(Mark One)

For the quarterly period ended April 30, 2013

or

For the transition period from                     to                    

Commission File Number: 000-21287

PEERLESS SYSTEMS CORPORATION

(Exact name of Registrant as Specified in its Charter)

(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):

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 June 10, 2013 was 3,001,455.

PEERLESS SYSTEMS CORPORATION INDEX

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)

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

PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands except per share amounts)

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)

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)

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 Company believes adoption of this new guidance will not have a material impact on the Company’s financial statements as these updates have an impact on presentation only.

3.  Cash, Cash Equivalents, and Marketable Securities 

As of April 30, 2013 and January 31, 2013, cash, cash equivalents, and marketable securities included the following (in thousands):

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 April 30, 2013 and 2012, is the Company’s position in ModusLink. 

During the three months ended April 30, 2013, the Company recorded approximately $0.4 million of realized losses on investments as compared to realized gains of $0.6 million for the three months ended April 30, 2012.  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 April 30, 2013 and January 31, 2013. 

4.  Earnings Per Share

Earnings per share (EPS) for the three months ended April 30, 2013 and 2012 are calculated as follows (in thousands, except for per share amounts):

Potentially dilutive options in the aggregate of approximately 137,650 and 156,750 for the three months ended April 30, 2013 and 2012, 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 and diluted weighted average shares exclude unvested shares of restricted common stock granted to employees and directors.

 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.

For the three months ended April 30, 2013 and April 30, 2012, the Company recorded a total of approximately $27,000 and $30,000, 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 ended April 30, 2013:

As of April 30, 2013, there was approximately $103,000 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 1.58 years.

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 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 months ended April 30, 2013 and April 30, 2012, the Company recorded a total of approximately $17,000 and $43,000, respectively, in stock compensation expense related to restricted stock awarded.  The total fair value, based on the price on the day of grant, for restricted stock awards that vested during the three months ended April 30, 2013, was approximately $9,000.  A summary of the Company’s non-vested restricted stock awards as of April 30, 2013 is as follows: 

The unrecognized compensation for non-vested restricted stock awards of approximately $36,000 will be recognized over a weighted-average period of 1.0 years.

The Company used a Monte Carlo simulation model valuation technique to determine the fair value of the 200,000 shares of restricted common stock granted to the Chairman and Chief Executive Officer issued during the fiscal quarter ended October 31, 2010 because this award vests based upon achievement of market price targets or “market conditions.”  One quarter of such shares will vest if prior to August 26, 2013 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. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying the market conditions 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 this restricted stock as of August 26, 2010:

The daily expected stock price volatility is based on three-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 three years. These shares had a grant date fair value of approximately $395,000. As of April 30, 2013, 50,000 shares had vested under this grant. All stock based compensation expense related to this grant was recognized during fiscal years 2011 and 2012.

6.  Concentration of Revenues

During the three months ended April 30, 2013, three customers, Kyocera Document Solutions, Inc (“KDS”), Oki Data Corporation and Novell Inc. (“Novell”), totaled approximately 90% of the revenues of the Company. During the three months ended April 30, 2012, three customers, Novell, Xerox International Partners and Seiko Epson Corporation represented approximately 95% of the revenues of the Company.  

7.  Common Stock Repurchases

During the three months ended April 30, 2013, the Company repurchased 68,441 shares of its common stock for an aggregate purchase price of $238,283, or an average cost of $3.48 per share. From May 1, 2013 through June 10, 2013, the Company repurchased an additional 41,697 shares of its common stock for an aggregate purchase price of $145,168.

8.  Income Taxes

The Company reported tax provision of approximately $86,000 and $289,000 for the three months ended April 30, 2013 and 2012, respectively.  The effective tax rate was 38.9% and 39.3% for the three months ended April 30, 2013 and 2012, respectively.

The majority of the change in deferred tax assets relates to the unrealized loss found in accumulated other comprehensive income (loss). As of April 30, 2013, the Company had a valuation allowance of approximately $109,000 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 months ended April 30, 2013, our revenue increased by 79.3% to $1,101,000 as compared to $614,000 recorded for the same period in 2012. This increase is primarily attributed to two customers who had recently exhausted their block licenses and are currently paying us on a pay-as-you-go basis.

As a part of our on-going cost reduction initiative, we reduced our operating expenses by 22.5% to $338,000 for the three months ended April 30, 2013 as compared to $436,000 reported for the three months ended April 30, 2012.

As a result of the revenue growth and the reduction in operating expenses, our income from operations increased 405% to $635,000 for the three months ended April 30, 2013 as compared to $126,000 recorded for the same period in 2012.

We recorded approximately $417,000 in net realized losses on marketable securities for the three months ended April 30, 2013 as compared to a gain of $614,000 for the three months ended April 30, 2012.

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 and block licensing revenues and perpetual licenses. 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 acquired.  Typically, payments are made 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 KDS 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.  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 price 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

Our total assets at April 30, 2013 were $14.2 million, an increase of 2.2% from $13.9 million as of January 31, 2013. Cash and cash equivalents increased from $8.9 million at January 31, 2013 to $10.6 million at April 30, 2013. Stockholders’ equity at April 30, 2012 was $13.3 million, an increase of $0.2 million from $13.1 million as of January 31, 2013 primarily due to the comprehensive net income of $0.5 million recorded for the three month period ended April 30, 2013 offset by the repurchase of our common stock of approximately $0.2 million.  

       At April 30, 2013, our principal source of liquidity, cash and cash equivalents and marketable securities, was $12.0 million, an increase of $0.2 million from January 31, 2013.  This increase is attributable to net cash provided by operating activities and partially offset by the amount spent on 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 $1,101,000 for the three months ended April 30, 2013, compared to $614,000 for the three months ended April 30, 2012.  This 79.3% increase is primarily attributable to two customers who had recently exhausted their block licenses and are currently paying us on a pay-as-you-go basis.

Cost of Revenues

Total cost of revenues were $128,000 or 11.6% of revenues for the three months ended April 30, 2013, compared to $52,000 or 8.5% of revenue for the three months ended April 30, 2012. 

 Gross Margin

Our gross margins were 88.4% and 91.5% for the three months ended April 30, 2013 and April 30, 2012, respectively. The decrease in gross margins was the result of more fees being paid to third parties due to a change in the product mix generating licensing revenues. 

Operating Expenses

Total operating expenses decreased 22.5% to $338,000 for the three months ended April 30, 2013, from $436,000 for the three months ended April 30, 2012.

Income from Operations

Income from operations was $635,000 for the three months ended April 30, 2013, compared to $126,000 for the three months ended April 30, 2012.  This 405% increase is primarily attributable to the 79.3% increase in revenue, and also attributable in part to lower operating expenses.

Other Income (Loss), Net

Other income (loss), net was a loss of $414,000 for the three months ended April 30, 2013, as compared to a gain of $609,000 for the three months ended April 30, 2012, due to realized losses on sales of marketable securities in the current period.

Income before income tax for the three months ended April 30, 2013 was $221,000, representing a 70% decrease as compared to $735,000 reported for the three months ended April 30, 2012. This decline was caused by the $1,023,000 negative change in other income (loss) net, partially offset by the $509,000 improvement in income from operations.

Income Taxes

The Company reported tax provision of approximately $86,000 and $289,000 for the three months ended April 30, 2013 and 2012, respectively.  The effective tax rate was 38.9% and 39.3% for the three months ended April 30, 2013 and 2012, respectively.

Net Income

Our net income for the three months ended April 30, 2013 was approximately $135,000 or $0.05 per basic share and $0.04 per diluted share, compared to a net income of approximately $446,000, or $0.13 per basic and diluted share, for the three months ended April 30, 2012. We had 2.9 million and 3.3 million weighted average shares of common stock outstanding for the three months ended April 30, 2013 and April 30, 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 April 30, 2013. 

Our investment in ModusLink is also subject to the risk factors set forth in ModusLink’s filings with the SEC, including, but not limited to, ModusLink’s Annual Report on Form 10-K filed on January 11, 2013 and the Quarterly Reports on Form 10-Q filed on March 12, 2013 and June 10, 2013.

Item 4 — 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 April 30, 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 April 30, 2013, our disclosure controls and procedures were effective.

In the three months ended April 30, 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 months ended April 30, 2013 on a month-by-month basis.  All of these purchases were made under the Company’s share repurchase program adopted by the Board.

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 April 30, 2013, the Company had repurchased a total of 3,137,361 shares for an aggregate consideration of approximately $7,193,000, effectively returning capital to stockholders. The Company believes the share repurchase plan increases stockholder value.

Item 6 — Exhibits.

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:

Date: June 13, 2013

EXHIBIT INDEX

*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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