Attached files
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EX-23.1 - NEOMEDIA TECHNOLOGIES INC | v178408_ex23-1.htm |
EX-21.1 - NEOMEDIA TECHNOLOGIES INC | v178408_ex21-1.htm |
EX-32.1 - NEOMEDIA TECHNOLOGIES INC | v178408_ex32-1.htm |
EX-32.2 - NEOMEDIA TECHNOLOGIES INC | v178408_ex32-2.htm |
EX-31.2 - NEOMEDIA TECHNOLOGIES INC | v178408_ex31-2.htm |
EX-31.1 - NEOMEDIA TECHNOLOGIES INC | v178408_ex31-1.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
x
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the Fiscal Year
Ended December 31, 2009
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
File Number 0-21743
NeoMedia
Technologies, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
36-3680347
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
Two
Concourse Parkway, Suite 500, Atlanta, GA 30328
(Address,
including zip code, of principal executive offices)
678-638-0460
(Registrants’
telephone number, including area code)
Securities
Registered Under Section 12(b) of the Exchange Act:
|
Common
Stock, par value $.01 per share
|
Name
of exchange on which registered:
|
The
OTC Bulletin Board® (OTCBB)
|
Securities
registered pursuant to Section 12(g) of the Act:
|
None
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange
Act. Yes ¨ No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or such shorter period that the registrant was required to submit and
post such files). Yes ¨
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not 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. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer o Smaller
Reporting Company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No
x
The
aggregate market value of the common stock held by non-affiliates of the
registrant as of June 30, 2009, the last business day of the registrant’s most
recently completed second fiscal quarter, was approximately $29.2 million, based
on the closing sale price for the registrant’s common stock on that date. For
purposes of determining this number, all officers and directors of the
registrant are consider to be affiliates of the registrant. This number is
provided only for the purpose of this report on Form 10-K and does not represent
an admission by either the registrant or any such person as to the status of
such person.
The
number of outstanding shares of the registrant’s Common Stock on March 22, 2010
was 2,267,567,835.
Documents
Incorporated By Reference
NONE
NeoMedia
Technologies, Inc.
INDEX
Page
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PART
I
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||
Item 1.
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Business.
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3
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Item 1A.
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Risk
Factors.
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8
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Item 1B.
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Unresolved
Staff Comments.
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16
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Item 2.
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Properties.
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16
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Item 3.
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Legal
Proceedings.
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16
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Item 4.
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(Removed
and Reserved)
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17
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PART
II
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||
Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters
and
|
|
Issuer
Purchases of Equity Securities.
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17
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Item 6.
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Selected
Financial Data.
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19
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
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19
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk.
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30
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Item 8.
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Financial
Statements.
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31
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial
|
|
Disclosure.
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64
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Item 9A.
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Controls
and Procedures.
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64
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PART
III
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||
Item 10.
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Directors,
Executive Officers and Corporate Governance.
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66
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Item 11.
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Executive
Compensation.
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68
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and
|
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Related
Stockholder Matters.
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72
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence.
|
74
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Item 14.
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Principal
Accountant Fees and Services.
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74
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Part
IV
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||
Item 15.
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Exhibits
and Financial Statement Schedules.
|
75
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SIGNATURES
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82
|
2
NeoMedia
Technologies, Inc.
PART
I
ITEM
1. Business
In
this Annual Report on Form 10-K, unless otherwise indicated, the words “we,”
“us,” and “our” refer to NeoMedia Technologies, Inc. and all entities owned or
controlled by NeoMedia Technologies, Inc. All references to
“NeoMedia” or the “Company” in this Annual Report mean NeoMedia Technologies,
Inc., a Delaware corporation, and all entities owned or controlled by NeoMedia
Technologies, Inc., except where it is made clear that the term only means the
parent or a subsidiary company.
Overview
We are a
Delaware corporation, founded in 1989 and based in Atlanta, Georgia. We provide
the infrastructure to make mobile barcode scanning and its associated commerce
easy, universal, and reliable – worldwide. Our barcode ecosystem products
include our mobile barcode reading software, “NeoReader”, which reads and
transmits data from 2D barcodes to its intended destination. Our code management
“NeoSphere” and code clearinghouse “NeoRouter” platforms create, connect,
record, and transmit the transactions embedded in the barcodes, like web-URLs,
text messages (SMS), and telephone calls, ubiquitously and reliably. In
order to provide complete mobile marketing solutions, we also offer barcode
scanning hardware that reads barcodes displayed on mobile phone screens or
printed media. We also provide infrastructure solutions to enable mobile
ticketing and couponing programs – including scanner hardware and system support
software for seamless implementation. This technology is supported by
our patents. In addition, we have an open standards philosophy designed to make
integration and use of the technology easy for handset manufacturers, mobile
operators and advertisers; and the user experience safe, reliable and
interoperable for consumers.
During
2008 and early 2009, we have made significant changes to strengthen our
management team. In June 2008, Mr. Iain A. McCready became our Chief Executive
Officer and Chairman of our Board of Directors; in September 2008, Mr. Michael
W. Zima became our Chief Financial Officer and Secretary; in January 2009, Ms.
Laura Marriott became a Member of our Board of Directors; and in March 2009, Mr.
Dean Wood became our Vice President - Business Development.
During
2009 and early 2010, we have taken steps to build upon the developing barcode
ecosystem based on the strengths of our patent portfolio. To accomplish this, we
have entered into several licensing programs and successfully resolved a
significant outstanding legal matter:
|
·
|
On
July 28, 2009, we entered into a non-exclusive patent licensing agreement
with Mobile Tag, Inc. for machine-readable mobile codes under our patent
portfolio. Under the terms of that agreement, we will receive a percentage
of revenue generated by Mobile Tag through the use and licensing of our
patent portfolio.
|
|
·
|
On
October 2, 2009, we entered into a four year agreement with Neustar,
Inc. in which we granted to Neustar a non-exclusive license to a
portion of our patent portfolio primarily for the purpose of establishing
and providing registry and clearinghouse services within the a defined
field of use and geographic territory. The terms of the license also
granted to Neustar an exclusive right to grant to third parties
royalty-bearing sub-licenses for the use of the same portion of our patent
portfolio within the defined field of use and geographic territory. The
license permits Neustar to grant sub-licenses for a period of
not less than one year, up to a maximum of four years depending on the
achievement by Neustar of certain milestones as set forth in the license
agreement. In addition, Neustar will perform certain reservations,
administration, billing and collection and other additional services for
our benefit as well as for the benefit of Neustar and the sub-licensees.
On January 22, 2010 we amended this agreement to further expand our
opportunities by including several of our patents and expanding the
geographical territory covered by this agreement to include
Mexico.
|
3
|
·
|
On
October 7, 2009, we entered into a four year agreement with Brand
Extension Mobile Solutions, S.A., a Madrid (Spain) corporation (“BEMS”), in
which we granted to BEMS a royalty bearing, and non-exclusive license
to use the licensed platform in an approved field of use within a certain
geographical territory. The licensed platform will support BEMS’s
performance of exclusive commercial operations under a particular
cooperation agreement between BEMS and Telefónica Internacional, S.A.U., a
subsidiary of Spain’s Telefónica
S.A., one of the world’s largest telecommunication companies. BEMS intends
to use us as their prime vendor in connection with their agreement with
Telefónica. The license agreement grants to BEMS the right to distribute
our barcode reading software via download or through its inclusion in
mobile devices. The license agreement also requires BEMS to purchase
twenty-five of our barcode scanning hardware products to support testing
and marketing of barcode and mobile barcode based ticketing and couponing
activities.
|
|
·
|
On
October 16, 2009, we entered into a ten year settlement and license
agreement with Scanbuy, Inc., in which we and Scanbuy settled all of our
pending litigation against each other and granted non-exclusive licenses
and a sublicense to each other. Pursuant to the terms of the agreement, we
granted to Scanbuy a royalty bearing, non-exclusive license to use a
portion of the Company’s patent portfolio within a defined field of use
and in a geographic territory.
|
|
·
|
On
November 27, 2009 we entered into an agreement with Sony Ericsson Mobile
Communications, AB, through which they have selected NeoMedia as their
strategic 2D barcode partner. Sony Ericsson will begin shipping phones
pre-loaded with our NeoReader barcode scanning application globally in the
1st half of 2010. The NeoReader will be pre-installed across all Sony
Ericsson platforms.
|
|
·
|
On
February 12, 2010 we entered into an agreement with Neustar to participate
in and to facilitate a leadership role in the 2010 Neustar Mobile Codes
Pilot Program. The Program will combine all of the elements required to
fulfill our goal of a seamless and interoperable barcode ecosystem and
will allow advertisers to test the market and
technology.
|
As of
December 31, 2009, we had one active wholly-owned subsidiary: NeoMedia Europe,
AG, (“NeoMedia Europe”) incorporated in Germany. In addition, there
are several dormant subsidiaries which are listed in Exhibit 21.1.
Products
and Services
We
provide a complete suite of software and hardware for processing 2D barcodes in
the mobile environment, and enabling applications in mobile marketing, mobile
couponing, mobile ticketing and mobile payment.
Our
barcode ecosystem includes software designed to read 2D barcodes using camera
and web enabled wireless communications devices and products to create unique
barcodes, to create and manage advertising campaigns using barcodes; to act as a
gateway managing activity between consumers and advertisers, and to gather and
interpret the results of advertising campaigns. These products
include:
|
·
|
NeoReader
– a barcode scanning application that transforms mobile camera phones into
universal barcode readers. Users simply launch the NeoReader application
on their mobile phone, scan the barcode and are linked directly to a
specific web page. There they can access real-time product or service
information, download content or complete a mobile commerce transaction.
Any product, magazine/newspaper, retail display or billboard with a 2D
barcode provides direct access to the multimedia capability of the mobile
web anytime, anywhere. NeoReader features our patented resolution
technology with an ultra-small footprint and platform-independent
algorithms. This application provides interoperability among 2D
barcodes in the market and operates on a variety of
handsets.
|
|
·
|
NeoReader
Enterprise & Lavasphere Enterprise – software solutions for commercial
applications where mobile devices are utilized to manage products through
manufacturing or distribution channels. These applications equip mobile
devices to read 1D and 2D barcodes with their built-in camera. The mobile
devices become universal barcode readers, allowing users to “track and
trace” products and services anytime,
anywhere.
|
|
·
|
These
solutions are ideal tools for a variety of business applications including
data collection, logistics, content linking, and accessing information on
the go. They provide the ability to capture lifecycle data for products
and services in real time and to share relevant data in a secure and
selective manner.
|
4
|
o
|
NeoReader
Enterprise: a standard solution utilizing our NeoReader technology to
route transactions to a customer’s existing mobile web
application
|
|
o
|
Lavasphere
Enterprise: a customized solution using LavaSphere barcode-reading
technologies for functions that are too complex to be handled by a mobile
web application
|
|
·
|
NeoSphere
- a web-based system that supports campaign management and allows users
(typically agencies and advertisers) to easily develop, launch and manage
a mobile barcode campaign by delivering three critical
components:
|
|
o
|
Barcode
creation tools
|
|
o
|
Campaign
management tools
|
|
o
|
Reporting
and analytics
|
NeoSphere
offers a customizable feature that uses rules to deliver dynamic content to a
single barcode based on preferences like language, gender, age and
location.
|
·
|
NeoMedia
Code Routing Service – is used in conjunction with NeoSphere and includes
an intelligent gateway configurable to support global interoperability and
a barcode resolution server designed to retrieve and deliver any form of
internet content to mobile phones worldwide. Our Code
Resolution Service uniquely
provides:
|
|
o
|
Interoperability
with other campaign management
systems
|
|
o
|
Access
to all barcode-enabled handsets
worldwide
|
|
o
|
Data
tracking, collection, and monetization of each mobile
transaction
|
|
·
|
NeoMedia
MSS – MSS is a completely stand-alone system supporting third-party
ticketing/couponing systems and databases as well as adding all missing
components to existing mobile systems essential for the successful
completion and fulfillment of mobile applications. Based on our
customers’ needs and requirements, we believe that we provide the best
solution –
|
|
o
|
Integrating
third-party ticketing and couponing
systems
|
|
o
|
Providing
marketing databases and our own coupon
system
|
|
o
|
Encrypting
and sending codes to mobile phones
|
|
o
|
Decrypting
and analyzing code contents
|
|
o
|
Enabling
customer’s own coupon and ticket
configuration
|
|
o
|
Supplying
statistics and information on mobile activities,
and
|
|
o
|
Implementing
and delivering customized hardware and software
solutions
|
Our
hardware products read, interpret and transmit barcodes and barcode information
to facilitate related transactions. These products include:
|
·
|
EXIO
II - a multi-application smart scanner for mobile couponing and ticketing
applications. The cutting-edge technology of the EXIO II smart scanner
allows customers to redeem mobile tickets and coupons making it easy and
affordable to use creative new mobile marketing text messaging programs to
track and reach customers. EXIO II is the evolution of EXIO® and combines
all the advantages of EXIO® with improved reading capabilities and a
programmable Linux platform that was developed based on customer feedback
we have received during our more than 10 years of operation. The EXIO II
is the ideal tool for one-to-one marketing applications and highly
targeted customer campaigns. With its color LCD touch-screen and video
playback capability, the EXIO II can be customized to display targeted
content and brand messages. Prior to 2009, we offered EXIO®, a complete
solution including printer, display, keypad and GSM/GPRS module. EXIO®
read and processed 2-D symbologies such as Data Matrix from mobile phone
displays as well as printed 1D barcodes. Utilizing a high-speed Digital
Signal Processor (DSP) and a high-resolution camera, EXIO® automatically
recognizes 2D barcodes such as Data Matrix, sent as MMS (Multimedia
Message Service), EMS (Enhanced Message Service) or Picture Message (Smart
Message) to any compatible mobile
phone.
|
5
|
·
|
XELIA
– a versatile desktop scanner that incorporates Honeywell Adaptus® Imaging
Technology 5.0 to enable high-performance reading of 2D codes from mobile
phone displays. Equipped with a high-speed Digital Signal Processor (DSP),
XELIA automatically recognizes 2D codes sent as text messages (SMS, MMS or
EMS) as well as printed 1D barcodes. It processes rapidly and with extreme
accuracy. Its compact size and sleek design make XELIA ideal for
counter-top use at a point-of-sale or service desk. It can also be used
for sweepstakes, mobile advertising (tickets and coupons) and boarding
passes. Prior
to 2009, we offered our model MD-20 – a
high-performance OEM code reader providing unparalleled flexibility in
scanning 2-D symbologies such as Data Matrix from mobile phone displays as
well as printed 1-D barcodes. Because of its compact size,
speed and flexibility, MD-20 was the ideal high-performance fixed-position
2-D code reader for a wide range of applications where mobile code
reading, mobile couponing, mobile ticketing and mobile marketing are
required, thus enabling the phone to be used as the single universal
mobile device.
|
Sales,
Marketing and Distribution Relationships
We have
worked to establish a network of direct salespeople, affiliates and business
development personnel to market our suite of products and services. We market
our products and services to potential customers primarily in the Americas and
Europe.
Data
Centers
As of
December 31, 2009, we do not own any data centers. We have servers
located in a data center in Miami, Florida, where our network infrastructure is
supported by an outside vendor.
Proprietary
Technology
Many of
the products we sell to our customers rely on hardware and software technologies
provided to us by third parties under license. Certain of our
products and services combine these third party technologies with technologies
that are proprietary to us. Our proprietary technology may be
protected by patent law, copyright law, trade secret law and other forms of
intellectual property protection. Our proprietary technology includes
technologies that enable us to automate a number of back-end functions and
technologies that allow customers to order, change and manage their accounts
easily without technical expertise. Some of our proprietary
technologies are unique and may not legally be utilized by competitors without a
license from us. Although we believe that our suite of proprietary
technologies offers customers significant benefits, we do not believe that our
proprietary technologies are sufficient to deter competitors from providing
competing products and services.
International
Revenue
Revenues
from our international customers totaled $1.1 million and $649,000 for the years
ended December 31, 2009 and 2008, respectively. The revenues are
denominated and received primarily in Euros.
Competition
We
believe we have positioned ourselves to compete as a leader in mobile marketing
solutions. However, within the mobile marketing industry there are a number of
competitors, many of which are just beginning to appear, who offer parts of the
mobile marketing barcode ecosystem. In general, due to the relative
immaturity of the mobile marketing industry, small players have sprung up
offering very specialized products and services.
As the
mobile marketing industry matures, we expect consolidation as industry leaders
emerge. Moreover, we believe we are well positioned at the onset due to our
intellectual property, including many patents, on which our products and
services are based. We expect that our intellectual property will serve as a
competitive advantage as this market matures.
Intellectual
Property
We rely
on a combination of laws (including patent, copyright, trademark, service mark
and trade secret laws) and contractual restrictions to establish and protect
proprietary rights in our services. As of December 31, 2009, we owned 35
patents spanning 15 countries and 27 additional patents are pending or in
appeal. Our patents cover core concepts behind our techniques for linking
the physical world to the electronic world. These patents cover various
linkage methods including barcodes, RF/ID, Mag Stripe, Voice and other machine
readable and keyed entry identifiers.
6
On June
9, 2009 we received an Ex Parte Reexamination Certificate from the United States
Patent and Trademark Office for our United States Patent No. 6,199,048.
The '048 patent was under reexamination at the request of third party
Electronic Frontier Foundation, and the Patent Office ruled that the inventions
as described in the claims, amended during the reexamination, are patentable
over the prior art.
During
2009 we have licensed our patents to Mobile Tag and Neustar. We have also
settled patent-related lawsuits and entered into a patent license agreement with
Scanbuy. In addition, we have also entered into a platform license agreement
with BEMS. In prior years we also settled patent-related lawsuits and licensed
our patents to Digital Convergence, A.T. Cross Company, Symbol Technologies,
Brandkey Systems Corporation, Virgin Entertainment Group, and AirClic,
Inc. We are in discussions with other companies with regard to the
licensing of our patents and our technology platforms. However, there can
be no guarantee that any of these discussions will result in future
revenues.
We have
ongoing relationships with several law firms specializing in intellectual
property licensing and litigation. These firms assist us in seeking out
potential licensees of our intellectual property portfolio, including any
resulting litigation.
We have
entered into confidentiality and other agreements with our employees and
contractors, including agreements in which the employees and contractors assign
their rights in inventions to us. We have also entered into nondisclosure
agreements with our suppliers, distributors and some customers in order to limit
access to and disclosure of our proprietary information. Nonetheless,
neither the intellectual property laws nor contractual arrangements, nor any of
the other steps we have taken to protect our intellectual property can ensure
that others will not use our technology or that others will not develop similar
technologies.
We
license, or lease from others, many technologies used in our services. We
expect that we and our customers could be subject to third-party infringement
claims as the number of competitors grows. Although we do not believe that
our technologies or services infringe the proprietary rights of any third
parties, we cannot ensure that third parties will not assert claims against us
in the future or that these claims will not be successful.
Periodically,
we may be made aware that technology we have used in our operations may have
infringed upon intellectual property rights held by others. We will
evaluate all such claims and, if necessary and appropriate, seek to obtain
licenses for the use of such technology. If we or our suppliers are unable
to obtain licenses necessary to use intellectual property in our operations, we
may be legally liable to the owner of such intellectual property.
Moreover, even in those instances where we are justified in denying claims that
we have infringed upon the intellectual property rights of others, we may
nonetheless be forced to defend or settle legal actions taken against us
relating to allegedly protected technology, and such legal actions may require
us to expend substantial funds. See “Item 1A Risk Factors – We may be
unable to protect our intellectual property rights and may be liable for
infringing the intellectual property rights of others.”
Government
Regulation
Existing
or future legislation could limit the growth or use of the internet, mobile
telecommunications and/or mobile advertising, which would curtail our revenue
growth. Statutes and regulations directly applicable to internet
communications, mobile commerce and mobile advertising are becoming more
prevalent. The United States Congress and the European Union have passed laws
regarding children’s online privacy, privacy in general, 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, internet commerce, mobile commerce and mobile
advertising. In addition, the growth and development of internet and mobile
commerce may prompt calls for more stringent consumer protection
laws.
Certain
of our proprietary technology allows for the storage of demographic data from
our users. The European Union has adopted directives addressing data
privacy that may limit the collection and use of certain information regarding
internet and mobile device users. This directive may limit our
ability to collect and use information collected by our 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. We could incur significant
additional expenses if new regulations regarding the use of personal information
are introduced or if our privacy practices are investigated.
7
Employees
As of
March 22, 2010, we had 23 employees, including 10 employees managed from our
headquarters in Atlanta, Georgia, and 13 employees managed from our offices in
Würseln, Germany. None of our employees are represented by a labor union or
bound by a collective bargaining agreement. We believe that our employee
relations are good.
Research
and Development
We have
incurred $1.4 million and $2.0 million in research and development expenses
during the years ended December 31, 2009 and 2008, respectively. None of these
expenses were directly borne or reimbursed by our customers.
ITEM
1A. Risk Factors
You
should carefully consider the following factors and all other information
contained in this Form 10-K before you make any investment decisions with
respect to our securities. The risks and uncertainties described
below may not be the only risks we face.
Risks
Related to Our Business
We
have incurred losses since inception and could incur losses in the future, and
we have a substantial accumulated deficit and a substantial working capital
deficit, which means that we may not be able to continue
operations.
We have
incurred substantial operating losses since inception, and could continue to
incur substantial losses for the foreseeable future. To succeed, we must develop
new client and customer relationships and substantially increase our revenue
derived from improved products and additional value-added
services. We have expended, and to the extent we have available
financing, we intend to continue to expend, substantial resources to develop and
improve our products, increase our value-added services and to market our
products and services. These development and marketing expenses must be incurred
well in advance of the recognition of revenue. As a result, we may
not be able to achieve or sustain profitability. A number of factors
could increase our operating expenses, such as:
|
·
|
adapting
corporate infrastructure and administrative resources to accommodate
additional customers and future
growth;
|
|
·
|
developing
products, distribution, marketing, and management for the broadest
possible market;
|
|
·
|
broadening
customer technical support
capabilities;
|
|
·
|
developing
or acquiring new products and associated technical
infrastructure;
|
|
·
|
developing
additional indirect distribution
partners;
|
|
·
|
increased
costs from third party service
providers;
|
|
·
|
improving
data security features; and
|
|
·
|
legal
fees and settlements associated with litigation and
contingencies.
|
To the
extent that increases in operating expenses are not offset by increases in
revenues, our operating losses will increase.
The
accompanying consolidated financial statements have been prepared in conformity
with United States generally accepted accounting principles (“US GAAP”), which
contemplate our continuation as a going concern. Net loss for the
years ended December 31, 2009 and 2008 was $67.4 million and $8.0 million,
respectively. Net cash used by operations was $4.2 million and $6.7 million for
the years ended December 31, 2009 and 2008, respectively. We also
have an accumulated deficit of $277.0 million and
a working capital deficit of $124.6 million as
of December 31, 2009, much of which is related to the derivative value of our
financing instruments including $47.6
million related to the fair value of warrants and those debentures that are
recorded as hybrid financial instruments, and $63.5 million related to the
amortized cost carrying value of certain of our debentures and the fair value of
the associated derivative liabilities.
8
We have a
continuing obligation as of December 31, 2009 of $4.5 million, dating from 2006,
relating to a purchase price guarantee associated with a previous acquisition,
which was later sold.
The items
discussed above raise substantial doubts about our ability to continue as a
going concern.
We
do not have any commitments to receive capital, and we need to raise additional
funds in order to continue our operations.
We
currently do not have sufficient cash to sustain us for the next twelve
months. We will require additional financing in order to execute our
operating plan and continue as a going concern. Our management’s plan
is to attempt to secure adequate funding to bridge the commercialization of our
barcode ecosystem business. We cannot predict whether this additional financing
will be in the form of equity, debt, or another form and we may not be able to
obtain the necessary additional capital on a timely basis, on acceptable terms,
or at all. We believe that we can obtain additional financing, but in
the event that these financing sources do not materialize, or that we are
unsuccessful in increasing our revenues and profits, we may be unable to
implement our current plans for expansion, repay our debt obligations as they
become due or continue as a going concern, any of which circumstances would have
a material adverse effect on our business, prospects, financial condition and
results of operations.
During
2009, our lender YA Global Investments, L.P. (“YA Global”) provided us with
financing from time to time, totaling $3.3 million. During 2010 YA Global has
provided us with an additional $2.5 million in financing. Should YA
Global choose not to provide us with continued capital financing, as they have
in the past, or if we do not find alternative sources of financing to fund our
operations, or if we are unable to generate significant product revenues, we
only have sufficient funds to sustain our current operations through
approximately April 30, 2010.
The
financial statements do not include any adjustments relating to the
recoverability and reclassification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary, should we be unable to
continue as a going concern.
Our
management and Board of Directors may be unable to execute their plans to turn
around the Company, grow our revenues and achieve profitability and positive
cash flows, which could cause us to discontinue our operations.
During
2008 and early 2009, we made significant changes to strengthen our management
team. In June 2008, Mr. Iain A. McCready became our Chief Executive Officer and
Chairman of our Board of Directors; in September 2008, Mr. Michael W. Zima
became our Chief Financial Officer and Secretary; in January 2009, Ms. Laura
Marriott became a Member of our Board of Directors; and in March 2009, Mr. Dean
Wood became our Vice President - Business Development. If our management and
Board of Directors are unable to attract and retain management to execute our
plans, then we may fail to grow our revenues, contain costs and achieve
profitability and positive cash flows.
Because
our historical financial information is not representative of our future
results, investors and analysts will have difficulty analyzing our future
earnings potential.
Prior to
2008, our operations included other lines of business which have since been
disposed of. Consequently, our historical results are not representative of
future expected operating results. We have also recognized significant charges
and expenditures in the past for impairment charges and discontinued
operations. Because these items are not recurring, it is more
difficult for investors to predict future results.
9
We
have material weaknesses in our internal control over financial reporting that
may prevent us from being able to accurately report our financial results or
prevent fraud, which could harm our business and operating results.
Effective
internal controls are necessary for us to provide reliable and accurate
financial reports and prevent fraud. In addition, Section 404 under the
Sarbanes-Oxley Act of 2002 requires that we assess the design and operating
effectiveness of internal control over financial reporting. If we
cannot provide reliable and accurate financial reports and prevent fraud, our
business and operating results could be harmed. We have in the past
discovered, and may in the future discover, areas of our internal controls that
need improvement. We have identified material weaknesses in our
internal control as of December 31, 2009. These matters and our
efforts regarding remediation of these matters, as well as efforts regarding
internal controls, generally, are discussed in detail in Part II, Item 9A.,
Controls and Procedures, of this Annual Report. However, as our material
weaknesses in our internal controls demonstrate, we cannot be certain that the
remedial measures we have taken to date will ensure that we design, implement,
and maintain adequate controls over our financial processes and reporting in the
future. Additionally, because the requirements of Section 404 are
ongoing and apply for future years, beginning in 2010, our auditors will be
required to attest to the adequacy of our assessment and we cannot be certain
that we or our independent registered public accounting firm will not identify
additional deficiencies or material weaknesses in our internal controls in the
future, in addition to those identified as of December 31, 2009. Remedying the
material weaknesses that have been presently identified, and any additional
deficiencies, significant deficiencies or material weaknesses that we or our
independent registered public accounting firm may identify in the future, could
in the future require us to incur significant costs, hire additional personnel,
expend significant time and management resources or make other
changes. Any delay or failure to design and implement new or improved
controls, or difficulties encountered in their implementation or operation,
could harm our operating results, cause us to fail to meet our financial
reporting obligations, or prevent us from providing reliable and accurate
financial reports or avoiding or detecting fraud. Disclosure of our material
weaknesses, any failure to remediate such material weaknesses in a timely
fashion or having or maintaining ineffective internal controls could cause
investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our stock and our access to
capital.
We
guaranteed the value of our common stock issued in connection with a prior-year
acquisition which resulted in a material cash liability.
Pursuant
to the terms of a 2006 acquisition agreement, we were obligated to compensate
the sellers in cash for the difference between the market price at the time the
shares become saleable and the price at which the shares were valued for
purposes of the acquisition agreement. At the time the shares became
saleable, such obligation amounted to $16.2 million.
During
2007, we issued 197,620,948 shares of our common stock, valued at $9.4 million,
as partial settlement of the $16.2 million obligation, leaving a balance due of
$6.8 million. Also during 2007, we made payments of $500,000 and
negotiated a reduction of $1.8 million in the obligation, leaving a purchase
price guarantee balance due of $4.5 million, the entire balance of which is
currently due and payable. As of December 31, 2009, the parties to whom the
balance is due have not come forward to claim or otherwise resolve the
matter.
All
of our assets are pledged to secure certain debt obligations, which if we fail
to repay, could result in foreclosure upon our assets.
The
repayment of our convertible debentures, issued to YA Global, is secured by
substantially all of our assets. In the event we are unable to repay
the secured convertible debentures, we could lose all of our assets and be
forced to cease our operations. As of December 31, 2008, we received
a waiver from YA Global, of several events of non-compliance related to the
debentures and related financial instruments. On April 6, 2009, in connection
with the amendment of our securities purchase agreement with YA Global, we were
granted additional waivers. In the future we could again become non-compliant
with the provisions of the debentures and there can be no assurance that YA
Global will continue to grant us waivers for past, present or future events of
non-compliance.
There
is limited information upon which investors can evaluate our business because
the physical-world-to-internet market is rapidly changing and
developing.
The
physical-world-to-internet market in which we operate is a rapidly changing and
developing market. Consequently, we have limited operating history
upon which an investor may base an evaluation of our primary business and
determine our prospects for achieving our intended business
objectives. To date, we have had limited sales of our
physical-world-to-internet products. We are prone to all of the risks inherent
to the establishment of any new business venture, including unforeseen changes
in our business plan. An investor should consider the likelihood of
our future success to be highly speculative in light of our limited operating
history in our primary market, as well as the limited resources, problems,
expenses, risks, and complications frequently encountered by similarly situated
companies in new and rapidly evolving markets, such as ours. To address these
risks, we must, among other things:
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maintain
and increase our client base;
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implement
and successfully execute our business and marketing
strategy;
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continue
to develop and upgrade our products;
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continually
update and improve service offerings and features;
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respond
to industry and competitive developments; and
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attract,
retain and motivate qualified
personnel.
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We may
not be successful in addressing these risks. If we are unable to do so, our
business, prospects, financial condition, and results of operations would be
materially and adversely affected.
Our
future success depends on the timely introduction of new products and the
acceptance of these new products in the marketplace.
Rapid
technological change and frequent new product introductions are typical for the
markets we serve. Our future success will depend in large part on
continuous, timely development and introduction of new products that address
evolving market requirements. If we fail to introduce new and innovative
products, we may lose market share to our competitors, which may be difficult to
regain. Any inability, for technological or other reasons, to successfully
develop and introduce new products could materially and adversely affect our
business.
Our
common stock is deemed to be “penny stock” which may make it more difficult for
investors to sell their shares due to suitability requirements.
Our
common stock is deemed to be “penny stock” as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934, as
amended. These requirements may reduce the potential market for our
common stock by reducing the number of potential investors. This may
make it more difficult for investors in our common stock to sell shares to third
parties or to otherwise dispose of them. This could cause our stock
price to decline. Penny stocks are stocks:
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with
a price of less than $5.00 per share;
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that
are not traded on a “recognized” national exchange;
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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
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in
issuers with net tangible assets less than $2 million (if the issuer has
been in continuous operation for at least three years) or $5 million
(if in continuous operation for less than three years), or with average
revenues of less than $6 million for the last three
years.
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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.
Existing
shareholders will experience significant dilution when certain investors
convert their preferred stock to common stock, convert outstanding convertible
debentures to common stock, or when the investors exercise their warrants and
receive common stock under the investment agreement with the
investors.
The
issuance of shares of common stock pursuant to the conversion of our Series C
and D convertible preferred stock, and the conversion of convertible debentures
to common stock, or the exercise of warrants pursuant to our transactions with
YA Global will have a dilutive impact on our stockholders. As a
result, our net earnings per share could decrease in future periods, and the
market price of our common stock could decline. In addition, the lower our
stock price, the more shares of common stock we will have to issue for the
conversion of preferred stock or the convertible debentures. If our stock
price is lower, then existing stockholders would experience greater
dilution.
11
Due
to the accounting treatment of certain convertible preferred stock, warrants and
convertible debenture instruments issued by us, fluctuations in our stock price
could have a material impact on our results of operations.
During
the years ended December 31, 2009 and 2008, the
changes in the fair values of our hybrid financial instruments and derivative
liabilities for our warrants and Series C Convertible Preferred Stock
and debentures totaled a loss of $58.0 million and a gain of $1.2
million, respectively. We adjust the carrying value of these
derivative instruments to market at each balance sheet date. As a
result, we could experience significant fluctuations in our earnings in future
periods from such gains or losses, based on movements in our share
price.
We
are uncertain of the success of our mobile business and the failure of this
business would negatively affect the price of our stock.
We
provide products and services that provide a link from physical objects,
including printed material, to the mobile internet. We can provide no
assurance that our mobile business will ever achieve profitability or that the
products we develop will obtain market acceptance. In the event that our mobile
business never achieves profitability or if our products fail to obtain market
acceptance, our business, prospects, financial condition, and results of
operations would be materially adversely affected.
A
large percentage of our assets are intangible assets, which will have little or
no value if our operations are unsuccessful.
At
December 31, 2009, approximately 79% of our total assets were intangible assets
and goodwill, consisting primarily of rights related to our patents, other
intellectual property, and the excess of the purchase price over the fair value
of tangible assets acquired in our purchase of NeoMedia Europe. If
our operations are unsuccessful, these assets will have little or no value,
which would materially adversely affect the value of our stock and the ability
of our stockholders to recoup their investments in our stock.
We review
our amortizable intangible assets for impairment when events or changes in
circumstances indicate the carrying value may not be recoverable. Goodwill is
required to be tested for impairment at least annually. We may be
required to record a significant charge to earnings in our financial statements
during the period in which any impairment of our goodwill or amortizable
intangible assets is determined, resulting in an impact on results of
operations.
Our
products and services have limited history and may not result in success, which
could have a materially adverse effect on our business.
To date,
we have conducted limited marketing efforts directly relating to our technology
products. Many of our marketing efforts with respect to these
technologies have been largely untested in the marketplace, and may not result
in materially increased sales of these products and services. To penetrate the
markets in which we compete, we expect that we will have to exert significant
efforts to create awareness of, and demand for, our products and services. To
the extent funding is available, we intend to continue to expand our sales and
marketing resources as the market continues to mature. Our failure to further
develop our sales and marketing capabilities and successfully market our
products and services would have a material adverse effect on our business,
prospects, financial condition, and results of operations.
Our internally developed systems are
inefficient and may put us at a competitive disadvantage.
We use
internally developed technologies for a portion of our technologies required to
interconnect our clients’ and customers’ physical-world-to-internet systems and
hardware with our own. As we develop these systems in order to
integrate disparate systems and hardware on a case-by-case basis, these systems
may require a significant amount of customization. Additionally, changes to the
underlying operating systems used by our clients may cause us to expend
resources to update our systems in order to conform to new or upgraded operating
systems. Such client and customer-specific customization, or changes imposed by
upgrades to operating systems, is time consuming and costly and may place us at
a competitive disadvantage when compared with our competitors with more
efficient systems.
12
We
could fail to attract or retain key personnel.
Our
future success will depend in large part on our 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 we have. We may
not be successful in attracting and retaining qualified personnel on a timely
basis, on competitive terms, or at all. Our failure to attract and
retain qualified personnel could have a material adverse effect on our business,
prospects, financial condition, and results of operations.
We
may be unable to protect our intellectual property rights and may be liable for
infringing the intellectual property rights of others.
Our
success in the physical-world-to-internet market is dependent upon our
proprietary technology, including patents and other intellectual property, and
on the ability to protect proprietary technology and other intellectual property
rights. In addition, we must conduct our operations without
infringing on the proprietary rights of third parties. We also intend to rely
upon unpatented trade secrets and the know-how and expertise of our employees,
as well as our patents. To protect our proprietary technology and other
intellectual property, we rely 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. Although we
believe that we have taken appropriate steps to protect our unpatented
proprietary rights, including requiring that our employees and third parties who
are granted access to our proprietary technology enter into confidentiality
agreements, we can provide no assurance that these measures will be sufficient
to protect our rights against third parties. Others may independently
develop or otherwise acquire patented or unpatented technologies or products
similar or superior to ours.
We
license from third parties certain software tools that are included in our
services and products. If any of these licenses were terminated, we could be
required to seek licenses for similar software from other third parties or
develop these tools internally. We 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. We may in
the future be required to defend our 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 us, and a diversion of our
resources. An adverse determination could subject us to significant liabilities
to third parties, require us to seek licenses from, or pay royalties to, third
parties, or require us to develop appropriate alternative technology. Some or
all of these licenses may not be available to us on acceptable terms, or at all,
and we 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 our
business, prospects, financial condition, and results of
operations.
We
are exposed to product liability claims and an uninsured claim could have a
material adverse effect on our business, prospects, financial condition, and
results of operations, as well as the value of our stock.
Many of
our projects are critical to the operations of our clients’ businesses. Any
failure in a client’s information system could result in a claim for substantial
damages against us, regardless of our responsibility for such failure. We could,
therefore, be subject to claims in connection with the products and services
that we sell. We currently maintain product liability
insurance. There can be no assurance that:
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We
have contractually limited our liability for such claims adequately or at
all; or
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We
would have sufficient resources to satisfy any liability resulting from
any such claim.
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The
successful assertion of one or more large claims against us could have a
material adverse effect on our business, prospects, financial condition, and
results of operations.
We
utilize a data center maintained by a third party, which could affect our
ability to support our customers or our financial performance.
Many of
the network services and computer servers utilized by us in our provision of
services to customers are housed in a data center owned by a third-party vendor.
In the future, we may house additional servers and hardware items in facilities
owned or operated by other vendors.
A
disruption in the ability of a data center to provide service to us could cause
a disruption in service to our customers. A data center could be disrupted in
its operations through a number of contingencies, including unauthorized access,
computer viruses, accidental or intentional actions, electrical disruptions, and
other extreme conditions. Although we believe we have taken adequate steps to
protect our operations through our contractual arrangements with our data
center, we cannot eliminate the risk of a disruption in service resulting from
the accidental or intentional disruption in service by a date center. Any
significant disruption could cause significant harm to us, including a
significant loss of customers. In addition, a data center could raise
its prices or otherwise change its terms and conditions in a way that adversely
affects our financial performance or our ability to support our
customers.
13
We
will not pay cash dividends and investors may have to sell their shares in order
to realize their investment.
We have
not paid any cash dividends on our common stock and do not intend to pay cash
dividends in the foreseeable future. We intend to retain future earnings, if
any, for reinvestment in the development and marketing of our products and
services. As a result, investors may have to sell their shares of common stock
to realize their investment.
Some
provisions of our certificate of incorporation and bylaws may deter takeover
attempts, which may limit the opportunity of our stockholders to sell their
shares at a premium to the then-current market price.
Some of
the provisions of our Certificate of Incorporation and bylaws could make it more
difficult for a third party to acquire us, even if doing so might be beneficial
to our stockholders by providing them with the opportunity to sell their shares
at a premium to the then-current market price. On December 10, 1999, our Board
of Directors adopted a stockholders rights plan and declared a non-taxable
dividend of one right to acquire our Series A Preferred Stock, par value $0.01
per share, on each outstanding share of our 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 us and to guard against partial or
two-tiered tender offers, open market accumulations, and other hostile tactics
to gain control of us. The stockholders rights plan was not adopted
in response to any effort to acquire control of us at the time of
adoption. This stockholder rights plan may have the effect of
rendering more difficult, delaying, discouraging, preventing, or rendering more
costly an acquisition of us or a change in control of us. Certain
stockholders, who were our founders, Charles W. Fritz, William E. Fritz and The
Fritz Family Limited Partnership and their holdings, were exempted from the
triggering provisions of our “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, our Certificate of Incorporation authorizes our 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 our Board of Directors, without
further action by stockholders, and may include voting rights, including the
right to vote as a series on particular matters, preferences as to dividends and
liquidation, conversion, redemption rights, and sinking fund
provisions.
We are
authorized to issue a total of 25 million shares of preferred stock, par value
$0.01 per share. The issuance of any preferred stock could have a material
adverse effect on the rights of holders of our common stock, and, therefore,
could reduce the value of shares of our common stock. In addition,
specific rights granted to future holders of preferred stock could be used to
restrict our ability to merge with, or sell our assets to, a third
party. The ability of our 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 us or a change in our
control.
Risks
Relating To Our Industry
The
security of the internet poses risks to the success of our 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 our
physical-world-to-internet business.
14
We
will only be able to execute our physical-world-to-internet business plan if
internet usage and electronic commerce continue to grow.
Our
future revenues and any future profits are substantially dependent upon the
widespread acceptance and use of the internet and camera devices on mobile
telephones. If use of the internet and camera devices on mobile
telephones does not continue to grow or grows more slowly than expected, or if
the infrastructure for the internet and camera devices on mobile telephones does
not effectively support the growth that may occur, or does not become a viable
commercial marketplace, our physical-world-to-internet business, and therefore
our business, prospects, financial condition, and results of operations, could
be materially adversely affected. Rapid growth in the use of, and interest in,
the internet and camera devices on mobile telephones is a recent phenomenon, and
may not continue on a lasting basis. In addition, customers may not adopt, and
continue to use mobile telephones as a medium of information retrieval or
commerce. Demand and market acceptance for recently introduced services and
products over the mobile internet are subject to a high level of uncertainty,
and few services and products have generated profits. For us to be successful,
consumers and businesses must be willing to accept and use novel and cost
efficient ways of conducting business and exchanging information.
In
addition, the public in general may not accept the use of the internet and
camera devices on mobile telephones as a viable commercial or information
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. To the extent that mobile
phone internet usage continues to experience significant growth in the number of
users, their frequency of use, or in their bandwidth requirements, the
infrastructure for the mobile internet may be unable to support the demands
placed upon it. In addition, the mobile internet and mobile interactivity could
lose its viability due to delays in the development or adoption of new standards
and protocols required to handle increased levels of mobile internet activity,
or due to increased governmental regulation. Significant issues concerning the
commercial and informational use of the mobile internet, and online network
technologies, including security, reliability, cost, ease of use, and quality of
service, remain unresolved and may inhibit the growth of internet business
solutions that utilize these technologies. Changes in, or insufficient
availability of, telecommunications services to support the internet, the web or
other online services also could result in slower response times and adversely
affect usage of the internet, the web and other online networks generally and
our physical-world-to-internet product and networks in particular.
We
may not be able to adapt as the internet, physical-world-to-internet, and
customer demands continue to evolve.
We may
not be able to adapt as the mobile internet and physical-world-to-internet
markets and consumer demands continue to evolve. Our failure to respond in a
timely manner to changing market conditions or client requirements would have a
material adverse effect on our business, prospects, financial condition, and
results of operations. The mobile internet and
physical-world-to-internet markets are characterized by:
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rapid
technological change;
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changes
in user and customer requirements and preferences;
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frequent
new product and service introductions embodying new technologies;
and
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the
emergence of new industry standards and practices that could render
proprietary technology and hardware and software infrastructure
obsolete.
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Our
success will depend, in part, on our ability to:
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enhance
and improve the responsiveness and functionality of our products and
services;
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license
or develop technologies useful in our business on a timely
basis;
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enhance
our existing services, and develop new services and technologies that
address the increasingly sophisticated and varied needs of our prospective
or current customers; and
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respond
to technological advances and emerging industry standards and practices on
a cost-effective and timely basis.
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We
may not be able to compete effectively in markets where our competitors have
more resources.
Although
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 us. We believe that competition will intensify and increase in the near
future. Our target market is rapidly evolving and is subject to continuous
technological change. As a result, our 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 our business, prospects, financial
condition, and results of operations.
Some of
our competitors have longer operating histories, larger customer bases, longer
relationships with clients, and significantly greater financial, technical,
marketing, and public relations resources than we do. We may not
successfully compete in any market in which we conduct or may conduct
operations. We may not be able to penetrate markets or market our
products as effectively as our better-funded, more-established
competitors.
15
In
the future, there could be government regulations and legal uncertainties that
could harm our business.
Any new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the internet and other online
services, could have a material adverse effect on our business, prospects,
financial condition, and results of operations. Due to the increasing popularity
and use of the internet, the web and other mobile and online services, federal,
state, and local governments in the United States, Europe, several Latin
American countries or other foreign governments may adopt laws and regulations,
or amend existing laws and regulations, with respect to the internet or other
online services covering issues such as taxation, user privacy, pricing,
content, copyrights, distribution, and characteristics and quality of products
and services. The growth and development of the market for electronic commerce
may prompt calls for more stringent consumer protection laws to impose
additional burdens on companies conducting business online. The adoption of any
additional laws or regulations may decrease the growth of the internet, the web
mobile telecommunications or other online services, which could, in turn,
decrease the demand for our services and increase our cost of doing business, or
otherwise have a material adverse effect on our business, prospects, financial
condition, and results of operations. Moreover, the relevant governmental
authorities have not resolved the applicability to the internet, the web and
other online services of existing laws in various jurisdictions governing issues
such as property ownership and personal privacy and it may take time to resolve
these issues definitively.
Certain
of our proprietary technology allow for the storage of demographic data from our
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 our ability to collect and
use information collected by our 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. We
could incur significant additional expenses if new regulations regarding the use
of personal information are introduced or if our privacy practices are
investigated.
ITEM
1B. Unresolved Staff Comments
None.
ITEM
2. Properties
As of
December 31, 2009, we had leases on two facilities, our corporate headquarters
in Atlanta, Georgia, and NeoMedia Europe’s office in Würselen,
Germany.
Our
principal executive, development and administrative office is located in
Atlanta, Georgia. We occupy approximately 10,000 square feet under a
written sublease from an unaffiliated party which expires on September 29, 2011,
with monthly rent of approximately $16,000. On March 6, 2010 we entered into a
sub-sublease with an unaffiliated party in which we have leased to them
approximately 6,400 square feet of our space for approximately $8,000 per month.
Our net rental obligation under these agreements is therefore approximately
$8,000, per month through the expiration of our sublease term.
NeoMedia
Europe operates from a facility in Würselen, Germany, where approximately 4,400
square feet are leased under the terms of a written lease which expires on
September 30, 2010, with monthly rent of approximately $6,000.
ITEM
3. Legal proceedings
We are
involved in various legal actions arising in the normal course of business, both
as claimant and defendant. Although it is not possible to determine with
certainty the outcome of these matters, it is the opinion of management that the
eventual resolution of the following legal actions is unlikely to have a
material adverse effect on our financial position or operating
results.
Ephrian Saguy,
iPoint – media, plc. and iPoint – media, Ltd. – On or around March 5,
2008, we received a summons and notice that the plaintiffs had commenced a third
party action in the Magistrate Court in Tel-Aviv-Jaffa, Israel seeking damages
from us and YA Global for breach of contract and unjust enrichment related to
services provided by iPoint and investment in us by YA Global. We have entered
into an assignment agreement with YA Global and have retained legal counsel in
Israel to represent us. The Company plans to vigorously defend this
lawsuit.
16
Rothschild Trust
Holdings, LLC – On September 19, 2008, we received a complaint filed in
the Circuit Court of the Eleventh Judicial Circuit, in and for Miami-Dade
County, Florida, by Rothschild Trust Holding, LLC alleging we owed royalty
payments for the use of certain patents. On February 25, 2009, we filed an
answer to the complaint. On July 20, 2009 we entered into non-binding mediation
and an interim agreement which required us to provide documentation for review
by Rothschild Trust Holding, LLC. The non-binding mediation and
interim agreement did not settle the matter. On January 4, 2010, we filed a
motion for summary judgment seeking to terminate the litigation. We believe the
complaint is without merit and we intend to vigorously defend against
it.
The Hudson
Consulting Group, LLC. – On June 30, 2009, we received from the Superior
Court of Fulton County, in the State of Georgia a Notice of Filing of Foreign
Judgment in favor of The Hudson Consulting Group, LLC, related to the judgment
granted against us by the Superior Court, Judicial District of Middlesex, in the
State of Connecticut, granted on August 22, 2008. In this judgment
Hudson sought to collect disputed fees related to their recruiting services. The
Notice of Filing seeks to collect on the judgment of approximately $61,000 which
was granted in Connecticut. We are seeking to settle this matter.
ITEM
4. (Removed and Reserved)
PART
II
ITEM
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
Market
Information
Our
common shares trade on the Over-The-Counter Bulletin Board (“OTCBB”) under the
symbol “NEOM.OB”. As of December 31, 2009, we had 2,267,567,835 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
OTCBB:
High
|
Low
|
|||||||
2010:
|
||||||||
First
quarter (to March 22, 2010)
|
$ | 0.0114 | $ | 0.0045 | ||||
2009:
|
||||||||
Fourth
quarter
|
$ | 0.0237 | $ | 0.0079 | ||||
Third
quarter
|
$ | 0.0174 | $ | 0.0040 | ||||
Second
quarter
|
$ | 0.0321 | $ | 0.0122 | ||||
First
quarter
|
$ | 0.0370 | $ | 0.0012 | ||||
2008:
|
||||||||
Fourth
quarter
|
$ | 0.0030 | $ | 0.0011 | ||||
Third
quarter
|
$ | 0.0109 | $ | 0.0020 | ||||
Second
quarter
|
$ | 0.0075 | $ | 0.0020 | ||||
First
quarter
|
$ | 0.0130 | $ | 0.0065 |
17
The
following table presents certain information with respect to our equity
compensation plans as of December 31, 2009:
Number of
|
||||||||||||
securities remaining
|
||||||||||||
Number of securities
|
available for future
|
|||||||||||
to be issued
|
Weighted-average
|
issuance under equity
|
||||||||||
upon exercise of
|
exercise price of
|
compensation plans
|
||||||||||
outstanding options,
|
outstanding options,
|
(excluding securities
|
||||||||||
warrants and rights
|
warrants and rights
|
reflected in column (a))
|
||||||||||
Plan Category
|
(a)
|
(b)
|
(c)
|
|||||||||
Equity
compensation plans
|
||||||||||||
approved
by security holders
|
94,561,241 | $ | 0.02 | 105,862,910 | ||||||||
Equity
compensation plans
|
||||||||||||
not
approved by security holders
|
- | - | - | |||||||||
Total
|
94,561,241 | $ | 0.02 | 105,862,910 |
We have
five stock option plans - the 2005 Stock Option Plan; the 2003 Stock Option
Plan; the 2003 Stock Incentive Plan; the 2002 Stock Option Plan; and the 1998
Stock Option Plan. Options issued under these Option Plans have a term of 10
years. Options may be granted with any vesting schedule as approved
by the stock option committee, but generally the vesting periods range from
immediate vesting to 5 years. Common shares required to be issued on
the exercise of stock options would be issued from our authorized and unissued
shares.
Performance
Graph
We are a
“smaller reporting company” as defined by Regulation S-K and, as such, are not
required to provide this information.
Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
On April
20, 2009 we issued 16.5 million shares of our common stock to GZ Paul
Management Services, GMBH in final settlement of the outstanding balance due to
the sellers for our purchase of NeoMedia Europe. The shares were valued at
$0.02565 per share, which was 95% of the fair value at the time of
issuance.
We relied
upon the exemption provided in Section 4(2) of the Securities Act and/or Rule
506, which cover “transactions by an issuer not involving any public offering”
to issue securities discussed above without registration under the Securities
Act. The certificates representing the securities issued displayed a restrictive
legend to prevent transfer except in compliance with applicable laws, and our
transfer agent was instructed not to permit transfers unless directed to do so
by us, after approval by our legal counsel. We believe that the investors to
whom securities were issued had such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of the
prospective investment. We also believe that the investors had access to the
same type of information as would be contained in a registration
statement.
On
January 5, 2010, we filed with the Secretary of State of the State of Delaware a
Certificate of Designation of Series D Convertible Redeemable Preferred Stock.
On January 7, 2010, we filed an amendment with the Secretary of State of the
State of Delaware to include certain registration rights in connection with the
Series D Convertible Redeemable Preferred Stock. On March 5, 2010, we filed an
additional amendment with the Secretary of State of the State of Delaware to
amend the voting rights of the Series D Convertible Redeemable Preferred Stock.
By the approval and filing, 25,000 shares were designated as Series D
Convertible Preferred Stock were issued to YA Global. The gross amount of this
transaction was $2.5 million and we received net proceeds of $1.9 million, net
of $100,000 in transaction fees and the redemption of $500,000 in short term
notes payable to YA Global. Our Series D Convertible Preferred Stock, par value
$0.01 per share, has the following rights:
|
·
|
The
Series D Convertible Preferred shares are entitled to dividends at a rate
of 8% per annum, if, as and when declared by the Board of
Directors.
|
|
·
|
Series
D Convertible Preferred shares receive proceeds of $100 per share upon our
liquidation, dissolution or winding
up;
|
18
|
·
|
Each
of Series D Convertible Preferred shares is convertible, at the option of
the holder, into shares of our common stock at the lesser of (i)
$0.02 or (ii) 97% of the lowest closing bid price of our common
stock for the 125 trading days immediately preceding the date of
conversion; and
|
|
·
|
Series
D Convertible Preferred shares have voting rights on an as-converted basis
with the common stock. Each
share of our Series D Convertible Preferred shares can vote 100,000 votes.
Thus, the 25,000 share issued allow YA Global to vote a total of 2.5
billion votes.
|
Holders
On March
22, 2010 the closing price of our common stock as reported on the OTCBB was
$0.0054 per share and there were approximately 370 shareholders of
record. The number of record holders does not include beneficial
owners of common stock whose shares are held in the names of banks, brokers,
nominees or other fiduciaries.
Dividends
We have
not declared or paid any cash dividends and do not foresee paying any cash
dividends in the foreseeable future.
ITEM
6. Selected Financial Data
We are a
“smaller reporting company” as defined by Regulation S-K and, as such, are not
required to provide this information.
ITEM 7. Management‘s Discussion and Analysis
of Financial Condition and Results of Operations
Overview
NeoMedia
provides the infrastructure to make mobile barcode scanning and its associated
commerce easy, universal, and reliable – worldwide. Our barcode ecosystem
products, including NeoReader, our mobile barcode reading software, read and
transmit data from 2D barcodes to its intended destination. Our Code Management
(NeoSphere) and Code Clearinghouse (NeoRouter) platforms create, connect,
record, and transmit the transactions embedded in the barcodes, like web-URLs,
text messages (SMS), and telephone calls, ubiquitously and
reliably.
In order
to provide complete mobile marketing solutions, we also offer barcode scanning
hardware that reads barcodes displayed on mobile phone screens or printed media.
We also provide infrastructure solutions to enable mobile ticketing and
couponing programs – including scanner hardware and system support software for
seamless implementation.
Our technology
is supported by our patents. In addition, we have an open standards philosophy
designed to make integration and use of the technology easy for handset
manufacturers, mobile operators and advertisers; and the user experience safe,
reliable and interoperable for consumers.
In 2007,
we completed the divestiture of our non-core businesses in order to focus our
efforts on the area that we believe will deliver the most value - our
barcode-reading business and the related intellectual property. A major
goal of ours is to provide the industrial and carrier-grade infrastructure to
enable reliable, scalable and billable commerce that is customer-focused and
drives revenue growth.
During
2008 and early 2009, we made significant changes to strengthen our management
team. In June 2008, Mr. Iain A. McCready became our Chief Executive Officer and
Chairman of our Board of Directors; in September 2008, Mr. Michael W. Zima
became our Chief Financial Officer and Secretary; in January 2009, Ms. Laura
Marriott became a Member of our Board of Directors; and in March 2009, Mr. Dean
Wood became our Vice President - Business Development.
During
2009 and early 2010, we have taken steps to build on the developing ecosystem
based on the strengths of our patent portfolio. To accomplish this, we have
entered into several licensing programs and resolved a significant outstanding
legal matter.
19
On July
28, 2009, we entered into a non-exclusive patent licensing agreement with Mobile
Tag, Inc. for machine readable mobile codes under our patent portfolio. Under
the terms of that agreement, we will receive a percentage of revenue generated
by Mobile Tag through the use and licensing of our patent
portfolio.
On
October 2, 2009, we entered into a four year agreement with Neustar, Inc.
in which we granted to Neustar a non-exclusive license to a portion of our
patent portfolio primarily for the purpose of establishing and providing
registry and clearinghouse services within a defined field of use and geographic
territory. The terms of the license also granted to Neustar an exclusive right
to grant to third parties royalty-bearing sub-licenses for the use of the same
portion of our patent portfolio within the defined field of use and geographic
territory. The license permits Neustar to grant sub-licenses for a period
of not less than one year, and up to a maximum of four years depending on the
achievement, by Neustar of certain milestones as set forth in the license
agreement. In addition, Neustar will perform certain reservations,
administration, billing and collection and other additional services for our
benefit as well as for the benefit of Neustar and the sub-licensees. On January
22, 2010 we amended this agreement to further expand our opportunities by
including several of our Mexican patents and expanding the geographical
territory covered by this agreement to include Mexico.
On
October 7, 2009, we entered into a four year agreement with Brand Extension
Mobile Solutions, S.A., a Madrid (Spain) corporation (“BEMS”), in which
we granted to BEMS a royalty-bearing, and non-exclusive license to use the
licensed platform in an approved field of use within a certain geographical
territory. The licensed platform will support BEMS’s performance of exclusive
commercial operations under a particular cooperation agreement between BEMS and
Telefónica Internacional, S.A.U., a subsidiary of Spain’s Telefonica S.A., one
of the world’s largest telecommunication companies. BEMS intends to use us as
their prime vendor in connection with their agreement with Telefónica. The
license agreement grants to BEMS the right to distribute our barcode reading
software via download or through its inclusion in mobile devices. The license
agreement also requires BEMS to purchase twenty-five of our barcode scanning
hardware products to support testing and marketing of barcode and mobile barcode
based ticketing and couponing activities.
On
October 16, 2009, we entered into a ten year settlement and license agreement
with Scanbuy, Inc., in which we and Scanbuy settled all of our pending
litigation against each other and granted non-exclusive licenses and a
sublicense to each other. Pursuant to the terms of the agreement, we granted to
Scanbuy a royalty-bearing, non-exclusive license to use a portion of the
Company’s patent portfolio within a defined field of use and geographic
territory.
On
November 27, 2009 we entered into an agreement with Sony Ericsson Mobile
Communications, AB, through which they have selected NeoMedia as their strategic
2D barcode partner. Sony Ericsson will begin shipping phones pre-loaded with our
NeoReader barcode scanning application globally in the 1st half of 2010. The
NeoReader will be pre-installed across all Sony Ericsson platforms.
On
February 12, 2010 we entered into and agreement with Neustar to participate in
and to facilitate a leadership role in the 2010 Neustar Mobile Codes Pilot
Program. The Program will combine all of the elements required to fulfill our
goal of a seamless and interoperable barcode ecosystem and will allow
advertisers to test the market and technology.
Critical
Accounting Policies and Estimates
This
discussion and analysis of financial condition and results of operations has
been prepared by management based on our consolidated financial statements,
which have been prepared in accordance with US GAAP. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues, and
expenses, and related disclosure of contingent assets and liabilities. On an
ongoing basis, management evaluates our critical accounting policies and
estimates, including those related to revenue recognition, valuation of accounts
receivable, property and equipment, long-lived assets, intangible assets,
derivative liabilities and contingencies. Estimates are based on
historical experience and on various assumptions believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. These judgments and estimates affect the reported
amounts of assets and liabilities and the reported amounts of revenue and
expenses during the reporting periods.
We
consider the following accounting policies important in understanding our
operating results and financial condition.
20
|
·
|
Intangible
Asset Valuation – The determination of the fair value of certain
acquired assets and liabilities is subjective in nature and often involves
the use of significant estimates and assumptions. Determining the fair
values and useful lives of intangible assets especially requires the
exercise of judgment. Although there are a number of different
generally accepted valuation methods to estimate the value of intangible
assets acquired, we primarily use the weighted-average probability method
outlined in FASB ASC Topic 360, Property, Plant, and
Equipment. This method requires significant management
judgment to forecast the future operating results used in the analysis. In
addition, other significant estimates are required such as residual growth
rates and discount factors. The estimates we have used are consistent with
the plans and estimates that we use to manage our business, based on
available historical information and industry averages. The judgments made
in determining the estimated useful lives assigned to each class of assets
acquired can also significantly affect our net operating
results.
|
According
to FASB ASC 360, a long-lived asset should be tested for recoverability whenever
events or changes in circumstances indicate that its carrying amount may not be
recoverable. We follow the two-step process outlined in FASB ASC 360 for
determining if an impairment charge should be taken: (1) the expected
undiscounted cashflows from a particular asset or asset group are compared to
the carrying value; if the expected undiscounted cashflows are greater than the
carrying value, no impairment is recognized, but if the expected undiscounted
cashflows are less than the carrying value, then (2) an impairment charge is
recognized for the difference between the carrying value and the expected
discounted cashflows. The assumptions used in developing expected
cashflow estimates are similar to those used in developing other information
used by us for budgeting and other forecasting purposes. In instances
where a range of potential future cashflows is possible, we use a
probability-weighted approach to weigh the likelihood of those possible
outcomes. In such instances, we use a discount rate equal to the
yield on zero-coupon treasury instruments with a life equal to the expected life
of the assets being tested.
|
·
|
Derivative
Financial Instruments – We generally do not use derivative
financial instruments to hedge exposures to cash-flow risks or
market-risks. However, certain financial instruments, such as warrants and
the embedded conversion features of our convertible preferred stock and
convertible debentures, which are indexed to our common stock, are
classified as liabilities when either (a) the holder possesses rights to
net-cash settlement or (b) physical or net-share settlement is not within
our control. In such instances, net-cash settlement is assumed
for financial accounting and reporting purposes, even when the terms of
the underlying contracts do not provide for net-cash
settlement. Derivative financial instruments are initially
recorded, and continuously carried, at fair
value.
|
Determining
the fair value of these complex derivative financial instruments involves
judgment and the use of certain relevant assumptions including, but not limited
to, interest rate risk, credit risk, equivalent volatility and
conversion/redemption privileges. The use of different assumptions
could have a material effect on the estimated fair value amounts.
For
certain of our convertible debentures, we have elected not to separately account
for the embedded conversion feature as a derivative instrument but to account
for the entire hybrid instrument at fair value in accordance with FASB ASC Topic
815, Derivatives and
Hedging. For the remaining convertible debentures and our
convertible preferred stock, the underlying instruments are carried at amortized
cost and the embedded conversion feature is accounted for separately at fair
value in accordance with FASB ASC 815-40-05 and FASB ASC 815-40-15.
Financial
Instruments and Concentrations of Credit Risk – Our financial instruments
include cash and cash equivalents, accounts receivable, the cash surrender value
of life insurance policies, accounts payable, accrued expenses, our accrued
purchase price guarantee obligation, notes payable, and other current
liabilities. For these financial instruments, we believe the carrying values
approximate their fair values due to their short-term
nature.
Certain
of our convertible debentures are recognized as hybrid financial instruments and
are carried in their entirety at fair value in accordance with FASB ASC 815. At
December 31, 2009 and 2008, the fair value of these debentures of $37.7 and
$19.9 million, respectively, exceeded their face amount of $10.9 million by
$26.8 and $9.0 million, respectively. Outstanding common stock warrants that are
accounted for as derivative liabilities are also carried at fair
value.
21
Our
Series C convertible preferred stock and most of our convertible debentures are
carried at amortized cost, with separate recognition of the fair value of any
embedded derivative instrument liabilities, including the conversion
feature. The following table compares the fair values of these instruments
with the aggregate of the amortized cost and separately recognized fair value of
the embedded derivative instrument liabilities, at which they are carried in our
balance sheet:
December
31, 2009
|
December
31, 2008
|
|||||||||||||||
Fair
|
Carrying
|
Fair
|
Carrying
|
|||||||||||||
Value
|
Value
|
Value
|
Value
|
|||||||||||||
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
Series
C Convertible Preferred Stock
|
$ | 23,488 | $ | 25,039 | $ | 30,039 | $ | 29,872 | ||||||||
August
24, 2006
|
16,309 | 19,131 | 9,127 | 12,260 | ||||||||||||
December
29, 2006
|
8,154 | 9,426 | 5,860 | 6,056 | ||||||||||||
July
10, 2008
|
497 | 464 | 248 | 267 | ||||||||||||
July
29, 2008
|
7,105 | 6,727 | 3,782 | 4,112 | ||||||||||||
October
28, 2008
|
7,032 | 6,724 | 3,716 | 4,060 | ||||||||||||
May
1, 2009
|
1,307 | 700 | - | - | ||||||||||||
June
5, 2009
|
2,112 | 1,481 | - | - | ||||||||||||
July
15, 2009
|
1,566 | 1,309 | - | - | ||||||||||||
August
14, 2009
|
1,386 | 1,149 | - | - | ||||||||||||
Total
|
$ | 68,956 | $ | 72,150 | $ | 52,772 | $ | 56,627 |
|
·
|
Revenue
Recognition – We derive revenues from the
following sources: (1) license fees relating to patents and
internally-developed software, and (2) hardware, software, and service
revenues related to mobile marketing campaign design and
implementation.
|
|
o
|
License
fees, including intellectual property licenses, represent revenue from the
licensing of our proprietary software tools and application
products. We license our development tools and application products
pursuant to non-exclusive and non-transferable license
agreements. The basis for license fee revenue recognition is
substantially governed by FASB ASC 985-605 Software Revenue
Recognition. License revenue is recognized if
persuasive evidence of an agreement exists, delivery has occurred,
pricing is fixed and determinable, and collectability is reasonably
assured. We defer revenue related to license fees for which amounts
have been collected but for which the above criteria have not been met,
and recognize that revenue when the criteria are
met.
|
|
o
|
Hardware,
software and service revenue, which includes sales of software and
technology equipment and service fees, is recognized based on
guidance provided in FASB ASC 650-10-S99, “Revenue Recognition in
Financial Statements”. Software and technology equipment resale
revenue is recognized when persuasive evidence of an arrangement
exists, the price to the customer is fixed and determinable, delivery of
the service has occurred and collectability is reasonably
assured. Service revenues, including maintenance fees for
providing system updates for software products, user documentation and
technical support, are recognized over the life of
the contract. We defer revenue related to technology service and
product revenue for which amounts have been invoiced and or collected but
for which the requisite service has not been provided. Revenue
is then recognized over the matching service
period.
|
|
·
|
Valuation
of Accounts Receivable – Judgment is required when we assess the
likelihood of ultimate realization of recorded accounts receivable,
including assessing the likelihood of collection and the credit worthiness
of customers. If the financial condition of our customers were
to deteriorate or their operating climate were to change, resulting in an
impairment of either their ability or willingness to make payments, an
increase in the allowance for doubtful accounts would be
required. Similarly, a change in the payment behavior of
customers generally may require an adjustment in the calculation of an
appropriate allowance. Each month we assess the collectability
of specific customer accounts, the aging of accounts receivable, our
history of bad debts, and the general condition of the
industry. If a major customer’s credit worthiness deteriorates,
or our customers’ actual defaults exceed historical experience, our
estimates could change and impact our reported results. At December 31,
2009 and 2008, we concluded that no allowance for doubtful accounts was
required. For the years ended December 31, 2009 and 2008, our bad debt
expense (recovery) was $9,000 and ($58,000),
respectively.
|
22
|
·
|
Inventory –
Inventories are stated at the lower of cost (using the first-in,
first-out method) or market. We continually evaluate the composition of
our inventories assessing slow-moving and ongoing products and maintain a
reserve for slow-moving and obsolete inventory as well as related disposal
costs. As of December 31, 2009 and 2008, we had recorded
reserves for inventory shrinkage and obsolescence of $136,000 and $81,000,
respectively.
|
|
·
|
Stock-based
Compensation – We record stock-based compensation in accordance
with FASB ASC 718, Compensation-Stock
Compensation, which requires measurement of all employee
stock-based compensation awards using a fair-value method and the
recording of such expense in the consolidated financial
statements. We use the Black-Scholes-Merton option pricing
model and recognize compensation cost on a straight-line basis over the
vesting periods of the awards. Inherent in this model are
assumptions related to expected stock-price volatility, option life,
risk-free interest rate and dividend
yield.
|
Although
the risk-free interest rate and dividend yield are less subjective assumptions,
typically based on factual data derived from public sources, the expected
stock-price volatility, forfeiture rate and option life assumptions require a
greater level of judgment which make them critical accounting
estimates. We use an expected stock-price volatility assumption that
is based on historical volatilities of our stock, and estimate the forfeiture
rates and option life based on historical data of prior
options. Because these assumptions are based on historical
information, actual future expenses may differ materially from the current
estimates which are based on these assumptions.
|
·
|
Contingencies
– We are subject to proceedings, lawsuits and other claims related
to lawsuits and other regulatory proceedings that arise in the ordinary
course of business. We are required to assess the likelihood of
any adverse judgments or outcomes of these matters as well as potential
ranges of possible losses. A determination of the amount of the
loss accrual required, if any, for these contingencies, is made after
careful analysis of each individual issue. We generally accrue
attorney fees and interest in addition to an estimate of the expected
liability. We consult with legal counsel and other experts when
necessary to assess any contingencies. The required accrual may
change in the future due to new developments in each matter or changes in
approach such as a change in settlement strategy in dealing with these
matters.
|
|
·
|
Income Tax
Valuation Allowance – Deferred tax
assets are reduced by a valuation allowance when, in the opinion of our
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. We have recorded a 100%
valuation allowance as December 31, 2009 and
2008.
|
|
·
|
Foreign
Currency Translation – The U.S. dollar is the functional currency
of our operations, except for our operations at NeoMedia Europe, which use
the Euro as their functional currency. Foreign currency
transaction gains and losses are reflected in income. Translation gains
and losses arising from translating the financial statements of NeoMedia
Europe into U.S. dollars for reporting purposes are included in
“Accumulated other comprehensive income
(loss).”
|
Discontinued
Operations
Prior to
2008, we discontinued certain operations. In accordance with FASB ASC 360, our
consolidated financial information presents the net effect of discontinued
operations separately from the results of our continuing operations. During
2008, we recognized a loss from discontinued operations of approximately
$323,000, for various incidental and wind-down expenses related to NeoMedia
Micro Paint Repair ($259,000) and 12Snap ($64,000).
At
December 31, 2009, we have a continuing purchase price obligation of $4.5
million related to our original purchase of 12Snap.
23
Results
of Continuing Operations
The
following table sets forth certain data derived from our consolidated statements
of operations:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Revenues
|
$ | 1,662 | $ | 1,046 | ||||
Cost
of revenues
|
1,557 | 1,257 | ||||||
Gross
profit (deficit)
|
105 | (211 | ) | |||||
Sales
and marketing expenses
|
809 | 2,177 | ||||||
General
and administrative expenses
|
3,942 | 5,406 | ||||||
Research
and development costs
|
1,381 | 1,997 | ||||||
Impairment
of investment
|
261 | 271 | ||||||
Operating
loss
|
(6,288 | ) | (10,062 | ) | ||||
Gain
on extinguishment of debt
|
- | 2,405 | ||||||
Gain
(loss) from change in fair value of hybrid financial
instruments
|
(17,786 | ) | 3,562 | |||||
Gain
(loss) from change in fair value of derivative liability -
warrants
|
(8,723 | ) | 4,416 | |||||
Gain
(loss) from change in fair value of derivative liability - Series C
preferred stock and debentures
|
(31,442 | ) | (6,755 | ) | ||||
Interest
expense related to convertible debt
|
(3,139 | ) | (1,262 | ) | ||||
Loss
from continuing operations
|
$ | (67,378 | ) | $ | (7,696 | ) | ||
Loss
per share from continuing operations, basic and diluted
|
$ | (0.03 | ) | $ | (0.01 | ) |
Revenues
|
||||||||
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Hardware
|
$ | 881 | $ | 320 | ||||
Lavasphere
|
167 | 153 | ||||||
Barcode
ecosystem
|
9 | - | ||||||
Patent
licensing
|
313 | 52 | ||||||
Legacy
products
|
270 | 345 | ||||||
Other
|
22 | 176 | ||||||
Total
revenues
|
$ | 1,662 | $ | 1,046 |
Year
Ended December 31, 2009 Compared With the Year Ended December 31,
2008
Revenues.
Revenues for 2009 were $1.7 million, an increase of $616,000, or 59%,
from $1.0 million for the year ended December 31, 2008. Our revenues and product
mix have changed as a result of changes in our operations and business strategy.
For 2009, our hardware product sales were $881,000, an increase of 175%, from
$320,000 for 2008. During 2009, we introduced our newest barcode scanners and
sold significant quantities of our older models. Our hardware products tend to
be sold in large transactions and revenues can fluctuate significantly from
period to period. For 2009, our Lavasphere product sales were $167,000, an
increase of 9% from $153,000 for 2008, as a result of modest increased demand
for these products and services. In 2009, we introduced our barcode ecosystem
products and, during the year recognized $9,000 of revenue for these
products, as well as $313,000 of revenue for the related platform licensing and
patent licensing agreements. In succeeding quarters, we expect these revenues to
increase as we shift the focus of our efforts toward the barcode ecosystem. We
believe this focus will deliver the most value in the future. During 2009 we
disposed of our legacy software products. However, we retained a share of those
products’ future revenues. Accordingly, we expect these revenues to continue at
reduced levels.
24
Cost of
Revenues. Cost of revenues was
$1.6 million for 2009, compared with $1.3 million for 2008, an increase of
$300,000, or 24%. Cost of revenues for NeoMedia Europe, related to our hardware
products, was $613,000 and $286,000 in 2009 and 2008, respectively. Amortization
costs related to our patents and the proprietary software of NeoMedia Europe
were $944,000 and $1.0 million for 2009 and 2008, respectively.
Sales and
Marketing.
Sales and marketing expenses were $809,000 for 2009, compared with $2.2
million for 2008, a decrease of $1.4 million or 63%. We scaled back our sales
and marketing efforts in 2009 while we were reorganizing our business strategy
to focus on our core technology. Sales and marketing expenses also decreased as
a result of reduced stock-based compensation expense of $42,000 in 2009,
compared with $781,000 in 2008.
General and
Administrative. General and administrative expenses were $3.9
million for 2009, compared with $5.4 million for 2008, a decrease of $1.5
million or 27%. Expenses decreased as a result of decreased staffing and
reductions in the compensation levels of the remaining employees consistent with
the reorganization of our business strategy and the reduction in our
professional fees consistent with the simplifying of our operations after we
discontinued our non-core business in prior years. General and administrative
expenses also decreased as a result of reduced stock-based compensation expense
of $304,000 in 2009, compared with $780,000 in 2008.
Research and
Development.
In 2009, expenses for research and development were $1.4 million,
compared with $2.0 million for 2008, a decrease of $616,000 or 31%. Research and
development decreased as we completed the development of our upgraded hardware
products and our barcode ecosystem products. Research and development expenses
also decreased as a result of reduced stock-based compensation expense of
$11,000 in 2009, compared with $235,000 for 2008.
Impairment of
Investment. In 2009, we wrote off
the remaining carrying value of our investment in Sponge of $261,000 and in
2008, we wrote off our remaining investment of $271,000 in our former automobile
painting business.
Loss from
Operations.
In 2009, our loss from operations was reduced to $6.3 million, from $10.1
million in 2008. This improvement of $3.8 million was primarily the result of
reductions in our sales and marketing expenses of $1.4 million, general and
administrative expenses of $1.5 million, research and development expenses of
$616,000 and an increase in our gross profit margin of $316,000.
Gain on
Extinguishment of Debt. As of December 31,
2008, we obtained a waiver from YA Global, waiving all outstanding events of
non-compliance or default related to our Series C convertible preferred stock
and convertible debentures. The waiver effectively eliminated default interest
and liquidated damages due related to certain of the instruments and, as a
result, reduced our future anticipated cash flows related to those
instruments. Because that reduction exceeded the threshold prescribed
by FASB ASC 470-50, Debt
Modifications and Extinguishments, the modification of the amounts due
under these instruments was accounted for as an extinguishment and we recognized
a gain in 2008 of $2.4 million.
Gain (Loss) from
Change in Fair Value of Hybrid Financial Instruments. We
carry certain of our convertible debentures at fair value, in accordance with
FASB ASC 815-15-25, and do not separately account for the embedded conversion
feature. The change in the fair value of these liabilities includes
changes in the value of the interest due under these instruments, as well as
changes in the fair value of the common stock underlying the instruments. In
2009, the liability related to these hybrid instruments increased resulting
in a loss of $17.8 million. In 2008, the liability related to these hybrid
instruments decreased resulting in a gain of $3.6 million. These fair value
changes were primarily the result of fluctuations in the value of our common
stock during the period. Because our stock price has been volatile and
because many of our hybrid financial instruments include relatively low fixed
conversion prices, it is possible that further increases in the market price of
our stock could cause the fair value of our hybrid financial instruments to
increase significantly in future periods.
Gain (Loss) from
Change in Fair Value of Derivative Liabilities - Warrants. We account for our
outstanding common stock warrants that were issued in connection with the
preferred stock and our debentures, at fair value. In 2009, the liability
related to warrants increased resulting in a loss of $8.7 million. In 2008,
the liability related to warrants decreased resulting in a gain of $4.4 million.
These fair value changes were primarily the result of fluctuations in the value
of our common stock during the period. Because our stock price has been volatile
and because many of our warrants include relatively low fixed exercise prices it
is possible that further increases in the market price of our common stock could
cause the fair value of our warrants to increase significantly in future
periods.
25
Gain (Loss) from
Change in Fair Value of Derivative Liabilities - Series C Preferred Stock and
Debentures. For our Series C convertible preferred stock, and certain of
our convertible debentures, we account for the embedded conversion feature
separately as a derivative financial instrument. We carry these
derivative financial instruments at fair value. In both 2009 and 2008, the
liability related to the derivative instruments embedded in the Series C
preferred stock and these debentures increased resulting in losses of $31.4
million and $6.8 million, respectively. These fair value changes were primarily
the result of fluctuations in the value of our common stock during the period.
Because our stock price has been volatile and because many of our derivative
financial instruments include relatively low fixed conversion prices, it is
possible that further increases in the market price of our common stock could
cause the fair value of our derivative financial instruments to increase
significantly in future periods.
Interest Expense
related to Convertible Debt. Interest expense related to convertible
debentures that are carried at amortized cost and which are not carried as
hybrid financial instruments at fair value was $3.1 million and $1.3 million in
2009 and 2008, respectively. The
increase in interest expense reflects the fact that interest on these debentures
is recognized using an effective interest method, which increases the cost over
time, as well as the cost associated with the additional debentures issued in
2009.
Loss from
Continuing Operations. As a result of the
above, our loss from continuing operations was increased by $59.7 million to
$67.4 million in 2009 from $7.7 million in 2008. This increase primarily
reflects increased costs related to our financing and losses related to the
associated derivative instruments of $63.3 million, offset by a $3.7 million
improvement in our loss from operations.
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Cash
and cash equivalents
|
$ | 198 | $ | 1,259 | ||||
Net
cash used in operating activities
|
$ | (4,202 | ) | $ | (6,678 | ) | ||
Net
cash used in investing activities
|
(100 | ) | 631 | |||||
Net
cash provided by financing activities
|
3,226 | 5,786 | ||||||
Effect
of exchange rate changes on cash
|
15 | 105 | ||||||
Net
(decrease) increase in cash
|
$ | (1,061 | ) | $ | (156 | ) |
During
2008 and 2009, we funded our liquidity requirements through our existing cash
resources and borrowings under our convertible debentures with YA
Global. As of December 31, 2009, we had $198,000 in cash and cash
equivalents, a reduction of $1.1 million from the $1.3 million balance as of
December 31, 2008.
26
Going
Concern
We have
historically incurred net losses from operations and we expect that we will
continue to have negative cash flows as we implement our business
plan. There can be no assurance that our continuing efforts to
execute our business plan will be successful and that we will be able to
continue as a going concern. The accompanying consolidated financial statements
have been prepared in conformity with US GAAP, which contemplate our
continuation as a going concern. Net loss for the years ended
December 31, 2009 and 2008 was $67.4 million and $8.0 million, respectively and
net cash used by operations was $4.2 million and $6.7 million,
respectively. At December 31, 2009, we have an accumulated deficit of
$277.0 million. We also have a working capital deficit of $124.6 million, of
which $111.1 million is related to our financing instruments, including $47.6
million related to the fair value of warrants and those debentures that are
recorded as hybrid financial instruments, and $63.5 million related to amortized
cost carrying value of certain of our debentures and the fair value of the
associated derivative liabilities. We also have a continuing purchase price
guarantee obligation of $4.5 million associated with our prior acquisition of 12
Snap, which we subsequently sold.
The items
discussed above raise substantial doubts about our ability to continue as a
going concern.
We
currently do not have sufficient cash to sustain our operations for the next
twelve months. We will require additional financing in order to
execute our operating plan and continue as a going concern. Our
management’s plan is to secure adequate funding to bridge the commercialization
of our barcode ecosystem business. We cannot predict whether this additional
financing will be in the form of equity, debt, or another form and we may not be
able to obtain the necessary additional capital on a timely basis, on acceptable
terms, or at all. In the event that these financing sources do not
materialize, or that we are unsuccessful in increasing our revenues and profits,
we may be unable to implement our current plans for expansion, repay our debt
obligations as they become due or respond to competitive pressures, any of which
circumstances would have a material adverse effect on our business, prospects,
financial condition and results of operations. Should YA Global choose not to
provide us with continued capital financing, as they have in the past, or if we
do not find alternative sources of financing to fund our operations or if we are
unable to generate significant product revenues, we only have sufficient funds
to sustain our current operations through approximately April 30,
2010.
The
financial statements do not include any adjustments relating to the
recoverability and reclassification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to
continue as a going concern.
Significant
Liquidity Events
Financing
Provided By YA Global. At
December 31, 2009, our financing transactions with YA Global, an accredited
investor, included shares of our Series C Convertible Preferred Stock issued in
2006, a series of fifteen secured convertible debentures issued between August
2006 and August 2009 and various warrants to purchase shares of our common
stock. In 2008, we received a gross total of $6.5 million in
financing from YA Global through a series of six convertible debentures, and in
2009 we received a gross total of $2.8 million under five additional
debentures. We also issued to YA Global an aggregate of 867,000,000
warrants and paid cash fees to them from the proceeds of the debentures of
approximately $900,000.
On December 23, 2009, we issued a $500,000, 8% Promissory Note to
YA Global, which was repaid on January 5, 2010, through the use of proceeds from
the issuance of our Series D Convertible Preferred stock to YA Global as
described in Note 4 in the accompanying financial statements.
On
January 5, 2010, we entered into an investment agreement with YA Global related
to our Series D Convertible Redeemable Preferred Stock. This agreement affected
many of the terms of, and the disclosures related to, our financing arrangements
with YA Global as of December 31, 2009. The January 5, 2010 investment agreement
included the issuance to YA Global of 25,000 shares of our $100 Series D
Convertible Redeemable Preferred Stock; modified the conversion terms of all of
our outstanding secured convertible debentures and extended their maturity dates
to July 29, 2012; issued additional warrants to acquire 225,000,000 shares of
our common stock; and modified the terms of three outstanding warrants to
acquire a total of 350,000,000 shares of our common stock. The gross amount of
this transaction was $2.5 million and we received net proceeds of $1.9 million
after fees of $100,000 and the redemption of the $500,000 promissory note
issued to YA Global on December 23, 2009.
The
Series D Convertible Redeemable Preferred Stock provides for an 8% cumulative
dividend and, for 90 days after issuance, entitles YA Global to vote
on an as-converted basis with the holders of the Company's common stock,
resulting in 100,000 votes for each share of the Series D Preferred. Each share
of our Series D Convertible Preferred shares can vote 100,000 votes. Thus, the
25,000 shares issued allow YA Global to vote a total of 2.5 billion votes. Each
share of Series D Preferred is convertible, at the option of the holder, at a
conversion price equal to the lesser of (i) $.02 or (ii) 97% of the lowest
closing bid price of our common stock for the 125 trading days preceding the
date of conversion, provided that no conversion will be at a price less than the
par value of the common stock. The conversion price is also subject to
adjustment for anti-dilution protection. The Series D Preferred has a
liquidation amount equal to $100 per share plus all declared and unpaid
dividends and is redeemable by us, at our option, at an amount of $100 per share
plus a redemption premium of 10%. The instrument is also redeemable at the
holder's option upon certain events of default, which include events and factors
that are not related to interest or credit risk.
On
January 5, 2010, we filed with the Secretary of State of the State of Delaware a
Certificate of Designation of Series D Convertible Redeemable Preferred Stock.
On January 7, 2010, we filed an amendment to include certain registration rights
in connection with the Series D Convertible Redeemable Preferred Stock. On March
5, 2010, we filed an additional amendment to amend the voting rights of the
Series D Convertible Redeemable Preferred Stock.
On March
26, 2010, we issued a $500,000, 8% Promissory Note to YA Global. The Company did
not pay any fees to YA Global in connection with this note and the note was
secured as defined in the security agreement between us and YA Global dated
August 24, 2007.
Under our
security agreements with YA Global in connection with the convertible
debentures, YA Global has a security interest in all of our assets.
Additionally, we cannot
|
·
|
enter
into any debt arrangements in which YA Global is not the
borrower,
|
|
·
|
grant
any security interest in any of our assets,
or
|
|
·
|
grant
any security below market price.
|
In the
event that (i) our stock price does not increase to levels where we can force
exercise of enough of our outstanding warrants to generate material operating
capital, (ii) the market for our stock will not support the sale of shares
underlying our warrants or other funding sources, or (iii) we do not realize a
material increase in revenue during the next 12 months, we will have to seek
additional cash sources. There can be no assurances that such funding
sources will be available. We do not have any commitments for funding. If
necessary funds are not available, our business and operations would be
materially adversely affected and in such event, we would attempt to reduce
costs and adjust our business plan, and could be forced to sell certain of our
assets, and reduce or cease our operations.
27
Contractual
Obligations
We are
party to various commitments and contingencies, including:
|
·
|
Operating
leases for office facilities, office and computer equipment, and
vehicles
|
|
·
|
Various
payment arrangements with our vendors that call for fixed payments on past
due liabilities.
|
|
·
|
Consulting
agreements that carry payment obligations into future
years.
|
|
·
|
Notes
payable to certain vendors that mature at various dates in the
future.
|
|
·
|
Convertible
debentures with outstanding face amounts of $25.2
million
|
|
·
|
A
purchase price guarantee obligation of $4.5 million related to our prior
acquisition of 12Snap.
|
The
following table sets forth the future minimum payments due under the above
commitments:
2010
|
2011
|
2012
|
2013
|
Total
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||||||
Operating
leases
|
$ | 273 | $ | 138 | $ | 6 | $ | 2 | $ | 419 | ||||||||||
Vendor
and consulting agreements
|
646 | - | - | - | 646 | |||||||||||||||
Notes
payable
|
69 | - | - | - | 69 | |||||||||||||||
Notes
payable - YA Global
|
500 | - | - | - | 500 | |||||||||||||||
Purchase
price guarantee obligation
|
4,535 | - | - | - | 4,535 | |||||||||||||||
Convertible
debentures
|
- | 25,220 | - | - | 25,220 | |||||||||||||||
Total
|
$ | 6,023 | $ | 25,358 | $ | 6 | $ | 2 | $ | 31,389 |
We
previously acquired our Mobile Search patent family from an unrelated third
party and agreed to pay the seller a 10% royalty, based on our revenues from
those patents. To date we have not earned any revenue from the mobile search
patents and have not paid any royalty to the seller. If we begin to earn
revenues based on those patents we will be obligated to pay the seller the
agreed royalty.
Recently
Issued Accounting Standards
The
following Accounting Standards Codification Updates have been issued, or will
become effective, after the end of the period covered by this
discussion:
28
Pronouncement
|
Issued
|
Title
|
||
ASU
No. 2009-13
|
October
2009
|
Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements – a
consensus of the FASB Emerging Issues Task Force
|
||
ASU
No. 2009-14
|
October
2009
|
Software
(Topic 985): Certain Revenue Arrangements That Include Software Elements—a
consensus of the FASB Emerging Issues Task Force
|
||
ASU
No. 2009-15
|
October
2009
|
Accounting
for Own-Share Lending Arrangements in Contemplation of Convertible Debt
Issuance or Other Financing
|
||
ASU
No. 2009-16
|
December
2009
|
Transfers
and Servicing (Topic 860): Accounting for Transfers and Financial
Assets.
|
||
ASU
No. 2009-17
|
December
2009
|
Consolidations
(Topic 810): Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities
|
||
ASU
No. 2010-01
|
January
2010
|
Equity
(Topic 505): Accounting for Distributions to Shareholders with
Components of Stock and Cash – a consensus of the FASB Emerging Issues
Task Force
|
||
ASU
No. 2010-02
|
January
2010
|
Consolidation
(Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary – a Scope Clarification
|
||
ASU
No. 2010-03
|
January
2010
|
Extractive
Activities – Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and
Disclosures
|
||
ASU
No. 2010-04
|
January
2010
|
Accounting
for Various Topics: Technical Corrections to SEC
Paragraphs
|
||
ASU
No. 2010-05
|
January
2010
|
Compensation -
Stock Compensation (Topic718): Escrowed Share Arrangements and the
Presumption of Compensation
|
||
ASU
No. 2010-06
|
January
2010
|
Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements
|
||
ASU
No. 2010-07
|
January
2010
|
Not-for-Profit
Entities (Topic 958): Not-for-Profit Entities - Mergers and
Acquisitions
|
||
ASU
No. 2010-08
|
February
2010
|
Technical
Corrections to Various Topics
|
||
ASU
No. 2010-09
|
February
2010
|
Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements
|
||
ASU
No. 2010-10
|
February
2010
|
Consolidation
(Topic 810): Amendments for Certain Investment Funds
|
||
ASU
No. 2010-11
|
|
March
2010
|
|
Derivatives
and Hedging (Topic 815): Scope Exception Related to Embedded Credit
Derivatives
|
To the
extent appropriate, the guidance in the above Accounting Standards Codification
Updates is already reflected in our consolidated financial statements and
management does not anticipate that these accounting pronouncements will have
any future effect on our consolidated financial statements.
At its
meeting on March 18, 2010, the FASB’s Emerging Issues Task Force reached a
consensus on five Issues. If the consensuses are ratified by the FASB at its
meeting on March 31, 2010, the related Accounting Standards Codification Updates
will become authoritative accounting guidance. None of the consensuses address
Issues that have a material effect on our consolidated financial
statements.
Off-Balance
Sheet Arrangements
We are
not currently engaged in the use of off-balance sheet derivative financial
instruments to hedge or partially hedge interest rate exposure nor do we
maintain any other off-balance sheet arrangements for the purpose of credit
enhancement, hedging transactions, or other financial or investment
purposes.
29
We are
exposed to certain market risks which exist as part of our ongoing business
operations. We currently do not engage in derivative and hedging
transactions to mitigate the effects of the risks below. In the
future, we may enter into foreign currency forward contracts to manage foreign
currency risk.
Interest Rate
Risk. Because our debt is primarily tied to borrowing rates in
the United States, changes in U.S. interest rates could affect the interest paid
on our borrowings and/or earned on our cash and cash
equivalents. Based on our overall interest rate exposure at December
31, 2009, a near-term change in interest rates, based on historical small
movements, would not materially affect our operations or the fair value of
interest rate sensitive instruments. Our current debt instruments have fixed
interest rates and terms and, therefore, a significant change in interest rates
would not have a material adverse effect on our financial position or results of
operations; however, changes in interest rates may increase our cost of
borrowing in the future.
Investment
Risk. As of December 31, 2009, we do not have material
amounts invested in other public or privately-held companies and therefore there
is minimal investment risk associated with our investment
portfolio.
Foreign Currency
Risk. We conduct business internationally in two currencies,
and as such, are exposed to adverse movements in foreign currency exchange
rates. Our exposure to foreign exchange rate fluctuations arise in
part from: (1) translation of the financial results of our NeoMedia Europe
subsidiary into U.S. dollars for financial reporting purposes; (2) the
re-measurement of non-functional currency assets, liabilities and intercompany
balances into U.S. dollars for financial reporting purposes; and
(3) non-U.S. dollar denominated sales to foreign customers.
Historically, neither fluctuations in foreign exchange rates nor changes in
foreign economic conditions have had a significant impact on our financial
condition or results of operations.
30
Page
|
||
Report
of Independent Registered Public Accounting Firm
|
32
|
|
Consolidated
Balance Sheets at December 31, 2009 and 2008
|
33
|
|
Consolidated
Statements of Operations and Comprehensive Loss for the years ended
December 31, 2009 and 2008
|
34
|
|
Consolidated
Statement of Shareholders’ Deficit for the years ended December 31,
2009 and 2008
|
35
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
36
|
|
Notes
to Consolidated Financial Statements
|
37
|
31
To the
Board of Directors and Shareholders of NeoMedia Technologies, Inc.:
We have
audited the accompanying consolidated balance sheets of NeoMedia Technologies,
Inc. (the “Company”), as of December 31, 2009 and 2008, and the related
consolidated statements of operations and comprehensive loss, shareholders’
equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009
and 2008, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to such
financial statements, the Company has suffered recurring losses from operations
and has ongoing requirements for additional capital investment. These factors
raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans in regard to these matters are described in Note 1.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/
Kingery & Crouse, P.A
Tampa,
FL
March 26,
2010
32
NeoMedia
Technologies, Inc. and Subsidiaries
Consolidated
Balance Sheets
(in
thousands, except share data)
December 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 198 | $ | 1,259 | ||||
Trade
accounts receivable
|
374 | 102 | ||||||
Inventories,
net of allowance for obsolete & slow-moving inventory of $136 and $81,
respectively
|
124 | 117 | ||||||
Prepaid
expenses and other current assets
|
294 | 544 | ||||||
Total
current assets
|
990 | 2,022 | ||||||
Property
and equipment, net
|
129 | 79 | ||||||
Goodwill
|
3,418 | 3,418 | ||||||
Proprietary
software, net
|
2,076 | 2,738 | ||||||
Patents
and other intangible assets, net
|
1,996 | 2,293 | ||||||
Cash
surrender value of life insurance policies
|
659 | 508 | ||||||
Other
long-term assets
|
156 | 430 | ||||||
Total
assets
|
$ | 9,424 | $ | 11,488 | ||||
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 558 | $ | 134 | ||||
Taxes
payable
|
4 | 7 | ||||||
Accrued
expenses
|
7,292 | 5,787 | ||||||
Deferred
revenues and customer prepayments
|
791 | 403 | ||||||
Notes
payable
|
69 | 50 | ||||||
Note
payable - YA Global
|
500 | - | ||||||
Accrued
purchase price guarantee
|
4,535 | 4,614 | ||||||
Deferred
tax liability
|
706 | 706 | ||||||
Derivative
financial instruments - warrants
|
9,912 | 1,189 | ||||||
Derivative
financial instruments - Series C preferred stock and debentures
payable
|
50,985 | 26,256 | ||||||
Debentures
payable - carried at amortized cost
|
12,523 | 11,227 | ||||||
Debentures
payable - carried at fair value
|
37,678 | 19,892 | ||||||
Total
current liabilities
|
125,553 | 70,265 | ||||||
Commitments
and contingencies (Note 12)
|
||||||||
Series
C convertible preferred stock, $0.01 par value, 27,000 shares authorized,
8,642 and 19,144 shares issued and outstanding, liquidation value of
$8,642 and $19,144
|
8,642 | 19,144 | ||||||
Shareholders’
deficit:
|
||||||||
Common
stock, $0.01 par value, 5,000,000,000 shares authorized, 2,270,709,261 and
1,375,056,229 shares issued and 2,267,567,835 and 1,371,904,960 shares
outstanding, respectively
|
22,676 | 13,719 | ||||||
Additional
paid-in capital
|
130,406 | 120,430 | ||||||
Accumulated
deficit
|
(276,985 | ) | (211,305 | ) | ||||
Accumulated
other comprehensive loss
|
(89 | ) | 14 | |||||
Treasury
stock, at cost, 201,230 shares of common stock
|
(779 | ) | (779 | ) | ||||
Total
shareholders’ deficit
|
(124,771 | ) | (77,921 | ) | ||||
Total
liabilities and shareholders’ deficit
|
$ | 9,424 | $ | 11,488 |
The
accompanying notes are an integral part of these consolidated financial
statements.
33
NeoMedia
Technologies, Inc. and Subsidiaries
Consolidated
Statements of Operations and Comprehensive Loss
(in
thousands, except share and per share data)
Year ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Revenues
|
$ | 1,662 | $ | 1,046 | ||||
Cost
of revenues
|
1,557 | 1,257 | ||||||
Gross
profit (deficit)
|
105 | (211 | ) | |||||
Sales
and marketing expenses
|
809 | 2,177 | ||||||
General
and administrative expenses
|
3,942 | 5,406 | ||||||
Research
and development costs
|
1,381 | 1,997 | ||||||
Impairment
of investment
|
261 | 271 | ||||||
Operating
loss
|
(6,288 | ) | (10,062 | ) | ||||
Gain
on extinguishment of debt
|
- | 2,405 | ||||||
Gain
(loss) from change in fair value of hybrid financial
instruments
|
(17,786 | ) | 3,562 | |||||
Gain
(loss) from change in fair value of derivative liability -
warrants
|
(8,723 | ) | 4,416 | |||||
Gain
(loss) from change in fair value of derivative liability - Series C
preferred stock and debentures
|
(31,442 | ) | (6,755 | ) | ||||
Interest
expense related to convertible debt
|
(3,139 | ) | (1,262 | ) | ||||
Loss
from continuing operations
|
(67,378 | ) | (7,696 | ) | ||||
Income/(loss)
from discontinued operations
|
- | (323 | ) | |||||
Net
loss
|
(67,378 | ) | (8,019 | ) | ||||
Dividends
on convertible preferred stock
|
(977 | ) | (1,571 | ) | ||||
Net
loss attributable to common shareholders
|
(68,355 | ) | (9,590 | ) | ||||
Comprehensive
loss:
|
||||||||
Net
loss
|
(67,378 | ) | (8,019 | ) | ||||
Other
comprehensive income (loss):
|
||||||||
Marketable
securities
|
- | 442 | ||||||
Foreign
currency translation adjustment
|
(103 | ) | 104 | |||||
Comprehensive
loss
|
$ | (67,481 | ) | $ | (7,473 | ) | ||
Net
loss per share, basic and diluted:
|
||||||||
Continuing
operations
|
$ | (0.03 | ) | $ | (0.01 | ) | ||
Discontinued
operations
|
0.00 | 0.00 | ||||||
Net
loss per share, basic and diluted
|
$ | (0.03 | ) | $ | (0.01 | ) | ||
Weighted
average number of common shares:
|
||||||||
Basic
and diluted
|
2,006,486,947 | 1,167,856,338 |
The
accompanying notes are an integral part of these consolidated financial
statements.
34
NeoMedia
Technologies, Inc. and Subsidiaries`
Consolidated
Statement of Shareholders’ Deficit
(In
thousands, except share data)
Common Stock
|
Accumulated
Other Compre-
|
Treasury Stock
|
||||||||||||||||||||||||||||||
Shares
|
Amount
|
Additional Paid-
in Capital
|
hensive Income
(Loss)
|
Accumulated
Deficit
|
Shares
|
Amount
|
Total Shareholders'
Equity (Deficit)
|
|||||||||||||||||||||||||
Balance,
December 31, 2007
|
1,022,144,424 | $ | 10,221 | $ | 118,427 | $ | (532 | ) | $ | (201,565 | ) | 201,230 | $ | (779 | ) | $ | (74,228 | ) | ||||||||||||||
Shares
issued to YA Global on conversion of Series C convertible preferred
stock
|
347,500,000 | 3,475 | 172 | - | - | - | - | 3,647 | ||||||||||||||||||||||||
Deemed
dividend on conversion of series C convertible preferred
stock
|
- | - | - | (1,721 | ) | - | - | (1,721 | ) | |||||||||||||||||||||||
Stock-based
compensation expense
|
- | - | 1,831 | - | - | - | - | 1,831 | ||||||||||||||||||||||||
Fair
value of shares issued to pay liabilities
|
2,260,536 | 23 | - | - | - | - | - | 23 | ||||||||||||||||||||||||
Comprehensive
income - foreign currency translation adjustment
|
- | - | 104 | - | - | - | 104 | |||||||||||||||||||||||||
Comprehensive
income - realized on marketable securities
|
- | - | - | 442 | - | - | - | 442 | ||||||||||||||||||||||||
Net
loss
|
- | - | - | - | (8,019 | ) | - | - | (8,019 | ) | ||||||||||||||||||||||
Balance,
December 31, 2008
|
1,371,904,960 | $ | 13,719 | $ | 120,430 | $ | 14 | $ | (211,305 | ) | 201,230 | $ | (779 | ) | $ | (77,921 | ) | |||||||||||||||
Shares
issued to YA Global on conversion of Series C convertible preferred stock
and debentures
|
867,583,498 | 8,676 | 6,831 | - | (1,338 | ) | - | - | 14,169 | |||||||||||||||||||||||
Shares
issued on exercise of employee options
|
11,600,000 | 116 | - | - | - | - | - | 116 | ||||||||||||||||||||||||
Shares
issued for prior year acquisition
|
2,470 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Adjustment
for estimate of Series C convertible preferred stock
converstions
|
- | - | 2,530 | - | 3,036 | - | - | 5,566 | ||||||||||||||||||||||||
Stock-based
compensation expense
|
- | - | 357 | - | - | - | - | 357 | ||||||||||||||||||||||||
Fair
value of shares issued to pay liabilities
|
16,476,907 | 165 | 258 | - | - | - | - | 423 | ||||||||||||||||||||||||
Comprehensive
income - foreign currency translation adjustment
|
- | - | - | (103 | ) | - | - | - | (103 | ) | ||||||||||||||||||||||
Net
loss
|
- | - | - | - | (67,378 | ) | - | - | (67,378 | ) | ||||||||||||||||||||||
Balance,
December 31, 2009
|
2,267,567,835 | $ | 22,676 | $ | 130,406 | $ | (89 | ) | $ | (276,985 | ) | 201,230 | $ | (779 | ) | $ | (124,771 | ) |
The
accompanying notes are an integral part of these consolidated financial
statements.
35
NeoMedia
Technologies, Inc. and Subsidiaries
(In
Thousands)
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Cash
Flows from Operating Activities:
|
||||||||
Loss
from continuing operations
|
$ | (67,378 | ) | $ | (7,696 | ) | ||
Adjustments
to reconcile loss from continuing operations to net cash used in
operating activities:
|
||||||||
Depreciation
and amortization
|
1,012 | 1,083 | ||||||
Impairment
of investment
|
261 | 271 | ||||||
Gain
on early extinguishment of debt
|
- | (2,405 | ) | |||||
(Gain)
loss from change in fair value of hybrid financial
instruments
|
17,786 | (3,562 | ) | |||||
(Gain)
loss from change in fair value of derivative liability -
warrants
|
8,723 | (4,416 | ) | |||||
(Gain)
loss from change in fair value of derivative liability - Series C
preferred stock and debentures
|
31,442 | 6,755 | ||||||
Interest
expense related to convertible debt
|
3,139 | 1,262 | ||||||
Stock-based
compensation expense
|
357 | 1,831 | ||||||
Decrease
(increase) in value of life insurance policies
|
(151 | ) | 239 | |||||
Changes
in operating assets and liabilities
|
||||||||
Trade
and other accounts receivable
|
(272 | ) | 181 | |||||
Inventories
|
(7 | ) | 81 | |||||
Prepaid
expenses and other assets
|
524 | (189 | ) | |||||
Accounts
payable and accrued liabilities
|
(26 | ) | 153 | |||||
Deferred
revenue and other current liabilities
|
388 | (266 | ) | |||||
Net
cash used in operating activities
|
(4,202 | ) | (6,678 | ) | ||||
Cash
Flows from Investing Activities:
|
||||||||
Proceeds
from sale of investments
|
- | 751 | ||||||
Acquisition
of property and equipment
|
(100 | ) | (75 | ) | ||||
Acquisition
of patents and other intangible assets
|
- | (12 | ) | |||||
Advances
to discontinued subsidaries
|
- | (33 | ) | |||||
Net
cash provided by (used in) investing activities
|
(100 | ) | 631 | |||||
Cash
Flows from Financing Activities:
|
||||||||
Borrowings
under convertible debt instruments, net
|
2,610 | 5,786 | ||||||
Borrowings
under notes payable
|
500 | - | ||||||
Net
proceeds from exercise of stock options
|
116 | - | ||||||
Net
cash provided by financing activities
|
3,226 | 5,786 | ||||||
Effect
of exchange rate changes on cash
|
15 | 105 | ||||||
Net
decrease in cash and cash equivalents
|
(1,061 | ) | (156 | ) | ||||
Cash
and cash equivalents, beginning of period
|
1,259 | 1,415 | ||||||
Cash
and cash equivalents, end of period
|
$ | 198 | $ | 1,259 | ||||
Supplemental
cash flow information:
|
||||||||
Interest
paid during the period
|
$ | 4 | $ | 35 | ||||
Accretion
of dividends on Series C Convertible Preferred Stock
|
$ | 977 | $ | 1,571 | ||||
Series
C Convertible Preferred Stock and debentures converted to common
stock
|
$ | 10,663 | $ | 3,647 | ||||
Issuance
of common shares to settle outstainding liabilities
|
$ | 423 | $ | 23 |
The
accompanying notes are an integral part of these consolidated financial
statements.
36
NeoMedia
Technologies, Inc.
Note
1 - General
Business - NeoMedia utilizes the
mobile phone by leveraging barcodes (printed symbols) as a seamless mechanism to
link brands, advertisers, carriers, retailers and consumers using the power of
the mobile internet.
With our
barcode ecosystem technology, NeoMedia transforms mobile phones with cameras
into barcode scanners that provide instant access to mobile web content whenever
a barcode is scanned. A barcode makes any medium immediately
interactive, and the code links consumers to the multimedia capability of
the mobile web. Combining this technology with analytics and reporting
capabilities improves the way advertisers market to mobile
consumers.
NeoMedia
provides the infrastructure to facilitate mobile barcode scanning and its
associated commerce worldwide. Our mobile barcode ecosystem software reads and
transmits data from 2D barcodes to its intended destination. Our code management
and clearinghouse platforms create, connect, record, and transmit the
transactions embedded in the barcodes, like web-URLs, text messages (SMS), and
telephone calls, ubiquitously and reliably.
In order
to provide complete mobile marketing solutions, NeoMedia also offers barcode
scanning hardware that reads barcodes displayed on mobile phone screens or
printed media. NeoMedia provides infrastructure solutions to enable mobile
ticketing and couponing programs – including scanner hardware and system support
software for seamless implementation.
This
technology is supported by our patents. In addition, NeoMedia has an open
standards philosophy designed to make integration and use of the technology easy
for handset manufacturers, mobile operators and advertisers; and the consumer’s
experience safe, reliable and interoperable.
Accounting
Standards Codification - In June 2009, the Financial Accounting Standards
Board ("FASB") issued a statement establishing the FASB Accounting Standards
Codification™ (the “FASB ASC" or the “Codification"). Effective for interim and
annual periods ended after September 15, 2009, the Codification became the
source of authoritative U.S. generally accepted accounting principles ("US
GAAP") recognized by the FASB to be applied by nongovernmental entities. Rules
and interpretive releases of the United States Securities and Exchange
Commission (the “SEC”) under authority of federal securities laws are also
sources of authoritative US GAAP for SEC registrants. This statement did not
change existing US GAAP, and as such, did not have an impact on our consolidated
financial statements. We have updated our references to US GAAP, in order to
reflect the Codification.
Going
Concern – We have historically incurred net losses from operations and we
expect that we will continue to have negative cash flows as we implement our
business plan. There can be no assurance that our continuing efforts
to execute our business plan will be successful and that we will be able to
continue as a going concern. The accompanying consolidated financial statements
have been prepared in conformity with US GAAP, which contemplate our
continuation as a going concern. Net loss for the years ended
December 31, 2009 and 2008 was $67.4 million and $8.0 million, respectively and
net cash used by operations during the same years was $4.2 million and $6.7
million, respectively. At December 31, 2009, we have an accumulated
deficit of $277.0 million. We also have a working capital deficit of $124.6
million, of which $111.1 million is related to our financing instruments,
including $47.6 million related to the fair value of warrants and those
debentures that are recorded as hybrid financial instruments, and $63.5 million
related to the amortized cost carrying value of certain of our debentures and
the fair value of the associated derivative liabilities.
The items
discussed above raise substantial doubts about our ability to continue as a
going concern.
We
currently do not have sufficient cash to sustain us for the next twelve months.
We will require additional financing in order to execute our operating plan and
continue as a going concern. Our management’s plan is to secure
adequate funding to bridge the commercialization of our barcode ecosystem
business. We cannot predict whether this additional financing will be in the
form of equity, debt, or another form and we may not be able to obtain the
necessary additional capital on a timely basis, on acceptable terms, or at
all. In the event that these financing sources do not materialize, or
that we are unsuccessful in increasing our revenues and profits, we may be
unable to implement our current plans for expansion, repay our debt obligations
as they become due or continue as a going concern, any of which circumstances
would have a material adverse effect on our business, prospects, financial
condition and results of operations. Should our lender YA Global Investments,
L.P (“YA Global”) choose not to provide us with capital financing, as they have
in the past, or if we do not find alternative sources of financing to fund our
operations, or if we are unable to generate significant product revenues, we
only have sufficient funds to sustain our current operations through
approximately April 30, 2010.
37
The
financial statements do not include any adjustments relating to the
recoverability and reclassification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary, should we be unable to
continue as a going concern.
Note
2 - Summary of Significant Accounting Policies
Basis of
Presentation – The consolidated financial statements include the accounts
of NeoMedia Technologies, Inc. and our wholly-owned subsidiaries. We
operate as one reportable segment. All significant intercompany
accounts and transactions have been eliminated.
Use of
Estimates – The preparation of consolidated financial statements in
conformity with US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Changes in facts
and circumstances may result in revised estimates, which are recorded in the
period in which they become known.
Revenue
Recognition – We derive revenues from several sources including
license revenues relating to patents and internally-developed software, hardware
sales, custom software development and service revenues related to mobile
applications and implementation.
|
·
|
License
revenues, including intellectual property licenses, represent revenue from
the licensing of our intellectual property and
proprietary software tools and application products. We
license our development tools and application products under non-exclusive
and non-transferable license agreements. The basis for license
fee revenue recognition is substantially governed by FASB ASC 985-605 Software Revenue
Recognition. License revenue is recognized if persuasive evidence
of an agreement exists, delivery has occurred, pricing is fixed and
determinable, and collectability is reasonably assured. We defer
revenue related to license fees for which amounts have been collected but
for which the above criteria have not yet been met, and we recognize that
revenue when the criteria are met.
|
|
·
|
Hardware,
software, and service revenues, which includes sales of software and
technology equipment and service fees, is recognized based on
guidance provided in FASB ASC 650-10-S99, “Revenue
Recognition in Financial Statements.” Software
and technology equipment resale revenue is
recognized when persuasive evidence of an arrangement exists, the
price to the customer is fixed and determinable, delivery of the service
has occurred and collectability is reasonably assured. Service
revenues, including maintenance fees for providing system updates for
software products, user documentation and technical
support, are recognized over the life of
the contract. We defer revenue related to technology service
and product revenue for which amounts have been invoiced and/or collected
but for which the requisite service has not been
provided. Revenue is then recognized over the matching service
period.
|
|
·
|
We
recognize shipping and handling costs at the time of invoice. All
associated transportation and handling costs for products shipped are
borne by the customer and are recognized as part of revenue at the time of
invoicing and are accrued as cost of
revenues.
|
|
·
|
We
recognize tax billings related to our sales revenue at the time of
invoicing. The customer is responsible for paying all associated taxes to
us in connection with the sale as part of the terms and conditions of the
sales invoice. Taxes on billings in connection with invoices are paid to
the corresponding taxing authority directly by us and recovered from the
customer upon payment of the customer
invoice.
|
|
·
|
When
sales transactions include multiple deliverables or shipments, we
recognize revenue on only that part of the transaction that has been
shipped to the customer. Revenue on subsequent shipments as part of an
original order or deliverable is recognized upon each new shipment or
release of deliverables to the
customer.
|
38
Basic and Diluted
Income (Loss) Per Share – Basic net loss per share is computed by
dividing net loss attributable to common shareholders by the weighted average
number of shares of common stock outstanding during the period. During the years
ended December 31, 2009 and 2008, we reported net loss per share and we have
excluded all outstanding stock options, warrants, convertible debt and
convertible preferred stock from the calculation of diluted net loss per share,
as their effect would be anti-dilutive. As a result, basic and diluted loss per
share were equivalent. The number of common shares issuable on assumed exercise
of options and warrants and on conversion of convertible instruments, but which
were excluded from the computations of earnings per share, were as
follows:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Outstanding
stock options
|
94,561,241 | 99,736,856 | ||||||
Outstanding
warrants
|
1,006,195,834 | 1,007,971,000 | ||||||
Convertible
debt
|
7,005,394,599 | 26,188,847,382 | ||||||
Convertible
preferred stock
|
13,572,306,409 | 21,456,650,327 | ||||||
21,678,458,083 | 48,753,205,565 |
Comprehensive
Income – We report comprehensive income in accordance with FASB ASC 220
Comprehensive
Income. This statement requires the disclosure of accumulated
other comprehensive income or loss (excluding net income or loss) as a separate
component of shareholders’ equity. Comprehensive income reported in our
financial statements has typically included changes in the value of unrealized
gains and losses on investments and foreign currency translation gains and
losses on intercompany balances which are deemed to be of a long-term investment
nature.
Fair-valued
Financial Instruments – Fair value measurement requirements are embodied
in certain accounting standards applied in the preparation of our financial
statements. The most significant application is in connection with our
Convertible Preferred Stock, Convertible Debentures and Warrants, where we
determine the fair value of certain hybrid instruments carried at fair value,
and certain derivative liabilities which are recorded at fair value under FASB
ASC 815, Derivatives and
Hedging. See below and Note 4 for further information regarding the
accounting treatment of our financing instruments.
Derivative
Financial Instruments – We generally do not use derivative financial
instruments to hedge exposures to cash-flow risks or market-risks that may
affect the fair values of our financial instruments. However, certain financial
instruments, such as warrants and the embedded conversion features of our
convertible preferred stock and convertible debentures, which are indexed to our
common stock, are classified as liabilities when either (a) the holder possesses
rights to net-cash settlement or (b) physical or net-share settlement is not
within our control. In such instances, net-cash settlement is assumed
for financial accounting and reporting purposes, even when the terms of the
underlying contracts do not provide for net-cash
settlement. Derivative financial instruments are initially recorded,
and continuously carried, at fair value.
Determining
the fair value of these complex derivative financial instruments involves
judgment and the use of certain relevant assumptions including, but not limited
to, interest rate risk, credit risk, equivalent volatility and
conversion/redemption privileges. The use of different assumptions
could have a material effect on the estimated fair value amounts.
For
certain of our convertible debentures, we have elected not to separately account
for the embedded conversion feature as a derivative instrument but to account
for the entire hybrid instrument at fair value in accordance with FASB ASC 815,
Derivatives and
Hedging. For the remaining convertible debentures and our
convertible preferred stock, the underlying instruments are carried at amortized
cost and the embedded conversion feature is accounted for separately at fair
value in accordance with FASB ASC 815-40-05 and FASB ASC
815-40-15.
39
Financial
Instruments and Concentration of Credit Risk – Our financial instruments
consist of cash and cash equivalents, accounts receivable, the cash surrender
value of life insurance policies, accounts payable, accrued expenses, our
accrued purchase price guarantee obligation, notes payable, derivative financial
instruments, other current liabilities, convertible preferred stock, and
convertible debenture financings. We believe the carrying values of cash and
cash equivalents, accounts receivable, cash surrender value of life insurance
policies, accounts payable, accrued expenses, our accrued purchase price
guarantee obligation, notes payable, and other current liabilities approximate
their fair values due to their short-term nature. Our Series C
convertible preferred stock and most of our convertible debentures are carried
at amortized cost, with separate recognition of the fair value of any embedded
derivative instrument liabilities, including the conversion
feature. The remainder of our convertible debentures are recognized
as hybrid financial instruments and carried in their entirety at fair value in
accordance with FASB ASC 815.
As of
December 31, 2009 and 2008, the estimated fair values and carrying values of our
Series C convertible preferred stock and those of our convertible debentures
that are carried at their amortized cost are as follows:
Year Ended December 31, 2009
|
Year Ended December 31, 2008
|
|||||||||||||||
Fair
|
Carrying
|
Fair
|
Carrying
|
|||||||||||||
Value
|
Value
|
Value
|
Value
|
|||||||||||||
(in
thousands)
|
(in
thousands)
|
|||||||||||||||
Series
C Convertible Preferred Stock
|
$ | 23,488 | $ | 25,039 | $ | 30,039 | $ | 29,872 | ||||||||
August
24, 2006
|
16,309 | 19,131 | 9,127 | 12,260 | ||||||||||||
December
29, 2006
|
8,154 | 9,426 | 5,860 | 6,056 | ||||||||||||
July
10, 2008
|
497 | 464 | 248 | 267 | ||||||||||||
July
29, 2008
|
7,105 | 6,727 | 3,782 | 4,112 | ||||||||||||
October
28, 2008
|
7,032 | 6,724 | 3,716 | 4,060 | ||||||||||||
May
1, 2009
|
1,307 | 700 | - | - | ||||||||||||
June
5, 2009
|
2,112 | 1,481 | - | - | ||||||||||||
July
15, 2009
|
1,566 | 1,309 | - | - | ||||||||||||
August
14, 2009
|
1,386 | 1,149 | - | - | ||||||||||||
Total
|
$ | 68,956 | $ | 72,150 | $ | 52,772 | $ | 56,627 |
At
December 31, 2009 and 2008, the fair value of our debentures that are carried in
their entirety at their fair values of $37,700 and $19,900, respectively,
exceeded their face amount of $11,000 by approximately $26.7 million and $8.9
million, respectively.
Our cash
balances are held by a highly-rated financial institution. The balances in our
accounts often exceed the amounts covered by the insurance obligations of the
Federal Deposit Insurance Corporation (“FDIC”). During portions of 2009, we
invested our cash on an overnight basis in a money market fund which invests in
highly liquid short-term investments, but is not insured by the FDIC. As of
December 31, 2009, none of our funds are invested in these instruments. Our
financial institution participates in the U. S. Department of the Treasury’s
Temporary Guarantee Program for Money Market Funds. At December 31, 2009, up to
$250,000 of our cash balances were guaranteed by the FDIC. Similarly, our cash
balances in our European location are also deposited and maintained in financial
institutions that provide deposit guarantees and are governed by local public
law. Our policies limit the concentration of credit exposure by restricting
investments with any single obligor, instrument, or geographic area. Our policies limit the
concentration of accounts receivable credit exposure by requiring the majority
of customers to prepay their renewal licenses prior to initiating services. To
the extent credit is granted to our customers, all open accounts receivable
beyond 90 days are evaluated for recovery, or the need to establish a reserve
for potential un-collectability. We do not require
collateral.
Accounts
Receivable – We report accounts receivable at net realizable value. Our
terms of sale provide the basis for when accounts become delinquent or past
due. We provide an allowance for doubtful accounts equal to the
estimated uncollectible amounts, based on historical collection experience and a
review of the current status of accounts receivable. Receivables are
generally charged off and sent to a collections agency after ninety days past
due, unless we believe that collection is reasonably assured. At
December 31, 2009 and 2008, we concluded that no allowance for doubtful accounts
was required.
40
Inventories
– Inventories are stated at the lower of cost or market and are comprised
of barcode-reading equipment at our NeoMedia Europe location. Cost is
determined using the first-in, first-out method.
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Raw
material
|
$ | 55 | $ | 61 | ||||
Finished
goods
|
205 | 137 | ||||||
Total
|
260 | 198 | ||||||
Less:
reserve for slow-moving and obsolete inventory
|
(136 | ) | (81 | ) | ||||
Total
Inventory, net of reserves
|
$ | 124 | $ | 117 |
Intangible
Assets – Intangible assets consist of patents, customer contracts,
copyrighted material, acquired software products, and brand
names. Intangible assets acquired as part of a business combination
are accounted for in accordance with FASB ASC 805, Business Combinations, and
are recognized apart from goodwill if the intangible asset arises from
contractual or other legal rights or the asset is capable of being separated
from the acquired enterprise. Intangible assets are reviewed for
impairment by applying the recognition and measurement provisions of FASB ASC
350, which require that we compare the carrying amount of the intangible asset
to its fair value. If the carrying amount exceeds fair value, an impairment loss
is recognized. Intangible assets are amortized, using the
straight-line method, over the estimate of their period of benefit of five to
seventeen years as follows:
Capitalized
patents
|
5 -
17 years
|
Customer
contracts
|
5
years
|
Copyrighted
materials
|
5
years
|
Acquired
software products
|
7
years
|
Brand
names
|
10
years
|
Evaluation of
Long-Lived Assets – We periodically perform impairment tests on each of
our long-lived assets, including goodwill and other intangible assets, including
capitalized patent costs, customer contracts, copyrighted materials, brand
names, and capitalized and purchased software costs. In doing so, we
evaluate the carrying value of each intangible asset with respect to several
factors, including historical revenue generated from each intangible asset,
application of the assets in our current business plan, and projected cash flow
to be derived from the asset.
The
determination of the fair value of certain acquired assets and liabilities is
subjective in nature and often involves the use of significant estimates and
assumptions. Determining the fair values and useful lives of intangible assets
especially requires the exercise of judgment. Where practicable, we will obtain
an independent valuation of intangible assets, and place reliance on such
valuation. Then on an ongoing basis, we use the weighted-average
probability method outlined in FASB ASC 360, Property, Plant, and
Equipment, to estimate the fair value. This method requires significant
management judgment to forecast the future operating results used in the
analysis. In addition, other significant estimates are required such as residual
growth rates and discount factors. The estimates we have used are consistent
with the plans and estimates that we use to manage our business, based on
available historical information and industry averages. The judgments made in
determining the estimated useful lives assigned to each class of assets acquired
can also significantly affect our net operating results.
41
According
to FASB ASC 360, a long-lived asset should be tested for recoverability whenever
events or changes in circumstances indicate that its carrying amount may not be
recoverable. We follow the two-step process outlined in FASB ASC 360 for
determining if an impairment charge should be taken: (1) the expected
undiscounted cash flows from a particular asset or asset group are compared with
the carrying value; if the expected undiscounted cash flows are greater than the
carrying value, no impairment is recognized, but if the expected undiscounted
cash flows are less than the carrying value, then (2) an impairment charge is
taken for the difference between the carrying value and the expected discounted
cash flows. The assumptions used in developing expected cash flow
estimates are similar to those used in developing other information used by us
for budgeting and other forecasting purposes. In instances where a
range of potential future cash flows is possible, we use a probability-weighted
approach to weigh the likelihood of those possible outcomes. For
purposes of discounting cash flows, we use a discount rate equal to the yield on
a zero-coupon US Treasury instrument with a life equal to the expected life of
the intangible asset or asset group being tested.
In 2009
and 2008, we recognized impairment charges of $261,000 and $271,000,
respectively, as a result of writing off the carrying value of certain long-term
investments.
Property, and
Equipment – Property, and equipment, including software, are stated at
cost less accumulated depreciation and amortization. Depreciation is
provided under the straight-line method over the estimated useful lives of the
assets, as follows:
Furniture
and fixtures
|
7
years
|
Equipment
|
3 -
5 years
|
Research and
Development – Costs associated with the planning and design phase of
software development, including coding and testing activities, and related
overhead, necessary to establish technological feasibility of our
internally-developed software products, are classified as research and
development and expensed as incurred.
Stock-Based
Compensation - FASB ASC 718 Stock Compensation, requires
that all stock-based compensation be recognized as an expense in the financial
statements and that such cost be measured at the grant date fair value of the
award.
We record
the grant date fair value of stock-based compensation awards as an expense over
the vesting period of the related stock options. In order to
determine the fair value of the stock options on the date of grant, we use the
Black-Scholes-Merton option-pricing model. Inherent in this model are
assumptions related to expected stock-price volatility, option life, risk-free
interest rate and dividend yield. Although the risk-free interest
rates and dividend yield are less subjective assumptions, typically based on
factual data derived from public sources, the expected stock-price volatility,
forfeiture rate and option life assumptions require a greater level of judgment
which make them critical accounting estimates.
We use an
expected stock-price volatility assumption that is based on historical
volatilities of our common stock and we estimate the forfeiture rate and option
life based on historical data related to prior option grants.
Discontinued
Operations –
Due to the completed divestitures of 12Snap, Telecom Services, and Micro
Paint Repair during 2007 and 2008, results of operations of these units were
reclassified as discontinued operations in the accompanying consolidated
statements of operations.
Income
Taxes – We account for income taxes under the provisions of FASB ASC 740,
Accounting for Income
Taxes, which requires recognition of deferred tax liabilities and assets
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the difference is expected to
reverse. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. We have
recorded a 100% valuation allowance as of December 31, 2009 and
2008.
Beginning
January 1, 2007, we adopted FASB ASC 740-10-05 Accounting for Uncertainty in Income
Taxes of FASB ASC 740. The Interpretation prescribes a recognition
threshold and a measurement attribute for the financial statement recognition
and measurement of tax positions taken or expected to be taken in a tax return.
For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities. The amount recognized is
measured as the largest amount of benefit that is greater than 50 percent likely
of being realized upon ultimate settlement. See Note 10 to our Consolidated
Financial Statements for discussions of our implementation of FASB ASC
740-10-05.
42
Translation of
Foreign Currency – The U.S. dollar is the functional currency of our
operations, except for our operations at NeoMedia Europe, which use the Euro as
their functional currency. Foreign currency transaction gains and
losses are reflected in income. Translation gains and losses arising from
translating the financial statements of NeoMedia Europe into U.S. dollars for
reporting purposes are included in “Accumulated other comprehensive income
(loss).”
Recently Issued Accounting Standards – The following Accounting
Standards Codification Updates have been issued, or will become effective, after
the end of the period covered by these financial statements:
Pronouncement
|
Issued
|
Title
|
ASU
No. 2009-13
|
October
2009
|
Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements - a
consensus of the FASB Emerging Issues Task Force
|
ASU
No. 2009-14
|
October
2009
|
Software
(Topic 985): Certain Revenue Arrangements That Include Software Elements -
a consensus of the FASB Emerging Issues Task Force
|
ASU
No. 2009-15
|
October
2009
|
Accounting
for Own-Share Lending Arrangements in Contemplation of Convertible Debt
Issuance or Other Financing
|
ASU
No. 2009-16
|
December
2009
|
Transfers
and Servicing (Topic 860): Accounting for Transfers and Financial
Assets.
|
ASU
No. 2009-17
|
December
2009
|
Consolidations
(Topic 810): Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities
|
ASU
No. 2010-01
|
January
2010
|
Equity
(Topic 505): Accounting for Distributions to Shareholders with Components
of Stock and Cash - a consensus of the FASB Emerging Issues Task
Force
|
ASU
No. 2010-02
|
January
2010
|
Consolidation
(Topic 810): Accounting and Reporting for Decreases in Ownership of a
Subsidiary - a Scope Clarification
|
ASU
No. 2010-03
|
January
2010
|
Extractive
Activities - Oil and Gas (Topic 932): Oil and Gas Reserve Estimation and
Disclosures
|
ASU
No. 2010-04
|
January
2010
|
Accounting
for Various Topics: Technical Corrections to SEC
Paragraphs
|
ASU
No. 2010-05
|
January
2010
|
Compensation
- Stock Compensation (Topic718): Escrowed Share Arrangements and the
Presumption of Compensation
|
ASU
No. 2010-06
|
January
2010
|
Fair
Value Measurements and Disclosures (Topic 820): Improving Disclosures
about Fair Value Measurements
|
ASU
No. 2010-07
|
January
2010
|
Not-for-Profit
Entities (Topic 958): Not-for-Profit Entities - Mergers and
Acquisitions
|
ASU
No. 2010-08
|
February
2010
|
Technical
Corrections to Various Topics
|
ASU
No. 2010-09
|
February
2010
|
Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements
|
ASU
No. 2010-10
|
February
2010
|
Consolidation
(Topic 810): Amendments for Certain Investment Funds
|
ASU
No. 2010-11
|
March
2010
|
Derivatives
and Hedging (Topic 815): Scope Exception Related to Embedded Credit
Derivatives
|
To the
extent appropriate, the guidance in the above Accounting Standards Codification
Updates is already reflected in our consolidated financial statements and
management does not anticipate that these accounting pronouncements will have
any future effect on our consolidated financial statements.
At its
meeting on March 18, 2010, the FASB's Emerging Issues Task Force reached a
consensus on five Issues. If the consensuses are ratified by the FASB at its
meeting on March 31, 2010, the related Accounting Standards Codification Updates
will become authoritative accounting guidance. None of the consensuses address
Issues that have a material effect on our consolidated financial
statements.
Common
Stock - Holders
of common stock are entitled to one vote for each share held of record on each
matter submitted to a vote of shareholders. Holders of our common stock do not
have a cumulative voting right, which means that the holders of more than one
half of our outstanding shares of common stock, subject to the rights of the
holders of preferred stock, can elect all of our directors, if they choose to do
so. In this event, the holders of the remaining shares of common stock would not
be able to elect any directors. Subject to the prior rights of any class or
series of preferred stock which may from time to time be outstanding, if any,
holders of common stock are entitled to receive ratably, dividends when, as, and
if declared by our Board of Directors out of funds legally available for that
purpose and, upon our liquidation, dissolution, or winding up, are entitled to
share ratably in all assets remaining after payment of liabilities and payment
of accrued dividends and liquidation preferences on the preferred stock, if any.
Holders of common stock have no preemptive rights and have no rights to convert
their common stock into any other securities. The outstanding common
stock is duly authorized and validly issued, fully-paid, and non-assessable.
Except as otherwise required by Delaware law, and subject to the rights of the
holders of preferred stock, all stockholder action is taken by the vote of a
majority of the outstanding shares of common stock present at a meeting of
stockholders at which a quorum consisting of a majority of the outstanding
shares of common stock is present in person or by proxy. Shares
repurchased are held as treasury shares and used for general corporate purposes
including, but not limited to, satisfying obligations under our employee benefit
plans. Treasury stock is recorded at cost.
Preferred Stock
- We are
authorized to issue 25 million shares of preferred stock, par value $0.01 per
share. We may issue preferred stock in one or more series and having
the rights, privileges, and limitations, including voting rights, conversion
rights, liquidation preferences, dividend rights and preferences and redemption
rights, as may from time to time be determined by our Board of
Directors. Preferred stock may be issued in the future in connection
with acquisitions, financings, or other matters, as our Board of Directors deems
appropriate. In the event that we determine to issue any shares of
preferred stock, a certificate of designation containing the rights, privileges,
and limitations of this series of preferred stock will be filed with the
Secretary of State of the State of Delaware. The effect of this preferred stock
designation power is that our Board of Directors alone, subject to Federal
securities laws, applicable blue sky laws, and Delaware law, may be able to
authorize the issuance of preferred stock which could have the effect of
delaying, deferring, or preventing a change in control of our company without
further action by our stockholders, and may adversely affect the voting and
other rights of the holders of our common stock. The issuance of preferred stock
with voting and conversion rights may also adversely affect the voting power of
the holders of our common stock, including the loss of voting control to
others.
Series A
Preferred Stock - During December 1999, our Board of Directors approved a
Certificate of Resolutions Designating Rights and Preferences of Preferred
Stock, filed with the Secretary of State of the State of Delaware on December
20, 1999. By this approval and filing, 200,000 shares of Series A
Preferred Stock were designated. Series A Preferred has the following
rights:
|
·
|
The
right to receive mandatory cash dividends equal to the greater of $0.001
per share or 100 times the amount of all dividends (cash or non-cash,
other than dividends of shares of common stock) paid to holders of the
common stock, which dividend is payable 30 days after the conclusion of
each calendar quarter and immediately following the declaration of a
dividend on common stock;
|
43
|
·
|
One
hundred votes per share of Series A Preferred on each matter submitted to
a vote of our stockholders;
|
|
·
|
The
right to elect two directors at any meeting at which directors are to be
elected, and to fill any vacancy on our Board of Directors previously
filled by a director appointed by the Series A Preferred
holders;
|
|
·
|
The
right to receive an amount, in preference to the holders of common stock,
equal to the amount per share payable to holders of common stock, plus all
accrued and unpaid dividends, and following payment of 1/100th of this
liquidation preference to the holders of each share of common stock, an
additional amount per share equal to 100 times the per share amount paid
to the holders of common stock;
|
|
·
|
The
right to exchange each share of Series A Preferred for 100 times the
consideration received per share of common stock in connection with any
merger, consolidation, combination or other transaction in which
shares of common stock are exchanged for or converted into cash,
securities or other property; and
|
|
·
|
The
right to be redeemed in accordance with our stockholder rights
plan.
|
While
accrued mandatory dividends are unpaid, we may not declare or pay dividends or
distributions on, or redeem, repurchase or reacquire, shares of any class or
series of junior or parity stock.
The
Series A Preferred was created in connection with our stockholders rights plan.
As of December 31, 2009, there were no shares of Series A Preferred
outstanding.
Series A
Convertible Preferred Stock - On June 19, 2001, our Board of Directors
approved a Certificate of Designations to create 500,000 shares of a Class of
Series A Convertible Preferred Stock, which was filed with the Secretary of
State of the State of Delaware on June 20, 2001. By this approval and
filing, 47,511 shares are designated as Series A Convertible Preferred Stock and
remain to be issued. Our Series A Convertible Preferred Stock, par
value $0.01 per share, has the following rights:
|
·
|
Series
A Convertible Preferred is convertible into shares of common stock at a
one-to-one ratio, subject to proportional adjustments in the event of
stock splits or combinations, and dividends or distributions of shares of
common stock, at the option of the holder; shares are subject to automatic
conversion as determined in each agreement relating to the purchase of
shares of Series A Convertible
Preferred;
|
|
·
|
Each
share of Series A Convertible Preferred is entitled to receive a
liquidation preference equal to the original purchase price of such share
in the event of liquidation, dissolution, or winding
up;
|
|
·
|
Upon
merger or consolidation, or the sale, lease or other conveyance of all or
substantially all of our assets, shares of Series A Convertible Preferred
are automatically convertible into the number of shares of stock or other
securities or property (including cash) to which the common stock into
which it is convertible would have been entitled;
and
|
|
·
|
Shares
of Series A Convertible Preferred are entitled to one vote per share, and
vote together with holders of common
stock.
|
As of
December 31, 2009, there were no shares of Series A Convertible Preferred
outstanding.
Series B
Convertible Redeemable Preferred Stock - On January 16, 2002, our Board
of Directors approved a Certificate of Designation, Preferences, Rights and
Limitations of Series B 12% Convertible Redeemable Preferred Stock, which was
filed with the Secretary of State of the State of Delaware on February 28,
2002. By this approval and filing, 100,000 shares were designated as
Series B 12% Convertible Redeemable Preferred Stock. Our Series B 12%
Convertible Redeemable Preferred Stock, par value $0.01 per share, has the
following rights:
|
·
|
Series
B Preferred shares accrue dividends at a rate of 12% per annum, or $1.20
per share, between the date of issuance and the first anniversary of
issuance;
|
|
·
|
Series
B Preferred is redeemable to the maximum extent permitted by law (based on
funds legally available for redemption) at a price per share of $15.00,
plus accrued dividends (a total of $16.20 per share) on the first
anniversary of issuance;
|
|
·
|
Series
B Preferred receive proceeds of $12.00 per share upon our liquidation,
dissolution or winding up;
|
|
·
|
To
the extent not redeemed on the first anniversary of issuance, Series B
Preferred is automatically convertible into the then existing general
class of common stock on the first anniversary of issuance at a price
equal to $16.20 divided by the greater of $0.20 or the lowest
publicly-sold share price during the 90 day period preceding the
conversion date, but in no event more than 19.9% of our outstanding
capital stock as of the date immediately prior to
conversion.
|
|
·
|
Upon
merger or consolidation, or the sale, lease or other conveyance of all or
substantially all of our assets, shares of Series B Preferred are
automatically convertible into the number of shares of stock or other
securities or property (including cash) to which the common stock into
which it is convertible would have been entitled;
and
|
44
|
·
|
Shares
of Series B Preferred are entitled to one vote per share and vote with
common stock, except where the proposed action would adversely affect the
Series B Preferred or where the non-waivable provisions of applicable law
mandate that the Series B Preferred vote separately, in which case Series
B Preferred vote separately as a class, with one vote per
share.
|
As of
December 31, 2009, there were no shares of Series B Convertible Redeemable
Preferred Stock have been issued or are currently outstanding.
Series C
Convertible Preferred Stock - On February 22, 2006, we filed with the
Secretary of State of the State of Delaware a Certificate of Designation of
Series C Convertible Redeemable Preferred Stock and on January 5, 2010 filed an
Amendment to the Certificate. By the approval and filing, 27,000
shares were designated as Series C Convertible Preferred Stock. Our
Series C Convertible Preferred Stock, par value $0.001 per share, as amended on
January 5, 2010, has the following rights:
|
·
|
Series
C Convertible Preferred shares are entitled to dividends at a rate of 8%
per annum, if, as and when declared by the Board of Directors. As of
December 31, 2009 and 2008, accumulated undeclared unpaid dividends were
$2.7 million and $4.6 million, respectively. The decrease in accumulated
unpaid dividends in 2009 is due to conversions of Series C shares by YA
Global during 2009;
|
|
·
|
Series
C Convertible Preferred shares receive proceeds of $1,000 per share upon
our liquidation, dissolution or winding
up;
|
|
·
|
Each
share of Series C Convertible Preferred is convertible, at the option of
the holder, into shares of our common stock at the lesser of (i)
$0.50 or (ii) 97% of the lowest closing bid price of our common
stock for the 125 trading days immediately preceding the date of
conversion; and
|
|
·
|
Series
C Convertible Preferred shares have voting rights on an as-converted basis
with the common stock.
|
As of
December 31, 2009, 8,642 shares of Series C Convertible Preferred Stock are
issued and outstanding. The holder of all of the outstanding shares
of our Series C Convertible Preferred Stock, YA Global, is limited by the
contractual provisions of their related Securities Purchase Agreements and other
related transaction documents from beneficial control of more than 4.99% of our
voting securities. Therefore, YA Global may not exercise all the voting rights
contained in the designation of these securities. See Note 4.
Series D
Convertible Preferred Stock - On January 5, 2010, we filed with the
Secretary of State of the State of Delaware a Certificate of Designation of
Series D Convertible Redeemable Preferred Stock. On January 7, 2010, we filed an
amendment with the Secretary of State of the State of Delaware to include
certain registration rights in connection with the Series D Convertible
Redeemable Preferred Stock. By the approval and filing, 25,000 shares were
designated as Series D Convertible Preferred Stock. On January 5,
2010, we issued 25,000 shares of Series D Convertible Preferred Stock to YA
Global for gross proceeds of $2,500,000. Our Series D Convertible Preferred
Stock, par value $0.01 per share, has the following rights:
|
·
|
Series
D Convertible Preferred shares are entitled to dividends at a rate of 8%
per annum, if, as and when declared by the Board of
Directors.
|
|
·
|
Series
D Convertible Preferred shares receive proceeds of $100 per share upon our
liquidation, dissolution or winding
up;
|
|
·
|
Each
share of Series D Convertible Preferred is convertible, at the option of
the holder, into shares of our common stock at the lesser of (i)
$0.02 or (ii) 97% of the lowest closing bid price of our common
stock for the 125 trading days immediately preceding the date of
conversion; and
|
|
·
|
Series
D Convertible Preferred shares have voting rights on an as-converted basis
with the common stock. Each
share of our Series D Convertible Preferred shares can vote 100,000 votes.
Thus, the 25,000 shares issued allow YA Global to vote a total of 2.5
billion votes.
|
45
Poison Pill
- On December 10, 1999, our Board of Directors adopted a stockholder
rights plan and declared a non-taxable dividend of one right to acquire our
Series A Preferred Stock, par value $0.01 per share, on each outstanding share
of our 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
us and to guard against partial or two-tiered tender offers, open market
accumulations, and other hostile tactics to gain control of us. The
stockholder rights plan was not adopted in response to any effort to acquire
control of us at the time of adoption. This stockholder rights plan
may have the effect of rendering more difficult, delaying, discouraging,
preventing, or rendering more costly an acquisition of us or a change in control
of us. Certain stockholders, who were our founders, Charles W. Fritz,
William E. Fritz and The Fritz Family Limited Partnership and their holdings
were exempted from the triggering provisions of our “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, our Certificate of Incorporation authorizes our Board of Directors to
designate and issue our preferred stock, in one or more series, the terms of
which may be determined at the time of issuance by our Board of Directors,
without further action by stockholders, and may include voting rights, including
the right to vote as a series on particular matters, preferences as to dividends
and liquidation, conversion, redemption rights, and sinking fund
provisions.
We are
authorized to issue a total of 25 million shares of Preferred Stock, par value
$0.01 per share. The issuance of any preferred stock could have a material
adverse effect on the rights of holders of our common stock, and, therefore,
could reduce the value of shares of our common stock. In addition,
specific rights granted to future holders of preferred stock could be used to
restrict our ability to merge with, or sell our assets to, a third
party. The ability of our 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 us or a change in our
control.
Note
4 – Financing
At
December 31, 2009, our financing transactions with YA Global, an accredited
investor, included shares of our Series C Convertible Preferred Stock issued in
2006, a series of fifteen secured convertible debentures issued between August
2006 and August 2009 and various warrants to purchase shares of our common
stock. On January 5, 2010, we entered into a further investment agreement with
YA Global related to our Series D Convertible Redeemable Preferred
Stock. This agreement affected many of the terms of, and the
disclosures related to, our financing arrangements with YA Global as of December
31, 2009.
The
January 5, 2010 investment agreement included the issuance to YA Global of
25,000 shares of our $100 Series D Convertible Redeemable Preferred Stock;
modified the conversion terms of all of our outstanding secured convertible
debentures and extended their maturity dates to July 29, 2012; issued additional
warrants to acquire 225,000,000 shares of our common stock; and modified the
terms of three outstanding warrants to acquire a total of 350,000,000 shares of
our common stock. The gross amount of this transaction was $2.5 million and we
received net proceeds of $1.9 million after fees of $100,000 and the redemption
of a $500,000 promissory note issued to YA Global on December 23,
2009.
We expect
that the modifications to our current outstanding financial instruments will be
accounted for as an extinguishment because the change in the conversion prices
and the maturity dates caused greater than a 10% difference in the net present
value of the future cash flows of the instruments. We estimate the
extinguishment loss to be approximately $4.9 million, which will be recognized
in the quarter ending March 31, 2010.
Series D
Convertible Redeemable Preferred Stock - The Series D Convertible
Redeemable Preferred Stock provides for an 8% cumulative dividend and, for 90
days after issuance, entitles the investor to vote on an as-converted basis with
the holders of the Company’s common stock, resulting in 100,000 votes for each
share of the Series D Preferred. Each share of Series D Preferred is
convertible, at the option of the holder, at a conversion price equal to the
lesser of (i) $.02 or (ii) 97% of the lowest closing bid price of our common
stock for the 125 trading days preceding the date of conversion, provided that
no conversion will be at a price less than the par value of the common stock.
The conversion price is also subject to adjustment for anti-dilution protection.
The Series D Preferred has a liquidation amount equal to $100 per share plus all
declared and unpaid dividends and is redeemable by us, at our option, at an
amount of $100 per share plus a redemption premium of 10%. The instrument is
also redeemable at the holder’s option upon certain events of default, which
include events and factors that are not related to interest or credit
risk.
The
accounting for the Series D Preferred will be reflected in our financial
statements for the quarterly period ending March 31, 2010. We have evaluated the
Series D Preferred under current accounting standards and have concluded that,
similar to our other financial instruments, the embedded conversion feature,
along with certain other embedded features, will require bifurcation and
classification as a derivative liability. Because the Series D Preferred
includes conditions for redemption that are outside our control, it will be
classified outside of Shareholders’ Equity, in the mezzanine section of our
balance sheet. The initial fair values of the compound embedded derivative
associated with the Series D Preferred and the 225,000,000 common stock warrants
that were issued as part of the January 5, 2010 investment agreement are
approximately $4.5 million and $2.4 million, respectively. Because these fair
values exceed the $2.5 million face amount of the Series D Preferred, we will
recognize an initial loss of $4.4 million in our quarter ending March 31,
2010.
46
In
addition to the issuance of the Series D Preferred described above, the January
5, 2010 investment agreement required us to seek shareholder approval to enact
the following changes relating to our common stock, a 1 share for 100 shares
reverse stock split, the fixing of our authorized shares at 5,000,000,000, and
the reduction in the par value from $0.01 to $0.001. On March 5, 2010, we filed
with the Securities and Exchange Commission a definitive proxy statement on
Schedule 14A and are scheduled to hold a Special Meeting of our shareholders on
March 30, 2010, to seek their approval.
In the
discussion that follows, we disclose the provisions of our financing
arrangements with YA Global as they existed at December 31, 2009 and 2008.
However, we have provided additional information in each of the disclosures
below to describe the significant changes as a result of the January 5, 2010
investment agreement and the estimated impact of those changes.
Series C
Convertible Preferred Stock - On February 17, 2006, we issued to YA
Global 22,000 shares of $1,000 Series C 8% Convertible Preferred Stock, with a
face value of $22 million. As amended on January 5, 2010, the Series C Preferred
is convertible at the lesser of $0.50 per share or 97% of the lowest closing bid
price of the common stock for the 125 trading days preceding the date of
conversion. Prior to the amendment, the Series C Preferred was
convertible into shares of common stock at the lower of $0.02 per share or 97%
of the lowest closing bid price of the common stock for the 30 trading days
immediately preceding the conversion date. Because the Series C Preferred
includes conditions for redemption that are outside our control, it is
classified outside of Shareholders’ Equity in the mezzanine section of our
balance sheet.
As of
December 31, 2009, 13,358 shares of the original 22,000 shares of Series C
Preferred have been converted into 1,240,037,100 of our common shares, leaving
8,642 shares of Series C Preferred with a face value of $8.6 million
outstanding. During 2009, there was a reassessment of the estimate of the number
of shares of preferred stock which were converted. From February 2008 through
April 2009, the trading market price of our common stock (and the conversion
price) was less than its par value. We are limited to issuing shares
of common stock at no less than the par value, and all shares of our common
stock issued in those conversions were issued at par value. However, the
methodology used to estimate the number of shares of preferred stock converted
during that time was based upon the value received for the shares issued, with
the difference between that value and the par value recorded as a
deemed dividend. On September 30, 2009, the methodology used to determine the
number of preferred shares being converted was changed such that it was no
longer dependent on the market value of the common shares issued. The number of
common shares issued did not change because we consistently issued those common
shares at a price no lower than par value. The change in estimate in the number
of shares converted resulted in a reduction in the preferred stock outstanding
of approximately $5.6 million, and a corresponding reduction in the accumulated
deficit of $3.0 million related to the deemed dividends, and $2.6 million
recorded as an increase to additional paid in capital.
Secured
Convertible Debentures
– The underlying agreements for each of the fifteen debentures issued to
YA Global are essentially the same, except in regard to the interest rate,
varying conversion prices per share, and the number of warrants that were issued
in conjunction with each of the debentures. The debentures are convertible into
our common stock, at any time, at the option of the holder, at the lower of a
fixed conversion price per share or a percentage of the lowest volume-weighted
average price (“VWAP”) for a specified number of days prior to the conversion
(the “lookback period”). The conversion is limited such that the holder cannot
exceed 4.99% ownership, unless the holder waives their right to such limitation.
All of the convertible debentures are secured according to the terms of a
Security Pledge Agreement dated August 23, 2006, which was entered into in
connection with the first convertible debenture issued to YA Global and which
provides YA Global with a security interest in substantially all of our
assets. The debentures are also secured by a Patent Security
Agreement dated July 29, 2008.
As
discussed above, subsequent to December 31, 2009, the terms of all of the
debentures were modified to extend the stated maturity date to July 29,
2012. The January 5, 2010 amendments also increased the look-back
period used to calculate the variable conversion price per share for all
debentures to a period of 125 days and increased the fixed portion of the
conversion price for certain of the debentures from $0.01 to
$0.02.
47
The table
below summarizes the significant terms of each of the debentures as of December
31, 2009, prior to the January 5, 2010 amendments:
Default
|
Conversion Price – Lower of Fixed Price or Percentage
of VWAP for Preceding Period
|
||||||||||||||||||||
Face
|
Interest
|
Interest
|
Fixed
|
Default
|
Preceding
|
||||||||||||||||
Debenture Issue Date
|
Amount
|
Maturity
|
Rate
|
Rate
|
Price
|
%
|
%
|
Period
|
|||||||||||||
August
24, 2006
|
$ | 5,000,000 |
7/29/2010
|
10%
|
n/a
|
$0.01
|
90%
|
n/a
|
30
Days
|
||||||||||||
December
29, 2006
|
2,500,000 |
7/29/2010
|
10%
|
n/a
|
$0.01
|
90%
|
n/a
|
30
Days
|
|||||||||||||
March
27, 2007
|
7,458,651 |
7/29/2010
|
13%
|
n/a
|
$0.01
|
90%
|
n/a
|
30
Days
|
|||||||||||||
August
24, 2007
|
1,775,000 |
7/29/2010
|
14%
|
n/a
|
$0.01
|
80%
|
n/a
|
10
Days
|
|||||||||||||
April
11, 2008
|
390,000 |
4/11/2010
|
15%
|
24%
|
$0.01
|
|
80%
|
75%
|
10
Days
|
||||||||||||
May
16, 2008
|
500,000 |
5/16/2010
|
15%
|
24%
|
|
$0.01
|
80%
|
50%
|
10
Days
|
||||||||||||
May
29, 2008
|
790,000 |
5/29/2010
|
15%
|
24%
|
$0.01
|
80%
|
50%
|
10
Days
|
|||||||||||||
July
10, 2008
|
137,750 |
7/10/2010
|
15%
|
24%
|
$0.01
|
80%
|
50%
|
10
Days
|
|||||||||||||
July
29, 2008
|
2,325,000 |
7/29/2010
|
14%
|
24%
|
$0.02
|
95%
|
50%
|
10
Days
|
|||||||||||||
October
28, 2008
|
2,325,000 |
7/29/2010
|
14%
|
20%
|
$0.02
|
95%
|
50%
|
10
Days
|
|||||||||||||
April
6, 2009
|
550,000 |
7/29/2010
|
14%
|
20%
|
$0.02
|
|
95%
|
50%
|
10
Days
|
||||||||||||
May
1, 2009
|
550,000 |
7/29/2010
|
14%
|
20%
|
$0.02
|
95%
|
50%
|
10
Days
|
|||||||||||||
June
5, 2009
|
715,000 |
7/29/2010
|
14%
|
20%
|
$0.02
|
95%
|
50%
|
10
Days
|
|||||||||||||
July
15, 2009
|
535,000 |
7/29/2010
|
14%
|
20%
|
$0.02
|
95%
|
50%
|
10
Days
|
|||||||||||||
August
14, 2009
|
475,000 |
7/29/2010
|
14%
|
20%
|
$0.02
|
95%
|
50%
|
10
Days
|
All the
debentures with YA Global contain provisions for acceleration of principal and
interest upon default. Certain of the debentures also contain default interest
rates and conversion prices, as reflected in the table above.
During
the 3rd quarter
of 2008, we were in default on our August 24, 2006 Convertible Debenture due to
non-payment of principal and interest in accordance with the terms of the
agreement. On September 24, 2008, we entered into a Letter Agreement with YA
Global which extended the maturity dates of both the August 24, 2006 and the
December 29, 2006 debentures to July 29, 2010. The extension was considered a
one-time extension for the specific period indicated but was not considered a
waiver of existing events of default. However, a waiver was subsequently
obtained from YA Global, effective December 31, 2008, which waiver is discussed
further below. During 2009, the maturity dates of the March 27, 2007 debenture
and the August 24, 2007 debenture were also extended to July 29,
2010.
We
obtained a waiver from YA Global, effective December 31, 2008 in which all prior
events of default and the related cross default provisions of other financing
instruments with YA Global were waived. YA Global waived the right to collect
any liquidated damages, penalties or fines which had not previously been paid by
us and also acknowledged that as of December 31, 2008, we were not under any
obligation to file a registration statement under any of the financing
arrangements. YA Global does, however, still have demand rights under certain
agreements which would require us to file registration statements in accordance
with the terms of the agreements.
In our
evaluation of these financing transactions, we concluded that the conversion
features were not afforded the exemption as conventional convertible instruments
due to the variable conversion rate; and they did not otherwise meet the
conditions set forth in current accounting standards for equity classification.
Because equity classification was not available for the conversion features, we
elected to bifurcate the compound derivatives, and carry them as derivative
liabilities, at fair value. Each compound derivative consists of (i) the
embedded conversion feature, (ii) down round protection features, and (iii)
default, non-delivery and buy-in puts which were combined into one compound
instrument that is carried as a component of derivative
liabilities.
Debenture
Conversions
|
1)
|
April 6,
2009 convertible debenture: On October 26, 2009,
$321,000 of the $550,000 face value convertible debenture was converted
into 30,000,000 shares of our common stock. The remaining principle
balance of $229,000 was converted into 19,741,379 shares of our common
stock on December 1, 2009.
|
|
2)
|
May 1, 2009
convertible debenture: On December 1, 2009, $256,000 of the
$550,000 face value convertible debenture was converted into 22,068,966
shares of our common stock. The remaining balance of $294,000 is still
outstanding as of December 31, 2009. As of March 22, 2010, there have been
no further conversions.
|
48
Fair Value
Considerations - In accordance with FASB
ASC 815 - Derivatives and
Hedging, we determined that the conversion features of the Series C
convertible preferred stock, and the August 2006, December 2006, July 2008,
October 2008, April 2009, May 2009 June 2009, July 2009 and August 2009
Debentures met the criteria of embedded derivatives and that the conversion
features of these instruments required bifurcation and accounting as derivative
instrument liabilities. Changes in the fair value of the derivative liability
for the embedded conversion option are charged or credited to income each
period. As permitted by FASB ASC 815-15-25, Recognition of Embedded
Derivatives, we have elected not to bifurcate the embedded derivatives in
the March 2007, August 2007, April 2008 or May 2008 Debentures and accordingly
these convertible instruments are being carried in their entirety at their fair
values, with the changes in the fair value of the Debentures charged or credited
to income each period.
Derivative
financial instruments arising from the issuance of convertible financial
instruments are initially recorded, and continuously carried, at fair value.
Upon conversion of any of the convertible financial instruments, the carrying
amount of the debt, including any unamortized premium or discount, and the
related derivative instrument liability are credited to the capital accounts
upon conversion to reflect the stock issued and no gain or loss is
recognized.
The fair
value of bifurcated derivative instrument liabilities and the fair value of
convertible instruments that are being carried in their entirety at fair value
will change due to the modification of the maturity date and the terms of the
conversion features of the convertible debentures, which modifications became
effective on January 5, 2010. The financial impact of these modifications is
discussed further below.
Embedded
Derivative Instruments – Series C Preferred Stock and August 2006, December
2006, July 2008, October 2008, April 2009, May 2009, June 2009, July 2009 and
August 2009 Convertible Debentures - Embedded derivative financial
instruments arising from the convertible instruments consist of multiple
individual features that were embedded in each instrument. For each convertible
instrument, we evaluated all significant features and, as required under current
accounting standards, aggregated the components into one compound derivative
financial instrument for financial reporting purposes. For financings recorded
in accordance with FASB ASC 815, the compound embedded derivative instruments
are valued using the Monte Carlo Simulation methodology because that model
embodies certain relevant assumptions (including, but not limited to, interest
rate risk, credit risk, and conversion/redemption privileges) that are necessary
to value these complex derivatives.
The
conversion price in each of the convertible debentures is subject to adjustment
for down-round, anti-dilution protection. Accordingly, if we sell
common stock or common share indexed financial instruments below the stated or
variable conversion price in the agreement, the conversion price adjusts to that
lower amount.
As
discussed above, on January 5, 2010, we entered into amendments to the
convertible debentures which extended the maturity dates and modified the terms
of the conversion prices. The modification changed the remaining term
for the debentures from 0.52 - 0.58 years to 2.56 years. For purposes of the
Monte Carlo Simulation calculations at December 31, 2009, we assigned a value to
the down round protection equal to the difference between the variable
conversion price using the stated look-back period prior to the amendment and
the 125 day look-back period in effect subsequent to the amendment. The effect
of extending the maturity dates to July 29, 2012 was not reflected in the
valuations as of December 31, 2009, but will be reflected in the valuations as
of March 31, 2010, the end of our first fiscal quarter in 2010.
The
assumptions included in the calculations are highly subjective and subject to
interpretation. Assumptions used as of December 31, 2009 included
exercise estimates/behaviors and the following other significant
estimates:
49
Remaining
|
Equivalent
|
Equivalent
|
|||||||||||||
Conversion
|
Term
|
Equivalent
|
Interest-Risk
|
Credit-Risk
|
|||||||||||
Prices
|
(years)
|
Volatility
|
Adjusted Rate
|
Adjusted Rate
|
|||||||||||
Series
C Convertible Preferred Stock
|
$0.0039
|
0.58
|
184%
|
8.00%
|
8.97%
|
||||||||||
August
24, 2006
|
|
$0.0036
|
0.58
|
184%
|
10.00%
|
8.97%
|
|||||||||
December
29, 2006
|
$0.0036
|
0.58
|
184%
|
10.00%
|
8.97%
|
||||||||||
July
10, 2008
|
$0.0032
|
0.52
|
183%
|
15.00%
|
8.97%
|
||||||||||
July
29, 2008
|
$0.0038
|
0.58
|
184%
|
14.00%
|
8.97%
|
||||||||||
October
28, 2008
|
$0.0038
|
|
0.58
|
184%
|
14.00%
|
8.97%
|
|||||||||
April
6, 2009
|
$0.0038
|
|
0.58
|
184%
|
14.00%
|
8.97%
|
|||||||||
May
1, 2009
|
$0.0038
|
|
0.58
|
184%
|
14.00%
|
8.97%
|
|||||||||
June
5, 2009
|
$0.0038
|
|
0.58
|
184%
|
14.00%
|
8.97%
|
|||||||||
July
15, 2009
|
$0.0038
|
0.58
|
184%
|
14.00%
|
8.97%
|
||||||||||
August
14, 2009
|
$0.0038
|
0.58
|
184%
|
14.00%
|
8.97%
|
Equivalent
amounts reflect the net results of multiple modeling simulations that the Monte
Carlo Simulation methodology applies to underlying assumptions.
Due to
the variable component of the conversion price, rapid fluctuations in the
trading market price may result in significant variations to the calculated
conversion price. For each debenture, we analyze the ratio of the conversion
price (as calculated based on the percentage of VWAP for the appropriate look
back period) to the trading market price for a period of time equal to the term
of the debenture to determine the average ratio for the term of the note. Each
quarter, the ratio in effect on the date of the valuation is compared with the
average ratio over the term of the debenture to determine if the calculated
conversion price is representative of past trends or if it is considered
unrepresentative due to a large fluctuation in the stock price over a short
period of time. If the calculated conversion price results in a ratio that
deviates significantly from the average ratio over the term of the agreement,
the average ratio of the conversion price to the trading market price is then
multiplied by the current trading market price to determine the variable portion
of the conversion price for use in the fair value calculations. This variable
conversion price is then compared with the fixed conversion price and, as
required by the terms of the debentures, the lower of the two amounts is used as
the conversion price in the Monte Carlo Simulation model used for valuation
purposes. On December 31, 2009, the fixed conversion price for each of the
debentures was equal to or higher than the calculated variable conversion price.
Accordingly, the variable conversion price was used in the Monte Carlo
Simulation model. This analysis is performed each quarter to determine if the
calculated conversion price is reasonable for purposes of determining the fair
value of the embedded conversion features (for instruments recorded under FASB
ASC 815) or the fair value of the hybrid instrument (for instruments recorded
under FASB ASC 815-15-25).
Hybrid Financial
Instruments Carried at Fair Value – 2007 and 2008 Convertible Debentures -
The March 2007, August 2007, April 11, 2008, May 16, 2008 and May 29,
2008 convertible debentures are recorded in accordance with FASB ASC 815-15-25
and the entire hybrid instrument was initially recorded at fair value, with
subsequent changes in fair value charged or credited to income each period.
These financial instruments are valued using the common stock equivalent
approach. The common stock equivalent is calculated using the shares
indexed to the debentures valued at the market price of our stock and the
present value of the coupon.
Subsequent
to the January 5, 2010 amendment, shares indexed to the debentures will be
calculated using the variable conversion price based on the 125 day look-back
period and the present value of the coupon from inception of the debentures to
the revised maturity date of July 29, 2012.
Prior to
the amendment, as of December 31, 2009, shares indexed to the debentures were
calculated using the variable conversion price calculated based on the 125 day
look-back period in order to embody the value of the anti-dilution protection
feature. The present value of the coupon was calculated based on the
coupon from inception of the financial instrument to the maturity date prior to
the modification. The effect of extending the maturity dates to July 29, 2012
was not reflected in the valuations as of December 31, 2009, but will be
reflected in the valuations as of March 31, 2010, the end of our first fiscal
quarter in 2010.
50
Current Period
Valuations - For the Series C convertible preferred stock and the August
2006 and December 2006 debentures, due to our previous default position with
respect to these instruments, the carrying value of each instrument in effect as
of December 31, 2006 was written up to its full face value during the fourth
quarter of 2006. For these instruments and the July 2008, October 2008, April
2009, May 2009, June 2009, July 2009 and August 2009 debentures, the embedded
derivative instrument, primarily the conversion feature, has been separated and
accounted for as a derivative instrument liability, as discussed above. This
derivative instrument liability is marked to market each reporting
period.
The March
2007, August 2007, April 2008 and May 2008 debentures were each initially
recorded at their full fair value pursuant to FASB ASC 815-15-25. That fair
value is marked-to-market each reporting period, with any changes in the fair
value charged or credited to income.
As
discussed above, the January 5, 2010 modification of the terms of the Series C
Preferred Stock and the debentures will change the carrying value of the host
instruments, the fair values of the bifurcated derivative liabilities and the
fair value of those debentures that are recorded in their entirety at fair value
pursuant to FASB ASC 815-15-25. Based on our evaluation of the impact
of the modification and resulting extinguishment, our expectations of the
effects of the January 5, 2010 amendments on our balance sheet (in thousands)
are as follows:
|
-
|
We
estimate the carrying value of the Series C preferred stock and the fair
value of the related embedded conversion feature to be $8,642 and $15,732,
respectively, compared with the amounts of $8,642 and $16,397,
respectively, recorded at December 31,
2009.
|
|
-
|
We
estimate the carrying value of the debentures, the fair value of the
related compound embedded conversion features and the fair value of those
debentures recorded in their entirety at fair value pursuant to FASB ASC
815-15-25 to be $14,224, $50,637 and $40,303, respectively, compared with
the amounts of $12,523, $34,588 and $37,678, respectively, recorded at
December 31, 2009.
|
For our
Series C preferred stock and convertible debentures, the following table
reflects the face value of the instruments and, as appropriate, either their
amortized cost carrying value and the fair value of the separately-recognized
compound embedded derivative or, for those debentures recorded in their entirety
at fair value, their fair value. The number of common shares (in thousands) into
which the instruments are convertible as of December 31, 2009 and December 31,
2008, does not reflect the effect of the January 5, 2010
amendments.
Embedded
|
Common
|
|||||||||||||||||||
December 31, 2009
|
Face
|
Carrying
|
Conversion
|
Fair
|
Stock
|
|||||||||||||||
Value
|
Value
|
Feature
|
Value
|
Shares
|
||||||||||||||||
(in thousands)
|
||||||||||||||||||||
Series C Convertible Preferred Stock
|
$ | 8,642 | $ | 8,642 | $ | 16,397 | $ | - | 2,215,812 | |||||||||||
August
24, 2006
|
$ | 5,000 | $ | 5,000 | 14,131 | - | 1,388,889 | |||||||||||||
December
29, 2006
|
2,500 | 2,500 | 6,926 | - | 925,989 | |||||||||||||||
March
27, 2007
|
7,459 | - | - | 25,046 | 2,071,848 | |||||||||||||||
August
24, 2007
|
1,775 | - | - | 6,573 | 554,688 | |||||||||||||||
April
11, 2008
|
390 | - | - | 1,412 | 121,875 | |||||||||||||||
May
16 ,2008
|
500 | - | - | 1,803 | 156,250 | |||||||||||||||
May
29, 2008
|
790 | - | - | 2,844 | 246,875 | |||||||||||||||
July
10, 2008
|
137 | 127 | 337 | - | 43,047 | |||||||||||||||
July
29, 2008
|
2,325 | 2,109 | 4,618 | - | 611,842 | |||||||||||||||
October
28, 2008
|
2,325 | 2,130 | 4,594 | - | 611,842 | |||||||||||||||
April
6, 2009
|
- | - | - | - | - | |||||||||||||||
May
1, 2009
|
294 | 120 | 580 | - | 77,368 | |||||||||||||||
June
5, 2009
|
715 | 71 | 1,410 | - | 188,158 | |||||||||||||||
July
15, 2009
|
535 | 253 | 1,056 | - | 140,789 | |||||||||||||||
August
14, 2009
|
475 | 213 | 936 | - | 125,000 | |||||||||||||||
Total
|
$ | 25,220 | $ | 12,523 | $ | 50,985 | $ | 37,678 | 9,480,272 |
51
Embedded
|
Common
|
|||||||||||||||||||
Face
|
Carrying
|
Conversion
|
Stock
|
|||||||||||||||||
December 31, 2008
|
Value
|
Value
|
Feature
|
Fair value
|
Shares
|
|||||||||||||||
(in thousands)
|
||||||||||||||||||||
Series C Convertible Preferred Stock
|
$ | 19,144 | $ | 19,144 | $ | 10,728 | $ | - | 21,456,650 | |||||||||||
August
24, 2006
|
$ | 5,000 | $ | 5,000 | 7,260 | - | 5,555,556 | |||||||||||||
December
29, 2006
|
2,500 | 2,500 | 3,556 | - | 3,703,957 | |||||||||||||||
March
27, 2007
|
7,459 | - | - | 13,478 | 8,287,390 | |||||||||||||||
August
24, 2007
|
1,775 | - | - | 3,217 | 1,972,222 | |||||||||||||||
April
11, 2008
|
390 | - | - | 736 | 433,333 | |||||||||||||||
May
16 ,2008
|
500 | - | - | 955 | 555,556 | |||||||||||||||
May
29, 2008
|
790 | - | - | 1,506 | 877,778 | |||||||||||||||
July
10, 2008
|
137 | 109 | 158 | - | 153,056 | |||||||||||||||
July
29, 2008
|
2,325 | 1,785 | 2,327 | - | 2,325,000 | |||||||||||||||
October
28, 2008
|
2,325 | 1,833 | 2,227 | - | 2,325,000 | |||||||||||||||
Total
|
$ | 23,201 | $ | 11,227 | $ | 26,256 | $ | 19,892 | 47,645,498 |
The terms
of the embedded conversion features in the convertible instruments presented
above provide for variable conversion rates that are indexed to our trading
common stock price. As a result, the number of indexed shares is subject to
continuous fluctuation. For presentation purposes, the number of shares of
common stock into which the embedded conversion feature of the Series C
convertible preferred stock was convertible as of December 31, 2009 was
calculated as face value plus assumed dividends (if declared), divided by the
lesser of the fixed rate ($0.02) or the calculated variable conversion price
using the 125 day look-back period. The number of shares of common stock into
which the embedded conversion feature in the convertible debentures was
convertible as of December 31, 2009 was calculated as the face value of each
instrument divided by the variable conversion price using a 125 day look-back
period.
The March
2007, August 2007, April 2008 and May 2008 debentures are carried in their
entirety at fair value in accordance with FASB ASC 815-15-25 and the value of
the embedded conversion feature is effectively embodied in those fair
values.
Changes
in the fair value of convertible instruments that are carried in their entirety
at fair value (the March 2007, August 2007, April 2008 and May 2008 debentures)
are reported as “Gain (loss) from change in fair value of hybrid financial
instruments” in the accompanying consolidated statements of operations. The
changes in fair value of these hybrid financial instruments were as
follows:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(in thousands)
|
||||||||
March
27, 2007
|
$ | (11,568 | ) | $ | 5,320 | |||
August
24, 2007
|
(3,356 | ) | (196 | ) | ||||
April
11, 2008
|
(676 | ) | (215 | ) | ||||
May
16, 2008
|
(848 | ) | (564 | ) | ||||
May
29, 2008
|
(1,338 | ) | (783 | ) | ||||
Gain/(loss)
from changes in fair value of hybrid financial instruments
|
$ | (17,786 | ) | $ | 3,562 |
Changes
in the fair value of derivative instrument liabilities related to the bifurcated
embedded derivative features of convertible instruments not carried at fair
value are reported as “Gain (loss) from change in fair value of derivative
liability – Series C preferred stock and debentures” in the accompanying
consolidated statement of operations. The changes in fair value of these
derivative financial instruments were as follows:
52
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(in thousands)
|
||||||||
Series
C Convertible Preferred Stock
|
$ | (13,904 | ) | $ | (3,397 | ) | ||
August
24, 2006
|
(6,871 | ) | 665 | |||||
December
29, 2006
|
(3,370 | ) | 406 | |||||
July
10, 2008
|
(179 | ) | (94 | ) | ||||
July
29, 2008
|
(2,291 | ) | (2,746 | ) | ||||
October
28, 2008
|
(2,367 | ) | (1,589 | ) | ||||
April
6, 2009
|
(95 | ) | - | |||||
May
1, 2009
|
(324 | ) | - | |||||
June
5, 2009
|
(730 | ) | - | |||||
July
15, 2009
|
(689 | ) | - | |||||
August
14, 2009
|
(622 | ) | - | |||||
Gain/(loss)
from change in fair value of derivative liability - Series C preferred
stock and debentures
|
$ | (31,442 | ) | $ | (6,755 | ) |
Warrants -
YA Global holds warrants to purchase shares of our common stock that were
issued in connection with the convertible debentures and the Series C
convertible preferred stock. The warrants are exercisable at the lower of a
fixed exercise price or a specified percentage of the current market price. From
time to time, the fixed exercise prices of the warrants held by YA Global have
been reduced as an inducement for YA Global to enter into subsequent financing
arrangements. In addition to the warrants issued to YA Global, certain other
warrants have been issued to consultants and other service
providers.
The
warrants issued to YA Global and others do not meet all of the established
criteria for equity classification in FASB ASC 815-40, Derivatives and Hedging – Contracts
in Entity’s Own Equity, and accordingly, are recorded as derivative
liabilities at fair value. Changes in the fair value of the warrants are charged
or credited to income each period.
The
January 5, 2010 investment agreement with YA Global amended the exercise price
of warrants indexed to 350,000,000 shares of common stock, which were issued in
July 2008. Due to full-ratchet anti-dilution provisions, the exercise price of
the warrants prior to the amendment was based on the lowest conversion price of
convertible debentures issued subsequent to July 2008; however, the amendment
fixed the exercise price at $0.01, subject to subsequent adjustment for
anti-dilution. The amendment reduced the exercise price of the July 2008
warrants resulting in an approximate decrease in fair value of
$3,500.
In
connection with the January 5, 2010 investment agreement we also issued to YA
Global warrants to purchase 225,000,000 shares of our common stock at an
exercise price of $0.01, expiring after seven years. These warrants will be
accounted for as a derivative liability and the initial fair value of these
warrants of $2.4 million will be reflected in our financial statements for the
quarterly period ending March 31, 2010.
The
following table summarizes the warrants outstanding (in thousands) prior to the
January 5, 2010 amendments and their fair value:
53
December 31,
|
December 31,
|
December 31,
|
December 31,
|
||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||||||||||||||
Exercise
|
Exercise
|
Expiration
|
Fair
|
Fair
|
|||||||||||||||||||||
Price
|
Price
|
Date
|
Warrants
|
Value
|
Warrants
|
Value
|
|||||||||||||||||||
Series C Convertible Preferred Stock
|
$ | 0.0039 | $ | 0.0200 |
2/17/2011
|
75,000 | $ | 712 | 75,000 | $ | 23 | ||||||||||||||
August
24, 2006
|
0.0039 | 0.0200 |
8/24/2011
|
175,000 | 1,697 | 175,000 | 193 | ||||||||||||||||||
December
29, 2006
|
0.0039 | 0.0200 |
12/29/2011
|
42,000 | 412 | 42,000 | 50 | ||||||||||||||||||
March
27, 2007
|
0.0039 | 0.0200 |
3/27/2012
|
125,000 | 1,238 | 125,000 | 150 | ||||||||||||||||||
August
24, 2007
|
0.0039 | 0.0200 |
8/24/2012
|
75,000 | 750 | 75,000 | 90 | ||||||||||||||||||
May
16, 2008
|
0.0039 | 0.0175 |
5/16/2015
|
7,500 | 77 | 7,500 | 10 | ||||||||||||||||||
May
29, 2008
|
0.0039 | 0.0100 |
5/29/2015
|
50,000 | 515 | 50,000 | 70 | ||||||||||||||||||
July
29, 2008
|
0.0047 | 0.0200 |
7/29/2015
|
450,000 | 4,500 | 450,000 | 602 | ||||||||||||||||||
Other
warrants
|
0.048-.035 | 0.011-3.45 |
Various
|
6,696 | 11 | 8,471 | 1 | ||||||||||||||||||
Total
|
1,006,196 | $ | 9,912 | 1,007,971 | $ | 1,189 |
The
warrants are valued using the Black-Scholes-Merton valuation methodology because
that model embodies all of the relevant assumptions that address the features
underlying these instruments. Significant assumptions used in this model as of
December 31, 2009 included an expected life equal to the remaining term of the
warrants, an expected dividend yield of zero, estimated volatility of 159% to
241%, and risk-free rates of return of 0.06% to 2.69%. For the risk-free rates
of return, we use the published yields on zero-coupon Treasury Securities with
maturities consistent with the remaining term of the warrants and volatility is
based upon our expected stock price volatility over the remaining term of the
warrants.
Changes
in the fair value of the warrants which are carried at fair value are reported
as "(Gain) loss from change in fair value of derivative liability - warrants" in
the accompanying consolidated statement of operations. The changes in the fair
value of the warrants were as follows:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(in thousands)
|
||||||||
Series
C Convertible Preferred Stock
|
$ | (689 | ) | $ | 85 | |||
August
24, 2006
|
(1,504 | ) | 1,540 | |||||
December
29, 2006
|
(362 | ) | 370 | |||||
July
10, 2008
|
(1,088 | ) | 1,113 | |||||
July
29, 2008
|
(660 | ) | 742 | |||||
October
28, 2008
|
(67 | ) | 12 | |||||
April
6, 2009
|
(445 | ) | 75 | |||||
June
5, 2009
|
(3,898 | ) | 479 | |||||
Other Warrants | (10 | ) | - | |||||
Total
|
$ | (8,723 | ) | $ | 4,416 |
Fair Value
Considerations – We adopted the
provisions of FASB ASC 820, Fair Value Measurement and
Disclosures, as of January 1, 2008, with respect to financial
instruments. As required by FASB ASC 820, assets and liabilities measured at
fair value are classified in their entirety based on the lowest level of input
that is significant to their fair value measurement. Our derivative financial
instruments which are required to be measured at fair value on a recurring basis
under FASB ASC 815-15-25 or FASB ASC 815 as of December 31, 2009
and 2008 are all measured at fair value using Level 3 inputs. Level 3
inputs are unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or
liabilities.
54
The
issuance of new financial instruments on January 5, 2010 in accordance with the
terms of the investment agreement with YA Global will impact the fair value of
the financial instruments that are measured at fair value on a recurring basis
using significant unobservable inputs (Level 3). Based on our
evaluation of the new instruments issued on January 5, 2010, the conversion
feature associated with the Series D Convertible Redeemable Preferred Stock,
along with certain other embedded features, will require bifurcation and
classification in liabilities as a compound embedded derivative financial
instrument. Calculation of the fair value of this compound embedded
derivative will require use of a valuation method, such as a Monte Carlo
Simulation, which includes Level 3 inputs. The additional 225,000,000 common
stock warrants will also require liability classification and use of a valuation
method which includes Level 3 inputs. The initial fair values of the compound
embedded derivative associated with the Series D Preferred and the 225,000,000
common stock warrants are approximately $4.5 million and $2.4 million,
respectively. These amounts will be recognized as “issuances” in the
reconciliation of changes in the fair value of financial instruments measured at
fair value using Level 3 inputs in our financial statements for the quarter
ending March 31, 2010.
The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value using Level 3 inputs during the year ended
December 31, 2009, prior to the January 5, 2010 investment
agreement:
Compound
|
||||||||||||
embedded
|
Warrant
|
|||||||||||
derivative
|
derivative
|
Total
|
||||||||||
(in thousands)
|
||||||||||||
Beginning
balance:
|
$ | 26,256 | $ | 1,189 | $ | 27,445 | ||||||
Issuances:
|
||||||||||||
April
6, 2009
|
531 | - | 531 | |||||||||
May
1, 2009
|
419 | - | 419 | |||||||||
June
5, 2009
|
679 | - | 679 | |||||||||
July
15 ,2009
|
367 | - | 367 | |||||||||
August
14, 2009
|
315 | - | 315 | |||||||||
Conversions:
|
||||||||||||
Series
C Preferred Stock
|
(8,235 | ) | - | (8,235 | ) | |||||||
April
6, 2009
|
(626 | ) | - | (626 | ) | |||||||
May
1, 2009
|
(163 | ) | - | (163 | ) | |||||||
Fair
value adjustments:
|
||||||||||||
Compound
embedded derivatives
|
31,442 | - | 31,442 | |||||||||
Warrant
derivatives
|
- | 8,723 | 8,723 | |||||||||
Ending
balance
|
$ | 50,985 | $ | 9,912 | $ | 60,897 |
Estimating
fair values of derivative financial instruments requires the development of
significant and subjective estimates that may, and are likely to, change over
the duration of the instrument with related changes in internal and external
market factors. In addition, valuation techniques are sensitive to changes in
the trading market price of our common stock, which has a high historical
volatility. Because derivative financial instruments are initially and
subsequently carried at fair values, our income will reflect the volatility in
these estimate and assumption changes.
Note
5 - Property and Equipment
As of
December 31, 2009 and 2008, property and equipment consisted of the
following:
55
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Furniture
and fixtures
|
419 | $ | 349 | |||||
Equipment
|
444 | 411 | ||||||
Total
|
$ | 863 | $ | 760 | ||||
Less:
Accumulated depreciation
|
$ | (734 | ) | $ | (681 | ) | ||
Total
property and equipment, net
|
$ | 129 | $ | 79 |
Depreciation
expense was $53,000 and $81,000 for the years ended December 31, 2009 and
2008, respectively.
Note
6 - Goodwill and Other Intangible Assets
At
December 31, 2009 and 2008, we had goodwill of $3.4 million, related to
our purchase of NeoMedia Europe. Goodwill represents the excess of
the purchase price paid over the fair value of the identifiable tangible and
intangible assets and liabilities acquired.
The
following table summarizes other intangible assets:
Patents and
Other
Intangibles
|
Proprietary
Software
|
Total
Intangibles
and
Proprietary
Software
|
||||||||||
(in
thousands)
|
||||||||||||
December
31, 2007
|
$ | 2,608 | $ | 3,413 | $ | 6,021 | ||||||
Additions
|
- | 12 | 12 | |||||||||
Amortization
|
(315 | ) | (687 | ) | (1,002 | ) | ||||||
December
31, 2008
|
2,293 | 2,738 | 5,031 | |||||||||
Additions
|
- | - | - | |||||||||
Amortization
|
(297 | ) | (662 | ) | (959 | ) | ||||||
December
31, 2009
|
$ | 1,996 | $ | 2,076 | $ | 4,072 | ||||||
Weighted-average
remaining amortization period in years
|
8.4 | 3.1 |
As of
December 31, 2009, we estimate future amortization expense of intangible assets
to be (in thousands):
2010
|
$ | 959 | ||
2011
|
907 | |||
2012
|
903 | |||
2013
|
344 | |||
2014
|
224 | |||
Thereafter
|
735 | |||
Total
future amortization expense
|
$ | 4,072 |
Note
7 - Valuation Accounts
We extend
credit to our customers as determined on an individual basis. At December 31,
2009 and 2008 an allowance for doubtful accounts was not required as the amounts
due from customers were considered to be collectible. The table below presents
the activity for the allowance accounts for the years ended December 31, 2009
and 2008:
56
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Beginning
balance
|
$ | - | $ | (78 | ) | |||
Bad
debt recovery (expense)
|
(9 | ) | 58 | |||||
Write-off
of uncollectible accounts
|
9 | 20 | ||||||
Ending
balance
|
$ | - | $ | - |
The
following table summarizes our inventory reserves as of December 31, 2009 and
2008:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Beginning
balance
|
$ | (81 | ) | $ | (80 | ) | ||
Provision
|
(55 | ) | (1 | ) | ||||
Charge-off
|
- | - | ||||||
Ending
balance
|
$ | (136 | ) | $ | (81 | ) |
Note
8 – Accrued Expenses
The
following table summarizes the accrued liabilities of December 31, 2009 and
2008:
December 31,
|
||||||||
2009
|
2008
|
|||||||
(in thousands)
|
||||||||
Accruals
for disputed services
|
$ | 2,412 | $ | 2,224 | ||||
Accrued
operating expenses
|
1,608 | 1,791 | ||||||
Accrued
payroll related expenses
|
158 | - | ||||||
Accrued
interest
|
3,114 | 1,772 | ||||||
Total
|
$ | 7,292 | $ | 5,787 |
Note
9 - Comprehensive Income (Loss)
Comprehensive
income consists of net income (loss) and other gains and losses affecting
shareholders’ investment that, under accounting principles generally accepted in
the United States, are excluded from net income. The following table
summarizes the balances and activity by component of other comprehensive income
as of December 31, 2009 and 2008:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(in thousands)
|
||||||||
Beginning
balance:
|
||||||||
Unrealized
gain/(loss) on marketable securities
|
$ | - | $ | (442 | ) | |||
Foreign
currency translation adjustment
|
14 | (90 | ) | |||||
Annual
Activity:
|
||||||||
Unrealized
gain/(loss) on marketable securities
|
- | 442 | ||||||
Foreign
currency translation adjustment
|
(103 | ) | 104 | |||||
Ending
balance
|
$ | (89 | ) | $ | 14 |
57
Note
10 - Income Taxes
As of
December 31, 2009 and 2008, the types of temporary differences between the tax
basis of assets and liabilities and their financial reporting amounts which gave
rise to deferred taxes, and their tax effects were as follows:
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
(in thousands)
|
||||||||
Net
operating loss carryforwards (NOL)
|
$ | 57,200 | $ | 56,922 | ||||
Capital
loss
|
3,343 | 3,388 | ||||||
Write-off
of long-lived assets
|
501 | 507 | ||||||
Amortization
of intangibles
|
(528 | ) | (502 | ) | ||||
Stock-based
compensation
|
2,337 | 2,238 | ||||||
Capitalized
software development costs and fixed assets
|
35 | 65 | ||||||
Deferred
revenue
|
419 | 188 | ||||||
Alternative
minimum tax credit carryforward
|
39 | 39 | ||||||
Inventory
reserve
|
29 | 30 | ||||||
Accruals
|
2,319 | 2,386 | ||||||
Impairment
loss
|
2,618 | 2,531 | ||||||
Derivative
gain/loss
|
22,922 | 982 | ||||||
Interest
expense
|
3,998 | 4,118 | ||||||
Total
deferred tax assets
|
95,232 | 72,892 | ||||||
Valuation
allowance
|
(95,232 | ) | (72,892 | ) | ||||
Net
deferred tax asset
|
$ | - | $ | - |
Due to
the uncertainty of the utilization and recoverability of the loss carry-forwards
and other deferred tax assets, we have reserved for the deferred tax assets
through a valuation allowance, as it is more likely than not that the deferred
tax assets will not be realizable.
For the
years ended December 31, 2009 and 2008, the income tax benefit differed from the
amount computed by applying the statutory federal rate of 34% as
follows:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(in thousands)
|
||||||||
Benefit
at federal statutory rate
|
$ | (22,880 | ) | $ | (3,137 | ) | ||
State
income taxes, net of federal benefit
|
- | (365 | ) | |||||
Permanent
and other difference, net
|
539 | 301 | ||||||
Decrease/(increase)
in valuation allowance
|
$ | (22,341 | ) | $ | (3,201 | ) |
As of
December 31, 2009, we had net operating loss carry forwards for federal tax
purposes totaling approximately $158.6 million, which may be used to offset
future taxable income, or, if unused, expire between 2011 and 2029 and a capital
loss carry-forward of $9.3 million. As a result of certain of our
equity activities, we anticipate that the annual usage of our pre-1998 net
operating loss carry forwards should be further restricted pursuant to the
provisions of Section 382 of the Internal Revenue Code.
In
addition to the above, our subsidiary NeoMedia Europe, had foreign operations
and is not included in our consolidated income tax balances
above. NeoMedia Europe did not have income tax expense during the
years ended December 31, 2009 and 2008.
58
NeoMedia
Europe has net operating loss carry forwards that are estimated to be $5.8
million and $4.4 million as of December 31, 2009 and 2008, respectively, not
included in our consolidated deferred tax assets stated above, that are fully
offset with a valuation allowance. Due to the uncertainty of the
utilization and recoverability of the loss carry forwards we have reserved for
the deferred tax assets through a valuation allowance, as it is more likely than
not that the deferred tax assets will not be realizable.
We
adopted FASB ASC Topic 740 Accounting for Uncertainty in Income Taxes as of
January 1, 2007. We have not taken any uncertain tax positions on any
of our open income tax returns filed through the period ended December 31,
2009. Our methods of accounting are based on established income tax
principles in the Internal Revenue Code and are properly calculated and
reflected within our income tax returns. In addition, we have filed
income tax returns in all applicable jurisdictions in which we had material
nexus warranting an income tax return filing.
We
re-assess the validity of our conclusions regarding uncertain tax positions on a
quarterly basis to determine if facts or circumstances have arisen that might
cause us to change our judgment regarding the likelihood of a tax position’s
sustainability under audit. We have determined that there were no
uncertain tax positions for the years ended December 31, 2009 and
2008.
Note
11 - Transactions With Related Parties
In
December 2006, we entered into a twenty-five month consulting agreement with SKS
Consulting of South Florida Corp. (“SKS”), whereby we pay SKS $1,000 per day for
services rendered by George O’Leary, the Chief Executive Officer of SKS and a
member of our Board of Directors. Under this agreement, in 2009 and 2008, we
paid SKS $1,500 and $37,000, respectively.
Note
12 - Commitments and Contingencies
We lease
our office facilities and certain office and computer equipment under various
operating leases. These leases provide for minimum rents and generally include
options to renew for additional periods. We incurred rent expense for our office
facilities of approximately $259,000 and $257,000 during the years ended
December 31, 2009 and 2008, respectively.
We are
party to various commitments and contingencies, including:
|
·
|
Operating
leases for office facilities, certain office and computer
equipment
|
|
·
|
Consulting
agreements that carry payment obligations into future
years
|
|
·
|
Various
payment arrangements with our vendors that call for fixed payments on past
due liabilities;
|
|
·
|
Notes
payable to certain vendors that mature at various dates in the
future;
|
|
·
|
A
purchase price guarantee obligation of $4.5 million related to our prior
acquisition of 12Snap;
|
|
·
|
Convertible
debentures with outstanding face amounts of $25.2
million.
|
The
following table sets forth the future minimum payments due under the above
commitments:
2010
|
2011
|
2012
|
2013
|
Total
|
||||||||||||||||
(in
thousands)
|
||||||||||||||||||||
Operating
leases
|
$ | 273 | $ | 138 | $ | 6 | $ | 2 | $ | 419 | ||||||||||
Vendor
and consulting agreements
|
646 | - | - | - | 646 | |||||||||||||||
Notes
payable
|
69 | - | - | - | 69 | |||||||||||||||
Notes
payable - YA Global
|
500 | - | - | - | 500 | |||||||||||||||
Purchase
price guarantee obligation
|
4,535 | - | - | - | 4,535 | |||||||||||||||
Convertible
debentures
|
- | 25,220 | - | - | 25,220 | |||||||||||||||
Total
|
$ | 6,023 | $ | 25,358 | $ | 6 | $ | 2 | $ | 31,389 |
As of
December 31, 2009, we had a continuing liability of $4.5 million relating to a
purchase price guarantee obligation associated with our acquisition and
subsequent disposal of a subsidiary during prior years.
59
In prior
years we acquired our Mobile Search patent family from an unrelated third party.
In the acquisition we agreed to pay to seller, as defined in that agreement, a
10% royalty, based on our revenues from those patents. To date we have not
earned any revenue from the mobile search patents and have not paid or incurred
any royalty to the seller. If we begin to earn revenues based on those patents
we will be obligated to pay the seller the agreed royalty.
Legal
Proceedings
We are
involved in various legal actions arising in the normal course of business, both
as claimant and defendant. Although it is not possible to determine with
certainty the outcome of these matters, it is the opinion of management that the
eventual resolution of the following legal actions is unlikely to have a
material adverse effect on our financial position or operating
results.
Ephrian Saguy,
iPoint – media, plc. and iPoint – media, Ltd. – On or around March 5,
2008, we received a summons and notice that the plaintiffs had commenced a third
party action in the Magistrate Court in Tel-Aviv-Jaffa, Israel seeking damages
from us and YA Global for breach of contract and unjust enrichment related to
services provided by iPoint and investment by us and YA Global. We have entered
into an assignment agreement with YA Global and have retained legal counsel in
Israel to represent us. The Company plans to vigorously defend this
lawsuit.
Rothschild Trust
Holdings, LLC – On September 19, 2008, we received a complaint filed in
the Circuit Court of the Eleventh Judicial Circuit, in and for Miami-Dade
County, Florida, by Rothschild Trust Holding, LLC alleging we owed royalty
payments for the use of certain patents. On February 25, 2009, we filed an
answer to the complaint. On July 20, 2009 we entered into non-binding mediation
and an interim agreement which required us to provide documentation for review
by Rothschild Trust Holding, LLC. The non-binding mediation and
interim agreement did not settle the matter. On January 4, 2010, we filed a
motion for summary judgment seeking to terminate the litigation. We believe the
complaint is without merit and we intend to vigorously defend against
it.
The Hudson
Consulting Group, LLC. – On June 30, 2009, we received from the Superior
Court of Fulton County, in the State of Georgia a Notice of Filing of Foreign
Judgment in favor of The Hudson Consulting Group, LLC, related to the judgment
granted against us by the Superior Court, Judicial District of Middlesex, in the
State of Connecticut, granted on August 22, 2008. In this judgment
Hudson sought to collect disputed fees related to their recruiting services. The
Notice of Filing seeks to collect on the judgment of approximately $61,000 which
was granted in Connecticut. We are seeking to settle this matter.
Note
13 - Retirement Plan
We
sponsor a 401(k) retirement plan in which substantially all of our employees are
eligible to participate. Each year, participants may contribute from
1% to 100% of their pretax annual compensation as defined by the Plan, up to
limits established by IRS regulations. All amounts contributed by
participants and earnings on these contributions are fully vested at all
times. The plan provides for matching and discretionary contributions
by us, although no such contributions to the plan have been made to
date.
Note
14 – Stock-Based Compensation
We have
five stock option plans, as summarized below. Options issued under these plans
have a term of 10 years. The plans allow for exercise prices of
options issued under the Option Plans to be set at amounts less than the fair
market value per share of our common stock on the date of grant. Options may be
granted with any vesting schedule as approved by the stock option committee of
our Board of Directors, but generally the vesting periods range from immediate
vesting to 5 years. Common shares required to be issued on the
exercise of stock options would be issued from our authorized and unissued
shares.
60
Shares Available
|
||||||||||
Shares Reserved
|
|
For
Issuance at
|
||||||||
Plan
|
Date Adopted
|
For Issuance
|
December 31, 2009
|
|||||||
2005
Stock Option Plan
|
December
16, 2005
|
60,000,000 | 60,000,000 | |||||||
2003
Stock Option Plan
|
September
24, 2003
|
150,000,000 | 18,700,000 | |||||||
2003
Stock Incentive Plan
|
October
31, 2003
|
30,000,000 | 27,000,000 | |||||||
2002
Stock Option Plan
|
June
6, 2002
|
10,000,000 | 20,000 | |||||||
1998
Stock Option Plan
|
May
27, 1998
|
8,000,000 | 165,000 | |||||||
105,885,000 |
We have
not registered the 60 million shares underlying the options in the 2005 Plan,
and as a result all 60 million options remain available for issuance. Options
issued under the 2002 and 2003 Stock Option Plans are non-qualified options. The
2003 Stock Incentive Plan provides for up to 30 million shares to be issued to
pay compensation and other expenses related to employees, former employees,
consultants, and non-employee directors.
The fair
value of stock-based awards was estimated using the Black-Scholes-Merton model
with the following weighted-average assumptions:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
Volatility
|
138-282 | % | 88-120 | % | ||||
Expected
dividends
|
- | - | ||||||
Expected
term (in years)
|
5.62 | 2.62 | ||||||
Risk-free
rate
|
0.50 | % | 4.35 | % |
A summary
of the transactions during the years ended December 31, 2009 and 2008 with
respect to our stock option plans follows:
Weighted-
|
||||||||||||||||
Average
|
||||||||||||||||
Weighted-
|
Contractual
|
|||||||||||||||
Average
|
Aggregate
|
Life
|
||||||||||||||
Exercice
|
Intrinsic
|
Remaining
|
||||||||||||||
Shares
|
Price
|
Value
|
in Years
|
|||||||||||||
(in thousands)
|
(in thousands)
|
|||||||||||||||
Outstanding
at January 1, 2008
|
115,511 | $ | 0.08 | |||||||||||||
Granted
|
56,194 | $ | 0.01 | |||||||||||||
Exercised
|
- | $ | - | |||||||||||||
Forfeited
|
(71,968 | ) | $ | 0.06 | ||||||||||||
Outstanding
at December 31, 2008
|
99,737 | $ | 0.02 | $ | - | 8.1 | ||||||||||
Exercisable
at December 31, 2008
|
57,839 | $ | 0.03 | $ | - | 7.1 | ||||||||||
Outstanding
at January 1, 2009
|
99,737 | $ | 0.02 | |||||||||||||
Granted
|
28,286 | $ | 0.01 | |||||||||||||
Exercised
|
(11,600 | ) | $ | 0.01 | ||||||||||||
Forfeited
|
(21,862 | ) | $ | 0.06 | ||||||||||||
Outstanding
at December 31, 2009
|
94,561 | $ | 0.02 | $ | 34 | 8.1 | ||||||||||
Exercisable
at December 31, 2009
|
69,697 | $ | 0.03 | $ | 25 | 7.8 |
During
the year ended December 31, 2009, options to purchase a total of 11,600,000
shares of our common stock, with an intrinsic value of $177,000 were exercised.
During the year ended December 31, 2008, no options were exercised. A
summary of the status of our non-vested options as of December 31, 2009, and
changes during the year ended December 31, 2009 is presented
below:
61
Weighted
|
||||||||
Average
|
||||||||
Grant
Date
|
||||||||
Nonvested Shares
|
Shares
|
Fair Value
|
||||||
(in
thousands)
|
||||||||
Nonvested
at January 1, 2009
|
41,898 | $ | 0.01 | |||||
Granted
|
28,286 | $ | 0.01 | |||||
Vested
|
(40,825 | ) | $ | 0.01 | ||||
Forfeited
|
(4,495 | ) | $ | 0.00 | ||||
Nonvested
at December 31, 2009
|
24,864 | $ | 0.01 |
Total
stock-based compensation expense is attributable to the granting of and the
remaining requisite service periods of stock options previously granted.
Compensation expense attributable to stock-based compensation for the year ended
December 31, 2009 and 2008 was $357,000 and $1.8 million, respectively. As of
December 31, 2009, the total unrecognized compensation cost related to
non-vested stock options was $217,000 net of expected forfeitures and the
related weighted-average period over which it is expected to be recognized is
approximately 2.3 years.
The
following table summarizes information about our stock options outstanding as of
December 31, 2009:
Options Outstanding
|
Options Exercisable
|
|||||||||||||||||||
Range of Exercise Prices
|
Number of
Shares
|
Weighted-
Average
Remaining
Life
|
Weighted-
Average
Exercise Price
|
Number of
Shares
|
Weighted-
Average
Exercise
Price
|
|||||||||||||||
(in thousands)
|
(in years)
|
(in thousands)
|
||||||||||||||||||
$0.01
to $0.05
|
86,920 | 8.3 | $ | 0.02 | 62,064 | $ | 0.02 | |||||||||||||
$0.06
to $0.10
|
5,191 | 5.5 | $ | 0.08 | 5,183 | $ | 0.08 | |||||||||||||
$0.10
to $0.15
|
2,100 | 5.5 | $ | 0.13 | 2,100 | $ | 0.13 | |||||||||||||
$0.15
to $0.20
|
350 | 6.1 | $ | 0.18 | 350 | $ | 0.18 | |||||||||||||
94,561 | 8.1 | $ | 0.02 | 69,697 | $ | 0.03 |
There
were no shares issued during 2009 under the 2003 Stock Incentive Plan. During
the year ended December 31, 2008, 500,000 shares were issued under the 2003
Stock Incentive Plan with an aggregate grant date fair value of $17,000, which
was recognized as expense.
62
Note
15 - Segment and Geographical Information
As of
December 31, 2009, we were structured and evaluated by our Board of Directors
and management as one business unit.
Consolidated
net sales and net loss from continuing operations for the years ended December
31, 2009 and 2008, and identifiable assets as of December 31, 2009 and 2008 by
geographic area, were as follows:
Year Ended December 31,
|
||||||||
2009
|
2008
|
|||||||
(in
thousands)
|
||||||||
Revenue:
|
||||||||
United
States
|
$ | 584 | $ | 397 | ||||
Germany
|
1,078 | 649 | ||||||
$ | 1,662 | $ | 1,046 | |||||
Net
Loss from Continuing Operations:
|
||||||||
United
States
|
$ | (66,005 | ) | $ | (5,950 | ) | ||
Germany
|
(1,373 | ) | (1,746 | ) | ||||
$ | (67,378 | ) | $ | (7,696 | ) |
As of December 31,
|
||||||||
2009
|
2008
|
|||||||
Identifiable
Assets:
|
|
|
||||||
United
States
|
$ | 8,738 | $ | 10,920 | ||||
Germany
|
686 | 568 | ||||||
$ | 9,424 | $ | 11,488 |
63
ITEM 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls
and Procedures
(a) Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures, as such term is defined in
Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934 (“the
Exchange Act”), that are designed to provide reasonable assurance that the
information required to be disclosed by us in reports filed under the Exchange
Act is (i) recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding
disclosure. A controls system cannot provide absolute assurance that the
objectives of the controls system are met, and no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within a company have been detected. Our management, with the participation
of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that, because of the material
weaknesses in internal control over financial reporting discussed in
Management’s Report on Internal Control Over Financial Reporting below, our
disclosure controls and procedures were not effective as of December 31,
2009. In light of these material weaknesses, we performed additional
post-closing procedures and analyses in order to prepare the Consolidated
Financial Statements included in this report. As a result of these procedures,
we believe our Consolidated Financial Statements included in this report present
fairly, in all material respects, our financial condition, results of operations
and cash flows for the periods presented.
(b) Management’s
Report on Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our internal control
over financial reporting includes those policies and procedures that pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets; provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect
on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim Consolidated Financial
Statements will not be prevented or detected on a timely basis.
Management
evaluated our internal control over financial reporting as of December 31,
2009. Management’s evaluation also included assessing the
effectiveness of internal controls over financial reporting at NeoMedia
Europe. In making this assessment, management used the criteria established
in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). As a result of this assessment and based on
the criteria in the COSO framework, management has concluded that, as of
December 31, 2009, our internal control over financial reporting was not
effective due to the existence of the following material
weaknesses:
64
Entity
Level Controls:
|
•
|
Our
senior management did not establish and maintain a proper tone as to
internal control over financial reporting. Specifically, our
senior management was unable, due to time constraints, to promptly address
the control weaknesses brought to their attention throughout this and the
previous year’s audit;
|
|
•
|
We,
through our senior management, failed to maintain formalized accounting
policies and procedures. Once implemented, the polices and procedures
should provide guidance to accounting personnel in the proper treatment
and recording of financial transactions, as well as proper internal
controls over financial reporting.
|
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the company to provide only management’s report
in this annual report.
(c) Change
in Internal Control over Financial Reporting
As of
December 31, 2009, management would like to report that it has remediated the
following material weaknesses noted in the December 31, 2008 Form
10-K:
|
·
|
We
have increased our internal controls over user access to the financial
accounting software package. User access has been amended and certain
mitigating controls, such as supervisory review and approval over
accounting software transactions, have been
implemented.
|
|
·
|
The
Company has improved its financial reporting processes concerning
convertible debentures and warrants. In coordination with its
third party accounting firm, we have improved communications and our
internal review and recording of these
transactions.
|
(d) Remediation
of Material Weaknesses
We have
commenced efforts to address the material weaknesses in our internal control
over financial reporting and the ineffectiveness of our disclosure controls and
procedures as of December 31, 2009. Although the remediation efforts are
underway, the above material weaknesses will not be considered remediated until
new controls over financial reporting are fully designed and operating
effectively for an adequate period of time.
65
PART
III
ITEM
10. Directors, Executive Officers and Corporate
Governance
Directors
and Executive Officers
Set forth
below are the names of our directors and officers, their business experience
during the last five years, their ages and all positions and offices that they
hold with us as of the date of this Annual Report.
Name
|
Age
|
Position
|
||
Iain
A. McCready
|
48
|
Chief
Executive Officer and Chairman
|
||
Michael
W. Zima
|
52
|
Chief
Financial Officer and Secretary
|
||
James
J. Keil
|
82
|
Director
|
||
George
G. O'Leary
|
47
|
Director
|
||
Laura
A. Marriott
|
40
|
Director
|
Family
Relationships
There are
no family relationships by and between or among the members of the Board or
other executives. None of our directors and officers are directors or executive
officers of any company that files reports with the SEC except as set forth in
the “Biographies of Officers and Directors” section below.
Election
of Directors and Officers
Directors
are elected at each annual meeting of shareholders and hold office until the
next succeeding annual meeting and the election and qualification of their
respective successors. Officers are elected annually by our Board of Directors
and hold office at the discretion of our Board of Directors. Our
By-Laws permit our Board of Directors to fill any vacancy and such director may
serve until the next annual meeting of shareholders and the due election and
qualification of their successor.
Biographies
of Officers and Directors
Iain A.
McCready. Mr. McCready joined
the Company on June 10, 2008 as Chief Executive Officer and Chairman of the
Board of Directors of the Company. Mr. McCready has extensive experience in
successfully growing technology businesses. From October 2004 through November
2007, Mr. McCready served as Chief Executive Officer of Mobiqa, a world leader
in mobile ticketing and mobile couponing solutions based on the creation,
optimization, delivery and redemption of barcodes to mobile phones. From
November 2003 through December 2007, Mr. McCready served as Non-Executive
Chairman of Scolocate Limited, a provider of co-location and managed services to
the IT marketplace, specializing in IT architecture, design and planning,
project management and implementation services. From September 2003 through
March 2004, Mr. McCready served as the Non-Executive Director of Concept Systems
Limited, a leading supplier of advanced IT systems, solutions and services to
the oil exploration and production industry. From January 2003 to November 2003,
Mr. McCready served as the Interim Chief Operating Officer at Hanon Solution
Limited. Prior to that, he served for twenty years at KSCL, Scotland’s largest
software house (now part of Convergys), developing customer care and billing
applications for the world’s leading mobile phone operators. Mr. McCready had
held a number of positions during his tenure at KSCL including Chief Operating
Officer and Customer Services Director.
Michael W.
Zima. Mr. Zima joined the Company on August 28, 2008 and was
appointed Chief Financial Officer and Corporate Secretary on September 17, 2008.
From 2006 to August 2008, Mr. Zima was a Senior Manager in the Consulting
Division of Solomon Edwards Group, LLC, where he served a publicly traded
television broadcasting company and a publicly traded enterprise software
company, assisting both in SEC reporting matters. From 2004 to 2006, Mr. Zima
served as a Senior Consultant with Horne Murdock Cole, where he served a
publicly traded television broadcasting company assisting them with SEC
reporting matters and a publicly traded textile manufacturing company assisting
them with the implementation of SOX documentation and testing processes. From
2002 to 2004, Mr. Zima served as Director of Finance for a non-profit social
service agency. From 1991 to 2002, Mr. Zima served as a senior financial
executive for both publicly and privately held businesses. Mr. Zima began his
career in public accounting in 1980, working for several firms including
McGladrey & Pullen. Mr. Zima received his BBA from Emory University in 1980
and has been a Certified Public Accountant in Georgia since
1982.
66
James J.
Keil. J. J. Keil has been a Director of NeoMedia since August
1996. Mr. Keil currently is a member of the Compensation, Stock
Option and Audit Committees. Mr. Keil is founder and President of
Keil & Keil Associates, now known as Keil Partners, LLC, a marketing,
consulting and Government Reseller firm now located in Chicago, Illinois
specializing in Reselling Hardware and Software Products and Solutions to the
various agencies of the Federal Government. Prior to having his own
businesses Mr. Keil worked for 38 years at IBM and Xerox Corporation in various
marketing, sales and senior executive positions. From 1989 to 1995,
Mr. Keil was on the board of directors of Elixir Technologies Corporation (a
non-public corporation) and from 1990 to 1992 was the Chairman of its Board of
Directors. From 1992 to 1996, Mr. Keil served on the board of
directors of Document Sciences Corporation. Mr. Keil holds a B.S.
degree from the University of Dayton and did Masters level studies at the
Harvard Business School and the University of Chicago in 1961/62.
George G.
O’Leary. Mr. O’Leary has been a Director of NeoMedia since in
February 2007, and is currently the President of SKS Consulting of South Florida
Corp. He is also a member the board of directors of ISONICS Corporation
(ISON.PK), where he is currently Chairman and acting CFO. Prior to assuming his
duties with the Company; Mr. O’Leary was and still is a board member and a
consultant to NeoGenomics (NGNM.OB) and was acting Chief Operating Officer from
October 2004 to April 2005. Prior to becoming a director of NeoGenomics, Mr.
O’Leary was the President and CFO of Jet Partners, LLC from 2002 to 2004. From
1996 to 2000, Mr. O’Leary was CEO and President of Communication Resources
Incorporated (‘CRI”). Prior
to CRI, Mr. O’Leary was Vice President of Operations of Cablevision Industries,
where he ran $125 million business for this major cable operator until it was
sold to Time Warner.
Laura A.
Marriott. Ms. Marriott was named to our Board of Directors in
January 2009. Ms. Marriott had recently served as President of the Mobile
Marketing Association (“MMA”) since July 15,
2005 and prior to that, served as Director of Marketing for Intrado, Inc. from
April 1, 2003 through July 14, 2005. Effective January 1, 2009, Ms.
Marriott became a member of the Board of Advisors of the MMA. During her tenure
at MMA, the MMA membership experienced substantial growth, established global
headquarters and regional chapters throughout the world, and developed
guidelines for the industry. Earlier this year, she was named one of the
industry’s Top 10 Women in Wireless by FierceMarkets. Laura has
more than eighteen years of experience in the high-tech industry in the areas of
business development, product management and marketing.
Director
Qualifications and Experience
The
following table identifies some of the experience, qualifications, attributes
and skills that the Board considered in making its decision to appoint and
nominate directors to our Board. This information supplements the biographical
information provided above. The vertical axis displays the primary factors
reviewed by the Board in evaluating a Board candidate:
Experience,
Qualification, Skill or Attribute
|
Mr.
McCready
|
Mr.
Keil
|
Mr.
O'Leary
|
Ms.
Marriott
|
||||
Professional
standing in chosen field
|
x
|
x
|
x
|
x
|
||||
Expertise
in mobile technology or related industries
|
x
|
x
|
||||||
Expertise
in information technology and I.P. matters
|
x
|
x
|
x
|
x
|
||||
Audit
committee financial expert (actual or potential)
|
x
|
|||||||
Civic
and community involvement
|
||||||||
Served
as public company director during past 5 years(1)
|
x
|
|||||||
Diversity
by race, gender or culture
|
x
|
|||||||
Expertise
in barcode technology
|
x
|
|||||||
Expertise
with respect to software products
|
x
|
x
|
x
|
|||||
Expertise
in marketing
|
x
|
x
|
x
|
x
|
||||
Senior-level
managerial experience
|
x
|
x
|
x
|
x
|
(1) Mr.
O'Leary is currently the Chairman and acting Chief Financial Officer of Isonics
Corporation (ISON.PK) and is currently
a director of NeoGenomics, Inc. (NGNM.OB).
Legal
Proceedings
None of
the members of the Board or other executives has been involved in any bankruptcy
proceedings, criminal proceedings, any proceeding involving any possibility of
enjoining or suspending members of our Board or other executives from engaging
in any business, securities or banking activities, and have not been found to
have violated, nor been accused of having violated, any federal or state
securities or commodities laws. In
addition, in the last ten years, none of the members of the Board or other
executives have been a party to any judicial or administrative proceedings (i)
resulting from involvement in mail or wire fraud or fraud in connection with any
business entity, or (ii) based on violations of federal or state securities,
commodities, banking or insurance laws and regulations, or any settlement to
such actions other than settlements of civil proceedings among private parties;
and, none have incurred disciplinary sanctions or orders imposed by stock,
commodities or derivatives exchanges or other self-regulatory
organizations.
Promoters
and Control Persons
None.
BOARD
LEADERSHIP STRUCTURE
Board
Leadership Structure, Executive Sessions of Non-Management
Directors
Presently,
our positions of Chief Executive Officer and Chairman of the Board are combined,
with Mr. McCready serving in such capacities. The Board has chosen to combine
the Chief Executive Officer and Board chair positions because it believes it
leverages the ability of Mr. McCready to interface interactively and effectively
with both management and the Board regarding the highly technical nature of our
business.
We have not
designated a lead independent director at this time.
Our
non-management directors meet without management present at each of the Board's
regularly scheduled in-person meetings. If the Board convenes for a special
meeting, the non-management directors will meet in an executive session if
circumstances so warrant.
Risk
Oversight
The Board
oversees the business of the Company and considers the risks associated
with our business strategy and decisions. The Board implements its risk
oversight function both as a whole and through its committees. In
particular:
-
The Audit Committee oversees risks related to our financial statements, the financial reporting process, accounting and legal matters. The Audit Committee meets in executive session with the Company's Chief Financial Officer and with representatives of our independent registered public accounting firm.
-
The Compensation Committee manages risks related to our compensation philosophy and programs. The Compensation Committee reviews and approves compensation programs and may engage the services of compensation consultants to ensure that it adopts appropriate levels of compensation commensurate with industry standards.
-
The Stock Option Committee manages risks related to our stock option plans. The Stock Option Committee reviews and approves stock option plans and may consult with consultants as necessary to ensure that our stock option plans are administered appropriately.
Each of
the Committee Chairs reports to the full Board regarding materials risks as
deemed appropriate.
67
CORPORATE
GOVERNANCE
Committees
of our Board of Directors
Our Board
of Directors has an Audit Committee, a Compensation Committee and a Stock Option
Committee. There is not a standing Nominating Committee, and there
have been no material changes to the procedures by which security holders may
recommend nominees to the Company’s Board of Directors during the period covered
by this Annual Report.
Audit
Committee – The
purpose of the Audit Committee is to provide assistance to our Board of
Directors in fulfilling their oversight responsibilities relating to our
consolidated financial statements and financial reporting process and internal
controls in consultation with our independent registered public accountants and
internal auditors. The Audit Committee is also responsible for
ensuring that the independent registered public accountants submit a formal
written statement to us regarding relationships and services which may affect
the auditors’ objectivity and independence. During the year ended
December 31, 2009, members of the Audit Committee were independent directors
George G. O’Leary and James J. Keil. Mr. O’Leary is designated as a financial
expert serving on our Audit Committee.
Compensation
Committee – The
Compensation Committee is responsible for recommending compensation and benefits
for our executive officers to our Board of Directors and for administering our
Incentive Plan for our management. Independent directors James J. Keil and
George G. O’Leary were members of our Compensation Committee during
2009.
Stock Option
Committee – The
Stock Option Committee has responsibility for administering our stock option
plans. During 2009, the committee was comprised of independent directors James
J. Keil and George G. O’Leary.
Nominations
of
Directors –
As
noted above, we do not have a standing Nominating Committee. With respect
to identifying director nominees, the Board does not have a formal diversity
policy. Although the Board does not currently have formal specific minimum
criteria for nominees, substantial relevant and diverse business, academic and
industry experience would generally be considered important qualifying criteria,
as would the ability to attend and prepare for Board and shareholder
meetings.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange Act requires our officers and directors, and persons who
own more than ten percent of a registered class of our equity securities, to
file reports of ownership and changes in ownership with the
SEC. Officers, directors and greater than ten percent shareholders
are required by SEC regulation to furnish us with copies of all Section 16(a)
forms they file.
Based
solely on a review of the copies of such forms furnished to us, we believe that
during the year ended December 31, 2009, Mr. George G. O’Leary did not timely
file three Form 4s to report his beneficial ownership of additional shares and
options granted in 2007 and additional shares and options granted on two
occasions in 2008.
Code
of Ethics
We have
adopted a Code of Ethics, as required by the rules of the SEC, which is
referenced hereto as exhibit 14. This code of ethics applies to all of our
directors, officers and employees. The code of ethics, and any amendments to, or
waivers from, the code of ethics, is available in print, at no charge, to any
shareholder who requests such information.
ITEM
11. Executive Compensation
Summary
Compensation Table
The
following table sets forth certain information with respect to the compensation
paid to those persons who were our Named Executive Officers during the year
ended December 31, 2009:
All
|
||||||||||||||||||||||||
Option
|
Other
|
|||||||||||||||||||||||
Name and
|
Salary
|
Bonus
|
Awards
|
Compensation
|
Total
|
|||||||||||||||||||
Principal Position
|
Year
|
($)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||||||||
Iain
A. McCready
|
2009
|
$ | 234,982 | $ | - | $ | 9,386 | $ | 9,699 | $ | 254,067 | |||||||||||||
Chief
Executive Officer
|
2008
|
$ | 168,893 | $ | 88,568 | $ | 149,304 | $ | 30,327 | $ | 437,092 | |||||||||||||
Michael
W. Zima
|
2009
|
$ | 129,500 | - | $ | 5,560 | $ | 3,849 | $ | 138,909 | ||||||||||||||
Chief
Financial Officer
|
2008
|
$ | 46,756 | - | $ | 28,866 | $ | 464 | $ | 76,086 | ||||||||||||||
Christian
Steinborn
|
2009
|
$ | 210,277 | $ | - | $ | 8,432 | $ | 14,954 | $ | 233,663 | |||||||||||||
Chief
Executive Officer of
|
2008
|
$ | 245,361 | $ | - | $ | - | $ | 15,190 | $ | 260,551 | |||||||||||||
NeoMedia
Europe, AG
|
Narrative
Disclosure To Summary Compensation Table
All
amounts presented for the value of Option Awards represent the aggregate grant
date fair value computed in accordance with FASB ASC 718.
Iain A.
McCready – Mr.
McCready became our Chief Executive Officer on June 10, 2008. His employment is
governed by an employment agreement as of that date, which expired on May 29,
2010 and which was subsequently amended on January 14, 2010 to expire on May 29,
2012. Under the original agreement, his annual salary was set at ₤160,000
British Pounds. He was also eligible to receive an annual incentive bonus based
on criteria established by the Compensation Committee of up to ₤80,000 and an
annual payment in-lieu of his participation in our employee benefit programs of
₤6,095.
68
For 2008,
Mr McCready was eligible to receive a fixed bonus of ₤20,000; an incentive bonus
based on criteria established by the Compensation Committee of up to ₤60,000 and
an annual payment in-lieu of his participation in our employee benefit programs
of ₤6,095. During 2008, Mr. McCready received the pro-rata portion of his
salary, his employee benefit payment, his fixed bonus of ₤20,000 and ₤30,000,
one half of his incentive bonus. In connection with funding
negotiations between us and YA Global, and effective on April 1, 2009, Mr.
McCready agreed to a 10% salary reduction and a deferral of his incentive bonus
payable in 2009. Mr. McCready‘s adjusted annual salary rate for the balance of
2009 was ₤144,000. Under the terms of the January 14, 2010 amendment, Mr.
McCready’s annual salary reverted to ₤160,000 as of January 1,
2010. He continues to be eligible to receive an annual bonus of up to
₤80,000 based on criteria established by the Compensation Committee. During
2009, Mr. McCready received his annual salary and his employee benefit
payment.
Mr.
McCready has received four grants of options to purchase our common stock. Mr.
McCready’s employment agreement provided for the grant of two options to
purchase our common stock. The first grant was made on the date of his
employment for 16,025,643 shares with an exercise price of $0.01 per share and
vesting equally over a 15 month period. The second grant was made on November
15, 2008 for 16,025,643 shares of our common stock with an exercise price of
$0.01 per share and vesting on November 29, 2009. In connection with his 10%
salary reduction in 2009, Mr. McCready was granted an option on April 29, 2009,
to purchase 886,260 shares of our common stock with an exercise price of $0.02
per share, vesting in equal monthly amounts over 12 months from the date of
grant. In connection with the amendment of his employment agreement on January
14, 2010, Mr. McCready will receive an option to purchase 18 million shares of
our common stock, vesting in 24 equal monthly amounts, beginning on May 29,
2010.
All Other
Compensation for Mr. McCready includes amounts paid to him in 2008 for
consulting services prior to his employment in the amount of $30,327 and in
2008, and 2009, the pro-rata portions of his employee benefit
payment.
Mr.
McCready is eligible to earn as additional incentive compensation a bonus upon a
successful sale of the company on or before May 29, 2012. The bonus is payable
in the amount of 2.5% of the sale proceeds, if the sale proceeds are at least
$45 million but not to exceed $200 million. Upon the occurrence of a Sale
Transaction or Change in Control (as defined), Mr. McCready’s unvested options
will be immediately vested and exercisable.
Mr.
McCready is also the Chairman of our Board of Directors but is not eligible to
receive additional compensation in that capacity.
Michael W.
Zima – Mr. Zima became our Chief Financial Officer on September 17, 2008.
His employment is not governed by an employment agreement. Mr. Zima’s annual
salary was originally $140,000 and he was eligible to receive a bonus of $10,000
based on his performance against specified objectives on the anniversary of his
employment. In connection with funding negotiations between us and YA Global,
and effective on April 1, 2009, Mr. Zima agreed to a 10% salary reduction and a
deferral of his bonus payable in 2009. Mr. Zima’s adjusted annual salary rate
for the balance of 2009 was $126,000. Effective on January 1, 2010 Mr. Zima’s
salary reverted to his original salary of $140,000 per year. Mr. Zima has
received three grants of options to purchase our common stock. In connection
with his 10% salary reduction in 2009, Mr. Zima was granted an option to
purchase 525,000 shares of our common stock on April 29, 2009, with an exercise
price of $0.02 per share and monthly vesting in equal amounts over 12 months
from the date of grant. During 2008, Mr. Zima received two grants of options to
purchase our common stock. The first grant was made on August 28, 2008, the date
of his employment, prior to his promotion to Chief Financial Officer, for an
option to purchase 500,000 shares of our common stock with an exercise price of
$0.01 per share and vesting in equal annual amounts over a four year period. The
second grant in 2008 was made upon his promotion to Chief Financial Officer for
an option to purchase 4,500,000 shares of our common stock with an exercise
price of $0.01 per share and vesting in equal annual amounts over a four year
period. All Other Compensation for Mr. Zima includes amounts related to his
participation in our employee benefit plans.
69
Dr. Christian
Steinborn – Dr. Steinborn serves as the Chief Executive Officer of our
NeoMedia Europe subsidiary. Dr. Steinborn served as our Chief Operating Officer
from October 1, 2007 until June 11, 2008. His employment is governed by an
employment agreement which set his annual salary at €160,000 Euros. In
connection with funding negotiations between us and YA Global, and effective on
April 1, 2009, Dr. Steinborn agreed to a 10% salary reduction. Dr Steinborn’s
adjusted annual salary rate for the balance of 2009 was €144,000 Euros.
Effective on January 1, 2010 Dr. Steinborn’s salary reverted to his original
salary of €160,000 Euros per year. During 2009 Dr. Steinborn received the
pro-rata portions of his annual salary rates. Dr. Steinborn has received several
stock option grants during his employment and his tenure as an officer. In
connection with his 10% salary reduction in 2009, Dr. Steinborn was granted an
option to purchase 796,200 shares of our common stock on April 29, 2009, with an
exercise price of $0.02 per share and monthly vesting in equal amounts over 12
months from the date of grant. Dr Steinborn’s other grants included a grant on
December 23, 2006 for 400,000 shares with exercise prices ranging from $0.045
per share to $0.175 per share vesting in equal annual installments over four
years. On February 16, 2007 he entered in to an incentive option agreement under
which he was eligible to earn an option to purchase up to 500,000 shares of our
common stock per year over each of the next four years. Dr. Steinborn earned the
first allocation based on 2007 objectives and an option to purchase 500,000
shares of our common stock were vested and are exercisable at $0.047 per share.
He did not earn the second allocation based on 2008 objectives. Dr. Steinborn
earned the third allocation based on 2009 objectives and an option to purchase
500,000 shares of our common stock were vested and are exercisable at $0.01 per
share. On December 20, 2007, he was granted 1,600,000 options to purchase shares
of our common stock with an exercise price of $0.011 per share, vesting equally
over a four year period. All Other Compensation for Dr. Steinborn includes the
annual value of his company provided automobile.
Outstanding
Equity Awards at Year-End
The
following table sets forth certain information relative to outstanding option
awards held by the Named Executive Officers as of December 31,
2009:
Option Awards
|
|||||||||||||||||||
Equity Incentive Plan
|
|||||||||||||||||||
Number of Securities
|
Awards: Number of
|
||||||||||||||||||
Underlying
|
Securities Underlying
|
Option
|
|||||||||||||||||
Unexercised Options
|
Unexercised
|
Exercise
|
Option
|
||||||||||||||||
Exercisable
|
Unexercisable
|
Unearned Options
|
Price
|
Expiration
|
|||||||||||||||
Name
|
(#)
|
(#)
|
(#)
|
($)
|
Date
|
||||||||||||||
Iain
A. McCready
|
(1)
|
16,025,643 | - | - | $ | 0.0100 |
6/10/2018
|
||||||||||||
Chief
Executive Officer
|
(2)
|
16,025,643 | - | - | $ | 0.0100 |
11/15/2018
|
||||||||||||
(3)
|
590,840 | 295,420 | $ | 0.0200 |
4/29/2019
|
||||||||||||||
Michael
W. Zima
|
(4)
|
125,000 | 375,000 | - | $ | 0.0100 |
8/28/2018
|
||||||||||||
Chief
Financial Officer
|
(5)
|
1,125,000 | 3,375,000 | - | $ | 0.0100 |
9/17/2018
|
||||||||||||
(6)
|
350,000 | 175,000 | - | $ | 0.0200 |
4/29/2019
|
|||||||||||||
Christian
Steinborn
|
(7)
|
100,000 | - | - | $ | 0.0450 |
2/23/2016
|
||||||||||||
Chief
Executive officer of
|
(7)
|
100,000 | - | - | $ | 0.0750 |
2/23/2016
|
||||||||||||
NeoMedia
Europe, AG
|
(7)
|
100,000 | - | - | $ | 0.1250 |
2/23/2016
|
||||||||||||
(7)
|
100,000 | - | - | $ | 0.1750 |
2/23/2016
|
|||||||||||||
(8)
|
500,000 | - | - | $ | 0.0470 |
2/15/2017
|
|||||||||||||
(8)
|
500,000 | - | - | $ | 0.0100 |
2/15/2017
|
|||||||||||||
(8)
|
- | - | 500,000 |
Various
|
2/15/2017
|
||||||||||||||
(9)
|
800,000 | 800,000 | - | $ | 0.0105 |
12/20/2017
|
|||||||||||||
(10)
|
530,800 | 265,400 | - | $ | 0.0200 |
4/29/2019
|
(1)
|
Mr.
McCready’s option grant on June 10, 2008 vested in 15 equal monthly
installments beginning on June 29, 2008 and was completely vested on
August 29, 2009.
|
(2)
|
Mr.
McCready’s option grant on November 15, 2008 vested in its entirety on
November 29, 2009.
|
(3)
|
Mr.
McCready’s option grant on April 29, 2009 vests in 12 equal monthly
installments beginning on May 29, 2009 and will completely vest on April
29, 2010.
|
70
(4)
|
Mr.
Zima’s option grant on August 28, 2008 vests over a 4 year period, 25%
vesting on each subsequent anniversary date of the
grant.
|
(5)
|
Mr.
Zima’s option grant on September 17, 2008 vests over a 4 year period, 25%
vesting on each subsequent anniversary date of the
grant.
|
(6)
|
Mr.
Zima’s option grant on April 29, 2009 vests in 12 equal monthly
installments beginning on May 29, 2009 and will completely vest on April
29, 2010.
|
(7)
|
Dr
Steinborn’s option grant on December 23, 2006 vests over a 3 year period,
25% vesting on the grant date and 25% on each subsequent anniversary date
of the grant.
|
(8)
|
Dr.
Steinborn’s incentive option agreement dated February 16, 2007 originally
provided for up to 2,000,000 options to purchase our shares. Each year 25%
of the original incentive option plan could be earned and vested based on
the achievement of goals as determined by the Compensation Committee. It
was determined that the first 25% increment of this plan, for options to
purchase 500,000 shares, were earned and vested. It was determined that
the second 25% increment of this plan was not earned. It was determined
that the third 25% increment of this plan, for options to purchase 500,000
shares, were earned and vested. The exercise price of each portion of the
options earned under this plan is established at the date it is
earned.
|
(9)
|
Dr
Steinborn’s option grant on December 20, 2007 vests over a 4 year period,
25% vesting on each subsequent anniversary date of the
grant.
|
(10)
|
Dr.
Steinborn’s option grant on April 29, 2009 vests in 12 equal monthly
installments beginning on May 29, 2009 and will completely vest on April
29, 2010.
|
Additional
Narrative Disclosure
Retirement
Benefits
We offer
a defined contribution plan to our United States employees in accordance with
Section 401(K) of the Internal Revenue Code. Under the provisions of this plan
eligible employees may defer a portion of their pre-tax compensation into the
plan. However, we do not make any matching contributions to the
plan.
Change
in Control Agreements
Our Chief
Executive Officer, Iain A. McCready is employed under the terms of an Employment
Agreement dated June 10, 2008, as amended on January 14, 2010, whereby if he is
terminated without cause, he is entitled to nine months' salary, currently
valued at ₤120,000; a prorated portion of any declared but unpaid incentive
bonus; any earned sale bonus; and accelerated vesting of all remaining unvested
stock options.
In
connection with funding negotiations between us and YA Global, and effective on
April 29, 2009 all directors and 11 employees of the company, including Mr.
McCready, Mr. Zima and Dr. Steinborn, were granted accelerated vesting of all
time-vesting options and all earned incentive options to purchase shares of our
common stock, upon a change in control of the company.
Director
Compensation
The
following table sets forth certain information relative to compensation paid to
outside directors for the year ended December 31, 2009:
Fees
|
|||||||||||||||||||||
Earned or
|
|
|
All
|
||||||||||||||||||
Paid in
|
Stock
|
Option
|
Other
|
||||||||||||||||||
Cash
|
Awards
|
Awards
|
Compensation
|
Total
|
|||||||||||||||||
Name
|
($)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||||||
James
J. Keil
|
$ | 47,525 | $ | - | $ | 6,381 | $ | - | $ | 53,906 | |||||||||||
George
O'Leary
|
$ | 51,900 | $ | - | $ | 7,466 | $ | 1,500 | $ | 60,866 | |||||||||||
Laura
A. Marriott
|
$ | 30,375 | $ | - | $ | 35,823 | $ | - | $ | 66,198 |
71
Narrative
To Director Compensation Table
All
amounts presented for the value of Option Awards represent the aggregate grant
date fair value computed in accordance with FASB ASC 718.
Outside
directors are compensated through a combination of cash and stock
options. Cash compensation amounts payable to the Directors,
described below, were established as of January 1, 2009. Effective on April 1,
2009, amounts payable to the Directors were reduced by 10% in connection with
funding negotiations between us and YA Global. Effective January 1, 2010, the
amounts payable to the Directors reverted to their original
amounts.
:
|
·
|
$4,000
as a quarterly retainer for each independent member of the
Board.
|
|
·
|
$4,000
for each regular quarterly meeting of the Board of Directors, for each
independent member of the Board.
|
|
·
|
$250
for each unanimous consent resolution in-lieu of a meeting of the Board of
Directors, for each independent member of the
Board.
|
|
·
|
$3,000
per quarter for the Audit Committee Chairman and $2,500 per quarter for
each Audit Committee member for each regular quarterly meeting of the
Audit Committee of the Board of
Directors.
|
|
·
|
$3,000
for the Compensation Committee Chairman and $2,500 for each Compensation
Committee member for each semi-annual quarterly meeting of the
Compensation Committee of the Board of
Directors.
|
|
·
|
$1,000
for the Compensation Committee Chairman and $500 for each Compensation
Committee member for each unanimous consent resolution in-lieu of a
meeting of the Compensation Committee of the Board of
Directors.
|
|
·
|
$500
for the Stock Option Committee Chairman and $250 for each Stock Option
Committee member for each unanimous consent resolution in-lieu of a
meeting of the Stock Option Committee of the Board of
Directors.
|
During
2009 Mr. O’Leary’s consulting firm, SKS Consulting of South Florida Corp.
(“SKS”) received $1,500 for services provided to the company. For further
information, see Item 13 – Certain Relationships and Related Transactions and
Director Independence.
Grants
of Plan-based Awards
We are a
“smaller reporting company” as defined by Regulation S-K and, as such, are not
required to provide this information.
ITEM
12. Security Ownership of Certain Beneficial Owners and
Management
The
following table sets forth certain information regarding beneficial ownership of
our common stock as of, March 22, 2010: (i) by each of our directors, (ii) by
each of the Named Executive Officers, (iii) by all of our executive officers and
directors as a group, and (iv) by each person or entity known by us to
beneficially own more than 5% of any class of our outstanding shares. As of
March 22, 2010, there were 2,267,567,835 shares of our common stock
outstanding:
72
Common Stock
|
Series C Convertible
Preferred Stock
|
Series D Convertible
Preferred Stock
|
Combined
Voting percent
of Common
Stock and
Series D
Convertible
|
||||||||||||||||||||||||||
Beneficial
|
Percent of
|
Beneficial
|
Percent of
|
Beneficial
|
Percent of
|
Preferred
|
|||||||||||||||||||||||
Name and Address
of Beneficial Owner
|
Ownership
(1)
|
Class (1)
|
Ownership
(1)
|
Class (1)
|
Ownership
(1)
|
Class (1)
|
Stock
(1)
|
||||||||||||||||||||||
Directors
and Named Executive
Officers
|
|||||||||||||||||||||||||||||
Iain A. McCready
(2)
(3)
|
32,937,546 | 1.5 | % | - | * | - | * | * | |||||||||||||||||||||
Michael W. Zima (2)
(4)
|
1,775,000 | * | - | * | - | * | * | ||||||||||||||||||||||
Christian Steinborn
(2)
(5)
|
5,112,526 | * | - | * | - | * | * | ||||||||||||||||||||||
James J. Keil (2)
(6)
|
5,602,500 | * | - | * | - | * | * | ||||||||||||||||||||||
George G. O'Leary
(2)
(7)
|
3,115,680 | * | - | * | - | * | * | ||||||||||||||||||||||
Laura A. Marriott
(2)
(8)
|
1,427,500 | * | - | * | - | * | * | ||||||||||||||||||||||
Officers and
Directors as a Group (6 Persons) (9)
|
49,970,752 | 2.2 | % | - | * | - | * | 1.0 | % | ||||||||||||||||||||
Other
Beneficial
Owners
|
|||||||||||||||||||||||||||||
YA Global
Investments, LP (10)
|
36,331,729 | 1.6 | % | 8,642 | 100.0 | % | 25,000 | 100.0 | % | 53.2 | % | ||||||||||||||||||
Total
|
36,331,729 | 1.6 | % | 8,642 | 100.0 | % | 25,000 | 100.0 | % | 53.2 | % | ||||||||||||||||||
Shares outstanding | 2,267,567,835 | 8,642 | 25,000 |
______________________________________
*
Indicates less than 1%.
(1)
|
Applicable
percentage of ownership is based on 2,267,567,835 shares of Common Stock
outstanding; 25,000 shares of Series D Convertible Preferred Stock
outstanding; and the combined voting power of the Common Stock and Series
D Convertible Preferred Stock in the amount of 4,767,567,835 shares as of
March 22, 2010. Percentage ownership is determined based on shares owned
together with securities exercisable or convertible into shares of Common
Stock within 60 days of March 22, 2010 for each stockholder. Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities. Shares of Common Stock subject to securities
exercisable or convertible into shares of Common Stock that are currently
exercisable or exercisable within 60 days of March 22, 2010 are deemed to
be beneficially owned by the person holding such securities for the
purpose of computing the percentage of ownership of such person, but are
not treated as outstanding for the purpose of computing the percentage
ownership of any other person. Our Common Stock, Series C
Preferred Stock and Series D Preferred Stock are our only issued and
outstanding classes of securities eligible to vote. From January 5, 2010
until April 5, 2010, each share of Series D Preferred Stock is
entitled to vote on an as-converted basis with the Common
Stock multiplied by one hundred thousand (100,000). Due to
contractual restrictions, Series C Preferred Stock are currently not
eligible to vote.
|
(2)
|
Address
of the referenced individual is c/o NeoMedia Technologies, Inc., Two
Concourse Parkway, Suite 500, Atlanta, GA,
30328.
|
(3)
|
Iain
A. McCready is our Chief Executive Officer and Chairman of our Board of
Directors. Ownership includes shares of common stock issuable
upon exercise of stock options that are exercisable within 60 days of
March 22, 2010.
|
(4)
|
Michael
W. Zima is our Chief Financial Officer. Ownership includes
shares of common stock issuable upon exercise of stock options that are
exercisable within 60 days of March 22,
2010.
|
(5)
|
Christian
Steinborn is Chief Executive officer of our subsidiary NeoMedia Europe,
AG. Ownership includes 2,116,326 shares of common stock and
2,996,200 shares of common stock issuable upon exercise of stock options
that are exercisable within 60 days of March 22,
2010.
|
(6)
|
James
J. Keil is a member of our Board of Directors. Ownership
includes 2,500,000 shares of common stock and 2,500,000 shares of common
stock issuable upon exercise of stock options that are exercisable within
60 days of March 22, 2010.
|
(7)
|
George
O'Leary is a member of our Board of Directors. Ownership
includes 1,022,028 shares owned by SKS Consulting of South Florida Corp, a
company that Mr. O'Leary currently serves as President, and 2,093,652
shares of common stock issuable upon exercise of stock options that are
exercisable within 60 days of March 22,
2010.
|
73
(8)
|
Ms.
Laura Marriott is a member of our Board of Directors. Ownership includes
shares of common stock issuable upon exercise of stock options that are
exercisable within 60 days of March 22,
2010.
|
(9)
|
Includes
an aggregate of 44,332,398 options to purchase shares of common stock
which will have vested within 60 days of March 22, 2010 and 5,638,354
shares owned directly by our named executive officers and
directors.
|
(10)
|
The
address of YA Global Investments, L.P. (“YA Global”) is 101 Hudson Street,
Suite 3700, Jersey City, NJ 07302. The information presented herein is
based on information provided by YA and based on the records of the
Company. Ownership includes 36,331,729 shares of Common Stock; 8,548
shares of Series C Preferred Stock; 94 shares of Series C Preferred Stock
owned by an affiliate, Yorkville Advisors GP, LLC; and 25,000 shares of
Series D Preferred Stock. Series C Preferred Stock is entitled to vote on
an as-converted basis with holders of our Common Stock with respect to the
amount of Common Shares receivable upon conversion of such preferred
stock. However the holders of our Series C Preferred Stock are subject to
contractual limitations in regards to their beneficial ownership,
including their ability to exercise their voting rights, to the extent
that they can not exceed 9.99% combined beneficial ownership. If such
holders were to declare us in default or if they issue a notice waiving
the 9.99% limitation, upon 61 days notice, and comply with the SEC’s
beneficial ownership reporting requirements for affiliates, they would be
able to vote their Series C Preferred Stock on an as-converted
basis.
|
ITEM
13. Certain Relationships and Related Transactions, and Director
Independence
Related
Party Transactions
In
December 2006, we entered into a 25 month consulting agreement with SKS
Consulting of South Florida Corp. (“SKS”), whereby we paid SKS for services
rendered by our director Mr. O’Leary and other employees of SKS. Payments under
this agreement in the form of cash, shares of our common stock and stock options
are described in Item 12 above.
Director
Independence
As of the
date of filing of this Annual Report, all of our non-executive directors,
including Mr. Keil, Mr. O’Leary and Ms. Marriott, are independent directors. Mr.
Iain McCready, our Chief Executive Officer and Chairman of the Board of
Directors, is not independent.
ITEM
14. Principal Accountant Fees and Services
Audit
and Audit-Related Fees
The
aggregate fees billed by our independent auditors, Kingery & Crouse, P.A.,
for the audit of our annual consolidated financial statements for the years
ended December 31, 2009 and 2008 and for the review of our quarterly financial
statements during 2009 and 2008 were $157,000 and $134,000, respectively. Our
auditors did not provide any tax compliance or planning services or any services
other than those described above.
Audit
Committee Pre-approval
The Audit
Committee of our Board of Directors approves all non-audit services provided by
our primary accountants.
74
PART
IV
ITEM
15. Exhibits and Financial Statement Schedules
(a)
Financial Statements and Schedules
The
financial statements are set forth under Item 8 of this Annual Report on
Form 10-K. Financial statement schedules have been omitted because they are
either not required, not applicable, or the information is otherwise
included.
(b)
|
Exhibits
|
Exhibit
Number
|
Description
|
Filed
Herewith
|
Form
|
Exhibit
|
Filing Date
|
|||||
3.1
|
Articles
of Incorporation of Dev-Tech Associates, Inc. and amendment
thereto
|
SB-2
|
3.1
|
11/25/1996
|
||||||
3.2
|
Bylaws
of DevSys, Inc.
|
SB-2
|
3.2
|
11/25/1996
|
||||||
3.3
|
Restated
Certificate of Incorporation of DevSys, Inc.
|
SB-2
|
3.3
|
11/25/1996
|
||||||
3.4
|
By-laws
of DevSys, Inc.
|
SB-2
|
3.4
|
11/25/1996
|
||||||
3.5
|
Articles
of Merger and Agreement and Plan of Merger of DevSys, Inc and Dev-Tech
Associates, Inc.
|
SB-2
|
3.5
|
11/25/1996
|
||||||
3.6
|
Certificate
of Merger of Dev-Tech Associates, Inc. into DevSys, Inc.
|
SB-2
|
3.6
|
11/25/1996
|
||||||
3.7
|
Articles
of Incorporation of Dev-Tech Migration, Inc. and amendment
thereto
|
SB-2
|
3.7
|
11/25/1996
|
||||||
3.8
|
By-laws
of Dev-Tech Migration, Inc.
|
SB-2
|
3.8
|
11/25/1996
|
||||||
3.9
|
Restated
Certificate of Incorporation of DevSys Migration, Inc.
|
SB-2
|
3.9
|
11/25/1996
|
||||||
3.10
|
Form
of By-laws of DevSys Migration, Inc.
|
SB-2
|
3.1
|
11/25/1996
|
||||||
3.11
|
Form
of Agreement and Plan of Merger of Dev-Tech Migration, Inc. into DevSys
Migration, Inc.
|
SB-2
|
3.11
|
11/25/1996
|
||||||
3.12
|
Form
of Certificate of Merger of Dev-Tech Migration, Inc. into DevSys
Migration, Inc.
|
SB-2
|
3.12
|
11/25/1996
|
||||||
3.13
|
Certificate
of Amendment to Certificate of Incorporation of DevSys, Inc. changing our
name to NeoMedia Technologies, Inc.
|
SB-2
|
3.13
|
11/25/1996
|
||||||
3.14
|
Form
of Certificate of Amendment to Certificate of Incorporation of NeoMedia
Technologies, Inc. authorizing a reverse stock split
|
SB-2
|
3.14
|
11/25/1996
|
||||||
3.15
|
Form
of Certificate of Amendment to Restated Certificate of Incorporation of
NeoMedia Technologies, Inc. increasing authorized capital and creating
preferred stock
|
SB-2
|
3.15
|
11/25/1996
|
||||||
3.16
|
Certificate
of Amendment to the Certificate of Designation of the Series "C"
Convertible Preferred Stock date January 5, 2010.
|
8-K
|
3.1
|
1/11/10
|
||||||
3.17
|
Certificate
of Designation of the Series "D" Convertible Preferred Stock date January
5, 2010.
|
8-K
|
3.2
|
1/11/10
|
||||||
3.18
|
Certificate
of Amendment to the Certificate of Designation of the Series "D"
Convertible Preferred Stock dated January 7, 2010
|
8-K
|
3.3
|
1/11/10
|
||||||
3.19
|
Certificate
of amendment to the certificate of designation of the series D convertible
preferred stock issued by the Company to YA Global dated January 5,
2010.
|
8-K
|
3.1
|
3/11/10
|
||||||
10.1
|
Warrant
dated March 30, 2005, granted by NeoMedia to Thornhill Capital
LLC
|
S-3/A
|
10.12
|
7/18/2005
|
||||||
10.2
|
Warrant
dated March 30, 2005, granted by NeoMedia to Cornell Capital Partners
LP
|
S-3/A
|
10.13
|
7/18/2005
|
75
Exhibit
Number
|
Description
|
Filed
Herewith
|
Form
|
Exhibit
|
Filing Date
|
|||||
10.3
|
Definitive
Sale and Purchase Agreement between NeoMedia and Gavitec
|
8-K
|
16.1
|
2/21/2006
|
||||||
10.4
|
Definitive
Sale and Purchase Agreement between NeoMedia and Sponge
|
8-K
|
16.1
|
2/22/2006
|
||||||
10.5
|
Investment
Agreement, dated February 17, 2006 between NeoMedia and Cornell Capital
Partners
|
8-K
|
10.1
|
2/21/2006
|
||||||
10.6
|
Investor
Registration Rights Agreement, dated February 17, 2006 between NeoMedia
and Cornell Capital Partners
|
8-K
|
10.2
|
2/21/2006
|
||||||
10.7
|
Irrevocable
Transfer Agent Instruction, dated February 17, 2006, by and among
NeoMedia, Cornell Capital Partners and American Stock Transfer & Trust
Co.
|
8-K
|
10.3
|
2/21/2006
|
||||||
10.8
|
Warrant,
dated February 17, 2006
|
8-K
|
10.4
|
2/21/2006
|
||||||
10.9
|
Warrant,
dated February 17, 2006
|
8-K
|
10.5
|
2/21/2006
|
||||||
10.10
|
Warrant,
dated February 17, 2006
|
8-K
|
10.6
|
2/21/2006
|
||||||
10.11
|
Assignment
Agreement, dated February 17, 2006 by NeoMedia and Cornell Capital
Partners
|
8-K
|
10.7
|
2/21/2006
|
||||||
10.12
|
Assignment
of Common Stock, dated February 17, 2006 between NeoMedia and Cornell
Capital Partners
|
8-K
|
10.8
|
2/21/2006
|
||||||
10.13
|
Securities
Purchase Agreement, dated August 24, 2006, between the Company and Cornell
Capital Partners, LP
|
8-K
|
10.1
|
8/30/2006
|
||||||
10.14
|
Investor
Registration Rights Agreement, dated August 24, 2006, between the Company
and Cornell Capital Partners, LP
|
8-K
|
10.2
|
8/30/2006
|
||||||
10.15
|
Pledge
and Security Agreement, dated August 24, 2006, between the Company and
Cornell Capital Partners, LP
|
8-K
|
10.3
|
8/30/2006
|
||||||
10.16
|
Secured
Convertible Debenture, dated August 24, 2006, issued by the Company to
Cornell Capital Partners, LP
|
8-K
|
10.4
|
8/30/2006
|
||||||
10.17
|
Irrevocable
Transfer Agent Instructions, dated August 24, 2006, by and among the
Company, Cornell Capital Partners, LP and American Stock Transfer &
Trust Co.
|
8-K
|
10.5
|
8/30/2006
|
||||||
10.18
|
A
Warrant, dated August 24, 2006
|
8-K
|
10.6
|
8/30/2006
|
||||||
10.19
|
B
Warrant, dated August 24, 2006
|
8-K
|
10.7
|
8/30/2006
|
||||||
10.20
|
C
Warrant, dated August 24, 2006
|
8-K
|
10.8
|
8/30/2006
|
||||||
10.21
|
D
Warrant, dated August 24, 2006
|
8-K
|
10.9
|
8/30/2006
|
||||||
10.22
|
Amendment
to Warrant No. CCP-002, dated August 24, 2006, between the
Company and Cornell Capital Partners, LP
|
8-K
|
10.1
|
8/30/2006
|
||||||
10.23
|
Amendment
to “A” Warrant No. CCP-001, dated August 24, 2006, between the
Company and Cornell Capital Partners, LP
|
8-K
|
10.11
|
8/30/2006
|
||||||
10.24
|
Amendment
to “B” Warrant No. CCP-002, dated August 24, 2006, between the Company and
Cornell Capital Partners, LP
|
8-K
|
10.12
|
8/30/2006
|
||||||
10.25
|
Amendment
to “C” Warrant No. CCP-003, dated August 24, 2006, between the
Company and Cornell Capital Partners, LP
|
8-K
|
10.13
|
8/30/2006
|
||||||
10.26
|
Definitive
share purchase and settlement agreement between NeoMedia and Sponge, dated
November 14, 2006
|
8-K
|
16.1
|
11/20/2006
|
||||||
10.27
|
Securities
Purchase Agreement, dated December 29, 2006, between the Company and
Cornell Capital Partners, LP
|
8-K
|
10.1
|
1/8/2007
|
||||||
10.28
|
Investor
Registration Rights Agreement, dated December 29, 2006, between the
Company and Cornell Capital Partners, LP
|
8-K
|
10.2
|
1/8/2007
|
||||||
10.29
|
Secured
Convertible Debenture, dated December 29, 2006, issued by the Company to
Cornell Capital Partners, LP
|
8-K
|
10.3
|
1/8/2007
|
||||||
10.30
|
Irrevocable
Transfer Agent Instructions, dated December 29, 2006, by and among the
Company, Cornell Capital Partners, LP and American Stock Transfer &
Trust Co.
|
8-K
|
10.4
|
1/8/2007
|
76
Exhibit
Number
|
Description
|
Filed
Herewith
|
Form
|
Exhibit
|
Filing Date
|
|||||
10.31
|
A
Warrant, dated December 29, 2006
|
8-K
|
10.5
|
1/8/2007
|
||||||
10.32
|
Amendment
to Warrant No. CCP-002, dated December 29, 2006, between the
Company and Cornell Capital Partners, LP
|
8-K
|
10.6
|
1/8/2007
|
||||||
10.33
|
Amendment
to “A” Warrant No. CCP-001, dated December 29, 2006, between
the Company and Cornell Capital Partners, LP
|
8-K
|
10.7
|
1/8/2007
|
||||||
10.34
|
Amendment
to “B” Warrant No. CCP-002, dated December 29, 2006, between the Company
and Cornell Capital Partners, LP
|
8-K
|
10.8
|
1/8/2007
|
||||||
10.35
|
Amendment
to “C” Warrant No. CCP-003, dated December 29, 2006, between
the Company and Cornell Capital Partners, LP
|
8-K
|
10.9
|
1/8/2007
|
||||||
10.36
|
Amendment
to “A” Warrant No. CCP-001, dated December 29, 2006, between
the Company and Cornell Capital Partners, LP
|
8-K
|
10.1
|
1/8/2007
|
||||||
10.37
|
Amendment
to “B” Warrant No. CCP-001, dated December 29, 2006, between
the Company and Cornell Capital Partners, LP
|
8-K
|
10.11
|
1/8/2007
|
||||||
10.38
|
Amendment
to “C” Warrant No. CCP-001, dated December 29, 2006, between
the Company and Cornell Capital Partners, LP
|
8-K
|
10.12
|
1/8/2007
|
||||||
10.39
|
Securities
Purchase Agreement, dated December 29, 2006, between the Company and
Cornell Capital Partners, LP
|
8-K
|
10.13
|
1/8/2007
|
||||||
10.40
|
Amendment
Agreement I to the Sale and Purchase Agreement between NeoMedia and
certain former shareholders of Gavitec AG, dated January 23,
2007
|
8-K
|
10.1
|
1/29/2007
|
||||||
10.41
|
Consulting
Agreement between the Company and SKS Consulting of South Florida
Corp.
|
8-K
|
10.1
|
2/6/2007
|
||||||
10.42
|
Securities
Purchase Agreement between NeoMedia and Cornell Capital Partners LP, dated
March 27, 2007
|
8-K
|
10.1
|
3/27/2007
|
||||||
10.43
|
Investor
Registration Rights Agreement between NeoMedia and Cornell Capital
Partners LP, dated March 27, 2007
|
8-K
|
10.2
|
3/27/2007
|
||||||
10.44
|
Secured
Convertible Debenture, issued by NeoMedia to Cornell Capital Partners, LP,
dated March 27, 2007
|
8-K
|
10.3
|
3/27/2007
|
||||||
10.45
|
Irrevocable
Transfer Agent Instructions, by and among NeoMedia, Cornell Capital
Partners, LP and Worldwide Stock Transfer, dated March 27,
2007
|
8-K
|
10.4
|
3/27/2007
|
||||||
10.46
|
Warrant,
issued by NeoMedia to Cornell Capital Partners, LP, dated March 27,
2007
|
8-K
|
10.5
|
3/27/2007
|
||||||
10.47
|
Master
Amendment Agreement, by and between NeoMedia and Cornell Capital Partners,
LP, dated March 27, 2007
|
8-K
|
10.6
|
3/27/2007
|
||||||
10.48
|
Security
Agreement, by and between NeoMedia and Cornell Capital Partners, LP, dated
on or about August 24, 2006
|
8-K
|
10.7
|
3/27/2007
|
||||||
10.49
|
Security
Agreement, by and between NeoMedia and Cornell Capital Partners, LP, dated
March 27,2007
|
8-K
|
10.8
|
3/27/2007
|
||||||
10.50
|
Security
Agreement (Patent), by and between NeoMedia and Cornell Capital Partners,
LP, dated March 27, 2007
|
8-K
|
10.9
|
3/27/2007
|
||||||
10.51
|
Pledge
Shares Escrow Agreement, by and between NeoMedia and Cornell Capital
Partners, dated March 27, 2007
|
8-K
|
10.1
|
3/27/2007
|
||||||
10.52
|
Completion
of Acquisition of Disposition of Assets of BSD Software
Inc.
|
8-K/A
|
10.1
|
6/8/2007
|
||||||
10.53
|
Registration
Rights Agreement, by and between NeoMedia and YA Global Investments, L.P.,
dated August 24, 2007
|
8-K
|
10.1
|
8/30/2007
|
||||||
10.54
|
Secured
Convertible Debenture, issued by NeoMedia to YA Global Investments, dated
August 24, 2007
|
8-K
|
10.2
|
8/30/2007
|
77
Exhibit
Number
|
Description
|
Filed
Herewith
|
Form
|
Exhibit
|
Filing Date
|
|||||
10.55
|
Irrevocable
Transfer Agent Instructions, by and among NeoMedia, YA Global Investments,
L.P. and Worldwide Stock Transfer, LLC, dated August 24,
2007
|
8-K
|
10.3
|
8/30/2007
|
||||||
10.56
|
Warrant
issued by NeoMedia to YA Global Investments, L.P., dated August 24,
2007
|
8-K
|
10.4
|
8/30/2007
|
||||||
10.57
|
Repricing
Agreement, by and between NeoMedia and YA Global Investments, L.P., dated
August 24, 2007
|
8-K
|
10.5
|
8/30/2007
|
||||||
10.58
|
Security
Agreement, by and between NeoMedia and YA Global Investments, L.P., dated
August 24, 2007
|
8-K
|
10.6
|
8/30/2007
|
||||||
10.59
|
Security Agreement (Patent),
by and between NeoMedia and YA Global Investments, L.P., dated August 24,
2007
|
8-K
|
10.7
|
8/30/2007
|
||||||
10.60
|
Secured
Convertible Debenture, dated April 11, 2008, issued by the Company to YA
Global Investments, L.P.
|
8-K
|
10.1
|
4/17/2008
|
||||||
10.61
|
Secured
Convertible Debenture, dated May 16, 2008, issued by the Company to YA
Global Investments, L.P.
|
8-K
|
10.1
|
5/22/2008
|
||||||
10.62
|
Warrant,
dated May 16, 2008, issued by the Company to YA Global Investments,
L.P.
|
8-K
|
10.2
|
5/22/2008
|
||||||
10.63
|
Secured
Convertible Debenture, dated May 30, 2008, issued by the Company to YA
Global Investments, L.P.
|
8-K
|
10.1
|
6/5/2008
|
||||||
10.64
|
Warrant,
dated May 30, 2008, issued by the Company to YA Global Investments,
L.P.
|
8-K
|
10.2
|
6/5/2008
|
||||||
10.65
|
Settlement
Agreement and Release, dated June 3, 2008, by and between the Company and
William Hoffman
|
8-K
|
10.5
|
6/5/2008
|
||||||
10.66
|
Employment
Agreement, dated June 10, 2008, by and between NeoMedia Technologies, Inc.
and Iain McCready
|
8-K
|
10.1
|
6/16/2008
|
||||||
10.67
|
Secured
Convertible Debenture, dated July 10, 2008, issued by the Company to YA
Global Investments, L.P.
|
8-K
|
10.1
|
7/16/2008
|
||||||
10.68
|
Securities
Purchase Agreement, dated July 29, 2008, by and between the Company and YA
Global Investments, L.P.
|
8-K
|
10.1
|
8/4/2008
|
||||||
10.69
|
Secured
Convertible Debenture, dated July 29, 2008, issued by the Company to YA
Global Investments, L.P.
|
8-K
|
10.2
|
8/4/2008
|
||||||
10.70
|
Security
Agreement, dated July 29, 2008, by and among the Company, each of the
Company’s subsidiaries made a party thereto and YA Global Investments,
L.P.
|
8-K
|
10.3
|
8/4/2008
|
||||||
10.71
|
Patent
Security Agreement, dated July 29, 2008, by and among the Company, each of
the Company’s subsidiaries made a party thereto and YA Global Investments,
L.P.
|
8-K
|
10.4
|
8/4/2008
|
||||||
10.72
|
Warrant
9-1A, dated July 29, 2008, issued by the Company to YA Global Investments,
L.P.
|
8-K
|
10.5
|
8/4/2008
|
||||||
10.73
|
Warrant
9-1B, dated July 29, 2008, issued by the Company to YA Global Investments,
L.P.
|
8-K
|
10.6
|
8/4/2008
|
||||||
10.74
|
Warrant
9-1C, dated July 29, 2008, issued by the Company to YA Global Investments,
L.P.
|
8-K
|
10.7
|
8/4/2008
|
||||||
10.75
|
Warrant
9-1D, dated July 29, 2008, issued by the Company to YA Global Investments,
L.P.
|
8-K
|
10.8
|
8/4/2008
|
||||||
10.76
|
Escrow
Agreement, dated July 29, 2008, by and among the Company, YA Global
Investments, L.P., Yorkville Advisors, LLC and David Gonzalez,
Esq.
|
8-K
|
10.9
|
8/4/2008
|
||||||
10.77
|
Irrevocable
Transfer Agent Instructions, dated July 29, 2008, by and among the
Company, the Investor, David Gonzalez, Esq. and WorldWide Stock Transfer,
LLC
|
8-K
|
10.1
|
8/4/2008
|
||||||
10.78
|
Letter
Agreement, dated September 24, 2008, by and among NeoMedia Technologies,
Inc. and YA Global Investments, L.P.
|
8-K
|
10.1
|
10/1/2008
|
78
Exhibit
Number
|
Description
|
Filed
Herewith
|
Form
|
Exhibit
|
Filing Date
|
|||||
10.79
|
Second
Secured Convertible Debenture, dated October 28, 2008, issued by the
Company to YA Global Investments, L.P.
|
8-K
|
10.3
|
11/3/2008
|
||||||
10.80
|
Revised
Exhibit A to Escrow Agreement, dated October 28, 2008
|
8-K
|
10.12
|
11/3/2008
|
||||||
10.81
|
Letter
Agreement, dated March 27, 2009, by and between the Company and YA Global
Investments, L.P.
|
8-K
|
10.13
|
4/13/09
|
||||||
10.82
|
Amendment
Agreement, dated April 6, 2009, by and between the Company and YA Global
Investments, L.P.
|
8-K
|
10.14
|
4/13/09
|
||||||
10.83
|
Third
Secured Convertible Debenture (first closing), dated April 6, 2009, issued
by the Company to YA Global Investments, L.P.
|
8-K
|
10.15
|
4/13/09
|
||||||
10.84
|
Waiver,
effective as of December 31, 2008, by and between the Company and YA
Global Investments, L.P.
|
8-K
|
10.16
|
4/13/09
|
||||||
10.85
|
Fourth
Secured Convertible Debenture (second amended third closing), dated May 1,
2009, issued by the Company to YA Global Investments, L.P.
|
8-K
|
10.15
|
5/7/09
|
||||||
10.86
|
Agreement,
dated June 5, 2009 (Additional Agreement), by and between the Company and
YA Global Investments, L.P.
|
8-K
|
10.16
|
6/5/09
|
||||||
10.87
|
Fifth
Convertible Debenture (Additional Agreement closing), dated June 5, 2009,
issued by the Company to YA Global Investments, L.P.
|
8-K
|
10.17
|
6/5/09
|
||||||
10.88
|
Agreement,
dated July 15, 2009 (Second Additional Agreement), by and between the
Company and YA Global Investments, L.P.
|
8-K
|
10.18
|
7/21/09
|
||||||
10.89
|
Sixth
Convertible Debenture dated July 15, 2009, (Second Additional Debenture),
issued by the Company to YA Global Investments, L.P.
|
8-K
|
10.19
|
7/21/09
|
||||||
10.90
|
Agreement,
dated July 17, 2009, by and between the Company and Silver Bay Software,
LLC.
|
8-K
|
10.20
|
7/21/09
|
||||||
10.91
|
Agreement,
dated July 17, 2009, by and between the Company and Mr. Greg
Lindholm.
|
8-K
|
10.21
|
7/21/09
|
||||||
10.92
|
Non-Exclusive
License Agreement between the Company and Mobile Tag, Inc. dated July 28,
2009
|
8-K
|
10.1
|
7/30/09
|
||||||
10.93
|
Agreement
dated August 14, 2009 (Third Additional Agreement) by and between the
Company and Y.A. Global Investments, L.P.
|
10-Q
|
10.124
|
8/14/09
|
||||||
10.94
|
Seventh
Convertible Debenture dated August 14, 2009 (Fifth Additional Debenture)
issued by the Company to Y.A. Global Investments, L.P.
|
10-Q
|
10.125
|
8/14/09
|
||||||
10.95
|
Non-exclusive
License Agreement with exclusive right to sub-license provision between
Company and Neustar, Inc. dated October 2, 2009.
|
8-K
|
10.1
|
10/6/09
|
||||||
10.96
|
Non-Exclusive
License Agreement to use the Licenced Platform between the Company and
Brand Extension Mobile Solutions, S.A., a Madrid (Spain) corporation
(“BEMS"), dated October 7, 2009.
|
8-K
|
10.1
|
10/13/09
|
||||||
10.97
|
Settlement
Agreement and non-exclusive license and a sublicense between the Company
and Scanbuy, Inc., dated October 16, 2009.
|
8-K
|
10.1
|
10/20/09
|
||||||
10.98
|
Investment
Agreement between Company and YA Global dated January 5,
2010.
|
8-K
|
10.1
|
1/11/10
|
79
Exhibit
Number
|
Description
|
Filed
Herewith
|
Form
|
Exhibit
|
Filing Date
|
|||||
10.99
|
Irrevocable
Transfer Agent Instructions letter issued by Company to WorldWide Stock
Transfer, LLC dated January 5, 2010.
|
8-K
|
10.2
|
1/11/10
|
||||||
10.100
|
Monitoring
Fee Escrow Agreement between Company and YA Global dated January 5,
2010.
|
8-K
|
10.3
|
1/11/10
|
||||||
10.101
|
Investor
Registration Rights Agreement between Company and YA Global dated January
5, 2010.
|
8-K
|
10.4
|
1/11/10
|
||||||
10.102
|
Issuance
of Warrants by Company to YA Global dated January 5, 2010.
|
8-K
|
10.5
|
1/11/10
|
||||||
10.103
|
Amendment
to the August 24, 2006 Secured Convertible Debenture No. CCP-1 between the
Company and YA Global dated January 5, 2010.
|
8-K
|
10.6
|
1/11/10
|
||||||
10.104
|
Amendment
to the December 29, 2006 Secured Convertible Debenture No. CCP-2 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.7
|
1/11/10
|
||||||
10.105
|
Amendment
to the March 27, 2007 Secured Convertible Debenture No. NEOM-4-1 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.8
|
1/11/10
|
||||||
10.106
|
Amendment
to the August 24, 2007 Secured Convertible Debenture No. NEOM-1-1 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.9
|
1/11/10
|
||||||
10.107
|
Amendment
to the April 11, 2008 Secured Convertible Debenture No. NEO-2008-1 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.10
|
1/11/10
|
||||||
10.108
|
Amendment
to the May 16, 2008 Secured Convertible Debenture No. NEO-2008-2 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.11
|
1/11/10
|
||||||
10.109
|
Amendment
to the May 29, 2008 Secured Convertible Debenture No. NEO-2008-3 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.12
|
1/11/10
|
||||||
10.110
|
Amendment
to the July 10, 2008 Secured Convertible Debenture No. NEO-2008-4 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.13
|
1/11/10
|
||||||
10.111
|
Amendment
to the July 29, 2008 Secured Convertible Debenture No. NEOM-9-1 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.14
|
1/11/10
|
||||||
10.112
|
Amendment
to the October 28, 2008 Secured Convertible Debenture No. NEOM-9-2 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.15
|
1/11/10
|
||||||
10.113
|
Amendment
to the May 1, 2009 Secured Convertible Debenture No. NEOM-9-4 between the
Company and YA Global dated January 5, 2010.
|
8-K
|
10.16
|
1/11/10
|
||||||
10.114
|
Amendment
to the June 5, 2009 Secured Convertible Debenture No. NEOM-9-5 between the
Company and YA Global dated January 5, 2010.
|
8-K
|
10.17
|
1/11/10
|
||||||
10.115
|
Amendment
to the July 15, 2009 Secured Convertible Debenture No. NEOM-9-6 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.18
|
1/11/10
|
||||||
10.116
|
Amendment
to the August 14, 2009 Secured Convertible Debenture No. NEOM-9-7 between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.19
|
1/11/10
|
||||||
10.117
|
Amendment
to the July 29, 2008 Secured Convertible Debenture No. NEOM-9-1B between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.20
|
1/11/10
|
80
Exhibit
Number
|
Description
|
Filed
Herewith
|
Form
|
Exhibit
|
Filing Date
|
|||||
10.118
|
Amendment
to the July 29, 2008 Secured Convertible Debenture No. NEOM-9-1C between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.21
|
1/11/10
|
||||||
10.119
|
Amendment
to the July 29, 2008 Secured Convertible Debenture No. NEOM-9-1D between
the Company and YA Global dated January 5, 2010.
|
8-K
|
10.22
|
1/11/10
|
||||||
10.120
|
Amendment
of employment agreement entered into on June 10, 2008 between the company
and Iain A. McCready.
|
8-K
|
10.2
|
1/20/10
|
||||||
10.121
|
Amended
and restated licensing agreement dated October 2, 2009 with NeuStar,
Inc.
|
8-K
|
10.1
|
1/28/10
|
||||||
10.122
|
Agreement
with Neu Star, Inc., dated February 12, 2010 (the Neu Star Mobile Codes
Pilot Program Agreement).
|
8-K
|
10.1
|
2/16/10
|
||||||
10.123
|
First
amendment to the investment agreement between Company and YA
Global dated January 5, 2010.
|
8-K
|
10.1
|
3/11/10
|
||||||
14
|
Code
of Professional Ethics
|
10-K
|
14.1
|
4/3/07
|
||||||
21.1
|
Subsidiaries
of the Registrant
|
X
|
||||||||
23.1
|
Consent
of Kingery & Crouse, P.A.
|
X
|
||||||||
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
X
|
||||||||
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
X
|
||||||||
32.1
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
X
|
||||||||
32.2
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
X
|
81
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEOMEDIA
TECHNOLOGIES, INC.
|
||
Date:
March 26, 2010
|
||
By:
|
/s/ Iain A. McCready
|
|
Iain
A. McCready
|
||
Chief
Executive Officer
|
||
/s/ Michael W. Zima
|
||
Michael
W. Zima
|
||
Chief
Financial Officer
|
In
accordance with the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 26, 2010.
Signatures
|
Title
|
Date
|
||
/s/ Iain A. McCready
|
Chief
Executive Officer, principal
executive
officer and Director
|
March
26, 2010
|
||
Iain
A. McCready
|
||||
/s/ Michael W. Zima
|
Chief
Financial Officer, principal
financial
and accounting officer
|
March
26, 2010
|
||
Michael
W. Zima
|
||||
/s/ James J. Keil
|
Director
|
March
26, 2010
|
||
James
J. Keil
|
||||
/s/ George G. O’Leary
|
Director
|
March
26, 2010
|
||
George
G. O’Leary
|
||||
/s/ Laura Marriott
|
Director
|
March
26, 2010
|
||
Laura
Marriott
|
82