Form 10-Q for NEOMEDIA TECHNOLOGIES INC
--------------------------------------------------------------------------------
16-Aug-2010
Quarterly Report
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
NeoMedia Technologies, Inc., a Delaware corporation ("NeoMedia", and also refereed to herein as "us", "we" and "our") provides the infrastructure to make mobile barcode scanning and its associated commerce easy, universal, and reliable - worldwide. Our barcode ecosystem products, including NeoReader, and 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, 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.
During 2009 and early 2010, we have taken steps to build on the developing barcode 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.
On July 28, 2009, we entered into a three year 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 royalty bearing sub-licenses for the use of the same portion of our patent portfolio within the defined field of use and geographic territory, to resolution authorities for a period of not less than one year, and up to a maximum of four years depending on the achievement 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 Telef?nica 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 Telef?nica. 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 began 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 combines 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.
During 2010, we have entered into seven platform reseller agreements with resellers of our services. These resellers are typically advertising agencies representing brands in the United States and Europe. Through these agreements, we will provide barcode ecosystem advertising campaign management and support services to the resellers' customers. Revenue derived from these services will be shared between us and the resellers. These agreements are expected to begin generating revenue during the second half of 2010.
Comparison of the Three and Six Months Ended June 30, 2010 and 2009
Results of Operations
Beginning in 2009 and continuing into 2010, we continued to focus on the development of our barcode ecosystem technology. During the three months ended June 2010 and 2009, respectively, operating losses were $1.8 million and $1.5 million. Our net income was $9.5 million and $78.1 million for the three months ended June 2010 and 2009, respectively. During the six months ended June 2010 and 2009, respectively, operating losses were $3.4 million and to $3.1 million. Our net income was $66.8 million for the six months ended June 2010 compared to a net loss of $28.5 million during the six months ended June 2009. Our operating results include non-cash gains and losses from the change in fair value of our hybrid financial instruments, warrants and debentures. We incur these non-cash gains and losses principally as a result of changes in the market value of our common stock. During the three and six months ended June 2010, we reported non-cash gains on our hybrid financial instruments, warrants and debentures, totaling $12.1 and $77.2 million, respectively.
The following table sets forth certain data derived from our consolidated statements of operations:
Three months ended June 30, Increase (decrease)
2010 2009 $ %
(in thousands)
Revenues:
Hardware $ 27 $ 36 $ (9 ) -25 %
Lavasphere 22 8 14 175 %
Barcode ecosystem 5 2 3 150 %
Patent licensing 165 - 165 100 %
Legacy products - 88 (88 ) -100 %
Other 2 2 0 0 %
Total revenues $ 221 $ 136 $ 85 63 %
--------------------------------------------------------------------------------
Six months ended June 30, Increase (decrease)
2010 2009 $ %
(in thousands)
Revenues:
Hardware $ 162 $ 429 $ (267 ) -62 %
Lavasphere 68 30 38 127 %
Barcode ecosystem 11 6 5 83 %
Patent licensing 330 10 320 3200 %
Legacy products 2 145 (143 ) -99 %
Other 3 6 (3 ) -50 %
Total revenues $ 576 $ 626 $ (50 ) -8 %
Revenues. Revenues for the three months ended June 2010 and 2009, respectively, were $221,000 and $136,000, an increase of $85,000, or 62%. Revenues for the six months ended June 2010 and 2009, respectively, were $576,000 and $626,000, a decrease of $50,000, or 8%. Our revenues and product mix have changed as a result of changes in our operations and business strategy. For the three months ended June 2010 and 2009, respectively, our hardware product sales were $27,000 and $36,000, a decrease of 26%. For the six months ended June 2010 and 2009, respectively, our hardware product sales were $162,000 and $429,000, a decrease of 62%. During 2009, we introduced our newest barcode scanners and sold most 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 the three months ended June 2010 and 2009, respectively, our Lavasphere product sales were $22,000 and $8,000, an increase of $14,000, or 175%. For the six months ended June 2010 and 2009, respectively, our Lavasphere product sales were $68,000 and $30,000, an increase of $38,000, or 125%, as a result of modest increased demand for these products and services. For the three months ended June 2010 and 2009, respectively, our Barcode ecosystem revenue was $5,000 and $2,000. For the six months ended June 2010 and 2009, respectively, our Barcode ecosystem revenue was $11,000 and $6,000, as a result of increased marketing campaigns in Europe. Revenues related to patent licensing agreements were $165,000 during the three months ended June 2010, and for the six months ended June 2010 and 2009, respectively, were $330,000 and $10,000, as a result of licensing agreements we entered into in late 2009 and 2010. 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.
Cost of Revenues. Cost of revenues was $255,000 for the three months ended June 2010 compared with $281,000 for the three months ended June 2009, a decrease of $26,000, or 9%. Cost of revenues was $594,000 for the six months ended June 2010 compared with $808,000 for the six months ended June 2009, a decrease of $214,000, or 26%. Cost of revenues for NeoMedia Europe, related to our hardware products, was $23,000 and $45,000 for the three months ended June 2010 and 2009, respectively, and was $128,000 and $334,000 for the six months ended June 2010 and 2009, respectively. Amortization costs related to our patents, and the proprietary software of NeoMedia Europe was $232,000 and $236,000 for the three months ended June 2010 and 2009, respectively, and was $466,000 and $474,000 for the six months ended June 2010 and 2009, respectively.
Sales and Marketing. Sales and marketing expenses were $262,000 and $178,000 for the three months ended June 2010 and 2009, respectively, an increase of $84,000 or 47%, and $581,000 and $464,000 for the six months ended June 2010 and 2009, respectively, an increase of $117,000 or 25%. The increase in sales and marketing expense resulted from additional efforts in late 2009 and 2010 to promote our business strategy and core technology.
General and Administrative. General and administrative expenses were $1,041,000 and $863,000 for the three months ended June 2010 and 2009, respectively, an increase of $178,000, or 21%, and $2,136,000 and $1,787,000 for the six months ended June 2010 and 2009, respectively, an increase of $349,000, or 20%. Expenses increased as a result of increased professional services fees related to legal and accounting, as well as business travel related to increased business development.
Research and Development. Research and development expenses were $418,000 and $350,000 for the three months ended June 2010 and 2009, respectively, an increase of $68,000, or 19%, and $701,000 and $673,000 for the six months ended June 2010 and 2009, respectively, an increase of $28,000, or 4%. Research and development decreased as we completed the development of our upgraded hardware products and our barcode ecosystem products.
--------------------------------------------------------------------------------
Loss from Operations. For the three months ended June 2010 and 2009, respectively, our loss from operations increased to $1.8 million, from $1.5 million. This increased loss of $219,000 was primarily the result of minimal increases in our sales and marketing expenses of $84,000, increased general and administrative expenses of $178,000, increased research and development expense of $68,000, and an increase in our gross profit margin of $111,000. For the six months ended June 2010 and 2009, respectively, our loss from operations was increased slightly to $3.4 million, from $3.1 million. This increased loss of $330,000 was primarily the result of minimal increases in our sales and marketing expenses of $117,000, increased general and administrative expenses of $349,000, increased research and development expense of $28,000, and an increase in our gross profit margin of $164,000.
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. For the three months ended June 2010 and 2009, respectively, liability related to these hybrid instruments decreased resulting in a gain of $1.2 million and a gain of $23.3 million, respectively. For the six months ended June 2010 and 2009, respectively, liability related to these hybrid instruments decreased resulting in a gain of $19.6 million and a gain of $0.3 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 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. For the three months ended June 2010 and 2009, respectively, the liability related to warrants decreased resulting in a gain of $4.3 million and a gain of $20.9 million, respectively. For the six months ended June 2010, the liability related to warrants decreased resulting in a gain of $10.9 million. For the six months ended June 2009, the liability related to warrants increased resulting in a loss of $12.4 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.
Gain (Loss) from Change in Fair Value of Derivative Liabilities - Series C and D Preferred Stock and Debentures. For our Series C and D 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. For the three months ended June 2010 and 2009, respectively, the liability related to the derivative instruments embedded in the Series C and D preferred stock and these debentures decreased resulting in a gain of $6.6 million and $38.0 million, respectively. For the six months ended June 2010, the liability related to the derivative instruments embedded in the Series C preferred stock and these debentures decreased resulting in a gain of $46.8 million. For the six months ended June 2009, the liability related to the derivative instruments embedded in the Series C preferred stock and these debentures increased resulting in a loss of $9.7 million. These fair value changes were primarily the result 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 $510,000 and $2.6 million for the three months ended June 2010 and 2009, respectively, and $956,000 and $3.7 million for the six months ended June 2010 and 2009, respectively. These positive changes were primarily the result of reductions in amortization of deferred financing cost and debt discounts not applicable during 2010, and other interest adjustments accounted for under ACS 815-15-25.
--------------------------------------------------------------------------------
Net Income (Loss). As a result of the above, during the three months ended June 2010 and 2009, respectively, we experienced net income of $9.5 million, and $78.1 million, respectively, resulting in an overall decrease of $68.6 million. During the six months ended June 2010 and 2009, respectively, we experienced net income of $66.8 million, and a net loss of $28.5 million, respectively, resulting in an overall increase of $95.3 million. This positive change primarily resulted from gains associated with our derivative instruments of $99.0 million, offset by a loss on extinguishment of debt of $6.0 million, and an increase in our loss from operations of $330,000.
Liquidity and Capital Resources
As of June 30, 2010, we had $673,000 in cash and cash equivalents, an increase of $475,000, or 239%, compared with a total of $198,000 on December 31, 2009.
Cash used in operating activities increased to $3.4 million for the six months ended June 2010 compared with $2.7 million for the period ended June 2009, representing increased operational expenses in connection with furthering our sales and business development, and the continued development of our barcode ecosystem.
Cash used in investing activities was $7,000 and $24,000 for the six months ended June 2010 and 2009, respectively, representing the purchase of equipment.
Cash provided by financing activities during the six months ended June 2010 was $3,785,000, which included the following:
? Gross proceeds of $2,500,000 of our Series D Preferred Stock, offset by fees paid of $100,000 and the repayment of a $500,000 promissory note issued December 23, 2009 and due to YA Global, resulting in net proceeds of $1,900,00; and,
? Gross proceeds of $500,000 in connection with a promissory note issued to YA Global on April 1, 2010, accruing interest at 8% per annum, less structuring fees of $10,000 and monitoring fees of $15,000, resulting in net proceeds of $475,000; and,
? Gross proceeds of $2,006,137 in connection with a Secured Convertible Debenture entered into with YA Global, accruing interest at 14% per annum and payable on the maturity date of July 29, 2012, less repayment of the April 1, 2010 promissory note of $500,000, less accrued interest on the promissory note of $6,137, less structuring and due diligence fees of $90,000, resulting in net proceeds of $1,410,000.
Cash provided by financing activities during the six months ended June 2009 was $1.8 million, which resulted from $1.7 million in convertible debt instruments, net of fees, from Y.A. Global, and proceeds received upon exercise of stock options by two former employees totaling $116,000.
As of June 30, 2010, we had a working capital deficiency of $57.2 million, of which $22.3 million relates to the fair value of hybrid and derivative financial instruments, and $21.8 million relates to the carrying value of certain of our debentures and the fair value of the derivative liabilities associated with those debentures and our Series C and D preferred stock.
Significant Liquidity Events
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 income (loss) for the six months ended June 30, 2010 and 2009 was $66.8 million and ($28.5) million, respectively and net cash used by operations during the same period was $3.4 million and $2.7 million, respectively. At June 30, 2010, we have an accumulated deficit of $212.7 million. We also have a working capital deficit of $57.2 million, of which $44.1 million is related to our financing instruments, including $22.3 million related to the fair value of warrants and those debentures that are recorded as hybrid financial instruments, and $21.8 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, 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 September 15, 2010. We do not have a commitment for any additional financing.
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.
Sources of Cash and Projected Cash Requirements - As of June 30, 2010, our cash balance was $673,000. NeoMedia's reliance on YA Global as our primary financing source has certain ramifications that could affect future liquidity and business operations. For example, pursuant to the terms of the convertible debenture agreements between us and YA Global, without YA Global's consent we cannot
(i) issue or sell any shares of our common stock or our preferred stock without consideration or for consideration per share less than the closing bid price immediately prior to its issuance, (ii) issue or sell any preferred stock, warrant, option, right, contract, call, or other security or instrument granting the holder thereof the right to acquire our common stock for consideration per share less than the closing bid price immediately prior to its issuance, (iii) enter into any security instrument granting the holder a security interest in any of our assets or (iv) file any registration statements on Form S-8. In addition, pursuant to security agreements between us and YA Global, YA Global has a security interest in all of our assets. Such covenants could severely harm our ability to raise additional funds from sources other than YA Global, and would likely result in a higher cost of capital in the event we secured funding.
Additionally, pursuant to the terms of the Investment Agreement between us and YA Global in connection with our Series C convertible preferred stock sale, we cannot (i) enter into any debt arrangements in which we are the borrower, (ii) grant any security interest in any of our assets or (iii) grant any security below market price.
Subsequent Event
Secured Convertible Debenture - On August 13, 2010, we issued a secured convertible debenture to YA Global in the principal amount of $550,000. The debenture accrues interest at 14% per annum and is payable on the maturity date, July 29, 2012, in cash, or provided that certain equity conditions are satisfied, in shares of common stock. At any time from the closing date until the maturity date, YA Global has the right to convert the convertible debenture into our common stock at the then effective conversion price, which varies relative to the our trading stock price, at the lesser of $0.20 per share, or 95% of the lowest weighted average price of our common stock during the sixty days preceding the conversion date, and adjusts to 50% of the lowest weighted average price of our common stock during the ten days preceding the conversion date, in the event of a default. The conversion is limited such that the YA Global cannot exceed 9.99% ownership, unless they waive their right to such limitation. We have the right to redeem a portion or the entire outstanding note at a 10% premium plus accrued interest. In addition to the debenture, we also issued to YA Global a warrant to purchase 1,000,000 shares of our common stock, for an exercise price of $0.20 per share.
The debenture is secured by certain Pledged Property, as such term is defined in the Security Agreement, dated July 29, 2008, and certain Patent Collateral, as defined in a security agreement (patent), entered into on July 29, 2008. Also on August 13, 2010 our wholly owned subsidiary, NeoMedia Europe AG, became a guarantor of the convertible debenture, and all outstanding prior financing transactions between us and YA Global, through a pledge of their intellectual property and their commitment to pledge their other movable assets. As security for our obligations to YA Global, all of our Pledged Property, Patent Collateral and other collateral was affirmed through the Second Ratification Agreement which was also executed in connection with this financing.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies and . . .
News 
Market Data 
Discover 
AI
