-----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, Lp7XLTCEQrFcsyCMFSDtrEYC1RtOjhuLogarYexh492wDTKuc/d0uzuM0J+7t2Ur GiJ5SQ7pkHSNoKF5zcq/DA== 0001144204-05-036775.txt : 20051118 0001144204-05-036775.hdr.sgml : 20051118 20051118152628 ACCESSION NUMBER: 0001144204-05-036775 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051118 DATE AS OF CHANGE: 20051118 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: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-21743 FILM NUMBER: 051215181 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 10QSB 1 form10qsb.txt U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------------------- FORM 10 - QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 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 600, Fort Myers, Florida 33901 (Address of Principal Executive Offices) (Zip Code) 239-337-3434 Issuer's Telephone Number (Including Area Code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of November 9, 2005, there were 463,382,141 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)
September 30, 2005 --------------- ASSETS Current assets: Cash and cash equivalents $ 4,673 Trade accounts receivable, net of allowance for doubtful accounts of $77 666 Inventories, net of allowance for obsolete & slow-moving inventory of $0 110 Investment in marketable securities 117 Prepaid expenses and other current assets 388 --------------- Total current assets 5,954 Property and equipment, net 165 Leasehold improvements, net 44 Capitalized patents, net 3,501 Micro paint chemical formulations and proprietary process, net 1,497 Goodwill 1,099 Other Intangible assets, net 209 Loan receivable from Mobot, Inc. 800 Investment in IPoint-media, Ltd. 1,250 Cash surrender value of life insurance policy 740 Other long-term assets 28 --------------- Total assets $ 15,287 =============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,587 Amounts payable under settlement agreements 77 Liabilities of discontinued business unit 676 Sales taxes payable 44 Accrued expenses 1,724 Deferred revenues and other 360 Notes payable 5,325 --------------- Total current liabilitie 9,793 --------------- 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, 476,410,478 shares issued and 460,253,892 outstanding 4,603 Additional paid-in capital 104,157 Deferred stock-based compensation (216) Deferred equity financing costs (13,256) Accumulated deficit (88,846) Accumulated other comprehensive loss (169) Treasury stock, at cost, 201,230 shares of common stock (779) --------------- Total shareholders' equity 5,494 --------------- Total liabilities and shareholders' equity $ 15,287 ===============
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 September 30, -------------------------------- 2005 2004 ------------- ------------- NET SALES: License fees $ 88 $ 96 Resale of software and technology equipment and service fees 105 138 Micro paint repair products and services 243 237 ------------- ------------- Total net sales 436 471 ------------- ------------- COST OF SALES: License fees 54 79 Resale of software and technology equipment and service fees 67 147 Micro paint repair products and services 214 151 ------------- ------------- Total cost of sales 335 377 ------------- ------------- GROSS PROFIT 101 94 Sales and marketing expenses 834 514 General and administrative expenses 856 516 Research and development costs 285 114 ------------- ------------- Loss from operations (1,874) (1,050) Gain \ (loss) on extinguishment of debt 1 6 Amortization of debt discount -- (334) Interest (expense) \ income, net (77) (62) ------------- ------------- NET LOSS (1,950) (1,440) Other comprehensive loss: Unrealized gain/loss on marketable securities (4) -- Foreign currency translation adjustment 15 (31) ------------- ------------- COMPREHENSIVE LOSS $ (1,939) $ (1,471) ============= ============= LOSS PER SHARE--BASIC AND DILUTED $ (0.00) $ (0.00) ============= ============= Weighted average number of common shares--basic and diluted 456,695,836 342,990,471 ============= =============
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)
Nine Months Ended September 30, -------------------------------- 2005 2004 ------------- ------------- NET SALES: License fees $ 426 $ 256 Resale of software and technology equipment and service fees 336 501 Micro paint repair products and services 959 512 ------------- ------------- Total net sales 1,721 1,269 ------------- ------------- COST OF SALES: License fees 302 249 Resale of software and technology equipment and service fees 208 480 Micro paint repair products and services 724 376 ------------- ------------- Total cost of sales 1,234 1,105 ------------- ------------- GROSS PROFIT 487 164 Sales and marketing expenses 2,859 1,461 General and administrative expenses 2,417 1,293 Research and development costs 629 354 ------------- ------------- Loss from operations (5,418) (2,944) Gain \ (loss) on extinguishment of debt 172 129 Amortization of debt discount -- (2,500) Interest expense, net (223) (178) ------------- ------------- NET LOSS (5,469) (5,493) Other comprehensive loss: Unrealized gain/loss on marketable securities (133) -- Foreign currency translation adjustment 24 (47) ------------- ------------- COMPREHENSIVE LOSS $ (5,578) $ (5,540) ============= ============= LOSS PER SHARE--BASIC AND DILUTED $ (0.01) $ (0.02) ============= ============= Weighted average number of common shares--basic and diluted 451,487,240 324,471,293 ============= =============
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)
Nine Months Ended September 30, --------------------- 2005 2004 ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ($ 5,469) ($ 5,493) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of discount on note payable -- 2,500 Depreciation and amortization 545 367 Provision for doubtful accounts -- 24 Expense (decrease of fair value) for repriced options -- (240) Fair value of expense portion of stock-based compensation granted for professional services 623 545 Interest expense allocated to debt -- 3 (Increase)/decrease in value of life insurance policies (13) 17 Changes in operating assets and liabilities: Trade accounts receivable, net (384) (8) Inventory 5 (54) Other current assets (848) 90 Accounts payable, amounts due under financing agreements, liabilities in excess of assets of discontinued business unit, accrued expenses and stock liability (256) (1,211) Deferred revenue and other current liabilities (154) (40) -------- -------- Net cash used in operating activities (5,951) (3,500) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in Pickups Plus, Inc./Intactis Software, Inc. (500) -- Capitalization of software development and purchased intangible assets (1,639) (109) Acquisition of property and equipment (187) (103) -------- -------- Net cash used in investing activities (2,326) (212) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common stock, net of issuance costs of $115 in 2005 and $620 in 2004 6,262 5,926 Net proceeds from exercise of stock options and warrants 909 581 Borrowings under notes payable and long-term debt 9,932 8,000 Repayments on notes payable and long-term debt (5,811) (6,687) 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 10,292 5,430 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 24 (47) NET INCREASE IN CASH AND CASH EQUIVALENTS 2,039 1,671 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,634 61 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,673 $ 1,732 ======== ======== 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 due to debt paid with shares of common 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 349 129 Direct costs associated with Standby Equity Distribution Agreement and Equity Line of Credit 1,204 1,447
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 September 30, 2005, the results of operations for the three-month and nine-month periods ended September 30, 2005 and 2004, and cash flows for the nine-month periods ended September 30, 2005 and 2004. The results of operations for the three-month and nine-month periods ended September 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 $1,950,000 and $1,440,000 for the three months ended September 30, 2005 and 2004, respectively, and net losses of $5,469,000 and $5,493,000 for the nine months ended September 30, 2005 and 2004, respectively, and has an accumulated deficit of $88,846,000 as of September 30, 2005. In addition, the Company had working capital deficit of $3,839,000 as of September 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. 6 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). 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 an initial 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. 7 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). 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 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. Concurrent with the SEDA, NeoMedia entered into an escrow agreement with Cornell and an escrow agent, under which the escrow agent holds in an escrow account shares of NeoMedia common stock, and the cash paid by Cornell for such shares, issued pursuant to an advance under the SEDA. The shares and funds can only be released upon receipt by the escrow agent of a joint disbursement instruction signed by NeoMedia and Cornell. NeoMedia expects to file a registration statement with the SEC to register the shares underlying the 2005 SEDA. The 2005 SEDA would become available at the time the SEC declares effective a registration statement containing such shares. 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. If shares of NeoMedia's common stock underlying the warrant are covered by an effective registration statement and if the closing bid price of NeoMedia's common stock is above $0.30 for five consecutive business days, NeoMedia may force conversion of the warrant. NeoMedia also issued 4 million warrants with an exercise price of $0.227 to a consultant as a fee in connection with the 2005 SEDA. As of March 31, 2005, NeoMedia 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. During the nine months ended September 30, 2005, the Company sold 19,337,119 shares of its common stock to Cornell under the 2003 SEDA. The following table summarizes funding received from Cornell during the nine-month periods ended September 30, 2005 and 2004:
2005 ------------------------------------------------------------------ Nine Months First Second Third Ended Quarter Quarter Quarter Sept. 30 ------------ ------------ ------------ ------------ Number of shares sold to Cornell 6,998,931 7,258,094 5,080,094 19,337,119 Gross Proceeds from sale of shares $ 1,709,000 $ 3,219,000 $ 2,130,000 $ 7,058,000 Less: discounts and fees* (204,000) (489,000) (170,000) (863,000) ------------ ------------ ------------ ------------ Net Proceeds from sale of shares $ 1,505,000 $ 2,730,000 $ 1,960,000 $ 6,195,000 ------------ ------------ ------------ ------------
8
2004 ------------------------------------------------------------------ Nine Months First Second Third Ended Quarter Quarter Quarter Sept. 30 ------------ ------------ ------------ ------------ Number of shares sold to Cornell 21,282,203 29,819,873 36,685,664 87,787,740 Gross Proceeds from sale of shares $ 2,332,000 $ 2,308,000 $ 2,734,000 $ 7,374,000 Less: discounts and fees* (500,000) (465,000) (483,000) (1,448,000) ------------ ------------ ------------ ------------ Net Proceeds from sale of shares $ 1,832,000 $ 1,843,000 $ 2,251,000 $ 5,926,000 ------------ ------------ ------------ ------------
* 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 restricted common stock as security for the note. As of September 30, 2005, NeoMedia had made payments of $4,690,000 against the principal, reducing the principal balance to $5,310,000. On August 6, 2004, NeoMedia borrowed from Cornell the gross amount of $2,000,000 before discounts and fees. Cornell withheld $153,000 as a fee. NeoMedia paid this note in full during 2004. On July 2, 2004, NeoMedia borrowed from Cornell the gross amount of $1,000,000 before discounts and fees. Cornell withheld $76,000 as a fee. NeoMedia paid this note in full during 2004. On April 8, 2004, NeoMedia borrowed from Cornell the gross amount of $1,000,000 before discounts and fees. Cornell withheld $76,000 as a fee. NeoMedia paid this note in full during 2004. 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 $315,000 as a fee. 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. 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. 9 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 to 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 September 30, 2005, NeoMedia has recorded an impairment of $133,000 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 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 Letter of Intent are non-binding and subject to due diligence by NeoMedia and AP. On September 21, 2005, the BOD approved to change the deal structure for the acquisition of AP, so that the Company would acquire only 30% of AP for a total purchase price of $1.6 million of which $600K would be paid in cash and $446K would be paid through the assumption of debt, and $554K through the issuance of restricted Neomedia stock. Neomedia will not acquire the remaining 70% of AP under the new structure. 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. 10 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 codes 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 distributor of NeoMedia's micro paint repair products, systems and licenses to automotive service facilities throughout Demark, Sweden and Norway. Based in Oslo, Norway, WI-THO AS is a new company formed to specialize in products and services involving micro paint repairs for automobiles in Denmark, 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. 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 Mobot 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. 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 not 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 Mobot letter of intent is not terminated by September 26, 2005, Mobot has the right to demand an additional $200,000 loan from NeoMedia. On September 26, 2005, Mobot exercised its right and received the additional $200,000 loan. Further, 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. On October 26, 2005, Mobot exercised its right and received the additional $200,000 loan. Both of the additional loans are in the form of unsecured promissory notes subject to the same terms as the original $600,000 note. 11 On August 30, 2005, NeoMedia signed a definitive distribution agreement to bring its NeoMedia Micro Paint Repair business to the People's Republic of China, as well as be a distributor of other automotive aftermarket products. The agreement, signed with Beijing Sino-US Jinche Yingang Auto Technological Services Limited ("Jinche"), a joint venture operating under the laws of the People's Republic of China, calls for Jinche to serve as a non-exclusive distributor and user of NeoMedia's micro paint repair products, systems and licenses at its automotive service facilities throughout China. The agreement also calls for Jinche to buy certain automotive aftermarket repair and environmental protection products from NeoMedia. On September 27, 2005, NeoMedia signed a definitive distribution agreement to bring its NeoMedia Micro Paint Repair business to Mexico and Latin America, as well as be a distributor of other automotive aftermarket products. The agreement, signed with Micropaint de Mexico, S.A. ("Micropaint de Mexico"), calls for Micropaint de Mexico to serve as an exclusive distributor of NeoMedia's micro paint repair products, systems and licenses to automotive service facilities throughout Mexico and Latin America. The Agreement also calls for Micropaint de Mexico to buy certain automotive aftermarket repair and environmental protection products from NeoMedia. Founded earlier this year and based in Monterrey, Mexico, Micropaint de Mexico specializes in providing automotive aftermarket products throughout Mexico and Latin America. On September 30, 2005, NeoMedia entered into a mobile marketing alliance and co-marketing agreement with advertising agency Arnold Worldwide ("Arnold"), centered on NeoMedia's patented PaperClick(R) technology platform. The agreement calls for Arnold and NeoMedia to work together to develop opportunities and marketing campaigns utilizing PaperClick. NeoMedia will provide technical and sales support for presentations, marketing programs and campaigns conceived and developed by Arnold for its clients. 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). The investments in marketable securities are summarized as follows:
As of September 30, 2005 ---------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Holding Gain Holding Losses Value --------------- --------------- --------------- --------------- Available-for-sale $250,000 $ -- ($133,000) $117,000
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. 12 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 September 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. Computation of Net Loss Per Share Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The Company has excluded all outstanding stock options and warrants from the calculation of diluted net loss per share because these securities are anti-dilutive for all years presented. The shares excluded from the calculation of diluted net loss per share are detailed in the table below: September 30, 2005 ------------------ Outstanding Stock Options 77,629,221 Outstanding Warrants 72,775,000 Pro-forma Information Required by SFAS 148 At September 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 Nine Months Ended September 30, September 30, -------------------- -------------------- 2005 2004 2005 2004 ------- ------- ------- ------- Net Loss, as reported ($1,950) ($1,440) ($5,469) ($5,493) Compensation recognized under APB 25 -- -- -- 9 Compensation recognized under SFAS 123 (1,080) (372) (2,760) (1,073) ------- ------- ------- ------- Pro-forma net loss ($3,030) ($1,812) ($8,229) ($6,557) ======= ======= ======= ======= Net Loss per share: Basic and diluted - as reported ($ 0.00) $ 0.00 ($ 0.01) ($ 0.02) ======= ======= ======= ======= Basic and diluted - pro-forma ($ 0.01) ($ 0.01) ($ 0.02) ($ 0.02) ======= ======= ======= =======
Subsequent Events On October 4, 2005, NeoMedia signed a definitive distribution agreement to bring its NeoMedia Micro Paint Repair business to Scandinavia. The agreement, signed with WITHO-AS of Oslo, Norway ("WITHO-AS"), calls for WITHO-AS to serve as an exclusive distributor of NeoMedia's micro paint repair products, systems and licenses to automotive service facilities throughout Denmark, Sweden, and Norway. Based in Oslo, Norway, WI-THO AS is a new company formed to specialize in products and services involving micro paint repairs for automobiles in Denmark, Sweden and Norway. During October 2005, the copyright lawsuit brought by Scanbuy, Inc. against NeoMedia was dismissed by the U.S. District Court for the Eastern District of Pennsylvania. The court also issued an injunction that prohibits LScan, Inc., against whom NeoMedia won a default judgment in 2004 in its patent infringement case against LScan, from using any technology or application that employs any NeoMedia patents. 13 Segment Reporting As of September 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. 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 nine-month periods ended September 30, 2005 and 2004, and long-lived assets by geographic area as of September 30, 2005, were as follows:
(in thousands) ---------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 2005 2004 2005 2004 ------- ------- ------- ------- Net Sales: United States $ 244 $ 234 $ 1,204 $ 757 Canada 192 237 517 512 ------- ------- ------- ------- $ 436 $ 471 $ 1,721 $ 1,269 ------- ------- ------- ------- Net (Loss)/Income: United States ($2,029) ($1,019) ($4,911) ($4,508) Canada 79 (421) (558) (985) ------- ------- ------- ------- ($1,950) ($1,440) ($5,469) ($5,493) ------- ------- ------- ------- Long-Lived Assets United States $ 5,699 Canada 2,834 ------- $ 8,533 -------
14 Consolidated net sales, net operating losses for the three-month and nine-month periods ended September 30, 2005 and 2004, and identifiable assets as of September 30, 2005, were as follows:
(in thousands) -------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2005 2004 2005 2004 -------- -------- -------- -------- Net Sales: NeoMedia Consulting & Integration Services $ 158 $ 230 $ 554 $ 711 NeoMedia Internet Switching Service 35 4 208 46 NeoMedia Micro Paint Repair 243 237 959 512 -------- -------- -------- -------- $ 436 $ 471 $ 1,721 $ 1,269 -------- -------- -------- -------- Net Loss: NeoMedia Consulting & Integration Services ($ 911) ($ 189) ($ 2,299) ($ 682) NeoMedia Internet Switching Service (640) (482) (1,863) (1,326) NeoMedia Micro Paint Repair (399) (421) (1,307) (985) Amortization of Cornell Debt Discount -- (348) -- (2,500) -------- -------- -------- -------- ($ 1,950) ($ 1,440) ($ 5,469) ($ 5,493) -------- -------- -------- -------- Identifiable Assets NeoMedia Consulting & Integration Services $ 241 NeoMedia Internet Switching Service 3,654 NeoMedia Micro Paint Repair 3,416 Corporate 7,976 -------- $ 15,287 --------
Effect Of Recently Issued Accounting Pronouncements 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 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. Management is currently evaluating the impact SFAS 123R will have on our consolidated financial statements. 15 In March 2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff's views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on our consolidated financial statements. In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and represents another step in the FASB's goal to converge its standards with those issued by the IASB. Among other changes, Statement 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. Statement 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a "restatement." The new standard is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005. Early adoption of this standard is permitted for accounting changes and correction of errors made in fiscal years beginning after June 1, 2005. In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue 05-6, Determining the Amortization Period for Leasehold Improvements, which requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. EITF 05-6 is effective for periods beginning after July 1, 2005. We do not expect the provisions of this consensus to have a material impact on the our financial position, results of operations or cash flows. In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. FIN 47 also defines when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. The provision is effective no later than the end of fiscal years ending after December 15, 2005. The Company will adopt FIN 47 and does not believe the adoption will have a material impact on its consolidated financial position or results of operations or cash flows. 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. 16 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 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. 17 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. 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. 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. 18 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 August 30, 2005, NeoMedia signed a distribution agreement with Jinche Yingang Automobile Co. of Beijing, China ("Jinche"), under which Jinche will act as a distributor of automotive products in China. Jinche is a Beijing PRC-registered company specializing in automobile sales, financing, insurance and repair. NeoMedia will supply Jinche with its micro paint repair products, as well as various other automotive aftermarket products from other manufacturers. On September 27, 2005, NeoMedia signed a definitive distribution agreement to bring its NeoMedia Micro Paint Repair business to Mexico and Latin America, as well as be a distributor of other automotive aftermarket products. The agreement, signed with Micropaint de Mexico, S.A. ("Micropaint de Mexico"), calls for Micropaint de Mexico to serve as an exclusive distributor of NeoMedia's micro paint repair products, systems and licenses to automotive service facilities throughout Mexico and Latin America. The Agreement also calls for Micropaint de Mexico to buy certain automotive aftermarket repair and environmental protection products from NeoMedia. Founded earlier this year and based in Monterrey, Mexico, Micropaint de Mexico specializes in providing automotive aftermarket products throughout Mexico and Latin America. On October 4, 2005, NeoMedia signed a definitive distribution agreement to bring its NeoMedia Micro Paint Repair business to Scandinavia. The agreement, signed with WITHO-AS of Oslo, Norway ("WITHO-AS"), calls for WITHO-AS to serve as an exclusive distributor of NeoMedia's micro paint repair products, systems and licenses to automotive service facilities throughout Denmark, Sweden, and Norway. Based in Oslo, Norway, WI-THO AS is a new company formed to specialize in products and services involving micro paint repairs for automobiles in Denmark, 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. 19 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, currently in process. 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, 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. 20 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 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. 21 In March 2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based Payment" ("SAB 107"), which provides interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. It also provides the SEC staff's views regarding valuation of share-based payment arrangements. In April 2005, the SEC amended the compliance dates for SFAS 123(R), to allow companies to implement the standard at the beginning of their next fiscal year, instead of the next reporting period beginning after June 15, 2005. Management is currently evaluating the impact SAB 107 will have on our consolidated financial statements. 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. 22 (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. Results Of Operations For The Three Months Ended September 30, 2005 As Compared To The Three Months Ended September 30, 2004 Net sales. Total net sales for the three months ended September 30, 2005 were $436,000, which represented a decrease of $35,000, or 7%, from $471,000 for the three months ended September 30, 2004. This decrease primarily resulted from reduced recognition of deferred revenue relating to software maintenance and proprietary license revenue in the consulting and integration services business unit. NeoMedia could realize an increase in net sales over the next 12 months with the anticipated acquisitions of BSD Software, Inc. and Mobot, Inc., and 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 $88,000 for the three months ended September 30, 2005, compared with $96,000 for the three months ended September 30, 2004, a decrease of $8,000, or 8%. The decrease was due primarily to reduced recognition of deferred revenue relating to proprietary license revenue in the consulting and integration services business unit. 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 $33,000, or 24%, to $105,000 for the three months ended September 30, 2005, as compared to $138,000 for the three months ended September 30, 2004. This decrease primarily resulted from reduced recognition of deferred revenue relating to software maintenance products. 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 September 30, 2005, rather than the three months ended September 30, 2004. Micro paint repair products and services. Sales of micro paint repair products and services were $243,000 for the three months ended September 30, 2005, compared with $237,000 for the three months ended September 30, 2004 an increase of $6,000 or 3%. The increase resulted primarily from the sale of additional micro paint repair systems since September 30, 2004. NeoMedia expects micro paint-related sales to more closely resemble the results for the three months ended September 30, 2005, rather for the three months ended three months ended September 30, 2004. NeoMedia could realize an increase in net sales over the next 12 months if the Company is successful in implementing its business plan for its Micro Paint Repair business unit, including revenue from distribution agreements signed in 2005 with distributors in China, New Zealand, Scandinavia, and Mexico. Cost of license fees. Cost of license fees was $54,000 for the three months ended September 30, 2005, an increase of $25,000, or 32%, compared with $79,000 for the three months ended September 30, 2004. Cost of license fees represents amortizatin of revenue generating intangible assets. Cost of resales of software and technology equipment and service fees. Cost of resales of software and technology equipment and service fees was $67,000 for the three months ended September 30, 2005, a decrease of $80,000, or 54%, compared with $147,000 for the three months ended September 30, 2004. The decrease resulted from decreased resales in 2005 compared with 2004. Cost of resales as a percentage of related resales was 64% in 2005, compared to 107% in 2004. This decrease has a direct correlation 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. 23 Cost of micro paint repair products and services. Cost of micro paint repair products and services was $214,000 for the three months ended September 30, 2005, compared with $151,000 for the three months ended September 30, 2004, an increase of $63,000 or 42%. The increase was primarily due to addition of fixed costs associated with the new micro paint facility located in Fort Myers, Florida. NeoMedia expects cost of micro paint will increase proportionate to any increase in sales of micro paint products over the next 12 months. Gross Profit. Gross profit was $101,000 for the three months ended September 30, 2005, an increase of $7,000, or 7%, compared with gross profit of $94,000 for the three months ended September 30, 2004. This increase was primarily the result of decreased resales in 2005 compared to 2004 offset by the addition of fixed costs associated with the new micro paint facility located in Fort Myers, Florida. Sales and marketing. Sales and marketing expenses were $834,000 for the three months ended September 30, 2005, compared to $514,000 for the three months ended September 30, 2004, an increase of $320,000 or 62%. The increase is a result of the addition of the micro paint business sales force 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 anticipated acquisitions of BSD Software, Inc. and Mobot, Inc., and the continued development and anticipated rollout of the PaperClick and Micro Paint Repair businesses. General and administrative. General and administrative expenses increased by $340,000, or 66%, to $856,000 for the three months ended September 30, 2005, compared to $516,000 for the three months ended September 30, 2004. The increase resulted primarily from additional personnel and 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 and Mobot, Inc. Research and development. During the three months ended September 30, 2005, NeoMedia charged to expense $285,000 of research and development costs, an increase of $171,000 or 150% compared to $114,000 for the three months ended September 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 added to the PaperClick product line. NeoMedia expects research and development costs to increase over the next 12 months with the anticipated acquisitions of BSD Software, Inc. and Mobot, Inc., and the continued development efforts related to the anticipated rollout of NeoMedia's PaperClick product suite. Gain/(loss) on extinguishment of debt. During the three months ended September 30, 2005, NeoMedia recognized a gain on extinguishment of debt of $1,000, a decrease of $5,000 or 83% compared to a gain of $6,000 during the three months ended September 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 September 30, 2004, NeoMedia recognized an amortization of debt issuance cost of $334,000. 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 September 30, 2005. 24 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 September 30, 2005, NeoMedia recognized interest expense of $77,000, an increase of $15,000 or 24% compared to interest expense of $62,000 during the three months ended September 30, 2004. The change is primarily due to interest accrued on a $10 million note payable to Cornell Capital Partners in 2005, offset by increased interest income resulting from higher cash balances in 2005. Net Loss. The net loss for the three months ended September 30, 2005 was $1,950,000, which represented increase of $510,000, or 35% from a loss of $1,440,000 for the three months ended September 30, 2004. The increase resulted primarily from expenses relating to increased sales, marketing, general and administrative expenses relating to the rollout of the Company's micro paint repair and PaperClick business units, as well as increased professional fees. Results Of Operations For The Nine Months Ended September 30, 2005 As Compared To The Nine Months Ended September 30, 2004 Net sales. Total net sales for the nine months ended September 30, 2005 were $1,721,000, which represented an increase of $452,000, or 36%, from $1,269,000 for the nine months ended September 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 patent lawsuits lawsuit. This revenue increase was offset by reduced recognition of deferred revenue relating to software maintenance and proprietary license revenue in the consulting and integration services business unit. NeoMedia could realize an increase in net sales over the next 12 months with the anticipated acquisitions of BSD Software, Inc. and Mobot, Inc., and 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 $426,000 for the nine months ended September 30, 2005, compared with $256,000 for the nine months ended September 30, 2004, an increase of $170,000, or 66%. The increase was due primarily to licensing fees from settlement of the patent lawsuits in 2005. 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 $165,000, or 33%, to $336,000 for the nine months ended September 30, 2005, as compared to $501,000 for the nine months ended September 30, 2004. This decrease primarily resulted from reduced recognition of deferred revenue relating to software maintenance revenue in the consulting and integration services business unit. NeoMedia intends to continue to pursue additional resales of equipment, software and services. NeoMedia expects resales to more closely resemble the results for the nine months ended September 30, 2005, rather than the nine months ended September 30, 2004. Micro paint repair products and services. Sales of micro paint repair products and services were $959,000 for the nine months ended September 30, 2005, compared with $512,000 for the nine months ended September 30, 2004, an increase of $447,000 or 87%. 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 an increase in the number of active paint systems since September 30, 2004. NeoMedia expects sales of micro paint to more closely resemble the results for the nine months ended September 30, 2005, rather than the nine months ended September 30, 2004. Cost of license fees. Cost of license fees was $302,000 for the nine months ended September 30, 2005, a increase of $53,000, or 21%, compared with $249,000 for the nine months ended September 30, 2004. Cost of license fees represents amortization of revenue generating intangible assets. 25 Cost of resales of software and technology equipment and service fees. Cost of resales of software and technology equipment and service fees was $208,000 for the nine months ended September 30, 2005, a decrease of $272,000, or 57%, compared with $480,000 for the nine months ended September 30, 2004. The decrease resulted from decreased resales in 2005 compared with 2004. Cost of resales as a percentage of related resales was 62% in 2005, compared to 96% 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 $724,000 for the nine months ended September 30, 2005, compared with $376,000 for the period between February 6, 2004 through September 30, 2004, an increase of $348,000 or 93%. The increase was primarily due to of the cost of sale of products to Micro Paint Repair Australasia, NeoMedia's distributor in the Australia and New Zealand market, the cost of sale of products in relation to increased sales and the fixed costs associated with the new micro paint facility located in Fort Myers, Florida. NeoMedia expects cost of micro paint will increase proportionate to any increase in sales of micro paint products over the next 12 months. Gross Profit. Gross profit was $487,000 for the nine months ended September 30, 2005, an increase of $323,000, or 197%, compared with gross profit of $164,000 for the nine months ended September 30, 2004. This increase was primarily the result of increased micro paint sales, and high-margin patent license fees in 2005 compared with 2004. Sales and marketing. Sales and marketing expenses were $2,859,000 for the nine months ended September 30, 2005, compared to $1,461,000 for the nine months ended September 30, 2004, an increase of $1,398,000 or 96%. The increase is a result of the addition of the micro paint business sales force, non-cash recognition 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 anticipated acquisitions of BSD Software, Inc. and Mobot, Inc., and the continued development and anticipated rollout of the PaperClick and Micro Paint Repair businesses. General and administrative. General and administrative expenses increased by $1,124,000, or 87%, to $2,417,000 for the nine months ended September 30, 2005, compared to $1,293,000 for the nine months ended September 30, 2004. The increase resulted primarily from additional personnel and 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 and Mobot, Inc. Research and development. During the nine months ended September 30, 2005, NeoMedia charged to expense $629,000 of research and development costs, an increase of $275,000 or 78% compared to $354,000 for the nine months ended September 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 added to the PaperClick product line. NeoMedia expects research and development costs to increase over the next 12 months with the anticipated acquisitions of BSD Software, Inc. and Mobot, Inc., and the continued development efforts related to the anticipated rollout of NeoMedia's PaperClick product suite. Gain on extinguishment of debt. During the nine months ended September 30, 2005, NeoMedia recognized a gain on extinguishment of debt of $172,000, an increase of $43,000 or 33% compared to a gain of $129,000 during the nine months ended September 30, 2004. These gains resulted from 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. 26 Amortization of debt discount. During the nine months ended September 30, 2004, NeoMedia recognized an amortization of debt issuance cost of $2,500,000. 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 nine months ended September 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 nine months ended September 30, 2005, NeoMedia recognized interest expense of $223,000, an increase of $45,000 or 25% compared to interest expense of $178,000 during the nine months ended September 30, 2004. The change is primarily due to interest accrued on a $10 million note payable to Cornell Capital Partners in 2005, offset by increased interest income resulting from higher cash balances in 2005. Net Loss. The net loss for the nine months ended September 30, 2005 was $5,469,000, which represented a decrease of $24,000, or 1% from a loss of $5,493,000 for the nine months ended September 30, 2004. The decrease in net loss resulted primarily from increased revenue and gross margin relating to the micro paint repair business and settlement of patent lawsuits, as well as expenses relating to the amortization of debt discount in 2004. These increases were offset by increased sales, marketing, general and administrative expenses relating to the rollout of the Company's micro paint repair and PaperClick business units in 2005. Liquidity and Capital Resources Net cash used in operating activities was $5,951,000 for the nine months September 30, 2005, compared with $3,500,000 for the nine months ended September 30, 2004. NeoMedia's net cash flow used in investing activities for the nine months ended September 30, 2005 and 2004 was $2,326,000 and $212,000, respectively. Net cash provided by financing activities for the nine months ended September 30, 2005 and 2004 was $10,292,000 and $5,430,000, respectively. During the nine months ended September 30, 2005 and 2004, NeoMedia's net loss totaled $5,469,000 and $5,493,000, respectively. As of September 30, 2005, NeoMedia had accumulated losses from operations of $88,846,000, had a working capital deficit of $3,839,000, and $4,673,000 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 September 30, 2005, NeoMedia had made payments totaling $4.7 million against the principal of the note. As of September 30, 2005, NeoMedia had drawn $14.3 million against its current $20 million 2003 Standby Equity Distribution Agreement with Cornell Capital Partners, leaving an available balance of $5.7 million. During the three- and nine-month periods ended September 30, 2005, NeoMedia sold approximately 5.1 million and 19.3 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. 27 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. 28 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 end of 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 three fiscal quarters ended September 30, 2005, the Company's Principal Executive Officer and Principal Financial Officer have determined that there were no changes to the Company's internal controls over financial reporting that have materially affected, or are reasonably likely to materially effect, the Company's internal controls over financial reporting during the first three fiscal quarters ended September 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS On November 9, 2005, NeoMedia filed a definitive proxy statement, submitting to a vote of securities holders the following items: (i) re-election of its current five directors, (ii) ratification of Stonefield Josephson, Inc. as NeoMedia's auditors for the fiscal year ended December 31, 2005, and (iii) approval of a 2005 stock option plan that would reserve up to 60 million shares to be issued underlying employee stock options. The shareholder meeting is scheduled for December 16, 2005. 29 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. Scanbuy, Inc. On January 23, 2004, NeoMedia filed suit against Scanbuy, Inc. ("Scanbuy") in the Northern District of Illinois, claiming that Scanbuy 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, Scanbuy 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 Scanbuy for lack of personal jurisdiction. 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. 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 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. On October 19, 2005, Wachovia Bank, N.A. filed a complaint against NeoMedia in the twentieth judicial circuit court of Lee County, Florida, seeking payment of $97,000 of rent from previous years. NeoMedia is preparing its response. 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. 30 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 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. NeoMedia filed a report on Form 8-K on August 31, 2005 with respect to Item 1.01, reporting that it had entered into a paint distribution agreement with Beijing Sino-US Jinche Yingang Auto Technological Services Limited, under which Jinche would distribute NeoMedia's paint products to its locations throughout China. NeoMedia filed a report on Form 8-K on September 29, 2005 with respect to Item 1.01, reporting that it had entered into a paint distribution agreement with Micropaint de Mexico, under which Micropaint de Mexico would distribute NeoMedia's paint products throughout Mexico and Latin America. NeoMedia filed a report on Form 8-K, on October 6, 2005, with respect to Item 1.01, reporting that it had entered into a paint distribution agreement with WI-THO AS, under which WI-THO AS would distribute NeoMedia's paint products throughout Scandinavia. 31 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NEOMEDIA TECHNOLOGIES, INC. Registrant Date: November 17 2005 By: /s/ Charles T. Jensen ----------------- -------------------------------- Charles T. Jensen, President, Chief Executive Officer, and Director Date: November 17, 2005 By: /s/ David A. Dodge ----------------- -------------------------------- David A. Dodge, Vice President, Chief Financial Officer and principal accounting officer 32 EX-31.1 2 ex31-1.txt EXHIBIT 31.1 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302* I, Charles T. Jensen, Chief Executive Officer, certify that: 1. I have reviewed this form 10-QSB for the quarter ended September 30, 2005 of NeoMedia Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Omitted; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: November 17, 2005 By: /s/ Charles T. Jensen --------------------- Name: Charles T. Jensen Title: Chief Executive Officer *The introductory portion of paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b), have been omitted in accordance with Release No. 33-8545 (March 2, 2005) because the compliance period has been extended for small business issuers until the first fiscal year ending on or after July 15, 2006. EX-31.2 3 ex31-2.txt EXHIBIT 31.2 OFFICER'S CERTIFICATE PURSUANT TO SECTION 302* I, David A. Dodge, Chief Financial Officer, certify that: 1. I have reviewed this form 10-QSB for the quarter ended September 30, 2005 of NeoMedia Technologies, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Omitted; (c) Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting; and 5. The small business issuer's other certifying officer(s) and I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Date: November 17, 2005 By: /s/ David A. Dodge ------------------ Name: David A. Dodge Title: Chief Financial Officer and principal accounting officer *The introductory portion of paragraph 4 of the Section 302 certification that refers to the certifying officers' responsibility for establishing and maintaining internal control over financial reporting for the company, as well as paragraph 4(b), have been omitted in accordance with Release No. 33-8545 (March 2, 2005) because the compliance period has been extended for small business issuers until the first fiscal year ending on or after July 15, 2006. EX-32.1 4 ex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of NeoMedia Technologies, Inc. (the "Company") on Form 10-QSB for the quarter ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date November 17, 2005 By: /s/ Charles T. Jensen --------------------- Name: Charles T. Jensen Title: Chief Executive Officer A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to NeoMedia Technologies, Inc. and will be retained by NeoMedia Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of NeoMedia Technologies, Inc. (the "Company") on Form 10-QSB for the quarter ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: November 17, 2005 By: /s/ David A. Dodge ------------------ Name: David A. Dodge Title: Chief Financial Officer and principal accounting officer A signed original of this written statement required by Section 906, or other document authentications, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to NeoMedia Technologies, Inc. and will be retained by NeoMedia Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----