Financing

3 Months Ended

Mar. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 3 – Financing

At March 31, 2012 our financing transactions with YA Global, an accredited investor, included shares of our Series C preferred stock issued in February 2006, Series D preferred stock issued in January 2010, a series of thirty-one secured convertible debentures issued between August 2006 and March 2012 and various warrants to purchase shares of our common stock. All of our assets are pledged to secure our obligations under these securities. At various times YA Global has assigned or distributed portions of its holdings of these securities to other holders, including persons who are officers of YA Global and its related entities, as well as to other holders who are investors in YA Global’s funds.

Secured Debentures - The underlying agreements for each of the thirty-one debentures are very similar in form, except in regard to the interest rate, varying conversion prices per share, and the number of warrants that were issued in conjunction with each of the debentures. The debentures are convertible into our common stock, at the option of the holder, at the lower of a fixed conversion price per share or a percentage of the lowest volume-weighted average price (“VWAP”) for a specified number of days prior to the conversion (the “look-back period”). The conversion is limited such that the holder cannot exceed 9.99% ownership, unless the holder waives their right to such limitation. All of the debentures are secured according to the terms of a Security Pledge Agreement dated August 23, 2006, which was entered into in connection with the first convertible debenture issued to YA Global and which provides YA Global with a security interest in substantially all of our assets.  The debentures are also secured by a Patent Security Agreement dated July 29, 2008. On August 13, 2010, our wholly owned subsidiary, NeoMedia Europe GmbH, became a guarantor of all outstanding financing transactions between us and YA Global, through pledges of their intellectual property and other movable assets. As security for our obligations to YA Global, all of our Pledged Property, Patent Collateral and other collateral is affirmed through the several successive Ratification Agreements which have been executed in connection with each of the 2010, 2011 and 2012 financings.

All debentures with YA Global contain provisions for acceleration of principal and interest upon default. Certain debentures also contain default interest rates and conversion prices, as reflected in the table below.

We evaluated the financing transactions in accordance with FASB ASC 815, Derivatives and Hedging, and determined that the conversion features of the Series C and Series D preferred stock and the Debentures were not afforded the exemption for conventional convertible instruments due to their variable conversion rates. The contracts have no explicit limit on the number of shares issuable so they did not meet the conditions set forth in current accounting standards for equity classification. Accordingly, either the embedded derivative instruments, including the conversion option, must be bifurcated and accounted for as derivative instrument liabilities or, as permitted by FASB ASC 815-15-25-4, Recognition of Embedded Derivatives, the instruments may be carried in their entirety at fair value. We elected not to bifurcate the embedded derivatives in the March 2007, August 2007, April 2008 and May 2008 Debentures and, accordingly, these convertible instruments are being carried in their entirety at their fair values, with the changes in the fair value of the debentures charged or credited to income each period. We bifurcated the embedded derivatives related to the Series C and Series D preferred stock and the remaining debentures. Significant components of the compound derivative include (i) the embedded conversion feature, (ii) down-round anti-dilution protection features and (iii) default, non-delivery and buy-in puts, all of which were combined into one compound instrument that is carried at fair value as a derivative liability. Changes in the fair value of the compound derivative liability, including the embedded conversion option, are charged or credited to income each period.

The table below summarizes the significant terms of the debentures that are carried at their amortized cost and for which the compound embedded derivative is bifurcated and accounted for as a derivative liability as of March 31, 2012:

					Conversion Price – Lower of Fixed Price or Percentage of VWAP for Look- back Period
				Default		Anti-Dilution
Debenture	Face		Interest	Interest	Fixed	Adjusted		Default	Look-back
Issuance Year	Amount		Rate	Rate	Price	Price	%	%	Period
	(in thousands)
2006	$	6,582	10%	n/a	$2.00	$0.00675	90%	n/a	125 Days
2008		4,788	14%- 15%	20%-24%	$1.00-$2.00	$0.00600-$0.007125	80%-95%	50%-75%	125 Days
2009		1,778	14%	20%	$2.00	$0.007125	95%	50%	125 Days
2010		3,881	14%	20%	$0.10- $0.30	$0.007125	95%	50%	60 Days
2011		3,766	14%	20%	$0.10	$0.007125	95%	50%	60 Days
2012		1,300	14%	20%	$0.10	$0.007125	95%	50%	60 Days
Total	$	22,095

The following table summarizes the significant terms of each of the debentures for which the entire hybrid instrument is recorded at fair value at March 31, 2012:

					Conversion Price – Lower of Fixed Price or Percentage of VWAP for Look- back Period
				Default		Anti-Dilution
Debenture	Face		Interest	Interest	Fixed	Adjusted		Default	Look-back
Issuance Year	Amount		Rate	Rate	Price	Price	%	%	Period
	(in thousands)
2007	$	7,394	13%-14%	n/a	$2.00	$0.006-$0.00675	80%-90%	n/a	125 days
2008		1,680	15%	24%	$1.00- $1.50	$0.00600	80%	50%-75%	125 days
Total	$	9,074

Conversions –Our preferred stock and convertible debentures are convertible into shares of our common stock. Upon conversion of any of the convertible financial instruments, the carrying amount of the debt, including any unamortized premium or discount, and the related derivative instrument liability are credited to the capital accounts to reflect the stock issued and no gain or loss is recognized.

The following table provides a summary of the preferred stock conversions that have occurred since inception and the number of common shares issued upon conversion.

			Preferred		Preferred		Common
	Preferred shares		shares		shares		shares
	issued		converted		remaining		issued
	(in thousands)
Series C preferred stock		22		17		5		273,382
Series D preferred stock		25		15		10		152,864

The outstanding principal and accrued interest for the debentures as of March 31, 2012 is reflected in the following table in addition to the principal and interest converted since inception and the number of common shares issued upon conversion.

	Outstanding		Principal and
	principal and		accrued interest		Common
	accrued interest at		converted since		shares
	March 31, 2012		inception		issued
	(in thousands)
Debentures	$	39,535	$	4,051		267,353

Warrants - YA Global holds warrants to purchase shares of our common stock that were issued in connection with the convertible debentures and the Series C and Series D preferred stock. The warrants are exercisable at a fixed exercise price which, from time to time, has been reduced due to anti-dilution provisions when the Company has entered into subsequent financing arrangements with a lower price. The exercise prices may be reset again in the future if we subsequently issue stock or enter into a financing arrangement with a lower price. In addition, upon each adjustment in the exercise price, the number of warrant shares issuable is adjusted to the number of shares determined by multiplying the warrant exercise price in effect prior to the adjustment by the number of warrant shares issuable prior to the adjustment divided by the warrant exercise price resulting from the adjustment.

The warrants issued to YA Global do not meet all of the established criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and accordingly, are recorded as derivative liabilities at fair value. Changes in the fair value of the warrants are charged or credited to income each period.

2012 Financing Transactions – During 2012, we entered into three Securities Purchase Agreements to issue and sell three debentures to YA Global in the aggregate principal amount of $1,300,000. The debentures are convertible, at the option of the holder, at a conversion price equal to the lesser of (i) $0.10 or (ii) 95% of the lowest closing bid price of our common stock for the 60 trading days preceding the date of conversion. The debentures bear interest at 14% and mature on July 29, 2012. We have the right to redeem a portion or all amounts outstanding under the debentures at a redemption premium of 10%, plus accrued interest.  We also issued warrants to YA Global in conjunction with the debentures. The warrants were issued with an initial fixed exercise price of $0.15 per share; however, as a result of the anti-dilution protection in these warrants, the issuance of subsequent debentures for a lower price resets the fixed exercise price of the warrants to the lower price and adjusts the number of warrant shares issuable. All warrants issued during 2012 have a term of five years. 

The following table provides a summary of the allocation of the components of the new debentures and warrants issued during 2012. The compound derivatives were valued using a Monte Carlo Simulation valuation method and the warrants were valued using a binomial option valuation method. Significant assumptions used to value the compound derivatives and warrants as of inception of the financings are also provided in the table below.

	January 11,			February 6,			March 26,
	2012			2012			2012
	issuance			issuance			issuance
	(in thousands)
Gross proceeds	$	400		$	450		$	450
Structuring and due diligence fee		(25	)		(25	)		(25	)
	$	375		$	425		$	425
Derivative liabilities:
Investor warrants	$	(13	)	$	(9	)	$	(42	)
Compound derivative		(289	)		(176	)		(287	)
Total derivative liabilities		(302	)		(185	)		(329	)
Convertible debenture-initial carrying value		(73	)		(240	)		(96	)
	$	(375	)	$	(425	)	$	(425	)
Warrant shares issued (in thousands)		1,000			1,000			1,000
Initial exercise price of warrants	$	0.1500		$	0.1500		$	0.1500
Warrant valuation inputs:
Anti-dilution adjusted exercise price	$	0.0135		$	0.0090		$	0.0418
Expected life		5 years			5 years			5 years
Estimated volatility		274	%		254	%		243	%
Risk free rate of return		0.32	%		0.33	%		0.48	%
Dividend yield		—			—			—
Compound derivative valuation inputs:
Conversion price	$	0.009975		$	0.009425		$	0.030772
Equivalent volatility		170	%		166	%		170	%
Equivalent interest risk		14.00	%		14.00	%		14.00	%
Equivalent credit risk		7.37	%		7.37	%		7.19	%

Fair value disclosures

Bifurcated Embedded Derivative Instruments – Series C and Series D preferred stock and Convertible Debentures - For financings in which the embedded derivative instruments are bifurcated and recorded separately, the compound embedded derivative instruments are valued using a Monte Carlo Simulation methodology because that model embodies certain relevant assumptions (including, but not limited to, interest rate risk, credit risk, and conversion/redemption privileges) that are necessary to value these complex derivatives.

The conversion price in each of the convertible debentures is subject to adjustment for down-round, anti-dilution protection.  Accordingly, if we sell common stock or common share indexed financial instruments below the stated or variable conversion price of the debenture, the conversion price adjusts to that lower amount.

The assumptions included in the calculations are highly subjective and subject to interpretation.  Assumptions used as of March 31, 2012 included exercise estimates/behaviors and the following other significant estimates: remaining term of 0.33 years, equivalent volatility of 168%, equivalent interest rate ranging from 8% - 14%, equivalent credit-risk adjusted rate of 7.19% and anti-dilution adjusted conversion prices ranging from $0.006000 - $0.007125. Equivalent amounts reflect the net results of multiple modeling simulations that the Monte Carlo Simulation methodology applies to underlying assumptions.

Due to the variable component of the conversion price, rapid fluctuations in the trading market price may result in significant variations to the calculated conversion price. For each debenture, we analyze the ratio of the conversion price (as calculated based on the percentage of VWAP for the appropriate look-back period) to the trading market price for a period of time equal to the term of the debenture to determine the average ratio for the term of the note. Each quarter, the ratio in effect on the date of the valuation is compared with the average ratio over the term of the debenture to determine if the calculated conversion price is representative of past trends or if it is considered unrepresentative due to a large fluctuation in the stock price over a short period of time. If the calculated conversion price results in a ratio that deviates significantly from the average ratio over the term of the agreement, the average ratio of the conversion price to the trading market price is then multiplied by the current trading market price to determine the variable conversion price for use in the fair value calculations. This variable conversion price is then compared with the fixed conversion price and, as required by the terms of the debentures, the lower of the two amounts is used as the conversion price in the Monte Carlo Simulation model used for valuation purposes. On March 31, 2012, the fixed conversion price for each of the debentures was equal to or higher than the calculated variable conversion price. Accordingly, the variable conversion price was used in the Monte Carlo Simulation model. This analysis is performed each quarter to determine if the calculated conversion price is reasonable for purposes of determining the fair value of the embedded conversion features (for instruments recorded under FASB ASC 815-15-25-1) or the fair value of the hybrid instrument (for instruments recorded under FASB ASC 815-15-25-4).

The following table reflects the face value of the instruments, their amortized cost carrying value and the fair value of the separately-recognized compound embedded derivative as well the number of common shares into which the instruments are convertible as of March 31, 2012 and December 31, 2011.

March 31, 2012							Embedded		Common
	Face		Carrying		Accrued		Conversion		Stock
	Value		Value		Interest		Feature		Shares
	(in thousands)
Series C preferred stock	$	4,840	$	4,840	$	-	$	15,039		665,246
Series D preferred stock	$	989	$	989	$	-		3,074		135,973
Debentures:
2006	$	6,582	$	6,582	$	3,705		22,699		1,528,815
2008		4,788		4,788		2,393		15,673		1,013,540
2009		1,778		1,768		799		5,799		361,695
2010		3,881		2,151		907		14,627		671,873
2011		3,766		1,585		540		13,603		595,401
2012		1,300		537		22		4,261		185,678
Total	$	22,095	$	17,411	$	8,366	$	94,775		5,158,221

December 31, 2011							Embedded		Common
	Face		Carrying		Accrued		Conversion		Stock
	Value		Value		Interest		Feature		Shares
	(in thousands)
Series C preferred stock	$	5,086	$	5,086	$	-	$	554		499,084
Series D preferred stock	$	1,395	$	1,395	$	-		152		136,899
Debentures:
2006	$	7,061	$	7,061	$	3,550		1,554		1,128,515
2008		4,788		4,788		2,226		932		712,474
2009		1,983		1,965		736		370		278,427
2010		3,881		1,426		770		2,692		470,718
2011		4,725		1,077		376		2,917		436,730
Total	$	22,438	$	16,317	$	7,658	$	9,171		3,662,847

The terms of the embedded conversion features in the convertible instruments presented above provide for variable conversion rates that are indexed to our common stock price. As a result, the number of indexed shares is subject to continuous fluctuation. For presentation purposes, the number of shares of common stock into which the embedded conversion feature of the Series C and Series D preferred stock was convertible as of March 31, 2012 and December 31, 2011 was calculated as face value plus assumed dividends (if declared), divided by the lesser of the fixed rate or the calculated variable conversion price using the 125 day look-back period. The number of shares of common stock into which the embedded conversion feature in the convertible debentures was convertible as of March 31, 2012 and December 31, 2011 was calculated as the face value of each instrument divided by the variable conversion price using the appropriate look-back period.

Changes in the fair value of derivative instrument liabilities related to the bifurcated embedded derivative features of convertible instruments not carried at fair value are reported as “Gain (loss) from change in fair value of derivative liability – Series C and Series D preferred stock and debentures” in the accompanying consolidated statements of operations.

The changes in fair value of these derivative financial instruments were as follows:

	Three months ended March 31, 2012
	2012			2011
	(in thousands)
Series C preferred stock	$	(15,117	)	$	2,440
Series D preferred stock		(3,292	)		552
Debentures:
2006		(21,885	)		1,888
2008		(14,741	)		1,238
2009		(5,450	)		389
2010		(11,935	)		635
2011		(13,721	)		305
2012		(3,508	)		-
		(89,649	)		7,447
Less: Day-one loss from debenture financings		-			(776	)
Gain (loss) from change in fair value of derivative liability	$	(89,649	)	$	6,671

Hybrid Financial Instruments Carried at Fair Value – 2007 and 2008 Convertible Debentures - The March 2007, August 2007, April 2008 and May 2008 convertible debentures are recorded as hybrid instruments in accordance with FASB ASC 815-15-25-4 and the entire hybrid instrument was initially recorded at fair value, with subsequent changes in fair value charged or credited to income each period. Because these debentures are carried in their entirety at fair value, the value of the embedded conversion feature is effectively embodied in those fair values. These financial instruments are valued using the common stock equivalent approach. The common stock equivalent is calculated using the shares indexed to the debentures using the variable conversion price based on the 125 day look-back period and valued at the market price of our stock and the present value of the coupon from inception of the debentures to the maturity date of July 29, 2012 and the default puts using a credit risk adjusted discount rate, currently 7.19%.

On December 23, 2010 and again on February 18, 2011, we made payments to YA Global of $1.0 million each of accrued interest, related to the March 27, 2007 debenture.

The following table reflects the face value of the instruments, the fair value of the hybrid financial instrument and the number of common shares into which the instruments are convertible as of March 31, 2012 and December 31, 2011.

March 31, 2012					Common
	Face		Fair		Stock
	Value		Value		Shares
		(in thousands)
Debentures:
2007	$	7,394	$	37,432		1,128,229
2008		1,680		9,456		280,000
Total	$	9,074	$	46,888		1,408,229

December 31, 2011					Common
	Face		Fair		Stock
	Value		Value		Shares
	(in thousands)
Debentures:
2007	$	7,682	$	13,115		836,428
2008		1,680		3,343		200,001
Total	$	9,362	$	16,458		1,036,429

Changes in the fair value of convertible instruments that are carried in their entirety at fair value are reported as “Gain (loss) from change in fair value of hybrid financial instruments” in the accompanying consolidated statements of operations. The changes in fair value of these hybrid financial instruments were as follows:

	Three months ended
	2012			2011
	(in thousands)
2007	$	(25,057	)	$	2,020
2008		(6,113	)		451
Gain (loss) from changes in fair value of hybrid instruments	$	(31,170	)	$	2,471

Warrants - The following table summarizes the warrants outstanding, their fair value and their exercise price after adjustment for anti-dilution provisions:

		March 31, 2012						December 31, 2011
		Anti-Dilution						Anti-Dilution
		Adjusted						Adjusted
	Expiration	Exercise				Fair		Exercise				Fair
	Year	Price		Warrants		Value		Price		Warrants		Value
				(in thousands)						(in thousands)
Warrants issued with preferred stock:
Series D preferred stock	2017		0.007125		315,789	$	9,406		0.00998		225,564	$	2,535
Warrants issued with debentures:
2007	2012		0.007125		210,526		4,848		0.00998		401,002		1,510
2008	2015		0.007125		860,526		25,418		0.00998		614,662		6,876
2010	2015		0.007125		294,035		8,677		0.00998		210,025		2,335
2011	2016		0.007125		210,526		6,263		0.00998		150,376		1,686
2012	2017		0.007125		63,158		1,882		n/a		—		—
Total					1,954,560	$	56,494				1,601,629	$	14,942

The warrants are valued using a binomial option valuation methodology because that model embodies all of the significant relevant assumptions that address the features underlying these instruments. Significant assumptions used in this model as of March 31, 2012 included an expected life equal to the remaining term of the warrants, an expected dividend yield of zero, estimated volatility ranging from 136% to 251%, and risk-free rates of return of 0.07% to 0.44%. For the risk-free rates of return, we use the published yields on zero-coupon Treasury Securities with maturities consistent with the remaining term of the warrants and volatility is based upon our expected stock price volatility over the remaining term of the warrants. As a result of the anti-dilution provisions, the fixed exercise price of the warrants has been reset equal to the lowest price of any subsequently issued common share indexed instruments with a conversion price below the previously stated exercise price of the warrant.

Changes in the fair value of the warrants are reported as "(Gain) loss from change in fair value of derivative liability - warrants" in the accompanying consolidated statement of operations. The changes in the fair value of the warrants were as follows:

	Three months ended March 31,
	2012			2011
	(in thousands)
Warrants issued with preferred stock:
Series C preferred stock	$	-		$	53
Series D preferred stock		(6,871	)		189
Warrants issued with debentures:
2006		-			140
2007		(3,337	)		143
2008		(18,543	)		408
2010		(6,342	)		711
2011		(4,577	)		138
2012		(1,818	)		-
Total	$	(41,488	)	$	1,782

Reconciliation of changes in fair value – Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments that are measured at fair value on a recurring basis are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value using Level 3 inputs and changes in the fair value of hybrid instruments carried at fair value during the three months ended March 31, 2012:

	Compound
	Embedded			Warrant		Hybrid
	Derivatives			Derivatives		Instruments			Total
Beginning balance, December 31, 2011:	$	9,171		$	14,942	$	16,458		$	40,571
Issuances:
January 11, 2012		289			13		-			302
February 6, 2012		176			9		-			185
March 26, 2012		287			42		-			329
Fair value adjustments:
Compound embedded derivatives		89,649			-		-			89,649
Warrant derivatives		-			41,488		-			41,488
Hybrid instruments		-			-		31,170			31,170
Payment of interest:		-			-		-			-
Conversions:
Series C preferred stock		(632	)		-		-			(632	)
Series D preferred stock		(370	)		-		-			(370	)
August 24, 2006 financing		(740	)		-		-			(740	)
March 27, 2007 financing							(740	)		(740	)
May 1, 2009 financing		(21	)							(21	)
June 28, 2011  financing		(136	)							(136	)
August 15, 2011 financing		(1,440	)							(1,440	)
September 15, 2011 financing		(1,458	)							(1,458	)
										-
Ending balance, March 31, 2012	$	94,775		$	56,494	$	46,888		$	198,157

Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, valuation techniques are sensitive to changes in the trading market price of our common stock, which has a high estimated historical volatility. Because derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.

Subsequent events

A secured convertible debenture in the amount of $450,000 was issued on April 26, 2012. The debenture is convertible, at the option of the holder, at a conversion price equal to the lesser of (i) $0.10 or (ii) 95% of the lowest closing bid price of our common stock for the 60 trading days preceding the date of conversion. The stated maturity date of the debenture is July 29, 2012.

Subsequent to March 31 2012, holders of convertible debentures converted $835,339 of principal and accrued interest on those debentures into 144,513,498 shares of our common stock. Holders of Series C and D preferred stock converted those securities into 62,328,837 shares of our common stock.