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 SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21743
NEOMEDIA TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified In Its Charter)
DELAWARE 36-3680347
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2201 SECOND STREET, SUITE 402, FORT MYERS, FLORIDA 33901
(Address of Principal Executive Offices) (Zip Code)
239-337-3434
Issuer's Telephone Number (Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
As of November 10, 2003, there were 235,783,873 outstanding shares of
the issuer's Common Stock.
1
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30,
2003
-------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,048
Restricted cash 600
Trade accounts receivable, net of allowance for doubtful
accounts of $28 178
Inventories, net 13
Prepaid expenses and other current assets 511
--------
Total current assets 2,350
Property and equipment, net 72
Capitalized patents, net 2,055
Capitalized and purchased software costs, net 60
Other long-term assets 704
--------
Total assets $ 5,241
========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,096
Amounts due under financing agreements 345
Liabilities in excess of assets of discontinued business
unit 996
Sales taxes payable 194
Accrued expenses 2,782
Deferred revenues 576
Cash advances payable through
the issuance of common stock 1,135
Notes payable 732
Current portion of long-term debt 591
Other 37
--------
Total current liabilities 10,484
Long-term debt, net of current portion 94
--------
Total liabilities 10,578
--------
Shareholders' deficit:
Preferred stock, $0.01 par value, 25,000,000 shares
authorized, none issued and outstanding --
Additional paid-in capital, preferred stock --
Common stock, $0.01 par value, 1,000,000,000 shares
authorized, 207,764,771 shares issued and 205,781,109
outstanding 2,058
Additional paid-in capital 68,469
Deferred stock-based compensation (260)
Accumulated deficit (74,825)
Treasury stock, at cost, 201,230 shares of common stock (779)
--------
Total shareholders' deficit (5,337)
--------
Total liabilities and shareholders' deficit $ 5,241
========
The accompanying notes are an integral part of this condensed consolidated
balance sheet.
2
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------
2003 2002
------------- -------------
NET SALES:
License fees $ 69 $ 150
Resale of software and technology equipment and service fees 392 3,254
------------- -------------
Total net sales 461 3,404
------------- -------------
COST OF SALES:
License fees 76 80
Resale of software and technology equipment and service fees 378 2,742
------------- -------------
Total cost of sales 454 2,822
------------- -------------
GROSS PROFIT 7 582
Sales and marketing expenses 146 207
General and administrative expenses 1,940 996
Research and development costs 78 150
------------- -------------
Loss from operations (2,157) (771)
Other expenses:
Loss on extinguishment of debt 24 --
Interest expense 24 2
------------- -------------
NET LOSS $ (2,205) $ (773)
============= =============
NET LOSS PER SHARE--BASIC AND DILUTED $ (0.01) $ (0.03)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED 151,698,465 22,979,755
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------
2003 2002
------------ ------------
NET SALES:
License fees $ 338 $ 303
Resale of software and technology equipment and service fees 1,671 8,149
------------ ------------
Total net sales 2,009 8,452
------------ ------------
COST OF SALES:
License fees 227 764
Resale of software and technology equipment and service fees 1,566 6,607
------------ ------------
Total cost of sales 1,793 7,371
------------ ------------
GROSS PROFIT 216 1,081
Sales and marketing expenses 407 719
General and administrative expenses 3,409 3,556
Research and development costs 243 683
Loss on impairment of assets -- 1,003
------------ ------------
Loss from operations (3,843) (4,880)
Other expenses:
Loss on extinguishment of debt 24 --
Interest expense 193 99
------------ ------------
Loss from continuing operations (4,060) (4,979)
Loss on disposal of discontinued business unit (Note 1) -- (1,523)
------------ ------------
NET LOSS $ (4,060) $ (6,502)
============ ============
NET LOSS PER SHARE FROM
CONTINUING OPERATIONS--BASIC AND DILUTED $ (0.05) $ (0.24)
============ ============
NET LOSS PER SHARE FROM
DISCONTINUED OPERATIONS--BASIC AND DILUTED $ -- $ (0.07)
============ ============
NET LOSS PER SHARE--BASIC AND DILUTED $ (0.05) $ (0.31)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED 89,440,869 20,736,080
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($4,060) ($6,502)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 368 938
Loss on disposal of discontinued business unit -- 1,523
Loss on impairment of assets -- 1,003
Expense associated with option and warrant repricing 748 38
Fair value of expense portion of stock-based
compensation granted for professional services 442 383
Interest expense allocated to debt 75 --
Discount related to issuance of employee common stock 688 --
Loss on payments of accounts payable in stock 24 --
(Increase)/decrease in value of life insurance policies (10) 80
Changes in operating assets and liabilities
Trade accounts receivable, net 149 (610)
Other current assets 217 491
Accounts payable, amounts due under financing agreements, liabilities in
excess of assets of discontinued business unit, accrued expenses and
stock liability (395) 1,916
Deferred revenue other current liabilities (303) 151
------- -------
Net cash used in operating activities (2,057) (589)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased intangible assets (22) (24)
Acquisition of property and equipment (42) --
------- -------
Net cash used in investing activities (64) (24)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 2,405 198
Ner proceeds payable through the issuance of common stock 1,135 --
Net proceeds from exercise of stock warrants 250 43
Net proceeds from exercise of stock options 90 272
Borrowings under notes payable and long-term debt 75 21
Transfer to restriced cash for long-term debt (600) --
Repayments on notes payable and long-term debt (260) --
Issuance of deferred stock-based compensation -- (46)
------- -------
Net cash provided by financing activities 3,099 488
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 978 (125)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 70 134
------- -------
CASH AND CASH EQUIVALENTS $ 1,048 $ 9
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the year $ 6 ($ 66)
Income taxes paid -- --
Non-cash investing and financing activities:
Reduction in accounts payable for debt paid in stock 72 --
Cancellation of common stock issued in 2001 to offset stock subscription
receivable -- (240)
Fair value of stock and warrants issued with debt 56 --
Fair value of stock issued for services 148 --
Fair value of stock compensation deferred to future periods 64 --
Direct costs associated with Equity Line of Credit 5,693 --
Net effect of issuance and subsequent
cancellation of common stock underlying notes receivable -- (190)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The condensed consolidated financial statements include the financial
statements of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries
("NeoMedia" or the "Company"). The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-QSB and do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete consolidated financial statements. These condensed consolidated
financial statements and related notes should be read in conjunction with the
Company's Form 10-K for the fiscal year ended December 31, 2002. In the opinion
of management, these condensed consolidated financial statements reflect all
adjustments which are of a normal recurring nature and which are necessary to
present fairly the consolidated financial position of NeoMedia as of September
30, 2003, and the results of operations and cashflows for the three-month and
nine-month periods ended September 30, 2003 and 2002. The results of operations
for the three-month and nine-month periods ended September 30, 2003 are not
necessarily indicative of the results which may be expected for the entire
fiscal year. All significant intercompany accounts and transactions have been
eliminated in preparation of the condensed consolidated financial statements.
NATURE OF BUSINESS OPERATIONS
The Company is structured and evaluated by its Board of Directors and
Management as two distinct business units:
NeoMedia Internet Switching Services (NISS) (formerly named NeoMedia
Application Services), and
NeoMedia Consulting and Integration Services (NCIS) (formerly named
NeoMedia SI)
NISS (physical world-to-Internet offerings) is the Company's core
business and is based in the United States, with development and operating
facilities in Fort Myers, Florida. NISS develops and supports the Company's
physical world to Internet core technology, including our linking "switch" and
our application platforms. NISS also manages the Company's valuable intellectual
property portfolio, including the identification and execution of licensing
opportunities surrounding the patents.
NCIS (systems integration service offerings) is the original business
line upon which the Company was organized. This unit resells client-server
equipment and related software, and general and specialized consulting services.
Systems integration services also identifies prospects for custom applications
based on our products and services. During 2002, this unit expanded its business
offerings to include a higher Value-Add called Storage Area Networks (SAN). The
operations are based in Lisle, Illinois.
RECLASSIFICATIONS
Certain amounts in the 2002 condensed consolidated financial statements have
been reclassified to conform to the 2003 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that
6
have economic effects that are similar to sale-leaseback transactions. NeoMedia
has implemented the provision of SFAS No. 145 and has concluded that the
adoption does not have a material impact on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Exit or Disposal
Activities." The provisions of this statement are effective for disposal
activities initiated after December 31, 2002, with early application encouraged.
NeoMedia has implemented the provision of SFAS No. 146 and has concluded that
the adoption does not have a material impact on the Company's financial
statements.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions-an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9," which removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with Statements
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets. In addition, this Statement amends SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. The requirements relating to acquisitions of financial
institutions is effective for acquisitions for which the date of acquisition is
on or after October 1, 2002. The provisions related to accounting for the
impairment or disposal of certain long-term customer-relationship intangible
assets are effective on October 1, 2002. The adoption of this Statement did not
have a material impact to the Company's financial position or results of
operations as the Company has not engaged in either of these activities.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations as the Company has not elected to
change to the fair value based method of accounting for stock-based employee
compensation.
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN45 did not have a material effect on the Company's
financial position, results of operations, or cash flows.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria was based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The adoption of this statement did not
have a material impact to the Company's financial position or results of
operations.
During October 2003, the FASB issued Staff Position No. FIN 46, deferring
the effective date for applying the provisions of FIN 46 until the end of the
first interim or annual period ending after December 31, 2003 if the
7
variable interest was created prior to February 1, 2003 and the public entity
has not issued financial statements reporting that variable interest entity in
accordance with FIN 46. The FASB also indicated it would be issuing a
modification to FIN 46 prior to the end of 2003. Accordingly, the Company has
deferred the adoption of FIN 46 with respect to VIEs created prior to February
1, 2003. Management is currently assessing the impact, if any, FIN 46 may have
on the Company; however, management does not believe there will be any material
impact on its consolidated financial statements, results of operations or
liquidity resulting from the adoption of this interpretation.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement amends Statement 133 for decisions made (1) as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, (2) in connection with other Board projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative, in particular, the meaning
of an initial net investment that is smaller than would be required for other
types of contracts that would be expected to have a similar response to changes
in market factors, the meaning of underlying, and the characteristics of a
derivative that contains financing components. The adoption of this statement
did not have a material impact to the Company's financial position or results of
operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Some of the provisions
of this Statement are consistent with the current definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial Statements. The remaining
provisions of this Statement are consistent with the Board's proposal to revise
that definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own equity shares, depending on the nature of the
relationship established between the holder and the issuer. While the Board
still plans to revise that definition through an amendment to Concepts Statement
6, the Board decided to defer issuing that amendment until it has concluded its
deliberations on the next phase of this project. That next phase will deal with
certain compound financial instruments including puttable shares, convertible
bonds, and dual-indexed financial instruments. The adoption of this statement
did not have a material impact on the Company's financial position or results of
operations.
LOCH ENERGY, INC. ("LOCH")
On March 7, 2003, NeoMedia announced that that it had reached an
agreement in principle to acquire and merge with Loch, an oil and gas provider
based in Humble, Texas. On October 1, 2003, NeoMedia discovered that the royalty
interest from future sales of oil owned by Loch were oversold, which would
likely result in materially lower projected available cashflow from Loch's
operations. This projected available cashflow was the basis for the proposed
acquisition by NeoMedia. On October 2, 2003, NeoMedia's Board of Directors voted
to cancel the Memorandum of Terms signed on March 13, 2003, and terminate the
acquisition and merger.
EQUITY LINE OF CREDIT WITH CORNELL CAPITAL PARTNERS, LP ("CORNELL")
On February 11, 2003, NeoMedia and Cornell entered into an Equity Line of
Credit Agreement under which Cornell agreed to purchase up to $10 million of
NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at the Company's discretion. The maximum amount of each purchase is
$150,000 with a minimum of seven days between purchases. The shares are valued
at 98% of the lowest closing bid price during the five-day period following the
delivery of a notice of purchase by NeoMedia. The Company pays 5% of the gross
proceeds of each purchase to Cornell. On February 14, 2003, the SEC declared
effective the S-1 registration statement containing 100 million shares
underlying the Equity Line of Credit.
During the nine months ended September 30, 2003, the Company has received
gross funding of $3,597,000 from the sale of stock under the Equity Line of
Credit, through the sale of 87,933,244 shares of its common
8
stock. The following table summarizes funding received from the Equity Line of
Credit during the nine months ended September 30, 2003:
NINE MONTHS
ENDED
FIRST SECOND THIRD SEPTEMBER 30,
QUARTER QUARTER QUARTER 2003
------------ ------------ ------------ ------------
Number of shares sold to Cornell 3,452,373 28,411,871 56,069,000 87,933,244
Gross funds received by NeoMedia $ 312,000 $ 685,000 $ 2,600,000 $ 3,597,000
Less: discount and fees* (28,000) (50,000) (226,000) (304,000)
------------ ------------ ------------ ------------
Net funding received by NeoMedia $ 284,000 $ 635,000 $ 2,374,000 $ 3,293,000
------------ ------------ ------------ ------------
* - Includes placement fees, escrow fees, and a 5% reduction in gross proceeds
retained by Cornell.
Subsequent to September 30, 2003, the Company sold an additional
12,066,756 shares to Cornell under the Equity Line of Credit, resulting in an
additional discount of $1,172,000.
Funding received from Cornell during the nine months ended September 30,
2003, was in the form of a debt instrument, under which the Company would pay
down the principal on the promissory note through the issuance of "puts" of
common stock to Cornell over a period of several weeks. Under this structure,
the Company also has the option to repay any remaining balances on the advances
from operating cash, and cancel all future puts against that promissory note.
The Company did not elect to make any cash payments to against advances during
2003.
On September 11, 2003, the Company received and advance from Cornell in the
gross amount of $500,000 before Cornell discounts and fees. As of September 30,
2003, the Company had not issued any shares against this advance to Cornell.
Accordingly, the company has recorded the advance balance of $500,000 in "Cash
advances payable through the issuance of common stock" on its condensed
consolidated balance sheet as of September 30, 2003. During October 2003, the
Company issued 1,066,756 shares to Cornell against this advance, reducing the
balance to approximately $376,000.
On September 29, 2003, the Company received an advance from Cornell in the
gross amount of $1,500,000 before Cornell discounts and fees. As of September
30, 2003, the Company had issued to Cornell 15,000,000 shares against the
advance, valued at approximately $865,000. The Company has recorded the unpaid
advance amount of $635,000 as "Cash advances payable through the issuance of
common stock" on the condensed consolidated balance sheet as of September 30,
2003. During October 2003, the Company issued an additional 11,000,000 shares to
Cornell to pay off the advance in full.
On October 27, 2003, the Company and Cornell entered into a $20 million
Standby Equity Distribution Agreement. The terms of the agreement are identical
to the terms of the previous Equity Line of Credit, except that the maximum
"draw" under the new agreement is $280,000 per week, not to exceed $840,000 in
any 30-day period, and Cornell will purchase up to $20 million of the Company's
common stock. As a consideration fee for Cornell to enter into the agreement,
the Company issued 10 million warrants to Cornell with an exercise price of
$0.05 per share, and a term of five years.
OPTION REPRICING
During May 2003, the Company re-priced approximately 8.0 million stock
options under a 6-month repricing program. Under the terms of the program, the
exercise price for outstanding options under the Company's 2002, 1998, and 1996
Stock Option Plans was restated to $0.01 per share for a period of 6 months. In
accordance with FASB Interpretation, FIN 44, Accounting for Certain Transactions
Involving Stock Transactions, the award has been accounted for as variable from
May 19, 2003 through the period ended June 30, 2002. Accordingly, the Company
recognized approximately $544,000 and $710,000 as compensation in general and
administrative expense during the three and nine month periods ended September
30, 2003. Approximately 4.4 million options were exercised under the repricing
program during the nine months ended September 30, 2003. During September 2003,
the deadline for the option repricing was extended to December 31, 2003 by the
Stock Option Committee of NeoMedia's Board of Directors.
DISPOSAL OF QODE BUSINESS UNIT
On August 31, 2001, the Company signed a non-binding letter of intent to
sell the assets and liabilities of its former Ft. Lauderdale-based Qode business
unit, which it acquired in March 2001, to The Finx Group, Inc., a holding
company based in Elmsford, NY. The Finx Group was to assume $620,000 in Qode
payables and $800,000 in long-term leases in exchange for the issuance of
500,000 shares of the Finx Group, right to use and sell Qode services, and up to
$5 million in affiliate revenues over the next five years. During the third and
fourth quarters of 2001 and the first quarter of 2002, the company recorded a
$2.6 million expense from the write-down of the Qode assets/liabilities to net
realizable value.
During June 2002, the Finx Group notified the Company that it did not
intend to carry out the letter of intent due to capital constraints. As a
result, during the three-month period ended June 30, 2002, the Company recorded
an additional expense of $1.5 million for the write-off of remaining Qode
assets. As of September 30, 2003, the Company had approximately $996,000 of
liabilities relating to the Qode system remaining on its books.
OTHER EVENTS
On March 13, 2003, the Company repaid the remaining balance of $85,000 on a
note due to Michael Kesselbrenner, a private investor. The original note had
been issued in the amount of $165,000 on December 2, 2002, with a term of 150
days. In connection with the default provision of the note, the Company entered
into a Pledge Agreement, dated December 2, 2002, under which the Company issued
53,620,020 shares of common
9
stock to an unrelated third party as collateral for the note. The note balance
of $85,000 was paid off on March 13, 2003, and the 53,620,020 shares were
returned to the Company on April 4, 2003 and retired.
On April 2, 2003, the Company was issued its sixth US Patent. The
technology covered by the patent allows for a connection from human-or
machine-readable input to generate a tailored response that can utilize a
profile of the person making the link between the code-carrying physical object
and the desired electronic information.
On April 17, 2003, the Board of Directors of the Company approved the
payment in full of approximately $154,000 of liabilities owed by the Company to
Charles W. Fritz, the Company's Founder and Chairman of the Board of Directors,
through the issuance of 15,445,967 shares of common stock. The Company
recognized a discount expense in general and administrative expenses of
approximately $15,000 relating to this transaction with Mr. Fritz.
On April 21, 2003, the Company sold 25,000,000 shares of its common stock,
par value $0.01, in a private placement at a price of $0.01 per share. In
connection with the sale, the Company also granted the purchaser 25,000,000
warrants to purchase shares of the Company's common stock at an exercise price
of $0.01 per share. The warrants had a fair value of $298,000 and have been
recorded as a cost of issuance. The purchaser was William E. Fritz, a member of
the Company's Board of Directors. Proceeds to the Company from sale of the
shares were $250,000. The Company recognized a discount expense in general and
administrative expenses of approximately $50,000 relating to this transaction
with Mr. Fritz. On August 6, 2003, Mr. Fritz exercised his warrants and
purchased 25,000,000 additional shares of common stock at a price of $0.01 per
share.
During April 2003, the Company repriced approximately 1.9 million warrants
held by Thornhill Capital LLC ("Thornhill"), an outside consultant to the
Company. Of the 1.9 million warrants, 1.5 million had an exercise price of $0.05
per share, and approximately 0.4 million had an exercise price of $2.09 per
share. All 1.9 million warrants were repriced to $0.00 per share. The Company
recognized an expense of approximately $27,000 related to this transaction
during the second quarter of 2003. These warrants were exercised immediately
after the repricing.
During April 2003, the Company entered into a consulting agreement with
William Fritz, an outside director, for consulting and advisement services
relating to the merger with Loch Energy, Inc., and to the subsequent
implementation of various management programs surrounding the business. The
agreement calls for total payments of $250,000 over a period of one year. During
August 2003, the Company paid the consulting contract in full. During September
2003, the consulting contract was rescinded and the full $250,000 was returned
to us.
On July 9, 2003, the Company borrowed $25,000 from William E. Fritz, one
of its outside directors. This amount was added to the principal of a $10,000
note payable to Mr. Fritz that matures in April 2004, with all other terms of
the note remaining the same. As consideration for the loan, the Company granted
Mr. Fritz 2,500,000 warrants to purchase shares of the Company's common stock at
an exercise price of $0.01 per share. The warrants had a fair value of
approximately $74,000. In accordance with EITF 00-27, the Company recorded the
relative fair value of the warrants as a discount against the note, and is
amortizing the discount over the life of the note.
On July 16, 2003, the Company's Board of Directors voted to authorize the
issuance of approximately 34.4 million stock options to employees, contingent
upon the passage at the Company's annual meeting on September 24, 2003, of a
proposal to adopt a 2003 Stock Option Plan, under which 150 million options
would be allocated for future issuance. The Company expensed approximately
$624,000 related to the issuance of these options during the quarter ended
September 30, 2003. The 2003 Stock Option Plan was approved by NeoMedia's
shareholders. Subsequent to September 30, 2003, the Company issued the 34.4
million options.
On July 21, 2003, the Company entered into a consulting agreement with an
unrelated party under which the Company paid the consultant 3.6 million shares
of the Company's common stock for services to be performed over a period of one
year. The Company recorded expense of $19,000 and the remaining $81,000 was
recorded as deferred compensation.
On July 28, 2003, the Company signed a binding letter of intent to
purchase Secure Source Technologies ("SST"), a provider of security solutions
and covert security technology for the manufacturing and financial
10
services industries, in exchange for 3.5 million shares of the Company's common
stock. On October 8, 2003, the merger was completed, and the Company issued 3.5
million shares to the stockholders of SST. With the purchase of SST, the Company
acquired eight additional patents that compliment its existing intellectual
property portfolio.
On August 29, 2003, the Company borrowed $50,000 from William E. Fritz,
one of its outside directors, under an unsecured note payable. The note was paid
in full during September 2003.
On September 3, 2003, the Company issued 10 million warrants to an
unrelated consultant for professional services rendered in the third and fourth
quarter of 2003. The warrants have an exercise price of $0.01 and a term of five
years. Services provided by the consultant include capital-raising services in
the third quarter of 2003, advisory services relating to our Standby Equity
Distribution Agreement with Cornell Capital Partners, and merger and acquisition
advisement provided during the third and fourth quarters of 2003. The Company
recorded approximately $19,000 as expense, $74,000 as deferred compensation, and
$47,000 as cost of raising capital against additional paid in capital.
On September 24, 2003, the Company's shareholders voted to (i) increase the
number of shares of common stock, par value $0.01 per share, that the Company is
authorized to issue from 200,000,000 to 1,000,000,000; and (ii) implement the
2003 Stock Option Plan, under which the Company is authorized to grant to
employeees, directors, and consultants up to 150,000,000 options to purchase
shares of its common stock.
On September 29, 2003, the Company transferred $600,000 to an escrow
account to be used to pay principal and interest relating to its note payable to
AirClic, Inc. ("AirClic") which is subject to a lawsuit between the Company and
AirClic (see "Legal Proceedings"). On October 3, 2003, NeoMedia paid AirClic the
principal plus interest in the approximate amount of $610,000. On November 3,
2003, NeoMedia reached a settlement agreement with AirClic which will end the
suit. The parties are currently drafting the release document and expect the
suit to be dismissed by the end of November 2003.
On September 30, 2003, the Company received requests from the SEC's
Southeast Regional Office for certain documents including those concerning
negotiations and arrangements with certain strategic partners and consultants,
patents, recent issuances of securities, investor relations, and the stock
ownership by the Company's officers and directors. The Company responded
promptly and fully and will cooperate with any further requests. The SEC's
letter states that the staff's inquiry is informal and should not be construed
as an indication of any violation of law or as a reflection on any person,
entity, or security.
PRO-FORMA INFORMATION REQUIRED BY SFAS 148
At September 30, 2003, the Company has four stock-based employee
compensation plans (the 2003 Stock Option Plan, the 2002 Stock Option Plan, the
1998 Stock Option Plan, and the 1996 Stock Option Plan). The Company accounts
for those plans under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
No stock-based employee compensation cost is reflected in net loss, except when
options granted under those plans had an exercise price less than the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net loss and loss per share if the company had applied
the fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
Net Loss, as reported ($2,205) ($ 773) ($4,060) ($6,502)
Compensation recognized under APB 25 623 -- 623 --
Compensation recognized under SFAS 123 (925) (313) (1,361) (629)
------- ------- ------- -------
Pro-forma net loss ($2,507) ($1,086) ($4,798) ($7,131)
======= ======= ======= =======
Net Loss per share:
Basic and diluted - as reported ($ 0.01) ($ 0.03) ($ 0.05) ($ 0.31)
======= ======= ======= =======
Basic and diluted - pro-forma ($ 0.02) ($ 0.05) ($ 0.05) ($ 0.34)
======= ======= ======= =======
SEGMENT REPORTING
The Company is structured and evaluated by its Board of Directors and
Management as two distinct business units:
NeoMedia Internet Switching Services (NISS), is based in the United
States, with development and operating facilities in Fort Myers, Florida. NISS
develops and supports the Company's physical world to Internet core technology,
including our linking "switch" and our application platforms. NISS also manages
the Company's valuable intellectual property portfolio, including the
identification and execution of licensing opportunities surrounding the patents.
NeoMedia Consulting and Integration Services (NCIS) is the Company's
systems integration business unit. This unit resells client-server equipment and
related software, and general and specialized consulting services. NCIS also
identifies prospects for custom applications based on NeoMedia's products and
services. This unit recently added to its business offerings a much higher
Value-Add called Storage Area Networks (SAN). The operations are based in Lisle,
Illinois.
The Company's reportable segments are strategic business units that offer
different technology and marketing strategies. The Company's areas of operations
are principally in the United States. No single foreign country or geographic
area is significant to the consolidated financial statements
Consolidated net sales, net operating losses for the nine months ended
September 30, 2003 and 2002, and identifiable assets as of September 30, 2003,
were as follows:
(in thousands)
-------------------------------------------
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
2003 2002 2003 2002
------- ------- ------- -------
NET SALES:
NeoMedia Consulting & Integration Services $ 448 $ 3,391 $ 1,971 $ 8,424
NeoMedia Internet Switching Service 13 13 38 28
------- ------- ------- -------
$ 461 $ 3,404 $ 2,009 $ 8,452
------- ------- ------- -------
NET LOSS:
NeoMedia Consulting & Integration Services ($1,855) ($ 338) ($3,310) ($ 546)
NeoMedia Internet Switching Service (350) (435) (750) (5,956)
------- ------- ------- -------
($2,205) ($ 773) ($4,060) ($6,502)
------- ------- ------- -------
AS OF
SEPTEMBER 30,
IDENTIFIABLE ASSETS 2003
NeoMedia Consulting & Integration Services $ 603
NeoMedia Internet Switching Service 2,115
Corporate 2,523
-------
$ 5,241
-------
11
SUBSEQUENT EVENTS
On October 8, 2003, the Company completed its acquisition of Secure
Source Technologies, Inc., a provider of security solutions and covert security
technology for the manufacturing and financial services industries, for 3.5
million shares of NeoMedia common stock. With the purchase of SST, the Company
acquired eight additional patents that compliment its existing intellectual
property portfolio.
On October 20, 2003, the Company entered into a consulting agreement
with an unrelated third party to provide services related to the implementation
of the Company's PaperClick for Camera Cell Phone business plan in Europe over a
12-month period. The consultant was paid 1,000,000 options with an exercise
price of $0.01 per share and a term of three years.
On October 20, 2003, the Company entered into a consulting agreement
with an unrelated third party to provide services related to the implementation
of the Company's domestic business plan relating to PaperClick patent business
plan over a 12-month period. The consultant was paid 500,000 options with an
exercise price of $0.01 per share and a term of three years.
On October 27, 2003, The Company entered into a Standby Equity
Distribution Agreement with Cornell Capital Partners, LP. Pursuant to the
Standby Equity Distribution Agreement, the Company may, at its discretion,
periodically sell to Cornell shares of common stock for a total purchase price
of up to $20 million. For each share of common stock purchased under the Standby
Equity Distribution Agreement, Cornell Capital Partners will pay 98% of the
lowest closing bid price of the Company's common stock on the OTC Bulletin Board
or other principal market on which our common stock is traded for the 5 trading
days immediately following the notice date. The amount of each advance is
subject to a maximum of $280,000 per week, not to exceed $840,000 in any 30-day
period, with a minimum of 6 trading days between advances. As a consideration
fee for Cornell to enter into the agreement, the Company issued 10 million
warrants to Cornell with an exercise price of $0.05 per share, and a term of
five years. On November 7, 2003 the Company filed a Registration Statement on
Form SB-2 to register the sale of up to 200,000,000 shares under the Standby
Equity Distribution Agreement, as well as the 10,000,000 warrants issued to
Cornell Capital Partners.
Effective October 31, 2003, NeoMedia adopted the 2003 Stock Incentive
Plan. Under the terms of the Plan, 30,000,000 shares of common stock are
initially authorized to be issued to pay compensation and other expenses related
to employees, former employees, consultants, and non-employee directors. On
November 3, 2003, NeoMedia filed a Form S-8 to register all 30,000,000 shares
under the 2003 Stock Incentive Plan.
On November 10, 2003, the Company announced that that it has signed a
non-binding letter of intent to acquire and merge with CSI International, Inc.
("CSI"), of Calgary, Alberta, Canada, a private technology products company and
worldwide leader in the micro paint repair industry. The LOI calls for the
issuance of 7,000,000 shares of the Company's common stock to be issued in
exchange for all outstanding shares of CSI. In addition, the Company will pay
$3.5 million cash. The merger is subject to completion of due diligence by both
sides.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") recently issued
Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, our most critical
accounting policies include: stock-based compensation; and the valuation of
intangibles, which affects our amortization and write-offs of goodwill and other
intangibles. The Company also has other key accounting policies, such as our
policies for revenue recognition, including the deferral of a portion of
revenues on sales to distributors, and allowance for bad debt. The methods,
estimates and judgments the Company uses in applying these most critical
accounting policies have a significant impact on the results the Company reports
in our financial statements.
INTANGIBLE ASSET VALUATION. The determination of the fair value of
certain acquired assets and liabilities is subjective in nature and often
involves the use of significant estimates and assumptions. Determining the fair
values and useful lives of intangible assets especially requires the exercise of
judgment. While there are a
12
number of different generally accepted valuation methods to estimate the value
of intangible assets acquired, the Company primarily uses the weighted-average
probability method outlined in SFAS 144. This method requires significant
management judgment to forecast the future operating results used in the
analysis. In addition, other significant estimates are required such as residual
growth rates and discount factors. The estimates the Company has used are
consistent with the plans and estimates that the Company uses to manage its
business, based on available historical information and industry averages. The
judgments made in determining the estimated useful lives assigned to each class
of assets acquired can also significantly affect our net operating results.
STOCK-BASED COMPENSATION. The Company records stock-based compensation to
outside consultants at fair market value in general and administrative expense.
The Company does not record expense relating to stock options granted to
employees with an exercise price greater than or equal to market price at the
time of grant. The Company reports pro-forma net loss and loss per share in
accordance with the requirements of SFAS 148 (see above). This disclosure shows
net loss and loss per share as if the Company had accounted for its employee
stock options under the fair value method of those statements. Pro-forma
information is calculated using the Black-Scholes pricing method at the date of
grant. This option valuation model requires input of highly subjective
assumptions. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of fair value of its employee stock options.
REVENUE RECOGNITION. We derive revenues from two primary sources: (1)
license revenues and (2) resale of software and technology equipment and service
fee revenues.
License fees, including Intellectual Property license, represent revenue
from the licensing of NeoMedia's proprietary software tools and applications
products. NeoMedia licenses its development tools and application products
pursuant to non-exclusive and non-transferable license agreements. Resales of
software and technology equipment represent revenue from the resale of purchased
third party hardware and software products and from consulting, education,
maintenance and post contract customer support services.
The basis for license fee revenue recognition is substantially governed by
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended. License
revenue is recognized if persuasive evidence of an agreement exists, delivery
has occurred, pricing is fixed and determinable, and collectibility is probable.
Revenue for resale of software and technology equipment and service fee is
recognized based on guidance provided in Securities and Exchange Commission
(SEC) Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," as amended (SAB 101). Software and technology equipment resale
revenue is recognized when all of the components necessary to run software or
hardware have been shipped. Service revenues include maintenance fees for
providing system updates for software products, user documentation and technical
support and are recognized over the life of the contract. Software license
revenue from long-term contracts has been recognized on a percentage of
completion basis, along with the associated services being provided. Other
service revenues, including training and consulting, are recognized as the
services are performed. The Company uses stand-alone pricing to determine an
element's vendor specific objective evidence (VSOE) in order to allocate an
arrangement fee amongst various pieces of a multi-element contract. NeoMedia
records an allowance for uncollectible accounts on a customer-by-customer basis
as appropriate.
INTANGIBLE ASSETS
At the end of each quarter, or upon occurrence of material events relating
to a specific intangible item, the Company performs impairment tests on each of
its intangible assets, which include capitalized patent costs, and capitalized
and purchased software costs. In doing so, the Company evaluates the carrying
value of each intangible asset with respect to several factors, including
historical revenue generated from each intangible asset, application of the
assets in our current business plan, and projected revenue to be derived from
the asset. Intangible asset balances are then adjusted to their current net
realizable value based on these criteria if impaired. No impairment charges were
taken during the three-month or nine-month periods ended September 30, 2003.
During the nine months ended September 30, 2002, the Company recognized an
impairment charge of $1.0 million relating to its PaperClick software product.
13
FINANCING AGREEMENTS
As of September 30, 2003, the Company was party to a commercial financing
agreement with GE Access that provides short-term financing for certain computer
hardware and software purchases. This arrangement allows the Company to re-sell
high-dollar technology equipment and software without committing cash resources
to financing the purchase. The Company and GE Access are currently operating
under an additional arrangement under which GE Access retains 50% of the
Company's proceeds from sales financed by GE Access, and applies the portion of
proceeds toward past due balances. This arrangement reduces by half the
Company's cash flow from resales of equipment and software financed by GE
Access, until the balance owed to GE Access is paid in full. During October
2003, the Company and GE entered into an additional agreement under which the
Company also makes regular payment against its past due balances. Termination of
the Company's financing relationship with GE Access could have a material
adverse effect the Company's financial condition. Management expects the
agreement to remain in place in the near future. As of September 30, 2003, the
amount payable under this financing arrangement was approximately $345,000.
OTHER DEBTS
On December 2, 2002, the Company issued to Michael Kesselbrenner, a
private investor, a promissory note in the principal amount of $165,000, bearing
interest at a rate of 12% per annum, with a maturity of 150 days. In connection
with the default provision of the promissory note, the Company entered into a
pledge agreement, dated December 2, 2002, under which the Company issued
53,620,020 shares of common stock to an unrelated third party as collateral for
the Promissory Note. The investor only funded $84,000 of the principal amount of
the note. The Company repaid this note during March 2003, and the shares held in
escrow were returned during April 2003. The Company has no further obligation
under this note.
During November 2002, NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz, Chairman of the Board of Directors of NeoMedia; William E. Fritz, an
outside director; and James J. Keil, an outside director. The notes bear
interest at a rate of 15% per annum, and matured at the earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
were registered with the SEC. The notes were convertible, at the option of the
holder, into either cash or shares of our common stock at a 30% discount to
either market price upon closing, or upon conversion, whichever is lower.
NeoMedia also granted to the holders an additional 1,355,670 shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share, with a term of three years. The warrants and shares were issued in
January 2003. In addition, since this debt is convertible into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion feature was recorded as a debt discount and amortized using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants issued exceed the face value of the notes payable, therefore, only
$60,000, the face amount of the note, was recognizable as debt discount, and
amortized over the life of the notes payable. During March 2003, two of the
affiliated parties, Mr. William Fritz and Mr. Keil, agreed to extend the
maturity date due to the Company's capital constraints. The Company repaid
Charles Fritz's note in full during March 2003, and repaid James J. Keil's note
in full during April 2003. The Company paid $30,000 of the principal on William
Fritz's note during April 2003, and entered into a new note with Mr. Fritz for
the remaining $10,000. The new note bears interest at a rate of 10% per annum
and matures in April 2004. The new note also includes a provision under which,
as consideration for the loan, Mr. Fritz will receive a 3% royalty on all future
revenue generated from the Company's intellectual property.
GOING CONCERN
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. Through
September 30, 2003, the Company has not been able to generate sufficient
revenues from its operations to cover its costs and operating expenses. Although
the Company has been able to issue its common stock or other financing for a
significant portion of its expenses, it is not known whether NeoMedia will be
able to continue this practice, or if its revenue will increase significantly to
be able to meet its cash
14
operating expenses. This, in turn, raises substantial doubt about the Company's
ability to continue as a going concern. Management believes that the Company
will be able to raise additional funds through its Standby Equity Distribution
Agreement with Cornell. However, there can be no assurances that the market for
the Company's stock will support the sale of sufficient shares of NeoMedia's
stock to raise sufficient capital to sustain operations. The condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Over the past several years, NeoMedia Technologies, Inc.'s ("NeoMedia")
focus has been aimed toward the intellectual property commercialization unit of
its Internet Switching Systems (NISS, formerly NAS) business. NISS consists of
the patented PaperClickTM technology that enables users to link directly from
the physical to the digital world, as well as the patents surrounding certain
physical-world-to-web linking processes. NeoMedia's mission is to invent,
develop, and commercialize technologies and products that effectively leverage
the integration of the physical and electronic to provide clear functional value
for NeoMedia's end-users, competitive advantage for their business partners and
return-on-investment for their investors. To this end, NeoMedia has signed four
intellectual property licenses since its inception, and also recently acquired
eight additional patents as part of its acquisition of Secure Source
Technologies, Inc. On September 8, 2003, NeoMedia announced its PaperClick for
Camera Cell Phones product, which reads and decodes UPC/EAN or other bar codes
to link users to the Internet, providing information and enabling e-commerce on
a compatible camera cell phone, such as the Nokia 3650 model. On October 30,
2003, NeoMedia unveiled its go-to-market strategy for the product. NeoMedia has
already established relationships with several key partners outlined in the
strategy, including agents Big Gig Strategies and SRP Consulting, European
advertising agency 12Snap, and worldwide brand communication company Seven.
NeoMedia's quarterly operating results have been subject to variation and
will continue to be subject to variation, depending upon factors, such as the
mix of business among NeoMedia's services and products, the cost of material,
labor and technology, particularly in connection with the delivery of business
services, the costs associated with initiating new contracts, the economic
condition of NeoMedia's target markets, and the cost of acquiring and
integrating new businesses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2002
NET SALES. Total net sales for the three months ended September 30, 2003
were $461,000, which represented a $2,943,000, or 86%, decrease from $3,404,000
for the three months ended September 30, 2002. This decrease primarily resulted
from reduced resales of Sun Microsystems equipment due to increased competition
and general economic conditions. NeoMedia intends to continue to pursue
additional resales of equipment, software and services, and to the extent that
such sales can be made, NeoMedia expects resales to more closely resemble the
results for the three months ended September 30, 2003, rather than the three
months ended September 30, 2002.
LICENSE FEES. License fees were $69,000 for the three months ended
September 30, 2003, compared with $150,000, for the three months ended September
30, 2002, a decrease of $81,000, or 54%. NeoMedia will continue to attempt to
increase license sales. NeoMedia expects license fees to remain materially
constant over the next 12 months.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of
software and technology equipment and service fees decreased by $2,862,000, or
88%, to $392,000 for the three months ended September 30, 2003, as compared to
$3,254,000 for the three months ended September 30, 2002. This decrease
primarily resulted from increased competition and general economic conditions.
NeoMedia intends to continue to pursue additional resales of equipment, software
and services, and to the extent that such sales can be made, NeoMedia expects
resales to more closely resemble the results for the three months ended
September 30, 2003, rather than the three months ended September 30, 2002.
COST OF SALES. Cost of license fees was $76,000 for the three months ended
September 30, 2003, a decrease of $4,000, or 0.5%, compared with $80,000 for the
three months ended September 30, 2002. The decrease is consistent with 2003 and
NeoMedia expects license fees will not fluctuate materially over the next 12
months. Cost of resales was $378,000 for the three months ended September 30,
2003, a decrease of $2,364,000, or 86%, compared with $2,742,000 for the three
months ended September 30, 2002. The decrease resulted from decreased resales
for the three months ended September 30, 2003 compared with the same period in
2002. Cost of resales as a percentage of related resales was 96% in 2003,
compared to 84% in 2002. This increase is due to an increased sales mix of
lower-margin equipment products sold in 2003 compared to 2002, combined with the
general erosion
16
of margins in the resale sector. NeoMedia expects costs of resales to fluctuate
with the sales of its equipment, software, and services over the next 12 months.
GROSS PROFIT. Gross profit was $7,000 for the three months ended September
30, 2003, compared with $582,000 for the three months ended September 30, 2002.
This decrease of $575,000, or 99%, was the result of lower resales of, and lower
margins on, computer equipment, software, and services in 2003 relative to 2002.
SALES AND MARKETING. Sales and marketing expenses were $146,000 for the
three months ended September 30, 2003, a decrease of $61,000, or 29%, compared
with $207,000 for the three months ended September 30, 2002. This decrease
resulted primarily from reduced sales commissions earned on lower sales in 2003
as compared with 2002, as well as a smaller sales force in 2003. NeoMedia
expects sales and marketing expense to fluctuate with sales of it proprietary
and resold products over the next 12 months.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $944,000, or 95%, to $1,940,000 for the three months ended September 30,
2003, compared to $996,000 for the three months ended September 30, 2002. The
increase resulted primarily from non-cash expenses relating to the Company's
option repricing program, expense for stock options issued with exercise prices
below market price, and stock-based professional service expense. NeoMedia
expects general and administrative expense to remain materially constant over
the next 12 months.
RESEARCH AND DEVELOPMENT. During the three months ended September 30,
2003, NeoMedia charged to expense $78,000 of research and development costs, a
decrease of $72,000 or 48% compared to $150,000 charged to expense for the three
months ended September 30, 2002. The decrease is primarily due to a continued
reduction in research and development overhead since the first quarter of 2002.
NeoMedia expects research and development costs will not fluctuate materially
over the next 12 months.
(GAIN) LOSS ON EXTINGUISHMENT OF DEBT. During the three months ended
September 30, 2003, the Company recognized a net loss from extinguishment of
debt of $24,000 due to the difference between the cash or market value of stock
issued to settle debt and the carrying value of the debt at the time of
settlement.
INTEREST EXPENSE/(INCOME), NET. Interest expense/(income) consists
primarily of interest accrued for creditors as part of financed purchases, past
due balances, notes payable and interest earned on cash equivalent investments.
Interest expense/(income) increased by $22,000 to $24,000 for the three months
ended September 30, 2003 from $2,000 for the three months ended September 30,
2002, due to interest expense during the third quarter of 2003 associated with
notes payable and past due trade accounts payable.
NET LOSS. The net loss for the three months ended September 30, 2003 was
$2,205,000, which represented a $1,432,000, or 185% increase from a loss of
$773,000 for the three months ended September 30, 2002. The increase resulted
primarily from non-cash expenses in 2003 relating to the company's option
repricing program, expense for stock options issued with exercise prices below
market price, and stock-based professional service expense, as well as lower
sales and gross profit in 2003 compared to 2002.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002
NET SALES. Total net sales for the nine months ended September 30, 2003
were $2,009,000, which represented a $6,443,000, or 76%, decrease from
$8,452,000 for the nine months ended September 30, 2002. This decrease primarily
resulted from reduced resales of Sun Microsystems equipment due to increased
competition and general economic conditions. NeoMedia intends to continue to
pursue additional resales of equipment, software and services, and to the extent
that such sales can be made, NeoMedia expects resales to more closely resemble
the results for the nine months ended September 30, 2003, rather than the nine
months ended September 30, 2002.
LICENSE FEES. License fees were $338,000 for the nine months ended
September 30, 2003, compared with $303,000, for the nine months ended September
30, 2002, an increase of $35,000, or 12%. NeoMedia will continue to attempt to
increase sales of these high-margin products. NeoMedia expects license fees to
remain materially constant over the next 12 months.
17
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of
software and technology equipment and service fees decreased by $6,478,000, or
79%, to $1,671,000 for the nine months ended September 30, 2003, as compared to
$8,149,000 for the nine months ended September 30, 2002. This decrease primarily
resulted from increased competition and general economic conditions. NeoMedia
intends to continue to pursue additional resales of equipment, software and
services, and to the extent that such sales can be made, NeoMedia expects
resales to more closely resemble the results for the nine months ended September
30, 2003, rather than the nine months ended September 30, 2002.
COST OF SALES. Cost of license fees was $227,000 for the nine months ended
September 30, 2003, a decrease of $537,000, or 70%, compared with $764,000 for
the nine months ended September 30, 2002. The decrease resulted from reduced
amortization expense in 2003 of capitalized development costs relating to the
PaperClick, MLM/Affinity, and Qode products that were written off during 2002.
Cost of resales was $1,566,000 for the nine months ended September 30, 2003, a
decrease of $5,041,000, or 76%, compared with $6,607,000 for the nine months
ended September 30, 2002. The decrease resulted from decreased resales in 2003
compared with 2002. Cost of resales as a percentage of related resales was 94%
for the nine months ended September 30, 2003, compared to 82% for the same
period in 2002. This increase is due to an increased sales mix of lower-margin
equipment products sold in 2003 compared to 2002, combined with the general
erosion of margins in the resale sector. NeoMedia expects costs of resales to
fluctuate with the sales of its equipment, software, and services over the next
12 months.
GROSS PROFIT. Gross profit was $216,000 for the nine months ended
September 30, 2003, compared with $1,081,000 for the nine months ended September
30, 2002. This decrease of $865,000, or 80%, was primarily the result of lower
resales of, and lower margin on, computer equipment, software, and services in
2003 relative to 2002.
SALES AND MARKETING. Sales and marketing expenses were $407,000 for the
nine months ended September 30, 2003, a decrease of $312,000, or 43%, compared
with $719,000 for the nine months ended September 30, 2002. This decrease
resulted primarily from reduced sales commissions earned on lower sales in 2003
as compared with 2002, as well as a smaller sales force in 2003. NeoMedia
expects sales and marketing expense to fluctuate with sales of it proprietary
and resold products over the next 12 months.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
by $147,000, or 4%, to $3,409,000 for the nine months ended September 30, 2003,
compared to $3,556,000 for the nine months ended September 30, 2002. The
increase resulted primarily from non-cash expenses relating to the company's
option repricing program, expense for stock options issued with exercise prices
below market price, and stock-based professional service expense. NeoMedia
expects general and administrative expense to remain materially constant over
the next 12 months.
RESEARCH AND DEVELOPMENT. During the nine months ended September 30, 2003,
NeoMedia charged to expense $243,000 of research and development costs, a
decrease of $440,000 or 64% compared to $683,000 charged to expense for the nine
months ended September 30, 2002. The decrease is primarily due to a continued
reduction in research and development overhead since first quarter 2002.
NeoMedia expects research and development costs will not fluctuate materially
over the next 12 months.
LOSS ON IMPAIRMENT OF ASSETS. During the nine months ended September 30,
2002, NeoMedia recognized a loss on impairment of assets of $1,003,000 for the
write-off capitalized development costs relating to its PaperClick
physical-world-to-internet software. NeoMedia did not take an impairment charge
during the nine months ended September 30, 2003.
(GAIN) LOSS ON EXTINGUISHMENT OF DEBT. During the three months ended
September 30, 2003, the Company recognized a net loss from extinguishment of
debt of $24,000, due to the difference between the cash or market value of stock
issued to settle debt and the carrying value of the debt at the time of
settlement.
INTEREST EXPENSE (INCOME), NET. Interest expense/(income) consists
primarily of interest accrued for creditors as part of financed purchases, past
due balances, notes payable and interest earned on cash equivalent investments.
Interest expense/(income) increased by $94,000, or 95%, to $193,000 for the nine
months ended September 30, 2003 from $99,000 for the nine months ended September
30, 2002, due to interest expense during the third quarter of 2003 associated
with notes payable and past due trade accounts payable.
18
LOSS ON DISPOSAL OF DISCONTINUED BUSINESS UNIT. During the nine months
ended September 30, 2002, the Company recognized a loss on disposal of
discontinued business unit of $1,523,000 to write off the remaining Qode-related
assets. No disposal loss was recognized in 2003.
NET LOSS. The net loss for the nine months ended September 30, 2003 was
$4,060,000, which represented a $2,442,000, or 38% decrease from a loss of
$6,502,000 for the nine months ended September 30, 2002. The decrease resulted
primarily from an impairment charge of $1,003,000 relating to NeoMedia's
PaperClick assets and a loss on disposal of the Company's Qode business unit of
$1,523,000 in 2002. The decrease was offset by higher non-cash expenses in 2003
relating to the company's option repricing program, expense for stock options
issued with exercise prices below market price, and stock-based professional
service expense, as well as lower sales and gross profit in 2003 compared to
2002.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying unaudited financial statements have been prepared
assuming NeoMedia will continue as a going concern. Accordingly, the financial
statements do not include any adjustments that might result from NeoMedia's
inability to continue as a going concern. NeoMedia may obtain up to $20 million
over the next two years through its Standby Equity Distribution Agreement with
Cornell Capital Partners LP. As of October 31, 2003, NeoMedia had obtained gross
funding of $3.6 million under its previous Equity Line of Credit Agreement with
Cornell Capital Partners. Management believes that this additional financing
will be sufficient to sustain operations through December 31, 2003, however,
there can be no assurances that the market for NeoMedia's stock will support the
sale of sufficient shares of NeoMedia's common stock to raise sufficient capital
to sustain operations beyond that date. If necessary funds are not available,
NeoMedia's business and operations would be materially adversely affected and in
such event, NeoMedia would attempt to reduce costs and adjust its business plan.
Net cash used in operating activities was approximately $2,057,000 for the
nine-month period ended September 30, 2003, compared with $589,000 for the
nine-month period ended September 30, 2002. During the nine months ended
September 30, 2003, trade accounts receivable inclusive of costs in excess of
billings decreased $149,000, while accounts payable, amounts due under financing
arrangements, accrued expenses, and deferred revenue decreased $698,000. During
the nine months ended September 30, 2002, trade accounts receivable increased
$610,000, while accounts payable, amounts due under financing arrangements,
accrued expenses, and deferred revenue increased $2,067,000. NeoMedia's net cash
flow from/(used in) investing activities for the nine months ended September 30,
2003 and 2002, was ($64,000) and ($24,000), respectively. Net cash provided by
financing activities for the nine months ended September 30, 2003 and 2002, was
$3,099,000 and $488,000, respectively.
During the nine months ended September 30, 2003 and 2002 NeoMedia's net
loss totaled approximately $4,060,000 and $6,502,000, respectively. As of
September 30, 2003 NeoMedia had accumulated losses from operations of
approximately $74,825,000, had a working capital deficit of approximately
$8,134,000, and approximately $1,048,000 in cash balances. As of September 30,
2003, the Company also had $600,000 of restricted cash that was used in October
to pay off the majority of the AirClic promissory note and accrued interest (see
"Legal Proceedings").
Management believes it will need to have access to capital from the
Cornell Standby Equity Distribution Agreement or other financing sources, or
NeoMedia will need to generate additional cash from its current operations to
sustain NeoMedia's operations in the fourth quarter of 2003. The failure of
management to accomplish these initiatives will adversely affect NeoMedia's
business, financial conditions, and results of operations and its ability to
continue as a going concern.
19
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. NeoMedia's chief executive
officer and chief financial officer, after evaluating the effectiveness of
NeoMedia's "disclosure controls and procedures" (as defined in Sections
13a-14(c) of the Securities Exchange Act of 1934) as of the end of the period
reported in this quarterly report (the "Evaluation Date"), NeoMedia's disclosure
controls and procedures were effective and designed to ensure that material
information relating to NeoMedia and its consolidated subsidiaries is
accumulated and would be made known to them by others within those entities as
appropriate to allow timely decisions regarding required disclosures.
CHANGES IN INTERNAL CONTROLS. NeoMedia does not believe that there are
significant deficiencies in the design or operation of its internal controls
that could adversely affect its ability to record, process, summarize and report
financial data. Although there were no significant changes in NeoMedia's
internal controls or in other factors that could significantly affect those
controls subsequent to the Evaluation Date, NeoMedia's senior management, in
conjunction with its Board of Directors, continuously reviews overall company
policies and improves documentation of important financial reporting and
internal control matters. NeoMedia is committed to continuously improving the
state of its internal controls, corporate governance and financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. NeoMedia's management, including
the Chief Executive Officer and Chief Financial Officer, does not expect that
its disclosure or internal controls will prevent all errors or fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
20
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NeoMedia is involved in the following legal actions arising in the normal
course of business, both as claimant and defendant.
NEOMEDIA SHAREHOLDERS
During January 2002, certain of NeoMedia's shareholders filed a complaint
with the Securities and Exchange Commission, alleging that the shareholders were
not included in the special shareholders meeting of November 25, 2001, to vote
on the issuance of 19 million shares of NeoMedia common stock. On March 11,
2002, NeoMedia filed its response claiming that NeoMedia had fully complied with
all of its obligations under the laws and regulations administered by the
Securities and Exchange Commission, as well as with its obligation under
Delaware General Corporation Law. No further action has been taken with respect
to this matter.
AIRCLIC, INC. LITIGATION
On September 6, 2001, AirClic, Inc. ("AirClic") filed suit against
NeoMedia in the Court of Common Pleas, Montgomery County, Pennsylvania, seeking,
among other things, the accelerated repayment of a $500,000 loan it advanced to
NeoMedia pursuant to the terms of a Secured Promissory Note made on July 11,
2003 and a non-binding Letter of Intent dated July 3, 2001 between AirClic and
NeoMedia. The note was secured by substantially all of NeoMedia's intellectual
property, including the core physical world-to-Internet technologies. In the
suit, NeoMedia acknowledged our obligations under the note but filed a
counterclaim against AirClic seeking damages for fraud, negligent
misrepresentation and promissory estoppel.
On October 3, 2003, NeoMedia paid AirClic the principal plus interest in
the approximate amount of $610,000. On November 3, 2003, NeoMedia reached a
settlement agreement with AirClic which will end the suit. The parties are
currently drafting the release document and expect the suit to be dismissed by
the end of November 2003. As of September 30, 2003, the Company had transferred
$600,000 into a restricted cash account to be used to satisfy the AirClic
obligation. This restricted cash, along with additional funds of approximately
$10,000 transferred subsequently, was used to pay the principal plus interest on
October 3, 2003. The Company had an additional accrual of $100,000 as of
September 30, 2003, to pay AirClic's legal fees.
DIGITAL:CONVERGENCE LITIGATION
On June 26, 2001, NeoMedia filed a $3 million lawsuit in the U.S. District
Court, Northern District of Texas, Dallas Division, against Digital:Convergence
Corporation for breach of contract regarding a $3 million promissory note due on
June 24, 2001 that was not paid. NeoMedia is seeking payment of the $3 million
note plus interest and attorneys fees. NeoMedia has not accrued any gain
contingency related to this matter. On March 22, 2002, Digital:Convergence filed
under Chapter 7 of the United States Bankruptcy Code. The matter is pending
before the bankruptcy court.
OTHER LITIGATION
On August 20, 2001, Ripfire, Inc. filed suit against NeoMedia in the San
Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between NeoMedia and Ripfire in May 2001 relating
to implementation of the Qode Universal Commerce Solution. On September 6, 2002,
NeoMedia settled this suit for $133,000 of NeoMedia's common stock, to be valued
at the time of registration of the shares. NeoMedia's stock was trading at
approximately $0.05 at that time. NeoMedia included for registration 2.7 million
shares in the name of Ripfire in its form S-1 that was declared effective by the
SEC on February 14, 2003. NeoMedia's stock was trading at approximately $0.02 on
February 14, 2003. The actual number of shares to be issued to Ripfire per the
pricing outlined in the agreement was approximately 9.8 million. On March 31,
2003, NeoMedia issued the 2.7 million shares of common stock that had been
registered in the S-1 to Ripfire. NeoMedia has a remaining accrued liability of
$106,000 relating to this matter as of September 30, 2003.
21
On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking
payment in full of approximately $525,000 relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
On October 23, 2003, we settled this matter for 3 million shares of NeoMedia
common stock, subject to registration, plus $10,000 cash payments to be made
over a period of 6 months. If the shares are not registered for re-sale by
February 14, 2004, Orsus has the option to return the shares and receive cash
payments in lieu of the stock. The Company has an accrued liability of $331,000
relating to this matter as of September 30, 2003.
On January 22, 2002, Rapidigm, Inc. sued NeoMedia to collect unpaid
professional service expense incurred in 2001 in the amount of approximately
$15,000. NeoMedia and Rapdigm reached a settlement in February 2002, under which
NeoMedia made payments totaling approximately $7,000. On April 22, 2003,
Rapidigm obtained a judgment for the remaining balance of the liability plus
court fees and interest. NeoMedia has continued to make payments against the
liability, and has a remaining accrued liability of approximately $3,000 as of
September 30, 2003.
On July 27, 2002, NeoMedia's former General Counsel filed suit in U.S.
District Court, Ft. Myers division, seeking payment of the 2000 executive
incentive, severance and unpaid vacation days in the amount of approximately
$154,000. In June 2001, NeoMedia's compensation committee approved an adjustment
to the 2000 executive incentive plan that reduced the executive incentive payout
as a result of the write-off of the Digital:Convergence intellectual property
license contract in the second quarter of 2001. As a result, NeoMedia reduced
the accrual for such payout by an aggregate of approximately $1.1 million in the
second quarter of 2002. The plaintiff is seeking payment of the entire original
incentive payout. On November 12, 2002, NeoMedia settled the lawsuit. The
settlement calls for cash payments totaling approximately $90,000 over a period
of ten months, plus 250,000 vested options to purchase shares of NeoMedia's
common stock at an exercise price of $0.01 with a term of five years. NeoMedia
had a liability of approximately $7,000 relating to this matter as of September
30, 2003.
On September 12, 2002, R. R. Donnelley & Sons Company filed a summons in
the Circuit Court of The Twentieth Judicial Circuit in and for Lee County,
Florida, seeking payment of approximately $92,000 in past due professional
services bills, plus interest and attorney fees. During July 2003, NeoMedia
settled the suit for cash payments over a period of approximately one year.
NeoMedia has an accrued liability of approximately $97,000 relating to this
matter as of September 30, 2003.
On September 13, 2002, Wachovia Bank, N.A., owner of the building in which
NeoMedia's Ft. Myers, Florida headquarters is located, filed a complaint in
Circuit Court of The Twentieth Judicial Circuit in and for Lee County, Florida,
seeking payment of approximately $225,000 in past due rents. The complaint also
seeks payment of all future rent payments under the lease term, which expires in
January 2004, as well as possession of the premises. On October 28, 2002,
NeoMedia and Wachovia reached a settlement on this matter. The settlement calls
for cash payments of past due rents of approximately $250,000 over a period of
16 months. NeoMedia also vacated approximately 70% of the unused space in its
headquarters, and the rent for the remainder of the lease, which expires in
January 2004, was reduced according to square footage used. NeoMedia has accrued
a liability of approximately $180,000 relating to this matter as of September
30, 2003.
On October 21, 2002, International Digital Scientific, Inc. ("IDSI") filed
a demand for arbitration relating to past due payments on an uncollateralized
note payable by NeoMedia to IDSI dated October 1, 1994. The note was issued in
exchange for the purchase by NeoMedia of computer software from IDSI. The note
calls for NeoMedia to make payments of the greater of: (i) 5% of the collected
gross revenues from sales of software or (ii) $16,000 per month. As of September
30, 2003, NeoMedia had recorded a current portion of long term debt to IDSI of
approximately $591,000. The net carrying value of future obligation under the
note was approximately $684,000 as of September 30, 2003. On October 31, 2003,
NeoMedia paid off all past due and future obligations under the note to IDSI
through the issuance of 8,000,000 shares of its common stock. If the shares are
not registered for re-sale by February 14, 2004, IDSI has the option to return
the shares and proceed under the terms of the original purchase agreement. .
On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against
NeoMedia seeking payment of approximately $170,000 in past due legal services.
The amount in question is subject to an unsecured promissory note that matured
unpaid on February 28, 2002. On May 1, 2003, NeoMedia settled the suit for cash
payments totaling approximately $196,000, to be paid at a rate of $30,000 per
quarter until the balance is
22
satisfied. If the balance is paid within one year of the settlement, NeoMedia
will not pay interest charges. NeoMedia has a remaining liability of
approximately $120,000 relating to this matter as of September 30, 2003.
On November 11, 2002, Avnet/Hallmark Computer Marketing Group filed a
complaint against NeoMedia seeking payment of approximately $66,000 in past due
amounts relating to hardware and software re-sold by NeoMedia. During December
2002, NeoMedia made payment of approximately $30,000 to Avnet, reducing the
balance owed to approximately $37,000. On April 1, 2003, the plaintiff received
a judgment from the circuit court for the remaining balance. NeoMedia and Avnet
have agreed to a payment plan under which the Company will pay the balance in
full by April 2004. NeoMedia had a liability of approximately $37,000 relating
to this matter as of September 30, 2003.
On December 30, 2002, Brooks Automation, Inc. filed a complaint against
NeoMedia seeking payment of approximately $37,000 in past due amounts relating
to software re-sold by NeoMedia. On January 16, 2003, NeoMedia and Brooks
Automation reached a settlement under which NeoMedia will pay the amount owed to
Brooks Automation. NeoMedia had a liability of approximately $37,000 relating to
this matter as of September 30, 2003.
On February 6, 2003, Allen Norton & Blue, P.A., filed a complaint against
NeoMedia seeking payment of approximately $25,000 in past due legal services.
The parties have agreed to a payment plan relating to this matter under which
the balance will be paid over approximately 12 months. NeoMedia had a liability
of approximately $19,000 relating to this matter as of September 30, 2003.
On April 18, 2003, a former participant in NeoMedia's 2001 self-insured
health plan sued NeoMedia to recover approximately $40,000 in unpaid health
claims from 2001. NeoMedia is attempting to negotiate a settlement prior to the
court date. NeoMedia had accrued the claims related to this suit in the amount
of approximately $51,000 as of September 30, 2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (A), (B), (C) AND (D)
On September 24, 2003, the Company's shareholders voted to increase the
number of shares of common stock, par value $0.01 per share, that the Company is
authorized to issue from 200,000,000 to 1,000,000,000.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
(a) NeoMedia is in default on the securities held by AirClic, IDSI and
Merrick & Klimek, P.C., as more fully described in Item 1., Legal Proceedings.
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 24, 2003, the Company held a shareholder meeting, at which
its shareholders approved the following three proposals:
a) To re-elect the current Board of Directors until the next annual
meeting of shareholders.
b) To increase the number of authorized common shares, $0.01 par
value, from 200,000,000 to 1,000,000,000
c) To approve the 2003 Stock Option Plan, under which the Company is
authorized to issue options to purchase up to 150,000,000 shares
of common stock
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
31.1 Certification by Chief Executive Officer pursuant to Provided herewith
15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer pursuant to Provided herewith
15 U.S.C. Section 7241, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Officer pursuant to Provided herewith
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by Chief Financial Officer pursuant to Provided herewith
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K:
NeoMedia filed a report on Form 8-K on October 3, 2003, reporting that it had
terminated its letter of intent to merge with Loch Energy, Inc.
NeoMedia filed a report on Form 8-K on October 9, 2003, reporting that it had
completed its pending merger with Secure Source Technologies, Inc.
24
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEOMEDIA TECHNOLOGIES, INC.
Registrant
Date: November 17, 2003 By: /s/ Charles T. Jensen
----------------------------------------------------
Charles T. Jensen, President, Acting Chief Executive
Officer, Chief Operating Officer, and Director
Date: November 17, 2003 By: /s/ David A. Dodge
----------------------------------------------------
David A. Dodge, Vice President,
Chief Financial Officer, and Controller
25