Note 2 – Summary of Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. We believe these statements include all adjustments, which are of a normal and recurring nature, considered necessary for a fair presentation of the financial statements. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the financial statements and notes thereto included in our annual report on Form 10-K filed with the SEC on April 1, 2013. The results of operations for the nine months ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year.

Basis of Presentation – The condensed consolidated financial statements include the accounts of NeoMedia Technologies, Inc. and its wholly-owned subsidiary. We operate as one reportable segment. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates – The preparation of the condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.

Foreign Currency – Historically, the functional currency of NeoMedia Europe GmbH was the Euro, its local currency, and we recorded translation gains and losses associated with the conversion of the subsidiary financial statements to U.S. dollars in accumulated other comprehensive loss as a component of shareholders’ deficit. During the third quarter of 2013, we determined that changes in economic facts and circumstances indicated that the functional currency of NeoMedia Europe GmbH had changed from the Euro to the U.S. dollar. The changes included, among other things, the termination of the hardware business and related sales activities that would allow the subsidiary to generate revenue independently in the local market or otherwise, and the completion of a repositioning of the subsidiary from a self-contained, revenue generating operation to a cost center focused primarily on research and development. As a result of the change in functional currency, translation gains and losses associated with the conversion of the NeoMedia Europe GmbH financial statements will be prospectively recorded in our results from operations effective July 1, 2013.

Revenue Recognition – We derive revenues from the following primary sources: (1) license fees relating to intellectual property, and (2) software and service revenues related to mobile marketing barcode infrastructure management and development, barcode readers and internally developed software.

We recognized revenue when: (a) persuasive evidence of the sales arrangement exists, (b) the arrangement fee is fixed or determinable, (c) service delivery or performance has occurred, (d) customer acceptance has been received, if contractually required, and (e) collectability of the arrangement fee is probable. Revenue associated with licensing agreements primarily consists of non-refundable upfront license fees. Non-refundable upfront license fees received under license agreements, whereby continued performance or future obligations are considered inconsequential to the relevant license technology, are recognized as revenue upon delivery of the technology. We typically use signed contractual agreements as persuasive evidence of a sales arrangement.

If at the inception of an arrangement the fee is not fixed or determinable, we defer revenue until the arrangement fee becomes due and payable. If we determine collectability is not probable, we defer revenue until we receive payment or collection becomes probable, whichever is earlier. The determination of whether fees are collectible requires judgment of our management, and the amount and timing of revenue recognition may change if different assessments are made.

Revisions to 2013 Interim Reporting – In connection with the completion of our third quarter 2013 reporting, we identified certain errors associated with our first and second quarter 2013 interim reporting. We assessed the impact of these errors and concluded that the errors did not result in a material misstatement. To correct the errors, we have revised our nine months ended September 30, 2013 reporting as discussed below. Our assessment considered the guidance provided by Accounting Standards Codification (ASC) Topic 250, Accounting Changes and Error Corrections and ASC Topic 250-10-S99-1, Assessing Materiality. Based on our conclusion that the errors were not material individually or in aggregate to any of the prior reporting periods, we determined amendments to previously filed financial statement reports were not required in accordance with the applicable ASC guidance. We also concluded that the revisions applicable to prior periods should be reflected herein and will be reflected in future filings containing such information.

The condensed consolidated statements of operations for the six months ended June 30, 2013 included a clerical error resulting in an understatement of general and administrative expenses of approximately $51,000. The revised net loss for the six months ended June 30, 2013 was $21,335,000, and there was no material effect on the basic and fully diluted net loss per share of $0.007. The previously reported condensed consolidated statements of operations for the three months ended March 31, 2013 and June 30, 2013 were properly stated.

As discussed in Note 4 – Financing, we are limited to issuing shares of common stock in connection with preferred stock and debenture conversions at no less than par value. The methodology used to determine the number of common stock shares issued for debentures and preferred stock is based upon the market value received for the shares issued, and any short-fall between the par value of the shares issued and the market value of the shares is recorded as a deemed dividend. During the three and six months ended June 30, 2013, the conversion of debentures and Series C Preferred Stock resulted in deemed dividends of $681,000 and $16,000, respectively, and the deemed dividend amounts were not reflected in the net loss available to common shareholders. The revised net loss available to common shareholders reflecting the inclusion of the deemed dividends was $31,069,000 and $22,032,000 for the three and six months ended June 30, 2013, respectively. The revised net loss available to common shareholders for the six months ended June 30, 2013 includes the impact of the correction to the general and administrative expenses noted in the above paragraph.

The condensed consolidated balance sheet as of June 30, 2013 included certain errors in connection with our consolidation of NeoMedia Europe GmbH. As a result of the errors, accounts payable and accrued expenses were understated by $163,000 and $38,000, respectively, as of June 30, 2013. Additionally, the accumulated other comprehensive income (loss) reported within shareholders’ deficit reflected income of $99,000 but should have reflected a loss of $102,000. The condensed consolidated statements of comprehensive income (loss) for the three and six months ended June 30, 2013 reflected other comprehensive losses of $223,000 and $334,000, respectively, but should have reflected other comprehensive gains of $22,000 and $133,000, respectively. The revised comprehensive losses for the three and six months ended June 30, 2013 were $30,350,000 and $21,202,000, respectively. The revised comprehensive loss for the six months ended June 30, 2013 includes the impact of the correction to the general and administrative expenses noted in the above paragraph.

The condensed consolidated statements of cash flows for the three months ended March 31, 2013 overstated net cash used in operating activities and effect of exchange rate changes on cash by approximately $113,000. The revised net cash used in operating activities was approximately $547,000 and the effect of exchange rate changes on cash was negative $2,000. The condensed consolidated statements of cash flows for the six months ended June 30, 2013 overstated net cash used in operating activities and effect of exchange rate changes on cash by approximately $334,000. The revised net cash used in operating activities was approximately $541,000 and the effect of exchange rate changes on cash was $0.

Basic and Diluted Net Income (Loss) Per Common Share – The components of basic and diluted income (loss) per share attributable to NeoMedia Technologies, Inc. common stock shareholders were as follows (in thousands, except share and per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Numerator:
Net income (loss) available to common shareholders	$	(26,245)	$	19,470	$	(48,276)	$	(21,945)
Effect of dilutive securities
Change in fair value of derivative liability Series C and D preferred stock and debentures		-		1,036		-		-
Change in fair value of derivative liability - warrants		-		4,897		-		-
Change in fair value of hybrid financial instruments		-		6,353		-		-
Interest expense on convertible debt		-		(10)		-		-
Numerator for diluted income (loss) per common share	$	(26,245)	$	31,746	$	(48,276)	$	(21,945)

Denominator
Weighted average shares used to compute basic income (loss) per common share		4,984,827,279		1,510,797,881		3,823,483,604		1,075,605,167
Effect of dilutive securities:
Derivative warrants		-		1,091,953,786		-		-
Convertible debentures		-		5,129,818,595		-		-
Convertible preferred stock		-		742,807,130		-		-
Denominator for diluted Income (loss) per common share		4,984,827,279		8,475,377,392		3,823,483,604		1,075,605,167

Basic income (loss) per common share	$	(0.005)	$	0.013	$	(0.013)	$	(0.020)
Diluted income (loss) per common share	$	(0.005)	$	0.004	$	(0.013)	$	(0.020)

We excluded 513,342,555 dilutive securities from the calculation of diluted income (loss) per common share for the three months and nine months ended September 30, 2013 because inclusion of these securities would be antidilutive.

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. The update improves the reporting of reclassifications out of accumulated other comprehensive income for certain transactions and is applied prospectively for periods beginning January 1, 2013. We do not anticipate that the accounting pronouncement will have a material impact on our consolidated financial statements in future periods.

In March 2013, the FASB issued ASU No. 2013-05, Liabilities (Topic 830): Parent’s Accounting for Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The ASU is effective beginning after December 15, 2013 and requires the release of any cumulative translation adjustment into net income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in foreign entity. We do not anticipate that the accounting pronouncement will have a material impact on our consolidated financial statements in future periods.

In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The ASU is effective for periods beginning after December 15, 2013 and standardizes the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. We do not anticipate that the accounting pronouncement will have a material impact on our consolidated financial statements in future periods.

From time to time, various other new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact of any other recently issued standards that are not yet effective will not have a material impact on our results of operations and financial position.