Nine Months
		Ended September 30,
		2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations		$	(31,929	)	$	(19,888	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			870			793
Loss on early extinguishment of debt			(454	)		1,858
Change in fair value from revaluation of warrants and embedded conversion features			14,601			(6,073	)
Write-off of deferred equity financing costs			0			13,256
Stock-based compensation expense			2,221			2,777
Interest expense related to convertible debt			8,203			22
Increase in value of life insurance policies			(86	)		(28	)
Changes in operating assets and liabilities
Trade and other accounts receivable			545			(671	)
Inventories			(187	)		55
Prepaid expenses and other current assets			(32	)		(227	)
Accounts payable and accrued liabilities			(112	)		927
Deferred revenue and other current liabilities			(293	)		1,206
Net cash used in operating activities			(6,653	)		(5,993	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from sale of (paid to acquire) CSI International, Inc., Mobot, Inc., Sponge Ltd., Gavitec AG, and 12Snap AG, net of cash acquired			1,100			(13,867	)
Acquisition of property and equipment			(15	)		(236	)
Acquisition of patents and other intangible assets			0			(160	)
Advances to discontinued subsidiaries Micro Paint Repair, 12Snap, Telecom Services, Mobot, and Sponge			(2,282	)		(4,957	)
Acquisition related costs			0			(164	)
Payment of purchase price guarantee obligations			(2,579	)		0
Amounts received (issued) under notes receivable			671			(500	)
Net cash used in investing activities			(3,105	)		(19,884	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under convertible debt instruments, net of fees of $981 in 2007 and $0 in 2006			8,253			5,000
Repayments on notes payable and convertible debt instrument			(1,015	)		(436	)
Net proceeds from issuance of common stock, net of issuance costs of $24 in 2006			0			210
Net proceeds from issuance of Series C convertible preferred stock, net of issuance costs of $2,725 in 2006			0			14,066
Net proceeds from exercise of stock options and warrants			17			8,419
Net cash provided by financing activities			7,255			27,259
EFFECT OF EXCHANGE RATE CHANGES ON CASH FROM CONTINUING OPERATIONS			(84	)		(1,120	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS			(2,587	)		262
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			2,813			1,704
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	226		$	1,966
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid during the period		$	636		$	48
Supplemental disclosure of investing and financing activities:
Unrealized gain (loss) on marketable securities			(40	)		(361	)
Fair value of 258,620,948 shares issued to satisfy purchase price guarantee obligations			12,721			0
Fair value of 28,854,685 shares issued to satisfy debt guarantee obligation			698			0
Prepaid acquisition costs applied to purchase price			0			168
Fair value of shares and notes receivable from Pickups Plus, Inc. acquired in exchange for Series C Convertible Preferred Stock			0			594
Carrying value of promissory note and accrued interest paid in exchange for Series C Convertible Preferred Stock			0			(3,208	)
Fair value of shares issued to acquire CSI International, Inc., Mobot, Inc., Sponge Ltd., Gavitec AG, 12Snap AG, and BSD Software, Inc.			0			46,964
Change in net assets resulting from acquisitions of CSI International, Inc., Mobot, Inc., Sponge Ltd., Gavitec AG, 12Snap AG, and BSD Software, Inc.			0			62,240
Accretion of dividends on Series C Convertible Preferred Stock			1,289			1,220
Fair value of outstanding warrants reclassified to liabilities			0			13,884
Portion of change in fair value of outstanding warrants converted to liabilities recorded to paid-in capital			0			3,790
Initial fair value of Series C Convertible Preferred Stock (host instrument only)			0			4,908
Deferred stock-based financing costs associated with Series C Convertible Preferred Stock			0			3,198
Difference between net proceeds and recorded fair value of Series C Convertible Preferred Stock			0			4,041
Advance receivable from Mobot, Inc. forgiven upon acquisition			0			1,500

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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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 condensed balance sheet as of December 31, 2006, which has been derived from audited financial statements, and the unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q 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-K for the fiscal year ended December 31, 2006. 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 condensed consolidated financial position of NeoMedia as of September 30, 2007, the results of operations for the three and nine month periods ended September 30, 2007 and 2006, and cash flows for the nine month periods ended September 30, 2007 and 2006. The results of operations for the three and nine month periods ended September 30, 2007 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.

Going Concern

The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of the Company as a going concern. Net loss for the three and nine month periods ended September 30, 2007 was $26,133,000, and $40,229,000, respectively. Net cash used in operations for the nine months ended September 30, 2007 was $6,653,000, and net cash used for discontinued operations (including operating, investing, and financing activities, as well as effect of exchange rates on cash for discontinued subsidiaries) was $741,000. NeoMedia also has an accumulated deficit of $201,160,000, and a working capital deficit of $91,163,000 as of September 30, 2007, of which $32,346,000 relates to the fair value of derivative financial instruments.

The items discussed above raise substantial doubts about the Company's ability to continue as a going concern. The Company's financial resources are insufficient to maintain operations beyond April, 2008, and the Company will require additional financing in order to execute its operating plan and continue as a going concern. The Company cannot predict whether this additional financing will be in the form of equity, debt, or another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the Company may be unable to implement its current plans for expansion, repay its debt obligations as they become due or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. The financial statements do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts or amounts and reclassification of liabilities that might be necessary, should the Company be unable to continue as a going concern.

Should financing sources fail to materialize, management would seek alternate funding sources such as the sale of common and/or preferred stock, the issuance of debt, or the sale of its marketable assets. Management's plan is to secure adequate funding to bridge the commercialization of its core code-reading business.

 

NeoMedia plans to attempt to address its working capital deficiency by completing the proposed sale of its Micro Paint Repair business unit, and continuing to reduce its workforce and overhead expenses in non-critical areas. In addition, NeoMedia will attempt to generate additional revenue and profit from the launch of its core code-reading products and the value optimization of its patent portfolio.

 

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In the event that these financing sources do not materialize, or that NeoMedia is unsuccessful in increasing its revenues and profits, NeoMedia will be forced to further reduce its costs, may be unable to repay its debt obligations as they become due, or respond to competitive pressures, any of which circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations. Additionally, if these funding sources or increased revenues and profits do not materialize, and NeoMedia is unable to secure additional financing, NeoMedia could be forced to reduce or curtail its business operations unless it is able to engage in a merger or other corporate finance transaction with a better capitalized entity.

Nature of Business Operations

NeoMedia is a pioneer in mobile enterprise and marketing technology, bridging the physical and electronic world with innovative direct-to-mobile-Web technology solutions. NeoMedia's flagship qode® service links users to the wireless, electronic world. NeoMedia is headquartered in Fort Myers, Florida, with an office in Aachen, Germany. The qode® suite of easy-to-use, market-driven products and applications is based on a strong foundation of patented technology, comprising the qode® (www.qode.com) platform, qode® reader and qode® window, all of which provide One Click to Content™ connectivity for products, print, packaging and other physical objects to link directly to specific desired content on the mobile Internet.

Prior to 2006, NeoMedia was structured and evaluated by its Board of Directors and management as three distinct business units: NeoMedia Internet Switching Software (NISS), NeoMedia Micro Paint Repair (NMPR), and NeoMedia Consulting and Integration Services (NCIS).

 

During the first quarter of 2006, NeoMedia acquired 12Snap AG (“12Snap”) of Munich, Sponge Ltd. (“Sponge”) of London, Gavitec AG of Aachen, Germany (“Gavitec”), Mobot, Inc. (“Mobot”) of Lexington, Massachusetts, and BSD Software, Inc. of Calgary, Canada (“BSD”), and wound down its NCIS business unit. As a result, during the year ended December 31, 2006, NeoMedia operated under the following three business units:

 

·

NeoMedia Mobile (NMM) - encompassing NeoMedia's physical-world-to-internet and mobile marketing technologies and products;

·

NeoMedia Telecom Services (NTS) - encompassing the billing, clearinghouse and information management services of Triton Global Business Services, the operating subsidiary of BSD, acquired in March 2006; and

·

NeoMedia Micro Paint Repair (NMPR) - encompassing the micro paint and auto aftermarket accessories manufactured and distributed by NeoMedia.

During August 2006, NeoMedia announced that it intended to sell its Micro Paint Repair business. On November 1, 2007 the Company entered into a definitive purchase agreement to sell the assets of the Micro Paint Repair business unit, excluding the assets of the U.S. Auto Xperience operations. During the fourth quarter of 2006, NeoMedia divested of its Mobot and Sponge subsidiaries. During January 2007, NeoMedia made the strategic decision with respect to its corporate structure in 2007 and beyond to shed its remaining non-core 12Snap and Telecom Services business units to focus on the area that management believes will deliver the most value - the core code-reading business. During April 2007, NeoMedia sold the 12Snap business. On October 30, 2007, NeoMedia completed the sale of its Telecom Services business unit.

As a result of the divestitures of 12Snap, Mobot, Sponge, and Telecom Services, and the proposed divestiture of Micro Paint Repair, beginning in the first quarter of 2007 NeoMedia evaluated its business as one consolidated business, focusing on its core code-reading business and related intellectual property.

 

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For purposes of these financial statements, NeoMedia Micro Paint Repair, NeoMedia Telecom Services, 12Snap, Sponge, and Mobot are considered discontinued operations as of September 30, 2007 and for the three and nine month periods ended September 30, 2007 and 2006. NeoMedia Micro Paint Repair, NeoMedia Telecom Services, 12Snap, Sponge, and Mobot qualified as separate operating business units because they (i) engaged in business activities that earned revenues and incurred expenses, (ii) had operating results that were regularly reviewed by decision makers for the purposes of allocating resources to the segment, and (iii) had separate discreet financial information.

On September 26, 2007, NeoMedia announced plans to relocate its corporate headquarters, as well as changes in current key personnel. NeoMedia is currently based out of Ft. Myers, Florida, and is relocating its operations to Atlanta, Georgia during the fourth quarter of 2007, in order to offer close contact to potential customers and easier access to international markets. NeoMedia will continue to operate its Aachen, Germany office, consisting of the operations of Gavitec. NeoMedia also announced that Christian Steinborn, 37, CEO of Gavitec, will assume the additional role of Chief Operating Officer of NeoMedia. Mr. Steinborn will oversee global sales opportunities and business operations of both NeoMedia and Gavitec. Christian is a seasoned executive with years of experience in the wireless industry and demonstrates consistent execution of sales and profitability initiatives. In addition, Charles W. Fritz, the founder and Chairman of the Board of NeoMedia, has resigned his role as Chairman of the Board. Mr. Fritz plans to pursue ventures in economic and environmental industries. NeoMedia has entered into a consulting arrangement with Mr. Fritz whereby he will provide sales, marketing, and other services to NeoMedia for a period of one year.

 

Reclassifications and Other

Certain amounts in the 2006 condensed consolidated financial statements have been reclassified to conform to the 2007 presentation, most notably, net sales were formerly reported as separate line items “Technology license, service and products,” and “Micro Paint Repair Products and Services.” As a result of the winding down of the former NCIS business unit and the proposed sale of the Micro Paint Repair business unit, revenue from continuing operations now consists of license revenue and is being reported under the caption “Net sales.”

In addition, due to the Company’s decision to sell the Telecom Services and Micro Paint Repair business units, and the completed divestitures of 12Snap, Mobot and Sponge, results of operations from each of these units have been reclassified under the caption “Discontinued Operations” for all periods shown on the accompanying condensed consolidated statement of operations, and assets and liabilities relating to these units are combined into the captions “Assets held for sale” and “Liabilities held for sale,” respectively, on the accompanying condensed consolidated balance sheet. Additionally, the statements of cash flows for the nine months ended September 30, 2006 have been reclassified to exclude the cash flows of the discontinued business units.

 

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While preparing the Company’s quarterly report on Form 10-Q for the second quarter of 2007, the Company became aware of amounts that were incorrectly reported in its 2006 Forms 10-Q and 10-K for the third quarter of 2006 and year end 2006, respectively. This issue has been reviewed by the Company pursuant to SEC Staff Accounting Bulletin No. 99 and FASB Statement of Financial Accounting Standards No. 154, and determined to be not material to the 2006 financial reports. The Company further determined that the correction of the prior year misstatement in the current year financial reports would be material to the current year financial statements. Pursuant to the SEC Staff Accounting Bulletin No. 108 (“SAB 108”), the Company has corrected its December 31, 2006 consolidated audited balance sheet presented in this third quarter 2007 Form 10-Q to reflect the corrected amounts. Pursuant to SAB 108, correcting prior year financial statements for immaterial errors would not require previously filed reports to be amended. The following table reflects the adjustments to the statement of operations for the three and nine months ended September 30, 2006, and to the balance sheet as of December 31, 2006 (all amounts in thousands):

 

Statement of operations		Three Months Ended September 30, 2006
		As Reported			Adjustment			Corrected
Loss on derivative financial instruments			(9,271	)		(450	)		(9,721	)
Net loss from continuing operations			(29,289	)		(450	)		(29,739	)
Net loss			(30,909	)		(450	)		(31,359	)
Net loss attributable to common shareholders			(31,513	)		(450	)		(31,963	)
Comprehensive loss			(31,113	)		(450	)		(31,563	)

 

Statement of operations		Nine Months Ended September 30, 2006
		As Reported			Adjustment			Corrected
Gain (loss) on derivative financial instruments			6,523			(450	)		6,073
Net loss from continuing operations			(24,268	)		(450	)		(24,718	)
Net loss			(27,094	)		(450	)		(27,544	)
Net loss attributable to common shareholders			(28,314	)		(450	)		(28,764	)
Comprehensive loss			(27,577	)		(450	)		(28,027	)

 

Balance sheet		As of December 31, 2006
		As Reported			Adjustment			Corrected
Derivative financial instruments			25,819			(402	)		25,417
Total liabilities			92,659			(402	)		92,257
Additional paid-in capital			100,541			(1,370	)		101,911
Accumulated deficit			(159,962	)		968			(160,930	)
Total shareholders equity / (deficit)			(54,534	)		(402	)		(54,132	)

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following significant accounting policies were not applicable as of the filing of the annual report for the year ended December 31, 2006. For a complete discussion of the Company’s significant accounting policies, please refer to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2006.

Financial Accounting Standards Board Interpretation No. 48

The Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes,” and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements. The Company’s evaluation was performed for the tax years ended December 31, 2003, 2004, 2005 and 2006, the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2007.

The Company may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to the Company’s financial results. In the event the Company has received an assessment for interest and/or penalties, it has been classified in the financial statements as interest expense.

Revenue Recognition

NeoMedia derives revenues from the following sources:  (1) license revenues relating to patents and internally-developed software, (2) hardware, software, and service revenues related to mobile marketing campaign design and implementation, and (3) sales from its proprietary Micro Paint Repair solution.

(1)

Technology 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.  The basis for license fee revenue recognition is substantially governed by the American  Institute  of  Certified  Public  Accountants  ("AICPA")  Statement of Position 97-2 "Software Revenue  Recognition" ("SOP 97-2"), as amended, and Statement of Position 98-9, Modification of SOP 97-2, “Software Revenue Recognition, With Respect to Certain Transactions.”.  License revenue is recognized if persuasive evidence of an agreement exists, delivery has occurred, pricing is fixed and determinable, and collectibility is probable.  The Company defers revenue related to license fees for which amounts have been collected but for which revenue has not been recognized in accordance with the above, and recognizes the revenue over the appropriate period.

(2)

Technology service and product revenue, which includes sales of software and technology equipment and service fee is recognized  based on guidance  provided in  SEC Staff  Accounting  Bulletin  (“SAB”) No. 104,  "Revenue  Recognition  in Financial Statements,"  as amended (SAB 104).  Software and technology equipment resale revenue is recognized when persuasive evidence of an arrangement exists, the price to the customer is fixed and determinable, delivery of the service has occurred and collectibility is reasonably assured. Service revenues including maintenance fees for providing system updates for software products, user documentation and technical support are recognized over the life of the contract. The Company’s subsidiaries, Mobot (sold during 2006), and Gavitec follow this policy. The Company defers revenue related to technology service and product revenue for which amounts have been invoiced and or collected but for which the requisite service has not been provided. Revenue is then recognized over the matching service period.

 

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(3)

Technology service also includes mobile marketing services to its customers which mobile marketing projects are recognized after the completion of the project and acceptance by the customer.  All response and messaging based revenues are recognized at the time such responses are received and processed and the Company recognizes its premium messaging revenues on a net basis based on guidance provided in Emerging Issues Task Force Issues No. 99-19 (EITF 99-19), “Reporting Revenue Gross as Principal or Net as an Agent” and No. 01-09 (EITF 01-09), “Accounting for Consideration Given by a Vendor to a Customer.”  Consulting and management revenues and revenues for periodic services are recognized as 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.  The Company’s subsidiaries Sponge (sold during 2006) and 12Snap (sold during 2007) followed this policy. Telecom revenues from NeoMedia’s subsidiary BSD are recognized at the time that calls are accepted by the clearinghouse for billing to customers on a net basis, based on guidance in EITF 99-19. The Company defers revenue related to mobile marketing service fees for which amounts have been invoiced and/or collected but for which revenue has not been recognized. Revenue is then recognized over the matching service period.

(4)

Revenue for licensing and exclusivity 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 licensing, training costs and initial products sold with the system. Revenue is recognized upon completion of training and shipment of the products, provided there is VSOE in a multiple element arrangement.  Ongoing product and service revenue is recognized as products are shipped and services performed.  The Company defers revenue related to micro paint repair licensing for which amounts have been invoiced and/or collected and revenue is then recognized over the estimated contract period, which is currently one year.

(5)

Sales taxes represent amounts collected on behalf of specific regulatory agencies that require remittance on a specified date. These amounts are collected at the time of sales and are detailed on invoices provided to customers. In compliance with the Emerging Issues Task Force consensus on issue number 06-03 (EITF 06-03), NeoMedia accounts for sales taxes on a net basis.

 

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (FAS 155). This Statement amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets."

This Statement:

a.

Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation

 

b.

Clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133

 

c.

Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation

 

d.

Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives

 

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e.

Amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

FAS 155 is effective for fiscal years beginning after September 15, 2006. The Company has adopted FAS 155 on an individual instrument basis and is currently applying FAS 155 to certain of its debt obligations. The Company will evaluate and determine on a case by case basis whether to apply FAS 155.

 

Effect Of Recently Issued Accounting Pronouncements

 

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This statement is effective for fiscal years beginning after November 15, 2007. The Company may adopt this statement for its 2007 fiscal year. The Company is currently evaluating the impact of adopting this statement; however, the Company does not expect the adoption of this provision to have a material effect on its financial position, results of operations or cash flows.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”), Financial Statements - Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB 108 provides that once a current year misstatement has been quantified, the guidance in SAB No. 99, Financial Statements - Materiality, should be applied to determine whether the misstatement is material and should result in an adjustment to the financial statements. Under certain circumstances, prior year financial statements will not have to be restated and the effects of initially applying SAB 108 on prior years will be recorded as a cumulative effect adjustment to beginning Retained Earnings on January 1, 2006, with disclosure of the items included in the cumulative effect. NeoMedia applied the provisions of SAB 108 with the preparation of NeoMedia’s annual financial statements for the year ended December 31, 2006. The application of the provisions of SAB 108 did not have a material impact on the Company’s financial statements for the three and nine month periods ended September 30, 2007.

In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans." This statement requires companies to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other postretirement benefit plans. The statement requires prospective application, and the recognition and disclosure requirements are effective for companies with fiscal years ending after December 15, 2006. Additionally, SFAS No. 158 requires companies to measure plan assets and obligations at their year-end balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008. The impact of this adoption had no impact on our consolidated financial statements and we are in compliance with the measurement date provisions of this statement.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. The objective of this statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected by the Board to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This statement is effective for fiscal years beginning after November 15, 2007. The Company may adopt this statement for its 2007 fiscal year. The Company is currently evaluating the impact of adopting this statement; however, the Company does not expect the adoption of this provision to have a material effect on its financial position, results of operations or cash flows.

 

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In December 2006, FASB Staff Position No. EITF 00-19-2 was issued. This FASB Staff Position (FSP) addresses an issuer’s accounting for registration payment arrangements. This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. The guidance in this FSP amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for registration payment arrangements. This FSP further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable generally accepted accounting principles “GAAP” without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. The Company follows the guidance in FSP 00-19-2 in assessing its liabilities related to the liquidated damages arising from the Company’s default position on the convertible financing arrangements.

In June 2007, the FASB ratified the consensus on Emerging Issues Task Force “EITF” Issue No. 06−11, "Accounting for Income Tax Benefits of Dividends on Share−Based Payment Awards" ("EITF 06−11"). EITF 06−11 requires companies to recognize the income tax benefit realized from dividends or dividend equivalents that are charged to retained earnings and paid to employees for non−vested equity−classified employee share−based payment awards as an increase to additional paid−in capital. EITF 06−11 is effective for fiscal years beginning after September 15, 2007. While the Company is currently evaluating the provisions of EITF 06−11, the adoption is not expected to have any significant effect on the Company's consolidated financial position or results of operations.

In November 2006, the FASB ratified EITF Issue No. 06−7, “Issuer's Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF No. 06−7”). At the time of issuance, an embedded conversion option in a convertible debt instrument may be required to be bifurcated from the debt instrument and accounted for separately by the issuer as a derivative under SFAS No. 133, based on the application of EITF No. 00−19. Subsequent to the issuance of the convertible debt, facts may change and cause the embedded conversion option to no longer meet the conditions for separate accounting as a derivative instrument, such as when the bifurcated instrument meets the conditions of EITF No. 00−19 to be classified in stockholders' equity. Under EITF No. 06−7, when an embedded conversion option previously accounted for as a derivative under Statement of Financial Accounting Standards (“SFAS”) No. 133 no longer meets the bifurcation criteria under that standard, an issuer shall disclose a description of the principal changes causing the embedded conversion option to no longer require bifurcation under SFAS No. 133 and the amount of the liability for the conversion option reclassified to stockholders' equity. EITF No. 06−7 should be applied to all previously bifurcated conversion options in convertible debt instruments that no longer meet the bifurcation criteria in SFAS No. 133 in interim or annual periods beginning after December 15, 2006, regardless of whether the debt instrument was entered into prior or subsequent to the effective date of EITF No. 06−7. The adoption of EITF 06−7 did not have a material impact on our financial position, results of operations or cash flows.

In November 2006, the FASB ratified EITF Issue No. 06−6, Application of EITF Issue No. 05−7, ‘Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues ’ (“EITF 06−6”). EITF 06−6 addresses the modification of a convertible debt instrument that changes the fair value of an embedded conversion option and the subsequent recognition of interest expense for the associated debt instrument when the modification does not result in a debt extinguishment pursuant to EITF 96−19. The Company does not expect the adoption of EITF 06−6 to have a material impact on its consolidated financial position, results of operations or cash flows.

 

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On January 1, 2007, the Company adopted the consensus reached in Emerging Issues Task Force (“EITF”) Issue No. 06−2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43.” EITF Issue No. 06−2 provides recognition guidance on the accrual of employees’ rights to compensated absences under a sabbatical or other similar benefit arrangement. The adoption of EITF Issue No. 06−2 had no impact on our financial position, results of operations, or cash flows.

In September 2006, the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. 06−1, Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive Service from the Service Provider. EITF Issue No. 06−1 provides guidance regarding whether the consideration given by a service provider to a manufacturer or reseller of specialized equipment should be characterized as a reduction of revenue or an expense. This issue is effective for our annual reporting period ending December 31, 2007. Entities are required to recognize the effects of applying this issue as a change in accounting principle through retrospective application to all prior periods unless it is impracticable to do so. We are in the process of evaluating the impact of this issue on our consolidated financial statements. The Company does not expect the adoption of EITF 06−1 to have a material impact on its consolidated financial position, results of operations or cash flows.

In June 2007, the FASB issued EITF Issue 07-3 “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (EITF 07-3). The scope of EITF 07-3 is limited to nonrefundable advance payments for goods and services related to research and development activities. EITF 07-3 requires that advanced payments be capitalized and subsequently expensed as the goods are delivered or services performed. NeoMedia is required to adopt EITF 07-3 effective January 1, 2008. We do not expect the adoption of EITF 07-3 to have a material impact on our consolidated results of operations and financial condition.

In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA “Audit and Accounting Guide Investment Companies” (the “Guide”). SOP 07-1 addresses whether the specialized industry accounting principles of the Guide should be retained by a parent company in consolidation. In addition, SOP 07-1 includes certain disclosure requirements for parent companies and equity method investors in investment companies that retain investment company accounting in the parent company’s consolidated financial statements or the financial statements of an equity method investor. SOP 07-1 is effective for the Company as of December 1, 2008. In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 46R-7, “Application of FIN 46R to Investment Companies,” which amends FIN 46R to make permanent the temporary deferral of the application of FIN 46R to entities within the scope of the revised audit guide under SOP 07-1. FSP FIN No. 46R-7 is effective upon adoption of SOP 07-1. The Company is currently evaluating the potential impact of adopting SOP 07-1 and FSP FIN 46R-7, and does not expect SOP 07-1 to have a material impact on our consolidated results of operations and financial condition.

 

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3. ACQUISITIONS

On February 17, 2006, NeoMedia acquired all of the outstanding shares of Mobot in exchange for $3,500,000 cash and $6,500,000 in stock, represented by 16,931,493 shares of NeoMedia common stock. On February 23, 2006, NeoMedia acquired all of the outstanding shares of Sponge in exchange for $6,141,000 cash and £6,550,000 in stock (approximately $13.1 million at the time of the agreement), represented by 33,097,135 shares of NeoMedia common stock. On February 23, 2006, NeoMedia acquired all of the outstanding shares of Gavitec in exchange for $1,800,000 cash and $5,200,000 in stock, represented by 13,660,511 shares of NeoMedia common stock. On February 28, 2006, NeoMedia acquired all of the outstanding shares of 12Snap in exchange for $2,500,000 cash and $19,500,000 in stock, represented by 49,294,581 shares of NeoMedia common stock. On March 21, 2006, NeoMedia acquired BSD for 7,123,698 shares of NeoMedia common stock.

On November 14, 2006, NeoMedia divested of 92.5% its ownership interest in Sponge. On December 6, 2006, NeoMedia sold 82% of its ownership interest in Mobot. On April 4, 2007, NeoMedia divested 90% of its ownership interest in 12Snap. On October 30, 2007, NeoMedia sold its 90% ownership stake in Triton Global Business Services, Inc., which had comprised the operations of NeoMedia’s Telecom Services business unit.

The consolidated statements of operations presented herein reflect the results of these acquired subsidiaries as follows: Mobot results are included from February 18, 2006 through December 6, 2006 under the caption “Loss from discontinued operations”; Sponge results are included from February 24, 2006 through November 14, 2006 under the caption “Loss from discontinued operations”; 12Snap results are included from February 24, 2006 through April 4, 2007 under the caption “Loss from discontinued operations”; BSD results are included from March 22, 2006 through September 30, 2007 under the caption “Loss from discontinued operations”; and Gavitec results are included in NeoMedia’s consolidated results from continuing operations from February 24, 2006 through September 30, 2007. Pro-forma results of operations are presented at the end of this Note 3.

The following disclosures reflect activity related to acquisitions since the filing of NeoMedia’s last annual report for the year ended December 31, 2006. For a complete discussion of the Company’s acquisition activity, please refer to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2006.

Gavitec

The acquisition agreement between NeoMedia and Gavitec stipulated that, in the event that NeoMedia’s stock price at the time the consideration shares became saleable (either upon effectiveness of a registration statement containing the shares, or under Rule 144) was less than $0.389, NeoMedia was obligated to compensate Gavitec shareholders in cash for the difference between the price at the time the shares became saleable and $0.389. On January 23, 2007, NeoMedia entered into an agreement with the former shareholders of Gavitec, whereby this purchase price obligation was to be satisfied through the payment by NeoMedia of (i) $1,800,000 in cash, payable no later than February 28, 2007 (subsequently extended to March 31, 2007), and (ii) 61,000,000 shares of NeoMedia common stock to be issued no later than February 28, 2007. NeoMedia also agreed to pay interest accrued on the purchase price in the amount of $481,000 and reimburse $100,000 of costs related to the acquisition to the primary former shareholder of Gavitec no later than February 28, 2007. NeoMedia issued the shares and made cash payments of $2,113,000 during March 2007. In August 2007, payments totaling $157,000 were made. As of September 30, 2007, NeoMedia owes $111,000 in remaining interest payments relating to this obligation.

 

12Snap

During the first quarter of 2007, NeoMedia initiated an action plan to sell its 12Snap business. During the three months ended March 31, 2007, and the year ended December 31, 2006, NeoMedia recorded impairment charges of $2,467,000 and $18,327,000, respectively, to adjust the carrying value of the 12Snap asset group to the expected net proceeds from the sale of the assets. Prior to the impairment charge, the asset group consisted primarily of goodwill and other intangible assets recorded upon purchase of 12Snap by NeoMedia during the first quarter of 2006. In connection with its decision to sell the 12Snap business in the first quarter of 2007, NeoMedia revised its expected cashflow to reflect the estimated net cash proceeds that the Company anticipated receiving in a sale transaction. The operations of 12Snap are classified as discontinued operations during the three and nine months ended September 30, 2007 and 2006. The criteria for discontinued operations classification were met during the three and nine months ended September 30, 2007. (See Note 4)

 

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Pursuant to the terms of the original purchase agreement, in the event that NeoMedia’s stock price at the time the consideration shares became saleable (either upon effectiveness of a registration statement containing the shares, or under Rule 144) was less than $0.3956, NeoMedia was obligated to compensate 12Snap shareholders in cash for the difference between the price at the time the shares became saleable and $0.3956. On February 22, 2007, the shares became eligible for resale under Rule 144. The actual calculated purchase price obligation to NeoMedia based on the volume weighted average closing price of NeoMedia common stock for the ten days up to and including February 22, 2007 was $16,233,000. Because the amount of the purchase price guarantee was measurable and probable as of December 31, 2006, it was recorded at that date by reducing the fair value of the initial stock consideration by the amount of the contingency. On March 19, 2007, NeoMedia issued 197,620,948 shares of its common stock in satisfaction of a portion of the purchase price obligation totaling $9,427,000. Additionally, NeoMedia has made cash payments against the liability totaling $467,000, and further reduced the balance through the forgiveness of $1,760,000 of the obligation in connection with the sale of 12Snap. The balance on the purchase price obligation as of September 30, 2007 was $4,592,000, which includes $13,000 in interest accrued on a portion of the balance. The Company is currently negotiating payment terms for the balance of the obligation.

 

On April 4, 2007, NeoMedia reached an agreement with Bernd Michael (the “Buyer”), a private investor and former shareholder of 12Snap prior to NeoMedia’s acquisition of 12Snap, pursuant to which the Buyer acquired from NeoMedia 90% of the shares of 12Snap, pursuant to the following material terms:

 

·

$1,100,000 was paid by the Buyer to the Company in cash at closing, of which $1,015,000 was paid directly to, and applied toward amounts owed to silent partners of 12Snap

 

·

$500,000 was placed into an escrow account for 90 days to secure warranty claims and release to NeoMedia during July 2007;

 

·

Buyer waived his portion of the purchase price guarantee obligation in the amount of $880,000;

 

·

Buyer returned to NeoMedia 2,525,818 NeoMedia shares previously issued to the Buyer;

 

·

12Snap management waived their portion of the purchase price guarantee obligation in the amount of $880,000;

 

·

12Snap management returned to NeoMedia 5,225,039 shares of NeoMedia common stock previously issued to 12Snap management;

 

·

NeoMedia retained a 10% ownership in 12Snap, subject to an option agreement pursuant to which NeoMedia has the right to sell and Buyer has the right to acquire the remaining 10% stake held by NeoMedia for a purchase price of $750,000 after December 31, 2007; and

 

·

12Snap and NeoMedia will execute a cooperation agreement pursuant to which 12snap will remain a NeoMedia preferred partner and enjoy most favored prices, and 12snap will perform certain research and development functions for NeoMedia.

 

NeoMedia recorded impairment charges of $0 and $2,467,000 during the three and nine months ended September 30, 2007, respectively, to adjust the carrying value of 12Snap’s assets to the final fair market value. NeoMedia realized a loss on the disposal of 12Snap in the three and nine months ended September 30, 2007, in the amount of $0 and $257,000 respectively.

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BSD

During January 2007, NeoMedia initiated an action plan to sell its Telecom Services business. On August 16, 2007, NeoMedia signed a binding letter of intent to sell its ownership of 90% of the outstanding shares of Triton, the operations of which comprise the Telecom Services business unit (acquired from BSD in March 2006), to Greywolf for $1,500,000 cash (subsequently revised to $1,350,000). On October 30, 2007, NeoMedia completed the sale of Triton to Greywolf, for $1,350,000 cash. Guy Fietz, who was the Vice President and General Manager of the NeoMedia Telecom Services business unit, is also the principal shareholder and CEO of Greywolf. Mr. Fietz received 6,190,476 shares of NeoMedia stock with a fair value of $130,000 a commission on the sale.

During the three months ended September 30, 2007, NeoMedia recorded an impairment charge of $3,378,000 to adjust the carrying value of the Telecom Services asset group to the actual net proceeds from the sale of the assets. Prior to the impairment charge, the asset group consisted primarily of goodwill and other intangible assets recorded upon purchase of BSD by NeoMedia during the first quarter of 2006. The operations of Telecom Services are classified as discontinued operations during the three and nine months ended September 30, 2007 and 2006. The criteria for discontinued operations classification were met during the first three quarters of 2007. (See Note 4)

Pro Forma Financial Information (Unaudited)

Pro-forma results of operations as if NeoMedia was combined with Gavitec as of January 1, 2006 are as follows:

								Loss			Weighted
					Loss			per Share			Average
		Total			from			from			Common
		Net			Continuing			Continuing			Shares
		Sales			Operations			Operations			Outstanding
Nine Months Ended September 30, 2006
NeoMedia		$	1,117			($27,544	)		($0.05	)		602,132,555
Gavitec			953			(874	)
Pro forma adjustments			(864	)(A)		732	(A)	$	0.00	(A)(B)		10,485,617	(B)
Pro forma combined		$	1,206			($27,686	)		($0.05	)		612,618,172

 

 

Basis of Presentation: NeoMedia acquired Mobot, Sponge, Gavitec, 12Snap, and BSD during the first quarter of 2006. During November and December 2006, NeoMedia divested of Mobot and Sponge. During April 2007, NeoMedia divested of 12Snap. On October 30, 2007, NeoMedia sold its Telecom Services business, comprised of the Triton operations acquired from BSD. Because the results of BSD, 12Snap, Mobot, and Sponge have already been removed from NeoMedia's continuing operations and classified as discontinued operations for the nine months ended September 30, 2006, these entities have not been included in the pro forma results shown above. However, the pro forma shares issued as consideration for the acquisitions of Gavitec, 12Snap, and BSD are reflected in the pro forma loss per share and weighted average common shares outstanding. The pro forma shares issued as consideration for the acquisitions of 12Snap, Mobot and Sponge, and NeoMedia shares returned in the sale of Sponge, are not reflected in the pro forma weighted average common shares outstanding, since for pro forma purposes the acquisition and disposal transactions are assumed to have occurred on January 1, 2006. Since the results of Gavitec were included in NeoMedia’s consolidated financial results for the entire three and nine month periods ended September 30, 2007, and the entire three month period ended September 30, 2006, separate pro forma results are not presented for these periods.

(A) Adjustment is to reflect operations of Gavitec from February 23, 2006 (closing date of acquisition) through September 30, 2006, and to reflect amortization of Gavitec intangible assets for the period January 1, 2006 through February 23, 2006. Results of operations for Gavitec from February 23, 2006 through September 30, 2006 are included in NeoMedia's results from continuing operations for the nine months ended September 30, 2006.

(B) Adjustment for shares that would have been issued in connection with the acquisitions of Gavitec and BSD if they had occurred on January 1, 2006. The adjustment between the reported and the pro forma number of weighted average shares outstanding is caused by (i) the weighting of the pro forma shares for the nine months ended September 30, 2006, whereas in the reported number the shares were only outstanding from the closing date of each acquisition through September 30, 2006, and (ii) the number of pro forma shares being higher than the actual shares issued due to a lower stock price on the pro forma date of issuance than the actual date of issuance. Using the stock price around January 1, 2006, the pro forma number of shares that would have been issued was:

		Gavitec			BSD			Total
Total stock consideration		$	5,400,000		$	2,279,263		$	7,679,263
Stock price on pro forma acquisition date		$	0.290		$	0.290
Pro forma number of consideration shares			18,620,690			7,859,527			26,480,217

 

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Tax Implications of Acquisitions

For income tax purposes, amounts assigned to particular assets acquired and liabilities assumed in the business combinations are different than amounts used for financial reporting. The differences in assigned values for financial reporting and tax purposes result in temporary differences. In applying SFAS 109, “Accounting for Income Taxes”, the Company is required to recognize the tax effect of these temporary differences and, accordingly, a deferred tax liability has been recognized. The Company determined that its pre-existing and acquired deferred tax assets, and those acquired, including those subject to limitations, were more likely than not to be realized to offset the deferred tax liability. In most cases the reduction in the valuation allowance resulted in an asset and was used to offset the deferred tax liability arising from the business combinations, pursuant to SFAS 109. A deferred tax liability was recognized where a net liability remained.

In addition, the acquisitions of Sponge, Gavitec, 12Snap, and BSD involve a change of control of foreign entities, and as a result any net operating loss carryforward in existence prior to the acquisition may have limited or no use for NeoMedia.

Intangible Assets

As of September 30, 2007, NeoMedia had intangible assets used in its continuing operations with original historical cost, accumulated amortization, and carrying value as follows:

(US dollars in thousands)		Gavitec			Other			Total
Patents
Historical cost		$	0		$	4,888		$	4,888
Less: accumulated amortization			0			(2,273	)		(2,273	)
Carrying value as of September 30, 2007		$	0		$	2,615		$	2,615
Proprietary Software
Historical cost		$	4,600		$	763		$	5,363
Less: accumulated amortization			(1,050	)		(722	)		(1,772	)
Carrying value as of September 30, 2007		$	3,550		$	41		$	3,591
Copyrighted Materials
Historical cost		$	64		$	0		$	64
Less: accumulated amortization			(23	)		0			(23	)
Carrying value as of September 30, 2007		$	41		$	0		$	41
Total carrying value		$	3,591		$	2,656		$	6,247

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Estimated future amortization expense on NeoMedia’s intangible assets is expected to be:

(US dollars in thousands)		Proprietary Software			Copyrighted Materials			Patents			Total
2007 (remaining 3 months)		$	171		$	2		$	75		$	248
2008			690			11			295			996
2009			659			11			284			954
2010			657			11			264			932
2011			657			3			245			905
Thereafter			757			3			1,452			2,212
Total		$	3,591		$	41		$	2,615		$	6,247

It is important to note that actual amortization expense could differ materially from the table due to subjective factors such as changes in assumptions of useful lives or impairment charges. The weighted average remaining life for the intangible assets was approximately 6.7 years as of September 30, 2007.

As of September 30, 2007, the following intangible assets relating to discontinued operations were included in “Assets held for sale” on the accompanying consolidated balance sheet:

(US dollars in thousands)		Telecom Services			Micro Paint Repair			Total
Customer Contracts, net		$	1,084		$	54		$	1,138
Proprietary Software, net			0			7			7
Copyrighted Materials, net			108			23			131
Patents, net			0			1,318			1,318
Goodwill, net			1,024			614			1,638
Total		$	2,216		$	2,016		$	4,232

 

Goodwill

As of September 30, 2007, goodwill consisted of $3,418,000 associated with NeoMedia’s acquisition of Gavitec. As of September 30, 2007, NeoMedia also had recorded goodwill in the amount of $614,000 and $1,024,000 relating to its Micro Paint Repair and Telecom Services businesses, respectively, that were held for sale as of September 30, 2007. These amounts are included in “Assets held for sale” on the accompanying consolidated balance sheet. During the three months ended September 30, 2007, NeoMedia recognized impairment charges of $3,378,000 and $589,000 to adjust the carrying value of the Telecom Services and Micro Paint Repair asset groups respectively, to the expected net proceeds from the sale of each asset group.

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4. DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE

Micro Paint Repair Business Unit

During August 2006, NeoMedia decided to sell its Micro Paint Repair business unit. On November 1, 2007 the Company entered into a definitive purchase agreement for the sale of the assets of the Micro Paint Repair business unit, excluding the assets of the U.S. Auto Xperience operations, with an expected closing date in mid November 2007.

NeoMedia has analyzed the pertinent facts of the proposed disposition with respect to the criteria outlined in SFAS 144, and has determined that all of the criteria have been met and continue to be met as of the date of this filing. Accordingly, NeoMedia is reporting the operating results of the Micro Paint Repair business unit as Discontinued Operations, and the assets and liabilities as Held for Sale for all periods presented in this filing. Assets Held for Sale are not depreciated or amortized.

During the three months ended September 30, 2007, NeoMedia recorded an impairment charge of $589,000 to adjust the carrying value of the Micro Paint Repair asset group to the expected net proceeds from the sale of the assets.

Sponge and Mobot Businesses

In the fourth quarter of 2006, NeoMedia disposed of two subsidiaries, Sponge and Mobot. All assets and liabilities associated with these two subsidiaries were disposed of in their respective sales and removed from NeoMedia’s consolidated balance sheet. In accordance with SFAS 144, NeoMedia is reporting the operating results of these two subsidiaries as Discontinued Operations for all periods presented in this filing. NeoMedia has analyzed the applicable accounting literature found in the SEC Staff Accounting Bulletin “SAB” Topic 5E, Accounting Principles Board (“APB”) Opinion 29, APB 18, Statement of Financial Accounting Standards “SFAS” 141, SFAS 144, and Emerging Issues Task Force (“EITF”) issue 01-2, and determined that the criteria for reporting the disposal of a business and reporting of discontinued operations have been met.

12Snap Business

In January 2007, NeoMedia management determined that it would focus on its core code-reading business in North America, the UK, mainland Europe, and China. In conjunction with this direction, the Company decided to sell its 12Snap business unit. On April 4, 2007, NeoMedia completed the sale of 12Snap. NeoMedia has analyzed the applicable accounting literature found in the SEC Staff Accounting Bulletin (SAB) Topic 5E, Accounting Principles Board (APB) Opinion 29, APB 18, Statement of Financial Accounting Standards (SFAS) 141, SFAS 144, and Emerging Issues Task Force (EITF) issue 01-2, and determined that the criteria for reporting the disposal of a business and reporting of discontinued operations have been met.

Telecom Services Business

In connection with its January 2007 decision to focus on its core code-reading business, the Company also decided to sell the NeoMedia Telecom Services business unit. NeoMedia has analyzed the pertinent facts of the proposed transaction with respect to the criteria outlined in SFAS 144, and has determined that all of the criteria were met as of September 30, 2007 and continue to be met. Accordingly, NeoMedia is reporting the operating results of the NeoMedia Telecom Services business unit as discontinued operations, and the assets and liabilities as held for sale for all periods presented in this filing. Assets Held for Sale are not depreciated or amortized.

 

On August 16, 2007, NeoMedia signed a binding letter of intent to sell its ownership of 90% of the outstanding shares of Triton Global Business Services, Inc. (“Triton”), the operations of which comprise the Telecom Services business unit, to Greywolf Entertainment, Inc, a Canadian company, for $1,500,000 cash (subsequently revised to $1,350,000). During the three months ended September 30, 2007, NeoMedia recorded an impairment charge of $3,378,000 to adjust the carrying value of the Telecom Services asset group to the expected net proceeds from the sale of the assets. On October 30, 2007, NeoMedia completed the sale of Triton, and as a result discontinued the operations of its Telecom Services business unit.

 

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The operating results of the Micro Paint Repair, Sponge, Mobot, 12Snap, and Telecom Services businesses classified as discontinued operations for the three and nine month periods ended September 30, 2007 and 2006 are shown in the following table. These results include the following items: (i) a gain on extinguishment of debt realized by Telecom Services in the amount of $265,000 in the nine months ended September 30, 2007, (ii) an impairment charge to reduce 12Snap assets to their fair market value in the amount of $2,467,000 in the three and nine months ended September 30, 2007, (iii) an impairment charge to reduce the Telecom Services assets to their fair market value in the amount of $3,378,000 in the three and nine months ended September 30, 2007, (iv) an impairment charge to reduce the Micro Paint Repair assets to their fair market value in the amount of $589,000 in the three and nine months ended September 30, 2007, (v)bad debt expense to write off accounts receivable from a material customer of the Telecom Services business unit in the amount of $405,000 in the three and nine months ended September 30, 2007, and (vi) a loss on the disposal of 12Snap in the amount of $257,000 in the nine months ended September 30, 2007. There is no tax expense or benefit to report due to NeoMedia’s net operating loss carry forward tax position.

(US dollars in thousands)		Three months ended September 30, 2007 (unaudited)
		Micro
		Paint			Telecom
		Repair			Services			12Snap			Mobot			Sponge			Total
Net Sales		$	287		$	525		$	0		$	0		$	0		$	812
Loss from discontinued operations			($913	)		($3,716	)		($92	)		($11	)		($15	)		($4,747	)

 

		Nine months ended September 30, 2007 (unaudited)
		Micro
		Paint			Telecom
		Repair			Services			12Snap			Mobot			Sponge			Total
Net Sales		$	1,003		$	1,339		$	2,621		$	0		$	0		$	4,963
Loss from discontinued operations			($2,122	)		($3,706	)		($2,394	)		($34	)		($44	)		($8,300	)

 

		Three months ended September 30, 2006 (unaudited)
		Micro
		Paint			Telecom
		Repair			Services			12Snap			Mobot			Sponge			Total
Net Sales		$	367		$	547		$	2,226		$	125		$	264		$	3,529
Income (loss) from discontinued operations			($1,619	)	$	144			($1,846	)		($581	)		($530	)		($4,432	)

 

		Nine months ended September 30, 2006 (unaudited)
		Micro
		Paint			Telecom
		Repair			Services			12Snap			Mobot			Sponge			Total
Net Sales		$	1,145		$	1,089		$	5,347		$	316		$	975		$	8,872
Loss from discontinued operations			($2,826	)		($135	)		($2,672	)		($1,275	)		($748	)		($7,656	)

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The assets and liabilities of the Micro Paint Repair and Telecom Services businesses classified as held for sale as of September 30, 2007 are shown in the following table. There are no assets or liabilities associated with the 12Snap, Sponge or Mobot subsidiaries as of September 30, 2007.

(US dollars in thousands)		September 30, 2007
		Micro
		Paint			Telecom
		Repair			Services			Total
ASSETS
Current assets:
Cash & cash equivalents		$	45		$	3		$	48
Trade accounts receivable, net			121			1,427			1,548
Inventory			324			0			324
Prepaid expenses and other current assets			77			14			91
Total Current Assets		$	567		$	1,444		$	2,011
Leasehold improvements and property and equipment, net			139			56			195
Goodwill and other intangible assets, net			2,016			2,216			4,232
Total Assets Held for Sale		$	2,722		$	3,716		$	6,438
LIABILITIES
Current liabilities:
Accounts payable		$	25		$	1,753		$	1,778
Accrued expenses			40			10			50
Taxes payable			9			1,268			1,277
Deferred revenue & other			264			71			335
Total Liabilities Held for Sale		$	338		$	3,102		$	3,440

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The assets and liabilities of the Micro Paint Repair, 12Snap, and Telecom Services businesses classified as held for sale as of December 31, 2006 are shown in the following table. There are no assets or liabilities associated with the Sponge or Mobot subsidiaries as of December 31, 2006.

 

(US dollars in thousands)		December 31, 2006
		Micro
		Paint			Telecom
		Repair			Services			12Snap			Total
ASSETS
Current assets:
Cash & cash equivalents		$	81		$	72		$	721		$	874
Trade accounts receivable, net			196			1,577			1,842			3,615
Inventory			154			0			0			154
Prepaid expenses and other current assets			36			12			407			455
Total Current Assets			467			1,661			2,970			5,098
Leasehold improvements and property and equipment, net			135			48			200			383
Goodwill and other intangible assets, net			2,470			5,593			5,876			13,939
Total Assets Held for Sale		$	3,072		$	7,302		$	9,046		$	19,420
LIABILITIES
Current liabilities:
Accounts payable		$	25		$	1,854		$	640		$	2,519
Accrued expenses			22			6			2,144			2,172
Taxes payable			8			1,037			0			1,045
Deferred revenue & other			352			73			4,096			4,521
Total Liabilities Held for Sale		$	407		$	2,970		$	6,880		$	10,257

Inventory included in assets held for sale is as follows:

(US dollars in thousands)		September 30,			December 31,
		2007			2006
Raw materials		$	180		$	90
Finished goods			144			64
Total		$	324		$	154

Results of operations for all discontinued business units are included in the line item entitled “Loss from discontinued operations” on the accompanying consolidated statement of operations for all periods presented. Balance sheet items for all discontinued business units are included in the line items entitled “Assets held for sale” and “Liabilities held for sale” on the accompanying consolidated balance sheet for all periods presented. As a result, pro forma results of operations as if the sale of each entity had occurred at the beginning of the period reported, and pro forma balance sheets as if the sale of each entity had occurred at the balance sheet dates presented, are not shown separately in this footnote.

As of September 30, 2007, NeoMedia also had recorded goodwill in the amount of $614,000 and $1,024,000 relating to its Micro Paint Repair and Telecom Services businesses, respectively, that are held for sale. These amounts are included in “Assets held for sale” on the accompanying consolidated balance sheet. During the three months ended September 30, 2007, NeoMedia recognized impairment charges of $3,378,000 and $589,000 to adjust the carrying value of the Telecom Services and Micro Paint Repair asset groups respectively, to the expected net proceeds from the sale of the assets.

 

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5. FINANCING

The following disclosures reflect a summary of the Company’s outstanding convertible securities, as well as activity related to financing transactions since the filing of NeoMedia’s last annual report for the year ended December 31, 2006. For a complete discussion of the Company’s financing activity, please refer to the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2006. NeoMedia currently has four outstanding convertible securities, each held by YA Global Investments, L.P., (f/k/a Cornell Capital Partners) an accredited investor. For clarification purposes, this entity is referred to as “YA Global Investments” or the “Purchaser” throughout this document.

Series C Convertible Preferred Stock

NeoMedia previously issued 22,000 shares of $1,000 Series C 8% convertible preferred stock to YA Global Investments. The Series C convertible preferred stock is convertible into NeoMedia common stock at the then effective conversion price, which varies relative to NeoMedia’s trading stock price, at the lower of $0.02 per share, or 97% of the lowest closing bid price (as reported by Bloomberg, L.P.) of the common stock for the 30 trading days immediately preceding the conversion date. The fixed conversion price was reset from $0.50 to $0.02 on August 24, 2007, as an inducement for YA Global Investments to enter into an additional financing arrangement with NeoMedia at that time. The conversions are limited such that YA Global Investments cannot exceed 4.99% ownership of NeoMedia. The Series C convertible preferred stock has voting rights on an “as converted” basis, meaning the Purchaser is entitled to vote the number of shares of common stock into which the 8% cumulative Series C convertible preferred stock was convertible as of the record date for a meeting of shareholders.

 

YA Global Investments has converted the preferred stock, as follows:

Date	Series C Shares Converted	Series C Shares Outstanding	Common Shares Issued
November 29, 2006	378	21,622	6,631,579
June 19, 2007	245	21,377	8,781,362
August 16, 2007	500	20,877	25,773,196
October 24, 2007	600	20,277	45,801,527
October 31, 2007	180	20,097	13,740,458

 

The Series C convertible preferred stock, at the option of the holder, affords the Purchaser anti-dilution protection should, at any time while the Series C preferred stock instruments are outstanding, the Company offer, sell or grant any option to purchase or offer, sell or grant any right to re-price its securities, or otherwise dispose of or issue any common stock or common stock equivalents, entitle any person to acquire shares of common stock at an effective price per share less than the then effective conversion price (excluding employee stock options), as calculated by the formula described above; then, in such instance, the conversion price for the convertible preferred stock shares shall be reduced to the lower price. In case of any such adjustment in the effective conversion price for the convertible preferred shares, this could significantly dilute existing investors. Each of the Company’s four convertible debenture instruments contain similar anti-dilution language.

 

In connection with the Series C convertible preferred stock, NeoMedia also entered into a Registration Rights Agreement with YA Global Investments that requires NeoMedia to, among other requirements, file a registration statement with the SEC registering the resale of the shares of common stock issuable upon conversion of the preferred stock and the exercise of the warrants, and achieve and maintain effectiveness of the registration statement. NeoMedia failed to meet the registration requirements, and accordingly is subject to liquidated damages amounting to 1% of the outstanding amount of Series C preferred stock per month, not to exceed $1,200,000. On March 27, 2007, NeoMedia paid $821,000 of liquidated damages from the proceeds of a secured convertible debenture entered into on that date. The remaining $379,000 has been accrued by the Company. On November 7, 2007, the SEC declared the Company’s S-3 Registration Statement effective.

 

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Under the Series C Agreement, the Purchaser also received “A” warrants, “B” warrants and “C” warrants to purchase 20,000,000, 25,000,000, and 30,000,000 shares of NeoMedia’s common stock, respectively, exercisable in three separate tranches at a price of $0.50, $0.40 and $0.35, respectively, per share, subject to adjustment, including anti-dilution protection similar to that described above. As an inducement to YA Global Investments to enter into subsequent financing arrangements with NeoMedia, the warrants were repriced on August 24, 2007 to $0.02 per share, subject to all the original terms and conditions of the respective warrant agreements. The warrants have a five-year contractual life. NeoMedia can force exercise of the warrants if the closing bid price of NeoMedia stock is more than $0.10 greater than the exercise price of any of the warrants for 15 consecutive trading days.

$5 Million Secured Convertible Debenture - August 2006

NeoMedia has outstanding a 10% secured convertible debenture in the aggregate amount of $5,000,000, entered into on August 24, 2006 (the “August 2006 Debenture”). The August 2006 Debenture is convertible into NeoMedia common stock at the then effective conversion price, which varies relative to NeoMedia’s trading stock price, at the lower of $0.02 per share, or 90% of the lowest closing bid price (as reported by Bloomberg, L.P.) of the common stock for the 30 trading days immediately preceding the conversion date, and adjusts to 50% of the lowest closing bid price for the 30 preceding days in the event of a default. The fixed conversion price was reset from $0.15 to $0.02 on August 24, 2007, as an inducement for YA Global Investments to enter into an additional financing arrangement with NeoMedia at that time. The conversions are limited such that YA Global Investments cannot exceed 4.99% ownership of NeoMedia. The August 2006 Debenture is secured by all of NeoMedia’s assets. The debenture agreements include anti-dilution language similar to the Series C convertible preferred stock. 

Under the August 2006 Debenture Agreement, the Purchaser also received “A” warrants, “B” warrants, “C” warrants and “D” warrants to purchase an aggregate of up to 175,000,000 shares of common stock. The warrants were exercisable in four separate tranches at a price of $0.15, $0.25, $0.20 and $0.05 respectively per share, subject to adjustment, including anti-dilution protection similar to that described above for the Series C convertible preferred stock. The warrants have a five-year contractual life. As an inducement to YA Global Investments to enter into subsequent financing arrangements with NeoMedia, the warrants were repriced on August 24, 2007 to $0.02 per share, subject to all the original terms and conditions of the respective warrant agreements. NeoMedia can force exercise of the warrants if the closing bid price of NeoMedia stock is more than $0.10 greater than the exercise price of any of the warrants for 15 consecutive trading days.

In connection with the August 2006 Debenture, NeoMedia also entered into a Registration Rights Agreement with YA Global Investments that required NeoMedia to, among other requirements, file a registration statement with the SEC registering the resale of the shares of common stock issuable upon conversion of the August 2006 debenture and the exercise of the warrants, and achieve and maintain effectiveness of the registration statement. NeoMedia failed to meet the registration requirements, and accordingly is subject to liquidated damages amounting to 2% of the outstanding amount of the August 2006 Debenture per month, not to exceed $1,000,000. On March 27, 2007, NeoMedia paid $491,000 of liquidated damages from the proceeds of a secured convertible debenture entered into on that date. The remaining $510,000 has been accrued by the Company. On November 7, 2007, the SEC declared the Company’s S-3 Registration Statement effective.

$2.5 Million Secured Convertible Debenture - December 2006

NeoMedia has outstanding a 10% secured convertible debenture in the aggregate amount of $2,500,000, entered into on December 29, 2006 (the “December 2006 Debenture”). The December 2006 Debenture is convertible into NeoMedia common stock at the then effective conversion price, which varies relative to NeoMedia’s trading stock price, at the lower of $0.02 per share, or 90% of the lowest closing bid price (as reported by Bloomberg, L.P.) of the common stock for the 30 trading days immediately preceding the conversion date, and adjusts to 50% of the lowest closing bid price for the 30 preceding days in the event of a default. The fixed conversion price was reset from $0.06 to $0.02 on August 24, 2007, as an inducement for YA Global Investments to enter into an additional financing arrangement with NeoMedia at that time. The conversions are limited such that YA Global Investments cannot exceed 4.99% ownership of NeoMedia. The December 2006 Debenture is secured by all of NeoMedia’s assets. The debenture agreements include anti-dilution language similar to the Series C convertible preferred stock.

 

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Under the December 2006 Debenture Agreement, the Purchaser also received a warrant to purchase up to 42,000,000 shares of common stock at an exercise price of $0.06 per share, subject to adjustment, including anti-dilution protection similar to that described above for the Series C convertible preferred stock. As an inducement to YA Global Investments to enter into subsequent financing arrangements with NeoMedia, the warrant was repriced on August 24, 2007 to $0.02 per share, subject to all the original terms and conditions of the warrant agreement. The warrants have a five-year contractual life. NeoMedia can force exercise of the warrants if the closing bid price of NeoMedia stock is more than $0.16 for ten consecutive trading days.

In connection with the December 2006 Debenture, NeoMedia also entered into a Registration Rights Agreement with YA Global Investments that required NeoMedia to, among other requirements, file a registration statement with the SEC registering the resale of the shares of common stock issuable upon conversion of the December 2006 debenture and the exercise of the warrants, and achieve and maintain effectiveness of the registration statement. NeoMedia failed to meet the registration requirements, and accordingly is subject to liquidated damages amounting to 2% of the outstanding amount of the December 2006 Debenture per month, not to exceed $500,000, which has been accrued by the Company. On November 7, 2007, the SEC declared the Company’s S-3 Registration Statement effective.

$7.5 Million Secured Convertible Debenture - March 2007

NeoMedia has outstanding a 13% secured convertible debenture in the aggregate amount of $7,459,000, entered into on March 27, 2007 (the “March 2007 Debenture”). The March 2007 Debenture is convertible into NeoMedia common stock at the then effective conversion price, which varies relative to NeoMedia’s trading stock price, at the lower of $0.02 per share, or 90% of the lowest closing bid price (as reported by Bloomberg, L.P.) of the common stock for the 30 trading days immediately preceding the conversion date, and adjusts to 50% of the lowest closing bid price for the 30 preceding days in the event of a default. The fixed conversion price was reset from $0.05 to $0.02 on August 24, 2007, as an inducement for YA Global Investments to enter into an additional financing arrangement with NeoMedia at that time. The conversions are limited such that YA Global Investments cannot exceed 4.99% ownership of NeoMedia. The March 2007 Debenture is secured by all of NeoMedia’s assets. The debenture agreements include anti-dilution language similar to the Series C convertible preferred stock.

Under the terms of the purchase agreement entered into in connection with the March 2007 Debenture, the Purchaser also received warrants to purchase an aggregate of up to 125,000,000 shares of common stock. The warrants are exercisable at a price of $0.04 per share, subject to adjustment, including anti-dilution protection similar to that described above for the Series C convertible preferred stock. As an inducement to YA Global Investments to enter into subsequent financing arrangements with NeoMedia, the warrant was repriced on August 24, 2007 to $0.02 per share, subject to all the original terms and conditions of the warrant agreement. The warrants have a five-year contractual life. The warrants do not contain a forced exercise attribute similar to previously issued warrants.

 

In connection with the March 2007 Debenture, NeoMedia also entered into a Registration Rights Agreement with YA Global Investments that requires NeoMedia to, among other requirements, file a registration statement with the SEC registering the resale of the shares of common stock issuable upon conversion of the March 2007 Debenture and the exercise of the warrants, and achieve and maintain effectiveness of the registration statement. The registration statement must be filed within 120 days of receipt of notice from YA Global Investments. No such notice has been issued as of the date of this filing. The Company has not accrued any of the liquidated damages with a maximum potential of $1,800,000, because the Company does not believe that any penalties are probable at this time. On November 7, 2007, the SEC declared the Company’s S-3 Registration Statement effective.

 

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At the inception date of March 27, 2007, the net proceeds of the March 2007 Debenture were allocated as follows:

 

Instrument:
Convertible debenture, at fair value		$	10,836,000
Common stock warrants-derivative liability (1)			5,638,000
Derivative loss recognized			(9,015,000	)
		$	7,459,000
Payment of liquidating damages (2)			(1,312,000	)
Payment of interest due(3)			(366,000	)
Interest expense(4)			(781,000	)
Total net proceeds received		$	5,000,000

 

(1)	The Company issued warrants to purchase aggregate 125,000,000 shares of common stock in connection with the March 2007 Debenture, as described above.

 

(2)	Liquidating damages arising from the February 2006 Series C convertible preferred stock financing arrangement and the August 2006 Debenture were paid from the proceeds in the amount of $1,312,000.

 

(3)	Interest payments of $366,000 toward the August 2006 Debenture and the December 2006 Debenture were made from the proceeds of the March 2007 Debenture.

 

(4)	Due to the default status, the financing costs of $781,000 were expensed to interest expense at inception.

 

$1.8 Million Secured Convertible Debenture - August 2007

NeoMedia entered into a Securities Purchase Agreement, dated August 24, 2007 (the “August 2007 Debenture”) with YA Global Investments. Pursuant to the August 2007 Debenture Agreement, the Purchaser agreed to purchase 14% secured convertible debentures maturing two years from the date of issuance in the aggregate amount of $1,775,000. NeoMedia received cash proceeds from the transaction of $1,575,000, net of $200,000 fees paid to the Purchaser. The August 2007 Debenture Agreement also provided for the issuance to the Purchaser, at no additional cost to the Purchaser, of 75,000,000 warrants to purchase shares of the Company's common stock. In connection with the August 2007 Debenture Agreement, the Company also entered into a registration rights agreement with the Purchaser that requires the Company to (i) file a registration statement with the SEC registering the resale of the shares of common stock issuable upon conversion of the convertible debenture and the exercise of the warrants within 30 days of receipt of a request for filing from the Purchaser, (ii) achieve effectiveness within 90 days of receipt of a request for filing from the Purchaser, and (iii) maintain effectiveness of the registration statement. Failure to meet these requirements will require the Company to pay liquidated damages amounting to 2% of the principal per month, not to exceed $852,000. No accrual has been recorded for any damages that may become payable because the Company does not believe that any liability is probable at this time.

The August 2007 Debenture is secured by (a) certain Pledged Property, as such term is defined in that certain Security Agreement, dated August 24, 2007, by and between the parties and perfected pursuant to UCC-1 Financing Statements filed with the Delaware Department of State (the UCC Filing Section) on or about August 24, 2007 and with the Florida Secured Transaction Registry on or about August 24, 2007; and (b) certain Patent Collateral, as defined in a security agreement (patent), entered into on August 24, 2007.

At any time from the closing date until August 24, 2009, the Purchaser has the right to convert the convertible debenture into common stock of the Company at the then effective conversion price, which varies relative to the Company’s trading stock price, as follows: $0.02 per share, or 80% of the lowest closing bid price (as reported by Bloomberg) of the common stock for the 10 trading days immediately preceding the conversion date, and adjusts to 50% of the lowest closing bid price for the 30 preceding days in the event of a default. The conversion is limited such that the holder cannot exceed 4.99% ownership, unless the holders waive their right to such limitation.

 

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The convertible debenture, at the option of the holder, affords the Purchaser anti-dilution protection should, at any time while the convertible debenture is outstanding, the Company offer, sell or grant any option to purchase or offer, sell or grant any right to re-price its securities, or otherwise dispose of or issue any common stock or common stock equivalents, entitle any person to acquire shares of common stock at an effective price per share less than the then effective conversion price (excluding employee stock options), as calculated by the formula described above; then, in such instance, the conversion price for the convertible debenture shall be reduced to the lower price.

 

Under the terms of the agreement, the Purchaser also received warrants to purchase an aggregate of up to 75,000,000 shares of common stock. The warrants are exercisable at a price of $0.02 per share, subject to adjustment, including anti-dilution protection similar to that described above. The warrants have a five-year contractual life. The warrants do not contain a forced exercise attribute similar to previously issued warrants.

At the inception date of August 24, 2007, the net proceeds of the August 2007 Debenture were allocated as follows:

 

Instrument:
Convertible debenture at fair value		$	4,539,000
Common stock warrants-derivative liability (1)			1,762,000
Derivative loss recognized			(4,726,000	)
Total net proceeds received		$	1,575,000

 

 

(1)	The Company issued warrants to purchase aggregate 75,000,000 shares of common stock at an exercise price of $0.02 per share in connection with the August 2007 Debenture, as described above

 

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Warrants

As described herein, YA Global Investments hold warrants to purchase shares of NeoMedia stock that were issued in connection with the convertible securities. The exercise prices of warrants held by YA Global Investments have been adjusted from time to time as inducement for YA Global Investments to enter into subsequent financing arrangements. YA Global Investments’ warrant holdings are outlined in the following table:

								Restated			Restated
								Exercise			Exercise
		Shares			Original			Price			Price
		Underlying			Exercise			December 29,			August 24,
Original Issue Date		Warrant			Price			2006 (1)			2007 (2)
March 30, 2005			10,000,000		$	0.20		$	0.04		$	0.02
February 17, 2006 (3)			20,000,000		$	0.50		$	0.04		$	0.02
February 17, 2006 (3)			25,000,000		$	0.40		$	0.04		$	0.02
February 17, 2006 (3)			30,000,000		$	0.35		$	0.04		$	0.02
August 24, 2006 (3)			25,000,000		$	0.15		$	0.04		$	0.02
August 24, 2006 (3)			50,000,000		$	0.25		$	0.04		$	0.02
August 24, 2006 (3)			50,000,000		$	0.20		$	0.04		$	0.02
August 24, 2006 (3)			50,000,000		$	0.05			n/a		$	0.02
December 29, 2006 (4)			42,000,000		$	0.06			n/a		$	0.02
March 27, 2007			125,000,000		$	0.04			n/a		$	0.02
August 24, 2007			75,000,000		$	0.02			n/a			n/a
Total			502,000,000

 

 

(1)	The exercise price of certain warrants outstanding as of December 29, 2006 was repriced as an inducement for YA Global Investments to enter into a financing arrangement with NeoMedia on that date.

(2)	The exercise price of all warrants outstanding as of August 24, 2007 was repriced as an inducement for YA Global Investments to enter into a financing arrangement with NeoMedia on that date.

(3)	NeoMedia can force exercise of the warrants if the closing bid price of NeoMedia stock is more than $0.10 greater than the exercise price of any of the warrants for 15 consecutive trading days.

(4)	NeoMedia can force exercise of the warrants if the closing bid price of NeoMedia stock is more than $0.16 for 10 consecutive trading days.

Default and Other Considerations

Each of the convertible securities described above contains consequences in case of default. Events of default which could subject the Company to penalties, damages, and liabilities as specified in the financing agreements include:

 

·

Any case or action of bankruptcy or insolvency commenced by the Company or any subsidiary, against the Company or adjudicated by a court against the Company for the benefit of creditors;

 

·

Any default in its obligations under a mortgage or debt in excess of $100,000;

 

·

Any cessation in the eligibility of the Company’s stock to be quoted on a trading market;

 

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·

Failure to timely file the registration statement covering the shares related to the conversion option, or failure to make the registration statement effective timely (NeoMedia is in default of this provision with respect to the Series C convertible preferred stock , the August 2006 Debenture, and the December 2006 Debenture);

 

·

Any lapse in the effectiveness of the registration statement covering the shares related to the conversion option and the warrants;

 

·

Any failure to deliver certificates within the specified time;

 

·

Any failure by the Company to pay in full the amount of cash due pursuant to a buy-in or failure to pay any amounts owed on account of an event of default within 10 days of the date due; and

 

·

Failure by the Company to sell its Micro Paint Repair and Telecom Services business units before September 30, 2007 (with respect to the August 2007 Debenture only).

 

Other material provisions of the convertible securities include the following:

 

·

The convertible securities are convertible into common stock, at the option of YA Global Investments, at any time after the effective date;

 

·

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