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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD ____________ TO__________
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 402
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
COMMON STOCK, PAR VALUE $.01 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
$9,399,000.
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 March 30, 2003 ($0.0195) was $619,000.
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 March 30, 2003, there were outstanding 36,899,341 shares of the
issuer's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended, are
incorporated by reference into Part III of the Form 10-K.
===============================================================================
PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements and information
relating to NeoMedia. 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. BUSINESS
GENERAL
NeoMedia Technologies, Inc. ("NeoMedia" or "the Company") develops
proprietary technologies that link physical information and objects to the
Internet marketed under the "PaperClickTM" brand name. The primary focus of the
Company is to develop and commercialize such technologies. The Company has also
developed an extensive patent portfolio covering convergence of the physical
world and the Internet.
COMPANY STRUCTURE
The Company is structured and evaluated by its Board of Directors and
Management as two distinct business units:
NeoMedia Internet Switching Services (NISS) (formerly named NeoMedia
Application Services), and
NeoMedia Consulting and Integration Services (NCIS) (formerly named
NeoMedia SI)
NISS (physical world-to-Internet offerings) is the core business and is
based in the United States, with development and operating facilities in Fort
Myers, Florida. NISS develops and supports the Company's physical world to
Internet core technology, including our linking "switch" and our application
platforms. NISS also manages the Company's valuable intellectual property
portfolio, including the identification and execution of licensing opportunities
surrounding the patents.
NCIS (systems integration service offerings) is the original business line
upon which the Company was organized. This unit resells client-server equipment
and related software, and general and specialized consulting services targeted
at software driven print applications, especially at process automation of
production print facilities through its integrated document factory solution.
Systems integration services also identifies prospects for custom applications
based on our products and services. This unit recently moved its business
offerings to a much higher Value-Add called Storage Area Networks (SAN). The
operations are based in Lisle, Illinois.
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. ("Dev-Tech"),
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 ("Dev-Tech Merger").
NeoMedia also has the following wholly-owned subsidiaries: NeoMedia
Migration, Inc., incorporated in Delaware; Distribuidora Vallarta, S.A.,
incorporated in Guatemala; NeoMedia Technologies of Canada, Inc., incorporated
in Canada; NeoMedia Tech, Inc., incorporated in Delaware; NeoMedia EDV GMBH,
incorporated in Austria; NeoMedia Technologies Holding Company B.V.,
incorporated in the Netherlands; NeoMedia Technologies de Mexico S.A. de C.V.,
incorporated in Mexico; NeoMedia Migration de Mexico S.A. de C.V., incorporated
in Mexico; NeoMedia Technologies do Brazil Ltd., incorporated in Brazil, and
NeoMedia Technologies UK Limited, incorporated in the United Kingdom.
RECENT DEVELOPMENTS
On November 12, 2002, the Company entered into an Equity Line of Credit
Agreement with Cornell under which Cornell agreed to purchase up to $10.0
million of NeoMedia's common stock and over the next two years, with the timing
and amount of the purchase at the Company's discretion. The maximum amount of
each purchase is $150,000 with a minimum of seven days between purchases. The
shares will be valued at 98% of the lowest closing bid price during the five-day
period following the delivery of a notice of purchase by NeoMedia. The Company
will pay 5% of the gross proceeds of each purchase to Cornell as a commission.
According to the terms of the agreement, the Company cannot draw on the line of
credit until the shares underlying the agreement are registered for trading with
the Securities and Exchange Commission. On February 14, 2003, the SEC declared
effective the S-1 registration statement containing 100 million shares
underlying the Equity Line of Credit.
During May 2002, the Company granted a personal, worldwide, non-exclusive,
limited intellectual property licensing agreement to Brandkey Systems
Corporation. Brandkey has paid the Company a $50,000 upfront licensing fee and
is obligated to pay 2.5% of all royalty-based revenues earned by Brandkey, with
minimum royalties of $25,000 in 2003, $50,000 in 2004, and $75,000 in 2005 and
after.
INDUSTRY OVERVIEW
NEOMEDIA INTERNET SWITCHING SERVICES
The goal of NeoMedia's Internet Switching Services business segment is to
promote mass adoption of the Company's switch and background computer process to
link physical world objects to the Internet. The Company's switching platform is
a state-of-the-art open and extensible cross-media publishing tool that applies
to customers in a variety of industrial, commercial, and educational
applications. This business segment is also responsible for licensing NeoMedia's
intellectual property to others as a means of promoting this new market as well
as providing a revenue and cash resource. The Company has been developing its
physical world-to-Internet technology and offerings since 1996 and considers
itself an innovator and pioneer in this industry. In the past several years, the
Company has seen similar technologies and concepts emerge in the marketplace,
and sees these events as a positive validation of the physical world-to-internet
concept.
The Company believes the key to the adoption of physical world-to-Internet
technologies in the marketplace will be in the development of real world
applications that provide the end user a valuable experience. The Company's
service offering, however, differs from those of AirClic and other competitors
in that, unlike their products and services, NeoMedia's products do not require
the use of a proprietary or specified device, and the Company offers its service
on a private label basis. The Company is positioned to provide solutions that
preserve the customer's brand and also provide tailored solutions to fit the
customer needs.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
The technology and equipment resale business is becoming a commodity
industry for products undifferentiated by value added proprietary elements and
services. Resale operations are also being compressed as equipment manufacturers
consolidate their distribution channels.
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Proprietary products, such as NeoMedia encoders, systems integration
services and Integrated Document Factory solutions offer a competitive value-add
to the Company's NCIS business. The Company has unique offerings, which, to the
extent that they meet market needs, offer the potential for growth in this
industry. In addition, the Company's recent high-end storage Area Network
Solution allows it to participate in the higher-margin area of the open systems
marketplace.
The NCIS division also sells migration products (tools designed to
"migrate" software code from one platform to another platform) primarily to
mid-sized to large corporations and government agencies. The products include
proprietary products and software tools to migrate Wang, HP3000, Data General,
DEC and IBM DOS/VSE platforms (legacy systems) to a Unix or NT open system
platform.
STRATEGY
NeoMedia has spent the past seven years developing and patenting the now
confirmed space of linking the physical and Internet environments, and
developing and implementing five generations of continuously refined switch
technology that seamlessly bridges these environments. The Company is
strategically pursuing potential licensees of the PaperClickTM switching
platform, as well as intellectual property licensing opportunities with
organizations attempting to commercialize physical world-to-Internet technology,
such as Symbol Technologies, A.T. Cross Company and Brandkey Systems
Corporation.
While pursing these goals NeoMedia remains aware of strategic issues,
opportunities, and constraints that will govern the interplay of competition and
alliances in this rapidly emerging market.
PRODUCTS/SERVICES
NEOMEDIA INTERNET SWITCHING SERVICES
PaperClickTM switching service. PaperClickTM is a state-of-the-art
application-switching platform that links physical objects to digital media
through the use of scanned UPC, EAN, or custom PaperClickTM codes. This dynamic
open solution serves a wide variety of customers in industrial, commercial,
governmental, and educational applications.
Intellectual Property Licensing. The Company currently holds six U.S.
patents relating to the physical world-to-Internet marketplace. The Company
intends to license this intellectual property portfolio to companies endeavoring
to tap the potential of this emerging market. To date, the Company has entered
into such agreements with Digital:Convergence, A.T. Cross Company, and Symbol
Technologies. During January 2002, the Company announced that it had entered
into an agreement with Baniak Pine and Gannon, a law firm specializing in patent
licensing and litigation, under which the firm will represent NeoMedia in
seeking out potential licensees of our patent portfolio.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
NCIS is a group of highly skilled application developers thoroughly
familiar with MSS and other associated NeoMedia technologies who contract to
develop custom applications for clients.
Storage Area Networks (SAN). SAN is a Storage Management solutions and
consultancy offering consisting of tools and services that insure data
integrity, efficiency and accessibility, achieved through moving data backup,
access and archival functions off of traditional LANs/WANs that are added on to
a highly reliable independent managed network.
Product Sales and Equipment Re-sales. NCIS markets and sells proprietary
software products, including high-density symbology encoders (e.g. PDF417 and
UPS Maxicode) and resells client-server hardware and related systems such as Sun
Microsystems, IBM and others , as well as related applications software and
services.
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Integrated Document Factory (IDF). The IDF solution provides design and
implementation of a collection of tested hardware and software solutions
utilizing Xerox's printers and Sun servers to turn document creation,
production, and printing into an assembly line manufacturing process. The system
particularly assists financial service concerns such as banks, insurance
companies, and brokerage firms as well as helps to manage high-volume printing
of statements on a frequent basis.
STRATEGIC RELATIONSHIPS
NEOMEDIA INTERNET SWITCHING SERVICES
In this segment, the Company has a number of customers who have used or are
using its products and services, including Amway, Solar, A.T. Cross Company,
NYCO and two universities in Latin America. During the year ended December 31,
2000, the Company entered into a license agreement with Digital:Convergence.
This customer accounted for 28.2% of NeoMedia's total revenue and 96.1% of its
Application Services revenue during such year. During the year ended December
31, 2001, the Company did not recognize any revenue related to the
Digital:Convergence contract, and the Company wrote off approximately $7.4
million in net assets and liabilities related to the contract. In March 2002,
Digital Convergence filed for bankruptcy under Chapter 7. The Company is
aggressively pursuing numerous additional opportunities for our products and
services.
In January 2001, the Company entered into a patent license with A.T. Cross
Company, a major international manufacturer of fine writing instruments and pen
computing products. A.T. Cross Company obtained the rights under the Company's
physical world-to-Internet patents for personal portable scanning devices used
to link bar codes on documents and other physical consumer goods to
corresponding Internet content. A.T. Cross Company will pay a royalty per device
to the Company for license rights granted under this agreement. To date, the
Company has not recognized any revenue relating to this contract.
In May 2001, the Company entered into an agreement with Symbol
Technologies, Inc., granting Symbol a worldwide, non-exclusive license of its
patents surrounding the sale and use of scanning devices used in physical
world-to-Internet technologies. Symbol will pay the Company a royalty per
qualified device shipped. To date, the Company has not recognized any revenue
relating to this contract.
During January 2002, the Company engaged Baniak Pine and Gannon, a Chicago
law firm specializing in intellectual property licensing and litigation. The
firm will assist the Company in seeking out potential licensees of its
intellectual property portfolio, including any resulting litigation.
During May 2002, the Company granted a personal, worldwide, non-exclusive,
limited intellectual property licensing agreement to Brandkey Systems
Corporation. Brandkey has paid the Company a $50,000 upfront licensing fee and
is obligated to pay 2.5% of all royalty-based revenues earned by Brandkey, with
minimum royalties of $25,000 in 2003, $50,000 in 2004, and $75,000 in 2005 and
after.
During September 2001, AirClic, Inc. filed suit against the Company seeking
a declaration that certain core intellectual property securing a note issued by
the Company to AirClic, some of which is patented and others for which a patent
application is pending, is invalid and in the public domain. On September 18,
2002, the court ruled in favor of the Company and dismissed AirClic's complaint.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
Through this segment, the Company provides services and products to a
spectrum of customers, ranging from closely held companies to Fortune 500
companies. For the years ended December 31, 2002, 2001, and 2000, one customer,
SBC/Ameritech Services, Inc., accounted for 36%, 37%, and 30%, respectively, of
the Company's revenue. The Company expects sales to Ameritech as a percentage of
total sales to decline in the future. Furthermore, the Company does not have a
written agreement with Ameritech and, therefore, there are no contractual
provisions to prevent Ameritech from terminating its relationship with us at any
time. Accordingly, the loss of this customer, or a significant reduction by it
in buying the products and services offered by us, absent diversification, would
4
materially and adversely affect of the Company's business, prospects, financial
condition, and results of operations. In addition, a single supplier supplies
the equipment and software, which is re-marketed to this customer. Accordingly,
the loss of this supplier would materially adversely affect our business,
prospects, financial condition, and results of operations. For these reasons, we
are seeking, and continue to seek, to diversify our sources of revenue and
vendors from whom we purchase.
SALES AND MARKETING
NEOMEDIA INTERNET SWITCHING SERVICES
PaperClickTM. While the Company eliminated the majority of its sales and
marketing staff during the third quarter of 2001, it continues to promote its
PaperClickTM line of products to potential customers in a wide array of
industries. Upon receipt of sufficient financing, the Company plans to re-focus
its efforts on the sale of PaperClickTM licenses through the hiring of
additional sales and marketing staff. The Company has refocused its sales
efforts by focusing on signing up channel partners who have industry market
presence. The Company intends to negotiate with a number of industry-focused
companies who will be its "go-to-market" partners. On March 3, 2003, the Company
announced that it had reached a partnering agreement with Tibbs Information
Systems, Inc., under which the two Companies will team up to compete for
government and homeland security projects, on which the two companies will
partner with major high-tech industry leaders. NeoMedia will contribute its
Physical-world-to-Internet platform, intellectual property, and industry
know-how. No assurances can be given that any successful association will
result.
Intellectual Property Licensing. During January 2002, the Company engaged
Baniak Pine and Gannon, a law firm specializing in intellectual property
licensing and litigation. The firm will assist the Company in seeking out
potential licensees of its intellectual property portfolio, including any
resulting litigation. On August 13, 2002, NeoMedia's fifth patent surrounding
its Physical-World-to-Internet technology was issued by the U.S. Patent and
Trademark Office.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
The Company, through its systems integration services segment, markets its
products and services, as well as those for which it acts as a re-marketer,
primarily through a direct sales force, which was composed of four individuals
as of December 31, 2002. In addition, this business unit also relies upon
strategic alliances with industry leaders to help market products and services,
provide lead referrals, and establish informal co-marketing arrangements. Our
representatives attend seminars and trade shows, both as speakers and
participants, to help market products and services. In addition, this business
segment has three agents in the United States that sell our products and
services.
CUSTOMERS
NEOMEDIA INTERNET SWITCHING SERVICES
PaperClickTM. NeoMedia's customers for its physical world-to-Internet
offerings have included Amway, Solar Communications, INC., NYCO Products
Company, and several large organizations in Latin America, including several
prestigious universities.
Intellectual Property Licensing. To date, the Company has entered into IP
licensing agreements with Digital:Convergence Corporation, A.T. Cross Company,
Symbol Technologies, and Brandkey Systems Corporation. The Company intends to
pursue additional license agreements in the future.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
The Company provides equipment and software reselling and integration and
automation consulting services to a variety of customers across a range of
industries, including telecommunications, insurance, financial services,
manufacturing, government entities, and more.
RESEARCH AND DEVELOPMENT
5
NEOMEDIA INTERNET SWITCHING SERVICES
NISS employed 2, 3, and 24 persons in the area of product development as of
December 31, 2002, 2001, and 2000, respectively. During the years ended December
31, 2002, 2001, and 2000, NISS incurred total software development costs of
$775,000, $2,064,000, and $2,888,000, respectively, of which $0, $1,515,000, and
$1,787,000, respectively, were capitalized as software development costs and
$781,000, $549,000, and $1,101,000, respectively, were expensed as research and
development costs.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES
All significant research and development relating to the Company's
consulting and integration products was discontinued at December 31, 1999 when
we discontinued our Y2K business. All employees that were in this area were
reassigned or released at or prior to such time. If any future research or
development of products is needed, it will be performed by the application
services division or outside contractors.
INTELLECTUAL PROPERTY RIGHTS
The Company'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 its ability to
protect its proprietary technology and other intellectual property rights. In
addition, the Company must conduct its operations without infringing on the
proprietary rights of third parties. The Company also intends to rely upon
unpatented trade secrets and the know-how and expertise of its employees. To
protect its proprietary technology and other intellectual property, the Company
relies primarily on a combination of the protections provided by applicable
patent, copyright, trademark, and trade secret laws as well as on
confidentiality procedures and licensing arrangements. The Company has six
patents for its physical world-to-Internet technology. The Company also has
several trademarks relating to its proprietary software products. Although the
Company 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 its proprietary technology enter into confidentiality
agreements with the Company, the Company 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 those of the Company. The
Company is currently engaged in a lawsuit initiated against the Company by one
of its primary competitors, AirClic. AirClic seeks, among other things, to
succeed to our core assets, by suing for alleged default under a promissory note
in the principal amount of $500,000 issued to AirClic by the Company, secured by
the Company's core assets. AirClic also sued to invalidate the Company's patents
on our key physical world-to-Internet technologies, but this claim was dismissed
by the court during 2002.
The Company licenses from third parties certain software tools that it
includes in its services and products. If any of these licenses were terminated,
the Company could be required to seek licenses for similar software from other
third parties or develop these tools internally. The Company may not be able to
obtain such licenses or develop such tools in a timely fashion, on acceptable
terms, or at all. Companies participating in the software and Internet
technology industries are frequently involved in disputes relating to
intellectual property. The Company may in the future be required to defend its
intellectual property rights against infringement, duplication, discovery, and
misappropriation by third parties or to defend against third-party claims of
infringement. Likewise, disputes may arise in the future with respect to
ownership of technology developed by employees who were previously employed by
other companies. Any such litigation or disputes could result in substantial
costs to, and a diversion of effort by, the Company. An adverse determination
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from, or pay royalties to, third parties, or
require the Company to develop appropriate alternative technology. Some or all
of these licenses may not be available to the Company on acceptable terms or at
all, and the Company may be unable to develop alternate technology at an
acceptable price or at all. Further, any of these events could have a material
adverse effect on the Company's business, prospects, financial condition, and
results of operations.
6
COMPETITION
NEOMEDIA INTERNET SWITCHING SERVICES
Although, the Company has been developing its physical world-to-Internet
technology and offerings since 1996, the physical world-to-Internet market in
which the Company competes is relatively new. In the past year, new technologies
and concepts have emerged in the physical world-to-Internet space. The Company
views the increased development of other products in this space as a validation
of the physical world-to-Internet concept and believes that the increased
promotion of these products and services by the Company and other companies in
this space, including AirClic, Inc., will raise consumer awareness of this
technology, resulting in a larger market. The Company believes that the
significant portfolio of physical world-to-Internet technologies that it has
developed over the last five years will provide a barrier to entry for most
potential competitors.
NEOMEDIA CONSULTING AND INTEGRATION SERVICES.
The largest competition, in terms of number of competitors, is for
customers desiring systems integration, including the re-marketing of another
party's products, and document solutions. These competitors range from local,
small privately held companies to large national and international
organizations, including large consulting firms. A large number of companies act
as re-marketers of another party's products, and therefore, the competition in
this area is intense. In some instances, the Company, in acting as a
re-marketer, may compete with the original manufacturer.
PRODUCT LIABILITY INSURANCE
The Company has never had any product liability claim asserted against it.
However, the Company could be subject to product liability claims in connection
with the use of the products and services that it sells. There can be no
assurance that the Company would have sufficient resources to satisfy any
liability resulting from these claims or would be able to have its customers
indemnify or insure it against such claims. Currently the Company does not
maintain insurance against such claims, which could result in material adverse
effects in the event of a successful claim
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 our users. In 2000, the European Union recently 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.
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ENVIRONMENTAL PROTECTION COMPLIANCE
The Company has no knowledge of any federal, state or local environmental
compliance regulations which affect its business activities. The Company has not
expended any capital to comply with any environmental protection statutes and
does not anticipate that such expenditures will be necessary in the future.
EMPLOYEES
As of December 31, 2002, the Company employed 18 persons. Of the 18
employees, 8 are located at the Company's headquarters in Fort Myers, Florida,
and 10 at other domestic locations. Of the 18 employees, 3 are dedicated to the
Application Services business unit, 10 are dedicated to the Systems Integration
Services business unit, and 5 provide shared services used by both business
units. 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 to 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 2002 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. The Company is not obligated to update or revise
these forward-looking statements to reflect new events or circumstances.
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RISK FACTORS
RISKS SPECIFIC TO NEOMEDIA
THE COMPANY HAS CURRENTLY PENDING LEGAL ACTIONS WHICH THREATEN TO DIVEST THE
COMPANY OF CRITICAL INTELLECTUAL PROPERTY
On September 6, 2001, AirClic filed suit against NeoMedia in the Court of
Common Pleas, Montgomery County, Pennsylvania, seeking, among other things, the
accelerated repayment of a $500,000 loan it advanced to NeoMedia under the terms
of a letter of intent entered into between AirClic and NeoMedia. The letter of
intent was subsequently abandoned on the basis of the Company's alleged breach
of certain representations made by NeoMedia in the promissory note issued to
AirClic in respect of such advance. The note issued by NeoMedia in respect of
AirClic's $500,000 advance is secured by substantially all of the Company's
property, including its core physical world-to-Internet technologies. If
NeoMedia is deemed to have defaulted under such note, and does not pay the
judgment, AirClic, which is one of the Company's key competitors, could acquire
NeoMedia's core intellectual property and other assets, which would have a
material adverse effect on NeoMedia's business, prospects, financial condition,
and results of operations. The Company is vigorously defending this claim and
has interposed counterclaims against AirClic. As of the date of this filing,
pleadings were closed and the parties have engaged in written discovery. Whether
or not AirClic is successful in asserting its claims that NeoMedia breached
certain representations made by it in the note, the note became due and payable
in accordance with its terms on January 11, 2002. Based on the cash currently
available to NeoMedia, payment of the note and related interest would have a
material adverse effect on NeoMedia's financial condition. If NeoMedia fails to
pay such note, AirClic could proceed against the Company's intellectual property
and other assets securing the note which would have a material adverse effect on
NeoMedia's business, prospects, financial condition, and results of operations.
THE COMPANY'S SHARES HAVE BEEN DE-LISTED FROM TRADING ON THE NASDAQ SMALLCAP
MARKET, WHICH MAY HAVE A MATERIAL ADVERSE EFFECT ON YOUR ABILITY TO RESELL YOUR
SHARES OR OBTAIN ACCURATE PRICE QUOTATIONS
On March 11, 2002, the Company received a Nasdaq Staff Determination
stating that, as of December 31, 2001, the Company did not meet either the
minimum net tangible assets ($2,000,000) or minimum stockholders' equity
($2,500,000) criteria for continued listing on the Nasdaq SmallCap Market and
advising that, accordingly, the Company's shares were subject to de-listing from
such market. On May 16, 2002, the Company received notification from the Nasdaq
Listing Qualifications Panel that the Company's shares were delisted effective
May 17, 2002. The Company's shares are now trading on the OTC Bulletin Board.
Your ability to resell shares of the Company's stock, obtain accurate or timely
price quotations on the Company's shares, and, potentially, the Company's
ability to sell shares for its own account in order to raise equity financing
could possibly be materially adversely affected by this delisting.
THE COMPANY HAS HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE
The Company has incurred substantial losses since its inception, and
anticipate continuing to incur substantial losses for the foreseeable future.
The Company incurred a loss of $7,421,000 in the year ended December 31, 2002,
$25,469,000 in the year ended December 31, 2001, $5,409,000 in the year ended
December 31, 2000, $10,472,000 in the year ended December 31, 1999, and
$11,495,000 in the year ended December 31, 1998. The Company's accumulated
losses were approximately $70,765,000 as of December 31, 2002. As of December
31, 2002 and 2001, the Company had a working capital (deficit) of approximately
$(8,985,000) and $(5,163,000), respectively. The Company had stockholders'
deficit of $(6,026,000) and $(263,000) at December 31, 2002 and 2001,
respectively. The Company generated revenues of $9,399,000, $8,142,000 and
$27,565,000 for the years ended December 31, 2002, 2001 and 2000. In addition,
during the years ended December 31, 2002, 2001 and 2000, the Company recorded
negative cash flows from operations of $556,000, $5,202,000 and $6,775,000,
9
respectively. To succeed, the Company must develop new client and customer
relationships and substantially increase its revenue derived from improved
products and additional value-added services. The Company has expended and to
the extent it has available financing, the Company intends to continue to expend
substantial resources to develop and improve its products, increase its
value-added services and to market its products and services. These development
and marketing expenses must be incurred well in advance of the recognition of
revenue. As a result, the Company may not be able to achieve or sustain
profitability.
THE COMPANY'S INDEPENDENT ACCOUNTANTS HAVE ADDED GOING CONCERN LANGUAGE TO THEIR
REPORT ON THE COMPANY'S FINANCIAL STATEMENTS, WHICH MEANS THAT THE COMPANY MAY
NOT BE ABLE TO CONTINUE OPERATIONS
The report of Stonefield Josephson, Inc., the Company's current independent
auditors, with respect to the Company's financial statements and the related
notes for the years ended December 31, 2002 and 2001, indicates that, at the
date of their report, the Company had suffered recurring losses from operations
and that the Company's current cash position raised substantial doubt about its
ability to continue as a going concern. The Company's financial statements do
not include any adjustments that might result from this uncertainty. The report
of Arthur Andersen LLP, the Company's former independent auditors, with respect
to the Company's financial statements and the related notes for the years ended
December 31, 2000 and 1999, indicates that, at the date of their report, the
Company had suffered recurring losses from operations and its current cash
position raised substantial doubt about its ability to continue as a going
concern. The Company's financial statements do not include any adjustments that
might result from this uncertainty.
THERE IS LIMITED INFORMATION UPON WHICH INVESTORS CAN EVALUATE THE COMPANY'S
BUSINESS BECAUSE THE PHYSICAL WORLD - TO - INTERNET MARKET HAS EXISTED FOR A
SHORT PERIOD OF TIME
The physical world-to-Internet market in which the Company operates is a
recently developed market. Further, the Company has conducted operations in this
market only since March 1996. Consequently, the Company has a relatively limited
operating history upon which you may base an evaluation of the Company's primary
business and determine the Company's prospects for achieving its intended
business objectives. To date, the Company has sold its physical
world-to-Internet products to only 12 companies. Further, Digital:Convergence,
the Company's primary customer for its physical world-to-Internet products, has
filed Chapter 7 of the United States Bankruptcy Code and is presently being sued
by the Company for default on a promissory note issued to the Company in lieu of
payment. The Company is prone to all of the risks inherent to the establishment
of any new business venture, including unforeseen changes in its business plan.
You should consider the likelihood of the Company's future success to be highly
speculative in light of the Company's limited operating history in its primary
market, as well as the limited resources, problems, expenses, risks, and
complications frequently encountered by similarly situated companies in the
early stages of development, particularly companies in new and rapidly evolving
markets, such as the physical world-to-Internet space. To address these risks,
the Company must, among other things,
o maintain and increase 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 its service offerings and features;
o respond to industry and competitive developments; and o attract,
retain, and motivate qualified personnel.
The Company may not be successful in addressing these risks. If the Company
is unable to do so, its business, prospects, financial condition, and results of
operations would be materially and adversely affected.
10
THE COMPANY IS SUBJECT TO PRICE VOLATILITY DUE TO ITS OPERATIONS MATERIALLY
FLUCTUATING
As a result of the emerging and evolving nature of the markets in which the
Company competes, as well as the current nature of the public markets and the
Company's current financial condition, the Company believes that its operating
results may fluctuate materially, as a result of which quarter-to-quarter
comparisons of its results of operations may not be meaningful. If in some
future quarter, whether as a result of such a fluctuation or otherwise, the
Company's results of operations fall below the expectations of securities
analysts and investors, the trading price of the Company's common stock would
likely be materially and adversely affected. You should not rely on the
Company's results of any interim period as an indication of its future
performance. Additionally, the Company's quarterly results of operations may
fluctuate significantly in the future as a result of a variety of factors, many
of which are outside the Company's control. Factors that may cause the Company's
quarterly results to fluctuate include, among others:
o the Company's ability to retain existing clients and customers;
o the Company's ability to attract new clients and customers at a steady
rate;
o the Company's ability to maintain client satisfaction;
o the Company's ability to motivate potential clients and customers to
acquire and implement new technologies;
o the extent to which the Company's products gain market acceptance;
o the timing and size of client and customer purchases;
o introductions of products and services by competitors;
o price competition in the markets in which the Company competes;
o the pricing of hardware and software which the Company resells or
integrates into its products;
o the level of use of the Internet and online services and the rate of
market acceptance of physical world-to-Internet marketing;
o the Company's ability to upgrade and develop its systems and
infrastructure in a timely and effective manner;
o the Company's ability to attract, train, and retain skilled
management, strategic, technical, and creative professionals;
o the amount and timing of operating costs and capital expenditures
relating to the expansion of the Company's business, operations, and
infrastructure;
o unanticipated technical, legal, and regulatory difficulties with
respect to use of the Internet; and
o general economic conditions and economic conditions specific to
Internet technology usage and electronic commerce.
THE COMPANY'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
The Company'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.
These requirements may reduce the potential market for the Company's common
stock by reducing the number of potential investors. This may make it more
difficult for investors in the Company's common stock to sell shares to third
parties or to otherwise dispose of them. This could cause the Company'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;
11
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 $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$10.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 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.
THE COMPANY IS UNCERTAIN OF THE SUCCESS OF ITS INTERNET SWITCHING SERVICES
BUSINESS UNIT AND THE FAILURE OF THIS UNIT WOULD NEGATIVELY AFFECT THE PRICE OF
THE COMPANY'S STOCK
The Company provides products and services that provide a seamless link
from physical objects, including printed material, to the Internet. The Company
can provide no assurance that:
o this Internet Switching Services business unit will ever achieve
profitability;
o the Company's 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 the Company develops will obtain market acceptance.
In the event that the Internet Switching Services business unit should
never achieve profitability, that the Company's current product offerings should
so suffer, or that the Company's products fail to obtain market acceptance, the
Company's business, prospects, financial condition, and results of operations
would be materially adversely affected.
THE COMPANY'S SUCCESS IS DEPENDENT UPON THE RESALE OF SOFTWARE AND EQUIPMENT FOR
REVENUE; A REDUCTION IN THESE SALES WOULD MATERIALLY ADVERSELY AFFECT THE
COMPANY'S OPERATIONS AND THE PRICE OF ITS STOCK
During the years ended December 31, 2002, 2001 and 2000, the Company
derived 95%, 93%, and 69%, respectively, of its revenues from the resale of
computer software and technology equipment. A loss or a reduction of this
revenue would have a material adverse effect on the Company's business,
prospects, financial condition, and results of operations, as well as its stock
price. The Company can provide no assurance that:
o the market for its products and services will continue;
o the Company will be successful in marketing these products due to
competition and other factors;
o the Company will continue to be able to obtain short-term financing
for the purchase of the products that it resells; or
o the Company's relationship with companies whose products and services
the Company sells will continue, including its relationship with Sun
Microsystems Computer Company.
Further, the technology and equipment resale business is becoming a
commodity industry for products undifferentiated by value-added proprietary
elements and services. A large number of companies act as re-marketers of
another party's products, and therefore, the competition in this area is
intense. Resale operations are also being compressed as equipment manufacturers
consolidate their distribution channels. In some instances, the Company, in
acting as a re-marketer, may compete with the original manufacturer. An
inability to effectively compete and generate revenues in this industry would
have a material adverse effect on the Company's business, prospects, financial
condition, and results of operations.
12
A LARGE PERCENTAGE OF THE COMPANY'S ASSETS ARE INTANGIBLE ASSETS, WHICH WILL
HAVE LITTLE OR NO VALUE IF ITS OPERATIONS ARE UNSUCCESSFUL
At December 31, 2002, approximately 55% of the Company's total assets were
intangible assets, consisting primarily of rights related to its patents and
other intellectual property. If the Company's operations are unsuccessful, these
assets will have little or no value, which will materially adversely affect the
value of the Company's stock and the ability of its stockholders to recoup their
investments in the Company's capital stock.
THE COMPANY'S ISS BUSINESS UNIT MARKETING STRATEGY HAS NOT BEEN TESTED AND MAY
NOT RESULT IN SUCCESS
To date, the Company has conducted limited marketing efforts directly
relating to its ISS business unit. All of the Company's marketing efforts have
been largely untested in the marketplace, and may not result in sales of its
products and services. To penetrate the markets in which the Company competes,
the Company will have to exert significant efforts to create awareness of, and
demand for, its products and services. With respect to the Company's marketing
efforts conducted directly, the Company intends to expand its sales staff upon
the receipt of sufficient operating capital. The Company's failure to further
develop its marketing capabilities and successfully market its products and
services would have a material adverse effect on its business, prospects,
financial condition, and results of operations.
THE COMPANY'S INTERNALLY DEVELOPED SYSTEMS ARE INEFFICIENT AND MAY PUT THE
COMPANY AT A COMPETITIVE DISADVANTAGE
The Company uses internally developed technologies for a portion of its
systems integration services, as well as the technologies required to
interconnect its clients' and customers' physical world-to-Internet systems and
hardware with its own. As the Company developed these systems in order to
integrate disparate systems and hardware on a case-by-case basis, these systems
are inefficient and require a significant amount of customization. Such client
and customer specific customization is time-consuming and costly and may place
the Company at a competitive disadvantage when compared to competitors with more
efficient systems.
THE COMPANY COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
The Company'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 the Company has. The Company may not
be successful in attracting and retaining qualified personnel on a timely basis,
on competitive terms, or at all. The Company's failure to attract and retain
qualified personnel would have a material adverse effect on its business,
prospects, financial condition, and results of operations will be materially
adversely affected.
THE COMPANY DEPENDS UPON ITS SENIOR MANAGEMENT AND THEIR LOSS OR UNAVAILABILITY
COULD PUT THE COMPANY AT A COMPETITIVE DISADVANTAGE
The Company's success depends largely on the skills of certain key
management and technical personnel, including Charles T. Jensen, its President,
Chief Executive Officer and Chief Operating Officer. The loss of the services of
Mr. Jensen could materially harm the Company'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. The Company does not
presently maintain a key-man life insurance policy on Mr. Jensen.
13
THE COMPANY MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS AND MAY BE
LIABLE FOR INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS
The Company's success in the physical world-to-Internet and the value-added
systems integration markets is dependent upon its proprietary technology,
including its patents and other intellectual property, and on the Company's
ability to protect its proprietary technology and other intellectual property
rights. In addition, the Company must conduct its operations without infringing
on the proprietary rights of third parties. The Company also intends to rely
upon unpatented trade secrets and the know-how and expertise of its employees,
as well as its patents. To protect its proprietary technology and other
intellectual property, the Company relies primarily on a combination of the
protections provided by applicable patent, copyright, trademark, and trade
secret laws as well as on confidentiality procedures and licensing arrangements.
The Company has five patents for its physical world-to-Internet technology. The
Company also has several trademarks relating to its proprietary products.
Although the Company 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 its proprietary technology enter into
confidentiality agreements with the Company, the Company 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 the Company's.
The Company licenses from third parties certain software tools that it
includes in its services and products. If any of these licenses were terminated,
the Company could be required to seek licenses for similar software from other
third parties or develop these tools internally. The Company may not be able to
obtain such licenses or develop such tools in a timely fashion, on acceptable
terms, or at all. Companies participating in the software and Internet
technology industries are frequently involved in disputes relating to
intellectual property. The Company may in the future be required to defend its
intellectual property rights against infringement, duplication, discovery, and
misappropriation by third parties or to defend against third-party claims of
infringement. Likewise, disputes may arise in the future with respect to
ownership of technology developed by employees who were previously employed by
other companies. Any such litigation or disputes could result in substantial
costs to, and a diversion of effort by, the Company. An adverse determination
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from, or pay royalties to, third parties, or
require the Company to develop appropriate alternative technology. Some or all
of these licenses may not be available to the Company on acceptable terms or at
all, and the Company may be unable to develop alternate technology at an
acceptable price or at all. Any of these events could have a material adverse
effect on the Company's business, prospects, financial condition, and results of
operations.
THE COMPANY IS EXPOSED TO PRODUCT LIABILITY CLAIMS FOR WHICH IT HAS COVERAGE AND
AN UNINSURED CLAIM COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S
BUSINESS, PROSPECTS, FINANCIAL CONDITION, AND RESULTS OF OPERATIONS, AS WELL AS
THE VALUE OF ITS STOCK
Many of the Company'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 the Company, regardless of the
Company's responsibility for such failure. The Company could, therefore, be
subject to claims in connection with the products and services that the Company
sells. The Company does not currently maintain product liability insurance. The
Company does not currently maintain errors and omissions insurance. There can be
no assurance that:
o the Company has contractually limited its liability for such claims
adequately or at all;
o the Company would have sufficient resources to satisfy any liability
resulting from any such claim;
The successful assertion of one or more large claims against the Company
could have a material adverse effect on the Company's business, prospects,
financial condition, and results of operations.
14
THE COMPANY WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
During May 2002, the Company entered into an Equity Line of Credit
Agreement with Cornell Capital Partners LP. The agreement was terminated and a
new agreement was entered into in November 2002. Under the terms of the revised
agreement, Cornell has agreed to purchase up to $10.0 million of NeoMedia common
stock over the next two years at the Company's discretion. The maximum amount of
each purchase is $150,000, with a minimum seven days between purchases. The
purchase price will be 98% of the lowest closing bid price during the five-day
period following the delivery of a notice of purchase by NeoMedia. The Company
will pay 5% of the gross proceeds of each purchase to Cornell as a commission.
According to the terms of the agreement, the Company cannot draw on the line of
credit until the shares underlying the agreement are registered for with
Securities and Exchange Commission. On February 14, 2003, the SEC declared
effective the S-1 registration statement containing 100 million shares
underlying the Equity Line of Credit. The Company has not secured any other
financing as of the date of this filing to fund operations.
The Company's cash balance as of December 31, 2002, was approximately
$70,000. Based on current cash balances and operating budgets, the Company
believes it only has enough operating capital to last through April 30, 2003. If
the Company's financial resources are insufficient, the Company may be forced to
seek protection from its creditors under the United States Bankruptcy Code or
analogous state statutes unless it is able to engage in a merger or other
corporate finance transaction with a better capitalized entity. The Company
cannot predict whether additional financing will be available, its form, whether
equity or debt, or be in another form, or if the Company will be successful in
identifying entities with which it may consummate a merger or other corporate
finance transactions.
On December 2, 2002, the Company issued to a private investor a promissory
note in the amount of $165,000, bearing interest at a rate of 12% per annum,
with a maturity of 150 days. The Company was to pay an administrative fee of
$16,500 and legal fees of $10,000 relating to the issuance of the note,
resulting in net proceeds to the Company of $138,500. In the event the Company
had defaulted on the note, it would have been required to issue to the investor
sufficient stock to comprise a non-dilutable 51% of the Company's fully-diluted
common shares. In connection with the default provision of the note, the Company
entered into a Pledge Agreement under which the Company issued 53,620,023 shares
to an unrelated third party as collateral for the note. The investor only funded
to the Company $84,000 of the principal amount of the note. The Company repaid
this note during March 2003, and the shares held in escrow were returned. The
Company has not incurred further obligation under this note agreement..
During November 2002, NeoMedia issued Convertible Secured Promissory Notes
with an aggregate face value of $60,000 to 3 separate parties, including Charles
W. Fritz, Chairman of the Board of Directors of NeoMedia; William E. Fritz, an
outside director; and James J. Keil, an outside director. The notes bear
interest at a rate of 15% per annum, and mature at the earlier of i.) four
months, or ii.) the date the shares underlying the Cornell Equity Line of Credit
are registered with the SEC. The notes are convertible, at the option of the
holder, into either cash or shares of our common stock at a 30% discount to
either market price upon closing, or upon conversion, whichever is lower.
NeoMedia also granted to the holders an additional 1,355,670 shares of its
common stock and 60,000 warrants to purchase shares of its common stock at $0.03
per share, with a term of three years. The warrants and shares were issued in
January 2003. In addition, since this debt is convertible into equity at the
option of the note holder at beneficial conversion rates, an embedded beneficial
conversion feature will be recorded as a debt discount and amortized using the
effective interest rate over the life of the debt in accordance with EITF 00-27.
Total cost of beneficial conversion feature, fair value of the stock and cost of
warrants issued exceed the face value of the notes payable, therefore, only
$60,000, the face amount of the note, is recognizable as debt discount, and is
being amortized over the life of the notes payable. Any unamortized debt
discount related to beneficial conversion feature will be charged to expense
upon conversion, as interest expense. In the event NeoMedia defaults on the
note, NeoMedia will issue an additional 1,483,318 shares of its common stock to
the note holders. The notes are secured by our intellectual property, which is
subject to first lien by AirClic, Inc. During March 2003, two of the affiliated
parties, Mr. William Firtz and Mr. Keil, agreed to extend the maturity date due
to the Company's capital constraints. The Company repaid Mr. Charles Fritz's
note in full during March 2003. NeoMedia will continue to pursue additional
capital through the issuance of Convertible Secured Promissory Notes with the
same terms as above.
15
Because the Company cannot reliably predict when or if future financing
will occur, the Company is unable to determine whether and for how long the
Company will be able to meet its capital requirements. The Company anticipates
offering additional shares of its common stock through private placements of
unregistered securities, as well as debenture notes and drawing on its Equity
Line of Credit to meet its short-term capital needs. As is typical with
short-term, bridge financing, this capital may be obtained upon terms highly
unfavorable to the Company. Further, the Company cannot be certain that
anticipated revenues from operations will be sufficient to satisfy its capital
requirements. In the absence of financing, the Company believes that it will
have sufficient capital to sustain operations through April 30, 2003. The
Company's belief is based on its operating plan, which in turn is based on
assumptions that may prove to be incorrect. If capital raised from financing
efforts and the Company's financial resources are insufficient the Company may
require additional financing in order to execute on its operating plan and
continue as a going concern. The Company cannot predict whether any additional
financing will be in the form of equity or debt, or be in 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. In the event that any future
financing should take the form of a sale of equity securities, the holders of
the common stock may experience additional dilution.
THE COMPANY WILL NOT PAY CASH DIVIDENDS AND INVESTORS MAY HAVE TO SELL THEIR
SHARES IN ORDER TO REALIZE THEIR INVESTMENT
The Company has not paid any cash dividends on its common stock and do not
intend to pay cash dividends in the foreseeable future. The Company intends to
retain future earnings, if any, for reinvestment in the development and
marketing of its products and services. As a result, investors may have to sell
their shares of common stock to realize their investment.
SOME PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS MAY
DETER TAKEOVER ATTEMPTS, WHICH MAY LIMIT THE OPPORTUNITY OF THE COMPANY'S
STOCKHOLDERS TO SELL THEIR SHARES AT A PREMIUM TO THE THEN MARKET PRICE
Some of the provisions of the Company's certificate of incorporation and
by-laws could make it more difficult for a third party to acquire the Company,
even if doing so might be beneficial to the Company's stockholders by providing
them with the opportunity to sell their shares at a premium to the then market
price. On December 10, 1999, the Company'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 the Company'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, which is similar to plans adopted by many leading
public companies, 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 the Company'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
the Company'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, the Company'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, and redemption rights,
and sinking fund provisions.
16
The Company is authorized to issue a total of 25,000,000 shares of
Preferred Stock, par value $0.01 per share. The Company's designated Preferred
Stock is currently comprised of 200,000 shares of Series A Preferred Stock, par
value $0.01 per share, which shares are issuable in connection with the
Company's stockholders rights plan, following the conversion and cancellation of
452,489 shares of Series A Convertible Preferred Stock, par value $0.01 per
share, 47,511 shares of Series A Convertible Preferred Stock; and 100,000 shares
of Series B 12% Convertible Redeemable Preferred Stock, par value $0.01 per
share. No shares of the Company's preferred stock are currently issued or
outstanding.
The Company has no present plans for the issuance of any additional
preferred stock. However, the issuance of any preferred stock could have a
material adverse effect on the rights of holders of the Company's common stock,
and, therefore, could reduce the value of shares of the Company'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 its 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 the Company or a change
in the Company's control thereby preserving our control by the current
stockholders.
17
RISKS RELATING TO THE COMPANY'S INDUSTRY
THE SECURITY OF THE INTERNET POSES RISKS TO THE SUCCESS OF THE COMPANY'S ENTIRE
BUSINESS
Concerns over the security of the Internet and other electronic
transactions and the privacy of consumers and merchants may inhibit the growth
of the Internet and other online services generally, especially as a means of
conducting commercial transactions, which may have a material adverse effect on
the Company's physical world-to-Internet business.
THE COMPANY WILL ONLY BE ABLE TO EXECUTE ITS PHYSICAL WORLD-TO-INTERNET BUSINESS
PLAN IF INTERNET USAGE AND ELECTRONIC COMMERCE CONTINUE TO GROW
The Company's future revenues and any future profits are substantially
dependent upon the widespread acceptance and use of the Internet and other
online services as an effective medium of information and commerce. If use of
the Internet and other online services does not continue to grow or grows more
slowly than the Company expects, if the infrastructure for the Internet and
other online services does not effectively support the growth that may occur, or
if the Internet and other online services do not become a viable commercial
marketplace, the Company's physical world-to-Internet business, and therefore
its business, prospects, financial condition, and results of operations, could
be materially adversely affected. Rapid growth in the use of, and interest in,
the Internet, the Web, and online services is a recent phenomenon, and may not
continue on a lasting basis. In addition, customers may not adopt, and continue
to use, the Internet and other online services as a medium of information
retrieval or commerce. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty, and few services and products have generated profits. For the
Company to be successful, consumers and businesses must be willing to accept and
use novel and cost efficient ways of conducting business and exchanging
information.
In addition, the public in general may not accept the Internet and other
online services 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 the Internet and other online
networks continue to experience significant growth in the number of users, their
frequency of use, or in their bandwidth requirements, the infrastructure for the
Internet and online networks may be unable to support the demands placed upon
them. In addition, the Internet or other online networks could lose their
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased governmental regulation. Significant issues concerning the commercial
and informational use of the 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 or other online services
also could result in slower response times and adversely affect usage of the
Internet and other online networks generally and the Company's physical
world-to-Internet product and networks in particular.
THE COMPANY MAY NOT BE ABLE TO ADAPT AS THE INTERNET, PHYSICAL
WORLD-TO-INTERNET, EQUIPMENT RESALES AND SYSTEMS INTEGRATIONS MARKETS, AND
CUSTOMER DEMANDS CONTINUE TO EVOLVE
The Company may not be able to adapt as the Internet, physical
world-to-Internet, equipment resales and systems integration markets, and
consumer demands continue to evolve. The Company's failure to respond in a
timely manner to changing market conditions or client requirements would have a
material adverse effect on its business, prospects, financial condition, and
results of operations. The Internet, physical world-to-Internet, equipment
resales, and systems integration markets are characterized by:
o rapid technological change;
18
o changes in user and customer requirements and preferences;
o frequent new product and service introductions embodying new
technologies; and
o the emergence of new industry standards and practices that could
render proprietary technology and hardware and software infrastructure
obsolete.
The Company's success will depend, in part, on its ability to:
o enhance and improve the responsiveness and functionality of the
Company's products and services;
o license or develop technologies useful in the Company's business on a
timely basis;
o enhance the Company's existing services, and develop new services and
technologies that address the increasingly sophisticated and varied
needs of its prospective or current customers; and
o respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
THE COMPANY MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN 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 the Company. The Company believes that competition will
intensify and increase in the future. The Company's target market is rapidly
evolving and is subject to continuous technological change. As a result, the
Company's competitors may be better positioned to address these developments or
may react more favorably to these changes, which could have a material adverse
effect on the Company's business, prospects, financial condition, and results of
operations.
In addition, the equipment resales and systems integration markets are
increasingly competitive. The Company competes in these industries on the basis
of a number of factors, including the attractiveness of the services offered,
the breadth and quality of these services, creative design and systems
engineering expertise, pricing, technological innovation, and understanding
clients' needs. A number of these factors are beyond the Company's control.
Existing or future competitors may develop or offer products or services that
provide significant technological, creative, performance, price, or other
advantages over the products and services offered by the Company.
Many of the Company'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, the Company is significantly smaller
than its two largest competitors in the physical world-to-Internet industry, the
primary focus of its business. Similarly, the Company competes against
significantly larger and better-financed companies in its systems integration
and resales businesses, including the manufacturers of the equipment and
technologies that the Company integrates and resells. If the Company competes
with its primary competitors for the same geographical or institutional markets,
their financial strength could prevent the Company from capturing those markets.
The Company may not successfully compete in any market in which the Company
conducts or may conduct operations. In addition, based on the increasing
consolidation, price competition and participation of equipment manufacturers in
the systems integration and equipment resales markets, the Company believes that
it will no longer be able to compete effectively in these markets in the future.
It is for this reason, that the Company has increasingly focused its business
plan on competing in the emerging market for physical world-to-Internet
products.
19
IN THE FUTURE THERE COULD BE GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
WHICH COULD HARM THE COMPANY'S BUSINESS
The Company is not currently subject to direct regulation by any government
agency other than laws or regulations applicable generally to electronic
commerce. Any new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to the
Company's business, or the application of existing laws and regulations to the
Internet and other online services, could have a material adverse effect on the
Company's business, prospects, financial condition, and results of operations.
Due to the increasing popularity and use of the Internet and other online
services, federal, state, and local governments may adopt laws and regulations,
or amend existing laws and regulations, with respect to the Internet or other
online services covering issues such as taxation, user privacy, pricing,
content, copyrights, distribution, and characteristics and quality of products
and services. The growth and development of the market for electronic commerce
may prompt calls for more stringent consumer protection laws to impose
additional burdens on companies conducting business online. The adoption of any
additional laws or regulations may decrease the growth of the Internet or other
online services, which could, in turn, decrease the demand for the Company's
services and increase its cost of doing business, or otherwise have a material
adverse effect on the Company's business, prospects, financial condition, and
results of operations. Moreover, the relevant governmental authorities have not
resolved the applicability to the Internet and other online services of existing
laws in various jurisdictions governing issues such as property ownership and
personal privacy and it may take time to resolve these issues definitively.
Certain of the Company's proprietary technology allows for the storage
of demographic data from the Company'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 its 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.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company's principal executive, development and administrative office is
located at 2201 Second Street, Suite 402, Fort Myers, Florida 33901. The Company
occupies approximately 5,000 square feet under terms of a written lease from an
unaffiliated party which expires on January 31, 2004, with monthly rent totaling
approximately $16,000. During September 2002, the Company entered into an
agreement with the landlord of this facility under which the Company vacated
approximately 70% of its previously rented space in exchange for reduced rent.
The Company maintains a sales facility at 2150 Western Court, Suite 230, Lisle,
Illinois 60532, where it occupy approximately 6,000 square feet under the terms
of a written lease from an unaffiliated party expiring on October 31, 2003.
Monthly rent on this facility was negotiated from approximately $9,000 per month
to $3,000 per month for a period of nine months as part of a settlement
agreement between NeoMedia and the landlord finalized in August 2002. In March
2001, with the acquisition of the assets of Qode.com, Inc., the Company added an
additional 8,388 square feet office lease at 4850 N. State Road 7, Suite 104,
Ft. Lauderdale, Florida, with monthly rent totaling approximately $9,200. Upon
the discontinuation of the Qode business unit, the Company vacated the premises.
The Company was subsequently sued by Headway Associates, the landlord, for past
and future rents on the facility. The Company settled the suit for cash payments
of $100,000, all of which have been made in 2002.
During 2001, the Company closed its office in Monterrey, Mexico, which was
primarily used for sales and consulting efforts.
The Company believes that existing office space is adequate to meet current
and short-term requirements.
20
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in the following legal actions arising in the
normal course of business, both as claimant and defendant.
NEOMEDIA SHAREHOLDERS
During January 2002, certain of NeoMedia's shareholders filed a complaint
with the Securities and Exchange Commission, alleging that the shareholders were
not included in the special shareholders meeting of November 25, 2001, to vote
on the issuance of 19 million shares of NeoMedia common stock. On March 11,
2002, NeoMedia filed its response claiming that NeoMedia had fully complied with
all of its obligations under the laws and regulations administered by the
Securities and Exchange Commission, as well as with its obligation under
Delaware General Corporation Law.
AIRCLIC, INC. LITIGATION
On July 3, 2001, the Company entered into a non-binding letter of intent
with AirClic which contemplated an intellectual property cross-licensing
transaction between the Company and AirClic. Under the terms of the letter of
intent, AirClic was to provide the Company with bridge financing of $2,000,000,
which was to be paid to the Company in installments. On July 11, 2001, AirClic
advanced $500,000 in bridge financing to the Company in return for a promissory
note from the Company secured by all of its assets, including its physical
world-to-Internet patents. During the negotiation of definitive agreements, the
letter of intent was abandoned on the basis of the Company's alleged breach of
certain representations made by the Company in the promissory note.
On September 6, 2001, AirClic filed suit against the Company in the Court
of Common Pleas, Montgomery County, Pennsylvania, seeking, among other things,
the accelerated repayment of a $500,000 loan it advanced to the Company under
the terms of a letter of intent entered into between AirClic and the Company.
The letter of intent was subsequently abandoned on the basis of the Company's
alleged breach of certain representations made by the Company in the promissory
note issued to AirClic in respect of such advance. The note issued by the
Company in respect of AirClic's $500,000 advance is secured by substantially all
of the Company's property, including the Company's core physical
world-to-Internet technologies. If the Company is unsuccessful in this
litigation, AirClic, which is one of the Company's key competitors, could
acquire the Company's core intellectual property and other assets, which would
have a material adverse effect on the Company's business, prospects, financial
condition, and results of operations. The Company is vigorously defending this
claim and have filed counterclaims against AirClic. As of the date of this
filing, pleadings were closed and the parties have engaged in written discovery.
Whether or not AirClic is successful in asserting its claims that the Company
breached certain representations made by it in the note, the note became due and
payable in accordance with its terms on January 11, 2002. Based on the cash
currently available to the Company, payment of the note and related interest
would have a material adverse effect on the Company's financial condition. If
the Company fails to pay such note, AirClic could proceed against the Company's
intellectual property and other assets securing the note which would have a
material adverse effect on the Company's business, prospects, financial
condition, and results of operations. The Company has not accrued any additional
liability over and above the note payable and related accrued interest. As of
December 3, 2002, pleadings were closed and the parties have engaged in written
discovery.
AirClic has also filed suit against the Company in the United States
District Court for the Eastern District of Pennsylvania. In this second action,
AirClic seeks a declaration that certain core intellectual property securing the
note issued by the Company to AirClic, some of which is patented and others for
which a patent application is pending, is invalid and in the public domain. Any
declaration that the Company's core patented or patentable technology is
non-protectable and in the public domain would have a material adverse effect on
the Company's business, prospects, financial condition, and results of
operations. The Company is vigorously defending this second action as well. On
November 21,2001, the Company filed a motion to dismiss the complaint. On
December 19, 2001, AirClic filed a response opposing that position. On September
18, 2002, the court ruled in favor of the Company and dismissed AirClic's
complaint. The Company has not accrued any liability in connection with this
matter.
21
DIGITAL: CONVERGENCE LITIGATION
On June 26, 2001, the Company filed a $3 million lawsuit in the U.S.
District Court, Northern District of Texas, Dallas Division, against
Digital:Convergence Corporation for breach of contract regarding a $3 million
promissory note due on June 24, 2001 that was not paid. The Company is seeking
payment of the $3 million note plus interest and attorneys fees. The Company has
not accrued any gain contingency related to this matter. On March 22, 2002,
Digital:Convergence filed under Chapter 7 of the United States Bankruptcy Code.
OTHER LITIGATION
In April 2001, the former President and director of NeoMedia filed a
lawsuit against the Company and several of its directors. The suit was filed in
the Circuit Court of the Twentieth Judicial Circuit for Sarasota, Florida. The
claim alleges the individual was fraudulently induced into accepting employment
and that the Company breached the employment agreement. The individual's
employment with the Company ended in January 2001. During May 2002, the Company
settled the suit. The Company is obligated to make cash payments of $90,000
directly to the plaintiff during the period May 2002 through December 2002, and
cash payments to the plaintiff's attorney for legal fees in the amount of
$45,000 due in July and August 2002. In addition, the plaintiff was granted
360,000 options to purchase shares of NeoMedia common stock at an exercise price
of $0.08. As of March 31, 2002, the Company had accrued a $347,000 liability
relating to the suit. As a result, the Company recognized an increase to net
income of approximately $176,000 during the three-month period ended June 30,
2002 to adjust the liability to the settlement amount. As of December 31, the
Company had an accrued liability of approximately $33,000 relating to this
matter.
On August 20, 2001, Ripfire, Inc. filed suit against the Company in the
San Francisco County Superior Court seeking payment of $138,000 under a software
license agreement entered into between the Company and Ripfire in May 2001
relating to implementation of the Qode Universal Commerce Solution. On September
6, 2002, the Company settled this suit for $133,000 of the Company's common
stock. On March 31, 2003, the Company issued 2,700,000 shares of common stock to
Ripfire under this arrangement. The Company has accrued a $133,000 liability
relating to this matter as of December 31, 2002.
On November 30, 2001, Orsus Solutions USA, Inc., filed a summons seeking
payment in full of approximately $525,000 relating to a software and services
contract associated with implementation of the Qode Universal Commerce Solution.
The Company is currently attempting to negotiate settlement of this matter. The
Company has accrued a liability of $525,000 as of December 31, 2002.
On July 22, 2002, 2150 Western Court, L.L.C., the property manager for the
Company's Lisle, IL, office, filed a summons seeking payment of approximately
$72,000 for all past due rents on the facility. The summons asked for a judgment
for the above amount plus possession of the premises. On August 9, 2002, the
Company settled this matter. The settlement calls for past due rents of
approximately $72,000 to be paid over a 15-month period, as well as reduced
rents for the period August 2002 through March 2003. As additional consideration
in the settlement, the Company issued 900,000 shares of its common stock to 2150
Western Court L.L.C. The Company had a liability of approximately $49,000
relating to this matter as of December 31, 2002.
On July 27, 2002, the Company's former General Counsel filed suit in U.S.
District Court, Ft. Myers division, seeking payment of the 2000 executive
incentive, severance and unpaid vacation days in the amount of approximately
$154,000. In June 2001, the Company's compensation committee approved an
adjustment to the 2000 executive incentive plan that reduced the executive
incentive payout as a result of the write-off of the Digital:Convergence
intellectual property license contract in the second quarter of 2001. As a
result, the Company reduced the accrual for such payout by an aggregate of
approximately $1.1 million in the second quarter of 2002. The plaintiff is
seeking payment of the entire original incentive payout. On November 12, 2002,
the Company settled the lawsuit. The settlement calls for cash payments totaling
approximately $90,000 over a period of ten months, plus 250,000 vested options
to purchase shares of the Company's common stock at an exercise price of $0.01
with a term of five years. The Company had a liability of approximately $70,000
relating to this matter as of December 31, 2002.
On September 12, 2002, R. R. Donnelley & Sons Company filed a summons in
the Circuit Court of The Twentieth Judicial Circuit in and for Lee County,
Florida, seeking payment of approximately $92,000 in past due professional
services bills. The Company is attempting to negotiate settlement of this issue
out of court prior to the court date. The Company has accrued approximately
22
$92,000 relating to this matter as of December 31, 2002.
On September 13, 2002, Wachovia Bank, N.A., owner of the building in which
the Company's Ft. Myers, Florida headquarters is located, filed a complaint in
Circuit Court of The Twentieth Judicial Circuit in and for Lee County, Florida,
seeking payment of approximately $225,000 in past due rents. The complaint also
seeks payment of all future rent payments under the lease term, which expires in
January 2004, as well as possession of the premises. On October 28, 2002, the
Company and Wachovia reached a settlement on this matter. The settlement calls
for cash payments of past due rents of approximately $250,000 over a period of
16 months. The Company will also vacate approximately 70% of the unused space in
its headquarters, and the rent for the remainder of the lease, which expires in
January 2004, will be reduced according to square footage used. The Company has
accrued a liability of approximately $269,000 relating to this matter as of
December 31, 2002.
On October 21, 2002, International Digital Scientific, Inc. ("IDSI") filed
a demand for arbitration relating to past due payments on an uncollateralized
note payable from us to IDSI dated October 1, 1994. The note was issued in
exchange for the purchase by us of computer software from IDSI. The note calls
for the Company to make payments of the greater of: (i) 5% of the collected
gross revenues from sales of software or (ii) $16,000 per month. As of December
31, 2002, the Company had recorded a current portion of long term debt to IDSI
of $425,093. The net carrying value of future obligation under the note was
$651,285 as of December 31, 2002. The Company has filed a counterclaim with the
arbitrator relating to this matter. The arbitration hearing has been scheduled
for June 25, 2003.
On October 28, 2002, Merrick & Klimek, P.C., filed a complaint against the
Company seeking payment of approximately $170,000 in past due legal services.
The amount in question is subject to an unsecured promissory note that matured
unpaid on February 28, 2002. The Company is attempting to negotiate settlement
of this issue out of court prior to the court date. The Company has recorded the
note payable amount of approximately $170,000 and accrued interest of
approximately $21,000 relating to this matter as of December 31, 2002.
On November 11, 2002, Avnet/Hallmark Computer Marketing Group filed a
complaint against the Company seeking payment of approximately $66,000 in past
due amounts relating to hardware and software re-sold by the Company. During
December 2002, the Company made payment of approximately $30,000 to Avnet,
reducing the balance owed to approximately $37,000. On April 1, 2003, the
Company received a judgment from the circuit court for the remaining balance.
The Company had a liability of approximately $37,000 relating to this matter as
of December 31, 2002.
On December 30, 2002, Brooks Automation, Inc. filed a complaint against
the Company seeking payment of approximately $37,000 in past due amounts
relating to software re-sold by the Company. The Company is attempting to
negotiate settlement of this issue out of court prior to the court date. On
January 16, 2003, the Company and Brooks Automation reached a settlement under
which the Company will pay the amount owed to Brooks Automation over a period of
approximately 15 months, with the payment amount increasing after three months.
The Company had a liability of approximately $37,000 relating to this matter as
of December 31, 2002.
On February 6, 2003, Norton Allen & Blue, P.A., filed a complaint against
the Company seeking payment of approximately $25,000 in past due legal services.
The Company is attempting to negotiate settlement of this issue out of court
prior to the court date.
On March 10, 2003, IBM Credit Corporation filed a complaint against the
Company seeking payment of approximately $9,000 in past due amounts relating to
equipment leased by the Company. The Company is attempting to negotiate
settlement of this issue out of court prior to the court date.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
23
(a) Market Information. NeoMedia's common stock began trading on The Nasdaq
SmallCap Market under the symbol "NEOM" on November 25, 1996, the date of the
Company's initial public offering. On March 11, 2002, the Company received a
Nasdaq Staff Determination stating that, as of December 31, 2001, it did not
meet either the minimum net tangible assets ($2,000,000) or minimum
stockholders' equity ($2,500,000) criteria for continued listing on the Nasdaq
SmallCap Market and advising that, accordingly, the Company's shares were
subject to de-listing from such market effective May 17, 2002. The Company's
shares are now trading on the OTC Bulletin Board under the symbol "NEOM." As of
December 31, 2002, there were 30,746,968 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 and Nasdaq SmallCap Market, as applicable:
(U.S. $)
------------------------------------ ----------------------------------------------------------
2000 HIGH LOW
------------------------------------ ------------------------------ ---------------------------
First Quarter $14.50 $5.69
Second Quarter 11.13 5.00
Third Quarter 6.75 4.13
Fourth Quarter 6.50 1.94
------------------------------------ ------------------------------ ---------------------------
2001 HIGH LOW
------------------------------------ ------------------------------ ---------------------------
First Quarter $6.00 $2.50
Second Quarter 4.50 1.76
Third Quarter 1.85 0.16
Fourth Quarter 0.24 0.11
------------------------------------ ------------------------------ ---------------------------
2002 HIGH LOW
------------------------------------ ------------------------------ ---------------------------
First Quarter $0.41 $0.14
Second Quarter 0.17 0.05
Third Quarter 0.10 0.02
Fourth Quarter 0.05 0.01
(b) Holders. As of January 31, 2003, there were 99 registered shareholders
of record of NeoMedia's common stock. NeoMedia believes that it has a greater
number of shareholders because a substantial number of NeoMedia's common stock
is held of record in street name by broker-dealers for their customers.
(c) Dividends. The Company has not declared or paid any dividends on its
common stock during the years ended December 31, 2002, 2001 or 2000. 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 articles of incorporation do not
require the Company's board of directors to declare dividends on the Company's
common stock. The Company expects to retain all earnings, if any, generated by
operations for the development and growth of the Company's business, and does
not anticipate paying any dividends to the Company's stockholders for the
foreseeable future.
(d) Recent Issuances of Unregistered Securities.
In January 2003, the Company issued 1,355,670 shares of common stock to
three separate related parties, Charles W. Fritz, Chairman of the Board of
Directors; William E. Fritz, outside director; and James J. Keil, outside
director, in connection with convertible promissory notes issued on their
behalf.
In December 2002, NeoMedia issued 4,000,000 shares of common stock to an
unrelated consultant in exchange for services to be provided over a one-year
period. There were no proceeds to the Company from the issuance of the stock.
On November 12, 2002, NeoMedia and Cornell Capital Partners terminated the
May 2002 Equity Line of Credit Agreement and entered into a new Equity Line of
Credit Agreement with Cornell under which Cornell agreed to purchase up to $10.0
million of NeoMedia's common stock and over the next two years, with the timing
and amount of the purchase at NeoMedia's discretion. The maximum amount of each
24
purchase is $150,000 with a minimum of seven days between purchases. The shares
will be valued at 98% of the lowest closing bid price during the five day period
following the delivery of a notice of advance by NeoMedia. NeoMedia will pay 5%
of the gross proceeds of each purchase to Cornell as a commission. According to
the terms of the agreement, NeoMedia cannot draw on the line of credit until the
shares underlying the agreement are registered for trading with the Securities
and Exchange Commission. On February 14, 2003, the SEC declared effective the
S-1 registration statement containing 100 million shares underlying the Equity
Line of Credit. Butler Gonzalez LLP was paid a fee of 837,500 shares of
NeoMedia's common stock for legal services relating to drafting and execution of
the Equity Line, and Westrock Advisors, Inc. was paid a fee of 62,500 shares of
NeoMedia's common stock for acting as the placement agent.
In November 2002, NeoMedia issued 250,000 shares of common stock upon
exercise of outstanding options by an unrelated party at a price of $0.01 per
share. The gross proceeds of such transaction were approximately $3,000.
In August 2002, NeoMedia issued 900,000 shares of common stock to 2150
Western Court L.L.C, the landlord of its Lisle, Illinois sales office, as
settlement of a lawsuit relating to past-due and future building rents. The
shares were valued at $0.03 per share, the market price at the date of issuance.
There were no cash proceeds to NeoMedia in this transaction.
In July, August and September 2002, NeoMedia issued an aggregate of
3,000,000 shares of its common stock upon the exercise of outstanding options by
a consultant at a price of $0.01 per share. The gross proceeds of such
transaction were $30,000.
In June 2002, the Company repriced 3 million of its common stock warrants
from $0.12 to $.05 per share. All of the warrants were exercised immediately.
The Company recognized an expense of $132,000 related to this repricing.
In June 2002, NeoMedia issued 900,000 shares of common stock to two
unrelated consultants as payment for consulting services to be performed from
June 2002 through June 2003. There were no cash proceeds to the Company in these
transactions.
In June 2002, NeoMedia issued 10,000 shares of common stock to an unrelated
vendor as an interest payment on past-due accounts payable. There were no cash
proceeds to the Company in these transactions.
In May 2002, NeoMedia issued an aggregate of 200 shares of its common stock
upon the exercise of outstanding options by an employee at a price of $0.12 per
share. The gross proceeds of such transaction were $24.
During April 2002, NeoMedia repriced 7.4 million of its common stock
options held by employees, consultants and advisors for a period of six months.
During the term of the option repricing program, participating holders are
entitled to exercise subject options at an exercise price per share equal to the
greater of (1) $0.12 or (2) 50% of the last sale price of shares of Common Stock
on the OTCBB, on the trading date immediately preceding the date of exercise.
Shortly after the announcement of the repricing program, the market price for
the Company's common stock fell below $0.12, and has not closed above $0.12
since. As a result, no options were exercised under the terms of the program and
NeoMedia did not recognize any expense relating to the repricing program during
the year ended December 31, 2002due to immaterial effect on the financial
statements.
In April 2002, NeoMedia issued an aggregate of 140,775 shares of its common
stock upon the exercise of outstanding warrants by Charles W. Fritz, its
Chairman and Chief Executive Officer, at a price of $0.12 per share. Mr. Fritz
subsequently sold the shares into the market. The gross proceeds of such
transaction were approximately $17,000. In accordance with Section 16(b), all
proceeds from the sales were retained by the Company.
In April 2002, NeoMedia issued an aggregate of 1,962,255 shares of its
common stock upon the exercise of outstanding options by two unrelated parties
at a price of $0.12 per share. The gross proceeds of such transaction were
approximately $235,000.
25
In April 2002, NeoMedia issued an aggregate of 40,000 shares of its common
stock upon the exercise of outstanding options by James J. Keil, an outside
director. Mr. Keil purchased 25,000 shares at an exercise price of $0.135 and
15,000 shares at $0.20. The gross proceeds of such transaction were
approximately $6,000.
During March 2002, NeoMedia repriced 1.2 million of its common stock
warrants for a period of six months. During the term of the warrant repricing
program, participating holders are entitled to exercise qualified warrants at an
exercise price per share equal to the greater of (1) $0.12 or (2) 50% of the
last sale price of shares of Common Stock on the OTCBB, on the trading date
immediately preceding the date of exercise. Approximately 370,000 warrants were
exercised in connection with the program, and NeoMedia recognized approximately
$63,000 in expense relating to the repricing during the year ended December 31,
2002.
In March 2002, NeoMedia issued an aggregate of 228,675 shares of its common
stock upon the exercise of outstanding warrants by an unrelated party at a price
of $0.12 per share. The gross proceeds of such transaction were approximately
$27,000.
In February 2002, NeoMedia issued 19,000,000 shares of its common stock at
a price of $0.17 per share to five individuals and two institutional unrelated
parties. The shares were issued in exchange for limited recourse promissory
notes maturing at the earlier of i.) 90 days from the date of issuance, or ii.)
30 days from the date of registration of the shares. The gross proceeds of such
transaction will be approximately $3,040,000 upon maturity of the notes, as a
purchase price of $0.01 per share, or $190,000 in aggregate, was paid in cash.
During August 2002, the notes matured without payment, and the Company
subsequently cancelled the 19 million shares issued in connection with such
notes. The Company has accrued a liability as of December 31, 2002 of $190,000
relating to the par value paid in connection with the issuance of the shares.
In January 2002, NeoMedia issued 452,489 shares of common stock to
About.com, Inc. The shares were issued upon conversion of 452,489 shares of
Series A Convertible Preferred Stock issued to About.com, Inc. as payment for
advertising expenses incurred during 2001. This issuance was made pursuant to
Section 3(a)(9) of the Act.
In January 2002, NeoMedia issued 55,000 shares of its common stock at a
price of $0.13 per share to an individual unrelated party. Cash proceeds to
NeoMedia were $7,150.
In January 2002, NeoMedia issued 1,646,987 shares of common stock to two
unrelated vendors as settlement of past-due accounts payable and future payments
under equipment lease agreements. There were no cash proceeds to the Company in
these transactions.
In September 2001, NeoMedia issued 150,000 options to buy shares of common
stock at a price of $0.20 per share for consulting services.
In July 2001, NeoMedia issued an aggregate of 11,300 shares of its common
stock upon the exercise of outstanding warrants at a price of $2.00 per share.
The gross proceeds of such transaction were $23,000. The warrants were
originally issued to one unrelated party for professional services provided to
the Company.
In June 2001, NeoMedia issued warrants to purchase 404,900 shares of common
stock with an exercise price of $2.09 for consulting services.
In June 2001, NeoMedia issued an aggregate of 4,100 shares of its common
stock upon the exercise of outstanding warrants at a price of $2.00 per share.
The gross proceeds of such transaction were $8,000. The warrants were originally
issued to one unrelated party for professional services provided to the Company.
In May 2001, NeoMedia issued an aggregate of 320,050 shares of its common
stock upon the exercise of outstanding warrants at a price of $2.00 per share.
The gross proceeds of such transaction were $641,000. The warrants were
originally issued to one related party in exchange for forgiveness of debt and
one unrelated party for professional services provided to the Company.
26
In April 2001, NeoMedia issued warrants to purchase 50,000 shares of common
stock at a price of $0.01 per share to an outside institution for services
performed
In March and April 2001, NeoMedia issued 316,500 shares of its common stock
at a price of $3.40 per share to four foreign institutional unrelated parties.
The gross proceeds of such transaction were approximately $1,076,000. In
connection with the sale, NeoMedia issued as a commission 50,000 warrants to
purchase shares of its common stock at an exercise price of $3.56 per share to a
foreign individual.
In March 2001, NeoMedia issued 18,000 shares of its common stock at a price
of $3.41 per share to a foreign institutional unrelated party. The gross
proceeds of such transaction were $61,000.
In March 2001, NeoMedia issued 156,250 shares of its common stock at a
price of $3.20 per share to a foreign institutional unrelated party. The gross
proceeds of such transaction were $500,000.
In March 2001, NeoMedia issued 170,000 shares of its common stock issuable
upon the exercise of outstanding warrants held by a foreign institutional
unrelated party, originally issued in connection with the transaction described
in paragraph 4, above. The gross proceeds of such transaction were approximately
$362,000.
In October 2000, NeoMedia issued warrants to purchase 80,000 shares of
common stock at a price of $4.13 per share for consulting services.
In October 2000, NeoMedia issued warrants to purchase 1,400,000 shares of
common stock at a price of $6.00 per share to Digital:Convergence Corporation as
consideration for a 10-year intellectual property license agreement.
In March 2000, NeoMedia issued an aggregate of 1,000,000 shares of its
common stock at a price of $7.50 per share to 20 foreign individuals and one
foreign institutional unrelated party. The gross proceeds of such transaction
were approximately $7,500,000. In connection with the sale, NeoMedia issued as a
commission 125,000 warrants to purchase shares of its common stock at an
exercise price of $7.50 per share, 125,000 warrants to purchase shares of its
common stock at an exercise price of $15.00 per share, and 100,000 warrants to
purchase shares of its common stock at an exercise price of $7.20 per share to
the institutional investor and an independent consultant.
In March 2000, NeoMedia issued 187,500 shares of its common stock upon the
exercise of outstanding warrants at a price of $7.38 per share. The gross
proceeds of such transaction were approximately $1,383,000. The warrants were
originally issued as payment for professional services provided to the Company.
In February 2000, NeoMedia issued 39,535 shares of its common stock at a
price of $6.88 per share to one individual and one institutional unrelated
party. In connection wi