<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 December 31, 1997
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 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)
============================================================================
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 January 30, 1998 there were 3,540,165 shares of Common Stock
outstanding.
1
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INDEX
-----
PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Balance Sheet as of December 31, 1997...................... 3
Statements of Operations for the three-month periods
ended December 31, 1997 and 1996.......................... 4
Statements of Cash Flows for the three-month periods
ended December 31, 1997 and 1996.......................... 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 1. Legal Proceedings.......................................... 9
Item 2. Changes in Securities and Use of Proceeds.................. 9
(d) Use of Proceeds........................................ 9
Item 6. Exhibits and Reports on Form 8-K........................... 9
SIGNATURES............................................................. 9
2
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PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Financial Statements:
NOTIFY CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1997
----------------
ASSETS (Unaudited)
Current assets:
<S> <C>
Cash and cash equivalents $ 4,357,171
Accounts receivable 308,946
Inventories 723,510
Prepaid assets 12,134
---------------
Total current assets 5,401,761
Property and equipment, net 109,549
Other assets 233,815
---------------
Total assets $ 5,745,125
===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ 24,165
Accounts payable 429,538
Accrued liabilities 154,162
---------------
Total current liabilities 607,865
Shareholders' equity:
Common stock 3,547
Additional paid-in capital 8,930,968
Retained earnings (3,797,255)
---------------
Total shareholders equity 5,137,260
---------------
Total liabilities and shareholders' equity $ 5,745,125
===============
</TABLE>
See accompanying notes to unaudited financial statements
3
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NOTIFY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31,
1997 1996
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Product sales $1,063,026 $ 396,294
Cost of sales 766,037 351,079
------------------ ------------------
Gross profit 296,989 45,215
Operating expenses:
Research & development 327,621 149,415
Sales and marketing 146,629 153,400
General and administrative 213,074 138,786
------------------ ------------------
Total operating expenses 687,324 441,601
------------------ ------------------
Loss from operations (390,335) (396,386)
Other income and expense, net (59,271) 19,583
------------------ ------------------
Net loss $ (331,064) $(415,969)
================== ==================
Basic and diluted net loss per share $(0.14) $(0.93)
================== ==================
Weighted average shares outstanding 2,297,606 448,897
================== ==================
Pro forma net loss per share $(0.51)
==================
Pro forma weighted average shares outstanding 814,204
==================
</TABLE>
See accompanying notes to unaudited financial statements
4
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NOTIFY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31,
1997 1996
------------------------------
<S> <C> <C>
(Unaudited)
Cash Flows used in operating activities:
Net loss $ (331,064) $(415,969)
Adjustments to reconcile net loss to cash used in
Operating activities:
Depreciation and amortization 11,885 9,480
Changes in operating assets and activities:
Accounts receivable 127,959 17,541
Inventories 372,069 168,074
Other assets (211,891) (9,499)
Accounts payable (285,816) (8,621)
Accrued liabilities (139,933) (86,760)
------------------------------
Net cash used in operating activities (456,791) (325,754)
------------------------------
Cash flows used in investing activities:
Expenditures for property & equipment (7,695) -
Cash flows provided by (used in) financing activities:
Proceeds from issuance of preferred stock - 3,000
Proceeds from issuance of convertible notes payable 125,000
Advances under line of credit (12,500) 50,000
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 (208,674) 173,325
------------------------------
Net decrease in cash and cash equivalents (673,160) (152,429)
Cash and cash equivalents at beginning of period 5,030,331 260,380
------------------------------
Cash and cash equivalents at end of period $4,357,171 $ 107,951
==============================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 11,708 $ 3,948
</TABLE>
See accompanying notes to unaudited financial statements
5
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NOTIFY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Notify 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
December 31, 1997, and the statements of operations for the three-month periods
ended December 31, 1997 and 1996 and the statements of cash flows for the three-
month periods ended December 31, 1997 and 1996 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 common stock equivalent 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
December 31, 1997, the Company had no material investments in debt or equity
securities.
6
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NOTIFY 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>
December 31, 1997
------------------------
<S> <C>
Raw Materials $214,498
Work In Process 61,773
Finished Goods 447,239
------------------------
$723,510
========================
</TABLE>
6. INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes
for the three months ended December 31, 1997 and 1996.
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
In the first quarter of fiscal 1998, substantially all of the Company's
revenue was derived from the sale of its MessageAlert products. Revenue
consists of gross revenue less product returns. Revenue for the first quarter
of fiscal 1998 increased to $1,063,026 from $396,294 for the first quarter of
fiscal 1997. The first quarter revenue was up from the previous year's first
quarter due to stronger telephone company promotions utilizing the Company's
products. Sales to telephone companies consisted of 61% and 78% of revenue for
the first quarter of fiscal 1998 and for the first quarter of fiscal 1997,
respectively. In addition, two customers accounted for 67% and 24% of sales in
the first quarter of fiscal 1998 and three customers accounted for 31%, 19% and
13% of sales in the first quarter of fiscal 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 increased to $766,037 in the first quarter of fiscal
1998 from $351,079 for first quarter of fiscal 1997. These increases were the
result of increased sales of the Company's products. As a result of achieving
certain manufacturing efficiencies from greater sales volumes the Company's
gross margin improved to 28% in the first quarter of fiscal 1998 from 11% in the
first quarter of fiscal 1997.
Research and development expense consists primarily of personnel costs,
contract engineering expense, development tooling, and supply expenses.
Research and development expense increased to $327,621 for the first quarter of
fiscal 1998 from $149,415 for first quarter of fiscal 1997. The increase was
primarily the result of hiring additional engineers and outside consulting and
spending on new product development. The Company expects that the investment in
research and development will continue at, or near, the current level for the
remainder of 1998.
7
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NOTIFY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, (CONTINUED)
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 remained consistent at $146,629 for the first quarter
of fiscal 1998 compared to $153,400 for the first quarter of fiscal 1997.
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 $213,074 for the
first quarter of fiscal 1998 from $138,786 for the first quarter of fiscal 1997.
The increases were primarily the result of additional legal, accounting and
printing expense and increases in executive salaries.
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 has increased to $456,791 for first quarter of fiscal 1998 from
$325,754 for the first quarter of fiscal 1997. The increases were due to
settlement of vendor debt following the completion of the IPO and increased
spending in research and development activities.
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.
8
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NOTIFY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS, (CONTINUED)
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
POTENTIAL TRADEMARK LITIGATION
The Company received a letter in September 1997 from counsel to Airmedia,
Inc. ("Airmedia") stating that Airmedia owns a federal trademark registration
for the mark "Notify" and alleging that the Company's use of the mark "Notify"
in connection with the sale of its products and in its Internet domain name
constitutes an infringement of Airmedia's trademark rights. The Company has
come to an agreement with Airmedia to change the name of the Company to NOTIFY
TECHNOLOGY CORPORATION and for the Company to refrain from using the mark
"Notify" in connection with the sale of its product in exchange for Airmedia to
withdraw its claim of infringement. This name change is being presented to the
shareholders of the Company for ratification at the Annual Shareholder Meeting
to be held on February 25, 1998.
ITEM 2. CHANGES IN SECURITIES AND USE OF FUNDS
(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 first fiscal quarter of 1998, the Company used an aggregate of
$1,453,000 of the net proceeds of the IPO of which $211,000 represented
repayment of indebtedness to Michael Ballard, a director of the Company. In
addition, the Company used an aggregate of $657,000 of the net proceeds from the
IPO for working capital for general corporate purposes including royalties,
administrative expense and salaries; $187,000 for remaining IPO costs; $251,000
for product development; and $147,000 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11.1 Statement Regarding the Computaiton of Per Share
Loss
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 CORPORATION
/s/ Gerald W. Rice
Chief Financial Officer
(Principal Financial and Accounting Officer)
9
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NOTIFY CORPORATION
EXHIBIT 11.1
NOTIFY CORPORATION
STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS
<TABLE>
<CAPTION>
Three months
Ended December 31,
1997 1996
--------------------------------------
<S> <C> <C>
Net Loss $ (331,064) $(415,969)
======================================
Weighted average common shares outstanding (1) 2,297,606 252,879
Common equivalent shares from issuance of warrants
and common stock during the twelve month period
prior to the Company's proposed initial public
offering (1) - 196,018
--------------------------------------
Shares used in computing net loss per share 2,297,606 448,897
--------------------------------------
Net loss per share $ (0.14) $ (0.93)
======================================
Convertible preferred stock issued more than twelve
months prior to the proposed initial public offering (1) 365,307
-------------------
Pro forma weighted average shares outstanding 814,204
===================
Pro forma net loss per share $ (0.51)
===================
(1) Excludes shares and warrants to be place into escrow according to the
"Escrow Agreement".
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,357,171
<SECURITIES> 0
<RECEIVABLES> 308,946
<ALLOWANCES> (19,314)
<INVENTORY> 723,510
<CURRENT-ASSETS> 12,134
<PP&E> 109,549
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,745,125
<CURRENT-LIABILITIES> 607,865
<BONDS> 0
0
0
<COMMON> 3,547
<OTHER-SE> 5,133,713
<TOTAL-LIABILITY-AND-EQUITY> 5,745,125
<SALES> 1,063,026
<TOTAL-REVENUES> 1,063,026
<CGS> 766,037
<TOTAL-COSTS> 766,037
<OTHER-EXPENSES> 687,324
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,946
<INCOME-PRETAX> (331,064)
<INCOME-TAX> 0
<INCOME-CONTINUING> (331,064)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (331,064)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
