactions), a flat monthly fee or an annual fee. Revenue for all methods of payment is recognized over the period the software is available to the client and we are responsible for providing software updates.
We have established vendor specific objective evidence for the individually priced elements in our contracts through the use of the market as each element in our 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 we use the residual method. When applying the residual method, VSOE of fair value is allocated to each of the undelivered elements and the remaining consideration is allocated to the delivered elements.
Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. These revenues are recognized based on the net value of the services provided.
Certain order processing services are contracted out by us to optimized independent distribution warehouses in North America. All of these services are managed by us through our order management platform. Since we have the exclusive responsibility to contract and to manage the services provided to our clients by these independent warehouses and the related transportation, the revenue and expenses are recognized based on the amount of services charged to our client and the related expenses are part of our cost of services.
Work in process represents costs and services which have been provided and properly recognized based on the above policy, however have not been billed to the client.
Shipping and handling costs are classified as cost of revenues.
Concentration of Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and cash equivalents and accounts receivables.
The majority of cash is maintained with a major financial institution in the United States. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.
Sales to a single, multi-national customer with several brands amounted to approximately $18,977,600, or approximately 85% of total revenue and amounted to approximately $13,290,300 or approximately 80% of total revenue during the 53-week period ended December 31, 2010 and the 52-week period ended December 25, 2009, respectively. Accounts receivable from this customer was approximately $1,517,800, or approximately 78% of total accounts receivable and approximately $974,200 or approximately 70% of total accounts receivable at December 31, 2010 and December 25, 2009, respectively. The risk of this is mitigated as the deferred revenue and customer deposits from this customer at December 31, 2010 and at December 25, 2009 was approximately $525,000 for both years. This customer is a large international company with more than one hundred brands and we continue to expand our services to additional brands. The Company classifies all business done for all of this customer’s brands as one single customer for the concentration of risk calculation.
The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts receivables, customer’s payment history and the customer’s current ability to pay its obligation. Based on management’s review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $60,000 and $40,000 is considered necessary as of December 31, 2010 and December 25, 2009, respectively. The Company charges uncollectible accounts against the allowance account once the invoices are deemed unlikely to be collectible. Although management believes that accounts receivable are recorded at their net realizable value, a 10% decline in historical collection rate would increase the current bad debt expense for the period ended December 31, 2010 by approximately $10,000. We do not accrue interest on past due receivables.
Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.
The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. In conducting this assessment, management considered a variety of factors, including the Company’s operating profits, the reasons for the Company’s operating losses in prior years, and management’s judgment as to the likelihood of continued profitability and expectations of future performance, and other factors. Management does not believe that a valuation allowance is necessary; however the amount of deferred tax asset realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. Net loss carry forwards do not begin to expire until 2018.
Put Options
In 2009, the Company issued 775,000 restricted common shares as partial consideration for a loan obtained from Moriah Capital L.P. (“Moriah”). Pursuant to the terms and conditions of the governing Securities Issuance Agreement, the holder of such shares had the right, but not the obligation, to put the shares back to the Company at a fixed price of $0.21 per common share on March 18, 2011. The Company accounted for these shares in accordance with the guidance established by FASB ASC 480 as a reclassification of the value of the shares from permanent to temporary equity.
Subsequent to year-end, as part of our amended Moriah agreement, Moriah put the 775,000 shares of common stock back to Jagged Peak at a fixed price of $0.21 per common share. As part of the amended agreement, the Company also issued Moriah 1,000,000 restricted common shares as collateral for the redemption premium related to the refinancing of the loan obtained from Moriah. Moriah has the option, at March 31, 2012 to retain the collateral shares or return the shares to Jagged Peak for the redemption premium of $170,000.
RESULTS OF OPERATIONS
For the 53-week period ended December 31, 2010 compared to the 52-week period ended December 25, 2009.
The following table summarizes selected financial data of the Company:
The following table sets forth the Company’s capitalization as of December 31, 2010. The table should be read in conjunction with the Company’s financial statements and related notes included elsewhere in this Form 10-K filing.
For the 53-week period ended December 31, 2010 compared to the 52-week period ended December 25, 2009.
Net revenues increased approximately $5,545,200, or 33%, to approximately $22,224,500 for the 53-week period ended December 31, 2010, as compared to approximately $16,679,300 for the 52-week period ended December 25, 2009. The increase in revenue primarily related to (i) continued growth in order/transaction volume, (ii) the newly operating Canadian operation, (iii) growth in our recurring technology transaction revenue, (iv) the additional week of operations and (v) new customers. The Canadian operation is similar to our United States fulfillment operation, however all technology services are performed and billed from the United States.
Cost of revenue, which consists primarily of labor, software amortization, technology, facilities, postage, freight, and packing supplies increased by approximately $4,560,700 or 37%, to approximately $17,016,100 for the 53-week period ended December 31, 2010, as compared to approximately $12,455,400 for the 52-week period ended December 25, 2009. As a percentage of revenues, cost of revenue amounted to approximately 77% of related revenues for the 53-week period ended December 31, 2010, as compared with approximately 75% for the 52-week period ended December 25, 2009. Increased cost of revenue and the increase as a percentage of revenue resulted primarily from (i) increased order / transaction volume, partially offset by (i) the decrease in revenue from software development and technology services, which has a higher gross margin, (ii) increased orders flowing through the Company’s North America distribution network, which has a lower gross margin, and (iii) the newly operating Canadian operation, which has a lower gross margin. Executive management continues to change the infrastructure and production methods, and to develop technology enhancements to enable the Company to continue to increase productivity without significant additional resources and to allow the Company to better capitalize on economies of scale as revenues increase. Management expects the percentage of cost of revenue to revenue to decrease as sales increase and we are able to increase revenue from technology, capitalize on the additional capacity and improve the efficiency of our Canadian operations.
Selling, General and administrative expense increased by approximately $350,200 or 8% to approximately $4,525,200 for the 53-week period ended December 31, 2010 as compared to approximately $4,175,000 for the 52-week period ended December 25, 2009. The increase was primarily related to (i) increased sales and marketing costs related to a new sales program, (ii) recruiting and travel expenses, and (iii) costs related to the implementation of the new warehouse management system. Management continues to “re-deploy” administrative resources to focus on sales and marketing activities to enable the Company to grow without significant increases in general and administrative expenses. General and administrative expenses are expected to continue to increase, however at a slower rate than the increase of revenue.
The Company realized a profit from continuing operations before provisions for income taxes of approximately $196,800 for the 53-week period ended December 31, 2010, compared with the loss from continuing operations before provisions for income taxes of approximately $338,800 for the 52-week period ended December 25, 2009.
The income tax expense was approximately $83,700 for the 53-week period ended December 31, 2010 compared to an income tax benefit of approximately $116,200 for the 52-week period ended December 25, 2009. Differences between the effective tax rate used for 2010 and 2009, as compared to the U.S. Federal and State statutory rate, are primarily due to permanent differences. As of December 31, 2010, the Company had federal and state net operating loss carry-forwards totaling approximately $4,000,000, which begin to expire in 2018. Management believes that there will be sufficient future earnings to support the more than likely realization of deferred tax assets in excess of existing taxable temporary differences. The amount of deferred tax assets considered realizable, however, could be reduced in the near-term if estimates of future taxable income are reduced.
Basic income per share from continuing operations for the 53-week period ended December 31, 2010 was $0.01 per weighted average share, compared with a basic loss of $0.02 per weighted average share for the 52-week period ended December 25, 2009. This was based on 16,020,961 and 14,699,330 weighted average common shares outstanding for the 53-week period ended December 31, 2010 and the 52-week period ended December 25, 2009, respectively.
EBITDA
EBITDA for the 53-week period ended December 31, 2010 was approximately $1,046,900 compared to approximately $400,200 in the comparable period of the prior year. The increase in the EBITDA directly relates to the increase in sales and profitability compared to 2009. The Company defines EBITDA as earnings before interest, taxes, depreciation and amortization costs. The Company also excludes the cumulative effect of a change in accounting principle, discontinued operations, and the impact of restructuring and other charges from the computation, if applicable. The Company believes EBITDA is a useful measure of operating performance before the impact of investing and financing transactions, making comparisons between companies’ earnings power more meaningful and providing consistent comparisons of the Company’s performance. In order to provide consistent comparisons of year-over-year EBITDA, the following reconciliation is provided.
USE OF GAAP AND NON-GAAP MEASURES
In addition to results presented in accordance with generally accepted accounting principles (“GAAP”), the Company has included in this report “EBITDA,” with EBITDA being defined by the Company as earnings before interest, taxes, depreciation and amortization. The Company excludes the cumulative effect of a change in accounting principle, discontinued operations, and the impact of restructuring and other charges from the computation of EBITDA if applicable. For each non-GAAP financial measure, the Company has presented the most directly comparable GAAP financial measure and has reconciled the non-GAAP financial measure with such comparable GAAP financial measure.
These non-GAAP financial measures provide useful information to investors to assist in understanding the underlying operational performance of the Company. Specifically, 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.
Liquidity and Capital Resources
As of December 31, 2010, the Company had approximately $232,600 of negative working capital compared to approximately $679,300 of negative working capital at December 25, 2009. As of December 31, 2010, the Company has cash of approximately $550,800 compared with approximately $331,300 of cash at December 25, 2009. The increase in working capital is primarily the result of the increased profitability. Subsequent to year end the debt was refinanced with Moriah Capital L.P. with a new maturity date of March 31, 2012.
During the 53-week period ended December 31, 2010, cash increased by approximately $219,500. During the 53-week period ended December 31, 2010, there was positive cash flow from operations, which included non-cash expenses of (i) approximately $376,200 related to depreciation and amortization, (ii) approximately $329,000 related to the amortization of debt cost, and (iii) approximately $5,200 related to stock based employee compensation. In addition there was approximately $539,700 used by investing activities for the purchase of fixed assets and the development of software, approximately $707,600 was used by operations for the increase in account receivables and work in process, approximately $528,000 was provided by operations for the decrease in accounts payable, and accrued salaries both primarily related to the increase in sales and approximately $250,000 was provided by financing activities through proceeds from notes payable.
In December 2009, the Company entered into a Loan and Security agreement and a Secured Revolving Note with Moriah Capital, L.P., a Delaware Limited Partnership (“Moriah” and the “Closing”), whereby we agreed to a Secured Revolving Term Note (the “Note”) with one million five hundred thousand dollars ($1,500,000) availability based on certain criteria. The loan was based on the Company’s account receivables and was advanced at a rate of 85% of eligible receivables, in addition to other collateral. The interest rate of the Note is six percent (6%) above prime with a floor of eleven percent (11.0%) and is paid on a monthly basis. The loan is secured by all of the Company’s assets. The entire Principal was payable in March of 2011. The proceeds from the Note were used to extinguish loans of the Company and provided the necessary working capital to accelerate the Company’s growth initiatives. A portion of the Note is secured by the Jagged Peak common stock held by certain stockholders of the Company.
In March 2011, the Company entered into an amended Loan and Security Agreement with Moriah Capital L.P., a Delaware limited partnership (“Moriah” and the “Closing”), whereby we agreed to extend the Term Note (the “Note”) in the principal amount of one million five hundred thousand dollars ($1,500,000). The new interest rate of the Note is six percent (6%) above prime with a floor of ten percent (10%) and is paid on a monthly basis. There are no monthly principal payments; a final balloon payment of $1,500,000 is due in March of 2012. The balance on the terms remain unchanged. A portion of the Note is secured by the Jagged Peak common stock held by certain stockholders of the Company, which could cause a change of control if the Company was to default on the loan.
Management expects to obtain additional financing or an equity infusion to make the final payment to Moriah, due in March of 2012. The current principal balance is $1,250,000. Based on the cash flow from operations and the Company’s past history, management believes it will be able to find conventional financing with reasonable terms. If the Company is unable to obtain the necessary financing from a conventional bank, it is highly likely that the current shareholders would be significantly diluted if the Company was required to refinance the debt with convertible debt at the current market price of the stock. Management began the refinancing process at the end of the fourth quarter.
The Company has embarked on marketing activities, upgrades to technology and increasing infrastructure that it believes will enhance cash flows and business opportunities in the future. In addition, the Company uses its warehouse to provide a portion of its e-fulfillment services. When the Company outgrows the capabilities of this warehouse facility, the Company may elect to outsource these additional fulfillment service arrangements to other warehouse services providers, or elect to add additional warehouse space. The Company’s current strategy has been to build a network of partner warehouses to fulfill the additional order requirements. If the Company elected to add additional warehouse space, we may need to obtain additional financing. There is no assurance that we will be able to obtain financing on terms favorable to the Company or successfully implement infrastructure growth strategies.
Our strategy is to expand through both internal development and mergers and acquisitions, which will depend on a number of factors that are beyond our control. There can be no assurance that we will be successful in implementing our growth strategy or successful obtaining adequate financing on favorable terms for these strategies.
From time to time the Company may become a defendant in legal proceedings in the normal course of business. Since the Company has not established a reserve in connection with such claims or any general reserve for legal expenses or claims, any such liability, if at all, would be recorded as an expense in the period incurred or estimated. This amount, even if not material to the Company’s overall financial condition, could adversely affect the Company’s results of operations in the period recorded.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-6 Improving Disclosures about Fair Value Measurements (Topic 820) (“ASU 2010-6”). ASU 2010-6 provides amendments to Topic 820 that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to Topic 820 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. The new disclosure requirements became effective for financial statements issued for interim and annual periods beginning after December 15, 2009, except for the disclosure about purchases, sales, issuances and settlements in Level 3 fair value measurements, which become effective for fiscal years beginning after December 15, 2010. The adoption of ASU 2010-6 did not have a material impact on the Company’s consolidated results of operations or financial position.
In January 2010, the FASB issued ASU 2010-2 Consolidations (Topic 810) Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification (“ASU 2010-2”). ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation-Overall Subtopic (“Subtopic 810-10”) of the ASC. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 became effective for the Company starting January 3, 2010. The adoption of ASU 2010-2 did not have a material impact on the Company’s consolidated results of operations or financial position.
In December 2009, the FASB issued ASU 2009-17 Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 amends the ASC for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about an enterprise’s involvement in variable interest entities. ASU 2009-17 was effective for the Company starting January 3, 2010. The adoption of ASU 2009-17 did not have an impact on the Company’s consolidated results of operations or financial position as the Company had no variable interest entities.
Other recent accounting pronouncements issued by the FASB (including its EITF), the 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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
N/A
Item 8.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements
Jagged Peak, Inc.
For the Fiscal Years Ended December 31, 2010 and December 25, 2009
Report of Independent Registered Public Accounting Firm
Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Jagged Peak, Inc.
We have audited the accompanying consolidated balance sheets of Jagged Peak, Inc. and Subsidiary (the Company) as of December 31, 2010 and December 25, 2009, and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for the 53-week and 52-week periods then ended, respectively. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jagged Peak, Inc. and Subsidiary as of December 31, 2010 and December 25, 2009, and the results of their operations and cash flows for the 53-week and 52-week periods ended December 31, 2010 and December 25, 2009, respectively, in conformity with accounting principles generally accepted in the United States of America.
Gregory, Sharer & Stuart, P.A.
St. Petersburg, Florida
March 29, 2011
Jagged Peak, Inc.
Consolidated Balance Sheets
The accompanying notes are an integral part of the consolidated financial statements.
Jagged Peak, Inc.
Consolidated Statements of Operations
The accompanying notes are an integral part of the consolidated financial statements.
Jagged Peak, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
53-Week Period Ended December 31, 2010 and 52-Week Period Ended December 25, 2009
The accompanying notes are an integral part of the consolidated financial statements.
Jagged Peak, Inc.
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of the consolidated financial statements.
Jagged Peak, Inc.
Notes to Audited Consolidated Financial Statements
53-Week Period Ended December 31, 2010 and 52-Week Period Ended December 25, 2009
1. General Background Information
Jagged Peak, Inc. (the “Company” or “Jagged Peak”) is an e-commerce software and services company headquartered in Tampa, Florida, providing Demand and Supply Chain management, CRM execution and e-Fulfillment solutions and services. The Company’s flagship product, EDGE (E-Business Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, incentive and rebate programs, customer service, repair and reverse logistics, marketing materials management, and automate other business processes through the use of the EDGE application and its related tools. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, distribution, travel and tourism and manufacturing.
Jagged Peak’s multi-channel, enterprise EDGE application provides a comprehensive, integrated platform for e-commerce management that supports a broad range of business and operational applications. Clients can use EDGE as an enterprise application or as an integrator and consolidator for multiple businesses, processes and applications. EDGE has built in tools to extend the application which enables clients to create complex and robust e-commerce, CRM related customer services and repair and reverse logistics solutions. The EDGE application permits users to manage order capturing, processing, tracking, fulfillment, settlement, creating, and managing dynamic catalogs, customer relation management, marketing and reporting, all in real-time application. The EDGE application is built to industry-standard best practices. The application has been integrated seamlessly with legacy and back-office management systems as well as industry leading ERP, WMS, TMS and CRM software systems. In addition to the traditional software license sales model, Jagged Peak offers its software with a flexible managed services transaction based pricing model.
Jagged Peak provides outsourced e-commerce and supply chain solutions that enable manufacturers, distributors, and consumer brand companies the ability to quickly and cost effectively establish and operate a direct to customer online business that is fully integrated with their offline sales channels. Jagged Peak’s proven solutions provide companies the tools, expertise, infrastructure and scalability they need to create and maximize their direct to customer sales channel potential without the risk and burden of managing it themselves. The Company uniquely provides companies the benefit of maintaining complete control of the channel, ownership of the customer relationship and retention of the gross product margin normally lost to distributors, resellers and other trading partners.
Jagged Peak has continued to market the launch of TotalCommerce™, an end to end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers. TotalCommerce™ is an outsourced “managed services” solution that leverages Jagged Peak’s extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a nationwide network of fulfillment centers; back office program management; and a range of online marketing services.
Jagged Peak has a network of independently owned fulfillment warehouses throughout North America that enables its clients to provide better service to their customers, while lowering their overall delivery costs. The EDGE application is able to automatically route the orders to the optimal warehouse based on an established set of factors such as service, cost and priority. This enables our clients to achieve their customer service goals while reducing cost and internal infrastructure.
In July 2009, Jagged Peak began operations in Canada through its wholly owned subsidiary, Jagged Peak Canada, Inc. The operations provide similar services as in the United States through a network of independently owned fulfillment warehouses, which are managed through technology provided by Jagged Peak, Inc.
In addition to application software and demand execution, Jagged Peak also focuses on e-marketing and e-channel management to provide a holistic e-commerce solution for its clients. The Company’s approach to e-marketing is to build marketing programs and systems that elevate client’s sites to be viewed by leading search engines as “authorities” within a particular product niche or keyword search term. Our services help companies excel in online retailing through the management, development, and optimization of e-commerce stores. Jagged Peak’s e-marketing services achieve superior results by utilizing a mix of traditional and emerging strategies and industry best practices. The Company’s e-channel management services help protect clients’ online pricing and intellectual property policies by utilizing an automated system and business process to identify, notify and potentially enforce violations. Jagged Peak’s holistic approach to e-commerce provides its clients with assurance that their e-business is performing at its highest level.
There are a variety of risks associated with the Company’s ability to achieve strategic objectives, including the ability to increase market penetration, acquire and profitably manage additional businesses, current reliance on key customers, the risks inherent in expanding, and the intense competition in the industry. For a more detailed discussion of these risks, see section 1 of the 10K entitled “Risks Factors.”
Effective January 1, 2003, the Company elected to change its fiscal year end to correspond to accounting periods based on a 52/53 week reporting year. Therefore, the period ended December 31, 2010 and the period ended December 25, 2009 consists of 53 and 52 weeks, respectively.
2. Significant Accounting Policies
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 on deferred tax assets and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made, as information is available. Management believes that these estimates are reasonable and have been discussed with the audit committee; however, actual results could differ from these estimates.
Revenue Recognition
There are multiple components in our TotalCommerce solution, which are sold through a master agreement where each individual component is priced separately and distinctly from the other components, based on market prices at which we sell those services individually. The client is able to choose which services it wishes to purchase. The separate components can be added or deleted at any time during the contract period from pre-determined prices. We have past history of selling each element separately to establish the market price of each element.
Software development services include activation, e-commerce site development, application and e-commerce site enhancements, consulting services and other development activities. Additional technology revenue is derived from help desk support, maintenance, general support, active monitoring and training.
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).
Our EDGE software is a web-based product and provided to our customers in software as a service model. Revenues are recognized ratably over the period the service is provided. The method of payment can be based on the clients’ use of the system (transactions), a flat monthly fee or an annual fee. Revenue for all methods of payment is recognized over the period the software is available to the client and we are responsible for providing software updates.
We have established vender specific objective evidence for the individually priced elements in our contracts through the use of the market as each element in our 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 we use the residual method. When applying the residual method, VSOE of fair value is allocated to each of the undelivered elements and the remaining consideration is allocated to the delivered elements.
Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. These revenues are recognized based on the net value of the services provided.
Certain order processing services are contracted out by us to optimized independent distribution warehouses in North America. All of these services are managed by us through our order management platform. Since we have the exclusive responsibility to contract and to manage the services provided to our clients by these independent warehouses and the related transportation, the revenue and expenses are recognized based on the amount of services charged to our client and the related expenses are part of our cost of services.
Work in process represents costs and services which have been provided and properly recognized based on the above policy, however have not been billed to the client.
Shipping and handling costs are classified as cost of revenues.
Software and Development Enhancements
Software and development enhancements expenses include costs such as payroll and employee benefit costs associated with product development. The EDGE product platform, including the order management, the warehouse management and the transportation management systems, are continually being enhanced with new features and functions. Once technological feasibility of new features and functions is established, the cost incurred until release to production are capitalized and amortized over a three-year useful life. There was approximately $341,800 capitalized during the 53-week period ended December 31, 2010 and there was approximately $394,900 capitalized during the 52-week period ended December 25, 2009. Amortization expenses related to capitalized software and charged to operations for the 53-week period ended December 31, 2010 and the 52-week period ended December 25, 2009 were approximately $203,000 and approximately $88,200, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and investments in money market funds with high quality financial institutions. The Company considers all highly liquid instruments purchased with a remaining maturity of less than three months at the time of purchase as cash equivalents.
Concentration of Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and cash equivalents and accounts receivables.
The majority of cash is maintained with a major financial institution in the United States. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.
Sales to a single, multi-national customer with several brands amounted to approximately $18,977,600, or approximately 85% of total revenue and amounted to approximately $13,290,300 or approximately 80% of total revenue during the 53-week period ended December 31, 2010 and the 52-week period ended December 25, 2009, respectively. Accounts receivable from this customer was approximately $1,517,800, or approximately 78% of total accounts receivable and approximately $974,200 or approximately 70% of total accounts receivable at December 31, 2010 and December 25, 2009, respectively. The risk of this is mitigated as the deferred revenue and customer deposits from this customer at December 31, 2010 and at December 25, 2009 was approximately $525,000 for both years. This customer is a large international company with more than one hundred brands and we continue to expand our services to additional brands. The Company classifies all business done for all of this customer’s brands as one single customer for the concentration of risk calculation.
The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts receivables, customer’s payment history and the customer’s current ability to pay its obligation. Based on management’s review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $60,000 and $40,000 is considered necessary as of December 31, 2010 and December 25, 2009, respectively. The Company charges uncollectible accounts against the allowance account once the invoices are deemed unlikely to be collectible. Although management believes that accounts receivable are recorded at their net realizable value, a 10% decline in historical collection rate would increase the current bad debt expense for the period ended December 31, 2010 by approximately $10,000. We do not accrue interest on past due receivables.
Identified Intangible Assets
The Company reviews identified intangible assets and long-lived assets to be held-and-used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the sum of the undiscounted expected future cash flows over the remaining useful life of a long-lived asset is less than its carrying amount, the asset is considered to be impaired. Impairment losses are measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risks associated with the recovery of the asset. For the 53-week period ended December 31, 2010 and the 52-week period ended December 25, 2009, there was no impairment of intangible assets.
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. Equipment held under capital leases are stated at the present value of the minimum lease payments and amortized on a straight-line basis over the estimated useful life of the asset.
Depreciation is calculated by the straight-line method over the following estimated useful lives of the related assets:
Estimated Fair Value of Financial Instruments
The aggregated net fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and cash equivalents, receivables, payables, accrued expenses and short-term borrowings. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company’s debt is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
Uncertain Tax Positions
The Company periodically assesses its tax positions taken for all open tax years and has not identified any uncertain tax positions. The Company is not subject to examination by taxing authorities for years prior to 2007.
Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.
The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. In conducting this assessment, management considered a variety of factors, including the Company’s operating profits, the reasons for the Company’s operating losses in prior years, and management’s judgment as to the likelihood of continued profitability and expectations of future performance, and other factors. Management does not believe that a valuation allowance is necessary; however the amount of deferred tax asset realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. Net loss carry forwards do not begin to expire until 2018.
Put Options and Temporary Equity
In 2009, the Company issued 775,000 restricted common shares as partial consideration for a loan obtained from Moriah Capital L.P. (“Moriah”). Pursuant to the terms and conditions of the governing Securities Issuance Agreement, the holder of such shares had the right, but not the obligation, to put the shares back to the Company at a fixed price of $0.21 per common share on March 18, 2011. The Company accounted for these shares in accordance with the guidance established by FASB ASC 480 as a reclassification of the value of the shares from permanent to temporary equity.
Subsequent to year-end, as part of our amended Moriah agreement, Moriah put the 775,000 shares of common stock back to Jagged Peak at a fixed price of $0.21 per common share. As part of the amended agreement, the Company also issued Moriah 1,000,000 restricted common shares as collateral for the redemption premium related to the refinancing of the loan obtained from Moriah. Moriah has the option, at March 31, 2012 to retain the collateral shares or return the shares to Jagged Peak for the redemption premium of $170,000.
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 an estimated forfeitures. Generally, stock options vest 50 percent on each anniversary of the grant date, are fully vested two years from the grant date, and have a contractual term of five years.
Foreign Currency
Generally, the functional currency of our international subsidiary is the local currency. The financial statements are translated to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs and expenses. Translation gains and losses are recorded in accumulated other comprehensive income as a component of stockholders’ equity. There were no recorded translation gains or losses for the 53-week period or the 52 week period ended December 31, 2010 and December 25, 2009. Net gains and losses resulting from foreign exchange transactions are recorded as a component of other expenses.
Earnings per Share
The Company computes earnings per share in accordance with FASB ASC 260, Earnings Per Share. FASB ASC 260 provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of the Company. Potential common stock shares consist of shares that may arise from outstanding dilutive common stock options and warrants (the number of which is computed using the “treasury stock method”) and from outstanding convertible debentures (the number of which is computed using the “if converted method”). Diluted EPS considers the potential dilution that could occur if the Company’s outstanding common stock options, warrants and convertible debentures were converted into common stock that then shared in the Company’s earnings (as adjusted for interest expense, that would no longer occur if the debentures were converted).
The weighted average number of shares was 16,020,961 and 14,699,330 for the 53-week period ended December 31, 2010 and for the 52-week period ended December 25, 2009. The diluted weighted average number of shares was 16,030,527 and 15,011,404 for the 53-week period ended December 31, 2010 and the 52-week period ended December 25, 2009, respectively.
Common stock equivalents for the 52-week period ended December 25, 2009 were anti-dilutive due to the net losses sustained by the Company during this period. Therefore, the diluted weighted average common shares outstanding for the dilutive weighted average share calculation in the period ended December 25, 2009 excludes approximately 312,074 shares that could dilute earnings per share in future periods.
Recently Issued Financial Accounting Standards
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-6 Improving Disclosures about Fair Value Measurements (Topic 820) (“ASU 2010-6”). ASU 2010-6 provides amendments to Topic 820 that require separate disclosure of significant transfers in and out of Level 1 and Level 2 fair value measurements and the presentation of separate information regarding purchases, sales, issuances and settlements for Level 3 fair value measurements. Additionally, ASU 2010-6 provides amendments to Topic 820 that clarify existing disclosures about the level of disaggregation and inputs and valuation techniques. The new disclosure requirements became effective for financial statements issued for interim and annual periods beginning after December 15, 2009, except for the disclosure about purchases, sales, issuances and settlements in Level 3 fair value measurements, which become effective for fiscal years beginning after December 15, 2010. The adoption of ASU 2010-6 did not have a material impact on the Company’s consolidated results of operations or financial position.
In January 2010, the FASB issued ASU 2010-2 Consolidations (Topic 810) Accounting and Reporting for Decreases in Ownership of a Subsidiary - a Scope Clarification (“ASU 2010-2”). ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation-Overall Subtopic (“Subtopic 810-10”) of the ASC. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 became effective for the Company starting January 3, 2010. The adoption of ASU 2010-2 did not have a material impact on the Company’s consolidated results of operations or financial position.
In December 2009, the FASB issued ASU 2009-17 Consolidations (Topic 810) Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 amends the ASC for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. ASU 2009-17 also requires additional disclosures about an enterprise’s involvement in variable interest entities. ASU 2009-17 was effective for the Company starting January 3, 2010. The adoption of ASU 2009-17 did not have an impact on the Company’s consolidated results of operations or financial position as the Company had no variable interest entities.
Other recent accounting pronouncements issued by the FASB (including its EITF), the 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. Property and Equipment
Property and equipment consist of:
Depreciation expense for the 53-week period ended December 31, 2010 and the 52-week period ended December 25, 2009 was approximately $173,100 and $198,000 respectively.
4. Other Assets
Other assets consist of:
5. Notes Payable and Secured Revolving Note
Notes payable consist of:
Moriah Agreements:
In December 2009, the Company entered into a Loan and Security agreement and a Secured Revolving Note with Moriah Capital, L.P., a Delaware Limited Partnership (“Moriah” and the “Closing”), whereby we agreed to a Secured Revolving Term Note (the “Note”) with one million five hundred thousand dollars ($1,500,000) availability based on certain criteria. The loan is based on the Company’s account receivables and is advanced at a rate of 85% of eligible receivables, in addition to other collateral. The interest rate of the Note is six percent (6%) above prime with a floor of eleven percent (11.0%) and is paid on a monthly basis. The loan is secured by all of the Company’s assets. The entire Principal is payable in March of 2011. The proceeds from the Note were used to extinguish loans of the Company and provide the necessary working capital to accelerate the Company’s growth initiatives. A portion of the Note is secured by the Jagged Peak common stock held by certain stockholders of the Company.
In connection with the Loan and Security agreement, the Company executed a Securities Issuance agreement. Pursuant to the terms and conditions of the governing Securities Issuance Agreement, the Company issued 775,000 shares of Jagged Peak common stock along with a put option to sell the stock back to the Company at a fixed price of $0.21 per share. Moriah had the right, but not the obligation, to put the shares back to the Company at the fixed price per share on March 18, 2011.
Pursuant to the terms and conditions of the Loan and Security agreement, the Company was required to maintain certain financial Covenants as follows:
Fixed Charge Coverage Ratio - Beginning March 31, 2010, Borrower shall maintain a Fixed Charge Coverage Ratio on a consolidated basis of not less than the following, in each case for the preceding twelve-month period: (i) 0.75:1.0 for the quarter ended March 31, 2010; (ii) 1.0:1.0 for the quarter ended June 30, 2010; (iii) 1.25:1.0 for the quarter ended September 30, 2010 and (iv) 1.5:1.0 for the quarter ended December 31, 2010;
Funded Debt to EBITDA Ratio - Beginning March 31, 2010, Borrower shall maintain a Funded Debt to EBITDA Ratio on a consolidated basis of not less than the following, in each case as of the last day of each calendar quarter, for the immediately preceding twelve-month period: (i) 3.0:1.0 for the quarter ended March 31, 2010; (ii) 2.5:1.0 for the quarter ended June 30, 2010; and (iii) 2.0:1.0 as of the end of each calendar quarter thereafter.
In connection with the Security and Purchase agreement, we agreed to pay Moriah, a closing payment equal to $112,500 and other fees, totaling approximately $35,000 in cash and 775,000 shares of Jagged Peak common stock. Additionally, we agreed to pay a finder’s fee to Bryant Park Capital, Inc. of $90,000 in cash and 54,250 shares of Jagged Peak common stock.
If an Event of Default were to occur, Moriah may at its option, demand repayment in full of all obligations and liabilities owed to it by the Company, plus any accrued and unpaid interest.
In addition, the Company entered into a Pledge and Security Agreement, Patent and Trademark Assignment and Security Agreement, and a Trademark Collateral Assignment and Security Agreement.
In March of 2011, the Company extended the loan agreement with Moriah Capital L.P. through March 31, 2012. The loan is based on the Company’s account receivables and is advanced at a rate of 85% of eligible receivables, in addition to other collateral. The interest rate of the Note is six percent (6%) above prime with a floor of ten percent (10.0%) and is paid on a monthly basis. The loan is secured by all of the Company’s assets. The entire Principal is payable in March of 2012.
Pursuant to the new terms and conditions of the Loan and Security agreement, the Company must maintain certain financial Covenants as follows:
Fixed Charge Coverage Ratio - Borrower shall maintain a Fixed Charge Coverage Ratio on a consolidated basis of not less than 1.5:1.0;
Funded Debt to EBITDA Ratio -Borrower shall maintain a Funded Debt to EBITDA Ratio on a consolidated basis of not less than 2.0:1.0.
In connection with the extension, we agreed to pay Moriah, a closing payment equal to $60,000 and other minor fees and 1,000,000 shares of Jagged Peak restricted common stock as collateral for the redemption premium. Jagged Peak also purchased the 775,000 shares of common stock Moriah previously held for $162,750 and return them to treasury. Moriah now has the option, at March 31, 2012 to retain the collateral shares or return the shares to Jagged Peak for the redemption premium of $170,000.
The Company expects that positive cash flow from operations will allow the Company to make payments to Moriah according to the terms of the loan agreement. The Company expects to obtain additional financing or an equity infusion to make the final principle payment, due in March of 2012. Based on the cash flow from operations and the Company’s past history, management believes they will be able to find conventional financing with reasonable terms. If the Company is unable to obtain the necessary financing from a conventional bank, it is highly likely that the current shareholders would be significantly diluted if the Company was required to refinance the debt with additional convertible debt at the current market price of the stock.
Laurus Agreements:
The Laurus revolving note was fully extinguished in 2009. Laurus accepted a payment of approximately $915,000 and 190,000 shares of Jagged Peak common stock as full payment for the convertible note. The Company recognized a gain on this transaction of approximately $72,100.
The following is a schedule by year of future minimum principle payments required under the terms of the above notes payable as of December 31, 2010:
6. Lease Commitments and Contingent Liabilities
The Company leases its facilities and certain equipment under operating leases with various terms. The following is a schedule, by year, of future minimum rental payments required under operating leases that have an initial or remaining noncancelable lease term in excess of one year as of December 31, 2010:
Rent expense amounted to approximately $662,900 and $695,700 for the 53-week period ended December 31, 2010 and the 52-week period ended December 25, 2009, respectively.
Litigation
In the ordinary course of business, the Company may be a party to a variety of legal actions that affect any business. The Company does not anticipate any of these matters or any matters in the aggregate to have a material adverse effect on the Company’s business or its financial position or results of operations.
Employment Agreements
In December 2005, the Company entered into an employment agreement with the Company’s Chief Financial Officer, which was amended in 2006 to extend the term to 2009. The agreement has been renewed annually after 2009. Under the employment agreement, the Chief Financial Officer is paid an initial base salary with minimum annual increases of $10,000. Additional performance-based bonuses are provided for. Benefits under the agreement are accelerated on a change of control, and the employee is subject to certain non-competition covenants.
7. Income Taxes
Significant components of the provision for income taxes are as follows:
The Company’s Income tax expense in 2010 included the effect of the Company’s federal, state, and foreign tax benefits. Income taxes are based on the estimation of the annual effective tax rate and evaluations of possible future events and transactions and may be subject to subsequent refinement or revision. The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2010 and December 25, 2009 are as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical performance and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. The Company also has a Canadian net operating loss carryforward of approximately $50,000 which does not begin to expire until 2029.
As of December 31, 2010, the Company had US (federal and state) net operating loss carryforwards of approximately $4,000,000 to reduce future taxable income, which will expire between 2021 and 2029.
The Company classifies penalty and interest expense related to income tax liabilities as an income tax expense. There are no interest and penalties recognized in the statement of operations or accrued on the balance sheet.
8. Stock Compensation
Overview
The Company’s 2005 Stock Incentive Plan, as amended in July 2008 (“the Plan”), authorizes the Board of Directors to grant up to 5,000,000 options to key employees, officers, directors, and consultants. The aggregate fair market value of grants to one individual shall not exceed $100,000 during any one calendar year for grants of both incentive stock options and non-qualified stock options. Options granted under the Plan must be exercised within ten years of the date of grant. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, but with regards to Incentive Stock Options, shall not be less than the Fair Market Value of one share of Common Stock on the Date of Grant. The Option Price for Nonstatutory Options may be less than the Fair Market Value of Common Stock on the Date of Grant only if the Committee determines that special circumstances warrant a lower exercise price.
The Company’s 2000 Stock Incentive Plan authorizes up to 100,000 shares of common stock to any employee or Consultant during any one calendar year for grants of both incentive stock options and non-qualified stock options to key employees, officers, directors, and consultants. Options granted under the Plan must be exercised within ten years of the date of grant. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, but shall in no event be less than the par value of Common Stock. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, but with regards to Incentive Stock Options, shall not be less than the Fair Market Value of one share of Common Stock on the Date of Grant. The Option Price for Nonstatutory Options may be less than the Fair Market Value of Common Stock on the Date of Grant only if the Committee determines that special circumstances warrant a lower exercise price.
Stock Option Awards
In 2009 the Company’s Board of Directors authorized stock option awards for certain employees to purchase up to 200,000 shares of Jagged Peak common stock with a weighted average exercise price of $0.25 per common share and an aggregate market value of approximately $10,400. The options have a term of five years and vests over a two year period.
In 2010 the Company’s Board of Directors authorized stock option awards for certain employees to purchase up to 400,000 shares of Jagged Peak common stock with a weighted average exercise price of $0.08 per common share and an aggregate market value of approximately $27,200. The options have a term of five years and vests over a two year period.
Stock Compensation Expense
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 stock options is determined on the grant date using assumptions for the expected term, expected volatility, dividend yield, and the risk free interest rate. The expected term is primarily based on the contractual term of the option and Company data related to historic exercise and post-vesting forfeiture patterns, which is adjusted based on management’s expectations of future results. The expected term is determined separately for options issued to the Company’s directors and to employees. The Company’s anticipated volatility level is primarily based on the historic volatility of the Company’s common stock, adjusted to remove the effects of certain periods of unusual volatility not expected to recur, and adjusted based on management’s expectations of future volatility, for the life of the option or option group. The Company’s model includes a zero dividend yield assumption in all periods, as the Company has not historically paid nor does it anticipate paying dividends on its common stock. The risk free interest rate is based on recent U.S. Treasury note auction results with a similar life to that of the option. The Company’s model does not include a discount for post-vesting restrictions, as the Company has not issued awards with such restrictions. The period expense is then determined based on the valuation of the options and, at that time, an estimated forfeiture rate is used to reduce the expense recorded. The Company’s estimate of pre-vesting forfeitures is primarily based on the recent historical experience of the Company and is adjusted to reflect actual forfeitures at each vesting date.
The Company values the options and warrants at the grant date using the Black-Scholes option model with the following weighted average assumptions for options granted in 2010: the historical dividend rate of 0%; the risk-free interest rate of approximately 1.35% for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term of 5 years which was calculated based on the Company’s historical pattern of options granted are expected to be outstanding; an expected volatility of approximately 127% which was calculated by review of the Company’s historical activity as well as comparable peer companies; and an option exercise experience rate for employees of 50% based on the Company’s historical rate of employee options being exercised prior to expiration or termination over the past five years.
The Company values the options and warrants at the grant date using the Black-Scholes option model with the following weighted average assumptions for options granted in 2009: the historical dividend rate of 0%; the risk-free interest rate of between approximately 2.4% and 3.8% for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant; the expected term of 5 years which was calculated based on the Company’s historical pattern of options granted are expected to be outstanding; an expected volatility of between 195% and 160% which was calculated by review of the Company’s historical activity as well as comparable peer companies; and an option exercise experience rate for employees of 50% based on the Company’s historical rate of employee options being exercised prior to expiration or termination over the past five years.
The following summarizes the Company’s stock option and warrant activity and related information:
The following table summarizes information about options and warrants outstanding and exercisable as of December 31, 2010:
As of December 31, 2010 and December 25, 2009, there were approximately 1,100,782 and 2,157,840 options exercisable at a weighted average exercise price of $0.68 and $0.75, respectively. The weighted average fair value of options at the date of grant of the options was approximately $0.07 and $0.25 for 2010 and 2009, respectively.
The following table represents our nonvested stock option activity for the years ended December 31, 2010 and December 25, 2009:
There was no aggregate intrinsic value of options outstanding at December 31, 2010, based on the Company’s closing stock price of $0.07 as of the last business day of the period ended December 31, 2010, which would have been received by the optionees had all options been exercised on that date. There was no aggregate intrinsic value of options exercisable at December 31, 2010, based on the Company’s closing stock price of $0.07 as of the last business day of the period ended December 31, 2010, which would have been received by the optionees had all options exercisable been exercised on that date.
There was no aggregate intrinsic value of options outstanding at December 25, 2009, based on the Company’s closing stock price of $0.13 as of the last business day of the period ended December 25, 2009, which would have been received by the optionees had all options been exercised on that date. There was no aggregate intrinsic value of options exercisable at December 25, 2009, based on the Company’s closing stock price of $0.13 as of the last business day of the period ended December 25, 2009, which would have been received by the optionees had all options exercisable been exercised on that date.
There were no options exercised during the years ended December 31, 2010 and December 25, 2009.
9. 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.
Issuance of Common Stock
In December of 2009, the Company issued 230,000 shares of common stock, $0.001 par value per share, under Regulation D promulgated under the Securities Act of 1933, as amended. The issuance of the stock was related to the exercise of certain warrants with an exercise price $0.01 per common share. The funds were used for working capital.
In December of 2009, the Company issued 190,000 shares of common stock, $0.001 par value per share, under Regulation D promulgated under the Securities Act of 1933, as amended. The issuance of the stock was related to the extinguishment of the Laurus debt and was recorded at $0.11 per common share, the market price on the date of issuance. No cash was received, only the relief of debt.
In December of 2009, the Company issued 829,250 shares of common stock, $0.001 par value per share, under Regulation D promulgated under the Securities Act of 1933, as amended. The issuance of the stock was related to the newly obtained Moriah financing. Of the shares issued, 775,000 shares were issued pursuant to the terms and conditions of the governing Securities Issuance Agreement. The holder of such shares had the right, but not the obligation, to put the shares back to the Company at a fixed price per share on March 18, 2011. These shares were purchased by the Company in March of 2011.
In March of 2011, the Company issued 1,000,000 shares of common stock, $0.001 par value per share, under Regulation D promulgated under the Securities Act of 1933, as amended as collateral for the redemption premium. The issuance of the stock was related to the refinancing agreement with Moriah. The shares were issued pursuant to the terms and conditions of the governing Securities Issuance Agreement. Moriah has the option, at March 31, 2012 to retain the collateral shares or return the shares to Jagged Peak for the redemption premium of $170,000.
10. Related Party Transactions
The Company contracted with Norco Accounting and Consulting Inc. (“Norco”) to provide accounting and consulting services. The Company did not use the services of Norco during the 53-week period ended December 31, 2010 and paid approximately $12,900 for such services during the 52-week period ended December 25, 2009. Norco is 50% owned by Andrew J. Norstrud, who joined the Company in October of 2005, as the Company’s Chief Financial Officer. The Company no longer uses Norco for consulting, however does occasionally use Norco for temporary accounting staffing needs under the contract signed prior to Andrew J. Norstrud joining the Company.
Subsequent to year end and to ensure Jagged Peak’s ability to renew the warehouse lease under similar terms, a group of investors, including officers of Jagged Peak, purchased the building from the bank that had taken control of the building from the previous landlord. There have been no changes to the lease Jagged Peak currently has for the building.
The above related party transactions are not necessarily indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent parties.
11. Employee Stock Ownership Plan
In 2007, the Company established an Employee Stock Ownership Plan (ESOP), for the benefit of it employees and to purchase shares of the Company’s common stock from time to time in the open market or in negotiated transactions at prices deemed to be attractive. The Plan was amended as of January 1, 2008. Contributions to the ESOP are made at the discretion of the Board of Directors. All employees of Jagged Peak that meet the 1,000 hours work requirement are eligible to participate in the ESOP. Under the ESOP, which is 100% Company funded, Jagged Peak allocates contributed shares to participants based on their eligible annual compensation. Compensation shall include but not be limited to the regular salaries and wages, overtime pay, bonuses, commissions and other amounts paid by Jagged Peak and taxable to the employee. The value or number of Jagged Peak common stock shares that are contributed to the ESOP on an annual basis is completely subject to the discretion of the Board of Directors. Any cash dividends or distributions paid with respect to shares of the ESOP trust will be retained and allocated in the same manner as other income of the ESOP trust. Shares held by the ESOP trust will be treated as all other issued and outstanding common shares for earnings per share calculations. For 2010 and 2009, the Company recognized expense of $12,500 and $85,700, respectively related to contributions to the ESOP. All ESOP shares are considered outstanding for earnings per share computations. All shares acquired in 2010 and 2009 have been allocated.
The ESOP shares were as follows:
12. Subsequent Event
In March of 2011, the Company extended the loan agreement with Moriah Capital L.P. through March 31, 2012. The loan is based on the Company’s account receivables and is advanced at a rate of 85% of eligible receivables, in addition to other collateral. The interest rate of the Note is six percent (6%) above prime with a floor of ten percent (10.0%) and is paid on a monthly basis. The loan is secured by all of the Company’s assets. The entire Principal is payable in March of 2012.
Subsequent to year end and to ensure Jagged Peak’s ability to renew its warehouse lease under similar terms, a group of investors, including officers of Jagged Peak, purchased the building from the bank that had taken ownership of the building from the previous landlord. There have been no changes to the lease Jagged Peak currently has for the building.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
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 the fiscal period ended December 31, 2010 covered by this Annual Report on Form 10-K. 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 December 31, 2010.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, under the supervision of the Company’s Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010 under the criteria set forth in the in Internal Control-Integrated Framework.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the year ended December 31, 2010, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The Company’s directors and executive officers as of March 25, 2011 were as follows:
Name
Age
Position
Paul Demirdjian
Chairman of the Board of Directors and Chief Executive Officer
Vince Fabrizzi
Chief Sales and Marketing Officer, Director
Dan Furlong
Chief Operations Officer, Director
Andrew J. Norstrud
Chief Financial Officer
Primrose Demirdjian
Director
The following is a brief summary of the business experience of the foregoing directors and executive officers.
The following sets forth information concerning the officers and directors, including present principal occupations, other business experience during the last 5 years, membership on committees of the Board of Directors and directorships in other publicly held companies.
Paul Demirdjian - Chief Executive Officer, Board Member
Mr. Demirdjian has over twenty years of experience in senior management, including executive positions of Senior Vice President of Operations, Chief Information Officer and Director for over ten years at Davel Communications, a publicly held telecom company operating private payphones, operator services, and long distance services. Mr. Demirdjian is in the process of applying for patents on a number of e-commerce methodologies and has written numerous articles published in Public Communications Magazine. Paul Demirdjian has served on the Board since the inception of Jagged Peak in 2000 and is married to Primrose Demirdjian, another member of the Board. Mr. Demirdjian attended the University of South Florida, where he was a member of the Engineering Honor Society (Tau Alpha Pi).
Vince Fabrizzi - Chief Sales and Marketing Officer, Board Member
Prior to joining Jagged Peak, Mr. Fabrizzi was Chief Executive Officer and co-Founder of Compass Marketing Services, a logistics services, warehouse management, and fulfillment services company. Previously, Mr. Fabrizzi co-founded Paradigm Communications in 1989 with Mr. Furlong, and together over the next eight years they built the company into one of the Southeast’s largest nationally recognized advertising agencies with over 160 employees, $60 million in revenues and an impressive list of Fortune 500 clients. Prior to co-founding Paradigm, Mr. Fabrizzi was a Vice President and Partner at FKQ Advertising. Vince Fabrizzi has served on the Board since the inception of Jagged Peak in 2000. Mr. Fabrizzi holds a B.S. in Mechanical Engineering from West Virginia University.
Dan Furlong - Chief Operating Officer, Board Member
Prior to joining Jagged Peak, Mr. Furlong was President and co-Founder with Mr. Fabrizzi of both Compass Marketing Services and Paradigm Communications. Previously, Mr. Furlong was Vice President of Marketing for Dollar Rent-A-Car of Florida - the largest Dollar Rent-A-Car franchise in the country. During his tenure, business at the Florida division increased ten-fold. Mr. Furlong has served as an officer and a board member since the inception of Jagged Peak in 2000. Mr. Furlong graduated from the University of Wyoming with both undergraduate and graduate degrees in Accounting.
Andrew J. Norstrud - Chief Financial Officer
Mr. Norstrud joined Jagged Peak in October of 2005 from Segmentz, Inc., where he served as Chief Financial Officer, and played an instrumental role in the company achieving its strategic goals by pursuing and attaining growth initiatives, building an exceptional financial team, completing and integrating strategic acquisitions and implementing the structure required of public companies. Previously, Mr. Norstrud worked for Grant Thornton LLP, Norco Accounting and Consulting, Aerosonic and PricewaterhouseCoopers LLP and has extensive experience with young, rapid growth public companies. Mr. Norstrud earned a Master of Accounting with a systems emphasis from the University of Florida and is a Florida licensed Certified Public Accountant.
Primrose Demirdjian - Board Member
Primrose Demirdjian is serving as the Company’s Public Relations Director. She currently serves on the board of the Tampa Bay International Business Council and leads the Children’s Cancer Research Group at St. Joseph’s Children’s Hospital. Prior to her tenure as president and co-founder of IBIS (June 1996), an Internet-related company, Mrs. Demirdjian was employed by GTE Data Services, Inc. where she held various administrative and technical positions. Primrose Demirdjian is married to Paul Demirdjian, the CEO of the Company. Mrs. Demirdjian has served as a board member since the inception of Jagged Peak in 2000. Mrs. Demirdjian holds a Bachelor of Science in Management Information Systems from Nova Southeastern University of Florida.
AUDIT COMMITTEE
The Audit Committee consists of the entire Board, as there are no independent Board members. The Audit Committee reviews the results and scope of the audit and other services provided by the Company’s independent auditors and reviews and evaluates the Company’s internal control functions. As an advisory function of the committee, members also participate in financings and review budgets versus historical results throughout the year. The Board of Directors determined that Dan Furlong qualifies as an audit committee financial expert as defined under the regulations of the Securities and Exchange Commission.
COMPENSATION COMMITTEE
The Compensation Committee provides overall guidance to our compensation and benefit programs. The Compensation Committee consists of the entire Board, as there are no independent Board members. The Compensation Committee does not function pursuant to a written charter adopted by the Board of Directors. The committee administers our stock incentive plans and makes recommendations for issuances.
CODE OF ETHICS
The Company’s Board of Directors has adopted a Code of Ethics applicable to all of the Company’s employees, including the Company’s Chief Executive Officer, Chief Sales and Marketing Officer, Chief Operating Officer, Chief Financial Officer, and Principal Accounting Officer and Controller. A copy of the Company’s Code of Ethics is attached as an exhibit to the December 30, 2005 Annual Report on Form 10-KSB. The Company intends to provide any disclosures which are required by the rules of the Securities and Exchange Commission, or which the Company would otherwise determine to be appropriate, with respect to amendments of, and waivers from the Company’s Code of Ethics by posting such disclosures on the Company’s Internet website, www.JaggedPeak.com.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on the Company’s review of copies of forms filed pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended, and written representations from certain reporting persons, the Company believes that during 2010 all reporting persons timely complied with all filing requirements applicable to them.
Section 16(a) of the Securities and Exchange Act of 1934 (the “Exchange Act”) requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file with the Securities and Exchange Commission (“SEC”) and any securities exchanges on which the equities of the Company trade, initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of these reports.
Item 11.
Item 11. Executive Compensation
COMPENSATION
General
The Compensation Committee of the Board of Directors is currently composed of all four directors and is not independent.
The Company is engaged in highly competitive businesses and competes nationally for personnel at the executive and technical staff level. Outstanding candidates are aggressively recruited, often at premium salaries. Highly qualified employees are essential to our success. The Company’s objective is to provide a competitive compensation and work environment that helps attract, retain, and motivate the highly skilled people the Company requires. The Company strongly believes that a considerable portion of the compensation for the Chief Executive Officer and other top executives must be tied to the achievement of business objectives and overall financial performance, both current and long-term.
The Company’s compensation program is based on the philosophy that the total cash compensation should vary with the performance of both the individual and the Company and any long-term incentive should be closely aligned with the interest of the stockholders. There are two cash components of the executives’ salary, a base salary and a bonus structure that compensates the executive for both their individual performance and the overall Company performance.
Long-term incentives are generally realized through the granting of stock options to executives and key employees. We have also granted certain non-qualified options to our executive officers.
The Company implemented an employee stock ownership plan in 2007 for the benefit of its employees. At this time, the Company has no other long-term incentive plans for our officers and employees.
Stock Options
Stock options are granted to aid in the retention of executive and key employees and to align the interests of executive and key employees with those of the stockholders. The level of stock options granted (i.e., the number of shares subject to each stock option grant) is based on the employee’s ability to impact future corporate results. An employee’s ability to impact future corporate results depends on the level and amount of job responsibility of the individual. Therefore, the level of stock options granted is proportional to the Company’s evaluation of each employee’s job responsibility. Stock options are granted at a price not less than the fair market value on the date granted.
The following table sets forth a summary of the compensation paid for the three fiscal years ended December 31, 2010 to or for the benefit of the Company’s Chief Executive Officer, Chief Financial Officer and other named executives that are considered the Company’s most highly compensated whose total annual salary and bonus compensation exceeded $100,000 (the “Named Executive Officers”).
SUMMARY COMPENSATION TABLE
The Company’s Board appoints the executive officers to serve at the discretion of the Board.
DIRECTOR COMPENSATION
Directors who are also employees receive no compensation for serving on the Board. The Company’s non-employee directors may receive options to purchase shares of common stock at the market price on the date they are granted, and are entitled to reimbursement of expenses incurred consequential to their service. There has been no (cash or equity) compensation paid in the past two years to non-employee directors.
EMPLOYMENT AGREEMENTS
In December 2005, the Company entered into an employment agreement with the Company’s Chief Financial Officer, which was amended in 2006 to extend the term to 2009. The agreement has been renewed annually after 2009. In addition to expense allotment and other reasonable expense reimbursement, this agreement provides for a base salary of $125,000 with annual increases in salary and bonuses at the discretion of the Board of Directors. The agreement provided for an option to purchase 100,000 shares of common stock at a price of $1.00 per share and an additional option to purchase 100,000 shares at $0.75 per share and both are completely vested. The agreement contains certain provisions in the event of a qualified change of control that would require the Company to immediately pay the executive the remaining salary due under the contract.
OPTION GRANTS TO NAMED EXECUTIVES IN LAST FISCAL YEAR
During 2010 and 2009, no options were granted to our Chief Executive Officer, Chief Financial Officer or other named executives.
During 2010, the board voted to grant a total of four hundred thousand options (400,000) to other employees other than named executives or directors. The exercise price was approximately $0.08 per share. The options primarily have a five-year term and vest over a two-year period and are exercisable only while the employee is employed with the Company. During the year there were two grants that enabled the employees to purchase up to 400,000 shares of common stock.
During 2009, the board voted to grant a total of two hundred thousand options (200,000) to other employees other than named executives or directors. The exercise price was approximately $0.25 per share. The options primarily have a five-year term and vest over a two-year period and are exercisable only while the employee is employed with the Company. During the year there were two grants that enabled the employees to purchase up to 200,000 shares of common stock options during the year.
STOCK OPTION PLANS
The Company’s 2005 Stock Incentive Plan as Amended in July 2008 (“the Plan”) authorizes the Board of Directors to grant up to 5,000,000 options to key employees, officers, directors, and consultants. The aggregate fair market value of grants to one individual shall not exceed $100,000 during any one calendar year for grants of both incentive stock options and non-qualified stock options. Options granted under the Plan must be exercised within ten years of the date of grant. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, but with regards to Incentive Stock Options, shall not be less than the Fair Market Value of one share of Common Stock on the Date of Grant. The Option Price for Nonstatutory Options may be less than the Fair Market Value of Common Stock on the Date of Grant only if the Committee determines that special circumstances warrant a lower exercise price.
The Company’s 2000 Stock Incentive Plan authorizes up to 100,000 shares of common stock to any employee or Consultant during any one calendar year for grants of both incentive stock options and non-qualified stock options to key employees, officers, directors, and consultants. Options granted under the Plan must be exercised within ten years of the date of grant. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, but shall in no event be less than the par value of Common Stock. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, but with regards to Incentive Stock Options, shall not be less than the Fair Market Value of one share of Common Stock on the Date of Grant. The Option Price for Nonstatutory Options may be less than the Fair Market Value of Common Stock on the Date of Grant only if the Compensation Committee determines that special circumstances warrant a lower exercise price.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table summarizes equity awards granted to our Chief Executive Officer, Chief Financial Officer and other named executive officers that were outstanding as of December 31, 2010.
(1) Consists of a grant made on December 27, 2006 for 200,000 option at a strike price of $0.55 that expire on December 27, 2011.
(2) Consists of a grant made on December 27, 2006 for 200,000 option at a strike price of $0.55 that expire on December 27, 2011.
(3) Consists of a grant made on December 27, 2006 for 200,000 option at a strike price of $0.55 that expire on December 27, 2011.
(4) Consists of a grant made on December 27, 2006 for 200,000 option at a strike price of $0.55 that expire on December 27, 2011.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth information, as of December 31, 2010, with respect to the Company’s stock option plans under which common stock is authorized for issuance, as well as information regarding other compensatory options granted outside of the Company’s stock option plans.
The Company’s 2005 Stock Incentive Plan, as Amended in July 2008 (“the Plan”) authorizes the Board of Directors to grant up to 5,000,000 options to key employees, officers, directors, and consultants. The aggregate fair market value of grants to one individual shall not exceed $100,000 during any one calendar year for grants of both incentive stock options and non-qualified stock options. Options granted under the Plan must be exercised within ten years of the date of grant. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, but shall in no event be less than the fair market value of the Common Stock. The Option Price for Incentive Stock Options shall not be less than the Fair Market Value of one share of Common Stock on the Date of Grant. The Option Price for Nonstatutory Options may be less than the Fair Market Value of Common Stock on the Date of Grant only if the Compensation Committee determines that special circumstances warrant a lower exercise price.
The Company’s 2000 Stock Incentive Plan authorizes the grant of up to 100,000 shares of common stock to any employee or Consultant during any one calendar year for grants of both incentive stock options and non-qualified stock options to key employees, officers, directors, and consultants. Options granted under the Plan must be exercised within ten years of the date of grant. The Option Price payable for the shares of Common Stock covered by any Option shall be determined by the Board of Directors, but shall in no event be less than the par value of Common Stock. The Option Price for Incentive Stock Options shall not be less than the Fair Market Value of one share of Common Stock on the Date of Grant. The Option Price for Nonstatutory Options may be less than the Fair Market Value of Common Stock on the Date of Grant only if the Compensation Committee determines that special circumstances warrant a lower exercise price.
PRINCIPAL SHAREHOLDERS
The following table sets forth information known to us, as of the date of this Form 10-K filing, relating to the beneficial ownership of shares of common stock by:
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each person who is known by us to be the beneficial owner of more than 5% of the Company’s outstanding common stock;
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each director;
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each executive officer; and
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all executive officers and directors as a group.
Under securities laws, a person is considered to be the beneficial owner of securities owned by him (or certain persons whose ownership is attributed to him) and that can be acquired by him within 60 days from the date of this Form 10-K filing, including upon the exercise of options, warrants or convertible securities. The Company determined a beneficial owner’s percentage ownership by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person, and which are exercisable within 60 days of the date of this Form 10-K filing, have been exercised or converted.
Except with respect to beneficial ownership of shares attributed to the named person, the following table does not give effect to the issuance of shares in the event outstanding common stock purchase warrants are exercised.
The Company believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock shown as being owned by them. Unless otherwise indicated, the address of each beneficial owner in the table set forth below is care of Jagged Peak, Inc., 3000 Bayport Drive, Tampa, Florida 33607.
(1) Mr. Demirdjian is the Company’s Chairman, Chief Executive Officer and a Director. Mrs. Demirdjian is a director of the Company. All shares are held jointly with Primrose Demirdjian and include 250,000 shares underlying common stock purchase options exercisable at $0.55 per share.
(2) Mr. Furlong is the Company’s Chief Operating Officer and a Director. Includes 200,000 shares underlying common stock purchase options exercisable at $0.55 per share.
(3) Mr. Fabrizzi is the Company’s Chief Sales and Marketing Officer and a Director. Includes 200,000 shares underlying common stock purchase options exercisable at $0.55 per share.
(4) Mr. Norstrud is the Company’s Chief Financial Officer. Includes 200,000 shares underlying common stock purchase options exercisable at $0.55 per share.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Directors’ Independence
The Company contracted with Norco Accounting and Consulting Inc. (“Norco”) to provide accounting and consulting services. The Company did not use the services of Norco during the 53-week period ended December 31, 2010 and paid approximately $12,900 for such services during the 52-week period ended December 25, 2009. Norco is 50% owned by Andrew J. Norstrud, who joined the Company in October of 2005, as the Company’s Chief Financial Officer. The Company no longer uses Norco for consulting, however does occasionally use Norco for temporary accounting staffing needs under the contract signed prior to Andrew J. Norstrud joining the Company.
Subsequent to year end and to ensure Jagged Peak’s ability to renew the warehouse lease under similar terms, a group of investors, including officers of Jagged Peak (Paul Demirdjian, Vince Fabrizzi and Andrew Norstrud), purchased the building from the bank that had taken control of the building from the previous landlord. There have been no changes to the lease Jagged Peak currently has for the building.
The Company does not have any independent board members and does not expect to add any in 2011. The members of the Board currently own approximately 70% of the Company’s common stock and all have a long history with the Company and in the industry. The Board believes there is sufficient segregation between the Board’s financial statement overview responsibilities and the Chief Financial Officer’s responsibilities for financial reporting and the Company’s compliance responsibilities.
The above related party transactions are not necessarily indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent parties.
Item 14.
Item 14. Principal Accountants Fees and Services
Audit Fees
During 2010, our accountants, Gregory, Sharer & Stuart, P.A., billed us approximately $78,400 for audit work and review of our Form 10-K, 10-Q and 8-K filings. During 2009, our accountants, Gregory, Sharer & Stuart, P.A., billed us approximately $73,400 for audit work and review of our Form 10-K, 10-Q and 8-K filings.
Audit Related Fees
None
Tax Fees
During 2010, we were billed by our accountants, Gregory, Sharer & Stuart, P.A., approximately $9,600 to prepare our federal and state tax returns. During 2009, we were billed by our accountants, Gregory, Sharer & Stuart, P.A., approximately $7,175 to prepare our federal and state tax returns. The audit committee approved all fees.
All Other Fees
None
The Board of Directors has not adopted any pre-approval policies and approves all engagements with the Company’s auditors prior to performance of services by them.
Item 15.
Item 15. Exhibits
* Management contract or compensatory plan or arrangement required to be filed as an exhibit.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tampa, State of Florida, on March 25, 2011.
JAGGED PEAK, INC.
BY:
/s/ Paul Demirdjian
Paul Demirdjian
(Chairman of the Board of Directors, Principle Executive Officer and Chief Executive Officer)
BY:
/s/ Andrew J. Norstrud
Andrew J. Norstrud
(Chief Financial Officer, Principal Accounting Officer and Principal Financial Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
Exhibit Index
Exhibit Index
* Management contract or compensatory plan or arrangement required to be filed as an exhibit.