Notify Technology 10QSB 2007 Q3 Quarterly report (small business)

U. S. Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2007

o Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934

For the Transition Period From ____________ to ______________

Commission File number 000-23025

NOTIFY TECHNOLOGY CORPORATION

(Exact name of small business issuer as specified in its charter)

CALIFORNIA	77-0382248
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

1054 South De Anza Blvd.

San Jose, CA 95129

(Address of principal executive offices)

(408) 777-7920

(Issuer’s telephone number)

Check whether the issuer (1) filed all reports required to be filed by Section 13 of 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 o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes o No x

As of June 30, 2007 there were 13,968,995 shares of Common Stock outstanding.

Transitional Small Business Disclosure Format

Yes o No x

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	Condensed Financial Statements:

	Condensed Balance Sheets as of June 30, 2007 (unaudited) and September 30, 2006	3

	Condensed Statements of Operations for the three and nine-month periods ended June 30, 2007 and 2006 (unaudited)	4

	Condensed Statements of Cash Flows for the nine-month periods ended June 30, 2007 and 2006 (unaudited)	5

	Notes to the Condensed Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10

Item 3.	Controls and Procedures	20

PART II. OTHER INFORMATION

Item 6.	Exhibits	20

SIGNATURES		21

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NOTIFY TECHNOLOGY CORPORATION

CONDENSED BALANCE SHEETS

	June 30, 2007			September 30, 2006
	(unaudited)			(1)
Assets
Current assets:
Cash and cash equivalents	$	877,488		$	829,406
Accounts receivable, net		420,623			436,509
Other current assets		44,254			53,135
Total current assets		1,342,365			1,319,050

Property and equipment, net		96,644			99,623
Total assets	$	1,439,009		$	1,418,673

Liabilities and shareholders' deficit
Current liabilities:
Current portion of capital lease obligations	$	10,705		$	18,219
Accounts payable		43,660			37,722
Accrued payroll and related liabilities		188,074			231,200
Deferred revenue		1,969,259			1,623,606
Other accrued liabilities		116,273			122,432
Total current liabilities		2,327,971			2,033,179
Long term portion of capital lease obligations		3,171			9,201
Total liabilities		2,331,142			2,042,380

Shareholders' deficit:
Preferred stock, $0.001 par value, 5,000,000 shares authorized		—			—
Common stock, $0.001 par value, 30,000,000 shares authorized, 13,968,955 shares issued and outstanding		13,969			13,969
Additional paid-in capital		23,340,206			23,310,903
Accumulated deficit		(24,246,308	)		(23,948,579	)
Total shareholders’ deficit		(892,133	)		(623,707	)
Total liabilities and shareholders' deficit	$	1,439,009		$	1,418,673

(1) The information in this column was derived from our audited financial statements for the year ended September 30, 2006

See accompanying notes to unaudited condensed financial statements

NOTIFY TECHNOLOGY CORPORATION

CONDENSED UNAUDITED STATEMENTS OF OPERATIONS

	Three-Month Periods Ended June 30,						Nine-Month Periods Ended June 30,
	2007			2006			2007			2006
Revenue:
Product revenue	$	937,607		$	745,606		$	2,720,694		$	2,707,495
Service revenue		—			191,909			237,991			637,784
Total revenue		937,607			937,515			2,958,685			3,345,279


Cost of Revenue:
Product cost		5,371			2,420			13,677			459,816
Service cost		—			—			—			15,375
Royalty payments		25,543			20,855			75,656			56,753
Total cost of sales		30,914			23,275			89,333			531,944
Gross profit		906,693			914,240			2,869,352			2,813,335

Operating expenses:
Research and development		328,035			250,589			945,062			713,035
Sales and marketing		369,618			403,320			1,247,004			1,221,606
General and administrative		302,926			334,681			977,692			970,746
Total operating expenses		1,000,579			988,590			3,169,758			2,905,387

Loss from operations		(93,886	)		(74,350	)		(300,406	)		(92,052	)

Other income (expense), net		120			(1,353	)		2,677			1,537
Proceeds from sale of patents		—			250,000			—			250,000
Loss on fair value of warrants		—			(312,667	)		—			(457,919	)
Net loss	$	(93,766	)	$	(138,370	)	$	(297,729	)	$	(298,434	)

Basic net loss per share	$	(0.01	)	$	(0.01	)	$	(0.02	)	$	(0.02	)

Basic weighted average shares outstanding		13,968,995			13,968,995			13,968,995			13,968,995

See accompanying notes to unaudited condensed financial statements

NOTIFY TECHNOLOGY CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

	Nine-Month Periods Ended June 30,
	2007			2006
	(Unaudited)
Cash flows provided by operating activities:
Net loss	$	(297,729	)	$	(298,434	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		31,607			52,733
Proceeds from the sale of patents		—			(250,000	)
Fair value of warrant liability		—			457,919
Gain from the sale of property and equipment		(3,000	)		(1,982	)
Stock based compensation		29,303			—
Changes in operating assets and activities:
Accounts receivable		15,886			(51,805	)
Other current assets		8,881			13,537
Accounts payable		5,938			(34,946	)
Deferred revenue		345,653			416,417
Other accrued liabilities		(49,285	)		(132,591	)
Net cash provided by operating activities		87,254			170,848

Cash flows provided by (used in) investing activities:
Purchase of property and equipment		(28,628	)		(7,726	)
Proceeds from the sale of patents					250,000
Proceeds from the sale of fixed assets		3,000			1,600
Net cash provided by (used) in investing activities		(25,628	)		243,874

Cash flows used in financing activities:
Principal payments on capital lease obligations		(13,544	)		(18,521	)
Net cash used in financing activities		(13,544	)		(18,521	)

Net increase in cash and cash equivalents		48,082			396,200
Cash and cash equivalents at beginning of period		829,406			424,228
Cash and cash equivalents at end of period	$	877,488		$	820,428

Non-cash investing activities:
Property and equipment acquired through capital lease	$	—		$	6,156
Supplemental disclosure of cash information
Cash paid for interest	$	1,164		$	1,892
Cash paid for taxes	$	—		$	300

See accompanying notes to unaudited condensed financial statements

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements of Notify Technology Corporation (referred to as “the Company”, “we”, “us” and “our” unless the context otherwise requires) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions of Regulation S-B Item 310(b) and Article 10 of Regulation S-X. The condensed financial statements included herein are unaudited but include all adjustments (consisting only of normal recurring adjustments), which we consider necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Although we believe that the disclosures in these condensed financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The accompanying condensed financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-KSB for the year ended September 30, 2006.

Results for any interim period are not necessarily indicative of results for any other interim period or for the entire year.

2. LIQUIDITY AND CAPITAL RESOURCES

During fiscal 2006 and the nine-month period ended June 30, 2007, we funded our operations through a combination of our gross profit earned from revenue and existing cash balances. Our ability to fund our recurring losses from operations depends upon success of our NotifyLink wireless e-mail notification market solutions. We continue to evaluate our opportunities to obtain further financing. We have no current intention to obtain financing. If financing were to become available on reasonable terms, we would consider the advisability of obtaining financing.

A significant characteristic of our business is the sale of our products customarily in the form of annual contracts paid for upon signing but the revenue amortized over the twelve-month service period. As our installed base grows, this practice increases the deferred revenue liability on the balance sheet as we add new contracts faster than old contracts expire. The major cost of operations is comprised of (1) the engineering design of our product offered for sale and (2) the physical sale of a contract that requires both direct sales effort and customer service hours to facilitate a trial period of our software prior to purchase. The change in the NotifyLink deferred revenue to $1,969,259 as of June 30, 2007 from $1,623,606 as of September 31, 2006 is an indicator of product sales improvement during the period. Deferred revenue also represents the obligation to service the contracts underlying the revenue. However, the cash flow required to service the contracts is significantly less than the amortized revenue recognized each month.

We generated revenue from the service portion of our Visual Got Mail Solution through the end of February 2007 when our customer for this product terminated the program due to a merger and reorganization. The service was terminated on schedule at the end of February 2007 and the equipment relocated to support our enterprise product line. Consequently, the Visual Got Mail Solution ended its product life after five years and no longer generates revenue. There are no warranty obligations outstanding or perceived redeployment opportunities.

Our continued operations depend on the cash flow from the NotifyLink product line. We have largely replaced the revenue that was lost from the Visual Got Mail Solution program but its termination will make it particularly important that we continue to increase NotifyLink revenues. In the event our NotifyLink revenue is interrupted, we would have to reduce our operations to service our existing contract obligations unless we secured additional financing. If we were unable to achieve NotifyLink revenue improvements or secure financing, we would have to restructure our business to reduce costs.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

In the event we require additional capital, we cannot predict whether we will be able to obtain financing on commercially reasonable terms, if at all. Any future financings may take the form of debt or equity securities or a combination of debt and equity, including convertible notes or warrants. In the event we are required to obtain additional financing, we cannot predict whether we could successfully conclude a financing with any new investors. Minimally, we expect that any additional financing could result in a substantial dilution of the equity and voting interests of our current shareholders.

3. NET INCOME (LOSS) PER SHARE

The net loss per share for the three-month period ended June 30, 2007 was a loss of $(0.01) compared to a loss of $(0.01) for the same period in the prior year. Options to purchase 2,961,000 and 3,362,333 shares of Common Stock and warrants to purchase 1,871,651 and 1,871,651 shares of Common Stock were outstanding at June 30, 2007 and 2006, respectively, but were excluded from the shares used to calculate loss per share as their effect would be anti-dilutive.

4. FINANCING ACTIVITIES

In accordance with The Emerging Issues Task Force (EITF) Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company’s Stock,” the terms of our warrants for Common shares issued in connection with our Series A Preferred offering issued on July 20, 2001, qualified for treatment as a liability on our balance sheet at their fair value during much of fiscal 2006.

On September 12, 2006, the Company entered into an amendment (the “Warrants Amendment”) to the Warrants to Purchase Shares of Common Stock dated as of July 20, 2001 (the “Warrants”) with Commonwealth Associates, L.P. (“Commonwealth”) and other holders of Warrants holding in the aggregate fifty-four percent (54%) of the outstanding Series A Warrants (as defined in the Warrants).

The Warrants Amendment amended the terms that made the Warrants subject to EITF 00-19 and allowed them to be reclassified as equity on September 12, 2006 at the then calculated value using the Black-Scholes option-pricing model.

In addition, we have outstanding 9.2685 Unit Purchase Options that, if ever executed, provides for the issuance of 926,772 common shares and 324,397 warrants. On September 12, 2006, the Company entered into an amendment (the “Option Amendment”) to one of the Unit Purchase Options issued in connection with the July 2001 Preferred Stock Offering of the Company (the “Unit Purchase Options”) with Commonwealth Associates, L.P. (Commonwealth).

In order to amend each of the outstanding Unit Purchase Options, the holder of each such Unit Purchase Option is required to execute a separate Option Amendment with the Company. Commonwealth’s Unit Purchase Option represents approximately thirty-seven percent (37%) of the outstanding Unit Purchase Options. All remaining outstanding Unit Purchase Options other than Commonwealth’s remain subject to their original terms. None of the Option Warrants are presently outstanding and will be issued only upon exercise of the Unit Purchase Options. Because all of the Option Warrants were not amended as a result of the Option Amendments, the Company could be required in the future to recognize additional charges under EITF 00-19, which would have an adverse effect on its future operating results.

On May 29, 2007, Commonwealth, along with a number of other investors, sold their securities, including Unit Purchase Options, to 21X Investments, LP. 21X Investments LP is beneficially owned by David Brewer, a director of Notify Technology Corporation since February 2000.

5. ACCOUNTING FOR STOCK BASED COMPENSATION

On October 1, 2006 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” requiring the Company to recognize expense related to the fair value of its employee stock option awards. The Company recognizes the cost of all share-based awards on a graded vesting basis over the vesting period of the award. Total stock compensation expense recognized by the Company during the nine-months ended June 30, 2007 was $29,303.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Prior to October 1, 2006, the Company accounted for its stock option plans under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” Effective October 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in fiscal 2007 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of October 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted subsequent to October 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated.

As a result of adopting SFAS 123(R) on October 1, 2006, the Company’s income before income taxes and net income for the period ended June 30, 2007, was $29,303 lower than if the Company had continued to account for share-based compensation under Opinion 25. The basic earnings per share for the nine-month period ended June 30, 2007 would have been $(0.02), if the Company had not adopted SFAS No. 123(R). Prior to the adoption of SFAS No. 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. Beginning on October 1, 2006 the Company changed its cash flow presentation in accordance with SFAS No. 123(R) which requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows.

The Company did not grant any options in the nine-month period ended June 30, 2007.

The Company estimated the fair value of its option awards granted prior to October 1, 2006 using the Black-Scholes option-pricing formula. The Black-Scholes option pricing model was used with the following weighted-average assumptions for grants made in the following years:

Black-Scholes Option Valuation Assumptions	2006			2005			2004

Fair value of options granted during the period	$	15,600		$	101,982		$	30,777

Expected term (in years)		4.0			4.0			4.0

Expected volatility		140	%		132	%		117	%

Expected dividend yield		0.0	%		0.0	%		0.0	%

Risk free rate		3.0	%		3.5	%		5.0	%

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 “Accounting for Stock-Based Compensation,” to options granted under the Company’s stock option plans during the three and nine-month periods ended June 30, 2006. For purposes of this pro forma disclosure, the value of the options is amortized to expense on a graded vesting basis over a three-year vesting period and forfeitures are recognized as they occur. The Company’s pro forma information follows for the three and nine-months ended June 30, 2006:

	Three-Month Period Ended			Nine-Month Period Ended
	June 30, 2006
Net income, as reported	$	(138,370	)	$	(298,434	)

Total stock-based employee compensation expense determined under fair value based method for all option awards, net of related tax effects		(24,950	)		(76,646	)

Pro forma net income	$	(163,320	)	$	(375,080	)

Basic earnings per share as reported	$	(.01	)	$	(.02	)

Basic earnings per share pro forma	$	(.01	)	$	(.03	)

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

The following table summarizes the stock option transactions for the nine-months ended June 30, 2007:

Stock Options	Shares			Weighted Average Price		Aggregate Intrinsic Value

Outstanding at October 1, 2006		3,225,000		$	1.18		—

Granted		—			—		—

Exercised		—			—		—

Forfeited		(264,000	)		0.79		—

Outstanding at June 30, 2007		2,961,000		$	1.21		—

Exercisable at June 30, 2007		2,855,499		$	1.22		—

The aggregate intrinsic value of options exercised during the nine-months ended June 30, 2007 and June 30, 2006 was zero.

6. PRODUCT WARRANTY

The Company warranted its legacy products for twelve months against material defects. Since the Company shipped its last hardware product in 2004 it had no product under warranty during the three or nine-month period ended June 30, 2007.

7. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS 157). The standard provides guidance for using fair value to measure assets and liabilities. The standard also responds to investors’ requests for expanded information about the extent to which companies’ measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The standard applies whenever other standards require or permit assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. SFAS 157 must be adopted prospectively as of the beginning of the year it is initially applied. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact this standard will have on its financial statements.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements” (SAB 108). SAB 108 addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB 108 requires an entity to quantify misstatements using a balance sheet and income-statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. The guidance is applicable for fiscal years ending after November 15, 2006. The Company currently does not believe that SAB 108 will have a material impact on its financial statements.

8. CAPITAL LEASE OBLIGATIONS

During the three-month period ended March 31, 2007, the Company entered into a two-year extension of the lease of its San Jose, California facility and now expires in March 2009.

Future minimum lease payments under the lease are as follows:

For the fiscal year ending September 30,
2007	$	35,121
2008		70,242
2009		35,121
Total minimum lease payments	$	140,484

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

FORWARD LOOKING STATEMENTS

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

RESULTS OF OPERATIONS

Three-Month Periods Ended June 30, 2007 and 2006

Revenue

Revenue consists of net revenue from the sale of NotifyLink software licenses, software installation fees and the sale of third party software products. Software revenue is recognized on a straight-line basis over the term of each contract. Installation revenue is recognized upon completion of trial activity and finalizing the software agreement. Third party software revenue is recognized upon delivery.

Revenue for the three-month period ended June 30, 2007 was flat at $937,607 versus $937,515 for the three-month period ended June 30, 2006. Although the gross revenue number appears unchanged, the NotifyLink product line revenue actually increased 26% to offset the loss in Visual Got Mail service revenue in the three month period ended June 30, 2006. The wireless NotifyLink product line revenue improved to $937,607 from $745,606 for the three-month periods ended June 30, 2007 and 2006, respectively but the service portion of the Visual Got Mail Solution, which ended in February 2007, was zero in the three-month period ended June 30, 2007 compared to $191,909 in the comparable period of fiscal 2006. The Visual Got Mail Solution service revenue terminated as a result of our customer for that product merging with another entity.

Our NotifyLink product line is an email and Personal Information Management (PIM) system designed for business users. We provide secure real time wireless synchronization of email, calendar, contacts and tasks, supporting any BlackBerry, Palm and Windows Mobile Wireless device on all major cellular voice and data networks worldwide. The NotifyLink solution provides users with bi-directional mobile “automatic” synchronization of emails sent to end users’ email mailbox and all emails originated forwarded and replied to from the mobile device will be synchronized with the user’s desktop. The transmitted information keeps personal calendars continually up to date at both the server level and the mobile device level.

The Visual Got Mail Solution service consisted of a subscription service, operated by us, which linked Consumer Premise Equipment (CPE) hardware product to our customer’s voice mail platform. We received a monthly subscription service fee for each active voice mail user on our customer’s service. In June 2004, our sole customer for this solution made a decision to cease marketing the product that our services support and the installed base of customers slowly declined. Our customer finally terminated the product that our service supports on February 28, 2007. Consequently, our contract ended at the same time.

We sell our products primarily in the United States directly to business users and resellers. The NotifyLink and Visual Got Mail Solution revenue accounted for 100% and 0%, respectively, of total revenue in the three-month period ended June 30, 2007 and 79% and 21%, respectively, of total revenue in the three-month period ended June 30, 2006.

Cost of Revenue

Cost of revenue consists primarily of the server center costs and third party royalty fees on our NotifyLink sales. Cost of revenue increased to $30,914 in the three-month period ended June 30, 2007 from $23,275 for the three-month period ended June 30, 2006. The increase in the cost of revenue is due to royalty fees calculated on a larger sales base.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Our gross margin was relatively unchanged at 96.7% in the three-month period ended June 30, 2007 compared to a gross margin of 97.5% in the three-month period ended June 30, 2006. The high gross margin in the three-month period ended June 30, 2007 is due to the major costs of the business consisting of product design and sales and support, both of which fall below the gross profit line in operating expenses.

Our gross margin has historically been affected by a number of factors, including product mix, product demand, pricing pressures, warranty costs, and timing. The most significant historical fluctuations have been associated with our legacy CPE product sales but we have ceased manufacturing and selling CPE. We are still subject to product demand and pricing pressures as our sales have transitioned to software and service products but we will no longer experience the more significant changes that have been historically caused by varying mixes of hardware, software and service revenue.

Research and development

Research and development expenses consist primarily of personnel costs and support expenses. Research and development expenses increased to $328,035 for the three-month period ended June 30, 2007 from $250,589 for the three-month period ended June 30, 2006. This increase reflects the growth in our design and test staff required to support our expanding product lines and the advance of wireless devices available to users. Research and development is a critical factor in a growing technical market. The proliferation of new devices introduced into the wireless market has also increased engineering support for our product. Consequently, we expect to continue to invest in this area as resources allow. There can be no assurance that the market will continue to accept our wireless products.

Sales and marketing

Sales and marketing expenses consist primarily of personnel, travel costs and sales commissions related to our sales effort of the NotifyLink product line. Sales and marketing costs decreased to $369,618 for the three-month period ended June 30, 2007 from $403,320 for the three-month period ended June 30, 2006. We use an internal sales force and a customer support staff to facilitate the NotifyLink sales process.

We anticipate that sales and marketing expenses will increase in future quarters as we hire additional sales and customer support personnel and attempt to expand our existing referral base and create new distribution channels.

General and administrative

General and administrative expenses consist of general management and finance personnel costs, insurance expense, occupancy costs, professional fees, stock based compensation expense and other general corporate expenses. General and administrative expenses increased to $302,926 for the three-month period ended June 30, 2007 from $334,681 for the three-month period ended June 30, 2006.

We expect that general and administrative expenses may increase in future quarters as we become subject to more of the requirements mandated by Sarbanes-Oxley Act.

Nine-Month Periods Ended June 30, 2007 and 2006

Revenue

Revenue for the nine-month period ended June 30, 2007 decreased to $2,958,685 from $3,345,279 for the nine-month period ended June 30, 2006. Product mix continued to play an important role in the change during this period. Our wireless NotifyLink product line revenue improved to $2,720,694 from $2,021,125 for the nine-month periods ended June 30, 2007 and 2006, respectively, but the service portion of the Visual Got Mail Solution, which ended in February 2007 was $237,991 in the nine-month period ended June 30, 2007 compared to $1,288,016 in the comparable period of fiscal 2006. The Visual Got Mail Solution service revenue terminated as a result of our customer merging with another entity.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Our NotifyLink product line is an email and Personal Information Management (PIM) system designed for business users. The Visual Got Mail Solution service consisted of a subscription service, operated by us, which linked CPE hardware product to our customer’s voice mail platform. Our customer finally terminated the product that our service supports on February 28, 2007. Consequently, our contract ended at the same time.

We sell our products primarily in the United States directly to business users and resellers. The NotifyLink and Visual Got Mail Solution revenue accounted for 92% and 8%, respectively, of total revenue in the nine-month period ended June 30, 2007 and 60% and 39%, respectively, of total revenue in the nine-month period ended June 30, 2006. The Visual Got Mail revenue was concentrated in one customer with the NotifyLink revenue spread out among many different customers during the nine-month period ended June 30, 2007.

Cost of Revenue

Cost of revenue consists of inventory costs on hardware sales and server center costs and third party royalty fees on our NotifyLink sales. Cost of revenue decreased significantly to $89,333 in the nine-month period ended June 30, 2007 from $531,944 for the nine-month period ended June 30, 2006. The decrease in the cost of revenue is due to the cost of hardware products in fiscal 2006 versus solely software and service costs in fiscal 2007.

Our gross margin increased to 97.0% in the nine-month period ended June 30, 2007 compared to a gross margin of 84.1% in the nine-month period ended June 30, 2006. The increase is directly related to the changed product mix where cost of sales for hardware products reduced the fiscal 2006 gross profit and was absent from the fiscal 2007 cost of sales. There will be no more hardware cost of sales in the foreseeable future as we have discontinued the hardware product line.

Our gross margin has historically been affected by a number of factors, including product mix, product demand, pricing pressures, warranty costs, and timing. The most significant historical fluctuations have been associated with our legacy CPE product sales but we have ceased manufacturing and selling CPE. We are still subject to product demand and pricing pressures as our sales have transitioned to software and service products but we do not believe will experience the more significant changes that have been historically caused by hardware versus software and service sales.

Research and development

Research and development expenses consist primarily of personnel costs and support expenses. Research and development expenses increased to $945,062 for the nine-month period ended June 30, 2007 from $713,035 for the nine-month period ended June 30, 2006. This increase reflects the growth in our design and test staff required to support our expanding product lines and the advance of wireless devices available to users. The proliferation of new devices introduced into the wireless market has also increased engineering support for our product. Research and development is a critical factor in a growing technical market. Consequently, we expect to continue to invest in this area as resources allow. There can be no assurance that the market will continue to accept our wireless products.

Sales and marketing

Sales and marketing expenses consist primarily of personnel, travel costs and sales commissions related to our sales effort of the NotifyLink product line. Sales and marketing costs increased to $1,247,004 for the nine-month period ended June 30, 2007 from $1,221,606 for the nine-month period ended June 30, 2006. We use an internal sales force and a customer support staff to facilitate the NotifyLink sales process. The Visual Got Mail Solution sales have been completely supported at the executive staff level and its termination will not result in any saving in sales and marketing costs.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

General and administrative

General and administrative expenses consist of general management and finance personnel costs, insurance expense, occupancy costs, professional fees, stock based compensation expense and other general corporate expenses. General and administrative expenses increased to $977,692 for the nine-month period ended June 30, 2007 from $970,746 for the nine-month period ended June 30, 2006.

LIQUIDITY AND CAPITAL RESOURCES

A significant characteristic of our business is the sale of our products customarily in the form of annual contracts paid for upon signing but the revenue amortized over the twelve-month service period. As our installed base grows, this practice increases the deferred revenue liability on the balance sheet as we add new contracts faster than old contracts expire. The major cost of operations is comprised of (1) the engineering design of our product offered for sale and (2) the physical sale of a contract that requires both direct sales effort and customer service hours to facilitate a trial period of our software prior to purchase. The change in the NotifyLink deferred revenue to $1,969,259 as of June 30, 2007 from $1,623,606 as of September 30, 2006 is an indicator of product sales improvement during the period. Deferred revenue also represents the obligation to service the contracts underlying the revenue. However, the cash flow required to service the contracts is significantly less than the amortized revenue recognized each month.

We generated revenue from the service portion of our Visual Got Mail Solution through the end of February 2007 when our customer for this product terminated the program due to a merger and reorganization. The service was terminated on schedule in March 2007 and the equipment relocated to support our enterprise product line. Consequently, the Visual Got Mail Solution ended its product life after five years and no longer generates revenue. There are no warranty obligations outstanding or perceived redeployment opportunities.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

At June 30, 2006, we had cash and cash equivalents of $877,487. Over the last several years, we have financed our operations primarily through revenue from operations and existing cash balances. The net cash generated by operating activities equaled $87,253 in the nine-month period ended June 30, 2007 versus net cash generated by operating activities of $170,848 in the nine-month period ended June 30, 2006. The cash generated by operations in the nine-month period ended June 30, 2007 was a combination of a net loss of $297,730, a decrease in accounts receivable of $15,886, an increase in deferred revenue of $345,653 and a decrease of accounts payable of $5,938. The net cash provided in the nine-month period ended June 30, 2006 was largely attributable to an increase in the fair value of warrants liability of $457,919 and an increase in deferred revenue of $416,417. Despite this favorable performance, we anticipate that we will have negative cash flow from time to time in operating activities in future quarters and years.

Net cash used in investing activities was an outflow of $25,628 and a net inflow of $243,874 for the nine-month periods ended June 30, 2007 and 2006, respectively. The net cash outflow in the nine-month period ended June 30, 2007 was due to capital purchases partially offset by the sale of fixed assets. The net cash outflow in the nine-month period ended June 30, 2006 was due to proceeds from the sale of patents partially offset by capital purchases.

Net cash used by financing activities was an outflow of $13,544 and an outflow of $18,521 for the nine-month periods ended June 30, 2007 and 2006, respectively due to payments on capital leases.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off balance sheet arrangements as defined by Item 303(c) of Regulation S-B.

RISK FACTORS

We operate in a dynamic and rapidly changing business environment that involves numerous risks and uncertainties. The following section lists some, but not all, of these risks and uncertainties, which may have a material adverse effect on our business, financial condition or results of operations.

A significant portion of our revenue has been derived from the sale of a single solution to a single customer and that customer has discontinued the program our product supports

For the nine-month period ended June 30, 2007, 8% of our revenue came from the sale of our Visual Got Mail Solution service to a single competitive provider of local phone services. In July 2004, the customer changed its business position in the market in which our product is sold and terminated its outbound marketing efforts. Although our customer continued to purchase our service product from us until February 28, 2007, they have since discontinued the program that our product supports and terminated our service. We have no alternative distribution channel for our Visual Got Mail Solution and, in the future, we will have to rely exclusively on our NotifyLink product revenue to support operations. If we are unable to increase our NotifyLink product revenues for any reason, it would have a material and adverse effect on our business, operating results, and financial condition.

We have a history of losses, and there is no assurance of future profitability

We commenced operations in August 1994 and through January 1996 were engaged primarily in research and development. We introduced the Visual Got Mail Solution in fiscal 2001 and made a subsequent decision in fiscal 2003 to refocus our strategy on developing and selling software applications for the wireless data market. Accordingly, our business has changed substantially in recent years, making it difficult to make period-to-period comparisons of our operations, and we face all of the risks and uncertainties encountered by early-stage companies. For the fiscal years ended September 30, 2006, 2005 and 2004, we incurred net losses of $314,892, $557,452 and $655,908, respectively. We incurred a net loss of $297,729 for the nine-month period ended June 30, 2007 and as of June 30, 2007 we had an accumulated deficit of $24,246,308 and a working capital deficit of $985,606. Although we were cash positive in fiscal 2006 and for the first nine-months of fiscal 2007, we anticipate having negative cash flow from operating activities from time to time in future quarters and years. We also expect to incur further operating losses in future quarters and years until such time, if ever, as there is a substantial increase in orders for our products and product sales generating 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.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

If we are unable to market our wireless software products and achieve industry acceptance quickly, we could lose existing and potential customers and our sales would decrease

We continue to invest in our wireless products in order to grow our revenue and improve our financial condition. We need to market improved wireless software products on a timely basis to keep pace with technological developments, emerging industry standards, and the growing needs of our sophisticated customers. We intend to extend our product offerings primarily through our NotifyLink product line primarily into the Internet Message Access Protocol (IMAP) product base. However, we may experience difficulties in marketing these new products, and our inability to timely and cost-effectively introduce them and future enhancements, or the failure of these new products or enhancements to achieve market acceptance, could seriously harm our business. Life cycles of wireless software products are difficult to predict, because the market for such products is new and evolving and characterized by rapid technological change, frequent enhancements to existing products and new product introductions, changing customer needs and evolving industry standards. The introduction of competing products that employ new technologies and emerging industry standards could render our products and services obsolete and unmarketable or shorten the life cycles of our products and services. The emergence of new industry standards might require us to redesign our products. If our products are not in compliance with industry standards that become widespread, our customers and potential customers may not purchase our products.

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 Enterprise and Hosted 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. We cannot predict that growth of our NotifyLink products will continue or maintain itself at the current level. 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.

We may be unable to generate the capital necessary to support our planned level of research and development activities or to manufacture and market our products. Financing may not be available to us when and if required or on commercially reasonable terms

At June 30, 2007, we had an accumulated deficit of $24,246,308 and incurred a net loss of $297,729 for the nine-month period ended June 30, 2007. We had a working capital deficit at that date of $985,606. Our recently developed NotifyLink products will need to attain favorable market acceptance in order for us to be able to continue our research and development activities and to fund operating expenses at current levels. Regardless, because our NotifyLink wireless product line has not provided sufficient contributions to our revenue to date to operate profitably without the contribution of our Visual Got Mail Solution service revenue, the success of our business operations will depend upon a significant favorable market acceptance for our new wireless software products and our ability to obtain further financing. Obtaining additional financing will be subject to a number of factors including market conditions, investor acceptance of our business plan, and investor sentiment. These factors may make the timing, amount, terms and conditions of additional financing unattractive or unavailable to us. If we are unable to raise additional financing, we will have to rely on our operations for cash flow or significantly reduce our spending, delay or cancel planned activities or substantially change our current corporate structure. In such an event, we intend to implement expense reduction plans in a timely manner. However, these actions would have material adverse effects on our business, results of operations, and prospects, resulting in a possible failure of our business. Any financing would be expected to substantially dilute the interests of our existing stockholders.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

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 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;

·	future market acceptance of our products;

·	licensing costs of patent conflicts; 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 revenue 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 level of product revenue, 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 future performance.

We depend on a limited number of potential customers and need to develop marketing channels

We are building a formal referral channel and participate in informal referral arrangements with several wireless carriers, 2way wireless device manufacturers and one net ware company for the sale of our NotifyLink products and services where our products assist in the sale of their products. We have a limited direct sales force to sell our NotifyLink products and services to eventual users and we rely upon both formal and informal referral arrangements to provide leads for our NotifyLink products. To date, most of our referral arrangements are formal and we will receive referrals only to the extent that our referral partners successfully refer our products and services to potential users. There can be no assurance that we will achieve a significant volume of sales of our NotifyLink products and services to end users or will continue to receive referrals through our formal arrangements. Our Enterprise solution product is sold into an emerging market and we have not yet achieved sufficient growth in our sales to operate profitably without contribution from our Visual Got Mail Solution. The termination of the Visual Got Mail Solution makes it more important we increase our NotifyLink business.

We are expanding our distribution channels for our wireless products by participating in national and regional trade shows, promotions with strategic partners, training programs for telephone and wireless carrier sales representatives and presenting at Novell GroupWise user meetings across the United States. We cannot predict whether these activities will result in increased wireless revenue. We also have limited international sales due to limited resources to build a reseller network. Our management will need to expend time and effort to develop these channels. Our customer profile has changed from volume sales to a limited number of large telecommunication customers to relatively small sales to a large number of business customers. We have expanded our internal sales force in response. We are building experience selling into the wireless market but lack the resources to recruit experts in the wireless market. We may not be able to adapt our traditional marketing and distribution programs to expand our distribution channels and any marketing efforts undertaken by or on behalf of us may not be successful.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Our products may suffer from defects

Most of our products consist of software and services 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 have stopped production and development of our Visual Got Mail Solution product and all products in the field are out of warranty so we have no exposure from unknown defects from this product line.

We face significant competition

We believe the market for our wireless products is highly competitive and that competition is likely to intensify. In the market for wireless email notification and management software, we compete with Research In Motion Limited, Visto and the Good Technology division of Motorola. 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 and adversely affect our business, revenue, operating results, and financial condition.

Our products may not be accepted

We first launched our NotifyLink product line in November 2000. We have since released improved versions and expanded our NotifyLink product offerings. Although the sales of our NotifyLink product has grown significantly over the last few years, the revenue from this product line alone has not yet been sufficient to bring us to profitability.

We intend to continue to devote engineering, sales and marketing efforts to our NotifyLink product line and to promote general 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.

Delisting from the Nasdaq SmallCap Market may affect the liquidity of our trading market and the market price of our common stock

Since September 4, 2002, our common stock has been quoted on the Over-the-Counter Bulletin Board. Our shareholders could find it difficult to dispose of or to obtain accurate quotations as to the market value of, our common stock. In addition, delisting may make our common stock ineligible for use as, or make our common stock substantially less attractive as, collateral for margin and purpose loans, for investment by financial institutions under their internal policies or state legal investment laws, as consideration in the financing of future acquisitions of businesses or assets by us, and for issuance by us in future capital raising transactions any of which could cause the market price of our common stock to decrease. Delisting subjects our common stock to the “penny stock rules” contained in Section 15(g) of the Securities Exchange Act of 1934.

We depend on key executives

Our potential for success depends significantly on key management employees, including our Chairman, President and Chief Executive Officer, Paul F. DePond, our Vice President of Development, Rhonda Chicone-Shick and our Chief Financial Officer, Gerald W. Rice. We have entered into employment agreements with these three key management employees. The loss of their services or those of any of our other key employees would materially adversely affect 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.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

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 we rely primarily on a combination of copyright, trademark laws and employee and third-party nondisclosure agreements to protect our proprietary rights. In fiscal 2006, we sold our rights to several patents for legacy products no longer in production. Our software products are generally not subject to patent claims although 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 we apply for will be granted, that any issued patents will be enforceable or valid, 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.

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 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 charter provisions may discourage acquisition bids

Our Articles of Incorporation gives our board of directors the authority to issue an aggregate of 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights for these shares, without any further vote or action by our shareholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock, while providing flexibility in connection with possible acquisition and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

One director holds a large percentage of our stock and his interests may differ from other stockholders

On May 29, 2007, Commonwealth Associates, LLC, along with a number of other investors, sold their securities, including Unit Purchase Options, to 21X Investments LLC.

As of June 30, 2007, Mr. David Brewer, beneficially owned, in the aggregate, approximately 55% of our outstanding common stock assuming the conversion of all outstanding warrants, preferred unit options and options held by 21X Investments LLC that were exercisable within 60 days of June 30, 2007. Mr. Brewer has been a director of Notify since February 2000. Because of this beneficial ownership and his management roll in 21X Investments LLC, Mr. Brewer will have a significant influence over most matters requiring approval by stockholders, including the election of directors, any amendments to our certificate of incorporation and significant corporate transactions.

On June 21, 2007, the Board of Directors passed a resolution reducing the size of the Board from seven members to five members. Prior to this event, two vacancies existed because of two Board member resignations, one due to business reasons and one as a result of no longer holding an investment interest in Notify.

NOTIFY TECHNOLOGY CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)

Our articles of incorporation limit the liability of officers and directors and we have entered into indemnification agreements with them

Our Articles of Incorporation eliminate, in certain circumstances, the liability of our directors for monetary damages for breach of their fiduciary duties as directors. We have also entered into indemnification agreements with each of our directors and officers. Each of these indemnification agreements provides that we will indemnify the indemnitee against expenses, including reasonable attorneys' fees, judgments, penalties, fines, and amounts paid in settlement actually and reasonably incurred by them in connection with any civil or criminal action or administrative proceeding arising out of their performance of duties as a director or officer, other than an action instituted by the director or officer. These indemnification agreements also require that we indemnify the director or other party thereto in all cases to the fullest extent permitted by applicable law. Each indemnification agreement permits the director or officer that is party thereto to bring suit to seek recovery of amounts due under the indemnification agreement and to recover the expenses of such a suit if they are successful.

Item 3. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures.

Our chief executive officer and our chief financial officer, after evaluating our disclosure controls and procedures (as defined in the rules and regulation of the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "Exchange Act"), as of the end of the period covered by this Quarterly Report on Form 10-QSB, have concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in Internal Controls.

During the period covered by this Quarterly Report on Form 10-QSB, there were no significant changes in our internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

(a)	Exhibits:

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1	Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NOTIFY TECHNOLOGY CORPORATION

Dated: August 14, 2007
	/s/ Gerald W. Rice
	Chief Financial Officer (Principal Financial and Accounting Officer)

Notify Technology (NTFY) Inactive 10QSB2007 Q3 Quarterly report (small business)