U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10 - QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21743
NEOMEDIA TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified In Its Charter)
DELAWARE 36-3680347
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2201 SECOND STREET, SUITE 402, FORT MYERS, FLORIDA 33901
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number (Including Area Code) 239-337-3434
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of August 6, 2003, there were 157,650,104 outstanding shares of the
issuer's Common Stock.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
2003
--------
ASSETS
Current assets:
Cash and cash equivalents $ 153
Trade accounts receivable, net of allowance for doubtful accounts of $27 227
Inventories, net 13
Prepaid expenses and other current assets 627
--------
Total current assets 1,020
Property and equipment, net 94
Capitalized patents, net 2,122
Capitalized and purchased software costs, net 87
Other long-term assets 702
--------
Total assets $ 4,025
========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,206
Amounts due under financing agreements 372
Liabilities in excess of assets of discontinued business unit 1,363
Sales taxes payable 271
Accrued expenses 2,539
Notes payable 771
Current portion of long-term debt 535
Deferred revenues 798
Other 37
--------
Total current liabilities 9,892
Long-term debt, net of current portion 139
--------
Total liabilities 10,031
--------
Shareholders' deficit:
Preferred stock, $0.01 par value, 25,000,000 shares authorized, none issued
and outstanding --
Additional paid-in capital, preferred stock --
Common stock, $0.01 par value, 200,000,000 shares authorized, 120,096,032
shares issued and 116,727,842 outstanding 1,167
Additional paid-in capital 66,319
Deferred stock-based compensation (93)
Accumulated deficit (72,620)
Treasury stock, at cost, 201,230 shares of common stock (779)
--------
Total shareholders' deficit (6,006)
--------
Total liabilities and shareholders' deficit $ 4,025
========
The accompanying notes are an integral part of this
condensed consolidated balance sheet.
2
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30,
------------ ------------
2003 2002
------------ ------------
NET SALES:
License fees $ 160 $ 41
Resale of software and technology equipment and service fees 514 3,611
------------ ------------
Total net sales 674 3,652
------------ ------------
COST OF SALES:
License fees 75 336
Resale of software and technology equipment and service fees 486 2,899
------------ ------------
Total cost of sales 561 3,235
------------ ------------
GROSS PROFIT 113 417
Sales and marketing expenses 122 280
General and administrative expenses 750 1,575
Research and development costs 76 317
Loss on impairment of assets -- 1,003
------------ ------------
Loss from operations (835) (2,758)
Interest expense (income), net 117 66
------------ ------------
Loss from continuing operations (952) (2,824)
Loss on disposal of discontinued business unit (Note 1) -- (1,523)
------------ ------------
NET LOSS $ (952) $ (4,347)
============ ============
NET LOSS PER SHARE FROM
CONTINUING OPERATIONS--BASIC AND DILUTED $ (0.01) $ (0.07)
============ ============
NET LOSS PER SHARE FROM
DISCONTINUED OPERATIONS--BASIC AND DILUTED $ -- $ (0.04)
============ ============
NET LOSS PER SHARE--BASIC AND DILUTED $ (0.01) $ (0.11)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED 78,404,148 39,412,368
============ ============
The accompanying notes are an integral part of this
condensed consolidated balance sheet.
3
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30,
------------ ------------
2003 2002
------------ ------------
NET SALES:
License fees $ 269 $ 153
Resale of software and technology equipment and service fees 1,279 4,895
------------ ------------
Total net sales 1,548 5,048
------------ ------------
COST OF SALES:
License fees 151 684
Resale of software and technology equipment and service fees 1,188 3,865
------------ ------------
Total cost of sales 1,339 4,549
------------ ------------
GROSS PROFIT 209 499
Sales and marketing expenses 261 512
General and administrative expenses 1,469 2,560
Research and development costs 165 533
Loss on impairment of assets -- 1,003
------------ ------------
Loss from operations (1,686) (4,109)
Interest expense (income), net 169 97
------------ ------------
Loss from continuing operations (1,855) (4,206)
Loss on disposal of discontinued business unit (Note 1) -- (1,523)
------------ ------------
NET LOSS $ (1,855) $ (5,729)
============ ============
NET LOSS PER SHARE FROM
CONTINUING OPERATIONS--BASIC AND DILUTED $ (0.03) $ (0.12)
============ ============
NET LOSS PER SHARE FROM
DISCONTINUED OPERATIONS--BASIC AND DILUTED $ -- $ (0.05)
============ ============
NET LOSS PER SHARE--BASIC AND DILUTED $ (0.03) $ (0.17)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED 57,796,124 34,291,781
============ ============
The accompanying notes are an integral part of this
condensed consolidated balance sheet.
4
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
2003 2002
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($1,855) ($5,729)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 247 805
Loss on disposal of discontinued business unit -- 1,523
Loss on impairment of assets -- 1,003
Expense associated with option and warrant repricing 204 38
Fair value of expense portion of stock-based
compensation granted for professional services 348 383
Interest expense allocated to debt 60 --
Discount related to common stock issuance 65 --
(Increase)/decrease in value of life insurance policies (8) 47
Changes in operating assets and liabilities
Trade accounts receivable, net 100 (1,030)
Other current assets 101 563
Accounts payable, amounts due under financing agreements, liabilities in excess
of assets of discontinued business unit, accrued expenses and stock liability (120) 1,933
Deferred revenue other current liabilities (81) 203
------- -------
Net cash used in operating activities (939) (261)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and purchased intangible assets (19) (20)
Acquisition of property and equipment (40) --
------- -------
Net cash used in investing activities (59) (20)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance costs of $298 1,170 198
Net proceeds from exercise of stock warrants -- 43
Net proceeds from exercise of stock options 71 242
Borrowings under notes payable and long-term debt -- 21
Repayments on notes payable and long-term debt (160) --
Issuance of deferred stock-based compensation -- (347)
------- -------
Net cash provided by financing activities 1,081 157
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 83 (124)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 70 134
------- -------
CASH AND CASH EQUIVALENTS, JUNE 30, 2003 $ 153 $ 10
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the year $ 6 $ 1
Non-cash investing and financing activities:
Fair value of common stock and options issued to settle debt -- 309
Cancellation of common stock issued in 2001 to
offset stock subscription receivable -- (240)
Stock and warrants issued with convertible promissory notes 37 --
Stock issued in exchange for limited recourse promissory note -- 3,040
The accompanying notes are an integral part of this
condensed consolidated balance sheet.
5
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The condensed consolidated financial statements include the financial
statements of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries
("NeoMedia" or the "Company"). The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-QSB and do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete consolidated financial statements. These condensed consolidated
financial statements and related notes should be read in conjunction with the
Company's Form 10-K for the fiscal year ended December 31, 2002. In the opinion
of management, these condensed consolidated financial statements reflect all
adjustments which are of a normal recurring nature and which are necessary to
present fairly the consolidated financial position of NeoMedia as of June 30,
2003, and the results of operations and cashflows for the three-month and
six-month periods ended June 30, 2003 and 2002. The results of operations for
the three-month and six-month periods ended June 30, 2003 are not necessarily
indicative of the results which may be expected for the entire fiscal year. All
significant intercompany accounts and transactions have been eliminated in
preparation of the condensed consolidated financial statements.
NATURE OF BUSINESS OPERATIONS
The Company is structured and evaluated by its Board of Directors and
Management as two distinct business units:
NeoMedia Internet Switching Services (NISS) (formerly named NeoMedia
Application Services), and
NeoMedia Consulting and Integration Services (NCIS) (formerly named
NeoMedia SI)
NISS (physical world-to-Internet offerings) is the Company's core business
and is based in the United States, with development and operating facilities in
Fort Myers, Florida. NISS develops and supports the Company's physical world to
Internet core technology, including our linking "switch" and our application
platforms. NISS also manages the Company's valuable intellectual property
portfolio, including the identification and execution of licensing opportunities
surrounding the patents.
NCIS (systems integration service offerings) is the original business line
upon which the Company was organized. This unit resells client-server equipment
and related software, and general and specialized consulting services targeted
at software driven print applications, especially at process automation of
production print facilities through its integrated document factory solution.
Systems integration services also identifies prospects for custom applications
based on our products and services. This unit recently moved its business
offerings to a much higher Value-Add called Storage Area Networks (SAN). The
operations are based in Lisle, Illinois.
RECLASSIFICATIONS
Certain amounts in the 2002 condensed consolidated financial statements have
been reclassified to conform to the 2003 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," and an amendment of that Statement, FASB
Statement No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements" and FASB Statement No. 44, "Accounting for Intangible Assets of
Motor Carriers." This Statement amends
6
FASB Statement No. 13, "Accounting for Leases," to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. NeoMedia has implemented the provision
of SFAS No. 145 and has concluded that the adoption does not have a material
impact on the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Exit or
Disposal Activities." The provisions of this statement are effective for
disposal activities initiated after December 31, 2002, with early application
encouraged. NeoMedia has implemented the provision of SFAS No. 146 and has
concluded that the adoption does not have a material impact on the Company's
financial statements.
In October 2002, the FASB issued Statement No. 147, "Acquisitions of
Certain Financial Institutions-an amendment of FASB Statements No. 72 and 144
and FASB Interpretation No. 9," which removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with Statements
No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible
Assets. In addition, this Statement amends SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, to include in its scope long-term
customer-relationship intangible assets of financial institutions such as
depositor- and borrower-relationship intangible assets and credit cardholder
intangible assets. The requirements relating to acquisitions of financial
institutions is effective for acquisitions for which the date of acquisition is
on or after October 1, 2002. The provisions related to accounting for the
impairment or disposal of certain long-term customer-relationship intangible
assets are effective on October 1, 2002. The adoption of this Statement did not
have a material impact to the Company's financial position or results of
operations as the Company has not engaged in either of these activities.
In December 2002, the FASB issued Statement No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The transition guidance and annual disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002, with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The
adoption of this statement did not have a material impact on the Company's
financial position or results of operations as the Company has not elected to
change to the fair value based method of accounting for stock-based employee
compensation.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." Interpretation 46 changes the criteria by which one
company includes another entity in its consolidated financial statements.
Previously, the criteria was based on control through voting interest.
Interpretation 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of loss from the
variable interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. A company that consolidates a variable
interest entity is called the primary beneficiary of that entity. The
consolidation requirements of Interpretation 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation requirements
apply to older entities in the first fiscal year or interim period beginning
after June 15, 2003. Certain of the disclosure requirements apply in all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established. The Company does not expect the
adoption to have a material impact to the Company's financial position or
results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement amends Statement 133 for decisions made (1) as part of the Derivatives
Implementation Group process that effectively required amendments to Statement
133, (2) in connection with other Board projects dealing with financial
instruments, and (3) in connection with implementation issues raised in relation
to the application of the definition of a derivative, in particular, the meaning
of an initial net investment that is smaller than would be required for other
types of contracts that would be expected to have a similar response to changes
in market factors, the meaning of underlying, and the characteristics of a
derivative
7
that contains financing components. The Company does not anticipate that the
adoption of this Statement will have a material effect on the financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
those instruments were previously classified as equity. Some of the provisions
of this Statement are consistent with the current definition of liabilities in
FASB Concepts Statement No. 6, Elements of Financial Statements. The remaining
provisions of this Statement are consistent with the Board's proposal to revise
that definition to encompass certain obligations that a reporting entity can or
must settle by issuing its own equity shares, depending on the nature of the
relationship established between the holder and the issuer. While the Board
still plans to revise that definition through an amendment to Concepts Statement
6, the Board decided to defer issuing that amendment until it has concluded its
deliberations on the next phase of this project. That next phase will deal with
certain compound financial instruments including puttable shares, convertible
bonds, and dual-indexed financial instruments. The Company does not anticipate
that the adoption of this Statement will have a material effect on the financial
statements.
PROPOSED ACQUISITION AND MERGER WITH LOCH ENERGY, INC. ("LOCH")
On March 13, 2003, the Company announced that it has reached an agreement
in principle to acquire and merge with Loch, an oil and gas provider based in
Humble, Texas. Loch currently owns mineral and lease rights to five properties,
totaling approximately 130 acres, near Houston, Texas. Per the terms outlined in
the Memorandum of Terms, the merger would provide for one share of common stock
of the Company to be exchanged for every four shares of Loch common stock on an
adjusted basis, and additional "earn out" shares to be issued to Loch
shareholders based on actual oil production in the first year after closing.
Total shares to be issued to Loch shareholders will not exceed 50% of NeoMedia
outstanding shares. The merger is subject to negotiations of definitive
contracts, corporate filing requirements, completion of due diligence and
approval by the Boards of Directors and shareholders of each company. It is
anticipated that closing would occur approximately 30 days after such conditions
are satisfied.
EQUITY LINE OF CREDIT WITH CORNELL CAPITAL PARTNERS, LP ("CORNELL")
On February 11, 2003, NeoMedia and Cornell terminated its November 12,
2002 Equity Line of Credit Agreement and entered into a new Equity Line of
Credit Agreement under which Cornell agreed to purchase up to $10.0 million of
NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at the Company's discretion. The maximum amount of each purchase is
$150,000 with a minimum of seven days between purchases. The shares are valued
at 98% of the lowest closing bid price during the five-day period following the
delivery of a notice of purchase by NeoMedia. The Company pays 5% of the gross
proceeds of each purchase to Cornell. On February 14, 2003, the SEC declared
effective the S-1 registration statement containing 102 million shares
underlying the Equity Line of Credit.
During the six months ended June 30, 2003, the Company has received gross
funding of $997,000 from the sale of stock under the Equity Line of Credit,
through the sale of 31,864,244 shares of its common stock. The following table
summarizes funding received from the Equity line of Credit during the six months
ended June 30, 2003:
SIX MONTHS
FIRST SECOND ENDED
QUARTER QUARTER JUNE 30, 2003
------------ ------------ ------------
Number of shares sold by Cornell 3,452,373 28,411,871 31,864,244
Gross funds received by NeoMedia $ 312,000 $ 685,000 $ 997,000
Less: discount (28,000) (50,000) (78,000)
------------------------------------------
Net funding received by NeoMedia $ 284,000 $ 635,000 $ 919,000
------------------------------------------
In addition to the $78,000 discount netted from the funding received by
the Company as outlined above, the Company recognized a $136,000 discount
relating to the sale of stock by Cornell during the six-month period
8
ended June 30, 2003. Both amounts were recorded as a reduction to additional
paid-in capital. In accordance with the terms of Equity Line of Credit
Agreement, Cornell sells the Company's stock at a 2% discount to the lowest
closing bid price of the Company's common stock during the week in which it is
sold. Accordingly, the Company records the difference between the market price
and contract valuation price as a reduction to additional paid-in capital.
Subsequent to June 30, 2003 (through July 31, 2003), the Company has
received additional funding, and sold additional shares, under the Equity line
of Credit as follows:
Number of shares sold by Cornell during July 2003 8,562,864
Gross funds received by NeoMedia during July 2003 $ 200,000
Less: discount (32,000)
-----------
Net funding received by NeoMedia $ 168,000
-----------
In addition to the $32,000 discount netted from the funding received by the
Company as outlined above, the Company recorded a $16,000 discount relating to
the sale of the Stock by Cornell for the subsequent period to June 30, 2003
(through July 31, 2003) in accordance with the term of the Equity Line of Credit
Agreement.
OPTION REPRICING
During May 2003, the Company re-priced approximately 8.0 million stock
options under a 6-month repricing program. Under the terms of the program, the
exercise price for outstanding options under the Company's 2002, 1998, and 1996
Stock Option Plans was restated to $0.01 per share for a period of 6 months. In
accordance with FASB Interpretation, FIN 44, Accounting for Certain Transactions
Involving Stock Transactions, the award has been accounted for as variable from
May 19, 2003 through the period ended June 30, 2002. Accordingly, approximately
$178,000 was recorded as compensation in general and administrative expense
during the three months ended June 30, 2003.
DISPOSAL OF QODE BUSINESS UNIT
On August 31, 2001, the Company signed a non-binding letter of intent to
sell the assets and liabilities of its former Ft. Lauderdale-based Qode business
unit, which it acquired in March 2001, to The Finx Group, Inc., a holding
company based in Elmsford, NY. The Finx Group was to assume $620,000 in Qode
payables and $800,000 in long-term leases in exchange for the issuance of
500,000 shares of the Finx Group, right to use and sell Qode services, and up to
$5 million in affiliate revenues over the next five years. During the third and
fourth quarters of 2001 and the first quarter of 2002, the company recorded a
$2.6 million expense from the write-down of the Qode assets/liabilities to net
realizable value.
During June 2002, the Finx Group notified the Company that it did not
intend to carry out the letter of intent due to capital constraints. As a
result, during the three-month period ended June 30, 2002, the company recorded
an additional expense of $1.5 million for the write-off of remaining Qode
assets. As of June 30, 2003, the Company had approximately $1,363,000 of
liabilities relating to the Qode system remaining on its books.
OTHER EVENTS
On March 13, 2003, the Company repaid the remaining balance of $85,000 on
a note due to Michael Kesselbrenner, a private investor. The original note had
been issued in the amount of $165,000 on December 2, 2002, with a term of 150
days. In connection with the default provision of the note, the Company entered
into a Pledge Agreement, dated December 2, 2002, under which the Company issued
53,620,020 shares of common stock to an unrelated third party as collateral for
the note. The note balance of $85,000 was paid off on March 13, 2003, and the
53,620,020 shares were returned to the Company on April 4, 2003 and retired.
On April 2, 2003, the Company was issued its sixth US Patent. The
technology covered by the patent allows for a connection from human-or
machine-readable input to generate a tailored response that can utilize a
profile of the person making the link between the code-carrying physical object
and the desired electronic information.
9
On April 17, 2003, the Board of Directors of the Company approved the
payment in full of approximately $154,000 of liabilities owed by the Company to
Charles W. Fritz, the Company's Founder and Chairman of the Board of Directors,
through the issuance of 15,445,967 shares of common stock. The Company
recognized a discount expense in general and administrative expenses of
approximately $15,000 relating to this transaction with Mr. Fritz.
On April 21, 2003, the Company sold 25,000,000 shares of its common stock,
par value $0.01, in a private placement at a price of $0.01 per share. In
connection with the sale, the Company also granted the purchaser 25,000,000
warrants to purchase shares of the Company's common stock at an exercise price
of $0.01 per share. The warrants had a fair value of $298,000 and have been
recorded as a cost of issuance. The purchaser was William E. Fritz, a member of
the Company's Board of Directors. Proceeds to the Company from sale of the
shares were $250,000. The Company recognized a discount expense in general and
administrative expenses of approximately $50,000 relating to this transaction
with Mr. Fritz. On August 6, 2003, Mr. Fritz exercised his warrants and
purchased 25,000,000 additional shares of common stock at a price of $0.01 per
share.
During April 2003, the Company repriced approximately 1.9 million warrants
held by Thornhill Capital LLC ("Thornhill"), an outside consultant to the
Company. Of the 1.9 million warrants, 1.5 million had an exercise price of $0.05
per share, and approximately 0.4 million had an exercise price of $2.09 per
share. All 1.9 million warrants were repriced to $0.00 per share. The Company
recognized an expense of approximately $27,000 related to this transaction
during the second quarter of 2003. These warrants were exercised immediately
after the repricing.
During April 2003, the Company entered into a consulting agreement with
William Fritz, an outside director, for consulting and advisement services
relating to the merger with Loch Energy, Inc., and to the subsequent
implementation of various management programs surrounding the business. The
agreement calls for total payments of $250,000 over a period of one year. During
August 2003, the Company paid the consulting contract in full.
PRO-FORMA INFORMATION REQUIRED BY SFAS 148
At June 30, 2003, the Company has three stock-based employee compensation plans
(the 2002 Stock Option Plan, the 1998 Stock Option Plan, and the 1996 Stock
Option Plan). The Company accounts for those plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net loss, except when options granted under those plans had
an exercise price less than the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net loss and
loss per share if the company had applied the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------- --------------------------
2003 2002 2003 2002
------- ------- ------- -------
Net Loss, as reported ($ 952) ($4,347) ($1,855) ($5,729)
Compensation recognized under APB 25 -- -- -- --
Compensation recognized under SFAS 123 (118) (131) (236) (242)
-------------------------- --------------------------
Pro-forma net loss ($1,070) ($4,478) ($2,091) ($5,971)
========================== ==========================
Net Loss per share:
Basic and diluted - as reported ($ 0.01) ($ 0.11) ($ 0.03) ($ 0.17)
========================== ==========================
Basic and diluted - pro-forma ($ 0.01) ($ 0.11) ($ 0.04) ($ 0.17)
========================== ==========================
SEGMENT REPORTING
The Company is structured and evaluated by its Board of Directors and
Management as two distinct business units:
10
NeoMedia Internet Switching Services (NISS), is based in the United
States, with development and operating facilities in Fort Myers, Florida. NISS
develops and supports the Company's physical world to Internet core technology,
including our linking "switch" and our application platforms. NISS also manages
the Company's valuable intellectual property portfolio, including the
identification and execution of licensing opportunities surrounding the patents.
NeoMedia Consulting and Integration Services (NCIS) is the Company's
systems integration business unit. This unit resells client-server equipment and
related software, and general and specialized consulting services targeted at
software driven print applications, especially at process automation of
production print facilities through its integrated document factory solution.
NCIS also identifies prospects for custom applications based on NeoMedia's
products and services. This unit recently moved its business offerings to a much
higher Value-Add called Storage Area Networks (SAN). The operations are based in
Lisle, Illinois.
The Company's reportable segments are strategic business units that offer
different technology and marketing strategies. The Company's areas of operations
are principally in the United States. No single foreign country or geographic
area is significant to the consolidated financial statements
Consolidated net sales, net operating losses for the six months ended June
30, 2003 and 2002, and identifiable assets as of June 30, 2003 and 2002, were as
follows:
(in thousands)
-------------------------------------------------------
SIX MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------- -----------------------
2003 2002 2003 2002
------- ------- ------- -------
NET SALES:
NeoMedia Consulting & Integration Services $ 1,523 $ 5,033 $ 662 $ 3,648
NeoMedia Internet Switching Service 25 15 12 4
------- ------- ------- -------
$ 1,548 $ 5,048 $ 674 $ 3,652
-------
NET LOSS:
NeoMedia Consulting & Integration Services ($ 154) ($ 208) ($ 726) ($ 34)
NeoMedia Internet Switching Service (1,701) (5,521) (226) (4,313)
------- ------- ------- -------
($1,855) ($5,729) ($ 952) ($4,347)
-------
IDENTIFIABLE ASSETS
NeoMedia Consulting & Integration Services $ 816 $ 816
NeoMedia Internet Switching Service 2,209 2,209
Corporate 1,000 1,000
------- -------
$ 4,025 $ 4,025
------- -------
SUBSEQUENT EVENTS
On July 9, 2003, the Company borrowed $25,000 from William E. Fritz, one
of its outside directors. This amount was added to the principal of a $10,000
note payable to Mr. Fritz that matures in April 2004, with all other terms of
the note remaining the same. As consideration for the loan, the Company granted
Mr. Fritz 2,500,000 warrants to purchase shares of the Company's common stock at
an exercise price of $0.01 per share.
On July 28, 2003, the Company signed a binding letter of intent to
purchase Secure Source Technologies ("SST"), a provider of security solutions
and covert security technology for the manufacturing and financial services
industries. Pending completion of due diligence and required approvals, the
planned acquisition and merger would be completed through an exchange of common
stock from NeoMedia to SST. SST owns patents that compliment NeoMedia's existing
intellectual property portfolio.
11
On July 16, 2003, the Company's Board of Directors voted to authorize the
issuance of approximately 31.7 million stock options to employees, contingent
upon the passage at the Company's annual meeting on September 24, 2003, of a
proposal to adopt a 2003 Stock Option Plan, under which 150 million options
would be allocated for future issuance. The Company filed a form Pre-14(a) proxy
statement on August 7, 2003, which included the proposal for the new option
plan. The options will only be issued upon approval by the shareholders of the
2003 Stock Option Plan.
On July 21, 2003, the Company entered into a consulting agreement with an
unrelated party under which the Company paid the consultant 3.6 million shares
of the Company's common stock for services to be performed over a period of one
year.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") recently issued
Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, our most critical
accounting policies include: inventory valuation, which affects our cost of
sales and gross margin; the valuation of intangibles, which affects our
amortization and write-offs of goodwill and other intangibles. The Company also
has other key accounting policies, such as our policies for revenue recognition,
including the deferral of a portion of revenues on sales to distributors, and
allowance for bad debt. The methods, estimates and judgments the Company uses in
applying these most critical accounting policies have a significant impact on
the results the Company reports in our financial statements.
Inventory Valuation. The Company's policy is to value inventories at the
lower of cost or market on a part-by-part basis. This policy requires management
to make estimates regarding the market value of our inventories, including an
assessment of excess or obsolete inventories. The Company determines excess and
obsolete inventories based on an estimate of the future demand for our products
within a specified time horizon, generally 12 months. The estimates the Company
uses for demand are also used for near-term capacity planning and inventory
purchasing and are consistent with revenue forecasts. If the Company's demand
forecast is greater than its actual demand the Company may be required to take
additional excess inventory charges, which will decrease gross margin and net
operating results in the future. In addition, as a result of the downturn in
demand for our products, the Company has excess capacity in our facilities.
Currently, the Company is not capitalizing any inventory costs related to this
excess capacity as the recoverability of such costs is not certain. The
application of this policy adversely affects our gross margin.
Intangible Asset Valuation. The determination of the fair value of certain
acquired assets and liabilities is subjective in nature and often involves the
use of significant estimates and assumptions. Determining the fair values and
useful lives of intangible assets especially requires the exercise of judgment.
While there are a number of different generally accepted valuation methods to
estimate the value of intangible assets acquired, the Company primarily uses the
weighted-average probability method outlined in SFAS 144. This method requires
significant management judgment to forecast the future operating results used in
the analysis. In addition, other significant estimates are required such as
residual growth rates and discount factors. The estimates the Company has used
are consistent with the plans and estimates that the Company uses to manage its
business, based on available historical information and industry averages. The
judgments made in determining the estimated useful lives assigned to each class
of assets acquired can also significantly affect our net operating results.
Allowance for Bad Debt. The Company maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. Our allowance for doubtful accounts is based on our
assessment of the collectibility of specific customer accounts, the aging of
accounts receivable, our history of bad debts, and the general condition of the
industry. If a major customer's credit worthiness deteriorates, or our
customers' actual defaults exceed our historical experience, our estimates could
change and impact our reported results.
Stock-based Compensation. The Company records stock-based compensation to
outside consultants at fair market value in general and administrative expense.
The Company does not record expense relating to stock options granted to
employees with an exercise price greater than or equal to market price at the
time of
12
grant. The Company reports pro-forma net loss and loss per share in accordance
with the requirements of SFAS 148 (see above). This disclosure shows net loss
and loss per share as if the Company had accounted for its employee stock
options under the fair value method of those statements. Pro-forma information
is calculated using the Black-Scholes pricing method at the date of grant. This
option valuation model requires input of highly subjective assumptions. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
INTANGIBLE ASSETS
At the end of each quarter, or upon occurrence of material events relating
to a specific intangible item, the Company performs impairment tests on each of
its intangible assets, which include capitalized patent costs, and capitalized
and purchased software costs. In doing so, the Company evaluates the carrying
value of each intangible asset with respect to several factors, including
historical revenue generated from each intangible asset, application of the
assets in our current business plan, and projected revenue to be derived from
the asset. Intangible asset balances are then adjusted to their current net
realizable value based on these criteria if impaired. No impairment charges were
taken during the three-month or six-month periods ended June 30, 2003. During
the three and six months ended June 30, 2002, the Company recognized an
impairment charge of $1.0 million relating to its PaperClick software product.
FINANCING AGREEMENTS
As of June 30, 2003, the Company was party to a commercial financing
agreement with GE Access that provides short-term financing for certain computer
hardware and software purchases. This arrangement allows the Company to re-sell
high-dollar technology equipment and software without committing cash resources
to financing the purchase. The Company and GE Access are currently operating
under an additional arrangement under which GE Access retains 50% of the
Company's proceeds from sales financed by GE Access, and applies the portion of
proceeds toward past due balances. This arrangement reduces by half the
Company's cash flow from resales of equipment and software financed by GE
Access, until the balance owed to GE Access is paid in full. Termination of the
Company's financing relationship with GE Access could materially adversely
affect the Company's financial condition. Management expects the agreement to
remain in place in the near future. As of June 30, 2003, the amount payable
under this financing arrangement was approximately $372,000.
OTHER DEBTS
On December 2, 2002, the Company issued to Michael Kesselbrenner, a
private investor, a promissory note in the principal amount of $165,000, bearing
interest at a rate of 12% per annum, with a maturity of 150 days. In connection
with the default provision of the promissory note, the Company entered into a
pledge agreement, dated December 2, 2002, under which the Company issued
53,620,020 shares of common stock to an unrelated third party as collateral for
the Promissory Note. The investor only funded $84,000 of the principal amount of
the note. The Company repaid this note during March 2003, and the shares held in
escrow were returned during April 2003. The Company has no further obligation
under this note.
During November 2002, NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz, Chairman of the Board of Directors of NeoMedia; William E. Fritz, an
outside director; and James J. Keil, an outside director. The notes bear
interest at a rate of 15% per annum, and matured at the earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
are registered with the SEC. The notes were convertible, at the option of the
holder, into either cash or shares of our common stock at a 30% discount to
either market price upon closing, or upon conversion, whichever is lower.
NeoMedia also granted to the holders an additional 1,355,670 shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share, with a term of three years. The warrants and shares were issued in
January 2003. In addition, since this debt is convertible into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion feature was recorded as a debt discount and amortized using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants issued exceed the face value of the notes payable, therefore, only
$60,000, the face amount of the note, was recognizable as debt discount, and
amortized over the life of the notes payable. During March 2003, two of
13
the affiliated parties, Mr. William Fritz and Mr. Keil, agreed to extend the
maturity date due to the Company's capital constraints. The Company repaid
Charles Fritz's note in full during March 2003, and repaid James J. Keil's note
in full during April 2003. The Company paid $30,000 of the principal on William
Fritz's note during April 2003, and entered into a new note with Mr. Fritz for
the remaining $10,000. The new note bears interest at a rate of 10% per annum
and matures in April 2004. The new note also includes a provision under which,
as consideration for the loan, Mr. Fritz will receive a 3% royalty on all future
revenue generated from the Company's intellectual property.
GOING CONCERN
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. Through
June 30, 2003, the Company has not been able to generate sufficient revenues
from its operations to cover its costs and operating expenses. Although the
Company has been able to issue its common stock or other financing for a
significant portion of its expenses, it is not known whether NeoMedia will be
able to continue this practice, or if its revenue will increase significantly to
be able to meet its cash operating expenses. This, in turn, raises substantial
doubt about the Company's ability to continue as a going concern. Management
believes that the Company will be able to raise additional funds through its $10
million Equity Line of Credit with Cornell. However, there can be no assurances
that the market for the Company's stock will support the sale of sufficient
shares of NeoMedia's stock to raise sufficient capital to sustain operations.
The condensed consolidated financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Beginning in the second quarter of 2002, the NeoMedia Technologies, Inc.'s
("NeoMedia") continued focus was aimed toward the intellectual property
commercialization unit of its Internet Switching Systems (NISS, formerly NAS)
business. NISS consists of the patented PaperClickTM technology that enables
users to link directly from the physical to the digital world, as well as the
patents surrounding certain physical-world-to-web linking processes. NeoMedia's
mission is to invent, develop, and commercialize technologies and products that
effectively leverage the integration of the physical and electronic to provide
clear functional value for NeoMedia's end-users, competitive advantage for their
business partners and return-on-investment for their investors. To this end,
NeoMedia has signed four intellectual property licenses since its inception.
NeoMedia also continued its movement into the Storage Area Network (SAN) market
through its NeoMedia Consulting and Integration Services (NCIS) business unit.
Additionally, during the first quarter of 2003, NeoMedia announced that
that it had reached an agreement in principle to acquire and merge with Loch
Energy, Inc. ("Loch"), an oil and gas provider based in Humble, Texas. Loch
currently owns mineral and lease rights to five properties, totaling
approximately 130 acres, near Houston, Texas. Loch's portion of the proven
reserves on the five properties is estimated at 7,707,247 barrels. Loch's
portion of the probable reserves on the five properties is estimated at an
additional 5,963,748 barrels. Per the terms outlined in the Memorandum of Terms,
the merger would provide for one share of common stock of NeoMedia to be
exchanged for every four shares of Loch common stock on an adjusted basis, and
additional "earn out" shares to be issued to Loch shareholders based on actual
oil production in the first year after closing. Total shares to be issued to
Loch shareholders will not exceed 50% of NeoMedia outstanding shares. The merger
is subject to negotiations of definitive contracts, corporate filing
requirements, completion of due diligence and any required approval by the
Boards of Directors and shareholders of each company. It is anticipated that
closing would occur approximately 30 days after such conditions are satisfied.
NeoMedia's quarterly operating results have been subject to variation and
will continue to be subject to variation, depending upon factors, such as the
mix of business among NeoMedia's services and products, the cost of material,
labor and technology, particularly in connection with the delivery of business
services, the costs associated with initiating new contracts, the economic
condition of NeoMedia's target markets, and the cost of acquiring and
integrating new businesses.
14
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 2002
Net sales. Total net sales for the three months ended June 30, 2003 were
$674,000, which represented a $2,978,000, or 82%, decrease from $3,652,000 for
the three months ended June 30, 2002. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
general economic conditions. NeoMedia intends to continue to pursue additional
resales of equipment, software and services, and to the extent that such sales
can be made, NeoMedia expects resales to more closely resemble the results for
the three months ended June 30, 2002, rather than the three months ended June
30, 2003.
License fees. License fees were $160,000 for the three months ended June
30, 2003, compared with $41,000, for the three months ended June 30, 2002, an
increase of $119,000, or 290%. NeoMedia will continue to attempt to increase
sales of these high-margin products. NeoMedia expects license fees to remain
materially constant over the next 12 months.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $3,097,000, or
86%, to $514,000 for the three months ended June 30, 2003, as compared to
$3,611,000 for the three months ended June 30, 2002. This decrease primarily
resulted from increased competition and general economic conditions. NeoMedia
intends to continue to pursue additional resales of equipment, software and
services, and to the extent that such sales can be made, NeoMedia expects
resales to more closely resemble the results for the three months ended June 30,
2002, rather than the three months ended June 30, 2003.
Cost of Sales. Cost of license fees was $75,000 for the three months ended
June 30, 2003, a decrease of $261,000, or 78%, compared with $336,000 for the
three months ended June 30, 2002. The decrease resulted from reduced
amortization expense in 2003 of capitalized development costs relating to the
PaperClick, MLM/Affinity, and Qode products that were written off during 2002.
Cost of resales was $486,000 for the three months ended June 30, 2003, a
decrease of $2,413,000, or 83%, compared with $2,899,000 for the three months
ended June 30, 2002. The decrease resulted from decreased resales for the six
months ended June 30, 2003 compared with the same period in 2002. Cost of
resales as a percentage of related resales was 95% in 2003, compared to 80% in
2002. This increase is due to an increased sales mix of lower-margin equipment
products sold in 2003 compared to 2002, combined with the general erosion of
margins in the resale sector. NeoMedia expects costs of resales to fluctuate
with the sales of its equipment software, and services over the next 12 months.
Gross Profit. Gross profit was $113,000 for the three months ended June
30, 2003, compared with $417,000 for the three months ended June 30, 2002. This
decrease of $304,000, or 73%, was primarily the result of lower resales of
computer equipment, software, and services in 2003 relative to 2002.
Sales and marketing. Sales and marketing expenses were $122,000 for the
three months ended June 30, 2003, a decrease of $158,000, or 56%, compared with
$280,000 for the three months ended June 30, 2002. This decrease resulted
primarily from reduced sales commissions earned on lower sales in 2003 as
compared with 2002. NeoMedia expects sales and marketing expense to fluctuate
with sales of it proprietary and resold products over the next 12 months.
General and administrative. General and administrative expenses decreased
by $825,000, or 52%, to $750,000 for the three months ended June 30, 2003,
compared to $1,575,000 for the three months ended June 30, 2002. The decrease
resulted primarily from reduced professional service expense in 2003 relating to
the recognition of deferred stock compensation. NeoMedia expects general and
administrative expense to remain constant or decrease slightly with continued
cost reduction efforts until the consummation of the Loch merger, at which time
general and administrative costs would be expected to rise.
Research and development. During the three months ended June 30, 2003,
NeoMedia charged to expense $76,000 of research and development costs, a
decrease of $241,000 or 76% compared to $317,000 charged to expense for the
three months ended June 30, 2002. The decrease is primarily due to a continued
reduction in research and development overhead since the first quarter of 2002.
NeoMedia expects research and development costs will not fluctuate materially
over the next 12 months.
15
Loss on Impairment of Assets. During the three months ended June 30, 2002,
NeoMedia recognized a loss on impairment of assets of $1,003,000 for the
write-off capitalized development costs relating to its PaperClick
physical-world-to-internet software. NeoMedia did not take an impairment charge
during the three months ended June 30, 2003.
Interest expense (income), net. Interest expense/(income) consists
primarily of interest accrued for creditors as part of financed purchases, past
due balances, notes payable and NeoMedia's asset-based collateralized line of
credit net of interest earned on cash equivalent investments. Interest
expense/(income) increased by $51,000, or 77%, to $117,000 for the three months
ended June 30, 2003 from $66,000 for the three months ended June 30, 2002, due
to interest expense during the second quarter of 2003 associated with vendor
settlements.
Net Loss. The net loss for the three months ended June 30, 2003 was
$952,000, which represented a $3,395,000, or 78% decrease from a loss of
$4,347,000 for the three months ended June 30, 2002. The decrease resulted
primarily from the impairment charge of $1.0 million relating to NeoMedia's
PaperClick assets during 2002, combined with a continued reduction of sales and
marketing, general and administrative, and development costs during 2003.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AS COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2002
Net sales. Total net sales for the six months ended June 30, 2003 were
$1,548,000, which represented a $3,500,000, or 69%, decrease from $5,048,000 for
the six months ended June 30, 2002. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
general economic conditions. NeoMedia intends to continue to pursue additional
resales of equipment, software and services, and to the extent that such sales
can be made, NeoMedia expects resales to more closely resemble the results for
the six months ended June 30, 2002, rather than the six months ended June 30,
2003.
License fees. License fees were $269,000 for the six months ended June 30,
2003, compared with $153,000, for the six months ended June 30, 2002, a increase
of $116,000, or 76%. NeoMedia will continue to attempt to increase sales of
these high-margin products. NeoMedia expects license fees to remain materially
constant over the next 12 months.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $3,616,000, or
74%, to $1,279,000 for the six months ended June 30, 2003, as compared to
$4,895,000 for the six months ended June 30, 2002. This decrease primarily
resulted from increased competition and general economic conditions. NeoMedia
intends to continue to pursue additional resales of equipment, software and
services, and to the extent that such sales can be made, NeoMedia expects
resales to more closely resemble the results for the six months ended June 30,
2002, rather than the six months ended June 30, 2003.
Cost of Sales. Cost of license fees was $151,000 for the six months ended
June 30, 2003, a decrease of $533,000, or 78%, compared with $684,000 for the
six months ended June 30, 2002. The decrease resulted from reduced amortization
expense in 2003 of capitalized development costs relating to the PaperClick,
MLM/Affinity, and Qode products that were written off during 2002. Cost of
resales was $1,188,000 for the six months ended June 30, 2003, a decrease of
$2,677,000, or 69%, compared with $3,865,000 for the six months ended June 30,
2002. The decrease resulted from decreased resales in 2003 compared with 2002.
Cost of resales as a percentage of related resales was 93% for the six months
ended June 30, 2003, compared to 79% for the same period in 2002. This increase
is due to an increased sales mix of lower-margin equipment products sold in 2003
compared to 2002, combined with the general erosion of margins in the resale
sector. NeoMedia expects costs of resales to fluctuate with the sales of its
equipment, software, and services over the next 12 months.
Gross Profit. Gross profit was $209,000 for the six months ended June 30,
2003, compared with $499,000 for the six months ended June 30, 2002. This
decrease of $290,000, or 58%, was primarily the result of lower resales of
computer equipment, software, and services in 2003 relative to 2002.
Sales and marketing. Sales and marketing expenses were $261,000 for the
six months ended June 30, 2003, a decrease of $251,000, or 49%, compared with
$512,000 for the six months ended June 30, 2002. This
16
decrease resulted primarily from reduced sales commissions earned on lower sales
in 2003 as compared with 2002. NeoMedia expects sales and marketing expense to
fluctuate with sales of its proprietary and resold products over the next 12
months.
General and administrative. General and administrative expenses decreased
by $1,091,000, or 43%, to $1,469,000 for the six months ended June 30, 2003,
compared to $2,560,000 for the six months ended June 30, 2002. The decrease
resulted primarily from reduced professional service expense in 2003 relating to
the recognition of deferred stock compensation. NeoMedia expects general and
administrative expense to remain constant or decrease slightly with continued
cost reduction efforts until the consummation of the Loch merger, at which time
general and administrative costs could increase.
Research and development. During the six months ended June 30, 2003,
NeoMedia charged to expense $165,000 of research and development costs, a
decrease of $368,000 or 69% compared to $533,000 charged to expense for the six
months ended June 30, 2002. The decrease is primarily due to a continued
reduction in research and development overhead since first quarter 2002.
NeoMedia expects research and development costs will not fluctuate materially
over the next 12 months.
Loss on Impairment of Assets. During the six months ended June 30, 2002,
NeoMedia recognized a loss on impairment of assets of $1,003,000 for the
write-off capitalized development costs relating to its PaperClick
physical-world-to-internet software. NeoMedia did not take an impairment charge
during the six months ended June 30, 2003.
Interest expense (income), net. Interest expense/(income) consists
primarily of interest accrued for creditors as part of financed purchases, past
due balances, and notes payable and NeoMedia's asset-based collateralized line
of credit, net of interest earned on cash equivalent investments. Interest
expense/(income) increased by $72,000, or 74%, to $169,000 for the six months
ended June 30, 2003 from $97,000 for the six months ended June 30, 2002, due to
interest expense during the second quarter of 2003 associated with vendor
settlements.
Net Loss. The net loss for the six months ended June 30, 2003 was
$1,855,000, which represented a $3,874,000, or 68% decrease from a loss of
$5,729,000 for the six months ended June 30, 2002. The decrease resulted
primarily from the impairment charge of $1,003,000 relating to NeoMedia's
PaperClick assets during 2002, a loss on disposal of the Company's Qode business
unit of $1,523,000 in 2002, and a continued reduction of sales and marketing,
general and administrative, and development costs during 2003.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying unaudited financial statements have been prepared
assuming NeoMedia will continue as a going concern. Accordingly, the financial
statements do not include any adjustments that might result from NeoMedia's
inability to continue as a going concern. NeoMedia may obtain up to $10.0
million over the next two years through its Equity Line of Credit agreement with
Cornell Capital Partners LP. As of July 31, 2003, NeoMedia had obtained $1.2
million under such agreement. Management believes that this additional financing
will be sufficient to sustain operations through September 30, 2003, however,
there can be no assurances that the market for NeoMedia's stock will support the
sale of sufficient shares of NeoMedia's common stock to raise sufficient capital
to sustain operations for such a period. If necessary funds are not available,
NeoMedia's business and operations would be materially adversely affected and in
such event, NeoMedia would attempt to reduce costs and adjust its business plan.
Net cash used in operating activities was approximately $939,000 for the
six-month period ended June 30, 2003, compared with $261,000 for the six-month
period ended June 30, 2002. During the six months ended June 30, 2003, trade
accounts receivable inclusive of costs in excess of billings decreased $100,000,
while accounts payable, amounts due under financing arrangements, accrued
expenses, and deferred revenue decreased $201,000. During the six months ended
June 30, 2002, trade accounts receivable increased $1,030,000, while accounts
payable, amounts due under financing arrangements, accrued expenses, and
deferred revenue increased $2,136,000. NeoMedia's net cash flow from/(used in)
investing activities for the six months ended June 30, 2003 and 2002, was
($59,000) and ($20,000), respectively. Net cash provided by financing activities
for the six months ended June 30, 2003 and 2002, was $1,081,000 and $157,000,
respectively.
17
During the six months ended June 30, 2003 and 2002 NeoMedia's net loss
totaled approximately $1,855,000 and $5,729,000, respectively. As of June 30,
2003 NeoMedia had accumulated losses from operations of approximately
$72,620,000, had a working capital deficit of approximately $8,872,000, and
approximately $153,000 in cash balances.
Management believes it will need to have access to capital from the
Cornell Equity Line of Credit agreement or other financing sources, or NeoMedia
will need to generate additional cash from its current operations to sustain
NeoMedia's operations in 2003. The failure of management to accomplish these
initiatives will adversely affect NeoMedia's business, financial conditions, and
results of operations and its ability to continue as a going concern.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. NeoMedia's chief executive
officer and chief financial officer, after evaluating the effectiveness of
NeoMedia's "disclosure controls and procedures" (as defined in Sections
13a-14(c) of the Securities Exchange Act of 1934) as of the end of the period
reported in this quarterly report (the "Evaluation Date"), NeoMedia's disclosure
controls and procedures were effective and designed to ensure that material
information relating to NeoMedia and its consolidated subsidiaries is
accumulated and would be made known to them by others within those entities as
appropriate to allow timely decisions regarding required disclosures.
CHANGES IN INTERNAL CONTROLS. NeoMedia does not believe that there are
significant deficiencies in the design or operation of its internal controls
that could adversely affect its ability to record, process, summarize and report
financial data. Although there were no significant changes in NeoMedia's
internal controls or in other factors that could significantly affect those
controls subsequent to the Evaluation Date, NeoMedia's senior management, in
conjunction with its Board of Directors, continuously reviews overall company
policies and improves documentation of important financial reporting and
internal control matters. NeoMedia is committed to continuously improving the
state of its internal controls, corporate governance and financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. NeoMedia's management, including
the chief executive officer and chief financial officer, does not expect that
its disclosure or internal controls will prevent all errors or fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
18
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NeoMedia is involved in the following legal actions arising in
the normal course of business, both as claimant and defendant.
NEOMEDIA SHAREHOLDERS
During January 2002, certain of NeoMedia's shareholders filed a complaint
with the Securities and Exchange Commission, alleging that the shareholders were
not included in the special shareholders meeting of November 25, 2001, to vote
on the issuance of 19 million shares of NeoMedia common stock. On March 11,
2002, NeoMedia filed its response claiming that NeoMedia had fully complied with
all of its obligations under the laws and regulations administered by the
Securities and Exchange Commission, as well as with its obligation under
Delaware General Corporation Law.
AIRCLIC, INC. LITIGATION
On July 3, 2001, NeoMedia entered into a non-binding letter of intent with
AirClic, which contemplated an intellectual property cross-licensing transaction
between NeoMedia and AirClic. Under the terms of the letter of intent, AirClic
was to provide NeoMedia with bridge financing of $2,000,000, which was to be
paid to NeoMedia in installments. On July 11, 2001, AirClic advanced $500,000 in
bridge financing to NeoMedia in return for a promissory note from NeoMedia
secured by all of its assets, including its physical world-to-Internet patents.
During the negotiation of definitive agreements, the letter of intent was
abandoned on the basis of NeoMedia's alleged breach of certain representations
made by NeoMedia in the promissory note.
On September 6, 2001, AirClic filed suit against NeoMedia in the Court of
Common Pleas, Montgomery County, Pennsylvania, seeking, among other things, the
accelerated repayment of a $500,000 loan it advanced to NeoMedia under the terms
of a letter of intent entered into between AirClic and NeoMedia. The letter of
intent was subsequently abandoned on the basis of NeoMedia's alleged breach of
certain representations made by NeoMedia in the promissory note issued to
AirClic in respect of such advance. The note issued by NeoMedia in respect of
AirClic's $500,000 advance is secured by substantially all of NeoMedia's
property, including NeoMedia's core physical world-to-Internet technologies. If
NeoMedia is unsuccessful in this litigation, AirClic, which is one of NeoMedia's
key competitors, could acquire NeoMedia's core intellectual property and other
assets, which would have a material adverse effect on NeoMedia's business,
prospects, financial condition, and results of operations. NeoMedia is
vigorously defending this claim and has filed counterclaims against AirClic. As
of the date of this filing, discovery has closed and the parties expect the
matter to be tried in the fall of 2003. Whether or not AirClic is successful in
asserting its claims that NeoMedia breached certain representations made by it
in the note, the note became due and payable in accordance with its terms on
January 11, 2002. Based on the cash currently available to NeoMedia, in the
absence of additional financing, payment of the note and related interest would
have a material adverse effect on NeoMedia's financial condition. If NeoMedia
fails to pay such note, AirClic could proceed against NeoMedia's intellectual
property and other assets securing the note which would have a material adverse
effect on NeoMedia's business, prospects, financial condition, and results of
operations. NeoMedia has not accrued any additional liability over and above the
note payable and related accrued interest.
DIGITAL:CONVERGENCE LITIGATION
On June 26, 2001, NeoMedia filed a $3 million lawsuit in the U.S. District
Court, Northern District of Texas, Dallas Division, against Digital:Convergence
Corporation for breach of contract regarding a $3 million promissory note due on
June 24, 2001 that was not paid. NeoMedia is seeking payment of the $3 million
note plus interest and attorneys fees. NeoMedia has not accrued any gain
contingency related to this matter. On March 22, 2002, Digital:Convergence filed
under Chapter 7 of the United States Bankruptcy Code. The matter is pending
before the bankruptcy court.
19
OTHER LITIGATION
In April 2001, the former President and director of NeoMedia filed a
lawsuit against NeoMedia and several of its directors. The suit was filed in the
Circuit Court of the Twentieth Judicial Circuit for Sarasota, Florida. The claim
alleges the individual was fraudulently induced into accepting employment and
that NeoMedia breached the employment agreement. The individual's employment
with NeoMedia ended in January 2001. During May 2002, NeoMedia settled the suit.
NeoMedia was obligated to make cash payments of $90,000 directly to the
plaintiff during the period May 2002 through December 2002, and cash payments to
the plaintiff's attorney for legal fees in the amount of $45,000 due in July and
August 2002. In addition, the plaintiff was granted 360,000 options to purchase
shares of NeoMedia common stock at an exercise price of $0.08. As of March 31,
2002, NeoMedia had accrued a $347,000 liability relating to the suit. As a
result, NeoMedia recognized an increase to net income of approximately $176,000
during the three-month period ended June 30, 2002 to adjust the liability to the
settlement amount. As of June 30, 2003, NeoMedia had an accrued liability of
$5,000 relating to this matter.
On August 20, 2001, Ripfire, Inc. filed suit against NeoMedia in the San
Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between NeoMedia and Ripfire in May 2001 relating
to implementation of the Qode Universal Commerce Solution. On September 6, 2002,
NeoMedia settled this suit for $133,000 of NeoMedia's common stock, to be valued
at the time of registration of the shares. NeoMedia's stock was trading at
approximately $0.05 at that time. NeoMedia included for registration 2.7 million
shares in the name of Ripfire in its form S-1 that was declared effective by the
SEC on February 14, 2003. NeoMedia's stock was trading at approximately $0.02 on
February 14, 2003. The actual number of shares to be issued to Ripfire per the
pricing outlined in the agreement was approximately 9.8 million. On March 31,
2003, NeoMedia issued the 2.7 million shares of common stock that had been
registered in the S-1 to Ripfire. NeoMedia has a remaining accrued liability of
$106,000 relating to this matter as of June 30, 2003.
On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking
payment in full of approximately $525,000 relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
NeoMedia is currently attempting to negotiate settlement of this matter.
NeoMedia has accrued a liability of $525,000 as of June 30, 2003.
On January 22, 2002, Rapidigm, Inc. sued NeoMedia to collect unpaid
professional service expense incurred in 2001 in the amount of approximately
$15,000. NeoMedia and Rapdigm reached a settlement in February 2002, under which
NeoMedia made payments totaling approximately $7,000. On April 22, 2003,
Rapidigm obtained a judgment for the remaining balance of the liability plus
court fees and interest. NeoMedia has continued to make payments against the
liability, and has a remaining accrued liability of approximately $7,000 as of
June 30, 2003.
On July 22, 2002, 2150 Western Court, L.L.C., the property manager for
NeoMedia's Lisle, IL, office, filed a summons seeking payment of approximately
$72,000 for all past due rents on the facility. The summons asked for a judgment
for the above amount plus possession of the premises. On August 9, 2002,
NeoMedia settled this matter. The settlement calls for past due rents of
approximately $72,000 to be paid over a 15-month period, as well as reduced
rents for the period August 2002 through March 2003. As additional consideration
in the settlement, NeoMedia issued 900,000 shares of its common stock to 2150
Western Court L.L.C. NeoMedia had a liability of approximately $53,000 relating
to this matter as of June 30, 2003.
On July 27, 2002, NeoMedia's former General Counsel filed suit in U.S.
District Court, Ft. Myers division, seeking payment of the 2000 executive
incentive, severance and unpaid vacation days in the amount of approximately
$154,000. In June 2001, NeoMedia's compensation committee approved an adjustment
to the 2000 executive incentive plan that reduced the executive incentive payout
as a result of the write-off of the Digital:Convergence intellectual property
license contract in the second quarter of 2001. As a result, NeoMedia reduced
the accrual for such payout by an aggregate of approximately $1.1 million in the
second quarter of 2002. The plaintiff is seeking payment of the entire original
incentive payout. On November 12, 2002, NeoMedia settled the lawsuit. The
settlement calls for cash payments totaling approximately $90,000 over a period
of ten months, plus 250,000 vested options to purchase shares of NeoMedia's
common stock at an exercise price of $0.01 with a term of five years. NeoMedia
had a liability of approximately $21,000 relating to this matter as of June 30,
2003.
20
On August 23, 2002, Dell Marketing LP filed suit against NeoMedia seeking
payment of approximately $5,000 relating to equipment purchased by NeoMedia.
NeoMedia made payments against the liability in the amount of approximately
$4,000 during 2002. The plaintiff has received a default judgment in the amount
of approximately $4,000 for the remaining balance plus interest and court costs.
This amount is accrued as of June 30, 2003.
On September 12, 2002, R. R. Donnelley & Sons Company filed a summons in
the Circuit Court of The Twentieth Judicial Circuit in and for Lee County,
Florida, seeking payment of approximately $92,000 in past due professional
services bills, plus interest and attorney fees. During July 2003, NeoMedia
settled the suit for cash payments over a period of approximately one year.
NeoMedia has an accrued liability of approximately $112,000 relating to this
matter as of June 30, 2003.
On September 13, 2002, Wachovia Bank, N.A., owner of the building in which
NeoMedia's Ft. Myers, Florida headquarters is located, filed a complaint in
Circuit Court of The Twentieth Judicial Circuit in and for Lee County, Florida,
seeking payment of approximately $225,000 in past due rents. The complaint also
seeks payment of all future rent payments under the lease term, which expires in
January 2004, as well as possession of the premises. On October 28, 2002,
NeoMedia and Wachovia reached a settlement on this matter. The settlement calls
for cash payments of past due rents of approximately $250,000 over a period of
16 months. NeoMedia will also vacate approximately 70% of the unused space in
its headquarters, and the rent for the remainder of the lease, which expires in
January 2004, will be reduced according to square footage used. NeoMedia has
accrued a liability of approximately $202,000 relating to this matter as of June
30, 2003.
On October 21, 2002, International Digital Scientific, Inc. ("IDSI") filed
a demand for arbitration relating to past due payments on an uncollateralized
note payable by NeoMedia to IDSI dated October 1, 1994. The note was issued in
exchange for the purchase by NeoMedia of computer software from IDSI. The note
calls for NeoMedia to make payments of the greater of: (i) 5% of the collected
gross revenues from sales of software or (ii) $16,000 per month. As of June 30,
2003, NeoMedia had recorded a current portion of long term debt to IDSI of
approximately $535,000. The net carrying value of future obligation under the
note was approximately $674,000 as of June 30, 2003. NeoMedia has filed a
counterclaim with the arbitrator relating to this matter. The parties are
currently proceeding with discovery.
On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against
NeoMedia seeking payment of approximately $170,000 in past due legal services.
The amount in question is subject to an unsecured promissory note that matured
unpaid on February 28, 2002. On May 1, 2003, NeoMedia settled the suit for cash
payments totaling approximately $196,000, to be paid at a rate of $30,000 per
quarter until the balance is satisfied. If the balance is paid within one year
of the settlement, NeoMedia will not pay interest charges. NeoMedia has a
remaining liability of approximately $176,000 relating to this matter as of June
30, 2003.
On November 11, 2002, Avnet/Hallmark Computer Marketing Group filed a
complaint against NeoMedia seeking payment of approximately $66,000 in past due
amounts relating to hardware and software re-sold by NeoMedia. During December
2002, NeoMedia made payment of approximately $30,000 to Avnet, reducing the
balance owed to approximately $37,000. On April 1, 2003, the plaintiff received
a judgment from the circuit court for the remaining balance. NeoMedia is
attempting to negotiate a payment plan for the judgment balance of approximately
$57,000, including court costs and interest. NeoMedia had a liability of
approximately $47,000 relating to this matter as of June 30, 2003.
On December 30, 2002, Brooks Automation, Inc. filed a complaint against
NeoMedia seeking payment of approximately $37,000 in past due amounts relating
to software re-sold by NeoMedia. On January 16, 2003, NeoMedia and Brooks
Automation reached a settlement under which NeoMedia will pay the amount owed to
Brooks Automation over a period of approximately 15 months, with the payment
amount increasing after three months. NeoMedia had a liability of approximately
$35,000 relating to this matter as of June 30, 2003.
On February 6, 2003, Allen Norton & Blue, P.A., filed a complaint against
NeoMedia seeking payment of approximately $25,000 in past due legal services.
NeoMedia is attempting to negotiate settlement of this issue out of court prior
to the court date. NeoMedia had a liability of approximately $23,000 relating to
this matter as of June 30, 2003.
On April 18, 2003, a former participant in NeoMedia's 2001 self-insured
health plan sued NeoMedia to recover approximately $46,000 in unpaid health
claims from 2001. NeoMedia is attempting to negotiate
21
a settlement prior to the court date. NeoMedia had accrued the claims related to
this suit in the amount of approximately $40,000 as of June 30, 2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (A), (B), (C) AND (D)
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
(a) NeoMedia is in default on the securities held by AirClic, IDSI and
Merrick & Klimek, P.C., as more fully described in Item 1., Legal Proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
Exhibit No. Description Location
----------- ------------------------------------- --------
31.1 Certification by Chief Executive Provided
Officer pursuant to 15 U.S.C. Section herewith
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Provided
Officer pursuant to 15 U.S.C. Section herewith
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Provided
Officer pursuant to 18 U.S.C. Section herewith
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by Chief Financial Provided
Officer pursuant to 18 U.S.C. Section herewith
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
99.5 Letter of intent to purchase Secure Provided
Source Technologies herewith
(B) REPORTS ON FORM 8-K:
NeoMedia filed a report on Form 8-K on April 24, 2003, reporting that: i)
the Board of Directors had approved the payment in full of approximately
$154,000 of liabilities owed by the Company to Charles W. Fritz, the Company's
Founder and Chairman of the Board of Directors, through the issuance of
15,445,967 shares of common stock, and ii) the Company had sold 25,000,000
shares of its common stock, par value $0.01, in a private placement at a price
of $0.01 per share to William E. Fritz, an outside director. The Company also
22
granted 25,000,000 warrants to purchase shares of the Company's common stock at
$0.01 per share to William Fritz as part of the purchase.
23
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEOMEDIA TECHNOLOGIES, INC.
Registrant
Date: August 13, 2003 By: /s/ Charles T. Jensen
---------------------------------------
Charles T. Jensen, President, Acting
Chief Executive Officer, Chief
Operating Officer, and Director
Date: August 13, 2003 By: /s/ David A. Dodge
------------------------------------
David A. Dodge, Vice President,
Chief Financial Officer, and Controller
24