Attached files
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EXCEL - IDEA: XBRL DOCUMENT - PEERLESS SYSTEMS CORP | Financial_Report.xls |
EX-32 - EXHIBIT 32.2 - PEERLESS SYSTEMS CORP | ex32-2.htm |
EX-32 - EXHIBIT 32.1 - PEERLESS SYSTEMS CORP | ex32-1.htm |
EX-31 - EXHIBIT 31.2 - PEERLESS SYSTEMS CORP | ex31-2.htm |
EX-31 - EXHIBIT 31.1 - PEERLESS SYSTEMS CORP | ex31-1.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
|
☑ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended October 31, 2013
or
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-21287
PEERLESS SYSTEMS CORPORATION
(Exact name of Registrant as Specified in its Charter)
Delaware |
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95-3732595 |
(State or Other Jurisdiction |
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(I.R.S. Employer |
of Incorporation or Organization) |
|
Identification No.) |
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1055 Washington Blvd., 8th Floor, Stamford, CT |
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06901 |
(Address of Principal Executive Offices) |
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(Zip Code) |
(203) 350-0040
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ |
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Accelerated filer ☐ |
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Non-accelerated filer ☐ (Do not check if a smaller reporting company) |
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Smaller reporting company ☑ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No
The number of shares of common stock outstanding as of December 5, 2013 was 2,776,391.
PEERLESS SYSTEMS CORPORATION INDEX
FORWARD-LOOKING STATEMENTS |
3 |
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PART I — FINANCIAL INFORMATION |
4 |
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Item 1 — Financial Statements. |
4 |
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Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
14 |
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Item 3 — Quantitative and Qualitative Disclosures About Market Risk. |
17 |
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Item 4 — Controls and Procedures. |
17 |
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PART II — OTHER INFORMATION |
18 |
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Item 1A — Risk Factors. |
18 |
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Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds |
18 |
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Item 6 — Exhibits. |
19 |
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SIGNATURES |
20 |
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EXHIBIT INDEX |
21 |
FORWARD-LOOKING STATEMENTS
Statements made by us in this report and in other reports and statements released by us that are not historical facts may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are necessarily estimates reflecting the judgment of our senior management based on our current estimates, expectations, forecasts and projections and include comments that express our current opinions about trends and factors that may impact future strategy, strategic alternatives or operating results. Disclosures that use words such as “believe,” “anticipate,” “estimate,” “intend,” “could,” “plan,” “expect,” “project” or the negative of these, as well as similar expressions, are intended to identify forward-looking statements. These statements are not guarantees of future performance, rely on a number of assumptions concerning future events, many of which are outside of our control, and involve known and unknown risks and uncertainties that could cause our actual results, performance or achievement, or industry results, to differ materially from any future results, performance or achievements, expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors which could cause results to differ materially from management’s expectations throughout this report. Additional information regarding factors that could cause results to differ materially from management's expectations is found in the section entitled "Risk Factors" in our 2013 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”). Any such forward-looking statements, whether made in this report or elsewhere, should be considered in the context of the various disclosures made by us about our businesses including, without limitation, the risk factors discussed below.
We intend that the forward-looking statements included herein be subject to the above-mentioned statutory safe harbor. Investors are cautioned not to rely on forward-looking statements. Except as required under the federal securities laws and the rules and regulations of the SEC, we do not have any intention or obligation to update publicly any forward-looking statements, whether as a result of new information, future events, changes in assumptions, or otherwise.
PART I—FINANCIAL INFORMATION
Item 1 — Financial Statements.
PEERLESS SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
October 31, 2013 January 31, 2013 ASSETS Current assets: Cash and cash equivalents Marketable securities Trade accounts receivable, net Deferred tax assets Income tax receivable Prepaid expenses and other current assets Total current assets Other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accrued wages and compensated absences Accrued product licensing costs Other current liabilities Total current liabilities Other liabilities Tax liabilities Total liabilities Stockholders’ equity: Common stock, $.001 par value, 30,000 shares authorized, 19,679 issued at October 31, 2013 and 19,588 issued at January 31, 2013 Additional paid-in capital Retained earnings Accumulated other comprehensive loss, net of taxes Treasury stock, 16,894 at October 31, 2013 and 16,460 at January 31, 2013 Total stockholders’ equity Total liabilities and stockholders’ equity
$
11,051
$
8,866
102
2,910
1,354
1,346
139
495
330
231
51
65
13,027
13,913
6
4
$
13,033
$
13,917
$
62
$
103
208
315
82
143
352
561
282
276
634
837
19
18
58,396
57,534
6,102
6,626
(114
)
(657
)
(52,004
)
(50,441
)
12,399
13,080
$
13,033
$
13,917
The accompanying notes are an integral part of these condensed consolidated financial statements.
PEERLESS SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
Three Months Ended October 31, Nine Months Ended October 31, 2013 2012 2013 2012 Revenues Cost of revenues Gross margin Operating expenses Sales and marketing General and administrative Total operating expenses Income from operations Other income (loss), net Income (loss) before income taxes Benefit from income taxes Net income (loss) Basic earnings (loss) per share Diluted earnings (loss) per share Weighted average common shares - outstanding — basic Weighted average common shares - outstanding — diluted
$
920
$
482
$
2,868
$
1,547
86
32
257
77
834
450
2,611
1,470
25
30
85
90
698
286
1,643
1,154
723
316
1,728
1,244
111
134
883
226
(372
)
(9
)
(1,488
)
168
(261
)
125
(605
)
394
(2
)
(1,272
)
(81
)
(1,146
)
$
(259
)
$
1,397
$
(524
)
$
1,540
$
(0.10
)
$
0.45
$
(0.19
)
$
0.48
$
(0.10
)
$
0.43
$
(0.19
)
$
0.45
2,638
3,085
2,768
3,233
2,638
3,259
2,768
3,415
The accompanying notes are an integral part of these condensed consolidated financial statements.
PEERLESS SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Three Months Ended October 31, Nine Months Ended October 31, 2013 2012 2013 2012 Net income (loss) Changes in unrealized gains (losses) in available for sale securities, net of taxes Reclassification adjustment for gains (losses) included in net income Total comprehensive income (loss), net of taxes
$
(259
)
$
1,397
$
(524
)
$
1,540
(114
)
(247
)
87
(1,596
)
43
86
456
(384
)
$
(330
)
$
1,236
$
19
$
(440
)
The accompanying notes are an integral part of these condensed consolidated financial statements.
PEERLESS SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended October 31, 2013 2012 Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Share-based compensation Realized (gain) loss on marketable securities Deferred tax expense (benefit) Changes in operating assets and liabilities: Trade accounts receivables Income tax receivable Prepaid expenses and other assets Accrued product licensing costs Other liabilities Tax liabilities Net cash provided by (used in) operating activities Cash flows from investing activities: Purchases of marketable securities (194,639 Proceeds from sale of marketable securities Net cash provided by investing activities Cash flows from financing activities: Proceeds from exercise of stock options Purchase of treasury stock Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period
$
(524
)
$
1,540
822
192
1,496
(50
)
27
(22
)
(8
)
363
(99
)
(406
)
12
11
(107
)
(17
)
(102
)
(712
)
6
(1,369
)
1,523
(470
)
(132,317
)
)
134,501
195,279
2,184
640
41
-
(1,563
)
(1,529
)
(1,522
)
(1,529
)
2,185
(1,359
)
8,866
10,433
$
11,051
$
9,074
The accompanying notes are an integral part of these condensed consolidated financial statements.
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Peerless Systems Corporation (the “Company” or “Peerless”) have been prepared pursuant to the rules of the SEC for Quarterly Reports on Form 10-Q and do not include all of the information and note disclosures required by U.S. generally accepted accounting principles. The condensed consolidated financial statements and notes herein are unaudited, but in the opinion of management, include all the adjustments (consisting only of normal, recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows of the Company. The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2013, filed with the SEC on April 29, 2013. The consolidated results of operations for the interim periods shown herein are not necessarily indicative of the results to be expected for any future interim period or for the entire year.
2. Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income,” which amends Accounting Standards Codification (“ASC”) 220, “Comprehensive Income.” The amended guidance requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. Additionally, entities are required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amended guidance does not change the current requirements for reporting net income or other comprehensive income. The amendment is effective prospectively for annual periods, and interim periods within those annual periods, beginning after December 15, 2012. The new guidance did not have a material impact on the Company’s financial statements for the three month and the nine month periods ended October 31, 2013 and 2012.
3. Cash, Cash Equivalents, and Marketable Securities
As of October 31, 2013 and January 31, 2013, cash, cash equivalents, and marketable securities included the following (in thousands):
October 31, 2013 Cost Unrealized Gains Unrealized Losses Less Than 12 Months Unrealized Losses 12 Months or Longer Estimated Fair Value Cash and cash equivalents Exchange traded marketable securities Long positions Short positions Cash collaterals Total
$
11,051
$
-
$
-
$
-
$
11,051
110
-
(8
)
-
102
(2,441
)
-
(180
)
-
(2,621
)
2,621
-
-
-
2,621
$
11,341
$
-
$
(188
)
$
-
$
11,153
January 31, 2013 |
||||||||||||||||||||
Cost |
Unrealized Gains |
Unrealized Losses Less Than 12 Months |
Unrealized Losses 12 Months or Longer |
Estimated Fair Value |
||||||||||||||||
Cash and cash equivalents |
$ | 8,866 | $ | - | $ | - | $ | - | $ | 8,866 | ||||||||||
Exchange traded marketable securities |
||||||||||||||||||||
Long positions |
3,970 | - | (1,060 | ) | - | 2,910 | ||||||||||||||
Total |
$ | 12,836 | $ | - | $ | (1,060 | ) | $ | - | $ | 11,776 |
Cash equivalents are comprised of money market funds traded in an active market with no restrictions and money market savings accounts. On a recurring basis, the Company measures its investments, cash equivalents, and marketable securities at fair value. Cash, cash equivalents, and marketable securities are classified within Level I of the fair value hierarchy because they are valued using observable inputs, such as quoted prices in active markets.
Substantially all of the marketable securities as of January 31, 2013 were the Company’s position in ModusLink. The Company has sold off this position completely as of October 31, 2013, and realized losses of approximately $1,000 and $ 674,000 for the three months and nine months ended October 31, 2013, respectively.
During the three months and nine months periods ended October 31, 2013, the Company recorded approximately $376,000 and $1,496,000 of realized losses on investments, respectively, as compared to realized loss of $139,000 and realized gain of $50,000 for the three month and nine month periods ended October 31, 2012, respectively. Financial instruments purchased with intention to sell over a short period were classified as trading securities. Realized gains and losses on trading securities were calculated using average cost method. The Company's investments consist of available-for-sale securities as of October 31, 2013 and January 31, 2013, respectively.
4. Earnings Per Share
Earnings per share (EPS) for the three month and nine month periods ended October 31, 2013 and 2012 are calculated as follows (in thousands, except for per share amounts):
Three Months Ended October 31, 2013 Three Months Ended October 31, 2012 Net Loss Shares Per Share Amount Net Income Shares Per Share Amount (In thousands, except per share amounts) Basic EPS Earnings (loss) available to common stockholders Effect of Dilutive Securities Options Restricted Shares Diluted EPS Earnings (loss) available to common stockholders with assumed conversions Nine Months Ended October 31, 2013 Nine Months Ended October 31, 2012 Net Loss Shares Per Share Amount Net Income Shares Per Share Amount (In thousands, except per share amounts) Basic EPS Earnings (loss) available to common stockholders Effect of Dilutive Securities Options Restricted Shares Diluted EPS Earnings (loss) available to common stockholders with assumed conversions
$
(259
)
2,638
$
(0.10
)
$
1,397
3,085
$
0.45
—
—
—
—
2
—
—
—
—
—
172
—
$
(259
)
2,638
$
(0.10
)
$
1,397
3,259
$
0.43
$
(524
)
2,768
$
(0.19
)
$
1,540
3,233
$
0.48
—
—
—
—
182
—
—
—
—
—
—
—
$
(524
)
2,768
$
(0.19
)
$
1,540
3,415
$
0.45
5. Stock-Based Compensation Plans
The Company has certain plans which provide for the grant of incentive stock options to employees and non-statutory stock options, restricted stock purchase awards and stock bonuses to employees, directors and consultants. The terms of stock options granted under these plans generally may not exceed 10 years. Options granted under the incentive plans vest at the rate specified in each optionee’s agreement, generally over three or four years. Since July 1996, an aggregate of 5.2 million shares of common stock have been authorized for issuance under the various option plans.
Compensation expense for share-based awards granted is recognized using a straight-line or single-option method. The Company recognizes these compensation costs over the service period of the award, which is generally the option vesting term of three or four years. In determining the fair value of options granted, the Company primarily used the Black-Scholes model and assumed no dividends per year. The risk-free rate of return is based on the yield of a U.S. Treasury instrument with terms approximating or equal to the expected term of the option. The expected life in years is based on historical actual stock option exercise experience. The expected volatility was based upon the changes in the price of the Company’s common stock over a five year period. The expected forfeiture rate of employee stock options was calculated using the Company’s historical terminations data.
On June 27, 2013, the Company granted options to purchase 6,000 shares of the Company's common stock with an exercise price of $3.71 per share and with an aggregate fair maket value of approximately $9,000 to its directors upon their re-election to the Board at the Company’s 2013 annual meeting of stockholders.
On March 12, 2012, as part of his semi-annual bonus review, the Company granted options to purchase 50,000 shares of the Company’s common stock with an exercise price of $3.99 per share and with a fair market value of approximately $103,000 to its Chief Executive Officer pursuant to the 2005 Plan, which vest monthly on a ratable basis over a 24 month period.
For the three month period ended October 31, 2013 and 2012, the Company recorded a total of approximately $23,000 and $34,000, respectively, in stock option expense related to stock options awarded. For the nine month period ended October 31, 2013 and 2012, the Company recorded a total of approximately $75,000 and $110,000, respectively, in stock option expense related to stock options awarded.
The following represents option activity under the 1996 Equity Incentive Plan and 2005 Incentive Award Plan, as amended and restated, for the nine month period ended October 31, 2013:
Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (In thousands, except per share amounts) Balance outstanding January 31, 2013 Granted Exercised Canceled or expired Balance outstanding April 30, 2013 Granted Exercised Canceled or expired Balance outstanding July 31, 2013 Granted Exercised Canceled or expired Balance outstanding October 31, 2013 Stock options exercisable, October 31, 2013
513
$
2.71
-
$
-
-
$
-
(30
)
$
3.55
483
$
2.66
6
$
3.71
(15
)
$
2.77
(74
)
$
2.61
400
$
2.68
-
$
-
-
$
-
-
$
-
400
$
2.68
5.38
$
445
355
$
2.55
4.96
$
441
As of October 31, 2013, there was approximately $64,000 of total unrecognized compensation cost related to unvested option-based compensation arrangements granted under the 2005 plan. That cost is expected to be recognized over a weighted-average period of 1.7 years.
In addition to the stock option expense, for the three month period ended October 31, 2013 and 2012, the Company also recorded a total of approximately $406,000 and $21,000, respectively, in stock compensation expense related to restricted stock awarded. For the nine month periods ended October 31, 2013 and October 31, 2012, the Company recorded a total of approximately $747,000 and $81,000, respectively, in stock compensation expense related to restricted stock awarded. The increase in stock compensation expense over the prior year period is primarily attributable to the restricted stock granted to Mr. Timothy Brog, the Company’s Chairman and Chief Executive Officer as discussed below.
In connection with the new employment agreement entered into on July 11, 2013 with Mr. Brog (the “Employment Agreement”), he agreed to forfeit 150,000 shares of restricted common stock that remained unvested under the previous employment agreement between the Company and Mr. Brog dated August 26, 2010 (the “2010 Agreement”). As part of the Employment Agreement, the Company granted 250,000 shares of restricted common stock to Mr. Brog. Although the fair value of the newly granted restricted common stock would be amortized as stock-based compensation, there would be no offset from the fair value previously expensed related to the 150,000 shares that were forfeited due to the fact that the requisite service period had been satisfied.
The Company used a Monte Carlo simulation model valuation technique to determine the fair value of the 250,000 restricted shares granted to Mr. Brog, because these awards vest based upon achievement of market price targets or a “market condition,” one quarter of which will vest if prior to July 11, 2017 the average closing price of the Company’s Common Stock on the Nasdaq Capital Market is greater than or equal to the target prices of $3.75, $4.00, $4.25 and $4.50, respectively, for 15 consecutive trading days. On the date of the grant, the closing price of the common stock was $3.76.
All such shares will also vest in the event that the Company (i) announces its intent to terminate its registration of the Common Stock under Section 12(g) of the Securities and Exchange Act of 1934, (ii) commences a self-tender offer for not less than 33% of the outstanding Common Stock, at an offer price at least equal to the average closing price over the preceding 15 trading days, or (iii) completes any other extraordinary transaction in which shares of the Company equal to not less than 20% of the shares of outstanding Common Stock immediately prior to such transaction are issued as part of such transaction.
The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculates the fair value of each share of the restricted stock. The Company used the following assumptions in determining the fair value of the awards granted on July 11, 2013:
Daily expected stock price volatility |
Daily expected mean return on equity |
Daily expected dividend yield |
Avg. daily risk free interest rate |
2.1071% |
0.0515% |
0.0000% |
0.0026% |
The daily expected stock price volatility is based on four-year historical volatility of the Company’s common stock. The daily expected dividend yield is based on annual expected dividend payments and the closing price of the Company’s common stock on the Nasdaq Capital Market on the date of the grant. The average daily risk-free interest rate is based on the three-year treasury yield as of the grant date. Each of the four tranches of the restricted stock grant is calculated to have its own fair value and requisite service period. The fair value of each tranche is amortized over the lesser of the requisite or derived service period which is up to four years. These shares had a grant date fair value of $812,000. Stock compensation expense of approximately $393,000 was recorded during the three month period ended October 31, 2013 in addition to the $313,000 recorded during the three month period ended July 31, 2013, with the remaining $106,000 to be amortized during the three month period ending January 31, 2014. As of October 31, 2013, 62,500 shares were vested under this grant with a fair market value of $235,000.
The total fair value, based on the price on the day of grant, for restricted stock awards that vested during the nine month period ended October 31, 2013, was approximately $254,000. A summary of the Company’s non-vested restricted stock awards as of October 31, 2013 is as follows:
Number of Shares Weighted Average Grant Date Fair Value Non-vested stock awards as of January 31, 2013 Granted Vested Forfeited Non-vested stock awards as of April 30, 2013 Granted Vested Forfeited Non-vested stock awards as of July 31, 2013 Granted Vested Forfeited Non-vested stock awards as of October 31, 2013
196,903
$
2.31
-
-
(2,709
)
3.24
(30,208
)
3.55
163,986
2.06
258,088
3.26
(65,198
)
3.59
(150,000
)
1.91
206,876
$
3.19
-
-
-
-
-
-
206,876
$
3.19
The unrecognized compensation for non-vested restricted stock awards of approximately $148,000 will be recognized over a weighted-average period of 0.48 years.
6. Concentration of Revenues
During the three month period ended October 31, 2013, three customers, Kyocera Document Solutions, Inc (“KDS”), Novell Inc. (“Novell”) and Oki Data Corporation (“Oki”) accounted for approximately 94% of the revenues of the Company. During the three month period ended October 31, 2012, three customers, KDS, Novell and Xerox International Partners (“XIP”) represented approximately 85% of the revenues of the Company.
During the nine month period ended October 31, 2013, three customers, KDS, Novell and Oki, accounted for approximately 93% of the revenues of the Company. During the nine month period ended October 31, 2012, two customers, Novell and XIP represented approximately 77% of the revenues of the Company.
At October 31, 2013, three customers represented 96% of total accounts receivable and at January 31, 2013, three customers collectively represented 91% of total accounts receivable.
7. Common Stock Repurchases
During the three month period ended October 31, 2013, the Company repurchased 80,026 shares of its common stock for an aggregate purchase price of $292,644, or an average cost of $3.66 per share. During the nine month period ended October 31, 2013, the Company repurchased 434,403 shares of its common stock for an aggregate purchase price of $1,562,653 or an average cost of $3.60 per share. From November 1, 2013 through December 5, 2013, the Company repurchased an additional 8,887 shares of its common stock for an aggregate purchase price of $32,731.
8. Income Taxes
The Company reported tax benefit of approximately $2,000 and $1,272,000 for the three month period ended October 31, 2013 and 2012, respectively. Cumulatively, the Company reported tax benefit of approximately $81,000 and $1,146,000 for the nine month period ended October 31, 2013 and 2012, respectively. The effective tax rate was 13.4% and -290.9% for the nine month period ended October 31, 2013 and 2012, respectively. The effective tax rate for the nine month period ended October 31, 2013 was lower than the statutory rate, caused primarily by a $214,000 increase in valuation allowance related to certain stock-based compensation recorded during the nine month period ended October 31, 2013, net of certain restricted stock that vested during the same period. The effective tax rate for the nine month period ended October 31, 2012 was lower than the statutory rate, caused primarily by a reversal of $1,265,000 in tax liabilities related to an unrecognized tax benefit from the Company’s tax position taken for the fiscal year ended January 31, 2009, in connection with the completion of the three year statute of limitations period applicable to the corresponding tax return.
The majority of the change in deferred tax assets relates to the unrealized loss included in accumulated other comprehensive loss. As of October 31, 2013, the Company had a valuation allowance of approximately $199,000 against certain deferred tax assets, for which realization cannot be considered more likely than not at this time. Such deferred tax assets relate to stock compensation expenses incurred by the Company in the form of equity awards. Management assesses the need for the valuation allowance on a quarterly basis.
The Company’s New York State corporate tax returns for the fiscal years 2008 and 2009 are currently under examination. The Company had one employee in New York State during a portion of those periods.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Highlights
For the three month period ended October 31, 2013, our revenue increased by 91% to $920,000 as compared to $482,000 recorded for the same period in 2012. For the nine month period ended October 31, 2013, our revenue increased by 85% to $2,868,000 as compared to $1,547,000 recorded for the same period in 2012. This increase is primarily attributed to two customers who had exhausted their block licenses and are currently paying us on a pay-as-you-go basis.
General
We generate revenue from our OEM customers through the licensing of technology related to imaging solutions. Our product licensing revenues are comprised of recurring per unit, block licenses and perpetual licenses revenue. Licensing revenues are derived from per unit fees paid periodically by our OEM customers upon manufacturing and subsequent commercial shipment of products incorporating the technology which we license. Licensing revenues are also derived from arrangements in which we enable third party technology, such as solutions from Novell, to be used with our OEM partners’ products.
Block licenses are per-unit licenses in large volume quantities sold to an OEM for products either in or about to enter into distribution into the marketplace. Perpetual licenses allow OEMs to ship products using licensed technology without the further payment of licensing fees. Payment schedules for these licenses are negotiable and payment terms are often dependent on the size and other terms and conditions of the license being sold. Typically, payments are received in either one lump sum or over a period of four or fewer quarters.
Revenue received for block and perpetual licenses is recognized in accordance with provisions of ASC 985-605, Software – Revenue Recognition and ASC 605-25, Revenue Recognition – Multiple-Element Arrangements, which requires that revenue be recognized after the following conditions have been met: (1) delivery has occurred; (2) fees have been determined and are fixed; (3) collection of fees is probable; and (4) and evidence of an arrangement exists. For block licenses that have a significant portion of the payments due within twelve months, revenue is generally recognized at the time the block license becomes effective assuming all other revenue recognition criteria have been met.
Historically, a limited number of customers have provided a substantial portion of our revenues. Therefore, the availability and successful closing of new contracts, or modifications and additions to existing contracts with these customers may materially impact our financial position and results of operations from quarter to quarter.
The technology we license has addressed the worldwide market for monochrome printers (21-69 pages per minute) and multifunction printers (“MFP”) (21-110 pages per minute). This market has been consolidating, and the demand for the technology offered by us has continued to decline since fiscal 2008. The document imaging industry has changed. Lower cost of development and production overseas as well as increasing complexity of imaging requirements makes us unable to effectively compete in this environment. As a result, we sold our imaging and networking technologies and certain other assets to Kyocera Document Solutions, Inc. in April 2008. As part of the transaction we retained the right, subject to certain restrictions, to continue licensing the imaging technology that we had previously developed and continue to license third party imaging technologies. We are currently pursuing other potential investment opportunities to diversify and increase our revenues. Our strategy calls for aligning our cost structure with our current and projected revenue streams, maximizing the value of our licensed back technologies and expanding our business through investment opportunities.
Our inability to implement our strategy to enhance stockholder value as well as the declining sales trend of our existing licenses, downward pricing pressure on the technologies we license, downward pricing pressure on OEM products and the anticipated consolidation of the number of OEMs in the marketplace, may have a material adverse effect on our business and financial results. See “Forward-Looking Statements” above.
Liquidity and Capital Resources
Management believes that the Company currently has sufficient cash flow from operations, cash, and cash equivalents to meet its short-term working capital requirements. Our total assets as of October 31, 2013 were $13.0 million, a decrease of 6.4% from $13.9 million as of January 31, 2013. Cash and cash equivalents increased from $8.9 million at January 31, 2013 to $11.1 million at October 31, 2013, resulting primarily from our disposition of our entire Modus Link position. Stockholders’ equity as of October 31, 2013 was $12.4 million, a decrease of $0.7 million from $13.1 million as of January 31, 2013 primarily due to the repurchase of approximately $1.6 million of our common stock.
At October 31, 2013, our principal source of liquidity, cash and cash equivalents and marketable securities was $11.2 million, a decrease of $0.6 million from $11.8 million as of January 31, 2013. This decrease is also primarily attributable to the repurchase of our common stock.
Critical Accounting Policies
We describe our significant accounting policies in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended January 31, 2013. There has been no change in our significant accounting policies since January 31, 2013.
Results of Operations
Revenues
Revenues were $920,000 for the three month period ended October 31, 2013, compared to $482,000 for the three month period ended October 31, 2012. This 91% increase is primarily attributable to two customers who had exhausted their block licenses and are currently paying us on a pay-as-you-go basis.
Revenues were $2,868,000 for the nine month period ended October 31, 2013, compared to $1,547,000 for the nine month period ended October 31, 2012. This 85% increase is primarily attributable to two customers who had exhausted their block licenses and are currently paying us on a pay-as-you-go basis.
Cost of Revenues
Product licensing costs were $86,000 or 9.3% of revenues for the three month period ended October 31, 2013, compared to $32,000 or 6.6% for the three month period ended October 31, 2012. The increase of cost of revenues was primarily due to the difference in licensing fees being paid to third parties resulting from a change in the revenue stream from our customers and the mix of products sold by our customers during the period.
Product licensing costs were $257,000 or 9.0% of revenues for the nine month period ended October 31, 2013, compared to $77,000 or 5.0% of revenue for the nine month period ended October 31, 2012. The increase of cost of revenues was primarily due to the difference in licensing fees being paid to third parties resulting from a change in the revenue stream from our customers and the mix of products sold by our customers during the period.
Gross Margin
Our gross margins were 90.7% and 93.4% for the three month periods ended October 31, 2013 and 2012, respectively. The decrease in gross margins was primarily due to the difference in licensing fees being paid to third parties resulting from a change in the revenue stream from our customers and the mix of products sold by our customers during the period.
Our gross margins were 91.0% and 95.0% for the nine month periods ended October 31, 2013 and 2012, respectively. The decrease in gross margins was primarily due to the difference in licensing fees being paid to third parties resulting from a change in the revenue stream from our customers and the mix of products sold by our customers during the period.
Operating Expenses
Total operating expenses increased 128.7% to $723,000 for the three month period ended October 31, 2013, from $316,000 for the three month period ended October 31, 2012. This increase is attributable to the non-cash stock-based compensation expense related to the new restricted stock award granted to our Chairman and Chief Executive Officer in connection with his new employment agreement as disclosed in footnote 5 of the financial statement presented in Item 1 ("Non-Cash Stock Expense"). Excluding the Non-Cash Stock Expense, operating expenses would have been $330,000 for the three month period ended October 31, 2013, up 4.4% from the same period in 2012.
Total operating expenses increased 38.9% to $1,728,000 for the nine month period ended October 31, 2013, from $1,244,000 for the nine month period ended October 31, 2012. Excluding the Non-Cash Stock Expense, operating expenses would have been $1,022,000 for the nine month period ended October 31, 2013, a decline of 17.9% from the same period in 2012. The decrease was due to our continued cost reduction efforts in general.
Income from Operations
Income from operations was $111,000 for the three month period ended October 31, 2013, compared to $134,000 for the three month period ended October 31, 2012. The decrease in income from operation is primarily attributed to the Non-Cash Stock Expense, despite higher revenue.
Income from operations was $883,000 for the nine month period ended October 31, 2013, compared to $226,000 for the nine month period ended October 31, 2012. This 291% increase is primarily attributable to the 85% increase in revenue.
Other Income (Loss), Net
Other income (loss), net was a loss of $372,000 for the three month period ended October 31, 2013, as compared to a loss of $9,000 for the three month period ended October 31, 2012, due to higher realized losses on sales of marketable securities in the current period.
Other income (loss), net was a loss of $1,488,000 for the nine month period ended October 31, 2013, as compared to a gain of $168,000 for the nine month period ended October 31, 2012, due to higher realized losses on sales of marketable securities in the 2013.
Income Taxes
The Company reported tax benefit of approximately $2,000 and $1,272,000 for the three month period ended October 31, 2013 and 2012, respectively. Cumulatively, the Company reported tax benefit of approximately $81,000 and $1,146,000 for the nine month periods ended October 31, 2013 and 2012, respectively. The effective tax rate was 13.4% and -290.9% for the nine month periods ended October 31, 2013 and 2012, respectively. The effective tax rate for the nine month period ended October 31, 2013 was lower than the statutory rate, caused primarily by a $214,000 increase in valuation allowance related to certain stock-based compensation recorded during the nine month period ended October 31, 2013, net of certain restricted stock that vested during the same period. The effective tax rate for the nine month period ended October 31, 2012 was lower than the statutory rate, caused primarily by a reversal of $1,265,000 in tax liabilities related to an unrecognized tax benefit from the Company’s tax position taken for the fiscal year ended January 31, 2009, in connection with the completion of the three year statute of limitations period applicable to the corresponding tax return.
Net Income (Loss)
Our net loss for the three month period ended October 31, 2013 was approximately $259,000 or $0.10 per basic and diluted share, compared to a net income of approximately $1,397,000, or $0.45 per basic share and $0.43 per diluted share, for the three month period ended October 31, 2012. We had 2.6 million and 3.1 million weighted average shares of common stock outstanding during the three month period ended October 31, 2013 and 2012, respectively, used for the calculation of basic earnings per share.
Our net loss for the nine month period ended October 31, 2013 was $524,000 or $0.19 per basic and diluted share, compared to a net income of $1,540,000, or $0.48 per basic share and $0.45 per diluted share, for the nine month period ended October 31, 2012. We had 2.7 million and 3.2 million weighted average shares of common stock outstanding during the nine month periods ended October 31, 2013 and 2012, respectively, used for the calculation of basic earnings per share.
Item 3 — Quantitative and Qualitative Disclosures About Market Risk.
We have investments in marketable securities that are classified and accounted for as available-for-sale as of October 31, 2013. See “Financial Statements – Note 3 Cash, Cash Equivalent and Marketable Securities.”
Item 4 — Controls and Procedures.
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(a) |
Evaluation of disclosure controls and procedures |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, comprised of our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
For the period ended October 31, 2013 (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of October 31, 2013, our disclosure controls and procedures were effective.
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(b) |
Changes in internal control over financial reporting |
In the three month period ended October 31, 2013, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II-OTHER INFORMATION
Item 1A — Risk Factors.
There have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2013 (the “Form 10-K”). Please refer to that section of the Form 10-K for disclosures regarding the risks and uncertainties related to our business.
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds.
The following table indicates the Company’s repurchases of shares of its common stock during the three month period ended October 31, 2013 on a month-by-month basis. All of these purchases were made under the Company’s share repurchase program adopted by the Board.
Period (a) Total Number of Shares purchased During the Period (b) Average Price Paid Per Share (c) Cumulative Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (d) Maximum Number of shares that May Yet Be Purchased Under the Plans or Programs August 1 to August 31, 2013 September 1 to September 30, 2013 October 1 to October 31, 2013
4,875
$
3.79
3,428,172
571,828
6,890
$
3.65
3,435,062
564,938
68,261
$
3.65
3,503,323
496,677
80,026
$
3.66
The share repurchase plan was approved by the Board in July 2008 pursuant to Rule 10b5-1 of the Exchange Act. Under this plan, the Company was authorized to repurchase up to 2,000,000 shares of its common stock. On June 5, 2009, the Board authorized the expansion of the original plan to purchase an additional 2,000,000 shares.
As of October 31, 2013, the Company had repurchased a total of 3,503,323 shares for an aggregate consideration of approximately $8,517,000, effectively returning capital to stockholders. The Company believes the share repurchase plan increases stockholder value.
In addition to the share repurchase program, we provided our stockholders with liquidity and the opportunity to sell their shares at a premium through a tender offer. In the offer, completed on November 4, 2010, we purchased approximately 13.2 million of our approximately 16.6 million outstanding shares of common stock for approximately $42.9 million.
Item 6 — Exhibits.
Exhibit 3.1 |
Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-09357) filed August 27, 1996. |
Exhibit 3.2 |
Amended and Restated Bylaws of the Company dated June 7, 2008, incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 10, 2008. |
Exhibit 31.1 |
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 31.2 |
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.1 |
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.2 |
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS** |
XBRL Instance |
101.SCH** |
XBRL Taxonomy Extension Schema |
101.CAL** |
XBRL Taxonomy Extension Calculation |
101.DEF** |
XBRL Taxonomy Extension Definition |
101.LAB** |
XBRL Taxonomy Extension Labels |
101.PRE** |
XBRL Taxonomy Extension Presentation |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
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Peerless Systems Corporation | ||
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By: |
/s/ Timothy E. Brog |
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Chairman and Chief Executive Officer | |
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/s/ Yi Tsai |
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Chief Financial Officer |
Date: December 11, 2013
EXHIBIT INDEX
Exhibit Number |
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Description of Exhibit |
Exhibit 3.1 |
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Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1/A (File No. 333-09357) filed August 27, 1996. |
Exhibit 3.2 |
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Amended and Restated Bylaws of the Company dated June 7, 2008, incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 10, 2008.. |
Exhibit 31.1* |
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Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 31.2* |
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Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act and Section 302 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.1* |
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Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit 32.2* |
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Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
101.INS** |
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XBRL Instance |
101.SCH** |
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XBRL Taxonomy Extension Schema |
101.CAL** |
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XBRL Taxonomy Extension Calculation |
101.DEF** |
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XBRL Taxonomy Extension Definition |
101.LAB** |
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XBRL Taxonomy Extension Labels |
101.PRE** |
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XBRL Taxonomy Extension Presentation |
*Filed herewith.
**Information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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