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PEERLESS SYSTEMS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

June 16, 2014

Highlights

For the three month period ended April 30, 2014, our revenue decreased by 50.3% to $547,000 from $1,101,000 reported for the same period in 2013. This decrease is primarily attributable to a large customer whose revenue dropped significantly during the three months ended April 30, 2014 when compared to the same period in 2013. The 50.3% 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" 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 April 30, 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 as a result of repaying broker payable of $1.4 million during the three months period ended April 30, 2014. Our cash and investments increased from $10.9 million (net of broker payable of $1.4 million included in other liabilities) at January 31, 2014 to $11.4 million at April 30, 2014. Stockholders' equity as of April 30, 2014 was $12.3 million, an increase of $0.2 million from $12.1 million as of January 31, 2014.

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Our operations used $0.9 million in cash during the three months ended April 30, 2014, compared to $0.3 million in cash provided by operations during the three months ended April 30, 2013, primarily as a result of repaying broker payable of $1.4 million during the three months period ended April 30, 2014. During the three months ended April 30, 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.

At April 30, 2014, our principal source of liquidity, cash and cash equivalents was $11.4 million, an increase of $3.4 million from $8.0 million as of January 31, 2014, primarily attributable to the sale of investments.

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 $547,000 for the three month period ended April 30, 2014, compared to $1,101,000 for the three month period ended April 30, 2013. This 50.3% decrease in revenue is primarily attributable to a large customer whose revenue dropped significantly during the three months ended April 30, 2014 when compared to the same period in 2013. The 50.3% 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 $78,000 or 14.2% of revenues for the three month period ended April 30, 2014, compared to $128,000 or 11.6% for the three month period ended April 30, 2013. The 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 85.8% and 88.4% for the three month periods ended April 30, 2014 and 2013, respectively. The decrease in gross margins was primarily due to higher cost of revenue incurred for the three months ended April 30, 2014 for the reasons set forth above.

Operating Expenses



Total operating expenses decreased 21.6% to $265,000 for the three month period ended April 30, 2014, from $338,000 for the three month period ended April 30, 2013. This decrease is attributable to the decline in professional fees and consulting expenses as well as our continued cost reduction efforts in general.

Income from Operations



Income from operations was $204,000 for the three month period ended April 30, 2014, compared to $635,000 for the three month period ended April 30, 2013. The decrease in income from operation was primarily due to the 50.3% decrease in revenue.

Other Loss, Net



Other loss, net was $119,000 for the three month period ended April 30, 2014, as compared to a loss of $414,000 for the three month period ended April 30, 2013, due to lower realized losses on sales of marketable securities in the current period.

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Net Income



Our net income for the three month period ended April 30, 2014 was approximately $51,000 or $0.02 per basic and diluted share, compared to a net income of approximately $135,000, or $0.05 per basic share and $0.04 per diluted share, for the three month period ended April 30, 2013. We had 2.5 million and 2.9 million weighted average shares of common stock outstanding during the three month period ended April 30, 2014 and 2013, respectively, used for the calculation of basic earnings per share. We had 2.7 million and 3.0 million weighted average shares of common stock outstanding during the three month period ended April 30, 2014 and 2013, respectively, used for the calculation of diluted earnings per share.


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Source: Edgar Glimpses


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