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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the Fiscal Year Ended September 30, 2000
or
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number 000-23025
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NOTIFY TECHNOLOGY CORPORATION
(Name of small business issuer in its charter)
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<S> <C>
California 77-0382248
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1054 S. De Anza Blvd. Suite
105 San Jose, California 95129
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number:
(408) 777-7920
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Units
Common Stock
Class A Warrants
----------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X]
No [_]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $4,219,703
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant, based upon the closing sale price of the
Common Stock on December 26, was approximately $7,587,000. Shares of Common
Stock held by officers and directors and their affiliated entities have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive for other
purposes.
The number of shares outstanding of Registrant's common stock, $0.001 par
value at September 30, 2000 was 4,887,058 shares.
Portions of our proxy statement for our Annual Meeting of Shareholders to be
held on March 8, 2001 are incorporated by reference into Part III of this
Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
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PART I
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS 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, INCLUDING
STATEMENTS THAT INCLUDE THE WORDS "BELIEVES", "EXPECTS", "ANTICIPATES" OR
SIMILAR EXPRESSIONS. FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED
TO, THOSE ITEMS IDENTIFIED WITH THE ASTERISK (*) SYMBOL. SUCH FORWARD-LOOKING
STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS
THAT MAY CAUSE OUR ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS.
THE READER SHOULD CAREFULLY CONSIDER, TOGETHER WITH THE OTHER MATTERS REFERRED
TO HEREIN, THE FACTORS SET FORTH UNDER THE CAPTION "RISK FACTORS". WE CAUTION
THE READER, HOWEVER, THAT THESE FACTORS MAY NOT BE EXHAUSTIVE.
ITEM 1. Description of Business.
Notify Technology Corporation (also referred to as "we", "us" and "our"
unless the context otherwise requires) was incorporated in the State of
California in August 1994. We are an innovative communications application
service provider of wireless and wireline messaging services. We are also a
supplier of innovative call and message notification products and services and
currently sell our products through OEM relationships with major telephone
companies, telephone equipment distributors, Internet service providers and
two-way wireless carriers.
In recent years, the number of individuals and businesses relying on
communication service providers to provide them with services such as voice
mail, caller-id and wireless communication has increased. Our products are
designed to enhance the convenience and utility of these services by providing
customers with features that are either not available or not included in
standard service packages. Our Call Manager products incorporate caller-id,
call waiting caller-id, and telephone company voice mail notification. We
provide an e-mail notification service with our Visual Got Mail technology and
our Centrex Receptionist product gives Centrex business customers a cost-
effective means of ensuring that incoming calls are properly routed even when a
human attendant is not available. Our newly announced NotifyLink products and
services provide users with two-way wireless e-mail notification and management
while they are mobile.
Products
NotifyLink
We launched our NotifyLink product line in December 2000. NotifyLink is
composed of a web based product called NotifyLink Internet Edition and a
desktop product called NotifyLink Standard Edition. Our NotifyLink Internet
Edition product is intended to provide the mobile "dial-up" e-mail user with
access and management to the user's e-mail account while our NotifyLink
Standard Edition product has been targeted for the "always on" user who is on a
continuous connection to the Internet. The NotifyLink Internet service will
provide users of Motorola's new T900 Talkabout Personal Information
Communicator with wireless e-mail notification and management. The new wireless
e-mail service works with most e-mail providers including AOL, Yahoo, and all
POP3 mail systems. Users will be able to use the NotifyLink Internet service
with their existing e-mail accounts. Users will register for the service via a
web based interface typically linked to a specific Carrier. To set up the
NotifyLink Internet service, the user will specify each e-mail account they
want to monitor and set any appropriate filters. The user can tailor the
notification by defining a "header" which contains information about the e-mail
such as account, sender, subject, date and time, attachment names,
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attachment sizes, partial body text, and remaining character count. Once
registered, the NotifyLink Internet service will check all specified e-mail
accounts every hour. Users will have the capability to perform "on-demand
checking" of any of their specified accounts at any time. Once the service
determines that a user has new e-mail, a notification will be sent to the user
in the format of a defined "header". The user will have the option to see
"more" of the e-mail body or "reply", "forward", or "delete" the e-mail and its
corresponding attachments from the T900.
Our NotifyLink Standard Edition software will provide users of Motorola's
new P935 Timeport(TM) and T900 Talkabout(TM) with wireless e-mail notification
and management. Owners of the Motorola PageWriter 2000x Personal Interactive
Communicator will be able to take advantage of NotifyLink Standard Edition once
they upgrade their device Operating System to the new Motorola Wisdom(TM) OS
4.0. A user can easily install our NotifyLink Standard Edition software on a
desktop computer that is connected to the Internet by a Cable, DSL, or LAN/WAN
service. The software is easy to use and quickly configured. The user can
configure the software by specifying the e-mail accounts that the user wants to
access with the user's wireless device, setting any filters to screen
notification, and designating the type of wireless device and its associated
address. In addition, the user can tailor the information contained in the
wireless e-mail notification "header" that is sent to the user's wireless
device. The "header" information can include options such as account, sender,
subject, date and time, attachment names, attachment sizes, partial body text,
and remaining character count.
Once configured, the NotifyLink Standard Edition software will forward the
filtered e-mail in the format of the "header" that was chosen by the user. Once
the "header" is received on the T900 or P935 device, the user will have the
option to see "more" of the e-mail body or "reply", "forward", or "delete" the
e-mail and its corresponding attachments. Any action taken on the new e-mail
message by the user will cause the "InBox", "Sent Items", or "Deleted Items"
folders on the user's desktop to be updated to reflect the action. Any e-mail
message sent from the T900 or P935 by a user will appear to the recipient as if
the message was sent from the user's desktop e-mail address.
Visual Got Mail
The Visual Got Mail service is designed to eliminate residential, Small
Office Home Office, or SOHO, and business e-mail subscribers' frustration with
the traditional, inconvenient process of checking for e-mail. The Visual Got
Mail technology, designed for telephone company or Internet Service Provider
deployment as a service offering, includes a scalable carrier class server
infrastructure, hosted by Notify Technology or the telephone company, and the
eView telephone adjunct. The eView integrates our caller-id technology with the
Visual Got Mail e-mail notification functionality. The eView integrates caller-
id, voice mail, and e-mail notification into a single device that can fit in
the palm of your hand. The eView displays the name and number of the calling
party and the e-mail "header" information, which contains the name of the
sender and the subject of the sender's message, for up to five e-mail accounts.
The eView displays up to 25 e-mail headers and indicates the presence of any e-
mail attachments.
Call Manager
We announced the Call Manager family of caller-id products in January 1999
and began shipping in April 1999. Our caller-id products incorporate the
MessageAlert visual message waiting indication technology and support for
combinations of telephone company services such as voice mail, caller-id, call
waiting caller-id and deluxe call waiting. Caller-id products are categorized
as either "Type I" (calling name and calling number only); "Type II" (Type I
features plus call waiting caller-id) or "Type II.5" (Type II plus deluxe call
waiting). Type II and Type II.5 products support the more sophisticated
services offered by telephone service providers than the "Type I" products more
commonly on the market. Our Call Manager line of products include all three
types and are designed to support bundling of services offered by the telephone
service provider giving more functionality to the end user and more revenue
opportunity for the telephone service provider.
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Centrex Receptionist
Small businesses that use Centrex services generally must maintain a human
attendant to answer incoming calls, or the calls will go unanswered or be
transferred into the business' general voice mail mailbox. The Centrex
Receptionist is a stand-alone unit that provides the Centrex customer with
automatic call answer and transfer capability 24 hours a day, 7 days a week.
The Centrex Receptionist provides thirty minutes of recorded announcement time,
special after hours or holiday announcements, and nine main menu items. Each
main menu item supports nine selections that can be either a transfer to a
telephone number or an announcement. The Centrex Receptionist also provides
extension dialing, name directory services and call statistics. The unit has a
battery back-up that will last up to three days. The Centrex Receptionist is
remotely configured by Notify Technology Customer Service but locally
programmable by the user for voice greetings and voice Announcements using a
touch tone telephone. It has password protection for all administrative
programming. The current Centrex Receptionist model supports two or four
incoming Centrex lines.
Sales, Marketing and Distribution
We are expanding our customer base by using two-way wireless carriers to
market our NotifyLink product line of services and software. NotifyLink
Internet service can be used by all major ReFLEX--two way messaging carriers
which include WebLink Wireless, SkyTel, MetroCall, Arch Wireless, PageNet TSR
Wireless, and Bell Mobility. In November 2000, we entered into our first
agreement with WebLink Wireless, Inc. to resell our NotifyLink Internet Edition
and Standard Edition service and software. In December 2000, we announced that
a Memorandum of Understanding (MOU) had been signed with Motorola, Inc. to
develop custom versions of our NotifyLink software to integrate into certain
Motorola products.
The Visual Got Mail product line will derive revenue from both sales of
adjunct equipment and supplying ongoing Visual Got Mail services to users.
Service revenue may be direct through our own service centers or indirect
through customer owned and maintained service centers. Our technology is
proprietary and only our adjunct products or products licensed through us will
interface with the server centers. We have currently signed marketing
agreements with Cincinnati Bell, Sprint, and AT&T WorldNet. Our pilot programs
with GTE and BellSouth have not yet resulted in mass market deployments.
Currently Alltel Telephone System and Century Telephone are piloting the Visual
Got Mail service. We will continue to market the Visual Got Mail service to
traditional large telephone companies and Internet service providers.
The traditional sales activities for our products have been focused on
direct sales to large telephone companies. Our hardware products have been
either private labeled or joint marketed by GTE Communication Systems
Corporation, Pacific Bell, Southwestern Bell Telephone Company, BellSouth
Corporation, Ameritech Corporation, Century Telephone Enterprises Inc and
Altell Telephone System. Except with respect to Pacific Bell, Southwestern Bell
and Ameritech Corporation, our relationship with these companies has not been
reduced to a formal agreement or contract and none of these companies is
obligated to purchase any product from us. We manufacture products based on
purchase orders and forecasts of purchases received from Regional Bell
Operating Companies, or RBOCS, and Local Exchange Carriers, or LECs. We believe
large telephone companies typically do business in this manner and we do not
intend to seek long-term contractual commitments from our telephone company
customers. We sell products in the United States primarily to regional bell
operating companies and local exchange carriers. The Call Manager and Centrex
Receptionist product lines accounted for 69%, and 20% of total revenues in
fiscal 2000, respectively. The same two product lines products accounted for
34% and 41% of total revenues in fiscal 1999, respectively. Significant
portions of our revenue have been concentrated in a small number of customers.
For example, four customers accounted for 23%, 22%, 17% and 15% of sales for
the fiscal year ended September 30, 2000, and two customers accounted for 55%
and 11% of sales for the fiscal year ended September 30, 1999. Two of these
customers had significant sales in both years.
We are marketing the Centrex Receptionist to the same group of large
telephone companies we have targeted for the eView and Call Manager products.
We have entered into contracts with three major telephone
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companies to sell our Centrex Receptionist through their ongoing customer
premise equipment channels. We believe that we have established ourselves as a
qualified supplier or joint marketing partner with respect to the Centrex
Receptionist.
To date, we have sold our products to five of the seven RBOCs and twelve of
the 20 largest LECs. Our strategy is to encourage these companies to bundle our
products with their services as both a consumer acquisition tool and in order
to increase retention of new service subscribers. In addition, we intend to
encourage telephone companies and their authorized resellers that focus on
selling Centrex services to also market our Centrex Receptionist as an
enhancement to the basic Centrex service.
Technical and Marketing Support
We have developed product collateral and marketing programs for the Visual
Got Mail, Centrex Receptionist and Call Manager products. We intend to expand
our ongoing marketing programs to include the new NotifyLink products.* These
marketing programs will include augmentation of collateral material,
advertising and trade shows, supplemented with public relations campaigns.
We provide back-up technical support to large telephone companies and
resellers of all of our products. Our support organization for the Centrex
Receptionist provides both sales and technical support. Sales support consists
of sales and marketing training at our customer's facility for their sales
force and those of authorized resellers. The Centrex Receptionist requires
ongoing remote modem support on a billable service arrangement by our customer
service group whenever the user wants to add lines, make directory changes and
perform system back ups.
Research and Development
We incurred $1,459,911 and $1,361,792 in research and development expenses
in fiscal 2000 and 1999, respectively. We primarily develop products using
internal engineering resources. We believe that our future success, if any,
depends significantly on our ability to continue to enhance our existing
products and to develop new products and we intend to continue to incur
substantial research and development costs. We expect that our research and
development efforts will be focused in three areas: continued development of
our two-way wireless service and related software, further development of our
Visual Got Mail products and the incorporation of our technology into
complimentary products.
Manufacturing
We use offshore turnkey manufacturing for our production. To the extent
possible, we use standard parts and components for our products although some
components are custom designed and/or are available only from a single source
or limited sources. We have established a relationship with an offshore
manufacturer to design and build low cost Type I caller-id units that we resell
as part of our Call Manager product line. We use a separate manufacturer to
build our Type II Call Manager and Visual Got Mail product lines. Our two-way
wireless service and software require no traditional manufacturing resources.
Governmental Regulation and Industry Standards
Our products must comply with a variety of regulations and standards
including regulations and standards set by the Federal Communications
Commission, Underwriters Laboratories, National Registered Testing
Laboratories, and Bell Communications Research. As we enter international
markets, we will be required to comply with whatever governmental regulations
and industry standards exist in those markets. In addition, the U.S.
telecommunications market is evolving rapidly in part due to recently enacted
laws revamping the telecommunications regulatory structure. Additional
legislative or regulatory changes are possible. A failure by us to comply with
existing regulations and standards or to adapt to new regulations and standards
could have a material adverse effect on our business and operating results.
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Competition
Our NotifyLink Standard Edition product competes directly with Infowave's
Symmetry desktop solution and competes indirectly with Research In Motion's
Blackberry desktop software. We believe that we do not currently have any
direct competition for our NotifyLink Internet Edition service.
We believe that we do not currently have any direct competition for our
Visual GotMail technology. There are several indirect competitors that include
Landel Telecom and CIDCO Incorporated. These companies produce products that
provide e-mail notification as well as limited e-mail access. All of these
products require a relatively expensive device that consists of a multi-line
character display and a keyboard. We believe our Visual Got Mail technology
competes favorably with respect to any of these indirectly competing products.
We believe that we have no direct competitors in the market for Centrex
auto-attendant products. Indirect competition exists from Central Office based
services, PBX hardware installed on the end user's site and various PC based
software systems. These alternate solutions do not always use Centrex lines and
therefore do not stimulate Centrex service sales.
We currently have several direct competitors in the market for caller-id
units. CIDCO, TT Systems, Aastra Telecom of Canada, FANSTEL, and Thompson
Consumer Inc. produce Type I and Type II caller-id products and have been
selling their products for a number of years into the marketplace. Since we
have more recently entered this marketplace, our products rely on increased or
unique functionality to gain market share. We believe that our Call Manager
products compete favorably with respect to other caller-id products currently
being offered on the market although we believe the market for caller-id
product has weakened over the last few years.
We expect that to the extent that the market for any of our products
develops, competition will intensify and new competitors will enter the market.
There can be no assurance that we will be able to compete successfully against
existing and new competitors as the market for our products evolves and the
level of competition increases. A failure to compete successfully against
existing and new competitors would have a materially adverse effect upon our
business and results of operations.
Proprietary Rights
We rely on a combination of patent and trade secret law, nondisclosure
agreements and technical measures to establish and protect our proprietary
rights in our products. We have a design patent issued on the MessageAlert
design. The MessageAlert design is unique in that it provides a visual message
waiting indicator light packaged in the form of a 3M Post-it Note holder. In
addition, we were granted a patent in October 1998 relating to the MultiSense
technology used in the MessageAlert product. Our MultiSense technology
automatically detects and reacts to either stutter or CLASS signaling. We also
have patents pending on our Visual Got Mail technology and other technology
under development. We intend to continue to apply for patents, as appropriate,
for our future technologies and products.*
There are few barriers to entry into the market for our products, and there
can be no assurance that any patents applied for by us will be granted or that
the scope of the our patent, or any patents granted in the future, will be
broad enough to protect against the use of similar technologies by the our
competitors. There can be no assurance, therefore, that any of our competitors,
some of whom have far greater resources than us, will not independently develop
technologies that are substantially equivalent or superior to our technology.
We may be involved from time to time in litigation to determine the
enforceability, scope and validity of any of our proprietary rights or of third
parties asserting infringement claims against the us. Any such litigation could
result in substantial cost to us and diversion of efforts by our management and
technical personnel.
We have entered into a non-exclusive license agreement with Active Voice
Corporation ("Active Voice") pursuant to which we have paid an up-front fee on
sales of products that contain stutter dial tone detection. We
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have also entered into a royalty agreement with Uniden America Corporation
allowing Uniden to incorporate our VMWI technology into Uniden's Products for a
per unit fee.
Employees
As of September 30, 2000, we employed thirty-four persons of whom thirteen
were engaged in research and development, three in operations, thirteen in
sales, marketing, and customer support, and five in general administration and
finance. We contemplate increasing our staff at a pace consistent with our
business and growth. None of our employees are currently represented by a labor
union. We consider our relations with our employees to be good.
Our success, if any, will be dependent on our ability to attract and retain
highly skilled technical personnel as well as marketing and sales personnel. If
we were unable to hire the necessary personnel, the development of new products
and enhancements to current products would likely be delayed or prevented.
Competition for highly skilled technical, managerial, sales, and marketing
personnel is intense. There can be no assurance that we will be successful in
retaining our key personnel and in attracting and retaining the personnel we
require for expansion.
Executive Officers
The following sets forth information with regard to our executive officers
as of September 30, 2000:
Paul F. DePond, founder of Notify Technology Corporation, has served as
our President, Chief Executive Officer and Chairman of our board of
directors since our inception in August 1994.
Gaylan I. Larson has served as our Vice President of Operations and as
one of our directors since August 1994.
Gerald W. Rice has served as our Chief Financial Officer and Secretary
since August 1994.
Dane J. Russell has served as our Vice President of Sales since October
1999. From August 1998 through October 1999, Mr. Russell served as
Worldwide Director of H.323 (VoIP) Sales, at Lucent Technologies, Telemedia
venture. From August 1996 through August 1998, Mr. Russell served as
National OEM Sales Manager at Cypress Research, a PC based telephony
software venture company. From June 1984 to June 1996, Mr. Russell held
various Sales and Sales Management positions with 3M's Data Storage
Products Division.
Maurice J. Hamoy has served as our Vice President of Marketing since
December 1999. From February 1998 to October 1999, Mr. Hamoy was Vice
President of Communications at Storactive, Inc., a developer of enterprise
storage management products. From October 1995 to February 1998, Mr. Hamoy
was Vice President of Marketing at Software Publishing Corporation, the
developer of the Harvard Graphics presentation software. Prior to Software
Publishing Corporation, Mr. Hamoy served, over a ten-year period, in
several senior management positions at Inset Systems, Inc., a privately
held graphics company that pioneered the use of graphics on the Internet.
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RISK FACTORS
We Have a Limited Operating History and a History of Losses, Moreover, There is
No Assurance of Future Profitability
We commenced operations in August 1994 and through January 1996 were engaged
primarily in research and development. Accordingly, we have a limited operating
history, and we face all of the risks and uncertainties encountered by early-
stage companies. For the fiscal years ended September 30, 1999, 1998 and 1997,
we incurred net losses of $3,123,284, $2,617,561 and $1,382,910 respectively.
We incurred a net loss of $3,526,452 for fiscal 2000 and as of September 30,
2000, we had an accumulated deficit of $12,733,488 and working capital of
$837,808. We anticipate having a negative cash flow from operating activities
in future quarters and years. We also expect to incur further operating losses
in future quarters and years and until such time, if ever, as there is a
substantial increase in orders for the our products and product sales generate
sufficient revenue to fund our continuing operations. There can be no assurance
that sales of our products will ever generate significant revenue, that we will
ever generate positive cash flow from our operations or that we will attain or
thereafter sustain profitability in any future period.
We May Be Unable to Generate the Capital Necessary to Support Our Planned Level
of Research and Development Activities and Manufacture and Market Our Product.
At September 30, 2000, we had an accumulated deficit of $12.7 million and
incurred a net loss of $3.5 million for the year ended September 30, 2000. Our
recently developed products will need to attain favorable market acceptance to
continue our research and development activities and fund operating expenses at
current levels. Our ability to fund our operations in fiscal 2001 depends upon
the success of our new products and/or our ability to find additional sources
of financing. There can be no assurance that our new products will attain
favorable market acceptance or that we will be able to raise additional
financing. If we are unable to attain our revenue goals or raise additional
financing, significant reductions in spending and the delay or cancellation of
planned activities or more substantial restructuring of the Company may be
necessary. In such an event, we intend to implement expense reduction plans in
a timely manner to enable us to meet our cash requirements through at least
September 30, 2001. These actions would have material adverse effects on our
business, results of operations, and prospects.
Our Quarterly Operating Results May Vary
We anticipate that we will experience significant fluctuations in our
operating results in the future. Fluctuations in operating results may cause
the price of our common stock, Units and Class A warrants to be volatile.
Operating results may vary as a result of many factors, including the
following:
. our level of research and development;
. our sales and marketing activities;
. announcements by us or our competitors;
. size and timing of orders from customers;
. new product introductions by us or our competitors; and
. price erosion.
Each of the above factors is difficult to control and forecast. Thus, they
could have a material adverse effect on our business, financial condition and
results of operations.
Notwithstanding the difficulty in forecasting future sales, we generally
must undertake research and development and sales and marketing activities and
other commitments months or years in advance. Accordingly, any shortfall in
product revenues in a given quarter may materially adversely affect our
financial condition and results of operations because we are unable to adjust
expenses during the quarter to match the
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level of product revenues, if any, for the quarter. Due to these and other
factors, we believe that quarter to quarter comparisons of our results of
operations are not necessarily meaningful and should not be relied upon as
indications of the future performance.
Our Products May Not Be Accepted
We sold our first Centrex Receptionist in March 1998, the first Call Manager
product in April 1999 and announced the first sales of our new Visual Got Mail
products into trial programs in November 1999. We also announced the launch of
the new NotifyLink Service in November 2000. To date, we have received only
limited revenue from the sale of these products. While we believe that our
products are commercially viable, developing products for the consumer and
business marketplaces is inherently difficult and uncertain. We do not believe
our sales to date are sufficient to determine whether or not there is
meaningful consumer or business demand for our products.
We intend to devote significant resources to sales and marketing efforts and
to promote consumer and business interest in our products. There can be no
assurance that such efforts will be successful or that significant market
demand for our products will ever develop.
We Depend on Limited Number of Potential Customers and Need to Develop
Marketing Channels
The success of our NotifyLink Internet Edition web based product will be
dependant on our ability to sell it to, or in conjunction with, the seven
largest two-way wireless carriers. Our NotifyLink desktop software will be
largely dependant on establishing a relationship with large two-way wireless
device manufactures. We believe that we can profitably sell our Call Manager
and Centrex Receptionist product only if we either sell our products to, or
enter into joint marketing arrangements with, the seven RBOCs, and
approximately 20 large LECs, in the United States. We also expect to rely
significantly on the RBOCs and LECs as a channel for our initial sales of our
Visual Got Mail product. Four customers accounted for 23%, 22%, 17% and 15% of
sales for the fiscal year ended September 30, 2000, and two customers accounted
for 55% and 11% of sales for the fiscal year ended September 30, 1999. Two of
these customers had significant sales in both years.
To date, we have sold our products to one wireless carrier, five RBOCs and
twelve LECs. It took us substantially longer than we originally anticipated to
qualify our product and develop some of these marketing relationships necessary
to make these sales. RBOCs and LECs tend to be hierarchical, which distribute
decision-making authority and resist taking risks. Selling a product to or
entering into a marketing relationship with an RBOC or LEC is generally a
lengthy process requiring multiple meetings with numerous people in the
organization. If we fail to develop significantly enhanced relationships with
the RBOCs and LECs, our business and operating results would be materially
adversely affected.
We also intend to develop other distribution channels for our products,
including certain wireless device manufacturers, local exchange carriers and
potential development of internet service provider channels. Our management
will need to expend time and effort to develop these channels. Because our
marketing efforts have been largely focused on developing relationships with
RBOCs and LECs, our management has had only limited experience in selling our
products through these channels. We may not be able to implement this marketing
and distribution program to expand our distribution channels and any marketing
efforts undertaken by or on behalf of us may not be successful.
Our Products May Suffer from Defects
Many of our products incorporate a combination of reasonably sophisticated
computer chip design, electric circuit design, software programming and
telephony technology. We have devoted substantial resources to researching and
developing each of these elements. In order to reduce the manufacturing costs,
expand the feature sets and otherwise enhance the operation of our products, we
have from time to time redesigned our products. We expect that in the future we
will engage in similar redesigns of our products. In addition, we are
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in the process of developing new, similarly complex products. Though we
extensively test our products before marketing them, any new, redesigned or
current product may contain design flaws that we won't detect through our
testing procedures. In addition, we rely on subcontractors to manufacture our
products. Though we have quality control procedures designed to detect
manufacturing errors, there can be no assurance that we will identify all
defective products. We believe that reliable operation will be an important
purchase consideration for both our consumer and business customers. A failure
by us to detect and prevent a design flaw or a widespread product defect could
materially adversely affect the sales of the affected product and our other
products and materially adversely affect our business, financial condition and
operating results.
Some of our products will consist of software and service related to our
wireless NotifyLink product line. Our NotifyLink products incorporate a mix of
new and proven technology that has been tested extensively but may still
contain undetected design flaws. A failure by us to detect and prevent a design
flaw or a widespread product defect could materially adversely affect the sales
of the affected product and our other products and materially adversely affect
our business, financial condition and operating results.
We Face Significant Competition
We believe the market for our products is highly competitive and that
competition is likely to intensify. In the market for wireless e-mail
notification and management software, we indirectly compete with Research In
Motion Limited and Infowave Software, Inc. In the Caller-ID market, we compete
directly with CIDCO Incorporated, TT Systems, Aastra Telecom of Canada and
Thompson Consumer Inc. Finally, our Visual GotMail technology indirectly
competes with several companies, including Landel Telecom and CIDCO
Incorporated. Some of these companies have greater financial, technical and
marketing resources than we do. In addition, there are several companies with
substantially greater technical, financial and marketing resources than we do
that could produce competing products. These companies include telephone
equipment manufacturers such as Northern Telecom, Inc. and Lucent Technologies,
Inc. We expect that to the extent that the market for our products develops,
competition will intensify and new competitors will enter the market. We may
not be able to compete successfully against existing and new competitors as the
market for our products evolves and the level of competition increases. A
failure to compete successfully against existing and new competitors would
materially adversely effect our business and results of operations.
We Depend on Key Executives
Our potential for success depends significantly on key management employees,
including our Chairman, President and Chief Executive Officer, Mr. Paul F.
DePond, our Vice President of Operations, Gaylan Larson and our Chief Financial
Officer, Gerald W. Rice. We have obtained three-year key-man term life
insurance on Mr. DePond in the amount of $2,000,000 and have entered into
employment agreements with him along with Mr. Larson and Mr. Rice. The loss of
their services or those of any of our other key employees would materially
adversely effect us. We also believe that our future success will depend in
large part on our ability to attract and retain additional highly skilled
technical, management, sales and marketing personnel. If we were unable to hire
the necessary personnel, the development of new products and enhancements to
current products would likely be delayed or prevented. Competition for these
highly-skilled employees is intense. Therefore, there can be no assurance that
we will be successful in retaining our key personnel and in attracting and
retaining the personnel we require for expansion.
Our Intellectual Property May Not Be Adequately Protected and We May Infringe
the Rights of Others
We regard various features and design aspects of our products as proprietary
and rely primarily on a combination of patent and trademark laws and employee
and third-party nondisclosure agreements to protect our proprietary rights. We
have been issued a patent covering the design of our MessageAlert products, and
a patent covering the MultiSense technology used in our MessageAlert product.
We have also applied for patents on our Visual Got Mail technology. We intend
to continue to apply for patents, as appropriate, for our future
9
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technologies and products. There are few barriers to entry into the market for
our products, and there can be no assurance that any patents we apply for will
be granted or that the scope of our patents or any patents granted in the
future will be broad enough to protect us against the use of similar
technologies by our competitors. There can be no assurance, therefore, that any
of our competitors, some of whom have far greater resources than we do, will
not independently develop technologies that are substantially equivalent or
superior to our technology.
We may be involved from time to time in litigation to determine the
enforceability, scope and validity of any of our proprietary rights or of third
parties asserting infringement claims against us. These claims could result in
substantial cost to us and could divert our management and technical personnel
away from their normal responsibilities.
We May Not Be Able to Obtain Critical Components from Our Suppliers
Currently, we are able to obtain many key components used in our products
only from single or limited sources. We do not have long term supply contracts
with these or any other component vendors and purchase all of our components on
a purchase order basis. Component shortages may occur and we may not be able to
obtain the components we need in a timely manner and on a commercially
reasonable basis. In particular, the microcontroller that forms the core of our
Call Manager and Visual Got Mail products is manufactured only by Epson
Electronics America, Inc. From time to time, the semiconductor industry has
experienced extreme supply constraints. If we are unable to obtain sufficient
quantities of microcontrollers from Epson Electronics America, Inc., our
business and operating results would be materially adversely effected.
We utilize offshore manufactures to manufacture our products and these
manufacturers may not be able to support our manufacturing requirements. If we
are unable to obtain sufficient quantities of sole-source components or
subassemblies, or to develop alternate sources, we could experience delays or
reductions in product shipments or be forced to redesign our products. Each of
these scenarios could materially adversely effect our business and operating
results.
Our Products May Not Comply with Government Regulations and Industry Standards
Our products must comply with a variety of regulations and standards. These
include regulations and standards set by the Federal Communications Commission,
Underwriters Laboratories, National Registered Testing Laboratories, and Bell
Communications Research. As our business expands into international markets we
will be required to comply with whatever governmental regulations and industry
standards exist in those markets. In addition, the U.S. telecommunications
market is evolving rapidly in part due to recently enacted laws revamping the
telecommunications regulatory structure. Additional legislative or regulatory
changes are possible. If we fail to comply with existing regulations and
standards or to adapt to new regulations and standards, our business and
operating results could be materially adversely effected.
We May Not Be Able to Manage Our Planned Growth
We plan to expand our business operations during fiscal year 2001. This
expansion could strain our limited personnel, financial, management and other
resources. In order to manage our planned growth, we will need to maintain our
product development program and expand our sales and marketing capabilities and
personnel. In addition, we will need to adapt our financial planning,
accounting systems and management structure to accommodate this growth if it
occurs. Our failure to properly anticipate or manage our growth, if any, could
adversely affect our business, operating results and financial condition.
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Sales of Outstanding Shares May Hurt Our Stock Price
The market price for our common stock could fall substantially if our
shareholders sell large amounts of our common stock. Potential future sales of
our common stock include the following:
. 425,000 Class A warrants and the underlying shares of common stock, which
we have agreed to register for resale pursuant to an agreement entered
into in connection with a 1997 bridge financing;
. 1,341,231 shares of our common stock or warrants to purchase shares of
our common stock placed in an escrow in connection with our initial
public offering.
. The holder of an option to purchase 160,000 Units consisting of one share
of common stock and one Class A warrant has demand and "piggy-back"
registration rights covering our securities. We could incur substantial
expenses if this option holder exercises this option.
. David Brewer holds 1,317,400 shares of common stock and warrants to
purchase 877,044 shares of common stock. We have agreed to register for
resale these shares of common stock, including the shares underlying the
warrants, at the request of Mr. Brewer.
. Various investors hold 376,865 shares of common stock and warrants to
purchase 188,424 shares of common stock, which they purchased in a
private placement in November 2000. We have agreed to register for resale
these shares, including the shares underlying the warrants, after
February 7, 2001 at the request of the investors.
Sales or the possibility of sales of our common stock in the public market may
adversely affect the market price of our securities.
Exercise of Outstanding Options and Warrants May Dilute Current Shareholders
The following options and warrants to purchase our common stock are
outstanding:
. 1,600,000 Class A warrants to purchase 1,600,000 shares of our common
stock for $6.50 per share, issued in connection with our initial public
offering, subject to adjustment in some circumstances;
. 425,000 Class A warrants to purchase 425,000 shares of our common stock
for $6.50 per share, issued in connection with our 1997 bridge financing;
. an option to purchase 160,000 Units at a price per Unit of $7.00 issued
to the underwriter of our initial public offering;
. additional warrants as of September 30, 2000 to purchase 163,386 shares
of our common stock;
. 505,535 options outstanding as of September 30, 2000 under our 1997 Stock
Plan, and subject to vesting requirements. 682,370 shares of our common
stock are reserved for issuance under our 1997 Stock Plan;
. warrants to purchase 877,044 shares of common stock at a price of $3.25
held by David Brewer; and
. warrants to purchase 188,424 shares of common stock at a price of $3.25
held by various investors.
Holders of these options and warrants may exercise them at a time when we would
otherwise be able to obtain additional equity capital on terms more favorable
to us. Moreover, while these options are outstanding, our ability to obtain
financing on favorable terms may be adversely affected.
Our Stock Price May be Volatile
The market price for our common stock may be affected by a number of
factors, including the announcement of new products or product enhancements by
us or our competitors, the loss of services of one or more of our executive
officers or other key employees, quarterly variations in our or our
competitors' results
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of operations, changes in earnings estimates, developments in our industry,
sales of substantial numbers of shares of our common stock in the public
market, general market conditions and other factors, including factors
unrelated to our operating performance or the operating performance of our
competitors. In addition, stock prices for many companies in the technology
sector have experienced wide fluctuations that have often been unrelated to the
operating performances of these companies. These factors and fluctuations, as
well as general economic, political and market conditions, such as recessions,
may materially adversely affect the market price of our common stock.
Our Securities May be Delisted From the Nasdaq Stock Market.
On December 5, 2000, The Nasdaq Stock Market, Inc. notified us that we may
have violated the Nasdaq Marketplace Rules when we sold common stock and
warrants to purchase common stock to David Brewer on March 4, 1999.
Specifically, Nasdaq claims that we may have needed to obtain shareholder
approval because:
. the transaction may have resulted in a change of control of us; and
. we may have issued over 20% of our outstanding common stock at a price
per share that was below market value.
We believe that the transaction did not result in a change of control of us
and that we issued the common stock at market value. We are currently
corresponding with Nasdaq to address their concerns. Nevertheless, if Nasdaq
does not agree with our assessment of the transaction, we may face penalties,
including the delisting of our securities from the Nasdaq SmallCap Market. In
the event that we are delisted, trading, if any, in our Units, Class A warrants
and common stock would thereafter be conducted in the over-the-counter market
in the so-called "pink sheets" or on the National Association of Security
Dealer's "Electronic Bulletin Board." As a result, the number or our securities
which could be bought or sold would likely be reduced, transactions in our
securities might be delayed and the prices for our securities might be lower
than otherwise would be attained.
If the Market for Wireless Data Communications Devices Does Not Grow, We May
Not Successfully Sell Our NotifyLink Products
The overall market for wireless data communications devices has experienced
significant growth in recent years. The success of our NotifyLink Internet
Edition and Standard Edition products depends upon this growth. There can be no
assurance that the market for wireless software products will continue to grow,
that firms within the industry will adopt our software products for integration
with their wireless data communications solutions, or that we will be
successful in independently establishing product markets for our wireless
software products. If the various markets in which our software products
compete fail to grow, or grow more slowly than we currently anticipate, or if
we were unable to establish product markets for our new software products, our
business, results of operation and financial condition would be materially
adversely affected.
Our Officers and Directors Substantially Control Us
Based upon the number of shares of our common stock that are outstanding as
of September 30, 2000, our officers and directors as a group will beneficially
own approximately 55% of our outstanding common stock after giving effect to
the exercise of all currently exercisable outstanding options and warrants held
by such individuals. Consequently, the officers and directors as a group will
be able to exert substantial influence over the election of our directors and
the direction of our policies.
Our Net Income Will Be Decreased if the Escrow Securities Are Released
In connection with our initial public offering, many of our shareholders,
including current officers, directors and employees, placed a substantial
portion of our securities then held by them into an escrow. These securities
will be released from escrow if we reach pre-tax earnings targets. Upon the
release from this escrow of any securities owned by our officers, directors,
consultants or employees, we will be required to record a
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compensation expense for financial reporting purposes. Accordingly, in any
period in which securities are released from this escrow, we will record a
substantial noncash charge to earnings that will increase our loss or reduce or
eliminate earnings, if any, at that time. The amount of this charge will be
equal to the aggregate market price of the securities owned by directors,
officers and employees which are released from the escrow. Although the amount
of compensation expense recognized by us will not affect our total
shareholders' equity or cash flow, it may have a depressive effect on the
market price of our securities.
ITEM 2. Description of Property.
Our principal executive offices are located at 1054 South DeAnza Boulevard,
Suite 105, San Jose, California 95129. These facilities consist of
approximately 5,000 square feet of office space pursuant to a lease that
expires March 31, 2001. We have a second location at 23 Lisbon Street,
Canfield, Ohio 44406 that houses an engineering group and customer support for
the Eastern United States. The Ohio facility consists of approximately 1,500
square feet of office space leased on a month to month basis. We will either
renew our leases and acquire more space if available or enter into a lease for
new premises in the local areas.
ITEM 3. Legal Proceedings.
We are not a party to any litigation.
ITEM 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote by security holders during the fourth
quarter of fiscal 2000.
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PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.
(a) 1. Market for Common Equity.
Since August 28, 1997, the effective date of our initial public offering,
our Common Stock, Class A Warrants and Units consisting of one share of Common
Stock and one Class A Warrant were listed on the Nasdaq SmallCap Market under
the symbols NTFY, NTFYW and NTFYU, respectively.
The quarterly high and low sales prices of our Common Stock during the last
two fiscal years are as follows:
NTFY Common Stock
<TABLE>
<CAPTION>
Closing Daily Average
High Low Sales Prices Trading Volume
------- ------ ------------ --------------
<S> <C> <C> <C> <C>
Fiscal Year Ended
September 30, 2000
Fourth Quarter.......... $ 6.000 $2.625 $3.375 16,924
Third Quarter........... $ 7.875 $3.578 $3.813 18,640
Second Quarter.......... $10.875 $4.375 $7.813 69,687
First Quarter........... $ 8.438 $6.063 $6.063 34,837
Fiscal Year Ended
September 30, 1999
Fourth Quarter.......... $ 8.875 $5.750 $7.656 37,302
Third Quarter........... $ 9.000 $6.313 $6.750 69,606
Second Quarter.......... $ 9.375 $1.188 $8.125 258,109
First Quarter........... $ 2.500 $0.750 $1.125 4,072
</TABLE>
The quarterly high and low sales prices of our Class A Warrants during the
last two fiscal years, are as follows:
NTFYW Warrants
<TABLE>
<CAPTION>
Closing Daily Average
High Low Sales Prices Trading Volume
------ ------ ------------ --------------
<S> <C> <C> <C> <C>
Fiscal Year Ended September 30, 2000
Fourth Quarter..................... $1.813 $.0438 $1.250 10,683
Third Quarter...................... $2.375 $0.813 $0.906 7,232
Second Quarter..................... $4.500 $1.375 $2.500 23,157
First Quarter...................... $3.063 $1.938 $2.031 20,270
Fiscal Year Ended September 30, 1999
Fourth Quarter..................... $3.219 $1.688 $2.688 23,928
Third Quarter...................... $3.250 $1.969 $2.031 45,664
Second Quarter..................... $3.375 $0.156 $2.500 73,187
First Quarter...................... $0.438 $0.156 $0.156 1,013
</TABLE>
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The quarterly high and low sales prices of our Units during the last two
fiscal years are as follows:
NTFYU Units
<TABLE>
<CAPTION>
Closing Daily Average
High Low Sales Prices Trading Volume
------- ------ ------------ --------------
<S> <C> <C> <C> <C>
Fiscal Year Ended
September 30, 2000
Fourth Quarter.......... $ 7.500 $3.500 $ 4.250 136
Third Quarter........... $11.000 $3.250 $ 3.500 95
Second Quarter.......... $14.250 $6.750 $11.000 803
First Quarter........... $11.750 $8.125 $ 8.250 175
Fiscal Year Ended
September 30, 1999
Fourth Quarter.......... $12.063 $7.500 $10.625 408
Third Quarter........... $12.438 $8.313 $ 9.250 645
Second Quarter.......... $12.000 $1.438 $10.000 8,938
First Quarter........... $ 2.750 $1.000 $ 1.500 2,660
</TABLE>
These quotations reflect inter-dealer prices, without retail mark-up, mark-
down or commission, and may not represent actual transactions.
Shareholders. As of December 26, 2000, there were approximately 92 holders
of record of our Common Stock and Class A Warrants.
Dividends. We have never declared or paid any cash dividends on our Common
Stock. We currently anticipate that we will retain all future earnings for the
expansion and operation of our business and do not anticipate paying cash
dividends in the foreseeable future.
2. Recent Sales of Unregistered Securities.
In November 2000, we sold 376,865 shares of common stock and 18 warrants to
purchase an aggregate of 188,424 shares of common stock to a group on nine
investors for an aggregate consideration of $1,224,820. Each investor was an
accredited investor and no public solicitation occurred in connection with the
offer and sale of securities. The offer and sale of the securities were exempt
from the registration requirements of the Securities Act of 1933 pursuant to
Rule 506 thereunder.
ITEM 6. Management's Discussion and Analysis or Plan of Operation.
Overview
We were incorporated in the State of California in August 1994. We are an
innovative communications application service provider of wireless and wireline
messaging services. We are also a supplier of innovative call and message
notification products and services and currently sell our products through OEM
relationships with major telephone companies, telephone equipment distributors,
Internet service providers and two-way wireless service providers.
We completed our initial public offering in September 1997, with net
proceeds of approximately $6.2 million. Prior to our initial public offering,
our working capital requirements were met through the sale of equity and debt
securities and, to a lesser extent, product revenue and a line of credit. We
have sustained significant operating losses in every fiscal period since
inception and expect to incur substantial quarterly operating losses in the
future. Our limited operating history makes the prediction of future operating
results difficult if not impossible. Future operating results will depend on
many factors, including the demand for our products, the level of product and
price competition, our ability to expand our existing distribution channels and
to create new distribution channels, and our ability to develop and market new
products and control costs. There can be no assurance that our revenue will
grow or be sustained in future periods or that we will ever achieve
profitability.
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Results of Operations
Revenue
Our revenue has been derived from the sale of our Call Manager, Centrex
Receptionist and MessageAlert products. Revenue consists primarily of gross
revenue from the sale of telephony equipment and service income related to the
Centrex Receptionist Product. The revenue from these service contracts are
recognized on a straight line basis over the term of the contract.Revenue for
the fiscal year ended September 30, 2000 increased to $4,219,703 from
$1,836,142 for the fiscal year ended September 30, 1999. Revenue was up from
the previous year due to the introduction of the Call Manager product line in
the third quarter of fiscal 1999 and growth in Centrex Receptionist sales
offset by a decline in sales of the MessageAlert product. We do not expect our
MessageAlert products to be a significant source of revenue in fiscal 2001.
Revenue from our Call Manager and Centrex product lines increased due to sales
to telephone companies for their customer acquisition programs using Call
Manager products during the first half of fiscal 2000. Despite the revenue
growth in fiscal 2000 over the prior year, we experienced a significant decline
in revenue from both our Call Manager and Centrex product lines in the second
half of fiscal 2000 compared to the first half of fiscal 2000. We believe the
decline in revenue for Call Manager products in the second half of fiscal 2000
was due to our telephone company customers reducing their use of adjunct
products as a marketing tool. Centrex Receptionist revenue decreased because
telephone companies emphasized the sale of "KEY Systems" as an alternative to
selling our Centrex products. There can be no assurance that this decline in
revenue from our Call Manager and Centrex products will not continue in fiscal
2001.
We sell products in the United States primarily to regional bell operating
companies and local exchange carriers. The Call Manager and Centrex
Receptionist product lines accounted for 69% and 20%, respectively of total
revenues in fiscal 2000. The same two product lines products accounted for 34%
and 41%, respectively of total revenues in fiscal 1999. Significant portions of
our revenue have been concentrated in a small number of customers although not
necessarily the same customers each year. For example, four customers accounted
for 23%, 22%, 17% and 15% of sales for the fiscal year ended September 30,
1999, and two customers accounted for 55% and 11% of sales for the fiscal year
ended September 30, 1999. Two of these customers had significant sales in both
years.
Cost of Sales
Cost of sales consists primarily of the cost to manufacture our products.
Cost of sales increased to $3,657,121 in the fiscal year ended September 30,
2000 from $1,721,029 in the fiscal year ended September 30, 1999. This increase
was the result of increased sales of our products for use in telephone company
promotional programs. Our gross margins were impacted by inventory write-downs
in both fiscal 2000 and fiscal 1999. Despite the significant inventory write-
downs recorded in the fourth quarter, our gross margin increased to 13% in
fiscal 2000 from 6% in fiscal 1999. The write-downs in fiscal 2000 were related
to both Call Manager product and Centrex Receptionist product. We have seen a
lower demand for our caller-id units in customer promotional programs. This
reduced demand also caused us to have excess inventory of the Centrex
Receptionist in fourth quarter of fiscal 2000. The inventory write-downs in
fiscal 1999 were primarily related to the MessageAlert product line that was
replaced by the Call Manager product line as well as the write-down of certain
Call Manager inventory to the lower of cost or market due to increased costs
incurred to achieve the initial volume deployment of the Call Manager product
line.
Research and Development
Research and development expense consists principally of personnel costs,
contract design services and supply expenses. Research and development expense
increased to $1,459,911 for the fiscal year ended September 30, 2000 from
$1,361,792 for the fiscal year ended September 30, 1999. This increase was
primarily the result of adding more development resources at our Ohio site to
support the further development of Visual Got Mail and NotifyLink, our entry
into the two-way wireless messaging market. We expect to continue this level
research and development activity but there can be no assurance that these
products will by accepted by the market.
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<PAGE>
We expect that our investment in research and development will continue at,
or near, the current level for fiscal 2001 in order that we may complete the
products under development and enhance our current products.*
Sales and Marketing
Sales and marketing expense consists primarily of personnel, consulting and
travel costs and sales commissions related to our sales and marketing efforts.
Sales and marketing expenses increased to $1,209,993 for the fiscal year ended
September 30, 2000 from $837,334 for the fiscal year ended September 30, 1999.
This increase was attributable primarily to the increase in salaries caused by
our hiring additional employees, the increase commission costs on increased
sales and the increase in show expense.
We anticipate that sales and marketing expenses will increase significantly
in future quarters as we hire additional sales and customer support personnel
and attempt to expand our existing and create new distribution channels.
General and Administrative
General and administrative expense consists of general management and
finance personnel, occupancy costs and professional fees and other general
corporate expenses. General and administrative expenses increased to $1,570,323
for the fiscal year ended September 30, 2000 from $1,136,779 for the fiscal
year ended September 30, 1999. These increases were primarily the result of
additional rent, legal, accounting and corporate expense and increases in
executive salaries. We expect that we will need to hire additional accounting
and financial personnel in order to support anticipated growth.
Income Taxes
There was no provision for federal or state income taxes in fiscal 1999 or
2000 as we incurred net operating losses. We expect to incur a net operating
loss in future quarters and years. As of September 30, 2000, we had federal and
state net operating loss carryforwards of approximately $10,000,000 and
$6,000,000, respectively. The net loss carryforwards and certain research and
development tax credit carryforwards will expire in tax years 2003 through
2020, if not utilized. Utilization of the net operating losses and credits may
be subject to a substantial annual limitation due to ownership change
limitations provided by the Internal Revenue Code of 1986, as amended (the
"Code"), and similar state provisions. The annual limitation may result in the
expiration of net operating losses and credits carryforwards before full
utilization. For financial reporting purposes, deferred tax assets primarily
related to the net operating carryforwards recognized under Financial
Accounting Standard No. 109, "Accounting for Income Taxes," has been fully
offset by a valuation allowance.
Release of Escrow Securities
In the event any Escrow Securities owned by security holders of the
Registrant who are officers, directors, consultants or employees of the
Registrant are released from escrow, compensation expense will be recorded for
financial reporting purposes. Therefore, in the event we attain any of the
earnings required for the release of the Escrow Securities, the release would
be treated, for financial reporting purposes, as compensation expense to the
Registrant. Accordingly, we will, in the event of the release of the Escrow
Securities, recognize during the period that the earnings or stock price
thresholds are met a substantial non-cash charge to earnings that would
increase our loss or reduce or eliminate earnings, if any, at such time. The
amount of this charge will be equal to the aggregate market price of such
Escrow Securities at the time of release from escrow. Although the amount of
compensation expense recognized by us will not affect our total shareholders'
equity or cash flow, it may cause a reduction in the market price of our
securities.
Liquidity and Capital Resources
Our financial statements are prepared and presented on a basis assuming we
continue as a going concern. The report of our independent auditors on our
financial statements for the year ended September 30, 2000
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includes an explanatory paragraph with respect to our ability to continue as a
going concern. We had an accumulated deficit of $12.7 million at September 30,
2000 and incurred a net loss of $3.5 million for the year ended September 30,
2000. Our recently developed products will need to attain favorable market
acceptance to continue our research and development activities and fund
operating expenses at current levels. Our ability to fund our operations in
fiscal 2001 depends upon the success of our new products and/or raising
additional financing. There can be no assurance that our new products will
attain favorable market acceptance or that we will be able to raise additional
financing. If we are unable to attain our revenue goals or raise additional
financing, significant reductions in spending and the delay or cancellation of
planned activities or more substantial restructuring of our organization may be
necessary. In such an event, we intend to implement expense reduction plans in
a timely manner to enable us to meet our cash requirements through at least
September 30, 2001. These actions would have material adverse effects on our
business, results of operations, and prospects.
At September 30, 2000, we had cash and cash equivalents and restricted cash
of $1,076,493. Of this amount, $764,698 is recorded as restricted cash, which
is securing outstanding letters of credit to our suppliers issued in connection
with commitments to purchase additional inventory of $687,000.
Over the last three years, we have financed our operations primarily through
sales of equity and debt securities and bank lines of credit. In the fiscal
years ended September 30, 2000 and 1999, the net cash used in operating
activities equaled $2,627,174 and $2,868,342, respectively. The net cash used
in operations in fiscal 2000, consisted primarily of the net loss of $3,526,452
offset by depreciation and amortization of $257,676 and a decrease in net
operating assets of $641,602. The major causes of the decrease in net operating
assets was a reduction in accounts receivable of $265,698 due to lower sales in
the fourth quarter of fiscal 2000 compared to the fourth quarter of fiscal
1999, and an increase in revenue that was deferred in accordance with our
revenue recognition policy. We anticipate that we will have a negative cash
flow from operating activities in future quarters and years.
Net cash used in investing activities increased from $183,022 in fiscal 1999
to $913,214 in fiscal 2000 due to the recording of the restricted cash noted
above, partially offset by a reduction in expenditures for property and
equipment from $183,022 in fiscal 1999 to $148,516 in fiscal 2000.
In March 1999, we sold to David Brewer 850,000 shares of common stock and
issued warrants to purchase 1,344,444 shares of common stock for an aggregate
consideration of $3,043,360. The warrants consisted of four warrants to
purchase 155,800 shares of common stock at $3.60 per share and one warrant to
purchase 721,244 shares of common stock at $3.60 per share. Each of the four
warrants originally expired upon the earlier of September 3, 2000 or 30 days
after we meet certain product sales or revenue milestones. On October 13, 1999,
David Brewer executed two of the warrants for a total of 311,600 shares of
common stock and the Company received $1.1 million. At the same time, we
renegotiated the two remaining warrants to restate the milestone on one and
extend both warrants until March 1, 2001 or 30 days after we meet certain
product sales or revenue milestones. One of these warrants was exercised by Mr.
Brewer in February 2000 for a total of 155,800 shares of common stock and the
Company received $0.6 million. We did not achieve the final milestone and
unless we re-negotiate the final warrant, it will expire on March 31, 2001.
However, there can be no assurances that we will re-negotiate this milestone or
that Mr. Brewer will, in fact, exercise the warrant.
In connection with the sale of the common shares and warrants to Mr. Brewer,
we agreed to issue additional warrants to Mr. Brewer if we sell shares of
common stock in a capital raising transaction at a price below $3.60 per share
prior to the earlier of (i) March 3, 2002 or (ii) our calling our outstanding
Class A warrants. In November 2000, we sold in a private offering, shares of
common stock at a price of $3.25 per share. Mr. Brewer agreed to waive his
right to receive additional warrants that was created by this dilutive issuance
of common stock, and we agreed to change the exercise price of each of his
877,044 outstanding warrants from $3.60 to $3.25.
18
<PAGE>
In November 2000, we sold to a private group of nine (9) investors, which
included Mr. Andrew Plevin, a director of Notify Technology Corporation,
376,865 shares of common stock and issued warrants to purchase an aggregate of
188,424 shares of common stock for an aggregate consideration of $1,224,820.
The exercise price for each of the warrants is $3.25 per share of common stock.
Warrants to purchase an aggregate of 94,212 shares of common stock expire nine
months from the closing date and warrants to purchase an aggregate of 94,212
shares of common stock expire three years from the closing date. We granted the
shareholders certain demand registration with respect to such shares. The
exercise of any such rights could involve substantial expense to us.
ITEM 7. Financial Statements
Our audited financial statements appear beginning on page F-1 of this
report.
ITEM 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
19
<PAGE>
PART III
ITEMS 9. Management
The information regarding the identification and business experience of our
directors under the caption "Nominees and Vote Required" under the main caption
"PROPOSAL NO. 1--ELECTION OF DIRECTORS" IN OUR DEFINITIVE 2001 Proxy Statement
for the annual meeting of shareholders to be held, as filed with the Securities
and Exchange Commission within 120 days after the end of our fiscal year ended
September 30, 2000, is incorporated herein by this reference. For information
regarding the identification and business experience of our executive officers,
see "Executive Officers" in Item I of this Annual Report on Form 10-KSB.
Information concerning filing requirements applicable to our executive officers
and directors under the caption "COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934" in our 2001 Proxy Statement is incorporated
herein by this reference.
ITEM 10. Executive Compensation
The information under the captions "Compensation of Directors" and
"EXECUTIVE COMPENSATION" in our 2001 Proxy Statement is incorporated herein by
this reference.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT" in our 2001 Proxy Statement is incorporated herein by
this reference.
ITEM 12. Certain Relationships and Related Transactions
The information under the caption "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS" in our 2001 Proxy Statement is incorporated herein by this
reference.
20
<PAGE>
ITEM 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
<TABLE>
<C> <S>
3.1 Restated Articles of Incorporation of Registrant. (incorporated herein
by reference to Exhibit (3.2)
to the Registrant's Registration Statement on Form SB-2, Reg. No. 333-
23369, filed on March 14, 1997)
3.2 Amended and Restated Bylaws of Registrant. (incorporated herein by
reference to Exhibit (3.2)
to Post-Effective Amendment No. 4 to the Registrant's Registration
Statement on Form SB-2, Reg. No. 333-23369, filed on April 18, 2000)
4.1 Form of Warrant Agreement. (incorporated herein by reference to Exhibit
(4.1) to Amendment No. 1 to the Registrant's Registration Statement on
Form SB-2, Reg. No. 333-23369, filed on May 29, 1997)
10.1 Employment Agreement dated as of August 1, 1997 between Registrant and
Paul DePond. (incorporated herein by reference to Exhibit (10.1) to
Amendment No. 2 to the Registrant's Registration Statement on Form SB-2,
Reg. No. 333-23369, filed on August 15, 1997)
10.2 Amendment No. 1 dated February 23, 2000 to Employment Agreement dated as
of August 1, 1997 between Registrant and Paul DePond. (incorporated
herein by reference to Exhibit (10.2) to Post-Effective Amendment No. 4
to the Registrant's Registration Statement on Form SB-2, Reg. No. 333-
23369, filed on April 18, 2000)
10.3 Employment Agreement dated as of August 1, 1997 between Registrant and
Gaylan Larson. (incorporated herein by reference to Exhibit (10.2) to
Amendment No. 2 to the Registrant's Registration Statement on Form SB-2,
Reg. No. 333-23369, filed on August 15, 1997)
10.4 Amendment No. 1 dated February 23, 2000 to Employment Agreement dated as
of August 1, 1997 between Registrant and Gaylan Larson. (incorporated
herein by reference to Exhibit (10.4) to Post-Effective Amendment No. 4
to the Registrant's Registration Statement on Form SB-2, Reg. No. 333-
23369, filed on April 18, 2000)
10.5 Employment Agreement dated as of August 1, 1997 between Registrant and
Gerald Rice. (incorporated herein by reference to Exhibit (10.3) to
Amendment No. 2 to the Registrant's Registration Statement on Form SB-2,
Reg. No. 333-23369, filed on August 15, 1997)
10.6 Amendment No. 1 dated February 23, 2000 to Employment Agreement dated as
of August 1, 1997 between Registrant and Gerald Rice. (incorporated
herein by reference to Exhibit (10.6) to Post-Effective Amendment No. 4
to the Registrant's Registration Statement on Form SB-2, Reg. No. 333-
23369, filed on April 18, 2000)
10.7 Form of Indemnification Agreement. (incorporated herein by reference to
Exhibit (10.5) to the Registrant's Registration Statement on Form SB-2,
Reg. No. 333-23369, filed on March 14, 1997)
10.8 Escrow Agreement by and between Registrant, the American Stock Transfer
& Trust Company and certain security holders of the Registrant, as
amended. (incorporated herein by reference to Exhibit (10.6) to
Amendment No. 2 to the Registrant's Registration Statement on Form SB-2,
Reg. No. 333-23369, filed on August 15, 1997)
10.9 Registrant's 1997 Stock Plan, as amended. (incorporated herein by
reference to Exhibit (10.9) to Post-Effective Amendment No. 4 to the
Registrant's Registration Statement on Form SB-2, Reg. No. 333-23369,
filed on April 18, 2000)
10.10 Lease between Registrant and C.C. Poon. (incorporated herein by
reference to Exhibit (10.9) to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2, Reg. No. 333-23369, filed on May
29, 1997)
</TABLE>
21
<PAGE>
<TABLE>
<C> <S>
10.11+ Nonexclusive Technology License Agreement between Registrant and Active
Voice Corporation dated April 30, 1997. (incorporated herein by
reference to Exhibit (10.10) to Amendment No. 2 to the Registrant's
Registration Statement on Form SB-2, Reg. No. 333-23369, filed on
August 15, 1997)
10.12 Securities Purchase Agreement dated as of March 4, 1999 between
Registrant and David A. Brewer. (incorporated herein by reference to
Exhibit (10.11) to Post-Effective Amendment No. 3 to the Registrant's
Registration Statement on Form SB-2, Reg. No. 333-23369, filed on April
2, 1999)
10.13 Amendment No. 1 dated October 7, 1999 to Securities Purchase Agreement
dated as of March 4, 1999 between Registrant and David Brewer.
(incorporated herein by reference to Exhibit (10.12) to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
September 30, 1999, filed on December 28, 1999.
10.14 Amendment No. 2 dated October 26, 2000 to Securities Purchase Agreement
dated as of March 4, 1999 and as amended on October 7, 1999 between
Registrant and David Brewer.
10.15 Form of Underwriter's Unit Purchase Option. (incorporated herein by
reference to Exhibit (4.2) to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2, Reg. No. 333-23369, filed on May
29, 1997)
10.16 Stock Option Agreement dated November 11, 1999 between Registrant and
Dane Russell. (incorporated herein by reference to Exhibit (10.15) to
Post-Effective Amendment No. 4 to the Registrant's Registration
Statement on Form SB-2, Reg. No. 333-23369, filed on April 18, 2000)
10.17 Securities Purchase Agreement dated November 8, 2000 by and among the
Registrant and the purchasers listed on Exhibit A thereto.
23.1. Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 23).
27.1 Financial Data Schedule
</TABLE>
--------
+ Confidential treatment has been granted with respect to portions of this
exhibit.
(b) Reports on Form 8-K
During the quarter ended September 30, 2000, we filed no reports on Form 8-
K.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, duly authorized, in the City of San Jose,
California, on the 21st day of December, 2000.
Notify Technology Corporation
Dated: December 21, 2000 /s/ Paul F. DePond
By: _________________________________
Paul F. DePond
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Paul F. DePond, Gerald W. Rice and Henry P.
Massey, Jr. and each of them, as his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments to this Report on Form 10-KSB, and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys- in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or either of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Exchange Act of 1934,
this Report was signed by the following persons in the capacities indicated
below and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul DePond President, Chief Executive December 21, 2000
______________________________________ Officer and Chairman
Paul DePond (Principal Executive
Officer)
/s/ Gerald Rice Chief Financial Officer December 21, 2000
______________________________________ (Principal Financial and
Gerald Rice Accounting Officer)
/s/ Gaylan Larson Vice President, Operations December 21, 2000
______________________________________ and Director
Gaylan Larson
/s/ Michael Ballard Director December 21, 2000
______________________________________
Michael Ballard
Director
______________________________________
David Brewer
Director
______________________________________
Andrew Plevin
</TABLE>
23
<PAGE>
Notify Technology Corporation
Financial Statements
Years ended September 30, 2000 and 1999
Contents
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Balance Sheet............................................................... F-3
Statements of Operations.................................................... F-4
Statements of Shareholders' Equity.......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Notify Technology Corporation
We have audited the accompanying balance sheet of Notify Technology
Corporation as of September 30, 2000, and the related statements of operations,
shareholders' equity, and cash flows for the years ended September 30, 2000 and
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Notify Technology
Corporation at September 30, 2000, and the results of its operations and its
cash flows for the years ended September 30, 2000 and 1999, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and reduction in liquidity raise substantial doubt about
its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 1. The 2000 financial statements do not
include any adjustments that might result from this uncertainty.
/s/ Ernst & Young LLP
San Jose, California
October 25, 2000, except for Note 8,
as to which the date is December 14, 2000
F-2
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
September 30,
2000
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 311,795
Restricted cash................................................ 764,698
Accounts receivable, net of allowance for doubtful accounts of
$15,000....................................................... 411,334
Inventories.................................................... 502,660
Other current assets........................................... 50,686
------------
Total current assets......................................... 2,041,173
Property and equipment, net...................................... 276,115
------------
$ 2,317,288
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $ 302,573
Deferred revenue............................................... 452,690
Other accrued liabilities...................................... 296,340
Accrued payroll and related.................................... 151,762
------------
Total current liabilities.................................... 1,203,365
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, none issued and outstanding....................... --
Common stock, $0.001 par value, 15,000,000 shares authorized,
4,887,058 shares issued and outstanding at September 30,
2000.......................................................... 4,887
Additional paid-in capital..................................... 13,845,024
Notes receivable from shareholders............................. (2,500)
Accumulated deficit............................................ (12,733,488)
------------
Total shareholders' equity................................... 1,113,923
------------
Total liabilities and shareholders' equity................... $ 2,317,288
============
</TABLE>
See accompanying notes.
F-3
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Product sales..................................... $ 4,219,703 $ 1,836,142
Cost of sales..................................... 3,657,121 1,721,029
------------ ------------
Gross profit...................................... 562,582 115,113
Operating costs and expenses:
Research and development........................ 1,459,911 1,361,792
Sales and marketing............................. 1,209,993 837,334
General and administrative...................... 1,570,323 1,136,779
------------ ------------
Total operating costs and expenses................ 4,240,227 3,335,905
------------ ------------
Loss from operations.............................. (3,677,645) (3,220,792)
Other income and expense, net..................... 151,193 97,508
------------ ------------
Net loss.......................................... $ (3,526,452) $ (3,123,284)
============ ============
Basic and diluted net loss per share.............. $ (0.99) $ (1.11)
============ ============
Weighted average shares used in computing net loss
per share........................................ 3,568,503 2,801,410
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Notes
Common Stock Additional Receivable Total
----------------- Paid-In From Deferred Accumulated Shareholders'
Shares Amount Capital Shareholders Compensation Deficit Equity
--------- ------ ----------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1998................... 3,541,569 $3,542 $ 8,945,417 $(11,397) $ -- $ (6,083,752) $ 2,853,810
Repurchases of common
stock from
shareholder............ (2,784) (3) (1,117) -- -- -- (1,120)
Repayment of notes
receivable from
shareholders........... -- -- -- 4,371 -- -- 4,371
Proceeds from exercise
of options and
warrants............... 14,392 14 8,029 -- -- -- 8,043
Issuance of common
shares pursuant to
private offering, net
of issuance costs...... 850,000 850 3,043,360 -- -- -- 3,044,210
Deferred compensation
relating to grant of
stock options.......... -- -- 167,462 -- (167,462) -- --
Amortization of deferred
compensation........... -- -- -- -- 50,774 -- 50,774
Net loss and
comprehensive net
loss................... -- -- -- -- -- (3,123,284) (3,123,284)
--------- ------ ----------- -------- --------- ------------ -----------
Balance at September 30,
1999................... 4,403,177 4,403 12,163,151 (7,026) (116,688) (9,207,036) 2,836,804
Repurchases of common
stock from
shareholder............ (1,820) (2) (663) 665 -- -- --
Repayment of notes
receivable from
shareholder............ -- -- -- 3,861 -- -- 3,861
Proceeds from exercise
of options and
warrants............... 485,701 486 1,726,083 -- -- -- 1,726,569
Change in fair value of
non-employee stock
options................ -- -- (43,547) -- 43,547 -- --
Amortization of deferred
compensation........... -- -- -- -- 73,141 -- 73,141
Net loss and
comprehensive net
loss................... -- -- -- -- -- (3,526,452) (3,526,452)
--------- ------ ----------- -------- --------- ------------ -----------
Balance at September 30,
2000................... 4,887,058 $4,887 $13,845,024 $ (2,500) $ -- $(12,733,488) $ 1,113,923
========= ====== =========== ======== ========= ============ ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September
30,
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating activities
Net loss............................................ $(3,526,452) $(3,123,284)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 184,535 151,689
Amortization of deferred compensation............. 73,141 50,774
Changes in operating assets and liabilities:
Accounts receivable............................. 265,698 (588,164)
Inventory....................................... 31,807 293,857
Other assets.................................... 89,893 (47,822)
Accounts payable................................ (116,843) 185,236
Other current liabilities....................... (81,643) 209,372
Deferred revenue................................ 452,690 --
----------- -----------
Net cash used in operating activities............... (2,627,174) (2,868,342)
Investing activities
Expenditures for property and equipment............. (148,516) (183,022)
Increase in restricted cash......................... (764,698) --
----------- -----------
Net cash used in investing activities............... (913,214) (183,022)
Financing activities
Proceeds from exercise of options and warrants...... 1,726,569 8,043
Proceeds from issuance of common stock.............. -- 3,044,210
Repayments of notes receivable from shareholders.... 3,861 4,371
Payments on repurchase of unvested stock............ -- (1,120)
----------- -----------
Net cash provided by financing activities........... 1,730,430 3,055,504
----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ (1,809,958) 4,140
Cash and cash equivalents at beginning of period.... 2,121,753 2,117,613
----------- -----------
Cash and cash equivalents at end of period.......... $ 311,795 $ 2,121,753
----------- -----------
Supplemental disclosure of cash flow information
Cash paid for interest.............................. $ 2,929 $ --
=========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
1. Fiscal 2001 Financing
During fiscal 2000, Notify Technology Corporation (the Company) financed its
operations through a combination of its existing cash balances and the proceeds
from the exercise of warrants. The Company's recurring losses from operations
and reduction in liquidity raise substantial doubt about its ability to
continue as a going concern.
The Company's ability to fund its recurring losses from operations depends
upon its success in shifting its product focus into wireless e-mail
notification and wireless e-mail notification market solutions, and/or raising
other sources of financing. Management expects to enter into several
arrangements that will produce increased revenue from new products during
fiscal 2001. The Company also continues to pursue other sources of additional
financing, including equity financing. If the Company is successful in selling
these new products and/or raising other sources of financing, it believes that
it will be able to finance its operations during fiscal 2001 (see Note 8).
The 2000 financial statements do not include any adjustments that might
result should the Company not be able to finance its expected level of future
expenditures.
2. Summary of Significant Accounting Policies
Organization and Business
The Company is a communications service and software provider for wireline
and wireless notification and messaging services.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. The Company is exposed to
credit risk in the event of default by the financial institutions to the extent
of amounts recorded on the balance sheet.
Inventories
Inventories are stated at the lesser of actual cost, on a first-in, first-
out basis, or market and consist of the following:
<TABLE>
<CAPTION>
September 30,
2000
-------------
<S> <C>
Raw materials............................................... $ 76,662
Work-in-process............................................. 197,062
Finished goods.............................................. 228,936
--------
$502,660
========
</TABLE>
Property and Equipment
Property and equipment are stated at cost and depreciated or amortized on a
straight-line basis of the lesser of the estimated useful lives of the asset or
the lease term. The estimated useful lives range from three to five years.
F-7
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2000
Revenue Recognition
Product sales are generally recognized at the time the product is shipped,
title has transferred, and no obligations remain. Service income is recognized
on a straight-line basis over the period of the service agreement.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company performs ongoing credit evaluations and generally requires no
collateral. The Company maintains reserves for credit losses, and such losses
have been within management's expectations. As of September 30, 2000, two
customers accounted for 50% and 19% of accounts receivable.
Stock Options
The Company accounts for its stock option plan in accordance with provisions
of the Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" (APB No. 25), because the Company believes the alternative fair
value accounting provided for under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), requires the
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB No. 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Net Loss Per Share
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. Options to
purchase 505,535 and 123,760 shares of common stock were outstanding at
September 30, 2000 and 1999, respectively, but were not included in the
computation of diluted net loss per share as the effect would be antidilutive.
Effect of New Accounting Pronouncements
SAB 101
In December 1999 and during fiscal 2000, the staff of the Securities and
Exchange Commission issued and amended Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101). SAB 101 is effective
for the Company in the fourth quarter of fiscal 2001. The Company does not
believe that SAB 101 will have any impact on its revenues and results of
operations.
FIN 44
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--An Interpretation of APB Opinion
F-8
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2000
No. 25" (FIN 44). FIN 44 clarifies the application of APB Opinion No. 25 and,
among other issues, clarifies the following: the definition of an employee for
purposes of applying APB Opinion No. 25; the criteria for determining whether a
plan qualifies as a noncompensatory plan; the accounting consequence of various
modifications to the terms of the previously fixed stock options or awards; and
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN
44 cover specific events that occurred after either December 15, 1998 or
January 12, 2000. The Company does not expect the application of FIN 44 to have
a material impact on the Company's financial position or results of operations.
3. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
2000
-------------
<S> <C>
Furniture and office equipment.............................. $ 459,600
Software.................................................... 41,774
Leasehold improvements...................................... 2,246
---------
503,620
Less accumulated depreciation and amortization.............. (227,505)
---------
$ 276,115
=========
</TABLE>
4. Commitments and Contingencies
The Company currently occupies a facility under an operating lease, which
expires in March 2001 and contains renewal options to extend the lease term for
one two-year period. Future minimum payments under this lease for the year
ended September 30, 2001 are $75,000.
Rent expense totaled $173,000 and $146,000 for the years ended September 30,
2000 and 1999, respectively.
At September 30, 2000, the Company had $764,698 of outstanding letters of
credit to its suppliers related to a commitment to purchase additional
inventory of $687,000. The letters of credit are secured by a money market
account of $764,698, which is recorded as restricted cash.
5. Shareholders' Equity
Preferred Stock
The Board of Directors has the authority, without any further vote or action
by the shareholders, to provide for the issuance of 5,000,000 shares of
preferred stock in one or more series with such designation, rights,
preferences, and limitations as the Board of Directors may determine, including
the consideration to be received, the number of shares comprising each series,
dividend rates, redemption provisions, liquidation preferences, redemption and
fund provisions, conversion rights, and voting rights, all without the approval
of the holders of common stock.
F-9
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2000
Common Stock
The following table summarizes shares of common stock reserved for future
issuance by the Company:
<TABLE>
<CAPTION>
September 30,
2000
-------------
<S> <C>
1997 Stock Option Plan.................................... 682,370
Warrant agreements........................................ 3,065,430
---------
3,747,800
=========
</TABLE>
In connection with an offering to the public in August 1997 (the Offering),
the Company granted an underwriter an option to purchase up to 160,000 units
(consisting of one share of common stock and one Class A warrant), exercisable
at $7.00 per unit, commencing in August 2000 and expiring in August 2002.
Warrants to Purchase Common Stock
In October 1999, the Company received proceeds of $1,121,760 from the
exercise of two warrants to purchase 311,600 shares of common stock issued in
connection with the March 1999 private placement of common stock. In
connection with the exercise, the product sales and revenue milestones and the
expiry date of two other warrants, each to purchase 155,800 shares of common
stock issued in connection with the March 1999 private placement were modified
such that the warrants expire upon the earlier of March 31, 2001 or 30 days
after the Company meets the revised product sales or revenue milestones. On
February 16, 2000, the Company received proceeds of $560,880 from the exercise
of one of these warrants. The Company did not meet the revenue milestone
related to the remaining warrant.
At September 30, 2000, 2,025,000 Class A warrants issued in connection with
the Offering and other financings were outstanding. Each Class A warrant
entitles the holder to purchase one share of common stock at an exercise price
of $6.50, subject to adjustment, at any time through August 2002. Under
certain circumstances, the warrants are subject to redemption by the Company
at $0.05 per warrant on 30 days written notice.
In addition, at September 30, 2000, two warrants to purchase 155,800 and
721,244 shares of common stock at an exercise price of $3.60 issued in
connection with the March 1999 private placement were outstanding. The warrant
to purchase 155,800 shares of common stock expires on March 31, 2001 and the
warrant to purchase 721,244 shares of common stock expires in March 2003. In
connection with the private placement, the Company also agreed to issue
additional warrants if it sells shares of common stock in a capital raising
transaction at a price below $3.60 per share prior to the earlier of (i) March
30, 2002 or (ii) the date on which the Company calls the outstanding Class A
warrants.
In addition, at September 30, 2000, 163,386 warrants to purchase shares of
the Company's common stock, issued in connection with various financings were
outstanding. These warrants are exercisable at any time at prices ranging from
$0.25 to $5.05 per share and expire at dates ranging through April 2002.
At September 30, 2000, warrants to purchase common stock included 972,334
and 24,752 warrants held by three directors and one officer, respectively.
F-10
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2000
1997 Stock Option Plan
In January 1997, the Company adopted the Notify Corporation 1997 Stock Plan
(the Plan), which provides for the granting of stock options to employees,
officers, consultants, and directors of the Company. Stock options are granted
at fair market value on the date of grant with terms of up to ten years. Under
the Plan, a total of 700,000 shares of the Company's common stock are reserved
for issuance. Under the terms of these option grants, the options commence
vesting upon the first anniversary of the date of employment and continue to
vest ratably over the remainder of the four-year vesting period.
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
Options
Outstanding
------------------
Shares Weighted
Available For Number of Average
Grant Shares Price
------------- --------- --------
<S> <C> <C> <C>
Balance at September 30, 1998............... 144,125 54,000 $ 2.742
Grants.................................... (171,000) 171,000 $ 4,062
Cancellations............................. 94,063 (94,063) $ 2,743
Exercises................................. -- (7,177) $ 0.906
-------- -------
Balance at September 30, 1999............... 67,188 123,760 $ 4,672
Authorized................................ 500,000 --
Grants.................................... (455,000) 455,000 $ 7,204
Cancellations............................. 64,647 (64,647) $ 6,561
Exercises................................. -- (8,578) $ 1,194
-------- -------
Balance at September 30, 2000............... 176,835 505,535 $ 6,677
======== =======
</TABLE>
The following table summarizes outstanding and exercisable options at
September 30, 2000:
<TABLE>
<S> <C> <C> <C> <C>
Options Outstanding Options Exercisable
---------------------------------- ------------------------------
Weighted
Weighted Number of Average
Number of Average Options Remaining
Exercise Options Remaining Exercisable Exercise
Prices Outstanding Life in Years Shares Price
-------- ----------- ------------- ----------- ---------
$0.906 35,394 7.71 26,374 $0.906
$2.750 28,000 9.87 375 $2.750
$3.500 6,000 9.76 -- $3.500
$3.781 14,141 8.40 8,099 $3.781
$3.875 54,000 9.80 1,167 $3.875
$5.594 8,000 9.27 -- $5.594
$6.125 6,000 9.46 -- $6.125
$6.375 57,000 9.14 -- $6.375
$7.188 21,000 9.21 -- $7.188
$7.344 16,000 8.68 5,292 $7.344
$7.656 13,000 9.00 3,250 $7.656
$7.750 5,000 8.86 1,458 $7.750
$7.906 2,000 8.67 2,000 $7.906
$8.813 240,000 9.39 40,832 $8.813
----------- -----------
505,535 9.24 88,847 $6.677
----------- -----------
</TABLE>
F-c11
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2000
The weighted average fair value of options granted was $6.02 in 2000 and
$3.35 in 1999.
Stock-Based Compensation
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying common stock
on the date of grant, no compensation expense is recognized.
SFAS 123 requires pro forma information regarding net income and earnings
per share as if the Company had accounted for its employee stock options
granted subsequent to September 30, 1995 under the fair value method of SFAS
123. The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions: a weighted
average expected life of the option of four years; risk-free interest rates of
6.0%; dividend yields of 0.0%; and volatility factors of the expected market
price of the Company's common stock of 133% and 136% for 2000 and 1999,
respectively.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net loss:
As reported..................................... $(3,526,452) $(3,123,284)
Pro forma....................................... (4,044,930) (3,173,000)
Basic and diluted net loss per share:
As reported..................................... $ (0.99) $ (1.11)
Pro forma....................................... (1.13) (1.13)
</TABLE>
The effects of applying SFAS 123 pro forma disclosures are not likely to be
representative of the effects on net income or loss of future years.
The Company recognized compensation expense of $73,000 and $51,000 in fiscal
2000 and 1999, respectively, related to the grant of options to non employees.
Escrow Securities
In connection with the Offering, holders of the Company's common stock
agreed to place 1,242,985 of their shares into escrow, and holders of certain
warrants agreed to place warrants to purchase 126,759 shares of common stock
into escrow. The securities will be released to the holders in the event
specified levels of pretax income are achieved for the years ended September
30, 1998 to 2003 or if the Company is acquired by or
F-12
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2000
merged into another entity in a transaction in which shareholders receive a
specified consideration. Any securities remaining in escrow on September 30,
2003 will be forfeited, which securities will then be contributed to the
Company's capital. The pretax income levels are subject to proportionate
adjustment upon the issuance of certain securities subsequent to the Company's
initial public offering.
In the event that the escrowed securities are released, the Securities and
Exchange Commission has adopted the position that the release of escrowed
securities to officers, directors, employees, and consultants of the Company
will be compensatory and, accordingly, will result in compensation expense for
financial reporting purposes. The expense will equal the fair value of the
escrowed securities on the date of release and will result in a material charge
to operations. At September 30, 2000, the Company had not attained any of the
specified earnings or market price levels.
6. Income Taxes
Due to operating losses, there is no provision for income taxes for 2000 or
1999. The expected statutory tax benefit of 34% is offset by the inability to
recognize an income tax benefit from the net operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets for federal and state income taxes are as
follows:
<TABLE>
<CAPTION>
Years Ended September
30,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................... $3,900,000 $3,000,000
Research credit carryforwards...................... 211,000 150,000
Other temporary differences........................ 824,000 350,000
---------- ----------
Total deferred tax assets........................ 4,935,000 3,500,000
Valuation allowance.................................. (4,935,000) (3,500,000)
---------- ----------
Net deferred tax assets.............................. $ -- $ --
========== ==========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, the
timing and amount of which are uncertain. Accordingly, a valuation allowance in
an amount equal to the net deferred tax asset has been established to reflect
these uncertainties. The change in the valuation allowance was a net increase
of $1,435,000 and $1,176,000 for fiscal years 2000 and 1999, respectively.
As of September 30, 2000, the Company had net operating loss carryforwards
of approximately $10,000,000 and $6,000,000 for federal and California tax
purposes, which will expire in years 2003 through 2020. As of September 30,
2000, the Company also had research and development tax credit carryforwards
for federal and California tax purposes of approximately $150,000 and $80,000,
respectively. The credits will expire in years 2010 through 2019, if not
utilized. Utilization of net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code of 1986, as amended, and
similar state provisions. The annual limitation may result in the expiration of
net operating loss and tax credit carryforwards before full utilization.
F-13
<PAGE>
NOTIFY TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, 2000
7. Industry Segment, Customer, and Geographic Information
The Company has one operating segment by which management evaluates
performance. The Company sells its products within the United States primarily
to regional bell operating companies and local exchange carriers. Two products
accounted for 69% and 20% of total revenues in fiscal 2000. The same two
products accounted for 34% and 41% in fiscal 1999. Four customers accounted for
23%, 22%, 17%, and 15% of sales for the fiscal year ended September 30, 2000.
Two customers accounted for 55% and 11% for the fiscal year ended September 30,
1999.
8. Subsequent Events
In November 2000, the Company sold in a private offering 376,865 shares of
common stock and issued warrants to purchase 188,424 shares of common stock for
an aggregate consideration of $1,224,820. The warrants consisted of one set of
warrants to purchase 94,212 shares of common stock at $3.25 per share expiring
in August 2001 and one set of warrants to purchase 94,212 shares of common
stock at $3.25 per share expiring in November 2003. In the event the Company
issues equity securities in a financing for an amount of $250,000 or more at a
price per share less than the price per share in this offering, the exercise
price of the outstanding warrants will be reduced to the price per share at
which such equity securities were sold and the Company will issue additional
warrants to purchase common stock with an exercise price of $0.01 and a term of
three years. The warrants will be exercisable into a number of shares of common
stock determined by the price per share and number of shares issued in the
financing.
F-14
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
3.1 Restated Articles of Incorporation of Registrant. (incorporated herein
by reference to Exhibit (3.2)
to the Registrant's Registration Statement on Form SB-2, Reg. No. 333-
23369, filed on March 14, 1997)
3.2 Amended and Restated Bylaws of Registrant. (incorporated herein by
reference to Exhibit (3.2)
to Post-Effective Amendment No. 4 to the Registrant's Registration
Statement on Form SB-2, Reg. No. 333-23369, filed on April 18, 2000)
4.1 Form of Warrant Agreement. (incorporated herein by reference to Exhibit
(4.1) to Amendment No. 1 to the Registrant's Registration Statement on
Form SB-2, Reg. No. 333-23369, filed on May 29, 1997)
10.1 Employment Agreement dated as of August 1, 1997 between Registrant and
Paul DePond. (incorporated herein by reference to Exhibit (10.1) to
Amendment No. 2 to the Registrant's Registration Statement on Form SB-
2, Reg. No. 333-23369, filed on August 15, 1997)
10.2 Amendment No. 1 dated February 23, 2000 to Employment Agreement dated
as of August 1, 1997 between Registrant and Paul DePond. (incorporated
herein by reference to Exhibit (10.2) to Post-Effective Amendment No. 4
to the Registrant's Registration Statement on Form SB-2, Reg. No. 333-
23369, filed on April 18, 2000)
10.3 Employment Agreement dated as of August 1, 1997 between Registrant and
Gaylan Larson. (incorporated herein by reference to Exhibit (10.2) to
Amendment No. 2 to the Registrant's Registration Statement on Form SB-
2, Reg. No. 333-23369, filed on August 15, 1997)
10.4 Amendment No. 1 dated February 23, 2000 to Employment Agreement dated
as of August 1, 1997 between Registrant and Gaylan Larson.
(incorporated herein by reference to Exhibit (10.4) to Post-Effective
Amendment No. 4 to the Registrant's Registration Statement on Form SB-
2, Reg. No. 333-23369, filed on April 18, 2000)
10.5 Employment Agreement dated as of August 1, 1997 between Registrant and
Gerald Rice. (incorporated herein by reference to Exhibit (10.3) to
Amendment No. 2 to the Registrant's Registration Statement on Form SB-
2, Reg. No. 333-23369, filed on August 15, 1997)
10.6 Amendment No. 1 dated February 23, 2000 to Employment Agreement dated
as of August 1, 1997 between Registrant and Gerald Rice. (incorporated
herein by reference to Exhibit (10.6) to Post-Effective Amendment No. 4
to the Registrant's Registration Statement on Form SB-2, Reg. No. 333-
23369, filed on April 18, 2000)
10.7 Form of Indemnification Agreement. (incorporated herein by reference to
Exhibit (10.5) to the Registrant's Registration Statement on Form SB-2,
Reg. No. 333-23369, filed on March 14, 1997)
10.8 Escrow Agreement by and between Registrant, the American Stock Transfer
& Trust Company and certain security holders of the Registrant, as
amended. (incorporated herein by reference to Exhibit (10.6) to
Amendment No. 2 to the Registrant's Registration Statement on Form SB-
2, Reg. No. 333-23369, filed on August 15, 1997)
10.9 Registrant's 1997 Stock Plan, as amended. (incorporated herein by
reference to Exhibit (10.9) to Post-Effective Amendment No. 4 to the
Registrant's Registration Statement on Form SB-2, Reg. No. 333-23369,
filed on April 18, 2000)
10.10 Lease between Registrant and C.C. Poon. (incorporated herein by
reference to Exhibit (10.9) to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2, Reg. No. 333-23369, filed on May
29, 1997)
10.11+ Nonexclusive Technology License Agreement between Registrant and Active
Voice Corporation dated April 30, 1997. (incorporated herein by
reference to Exhibit (10.10) to Amendment No. 2 to the Registrant's
Registration Statement on Form SB-2, Reg. No. 333-23369, filed on
August 15, 1997)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.12 Securities Purchase Agreement dated as of March 4, 1999 between
Registrant and David A. Brewer. (incorporated herein by reference to
Exhibit (10.11) to Post-Effective Amendment No. 3 to the Registrant's
Registration Statement on Form SB-2, Reg. No. 333-23369, filed on April
2, 1999)
10.13 Amendment No. 1 dated October 7, 1999 to Securities Purchase Agreement
dated as of March 4, 1999 between Registrant and David Brewer.
(incorporated herein by reference to Exhibit (10.12) to the Registrant's
Annual Report on Form 10-K for the fiscal year ended September 30, 1999,
filed on December 28, 1999.
10.14 Amendment No. 2 dated October 26, 2000 to Securities Purchase Agreement
dated as of March 4, 1999 and as amended on October 7, 1999 between
Registrant and David Brewer.
10.15 Form of Underwriter's Unit Purchase Option. (incorporated herein by
reference to Exhibit (4.2) to Amendment No. 1 to the Registrant's
Registration Statement on Form SB-2, Reg. No. 333-23369, filed on May
29, 1997)
10.16 Stock Option Agreement dated November 11, 1999 between Registrant and
Dane Russell. (incorporated herein by reference to Exhibit (10.15) to
Post-Effective Amendment No. 4 to the Registrant's Registration
Statement on Form SB-2, Reg. No. 333-23369, filed on April 18, 2000)
10.17 Securities Purchase Agreement dated November 8, 2000 by and among the
Registrant and the purchasers listed on Exhibit A thereto.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 23).
27.1 Financial Data Schedule
</TABLE>
--------
+ Confidential treatment has been granted with respect to portions of this
exhibit.
