U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21743
NEOMEDIA TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified In Its Charter)
DELAWARE 36-3680347
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2201 SECOND STREET, SUITE 402, FORT MYERS, FLORIDA 33901
(Address of Principal Executive Offices) (Zip Code)
239-337-3434 Issuer's Telephone Number (Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
As of July 30, 2004, there were 337,308,636 outstanding shares of the
issuer's Common Stock.
1
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30,
2004
---------
ASSETS
Current assets:
Cash and cash equivalents $ 327
Trade accounts receivable, net of allowance for doubtful
accounts of $46 239
Inventories, net of allowance for obsolete & slow-moving
inventory of $13 64
Prepaid expenses and other current assets 419
--------
Total current assets 1,049
Property and equipment, net 115
Capitalized patents, net 2,292
Capitalized and purchased software costs, net 85
Excess of purchase price over tangible assets of CSI 3,056
Other long-term assets 743
--------
Total assets $ 7,340
========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,829
Amounts due under financing agreements 102
Amounts payable under settlement agreements 537
Liabilities of discontinued business unit 664
Sales taxes payable 121
Accrued expenses 1,444
Deferred revenues and other 603
Notes payable, net of unamortized discount of $334 1,302
--------
Total current liabilities 6,602
Long-term portion of amounts payable under settlement agreements,
net of current portion 24
--------
Total liabilities 6,626
--------
Shareholders' deficit:
Preferred stock, $0.01 par value, 25,000,000 shares
authorized, none issued and outstanding --
Common stock, $0.01 par value, 1,000,000,000 shares
authorized, 329,788,130 shares issued and 323,925,084
outstanding 3,239
Additional paid-in capital 79,182
Deferred stock-based compensation (582)
Deferred equity financing costs (130)
Accumulated deficit (80,200)
Accumulated other comprehensive loss - foreign currency
translation adjustment (16)
Treasury stock, at cost, 201,230 shares of common stock (779)
--------
Total shareholders' equity 714
--------
Total liabilities and shareholders' deficit $ 7,340
========
The accompanying notes are an integral part of this
condensed consolidated balance sheet.
2
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30,
-----------------------------
2004 2003
------------- -------------
NET SALES:
License fees $ 88 $ 160
Resale of software and technology equipment
and service fees 171 514
Micro paint repair products and services
189 --
------------- -------------
Total net sales 448 674
------------- -------------
COST OF SALES:
License fees 81 75
Resale of software and technology equipment
and service fees 173 486
Micro paint repair products and services 168 --
------------- -------------
Total cost of sales 422 561
------------- -------------
GROSS PROFIT (LOSS) 26 113
Sales and marketing expenses 522 122
General and administrative expenses 399 750
Research and development costs 122 76
------------- -------------
Loss from operations (1,017) (835)
Gain on extinguishment of debt (3) --
Amortization of debt discount (772) --
Interest expense, net (39) (117)
------------- -------------
NET LOSS (1,831) (952)
Other comprehensive loss:
Foreign currency translation adjustment 6 --
------------- -------------
COMPREHENSIVE LOSS $ (1,825) $ (952)
============= =============
LOSS PER SHARE--BASIC AND DILUTED $ (0.01) $ (0.01)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC
AND DILUTED 305,327,410 78,404,148
============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED JUNE 30,
----------------------------
2004 2003
------------ -------------
NET SALES:
License fees $ 160 $ 269
Resale of software and technology equipment
and service fees 363 1,279
Micro paint repair products and services 275 --
------------- -------------
Total net sales 798 1,548
------------- -------------
COST OF SALES:
License fees 170 151
Resale of software and technology equipment
and service fees 333 1,188
Micro paint repair products and services 225 --
------------- -------------
Total cost of sales 728 1,339
------------- -------------
GROSS PROFIT (LOSS) 70 209
Sales and marketing expenses 947 261
General and administrative expenses 777 1,469
Research and development costs 240 165
------------- -------------
Loss from operations (1,894) (1,686)
Gain on extinguishment of debt 123 --
Amortization of debt discount (2,166) --
Interest expense, net (116) (169)
------------- -------------
NET LOSS (4,053) (1,855)
Other comprehensive loss:
Foreign currency translation adjustment (16) --
------------- -------------
COMPREHENSIVE LOSS $ (4,069) $ (1,855)
============= =============
LOSS PER SHARE--BASIC AND DILUTED $ (0.01) $ (0.03)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC
AND DILUTED 287,733,421 57,796,124
============= =============
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
------------------
2004 2003
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($4,053) ($1,855)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of discount on note payable 2,166 --
Depreciation and amortization 263 247
Stock issued to reacquire rights under a contract 24
Fair value of expense portion of stock-based
compensation granted for professional services 381 348
Interest expense allocated to debt 3 60
Discount related to common stock issuance -- 65
(Increase)/decrease in value of life insurance
policies 11 (8)
Increase (decrease) of fair value of repriced
options (243) 204
Changes in operating assets and liabilities
Trade accounts receivable, net (39) 100
Inventory (7) --
Other current assets 64 101
Accounts payable, amounts due under financing
agreements, liabilities in excess of assets of
discontinued business unit, accrued expenses
and stock liability (919) (120)
Deferred revenue other current liabilities 88 (81)
------- -------
Net cash used in operating activities (2,261) (939)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development and
purchased intangible assets (74) (19)
Acquisition of property and equipment (81) (40)
------- -------
Net cash used in investing activities (155) (59)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net
of issuance costs of $391 3,675 1,170
Net proceeds from exercise of stock options and
warrants 581 71
Borrowings under notes payable and long-term debt 5,000 --
Repayments on notes payable and long-term debt (4,168) (160)
Cash paid to acquire CSI International, Inc. (net
of cash acquired) (2,390) --
------- -------
Net cash provided by financing activities 2,698 1,081
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (16) --
NET INCREASE IN CASH AND CASH EQUIVALENTS 266 83
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 61 70
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 327 $ 153
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the period $ 50 $ 6
Income taxes paid -- --
Non-cash investing and financing activities:
Reduction in accounts payable and accruals for
debt paid in stock 190 37
Fair value of stock issued for services and
deferred to future periods 585 --
Fair value of shares issued to acquire CSI
Int'l (net of costs of registration) 695 --
Change in net assets resulting from acquisition
of CSI (net of cash acquired) 3,090 --
Gain on extinguishment of debt 123 --
Direct costs associated with Standby Equity
Distribution Agreement 965 --
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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-KSB for the fiscal year ended December 31, 2003. In the
opinion of management, these condensed consolidated financial statements reflect
all adjustments which are of a normal recurring nature and which are necessary
to present fairly the consolidated financial position of NeoMedia as of June 30,
2004, the results of operations for the three-month and six-month periods ended
June 30, 2004 and 2003, and cash flows for the six-month periods ended June 30,
2004 and 2003. The results of operations for the three-month and six-month
periods ended June 30, 2004 and 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
NeoMedia is structured as three distinct business units: NeoMedia Internet
Software Service (NISS), NeoMedia Consulting and Integration Services (NCIS),
and NeoMedia Micro Paint Repair (NMPR).
NISS (physical world-to-Internet offerings) is the core business and is
based in the United States, with development and operating facilities in Fort
Myers, Florida. NISS develops and supports NeoMedia's physical world to Internet
core technology, including the linking "switch" and application platforms. NISS
also manages NeoMedia's intellectual property portfolio, including the
identification and execution of licensing opportunities surrounding the patents.
NCIS (systems integration service offerings) is the original business line
upon which NeoMedia was organized. This unit resells client-server equipment and
related software, and general and specialized consulting services. Systems
integration services also identifies prospects for custom applications based on
NeoMedia's products and services. These operations are based in Lisle, Illinois.
NMPR (micro paint repair offerings) is the business unit encompassing the
recently-acquired CSI International chemical line. NMPR is attempting to
commercialize its unique micro-paint repair solution. The Company completed its
acquisition of CSI on February 6, 2004.
RECLASSIFICATIONS
Certain amounts in the 2003 condensed consolidated financial statements
have been reclassified to conform to the 2004 presentation.
6
ACQUISITION OF CSI INTERNATIONAL, INC. ("CSI")
On February 6, 2004, NeoMedia acquired 100% ownership of CSI
International, Inc., of Calgary, Alberta, Canada, a private technology products
company in the micro paint repair industry. NeoMedia paid a purchase price
including an issuance of 7,000,000 shares of its common stock, and cash of
$2,500,000 in exchange for all outstanding shares of CSI. The shares were valued
at $0.10 per share, which was the market price of NeoMedia's common stock on the
Over-the-counter Bulletin Board exchange around the acquisition date. NeoMedia
also incurred direct costs of the business combination totaling $5,000, which
are included in the purchase price for purposes of allocating assets acquired
and liabilities assumed.
The acquisition was accounted for under the purchase method. The actual
purchase price was based on cash paid, the fair value of NeoMedia stock around
the date of the acquisition, and direct costs associated with the combination.
The purchase price was allocated as follows:
(Dollars in
Thousands)
-----------
Value of 7 Million Shares Issued ($0.10 per share) $ 700
Cash paid 2,500
Direct costs of acquisition 5
-----------
Total Fair Value of Purchase Price $ 3,205
-----------
Assets Purchased:
Cash $ 115
Accounts receivable, net 67
Inventory 54
Other current assets 12
Investments 25
Property, plant & equipment 8
Excess of purchase price over net tangible assets 3,059
-----------
Total Assets Purchased 3,340
-----------
Less Liabilities Assumed:
Accounts payable (23)
Accrued liabilities (12)
Notes payable (100)
-----------
Total Liabilities Assumed (135)
-----------
The combination is being accounted for as a purchase business combination
as defined by Statement of Financial Accounting Standards No. 141, Business
Combinations. The allocation of the purchase price is preliminary and is subject
to revision as the Company continues to evaluate the allocations. The Company
has not amortized the excess of purchase price over net tangible assets since
the allocation is not yet final. With limited operation history of CSI, the
Company expects to evaluate the results of operations of CSI in the coming
months in order to accurately finalize the allocation. The Company expects to
finalize this process in the second half of 2004. If the excess of purchase
price over net tangible assets is determined to be allocated fully or partially
to intangible assets with definite lives upon final allocation, the Company will
determine the economic useful lives based on its best estimate and amortize such
assets accordingly. The Company will continue to evaluate this asset for
impairment until such time as the purchase price allocation is final.
7
The accompanying consolidated statement of operations presented herein
contains the results of operations for CSI for the period February 6, 2004,
through June 30, 2004.
Pro-forma results of operations as if NeoMedia and CSI had combined as of
January 1, 2004 are as follows:
THREE MONTHS ENDED JUNE 30, 2004 SIX MONTHS ENDED JUNE 30, 2004
----------------------------------------------- -----------------------------------------------------------
(A) (A)
PRO-FORMA PRO-FORMA
CSI ADJUST- PRO-FORMA CSI ADJUST- PRO-FORMA
NEOMEDIA INT'L MENTS COMBINED NEOMEDIA INT'L MENTS COMBINED
----------- ------ ---------- ------------ ------------- ------ ---------- -------------
Total net sales $448 -- -- (A) $448 $798 $339 ($275) (A) $862
Loss from operations ($1,017) -- -- (A) ($1,017) ($1,894) ($589) $563 (A) ($1,920)
Net loss ($1,831) -- -- (A) ($1,831) ($4,053) ($589) $563 (A) ($4,079)
Net loss per share-
basic and diluted ($0.01) ($0.01) ($0.01) (A) ($0.01)
Weighted average
number of common
shares - basic
and diluted 305,327,410 -- 305,327,410 287,733,421 7,000,000 (B) 294,733,421
Pro-forma Adjustments
(A) - Adjustments are to reflect operations of CSI from February 6, 2004
through June 30, 2004, which are included in NeoMedia's operations for the
three months ended June 30, 2004.
(B) - To adjust weighted average shares outstanding as if the 7,000,000 shares
issued as part of the purchase price of CSI on February 6, 2004, had been
issued on January 1, 2004
Pro-forma results of operations as if NeoMedia and CSI had combined as of
January 1, 2003 are as follows:
THREE MONTHS ENDED JUNE 30, 2003 SIX MONTHS ENDED JUNE 30, 2003
--------------------------------------------------- -----------------------------------------------------
(A) (A)
PRO-FORMA PRO-FORMA
CSI ADJUST- PRO-FORMA CSI ADJUST- PRO-FORMA
NEOMEDIA INT'L MENTS COMBINED NEOMEDIA INT'L MENTS COMBINED
------------ ------- ------------ ------------ -------------- --------- --------- -------------
Total net sales $674 $141 -- $815 $1,548 $268 -- $1,816
Income (loss) from
operations ($835) $7 -- ($828) ($1,686) $9 -- ($1,677)
Net income (loss) ($952) $7 -- ($945) ($1,855) $9 -- ($1,846)
Net loss per share-
basic and diluted ($0.01) ($0.01) ($0.03) ($0.03)
Weighted average
number of common
shares - basic and
diluted 78,404,148 7,000,000 (C) 85,404,148 57,796,124 7,000,000 (C) 64,796,124
Pro-forma Adjustments
(C) - To adjust weighted average shares outstanding as if the 7,000,000 shares
issued as part of the purchase price of CSI on February 6, 2004, had been
issued on January 1, 2003
8
STANDBY EQUITY DISTRIBUTION AGREEMENT WITH CORNELL CAPITAL PARTNERS, LP
("CORNELL")
On February 11, 2003, NeoMedia and Cornell entered into an Equity Line of
Credit Agreement under which Cornell agreed to purchase up to $10 million of
NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at the Company's discretion. The maximum amount of each purchase
was $150,000 with a minimum of seven days between purchases. The shares were
valued at 98% of the lowest closing bid price during the five-day period
following the delivery of a notice of purchase by NeoMedia. The Company paid 5%
of the gross proceeds of each purchase to Cornell.
On October 27, 2003, the Company and Cornell entered into a $20 million
Standby Equity Distribution Agreement. The terms of the agreement are identical
to the terms of the previous Equity Line of Credit, except that the maximum
"draw" under the new agreement is $280,000 per week, not to exceed $840,000 in
any 30-day period, and Cornell will purchase up to $20 million of the Company's
common stock over a two-year period. As a consideration fee for Cornell to enter
into the agreement, the Company issued 10 million warrants to Cornell with an
exercise price of $0.05 per share, and a term of five years. Cornell exercised
the warrants in January 2004, resulting in $500,000 cash receipts to the
Company. In November 2003, the Company filed a Form SB-2 to register 200 million
shares under this $20 million Standby Equity Distribution Agreement. In January
2004, the Form SB-2 was declared effective by the Securities and Exchange
Commission. In April 2004, the Company filed a Form SB-2 to register 40 million
shares underlying warrants granted to Cornell in connection with a promissory
note issued by the Company to Cornell (see "Notes Payable to Cornell" below). In
May 2004, the Form SB-2 was declared effective by the Securities and Exchange
Commission.
During the six months ended June 30, 2004, the Company sold 51,102,076
shares of its common stock to Cornell under the Standby Equity Distribution
Agreement. The following table summarizes funding received from Cornell during
the six months ended June 30, 2004:
THREE THREE SIX
MONTHS MONTHS MONTHS
ENDED ENDED ENDED
MARCH 31, JUNE 30, JUNE 30,
2004 2004 2004
------------ ------------ ------------
Number of shares sold to Cornell 21,282,203 29,819,873 51,102,076
Gross Proceeds from sale of shares
to Cornell $ 2,332,000 $ 2,308,000 $ 4,640,000
Less: discounts and fees* (500,000) (465,000) (965,000)
------------ ------------ ------------
Net Proceeds from sale of shares
to Cornell $ 1,832,000 $ 1,843,000 $ 3,675,000
------------ ------------ ------------
* - Per Standby Equity Distribution Agreement, stock is valued at 98% of the
lowest closing bid price during the week it is sold
PROMISSORY NOTES PAYABLE TO CORNELL
On January 20, 2004, the Company borrowed from Cornell the gross amount of
$4,000,000 before Cornell discounts and fees. Of the $4,000,000 funding,
$2,500,000 was used to fund the acquisition of CSI International, Inc. during
February 2004. Cornell withheld a $315,000 retention fee related to the issuance
of stock to pay off the debt in the future. As of June 30, 2004, the Company had
reduced the balance payable on the note to $480,000. During July 2004, the
Company paid the remaining balance on the note.
9
On April 8, 2004, the Company borrowed from Cornell the gross amount of
$1,000,000 before Cornell discounts and fees. Cornell withheld a $76,000
retention fee related to the issuance of stock to pay off the debt in the
future. As of June 30, 2004, the Company had not made any payment against the
principal. As of July 23, 2004, the Company had reduced the balance on the note
to $800,000. The note matures on October 5, 2004, after which the Company has a
60-day period in which to cure any defaults without penalty. The note accrues
interest at a rate of 24% beginning only upon expiration of the 60-day cure
period after maturity. The Company has the option to repay any remaining
principal of either note in cash. The Company expects to pay the remaining note
balance by applying the proceeds from the sale stock under the terms of the
Standby Equity Distribution Agreement toward the outstanding principal on the
notes.
On July 2, 2004, the Company borrowed from Cornell the gross amount of
$1,000,000 before Cornell discounts and fees. Cornell withheld a $76,000
retention fee related to the issuance of stock to pay off the debt in the
future. The Company has not made any payments against the principal. The note
matures on September 30, 2004. The note accrues interest at a rate of 12%
beginning only upon maturity (after September 30, 2004). The Company has the
option to repay any remaining principal of either note in cash. The Company
expects to pay the remaining note balance by applying the proceeds from the sale
stock under the terms of the Standby Equity Distribution Agreement toward the
outstanding principal on the notes.
The Company also granted to Cornell 40,000,000 warrants to purchase shares
of NeoMedia stock with an exercise price of $0.05 per share during January 2004.
In April 2004, the Company filed a Form SB-2 to register 40 million shares
underlying warrants granted to Cornell in connection with a promissory note
issued by the Company to Cornell. In May 2004, the Form SB-2 was declared
effective by the Securities and Exchange Commission.
The fair value of the warrants using the Black/Scholes pricing model was
$5,000,000. In accordance with APB 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants", the Company has compared the relative fair
values of the warrants and the face value of the notes, and has allocated a
value of $2.5 million to the warrants. Of the $2.5 million, $2 million was
allocated to the $4 million note issued in January 2004 and $0.5 million against
the $1 million note in April 2004. The $2.5 million was recorded as a discount
against the carrying value of the note. The $2.5 million being allocated to the
notes is considered a discount on the promissory notes, and therefore is being
amortized over the life of the notes using the effective interest method, in
accordance with Staff Accounting Bulletin No. 77, Topic 2.A.6, "Debt Issue
Costs" of SFAS 141, "Business Combinations". Accordingly, the Company recorded
an amortization of discount of $772,000 and $2,166,000 related to the warrants
during the three months and six months ended June 30, 2004, respectively,.
OPTION REPRICING PROGRAM
During May 2003, the Company re-priced approximately 8.0 million stock
options under a 6-month repricing program. Under the terms of the program, the
exercise price for outstanding options under the Company's 2002, 1998, and 1996
Stock Option Plans was restated to $0.01 per share. During June 2004, the
deadline for the option repricing was extended to December 31, 2004 by the Stock
Option Committee of NeoMedia's Board of Directors. In accordance with FASB
Interpretation, FIN 44, "Accounting for Certain Transactions Involving Stock
Transactions", the award has been accounted for as variable from May 19, 2003
through the period ended June 30, 2004. The closing price of the Company's
common stock on June 30, 2004, March 31, 2004, and December 31, 2003 was $0.067,
$0.09, and $0.137 per share, respectively. As a result, the Company recorded a
reduction to general and administrative expense of $163,000 and $80,000 during
the three months ended March 31, 2004 and June 30, 2004. The adjustment was
recorded in order to reflect the decrease of the fair value of options still
unexercised under the repricing program under variable accounting.
10
OTHER EVENTS
On June 25, 2004, the Company issued 322,228 shares of its common stock
valued at $24,000, plus $8,000 cash to 540608 Alberta Ltd., a distributor of the
Company's micro paint repair products, in exchange for the forfeiture by 540608
Alberta Ltd. of exclusive distribution rights in the greater Edmonton, Alberta,
Canada area. 540608 Alberta Ltd. had purchased the exclusivity rights in 1992
from CSI International, Inc.
On February 6, 2004, the Company entered into a consulting agreement with
an unrelated third party, under which the consultant will provide sales and
marketing services relating to the Company's Micro Paint business unit over a
period of three years. As consideration for the contract, the Company issued
6,055,556 options with an exercise price of $0.01 to the consultant. The fair
value of the options at the time of issuance was $550,000. The Company is
recognizing the fair value as sales and marketing expense over the term of the
contract (three years). Accordingly, the Company recognized $81,000 in expense
relating the contract during the six months ended June 30, 2004.
During January 2004, the Company entered into a consulting agreement with
James J. Keil, a member of the Company's board of directors, for consulting
services to be provided over a period of six months in connection with
NeoMedia's sales strategies and processes. The contract calls for monthly
payments of $4,500 during the term of the contract. The Company recognized
$27,000 in general and administrative expense relating to the contract during
the six months ended June 30, 2004.
11
PRO-FORMA INFORMATION REQUIRED BY SFAS 148
At June 30, 2004, the Company has five stock-based employee compensation
plans (the 2003 Stock Incentive Plan, the 2003 Stock Option Plan, the 2002 Stock
Option Plan, the 1998 Stock Option Plan, and the 1996 Stock Option Plan). The
Company accounts for those plans under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation cost is reflected
in net loss, except when options granted under those plans had an exercise price
less than the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net Loss, as reported ($1,831) ($952) ($4,053) ($1,855)
Compensation recognized under APB 25 5 -- 9 --
Compensation recognized under SFAS 123 (368) (118) (711) (236)
------------------- -------------------
Pro-forma net loss ($2,194) ($1,070) ($4,755) ($2,091)
=================== ===================
Net Loss per share:
Basic and diluted - as reported ($0.01) ($0.01) ($0.01) ($0.03)
=================== ===================
Basic and diluted - pro-forma ($0.01) ($0.01) ($0.02) ($0.04)
=================== ===================
SEGMENT REPORTING
The Company is structured and evaluated by its Board of Directors and
Management as three distinct business units:
NeoMedia Internet Switching Services (NISS), is based in the United
States, with development and operating facilities in Fort Myers, Florida. NISS
develops and supports the Company's physical world to Internet core technology,
including NeoMedia's linking "switch" and application platforms. NISS also
manages the Company's valuable intellectual property portfolio, including the
identification and execution of licensing opportunities surrounding the patents.
NeoMedia Consulting and Integration Services (NCIS) is the Company's
systems integration business unit. This unit resells client-server equipment and
related software, and general and specialized consulting services. NCIS also
identifies prospects for custom applications based on NeoMedia's products and
services. The operations are based in Lisle, Illinois.
NeoMedia Micro Paint Repair (NMPR) is the business unit encompassing the
Company's recently-acquired CSI International micro paint repair line. NMPR is
attempting to commercialize its micro-paint repair solution. The Company
completed its acquisition of CSI on February 6, 2004
The Company's reportable segments are strategic business units that offer
different technology and marketing strategies. NCIS operates principally in the
United States. NISS operates principally in the United States and Europe. NMPR
is headquartered in Ft. Myers, Florida, and currently sells into Canada, the
United States, Australia, and New Zealand. During the six months ended June 30,
2004, NeoMedia derived 32% of its revenue from customers based in Canada.
12
Consolidated net sales, net operating losses for the three-month and
six-month periods ended June 30, 2004 and 2003, and identifiable assets as of
June 30, 2004, were as follows:
(in thousands)
--------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2004 2003 2004 2003
-------- -------- -------- --------
NET SALES:
NeoMedia Consulting &
Integration Services $230 $662 $481 $1,523
NeoMedia Internet Switching Service 29 12 42 25
NeoMedia Micro Paint Repair 189 -- 275 --
------------------ ------------------
$448 $674 $798 $1,548
------------------ ------------------
NET LOSS:
NeoMedia Consulting &
Integration Services ($227) ($726) ($483) ($154)
NeoMedia Internet Switching Service (436) (226) (841) (1,701)
NeoMedia Micro Paint Repair (396) -- (563) --
Amortization of Cornell Debt
Discount (772) -- (2,166) --
------------------ ------------------
($1,831) ($952) ($4,053) ($1,855)
------------------ ------------------
IDENTIFIABLE ASSETS:
NeoMedia Consulting &
Integration Services $223
NeoMedia Internet Switching Service 2,352
NeoMedia Micro Paint Repair 3,263
Corporate 1,502
--------
$7,340
--------
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
NISS (PHYSICAL-WORLD-TO-INTERNET OFFERINGS) BUSINESS UNIT DEVELOPMENTS.
Over the past several years, NeoMedia's focus has been aimed toward the
commercialization of its Internet Switching Systems (NISS) business unit.
NISS consists of the patented PaperClick(TM) technology that enables users
to link directly from the physical to the digital world, as well as the
patents surrounding certain physical-world-to-web linking processes.
NeoMedia's mission is to invent, develop, and commercialize technologies
and products that effectively leverage the integration of the physical and
electronic to provide clear functional value for its end-users,
competitive advantage for their business partners and return-on-investment
for their investors. To this end, NeoMedia has signed four intellectual
property licenses since inception, and also acquired additional patents as
part of its acquisition of Secure Source Technologies, Inc. during 2003.
On September 8, 2003, NeoMedia announced its PaperClick for Camera Cell
Phones(TM) product, which reads and decodes UPC/EAN or other bar codes to
link users to the Internet, providing information and enabling e-commerce
on a compatible camera cell phone, such as the Nokia 3650 model. During
the second quarter of 2004, NeoMedia introduced its PaperClick Mobile
Go-Window(TM), a horizontal bar on the screen of a wireless device where
users can enter numeric strings from UPC or other bar codes to link
directly to targeted online information via patented PaperClick technology
and software. The PaperClick Mobile Go-Window(TM) currently works with
Palm(TM) Tungsten C PDA, the Handspring(TM) Treo 270 and 600 Smartphones,
Pocket PC(R), and the Java MIDP 2.0 (Mobile Independent Device Profile)
standard.
On October 30, 2003, NeoMedia unveiled the go-to-market strategy for its
PaperClick suite of products. Over the past several months, NeoMedia has
signed contracts with several key partners outlined in the strategy,
including agents Big Gig Strategies, SRP Consulting, and Relyco, systems
integrator Science Applications International Corporation (SAIC), and
European advertising agency 12Snap. In June 2004, NeoMedia entered into a
collaborative agreement with Intel Corporation for NeoMedia's PaperClick
mobile connectivity platform to operate on the recently introduced Intel
PXA27x processor family-based cellular phones.
On June 3, 2004, NeoMedia announced that it signed a teaming agreement
with IPSO, an integrator of proprietary solutions developed by its
provider companies for financial institution members and a leader in
meeting Check 21 standards. Enacted by Congress and signed into law last
year, Check 21 requires banks to begin accepting substitute checks (called
IRDs for image replacement documents) in lieu of original checks as of
October 29, 2004. NeoMedia and IPSO could partner on proposals and
presentations surrounding Check 21.
NMPR (MICRO PAINT REPAIR) BUSINESS UNIT DEVELOPMENTS.
On February 6, 2004, NeoMedia acquired 100% ownership of CSI
International, Inc., of Calgary, Alberta, Canada, a private technology
products company in the micro paint repair industry. NeoMedia currently
has approximately 50 active paint repair end-user system agreements.
On June 1, 2004, NeoMedia announced that it had entered into a
distribution agreement with Micro Paint Systems (Australasia) Limited of
New Zealand for exclusive distribution rights to NeoMedia's micro paint
14
repair products in Australia and New Zealand. The agreement is contingent
upon a minimum purchase of 500 systems over five years in that territory.
NeoMedia received an initial payment on signing of the contract, which
included the fee for four initial systems.
On June 22, 2004, NeoMedia announced its new product called "Silver
Solutions," a process created specifically to mend the popular high
metallic and pearl paint finishes on new cars.
On July 7, 2004, NeoMedia announced the appointment of Arthur W. Gilfus to
the newly-created position of global vice president of sales for the Micro
Paint Repair Business Unit.
On July 16, 2004, NeoMedia announced that its NeoMedia Micro Paint Repair
business unit added five more licensees as part of a private label
contract with Crackmaster Distributors Ltd., a Canadian auto aftermarket
company.
On August 2, 2004, NeoMedia announced that it signed a distribution
agreement with Motor Dealer's Association (MDA) Co-Auto Ltd., the largest
buying consortium for new car franchised dealers in Western Canada. The
agreement provides exclusive rights for MDA Co-Auto to market NeoMedia's
micro paint repair system to its member dealers. MDA Co-Auto has 1,050
member dealers in British Columbia, Alberta, Saskatchewan, Manitoba and
the Yukon.
NCIS (SYSTEMS INTEGRATION) BUSINESS UNIT DEVELOPMENTS.
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. Systems integration services also identifies prospects for
custom applications based on NeoMedia's products and services. These
operations are based in Lisle, Illinois.
SEC INQUIRY
During 2003, NeoMedia received requests from the SEC's Southeast Regional
Office for certain documents including those concerning negotiations and
arrangements with certain strategic partners and consultants, patents, recent
issuances of securities, investor relations, and the stock ownership by
NeoMedia's officers and directors. NeoMedia responded promptly and fully and
will cooperate with any further requests. The SEC's letter states that the
staff's inquiry is informal and should not be construed as an indication of any
violation of law or as a reflection on any person, entity, or security.
ACQUISITIONS
CSI INTERNATIONAL, INC. On February 6, 2004, NeoMedia acquired 100%
ownership of CSI International, Inc., of Calgary, Alberta, Canada, a
private technology products company in the micro paint repair industry.
NeoMedia paid 7,000,000 shares of its common stock, plus $2.5 million cash
in exchange for all outstanding shares of CSI. NeoMedia has centralized
the administrative functions in its Ft. Myers, Florida headquarters, and
maintains a sales office in Calgary, Alberta, Canada.
BSD SOFTWARE, INC. On December 9, 2003, NeoMedia signed a non-binding
letter of intent to acquire Triton Global Business Services Inc. and its
parent company, BSD Software Inc. (Pink Sheets: BSDS), both of Calgary,
Alberta, Canada. The LOI outlined terms, including an exchange of one
share of NeoMedia common stock for each share of BSD Software, not to
exceed 40 million shares. The transaction is dependent on due diligence by
15
both companies, approval by NeoMedia's Board of Directors, BSD Software's
Board of Directors and shareholders, and any required regulatory
approvals. Triton, formed in 1998 and acquired by BSD in 2002, is an
Internet Protocol-enabled provider of live and automated operator calling
services, e-business support, billing and clearinghouse functions and
information management services to telecommunications, Internet and
e-business service providers. The companies are currently completing their
due diligence.
NeoMedia's operating results have been subject to variation and will
continue to be subject to variation, depending upon factors, such as the mix of
business among services and products, the cost of material, labor and
technology, particularly in connection with the delivery of business services,
the costs associated with initiating new contracts, the economic condition of
NeoMedia's target markets, and the cost of acquiring and integrating new
businesses.
CRITICAL ACCOUNTING POLICIES
The U.S. Securities and Exchange Commission ("SEC") issued Financial
Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical
Accounting Policies" ("FRR 60"), suggesting companies provide additional
disclosure and commentary on their most critical accounting policies. In FRR 60,
the SEC defined the most critical accounting policies as the ones that are most
important to the portrayal of a company's financial condition and operating
results, and require management to make its most difficult and subjective
judgments, often as a result of the need to make estimates of matters that are
inherently uncertain. Based on this definition, NeoMedia's most critical
accounting policies include: inventory valuation, which affects cost of sales
and gross margin; and the valuation of intangibles, which affects amortization
and write-offs of goodwill and other intangibles. NeoMedia also has other key
accounting policies, such as policies for revenue recognition, including the
deferral of a portion of revenues on sales to distributors, and allowance for
bad debt. The methods, estimates and judgments NeoMedia uses in applying these
most critical accounting policies have a significant impact on the results it
reports in its consolidated financial statements.
Intangible Asset Valuation. The determination of the fair value of certain
acquired assets and liabilities is subjective in nature and often involves the
use of significant estimates and assumptions. Determining the fair values and
useful lives of intangible assets especially requires the exercise of judgment.
While there are a number of different generally accepted valuation methods to
estimate the value of intangible assets acquired, NeoMedia primarily uses the
weighted-average probability method outlined in SFAS 144. This method requires
significant management judgment to forecast the future operating results used in
the analysis. In addition, other significant estimates are required such as
residual growth rates and discount factors. The estimates NeoMedia has used are
consistent with the plans and estimates that NeoMedia uses to manage its
business, based on available historical information and industry averages. The
judgments made in determining the estimated useful lives assigned to each class
of assets acquired can also significantly affect NeoMedia's net operating
results.
Allowance for Bad Debt. NeoMedia maintains an allowance for doubtful
accounts for estimated losses resulting from the inability of its customers to
make required payments. Allowance for doubtful accounts is based on NeoMedia's
assessment of the collectibility of specific customer accounts, the aging of
accounts receivable, NeoMedia's history of bad debts, and the general condition
of the industry. If a major customer's credit worthiness deteriorates, or
NeoMedia's customers' actual defaults exceed historical experience, NeoMedia's
estimates could change and impact its reported results.
Stock-based Compensation. NeoMedia records stock-based compensation to
outside consultants at fair market value in general and administrative expense.
NeoMedia does not record expense relating to stock options granted to employees
with an exercise price greater than or equal to market price at the time of
grant. NeoMedia reports pro-forma net loss and loss per share in accordance with
the requirements of SFAS 123 and 148. This disclosure shows net loss and loss
per share as if NeoMedia had accounted for its employee stock options under the
16
fair value method of those statements. Pro-forma information is calculated using
the Black-Scholes pricing method at the date of grant. This option valuation
model requires input of highly subjective assumptions. Because NeoMedia's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the existing
model does not necessarily provide a reliable single measure of fair value of
its employee stock options.
Estimate of Litigation-based Liability. NeoMedia is defendant in certain
litigation in the ordinary course of business (see "Legal Proceedings").
NeoMedia accrues liabilities relating to these lawsuits on a case-by-case basis.
NeoMedia generally accrues attorney fees and interest in addition to the
liability being sought. Liabilities are adjusted on a regular basis as new
information becomes available. NeoMedia consults with its attorneys to determine
the viability of an expected outcome. The actual amount paid to settle a case
could differ materially from the amount accrued.
Revenue Recognition. NeoMedia derives revenues from three primary sources:
(1) license revenues and (2) resale of software and technology equipment and
service fee revenues, and (3) sale of its proprietary micro paint repair
solution.
(1) License fees, including Intellectual Property licenses, represent
revenue from the licensing of NeoMedia's proprietary software tools
and applications products. NeoMedia licenses its development tools
and application products pursuant to non-exclusive and
non-transferable license agreements. Resales of software and
technology equipment represent revenue from the resale of purchased
third party hardware and software products and from consulting,
education, maintenance and post contract customer support services.
The basis for license fee revenue recognition is substantially
governed by American Institute of Certified Public Accountants
("AICPA") Statement of Position 97-2 "Software Revenue Recognition"
("SOP 97-2"), as amended. License revenue is recognized if
persuasive evidence of an agreement exists, delivery has occurred,
pricing is fixed and determinable, and collectibility is probable.
(2) Revenue for resale of software and technology equipment and service
fee is recognized based on guidance provided in Securities and
Exchange Commission (SEC) Staff Accounting Bulletin No. 104,
"Revenue Recognition in Financial Statements," as amended (SAB 104).
Software and technology equipment resale revenue is recognized when
all of the components necessary to run software or hardware have
been shipped. Service revenues including maintenance fees for
providing system updates for software products, user documentation
and technical support are recognized over the life of the contract.
Software license revenue from long-term contracts has been
recognized on a percentage of completion basis, along with the
associated services being provided. Other service revenues,
including training and consulting, are recognized as the services
are performed. NeoMedia uses stand-alone pricing to determine an
element's vendor specific objective evidence (VSOE) in order to
allocate an arrangement fee amongst various pieces of a
multi-element contract. NeoMedia records an allowance for
uncollectible accounts on a customer-by-customer basis as
appropriate.
In December 2003, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition." SAB 104 supersedes SAB 101, "Revenue Recognition in
Financial Statements." SAB 104's primary purpose is to rescind
accounting guidance contained in SAB 101 related to multiple element
17
revenue arrangements, superseded as a result of the issuance of EITF
00-21, "Accounting for Revenue Arrangements with Multiple
Deliverables." Additionally, SAB 104 rescinds the SEC's Revenue
Recognition in Financial Statements Frequently Asked Questions and
Answers ("the FAQ") issued with SAB 101 that had been codified in
SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have
been incorporated into SAB 104. While the wording of SAB 104 has
changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104, which was effective upon issuance. The adoption
of SAB 104 did not impact the consolidated financial statements.
(3) Revenue for training and certification on NeoMedia's Micro Paint
Repair systems is recognized equally over the term of the contract,
which is currently one year. A portion of the initial fee paid by
the customer is allocated to training costs and initial products
sold with the system, and is recognized upon completion of training
and shipment of the products. Ongoing product and service revenue is
recognized as products are shipped and services performed.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004 AS COMPARED TO
THE THREE MONTHS ENDED JUNE 30, 2003
Net sales. Total net sales for the three months ended June 30, 2004 were
$448,000, which represented a decrease of $226,000, or 34%, from $674,000 for
the three months ended June 30, 2003. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
general economic conditions, offset by an increase in sales resulting from the
acquisition of the Company's micro paint repair business unit. NeoMedia could
realize an increase in license fees over the next 12 months if the Company is
successful in implementing its PaperClick go-to-market strategy. NeoMedia could
also realize increased license fees if pending court cases involving its
intellectual property are resolved in NeoMedia's favor.
License fees. License fees were $88,000 for the three months ended June
30, 2004, compared with $160,000 for the three months ended June 30, 2003, a
decrease of $72,000, or 45%. The decrease was due to lower sales of internally
developed software licenses in 2004. NeoMedia could realize a material increase
in license fees over the next 12 months if the Company is successful in
implementing its PaperClick go-to-market strategy. NeoMedia could also realize
increased license fees if pending court cases involving its intellectual
property are resolved in NeoMedia's favor.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $343,000, or
67%, to $171,000 for the three months ended June 30, 2004, as compared to
$514,000 for the three months ended June 30, 2003. This decrease primarily
resulted from reduced resales of Sun Microsystems equipment due to increased
competition and general economic conditions. NeoMedia intends to continue to
pursue additional resales of equipment, software and services. NeoMedia expects
resales to more closely resemble the results for the three months ended June 30,
2004, rather than the three months ended June 30, 2003.
Micro paint repair products and services. Sales of micro paint repair
products and services were $189,000 for the three months ended June 30, 2004.
NeoMedia acquired this business on February 6, 2004, so there were no sales of
micro paint repair products and services during the three months ended June 30,
2003. NeoMedia expects sales of micro paint repair products and services to
increase during 2004 as the Company implements its business to rollout its Micro
Paint Repair solution.
18
Cost of license fees. Cost of license fees was $81,000 for the three
months ended June 30, 2004, an increase of $6,000, or 8%, compared with $75,000
for the three months ended June 30, 2003. The increase resulted from increased
amortization of capitalized patent costs during 2004.
Cost of resales. Cost of resales was $173,000 for the three months ended
June 30, 2004, a decrease of $313,000, or 64%, compared with $486,000 for the
three months ended June 30, 2003. The decrease resulted from decreased resales
in 2004 compared with 2003. Cost of resales as a percentage of related resales
was 101% in 2004, compared to 95% in 2003. This increase is due to revenue
declining more rapidly than the fixed portion of costs of resales. NeoMedia
expects costs of resales to fluctuate with the mix of sales of equipment,
software, and services over the next 12 months.
Cost of micro paint repair products and services. Cost of micro paint
repair products and services was $168,000 for the three months ended June 30,
2004. NeoMedia acquired this business on February 6, 2004, so there were no cost
of sales of micro paint repair products and services during the three months
ended June 30, 2003. Cost of micro paint repair products and services as a
percentage of related sales was 89%. NeoMedia expects cost of micro paint repair
products and services to increase over the next 12 months as revenue continues
to increase with the roll-out. NeoMedia also expects cost of sales as a
percentage of sales to decrease over the next 12 months as the Company continues
to implement its rollout of its higher-margin Micro Paint Repair products.
Gross Profit. Gross profit was $26,000 for the three months ended June 30,
2004, a decrease of $87,000, or 77%, compared with gross profit of $113,000 for
the three months ended June 30, 2003. This decrease was primarily the result of
reduced resales of Sun Microsystems equipment due to increased competition and
general economic conditions.
Sales and marketing. Sales and marketing expenses were $522,000 for the
three months ended June 30, 2004, compared to $122,000 for the three months
ended June 30, 2003, an increase of $400,000 or 328%. This increase resulted
primarily from the addition of recently-acquired micro paint business sales
force and cost associated with marketing, as well as promotion of the Company's
PaperClick and Micro Paint Repair products. NeoMedia expects sales and marketing
expense to increase over the next 12 months with the continued development and
anticipated rollout of the PaperClick and Micro Paint Repair product suites.
General and administrative. General and administrative expenses decreased
by $351,000, or 47%, to $399,000 for the three months ended June 30, 2004,
compared to $750,000 for the three months ended June 30, 2003. The decrease
resulted primarily from a decrease in stock-based professional services expense
in 2004 compared with 2003, as well as a reduction to general and administrative
expense of $80,000 relating to the Company's option repricing program during the
three months ended June 30, 2004. NeoMedia expects general and administrative
expense to increase over the next 12 months with the recent acquisition of CSI
International and the potential acquisition of BSD Software.
Research and development. During the three months ended June 30, 2004,
NeoMedia charged to expense $122,000 of research and development costs, an
increase of $46,000 or 61% compared to $76,000 for the three months ended June
30, 2003. The increase is primarily due to the addition of developers and
development computer systems during 2004. NeoMedia expects research and
development costs to increase over the next 12 months with the continued
development efforts, and the anticipated rollout of NeoMedia's PaperClick
product suite.
Amortization of debt discount. During the three months ended June 30,
2004, NeoMedia recognized an amortization of debt issuance cost of $772,000
relating to the amortization of the fair value of warrants granted to Cornell
Capital Partners in connection with promissory notes issued to Cornell by
NeoMedia during January 2004. NeoMedia did not recognize any such expense during
19
the three months ended June 30, 2003. NeoMedia expects to recognize an
additional $334,000 expense related to this discount during the third quarter of
2004, at which time the discount will be fully amortized and no more expense
will be recorded.
Interest expense. Interest expense consists primarily of interest accrued
for creditors as part of financed purchases, past due balances, notes payable
and interest earned on cash equivalent investments. Interest expense decreased
by $78,000, or 67%, to $39,000 for the three months ended June 30, 2004 from
$117,000 for the three months ended June 30, 2003, due to reduced expense
associated with vendor settlements and debt in 2004 compared with 2003.
Net Loss. The net loss for the three months ended June 30, 2004 was
$1,831,000, which represented an increase of $879,000, or 92% from a $952,000
loss for the three months ended June 30, 2003. The increase resulted primarily
from the non-cash amortization of debt issuance cost to funding provided By
Cornell Capital Partners during the three months ended June 30, 2004, as well as
reduced resales of software and technology equipment and service fees in 2004
compared with 2003. These items were partially offset by a reduction to general
and administrative expense during 2004.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004 AS COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 2003
Net sales. Total net sales for the six months ended June 30, 2004 were
$798,000, which represented a decrease of $750,000, or 48%, from $1,548,000 for
the six months ended June 30, 2003. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
general economic conditions. NeoMedia could realize an increase in license fees
over the next 12 months if the Company is successful in implementing its
PaperClick go-to-market strategy. NeoMedia could also realize increased license
fees if pending court cases involving its intellectual property are resolved in
NeoMedia's favor.
License fees. License fees were $160,000 for the six months ended June 30,
2004, compared with $269,000 for the six months ended June 30, 2003, a decrease
of $109,000, or 41%. The decrease was due to lower sales of internally developed
software licenses in 2004. NeoMedia could realize a material increase in license
fees over the next 12 months if the Company is successful in implementing its
PaperClick go-to-market strategy. NeoMedia could also realize increased license
fees if pending court cases involving its intellectual property are resolved in
NeoMedia's favor.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $916,000, or
72%, to $363,000 for the six months ended June 30, 2004, as compared to
$1,279,000 for the six months ended June 30, 2003. This decrease primarily
resulted from reduced resales of Sun Microsystems equipment due to increased
competition and general economic conditions. NeoMedia intends to continue to
pursue additional resales of equipment, software and services. NeoMedia expects
resales to more closely resemble the results for the six months ended June 30,
2004, rather than the six months ended June 30, 2003.
Micro paint repair products and services. Sales of micro paint repair
products and services were $275,000 for the six months ended June 30, 2004.
NeoMedia acquired this business on February 6, 2004, so there were no sales of
micro paint repair products and services during the six months ended June 30,
2003. NeoMedia expects sales of micro paint repair products and services to
increase during 2004 as the Company implements its business to rollout its Micro
Paint Repair solution.
20
Cost of license fees. Cost of license fees was $170,000 for the six months
ended June 30, 2004, an increase of $19,000, or 13%, compared with $151,000 for
the six months ended June 30, 2003. The increase resulted from increased
amortization of capitalized patent costs during 2004.
Cost of resales. Cost of resales was $333,000 for the six months ended
June 30, 2004, a decrease of $855,000, or 72%, compared with $1,188,000 for the
six months ended June 30, 2003. The decrease resulted from decreased resales in
2004 compared with 2003. Cost of resales as a percentage of related resales was
92% in 2004, compared to 93% in 2003. This decrease is due to a slightly
increased mix of higher-margin software maintenance products in 2004 compared
with 2003. NeoMedia expects costs of resales to fluctuate with the mix of sales
of equipment, software, and services over the next 12 months.
Cost of micro paint repair products and services. Cost of micro paint
repair products and services was $225,000 for the six months ended June 30,
2004. Cost of micro paint repair products and services as a percentage of
related sales was 82%. NeoMedia acquired this business on February 6, 2004, so
there were no cost of sales of micro paint repair products and services during
the six months ended June 30, 2003. NeoMedia expects cost of micro paint repair
products and services to increase over the next 12 months as revenue continues
to increase with the roll-out. NeoMedia also expects cost of sales as a
percentage of sales to decrease over the next 12 months as the Company continues
to implement its rollout of its higher-margin Micro Paint Repair products.
Gross Profit. Gross profit was $70,000 for the six months ended June 30,
2004, a decrease of $139,000, or 67%, compared with gross profit of $209,000 for
the six months ended June 30, 2003. This decrease was primarily the result of
reduced resales of Sun Microsystems equipment due to increased competition and
general economic conditions.
Sales and marketing. Sales and marketing expenses were $947,000 for the
six months ended June 30, 2004, compared to $261,000 for the six months ended
June 30, 2003, an increase of $686,000 or 263%. This increase resulted primarily
from the addition of recently-acquired micro paint business sales force and cost
associated with marketing, as well as promotion of the Company's PaperClick and
Micro Paint Repair products. NeoMedia expects sales and marketing expense to
increase over the next 12 months with the continued development and anticipated
rollout of the PaperClick and Micro Paint Repair product suites.
General and administrative. General and administrative expenses decreased
by $692,000, or 47%, to $777,000 for the six months ended June 30, 2004,
compared to $1,469,000 for the six months ended June 30, 2003. The decrease
resulted primarily from a decrease in stock-based professional services expense
in 2004 compared with 2003, as well as a reduction to general and administrative
expense of $243,000 relating to the Company's option repricing program during
the six months ended June 30, 2004. NeoMedia expects general and administrative
expense to increase over the next 12 months with the recent acquisition of CSI
International and the potential acquisition of BSD Software
Research and development. During the six months ended June 30, 2004,
NeoMedia charged to expense $240,000 of research and development costs, an
increase of $75,000 or 45% compared to $165,000 for the six months ended June
30, 2003. The increase is primarily due to the addition of developers and
development computer systems during 2004. NeoMedia expects research and
development costs to increase over the next 12 months with the continued
development efforts, and the anticipated rollout of NeoMedia's PaperClick
product suite.
Gain on extinguishment of debt. During the six months ended June 30, 2004,
NeoMedia recognized a gain on extinguishment of debt of $123,000, resulting from
the payment of debt at a discount to the book value of the debt. NeoMedia did
not recognize gain or loss on extinguishment of debt during the six months ended
June 30, 2003.
21
Amortization of debt discount. During the six months ended June 30, 2004,
NeoMedia recognized an amortization of debt issuance cost of $2,166,000 relating
to the amortization of the fair value of warrants granted to Cornell Capital
Partners in connection with promissory notes issued to Cornell by NeoMedia
during January 2004. NeoMedia did not recognize any such expense during the six
months ended June 30, 2003. NeoMedia expects to recognize an additional $334,000
expense related to this discount during the third quarter of 2004, at which time
the discount will be fully amortized and no more expense will be recorded.
Interest expense. Interest expense consists primarily of interest accrued
for creditors as part of financed purchases, past due balances, notes payable
and interest earned on cash equivalent investments. Interest expense decreased
by $53,000, or 31%, to $116,000 for the six months ended June 30, 2004 from
$169,000 for the six months ended June 30, 2003, due to reduced expense
associated with vendor settlements and debt in 2004 compared with 2003.
Net Loss. The net loss for the six months ended June 30, 2004 was
$4,053,000, which represented a $2,198,000, or 118% increase from a $1,855,000
loss for the six months ended June 30, 2003. The increase resulted primarily
from the non-cash amortization of debt issuance cost to funding provided By
Cornell Capital Partners during the three months ended June 30, 2004, as well as
reduced resales of software and technology equipment and service fees in 2004
compared with 2003. These items were partially offset by a reduction to general
and administrative expense during 2004.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $2,261,000 for the six months
ended June 30, 2004, compared with $939,000 for the six months ended June 30,
2003. NeoMedia's net cash flow used in investing activities for the six months
ended June 30, 2004 and 2003 was $155,000 and $59,000, respectively. Net cash
provided by financing activities for the six months ended June 30, 2004 and 2003
was $2,698,000 and $1,081,000, respectively.
During the six months ended June 30, 2004 and 2003, NeoMedia's net loss
totaled $4,053,000 and $1,855,000, respectively. As of June 30, 2004, NeoMedia
had accumulated losses from operations of $80,200,000, had a working capital
deficit of $5,553,000, and $327,000 in cash balances.
The accompanying consolidated financial statements have been prepared
assuming NeoMedia will continue as a going concern. Accordingly, the
consolidated financial statements do not include any adjustments that might
result from NeoMedia's inability to continue as a going concern.
NeoMedia may obtain up to $20 million over the next year and a half
through its Standby Equity Distribution Agreement with Cornell Capital Partners.
As of June 30, 2004, NeoMedia had drawn $5 million against the Standby Equity
Distribution Agreement in the form of promissory notes which may be repaid from
the proceeds of sale of common stock.
In addition, if the average closing bid price of NeoMedia's common stock
for any five day period exceeds $0.10, NeoMedia may force the exercise of 40
million warrants held by Cornell, resulting in additional cash to the Company of
$2 million. In the absence of any major sales from its Micro Paint Repair or
PaperClick products, management believes that it has sufficient funding to
sustain operations through December 31, 2004, however, there can be no
assurances that the market for NeoMedia's stock will support the sale of
sufficient shares of NeoMedia's common stock to raise sufficient capital to
sustain operations for such a period, or that actual revenue will meet
management's expectations. If necessary funds are not available, NeoMedia's
business and operations would be materially adversely affected and in such
event, NeoMedia would attempt to reduce costs and adjust its business plan.
22
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. NeoMedia's Chief Executive
Officer and Chief Financial Officer, after evaluating the effectiveness of
NeoMedia's "disclosure controls and procedures" (as defined in Sections
13a-14(c) of the Securities Exchange Act of 1934) as of the end of the period
reported in this annual report (the "Evaluation Date"), concluded that
NeoMedia's disclosure controls and procedures were effective and designed to
ensure that material information relating to NeoMedia and its consolidated
subsidiaries is accumulated and would be made known to them by others within
those entities as appropriate to allow timely decisions regarding required
disclosures.
CHANGES IN INTERNAL CONTROLS. NeoMedia does not believe that there are
significant deficiencies in the design or operation of its internal controls
that could adversely affect its ability to record, process, summarize and report
financial data. Although there were no significant changes in NeoMedia's
internal controls or in other factors that could significantly affect those
controls subsequent to the Evaluation Date, NeoMedia's senior management, in
conjunction with its Board of Directors, continuously reviews overall company
policies and improves documentation of important financial reporting and
internal control matters. NeoMedia is committed to continuously improving the
state of its internal controls, corporate governance and financial reporting.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. NeoMedia's management, including
the Chief Executive Officer and Chief Financial Officer, does not expect that
its disclosure or internal controls will prevent all errors or fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
23
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
NeoMedia is involved in the following legal actions arising in the normal
course of business, both as claimant and defendant.
AIRCLIC, INC., SCANBUY, INC., AND LSCAN TECHNOLOGIES, INC.
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Inc., Scanbuy, Inc., and LScan Technologies, Inc. in the Northern
District of Illinois, claiming that each of the parties has manufactured, or has
manufactured for it, and has used, or actively induced others to use, technology
which allows customers to use a built-in UPC bar code scanner to scan individual
items and access information, thereby infringing NeoMedia's patents. The
complaint states that on information and belief, AirClic, Scanbuy and LScan have
had actual and constructive notice of the existence of the patents-in-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 suit against AirClic and Scanbuy for lack of
personal jurisdiction. On April 20, 2004, NeoMedia re-filed the suit against
AirClic in Pennsylvania and the suit against Scanbuy in New York, both for
patent infringement. AirClic answered and counterclaimed on May 13, 2004.
NeoMedia filed is answer to AirClic's counterclaim on June 2, 2004. NeoMedia
filed an amended complaint on July 1, 2004, and AirClic answered on July 20,
2004. NeoMedia voluntarily dismissed the suit against LScan in the Northern
District of Illinois and re-filed the suit on May 26, 2004, in the Eastern
District of Pennsylvania. After LScan failed to answer, NeoMedia filed and
served its motion for default judgment on July 6, 2004. On April 19, 2004,
AirClic filed suit against NeoMedia in the Eastern District of Pennsylvania
claiming that some of the NeoMedia patents are invalid. NeoMedia answered and
counterclaimed on May 18, 2004. AirClic answered NeoMedia's counterclaim on June
10, 2004. On March 29, 2004, Scanbuy filed suit against NeoMedia in the Southern
District of New York alleging that NeoMedia infringed Scanbuy's copyrights,
violated the Lanham Act and committed deceptive trade practices and tortious
interference. Scanbuy filed an amended complaint on June 23, 2004. NeoMedia
filed its answer and affirmative defenses on July 23, 2004.
VIRGIN ENTERTAINMENT GROUP
On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore ("Virgin"). The complaint for Patent Infringement and Damages was
filed in the United States District Court for the Northern District of Illinois,
by Baniak Pine & Gannon, NeoMedia's intellectual property law firm. The
complaint claims that Virgin has infringed four of NeoMedia's patents - U.S.
Patents Nos. 5,933,829, 5,978,773, 6,108,656, and 6,199,048. The complaint
alleges that the Virgin Megaplay Stations located in Virgin's Megastores
infringe NeoMedia's patents by using Virgin's Megascan technology to allow
customers to scan UPC codes from in-store CDs and DVDs to access Internet-based
product information, such as music and movie previews, and album and video art.
The complaint also alleges that Virgin had notice of NeoMedia's patents since
the latter part of 2002 or before, yet it continued with its infringing
activities. The complaint seeks compensatory damages for Virgin's infringement,
with those damages to be trebled due to the willful and wanton nature of the
infringement. NeoMedia also seeks to preliminarily and permanently enjoin Virgin
from its infringing activities. Virgin answered NeoMedia's complaint on March 1,
2004.
OTHER LITIGATION
On August 20, 2001, Ripfire, Inc. filed suit against NeoMedia in the San
Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between NeoMedia and Ripfire in May 2001 relating
24
to implementation of the Qode Universal Commerce Solution. On September 6, 2002,
NeoMedia settled this suit for $133,000 of common stock, to be valued at the
time of registration of the shares. NeoMedia's stock was trading at
approximately $0.05 at that time. NeoMedia included for registration 2.7 million
shares in the name of Ripfire in its Form S-1 that was declared effective by the
SEC on February 14, 2003. NeoMedia's stock was trading at approximately $0.02 on
February 14, 2003. The actual number of shares to be issued to Ripfire per the
pricing outlined in the agreement was approximately 9.8 million. On March 31,
2003, NeoMedia issued the 2.7 million shares of common stock that had been
registered in the S-1 to Ripfire. During April 2004, the Company and Ripfire
settled this matter for cash payments totaling $30,000. NeoMedia had a remaining
accrued liability of $15,000 relating to this matter as of June 30, 2004, which
was paid in full during July 2004.
On September 12, 2002, R. R. Donnelley & Sons Company filed a summons in
the Circuit Court of The Twentieth Judicial Circuit in and for Lee County,
Florida, seeking payment of approximately $92,000 in past due professional
services bills, plus interest and attorney fees. During July 2003, NeoMedia
settled the suit for cash payments over a period of approximately one year.
NeoMedia had an accrued liability of approximately $57,000 relating to this
matter as of June 30, 2004.
On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against
NeoMedia seeking payment of approximately $170,000 in past due legal services.
The amount in question is subject to an unsecured promissory note that matured
unpaid on February 28, 2002. On May 1, 2003, NeoMedia settled the suit for cash
payments totaling approximately $196,000, to be paid at a rate of $30,000 per
quarter until the balance is satisfied. NeoMedia had a remaining liability of
approximately $56,000 relating to this matter as of June 30, 2004, which was
included in notes payable.
On April 18, 2003, a former participant in NeoMedia's 2001 self-insured
health plan sued NeoMedia to recover approximately $46,000 in unpaid health
claims from 2001. On December 1, 2003, NeoMedia settled this suit for cash
payments over a period of approximately one year. NeoMedia had a remaining
balance of approximately $16,000 accrued as of June 30, 2004.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (A), (B), (C) AND (D)
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
(a) NeoMedia is in default on an unsecured promissory note payable held by
Merrick & Klimek, P.C. During 2002, Merrick & Klimek, P.C. sued NeoMedia for
nonpayment of the note. During 2003, the two parties settled the suit and
NeoMedia is making installment payments against the balance through December 31,
2004.
25
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 herewith
Officer pursuant to 15 U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Provided herewith
Officer pursuant to 15 U.S.C. Section
7241, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification by Chief Executive Provided herewith
Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by Chief Financial Provided herewith
Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(B) REPORTS ON FORM 8-K:
On April 12, 2004, the Company filed an 8K/A to report the audited
financial statements and proforma financial statements of CSI
International, Inc., which became a wholly-owned subsidiary of the
Company effective February 6, 2004.
26
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 2, 2004 By: /s/ Charles T. Jensen
---------------------------------------
Charles T. Jensen, President, Acting
Chief Executive Officer, Chief
Operating Officer, and Director
Date: August 2, 2004 By: /s/ David A. Dodge
---------------------------------------
David A. Dodge, Vice President,
Chief Financial Officer, and Controller
27