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, 2001
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 of (IRS Employer Identification No.)
incorporation or organization)
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 December 31, 2001 there were 5,286,593 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format
Yes No X
1
INDEX
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PART I. FINANCIAL INFORMATION (unaudited)
Item 1. Financial Statements: (unaudited)
Balance Sheets as of December 31, 2001 and September 30, 2001............ 3
Statements of Operations for the three-month periods ended
December 31, 2001 and 2000............................................... 4
Statements of Cash Flows for the three-month periods ended
December 31, 2001 and 2000............................................... 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 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
December 31, September 30,
2001 2001
------------- -------------
(unaudited) (1)
Assets
Current assets:
Cash and cash equivalents $ 2,673,505 $ 3,304,823
Restricted cash 275,986 282,356
Accounts receivable 61,296 114,778
Inventories 360,006 112,081
Other current assets 45,474 48,674
------------ ------------
Total current assets 3,416,267 3,862,712
Property and equipment, net 161,984 160,595
------------ ------------
Total assets $ 3,578,251 $ 4,023,307
============ ============
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 343,184 $ 163,888
Deferred revenue 228,264 263,963
Other accrued liabilities 383,790 366,277
------------ ------------
Total current liabilities 955,238 794,128
Shareholders' equity:
Preferred stock 1,079,967 1,079,967
Common stock 5,287 5,287
Additional paid-in capital 21,720,787 21,722,025
Retained earnings (20,183,028) (19,578,100)
------------ ------------
Total shareholders' equity 2,623,013 3,229,179
------------ ------------
Total liabilities and shareholders' equity $ 3,578,251 $ 4,023,307
============ ============
___________________
(1) The information in this column was derived from our audited financial
statements for the year ended September 30, 2001
See accompanying notes to unaudited financial statements
3
NOTIFY TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
Three-Month Periods
Ended December 31,
2001 2000
----------- -----------
(Unaudited)
Revenue:
Product sales and service revenue $ 169,065 $ 323,673
Royalty revenue 63,880 38,642
----------- -----------
Total revenue 232,945 362,315
Cost of Sales:
Product cost 33,192 146,190
Inventory write-downs -- 200,000
----------- -----------
Total cost of sales 33,192 346,190
----------- -----------
Gross profit 199,753 16,125
Operating expenses:
Research & development 293,110 286,518
Sales and marketing 144,804 257,914
General and administrative 383,654 351,709
----------- ---------
Total operating expenses 821,568 896,141
----------- ---------
Loss from operations (621,815) (880,016)
Other (income) and expense, net (16,886) (96,560)
----------- -----------
Net loss $ (604,929) $ (783,456)
=========== ===========
Basic and diluted net loss per share $ (0.15) $ (0.20)
=========== ===========
Weighted average shares outstanding 4,046,920 3,835,818
=========== ===========
See accompanying notes to unaudited financial statements
4
NOTIFY TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
Three-Month Periods
Ended December 31,
2001 2000
---------------------------
(Unaudited)
Cash flows used in operating activities:
Net loss $ (604,929) $ (783,456)
Adjustments to reconcile net loss to cash used in
Operating activities:
Depreciation and amortization 25,730 48,313
Changes in operating assets and activities:
Accounts receivable 53,482 351,733
Inventories (247,925) 148,081
Other current assets 3,200 (2,195)
Accounts payable 179,296 (243,618)
Deferred revenue (35,699) (42,753)
Other accrued liabilities 17,513 (15,134)
---------------------------
Net cash used in operating activities (609,332) (539,029)
---------------------------
Cash flows used in investing activities:
Expenditures for property & equipment (27,119) (2,070)
Decrease in restricted cash 6,370 78,307
---------------------------
Net cash provided by (used in) investing activities (20,749) 76,237
Cash flows provided by financing activities:
Proceeds from issuance of common stock, net of issuance costs (1,237) 1,209,748
Proceeds from exercise of options and warrants -- 3,248
---------------------------
Net cash provided by (used in) financing activities (1,237) 1,212,996
---------------------------
Net increase in cash and cash equivalents (631,318) 750,204
Cash and cash equivalents at beginning of period 3,304,823 311,795
---------------------------
Cash and cash equivalents at end of period $ 2,673,505 $ 1,061,999
===========================
See accompanying notes to unaudited financial statements
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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 sheets as of
December 31, 2001 and September 30, 2001, the statements of operations for the
three-month periods ended December 31, 2001 and 2000 and the statements of cash
flows for the three-month periods ended December 31, 2001 and 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, 2001.
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
The weighted average number of common shares used in the net loss per share
calculation was reduced by the common stock and potential common shares placed
in escrow in connection with our initial public offering. Options to purchase
2,169,119 and 611,220 shares of common stock were outstanding at December 31,
2001 and 2000, respectively, but were not included in the computation of diluted
net loss per share as the effect would be anti-dilutive.
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. INVENTORIES
Inventories consist principally of subassemblies and finished goods, which
are stated at lower of cost (first-in, first-out) or market.
December 31, September 30,
2001 2001
------------------------------------
Work In Process $ 36,377 $ 53,342
Finished Goods 323,629 58,739
------------------------------------
$ 360,006 $ 112,081
====================================
5. COMMITMENTS
We currently occupy two facilities under operating leases. The lease on our
San Jose, California facility expires in March 2003. The future minimum payments
under this lease for the remainder of the year ending September 30, 2002 and the
year ending September 30, 2003 are $182,699 and $129,657, respectively. The
lease on our Canfield, Ohio facility expires in October 2006. Future minimum
payments
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NOTIFY TECHNOLOGY CORPORATION
under this lease for the remainder of the year ending September 30, 2002 and for
each of the following four years ending September 30 are $53,540 and $71,387 per
annum, respectively.
At December 31, 2001, we had $275,986 of outstanding letters of credit to
our suppliers related to a commitment to purchase additional inventory. The
letters of credit are secured by a money market account of $275,986, which is
recorded as restricted cash.
6. INCOME TAXES
Due to our loss position, there was no provision for income taxes for the
three-month periods ended December 31, 2001 and 2000.
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, 2001.
RESULTS OF OPERATIONS
Three-Month Periods Ended December 31, 2001 and 2000
Revenue
Revenue consists primarily of net revenue from the sale of telephony
equipment, service revenue related to the Centrex Receptionist and royalty
revenue. We recognize revenue on sales of telephony products when the product is
delivered, title has transferred, and no obligations remain. Service income is
recognized on a straight-line basis over the period of the service agreement.
Revenue from royalty agreements is recognized on receipt of payment.
Revenue for the three month period ended December 31, 2001 decreased to
$232,945 from $362,315 for the three month period ended December 31, 2000.
Revenue decreased from the previous year primarily due to decreased sales of
$125,510 in the Call Manager product line. We believe the continued decline in
revenue from Call Manager products is due to our telephone company customers
reducing the use of adjunct products as a marketing tool. We are no longer
selling Call Manager on a stand-alone basis, but will sell solutions based on
our Visual Got Mail technology that utilizes the Caller-id technology as part of
the overall solution. Revenue for the three month period ended December 31, 2001
includes royalty revenue of $63,880 from our multi-sense/stutter-dial patent
compared to $38,642 for the three month period ended December 31, 2000. There
can be no assurance that the decline in revenue from our Call Manager will not
continue throughout fiscal 2002 and beyond or that we will not experience
declines in revenue from our Centrex Receptionist product similar to declines we
have experienced in the past.
We sell our products in the United States primarily to 2way wireless
carriers, regional bell operating companies and local exchange carriers. The
Call Manager, Centrex Receptionist and royalty revenue accounted for 0%, 55% and
27%, respectively of total revenue in the three month period ended December 31,
2001. The same three revenue streams accounted for 36%, 36%, and 11%,
respectively of total revenues in the three month period ended December 31,
2000. Sales to telephone companies were 59% and 75% of revenue for the
three-month periods ended December 31, 2001 and 2000, respectively. Significant
portions of our revenue are concentrated in a small number of customers although
not necessarily the same customers each year. One customer accounted for 50% and
25% of total sales in the three-month periods ended December 31, 2001 and 2000,
respectively. Two other customers accounted for 27% and 9% of total sales in the
three month period ended December 31, 2001.
Our new wireless NotifyLink products were in limited release and did not
account for significant revenue during the period. In November 2001, we received
an order for our Call Manager product, which is
7
expected to generate approximately $1 million of revenue in the second half of
fiscal 2002. Nevertheless, as we expect minimal sales of our traditional
products in the future and as our new products are not yet in full release, we
anticipate that we will continue to experience substantial variances in
quarterly revenue.
At December 31, 2001, deferred revenue related to service revenue that
is being recognized over the period of the service agreement and products that
have been delivered and are pending installation and configuration, at which
time title transfers to the customer and revenue is recognized.
Cost of Sales
Cost of sales consists primarily of the cost to manufacture our
products. Cost of sales decreased to $33,192 in the three month period ended
December 31, 2001 from $346,190 for the three month period ended December 31,
2000. This decrease was the result of decreased sales of the Call Manager
product line and also as a result of recording an accrual for losses on firm
purchase commitments for inventory of $200,000 associated with the Call Manager
product line in the three month period ended December 31, 2000.
Including the accrual for losses on firm purchase commitments for
inventory, our gross margin increased to 85.8% in the three month period ended
December 31, 2001 compared to a gross margin of 4.4% in the three month period
ended December 31, 2000. Our gross margin increased to 85.8% in the three month
period ended December 31, 2001 compared to a gross margin, prior to the accrual
for losses on firm purchase commitments for inventory of $200,000, of 59.7% in
the three month period ended December 31, 2000. The increase occurred because of
increased royalty proceeds from our stutter-dial patent and a higher
concentration of Centrex Receptionist sales and the sale of previously written
down inventory, which increased the gross margin by $19,340.
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.
The accrual for losses on firm purchase commitments for inventory in
the three month period ended December 31, 2000 related to raw materials and
work-in-process for our Call Manager product line. We experienced a lower demand
for our caller-id units in customer promotional programs during the three month
period ended December 31, 2000. Based on this continuing trend, we revised our
fiscal 2001 sales forecast for our caller-id product line, which led to a
determination that there was excess inventory at December 31, 2000 resulting in
the $200,000 accrual for losses on firm purchase commitments.
Research and development
Research and development expenses consist primarily of personnel costs,
contract design services and supply expenses . Research and development expenses
increased to $293,110 for the three-month period ended December 31, 2001 from
$286,518 for the three-month period ended December 31, 2000. This increase
reflects the increase in our Ohio Staff that supports our efforts to expand our
NotifyLink products to service other networks and devices. We expect to continue
investing in this area of research and development but there can be no assurance
that these products will be accepted by the market.
We expect that our investment in research and development will continue
at, or near, the current level for the remainder of fiscal 2002 in order that we
may complete the products under development and enhance our current products.
Sales and marketing
Sales and marketing expense consists primarily of personnel,
consulting, travel costs and sales commissions related to our sales and
marketing efforts. Sales and marketing costs decreased to $144,804 for the three
month period ended December 31, 2001 from $257,914 for the three month period
ended December 31, 2000. This decrease is the result of personnel reductions,
lower travel expense and lower advertising expense. Our move to our NotifyLink
product line has changed our sales process as we concentrate on our
relationships with various 2way wireless carriers and device manufacturers.
8
We anticipate that sales and marketing expenses will increase
significantly in future quarters as we hire additional sales and customer
support personnel and attempt to expand our existing and create new distribution
channels.
General and administrative
General and administrative expense consists of general management and
finance personnel costs, occupancy costs, professional fees and other general
corporate expenses. General and administrative expenses increased to $383,654
for the three month period ended December 31, 2001 from $351,709 for the three
month period ended December 31, 2000. This increase is primarily due to higher
occupancy costs for both our San Jose, California and Canfield, Ohio facilities.
We expect that general and administrative expense may increase in
future quarters, as we will need to hire additional accounting and financial
personnel to support our anticipated growth.
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. Our ability to fund
our recurring losses from operations depends upon our success in shifting our
product focus into wireless e-mail notification and wireless e-mail notification
market solutions, and/or raising other sources of financing. Management expects
to enter into several arrangements during fiscal 2002 that it believes will
produce increased revenue from these new products.* We believe that our existing
cash balances are sufficient to fund our operations through at least September
30, 2002.*
At December 31, 2001, we had cash and cash equivalents and restricted
cash of $2,949,491. Of this amount, $275,986 is recorded as restricted cash,
which is securing outstanding letters of credit to our suppliers issued in
connection with commitments to purchase additional inventory of $275,986.
Cash used in operating activities increased to $609,332 for the three
month period ending December 31, 2001 from $539,029 for the three month period
ending December 31, 2000. Cash used in operating activities for the three month
period ending December 31, 2001 was primarily due to our net loss of $604,929
and an increase in inventory of $247,925 partially offset by an increase in
accounts payable of $179,296 and a decrease in accounts receivable of $53,482.
The increase in inventory and accounts payable is due to the receipt of a
shipment of product for an order of our Visual Got Mail product. The decrease in
accounts receivable is a result in the decline in sales of our legacy products.
Cash used in operating activities for the three month period ending December 31,
2000 was primarily due to our net loss of $783,456 and a decrease in accounts
payable of $243,618 partially offset by a decrease in inventory of $148,081 and
a decrease in accounts receivable of $351,733.
Expenditures for property and equipment increased by $25,049 for the
three month period ended December 31, 2000 compared to the prior year due to
purchases of equipment to support a new order of our Visual Got Mail service.
In the three month period ended December 31, 2000, net cash provided by
financing activities was $1,212,996 consisting almost entirely of the net
proceeds from a private offering of 376,865 shares of common stock and warrants
to purchase 188,424 shares of common stock.
We currently occupy two facilities under operating leases. The lease on
our San Jose, California facility expires in March 2003. The future minimum
payments under this lease for the remainder of the year ending September 30,
2002 and the year ending September 30, 2003 are $182,699 and $129,657,
respectively. The lease on our Canfield, Ohio facility expires in October 2006.
Future minimum payments under this lease for the remainder of the year ending
September 30, 2002 and for each of the following four years ending September 30
are $53,540 and $71,387 per annum, respectively.
9
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.
These statements include, but are not limited to, those statements marked with
an asterisk (*). In addition, the Company may from time to time make
forward-looking statements through statements that include the words "believes",
"expects", "anticipates" or similar expressions. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievements to differ materially from those
expressed or implied by such forward-looking statements. These factors include,
but are not limited to, lower than expected customer orders and timing of actual
orders of our wireless products; the timing and extent to which telephone
companies adopt, initiate and promote programs involving our telephony adjunct
devices; competition from other suppliers; changes in product mix or
distribution channels; technological difficulties and resource constraints
encountered in developing new products; inability to attract and retrain key
personnel; delisting of our securities by Nasdaq; changes in regulatory
requirements; and lack of growth in the market for wireless data communications
devices. The reader should carefully consider, together with the other matters
referred to herein, additional factors discussed from time to time in our public
reports filed with the Securities and Exchange Commission. We caution the
reader, however, that these factors may not be exhaustive.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
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, 2002
/s/ Gerald W. Rice
Chief Financial Officer
(Principal Financial and Accounting
Officer)
10