UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

		October 31,				January 31,
		2009				2009
ASSETS
Current assets:
Cash and cash equivalents		$	36,868			$	44,689
Marketable securities			12,588				—
Trade accounts receivable, net			1,598				676
Income tax receivable			352				3,343
Deferred tax asset			805				2,673
Prepaid expenses and other current assets			396				205
Total current assets			52,607				51,586
Property and equipment, net			27				46
Other assets			8				1
Total assets		$	52,642			$	51,633
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	22			$	92
Accrued wages			82				86
Accrued compensated absences			94				102
Accrued product licensing costs			278				4,139
Other current liabilities			322				505
Deferred revenue			459				706
Total current liabilities			1,257				5,630
Other liabilities
Tax liabilities			644				1,511
Total liabilities			1,901				7,141
Stockholders’ equity:
Common stock			19				19
Additional paid-in capital			55,847				55,493
Retained earnings			(817	)			(7,873	)
Accumulated other comprehensive income			134				16
Treasury stock, 2,473 and 1,813 shares at October 31, 2009 and January 31, 2009, respectively			(4,442	)			(3,163	)
Total stockholders’ equity			50,741				44,492
Total liabilities and stockholders’ equity		$	52,642			$	51,633

 

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

 

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PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STAMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

		Three Months Ended								Nine Months Ended
		October 31,								October 31,
		2009				2008				2009				2008
Revenues:
Product licensing		$	682			$	1,299			$	3,359			$	5,148
Engineering services and maintenance			273				333				613				3,059
Total revenues			955				1,632				3,972				8,207
Cost of revenues:
Product licensing			248				526				(1,437	)			4,769
Engineering services and maintenance			54				170				199				1,675
Total cost of revenues			302				696				(1,238	)			6,444
Gross margin			653				936				5,210				1,763
Research and development			-				124				-				1,430
Sales and marketing			143				274				512				1,330
General and administrative			851				911				2,286				6,551
Gain on sale of operating assets			-				-				(3,759	)			(32,912	)
Restructuring charges			-				744				-				1,941
			994				2,053				(961	)			(21,660	)
Income (loss) from operations			(341	)			(1,117	)			6,171				23,423
Other income, net			4,813				352				5,029				848
Income (loss) before income taxes			4,472				(765	)			11,200				24,271
Provision for income taxes			929				398				4,145				10,593
Net income (loss)		$	3,543			$	(1,163	)		$	7,055			$	13,678
Basic earnings (loss) per share		$	0.21			$	(0.06	)		$	0.42			$	0.76
Diluted earnings (loss) per share		$	0.21			$	(0.06	)		$	0.42			$	0.74
Weighted average common shares - outstanding — basic			16,505				18,115				16,688				17,925
Weighted average common shares - outstanding — diluted			16,699				18,115				16,835				18,367

 

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

 

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PEERLESS SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STAMENTS OF CASH FLOWS

(In thousands)

		Nine Months Ended
		October 31,
		2009				2008
Cash flows from operating activities:
Net income		$	7,055			$	13,678
Adjustments to reconcile net income to net cash used by operating activities
Depreciation and amortization			56				251
Share-based compensation			347				1,125
Income tax receivable			2,991				-
Tax liabilities			(867	)			-
Deferred income taxes			1,868				4,940
Gain on sale of operating assets			(3,759	)			(32,912	)
Asset impairment – restructuring			-				112
Other			-				(16	)
Changes in operating assets and liabilities:
Trade accounts receivables			(922	)			1,960
Unbilled receivables			-				675
Prepaid expenses and other assets			(185	)			286
Accounts payable			(70	)			(228	)
Accrued product licensing costs			(3,861	)			2,545
Deferred revenue			(247	)			(368	)
Income taxes payable			-				2,195
Other liabilities			(195	)			176
Net cash provided by (used in) operating activities			2,211				(5,581	)
Cash flows from investing activities:
Purchases of property and equipment			-				(16	)
Purchases of marketable securities			(12,506	)			-
Proceeds from sale of operating assets, net of expenses			3,759				32,723
Purchases of software licenses			(13	)			(63	)
Net cash (used in) provided by investing activities			(8,760	)			32,644
Cash flows from financing activities:
Purchase of treasury stock			(1,279	)			(2,216	)
Purchase of employee stock option			(30	)			-
Proceeds from exercise of common stock options			37				871
Net cash used in financing activities			(1,272	)			(1,345	)
Net (decrease) increase in cash and cash equivalents			(7,821	)			25,718
Cash and cash equivalents, beginning of period			44,689				23,136
Cash and cash equivalents, end of period		$	36,868			$	48,854

 

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

 

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PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.  Basis of Presentation

 

The accompanying unaudited, condensed, consolidated financial statements of Peerless Systems Corporation (the “Company” or “Peerless”) have been prepared pursuant to the rules of the SEC for Quarterly Reports on Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles.  The 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.  These statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009, filed with the SEC on May 1, 2009.  The 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.

 

We have evaluated subsequent events through December 11, 2009, the date these consolidated financial statements were issued, and concluded no other subsequent events required disclosure or recognition.

 

2.  Recent Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the FASB Accounting Standards Codification ™ (“ASC”) as the sole source of authoritative nongovernmental GAAP. All non-grandfathered non-SEC accounting literature has been superseded by the ASC. The ASC does not change how the Company accounts for its transactions or the nature of related disclosures made. Instead, when referring to guidance issued by the FASB, the Company refers to topics in the ASC rather than individual pronouncements. The above change was made effective by the FASB for financial statements issued for interim and annual periods ending after September 15, 2009. As a result of the Company’s implementation of the ASC in this quarterly report and to facilitate understanding of the impact of the ASC, we have updated references to GAAP to include both new and old guidance. The Company believes that adoption of the ASC does not have a material effect on its consolidated financial statements.

 

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”). This update provides amendments to ASC Topic 820, “Fair Value Measurements and Disclosure” for the fair value measurement of liabilities. There was no impact upon adoption of ASU 2009-05 for all financial liabilities.

 

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). This update provides amendments to the criteria to ASC Topic 605, “Revenue Recognition” for separating consideration in multiple-deliverable arrangements. The amendments to this update establish a selling price hierarchy for determining the selling price of a deliverable. ASU 2009-13 is effective for financial statements issued for years beginning on or after June 15, 2010. We are currently evaluating the effect that the adoption of ASU 2009-13 will have on our results of operation, financial position and cash flows, but do not expect the adoption will have a material impact.

 

3.  Cash, Cash Equivalents and Marketable Securities

 

On February 1, 2008, the Company adopted the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures (formerly known as FAS 157 Fair Value Measurements), which clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.  As a basis for considering such assumptions, Topic 820 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level I) observable inputs such as quoted prices in active markets; (Level II) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level III) unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.  This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.  On a recurring basis, the Company measures its investments, cash equivalents or marketable securities at fair value.  Cash, cash equivalents and marketable securities are classified within Level I of the fair value hierarchy because they are valued using quoted market prices.

 

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PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

As of October 31, 2009, cash, cash equivalents and marketable securities included the following (in thousands):

 

		Cost				Unrealized Gains				Unrealized Losses Less Than 12 Months				Unrealized Losses 12 Months or Longer				Estimated Fair Value
Cash and cash equivalents		$	36,868			$	—			$	—			$	—			$	36,868
Exchange traded marketable securities			12,513				75				—				—				12,588
Total		$	49,381			$	75			$	—			$	—			$	49,456

 

Cash equivalents are comprised of money market funds which are traded in an active market with no restrictions and money market savings accounts. In the current quarter, we received a $4.8 million dividend on our shares of Highbury Financial, Inc. (“Highbury”) common stock.

 

4.  Comprehensive Income

 

Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events.  For the Company, comprehensive income consists of its reported net income and the net unrealized gains or losses on marketable securities and foreign currency translation adjustments.  Comprehensive income for each of the periods presented is comprised as follows:

 

		Three Months Ended October 31,								Nine Months Ended October 31,
		2009				2008				2009				2008
Net income (loss)		$	3,543			$	(1,163	)		$	7,055			$	13,678
Changes in unrealized losses in available for sale securities, net of taxes			(2,231	)			-				(162	)			-
Foreign currency translation adjustment, net of taxes			13				20				44				(16	)
Total comprehensive income (loss), net of taxes		$	1,325			$	(1,143	)		$	6,937			$	13,662

 

5.  Earnings Per Share

 

Earnings per share (EPS) for the three and nine months ended October 31, 2009 and 2008, is calculated as follows (in thousands, except for per share amounts):

 

		2009												2008
		Net Income				Shares				Per Share Amount				Net Loss				Shares				Per Share Amount
Basic EPS for three months ended October 31,
Earnings (loss) available to common stockholders		$	3,543				16,505			$	0.21			$	(1,163	)			18,115			$	(0.06	)
Effect of Dilutive Securities
Options			—				194				—				—				—				—
Diluted EPS
Earnings available to common stockholders with assumed conversions		$	3,543				16,699			$	0.21			$	(1,163	)			18,115			$	(0.06	)
		2009												2008
		Net Income				Shares				Per Share Amount				Net Income				Shares				Per Share Amount
Basic EPS for nine months ended October 31,
Earnings available to common stockholders		$	7,055				16,688			$	0.42			$	13,678				17,925			$	0.76
Effect of Dilutive Securities
Options			—				147				—				—				442				—
Diluted EPS
Earnings available to common stockholders with assumed conversions		$	7,055				16,835			$	0.42			$	13,678				18,367			$	0.74

 

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PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Potentially dilutive options in the aggregate of approximately 320,000 and 1,598,000 for the three months ended October 31, 2009 and 2008, respectively, and 528,000 and 1,468,000 for the nine months ended October 31, 2009 and 2008, respectively, have been excluded from the calculation of diluted income per share based on (i) the fact that the exercise prices of such options was above the average stock price and (ii) the number of buy back options above the assumed shares issued upon exercise of options.  For these reasons, these options were considered anti-dilutive.

 

6. Sale of operating assets to Kyocera-Mita Corporation

 

On April 30, 2008, the Company consummated the transactions contemplated by the Asset Purchase Agreement, dated as of January 9, 2008, between Kyocera-Mita Corporation (“KMC”) and the Company, pursuant to which the Company sold substantially all of its intellectual property (“IP”) to KMC, transferred to KMC thirty-eight (38) of its employees, licensed the IP back from KMC on a nonexclusive, worldwide, perpetual and royalty free basis subject to certain restrictions, and terminated substantially all of the Company’s existing agreements with KMC.  As consideration for the sale, KMC assumed approximately $0.4 million of the Company’s liabilities, paid the Company $33.0 million and agreed to escrow an additional $4.0 million relating to potential indemnification obligations.  The Company recorded a pre-tax gain on the sale of assets of approximately $32.9 million during the three months ended April 30, 2008 which does not include the $2.4 million of additional product licensing costs associated with the restructured license agreements with KMC.

 

In the first quarter of fiscal 2010, the Company entered into an agreement with KMC providing for the early release of the escrow funds. The Company received approximately $3.8 million which was recognized as a gain and $0.2 million was paid to KMC as a discount for the early release of the $4.0 million held in escrow.

 

7.  Product License Costs

 

In the first quarter of fiscal 2010, the Company reduced an estimated product licensing liability by $2.6 million in connection with the amendment of a third party technology license agreement.  In the first quarter of fiscal 2009, the Company had a $2.4 million increase of product licensing expense due to the sale of assets to KMC and the resulting change in mix of technologies available to be delivered against existing block licenses with KMC.

 

8.  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 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.  An aggregate of 6.2 million shares of common stock have been authorized for issuance under the various option plans.

 

On February 1, 2006 the Company adopted FASB ASC Topic 718, Compensation – Stock Compensation (formerly known as FAS 123(R) Share-Based Payment), using the modified-prospective method.  Under this transition method, compensation expense recognized subsequent to adoption includes: a) compensation cost for all share-based payments granted prior to, but not yet vested as of adoption, based on values estimated in accordance with the original provisions of SFAS No. 123, and b) compensation cost of all share-based payments granted subsequent to adoption, based on the grant-date fair values estimated in accordance with Topic 718.

 

Upon adoption of Topic 718, the Company changed its method of attributing the value of stock-based compensation expense from the multiple-option (i.e., accelerated) approach to the single-option (i.e., straight-line) method.  Compensation expense for share-based awards granted through January 31, 2006 will continue to be subject to the accelerated or multiple-option method, while compensation expense for share-based awards granted on or after February 1, 2006 will be 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.  For fiscal 2010, the Company is using a weighted average expected life of 3.29 years, expected volatility of 64% and a weighted average risk free interest rate of 2.33%.  For fiscal 2009, the Company used a weighted average expected life of 3.41 years, an expected volatility of 69%, and a weighted average risk free interest rate of 4.00%.

 

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PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

For the nine months ended October 31, 2009, the Company recorded a total of $347,000 in share based compensation related to stock options, restricted stock and issuance of common stock.  Share-based compensation expense was allocated as follows for the nine months ending October 31, 2009: (1) $15,000 in sales and marketing expense; and (2) $332,000 in general and administrative expense.  The Company granted 155,000 stock options and issued 30,000 shares of common stock and 44,481 restricted common shares in the nine months ended October 31, 2009.

 

In the current quarter, a merit bonus and common stock was disbursed to a board member of approximately $0.3 million.

 

The following represents option activity under the 1992 Stock Option Plan, 1996 Equity Incentive Plan, and 2005 Incentive Award Plan, as amended and restated for the nine months ended October 31, 2009: (shares and intrinsic value in thousands)

		Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term (Years)				Aggregate Intrinsic Value
Outstanding at January 31, 2009			1,058			$	2.26
Granted			-				-
Exercised			(36	)			1.04
Canceled or expired			(46	)			7.19
Outstanding at April 31, 2009			976			$	1.91
Granted			105				1.95
Exercised			-				-
Canceled or expired			(179	)			2.80
Outstanding at July 31, 2009			902			$	1.91
Granted			50				2.24
Exercised			-				-
Canceled or expired			-				-
Outstanding at October 31, 2009			952			$	1.93				6.20			$	570
Stock options exercisable at quarter-end			654			$	1.88				4.86			$	474

 

 The weighted-average grant date fair value of the options granted during the nine months ended October 31, 2009 was $2.04 per option.  As of October 31, 2009, there was $243,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the 1992, 1996, and 2005 plans, and certain employee options issued outside these plans.  That cost is expected to be recognized over a weighted-average period of 2.6 years.

 

The Company’s valuations are based upon the Black-Scholes valuation model.  These option valuation models were developed for use in estimating the fair value of traded-options, which have no vesting restrictions and are fully transferable and negotiable in a free trading market.  In addition, option valuation models require input of subjective assumptions, including the expected stock price volatility and expected life of the option.  Because the Company’s stock options have characteristics significantly different from those of freely traded options, and changes in the subjective input assumptions can materially affect the Company’s fair value estimates of those options, in the Company’s opinion, existing valuation models are not reliable single measures and may misstate the fair value of the Company’s stock options.  Because the Company stock options do not trade on a secondary exchange, recipients can receive no value nor derive any benefit from holding stock options under the plans without an increase, above the grant price, in the market price of the Company’s stock.  Such an increase would benefit all stockholders commensurately.

 

9.  Concentration of Revenues

 

During the third quarter of fiscal year 2010, three customers, Seiko Epson Corporation (“Seiko Epson”), Oki Data Corporation, and Novell Inc. (“Novell”), each generated greater than 10% of the Company’s revenue, and collectively contributed approximately 70% of the revenues for the quarter.  During the third quarter of fiscal year 2009, two customers, Novell and Seiko Epson, each generated greater than 10% of the Company’s revenue and collectively contributed approximately 72% of the revenues for the quarter.

 

10.  Income Taxes

 

On February 1, 2007, the Company adopted FASB ASC 740-10, Income Taxes (formerly known as FIN 48 Accounting for Uncertainty in Income Taxes, an interpretation of FAS 109).  ASC 740-10 clarifies the accounting and reporting for uncertainties in income tax law.  This Interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.  The Interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date.  If the tax position is not considered “more-likely-than-not” to be sustained, then no benefits of the position are to be recognized.  There was no cumulative effect of adopting ASC 740-10 to the February 1, 2007 retained earnings balance.

 

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PEERLESS SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

At October 31, 2009, the Company had determined it was more likely than not that its short term deferred tax assets would be realized.  A full valuation allowance remains against the Company’s long-term deferred tax assets.

 

The Company’s effective income tax rate was 37.0% for the nine months ended October 31, 2009 compared to 43.6% for the nine months ended October 31, 2008. The decrease in the effective income tax rate for the nine months ended October 31, 2009 is primarily due to the dividend received deduction on the Highbury dividend.

 

11.  Restructuring

 

In connection with the sale of the intellectual property to Kyocera Mita Corporation (“KMC”), the Company formalized a plan directed at reducing operating costs. The plan focused primarily on operational and organizational structures, use of facilities, and certain other matters. As a result of the plan, the Company recorded approximately $1.9 million of restructuring charges during the nine months ended October 31, 2008, of which $0.9 million related to exiting facilities, $0.1 million was due to asset impairments and $0.9 million was employee severance costs.

 

A summary of the activities related to these restructuring liabilities are as follows:

(In thousands)		Severance				Facilities
Balance at February 1, 2009		$	197			$	—
Restructuring Charges			—				—
Payments			188				—
Balance at October 31, 2009		$	9			$	—

 

The remaining severance payments are expected to be paid out over the next 5 months.  At October 31, 2009, $9,000 is included in other current liabilities.

 

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PEERLESS SYSTEMS CORPORATION

 

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

 

Highlights

 

Since the sale of substantially all of the Company’s assets to KMC in April 2008, the Company reduced its staffing and presently has a total of 5 employees.  Currently, we maintain an organization that is capable of meeting the requirements of the customers from our legacy business, evaluating our corporate strategy and meeting the obligations of a public company.

 

Consolidated revenues for the three months ended October 31, 2009 decreased $0.6 million, or 41%, to $1.0 million as compared with $1.6 million for the three months ended October 31, 2008.  Year-to-date net sales decreased $4.2 million, or 52% to $4.0 million for the nine months ended October 31, 2009 as compared to $8.2 million for the nine months ended October 31, 2008.  These overall decreases in revenues were primarily attributable to the sale of the Company’s intellectual property to KMC, and declines in the demand for (a) our technologies, (b) third party technologies we are licensed to sell, and (c) the requirement for traditional engineering services.

 

In the third quarter of 2010, we invested $9.3 million comprised of common stock and warrants of Highbury, and the subsequent exercise of such warrants. We received from Highbury a $4.8 million dividend on our shares of Highbury common stock.  As of October 31, 2009, we held 3,070,355 shares of common stock of Highbury recorded at fair value of approximately $12.6 million.  Subsequently, we filed a definitive proxy statement with the SEC on November 25, 2009, to (i) nominate Timothy Brog, Chairman of Peerless’s Board, for election as a director of Highbury and (ii) make precatory stockholder proposals to eliminate Highbury’s classified Board of Directors and poison pill.  There is no assurance that we will be successful in any of these matters.

 

Our inability to implement our acquisition plan as well as the declining sales trend of our existing licenses, downward price pressure on the technologies we license, uncertainty surrounding third party license revenue sharing agreements, downward price pressure on original equipment manufacturer (“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.

 

General

 

We continue to generate revenue from our OEMs through the licensing of imaging solutions.  Our product licensing revenues are comprised of minimal recurring per unit and block licensing revenues and development licensing fees for source code or software development kits (“SDK”).  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 Adobe Systems Inc. (“Adobe”) or Novell, to be used with our OEM partners’ products.

 

Block licenses are per-unit licenses in large volume quantities to an OEM for products either in or about to enter into distribution into the marketplace.  Payment schedules for block licenses are negotiable and payment terms are often dependent on the size of the block and other terms and conditions of the block license being acquired.  Typically, payments are made in either one lump sum or over a period of four or fewer quarters.

 

Revenue received for block 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.

 

We also have engineering services revenues that are derived primarily from adapting our software and supporting electronics to specific OEM requirements.  Our maintenance revenues are derived from software maintenance agreements.  Engineering services and maintenance revenues currently constitute a small portion of total revenue.

 

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.

 

12

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