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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2005
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period to
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Commission File Number 0-21743
NEOMEDIA TECHNOLOGIES, INC.
(Exact Name of Issuer 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
Securities Registered Under Section 12(b) of the Exchange Act:
Title of Each Class Name of each exchanged
Common Stock, par value $.01 on which registere
Over-the-Counter Bulletin Board
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 |_|
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-X is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K |_|
Issuer's consolidated revenue for its most recent fiscal year was
$2,156,000.
The aggregate market value of the voting stock held by non-affiliates of
the issuer based on the price at which shares of common stock closed on the
Over-the-Counter Bulleting Board on February 28, 2006 ($0.39) was $210,089,000.
Determination of stock ownership by non-affiliates is made solely for purposes
of responding to the requirements of the form and the registrant is not bound by
this determination for any other purpose.
As of February 28, 2006, there were outstanding 601,789,324 shares of the
issuer's Common Stock.
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PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-KSB contains forward-looking statements and information
relating to NeoMedia Technologies, Inc. ("NeoMedia" or "the Company"). NeoMedia
intends to identify forward-looking statements in this prospectus by using words
such as "believes," "intends," "expects," "may," "will," "should," "plan,"
"projected," "contemplates," "anticipates," "estimates," "predicts,"
"potential," "continue," or similar terminology. These statements are based on
the Company's beliefs as well as assumptions the Company made using information
currently available to us. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events, or otherwise. Because these statements reflect the
Company's current views concerning future events, these statements involve
risks, uncertainties, and assumptions. Actual future results may differ
significantly from the results discussed in the forward-looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
General
NeoMedia develops proprietary technologies that link physical information
and objects to the Internet marketed under the "PaperClick(R)" brand name.
NeoMedia has also developed an extensive patent portfolio covering convergence
of the physical world and the Internet.
During 2005, NeoMedia continued its efforts to commercialize its
PaperClick and Micro Paint Repair businesses both in North America and overseas.
As part of the commercialization efforts, NeoMedia began to implement an
aggressive growth campaign focusing on expansion through acquisition and
globalization. As a result, during the first quarter of 2006 NeoMedia completed
acquisitions of Mobot, Inc., 12Snap AG, Sponge Ltd., and Gavitec AG, and BSD
Software, Inc., and also signed a letter of intent to acquire Hip Cricket, Inc.
(see below for additional discussion of acquisitions)
The Company has adopted a code of ethics, as required by the rules of the
SEC (attached as exhibit 10.55 hereto). This code of ethics applies to all of
the Company's directors, officers and employees. The code of ethics, and any
amendments to, or waivers from, the code of ethics, is available in print, at no
charge, to any stockholder who requests such information.
Company Structure
During the year ended December 31, 2005, NeoMedia was structured and
evaluated by its Board of Directors and Management as three distinct business
units:
- NeoMedia Internet Switching Software (NISS),
- NeoMedia Micro Paint Repair (NMPR)
- NeoMedia Consulting and Integration Services (NCIS), and
NISS 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
NeoMedia's PaperClick(R) linking "switch" and application platforms. NISS also
manages the Company's intellectual property portfolio, including the
identification and execution of licensing opportunities surrounding the patents.
1
NMPR is the business unit encompassing the recently-acquired CSI
International paint repair and chemical line. NMPR is attempting to
commercialize its unique micro-paint repair solution. The Company completed its
acquisition of CSI on February 6, 2004.
NCIS is the original business line upon which the Company was founded.
This unit resells client-server equipment and related software, and general and
specialized consulting services. As a result of decreased demand for systems
integration products, and increased consolidation and competition in the
industry in general, during 2005 resources allocated to the NCIS business unit
were increasingly used in sales and business development efforts associated with
the NISS business unit. During February 2006, NeoMedia's Board of Directors
elected to formally wind down the NCIS business unit. As a result, during
February 2006, NeoMedia closed its Lisle, Illinois facility out of which the
NCIS business unit was based. NeoMedia does, however, plan to continue servicing
existing contracts and customers.
Following the completion of the acquisitions of 12Snap, Sponge, Gavitec,
Mobot and during the first quarter of 2006, NeoMedia expects to operate as three
business units during 2006:
- NeoMedia Mobile (NMM) - encompassing NeoMedia's
physical-world-to-internet and mobile marketing technologies
branded under PaperClick, 12Snap, Sponge, Gavitec and Mobot
- NeoMedia Micro Paint Repair (NMPR)
- NeoMedia Telecom Services (NTS) - encompassing the BSD/Triton
business line
Company History
NeoMedia was incorporated under the laws of the State of Delaware on July
29, 1996, to acquire by tax-free merger Dev-Tech Associates, Inc., NeoMedia's
predecessor, which was organized in Illinois in December 1989. In March 1996,
Dev-Tech's common stock was split, with an aggregate of 2,551,120 shares of
common stock being issued in exchange for the 164 then-issued and outstanding
shares of common stock. On August 5, 1996, NeoMedia acquired all of the shares
of Dev-Tech in exchange for the issuance of shares of NeoMedia's common stock to
Dev-Tech's stockholders.
As of December 31, 2005, NeoMedia also has the following wholly-owned
subsidiaries: NeoMedia Micro Paint Repair, Inc., incorporated in Nevada;
NeoMedia Migration, Inc., incorporated in Delaware; Distribuidora Vallarta,
S.A., incorporated in Guatemala (a dormant subsidiary); NeoMedia Technologies of
Canada, Inc., incorporated in Canada (a dormant subsidiary); NeoMedia Tech,
Inc., incorporated in Delaware (a dormant subsidiary); NeoMedia EDV GMBH,
incorporated in Austria (a dormant subsidiary); NeoMedia Technologies Holding
Company B.V., incorporated in the Netherlands (a dormant subsidiary); NeoMedia
Technologies de Mexico S.A. de C.V., incorporated in Mexico (a dormant
subsidiary); NeoMedia Migration de Mexico S.A. de C.V., incorporated in Mexico
(a dormant subsidiary); NeoMedia Technologies do Brazil Ltd., incorporated in
Brazil (a dormant subsidiary); and NeoMedia Technologies UK Limited,
incorporated in the United Kingdom (a dormant subsidiary). In October 2004,
NeoMedia established NeoMedia Telecom Services, Inc. in Nevada for the purpose
of acquiring BSD. In October 2004, NeoMedia established Mobot Acquisition, Inc.
in Delaware for the purpose of acquiring Mobot. Subsequent to the completion of
the acquisition of Mobot in February 2006, the name of this subsidiary was
changed to Mobot, Inc.
During the first quarter of 2006, NeoMedia also acquired 12Snap AG and
Gavitec AG, both incorporated in Germany, and Sponge Ltd., incorporated in the
United Kingdom.
2
Recent Developments
$27 Million Preferred Stock Sale
On February 17, 2006, NeoMedia entered into an investment agreement (the
"Investment Agreement") with Cornell Capital Partners, LP ("Cornell"). Pursuant
to the Investment Agreement, the Company issued and sold to Cornell Twenty-Seven
Million Dollars (US $27,000,000) of Series C Preferred Shares (the "Series C
Preferred Shares"), of which (i) Three Million Two Hundred Eight Thousand Seven
Hundred Two Dollars ($3,208,702) were purchased by Cornell for consideration
solely consisting of surrendering that certain promissory note, dated March 30,
2005 in the original principal amount of Ten Million Dollars (US $10,000,000)
issued in the name of Cornell, (ii) Eighteen Million Seven Hundred Ninety-One
Thousand Two Hundred Ninety-Eight Dollars (US $18,791,298) were purchased by
additional funding (consisting of $16,791,298 of immediately available funds and
$2,000,000 of securities) from Cornell as of February 17, 2006, and (iii) Five
Million Dollars (US $5,000,000) shall be purchased by an additional funding by
Cornell on the date a registration statement filed by the Company pursuant to
the terms of that certain investor registration rights agreement, dated February
17, 2006 by and between the Company and Cornell is declared effective by the
U.S. Securities and Exchange Commission. The Series C Preferred Shares are
convertible into shares of the Company's common stock, par value $0.01 per share
in accordance with the terms of the Company certificate of designations,
preferences, and rights of the Series C Preferred Shares.
In addition, pursuant to the terms of the Investment Agreement, the
Company issued to Cornell (i) a warrant to purchase twenty million (20,000,000)
shares of NeoMedia common stock exercisable for a period of 5 years at an
exercise price of $0.50 per share; (ii) a warrant to purchase twenty-five
million (25,000,000) shares of common stock exercisable for a period of 5 years
at an exercise price of $0.40 per share; and (iii) a warrant to purchase thirty
million (30,000,000) shares of common stock exercisable for a period of 5 years
at an exercise price of $0.35 per share.
On February 17, 2006, the Company and Cornell entered into an assumption
agreement, whereby Cornell sold and assigned to the Company those certain
promissory notes issued by Pick Ups Plus, Inc., dated September 30, 2003,
October 13, 2004, June 6, 2005, and August 4, 2005, in the aggregate principal
amount of $1,365,000 and accrued interest of $246,232 for a purchase price equal
to One Million Six Hundred Eleven Thousand Two Hundred Thirty-One Dollars and
78/100 (US $1,611,231.78).
On February 17, 2006, the Company and Cornell entered into an assignment
of common stock, whereby Cornell sold and assigned to the Company twenty million
(20,000,000) shares of common stock, par value $0.001 per share, of Pick Ups
Plus, Inc. for a purchase price equal to Three Hundred Eighty-Eight Thousand
Seven Hundred Sixty-Eight Dollars and 22/100 (US $388,768.22).
Acquisition of Mobot, Inc.
On February 9, 2006, NeoMedia and Mobot, Inc. (www.mobot.com) ("Mobot")
signed a definitive merger agreement under which NeoMedia acquired all of the
outstanding shares of Mobot in exchange for $3,500,000 cash and $6,500,000 in
shares of NeoMedia common stock. The $6,500,000 stock portion of the purchase
price is represented by 16,931,493 shares of NeoMedia common stock, calculated
by dividing $6,500,000 by the volume-weighted average closing price of NeoMedia
common stock for the ten day up to and including February 8, 2006. On February
17, 2006, NeoMedia and Mobot completed the closing requirements and the
acquisition became effective. As of December 31, 2005, NeoMedia had loaned Mobot
$1,500,000, which was forgiven upon the effective closing date.
3
Mobot is a pioneer in visual search and recognition technology designed to
make marketing effective and innovative using mobile devices. Launched in 2004
to help companies cultivate rewarding relationships with the world's 1.5 billion
mobile phone users, Mobot gives marketers, content providers and carriers the
tools to make it easy for any consumer with a camera phone to interact with
their offerings.
Acquisition of 12Snap AG
On February 10, 2006, NeoMedia and 12Snap AG ("12Snap") signed a
definitive sale and purchase agreement under which NeoMedia acquired all of the
outstanding shares of 12Snap in exchange for $2,500,000 cash and $19,500,000 in
shares of NeoMedia common stock. The $19,500,000 stock portion of the purchase
price is represented by 49,294,581 shares of NeoMedia common stock, calculated
by dividing $19,500,000 by the volume-weighted average closing price of NeoMedia
common stock for the ten day up to and including February 9, 2006. On February
28, 2006, NeoMedia and 12Snap completed the closing requirements and the
acquisition became effective.
12snap AG is a non-public incorporated company headquartered in Munich
with branches in Dusseldorf, New York, London, Milan, Stockholm and Vienna. As
an expert in innovative marketing and entertainment for mobile phones, 12snap
combines know-how in mobile applications, mobile loyalty and mobile marketing.
In the mobile marketing space, 12snap creates and implements national and
pan-European mobile marketing campaigns for international brands; its mobile
loyalty business unit offers customer loyalty programs for companies and brands,
and its mobile applications business unit is the center for development and
software. 12snap sells and licenses a wide spectrum of mobile solutions to
satisfy the demands of the current growing market and the new uses of the third
mobile phone generation from dynamic video services and multiplayer games to
personalized messaging applications. 12snap has 75 employees, and services
companies including McDonald's, MTV(R), Coca-Cola, Ferrero, Wella, adidas,
Unilever and Gillette(R).
Acquisition of Sponge Ltd.
On February 20, 2006, NeoMedia and Sponge Limited ("Sponge") of London
(www.spongegroup.com) signed a definitive share purchase agreement under which
NeoMedia acquired all of the outstanding shares of Sponge in exchange for
(pound)3,450,000 (approximately $6 million) cash and (pound)6,550,000
(approximately $11.4 million) in shares of NeoMedia common stock. The
(pound)6,550,000 stock portion of the purchase price is represented by
29,696,745 shares of NeoMedia common stock, calculated by dividing
(pound)6,550,000 by the volume-weighted average closing price of NeoMedia common
stock for the ten days up to and including February 8, 2006. The agreement also
calls for Sponge to earn an additional (pound)2,500,000 (approximately $4.4
million) in the form of NeoMedia common stock if, during the two-year period
beginning at closing, the Sponge business earns in excess of (pound)1,300,000
(approximately $2.3 million) in net profits. On February 23, 2006, NeoMedia and
Sponge completed the closing requirements and the acquisition became effective.
Founded in 2001, Sponge has grown to become a U.K. market leader in
providing mobile applications to agencies and media groups, and gain recognition
as one of Europe's top independent developers of mobile applications and
content. Today, Sponge counts more than 40 agencies, including WPP, Aegis and
BBH, as clients, and supplies services for over 100 world-class brands,
including Coca Cola(R), Heineken(R) and Diageo. Sponge also supplies a range of
mobile services to media groups, including News International, Trinity Mirror,
Endemol and IPC.
4
Acquisition of Gavitec AG
On February 17, 2006, NeoMedia and Gavitec AG ("Gavitec") of Wurselen,
Germany (www.gavitec.com) signed a definitive sale and purchase agreement under
which NeoMedia acquired all of the outstanding shares of Gavitec in exchange for
$1,800,000 cash and $5,400,000 in shares of NeoMedia common stock. The
$5,400,000 stock portion of the purchase price is represented by 13,660,511
shares of NeoMedia common stock, calculated by dividing $5,400,000 by the
volume-weighted average closing price of NeoMedia common stock for the ten days
up to and including February 16, 2006. On February 23, 2006, NeoMedia and
Gavitec completed the closing requirements and the acquisition became effective
Gavitec was founded in 1997 as a specialized provider and manufacturer of
products and solutions for mobile marketing and mobile information technology.
As a technology leader in code-reading systems and software for mobile
applications, Gavitec offers its clients standardized or individual solutions in
the areas of mobile marketing, mobile ticketing, mobile couponing, and mobile
payment systems.
Acquisition of BSD Software, Inc.
On December 21, 2004, NeoMedia signed a merger agreement to acquire BSD.
On March 21, 2006, NeoMedia and BSD completed the requirements to closing and
the acquisition became effective. After exchange of shares certificates,
NeoMedia expects to issue 7,123,698 shares of its common stock in connection
with the acquisition.
BSD, operating under its trade name of Triton Global Business Services, is
a customer service-oriented organization providing telephone services to direct
customers and telecommunications companies (including clearing houses,
alternative operator service providers, local exchange carriers, long distance
voice and data providers, wireless carriers), both within North America and
internationally.
Letter of Intent to Acquire Hip Cricket
On February 16, 2006, NeoMedia signed a non-binding letter of intent to
acquire HipCricket, Inc. ("HipCricket") of Essex, CT (www.hipcricket.com) in
exchange for $500,000 cash and $4,000,000 of NeoMedia common stock. The letter
of intent is subject to due diligence and signing of a mutually agreeable
definitive purchase agreement by both parties.
HipCricket is a leading mobile marketing firm that provides innovative,
custom solutions to broadcasters and brand marketers. Today, HipCricket works
with five of the top 10 radio groups in the U.S. as well as with some 40 major
brand marketers. HipCricket combines senior marketing expertise with
state-of-the-art mobile and event marketing technologies to offer clients
unprecedented interactivity with their consumers, viewers, listeners or
customers on a one-to-one personal level.
$100 Million Standby Equity Distribution Agreement with Cornell
On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity
Distribution Agreement under which Cornell agreed to purchase up to $100 million
of NeoMedia's common stock over a two-year period, with the timing and amount of
the purchase at NeoMedia's discretion. The maximum amount of each purchase would
be $2,000,000 with a minimum of five business days between advances. The shares
would 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, and NeoMedia
would pay 5% of the gross proceeds of each purchase to Cornell. As a commitment
5
fee for Cornell to enter into the agreement, NeoMedia issued 50 million warrants
to Cornell with an exercise price of $0.20 per share, and a term of three years,
and also paid a cash commitment fee of $1 million. NeoMedia also issued 4
million warrants with an exercise price of $0.229 to an independent third party
as a fee for negotiating and structuring the Standby Equity Distribution
Agreement.
iPoint-Media Ltd.
On September 7, 2004, NeoMedia and iPoint-media Ltd. ("iPoint-media") of
Tel Aviv, Israel, entered into a business development agreement. In exchange for
entering into the service agreement, NeoMedia received 7% ownership in
iPoint-media, consisting of 28,492 shares of iPoint-media common stock. In
addition to the business development agreement, NeoMedia acquired an additional
10% ownership of iPoint-media, consisting of 40,704 shares of common stock, for
$1 million cash. During 2005, iPoint-media recapitalized such that each share of
its stock was exchanged for 100 shares. As a result, NeoMedia now holds
6,919,680 shares of iPoint-media common stock. NeoMedia's ownership percentage
remains unchanged at 17%.
iPoint-media was founded in April 2001 as a spin off from Imagine Visual
Dialog LTD, whose shareholders include Israeli-based Nisko group, an Israeli
holding company, Singapore-based Keppel T&T, and marketing and advertising group
WPP. iPoint-media specializes in Customer Interaction Management and is the
world's 1st developer of IP Video Call Centers for Deutsche Telecom. Muki
Geller, the founder of Imagine Visual Dialog, is the founder, President & CEO of
iPoint-media. iPoint-media is located in Tel Aviv, Israel, with a European
customer support center in The Netherlands. iPoint-media's mission is to become
the video access platform and application engine of choice for service
providers.
On October 26, 2004, NeoMedia announced that it would issue its first-ever
stock dividend with the distribution of common shares of iPoint-media Ltd. of
Tel Aviv as a property dividend. NeoMedia will distribute approximately
2,043,500 shares of iPoint-media's common stock to NeoMedia shareholders of
record as of November 17, 2004. The date of the property dividend payment will
be announced after the Securities and Exchange Commission declares
iPoint-media's Form SB-2 registration statement effective.
During the year ended December 31, 2005, NeoMedia recognized an impairment
charge considered to be other than temporary of $530,000 to the carrying value
of its investment in iPoint-media common stock.
Patent Developments
On January 23, 2004, NeoMedia filed a patent infringement lawsuit against
AirClic, Inc. During July 2005, NeoMedia and AirClic settled the case out of
court, with AirClic agreeing to compensate NeoMedia for past and future
activities. AirClic did not receive a license to use NeoMedia's patented
PaperClick(R) technology.
On January 2, 2004, NeoMedia filed a patent infringement lawsuit against
Virgin(R) Entertainment Group, Inc., Virgin Megastore Online and Virgin
Megastore (collectively, "Virgin"). During June 2005, NeoMedia and Virgin
settled the case out of court, with Virgin agreeing to purchase a license to use
NeoMedia's patented PaperClick(R) technology platform through 2016.
On March 29, 2004, Scanbuy filed suit against NeoMedia in the Southern
District of New York alleging that NeoMedia infringed Scanbuy's copyrights,
violated the Lanham Act and committed deceptive trade practices and tortious
interference. During October 2005, the copyright charges were dismissed by the
court. On April 20, 2004, NeoMedia re-filed its suit against Scanbuy in the
Southern District of New York alleging patent infringement. Scanbuy filed its
answer on June 2, 2004. NeoMedia filed its answer and affirmative defenses on
July 23, 2004. The parties are currently engaged in discovery in both of these
actions. Management cannot predict the outcome of the matter, however, believes
it has adequate defense strategies. The Company plans to vigorously defend this
matter. An adverse outcome to this suit could have a material adverse effect on
NeoMedia's business plan and expected future revenue from patent licensing.
6
On April 12, 2005, NeoMedia acquired four search-oriented patents issued
in the U.S. and pending in Europe and Japan from LoyaltyPoint Inc. for $1.5
million cash and 10% royalties on all future sales for a period of ten years.
The first patent (U.S. 6,430,554 B1) covers technology that uses uniquely-coded
objects, such as consumer goods to automatically generate an online search for
information related to those objects or goods from a computer, PDA, mobile phone
or other device. The second patent (U.S. 6,651,053 B1) is an extension of the
first, covering additional mechanisms for performing such searches using mobile
devices. The third patent (U.S. 6,675,165 B1) covers uses of location-based
technology to deliver content that is based both on a particular advertisement
and the geographic location in which the advertisement is located. The fourth
patent (U.S. 6,766,363 B1) covers techniques for providing information to end
users based on objects, goods or other items depicted in external media, such as
video, audio, film or printed matter.
On May 13, 2005, the European Patent Office (EPO) issued a Notice of
Allowance based on proceedings conducted during April 2005 in The Hague.
Recognition by the EPO extends the patents for NeoMedia's core technology - the
use of bar codes and other unique identifiers to automatically link to content
on the Internet - to Austria, Belgium, France, Germany, Liechtenstein,
Luxembourg, the Netherlands, Sweden, Switzerland and the United Kingdom.
On February 1, 2006, the U.S. Patent and Trademark Office issued a new
patent to NeoMedia covering the capture and processing of bar codes explicitly
from camera cell phones. The patent (U.S. Patent No. 6,993,573) explicitly
describes and patents NeoMedia's method of capturing the image of a bar code by
the camera device on a Web-enabled cell phone, and processing the bar code so as
to deliver the appropriate URL - or Web-based information - to the user's cell
phone screen.
PaperClick(R) Developments
On September 30, 2005, NeoMedia entered into a mobile marketing alliance
and co-marketing agreement with advertising agency Arnold Worldwide ("Arnold"),
centered on NeoMedia's patented PaperClick(R) technology platform. The agreement
calls for Arnold and NeoMedia to work together to develop opportunities and
marketing campaigns utilizing PaperClick. NeoMedia will provide technical and
sales support for presentations, marketing programs and campaigns conceived and
developed by Arnold for its clients.
On July 12, 2005, NeoMedia entered into a consulting agreement with
Silicon Space, Inc., under which Silicon Space developed portions of NeoMedia's
PaperClick(R) WordRegistry interface, for which NeoMedia paid Silicon Space
approximately $53,000 in fees during the year ended December 31, 2005. Silicon
Space replaces Science Applications International, Inc., who NeoMedia engaged in
October 2004 on a contingency basis to build and host the interface. NeoMedia
intends to host the WordRegistry internally upon its completion.
On April 18, 2005, NeoMedia announced that it named Martin N. Copus, a
global and interactive marketing executive who has worked with many of the
world's leading brands, as its COO and to the newly-created position of chief
executive of its PaperClick wireless business unit. Prior to joining NeoMedia,
Mr. Copus was Managing Director of 12Snap UK, an internationally-acclaimed,
award-winning mobile marketing company focusing on wireless channels, where he
led development and implementation of interactive marketing programs for major
blue-chip companies including McDonald's(R), Kellogg(R), Procter & Gamble(R),
Coca-Cola(R), Safeway(R), Budweiser(R), and 20th Century Fox(R). Prior to
running the U.K. operations of 12Snap, Mr. Copus's background included
assignments as executive director of Huntsworth PLC, a marketing services group
listed on the main board of the London Stock Exchange; Worldwide Board Director
of Interpublic Group's Ammirati Puris Lintas advertising unit; and senior vice
president of Leo Burnett Company Inc., Chicago, responsible for its Marlboro(R)
USA advertising and marketing services account. Mr. Copus holds a B.A. in
marketing and an M.A. in modern languages, both from Oxford University.
7
On March 18, 2005, NeoMedia and Foote Cone & Belding ("FCB"), a division
of FCB Worldwide LLC and part of the Interpublic Group of Companies, Inc. (NYSE:
IPG), entered into a co-marketing agreement surrounding NeoMedia's PaperClick(R)
technology platform. The agreement calls for FCB to work with NeoMedia to create
and develop opportunities and programs utilizing PaperClick(R), to integrate
PaperClick into marketing campaigns for new and existing clients, and to
facilitate the introduction of NeoMedia and PaperClick in the mobile
telecommunications industry. NeoMedia will provide technical and sales support
for presentations and marketing programs co-developed for FCB clients, work with
FCB to explore and create marketing opportunities and solutions, and introduce
FCB to its business customers, including brand managers. FCB and NeoMedia will
team up for co-marketing and sales efforts in the U.S., as well as in Europe,
the Middle East, Africa and Latin America.
On March 10, 2005, NeoMedia and Intactis Software, Inc., a provider of
Check 21 software products and solutions for the small- to medium-sized
financial institution market, entered into a business development agreement
under which the two companies will develop a database lookup system for
validating codes printed on negotiable instruments (checks). In addition,
NeoMedia invested $250,000 in Intactis convertible preferred stock and warrants
to own up to 25% of Intactis. Intactis also placed an order for an initial 100
copies of NeoMedia's PaperClick Print Encoder software for which NeoMedia
recognized $30,000 revenue during 2005. During the year ended December 31, 2005,
NeoMedia recognized an impairment charge considered other than temporary of
$250,000 to the carrying value of its investment in Intactis since the carrying
value exceeded its fair value as estimated by management. As of the date of this
report, management does not expect to invest any more capital into Intactis.
On December 13, 2004, NeoMedia introduced PaperClick(R) Mobile Marketing
Services, a tool that allows global marketers and advertising agencies to have
one-on-one contact with consumers through cell phones and other mobile wireless
devices. PaperClick(R) Mobile Marketing Services delivers real-time promotional
content, which can be updated and changed by marketers, while giving consumers
one-click e-commerce buying power. The latest addition to the Mobile Marketing
Services suite lets users of a wide range of already-in-use camera phones "take
pictures" of special created codes on packages and promotional items and connect
in one-click to marketing information. First available for Nokia(R) Series 60
mobile phones, the new capability complements the launch of the PaperClick(R)
Mobile Go-Window(TM) during 2004 and PaperClick(R) for Camera Cell Phones(TM) in
2003.
Micro Paint Repair Developments
On February 28, 2006, NeoMedia signed a 10-year exclusive supplier
agreement with Automart, a Beijing-based joint venture operating under the laws
of the People's Republic of China specializing in automobile sales, financing,
insurance and repair. Automart is the brand name of Jinche Yingang Auto
Technological Services Limited, with which NeoMedia signed a distribution
agreement in August 2005. The new agreement expands on the previous agreement,
giving Automart the exclusive rights to distribute NeoMedia's micro paint repair
products to their own stores and others throughout China, Hong Kong, Macao, and
Taiwan, and also guaranteeing that Automart will purchase at least 70% of its
non-micro paint products through NeoMedia as its distributor. NeoMedia has
signed distribution agreements with DuPont and PPG, and intends to become a
distributor of other automotive aftermarket products to Automart.
On December 20, 2005, NeoMedia executed a definitive supply agreement with
E.I. DuPont de Nemours (Belgium) BVBA of Belgium ("DuPont"), a subsidiary of
E.I. DuPont, under which NeoMedia will distribute DuPont's automobile refinish
paint throughout the People's Republic of China. The agreement calls for
NeoMedia to serve as a non-exclusive distributor of DuPont products to Beijing
Sino-US Jinche Yingang Auto Technological Services Limited ("Jinche") in the
People's Republic of China. NeoMedia previously signed a distribution agreement
with Jinche under which Jinche will distribute and use NeoMedia's micro paint
repair products at its automotive service facilities throughout China.
8
On February 17, 2006, in connection with the $27 million convertible
preferred funding arrangement with Cornell, NeoMedia was assigned 20,000,000
shares of Pick Ups Plus ("PUPS") common stock. NeoMedia had previously acquired
8,333,333 shares of PUPS common stock directly from PUPS, in exchange for
$250,000 cash.
On December 14, 2005, NeoMedia executed a definitive distribution
agreement with PPG Industries' PPG Shanghai Trading Co. Ltd. ("PPG"), under
which NeoMedia will distribute automotive aftermarket products produced by PPG.
The Agreement calls for NeoMedia to serve as a non-exclusive distributor of PPG
products to Jinche in the People's Republic of China.
On October 4, 2005, NeoMedia signed a definitive distribution agreement to
bring its NeoMedia Micro Paint Repair business to Scandinavia. The agreement,
signed with WITHO-AS of Oslo, Norway ("WITHO-AS"), calls for WITHO-AS to serve
as an exclusive distributor of NeoMedia's micro paint repair products, systems
and licenses to automotive service facilities throughout Denmark, Sweden, and
Norway. Based in Oslo, Norway, WITHO-AS is a new company formed to specialize in
products and services involving micro paint repairs for automobiles in Denmark,
Sweden and Norway.
On September 27, 2005, NeoMedia signed a definitive distribution agreement
to bring its NeoMedia Micro Paint Repair business to Mexico and Latin America,
as well as be a distributor of other automotive aftermarket products. The
agreement, signed with Micropaint de Mexico, S.A. ("Micropaint de Mexico"),
calls for Micropaint de Mexico to serve as an exclusive distributor of
NeoMedia's micro paint repair products, systems and licenses to automotive
service facilities throughout Mexico and Latin America. The agreement also calls
for Micropaint de Mexico to buy certain automotive aftermarket repair and
environmental protection products from NeoMedia. Founded earlier this year and
based in Monterrey, Mexico, Micropaint de Mexico specializes in providing
automotive aftermarket products throughout Mexico and Latin America.
On August 30, 2005, NeoMedia signed a distribution agreement with Jinche,
under which Jinche will act as a distributor of automotive products in China.
Jinche is a Beijing PRC-registered company specializing in automobile sales,
financing, insurance and repair. NeoMedia will supply Jinche with its micro
paint repair products, as well as various other automotive aftermarket products
from other manufacturers.
On February 25, 2005, NeoMedia signed two non-binding letters of intent to
acquire up to 100% of Automotive Preservation, Inc. ("AP"), a distributor of
automotive paint and accessory products, from AP's parent company, PUPS. The
first letter of intent calls for NeoMedia to initially acquire 30% of AP for
$1,600,000, to be paid $600,000 in cash, $554,000 in shares of NeoMedia
restricted common stock, and $446,000 through the assumption of AP debt by
NeoMedia. Under the second letter of intent, upon completion of the acquisition
of the initial 30% of AP by NeoMedia, NeoMedia would have the option to acquire
an additional 30% of AP for $1,650,000, payable in shares of NeoMedia restricted
common stock. The second letter of intent also gives NeoMedia the option to
purchase the final 40% of AP for either: (i) $2,200,000, payable in shares of
NeoMedia restricted common stock, if NeoMedia exercises this right within 12
months of acquiring the second 30% of AP, or (ii) a price equivalent to AP's
previous quarter EBITDA multiplied by 8, payable in shares of NeoMedia
restricted common stock. Both letters of intent are non-binding and subject to
due diligence by NeoMedia and AP. On September 21, 2005, the BOD approved to
change the deal structure for the acquisition of AP, so that the Company would
acquire only 30% of AP for a total purchase price of $1.6 million of which $600K
would be paid in cash and $446K would be paid through the assumption of debt,
and $554K through the issuance of restricted Neomedia stock. Neomedia will not
acquire the remaining 70% of AP under the new structure.
9
Industry Overview
NeoMedia Mobile
NeoMedia Mobile (NMM) business unit encompasses all the technologies,
products and services designed to connect the physical world to the electronic
world, with consumer, enterprise, educational and governmental applications.
Being an early pioneer in the wireless solutions industry, NeoMedia has been
developing its PaperClick platform and applications since 1996. During that
time, NeoMedia has also established an extensive portfolio of intellectual
property.
The original commercial use of the PaperClick technology depended on
utilizing a scanning device (e.g. pen with scanner) to de-code printed codes,
which it would then link via PC to the Internet to enable the consumer to
retrieve extensive information on the Internet. With the advent and
proliferation of the cell phone, NeoMedia realized the immense potential to
reach consumers anywhere and anytime with a device that they carried with them.
This was further augmented by the escalation of camera phones in the marketplace
over the past several years. With the PaperClick platform, cell phone users (and
users of other mobile devices such as personal digital assistants) are able to
directly access the mobile internet in one step, via "texting,, "keying,"
"clicking" on printed barcodes or smartcodes, or "keying" in keywords or product
on their cell phones.
To accelerate NeoMedia's entry into the fast-growing and lucrative mobile
marketing marketplace, NeoMedia has made a number of several key strategic
acquisitions already in 2006: Boston-based visual recognition provider Mobot,
London-based applications developer Sponge, Aachen (Germany) based code-reading
specialist Gavitec and Munich-based award-winning mobile marketing agency
12Snap. All of these companies have proven track records in creating highly
innovative wireless marketing solutions that they have successfully introduced
into the market, on behalf of numerous household name consumer goods and media
companies in the US, across Europe, and in Asia/Pacific including Australia and
Japan.
NeoMedia anticipates further growth in the mobile marketing industry to
come from several factors:
(1) The increased growth of mobile subscribers, and those
subscribers accessing the Internet. According to the Cellular
Telecommunications & Internet Association (CTIA) and the
Mobile Marketing Association (MMA), there are over 1.9
billion-plus phones in use worldwide--more than TVs and PCs
combined, and, that by the end of 2008, it is projected that
more than 600 million phone users will have Internet access.
(2) Improvements in Infrastructure. The penetration of high speed
GPRS networks is increasing bandwidths, which in turn allows
more complex application development, faster speed and
enhanced user experience, resulting in mobile customers
embracing mobile content in ever greater numbers and
complexity. NeoMedia's 12snap unit, for example, is now
offering consumers in Germany personalized screensavers and
animations for their handsets..
(3) Enhanced Handset Functionality. Color screens and camera
phones are driving sales of mobile devices in the replacement
market. Worldwide, 295 million camera phones were sold during
2005, and that number is expected to grow to almost 750
million by 2009 (Source: Gartner Dataquest, November 2005). No
less than three products in NeoMedia's arsenal of solutions -
PaperClick, Gavitec's Lavasphere and Mobot's visual
recognition product are technologies that are designed to
bring enhanced user experience to consumers via the camera in
their wireless handsets. Additionally, in early 2006 NeoMedia
obtained a further U.S. patent covering the capture and
processing of bar codes explicitly from camera cell phones.
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The Japanese and European marketplaces are leading the way in mobile
marketing usage and acceptance. In Japan, the use of 2D "smart codes" in
advertising and marketing has become increasingly more popular with subscriber
levels now approaching 10million consumers. Northwest Airlines recently ran a
30' billboard of a smart code in downtown Tokyo, promoting one of its Japanese
routes; according to The Wall Street Journal, "For Northwest, of St. Paul,
Minnesota - which last month filed for bankruptcy protection in the face of high
labor costs, soaring oil prices and intense competition - the [smart code]
campaign is a chance to boost its Japanese presence and its reputation as a
technology leader."
In Europe, two specific areas where mobile marketing has already proven
successful are SMS (text) and MMS (picture messaging) mobile marketing
campaigns. There, 40% of brands surveyed have already deployed text messaging
campaigns and 18% have deployed MMS campaigns (Source: Airwide Solutions Feb.
2006). This study also showed that by 2008, 89% of brands expect to use wireless
marketing campaigns to reach their audience, and in five years 52% expect to
spend between 5% and 25% of their marketing budget on the "Third Screen" as the
cell phone is now being described in marketing circles. NeoMedia, by acquiring
Sponge, Mobot, 12Snap and Gavitec in particular, has overnight become an
innovative global leader in creating and executing mobile campaigns and in
developing related content. From campaigns that 7% of the population take part
in - as was the case with a recent Walkers (Frito-Lay) promotion in the UK run
by its Sponge unit - to 12snap winning four prestigious Lions at the renowned
Cannes Advertising Festival, NeoMedia has added companies with wireless
solutions of the highest standard to accompany its groundbreaking PaperClick
technology, driving recognition as one of the lead players in its industry.
NeoMedia Micro Paint Repair
NMPR has made great strides over the past year to become a global supplier
to the automotive rejuvenation market. NMPR now offers a comprehensive line of
products and services needed for complete interior and exterior automotive
rejuvenation, expanding from its initial business in the light collision and
automotive paint repair industry. NMPR also offers its clients full service
training at its corporate headquarters in Fort Myers, Florida or onsite at its
clients' places of business.
Focused on quality, efficiency, innovativeness and environmentally sound
products and technologies, NMPR offers its clients expert solutions intended to
increase their productivity and profits while helping them to deliver a positive
experience to the end consumer. NMPR's products are positioned to augment
traditional paint repair methods commonly used in body shops, as well as
allowing non-body shop operations to expand their service offerings.
NeoMedia Telecom Services
Triton was incorporated in April 1998 as a next generation Internet
Protocol (IP) enabled provider of live and automated operator calling services,
e-Business support, billing and clearinghouse functions and information
management services to telecommunications, internet and e-business service
providers. Triton was acquired by NeoMedia in March 2006, at which time NeoMedia
established the NeoMedia Telecom Services (NTS) business unit, consisting solely
of Triton's business.
NTS' technology platforms are capable of providing its customers with the
ability to integrate traditional telephony services, internet information and
subscription services and e-Commerce transactions and place the charges on the
billing medium of the end users' choice.
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Strategy
NeoMedia Mobile
NeoMedia has spent the past decade as a pioneer in the now confirmed space
of linking the physical world to the electronic world, developing, patenting and
implementing four generations of continuously refined switch technology that
bridges these environments.
During the past two and a half years, NeoMedia has introduced
PaperClick(R) for Camera Cell Phones and the PaperClick(R) GoWindow and
CodeWindow, to capitalize on the rapidly emerging mobile marketing sector and
using it as a basis from which to demonstrate the effectiveness of its
PaperClick platform. With this industry positioned for rapid worldwide growth,
NeoMedia believes its poised to gain global market share, both from its patented
PaperClick direct-to-web platform and from the platforms, applications and
services of its recent acquisitions.
The acquisitions of Mobot, Sponge, Gavitec and 12Snap have placed NeoMedia
into a leadership position in the wireless solutions industry. Taken together
with NeoMedia's patented PaperClick(R) platform, NeoMedia offers marketers
end-to-end solutions to market to their target audiences via mobile devices
through SMS (text messaging), MMS (multimedia messaging), direct-to-Internet
GoWindow(TM), and CodeWindow(TM), Visual Recognition, and 1-D barcode and 2-D
smartcode recognition.
NeoMedia intends to gain market share in the global mobile marketing
industry through organic growth from existing markets and new and existing
clients, together with geographic growth in new and expanding markets. With the
combination of platforms, services, content and applications now available
through NeoMedia, each NMM business sub-unit has the ability to offer its
existing client base ever more sophisticated and innovative mobile marketing
services and solutions. With the growth of cell phone usage world-wide, and by
having many global brands such as McDonald's, Coca-Cola, adidas and Unilever as
existing clients, NeoMedia intends to bring mobile marketing services to
additional geographic regions around the globe, notwithstanding the immense
potential in the virtually untapped mobile marketing industry in the United
States, which is about 1-2 years behind Europe and Japan in its maturity.
Beyond consumer goods, the PaperClick platform is also an effective
platform for other industry markets and can be utilized through other devices,
such as personal computers. As such, NeoMedia is pursuing opportunities in areas
as diverse as homeland security, banking, search, food labeling, inventory
tracking and multiple enterprise applications--from affinity programs to mobile
service solutions to complete company management systems.
NeoMedia Micro Paint Repair
NeoMedia Micro Paint Repair (NMPR) offers its clients a "one-stop shop" to
obtain a comprehensive line of technologically and environmentally advanced
products and processes for interior and exterior automotive rejuvenation. Its
proprietary Micro Paint Repair system can dramatically reduce costs for current
auto body repair facilities, or create a new profit center for auto-related
businesses that do not currently offer paint repair. Likewise, NMPR can help
automotive repair businesses offer complementary services beyond micro paint,
not only through its product line, but also through training on how to do
additional interior and exterior repairs.
NMPR markets its comprehensive automotive rejuvenation system to a myriad
of automotive industry businesses, from auto dealers to body shops to glass
repair shops, and more. Two facilities, NMPR's headquarters in Fort Myers,
Florida and its Canadian head office in Calgary, Alberta offer repairs directly
to customers, and on-site training to business clients.
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Geographically, outside of the United States NeoMedia has expanded its
micro paint repair offering into: China through partnerships with Jinche
(Automart), DuPont and PPG; Scandinavia, through its distribution agreement with
WI-THO AS in Norway; Mexico and Latin America, through its distribution
agreement with Micropaint de Mexico; Australia/New Zealand, through a
distribution agreement with Micro Paint Systems (Australasia) Limited of New
Zealand; and Canada, through a distribution agreement with MDA Co-Auto.
NeoMedia Telecom Services
NTS is a fully implemented alternate billing agent within the Local
Exchange Carriers (LEC's) billing system in Canada. NTS's vision is to continue
expanding its live and automated operator service capability focusing on making
emerging web-based information and transaction services easier to access and pay
for. NTS has aligned itself to provide globally accessible products, coupled
with sophisticated proprietary technology, allowing it to offer this global
marketplace fully-integrated or unbundled solutions. NeoMedia believes that the
future growth of the industry is largely based upon the ability of service
providers to offer multiple billing options for consumer services thus
increasing market penetration.
Products/Services
NeoMedia Mobile
Mobile Marketing
Through the acquisitions of Mobot, Sponge, Gavitec and 12Snap in early
2006, NeoMedia Mobile (NMM) now offers complete end-to-end mobile marketing
products and services. This includes: the proprietary PaperClick(R) Mobile
Marketing Service; mobile content & application development, including the Mobot
proprietary visual matching platform; complete campaign management including
execution and campaign analysis; and CRM (customer relationship management).
Clients can choose from any or all delivery options offered through
NeoMedia for their mobile marketing campaigns: SMS (text messaging), MMS
(multimedia messaging), GoWindow(TM), CodeWindow(TM), Visual Recognition, or 1D
and 2D Bar Code Recognition.
PaperClick(R) Mobile Marketing Service
PaperClick(R) is a mobile marketing service, based on the patented
PaperClick technology platform, which enables brand managers and product
manufacturers to market directly to their target customers via their portable
devices such as mobile phones and PDAs.
By entering a word or phrase (e.g.: brand name or tagline) into a mobile
device using the PaperClick(R) GoWindow; by entering a numeric product code into
a mobile device using the PaperClick(R) CodeWindow; or by clicking on a barcode
or smart code on product packaging or marketing collateral using PaperClick(R)
for Camera Phones, a consumer can retrieve tailored Web content in a single
step, even to pages deep-linked within a website. PaperClick bypasses long URLs,
search engines or difficult-to-navigate phone menus by linking directly from a
word or code to mobile commerce, rebates, contests, coupons, registration,
instructional videos, ad tracking, polling, customer profiling and more.
The PaperClick solution consists of:
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o Word Registration and Activation
1. Registration of brand names and taglines in the PaperClick(R)
WordRegistry(TM). The WordRegistry is the official repository
for PaperClick Keywords;
2. Bidding for non-trademarked generic keywords (e.g., cola,
burger, car), which will be auctioned to the highest bidder
via the PaperClick WordRegistry; and
3. Activation of brand names, taglines and non-trademarked
keywords by linking them to mobile web content using the Link
Manager Software.
o New Code Activation. NeoMedia can create custom smartcodes to print
on product packaging or literature, a subway poster, a direct mailer
or other marketing collateral. Consumers with a camera phone then
click on the code to link directly to Web content designated by the
product's manufacturer.
o Existing Code Activation. As with new smartcodes, PaperClick(R) can
link already-existing product codes, such as UPC, EAN, JAN, and ISBN
codes, to tailored Web content.
Upon activation, the PaperClick platform also provides the following word
management tools:
o Link Manager Software. Software for a PC that allows a product owner
to link keywords and codes to a specific URL;
o Handset Software. Device software required for a mobile device
customers to read activated codes and keywords; and
o Enterprise Reporting. Allows product owner of keywords or codes to
track the number of consumer "hits" by code, date and time.
Other value-added services:
o Click Management Services
- Link Manager Service. Management of the linking of all words
and codes on behalf of a product owner; and
- Code Verification. Testing of each code to ensure that it is
printed properly and that it links to the correct URL.
o Web Content Creation Services. Assistance in creating Web content
for mobile devices in XHTML, WAP and other mobile formats.
o Mobile Marketing Campaign Services. Assistance in creating mobile
advertising campaigns using products with PaperClick(R) technology.
o Customized Reporting. Customized reporting and data mining that
allows product owners to receive additional data about their
marketing campaigns.
o Server Software. For companies managing a large number of codes or
keywords, server software is available that allows clients to store
the links within their organization's network.
Content & Application Development
12snap and Sponge, acquired as subsidiaries of NeoMedia during the first
quarter of 2006, are recognized leaders in content and application development
for mobile marketing. Between them they have developed and implemented over
20,000 applications and tens of thousands of content items for use by major
brands in Europe and the U.S., activating over 4 billion products in the
process. Their platforms are highly scalable and capable of running hundreds of
campaigns simultaneously.
The NMM business sub-units typically retain the IP for custom-made
applications, therefore the applications can be "re-skinned" for use by other
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clients quickly and efficiently. Some applications are server-based, some are
handset-based while others still are handset-based but server-linked. Delivery
mechanisms are via SMS, MMS, WAP-push link with subsequent download, Bluetooth,
infrared, IVR or direct to Web.
Sponge's proprietary core applications suite, Text Generator, deploys
applications for clients quickly and efficiently in a user-friendly environment,
with all applications offering a wide range of monitoring and performance tools.
Clients access their own-labeled environment via an internet-enabled PC,
enabling them to setup , edit, terminate and report on all their applications.
Examples of Sponge's applications include:
o Games. Multilevel single-player games (e.g. adventure, sports,
arcade), Bluetooth multiplayer games (e.g. Mud Racer, Madagascar
Multiplayer) as well as web and mobile convergence games (e.g. Fish
Snapper, Coke Music Summer Games).
o Competitions. Various formats (e.g. multiple choice, tie-breakers,
free text entry).
o Feedbacks. Clients are able to sort feedback and quickly target
selected responses for publication.
o Votes. Rapid implementation of voting formats with unlimited vote
options,, generating real-time voting patterns with the ability to
block multiple votes.
o Text to Win. Entrants get code and short message number to text in
to win a variety of prizes; client options include multiple prize
groups, caps on prizes, win ratio management, prize draws, varying
start and end dates by prize group and email alerts when prizes are
won
o Reverse Auction. Turnkey reverse auction promotions, where the
lowest unique bid is the ultimate winner.
o SMS- or MMS-to-Postcard. Customers send in recipient's address and
greeting message, which is matched to a postcard and sent to
recipient.
o Intelligent Offline Client. (European Patent Pending). Serves as a
mobile content and application portal (i.e. an offline browser)
which remains installed as a handset-based application on a mobile
phone.
o Messenger. Provides all the functions of an instant messaging
application on PCs.
o The Cam. Allows customers to enrich photos taken with a camera phone
by combining them with pre-defined characters.
12snap's Content Management Platform offers dynamic content creation. In
numerous mobile marketing programs this platform has delivered tens of millions
of content pieces to end users.
Examples of Mobile Content Include:
o Wallpaper
o Ring Tones
o Music
o Mobile Web-Based Information
o Mobile Cards
Mobot Proprietary Visual Matching Service
With Mobot's proprietary visual recognition technology, consumers use the
camera in their phone to snap on a brand advertisement, an editorial page in a
magazine, or even a product in a catalog, whereby visual matching technology
identifies their picture and connects them directly to relevant information.
Fast and easy for consumers, it's a powerful tool for any media company or
marketer.
15
Designed to allow seamless integration, Mobot requires no modifications to
existing visual media -- no keywords, phone numbers, URLs, short codes, product
codes, or bar codes are necessary. Mobot visual matching technology "reads" the
image and delivers a wide range of responses to the consumer.
Gavitec Platforms & Applications
Lavasphere for Smartphones
This software solution - specifically designed for smartphones and based
on the award-winning Lavasphere technology - enables mobile camera phones to
read 2D-codes (such as Data Matrix and QR codes) as well as traditional barcodes
with the integrated digital camera, even during preview (Zero-Click(TM)
live-stream decoding).
Using the mobile phone, the user can retrieve information contained within
a QR smartcode for example, or link directly to a specific web page, access
services, retrieve real-time information or place orders. To use Lavasphere(R),
no additional hardware is required. This set of ultra-small footprint algorithms
is designed to be integrated into any current and future series 60 camera phones
with Symbian server-client architecture.
Lavasphere for Smartphone is the ideal solution to turn a smartphone into
a universal personnel code reader and provides many mobile applications:
o M-Commerce
o Mobile marketing and advertising
o Access to multimedia HTML, XHTML, WAP information and services
o Print-to-web integration
o Content linking
o Data collection
o E-Ticketing
o Price comparison
o Logistics
EXIO
EXIO is an advanced and complete solution, including printer, display,
keypad and GSM/GPRS module - able to read and process two-dimensional (2D)
smartcode symbologies such as Data Matrix from mobile phone displays as well as
printed one-dimensional (1D) barcodes.
Thanks to a high-speed Digital Signal Processor (DSP) and a
high-resolution camera, EXIO automatically recognizes smartcodes sent as SMS
(text) or MMS (picture message) to any compatible mobile phone.
EXIO has been designed for various direct marketing applications such as
mobile ticketing, mobile couponing, mobile payment and mobile loyalty programs,
and is therefore the ideal off-the-shelf solution for innovative application
areas such as m-Commerce, 1-to-1-communication, entertainment and retail trade.
MD-20
MD-20 is a high-performance OEM code reader providing unparalleled
flexibility in scanning two-dimensional (2D) smartcode symbologies such as Data
Matrix from mobile phone displays as well as printed one-dimensional (1D)
barcodes.
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Designed to be embedded directly into OEM devices, the new MD-20 features
a high-resolution video camera with CMOS sensor and specialized code reading
algorithms allowing automatic detection of 2D smartcodes sent as MMS or Picture
SMS to mobile phones. Equipped with a high-speed digital signal processor (DSP),
it reads smartcodes with extreme accuracy and rapidity. Offering Ethernet and
supporting RS-232 for data connection, the new MD-20 can be directly connected
to any host system to process the decoded information.
The MD-20 enables device manufacturers as well as third-party providers to
maximize their business. By implementing MD-20 into their product design,
manufacturers and system integrators can enhance the attractiveness and
complement the functionality of their products with significant added value. The
MD-20 creates competitive advantages through marketing differentiation as well
as to enhance company's image for innovation.
Thanks to its compact size, speed and flexibility, MD-20 is the ideal
high-performance fixed-position smartcode reader for a wide range of
applications where mobile code reading, mobile couponing, mobile ticketing and
mobile marketing are required, thus enabling the phone to be used as the single
universal mobile device.
The MD-20 can be integrated, for example, into a terminal or an access
control system to permit quick and easy access to users. It can be also used to
validate all sorts of tickets, such as admission tickets or transportation
tickets and also to redeem vouchers, to get a discount, or to pay for a product
or service.
Mobile Marketing Campaign Management
Through NeoMedia, marketers and agencies can get full-service mobile
marketing account management including campaign reporting and integration into
media-led campaigns (TV, radio, print, outdoor, direct, events, etc.). Those
marketers looking for a full end-to-end creative solution would likely turn to
12snap. Those marketers who wish to add mobile marketing to their existing
marketing strategy while utilizing their existing agencies would turn to
PaperClick, Mobot, Gavitec or Sponge, depending on their technology or campaign
requirements, or the geographical footprint of their desired market or campaign.
Customer Relationship Management
Gavitec, Sponge and 12snap have customer relationship management (CRM)
platforms that utilize the mobile phone to build loyalty among clients,
establishing long-term customer relationships and a stable revenue base.
12snap's 12CRM platform includes design, data analysis, content creation
and ongoing program management. It also includes a mobile couponing solution,
utilizing Gavitec readers, that allows marketers to send out personalized
coupons that link directly to a consumer's mobile phone, making it impossible to
redeem the coupon multiple times.
Sponge's CRM application includes list management, opt-in database
functionality and messaging scheduling.
Enterprise & Niche Market Products and Services
NMM has a unique competitive advantage of holding intellectual property
for the numerous products, services and platforms mentioned above that allows it
entry into established broad-based markets as well as many more niche industry
opportunities. From homeland security to banking to inventory tracking to food
labeling, NMM has the solutions ready to customize and implement.
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NeoMedia Micro Paint Repair
NMPR offers both its own unique product line and acts as a distributor of
other companies' products to round out its comprehensive offering to automotive
rejuvenation businesses worldwide. The products offered through NMPR include:
NMPR Paint System. NMPR offers a license to use its proprietary NMPR
Paint System, along with a training program and ongoing technical
support relating to the system. The system itself utilizes
proprietary technology to repair cosmetic automobile damage such as
chips, scratches, spots, blemishes and oxidized paint. While
competitive paint repair products utilize a mechanical fix, the NMPR
system chemically alters the paint to make the repair invisible to
the naked eye, even with the most lustrous metal flake and pearlized
auto paints. Repairs can be completed in a fraction of the time of
conventional methods, and all of NMPR's products are free of harmful
icocyanates.
NMPR Paint System Products. NMPR supplies the products necessary for a
paint system operator to implement an NMPR Paint System. Products
include NMPR's proprietary chemicals, auto paint and application
hardware.
NMPR Specialty Products. NMPR offers a variety of non-paint related
specialty products, including paintless dent repair, interior
cleaning, corrosion protection, windshield repair and warranty
programs.
NMPR Auto Rejuvenation Services. NMPR currently operates two repair
facilities, one in its headquarters office in Fort Myers, Florida
and the other in its Canadian head office in Calgary, Alberta. The
facilities utilize the NMPR Paint System and other auto rejuvenation
services to make cosmetic repairs to automobiles for dealerships,
rental car companies and consumers.
NMPR Auto Rejuvenation Training. NMPR offers complete training on its own
proprietary micropaint system, paintless dent repair and other auto
rejuvenation services to clients of all sizes in its facilities in
Fort Myers, Florida and Calgary, Alberta, and at client locations.
In early 2006, NMPR specialists trained partner Jinche in China on
the NeoMedia Micro Paint Repair system in 30 of Jinche's Beijing
facilities initially.
Other Automotive Aftermarket Products. In some geographies, NMPR serves as
a distributor of other automotive aftermarket products from a
variety of manufacturers, such as DuPont and PPG.
NeoMedia Telecom Services
NTS has sophisticated proprietary software and hardware services that are
capable of processing call records for telecommunications companies worldwide.
They track and process bills for a wide range of services, from local and long
distance operator services as well as paging, voice mail, caller ID, phone cards
and other "ease of access" 0+Plus dialing solutions. NTS has also developed
flat-fee billing solutions that it believes will benefit Internet content and
service providers. With the addition of services for the Internet community, NTS
anticipates that it will be able to meet the needs of an even broader range of
communications companies.
NTS's products and services include, in the operator/agent service field:
global and domestic origination, hospitality providers, payphone providers,
18
directory assistance, North America service, international service, enhanced
information services, e-business support services, e-commerce transaction
support, "Click-2-Talk" web-based voice routing, and call center ASP solutions.
NTS's billing services include: North American LEC billing, online
subscription-based billing, and web-based transaction billing (e-commerce).
Strategic Relationships
NeoMedia Mobile
The initial business sub unit within NeoMedia Mobile (NMM), PaperClick,
and the recent strategic acquisitions to NMM, Sponge, Mobot, Gavitec and 12snap,
have all developed strategic relationships to leverage their capabilities across
new geographic and product markets.
In February 2006, NeoMedia entered into a strategic alliance with Italian
mobile marketing pioneer Mobedia (www.mobedia.it). The new strategic
relationship with NeoMedia is a co-marketing partnership agreement, which allows
Mobedia to integrate NeoMedia's direct-to-mobile-internet PaperClick(R)
technology into all of its campaigns. Mobedia was founded in Milan in July 2005
by a group of ex-Unilever marketers. With a collective network of business
relationships covering a wide range of sectors, from fast moving consumer
packaged goods to network operators, and from media to advertising and promotion
agencies, Mobedia is positioned to expand its mobile marketing offerings in
Italy and across southern Europe.
In October 2005, NeoMedia entered into a mobile marketing alliance and
co-marketing agreement with Arnold Worldwide, one of the largest and best-known
advertising agencies in the U.S. and globally. The agreement has Arnold and
NeoMedia working together to develop opportunities and marketing campaigns
utilizing the PaperClick platform.
In March 2005, NeoMedia and Foote Cone & Belding, a division of FCB
Worldwide LLC, entered into a co-marketing agreement centered on NeoMedia's
patented PaperClick(R) technology platform. The agreement calls for Foote Cone &
Belding's FCBi unit to work with NeoMedia to develop opportunities and marketing
campaigns utilizing PaperClick, and facilitate the introduction of NeoMedia and
PaperClick in the mobile telecommunications industry. NeoMedia provides
technical and sales support for presentations and marketing programs
co-developed for FCBi clients and is working with FCBi to explore and create
marketing opportunities and innovative solutions for its business customers.
In March 2005, NeoMedia also entered into a business development agreement
with Intactis Software, Inc., a provider of Check 21 software products and
solutions for the small- to medium-sized financial institution market, under
which the two companies committed to develop a database lookup system for
validating codes printed on negotiable instruments (checks).
During 2005, Gavitec and PostFinance, the largest Swiss bank for private
customers, started a project with system integrator Unisys and numerous partners
in the retail sector (Migros, COOP, SBB, McDonald's, Interdiscount, Mobilezone
and PostShops) enabling customers to pay easily and safely by mobile phone
instead of EC-card - the first mobile macro-payment system worldwide.
During 2005, Gavitec also signed a distribution agreement with Philippine
company Omniprime Corp, a leading supplier of full service solutions to various
industries throughout Asia, and by this expanded the distribution of its product
lines of code scanners to the Far East region.
19
Gavitec concluded three further business co-operations during 2005: first
with RegiSoft Ltd., leading developer of innovative VAS solutions for the mobile
market place, then with REA Card GmbH, market leader for cashless payment
systems and lastly with Clicktivities AG, supplier of digital premium solutions.
The cooperation agreement with RegiSoft Ltd. focuses on the integration of
Gavitec hardware solutions and RegiSoft's World Trade Server(TM) (WTS(TM)) to
provide customers with complete and integrated products and services for mobile
marketing, mobile ticketing and mobile couponing. Gavitec and the two
subsidiaries of REA Systeme GmbH, REA Card GmbH and FunkTicket AG, intend to
bundle their competencies and products in order to enable secure and easy
payments by mobile phones. In addition, they plan to develop a hybrid-system
which combines Gavitec scanners with REA terminals to one single payment system.
In conjunction with Clicktivities AG, Gavitec plans to address the mobile
marketing segment by offering customized digital solutions for eBusinness.
In November 2005, Mobot announced an agreement with the Light Agency to
use and distribute its visual search and recognition technology for mobile
phones, exclusively to the grocery sector in the UK. This adds an additional
dimension onto an already running program based on a unique partnership between
The Light Agency, Jacksons Stores, a Sainsbury's Plc company and nearly 200
brands. Consumers participating in this program can "shop, scan, and save" while
in the grocery store through texting and now by snapping and sending information
through their mobile phones, based on an advertisement in the store.
NeoMedia has on ongoing relationship with Baniak Pine and Gannon, a
Chicago law firm specializing in intellectual property licensing and litigation.
The firm assists NeoMedia in seeking out potential licensees of its intellectual
property portfolio, including any resulting litigation. Baniak Pine and Gannon
currently represents NeoMedia in its lawsuit against Scanbuy.
During 2004 and 2005, NeoMedia engaged key partners around the world to
assist in the anticipated roll-out of the PaperClick(R) family of products.
During such time NeoMedia has partnered with affiliates and resellers, such as
Big Gig Strategies (United Kingdom), Relyco and IT-Global (United States), AURA
Digital Communications (Australia), E&I Marketing (Taiwan), Deusto Sistemas
(Spain), and Jorge Christen and Partners LLP (Mexico).
NeoMedia Micro Paint Repair
On August 30, 2005, NeoMedia signed a distribution agreement with Jinche,
under which Jinche will act as a distributor of automotive products in China.
Jinche is a Beijing PRC-registered company specializing in automobile sales,
financing, insurance, repair, and accessories through its Automart branded
facilities. NeoMedia will supply Jinche with its micro paint repair products, as
well as various other automotive aftermarket products from other manufacturers.
In early 2006, NeoMedia strengthened this relationship to a 10-year exclusive
agreement to supply micro paint and related products and to supply 70% of the
macro paint sales at Jinche's Automart-branded facilities. Conversely, Jinche
gets sole distributorship of NeoMedia products in China, Hong Kong & Taiwan for
this 10-year period.
An additional goal of the NMPR business unit is to act as the premier
supplier and distributor of automotive aftermarket products. To this end, during
2005 NeoMedia signed agreements to distribute DuPont and PPG paint and
aftermarket products to Jinche.
To achieve a global supplier status, the NMPR business unit has
established agreements with distributors in other key geographies to help
promote, sell and distribute its micro paint repair system and products. During
2004 and 2005, NeoMedia has enlisted the following distributors:
20
o Micro Paint Systems Australasia (Australia and New Zealand)
o WI-THO AS (Scandinavia)
o Micropaint de Mexico (Mexico)
o MDA Co-Auto (Canada)
o Restex (USA)
During 2005 NeoMedia also signed two non-binding Letters of Intent
outlining steps for NeoMedia to acquire an interest in Auto Preservation, Inc.,
a wholly-owned subsidiary of Cincinnati-based Pickups Plus.
NeoMedia Telecom Services
NTS has developed and secured strategic alliances within the industry that
it believes are key to the successful service and maintenance of its client
support systems and the delivery of advanced features. The strategic
partnerships are expected to promote global solutions with billing as the core
function or source of revenue. NTS continually enhances and streamlines its
service offerings to remain competitive in an evolving marketplace. NTS has
completed the development of a state-of-the-art IP e-commerce platform described
below for future deployment.
Next Generation IP-Enabled Operator Services Platform. NTS's
International Operator Services Platform, which is not yet deployed,
has been created by integrating hardware and software applications
from Cisco's IP Gateway, CosmoCom's IP-based Next Generation
CosmoCall Universe Platform, and the Enhanced Operator Services
("EOS") from Intelis. CosmoCall Universe is a multimedia,
multi-channel call center system that goes far beyond the
capabilities of traditional call center technology. Traditional call
centers are based on circuit-switched automatic call distributors
("ACDs"), and support only voice telephone calls. CosmoCall has all
the capabilities of a modern telephone call center, but as a
multimedia, multi-channel interaction center, CosmoCall supports not
only voice telephone calls, but also live multimedia communication
sessions via the Internet. Integrated together these products
provide NTS the capability to launch web-based services as well as
support for traditional telephony including collect, third party and
calling card supported calls.
NTS's Telco Grade Billing Platform. Highland Lakes Software
("Highland") is an independent global service provider for core
billing services for competitive LECs ("CLECs") and LECs. NTS has
been able to achieve continued market penetration by employing
Highlands' core billing software at the root of its billing
infrastructure. NeoMedia expects that Highland will continue to
provide billing solutions to NTS as the industry matures and demands
more technically enhanced functionality. NTS works closely with
Highland to provide extended electronic billing services to meet the
demands of service providers and the Internet end-user. With the
coordination of Highland engineers, NTS has developed proprietary
modules to enhance allowable billing types and to provide an
effective direct billing service as well as an aggressive revenue
recovery service for our customers.
Sales and Marketing
NeoMedia Mobile
NeoMedia Mobile (NMM) has worked to establish a global network of direct
salespeople, affiliates and business development personnel to market, upsell and
cross-sell its suite of products and services. Its core target markets across a
number of geographic regions including: the U.S., the U.K., Germany, Italy,
Scandinavia, Central & Eastern Europe, and in Asia/Pacific: Japan, Korea,
Singapore Australia.
21
Core markets for the sales force include:
Brand Marketers and Marketing Services Agencies. NeoMedia markets its
robust suite of end-to-end (and everything in between) mobile marketing
products and services to both agencies, who maintain the main
relationships with major brands while the NeoMedia business units creates
and manages the wireless marketing campaign portion of the relationship,
and directly to brand/product marketers where there is a higher level of
wireless experience or expertise..
Media. NMM supplies applications and services, such as competitions, votes
and alerts to media companies operating in the TV, radio and print media
industries.
Network Operators/Carriers & Handset Manufacturers. There are a range of
applications and platforms that are suited directly for network operators
or carriers and the handset manufacturers who supply them; many
applications are custom developed at the request of these operators and
manufacturers.
Retailers. In addition to mobile marketing campaigns carried out on behalf
of major retailers in a variety of markets by the NeoMedia Wireless
companies, Gavitec's EXIO and MD20 products represent the next evolution
in point-of-sale equipment offering m-coupons and m-commerce.
Enterprise Clients, Government & Education. The robust and innovative
platforms, on which many of the products offered by NeoMedia run, can be
customized to work in numerous other environments and in many industries
including finance, security, tracking and labeling.
NeoMedia Micro Paint Repair
NeoMedia markets its Micro Paint Repair products and services primarily
through a direct sales force, as well as a worldwide network of distributors and
agents. During 2004 and 2005, NeoMedia Micro Paint Repair signed distribution
agreements to bring its products to China, Australia, New Zealand, Scandinavia,
Mexico and Latin America, in addition to its existing distribution channels in
the US and Canada.
NeoMedia Telecom Services
Direct sales and strategic sales alliances are used as the business
strategy for NTS as it continues to grow.
As a provider of billing, clearinghouse and information management
services to the telecommunications industry, NTS has attempted to position
itself to take advantage of the current disarray in the telecommunications
sector. Historically many of the international collect calling and international
billing and clearing contracts have been controlled by intermediary agents.
NTS's sales team is segmented between target customer segments and
geography (domestic and international).
NTS anticipates that initially, incremental business development
representatives will be added to target North American carriers including
clearing houses, alternative operator service providers, local exchange
carriers, long distance voice and data providers, wireless carriers and internet
and e-business service providers. While this will involve primarily direct
marketing and selling, it is anticipated that alliances can be established where
NTS's products and services can be positioned as part of a bundled offering in
conjunction with other complementary services.
22
Customers and Clients
NeoMedia Mobile
PaperClick. To date, NeoMedia has licensed its patents to, or settled
patent-related lawsuits with, Digital:Convergence, A.T. Cross Company, Symbol
Technologies, Brandkey Systems Corporation, Virgin Entertainment Group, and
AirClic, Inc. NeoMedia intends to pursue additional license agreements of its
patent portfolio in the future, in addition to enabling consumer brand and
enterprise organization campaigns and projects.
With the acquisitions of Mobot, Sponge, Gavitec and 12Snap during the
first quarter of 2006, NeoMedia has added an extensive list of major clients
including:
Mobot. Major brands utilizing Mobot's visual recognition technology to
date include L'Oreal, Samsung and Saturn. Media clients include ELLEgirl,
VIBE and JANE magazines, together with music label WEA (Warner Music
Group's U.S. sales and retail marketing company)
Sponge. Major agency clients include WPP, Aegis and BBH, while brand and
telco clients include Walkers Crisps (Frito-Lay), NEC, Coca-Cola,
Heineken, Diageo, Vodafone and Unilever. Major media groups utilizing
Sponge's multi-application platform include Endemol, IPC, Trinity Mirror
and News International.
Gavitec. Network provider/carrier clients include T-Mobile, Vodafone and
Telefonica, together with mobile handset manufacturers: Motorola and
Nokia. IT Leader clients comprise Hewlett Packard, Ericsson Mobility World
and Unisys, to name but three, while content providers such as Warner
Music International and RTL Enterprises, European solutions providers
including xsmart, Dimoco, ucp morgen, RegiSoft, and Top Solutions, and
access management systems company SkiData(TM) are all represented on the
Gavitec roster.
12snap. Major brand clients to have used 12snap's award-winning platform
and creativity include Sony PS2, Nokia, Coca-Cola, McDonald's, MTV,
Unilever, Gillette, Ferrero, Wella, Vodafone, adidas, Procter & Gamble,
and Kellogg's
NeoMedia Micro Paint Repair
The customer base for the NMPR business unit consists of auto dealerships,
general automotive repair shops, collision shops, rental car agencies, and other
automotive service facilities in Canada, the US, China, Scandinavia, Mexico,
Latin America and Australia/New Zealand.
NeoMedia Telecom Services (BSD/Triton)
Triton is a customer service-oriented organization providing telephone
services to direct customers and telecommunications companies (including
clearing houses, alternative operator service providers, local exchange
carriers, long distance voice and data providers, wireless carriers), both
within North America and internationally. Triton has also developed flat-fee
billing solutions that it believes will benefit Internet content and service
providers. With the addition of services for the Internet community, Triton
anticipates that it will be able to meet the needs of an even broader range of
communications companies.
23
Competition
NeoMedia Mobile
Through the combination of all its business sub units: PaperClick(R),
Sponge, Mobot, Gavitec and 12snap, NeoMedia believes its NMM business unit has
positioned itself to compete as a global leader in mobile marketing solutions.
The individual business units, prior to acquisition, were already known as
leaders in their own respective marketplaces, so taken together, NeoMedia
believes itself now to be one of the most experienced and successful global
end-to-end mobile marketing solutions providers in the world.
However, within the mobile marketing industry there are numerous players,
many of which are just beginning to appear, who offer parts of the mobile
marketing equation.
Traditional agencies are starting to add mobile campaigns to their
clients' overall marketing mix, often at the request of the client. However,
many of these agencies turn to different companies to provide content and
applications, and to the aggregators who have the relationship with the wireless
carriers to obtain the short codes for SMS and MMS messaging. It is important to
note that the PaperClick platform transcends messaging services since, once the
PaperClick technology is on a mobile phone, there is only one step to access the
mobile web--via keyword or numeric entry into the GoWindow(R) or CodeWindow(R)
or by clicking on a barcode or smartcode with the camera in a handset.
In the European market, where mobile marketing has been embraced by many
large brands (and poised to grow exponentially--see Industry Section) and
numerous consumers, the competition is quite fragmented by geographic region and
by product and service offerings. For example, while Flytxt, Aerodeon and
Enpocket have traditionally competed with NeoMedia companies Sponge and 12snap
in the UK mobile marketing marketplace, Mindmatics has provided the principal
competition in Germany. Additionally, Spielplatz.cc is one of the larger premium
players in Germany, Austria and Switzerland. Also, Austria-based DIMICO is
focused on premium SMS connectivity and messaging.
In general, due to the relative immaturity of the mobile marketing
industry, small players have sprung up offering very specialized products and
services. This is even more pronounced in the U.S. where mobile marketing has
mostly been confined to text-to-vote applications.
As the mobile marketing industry matures, NeoMedia expects consolidation
as industry leaders emerge. Moreover, NeoMedia believes its well positioned at
the onset due to the intellectual property, including many patents, on which its
products and services are based. NeoMedia expects that its intellectual
property, coupled with its early aggregation of proven market leaders, will
serve as a competitive advantage as this market rapidly matures.
NeoMedia Micro Paint Repair.
NeoMedia's competitors in the micro paint repair industry consist
primarily of suppliers of traditional paint repair methods, such as automotive
paint manufacturers. Various ancillary competitors exist in the automotive
paintless dent repair, window repair, interior repair, etc. markets.
NeoMedia Telecom Services
Competitors of the NTS business unit fall into two major categories: (1)
Third Party Billing Companies, and (2) Alternative Operator Services Providers
("AOSPs").
24
Third Party Billing Companies. The majority of clearinghouse
competitors are United States-based or are part of an incumbent LEC.
NTS believes that its position as an independent Canadian operation
makes it unique among those in the third party billing market in
North America. NTS may not be able to compete with large
telecommunication providers on a revenue scale, but NTS believes
that it does have the ability to meet the evolving telecom market's
needs quickly and efficiently. Most of these competitors are
restricted from entering the Canadian marketplace due to regulatory
issues. This means that these competitors can also become NTS
customers in certain segments of their business, particularly when
it comes to providing services to all outside competitors who wish
to bill for Canadian Services.
AOSPs. In addition to providing sophisticated billing and clearing,
the technology platform currently being developed will allow NTS to
compete with carriers and companies providing live and automated
operator services both domestically and, with multi-language
capabilities, on an international basis. In addition to specific
AOSPs, the majority of the LECs in the United States and Canada
provide operator services as part of their core offerings. In 1997,
the Federal Communications Commission ruled that in order to be an
eligible telecommunications carrier a service provider would have to
provide the basic universal services as laid out in the
Telecommunications Act of 1996, including: voice grade access to the
PSTN, single party service, access to emergency service (i.e., 911),
and access to both operator services and directory assistance (i.e.,
411). While telecommunication carriers are mandated to provide these
services, they do not have to provide these services themselves. NTS
believes that this provides opportunity for NTS to look to these
competitors as prospective customers for its AOSP and future
IP-enabled service offerings. NTS's Canadian-based low cost
infrastructure, fewer regulatory encumbrances than United
States-based carriers and the ability to provide a fully-bundled
suite of services on a single IP enabled platform allows it to
compete for both traditional services as well as future services.
Product Liability
The Company has never had any product liability claim asserted against it.
Currently the Company maintains product liability insurance, but there can be no
guarantee that such policy will be sufficient to cover any claims made against
the Company.
Government Regulation
Existing or future legislation could limit the growth of use of the
Internet, which would curtail the Company's revenue growth. Statutes and
regulations directly applicable to Internet communications, commerce and
advertising are becoming more prevalent. Congress recently passed laws regarding
children's online privacy, copyrights and taxation. The law remains largely
unsettled, even in areas where there has been legislative action. It may take
years to determine whether and how existing laws governing intellectual
property, privacy, libel and taxation apply to the Internet, e-commerce and
online advertising. In addition, the growth and development of e-commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad.
Certain of the Company's proprietary technology allows for the storage of
demographic data from NeoMedia's 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.
25
Environmental Protection Compliance
The Company's Micro Paint Division operations are subject to normal
environmental protection regulations. Compliance with federal, state and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, is not expected to have a material effect upon the capital
expenditures, earnings or the competitive position of the Company. However,
environmental requirements are constantly changing, and it is difficult to
predict the effect of future requirements on the Company. Company policy
requires that all operations fully meet or exceed legal and regulatory
requirements. As of the date of this report, the Company is not aware of any
non-compliance matters.
Employees
As of December 31, 2005, the Company employed 51 persons, of which 25 were
located at the Company's headquarters in Fort Myers, Florida, 7 at the Company's
Lisle, Illinois office (which was subsequently closed during the first quarter
of 2006), 9 at the NeoMedia's micro paint repair facility in Ft, Myers Florida,
9 at the Company's Calgary, Alberta, Canada office, and 1 remote employee. None
of the Company's employees are represented by a labor union or bound by a
collective bargaining agreement. The Company believes that its employee
relations are good.
The Company's success depends on a significant extent on the performance
of its senior management and certain key employees. Competition for highly
skilled employees, including sales, technical and management personnel, is
intense in the computer industry. The Company's failure to attract additional
qualified employees or to retain the services of key personnel could materially
adversely affect the Company's business.
Safe Harbor Provision of the Private Securities Litigation Act of 1995
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 in 2006 and beyond 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 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.
26
RISK FACTORS
Risks Specific To NeoMedia
Risks Related to NeoMedia's Business
NeoMedia has Historically Lost Money and Losses May Continue
NeoMedia has incurred substantial losses since inception, and anticipates
continuing to incur substantial losses for the foreseeable future. NeoMedia
incurred a loss of $9,147,000 and $7,230,000 for the years ended December 31,
2005 and 2004, respectively. NeoMedia's accumulated losses were approximately
$92,524,000 as of December 31, 2005. As of December 31, 2005 and 2004, NeoMedia
had a working capital deficit of approximately $4,874,000 and $2,597,000,
respectively. NeoMedia had stockholders' equity of $4,227,000 and $4,392,000
December 31, 2005 and 2004, respectively. NeoMedia generated revenues of
$2,156,000 and $1,700,000 for the years ended December 31, 2005 and 2004,
respectively. In addition, during the years ended December 31, 2005 and 2004,
NeoMedia recorded negative cash flows from operations of $7,309,000 and
$4,650,000, respectively. To succeed, NeoMedia must develop new client and
customer relationships and substantially increase its revenue derived from
improved products and additional value-added services. NeoMedia has expended,
and to the extent it has available financing, NeoMedia 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, NeoMedia may not be able to achieve or sustain
profitability.
NeoMedia's Independent Registered Public Accounting Firm Have Added Going
Concern Language To Their Report On NeoMedia's Consolidated Financial
Statements, Which Means That NeoMedia May Not Be Able To Continue Operations
The report of Stonefield Josephson, Inc., NeoMedia's independent
registered public accounting firm, with respect to NeoMedia's consolidated
financial statements and the related notes for the years ended December 31, 2005
and 2004, indicates that, at the date of their report, NeoMedia had suffered
significant recurring losses from operations and its working capital deficit
raised substantial doubt about its ability to continue as a going concern.
NeoMedia's consolidated financial statements do not include any adjustments that
might result from this uncertainty.
There is Limited Information Upon Which Investors Can Evaluate NeoMedia's
Business Because The Physical-World-to-Internet Market Has Existed For Only A
Short Period Of Time
The physical-world-to-Internet market in which NeoMedia operates is a
recently developed market. Further, NeoMedia has conducted operations in this
market only since March 1996. Consequently, NeoMedia has a relatively limited
operating history upon which an investor may base an evaluation of NeoMedia's
primary business and determine NeoMedia's prospects for achieving its intended
business objectives. To date, NeoMedia has sold its physical-world-to-Internet
products to only 12 companies. NeoMedia is prone to all of the risks inherent to
the establishment of any new business venture, including unforeseen changes in
its business plan. An investor should consider the likelihood of NeoMedia's
future success to be highly speculative in light of its 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 new and rapidly evolving markets, such as the
physical-world-to-Internet space. To address these risks, NeoMedia must, among
other things:
27
o maintain and increase its client base;
o implement and successfully execute its business and marketing
strategy;
o continue to develop and upgrade its products;
o continually update and improve service offerings and features;
o respond to industry and competitive developments; and
o attract, retain, and motivate qualified personnel.
NeoMedia may not be successful in addressing these risks. If NeoMedia is
unable to do so, its business, prospects, financial condition, and results of
operations would be materially and adversely affected.
NeoMedia's future success depends on the timely introduction of new products and
the acceptance of these new products in the marketplace.
Rapid technological change and frequent new product introductions are
typical for the markets NeoMedia serves. NeoMedia's future success will depend
in large part on continuous, timely development and introduction of new products
that address evolving market requirements. To the extent that NeoMedia fails to
introduce new and innovative products, it may lose market share to its
competitors, which may be difficult to regain. Any inability, for technological
or other reasons, to successfully develop and introduce new products could
materially and adversely affect NeoMedia's business.
NeoMedia's Common Stock Is Deemed To Be "Penny Stock," Which May Make It More
Difficult For Investors To Sell Their Shares Due To Suitability Requirements
NeoMedia's common stock is deemed to be "penny stock" as that term is
defined in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as
amended. These requirements may reduce the potential market for NeoMedia's
common stock by reducing the number of potential investors. This may make it
more difficult for investors in NeoMedia's common stock to sell shares to third
parties or to otherwise dispose of them. This could cause NeoMedia's stock price
to decline. Penny stocks are stock:
o with a price of less than $5.00 per share;
o that are not traded on a "recognized" national exchange;
o whose prices are not quoted on the NASDAQ automated quotation
system (NASDAQ listed stock must still have a price of not
less than $5.00 per share); or
o in issuers with net tangible assets less than $2 million (if
the issuer has been in continuous operation for at least three
years) or $10 million (if in continuous operation for less
than three years), or with average revenues of less than $6
million for the last three years.
Broker-dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker-dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor.
28
NeoMedia is Uncertain Of The Success Of Its Internet Switching Software Business
Unit And The Failure Of This Unit Would Negatively Affect The Price Of
NeoMedia's Stock
NeoMedia provides products and services that provide a link from physical
objects, including printed material, to the Internet. NeoMedia can provide no
assurance that:
o this Internet Switching Software business unit will ever
achieve profitability;
o its current product offerings will not be adversely affected
by the focusing of its resources on the
physical-world-to-Internet space; or
o the products NeoMedia develops will obtain market acceptance.
In the event that the Internet Switching Software business unit should
never achieve profitability, that NeoMedia's current product offerings should so
suffer, or that NeoMedia's products fail to obtain market acceptance, NeoMedia's
business, prospects, financial condition, and results of operations would be
materially adversely affected.
A Large Percentage Of NeoMedia's Assets Are Intangible Assets, Which Will Have
Little Or No Value If NeoMedia's Operations Are Unsuccessful
At December 31, 2005 and 2004, approximately 48% and 49%, respectively, of
NeoMedia's total assets were intangible assets, consisting primarily of rights
related to NeoMedia's patents, other intellectual property, and excess of
purchase price over fair market value paid for CSI International, Inc. (now
NeoMedia Micro Paint Repair). If NeoMedia's operations are unsuccessful, these
assets will have little or no value, which would materially adversely affect the
value of NeoMedia's stock and the ability of NeoMedia's stockholders to recoup
their investments in NeoMedia's capital stock.
NeoMedia's Physical-World-To-Internet Marketing Strategy Has Not Been Tested And
May Not Result In Success
To date, NeoMedia has conducted limited marketing efforts directly
relating to NeoMedia's NISS business unit. All of NeoMedia's marketing efforts
have been largely untested in the marketplace, and may not result in sales of
NeoMedia's products and services. To penetrate the markets in which it competes,
NeoMedia will have to exert significant efforts to create awareness of, and
demand for, its products and services. With respect to NeoMedia's marketing
efforts conducted directly, NeoMedia intends to expand its sales staff upon the
receipt of sufficient operating capital. NeoMedia's failure to further develop
NeoMedia's marketing capabilities and successfully market NeoMedia's products
and services would have a material adverse effect on NeoMedia's business,
prospects, financial condition, and results of operations.
NeoMedia's Internally Developed Systems Are Inefficient And May Put NeoMedia At
A Competitive Disadvantage
NeoMedia 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 its own. As NeoMedia develops 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
NeoMedia at a competitive disadvantage when compared to competitors with more
efficient systems.
29
NeoMedia Could Fail to Attract Or Retain Key Personnel
NeoMedia's future success will depend in large part on its 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 NeoMedia has. NeoMedia may not be
successful in attracting and retaining qualified personnel on a timely basis, on
competitive terms, or at all. NeoMedia's failure to attract and retain qualified
personnel could have a material adverse effect on its business, prospects,
financial condition, and results of operations.
NeoMedia Depends Upon Its Senior Management And Their Loss Or Unavailability
Could Put NeoMedia At A Competitive Disadvantage
NeoMedia's success depends largely on the skills of certain key management
and technical personnel, including Charles T. Jensen, NeoMedia's President and
Chief Executive Officer, Charles W. Fritz, NeoMedia's founder and Chairman of
the Board of Directors, Martin N. Copus, NeoMedia's Chief Operating Officer and
head of the NMM business unit, and David A. Dodge, NeoMedia's Chief Financial
Officer. The loss of the services of Messrs. Jensen, Fritz, Copus, or Dodge
could materially harm NeoMedia's business because of the cost and time necessary
to replace and train a replacement. Such a loss would also divert management
attention away from operational issues. NeoMedia does not presently maintain a
key-man life insurance policy on Messrs. Jensen, Fritz, Copus, or Dodge.
NeoMedia May Be Unsuccessful In Integrating Its Recently Completed and Pending
Acquisitions With Its Current Business
The success of the acquisitions of Mobot, 12Snap, Sponge, Gavitec, and BSD
could depend on the ability of NeoMedia's executive management to integrate the
business plan of each company with NeoMedia's overall business plan. Failure to
properly integrate the business could have a material adverse effect on the
expected revenue and operations of the acquisitions, as well as the expected
return on investment for NeoMedia.
NeoMedia May Be Unable To Protect Its Intellectual Property Rights And May Be
Liable For Infringing The Intellectual Property Rights Of Others
NeoMedia's success in the physical-world-to-Internet and the value-added
systems integration markets is dependent upon its proprietary technology,
including patents and other intellectual property, and on the ability to protect
proprietary technology and other intellectual property rights. In addition,
NeoMedia must conduct its operations without infringing on the proprietary
rights of third parties. NeoMedia also intends to rely upon unpatented trade
secrets and the know-how and expertise of its employees, as well as its patents.
To protect its proprietary technology and other intellectual property, NeoMedia
relies primarily on a combination of the protections provided by applicable
30
patent, copyright, trademark, and trade secret laws as well as on
confidentiality procedures and licensing arrangements. Although NeoMedia
believes that it has taken appropriate steps to protect its unpatented
proprietary rights, including requiring that its employees and third parties who
are granted access to NeoMedia's proprietary technology enter into
confidentiality agreements, NeoMedia can provide no assurance that these
measures will be sufficient to protect its rights against third parties. Others
may independently develop or otherwise acquire patented or unpatented
technologies or products similar or superior to NeoMedia's.
NeoMedia licenses from third parties certain software tools that are
included in NeoMedia's services and products. If any of these licenses were
terminated, NeoMedia could be required to seek licenses for similar software
from other third parties or develop these tools internally. NeoMedia 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. NeoMedia 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
costs to, and a diversion of effort by, NeoMedia. An adverse determination could
subject NeoMedia to significant liabilities to third parties, require NeoMedia
to seek licenses from, or pay royalties to, third parties, or require NeoMedia
to develop appropriate alternative technology. Some or all of these licenses may
not be available to NeoMedia on acceptable terms or at all, and NeoMedia 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 NeoMedia's business,
prospects, financial condition, and results of operations.
NeoMedia Is Exposed To Product Liability Claims And An Uninsured Claim Could
Have A Material Adverse Effect On NeoMedia's Business, Prospects, Financial
Condition, And Results Of Operations, As Well As The Value Of NeoMedia's Stock
Many of NeoMedia's projects are critical to the operations of its clients'
businesses. Any failure in a client's information system could result in a claim
for substantial damages against NeoMedia, regardless of NeoMedia's
responsibility for such failure. NeoMedia could, therefore, be subject to claims
in connection with the products and services that it sells. NeoMedia currently
maintains product liability insurance. There can be no assurance that:
o NeoMedia has contractually limited its liability for such
claims adequately or at all; or
o NeoMedia would have sufficient resources to satisfy any
liability resulting from any such claim.
The successful assertion of one or more large claims against NeoMedia
could have a material adverse effect on its business, prospects, financial
condition, and results of operations.
NeoMedia Will Not Pay Cash Dividends and Investors May Have To Sell Their Shares
In Order To Realize Their Investment
NeoMedia has not paid any cash dividends on its common stock and does not
intend to pay cash dividends in the foreseeable future. NeoMedia intends to
retain future earnings, if any, for reinvestment in the development and
marketing of NeoMedia's products and services. As a result, investors may have
to sell their shares of common stock to realize their investment.
31
Some Provisions Of NeoMedia's Certificate of Incorporation And bylaws May Deter
Takeover Attempts, Which May Limit The Opportunity Of NeoMedia's Stockholders To
Sell Their Shares At A Premium To The Then-Current Market Price
Some of the provisions of NeoMedia's Certificate of Incorporation and
bylaws could make it more difficult for a third party to acquire NeoMedia, even
if doing so might be beneficial to NeoMedia's stockholders by providing them
with the opportunity to sell their shares at a premium to the then-current
market price. On December 10, 1999, NeoMedia's Board of Directors adopted a
stockholders rights plan and declared a non-taxable dividend of one right to
acquire Series A Preferred Stock of NeoMedia, par value $0.01 per share, on each
outstanding share of NeoMedia's common stock to stockholders of record on
December 10, 1999 and each share of common stock issued thereafter until a
pre-defined hostile takeover date. The stockholder rights plan was adopted as an
anti-takeover measure, commonly referred to as a "poison pill." The stockholder
rights plan was designed to enable all stockholders not engaged in a hostile
takeover attempt to receive fair and equal treatment in any proposed takeover of
NeoMedia and to guard against partial or two-tiered tender offers, open market
accumulations, and other hostile tactics to gain control of NeoMedia. The
stockholders rights plan was not adopted in response to any effort to acquire
control of NeoMedia at the time of adoption. This stockholders rights plan may
have the effect of rendering more difficult, delaying, discouraging, preventing,
or rendering more costly an acquisition of NeoMedia or a change in control of
NeoMedia. Certain of NeoMedia's directors, officers and principal stockholders,
Charles W. Fritz, William E. Fritz and The Fritz Family Limited Partnership and
their holdings were exempted from the triggering provisions of NeoMedia's
"poison pill" plan, as a result of the fact that, as of the plan's adoption,
their holdings might have otherwise triggered the "poison pill".
In addition, NeoMedia's Certificate of Incorporation authorizes the Board
of Directors to designate and issue preferred stock, in one or more series, the
terms of which may be determined at the time of issuance by the Board of
Directors, without further action by stockholders, and may include voting
rights, including the right to vote as a series on particular matters,
preferences as to dividends and liquidation, conversion, redemption rights, and
sinking fund provisions.
NeoMedia is authorized to issue a total of 25,000,000 shares of Preferred
Stock, par value $0.01 per share. NeoMedia has no present plans for the issuance
of any preferred stock. However, the issuance of any preferred stock could have
a material adverse effect on the rights of holders of NeoMedia's common stock,
and, therefore, could reduce the value of shares of NeoMedia's common stock. In
addition, specific rights granted to future holders of preferred stock could be
used to restrict NeoMedia's ability to merge with, or sell NeoMedia's assets to,
a third party. The ability of the Board of Directors to issue preferred stock
could have the effect of rendering more difficult, delaying, discouraging,
preventing, or rendering more costly an acquisition of NeoMedia or a change in
NeoMedia's control thereby preserving control by the current stockholders.
Existing Shareholders Will Experience Significant Dilution when the Investors
Convert Their Preferred Stock to Common Stock or When the Investor Exercise
Their Warrants and Received Common Stock Shares Under the Investment Agreement
with the Investors
The issuance of shares of common stock pursuant to the conversion of
preferred stock or exercise of warrants pursuant to our transaction with certain
investors described in this filing or any other future equity financing
transaction will have a dilutive impact on our stockholders. As a result, our
net income or loss per share could decrease in future periods, and the market
32
price of our common stock could decline. In addition, the lower our stock price
is, the more shares of common stock we will have to issue pursuant to the
conversion of our preferred stock and exercise of warrants. If our stock price
is lower, then our existing stockholders would experience greater dilution. We
cannot predict the actual number of shares of common stock that will be issued
underlying our preferred stocks and warrants; however, existing stockholders
could experience significant dilution of their ownership of the Company.
Risks Relating To NeoMedia's Industry
The Security of the Internet Poses Risks To The Success Of NeoMedia'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
NeoMedia's physical-world-to-Internet business.
NeoMedia Will Only Be Able To Execute Its Physical-World-To-Internet Business
Plan If Internet Usage and Electronic Commerce Continue To Grow
NeoMedia's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and camera
devices on mobile telephones. If use of the Internet and camera devices on
mobile telephones does not continue to grow or grows more slowly than expected,
or if the infrastructure for the Internet and camera devices on mobile
telephones does not effectively support the growth that may occur, or does not
become a viable commercial marketplace, NeoMedia's physical-world-to-Internet
business, and therefore NeoMedia'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 and camera devices on mobile
telephones is a recent phenomenon, and may not continue on a lasting basis. In
addition, customers may not adopt, and continue to use mobile telephones as a
medium of information retrieval or commerce. Demand and market acceptance for
recently introduced services and products over the mobile Internet are subject
to a high level of uncertainty, and few services and products have generated
profits. For NeoMedia to be successful, consumers and businesses must be willing
to accept and use novel and cost efficient ways of conducting business and
exchanging information.
In addition, the public in general may not accept the use of the Internet
and camera devices on mobile telephones as a viable commercial or information
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that mobile
phone Internet usage continues to experience significant growth in the number of
users, their frequency of use, or in their bandwidth requirements, the
infrastructure for the mobile Internet may be unable to support the demands
placed upon them. In addition, the mobile Internet and mobile interactivity
could lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of mobile Internet
activity, or due to increased governmental regulation. Significant issues
concerning the commercial and informational use of the mobile Internet, and
online networks technologies, including security, reliability, cost, ease of
use, and quality of service, remain unresolved and may inhibit the growth of
Internet business solutions that utilize these technologies. Changes in, or
insufficient availability of, telecommunications services to support the
Internet, the Web or other online services also could result in slower response
times and adversely affect usage of the Internet, the Web and other online
networks generally and NeoMedia's physical-world-to-Internet product and
networks in particular.
33
NeoMedia 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
NeoMedia may not be able to adapt as the mobile Internet and
physical-world-to-Internet markets and consumer demands continue to evolve.
NeoMedia's failure to respond in a timely manner to changing market conditions
or client requirements would have a material adverse effect on its business,
prospects, financial condition, and results of operations. The mobile Internet
and physical-world-to-Internet 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.
NeoMedia's success will depend, in part, on its ability to:
o enhance and improve the responsiveness and functionality of
its products and services;
o license or develop technologies useful in its business on a
timely basis;
o enhance its existing services, and develop new services and
technologies that address the increasingly sophisticated and
varied needs of NeoMedia's prospective or current customers;
and
o respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis.
NeoMedia's Competitors In The Micro Paint Repair Industry Could Duplicate
NeoMedia's Proprietary Processes
NeoMedia's success in the micro paint repair industry depends upon
proprietary chemical products and processes. There is no guarantee that
NeoMedia's competitors will not duplicate NeoMedia's proprietary processes.
NeoMedia May Not Be Able To Compete Effectively In Markets Where Its Competitors
Have More Resources
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 NeoMedia. NeoMedia believes that competition will intensify and
increase in the near future. NeoMedia's target market is rapidly evolving and is
subject to continuous technological change. As a result, NeoMedia'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
NeoMedia's business, prospects, financial condition, and results of operations.
34
Some of NeoMedia's competitors have longer operating histories, larger
customer bases, longer relationships with clients, and significantly greater
financial, technical, marketing, and public relations resources than NeoMedia.
Based on total assets and annual revenues, NeoMedia is significantly smaller
than its two largest competitors in the physical-world-to-Internet industry, the
primary focus of NeoMedia's business. If NeoMedia competes with its primary
competitors for the same geographical or institutional markets, their financial
strength could prevent NeoMedia from capturing those markets. NeoMedia may not
successfully compete in any market in which it conducts or may conduct
operations. Many of NeoMedia's competitors in the Micro Paint Repair business
have a longer operating history in the industry, as well as access to greater
financial resources. NeoMedia may not be able to penetrate markets or market its
products as effectively as NeoMedia's better-funded more-established
competitors.
In The Future There Could Be Government Regulations And Legal Uncertainties
Which Could Harm NeoMedia's Business
Any new legislation or regulation, the application of laws and regulations
from jurisdictions whose laws do not currently apply to NeoMedia's business, or
the application of existing laws and regulations to the Internet and other
online services, could have a material adverse effect on NeoMedia's business,
prospects, financial condition, and results of operations. Due to the increasing
popularity and use of the Internet, the Web 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, the Web or other online
services, which could, in turn, decrease the demand for NeoMedia's services and
increase NeoMedia's cost of doing business, or otherwise have a material adverse
effect on NeoMedia's business, prospects, financial condition, and results of
operations. Moreover, the relevant governmental authorities have not resolved
the applicability to the Internet, the Web 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 NeoMedia's proprietary technology allows for the storage of
demographic data from NeoMedia's 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
NeoMedia's ability to collect and use information collected by NeoMedia'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. NeoMedia could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if NeoMedia's privacy practices are investigated.
Certain of NeoMedia's micro paint solutions could be subject to
environmental regulations.
35
ITEM 2. Description of Properties
NeoMedia's principal executive, development and administrative office is
located at 2201 Second Street, Suite 600, Fort Myers, Florida 33901. NeoMedia
occupies approximately 12,000 square feet under terms of a written lease from an
unaffiliated party which expires on July 31, 2008, with monthly rent totaling
approximately $18,000.
The Company maintains a production and product development facility for
its Micro Paint Repair Business unit in Calgary, Alberta, Canada, occupying
approximately 4,000 square feet under the terms of a written month-to-month
lease from an affiliated party with monthly rent totaling $2,400.
The Company maintains a training, demonstrations, production,
distribution, and retail services facility for its Micro Paint Repair Business
unit in Ft. Myers, Florida, occupying approximately 10,000 square foot under the
terms of a written lease from an unaffiliated party expiring on February 28,
2008, with monthly rent totaling approximately $9,000.
During 2005, NeoMedia occupied a sales facility at 2150 Western Court,
Suite 230, Lisle, Illinois 60532, occupying approximately 6,000 square feet
under the terms of a written month-to-month lease from an unaffiliated party
with monthly rent totaling approximately $4,000. During February 2006, NeoMedia
cancelled the lease and centralized the operations from this facility to its Ft.
Myers, FL headquarters.
The Company believes that existing office space is adequate to meet
current and short-term requirements for its operations in the United States.
ITEM 3. Legal Proceedings
The Company is involved in various legal actions arising in the normal
course of business, both as claimant and defendant. While it is not possible to
determine with certainty the outcome of these matters, it is the opinion of
management that the eventual resolution of the following legal actions could
have a material adverse effect on the Company's financial position or operating
results.
Scanbuy, Inc.
On January 23, 2004, NeoMedia filed suit against Scanbuy, Inc. ("Scanbuy")
in the Northern District of Illinois, claiming that Scanbuy has manufactured, or
has manufactured for it, and has used, or actively induced others to use,
technology which allows customers to use a built-in UPC bar code scanner to scan
individual items and access information, thereby infringing NeoMedia's patents.
The complaint stated that on information and belief, Scanbuy had actual and
constructive notice of the existence of the patents-in-suit, and, despite such
notice, failed to cease and desist their acts of infringement, and continue to
engage in acts of infringement of the patents-in-suit. On April 15, 2004, the
court dismissed the suits against Scanbuy for lack of personal jurisdiction.
On April 20, 2004, NeoMedia re-filed its suit against Scanbuy in the
Southern District of New York alleging patent infringement. Scanbuy filed its
answer on June 2, 2004. NeoMedia filed its answer and affirmative defenses on
July 23, 2004. Discovery is ongoing.
36
Other Litigation
On May 2, 2005, three shareholders of BSD Software, Inc. filed a complaint
against BSD and NeoMedia, claiming that the purchase price as outlined in the
purchase agreement between NeoMedia and BSD is too low. The plaintiffs are
seeking unspecified damages and injunctive relief against the merger. NeoMedia
has moved to dismiss the complaint as frivolous. The case is still pending.
On October 19, 2005, Wachovia Bank, N.A. filed a complaint against
NeoMedia in the twentieth judicial circuit court of Lee County, Florida, seeking
payment of $97,000 of rent from previous years. NeoMedia has placed the
requested funds into escrow with the court, pending resolution of the matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 16, 2005, NeoMedia held its annual meeting of shareholders, at
which the following matters were ratified:
o Each of Charles T. Jensen, Charles W. Fritz, William E. Fritz,
A. Hayes Barclay, and James J. Keil were re-elected as
directors
o Stonefield Josephson, Inc. was named as NeoMedia's auditors
for the fiscal year ended December 31, 2005, and
o The 2005 Stock Option Plan, which contains up to 60 million
shares underlying future option issuances, was adopted.
The number of votes cast for each matter were:
Broker
Matter For Against Withheld Non-votes Total
--------------- --------------- --------------- --------------- --------------- ---------------
Matter #1
---------
Barclay, A. Hayes 428,582,677 -- 5,069,186 -- 433,651,863
Fritz, Charles W 429,204,100 -- 4,447,763 -- 433,651,863
Fritz, William E 428,974,763 -- 4,677,100 -- 433,651,863
Jensen, Charles T 428,701,413 -- 4,950,450 -- 433,651,863
Keil, James J 428,500,377 -- 5,151,486 -- 433,651,863
Matter #2
---------
Ratification of
Stonefield
Josephson, Inc. as
independent auditors 432,186,015 864,437 601,411 -- 433,651,863
Matter #3
---------
2005 Stock Option
Plan 122,359,392 17,803,875 1,279,861 292,208,735 433,651,863
37
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. The Company's shares trade on the OTC Bulletin
Board under the symbol "NEOM." As of December 31, 2005, the Company had
467,601,717 common shares outstanding.
The following table summarizes the high and low closing sales prices per
share of the common stock for the periods indicated as reported on The OTC
Bulletin Board:
(U.S. $)
-------------------------------
2004 HIGH LOW
-------------- -------------- --------------
First Quarter $ 0.16 $ 0.14
Second Quarter 0.11 0.05
Third Quarter 0.12 0.06
Fourth Quarter 0.30 0.06
2005 HIGH LOW
-------------- -------------- --------------
First Quarter $ 0.29 $ 0.22
Second Quarter $ 0.72 $ 0.19
Third Quarter $ 0.51 $ 0.32
Fourth Quarter $ 0.45 $ 0.28
(b) Holders. As of December 31, 2005, NeoMedia had an estimated 13,500
recordholders of common stock.
(c) Dividends. The Company has not declared or paid any cash dividends on
its common stock during the years ended December 31, 2004 or 2005. The Company
will base any issuance of dividends upon its earnings, financial condition,
capital requirements and other factors considered important by its board of
directors. Delaware law and the Company's certificate of incorporation do not
require the board of directors to declare dividends on the Company's common
stock. The Company expects to retain all earnings, if any, generated by its
operations for the development and growth of its business and does not
anticipate paying any dividends to its stockholders for the foreseeable future.
On October 26, 2004, NeoMedia announced that it would issue a property
dividend with the distribution of common shares of iPoint-media Ltd. of Tel
Aviv. The date of the property dividend payment will be announced after the
United States Securities and Exchange Commission declares iPoint-media's
registration statement on Form SB-2 effective. iPoint-media filed their SB-2
(Registration No. 333-126342) on July 1, 2005, and amended the filing on January
12, 2006.
(d) Recent Issuances of Unregistered Securities.
On July 26, 2005, the Company issued to Newbridge Securities, an unrelated
party, 44,723 shares of common stock in exchange for placement agent services to
be provided in connection with NeoMedia's Standby Equity Distribution Agreement
with Cornell Capital Partners. The shares were valued at $0.41, which was the
market price at the time of issuance.
38
On June 25, 2004, the Company issued to Marvin Tkachuk, an unrelated
distribution agent, 322,228 shares of common stock in exchange for exclusivity
rights under a distribution contract. The shares were valued at $0.074, which
was the market price at the time of the agreement.
On June 9, 2004, the Company issued to Stanton Hill, a current outside
consultant and former president of CSI International, Inc., 518,185 shares of
common stock as payment for debt acquired with the purchase by NeoMedia of CSI
in February 2004. The shares were valued at $0.061, which was the market price
at the time of the agreement.
On March 8, 2004, the Company issued to Stone Street Asset Management,
LLC, 40,000,000 warrants to purchase shares of common stock at an exercise price
of $0.05 per share. The market price at the time of issuance was $0.11.
On February 25, 2004, the Company issued 103,199 shares of stock to David
Kaminer, as payment of past due professional services. The shares were valued at
$0.097. The market price at the time of the agreement was $0.102.
On February 6, 2004, the Company issued 7,000,000 shares of common stock
to CSI International, Inc. shareholders in connection with NeoMedia's purchase
of CSI. The closing market price on the date of issuance was $0.10.
The Company relied upon the exemption provided in Section 4(2) of the
Securities Act and/or Rule 506, 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 certificates representing the
securities issued displayed a restrictive legend to prevent transfer except in
compliance with applicable laws, and the Company's transfer agent was instructed
not to permit transfers unless directed to do so by us, after approval by the
Company's 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.
39
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
During 2005, NeoMedia continued its efforts to commercialize its two
primary lines of business, NeoMedia Mobile and NeoMedia Micro Paint Repair, both
in North America and overseas. As part of the commercialization efforts,
NeoMedia began to implement an aggressive growth campaign focusing on expansion
through three major avenues: acquisition and globalization.
To this end, during the second half of 2005 and the first quarter of 2006,
NeoMedia made the following strategic maneuvers:
August 2005: signed agreement to distribute Micro Paint products to
China via Jinche automotive group
September 2005: signed agreement to distribute Micro Paint products to
Mexico and Latin America via Micropaint de Mexico
October 2005: signed letter of intent to acquire Mobot
October 2005: signed agreement to distribute Micro Paint products to
Scandinavia via WITHO-AS
December 2005: signed agreements to distribute DuPont and PPG
automotive aftermarket products to Jinche in China
February 2006: completed acquisitions of Mobot (US), 12Snap
(Europe), Gavitec (Europe), and Sponge (Europe); signed
letter of intent to acquire Hip Cricket; completed $27
million funding to finance acquisitions and future
growth
March 2006: completed acquisition of BSD Software, creating the
NeoMedia Telecom Services (NTS) business unit
Acquisitions
During 2005 and the first quarter of 2006, NeoMedia has aggressively
pursued acquisitions that will confirm its presence in the global mobile
marketing space. To this end, NeoMedia has completed, or agreed to complete, the
following acquisitions:
12Snap AG. On February 10, 2006, NeoMedia and 12Snap AG ("12Snap")
signed a definitive sale and purchase agreement under which NeoMedia
acquired all of the outstanding shares of 12Snap in exchange for
$2,500,000 cash and $19,500,000 in shares of NeoMedia common stock. The
$19,500,000 stock portion of the purchase price is represented by
49,294,581 shares of NeoMedia common stock, calculated by dividing
$19,500,000 by the volume-weighted average closing price of NeoMedia
common stock for the ten days up to and including February 9, 2006. On
February 28, 2006, NeoMedia and 12Snap completed the closing requirements
and the acquisition became effective. 12snap AG is a non-public
incorporated company headquartered in Munich with branches in Dusseldorf,
New York, London, Milan, Stockholm, Romania and Vienna. As an expert in
innovative marketing and entertainment for mobile phones, 12snap combines
40
know-how in mobile applications, mobile loyalty and mobile marketing. In
the mobile marketing space, 12snap creates and implements national and
pan-European mobile marketing campaigns for international brands; its
mobile loyalty business unit offers customer loyalty programs for
companies and brands, and its mobile applications business unit is the
center for development and software. 12snap sells and licenses a wide
spectrum of mobile solutions to satisfy the demands of the current growing
market and the new uses of the third mobile phone generation from dynamic
video services and multiplayer games to personalized messaging
applications. 12snap has 75 employees, and provides services to companies
including McDonald's, MTV(R), Coca-Cola, Ferrero, Wella, adidas, Unilever
and Gillette(R).
Sponge Ltd. On February 20, 2006, NeoMedia and Sponge Limited
("Sponge") of London (www.spongegroup.com) signed a definitive share
purchase agreement under which NeoMedia acquired all of the outstanding
shares of Sponge in exchange for (pound)3,450,000 (approximately $6
million) cash and (pound)6,550,000 (approximately $11.4 million) in shares
of NeoMedia common stock. The (pound)6,550,000 stock portion of the
purchase price is represented by 29,696,745 shares of NeoMedia common
stock, calculated by dividing (pound)6,550,000 by the volume-weighted
average closing price of NeoMedia common stock for the ten days up to and
including February 8, 2006. The agreement also calls for Sponge to earn an
additional (pound)2,500,000 (approximately $4.4 million) in the form of
NeoMedia common stock if, during the two-year period beginning at closing,
the Sponge business earns in excess of (pound)1,300,000 (approximately
$2.3 million) in net profits. On February 23, 2006, NeoMedia and Sponge
completed the closing requirements and the acquisition became effective.
Founded in 2001, Sponge has grown to become a U.K. market leader in
providing mobile applications to agencies and media groups, and gain
recognition as one of Europe's top independent developers of mobile
applications and content. Today, Sponge counts more than 40 agencies,
including WPP, Aegis and BBH, as clients, and supplies services for over
100 world-class brands, including Coca Cola(R), Heineken(R) and Diageo.
Sponge also supplies a range of mobile services to media groups, including
News International, Trinity Mirror, Endemol and IPC
Gavitec AG. On February 17, 2006, NeoMedia and Gavitec AG
("Gavitec") of Wurselen, Germany (www.gavitec.com) signed a definitive
sale and purchase agreement under which NeoMedia acquired all of the
outstanding shares of Gavitec in exchange for $1,800,000 cash and
$5,400,000 in shares of NeoMedia common stock. The $5,400,000 stock
portion of the purchase price is represented by 13,660,511 shares of
NeoMedia common stock, calculated by dividing $5,400,000 by the
volume-weighted average closing price of NeoMedia common stock for the ten
days up to and including February 16, 2006. On February 23, 2006, NeoMedia
and Gavitec completed the closing requirements and the acquisition became
effective. Gavitec was founded in 1997 as a specialized provider and
manufacturer of products and solutions for mobile marketing and mobile
information technology. As a technology leader in code-reading systems and
software for mobile applications, Gavitec offers its clients standardized
or individual solutions in the areas of mobile loyalty, mobile ticketing,
mobile couponing, and mobile payment systems
Mobot, Inc. On February 9, 2006, NeoMedia and Mobot, Inc.
(www.mobot.com) ("Mobot") signed a definitive merger agreement under which
NeoMedia acquired all of the outstanding shares of Mobot in exchange for
$3,500,000 cash and $6,500,000 in shares of NeoMedia common stock. The
$6,500,000 stock portion of the purchase price is represented by
16,931,493 shares of NeoMedia common stock, calculated by dividing
$6,500,000 by the volume-weighted average closing price of NeoMedia common
stock for the ten day up to and including February 8, 2006. On February
17, 2006, NeoMedia and Mobot completed the closing requirements and the
acquisition became effective. Mobot is a pioneer in visual search and
recognition technology designed to make marketing effective and innovative
using mobile devices. Launched in 2004 to help companies cultivate
rewarding relationships with the world's 1.5 billion mobile phone users,
Mobot gives marketers, content providers and carriers the tools to make it
easy for any consumer with a camera phone to interact with their
offerings.
41
BSD Software, Inc. On March 21, 2006, NeoMedia completed its
acquisition of BSD Software, Inc. of Calgary, Alberta, Canada. BSD owns
90% of the outstanding shares of Triton Global Business Services, Inc., a
provider of live and automated operator calling services and e-business
support, including billing, clearinghouse and information management
services, to companies in the telecommunications industry. After exchange
of shares certificates, NeoMedia expects to issue 7,123,698 shares of its
common stock in connection with the acquisition.
Hip Cricket, Inc. On February 16, 2006, NeoMedia signed a
non-binding letter of intent to acquire HipCricket, Inc. ("HipCricket") of
Essex, CT (www.hipcricket.com) in exchange for $500,000 cash and
$4,000,000 of NeoMedia common stock. The letter of intent is subject to
due diligence and signing of a mutually agreeable definitive purchase
agreement by both parties. HipCricket is a leading mobile marketing firm
that provides innovative, custom solutions to broadcasters and brand
marketers. Today, HipCricket works with five of the top 10 radio groups in
the U.S. as well as with some 40 major brand marketers. HipCricket
combines senior marketing expertise with state-of-the-art mobile and event
marketing technologies to offer clients unprecedented interactivity with
their consumers, viewers, listeners or customers on a one-to-one personal
level.
Auto Preservation, Inc. On February 25, 2005, NeoMedia signed two
non-binding Letters of Intent to acquire up to 100% of Automotive
Preservation, Inc. ("AP"), a distributor of automotive paint and accessory
products, from AP's parent company, PUPS. The first Letter of Intent calls
for NeoMedia to initially acquire 30% of AP for $1,600,000, to be paid
$600,000 in cash, $554,000 in shares of NeoMedia restricted common stock,
and $446,000 through the assumption of AP debt by NeoMedia. Under the
second Letter of Intent, upon completion of the acquisition of the initial
30% of AP by NeoMedia, NeoMedia would have the option to acquire an
additional 30% of AP for $1,650,000, payable in shares of NeoMedia
restricted common stock. The second Letter of Intent also gives NeoMedia
the option to purchase the final 40% of AP for either: (i) $2,200,000,
payable in shares of NeoMedia restricted common stock, if NeoMedia
exercises this right within 12 months of acquiring the second 30% of AP,
or (ii) a price equivalent to AP's previous quarter EBITDA multiplied by
8, payable in shares of NeoMedia restricted common stock. Both Letter of
Intent are non-binding and subject to due diligence by NeoMedia and AP. On
September 21, 2005, the BOD approved to change the deal structure for the
acquisition of AP, so that the Company would acquire only 30% of AP for a
total purchase price of $1.6 million of which $600K would be paid in cash
and $446K would be paid through the assumption of debt, and $554K through
the issuance of restricted Neomedia stock. Neomedia will not acquire the
remaining 70% of AP under the new structure.
Consulting & Integration Services Business Unit
As part of the acceleration of global expansion in PaperClick and Paint,
as well as the creation of the NTS business unit through the BSD acquisition,
NeoMedia also decided in February 2006 to wind down its legacy NeoMedia
Consulting & Integration Services (NCIS) business unit. The NCIS unit consisted
of client-server equipment and related software resales. The resale market has
been commoditized over the past several years, and NeoMedia believes its
resources are better spent on the development and commercialization of its NMM,
NMPR and NTS business units. Certain of the proprietary products associated with
the NCIS business, such as PDF-417 and Maxicode print encoder software and WISP
migration tools, will be retained by NeoMedia and consolidated with the NMM
unit. NeoMedia will not pursue additional resales of hardware and software or
integration services.
42
Critical Accounting Policies
The United States Securities and Exchange Commission (the "SEC") issued
Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure
About Critical Accounting Policies" ("FRR 60"), suggesting companies provide
additional disclosure and commentary on their most critical accounting policies.
In FRR 60, the SEC defined the most critical accounting policies as the ones
that are most important to the portrayal of a company's financial condition and
operating results, and require management to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. Based on this definition, NeoMedia's most
critical accounting policies include: inventory valuation, which affects cost of
sales and gross margin; and the valuation of intangibles, which affects
amortization and impairment of goodwill and other intangibles. NeoMedia also has
other key accounting policies, such as policies for revenue recognition,
including the deferral of a portion of revenues on sales to distributors,
allowance for doubtful accounts, and stock-based compensation. The methods,
estimates and judgments NeoMedia uses in applying these most critical accounting
policies have a significant impact on the results it reports in its consolidated
financial statements.
Intangible Asset Valuation. The determination of the fair value of certain
acquired assets and liabilities is subjective in nature and often involves the
use of significant estimates and assumptions. Determining the fair values and
useful lives of intangible assets especially requires the exercise of judgment.
While there are a number of different generally accepted valuation methods to
estimate the value of intangible assets acquired, NeoMedia primarily uses the
weighted-average probability method outlined in SFAS 144. This method requires
significant management judgment to forecast the future operating results used in
the analysis. In addition, other significant estimates are required such as
residual growth rates and discount factors. The estimates NeoMedia has used are
consistent with the plans and estimates that NeoMedia uses to manage its
business, based on available historical information and industry averages. The
judgments made in determining the estimated useful lives assigned to each class
of assets acquired can also significantly affect NeoMedia's net operating
results.
According to SFAS 144, a long-lived asset should be tested for
recoverability whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. The following are examples of such
events or changes in circumstances:
- A significant decrease in the market price of the asset
- A significant adverse change in the extent or manner in which the
asset is being used, or in its physical condition
- A significant adverse change in legal factors or in the business
climate that could affect the value of the asset, including an
adverse action or assessment by a regulator
- An accumulation of costs significantly in excess of the amount
originally expected
- A current-period operating or cash flow loss combined with a history
of operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of the asset
- A current expectation that, more likely than not, the asset will be
sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
NeoMedia follows the two-step process outlined in SFAS 144 for determining if an
impairment charge should be taken: (1) the expected undiscounted cashflows from
a particular asset or asset group are compared to the carrying value; if the
expected undiscounted cashflows are greater than the carrying value, no
impairment is taken, but if the expected undiscounted cashflows are less than
the carrying value, then (2) an impairment charge is taken for the difference
between the carrying value and the expected discounted cashflows. The
43
assumptions used in developing expected cashflow estimates are similar to those
used in developing other information used by NeoMedia for budgeting and other
forecasting purposes. In instances where a range of potential future cashflows
is possible, NeoMedia uses a probability-weighted approach to weigh the
likelihood of those possible outcomes. NeoMedia used a rate of 10% for purposes
of discounting cashflows in 2005.
Allowance for Doubtful Accounts. NeoMedia maintains an allowance for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. Allowance for doubtful accounts is based on
NeoMedia's assessment of the collectibility of specific customer accounts, the
aging of accounts receivable, NeoMedia's history of bad debts, and the general
condition of the industry. If a major customer's credit worthiness deteriorates,
or NeoMedia's customers' actual defaults exceed historical experience,
NeoMedia's estimates could change and impact its reported results.
Inventory. Inventories are stated at lower of cost (using the first-in,
first-out method) or market. NeoMedia continually evaluates the composition of
its inventories assessing slow-moving and ongoing products and maintains a
reserve for slow-moving and obsolete inventory as well as related disposal
costs.
Stock-based Compensation. NeoMedia records stock-based compensation to
outside consultants at fair market value in general and administrative expense.
NeoMedia does not record expense relating to stock options granted to employees
with an exercise price greater than or equal to market price at the time of
grant. NeoMedia reports pro forma net loss and loss per share in accordance with
the requirements of SFAS 123 and 148. This disclosure shows net loss and loss
per share as if NeoMedia had accounted for its employee stock options under the
fair value method of those statements. Pro forma information is calculated using
the Black Scholes option pricing model on the date of grant. This option
valuation model requires input of highly subjective assumptions. Because
NeoMedia's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing model does not necessarily provide a reliable single
measure of fair value of its employee stock options.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. The Company is currently evaluating the impact of the
adoption of this Statement.
Estimate of Litigation-based Liability. NeoMedia is defendant in certain
litigation in the ordinary course of business (see the section of this
information statement/prospectus entitled "Legal Proceedings"). NeoMedia accrues
liabilities relating to these lawsuits on a case-by-case basis. NeoMedia
generally accrues attorney fees and interest in addition to the liability being
sought. Liabilities are adjusted on a regular basis as new information becomes
available. NeoMedia consults with its attorneys to determine the viability of an
expected outcome. The actual amount paid to settle a case could differ
materially from the amount accrued.
44
Revenue Recognition. NeoMedia derives revenues from three primary sources:
(1) license revenues and (2) resale of software and technology equipment and
service fee revenues, and (3) sale of its proprietary Micro Paint Repair
solution.
(1) License fees, including Intellectual Property licenses,
represent revenue from the licensing of NeoMedia's proprietary
software tools and applications products. NeoMedia licenses
its development tools and application products pursuant to
non-exclusive and non-transferable license agreements. Resales
of software and technology equipment represent revenue from
the resale of purchased third party hardware and software
products and from consulting, education, maintenance and post
contract customer support services.
The basis for license fee revenue recognition is substantially
governed by American Institute of Certified Public Accountants
("AICPA") Statement of Position 97-2 "Software Revenue
Recognition" ("SOP 97-2"), as amended, and Statement of
Position 98-9, Modification of SOP 97-2, "Software Revenue
Recognition, With Respect to Certain Transactions.". License
revenue is recognized if persuasive evidence of an agreement
exists, delivery has occurred, pricing is fixed and
determinable, and collectibility is probable.
(2) Revenue for resale of software and technology equipment and
service fee is recognized based on guidance provided in SEC
Staff Accounting Bulletin ("SAB") No. 104, "Revenue
Recognition in Financial Statements," as amended (SAB 104).
Software and technology equipment resale revenue is recognized
when all of the components necessary to run software or
hardware have been shipped. Service revenues including
maintenance fees for providing system updates for software
products, user documentation and technical support are
recognized over the life of the contract. Software license
revenue from long-term contracts has been recognized on a
percentage of completion basis, along with the associated
services being provided. Other service revenues, including
training and consulting, are recognized as the services are
performed. NeoMedia uses stand-alone pricing to determine an
element's vendor specific objective evidence ("VSOE") in order
to allocate an arrangement fee amongst various pieces of a
multi-element contract. NeoMedia records an allowance for
doubtful accounts on a customer-by-customer basis as
appropriate.
In December 2003, the SEC issued SAB 104, "Revenue
Recognition." SAB 104 supersedes SAB 101, "Revenue Recognition
in Financial Statements." SAB 104's primary purpose is to
rescind accounting guidance contained in SAB 101 related to
multiple element revenue arrangements, superseded as a result
of the issuance of EITF 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." Additionally, SAB
104 rescinds the SEC's Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers (the "FAQ")
issued with SAB 101 that had been codified in SEC Topic 13,
Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. While the wording of SAB 104 has
changed to reflect the issuance of EITF 00-21, the revenue
recognition principles of SAB 101 remain largely unchanged by
the issuance of SAB 104, which was effective upon issuance.
The adoption of SAB 104 did not impact NeoMedia's consolidated
financial statements.
45
(3) Revenue for training and certification on NeoMedia's Micro
Paint Repair systems is recognized equally over the term of
the contract, which is currently one year. A portion of the
initial fee paid by the customer is allocated to training
costs and initial products sold with the system, and is
recognized upon completion of training and shipment of the
products, provided there is VSOE in a multiple element
arrangement. Ongoing product and service revenue is recognized
as products are shipped and services performed.
Income Tax Valuation Allowance. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be recognized.
The Company has recorded a 100% valuation allowance as of December 31, 2005.
46
Results of Operations for the Year Ended December 31, 2005 as Compared to the
Year Ended December 31, 2004
Net sales. Total net sales for the year ended December 31, 2005 were
$2,156,000, which represented a $456,000, or 27%, increase from $1,700,000 for
the year ended December 31, 2004. This increase primarily resulted from
increased sales from the Company's Micro Paint Repair business, offset by the
reduced resales of Sun Microsystems equipment due to increased competition in
that industry that led NeoMedia to wind down this business unit during the first
quarter of 2006. NeoMedia could realize a material increase in revenue over the
next 12 months due to the recent acquisitions of Mobot, 12Snap, Sponge, Gavitec,
and BSD. NeoMedia could also realize a material increase in revenue over the
next 12 months if the Company is successful in implementing its PaperClick(R)
go-to-market strategy, if pending court cases involving its intellectual
property are resolved in NeoMedia's favor, or if it is successful in
implementing the expansion of the Micro Paint Repair business unit into China
and other geographies.
License fees. License fees were $523,000 for the year ended December 31,
2005, compared with $343,000 for the year ended December 31, 2004, an increase
of $180,000, or 52%. The increase was primarily due to revenue associated with
settlements of patent-related lawsuits in 2005. NeoMedia could realize an
increase in license fees over the next 12 months due to the recent acquisitions
of Mobot, 12Snap, Sponge, Gavitec, and BSD, if the Company is successful in
implementing its PaperClick(R) go-to-market strategy, or if pending court cases
involving its intellectual property are resolved in NeoMedia's favor.
Resales of software and technology equipment and service fees. Resales of
software and technology equipment and service fees decreased by $276,000, or
44%, to $354,000 for the year ended December 31, 2005, as compared to $630,000
for the year ended December 31, 2004. This decrease primarily resulted from
reduced resales of Sun Microsystems equipment due to increased competition and
general downturn in the resale market over the past several years. As a result,
NeoMedia formally decided to wind down this business unit during the first
quarter of 2006, and as a result does not expect additional material hardware
and software resales in 2006 and beyond. NeoMedia does however, plan to continue
servicing existing contracts and customers.
Micro Paint Repair products and services. Sales of Micro Paint Repair
products and services were $1,279,000 for the year ended December 31, 2005,
compared with $727,000 for the year ended December 31, 2004, an increase of
$552,000, or 76%. This increase is primarily due to the expansion of the
business unit into new markets such as China, Australia/New Zealand, Scandinavia
and Mexico. NeoMedia could realize a material increase in Micro Paint Repair
revenue if the Company is successful in continuing the expansion of the business
unit into China and other geographies.
Cost of license fees. Cost of license fees was $453,000 for the year ended
December 31, 2005, an increase of $129,000, or 40%, compared with $324,000 for
the year ended December 31, 2004. The increase resulted from increased
amortization of capitalized patent costs during 2005 compared with 2004.
Cost of resales of software and technology equipment and service. Cost of
resales of software and technology equipment and service was $206,000 for the
year ended December 31, 2005, a decrease of $398,000, or 66%, compared with
$604,000 for the year ended December 31, 2004. The decrease resulted from
decreased resales in 2005 compared with 2004. Cost of resales as a percentage of
related resales was 58% in 2005, compared to 96% in 2004. This decrease is due
to a reduction in 2005 of the hired personnel costs associated with providing
service revenue.
Cost of Micro Paint Repair products and services. Cost of Micro Paint
Repair products and services was $913,000 for the year ended December 31, 2005,
compared with $541,000 for the year ended December 31, 2004, an increase of
$372,000, or 69%. This increase is in direct correlation of increased sales.
Cost of micro paint repair products and services as a percentage of related
47
sales was 71% in 2005, compared to 74% in 2004. NeoMedia expects cost of micro
paint repair products and services to increase with Micro Paint Repair revenue
over the next 12 months as the Company continues to expand globally.
Gross Profit. Gross profit was $584,000 for the year ended December 31,
2005, an increase of $353,000, or 153%, compared with gross profit of $231,000
for the year ended December 31, 2004. This increase was primarily the result of
increased sales and corresponding margin of the Company's Micro Paint Repair
products and services.
Sales and marketing. Sales and marketing expenses were $4,186,000 for the
year ended December 31, 2005, compared to $2,046,000 for the year ended December
31, 2004, an increase of $2,140,000 or 105%. This increase resulted primarily
from the addition of sales force and cost associated with marketing and
promotion of the Company's PaperClick(R) and Micro Paint Repair products.
NeoMedia expects sales and marketing expense to increase over the next 12 months
with the continued development and expansion of the PaperClick(R) and Micro
Paint Repair product groups, as well as the acquisitions of Mobot, 12Snap,
Sponge, Gavitec, and BSD.
Impairment charges. During the year ended December 31, 2005, NeoMedia
recognized an impairment of an intangible asset of $335,000 relating to the
write-down of an intangible asset. During the year ended December 31, 2004, no
impairment charges were taken. The impairment relates to the assets purchased
from Secure Source Technologies, Inc. during 2003 that are part of the NeoMedia
Internet Switching Service (NISS) business unit. The impairment is due to the
fact that the intangible assets purchased are not generating any revenue at the
present time and NeoMedia's management does not foresee these assets generating
revenue in the near term. The amount of impairment was determined by determining
the fair value of the intangible assets using the discounted cashflow method.
General and administrative. General and administrative expenses increased
by $1,160,000, or 52%, to $3,375,000 for the year ended December 31, 2005,
compared to $2,215,000 for the year ended December 31, 2004. The increase
resulted primarily from additional personnel and higher legal and professional
fees in 2005 resulting from registration and regulatory filings. NeoMedia
expects general and administrative expense to increase over the next 12 months
with the Mobot, 12Snap, Sponge, Gavitec, and BSD, and the continued expansion of
the PaperClick and Micro Paint business units.
Research and development. During the year ended December 31, 2005,
NeoMedia charged to expense $934,000 of research and development costs, an
increase of $283,000 or 43% compared to $651,000 for the year ended December 31,
2004. The increase is primarily due to the addition of development staff hired
in connection with the commercialization of the PaperClick product line.
NeoMedia expects research and development costs to increase over the next 12
months with the continued development efforts of its PaperClick(R) and Micro
Paint Repair products and services, as well as with the addition of research and
development resources acquired with Mobot, 12Snap, Sponge and Gavitec.
Gain on extinguishment of debt. During the year ended December 31, 2005,
NeoMedia recognized a gain on extinguishment of debt of $172,000, resulting from
the payment of debt at a discount to the book value of the debt, an increase of
$32,000, or 23%, compared with a gain on extinguishment of debt of $140,000 for
the year ended December 31, 2004. These gains resulted from a difference between
the cash or market value of stock issued to settle the debt and the carrying
value of the debt at the time of settlement.
Impairment charge on investments. During the year ended December 31, 2005,
NeoMedia recognized an impairment of investment of $780,000 relating to the
write-down of its investment. During the year ended December 31, 2004, no
impairment charges were taken. The Impairment relates to the investment in
iPoint-Media Ltd. ("iPoint") for $530,000 and the investment in Intactis
Software, Inc. ("Intactis") for $250,000. These investments are not part of a
specific business segment and as such are charged against the corporate segment.
48
The impairment relating to iPont primarily results from a delay in registration
for the resale of the shares held by NeoMedia. The impairment of the investment
in Intactis is a result of NeoMedia management's expectation that additional
investment or research and development resources would be required in order to
recoup the initial investment. The amount of impairment for both iPoint and
Intactis was determined by determining the fair value of the assets using the
discounted cashflow method.
Amortization of debt discount. During the year ended December 31, 2004,
NeoMedia recognized an amortization of debt issuance cost of $2,500,000 relating
to the fair value of warrants granted to Cornell Capital Partners in connection
with promissory notes issued to Cornell by NeoMedia during January 2004. During
the year ended December 31, 2004, NeoMedia amortized the full $2.5 million
discount value relating to the Cornell warrants, and as a result does not expect
to recognize such expense in the next 12 months. During the year ended December
31, 2005, NeoMedia did not recognize any such expense.
Interest expense. Interest expense consists primarily of interest accrued
for creditors as part of financed purchases, past due balances, notes payable
and interest earned on cash equivalent investments. Interest expense increased
by $104,000, or 55%, to $293,000 for the year ended December 31, 2005 from
$189,000 for the year ended December 31, 2004, due to increased expense
associated with interest on notes payable in 2005 compared with 2004.
Net Loss. The net loss for the year ended December 31, 2005 was
$9,147,000, which represented a $1,917,000, or 27% increase from a $7,230,000
loss for the year ended December 31, 2004. The increase resulted from impairment
charge of intangible assets in 2005, as well as increased selling, general, and
administrative expenses associated with the continued commercialization and
expansion of the PaperClick and micro Paint business units.
Liquidity and Capital Resources
As of December 31, 2005, NeoMedia's cash balance was $2,291,000, compared
to $2,634,000 at December 31, 2004.
Net cash used in operating activities was approximately $6,509,000 for the
year ended December 31, 2005, compared with $4,650,000 for the year ended
December 31, 2004, an increase of $1,859,000, or 40%. The increase was primarily
due to increased selling, general, and administrative expenses in 2005
associated with the continued commercialization and expansion of the PaperClick
and micro Paint business units, and the continued payment of accounts payable
and accruals incurred in previous years.
NeoMedia's net cash flow used in investing activities for the years ended
December 31, 2005 and 2004, was $4,169,000 and $3,642,000, respectively, an
increase of $527,000, or 15%. The increase was primarily due to the acquisition
in 2005 of patents from Loyaltypoint, Inc. for $1.4 million, advances to Mobot
of $1.5 million and the investments in Intactis, Inc. and Pickups Plus, Inc.
Net cash provided by financing activities for the years ended December 31,
2005 and 2004 was $10,306,000 and $10,925,000, respectively, a decrease of
$619,000, or 6%. The decrease was, due to fewer options and warrants exercised
in 2005.
During the years ended December 31, 2005 and 2004, NeoMedia's net loss
totaled $9,147,000 and $7,230,000, respectively. As of December 31, 2005,
NeoMedia had accumulated losses from operations of $92,524,000, had a working
capital deficit of $4,874,000, and $2,291,000 in cash balances.
During February 2006, NeoMedia's Board of Directors elected to formally
wind down the NCIS business unit. As a result, during February 2006, NeoMedia
closed its Lisle, Illinois facility out of which the NCIS business unit was
based. NeoMedia plans to continue servicing existing contracts and customers.
NeoMedia management expects that the effect on cashflow will be positive, since
49
the majority of the revenue relating to the NCIS business unit in 2005 was
derived from licenses of software products that will be retained in the NeoMedia
Mobile Business Unit, and certain overhead costs associated with the business
unit were eliminated in the winding down process.
Going Concern
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company has reported net losses of $9,197,000 and $7,230,000 for
the years ended December 31, 2005 and 2004, respectively and has an accumulated
deficit of $92,574,000 as of December 31, 2005. In addition, the Company had
working capital deficit of $4,874,000 as of December 31, 2005. All of the
factors discussed above, amongst others, raise substantial doubt about the
Company's ability to continue as a going concern.
If the Company's financial resources are insufficient the Company may
require additional financing in order to execute its operating plan and continue
as a going concern. The Company cannot predict whether this additional financing
will be in the form of equity, debt, or another form. The Company may not be
able to obtain the necessary additional capital on a timely basis, on acceptable
terms, or at all. In any of these events, the Company may be unable to implement
its current plans for expansion, repay its debt obligations as they become due
or respond to competitive pressures, any of which circumstances would have a
material adverse effect on its business, prospects, financial condition and
results of operations. The financial statements do not include any adjustments
relating to the recoverability and reclassification of recorded asset amounts or
amounts and reclassification of liabilities that might be necessary, should the
Company be unable to continue as a going concern.
During the first quarter of 2006, NeoMedia received approximately $14.1
million net proceeds from the convertible preferred stock sale to Cornell, and
an additional $4 million proceeds received upon exercise of warrants held by
Cornell. NeoMedia used $13.8 million of the proceeds to pay the cash portion of
the purchase price of Mobot, Gavitec, Sponge, and 12Snap. NeoMedia expects to
receive an additional $6 million proceeds from the exercise of additional
warrants held by Cornell, the exercise of which can be forced by NeoMedia if the
closing bid price of NeoMedia stock is greater than $0.30 for five consecutive
days, and NeoMedia will also receive an additional $5 million upon registration
of the shares underlying the convertible preferred stock held by Cornell.
NeoMedia intends to fund its growth and working capital deficiencies from
the following sources during 2006 and beyond:
Warrant Exercises
On February 9, 2006, Cornell exercised warrants to purchase 20,000,000
shares of NeoMedia common stock, par value $0.01 per share. The warrants were
issued to Cornell Capital on March 30, 2005 as a commitment fee for Cornell
Capital entering into that certain Standby Equity Distribution Agreement, dated
March 30, 2005 by and between NeoMedia and Cornell Capital. The warrants had an
exercise price equal to $0.20 per share. In connection with the exercise of the
20,000,000 Warrants, NeoMedia received proceeds of $4,000,000. NeoMedia expects
to receive an additional $6 million proceeds from the exercise of additional
warrants held by Cornell, the exercise of which can be forced by NeoMedia if the
closing bid price of NeoMedia stock is greater than $0.30 for five consecutive
days.
50
$27 Million Convertible Preferred Stock Sale
On February 17, 2006, NeoMedia entered into an investment agreement with
Cornell. Pursuant to the Investment Agreement, NeoMedia issued and sold to
Cornell Twenty-Seven Million Dollars (US $27,000,000) of Series C Preferred
Shares (the "Series C Preferred Shares"), of which (i) Three Million Two Hundred
Eight Thousand Seven Hundred Two Dollars ($3,208,702) were purchased by Cornell
for consideration solely consisting of surrendering that certain Promissory
Note, dated March 30, 2005 in the original principal amount of Ten Million
Dollars (US $10,000,000) issued in the name of Cornell, (ii) Eighteen Million
Seven Hundred Ninety-One Thousand Two Hundred Ninety-Eight Dollars (US
$18,791,298) were purchased by additional funding (consisting of $16,791,298 of
immediately available funds and $2,000,000 of securities) from Cornell as of
February 17, 2006, and (iii) Five Million Dollars (US $5,000,000) shall be
purchased by an additional funding by Cornell on the date a registration
statement filed by the Company pursuant to the terms of that certain Investor
Registration Rights Agreement, dated February 17, 2006 by and between the
Company and Cornell is declared effective by the U.S. Securities and Exchange
Commission. The Series C Preferred Shares are convertible into shares of the
Company's common stock, par value $0.01 per share in accordance with the terms
of the Company Certificate of Designations, Preferences, and Rights of the
Series C Preferred Shares.
In addition, pursuant to the terms of the Investment Agreement, the
Company issued to Cornell (i) a warrant to purchase twenty million (20,000,000)
shares of NeoMedia common stock exercisable for a period of 5 years at an
exercise price of $0.50 per share; (ii) a warrant to purchase twenty-five
million (25,000,000) shares of common stock exercisable for a period of 5 years
at an exercise price of $0.40 per share; and (iii) a warrant to purchase thirty
million (30,000,000) shares of common stock exercisable for a period of 5 years
at an exercise price of $0.35 per share.
$100 million SEDA
On March 30, 2005, NeoMedia and Cornell Capital Partners entered into a
Standby Equity Distribution Agreement under which Cornell agreed to purchase up
to $100 million of NeoMedia's common stock over a two-year period, with the
timing and amount of the purchase at NeoMedia's discretion. The maximum amount
of each purchase would be $2,000,000 with a minimum of five business days
between advances. NeoMedia expects to file a registration statement with the SEC
during 2006 to register the shares underlying the $100 million 2005 SEDA. The
2005 SEDA would become available at the time the SEC declares effective a
registration statement containing such shares. As a commitment fee for the SEDA,
NeoMedia issued to Cornell 50 million warrants to purchase shares of NeoMedia
common stock at an exercise price of $0.20 per share. 20 million of the Cornell
warrants were exercised in February 2006, generating $4 million cash proceeds to
NeoMedia.
Should these financing sources fail to materialize, management would seek
alternate funding sources through sale of common and/or preferred stock.
Management's plan is to secure adequate funding to bridge the profitability from
the Company's PaperClick business, intellectual property portfolio and Micro
Paint Repair business.
There can be no assurances that the market for NeoMedia's stock will
support the sale of sufficient shares of NeoMedia's common stock to raise
sufficient capital to sustain operations for such a period, or that actual
revenue will meet management's expectations. If necessary funds are not
available, NeoMedia's business and operations would be materially adversely
affected and in such event, NeoMedia would attempt to reduce costs and adjust
its business plan.
51
Contractual Obligations
The following table presents the Company's contractual obligations as of
December 31, 2005, over the next five years and thereafter:
Payments by Period
(in thousands)
-------------------------------------------------------------------------------
Less
Than 1-3 4-5 After 5
Amount 1 Year Years Years Years
------ ------ ------ ------ ------
Vendor Settlements & Agreements $ 24 $ 24 $ -- $ -- $ --
Operating Leases 805 330 475 -- --
Short Term Debt 3,015 3,015 -- -- --
------ ------ ------ ------ ------
Total Contractual Cash Obligations $3,844 $3,369 $ 475 $ -- $ --
====== ====== ====== ====== ======
Intangible Assets
NeoMedia periodically performs impairment tests on each of its intangible
assets, which include goodwill, capitalized patent costs, repair chemical
formulations and proprietary process, customer base and trademarks, and
capitalized and purchased software costs. In doing so, NeoMedia evaluates the
carrying value of each intangible asset with respect to several factors,
including historical revenue generated from each intangible asset, application
of the assets in NeoMedia's current business plan, and projected cashflow to be
derived from the asset.
The determination of the fair value of certain acquired assets and
liabilities is subjective in nature and often involves the use of significant
estimates and assumptions. Determining the fair values and useful lives of
intangible assets especially requires the exercise of judgment. While there are
a number of different generally accepted valuation methods to estimate the value
of intangible assets acquired, NeoMedia primarily uses the weighted-average
probability method outlined in SFAS 144. This method requires significant
management judgment to forecast the future operating results used in the
analysis. In addition, other significant estimates are required such as residual
growth rates and discount factors. The estimates NeoMedia has used are
consistent with the plans and estimates that NeoMedia uses to manage its
business, based on available historical information and industry averages. The
judgments made in determining the estimated useful lives assigned to each class
of assets acquired can also significantly affect NeoMedia's net operating
results.
According to SFAS 144, a long-lived asset should be tested for
recoverability whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. The following are examples of such
events or changes in circumstances:
- A significant decrease in the market price of the asset
- A significant adverse change in the extent or manner in which the
asset is being used, or in its physical condition
- A significant adverse change in legal factors or in the business
climate that could affect the value of the asset, including an
adverse action or assessment by a regulator
- An accumulation of costs significantly in excess of the amount
originally expected
- A current-period operating or cash flow loss combined with a history
of operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of the asset
- A current expectation that, more likely than not, the asset will be
sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
52
NeoMedia follows the two-step process outlined in SFAS 144 for determining
if an impairment charge should be taken: (1) the expected undiscounted cashflows
from a particular asset or asset group are compared to the carrying value; if
the expected undiscounted cashflows are greater than the carrying value, no
impairment is taken, but if the expected undiscounted cashflows are less than
the carrying value, then (2) an impairment charge is taken for the difference
between the carrying value and the expected discounted cashflows. The
assumptions used in developing expected cashflow estimates are similar to those
used in developing other information used by NeoMedia for budgeting and other
forecasting purposes. In instances where a range of potential future cashflows
is possible, NeoMedia uses a probability-weighted approach to weigh the
likelihood of those possible outcomes. NeoMedia generally uses a rate of 10% for
purposes of discounting cashflows.
Financing Agreements
As of December 31, 2005 and 2004, NeoMedia was party to a commercial
financing agreement with GE Access that provides short-term financing for
certain computer hardware and software purchases. This arrangement allows
NeoMedia to re-sell high-dollar technology equipment and software without
committing cash resources to financing the purchase. Due to the discontinuation
of the NCIS business unit, NeoMedia expects to terminate the agreement during
2006. There were no amounts payable under this agreement as of December 31,
2005.
Effect Of Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. Management is currently evaluating the impact SFAS 123R
will have on our consolidated financial statements.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive guidance related
to the interaction between SFAS 123(R) and certain SEC rules and regulations. It
also provides the SEC staff's views regarding valuation of share-based payment
arrangements. In April 2005, the SEC amended the compliance dates for SFAS
123(R), to allow companies to implement the standard at the beginning of their
next fiscal year, instead of the next reporting period beginning after June 15,
2005. Management is currently evaluating the impact SAB 107 will have on our
consolidated financial statements.
53
In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes
and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and represents another step in the FASB's goal to converge
its standards with those issued by the IASB. Among other changes, Statement 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on the new
accounting principle, unless it is impracticable to do so. Statement 154 also
provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting principle, and (2) correction of errors
in previously issued financial statements should be termed a "restatement." The
new standard is effective for accounting changes and correction of errors made
in fiscal years beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005.
In June 2005, the Emerging Issues Task Force, or EITF, reached a consensus
on Issue 05-6, Determining the Amortization Period for Leasehold Improvements,
which requires that leasehold improvements acquired in a business combination or
purchased subsequent to the inception of a lease be amortized over the lesser of
the useful life of the assets or a term that includes renewals that are
reasonably assured at the date of the business combination or purchase. EITF
05-6 is effective for periods beginning after July 1, 2005. We do not expect the
provisions of this consensus to have a material impact on the our financial
position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides guidance
relating to the identification of and financial reporting for legal obligations
to perform an asset retirement activity. The Interpretation requires recognition
of a liability for the fair value of a conditional asset retirement obligation
when incurred if the liability's fair value can be reasonably estimated. FIN 47
also defines when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The provision is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company will adopt FIN 47 and does not believe the adoption will have a
material impact on its consolidated financial position or results of operations
or cash flows.
In February 2006, the Financial Accounting Standards Board issued SFAS No.
155, "Accounting for Certain Hybrid Financial Instruments -- an amendment of
FASB Statements No. 133 and 140." SFAS No. 155 simplifies the accounting for
certain hybrid financial instruments, eliminates the FASB's interim guidance
which provides that beneficial interests in securitized financial assets are not
subject to the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and eliminates the restriction on the
passive derivative instruments that a qualifying special-purpose entity may
hold. SFAS No. 155 is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006, however, early adoption is permitted for instruments acquired or
issued after the beginning of an entity's fiscal year in 2006. The Company is
evaluating the impact of this new pronouncement to its financial position and
results of operations or cash flows.
54
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements to this Form 10-KSB are attached commencing on
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
ITEM 8A. CONTROLS AND PROCEDURES
There were no policy reviews, improvements of documentation or general
improvement in the state of internal controls that led to any change during the
fiscal year, or subsequent to the end of the fiscal year through the date of
this Form 10-KSB, that materially affected or were reasonably likely to
materially affect, internal controls over financial reporting
Evaluation of Disclosure Controls and Procedures. As of the end of the period
covered by this report, the Company carried out an evaluation, under the
supervision and with the participation of the Company's Principal Executive
Officer and Principal Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. The Company's
disclosure controls and procedures are designed to provide a reasonable level of
assurance of achieving the Company's disclosure control objectives. The
Company's Principal Executive Officer and Principal Financial Officer have
concluded that the Company's disclosure controls and procedures are, in fact,
effective at this reasonable assurance level as of the end of period covered. In
addition, the Company reviewed its internal controls, and there have been no
significant changes in its internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation or from the end of the reporting period to the date of this Form
10-KSB.
Changes in Internal Controls. In connection with the evaluation of the Company's
internal controls during the Company's year ended December 31, 2005, the
Company's Principal Executive Officer and Principal Financial Officer have
determined that there were no changes to the Company's internal controls over
financial reporting that have materially affected, or are reasonably likely to
materially effect, the Company's internal controls over financial reporting
during the year ended December 31, 2005, or subsequent to the date of their last
evaluation, or from the end of the reporting period to the date of this Form
10-KSB.
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Neomedia Technologies, Inc.
Fort Myers, Florida
We have audited the accompanying consolidated balance sheet of Neomedia
Technologies, Inc. and subsidiaries as of December 31, 2005, and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity, and cash flows for the two years in the period then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Neomedia Technologies, Inc. and subsidiaries at December 31, 2005 and the
consolidated results of their operations and their cash flows for the two years
in the period then ended in conformity with accounting principles generally
accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's significant operating losses,
negative cash flows from operations and working capital deficit raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding these matters also are described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Stonefield Josephson, Inc.
Irvine, California
March 2, 2006
F-1
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31 2005
----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,291
Trade accounts receivable, net of allowance for doubtful accounts of $203 341
Inventories 423
Investment in marketable securities 104
Prepaid expenses and other current assets 151
---------
Total current assets 3,310
Leasehold improvements & property and equipment, net 236
Capitalized patents, net 3,134
Micro paint chemical formulations and proprietary process, net 1,450
Goodwill 1,099
Other Intangible assets, net 246
Cash surrender value of life insurance policy 769
Advances to Mobot, Inc. 1,500
Other long-term assets 667
---------
Total assets $ 12,411
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,574
Accrued expenses 1,844
Amounts payable under settlement agreements 97
Sales taxes payable 80
Deferred revenues and other 898
Liabilities of discontinued business unit 676
Notes payable 3,015
---------
Total current liabilities 8,184
---------
Shareholders' equity:
Preferred stock, $0.01 par value, 25,000,000 shares authorized, none issued
and outstanding --
Common stock, $0.01 par value, 1,000,000,000 shares authorized,
475,387,910 shares issued and 467,601,717 outstanding 4,676
Additional paid-in capital 106,456
Deferred stock-based compensation (169)
Deferred equity financing costs (13,256)
Accumulated deficit (92,524)
Accumulated other comprehensive loss (177)
Treasury stock, at cost, 201,230 shares of common stock (779)
---------
Total shareholders' equity 4,227
---------
Total liabilities and shareholders' equity $ 12,411
=========
The accompanying notes form an integral part of these
consolidated financial statements.
F-2
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
------------------------------
2005 2004
------------- -------------
NET SALES:
License fees $ 523 $ 343
Resale of software and technology equipment and service fees 354 630
Micro paint repair products and services 1,279 727
------------- -------------
Total net sales 2,156 1,700
------------- -------------
COST OF SALES:
License fees 453 324
Resale of software and technology equipment and service fees 206 604
Micro paint repair products and services 913 541
------------- -------------
Total cost of sales 1,572 1,469
------------- -------------
GROSS PROFIT 584 231
OPERATING EXPENSES:
Sales and marketing expenses 4,186 2,046
Impairment charge 335 --
General and administrative expenses 3,375 2,215
Research and development costs 934 651
------------- -------------
Loss from operations (8,246) (4,681)
Gain on extinguishment of debt 172 140
Impairment charge on investments (780) --
Amortization of debt discount -- (2,500)
Interest expense, net (293) (189)
------------- -------------
NET LOSS (9,147) (7,230)
Other comprehensive loss:
Unrealized gain/loss on marketable securities (146) --
Foreign currency translation adjustment 29 (60)
------------- -------------
COMPREHENSIVE LOSS $ (9,264) $ (7,290)
============= =============
NET LOSS PER SHARE--BASIC AND DILUTED $ (0.02) $ (0.02)
============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES--BASIC AND DILUTED 451,857,851 329,362,127
============= =============
The accompanying notes form an integral part of these
consolidated financial statements.
F-3
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
DECEMBER 31,
--------------------
2005 2004
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 9,147) ($ 7,230)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount on note payable -- 2,500
Depreciation and amortization 735 674
Impairment charge 1,115 --
Provision for doubtful accounts 157 24
Expense (decrease of fair value) for repriced options -- 104
Fair value of expense portion of stock-based
compensation granted for professional services 733 626
Interest expense allocated to debt -- 3
(Increase)/decrease in value of life insurance policies (42) (1)
Decrease in fair value of marketable securities -- --
Decrease of fair value of repriced options -- --
Changes in operating assets and liabilities
Trade accounts receivable, net (216) (82)
Inventory (308) (58)
Other current assets 173 68
Accounts payable, amounts due under financing agreements, liabilities in excess
of assets of discontinued business unit, accrued expenses and stock liability (93) (1,277)
Deferred revenue other current liabilities 384 (1)
-------- --------
Net cash used in operating activities (6,509) (4,650)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to Mobot, Inc. (1,500)
Investments (500) (1,000)
Acquisition of patents (1,400)
Acquisition related costs (168) --
Capitalization of software development and purchased intangible assets (359) (141)
Acquisition of property and equipment (242) (111)
Cash paid to acquire CSI International, Inc. (net of cash acquired) -- (2,390)
-------- --------
Net cash used in investing activities (4,169) (3,642)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock, net of issuance costs of $115
in 2005 and $620 in 2004 8,572 7,906
Net proceeds from exercise of stock options and warrants 923 2,687
Borrowings under notes payable and long-term debt 9,932 9,085
Repayments on notes payable and long-term debt (8,121) (8,753)
Cash commitment fee for $100 million Standby Equity Distribution Agreement (1,000) --
-------- --------
Net cash provided by financing activities 10,306 10,925
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 29 (60)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (343) 2,573
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,634 61
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,291 $ 2,634
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid/(received) during the period $ 47 $ 111
Income taxes paid -- --
Non-cash investing and financing activities:
Reduction in accounts payable and accruals due to debt paid with shares
of common stock -- 190
Reduction of note payable paid in stock -- 32
Fair value of stock issued for services and deferred to future periods 239 653
Fair value of shares issued to acquire CSI Int'l (net of costs of registration) -- 695
Change in net assets resulting from acquisition of CSI (net of cash acquired) -- 3,090
Gain on extinguishment of debt 172 140
Direct costs associated with Standby Equity Distribution Agreement
and Equity Line of Credit 1,204 2,216
The accompanying notes form an integral part of these
consolidated financial statements.
F-4
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
-------------------------------------------
ACCUMULATED
DEFERRED -----------
ADDITIONAL DEFERRED EQUITY OTHER
PAID-IN STOCK FINANCING COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION COSTS LOSS
----------- ---------- ----------- ------------ --------- -------------
BALANCE, DECEMBER 31, 2003 243,991,257 $ 2,440 $ 71,565 ($ 282) -- $ 0
Shares issued to
Cornell Capital
Partners under ELOC
and SEDA 112,743,417 1,127 6,864 -- -- --
Exercise of stock
options 12,860,616 129 43 -- -- --
Exercise of stock
warrants 51,510,000 515 2,000 -- -- --
Fair value stock,
options, & warrants
issued for
professional services
rendered 2,013,375 20 785 -- -- --
Stock issued to pay
past due liabilities 2,406,388 24 242 -- -- --
Stock issued in
connection with
acquisition of CSI
International 7,000,000 70 625 -- -- --
Expense associated
with option repricing -- -- 104 -- -- --
Fair value of
warrants issued with
debt -- -- 2,500 -- -- --
Change in Deferred
Stock Compensation -- -- -- (163) -- --
Comprehensive loss -
foregin currency
translation adjustment -- -- -- -- -- (60)
Net Loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ---------- -----------
BALANCE, DECEMBER 31, 2004 432,525,053 $ 4,325 $ 84,728 (445) -- ($ 60)
Shares issued to
Cornell Capital
Partners under SEDA 26,435,512 264 8,177 -- -- --
Deferred financing
cost associated with
$100 million SEDA 44,723 -- 12,256 -- (13,256) --
Exercise of stock
options 7,953,650 80 837 -- -- --
Exercise of stock
warrants 50,000 1 5 -- -- --
Fair value stock,
options, & warrants
issued for
professional services
rendered 592,779 6 453 -- -- --
Change in Deferred
Stock Compensation -- -- -- 276 -- --
Comprehensive loss -
foregin currency
translation adjustment -- -- -- -- -- 29
Comprehensive loss -
unrealized loss on
marketable securities -- -- -- -- -- (146)
Net Loss -- -- -- -- -- --
BALANCE, DECEMBER 31, 2005 467,601,717 $ 4,676 $ 106,456 ($ 169) ($ 13,256) ($ 177)
=========== =========== =========== =========== ========== ===========
TREASURY STOCK
------------------------
TOTAL
ACCUMULATED SHAREHOLDER
DEFICIT SHARES AMOUNT EQUITY
----------- ------- ------- -----------
BALANCE, DECEMBER 31, 2003 ($ 76,147) 201,230 ($ 779) ($ 3,203)
Shares issued to
Cornell Capital
Partners under ELOC
and SEDA -- -- -- 7,991
Exercise of stock
options -- -- -- 172
Exercise of stock
warrants -- -- -- 2,515
Fair value stock,
options, & warrants
issued for
professional services
rendered -- -- -- 805
Stock issued to pay
past due liabilities -- -- -- 266
Stock issued in
connection with
acquisition of CSI
International -- -- -- 695
Expense associated
with option repricing -- -- -- 104
Fair value of
warrants issued with
debt -- -- -- 2,500
Change in Deferred
Stock Compensation -- -- -- (163)
Comprehensive loss -
foregin currency
translation adjustment -- -- -- (60)
Net Loss (7,230) -- -- (7,230)
------------- -------- ------------ ------------
BALANCE, DECEMBER 31, 2004 ($ 83,377) 201,230 ($ 779) $ 4,392
Shares issued to
Cornell Capital
Partners under SEDA -- -- -- 8,441
Deferred financing
cost associated with
$100 million SEDA -- -- -- (1,000)
Exercise of stock
options -- -- -- 917
Exercise of stock
warrants -- -- -- 6
Fair value stock,
options, & warrants
issued for
professional services
rendered -- -- -- 459
Change in Deferred
Stock Compensation -- -- -- 276
Comprehensive loss -
foregin currency
translation adjustment -- -- -- 29
Comprehensive loss -
unrealized loss on
marketable securities -- -- -- (146)
Net Loss (9,147) -- -- (9,147)
------------- -------- ------------ ------------
BALANCE, DECEMBER 31, 2005 ($ 92,524) 201,230 ($ 779) $ 4,227
============= ======== ============ ============
The accompanying notes form an integral part of these
consolidated financial statements.
F-5
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The consolidated financial statements include the financial statements of
NeoMedia Technologies, Inc. and its wholly-owned subsidiaries, NeoMedia
Migration, Inc., a Delaware corporation; Distribuidora Vallarta, S.A.
incorporated in Guatemala (a dormant subsidiary); NeoMedia Technologies of
Canada, Inc. incorporated in Canada (a dormant subsidiary); NeoMedia Tech, Inc.
incorporated in Delaware; NeoMedia EDV GmbH incorporated in Austria (a dormant
subsidiary); NeoMedia Technologies Holding Company B.V. incorporated in the
Netherlands (a dormant subsidiary); NeoMedia Technologies de Mexico S.A. de C.V.
incorporated in Mexico (a dormant subsidiary); NeoMedia Migration de Mexico S.A.
de C.V. incorporated in Mexico (a dormant subsidiary); NeoMedia Technologies do
Brasil Ltd. incorporated in Brazil (a dormant subsidiary); NeoMedia Technologies
UK Limited incorporated in the United Kingdom (a dormant subsidiary); NeoMedia
Micro Paint Repair, Inc. a Nevada corporation; NeoMedia Telecom Services, Inc. a
Nevada corporation established for the purpose of completing the acquisition of
BSD Software, Inc.; and Mobot, Inc., a Delaware corporation established for the
purpose of completing the acquisition of Mobot, Inc., and are collectively
referred to as "NeoMedia" or the "Company". The consolidated financial
statements of NeoMedia are presented on a consolidated basis for all years
presented. All significant intercompany accounts and transactions have been
eliminated in preparation of the consolidated financial statements.
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, the Company has reported net losses of $9,147,000 and $7,230,000 for
the years ended December 31, 2005 and 2004, respectively, and has an accumulated
deficit of $92,524,000 as of December 31, 2005. In addition, the Company had
working capital deficit of $4,874,000 as of December 31, 2005. All of the
factors discussed above, amongst others, raise substantial doubt about the
Company's ability to continue as a going concern.
The Company cannot be certain that anticipated revenues from operations
will be sufficient to satisfy its ongoing capital requirements. Management's
belief is based on the Company's operating plan, which in turn is based on
assumptions that may prove to be incorrect. If the Company's financial resources
are insufficient the Company may require additional financing in order to
execute its operating plan and continue as a going concern. The Company cannot
predict whether this additional financing will be in the form of equity, debt,
or another form. The Company may not be able to obtain the necessary additional
capital on a timely basis, on acceptable terms, or at all. In any of these
events, the Company may be unable to implement its current plans for expansion,
repay its debt obligations as they become due or respond to competitive
pressures, any of which circumstances would have a material adverse effect on
its business, prospects, financial condition and results of operations.
Should these financing sources fail to materialize, management would seek
alternate funding sources through sale of common and/or preferred stock.
Management's plan is to secure adequate funding to bridge to profitability from
the Company's PaperClick(R) business, intellectual property portfolio and Micro
Paint Repair business.
F-6
NATURE OF BUSINESS OPERATIONS
During 2005, NeoMedia was structured as three distinct business units:
NeoMedia Internet Software Service (NISS), NeoMedia Consulting and Integration
Services (NCIS), and NeoMedia Micro Paint Repair (NMPR).
NISS (physical world-to-Internet offerings) is the core business and
is based in the United States, with development and operating facilities
in Fort Myers, Florida. NISS develops and supports NeoMedia's physical
world to Internet core technology, including the PaperClick branded
linking "switch" and application platforms. NISS also manages NeoMedia's
intellectual property portfolio, including the identification and
execution of licensing opportunities surrounding the patents.
NCIS (systems integration service offerings) is the original
business line upon which NeoMedia was organized. This unit resells
client-server equipment and related software, and general and specialized
consulting services. During the first quarter of 2006, NeoMedia formally
decided to wind down this business unit. To the extent practicable,
NeoMedia will attempt to sell additional licenses of its propriety print
encoder and migration software products, but will not pursue additional
hardware and software resales.
NMPR (Micro Paint Repair offerings) is the business unit
encompassing the proprietary paint and chemical line acquired from CSI
International in 2004. This business also acts as a distributor of other
manufacturers' automotive aftermarket products to customers around the
world.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the purposes of the consolidated balance sheet and consolidated
statements of cash flows, all highly liquid investments with original maturities
of three months or less are considered cash equivalents. The Company maintains
bank accounts with balances which, at times, may exceed federally insured
limits. The Company has not experienced any losses on such accounts. The Company
believes it is not exposed to any significant risk on bank deposit accounts. As
of December 31, 2005, the Company had cash balances of $2,191,000 which were not
insured by the FDIC.
FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash equivalents, accounts
receivable, prepaid expenses, other current assets, cash surrender value of life
insurance policy, accounts payable and accrued expenses, accrued salaries and
benefits, and payables to merchants approximates their estimated fair values due
to the short-term maturities of those financial instruments.
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.
F-7
ACCOUNTS RECEIVABLE
The Company reports accounts receivable at net realizable value. The
Company's terms of sale provide the basis for when accounts become delinquent or
past due. The Company provides an allowance for doubtful accounts equal to the
estimated uncollectible amounts. The Company's estimate is based on historical
collection experience and a review of the current status of accounts receivable.
Receivables are generally charged off and sent to a collections agency after
ninety days past due. It is at least reasonably possible that the Company's
estimate of the allowance for doubtful accounts will change in the near-term. At
December 31, 2005, the allowance for doubtful accounts was $203,000.
INVENTORIES
Inventories are stated at the lower of cost or market, and at December 31,
2005 was comprised of micro paint repair products. Cost is determined using the
first-in, first-out method. At December 31, 2005 and December 31, 2004, there
was no reserve.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less allowance for accumulated
depreciation. Repairs and maintenance are charged to expense as incurred.
Depreciation is generally computed using the straight-line method over the
estimated useful lives of the related assets. Upon retirement or sale, cost and
accumulated depreciation are removed from the accounts and any gain or loss is
reflected in the consolidated statements of operations. The cost of normal
maintenance and repairs is charged to operations as incurred. Material
expenditures, which increase the life of an asset, are capitalized and
depreciated over the estimated remaining life of the asset.
The estimated service lives of property and equipment are as follows:
Furniture and fixtures 7 years
Computer equipment 3 to 5 years
CAPITALIZED PATENTS
Patents (including patents pending and intellectual property) are stated
at cost, less accumulated amortization. Patents are generally amortized over the
shorter of the estimated useful lives or contractual lives ranging from five to
seventeen years.
MICRO PAINT CHEMICAL FORMULATIONS AND PROPRIETARY PROCESSES
Micro Paint Repair chemical formulations and proprietary processes
consists of the estimated fair value of the formulations acquired from CSI
International, Inc. that are used in NeoMedia's Micro Paint Repair business
unit. The estimated fair value was determined using an independent appraisal of
the assets and liabilities acquired in the transaction. This value is being
amortized using the straight-line method over its estimated useful life of 10
years.
F-8
GOODWILL
Goodwill consists of the excess of the purchase price paid for CSI
International, Inc. over the identifiable net assets and liabilities acquired at
fair value. Goodwill was determined using an independent appraisal of the assets
and liabilities acquired in the transaction. Goodwill was not assigned a life
and will be tested for impairment as defined by Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets."
OTHER INTANGIBLE ASSETS
Other intangible assets consists of customer contracts, copyrighted
material and acquired software products, which are amortized over the expected
life of the product, generally three to five years.
INVESTMENTS
Investments included in other long term assets consist of NeoMedia's
investments in iPoint-media and Intactis Software, Inc.
On September 7, 2004, NeoMedia acquired 17% ownership of iPoint-media,
consisting of 69,196 shares of common stock, for $1 million cash. NeoMedia
recorded the investment at cost. iPoint-Media Ltd. ("iPoint-media"), distributes
video, audio and data over IP networks. As a result of the delay by iPoint
-media in registering the shares held by NeoMedia, during the year ended
December 31, 2005 NeoMedia recognized an impairment of $530,000 related to the
excess of the carrying value of the investment over the estimated fair value as
determined by management using the weighted average probability method. The
impairment loss is included in the statement of operations for the year ended
December 31, 2005.
Pertinent financial information reported by iPoint-media on its Form SB-2 is
as follows:
Nine Months
Ended Years Ended
September 30, December 31,
2005 2004 2003
(Unaudited) -------- --------
------------
Revenues $ 44 $ 514 $ 618
Net loss (1,148) (1,397) (551)
Total Assets $ 302 $ 1,124
Stockholders' deficit (1,488) (340)
On March 10, 2005, NeoMedia invested $250,000 in exchange for 250,000
shares of Intactis non-voting convertible preferred stock. In connection with
the investment, NeoMedia received a warrant to purchase up to an additional
50,000 shares of Intactis. During the year ended December 31, 2005 NeoMedia took
an impairment of the carrying value of the investment of $250,000. The
impairment loss is included in the statement of operations for the year ended
December 31, 2005.
F-9
On February 25,2005, NeoMedia invested $250,000 in exchange foe 8,333,333
shares of Pick Ups Plus, Inc. common stock. During the year ended December
31,2005, NeoMedia recognized a temporary loss in the fair value of $146,000 as
an adjustment through other comprehensive loss in the statement of operations
and comprehensive loss.
On February 25, 2005, NeoMedia signed two non-binding letters of intent to
acquire up to 100% of Automotive Preservation, Inc. ("AP"), a distributor of
automotive paint and accessory products, from AP's parent company, PUPS. The
first letter of intent calls for NeoMedia to initially acquire 30% of AP for
$1,600,000, to be paid $600,000 in cash, $554,000 in shares of NeoMedia
restricted common stock, and $446,000 through the assumption of AP debt by
NeoMedia. Under the second letter of intent, upon completion of the acquisition
of the initial 30% of AP by NeoMedia, NeoMedia would have the option to acquire
an additional 30% of AP for $1,650,000, payable in shares of NeoMedia restricted
common stock. The second letter of intent also gives NeoMedia the option to
purchase the final 40% of AP for either: (i) $2,200,000, payable in shares of
NeoMedia restricted common stock, if NeoMedia exercises this right within 12
months of acquiring the second 30% of AP, or (ii) a price equivalent to AP's
previous quarter EBITDA multiplied by 8, payable in shares of NeoMedia
restricted common stock. Both letters of intent are non-binding and subject to
due diligence by NeoMedia and AP. On September 21, 2005, the BOD approved to
change the deal structure for the acquisition of AP, so that the Company would
acquire only 30% of AP for a total purchase price of $1.6 million of which $600K
would be paid in cash and $446K would be paid through the assumption of debt,
and $554K through the issuance of restricted Neomedia stock. Neomedia will not
acquire the remaining 70% of AP under the new structure.
EVALUATION OF LONG-LIVED ASSETS
NeoMedia periodically performs impairment tests on each of its intangible
assets, which include goodwill, capitalized patent costs, repair chemical
formulations and proprietary process, customer base and trademarks, and
capitalized and purchased software costs. In doing so, NeoMedia evaluates the
carrying value of each intangible asset with respect to several factors,
including historical revenue generated from each intangible asset, application
of the assets in NeoMedia's current business plan, and projected cashflow to be
derived from the asset.
The determination of the fair value of certain acquired assets and
liabilities is subjective in nature and often involves the use of significant
estimates and assumptions. Determining the fair values and useful lives of
intangible assets especially requires the exercise of judgment. While there are
a number of different generally accepted valuation methods to estimate the value
of intangible assets acquired, NeoMedia primarily uses the weighted-average
probability method outlined in SFAS 144. This method requires significant
management judgment to forecast the future operating results used in the
analysis. In addition, other significant estimates are required such as residual
growth rates and discount factors. The estimates NeoMedia has used are
consistent with the plans and estimates that NeoMedia uses to manage its
business, based on available historical information and industry averages. The
judgments made in determining the estimated useful lives assigned to each class
of assets acquired can also significantly affect NeoMedia's net operating
results.
According to SFAS 144, a long-lived asset should be tested for
recoverability whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. The following are examples of such
events or changes in circumstances:
- A significant decrease in the market price of the asset
- A significant adverse change in the extent or manner in which the
asset is being used, or in its physical condition
- A significant adverse change in legal factors or in the business
climate that could affect the value of the asset, including an
adverse action or assessment by a regulator
- An accumulation of costs significantly in excess of the amount
originally expected
- A current-period operating or cash flow loss combined with a history
of operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of the asset
- A current expectation that, more likely than not, the asset will be
sold or otherwise disposed of significantly before the end of its
previously estimated useful life.
F-10
NeoMedia follows the two-step process outlined in SFAS 144 for determining
if an impairment charge should be taken: (1) the expected undiscounted cashflows
from a particular asset or asset group are compared to the carrying value; if
the expected undiscounted cashflows are greater than the carrying value, no
impairment is taken, but if the expected undiscounted cashflows are less than
the carrying value, then (2) an impairment charge is taken for the difference
between the carrying value and the expected discounted cashflows. The
assumptions used in developing expected cashflow estimates are similar to those
used in developing other information used by NeoMedia for budgeting and other
forecasting purposes. In instances where a range of potential future cashflows
is possible, NeoMedia uses a probability-weighted approach to weigh the
likelihood of those possible outcomes. NeoMedia used a rate of 10% for purposes
of discounting cashflows in 2005.
The impairment charge included in operations during the fourth quarter of
2005 for $335,000 relates to the assets purchased from Secure Source
Technologies, Inc. during 2003 that are part of the NeoMedia Internet Switching
Service (NISS) business unit. The impairment is due to the fact that the
intangible assets purchased are not generating any revenue at the present time
and NeoMedia's management does not foresee these assets generating revenue in
the near term. The amount of impairment was determined by determining the fair
value of the intangible assets using the discounted cashflow method.
The impairment charge after loss from operations during the fourth quarter
of 2005 for $780,000 relates to the investment in iPoint-Media Ltd. ("iPoint")
for $530,000 and the investment in Intactis Software, Inc. ("Intactis") for
$250,000. These investments are not part of a specific business segment and as
such are charged against the corporate segment. . The impairment relating to
iPont primarily results from a delay in registration fro resale of the shares
held by NeoMedia. The impairment of the investment in Intactis is a result of
NeoMedia management's expectation that additional investment or research and
development resources would be required in order to recoup the initial
investment. The amount of impairment for both iPoint and Intactis was determined
by determining the fair value of the assets using the discounted cashflow
method.
AMOUNTS DUE UNDER SETTLEMENT AGREEMENTS
NeoMedia is party to various settlement agreements with certain of its
vendors relating to past due accounts payable. The settlement agreements
generally call for monthly payment installments against such past due amounts.
REVENUE RECOGNITION
During 2005 and 2004, NeoMedia derived revenues from three primary
sources: (1) license revenues, (2) resale of software and technology equipment
and service fee revenues, and (3) Micro Paint Repair sales.
(1) License fees, including Intellectual Property license, represent
revenue from the licensing of NeoMedia's proprietary software tools and
applications products. NeoMedia licenses its development tools and application
products pursuant to non-exclusive and non-transferable license agreements.
Resales of software and technology equipment represent revenue from the resale
of purchased third party hardware and software products and from consulting,
education, maintenance and post contract customer support services.
The basis for license fee revenue recognition is substantially governed by
American Institute of Certified Public Accountants ("AICPA") Statement of
Position 97-2 "Software Revenue Recognition" ("SOP 97-2"), as amended, and
Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions. License revenue is recognized if persuasive evidence of an
agreement exists, delivery has occurred, pricing is fixed and determinable, and
collectibility is probable.
F-11
(2) Revenue for resale of software and technology equipment and service
fee is recognized based on guidance provided in Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements," as amended (SAB 104). Software and technology equipment
resale revenue is recognized when all of the components necessary to run
software or hardware have been shipped. Service revenues include maintenance
fees for providing system updates for software products, user documentation and
technical support and are recognized over the life of the contract. Software
license revenue from long-term contracts has been recognized on a percentage of
completion basis, along with the associated services being provided. Other
service revenues, including training and consulting, are recognized as the
services are performed. The Company uses stand-alone pricing to determine an
element's vendor specific objective evidence ("VSOE") in order to allocate an
arrangement fee amongst various pieces of a multi-element contract. NeoMedia
records an allowance for uncollectible accounts on a customer-by-customer basis
as appropriate.
(3) NeoMedia's Micro Paint Repair business unit derives revenue from: (a)
the right to use NeoMedia's proprietary Micro Paint Repair system, (b) paint
products and services, (c) training, and (d) technical support.
(a) Paint system revenue is a one-time fee paid by NeoMedia's
customer to use NeoMedia's proprietary paint system, and is
deferred and recognized over the expected life of the
relationship, which was estimated at one year during 2005.
(b) Paint product and service revenue is recognized when products
are shipped or when services are performed.
(c) Training revenue is recognized upon completion of a
company-certified training course.
(d) Technical support revenue is recognized on a monthly basis as
support services are provided.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are passed through to the Company's
customers, and are recorded as revenue with the associated costs recorded as
cost of goods sold.
RESEARCH AND DEVELOPMENT
Costs associated with the planning and designing phase of software
development, including coding and testing activities, and related overhead,
necessary to establish technological feasibility of the Company's
internally-developed software products, are classified as research and
development and expensed as incurred.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25. "Accounting for Stock Issued
to Employees," and complies with the disclosure provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized over the vesting period based on the excess, if any, on the date
of grant of the fair value of the Company's shares over the employee's exercise
price. When the exercise price of the option is less than the fair value price
of the underlying shares on the grant date, deferred stock compensation is
recognized and amortized to expense in accordance with Financial Accounting
Standards Board ("FASB") Interpretation No. 44 over the vesting period of the
individual options. Accordingly, if the exercise price of the Company's employee
options equals or exceeds the market price of the underlying shares on the date
of grant no compensation expense is recognized. Options or shares awards issued
to non-employees and directors are valued using the Black-Scholes pricing model
and expensed over the period services are provided.
F-13
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure," which amends, SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 expands the
disclosure requirements of SFAS No. 123 to require more prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The transition provisions of SFAS No. 148 are effective for fiscal
years ended after December 15, 2002. The transition provisions do not currently
have an impact on the Company's consolidated financial position and results of
operations as the Company has not elected to adopt the fair value-based method
of accounting for stock-based employee compensation under SFAS No. 123. The
disclosure provisions of SFAS No. 148 are effective for financial statements for
interim periods beginning after December 15, 2002. The Company adopted the
disclosure requirements in the first quarter of 2003.
The Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net loss, except when options granted under those plans had
an exercise price less than the market value of the underlying common stock on
the date of grant. The following table illustrates the effect on net loss and
loss per share if the company had applied the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation.
YEARS ENDED
DECEMBER 31,
---------------------
(in 000's, except share data) 2005 2004
--------- ---------
Net Loss, as reported ($ 9,147) ($ 7,230)
Compensation recognized under APB 25 -- --
Compensation recognized under SFAS 123 (4,124) (1,445)
-------- --------
Pro-forma net loss ($13,271) ($ 8,675)
======== ========
Net Loss per share:
Basic and diluted - as reported ($ 0.02) ($ 0.02)
======== ========
Basic and diluted - pro-forma ($ 0.03) ($ 0.03)
======== ========
For grants in 2005 and 2004, the following assumptions were used: (i) no
expected dividends; (ii) a risk-free interest rate of 4.5%; (iii) expected
volatility ranging from 385% to 434% in 2005 and from 438% to 451% in 2004, and
(iv) an expected life of the shorter of 3 years or the stated life of the option
for options granted in 2005 and 2004. The fair-value was determined using the
Black-Scholes option-pricing model.
The estimated fair value of grants of stock options and warrants to
non-employees of NeoMedia is charged to expense in the consolidated financial
statements. These options vest in the same manner as the employee options
granted under each of the option plans as described above.
INCOME TAXES
In accordance with SFAS No. 109, "Accounting for Income Taxes", income
taxes are accounted for using the assets and liabilities approach. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities, and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be recognized. The
Company has recorded a 100% valuation allowance as of December 31, 2005.
F-14
TRANSLATION OF FOREIGN CURRENCY
The functional currency of the Company's Micro Paint Repair business is
the Canadian dollar. Financial statements from the Micro Paint Repair business
unit are translated to United States dollars at the exchange rates in effect at
the balance sheet date for assets and liabilities and at average rates for the
period for revenues and expenses. Resulting exchange differences are accumulated
as a component of accumulated other comprehensive loss.
COMPUTATION OF NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the period. The
Company has excluded all outstanding stock options and warrants from the
calculation of diluted net loss per share because these securities are
anti-dilutive for all years presented. The shares excluded from the calculation
of diluted net loss per share are detailed in the table below:
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
Outstanding Stock Options 100,041,721 52,804,121
Outstanding Warrants 71,375,000 18,825,000
RECLASSIFICATIONS
Certain reclassifications have been made to the 2004 consolidated
financial statements to conform to the 2005 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment". Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after December 15, 2005. Management is currently evaluating the impact SFAS 123R
will have on our consolidated financial statements.
In March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment" ("SAB 107"), which provides interpretive guidance related
to the interaction between SFAS 123(R) and certain SEC rules and regulations. It
also provides the SEC staff's views regarding valuation of share-based payment
arrangements. In April 2005, the SEC amended the compliance dates for SFAS
123(R), to allow companies to implement the standard at the beginning of their
next fiscal year, instead of the next reporting period beginning after June 15,
2005. Management is currently evaluating the impact SAB 107 will have on our
consolidated financial statements.
F-15
In May 2005, the FASB issued FASB Statement No. 154, Accounting Changes
and Error Corrections. This new standard replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and represents another step in the FASB's goal to converge
its standards with those issued by the IASB. Among other changes, Statement 154
requires that a voluntary change in accounting principle be applied
retrospectively with all prior period financial statements presented on the new
accounting principle, unless it is impracticable to do so. Statement 154 also
provides that (1) a change in method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in estimate (prospectively) that
was effected by a change in accounting principle, and (2) correction of errors
in previously issued financial statements should be termed a "restatement." The
new standard is effective for accounting changes and correction of errors made
in fiscal years beginning after December 15, 2005. Early adoption of this
standard is permitted for accounting changes and correction of errors made in
fiscal years beginning after June 1, 2005.
In June 2005, the Emerging Issues Task Force, or EITF, reached a
consensus on Issue 05-6, Determining the Amortization Period for Leasehold
Improvements, which requires that leasehold improvements acquired in a business
combination or purchased subsequent to the inception of a lease be amortized
over the lesser of the useful life of the assets or a term that includes
renewals that are reasonably assured at the date of the business combination or
purchase. EITF 05-6 is effective for periods beginning after July 1, 2005. We do
not expect the provisions of this consensus to have a material impact on the our
financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 provides guidance
relating to the identification of and financial reporting for legal obligations
to perform an asset retirement activity. The Interpretation requires recognition
of a liability for the fair value of a conditional asset retirement obligation
when incurred if the liability's fair value can be reasonably estimated. FIN 47
also defines when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The provision is
effective no later than the end of fiscal years ending after December 15, 2005.
The Company will adopt FIN 47 and does not believe the adoption will have a
material impact on its consolidated financial position or results of operations
or cash flows.
In February 2006, the Financial Accounting Standards Board issued SFAS No.
155, "Accounting for Certain Hybrid Financial Instruments -- an amendment of
FASB Statements No. 133 and 140." SFAS No. 155 simplifies the accounting for
certain hybrid financial instruments, eliminates the FASB's interim guidance
which provides that beneficial interests in securitized financial assets are not
subject to the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," and eliminates the restriction on the
passive derivative instruments that a qualifying special-purpose entity may
hold. SFAS No. 155 is effective for all financial instruments acquired or issued
after the beginning of an entity's first fiscal year that begins after September
15, 2006, however, early adoption is permitted for instruments acquired or
issued after the beginning of an entity's fiscal year in 2006. The Company is
evaluating the impact of this new pronouncement to its financial position and
results of operations or cash flows.
3. STANDBY EQUITY DISTRIBUTION AGREEMENTS WITH CORNELL CAPITAL PARTNERS, LP
("CORNELL")
On October 27, 2003, the Company and Cornell entered into a $20 million
Standby Equity Distribution Agreement (the "2003 SEDA"). The agreement provides
for a maximum "draw" of $280,000 per week, not to exceed $840,000 in any 30-day
period, and Cornell will purchase up to $20 million of the Company's common
stock over a two-year period. As a commitment fee for Cornell to enter into the
2003 SEDA, the Company issued 10 million warrants to Cornell with an exercise
price of $0.05 per share, and a term of five years. Cornell exercised the
warrants in January 2004, resulting in $500,000 cash receipts to the Company. In
November 2003, the Company registered 200 million shares underlying this $20
million 2003 SEDA. In April 2004, the Company registered 40 million shares of
common stock underlying warrants granted to Cornell in connection with a
promissory note issued by the Company to Cornell (see "Promissory Notes Payable
to Cornell" below).
F-16
On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity
Distribution Agreement (the "2005 SEDA") under which Cornell agreed to purchase
up to $100 million of NeoMedia common stock over a two-year period, with the
timing and amount of the purchase at NeoMedia's discretion. The maximum amount
of each purchase would be $2,000,000 with a minimum of five business days
between advances. The shares would 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, and NeoMedia would pay 5% of the gross proceeds of each purchase to
Cornell. Concurrent with the SEDA, NeoMedia entered into an escrow agreement
with Cornell and an escrow agent, under which the escrow agent holds in an
escrow account shares of NeoMedia common stock, and the cash paid by Cornell for
such shares, issued pursuant to an advance under the SEDA. The shares and funds
can only be released upon receipt by the escrow agent of a joint disbursement
instruction signed by NeoMedia and Cornell. NeoMedia expects to file a
registration statement with the SEC to register the shares underlying the 2005
SEDA. The 2005 SEDA would become available at the time the SEC declares
effective a registration statement containing such shares.
As a commitment fee for Cornell to enter into the 2005 SEDA, NeoMedia
issued 50 million warrants to Cornell with an exercise price of $0.20 per share,
and a term of three years, and also paid a cash commitment fee of $1 million. If
shares of NeoMedia's common stock underlying the warrant are covered by an
effective registration statement and if the closing bid price of NeoMedia's
common stock is above $0.30 for five consecutive business days, NeoMedia may
force conversion of the warrant. NeoMedia also issued 4 million warrants with an
exercise price of $0.227 to a consultant as a fee in connection with the 2005
SEDA. As of March 31, 2005, NeoMedia recorded the $12.3 million fair value of
the warrants to "Deferred equity financing costs" and, upon effectiveness of the
2005 SEDA, will amortize this amount to additional paid-in capital straight-line
over the two-year life of the 2005 SEDA. 20 million warrants were exercised in
February 2006, generating $4 million cash proceeds to NeoMedia.
During the years ended December 31, 2005, the Company sold 26,435,512 and
112,743,417 shares of its common stock to Cornell under the 2003 SEDA. The
following table summarizes funding received from Cornell during the years ended
December 31, 2005 and 2004:
YEAR ENDED DECEMBER 31,
------------------------------
2005 2004
------------- -------------
Number of shares sold to Cornell 26,435,512 112,743,417
Gross Proceeds from sale of shares to Cornell $ 9,527,000 $ 10,123,000
Less: discounts and fees* (1,022,000) (1,967,000)
------------- -------------
Net Proceeds from sale of shares to Cornell $ 8,505,000 $ 8,156,000
------------- -------------
* Pursuant to the terms of the 2003 SEDA , stock is valued at 98% of the lowest
closing bid price during the week it was sold.
F-17
4. PROPERTY AND EQUIPMENT
As of December 31, 2005, property and equipment consisted of the
following:
(dollars
in thousands)
-------------
2005
-----
Furniture and fixtures $ 305
Equipment 250
Autos 39
Leasehold improvements 55
-----
Total 649
Less: accumulated depreciation
Furniture and fixtures (268)
Equipment (119)
Autos (10)
Leasehold improvements (16)
-----
Total property and equipment, net $ 236
=====
Depreciation expense was $109,000 and $66,000 for the years ended December
31, 2005 and 2004, respectively.
5. INTANGIBLE ASSETS
As of December 31, 2005, intangible assets consisted of the following:
(dollars
in thousands)
-------------
2005
------
Patents and related costs, net $3,134
Micro paint repair chemical formulations
and proprietary process, net 1,450
Goodwill 1,099
Other intangible assets, net 246
------
Total $5,929
======
Capitalized patent activity for the year ended December 31, 2005 was as
follows:
(dollars
in thousands)
-------------
2005
------
Beginning balance, net of accumulated
amortization of $1,471 $ 2,174
Additions 1,651
Impairment charge (335)
Amortization (356)
-------
Ending balance $ 3,134
=======
F-18
Amortization expense of capitalized patents was $356,000 and $321,000 for
the years ended December 31, 2005 and 2004, respectively. The weighted-average
amortization period of capitalized patents as of December 31, 2005 was 14.25
years.
The impairment charge of $335,000 relates to the assets purchased from
Secure Source Technologies, Inc. during 2003 that are part of the NeoMedia
Internet Switching Service (NISS) business unit. The impairment is due to the
fact that the intangible assets purchased are not generating any revenue at the
present time and NeoMedia's management does not foresee these assets generating
revenue in the near term. The amount of impairment was determined by determining
the fair value of the intangible assets using the discounted cashflow method.
Capitalized Micro Paint Repair chemical formulations and proprietary
process activity for the year ended December 31, 2005 was as follows:
(dollars
in thousands)
-------------
2005
-------
Beginning balance, net of accumulated amortization of $170 $ 1,630
Amortization (180)
-------
Ending balance $ 1,450
=======
Amortization expense of Micro Paint Repair chemical formulations and
proprietary process was $180,000 and $170,000 for the years ended December 31,
2005 and 2004, respectively. The weighted-average amortization period of
capitalized repair chemical formulations and proprietary process as of December
31, 2005 was 9 years.
Goodwill activity for the year ended December 31, 2005 was as follows:
(dollars
in thousands)
-------------
2005
-------
Beginning balance $1,099
Additions --
------
Ending balance $1,099
======
Other intangible assets activity for the year ended December 31, 2005 was
as follows:
(dollars
in thousands)
-------------
2005
-------
Beginning balance, net of accumulated amortization of $567 $ 221
Additions $ 117
Amortization (92)
------
Ending balance $ 246
======
Amortization expense of capitalized and purchased software costs and other
intangible assets was $92,000 and $117,000 for the years ended December 31, 2005
and 2004, respectively. The weighted-average amortization period of capitalized
and purchased software costs as of December 31, 2005 was 5.3 years.
F-19
As of December 31, 2005, the Company estimated future amortization expense
of capitalized patents and software for the next five years to be:
(IN THOUSANDS)
-------------
2006 $583
2007 544
2008 519
2009 450
2010 431
The Company performed its annual test for impairment on its intangible
assets and goodwill. As a result of these tests, the Company recognized an
impairment of $335,000 on its capitalized patent costs. For the other intangible
assets and goodwill, no impairment existed as of December 31, 2005.
6. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND INVENTORY RESERVE
Allowance for doubtful accounts activity for the year ended December 31,
2005 was as follows:
(dollars
in thousands)
-------------
2005
-----
Beginning balance $ 46
Bad debt 205
Write-off of uncollectible accounts (48)
-----
Ending balance $ 203
=====
Inventory reserve for the year ended December 31, 2005 was $0.
7. FINANCING AGREEMENTS
As of December 31, 2005 and 2004, NeoMedia was party to a commercial
financing agreement with GE Access that provides short-term financing for
certain computer hardware and software purchases. This arrangement allows
NeoMedia to re-sell high-dollar technology equipment and software without
committing cash resources to financing the purchase. Due to the discontinuation
of the NCIS business unit during the first quarter of 2006, NeoMedia expects to
terminate the agreement during 2006. There were no amounts payable under this
agreement as of December 31, 2005.
8. NOTES PAYABLE
On March 30, 2005, NeoMedia borrowed from Cornell the principal amount
of $10,000,000 before discounts and fees in the form of a secured promissory
note. Cornell withheld structuring and escrow fees of $68,000 related to the
note. The note was originally scheduled to be repaid at a rate of $1,120,000 per
month commencing May 1, 2005, which was subsequently changed to $840,000 per
month, continuing until principal and interest are paid in full. The note
accrues interest at a rate of 8% per annum on any unpaid principal. NeoMedia has
the option to prepay any remaining principal of the note in cash without
penalty. In connection with the note, NeoMedia and Cornell entered into a
Security Agreement under which the note is secured by all of NeoMedia's assets
other than its patents and patent applications. NeoMedia also escrowed
25,000,000 shares of its restricted common stock as security for the note. As of
December 31, 2005, NeoMedia had made payments of $7,000,000 against the
principal, reducing the principal balance to $3,000,000. During February 2006,
NeoMedia satisfied the remaining principal plus interest due on the note in
connection with its $27 million convertible preferred stock sale to Cornell (see
"subsequent events").
F-20
On August 6, 2004, NeoMedia borrowed from Cornell the gross amount of
$2,000,000 before discounts and fees. Cornell withheld $153,000 as a fee.
NeoMedia paid this note in full during 2004.
On July 2, 2004, NeoMedia borrowed from Cornell the gross amount of
$1,000,000 before discounts and fees. Cornell withheld $76,000 as a fee.
NeoMedia paid this note in full during 2004.
On April 8, 2004, NeoMedia borrowed from Cornell the gross amount of
$1,000,000 before discounts and fees. Cornell withheld $76,000 as a fee.
NeoMedia paid this note in full during 2004.
On January 20, 2004, NeoMedia borrowed from Cornell the gross amount of
$4,000,000 before discounts and fees. Of the $4,000,000 funding, $2,500,000 was
used to fund the acquisition of CSI International, Inc. during February 2004.
Cornell withheld $315,000 as a fee. NeoMedia paid this note in full during 2004.
In connection with this note, NeoMedia also granted to Cornell 40,000,000
warrants to purchase shares of NeoMedia stock with an exercise price of $0.05
per share. In April 2004, NeoMedia registered 40 million shares underlying the
warrants granted to Cornell (and subsequently transferred by Cornell to Stone
Street Asset Management LLC). The fair value of the warrants using the
Black-Scholes pricing model was $5,000,000. In accordance with APB 14,
"Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants",
NeoMedia compared the relative fair values of the warrants and the face value of
the notes, and allocated a value of $2.5 million to the warrants. Of the $2.5
million, $2 million was allocated to the $4 million note issued in January 2004
and $0.5 million against the $1 million note in April 2004. The $2.5 million was
recorded as a discount against the carrying value of the note. The $2.5 million
that was allocated to the notes was considered a discount on the promissory
notes, and therefore was amortized over the life of the notes using the
effective interest method, in accordance with Staff Accounting Bulletin No. 77,
Topic 2.A.6, "Debt Issue Costs" of SFAS 141, "Business Combinations".
Accordingly, NeoMedia recorded an amortization of discount of $2,500,000 related
to the warrants during the year ended December31, 2004. Stone Street Asset
Management LLC exercised the warrants during November 2004, resulting in net
funds to NeoMedia of $2 million.
9. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject NeoMedia to concentrations
of credit risk consist primarily of trade accounts receivable with customers.
NeoMedia extends credit to its customers as determined on an individual basis
and has included an allowance for doubtful accounts of $203,000 in its December
31, 2005 consolidated balance sheet.
10. 2000 EXECUTIVE INCENTIVE
During the year ended December 31, 2004, the Company satisfied a
portion of its 2000 accrued executive incentive obligation through the issuance
of common stock to current and former employees who had participated in the
plan. The Company relieved $160,000 of the liability through the issuance of
approximately 1.5 million shares during the year ended December 31, 2004. No
payments in cash or stock were made against this incentive during the year ended
December 31, 2005. The excess of the fair value of the common stock issued over
the outstanding accrued bonuses was included in the gain (loss) on
extinguishment of debt.
F-21
11. COMPREHENSIVE LOSS
Comprehensive loss consists of net income (loss) and other gains and
losses affecting shareholders' investment that, under accounting principles
generally accepted in the United States, are excluded from net income. Changes
in the components of other comprehensive loss are as follows:
2005
-----
Beginning balance $ (60)
Subtractions:
Unrealized loss on marketable securities (146)
Additions:
Foreign currency translation adjustment 29
-----
Ending Balance $(177)
=====
12. INCOME TAXES
For the years ended December 31, 2005 and 2004, the components of income
tax expense were as follows:
2005 2004
------- -------
(In thousand)
Current $ -- $ --
Deferred -- --
Foreign -- --
------- -------
Income tax expense/(benefit) $ -- $ --
======= =======
As of December 31, 2005 and 2004, the types of temporary differences
between the tax basis of assets and liabilities and their financial reporting
amounts which gave rise to deferred taxes, and their tax effects were as
follows:
2005 2004
-------- --------
(In thousand)
Provisions for doubtful accounts $ 102 $ 18
Capitalized software development costs and fixed assets 881 799
Net operating loss carryforwards (NOL) 33,157 30,319
Accruals 738 501
Write-off of long-lived assets 2,516 2,070
State taxes 151 156
Alternative minimum tax credit carryforward 45 45
-------- --------
Total deferred tax assets 37,590 33,908
Valuation Allowance (37,590) (33,908)
-------- --------
Net deferred income tax asset $ -- $ --
======== ========
Because it is more likely than not that NeoMedia will not realize the
benefit of its deferred tax assets, a valuation allowance has been established
against them.
F-22
For the years ended December 31, 2005 and 2004, the income tax benefit
differed from the amount computed by applying the statutory federal rate of 34%
as follows:
2005 2004
------- -------
(In thousands)
Benefit at federal statutory rate $(3,150) $(2,458)
State income taxes, net of federal (367) (286)
Permanent and other, net (166) (582)
Change in valuation allowance 3,683 3,326
------- -------
Income tax expense/(benefit) $ -- $ --
======= =======
As of December 31, 2005, NeoMedia had net operating loss carryforwards for
federal tax purposes totaling approximately $80 million which may be used to
offset future taxable income, or, if unused expire between 2011 and 2020. As a
result of certain of NeoMedia's equity activities, NeoMedia anticipates that the
annual usage of its pre-1998 net operating loss carryforwards should be further
restricted pursuant to the provisions of Section 382 of the Internal Revenue
Code.
13. TRANSACTIONS WITH RELATED PARTIES
On November 1, 2005, NeoMedia acquired a used automobile for $17,000 from
Charles T. Jensen, its President, Chief Executive Officer and a member of its
board of directors.
14. COMMITMENTS AND CONTINGENCIES
NeoMedia leases its office facilities and certain office and computer
equipment under various operating leases. These leases provide for minimum rents
and generally include options to renew for additional periods. For the years
ended December 31, 2005 and 2004, NeoMedia's rent expense was $303,000 and
$229,000, respectively.
NeoMedia is party to various payment arrangements with its vendors that
call for fixed payments on past due liabilities. NeoMedia is also party to
various consulting agreements that carry payment obligations into future years.
The following is a schedule of the future minimum payments under
non-cancelable operating leases in effect as of December 31, 2005:
PAYMENTS
(IN THOUSANDS)
--------------
2006 330
2007 340
2008 134
Thereafter --
----
Total $804
====
As of December 31, 2005, none of the Company's employees were under
contract. As of December 31, 2005, the Company was a party to various long-term
consulting agreements that are required to be paid in cash.
F-23
NeoMedia does not carry any product liability insurance on its Micro Paint
Repair product line.
LEGAL PROCEEDINGS
The Company is involved in various legal actions arising in the normal
course of business, both as claimant and defendant. While it is not possible to
determine with certainty the outcome of these matters, it is possible that the
eventual resolution of the following legal actions could have a material adverse
effect on the Company's financial position or operating results.
SCANBUY, INC.
On January 23, 2004, NeoMedia filed suit against Scanbuy, Inc. ("Scanbuy")
in the Northern District of Illinois, claiming that Scanbuy has manufactured, or
has manufactured for it, and has used, or actively induced others to use,
technology which allows customers to use a built-in UPC bar code scanner to scan
individual items and access information, thereby infringing NeoMedia's patents.
The complaint stated that on information and belief, Scanbuy had actual and
constructive notice of the existence of the patents-in-suit, and, despite such
notice, failed to cease and desist their acts of infringement, and continue to
engage in acts of infringement of the patents-in-suit. On April 15, 2004, the
court dismissed the suits against Scanbuy for lack of personal jurisdiction.
On April 20, 2004, NeoMedia re-filed its suit against Scanbuy in the
Southern District of New York alleging patent infringement. Scanbuy filed its
answer on June 2, 2004. NeoMedia filed its answer and affirmative defenses on
July 23, 2004. Discovery is ongoing.
OTHER LITIGATION
On May 2, 2005, three shareholders of BSD Software, Inc. filed a complaint
against BSD and NeoMedia, claiming that the purchase price as outlined in the
purchase agreement between NeoMedia and BSD is too low. The plaintiffs are
seeking unspecified damages and injunctive relief against the merger. NeoMedia
has moved to dismiss the complaint as frivolous. The case is still pending.
On October 19, 2005, Wachovia Bank, N.A. filed a complaint against
NeoMedia in the twentieth judicial circuit court of Lee County, Florida, seeking
payment of $97,000 of rent from previous years. NeoMedia has placed the
requested funds into escrow with the court, pending resolution of the matter.
15. DEFINED CONTRIBUTION SAVINGS PLAN
NeoMedia maintains a defined contribution 401(k) savings plan.
Participants may make elective contributions up to established limits. All
amounts contributed by participants and earnings on these contributions are
fully vested at all times. The plan provides for matching and discretionary
contributions by NeoMedia, although no such contributions to the plan have been
made to date.
16. STOCK OPTIONS AND WARRANTS
Effective February 1, 1996, NeoMedia adopted the 1996 Stock Option Plan
making available for grant to employees of NeoMedia options to purchase up to
1,500,000 shares of NeoMedia's common stock. The stock option committee of the
board of directors has the authority to determine to whom options will be
granted, the number of options, the related term, and exercise price. The option
exercise price shall be equal to or in excess of the fair market value per share
of NeoMedia's common stock on the date of grant. These options granted expired
ten years from the date of grant. These options vest 100% one year from the date
of grant.
F-24
Effective March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan
making available for grant to employees of NeoMedia options to purchase up to
8,000,000 shares of NeoMedia's common stock. The stock option committee of the
board of directors has the authority to determine to whom options will be
granted, the number of options, the related term, and exercise price. The option
exercise price may be less than the fair market value per share of NeoMedia's
common stock on the date of grant. Options generally vest 20% upon grant and 20%
per year thereafter. The options expire ten years from the date of grant.
Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan. The
2002 Stock Option Plan provides for authority for the stock option committee of
the board of directors to grant non-qualified stock options with respect to a
maximum of 10,000,000 shares of common stock. The option exercise price may be
less than the fair market value per share of NeoMedia's common stock on the date
of grant, and may be granted with any vesting schedule as approved by the stock
option committee.
Effective September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan.
The 2003 Stock Option Plan provides for authority for the Board of Directors to
the grant non-qualified stock options with respect to a maximum of 150,000,000
shares of common stock. The option exercise price may be less than the fair
market value per share of NeoMedia's common stock on the date of grant, and may
be granted with any vesting schedule as approved by the stock option committee.
On October 17, 2003, NeoMedia filed a Form S-8 to register all 150,000,000
shares underlying the options in the 2003 Stock Option Plan.
Effective December 16, 2005, NeoMedia adopted its 2005 Stock Option Plan.
The 2005 Stock Option Plan provides for authority for the Board of Directors to
the grant non-qualified stock options with respect to a maximum of 60,000,000
shares of common stock. The option exercise price may be less than the fair
market value per share of NeoMedia's common stock on the date of grant, and may
be granted with any vesting schedule as approved by the stock option committee.
As of December 31, 2005, NeoMedia has not registered the 60,000,000 shares
underlying the options in the 2005 Stock Option Plan.
F-25
2005 2004
----------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
Outstanding at beginning of year 52,804 $ 0.06 33,512 $ 0.23
Granted 58,510 $ 0.28 32,752 $ 0.10
Exercised (7,954) $ 0.11 (12,860) $ 0.23
Forfeited (3,319) $ 0.22 (600) $ 0.09
------- ------- ------- -------
Outstanding at end of year 100,041 $ 0.18 52,804 $ 0.06
======= ======= ======= =======
Options exercisable at year-end 53,952 34,680
Weighted-average fair value
of options granted during
the year $0.28 $0.10
Available for grant at the
end of the year 26,682 81,873
The following table summarizes information about NeoMedia's stock options
outstanding as of December 31, 2005:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------ --------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
RANGE OF NUMBER WEIGHTED-AVERAGE EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING REMAINING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
--------------- ----------- -------------------------- --------- ----------- ---------
$-- to $0.10 29,744 7 years $ 0.02 29,537 $ 0.02
0.11 to 0.20 16,091 8 years $ 0.11 7,341 $ 0.11
0.21 to 0.30 29,575 9 years $ 0.24 10,900 $ 0.24
0.31 to 0.40 22,200 9 years $ 0.33 5,550 $ 0.33
0.41 to 0.50 2,410 9 years $ 0.41 603 $ 0.41
0.51 to 7.000 21 3 years $ 6.89 21 $ 6.89
------------- --------- --------- --------- --------- --------- ---------
$-- to $7.000 100,041 8 years $ 0.18 53,952 $ 0.12
============= ========= ========= ========= ========= ========= =========
F-26
During the years ended December 31, 2005 and 2004, NeoMedia made the
following option grants:
2005 2004
--------------------------------------- ---------------------------------------
RANGE OF OPTIONS GRANTED RANGE OF OPTIONS GRANTED
RECIPIENTS EXERCISE PRICES (In thousands) EXERCISE PRICES (In thousands)
------------------------ ---------------- ---------------- ---------------- ----------------
Employees $0.227 to $0.516 51,010 $0.062 to $0.128 23,290
Non-employee directors $0.239 to $0.328 6,500 $0.010 to $0.075 3,357
Non-employees $ 0.239 1,000 $0.025 to $0.100 6,105
---------------- ---------------- ---------------- ----------------
Total $0.227 to $0.516 58,510 $0.010 to $0.128 32,752
---------------- ---------------- ---------------- ----------------
OPTION-RELATED EXPENSE
In January 2004, the Company issued 50,000 options to buy shares of the
Company's common stock to an outside consultant at a price of $0.025 per share
for consulting services rendered to the Company. The Company recognized $7,000
in general and administrative expense in the accompanying consolidated financial
statements for the year ended December 31, 2004.
During the period January through June 2004, the Company issued 106,674
options to buy shares of the Company's common stock to James J. Keil, an outside
director, at a price of $0.01 per share for consulting services rendered to the
Company during that time. The Company recognized $9,000 in general and
administrative expense in the accompanying consolidated financial statements for
the year ended December 31, 2004.
In February 2004, the Company issued 5,555,556 options to buy shares of
the Company's common stock to an outside consultant, at a price of $0.01 per
share for consulting services rendered to the Company's Micro Paint Repair
business over a period of three years from the date of issuance. The Company
recorded $550,000 as deferred stock compensation at the time of issuance, and is
recognizing this amount over the period of the contract. Accordingly, the
Company recognized $182,000 in general and administrative expense in the
accompanying consolidated financial statements for the year ended December 31,
2004.
In February 2005, the Company issued 1,000,000 options to buy shares of
the Company's common stock to two outside consultants with a strike price of
$0.239 per share for consulting services to be rendered to the Company over a
two-year period. The Company recognized $103,000 in general and administrative
expense in the accompanying consolidated financial statements for the year ended
December 31, 2005.
For the years ended December 31, 2005 and 2004, total option-related
expense was $334,000 and $805,000, respectively.
F-27
WARRANTS
Warrant activity as of December 31, 2005 and 2004 was as follows:
WEIGHTED AVERAGE
EXERCISE PRICE
----------------
Warrants Outstanding as of December 31, 2003 26,195,000 $ 0.38
Warrants issued 44,150,000 $ 0.06
Warrants exercised (51,510,000) $ 0.05
Warrants expired (10,000) $ 6.54
----------- -----------
Warrants Outstanding as of December 31, 2004 18,825,000 $ 0.52
Warrants issued 54,000,000 $ 0.20
Warrants exercised (50,000) $ 0.10
Warrants expired (1,400,000) $ 6.00
----------- -----------
Warrants Outstanding as of December 31, 2005 71,375,000 $ 0.17
=========== ===========
The following table summarizes information about warrants outstanding at
December 31, 2005, all of which are exercisable:
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
RANGE OF WARRANTS REMAINING EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE
$--- to $0.05 13,050,000 2.5 years $0.01
0.06 to 0.23 58,100,000 2.4 years $0.20
0.24 to 3.56 225,000 2.6 years $3.47
--------------------- -------------- ------- ------------ ------------
$--- to $6.00 71,375,000 2.5 years $0.17
===================== ============== ======= ============ ============
During January 2004, the Company granted to Cornell 40,000,000 warrants to
purchase shares of NeoMedia stock with an exercise price of $0.05 per share, as
consideration for the issuance of two promissory notes by Cornell to NeoMedia.
The first note was for a face amount of $4 million and was issued in January
2004; the second was for a face amount of $1 million issued in April 2004. The
fair value of the warrants using the Black/Scholes pricing model was $5 million.
In accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants", the Company compared the relative fair values of the
warrants and the face value of the notes, and allocated a value of $2.5 million
to the warrants. Of the $2.5 million, $2 million was allocated to the $4 million
note issued in January 2004 and $0.5 million against the $1 million note in
April 2004. The $2.5 million was recorded as a discount against the carrying
value of the note. The $2.5 million that was allocated to the notes is
considered a discount on the promissory notes, and therefore was amortized over
the life of the notes using the effective interest method, in accordance with
Staff Accounting Bulletin No. 77, Topic 2.A.6, "Debt Issue Costs" of SFAS 141,
"Business Combinations". Accordingly, the Company recorded an amortization of
discount of $2,500,000 related to the warrants during the year ended December
31, 2004. The warrants were subsequently assigned by Cornell to Stone Street
Asset Management LLC. Stone Street Asset Management LLC exercised the warrants
during November 2004, resulting in net funds to NeoMedia of $2 million.
F-28
During February 2004, the Company granted 150,000 warrants to purchase
shares of NeoMedia common stock at an exercise price of $0.102 per share to an
outside consultant. The Company recognized approximately $15,000 in expense in
the 2004 consolidated financial statements relating to the warrant issuance.
During February 2005, the holder exercised 50,000 of the warrants, resulting in
proceeds of $5,100 to NeoMedia. The remaining 100,000 warrants were not
exercised as of December 31, 2005.
During March 2004, the Company granted 4,000,000 warrants to purchase
shares of NeoMedia common stock at an exercise price of $0.11 per share to an
outside consultant as a finder fee related to financing received by NeoMedia.
The Company charged the fair value of the warrants of $440,000 as a reduction to
capital accounts. The warrants were not exercised as of December 31, 2005.
During March 2005, in connection with the signing of the $100 million SEDA
with Cornell, NeoMedia issued 50 million warrants to Cornell with an exercise
price of $0.20 per share, and 4 million warrants with an exercise price of
$0.229 to an independent third party as a fee for negotiating and structuring
the SEDA. The Company charged the fair value of the warrants of $12.3 million to
"Deferred equity financing costs." 20 million warrants were exercised in
February 2006, generating $4 million cash proceeds to NeoMedia.
During October 2005, 1.4 million outstanding warrants with an exercise
price of $6.00 per share expired.
17. SEGMENT AND GEOGRAPHICAL INFORMATION
Beginning with the year ended December 31, 1999, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). SFAS 131 supersedes Financial Accounting Standards Board's SFAS No.
14, "Financial Reporting for Segments of a Business Enterprise." SFAS 131
establishes standards for the way that business enterprises report information
about operating segments in annual financial statements. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers.
NeoMedia is structured as three distinct business units: NeoMedia Internet
Software Service (NISS), NeoMedia Consulting and Integration Services (NCIS),
and NeoMedia Micro Paint Repair (NMPR). Performance is evaluated and resources
allocated based on specific segment requirements and measurable factors.
Management uses the Company's internal income statements to evaluate each
business unit's performance.
F-29
Operational results for the three segments for the years ended December
31, 2005 and 2004 are presented below:
------------------------
(in thousands)
------------------------
YEARS ENDED DECEMBER 31,
------------------------
2005 2004
-------- --------
NET SALES:
NeoMedia Consulting & Integration Services $ 633 $ 910
NeoMedia Internet Switching Service 244 63
NeoMedia Micro Paint Repair 1,279 727
-------- --------
$ 2,156 $ 1,700
-------- --------
NET LOSS:
NeoMedia Consulting & Integration Services ($ 1,548) ($ 343)
NeoMedia Internet Switching Service (2,020) (1,312)
NeoMedia Micro Paint Repair (1,615) (960)
Amortization of Cornell Debt Discount -- (2,500)
Corporate overhead (3,964) (2,115)
-------- --------
($ 9,147) ($ 7,230)
-------- --------
IDENTIFIABLE ASSETS
NeoMedia Consulting & Integration Services $ 139
NeoMedia Internet Switching Service 3,300
NeoMedia Micro Paint Repair 3,675
Corporate 5,297
--------
12,411
--------
F-30
Consolidated net sales, net operating losses by geographic area for the
years ended December 31, 2005 and 2004, and long-lived assets by geographic as
of December 31, 2005, were as follows:
(in thousands)
-------------------------
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004
------- -------
NET SALES:
United States $ 1,445 $ 1,063
Canada 711 637
------- -------
$ 2,156 $ 1,700
------- -------
NET LOSS:
United States ($8,250) ($6,516)
Canada (897) (714)
------- -------
($9,147) ($7,230)
------- -------
LONG-LIVED ASSETS
United States $ 4,658
Canada 2,775
-------
$ 7,433
-------
18. COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders. Holders of the common
stock do not have cumulative voting rights, which means that the holders of more
than one half of NeoMedia's outstanding shares of common stock, subject to the
rights of the holders of preferred stock, can elect all of NeoMedia's directors,
if they choose to do so. In this event, the holders of the remaining shares of
common stock would not be able to elect any directors. Subject to the prior
rights of any class or series of preferred stock which may from time to time be
outstanding, if any, holders of common stock are entitled to receive ratably,
dividends when, as, and if declared by the Board of Directors out of funds
legally available for that purpose and, upon NeoMedia's liquidation,
dissolution, or winding up, are entitled to share ratably in all assets
remaining after payment of liabilities and payment of accrued dividends and
liquidation preferences on the preferred stock, if any. Holders of common stock
have no preemptive rights and have no rights to convert their common stock into
any other securities. The outstanding common stock is duly authorized and
validly issued, fully-paid, and nonassessable.
On September 24, 2003, the Company's shareholders voted to increase the
number of shares of common stock, par value $0.01 per share, that the Company is
authorized to issue from 200,000,000 to 1,000,000,000.
On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity
Distribution Agreement (the "2005 SEDA") under which Cornell agreed to purchase
up to $100 million of NeoMedia common stock over a two-year period, with the
timing and amount of the purchase at NeoMedia's discretion. The maximum amount
of each purchase would be $2,000,000 with a minimum of five business days
between advances. The shares would 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, and NeoMedia would pay 5% of the gross proceeds of each purchase to
Cornell. Concurrent with the SEDA, NeoMedia entered into an escrow agreement
with Cornell and an escrow agent, under which the escrow agent holds in an
escrow account shares of NeoMedia common stock, and the cash paid by Cornell for
such shares, issued pursuant to an advance under the SEDA. The shares and funds
can only be released upon receipt by the escrow agent of a joint disbursement
instruction signed by NeoMedia and Cornell. NeoMedia expects to file a
registration statement with the SEC to register the shares underlying the 2005
SEDA. The 2005 SEDA would become available at the time the SEC declares
effective a registration statement containing such shares.
F-31
For the year ended December 31, 2005, NeoMedia granted 393,931 shares
as incentive and sign on bonuses to new hires. Accordingly, NeoMedia recognized
expense of $125,000 for these issuances.
19. PREFERRED STOCK
As of December 31, 2005, the Company's Preferred Stock was comprised of
25,000,000 shares, par value $0.01 per share, of which 200,000 shares are
designated as Series A Preferred Stock, none of which are issued or outstanding.
Additionally, 47,511 shares are designated as Series A Convertible Preferred
Stock, none of which are issued and outstanding, and 100,000 shares are
designated as Series B 12% Convertible Redeemable Preferred Stock, none of which
are issued and outstanding. In February 2006, NeoMedia issued $27,000,000 of
Series C Preferred Shares. See subsequent events for further information.
20. SUBSEQUENT EVENTS
WINDING DOWN OF NCIS BUSINESS UNIT
On February 9, 2006, NeoMedia decided to wind down its NCIS business unit.
NeoMedia has re-allocated certain of the resources associated with the NCIS
business unit to NeoMedia Mobile business. In connection with the
discontinuation of the NCIS business unit, NeoMedia closed its Lisle, IL office
during February 2006. NeoMedia does, however, plan to continue servicing
existing contracts and customers. As of December 31, 2005, the business units
had $633,000 in net sales, a net loss of $1,548,000 and identifiable assets of
$139,000.
FINANCING:
WARRANT EXERCISES
On February 9, 2006, Cornell exercised warrants to purchase 20,000,000
shares of NeoMedia common stock, par value $0.01 per share. The warrants were
issued to Cornell Capital on March 30, 2005 as a commitment fee for Cornell
Capital entering into that certain Standby Equity Distribution Agreement, dated
March 30, 2005 by and between NeoMedia and Cornell Capital. The warrants had an
exercise price equal to $0.20 per share. In connection with the exercise of the
20,000,000 Warrants, NeoMedia received proceeds of $4,000,000.
$27 MILLION PREFERRED STOCK SALE
On February 17, 2006, NeoMedia entered into an investment agreement with
Cornell Capital Partners, LP, pursuant to which NeoMedia issued and sold to
Cornell Twenty-Seven Million Dollars (US $27,000,000) of Series C Preferred
Shares (the "Series C Preferred Shares"), of which (i) Three Million Two Hundred
Eight Thousand Seven Hundred Two Dollars ($3,208,702) were purchased by Cornell
for consideration solely consisting of surrendering that certain Promissory
Note, dated March 30, 2005 in the original principal amount of Ten Million
Dollars (US $10,000,000) issued in the name of Cornell, (ii) Eighteen Million
Seven Hundred Ninety-One Thousand Two Hundred Ninety-Eight Dollars (US
$18,791,298) were purchased by additional funding (consisting of $16,791,298 of
immediately available funds and $2,000,000 of securities) from Cornell as of
February 17, 2006, and (iii) Five Million Dollars (US $5,000,000) shall be
purchased by an additional funding by Cornell on the date a registration
statement filed by the Company pursuant to the terms of that certain Investor
Registration Rights Agreement, dated February 17, 2006 by and between the
Company and Cornell is declared effective by the U.S. Securities and Exchange
Commission. The Series C Preferred Shares are convertible into shares of the
Company's common stock, par value $0.01 per share in accordance with the terms
of the Company Certificate of Designations, Preferences, and Rights of the
Series C Preferred Shares.
F-32
Some of the material characteristics of the Series C Preferred shares are
as follows:
- The shares accrue dividends at a rate of 8% per annum
- The shares receive proceeds of $1,000 per share upon the
Company's liquidation, dissolution or winding up
- Each Series C Convertible Preferred Share is convertible, at
the option of the holder, into shares of the Company's common
stock at the lesser of (i) Fifty Cents ($0.50) or (ii) 97% of
the lowest closing bid price of the Company's common stock for
the thirty (30) trading days immediately preceding the date of
conversion.
- The shares have voting rights on an as converted basis
- Pursuant to the registration rights agreement, in the event
that NeoMEdia does not file a registration to register the
common shares underlying the convertible preferred, or if the
registration is not declared effective within 180 days of
filing of such registration statement, then the shares wil
accrue liquidated damages in the amount of 1% of the face
value of the convertible instrument per month, with a total
not to exceed $1.2 million
In addition, pursuant to the terms of the Investment Agreement, the Company
issued to Cornell (i) a warrant to purchase twenty million (20,000,000) shares
of NeoMedia common stock exercisable for a period of 5 years at an exercise
price of $0.50 per share; (ii) a warrant to purchase twenty-five million
(25,000,000) shares of common stock exercisable for a period of 5 years at an
exercise price of $0.40 per share; and (iii) a warrant to purchase thirty
million (30,000,000) shares of common stock exercisable for a period of 5 years
at an exercise price of $0.35 per share.
On February 17, 2006, the Company and Cornell entered into an Assumption
Agreement, whereby Cornell sold and assigned to the Company those certain
Promissory Notes issued by Pick Ups Plus, Inc., dated September 30, 2003,
October 13, 2004, June 6, 2005, and August 4, 2005, in the aggregate principal
amount of $1,365,000 and accrued interest of $246,231.78 for a purchase price
equal to One Million Six Hundred Eleven Thousand Two Hundred Thirty-One Dollars
and 78/100 (US $1,611,231.78).
On February 17, 2006, the Company and Cornell entered into an Assignment of
Common Stock, whereby Cornell sold and assigned to the Company twenty million
(20,000,000) shares of common stock, par value $0.001 per share, of Pick Ups
Plus, Inc. for a purchase price equal to Three Hundred Eighty-Eight Thousand
Seven Hundred Sixty-Eight Dollars and 22/100 (US $388,768.22).
F-33
ACQUISITIONS:
ACQUISITION OF MOBOT, INC.
On February 9, 2006, NeoMedia and Mobot. (www.mobot.com) signed a
definitive merger agreement under which NeoMedia acquired all of the outstanding
shares of Mobot in exchange for $3,500,000 cash and $6,500,000 in shares of
NeoMedia common stock. The $6,500,000 stock portion of the purchase price is
represented by 16,931,493 shares of NeoMedia common stock, calculated by
dividing $6,500,000 by the volume-weighted average closing price of NeoMedia
common stock for the ten day up to and including February 8, 2006. On February
17, 2006, NeoMedia and Mobot completed the closing requirements and the
acquisition became effective.
Mobot is a pioneer in visual search and recognition technology designed to
make marketing effective and innovative using mobile devices. Launched in 2004
to help companies cultivate rewarding relationships with the world's 1.5 billion
mobile phone users, Mobot gives marketers, content providers and carriers the
tools to make it easy for any consumer with a camera phone to interact with
their offerings.
ACQUISITION OF 12SNAP AG
On February 10, 2006, NeoMedia and 12Snap AG of Munich signed a definitive
sale and purchase agreement under which NeoMedia acquired all of the outstanding
shares of 12Snap in exchange for $2,500,000 cash and $19,500,000 in shares of
NeoMedia common stock. The $19,500,000 stock portion of the purchase price is
represented by 49,294,581 shares of NeoMedia common stock, calculated by
dividing $19,500,000 by the volume-weighted average closing price of NeoMedia
common stock for the ten day up to and including February 9, 2006. On February
28, 2006, NeoMedia and 12Snap completed the closing requirements and the
acquisition became effective.
12snap AG is a non-public incorporated company headquartered in Munich with
branches in Dusseldorf, New York, London, Milan, Stockholm and Vienna. As an
expert in innovative marketing and entertainment for mobile phones, 12snap
combines know-how in mobile applications, mobile loyalty and mobile marketing.
In the mobile marketing space, 12snap creates and implements national and
pan-European mobile marketing campaigns for international brands; its mobile
loyalty business unit offers customer loyalty programs for companies and brands,
and its mobile applications business unit is the center for development and
software. 12snap sells and licenses a wide spectrum of mobile solutions to
satisfy the demands of the current growing market and the new uses of the third
mobile phone generation from dynamic video services and multiplayer games to
personalized messaging applications. 12snap has 75 employees, and services to
companies including McDonald's, MTV(R), Coca-Cola, Ferrero, Wella, adidas,
Unilever and Gillette(R).
LETTER OF INTENT TO ACQUIRE HIP CRICKET
On February 16, 2006, NeoMedia signed a non-binding letter of intent to
acquire HipCricket, Inc. ("HipCricket") of Essex, CT (www.hipcricket.com) in
exchange for $500,000 cash and $4,000,000 of NeoMedia common stock. The letter
of intent is subject to due diligence and signing of a mutually agreeable
definitive purchase agreement by both parties.
In addition to signing the LOI, NeoMedia loaned HipCricket the
principal amount of $500,000 in the form of two unsecured promissory notes. The
notes accrue interest at a rate of 8% per annum. The notes will be applied
toward the cash portion of the purchase price upon signing of a definitive
purchase agreement for the acquisition of all of the outstanding shares of
HipCricket by NeoMedia, as contemplated the LOI. In the event the acquisition is
not consummated, the notes will become due 90 days after termination of the LOI.
In the event the LOI is terminated and the notes are not repaid within 90 days
of such cancellation, the notes will convert into shares of HipCricket common
stock.
F-34
HipCricket is a leading mobile marketing firm that provides innovative,
custom solutions to broadcasters and brand marketers. Today, HipCricket works
with five of the top 10 radio groups in the U.S. as well as with some 40 major
brand marketers. HipCricket combines senior marketing expertise with
state-of-the-art mobile and event marketing technologies to offer clients
unprecedented interactivity with their consumers, viewers, listeners or
customers on a one-to-one personal level.
ACQUISITION OF GAVITEC AG
On February 17, 2006, NeoMedia and Gavitec AG of Wurselen, Germany
(www.gavitec.com) signed a definitive sale and purchase agreement under which
NeoMedia acquired all of the outstanding shares of Gavitec in exchange for
$1,800,000 cash and $5,400,000 in shares of NeoMedia common stock. The
$5,400,000 stock portion of the purchase price is represented by 13,660,511
shares of NeoMedia common stock, calculated by dividing $5,400,000 by the
volume-weighted average closing price of NeoMedia common stock for the ten days
up to and including February 16, 2006. On February 23, 2006, NeoMedia and
Gavitec completed the closing requirements and the acquisition became effective
Gavitec was founded in 1997 as a specialized provider and manufacturer of
products and solutions for mobile marketing and mobile information technology.
As a technology leader in code-reading systems and software for mobile
applications, Gavitec offers its clients standardized or individual solutions in
the areas of mobile marketing, mobile ticketing, mobile couponing, and mobile
payment systems.
ACQUISITION OF SPONGE LTD.
On February 20, 2006, NeoMedia and Sponge Limited of London
(www.spongegroup.com) signed a definitive share purchase agreement under which
NeoMedia acquired all of the outstanding shares of Sponge in exchange for
(pound)3,450,000 (approximately $6 million) cash and (pound)6,550,000
(approximately $11.4 million) in shareS OF NeoMedia common stock. The
(pound)6,550,000 stock portion of the purchase price is represented by
29,696,745 shares of NeoMedia common stock, calculated by dividing
(pound)6,550,000 by the volume-weighted average closing price of NeoMedia common
stock for the ten days up to and including February 8, 2006. The agreement also
calls for Sponge to earn an additional (pound)2,500,000 (approximately $4.4
million) in the form of NeoMedia common stock if, during the two-year period
beginning at closing, the Sponge business earns in excess of (pound)1,300,000
(approximately $2.3 million) in net profits. On February 23, 2006, NeoMedia and
Sponge completed the closing requirements and the acquisition became effective.
Founded in 2001, Sponge has grown to become a U.K. market leader in
providing mobile applications to agencies and media groups, and gain recognition
as one of Europe's top independent developers of mobile applications and
content. Today, Sponge counts more than 40 agencies, including WPP, Aegis and
BBH, as clients, and supplies services for over 100 world-class brands,
including Coca Cola(R), Heineken(R) and Diageo. Sponge also supplies a range of
mobile services to media groups, including News International, Trinity Mirror,
Endemol and IPC.
F-35
ACQUISITION OF BSD SOFTWARE, INC.
On March 21, 2006, NeoMedia completed its acquisition of BSD Software,
Inc. of Calgary, Alberta, Canada. BSD owns 90% of the outstanding shares of
Triton Global Business Services, Inc., a provider of live and automated operator
calling services and e-business support, including billing, clearinghouse and
information management services, to companies in the telecommunications
industry. After exchange of shares certificates, NeoMedia expects to issue
7,123,698 shares of its common stock in connection with the acquisition.
(Unaudited).
The acquisitions of BSD, Mobot, 12Snap, Gavitec, and Sponge are not
reflected in the 2005 consolidated financial statements. The proforma financial
information as required by SFAS 141, "Business Combinations" has not been
presented as much information was not immediately practically attainable. The
Company plans to file a Form 8-K/A relating to these acquisitions which will
include the historical financial statements of the acquired companies and
the required proforma information.
JINCHE AGREEMENT
On February 28, 2006, NeoMedia signed a 10-year exclusive supplier
agreement with Automart, a Beijing-based joint venture operating under the laws
of the People's Republic of China specializing in automobile sales, financing,
insurance and repair. Automart is the brand name of Jinche Yingang Auto
Technological Services Limited, with which NeoMedia signed a distribution
agreement in August 2005. The new agreement expands on the previous agreement,
giving Automart the exclusive rights to distribute NeoMedia's micro paint repair
products to their own stores and others throughout China, Hong Kong, Macao, and
Taiwan, and also guaranteeing that Automart will purchase at least 70% of its
non-micro paint products through NeoMedia as its distributor. NeoMedia has
signed distribution agreements with DuPont and PPG, and intends to become a
distributor of other automotive aftermarket products to Automart.
F-36
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
As of February 28, 2006, NeoMedia's directors and executive officers
were:
NAME AGE POSITION
----------------- --- ------------------------------------------------
Charles W. Fritz 49 Chairman of the Board of Directors
Charles T. Jensen 62 President, Chief Executive Officer and Director
David A. Dodge 31 Vice-President and Chief Financial Officer
Martin N. Copus 51 Chief Operating Officer
William E. Fritz 75 Director
James J. Keil 78 Director
A. Hayes Barclay 74 Director
The following is certain summary information with respect to the directors
and executive officers of NeoMedia:
CHARLES W. FRITZ is a founder of NeoMedia and has served as an officer and
as a Director of NeoMedia since our inception. On August 6, 1996, Mr. Fritz was
appointed Chief Executive Officer and Chairman of the Board of Directors. On
April 2, 2001, Mr. Fritz was appointed as President where he served until June
2002. Mr. Fritz is currently a member of the Compensation Committee. Prior to
founding NeoMedia, Mr. Fritz was an account executive with IBM Corporation from
January 1986 to January 1988, and Director of Marketing and Strategic Alliances
for the information consulting group from February 1988 to January 1989. Mr.
Fritz holds an M.B.A. from Rollins College and a B.A. in finance from the
University of Florida. Mr. Fritz is the son of William E. Fritz, a Director of
NeoMedia.
CHARLES T. JENSEN was Chief Financial Officer, Treasurer and Vice-President
of NeoMedia from 1996 through 2002. Mr. Jensen has been a Director since 1996,
and currently is a member of the Compensation Committee. During 2002, Mr. Jensen
was promoted to President, Chief Operating Officer, and Acting Chief Executive
Officer. During August 2004, Mr. Jensen was made Chief Executive Officer. Prior
to joining NeoMedia in November 1995, Mr. Jensen was Chief Financial Officer of
Jack M. Berry, Inc., a Florida corporation which grows and processes citrus
products, from December 1994 to October 1995, and at Viking Range Corporation, a
Mississippi corporation which manufactures gas ranges, from November 1993 to
December 1994. From December 1992 to February 1994, Mr. Jensen was Treasurer of
Lin Jensen, Inc., a Virginia corporation specializing in ladies clothing and
accessories. Prior to that, from January 1982 to March 1993, Mr. Jensen was
Controller and Vice-President of Finance of The Pinkerton Tobacco Co., a tobacco
manufacturer. Mr. Jensen holds a B.B.A. in accounting from Western Michigan
University and is a Certified Public Accountant.
III-1
DAVID A. DODGE joined NeoMedia in 1999 as the Financial Reporting Manager.
Since then, Mr. Dodge has acted as NeoMedia's Director of Financial Planning and
Controller, and currently holds the title of Vice President and Chief Financial
Officer. Prior to joining NeoMedia in 1999, Mr. Dodge was an auditor with Ernst
& Young LLP for 2 years. Mr. Dodge holds a B.A. in economics from Yale
University and an M.S. in accounting from the University of Hartford, and is
also a Certified Public Accountant.
MARTIN N. COPUS joined NeoMedia in March 2005 as COO and chief executive of
the NeoMedia Mobile business unit. Prior to joining NeoMedia, Mr. Copus was
Managing Director of 12Snap UK, an internationally-acclaimed, award-winning
mobile marketing company focusing on wireless channels, where he led development
and implementation of interactive marketing programs for major blue-chip
companies including McDonald's(R), Kellogg(R), Procter & Gamble(R),
Coca-Cola(R), Safeway(R), Budweiser(R), and 20th CenTuRY Fox(R). Prior to
running the U.K. operations of 12Snap, Mr. Copus's background included
assignments as executive director of Huntsworth PLC, a marketing services group
listed on the main board of the London Stock Exchange; Worldwide Board Director
of Interpublic Group's Ammirati Puris Lintas advertising unit; and senior vice
president of Leo Burnett Company Inc., Chicago, responsible for its Marlboro(R)
USA advertising and marketing services account. Mr. Copus holds a B.A. in
marketing and an M.A. in modern languages, both from Oxford University.
WILLIAM E. FRITZ is a founder of NeoMedia and has served as a Director of
NeoMedia since its inception. Mr. Fritz also served as Treasurer of NeoMedia
from its inception until May 1, 1996. Since February 1981, Mr. Fritz has been an
officer and either the sole shareholder or a majority shareholder of G.T.
Enterprises, Inc. (formerly Gen-Tech, Inc.), D.M., Inc. (formerly Dev-Mark,
Inc.) and EDSCO, three railroad freight car equipment manufacturing companies.
Mr. Fritz holds a B.S.M.E. and a Bachelor of Naval Science degree from the
University of Wisconsin. Mr. Fritz is the father of Charles W. Fritz, NeoMedia's
former Chief Executive Officer and Chairman of the Board of Directors.
JAMES J. KEIL has been a Director of NeoMedia since August 6, 1996. Mr. Keil
currently is a member of the Compensation Committee, the Stock Option Committee
and the Audit Committee. He is founder and President of Keil & Keil Associates,
a business and marketing consulting firm located in Washington, D.C.,
specializing in marketing, sales, document application strategies, recruiting
and electronic commerce projects. Prior to forming Keil & Keil Associates in
1990, Mr. Keil worked for 38 years at IBM Corporation and Xerox Corporation in
various marketing, sales and senior executive positions. From 1989-1995, Mr.
Keil was on the Board of Directors of Elixir Technologies Corporation (a
non-public corporation), and from 1990-1992 was the Chairman of its Board of
Directors. From 1992-1996, Mr. Keil served on the Board of Directors of Document
Sciences Corporation. Mr. Keil holds a B.S. degree from the University of Dayton
and did Masters level studies at the Harvard Business School and the University
of Chicago in 1961/62.
A. HAYES BARCLAY has been a Director of NeoMedia since August 6, 1996, and
currently is a member of the Stock Option Committee and the Audit Committee. Mr.
Barclay has practiced law for approximately 37 years and, since 1967, has been
an officer, owner and employee of the law firm of Barclay & Damisch, Ltd. and
its predecessor, with offices in Chicago, Wheaton and Arlington Heights,
Illinois. Mr. Barclay holds a B.A. degree from Wheaton College, a B.S. from the
University of Illinois and a J.D. from the Illinois Institute of Technology -
Chicago Kent College of Law.
III-2
ELECTION OF DIRECTORS AND OFFICERS
Directors are elected at each annual meeting of shareholders and hold
office until the next succeeding annual meeting and the election and
qualification of their respective successors. Officers are elected annually by
the Board of Directors and hold office at the discretion of the Board of
Directors. NeoMedia's By-Laws permit the Board of Directors to fill any vacancy
and such director may serve until the next annual meeting of shareholders and
the due election and qualification of his successor.
MEETINGS OF THE BOARD OF DIRECTORS
During the year ended December 31, 2005, NeoMedia held 5 directors'
meetings and each incumbent director attended more than seventy-five percent of
the total of meetings of the Board of Directors and the Committees of which he
is a member. The Board of Directors also acted 7 times by unanimous written
consent.
COMMITTEES OF THE BOARD OF DIRECTORS
NeoMedia's Board of Directors has an Audit Committee, Compensation
Committee and a Stock Option Committee. The Board of Directors does not have a
standing Nominating Committee.
AUDIT COMMITTEE. The Audit Committee is responsible for nominating
NeoMedia's independent accountants for approval by the Board of Directors,
reviewing the scope, results and costs of the audit with NeoMedia's independent
accountants, and reviewing the financial statements, audit practices and
internal controls of NeoMedia. During 2005, members of the Audit Committee were
non-employee directors James J. Keil and A. Hayes Barclay. During 2005, the
Audit Committee held 4 meetings. Due to financial constraints, the Company does
not currently have an audit committee financial expert serving on its audit
committee.
COMPENSATION COMMITTEE. The Compensation Committee is responsible for
recommending compensation and benefits for the executive officers of NeoMedia to
the Board of Directors and for administering NeoMedia's Incentive Plan for
Management. Charles W. Fritz, Charles T. Jensen, and James J. Keil, were members
of NeoMedia's Compensation Committee during 2005. The Compensation Committee met
once and acted by unanimous written consent 2 times during 2005.
STOCK OPTION COMMITTEE. The Stock Option Committee, which is comprised of
non-employee directors, is responsible for administering NeoMedia's Stock Option
Plans. A. Hayes Barclay and James J. Keil are the current members of NeoMedia's
Stock Option Committee. During 2005, the Stock Option Committee met once and
acted by unanimous written consent 7 times.
DIRECTOR COMPENSATION
Outside directors are currently compensated through the issuance of stock
options from the Company's stock option plans. During February 2005, each
outside director received 1,000,000 options with an exercise price of $0.239 per
share (equal to the closing price on the date of issuance), and James J. Keil,
the audit and compensation committee chairperson, received and additional
1,000,000 options with the same exercise price. During December 2005, each
outside director received 750,000 options with an exercise price of $0.328 per
share (equal to the closing price on the date of issuance), and James J. Keil,
the audit and compensation committee chairperson, received and additional
250,000 options with the same exercise price. NeoMedia does not have a written
compensation policy for its outside directors at this time.
CODE OF ETHICS
The Company has adopted a code of ethics, as required by the rules of the
SEC (attached as exhibit 10.53 to the Company's Form 10-KSB as filed on March 5,
2005). This code of ethics applies to all of the Company's directors, officers
and employees. The code of ethics, and any amendments to, or waivers from, the
code of ethics, is available in print, at no charge, to any shareholder who
requests such information.
III-3
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires NeoMedia's
officers and directors, and persons who own more than ten percent of a
registered class of NeoMedia's equity securities, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than ten-percent shareholders are required by SEC
regulation to furnish NeoMedia with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to NeoMedia,
NeoMedia believes that during 2005 all Section 16(a) filing requirements
applicable to NeoMedia's officers, directors and ten percent beneficial owners
were complied with.
III-4
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to the
compensation paid to (i) NeoMedia's Chief Executive Officer and (ii) each of
NeoMedia's other executive officers who received aggregate cash compensation in
excess of $100,000 for services rendered to NeoMedia (collectively, "the Named
Executive Officers") during the years ended December 31, 2005 and 2004:
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------- ------------------------------------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING
COMPENS- STOCK OPTIONS/ LTIP ALL OTHER
NAME AND SALARY BONUS ATION AWARD(S) SARS(1) PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
----------------------- ------ ---------- ------- ---------- ----------- ------------- --------- ---------------
Charles T. Jensen 2005 197,500 -- -- -- 6,000,000 --
President and Chief 2004 175,386 -- -- -- 4,000,000 -- 386(2)
Executive Officer
Charles W. Fritz 2005 $ 205,278 -- -- -- 6,000,000 --
Chairman of the Board 2004 175,355 -- -- -- 4,000,000 -- 355(2)
David A. Dodge 2005 $ 141,733 -- -- -- 4,500,000 --
Vice President and 2004 122,396 -- -- -- 2,000,000 -- --
Chief Financial
Officer
Martin N. Copus (3) 2005 $ 184,076 -- -- -- 5,000,000 --
Chief Operating
Officer 2004 -- -- -- -- -- -- --
(1) Represents options granted under NeoMedia's 2003 Stock Option Plan granted
at the discretion of the Stock Option Committee of NeoMedia's Board of
Directors.
(2) Includes automobile expenses attributable to personal use and the
corresponding income tax effects.
(3) Martin Copus joined NeoMedia in March 2005.
EMPLOYMENT AGREEMENTS
No employment agreements are currently in place for any employees of the
Company.
INCENTIVE PLAN FOR MANAGEMENT
Effective as of January 1, 1996, NeoMedia adopted an Annual Incentive
Plan for Management ("Incentive Plan"), which provides for annual bonuses to
eligible employees based upon the attainment of certain corporate and/or
individual performance goals during the year. The Incentive Plan is designed to
provide additional incentive to NeoMedia's management to achieve these growth
and profitability goals. Participation in the Incentive Plan is limited to those
employees holding positions assigned to incentive eligible salary grades and
whose participation is authorized by NeoMedia's Compensation Committee which
administers the Incentive Plan, including determination of employees eligible
for participation or exclusion. The Board of Directors can amend, modify or
terminate the Incentive Plan for the next plan year at any time prior to the
commencement of such next plan year.
III-5
To be eligible for consideration for inclusion in the Incentive Plan,
an employee must be on NeoMedia's payroll for the last three months of the year
involved. Death, total and permanent disability or retirement are exceptions to
such minimum employment, and awards in such cases are granted on a pro-rata
basis. In addition, where employment is terminated due to job elimination, a pro
rata award may be considered. Employees who voluntarily terminate their
employment, or who are terminated by NeoMedia for unacceptable performance,
prior to the end of the year are not eligible to participate in the Incentive
Plan. All awards are subject to any governmental regulations in effect at the
time of payment.
Performance goals are determined for both NeoMedia's and/or the
employee's performance during the year, and if performance goals are attained,
eligible employees are entitled to an award based upon a specified percentage of
their base salary.
The Company did not have a formal incentive plan for management in
place for the year ended December 31, 2005.
During the years ended December 31, 2005 and 2004, the Company paid $0
and $159,000, respectively, in past due incentive awards relating to its
executive incentive plan for fiscal 2000, through the issuance of common stock.
STOCK OPTION PLANS
Effective February 1, 1996 (and amended and restated effective July 18,
1996 and further amended through November 18, 1996), NeoMedia adopted its 1996
Stock Option Plan ("1996 Stock Option Plan"). The 1996 Stock Option Plan
provides for the granting of non-qualified stock options and "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, and provides for the issuance of a maximum of 1,500,000 shares of
common stock. All 1,500,000 options were granted under NeoMedia's 1996 Stock
Option Plan.
Effective March 27, 1998, NeoMedia adopted its 1998 Stock Option Plan
("1998 Stock Option Plan"). The 1998 Stock Option Plan provides for the granting
of non-qualified stock options and provides for the issuance of a maximum of
8,000,000 shares of common stock. All 8,000,000 options were granted under
NeoMedia's 1998 Stock Option Plan.
Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan
("2002 Stock Option Plan"). The 2002 Stock Option Plan provides for authority
for the Board of Directors to the grant non-qualified stock options with respect
to a maximum of 10,000,000 shares of common stock. All 10,000,000 options were
granted under NeoMedia's 2002 Stock Option Plan.
Effective September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan
("2003 Stock Option Plan"). The 2003 Stock Option Plan provides for authority
for the Board of Directors to the grant non-qualified stock options with respect
to a maximum of 150,000,000 shares of common stock. On October 17, 2003,
NeoMedia filed a Form S-8 to register all 150,000,000 shares underlying the
options in the 2003 Stock Option Plan. As of December 31, 2005, the Company had
issued approximately 128 million shares under the 2003 Stock Option Plan.
Effective December 16, 2005, NeoMedia adopted its 2005 Stock Option Plan
("2005 Stock Option Plan"). The 2005 Stock Option Plan provides for authority
for the Board of Directors to the grant non-qualified stock options with respect
to a maximum of 60,000,000 shares of common stock. The option exercise price may
be less than the fair market value per share of NeoMedia's common stock on the
date of grant, and may be granted with any vesting schedule as approved by the
stock option committee. As of December 31, 2005, NeoMedia had not issued any of
the 60,000,000 options in the 2005 Stock Option Plan.
III-6
STOCK INCENTIVE PLAN
Effective October 31, 2003, NeoMedia adopted the 2003 Stock Incentive Plan.
Under the terms of the Plan, NeoMedia has set aside up to 30,000,000 shares of
common stock to be issued to pay compensation and other expenses related to
employees, former employees, consultants, and non-employee directors. On
November 3, 2003, NeoMedia filed a Form S-8 to register all 30,000,000 shares
underlying the options in the 2003 Stock Incentive Plan. As of December 31,
2005, the Company had issued approximately 9.8 million shares under the 2003
Stock Incentive Plan.
401(K) PLAN
NeoMedia maintains a 401(k) Profit Sharing Plan and Trust (the "401(k)
Plan"). All employees of NeoMedia who are 21 years of age and who have completed
three months of service are eligible to participate in the 401(k) Plan. The
401(k) Plan provides that each participant may make elective contributions of up
to 20% of such participant's pre-tax salary (up to a statutorily prescribed
annual limit, which is $13,000 for 2004) to the 401(k) Plan, although the
percentage elected by certain highly compensated participants may be required to
be lower. All amounts contributed to the 401(k) Plan by employee participants
and earnings on these contributions are fully vested at all times. The 401(k)
Plan also provides for matching and discretionary contributions by NeoMedia. To
date, NeoMedia has not made any such contributions.
III-7
OPTIONS GRANTED IN THE LAST FISCAL YEAR
The following presents certain information on stock options for the Named
Executive Officers for the year ended December 31, 2005:
NUMBER OF PERCENT OF
SECURITIES TOTAL POTENTIAL REALIZABLE VALUE
UNDERLYING OPTIONS AT ASSUMED ANNUAL RATES
OPTIONS SARS OF STOCK PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM
NAMED GRANTED EMPLOYEES IN BASE PRICE ----------------------------
EXECUTIVE OFFICER (#) FISCAL YEAR ($/SHARE) EXPIRATION DATE 5% ($) 10% ($)
----------------- ----------- ------------- ----------- --------------- ----------------------------
Charles T. Jensen 4,000,000 3.6% $0.239 February 8, 2015 $ 601,223 $1,523,618
2,000,000 1.8% $0.328 December 16, 2015 $ 412,555 $1,045,495
----------- ------------- ---------- ----------
6,000,000 5.4% $1,013,778 $2,569,113
Charles W. Fritz 4,000,000 3.6% $0.239 February 8, 2015 $ 601,223 $1,523,618
2,000,000 1.8% $0.328 December 16, 2015 $ 412,555 $1,045,495
----------- ------------- ---------- ----------
6,000,000 5.4% $1,013,778 $2,569,113
David A. Dodge 2,500,000 2.2% $0.239 February 8, 2015 $ 375,765 $ 952,261
2,000,000 1.8% $0.328 December 16, 2015 $ 412,555 $1,045,495
----------- ------------- ---------- ----------
4,500,000 4.0% $ 788,320 $1,997,756
Martin N. Copus 3,000,000 2.7% $0.247 March 1, 2015 $ 466,011 $1,180,963
2,000,000 1.8% $0.328 December 16, 2015 $ 412,555 $1,045,495
----------- ------------- ---------- ----------
5,000,000 4.4% $ 878,566 $2,226,458
III-8
AGGREGATE OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTIONS/SAR VALUES
The following table sets forth options exercised by NeoMedia Named
Executive Officers during the year ended December 31, 2005, and the number and
value of all unexercised options at fiscal year end.
NUMBER OF UNEXERCISED
SHARES SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-
ACQUIRED OPTIONS/SARS AT THE-MONEY OPTIONS/SARS AT
SHARES VALUE DECEMBER 31, 2005 DECEMBER 31, 2005 (1)
NAMED ON EXERCISE REALIZED ------------------------------- ------------------------------
EXECUTIVE OFFICER (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
-------------------- ----------- --------- ------------ --------------- ----------- ---------------
Charles T. Jensen -- -- 13,500,000 6,500,000 $3,393,000 $ 583,000
Charles W. Fritz -- -- 15,010,000 6,500,000 3,776,740 583,000
David A. Dodge 600,000 $ 194,100 3,725,000 4,375,000 705,025 315,875
Martin N. Copus -- -- 2,000,000 3,000,000 85,500 85,500
(1) Based on the difference between the closing price of $0.304 of NeoMedia's
common stock as quoted on OTC Bulletin Board on December 30, 2005 and the
exercise price of the option/SAR.
III-9
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of NeoMedia's common stock as of February 28, 2006, (i) by each person
or entity known by NeoMedia to own beneficially more than five percent of
NeoMedia's Common Stock, (ii) by each of NeoMedia's directors and nominees,
(iii) by each executive officer of NeoMedia named in the Summary Compensation
Table, and (iv) by all executive officers and directors of NeoMedia as a group.
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF
CLASS BENEFICIAL OWNER OWNERSHIP (1) CLASS (1)
-------------------- --------------------------------- ------------------ ----------------
Common Stock Charles W. Fritz (2)(3) 30,920,555 5.0%
Common Stock William Fritz (2)(4) 53,150,944 8.7%
Common Stock Charles T. Jensen (2)(5) 15,501,500 2.5%
Common Stock David A. Dodge (2)(6) 4,850,000 *
Common Stock A. Hayes Barclay (2)(7) 3,155,000 *
Common Stock James J. Keil (2)(8) 5,388,619 *
Common Stock Martin N. Copus (9) 3,682,186 *
------------------ ----------------
Common Stock Officers and Directors
as a Group (9 Persons) (10) 116,648,804 17.8%
================== ================
-------------------------
* - denotes ownership of less than one percent of issued and outstanding shares
of NeoMedia's common stock.
(1) Applicable percentage of ownership is based on 601,789,324 shares of
common stock outstanding as of February 28, 2006, together with securities
exercisable or convertible into shares of common stock within 60 days of
February 28, 2006, for each shareholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect
to securities. Shares of common stock subject to securities exercisable or
convertible into shares of common stock that are currently exercisable or
exercisable within 60 days of February 28, 2006, are deemed to be
beneficially owned by the person holding such securities for the purpose
of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person. The common stock is the only outstanding
class of equity securities of NeoMedia.
(2) Address of the referenced individual is c/o NeoMedia Technologies, Inc.,
2201 Second Street, Suite 600, Fort Myers, FL, 33901.
(3) Charles W. Fritz is the Company's founder and the Chairman of the Board of
Directors. Shares beneficially owned include 100 shares owned by each of
Mr. Fritz's four children for an aggregate of 400 shares, 15,500,000
shares of common stock issuable upon exercise of options granted under the
Company's 2003, 2002 and 1998 stock option plans, 1,510,000 shares
issuable upon exercise of stock warrants, 12,367,186 shares of common
stock owned by Mr. Charles W. Fritz directly, and 1,542,969 shares of
common stock held by the CW/LA II Family Limited Partnership, a family
limited partnership for the benefit of Mr. Fritz's family.
(4) William E. Fritz, the Company's corporate secretary and a director, and
his wife, Edna Fritz, are the general partners of the Fritz Family Limited
Partnership and therefore each are deemed to be the beneficial owners of
the 1,511,742 shares held in the Fritz Family Partnership. As trustee of
each of the Chandler R. Fritz 1994 Trust, Charles W. Fritz 1994 Trust and
Debra F. Schiafone 1994 Trust, William E. Fritz is deemed to be the
beneficial owner of the 165,467 shares of NeoMedia held in these trusts.
Additionally, Mr. Fritz is deemed to own: 45,433,735 shares held directly
by Mr. Fritz or his spouse, 2,540,000 shares to be issued upon the
exercise of warrants held by Mr. Fritz or his spouse, and 3,500,000 shares
to be issued upon the exercise of options held by Mr. Fritz or his spouse.
(5) Charles T. Jensen is President, Chief Operating Officer, Acting Chief
Executive Officer, and a member of the Board of Directors. Beneficial
ownership includes 15,500,000 shares of common stock issuable upon
exercise of options granted under NeoMedia's stock option plans, and 1,500
shares owned by Mr. Jensen's sons.
(6) David A. Dodge is Vice President, Chief Financial Officer, and Controller.
Beneficial ownership includes 4,850,000 shares of common stock issuable
upon exercise of options granted under NeoMedia's stock option plans.
III-10
(7) A. Hayes Barclay is a member of the Board of Directors. Ownership includes
3,150,000 shares of common stock issuable upon exercise of options granted
under NeoMedia's stock option plans, and 5,000 shares owned by Mr. Barclay
directly.
(8) James J. Keil is a member of the Board of Directors. Shares beneficially
owned includes 3,500,000 shares issuable upon exercise of options and
1,888,619 shares owned by Mr. Keil directly.
(9) Martin N. Copus is Chief Operating Office. Beneficial ownership includes
3,500,000 shares of common stock issuable upon exercise of options granted
under NeoMedia's stock option plans, and 182,186 shares held by Mr. Copus
directly.
(10) Includes an aggregate of 49,500,000 currently exercisable options to
purchase shares of common stock granted under NeoMedia's stock option
plans, 4,050,000 currently exercisable warrants to purchase shares of
common stock, and 63,098,804 shares owned directly by NeoMedia's officers
and directors.
III-11
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 1, 2005, NeoMedia acquired a used automobile for $17,000 from
Charles T. Jensen, its president, chief executive officer and a member of its
board of directors. NeoMedia believes the transaction was completed at arm's
length.
III-12
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(1) The following exhibits required by Item 601 of Regulation S-B to be
filed herewith are hereby incorporated by reference:
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------------------------------------------------------- ----------------------------------------------------
3.1 Articles of Incorporation of Dev-Tech Associates, Inc. Incorporated by reference to Exhibit 3.1 to
and amendment thereto Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.2 Bylaws of DevSys, Inc. Incorporated by reference to Exhibit 3.2 to
Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.3 Restated Certificate of Incorporation of DevSys, Inc. Incorporated by reference to Exhibit 3.3 to
Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.4 By-laws of DevSys, Inc. Incorporated by reference to Exhibit 3.4 to
Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.5 Articles of Merger and Agreement and Plan of Merger of Incorporated by reference to Exhibit 3.5 to
DevSys, Inc and Dev-Tech Associates, Inc. Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.6 Certificate of Merger of Dev-Tech Associates, Inc. into Incorporated by reference to Exhibit 3.6 to
DevSys, Inc. Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.7 Articles of Incorporation of Dev-Tech Migration, Inc. Incorporated by reference to Exhibit 3.7 to
and amendment thereto Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.8 By-laws of Dev-Tech Migration, Inc. Incorporated by reference to Exhibit 3.8 to
Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
III-13
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------------------------------------------------------- ----------------------------------------------------
3.9 Restated Certificate of Incorporation of DevSys Incorporated by reference to Exhibit 3.9 to
Migration, Inc. Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.10 Form of By-laws of DevSys Migration, Inc. Incorporated by reference to Exhibit 3.10 to
Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.11 Form of Agreement and Plan of Merger of Dev-Tech Incorporated by reference to Exhibit 3.11 to
Migration, Inc. into DevSys Migration, Inc. Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.12 Form of Certificate of Merger of Dev-Tech Migration, Incorporated by reference to Exhibit 3.12 to
Inc. into DevSys Migration, Inc. Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
3.13 Certificate of Amendment to Certificate of Incorporation Incorporated by reference to Exhibit 3.13 to
of DevSys, Inc. changing its name to NeoMedia Registrant's Registration Statement No. 333-5534
Technologies, Inc. as filed with the SEC on November 25, 1996
3.14 Form of Certificate of Amendment to Certificate of Incorporated by reference to Exhibit 3.14 to
Incorporation of NeoMedia Technologies, Inc. authorizing Registrant's Registration Statement No. 333-5534
a reverse stock split as filed with the SEC on November 25, 1996
3.15 Form of Certificate of Amendment to Restated Certificate Incorporated by reference to Exhibit 3.5 to
of Incorporation of NeoMedia Technologies, Inc. Registrant's Annual Report as filed with the SEC
increasing authorized capital and creating preferred on November 2, 2001
stock
10.1 Dev-Tech Associates, Inc. 1996 Stock Option Plan Incorporated by reference to Exhibit 10.44 to the
Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
10.2 First Amendment and Restatement of Dev-Tech Associates, Incorporated by reference to Exhibit 10.45 to the
Inc. 1996 Stock Option Plan Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
10.3 Form of Stock Option Agreement - Dev-Tech Associates, Incorporated by reference to Exhibit 10.46 to the
Inc. Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
III-14
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------------------------------------------------------- ----------------------------------------------------
10.4 Dev-Tech Migration, Inc. 1996 Stock Option Plan Incorporated by reference to Exhibit 10.47 to the
Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
10.5 First Amendment and Restatement of Dev-Tech Migration, Incorporated by reference to Exhibit 10.48 to the
Inc. Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
10.6 Form of Stock Option Agreement - Dev-Tech Migration, Incorporated by reference to Exhibit 10.49 to the
Inc. Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
10.7 Dev-Tech Associates, Inc. 401(k) Plan and amendments Incorporated by reference to Exhibit 10.50 to the
Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
10.8 First Amendment and Restatement of NeoMedia Incorporated by reference to Exhibit 10.60 to the
Technologies, Inc. 1996 Stock Option Plan Registrant's Registration Statement No. 333-5534
as filed with the SEC on November 25, 1996
10.9 NeoMedia Technologies, Inc. 1998 Stock Option Plan Incorporated by reference to Exhibit 10.9 to the
Registrant's Form 10-KSB as filed on March 9, 2004
10.10 Amendment to NeoMedia Technologies 1998 Stock Option Incorporated by reference to Form 14A as filed
Plan with the SEC on July 2, 1999
10.11 Sale and Purchase Agreement between Qode.com, Inc. and Incorporated by reference to Exhibit 10.48 to the
NeoMedia Technologies, Inc. Registrant's Current Report on Form 8-K as filed
with the SEC on March 15, 2001
10.12 Warrant repricing letter dated March 19, 2002 Incorporated by reference to Exhibit 1.2 to the
Registrant's Current Report on Form 8-K as filed
with the SEC on April 2, 2002
10.13 Option repricing letter dated April 3, 2002 Incorporated by reference to Exhibit 1.2 to the
Registrant's Current Report on Form 8-K as filed
with the SEC on April 15, 2002
III-15
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------------------------------------------------------- ----------------------------------------------------
10.14 Intellectual Property licensing agreement between Incorporated by reference to Exhibit 10.18 to the
NeoMedia and A.T. Cross Company Registrant's Form S-1/A as filed with the SEC on
April 24, 2002
10.15 Intellectual Property licensing agreement between Incorporated by reference to Exhibit 10.19 to the
NeoMedia and Symbol Technologies, Inc. Registrant's Form S-1/A as filed with the SEC on
April 24, 2002
10.16 Sponsorship and Advertising Agreement between NeoMedia Incorporated by reference to Exhibit 10.20 to the
and About.com, Inc. Registrant's Form S-1/A as filed with the SEC on
April 24, 2002
10.17 Letter of Intent regarding proposed strategic Incorporated by reference to Exhibit 10.21 to the
transaction between NeoMedia and AirClic, Inc. Registrant's Form S-1/A as filed with the SEC on
April 24, 2002
10.18 Form of Promissory Note issued to AirClic, Inc. Incorporated by reference to Exhibit 10.22 to the
Registrant's Form S-1/A as filed with the SEC on
April 24, 2002
10.19 Form of Limited Recourse Promissory Note issued in Incorporated by reference to Exhibit 10.23 to the
exchange for 19 Million Shares of Common Stock Registrant's Form S-1/A as filed with the SEC on
April 24, 2002
10.20 Nasdaq Staff Determination Letter with respect to Incorporated by reference to Exhibit 10.24 to the
de-listing of NeoMedia securities from the Nasdaq Registrant's Form S-1/A as filed with the SEC on
SmallCap market April 24, 2002
10.21 Revised warrant repricing letter dated April 3, 2002 Incorporated by reference to Exhibit 10.25 to the
Registrant's Form S-1/A as filed with the SEC on
April 24, 2002
10.22 Equity Line of Credit Agreement, dated May 6, 2002, Incorporated by reference to Exhibit 10.17 to the
between NeoMedia Technologies and Cornell Capital Registrant's Quarterly Report on Form 10-Q as
Partners, LP filed with the SEC on August 14, 2002
10.23 Nasdaq Staff delisting notification letter dated May 16, Incorporated by reference to Exhibit 10.18 to the
2002 Registrant's Quarterly Report on Form 10-Q as
filed with the SEC on August 14, 2002
10.24 Settlement Agreement relating to wrongful termination Incorporated by reference to Exhibit 10.19 to the
lawsuit brought by former president and Chief Operating Registrant's Form 10-Q as filed with the SEC on
Officer August 14, 2002
10.25 Mutual settlement agreement by and between NeoMedia Incorporated by reference to Exhibit 10.20 to the
Technologies and 2150 Western Court Company, LLC Registrants Form 10-Q as filed on November 14,
2002
III-16
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------------------------------------------------------- ----------------------------------------------------
10.26 Mutual settlement agreement by and between NeoMedia Incorporated by reference to Exhibit 10.21 to the
Technologies and Ripfire, Inc. Registrants Form 10-Q as filed on November 14,
2002
10.27 Mutual settlement agreement by and between NeoMedia Incorporated by reference to Exhibit 10.22 to the
Technologies and Wachovia Bank, N.A. Registrants Form 10-Q as filed on November 14,
2002
10.28 Mutual settlement agreement by and between NeoMedia Incorporated by reference to Exhibit 10.23 to the
Technologies and Marianne LePera, NeoMedia Technologies' Registrants Form 10-Q as filed on November 14,
former General Counsel 2002
10.29 Equity Line of Credit Agreement, dated February 11, Incorporated by reference to Exhibit 10.80 to the
2003, between NeoMedia Technologies and Cornell Capital Registrants Form S-1/A as filed on February 14,
Partners 2003
10.30 Form of Placement Agent Agreement, dated November 2002, Incorporated by reference to Exhibit 10.84 to the
between NeoMedia Technologies and Westrock Advisors, Inc. Registrant's Form S-1 as filed on February 12,
2003
10.31 Form of Escrow Agreement, dated November 2002, between Incorporated by reference to Exhibit 10.85 to the
NeoMedia Technologies and Cornell Capital Partners Registrant's Form S-1 as filed on February 12,
2003
10.32 Form of Registration Rights Agreement, dated November Incorporated by reference to Exhibit 10.86 to the
2002, between NeoMedia Technologies and Cornell Capital Registrant's Form S-1 as filed on February 12,
Partners 2003
10.33 Promissory Note, dated February 23, 2001, between Incorporated by reference to Exhibit 10.87 to the
Digital Convergence Corporation and NeoMedia Registrant's Form S-1 as filed on February 12,
2003
10.34 Termination Agreement, dated August 21, 2001, between Incorporated by reference to Exhibit 10.88 to the
About.com and NeoMedia Registrant's Form S-1 as filed on February 12,
2003
10.35 Memorandum of Terms to merge, dated March 7, 2003, Incorporated by reference to Exhibit 3.1 to the
between NeoMedia and Loch Energy, Inc. Registrant's Form 8-K as filed on March 19, 2003
10.36 Binding Letter of Intent to merge, dated July 25, 2003, Incorporated by reference to Exhibit 99.5 to the
between NeoMedia and Secure Source Technologies, Inc. Registrant's Form 10-QSB as filed on August 14,
2003
10.37 Definitive Merger Agreement, dated October 3, 2003, Incorporated by reference to Exhibit 99.1 to the
between NeoMedia and Secure Source Technologies, Inc Registrant's Form 8-K as filed on October 8, 2003
III-17
EXHIBIT NO. DESCRIPTION LOCATION
----------- -------------------------------------------------------- --------------------------------------------------
10.38 Standby Equity Distribution Agreement, dated October 27, Incorporated by reference to Exhibit 10.91 to the
2003, between NeoMedia and Cornell Capital Partners Registrant's Form SB-2/A as filed on December 19,
2003
10.39 Form of Placement Agent Agreement, dated October 27, Incorporated by reference to Exhibit 10.92 to the
2003, between NeoMedia and Newbridge Securities Registrant's Form SB-2/A as filed on December 19,
Corporation 2003
10.40 Form of Registration Rights Agreement, dated October 27, Incorporated by reference to Exhibit 10.93 to the
2003, between NeoMedia and Cornell Capital Partners Registrant's Form SB-2/A as filed on December 19,
2003
10.41 Form of Escrow Agreement, dated October 27, 2003, Incorporated by reference to Exhibit 10.94 to the
between NeoMedia and Cornell Capital Partners Registrant's Form SB-2/A as filed on December 19,
2003
10.42 2003 Stock Compensation Plan Incorporated by reference to Exhibit 4.1 to the
Registrant's Form S-8 as filed on October 31, 2003
10.43 Letter of Intent to acquire CSI International, Inc., Incorporated by reference to Exhibit 3.1 to the
dated November 8, 2003 Registrant's Form 8-K as filed on November 13,
2003
10.44 Letter of Intent to acquire BSD Software, Inc., dated Incorporated by reference to Exhibit 3.1 to the
December 9, 2003 Registrant's Form 8-K as filed on December 11,
2003
10.45 Definitive Merger Agreement, dated February 6, 2004, Incorporated by reference to Exhibit 3.1 to the
between NeoMedia and CSI International, Inc. Registrant's Form 8-K as filed on February 10,
2004
10.46 $4 million Promissory note payable to Cornell Capital Incorporated by reference to Exhibit 10.49 to the
Partners, dated January 15, 2004 Registrant's Form 10-KSB as filed on March 9, 2004
10.47 Form of Business Development Agreement between Incorporated by reference to Exhibit 2.2 to the
NeoMedia and iPoint-media Registrant's Form 8-K as filed on September 17,
2004
10.48 Form of Investment Agreement between NeoMedia and Incorporated by reference to Exhibit 2.3 to the
iPoint-media Registrant's Form 8-K as filed on September 17,
2004
10.49 Form of Registration Rights Agreement between NeoMedia Incorporated by reference to Exhibit 2.4 to the
and iPoint-media Registrant's Form 8-K as filed on September 17,
2004
10.50 Form of Indemnification Agreement between NeoMedia and Incorporated by reference to Exhibit 2.5 to the
iPoint-media Registrant's Form 8-K as filed on September 17,
2004
III-18
EXHIBIT NO. DESCRIPTION LOCATION
----------- -------------------------------------------------------- --------------------------------------------------
10.51 Form of Merger Agreement among NeoMedia Technologies, Incorporated by reference to Exhibit 16.1 to the
Inc., NeoMedia Telecom Services, Inc., and BSD Software, Registrant's Form 8-K as filed on December 22,
Inc. 2004
10.52 Form of Letters of Intent With Pickups Plus, Inc. Incorporated by reference to Exhibits 16.1 and
16.2 to the Registrant's Form 8-K as filed on
March 1, 2005
10.53 Form of NeoMedia's Policy Statement on Ethical Behavior Incorporated by reference to Exhibit 10.53 to the
Registrant's Form 10-KSB as filed on March 7, 2005
10.54 Form of Term Sheet with Nextcode Corporation Incorporated by reference to Exhibit 10.54 to the
Registrant's Form 10-KSB as filed on March 7, 2005
10.55 Form of Letter of Intent With Shelron Group, Inc. Incorporated by reference to Exhibit 10.55 to the
Registrant's Form 10-KSB as filed on March 7, 2005
10.56 Letter of extension of outside date between NeoMedia and Incorporated by reference to Exhibit 10.56 to the
BSD Registrant's Registration Statement No.
333-123848 as filed with the SEC on January 20,
2006
10.57 Co-Marketing Partner Agreement between NeoMedia Incorporated by reference to Exhibit 16.1 to the
Technologies, Inc. and Foote Cone & Belding, a division Registrant's Form 8-K as filed on March 24, 2005
of FCB Worldwide L.L.C.
10.58 Standby Equity Distribution Agreement, dated March Incorporated by reference to Exhibit 16.1 to the
30,2005, between NeoMedia and Cornell Registrant's Form 8-K as filed on April 1, 2005
10.59 Placement Agent Agreement, dated March 30, 2005, between Incorporated by reference to Exhibit 16.2 to the
NeoMedia and Cornell Registrant's Form 8-K as filed on April 1, 2005
10.60 Escrow Agreement, dated March 30, 2005, between NeoMedia Incorporated by reference to Exhibit 16.3 to the
and Cornell Registrant's Form 8-K as filed on April 1, 2005
10.61 Registration Rights Agreement, dated March 30, 2005, Incorporated by reference to Exhibit 16.4 to the
between NeoMedia and Cornell Registrant's Form 8-K as filed on April 1, 2005
10.62 Promissory Note, dated March 30, 2005, between NeoMedia Incorporated by reference to Exhibit 16.5 to the
and Cornell Registrant's Form 8-K as filed on April 1, 2005
10.63 Security Agreement, dated March 30, 2005, between Incorporated by reference to Exhibit 16.6 to the
NeoMedia and Cornell Registrant's Form 8-K as filed on April 1, 2005
10.64 Patent Purchase Agreement, dated April 8, 2005, between Incorporated by reference to Exhibit 16.1 to the
NeoMedia and Loyaltypoint, Inc. Registrant's Form 8-K as filed on April 13, 2005
10.65 Letter Amending Section 7.3(g) of the Merger Agreement Incorporated by reference to Exhibit 10.65 to the
between NeoMedia and BSD Registrant's Registration Statement No.
333-123848 as filed with the SEC on January 20,
2006
III-19
EXHIBIT NO. DESCRIPTION LOCATION
----------- -------------------------------------------------------- --------------------------------------------------
10.66 Letter of extension of outside date between NeoMedia and Incorporated by reference to Exhibit 10.66 to the
BSD Registrant's Registration Statement No.
333-123848 as filed with the SEC on January 20,
2006
10.67 Letter of extension of outside date between NeoMedia and Incorporated by reference to Exhibit 10.67 to the
BSD Registrant's Registration Statement No.
333-123848 as filed with the SEC on January 20,
2006
10.68 Distribution Agreement between NeoMedia and Beijing Incorporated by reference to Exhibit 16.1 to the
Sino-US Jinche Yingang Auto Technological Services Registrant's Form 8-K as filed on August 31, 2005
Limited
10.69 Distribution Agreement between NeoMedia and Micropaint Incorporated by reference to Exhibit 16.1 to the
de Mexico, S.A. Registrant's Form 8-K as filed on September 29,
2005
10.70 Distribution Agreement between NeoMedia and WITHO-AS Incorporated by reference to Exhibit 16.1 to the
Registrant's Form 8-K as filed on October 6, 2005
10.71 Second Bridge Loan Agreement between NeoMedia and Incorporated by reference to Exhibit 10.71 to the
Mobot Registrant's Registration Statement No.
333-123848 as filed with the SEC on January 20,
2006
10.72 Distribution Agreement between NeoMedia and PPG Incorporated by reference to Exhibit 16.1 to
Industries the Registrant's Form 8-K as filed on December
15, 2005
10.73 Supply Agreement between NeoMedia and DuPont de Nemours Incorporated by reference to Exhibit 16.1 to
(Belgium) BVBA the Registrant's Form 8-K as filed on December
21, 2005
10.74 Merger Agreement with Mobot, Inc. Incorporated by reference to Exhibit 16.1 to the
Registrant's Form 8-K as filed on February 10,
2006
10.75 Sale and Purchase Agreement with 12Snap AG Incorporated by reference to Exhibit 16.1 to the
Registrant's Form 8-K as filed on February 14,
2006
10.76 Form of Letter of Intent with HipCricket Incorporated by reference to Exhibit 16.1 to the
Registrant's Form 8-K as filed on February 17,
2006
10.77 Sale and Purchase Agreement with Gavitec AG Incorporated by reference to Exhibit 16.1 to the
Registrant's Form 8-K as filed on February 21,
2006
10.78 Sale and Purchase Agreement with Sponge Ltd. Incorporated by reference to Exhibit 16.1 to the
Registrant's Form 8-K as filed on February 22,
2006
10.79 Sole Agent Agreement between NeoMedia and Beijing Incorporated by reference to Exhibit 16.1 to the
Sino-US Jinche Yingang Auto Technological Services Registrant's Form 8-K as filed on March 2, 2006
Limited
III-20
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------------------------------------------------------- ----------------------------------------------------
23.1 Consent of Stonefield Josephson, Inc., independent Provided Herewith
auditors
31.1 - 31.4 Certifications Provided Herewith
(b) Reports on Form 8-K
NeoMedia filed a report on Form 8-K on October 6, 2005, with respect to
Item 1.01, reporting that it had entered into a paint distribution agreement
with WI-THO AS, under which WI-THO AS would distribute NeoMedia's paint products
throughout Scandinavia.
NeoMedia filed a report on Form 8-K on December 14, 2005, with respect to
Item 1.01, reporting that it had entered into a paint distribution agreement
with PPG Industries' PPG Shanghai Trading Co. Ltd. ("PPG"), under which NeoMedia
would distribute automotive aftermarket products produced by PPG and serve as a
non-exclusive distributor of PPG products to Beijing Sino-US Jinche Yingang Auto
Technological Services Limited in the People's Republic of China.
NeoMedia filed a report on Form 8-K on December 20, 2005, with respect to
Item 1.01, reporting that it had entered into a paint supply agreement with
DuPont de Nemours (Belgium) BVBA of Belgium, a subsidiary of IE DuPont
("DuPont"), under which NeoMedia would serve as a non-exclusive distributor of
DuPont products to Beijing Sino-US Jinche Yingang Auto Technological Services
Limited in the People's Republic of China.
NeoMedia filed a report on Form 8-K on February 10, 2006, with respect to
Item 8.01, reporting that Cornell Capital Partners had exercised warrants to
purchase 20,000,000 shares of NeoMedia common stock, par value $0.01 per share.
The warrants were issued to Cornell Capital on March 30, 2005 as a commitment
fee for Cornell Capital entering into that certain Standby Equity Distribution
Agreement, dated March 30, 2006 by and between NeoMedia and Cornell Capital. The
warrants had an exercise price equal to $0.20 per share. In connection with the
exercise of the 20,000,000 Warrants, NeoMedia received proceeds of $4,000,000.
NeoMedia filed a report on Form 8-K on February 10, 2006, with respect to
Item 1.01, reporting that it had signed a definitive merger agreement under
which NeoMedia acquired all of the outstanding shares of Mobot in exchange for
$3,500,000 cash and $6,500,000 in shares of NeoMedia common stock.
NeoMedia filed a report on Form 8-K on February 14, 2006, with respect to
Item 1.01, reporting that it had signed a definitive sale and purchase agreement
under which NeoMedia acquired all of the outstanding shares of 12Snap AG of
Munich, Germany, in exchange for $2,500,000 cash and $19,500,000 in shares of
NeoMedia common stock.
NeoMedia filed a report on Form 8-K on February 20, 2006, with respect to
Items 1.01 and 8.01, reporting that it had signed a non-binding letter of intent
to acquire HipCricket, Inc. of Essex, CT in exchange for $500,000 cash and
$4,000,000 of NeoMedia common stock. The 8-K also reported that NeoMedia had
loaned Hip Cricket $250,000 in the form of an unsecured promissory note, the
principal and interest of which would be applied toward the purchase price in
the event the acquisition is completed.
III-21
NeoMedia filed a report on Form 8-K on February 21, 2006, with respect to
Items 1.01 and 3.02, reporting that it had entered into a $27 million
convertible preferred stock sale agreement with Cornell Capital Partners.
NeoMedia filed a report on Form 8-K on February 21, 2006, with respect to
Item 1.01, reporting that it had signed a definitive sale and purchase agreement
under which NeoMedia acquired all of the outstanding shares of Gavitec AG of
Wurselen, Germany in exchange for $1,800,000 cash and $5,400,000 in shares of
NeoMedia common stock.
NeoMedia filed a report on Form 8-K on February 21, 2006, with respect to
Item 2.01, reporting that it had completed all of the closing requirements for
the acquisition of Mobot, Inc.
NeoMedia filed a report on Form 8-K on February 22, 2006, with respect to
Item 1.01, reporting that it had signed a definitive share purchase agreement
under which it acquired all of the outstanding shares of Sponge Ltd. Of London,
in exchange for (pound)3,450,000 (approximately $6 million) cash and
(pound)6,550,000 (approximately $11.4 million) in shares of NeoMedia common
stock. The agreement also calls for Sponge to earn an additional
(pound)2,500,000 (approximately $4.4 million) in the form of NeoMedia common
stock if, during the two-year period beginning at closing, the Sponge business
earns in excess of (pound)1,300,000 (approximately $2.3 million) in net profits
NeoMedia filed a report on Form 8-K on February 24, 2006, with respect to
Item 2.01, reporting that it had completed all of the closing requirements for
the acquisitions of 12 Snap AG, Gavitec AG, and Sponge Ltd.
NeoMedia filed a report on Form 8-K on March 2, 2006, with respect to Item
1.01, reporting that it had signed a 10-year exclusive agreement with Beijing
Sino-US Jinche Yingang Auto Technological Services Limited.
NeoMedia filed a report on Form 8-K on March 22, 2006, with respect to
Item 1.01, reporting that it had loaned an additional $250,000 to Hip Cricket,
Inc., pursuant to the terms of a previously signed letter of intent.
NeoMedia filed a report on Form 8-K on March 23, 2006, with respect to
Item 2.01, reporting that it had closed its acquisition of BSD Software, Inc.
III-22
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
The aggregate fees billed by Stonefield Josephson, Inc., NeoMedia's
independent auditors, for the audit of NeoMedia's annual consolidated financial
statements and reviews of quarterly financial statements for the years ended
December 31, 2005 and 2004 were $151,000 and $137,000, respectively.
AUDIT-RELATED FEES
The aggregate fees billed by Stonefield Josephson, Inc., NeoMedia's
independent auditors, for assurance and related services for the years ended
December 31, 2005 and 2004 were $0 and $0, respectively.
TAX FEES
The aggregate fees billed by Wiltshire, Whitley, Richardson & English,
NeoMedia's principal accountants for tax compliance, advice, and planning, were
$0 and $9,000 for the years ended December 31, 2005 and 2004, respectfully.
ALL OTHER FEES
The aggregate fees billed by Stonefield Josephson, Inc., for other
products and services, primarily related to registration statements, during the
years ended December 31, 2005 and 2004 were $60,000 and $0, respectively.
AUDIT COMMITTEE PRE-APPROVAL
The audit committee of NeoMedia's board of directors approves all
non-audit services provided by NeoMedia's primary accountants.
III-23
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized in the City of Fort Myers, State of
Florida, on the 29th day of March, 2006.
NEOMEDIA TECHNOLOGIES, INC.
REGISTRANT
By:-------------------------------------------------
/s/ Charles T. Jensen, President, Chief Executive
Officer, and Director
In accordance with the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 29, 2006.
SIGNATURES TITLE DATE
---------------------------------------- ---------------------------------------- --------------------------------------
------------------------------------ President, Chief Executive Officer, and
/s/ Charles T. Jensen Director March 29, 2006
Director March 29, 2006
------------------------------------
/s/ William E. Fritz
Chairman of the Board
------------------------------------
/s/ Charles W. Fritz March 29, 2006
------------------------------------ Vice-President, Chief Financial
/s/ David A. Dodge Officer and principal accounting officer March 29, 2006
Director March 29, 2006
------------------------------------
/s/ Hayes Barclay
Director March 29, 2006
------------------------------------
/s/ James J. Keil
10.54-1