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 December 31, 2003
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 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 Registrant (1) has filed all reports required to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yesx No¨
As of December 31, 2003 there were 5,833,678 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format
Yes¨ Nox
1
PART I. FINANCIAL INFORMATION (unaudited) | ||||||
| Item 1. | Condensed Financial Statements: (unaudited) | |||||
Condensed Balance Sheets as of December 31, 2003 and September 30, 2003 | 3 | |||||
Condensed Statements of Operations for the three-month periods ended December 31, 2003 and 2002 | 4 | |||||
Condensed Statements of Cash Flows for the three-month periods ended December 31, 2003 and 2002 | 5 | |||||
| 6 | ||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 8 | ||||
| Item 3. | 19 | |||||
PART II. OTHER INFORMATION | ||||||
| Item 6. | 19 | |||||
| 20 | ||||||
2
PART I. FINANCIAL INFORMATION (unaudited)
| Item 1. | Financial Statements |
CONDENSED BALANCE SHEETS
| December 31, 2003 | September 30, 2003 | |||||||
| (unaudited) | (1) | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,136,255 | $ | 556,805 | ||||
Restricted cash | 3,100 | 436,000 | ||||||
Accounts receivable | 262,768 | 528,927 | ||||||
Other current assets | 72,898 | 101,406 | ||||||
Total current assets | 1,475,021 | 1,623,138 | ||||||
Property and equipment, net | 218,612 | 247,168 | ||||||
Total assets | $ | 1,693,633 | $ | 1,870,306 | ||||
Liabilities and shareholders’ equity | ||||||||
Current liabilities: | ||||||||
Short term borrowings | $ | — | $ | 162,750 | ||||
Current portion of capital lease obligations | 13,931 | 13,725 | ||||||
Accounts payable | 34,999 | 108,948 | ||||||
Accrued payroll and related liabilities | 140,172 | 141,792 | ||||||
Deferred revenue | 711,445 | 438,137 | ||||||
Customer advances | 371,442 | 417,786 | ||||||
Other accrued liabilities | 132,465 | 160,050 | ||||||
Total current liabilities | 1,404,454 | 1,443,388 | ||||||
Long term portion of capital lease obligations | 27,633 | 31,195 | ||||||
Total liabilities | 1,432,087 | 1,474,583 | ||||||
Shareholders’ equity: | ||||||||
Preferred stock | 993,742 | 993,742 | ||||||
Common stock | 5,834 | 5,834 | ||||||
Additional paid-in capital | 21,816,474 | 21,816,474 | ||||||
Accumulated deficit | (22,554,504 | ) | (22,420,327 | ) | ||||
Total shareholders’ equity | 261,546 | 395,723 | ||||||
Total liabilities and shareholders’ equity | $ | 1,693,633 | $ | 1,870,306 | ||||
| (1) | The information in this column was derived from our audited condensed financial statements for the year ended September 30, 2003 |
See accompanying notes to unaudited condensed financial statements
3
CONDENSED STATEMENTS OF OPERATIONS
| Three-Month Periods Ended December 31, | ||||||||
| 2003 | 2002 | |||||||
| (Unaudited) | ||||||||
Revenue: | ||||||||
Product revenue | $ | 331,996 | $ | 1,989,390 | ||||
Service revenue | 421,718 | 254,884 | ||||||
Royalty revenue | 48,035 | 18,200 | ||||||
Total revenue | 801,749 | 2,262,474 | ||||||
Cost of revenue: | ||||||||
Product cost | 205,319 | 1,511,289 | ||||||
Service cost | 50,719 | 89,412 | ||||||
Total cost of revenue | 256,038 | 1,600,701 | ||||||
Gross profit | 545,711 | 661,773 | ||||||
Operating expenses: | ||||||||
Research and development | 220,993 | 247,809 | ||||||
Sales and marketing | 142,931 | 110,553 | ||||||
General and administrative | 307,078 | 364,378 | ||||||
Total operating expenses | 671,002 | 722,740 | ||||||
Loss from operations | (125,291 | ) | (60,967 | ) | ||||
Interest expense and other, net | 8,886 | 37,569 | ||||||
Net loss | $ | (134,177 | ) | $ | (98,536 | ) | ||
Basic and diluted net loss per share | $ | (0.03 | ) | $ | (0.02 | ) | ||
Weighted average shares outstanding | 4,599,800 | 4,549,808 | ||||||
See accompanying notes to unaudited condensed financial statements
4
CONDENSED STATEMENTS OF CASH FLOWS
| Three-Month Periods Ended December 31, | ||||||||
| 2003 | 2002 | |||||||
| (Unaudited) | ||||||||
Cash flows used in operating activities: | ||||||||
Net loss | $ | (134,177 | ) | $ | (98,536 | ) | ||
Adjustments to reconcile net loss to cash used in Operating activities: | ||||||||
Depreciation and amortization | 28,727 | 24,461 | ||||||
Loss from the sale of property and equipment | 6,080 | — | ||||||
Changes in operating assets and activities: | ||||||||
Accounts receivable | 266,159 | (802,304 | ) | |||||
Inventories | — | 366,311 | ||||||
Pre-paid inventory | — | (292,750 | ) | |||||
Other current assets | 28,508 | 6,864 | ||||||
Accounts payable | (73,949 | ) | (351,439 | ) | ||||
Deferred revenue | 273,308 | 6,494 | ||||||
Other accrued liabilities | (75,749 | ) | 78,503 | |||||
Net cash provided by (used in) operating activities | 318,907 | (1,062,396 | ) | |||||
Cash flows used in investing activities: | ||||||||
Purchase of property and equipment | (9,251 | ) | (87,660 | ) | ||||
Proceeds from the sale of fixed assets | 3,000 | |||||||
Decrease in restricted cash | 432,900 | 351,300 | ||||||
Net cash provided by investing activities | 426,649 | 263,640 | ||||||
Cash flows provided by financing activities: | ||||||||
Net proceeds from (payments on) short term borrowings | (162,750 | ) | 488,250 | |||||
Payments on capital lease | (3,356 | ) | — | |||||
Net cash (used in) provided by financing activities | (166,106 | ) | 488,250 | |||||
| �� | ||||||||
Net increase (decrease) in cash and cash equivalents | 579,450 | (310,506 | ) | |||||
Cash and cash equivalents at beginning of period | 556,805 | 526,656 | ||||||
Cash and cash equivalents at end of period | $ | 1,136,255 | $ | 216,150 | ||||
See accompanying notes to unaudited condensed financial statements
5
NOTIFY TECHNOLOGY CORPORATION
NOTES TO THE 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 generally accepted 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 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 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, 2003.
Results for any interim period are not necessarily indicative of results for any other interim period or for the entire year.
| 2. | GOING CONCERN |
Due to our present financial condition, our current stage of research and development of new product and our business plans, there is substantial doubt as to our ability to continue as a going concern. To date, our NotifyLink product line is only beginning to contribute revenue and our Visual Got Mail Solution sales are highly concentrated in one customer. The success of our business operations will depend upon our ability to obtain further financing until such time, if ever, as there is favorable market acceptance for our new wireless software products. It is not possible for us to predict with assurance the outcome of these matters. If we are unable to obtain further financing and profitable operations from our new software wireless products, then our business will fail.
| 3. | LIQUIDITY AND CAPITAL RESOURCES |
During fiscal 2001, we financed our operations through a combination of existing cash balances, the sale of common stock, the sale of preferred stock and the proceeds from the exercise of warrants and options. During fiscal 2002 and fiscal 2003, we financed our operations through a combination of gross margin from sales of product and services and existing cash balances. Our ability to fund our recurring losses from operations depends upon the success of our wireline Visual Got Mail Solution and the success in our wireless products designed for wireless e-mail notification and wireless e-mail notification market solutions, and raising other sources of financing. Our NotifyLink product revenue is just emerging and we are uncertain of the rate of its growth, if any. We believe that our existing cash balances are sufficient to fund our operations through at least June 30, 2004. However, to fund our operations beyond June 30, 2004, we will need to raise additional funds or reduce our level of spending. There is no assurance that we will be successful in acquiring or raising these additional funds or reducing expenses sufficiently.
| 4. | NET LOSS PER SHARE |
Options to purchase 3,333,667 and 2,140,952 shares of common stock and warrants to purchase 2,062,005 and 4,161,988 were outstanding at December 31, 2003 and 2002, respectively, but were not included in the computation of diluted net loss per share as the effect would be anti-dilutive.
6
NOTIFY TECHNOLOGY CORPORATION
| 5. | ACCOUNTING FOR STOCK-BASED COMPENSATION |
The Company accounts for stock-based employee compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations and complies with the disclosure provisions of Statement of Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure – an Amendment of FASB Statement No. 123.” The following table illustrates the effect on net loss and net loss per common share if the Company had applied the fair market recognition provisions of SFAS 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.
| Three Months Ended December 31 | ||||||||
| 2003 | 2002 | |||||||
Net loss as reported | $ | (134,177 | ) | $ | (98,536 | ) | ||
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects | — | — | ||||||
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects | (162,397 | ) | (323,363 | ) | ||||
Pro forma net loss | $ | (296,574 | ) | $ | (421,899 | ) | ||
| 2003 | 2002 | |||||||
Earnings per share basic and diluted: | ||||||||
As reported | $ | (0.03 | ) | $ | (0.02 | ) | ||
Pro forma | $ | (0.06 | ) | $ | (0.09 | ) | ||
| 6. | PRODUCT WARRANTY |
The Company warrants its products for a specific period of time, generally twelve months, against material defects. The Company provides for the estimated future costs of warranty obligations in cost of sales when the related revenue is recognized. The accrued warranty costs represents the best estimate at the time of sale of the total costs that the Company expects to incur to repair or replace product parts, which fail while still under warranty. The amount of accrued estimated warranty costs are primarily based on historical experience as to product failures as well as current information on repair costs. On a quarterly basis, the Company reviews the accrued balances and updates the historical warranty cost trends. The following table reflects the change in the Company’s warranty accrual during fiscal year 2003:
Warranty accrual, September 30, 2003 | $ | 17,057 | ||
Charged to cost of sales | 2,019 | |||
Actual warranty expenditures | (8,559 | ) | ||
Warranty accrual, December 31, 2003 | $ | 10,517 | ||
7
NOTIFY TECHNOLOGY CORPORATION
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-QSB contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. In addition, we may from time to time make oral forward-looking statements. These statements may generally be identified by the use of such words as “expect,” “anticipate,” “believe,” “intend,” “plan,” “will,” or “shall,” and include, but are not necessarily limited to, all of the statements marked in this Form 10-QSB with an asterisk (“*”). These forward-looking statements are based on current expectations and entail various risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth below under “Risk Factors.” 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, our annual report on Form 10-KSB for the year ended September 30, 2003, and the section below entitled “Risk Factors.” We disclaim any obligation to update any forward-looking statements as a result of developments occurring after the date of this Quarterly Report.
RESULTS OF OPERATIONS
Three-Month Periods Ended December 31, 2003 and 2002
Revenue
Revenue consists of net revenue from the sale of service revenue related to the Visual Got Mail Solution, telephony equipment, NotifyLink revenue and royalty revenue. We recognize service revenue on a straight-line basis over the period of the service agreement, revenue on sales of telephony products when the product is delivered, title has transferred, and no obligations remain. Revenue from royalty agreements is recognized on receipt of payment.
Revenue for the three-month period ended December 31, 2003 decreased to $801,749 from $2,262,474 for the three-month period ended December 31, 2002. Revenue decreased from the previous year primarily due to the drop in Customer Premise Equipment (CPE) and fulfillment revenue resulting from our primary customer changing from a giveaway program in June 2003 to a program that sold the CPE to new voice mail customers. We also discontinued the Centrex Receptionist in July of fiscal 2003, as the market was very small. Offsetting these decreases was an increase in our NotifyLink sales to $75,282 in the three-month period ended December 31, 2003 compared to $12,129 in the same period of fiscal 2002.
The Visual Got Mail Solution allows competitive providers of local telephone service to offer voice mail, including message notification, to local telephone customers without relying on a stutter dial tone or FSK signaling provided by the incumbent telephone company. The Visual Got Mail Solution consists of a hardware product, based on our Call Manager product, that provides a visual indication that a telephone customer has received a voice message and a subscription service, operated by us, which links the hardware product to the competitive provider’s voice mail platform. We sell the hardware product and related fulfillment services to the provider and also receive from the provider a monthly fee for each active voice mail user for providing the subscription service. For the three-month period ending December 31, 2003, revenue from our Visual Got Mail Solution was $657,865. During the three-month period ending December 31, 2002, we sold $2,153,812 in Visual Got Mail Solution product and services.
Of the $657,865 of revenue generated from our Visual Got Mail Solution, monthly service fees from the Visual Got Mail Solution end user accounts that were active during the quarter represented $389,605. This monthly service fee is an ongoing revenue stream as long as each end user is an active Voice Mail customer. The Visual Got Mail Solution is being sold to a single customer and our contract is subject to renewal so we anticipate that we will continue to experience substantial variances in quarterly revenue.
8
NOTIFY TECHNOLOGY CORPORATION
Our new wireless NotifyLink products have sold more strongly in the period ended December 31, 2003 but only consists of 9% of our total revenue. However, we are encouraged by the increase to date and have decided to continue our investment in the product on both a sales and research and development level.
Revenue for the three-month period ended December 31, 2003 includes royalty revenue of $48,035 from our multi-sense/stutter-dial patent compared to $18,200 for the three-month period ended December 31, 2002. The level of royalty revenue varies from period to period based on the level of third party activity. The payment received in the period ended December 31, 2003, included a $39,688 nonrecurring royalty payment and does not accurately reflect current patent use. The level of royalty activity has declined in the last twelve months and has been reflected in decreasing royalty revenues. There is no assurance that our multi-sense/stutter-dial technology will continue to be used so that we may continue to collect royalty income.
We sell our products in the United States primarily to 2way wireless carriers, long distance telephone carriers and directly to business users. The Visual Got Mail Solution, NotifyLink, royalty, and Centrex Receptionist revenue accounted for 79%, 9%, 6% and 1%, respectively, of total revenue in the three-month period ended December 31, 2003.Revenue from our Visual Got Mail Solution, NotifyLink, royalty, and Centrex Receptionist revenue accounted for 95%, 1%, 1% and 2%, respectively of total revenues in the three-month period ended December 31, 2002. Sales to telephone companies were 81% and 97% of total revenue for the three-month periods ended December 31, 2003 and 2002, respectively. 81% of our revenue is concentrated in one customer although the remaining sales are spread out into many different customers.
At December 31, 2003, $493,000 of our deferred revenue is related to the CPE portion of the Visual Got Mail Solution where title has transferred to our customer but the CPE has not been delivered. The combined revenue of the CPE and fulfillment is recognized as delivery occurs. $211,000 of the deferred revenue is related to NotifyLink where revenue is recognized over the period of customer service obligation. The remaining $8,000 of the deferred revenue is related to Centrex Receptionist service contracts that are being recognized over the period of each service agreement.
Cost of Revenue
Cost of revenue consists primarily of the cost to manufacture our products and the postal costs associated with our fulfillment service. Cost of revenue decreased to $256,038 in the three-month period ended December 31, 2003 from $1,600,701 for the three-month period ended December 31, 2002. This decrease was the result of lower sales of the Visual Got Mail Solution CPE during the three-month period ended December 31, 2003 resulting from our primary customer changing from a giveaway program in June 2003 to a program that sold the CPE to new voice mail customers.
Our gross margin increased to 68.1% in the three-month period ended December 31, 2003 compared to a gross margin of 29.2% in the three-month period ended December 31, 2002. The increase occurred because the period ended December 31, 2003 contained a high concentration of service sales and the period ended December 31, 2002 contained a high volume of low margin CPE sales. The NotifyLink sales contributed to the high margin mix due to the lower costs associated with this product. The royalty income, which was greater than typically recognized for the reasons described above, has no cost of sales associated with it thereby increasing the gross margin.
Our gross margin can generally be affected by a number of factors, including product mix, product demand, pricing pressures, inventory write downs, warranty costs, and timing and amount of royalty revenue receipts. Considering these factors, our gross margin has and will continue to fluctuate significantly and there can be no assurance that we will maintain our gross margins at the current levels.
Research and development
Research and development expenses consist primarily of personnel costs and support expenses. Research and development expenses decreased to $220,993 for the three-month period ended December 31, 2003 from $247,809 for the three-month period ended December 31, 2002. This decrease reflects the decrease in our California staff that supported our wireline effort. The primary focus of our development continues to be in the NotifyLink product area. Although we have reduced our spending in this area, we expect to
9
NOTIFY TECHNOLOGY CORPORATION
continue investing in this area of research and development. There can be no assurance that the market will accept these products.
Sales and marketing
Sales and marketing expense consists primarily of personnel, travel costs and sales commissions related to our sales effort of the NotifyLink product line. Sales and marketing costs increased to $142,931 for the three-month period ended December 31, 2003 from $110,553 for the three-month period ended December 31, 2002. This increase is primarily the result of personnel additions. We have expanded our NotifyLink product sales effort using an internal sales force and our Visual Got Mail Solution relationship is maintained by our executive level staff.
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, occupancy costs, professional fees and other general corporate expenses. General and administrative expenses decreased to $307,078 for the three-month period ended December 31, 2003 from $364,378 for the three-month period ended December 31, 2002. The decrease was due to reduced lease costs and reduced audit expense.
We expect that general and administrative expense may increase in future quarters as the requirements of being a public company conforming to the Sarbanes-Oxley Act unfold.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 2003 and the first quarter of fiscal 2004, we financed our operations through a combination of gross margin from sales of product and services and existing cash balances. Our ability to fund our recurring losses from operations depends upon the continuation of the current Visual Got Mail Solution program, our success in the wireless e-mail notification and wireless e-mail notification market solutions, and/or raising other sources of financing. We had a backlog of 136,000 Visual Got Mail Solution units as of December 31, 2003 for our Visual Got Mail Solution, which we expect to fulfill at a rate determined by the success of our customer’s sales program. We believe that our existing cash balances are sufficient to fund our operations through at least June 30, 2004. However, to fund our operations beyond June 30, 2004, we will need to raise additional funds or reduce our level of spending. In October 2002, we entered into a credit facility arrangement of $750,000 that will allow us to continue to purchase our Visual Got Mail Solution inventory, but is not intended to fund operations through September, 30 2004.
Holders of our outstanding Series A Preferred Stock have the right to require us to redeem any unconverted shares of Series A Preferred Stock at any time and from time to time during the period from July 20, 2003 to July 25, 2004. The per share redemption price is $10.00 plus any accrued dividends. Subject to certain limitations, we have the option to pay the redemption price in cash or in shares of our common stock. If all holders of outstanding Series A Preferred Stock as of December 31, 2003 elected to redeem, the aggregate redemption price would total $4,610,000. We do not currently have sufficient cash resources to satisfy any redemption request from preferred shareholders, and any such redemption request would have a material adverse effect on our business, operations, and financial condition. If we pay the redemption price in shares of our common stock, we are required to register the shares with the Securities and Exchange Commission (SEC), and there can be no assurances that the SEC will declare the registration statement effective in the time period required to avoid additional penalties, if at all. In any event, we expect that any redemption election by preferred shareholders would require our Board of Directors to consider various strategic alternatives, including bankruptcy or recapitalizations that could adversely affect the rights of our existing shareholders.
At December 31, 2003, we had cash and cash equivalents of $1,136,255 and restricted cash of $3,100 as compared to cash and cash equivalents of $556,805 and restricted cash of $436,000 at September
10
NOTIFY TECHNOLOGY CORPORATION
30, 2003. The increase in cash and cash equivalents during the period was largely attributable to the release of restricted cash held by our bank and collections of accounts receivable. Although our cash and cash equivalents increased between September and December 2003, our working capital decreased from $179,750 to $70,567 at December 31, 2003.
Until fiscal 2003, we financed our operations primarily through sales of equity and debt securities and bank lines of credit. In the three-month period ended December 31, 2003 we had a net cash inflow of $318,907 versus net cash used in operating activities in the three-month period ended December 31, 2002 of $1,062,396. The net cash inflow in operations in the three-month period ended December 31, 2003 consisted primarily of the net loss of $134,177 and decreases in accounts payable of $73,949 and other accrued liabilities of $75,749 offset by a decrease in accounts receivable of $266,159 due to a reduction of inbound CPE shipments billable to our primary customer and an increase of $273,308 in deferred revenue representing CPE receivables being received faster than shipment demands for the Visual Got Mail Solution program. We anticipate that we will have a negative cash flow from operating activities in future quarters and years.
Net cash used in investing activities was an inflow of $426,649 and $263,640 for the three-month periods ended December 31, 2003 and 2002, respectively. The net cash inflow is due to decreases in restricted cash of $432,900 and $351,300, for the three-month periods ended December 31, 2003 and 2002, respectively, partially offset by purchases of property and equipment of $9,251 and $87,660, respectively. The restricted cash was used to purchase inventory and we reduced purchases of inventory at the end of the 2003 fiscal year as the demand for the CPE portion of our Visual Got Mail Solution decreased.
Short-term Borrowings
In September 2002, we entered into a purchase order assignment agreement with a financial institution that allows for the assignment of purchase orders up to $750,000. Borrowings bear interest at 4% above the prime rate plus a set up fee of 2.75% and a daily maintenance fee of 0.09166% and are collateralized by substantially all of our assets. Borrowings are repaid either directly by our customers or by us upon receipt of payment from customers. At December 31, 2003, the outstanding balance under this agreement was zero and the amount available was $750,000. This agreement is for an initial term of twelve months and will continue thereafter for successive twelve months renewal terms unless either party terminates the agreement.
We had 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.
Most of our Revenue is Derived from the Sale of a Single Solution to a Single Customer
Revenue from our Visual Got Mail Solution accounted for 79% and 83% of the three-month period ending December 31, 2003 and 2002, respectively. Also, the sale of our Visual Got Mail Solution was to a single long distance telephone company providing local telephone services. As we cannot assume that the sales from our NotifyLink services will increase significantly in the near term and our single customer for the Visual Got Mail Solution has recently reduced their program, we expect our revenue for at least the next two quarters and possibly longer will be largely dependent on the level of the reduced sales volume of the Visual Got Mail Solution and the associated monthly fees. Although as of December 31, 2003, we had a backlog of approximately $2,200,000 in orders from this customer, there can be no assurance that we will receive additional orders from this customer.
Our customer implemented a proposed program change on schedule and, as of June 2, 2003, they changed the program from giving away to every new voice mail customer the CPE portion of the Visual Got Mail Solution free of charge to selling the CPE to each new customer resulting in a drop in sales volume of the Visual Got Mail Solution. We have experienced a substantial drop in CPE shipments as a result. In
11
NOTIFY TECHNOLOGY CORPORATION
addition, a significant portion of our revenue in the three-month period ended December 31, 2003 is related to the Visual Got Mail Solution fulfillment and subscription services. If this customer continues to sell the CPE to its customers at the lower rate, our revenue, operating profit and financial condition will continue to be materially adversely affected. In addition, this customer could at any time decide to decrease its sales efforts with respect to local telephone service, cease to promote or provide voice mail services or use an alternative to our Visual Got Mail Solution. In such an event, we would have no alternative distribution channel for our Visual Got Mail Solution and our revenue, operating results and financial condition would be materially adversely affected.
Because of Our Financial Condition and Our Business Plans, Our Financial Statements Disclose That There is Substantial Doubt as to Our Ability to Continue as a Going Concern and Accordingly Our Business Has a High Risk of Failure
We are currently researching and developing new products and enhancements to existing products. Due to our present financial condition and our business plans, there is substantial doubt as to our ability to continue as a going concern. To date, our NotifyLink product line has only started to provide significant contributions to our revenues and our Visual Got Mail Solution sales are highly concentrated in one customer. The success of our business operations will depend upon our ability to obtain further financing until such time, if ever, as there is favorable market acceptance for our new wireless software products. It is not possible for us to predict with assurance the outcome of these matters. If we are unable to obtain further financing and profitable operations from our new software wireless products, then our business will fail.
We Have a Limited Operating History and a History of Losses, Moreover, There is No Assurance of Future Profitability
We commenced operations in August 1994 and through January 1996 were engaged primarily in research and development. We made a decision in January 2000 to develop and sell software applications for the 2way wireless data market. Accordingly, we have a limited operating history, and we face all of the risks and uncertainties encountered by early-stage companies. For the fiscal years ended September 30, 2003, 2002, 2001, 2000, 1999, and 1998, we incurred net losses of $1,741,752, $6,844,612, $3,337,612, $3,526,452, $3,123,284 and $2,617,561 respectively. We incurred a net loss of $134,177 for the three-month period ended December 31, 2003. As of December 31, 2003, we had an accumulated deficit of $22,554,504 and working capital of $70,567. We anticipate having a negative cash flow from operating activities in future quarters and years. We also expect to incur further operating losses in future quarters and years 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.
Exercise of redemption rights by our preferred shareholders would have a material adverse effect on our financial condition as well as our business and operations.
Holders of our outstanding Series A Preferred Stock have the right to require us to redeem any unconverted shares of Series A Preferred Stock at any time and from time to time during the period from July 20, 2003 to July 25, 2004. The per share redemption price is $10.00 plus any accrued dividends. The holders of Series A Preferred Stock have the option to receive the redemption price in cash or in shares of our common stock; provided, however, that we are not obligated to pay the redemption price in cash unless our Board of Directors unanimously approves such payment in cash. If all holders of outstanding Series A Preferred as of December 31, 2003 elected to redeem, the aggregate redemption price would total $4,610,000. If we fail to pay the entire redemption price for a cash redemption that is unanimously approved by our Board of Directors, the redemption price will be increased by five percent (5%) for each thirty (30) day period (and for a pro rata percentage for any portion thereof) during which we fail to make such payment, subject to certain periods during which we can cure our default.
If the holders of Series A Preferred Stock choose to receive the redemption price in shares of common stock, each holder of Series A Preferred Stock requesting redemption will receive that number of
12
NOTIFY TECHNOLOGY CORPORATION
shares of common stock equal to (x) the aggregate redemption price owed to him divided by (y) the redemption conversion price, which is the greater of (i) the average closing bid price for a defined period of twenty (20) trading days and (ii) $0.50 per share. We may pay the redemption price in shares of our common stock, only if the shares of common stock are registered for resale under the Securities Act pursuant to an effective registration statement or may be sold without any volume or similar restriction and/or limitation under Rule 144 pursuant to Rule 144(k) of the Securities Act. If the shares of common stock do not meet this condition, the redemption conversion price will automatically be reduced by five percent (5%) and the redemption price increased by five percent (5%) for each thirty (30) day period (and for a pro rata percentage for any portion thereof) during which we are unable to satisfy the condition, subject to certain periods during which we can cure our default.
We do not currently have sufficient available cash to redeem any shares of preferred stock in cash, and we do not expect to have such funds at any time in the near future. Any redemption elections by preferred shareholders would have a material adverse effect on our financial condition. In the event of such elections, we would be required to pay the redemption price in the form of shares of our common stock, which would result in dilution to existing common shareholders. In addition, we would be required to provide for the registration of the redemption shares, and there can be no assurances that we can get the SEC to declare a registration statement effective within the required time periods, if at all. As noted above, failure to have an effective registration statement covering the newly issued shares results in additional accruing penalties. In any event, we expect any redemption elections by preferred shareholders will have an adverse effect on the trading price of our common stock. We expect that any redemption election by preferred shareholders would require our Board of Directors to consider various strategic alternatives, including bankruptcy or recapitalizations that could adversely affect the rights of our existing shareholders.
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
Although most of our current revenue comes from our wireline Visual Got Mail Solution, our wireless products play a significant role in our plans for future growth. We need to market our new 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 the offerings under our product family primarily through our NotifyLink product line. 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 Internet Edition and Standard Edition products depends upon this growth. There can be no assurance that the market for wireless software products will continue to grow, that firms within the industry will adopt our software products for integration with their wireless data communications solutions, or that we will be successful in independently establishing product markets for our wireless software products. In fact, our sales and marketing efforts over the last year have not resulted in significant sales of our NotifyLink products. If the various markets in which our software products compete fail to grow, or grow more slowly than we currently anticipate, or if we were unable to establish product markets for our new software products, our business, results of operation and financial condition would be materially adversely affected.
13
NOTIFY TECHNOLOGY CORPORATION
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
At December 31, 2003, we had an accumulated deficit of $22,554,504 and incurred a net loss of $134,177 for the three-month period ended December 31, 2003. Our working capital at that date was only $70,567. Our recently developed 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. We discontinued our Centrex Receptionist product line in July 2003 as the demand was so small and we reduced our headcount by two employees associated with the service associated with the Centrex Receptionist. Regardless, because our NotifyLink wireless product line has only started to contribute to our revenues to date, the success of our business operations will depend upon our ability to obtain further financing until such time, if ever, as there is favorable market acceptance for our new wireless software products. 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 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.
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:
| • | the continued commitment of our long distance customer to the voice mail business underlying our voice mail notification business; |
| • | 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; |
| • | licensing costs of additional 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 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.
Our Products May Not Be Accepted
We sold our first Centrex Receptionist in March 1998, the first Call Manager product in April 1999, and announced the first sales of our e-mail version of our Visual Got Mail products in November 1999. We also announced the launch of our new NotifyLink web based service and our NotifyLink Desktop products in November 2000 followed by the introduction of our voice mail version of our Visual Got Mail Solution in April 2001. To date, we have received only limited revenue from the sale of these products. While we have
14
NOTIFY TECHNOLOGY CORPORATION
experienced some success with our Visual Got Mail Solution in fiscal 2002 and fiscal 2003, we are limited by having only one customer and we now expect CPE sales to be substantially less in 2004 as a result of that customer’s decision to convert from a giveaway program to its customers to a sales program. We also believe that our wireless products are commercially viable, but developing products for the consumer and business marketplaces is inherently difficult and uncertain. We do not believe our sales to date are sufficient to determine whether or not there is meaningful consumer or business demand for our products.
We intend to devote resources to sales and marketing efforts of the 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.
We Depend on Limited Number of Potential Customers and Need to Develop Marketing Channels
Currently, our Voice Mail notification CPE and service revenue is highly dependant on one customer. Also, we 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 Enterprise products. To date, most of our referral arrangements are informal 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 ever sell our NotifyLink products and services to end users or that we will ever receive any referrals from our informal arrangements. Our Enterprise solution product is relatively new and sales are in an early growth stage.
Although we have sold significant quantities of our Call Manager as part of our Visual Got Mail Solution, we are highly dependant on one customer. We have discontinued our traditional Call Manager and Centrex Receptionist products. To date, we have sold our Visual Got Mail Solution product to one long distance telephone company. If we fail to maintain a significant relationship with this current customer, our business and operating results would be materially adversely affected.
We are expanding our distribution channels for our wireless products by participating in industry events, training programs for telephone and wireless carrier sales representatives and presenting at Novell® Groupwise® user meetings across the United States. We also have limited international sales as opportunities present themselves. Our management will need to expend time and effort to develop these channels. We are also changing our customer profile from volume sales to a limited number of large customers to relatively small sales to a large number of individual customers and we have begun expanding our internal sales force in response. Because our marketing efforts have been largely focused on developing relationships for wireline products, our management has had only limited experience in selling wireless with the new customer profile. 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.
Our Products May Suffer from Defects
Some 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. Our Visual Got Mail Solution product incorporates a combination of reasonably sophisticated computer chip design, electric circuit design, software programming and telephony technology. We have devoted substantial resources to researching and developing each of these elements. In order to reduce the manufacturing costs, expand the feature sets and otherwise enhance the operation of our products, we have from time to time redesigned our products. We expect that in the future we may engage in similar redesigns of our products. Though we extensively test our products before marketing them, any new, redesigned or current product may contain design flaws that we would not detect through our testing procedures. In addition, we rely on subcontractors to manufacture our products. Though we have quality control procedures designed to detect manufacturing errors, there can be no assurance that we will identify all defective products. We believe that
15
NOTIFY TECHNOLOGY CORPORATION
reliable operation will be an important purchase consideration for both our consumer and business customers. A failure by us to detect and prevent a design flaw or a widespread product defect could materially adversely affect the sales of the affected product and our other products and materially adversely affect our business, financial condition and operating results.
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 e-mail notification and management software, we indirectly compete with Research In Motion Limited, Consilient Technologies Corp., Infowave Software, Inc, Wireless Knowledge, Extended Systems, Synchrologic, Visto and Good Technology. Our Visual Got Mail Solution indirectly competes with a single alternate Voice Mail notification service offered only by Local Exchange Carriers. Some of these companies have greater financial, technical and marketing resources than we do. In addition, there are several companies with substantially greater technical, financial and marketing resources than we have that could produce competing products. These companies include wireless software providers such as Consilient Technologies Corp., Infowave Software, Inc, Wireless Knowledge, Extended Systems, Synchrologic, Visto and Good Technology. We expect that to the extent that the market for our products develops, competition will intensify and new competitors will enter the market. We may not be able to compete successfully against existing and new competitors as the market for our products evolves and the level of competition increases. A failure to compete successfully against existing and new competitors would materially adversely affect our business and results of operations.
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, Mr. Paul F. DePond, our Vice President of Operations, Gaylan Larson 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.
Our Intellectual Property May Not Be Adequately Protected and We May Infringe the Rights of Others
We regard various features and design aspects of our products as proprietary and rely primarily on a combination of patent and trademark laws and employee and third-party nondisclosure agreements to protect our proprietary rights. We have been issued a patent covering the design of our MessageAlert products, and a patent covering the MultiSense technology used in our MessageAlert product. We have also applied for patents on our Visual Got Mail technology. We intend to continue to apply for patents, as appropriate, for our future technologies and products. There are few barriers to entry into the market for our products, and there can be no assurance that any patents we apply for will be granted or that the scope of our patents or any
16
NOTIFY TECHNOLOGY CORPORATION
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.
In November 2003, NCR Corporation and Notify Technology Corporation entered into a non-exclusive license agreement that allows us to offer certain product features on our enterprise product that are covered by a patent held by NCR. This agreement requires a royalty payment on all enterprise revenue subject to the patent.
On May 17, 2001, Research In Motion Limited, the maker of the “Blackberry” hand-held computer, announced that it had been issued a patent on its Blackberry single mailbox integration. Generally, the patent relates to Research In Motion’s proprietary system and method of redirecting information between a host computer system, and a mobile communications device while maintaining a common electronic address between the host system and the mobile device. Research In Motion also announced that it had filed a complaint against Glenayre Technologies, Inc. for, among other items, patent and trademark infringement. Our intellectual property counsel has reviewed the patent and issued an opinion to us opining that version 4.0 of our Desktop software does not infringe on Research In Motion’s patent.Nevertheless, no assurances can be given that Research In Motion will not bring an action against us for a patent infringement or similar claim, or if any such claim is brought, the eventual results thereof.
We may be involved from time to time in litigation to determine the enforceability, scope and validity of any of our proprietary rights or of third parties asserting infringement claims against us. These claims could result in substantial cost to us and could divert our management and technical personnel away from their normal responsibilities.
We May Not Be Able to Obtain Critical Components from Our Suppliers
Currently, we are able to obtain many key components used in our products only from single or limited sources. We do not have long term supply contracts with these or any other component vendors and purchase all of our components on a purchase order basis. Component shortages may occur and we may not be able to obtain the components we need in a timely manner and on a commercially reasonable basis. In particular, the microcontroller that forms the core of our Call Manager that is a key component in our Visual Got Mail Solution is manufactured only by Epson Electronics America, Inc. From time to time, the semiconductor industry has experienced extreme supply constraints. If we are unable to obtain sufficient quantities of microcontrollers from Epson Electronics America, Inc., our business and operating results would be materially adversely effected.
We utilize an offshore manufacturer to manufacture our products and this manufacturer may not be able to support our manufacturing requirements. If we are unable to obtain sufficient quantities of sole-source components or subassemblies, or to develop alternate sources, we could experience delays or reductions in product shipments or be forced to redesign our products. Each of these scenarios could materially adversely affect our business and operating results.
Our Products May Not Comply with Government Regulations and Industry Standards
Our products must comply with a variety of regulations and standards. These include regulations and standards set by the Federal Communications Commission, Underwriters Laboratories, National Registered Testing Laboratories, and Bell Communications Research. As our business expands into international markets, we will be required to comply with whatever governmental regulations and industry standards exist in those markets. In addition, the U.S. telecommunications market is evolving rapidly in part due to recently enacted laws revamping the telecommunications regulatory structure. Additional legislative or regulatory changes are possible. If we fail to comply with existing regulations and standards or to adapt to new regulations and standards, our business and operating results could be materially adversely affected.
17
NOTIFY TECHNOLOGY CORPORATION
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, actual or anticipated fluctuations in our or our competitors’ results of operations, changes in earnings estimates, developments in our industry, sales or the perception in the market of possible sales of substantial numbers of shares of our common stock by our directors, officers, employees or principal shareholders, 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.
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.
Sales of Outstanding Shares May Hurt Our Stock Price
The market price for our common stock could fall substantially if our shareholders sell large amounts of our common stock. Potential future sales of our common stock include the following:
| • | We have registered for resale 7,782,820 shares of common stock that underly our outstanding Series A preferred stock and warrants will be registered for resale in the public market. |
| • | David Brewer holds 1,161,600 shares of common stock. |
| • | Various investors hold 535,538 shares of common stock and warrants to purchase 190,354 shares of common stock that we have agreed to register for resale. |
18
NOTIFY TECHNOLOGY CORPORATION
Outstanding Options and Warrants May Dilute Current Shareholders or Prevent Us from Receiving Financing
The following options and warrants to purchase our common stock were outstanding as of December 31, 2003:
| • | Options to purchase 3,333,667 shares of common stock and 295,995 additional shares of our common stock reserved for issuance under our 1997 Stock Plan; |
| • | warrants to purchase 190,354 shares of common stock at a price of $0.01 per share issued to various prior investors as an anti-dilution adjustment to our issuance of securities in our July 2001 private placement; |
| • | warrants to purchase an aggregate of 1,871,651 shares of common stock at a price per share of $1.00 issued in connection with our July 2001 private placement; and |
| • | options to purchase an aggregate of 9.2685 units at a price per unit of $100,000, each unit consisting of shares of Series A Preferred Stock convertible into an aggregate of 100,000 shares of common stock and a warrant to purchase 35,000 shares of common stock issued to the placement agent in our July 2001 private placement. |
The exercise of these options and warrants may dilute our current shareholders. In addition, holders of these options and warrants may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us. Moreover, while these options and warrants are outstanding, our ability to obtain financing on favorable terms may be adversely affected.
| 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 as of the 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.
Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud. Because of inherent limitations in any system of disclosure controls and procedures, no evaluation of controls can provide absolute assurance that all instances of error or fraud, if any, within our company may be detected.
| (b) | Changes in Internal Controls. |
During the period covered by the 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 and Reports on Form 8-K |
| (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 | |
19
NOTIFY TECHNOLOGY CORPORATION
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 | |
| (b) | Reports on Form 8-K |
No reports on Form 8-K were filed during the period.
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 12, 2004 | ||||
/s/ Gerald W. Rice | ||||
Chief Financial Officer (Principal Financial and Accounting Officer) | ||||
20
