-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MWWJoUfa8Nq66OAkpjCroDQXy6h3NuZZqmzCc2p9DYZYgOyAWCuJ0CI7rNNyfBc/ Gtx+CRIsGCDTvfGXXPN+JA== 0001021408-01-509872.txt : 20020410 0001021408-01-509872.hdr.sgml : 20020410 ACCESSION NUMBER: 0001021408-01-509872 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20011113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEOMEDIA TECHNOLOGIES INC CENTRAL INDEX KEY: 0001022701 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 363680347 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-21743 FILM NUMBER: 1783032 BUSINESS ADDRESS: STREET 1: 2201 SECOND ST STE 600 STREET 2: STE 600 CITY: FORT MYERS STATE: FL ZIP: 33901 BUSINESS PHONE: 6303554404 MAIL ADDRESS: STREET 1: 2201 SECOND STREET STREET 2: SUITE 600 CITY: FORT MYERS STATE: FL ZIP: 33901 FORMER COMPANY: FORMER CONFORMED NAME: DEVSYS INC DATE OF NAME CHANGE: 19960911 10-Q/A 1 d10qa.txt FORM 10-Q AMENDMENT U. S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------------- Amendment No. 1 to Form 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR [_] TRANSITION REPORT UNDER 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 600, FORT MYERS, FLORIDA 33901 - -------------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number (Including Area Code) 941-337-3434 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 May 1, 2001, there were 15,263,163 outstanding shares of the issuer's Common Stock. PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31, 2001 2000 -------- -------- (Unaudited) ASSETS Current assets: Cash and cash equivalents ........................................ $ 2,679 $ 4,453 Restricted cash .................................................. 600 750 Trade accounts receivable, net of allowance for doubtful accounts of $548 in 2001 and $484 in 2000 ..................... 1,295 1,870 Digital Convergence receivable ................................... 6,644 7,644 Costs and estimated earnings in excess of billings on uncompleted contracts ......................................... -- 89 Inventories ...................................................... 260 116 Investment in Digital Convergence................................. 1,000 -- Prepaid expenses and other current assets ........................ 1,138 946 -------- -------- Total current assets ....................................... 13,616 15,868 -------- -------- Property and equipment, net ......................................... 1,284 365 Digital Convergence receivable, net of current portion .............. 2,572 10,288 Prepaid - Digital Convergence ....................................... 3,998 4,116 Intangible assets, net .............................................. 11,574 9,043 Other long-term assets .............................................. 915 914 -------- -------- Total assets ............................................... $ 33,959 $ 40,594 ======== ========
2 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ................................................. $ 2,851 $ 2,301 Accrued expenses ................................................. 2,692 2,691 Current portion of long-term debt ................................ 280 137 Sales taxes payable .............................................. 192 261 Billings in excess of costs and estimated earnings on uncompleted contracts ......................................... 15 49 Deferred revenues - Digital Convergence .......................... 772 1,543 Deferred revenues ................................................ 525 449 Other ............................................................ 22 11 -------- -------- Total current liabilities .................................. 7,349 7,442 -------- -------- Long-term debt, net of current portion .............................. 922 539 Long-term deferred revenues - Digital Convergence ................... 6,558 13,503 -------- -------- Total liabilities .......................................... 14,829 21,484 -------- -------- Shareholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding ........................ -- -- Common stock, $.01 par value, 50,000,000 shares authorized, 17,110,893 shares issued and 15,233,163 outstanding in 2001 and 14,460,384 shares issued and outstanding in 2000 ................................ 154 145 Additional paid-in capital ....................................... 61,055 57,619 Accumulated deficit .............................................. (41,300) (37,875) Treasury stock, at cost, 201,230 shares of common stock .......... (779) (779) -------- -------- Total shareholders' equity ................................. 19,130 19,110 -------- -------- Total liabilities and shareholders' equity .............. $ 33,959 $ 40,594 ======== ========
The accompanying notes are an integral part of these condensed consolidated balance sheets. 3 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, ------------------------------- 2001 2000 ------------ ------------ (unaudited) NET SALES: License fees ................................................. $ 109 $ 208 Resale of software and technology equipment and service fees.. 1,429 3,886 ------------ ------------ Total net sales ........................................ 1,538 4,094 ------------ ------------ COST OF SALES: License fees ................................................. 731 216 Resale of software and technology equipment and service fees.. 1,221 3,338 ------------ ------------ Total cost of sales .................................... 1,952 3,554 ------------ ------------ GROSS MARGIN .................................................... (414) 540 Sales and marketing expenses .................................... 962 1,264 General and administrative expenses ............................. 1,743 1,396 Research and development costs .................................. 337 335 ------------ ------------ Loss from operations ............................................ (3,456) (2,455) Interest income, net ............................................ (31) (19) ------------ ------------ NET LOSS ........................................................ $ (3,425) $ (2,436) ============ ============ NET LOSS PER SHARE--BASIC AND DILUTED ........................... $ (0.24) $ (0.19) ============ ============ Weighted average number of common shares--basic and diluted ..... 14,540,380 12,752,000 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 -------- -------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .............................................................................. $ (3,425) $ (2,436) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ...................................................... 848 391 Loss on disposal of property and equipment ......................................... -- 7 Options issued to directors ........................................................ 50 -- Changes in operating assets and liabilities Trade accounts receivable ....................................................... 580 1,777 Prepaid-Digital Convergence ..................................................... 118 Costs and estimates earnings in excess of billings on uncompleted contracts ........................................................ 89 (8) Other current assets ............................................................ (114) 28 Accounts payable and accrued expenses ........................................... (354) (2,234) Billings in excess of costs and estimates earnings on uncompleted contracts ........................................................ (34) (131) Deferred revenue ................................................................ 76 43 Other current liabilities ....................................................... 11 (1) -------- -------- Net cash used in operating activities ........................................ (2,155) (2,564) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capitalization of software development and purchased intangible assets ................ (1,698) (386) Acquisition of property and equipment ................................................. (73) (27) -------- -------- Net cash used in investing activities ........................................ (1,771) (413) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock net of $10 issuance costs in 2001 and $74 in 2000 .................................. 1,535 9,154 Net proceeds from exercise of stock warrants .......................................... 361 2,786 Net proceeds from exercise of stock options ........................................... 139 234 Change in restricted cash ............................................................. 150 -- Repayments on notes payable and long-term debt ........................................ (33) (530) -------- --------
5 Net cash provided by financing activities .................................... 2,152 11,644 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................. (1,774) 8,667 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR .......................................... 4,453 2,460 -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR ................................................ $ 2,679 $ 11,127 ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid during the quarter ................................................... 25 (35) Non-cash activities: Net assets acquired as part of Qode purchase agreement in exchange for common stock and forgiveness of note .......................... 1,800 -- Write-down of Digital Convergence stock receivable against deferred revenue - Digital Convergence ................................ 7,716 --
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 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. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles 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, 2000. 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 March 31, 2001 and December 31, 2000, and the results of operations for the three months ended March 31, 2001 and 2000, and cash flows for the three months ended March 31, 2001 and 2000. The results of operations for the three months ended March 31, 2001 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. The Company has recognized revenue derived from its intellectual property license contract with Digital Convergence (DC) executed in October 2000, based on management's current estimates of total receipts under the first year of the DC contract, ratably over the contract year. PURCHASE OF QODE.COM, INC. On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com, Inc. (Qode), accept for cash. Qode is a development stage company, as defined in Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and Reporting By Development Stage Enterprises". The Company intends to provide manufacturers, retailers, advertisers and users a unique tool for website navigation through the use of imbedded standard bar codes and Uniform Product Codes (UPC). It is the Company's mission to develop, operate, maintain and promote the use of Qode.com technologies to enable any bar code to interface with their technology. In consideration for these assets, NeoMedia issued 1,676,500 shares of the Company's common stock to Qode, valued At $8,298,675, issued 274,699 of the Company's Common Stock to certain debtholders of Qode, valued at $1,359,760, forgave a $440,000 short term note to the Company, and assumed $836,000 of Qode payables. The 1,676,500 shares paid to Qode are to be held in escrow for one year, and are subject to downward adjustment, based upon the achievement of certain performance targets over the period of March 1, 2001 to February 28, 2002, and therefore are not reflected in the accompanying financial statements. As a result of the acquisition, the Company acquired substantially all of Qode's assets, including but not limited to the Qode Universal Commerce Solution, customer lists, licenses, intellectual property and certain contracts. The Company accounted for this purchase using the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16, "Business Combinations". The allocation of the purchase price is considered preliminary because the Company is in the process of valuing the intangibles received. The excess fair market value of the net assets acquired over the purchase price was allocated to reduce proportionately the values assigned to noncurrent assets. The accompanying consolidated statements of operations include the operations of Qode from March 1, 2001, through March 31, 2001. 7 Pro forma results of operations as though the companies had combined at the beginning of the period is as follows: THREE MONTHS ENDED ------------------------------- MARCH 31, 2001 MARCH 31, 2000 -------------- -------------- Revenue $ 1,624 $ 4,094 Net Income (loss) $ (4,873) $(3,970) EPS - basic and diluted $ (0.34) $ (0.31) NATURE OF BUSINESS OPERATIONS The Company is structured and evaluated by its Board of Directors and Management as two distinct business units: NeoMedia Application Services (NAS) (formerly named NeoMedia ASP), and NeoMedia Consulting and Integration Services (NCIS) (formerly named NeoMedia SI) NEOMEDIA APPLICATION SERVICES (NAS) NAS is the Company's core business and is based in the US, with development and operating facilities in Fort Myers, Florida and contracted network support provided in Herndon, Virginia. NAS develops and supports all of the Company's core technology as well as its suite of application service provider services including its linking "switch" and its application platforms including PaperClick(TM) and the Qode Service. NAS also provides the contract systems integration resources needed to design and build custom customer solutions predicated on the Company's infrastructure technology. NEOMEDIA CONSULTING AND INTEGRATION SERVICES (NCIS) NCIS is the original business line upon which the Company was organized. NCIS resells client-server equipment and related software. The unit also provides general and specialized consulting services targeted at software driven print applications, and especially at process automation of production print facilities through the efforts of its Integrated Document Factory (IDF) consulting team. NCIS also identifies prospects for custom applications based on the NeoMedia's NAS products and services. The operations are based in Lisle, Illinois and Monterrey, Mexico. RECLASSIFICATIONS Certain amounts in the 2000 condensed consolidated financial statements have been reclassified to conform to the 2001 presentation. RECENT ACCOUNTING PRONOUNCEMENTS In June of 1998 the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The FASB later issued in June 1999 SFAS No. 137, which deferred the effective date for SFAS No. 133 to all fiscal years beginning after June 15, 2000, with earlier application encouraged. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative insruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets of liabilities in the balance sheet and measure those instruments at fair value. The adoption of SFAS No. 133 did not have an impact on the Company's financial position or results of operations. 8 NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. LIQUIDITY AND CAPITAL RESOURCES The accompanying unaudited financial statements have been prepared assuming the Company will continue as a going concern. Accordingly, the financial statements do not include any adjustments that might result from the Company's inability to continue as a going concern. The Company has been advised by its independent certified public accountants that if this contingency has not been resolved prior to the completion of their audit of the Company's financial statements for the year ending December 31, 2001, their auditors' report on those financial statements may be modified for that contingency. Based on current operating budgets, management does not anticipate having sufficient cash on hand or available through current lending arrangements to fund operations. To address this funding need, the Company's management is seeking to raise funds through private placements and a warrant repricing program, as well as decrease cash outflow through expense reductions. Management believes that the funds generated by these transactions will be sufficient to fund operations for at least 12 months. In the event all the funding is not received, management believes it can revise its operating plan to such a level that the Company will be able to fund operations for the next 12 months. During the first quarter of 2001, the Company has successfully obtained approximately $1.5 million of equity financing and $0.5 million from exercises of warrants and employee stock options. Net cash used in operating activities for the three months ended March 31, 2001 and 2000, was $2.2 million and $2.6 million, respectively. During 2001, trade accounts receivable inclusive of costs in excess of billings decreased $0.7 million, while accounts payable and accrued expenses and deferred revenue decreased $0.3 million. During 2001, trade accounts receivable inclusive of costs in excess of billings decreased $1.6 million, while accounts payable and accrued expenses and deferred revenue decreased $2.2 million. NeoMedia's net cash flow used in investing activities for the three months ended March 31, 2001 and 2000, was $1.8 million and $0.4, respectively. Net cash provided by financing activities for the three months ended March 31, 2001 and 2000, was $2.0 million and $11.6 million, respectively. The decrease was due to $12.2 million raised during the first quarter of 2000 through the issuance of common stock, as well as the exercise of warrants and stock options. 3. SUBSEQUENT EVENTS Write-off of Digital Convergence Contract The Company entered into an agreement with a competitor, Digital:Convergence Corporation, in October 2000 granting them a worldwide, non-exclusive license of the Company's extensive patent portfolio for directly linking documents, objects, transaction and voice commands to the internet. The agreement provided for annual license fees over a period of ten years in excess of $100 million through a combination of cash and equity. The Company recognized $7.8 million of revenue in 2000 related to this contract, including a $5 million cash payment received in October 2000 for royalties earned before contract execution and $2.5 million related to the $10 million of payments in DC common stock and cash expected to be received in the first year of the contract. As part of the contract, the Company issued to DC a warrant to purchase 1.4 million shares of NeoMedia common stock. In the first quarter of 2001, DC issued the Company an interest bearing $3 million note payable in lieu of a $3 million cash payment due in January 2001. The Company also received $2 million of DC stock in January as part of the $5 million payment due. The note was originally due on April 24, 2001, however, on that date the Company agreed to extend it until June 24, 2001. As a result of this extended payment, royalty revenue was not recognized in the first quarter 2001. The Company also partially wrote down, in the first quarter of 2001, the value of the DC stock receivable, and DC stock that had already been received, to a value that management believed was reasonable at the time. The write-down consisted of a reduction in assets of $7.7 million and a corresponding reduction in liabilities of $7.7 million. The DC stock was valued at $1 million and the DC receivable was valued at $9.2 million. In April 2001, the Company received an additional $5 million in DC stock based on the valuation formula stipulated in the contract. This stock was valued at $2.5 million upon receipt. Also in April, an agreement was entered into with DC whereby for a period from the date of the registration until October 24, 2001, if the Company identifies a purchaser for the Company's shares, DC will exercise the warrant to purchase 1.4 million shares of common stock and sell the shares to the identified purchaser. One third of the net proceeds made by DC on the sale of the common stock shall be paid to the Company toward repayment of DC's obligations under the note to the Company in the amount of $3 million. In consideration for this, the warrant exercise price was reduced during this period to 38 percent of the closing sale price of the Company's common stock on the day prior to the date of exercise, subject to a minimum price. Because the exercise of the warrants at this reduced price is contingent upon the Company finding a purchaser, the value of this re- pricing will be measured and recorded at that time. On June 24, 2001, DC did not pay the note that was due, and on June 26, 2001, the Company filed a $3 million lawsuit against DC for breach of contract regarding the $3 million promissory note. It was also learned in June that DC's capital raising efforts and business operations were having difficulty, and the Company decided to write off all remaining amounts related to the DC contract. The following table represents balance sheet balances at December 31, 2000 and March 31, 2001, as well as all amounts written off during the second quarter of 2001:
December 31, March 31, Write-off 2000 Balances 2001 Balances June 30, 2001 ------------- ------------- ------------- (Dollars in thousands) ---------------------- ASSETS Investment in Digital Convergence.................................. $ - $ 1,000 $ 1,000 Digital Convergence receivable..................................... 7,644 6,644 6,644 Digital Convergence receivable, net of current portion............. 10,288 2,572 2,572 Prepaid expenses (current portion)................................. 470 470 470 Prepaid DC (long-term portion)..................................... 4,116 3,998 3,998 ------- ------- ------- Total assets ................................................. $22,518 $14,684 $14,684 ======= ======= ======= LIABILITIES Deferred revenues DC............................................... $ 1,543 $ 772 $ 772 Long term deferred revenues - DC................................... 13,503 6,558 6,558 ------- ------- ------- Total liabilities............................................. $15,046 $ 7,330 $ 7,330 ======= ======= =======
The net effect of the write-off is a $7,354,000 non-cash charge to income, which is included in Write off of Digital Convergence contract in the consolidated statements of operations for the second quarter 2001. Any future revenues related to this contract will be recorded as payments are received. Other Events In April, 2001, the former President and director of NeoMedia filed a lawsuit against Neomedia and several of our directors. The suit was filed in the Circuit Court of the Twentieth Judicial Circuit for Sarasota, Florida. The claim alledges the individual was fraudulently induced into accepting employment and that the Company breached the employment agreement. The individual's employment with NeoMedia ended in January, 2001. NeoMedia believes the claim is without merit and intends to vigorously defend itsself. Final outcome of this matter is uncertain and a range of loss cannot reasonably be estimated. On May 31, 2001, three creditors of Qode.com, Inc. filed in the U.S. Bankruptcy Court an involuntary bankruptcy petition for Qode.com, Inc. Qode.com, Inc. has converted the proceedings to Chapter 11, U.S. Code to re-organize its debts. In May 2001, the Company re-priced approximately 1.5 million additional warrants subject to a limited exercise period and other conditions, including certain warrants issued in connection with NeoMedia's initial public offering in 1996, which will expire at the end of 2001. The repricing program allows the warrant exercise price to be reduced to 33 percent of the closing sale price of our common stock (subject to a minimum) on the day prior to the date of exercise for a period of six months from the date the repricing program began. The exercise of the warrants and sale of the underlying common stock is at the discretion of a broker selected by the Company, within the parameters of the repricing arrangement. The value given to the warrant holders as a result of this repricing will be measured and recorded using variable accounting. The Company recognized an expense of approximately $181,000 related to this transaction in the second quarter of 2001 as a general and administrative expense. In June 2001, the Board of Directors' approved the issuance of 414,000 warrants for Charles W. Fritz, NeoMedia's Chairman, CEO, and president at a exercise price of $2.09. The Company recognized an expense of approximately $99,000 related to this transaction in the second quarter of 2001 as a general and administrative expense. In June 2001, the Board of Directors' approved the issuance of 404,900 warrants to an outside consultant at a exercise price of $2.09. The Company recognized an expense of approximately $550,000 related to this transaction in the second quarter of 2001 as a general and administrative expense. In June 2001, the Company's compensation committee approved an adjustment, relating to the Digital:Convergence patent license fees, to the 2000 executive incentive plan that reduced the bonus payout by approximately $1.1 million. This was recorded as a negative expense in the second quarter of 2001. In June of 2001, the Company announced that it entered into a one-year license agreement with About.com to provide the Qode Commerce SolutionTM to About.com's estimated 36 million worldwide users. NeoMedia and About.com will be promoting the co-branded shopping service throughout the About.com network. In addition, About.com ran banner ads during June to promote the Qode Commerce SolutionTM. About.com received 452,489 shares of NeoMedia preferred stock in consideration for this. NeoMedia recorded an expense of $882,000 associated with this transaction in the second quarter of 2001 as a sales and marketing expense. On August 12, 2001, the Company cancelled the contract with About.com on the grounds that the projected user traffic and purchases with resulting revenues did not materialize. The Preferred Stock issued to About.com is a new series, Series A Convertible Preferred Stock (the "Preferred Stock"), which consists of 500,000 authorized shares, par value $0.01 per share, of which the preferences and relative and other rights, and the qualifications, limitations or restrictions thereof; are the same as common stock except as follows: The holders of preferred stock have the right to convert as the holder's option, once the underlying common stock has been registered Preferred Stock into common shares on a one-to-one ratio. The Preferred Stock converts automatically on January 2, 2002. The Preferred Stock has liquidation rights upon liquidation or dissolution of the Company. On July 3, 2001, NeoMedia signed a non-binding letter of intent with AirClic, Inc. to cross-license the companies' intellectual property. The terms of the proposed agreement called for NeoMedia to: (i) acquire an equity interest in AirClic, and (ii) issue a significant equity interest in NeoMedia to AirClic, which interest would likely have exceeded 50% of NeoMedia's outstanding equity securities. Further terms of the agreement called for NeoMedia to acquire AirClic's Connect2 comparison shopping business unit, which was to be combined with NeoMedia's Qode business unit. AirClic has loaned NeoMedia $500,000 under a secured note due on the earlier of (i) the date on which NeoMedia raises $5 million in equity financing from a source other than AirClic, (ii) a change in control of NeoMedia, or (iii) January 11, 2002. During the negotiation of a definitive set of agreements between the companies, it was determined that the consummation of the transaction as provided in the non-binding letter of intent would not be completed. As a result, additional notes aggregating $1,500,000 will not be executed between the companies. On September 6, 2001, AirClic filed suit against the Company in the Court of Common Pleas, Montgomery County, PA, for breach of contract relating to the July 3, 2001 non-binding letter of intent signed by the Company and AirClic. AirClic claims that the Company violated express representations and warranties relating to the Company's assets and state of business affairs. AirClic seeks a judgment to accelerate repayment of the $500,000 note due January 11, 2002, and to relieve AirClic from any obligation to make further loans to the Company as outlined in the letter of intent. On August 20, 2001, Ripfire, Inc. filed suit against the Company in the San Francisco County Superior Court seeking payment of $138,000 under a software license agreement entered into between the Company and Ripfire in May 2001. During the third quarter, the Company laid off 55 employees, including the chief technology officer and the chief operating officer, representing a 60% decrease in its total workforce. In connection with the layoffs, the Company will recognize severance expense of approximately $250,000 during the third quarter of 2001. The layoffs are part of a company-wide cost reduction initiative. As a result of this initiatives, the Company could incur a material impairment of intangible assets during the third quarter of 2001. During September, 2001, the Company announced that it had signed a letter of intent to sell the assets of its Fort Lauderdale-based Qode business unit, which it acquired in March, to The Finx Group, Inc., a holding company in Elmsford, NY. The agreement calls for The Finx Group to assume approximately $620,000 of Qode's payables and $800,000 in long-term assets. The Company is to receive 500,000 shares of The Finx Group common stock, a five-year license to use and sell Qode Services, and up to $5 million in affiliate revenues from The Finx Group from Qode sales over the next five years. During September 2001, the Board of Directors approved the issuance of 200,000 options to Charles W. Fritz, NeoMedia's Chairman and CEO at an exercise price of $0.20 per share and 150,000 options to Charles T. Jensen, Vice President, Treasurer, and CFO at an exercise price of $0.20 per share. No expense was recognized relating to these transactions. During September 2001, the Board of Directors approved the issuance of 150,000 options to an outside consultant at an exercise price of $0.20 per share for services rendered. The Company recognized approximately $19,000 related to this transaction as general and administrative expense in the third quarter of 2001. On October 3, 2001, Headway Associates, Ltd. filed a complaint for damages in the Circuit Court of the Seventeenth Judicial Circuit for Broward County, Florida. Headway Associates, Ltd. is seeking payment of all amounts due under the terms of the lease agreement of the Ft. Lauderdale office of NeoMedia's Qode business unit, approximately $400,000. The lease commenced on March 3, 2000 and terminates on March 31, 2005. On October 24, 2001, the Company filed a proxy statement with the SEC to request a shareholder vote that would increase the number of the Company's authorized shares of common stock from 50,000,000 shares to 100,000,000 and increase the number of the Company's authorized shares of preferred stock from 10,000,000 shares to 25,000,000. The proxy also requests approval to sell 19,000,000 shares of common stock to accredited investors in exchange for limited recourse promissory notes. On October 30, 2001, AirClic, Inc. filed a civil action in the United States District of Pennsylvania, requesting a declaratory judgment that three of the Company's patents are invalid and/or unenforceable. The action alleges that NeoMedia failed to disclose material prior art to the US Patent and Trade Office in connections with the prosecution of certain of its patents. The action further alleges that claims of certain of NeoMedia's patents fail to satisfy the requirements of patentability. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The accompanying unaudited financial statements have been prepared assuming the Company will continue as a going concern. Accordingly, the financial statements do not include any adjustments that might result from the Company's inability to continue as a going concern. Based on current operating budgets, management does not anticipate having sufficient cash on hand or available through current lending arrangements to fund operations. To address this funding need, the Company's management is seeking to raise funds through private placements and a warrant repricing program, as well as decrease cash outflow through expense reductions. Management believes that the funds generated by these transactions will be sufficient to fund operations for at least 12 months. In the event all the funding is not received, management believes it can revise its operating plan to such a level that the Company will be able to fund operations for the next 12 months. During the first quarter of 2001, the Company has successfully obtained approximately $1.5 million of equity financing and $0.5 million from exercises of warrants and employee stock options. Net cash used in operating activities for the three months ended March 31, 2001 and 2000, was $2.2 million and $2.6 million, respectively. During 2001, trade accounts receivable inclusive of costs in excess of billings decreased $0.7 million, while accounts payable and accrued expenses and deferred revenue decreased $0.3 million. During 2000, trade accounts receivable inclusive of costs in excess of billings decreased $1.6 million, while accounts payable and accrued expenses and deferred revenue decreased $2.2 million. NeoMedia's net cash flow used in investing activities for the three months ended March 31, 2001 and 2000, was $1.8 million and $0.4, respectively. Net cash provided by financing activities for the three months ended March 31, 2001 and 2000, was $2.0 million and $11.6 million, respectively. The decrease was due to $12.2 million raised during the first quarter of 2000 through the issuance of common stock, as well as the exercise of warrants and stock options. OVERVIEW During 2000, the company's continued focus was aimed toward its NeoMedia Application Service (NAS) business. On March 1, 2001, the Company acquired substantially all of the assets of Qode.com, Inc., a commerce-enabling company that delivers promotions to consumers over the internet through its Qode Universal Commerce Solution(TM). The Quode system is comprised of a directory of products and retailers, enhanced with Qode's proprietary DNA(TM), and coupled with a product search engine. The Qode Solution is licensable, and is designed to increase revenues, traffic and loyalty to internet websites. NAS consists of the patented PaperClickTM technology that enables users to link directly from the physical to the digital world. During the past several months, the Company has also signed several PaperClickTM license agreements with domestic and international companies that demonstrate the versatility of the technology. 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 the Company's end-users, competitive advantage for their business partners and return-on-investment for their investors. Through the three months ended March 31, 2001, a substantial part of NeoMedia's revenue was derived from resales of software and technology equipment. NeoMedia couples its proprietary software products with independent vendor products it resells, enabling it to provide a complete "turn-key" service for its customers. Currently, NeoMedia's revenue consists of (i) software license fees, (ii) resales of software and technology equipment from independent vendors and (iii) service fees, including consulting and post contract software support. 10 During the first quarter of 2001, the Company's focus continued to shift from Systems Integration and Migration products toward its Applications Service Provider (ASP) business. During 2000, the Company sold its first license with the internally-developed NeoLink technology, and in December launched its PaperClick.com virtual portal. NeoMedia's strategy is to become the world's leading provider of systems and services that link print and print on products to web based information. The Company discontinued its Y2K product line during the fourth quarter of 1999. NeoMedia's quarterly operating results have been subject to variation and will continue to be subject to variation, depending upon factors, such as the mix of business among NeoMedia's services and products, the cost of material, labor and technology, particularly in connection with the delivery of business services, the costs associated with initiating new contracts, the economic condition of NeoMedia's target markets, and the cost of acquiring and integrating new businesses. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2000 NET SALES. Total net sales for the three months ended March 31, 2001 were $1.5 million, which represented a $2.6 million, or 63%, decrease from $4.1 million for the three months ended March 31, 2000. This decrease primarily resulted from reduced resales of Sun Microsystems equipment. LICENSE FEES. License fees for the three months ended March 31, 2001 were $0.1 million compared to $0.2 million for the three months ended March 31, 2000, a decrease of $0.1 million. RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of software and technology equipment and service fees decreased by $2.5 million, or 64%, to $1.4 million for the three months ended March 31, 2001, as compared to $3.9 million for the three months ended March 31, 2000. This decrease primarily resulted from fewer sales of Sun Microsystems hardware due to increased competition and general economic conditions. Cost of sales as a percentage of related sales was 85% in 2001 and 86% in 2000. SALES AND MARKETING. A portion of the compensation to the sales and marketing staff constitutes salary and is fixed in nature and the remainder of this compensation, which is paid as a commission, is directly related to sales volume. Sales and marketing expenses were $1.0 million for the three months ended March 31, 2001, compared to $1.3 million for the three months ended March 31, 2000, a decrease of $0.3 million or 24%. This decrease primarily resulted from a decrease in NeoMedia's NAS direct sales force offset by personnel additions in marketing. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by $0.3 million, or 21%, to $1.7 million for the three months ended March 31, 2001, compared to $1.4 million for the three months ended March 31, 2000. The increase is primarily related to higher legal expenses in 2001. RESEARCH AND DEVELOPMENT. During the three months ended March 31, 2001, NeoMedia charged to expense $337,000 of research and development costs, an increase of $2,000 or 1% compared to $335,000 charged to expense for the three months ended March 31, 2000. INTEREST INCOME, NET. Interest income consists primarily of interest earned on cash equivalent investments, net of interest paid to creditors as part of financed purchases, notes payable and NeoMedia's asset-based collateralized line of credit. Interest income increased by $12,000, or 63%, to $31,000 for the three months ended March 31, 2001 from $19,000 for the three months ended March 31, 2000, due to reduced interest expense on the line of credit as a result of lower resale business the first quarter of 2001. 11 NET LOSS. The net loss for the quarter ended March 31, 2001 was $3.4 million, which represented a $1.0 million, or 42% increase from a $2.4 million loss for the three months ended March 31, 2000. The increase in net loss primarily resulted from reduced resales of software and technology equipment and related service fees. The Company has recognized revenue derived from its intellectual property license contract with Digital Convergence (DC) executed in October 2000, based on management's current estimates of total receipts under the first year of the DC contract, ratably over the contract year. Therefore, for the first quarter, no revenue was recognized. During the first quarter of 2001, the Company wrote down the value of the stock receivable from DC and the related deferred revenue by $7,716,000. Total assets and liabilities at March 31, 2001 related to the DC contract were $14,214,000 and $7,330,000 respectively. SAFE HARBOR PROVISION OF THE PRIVATE SECURITIES LITIGATION ACT OF 1995 The Company operates in a dynamic and rapidly changing environment that involves numerous risks and uncertainties. The market for software products is generally characterized by rapidly changing technology, frequent new product introductions and changes in customer requirements which can render existing products obsolete or unmarketable. The statements contained in this document ate not historical facts may be forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Exchange Act of 1934) that are subject to a variety of risks and uncertainties more fully described in the Company's filings with the Securities and Exchange Commission. The forward-looking statements are based on the beliefs of the management of the Company, as well as assumptions made by, and information currently available to, the Company's management. Accordingly, these statments are subject to significant risks, uncertainties and contingencies which could cause the Company's actual growth, results, performance and business prospects and opportunities in 2001 and beyond to differ materially from those expressed in or implied by, any such forward-looking statements. Wherever possible, words such as "anticipate," "plan," "expect," "believe," "estimate," and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying such statements. These risks, uncertainties and contingencies include, but are not limited to, the Company's limited operating history on which expectations regarding its future performance can be based, competition from, among others, high technology companies that have greater financial, technical and marketing resources and distribution capabilities than the Company, the availability of sufficient capital, the effectiveness of the Company's efforts to control operating expenses, the Company's ability to sell its products and general economic and business conditions affecting the Company and its customers in the United States and other countries in which the Company sells and anticipates to sell its products and services. The Company is not obligated to update or revise these forward-looking statements to reflect new events or circumstances. 12 PART II -- OTHER INFORMATION Item 1 - Legal Proceedings In April, 2001, the former President and director of the Company filed a lawsuit against the Company and several of the Company's directors. The suit was filed in the Circuit Court of the Twentieth Judicial Circuit for Sarasota, Florida. The claim alleges the individual was fraudulently induced into accepting employment and that the Company breached the employment agreement. The individual's employment with the Company ended in January, 2001. The Company believes the claim is without merit and intends to vigorously defend itself. Final outcome of this matter is uncertain and a range of loss cannot reasonably be estimated. On August 20, 2001, Ripfire, Inc. filed suit against the Company in the San Francisco County Superior Court seeking payment of $138,000 under a software license agreement entered into between the Company and Ripfire in May 2001. On September 6, 2001, AirClic filed suit against the Company in the Court of Common Pleas, Montgomery County, PA, for breach of contract relating to the July 3, 2001 non-binding letter of intent signed by the Company and AirClic. AirClic claims that the Company violated express representations and warranties relating to the Company's assets and state of business affairs. AirClic seeks a judgment to accelerate repayment of the $500,000 note due January 11, 2002, and to relieve AirClic from any obligation to make further loans to the Company as outlined in the letter of intent. On October 3, 2001, Headway Associates, Ltd. filed a complaint for damages in the Circuit Court of the Seventeenth Judicial Circuit for Broward County, Florida. Headway Associates, Ltd. is seeking payment of all amounts due under the terms of the lease agreement of the Ft. Lauderdale office of NeoMedia's Qode business unit, approximately $400,000. The lease commenced on March 3, 2000 and terminates on March 31, 2005. On October 30, 2001, AirClic, Inc. filed a civil action in the United States District Court for the Eastern District of Pennsylvania, requesting a declaratory judgment that three of the Company's patents are invalid and/or unenforceable. The action alleges that NeoMedia failed to disclose material prior art to the US Patent and Trade Office in connections with the prosecution of certain of its patents. The action further alleges that claims of certain of NeoMedia's patents fail to satisfy the requirements for patentability. Item 2 - Changes in Securities and Use of Proceeds In March, 2001, the Company issued 156,250 shares of the Company's common stock at a price of $3.20 per share to an unrelated party. In March, 2001, the Company issued 316,500 shares of the Company's common stock at a price of $3.40 per share to an unrelated party. In March, 2001, the Company issued 18,000 shares of the Company's common stock at a price of $3.41 per share to an unrelated party. In March, 2001, holders of the Company's warrants exercised 170,000 warrants at a price of $2.13 per share. In April, 2001, the Company issued 30,000 shares of the Company's common stock at a price of $3.40 per share to an unrelated party. In May, 2001, holders of the Company's warrants exercised 324,150 warrants at an exercise price of $2.00 per share. In July, 2001, holders of the Company's warrants exercised 11,300 warrants at an exercise price of $2.00 per share. The above issuances were exempt from registration under section 4(2) of the Securities Act of 1933, as amended, as an issuance not constituting a public offering. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (None) (b) Reports on Form 8-K On March 16, 2001, the Company filed a Form 8-K Current Report to disclose that it had acquired substantially all of the assets of Qode.com, Inc., a commerce-enabling company that delivers promotions to consumers over the internet through its Qode Universal Commerce Solution(TM). 13 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEOMEDIA TECHNOLOGIES, INC. --------------------------- Registrant Date November 13, 2001 By: /s/ CHARLES W. FRITZ ----------------- ------------------------------------------------ Charles W. Fritz, Chief Executive Officer and Chairman of the Board Date November 13, 2001 By: /s/ CHARLES T. JENSEN ----------------- ------------------------------------------------ Charles T. Jensen, Vice President, Chief Financial Officer, Treasurer and Director 14 -----END PRIVACY-ENHANCED MESSAGE-----