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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 July 31, 2014

 

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

95-3732595

(State or Other Jurisdiction

(I.R.S. Employer

of Incorporation or Organization)

Identification No.)

 

 

1055 Washington Blvd., 8th Floor, Stamford, CT

06901

(Address of Principal Executive Offices)

(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  

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  

  (Do not check if a 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 September 9, 2014 was 2,719,107.

 

 

 

 

PEERLESS SYSTEMS CORPORATION INDEX

 

 

FORWARD-LOOKING STATEMENTS

3

 

 

PART I — FINANCIAL INFORMATION

4

 

 

Item 1 — Financial Statements.

4

 

 

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

13

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk.

16

 

 

Item 4 — Controls and Procedures.

16

 

 

PART II — OTHER INFORMATION

17

 

 

Item 1A — Risk Factors.

17

 

 

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds.

  17

 

 

Item 6 — Exhibits.

18

 

 

SIGNATURES

19

 

 

EXHIBIT INDEX

20

 

 
Page 2

 

 

 

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 2014 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.

 

 
Page 3

 

 

PART I—FINANCIAL INFORMATION

 

 

Item 1 — Financial Statements.

 

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

  

   

July 31, 2014

   

January 31, 2014

 
                 

ASSETS

 

Current assets:

               

Cash and cash equivalents

  $ 10,826     $ 7,962  

Marketable securities

    -       4,301  

Trade accounts receivable, net

    927       1,186  

Deferred tax assets

    173       137  

Income tax receivable

    850       416  

Prepaid expenses and other current assets

    28       58  

Total current assets

    12,804       14,060  

Other assets

    6       6  

Total assets

  $ 12,810     $ 14,066  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
                 

Current liabilities:

         

Accrued wages and compensated absences

  $ 61     $ 60  

Accrued product licensing costs

    73       137  

Other current liabilities

    97       1,457  

Total current liabilities

    231       1,654  

Other liabilities

               

Tax liabilities

    289       285  

Total liabilities

    520       1,939  

Stockholders’ equity:

 

Common stock, $.001 par value, 30,000 shares authorized, 19,703 issued at July 31, 2014 and 19,679 at January 31, 2014

    20       20  

Additional paid-in capital

    58,576       58,535  

Retained earnings

    5,955       5,768  

Accumulated other comprehensive loss, net of taxes

    -       (134 )

Treasury stock, 16,964 at July 31, 2014 and 16,910 at January 31, 2014

    (52,261 )     (52,062 )

Total stockholders’ equity

    12,290       12,127  

Total liabilities and stockholders’ equity

  $ 12,810     $ 14,066  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

  

 
Page 4

 

 

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands except per share amounts) 

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2014

   

2013

   

2014

   

2013

 

Revenues

  $ 569     $ 847     $ 1,116     $ 1,948  

Cost of revenues

    22       43       100       171  

Gross margin

    547       804       1,016       1,777  

Operating expenses

    325       667       590       1,005  

Income from operations

    222       137       426       772  

Other loss, net

    (2 )     (702 )     (121 )     (1,116 )

Income (loss) before income taxes

    220       (565 )     305       (344 )

Provision for (benefit from) income taxes

    84       (166 )     118       (80 )

Net income (loss)

  $ 136     $ (399 )   $ 187     $ (264 )

Basic earnings (loss) per share

  $ 0.05     $ (0.14 )   $ 0.07     $ (0.09 )

Diluted earnings (loss) per share

  $ 0.05     $ (0.14 )   $ 0.07     $ (0.09 )

Weighted average common shares - outstanding — basic

    2,537       2,762       2,543       2,834  

Weighted average common shares - outstanding — diluted

    2,649       2,762       2,658       2,834  

  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
Page 5

 

 

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

 

   

Three Months Ended

   

Six Months Ended

 
   

July 31,

   

July 31,

 
   

2014

   

2013

   

2014

   

2013

 

Net income (loss)

  $ 136     $ (399 )   $ 187     $ (264 )

Changes in unrealized losses in available for sale securities, net of taxes

    -       96       -       201  

Reclassification adjustment for gains included in net income

    -       200       134       413  

Total comprehensive income (loss), net of taxes

  $ 136     $ (103 )   $ 321     $ 350  

 

   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
Page 6

 

 

 

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

   

   

Six Months Ended

 
   

July 31,

 
   

2014

   

2013

 
                 

Cash flows from operating activities:

               

Net income (loss)

  $ 187     $ (264 )

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Stock-based compensation

    41       393  

Realized loss on marketable securities

    120       1,120  

Deferred tax expense

    (122 )     11  

Changes in operating assets and liabilities:

               

Trade accounts receivable

    259       337  

Income tax receivable

    (434 )     (91 )

Prepaid expenses and other assets

    29       (11 )

Accrued product licensing costs

    (65 )     (73 )

Other liabilities

    (1,360 )     (77 )

Tax liabilities

    4       4  

Net cash provided by (used in) operating activities

    (1,341 )     1,349  

Cash flows from investing activities:

               

Purchases of marketable securities

    (4,895 )     (70,112 )

Proceeds from sale of marketable securities

    9,299       72,328  

Net cash provided by investing activities

    4,404       2,216  

Cash flows from financing activities:

               

Proceeds from exercise of stock options

    -       41  

Purchase of treasury stock

    (199 )     (1,270 )

Net cash used in financing activities

    (199 )     (1,229 )

Net increase in cash and cash equivalents

    2,864       2,336  

Cash and cash equivalents, beginning of period

    7,962       8,866  

Cash and cash equivalents, end of period

  $ 10,826     $ 11,202  
                 

Supplemental disclosure of cash flow information:

               

Cash paid during the period for:

               

Interest

  $ 3     $ -  

Taxes

  $ 680     $ -  

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

 
Page 7

 

 

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, 2014, filed with the SEC on April 30, 2014.  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.  Cash, Cash Equivalents, and Marketable Securities 

 

As of July 31, 2014 and January 31, 2014, cash, cash equivalents, and marketable securities included the following (in thousands):

 

July 31, 2014

 
           

Unrealized

   

Losses

   

Losses

   

Fair

 
           

Gains

   

Less Than

   

12 Months or

   

Value

 
    Cost            

12 Months

   

Longer

         

Cash and cash equivalents

  $ 10,826     $ -     $ -     $ -     $ 10,826  

Total

  $ 10,826     $ -     $ -     $ -     $ 10,826  

 

January 31, 2014

 
           

Unrealized

   

Unrealized Losses

   

Unrealized Losses

   

Estimated Fair

 
           

Gains

   

Less Than

   

12 Months or

   

Value

 
    Cost            

12 Months

   

Longer

         

Cash and cash equivalents

  $ 7,962     $ -     $ -     $ -     $ 7,962  

Exchange traded marketable securities

    4,521       -       (220 )     -       4,301  

Total

  $ 12,483     $ -     $ (220 )   $ -     $ 12,263  

 

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.

 

During the three months periods ended July 31, 2014, the Company had no realized gain or loss on investment while it recorded approximately $0.1 million in realized loss for the six months then ended, as compared to realized loss of $0.7 million and $1.1 million for the three months and six months ended July 31, 2013, 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 January 31, 2014 and no such securities existed as of July 31, 2014.

 

 
Page 8

 

   

3.  Earnings (Loss) Per Share

 

Earnings (loss) per share (EPS) for the three months and six months periods ended July 31, 2014 and 2013 are calculated as follows (in thousands, except for per share amounts):

 

   

Three Months Ended July 31, 2014

   

Three Months Ended July 31, 2013

 
   

Net Income

   

Shares

   

Per Share Amount

   

Net Loss

   

Shares

   

Per Share Amount

 
   

(In thousands, except per share amounts)

 

Basic EPS

                                               

Earnings (loss) available to common stockholders

  $ 136       2,537     $ 0.05     $ (399 )     2,762     $ (0.14 )

Effect of Dilutive Securities

                                               

Options

          112                          

Restricted Shares

                                   

Diluted EPS

                                               

Earnings (loss) available to common stockholders with assumed conversions

  $ 136       2,649     $ 0.05     $ (399 )     2,762     $ (0.14 )

 

   

Six Months Ended July 31, 2014

   

Six Months Ended July 31, 2013

 
   

Net Income

   

Shares

   

Per Share Amount

   

Net Loss

   

Shares

   

Per Share Amount

 
   

(In thousands, except per share amounts)

 

Basic EPS

                                               

Earnings (loss) available to common stockholders

  $ 187       2,543     $ 0.07     $ (264 )     2,834     $ (0.09 )

Effect of Dilutive Securities

                                               

Options

          115                          

Restricted Shares

                                   

Diluted EPS

                                               

Earnings (loss) available to common stockholders with assumed conversions

  $ 187       2,658     $ 0.07     $ (264 )     2,834     $ (0.09 )

 

Potentially dilutive options in the aggregate of approximately 98,600 and 96,700 for the three months and six months ended July 31, 2014, respectively, have been excluded from the calculation of the diluted earnings per share, because their effect would have been anti-dilutive, based on (i) the fact that the exercise prices of such options exceeds the average stock price and (ii) the number of buy-back shares exceeded the assumed shares issued upon exercise of options.  Basic weighted average shares exclude unvested shares of restricted common stock granted to employees and directors.

 

4.  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.

 

 
Page 9

 

  

On July 1, 2014, the Company granted stock options to its directors upon their re-election to the Board at the Company’s 2014 annual meeting of stockholders to purchase an aggregate of 6,000 shares of the Company’s common stock. On July 16, 2014, the Company granted a stock option to its Chief Financial Officer to purchase 15,000 shares of the Company’s common stock.

 

For the three months ended July 31, 2014 and 2013, the Company recorded a total of approximately $10,000 and $25,000, respectively, in stock option expense related to stock options awarded.  For the six months ended July 31, 2014 and 2013, the Company recorded a total of approximately $23,000 and $52,000 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 three months and six months ended July 31, 2014:

 

                   

Weighted

   

 

 
           

Weighted

   

Average Remaining

         
           

Average

   

Contractual

    Aggregate  
   

 

   

Exercise

   

Term

   

Intrinsic

 
    Options    

Price

   

(Years)

   

Value

 
   

(In thousands, except per share amounts)

 
                                 

Balance outstanding January 31, 2014

    400     $ 2.61       4.90     $ 439  

Granted

    -     $ -                  

Exercised

    -     $ -                  

Canceled or expired

    -     $ -                  

Balance outstanding April 30, 2014

    400     $ 2.68       4.89     $ 424  

Granted

    21     $ 3.67                  

Exercised

    -     $ -                  

Canceled or expired

    (50 )   $ 3.77                  

Balance outstanding July 31, 2014

    371     $ 2.59       5.58     $ 415  

Stock options exercisable, July 31, 2014

    335     $ 2.47       5.19     $ 415  

 

As of July 31, 2014, there was approximately $54,000 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 2.0 years.

 

In addition to the stock option expense, for the three months ended July 31, 2014 and 2013, the Company also recorded a total of approximately $5,000 and $324,000, respectively, in stock compensation expense related to restricted stock awarded.  For the six months ended July 31, 2014 and July 31, 2013, the Company recorded a total of approximately $18,000 and $341,000, respectively, in stock compensation expense related to restricted stock awarded.  

 

 On July 1, 2014, the Company granted an aggregate of 8,109 shares of restricted stock to its directors upon their re-election to the Board at the Company’s 2014 annual meeting of stockholders. On July 16, 2014, the Company granted 15,000 shares of restricted stock to its Chief Financial Officer.

 

 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.

 

 
Page 10

 

 

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 an aggregate grant date fair value of $812,000. This award was fully expensed as of July 31, 2014. As of July 31, 2014, 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 three months and six months ended July 31, 2014, was approximately $20,000 and $56,000 respectively.  A summary of the Company’s non-vested restricted stock awards as of July 31, 2014 is as follows: 

 

           

Weighted

 
           

Average

 
           

Grant

 
   

Number of

   

Date Fair

 
   

Shares

   

Value

 

Non-vested stock awards as of January 31, 2014

    206,876     $ 3.19  

Vested

    (10,000 )     3.64  

Non-vested stock awards as of April 30, 2014

    196,876       3.16  

Granted

    23,109       3.67  

Vested

    (5,332 )     3.75  

Non-vested stock awards as of July 31, 2014

    214,653     $ 3.21  

 

 

The unrecognized compensation for non-vested restricted stock awards of approximately $97,000 will be recognized over a weighted-average period of 1.2 years.

  

5.  Concentration of Revenues

 

During the three months ended July 31, 2014 and 2013, three customers, Kyocera Document Solutions, Inc (“KDS”), Oki Data Corporation (“Oki”) and Novell Inc. (“Novell”), accounted for approximately 91% and 97% of the Company’s revenue, respectively.  During the six months ended July 31, 2014 and 2013, the same three customers (KDS, Oki and Novell) accounted for approximately 87% and 93% of the Company’s revenue, respectively.   

 

At July 31, 2014, three customers represented 92% of total accounts receivable and at January 31, 2014 three customers collectively represented 93% of total accounts receivable.

 

 
Page 11

 

  

6.  Common Stock Repurchases

 

During the three months ended July 31, 2014, the Company repurchased 30,850 shares of its common stock for an aggregate purchase price of $113,279, or an average cost of $3.67 per share. During the six months ended July 31, 2014, the Company repurchased 53,820 shares of its common stock for an aggregate purchase price of $198,695 or an average cost of $3.69 per share. These repurchases include 3,935 shares delivered to the Company in order to withhold $14,205 to pay a tax liability that resulted from the vesting of restricted stock. From August 1, 2014 through September 9, 2014, the Company repurchased an additional 19,772 shares of its common stock for an aggregate purchase price of $73,255.

 

7.  Income Taxes

 

The Company reported tax provision (benefit) of approximately $84,000 and ($166,000) for the three months ended July 31, 2014 and 2013, respectively.  The effective tax rate was 38.2% and 29.4% for the three months ended July 31, 2014 and 2013, respectively. The Company reported tax provision (benefit) of approximately $118,000 and ($80,000) for the six months ended July 31, 2014 and 2013, respectively.  The effective tax rate was 38.7% and 23.3% for the six months ended July 31, 2014 and 2013, respectively.

 

The effective tax rate for the six months ended July 31, 2014 was higher than the statutory rate, primarily attributable to the state income tax payable in Connecticut. The effective tax rate for the six months ended July 31, 2013 was lower than the statutory rate, due to a discrete tax expense related to the reversal of certain deferred tax assets of $112,000 resulting from the forfeiture of certain restricted stock effective July 11, 2013, net of the changes in valuation allowance of $63,000.

 

The majority of the changes in deferred tax assets relates to the increase in capital loss carryover for the state of Connecticut offset by the decrease in unrealized loss included in accumulated other comprehensive income. As of July 31, 2014, the Company had a valuation allowance of approximately $248,000 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 and remained open as of September 12, 2014. The Company had one employee in New York State during a portion of those periods.

 

8. Subsequent Event

 

On September 3, 2014, the Company announced that it has entered into a definitive agreement with Vicis Capital Master Fund and Deer Valley Corporation (OTC: DVLY) to acquire an aggregate of 12,436,458 shares of Deer Valley’s common stock, representing approximately 80% of its issued and outstanding shares, for an aggregate purchase price of $3,681,900. Consummation of the transaction is expected to occur prior to September 30, 2014, and is contingent upon satisfaction of customary closing conditions and consents. Deer Valley, through its subsidiaries, designs and manufactures factory built homes and provides dealer inventory-secured financing for its factory built homes. Deer Valley’s homes are marketed in 14 states through a network of independent dealers, builders, developers and government agencies located primarily in the southeastern and south central regions of the United States. The Company is expected to realize a gain of bargain purchase upon closing.

 

 
Page 12

 

 

 

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Highlights

 

We announced on September 3, 2014 that we have entered into a definitive agreement to acquire approximately 80% of the issued and outstanding shares of Deer Valley Corporation (“DVC”) for an aggregate purchase price of $3,681,900. We expect to close this transaction prior to September 30, 2014. DVC through its wholly owned subsidiaries Deer Valley Homebuilders, Inc., Deer Valley Financial Corp (“DVFC”) and Deer Valley Home Repair Services, Inc., designs and manufactures factory built homes and provides dealer inventory-secured financing for its factory built homes. Deer Valley’s manufacturing plant located in Guin, Alabama, produces homes which are marketed in 14 states through a network of independent dealers, builders, developers and government agencies located primarily in the southeastern and south central regions of the United States. Inventory-secured loan financing for its homes is offered to qualified retail dealers and developers, through DVFC.

 

For the three months ended July 31, 2014, our revenue decreased by 32.8% to $569,000 as compared to $847,000 recorded for the same period in 2013. This decrease is primarily attributable to a large customer whose revenue dropped significantly during the three months ended July 31, 2014 when compared to the same period in 2013. The 32.8% decrease in revenue is also attributable in part to the declining revenue trajectory from our other original equipment manufacturers (“OEMs”) customers.

 

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” on page 3.

 

 
Page 13

 

 

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 July 31, 2014 were $12.8 million, a decrease of 9.2% from $14.1 million as of January 31, 2014. This 9.2% decrease is primarily due to repaying broker payable of $1.4 million during the six month months period ended July 31, 2014. Our cash and investments decreased marginally from $10.9 million (net of broker payable of $1.4 million included in other liabilities) at January 31, 2014 to $10.8 million at July 31, 2014. Stockholders’ equity as of July 31, 2014 was $12.3 million, an increase of $0.2 million from $12.1 million as of January 31, 2014.

 

Our operations used $1.3 million in cash during the six months ended July 31, 2014, compared to $1.3 million in cash provided by operations during the six months ended July 31, 2013, primarily as a result of repaying broker payable of $1.4 million during the six months period ended July 31, 2014. During the six months period ended July 31, 2014, $4.4 million in cash was generated by our investing activities, mainly due to the dispositions of all of our investment in marketable securities during the period.  

 

 At July 31, 2014, our principal source of liquidity, cash and cash equivalents was $10.8 million, an increase of $2.8 million from $8.0 million as of January 31, 2014, primarily attributable to the net proceeds from the sale of all of our marketable securities during the period.

 

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, 2014. There has been no change in our significant accounting policies since January 31, 2014.

 

Results of Operations 

 

Revenues

 

Revenues were $569,000 for the three months ended July 31, 2014, compared to $847,000 for the three months ended July 31, 2013.  This 32.8% decrease in revenue is primarily attributable to a large customer whose revenue dropped significantly during the three months ended July 31, 2014 when compared to the same period in 2013. The 32.8% decrease in revenue is also attributable in part to the declining revenue trajectory from our other OEM customers.

 

Revenues were $1,116,000 for the six months ended July 31, 2014, compared to $1,948,000 for the six months ended July 31, 2013.  This 42.7% decrease in revenue is primarily attributable to a large customer whose revenue dropped significantly during the six months ended July 31, 2014 when compared to the same period in 2013. The 42.7% decrease in revenue is also attributable in part to the declining revenue trajectory from our other OEM customers.

 

Cost of Revenues

 

Product licensing costs were $22,000 or 3.9% of revenues for the three months ended July 31, 2014, compared to $43,000 or 5.1% of revenues for the three months ended July 31, 2013. The decrease in cost of revenues as a percentage of revenue 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 $100,000 or 9.0% of revenues for the six months ended July 31, 2014, compared to $171,000 or 8.8% of revenue for the six months ended July 31, 2013. The marginal increase in cost of revenues as a percentage of revenue 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 96.1% and 94.9% for the three months ended July 31, 2014 and 2013, respectively. The increase in gross margins was primarily due to lower cost of revenue incurred for the three months ended July 31, 2014 for the reasons set forth in Cost of Revenues above.

 

Our gross margins were 91.0% and 91.2% for the six months ended July 31, 2014 and 2013, respectively. The marginal decrease in gross margins was primarily due to higher cost of revenue incurred for the six months ended July 31, 2014 for the reasons set forth in Cost of Revenues above.

 

 
Page 14

 

 

 

Operating Expenses

 

Total operating expenses decreased 51.3% to $325,000 for the three months ended July 31, 2014, from $667,000 for the three months ended July 31, 2013 that include $313,000 in stock-based compensation in connection with the restricted stock award granted to our Chairman and Chief Executive Officer on July 11, 2013, as disclosed in footnote 4 of the financial statement presented in Item 1. Excluding the effect of this stock-based compensation, operating expenses declined 8.2% for the three months period ended July 31, 2014 as compared to the same period in 2013, primarily due to the decrease in consulting expenses.

 

Total operating expenses decreased 41.3% to $590,000 for the six months ended July 31, 2014, from $1,005,000 for the six months ended July 31, 2013 that include $313,000 related to the stock-based compensation as discussed above. Excluding the effect of this stock-based compensation, operating expenses declined 14.7% for the six months period ended July 31, 2014 as compared to the same period in 2013, also primarily due to the decrease in consulting expenses. 

 

Income from Operations

 

Income from operations was $222,000 for the three months ended July 31, 2014, compared to $137,000 for the three months ended July 31, 2013. This 62.0% increase in income from operation is primarily attributable to lower operating expenses despite the 32.8% drop in revenues during the three months ended July 31, 2014. 

 

Income from operations was $426,000 for the six months ended July 31, 2014, compared to $772,000 for the six months ended July 31, 2013. This 44.8% decrease in income from operation is primarily attributable to the 42.7% drop in revenue during the six months ended July 31, 2014.

 

Other Loss, Net

 

Other loss, net was $2,000 for the three months ended July 31, 2014, as compared to a loss of $702,000 for the three months ended July 31, 2013, due to realized losses on sales of marketable securities in the three months ended July 31, 2013.

 

Other loss, net was $121,000 for the six months ended July 31, 2014, as compared to a loss of $1,116,000 for the six months ended July 31, 2013, due to lower realized losses on sales of marketable securities in the current period.

 

Income Taxes

 

The Company reported tax provision (benefit) of approximately $84,000 and ($166,000) for the three months ended July 31, 2014 and 2013, respectively.  The effective tax rate was 38.2% and 29.4% for the three months ended July 31, 2014 and 2013, respectively. The Company reported tax provision (benefit) of approximately $118,000 and ($80,000) for the six months ended July 31, 2014 and 2013, respectively.  The effective tax rate was 38.7% and 23.3% for the six months ended July 31, 2014 and 2013, respectively.

 

The effective tax rate for the six months ended July 31, 2014 was higher than the statutory rate, primarily attributable to the state income tax payable in Connecticut. The effective tax rate for the six months ended July 31, 2013 was lower than the statutory rate, due to a discrete tax expense related to the reversal of certain deferred tax assets of $112,000 resulting from the forfeiture of certain restricted stock effective July 11, 2013, net of the changes in valuation allowance of $63,000.

 

Net Income

 

Our net income for the three months ended July 31, 2014 was approximately $136,000 or $0.05 per basic and diluted share, compared to a net loss of approximately $399,000, or $0.14 per basic and diluted share, for the three months ended July 31, 2013. We had 2.5 million and 2.8 million weighted average shares of common stock outstanding during the three months ended July 31, 2014 and 2013, respectively, used for the calculation of basic and diluted earnings per share.

 

Our net income for the six months ended July 31, 2014 was approximately $187,000 or $0.07 per basic and diluted share, compared to a net loss of approximately $264,000, or $0.09 per basic and diluted share, for the six months ended July 31, 2013. We had 2.5 million and 2.8 million weighted average shares of common stock outstanding during the six months ended July 31, 2014 and 2013, respectively, used for the calculation of basic and diluted earnings per share.

 

 
Page 15

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.

 

 

Item 4 — Controls and Procedures.

 

(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 July 31, 2014 (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 July 31, 2014, our disclosure controls and procedures were effective.

 

(b)     Changes in internal control over financial reporting

 

In the three months ended July 31, 2014, 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.

 

 
Page 16

 

 

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, 2014 (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 months ended July 31, 2014 on a month-by-month basis.  All of these purchases were made under the Company’s share repurchase plan 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

 

May 1 to May 31, 2014

    5,012     $ 3.59       3,546,993       453,007  

June 1 to June 30, 2014

    13,136     $ 3.66       3,560,129       439,871  

July 1 to July 31, 2014

    8,767     $ 3.76       3,568,896       431,104  

Total

    26,915     $ 3.68                  

 

  

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 July 31, 2014, the Company had repurchased a total of 3,568,896 shares pursuant to its share repurchase plan for an aggregate consideration of approximately $8,760,000 effectively returning capital to stockholders. The Company believes the share repurchase plan increases stockholder value.

 

In addition to the share repurchase plan, we provided our stockholders with liquidity and the opportunity to sell their shares at a premium through a tender offer. In the tender 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.

 

 
Page 17

 

 

 

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

 

 
Page 18

 

 

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:

 

 

Peerless Systems Corporation

 

 

 

By:

/s/ Timothy E. Brog

 

 

 

Chairman and Chief Executive Officer

 

 

 

 

 

/s/ Yi Tsai

 

 

 

Chief Financial Officer

 

Date: September 15, 2014

 

 
Page 19

 

 

EXHIBIT INDEX

 

Exhibit

Number

 

Description of Exhibit

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

 

*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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