UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.   20549

FORM 10 - Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to ____________

Commission File Number 0-21743

NeoMedia Technologies, Inc.
(Exact Name of Issuer as Specified In Its Charter)

Delaware
36-3680347
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)

Two Concourse Parkway, Suite 500, Atlanta, GA 30328
    (Address, including zip code, of principal executive offices)

678-638-0460
(Registrants’ telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x   No¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files. Yes ¨   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨  Accelerated filer ¨   Non-accelerated filer ¨ Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨    No x

The number of outstanding shares of the registrant’s common stock on November 9, 2009 was 2,176,040,904.

 
NeoMedia Technologies, Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 2009
Index

     
Page
       
PART I
Financial Information
  
2
       
ITEM 1.
Financial Statements
  
2
ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
20
ITEM 3.
Quantitative and Qualitative Disclosures About Market Risk
  
26
ITEM 4.
Controls and Procedures
  
26
       
PART II
Other Information
  
28
       
ITEM 1.
Legal Proceedings
  
28
ITEM 1A.
Risk Factors
  
28
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
  
29
ITEM 3.
Defaults Upon Senior Securities
  
29
ITEM 4.
Submission of Matters to A Vote of Security Holders
  
29
ITEM 5.
Other Information
  
29
ITEM 6.
Exhibits
  
30
       
Signatures
  
36

 
 
 

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains “forward-looking statements” relating to NeoMedia Technologies, Inc., a Delaware corporation, which represent our current expectations or beliefs including, but not limited to, statements concerning our operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “may”, “anticipate”, “intend”, “could”, “estimate” or “continue” or the negative or other comparable terminology are intended to identify forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, the ability to continue our growth strategy and competition, certain of which are beyond our control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for us to predict all of such factors, nor can we assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 
1
 

PART I - FINANCIAL INFORMATION
ITEM 1.  Financial Statements

NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
 
   
September 30,
    
December 31,
  
   
2009
    
2008
  
ASSETS
  
(unaudited)
        
Current assets:
            
Cash and cash equivalents
   $ 74     $ 1,259  
Trade accounts receivable, net of allowance for doubtful accounts of $0 and $0, respectively
     46       102  
Inventories, net of allowance for obsolete & slow-moving inventory of $65 and $81 respectively
     187       117  
Prepaid expenses and other current assets
     421       544  
Total current assets
     728       2,022  
                 
Property, equipment and leasehold improvements, net
     107       79  
Goodwill
     3,060       3,418  
Proprietary software, net
     2,241       2,738  
Patents and other intangible assets, net
     2,066       2,293  
Cash surrender value of life insurance policies
     659       508  
Other long-term assets
     156       430  
Total assets
   $ 9,017     $ 11,488  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
                
Current liabilities:
                
Accounts payable
   $ 158     $ 134  
Taxes payable
     7       7  
Accrued expenses
     8,119       5,787  
Deferred revenues and customer prepayments
     235       403  
Notes payable
     109       50  
Accrued purchase price guarantee
     4,535       4,614  
Deferred tax liability
     348       706  
Derivative financial instruments - warrants
     7,791       1,189  
Derivative financial instruments - debentures payable
     41,253       26,256  
Debentures payable - carried at amortized cost
     12,241       11,227  
Debentures payable - carried at fair value
     27,383       19,892  
Total current liabilities
     102,179       70,265  
                 
Commitments and contingencies (Note 7)
                
                 
Series C convertible preferred stock, $0.01 par value, 30,000 shares authorized, 9,859 and 19,144 shares issued and outstanding, liquidation value of $9,859 and $19,144
     9,859       19,144  
                 
Shareholders’ deficit:
                
Common stock, $0.01 par value, 5,000,000,000 shares authorized, 2,079,180,883 and 1,375,056,229 shares issued and 2,076,028,605 and 1,371,904,960 outstanding, respectively
     20,760       13,719  
Additional paid-in capital
     131,815       120,430  
Accumulated deficit
     (254,745 )     (211,305 )
Accumulated other comprehensive loss
     (72 )     14  
Treasury stock, at cost, 201,230 shares of common stock
     (779 )     (779 )
Total shareholders’ deficit
     (103,021 )     (77,921 )
Total liabilities and shareholders’ deficit
   $ 9,017     $ 11,488  

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

 
2
 

NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
 (in thousands, except share and per share data)
 
   
For the three months ended
  
   
September 30,
    
September 30,
  
   
2009
    
2008
  
             
Net sales
   $ 189     $ 330  
Cost of sales
     238       377  
Gross deficit
     (49 )     (47 )
                 
Sales and marketing expenses
     149       711  
General and administrative expenses
     984       1,216  
Research and development costs
     330       406  
Impairment of investment
     261       -  
                 
Operating loss
     (1,773 )     (2,380 )
                 
Gain (loss) from change in fair value of hybrid financial instruments
     (7,802 )     975  
Gain (loss) from change in fair value of derivative liability - warrants
     5,800       (315 )
Loss from change in fair value of derivative liability - debentures
     (8,651 )     (7,640 )
Loss on sale of assets
     -       (6 )
Interest expense related to convertible debt
     (1,140 )     (498 )
                 
Loss from continuing operations
     (13,566 )     (9,864 )
                 
Income from discontinued operations
     -       31  
                 
Net loss
     (13,566 )     (9,833 )
                 
Dividends on convertible preferred stock
     (234 )     (398 )
                 
Net loss attributable to common shareholders
     (13,800 )     (10,231 )
                 
Comprehensive loss:
                
Net loss
     (13,566 )     (9,833 )
Other comprehensive income (loss):
                
Foreign currency translation adjustment
     (7 )     136  
                 
Comprehensive loss
   $ (13,573 )   $ (9,697 )
                 
Net loss per share, basic and diluted:
                
Continuing operations
   $ (0.01 )   $ (0.01 )
Discontinued operations
   $ -     $ -  
Net loss per share, basic and diluted
   $ (0.01 )   $ (0.01 )
                 
Weighted average number of common shares:
                
Basic and fully diluted
     1,957,840,909       1,236,058,293  

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

 
3
 

NeoMedia Technologies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
 (in thousands, except share and per share data)
 
   
For the nine months ended
  
   
September 30,
    
September 30,
  
   
2009
    
2008
  
             
Net sales
   $ 815     $ 801  
Cost of sales
     1,046       983  
Gross deficit
     (231 )     (182 )
                 
Sales and marketing expenses
     613       1,994  
General and administrative expenses
     2,770       3,789  
Research and development costs
     1,004       1,623  
Impairment of investment
     261       -  
                 
Operating loss
     (4,879 )     (7,588 )
                 
Gain on extinguishment of debt
     -       22  
Gain (loss) from change in fair value of hybrid financial instruments
     (7,490 )     3,684  
Gain (loss) from change in fair value of derivative liability - warrants
     (6,602 )     3,151  
Loss from change in fair value of derivative liability - debentures
     (18,327 )     (12,186 )
Loss on sale of assets
     -       (90 )
Interest expense related to convertible debt
     (4,803 )     (2,172 )
                 
Loss from continuing operations
     (42,101 )     (15,179 )
                 
Income/(loss) from discontinued operations
     -       (260 )
                 
Net Loss
     (42,101 )     (15,439 )
                 
Dividends on convertible preferred stock
     (977 )     (1,196 )
                 
Net loss attributable to common shareholders
     (43,078 )     (16,635 )
                 
Comprehensive loss:
                
Net loss
     (42,101 )     (15,439 )
Other comprehensive loss:
                
Foreign currency translation adjustment
     (86 )     (14 )
                 
Comprehensive loss
   $ (42,187 )   $ (15,453 )
                 
Net loss per share, basic and diluted:
                
Continuing operations
   $ (0.02 )   $ (0.01 )
Discontinued operations
   $ -     $ -  
Net loss per share, basic and diluted
   $ (0.02 )   $ (0.01 )
                 
Weighted average number of common shares:
                
Basic and fully diluted
     1,713,213,128       1,137,671,871  

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

 
4
 

NeoMedia Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
 
   
For the nine months ended
  
   
September 30,
  
   
2009
    
2008
  
Cash Flows from Operating Activities:
            
Loss from continuing operations
     (42,101 )     (15,439 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:
                
Loss from discontinued operations
     -       260  
Depreciation and amortization
     760       786  
Impairment of investment
     261       -  
Loss on sale of assets
     -       90  
Gain on early extinguishment of debt
     -       (22 )
(Gain) loss from change in fair value of hybrid financial instruments
     7,490       (3,684 )
(Gain) loss from change in fair value of warrants
     6,602       (3,151 )
Loss from change in fair value of debentures
     18,327       12,186  
Interest expense related to convertible debt
     4,803       2,172  
Stock-based compensation expense
     280       1,570  
Decrease/ (increase) in value of life insurance policies
     (151 )     69  
                 
Changes in operating assets and liabilities
                
Trade and other accounts receivable
     56       157  
Inventories
     (70 )     53  
Prepaid expenses and other assets
     136       (623 )
Accounts payable and accrued liabilities
     (55 )     831  
Deferred revenue and other current liabilities
     (178 )     (275 )
Net cash used in operating activities
     (3,840 )     (5,020 )
                 
Cash Flows from Investing Activities:
                
Acquisition of property and equipment
     (65 )     (41 )
Expenses of discontinued operations
     -       (255 )
Proceeds from sale of investments
     -       751  
Payment of purchase price guarantee obligations
     -       (14 )
Net cash provided by (used in) investing activities
     (65 )     441  
                 
Cash Flows from Financing Activities:
                
Net proceeds from exercise of stock options
     116       -  
Borrowings under convertible debt instruments, net
     2,610       3,686  
Net cash provided by financing activities
     2,726       3,686  
                 
Effect of exchange rate changes on cash for continuing operations
     (6 )     (7 )
                 
Net decrease in cash and cash equivalents from continuing operations
     (1,185 )     (900 )
                 
Cash and cash equivalents, beginning of period
     1,259       1,415  
Cash and cash equivalents, end of period
     74       515  
                 
                 
Supplemental cash flow information:
                
Interest paid during the period
     3       34  
Accretion of dividends on Series C Convertible Preferred Stock
     977       1,196  
Series C Convertible Preferred Stock converted to common stock
     9,285       789  

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

 
5
 

NeoMedia Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - General

Business – NeoMedia utilizes the mobile phone by leveraging barcodes (printed symbols) as a seamless mechanism to link brands, advertisers, carriers, retailers and consumers using the power of the mobile internet.

With our barcode ecosystem technology, NeoMedia transforms mobile phones with cameras into barcode scanners which provide instant access to mobile web content whenever a barcode is scanned. A barcode makes any medium immediately interactive – the code links consumers to the multimedia capability of the mobile web. Combining this technology with analytics and reporting capabilities improves the way advertisers market to mobile consumers.

NeoMedia provides the infrastructure to facilitate mobile barcode scanning and its associated commerce worldwide. Our mobile barcode ecosystem software reads and transmits data from 1D and 2D barcodes to its intended destination. Our code management and clearinghouse platforms create, connect, record, and transmit the transactions embedded in the barcodes, like web-URLs, text messages (SMS), and telephone calls, ubiquitously and reliably.

In order to provide complete mobile marketing solutions, NeoMedia also offers barcode scanning hardware that reads barcodes displayed on mobile phone screens or printed media. NeoMedia provides infrastructure solutions to enable mobile ticketing and couponing programs – including scanner hardware and system support software for seamless implementation.

This technology is supported by our patents. In addition, NeoMedia has an open standards philosophy designed to make integration and use of the technology easy for handset manufacturers, mobile operators and advertisers; and the consumer’s experience is safe, reliable and interoperable.

Accounting Standards Codification - In June 2009, the Financial Accounting Standards Board ("FASB") issued a statement establishing the FASB Accounting Standards Codification™ (the “FASB ASC" or the “Codification"). Effective for interim and annual periods ended after September 15, 2009, the Codification became the source of authoritative U.S. generally accepted accounting principles ("US GAAP") recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the United States Securities and Exchange Commission (the “SEC”) under authority of federal securities laws are also sources of authoritative US GAAP for SEC registrants. This statement did not change existing US GAAP, and as such, did not have an impact on our consolidated financial statements. We have updated our references to US GAAP, in order to reflect the Codification.

Going Concern – We have historically incurred net losses and losses from operations and we expect that we will continue to have negative cash flows as we implement our business plan.  There can be no assurance that our continuing efforts to execute our business plan will be successful and that we will be able to continue as a going concern. The accompanying consolidated financial statements have been prepared in conformity with US GAAP, which contemplate our continuation as a going concern.  Net loss from continuing operations for the nine months ended September 30, 2009 and 2008 was $42.1 million and $15.2 million, respectively.  Net cash used for operations during the same periods was $3.8 million and $5.0 million, respectively. We also have an accumulated deficit of $254.7 million and a working capital deficit of $101.5 million as of September 30, 2009, much of which is related to the derivative value of our financing instruments including $76.4 million related to the fair value of hybrid and derivative financial instruments, and $12.2 million related to the carrying value of debentures carried at amortized cost.

The items discussed above raise substantial doubt about our ability to continue as a going concern.

We currently do not have sufficient cash to sustain us for the next twelve months.  We will require additional financing in order to execute our operating plan and continue as a going concern.  Our management’s plan is to attempt to secure adequate funding to bridge the commercialization of our barcode ecosystem business. We cannot predict whether this additional financing will be in the form of equity, debt, or another form and we may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all.  We believe that we can obtain additional financing, but in the event that these financing sources do not materialize, or that we are unsuccessful in increasing our revenues and profits, we may be unable to implement our current plans for expansion, repay our debt obligations as they become due or continue as a going concern, any of which circumstances would have a material adverse effect on our business, prospects, financial condition and results of operations.

 
6
 
 
YA Global Investments, L.P. (“YA Global”) has provided us with financing on a month-to-month basis, totaling $2.6 million, during 2009. YA Global has informed us that they intend to provide additional financing for our operations through the end of 2009. This additional financing has not yet been completed as of the date of this report. If cash received from our customers and licensees is not sufficient to fund our operations we will require additional capital financing from YA Global or from other sources in the future in order to continue as a going concern.
 
The financial statements do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts or the amounts and classification of liabilities that might be necessary, should we be unable to continue as a going concern.
 
Note 2 - Summary of Significant Accounting Policies

Basis of Presentation – The accompanying condensed balance sheet as of December 31, 2008, which was derived from audited consolidated financial statements, and the unaudited condensed consolidated financial statements as of and for the periods ended September 30, 2009 and 2008, have been prepared in accordance with US GAAP for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Our operations consist of one reportable segment. For further information, refer to the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.  The net effect of discontinued operations is reported separately from the results of our continuing operations.  Operating results for the nine month period ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full fiscal year.
 
Use of Estimates – The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect amounts reported therein, including those related to revenue recognition, valuation of accounts receivable, property, plant and equipment, long-lived assets, intangible assets, derivative liabilities and contingencies. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates.

Basic and Diluted Loss Per Share – Basic net loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. During the three and nine months ended September 30, 2009 and 2008, we reported a net loss per share, and as such the basic and diluted loss per share were equivalent.

The following shares related to outstanding stock options, warrants, convertible debt and convertible preferred stock for the three and nine months ended September 30, 2009 and 2008, are anti-dilutive and therefore have been excluded from diluted earnings per share:
 
   
Three months ended September 30,
    
Nine months ended September 30,
  
   
2009
    
2008
    
2009
    
2008
  
                         
Outstanding stock options
     95,263,548       116,541,081       94,561,241       116,541,081  
Outstanding warrants
     1,006,195,834       1,014,470,834       1,006,195,834       1,014,470,834  
Convertible debt
     6,492,936,266       11,780,475,652       6,215,593,350       10,645,838,866  
Convertible preferred stock
     1,922,206,202       6,518,198,594       2,134,358,223       6,627,785,070  
      9,516,601,850       19,429,686,161       9,450,708,648       18,404,635,851  
 
 
Inventories - Inventories, consisting of material, material overhead, labor and processing costs, are stated at the lower of cost (first-in, first-out) or market.

 
7
 
 
Note 3 – Discontinued Operations
 
MicroPaint Repair, 12Snap & Telecom Services – During 2006, we acquired and in 2007 we subsequently disposed of our Micro Paint Repair (MPR), 12Snap, Mobot and Sponge business units. During the three and nine months ended September 30, 2008, we incurred wind-down expenses related to these discontinued businesses.

Legacy Software Product lines, Maxicode, PDF417 & WISP – On July 17, 2009, the Company entered into an Asset Purchase and Sale Agreement to dispose of certain assets in connection with our legacy Maxicode, PDF 417 and WISP software product lines. Neither the assets sold, nor the royalty revenues to be received in connection with the asset sale, were or are material to the Company.

Note 4 – Financing

On February 17, 2006, the Company issued shares of its Series C convertible preferred stock to YA Global, an accredited investor, and between August 24, 2006 and August 14, 2009, has issued fifteen secured convertible debentures to YA Global. In addition, in connection with these debentures and the Series C convertible preferred stock, the Company also issued common stock warrants to YA Global. The significant terms of the Series C convertible preferred stock, the convertible debentures and the warrants are set out in Note 5 to our consolidated financial statements, included in our Annual Report on Form 10-K for the year ended December 31, 2008 and summarized below. During the second quarter of 2009, YA Global distributed 3,350 of it’s preferred shares to other investors.

Series C Convertible Preferred Stock - On February 17, 2006, we issued 22,000 shares of $1,000 Series C 8% convertible preferred stock, with a face value of $22 million, to YA Global. The Series C convertible preferred stock is convertible into shares of common stock at the lower of $0.02 per share and 97% of the lowest closing bid price of the common stock for the 30 trading days immediately preceding the conversion date.

As of September 30, 2009, 12,141 shares of the original 22,000 shares of our Series C preferred stock have been converted into our common shares, leaving 9,859 shares, with a face value of $9.9 million outstanding. During the quarter ended September 30, 2009, there was a change in the estimate of the number of shares of preferred stock which were converted. During the period from February 2008 through April 2009, the trading market price of our common stock (and the conversion price) was less than its par value.  We are limited to issuing shares of common stock at no less than the par value, and all shares of our common stock issued in those conversions were issued at par value. However, the methodology used to estimate the number of shares of preferred stock converted during that time was based upon the value received for the shares issued, with the difference between that value and  the par value recorded as a deemed dividend. Effective September 30, 2009, the methodology used to determine the number of preferred shares being converted was changed such that it was no longer dependent on the market value of the common shares issued. The number of common shares issued did not change because we consistently issued those common shares at a price no lower than par value.

The Series C convertible preferred stock is currently classified outside of Shareholders’ Equity in the mezzanine section of our balance sheet. The change in estimate in the number of shares converted resulted in a reduction in the preferred stock outstanding of approximately $5.6 million, and a corresponding reduction in the accumulated deficit of $3.0 million related to the deemed dividends, and $2.6 million recorded as an increase to additional paid in capital.

On October 13, 2009, 300 Series C preferred shares were converted into 30 million common shares. On October 19, 2009, 100 Series C preferred shares were converted into 10 million common shares. And on October 23, 2009, 300 Series C preferred shares were converted into 30 million common shares.
 
 
8
 


Secured Convertible Debentures - The underlying agreements for each of the fifteen debentures issued to YA Global are essentially the same, except in regard to the interest rate, varying conversion prices per share, and the number of warrants that were issued in conjunction with each of the debentures. The debentures are convertible into our common stock at the lower of a fixed conversion price per share or a percentage of the lowest volume-weighted average price (“VWAP”) for a specified number of trading days prior to conversion. All of the convertible debentures are secured according to the terms of a Security Pledge Agreement dated August 23, 2006, which was entered into in connection with the first convertible debenture issued to YA Global and which provides YA Global with a security interest in substantially all of our assets.

The table below summarizes the significant terms of each of the debentures:

                       
Conversion Price – Lower of Fixed Price or Percentage
                 
Default
    
of VWAP for Preceding Period
   
Face
      
Interest
    
Interest
    
Fixed
          
Default
  
Preceding
Debenture Issue Date
  
Amount
  
Maturity
  
Rate
    
Rate
    
Price
    
%
    
%
  
Period
                                         
August 24, 2006
   $ 5,000,000  
7/29/2010
     10 %     n/a     $ 0.01       90 %     n/a  
30 Days
December 29, 2006
     2,500,000  
7/29/2010
     10 %     n/a     $ 0.01       90 %     n/a  
30 Days
March 27, 2007
     7,458,651  
7/29/2010
     13 %     n/a     $ 0.01       90 %     n/a  
30 Days
August 24, 2007
     1,775,000  
7/29/2010
     14 %     n/a     $ 0.01       80 %     n/a  
10 Days
April 11, 2008
     390,000  
4/11/2010
     15 %     24 %   $ 0.01       80 %     75 %
10 Days
May 16, 2008
     500,000  
5/16/2010
     15 %     24 %   $ 0.01       80 %     50 %
10 Days
May 29, 2008
     790,000  
5/29/2010
     15 %     24 %   $ 0.01       80 %     50 %
10 Days
July 10, 2008
     137,750  
7/10/2010
     15 %     24 %   $ 0.01       80 %     50 %
10 Days
July 29, 2008
     2,325,000  
7/29/2010
     14 %     24 %   $ 0.02       95 %     50 %
10 Days
October 28, 2008
     2,325,000  
7/29/2010
     14 %     20 %   $ 0.02       95 %     50 %
10 Days
April 6, 2009
     550,000  
7/29/2010
     14 %     20 %   $ 0.02       95 %     50 %
10 Days
May 1, 2009
     550,000  
7/29/2010
     14 %     20 %   $ 0.02       95 %     50 %
10 Days
June 5, 2009
     715,000  
7/29/2010
     14 %     20 %   $ 0.02       95 %     50 %
10 Days
July 15, 2009
     535,000  
7/29/2010
     14 %     20 %   $ 0.02       95 %     50 %
10 Days
August 14, 2009
     475,000  
7/29/2010
     14 %     20 %   $ 0.02       95 %     50 %
10 Days

The debentures issued prior to May 29, 2008 were originally issued with higher fixed exercise prices but because those debentures include full-ratchet anti-dilution provisions, their fixed conversion price was reduced to $0.01 as of May 29, 2008.

All the debentures with YA Global contain provisions for acceleration of principal and interest upon default. Certain of the debentures also contain default interest rates and conversion prices, as reflected in the table above.

As of August 25, 2008, we were in default on our August 24, 2006 Convertible Debenture due to non-payment of principal and interest in accordance with the terms of the agreement. On September 24, 2008, we entered into a Letter Agreement with YA Global which extended the maturity dates of the August 24, 2006 and the December 29, 2006 debentures to July 29, 2010. The extension was considered a one-time extension for the specific period indicated but was not considered a waiver of existing events of default. However, a waiver was subsequently obtained from YA Global, effective as of December 31, 2008, which waiver is discussed further below. On April 6, 2009 (effective March 27, 2009) the maturity date of the March 27, 2007 debenture was extended to July 29, 2010. On August 14, 2009, the maturity date of the August 24, 2007 debenture was extended to July 29, 2010.

 
9
 

We obtained a waiver from YA Global, effective as of December 31, 2008 in which all prior events of default and the related cross default provisions of other financing instruments with YA Global were waived. YA Global waived the right to collect any liquidated damages, penalties or fines which had not previously been paid by us and also acknowledged that as of December 31, 2008, we were not under any obligation to file a registration statement under any of the financing arrangements. YA Global does, however, still have demand rights under certain agreements which would require us to file registration statements in accordance with the terms of the agreements.

On July 15, 2009 and August 14, 2009, we entered into additional secured convertible debentures with YA Global for principal amounts of $535,000 and $475,000, respectively. The debentures mature on July 29, 2010, accrue interest at 14% per annum and are payable on the maturity date in cash, or provided that certain equity conditions are satisfied, in shares of common stock.  At any time from the closing date until the maturity date, YA Global has the right to convert the convertible debentures into our common stock  at the then effective conversion price, which varies relative to the our trading stock price, at the lesser of $0.02 per share, and 95% of the lowest weighted average price of the Company’s common stock during the ten days preceding the conversion date, and adjusts to 50% of the lowest weighted average price of the Company’s common stock during the ten days preceding the conversion date 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. We have the right to redeem a portion or the entire outstanding note at a 10% premium plus accrued interest. The debentures are secured by certain Pledged Property, as defined in the Security Agreement dated July 29, 2008, and certain Patent Collateral, as defined in a Patent Security Agreement dated July 29, 2008.

In our evaluation of these financing transactions, we concluded that the conversion features were not afforded the exemption as conventional convertible instruments due to the variable conversion rate; and they did not otherwise meet the conditions set forth in current accounting standards for equity classification. Because equity classification was not available for the conversion feature, we elected to bifurcate the compound derivative, and carry it as a derivative liability, at fair value. The compound derivative consists of (i) the embedded conversion feature, (ii) down round protection feature, and (iii) default, non-delivery and buy-in puts which were combined into one compound instrument that is carried as a component of derivative liabilities.

The following tables illustrate how the proceeds arising from the July 2009 and August 2009 financings were allocated on the financing inception dates:

Classification
  
July 15, 2009
    
August 14, 2009
  
             
Convertible debenture
   $ 132,779     $ 134,337  
Compound embedded derivative
     367,221       315,663  
                 
Net proceeds
     500,000       450,000  
Fees retained by YA Global
     35,000       25,000  
Gross proceeds
   $ 535,000     $ 475,000  

We used the Flexible Monte Carlo Simulation valuation technique to value the compound embedded derivative because it embodies all of the requisite assumptions (including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to fair value these more complex instruments.

Assumptions used as of inception of the financings included the following significant estimates:

 
10
 

   
July 15, 2009
    
August 14, 2009
  
             
Conversion prices
   $ 0.011     $ 0.009  
Remaining terms (years)
     1.04       0.96  
Equivalent volatility
     227.74 %     203.09 %
Equivalent interest-risk adjusted rate
     12.51 %     12.46 %
Equivalent credit-risk adjusted yield rate
     14.50 %     10.93 %

Subsequent Events

Debenture Conversion - On October 26, 2009, $321,000 of the $550,000 face value convertible debenture dated April 6, 2009 was converted into 30,000,000 shares of our common stock.

Fair Value Considerations - In accordance with the FASB ASC Topic 815, Derivatives and Hedging, we determined that the conversion features of the Series C convertible preferred stock, and the August 2006, December 2006, July 2008, October 2008, April 2009, May 2009 June 2009, July 2009 and August 2009 Debentures met the criteria of embedded derivatives and that the conversion features of these instruments needed to be bifurcated and accounted for as derivative instrument liabilities. Changes in the fair value of the derivative liability for the embedded conversion option are charged or credited to income. As permitted by FASB ASC 815-15-25, Recognition of Embedded Derivatives, we have elected not to bifurcate the embedded derivatives in the March 2007, August 2007, April 2008 or May 2008 Debentures and accordingly these convertible instruments are being carried in their entirety at their fair values, with the changes in the fair value of the Debentures charged or credited to income each period. 
 
Derivative financial instruments arising from the issuance of convertible financial instruments are initially recorded, and continuously carried, at fair value. Upon conversion of any of the convertible financial instruments, the carrying amount of the debt, including any unamortized premium or discount, and the related derivative instrument liability are credited to the capital accounts upon conversion to reflect the stock issued and no gain or loss is recognized.

Embedded Derivative Instruments – Series C Preferred Stock and August 2006, December 2006, July 2008, October 2008, April 2009, May 2009, June 2009, July 2009 and August 2009 Convertible Debentures - Embedded derivative financial instruments arising from the convertible instruments consist of multiple individual features that were embedded in each instrument. For each convertible instrument, we evaluated all significant features and, as required under current accounting standards, aggregated the components into one compound derivative financial instrument for financial reporting purposes. For financings recorded in accordance with FASB ASC 815, the compound embedded derivative instruments are valued using the Flexible Monte Carlo methodology because that model embodies certain relevant assumptions (including, but not limited to, interest rate risk, credit risk, and conversion/redemption privileges) that are necessary to value these complex derivatives.

Assumptions used as of September 30, 2009 included exercise estimates/behaviors and the following other significant estimates:

 
11
 

         
Remaining
          
Equivalent
    
Equivalent
  
   
Conversion
    
Term
    
Equivalent
    
Interest-Risk
    
Credit-Risk
  
   
Prices
    
(years)
    
Volatility
    
Adjusted Rate
    
Adjusted Rate
  
                               
Series C Convertible Preferred Stock
   $ 0.004       0.83       184 %     8.38 %     10.40 %
August 24, 2006
   $ 0.004       0.83       184 %     10.79 %     10.40 %
December 29, 2006
   $ 0.004       0.83       184 %     10.79 %     10.40 %
July 10, 2008
   $ 0.004       0.78       188 %     15.00 %     10.40 %
July 29, 2008
   $ 0.005       0.83       184 %     12.93 %     10.40 %
October 28, 2008
   $ 0.005       0.83       184 %     12.93 %     10.40 %
April 6, 2009
   $ 0.005       0.83       184 %     12.93 %     10.40 %
May 1, 2009
   $ 0.005       0.83       184 %     12.93 %     10.40 %
June 5, 2009
   $ 0.005       0.83       184 %     12.93 %     10.40 %
July 15, 2009
   $ 0.005       0.83       183 %     12.69 %     10.40 %
August 14, 2009
   $ 0.005       0.83       183 %     12.69 %     10.40 %

Equivalent amounts reflect the net results of multiple modeling simulations that the Flexible Monte Carlo Simulation methodology applies to underlying assumptions. The assumptions included in the calculation are highly subjective and subject to interpretation.

Due to the variable component of the conversion price, rapid fluctuations in the trading market price may result in significant variations to the calculated conversion price. For each debenture, we analyze the ratio of the conversion price (as calculated based on the percentage of VWAP for the 30 day or 10 day prior period) to the trading market price for a period of time equal to the term of the debenture to determine the average ratio for the term of the note. Each quarter, the ratio in effect on the date of the valuation is compared with the average ratio over the term of the debenture to determine if the calculated conversion price is representative of past trends or if it is considered unrepresentative due to a large fluctuation in the stock price over a short period of time. If the calculated conversion price results in a ratio which deviates significantly from the average ratio over the term of the agreement, the average ratio of the conversion price to the trading market price is then multiplied by the current trading market price to determine the variable portion of the conversion price for use in the fair value calculations. This variable conversion price is then compared with the fixed conversion price and, as required by the terms of the debentures, the lower of the two amounts is used as the conversion price in the Flexible Monte Carlo model used for valuation purposes. On September 30, 2009, the fixed conversion price for each of the debentures was equal to or higher than the calculated variable conversion price. Accordingly, the variable conversion price was used in the Flexible Monte Carlo valuation model. This analysis is performed each quarter to determine if the calculated conversion price is reasonable for purposes of determining the fair value of the embedded conversion features (for instruments recorded under FASB ASC 815) or the fair value of the hybrid instrument (for instruments recorded under FASB ASC 815-15-25).

Hybrid Financial Instruments Carried at Fair Value – 2007 and 2008 Convertible Debentures - The March 2007, August 2007, April 11, 2008, May 16, 2008 and May 29, 2008 convertible debentures are recorded in accordance with FASB ASC 815-15-25 and the entire hybrid instrument was initially recorded at fair value, with subsequent changes in fair value recognized in earnings. These financial instruments are valued using the common stock equivalent approach. The common stock equivalent is calculated using the shares indexed to the debentures valued at the market price of our stock and the present value of the coupon.

Current Period Valuations - For the Series C convertible preferred stock and the August 2006 and December 2006 debentures, due to our previous default position with respect to these instruments, the carrying value of each instrument in effect as of December 31, 2006 was written up to its full face value during the fourth quarter of 2006. For these instruments and the July 2008, October 2008, April 2009, May 2009, June 2009, July 2009 and August 2009 debentures, the embedded derivative instrument, primarily the conversion feature, has been separated and accounted for as a derivative instrument liability, as discussed above. This derivative instrument liability is marked to market each reporting period.

 
12
 

The March 2007, August 2007, April 2008 and May 2008 debentures were each initially recorded at their full fair value pursuant to FASB ASC 815-15-25. That fair value is marked-to-market each reporting period, with any changes in the fair value charged or credited to income.

The face value and the carrying value or fair value, as appropriate, of the Series C preferred stock and the debentures as of September 30, 2009 and December 31, 2008 was:

   
Face
    
Carrying
              
September 30, 2009
  
Value
    
Value
    
Fair value
    
Total
  
   
(in thousands)
  
                         
Series C Convertible Preferred Stock
   $ 9,859     $ 9,859     $ -     $ 9,859  
                                 
August 24, 2006
   $ 5,000     $ 5,000     $ -     $ 5,000  
December 29, 2006
     2,500       2,500       -       2,500  
March 27, 2007
     7,459       -       18,859       18,859  
August 24, 2007
     1,775       -       4,449       4,449  
April 11, 2008
     390       -       952       952  
May 16, 2008
     500       -       1,212       1,212  
May 29, 2008
     790       -       1,911       1,911  
July 10, 2008
     137       122       -       122  
July 29, 2008
     2,325       2,023       -       2,023  
October 28, 2008
     2,325       2,051       -       2,051  
April 6, 2009
     550       31       -       31  
May 1, 2009
     550       153       -       153  
June 5, 2009
     715       27       -       27  
July 15, 2009
     535       183       -       183  
August 14, 2009
     475       151       -       151  
                                 
Total
   $ 26,026     $ 12,241     $ 27,383     $ 39,624  
 
   
Face
    
Carrying
              
December 31, 2008
  
Value
    
Value
    
Fair value
    
Total
  
   
(in thousands)
  
                         
Series C Convertible Preferred Stock
   $ 19,144     $ 19,144     $ -     $ 19,144  
                                 
August 24, 2006
   $ 5,000     $ 5,000     $ -     $ 5,000  
December 29, 2006
     2,500       2,500       -       2,500  
March 27, 2007
     7,459       -       13,478       13,478  
August 24, 2007
     1,775       -       3,217       3,217  
April 11, 2008
     390       -       736       736  
May 16, 2008
     500       -       955       955  
May 29, 2008
     790       -       1,506       1,506  
July 10, 2008
     137       109       -       109  
July 29, 2008
     2,325       1,785       -       1,785  
October 23, 2008
     2,325       1,833       -       1,833  
Total
   $ 23,201     $ 11,227     $ 19,892     $ 31,119  
 
 
13
 

The following table reflects the number of common shares (in thousands) into which the Series C convertible preferred stock and debentures are convertible and the fair values of the embedded conversion features in those debentures that are carried at amortized cost, at September 30, 2009 and December 31, 2008:

   
September 30, 2009
    
December 31, 2008
  
   
Common
    
Embedded
    
Common
    
Embedded
  
   
Stock
    
Conversion
    
Stock
    
Conversion
  
   
Shares
    
Feature
    
Shares
    
Feature
  
         
(in thousands)
        
                         
Series C Convertible Preferred Stock
     3,269,931     $ 18,312       21,456,650     $ 10,728  
August 24, 2006
     1,282,051       9,642       5,555,556       7,260  
December 29, 2006
     854,759       4,590       3,703,957       3,556  
March 27, 2007
     1,912,475       -       8,287,390       -  
August 24, 2007
     455,128       -       1,972,222       -  
April 11, 2008
     100,000       -       433,333       -  
May 16, 2008
     128,205       -       555,556       -  
May 29, 2008
     202,564       -       877,778       -  
July 10, 2008
     35,321       200       153,056       158  
July 29, 2008
     494,681       2,692       2,325,000       2,327  
October 28, 2008
     494,681       2,637       2,325,000       2,227  
April 6, 2009
     96,491       619       -       -  
May 1, 2009
     96,491       619       -       -  
June 5, 2009
     125,439       805       -       -  
July 15, 2009
     113,830       602       -       -  
August 14, 2009
     101,064       535       -       -  
                                 
Total
     9,763,111     $ 41,253       47,645,498     $ 26,256  

The carrying value of the embedded conversion feature related to the April 6, 2009, May 1, 2009, June 5, 2009, July 15, 2009 and August 14, 2009 financings at inception was approximately $531,000, $419,000, $679,000, $367,000 and $316,000, respectively.

The terms of the embedded conversion features in the convertible instruments presented above provide for variable conversion rates that are indexed to our trading common stock price. As a result, the number of indexed shares is subject to continuous fluctuation. For presentation purposes, the number of shares of common stock into which the embedded conversion feature of the Series C convertible preferred stock was convertible as of September 30, 2009 was calculated as face value plus assumed dividends (if declared), divided by the lesser of the fixed rate ($0.02) or the market price multiplied by the average ratio of market price to conversion price over the term of the note. The number of shares of common stock into which the embedded conversion feature in the convertible debentures was convertible as of September 30, 2009 was calculated as the face value of each instrument divided by the conversion price as of September 30, 2009.

The March 2007, August 2007, April 2008 and May 2008 debentures are carried in their entirety at fair value in accordance with FASB ASC 815-15-25 and the value of the embedded conversion feature is effectively embodied in those fair values. 
 
Changes in the fair value of convertible instruments that are carried at fair value (the March 2007, August 2007, April 2008 and May 2008 debentures) are reported as “Gain (loss) from change in fair value of hybrid financial instruments” in the accompanying consolidated statement of operations. The following represents a reconciliation of the changes in fair value of these financial instruments measured at fair value under FASB ASC 815-15-25:

 
14
 

   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
   
2009
    
2008
    
2009
    
2008
  
   
(in thousands)
    
(in thousands)
  
Debenture Issue Date
                        
March 27, 2007
   $ (5,272 )   $ 1,721     $ (5,382 )   $ 3,777  
August 24, 2007
     (1,388 )     358       (1,232 )     809  
April 11, 2008
     (264 )     (94 )     (215 )     (74 )
May 16, 2008
     (341 )     (391 )     (257 )     (363 )
May 29, 2008
     (537 )     (619 )     (404 )     (465 )
Total
   $ (7,802 )   $ 975     $ (7,490 )   $ 3,684  


Changes in the fair value of derivative instrument liabilities related to the bifurcated embedded derivative features of convertible instruments not carried at fair value are reported as “Gain (loss) from change in fair value of derivative liability debentures” in the accompanying consolidated statement of operations. The following represents a reconciliation of the changes in fair value of these derivative financial instruments recorded under FASB ASC 815:

   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
   
2009
    
2008
    
2009
    
2008
  
   
(in thousands)
    
(in thousands)
  
Series C Convertible Preferred Stock
   $ (1,837 )   $ (4,793 )   $ (13,226 )   $ (9,226 )
                                 
Debenture Issue Date
                                
August 24, 2006
     (3,001 )     (471 )     (2,382 )     (546 )
December 29, 2006
     (1,323 )     (235 )     (1,034 )     (273 )
July 10, 2008
     (59 )     (67 )     (42 )     (67 )
July 29, 2008
     (726 )     (2,074 )     (365 )     (2,074 )
October 28, 2008
     (699 )     -       (410 )     -  
April 6, 2009
     (167 )     -       (88 )     -  
May 1, 2009
     (167 )     -       (200 )     -  
June 5, 2009
     (218 )     -       (126 )     -  
July 15, 2009
     (235 )     -       (235 )     -  
August 14, 2009
     (219 )     -       (219 )     -  
Total
   $ (8,651 )   $ (7,640 )   $ (18,327 )   $ (12,186 )

Warrants - YA Global holds warrants to purchase shares of our common stock that were issued in connection with the convertible debentures and the Series C convertible preferred stock. The warrants are exercisable at the lower of a fixed exercise price or a specified percentage of the current market price. From time to time, the fixed exercise prices of the warrants held by YA Global have been reduced as an inducement for YA Global to enter into subsequent financing arrangements. In addition to the warrants issued to YA Global, certain other warrants have been issued to consultants and other service providers.

The warrants issued to YA Global and others do not meet all of the established criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, and accordingly, are recorded as derivative liabilities at fair value. Changes in the fair value of the warrants are charged or credited to income or expense each period.

A summary of the warrants outstanding (in thousands) follows:

 
15
 

             
September 30, 2009
    
December 31, 2008
  
             
Common
          
Common
        
   
Exercise
  
Expiration
    
Stock
    
Fair
    
Stock
    
Fair
  
   
Price
  
Date
    
Warrants
    
Value
    
Warrants
    
Value
  
                   
(in thousands)
        
Series C Convertible Preferred Stock
   $ 0.0039  
2/17/2011
       75,000     $ 540       75,000     $ 23  
August 24, 2006 debenture
     0.0039  
8/24/2011
       175,000       1,313       175,000       193  
December 29, 2006 debenture
     0.0039  
12/29/2011
       42,000       323       42,000       50  
March 27, 2007 debenture
     0.0039  
3/27/2012
       125,000       963       125,000       150  
August 24, 2007 debenture
     0.0039  
8/24/2012
       75,000       577       75,000       90  
May 16, 2008 debenture
     0.0039  
5/16/2015
       7,500       60       7,500       10  
May 29, 2008 debenture
     0.0039  
5/29/2015
       50,000       400       50,000       70  
July 29, 2008 debenture
     0.0047  
7/29/2015
       450,000       3,600       450,000       602  
Other warrants
     0.011-.48  
Various
       6,696       15       8,471       1  
Total
                 1,006,196     $ 7,791       1,007,971     $ 1,189  

The warrants are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions used in this model as of September 30, 2009 included an expected life equal to the remaining term of the warrants, an expected dividend yield of zero, estimated volatility of 157% to 223%, and risk-free rates of return of 0.18% to 2.31%.

Fair Value Considerations – We adopted the provisions of FASB ASC Topic 820, Fair Value Measurement and Disclosures, as of January 1, 2008, with respect to financial instruments. As required by FASB ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments which are required to be measured at fair value on a recurring basis under FASB ASC 815-15-25 or FASB ASC 815 as of September 30, 2009 and December 31, 2008 are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following represents a reconciliation of the changes in fair value of financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the nine months ended September 30, 2009, in thousands:

Beginning balance: Derivative financial instruments
   $ 27,445  
Total gains (losses)
     24,929  
Transfers in/out of Level 3
     (3,330 )
Ending balance
   $ 49,044  
 
Note 5 – Stock-Based Compensation
 
A total of 28,286,040 stock options were issued to employees and directors during the nine months ended September 30, 2009. A total of 38,876,763 stock options were issued to employees during the nine months ended September 30, 2008.  The grant date fair values of these options were $184,000 and $202,000, respectively, which amounts are being recognized over the vesting period of the options.  For the three months ended September 30, 2009 and 2008, respectively, total stock-based compensation expense recorded in the statement of operations was $103,000 and $580,000, and $280,000 and $1.6 million for the nine months ended September 30, 2009 and 2008, respectively.
 
We used the following assumptions to value the stock options granted during the nine months ended September 30, 2009 and 2008:

 
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Nine months ended September 30,
  
   
2009
    
2008
  
Volatility
     138% - 282 %     88% - 201 %
Expected dividends
     -       -  
Expected term (in years)
     5.6       3  
Risk-free rate
     0.50 %     4.35 %
 
During the nine months ended September 30, 2009 options to purchase 11,600,000 shares of our common stock were exercised. The exercise price of these options was $0.01 per share, providing us with proceeds of $116,000. There were no stock option exercises during the nine months ended September 30, 2008.
 
On April 29, 2009 the Stock Option Committee of the Board of Directors approved a resolution granting 6,548,540 stock options to 14 of our employees and directors to partially compensate them for reductions in salaries and fees related to our cost control measures. These stock options are inclusive in the aggregate number of stock options issued during the nine months ended September 30, 2009. The exercise price of these options was $0.02 per share. In addition, the resolution included a change in control provision, under which all options held by these employees and directors would vest upon such change in control of the company.
 
Note 6 – Accrued Liabilities
 
Accrued liabilities consist of the following as of September 30, 2009 and December 31, 2008:
 
   
September 30,
    
December 31,
  
   
2009
    
2008
  
   
(in thousands)
  
             
Accruals for disputed services
   $ 2,298     $ 2,224  
Accrued operating expenses
     1,508       1,791  
Accrued payroll related expenses
     278       -  
Accrued interest
     4,035       1,772  
Total
   $ 8,119     $ 5,787  
 
Note 7 – Contingencies

We are involved in various legal actions arising in the normal course of business, both as claimant and defendant. Although it is not possible to determine with certainty the outcome of these matters, it is the opinion of management that the eventual resolution of the following legal actions will not have a material adverse effect on our financial position or operating results. We expense professional fees associated with our legal proceedings as they are incurred according to the terms negotiated between us and the respective professional who represents our interests. We have not accrued a loss contingency in relation to any of our pending litigation.

Scanbuy, Inc. - On January 23, 2004, we filed suit against Scanbuy, Inc. (“Scanbuy”) in the Northern District of Illinois, claiming that Scanbuy has manufactured, or has had manufactured for it, and has used, or actively induced others to use, technology which allows customers to use a built-in UPC bar code scanner to scan individual items and access information, thereby infringing our patents.  The complaint stated that on information and belief, Scanbuy had actual and constructive notice of the existence of the patents-in-suit, and, despite such notice, failed to cease and desist their acts of infringement and continue to engage in acts of infringement of the patents-in-suit.  On April 15, 2004, the Court dismissed the suits against Scanbuy for lack of personal jurisdiction.
 
On April 20, 2004, we re-filed our suit against Scanbuy in the Southern District of New York alleging patent infringement. Scanbuy filed their answer on June 2, 2004. We filed our answer on July 23, 2004. On February 13, 2006, Scanbuy filed an amended answer to the complaint. We filed our reply to Scanbuy’s amended answer on March 6, 2006. On January 20, 2007, the court dismissed Scanbuy's request for a summary judgment. On February 17, 2009, the USPTO sent NeoMedia a Notice of Intent to Issue Ex Parte Reexamination Certificate, and on June 9, 2009 NeoMedia received a Reexamination Certificate for the ‘048 patent.  NeoMedia requested that the stay be lifted and a joint summary status of the case was provided to the Court.  On April 17, 2009 both parties met with the Court to discuss the status of the case. On August 3, 2009 the Court issued an order lifting the stay and granting our request to proceed with discovery, which is now in progress.

 
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On October 16, 2009, we entered into a ten year settlement and license agreement with Scanbuy, Inc., in which the Company and Scanbuy settled all of their pending litigation against each other and granted non-exclusive licenses and a sublicense to each other.

Ephrian Saguy, iPoint – media, plc. and iPoint – media, Ltd. – On or around March 5, 2008, we received a summons and notice that the plaintiffs had commenced a third party action in the Magistrate Court in Tel-Aviv-Jaffa, Israel seeking damages from us and YA Global for breach of contract and unjust enrichment related to services provided by iPoint and investment by us and YA Global. We have entered into an assignment agreement with YA Global and have retained legal counsel in Israel to represent us. The Company plans to rigorously defend this lawsuit and at this time we are unable to determine a probable outcome in this matter.

Rothschild Trust Holdings, LLC – On September 19, 2008, we were served a complaint by Rothschild Trust Holding, LLC alleging we owed royalty payments for the use of certain patents. On February 25, 2009, we filed an answer to the complaint. On July 20, 2009 we entered into non-binding mediation and an interim agreement which requires us to provide documentation for review by Rothschild Trust Holding, LLC.   The non-binding mediation and interim agreement failed to settle the matter, and the litigation continues.  We believe the complaint is without merit and we intend to vigorously defend against it.

Scanbuy and Marshall Feature Recognition, LLC – On or around December 19, 2008, we received a complaint filed in the Eastern District of Texas by Scanbuy and Marshall Feature Recognition, LLC (“MFR”) alleging infringement of certain patents. On January 8, 2009, we filed an answer denying infringement and asserting that the patents of Scanbuy and MFR are invalid. On or about May 8, 2009, the parties agreed and the case was transferred to the Southern District of New York due to lack of personal jurisdiction in the Eastern District of Texas. On August 3, 2009 the New York Court assigned the case to the same judge responsible for our suit against Scanbuy, described above. However, because of significant differences between the cases each will be tried separately. The Court’s order also established a timetable for discovery in this case.

On October 16, 2009, we entered into a settlement and license agreement with Scanbuy., in which the Company and Scanbuy settled all of their pending litigation against each other.  The settlement and license agreement also settled the pending claim brought by Scanbuy and Marshall Feature Recognition, LLC (“MFR”) against the Company by providing for a paid-up, non-exclusive sublicense to use all of the patents licensed by MFR to Scanbuy within the defined territory. 

The Hudson Consulting Group, Inc. – On June 30, 2009, we received from the Superior Court of Fulton County, in the State of Georgia a Notice of Filing of Foreign Judgment related to the judgment granted against us by the Superior Court, Judicial District of Middlesex, in the State of Connecticut, granted on August 22, 2008.  The Notice of Filing seeks to collect on the Judgment which was granted in Connecticut. We are seeking to settle this matter.

Dennis G. Priddy – On July 30, 2009, we and our Chief Executive Officer were served with a Writ of Summons filed in the Northern District Superior Court of Hillsborough County, New Hampshire. The allegations in the Writ included several employment related matters. We believe the complaint is without merit and we intend to vigorously defend against it. On October 19, 2009 the parties entered into a settlement agreement and the matter was subsequently dismissed. The settlement amount was not material.
 
Note 8 – Geographic Reporting

We are structured and evaluated by our Board of Directors and management as one business unit.
 
Consolidated net sales and net loss from continuing operations for the three and nine month ended September 30, 2009 and 2008, and the identifiable assets as of September 30, 2009 and December 31, 2008 by geographic area were as follows:

 
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Three Months Ended September 30,
    
Nine Months Ended September 30,
  
   
2009
    
2008
    
2009
    
2008
  
   
(in thousands)
    
(in thousands)
  
Net Sales:
                        
United States
   $ 73     $ 83     $ 228     $ 289  
Germany
     116       247       587       512  
Total
   $ 189     $ 330     $ 815     $ 801  
                                 
Loss from continuing operations:
                                
United States
     (13,246 )     (9,542 )     (40,998 )     (13,851 )
Germany
     (320 )     (322 )     (1,103 )     (1,328 )
Total
   $ (13,566 )   $ (9,864 )   $ (42,101 )   $ (15,179 )
 
   
September 30,
    
December 31,
  
   
2009
    
2008
  
Identifiable assets:
            
United States
   $ 8,642     $ 10,920  
Germany
     375       568  
Total
   $ 9,017     $ 11,488  
 
Note 9 - Subsequent Events

NeuStar, Inc., License Agreement - On October 2, 2009, we entered into a four year agreement with NeuStar, Inc., in which we granted to NeuStar a non-exclusive license to a portion of the Company’s patent portfolio primarily for the purpose of establishing and providing registry and clearinghouse services within the field of use and territory. The terms of the License Agreement also grant to NeuStar an exclusive right to sub-license that same portion of the Company’s patent portfolio within the field of use and territory to resolution authorities for a period of not less than one year, but up to four years depending on the achievement of certain milestones as set forth in the License Agreement. In addition, NeuStar will perform certain reservations, administration, billing & collection and other additional services for the benefit of the Company, Neustar and the sub-licensees.

Brand Extension Mobile Solutions, S.A (“BEMS”) License Agreement - On October 7, 2009, we entered into a four year agreement with Brand Extension Mobile Solutions, S.A., a Madrid (Spain) corporation (“BEMS”), in which we granted to BEMS a non-exclusive license to use the Licensed Platform in an approved field of use within a certain geographical territory. The Licensed Platform will support BEMS’s performance of exclusive commercial operations under a particular cooperation agreement between BEMS and Telefónica Internacional, S.A.U. (“Telefónica”). BEMS intends to use the Company as its prime vendor in connection with such agreement with Telefónica. The License Agreement grants to BEMS the right to distribute the Company’s barcode reading software via download or through its inclusion in mobile devices. The License Agreement also requires BEMS to purchase twenty-five of the Company’s hardware products to support testing and marketing of barcode and mobile barcode based ticketing and couponing activities. The License Agreement requires the Company to provide certain support services, which include providing support, maintenance, upgrade and update services to BEMS or to BEMS’s customers. The License Agreement also provides that the Company shall have certain limited sublicense and interoperability obligations to facilitate BEMS’s existing relationships and obligations.

 
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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note About Forward-Looking Statements

Certain statements in Management’s Discussion and Analysis, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the