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 March 3, 2015. The results of operations for the three and nine months ended September 30, 2015 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 and its wholly owned subsidiaries. We operate as one reportable segment. All intercompany accounts, transactions and profits have been eliminated in consolidation.

Use of Estimates – The preparation of 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. Changes in facts and circumstances may result in revised estimates, which are recorded in the period in which they become known.

Going Concern – We have historically incurred operating losses, and we may continue to generate negative cash flows as we implement our business plan. There can be no assurance that our continuing efforts to execute our business plan will be successful and that we will be able to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared in conformity with US GAAP, which contemplates our continuation as a going concern. Our net loss for the nine months ended September 30, 2015 was $2,259 as compared to net income of $2,500 for the same period in 2014. The operating results for the nine months ended September 30, 2015 and 2014, respectively, included $3,103 and $1,651 of net expense related to financing instruments, and a gain on the settlement of debt of $4,247 in 2014.

Net cashused by operations during the nine months ended September 30, 2015 and 2014, respectively, was $41 and $333. As of September 30, 2015, we have an accumulated deficit of $241.6 million, and a working capital deficit of $41.2 million, including $40.4 million in current liabilities for our derivative and debenture financing instruments.

We currently do not have sufficient cash or commitments for financing to sustain our operations for the next twelve months if we are unable to generate sufficient cash flows from operations. Our plan is to develop new client and customer relationships and substantially increase our revenue derived from our products/services and IP licensing. If our revenues do not reach the level anticipated in our plan, we will require additional financing in order to execute our operating plan. If additional financing is required, we cannot predict whether this additional financing will be in the form of equity, debt, or another form, and we may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that we are unsuccessful in increasing our revenues and profits, we may be unable to implement our current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on our business, prospects, financial condition and results of operations, and our ability to continue as a going concern.

The maturitydate of our convertible debentures was extended from August 1, 2015, to February 5, 2016. The convertible debentures and preferred stock used to finance the Company, which may be converted into common stock at the sole option of the holders, have a highly dilutive impact when they are converted, greatly increasing the number of shares of common stock outstanding. During the first nine months of 2015, there were 767,633,768 million shares of common stock issued for these conversions. We cannot predict if or when each holder may or may not elect to convert into shares of common stock.

Our financial statements do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Basic and Diluted Net Income (Loss) Per Common Share – Basic net income (loss) per common share is computed by dividing net income (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share includes all outstanding stock options, warrants and convertible instruments, except in the case where doing so would be anti-dilutive, such as when we have a net loss. The weighted average shares outstanding for 2014 reflect the fifteen to one reverse stock split as though it had occurred on January 1, 2014. The components of basic and diluted income (loss) per share attributable to common stock shareholders were as follows (in thousands, except share and per share data):

	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Basic income (loss) per common share:
Numerator: Net income (loss) available to common shareholders	$	463	$	(1,088)	$	(2,259)	$	2,500
Denominator: Weighted average shares outstanding		4,900,892,387		1,357,349,653		4,770,891,318		810,443,147
Basic income (loss) per common share	$	0.000	$	(0.001)	$	(0.000)	$	0.003

Diluted income (loss) per common share:
Numerator:
Net income (loss) available to common shareholders	$	463	$	(1,088)	$	(2,259)	$	2,500
Effect of dilutive securities		—		—		—		—
Diluted net income (loss) available to common shareholders	$	463	$	(1,088)	$	(2,259)	$	2,500
Denominator:
Weighted average shares outstanding		4,900,892,387		1,357,349,653		4,770,891,318		810,443,147
Effect of dilutive securities		38,431,700		—		—		38,431,700
Diluted weighted average shares outstanding		4,939,324,087		1,357,349,653		4,770,891,318		848,874,847
Diluted income (loss) per common share	$	0.000	$	(0.001)	$	(0.000)	$	0.003

Recent Accounting Pronouncements – From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact of recently issued standards that are not yet effective may have an impact on our results of operations and financial position. ASU Update 2014-09 Revenue from Contracts with Customers (Topic 606) issued May 28, 2014 by FASB and IASB converged guidance on recognizing revenue in contracts with customers, effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, will be evaluated as to impact and implemented accordingly. In addition, ASU Update 2014-15 Presentation of Financial Statements-Going Concern (Sub Topic 205-40) issued August 27, 2014 by FASB defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern. The additional disclosure requirement is effective after December 15, 2016 and will be evaluated as to impact and implemented accordingly.