Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
Issuer’s revenues for its most recent fiscal year ended December 28, 2007 was $14,416,600.
Aggregate market value of the voting stock held by non-affiliates of the registrant at March 21, 2008 was $2,925,500.
There were 14,627,594 shares of the Registrant’s $.001 par value common stock outstanding as of March 21, 2008.
Transitional Small Business Format (check one). Yes ¨ No x
Table of Contents
ANNUAL REPORT ON FORM 10-KSB
FOR THE FISCAL YEAR ENDED
DECEMBER 28, 2007
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This Annual Report on Form 10-KSB includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company has based these forward-looking statements on the Company’s current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us and the Company’s subsidiaries that may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a material difference include, but are not limited to, those discussed elsewhere in this Annual Report, including the section entitled “Risks Particular to the Company’s Business” and the risks discussed in the Company’s other Securities and Exchange Commission filings. The following discussion should be read in conjunction with the Company’s audited Financial Statements and related Notes thereto included elsewhere in this report.
| Item 1. | Description of Business |
OVERVIEW
Jagged Peak, Inc. (the “Company” or “Jagged Peak”) is an e-business software and services company headquartered in Clearwater, Florida, providing Demand and Supply Chain management, CRM execution and e-Fulfillment solutions and services. The Company’s flagship product, EDGE (E-Business Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, and partners in real-time. The Company’s clients are able to build and operate custom branded portals such as e-commerce, incentive and rebate programs, customer service, repair and reverse logistics and automate other business processes through the use of the EDGE application and its related tools. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, distribution, travel and tourism and manufacturing.
Jagged Peak’s multi-channel, enterprise EDGE application provides a comprehensive, integrated platform for e-business management that supports a broad range of business and operational applications. Clients can use EDGE as an enterprise application or as an integrator and consolidator for multiple businesses, processes and applications. EDGE has built in tools to extend the application which enables clients to create complex and robust e-commerce, CRM related customer services and repair and reverse logistics solutions. The EDGE application permits users to manage order capturing, processing, tracking, fulfillment, settlement, creating and managing dynamic catalogs, customer relation management, marketing and reporting, all in real-time application. The EDGE application is built to industry-standard best practices. The application has been integrated seamlessly with legacy and back-office management systems as well as industry leading ERP, WMS, TMS and CRM software systems. In addition to the traditional software license sales model, Jagged Peak offers its software with a flexible managed services transaction based pricing model.
Jagged Peak offers its clients’ third party fulfillment services that are typically bundled with its software and sold as a turnkey “web-to-ship” solution. Jagged Peak has a network of fulfillment warehouses throughout North America that enables its clients to provide better service to their customers, while lowering their overall delivery costs. The EDGE application is able to automatically route the orders to the optimal warehouse based on an established set of factors such as service, cost and priority. This enables our clients to achieve their customer service goals while reducing cost and internal infrastructure.
There are a variety of risks associated with the Company’s ability to achieve strategic objectives, including the ability to increase market penetration, acquire and profitably manage additional businesses, current reliance on key customers, the risks inherent in expanding, and the intense competition in the industry. For a more detailed discussion of these risks, see the section of this Item 1 entitled “Risks Particular to the Company’s Business.”
INDUSTRY OVERVIEW
Forrester Research, which analyzes online trends and statistics, projects the online retail market for U.S. businesses to be $230 billion by 2008. This represents approximately 10 percent of the anticipated total U.S. retail sales. Internet is also driving profitability, according to research from IPSOS. The IPSOS survey discovered that, far from being an extra “expense,” Internet operations boosted businesses’ bottom lines. 48 percent felt the Internet helped to expand their geographic reach in the United States and 73 percent saved money by decreasing administrative costs.
According to most market indicators e-commerce sales continue to grow at a rapid pace. Many industry analysts predict strong e-commerce growth rates to continue in the U.S., with even higher expected growth rates in European and Asia-Pacific markets. There are a number of growth factors to be considered: (i) continued adoption of the Internet as a means of commerce; (ii) increase in users
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with high speed internet connection, which enables providers to create more interactive and customer specific web portals; (iii) Internet users like the convenience of buying products online and the ability to have that product delivered to their destination of choice; (iv) enhancements to online store functionality, enabling not only the user additional purchase options, it also enables sellers ability to quickly take advantage of market fluctuations through immediate price changes and adjustments to sales promotions; (v) the sellers are able to better track customer buying habits and Internet activity, which enables them to focus marketing efforts and costs on the ideal customer group; and (vi) businesses are placing increased emphasis on their online business.
Despite the fact that large companies have become more reliant on sophisticated software applications to run their businesses, many enterprises have been dissatisfied with the return on their investments. Deploying new business applications and keeping them up and running has taken them more time, effort and money than anticipated. Most companies today have a variety of order management systems, which are segregated based on different channels, verticals, and/or lines of business. Each system typically has different workflows and order cycles to accomplish the requirements of the business. This leads to a lack of visibility into customer interactions across the enterprise, and an inability to optimize orders across multiple order systems. For most companies, managing order-to-delivery is largely a manual process that requires numerous staff to pull information from multiple systems and coordinate order fulfillment with suppliers and logistics providers using phone, fax, e-mail, and Electronic Data Interchange (EDI) messages. These manual systems are expensive to manage, error-prone, not scalable, and typically break down under the real-time demands and compressed business cycles of today’s environment.
COMPETITIVE ADVANTAGES
The Company provides a suite of services to help businesses worldwide grow their revenues and avoid the costs and risks associated with running a global technology operation in-house. The Company provides vertically integrated e-business solutions that include e-commerce, order management, CRM, digital and physical product fulfillment, email marketing, business process automation and strategic marketing services. At the core of these services is the Company’s proprietary EDGE software. The EDGE application provides a complete multi-channel, multi distribution center, multi-enterprise, highly functional software solution that can be deployed in minimal time, requires a lower upfront purchase cost or activation fee, and is easy to use and maintain. As a result, Jagged Peak believes it is able to deliver a complete enterprise commerce management software solution faster and at a lower cost than the competition. Jagged Peak offers its clients an end-to-end web based order management software solution that has a compelling return-on-investment proposition that is the result of an attractive and flexible transaction-based pricing model coupled with reduced implementation requirements. The Company believes its EDGE application maintains additional advantages relative to the competition such as complete web-native architecture, platform or vendor independence, highly scalable solution, role-based hierarchical security, real-time order visibility and ease of use. We believe that we are uniquely positioned to assist our clients accelerate and manage their growth.
GROWTH STRATEGY
The Company’s growth strategy includes:
| • | Increasing Market Share - Jagged Peak believes that it can leverage its success with existing clients to obtain new clients. The Company has a proven ability to add new client relationships by utilizing its scalable business model to increase its client base while maintaining its ability to provide a high quality software product. |
In addition, the Company believes that current clients will continue to increase their spending on technology solutions in an effort to update legacy order capture and order management applications that are no longer efficient and will ultimately become obsolete. Jagged Peak expects that its growing number of new client relationships, combined with its proven ability to expand its revenue base with existing clients, will enable the Company to capture a greater portion of its clients’ global outsourced e-commerce related expenditures.
Jagged Peak believes that significant opportunities exist to leverage its current client base to increase its penetration in attractive end markets such as consumer retail, financial services & insurance, healthcare & pharmaceutical, travel & tourism, general manufacturing, and government.
| • | Developing Brand Recognition - The Company must continue to incur expenses to develop the brand of “Jagged Peak” and “EDGE”. The Company intends to leverage the Company’s broader set of capabilities with the goal of capturing business opportunities, which would not normally be available to smaller companies. |
| • | Expanding EDGE Application Offerings - Jagged Peak has a proven ability to identify and develop new applications for its EDGE product offering to meet the needs of the marketplace. The Company plans to continue to diversify its EDGE software platform by adding capabilities such as demand forecasting, marketing data mining, analytical tools and communications, as well as multi-vendor selection and permissions for purchasing and procurement. |
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| • | Expanding the Sales Force and Investment in Marketing - Jagged Peak has achieved an impressive customer base without the efforts of a large dedicated sales force. Client referrals and prior client relationships have fueled the growth of the Company to date. Management believes, however, in order to fully capitalize on the market opportunity, a direct sales force and marketing organization needs to be established and complimented with focused channel partners. The Company began to recruit direct salespeople with enterprise software sales experience and long-standing relationships in various targeted vertical markets in 2007. The Company has not recognized a significant benefit from those efforts, however it will continue its efforts to build impactful sales and marketing organization. |
| • | Future Software Product Development - The EDGE application was first released in January of 2000 and has been under continual development. Significant functionality has been added over the years and the current product is highly functional and robust, yet easy to use and rapidly deployed. Features have been added based on real world demand from clients. The Company plans to continuously invest in and enhance the EDGE product. |
| • | Mergers and Acquisitions - Jagged Peak has a strong management team with extensive experience in mergers and acquisitions. The Company is looking for strategic acquisitions that will expand Jagged Peak’s web-based technology services and its clientele. |
OPERATIONS AND SERVICES
Software Product and Technology
Jagged Peak’s proprietary EDGE application is a highly scalable e-business platform that empowers companies to effectively conduct business and communicate with their customers, vendors, suppliers, employees and distribution partners. The EDGE application is a web-based, end-to-end transaction processing and information management system that enables companies to achieve complete automation and total integration of their demand management, e-business and related processes. EDGE is comprised of integrated modules that work together seamlessly in real-time.
Fulfillment Services
Jagged Peak leads its sales and marketing of new business development efforts with its EDGE application. It also offers customers a complete turnkey solution, if desired, which can include both physical and digital fulfillment services. EDGE is used for our fulfillment, which includes reporting, warehouse optimization, order fulfillment, return authorizations, back order processing, and full transaction auditing capabilities.
Hosting and Managed Services (ASP)
Jagged Peak’s hosting and managed services (ASP) transaction pricing model provides a strong recurring revenue stream for the Company as it builds its customer base. Managed services contracts are typically three years in length with minimum transaction volumes guaranteed. The managed services model provides a lower initial cost, a turnkey outsourced solution with a very rapid path to deployment, which requires less of our clients internal resources.
INFORMATION SYSTEMS
A key component of the Jagged Peak growth strategy is the significant capital, planning and corporate intelligence that is deployed towards technology as we deliver our solution primarily through the EDGE application. To remain competitive, we must continue to enhance and improve the responsiveness, features and functionality of the EDGE application and the underlying network infrastructure. We are continuously working to improve our infrastructure, core applications and software products.
EDGE is a highly available, scalable platform that is designed to handle an unlimited number of stores and products. An EDGE cluster consists of a configurable number of redundant web servers configured to J2EE standards that serve data from a cluster of Microsoft SQL or similar database servers. Part of our standard architecture includes the use of a sophisticated database configured and designed to maintain flexibility and speed. Due to the programming architecture and network design of the EDGE platform, it can seamlessly be extended with additional modules and components. The EDGE administrative system allows instantaneous system wide changes to be implemented and administrated by the end user to support rapid response to industry changes, including business logic changes, payment processing changes, warehouse and logistics concerns, requirements for taxes, and pricing rules. EDGE allows the end user to create dynamic, time sensitive business rules to control what items are available to specific users, based upon a highly configurable set of data. EDGE also supports real time based transactions in all instances as opposed to a batching process, enabling our clients’ inventory and orders to have real-time accuracy and to be in synch with external systems.
Our environment architecture consists of multiple layers to ensure smooth operation with minimal interruption. By co-locating our mission critical systems we enable ourselves to separate our web accessible systems from those that support our internal functions. Each network is protected using industry standard encryption, authentication, firewalls, and anti-virus software. With dependant clients spanning the entire globe, state of the art monitoring is used to provide alerting, logging, and the timely notifications needed to
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support a twenty-four hour, three hundred and sixty-five day operation. Whenever possible we continue to improve and implement the latest in best-practices to ensure that our system infrastructure remains current and up-to-date, allowing us to keep sensitive information safe and our systems secure while meeting the changing demands of our clients and an always evolving industry.
In executing this strategy, the Company has and will continue to invest significant management and financial resources to deliver these technologies. The Company believes these technologies will provide financial and competitive advantages in the years ahead and will increase our sustainable competitive advantages in the marketplace.
CUSTOMERS, SALES AND MARKETING
Jagged Peak’s EDGE application addresses the large market opportunity for e-commerce software applications that can integrate across Supply Chain Management (SCM) and Customer Relationship Management (CRM) systems. Since 2000, the generally accepted definition of SCM has expanded to include all applications relating to demand management, e-commerce, and order execution. Many companies today are trying to cost effectively and rapidly web enable their legacy order managements systems. Larger corporations have many departments, divisions, or subsidiary companies that are seeking to optimally manage their demand chain. In general, companies are attempting to enhance communications and create more efficient business processes and visibility within an enterprise and across customers, vendors, suppliers or other external relationships. EDGE facilitates the integration of multiple applications across the Web, while providing companies a way to effectively manage transactions of every nature with multiple parties. The market for SCM software is expected to be more than $3 billion in the next few years. Factors contributing to the historical and projected growth in the SCM software market include: increased emphasis on the customer – and supplier-centric approach to managing revenues and expenses, increasing profits, and expanding overall competitive positioning. In addition, current economic conditions have increased companies’ requirements for short-term Return-On-Investment (ROI) and proof of value.
A significant portion of the Company’s revenue comes from a few customers. (See Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies, Concentration of Risk.)
SEASONALITY
Historically, the Company’s revenues and profitability have been subject to moderate quarterly seasonal trends. The first quarter has traditionally been the weakest and the fourth quarter has traditionally been the strongest. Typically, this pattern has been the result of factors such as, national holidays, customer demand and economic conditions. Additionally, significant portions of the Company’s revenues are from clients whose business levels are impacted by seasonality and the economy.
PERSONNEL
At December 28, 2007, the Company had approximately 105 full time employees. At this time, none of the Company’s employees are covered by a collective bargaining agreement. The Company recognizes the employees as one of its most valuable asset and provides above industry average compensation and benefits. The recruitment, training and retention of qualified employees are essential to support continued growth and to meet the service requirements of our clients.
RISK MANAGEMENT
The Company maintains general liability, errors and omissions, property, property of others and workers’ compensation insurance. The Company could incur claims in excess of the policy limits or incur claims not covered by the insurance policy.
CORPORATE INFORMATION
Compass Marketing Services, Inc. (“Compass”), a Florida corporation, was formed in 1990. On August 22, 2000, Compass merged with IBIS Business Internet Solutions, Inc., a Florida corporation, in a merger of equals and amended its name to Jagged Peak, Inc. In July 2005, Jagged Peak, Inc. merged with a subsidiary of Absolute Glass Inc., which was incorporated in Nevada in November of 1999. Absolute Glass, Inc. subsequently amended its articles of incorporation and changed its name to Jagged Peak Inc. (the “Company”). The Company’s principal executive offices are located at 13577 Feather Sound Drive, Suite 330, Clearwater, Florida 33762. The telephone number is (727) 499-1717 and the Internet website address is www.JaggedPeak.com.
RISKS PARTICULAR TO THE COMPANY’S BUSINESS
OUR LIMITED OPERATING HISTORY
The Company is in the expansion stage and accordingly, the Company’s business is subject to the risks inherent in the transition to a large-scale business. Failure by the Company to develop the ability to consistently provide high quality products and services to its clients would have a material adverse effect on the Company’s business, operating results and financial condition. To address these risks, the Company must, among other things, respond to competitive developments, attract and motivate qualified personnel, develop
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market acceptance for its products, establish effective distribution channels, effectively manage growth and continue to improve its proprietary technologies and successfully commercialize products incorporating such technologies. In addition, the Company’s limited operating history makes forecasting difficult.
OUR OFFICERS AND DIRECTORS OWN A CONTROLLING INTEREST IN OUR STOCK AND INVESTORS HAVE A LIMITED VOICE IN OUR MANAGEMENT
The Company’s executive officers and directors and their affiliates together control more than 50% of the Company’s voting shares outstanding. As a result, these stockholders, if they act together, will be able to control all matters requiring the Company’s stockholders’ approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may delay, prevent or deter a change in control, and could deprive the Company’s stockholders of an opportunity to receive a premium for their common stock as part of a sale of the Company or its assets.
WE HAVE EXPERIENCED LOSSES FROM OPERATIONS AND MAY NOT BE PROFITABLE IN THE FUTURE
Jagged Peak had losses before tax benefit of approximately $518,600 for the fiscal year ended December 28, 2007, and losses before tax benefit of approximately $1,851,100 for the fiscal year ended December 29, 2006, and there can be no assurance that the Company will not incur additional losses in the future. The Company’s operating expenses have increased as the business has grown and can be expected to increase significantly because of expansion efforts. There is no assurance that the Company will be able to generate sufficient revenue to meet its operating expenditures or to operate profitably.
WE ARE DEPENDENT ON A SMALL NUMBER OF CLIENTS FOR A LARGE PORTION OF OUR SALES AND A LOSS OF ANY CLIENT THAT ACCOUNTS FOR A LARGE PORTION OF OUR REVENUE WOULD CAUSE OUR REVENUE TO DECLINE
Sales to one of our clients, Nespresso USA, a division of Nestle, accounted for approximately 61% of our revenue in 2007, an increase since 2006. Contracts with our clients are generally two to three years in length. If any one of these key contracts is not renewed or otherwise terminates, particularly this contract, or if revenues from this or other key clients decline for any other reason (such as competitive developments), our revenue would decline and our ability to obtain profitability would be impaired. It is important to our ongoing success that we maintain these key client relationships and at the same time develop new client relationships.
COMPETITION
Competition in the market for providing transaction management software is intense. The Company’s software products face competition from many larger, more established companies. In addition, other companies could seek to introduce competing products or services and increased competition could result in a decrease in the price charged by the Company’s competitors for their products and services or reduce demand for the Company’s products and services, which would have a material adverse effect on the Company’s business, operating results and financial condition. There can be no assurance that the Company will be able to compete successfully with its existing or potential competitors, which may have substantially greater financial, technical, and marketing resources, longer operating histories, greater name recognition or more established relationships in the industry than the Company. If any of these competitors provide competitive software products and services to the marketplace in the future, the Company cannot be sure that it will have the resources or expertise to compete successfully.
LACK OF MARKET ACCEPTANCE FOR PRODUCTS
The market for the Company’s software may develop at a slower pace than expected as a result of lack of acceptance by companies involved in implementing a supply-chain execution software system for their business processes. If the market develops more slowly than expected, or if the Company’s software products do not achieve significant market acceptance, the Company’s business, operating and financial condition would be materially adversely affected.
OUR OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS IN DEMAND FOR PRODUCTS AND SERVICES OFFERED BY OUR CLIENTS OR US
Our quarterly and annual operating results are subject to fluctuations in demand for the products or services offered by our clients or us. If, as a result, our annual or quarterly revenues or operating profits fail to meet the guidance we provide to securities analysts and investors, or we otherwise fail to meet their expectations, the trading price of our common stock will likely decline.
NEED FOR FURTHER PRODUCT DEVELOPMENT
Although the Company currently has the capability to achieve installation of its software products for enterprise initiatives, additional ongoing development is necessary to continue to enhance the quality, efficiency and reliability of the Company’s software product offerings. If the Company were unable to continue to develop and install market leading software products, then the Company’s business, operating results and financial condition would be materially adversely affected.
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INTERNATIONAL OPERATIONS
In the normal course of business, the Company may enter into contractual relationships with companies located worldwide. Accordingly, the Company may be subject to general geopolitical risks in connection with some of its contracts, such as political, social and economic instability, changes in diplomatic and trade or business relationships and other factors beyond the Company’s control. There can be no assurance that such factors will not impact the Company’s operations in the future or require the Company to modify its anticipated research practices.
WE MAY BECOME LIABLE TO CLIENTS WHO ARE DISSATISFIED WITH OUR SERVICES
We design, develop, implement and manage e-commerce solutions that are crucial to the operation of our clients’ businesses. Defects in the solutions we develop could result in delayed or lost revenue, adverse end-user reaction, and/or negative publicity, which could require expensive corrections. As a result, clients who experience these adverse consequences either directly or indirectly as a result of our services could bring claims against us for substantial damages. Any claims asserted could exceed the level of any insurance coverage that may be available to us. Moreover, the insurance we carry may not continue to be available on economically reasonable terms, or at all. The successful assertion of one or more large claims that are uninsured, that exceed insurance coverage or that result in changes to insurance policies (including premium increases) could adversely affect our operating results or financial condition.
CHANGES IN GOVERNMENT REGULATION COULD LIMIT OUR INTERNET ACTIVITIES OR RESULT IN ADDITIONAL COSTS OF DOING BUSINESS OVER THE INTERNET
We are subject to the same federal, state and local laws as other companies conducting business over the Internet. Today, there are relatively few laws specifically directed towards conducting business over the Internet. The adoption or modification of laws related to the Internet could harm our business, operating results and financial condition by increasing our costs and administrative burdens. Due to the increasing popularity and use of the Internet, many laws and regulations relating to the Internet are being debated at the international, federal and state levels.
Applicability to the Internet of existing laws governing issues such as property ownership, copyrights and other intellectual property issues, taxation, libel, obscenity and personal privacy could also harm our operating results and substantially increase the cost to us of doing business.
LAWS RELATING TO USER INFORMATION AND ONLINE PRIVACY MAY LIMIT THE COLLECTION AND USE OF END-USER DATA FOR OUR CLIENTS
We collect and maintain end-user data for our clients, which subjects us to increasing international, federal and state regulation related to online privacy and the use of personal user information. Congress recently enacted anti-SPAM legislation with which we must comply when providing email campaigns for our clients. Bills are pending in Congress and in various states that address online privacy protections. Several states have proposed, and some have enacted, legislation that would limit the use of personal user information or require online services to establish privacy policies. In addition, the U.S. Federal Trade Commission, or FTC, has urged Congress to adopt legislation regarding the collection and use of personal identifying information obtained from individuals when accessing Web sites.
Even in the absence of laws requiring companies to establish these procedures, the FTC has settled several proceedings resulting in consent decrees in which Internet companies have been required to establish programs regarding the manner in which personal information is collected from users and provided to third parties. We could become a party to a similar enforcement proceeding. These regulatory and enforcement efforts could limit our collection of demographic and personal information from end-users, which could adversely affect our ability to comprehensively serve our clients.
INTERNET-RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY MAY DEPRESS OUR STOCK PRICE OR CAUSE IT TO FLUCTUATE SIGNIFICANTLY
The stock market, and the trading prices of Internet-related companies in particular, have been notably volatile. This volatility is likely to continue in the short-term and is not necessarily related to the operating performance of affected companies. This broad market and industry volatility could significantly reduce the price of our common stock at any time, without regard to our operating performance.
INTERRUPTION OF BUSINESS DUE TO INCREASED SECURITY MEASURES IN RESPONSE TO TERRORISM
The continued threat of terrorism within the United States and the ongoing military action and heightened security measures in response to such threat has and may cause significant disruption to commerce. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities. Any economic downturn could adversely impact the Company’s results of operations, impair the Company’s ability to raise capital or otherwise adversely affect the Company’s ability to grow the business. It is impossible to predict how this may affect the Company’s business or the economy in the U.S. and in the world, generally. In the event of further threats or acts of terrorism, the Company’s business and operations may be severely and adversely affected or destroyed.
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REGULATION
The Company’s operations are subject to various federal, state and local laws and regulations. Although compliance with these laws and regulations has not had a material effect on the Company’s operations or financial condition, there is no assurance that additions or changes to current laws or regulations will not have a material effect on us, the Company’s profitability and financial condition.
SUBSTANTIAL ALTERATION OF THE COMPANY’S CURRENT BUSINESS AND REVENUE MODEL
The Company’s present business and revenue model represents the current view of the optimal business and revenue structure, which is to derive revenues and achieve profitability in the shortest period. There can be no assurance that current models will not be altered significantly or replaced with an alternative model that is driven by motivations other than near-term revenues and/or profitability (for example, building market share before the Company’s competitors). Any such alteration or replacement of the business and revenue model may ultimately result in the deferring of certain revenues in favor of potentially establishing larger market share. The Company cannot assure that any adjustment or change in the business and revenue model will prove to be successful.
INABILITY TO MANAGE GROWTH AND INTERNAL EXPANSION
The Company has not yet undergone the significant managerial and internal expansion that the Company expects will occur, and the Company’s inability to manage growth could hurt the results of operations. Expansion of operations will be required to address anticipated growth of the Company’s customer base and market opportunities. Expansion will place a significant strain on the Company’s management, operational and financial resources. Currently, the Company has a limited number of employees. The Company will need to improve existing procedures and controls as well as implement new transaction processing, operational and financial systems, procedures and controls to expand, train and manage the Company’s employee base. The Company’s failure to manage growth effectively could have a damaging effect on the Company’s business, results of operations and financial condition.
DEPENDENCE ON KEY MANAGEMENT; LOSS OF KEY MANAGEMENT COULD HAVE A MATERIAL ADVERSE EFFECT ON OPERATIONS
The Company’s success depends in part upon retaining the services of certain executive officers, software developers and other key employees. In addition, because of the Company’s rapid pace of growth, the Company is also dependent on its ability to recruit, retain and motivate personnel with technical, marketing, sales and managerial skills. If the Company loses key personnel or is unable to recruit qualified personnel, the ability to manage the day-to-day aspects of the business will be weakened. The Company’s operations and prospects depend in large part on the performance of the senior management team. The loss of the services of one or more members of the senior management team could have a material adverse effect on the business, financial condition and results of operation. Because the senior management team has exceptional experience with the Company and in the industry, it would be difficult to replace them without adversely effecting the Company’s business operations.
WE ARE NOT REQUIRED TO MEET OR MAINTAIN ANY LISTING STANDARDS FOR OUR COMMON STOCK TO BE QUOTED ON THE OTC BULLETIN BOARD, WHICH COULD AFFECT OUR STOCKHOLDERS’ ABILITY TO ACCESS TRADING INFORMATION ABOUT OUR COMMON STOCK
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 National Association of Securities Dealers (“NASD”), that displays real-time quotes, last sale prices, and volume information in over-the-counter (“OTC”) equity securities like our common stock, we are not required to meet or maintain any qualitative or quantitative standards for our common stock to be quoted on the OTCBB. Our common stock does not presently meet the minimum listing standards for listing on the Nasdaq Capital Market or any national securities exchange, which could affect our stockholders’ ability to access trading information about our common stock.
IF WE FAIL TO REMAIN CURRENT ON OUR REPORTING REQUIREMENTS, WE COULD BE REMOVED FROM THE OTC BULLETIN BOARD, WHICH WOULD LIMIT THE ABILITY OF BROKER–DEALERS TO SELL OUR SECURITIES AND THE ABILITY OF STOCKHOLDERS’ TO SELL THEIR SECURITIES IN THE SECONDARY MARKET
Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker–dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
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OUR ABILITY TO COMPETE AND PURSUE STRATEGIC ALTERNATIVES COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR INFRINGE ON INTELLECTUAL PROPERTY RIGHTS OF OTHERS
We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners and control access to and distribution of our products, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete and pursue strategic alternatives effectively could be harmed. Litigation may be necessary to enforce our intellectual property rights. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse affect on our business, operating results and financial condition.
Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property rights. In the course of our business, we may receive claims of infringement or otherwise become aware of potentially relevant patents or other intellectual property rights held by other parties. We evaluate the validity and applicability of these intellectual property rights, and determine in each case whether we must negotiate licenses or cross-licenses to incorporate or use the proprietary technologies in our products.
Any parties asserting that our products infringe upon their proprietary rights would require us to defend ourselves, and possibly our customers, manufacturers or suppliers against the alleged infringement. Regardless of their merit, these claims could result in costly litigation and subject us to the risk of significant liability for damages. Such claims would likely be time consuming and expensive to resolve, would divert management time and attention and would put us at risk to:
| • | Stop selling, incorporating or using our products that incorporate the challenged intellectual property; |
| • | 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; |
| • | Redesign those products that use such technology; or |
| • | 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.
VOLATILITY OF THE MARKET PRICE OF THE COMPANY’S STOCK
The market price of the Company’s common stock may be volatile, which could cause the value of your investment to decline. Any of the following factors could affect the market price of our common stock:
| • | Changes in earnings estimates and outlook by financial analysts; |
| • | Our failure to meet financial analysts’ and investors’ performance expectations; |
| • | Changes in market valuations of other transportation and logistics companies; or |
| • | General market and economic conditions. |
| • | A large number of shares are being registered for resale pursuant hereto. |
| • | We have a small trading volume. |
| • | The sale of any significant number of shares could materially negatively impact our stock. |
ACCORDING TO THE SEC, THE MARKET FOR PENNY STOCKS HAS SUFFERED FROM PATTERNS OF FRAUD AND ABUSE
Such patterns include:
| • | Control of the market for the security by one or a few broker–dealers that are often related to the promoter or issuer; |
| • | Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; |
| • | “Boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; |
| • | Excessive and undisclosed bid–ask differentials and markups by selling broker–dealers; and |
| • | 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. |
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In addition, many of the risks described elsewhere in this “Risk Factors” section could adversely affect the stock price. The stock markets have experienced price and volume volatility that have affected many companies’ stock prices. Stock prices for many companies have experienced wide fluctuations that have often been unrelated to the operating performance of those companies. These types of fluctuations may affect the market price of our common stock.
APPLICABILITY OF LOW PRICED STOCK RISK DISCLOSURE REQUIREMENTS
The Company’s common stock may be considered a low priced security under rules promulgated under the Securities Exchange Act of 1934 (“Exchange Act”). Under these rules, broker-dealers participating in transactions in low priced securities must first deliver a risk disclosure document which describes that risks associated with such stock, the broker-dealer’s duties, the customer’s rights and remedies, and certain market and other information, and make a suitability determination approving the customer for low priced stock transactions based on the customer’s financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing and provide monthly account statements to the customer, and obtain specific written consent of the customer. With these restrictions, the likely effect of designation as a low price stock would be to decrease the willingness of broker-dealers to make a market for the stock, to decrease the liquidity of the stock and to increase the transaction costs of sales and purchase of such stocks compared to other securities.
NO DIVIDENDS ANTICIPATED
The Company intends to retain all future earnings for use in the development of the Company’s business and does not anticipate paying any cash dividends on the Common Stock in the near future.
THE ISSUANCE OF OUR STOCK UPON CONVERSION OF OUR CONVERTIBLE NOTES COULD ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE TO THE FUTURE DECLINE OF OUR STOCK PRICE AND MATERIALLY DILUTE EXISTING STOCKHOLDERS’ EQUITY AND VOTING RIGHTS
The convertible notes we have issued have the potential to cause significant downward pressure on the price of our common stock. This is particularly the case if the shares issued upon conversion of the notes exceed the market’s ability to absorb the increased number of shares of stock. Such an event could place further downward pressure on the price of our common stock, which presents an opportunity to short sellers and others to contribute to the future decline of our stock price. If there are significant short sales of our stock, the price decline that would result from this activity will cause the share price to decline more so, which, in turn, may cause long holders of the stock to sell their shares thereby contributing to sales of stock in the market. If there is an imbalance on the sell side of the market for the stock, our stock price will decline. Falling prices may encourage investors to profit by engaging in short sales by borrowing shares that they do not own in anticipation of a decline in price to enable the seller to cover the sale with a purchase at a later date, at a lower price, and thus at a profit, which further contributes to a decline in the price of our stock. If this occurs, the number of shares of our common stock that is issuable upon conversion of the convertible notes will increase, which will materially dilute existing stockholders’ equity and voting rights.
IF AN EVENT OF DEFAULT OCCURS UNDER THE SECURITY AND PURCHASE AGREEMENT, OUR LENDER COULD TAKE POSSESSION OF ALL OUR ASSETS
In connection with the security and purchase agreement entered into in December, 2006, we granted to Laurus Master Fund, Ltd. (“Laurus”) a first priority security interest in our assets. The security and purchase agreement provides that upon the occurrence of an event of default under the agreement, Laurus 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 Laurus to foreclose on our assets could likewise cause us to curtail our current operations.
| Item 2. | Description of Properties |
The Company’s executive offices are located in 23,000 square feet of leased office space located at 13577 Feather Sound Drive, Suite 330, Clearwater, Florida 33762. Monthly rent expense is approximately $15,000 per month under a lease that expires April 2008. In addition, the Company leases approximately 90,000 square feet of warehouse space at 118 18th Street South, St. Petersburg, Florida. The monthly rent expense is approximately $30,000 per month under a lease that expires May 2011.
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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 1 year as of December 28, 2007:
| Year Ending |
Minimum Rental Payments | ||
| 2008 |
$ | 409,000 | |
| 2009 |
$ | 357,000 | |
| 2010 |
$ | 364,000 | |
| 2011 |
$ | 122,000 | |
| 2012 |
$ | ||
| Total |
$ | 1,252,000 | |
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. | Legal Proceedings |
None.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None
| 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 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 2006 and 2007. Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.
| Period |
High | Low | ||||||||
| December 31, 2005 |
– |
March 31, 2006 |
$ | 2.70 | $ | 1.60 | ||||
| April 1, 2006 |
– |
June 30, 2006 |
$ | 2.40 | $ | 1.08 | ||||
| July 1, 2006 |
– |
September 29, 2006 |
$ | 1.50 | $ | 0.52 | ||||
| September 30, 2006 |
– |
December 29, 2006 |
$ | 1.06 | $ | 0.30 | ||||
| December 30, 2006 |
– |
March 30, 2007 |
$ | 0.65 | $ | 0.16 | ||||
| March 31, 2007 |
– |
June 29, 2007 |
$ | 0.40 | $ | 0.17 | ||||
| June 30, 2007 |
– |
September 28, 2007 |
$ | 0.60 | $ | 0.20 | ||||
| September 29, 2007 |
– |
December 28, 2007 |
$ | 0.30 | $ | 0.12 | ||||
The Company has approximately 80 investors of record. The Company has never paid cash dividends on the Company’s common stock. The Company intends to keep future earnings, if any, to finance the expansion of the Company’s business, and the Company does not anticipate that any cash dividends will be paid in the near future. The Company’s future payment of dividends will depend on the Company’s earnings, capital requirements, expansion plans, financial condition and other relevant factors.
| Item 6. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This discussion is intended to further the reader’s understanding of the Company’s financial condition and results of operations and should be read in conjunction with the Company’s financial statements and related notes included elsewhere herein. This discussion also contains forward-looking statements. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of the risks and uncertainties set forth elsewhere in this Annual Report and in the Company’s other SEC filings. Readers are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. The Company is not party to any transactions that would be considered “off balance sheet” pursuant to disclosure requirements under ITEM 303(c) of Regulation S-B.
OVERVIEW
Jagged Peak, Inc. (the “Company” or “Jagged Peak”) is an e-business software and services company headquartered in Clearwater, Florida, providing Demand and Supply Chain management, CRM execution and e-Fulfillment solutions and services. The Company’s
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flagship product, EDGE (E-Business Dynamic Global Engine), is a web-based software application that enables companies to control and coordinate multi-channel orders, catalogs, multi-warehouse inventories, and fulfillment across multiple customers, suppliers, employees, and partners in real-time. The Company’s clients are able to build and operate custom branded portals such as e-commerce, incentive and rebate programs, customer service, repair and reverse logistics and automate other business processes through the use of the EDGE application and its related tools. The EDGE platform has been deployed in multiple vertical markets such as consumer goods, financial services, distribution, travel and tourism and manufacturing.
Effective January 1, 2003, the Company elected to change its fiscal year end to correspond to accounting periods based on a 52/53 week reporting year. Therefore, the periods ended December 28, 2007 and December 29, 2006 consisted of 52 weeks.
CRITICAL ACCOUNTING POLICIES
Use of Estimates
The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates, including but not limited to, capitalization of software, work in process, recoverability of long-lived assets, recoverability of prepaid expenses, valuation on deferred tax assets and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made, as information is available. Management believes that these estimates are reasonable and have been discussed with the audit committee; however, actual results could differ from these estimates.
Revenue Recognition
The Company recognizes revenues in accordance with Statement of Position (SOP) 97-2, (Software Revenue Recognition) as amended by SOP 98-9 (Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions). Revenue from software license agreements is recognized when an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectibility is probable. In software arrangements that include more than one element, the Company allocates the total arrangement fee among the elements based on the relative fair value of each of the elements. Maintenance and support agreement revenues are amortized over the contract period, which is usually one year.
Additional technology revenues are derived from software development services, managed services, transaction fees, and consulting and customized technology assignments. Revenue from technology service arrangements and software development 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.
Revenue is also derived from fulfillment service arrangements. Services included under fulfillment arrangements include account services, shipping and handling, order processing, packaging, storage and reporting. These services are based on established monthly charges as well as handling fees based on volume. Work in process represents unbilled costs and services. Shipping and handling costs are classified as cost of sales.
Concentration of Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, are cash and cash equivalents and accounts receivables.
The majority of cash is maintained with a major financial institution in the United States. Deposits with this bank may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand, and, therefore, bear minimal risk.
Sales to a single customer amounted to approximately $8,560,000 or approximately 61% and amounted to approximately $5,681,000 or approximately 50% of total revenues during the 52-week periods ended December 28, 2007 and December 29, 2006, respectively. Accounts receivable from the one customer was approximately $1,099,200 or approximately 45% of total accounts receivable and approximately $476,400 or approximately 40% of total accounts receivable at December 28, 2007 and December 29, 2006, respectively. The risk of this is mitigated as the deferred revenue and customer deposits from the single customer at December 28, 2007 and at December 29, 2006 was approximately $250,000.
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
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number of factors, including the overall aging of accounts receivables, customer’s payment history and the customer’s current ability to pay its obligation. Based on managements’ review of accounts receivable and other receivables, an allowance for doubtful accounts of approximately $130,000 and $105,000 is considered necessary as of December 28, 2007 and December 29, 2006, respectively. The Company charges uncollectible accounts against the allowance account once the invoices are deemed unlikely to be collectible. Although management believes that accounts receivable are recorded at their net realizable value, a 10% decline in historical collection rate would increase the current bad debt expense for the period ended December 28, 2007 by approximately $8,000. We do not accrue interest on past due receivables.
Income Taxes
Taxes on income are provided in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the financial statements. 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. Through the reverse acquisition with Absolute Glass, the Company acquired net operating losses for tax purposes of approximately $2.4 million. Internal Revenue Code Sec. 382 places limitations on the utilization of the acquired net operating losses. Due to the limitation, the Company has placed a full valuation allowance against that asset of approximately $900,000.
Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109”. The Company recognized no adjustment in the liability for unrecognized income tax benefits as a result of the adoption of FIN No. 48.
RESULTS OF OPERATIONS
For the 52-week period ended December 28, 2007 compared to the 52-week period ended December 29, 2006.
The following table summarizes selected financial data of the Company:
| 2007 | 2006 | Change | Percent | |||||||||||
| Gross revenue |
$ | 17,574,000 | $ | 14,442,600 | $ | 3,131,400 | 22 | % | ||||||
| Net revenue |
14,416,600 | 11,462,300 | 2,954,300 | 26 | % | |||||||||
| Cost of sales |
10,888,700 | 8,862,400 | 2,026,300 | 23 | % | |||||||||
| Gross profit |
3,527,900 | 2,599,900 | 928,000 | 36 | % | |||||||||
| Selling, general and administrative expenses |
3,519,600 | 4,184,000 | (664,400 | ) | (16 | )% | ||||||||
| Income (loss) from operations |
$ | 8,300 | $ | |||||||||||