This is a short post on Peerless Systems (NASDAQ:PRLS) which I came across on Shadowstock. It is selling for below net cash and management is engaging in one of the most aggressive buybacks I’ve ever seen. Take a look at the table below.

Quarter Shares purchased (k) % of outstanding (diluted) Q2 2012 222 6.3% Q3 2012 50 1.5% Q4 2012 156 4.8% Q1 2013 72 2.3% Q2 2013 269 8.9% Q3 2013 124 4.5%

Keep in mind these are quarters and you can see just how much it is reducing the share count by.

The company has $11.2m in cash and equivalents, or $4.35 per share, 20% above the current share price of $3.64. What’s more is the company is still generating positive free cash flow, and combined with the buybacks, the intrinsic value per share has been increasing over the last few years. For example at the end of Q3 2012 it had $11.9m in cash and equivalents and this was worth $3.65 per share.

The company itself is pretty boring, it gets revenue from software licenses, a software that is very old and not being developed further so expected to diminish over time. That doesn’t particularly bother me however, considering the company is selling below net cash.

The companies only overheads are essentially its management, the chairman has a base salary of $360k and takes more in the form of stock each year. That is significant considering revenue was only $2.5m in 2013. There was also recently the issue of a lot of common stock for paying the chairman. This current report details the issue of new restricted stock, 250k shares (7% of 3.4m outstanding at the time), only vested if stock price is greater than targets of $3.75-$4.50, or if company de-lists.

The company’s 10-K hints that it is looking around for an acquisition target or new business to enter into. In 2010 the company returned $45m (the majority of its cash) to shareholders and states that it now has more limitations for enhancing shareholder value. Given the company is already small you have to wonder whether the management will cease the share buybacks anytime soon otherwise they wont have much left to invest going forward.

But there is something else very concerning about this company. It wants to get involved in the asset management business, and its chairman fancies himself as some sort of investor. Take a look at the cash flow statement from the last annual report.



Can you spot the abnormality? Income and cash flow is around $1m yet it made $200-400m of purchases and sales of investments during the last couple of years. This definitely to me looks like the company is actively trading with the cash on the balance sheet.

What makes this a red flag is that the company is not authorised to be an investment company. If the SEC requires it to register as one then it will incur significant additional expenses to comply with increased regulation, not to mention any repercussions from trading when not authorised to do so.

I don’t know enough about U.S. legislation to know what risk management’s trading poses to the company, if anyone is reading and does know then I would really appreciate some clarity in the comments. Without knowing this I can’t comment on the downside to this investment, and the upside looks fairly limited even though it trades below net cash.

Disclosure: PRLS – no position