<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended March 31, 1998
or
[ ] Transition Report Pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934 For the Transition Period
From ____________ to ______________
Commission File number 000-23025
============================================================================
NOTIFY TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its charter)
CALIFORNIA 77-0382248
(State of Incorporation) (I.R.S. Employer
Identification No.)
1054 South De Anza Blvd. #105
San Jose, CA 95129
(Address of principal executive offices)
(408) 777-7920
(Registrant's telephone number)
NOTIFY CORPORATION (Registrant's former name)
============================================================================
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 of 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 X
As of March 31, 1998 there were 3,540,226 shares of Common Stock
outstanding.
1
<PAGE>
INDEX
-----
PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Balance Sheet as of March 31, 1998.....................3
Statements of Operations for the three-month and
six-month periods ended March 31, 1998 and 1997........4
Statements of Cash Flows for the six-month periods
ended March 31, 1998 and 1997..........................5
Notes to the Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................7
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds..............10
(d) Use of Proceeds........................................10
Item 4. Submission of Materials to a Vote of Security Holders..10
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES...............................................................10
2
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PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Financial Statements:
NOTIFY TECHNOLOGY CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
March 31,
1998
-----------
(Unaudited)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,749,371
Accounts receivable 86,251
Inventories 896,572
Prepaid assets 20,975
-----------
Total current assets 4,753,169
Property and equipment, net 113,219
Other assets 213,187
-----------
Total assets $ 5,079,575
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 11,665
Accounts payable 275,180
Accrued liabilities 297,032
-----------
Total current liabilities 583,877
Shareholders' equity:
Common stock 3,540
Additional paid-in capital 8,930,975
Retained earnings (4,438,817)
-----------
Total shareholders' equity 4,495,698
-----------
Total liabilities and shareholders' equity $ 5,079,575
===========
</TABLE>
See accompanying notes to unaudited financial statements
3
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NOTIFY TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three-Month Periods Six-Month Periods
Ended March 31, Ended March 31,
1998 1997 1998 1997
------------------- ------------------ ----------------- -------------------
(Unaudited) (Unaudited)
<S><C> <C> <C> <C> <C>
Product sales $ 209,444 $ 536,072 $ 1,272,470 $ 932,366
Cost of sales 148,915 372,450 914,952 723,529
------------------- ------------------ ---------------- ------------------
Gross profit 60,529 163,622 357,518 208,837
Operating expenses:
Research & development 403,552 163,828 731,173 313,243
Sales and marketing 121,099 144,853 267,728 298,253
General and administrative 227,662 169,016 440,736 307,802
------------------- ------------------ ---------------- ------------------
Total operating expenses 752,313 477,697 1,439,637 919,298
------------------- ------------------ ---------------- ------------------
Loss from operations (691,784) (314,075) (1,082,119) (710,461)
Other (income) and expense, net (50,221) 39,651 (109,492) 59,234
------------------- ------------------ ---------------- ------------------
Net loss $ (641,563) $(353,726) $ (972,627) $(769,695)
=================== ================== ================= ===================
Basic and diluted net loss per share $(0.28) $(1.31) $(0.42) $(3.18)
=================== ================== ================= ===================
Weighted average shares outstanding 2,297,606 269,620 2,297,023 242,395
=================== ================== ================= ===================
Pro forma net loss per share $(0.56) $(1.27)
================== ===================
Pro forma weighted average shares
outstanding 634,918 607,693
================== ===================
</TABLE>
See accompanying notes to unaudited financial statements
4
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NOTIFY TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six-Month Period Ended
March 31,
1998 1997
-----------------------------
<S> <C> <C>
(Unaudited)
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (972,627) $(769,695)
Adjustments to reconcile net loss to cash used in
Operating activities:
Depreciation and amortization 24,695 15,353
Amortization of debt discount and issuance costs ------ 18,479
Conversion of accrued interest on convertible notes to common stock ------ 29,351
Changes in operating assets and activities:
Accounts receivable 350,654 (181,523)
Inventories 199,008 (76,445)
Prepaid assets (200,104) (310,079)
Accounts payable (440,174) 316,256
Accrued liabilities 2,937 7,854
---------- --------
Net cash used in operating activities (1,035,611) (950,449)
---------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Expenditures for property & equipment (24,175) (41,088)
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from issuance of common stock ------ 3,000
Proceeds from issuance of convertible promissory notes ------ 125,000
Net proceeds from private placement of bridge notes ------ 734,500
Advances under line of credit ------ 150,000
Repayments under line of credit (25,000) (200,000)
Proceeds from note payable shareholder ------ 65,000
Payments on repurchase of unvested stock (354) ------
Proceeds from exercise of warrants 5 ------
Payments on note payable to shareholder (200,000) (5,000)
Repayments of notes receivable from shareholders 4,175 325
---------- --------
Net cash provided by (used in) financing activities (221,174) 872,825
---------- --------
Net decrease in cash and cash equivalents (1,280,960) (118,712)
Cash and cash equivalents at beginning of period 5,030,331 260,380
---------- --------
Cash and cash equivalents at end of period $ 3,749,371 $ 141,668
=========== =========
NONCASH FINANCING ACTIVITIES:
Common stock issued or retired for notes receivable from shareholders $ ------ $ 9,200
Conversion of convertible notes payable to common stock $ ------ $ 732,125
=========== =========
Value ascribed to warrants issued in conjunction with Private
Placement $ ------ $ 116,875
=========== =========
</TABLE>
See accompanying notes to unaudited financial statements
5
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Notify Technology
Corporation (the "Company"), have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instruction for Form 10-QSB Item 310b and Article 10 of regulation S-X. The
balance sheet as of March 31, 1998, and the statements of operations for the
three month and six-month periods ended March 31, 1998 and 1997 and the
statements of cash flows for the six-month periods ended March 31, 1998 and 1997
are unaudited but include all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for a fair presentation of
the financial position at such date and the operating results and cash flows for
those periods. Although the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading, certain information normally included in financial statements and
related footnotes prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. The accompanying financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's annual report and Form 10-KSB for the year
ended September 30, 1997.
Results for any interim period are not necessarily indicative of results
for any other interim period or for the entire year.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted-average number of shares
of common stock outstanding during the periods presented. Potential common
shares are excluded from the computation as their effect is antidilutive. In
1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. All earnings
per share amounts for all periods have been presented, and where necessary,
restated to conform to the Statement 128 requirements. The weighted average
number of common shares used in the net loss per share calculation was reduced
by the common stock, and potential common shares placed in escrow in connection
with the Company's initial public offering.
Pro forma net loss per share has been computed as described above and also
gives effect to the conversion of preferred stock that converted to common stock
upon completion of the Company's initial public offering.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
4. CASH EQUIVALENTS
Cash equivalents consist mainly of money market funds and commercial paper
which are highly liquid financial instruments that are readily convertible to
cash. The Company has not incurred losses related to these instruments. As of
March 31, 1998, the Company had no material investments in debt or equity
securities.
6
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NOTIFY TECHNOLOGY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, (CONTINUED)
5. INVENTORIES
Inventories consist principally of raw materials and subassemblies, which
are stated at lower of cost (first-in, first-out) or market.
<TABLE>
<CAPTION>
March 31,
1998
-----------------------
<S> <C>
Raw Materials $540,296
Work In Process 184,793
Finished Goods 171,483
-----------------------
$896,572
=======================
</TABLE>
6. INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes
for the three months and six months ended March 31, 1998 and 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I - Item 1 of this
Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report and Form 10-KSB for the year
ended September 30, 1997.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Revenue consists of gross revenue less product returns. In the three
months ended March 31, 1998, substantially all of the Company's revenue was
derived from the sale of its MessageAlert products. Revenue for the three months
ended March 31, 1998 decreased to $209,444 from $536,072 for the three months
ended March 31, 1997. Revenue was down from the previous year due to a decrease
in telephone company voice mail promotions featuring visual message lights.
Sales to telephone companies consisted of 52% and 82% of revenue for the three
months ended March 31, 1998 and for the three months ended March 31, 1997,
respectively. In addition, four customers accounted for 35%, 17%, 17% and 13%
of sales in the three months ended March 31, 1998 and three customers accounted
for 37%, 19% and 15% of sales in the three months ended March 31, 1997.
A substantial portion of the Company's revenue continues to be derived from
the sale of products in connection with telephone company promotional programs.
As the timing and size of these programs is uncertain, the Company anticipates
it will continue to experience substantial variances in quarterly revenue.
Cost of sales consists primarily of the cost to manufacture the Company's
products. Cost of sales decreased to $148,915 in the three months ended March
31, 1998 from $372,450 for the three months ended March 31, 1997. These
decreases were the result of decreased sales of the Company's products. As a
result of achieving certain manufacturing efficiencies, the Company's gross
margin decreased only slightly to 28.8% in the three months ended March 31, 1998
compared to 30.5% in the three months ended March 31, 1997 despite significantly
lower volumes.
Research and development expense consists primarily of personnel costs,
contract engineering expense, development tooling, and supply expenses.
Research and development expense increased to $403,552 for the three months
ended March 31, 1998 from $163,828 for the three months ended March 31,
7
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NOTIFY TECHNOLOGY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, (CONTINUED)
1997. An aggressive program to develop and expand the Company's product
offerings has significantly increased spending on additional engineers, outside
consulting services, tooling and development materials. The Company expects
that the investment in research and development will continue at, or near, the
current level for the remainder of 1998.
Sales and marketing expense consists primarily of personnel, travel costs
and sales commissions related to the Company's sales and marketing efforts.
Sales and marketing costs decreased to $121,099 for the three months ended March
31, 1998 compared to $144,853 for the three months ended March 31, 1997 due to
personnel decreases.
General and administrative expense consists of general management and
finance personnel costs, occupancy expense, accounting expense and legal
expense. General and administrative expenses increased to $227,662 for the
three months ended March 31, 1998 from $169,016 for the three months ended March
31, 1997. The increases were primarily the result of additional legal,
accounting and printing expenses and increases in executive salaries.
SIX MONTHS ENDED MARCH 31, 1998 AND 1997
In the six month period ended March 31, 1998, substantially all of the
Company's revenue was derived from the sale of its MessageAlert products.
Revenue for the six month period ended March 31, 1998 increased to $1,272,470
from $932,366 for the six month period ended March 31, 1997. Revenue was up
from the previous year due to telephone company voice mail promotions featuring
the Company's products which occurred in the first quarter, 1998. Sales to
telephone companies consisted of 70% and 80% of revenue for the six month period
ended March 31, 1998 and for the six month period ended March 31, 1997,
respectively. In addition, two customers accounted for 62% and 22% of sales in
the six month period ended March 31, 1998 and three customers accounted for 24%,
23% and 18% of sales in the six month period ended March 31, 1997.
Cost of sales consists primarily of the cost to manufacture the Company's
products. Cost of sales increased to $914,952 in the six month period ended
March 31, 1998 from $723,529 in the six month period ended March 31, 1997. The
increase was the result of increased sales of the Company's products. As a
result of achieving certain manufacturing efficiencies, the Company's gross
margin increased to 28.8% in the six month period ended March 31, 1998 compared
to 22.4% in the six month period ended March 31, 1997.
Research and development expense consists primarily of personnel costs,
contract engineering expense, development tooling, and supply expenses.
Research and development expense increased to $731,173 for the six month period
ended March 31, 1998 from $313,243 for the six month period ended March 31,
1997. An aggressive program to develop and expand the Company's product
offerings has significantly increased spending on additional engineers, outside
consulting services, tooling and development materials. The Company expects
that the investment in research and development will continue at, or near, the
current level for the remainder of 1998.
Sales and marketing expense consists primarily of personnel, travel costs
and sales commissions related to the Company's sales and marketing efforts.
Sales and marketing costs decreased to $267,728 for the six month period ended
March 31, 1998 compared to $298,253 for the six month period ended March 31,
1997 due to personnel decreases.
General and administrative expense consists of general management and
finance personnel costs, occupancy expense, accounting expense and legal
expense. General and administrative expenses increased to $440,736 for the six
month period ended March 31, 1998 from $307,802 for the six month period ended
March 31, 1997. The increases were primarily the result of additional legal,
accounting and printing expense and increases in executive salaries.
8
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
The Company completed its initial public offering (IPO) in August 1997,
receiving net proceeds of approximately $6.2 million. Cash used in operating
activities increased to $1,035,611 for the six month period ending March 31,
1998 from $950,449 for the six month period ending March 31, 1997. The spending
pattern between the two periods was dissimilar due to IPO expense activity in
the six month period ending March 31, 1997 versus the entering into a
significant prepaid royalty agreement and the reduction of accounts payable in
the period ending March 31, 1998 following the close of the IPO.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that have date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. To be in "Year 2000 compliance" a computer
program must be written using four digits to define years. The Company's
current adjunct and software products are largely independent of other operating
environments and therefore, not affected by the Year 2000 Issue. All products
currently in development are being designed to be in Year 2000 compliance.
The Company is identifying Year 2000 dependencies in its systems and is
investigating the need for changes to its internal information systems to make
them Year 2000 compliant. The Company will initiate formal communications with
all of its significant suppliers and financial institutions, and will be
communicating with its large customers to determine the extent to which the
Company is vulnerable to those third parties failing to remediate their own Year
2000 issues. The cost of the Year 2000 project is not expected to have a
material effect on the Company's financial condition or results of operations.
While the Company currently expects that the Year 2000 will not pose significant
operational problems, delays in the implementation of new information systems,
or a failure of its vendors, customer and financial institutions could have
material adverse consequences, including delays in the delivery or sale of
products.
FORWARD LOOKING STATEMENTS
Statements in this report regarding product development and introductions
and future business activities are forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and are subject to the safe harbors
created thereby. Actual results could differ materially from these forward-
looking statements as a result of the following factors: business conditions
and growth in the telecommunications industry and general economics, both
domestic and international; lower than expected customer orders and timing of
actual orders; the timing and extent to which telephone companies adopt,
initiate and promote programs involving the Company's products; competition from
other suppliers of telephony adjunct devices; changes in product mix or
distribution channels; technological difficulties and resource constraints
encountered in developing new products; and additional factors discussed from
time to time in the Company's public reports filed with the Securities and
Exchange Commission.
9
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NOTIFY TECHNOLOGY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, (CONTINUED)
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) USE OF PROCEEDS
The Company completed its IPO pursuant to a Registration Statement on Form
SB-2 (No. 333-23369) declared effective on August 28, 1997 and issued 1,600,000
of its Units to the public at a price of $5.00 per Unit. The net proceeds of
the IPO to the Company after total expenses was $6,153,000.
In the three month period ended March 31, 1998, the Company used an
aggregate of $1,054,000 of the net proceeds of the IPO of which $478,000 was for
working capital and for general corporate purposes including royalties,
administrative expense and salaries; $178,000 was for inventory; $292,000 was
for product development; and $106,000 was for sales and marketing. This use of
the proceeds of the IPO does not reflect a material change in the use of
proceeds described in the prospectus filed as a part of the Registration
Statement filed in connection with the IPO.
ITEM 4. SUBMISSION OF MATERIALS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of shareholders on February 25, 1998.
Out of 3,547,237 shares of Common Stock entitled to vote at such meeting, there
were present in person or by proxy 1,999,513 shares. At the Annual Meeting ,
the shareholders of the Company approved the following matters:
(a) The election of Paul F. DePond, Michael Ballard, Gaylan I. Larson, Michael
Smith and Andrew Plevin as directors of the Company for the ensuing year
and until their successors are elected. The vote for the nominated
directors was as follows:
Paul F. DePond, 1,988,113 votes cast for and 11,400 votes withheld; Michael
Ballard, 1,998,013 votes cast for and 1,500 votes withheld; Gaylan I.
Larson, 1,998,013 votes cast for and 1,500 votes withheld; Michael Smith,
1,998,013 votes cast for and 1,500 votes withheld; Andrew Plevin, 1,998,013
votes cast for and 1,500 votes withheld.
(b) Approval for an amendment to the Company's Articles of Incorporation to
change the name of the Company to Notify Technology Corporation. 1,982,213
votes were cast for and 1,500 votes were cast against; 15,800 votes
abstained.
( c) Ratification of the appointment of Ernst & Young LLP as independent public
accountants of the Company for the fiscal year ending September 30, 1998.
1,999,353 votes were cast for and 160 votes were cast against.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) None
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.
NOTIFY TECHNOLOGY CORPORATION
/s/ Gerald W. Rice
Chief Financial Officer
(Principal Financial and Accounting Officer)
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,749,371
<SECURITIES> 0
<RECEIVABLES> 104,329
<ALLOWANCES> (18,078)
<INVENTORY> 896,572
<CURRENT-ASSETS> 234,162
<PP&E> 113,219
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,079,575
<CURRENT-LIABILITIES> 583,877
<BONDS> 0
0
0
<COMMON> 3,540
<OTHER-SE> 4,492,158
<TOTAL-LIABILITY-AND-EQUITY> 5,079,575
<SALES> 1,272,470
<TOTAL-REVENUES> 1,272,470
<CGS> 914,952
<TOTAL-COSTS> 914,952
<OTHER-EXPENSES> 1,439,637
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,420
<INCOME-PRETAX> (972,627)
<INCOME-TAX> 0
<INCOME-CONTINUING> (972,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (972,627)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
