UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10 - Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
|
EXCHANGE
ACT OF 1934
For
the Quarterly Period Ended June 30, 2008
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
|
EXCHANGE
ACT OF 1934
For
the transition period from __________ to ____________
Commission
File Number 0-21743
NeoMedia
Technologies, Inc.
(Exact
Name of Issuer 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)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the 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 is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of
the Exchange Act. (Check one):
Large
accelerated filer
¨
Accelerated filer
¨
Non-accelerated
filer
¨
Smaller
Reporting Company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes
¨
No
x
The
number of outstanding shares of the registrant’s Common Stock on August 13, 2008
was 1,235,224,960.
NeoMedia
Technologies, Inc.
Form
10-Q
For
the Quarterly Period Ended June 30, 2008
Index
|
|
Page
|
PART I Financial Information
|
2
|
|
|
|
ITEM 1.
|
Financial Statements
|
2
|
|
|
|
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
21
|
|
|
|
ITEM 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
24
|
|
|
|
ITEM 4T.
|
Controls and Procedures
|
25
|
|
|
|
PART II Other Information
|
25
|
|
|
|
ITEM 1.
|
Legal Proceedings
|
25
|
|
|
|
ITEM 1A.
|
Risk Factors
|
25
|
|
|
|
ITEM 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
25
|
|
|
|
ITEM 3.
|
Default upon Senior Securities
|
25
|
|
|
|
ITEM 4.
|
Submission of Matters to a Vote of Security Holders
|
26
|
|
|
|
ITEM 5.
|
Other Information
|
26
|
|
|
|
ITEM 6.
|
Exhibits
|
26
|
|
|
|
Signatures
|
27
|
FORWARD LOOKING STATEMENTS
This
Form
10-Q contains “forward-looking statements” relating to NeoMedia Technologies,
Inc, a Delaware corporation, which represent the Company’s current expectations
or beliefs including, but not limited to, statements concerning the Company’s
operations, performance, financial condition and growth. For this purpose,
any
statements contained in this Form 10-Q that are not statements of historical
fact are forward-looking statements. Without limiting the generality of the
foregoing, words such as “may”, “anticipation”, “intend”, “could”, “estimate”,
or “continue” or the negative or other comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, such as credit losses, dependence on
management and key personnel, variability of quarterly results, and the ability
of the Company to continue its growth strategy and competition, certain of
which
are beyond the Company’s control. Should one or more of these risks or
uncertainties materialize or should the underlying assumptions prove incorrect,
actual outcomes and results could differ materially from those indicated in
the
forward-looking statements.
Any
forward-looking statement speaks only as of the date on which such statement
is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of
each
such factor on the business or the extent to which any factor, or combination
of
factors, may cause actual results to differ materially from those contained
in
any forward-looking statements.
PART
I — FINANCIAL INFORMATION
ITEM
1. Financial Statements
NeoMedia
Technologies, Inc. and Subsidiaries
Condensed
Consolidated Balance Sheet
s
(In
Thousands, Except Share and Per Share Data)
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
75
|
|
$
|
1,415
|
|
Trade
accounts receivable, net of allowance for doubtful accounts of $78
and
$78, respectively
|
|
|
66
|
|
|
58
|
|
Other
receivable
|
|
|
4
|
|
|
225
|
|
Inventories,
net of allowance for obsolete & slow-moving inventory of $87 and $80,
respectively
|
|
|
213
|
|
|
198
|
|
Investment
in marketable securities
|
|
|
-
|
|
|
8
|
|
Prepaid
expenses and other current assets
|
|
|
300
|
|
|
188
|
|
Assets
held for sale
|
|
|
-
|
|
|
159
|
|
Total
current assets
|
|
|
658
|
|
|
2,251
|
|
|
|
|
|
|
|
|
|
Property,
equipment & leasehold improvements, net
|
|
|
87
|
|
|
85
|
|
Goodwill
|
|
|
3,418
|
|
|
3,418
|
|
Proprietary
software
|
|
|
3,077
|
|
|
3,413
|
|
Patents
and other intangible assets
|
|
|
2,475
|
|
|
2,608
|
|
Cash
surrender value of life insurance policy
|
|
|
747
|
|
|
747
|
|
Other
long term assets
|
|
|
631
|
|
|
1,002
|
|
Total
assets
|
|
$
|
11,093
|
|
$
|
13,524
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
114
|
|
$
|
322
|
|
Accrued
expenses
|
|
|
6,732
|
|
|
6,015
|
|
Deferred
revenues and customer prepayments
|
|
|
583
|
|
|
669
|
|
Notes
payable
|
|
|
15
|
|
|
44
|
|
Accrued
purchase price guarantee
|
|
|
4,614
|
|
|
4,549
|
|
Deferred
tax liability
|
|
|
706
|
|
|
706
|
|
Derivative
financial instruments
|
|
|
25,659
|
|
|
24,651
|
|
Debentures
payable
|
|
|
7,500
|
|
|
7,500
|
|
Debentures
payable at fair value
|
|
|
23,331
|
|
|
23,199
|
|
Series
C Convertible Preferred stock, $0.01 par value, 25,000,000 shares
authorized, 22,000 shares issued, 19,674 shares
outstanding
|
|
|
19,674
|
|
|
20,097
|
|
Total
liabilities
|
|
|
88,928
|
|
|
87,752
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
deficit
|
|
|
|
|
|
|
|
Common
stock, $0.01 par value, 5,000,000,000 shares authorized, 1,128,376,229
and
1,025,295,693 shares issued and 1,145,224,960 and 1,022,144,424 shares
outstanding, respectively
|
|
|
11,452
|
|
|
10,221
|
|
Additional
paid in capital
|
|
|
118,765
|
|
|
118,427
|
|
Accumulated
deficit
|
|
|
(207,168
|
)
|
|
(201,565
|
)
|
Accumulated
other comprehensive loss
|
|
|
(105
|
)
|
|
(532
|
)
|
Treasury
stock, at cost, 201,230 shares
|
|
|
(779
|
)
|
|
(779
|
)
|
Total
shareholders' deficit
|
|
|
(77,835
|
)
|
|
(74,228
|
)
|
Total
liabilities and shareholders’ deficit
|
|
$
|
11,093
|
|
$
|
13,524
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NeoMedia
Technologies, Inc. and Subsidiaries
Condensed
Consolidated Statements of Operations
(unaudited)
(In
Thousands, Except Share and per Share Data)
|
|
For the six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
471
|
|
$
|
1,023
|
|
Cost
of sales
|
|
|
605
|
|
|
687
|
|
|
|
|
|
|
|
|
|
Gross
Profit (Loss)
|
|
|
(134
|
)
|
|
336
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
1,283
|
|
|
1,402
|
|
General
and administrative
|
|
|
2,573
|
|
|
3,764
|
|
Research
and development
|
|
|
1,217
|
|
|
925
|
|
|
|
|
|
|
|
|
|
Operating
Profit (Loss)
|
|
|
(5,207
|
)
|
|
(5,755
|
)
|
|
|
|
|
|
|
|
|
Gain
on extinguishment of debt
|
|
|
22
|
|
|
253
|
|
Interest
income/(expense) due to fair value adjustment
|
|
|
2
,709
|
|
|
(464
|
)
|
Other
interest income/(expense)-net
|
|
|
(411
|
)
|
|
(2,191
|
)
|
(Loss)
on sale of assets
|
|
|
(84
|
)
|
|
(1
|
)
|
(Loss)
from change in fair value of derivative financial
instruments
|
|
|
(2,343
|
)
|
|
(2,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) from continuing operations
|
|
|
(5,313
|
)
|
|
(10,544
|
)
|
|
|
|
|
|
|
|
|
(Loss)
from discontinued operations
|
|
|
(291
|
)
|
|
(3,296
|
)
|
(Loss)
from disposal of 12Snap
|
|
|
-
|
|
|
(257
|
)
|
(Loss)
from discontinued operations
|
|
|
(291
|
)
|
|
(3,553
|
)
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
|
(5,604
|
)
|
|
(14,097
|
)
|
|
|
|
|
|
|
|
|
Accretion
of dividends on convertible preferred stock
|
|
|
(798
|
)
|
|
(861
|
)
|
|
|
|
|
|
|
|
|
Net
(loss) attributable to common shareholders
|
|
$
|
(6,402
|
)
|
$
|
(14,958
|
)
|
|
|
|
|
|
|
|
|
Comprehensive
(loss):
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
(5,604
|
)
|
|
(14,097
|
)
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
Unrealized
(loss) on marketable securities
|
|
|
-
|
|
|
(43
|
)
|
Foreign
currency translation adjustment
|
|
|
(14
|
)
|
|
105
|
|
|
|
|
|
|
|
|
|
Comprehensive
(loss)
|
|
$
|
(5,618
|
)
|
$
|
(14,035
|
)
|
|
|
|
|
|
|
|
|
(Loss)
per share, basic:
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
Discontinued
operations
|
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
Net
(loss) per share, basic
|
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares used in per share calculation,
basic
|
|
|
1,081,308,224
|
|
|
789,247,203
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
NeoMedia
Technologies, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(In
Thousands)
|
|
For the six months ended
|
|
|
|
June 30, 2008
|
|
June 30, 2007
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,604
|
)
|
$
|
(14,097
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities from
continuing operations:
|
|
|
|
|
|
|
|
Loss
from discontinued operations
|
|
|
291
|
|
|
3,553
|
|
Depreciation
and amortization
|
|
|
539
|
|
|
572
|
|
Loss
on sale of assets
|
|
|
229
|
|
|
-
|
|
Change
in fair value from revaluation of warrants and embedded conversion
features
|
|
|
2,343
|
|
|
2,386
|
|
Gain
on early extinguishment of debt
|
|
|
(22
|
)
|
|
(252
|
)
|
Stock-based
compensation
|
|
|
987
|
|
|
1,661
|
|
Interest
(income) expense related to convertible debt
|
|
|
(2,709
|
)
|
|
1,245
|
|
Change
in value of life insurance policies
|
|
|
-
|
|
|
(62
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Receivables
|
|
|
213
|
|
|
(110
|
)
|
Inventories
|
|
|
(14
|
)
|
|
(200
|
)
|
Prepaid
expenses and other current assets
|
|
|
82
|
|
|
(84
|
)
|
Accounts
payable and accrued expenses
|
|
|
599
|
|
|
471
|
|
Deferred
revenue and other current liabilities
|
|
|
(86
|
)
|
|
(347
|
)
|
Cash
used in operating activities of continuing operations
|
|
|
(3,152
|
)
|
|
(5,264
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Expenditures
for property, plant, and equipment
|
|
|
(73
|
)
|
|
(15
|
)
|
Loans
repaid from subsidiaries
|
|
|
-
|
|
|
1,334
|
|
Proceeds
from sale of investments
|
|
|
751
|
|
|
-
|
|
Payment
of purchase price guarantee obligations
|
|
|
(14
|
)
|
|
(2,484
|
)
|
Acquisitions,
net of cash acquired
|
|
|
-
|
|
|
1,100
|
|
Amounts
received (issued) under notes receivable
|
|
|
-
|
|
|
450
|
|
Cash
provided by (used in) investing activities of continuing operations
|
|
|
664
|
|
|
385
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Repayments
of debt and capital lease obligations
|
|
|
(29
|
)
|
|
-
|
|
Borrowing
under convertible debt instrument
|
|
|
1,477
|
|
|
5,663
|
|
Net
proceeds from exercise of stock options and warrants
|
|
|
-
|
|
|
17
|
|
Cash
provided by (used in) financing activities of continuing operations
|
|
|
1,448
|
|
|
5,680
|
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by continuing operations
|
|
|
(1,040
|
)
|
|
801
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash for continuing operations
|
|
|
(14
|
)
|
|
90
|
|
|
|
|
|
|
|
|
|
Net
cash used in discontinued operations
|
|
|
|
|
|
|
|
Operating
cash flows
|
|
|
(286
|
)
|
|
(3,553
|
)
|
Investing
cash flows
|
|
|
-
|
|
|
-
|
|
Financing
cash flows
|
|
|
-
|
|
|
-
|
|
Total
cash flows used in discontinued operations
|
|
|
(286
|
)
|
|
(3,553
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,340
|
)
|
|
(2,662
|
)
|
Cash
and cash equivalents at beginning of period
|
|
|
1,415
|
|
|
2,813
|
|
Cash
and cash equivalents at end of period
|
|
$
|
75
|
|
$
|
151
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Interest
paid during the period
|
|
$
|
14
|
|
$
|
401
|
|
Unrealized
gain (loss) on marketable securities
|
|
|
-
|
|
|
(43
|
)
|
Fair
value of shares issued to satisfy purchase price guarantee
obligations
|
|
|
-
|
|
|
12,721
|
|
Accretion
of dividends on Series C Convertible Preferred Stock
|
|
|
798
|
|
|
433
|
|
Series
C Convertible Preferred Stock converted to common stock
|
|
|
423
|
|
|
-
|
|
Deemed
dividend on preferred stock conversions
|
|
|
631
|
|
|
-
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
NeoMedia
Technologies, Inc. and Subsidiaries
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
1 -
General
Business
–
NeoMedia Technologies together with our subsidiaries (collectively the
“Company”)
provides
internet advertising solutions using wireless technologies to connect
traditional print and broadcast media companies to active mobile content. Using
camera-enabled mobile phones, barcode-reading software (NeoReader
TM
),
and an
interoperable billing, clearing and settlement infrastructure
(NeoServer-OMS/OMI), we embrace open standards, full interoperability, and
are
barcode symbology agnostic.
Our
mobile phone technology, NeoReader
TM
,
reads
and transmits data from 1-D, and 2-D barcodes to its intended destination.
Our
Optical Messaging and Interchange platforms (OMS and OMI) create, connect,
record, and transmit the transactions embedded in the 1-D and 2-D barcodes,
like
web-URLs, text messages (SMS), and telephone calls, ubiquitously and reliably.
We provide the industrial and carrier-grade infrastructure to enable reliable,
scalable, and billable commerce. To provide a robust high-performance
infrastructure for the processing of optical codes, we extend our offering
with
the award winning Gavitec technology. Gavitec’s Mobile Ticketing and Couponing
solutions allow users to enter information and opt-in to initiate mobile
transactions.
Going
Concern
–
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate our continuation as a going concern. Our code-reading business
has historically incurred net losses and losses from operations. Net loss from
continuing operations for the six months ended June 30, 2008 and 2007 was $5
million and $10.5 million, respectively. Net cash used for operations during
the
same periods was $3.2 million and $5.3 million. We also have an accumulated
deficit of $207 million and a working capital deficit of $88 million as of
June
30, 2008. Although we have reduced cash outlays for payments associated with
prior integration and discontinued operation liabilities, we will continue
to
have negative cash flows as we continue to execute on our business plan. The
items discussed above raise substantial doubts about our ability to continue
as
a going concern. There can be no assurance that our continuing efforts to
execute our business plan will be successful and if we will be able to continue
as a going concern
We
will
require additional financing in order to execute our operating plan and continue
as a going concern. We cannot predict whether this additional financing will
be
in the form of equity, debt, or another form. We may not be able to obtain
the
necessary additional capital on a timely basis, on acceptable terms, or at
all.
In any of these events, 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 financing sources fail to materialize, our management would
seek alternate funding sources such as the sale of common and/or preferred
stock, the issuance of debt, or the sale of our marketable assets. Our
management’s plan is to attempt to secure adequate funding to bridge the
commercialization of our NeoReader
TM
business. If these financing sources or increased revenues and profits do not
materialize, and we are unable to secure additional financing, we could be
forced to further reduce or cease our business operations.
The
financial statements do not include any adjustments relating to the
recoverability and reclassification of recorded asset amounts or amounts and
reclassification of liabilities that might be necessary, should we be unable
to
continue as a going concern.
Note
2 - Summary of Significant Accounting Policies
For
a
complete discussion of our significant accounting policies, please refer to
our
Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
Interim
Unaudited Financial Information
–
The
accompanying
unaudited consolidated financial statements include our results of operations
for the six months ended June 30, 2008 and 2007. These financial statements
were
prepared in conformity with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) for interim financial information. In
management’s opinion, these statements include all adjustments necessary for a
fair statement of the results of the interim periods shown. All adjustments
are
of a normal recurring nature unless otherwise disclosed. The net effect of
discontinued operations is reported separately from the results of our
continuing operations. Operating results for the six month periods ended June
30, 2008 and 2007 are not necessarily indicative of the results that may be
expected for the full fiscal year.
Basis
of Presentation
–
This
report on Form 10-Q for the six months ended June 30, 2008 should be read in
conjunction with our Annual Report on Form 10-K for the twelve months ended
December 31, 2007. The financial statements include the accounts of NeoMedia
Technologies, Inc. and its wholly owned subsidiaries. All significant
inter-company balances and transactions have been eliminated. We operate as
one
reportable segment.
During
the year ended December 31, 2006, we completed acquisitions of Mobot, Sponge,
Gavitec, 12Snap, and BSD. During 2006, we also divested of a substantial portion
of our ownership in both Mobot and Sponge. During 2007, we made the strategic
decision to sell 12Snap and Telecom Services (consisting of the business
acquired from BSD) and these divestitures were completed on April 4, 2007 and
October 30, 2007, respectively. The consolidated statements of operations
presented herein reflect the results of 12Snap and BSD from January 1, 2007
through June 30, 2007 under the caption “Loss from discontinued operations”.
Gavitec results are included in NeoMedia’s consolidated results from continuing
operations for all periods presented.
Use
of Estimates
–
The preparation of financial statement in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect amounts reported
therein. Due to the inherent uncertainty involved in making estimates, actual
results reported in future periods may differ from those estimates.
Basic
and Diluted Income (Loss) Per Share
–
Basic
net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the period.
During the six months ended June 30, 2008, we reported net loss per share,
and
as such basic and diluted loss per share were equivalent. We have excluded
all
outstanding stock options, warrants, convertible debt and convertible preferred
stock from the calculation of diluted net loss per share because these
securities are anti-dilutive for all periods presented.
In
addition to net income (loss) per share, we have also reported per share amounts
on the separate income statement components required by APB 30, “
Reporting
the Results of Operations
–
Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions
,”
as
the
disposal activities of our discontinued operations were initiated prior to
our
adoption of FAS 144. Because we have reported a loss from continuing operations
for the six months ended June 30, 2008, the effect of potentially dilutive
securities has been excluded from the calculation of per share amounts for
that
period.
Inventories,
consisting of material, material overhead, labor and processing costs, are
stated at the lower of cost (first-in, first-out) or market.
Recent
Accounting Pronouncements
In
May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60” (“SFAS 163”).
This Statement interprets Statement 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of this Statement. SFAS 163 is not expected
to have a material impact on the Company’s consolidated financial
statements.
In
May
2008, the FASB issued SFAS No. 162 (“SFAS No. 162”), “The Hierarchy of
Generally Accepted Accounting Principles.” This statement identifies the sources
of accounting principles and the framework for selecting the principles to
be
used in the preparation of financial statements of nongovernmental entities
that
are presented in conformity with GAAP. While this statement formalizes the
sources and hierarchy of GAAP within the authoritative accounting literature,
it
does not change the accounting principles that are already in place. This
statement will be effective 60 days following the SEC’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.” SFAS No. 162 is not expected to have a material impact on the
Company’s consolidated financial statements.
In
April
2008, the FASB issued FSP SFAS No. 142-3,
Determination
of the Useful Life of Intangible Assets
(“FSP
SFAS No. 142-3”). FSP SFAS No. 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine
the
useful life of a recognized intangible asset under SFAS No. 142,
Goodwill
and Other Intangible Assets
(“SFAS
No. 142”). The intent of FSP SFAS No. 142-3 is to improve the consistency
between the useful life of a recognized intangible asset under SFAS No. 142
and
the period of expected cash flows used to measure the fair value of the asset
under SFAS No. 141(R) and other applicable accounting literature. FSP SFAS
No. 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and must be applied prospectively to
intangible assets acquired after the effective date. The Company has not
determined the impact, if any, of the adoption of FSP SFAS No. 142-3.
Effective
January 1, 2008, we adopted the provisions of FAS 157,
Fair
Value Measurements,
except
as it applies to those nonfinancial assets and nonfinancial liabilities as
noted
in proposed FSP FAS 157-b. The partial adoption of FAS 157 did not have a
material impact on our consolidated financial position, results of operations
or
cash flows. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. This statement does not require
any
new fair value measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source of the
information. In February 2008, the FASB issued FASB Staff Position (“FSP”)
157-2,
Effective Date of FASB Statement No. 157,
which
delays the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed
at
fair value in the financial statements on a recurring basis (at least
annually).
In
March
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 161,
Disclosures about Derivative Instruments and Hedging Activities, an amendment
of
FASB Statement No. 133,
which
requires additional disclosures about the objectives of the derivative
instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on our financial position, financial performance, and cash flows. SFAS
No. 161 is effective for us beginning January 1, 2009. We are
currently assessing the potential impact that adoption of SFAS No. 161 may
have on our financial statements.
Effective
January 1, 2008, we adopted the provisions of SFAS 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities
.
The
adoption did not have a material impact on our consolidated financial position,
results of operations or cash flows. SFAS No. 159 gives us the irrevocable
option to carry many financial assets and liabilities at fair values, with
changes in fair value recognized in earnings.
In
December 2007, the FASB issued SFAS No. 141R,
Business Combinations
,
which
replaces SFAS No. 141. The statement retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes
in the way assets and liabilities are recognized in the purchase accounting.
It
also changes the recognition of assets acquired and liabilities assumed arising
from contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141R is effective for us beginning
January 1, 2009 and will apply prospectively to business combinations
completed on or after that date.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment
of
ARB No. 51,
which
changes the accounting and reporting for minority interests. Minority interests
will be recharacterized as noncontrolling interests and will be reported as
a
component of equity separate from the parent’s equity, and purchases or sales of
equity interests that do not result in a change in control will be accounted
for
as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the
face
of the income statement and, upon a loss of control, the interest sold, as
well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. SFAS No. 160 is effective for us beginning January
1, 2009 and will apply prospectively, except for the presentation and disclosure
requirements, which will apply retrospectively. We are currently assessing
the
potential impact that adoption of SFAS No. 160 may have on our financial
statements.
Note
3
–
Discontinued Operations
MicroPaint
Repair, 12Snap & Telecom Services
–
During
August 2006, we decided to sell our Micro Paint Repair (MPR) business unit;
this
sale was completed on November 15, 2007. During the first quarter of 2007,
we
also decided to sell our remaining non-core business units, consisting of 12Snap
and Telecom Services. Our sale of 12Snap was completed in April 2007, and our
sale of Telecom Services was completed in October 2007.
Sponge
and Mobot Businesses
–
In
the
fourth quarter of 2006, we disposed of two subsidiaries, Sponge and Mobot.
All
assets and liabilities associated with these two subsidiaries were disposed
of
in the sale.
All
costs
related to the operations of Micro Paint Repair, Mobot, Sponge, 12Snap and
Telecom Services are classified as discontinued operations for all periods
presented in this Form 10-Q. Loss from the discontinued business units for
the
six months ended June 30, 2007 reflects direct operations of the Micro Paint
Repair, 12Snap, and Telecom Services units. For the six months ended June 30,
2008, we incurred wind-down expenses for Micro Paint Repair – US. For the six
months ended June 30, 2008, we also set up a reserve for the remaining $0.3
million due from the sale of Micro Paint Repair, because the funds have not
been
received as of the date of this filing, and legal efforts to secure the
remaining payment due have been unsuccessful.
There
is
no tax expense or benefit to report as a result of our net operating loss carry
forward tax position.
The
following table presents a summary of results of our discontinued operations
for
the six months ended June 30, 2008 and 2007:
|
|
Micro Paint
Repair
|
|
12Snap
|
|
Other
|
|
Total
|
|
Six Months
Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Income
(Loss) from discontinued operations
|
|
|
(291.2
|
)
|
|
-
|
|
|
-
|
|
|
(291.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
716.0
|
|
$
|
2,621.0
|
|
$
|
814.0
|
|
$
|
4,151.0
|
|
Income
(Loss) from discontinued operations
|
|
|
(1,209.0
|
)
|
|
(2,302.0
|
)
|
|
(42.0
|
)
|
|
(3,553.0
|
)
|
On
February 17, 2006, the Company issued Series C Convertible Preferred Stock
to YA
Global Investments, L.P. (“YA Global”) and between August 24, 2006 and May 29,
2008, has entered into seven Secured Convertible Debentures with YA Global.
In
addition, in connection with these debentures and preferred stock, the Company
also issued common stock warrants to YA Global. As described in Note 11,
subsequent to June 30, 2008, we have entered into, or expect to enter into,
four
additional convertible debentures with YA Global.
Secured
Convertible Debentures
In
2006
and 2007, the Company issued four Secured Convertible Debentures to YA Global.
During the quarter ended June 30, 2008, the Company issued three additional
Secured Convertible Debentures to YA Global, dated April 11, 2008, May 16,
2008
and May 29, 2008, as follows:.
|
|
April 11,
2008
|
|
May 16,
2008
|
|
May 29,
2008
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Face
Amount
|
|
$
|
390,000
|
|
$
|
500,000
|
|
$
|
790,000
|
|
$
|
1,680,000
|
|
Net
Proceeds
|
|
$
|
336,000
|
|
$
|
441,000
|
|
$
|
700,000
|
|
$
|
1,477,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares indexed to debenture
|
|
|
92,857,143
|
|
|
227,272,727
|
|
|
395,000,000
|
|
|
715,129,870
|
|
Common
shares indexed to warrants
|
|
|
—
|
|
|
7,500,000
|
|
|
50,000,000
|
|
|
57,500,000
|
|
Total
common shares indexed
|
|
|
92,857,143
|
|
|
234,772,727
|
|
|
445,000,000
|
|
|
772,629,870
|
|
The
underlying agreements for each of the seven debentures 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 table below summarizes the significant terms of each of the
seven debentures outstanding at June 30, 2008.
The
debentures are convertible into our common stock at the then effective
conversion price, which varies relative to our trading stock price, as
summarized in table below. The conversions are limited such that YA Global’s
ownership of our common stock cannot exceed 4.99%. The convertible debentures
provide anti-dilution protection such that, if at any time while the debentures
are outstanding, we offer, sell or grant any option to purchase or offer, sell
or grant any right to re-price our securities, or otherwise dispose of or issue
any common stock or common stock equivalents, or entitle any person to acquire
shares of common stock at an effective price per share less than the then
effective conversion price (excluding employee stock options), then, in such
instance, the conversion price of the convertible debentures will be reduced
to
the lower price. Any such adjustment in the effective conversion price for
the
convertible debentures could significantly dilute existing
investors.
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 with YA Global and which provides YA Global
with a security interest in substantially all of our assets.
The
April
2008 and May 2008 debentures are included in the terms of an existing
Registration Rights Agreement with YA Global dated August 24, 2007. That
agreement requires the Company to (i) file a registration statement with the
SEC
registering the resale of the shares of common stock issuable upon conversion
of
the convertible debenture and the exercise of the related warrants and (ii)
maintain effectiveness of the registration statement. Failure to meet these
requirements will require the Company to pay liquidating damages amounting
to 2%
per month of the principal amount of the debentures, not to exceed aggregate
damages of $1,000,000.
In
connection with the August 2006 and December 2006 convertible debentures, we
also entered into a Registration Rights Agreement with YA Global that required
us to file a registration statement with the SEC registering the resale of
the
shares of common stock issuable upon conversion of the debentures and the
exercise of the warrants, and achieve and maintain effectiveness of the
registration statement. Although the required registration statement was
declared effective on November 5, 2007, we failed to meet the timely filing
requirements, and accordingly were subject to liquidated damages amounting
to 2%
of the outstanding amount of the convertible debentures, not to exceed $1.3
million. On March 27, 2007, we paid $0.5 million of liquidated damages from
the
proceeds of a new secured convertible debenture. The remaining $0.8 million
of
liquidated damages has been accrued. On March 27, 2007, we also paid from the
proceeds of the new debenture $0.8 million of liquidated damages related to
our
failure to timely file the registration statement required in connection with
the Series C preferred stock.
The
convertible debentures contain various Events of Default, which could subject
us
to penalties, damages, and liabilities as specified in the agreements. Such
Events include:
|
·
|
Any
case or action of bankruptcy or insolvency commenced by us or any
subsidiary, against us or adjudicated by a court for the benefit
of
creditors;
|
|
·
|
Any
default in our obligations under a mortgage or debt in excess of
$0.1
million;
|
|
·
|
Any
cessation in the eligibility of our stock to be quoted on a trading
market;
|
|
·
|
Failure
to timely file the registration statement covering the shares related
to
the conversion option, or failure to make the registration statement
effective timely (we were in default of this provision as of December
31,
2006, with respect to the Series C convertible preferred stock, the
August
2006 Debenture, and the December 2006
Debenture);
|
|
·
|
Any
lapse in the effectiveness of the registration statement covering
the
shares related to the conversion option and the
warrants;
|
|
·
|
Any
failure to deliver share certificates within the specified
time;
|
|
·
|
Any
failure by us to pay in full the amount of cash due pursuant to a
buy-in
or failure to pay any amounts owed on account of an event of default
within 10 days of the date due.
|
In
addition, the debentures require that:
|
·
|
We
will reserve and keep available authorized and unissued registered
shares
available to be issued upon
conversion;
|
|
·
|
Without
YA Global’s consent, we cannot:
|
|
o
|
issue
or sell any shares of common stock or preferred stock without
consideration or for consideration per share less than the closing
bid
price immediately prior to its
issuance,
|
|
o
|
issue
or sell any preferred stock, warrant, option, right, contract, call,
or
other security or instrument granting the holder thereof the right
to
acquire common stock for consideration per share less than the closing
bid
price immediately prior to its
issuance,
|
|
o
|
enter
into any security instrument granting the holder a security interest
in
any of our assets, or
|
|
o
|
file
any registration statements on Form
S-8.
|
As
of
June 30, 2008, the significant terms of the seven convertible debentures are
as
follows:
|
|
August 24,
2006
|
|
December 29,
2006
|
|
March 27,
2007
|
|
August 24, 2007
|
|
|
|
|
|
|
|
|
|
|
|
Principal
amount
|
|
$
|
5,000,000
|
|
$
|
2,500,000
|
|
$
|
7,458,651
|
|
$
|
1,775,000
|
|
Fees
paid
|
|
|
-
|
|
|
(270,000
|
)
|
|
(780,865
|
)
|
|
(200,000
|
)
|
Accrued
interest on prior obligations paid
|
|
|
-
|
|
|
-
|
|
|
(365,972
|
)
|
|
-
|
|
Liquidated
damages on prior obligations paid
|
|
|
-
|
|
|
-
|
|
|
(1,311,814
|
)
|
|
-
|
|
Net
proceeds to Company
|
|
$
|
5,000,000
|
|
$
|
2,230,000
|
|
$
|
5,000,000
|
|
$
|
1,575,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate
|
|
|
10
|
%
|
|
10
|
%
|
|
13
|
%
|
|
14
|
%
|
Maturity
date (2 years)
|
|
|
8/24/2008
|
|
|
12/29/2008
|
|
|
3/27/2009
|
|
|
8/24/2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of warrants issued
|
|
|
175,000,000
|
|
|
42,000,000
|
|
|
125,000,000
|
|
|
75,000,000
|
|
Exercise
price of warrants
|
|
|
0.02
|
|
|
0.02
|
|
|
0.02
|
|
|
0.02
|
|
Warrants
expire (5 years)
|
|
|
8/24/2011
|
|
|
12/29/2011
|
|
|
3/24/2012
|
|
|
8/24/2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
into our common stock at the lower of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
conversion price per share
|
|
$
|
0.15
|
|
$
|
0.06
|
|
$
|
0.05
|
|
$
|
0.02
|
|
or
percent of the lowest closing bid price
|
|
|
90
|
%
|
|
90
|
%
|
|
90
|
%
|
|
80
|
%
|
of
lowest volume weighted average price preceding conversion
|
|
|
30
days
|
|
|
30
days
|
|
|
30
days
|
|
|
10
days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registration
rights agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
File
registration with SEC within
|
|
|
30
days
|
|
|
150
days
|
|
|
before
4/12/07
|
|
|
30
days / demand
|
|
Achieve
effectiveness of registration statement with SEC within
|
|
|
90
days
|
|
|
90
days
|
|
|
5/10/2007
|
|
|
90
days
of
demand
|
|
Liquidated
damages for failure to meet filing or effectiveness
requirements
|
|
|
2%
of principal, per month
|
|
|
2%
of principal, per month
|
|
|
2%
of principal, per month
|
|
|
2%
of principal, per month
|
|
Security
pledged as collateral
|
|
|
substantially
all of our assets
|
|
|
substantially
all of our assets
|
|
|
substantially
all of our assets
|
|
|
substantially
all
of
our assets
|
|
|
|
April 11, 2008
|
|
May 16, 2008
|
|
May 29, 2008
|
|
Total of all
financings
|
|
|
|
|
|
|
|
|
|
|
|
Principal
amount
|
|
$
|
390,000
|
|
$
|
500,000
|
|
$
|
790,000
|
|
$
|
18,413,651
|
|
Fees
paid
|
|
|
(54,000
|
)
|
|
(59,000
|
)
|
|
(90,000
|
)
|
|
(1,453,864
|
)
|
Accrued
interest on prior obligations paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(365,972
|
)
|
Liquidated
damages on prior obligations paid
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,311,814
|
)
|
Net
proceeds to Company
|
|
$
|
336,000
|
|
$
|
441,000
|
|
$
|
700,000
|
|
$
|
15,282,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate
|
|
|
15
|
%
|
|
15
|
%
|
|
15
|
%
|
|
|
|
Maturity
date (2 years)
|
|
|
4/11/2010
|
|
|
5/16/2010
|
|
|
5/29/2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of warrants issued
|
|
|
-
|
|
|
7,500,000
|
|
|
50,000,000
|
|
|
474,500,000
|
|
Exercise
price of warrants
|
|
|
-
|
|
|
0.0175
|
|
|
0.01
|
|
|
|
|
Warrants
expire (7 years)
|
|
|
-
|
|
|
5/16/2015
|
|
|
5/29/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
into our common stock at the lower of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
conversion price per share
|
|
$
|
0.015
|
|
$
|
0.015
|
|
$
|
0.01
|
|
|
|
|
or
percent of the lowest closing bid price
|
|
|
80
|
|
|
80
|
|
|
80
|
|
|
|
|
of
lowest volume weighted average price preceding conversion
|
|
|
10
days
|
|
|
10
days
|
|
|
10
days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Registration
rights agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
File
registration with SEC within
|
|
|
30
days
|
|
|
30days
|
|
|
30
days
|
|
|
|
|
achieve
effectiveness of registration statement with SEC within
|
|
|
90
days
|
|
|
90
days
|
|
|
90
days
|
|
|
|
|
Liquidated
damages for failure to meet filing or effectiveness
requirements
|
|
|
2%
of principal, per month
|
|
|
2%
of principal, per month
|
|
|
2%
of principal,
per
month
|
|
|
|
|
Security
pledged as collateral
|
|
|
substantially
all of our assets
|
|
|
substantially
all of our assets
|
|
|
substantially
all of our assets
|
|
|
|
|
Series
C Convertible Preferred Stock
On
February 17, 2006, we issued 22,000 shares of $1,000 Series C 8% convertible
preferred stock to YA Global. The Series C convertible preferred stock is
convertible into our 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. The fixed conversion price was reset from $0.50
to $0.02 on August 24, 2007, as an inducement to YA Global to enter into an
additional financing arrangement with us at that time. The conversions are
limited such that YA Global’s ownership of the Company cannot exceed 4.99%. The
Series C convertible preferred stock has voting rights on an “as converted”
basis, meaning YA Global is entitled to vote the number of shares of common
stock into which the 8% cumulative Series C convertible preferred stock was
convertible as of the record date for a meeting of shareholders.
As
of
June 30, 2008, YA Global has converted 2,326 shares of the original 22,000
shares of Series C preferred stock, leaving 19,674 shares outstanding, as
follows:
Date Converted
|
|
Series C Shares
Converted
|
|
Common Shares
Issued
|
|
|
|
|
|
|
|
11/29/06
|
|
|
378
|
|
|
6,631,579
|
|
06/19/07
|
|
|
245
|
|
|
8,781,362
|
|
08/16/07
|
|
|
500
|
|
|
25,773,196
|
|
10/24/07
|
|
|
600
|
|
|
45,801,527
|
|
10/31/07
|
|
|
180
|
|
|
13,740,458
|
|
02/19/08
|
|
|
78
|
|
|
10,000,000
|
|
03/10/08
|
|
|
16
|
|
|
2,500,000
|
|
03/17/08
|
|
|
32
|
|
|
10,000,000
|
|
03/25/08
|
|
|
32
|
|
|
10,000,000
|
|
04/01/08
|
|
|
64
|
|
|
10,000,000
|
|
05/06/08
|
|
|
15.5
|
|
|
5,000,000
|
|
05/09/08
|
|
|
15
|
|
|
5,000,000
|
|
05/22/08
|
|
|
11
|
|
|
5,000,000
|
|
05/30/08
|
|
|
44
|
|
|
20,000,000
|
|
06/12/08
|
|
|
52.5
|
|
|
25,000,000
|
|
06/23/08
|
|
|
21
|
|
|
10,000,000
|
|
06/30/08
|
|
|
42
|
|
|
20,000,000
|
|
Total
|
|
|
2,326
|
|
|
233,228,122
|
|
The
Series C convertible preferred stock provides anti-dilution protection such
that, if at any time while the Series C preferred stock is outstanding, we
offer, sell or grant any option to purchase or offer, sell or grant any right
to
re-price our securities, or otherwise dispose of or issue any common stock
or
common stock equivalents, or entitle any person to acquire shares of common
stock at an effective price per share less than the then effective conversion
price (excluding employee stock options), then, in such instance, the conversion
price for the convertible preferred stock will be reduced to the lower price.
Any such adjustment in the effective conversion price for the convertible
preferred shares could significantly dilute existing investors.
In
connection with the Series C convertible preferred stock, we also entered into
a
Registration Rights Agreement with YA Global that requires us to, among other
requirements, file a registration statement with the SEC registering the resale
of the shares of common stock issuable upon conversion of the preferred stock
and the exercise of the warrants, and achieve and maintain effectiveness of
the
registration statement. Although the required registration statement was
declared effective on November 5, 2007, we failed to meet the timely filing
requirements, and accordingly were subject to liquidated damages amounting
to 1%
of the outstanding amount of Series C preferred stock per month, not to exceed
$1.2 million. On March 27, 2007, we paid $0.8 million of liquidated damages
from
the proceeds of a new secured convertible debenture. The remaining $0.4 million
of liquidated damages has been accrued by us.
Under
the
Series C Agreement, YA Global also received Series A, B and C warrants to
purchase 20 million, 25 million, and 30 million shares of our common stock.
The
warrants, which are exercisable separately, originally had exercise prices
of
$0.50, $0.40 and $0.35, respectively, per share, subject to adjustment,
including anti-dilution protection similar to that described above. As an
inducement to YA Global to enter into subsequent financing arrangements with
us,
the exercise prices of these warrants were reduced on December 29, 2006 to
$0.04
per share and were again reduced on August 24, 2007 to $0.02 per share, subject
to all the original terms and conditions of the respective warrant agreements.
The warrants have a five-year contractual life. We can force exercise of the
warrants if the closing bid price of our common stock is more than $0.10 greater
than the exercise price of the warrants for 15 consecutive trading
days.
Warrants
As
described above, 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. As discussed above, the exercise prices of warrants
held by YA Global have been adjusted from time to time as an inducement for
YA
Global to enter into subsequent financing arrangements. At June 30, 2008, the
warrants issued to YA Global, none of which have been exercised, were as
follows:
Original Issue Date
|
|
Shares Underlying
Warrant
|
|
Original
Exercise Price
|
|
Restated Exercise
Price December
29, 2006
|
|
Restated Exercise
Price August 24,
2006
|
|
|
|
|
|
|
|
|
|
|
|
February
17, 2006
|
|
|
20,000,000
|
|
$
|
0.50
|
|
$
|
0.04
|
|
$
|
0.02
|
|
February
17, 2006
|
|
|
25,000,000
|
|
|
0.40
|
|
|
0.04
|
|
|
0.02
|
|
February
17, 2006
|
|
|
30,000,000
|
|
|
0.35
|
|
|
0.04
|
|
|
0.02
|
|
August
24, 2006
|
|
|
25,000,000
|
|
|
0.15
|
|
|
0.04
|
|
|
0.02
|
|
August
24, 2006
|
|
|
50,000,000
|
|
|
0.25
|
|
|
0.04
|
|
|
0.02
|
|
August
24, 2006
|
|
|
50,000,000
|
|
|
0.20
|
|
|
0.04
|
|
|
0.02
|
|
August
24, 2006
|
|
|
50,000,000
|
|
|
0.05
|
|
|
n/a
|
|
|
0.02
|
|
December
29, 2006
|
|
|
42,000,000
|
|
|
0.06
|
|
|
n/a
|
|
|
0.02
|
|
March
27, 2007
|
|
|
125,000,000
|
|
|
0.04
|
|
|
n/a
|
|
|
0.02
|
|
August
24, 2007
|
|
|
75,000,000
|
|
|
0.02
|
|
|
n/a
|
|
|
n/a
|
|
May
16, 2008
|
|
|
7,500,000
|
|
|
0.0175
|
|
|
n/a
|
|
|
n/a
|
|
May
29, 2008
|
|
|
50,000,000
|
|
|
0.01
|
|
|
n/a
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
549,500,000
|
|
|
|
|
|
|
|
|
|
|
Default
and Other Considerations
As
of
December 31, 2006, we were in default of the August 2006, December 2006 and
Series C preferred stock instruments, due primarily to our failure to register
the shares underlying the instruments by the prescribed deadline, and for
failure to sell our Micro Paint Repair and Telecom Services businesses by
September 30, 2007, as required by the August 2007 Debenture. Due to the then
default status, YA Global had certain material rights that did not exist prior
to default. Specifically, the full face value of the instruments were callable,
and we were responsible for liquidated damages until the default was cured
by
the effectiveness of our registration statement on November 5, 2007, and the
sale of Telecom Services and MPR, which were completed on October 30, 2007
and
November 15, 2007, respectively.
In
addition, the accounting for the convertible securities reflects certain
specific accounting rules and regulations that are applicable under the default
provision:
|
·
|
Prior
to the default, we were accreting dividends on the Series C convertible
preferred stock, using the effective interest method, through periodic
charges to additional paid in capital. Due to the default status,
we
accreted dividends to the full face value of the Series C convertible
preferred stock during the fourth quarter of
2006.
|
|
·
|
Prior
to the default, we were accreting the debt discount on the August
2006
Debenture and the December 2006 Debenture, using the effective interest
method, through periodic charges to interest expense. Due to the
default
status, during the fourth quarter of 2006, we accreted debt discount
to
the full face value of these secured convertible
debentures.
|
|
·
|
The
Series C convertible preferred stock is now reported as demand debt
in the
current liabilities section of the balance sheet, pursuant to the
guidance
outlined in FAS 150.
|
|
·
|
The
secured convertible debentures are reported as debt in the current
liabilities section of the balance sheet rather than long term because
the
debenture is callable as demand debt due to the
default.
|
Fair
Value Considerations
In
accordance with FAS 133, ‘
Accounting
for Derivative Instruments and Hedging Activities
’,
we
determined that the conversion features of the Series C convertible preferred
stock, the August 2006 Debenture, and the December 2006 Debenture met the
criteria of embedded derivatives and that the conversion features of these
instruments needed to be bifurcated and accounted for as derivative instrument
liabilities. These instruments do not meet the definition of “conventional
convertible debt” because the number of shares which may be issued upon their
conversion is not fixed, and there is no cap on the number of shares that could
be issued upon conversion. Therefore, the conversion feature fails to qualify
for equity classification under EITF 00-19, and must be accounted for as a
derivative liability, at fair value. Changes in the fair value of the derivative
liability for the embedded conversion option are charged or credited to
income.
Beginning
in 2007, each new financing arrangement is evaluated, on an
instrument-by-instrument basis, under FAS 155, ‘
Accounting
for Certain Hybrid Financial Instruments an amendment of FASB Statements No.
133
and 140
’,
which
permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation. During
the evaluation of the March 2007 Debenture, August 2007 Debenture, April 2008
Debenture and May 2008 Debentures, we determined that (i) the hybrid debt
instrument embodied certain derivative features whose risks and rewards were
not
clearly and closely related to the risks and rewards of the host debt instrument
and (ii) warrants issued in connection with the March 2007 Debenture, August
2007 Debenture and May 2008 Debentures did not meet all of the established
criteria for equity classification. Additionally, the March 2007 Debenture,
August 2007, April 2008 and May 2008 Debentures extended a right to the holder
to accelerate repayment of the debt (default put) and each contains cash
penalties upon the occurrence of certain contingent events. The default put
may
be triggered by certain events that are not related to the debt characteristics
of the debentures and those events are not within our control. As permitted
by
FAS 155, we have elected not to bifurcate the embedded derivatives in the March
2007 Debenture, August 2007 Debenture, April 2008 Debenture or the 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
secured convertible debentures charged or credited to income each
period..
The
warrants issued to YA Global in connection with the Series C preferred stock
and
in connection with the convertible debentures do not meet all of the established
criteria for equity classification provided in EITF 00-19 and, accordingly,
are
recorded as derivative liabilities at fair value. In addition, certain other
warrants issued by the Company do not meet the criteria for equity
classification and are also carried as derivative liabilities. Changes in the
fair value of the warrants are 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 derivative financial instrument, the change in fair
value
from the previous reporting date to the date of conversion is recorded to income
(loss), and then the carrying value is recorded to paid-in capital, provided
all
other criteria for equity classification are met.
Initial
Accounting for New Debentures
As
discussed above, for the April 11, 2008, May 16, 2008 and May 29, 2008
convertible debentures, we elected not to bifurcate the embedded derivatives
and
accordingly, in accordance with FAS 155, these convertible instruments are
being
carried in their entirety at their fair values. In connection with the May
16,
2008 and May 29, 2008 convertible debentures, YA Global received 7,500,000
and
50,000,000 common stock warrants. The warrants were 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 included in this model as of inception of the financing
arrangements are as follows:
|
|
May 16, 2008
|
|
May 29, 2008
|
|
|
|
|
|
|
|
Indexed
shares
|
|
|
7,500,000
|
|
|
50,000,000
|
|
Exercise
price
|
|
$
|
0.0175
|
|
$
|
0.01
|
|
Effective
exercise price
|
|
$
|
0.0030
|
|
$
|
0.0030
|
|
Term
(years)
|
|
|
7
years
|
|
|
7
years
|
|
Volatility
|
|
|
152
|
%
|
|
152
|
%
|
Risk
free rate
|
|
|
3.43
|
%
|
|
3.68
|
%
|
The
results of the anti-dilution protection resulted in an effective exercise price
which was lower than the stated exercise price.
At
inception, a summary of the allocation of the components of the new debenture
transactions was as follows:
|
|
April 11,
2008
|
|
May 16,
2008
|
|
May 29,
2008
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
debenture, at fair value
|
|
$
|
637,270
|
|
$
|
813,631
|
|
$
|
1,389,544
|
|
$
|
2,840,445
|
|
Warrant
derivative liability
|
|
|
—
|
|
|
21,750
|
|
|
145,000
|
|
|
166,750
|
|
Day-one
derivative loss
|
|
|
(247,270
|
)
|
|
(335,381
|
)
|
|
(744,544
|
)
|
|
(1,327,195
|
)
|
Total
gross proceeds
|
|
$
|
390,000
|
|
$
|
500,000
|
|
$
|
790,000
|
|
$
|
1,680,000
|
|
The
fair
value of the debentures and warrants at inception was greater than the proceeds
received, which resulted in a day-one derivative loss.
Current
Period Accounting Considerations and Valuations
Warrants
Freestanding
derivative instruments, consisting of warrants that were issued in connection
with the Series C preferred stock and the convertible debentures as well as
certain other 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 June 30, 2008 are as follows:
|
|
Series C
Convertible
Preferred
Stock
|
|
August 2006
Debenture
|
|
December
2006
Debenture
|
|
March 2007
Debenture
|
|
August
2007
Debenture
|
|
May 16,
2008
Debenture
|
|
May 29,
2008
Debenture
|
|
|
|
Total
|
|
Holder
|
|
|
YA Global
|
|
|
YA
Global
|
|
|
YA
Global
|
|
|
YA
Global
|
|
|
YA
Global
|
|
|
YA
Global
|
|
|
YA
Global
|
|
|
Other
|
|
|
|
|
Instrument
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Warrants
|
|
|
|
|
Exercise
price
|
|
$
|
0.02
|
|
$
|
0.0015
|
|
$
|
0.0015
|
|
$
|
0.0015
|
|
$
|
0.0015
|
|
$
|
0.0175
|
|
$
|
0.01
|
|
$
|
0.01
- 3.45
|
|
|
|
|
Remaining
term (years)
|
|
|
2.64
|
|
|
3.15
|
|
|
3.5
|
|
|
3.74
|
|
|
4.15
|
|
|
6.88
|
|
|
6.92
|
|
|
.27
- 2.88
|
|
|
|
|
Volatility
|
|
|
173
|
%
|
|
120
|
%
|
|
119
|
%
|
|
121
|
%
|
|
119
|
%
|
|
153
|
%
|
|
153
|
%
|
|
131%-331
|
%
|
|
|
|
Risk-free
rate
|
|
|
2.91
|
%
|
|
2.91
|
%
|
|
2.91
|
%
|
|
2.91
|
%
|
|
3.34
|
%
|
|
3.61
|
%
|
|
3.61
|
%
|
|
1.60%
2.91
|
%
|
|
|
|
Number
of warrants
|
|
|
75,000,000
|
|
|
175,000,000
|
|
|
42,000,000
|
|
|
125,000,000
|
|
|
75,000,000
|
|
|
7,500,000
|
|
|
50,000,000
|
|
|
17,471,000
|
|
|
566,971,000
|
|
Embedded
Derivative Instruments – Series C Preferred Stock and August and December 2006
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 FAS 133, the compound embedded derivative
instruments are valued using the Flexible Monte Carlo 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.
Assumptions
used as of June 30, 2008 included exercise estimates/behaviors and the following
other significant estimates:
|
|
Series
C
Convertible
Preferred
Stock
|
|
August
2006
Debenture
|
|
December
2006
Debenture
|
|
Conversion
prices
|
|
$
|
0.0021
|
|
$
|
0.0015
|
|
$
|
0.0015
|
|
Remaining
terms (years)
|
|
|
0.64
|
|
|
0.17
|
|
|
0.50
|
|
Equivalent
volatility
|
|
|
176
|
%
|
|
207
|
%
|
|
211
|
%
|
Equivalent
interest-risk adjusted rate
|
|
|
9.45
|
%
|
|
10.00
|
%
|
|
11.58
|
%
|
Equivalent
credit-risk adjusted yield rate
|
|
|
74.6
|
%
|
|
40.67
|
%
|
|
41.03
|
%
|
Equivalent
amounts reflect the net results of multiple modeling simulations that the Monte
Carlo Simulation methodology applies to underlying assumptions. The assumptions
included in the Monte Carlo Simulation calculation are highly subjective and
subject to interpretation.
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 FAS 155 and the entire hybrid
instrument was initially recorded at fair value, with subsequent changes in
fair
value recognized in earnings. These financial instruments were valued using
the
common stock equivalent approach. The common stock equivalent was
calculated using the shares indexed to the financial instruments valued at
the
market price of our stock and the present value of the coupon.
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, 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 Debenture, August 2007 Debenture, April 2008 Debenture and the May 2008
Debentures were each initially recorded at their full fair value pursuant to
FAS
155. That fair value is marked-to-market each reporting period, with any changes
in the fair value charged or credited to income.
The
face
value or fair value, as appropriate, of each instrument as of June 30, 2008
and
December 31, 2007 was:
June 30, 2008
|
|
Face value
|
|
Fair value
|
|
Total
|
|
|
|
(in thousands)
|
|
Series C Convertible Preferred Stock
|
|
$
|
19,674
|
|
$
|
—
|
|
$
|
19,674
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2006 debenture
|
|
|
5,000
|
|
|
—
|
|
|
5,000
|
|
December 2006
debenture
|
|
|
2,500
|
|
|
—
|
|
|
2,500
|
|
March
2007 debenture
|
|
|
—
|
|
|
16,741
|
|
|
16,741
|
|
August
2007 debenture
|
|
|
—
|
|
|
3,950
|
|
|
3,950
|
|
April
2008 debenture
|
|
|
—
|
|
|
618
|
|
|
618
|
|
May
16 ,2008 debenture
|
|
|
—
|
|
|
785
|
|
|
785
|
|
May
29, 2008 debenture
|
|
|
—
|
|
|
1,236
|
|
|
1,236
|
|
Total
|
|
$
|
7,500
|
|
$
|
23,330
|
|
$
|
30,830
|
|
December 31, 2007
|
|
Face value
|
|
Fair value
|
|
Total
|
|
|
|
(in thousands)
|
|
Series C Convertible Preferred
Stock
|
|
$
|
20,097
|
|
$
|
—
|
|
$
|
20,097
|
|
|
|
|
|
|
|
|
|
|
|
|
August
2006 debenture
|
|
|
5,000
|
|
|
—
|
|
|
5,000
|
|
December
2006 debenture
|
|
|
2,500
|
|
|
—
|
|
|
2,500
|
|
March
2007 debenture
|
|
|
—
|
|
|
18,798
|
|
|
18,798
|
|
August
2007 debenture
|
|
|
—
|
|
|
4,401
|
|
|
4,401
|
|
|
|
$
|
7,500
|
|
$
|
23,199
|
|
$
|
30,699
|
|
We
adopted the provisions of FAS 157 as of January 1, 2008, with respect to
financial instruments. As required by FAS 157, 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 FAS 155 or FAS 133 as of June 30, 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.
The
following tabular presentation reflects the components of derivative financial
instruments related to convertible financial instruments in the liability
section on our balance sheet at June 30, 2008:
|
|
Common Stock
Warrants
|
|
Embedded Conversion
Feature
|
|
Total
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
$
|
150,000
|
|
$
|
12,288,000
|
|
$
|
12,438,000
|
|
August
24, 2006 Debenture
|
|
|
420,000
|
|
|
8,000,000
|
|
|
8,420,000
|
|
December
29, 2006 Debenture
|
|
|
105,000
|
|
|
4,000,000
|
|
|
4,105,000
|
|
March
27, 2007 Debenture
|
|
|
313,000
|
|
|
n/a
|
|
|
313,000
|
|
August
24, 2007 Debenture
|
|
|
195,000
|
|
|
n/a
|
|
|
195,000
|
|
April
11, 2008 Debenture
|
|
|
-
|
|
|
n/a
|
|
|
-
|
|
May
16, 2008 Debenture
|
|
|
22,000
|
|
|
n/a
|
|
|
22,000
|
|
May
29, 2008 Debenture
|
|
|
145,000
|
|
|
n/a
|
|
|
145,000
|
|
Other
instruments
|
|
|
5,000
|
|
|
20,000
|
|
|
25,000
|
|
Total
|
|
$
|
1,355,000
|
|
$
|
24,308,000
|
|
$
|
25,663,000
|
|
For
the
March 2007, August 2007, April 2008 and May 2008 debentures, the embedded
conversion feature is effectively embodied in the fair value of those
instruments.
The
following table reflects the number of common shares into which the convertible
instruments and warrants are convertible or exercisable at June 30,
2008:
|
|
Common Stock
Warrants
|
|
Embedded Conversion
Feature
|
|
Total
|
|
|
|
|
|
|
|
|
|
Series
C Convertible Preferred Stock
|
|
|
75,000,000
|
|
|
11,171,183,000
|
|
|
11,246,183,000
|
|
August
24, 2006 Debenture
|
|
|
175,000,000
|
|
|
3,333,333,000
|
|
|
3,508,333,000
|
|
December
29, 2006 Debenture
|
|
|
42,000,000
|
|
|
1,666,667,000
|
|
|
1,708,667,000
|
|
March
27, 2007 Debenture
|
|
|
125,000,000
|
|
|
4,972,434,000
|
|
|
5,097,434,000
|
|
August
24, 2007 Debenture
|
|
|
75,000,000
|
|
|
1,183,333,000
|
|
|
1,258,333,000
|
|
April
11, 2008 Debenture
|
|
|
-
|
|
|
169,565,000
|
|
|
169,565,000
|
|
May
16, 2008 Debenture
|
|
|
7,500,000
|
|
|
217,391,000
|
|
|
224,891,000
|
|
May
29, 2008 Debenture
|
|
|
50,000,000
|
|
|
343,478,000
|
|
|
393,478,000
|
|
Other
warrants
|
|
|
17,471,000
|
|
|
-
|
|
|
17,471,000
|
|
Total
|
|
|
566,971,000
|
|
|
23,057,384,000
|
|
|
23,624,355,000
|
|
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 in the Series C
convertible stock was convertible as of June 30, 2008 was calculated as the
face
value plus assumed dividends (if declared), divided by 97% of the lowest closing
bid price for the 30 trading days preceding June 30, 2008. The number of shares
of common stock into which the embedded conversion feature in the convertible
debentures was convertible as of June 30, 2008 was calculated as the face value
of each instrument divided by the lower of $0.01 or 50% of the average closing
market price of our common stock for the 10 days prior to June 30,
2008.
Changes
in the fair value of convertible instruments that are carried at fair value
(the
March 2007 Debenture, August 2007 Debenture, April 2008 Debenture and May 2008
Debentures) and changes in the fair values of derivative instrument liabilities
(including warrants and the bifurcated embedded derivative features of
convertible instruments not carried at fair value) are reported as “Gain (loss)
on derivative financial instruments” in the accompanying consolidated statement
of operations, as follows:
|
|
Six months ended June 30,
|
|
(in thousands)
|
|
2008
|
|
2007
|
|
Series
C Convertible Preferred Stock
|
|
$
|
(4,028
|
)
|
$
|
(756
|
)
|
August
24, 2006 debenture
|
|
|
1,237
|
|
|
5,796
|
|
December
29, 2006 debenture
|
|
|
277
|
|
|
297
|
|
March
27, 2007 debenture
|
|
|
3,006
|
|
|
(7,892
|
)
|
August
24, 2007 debenture
|
|
|
1,088
|
|
|
-
|
|
April
11, 2008 debenture
|
|
|
(228
|
)
|
|
-
|
|
May
16, 2008 debenture
|
|
|
(307
|
)
|
|
-
|
|
May
29, 2008 debenture
|
|
|
(591
|
)
|
|
-
|
|
Other
derivative instruments
|
|
|
20
|
|
|
-
|
|
Total
|
|
$
|
475
|
|
$
|
(2,555
|
)
|
The
following represents a reconciliation of the changes in fair value of financial
instruments measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) during the first half of 2008:
(in
thousands)
|
|
2008
|
|
|
|
|
|
Beginning
balance: Derivative financial instruments
|
|
$
|
47,769
|
|
Total
gains (losses)
|
|
|
(475
|
)
|
Transfers
in/out of Level 3
|
|
|
(21,597
|
)
|
Ending
balance
|
|
$
|
25,697
|
|
Gains
and
losses included in earnings are reported on the Consolidated Statements of
Operations and Comprehensive Loss in “(Gain) loss from change in fair value of
derivative financial instruments” for warrants and embedded conversion features
and in Interest expense (income) for financial instruments recorded at fair
value under FAS 155.
The
fair
value of derivative financial instrument liabilities recorded as of June 30,
2008 and December 31, 2007 was:
(in thousands)
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Warrants and
embedded conversion features in preferred stock
|
|
$
|
12,438
|
|
$
|
8,410
|
|
Warrants
and embedded conversion features in certain debentures
|
|
|
13,200
|
|
|
16,136
|
|
Other
warrants
|
|
|
5
|
|
|
26
|
|
Fair
value of future payment obligation
|
|
|
-
|
|
|
-
|
|
Special
preference stock of Mobot
|
|
|
20
|
|
|
79
|
|
Total
derivative financial instruments
|
|
$
|
25,663
|
|
$
|
24,651
|
|
Note
5 -
Investment
in Marketable Securities and Other Long-Term Assets
In
2005,
we invested $0.3 million in exchange for 8.3 million shares of Pickups Plus,
Inc
(“PUPS”) restricted common stock. On February 17, 2006, as a component of net
proceeds from the issuance of 8% Series C Convertible Preferred Stock, we
received marketable securities with a fair value of $0.6 million, of which
$0.2
million represented 20 million shares of PUPS common stock and $0.4 million
in
notes designated as held to maturity. In accordance with FAS 115, “
Accounting
for Certain Investments in Debt and Equity Securities
,”
the
investment in PUPS was previously recorded as available-for-sale securities
and
reported at fair value. As of March 31, 2008, the fair value of our PUPS shares
was determined to be $0, as reflected by PUPS failure to maintain current
filings with the SEC and not maintaining active trading on a SEC-recognized
exchange or trading board. Accordingly, prior unrealized losses related to
our
PUPS investment were considered realized as of March 31, 2008 and were charged
to an operating loss as of March 31,2008, and were no longer included in Other
Comprehensive Income (Loss). Previously, we had announced our intention to
distribute the PUPS shares as a dividend to our shareholders, but due to PUPS’
inactive standing with the SEC, we are not able to legally distribute the shares
until such time as PUPS regains their active status with the SEC and obtain
an
effective registration statement relating to said shares, both of which are
events that management considers remote.
We
retained small percentages of ownership in some of the subsidiaries that we
sold, including Mobot, represented by 18% ownership of FMS Group, which has
operated the Mobot business subsequent to our sale of Mobot, Sponge, of which
we
retained a 7.5% ownership after the sale, 12Snap, of which we retained a 10%
ownership after the sale but subsequently sold on January 28, 2008, and Micro
Paint Repair, represented by 5% ownership of Micro Paint Holdings Limited,
which
has operated the MPR business subsequent to our sale of MPR.
We
have a
long-term facility lease deposit of $0.2 million included in other long-term
assets, which represents the deposit required on our Atlanta corporate
office.
Note
6 – Stock-Based Compensation
Equity-Based
Compensation Plans
We
have
four stock option plans, the 2005 Stock Option Plan (the “2005 Plan”), the 2003
Stock Option Plan (the “2003 Plan”), the 2002 Stock Option Plan (the “2002
Plan”), and the 1998 Stock Option Plan (the “1998 Plan”), collectively referred
to as the “Option Plans”. Options issued under these Option Plans have an option
term of 10 years. Exercise prices of options issued under the Option Plans
may
be 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 0 to 5 years. Common shares required to be issued upon the exercise
of stock options and warrants would be issued from our authorized and unissued
shares.
The
2005
Plan provides for the grant of up to 60 million shares of common stock. As
of
June 30, 2008, we have not registered the shares underlying the options in
the
2005 Plan, and as a result, no options have been issued and all 60 million
options remain available for issuance under the 2005 Plan, once registration
has
been effected.
The
2003
Plan provides for the grant of up to 150 million non-qualified stock options.
As
of June 30, 2008, options to purchase 4.6 million shares of common stock
remained available for issuance under the 2003 Plan.
The
2002
Plan provides for the grant of up to 10 million non-qualified stock options.
As
of June 30, 2008, options to purchase 20,000 shares of common stock remained
available for issuance under the 2002 Plan.
The
1998
Plan provided for the grant of options to purchase up to 8 million shares of
our
common stock. Effective March 27, 2008, the 1998 Plan expired.
We
also
have one stock incentive plan, the 2003 Stock Incentive Plan (the “2003
Incentive Plan”). Under the terms of the 2003 Incentive Plan, we reserved 30
million shares of common stock to be issued to pay compensation and other
expenses related to employees, former employees, consultants, and non-employee
directors. As of June 30, 2008, we have 426,451 shares of common stock available
for issuance under the 2003 Stock Incentive Plan.
Total
options issued during the six months ended June 30, 2008 were 32,314,263
compared with 28,773,500 issued during the six months ended June 30, 2007.
For
the six months ended June 30, 2008 and 2007, stock-based compensation expense
recorded in the statement of operations was $987,000 and $2,716,000,
respectively. There were no options exercised during the six months ended June
30, 2008.
We
used
the following assumptions for grants during the six months ended June 30, 2008
and 2007:
|
|
Six months ended June 30,
|
|
|
|
2008
|
|
2007
|
|
Volatility Range
|
|
|
88%-120%
|
|
|
96%-115%
|
|
Expected
dividends
|
|
|
0
|
|
|
0
|
|
Expected
term (in years)
|
|
|
3
|
|
|
3
|
|
Risk-free
rate
|
|
|
4.35%
|
|
|
4.35%
|
|
Estimated
income tax benefits recognized during the six months ended June 30, 2008 and
2007 were offset by a valuation allowance since realization was not reasonably
assured. FAS 123(R) requires the cash flows resulting from the tax benefits
resulting from tax deductions in excess of the compensation cost recognized
for
those options (excess tax benefits) to be classified as financing cash flows.
We
will use this presentation if and when we have exhausted our tax loss
carryforward.
Note
7 – Accrued Liabilities
Accrued
liabilities consist of the following as of June 30, 2008 and December 31,
2007:
(in thousands)
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Accrued
legal and accounting costs
|
|
|
79
|
|
|
358
|
|
Accruals
for disputed services
|
|
|
1,336
|
|
|
1,336
|
|
Accrued
operating expenses
|
|
|
2,548
|
|
|
2,184
|
|
Payroll
related accruals
|
|
|
347
|
|
|
121
|
|
Accrued
interest & liquidated damages
|
|
|
2,422
|
|
|
2,016
|
|
Total
|
|
$
|
6,732
|
|
$
|
6,015
|
|
Additionally,
we have accrued $4.6 million relating to a purchase price guarantee obligation
in connection with our acquisition of 12Snap which is not included in the totals
above.
Note
8 – Income Taxes
We
adopted the provisions of FASB Interpretation No. 48,
Accounting
for Uncertainty in Income Taxes
–
an interpretation of FASB Statement
No. 109
–
Accounting for Income Taxes (“FIN 48”)
on
January 1, 2007. As a result of the implementation of FIN 48, we did not
recognize any material adjustment in the liability for unrecognized income
tax
benefits. At January 1, 2007, the total amount of unrecognized income tax
benefits was $0.
We
are
subject to U.S. federal income tax as well as income tax of multiple states
and
foreign jurisdictions. With few exceptions, we are no longer subject to U.S,
federal, state and local, or foreign income tax examinations by tax authorities
for years prior to 1999. As of June 30, 2008, there are no notifications of
any
pending audits from any jurisdiction.
Our
continuing practice is to recognize interest and penalties related to uncertain
tax positions in other expense (income). As of January 1, 2008 and for the
six
months ended June 30, 2008, we did not have any interest or penalty expense
or
accruals related to uncertain tax positions.
The
tax
years 1999 – 2007 remain open to examination by the major taxing jurisdictions
in which we are subject to taxation, including federal, state and foreign
jurisdictions. All tax years in which we generated a net operating loss are
subject to examination, including federal, state and foreign
jurisdictions.
We
do not
expect a material change in the amount of unrecognized tax benefits in the
next
twelve months.
Tax
expense or benefit from continuing operations for interim periods is based
on
our estimated annualized tax rate.
Note
9 –
Contingencies
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 possible that the eventual
resolution of the following legal actions could have a material adverse effect
on our financial position or operating results.
Scanbuy,
Inc.
- On
January 23, 2004, we filed suit against Scanbuy, Inc. (“Scanbuy”) in the
Northern District of Illinois, claiming that Scanbuy has manufactured, or has
manufactured for it, and has used, or actively induced others to use, technology
which allows customers to use a built-in UPC bar code scanner to scan individual
items and access information, thereby infringing our patents. The
complaint stated that on information and belief, Scanbuy had actual and
constructive notice of the existence of the patents-in-suit, and, despite such
notice, failed to cease and desist their acts of infringement and continue
to
engage in acts of infringement of the patents-in-suit. On April 15, 2004,
the court dismissed the suits against Scanbuy for lack of personal
jurisdiction.
On
April
20, 2004, we re-filed our suit against Scanbuy in the Southern District of
New
York alleging patent infringement. Scanbuy filed their answer on June 2, 2004.
We filed our answer and affirmative defenses on July 23, 2004. On February
13,
2006, Scanbuy filed an amended answer to the complaint. We filed our reply
to
Scanbuy’s amended answer on March 6, 2006. On January 20, 2007, the court
dismissed Scanbuy's request for a summary judgment. The case has been stayed
due
to the reexamination of “the ‘048 patent” (see Electronic Frontier Foundation
discussion below).
Electronic
Frontier Foundation -
In
October 2007, we received a communication from the United States Patent and
Trademark Office (USPTO) stating that a request by the Electronic Frontier
Foundation for Ex-Parte Reexamination of U.S. Patent No. 6,199,048 (“the ‘048
patent”) has been granted, and is pending. Although the ’048 patent is an
important NeoMedia patent, it is not alone. We have a portfolio consisting
of
U.S. and foreign patents and pending applications relating to various inventions
surrounding the processing of machine readable codes over wireless networks.
We
believe some or all of the claims of the ’048 patent will be confirmed by the
USPTO in the course of the re-examination.
Federal
Aviation Administration
–
On
April 22, 2008, the Company received a notice of proposed civil penalty from
the
Federal Aviation Administration (FAA) related to an air bill shipment processed
by one of the Company’s business units which has been discontinued. The
potential penalty will be from a minimum of $5,750 up to a maximum of
$1,150,000. The Company has accrued the minimum fine related to this action
in
the amount of $5,750, which is the amount the Company expects will be assessed.
Resolution of the incident with the FAA is pending.
Note
10 – Geographic Reporting
As
of
June 30, 2008, we were structured and evaluated by our Board of Directors and
management as one business unit encompassing NeoReader
TM
,
legacy
licensing, and hardware product lines; in prior years, these product lines
were
reported as part of the NeoMedia Mobile business unit. Our operations are
managed as one global unit out of Atlanta, Georgia and Aachen,
Germany.
Consolidated
net sales and net loss from continuing operations for the six months ended
June
30, 2008 and 2007, and the identifiable assets as of June 30, 2008 and December
31, 2007 by geographic area were as follows:
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in
thousands)
|
|
Net Sales
(1)
:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$
|
207
|
|
$
|
303
|
|
Germany
|
|
|
264
|
|
|
720
|
|
|
|
$
|
471
|
|
$
|
1,023
|
|
|
|
|
|
|
|
|
|
Net
Loss from Continuing Operations
(1)
:
|
|
|
|
|
|
|
|
United
States
|
|
$
|
(4,027
|
)
|
|
($10,636
|
)
|
Germany
|
|
|
(1,006
|
)
|
|
92
|
|
|
|
$
|
(5,033
|
)
|
|
($
10,544
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
Assets
(1)
|
|
|
June
30, 2008
|
|
|
December
31, 2007
|
|
United
States
|
|
$
|
10,689
|
|
$
|
12,875
|
|
Germany
|
|
|
404
|
|
|
649
|
|
|
|
$
|
11,093
|
|
$
|
13,524
|
|
(1)
Geographic reporting excludes the Micro Paint Repair, Mobot, Sponge, 12Snap
and
Telecom Service business units that are reported as discontinued operations
and
the corresponding assets and liabilities that are reported as Held For
Sale.
Note
11
–
Sub
sequent
Events
Preferred
Stock conversions
On
July
14 and July 22, 2008, YA Global converted 21 shares and 22 shares, respectively,
of Series C preferred stock into 10 million shares and 10 million shares,
respectively, of common stock.
Convertible
Debentures
$137,750
Secured Convertible Debenture
–
On
July
10, 2008, we issued and sold a secured convertible debenture (the “July 10
debenture”) to YA Global, in the principal amount of $137,750. The July 10
debenture matures, unless extended by the holder in accordance with the terms
of
the debenture, on July 10, 2010, and accrues interest at the rate of 15%, which
is payable quarterly in arrears beginning September 1, 2008. The debenture
is
secured by substantially all of our assets. YA Global has the right to convert
any portion of the outstanding and unpaid principal and accrued interest thereon
into fully-paid and nonassessable shares of our common stock at a price equal
to
the lesser of $0.01 or 80% of the lowest volume weighted average price of our
common stock during the 10 trading days immediately preceding each conversion
date. The conversion is limited such that YA Global’s ownership of our common
stock cannot exceed 4.99%, unless they waive their right to such limitation.
The
limitation will terminate under any event of default. In connection with the
July 10 debenture, YA Global retained fees of $14,000, resulting in net proceeds
to us of $123,750.
$8,650,000
Securities Purchase Agreement
–
On
July
29, 2008, we entered into a Securities Purchase Agreement (the “July 29 SPA”)
with YA Global, an accredited investor in the principal amount of
$8,650,000. The July 29 SPA provides for the amount to be drawn through
three separate secured convertible debentures (the “debentures”) in the amounts
of $2,325,000, $2,325,000, and $4,000,000 respectively. The first debenture
was
issued on July 29, 2008. Upon the achievement of certain milestones, the
remaining two debentures are scheduled to be issued on October 29, 2008 and
January 2, 2009, respectively. The debentures mature, unless extended by the
holder in accordance with the terms of the debenture, two years from the issue
dates, and accrue interest at the rate of 14%, which is payable at the maturity
dates. The debentures are secured by substantially all of our
assets. At any time after the debentures are issued, YA Global has the
right to convert any portion of the outstanding and unpaid principal and accrued
interest thereon into fully-paid and nonassessable shares of our common stock
at
a price equal to the lesser of $0.02 or 95% of the lowest volume weighted
average price of our common stock during the 10 trading days immediately
preceding each conversion date. The conversion is limited such that YA
Global’s ownership of our common stock cannot exceed 4.99%, unless they waive
their right to such limitation. The limitation will terminate under any
event of default. In connection with the debenture issued on July 29,
2008, YA Global retained fees of $240,000, resulting in net proceeds to us
of
$2,085,000. In conjunction with the July 29 SPA we also issued warrants to
YA
Global to purchase 100,000,000, 100,000,000, 125,000,000, and 125,000,000 shares
of our common stock at exercise prices of $0.02, $0.04, $0.05, and $0.075,
respectively
ITEM
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Special
Note About Forward-Looking Statements
Certain
statements in Management’s Discussion and Analysis (“MD&A”), other than
purely historical information, including estimates, projections, statements
relating to our business plans, objectives, and expected operating results,
and
the assumptions upon which those statements are based, are “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995, Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. These forward-looking statements generally
are identified by the words “believe,” “project,” “expect,” “anticipate,”
“estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,”
“will be,” “will continue,” “will likely result,” and similar expressions.
Forward-looking statements are based on current expectations and assumptions
that are subject to risks and uncertainties, which may cause actual results
to
differ materially from the forward-looking statements. For a detailed discussion
of risks and uncertainties that could cause actual results and events to differ
materially from such forward looking statements, please refer to the section
titled “Risk Factors” in the Company’s 2007 Form 10-K filed on March 28, 2008.
We undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events, or
otherwise.
Overview
The
following MD&A is intended to help the reader understand the results of
operations and financial condition of NeoMedia Technologies, Inc. MD&A is
provided as a supplement to, and should be read in conjunction with, our
financial statements and the accompanying notes to the financial statements
(“Notes”).
NeoMedia
provides internet advertising solutions using wireless technologies to connect
traditional print and broadcast media companies to active mobile content. Using
camera-enabled mobile phones, barcode-reading software (NeoReader
TM
),
and an
interoperable billing, clearing and settlement infrastructure
(NeoServer-OMS/OMI), we embrace open standards, full interoperability, and
are
barcode symbology agnostic.
Our
mobile phone technology, NeoReader
TM
,
reads
and transmits data from 1-D and 2-D barcodes to its intended destination. Our
Optical Messaging and Interchange platforms (OMS and OMI) create, connect,
record, and transmit the transactions embedded in the 1-D and 2-D barcodes,
like
web-URLs. We provide the industrial and carrier-grade infrastructure to enable
reliable, scalable, and billable commerce. To provide a robust high-performance
infrastructure for the processing of optical codes, we extend our offering
with
the award winning Gavitec technology. Gavitec’s Mobile Ticketing and Couponing
solutions allow users to enter information and opt-in to initiate mobile
transactions.
By
shifting to a business model that focuses on our NeoReader
TM
business
and related intellectual property, we are able to concentrate our management
and
financial resources on the area that our management believes will deliver the
most value. Our primary business strategy is to provide the industrial and
carrier-grade infrastructure to enable reliable, scalable and billable commerce
that is customer-focused and drives revenue growth.
MANAGEMENT
CHANGES
Effective
May 22, 2008, Mr. William Hoffman resigned his position as Chief Executive
Officer and Chairman of the Board of Directors of the Company. In connection
with Mr. Hoffman’s resignation, on June 3, 2008 the Company and Mr. Hoffman
consummated a Settlement Agreement and Release whereby the parties agreed to
terminate Mr. Hoffman’s June 18, 2007 employment agreement.
Effective
May 22, 2008, Mr. Frank Pazera resigned his position as Chief Financial Officer
of the Company. In connection with Mr. Pazera’s resignation, on June 2, 2008 the
Company and Mr. Pazera entered into a Settlement Agreement and Release whereby
the parties agreed to terminate Mr. Pazera’s January 1, 2008 employment
agreement.
Effective
May 22, 2008, the Board of Directors of the Company appointed Iain A. McCready
to serve as Chief Executive Officer and Chairman of the Board of Directors
of
the Company. On June 10, 2008, the Company entered into an employment agreement
with Mr. McCready, for an initial term of employment of two years (commencing
on
May 29, 2008), unless earlier terminated as provided under the
agreement.
On
June
2, 2008, the Board of Directors of the Company appointed J. Scott Womble to
serve as the Company’s Chief Financial Officer, effective May 22, 2008. Mr.
Womble had previously served as NeoMedia’s Interim CFO and Corporate
Controller.
On
June
11, 2008, Dr. Christian Steinborn resigned as Chief Operating Officer of the
Company. Dr. Steinborn continues to serve as CEO (Vorstand) of Gavitec AG,
a
wholly owned subsidiary of the Company.
Results
of Continuing Operations
Comparison
of the Six Months Ended June 30, 2008 and June 30, 2007
The
loss
from continuing operations decreased $5.3 million, or 52% to
$5.2 million for the six months ended June 30, 2008 from a net loss of
$10.5 million for the six months ended June 30, 2007. This decrease is primarily
due to a gain from change in fair value of our derivative financial instruments,
decreased stock-based compensation and decreased general and administrative
costs during the current period compared with the prior period.
Revenues.
Total
revenues decreased $0.5 million, or 50%, to $0.5 million for the six
months ended June 30, 2008 from $1 million for the six months ended June
30, 2007. The revenue decrease was primarily due to management’s focus on
developing new opportunities for NeoReader
TM
technology, which we believe will deliver the most value in the
future.
|
|
|
|
|
|
Increase(decrease)
|
|
|
|
For the Six Months Ended June 30,
|
|
2008 to 2007
|
|
|
|
2008
|
|
2007
|
|
$
|
|
%
|
|
|
|
(in
thousands)
|
|
|
|
|
|
Hardware
sales – Gavitec
|
|
$
|
149
|
|
$
|
285
|
|
$
|
(136
|
)
|
|
(48
|
%)
|
Lavasphere
revenue – Gavitec
|
|
|
39
|
|
|
373
|
|
|
(334
|
)
|
|
(90
|
%)
|
Legacy
product revenue
|
|
|
168
|
|
|
250
|
|
|
(82
|
)
|
|
(33
|
%)
|
Patent
licensing
|
|
|
39
|
|
|
49
|
|
|
(10
|
)
|
|
(20
|
%)
|
Other
revenue
|
|
|
76
|
|
|
66
|
|
|
10
|
|
|
15
|
%
|
Total
revenue
|
|
$
|
471
|
|
$
|
1,023
|
|
$
|
(552
|
)
|
|
(54
|
%)
|
Hardware
sales at Gavitec were $149,000 and $285,000 for the six months ended June 30,
2008 and 2007, respectively. Lavasphere revenue, which tends to be
project-oriented, was $39,000 for the current period and $373,000 in the prior
period. Legacy product revenue declined in the current period to $168,000 from
$250,000 in the prior period due to our focus on our new business strategy
to
develop NeoReader
TM
business
applications. .
Operating
Costs and Expenses
A
summary
of key operating costs and expenses is presented below:
|
|
For
the Six Months Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
(in
thousands)
|
|
Sales
and marketing
|
|
$
|
1,283
|
|
$
|
1.402
|
|
General
and administrative
|
|
|
2,573
|
|
|
3,764
|
|
Research
and development
|
|
|
1,217
|
|
|
925
|
|
Gain
(loss) on extinguishment of debt
|
|
|
22
|
|
|
253
|
|
Interest
(expense)/income, net
|
|
|
2,299
|
|
|
(2,655
|
)
|
Gain
(loss) from change in fair value of derivative financial
instruments
|
|
|
(2,
343
|
)
|
|
(2,386
|
)
|
Sales
and Marketing.
Sales
and marketing expenses were $1.3 and $1.4 million for the six months ended
June 30, 2008 and 2007, respectively. This decrease of approximately $0.1
million, or 7%, is primarily due to decreased stock based compensation expense
and a reduction in outside professional services of $221,000.
General
and Administrative.
General
and administrative expenses were $2.6 million and $3.8 million for the
six months ended June 30, 2008 and 2007, respectively. The decrease of
$1.2 million, or 32%, is primarily attributable to a reduction of
$1.4 million in audit and legal fees, partially offset by a one time charge
of $254,000 for severance payable to the former CEO and CFO. Gavitec’s general
and administrative costs increased $100,000 from the six months ended June
30,
2007 as compared with the six months ended June 30, 2008, due to an increase
in
headcount.
Research
and Development.
Research
and development expenses were $1.2 million and $0.9 million for the six month
periods ended June 30, 2008 and 2007, respectively. Although stock compensation
decreased from the six months ended June 30, 2007 as compared with the six
months ended June 30, 2008, personnel related expenses increased during the
same
time period, as well as non-capitalized equipment and software. Additionally,
Gavitec’s research and developments costs increased $165,000 over the same time
period. The increase in research and development costs overall were attributable
to bringing our mobile phone technology to market.
Interest
(Income)/Expense
.
Interest
(income)/expense consists primarily of interest charges or gains related to
convertible debentures, combined with other interest accrued for creditors
as
part of financed purchases, past due balances, and notes payable, net of
interest earned on cash equivalent investments. Net interest income was $2.3
million for the six months ended June 30, 2008 compared to net interest expense
of $2.7 million for the six months ended June 30, 2007. The $5.0 million
difference resulted from favorable fair value adjustments of our convertible
debt in accordance with the FAS 155 provisions that we use to account for the
financial instruments.
(Gain)/Loss
on Derivative Financial Instruments
.
Loss
on
derivative financial instruments was $2.3 million for the six months ended
June
30, 2008, compared with a loss of $2.4 million for the six months ended June
30,
2007, a change of $0.1 million or 5%. The derivative gains and losses are
associated with our convertible preferred stock and convertible debenture
financing. Certain derivatives and embedded conversion features were
created at the time of each offering and are recorded at fair value on the
accompanying balance sheet
.
The
gains
(losses) represent the reduction (appreciation) in value of the derivatives
and
embedded conversion features from the beginning of each reporting period
presented to the end of the period, resulting primarily from the changes in
our
stock price during the reporting period. The fair value of the derivative
financial instruments at each measurement date correlates to our stock price
at
the same date. As a result, our net loss varies significantly from our cash
flow
from operations during the six months ended June 30, 2008 and 2007. In future
periods, our loss could fluctuate dramatically from quarter to quarter if our
stock price is significantly different from the stock price at the end of the
previous measurement period. Because we cannot guarantee that we have enough
authorized shares to net share settle the convertible instruments, the change
in
fair value of derivative instruments will be recorded to our statement of
operations each reporting period until the convertible instruments are fully
converted.
Results
of Discontinued Operations
In
fiscal
2006 and 2007 we discontinued the operations of our Mobot, Sponge, 12Snap,
Telecom Services and Micro Paint Repair businesses, which were accounted for
as
discontinued operations in accordance with SEC Staff Accounting Topic 5E,
Accounting Principles Board (APB) Opinion 29, APB 18, Statement of Financial
Accounting Standards (FAS) 141, FAS 144, and Emerging Issues Task Force Issue
01-2. A loss of $291,000 was recognized for the six months ended June 30, 2008,
which was primarily attributable to wind-down expenses associated with Micro
Paint Repair-US operations. For the six months ended June 30, 2007, we
recognized a loss of $3.6 million for discontinued operations, which included
a
charge of $2.5 million for impairment of intangible assets related to our prior
acquisition of 12Snap, other operating costs of $2.8 million and stock
compensation expense of $0.5 million that were partially offset by revenues
related to the discontinued operations during the period of $3.2
million.
Liquidity
and Capital Resources
As
of
June 30, 2008, we had $75,000 in cash and cash equivalents as noted on our
consolidated balance sheet and statement of cash flows. This is a decrease
of
$1.3 million or 95% compared with a total of $1.4 million as of
December 31, 2007.
On
a
comparative basis, cash used by operating activities of continuing operations
decreased $2.1 million to $3.2 million for the six months ended June
30, 2008 compared with $5.3 million of cash used by operating activities
for the period ended June 30, 2007. The decrease in cash used by continuing
operations is primarily due to reduced audit and legal fees and lower personnel
cost due to a reduced headcount.
Cash
provided by investing activities increased by $0.3 million to $0.7 million
for
the six months ended June 30, 2008 compared with $0.4 million of cash used
in
investing activities for the period ended June 30, 2007. This increase was
primarily due the sale of our remaining ownership of 12Snap, which resulted
in
net proceeds to us of $0.8 million, combined with cash and other assets in
the
amount of $0.3 million retained by us from Micro Paint Repair-US after the
operation was shut down, reflecting a partial settlement of intercompany loans,
offset by expenditures of $73,000 for computer equipment, and, $65,000 of
interest paid on purchase price guarantee obligations. For the six months ended
June 30, 2007, we paid purchase price guarantee obligations in the amount of
$2.5 million offset by $0.5 million cash received in repayment of a note
receivable and cash and other assets in the amount of $0.9 million retained
by
us from subsidiaries disposed during the period, resulting in a net use of
cash
by investing activities of $1.0 million.
Cash
provided by financing activities was $1.5 million for the six months ended
June
30, 2008 compared with $5.7 million cash provided by financing activities for
the six months ended June 30, 2007. Cash used in discontinued operations
(12Snap, MicroPaint Repair, Telecom Services) was $0.3 million and $3.6 million
for the six months ended June 30, 2008 and 2007, respectively, representing
a
decrease of $3.3 million for the current period. The decrease reflects the
reduced costs incurred for the discontinued operations subsequent to their
disposal.
As
of
June 30, 2008, we have a working capital deficiency of $88 million, of which
$25.6 million relates to the fair value of derivative financial instruments,
and
$50.5 million relates to the carrying value of debentures and convertible
preferred stock that are convertible into shares of our common
stock.
Significant
Liquidity Events
Going
Concern
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. Net loss
for
the six months ended June 30, 2008 was $5.6 million compared with a net loss
of
$14.1 million for the six months ended June 30, 2007. Net cash used for
operations was $3.2 million and $5.3 million, for the six months ended June
30,
2008 and 2007, respectively. We also have an accumulated deficit of $207.2
million and a working capital deficit of $88 million as of June 30, 2008. We
also have an obligation as of June 30, 2008 of $4.6 million relating to a
purchase price guarantee associated with our acquisition of 12Snap.
The
items
discussed above raise substantial doubt about our ability to continue as a
going
concern.
On
July
29, 2008, we
entered
into a Securities Purchase Agreement (“SPA”) in the amount of $8,650,000 with YA
Global Investments, LP (“YA Global”), an accredited investor
.
Under
the SPA, YA Global will buy three secured convertible debentures, subject to
our
meeting certain milestones, which are designed to fund the Company’s business
plan to bring our products to market over approximately the next one and one
half years. The first debenture under the SPA was issued on July 29, 2008,
in
the amount of $2.325 million.
In
the
event that we are unsuccessful in bringing our product to market, or that we
are
unsuccessful in increasing our revenues and profits, we will be forced to
further reduce our costs and may be unable to 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.
Sources
of Cash and Projected Cash Requirements
As
of
June 30, 2008, our cash balances were $75,000. However, we believe that the
Securities Purchase Agreement issued July 29, 2008 in the amount of $8,650,000
will accelerate implementation of NeoMedia’s aggressive go-to-market plans under
new CEO, Iain A. McCready. These plans will focus on providing mobile barcode
scanning infrastructure to carriers, NeoReader scanning software to handset
manufacturers and code implementation products to the advertising community.
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
,
signed
in connection with the convertible debenture sales, without
YA
Global’s
consent
we cannot (i
) issue
or sell any shares of common stock or 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 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 of,
or
(iv)
file any
registration statements on Form S-8. In addition, pursuant to security
agreements between us and YA Global, signed in connection with the convertible
debentures,
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 funding were
secured.
Additionally,
pursuant to the terms of the investment agreement between us and YA Global
signed in connection with the 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.
Related
Party Transactions
For
the
three month period ended June 30, 2008, we paid SKS Consulting a total of $4,500
for professional services provided by George O’Leary in conjunction with our
previously disclosed consulting agreement. Mr. O’Leary is on our Board of
Directors.
Critical
Accounting Policies and Estimates
There
have been no material changes to our critical accounting policies and estimates
from the information provided in Item 2, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” included in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2007.
ITEM 3.
Quantitative and Qualitative Disclosures About Market
Risk
We
are a smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide information under this
item.
ITEM 4T.
Controls and Procedures
Disclosure
Controls and Procedures.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the
end of the period covered by this report.
These
controls are designed to ensure that information required to be disclosed in
the
reports we file or submit pursuant to the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Securities and Exchange Commission, and that
such
information is accumulated and communicated to our management, including our
CEO
and CFO, as appropriate, to allow timely decisions regarding required
disclosure.
Based
on
this evaluation, our CEO and CFO concluded that our disclosure controls and
procedures were not effective as of June 30, 2008, at the reasonable assurance
level, because of the material weaknesses described in Item 9A of our Annual
Report on Form 10−K for the fiscal year ended December 31, 2007, which we are
still in the process of remediating. Please see “Management’s Report on Internal
Control over Financial Reporting” in Item 9A of the 2007 Form 10−K for a full
description of these weaknesses.
Notwithstanding
the material weaknesses described in Item 9A of the Form 10−K for the fiscal
year ended December 31, 2007, we believe that our consolidated financial
statements presented in this Quarterly Report on Form 10−Q fairly present, in
all material respects, our financial position, results of operations, and cash
flows for all periods presented herein.
Inherent
Limitations
Our
management, including our Chief Executive Officer and Chief Financial Officer,
do not expect that our disclosure controls and procedures will prevent all
error
and all fraud. A control system, no matter how well conceived and operated,
can
provide only reasonable, not absolute, assurance that the objectives of the
control system are met. The design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and there can
be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within our company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdown
can occur because of simple error or mistake. In particular, many of our current
processes rely upon manual reviews and processes to ensure that neither human
error nor system weakness has resulted in erroneous reporting of financial
data.
Changes
in Internal Control over Financial Reporting.
There
were no changes in the Company’s internal control over financial reporting
during the second quarter of 2008, which were identified in conjunction with
management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15
under the Exchange Act, that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial
reporting.
PART
II - OTHER INFORMATION
ITEM
1. Legal Proceedings
There
have been no material developments relating to certain pending legal
proceedings. For a description of pending legal proceedings, see Note 12 –
Contingencies, to the Consolidated Financial Statements.
ITEM
1A. Risk Factors
We
are a smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide information under this
item.
ITEM
2.
Unregistered
Sales of Equity Securities and Use of Proceeds
None
ITEM
3.
Default
Upon Senior Securities
None.
ITEM
4.
Submission
of Matters to a Vote of Security Holders
None.
ITEM
5. O
ther
Information
None.
ITEM
6. E
xhibits
(a)
Exhibits
:
31.1
|
|
Certifications
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
31.2
|
|
Certifications
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
32.1
|
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
(b)
|
Reports
on Form 8-K
:
|
On
April
17, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
3.02, reporting that it had entered into a secured convertible debenture
financing arrangement with YA Global Investments, L.P. in the principal amount
of $390,000.
On
May
22, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
3.02, reporting that it had entered into a secured convertible debenture
financing arrangement with YA Global Investments, L.P. in the principal amount
of $500,000.
On
May
29, 2008, NeoMedia filed a report on Form 8-K with respect to Items 5.02,
disclosing that Iain A. McCready, 46, replaced William J. Hoffman as the Chief
Executive Officer of NeoMedia.
On
June
5, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
3.02
and 5.02, reporting that (i) it had entered into a secured convertible debenture
financing arrangement with YA Global Investments, L.P. in the principal amount
of $790,000, (ii) Frank J. Pazera resigned his position as Vice President and
Chief Financial Officer, effective May 22, 2008, (iii) Mr. Pazera would be
replaced by J. Scott Womble, who had previously held the positions of NeoMedia’s
Interim CFO and Controller, (iv) it had entered into severance and release
agreements with Mr. William J. Hoffman and Mr. Frank J. Pazera.
On
June
16, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
3.02 and 5.02, disclosing that (i) it had entered into an employment contract
and compensation agreement with Iain A. McCready in the capacity of CEO, (ii)
Mr. Christian Steinborn resigned as the Company’s Chief Operating Officer
effective June 11, 2008, and would continue to serve as the CEO of the Company’s
subsidiary Gavitec.
On
July
16, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
3.02, reporting that it had entered into a secured convertible debenture
financing arrangement with YA Global Investments, L.P. in the principal amount
of $137,750.
On
August
4, 2008, NeoMedia filed a report on Form 8-K with respect to Items 1.01 and
3.02, reporting that it had entered into a Securities Purchase Agreement (SPA)
with YA Global Investments, L.P. (“Yorkville”), in the amount of $8,650,000,
whereby Yorkville will provide financing to NeoMedia through three secured
convertible debentures, with the first such instrument issued and funded on
July
29, 2008.
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
NEOMEDIA
TECHNOLOGIES, INC.
|
|
(Registrant)
|
|
|
Dated:
August
14, 2008
|
/s/
Iain McCready
|
|
Iain
McCready
|
|
Chief
Executive Officer
|
|
|
|
/s/
J. Scott Womble
|
|
J.
Scott Womble
|
|
Chief
Financial Officer & Principal Accounting
Officer
|
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