Item 1. Business
OVERVIEW
Jagged Peak, Inc. (the "Company" or "Jagged Peak") is a software and services company headquartered in Tampa, Florida, providing internally developed cloud-based enterprise e-commerce technology supporting the entire e-commerce life cycle including order, warehouse, and transportation management solutions. The Company's flagship product, EDGE™ (EDGE, Enterprise Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, locations, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, customer service, repair and reverse logistics, and marketing materials management, and automate other business processes through the use of the EDGE platform and its related software applications. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, healthcare, distribution, travel and tourism and manufacturing.
With the EDGE platform, Jagged Peak has continued to market the launch of TotalCommerce™ (TotalCommerce), an end-to-end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers. TotalCommerce is an outsourced "managed services" solution that leverages Jagged Peak's extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a network of twenty-five fulfillment centers throughout the United States, Canada, and the United Kingdom; back office program management; payment processing; and a range of online marketing services.
Jagged Peak operates two warehouses in Florida, an expandable network of twenty-two independently owned fulfillment warehouses throughout North America, and one warehouse in the United Kingdom using the cloud-based EDGE platform. The EDGE application is able to automatically route orders to the optimal warehouse and transportation provider based on an established set of factors such as service, inventory, cost and priority. This enables the Company's clients to reduce customer wait times, while lowering overall delivery costs.
In July 2009, Jagged Peak began operations in Canada through its wholly owned subsidiary, Jagged Peak Canada, Inc. The operations provide similar services as in the United States through a network of independently owned fulfillment warehouses, which use the cloud-based EDGE platform to process orders for Jagged Peak clients.
The Company operates on a 52/53 week reporting year. Therefore, the period ended December 26, 2014 and the period ended December 27, 2013 each consist of 52 weeks.
There are a variety of risks associated with the Company's ability to achieve strategic objectives, including the ability to increase market penetration and 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. Risk Factors
WE ARE A GROWTH STAGE COMPANY WITH A HISTORY OF LOSSES IN MOST YEARS. ALTHOUGH WE HAVE RECENTLY BECOME PROFITABLE, WE MAY NOT BE ABLE TO MAINTAIN PROFITABILITY.
Jagged Peak experienced net losses every year, except for 2010, 2012, 2013 and 2014, since completing its reverse merger in 2005. There can be no assurance that the Company will not incur 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 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 SUBSTANTIALLY
Sales to one of our clients accounted for approximately 88% of our revenue in 2014, and approximately 87% in 2013. Contracts with our clients are generally one to three years in length. If any key contract 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 maintain 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.
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 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 effect on our business, operating results and financial condition.
Our industry is characterized by the existence of intellectual property rights and frequent claims and related litigation regarding these intellectual property rights. In the course of our business, we may become subject to claims of infringement or otherwise become aware of potentially relevant 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 TRENDS IN THE FINANCIAL MARKETS 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' businesses, which are 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.
WE MAY NOT BE ABLE TO EFFECTIVELY EXPAND AND TRANSITION TO A MATURE BUSINESS
The Company is in the expansion stage and accordingly, the Company's business is subject to the risks inherent in the transition to a mature 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.
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 70% 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 MAY NOT BE ABLE TO COMPETE EFFECTIVELY
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. Our primary public company competitors are IBM, SAP, Oracle (Art Technology Group), eBay, Magento, Speed Commerce and PFSweb. There can be no assurance that the Company will be able to compete successfully with its existing or potential competitors, which 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 provides 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 MAY IMPEDE OUR GROWTH
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.
IF WE ARE UNABLE TO DEVELOP FURTHER PRODUCT ENHANCEMENTS, OUR RESULTS FROM OPERATIONS MAY SUFFER
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.
WE MAY BECOME LIABLE TO CLIENTS FOR ANY DEFECTS IN OUR SOFTWARE OR 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 THE COMPANY'S BUSINESS COULD RESULT FROM 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 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.
SUBSTANTIAL ALTERATION OF THE COMPANY'S CURRENT BUSINESS AND REVENUE MODEL COULD HURT SHORT-TERM RESULTS
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.
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 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 affecting 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 Stock 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 IS LIKELY TO OCCUR DUE TO THE LOW TRADING VOLUME OF OUR 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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General market and economic conditions; and
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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;
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Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;
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"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 Company's 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 COULD DISCOURAGE BROKERS FROM MAKING A MARKET IN OUR STOCK
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 our credit facility with Fifth Third Bank ("Fifth Third"), we granted to Fifth Third a first priority security interest in all of our assets. The loan agreement provides that upon the occurrence of an event of default under the agreement, Fifth Third 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 Fifth Third to foreclose on our assets could likewise cause us to curtail our current operations. The credit facility contains customary covenants, including, among other things, the maintenance of certain minimum EBITDA levels and fixed coverage ratios. Our ability to satisfy the financial covenants related to our existing or future indebtedness can be affected by events beyond our control, and there is a risk that we will not meet those covenants. A breach of any such covenants could result in a default under our credit facility or under any other debt instrument that we may enter into in the future.
OUR BUSINESS IS SUBJECT TO ONLINE SECURITY RISKS, INCLUDING SECURITY BREACHES, WHICH COULD RESULT IN LIABILITY BY THE COMPANY TO THIRD PARTIES
Our businesses involve the storage and transmission of users' proprietary information, and security breaches could expose us to a risk of loss or misuse of this information, litigation and potential liability. An increasing number of websites, including several other large Internet companies, have recently disclosed breaches of their security, some of which have involved sophisticated and highly targeted attacks on portions of their sites. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, public perception of the effectiveness of our security measures could be harmed and we could lose users. A party that is able to circumvent our security measures could misappropriate our or our users' proprietary information, cause interruption in our operations, damage our computers or those of our users, or otherwise damage our reputation and business. Any compromise of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to our reputation and a loss of confidence in our security measures, which could harm our business. Data security breaches may also result from non-technical means, for example, actions by a suborned employee.
Our clients and their customers may authorize us to bill their payment card accounts directly for all transaction fees charged by us. We rely on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including customer payment card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by us to protect transaction data being breached or compromised.
Under payment card rules and our contracts with our card processors, if there is a breach of payment card information that we store, we could be liable to the payment card issuing banks for their cost of issuing new cards and related expenses. In addition, if we fail to follow payment card industry security standards, even if customer information has not been compromised, we could incur significant fines or lose our ability to give customers the option of using payment cards to fund their payments or pay their fees. If we were unable to accept payment cards, our businesses would be seriously damaged.
Our servers are also vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, and we have experienced "denial-of-service" type attacks on our system that have, in certain instances, made all or portions of our websites unavailable for periods of time. Security breaches, including any breaches of our security measures or those of parties with which we have commercial relationships (e.g., our clients and third-party service providers) that result in the unauthorized release of users' personal information, could damage our reputation and expose us to a risk of loss or litigation and possible liability. Our insurance policies carry low coverage limits, which may not be adequate to reimburse us for losses caused by security breaches.
Item 1B.
Item 1B. Unresolved Staff Comments
Not Applicable
Item 2.
Item 2. Properties
The Company leases approximately 12,000 square feet of office space for its executive offices at 3000 Bayport Drive, Suite 250, Tampa, Florida 33607. Monthly rent expense is approximately $23,200 under a lease that expires February of 2016.
In addition, the Company owns approximately 93,000 square feet of warehouse space at 1701 3rd Ave. South, St. Petersburg, Florida. On June 25, 2012, the Company purchased this previously leased warehouse for $3.0 million. The purchase was financed with a $2,388,000 5-year term loan (the "Mortgage") amortized over 20 years and an approximately $612,000 down payment provided by a revolving line of credit. Principal and interest on the Mortgage are due monthly. Concurrent with the Mortgage, the Company entered into an interest rate swap thereby fixing the effective rate on the Mortgage at 3.93%. The Mortgage, revolving line of credit and interest rate swap are agreements entered into with Fifth Third Bank and are explained further in the Liquidity and Capital Resources section of Item 7. At the date of purchase, the recorded values of the warehouse building and related land were approximately $1,433,000 and $1,567,000, respectively. The 5-year Mortgage balance was approximately $2,089,500 as of December 26, 2014.
On December 21, 2013, the Company entered into an agreement to lease approximately 71,000 square feet of warehouse space and 6,000 square feet of office space at Gateway Business Park, 2007 Gandy Blvd. North, St. Petersburg, Florida. The initial lease term is for seventy-three months, commencing on January 1, 2014. On March 20, 2014 the Company expanded the office space from 6,000 square feet to 10,329 square feet. On May, 1, 2014, the Company increased the leasehold premises by an additional 70,000 square feet. Monthly rent expense as of year-end is approximately $63,000.
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 26, 2014:
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. Mine Safety Disclosures
Not Applicable
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 2013 and 2014. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
The Company had approximately 115 stockholders of record as of March 26, 2015. The Company has never paid cash dividends on the Company's common stock. The Company intends to retain 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 2011, the Company's Board of Directors granted stock option awards to four executives and one director to purchase up to 2,150,000 shares of Jagged Peak common stock with an exercise price of $0.13 per common share, which approximated the fair market value of the common stock on the date of grant. The options have a term of five years and vested ratably on a monthly basis over a one year period.
In 2012, the Company's Board of Directors granted stock option awards to an officer to purchase up to 100,000 shares of Jagged Peak common stock with an exercise price of $0.25 per common share, which approximated the fair market value of the common stock on the date of granted and an aggregate market value of approximately $25,000. The options have a term of nine years and eleven months and vests ratably on a monthly basis over a nine-month period.
Both the 2011 and 2012 grants of options were exempt from the registration provisions of the Securities Act of 1933, as amended, because they were made in private offerings under Section 4(2) thereof.
In November 18, 2014, the Company granted 1,850,000 restricted shares of Jagged Peak to five executives and one director. The restricted stock vests ratably on an annual basis over a three year period. Restricted stock is measured at fair value of $0.65, which was the market value of the stock at the date of grant, and is recognized on a straight-line basis over the vesting period.
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 the SEC's Item 303(c) of Regulation S-K.
OVERVIEW
Jagged Peak, Inc. (the "Company" or "Jagged Peak") is a software and services company headquartered in Tampa, Florida, providing internally developed cloud-based enterprise e-commerce technology supporting the entire e-commerce life cycle including order, warehouse, and transportation management solutions. The Company's flagship product, EDGE™ (EDGE, Enterprise Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, locations, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, customer service, repair and reverse logistics, and marketing materials management, and automate other business processes through the use of the EDGE platform and its related software applications. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, healthcare, distribution, travel and tourism and manufacturing.
With the EDGE platform, Jagged Peak has continued to market the launch of TotalCommerce™ (TotalCommerce), an end-to-end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers. TotalCommerce is an outsourced "managed services" solution that leverages Jagged Peak's extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a network of twenty-five fulfillment centers throughout the United States, Canada, and the United Kingdom; back office program management; payment processing; and a range of online marketing services.
Jagged Peak operates two warehouses in Florida, an expandable network of twenty-two independently owned fulfillment warehouses throughout North America, and one warehouse in the United Kingdom using the cloud-based EDGE platform. The EDGE application is able to automatically route orders to the optimal warehouse and transportation provider based on an established set of factors such as service, inventory, cost and priority. This enables the Company's clients to reduce customer wait times, while lowering overall delivery costs.
In July 2009, Jagged Peak began operations in Canada through its wholly owned subsidiary, Jagged Peak Canada, Inc. The operations provide similar services as in the United States through a network of independently owned fulfillment warehouses, which use the cloud-based EDGE platform to process orders for Jagged Peak clients.
The Company operates on a 52/53 week reporting year. Therefore, the period ended December 26, 2014 and the period ended December 27, 2013 each consist of 52 weeks.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The Company prepares its financial statements in conformity with U.S. GAAP. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates, including but not limited to, capitalization of software, work in process, recoverability of long-lived assets, recoverability of prepaid expenses, valuation of deferred tax assets and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made, as information is available. Management believes that these estimates are reasonable, however, actual results could differ from these estimates.
Revenue Recognition
There are multiple components in Jagged Peak's TotalCommerce solution, which are sold through a master agreement where each individual component is priced separately and distinctly from the other components, based on market prices at which we sell those services individually. The client is able to choose which services it wishes to purchase. The separate components can be added or deleted at any time during the contract period at pre-determined prices. The Company has a history of selling each element separately to establish the market price of each element.
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).
The Company's EDGE software is a web-based product and is typically provided to its customers in a Software as a Service ("SaaS") model. Revenues are recognized ratably over the period the service is provided. The method of payment can be based on the clients' use of the system (transactions), a flat monthly fee or an annual fee. Revenue for all methods of payment is recognized over the period the software is available to the client and the Company is responsible for providing software updates.
The Company has established vendor specific objective evidence for the individually priced elements in its contracts through the use of the market as each element in its contracts is sold both as a package and individually with the same pricing. For any element delivered for which vendor specific objective evidence ("VSOE") is not available it uses the residual method. When applying the residual method, VSOE of fair value is allocated to each of the undelivered elements and the remaining consideration is allocated to the delivered elements.
Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. These revenues are recognized based on the net value of the services provided.
Certain order processing services are contracted out by the Company to optimized independent distribution warehouses in North America. All of these services are managed by the Company through its order management platform. Because the Company has the exclusive responsibility to contract and to manage the services provided to its clients by these independent warehouses and the related transportation, the revenue and expenses are recognized based on the amount of services charged to the client and the related expenses are part of the Company's cost of services.
Work in process represents costs and services which have been provided and properly recognized based on the above policies, however have not been billed to the client.
Shipping and handling costs are classified as cost of revenues.
Concentration of Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and accounts receivable.
Cash is maintained with one major financial institution in the United States and Canada. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.
Revenue from a single, multi-national customer with several brands amounted to approximately $54.5 million, or approximately 88% of total revenue, and approximately $41.3 million, or approximately 87% of total revenue, during the 52-week periods ended December 26, 2014 and December 27, 2013, respectively. Accounts receivable from this customer were approximately $10.0 million, or approximately 82% of net accounts receivable and approximately $4.1 million, or approximately 69% of net accounts receivable, at December 26, 2014 and December 27, 2013, respectively. The risk of this concentration is mitigated as the deposits from this customer at December 26, 2014 and at December 27, 2013 were approximately $2.8 million and $2.1 million, respectively.
Accounts receivable result primarily from the sales of e-commerce and fulfillment services to a variety of customers. Accounts receivable are stated at cost less an allowance for doubtful accounts. The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts receivables, the customer’s payment history and the customer’s current ability to pay its obligations. Based on management’s review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $513,100 and $579,800 is considered necessary as of December 26, 2014 and December 27, 2013, respectively. The Company charges uncollectible accounts against the allowance account once the invoices are deemed unlikely to be collectible. The Company does not accrue interest on past due receivables.
Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.
The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. In conducting this assessment, management considers a variety of factors, including the Company's operating profits, the reasons for the Company's operating losses in prior years, management's judgment as to the likelihood of profitability and expectations of future performance, and other factors. Management does not believe that a valuation allowance is necessary; however, the amount of deferred tax asset realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. Net loss carry forwards do not begin to expire until 2029.
RESULTS OF OPERATIONS
For the 52-week period ended December 26, 2014 compared to the 52-week period ended December 27, 2013.
The following table summarizes selected financial data of the Company:
The following table sets forth the Company’s capitalization as of December 26, 2014. The table should be read in conjunction with the Company’s financial statements and related notes included elsewhere in this Form 10-K filing.
Revenues increased $14,229,600, or 30%, to $61,711,400 for the 52-week period ended December 26, 2014, as compared to $47,481,800 for the 52-week period ended December 27, 2013. Greater e-commerce order processing resulted in increases in both technology and fulfillment service revenues. Revenues from implementation of new client sites and on-going development for existing clients were consistent across these periods.
Cost of revenue, which consists primarily of labor, fulfillment operations and facilities costs, increased by $13,162,200, or 35%, to $51,181,500 for the 52-week period ended December 26, 2014, as compared to $38,019,300 for the 52-week period ended December 27, 2013. As a percentage of revenue, cost of revenue was 83% for the 52-week period ended December 26, 2014, as compared to 80% for the 52-week period ended December 27, 2013. This increase is primarily related to the increase in temporary fulfillment labor needed to manage peak order volume.
Selling, general and administrative expense increased by $1,787,400, or 23%, to $9,533,800 for the 52-week period ended December 26, 2014, as compared to $7,746,400 for the 52-week period ended December 27, 2013. This increase was primarily related to accelerated hiring of experienced managers at higher wages to support our current and expected growth.
Interest expense increased by $6,200 to $213,200 for the 52-week period ended December 26, 2014, as compared to $207,000 for the 52-week period ended December 27, 2013.
Income tax expense was $320,300 for the 52-week period ended December 26, 2014 compared to an income tax expense of $573,800 for the 52-week period ended December 27, 2013. Differences between the taxable income and the effective tax rate used for 2014 and 2013, as compared to the U.S. federal statutory rate, are primarily due to permanent differences and taxes on foreign operations. As of December 26, 2014, the Company had U.S. (federal and state) net operating loss carry forwards of $1,397,400 to reduce future taxable income, which will expire between 2031 and 2033. The Company also has a Canadian net operating loss carry forward of $2,166,800 which does not begin to expire until 2029.
Management believes there will be sufficient future earnings to support the more than likely realization of deferred tax assets in excess of existing taxable temporary differences. The amount of deferred tax assets considered realizable, however, could be reduced in the near-term if estimates of future taxable income are reduced.
The Company realized net income of $230,900 for the 52-week period ended December 26, 2014, compared with net income of $847,300 for the 52-week period ended December 27, 2013, a decrease of 73%.
Basic income per share from continuing operations for the 52-week period ended December 26, 2014 was $0.01 per weighted average share, compared with basic income of $0.05 per weighted average share for the 52-week period ended December 27, 2013.
USE OF GAAP AND NON-GAAP MEASURES
In addition to results presented in accordance with generally accepted accounting principles (“GAAP”), the Company has included in this report “Adjusted EBITDA,” with Adjusted EBITDA being defined by the Company as earnings before interest, taxes, depreciation and amortization, and non-cash compensation expense. For each non-GAAP financial measure, the Company has presented the most directly comparable GAAP financial measure and has reconciled the non-GAAP financial measure with such comparable GAAP financial measure.
These non-GAAP financial measures provide useful information to investors to assist in understanding the underlying operational performance of the Company. Specifically, Adjusted EBITDA is a useful measure of operating performance before the impact of investing and financing transactions, making comparisons between companies’ earnings power more meaningful and providing consistent period-over-period comparisons of the Company’s performance. In addition, the Company uses this non-GAAP financial measure internally to measure its on-going business performance and in reports to bankers to permit monitoring of the Company’s ability to pay outstanding liabilities.
ADJUSTED EBITDA
Adjusted EBITDA for the 52-week period ended December 26, 2014 was approximately $2,054,300 compared to approximately $2,436,200 for the 52-week period ended December 27, 2013. The decrease in the Adjusted EBITDA primarily relates to the increase in selling, general and administrative expense due to the accelerated hiring of experienced managers at higher wages to support our current and expected growth. The Company defines Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, and non-cash compensation expense. The Company believes Adjusted EBITDA is a useful measure of operating performance before the impact of investing and financing transactions, making comparisons between companies’ earnings power more meaningful and providing consistent comparisons of the Company’s performance. To provide consistent comparisons of year-over-year Adjusted EBITDA, the following reconciliation is provided:
Liquidity and Capital Resources
The Company's cash needs consist of working capital, capital expenditures and debt service. The Company's working capital needs primarily depend on the timing of collections from customers and payments to vendors. Capital expenditures consist of building, computer, and warehouse equipment purchases and developer salaries for EDGE enhancements. The Company reduces capital expenditure requirements by utilizing independent fulfillment warehouses. Independent fulfillment warehouses typically provide their own equipment, which reduces capital investment requirements.
For the 52-week period ended December 26, 2014, the Company’s operations used cash of approximately $425,100. Cash used by operations increased as timing of year end sales resulted in an increase in accounts receivable, partially offset by the increase in accounts payable.
Net cash used in the Company’s investing activities totaled $2,934,000 for the 52-week period ended December 26, 2014 consisting of acquisition of warehouse equipment, computer hardware, building improvements to the company owned warehouse in St. Petersburg and enhancements to the Company’s software. The Company expects total capital expenditures for the year 2015 will be approximately $2,500,000 to $3,000,000.
The Company’s financing activities provided cash of $3,122,300 for the 52-week period ended December 26, 2014 consisting of net borrowings on the Fifth Third credit facility (the “Facility”) and Term Loan and payments on its Term Loan and Mortgage.
The Company’s primary sources of cash flow were from borrowings under the “Facility” and the Term Loan.
On March 22, 2013, the Company amended the Facility to reduce the interest rate to an applicable margin of one-month LIBOR plus 2.50%. Prior to this Amendment, borrowings under the Facility bore interest at a rate equal to an applicable margin of one-month LIBOR plus 3.00%. In addition to paying monthly interest on outstanding principal under the Facility, the Company is required to pay a quarterly unutilized 0.25% commitment fee to the lender, based on the average daily unused balance of the Facility. The Company may voluntarily repay outstanding loans under the Facility at any time without premium or penalty.
On August 27, 2013, the Company amended the Facility to increase the borrowing capacity to $5.0 million and to extend the maturity date to August 27, 2015. One-month LIBOR was approximately 0.17% as of December 26, 2014.
On September 5, 2014, the Company amended the Facility to extend the maturity date to September 5, 2016.
On September 5, 2014 the Company entered into the Term Loan with Fifth Third Bank to fund operations. The Term Loan provides for a principal amount of $2.0 million at an interest rate of one-month LIBOR plus 2.50% amortized over 4 years. One-month LIBOR was 0.17% as of December 26, 2014. Principal and interest are due monthly. The Term Loan matures in September 2018. The Term Loan is secured by a first priority lien on substantially all of the Company's assets.
On June 25, 2012, the Company purchased its previously leased warehouse facility for $3.0 million. The purchase was financed with a $2.388 million 5-year term loan ("Mortgage") amortized over 20 years. Principal and interest are due monthly. The Mortgage is secured by a first priority lien on substantially all of the Company's assets. Concurrent with the Mortgage, the Company entered into an interest rate swap agreement that expires in June 2017 concurrent with the maturity of the Company's Mortgage. The interest rate swap agreement has an initial notional amount of $2.388 million and provides for the Company to pay interest at a fixed rate of 1.43% while receiving interest for the same period at the one-month LIBOR rate on the same notional principal amount. The Company entered into the interest rate swap agreement to hedge against LIBOR movements on current variable rate indebtedness totaling $2.388 million at one-month LIBOR plus 2.50%, thereby fixing the Company's effective rate on the notional amount at 3.93%. One-month LIBOR was 0.17% as of December 26, 2014. The swap agreement qualifies as an "effective" hedge under U.S. GAAP. As of December 26, 2014, the fair market value of the interest rate swap included in other accrued expenses was approximately $23,600.
At December 26, 2014, the balance outstanding on the Facility, Mortgage, and the Term Loan were approximately $1,941,000, $2,089,500 and $1,875,000, respectively.
The Company believes that, based on current operations and anticipated growth, cash flow from operations, together with the Facility, will be sufficient to fund anticipated capital expenditures, operating expenses and other anticipated liquidity needs for the next twelve months. Anticipated debt maturity of the Facility in 2016, and other unforeseen events may require the Company to seek alternative financing, such as restructuring or refinancing of its long-term debt, selling assets or operations or selling debt or equity securities. If these alternatives were not available in a timely manner or on satisfactory terms or are not permitted under the Facility and the Company defaulted on obligations, its debt could be accelerated and its lender may foreclose on its assets.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. The comprehensive new standard will supersede existing revenue recognition guidance and require revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which the Company expects to be entitled in exchange for those goods or services. The guidance will also require that certain contract costs incurred to obtain or fulfill a contract be capitalized as an asset and amortized as revenue is recognized. Adoption of the new rules could affect the timing of both revenue recognition and the recognition of contract costs for certain transactions. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. For the Company, the new standard will be effective January 1, 2017. The Company is currently evaluating the impact of adoption and the implementation approach to be used.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
Item 8.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements
Jagged Peak, Inc.
For the Fiscal Years Ended December 26, 2014 and December 27, 2013
Report of Independent Registered Public Accounting Firm
Contents
Report of Independent Registered Public Accounting Firm
Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Audited Consolidated Financial Statements
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 26, 2014 and December 27, 2013, and the related consolidated statements of comprehensive income, changes in stockholders' equity, and cash flows for the 52-week periods then ended. 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 26, 2014 and December 27, 2013, and the results of their operations and cash flows for the 52-week periods ended December 26, 2014 and December 27, 2013 in conformity with accounting principles generally accepted in the United States of America.
Gregory, Sharer & Stuart, P.A.
St. Petersburg, Florida
March 26, 2015
Jagged Peak, Inc.
Consolidated Balance Sheets
The accompanying notes are an integral part of the consolidated financial statements.
Jagged Peak, Inc.
Consolidated Statements of Comprehensive Income
52-Week Periods Ended
The accompanying notes are an integral part of the consolidated financial statements.
Jagged Peak, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
52-Week Periods Ended December 26, 2014 and December 27, 2013
The accompanying notes are an integral part of the consolidated financial statements.
Jagged Peak, Inc.
Consolidated Statements of Cash Flows
52-Week Periods Ended
The accompanying notes are an integral part of the financial statements.
Jagged Peak, Inc.
Notes to Audited Consolidated Financial Statements
52-Week Periods Ended December 26, 2014 and December 27, 2013
1.
General Background Information
Jagged Peak, Inc. (the "Company" or "Jagged Peak") is a software and services company headquartered in Tampa, Florida, providing internally developed cloud-based enterprise e-commerce technology supporting the entire e-commerce life cycle including order, warehouse, and transportation management solutions. The Company's flagship product, EDGE™ (EDGE, Enterprise Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, locations, and partners in real-time. The Company enables clients to build and operate custom branded portals such as e-commerce, customer service, repair and reverse logistics, and marketing materials management, and automate other business processes through the use of the EDGE platform and its related software applications. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, healthcare, distribution, travel and tourism and manufacturing.
With the EDGE platform, Jagged Peak has continued to market the launch of TotalCommerce™ (TotalCommerce), an end-to-end solution that enables a company to quickly and cost effectively launch a fully operational, best practices, e-commerce online channel direct to its consumers. TotalCommerce is an outsourced "managed services" solution that leverages Jagged Peak's extensive technology and supply chain infrastructure and provides manufacturers with a turnkey, rapidly deployable solution including e-commerce webstore(s); order, inventory and transportation management software; a network of twenty-five fulfillment centers throughout the United States, Canada, and the United Kingdom; back office program management; payment processing; and a range of online marketing services.
Jagged Peak operates two warehouses in Florida, an expandable network of twenty-two independently owned fulfillment warehouses throughout North America, and one warehouse in the United Kingdom using the cloud-based EDGE platform. The EDGE application is able to automatically route orders to the optimal warehouse and transportation provider based on an established set of factors such as service, inventory, cost and priority. This enables the Company's clients to reduce customer wait times, while lowering overall delivery costs.
In July 2009, Jagged Peak began operations in Canada through its wholly owned subsidiary, Jagged Peak Canada, Inc. The operations provide similar services as in the United States through a network of independently owned fulfillment warehouses, which use the cloud-based EDGE platform to process orders for Jagged Peak clients.
The Company operates on a 52/53 week reporting year. Therefore, the period ended December 26, 2014 and the period ended December 27, 2013 each consist of 52 weeks.
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 of deferred tax assets and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made, as information is available. Management believes that these estimates are reasonable however; actual results could differ from these estimates.
Revenue Recognition
There are multiple components in Jagged Peak's TotalCommerce solution, which are sold through a master agreement where each individual component is priced separately and distinctly from the other components, based on market prices at which we sell those services individually. The client is able to choose which services it wishes to purchase. The separate components can be added or deleted at any time during the contract period at pre-determined prices. The Company has a history of selling each element separately to establish the market price of each element.
Revenue from software development and technology services is recognized as services are provided or on the percentage of completion method for those arrangements with specified milestones. The percentage of completion is based on labor hours incurred to total labor hours expected to be incurred. Additional technology revenues are either paid monthly or on an annual basis. If paid on an annual basis, the revenue is recognized over the year, and if paid on a monthly basis, the revenue is recognized in the month in which the service was provided.
Hosting and managed services contracts range in length from one to three years, and are typically renewed annually after the initial term for subsequent one year periods. Revenue from hosting and managed services is recognized ratably over the period for which the services are provided. In most cases the fees are either a flat monthly fee or based on the client's use of the system (transactions).
The Company's EDGE software is a web-based product and is typically provided to its customers in a Software as a Service ("SaaS") model. Revenues are recognized ratably over the period the service is provided. The method of payment can be based on the clients' use of the system (transactions), a flat monthly fee or an annual fee. Revenue for all methods of payment is recognized over the period the software is available to the client and the Company is responsible for providing software updates.
The Company has established vendor specific objective evidence for the individually priced elements in its contracts through the use of the market as each element in its contracts is sold both as a package and individually with the same pricing. For any element delivered for which vendor specific objective evidence ("VSOE") is not available it uses the residual method. When applying the residual method, VSOE of fair value is allocated to each of the undelivered elements and the remaining consideration is allocated to the delivered elements.
Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. These revenues are recognized based on the net value of the services provided.
Certain order processing services are contracted out by the Company to optimized independent distribution warehouses in North America. All of these services are managed by the Company through its order management platform. Because the Company has the exclusive responsibility to contract and to manage the services provided to its clients by these independent warehouses and the related transportation, the revenue and expenses are recognized based on the amount of services charged to the client and the related expenses are part of the Company's cost of services.
Work in process represents costs and services which have been provided and properly recognized based on the above policies, however have not been billed to the client.
Shipping and handling costs are classified as cost of revenues.
Software and Development Enhancements
Software and development enhancement expenses include costs such as payroll and employee benefit costs associated with product development. The EDGE product platform, including the e-commerce, order management, warehouse management and transportation management systems, are continually being enhanced with new features and functions. Once technological feasibility of new features and functions is established, the costs incurred from release to production are capitalized and amortized over their useful life. The Company capitalized approximately $1,502,100 and $1,022,900 during the 52-week periods ended December 26, 2014 and December 27, 2013, respectively. Amortization expense related to capitalized software and charged to operations for the 52-week periods ended December 26, 2014 and December 27, 2013 was approximately $455,600 and $263,600, respectively.
Cash
Cash includes cash on hand with high quality financial institutions.
Concentration of Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and accounts receivable.
Cash is maintained with one major financial institution in the United States and Canada. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.
Revenue from a single, multi-national customer with several brands amounted to approximately $54.5 million, or approximately 88% of total revenue, and approximately $41.3 million, or approximately 87% of total revenue, during the 52-week periods ended December 26, 2014 and December 27, 2013, respectively. Accounts receivable from this customer were approximately $10.0 million, or approximately 82% of net accounts receivable and approximately $4.1 million, or approximately 69% of net accounts receivable, at December 26, 2014 and December 27, 2013, respectively. The risk of this concentration is mitigated as the deposits from this customer at December 26, 2014 and at December 27, 2013 were approximately $2.8 million and $2.1 million, respectively.
Accounts receivable result primarily from the sales of e-commerce and fulfillment services to a variety of customers. Accounts receivable are stated at cost less an allowance for doubtful accounts. The Company extends credit to its various customers based on evaluation of the customer’s financial condition and ability to pay the Company in accordance with the payment terms. The Company provides for estimated losses on accounts receivable considering a number of factors, including the overall aging of accounts receivables, the customer’s payment history and the customer’s current ability to pay its obligations. Based on management’s review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $513,100 and $579,800 is considered necessary as of December 26, 2014 and December 27, 2013, respectively. The Company charges uncollectible accounts against the allowance account once the invoices are deemed unlikely to be collectible. The Company does not accrue interest on past due receivables.
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 52-week periods ended December 26, 2014 and December 27, 2013, there were no impairments 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. Depreciation expense was $630,100 and $430,500 for the 52-week periods ended December 26, 2014 and December 27, 2013, respectively. Depreciation expense is included in selling, general and administrative expenses.
Depreciation is calculated by the straight-line method over the following estimated useful lives of the related assets:
On June 25, 2012, the Company purchased its previously leased warehouse located in St. Petersburg, Florida for $3.0 million with the proceeds of a 5-year term loan. At the date of purchase, the recorded values of the warehouse building and related land were approximately $1,433,000 and $1,567,000, respectively. The 5-year term loan balance was approximately $2,089,500 and $2,208,900 as of December 26, 2014 and December 27, 2013, respectively.
Estimated Fair Value of Financial Instruments
The aggregated net fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include receivables, payables, accrued expenses and short-term borrowings. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company's debt is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
Uncertain Tax Positions
The Company periodically assesses its tax positions taken for all open tax years and has not identified any uncertain tax positions. The Company is not subject to examination by taxing authorities for years prior to 2011.
Income Taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and tax return purposes. Deferred tax assets and liabilities are determined based on the differences between the book values and the tax bases of particular assets and liabilities and the tax effects of net operating loss and capital loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in the tax rate is recognized as income or expense in the period that included the enactment date.
The Company periodically assesses the recoverability of its deferred tax assets, as necessary, when the Company experiences changes that could materially affect its determination of the recoverability of its deferred tax assets. In conducting this assessment, management considers a variety of factors, including the Company's operating profits, the reasons for the Company's operating losses in prior years, management's judgment as to the likelihood of profitability and expectations of future performance, and other factors. Management does not believe that a valuation allowance is necessary; however, the amount of deferred tax asset realizable could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced. Net loss carry forwards do not begin to expire until 2029.
Interest Rate Swap
Derivative financial instruments are carried at fair value on the consolidated balance sheets. The Company's derivative instrument is an interest rate swap that hedges the interest payments of the Mortgage by effectively converting interest from a variable rate to a fixed rate. This instrument is considered fully effective and qualifies for hedge accounting with changes in the fair value recorded in other comprehensive income. The Company does not enter into derivative agreements for trading purposes.
The swap agreement's fair value is calculated using Level 2 inputs. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities. Level 2 inputs are based on observable market inputs (other than those included in Level 1) and are provided by the Company's lender, Fifth Third Bank. Level 3 inputs include inputs that are not currently observable.
The fair value of the Company’s interest rate swap included in other accrued expenses:
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 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 and restricted stock 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, the restricted stock, and on estimated forfeitures.
Foreign Currency
The functional currency of the Company's Canadian subsidiary, Jagged Peak Canada, Inc., is the local currency. The financial statements are translated to U.S. dollars using month-end rates of exchange for assets and liabilities, and average rates of exchange for revenues, costs and expenses. Foreign currency translation gains and losses are recorded as a component of other comprehensive income. Net gains and losses resulting from foreign exchange transactions are recorded as a component of other expenses.
Earnings per Share
Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur upon issuance of certain additional potential common stock shares. Potential common stock shares consist of shares that may arise from outstanding dilutive common stock options (the number of which is computed using the "treasury stock method"). Diluted earnings per share considers the potential dilution that could occur if the Company's outstanding common stock options were exercised for common stock that then shared in the Company's earnings.
The weighted average number of shares was 16,321,515 and 16,156,583 for the 52-week periods ended December 26, 2014 and December 27, 2013, respectively. The diluted weighted average number of shares was 19,983,799 and 17,802,840 for the 52-week periods ended December 26, 2014 and December 27, 2013, respectively.
Recently Issued Financial Accounting Standards
Recent accounting pronouncements issued by the FASB (including its EITF), the AICPA, and the SEC 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:
4.
Other Current Assets
Other current assets of approximately $529,500 and $273,300 include capitalized debt issuance costs of $35,600 and $42,500 for the 52-week periods ended December 26, 2014 and December 27, 2013, respectively.
5.
Debt
Notes payable consist of:
On March 23, 2012, the Company entered into the senior credit facility (the "Facility") with Fifth Third Bank. The Facility provides for a revolving line of credit with a maturity of two years and a maximum borrowing capacity of $3.0 million. The Facility is available for general corporate purposes. The Facility is secured by a first priority lien on substantially all of the Company's assets. The Facility contains customary events of default and covenants including among other things, covenants that restrict but do not prevent the Company from incurring certain additional indebtedness, creating or permitting liens on assets, paying dividends and repurchasing stock, engaging in mergers or acquisitions and making investments and loans.
On June 25, 2012, the Company purchased its previously leased warehouse facility for $3.0 million. The purchase was financed with a $2.388 million 5-year term loan ("Mortgage") amortized over 20 years. Principal and interest are due monthly. The Mortgage is secured by a first priority lien on substantially all of the Company's assets. Concurrent with the Mortgage, the Company entered into an interest rate swap agreement that expires in June 2017 concurrent with the maturity of the Company's Mortgage. The interest rate swap agreement has an initial notional amount of $2.388 million and provides for the Company to pay interest at a fixed rate of 1.43% while receiving interest for the same period at the one-month LIBOR rate on the same notional principal amount. The Company entered into the interest rate swap agreement to hedge against LIBOR movements on current variable rate indebtedness totaling $2.388 million at one-month LIBOR plus 2.50%, thereby fixing the Company's effective rate on the notional amount at 3.93%. One-month LIBOR was 0.17% as of December 26, 2014. The swap agreement qualifies as an "effective" hedge under U.S. GAAP. As of December 26, 2014, the fair market value of the interest rate swap included in other accrued expenses was approximately $23,600.
On March 22, 2013, the Company amended the Facility to reduce the interest rate to an applicable margin of one-month LIBOR plus 2.50%. Prior to this Amendment, borrowings under the Facility bore interest at a rate equal to an applicable margin of one-month LIBOR plus 3.00%. In addition to paying monthly interest on outstanding principal under the Facility, the Company is required to pay a quarterly unutilized 0.25% commitment fee to the lender, based on the daily unused balance of the Facility. The Company may voluntarily repay outstanding loans under the Facility at any time without premium or penalty.
On August 27, 2013, the Company amended the Facility to increase the borrowing capacity to $5.0 million and to extend the maturity date to August 27, 2015.
On September 5, 2014, the Company amended the Facility to extend the maturity date to September 5, 2016.
The amount available for borrowing under the Facility was $3,059,000 and $4,420,000 as of December 26, 2014 and December 27, 2013, respectively. Average borrowings under the Facility during 2014 and 2013 were approximately $2,630,100 and $1,684,000, respectively.
On September 5, 2014 the Company entered into a term loan with Fifth Third Bank to fund operations (“Term Loan”). The Term Loan provides for $2.0 million at an interest rate of one-month LIBOR plus 2.50% amortized over 4 years. One-month LIBOR was 0.17% as of December 26, 2014. Principal and interest are due monthly. The Term Loan matures in September 2018. The Term Loan is secured by a first priority lien on substantially all of the Company's assets.
6.
Lease Commitments and Contingent Liabilities
The Company's leases approximately 12,000 square feet of office space for its executive offices at 3000 Bayport Drive, Suite 250, Tampa, Florida 33607. Monthly rent expense is approximately $23,200 under a lease that expires February of 2016.
On December 21, 2013, the Company entered into an agreement to lease approximately 71,000 square feet of warehouse space and 6,000 square feet of office space at Gateway Business Park, 2007 Gandy Blvd. North, St. Petersburg, Florida. The initial lease term is for seventy-three months, commencing on January 1, 2014. On March 20, 2014 the Company expanded the office space from 6,000 square feet to 10,329 square feet. On May, 1, 2014, the Company increased the leasehold premises by an additional 70,000 square feet. Monthly rent expense as of year-end was approximately $63,000.
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 26, 2014:
Rent expense amounted to approximately $1,137,700 and $473,300 for the 52-week periods ended December 26, 2014 and December 27, 2013, 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.
7.
Income Taxes
Significant components of the provision for income taxes are as follows:
The Company's income tax expense in 2014 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 26, 2014 and December 27, 2013 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.
As of December 26, 2014, the Company had U.S. (federal and state) net operating loss carryforwards of approximately $1,397,400 to reduce future taxable income, which will expire between 2031 and 2033. The Company also has a Canadian net operating loss carryforward of approximately $2,166,800 which does not begin to expire until 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 financial statements.
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 stock options and restricted stock to purchase up to 5,000,000 shares of common stock 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, non-qualified stock options and restricted stock. 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 Board of Directors determines that special circumstances warrant a lower exercise price.
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 at the grant date using the Black-Scholes option model with the following weighted average assumptions for options granted in 2011: the historical dividend rate of 0%; the risk-free interest rate of approximately 1.84% for periods within the contractual life of the option 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 and expected to be outstanding; an expected volatility of approximately 275%, which was calculated by review of the Company's historical activity as well as that of 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 at the grant date using the Black-Scholes option model with the following weighted average assumptions for options granted in 2012: the historical dividend rate of 0%; the risk-free interest rate of approximately 0.10% for periods within the contractual life of the option 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 and expected to be outstanding; an expected volatility of approximately 275%, which was calculated by review of the Company's historical activity as well as that of 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 activity and related information:
The following table summarizes information about options outstanding and exercisable as of December 26, 2014:
As of December 26, 2014 and December 27, 2013, there were 2,260,782 options exercisable at a weighted average exercise price of $0.13, respectively.
As of December 26, 2014 and December 27, 2013, the company did not have any nonvested options. During the years ended December 26, 2014 and December 27, 2013 the company did not have any nonvested options granted or vested.
At December 26, 2014 and December 27, 2013, the aggregate intrinsic value of exercisable options outstanding was approximately $1,401,500 and $1,001,100, respectively, based on the Company’s closing stock price of $0.75 and $0.57 as of the last business day of the period ended December 26, 2014 and December 27, 2013, respectively, which would have been received by the optionees had all options been exercised on that date.
There were no options exercised during the years ended December 26, 2014 and December 27, 2013.
On November 18, 2014, the Company granted 1,850,000 restricted shares of Jagged Peak to five executives and one director. The restricted stock vest ratably on an annual basis over a three year period.
Restricted stock awards are measured at fair value of $0.65 which is the stock price at date of grant and recognized on a straight-line basis over the vesting period. The table below represents the shares issued to Named Executive Officers:
These amounts do not include the cost of any additional options or restricted stock that may be granted in future periods or any changes in the Company’s forfeiture rate. During 2014, the Company recognized $64,200 of compensation expense for these restricted stock awards.
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.
10.
Related Party Transactions
None.
11.
Variable Interest Entity
None.
12.
Employee Stock Ownership Plan
In 2007, the Company established an Employee Stock Ownership Plan (“ESOP”), for the benefit of its 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 ESOP was amended as of January 1, 2013. The ESOP is non-leveraged and contributions to it are made at the discretion of the Board of Directors. All employees of Jagged Peak that meet the 1,000 hours worked requirement are eligible to participate in the ESOP. The ESOP is 100% Company funded and Jagged Peak allocates contributed shares to participants based on their eligible annual compensation. Compensation includes but is not limited to regular salaries and wages, overtime pay, bonuses, commissions and other amounts paid by Jagged Peak and taxable to the employee. The amount of cash contributions 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 are retained and allocated in the same manner as other income of the ESOP trust. Shares held by the ESOP trust are treated as all other issued and outstanding common shares for earnings per share calculations.
In 2014, the Company agreed to contribute 200,000 shares to the ESOP and the Company recognized an expense of $140,000 for this contribution. The 200,000 shares were not yet issued or allocated to the ESOP as of December 26, 2014.
In 2013, the Company agreed to contribute 200,000 shares to the ESOP and the Company recognized an expense of $114,000 for this contribution. The 200,000 shares were not yet issued or allocated to the ESOP as of December 27, 2013 but subsequently issued in 2014. All shares held by the ESOP are considered outstanding for earnings per share computations.
The ESOP shares were as follows:
13.
Subsequent Event
None.
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 26, 2014 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 26, 2014.
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 26, 2014 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 26, 2014, 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 26, 2015 were as follows:
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 - Chairman of the Board of Directors and Chief Executive Officer
Mr. Demirdjian has served on the Board since the inception of Jagged Peak in 2000. He has more than 25 years of experience in a variety of leadership roles at several technology companies, including Davel Communications, a publicly traded telecom company where he held several executive-level positions, including Senior Vice President of Operations, Chief Technology Officer and Director. A true eCommerce pioneer and entrepreneur, Paul has deep understanding of emerging technologies, and is instrumental in the design and architecture of the EDGE platform. He has a degree in electronic engineering technology from Saint Petersburg College, where he also was a member of the Engineering Honor Society (Tau Alpha Pi). He currently serves on the St. Petersburg College Foundation Board and the University Of South Florida's, College Of Business, Information Systems Decision Sciences Advisory Board.
Vince Fabrizzi - Chief Sales and Marketing Officer, Director
Mr. Fabrizzi has served on the Board since the inception of Jagged Peak in 2000. 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. Mr. Fabrizzi holds a B.S. in Mechanical Engineering from West Virginia University.
Daniel Furlong - Chief Operations Officer, Director
Mr. Furlong has served as an officer and a board member since the inception of Jagged Peak in 2000. 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 graduated from the University of Wyoming with both undergraduate and graduate degrees in Accounting.
Albert Narvades - Senior Vice President, Chief Financial Officer, Treasurer and Secretary
Mr. Narvades joined Jagged Peak in November 2011 as Senior Vice President, Chief Financial Officer, Treasurer and Secretary. Prior to joining Jagged Peak, he served as Controller at Vercipia Biofuels, a division of British Petroleum (BP) from February 2010 through November 2011. He also has held various accounting roles at Walter Industries, Inc. (predecessor to Walter Energy, Inc.) during his nine-year tenure, including serving as Vice President of Finance for their Financial Services Group. Mr. Narvades began his career with Ernst & Young in 1994 and served in various roles there, including Audit Manager, through 2000. He holds both an undergraduate and a graduate degree in Accounting from the University of Florida, and has been a Florida-licensed Certified Public Accountant since 1995.
Primrose Demirdjian - Director
Mrs. Demirdjian has served as an officer and as a board member since the inception of Jagged Peak in 2000. She currently leads the Children's Cancer Research Group, a non-profit dedicated to research for cancer prevention. 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. Mrs. Demirdjian is married to Paul Demirdjian, the CEO of the Company. Mrs. Demirdjian holds a Bachelor of Science in Management Information Systems from Nova Southeastern University.
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 the review of budgets versus historical results throughout the year. The Board of Directors determined that Daniel Furlong qualifies as an audit committee financial expert as defined under the regulations of the SEC.
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. 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 that are required by the rules of the SEC, 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, the Company believes that during 2014 all reporting persons timely complied with all filing requirements applicable to them.
Section 16(a) of the Securities Exchange Act of 1934, as amended, (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 SEC and any securities exchanges on which the common stock of the Company trades, 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 executives for both their individual performance and the overall Company performance.
Long-term incentives are generally realized through the granting of stock options to executive officers and key employees.
The Company also 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 its executive officers and employees.
Stock Options
Stock options are granted to aid in the retention of executive officers and key employees and to align the interests of executive officers 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 of the Company's common stock on the date granted.
The following table sets forth a summary of the compensation paid for the two fiscal years ended December 26, 2014 to or for the benefit of the Company's Chief Executive Officer, Chief Financial Officer and other named executive officers 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
(1)
All other compensation consists of taxable auto allowance and company paid health insurance premiums.
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.
OPTION AND RESTRICTED STOCK GRANTS TO NAMED EXECUTIVE OFFICERS IN LAST FISCAL YEAR
In 2013, the Company's Board of Directors did not grant any options.
In November 18, 2014, the Company granted a restricted stock award of 1,650,000 common shares. These shares were distributed as follows:
During 2014, the Company recognized $64,200 of compensation expense for these restricted share awards.
STOCK OPTION PLANS
The Company's 2005 Stock Incentive Plan, as amended in July 2008 ("the Plan"), authorizes the Board of Directors to grant options and restricted stock to purchase up to 5,000,000 shares of common stock 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, non-qualified stock options and restricted stock. 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 Board of Directors determines that special circumstances warrant a lower exercise price.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
The following table summarizes equity awards granted to Named Executive Officers that were outstanding as of December 26, 2014:
(1)
Consists of an option grant made on May 9, 2011.
(2)
Consists of an option grant made on January 10, 2012.
(3)
Consists of restricted share grants made on November 18, 2014.
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 26, 2014, 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 options to purchase up to 5,000,000 shares of common stock 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 Board of Directors determines that special circumstances warrant a lower exercise price.
The Company’s stock option plan includes 2,250,000 shares issued at $0.13 and 1,850,000 restricted stock awards issued. In addition, the stock option plan includes 10,782 shares at $0.01 that was not approved by shareholders. As of December 26, 2014, there were 900,000 shares remaining available for future issuance under the equity compensation plan.
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:
●
each person who is known by us to be the beneficial owner of more than 5% of the Company's outstanding common stock;
●
each director;
●
each executive officer; and
●
all executive officers and directors as a group.
Under federal 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 options 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. The address of each beneficial owner in the table set forth below is care of Jagged Peak, Inc., 3000 Bayport Drive, Suite 250, Tampa, Florida.
(1)
All shares are held jointly with Primrose Demirdjian and include 750,000 shares underlying stock options exercisable at $0.13 per share. In addition, Paul Demirdjian has fully vested ownership of 103,046 shares in the Employee Stock Option Plan. These shares are included in the table above.
(2)
Includes 500,000 shares underlying stock options exercisable at $0.13 per share. In addition, Daniel Furlong has fully vested ownership of 97,443 shares in the Employee Stock Option Plan. These shares are included in the table above.
(3)
Includes 500,000 shares underlying stock options exercisable at $0.13 per share. In addition, Vincent Fabrizzi has fully vested ownership of 99,445 shares in the Employee Stock Option Plan. These shares are included in the table above.
(4)
Consists of 100,000 shares underlying stock options exercisable at $0.25 per share.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Directors’ Independence
The Company does not have any independent board members and does not expect to add any in 2014. The members of the Board currently own approximately 78% of the Company's common stock and all have a long history with the Company and in its 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.
Item 14.
Item 14. Principal Accountants Fees and Services
Audit Fees
During 2014, our accountants, Gregory, Sharer & Stuart, P.A., billed us approximately $84,000 for audit work and review of our Form 10-K, 10-Q and 8-K filings. During 2013, our accountants, Gregory, Sharer & Stuart, P.A., billed us approximately $77,000 for audit work and review of our Form 10-K, 10-Q and 8-K filings.
Audit Related Fees
None
Tax Fees
During 2014, we were billed by our accountants, Gregory, Sharer & Stuart, P.A., approximately $7,000 to prepare our federal and state tax returns. During 2013, we were billed by our accountants, Gregory, Sharer & Stuart, P.A., approximately $7,000 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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this to be signed on its behalf by the undersigned, thereunto duly authorized.
JAGGED PEAK, INC.
BY:
/s/ Paul Demirdjian
Paul Demirdjian
Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer)
BY: /s/ Albert Narvades
Albert Narvades
Senior Vice President, Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer)
Date: March 26, 2015
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