Notify Technology (NTFY) 10-Q 2009 Q1 Quarterly report

U. S. Securities and Exchange Commission

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly periods ended December 31, 2008

or

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

For the transition period from ____________ to ______________

Commission File Number 000-23025

NOTIFY TECHNOLOGY CORPORATION 

(Exact name of registrant as specified in its charter)

CALIFORNIA	77-0382248
(State 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

(Registrant’s telephone number including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨	Accelerated filer  ¨
Non-accelerated filer  ¨	Smaller reporting company  þ

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

Yes ¨ No x

As of December 31, 2008, there were 14,075,662 shares of common stock outstanding.

INDEX

PART I.  FINANCIAL INFORMATION
Item 1.	Condensed Financial Statements:
	Condensed Balance Sheets as of December 31, 2008 (unaudited) and  September 30, 2008	3
	Condensed Statements of Operations for the three-month periods ended December 31, 2008 and 2007 (unaudited)	4
	Condensed Statements of Cash Flows for the three-month periods ended December 31, 2008 and 2007 (unaudited)	5
	Notes to Condensed Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3	Quantitative and Qualitative Disclosures About Market Risk	12
Item 4(T).	Controls and Procedures	13
PART II.  OTHER INFORMATION
Item 1A.	Risk Factors	13
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 6.	Exhibits	19
SIGNATURES		19

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PART I.  FINANCIAL INFORMATION (unaudited)

Item 1.  Financial Statements

NOTIFY TECHNOLOGY CORPORATION

CONDENSED BALANCE SHEETS

	December 31,			September 30,
	2008			2008
	(unaudited)				(1)
Assets
Current assets:
Cash and cash equivalents	$	1,052,177		$	1,010,607
Accounts receivable, net		826,975			509,735
Other current assets		36,942			39,452
Total current assets		1,916,094			1,559,793
Non-current assets
Property and equipment, net		202,920			173,224
Total non-current assets		202,920			173,224
Total assets	$	2,119,014		$	1,733,018
Liabilities and shareholders' deficit
Current liabilities:
Current portion of capital lease obligations	$	4,011		$	4,445
Accounts payable		64,890			40,045
Accrued payroll and related liabilities		324,411			349,292
Deferred revenue		2,866,631			2,418,235
Other accrued liabilities		170,479			171,108
Total current liabilities		3,430,422			2,983,125
Long term portion of capital lease obligations		10,034			10,685
Total liabilities		3,440,456			2,993,810
Commitments and contingencies
Shareholders' deficit:
Preferred stock, $0.001 par value, 5,000,000 shares authorized, no shares outstanding		—			—
Common stock, $0.001 par value, 30,000,000 shares authorized, 14,075,662 and 13,968,995 shares issued and outstanding on December 31, 2008 and September 30, 2007, respectively		14,076			14,076
Additional paid-in capital		23,387,395			23,387,395
Accumulated deficit		(24,722,913	)		(24,662,263	)
Total shareholders’ deficit		(1,321,442	)		(1,260,792	)
Total   liabilities and shareholders' deficit	$	2,119,014		$	1,733,018

(1) The information in this column was derived from our audited financial statements for the year ended September 30, 2008.

See accompanying notes to condensed financial statements

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NOTIFY TECHNOLOGY CORPORATION

CONDENSED (UNAUDITED) STATEMENTS OF OPERATIONS

	Three-Month Periods
	Ended December 31,
	2008			2007
	(Unaudited)
Revenue:
Product sales	$	1,349,261		$	1,074,854
Total revenue		1,349,261			1,074,854
Cost of revenue:
Product cost		5,260			5,080
Royalty payments		34,188			29,070
Total cost of revenue		39,448			34,150
Gross profit		1,309,813			1,040,704
Operating expenses:
Research and development		479,915			395,683
Sales and marketing		562,249			414,206
General and administrative		329,919			323,356
Total operating expenses		1,372,083			1,133,245
Loss from operations		(62,270	)		(92,541	)
Interest income (expense) and other, net		1,620			4,650
SFAS 123(R) expense		—			(4,810	)
Net loss	$	(60,650	)	$	(92,701	)
Basic and diluted net loss per share	$	(0.00	)	$	(0.01	)
Weighted average shares outstanding		14,075,662			14,017,328

See accompanying notes to condensed financial statements

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NOTIFY TECHNOLOGY CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

	Three-Month Periods
	Ended December 31,
	2008			2007
	(Unaudited)
Cash flows provided by (used in) operating activities:
Net loss	$	(60,650	)	$	(92,701	)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		18,454			15,635
SFAS 123(R) expense		—			4810
Changes in operating assets and activities:
Accounts receivable		(317,240	)		(49,146	)
Other current assets		2,510			(17,572	)
Accounts payable		24,845			13,747
Deferred revenue		448,396			186,031
Other accrued liabilities		(25,510	)		(20,423	)
Net cash provided by (used in) operating activities		90,805			40,381
Cash flows provided by (used in) investing activities:
Purchase of property and equipment		(48,150	)		(15,897	)
Deposit on property and equipment		—			(31,850	)
Net cash used in investing activities		(48,150	)		(47,837	)
Cash flows provided by (used in) financing activities:
Proceeds from exercise of options		—			27,933
Principal payments on capital lease obligations		(1,085	)		(4,481	)
Net cash provided by (used in) financing activities		(1,085	)		23,452
Net increase (decrease) in cash and cash equivalents		41,570			15,996
Cash and cash equivalents at beginning of period		1,010,607			839,775
Cash and cash equivalents at end of period	$	1,052,177		$	855,771
Supplemental disclosure of cash information
Cash paid for interest	$	229		$	510
Cash paid for taxes	$	850		$	—

See accompanying notes to condensed financial statements

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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.  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, 2008.

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

2.      NET INCOME (LOSS) PER SHARE

The net loss per share for the three-month period ended December 31, 2008 was a loss of $(0.00) compared to a loss of $(0.01) for the same period in the prior year.  Options to purchase 3,453,544 and 2,778,000 shares of common stock and warrants to purchase zero and 1,871,651 shares of common stock were outstanding at December 31, 2008 and 2007, respectively. The outstanding options were not included in the computation of diluted net loss per share for the three-month periods ended December 31, 2008 and 2007 as the effect would be anti-dilutive.

3. FINANCING ACTIVITIES

On May 29, 2007, Commonwealth Associates, L.P., along with a number of other investors, sold all of their respective interests in the Company, including options to purchase Series A Preferred Stock in the form of Unit Purchase Options, to 21X Investments LLC.  Commonwealth Associates, L.P. and the other investors had originally acquired their interests in the July 2001 Preferred Stock Offering of the Company.

21X Investments LLC is beneficially owned by David Brewer, a director and chairman of the Audit Committee of the Company since February 2000.  As a result of the May 29, 2007 transaction, Mr. Brewer acquired approximately 55% beneficial ownership of the stock of the Company.

The warrants mentioned in note 2 above and the Unit Purchase Options mentioned in this note 3 expired on July 20, 2008 leaving 14,075,662 shares of common stock and options to purchase 3,453,244 shares of common stock as the only issued and outstanding securities of the Company.  There were no remaining obligations associated with the expiring warrants and options.

On December 17, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (“2008 Plan”) subject to the approval of the company's shareholders.  The Board authorized 2,317,000 shares of the Company’s common stock to be reserved under the 2008 Plan.  Included in the 3,453,244 total outstanding options as of December 31, 2008 were 1,580,544 options granted under the 2008 Plan on December 17, 2008 to various employees.  These grants included 169,470 options exchanged for 900,000 options granted under a prior option plan.

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NOTIFY TECHNOLOGY CORPORATION

Notes to Condensed Financial Statements

(Unaudited)

4. ACCOUNTING FOR STOCK BASED COMPENSATION

Statement of Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation—Transition and Disclosure, an Amendment of FASB Statement No. 123," amends the disclosure requirements of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," to require more prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results.

On October 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” requiring us to recognize expense related to the fair value of our employee stock option awards. We recognize the cost of all share-based awards on a graded vesting basis over the vesting period of the award.  We recognized stock based employee compensation of $4,810 in the three-month period ended December 31, 2007. 

We recognized no compensation expense during the first three months of fiscal 2009 related to the grant of options to non-employees.

5. PRODUCT WARRANTY

We warrant our products to current paid-up customers and make available for download service update releases that contain the most up-to-date version of our products.  These software updates are continually maintained and released when available.  As such, we do not maintain a separate warranty reserve but expense the cost to create and post any maintenance release as a part of normal operations.

6. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB Statement No. 109, “ Accounting for Income Taxes”.  FIN 48 provides guidance on the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  For the three-month period ended December 31, 2008, FIN 48 has had no impact on the condensed financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements”.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value.  SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  For the three-month period ended December 31, 2008, SFAS No. 157 has had no impact on the condensed financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”,  SFAS No. 159 provides an option to report selected financial assets and financial liabilities using fair value.  The standard establishes required presentation and disclosures to facilitate comparisons with companies that use different measurements for similar assets and liabilities.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, with early adoption allowed only if SFAS No. 157 is also adopted.  The Company is currently evaluating the impact of this standard on the condensed financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of this standard on the condensed financial statements.

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NOTIFY TECHNOLOGY CORPORATION

Notes to Condensed Financial Statements

(Unaudited)

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact of this standard on the condensed financial statements.

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

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which involve risks and uncertainties.  Forward-looking statements generally include words such as “may,” “will,” “plans,” “seeks,” ”expects,” “anticipates,” “outlook,” “intends,” “believes” and words of similar import as well as the negative of those terms. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.  All forward-looking statements in this Quarterly Report on Form 10-Q include, but are not limited to:

· statements regarding the future growth of our wireless product line;

· statements regarding future revenue from our products;

· statements regarding our future success;

· statements regarding our future financings;

· statements regarding future costs;

· statements regarding future research and development efforts;

· statements regarding competition in the market for wireless products;

· statements regarding future patent applications;

· statements regarding future financial results; and

· statements regarding future plans to extend our product line.

These statements are based on current expectations and are subject to important factors that could cause actual results to differ materially from those projected in the forward-looking statements. Such important factors include, but are not limited to, those discussed below under “Risk Factors” and elsewhere in this Quarterly Report and in other documents we file with the U.S. Securities and Exchange Commission. When reading the sections titled "Results of Operations" and "Financial Condition," you should also read our unaudited condensed financial statements and related notes included elsewhere herein and our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2008 We disclaim any obligation to update any forward-looking statements as a result of developments occurring after the date of this Quarterly Report.

OVERVIEW

We were incorporated in the State of California in August 1994.  We are an independent software vendor (“ISV”) focused on providing secure, wireless synchronization of email and personal information management (“PIM”) (calendar, contacts, and tasks information) across a variety of wireless devices and email collaboration suites. Our products provide solutions to organizations and businesses supporting Novell GroupWiseä, Microsoft Exchangeä, Google Enterprise™ and a variety of alternative email collaboration suites such as the Sun Java Communications Suite, the Oracle Collaboration Suite, the Mirapoint Messaging Suite, CommunigatePro, Scalix Enterprise Server, Kerio Messaging Suite, the MDaemon Messaging Suite, FirstClass, and Meeting Maker.  We support a variety of wireless device platforms on each of these suites including the BlackBerry®, Apple® iPhone®, iPod® touch, Palm, Windows Mobile®, and Symbian. In July 2006, we became an official BlackBerry ISV Alliance Partner with Research In Motion.  Using our products, our customers can achieve secure wireless mobile access using various handheld wireless devices to manage their email, calendar appointments and address books on any of the email collaboration suites we support.  Our products support wireless devices from a wide range of manufacturers and network carriers around the world.

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NOTIFY TECHNOLOGY CORPORATION

We completed our initial public offering in September 1997, receiving 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 in private placements 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 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, and our ability to develop and market new products and control costs. There can be no assurance that our revenues will grow or be sustained in future periods or that we will ever achieve profitability.

RESULTS OF OPERATIONS

Three-Month Periods Ended December 31, 2008 and 2007

Revenue

Revenue consists of net revenue from the sale of NotifyLink software licenses, installation fees and the sale of third party software.  License 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 to the customer.

Our revenues increased 25% to $1,349,261 in the three-month period ended December 31, 2008 from $1,074,854 in the three-month period ended December 31, 2007.  The increase in revenue was attributed to growth in both domestic and international sales of our NotifyLink product line.  Over the past twelve months, we have increased our level of activity in both Europe and other parts of the world.  We also believe that the growth in acceptance of cloud computing has led to an increase in sales of our on-demand product.

Our NotifyLink product is comprised of a backend server component and a wireless device client component. We are a provider of secure real time wireless synchronization of email, calendar, contacts and tasks, supporting 13 different email platforms. In addition we support any BlackBerry, Palm, Windows Mobile, and select Symbian wireless devices 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 mailboxes and all emails originated forwarded and replied to from the mobile device will be synchronized with the user’s email mailbox.  The synchronized information also keeps personal calendars, contacts, and task information continually up to date at both the server and the mobile device level.

We sell our products primarily in the United States directly to business users and resellers.  Certain domestic customers have deployed our product to international sites, demonstrating NotifyLink’s ability to link our customers’ email across international boundaries. We also have limited direct sales internationally and sell primarily through resellers.

Cost of revenue

Cost of revenue consists of the hosting center costs to support the service portion of our NotifyLink products, the cost of resale software related to NotifyLink and royalty expense to NCR for certain technology utilized in our NotifyLink product. Cost of revenue increased to $39,448 in the three-month period ended December 31, 2008, from $34,151 for the three-month period ended December 31, 2007. The increase in the cost of revenue was due to a fixed royalty percentage applied to increased software sales.

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NOTIFY TECHNOLOGY CORPORATION

Our gross margin increased to 97.1% in the three month period ended December 31, 2008 compared to a gross margin of 96.8% in the three-month period ended December 31, 2007.  The major cost component affecting gross margin is the royalty expense mentioned above that is applied at a constant percentage of revenues regardless of volume.  The other major costs of our business, consisting of product design and sales/support, are categorized in operating expenses and thus do not impact gross margin.

Research and development

Research and development expenses consist primarily of personnel costs and expenses. Research and development expenses increased to $479,915 for the three-month period ended December 31, 2008 from $395,683 for the three-month period ended December 31, 2007.  Virtually all the increase is due to salaries as we invested heavily in expanding the NotifyLink product line and readying a new product line for launch in early 2009.  Our development efforts were devoted to improving our software product in the area of device management, porting our solution to new devices and creating new products.

We believe that our future success, if any, depends significantly on our ability to continue to enhance our existing wireless products and to develop new products. Therefore, we intend to continue to incur research and development costs for the foreseeable future.

Sales and marketing

Sales and marketing expense consists primarily of personnel, travel costs and sales commissions related to our sales and marketing efforts.  We use an internal sales force and a customer support staff to facilitate the NotifyLink sales process.  Sales and marketing costs increased to $562,249 for the three-month period ended December 31, 2008 from $414,206 for the three-month period ended December 31, 2007.  The increase in sales expense is due to merit increases in salaries and increases in commissions related to the improved sales activity. We have also devoted additional resources to developing international sales.

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 and create new distribution channels.

General and administrative

General and administrative expense consists of general management and finance personnel costs, insurance expense, rent expense, professional fees and other general corporate expenses.  General and administrative expenses increased slightly to $329,919 for the three-month period ended December 31, 2008 from $323,356 for the three-month period ended December 31, 2007.

Although we have been able to avoid increased expenses in recent periods, we expect that general and administrative expense may increase in future quarters as we adhere to the requirements mandated by the Sarbanes-Oxley Act and integrate any additional requirements imposed by future regulations.

LIQUIDITY AND CAPITAL RESOURCES

During the three-month period ended December 31, 2008, 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.

A significant characteristic of our business is the sale of our products customarily in the form of annual contracts paid for upon signing with the revenue amortized over the twelve-month service period.  The unamortized contract revenue is reflected in the deferred revenue account on our balance sheet.  As our installed base grows, this practice increases the deferred revenue liability on the balance sheet provided we add new contracts faster than old contracts expire.  For example, deferred revenue increased significantly to $2,866,631 at December 31, 2008 from $2,418,235 at September 30, 2008 partially due to a renewal of an existing $200,000 account by one customer plus a growth in the same account of $40,000.  This account balance will amortize over the next twelve months at the rate of $20,000 a month. If we continue to renew and grow accounts as in this example plus sell new accounts, we could continue to see deferred revenue increase in the future.

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NOTIFY TECHNOLOGY CORPORATION

The major cost of operations is comprised of (1) the engineering design of our products offered for sale and (2) the sales process of a contract that requires both direct sales effort and technical support hours to facilitate a 30-day trial period of our software prior to purchase.  We believe that the increase in the NotifyLink deferred revenue to $2,866,630 as of December 31, 2008 from $2,312,548 as of December 31, 2007, combined with the increase in revenues over the same period, indicates that total product revenue improved in the twelve-month period ended December 31, 2008.  Deferred revenue also represents the obligation to service the contracts underlying the revenue.  However, the cash flow required to provide the service of contracts is significantly less than the amortized revenue recognized each month.

Our continued operations depend on the cash flow from sales of NotifyLink.  In the event sales of our product decline or our revenue is otherwise interrupted, we would have to reduce our operations to minimally service our existing contract obligations unless we secured additional financing. If we were unable to increase our revenues or secure financing, we would have to restructure our business to reduce costs.

We are currently planning to expand our product offerings into our current or other niche markets.  We believe that these niche markets are not adequately addressed by market competitors at the present time.   We also intend to capitalize on our ability to offer a single middleware solution for those companies deploying a variety of manufacturers’ devices on a single email system.  The success of our business operations will depend upon a continued favorable market acceptance for our wireless software products.

We also continue to evaluate our opportunities to obtain financing to provide additional funding for our operations.  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.

In July 2008, warrants and options to purchase our preferred shares that had been outstanding since July 2001, expired without having been exercised.  The expiration left 14,075,662 shares of common stock and options to purchase 3,453,244 shares of common stock as our only issued and outstanding securities.  There were no remaining obligations associated with the expiring warrants and options.  This simplification of our equity structure could be advantageous in the event we require additional capital.

On December 17, 2008, the Board of Directors adopted the 2008 Equity Incentive Plan (“2008 Plan”) subject to the approval of our shareholders.  The Board authorized 2,317,000 shares of the Company’s common stock to be reserved under the 2008 Plan.  Included in the 3,453,244 total outstanding options as of December 31, 2008 were 1,580,544 options granted under the 2008 Plan on December 17, 2008 to various employees.  These grants included 169,470 options exchanged for 900,000 options granted under a prior option plan.

At December 31, 2008, we had cash and cash equivalents of $1,052,177, compared to $855,771 at December 31, 2007.  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 $90,804 in the three-month period ended December 31, 2008, versus net cash generated by operating activities of $40,381 in the three-month period ended December 31, 2007. The cash generated by operations in the three-month period ended December 31, 2008 was a combination of a net loss of $60,650 and an increase in accounts receivable of $317,240 offset by an increase in deferred revenue of $448,396 and an increase in accounts payable of $24,845.  The cash generated by operations in the three-month period ended December 31, 2007 was a combination of a net loss of $92,701 and an increase in deferred revenue of $186,031 partially offset by an increase in accounts receivable of $49,146, an increase in deposits on property and equipment of $31,850 for a software system partially installed and a increase in accounts payable of $13,747.  Although we have been cash positive in the last two fiscal years, we anticipate that we will have negative cash flow from time to time in operating activities in future periods.

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NOTIFY TECHNOLOGY CORPORATION

Net cash used by investing activities in the three-month period ended December 31, 2008 was an outflow of $48,150 for computer  purchases.  There was a net cash outflow of $47,837 from the purchase of fixed assets in the three-month period ended December 31, 2007.

Net cash provided by financing activities was an outflow of $1,085 and an inflow of $23,452 for the three-month periods ended December 31, 2008 and 2007, respectively.  The net cash outflow for the three-month period ended December 31, 2008 was due to payments on capital leases.  The inflow for the three-month period ended December 31, 2007 was due to $27,933 from the exercise of options partially offset by $4,481 of payments on capital leases.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate estimates, including those related to bad debts, inventories and income taxes, on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies, among others, involve the more significant judgments and estimates used in the preparation of our financial statements:

We recognize revenue in accordance with the American institute of Certified Public Accounts Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” and SEC Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”).

Under SOP 97-2, we recognize software license agreements when persuasive evidence of an agreement exists, delivery of the product has occurred, the license fee is fixed or determinable and collection is probable.  Our license agreements generally have a fixed term and the license revenue is recognized ratably over the term of each license.

Under SAB 104, we recognize revenue when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery of the product has occurred or services have been rendered, the sales price is fixed or determinable and collection is probable. We recognize revenues at time of shipment of our products and sales are recorded net of discounts and returns.

We maintain allowances for doubtful accounts for estimated bad debts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.

The carrying value of our deferred tax assets are dependent upon our ability to generate sufficient future taxable income in certain tax jurisdictions.  Should we determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.  Currently, our deferred tax assets are fully reserved.

OFF BALANCE SHEET ARRANGEMENTS

We have no off balance sheet arrangements as defined by Item 303(a)4 of Regulation S-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk generally represents the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates and market prices. We do not currently have any trading derivatives nor do we expect to have any in the future. We have established policies and internal processes related to the management of market risks, which we use in the normal course of our business operations.

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Intangible Asset Risk

At December 31, 2008, we did not carry any intangible assets on our financial statements.

Equity Price Risk

At December 31, 2008, we did not own any equity investments. As a result, we do not currently have any direct equity price risk.

Commodity Price Risk

We do not enter into contracts for the purchase or sale of commodities. As a result, we do not currently have any direct commodity price risk.

Item 4T. 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-Q, have concluded that as of such date, our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act 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-Q, 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

Item1 A. 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.

The recent downturn in the macroeconomic environment may negatively impact our future results of operations.

The recent disruption in global macroeconomic conditions has had a significant impact on the wireless industry as a whole.  Due to the uncertainty about current macroeconomic conditions, our customers may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material adverse effect on the demand for our products. Other factors that could influence demand include conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on future demand for our products and on our financial condition and operating results.

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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 the sale of hardware products to the telephone market. We made the decision in fiscal 2003 to refocus our strategy on developing and selling software applications for the wireless 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, 2008, 2007, 2006, and 2005, we incurred net losses of $287,681, $426,004, $314,892 and $557,452, respectively. We incurred a net loss of $60,650 for the three-month period ended December 31, 2008.  Although our cash flow from operations was positive in the three-month period ended December 31, 2008, we are not assured that we can maintain a positive cash flow from operating activities in future periods. We may also incur further operating losses in the future until such time, if ever, as there is a substantial increase in orders for our products and product sales generate sufficient revenue to fund our continuing operations.  There can be no assurance that sales of our products will continue to generate or maintain positive cash flow or that we will attain or thereafter sustain profitability in any future period.

We may be unable to generate the cash necessary to support a competitive level of research and development activities.

At December 31, 2008, we had an accumulated deficit of $24,722,913 and incurred a net loss for the three-month period ended December 31, 2008 of $60,650. We also had a working capital deficit at that date of $1,514,328.  Our NotifyLink products will need to sustain a favorable market acceptance in order for us to be able to continue our research and development activities and to fund operating expenses at a level required to stay competitive in our market.  Regardless, as our NotifyLink wireless product line has not generated sufficient contributions to our revenues to date to operate profitably at the current level of research and development, an increase in the level of research and development driven by market pressures could require us 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, in a situation that required an increase in research and development we are unable to maintain market acceptance of our wireless products or raise additional financing, we will have to 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.

If we are unable to develop market and sell new and improved wireless products on a timely basis, we could lose existing and potential customers and our sales could decrease.

We continue to invest in our wireless products in order to grow our revenue and improve our financial condition.  We need to develop, market and sell new and 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 may experience difficulties in marketing and selling new products, and our inability to timely and cost-effectively introduce new products 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 relatively 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.

Revenues or expenses may vary, affecting our quarterly operating results.

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;

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· 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; 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 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 future performance.

We need to continue to develop our marketing channels and build our sales force.

We continue to develop our formal referral partner channel and our international reseller partner channel.  We participate in informal referral arrangements with several wireless carriers, wireless device manufacturers and several of our collaboration partners 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 organizations and businesses 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 continue to receive referrals through our formal or informal arrangements.  Our NotifyLink solution is sold into an emerging market and although we have operated on a cash positive basis in the fiscal years ending September 30, 2008 and 2007, we have not yet achieved sufficient growth in our sales to operate profitably on an income statement basis.

We are expanding our distribution channels for our wireless products by participating in national and regional trade shows and promotions with strategic partners across the United States and Europe.  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 consists of a large number of small to medium business customers thereby reducing our dependence on any one customer.  We have expanded our internal sales force in response. We are building experience selling into the wireless market but make use of modest marketing and distribution programs to expand our distribution channels and any marketing efforts undertaken by or on behalf of us may not be successful.

One of our directors holds a large percentage of our stock and is able to exert substantial control over us.

David A. Brewer, a member of our Board of Directors and the Chairman of our Audit Committee since 2000, together with an entity affiliated with Mr. Brewer, currently own approximately 56% of our outstanding common stock.  In addition, Mr. Brewer owns options to purchase an additional fractional percent of our common stock.   This represents a significant influence over all matters requiring approval by shareholders, including the election of directors, amendments to our Articles of Incorporation and significant corporate transactions, such as a merger or other sale of our company or its assets.  This concentration of ownership will limit other shareholders’ ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us.

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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 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 Development, Rhonda Chicone and our Chief Financial Officer, Gerald W. Rice.  We have entered into amended and restated employment agreements with these three key management employees.  We do not currently have “key man” life insurance on any of these executives or any of our other key employees.  The loss of the services of these executives or those of any of our other key employees would materially and 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 retain or 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 or 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 copyright, trademark and trade secret laws and employee and third-party nondisclosure agreements to protect our proprietary rights.   Our software products are generally not subject to patent claims.  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 charter provisions may discourage acquisition bids.

Our Articles of Incorporation give 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.

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 such director in connection with any civil or criminal action or administrative proceeding arising out of his 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.  We currently have directors’ and officers’ liability insurance, but there can be no assurance that any or all of our indemnification obligations will be covered by this insurance or that the insurance limits will not be exceeded.

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Risks Related to Our Industry

We face significant competition.

We believe the market for our wireless products is extremely competitive for certain platforms, and less competitive for others.  Several companies offer wireless email notification and management software for Microsoft Exchange and Novell GroupWise.  Many of these companies have greater financial and other resources than we do.  Microsoft and Novell offer similar products at little to no charge that function in large parts of the enterprise email market.  We sell our products in segments of the market where the free products do not provide adequate functionality or sufficient product features.  If these lower cost products were extended to our segment of the market, we would face additional price pressure.  We may not be able to compete successfully against better funded 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.

If the market for wireless data communications devices does not grow, we may not successfully increase or maintain the sale of our NotifyLink products.

The overall market for wireless data communications devices has experienced significant growth in recent years.  The success of our NotifyLink Enterprise On-Premise and On-Demand products depends upon this growth.  There can be no assurance that the market for wireless software products will continue to grow.  We cannot predict that growth of our NotifyLink products will continue. If the various markets in which our software products compete fail to grow, or grow more slowly than we currently anticipate, or if we are unable to establish product markets for our new software products, our business, results of operation and financial condition would be materially and adversely affected.

Risks Related to Our Common Stock

If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board, which would limit the ability of broker-dealers to sell our securities and the ability of shareholders to sell their securities in the secondary market.

Companies trading on the OTC Bulletin Board, such as Notify Technology, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934 (“Exchange Act”), and must be current in their reports under Section 13 of the Exchange Act, in order to maintain price quotation privileges on the OTC Bulletin Board.  If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board.  As a result, the liquidity of our securities could be adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of shareholders to sell their securities in the secondary market

Our common stock is subject to the “penny stock” rules of the Securities and Exchange Commission, and the trading market in our common stock is limited, which makes transactions in our stock cumbersome and may reduce the investment value of our stock.

Our common stock is “penny stock” because it is not registered on a national securities exchange or listed on an automated quotation system sponsored by a registered national securities association, pursuant to Rule 3a51-1(a) under the Exchange Act.  For any transaction involving a penny stock, unless exempt, the rules require:

· That a broker or dealer approve a person’s account for transactions in penny stocks; and

· That the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market, which, in highlight form:

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· Sets forth the basis on which the broker or dealer made the suitability determination; and

· That the broker or dealer received a signed, written agreement from the investor prior to the transaction.

Generally, brokers may be less willing to execute transactions in securities subject to the penny stock rules.  This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions.  Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

The market for penny stocks has suffered in recent years from patterns of fraud and abuse.

Shareholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse.  Such patterns include:

· Control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer;

· Manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases;

· Boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced salespersons;

· Excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and

· The wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequential investor losses.

Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.  The occurrence of these patterns or practices could increase the volatility of our share price.

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.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

In December 2008, we issued options to purchase an aggregate of 1,480,544 shares of our common stock to a total of 18 individuals pursuant to our 2008 Equity Incentive Plan.  The issuances were made in reliance on Regulation D promulgated pursuant to the Securities Act, and without general solicitation or advertising.

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:  February 13, 2009
	/s/ Gerald W. Rice
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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