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 March 31, 2000
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
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NOTIFY TECHNOLOGY CORPORATION
-----------------------------
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 77-0382248
(State or other jurisdiction (IRS Employer
of incorporation or organization) 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.
Yes [X] No
As of March 31, 2000 there were 4,721,576 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format
Yes No [X]
1
INDEX
- -----
PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Financial Statements: (unaudited)
Balance Sheet as of March 31, 2000.......................................................... 3
Statements of Operations for the three-month and six-month
periods ended March 31, 2000 and 1999....................................................... 4
Statements of Cash Flows for the six-month periods
ended March 31, 2000 and 1999............................................................... 5
Notes to the Financial Statements........................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................... 7
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................................... 10
Item 4. Submission of matters to a vote of security holders......................................... 10
Item 6. Exhibits and Reports on Form 8-K............................................................ 10
SIGNATURES.............................................................................................. 10
2
PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Financial Statements
NOTIFY TECHNOLOGY CORPORATION
BALANCE SHEET
March,
2000
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,226,688
Accounts receivable 1,119,594
Inventories 693,895
Prepaid assets 50,403
------------
Total current assets 4,090,580
Property and equipment, net 255,171
Other assets 42,260
------------
Total assets $ 4,388,011
============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable 567,617
Accrued liabilities 681,471
------------
Total current liabilities 1,249,088
Shareholders' equity:
Common stock 4,878
Additional paid-in capital 13,735,381
Retained earnings (10,601,336)
------------
Total shareholders' equity 3,138,923
------------
Total liabilities and shareholders' equity $ 4,388,011
============
See accompanying notes to unaudited financial statements
3
NOTIFY TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
Three-Month Periods Six-Month Periods
Ended March 31, Ended March 31,
------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited)
Product sales $1,684,603 $ 280,510 $ 2,754,281 $ 506,854
Cost of sales 1,287,101 168,906 2,022,546 281,206
--------- ------- --------- -------
Gross profit 397,502 111,604 731,735 225,648
Operating expenses:
Research & development 340,537 294,011 719,573 621,385
Sales and marketing 343,601 170,305 661,987 357,294
General and administrative 421,407 258,339 784,668 484,627
--------- ------- --------- ---------
Total operating expenses 1,105,545 722,655 2,166,228 1,463,306
--------- ------- --------- ---------
Loss from operations (708,043) (611,051) (1,434,493) (1,237,658)
Other (income) and expense, net (13,592) (17,132) (40,193) (37,908)
--------- ------- --------- -------
Net loss $ (694,451) $ (593,919) $(1,394,300) $(1,199,750)
========= ========= ========= =========
Basic and diluted net loss per share $(0.20) $(0.23) $(0.40) $(0.49)
========= ========= ========= =========
Weighted average shares outstanding 3,553,612 2,586,004 3,492,949 2,440,715
========= ========= ========= =========
See accompanying notes to unaudited financial statements
4
NOTIFY TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
Six-Month
Periods
Ended March 31,
------------------
2000 1999
---- ----
(Unaudited)
Cash Flows used in operating activities:
Net loss $(1,394,300) $(1,199,750)
Adjustments to reconcile net loss to cash used in
Operating activities:
Depreciation and amortization 98,056 73,717
Changes in operating assets and activities:
Accounts receivable (442,562) (57,744)
Inventories (159,428) (256,544)
Accounts payable 148,200 (69,217)
Accrued liabilities 151,727 121,081
Other current assets 76,970 36,596
----------- ---------
Net cash used in operating activities (1,521,337) (1,351,861)
----------- ---------
Cash flows used in investing activities:
Expenditures for property & equipment (70,147) (31,817)
Cash flows provided by financing activities:
Proceed from issuance of common stock -- 3,060,000
Proceeds from exercise of options and warrants 1,696,419 3,384
Repayments of notes receivable from shareholders -- 3,750
----------- ---------
Net cash provided by financing activities 1,696,419 3,067,134
----------- ---------
Net increase in cash and cash equivalents 104,935 1,683,456
Cash and cash equivalents at beginning of period 2,121,753 2,117,613
----------- ---------
Cash and cash equivalents at end of period $ 2,226,688 $ 3,801,069
=========== =========
See accompanying notes to unaudited financial statements
5
NOTIFY TECHNOLOGY CORPORATION
NOTES TO THE FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements of Notify Technology
Corporation (referred to as "we", "us" and "our" unless the context otherwise
requires) have been prepared in accordance with generally accepted accounting
principles for interim financial information and the instructions of Regulation
S-B Item 310(b) and Article 10 of Regulation S-X. The balance sheet as of March
31, 2000, and the statements of operations for the three-month and six-month
periods ended March 31, 2000 and 1999 and the statements of cash flows for the
six-month period ended March 31, 2000 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 generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The accompanying
financial statements should be read in conjunction with the financial statements
and notes thereto included in our Annual Report on Form 10-KSB for the year
ended September 30, 1999.
Results for any interim period are not necessarily indicative of results
for any other interim period or for the entire year.
2. NET LOSS PER SHARE
Net loss per share is computed using the weighted-average number of shares
of common stock outstanding during the periods presented. Potential common
shares are excluded from the computation as their effect is antidilutive in
accordance with the Financial Accounting Standards Board Statement No. 128,
"Earnings per Share" (SFAS 128), SFAS 128. The weighted average number of
common shares used in the net loss per share calculation was reduced by the
common stock and common stock equivalents placed in escrow in connection with
the our initial public offering.
3. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these estimates.
4. CASH EQUIVALENTS
Cash equivalents consist mainly of money market funds. As of March 31,
2000, we had no material investments in debt or equity securities.
5. INVENTORIES
Inventories consist principally of raw materials and subassemblies, which
are stated at lower of cost (first-in, first-out) or market.
March 31,
2000
----
Raw Materials $155,089
Work In Process 321,502
Finished Goods 217,304
_______
$693,895
=======
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NOTIFY TECHNOLOGY CORPORATION
6. INCOME TAXES
Due to our loss position, there was no provision for income taxes for the
three-month and six-month periods ended March 31, 2000 and 1999.
7. SHAREHOLDERS EQUITY
On October 12, 1999, we received proceeds of $1,121,760 from the exercise
of warrants to purchase 311,600 shares of common stock and on February 16, 2000,
we received proceeds of $560,880 from the exercise of warrants to purchase
155,800 shares of common stock.
On February 23, 2000, the shareholders of the Company voted to add 500,000
shares for issuance under the 1997 Stock Plan.
8. NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition," which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that must be
met in order to recognize revenue and provides guidance for disclosures related
to revenue recognition policies. Although we have not fully assessed the impact
of adopting SAB 101 on our financial position and results of operations in 2000
and thereafter, we do not expect the effect, if any, to be material.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included in Part I - Item 1 of this
Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-KSB for the year ended
September 30, 1999.
RESULTS OF OPERATIONS
Three-Month Periods Ended March 31, 2000 and 1999
Revenue consists of gross revenue less product returns. Sales of the Call
Manager product, which began shipping in the third quarter of fiscal 1999,
represented 76% of our revenue in the three month period ended March 31, 2000.
Sales of the Centrex Receptionist represented 14% of our revenue in the three
month period ended March 31, 2000 compared to 58% in the three month period
ended March 31, 1999. Sales of the MessageAlert represented 1% of our revenue
in the three month period ended March 31, 2000 compared to 35% in the three
month period ended March 31, 1999. Revenue for the three month period ended
March 31, 2000 increased to $1,684,603 from $280,510 for the three month period
ended March 31, 1999. Revenue was up from the previous year due to increased
sales of the Call Manager product line and, to a lessor extent, growth in
Centrex Receptionist sales. Sales to telephone companies were 91% and 87% of
revenue for the three-month periods ended March 31, 2000 and 1999, respectively.
One customer accounted for 16% and 56% of sales in the three month periods ended
March 31, 2000 and 1999, respectively. Two other customers accounted for 40%
and 25% of sales in the three month period ended March 31, 2000.
Most of the Call Manager revenue in the three-month period ended March 31,
2000 was derived from telephone company promotional programs utilizing the Call
Manager product as a customer acquisition device. Conversely, most of the
revenue from the Centrex Receptionist came from continuing, non-promotional
telephone company programs resulting in more consistent sales. As the timing
and size of promotional programs using our Call Manager products is uncertain,
we anticipate we will continue to experience substantial variances in quarterly
revenue.
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NOTIFY TECHNOLOGY CORPORATION
Cost of sales consists primarily of the cost to manufacture our products.
Cost of sales increased to $1,287,101 in the three month period ended March 31,
2000 from $168,906 for the three month period ended March 31, 1999. This
increase was the result of increased sales of the Call Manager product line.
Our gross margin performance decreased to 23.6% in the three month period
ended March 31, 2000 compared to 39.8% in the three month period ended March 31,
1999. This decline occurred because the Call Manager product constituted an
increased proportion of our sales in the three month period ended March 31,
2000. The Call Manager product has significantly lower margins than the Centrex
Receptionist due to competitive pressures and is sold in much higher volumes.
The Call Manager is also manufactured off-shore and higher shipping costs occur
as a result.
Research and development expense consists primarily of personnel costs,
testing expense, contract engineering expense and supply expenses. Research and
development expense increased to $340,537 for the three month period ended March
31, 2000 from $294,011 for the three month period ended March 31, 1999.
Research and development cost increases in the three month period ending March
31, 2000 reflect the growth of our staff that supports the Got Mail product
development.
Sales and marketing expense consists primarily of personnel costs, show
expense, travel costs and sales commissions related to our sales and marketing
efforts. Sales and marketing costs increased to $343,601 for the three month
period ended March 31, 2000 from $170,305 for the three month period ended March
31, 1999. Salaries increased due to the addition of a Vice President of Sales
and a Vice President of Marketing and an increase in the size of the customer
service department. We have been expanding our ability to manage the rollout of
the Got Mail product line and to provide better support for the growing Call
Manager and Centrex Receptionist product lines. We also made a larger
investment in promoting our products at the Consumer Electronics Show held in
Las Vegas in January 2000.
General and administrative expense consists of general management and
finance personnel costs, occupancy expense, investor and public relations costs,
accounting expense and legal expense. General and administrative expenses
increased to $421,407 for the three month period ended March 31, 2000 from
$258,339 for the three month period ended March 31, 1999. The increase is
primarily due to increased public and investor communication efforts and
additional space costs to establish our Ohio facility.
Six-Month Periods Ended March 31, 2000 and 1999
Sales of the Call Manager represented 66% of our revenue in the six month
period ended March 31, 2000 compared to no sales in the six month period ended
March 31, 1999. Sales of the MessageAlert represented 1% of our revenue in the
six month period ended March 31, 2000 compared to 35% in the six month period
ended March 31, 1999. Sales of the Centrex Receptionist represented 16% of our
revenue in the six month period ended March 31, 2000 compared to 65% in the six
month period ended March 31, 1999. Revenue for the six month period ended March
31, 2000 increased to $2,754,281 from $506,854 for the six month period ended
March 31, 1999. Revenue was up from the previous year due to telephone company
caller-id promotions utilizing the our Call Manager product. Sales to telephone
companies consisted of 92% and 87% of revenue for the six month periods ended
March 31, 2000 and 1999, respectively. In addition, four customers accounted
for 25%, 25%, 21% and 11% of sales in the six month period ended March 31, 2000
and two customers accounted for 69% and 9% of sales in the six month period
ended March 31, 1999.
Cost of sales increased to $2,022,546 in the six month period ended March
31, 2000 from $281,206 for the six month period ended March 31, 1999. This
increase was the result of increased sales of the Call Manager product line. Our
gross margin performance decreased to 26.6% in the six month period ended March
31, 2000 compared to 44.5% in the six month period ended March 31, 1999. This
decline was the result of lower gross margins associated with volume pricing of
the Call Manager product line that constituted a major portion of the increased
revenue.
Research and development expense increased to $719,573 for the six month
period ended March 31, 2000 versus $621,385 for the six month period ended March
31, 1999. An increase in software design staff to develop and launch the Visual
Got Mail product line was the major cause of the increase in the six month
period ended March 31, 2000. This was offset by reduced spending on outside
consultants and hardware development materials in the six month period ended
March 31, 2000 versus the hardware deployment expenses that occurred in the six
month period ended March 31, 1999.
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NOTIFY TECHNOLOGY CORPORATION
Sales and marketing costs increased to $661,987 for the six month period
ended March 31, 2000 compared to $357,294 for the six month period ended March
31, 1999 due to an increase in personnel for customer service and the hiring of
a Vice President of Sales and a Vice President of Marketing. Part of the
increase was also due to an increased investment in the Consumer Electronics
Show (CES) in January 1999.
General and administrative expenses increased to $784,668 for the six month
period ended March 31, 2000 from $484,627 for the six month period ended March
31, 1999. The most significant cause of this change was increased spending on
investor public relations. Additional increases occurred in space costs,
salary, depreciation and recruiting.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities decreased to $1,521,337 for the six month
period ending March 31, 2000 from $1,351,861 for the six month period ending
March 31, 1999. Cash used in operating activities for the six month period
ending March 31, 2000 was primarily related to operations and an increase of
Accounts Receivable generated by the increase in sales.
Cash provided by financing activities relate primarily to the proceeds of
$1,682,640 from the exercise of warrants to purchase 467,400 shares of common
stock during the six month period ended March 31, 2000.
We believe research and development spending will continue at or above the
current level as improvement and further development of existing and new
products continues. We also anticipate that sufficient funds will be available
from cash, cash equivalents, and operating activities to support the current
level of operations through September 30, 2000. There can be no assurance that
our new products will attain favorable market acceptance. If we are unable to
attain certain goals, significant reductions in spending and the delay or
cancellation of planned activities or more substantial restructuring of our
organization may be necessary. In such an event, we intend to implement expense
reduction plans in a timely manner to enable us to meet our cash requirements
through at least September 30, 2000. These actions would have material adverse
effects on our business, results of operations, and prospects.
IMPACT OF THE YEAR 2000 ISSUE
No Y2K problems occurred as a result of passing into calendar year 2000.
We have found no evidence of Y2K problems in our internal systems. No users of
our products have yet notified us of any Y2K problems connected with the use of
our products. No vendors have yet informed us any problems related to Y2K and
deliveries of material to us has not been interrupted. Based on the currently
available information, we do not believe the Year 2000 issue will have a
material effect on our financial condition or results of operations.
FORWARD LOOKING STATEMENTS
Statements in this report regarding product development efforts, capital
resources, future business activities and Y2K compliance are forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
are subject to the safe harbors created thereby. These forward looking
statements include, but are not limited to (1) our statement that sufficient
funds will be available to support our current level of expenditures through
September 30, 2000 and (b) our belief that the Year 2000 issue will not have a
material effect on our financial condition or results of operations. Actual
results could differ materially from these forward-looking statements as a
result of the following factors: business conditions and growth in the
telecommunications industry and general economics, both domestic and
international; lower than expected customer orders and timing of actual orders;
the timing and extent to which telephone companies adopt, initiate and promote
programs involving the our products; competition from other suppliers of
telephony adjunct devices; changes in product mix or distribution channels;
technological difficulties and resource constraints encountered in developing
new products; and additional factors discussed from time to time in our public
reports filed with the Securities and Exchange Commission.
9
NOTIFY TECHNOLOGY CORPORATION
PART II. OTHER INFORMATION
ITEM 2 CHANGES IN SECURITIES
(d) Sale of Unregistered Securities
In February 2000, David Brewer exercised one warrant for 155,800 shares of
common stock for an aggregate consideration of $560,880. Mr. Brewer is an
accredited investor and no public solicitation occurred in connection with the
offer and sale of securities. The offer and sale of the securities were exempt
from the registration requirements of the Securities Act of 1933 pursuant to
Section 4 (2) thereunder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Shareholders on February 23, 2000. Out of
4,714,688 shares of Common Stock entitled to vote at such meeting, there were
present in person or by proxy 3,932,975 shares. At the Annual Meeting, the
shareholders of Notify Technology Corporation approved the following matters:
(a) The elections of Paul F. DePond, Michael Ballard, Gaylan I. Larson, Andrew
Plevin and David Brewer as directors of Notify Technology Corporation for
the ensuing year and until their successors are elected. The vote for the
nominated directors was as follows:
Paul F. DePond, 3,920,355 votes cast for and 12,620 votes against; Michael
Ballard, 3,920,355 votes cast for and 12,620 votes against; Gaylan I.
Larson, 3,920,355 votes cast for and 12,620 votes against; Andrew Plevin,
3,920,355 votes cast for and 12,620 votes against; David Brewer, 3,920,355
votes cast for and 12,620 votes against.
(b) An amendment to the Company's Bylaws to change the range of directors that
may serve on the Board of Directors from a range of three to five directors
to a range of five to nine directors. 2,456,087 votes were cast for and
24,330 votes against with 8,150 votes abstaining.
(c) To ratify and approve a 500,000 share increase in the number of shares of
Common Stock issuable under the Company's 1997 stock plan. 2,413,534 votes
were cast for and 61,313 votes against with 13,720 votes abstaining.
(d) The ratification of the appointment of Ernst & Young LLP as independent
public auditors of the Company for the fiscal year ending September 30,
2000. 3,923,825 votes were cast for and 1,550 votes were cast against with
7,600 votes abstaining
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the
quarter ended March 31, 2000, for which this report is filed.
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: May 15, 2000
/s/ Gerald W. Rice
Chief Financial Officer
(Principal Financial and Accounting Officer)
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