Financing

3 Months Ended

Mar. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 4 – Financing

At March 31, 2015, financial instruments arising from our financing transactions with YA Global Investments, L.P. (“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 six consolidated secured convertible debentures (the “Consolidated Debentures”) issued July 1, 2013 and various warrants to purchase shares of our common stock. All of our assets are pledged to secure our obligations under the debt 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 – We had originally entered into financing transactions with YA Global, which included a series of twenty-seven secured convertible debentures issued between August 2006 and July 2012. Effective July 1, 2013, the terms of the debentures held by YA Global were modified to consolidate the principal and interest amounts outstanding under all of the outstanding secured convertible debentures previously issued by us to YA Global, such that, upon the issuance of the Consolidated Debentures and cancellation of the prior debentures, the amount of outstanding debentures issued to YA Global decreased from twenty-seven to six debentures. The maturity dates of these secured convertible debentures were also extended from August 1, 2014 to August 1, 2015.

The underlying agreements for each of the Consolidated Debentures are very similar in form. The Consolidated 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 of the outstanding common stock, 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 executed in connection with each of the 2010, 2011 and 2012 financings. The 2013 modification and consolidation of the outstanding secured convertible debentures as well as the execution of an Amended and Restated Patent Security Agreement in 2013 reaffirmed the Pledged Property, Patent Collateral and other collateral pledged as security for our obligations to YA Global.

We evaluated the financing transactions in accordance with ASC 815, Derivatives and Hedging, and determined that the conversion features of the Series C and Series D preferred stock and the Consolidated 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 ASC 815-15-25-4, Recognition of Embedded Derivatives, the instruments may be carried in their entirety at fair value.

At inception, we elected to bifurcate the embedded derivatives related to the Series C and Series D preferred stock, while electing the fair value option for the Consolidated Debentures. ASC 825, Financial Instruments, allows us to elect the fair value option for recording financial instruments when they are initially recognized or if there is an event that requires re-measurement of the instruments at fair value, such as a significant modification of the debt.

On February 4, 2013, we entered into a Debenture Extension Agreement with YA Global to extend the maturity dates of the secured convertible debentures to August 1, 2014.   Because the effect of the extension did not exceed a significance threshold relative to cash flows prescribed by ASC 470-50, Debt Modifications and Extinguishments, extinguishment accounting was not applicable. On July 1, 2013, in addition to consolidating the secured debentures into six Consolidated Debentures, the maturity date was extended to August 1, 2015. Four of the Consolidated Debentures are non-interest bearing while the remaining two Consolidated Debentures accrue interest at 9.5% as outlined in further detail below. Debentures assigned to other investors by YA Global were also modified effective July 1, 2013 to extend the maturity date to August 1, 2015. We evaluated the impact of the modification on the accounting for the Consolidated Debentures in accordance with ASC 470-50-40-6 through 12 to determine whether extinguishment accounting was appropriate. Because the effect of the extension did not exceed a significance threshold relative to cash flows prescribed by ASC 470-50, Debt Modifications and Extinguishments, extinguishment accounting was not applicable.

The following table summarizes the significant terms of each of the debentures for which the entire hybrid instrument is recorded at fair value as of March 31, 2015:

								Conversion Price – Lower of Fixed Price or Percentage of VWAP for Look-back period
								Anti- Dilution
Debenture	Face		Interest			Fixed		Adjusted					Look-back
Issuance Year	Amount		Rate			Price		Price		%			Period
	(in thousands)
2006	$	1,962		9.5	%	$	2.00	$	0.000095		90	%		125 Days
2007		540		9.5	%	$	2.00	$	0.000095		90	%		125 Days
2007		272		-		$	2.00	$	0.000090		95	%		125 Days
2008		1,095		9.5	%	$	2.00	$	0.000095		90	%		125 Days
2008		830		-		$	2.00	$	0.000090		95	%		125 Days
2009		--		9.5	%	$	2.00	$	0.000095		90	%		125 Days
2011		794		9.5	%	$	2.00	$	0.000095		90	%		125 Days
2012		762		9.5	%	$	2.00	$	0.000095		90	%		125 Days
2012		210		-		$	2.00	$	0.000090		95	%		125 Days
2013		22,084		9.5	%	$	2.00	$	0.000095		90	%		125 Days
2013		7,127		-		$	2.00	$	0.000095		95	%		125 Days
2014		150		9.5	%	$	2.00	$	0.000090		90	%		125 Days
Total	$	35,826

We bifurcate the compound embedded derivatives related to the Series C and Series D preferred stock and carry these financial instruments as liabilities in the accompanying balance sheet.  Election to carry the instruments at fair value in their entirety is not available since their terms have not been modified. Significant components of the compound embedded 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 are recorded within income each period.

Conversions and Repayments – Our preferred stock and convertible debentures are convertible into shares of our common stock. Upon conversion of any of the convertible financial instruments in which the compound embedded derivative is bifurcated, the carrying amount of the debt, including any unamortized premium or discount, and the related derivative instrument liability are credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss is recognized. For instruments that are recorded in their entirety at the fair value of the hybrid instrument, the fair value of the hybrid instrument converted is credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss is recognized. Beginning in April 2013, the trading market price of our common stock (and the conversion price) was less than its par value. We are limited to issuing shares of common stock at no less than the par value, and all shares of our common stock issued in those conversions were issued at par value. However, the methodology used to estimate the number of shares of convertible debentures and preferred stock converted during this time are based upon the value received for the shares issued, with the difference between that value and the par value recorded as a deemed dividend.

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 through March 31, 2015.

	Preferred shares		Preferred shares		Preferred shares		Common shares
	issued		converted		remaining		issued
	(in thousands)
Series C Preferred Stock		22		18		4		1,264,419
Series D Preferred Stock		25		22		3		16,344

The outstanding principal and accrued interest for the debentures as of March 31, 2015 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 accrued interest at March 31, 2015		Principal and accrued interest converted since inception	Common Shares issued
		(in thousands)
Debentures	$	40,248	$	12,577	2,754,770

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 we have 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 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.

Effective February 1, 2013, 1.4 billion of the 1.9 billion warrants held by YA Global were cancelled and the remaining 500 million had their exercise price reduced to $0.0001 per share. These changes resulted in a decrease in fair value of the warrants of approximately $1.6 million during the first quarter of 2013.

Fair value disclosures for Series C and D Bifurcated Embedded Derivative Instruments – 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, 2015 included exercise estimates/behaviors and the following other significant estimates for valuing the preferred stock embedded derivatives: remaining term of 0.33 years, equivalent volatility of 939%, stated dividend of 8%, equivalent credit-risk adjusted rate of 13.0% and conversion price of $0.000097. Equivalent amounts reflect the net results of multiple modeling simulations that the Monte Carlo Simulation methodology applies to underlying assumptions.

Due to the variability of the conversion prices, fluctuations in the trading market price of our common stock 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 common 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, 2015, 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 ASC 815-15-25-1) or the fair value of the hybrid instrument (for instruments recorded under ASC 815-15-25-4).

The following table reflects the face value of the instruments, their amortized 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, 2015 and December 31, 2014:

March 31, 2015
	Face		Carrying		Embedded Conversion		Common Stock
	Value		Value		Feature		Shares
	(in thousands)
Series C Preferred Stock	$	4,317	$	4,317	$	1		44,505,155
Series D Preferred Stock		348		348		--		3,588,660
Total	$	4,665	$	4,665	$	1		48,093,815

December 31, 2014
	Face		Carrying		Embedded Conversion		Common Stock
	Value		Value		Feature		Shares
	(in thousands)
Series C Preferred Stock	$	4,332	$	4,332	$	5		44,659,794
Series D Preferred Stock		348		348		--		3,588,660
Total	$	4,680	$	4,680	$	5		48,248,454

The terms of the embedded conversion features in the convertible instruments presented above provide for variable conversion rates that are indexed to our quoted 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, 2015 and December 31, 2014 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.

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 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.

Gain (loss) from change in fair value of derivative liability – Series C and D Preferred Stock and debentures

	Three months ended March 31,
	2015		2014
	(in thousands)
Series C Preferred Stock	$	4	$	128
Series D Preferred Stock		1		9
Gain/(loss) from change in fair value of derivative liability	$	5	$	137

Hybrid Financial Instruments Carried at Fair Value  – At inception, the March 2007, August 2007, April 2008, May 2008 and April 2012 convertible debentures were recorded in their entirety at fair value as hybrid instruments in accordance with ASC 815-15-25-4 with subsequent changes in fair value charged or credited to income each period. As of May 25, 2012, we elected the fair value option for all other convertible debentures held by YA Global upon a re-measurement date that was triggered by significant modifications of the financial instruments.  The convertible debentures continued to be recorded in their entirety at fair value upon their consolidation into six Consolidated Debentures effective July 1, 2013.

Because these debentures are carried in their entirety at fair value, the value of the embedded conversion feature is embodied in those fair values. We estimate the fair value of the hybrid instrument as the present value of the cash flows of the instrument, using a risk-adjusted interest rate, enhanced by the value of the conversion option, valued using a Monte Carlo model. This method was considered by our management to be the most appropriate method of encompassing the credit risk and exercise behavior that a market participant would consider when valuing the hybrid financial instrument. Inputs used to value the hybrid instruments as of March 31, 2015 included: (i) present value of future cash flows for the debentures using an effective market interest rate of 13.0%, (ii) remaining term of 0.33 years, (iii) equivalent volatility of 939% and anti-dilution adjusted conversion prices ranging from $0.000090 - $0.000095.

The following table reflects the face value of the financial 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, 2015 and December 31, 2014.

March 31, 2015					Common
	Face		Fair		Stock
	Value		Value		Shares
	(in thousands)
Debentures:
2006	$	1,962	$	2,102		24,204,635
2007		812		1,034		11,677,185
2008		1,925		2,028		22,883,750
2009		--		30		331,733
2011		794		849		9,780,037
2012		972		1,155		13,124,733
2013		29,211		31,501		358,502,804
2014		150		152		1,752,311
Total	$	35,826	$	38,851		442,257,188

December 31, 2014					Common
	Face		Fair		Stock
	Value		Value		Shares
	(in thousands)
Debentures:
2006	$	1,961	$	2,019		23,871,436
2007		814		1,000		11,549,397
2008		1,925		1,949		22,598,665
2009		7		46		517,119
2011		785		800		9,469,332
2012		972		1,111		12,926,448
2013		29,211		30,297		354,041,487
2014		170		162		1,930,434
Total	$	35,845	$	37,384		436,904,318

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:

Gain (loss) from change in fair value of hybrid financial instruments

	Three months ended March 31,
	2015		2014
	(in thousands)
2006	$	(83)	$	(33)
2007		(34)		(417)
2008		(81)		7
2009		--		(4)
2010		--		--
2011		(34)		(12)
2012		(41)		379
2013		(1,236)		(465)
2014		(6)		--
		(1,515)		(545)
Less: Day-one loss from debenture financings		-		-
Gain (loss) from changes in fair value of hybrid instruments	$	(1,515)	$	(545)

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

			March 31, 2015						December 31, 2014
			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		0.001500		5,825	$	1		.000100		5,825	$	0
Warrants issued with debentures:
2008		2015		0.001500		15,872		1		0.000100		15,872		1
2010		2015		0.001500		5,423		1		0.000100		5,423		1
2011		2016		0.001500		3,883		0		0.000100		3,884		0
2012		2017		0.001500		2,330		0		0.000100		2,330		0
Total						33,333	$	3				33,333	$	2

The warrants are valued using a binomial lattice 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, 2015 included an expected life equal to the remaining term of the warrants, an expected dividend yield of zero, estimated volatility ranging from 657% to 2199%, and risk-free rates of return ranging from 0.05% to 0.65%. 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 common stock price volatility over the remaining term of the warrants. As a result of the repricing on February 1, 2013, the exercise price of the warrants is currently $0.0001.  The anti-dilution provisions are still applicable so in the future the fixed exercise price of the warrants may be reset to equal to the lowest price of any subsequently issued common share indexed instruments with a conversion price below the current exercise price of the warrant.

Changes in the fair value of the warrants are reported as Gain 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:

Gain (loss) from change in fair value of derivative liability – warrants

	Three months ended March 31,
	2015		2014
	(in thousands)
Warrants issued with preferred stock:
Series D Preferred Stock	$	--	$	66
Warrants issued with debentures:
2007		--		--
2008		(1)		177
2010		--		61
2011		--		43
2012		--		26
Total	$	(1)	$	373

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, 2015 (in thousands):

	Compound
	Embedded		Warrant		Hybrid
	Derivatives		Derivatives		Instruments		Total
Beginning balance, December 31, 2014:	$	6	$	2	$	37,384	$	37,392
Fair value adjustments:
Compound embedded derivatives		(5)		--		--		(5)
Warrant derivatives		--		1		--		1
Hybrid instruments		--		--		1,515		1,515
Conversions:
Series C Preferred Stock		--		--		--		--
August 24, 2006 financing		--		--		(12)		(12)
December 29, 2006 financing		--		--		--		--
March 27, 2007 financing		--		--		--		--
October 28, 2008 financing		--		--		--		--
August 14, 2009 financing		--		--		(16)		(16)
February 8, 2011 financing		--		--		--		--
March 11, 2011 financing		--		--		--		--
April 13, 2011 financing		--		--		--		--
May 31, 2011 financing		--		--		--		--
June 28, 2011 financing		--		--		--		--
December 8, 2011 financing		--		--		--		--
July 1, 2013 financing		--		--		--		--
Sep 15, 2014 financing		--		--		(20)		(20)
Ending balance, March 31, 2015	$	1	$	3	$	38,851	$	38,855

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.

Note Payable –  In 2014, we received financing of $242,000 from YA Global to meet short term cash needs related to legal expenses. The financing was through secured debentures in the form of a line of credit with varying maturity dates in 2016. The interest rate is 12% payable annually on the anniversary of the individual debenture.