U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10 - Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
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 600, 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 November 8, there were 25,141,298 outstanding shares of the
issuer's Common Stock.
1
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED SONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
ASSETS (Unaudited) (Audited)
Current assets:
Cash and cash equivalents.............................................. $ 9 $ 134
Trade accounts receivable, net of allowance for doubtful
account of $81 in 2002 and $65 in 2001.............................. 3,230 2,583
Costs and estimated earnings in excess of billings on
uncompleted contracts............................................... 6 43
Inventories............................................................ 141 197
Assets held for sale................................................... --- 210
Prepaid expenses and other current assets.............................. 786 582
----------- ------------
Total current assets............................................. 4,172 3,749
Property and equipment, net............................................... 121 205
Capitalized patents, net.................................................. 2,311 2,500
Capitalized and purchased software costs, net............................. 184 1,828
Other long-term assets.................................................... 677 757
----------- ------------
Total assets..................................................... $ 7,465 $ 9,039
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 3,939 $ 2,886
Amounts due under financing agreements................................. 2,375 2,283
Liabilities in excess of assets of discontinued business unit.......... 1,489 ---
Accrued expenses....................................................... 2,351 1,922
Current portion of long-term debt...................................... 160 149
Notes payable.......................................................... 785 750
Sales taxes payable.................................................... 356 135
Billings in excess of costs and estimated earnings on
uncompleted contracts............................................... 2 13
Deferred revenues...................................................... 913 767
Other.................................................................. 10 7
----------- ------------
Total current liabilities........................................ 12,380 8,912
Long-term debt, net of current portion.................................... 268 390
----------- ------------
Total liabilities................................................ 12,648 9,302
----------- ------------
Shareholders' equity:
Preferred stock, $.01 par value, 25,000,000 shares authorized, none issued
and outstanding in 2002, 452,489 issued and outstanding in 2001..... --- 5
Additional paid-in capital, preferred stock............................ --- 878
Common stock, $.01 par value, 200,000,000 shares authorized,
26,782,724 shares issued and 25,141,298 outstanding in 2002
and 17,446,343 shares issued and 15,804,917 outstanding in 2001..... 251 188
Additional paid-in capital............................................. 65,237 63,029
Stock subscription receivable.......................................... --- (240)
Deferred stock-based compensation...................................... (47) ---
Accumulated deficit.................................................... (69,845) (63,344)
Treasury stock, at cost, 201,230 shares of common stock.................. (779) (779)
----------- ------------
Total shareholders' equity....................................... (5,183) (263)
----------- ------------
Total liabilities and shareholders' equity.................... $ 7,465 $ 9,039
=========== ============
The accompanying notes are an integral part of these consolidated financial statements.
2
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
NET SALES:
License fees.............................................................. $ 303 $ 522
Resale of software and technology equipment and service fees.............. 8,149 3,268
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Total net sales..................................................... 8,452 3,790
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COST OF SALES:
License fees.............................................................. 764 1,996
Resale of software and technology equipment and service fees.............. 6,607 2,737
------------- ------------
Total cost of sales................................................. 7,371 4,733
------------- ------------
GROSS PROFIT (LOSS).......................................................... 1,081 (943)
Sales and marketing expenses................................................. 719 2,100
General and administrative expenses.......................................... 3,556 3,409
Research and development costs............................................... 683 280
Loss on impairment of assets................................................. 1,003 2,871
Loss on Digital:Convergence license contract................................. --- 7,354
------------- ------------
Loss from operations......................................................... (4,880) (16,957)
Interest expense (income), net............................................... 99 (30)
------------- ------------
Loss from continuing operations.............................................. (4,979) (16,927)
Discontinued operations (Note 1):
Loss from operations of discontinued business unit...................... --- (3,653)
Loss on disposal of discontinued business unit, including provision of
$424 in 2001 for operating losses during phase-out period............. (1,523) (3,197)
------------- ------------
NET LOSS..................................................................... $ (6,502) $ (23,777)
============= ============
NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
BASIC AND DILUTED....................................................... $ (0.24) $ (1.12)
============= ============
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS-
BASIC AND DILUTED....................................................... $ (0.07) $ (0.45)
============= ============
NET LOSS PER SHARE--BASIC AND DILUTED......................................... $ (0.31) $ (1.57)
============= ============
Weighted average number of common shares--basic and diluted .................. 20,736,080 15,142,312
============= ============
The accompanying notes are an integral part of these consolidated financial statements.
3
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
NET SALES:
License fees.............................................................. $ 150 $ 92
Resale of software and technology equipment and service fees.............. 3,254 816
------------- ------------
Total net sales..................................................... 3,404 908
------------- ------------
COST OF SALES:
License fees.............................................................. 80 668
Resale of software and technology equipment and service fees.............. 2,742 743
------------- ------------
Total cost of sales................................................. 2,822 1,411
------------- ------------
GROSS PROFIT (LOSS).......................................................... 582 (503)
Sales and marketing expenses................................................. 207 721
General and administrative expenses.......................................... 996 818
Research and development costs............................................... 150 137
Loss on impairment of assets................................................. --- 2,871
Loss from operations......................................................... (771) (5,050)
Interest expense (income), net............................................... 2 22
------------- ------------
Loss from continuing operations.............................................. (773) (5,072)
Discontinued operations (Note 1):
Loss from operations of discontinued business unit...................... --- (1,041)
Loss on disposal of discontinued business unit, including provision of
$424 in 2001 for operating losses during phase-out period --- (3,197)
------------- ------------
NET LOSS..................................................................... $ (773) $ (9,310)
============= ============
NET LOSS PER SHARE FROM CONTINUING OPERATIONS-
BASIC AND DILUTED....................................................... $ (0.03) $ (0.33)
============= ============
NET LOSS PER SHARE FROM DISCONTINUED OPERATIONS-
BASIC AND DILUTED....................................................... $ --- $ (0.27)
============= ============
NET LOSS PER SHARE--BASIC AND DILUTED......................................... $ (0.03) $ (0.60)
============= ============
Weighted average number of common shares--basic and diluted .................. 22,979,755 15,570,693
============= ==========
The accompanying notes are an integral part of these consolidated financial statements.
4
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................... $ (6,502) $ (23,777)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 938 2,932
Loss on disposal of discontinued business unit............................. 1,523 2,773
Loss on impairment of assets............................................... 1,003 2,871
Effect of Digital Convergence write-off.................................... --- 7,354
Preferred stock issued to pay advertising expense.......................... --- 882
Expense associated with warrant repricing.................................. 38 845
Stock options and warrants granted for services............................ 383 94
Changes in operating assets and liabilities:
Trade accounts receivable............................................... (610) 1,299
Prepaid - Digital:Convergence........................................... --- 118
Other current assets.................................................... 491 (167)
Accounts payable, amounts due under financing agreements, liabilities in
excess of assets of discontinued business unit, and accrued expenses 1,916 (235)
Deferred revenue........................................................ 148 174
Other current liabilities............................................... 3 (11)
------------ -----------
Net cash used in operating activities................................ (669) (4,848)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of patent costs, software development and purchased
intangible assets (24) (2,939)
(Increase)/decrease in value of life insurance policies....................... 80 (3)
Acquisition of property and equipment......................................... --- (81)
------------ -----------
Net cash used in investing activities................................ 56 (3,023)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock
net of $0 issuance costs in 2002 and $10 in 2001......................... 198 1,637
Net proceeds from exercise of stock warrants.................................. 43 1,034
Net proceeds from exercise of stock options................................... 272 139
Net proceeds from release of restricted cash held for line of credit.......... --- 750
Net proceeds from issuance of notes payable................................... 21 500
Issuance of stock-based deferred compensation................................. (46) ---
Repayments on notes payable and long-term debt................................ --- (352)
------------ -----------
Net cash provided by financing activities............................ 488 3,708
------------ -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS....................................................... (125) (4,163)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.................................. 134 4,453
------------ -----------
CASH AND CASH EQUIVALENTS, SEPTEMBER 30, 2001................................. $ 9 $ 290
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the nine months ended September 30 (net)... $ (66) $ (31)
Non-cash investing and financing activities:
Net assets acquired as part of Qode purchase agreement
in exchange for common stock and forgiveness of note................. --- 1,800
Issuance costs for shares issued through private placements.............. --- 10
Shares earned by Qode under purchase agreement........................... --- 13
Common stock issued to settle debt....................................... 27 ---
Cancellation of common stock issued
in 2001 to offset stock subscription receivable...................... (240) ---
Net effect of issuance and subsequent
cancellation of common stock underlying notes receivable ............ (190)
Accounts payable converted to note payable............................. --- 170
The accompanying notes are an integral part of these 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. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles 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,
2001. 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 September 30, 2002, and the results of operations for the three-
and nine-month periods ended September 30, 2002 and 2001, and cash flows for the
nine-month period ended September 30, 2002 and 2001. The results of operations
for the three- and nine-month periods ended September 30, 2002 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 Service
(NISS) and NeoMedia Consulting and Integration Service (NCIS).
NEOMEDIA INTERNET SWITCHING SERVICE (NISS)
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 the Company's
physical world to Internet core technology, including its 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)
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 identify prospects for custom applications
based on the Company'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.
RECLASSIFICATIONS
Certain amounts in the 2001 condensed consolidated financial statements have
been reclassified to conform to the 2002 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
On July 21, 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations", and No. 142 (SFAS No. 142), "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for goodwill
and other intangible assets acquired in a business combination at acquisition.
SFAS No. 141 requires the purchase method of accounting to be used for all
business combinations initiated after June 30, 2001 and establishes specific
criteria for the recognition of intangible assets separately from goodwill; SFAS
No. 142 addresses financial accounting and reporting for goodwill and other
6
intangible assets subsequent to their acquisition. SFAS No. 142 provides that
goodwill and intangible assets which have indefinite useful lives will not be
amortized, but rather will be tested at least annually for impairment. It also
provides that intangible assets that have finite useful lives will continue to
be amortized over their useful lives, but those lives will no longer be limited
to forty years. SFAS No. 141 is effective for all business combinations after
June 30, 2001. The provisions of SFAS No. 142 are effective beginning January 1,
2002. The Company has implemented the provisions of SFAS No. 141 and No. 142 and
has concluded that the adoption does not have a material impact on the Company's
financial statements.
In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
The statement provides a single accounting model for long-lived assets to be
disposed of. New criteria must be met to classify the asset as an asset
held-for-sale. This statement also focuses on reporting the effects of a
disposal of a segment of a business. This statement is effective for fiscal
years beginning after December 15, 2001. The Company does not expect the
adoption to have a material impact to its financial position or results of
operations.
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 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. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.
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. The Company does not expect the adoption of FASB No. 146 to have a
material impact on the Company's financial position or results of operations.
PURCHASE AND DISPOSAL OF QODE.COM, INC.
On March 1, 2001, NeoMedia purchased all of the net assets of Qode.com,
Inc. (Qode), except for cash. Qode is a development stage company, as defined in
Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting and
Reporting By Development Stage Enterprises". In consideration for these assets,
NeoMedia issued 274,699 shares of common stock, valued at $1,359,760.
Additionally, the Company placed in escrow 1,676,500 shares of its common stock
valued at $8,298,675 at the time of issuance. Stock issued was valued at $4.95
per share, which is the average closing price for the few days before and after
the measurement date of March 1, 2001. As of December 31, 2001 the Company had
released 35,074 shares of common stock from escrow for performance for the
period March 1, 2001 to August 31, 2001. The remaining 1,641,426 shares are
being held in escrow pending the results of negotiations between the Company and
Qode with respect to the performance of the Qode business unit for the period
March 1, 2001 through February 28, 2002. As a result, all such shares may be
released to Qode.
The Company accounted for this purchase using the purchase method of
accounting in accordance with Accounting Principles Board Opinion No. 16,
"Business Combinations". The excess fair market value of the net assets acquired
7
over the purchase price was allocated to reduce proportionately the values
assigned to noncurrent assets. The accompanying consolidated statements of
operations include the operations of Qode from March 1, 2001, through September
30, 2002.
8
The purchase price at the original purchase date was calculated and allocated as
follows:
Original Shares: 274,699 issued at $4.95 1,360,000
Contingent shares: 35,074 issued at $0.39 $ 13,000
--------------
Total purchase price $ 1,373,000
--------------
PURCHASE PRICE ALLOCATED AS FOLLOWS:
ASSETS PURCHASED
Trade receivables $ 5,000
Inventory 144,000
Prepaid expenses 49,000
Furniture & fixtures 913,000
Capitalized development costs 2,132,000
Capitalized software 83,000
Refundable deposits - non-current 38,000
LIABILITIES ASSUMED
Accounts payable (981,000)
Forgiveness of note receivable (440,000)
Interest receivable (10,000)
Current portion of long-term debt (117,000)
Note payable (24,000)
Capitalized lease obligation (419,000)
--------------
Total purchase price allocated $ 1,373,000
==============
During the third quarter of 2001, the Company issued an additional 35,074
shares under the terms of the earn-out with Qode.com, Inc. (see explanation
below). The value of these shares in the amount of $13,000 was allocated $9,000
to capitalized development costs and $4,000 to furniture and fixtures.
CONTINGENT CONSIDERATION
In accordance with the purchase of the assets of Qode.com, Inc., NeoMedia
has placed 1,676,500 shares of its common stock in escrow for a period of one
year, subject to downward adjustment, based upon the achievement of certain
performance targets over the period of March 1, 2001 to February 28, 2002. As of
March 1, 2002, these performance targets were not met and therefore, the
remaining 1,641,426 shares held in escrow were not issued. The criteria used to
determine the number of shares released from escrow is a weighted combination of
revenue, page views, and fully allocated earnings before taxes relating to the
Qode Universal Commerce Solution.
At the end of each of certain interim periods as outlined in the purchase
agreement, the number of cumulative shares earned by Qode.com is calculated
based on revenue and page views and the shares are released. The resulting
financial impact on NeoMedia is a proportionate increase in the long-term assets
acquired from Qode, with a corresponding increase in depreciation expense from
that point forward. The amount of the increase in long-term assets is dependent
upon the number of shares released from escrow, as well as the value of NeoMedia
stock at the time of measurement. The first such measurement date was July 1,
2001. At the end of the 12-month measurement period (February 28, 2002), the
number of shares issued to Qode under the earn-out was 309,773, allocated as
outlined in the table above. The remaining 1,641,426 shares are being held in
escrow pending the results of negotiations between the Company and Qode with
respect to a disagreement over the performance of, and investment in, the Qode
business unit for the period March 1, 2001 through February 28, 2002. As a
result, all such shares may be released to Qode.
9
INTANGIBLE ASSETS
Intangible assets acquired from Qode.com include:
i). Purchased software licenses relating to the development of the Qode
Universal Commerce Solution, amortized on a straight-line basis over
three years.
ii). Capitalized software development costs relating to the development
of the Qode Universal Commerce Solution.
OTHER
On May 31, 2001, three creditors of Qode.com, Inc. filed in the U.S.
Bankruptcy Court an involuntary bankruptcy petition for Qode.com, Inc. On July
22, the case was converted to Chapter 7, U.S. Code.
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 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 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.
The loss for discontinued operations during the phase-out period from
August 31, 2001 (measurement date) to September 30, 2001 was $439,000. No
further loss is anticipated.
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 September 30, 2002, the Company had $1.5 million of liabilities
relating to the Qode system on its books.
IMPAIRMENT OF PAPERCLICK ASSET
During the three-month period ending June 30, 2002, the Company recognized
an impairment charge of $1.0 million relating to its PaperClick
physical-world-to-internet software solution. Due to capital constraints, the
Company is not currently able to devote full-time resources and infrastructure
to commercializing the technology. The Company intends to re-focus sales and
marketing efforts surrounding the product upon the receipt of sufficient
capital.
OTHER EVENTS
During January 2002, certain of the Company'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, the Company filed its response claiming that the Company 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.
During January 2002, NeoMedia announced that it had entered into an
agreement with Baniak Pine and Gannon, a law firm specializing in patent
licensing and litigation, under which the firm will represent NeoMedia in
seeking out potential licensees of the Company's patent portfolio.
During February 2002, the Company sold 19 million shares of its common
stock to five individuals and two institutional unrelated parties at $0.17 per
share in exchange for promissory notes maturing at the earlier of i) August 12,
2002, or ii) 30 days from registration of the shares. Assuming full payment of
the notes, proceeds from this transaction would have been $3,230,000, of which
$190,000 par value was paid during the first quarter of 2002. During August
2002, the
10
notes matured without payment, and the Company subsequently cancelled the 19
million shares issued in connection with such notes. The Company has accrued a
liability in the third quarter of $190,000 relating to the par value paid in
connection with the issuance of the shares.
During February 2002, the Company issued 1,646,987 shares of its common
stock to two separate vendors as settlement of past due liabilities and future
payments relating to equipment leases.
During March 2002, the Company repriced 1.2 million of its common stock
warrants for a period of six months. During the term of the warrant repricing
program, participating holders are entitled to exercise qualified warrants at an
exercise price per share equal to the greater of (1) $0.12 or (2) 50% of the
last sale price of shares of Common Stock on the OTCBB, on the trading date
immediately preceding the date of exercise. Approximately 370,000 warrants were
exercised in connection with the program, and the Company recognized
approximately $38,000 in expense relating to the repricing during the nine
months ended September 30, 2002.
On March 20, 2002, IOS Capital, Inc. filed a summons seeking full payment
of approximately $38,700 relating to past due and future payments under an
office equipment lease. The Company returned the equipment and settled the
liability for cash payments totaling $30,000.
During April 2002, the Company repriced 7.4 million of its common stock
options held by employees, consultants and advisors for a period of six months.
During the term of the option repricing program, participating holders are
entitled to exercise subject options at an exercise price per share equal to the
greater of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock
on the OTCBB, on the trading date immediately preceding the date of exercise.
Shortly after the announcement of the repricing program, the market price for
the Company's common stock fell below $0.12, and has not closed above $0.12
since. As a result, no options were exercised under the terms of the program and
the Company did not recognize any expense relating to the repricing program
during the nine months ended September 30, 2002 due to immaterial effect on the
financial statements.
On May 16, 2002, the Company received notification from the Nasdaq Listing
Qualifications Panel that its shares were delisted effective May 17, 2002, due
to failure to meet either the minimum net tangible assets ($2,000,000) or
minimum stockholders' equity ($2,500,000) criteria for continued listing. The
Company's shares are now trading on the Over-the-Counter Bulletin Board
("OTCBB").
During May 2002, the Company settled its lawsuit with William Goins, its
former President and Chief Operating Officer (see "Legal Proceedings"). The
Company is obligated to make cash payments of $90,000 directly to the plaintiff
from 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, Mr. Goins was granted 360,000 options to purchase
shares of NeoMedia common stock at an exercise price of $0.08. These options
were valued at approximately $36,000. The Company had a remaining liability of
approximately $72,000 as of September 30, 2002.
During May 2002, the Company entered into an Equity Line of Credit
Agreement with Cornell Capital Partners LP ("Cornell"). Under the terms of the
agreement, Cornell has agreed to purchase up to $5.0 million of NeoMedia common
stock over the next two years at the Company's discretion.
During May 2002, the Company granted a personal, worldwide, non-exclusive,
limited intellectual property licensing agreement to Brandkey Systems
Corporation. Brandkey will pay the Company $50,000 upfront licensing fee plus
2.5 % of all royalty-based revenues earned by Brandkey, with minimum royalties
of $25,000 in 2003, $50,000 in 2004, and $75,000 in 2005 and after. Royalty
revenue earned by the Company may not exceed $1.0 million in any given year. The
Company recognized approximately $16,000 in revenue relating to this contract
during the nine months ended September 20, 2002.
On June 6, 2002, the Company held its annual meeting of shareholders, at
which shareholders approved proposals to: i.) amend NeoMedia's Certificate of
Incorporation to increase the number of shares of authorized common stock, par
value $.01, from 50,000,000 to 200,000,000 shares and to increase the number of
shares of authorized preferred stock, par value $0.01, from 10,000,000 to
25,000,000; and ii.) implement the 2002 Stock Option Plan, under which the
Company is authorized to grant to employees, directors, and consultants up to
10,000,000 options to purchase shares of its common stock.
11
On June 26, 2002, the Company announced that its chairman, Charles W.
Fritz, had been granted a 90-day leave of absence from his responsibilities as
Chief Executive Officer by the company's Board, which, concurrently, elected
Charles T. Jensen president and Chief Operating Officer, and also named him
acting CEO. The Company also announced that it had promoted David Dodge, its
Controller, to Vice President and Chief Financial Officer. On September 23,
2002, Mr. Fritz officially resigned his duties as Chief Executive Officer. He
will remain Chairman of the Board of Directors and a part-time executive of the
Company. Mr. Jensen has assumed the role of acting CEO.
On August 9, 2002, the Company settled its lawsuit with 2150 Western Court
L.L.C., the property manager for the Company's Lisle, IL, office, in which 2150
Western Court L.L.C. was seeking payment of past due rent plus possession of the
premises. 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, the Company
issued 900,000 shares of its common stock to 2150 Western Court L.L.C. The
Company had a liability of approximately $61,000 relating to this matter as of
September 30, 2002.
2. LIQUIDITY AND CAPITAL RESOURCES
The accompanying unaudited financial statements have been prepared
assuming the Company will continue as a going concern. Accordingly, the
financial statements do not include any adjustments that might result from the
Company's inability to continue as a going concern. Based on current cash
balances and operating budgets, the Company believes it will need to raise
operating capital in the next 30 days. If the Company's financial resources are
insufficient, the Company may be forced to seek protection from its creditors
under the United States Bankruptcy Code or analogous state statutes unless it is
able to engage in a merger or other corporate finance transaction with a better
capitalized entity. The Company cannot predict whether additional financing will
be available, its form, whether equity or debt, or be in another form, or if the
Company will be successful in identifying entities with which it may consummate
a merger or other corporate finance transactions.
3. GOING CONCERN
The accompanying 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 September 30, 2002, the Company has not been able to generate
significant 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 the
Company 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 an offering of its common stock or alternative
sources of financing. However, no assurances can be given as to the success of
these plans. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
4. SUBSEQUENT EVENTS
On October 28, 2002, the Company settled its lawsuit with Wachovia Bank,
N.A., the owner of the building in which the Company's headquarters is located.
Wachovia was seeking payment of past due rents under its lease agreement with
the Company. The settlement calls for cash payments of past due rents of
approximately $250,000 over a period of 16 months. The Company 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. The Company has accrued a liability of approximately
$250,000 relating to this matter as of September 30, 2002.
On November 12, 2002, the Company settled the lawsuit with its former
General Counsel over payment of the 2000 executive incentive, severance and
unpaid vacation days in the amount of approximately $154,000. The settlement
calls for cash payments totaling approximately $100,000 over a period of 10
months, plus 250,000 vested options to purchase shares of the Company's common
12
stock at an exercise price of $0.01 and a term of five years.
During November 2002, the Company 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; William E. Fritz, outside
director; and James J. Keil, outside director. The notes bear interest at a rate
of 15% per annum, and mature at the earlier of i.) four months, or ii.) that
date the shares underlying the Cornell Equity Line of Credit are registered with
the SEC. The notes are convertible, at the option of the holder, into either
cash or shares of the Company's common stock at a 30% discount to either market
price upon closing, or upon conversion, whichever is lower. The Company will
also grant to the holders an additional 192,000 shares of the Company's common
stock and 60,000 warrants to purchase shares of the Company's common stock at
$0.03 per share, with a term of three years. In the event the Company defaults
on the note, the Company will issue an additional 1,404,330 shares of its common
stock to the note holders. The notes are secured by the Company's intellectual
property, which is subject to first lien by AirClic, Inc. (see "Legal
Proceedings").
On November 12, 2002, the Company and Cornell terminated the May 2002
Equity Line of Credit Agreement and entered into a new Equity Line of Credit
Agreement with Cornell under which Cornell agreed to purchase up to $10.0
million of NeoMedia's common stock and over the next two years, 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 will be 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
will pay 5% of the gross proceeds of each purchase to Cornell as a commission.
According to the terms of the agreement, the Company cannot draw on the line of
credit until the shares underlying the agreement are registered for trading with
the Securities and Exchange Commission.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Beginning in the second quarter of 2002, the Company's 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 the Company's end-users, competitive advantage for their business partners
and return-on-investment for their investors. To this end, the Company signed an
intellectual property license with Brandkey Systems Corporation, the fourth
intellectual property license into which the Company has entered. The Company
also continued its movement into the Storage Area Network (SAN) market through
its NeoMedia Consulting and Integration Services (NCIS) business unit.
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.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2001
NET SALES. Total net sales for the nine months ended September 30, 2002
were $8.5 million, which represented a $4.7 million, or 124%, increase from $3.8
million for the nine months ended September 30, 2001. This increase primarily
resulted from revenues relating to the Company's newly created SAN practice in
2002. The Company will continue to pursue additional sales of SAN products and
services, and to the extent that such sales can be made, the Company expects
total net sales to more closely resemble the results for the first nine months
of 2002, rather than the first nine months of 2001.
LICENSE FEES. License fees were $0.3 million for the nine months ended
September 30, 2002, a decrease of $0.2 million or 40%, compared with $0.5
million for the nine months ended September 30, 2001. The decrease was due to
lower sales of internally developed software licenses in 2002. Demand for such
licenses has historically fluctuated from year to year. The Company intends to
continue to increase sales efforts of its internally developed software licenses
in the future.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of
software and technology equipment and service fees increased by $4.8 million, or
145%, to $8.1 million for the nine months ended September 30, 2002, as compared
to $3.3 million for the nine months ended September 30, 2001. This increase
primarily resulted from revenues relating to the Company's newly created SAN
practice in 2002. The Company will continue to pursue additional sales of SAN
products and services.
COST OF SALES. Cost of license fees was $0.8 million for the nine months
ended September 30, 2002, a decrease of $1.2 million, or 150%, compared with
$2.0 million for the nine months ended September 30, 2001. The decrease resulted
from reduced amortization expense of capitalized development costs in 2002
relating to the PaperClick, MLM/Affinity, and Qode products that were written
off during 2002. Cost of resales was $6.6 million for the nine months ended
September 30, 2002, an increase of $3.9 million, or 144%, compared with $2.7
million for the nine months ended September 30, 2001. The increase resulted form
increased resales in 2002 compared with 2001. Cost of resales as a percentage of
related resales was 81% in 2002 and 84% in 2001. The Company expects the cost of
resales as a percentage of related resales to remain relatively stable in the
next 12 months.
14
GROSS PROFIT. Gross profit was $1.1 million for the nine months ended
September 30, 2002, an increase of $2.0 million, or 222%, compared with a
negative gross profit of ($0.9) million in 2001. The increase was due to higher
SAN-related sales in 2002, as well as lower software amortization costs in 2002
due to the write-off of Qode-related assets at the end of 2001, and PaperClick
assets in the second quarter of 2002.
SALES AND MARKETING. Sales and marketing expenses were $0.7 million for
the nine months ended September 30, 2002, compared to $2.1 million for the nine
months ended September 30, 2001, a decrease of $1.4 million or 67%. This
decrease resulted from a reduction in sales and marketing personnel following
the Company's cost-reduction initiative started in the second half of 2001. The
Company does not expect sales and marketing expenses to fluctuate dramatically
from 2002 levels over the next 12 months.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $3.6
million for the nine months ended September 30, 2002 compared with general and
administrative expenses of $3.4 million for the nine months ended September 30,
2001, an increase of $0.2 million or 6%. The increase resulted primarily from
increased legal and professional service. The Company expects general and
administrative expense to decrease slightly in the next 12 months due to reduced
professional service expenses, lease restructuring, and other cost reduction
efforts.
RESEARCH AND DEVELOPMENT. During the nine months ended September 30, 2002,
NeoMedia charged to expense $0.7 million of research and development costs,
compared to $0.3 million for the nine months ended September 30, 2001, an
increase of $0.4 million or 133%. The increase is primarily due to the fact that
the Company was capitalizing the majority of its product development costs in
2001 as the Qode Commerce Solution was being implemented. The implementation was
cancelled and the product discontinued in the third quarter of 2001. During the
third quarter of 2002, development resources were devoted primarily to system
maintenance. The Company expects research and development costs will decline
over the next 12 months.
LOSS ON IMPAIRMENT OF ASSETS. During the nine months ended September 30,
2002, the Company recognized a loss on impairment of assets of $1.0 million for
the write-off capitalized development costs relating to its PaperClick
physical-world-to-internet software. Due to capital constraints, the Company is
not currently able to devote full-time resources and infrastructure to
commercializing the technology. The Company intends to re-focus sales and
marketing efforts surrounding the product upon the receipt of sufficient
capital. The Company does not expect any additional losses from asset impairment
in the next 12 months.
WRITE-OFF OF DIGITAL CONVERGENCE LICENSE CONTRACT. During the second
quarter of 2001, the Company took a $7.4 million charge to income to write off
the net assets associated with the Digital Convergence intellectual property
license contract. There were no charges related to the contract in 2002. No
charges are expected in the next 12 months.
INTEREST EXPENSE/(INCOME), NET. Interest expense/(income) consists
primarily of interest paid to creditors as part of financed purchases, notes
payable and NeoMedia's asset-based collateralized line of credit net of interest
earned on cash equivalent investments. Interest expense increased by $129,000 to
$99,000 for the nine months ended September 30, 2002 from income of $(30,000)
for the nine months ended September 30, 2001, due to lower cash balances in
2002, as well as interest charges in 2002 relating to notes payable not held
during 2001. The Company expects net interest expense similar to 2002 levels
over the next 12 months, due to capital constraints and borrowing costs.
LOSS FROM CONTINUING OPERATIONS. The loss from continuing operations for
the nine months ended September 30, 2002 was $5.0 million, which represented a
$12.0 million, or 71% decrease from a $17.0 million loss for the nine months
ended September 30, 2001. The decrease resulted primarily from the $7.4 million
write-off of the Digital Convergence license contract during the second quarter
of 2001, combined with a loss on impairment of the Company's MLM/Affinity
product line of $2.9 million in 2001 and decrease of sales and marketing expense
by $1.4 million due to reduction of sales force.
LOSS FROM OPERATIONS OF DISCONTINUED BUSINESS UNITS. The Company
discontinued operations of its Qode business unit in 2001, resulting in a loss
from operations of discontinued business units of $3.7 million for the nine
months ended September 30, 2001. The business unit's assets were purchased in
March 2001 and the implementation was cancelled during the second quarter of
2001. The Company does not expect any charges relating to the Qode business unit
in the next 12 months.
15
LOSS ON DISPOSAL OF DISCONTINUED BUSINESS UNITS. During the third quarter
of 2001, the Company discontinued operations of its Qode business unit,
resulting in a loss on disposal of discontinued business unit of $3.2 million.
The remaining Qode system assets were held for sale subject to a letter of
intent with the Finx Group, Inc. As of September 30, 2001, December 31, 2001,
and March 31, 2002, the Company recorded on its consolidated balance sheet net
assets held for sale in the amount of $210,000, which was the estimated value to
be received by the Company from the Finx Group in exchange for the Qode assets.
During the second quarter of 2002, the Finx group withdrew its letter of intent.
As a result, during the nine months ended September 30, 2002, the Company
recognized an additional loss on disposal of discontinued business unit of $1.5
million to write off the remaining Qode-related assets. The Company does not
expect any charges relating to the Qode business unit in the next 12 months.
NET LOSS. The net loss for the nine months ended September 30, 2002 was
$6.5 million, which represented a $17.3 million, or 73% decrease from a $23.8
million loss for the nine months ended September 30, 2001. The decrease
primarily resulted from the $7.4 million write-off of the Digital Convergence
license contract during the second quarter of 2001, a loss on impairment of the
Company's MLM/Affinity product line of $2.9 million in 2001, loss from
discontinued Qode operations of $6.9 million in 2001, and a reduction in
overhead expenses resulting from a reduction in force initiated in the third
quarter of 2001.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2001
NET SALES. Total net sales for the three months ended September 30, 2002
were $3.4 million, which represented a $2.5 million, or 278%, increase from $0.9
million for the three months ended September 30, 2001. This increase primarily
resulted from revenues relating to a $1.7 million equipment and software order
in 2002. The Company intends to continue to pursue additional software and
equipment sales, as well as sales of its SAN products and services, and to the
extent that such sales can be made, the Company expects future net sales to more
closely resemble the results for the first nine months of 2002, rather than the
first nine months of 2001.
LICENSE FEES. License fees were $0.2 million for the three months ended
September 30, 2002, an increase of $0.1 million or 100%, compared with $0.1
million for the three months ended September 30, 2001. The increase was due to
higher sales of internally developed software licenses in 2002. Demand for such
licenses has historically fluctuated from year to year. The Company intends
continue to increase sales efforts of its internally developed software licenses
in the future.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of
software and technology equipment and service fees increased by $2.5 million, or
313%, to $3.3 million for the three months ended September 30, 2002, as compared
to $0.8 million for the three months ended September 30, 2001. This increase
primarily resulted from revenues relating to a $1.7 million equipment and
software order in 2002. The Company intends to continue to pursue additional
software and equipment sales, as well as sales of its SAN products and services.
COST OF SALES. Cost of license fees was $0.1 million for the three months
ended September 30, 2002, a decrease of $0.6 million, or 86%, compared with $0.7
million for the three months ended September 30, 2001. The decrease resulted
from reduced amortization expense of capitalized development costs in 2002
relating to the PaperClick, MLM/Affinity, and Qode products that were written
off during 2002. Cost of resales was $2.7 million for the nine months ended
September 30, 2002, an increase of $2.0 million, or 286%, compared with $0.7
million for the nine months ended September 30, 2001. The increase resulted form
increased resales in 2002 compared with 2001. Cost of resales as a percentage of
related resales for the three months ended September 30 was 84% in 2002 and 91%
in 2001. This decrease is primarily due to a higher sales mix of higher-margin
equipment, software, and services in 2002.
GROSS PROFIT. Gross profit was $0.6 million for the three months ended
September 30, 2002, an increase of $1.1 million, or 220%, compared with a
negative gross profit of ($0.5) million in 2001. The increase was due to higher
SAN-related sales in 2002, as well as lower software amortization costs in 2002
due to the write-off of Qode-related assets at the end of 2001, and PaperClick
assets in the second quarter of 2002
16
SALES AND MARKETING. Sales and marketing expenses were $0.2 million for
the three months ended September 30, 2002, compared to $0.7 million for the
three months ended September 30, 2001, a decrease of $0.5 million or 71%. This
decrease resulted from a reduction in sales and marketing personnel resulting
from the Company's cost-reduction initiative started in the second half of 2001.
The Company does not expect sales and marketing expenses to fluctuate
dramatically from 2002 levels over the next 12 months.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $0.2 million, or 25%, to $1.0 million for the three months ended September
30, 2002, compared to $0.8 million for the three months ended September 30,
2001. The increase resulted primarily from increased legal and professional
service. The Company expects general and administrative expense to decrease
slightly in the next 12 months due to reduced professional service expenses,
lease restructuring, and other cost reduction efforts.
RESEARCH AND DEVELOPMENT. During the three months ended September 30,
2002, NeoMedia charged to expense $150,000 of research and development costs, an
increase of $13,000, or 9%, compared to $137,000 for the three months ended
September 30, 2001. The company expects research and development costs to remain
materially constant over the next 12 months.
LOSS ON IMPAIRMENT OF ASSETS. During the three months ended September 30,
2002, the Company did not recognize a loss on impairment of assets. During the
three months ended September 30, 2001, the Company recognized an impairment loss
of $2.9 million relating to its MLM/Affinity product line. The Company does not
expect any additional losses from asset impairment in the next 12 months.
INTEREST EXPENSE/(INCOME), NET. Interest expense/(income) consists
primarily of interest paid to creditors as part of financed purchases, notes
payable and NeoMedia's asset-based collateralized line of credit net of interest
earned on cash equivalent investments. Interest expense decreased by $20,000 to
$2,000 for the three months ended September 30, 2002 from $22,000 for the three
months ended September 30, 2001. The Company expects net interest expense
similar to 2002 levels over the next 12 months, due to capital constraints and
borrowing costs.
LOSS FROM CONTINUING OPERATIONS. The loss from continuing operations for
the three months ended September 30, 2002 was $0.8 million, which represented a
$4.3 million, or 84% decrease from a $5.1 million loss for the three months
ended September 30, 2001. The decrease resulted primarily from an impairment
loss of $2.9 million relating to the Company's MLM/Affinity product line during
the second quarter of 2001, combined with continued company-wide cost reduction
efforts during the last quarter of 2001 and the first three quarters of 2002.
LOSS FROM OPERATIONS OF DISCONTINUED BUSINESS UNITS. The Company
discontinued operations of its Qode business unit in 2001, resulting in a loss
from operations of discontinued business units of $1.0 million for the three
months ended September 30, 2001. The business unit's assets were purchased in
March 2001 and the implementation was cancelled during the second quarter of
2001. The Company does not expect any charges relating to the Qode business unit
in the next 12 months.
NET LOSS. The net loss for the three months ended September 30, 2002 was
$0.8 million, which represented an $8.5 million, or 91% decrease from a $9.3
million loss for the three months ended September 30, 2001. The decrease
resulted from the $7.4 million write-off of the Digital Convergence license
contract and an impairment loss of $2.9 million relating to the Company's
MLM/Affinity product line during the second quarter of 2001.
FINANCIAL CONDITION
As of September 30, 2002, the Company's cash balance was $9,000 compared
to $10,000 at June 30, 2002 and $134,000 at December 31, 2001.
Net cash used in operating activities for the nine months ended September
30, 2002 and 2001, was $0.7 million and $4.8 million, respectively. During the
nine months ended September 30, 2002, trade accounts receivable increased $0.6
million, while accounts payable inclusive of amounts due under financing
agreements, liabilities in excess of assets of discontinued business unit,
accrued expenses and deferred revenue increased $2.0 million. During the nine
17
months ended September 30, 2001, trade accounts receivable decreased $1.3
million, while accounts payable inclusive of amounts due under financing
agreements, accrued expenses and deferred revenue decreased $0.1 million.
NeoMedia's net cash flow from/(used in) investing activities for the nine months
ended September 30, 2002 and 2001 was $0.1 and ($3.0) million, respectively.
Net cash provided by financing activities for the nine months ended
September 30, 2002 and 2001, was $0.5 million and $3.7 million, respectively.
The decrease was due to $1.6 million proceeds for the sale of common stock and
$1.2 million from the exercise of stock options and warrants in 2001. During the
nine months ended September 30, 2002, the Company sold 19 million shares of its
common stock at $0.17 per share in exchange for promissory notes maturing at the
earlier of i), August 12, 2002, or ii) 30 days from registration of the shares.
During August 2002, the notes matured without payment, and the Company
subsequently cancelled the 19 million shares issued in connection with such
notes. The Company has accrued a liability in the third quarter of $190,000
relating to the par value paid in connection with the issuance of the shares.
The accompanying unaudited financial statements have been prepared
assuming the Company will continue as a going concern. Accordingly, the
financial statements do not include any adjustments that might result from the
Company's inability to continue as a going concern. Based on current cash
balances and operating budgets, the Company believes it will need to raise
operating capital in the next 30 days. If the Company's financial resources are
insufficient, the Company may be forced to seek protection from its creditors
under the United States Bankruptcy Code or analogous state statutes unless it is
able to engage in a merger or other corporate finance transaction with a better
capitalized entity. The Company cannot predict whether additional financing will
be available, its form, whether equity or debt, or be in another form, or if the
Company will be successful in identifying entities with which it may consummate
a merger or other corporate finance transactions.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency exchange, interest rates and a
decline in the stock market. The Company does not enter into derivatives or
other financial instruments for trading or speculative purposes. The Company has
limited exposure to market risks related to changes in interest rates and
foreign currency exchange rates. The Company does not currently invest in equity
instruments of public or private companies for business or strategic purposes.
The Company generally conducts business, including sales to foreign
customers, in U.S. dollars, and as a result, has limited foreign currency
exchange rate risk. The effect of an immediate 10 percent change in foreign
exchange rates would not have a material impact on the Company's financial
condition or results of operations.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within the 90 days prior
to the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of its disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. This evaluation was done under
the supervision and with the participation of the Company's President and Chief
Financial Officer. Based upon that evaluation, they concluded that the Company's
disclosure controls and procedures are effective in gathering, analyzing and
disclosing information needed to satisfy the Company's disclosure obligations
under the Exchange Act.
CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
those controls since the most recent evaluation of such controls.
18
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The market for software products is
generally characterized by rapidly changing technology, frequent new product
introductions and changes in customer requirements which can render existing
products obsolete or unmarketable. The statements contained in this document
that are not historical facts may be forward-looking statements (as such term is
defined in the rules promulgated pursuant to the Securities Exchange Act of
1934) that are subject to a variety of risks and uncertainties more fully
described in the Company's filings with the Securities and Exchange Commission.
The forward-looking statements are based on the beliefs of the management of the
Company, as well as assumptions made by, and information currently available to,
the Company's management. Accordingly, these statements are subject to
significant risks, uncertainties and contingencies which could cause the
Company's actual growth, results, performance and business prospects and
opportunities to differ materially from those expressed in or implied by, any
such forward-looking statements. Wherever possible, words such as "anticipate,"
"plan," "expect," "believe," "estimate," and similar expressions have been used
to identify these forward-looking statements, but are not the exclusive means of
identifying such statements. These risks, uncertainties and contingencies
include, but are not limited to, the Company's limited operating history on
which expectations regarding its future performance can be based, competition
from, among others, high technology companies that have greater financial,
technical and marketing resources and distribution capabilities than the
Company, the availability of sufficient capital, the effectiveness of the
Company's efforts to control operating expenses, the Company's ability to sell
its products and general economic and business conditions affecting the Company
and its customers in the United States and other countries in which the Company
sells and anticipates to sell its products and services. The Company does not
undertake any obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
19
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On September 6, 2001, AirClic, Inc. ("AirClic") filed suit against the
Company in the Court of Common Pleas, Montgomery County, Pennsylvania, seeking,
among other things, the accelerated repayment of a $500,000 loan it advanced to
the Company under the terms of a letter of intent entered into between AirClic
and the Company. The letter of intent was subsequently abandoned on the basis of
the Company's alleged breach of certain representations made by the Company in
the promissory note issued by the Company to AirClic in respect of such advance.
The note issued by the Company in respect of AirClic's $500,000 advance is
secured by substantially all of the Company's intellectual property, including
its core physical world-to-Internet technologies. If the Company is deemed to
have defaulted under the note, and does not pay the judgment, AirClic, which is
one of the NeoMedia's key competitors, could acquire the Company's core
intellectual property, which would have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
The Company is vigorously defending this lawsuit and has interposed
counterclaims against AirClic. Whether or not AirClic is successful in asserting
its claims that the Company breached certain representations made by the Company
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 the Company, payment
of the note and related interest would have a material adverse effect on the
Company's financial condition. If the Company fails to pay such note, AirClic
could proceed against the Company's intellectual property securing the note,
which would have a material adverse effect on the Company's business, prospects,
financial condition, and results of operations. The Company is aggressively
seeking bridge financing to enable it to pay the principal and interest
remaining under the note following the resolution of the counterclaims against
AirClic. The Company has not accrued any additional liability over and above the
note payable and related accrued interest. As of the date of this filing,
pleadings were closed and the parties have engaged in written discovery.
AirClic also filed suit against the Company in the United States District
Court for the Eastern District of Pennsylvania. In this second action, AirClic
sought a declaration that certain core intellectual property securing the note
issued by the Company to AirClic, some of which is patented and others for which
a patent application is pending is invalid and unenforceable. On November
21,2001, the Company filed a motion to dismiss the complaint. On December 19,
2001, AirClic filed a response opposing that position. On September 18, 2002,
the court ruled in favor of the Company and dismissed AirClic's complaint. The
Company has not accrued any liability in connection with this matter.
On June 26, 2001, the Company 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. The Company is seeking
payment of the $3 million note plus interest and attorneys fees. The Company 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.
In April 2001, the former President and director of NeoMedia filed a
lawsuit against the Company 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 the Company breached the employment agreement. The individual's
employment with the Company ended in January 2001. During May 2002, the Company
settled the suit. The Company is 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, the Company had accrued a $347,000 liability
relating to the suit. As a result, the Company 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 September 30, the
Company had an accrued liability of $72,000 relating to this matter.
On August 20, 2001, Ripfire, Inc. filed suit against the Company in the
San Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between the Company and Ripfire in May 2001
relating to implementation of the Qode Universal Commerce Solution. On September
6, 2002, the Company settled this suit for $133,000 of the Company's common
stock, to be valued at the average closing price for the five days preceding the
date that such shares are registered for resale with the United States
Securities and Exchange Commission. The Company has accrued a $133,000 liability
relating to this matter as of September 30, 2002.
20
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.
The Company is currently attempting to negotiate settlement of this matter. The
Company has accrued a liability of $525,000 in the accompanying financial
statements.
On July 22, 2002, 2150 Western Court, L.L.C., the property manager for the
Company'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, the
Company 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, the Company issued 900,000 shares of its common stock to 2150
Western Court L.L.C. The Company had a liability of approximately $61,000
relating to this matter as of September 30, 2002.
On July 27, 2002, the Company'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, the Company'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, the Company 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,
the Company 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 the Company's common stock at an exercise price of $0.01
with a term of five years. The Company had a liability of approximately $100,000
relating to this matter as of September 30, 2002.
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. The Company is attempting to negotiate settlement of this issue
out of court prior to the court date. The Company has accrued approximately
$92,000 relating to this matter as of September 30, 2002.
On September 13, 2002, Wachovia Bank, N.A., owner of the building in which
the Company'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, the
Company 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. The Company 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. The Company has
accrued a liability of approximately $250,000 relating to this matter as of
September 30, 2002.
21
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2002, the Company issued 452,489 shares of common stock to
About.com, Inc. The shares were issued upon conversion of 452,489 shares of
Series B Preferred Stock issued to About.com, Inc. as payment for advertising
expense incurred during 2001.
In January 2002, the Company issued 55,000 shares of its common stock at a
price of $0.13 per share to an individual unrelated party. Cash proceeds to
NeoMedia were $7,150.
In January 2002, the Company issued 1,646,987 shares of common stock to
two unrelated vendors as settlement of past-due accounts payable and future
payments under equipment lease agreements. There were no cash proceeds to
NeoMedia in these transactions.
In February 2002, the Company issued 19,000,000 shares of common stock at
a price of $0.17 per share to five individuals and two institutional unrelated
parties. The shares were issued in exchange for limited recourse promissory
notes maturing at the earlier of i.) August 12, 2002, or ii.) 30 days from the
date of registration of the shares. The gross proceeds of such transaction were
expected to be approximately $3,040,000 upon maturity of the notes, as a
purchase price of $0.01 per share, or $190,000 in aggregate, was paid in cash.
During August 2002, the notes matured without payment, and the Company
subsequently cancelled the 19 million shares issued in connection with such
notes. The Company has accrued a liability in the third quarter of $190,000
relating to the par value paid in connection with the issuance of the shares.
In March 2002, NeoMedia issued an aggregate of 228,675 shares of NeoMedia
common stock upon the exercise of outstanding warrants by an unrelated party at
a price of $0.12 per share. The gross proceeds of such transaction were
approximately $27,000.
In April 2002, NeoMedia issued an aggregate of 140,775 shares of NeoMedia
common stock upon the exercise of outstanding warrants by Charles W. Fritz, its
Chairman and Chief Executive Officer, at a price of $0.12 per share. Mr. Fritz
subsequently sold the shares into the market. The gross proceeds of such
transaction were approximately $17,000. In accordance with Section 16(b), all
proceeds from the sales were retained by the Company.
In April 2002, NeoMedia issued an aggregate of 1,962,255 shares of
NeoMedia common stock upon the exercise of outstanding options by two unrelated
parties at a price of $0.12 per share. The gross proceeds of such transaction
were approximately $235,000.
In April 2002, NeoMedia issued an aggregate of 40,000 shares of NeoMedia
common stock upon the exercise of outstanding options by James J. Keil, an
outside director. Mr. Keil purchased 25,000 shares at an exercise price of
$0.135 and 15,000 shares at $0.20. The gross proceeds of such transaction were
approximately $6,000.
In May 2002, NeoMedia issued an aggregate of 200 shares of NeoMedia common
stock upon the exercise of outstanding options by an employee at a price of
$0.12 per share. The gross proceeds of such transaction were $24.
In June 2002, the Company issued 900,000 shares of common stock to two
unrelated consultants as payment for consulting services to be performed from
June 2002 through June 2003. There were no cash proceeds to NeoMedia in these
transactions.
In June 2002, the Company issued 10,000 shares of common stock to an
unrelated vendor as an interest payment on past-due accounts payable. There were
no cash proceeds to NeoMedia in these transactions.
In July 2002, the Company issued 575,980 shares of common stock upon the
exercise of outstanding options by an unrelated consultant at a price of $0.01
per share. The gross proceeds of such transaction were approximately $6,000.
22
In August 2002, the Company issued 1,262,218 shares of common stock upon
the exercise of outstanding options by an unrelated consultant at a price of
$0.01 per share. The gross proceeds of such transaction were approximately
$13,000.
In August 2002, the Company cancelled 19,000,000 shares issued during
February 2002 in exchange for promissory notes maturing at the earlier of i)
August 12, 2002, or ii) 30 days from registration of the shares. During August
2002, the notes matured without payment, and the Company subsequently cancelled
the 19,000,000 shares issued in connection with such notes.
In August 2002, the Company issued 900,000 shares of common stock to 2150
Western Court L.L.C, the landlord of its Lisle, Illinois sales office, as
settlement of a lawsuit relating to past-due and future building rents (see
"Legal Proceedings"). The shares were valued at $0.03 per share, the market
price at the date of issuance. There were no cash proceeds to NeoMedia in this
transaction.
In September 2002, the Company issued 1,161,402 shares of common stock
upon the exercise of outstanding options by an unrelated consultant at a price
of $0.01 per share. The gross proceeds of such transaction were approximately
$12,000.
The Company relied upon the exemption provided in Section 4(2) of the
Securities Act and/or Rule 506 thereunder, which cover "transactions by an
issuer not involving any public offering," to issue securities discussed above
without registration under the Securities Act of 1933. The Company made a
determination in each case that the person to whom the securities were issued
did not need the protection that registration would afford. The certificates
representing the securities issued displayed a restrictive legend to prevent
transfer except in compliance with applicable laws, and our transfer agent was
instructed not to permit transfers unless directed to do so by the Company,
after approval by our legal counsel. The Company believes that the investors to
whom securities were issued had such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of the
prospective investment. The Company also believes that the investors had access
to the same type of information as would be contained in a registration
statement.
23
RISK FACTORS
RISKS SPECIFIC TO NEOMEDIA
CURRENTLY PENDING LEGAL ACTIONS THREATEN TO DIVEST THE COMPANY OF CRITICAL
INTELLECTUAL PROPERTY
On September 6, 2001, AirClic filed suit against the Company in the Court
of Common Pleas, Montgomery County, Pennsylvania, seeking, among other things,
the accelerated repayment of a $500,000 loan it advanced to the Company under
the terms of a letter of intent entered into between AirClic and the Company.
The letter of intent was subsequently abandoned on the basis of the Company's
alleged breach of certain representations made by the Company in the promissory
note issued to AirClic in respect of such advance. The note issued by the
Company in respect of AirClic's $500,000 advance is secured by substantially all
of the Company's property, including its core physical world-to-Internet
technologies. If the Company is deemed to have defaulted under such note, and
does not pay the judgment, AirClic, which is one of the Company's key
competitors, could acquire the Company's core intellectual property and other
assets, which would have a material adverse effect on the Company's business,
prospects, financial condition, and results of operations. The Company is
vigorously defending this claim and has interposed counterclaims against
AirClic. As of the date of this filing, pleadings were closed and the parties
have engaged in written discovery. Whether or not AirClic is successful in
asserting its claims that the Company 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 the Company, payment
of the note and related interest would have a material adverse effect on the
Company's financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". If the Company fails to pay such
note, AirClic could proceed against the Company's intellectual property and
other assets securing the note which would have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
The Company is aggressively seeking bridge financing to enable it to pay such
principal and interest that remains under the note following the resolution of
the Company's counterclaims against AirClic. See "Risk Factors - Risks Specific
to NeoMedia - The Company Cannot Predict Its Capital Needs And May Not Be Able
To Secure Additional Financing".
THE COMPANY'S SHARES HAVE BEEN DE-LISTED FROM TRADING ON THE NASDAQ
SMALLCAP MARKET, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON AN INVESTOR'S
ABILITY TO RESELL SHARES OR OBTAIN ACCURATE PRICE QUOTATIONS
On March 11, 2002, the Company received a Nasdaq Staff Determination
stating that, as of December 31, 2001, it did not meet either the minimum net
tangible assets ($2,000,000) or minimum stockholders' equity ($2,500,000)
criteria for continued listing on the Nasdaq SmallCap Market and advising that,
accordingly, the Company's shares were subject to de-listing from such market.
On May 16, 2002, The Company received notification from the Nasdaq Listing
Qualifications Panel that the Company's shares were delisted effective May 17,
2002. The Company's shares are now trading on the OTC Bulletin Board.
THE COMPANY HAS AN ACCUMULATED DEFICIT; THE COMPANY ANTICIPATES FUTURE LOSSES.
The Company has incurred substantial losses since its inception, and
anticipates continuing to incur substantial losses for the foreseeable future.
The Company incurred a loss of $6,502,000 in the nine months ended September 30,
2002, $25,469,000 in the year ended December 31, 2001. The Company's accumulated
losses were approximately $69,845,000 as of September 30, 2002, and $63,344,000
as of December 31, 2001. As of September 30, 2002 and December 31, 2001 and
2000, the Company had a working capital (deficit) of approximately $(8,208,000),
$(5,163,000) and $8,426,000, respectively. The Company had stockholders' equity
of $(5,183,000),
24
$(263,000) and $19,110,000 at September 30, 2002, December 31, 2001 and
2000, respectively. The Company generated revenues of $8,452,000 for the nine
months ended September 30, 2002 and $8,142,000 and $27,565,000 for the years
ended December 31, 2001 and 2000. In addition, during the nine months ended
September 30, 2002, and years ended December 31, 2001 and 2000, the Company
recorded negative cash flows from operations of $669,000, $5,202,000 and
$6,775,000, respectively. To succeed, the Company must develop new client and
customer relationships and substantially increase its revenue derived from
improved products and additional value-added services. The Company has expended
and intends to continue to expend substantial resources to develop and improve
its products, increase its value-added services and to market its products and
services. These development and marketing expenses must be incurred well in
advance of the recognition of revenue. As a result, the Company may not be able
to achieve or sustain profitability.
THE COMPANY'S AUDITORS HAVE QUALIFIED THEIR REPORT ON THE COMPANY
FINANCIAL STATEMENTS WITH RESPECT TO THE COMPANY'S ABILITY TO CONTINUE AS
A GOING CONCERN.
The report of Stonefield Josephson, Inc., the Company's current
independent auditors, with respect to the Company's financial statements and the
related notes for the year ended December 31, 2001, indicate that, at the date
of their report, the Company had suffered recurring losses from operations and
the Company's current cash position raised substantial doubt about the Company's
ability to continue as a going concern. The Company's financial statements do
not include any adjustments that might result from this uncertainty. The report
of Arthur Andersen LLP, the Company's former independent auditors, with respect
to the Company's financial statements and the related notes for the years ended
December 31, 2000 and 1999, indicate that, at the date of their report, the
Company had suffered recurring losses from operations and the Company's current
cash position raised substantial doubt about the Company's ability to continue
as a going concern. The Company's financial statements do not include any
adjustments that might result from this uncertainty.
BECAUSE THE PHYSICAL WORLD - TO - INTERNET MARKET IN WHICH THE COMPANY
OPERATES HAS EXISTED FOR A SHORT PERIOD OF TIME, THERE IS LIMITED
INFORMATION UPON WHICH INVESTORS CAN EVALUATE THE BUSINESS.
The physical world-to-Internet market in which the Company operates is a
recently developed market. Further, the Company has conducted operations in this
market only since March 1996. Consequently, the Company may be deemed to have a
relatively limited operating history upon which investors may base an evaluation
of the Company's primary business and determine its prospects for achieving
intended business objectives. To date, the Company has sold its physical
world-to-Internet products to only 13 companies. Further, on March 22, 2002,
Digital:Convergence Corporation, the Company's primary customer for the
Company's physical world-to-Internet products, filed for bankruptcy under
Chapter 7 of the United States Bankruptcy Code. The Company is prone to all of
the risks inherent to the establishment of any new business venture, including
unforeseen changes in its business plan. Investors should consider the
likelihood of the company's future success to be highly speculative in light of
the Company's limited operating history in its primary market, as well as the
limited resources, problems, expenses, risks, and complications frequently
encountered by similarly situated companies in the early stages of development,
particularly companies in new and rapidly evolving markets, such as the physical
world-to-Internet space. To address these risks, the Company must, among other
things,
o Maintain and increase the Company's client base;
o Implement and successfully execute the Company's business and marketing
strategy;
o Continue to develop and upgrade the Company's products;
o Continually update and improve the Company's service offerings and
features;
o Respond to industry and competitive developments; and
o Attract, retain, and motivate qualified personnel.
The Company may not be successful in addressing these risks. If the
Company is unable to do so, the Company's business, prospects, financial
condition, and results of operations would be materially and adversely affected.
25
FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS MAY AFFECT THE COMPANY'S
STOCK PRICE.
As a result of the emerging and evolving nature of the markets in which
the Company competes, as well as the current nature of the public markets and
the Company's current financial condition, the Company believes its operating
results may fluctuate materially, as a result of which quarter-to-quarter
comparisons of the Company's results of operations may not be meaningful. If in
some future quarter, whether as a result of such a fluctuation or otherwise, the
Company's results of operations fall below the expectations of securities
analysts and investors, the trading price of the Company's common stock would
likely be materially and adversely affected. Investors should not rely on the
Company's results of any interim period as an indication of the Company's future
performance. Additionally, the Company's quarterly results of operations may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside the Company's control. Factors that may cause the Company's
quarterly results to fluctuate include, among others:
o The Company's ability to retain existing clients and customers;
o The Company's ability to attract new clients and customers at a steady
rate;
o The Company's ability to maintain client satisfaction;
o The Company's ability to motivate potential clients and customers to
acquire and implement new technologies;
o The extent to which the Company's products gain market acceptance;
o The timing and size of client and customer purchases;
o Introductions of products and services by competitors;
o Price competition in the markets in which the Company competes;
o The pricing of hardware and software which the Company resells or
integrates into its products;
o The level of use of the Internet and online services and the rate of
market acceptance of physical world-to-Internet marketing;
o The Company's ability to upgrade and develop its systems and
infrastructure in a timely and effective manner;
o The Company's ability to attract, train, and retain skilled management,
strategic, technical, and creative professionals;
o The amount and timing of operating costs and capital expenditures
relating to the expansion of the Company's business, operations, and
infrastructure;
o Unanticipated technical, legal, and regulatory difficulties with respect
to use of the Internet; and
o General economic conditions and economic conditions specific to Internet
technology usage and electronic commerce.
THE COMPANY IS UNCERTAIN OF THE SUCCESS OF ITS INTERNET SWITCHING SERVICES
BUSINESS UNIT AND THE FAILURE OF THIS UNIT WOULD NEGATIVELY AFFECT THE
PRICE OF THE COMPANY'S STOCK.
The Company provides products and services that provide a seamless link
from physical objects, including printed material, to the Internet. The Company
can provide no assurance that:
o This application services business unit will ever achieve profitability;
o The Company's current product offerings will not be adversely affected
by the focusing of the Company resources on the physical
world-to-Internet space; or
o The products the Company develops will obtain market acceptance.
In the event that the application Services business unit should never
achieve profitability, that the Company's current product offerings should so
suffer, or that the Company's products fail to obtain market acceptance, the
Company's business, prospects, financial condition, and results of operations
would be materially adversely affected.
THE COMPANY DEPENDS ON THE RESALE OF SOFTWARE AND EQUIPMENT FOR REVENUE
AND A REDUCTION IN THESE SALES WOULD MATERIALLY ADVERSELY AFFECT THE
COMPANY'S OPERATIONS AND THE VALUE OF THE COMPANY'S STOCK.
During the nine months ended September 30, 2002 and the years ended
December 31, 2001, 2000, 1999, 1998, and 1997, the Company derived 96%, 73% and
66%, respectively, of its revenues from the resale of computer software and
technology equipment. A loss or a reduction of this revenue would have a
material adverse effect on the Company's business,
26
prospects, financial condition, and results of operations, as well as the
Company's stock price. The Company can provide no assurance that:
o The market for the Company's products and services will continue;
o The Company will be successful in marketing these products due to
competition and other factors;
o The Company will continue to be able to obtain short-term financing for
the purchase of the products that the Company resells; or
o The Company's relationship with companies whose products and services it
sells, such as Sun Microsystems Computer Company, will continue.
Further, the technology and equipment resale business is becoming a
commodity industry for products undifferentiated by value-added proprietary
elements and services. A large number of companies act as re-marketers of
another party's products, and therefore, the competition in this area is
intense. Resale operations are also being compressed as equipment manufacturers
consolidate their distribution channels. In some instances, the Company, in
acting as a re-marketer, may compete with the original manufacturer. An
inability to effectively compete and generate revenues in this industry would
have a material adverse effect on the Company's business, prospects, financial
condition, and results of operations.
A LARGE PERCENTAGE OF THE COMPANY'S ASSETS ARE INTANGIBLE ASSETS, WHICH
WILL HAVE LITTLE OR NO VALUE IF THE COMPANY'S OPERATIONS ARE UNSUCCESSFUL.
At September 30, 2002, approximately 33% of the Company's total assets
were intangible assets, consisting primarily of rights related to the Company's
patents and other intellectual property. If the Company operations are
unsuccessful, these assets will have little or no value, which will materially
adversely affect the value of the Company's stock and the ability of the
Company's stockholders to recoup their investments in the Company's capital
stock.
THE COMPANY'S MARKETING STRATEGY HAS NOT BEEN TESTED AND MAY NOT RESULT IN
SUCCESS.
To date, the Company has conducted limited-marketing efforts directly. All
of the Company's marketing efforts have been largely untested in the
marketplace, and may not result in sales of the Company's products and services.
To penetrate the markets in which the Company competes, the Company will have to
exert significant efforts to create awareness of, and demand for, the Company's
products and services. With respect to the Company's marketing efforts conducted
directly, the Company intends to expand the Company's sales staff upon receipt
of adequate financing. The Company's failure to further develop its marketing
capabilities and successfully market its products and services would have a
material adverse effect on the Company's business, prospects, financial
condition, and results of operations.
THE COMPANY RELIES ON INTERNALLY DEVELOPED SYSTEMS, WHICH MAY PUT THE
COMPANY AT A COMPETITIVE DISADVANTAGE.
The Company uses internally developed technologies for a portion of its
systems integration services, as well as the technologies required to
interconnect its clients' and customers' physical world-to-Internet systems and
hardware with the Company's own. As the Company has developed these systems in
order to integrate disparate systems and hardware on a case-by-case basis, these
systems are inefficient and require a significant amount of customization. Such
client and customer specific customization is time-consuming and costly and may
place the Company at a competitive disadvantage when compared to competitors
with more efficient systems. The Company intends to upgrade and expand its
systems and technologies and to integrate newly-developed and purchased
technologies with its own in order to improve the efficiency of the Company's
systems and technologies, although the Company is unable to predict whether
these upgrades will improve the Company's competitive position when compared to
its competitors.
THE COMPANY HAS LIMITED HUMAN RESOURCES; THE COMPANY NEEDS TO ATTRACT AND
RETAIN HIGHLY SKILLED PERSONNEL; AND THE COMPANY MAY BE UNABLE TO
EFFECTIVELY MANAGE COMPANY GROWTH WITH THE COMPANY'S LIMITED RESOURCES.
The Company's future success will depend in large part on the Company's
ability to attract, train, and retain additional highly skilled executive level
management, creative, technical, and sales personnel. Competition is intense for
these types of personnel from other technology companies and more established
organizations, many of which have significantly larger operations and greater
financial, marketing, human, and other resources than the Company has currently.
27
The Company may not be successful in attracting and retaining qualified
personnel on a timely basis, on competitive terms, or at all. If the Company is
not successful in attracting and retaining qualified personnel, its business,
prospects, financial condition, and results of operations would be materially
adversely affected.
THE COMPANY DEPENDS UPON ITS SENIOR MANAGEMENT AND THEIR LOSS OR
UNAVAILABILITY COULD PUT THE COMPANY AT A COMPETITIVE DISADVANTAGE.
The Company's success depends largely on the skills of certain key
management and technical personnel. The loss or unavailability of any of these
individuals for any significant period of time could have a material adverse
effect on the Company's business, prospects, financial condition, and results of
operations. None of the Company's key management or technical personnel is
presently subject to employment agreements. The Company has recently awarded
stock options to key members of management. All key management personnel are
required to sign non-solicitation and confidentiality agreements. However, there
is no guarantee that these option incentives or contractual restrictions will
discourage the Company's key management and technical personnel from leaving. If
the Company were not successful in retaining its key personnel, the Company's
business, prospects, financial condition, and results of operations would be
materially adversely affected.
THE COMPANY MAY BE UNABLE TO PROTECT THE COMPANY'S INTELLECTUAL PROPERTY
RIGHTS AND THE COMPANY MAY BE LIABLE FOR INFRINGING THE INTELLECTUAL
PROPERTY RIGHTS OF OTHERS.
The Company's success in the physical world-to-Internet and the
value-added systems integration markets is dependent upon the Company's
proprietary technology, including the Company's patents and other intellectual
property, and on the Company's ability to protect the Company's proprietary
technology and other intellectual property rights. In addition, the Company must
conduct the Company's operations without infringing on the proprietary rights of
third parties. The Company also intends to rely upon unpatented trade secrets
and the know-how and expertise of the Company's employees, as well as the
Company's patents. To protect the Company's proprietary technology and other
intellectual property, the Company relies primarily on a combination of the
protections provided by applicable patent, copyright, trademark, and trade
secret laws as well as on confidentiality procedures and licensing arrangements.
The Company has four issued patents for its physical world-to-Internet
technology. On July 25, 2002, the Company received an Issue Notification from
the U.S. Patent and Trademark Office that a fifth patent surrounding the
Company's technology would be issued on August 13, 2002. The Company also has
several trademarks relating to the Company's proprietary products. Although the
Company believes that the Company has taken appropriate steps to protect the
Company's unpatented proprietary rights, including requiring that the Company's
employees and third parties who are granted access to the Company's proprietary
technology enter into confidentiality agreements with the Company, the Company
can provide no assurance that these measures will be sufficient to protect the
Company's rights against third parties. Others may independently develop or
otherwise acquire patented or unpatented technologies or products similar or
superior to the Company.
The Company licenses from third parties certain software tools that it
includes in its services and products. If any of these licenses were terminated,
the Company could be required to seek licenses for similar software from other
third parties or develop these tools internally. The Company may not be able to
obtain such licenses or develop such tools in a timely fashion, on acceptable
terms, or at all. Companies participating in the software and Internet
technology industries are frequently involved in disputes relating to
intellectual property. The Company may in the future be required to defend its
intellectual property rights against infringement, duplication, discovery, and
misappropriation by third parties or to defend against third-party claims of
infringement. Likewise, disputes may arise in the future with respect to
ownership of technology developed by employees who were previously employed by
other companies. Any such litigation or disputes could result in substantial
28
costs to, and a diversion of effort by, the Company. An adverse determination
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from, or pay royalties to, third parties, or
require the Company to develop appropriate alternative technology. Some or all
of these licenses may not be available to the Company on acceptable terms or at
all, and the Company may be unable to develop alternate technology at an
acceptable price or at all. Any of these events could have a material adverse
effect on the Company's business, prospects, financial condition, and results of
operations. See "Risks Specific To NeoMedia - Currently Pending Legal Actions
Threaten To Divest The Company Of Critical Intellectual Property."
THE COMPANY IS EXPOSED TO PRODUCT LIABILITY CLAIMS FOR WHICH INSURANCE
COVERAGE IS LIMITED, POTENTIALLY INADEQUATE AND IN SOME CASES UNAVAILABLE,
AND AN UNINSURED CLAIM COULD HAVE A MATERIAL ADVERSE EFFECT ON THE
COMPANY'S BUSINESS, PROSPECTS, FINANCIAL CONDITION, AND RESULTS OF
OPERATIONS, AS WELL AS THE VALUE OF THE COMPANY STOCK.
Many of the Company's projects are critical to the operations of the
Company's clients' businesses. Any failure in a client's information system
could result in a claim for substantial damages against the Company, regardless
of the Company's responsibility for such failure. The Company could, therefore,
be subject to claims in connection with the products and services that it sells.
The Company currently maintains product liability insurance:
o The Company has contractually limited its liability for such claims
adequately or at all;
o The Company would have sufficient resources to satisfy any liability
resulting from any such claim;
o The Company coverage, if available, will be adequate in term and scope
to protect it against material adverse effects in the event of a
successful claim; or
o The Company insurer will not disclaim coverage as to any future claim.
The successful assertion of one or more large claims against the Company
that exceed available insurance coverage could materially adversely affect the
Company's business, prospects, financial condition, and results of operations.
THE COMPANY CANNOT PREDICT ITS FUTURE CAPITAL NEEDS AND THE COMPANY MAY
NOT BE ABLE TO SECURE ADDITIONAL FINANCING.
During May 2002, the Company entered into an Equity Line of Credit
Agreement with Cornell Capital Partners LP ("Cornell"). The agreement was
terminated and a new agreement was entered into in November 2002. Under the
terms of the revised agreement, Cornell has agreed to purchase up to $10.0
million of NeoMedia common stock over the next two years at the Company's
discretion. The maximum amount of each purchase is $150,000, with a minimum
seven days between purchases. The shares will be 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 will pay 5% of the gross proceeds of each
purchase to Cornell as a commission. According to the terms of the agreement,
the Company cannot draw on the line of credit until the shares underlying the
agreement are registered for with Securities and Exchange Commission. The
Company has not secured any other financing as of the date of this filing to
fund operations until such shares are registered.
The Company's cash balance as of September 30, 2002, was approximately
$9,000. Based on current cash balances and operating budgets, the Company
believes it will need to raise operating capital in the next 30 days. If the
Company's financial resources are insufficient, the Company may be forced to
seek protection from its creditors under the United States Bankruptcy Code or
analogous state statutes unless it is able to engage in a merger or other
corporate finance transaction with a better capitalized entity. The Company
cannot predict whether additional financing will be available, its form, whether
equity or debt, or be in another form, or if the Company will be successful in
identifying entities with which it may consummate a merger or other corporate
finance transactions.
29
THE COMPANY'S COMMON STOCK TRADES SPORADICALLY, THE OFFERING PRICE OF THE
COMMON STOCK IS ARBITRARY, AND THE MARKET PRICE OF THE SECURITIES MAY BE
VOLATILE
The Company's common stock currently trades sporadically on the OTCBB. The
market for the Company's common stock may continue to be an inactive market.
Accordingly, unless and until an active public market develops, investors may
have difficulty selling their shares of common stock into which the preferred
stock offered is automatically convertible at a price that is attractive to the
investor.
The Company's common stock has traded as low as $0.02 and as high as $6.75
between September 30, 2000 and October 29, 2002. From time to time after this
filing, the market price of the common stock may experience significant
volatility. The Company's quarterly results, failure to meet analysts
expectations, announcements by the Company or the Company's competitors
regarding acquisitions or dispositions, loss of existing clients, new procedures
or technology, changes in general conditions in the economy, and general market
conditions could cause the market price of the common stock to fluctuate
substantially. In addition, the stock market has experienced significant price
and volume fluctuations that have particularly affected the trading prices of
equity securities of many technology companies. These price and volume
fluctuations often have been unrelated to the operating performance of the
affected companies.
30
INVESTORS MAY SUFFER SIGNIFICANT ADDITIONAL DILUTION IF OUTSTANDING
OPTIONS AND WARRANTS ARE EXERCISED.
As of September 30, 2002, the Company had outstanding stock options to
purchase approximately 8.8 million shares of common stock and warrants to
purchase approximately 7.7 million shares of common stock, some of which may in
the future, but do not currently, have exercise prices at or below the price of
the Company's common shares on the public market. To the extent such options or
warrants are exercised, there will be further dilution. In addition, in the
event that any future financing should be in the form of, be convertible into,
or exchangeable for, equity securities, and upon the exercise of options and
warrants, investors may experience additional dilution.
FUTURE SALES OF COMMON STOCK BY THE COMPANY'S EXISTING STOCKHOLDERS COULD
ADVERSELY AFFECT THE COMPANY'S STOCK PRICE.
The market price of the Company's common stock could decline as a result
of sales of a large number of shares of the Company's common stock in the market
as a result of offerings of common stock or securities convertible, exercisable
or exchangeable for common stock, or the perception that these sales could
occur. These sales also might make it more difficult for the Company to sell
equity securities in the future at a time and at a price that the Company deems
appropriate. The Company's officers and directors are currently subject to
lock-up agreements preventing them from selling their shares. Additionally,
shares issued upon the exercise of stock options granted under the Company's
stock option plans will be eligible for resale in the public market from time to
time subject to vesting. As of September 30, 2002, the Company had outstanding
options to purchase up to 8.8 million shares of its common stock, with exercise
prices ranging from $0.01 to $10.88. Of the 8.8 million options outstanding, 8.2
million were vested as of September 30, 2002. As of September 30, 2002 the
Company also had outstanding 7.7 million warrants to purchase shares of common
stock, with exercise prices ranging from $0.00 to $15.00.
In addition, the Company may offer for sale additional shares of common
stock, as necessary to raise capital to sustain Company operations. While
applicable law provides that unregistered securities may not generally be resold
within one year of their purchase, market conditions may require the Company to
register such shares for public sale earlier than such shares would otherwise
become freely tradable, thereby creating the possibility of further dilution to
purchasers of the Company's shares.
RISKS RELATING TO THE COMPANY'S INDUSTRY
INTERNET SECURITY POSES RISKS TO THE COMPANY'S ENTIRE BUSINESS.
Concerns over the security of the Internet and other electronic
transactions and the privacy of consumers and merchants may inhibit the growth
of the Internet and other online services generally, especially as a means of
conducting commercial transactions, which may have a material adverse effect on
the Company's physical world-to-Internet business.
THE COMPANY WILL ONLY BE ABLE TO EXECUTE ITS PHYSICAL WORLD-TO-INTERNET
BUSINESS PLAN IF INTERNET USAGE AND ELECTRONIC COMMERCE CONTINUE TO GROW.
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of information and commerce. If use of
the Internet and other online services does not continue to grow or grows more
slowly than the Company expects, if the infrastructure for the Internet and
other online services does not effectively support the growth that may occur, or
if the Internet and other online services do not become a viable commercial
marketplace, the Company's physical world-to-Internet business, and therefore
the Company's business, prospects, financial condition, and results of
operations, could be materially adversely affected. Rapid growth in the use of,
and interest in, the Internet, the Web, and online services is a recent
phenomenon, and may not continue on a lasting basis. In addition, customers may
not adopt, and continue to use, the Internet and other online services as a
medium of information retrieval or commerce. Demand and market acceptance for
recently introduced services and products over the Internet are subject to a
high level of uncertainty, and few services and products have generated profits.
31
For the Company to be successful, consumers and businesses must be willing to
accept and use novel and cost efficient ways of conducting business and
exchanging information.
THE COMPANY MAY NOT BE ABLE TO ADAPT AS THE INTERNET, PHYSICAL
WORLD-TO-INTERNET, EQUIPMENT RESALES, AND SYSTEMS INTEGRATIONS MARKETS,
AND CUSTOMER DEMANDS, CONTINUE TO EVOLVE.
The Company may not be able to adapt as the Internet, physical
world-to-Internet, equipment resales and systems integration markets, and
consumer demands, continue to evolve. The Company's failure to respond in a
timely manner to changing market conditions or client requirements would have a
material adverse effect on the Company's business, prospects, financial
condition, and results of operations. The Internet, physical world-to-Internet,
equipment resales, and systems integration markets are characterized by:
o Rapid technological change;
o Changes in user and customer requirements and preferences;
o Frequent new product and service introductions embodying new
technologies; and
o The emergence of new industry standards and practices that could render
proprietary technology and hardware and software infrastructure
obsolete.
The Company's success will depend, in part, on its ability to:
o Enhance and improve the responsiveness and functionality of the
Company's products and services;
o License or develop technologies useful in the Company's business on a
timely basis;
o Enhance the Company's existing services, and develop new services and
technologies that address the increasingly sophisticated and varied
needs of the Company's prospective or current customers; and
o Respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
THE COMPANY MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE MARKETS IN WHICH
IT COMPETES.
While the market for physical world-to-Internet technology is relatively
new, it is already highly competitive and characterized by an increasing number
of entrants that have introduced or developed products and services similar to
those offered by the Company. NeoMedia believes that competition will intensify
and increase in the future. The Company's target market is rapidly evolving and
is subject to continuous technological change. As a result, the Company's
competitors may be better positioned to address these developments or may react
more favorably to these changes, which could have a material adverse effect on
the Company's business, prospects, financial condition, and results of
operations.
In addition, the equipment resales and systems integration markets are
increasingly competitive. The Company competes in these industries on the basis
of a number of factors, including the attractiveness of the services offered,
the breadth and quality of these services, creative design and systems
engineering expertise, pricing, technological innovation, and understanding
clients' needs. A number of these factors are beyond the Company's control.
Existing or future competitors may develop or offer products or services that
provide significant technological, creative, performance, price, or other
advantages over the products and services offered by NeoMedia.
32
Many of the Company's competitors have longer operating histories, larger
customer bases, and longer relationships with clients, and significantly greater
financial, technical, marketing, and public relations resources than the Company
does. Based on total assets and annual revenues, the Company is significantly
smaller than its two largest competitors in the physical world-to-Internet
industry, the primary focus of the Company's business. Similarly, the Company
competes against significantly larger and better-financed companies in the
Company's systems integration and resales businesses, including the
manufacturers of the equipment and technologies that the Company integrates and
resells. If NeoMedia competes with its primary competitors for the same
geographical or institutional markets, their financial strength could prevent
the Company from capturing those markets. The Company may not successfully
compete in any market in which it conducts or may conduct operations. In
addition, based on the increasing consolidation, price competition, and
participation of equipment manufacturers in the systems integration and
equipment resales markets, the Company believes that it will not be able to
compete effectively in these markets in the future. It is for this reason, that
the Company has increasingly focused its business plan on competing in the
emerging market for physical world-to-Internet products.
REGULATORY AND LEGAL UNCERTAINTIES COULD HARM THE COMPANY'S BUSINESS.
The Company is not currently subject to direct regulation by any
government agency other than laws or regulations applicable generally to
electronic commerce. Any new legislation or regulation, the application of laws
and regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other online services, could have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
Due to the increasing popularity and use of the Internet and other online
services, federal, state, and local governments may adopt laws and regulations,
or amend existing laws and regulations, with respect to the Internet or other
online services covering issues such as taxation, user privacy, pricing,
content, copyrights, distribution, and characteristics and quality of products
and services. The growth and development of the market for electronic commerce
may prompt calls for more stringent consumer protection laws to impose
additional burdens on companies conducting business online. The adoption of any
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for the Company's
services and increase the Company's cost of doing business, or otherwise have a
material adverse effect on its business, prospects, financial condition, and
results of operations. Moreover, the relevant governmental authorities have not
resolved the applicability to the Internet and other online services of existing
laws in various jurisdictions governing issues such as property ownership and
personal privacy and it may take time to resolve these issues definitively.
Certain of the Company's proprietary technology allow for the storage of
demographic data from its users. In 2000, the European Union adopted a directive
addressing data privacy that may limit the collection and use of certain
information regarding Internet users. This directive may limit the Company's
ability to collect and use information collected by the Company's technology in
certain European countries. In addition, the Federal Trade Commission and
several state governments have investigated the use by certain Internet
companies of personal information. The Company could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if the Company's privacy practices are investigated.
33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.20 Mutual settlement agreement by and between Provided herewith
the Company and 2150 Western Court Company,
LLC
10.21 Mutual settlement agreement by and between Provided herewith
the Company and Ripfire, Inc.
10.22 Mutual settlement agreement by and between Provided herewith
the Company and Wachovia Bank, N.A.
10.23 Mutual settlement agreement by and between Provided herewith
the Company and Marianne LePera, the
Company's former General Counsel
10.24 Revised Equity Line of Credit Agreement Provided herewith
with Cornell Capital Partners LP
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 2002.
34
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 November 13, 2002 By: /s/ Charles T. Jensen
-------------------------------------------------
Charles T. Jensen, President and Chief
Operating Officer
Date November 13, 2002 By: /s/ David A. Dodge
-------------------------------------------------
David A. Dodge, Vice President, Chief Financial
Officer, and Controller
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of NeoMedia Technologies, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned, in the capacities and on the dates indicated below, hereby
certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
By: /s/ Charles T. Jensen Date November 13, 2002
---------------------------------------------------------- ----------------------
Charles T. Jensen, President and Chief Operating Officer
By: /s/ David A. Dodge Date November 13, 2002
---------------------------------------------------------- ----------------------
David A. Dodge, Vice President, Chief Financial Officer,
and Controller
35
CERTIFICATION
PURSUANT TO SECTION 302
I, Charles T. Jensen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NeoMedia Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/ Charles T. Jensen
----------------------------------
Charles T. Jensen
President, Chief Operating Officer,
and Acting Chief Executive Officer
36
CERTIFICATION
PURSUANT TO SECTION 302
I, David A. Dodge, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NeoMedia Technologies,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 By: /s/ David A. Dodge
--------------------------
David A. Dodge
Vice President, Chief Financial Officer,
Controller and Principle Accounting
Officer
37