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 June 30, 2005
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 July 27, 2005, there were 455,669,128 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 (Unaudited)
(In Thousands, Except Share Data)
June 30,
2005
ASSETS
Current assets:
Cash and cash equivalents $ 7,075
Trade accounts receivable, net of allowance for doubtful accounts
of $80 786
Inventories 136
Investment in marketable securities 121
Prepaid expenses and other current assets 288
------------
Total current assets
8,406
Property and equipment, net 179
Leasehold improvements, net 40
Capitalized patents, net 3,542
Micro paint chemical formulations and proprietary process, net 1,540
Goodwill 1,099
Other Intangible assets, net 191
Investment in IPoint-media, Ltd. 1,000
Cash surrender value of life insurance policy 719
Other long-term assets 277
------------
Total assets $ 16,993
============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,588
Amounts payable under settlement agreements 78
Liabilities of discontinued business unit 676
Sales taxes payable 55
Accrued expenses 1,675
Deferred revenues and other 453
Notes payable 7,299
------------
Total current liabilities
11,824
------------
Shareholders' equity:
Preferred stock, $0.01 par value, 25,000,000 shares authorized, none
issued
and outstanding --
Common stock, $0.01 par value, 1,000,000,000 shares authorized,
473,949,163 shares issued and 453,984,483 outstanding 4,540
Additional paid-in capital 102,009
Deferred stock-based compensation (269)
Deferred equity financing costs (13,256)
Accumulated deficit (86,896)
Accumulated other comprehensive loss (180)
Treasury stock, at cost, 201,230 shares of common stock (779)
------------
Total shareholders' equity 5,169
------------
Total liabilities and shareholders' equity $ 16,993
============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
and Comprehensive Loss (Unaudited)
(In Thousands, Except per Share Data)
Three Months Ended June 30,
--------------------------------
2005 2004
-------------- --------------
NET SALES:
License fees $ 174 $ 88
Resale of software and technology equipment and service fees 103 171
Micro paint repair products and services 261 189
-------------- --------------
Total net sales 538 448
-------------- --------------
COST OF SALES:
License fees 160 81
Resale of software and technology equipment and service fees 53 173
Micro paint repair products and services 237 168
-------------- --------------
Total cost of sales 450 422
-------------- --------------
GROSS PROFIT 88 26
Sales and marketing expenses 1,230 522
General and administrative expenses 862 399
Research and development costs 160 122
-------------- --------------
Loss from operations (2,164) (1,017)
Gain / (loss) on extinguishment of debt 33 (3)
Amortization of debt discount -- (772)
Interest expense, net (169) (39)
-------------- --------------
NET LOSS (2,300) (1,831)
Other comprehensive loss:
Unrealized loss on marketable securities (87) --
Foreign currency translation adjustment (2) 6
-------------- --------------
COMPREHENSIVE LOSS $ (2,389) $ (1,825)
============== ==============
LOSS PER SHARE--BASIC AND DILUTED $ (0.00) $ (0.01)
============== ==============
Weighted average number of common shares--basic and diluted
448,777,048 305,327,410
============== ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
and Comprehensive Loss (Unaudited)
(In Thousands, Except per Share Data)
Six Months Ended June 30,
--------------------------------
2005 2004
-------------- --------------
NET SALES:
License fees $ 338 $ 160
Resale of software and technology equipment and service fees 231 363
Micro paint repair products and services 716 275
-------------- --------------
Total net sales 1,285 798
-------------- --------------
COST OF SALES:
License fees 248 170
Resale of software and technology equipment and service fees 141 333
Micro paint repair products and services 510 225
-------------- --------------
Total cost of sales 899 728
-------------- --------------
GROSS PROFIT 386 70
Sales and marketing expenses 2,025 947
General and administrative expenses 1,561 777
Research and development costs 344 240
-------------- --------------
Loss from operations (3,544) (1,894)
Gain on extinguishment of debt 171 123
Amortization of debt discount -- (2,166)
Interest expense, net (146) (116)
-------------- --------------
NET LOSS (3,519) (4,053)
Other comprehensive loss:
Unrealized loss on marketable securities (129) --
Foreign currency translation adjustment 9 (16)
-------------- --------------
COMPREHENSIVE LOSS $ (3,639) $ (4,069)
============== ==============
LOSS PER SHARE--BASIC AND DILUTED $ (0.01) $ (0.01)
============== ==============
Weighted average number of common shares--basic and diluted
443,301,430 287,733,421
============== ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
Six Months Ended
June 30,
----------------------------
2005 2004
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,519) $ (4,053)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount on note payable -- 2,166
Depreciation and amortization 354 263
Stock issued to reacquire rights under a contract -- 24
Fair value of expense portion of stock-based
compensation granted for professional services 514 381
Interest expense allocated to debt -- 3
Decrease in value of life insurance policies 9 11
Decrease of fair value of repriced options -- (243)
Changes in operating assets and liabilities
Trade accounts receivable, net (504) (39)
Inventory (21) (7)
Other current assets 65 64
Accounts payable, amounts due under financing agreements, liabilities in excess
of assets of discontinued business unit, accrued expenses and stock liability (292) (919)
Deferred revenue other current liabilities (61) 88
------------ ------------
Net cash used in operating activities (3,455) (2,261)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in iPoint-media (500) --
Capitalization of software development and purchased intangible assets (1,549) (74)
Acquisition of property and equipment (162) (81)
------------ ------------
Net cash used in investing activities (2,211) (155)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance costs of $105 in 2005
and $391 in 2004 4,302 3,675
Net proceeds from exercise of stock options and warrants 701 581
Borrowings under notes payable and long-term debt 9,932 5,000
Repayments on notes payable and long-term debt (3,837) (4,168)
Cash commitment fee for $100 million Standby Equity Distribution Agreement (1,000) --
Cash paid to acquire CSI International, Inc. (net of cash acquired) -- (2,390)
------------ ------------
Net cash provided by financing activities 10,098 2,698
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 9 (16)
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,441 266
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,634 61
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,075 $ 327
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period $ 47 $ 50
Income taxes paid -- --
Non-cash investing and financing activities:
Reduction in accounts payable and accruals for debt paid in stock -- 190
Fair value of stock issued for services and deferred to future periods 239 585
Fair value of shares issued to acquire CSI Int'l (net of costs of registration) -- 695
Change in net assets resulting from acquisition of CSI (net of cash acquired) -- 3,090
Gain on extinguishment of debt 138 123
Direct costs associated with Standby Equity Distribution Agreement and Equity Line
of Credit 1,204 965
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-KSB for the fiscal year ended December 31, 2004. 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 June 30,
2005, the results of operations for the three-month and six-month periods ended
June 30, 2005 and 2004, and cash flows for the six-month periods ended June 30,
2005 and 2004. The results of operations for the three-month and six-month
periods ended June 30, 2005 and 2004 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.
Going Concern
The accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the
United States of America, which contemplate continuation of the Company as a
going concern. However, the Company has reported net losses of $2,300,000 and
$1,831,000 for the three months ended June 30, 2005 and 2004, respectively, and
net losses of $3,519,000 and $4,053,000 for the six months ended June 30, 2005
and 2004, respectively, and has an accumulated deficit of $86,896,000 as of June
30, 2005. In addition, the Company had working capital deficit of $3,418,000 as
of June 30, 2005.
If the Company's financial resources are insufficient the Company may
require additional financing in order to execute its operating plan and continue
as a going concern. The Company cannot predict whether this additional financing
will be in the form of equity, debt, or another form. The Company may not be
able to obtain the necessary additional capital on a timely basis, on acceptable
terms, or at all. In any of these events, the Company may be unable to implement
its current plans for expansion, repay its debt obligations as they become due
or respond to competitive pressures, any of which circumstances would have a
material adverse effect on its business, prospects, financial condition and
results of operations. The financial statements do not include any adjustments
relating to the recoverability and reclassification of recorded asset amounts or
amounts and reclassification of liabilities that might be necessary, should the
Company be unable to continue as a going concern.
Should these financing sources fail to materialize, management would seek
alternate funding sources through sale of common and/or preferred stock.
Management's plan is to secure adequate funding to bridge the profitability from
the Company's PaperClick business, intellectual property portfolio and Micro
Paint Repair business.
Nature of Business Operations
NeoMedia is structured as three distinct business units: NeoMedia
Internet Software Service (NISS), NeoMedia Consulting and Integration Services
(NCIS), and NeoMedia Micro Paint Repair (NMPR).
6
NISS (physical world-to-Internet offerings) is the core business and is
based in the United States, with development and operating facilities in Fort
Myers, Florida. NISS develops and supports NeoMedia's physical world to Internet
core technology, including the linking "switch" and application platforms. NISS
also manages NeoMedia's 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 NeoMedia 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 NeoMedia's products and services. These operations are based in Lisle,
Illinois.
NMPR (micro paint repair offerings) is the business unit encompassing the
CSI International chemical line acquired during 2004. NMPR is attempting to
commercialize its unique micro-paint repair solution. The Company completed its
acquisition of CSI on February 6, 2004.
In addition, on December 21, 2004, NeoMedia signed a definitive Agreement
and Plan of Merger to acquire and merge with BSD Software, Inc. BSD owns 90% of
the outstanding shares of Triton Global Business Services, Inc., a provider of
live and automated operator calling services and e-business support, including
billing, clearinghouse and information management services, to companies in the
telecommunications industry. On April 4, 2005 NeoMedia and BSD filed a joint
registration/information statement with the United States Securities and
Exchange Commission (the "SEC"). NeoMedia expects to complete the merger when
the SEC review is complete, the registration is declared effective and the
information statement is mailed to BSD's shareholders of record. At this time,
the exchange rate will be determined and closing will be held. Closing is
subject to the terms and conditions outlined in the merger agreement, as well as
regulatory approval of the merger and registration/information statement by the
SEC. Upon the anticipated closing of the merger, NeoMedia expects to integrate a
new business unit called "NeoMedia Telecom Services" encompassing Triton's
business.
Reclassifications
Certain amounts in the 2004 condensed consolidated financial statements
have been reclassified to conform to the 2005 presentation.
Standby Equity Distribution Agreements 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
was $150,000 with a minimum of seven days between purchases. The shares were
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 paid 5%
of the gross proceeds of each purchase to Cornell.
On October 27, 2003, the Company and Cornell entered into a $20 million
Standby Equity Distribution Agreement (the "2003 SEDA") 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 over a two-year period. As a commitment
fee for Cornell to enter into the 2003 SEDA, the Company issued 10 million
warrants to Cornell with an exercise price of $0.05 per share, and a term of
five years. Cornell exercised the warrants in January 2004, resulting in
$500,000 cash receipts to the Company. In November 2003, the Company registered
200 million shares underlying this $20 million 2003 SEDA. In April 2004, the
Company registered 40 million shares of common stock underlying warrants granted
to Cornell in connection with a promissory note issued by the Company to Cornell
(see "Notes Payable to Cornell" below).
7
On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity
Distribution Agreement (the "2005 SEDA") under which Cornell agreed to purchase
up to $100 million of NeoMedia's common stock over a two-year period, with the
timing and amount of the purchase at NeoMedia's discretion. The maximum amount
of each purchase would be $2,000,000 with a minimum of five business days
between advances. The shares would be valued at 98% of the lowest closing bid
price during the five-day period following the delivery of a notice of purchase
by NeoMedia, and NeoMedia would pay 5% of the gross proceeds of each purchase to
Cornell. As a commitment fee for Cornell to enter into the 2005 SEDA, NeoMedia
issued 50 million warrants to Cornell with an exercise price of $0.20 per share,
and a term of three years, and also paid a cash commitment fee of $1 million.
NeoMedia also issued 4 million warrants with an exercise price of $0.227 to a
consultant as a fee for negotiating and structuring the 2005 SEDA. NeoMedia has
recorded the $12.3 million fair value of the warrants to "Deferred equity
financing costs" and, upon effectiveness of the 2005 SEDA, will amortize this
amount to additional paid-in capital straight-line over the two-year life of the
2005 SEDA. NeoMedia expects to file a registration statement with the SEC during
2005 to register the shares underlying the $100 million 2005 SEDA. The new SEDA
would become available at the time the SEC declares effective a registration
statement containing such shares.
During the six months ended June 30, 2005, the Company sold 14,257,025
shares of its common stock to Cornell under the 2003 SEDA. The following table
summarizes funding received from Cornell during the six-month periods ended June
30, 2005 and 2004:
2005 2004
-------------------------------------------- --------------------------------------------
Six Six
Months Months
First Second Ended First Second Ended
Quarter Quarter June 30 Quarter Quarter June 30
------------ ------------ ------------ ------------ ------------ ------------
Number of shares sold to Cornell 6,998,931 7,258,094 14,257,025 21,282,203 29,819,873 51,102,076
Gross Proceeds from sale of
shares $ 1,709,000 $ 3,219,000 $ 4,928,000 $ 2,332,000 $ 2,308,000 $ 4,640,000
Less: discounts and fees* (204,000) (489,000) (693,000) (500,000) (465,000) (965,000)
------------ ------------ ------------ ------------ ------------ ------------
Net Proceeds from sale of
shares $ 1,505,000 $ 2,730,000 $ 4,235,000 $ 1,832,000 $ 1,843,000 $ 3,675,000
------------ ------------ ------------ ------------ ------------ ------------
* Pursuant to the terms of the 2003 SEDA , stock is valued at 98% of the
lowest closing bid price during the week it is sold
Promissory Notes Payable to Cornell
On March 30, 2005, NeoMedia borrowed from Cornell the principal amount
of $10,000,000 before discounts and fees in the form of a secured promissory
note. Cornell withheld structuring and escrow fees of $68,000 related to the
note. The note was originally scheduled to be repaid at a rate of $1,120,000 per
month commencing May 1, 2005, which was subsequently changed to $840,000 per
month, continuing until principal and interest are paid in full. The note
accrues interest at a rate of 8% per annum on any unpaid principal. NeoMedia has
the option to prepay any remaining principal of the note in cash without
penalty. In connection with the note, NeoMedia and Cornell entered into a
Security Agreement under which the note is secured by all of NeoMedia's assets
other than its patents and patent applications. NeoMedia also escrowed
25,000,000 shares of its common restricted stock as security for the note. As of
June 30, 2005, NeoMedia had made payments of $2,730,000 against the principal,
reducing the principal balance to $7,270,000.
On April 8, 2004, NeoMedia borrowed from Cornell the gross amount of
$1,000,000 before discounts and fees. Cornell withheld a $76,000 retention fee
related to the issuance of stock to pay off the debt in the future. NeoMedia
paid this note in full during 2004.
8
On January 20, 2004, NeoMedia borrowed from Cornell the gross amount of
$4,000,000 before discounts and fees. Of the $4,000,000 funding, $2,500,000 was
used to fund the acquisition of CSI International, Inc. during February 2004.
Cornell withheld a $315,000 retention fee related to the issuance of stock to
pay off the debt in the future. NeoMedia paid this note in full during 2004.
In connection with the January 20, 2004 note, NeoMedia also granted to
Cornell 40,000,000 warrants to purchase shares of NeoMedia stock with an
exercise price of $0.05 per share during January 2004. In April 2004, NeoMedia
registered 40 million shares underlying the warrants granted to Cornell (and
subsequently transferred by Cornell to Stone Street Asset Management LLC). The
fair value of the warrants using the Black-Scholes pricing model was $5,000,000.
In accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants", NeoMedia compared the relative fair values of the
warrants and the face value of the notes, and allocated a value of $2.5 million
to the warrants. Of the $2.5 million, $2 million was allocated to the $4 million
note issued in January 2004 and $0.5 million against the $1 million note in
April 2004. The $2.5 million was recorded as a discount against the carrying
value of the note. The $2.5 million that was allocated to the notes was
considered a discount on the promissory notes, and therefore was amortized over
the life of the notes using the effective interest method, in accordance with
Staff Accounting Bulletin No. 77, Topic 2.A.6, "Debt Issue Costs" of SFAS 141,
"Business Combinations". Accordingly, NeoMedia recorded an amortization of
discount of $2,500,000 related to the warrants during the year ended December31,
2004. Stone Street Asset Management LLC exercised the warrants during November
2004, resulting in net funds to NeoMedia of $2 million.
Other Events
During February 2004, the Company entered into a Consulting Agreement with
an unrelated third party, under which the consultant will provide sales and
marketing services relating to the Company's Micro Paint business unit over a
period of three years. As consideration for the contract, the Company issued
6,055,556 options with an exercise price of $0.01 to the consultant. The fair
value of the options at the time of issuance was $550,000. The Company is
recognizing the fair value as sales and marketing expense over the term of the
contract (three years). The contract was terminated during the second quarter of
2005, accordingly, the Company recognized professional services expense of
$267,000 to write off the remaining deferred stock compensation. The Company
recognized $368,000 and $81,000 in expense relating the contract during the six
month periods ended June 30, 2005 and 2004, respectively.
On February 25, 2005, NeoMedia invested $250,000 in exchange for
8,333,333 shares of Pickups Plus, Inc. ("PUPS")(OTCBB:PUPS) restricted common
stock. PUPS is a retail operator and franchiser of retail automotive parts and
accessories stores catering to the light truck market, and also provides new
vehicle preparation, environmental protection packages, detailing and
reconditioning products and services. The 8,333,333 shares represent
approximately 5.8% of PUPS outstanding shares (based on 125,249,954 PUPS shares
outstanding as of September 30, 2004). Because the investment represents less
than 20% of PUPS outstanding shares, NeoMedia has recorded the investment at
cost and analyze it for impairment going forward. As of June 30, 2005, NeoMedia
has recorded an impairment of $129,000 due to the decrease in the quoted market
price.
On February 25, 2005, NeoMedia signed two non-binding Letters of Intent
to acquire up to 100% of Automotive Preservation, Inc. ("AP"), a distributor of
automotive paint and accessory products, from AP's parent company, PUPS. The
first Letter of Intent calls for NeoMedia to initially acquire 30% of AP for
$1,600,000, to be paid $600,000 in cash, $554,000 in shares of NeoMedia
restricted common stock, and $446,000 through the assumption of AP debt by
NeoMedia. Under the second Letter of Intent, upon completion of the acquisition
of the initial 30% of AP by NeoMedia, NeoMedia would have the option to acquire
9
an additional 30% of AP for $1,650,000, payable in shares of NeoMedia restricted
common stock. The second Letter of Intenr also gives NeoMedia the option to
purchase the final 40% of AP for either: (i) $2,200,000, payable in shares of
NeoMedia restricted common stock, if NeoMedia exercises this right within 12
months of acquiring the second 30% of AP, or (ii) a price equivalent to AP's
previous quarter EBITDA multiplied by 8, payable in shares of NeoMedia
restricted common stock. Both Letter of Intent are non-binding and subject to
due diligence by NeoMedia and AP.
On April 12, 2005, NeoMedia acquired four search-oriented patents
issued in the U.S. and pending in Europe and Japan from LoyaltyPoint Inc. for
$1.5 million cash and 10% royalties on all future sales for a period of ten
years. The first patent (U.S. 6,430,554 B1) covers technology that uses
uniquely-coded objects, such as consumer goods to automatically generate an
online search for information related to those objects or goods from a computer,
PDA, mobile phone or other device. The second patent (U.S. 6,651,053 B1) is an
extension of the first, covering additional mechanisms for performing such
searches using mobile devices. The third patent (U.S. 6,675,165 B1) covers uses
of location-based technology to deliver content that is based both on a
particular advertisement and the geographic location in which the advertisement
is located. The fourth patent (U.S. 6,766,363 B1) covers techniques for
providing information to end users based on objects, goods or other items
depicted in external media, such as video, audio, film or printed matter.
On May 2, 2005, NeoMedia announced that it had signed a Letter of
Intent with Jinche Yingang Automobile Co. of Beijing, China ("Jinche"), under
which Jinche will act as a distributor of NeoMedia's micro paint repair products
in China. Jinche is a Beijing PRC-registered company specializing in automobile
sales, financing, insurance and repair.
On May 13, 2005, the European Patent Office (EPO) issued a Notice of
Allowance based on proceedings conducted during April 2005 in The Hague.
Recognition by the EPO extends the patents for NeoMedia's core technology - the
use of bar cods and other unique identifiers to automatically link to content on
the Internet - to Austria, Belgium, France, Germany, Liechtenstein, Luxembourg,
the Netherlands, Sweden, Switzerland and the United Kingdom.
On June 20, 2005, NeoMedia announced that it has signed a Letter of
Intent with WI-THO AS of Oslo, Norway, where WI-THO AS will become the exclusive
master distributor of NeoMedia's micro paint repair products, systems and
licenses to automotive service facilities throughout Demark, Sweden and Norway.
On June 29, 2005, NeoMedia announced that it had reached an
out-of-court agreement with Virgin Entertainment Group, Inc. whom it sued for
patent infringement. In the agreement, Virgin agreed to purchase a license of
NeoMedia's PaperClick(R) technology platform through 2006.
Investment in Marketable Securities
On February 25, 2005, NeoMedia invested $250,000 in exchange for
8,333,333 shares, or approximately 5.8% of Pickups Plus, Inc. ("PUPS")
restricted common stock. PUPS is a retail operator and franchiser of retail
automotive parts and accessories stores catering to the light truck market, and
also provides new vehicle preparation, environmental protection packages,
detailing and reconditioning products and services. In accordance with
Statements of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the investment in PUPS is being
recorded as available-for-sale securities and reported at fair value.
Accordingly, unrealized gains and losses on the equity securities are reflected
in the condensed consolidated statement of operations and comprehensive income
(loss).
10
The investments in marketable securities are summarized as follows:
As of June 30, 2005
-----------------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Holding Gain Holding Losses Value
-----------------------------------------------------------------------------------------
Available-for-sale $250,000 $ - ($ 129,000) $ 121,000
Financial Instruments
The carrying amount of the Company's cash equivalents, accounts
receivable, prepaid expenses, other current assets, cash surrender value of life
insurance policy, accounts payable and accrued expenses, accrued salaries and
benefits, and payable to merchants approximates their estimated fair values due
to the short-term maturities of those financial instruments.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
It is not practicable to estimate the fair value of the Company's 17%
investment in the common stock of i-Point Media Ltd. and its investments of
250,000 shares of preferred stock of Intactis Software, Inc., because of the
lack of quoted market prices and the inability to estimate fair value without
incurring excessive costs. However, management believes that the total carrying
amount of $1,250,000 in the investments in iPoint Media Ltd. and Intactis
Software, Inc. at June 30, 2005 was not impaired.
For all available-for-sale investment securities, the carrying values
represents fair value of the securities and unrealized gain (losses) that are
other than temporary are recognized as other comprehensive income (loss). The
Company does not hold these securities for speculative or trading purposes.
Pro-forma Information Required by SFAS 148
At June 30, 2005, the Company has five stock-based employee compensation
plans (the 2003 Stock Incentive Plan, 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 Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net Loss, as reported $ (2,300) $ (1,831) $ (3,519) $ (4,053)
Compensation recognized under APB 25 -- 5 -- 9
Compensation recognized under SFAS 123 (1,051) (368) (1,404) (711)
------------ ------------ ------------ ------------
Pro-forma net loss $ (3,351) $ (2,194) $ (4,923) $ (4,755)
============ ============ ============ ============
Net Loss per share:
Basic and diluted - as reported $ (0.00) $ (0.01) $ (0.01) $ (0.01)
============ ============ ============ ============
Basic and diluted - pro-forma $ (0.00) $ (0.01) $ (0.01) $ (0.02)
============ ============ ============ ============
11
Subsequent Events
On July 8, 2005, NeoMedia reached an out-of-court agreement with
AirClic, Inc. whom it sued for patent infringement. In the agreement, AirClic
agreed to compensate NeoMedia for past and future activities. AirClic did not
receive a license to use NeoMedia's patented PaperClick(R) technology as part of
the settlement.
On July 12, 2005, NeoMedia entered into a consulting agreement with
Silicon Space, Inc., under which Silicon Space is developing NeoMedia's
PaperClick(R) WordRegistry interface. Silicon Space replaces Science
Applications International, Inc., who NeoMedia engaged in October 2004 on a
contingency basis to build and host the interface. NeoMedia intends to host the
WordRegistry internally upon its completion.
On July 27, 2005, NeoMedia signed a non-binding Letter of Intent to
acquire Mobot(TM), Inc. ("Mobot"), of Lexington, Massachusetts. Mobot develops
and commercializes mobile visual search technologies.
The Letter of Intent calls for NeoMedia to acquire all of the outstanding
shares of Mobot in exchange for $3,500,000 cash and $6,500,000 in shares of
NeoMedia common stock. The LOI is subject to due diligence by both parties.
On July 28, 2005, NeoMedia loaned Mobot the principal amount of
$600,000 in the form of an unsecured promissory note. The Note accrues interest
at a rate of 6% per annum. The Note will be forgiven upon signing of a
definitive purchase agreement for the acquisition of all of the outstanding
shares of Mobot by NeoMedia, as contemplated by the Letter of Intent. In the
event the acquisition is not consummated, the Note will become due 90 days after
written notice of cancellation of the Letter of Intent. In the event the Letter
of Intent is terminated and the Note is note repaid within 90 days of such
cancellation, the note will convert into shares of Mobot common stock with a
value equal to the unpaid principal and accrued interest on the Note.
In the event a definitive purchase agreement is not executed by the
parties, or the Letter of Intent is not terminated, by September 26, 2005, Mobot
has the right to demand an additional $200,000 loan from NeoMedia. In the event
a definitive purchase agreement is not executed by the parties, or the Letter of
Intent is not terminated, by October 26, 2005, Mobot has the right to demand an
additional $200,000 loan from NeoMedia. Both of the additional loans would be in
the form of a unsecured promissory notes subject to the same terms as the Note.
Segment Reporting
As of June 30, 2005 NeoMedia was structured and evaluated by its Board of
Directors and Management as three 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 NeoMedia's linking "switch" and 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. The operations are based in Lisle, Illinois.
NeoMedia Micro Paint Repair (NMPR) is the business unit encompassing the
Company's micro paint repair products and services acquired in 2004.
12
The Company's reportable segments are strategic business units that offer
different technology and marketing strategies. NCIS operates principally in the
United States. NISS operates principally in the United States and Europe. NMPR
is headquartered in Ft. Myers, Florida, and currently sells into Canada, the
United States, Australia, and New Zealand, and has entered into letters of
intent to begin distribution in China and Scandinavia.
Consolidated net sales, net operating losses by geographic area for the
three-month and six-month periods ended June 30, 2005 and 2004, and long-lived
assets by geographic area as of June 30, 2005, were as follows:
(in thousands)
------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net Sales:
United States $ 350 $ 259 $ 960 $ 523
Canada 188 189 325 275
------------ ------------ ------------ ------------
$ 538 $ 448 $ 1,285 $ 798
------------ ------------ ------------ ------------
Net Loss:
United States $ (1,882) $ (1,435) $ (2,882) $ (3,490)
Canada (418) (396) (637) (563)
------------ ------------ ------------ ------------
$ (2,300) $ (1,831) $ (3,519) $ (4,053)
------------ ------------ ------------ ------------
Long-Lived Assets
United States $ 5,706
Canada 2,881
------------
$ 8,587
------------
13
Consolidated net sales, net operating losses for the three-month and
six-month periods ended June 30, 2005 and 2004, and identifiable assets as of
June 30, 2005, were as follows:
(in thousands)
------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net Sales:
NeoMedia Consulting & Integration Services $ 124 $ 230 $ 396 $ 481
NeoMedia Internet Switching Service 153 29 173 42
NeoMedia Micro Paint Repair 261 189 716 275
------------ ------------ ------------ ------------
$ 538 $ 448 $ 1,285 $ 798
------------ ------------ ------------ ------------
Net Loss:
NeoMedia Consulting & Integration Services $ (874) $ (227) $ (1,388) $ (483)
NeoMedia Internet Switching Service (778) (436) (1,223) (841)
NeoMedia Micro Paint Repair (648) (396) (908) (563)
Amortization of Cornell Debt Discount -- (772) -- (2,166)
------------ ------------ ------------ ------------
$ (2,300) $ (1,831) $ (3,519) $ (4,053)
------------ ------------ ------------ ------------
Identifiable Assets
NeoMedia Consulting & Integration Services $ 453
NeoMedia Internet Switching Service 3,700
NeoMedia Micro Paint Repair 3,482
Corporate 9,358
------------
$ 16,993
------------
Effect Of Recently Issued Accounting Pronouncements
In March 2005, the staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin No. 107 ("SAB 107"). The
interpretations in SAB 107 express views of the staff regarding the interaction
between Statement of Financial Accounting Standards Statement No. 123 (revised
2004), "Share-Based Payment" ("Statement 123(R)") and certain SEC rules and
regulations and provide the staff's views regarding the valuation of share-based
payment arrangements for public companies. In particular SAB 107 provides
guidance related to share-based payment transactions with nonemployees, the
transition from public entity status, valuation methods (including assumptions
such as expected volatility and expected term), the accounting for certain
redeemable financial instruments issued under share-based payment arrangements,
the classification of compensation expense, non-GAAP financial measures,
first-time adoption of Statement 123(R) in an interim period, capitalization of
compensation cost related to share-based payment arrangements, the accounting
for income tax effects of share-based payment arrangements upon adoption of
Statement 123(R), the modification of employee share options prior to adoption
of Statement 123(R) and disclosures in Management's Discussion and Analysis
subsequent to adoption of Statement 123(R).
In May 2005, the FASB issued SFAS No.154, "Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 "
("SFAS No. 154"). SFAS No. 154 requires retrospective application to prior
periods' financial statements of a voluntary change in accounting principle
unless it is impracticable. APB Opinion No. 20 "Accounting Changes," previously
required that most voluntary changes in accounting principle be recognized by
including in net income of the period of the change the cumulative effect of
changing to the new accounting principle. SFAS No. 154 is effective for
14
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005; however earlier adoption is permitted for accounting
changes and corrections of errors made in fiscal years beginning after the date
of issuance of SFAS No 154. The Company is in the process of evaluating whether
the adoption of SFAS 154 will have a significant impact on the Company's overall
results of operations or financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
PaperClick Developments.
Over the past several years, NeoMedia has focused on the
commercialization of its Internet Switching Systems ("NISS") business unit. 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-Internet 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 its end-users, competitive advantage for their
business partners and return-on-investment for their investors.
On September 8, 2003, NeoMedia announced its PaperClick(R) for Camera
Cell PhonesTM 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(R) 3650 model. During the second
quarter of 2004, NeoMedia introduced its PaperClick(R) Mobile Go-WindowTM, a
horizontal bar on the screen of a wireless device where users can enter numeric
strings from UPC or other bar codes to link directly to targeted online
information via patented PaperClick technology and software.
During 2003, NeoMedia unveiled the go-to-market strategy for its
PaperClick(R) suite of products. Over the past several months, NeoMedia has
signed contracts with several key partners outlined in the strategy, including
agents and resellers Big Gig Strategies (United Kingdom), SRP Consulting (United
States), AURA Digital Communications (Australia), Relyco (United States), E&I
Marketing (Taiwan), Deusto Sistemas (Spain), Nextcode Corporation (United
States), Jorge Christen and Partners LLP (Mexico), and IT-Global (United
States). NeoMedia has also teamed with European advertising agency 12Snap to
provide click management services for PaperClick(R) products in Europe. In June
2004, NeoMedia entered into a collaborative agreement with Intel Corporation for
NeoMedia's PaperClick(R) mobile connectivity platform to operate on the recently
introduced Intel PXA27x processor family-based cellular phones.
In addition, during June 2004 NeoMedia signed a teaming agreement with
IPSO, an integrator of proprietary solutions developed by its provider companies
for financial institution members and a leader in meeting Check 21 standards.
Enacted by Congress and signed into law last year, Check 21 requires banks to
begin accepting substitute checks (called "IRDs" for image replacement
documents) in lieu of original checks as of October 29, 2004. NeoMedia and IPSO
could partner on proposals and presentations surrounding Check 21. On March 10,
2005, NeoMedia and Intactis Software, Inc., (IPSO's successor), entered into a
business development agreement under which the two companies will develop a
database lookup system for validating codes printed on negotiable instruments
(checks). In addition, NeoMedia invested $250,000 in exchange for 250,000 shares
of Intactis non-voting convertible preferred stock. In connection with the
investment, NeoMedia received a warrant to purchase up to an additional 50,000
shares of Intactis. Intactis also placed an order for an initial 100 copies of
NeoMedia's PaperClick Print Encoder software.
During January 2005, NeoMedia signed a Letter of Intent to enter into a
licensing agreement with Shelron Group, Inc. for PaperClick(R)'s family of
mobile marketing products to be used with Shelron's ActivShopper comparison
shopping toolbar. The agreement will give Shelron Group, Inc. the worldwide
rights to use PaperClick(R) on the new ActivShopper Mobile Edition for cell
15
phones and PDA's. ActivShopper is a free software download designed to
automatically scan, locate and compare prices for items a consumer selects at an
e-commerce site.
On March 18, 2005, NeoMedia and Foote Cone & Belding ("FCB"), a
division of FCB Worldwide LLC and part of the Interpublic Group of Companies,
Inc. (NYSE: IPG), entered into a Co-Marketing Agreement surrounding NeoMedia's
PaperClick(R) technology platform. The agreement calls for FCB to work with
NeoMedia to create and develop opportunities and programs utilizing
PaperClick(R), to integrate PaperClick into marketing campaigns for new and
existing clients, and to facilitate the introduction of NeoMedia and PaperClick
in the mobile telecommunications industry. NeoMedia will provide technical and
sales support for presentations and marketing programs co-developed for FCB
clients, work with FCB to explore and create marketing opportunities and
solutions, and introduce FCB to its business customers, including brand
managers. FCB and NeoMedia will team for co-marketing and sales efforts in the
U.S., as well as in Europe, the Middle East, Africa and Latin America.
Patent Developments
On April 12, 2005, NeoMedia acquired four search-oriented patents
issued in the U.S. and pending in Europe and Japan from LoyaltyPoint Inc. for
$1.5 million cash and 10% royalties on all future sales for a period of ten
years. The first patent (U.S. 6,430,554 B1) covers technology that uses
uniquely-coded objects, such as consumer goods to automatically generate an
online search for information related to those objects or goods from a computer,
PDA, mobile phone or other device. The second patent (U.S. 6,651,053 B1) is an
extension of the first, covering additional mechanisms for performing such
searches using mobile devices. The third patent (U.S. 6,675,165 B1) covers uses
of location-based technology to deliver content that is based both on a
particular advertisement and the geographic location in which the advertisement
is located. The fourth patent (U.S. 6,766,363 B1) covers techniques for
providing information to end users based on objects, goods or other items
depicted in external media, such as video, audio, film or printed matter.
On June 29, 2005, NeoMedia announced that it had reached an
out-of-court agreement with Virgin Entertainment Group, Inc. whom it sued for
patent infringement. In the agreement, Virgin agreed to purchase a license of
NeoMedia's PaperClick(R) technology platform through 2016.
On July 8, 2005, NeoMedia reached an out-of-court agreement with
AirClic, Inc. whom it sued for patent infringement. In the agreement, AirClic
agreed to compensate NeoMedia for past and future activities. AirClic did not
receive a license to use NeoMedia's patented PaperClick(R) technology as part of
the settlement.
NMPR (Micro Paint Repair) Business Unit Developments.
On February 6, 2004, NeoMedia acquired 100% ownership of CSI
International, Inc., of Calgary, Alberta, Canada, a private technology products
company in the micro paint repair industry. NeoMedia currently has approximately
50 active paint repair end-user system agreements.
On June 1, 2004, NeoMedia announced that it had entered into a
Distribution Agreement with Micro Paint Systems (Australasia) Limited of New
Zealand for exclusive distribution rights to NeoMedia's Micro Paint Repair
products in Australia and New Zealand. The agreement is contingent upon a
minimum purchase of 500 systems over five years in that territory. NeoMedia
received an initial payment on signing of the contract, which included the fee
for four initial systems. During the first quarter of 2005, NeoMedia shipped a
$290,000 order for paints and related materials to Micro Paint Systems
(Australasia) Limited.
On July 16, 2004, NeoMedia announced that its NeoMedia Micro Paint Repair
business unit added five additional licensees as part of a private label
contract with Crackmaster Distributors Ltd., a Canadian auto aftermarket
company.
16
On August 2, 2004, NeoMedia announced that it signed a Distribution
Agreement with Motor Dealer's Association Co-Auto Ltd. ("MDA Co-Auto"), the
largest buying consortium for new car franchised dealers in Western Canada. The
agreement provides exclusive rights for MDA Co-Auto to market NeoMedia's Micro
Paint Repair system to its member dealers. MDA Co-Auto has 1,050 member dealers
in British Columbia, Alberta, Saskatchewan, Manitoba and the Yukon.
On March 29, 2005, NeoMedia's Micro Paint Repair business signed a
National Marketing and Sales Agreement with Restex, Inc., of Dallas, Texas, a
provider of products to automobile dealerships. The agreement calls for Restex
to sell and market NeoMedia's proprietary micro paint repair system to its
customers in the automotive industry.
On May 2, 2005, NeoMedia announced that it had signed a Letter of
Intent with Jinche Yingang Automobile Co. of Beijing, China ("Jinche"), under
which Jinche will act as a distributor of NeoMedia's micro paint repair products
in China. Jinche is a Beijing PRC-registered company specializing in automobile
sales, financing, insurance and repair.
On June 20, 2005, NeoMedia announced that it has signed a Letter of
Intent with WI-THO AS of Oslo, Norway, where WI-THO AS will become the exclusive
master distributor of NeoMedia's micro paint repair products, systems and
licenses to automotive service facilities throughout Demark, Sweden and Norway.
Acquisitions
CSI International, Inc. On February 6, 2004, NeoMedia acquired 100%
ownership of CSI International, Inc., of Calgary, Alberta, Canada, a private
company in the micro paint repair industry. NeoMedia issued 7,000,000 shares of
its common stock, plus $2.5 million cash in exchange for all outstanding shares
of CSI. NeoMedia has centralized the administrative functions in its Fort Myers,
Florida headquarters, and maintains a sales office in Calgary, Alberta, Canada.
BSD Software, Inc. On December 21, 2004, NeoMedia and BSD signed a
definitive Agreement and Plan of Merger. BSD owns 90% of the outstanding shares
of Triton Global Business Services, Inc., a provider of live and automated
operator calling services and e-business support, including billing,
clearinghouse and information management services, to companies in the
telecommunications industry. BSD's shareholders will receive, for each share of
BSD stock owned, NeoMedia stock equivalent to .07 divided by the volume-weighted
average price of NeoMedia stock for the five days prior to the effective time of
the merger. The agreement has been approved by holders of approximately 63% of
BSD's outstanding shares and its Board of Directors. On April 4, 2005 NeoMedia
and BSD filed a Form S-4 registration/information statement with the United
States Securities and Exchange Commission (the "SEC"). NeoMedia expects to
complete the merger when the SEC review is complete, the registration is
declared effective and the information statement is mailed to the BSD's
shareholders of record. At this time, the exchange rate will be determined and
closing will be held. Closing is subject to the terms and conditions outlined in
the Agreement and Plan of Merger, as well as regulatory approval of the merger
and the Form S-4 registration/information statement by the SEC.
Automotive Preservation, Inc. On February 25, 2005, NeoMedia signed two
non-binding letters of intent to acquire up to 100% of Automotive Preservation,
Inc. ("AP"), a distributor of automotive paint and accessory products, from AP's
parent company, Pickups Plus, Inc. The first Letter of Intent calls for NeoMedia
to initially acquire 30% of AP for $1,600,000, to be paid $600,000 in cash,
$554,000 in shares of NeoMedia restricted common stock, and $446,000 through the
assumption of AP debt by NeoMedia. Under the second Letter of Intent, upon
17
completion of the acquisition of the initial 30% of AP by NeoMedia, NeoMedia
would have the option to acquire an additional 30% of AP for $1,650,000, payable
in shares of NeoMedia restricted common stock. The second Letter of Intent also
gives NeoMedia the option to purchase the final 40% of AP for either: (i)
$2,200,000, payable in shares of NeoMedia restricted common stock, if NeoMedia
exercises this right within 12 months of acquiring the second 30% of AP, or (ii)
a price equivalent to AP's previous quarter EBITDA multiplied by 8, payable in
shares of NeoMedia restricted common stock. Both Letters of Intent are
non-binding and subject to due diligence by NeoMedia and AP. NeoMedia is
currently engaged in due diligence relating to both Letters of Intent.
Mobot, Inc. On July 27, 2005, NeoMedia signed a non-binding Letter of
Intent to acquire Mobot, Inc., a pioneer and leader in mobile visual search
technologies. The Letter of Intent calls for NeoMedia to acquire all of the
outstanding shares of Mobot in exchange for $3,500,000 cash and $6,500,000 in
shares of NeoMedia common stock. The Letter of Intent is subject to due
diligence by both parties.
iPoint-Media Ltd.
On September 7, 2004, NeoMedia and iPoint-media Ltd. ("iPoint-media") of
Tel Aviv, Israel, entered into a Business Development Agreement. In exchange for
entering into the agreement, NeoMedia received 7% ownership in iPoint-media,
consisting of 28,492 shares of iPoint-media common stock. In addition to the
agreement, NeoMedia acquired an additional 10% ownership of iPoint-media,
consisting of 40,704 shares of common stock, for $1 million cash.
iPoint-media was founded in April 2001 as a spin-off from Imagine Visual
Dialog LTD, whose shareholders include Israeli-based Nisko group, an Israeli
holding company, Singapore-based Keppel T&T, and marketing and advertising group
WPP. iPoint-media specializes in customer interaction management and is the
world's first developer of IP Video Call Centers for Deutsche Telecom. Muki
Geller, the founder of Imagine Visual Dialog, is the founder, President & CEO of
iPoint-media. iPoint-media is located in Tel Aviv, Israel, with a European
customer support center in The Netherlands. iPoint-media's mission is to become
the video access platform and application engine of choice for service
providers.
On October 26, 2004, NeoMedia announced that it would issue its
first-ever stock dividend with the distribution of common shares of IPoint-media
Ltd. of Tel Aviv as a property dividend. NeoMedia intends to distribute 5% (or
20,435 shares) of iPoint-media's common stock to NeoMedia shareholders of record
as of November 17, 2004. The date of the property dividend payment will be
announced after the SEC declares iPoint-media's registration statement on Form
SB-2 effective. On July 1, 2005, IPoint filed a Form SB-2 registration statement
to register 2,032,200 shares of its common stock, included in which are the
shares NeoMedia intends to distribute.
NeoMedia's 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 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.
Critical Accounting Policies
The SEC 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,
18
NeoMedia's most critical accounting policies include: inventory valuation, which
affects cost of sales and gross margin; and the valuation of intangibles, which
affects amortization and impairment of goodwill and other intangibles. NeoMedia
also has other key accounting policies, such as policies for revenue
recognition, including the deferral of a portion of revenues on sales to
distributors, allowance for doubtful accounts, and stock-based compensation. The
methods, estimates and judgments NeoMedia uses in applying these most critical
accounting policies have a significant impact on the results it reports in its
consolidated 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 number of different generally accepted valuation methods to
estimate the value of intangible assets acquired, NeoMedia 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 NeoMedia has used are
consistent with the plans and estimates that NeoMedia 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 NeoMedia's net operating
results.
Allowance for Doubtful Accounts. NeoMedia maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. Allowance for doubtful accounts is based on
NeoMedia's assessment of the collectibility of specific customer accounts, the
aging of accounts receivable, NeoMedia's history of bad debts, and the general
condition of the industry. If a major customer's credit worthiness deteriorates,
or NeoMedia's customers' actual defaults exceed historical experience,
NeoMedia's estimates could change and impact its reported results.
Inventory. Inventories are stated at lower of cost (using the first-in,
first-out method) or market. NeoMedia continually evaluates the composition of
its inventories assessing slow-moving and ongoing products and maintains a
reserve for slow-moving and obsolete inventory as well as related disposal
costs.
Stock-based Compensation. NeoMedia records stock-based compensation to
outside consultants at fair market value in general and administrative expense.
NeoMedia 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. NeoMedia reports pro forma net loss and loss per share in accordance with
the requirements of SFAS 123 and 148. This disclosure shows net loss and loss
per share as if NeoMedia had accounted for its employee stock options under the
fair value method of those statements. Pro forma information is calculated using
the Black Scholes option pricing model on the date of grant. This option
valuation model requires input of highly subjective assumptions. Because
NeoMedia'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.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
19
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. The Company is currently evaluating the impact of the
adoption of this Statement.
Estimate of Litigation-based Liability. NeoMedia is defendant in certain
litigation in the ordinary course of business (see the section of this
information statement/prospectus entitled "Legal Proceedings"). NeoMedia accrues
liabilities relating to these lawsuits on a case-by-case basis. NeoMedia
generally accrues attorney fees and interest in addition to the liability being
sought. Liabilities are adjusted on a regular basis as new information becomes
available. NeoMedia consults with its attorneys to determine the viability of an
expected outcome. The actual amount paid to settle a case could differ
materially from the amount accrued.
Revenue Recognition. NeoMedia derives revenues from three primary sources:
(1) license revenues and (2) resale of software and technology equipment and
service fee revenues, and (3) sale of its proprietary Micro Paint Repair
solution.
(1) License fees, including Intellectual Property licenses, 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, and Statement of Position
98-9, Modification of SOP 97-2, "Software Revenue Recognition,
With Respect to Certain Transactions.". License revenue is
recognized if persuasive evidence of an agreement exists, delivery
has occurred, pricing is fixed and determinable, and
collectibility is probable.
(2) Revenue for resale of software and technology equipment and
service fee is recognized based on guidance provided in SEC Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition in
Financial Statements," as amended (SAB 104). Software and
technology equipment resale revenue is recognized when all of the
components necessary to run software or hardware have been
shipped. Service revenues including maintenance fees for providing
system updates for software products, user documentation and
technical support 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. NeoMedia 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 doubtful
accounts on a customer-by-customer basis as appropriate.
(3) Revenue for training and certification on NeoMedia's Micro Paint
Repair systems is recognized equally over the term of the
contract, which is currently one year. A portion of the initial
fee paid by the customer is allocated to training costs and
initial products sold with the system, and is recognized upon
completion of training and shipment of the products. Ongoing
product and service revenue is recognized as products are shipped
and services performed.
20
Results Of Operations For The Three Months Ended June 30, 2005 As Compared To
The Three Months Ended June 30, 2004
Net sales. Total net sales for the three months ended June 30, 2005 were
$538,000, which represented an increase of $90,000, or 20%, from $448,000 for
the three months ended June 30, 2004. This increase resulted from revenue
generated by the Company's micro paint repair business unit acquired in February
2004 and licensing fees from the settlement of the Virgin lawsuit. This increase
in micro paint revenue and licensing fees was offset by reduced resales of Sun
Microsystems equipment, software and services. NeoMedia could realize an
increase in license fees over the next 12 months if the Company is successful in
implementing its PaperClick go-to-market strategy and/or its business plan for
its Micro Paint Repair business unit.
License fees. License fees were $174,000 for the three months ended June
30, 2005, compared with $88,000 for the three months ended June 30, 2004, an
increase of $86,000, or 98%. The increase was due primarily to licensing fees
from settlement of the Virgin lawsuit. NeoMedia could realize an increase in
license fees over the next 12 months if the Company is successful in
implementing its PaperClick go-to-market strategy.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $68,000, or 40%,
to $103,000 for the three months ended June 30, 2005, as compared to $171,000
for the three months ended June 30, 2004. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
fewer resources devoted to this product line. NeoMedia intends to continue to
pursue additional resales of equipment, software and services. NeoMedia expects
resales to more closely resemble the results for the three months ended June 30,
2005, rather than the three months ended June 30, 2004.
Micro paint repair products and services. Sales of micro paint repair
products and services were $261,000 for the three months ended June 30, 2005,
compared with $189,000 for the three months ended June 30, 2004 an increase of
$72,000 or 38%. The increase resulted primarily from a larger number of paint
systems sold since June 30, 2004. NeoMedia expects sales of micro paint to more
closely resemble the results for the three months ended June 30, 2005, rather
for the three months ended three months ended June 30, 2004.
Cost of license fees. Cost of license fees was $160,000 for the three
months ended June 30, 2005, a increase of $79,000, or 98%, compared with $81,000
for the three months ended June 30, 2004. The increase resulted from higher
amortization in 2005 due to the acquisition of patents from Loyaltypoint.
Cost of resales of software and technology equipment and service fees. Cost
of resales of software and technology equipment and service fees was $53,000 for
the three months ended June 30, 2005, a decrease of $120,000, or 69%, compared
with $173,000 for the three months ended June 30, 2004. The decrease resulted
from decreased resales in 2005 compared with 2004. Cost of resales as a
percentage of related resales was 51% in 2005, compared to 101% in 2004. This
decrease has a direct coloration to the decrease in revenue. NeoMedia expects
costs of resales to fluctuate with the mix of sales of equipment, software, and
services over the next 12 months.
Cost of micro paint repair products and services. Cost of micro paint
repair products and services was $237,000 for the three months ended June 30,
2005, compared with $168,000 for the three months ended June 30, 2004, an
increase of $69,000 or 41%. The increase was primarily due to of the cost of
sale of products in relation to increased sales. NeoMedia expects cost of micro
paint to more closely resemble the results for the three months ended June 30,
2005, rather for the three months ended June 30, 2004.
Gross Profit. Gross profit was $88,000 for the three months ended June
30, 2005, an increase of $62,000, or 238%, compared with gross profit of $26,000
21
for the three months ended June 30, 2004. This increase was primarily the result
of increased sales of higher-margin micro paint repair products and increased
intellectual property revenue during 2005.
Sales and marketing. Sales and marketing expenses were $1,230,000 for the
three months ended June 30, 2005, compared to $522,000 for the three months
ended June 30, 2004, an increase of $708,000 or 136%. The increase is a result
of the addition of the micro paint business sales force, recognization of
professional services expense due to the cancellation of consulting contract
originally recorded as deferred stock compensation and cost associated with
marketing and promotion of the Company's PaperClick and micro paint repair
products. NeoMedia expects sales and marketing expense to increase over the next
12 months with the continued development and anticipated rollout of the
PaperClick and Micro Paint Repair businesses.
General and administrative. General and administrative expenses increased
by $463,000, or 116%, to $862,000 for the three months ended June 30, 2005,
compared to $399,000 for the three months ended June 30, 2004. The increase
resulted primarily from higher legal and professional fees in 2005 resulting
from pending acquisitions and registration filings. NeoMedia expects general and
administrative expense to increase over the next 12 months with the potential
acquisition of BSD Software.
Research and development. During the three months ended June 30, 2005,
NeoMedia charged to expense $160,000 of research and development costs, an
increase of $38,000 or 31% compared to $122,000 for the three months ended June
30, 2004. The increase is primarily due to the amortization of the micro paint
chemical formulations and proprietary process during 2005, as well as additional
development resources allocated to the PaperClick product line. NeoMedia expects
research and development costs to increase over the next 12 months with the
continued development efforts, and the anticipated rollout of NeoMedia's
PaperClick product suite.
Gain/(loss) on extinguishment of debt. During the three months ended June
30, 2005, NeoMedia recognized a gain on extinguishment of debt of $33,000, an
increase of $36,000 or 1200% compared to a loss of $3,000 during the three
months ended June 30, 2004. These gains resulted from a discount in settlement
of debt and/or the difference between the cash or market value of stock issued
to settle the debt and the carrying value of the debt at the time of settlement.
Amortization of debt discount. During the three months ended June 30, 2004,
NeoMedia recognized an amortization of debt issuance cost of $722,000. This cost
is related to the amortization of the fair value of warrants granted to Cornell
Capital Partners in connection with promissory notes issued to Cornell Capital
Partners by NeoMedia during January 2004. No amortization of debt issuance cost
was recognized during the three months ended June 30, 2005.
Interest (expense) / income. Interest expense consists primarily of
interest accrued on notes payable and past due account balances. Interest income
consists primarily of interest earned on cash equivalent investments. During the
three months ended June 30, 2005, NeoMedia recognized interest expense of
$169,000, an increase of $130,000 or 333% compared to interest expense of
$39,000 during the three months ended June 30, 2004. The change is primarily due
to interest accrued on a $10 million note payable to Cornell Capital Partners in
2005.
Net Loss. The net loss for the three months ended June 30, 2005 was
$2,300,000, which represented increase of $469,000, or 26% from a loss of
$1,831,000 for the three months ended June 30, 2004. The increase resulted
primarily from expenses relating to increased sales and marketing, and general
and administrative expenses relating to the rollout of the Company's micro paint
repair and PaperClick business units and increased professional fees.
22
Results Of Operations For The Six Months Ended June 30, 2005 As Compared To The
Six Months Ended June 30, 2004
Net sales. Total net sales for the six months ended June 30, 2005 were
$1,285,000, which represented an increase of $487,000, or 61%, from $798,000 for
the six months ended June 30, 2004. This increase resulted from revenue
generated by the Company's micro paint repair business unit acquired in February
2004, as well as licensing fees from the settlement of the Virgin lawsuit. This
increase in micro paint revenue and licensing fees was offset by reduced resales
of Sun Microsystems equipment. NeoMedia could realize an increase in license
fees over the next 12 months if the Company is successful in implementing its
PaperClick go-to-market strategy and/or its business plan for its Micro Paint
Repair business unit.
License fees. License fees were $338,000 for the six months ended June 30,
2005, compared with $160,000 for the six months ended June 30, 2004, an increase
of $178,000, or 111%. The increase was due primarily to licensing fees from
settlement of the Virgin lawsuit. NeoMedia could realize an increase in license
fees over the next 12 months if the Company is successful in implementing its
PaperClick go-to-market strategy.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $132,000, or
36%, to $231,000 for the six months ended June 30, 2005, as compared to $363,000
for the six months ended June 30, 2004. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
fewer resources devoted to this product line. NeoMedia intends to continue to
pursue additional resales of equipment, software and services. NeoMedia expects
resales to more closely resemble the results for the six months ended June 30,
2005, rather than the six months ended June 30, 2004.
Micro paint repair products and services. Sales of micro paint repair
products and services were $716,000 for the six months ended June 30, 2005,
compared with $275,000 for the period between Febraury 6, 2004 through June 30,
2004 an increase of $441,000 or 160%. The increase was primarily from a $290,000
sale of products to Micro Paint Repair Australasia, NeoMedia's distributor in
the Australia and New Zealand market, as well as a larger number of paint
systems sold since June 30, 2004. NeoMedia expects sales of micro paint to more
closely resemble the results for the six months ended six months ended June 30,
2005, rather for the six months ended six months ended June 30, 2004.
Cost of license fees. Cost of license fees was $248,000 for the six months
ended June 30, 2005, a increase of $78,000, or 46%, compared with $170,000 for
the six months ended June 30, 2004. The increase resulted from higher
amortization in 2005 due to the acquisition of patents from Loyaltypoint.
Cost of resales of software and technology equipment and service fees. Cost
of resales of software and technology equipment and service fees was $141,000
for the six months ended June 30, 2005, a decrease of $192,000, or 58%, compared
with $333,000 for the six months ended June 30, 2004. The decrease resulted from
decreased resales in 2005 compared with 2004. Cost of resales as a percentage of
related resales was 61% in 2005, compared to 92% in 2004. This decrease is
mainly due to revenue in 2005 resulting from higher-margin maintenance
contracts. NeoMedia expects costs of resales to fluctuate with the mix of sales
of equipment, software, and services over the next 12 months.
Cost of micro paint repair products and services. Cost of micro paint
repair products and services was $510,000 for the six months ended June 30,
2005, compared with $225,000 for the period between February 6, 2004 through
June 30, 2004, an increase of $285,000 or 127%. The increase was primarily due
to of the cost of sale of products to Micro Paint Repair Australasia, NeoMedia's
23
distributor in the Australia and New Zealand market and the cost of sale of
products in relation to increased sales. NeoMedia expects cost of micro paint to
more closely resemble the results for the six months ended June 30, 2005, rather
for the six months ended June 30, 2004.
Gross Profit. Gross profit was $386,000 for the six months ended June 30,
2005, an increase of $316,000, or 451%, compared with gross profit of $70,000
for the six months ended June 30, 2004. This increase was primarily the result
of increased sales of higher-margin licenses and micro paint repair products
during 2005.
Sales and marketing. Sales and marketing expenses were $2,025,000 for the
six months ended June 30, 2005, compared to $947,000 for the six months ended
June 30, 2004, an increase of $1,078,000 or 114%. The increase is a result of
the addition of the micro paint business sales force, recognization of
professional services expense due to the cancellation of consulting contract
originally recorded as deferred stock compensation and cost associated with
marketing and promotion of the Company's PaperClick and micro paint repair
products. NeoMedia expects sales and marketing expense to increase over the next
12 months with the continued development and anticipated rollout of the
PaperClick and Micro Paint Repair business units.
General and administrative. General and administrative expenses increased
by $784,000, or 101%, to $1,561,000 for the six months ended June 30, 2005,
compared to $777,000 for the six months ended June 30, 2004. The increase
resulted primarily from higher legal and professional fees in 2005 resulting
from pending acquisitions and registration filings. NeoMedia expects general and
administrative expense to increase over the next 12 months with the potential
acquisition of BSD Software.
Research and development. During the six months ended June 30, 2005,
NeoMedia charged to expense $344,000 of research and development costs, an
increase of $104,000 or 43% compared to $240,000 for the six months ended June
30, 2004. The increase is primarily due to the amortization of the micro paint
chemical formulations and proprietary process during 2005, as well as additional
development resources allocated to the PaperClick product line. NeoMedia expects
research and development costs to increase over the next 12 months with the
continued development efforts, and the anticipated rollout of NeoMedia's
PaperClick product suite.
Gain on extinguishment of debt. During the six months ended June 30, 2005,
NeoMedia recognized a gain on extinguishment of debt of $171,000, an increase of
$48,000 or 39% compared to a gain of $123,000 during the six months ended June
30, 2004. These gains resulted from a discount in settlement of debt and/or the
difference between the cash or market value of stock issued to settle the debt
and the carrying value of the debt at the time of settlement.
Amortization of debt discount. During the six months ended June 30, 2004,
NeoMedia recognized an amortization of debt issuance cost of $2,166,000. This
cost is related to the amortization of the fair value of warrants granted to
Cornell Capital Partners in connection with promissory notes issued to Cornell
Capital Partners by NeoMedia during January 2004. No amortization of debt
issuance cost was recognized during the six months ended June 30, 2005.
Interest (expense) / income. Interest expense consists primarily of
interest accrued on notes payable and past due account balances. Interest income
consists primarily of interest earned on cash equivalent investments. During the
six months ended June 30, 2005, NeoMedia recognized interest expense of
$146,000, an increase of $30,000 or 26% compared to interest expense of $116,000
during the six months ended June 30, 2004. The change is primarily due to
interest accrued on a $10 million note payable to Cornell Capital Partners in
2005.
Net Loss. The net loss for the six months ended June 30, 2005 was
$3,519,000, which represented decrease of $534,000, or 13% from a loss of
$4,053,000 for the six months ended June 30, 2004. The decrease resulted
primarily from expenses relating to the amortization of debt discount relating
to debt financing through Cornell in 2004, combined with increased gross profit
24
from the Company's micro paint repair business and intellectual property
licenses in 2005. These items were offset by increased sales and marketing, and
general and administrative expenses relating to the rollout of the Company's
micro paint repair and PaperClick business units.
Liquidity and Capital Resources
Net cash used in operating activities was $3,455,000 for the six months
June 30, 2005, compared with $2,261,000 for the six months ended June 30, 2004.
NeoMedia's net cash flow used in investing activities for the six months ended
June 30, 2005 and 2004 was $2,211,000 and $155,000, respectively. Net cash
provided by financing activities for the six months ended June 30, 2005 and 2004
was $10,098,000 and $2,698,000, respectively.
During the six months ended June 30, 2005 and 2004, NeoMedia's net loss
totaled $3,519,000 and $4,053,000, respectively. As of June 30, 2005, NeoMedia
had accumulated losses from operations of $86,896,000, had a working capital
deficit of $3,418,000, and $7,075,000 in cash balances.
The accompanying condensed consolidated financial statements have been
prepared assuming NeoMedia will continue as a going concern. Accordingly, the
consolidated financial statements do not include any adjustments that might
result from NeoMedia's inability to continue as a going concern.
On March 30, 2005, NeoMedia obtained $9.9 million cash from Cornell Capital
Partners in the form of a promissory note with a face value of $10 million. As
of June 30, 2005, NeoMedia had made payments totaling $2.7 million against the
principal of the note.
As of June 30, 2005, NeoMedia had drawn $12.3 million against its current
$20 million 2003 Standby Equity Distribution Agreement with Cornell Capital
Partners, leaving an available balance of $7.7 million. During the three- and
six-month periods ended June 30, 2005, NeoMedia sold approximately 7.3 million
and 14.3 million shares, respectively, to Cornell under the 2003 SEDA. NeoMedia
expects to use proceeds from the 2003 SEDA to repay all or a portion of the $10
million promissory note funded by Cornell. The Company expects to use the cash
proceeds as future working capital and to fund potential acquisitions.
On March 30, 2005, NeoMedia and Cornell Capital Partners entered into a
Standby Equity Distribution Agreement under which Cornell Capital Partners
agreed to purchase up to $100 million of NeoMedia's common stock over a two-year
period, with the timing and amount of the purchase at NeoMedia's discretion. The
maximum amount of each purchase would be $2,000,000 with a minimum of five
business days between advances. NeoMedia expects to file a registration
statement with the SEC during 2005 to register the shares underlying the $100
million 2005 SEDA. The 2005 SEDA would become available at the time the SEC
declares effective a registration statement containing such shares. In addition,
Cornell Capital Partners holds 50 million warrants to purchase shares of
NeoMedia common stock at an exercise price of $0.20 per share. NeoMedia is
currently in the process of registering the shares underlying the warrants. Upon
registration, NeoMedia can force exercise of the warrants, resulting in an
additional $10 million cash to NeoMedia.
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 for such a period, or that actual
revenue will meet management's expectations. 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.
25
ITEM 3. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As of the end of the period
covered by this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's Principal Executive
Officer and Principal Financial Officer of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. The Company's
disclosure controls and procedures are designed to provide a reasonable level of
assurance of achieving the Company's disclosure control objectives. The
Company's Principal Executive Officer and Principal Financial Officer have
concluded that the Company's disclosure controls and procedures are, in fact,
effective at this reasonable assurance level as of the period covered. In
addition, the Company reviewed its internal controls, and there have been no
significant changes in its internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation or from the end of the reporting period to the date of this Form
10-QSB.
Changes in Internal Controls. In connection with the evaluation of the Company's
internal controls during the Company's first two fiscal quarters ended June 30,
2005, the Company's Principal Executive Officer and Principal Financial Officer
have determined that there are no changes to the Company's internal controls
over financial reporting that has materially affected, or is reasonably likely
to materially effect, the Company's internal controls over financial reporting
during the first two fiscal quarters ended June 30, 2005, or subsequent to the
date of their last evaluation, or from the end of the reporting period to the
date of this Form 10-QSB.
26
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the normal
course of business, both as claimant and defendant. While it is not possible to
determine with certainty the outcome of these matters, it is the opinion of
management that the eventual resolution of the following legal actions could
have a material adverse effect on the Company's financial position or operating
results.
AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc.
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. in the Northern
District of Illinois, claiming that each of the parties has manufactured, or has
manufactured for it, and has used, or actively induced others to use, technology
which allows customers to use a built-in UPC bar code scanner to scan individual
items and access information, thereby infringing NeoMedia's patents. The
complaint stated that on information and belief, AirClic, Scanbuy and LScan had
actual and constructive notice of the existence of the patents-in-suit, and,
despite such notice, failed to cease and desist their acts of infringement, and
continue to engage in acts of infringement of the patents-in-suit. On April 15,
2004, the court dismissed the suits against AirClic and Scanbuy for lack of
personal jurisdiction.
NeoMedia voluntarily dismissed the suit against LScan in the Northern
District of Illinois and re-filed the suit on May 26, 2004, in the Eastern
District of Pennsylvania. After LScan failed to answer, NeoMedia filed and
served its motion for default judgment on July 6, 2004.
On April 20, 2004, NeoMedia re-filed its suit against AirClic in
Pennsylvania for patent infringement. On July 8, 2005, NeoMedia and AirClic
settled the case out of court, with AirClic agreeing to compensate NeoMedia for
past and future activities AirClic did not receive a license to use NeoMedia's
patented PaperClick(R) technology as part of the settlement. A Notice of
Dismissal is currently pending with the Court.
On March 29, 2004, Scanbuy filed suit against NeoMedia in the Southern
District of New York alleging that NeoMedia infringed Scanbuy's copyrights,
violated the Lanham Act and committed deceptive trade practices and tortious
interference. Scanbuy filed an amended complaint on June 23, 2004. NeoMedia
filed its answer and affirmative defenses on July 23, 2004. On April 20, 2004,
NeoMedia re-filed its suit against Scanbuy in the Southern District of New York
alleging patent infringement. Scanbuy filed its answer on June 2, 2004. NeoMedia
filed its answer and affirmative defenses on July 23, 2004.
Virgin Entertainment Group
On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore ("Virgin"). The complaint for Patent Infringement and Damages was
filed in the United States District Court for the Northern District of Illinois,
by Baniak Pine & Gannon, NeoMedia's intellectual property law firm. On June 22,
2005, NeoMedia and Virgin settled the case out of court, with Virgin agreeing to
purchase a license to use NeoMedia's patented PaperClick(R) technology platform
through 2016. A Notice of Dismissal is currently pending with the Court.
Other Litigation
On May 2, 2005, three shareholders of BSD Software, Inc. filed a
complaint against BSD and NeoMedia, claiming that the purchase price as outlined
27
in the purchase agreement between NeoMedia and BSD is too low. The plaintiffs
are seeking unspecified damages and injunctive relief against the merger.
NeoMedia has moved to dismiss the complaint as frivolous. The case is still
pending.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a),
(b), (c) AND (d)
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
28
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 April 1, 2005, with respect to
Items 1.01 and 2.03, reporting that it entered into a $100 million Standby
Equity Distribution Agreement with Cornell Capital Partners LP (Cornell), and
also that it had borrowed from Cornell the principal amount of $10,000,000 in
the form of a secured promissory note.
NeoMedia filed a report on Form 8-K on April 13, 2005, with respect to
Item 2.01, reporting that it had acquired four United States Patents and two
patent applications, one each in Europe and Japan from Loyaltypoint, Inc.
NeoMedia filed a report on Form 8-K, on April 22, 2005, with respect to
Item 5.02, reporting that it has named Martin N. Copus as its COO and chief
executive of NeoMedia's PaperClick business.
Neomedia filed a report on Form 8-K, on August 1, 2005, with respect to
Item 8.01 and 1.01, reporting that it had entered into a non-binding Letter of
Intent to acquire Mobot, Inc, and had loaned Mobot $600,000 in the form of an
unsecured promissory note.
29
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: August 11, 2005 By: /s/ Charles T. Jensen
--------------- ------------------------------
Charles T. Jensen, President, Chief
Executive Officer, and Director
Date: August 11, 2005 By: /s/ David A. Dodge
---------------------------
David A. Dodge, Vice President,
Chief Financial Officer and principal
accounting officer
30