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Wednesday, August 09, 2006 7:10:55 PM
From page 43:
Accounting Treatment of Series C Convertible Preferred Stock
In connection with the accounting treatment of the Series C convertible preferred stock sale, NeoMedia recognized a gain on derivative financial instruments of $11,025,000 and $15,794,000 during the three and six month periods ended June 30, 2006, respectively. The gain is due to the change in fair value of derivative financial instruments resulting from a decrease in NeoMedia’s stock price from $0.389 per share on the date of the Series C convertible preferred stock sale (February 17, 2006) to $0.231 per share on June 30, 2006. The fair value of the derivative financial instruments at each measurement date correlates to NeoMedia’s stock price at the same date. As a result, NeoMedia’s net income varies significantly from its cash flow from operations during the three and isx months ended June 30, 2006. In future periods, NeoMedia’s earnings could fluctuate dramatically from quarter to quarter if its stock price is significantly different from the stock price at the end of the previous measurement period. Because NeoMedia cannot guarantee that it has enough authorized shares to net share settle the Series C convertible preferred stock, the change in fair value of derivative instruments will be recorded to NeoMedia’s statement of operations each reporting period until the Series C convertible preferred stock is fully converted.
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