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~~ October 31, 2014

☐

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., 8^th 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) 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~~December 912, 2014 was 2,~~719~~701,~~107~~364.

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.	1317
Item 3 — Quantitative and Qualitative Disclosures About Market Risk.	1621
Item 4 — Controls and Procedures.	1621
PART II — OTHER INFORMATION	1722
Item 1A — Risk Factors.	1722
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds.	1722
Item 6 — Exhibits.	1823
SIGNATURES	1924
EXHIBIT INDEX	2025

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”), as well as risks discussed in Deer Valley’s Annual Report on Form 10-K filed with 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
	October 31, 2014			January 31, 2014
ASSETS
Current assets:
Cash and cash equivalents	$	1011,~~826~~588		$	7,962
Marketable securities		-149			4,301
Trade accounts receivable, net		~~927~~2,575			1,186
Deferred tax assets		173			137
Inventory		1,782			-
Income tax receivable		850			416
Deferred tax assets		583			137
Prepaid expenses and other current assets		28			58
Inventory finance notes receivable		2,146			-
Total current assets		12,804			14,060
Income tax receivable		367			416
Other assets		6			6
Prepaid expenses and other current assets		220			58
Total assets	$	12,810		$	14,066
Total current assets		19,410			14,060
Fixed Assets:
Property, plant and equipment, net		2,131			-
Other Assets:
Inventory finance notes receivable, net		1,672			-
Deferred tax assets		660			-
Other assets		20			6
Total other assets		2,352			6
Total assets	$	23,893		$	14,066
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accrued wages and compensated absences	$	61		$	60
Current maturities on long term debt	$	126		$	-
Accrued product licensing costs		73			137
Revolving credit loans		700			-
Other current liabilities		97			1,457
Accounts payable		678			15
Total current liabilities		231			1,654
Accrued expenses		2,363			268
Other liabilities
Accrued warranties		1,205			-
Tax liabilities		289			285
Other current liabilities		-			1,371
Total liabilities		520			1,939
Total current liabilities		5,072			1,654
Stockholders’ equity:
Long term liabilities:
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
Long-term debt, net of current maturities		722			-
Additional paid-in capital		58,576			58,535
Tax liabilities		-			285
Retained earnings		5,955			5,768
Total long term liabilities		722			285
Accumulated other comprehensive loss, net of taxes		-			(134	)
Total liabilities		5,794			1,939
Treasury stock, 16,964 at July 31, 2014 and 16,910 at January 31, 2014		(52,261	)		(52,062	)
Equity:
Total stockholders’ equity		12,290			12,127
Common stock, $.001 par value, 30,000 shares authorized, 19,703 issued at October 31, 2014 and 19,680 at January 31, 2014		20			20
Total liabilities and stockholders’ equity	$	12,810		$	14,066
Additional paid-in capital		58,711			58,535
Retained earnings		9,964			5,768
Accumulated other comprehensive income (loss), net of taxes		4			(134	)
Treasury stock, 17,044 at October 31, 2014 and 16,910 at January 31, 2014		(52,606	)		(52,062	)
Total Peerless Systems Corporation stockholders’ equity		16,093			12,127
Noncontrolling interest		2,006			-
Total equity		18,099			12,127
Total liabilities and equity	$	23,893		$	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~~Nine Months Ended
	July 31,						July 31,
	October 31,						October 31,
	2014			2013			2014			2013
Revenues	$	~~569~~458		$	~~847~~920		$	1,~~116~~574		$	12,~~948~~868
Cost of revenues		22(39	)		4386			~~100~~61			~~171~~257
Gross margin		~~547~~497			~~804~~834			1,~~016~~513			12,~~777~~611
Operating expenses		~~325~~342			~~667~~723			~~590~~932			1,~~005~~728
Income from operations		~~222~~155			~~137~~111			~~426~~581			~~772~~883
Other loss, net		(2	)		(702	)		(121	)		(1,116	)
Gain on bargain purchase		3,597			-			3,597			-
Income (loss) before income taxes		220			(565	)		305			(344	)
Other income (loss), net		15			(372	)		(106	)		(1,488	)
Provision for (benefit from) income taxes		84			(166	)		118			(80	)
Income (loss) before income taxes		3,767			(261	)		4,072			(605	)
Net income (loss)	$	136		$	(399	)	$	187		$	(264	)
Benefit from income taxes		(243	)		(2	)		(124	)		(81	)
Basic earnings (loss) per share	$	0.05		$	(0.14	)	$	0.07		$	(0.09	)
Net income (loss)	$	4,010		$	(259	)	$	4,196		$	(524	)
Diluted earnings (loss) per share	$	0.05		$	(0.14	)	$	0.07		$	(0.09	)
Basic earnings (loss) per share	$	1.57		$	(0.10	)	$	1.65		$	(0.19	)
Weighted average common shares - outstanding — basic		2,537			2,762			2,543			2,834
Diluted earnings (loss) per share	$	1.49		$	(0.10	)	$	1.57		$	(0.19	)
Weighted average common shares - outstanding — diluted		2,649			2,762			2,658			2,834
Weighted average common shares - outstanding — basic		2,560			2,638			2,549			2,768
Weighted average common shares - outstanding — diluted		2,699			2,638			2,672			2,768

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~~Nine Months Ended
	July 31,					July 31,
	October 31,					October 31,
	2014		2013			2014		2013
Net income (loss)	$	~~136~~4,010	$	(~~399~~259	)	$	~~187~~4,196	$	(~~264~~524	)
Changes in unrealized losses in available for sale securities, net of taxes		-		96			-		201
Changes in unrealized gains (losses) in available for sale securities, net of taxes		4		(114	)		4		87
Reclassification adjustment for gains included in net income		-		200			134		413
Reclassification adjustment for gains included in net income (loss)		-		43			134		456
Total comprehensive income (loss), net of taxes	$	~~136~~4,014	$	(~~103~~330	)	$	~~321~~4,334	$	~~350~~19

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
	Nine Months Ended
	July 31,
	October 31,
	2014			2013
Cash flows from operating activities:
Net income (loss)	$	~~187~~4,196		$	(~~264~~524	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Stock-based compensation		4177			~~393~~822
Realized loss on marketable securities		120			1,120
Gain on bargain purchase		(3,597	)		-
Deferred tax expense		(122	)		11
Realized loss on marketable securities		120			1,496
Deferred tax expense		17			27
Changes in operating assets and liabilities:
Trade accounts receivable		~~259~~382			~~337~~(8	)
Income tax receivable		~~(434~~49	)		(9199	)
Prepaid expenses and other assets		2941			~~(11~~12	)
Accrued product licensing costs		(65	)		(73	)
Accrued expenses		(173	)		(107	)
Other liabilities		(1,~~360~~309	)		(77102	)
Tax liabilities		4(285	)		46
Net cash provided by (used in) operating activities		(~~1,341~~482	)		1,~~349~~523
Cash flows from investing activities:
Purchases of marketable securities		(4,895	)		(70,112	)
Purchase of 80% equity in Deer Valley, net of cash acquired		294			-
Proceeds from sale of marketable securities		9,299			72,328
Purchases of marketable securities		(5,039	)		(132,317	)
Net cash provided by investing activities		4,404			2,216
Proceeds from sale of marketable securities		9,297			134,501
Net cash provided by investing activities		4,552			2,184
Cash flows from financing activities:
Proceeds from exercise of stock options		-			41
Purchase of treasury stock		(199	)		(1,270	)
Windfall tax benefit		100			-
Net cash used in financing activities		(199	)		(1,229	)
Purchase of treasury stock		(544	)		(1,563	)
Net increase in cash and cash equivalents		2,864			2,336
Net cash used in financing activities		(444	)		(1,522	)
Net increase in cash and cash equivalents		3,626			2,185
Cash and cash equivalents, beginning of period		7,962			8,866
Cash and cash equivalents, end of period	$	1011,~~826~~588		$	11,~~202~~051
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	3		$	-
Taxes	$	~~680~~732		$	-

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 and Deer Valley’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013, filed with the SEC on March 20, 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~~On September 3, ~~Cash~~2014, ~~Equivalents~~we entered into a definitive stock purchase agreement by and among Vicis Capital Master Fund (“Vicis”), a Cayman Island unit trust managed by Vicis Capital, LLC and ~~Marketable~~Deer ~~Securities~~ Valley Corporation (“Deer Valley”), a Florida corporation, to acquire 80% of Deer Valley for an aggregate purchase price of $3,681,900. The transaction was consummated on October 6, 2014 (“Acquisition Date”).

AsDeer ofValley, ~~July~~through 31its wholly owned subsidiaries Deer Valley Homebuilders, ~~2014~~Inc. (“DVH”) and ~~January~~Deer 31Valley Financial Corp (“DVFC”), ~~2014~~designs and manufactures factory built homes, ~~cash~~and provides dealer inventory-secured financing, ~~cash~~and ~~equivalents~~warranty and repair services 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 ~~marketable~~government ~~securities~~agencies ~~included~~located primarily in the ~~following~~southeastern ~~(in~~and ~~thousands):~~south central regions of the United States. Inventory secured loan financing is offered to qualified retail dealers and developers, through DVFC, for homes Deer Valley manufactures.

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

Deer Valley has a 52-53- week fiscal year and ends each year on the Saturday nearest to December 31^st. No decision has been made whether it will retain such fiscal year for standalone reporting purposes. Its financial statements are reflected in our consolidated financial statements utilizing a one month lag. Therefore, since Deer Valley’s recent quarter ended on September 27, 2014, prior to the consummation of the transaction, Deer Valley is only included in our Unaudited Condensed Consolidated Balance Sheets at October 31, 2014 and not in Peerless’ Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended October 31, 2014 (Note 2). We have reviewed Deer Valley business and internal operating results for the five weeks ended November 1, 2014 for the purpose of evaluating whether additional financial statement disclosure or adjustments are required to this quarterly Report on Form 10-Q, and we have concluded that no additional disclosure or adjustments are warranted.

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

2. Deer Valley Acquisitions

~~Cash~~As ~~equivalents~~discussed ~~are~~above, ~~comprised~~we acquired 80% of ~~money~~Deer ~~market~~Valley ~~funds~~on ~~traded~~October in6, 2014 for an ~~active~~aggregate ~~market~~purchase ~~with~~price noof ~~restrictions~~$3,681,900 ~~and~~which ~~money~~was ~~market~~funded ~~savings~~from ~~accounts~~our cash on-hand. OnIn aaccordance ~~recurring~~with ~~basis~~FASB ASC 805, Business Combinations, this acquisition has been accounted for using the ~~Company~~acquisition ~~measures~~method ~~its~~of ~~investments~~accounting which requires, ~~cash~~among ~~equivalents~~other things, that assets acquired and ~~marketable~~liabilities ~~securities~~assumed be recognized at their fair ~~value. Cash,~~values ~~cash~~as ~~equivalents~~of the Acquisition Date, notwithstanding the fact that we acquired substantially all of the shares of Deer Valley common stock directly from Vicis. The following table reflects the preliminary allocation of the purchase price to the assets acquired and ~~marketable~~liabilities ~~securities~~assumed at the Acquisition Date. Certain estimated values are ~~classified~~not ~~within~~yet ~~Level~~finalized Iand are subject to change, which could be significant. The allocation of the purchase price is still preliminary due to the short duration since the Acquisition Date and will be finalized upon completion of the analysis of the fair ~~value~~values ~~hierarchy~~of ~~because~~Deer ~~they~~Valley’s ~~are~~assets ~~valued~~and ~~using~~specified ~~observable~~liabilities. ~~inputs,~~We ~~such~~expect to finalize these amounts as ~~quoted~~soon ~~prices~~as inpossible ~~active~~but ~~markets~~no later than one year from the Acquisition Date.

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~~The ~~(Loss)~~following ~~Per~~table ~~Share~~reflects the preliminary allocation of the purchase price to the assets acquired and liabilities assumed at the Acquisition Date (in thousands):

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):

	Acquisition Date
	Fair Value

Cash	$	3,976
Accounts receivable		1,770
Inventory		1,782
Inventory finance notes receivable		3,818
Prepaid expenses and other current assets		202
Property, plant and equipment		2,131
Deferred tax asset		1,211
Other assets		15
Total identifiable assets acquired	$	14,905

Revolving credit loans	$	700
Accounts payable		601
Accrued expenses		2,266
Accrued warranties		1,205
Mortgage payable		848
Total liabilities assumed		5,620

Net identifiable assets acquired		9,285

Fair value of the consideration transferred for 80% of Deer Valley		3,682
Fair value of noncontrolling interest in Deer Valley		2,006
Total		5,688

Gain on bargain purchase of 80% ownership interest	$	3,597

	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	)

The fair value of the noncontrolling interests is estimated at $0.65 per share.

	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	)

The fair value of identifiable assets acquired and specified liabilities assumed exceeded the fair value of the consideration transferred. In accordance with ASC 805, the Company consequently reassessed the recognition and measurement of identifiable assets acquired and specified liabilities assumed and concluded that the valuation procedures and resulting measures were appropriate. As a result, the Company recognized a gain on bargain purchase of $ 3.6 million in its consolidated statements of operations for the quarter ended October 31, 2014.

~~Potentially~~For ~~dilutive options in~~ the ~~aggregate~~nine ofmonth ~~approximately~~period ~~98,600 and 96,700 for the three months and six months~~ ended ~~July~~October 31, 2014, ~~respectively,~~we ~~have~~expensed ~~been~~approximately ~~excluded from the calculation of the diluted earnings per share~~$155,000 ~~because their effect would have been anti-dilutive, based on (i) the fact that the exercise prices~~ of ~~such~~costs ~~options~~related ~~exceeds~~to the ~~average~~acquisition ~~stock price and (ii) the number~~ of ~~buy-back~~Deer ~~shares exceeded the assumed shares issued upon exercise of options~~Valley. ~~Basic weighted average shares exclude unvested shares of restricted common stock granted to employees and directors.~~

~~4. Stock-Based~~Unaudited ~~Compensation~~pro ~~Plans~~forma operating results for the nine month periods ended October 31, 2014 and 2013, assuming the acquisition of Deer Valley had occurred on February 1, 2013, are as follows (in thousands, except per share amounts):

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.

	Unaudited Pro forma Consolidated Results
	Nine Months Ended October 31,
	2014		2013

Revenues	$	23,163	$	22,832

Income (loss) attributable to Peerless Systems Corporation common shareholders	$	4,398	$	(322	)

Basic income (loss) per share attributable to Peerless Systems Corporation common shareholders	$	1.73	$	(0.12	)

Diluted income (loss) per share attributable to Peerless Systems Corporation common shareholders	$	1.65	$	(0.12	)

~~Compensation expense for share-based awards granted is recognized using a straight-line or single-option method.~~ The ~~Company~~unaudited ~~recognizes~~pro ~~these~~forma ~~compensation~~data ~~costs over the service period of the award, which~~ is ~~generally~~not ~~the~~indicative ~~option vesting term~~ of ~~three~~future orresults ~~four years. In determining the fair value~~ of ~~options~~operations 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~~what towould ~~the~~have ~~expected~~resulted ~~term~~if of the ~~option. The~~acquisition ~~expected~~had ~~life~~actually inoccurred ~~years~~as ~~is based on historical actual stock option exercise experience. The expected volatility was based upon the changes in the price~~ of ~~the~~February ~~Company’s~~1, ~~common stock over a five year period~~2013. ~~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 stock3. ~~On July 16~~ Cash, ~~2014,~~Cash ~~the Company granted a stock option to its Chief Financial Officer to purchase 15~~Equivalents,~~000~~ ~~shares~~and ofMarketable ~~the Company’s common stock.~~Securities

~~For~~As ~~the~~of ~~three~~October ~~months ended July~~ 31, 2014 and ~~2013,~~January ~~the Company recorded a total of approximately $10~~31,~~000~~ ~~and $25~~2014,~~000,~~ ~~respectively~~cash, incash ~~stock option expense related to stock options awarded. For the six months ended July 31~~equivalents, ~~2014~~ and ~~2013,~~marketable ~~the~~securities ~~Company~~included ~~recorded~~the afollowing ~~total of approximately $23,000 and $52,000 respectively,~~ (in ~~stock option expense related to stock options awarded.~~ thousands):

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:

October 31, 2014
					Unrealized Losses		Unrealized Losses		Estimated
			Unrealized		Less Than		12 Months or		Fair
	Cost		Gains		12 Months		Longer		Value
Cash and cash equivalents	$	11,588	$	-	$	-	$	-	$	11,588
Exchange traded marketable securities		143		6		-		-		149
Total	$	11,731	$	6	$	-	$	-	$	11,737

						Weighted
January 31, 2014
				Weighted		Average Remaining
						Unrealized Losses			Unrealized Losses		Estimated
				Average		Contractual			Aggregate
				Unrealized		Less Than			12 Months or		Fair
				Exercise		Term			Intrinsic
	Cost			Gains		12 Months			Longer		Value
	Options			Price		(Years)			Value
Cash and cash equivalents	$	7,962		$	-	$	-		$	-	$	7,962
	(In thousands, except per share amounts)
Exchange traded marketable securities		4,521			-		(220	)		-		4,301
Balance outstanding January 31, 2014		400		$	2.61		4.90		$	439
Total	$	12,483		$	-	$	(220	)	$	-	$	12,263
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

AsCash equivalents are comprised of ~~July~~money ~~31,~~market ~~2014,~~funds ~~there~~traded ~~was~~in ~~approximately~~an ~~$54,000~~active ofmarket ~~total~~with ~~unrecognized~~no ~~compensation~~restrictions ~~cost~~and ~~related~~money tomarket ~~unvested~~savings ~~option-based~~accounts. ~~compensation~~On ~~arrangements~~a ~~granted~~recurring ~~under~~basis, the ~~2005~~Company ~~plan~~measures its investments, cash equivalents, and marketable securities at fair value. ~~That~~Cash, ~~cost~~cash isequivalents, ~~expected~~and tomarketable besecurities ~~recognized~~are ~~over~~classified awithin ~~weighted-average~~Level ~~period~~I of 2the fair value hierarchy because they are valued using observable inputs, such as quoted prices in active markets.~~0 years.~~

InDuring ~~addition~~the tothree ~~the~~month ~~stock~~period ~~option~~ended ~~expense~~October 31, ~~for~~2014, the ~~three~~Company ~~months~~had ~~ended~~no ~~July~~realized ~~31,~~gain ~~2014~~or ~~and~~loss ~~2013,~~on ~~the~~investment ~~Company~~while ~~also~~it recorded aapproximately ~~total~~$0.1 ofmillion ~~approximately~~in ~~$5,000~~realized ~~and~~loss ~~$324,000,~~for ~~respectively,~~the innine ~~stock~~months ~~compensation~~then ~~expense~~ended, ~~related~~as compared to ~~restricted~~realized ~~stock~~loss ~~awarded~~of $0. ~~For~~4 ~~the~~million ~~six~~and ~~months~~$1.5 ~~ended~~million ~~July~~for ~~31,~~the ~~2014~~three months and ~~July~~nine months ended October 31, 2013, ~~the~~respectively. Financial ~~Company~~instruments ~~recorded~~purchased with intention to sell over a ~~total~~short ofperiod ~~approximately~~were ~~$18,000~~classified as trading securities. Realized gains and ~~$341,000,~~losses ~~respectively,~~on intrading ~~stock~~securities ~~compensation~~were ~~expense~~calculated ~~related~~using toaverage ~~restricted~~cost ~~stock~~method. The ~~awarded~~Company's investments consist of available-for-sale securities as of October 31, 2014 and January 31, 2014, respectively.

~~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~~4. ~~On July 16, 2014, the Company granted 15,000 shares of restricted stock to its Chief Financial Officer.~~Inventory

InInventory ~~connection~~consisted ~~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~~following 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.components:

	October 31, 2014		January 31, 2014

Raw Materials	$	1,103	$	-
Work-in-Process		277		-
Finished Goods		402		-
Total Inventory	$	1,782	$	-

5. Inventory Finance Notes Receivable and Allowance for Loan Loss

Deer Valley offers inventory-secured financing for its products to a limited number of qualified retail dealers and developers. Administrative services for inventory-secured financing are provided by Triad Financial Services, Inc. of Jacksonville, Florida. Finance contracts require periodic installments of principal and interest over periods of up to 24 months. These notes are secured by the inventory collateral and other security depending on borrower circumstances.

Page 10

Inventory finance notes receivable, net, consisted of the following:

	October 31,			January 31,
	2014			2014
Inventory finance notes receivable	$	3,949		$	-
Allowance for loan loss		(131	)		-
Inventory finance notes receivable, net of loan loss reserve		3,818			-
Current portion of inventory finance notes receivables		(2,146	)		-
Inventory finance notes receivable, net of current portion	$	1,672		$	-

With respect to our inventory finance notes receivable, approximately 80% of the risk of loss is spread over five borrowers. In addition to historical experience, borrower inventory levels and activity are monitored in conjunction with a third-party provider to estimate the potential for loss. Deer Valley anticipates it will be able to resell any repossessed homes, thereby mitigating its loan loss ratio. If a default occurs and collateral is lost, Deer Valley is exposed to loss of the full value of the note receivable.

6. Accrued Expenses

Accrued expenses consisted of the following:

	October 31,		January 31,
	2014		2014

Accrued dealer incentive program	$	308	$	-
Accrued third party billings		607		-
Accrued compensation		585		60
Accrued royalty		34		137
Accrued insurance		59		-
Accrued repurchase commitment (Note 15)		204		-
Customer deposits		430		-
Other		136		71

Total Accrued Expenses	$	2,363	$	268

7. Product Warranties

Deer Valley provides the retail home buyer a one-year limited warranty covering defects in material or workmanship in home structure, plumbing and electrical systems. Deer Valley’s estimated warranty costs are accrued at the time of the sale to the dealer following industry standards and historical warranty cost incurred. Periodic adjustments to the estimated warranty accrual are made as events occur which indicate changes are necessary. Management reviews its warranty requirements at the close of each reporting period and adjusts the reserves accordingly.

8. Revolving Credit Loans

Effective September 10, 2013, Deer Valley renewed its $5,000,000 Revolving Credit Loan and Security Agreement with its primary bank, used for display model financing for dealers of the products produced by DVH (the “Display Model LOC”). The Display Model LOC has a two year term and has a variable interest rate at 4.00% above LIBOR or 4.15580% at September 27, 2014. As of October 6, 2014, Deer Valley had no outstanding balance under this revolving credit loan.

Effective September 10, 2013, Deer Valley renewed its $3,000,000 Revolving Credit Loan and Security Agreement with its primary bank, used for short term working capital financing, letters of credit and as a bridge loan on financing the sale of retail units by DVH (the “Working Capital LOC”). The Working Capital LOC has a two year term and has a variable interest rate at 2.50% above LIBOR or 2.6558% at September 27, 2014. As of September 27, 2014, Deer Valley had an outstanding balance of $700,000 under this revolving credit loan.

On April 12, 2013 Deer Valley entered into a $2,500,000 Revolving Credit Loan and Security Agreement with its primary bank, used for funding “construction-to-permanent loans” prior to the issue of a certificate of occupancy and ultimate resale of the loan to either private or government controlled long term financing entities. On August 19, 2014 Deer Valley discontinued this loan program and closed this credit facility.

The amount available under Deer Valley’s revolving credit loans is equal to the lesser of $8,000,000 or an amount calculated based on defined percentages of accounts receivable and inventories reduced by any outstanding letters of credit. At September 27, 2014, $3,479,453 was available under the revolving credit loans after deducting letters of credit of $65,000. Additionally, borrowings under these revolving credit facilities are subject to certain financial covenants. As of September 27, 2014 (the date of the last covenant testing), Deer Valley was in compliance with all covenants.

Page 11

In addition to the revolving line of credit described in the preceding paragraph, Deer Valley, during its normal course of business, is required to issue irrevocable standby letters of credit in favor of independent third party beneficiaries to cover obligations under insurance policies. As of October 6, 2014, no amounts had been drawn on the above irrevocable letters of credit by the beneficiaries.

9. Long Term Debt

On May 26, 2006, Deer Valley entered into a Loan Agreement with Fifth Third Bank (the “Lender”) providing for a loan of $2,000,000 (the "Real Estate Loan") evidenced by a promissory note and secured by a first mortgage on Deer Valley’s properties in Guin and Sulligent, Alabama, including the structures and fixtures located thereon, as well as Deer Valley’s interest in any lease thereof. The Loan had a term from May 26, 2006 through June 1, 2011 and has a variable interest rate at 2.25% above LIBOR. There is no prepayment penalty. Future advances are available under the Loan Agreement, subject to approval by the Lender. On June 1, 2011 Fifth Third Bank agreed to extend the maturity date on the loan until an amendment to the loan agreement could be finalized.

On July 8, 2011, Deer Valley and the Lender entered into that certain Amendment to Loan Agreement effective June 1, 2011, pursuant to which, among matters, (a) Deer Valley made a cash payment to reduce the outstanding principal balance of the Real Estate Loan to $1,256,000, (b) the term of the Real Estate Loan was extended to June 1, 2016, and (c) the variable interest rate was set at 400 basis points (4.00%) above the One-Month LIBOR-Index Rate which was 0.1559% as of October 31, 2014. As of October 31, 2014, the remaining balance outstanding was $837,333.

10. Earnings (Loss) Per Share

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

	Three Months Ended Ocotber 31, 2014						Three Months Ended October 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	$	4,010		2,560	$	1.57	$	(259	)		2,638	$	(0.10	)
Effect of Dilutive Securities
Options		—		138		—		—			—		—
Restricted Shares		—		1		—		—			—		—
Diluted EPS
Earnings (loss) available to common stockholders with assumed conversions	$	4,010		2,699	$	1.49	$	(259	)		2,638	$	(0.10	)

	Nine Months Ended October 31, 2014						Nine Months Ended October 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	$	4,196		2,549	$	1.65	$	(524	)		2,768	$	(0.19	)
Effect of Dilutive Securities
Options		—		123		—		—			—		—
Restricted Shares		—		—		—		—			—		—
Diluted EPS
Earnings (loss) available to common stockholders with assumed conversions	$	4,196		2,672	$	1.57	$	(524	)		2,768	$	(0.19	)

Potentially dilutive options in the aggregate of approximately 49,000 and 98,000 for the three months and nine months ended October 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.

Page 12

Stock options in the aggregate of approximately 117,000 and 122,000 for the three and nine months ended October 31, 2013 were excluded from the diluted EPS calculation as the Company had losses for those periods and their effect would have been anti-dilutive.

11. 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 October1996, 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.

Pursuant to the Company’s compensation plan for its Board of Directors, on July 1, 2014, the Company automatically granted stock options to its non-employee directors upon their re-election to the Board at the Company’s 2014 annual meeting of stockholders. Such directors were granted options 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 October 31, 2014 and 2013, the Company recorded a total of approximately $10,000 and $23,000, respectively, in stock option expense related to stock options awarded. For the nine months ended October 31, 2014 and 2013, the Company recorded a total of approximately $33,000 and $75,000 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 nine months ended October 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
Granted		-		$	-
Exercised		-		$	-
Canceled or expired		-		$	-
Balance outstanding October 31, 2014		371		$	2.59		5.33	$	756
Stock options exercisable, October 31, 2014		336		$	2.48		4.96	$	724

As of October 31, 2014, there was approximately $43,000 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 1.8 years.

Page 13

In addition to the stock option expense, for the three months ended October 31, 2014 and 2013, the Company also recorded a total of approximately $26,000 and $406,000, respectively, in stock compensation expense related to restricted stock awarded. For the nine months ended October 31, 2014 and October 31, 2013, the Company recorded a total of approximately $44,000 and $747,000, respectively, in stock compensation expense related to restricted stock awarded.

Pursuant to the Company’s compensation plan for its Board of Directors, on July 1, 2014, the Company automatically 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.

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~~October 31, 2014. AsOn August 1, 2013, 62,500 shares were vested under this grant with a fair market value of ~~July~~$235,000. 31On September 23, 2014, 62the remaining 187,500 shares were vested under this grant with a fair market value of $~~235~~840,000, resulting in a windfall tax benefit of approximately $100,000.

~~The~~Page 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: 14

				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 total fair value, based on the price on the day of grant, for restricted stock awards that vested during the three months and nine months ended October 31, 2014, was approximately $588,000 and $644,000 respectively. A summary of the Company’s non-vested restricted stock awards as of October 31, 2014 is as follows:

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.

				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
Vested		(187,500	)		3.14
Non-vested stock awards as of October 31, 2014		27,153		$	3.68

~~5. Concentration~~The unrecognized compensation for non-vested restricted stock awards of ~~Revenues~~approximately $73,000 will be recognized over a weighted-average period of 1.0 years.

~~During the three months ended July 31, 2014 and 2013, three customers, Kyocera Document Solutions, Inc (“KDS”), Oki Data Corporation (“Oki”) and Novell Inc~~12. ~~(“Novell”), accounted for approximately 91% and 97% of the Company’s revenue, respectively.~~ ~~During~~Concentration ~~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.~~ Revenues

AtDuring ~~July~~the three months ended October 31, 2014 and 2013, three customers, ~~represented~~Kyocera 92Document Solutions, Inc (“KDS”), Oki Data Corporation (“Oki”) and Novell Inc. (“Novell”), accounted for approximately 96% and 94% of ~~total~~the ~~accounts~~Company’s ~~receivable~~revenue, ~~and~~respectively. During atthe ~~January~~nine months ended October 31, 2014 and 2013, the same three customers ~~collectively~~(KDS, ~~represented~~Oki and Novell) accounted for approximately 90% and 93% of ~~total~~the ~~accounts~~Company’s ~~receivable~~revenue, respectively.

~~Page~~At 11October 31, 2014, three customers represented 96% of total accounts receivable and at January 31, 2014 three customers collectively represented 93% of total accounts receivable.

613. Common Stock Repurchases

During the three months ended ~~July~~October 31, 2014, the Company repurchased 3080,~~850~~428 shares of its common stock for an aggregate purchase price of $~~113~~344,~~279~~995, or an average cost of $34.6729 per share. During the ~~six~~nine months ended ~~July~~October 31, 2014, the Company repurchased 53134,~~820~~248 shares of its common stock for an aggregate purchase price of $~~198~~543,~~695~~690 or an average cost of $34.6905 per share. These repurchases include 364,~~935~~591 shares delivered to the Company in order to ~~withhold~~satisfy $14285,~~205~~945 toin ~~pay a~~ tax ~~liability~~withholding liabilities 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.~~

714. Income Taxes

~~The~~On February 1, 2007, the Company ~~reported~~adopted ~~tax~~ASC ~~provision~~740-10 ~~(benefit)~~which ofclarifies ~~approximately~~the ~~$84,000~~accounting and ~~($166,000)~~reporting for ~~the~~uncertainties ~~three~~in ~~months~~income ~~ended~~tax ~~July~~law. ASC ~~31,~~740-10 ~~2014~~prescribes ~~and~~a ~~2013,~~comprehensive ~~respectively. The~~model ~~effective~~for ~~tax~~the ~~rate~~financial ~~was~~statement ~~38.2%~~recognition, measurement, presentation and ~~29.4%~~disclosure ~~for~~of ~~the~~uncertain ~~three~~tax ~~months~~positions ~~ended~~taken ~~July~~or ~~31,~~expected ~~2014~~to ~~and~~be ~~2013,~~taken ~~respectively~~in income tax returns. This ~~The~~Interpretation ~~Company~~requires ~~reported~~that the tax ~~provision~~effects ~~(benefit)~~ of ~~approximately~~a ~~$118,000~~position ~~and~~be ~~($80,000)~~recognized ~~for~~only ~~the~~if ~~six~~it ~~months~~is ~~ended~~“more-likely-than-not” ~~July~~to ~~31,~~be ~~2014~~sustained ~~and~~by ~~2013,~~the ~~respectively~~taxing authority as of the reporting date. ~~The~~If ~~effective~~the tax ~~rate~~position ~~was~~is ~~38.7%~~not ~~and~~considered ~~23.3%~~“more-likely-than-not” ~~for~~to ~~the~~be sustained, ~~six~~then ~~months~~no ~~ended~~benefits ~~July~~of ~~31,~~the ~~2014~~position ~~and~~are ~~2013,~~to ~~respectively~~be recognized.

~~The~~During ~~effective tax rate for~~ the ~~six~~three months ended ~~July~~October 31, 2014 ~~was~~the ~~higher~~Company ~~than~~reversed the ~~statutory~~last ~~rate~~remaining $290,000 ~~primarily~~of ~~attributable~~tax toliabilities, ~~the~~consisting ~~state~~of ~~income~~$260,000 ~~tax payable~~ in ~~Connecticut.~~an ~~The~~unrecognized ~~effective~~federal income tax ~~rate~~benefit ~~for~~and ~~the~~approximately ~~six~~$30,000 ~~months~~in ~~ended~~related ~~July~~accrued ~~31,~~interest ~~2013~~expense. This ~~was~~reversal ~~lower~~of ~~than~~tax ~~the~~liabilities ~~statutory~~related ~~rate, due~~ to aan ~~discrete~~unrecognized tax ~~expense~~benefit ~~related~~from to the ~~reversal~~Company’s oftax ~~certain~~position ~~deferred~~taken ~~tax~~for ~~assets~~the offiscal ~~$112,000~~year ~~resulting~~ended ~~from~~January ~~the~~31, ~~forfeiture~~2011, ofin ~~certain~~connection ~~restricted~~with ~~stock~~the ~~effective~~completion ~~July~~of ~~11,~~the ~~2013,~~three ~~net~~year statute of ~~the~~limitations ~~changes~~period inapplicable ~~valuation~~to ~~allowance~~the ofcorresponding ~~$63,000~~tax return.

The ~~majority~~statute of ~~the~~limitations ~~changes~~with inrespect ~~deferred tax assets relates~~ to ~~the~~our ~~increase~~federal inincome ~~capital~~tax ~~loss~~returns ~~carryover~~has expired for ~~the~~all ~~state~~years ofthrough ~~Connecticut~~fiscal ~~offset~~year ~~by the decrease in unrealized loss included in accumulated other comprehensive income~~2011. AsThe ~~of July 31, 2014, the~~ Company’s ~~had~~New aYork ~~valuation~~State ~~allowance~~corporate oftax ~~approximately~~returns ~~$248,000~~for ~~against~~the ~~certain~~fiscal ~~deferred~~years ~~tax assets~~2008, ~~for~~2009 ~~which~~and ~~realization~~2010 ~~cannot~~were beunder ~~considered~~examination. ~~more~~The ~~likely~~Company ~~than~~was ~~not~~notified aton ~~this~~November ~~time.~~13, ~~Such~~2014 ~~deferred~~by ~~tax~~the ~~assets~~New ~~relate~~York toState ~~stock~~Department ~~compensation~~of ~~expenses~~Taxation ~~incurred~~and byFinance ~~the~~that ~~Company~~those inreturns ~~the~~were ~~form~~accepted ofas ~~equity awards~~filed. ~~Management~~No ~~assesses~~changes ~~the~~were ~~need~~made ~~for~~to the ~~valuation~~tax ~~allowance on a quarterly basis~~returns.

~~The~~As ~~Company’s~~part ~~New~~of ~~York~~the ~~State~~assets ~~corporate~~acquired in connection with the Deer Valley transaction, Peerless added $1,211,000 in deferred tax ~~returns~~assets to our consolidated balance sheet as of October 31, 2014. Excluding that effect, the majority of the changes in deferred tax assets relates to the increase in capital loss carryover for the ~~fiscal~~state ~~years~~of ~~2008~~Connecticut ~~and~~offset ~~2009~~by ~~are~~the ~~currently~~decrease ~~under~~in ~~examination~~unrealized loss included in accumulated other comprehensive income and ~~remained~~the ~~open~~vesting asof certain restricted stock awards. As of ~~September~~October 1231, 2014., ~~The~~the Company had ~~one~~a ~~employee~~valuation allowance of approximately $146,000 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 ~~New~~the ~~York~~form ~~State~~of ~~during~~equity aawards ~~portion~~and the capital loss carryover for the state of ~~those~~Connecticut. ~~periods~~Management assesses the need for the valuation allowance on a quarterly basis.

8.Page ~~Subsequent Event~~15

OnAs ~~September~~discussed 3above, ~~2014,~~for the ~~Company~~nine ~~announced~~month ~~that~~period itended ~~has~~October ~~entered~~31, ~~into~~2014, athe ~~definitive~~provision ~~agreement with Vicis Capital Master Fund and Deer Valley Corporation~~ (~~OTC: DVLY~~benefit) tofor ~~acquire~~income antaxes ~~aggregate~~includes ofa ~~12,436,458~~reversal ~~shares~~ of ~~Deer~~tax ~~Valley’s~~liability ~~common~~of ~~stock~~$260,000 ~~representing~~related ~~approximately~~to ~~80%~~certain oftax ~~its~~position ~~issued~~taken ~~and~~in ~~outstanding~~prior ~~shares~~year, ~~for~~and anchanges ~~aggregate~~of ~~purchase~~valuation ~~price~~allowance of approximately $3108,~~681,900.~~000 ~~Consummation~~related ~~of the transaction is expected~~ to ~~occur~~stock ~~prior~~compensation toexpenses ~~September~~and ~~30,~~certain ~~2014,~~capital ~~and~~loss iscarryover ~~contingent~~of ~~upon~~the ~~satisfaction~~state of ~~customary~~Connecticut. ~~closing~~For ~~conditions~~the ~~and~~nine ~~consents.~~month ~~Deer~~period ~~Valley,~~ended ~~through~~October ~~its~~31, ~~subsidiaries~~2014, ~~designs~~the ~~and~~provision ~~manufactures~~(benefit) ~~factory~~for ~~built~~income ~~homes~~taxes ~~and~~also ~~provides~~includes ~~dealer~~$36,000 ~~inventory-secured financing~~ for ~~its~~state ~~factory~~income ~~built homes~~taxes. ~~Deer~~Additionally, ~~Valley’s~~for ~~homes~~the ~~are~~nine ~~marketed~~months inended 14October ~~states~~31, ~~through~~2014, awe ~~network~~recorded ofa ~~independent~~gain ~~dealers,~~on ~~builders,~~bargain ~~developers~~purchase ~~and~~of ~~government~~approximately ~~agencies~~$3.6 ~~located~~million ~~primarily~~which inis ~~the~~a ~~southeastern~~non-taxable ~~and~~event. ~~south~~These ~~central~~are ~~regions of~~ the ~~United~~principal ~~States.~~reasons ~~The~~why ~~Company~~our iseffective ~~expected~~tax torate ~~realize~~is adifferent ~~gain~~than ofthe ~~bargain~~federal ~~purchase~~statutory ~~upon closing~~rate.

~~Page~~15. 12Commitments and Contingencies

Litigation

In the normal course of business Deer Valley is subject to claims and litigation. Deer Valley’s management is of the opinion that, based on information available, such legal matters will not have a material adverse effect on its financial position or results of operation.

Reserve for Repurchase Commitments

Deer Valley is contingently liable under the terms of repurchase agreements with financial institutions providing inventory financing for retailers of Deer Valley’s products. These arrangements, which are customary in the industry, provide for the repurchase of products sold to retailers in the event of default by the retailer. The risk of loss under these agreements is spread over numerous retailers. The price Deer Valley is obligated to pay generally declines over the period of the agreement (typically 18 to 24 months) and the risk of loss is further reduced by the sale value of the repurchased homes. The maximum amount for which Deer Valley is contingently liable under repurchase agreements is approximately $6,800,000 at September 27, 2014. As of September 27, 2014 the Company reserved $203,945 for future repurchase losses, based on prior experience and an evaluation of dealers’ financial conditions. Deer Valley to date has not experienced significant losses under these agreements, and management does not expect any future losses to have a material effect on the accompanying financial statements.

Page 16

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

Highlights

WeAs previously announced, onwe ~~September~~completed 3,the ~~2014~~Deer ~~that~~Valley weacquisition ~~have~~on ~~entered~~October ~~into~~6, a2014 ~~definitive~~in ~~agreement~~which towe ~~acquire~~acquired approximately 80% of the issued and outstanding shares of Deer Valley ~~Corporation (“DVC”)~~ for an aggregate purchase price of $3,681,900. WeDeer ~~expect~~Valley tobecame ~~close~~our ~~this~~80% ~~transaction~~owned ~~prior~~subsidiary toon ~~September~~that 30date. However, ~~2014.~~as ~~DVC~~discussed ~~through~~in ~~its~~footnote ~~wholly~~1 ~~owned~~to ~~subsidiaries~~the ~~Deer~~condensed ~~Valley~~consolidated ~~Homebuilders,~~financial ~~Inc.~~statements, Deer Valley’s ~~Financial~~fiscal ~~Corp~~year ~~(“DVFC”)~~ends ~~and~~each ~~Deer~~year ~~Valley~~on ~~Home~~the ~~Repair~~Saturday ~~Services,~~nearest ~~Inc.,~~to ~~designs~~December 31st and ~~manufactures~~its ~~factory~~fiscal ~~built~~quarters ~~homes~~end ~~and~~approximately ~~provides~~one ~~dealer~~month ~~inventory-secured~~prior ~~financing~~to ~~for~~our ~~its~~reporting ~~factory~~periods. ~~built~~Deer ~~homes~~Valley is reflected in our consolidated financial statement utilizing a one month lag. Therefore, since Deer Valley’s ~~manufacturing~~recent ~~plant~~quarter ~~located~~ended inon ~~Guin~~September 27, ~~Alabama~~2014, ~~produces~~prior ~~homes~~to ~~which~~the ~~are~~consummation ~~marketed~~of inthe 14transaction, ~~states~~Deer ~~through~~Valley ais ~~network~~only ofincluded ~~independent~~in ~~dealers,~~our ~~builders,~~Unaudited ~~developers~~Condensed ~~and~~Consolidated ~~government~~Balance ~~agencies~~Sheets ~~located~~at ~~primarily~~October in31, ~~the~~2014 ~~southeastern~~ and ~~south~~not ~~central~~included ~~regions~~in ofour ~~the~~Unaudited ~~United~~Condensed ~~States.~~Consolidated ~~Inventory-secured~~Statements ~~loan~~of ~~financing~~Operations for ~~its~~the ~~homes~~three ismonths ~~offered~~and tonine ~~qualified~~months ~~retail~~ended ~~dealers~~October ~~and developers~~31, ~~through DVFC~~2014.

For the three months ended ~~July~~October 31, 2014, our revenue decreased by 3250% to $458,000 as compared to $920,000 recorded for the same period in 2013.8 For the nine months ended October 31, 2014, our revenue decreased by 45% to $~~569~~1,574,000 as compared to $~~847~~2,868,000 recorded for the same period in 2013. This decrease is primarily attributable to a large customer whose revenue dropped significantly during the three ~~months~~month and nine month period ended ~~July~~October 31, 2014 when compared to the same ~~period~~periods in 2013. The ~~32.8~~50% 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~~Page 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 3.17

~~Page~~Deer 13Valley Overview

Deer Valley, through its wholly owned subsidiaries Deer Valley Homebuilders, Inc. and Deer Valley Financial Corp., designs and manufactures factory built homes, and provides dealer inventory-secured financing, and warranty and repair services for its factory built homes. The Company’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 is offered to qualified retail dealers and developers through DVFC for homes Deer Valley manufactures.

Deer Valley’s business segments consist of factory-built housing and financial services. Its financial services provide qualified independent retail dealers and developers with inventory-secured financing for homes Deer Valley produces. Deer Valley does not maintain separate operating segments for regions and does not separately report financial information by geographic sales area because they are similar products using similar production techniques and sold to the same class of customer.

Manufactured Housing Industry Outlook

As a result of the “great recession,” the manufactured housing industry and Deer Valley continue to operate at historically low production and shipment levels. According to data provided by the Manufactured Housing Institute (“MHI”), the entire manufactured housing industry shipped approximately 60,000 HUD Code (“Manufactured Home Construction and Safety Standards “) homes during the calendar year 2013, compared to approximately 55,000 homes shipped in 2012 and 52,000 homes shipped in 2011. From January to August 2014, industry HUD code shipments were approximately 42,000 units; an increase of approximately 6 percent from the same period a year ago.

While we are encouraged by the modest improvement in shipments of HUD code homes during the most recent three years, the manufactured housing industry and Deer Valley’s home sales continue to struggle due to ongoing economic challenges. Low consumer confidence levels and high unemployment and underemployment rates are two of the most significant challenges affecting buyers of manufactured homes. Low consumer confidence regarding the outlook for jobs is not conducive for potential customers to commit to a home purchase. Historically, lower-income households are among the largest segments of new manufactured home purchasers. Lower-income households are particularly affected by high unemployment and underemployment rates.

Sales activity for Deer Valley and the manufactured housing industry appear to be showing signs of improvement; however, a revival faces multiple obstacles, including competition from distressed sales of site-built homes, historically low interest rates resulting in record affordability of site-built homes, restrictive underwriting guidelines, inconsistent appraisal processes and an undeveloped secondary market for manufactured home loans. We believe the key to full recovery in the manufactured housing industry depends on improved consumer confidence levels and an increased availability of consumer financing for the retail purchase of manufactured homes.

Deer Valley management continues to focus on challenges faced by their industry and the general economy. As part of the Company’s strategic plan, management seeks to identify niche market opportunities where their custom building capabilities provide them with a competitive advantage. Deer Valley continues to focus on the production of custom built, energy efficient, “heavy built homes” and has intensified efforts in innovative exterior elevations to meet the needs of homeowners, dealers. Management continues to focus on operating activities to improve manufacturing efficiencies and maintaining a conservative cost structure. Deer Valley management continuously looks for new market opportunities and ways to expand its product offering by developing innovative product designs and production methods.

Liquidity and Capital Resources

~~Management~~We ~~believes~~believe that ~~the~~we ~~Company~~ currently ~~has~~have sufficient cash flow from operations, cash, and cash equivalents and available revolving credit facilities to meet ~~its~~our short-term working capital ~~requirements~~needs. Our total assets as of ~~July~~October 31, 2014 were $1223.89 million, aan ~~decrease~~increase of ~~9.2~~70% from $14.1 million as of January 31, 2014., ~~This 9.2% decrease is~~ primarily due to ~~repaying~~the ~~broker~~inclusion ~~payable~~ of ~~$1.4~~assets ~~million~~acquired ~~during~~in the ~~six~~Deer ~~month~~Valley ~~months period ended July 31, 2014~~transaction. Our cash and ~~investments~~marketable ~~decreased~~securities ~~marginally~~increased from $10.9 million (net of a broker payable of $1.4 million included in other liabilities) at January 31, 2014 to $1011.87 million at ~~July~~October 31, 2014. ~~Stockholders~~The Company’s equity as of ~~July~~October 31, 2014 was $1216.31 million, an increase of $04.20 million from $12.1 million as of January 31, 2014, primarily as a results from net income earned for the nine months ended October 31, 2014 which includes $3.6 million in gain on bargain purchase resulting from the Deer Valley acquisition .

Our operations used $10.35 million in cash during the ~~six~~nine months ended ~~July~~October 31, 2014, compared to $1.35 million in cash provided by operations during the ~~six~~nine months ended ~~July~~October 31, 2013,. ~~primarily~~The asdecrease is primarily a result of repaying a broker payable of $1.4 million during the ~~six~~nine ~~months~~month period ended ~~July~~October 31, 2014. During the ~~six~~nine ~~months~~month period ended ~~July~~October 31, 2014, $4.46 million in cash was generated by our investing activities, mainly due to the dispositions of substantially all of our investment in marketable securities during the period and the net cash acquired from Deer Valley.

AtPage 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.18

At October 31, 2014, our principal source of liquidity, cash and cash equivalents was $11.6 million, an increase of $3.6 million from $8.0 million as of January 31, 2014, primarily attributable to the net proceeds from the sale of substantially all of our marketable securities during the period. During the nine months ended October 31, 2014, our cash position increased by approximately $294,000 resulting from the Deer Valley acquisition.

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~~Peerless’ significant accounting policies since January 31, 2014. Deer Valley describes its significant accounting policies in Item 7, Management’s Discussion and Analysis or Plan of Operation, in its Annual Report on Form 10-K for the year ended December 28, 2013. There has been no change in Deer Valley’ significant accounting policies since December 28, 2013.

Results of Operations

Revenues

Revenues were $~~569~~458,000 for the three months ended ~~July~~October 31, 2014, compared to $~~847~~920,000 for the three months ended ~~July~~October 31, 2013. This ~~32.8~~50% decrease in revenue is primarily attributable to a large customer whose revenue dropped significantly during the three months ended ~~July~~October 31, 2014 when compared to the same period in 2013. The ~~32.8~~50% decrease in revenue is also attributable in part to the declining revenue trajectory from our other OEM customers.

Revenues were $1,~~116~~574,000 for the ~~six~~nine months ended ~~July~~October 31, 2014, compared to $12,~~948~~868,000 for the ~~six~~nine months ended ~~July~~October 31, 2013. This ~~42.7~~45% decrease in revenue is primarily attributable to a large customer whose revenue dropped significantly during the ~~six~~nine months ended ~~July~~October 31, 2014 when compared to the same period in 2013. The ~~42.7~~45% 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 negative $2239,000 ~~or 3.9% of revenues~~ for the three months ended ~~July~~October 31, 2014, ~~compared~~primarily toresulting from an $4382,000 oradjustment ~~5.1%~~made ofduring ~~revenues~~this ~~for~~period ~~the~~relating ~~three~~to ~~months~~a ~~ended~~block ~~July~~license ~~31,~~where ~~2013.~~the ~~The~~originally ~~decrease~~projected inproduct ~~cost~~mix ofincluded ~~revenues~~the asassumption that a greater percentage of ~~revenue~~the ~~was~~products ~~primarily~~sold ~~due~~would toinclude ~~the~~third ~~difference~~party intechnology. ~~licensing~~However, ~~fees~~the ~~being~~actual ~~paid~~product tomix included much less third ~~parties~~party ~~resulting~~technology ~~from~~than awhat ~~change~~was included in the ~~revenue~~original ~~stream~~projections. ~~from~~Without ~~our~~the ~~customers~~effect ~~and~~of ~~the~~this ~~mix~~adjustment, product licensing costs would have been $43,000 or 9.4% of ~~products~~revenues ~~sold~~for bythe ~~our~~three ~~customers~~months ~~during~~ended October 31, 2014, compared to $86,000 or 9.3% of revenues for the ~~period~~three months ended October 31, 2013.

Product licensing costs were $~~100~~61,000 or 93.09% of revenues for the ~~six~~nine months ended ~~July~~October 31, 2014, compared to $~~171~~257,000 or 89.80% of revenue for the ~~six~~nine months ended ~~July~~October 31, 2013. ~~The~~During ~~marginal~~the ~~increase~~nine inmonth ~~cost~~period ofended ~~revenues~~October as31, a2014 ~~percentage~~and of2013, ~~revenue~~there ~~was~~were adjustments, primarily ~~due~~related to ~~the~~block ~~difference~~licenses sold in ~~licensing~~prior ~~fees~~years, ~~being~~made ~~paid~~in tothe ~~third~~amount ~~parties~~$106,000 ~~resulting~~and ~~from~~$32,000 ato ~~change~~reduce insuch costs, respectively. Without the ~~revenue~~effect ~~stream~~of ~~from~~these ~~our~~adjustments, ~~customers~~product ~~and~~licensing ~~the~~costs ~~mix~~would have been $167,000 or 10.6% of ~~products~~revenues ~~sold~~for bythe ~~our~~nine ~~customers~~months ~~during~~ended October 31, 2014, compared to $289,000 or 10.1% of revenues for the ~~period~~nine months ended October 31, 2013.

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~~53% to $~~325~~342,000 for the three months ended ~~July~~October 31, 2014, from $~~667~~723,000 for the three months ended ~~July~~October 31, 2013. ~~that~~The ~~include~~operating expenses for the three months ended October 31, 2013 included $~~313~~393,000 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 411 of the financial statement presented in Item 1. Excluding the effect of this stock-based compensation, operating expenses ~~declined~~increased 83.27% for the three ~~months~~month period ended ~~July~~October 31, 2014 as compared to the same period in 2013, primarily due to the ~~decrease~~increase in transaction expenses related to the Deer Valley acquisition offset by certain decreases in consulting expenses and professional fees. In connection with the Deer Valley acquisition, we incurred $69,000 in transaction expenses for the three months ended October 31, 2014.

Total operating expenses decreased ~~41.3~~46% to $~~590~~932,000 for the ~~six~~nine months ended ~~July~~October 31, 2014, from $1,~~005~~728,000 for the ~~six~~nine months ended ~~July~~October 31, 2013. ~~that~~The ~~include~~operating expenses for the three months ended October 31, 2013 included $~~313~~706,000 related to the stock-based compensation as discussed above. Excluding the effect of this stock-based compensation, operating expenses declined 148.78% for the ~~six~~nine ~~months~~month period ended ~~July~~October 31, 2014 as compared to the same period in 2013, ~~also~~ primarily due to the decrease in consulting expenses and professional fees offset by the increase in transaction expenses related to the Deer Valley acquisition which amounted to approximately $155,000 for the nine months ended October 31, 2014.

Page 19

Income from Operations

Income from operations was $~~222~~155,000 for the three months ended ~~July~~October 31, 2014, compared to $~~137~~111,000 for the three months ended ~~July 31~~October31, 2013. This ~~62.0~~39% increase in income from operation is primarily attributable to lower operating expenses, as discussed above, despite the ~~32.8~~50% drop in revenues during the three months ended ~~July~~October 31, 2014.

Income from operations was $~~426~~581,000 for the ~~six~~nine months ended ~~July~~October 31, 2014, compared to $~~772~~883,000 for the ~~six~~nine months ended ~~July~~October 31, 2013. This ~~44.8~~34% decrease in income from operation is primarily attributable to the ~~42.7~~45% drop in revenue during the ~~six~~nine months ended ~~July~~October 31, 2014.

~~Other~~Gain ~~Loss,~~on ~~Net~~Bargain Purchase

~~Other~~As ~~loss,~~discussed ~~net was~~in $footnote 2~~,000~~ ~~for the three months ended July 31, 2014, as compared~~ to a ~~loss of $702,000 for~~ the ~~three~~condensed ~~months~~consolidated ~~ended~~financial ~~July 31~~statements, ~~2013,~~we ~~due to~~ realized ~~losses~~a gain on ~~sales~~bargain ofpurchase ~~marketable~~from ~~securities in~~ the ~~three~~Deer ~~months~~Valley ~~ended July 31, 2013~~acquisition.

Other ~~loss,~~Income ~~net was $121~~(Loss),~~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.Net

~~Income~~Other ~~Taxes~~income, net was $15,000 for the three months ended October 31, 2014, as compared to a loss of $372,000 for the three months ended October 31, 2013, primarily due to realized losses on marketable securities. There were no realized losses on sales of marketable securities for the three months ended October 31, 2014 as compared to a realized loss of $376,000 for the three months ended October 31, 2013.

~~The~~Other ~~Company~~loss, ~~reported~~net was ~~tax~~a ~~provision~~loss ~~(benefit)~~ of ~~approximately~~ $84106,000 ~~and ($166,000)~~ for the ~~three~~nine months ended ~~July~~October 31, 2014 ~~and 2013~~, as ~~respectively. The~~compared ~~effective~~to a ~~tax~~loss ~~rate~~of ~~was~~$1,488,000 ~~38.2% and 29.4%~~ for the ~~three~~nine months ended ~~July~~October 31, ~~2014 and~~ 2013, ~~respectively.~~due ~~The~~to ~~Company~~lower ~~reported~~realized ~~tax~~losses ~~provision~~on ~~(benefit)~~sales of ~~approximately~~marketable ~~$118,000~~securities ~~and~~in ~~($80,000)~~the current period. Realized loss for the ~~six~~nine months ended ~~July~~October 31, 2014 ~~and~~was ~~2013~~$120,000 ~~respectively. The~~as ~~effective~~compared ~~tax~~to ~~rate~~a ~~was~~realized ~~38.7%~~loss ~~and~~of ~~23.3%~~$1,497,000 for the ~~six~~nine months ended ~~July~~October 31, ~~2014 and~~ 2013~~, respectively~~.

~~The~~Income ~~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.

As discussed in footnote 14 above, for the nine month period ended October 31, 2014, the provision (benefit) for income taxes includes a reversal of a tax liability of $260,000 related to a certain tax position taken in a prior year, and changes of valuation allowance of approximately $108,000 related to stock compensation expenses and a Connecticut capital loss carry forward. For the nine month period ended October 31, 2014, the provision (benefit) for income taxes also includes $36,000 for state income taxes. Additionally, for the nine months ended October 31, 2014, we recorded a gain on bargain purchase of approximately $3.6 million which is a non-taxable event. These are the principal reasons why our effective tax rate is different than the federal statutory rate.

Net Income

Our net income for the three months ended ~~July~~October 31, 2014 was approximately $~~136~~4,010,000 or $01.0557 per basic share and $1.49 per diluted share, compared to a net loss of approximately $~~399~~259,000, or $0.1410 per basic and diluted share, for the three months ended ~~July~~October 31, 2013. WeExcluding ~~had~~the ~~2.5~~effect ~~million~~of ~~and~~the ~~2.8~~gain ~~million~~on ~~weighted~~bargain ~~average~~purchase ~~shares~~which ofis ~~common~~a ~~stock~~non-taxable ~~outstanding~~event, ~~during~~our net income for the three months ended ~~July~~October 31, 2014 ~~and~~would ~~2013,~~have ~~respectively~~been $413,000 ~~used~~or ~~for~~$0.16 ~~the~~per ~~calculation of~~ basic share and ~~diluted~~$0.15 ~~earnings~~ per diluted share.

Our net income for the ~~six~~nine months ended ~~July~~October 31, 2014 was approximately $~~187~~4,196,000 or $01.0765 per basic and $1.57 per diluted share, compared to a net loss of approximately $~~264~~524,000, or $0.0919 per basic and diluted share, for the ~~six~~nine months ended ~~July~~October 31, 2013. WeExcluding ~~had~~the ~~2.5~~effect ~~million~~of ~~and~~the ~~2.8~~gain ~~million~~on ~~weighted~~bargain ~~average~~purchase ~~shares~~which ofis ~~common~~a ~~stock~~non-taxable ~~outstanding~~event, ~~during~~our net income for the ~~six~~nine months ended ~~July~~October 31, 2014 ~~and~~would ~~2013,~~have ~~respectively~~been $599,000 ~~used~~or ~~for~~$0.24 ~~the~~per ~~calculation of~~ basic share and ~~diluted~~$0.22 ~~earnings~~ per diluted share.

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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~~October 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~~October 31, 2014, our disclosure controls and procedures were effective.

(b)

Changes in internal control over financial reporting

In the three months ended ~~July~~October 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 1621

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. Please also refer to the risk factors discussed in Deer Valley’s Annual Report on Form 10-K for the year ended December 28, 2013 filed with the SEC on March 20, 2014.

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~~October 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
August 1 to August 31, 2014		19,121	$	3.71		3,588,017		411,983
June 1 to June 30, 2014		13,136	$	3.66		3,560,129		439,871
September 1 to September 30, 2014		651	$	3.68		3,588,668		411,332
July 1 to July 31, 2014		8,767	$	3.76		3,568,896		431,104
October 1 to October 31, 2014		-	$	-		3,588,668		411,332
Total		26,915	$	3.68
		19,772	$	3.71

The share repurchase plan was approved by the Board in ~~July~~October 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~~October 31, 2014, the Company had repurchased a total of 3,~~568~~588,~~896~~668 shares pursuant to its share repurchase plan for an aggregate consideration of approximately $8,~~760~~833,000 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 1722

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 1823

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~~December 15, 2014

Page 1924

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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