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 MARCH 31, 2004
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 402, 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 May 10, 2004, there were 300,450,338 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)
MARCH 31
2004
------------
ASSETS
Current assets:
Cash and cash equivalents $ 635
Trade accounts receivable, net of allowance for doubtful accounts of $62 174
Inventories, net of allowance for obsolete & slow-moving inventory of $13 80
Prepaid expenses and other current assets 453
------------
Total current assets 1,342
Property and equipment, net 130
Capitalized patents, net 2,348
Capitalized and purchased software costs, net 111
Excess of purchase price over tangible assets of CSI 3,056
Other long-term assets 746
------------
Total assets $ 7,733
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,030
Amounts due under financing agreements 127
Amounts payable under settlement agreements 598
Liabilities of discontinued business unit 650
Sales taxes payable 107
Accrued expenses 1,451
Deferred revenues and other 576
Notes payable, net of unamortized discount of $606 2,067
------------
Total current liabilities 7,606
Long-term portion of amounts payable under settlement agreements, net of
current portion 35
------------
Total liabilities 7,641
------------
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,
298,811,499 shares issued and 291,628,580 outstanding 2,916
Additional paid-in capital 77,841
Deferred stock-based compensation (696)
Deferred debt issuance and equity financing costs (799)
Accumulated deficit (78,369)
Accumulated other comprehensive loss - foreign currency
translation adjustment (22)
Treasury stock, at cost, 201,230 shares of common stock (779)
------------
Total shareholders' equity 92
------------
Total liabilities and shareholders' equity $ 7,733
============
The accompanying notes are an integral part of this condensed
consolidated balance sheet.
2
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31,
-----------------------------
2004 2003
------------ ------------
NET SALES:
License fees $ 72 $ 109
Resale of software and technology equipment and service fees 192 765
Micro paint repair products and services 86 --
------------ ------------
Total net sales 350 874
------------ ------------
COST OF SALES:
License fees 89 76
Resale of software and technology equipment and service fees 160 702
Micro paint repair products and services 57 --
------------ ------------
Total cost of sales 306 778
------------ ------------
GROSS PROFIT (LOSS) 44 96
Sales and marketing expenses 425 139
General and administrative expenses 378 719
Research and development costs 118 89
------------ ------------
Loss from operations (877) (851)
OTHER INCOME (EXPENSES)
Gain on extinguishment of debt 126 --
Amortization of debt discount (1,394) --
Interest expense net (77) (52)
------------ ------------
NET LOSS (2,222) (903)
Other comprehensive loss: (22) --
Foreign currency translation adjustment ------------ ------------
$ (2,244) $ (903)
COMPREHENSIVE LOSS ============ ============
LOSS PER SHARE--BASIC AND DILUTED $ (0.01) $ (0.03)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED 270,139,433 31,519,083
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($2,222) ($903)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of discount on note payable 1,394 --
Depreciation and amortization 140 126
Fair value of expense portion of stock-based
compensation granted for professional services 190 278
Interest expense allocated to debt 3 37
(Increase)/decrease in value of life insurance policies 8 16
Decrease of fair value of repriced options (163) --
Changes in operating assets and liabilities
Trade accounts receivable, net 26 (82)
Inventory (24) 91
Other current assets 104 (131)
Accounts payable, amounts due under financing agreements, liabilities
in excess of assets of discontinued business unit, accrued expenses
and stock liability (648) 190
Deferred revenue other current liabilities 62 125
------------ ------------
Net cash used in operating activities (1,130) (253)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased intangible assets (50) (5)
Acquisition of property and equipment (79) --
------------ ------------
Net cash used in investing activities (129) (5)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance costs of $315 1,832 81
Net proceeds from exercise of stock warrants 500 --
Net proceeds from exercise of stock options 75 --
Borrowings under notes payable and long-term debt 4,000 262
Repayments on notes payable and long-term debt (2,162) (147)
Cash paid to acquire CSI International, Inc. (net of cash acquired) (2,390) --
------------ ------------
Net cash provided by financing activities 1,855 196
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (22) --
NET INCREASE IN CASH AND CASH EQUIVALENTS 574 (62)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 61 70
------------ ------------
$ 635 $ 8
CASH AND CASH EQUIVALENTS, END OF PERIOD ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the period $ 47 $ 1
Income taxes paid -- --
Non-cash investing and financing activities:
Reduction in accounts payable and accruals for debt paid in stock 221 60
Fair value of stock issued for services and deferred to future periods 549 --
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 126 --
Direct costs associated with Equity Line of Credit 500 --
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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, 2003. 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 March
31, 2004, and the results of operations and cashflows for the three-month
periods ended March 31, 2004 and 2003. The results of operations for the
three-month period ended March 31, 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.
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
recently-acquired CSI International chemical line. NMPR is attempting to
commercialize its unique micro-paint repair solution. The Company completed its
acquisition of CSI on February 6, 2004.
RECLASSIFICATIONS
Certain amounts in the 2003 condensed consolidated financial statements
have been reclassified to conform to the 2004 presentation.
5
ACQUISITION OF CSI INTERNATIONAL, INC. ("CSI")
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 paid a purchase price
including an issuance of 7,000,000 shares of its common stock, and cash of
$2,500,000 in exchange for all outstanding shares of CSI. The shares were valued
at $0.10 per share, which was the market price of NeoMedia's common stock on the
Over-the-counter Bulletin Board exchange around the acquisition date. NeoMedia
also incurred direct costs of the business combination totaling $5,000, which
are included in the purchase price for purposes of allocating assets acquired
and liabilities assumed.
The acquisition was accounted for under the purchase method. The actual
purchase price was based on cash paid, the fair value of NeoMedia stock around
the date of the acquisition, and direct costs associated with the combination.
The purchase price was allocated as follows:
(Dollars in
Thousands)
------------
Value of 7 Million Shares Issued ($0.10 per share) $ 700
Cash paid 2,500
Direct costs of acquisition 5
------------
Total Fair Value of Purchase Price $ 3,205
------------
Assets Purchased:
Cash $ 115
Accounts receivable, net 67
Inventory 54
Other current assets 12
Investments 25
Property, plant & equipment 8
Excess of purchase price over net tangible assets 3,059
------------
Total Assets Purchased 3,340
------------
Less Liabilities Assumed:
Accounts payable (23)
Accrued liabilities (12)
Notes payable (100)
------------
Total Liabilities Assumed (135)
------------
The combination is being accounted for as a purchase business combination
as defined by Statement of Financial Accounting Standards No. 141, Business
Combinations. The allocation of the purchase price is preliminary and is subject
to revision as the Company continues to evaluate the allocations. The Company
has not amortized the excess of purchase price over net tangible assets since
the allocation is not yet final. With limited operation history of CSI, the
Company expects to evaluate the results of operations of CSI in the coming
months in order to accurately finalize the allocation. The Company expects to
finalize this process in the second half of 2004. If the excess of purchase
price over net tangible assets is determined to be allocated fully or partially
to intangible assets with definite lives upon final allocation, the Company will
determine the economic useful lives based on its best estimate and amortize such
assets accordingly. The Company will continue to evaluate this asset for
impairment until such time as the purchase price allocation is final.
The accompanying consolidated statement of operations presented herein
contains the results of operations for CSI for the period February 6, 2004,
through March 31, 2004.
6
Pro-forma results of operations as if NeoMedia and CSI had combined as of
January 1, 2004 are as follows:
THREE MONTHS ENDED MARCH 31, 2004
-------------------------------------------------------
(A)
PRO-FORMA
CSI ADJUST- PRO-FORMA
NEOMEDIA INT'L MENTS COMBINED
------------ ------- ----------- --------------
Total net sales $350 $150 ($86) (A) $414
Loss from operations ($877) ($167) $141 (A) ($903)
Net loss ($2,222) ($192) $166 (A) ($2,248)
Net loss per share-basic and
diluted ($0.01) (A) ($0.01)
Weighted average number of
Common shares - basic and
diluted 270,139,433 2,769,231 (B) 272,908,664
Pro-forma Adjustments
(A) - Adjustments are to reflect operations of CSI from February 6, 2004
through March 31, 2004, which are included in NeoMedia's operations for
the three months ended March 31, 2004.
(B) - To adjust weighted average shares outstanding as if the 7,000,000
shares issued as part of the purchase price of CSI on February 6, 2004,
had been issued on January 1, 2004
Pro-forma results of operations as if NeoMedia and CSI had combined as of
January 1, 2003 are as follows:
THREE MONTHS ENDED MARCH 31, 2003
------------------------------------------------------
(A)
PRO-FORMA
CSI ADJUST- PRO-FORMA
NEOMEDIA INT'L MENTS COMBINED
------------ ------ ----------- --------------
Total net sales $874 $127 --- $1,001
Income (loss) from operations ($851) $2 --- ($849)
Net income (loss) ($903) $2 --- ($901)
Net loss per share-basic and
diluted ($0.03) ($0.02)
Weighted average number of
common shares - basic and
diluted 31,519,083 7,000,000 (C) 38,519,083
Pro-forma Adjustments
(C) - To adjust weighted average shares outstanding as if the 7,000,000
shares issued as part of the purchase price of CSI on February 6, 2004,
had been issued on January 1, 2003
STANDBY EQUITY DISTRIBUTION AGREEMENT 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
On October 27, 2003, the Company and Cornell entered into a $20 million
Standby Equity Distribution Agreement. 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 consideration fee for Cornell to enter
into the agreement, 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 filed a Form SB-2 to register 200 million
shares under this $20 million Standby Equity Distribution Agreement. In January
2004, the Form SB-2 was declared effective by the Securities and Exchange
Commission. In April 2004, the Company filed a Form SB-2 to register 40 million
shares underlying warrants granted to Cornell in connection with a promissory
note issued by the Company to Cornell (see "Notes Payable to Cornell" below). In
May 2004, the Form SB-2 was declared effective by the Securities and Exchange
Commission.
During the three months ended March 31, 2004, the Company sold 21,282,203
shares of its common stock to Cornell under the Standby Equity Distribution
Agreement. The following table summarizes funding received from Cornell during
the three months ended March 31, 2004:
THREE
MONTHS
ENDED
MARCH 31,
2004
------------
Number of shares sold to Cornell 21,282,203
Gross Proceeds from sale of shares to
Cornell $ 2,332,000
Less: discounts and fees* (500,000)
------------
Net Proceeds from sale of shares to
Cornell $ 1,832,000
------------
* - Per Standby Equity Distribution Agreement, stock is valued at 98% of the
lowest closing bid price during the week it is sold
PROMISSORY NOTES PAYABLE TO CORNELL
On January 20, 2004, the Company borrowed from Cornell the gross amount of
$4,000,000 before Cornell discounts and fees. Cornell also committed to fund an
additional $1,000,000 in the form of a promissory note, which was funded on
April 8, 2004. 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 retention fee related to the issuance of stock to pay off the debt in
the future.
As of March 31, 2004, the Company had reduced the balance payable on the
$4,000,000 note to $2,400,000. As of May 10, 2004, the Company further reduced
the outstanding principal on the $4,000,000 note to $1,760,000. The Company had
not made any payments against the principal of the $1,000,000 note that was
issued on April 8, 2004. All assets of the Company are pledged as collateral for
the $4,000,000 note, which matures on June 18, 2004. The note has a 60-day cure
period after maturity during which the Company can cure any defaults without
penalty. The note accrues interest at a rate of 24% upon default only. The
Company has the option to repay any remaining principal of either note in cash.
The Company expects to pay the remaining note balance by applying the proceeds
from the sale stock under the terms of the Standby Equity Distribution Agreement
toward the outstanding principal on the notes.
The Company 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, the
Company filed a Form SB-2 to register 40 million shares underlying warrants
granted to Cornell in connection with a promissory note issued by the Company to
Cornell. In May 2004, the Form SB-2 was declared effective by the Securities and
Exchange Commission. If the average closing bid price of NeoMedia's common stock
for any five-day period exceeds $0.10, the Company has the option to force
8
Cornell to exercise the warrants, resulting in additional funds to the Company
of $2,000,000. 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", the Company has compared the
relative fair values of the warrants and the face value of the notes, and has
allocated a value of $2.5 million to the warrants. Of the $2.5 million, $2
million was allocated to the $4 million note and recorded as a discount against
the carrying value of the note as of March 31, 2004, and the remaining $0.5
million was recorded as deferred debt issuance and equity financing costs which
will be recorded as discount against the $1 million note when issued during the
second quarter of 2004. The $2.5 million being allocated to the notes is
considered a discount on the promissory notes, and therefore is being 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, the Company recorded an amortization
of discount of $1,394,000 during the three months ended March 31, 2004 related
to the warrants.
OPTION REPRICING PROGRAM
During May 2003, the Company re-priced approximately 8.0 million stock
options under a 6-month repricing program. Under the terms of the program, the
exercise price for outstanding options under the Company's 2002, 1998, and 1996
Stock Option Plans was restated to $0.01 per share for a period of 6 months.
During December 2003, the deadline for the option repricing was extended to June
30, 2004 by the Stock Option Committee of NeoMedia's Board of Directors. In
accordance with FASB Interpretation, FIN 44, "Accounting for Certain
Transactions Involving Stock Transactions", the award has been accounted for as
variable from May 19, 2003 through the period ended March 31, 2004. On March 31,
2004, the closing price of the Company's common stock was lower than the closing
price on December 31, 2004. As a result, the Company recorded a reduction to
general and administrative expense of $163,000 under variable accounting for the
decrease of fair value of options still unexercised under the repricing program.
OTHER EVENTS
During January 2004, the Company entered into a consulting agreement with
James J. Keil, a member of the Company's board of directors, for consulting
services to be provided over a period of six months in connection with
NeoMedia's sales strategies and processes. The contract calls for monthly
payments of $4,500 during the term of the contract.
On February 6, 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). Accordingly, the Company recognized $27,000 in expense
relating the contract during the three months ended March 31, 2004.
On March 13, 2003, the Company repaid the remaining balance of $85,000 on
a note due to Michael Kesselbrenner, a private investor. The original note had
been issued in the amount of $165,000 on December 2, 2002, with a term of 150
days. In connection with the default provision of the note, the Company entered
into a Pledge Agreement, dated December 2, 2002, under which the Company issued
53,620,020 shares of common stock to an unrelated third party as collateral for
the note. The note balance of $85,000 was paid off on March 13, 2003, and the
53,620,020 shares were returned to the Company on April 4, 2003 and retired.
9
PRO-FORMA INFORMATION REQUIRED BY SFAS 148
At March 31, 2004, the Company has five stock-based employee compensation
plans (the 2003 Stock Incentive Plan, the 2003 Stock Option Plan, the 2002 Stock
Option Plan, the 1998 Stock Option Plan, and the 1996 Stock Option Plan). The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net loss, except when options granted under those plans had an exercise price
less than the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
THREE MONTHS ENDED
MARCH 31,
---------------------------
2004 2003
------------ ------------
Net Loss, as reported ($ 2,222) ($ 903)
Compensation recognized under APB 25 -- --
Compensation recognized under SFAS 123 (455) (218)
------------ ------------
Pro-forma net loss ($ 2,677) ($ 1,121)
============ ============
Net Loss per share:
Basic and diluted - as reported ($ 0.01) ($ 0.03)
============ ============
Basic and diluted - pro-forma ($ 0.01) ($ 0.04)
============ ============
SEGMENT REPORTING
The Company is 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. This unit recently added to its business offerings a much higher
Value-Add called Storage Area Networks (SAN). The operations are based in Lisle,
Illinois.
NeoMedia Micro Paint Repair (NMPR) is the business unit encompassing the
Company's recently-acquired CSI International micro paint repair line. NMPR is
attempting to commercialize its micro-paint repair solution. The Company
completed its acquisition of CSI on February 6, 2004
The Company's reportable segments are strategic business units that offer
different technology and marketing strategies. NISS and NCIS operate principally
in the United States. NMPR operates out of Canada. During the three months ended
March 31, 2004, NeoMedia derived 24% of its revenue from customers based in
Canada.
10
Consolidated net sales, net operating losses for the three months ended
March 31, 2004 and 2003, and identifiable assets as of March 31, 2004, were as
follows:
(in thousands)
-------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
------------- -----------
NET SALES:
NeoMedia Consulting & Integration Services $251 $861
NeoMedia Internet Switching Service 13 13
NeoMedia Micro Paint Repair 86 ---
------------- -----------
$350 $874
------------- -----------
NET LOSS:
NeoMedia Consulting & Integration Services ($722) ($729)
NeoMedia Internet Switching Service (870) (174)
NeoMedia Micro Paint Repair (630) ---
------------- -----------
($2,222) ($903)
------------- -----------
IDENTIFIABLE ASSETS
NeoMedia Consulting & Integration Services $302
NeoMedia Internet Switching Service 2,351
NeoMedia Micro Paint Repair 3,260
Corporate 1,820
-------------
$7,733
-------------
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Over the past several years, NeoMedia's focus has been aimed toward the
intellectual property commercialization unit of its Internet Switching Systems
(NISS, formerly NAS) business. 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-web 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. To this end, NeoMedia has signed four intellectual property
licenses since inception, and also acquired additional patents as part of the
acquisition of Secure Source Technologies, Inc. during 2003. On September 8,
2003, NeoMedia announced its PaperClick 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 3650 model. On October 30, 2003, NeoMedia unveiled its
go-to-market strategy for the product. Over the past several months, NeoMedia
signed contracts with several key partners outlined in the strategy, including
agents Big Gig Strategies, SRP Consulting, and Relyco, systems integrator
Science Applications International Corporation (SAIC), and European advertising
agency 12Snap. NeoMedia has also entered into letters of intent with global
brand communication company Seven Worldwide, and marketing organizations iCoupon
and Digital Rum.
SEC INQUIRY
During 2003, NeoMedia received requests from the SEC's Southeast Regional
Office for certain documents including those concerning negotiations and
arrangements with certain strategic partners and consultants, patents, recent
issuances of securities, investor relations, and the stock ownership by
NeoMedia's officers and directors. NeoMedia responded promptly and fully and
will cooperate with any further requests. The SEC's letter states that the
staff's inquiry is informal and should not be construed as an indication of any
violation of law or as a reflection on any person, entity, or security.
ACQUISITIONS
CSI INTERNATIONAL, INC. 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 paid 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 Ft. Myers, Florida headquarters, and
maintain the sales and operations office in Calgary, Alberta, Canada.
SECURE SOURCE TECHNOLOGIES, INC. On October 8, 2003, the Company acquired
100% ownership of SST, a provider of security solutions and covert
security technology for the manufacturing and financial services
industries, in exchange for 3.5 million shares of the Company's common
stock. With the purchase of SST, the Company acquired additional patents
that compliment its existing intellectual property portfolio, as well as a
security software platform, and computer equipment. Prior to the
acquisition, SST was inactive and had minimal operating activities.
BSD SOFTWARE, INC. On December 9, 2003,NeoMedia signed a non-binding
letter of intent to acquire Triton Global Business Services Inc. and its
parent company, BSD Software Inc. (Pink Sheets: BSDS), both of Calgary,
Alberta, Canada. The LOI outlined terms, including an exchange of one
share of NeoMedia common stock for each share of BSD Software, not to
exceed 40 million shares. The transaction is dependent on due diligence by
both companies, approval by NeoMedia's Board of Directors, BSD Software's
12
Board of Directors and shareholders, and any required regulatory
approvals. Triton, formed in 1998 and acquired by BSD in 2002, is an
Internet Protocol-enabled provider of live and automated operator calling
services, e-business support, billing and clearinghouse functions and
information management services to telecommunications, Internet and
e-business service providers.
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 U.S. Securities and Exchange Commission ("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 write-offs 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, and allowance for
bad debt. 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..
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 Bad Debt. 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.
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 pricing method at 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
13
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.
Estimate of Litigation-based Liability. NeoMedia is defendant in certain
litigation in the ordinary course of business (see "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. 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 Securities and
Exchange Commission (SEC) Staff Accounting Bulletin 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 include maintenance fees for
providing system updates for software products, user documentation
and technical support and 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
uncollectible accounts on a customer-by-customer basis as
appropriate.
In December 2003, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition." SAB 104 supersedes SAB 101, "Revenue Recognition in
Financial Statements." SAB 104's primary purpose is to rescind
accounting guidance contained in SAB 101 related to multiple element
revenue arrangements, superseded as a result of the issuance of EITF
00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue
Recognition in Financial Statements Frequently Asked Questions and
Answers ("the FAQ") issued with SAB 101 that had been codified in
SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have
14
been incorporated into SAB 104. While the wording of SAB 104 has
changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104, which was effective upon issuance. The adoption
of SAB 104 did not impact the consolidated financial statements.
(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 MARCH 31, 2004 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 2003
Net sales. Total net sales for the three months ended March 31, 2004 were
$350,000, which represented a $524,000, or 60%, decrease from $874,000 for the
three months ended March 31, 2003. This decrease primarily resulted from reduced
resales of Sun Microsystems equipment due to increased competition and general
economic conditions. 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 March 31, 2004, rather than the
three months ended March 31, 2003. With the sales from its recently-acquired
Micro Paint Repair business unit, the Company expects sales in 2004 to be higher
than in 2003.
License fees. License fees were $72,000 for the three months ended March
31, 2004, compared with $109,000 for the three months ended March 31, 2003, a
decrease of $37,000, or 34%. The decrease was due to lower sales of internally
developed software licenses in 2004. NeoMedia will continue to attempt to
increase sales of these high-margin products, and expects license fees to remain
materially constant over the next 12 months.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $573,000, or
75%, to $192,000 for the three months ended March 31, 2004, as compared to
$765,000 for the three months ended March 31, 2003. This decrease primarily
resulted from reduced resales of Sun Microsystems equipment due to increased
competition and general economic conditions. 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 March
31, 2004, rather than the three months ended March 31, 2003.
Micro paint repair products and services. Sales of micro paint repair
products and services were $86,000 for the three months ended March 31, 2004,
the first period for which the results of this business unit were included in
NeoMedia's consolidated financial statements. NeoMedia expects sales of micro
paint repair products and services to increase during 2004 as the Company
implements its business to rollout its Micro Paint Repair solution.
Cost of sales. Cost of license fees was $89,000 for the three months ended
March 31, 2004, a increase of $13,000, or 17%, compared with $76,000 for the
three months ended March 31, 2003. The increase resulted from the amortization
of the acquired intangible micro paint asset. Cost of resales was $160,000 for
the three months ended March 31, 2004, a decrease of $542,000, or 77%, compared
with $702,000 for the three months ended March 31, 2003. The decrease resulted
from decreased resales in 2004 compared with 2003. Cost of resales as a
percentage of related resales was 83% in 2004, compared to 92% in 2003. This
decrease is due to an increased mix of higher-margin software maintenance
products in 2004 compared with 2003. NeoMedia expects costs of resales to
15
fluctuate with the mix of sales of equipment, software, and services over the
next 12 months. Cost of micro paint repair products and services was $57,000 for
the three months ended March 31, 2004, a the first period for which the results
of this business unit were included in NeoMedia's consolidated financial
statements. Cost of micro paint repair products and services as a percentage of
related sales was 68%. With the expected increase in sales from its
recently-acquired Micro Paint Repair business, the Company expects overall cost
of sales in 2004 to be higher than in 2003.
Gross Profit. Gross profit was $44,000 for the three months ended March
31, 2004, a decrease of $52,000, or 54%, compared with gross profit of $96,000
for the three months ended March 31, 2003. This decrease was primarily the
result of reduced resales of Sun Microsystems equipment due to increased
competition and general economic conditions.
Sales and marketing. Sales and marketing expenses were $425,000 for the
three months ended March 31, 2004, compared to $139,000 for the three months
ended March 31, 2003, an increase of $286,000 or 206%. This increase resulted
primarily from the addition of recently-acquired micro paint business sales
force and cost associated with marketing and promotion of the Company's
PaperClick products. NeoMedia expects sales and marketing expense to increase
over the next 12 months with the acquisition of CSI and the potential
acquisition of BSD Software, as well as with the continued development and
anticipated rollout of NeoMedia's PaperClick product suite.
General and administrative. General and administrative expenses decreased
by $341,000, or 47%, to $378,000 for the three months ended March 31, 2004,
compared to $719,000 for the three months ended March 31, 2003. The decrease
resulted primarily from a decrease in stock-based professional services expense
in 2004 compared with 2003, as well as a reduction to general and administrative
expense of $163,000 relating to the Company's option repricing program during
the three months ended March 31, 2004. NeoMedia expects general and
administrative expense to increase over the next 12 months with the acquisition
of CSI International and the potential acquisition of BSD Software.
Research and development. During the three months ended March 31, 2004,
NeoMedia charged to expense $118,000 of research and development costs, an
increase of $29,000 or 33% compared to $89,000 for the three months ended March
31, 2003. The increase is primarily due to addition of developers and
development computer systems. NeoMedia expects research and development costs to
increase slightly over the next 12 months with the continued development and
anticipated rollout of NeoMedia's PaperClick product suite.
Gain on extinguishment of debt. During the three months ended March 31,
2004, NeoMedia recognized a gain on extinguishments of debt of $126,000,
resulting from the payment of debt at a discount to the book value of the debt.
NeoMedia did not recognize gain or loss on extinguishment of debt during the
three months ended March 31, 2003.
Amortization of debt discount. During the three months ended March 31,
2004, NeoMedia recognized an amortization of debt issuance cost of $1,394,000
relating to the amortization of the fair value of warrants granted to Cornell
Capital Partners in connection with promissory notes issued to Cornell by
NeoMedia during the three months ended March 31, 2004. NeoMedia did not
recognize any such expense during the three months ended March 31, 2003.
Interest expense. Interest expense consists primarily of interest accrued
for creditors as part of financed purchases, past due balances, notes payable
and interest earned on cash equivalent investments. Interest expense increased
by $25,000, or 48%, to $77,000 for the three months ended March 31, 2004 from
$52,000 for the three months ended March 31, 2003, due to increased expense
associated with notes payable in 2004.
Net Loss. The net loss for the three months ended March 31, 2004 was
$2,222,000, which represented a $1,319,000, or 146% increase from a $903,000
loss for the three months ended March 31, 2003. The increase resulted primarily
from the non-cash amortization of debt issuance cost to funding provided By
Cornell Capital Partners during the three months ended March 31, 2004, as well
16
as reduced resales of software and technology equipment and service fees in 2004
compared with 2003. These items were partially offset by a reduction to general
and administrative expense relating to the Company's option repricing program
and a gain on extinguishment of debt during 2004.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was approximately $1,130,000 for the
three months ended March 31, 2004, compared with $253,000 for the three months
ended March 31, 2003. NeoMedia's net cash flow used in investing activities for
the three months ended March 31, 2004 and 2003 was $129,000 and $5,000,
respectively. Net cash provided by financing activities for the three months
ended March 31, 2004 and 2003 was $1,855,000 and $196,000, respectively.
During the three months ended March 31, 2004 and 2003, NeoMedia's net loss
totaled $2,222,000 and $903,000, respectively. As of March 31, 2004, NeoMedia
had accumulated losses from operations of $78,369,000, had a working capital
deficit of $6,264,000, and $635,000 in cash balances.
The accompanying 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. NeoMedia may
obtain up to $20 million over the next two years through its Standby Equity
Distribution Agreement with Cornell Capital Partners LP. As of May 10, 2004,
NeoMedia had obtained approximately $3.6 million under its previous $10 million
Equity Line of Credit Agreement with Cornell, and an additional $5 million in
promissory notes, which may be repaid from the proceeds of sale of common stock
under the current $20 million Standby Equity Distribution Agreement with
Cornell. In addition, if the average closing bid price of NeoMedia's common
stock for any five day period exceeds $0.10, NeoMedia may force the exercise of
40 million warrants held by Cornell, resulting in additional cash to the Company
of $2 million. Management believes that it has sufficient funding to sustain
operations through December 31, 2004, however, 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.
17
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. NeoMedia's Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of
NeoMedia's "disclosure controls and procedures" (as defined in Sections
13a-14(c) of the Securities Exchange Act of 1934) as of the end of the period
reported in this annual report (the "Evaluation Date"), concluded that
NeoMedia's disclosure controls and procedures were effective and designed to
ensure that material information relating to NeoMedia and its consolidated
subsidiaries is accumulated and would be made known to them by others within
those entities as appropriate to allow timely decisions regarding required
disclosures.
CHANGES IN INTERNAL CONTROLS. NeoMedia does not believe that there are
significant deficiencies in the design or operation of its internal controls
that could adversely affect its ability to record, process, summarize and report
financial data. Although there were no significant changes in NeoMedia's
internal controls or in other factors that could significantly affect those
controls subsequent to the Evaluation Date, NeoMedia's senior management, in
conjunction with its Board of Directors, continuously reviews overall company
policies and improves documentation of important financial reporting and
internal control matters. NeoMedia is committed to continuously improving the
state of its internal controls, corporate governance and financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. NeoMedia's management, including
the Chief Executive Officer and Chief Financial Officer, does not expect that
its disclosure or internal controls will prevent all errors or fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NeoMedia is involved in the following legal actions arising in the normal
course of business, both as claimant and defendant.
AIRCLIC, INC., SCANBUY, INC., AND LSCAN TECHNOLOGIES, INC.
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. in the Northern
District of Illinois, Eastern Region, claiming that each of the parties 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 states that on information and belief,
AirClic, Scanbuy and LScan have had actual and constructive notice of the
existence of the patents-in-suite, 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
suit against AirClic and Scanbuy for lack of personal jurisdiction. The suit
against LScan remains in the Northern District of Illinois, Eastern Region. On
April 20, 2004, NeoMedia refiled the suit against AirClic in Pennsylvania and
the suit against Scanbuy in New York, both for patent infringment. On April 19,
2004, AirClic filed suit against NeoMedia in the Eastern District of
Pennsylvania claiming that some of the NeoMedia patents are invalid. On March
29, 2004, Scanbuy filed suit against NeoMedia in the Southern District of New
York alleging that NeoMedia infringed Scanbuy's copyrights, violated the Lanham
Act and committed deceptive trade practices and tortuous interference.
VIRGIN ENTERTAINMENT GROUP
On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore ("Virgin"). The complaint for Patent Infringement and Damages was
filed in the United States District Court for the Northern District of Illinois,
Eastern Division, by Baniak Pine & Gannon, NeoMedia's intellectual property law
firm. The complaint claims that Virgin has infringed four of NeoMedia's patents
- U.S. Patents Nos. 5,933,829, 5,978,773, 6,108,656, and 6,199,048. The
complaint alleges that the Virgin Megaplay Stations located in Virgin's
Megastores infringe NeoMedia's patents by using Virgin's Megascan technology to
allow customers to scan UPC codes from in-store CDs and DVDs to access
Internet-based product information, such as music and movie previews, and album
and video art. The complaint also alleges that Virgin had notice of NeoMedia's
patents since the latter part of 2002 or before, yet it continued with its
infringing activities. The complaint seeks compensatory damages for Virgin's
infringement, with those damages to be trebled due to the willful and wanton
nature of the infringement. NeoMedia also seeks to preliminarily and permanently
enjoin Virgin from its infringing activities.
OTHER LITIGATION
On August 20, 2001, Ripfire, Inc. filed suit against NeoMedia in the San
Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between NeoMedia and Ripfire in May 2001 relating
to implementation of the Qode Universal Commerce Solution. On September 6, 2002,
NeoMedia settled this suit for $133,000 of common stock, to be valued at the
time of registration of the shares. NeoMedia's stock was trading at
approximately $0.05 at that time. NeoMedia included for registration 2.7 million
shares in the name of Ripfire in its Form S-1 that was declared effective by the
19
SEC on February 14, 2003. NeoMedia's stock was trading at approximately $0.02 on
February 14, 2003. The actual number of shares to be issued to Ripfire per the
pricing outlined in the agreement was approximately 9.8 million. On March 31,
2003, NeoMedia issued the 2.7 million shares of common stock that had been
registered in the S-1 to Ripfire. During April 2004, the Company and Ripfire
settled this matter for cash payments totaling $30,000. NeoMedia had a remaining
accrued liability of $30,000 relating to this matter as of March 31, 2004.
On September 12, 2002, R. R. Donnelley & Sons Company filed a summons in
the Circuit Court of The Twentieth Judicial Circuit in and for Lee County,
Florida, seeking payment of approximately $92,000 in past due professional
services bills, plus interest and attorney fees. During July 2003, NeoMedia
settled the suit for cash payments over a period of approximately one year.
NeoMedia had an accrued liability of approximately $67,000 relating to this
matter as of March 31, 2004.
On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against
NeoMedia seeking payment of approximately $170,000 in past due legal services.
The amount in question is subject to an unsecured promissory note that matured
unpaid on February 28, 2002. On May 1, 2003, NeoMedia settled the suit for cash
payments totaling approximately $196,000, to be paid at a rate of $30,000 per
quarter until the balance is satisfied. If the balance is paid within one year
of the settlement, NeoMedia will not pay interest charges. NeoMedia had a
remaining liability of approximately $81,000 relating to this matter as of March
31, 2004, which was included in notes payable.
On February 6, 2003, Allen Norton & Blue, P.A., filed a complaint against
NeoMedia seeking payment of approximately $25,000 in past due legal services.
NeoMedia has agreed to a payment plan relating to this matter under which the
balance will be paid over approximately 12 months. NeoMedia had a liability of
approximately $5,000 relating to this matter as of March 31, 2004.
On April 18, 2003, a former participant in NeoMedia's 2001 self-insured
health plan sued NeoMedia to recover approximately $46,000 in unpaid health
claims from 2001. On December 1, 2003, NeoMedia settled this suit for cash
payments over a period of approximately one year. NeoMedia had accrued
approximately $24,000 as of March 31, 2004.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (A), (B), (C) AND (D)
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
(a) NeoMedia is in default on the note payable held by Merrick & Klimek,
P.C., as more fully described in Item 1, Legal Proceedings.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
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 February 10, 2004, with respect to Item
5, reporting that it had completed its acquisition of CSI International, Inc.
NeoMedia filed a report on Form 8-K/A on April 12, 2004, with respect to Items 2
and 7, amending the Form 8-K filed on February 10, 2004, including the financial
statements of the acquired business, CSI International, Inc.
21
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: May 19, 2004 By: /s/ Charles T. Jensen
------------------------------
Charles T. Jensen, President, Acting
Chief Executive Officer, Chief
Operating Officer, and Director
Date: May 19, 2004 By: /s/ David A. Dodge
---------------------------
David A. Dodge, Vice President,
Chief Financial Officer, and Controller
22