4. DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE

Micro Paint Repair Business Unit

During August 2006, the Company decided to sell its Micro Paint Repair business unit. The Company is currently in the process of negotiating with multiple potential buyers with respect to the sale.

NeoMedia has analyzed the pertinent facts of the proposed transaction with respect to the criteria outlined in SFAS 144, and has determined that all of the criteria have been met and continue to be met. Accordingly NeoMedia is reporting the operating results of the MPR business unit as Discontinued Operations, and the assets and liabilities as Held for Sale for all periods presented in this filing. Assets Held for Sale are not depreciated or amortized.

Sponge and Mobot Businesses

In the fourth quarter of 2006, NeoMedia disposed of two subsidiaries, Sponge and Mobot. All assets and liabilities associated with these two subsidiaries were disposed in the sale and removed from NeoMedia’s consolidated balance sheet. In accordance with SFAS 144, NeoMedia is reporting the operating results of these two subsidiaries as Discontinued Operations for all periods presented in this filing. NeoMedia has analyzed the applicable accounting literature found in the SEC Staff Accounting Bulletin (SAB) Topic 5E, Accounting Principles Board (APB) Opinion 29, APB 18, Statement of Financial Accounting Standards (SFAS) 141, SFAS 144, and Emerging Issues Task Force (EITF) issue 01-2, and determined that the criteria for reporting the disposal of a business and reporting of discontinued operations have been met.

The operating results of the MPR business unit, and Sponge and Mobot subsidiaries classified as discontinued operations are indicated in the following table. There is not any tax expense or benefit to report due to NeoMedia’s net operating loss carry forward tax position.

F-31

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The following table presents a summary of results of the Company’s discontinued operations for the years ended December 31, 2006, 2005, and 2004:

 

		Year Ended December 31,
		2006			2005			2004
NeoMedia Micro Paint Repair business unit
Net sales		$	1,547		$	1,279		$	727
Cost of sales			1,912			989			543
Gross profit			(365	)		290			184
Sales and marketing expenses			1,194			1,594			711
General and administrative expenses			1,193			355			243
Research and development costs			245			342			188
Loss from operations of business to be discontinued			($2,997	)		($2,001	)		($958	)
Mobot
Net sales		$	436		$	—		$	—
Cost of sales			591			—			—
Gross profit			(155	)		—			—
Sales and marketing expenses			725			—			—
General and administrative expenses			198			—			—
Research and development costs			564			—			—
Loss from operations of discontinued business			($1,642	)	$	—		$	—
Loss on disposal of business			($4,367	)	$	—		$	—
Sponge
Net sales		$	1,036		$	—		$	—
Cost of sales			397			—			—
Gross profit			639			—			—
Sales and marketing expenses			1,028			—			—
General and administrative expenses			740			—			—
Research and development costs			—			—			—
Loss from operations of discontinued business			($1,129	)	$	—		$	—
Loss on disposal of business			($5,051	)	$	—		$	—
Total discontinued operations
Net sales		$	3,019		$	1,279		$	727
Cost of sales			2,900			989			543
Gross profit			119			290			184

Sales and marketing expenses			2,947			1,594			711
General and administrative expenses			2,131			355			243
Research and development costs			809			342			188
Loss from operations of discontinued business
and business to be discontinued			($5,768	)		($2,001	)		($958	)
Loss on disposal of businesses			($9,418	)	$	—		$	—
Loss from discontinued operations			($15,186	)		($2,001	)		($958	)

 

F-32

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The assets and liabilities of the MPR business unit classified as held for sale are as follows. There are no assets or liabilities associated with the Sponge or Mobot subsidiaries as of the balance sheet dates of December 31, 2006, or 2005.

		December 31,
		2006			2005
ASSETS
Current assets:
Cash and cash equivalents		$	81		$	587
Trade accounts receivable, net			196			211
Inventories, net of allowance for obsolete & slow-moving inventory of $0			154			421
Prepaid expenses and other current assets			37			30
Total current assets			468			1,249
Leasehold improvements & property and equipment, net			134			126
Goodwill and other intangible assets, net			2,470			2,655
Other long-term assets			—			28
Total assets held for sale		$	3,072		$	4,058
LIABILITIES
Current liabilities:
Accounts payable		$	25		$	72
Taxes payable			8			—
Accrued expenses			22			6
Deferred revenues and other			352			591
Total liabilities held for sale		$	407		$	669

Inventory included in assets held for sale is as follows:

		December 31, 2006			December 31, 2005
Raw materials		$	89		$	33
Work-in-process			—			—
Finished goods			65			388
Total		$	154		$	421

 

F-33

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Proposed Dispositions of 12Snap and NeoMedia Telecom Services (“NTS”)

In January 2007, NeoMedia management determined that it would focus on its core code-reading business in North America, the UK, mainland Europe, and China. In conjunction with this direction, subsidiaries 12Snap and NTS will be sold in the most profitable, timely, and viable manner possible. NeoMedia has analyzed the pertinent facts of the proposed disposition of these two subsidiaries and has determined the criteria included in paragraph 30 of SFAS 144, outlined above, were met after the date of the balance sheet included in this filing. Specificallly, the decision to sell these two businesses was committed to by the Company in January 2007. Accordingly, the results of operations and the assets and liabilities of these two subsidiaries are included in the accompanying consolidated statements of operations and balance sheets.

The results of operations of the 12Snap and NTS subsidiaries included in NeoMedia’s operating loss from continuing operations is as follows.

 

		Year Ended December 31, 2006
		NTS			12 Snap			Total
Net sales		$	1,371		$	7,333		$	8,704
Cost of sales			—			2,054			2,054
Gross profit			1,371			5,279			6,650
Sales and marketing expenses			400			4,053			4,453
General and administrative expenses			1,166			1,692			2,858
Research and development costs			—			1,258			1,258
Amortization of intangibles			806			732			1,538
Impairment charge			—			18,327			18,327
Income/(Loss) from operations of business available for sale			($1,001	)		($20,783	)		($21,784	)

The assets and liabilities of the 12 Snap and Telecom subsidiaries included with NeoMedia’s balance sheet are as follows.

 

		December 31, 2006
		NTS			12 Snap			Total
ASSETS
Current assets:
Cash and cash equivalents		$	72		$	721		$	793
Trade accounts receivable, net			1,577			1,842			3,419
Inventories, net			—			—			—
Prepaid expenses and other current assets			12			407			419
Total current assets			1,661			2,970			4,631
Leasehold improvements & property and equipment, net			48			200			248
Goodwill			4,402			—			4,402
Other intangible assets, net			1,192			5,815			7,007
Other long-term assets			—			—			—
Total assets		$	7,303		$	8,985		$	16,288
LIABILITIES
Current liabilities:
Accounts payable		$	1,854		$	640		$	2,494
Taxes payable			1,037			—			1,037
Accrued expenses			6			384			390
Deferred revenues and other			73			4,097			4,170
Total liabilities		$	2,970		$	5,121		$	8,091

 

F-34

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The following proforma statement of operations shows what NeoMedia’s operating results from continuing operations would have been if the proposed sales of NTS and 12 Snap had occurred as of January 1, 2006.

											Pro-forma
											NeoMedia
		NeoMedia									without NTS
		as reported			NTS			12 Snap			and 12 Snap
Net sales		$	10,309			($1,371	)		($7,333	)	$	1,605
Cost of sales			3,863			—			(2,054	)		1,809
Gross profit			6,446			(1,371	)		(5,279	)		(204	)
Sales and marketing expenses			10,239			(400	)		(4,053	)		5,786
General and administrative expenses			12,125			(1,972	)		(2,424	)		7,729
Research and development costs			3,522			—			(1,258	)		2,264
Impairment Charge			18,706			—			(18,327	)		379
Loss from operations			(38,146	)		1,001			20,783			(16,362	)
Gain (loss) on extinguishment of debt			(1,879	)		—			—			(1,879	)
Amortization of debt discount			—			—			—			—
Interest income (expense), net			(10,182	)		—			—			(10,182	)
Write-off of deferred equity financing costs			(13,256	)		—			—			(13,256	)
Gain on sale of marketable securities			1,103			—			—			1,103
Gain on embedded conversion features of derivative financial instruments			13,645			—			—			13,645
Change in fair value from revaluation of warrants in derivative financial instruments			(3,537	)		—			—			(3,537	)
LOSS FROM CONTINUING OPERATIONS			(52,252	)		1,001			20,783			(30,468	)
DISCONTINUED OPERATIONS (Note 4)
Net loss from discontinued operations			(5,768	)		—			—			(5,768	)
Loss on disposal of Sponge and Mobot subsidiaries			(9,418	)		—			—			(9,418	)
LOSS FROM DISCONTINUED OPERATIONS			(15,186	)		—			—			(15,186	)
NET LOSS			($67,438	)	$	1,001		$	20,783			($45,654	)

Note: 2005 and 2004 pro forma statements of operations are omitted, since NTS and 12Snap were both acquired during 2006,

F-35

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The following proforma balance shows what NeoMedia’s consolidated balance sheet would have been if the proposed sales of NTS and 12Snap had occurred as of December 31, 2006.

											Pro-forma
											NeoMedia
		NeoMedia									without NTS
		as reported			NTS			12 Snap			and 12 Snap
ASSETS
Current assets:
Cash and cash equivalents		$	3,606		$	(72	)	$	(721	)	$	2,813
Trade accounts receivable, net of allowance for doubtful accounts of $69 and $14, respectively			3,606			(1,577	)		(1,842	)		187
Other Receivables			550			—			—			550
Inventories, net of allowance for obsolete & slow-moving inventory of $53.			80			—			—			80
Investment in marketable securities			57			—			—			57
Prepaid expenses and other current assets			521			(12	)		—			509
Assets held for sale			3,072			—			(407	)		2,665
Total current assets			11,492			(1,661	)		(2,970	)		6,861
Leasehold improvements & property and equipment, net			439			(48	)		(200	)		191
Goodwill			7,882			(4,402	)		(62	)		3,542
Other Intangible assets, net			14,024			(1,192	)		(5,753	)		7,017
Cash surrender value of life insurance policy			863			—			—			863
Loan to Mobot			—			—			—			-
Other long-term assets			3,425			—			—			3,425
Total assets		$	38,125		$	(7,303	)	$	(8,985	)	$	21,837
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	4,936		$	(1,854	)	$	(640	)	$	2,442
Liabilities held for sale			407			—			—			407
Taxes payable			1,042			(1,037	)		—			5
Accrued expenses			4,406			(6	)		(384	)		4,016
Deferred revenues and customer prepayments			2,563			—			(1,989	)		574
Notes payable			2,196			(73	)		(2,108	)		15
Accrued purchase price guarantee			21,427			—			—			21,427
Derivative financial instruments			25,819			—			—			25,819
Deferred tax liability			706			—			—			706
Debentures payable			7,500			—			—			7,500
Preferred stock, $0.01 par value, 25,000,000 shares authorized, 22,000 issued, 21,622 shares outstanding, liquidation value of $21,657.			21,657			—			—			21,657
Total liabilities			92,659			(2,970	)		(5,121	)		84,568
Shareholders’ equity (deficit):
Common stock, $0.01 par value, 5,000,000,000 shares authorized, 639,233,173 and 475,387,910 shares issued and 637,591,747 and 467,601,717 outstanding, respectively			6,376			—			—			6,376
Additional paid-in capital			100,541			—			—			100,541
Deferred equity financing costs			—			—			—			-
Accumulated deficit			(159,962	)		(4,333	)		(3,864	)		(168,159	)
Accumulated other comprehensive loss			(710	)		—			—			(710	)
Treasury stock, at cost, 201,230 shares of common stock			(779	)		—			—			(779	)
Total shareholders’ equity (deficit)			(54,534	)		(4,333	)		(3,864	)		(62,731	)
Total liabilities and shareholders’ equity (deficit)		$	38,125		$	(7,303	)	$	(8,985	)	$	21,837

 

F-36

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5. FINANCING

Series C Convertible Preferred Stock

 

The Company entered into a Securities Purchase Agreement, dated February 17, 2006 (the “Agreement”) with Cornell Capital Partners LP, an accredited investor (the “Purchaser”). Pursuant to the Agreement, the Purchaser agreed to purchase 8% cumulative Series C convertible preferred stock to be fully converted three (3) years from the date of issuance in the aggregate amount of $22,000,000. Net consideration from this arrangement amounted to $17,854,000, comprised of cash of $14,066,000, marketable securities with a calculated fair value of $579,000 and a purchase value of $2,000,000, and the extinguishment of $3,209,000 of preexisting indebtedness. In addition, the Purchaser withheld $2,725,000 commitment and structuring fees from the gross proceeds. The Agreement also provided for the issuance to the Purchaser, at no additional cost to the Purchaser, warrants to purchase shares of the Company's common stock. The Agreement also called for the Purchaser to acquire an additional $5,000,000 of Series C convertible preferred stock on the date a registration statement filed by the Company was declared effective by the U.S. Securities and Exchange Commission. In connection with the Agreement, the Company also entered into a registration rights agreement with the Purchaser that required 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 preferred stock and the exercise of the warrants, (ii) achieve effectiveness by December 1, 2006, and (iii) maintain effectiveness of the registration statement. NeoMedia failed to meet these requirements, accordingly the Company is subject to liquidated damages amounting to 1% of the outstanding amount of Series C preferred stock per month, not to exceed $1,200,000.

At any time from the closing date until February 17, 2009, the Purchaser has the right to convert the preferred stock, in whole or in part, into common stock of the Company at the then effective conversion price, which varies relative to the Company’s trading stock price, as follows: $0.50 per share, or 97% of the lowest closing bid price (as reported by Bloomberg) of the common stock for the 30 trading days immediately preceding the conversion date. The conversions are limited such that the holder cannot exceed 4.99% ownership, unless the holders waive their right to such limitation. The limitation will terminate under any event of default.

On November 29, 2006, the Purchaser exercised the conversion of 378 shares of the Series C convertible preferred stock for 6,631,579 shares of NeoMedia’s common stock, leaving a balance of 21,622 shares of Series C convertible preferred stock outstanding.

The Series C convertible preferred stock, at the option of the holder, affords the Purchaser anti-dilution protection should, at any time while the Series C preferred stock instruments are outstanding, the Company offer, sell or grant any option to purchase or offer, sell or grant any right to re-price its securities, or otherwise dispose of or issue any common stock or common stock equivalents, 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), as calculated by the formula described above; then, in such instance, the conversion price for the convertible preferred stock shares shall be reduced to the lower price. In case of any such adjustment in the effective conversion price for the convertible preferred shares, this could significantly dilute existing investors.

 

Under the Series C Agreement, the Purchaser also received “A” warrants, “B” warrants and “C” warrants to purchase 20,000,000, 25,000,000, and 30,000,000 shares of NeoMedia’s common stock, respectively, exercisable in three separate traunches at a price of $0.50, $0.40 and $0.35, respectively, per share, subject to adjustment, included under anti-dilution protection similar to that described above. As an inducement to enter into subsequent financing arrangements related to Cornell Debentures, the warrants were repriced on December 29, 2006 to $0.04 per share, subject to all the original terms and conditions of the respective warrant agreements, resulting in a charge to income of $702,000. The warrants have a five-year contractual life. NeoMedia can force exercise of the warrants if the closing bid price of NeoMedia stock is more than $0.10 greater than the exercise price of any of the warrants for 15 consecutive trading days. It is important to note that the warrants held by Cornell Capital Partners contain a provision that, if at the time of exercise, NeoMedia is in default of the warrant agreement, the holder can perform a “cashless” exercise of the warrants and in lieu of making payment of the exercise price in cash, elect instead to withhold shares as consideration for the exercise price. In the event of such a “cashless” exercise, NeoMedia would not receive any cash proceeds upon the exercise of such warrants. NeoMedia is currently in default of the Investor Registration Rights Agreement entered into on February 17, 2006, in connection with the Series C convertible preferred stock, which called for a registration statement containing the shares underlying the Series C convertible preferred stock to be filed by June 1, 2006 and declared effective by December 1, 2006. Such a default of the Investor Registration Rights Agreement constitutes an event of default under the warrant agreements issued in connection with the Series C convertible preferred stock. As a result, Cornell Capital Partners currently has the right to exercise on a cashless basis 75,000,000 of the warrants they hold that were issued in connection with the Series C convertible preferred stock.

 

F-37

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The 8% cumulative Series C convertible preferred stock contains consequences in case of default. Events of default which could subject the Company to penalties, damages, and liabilities as specified in the Agreement include:

 

·	Any case or action of bankruptcy or insolvency commenced by the Company or any subsidiary, against the Company or adjudicated by a court against the Company for the benefit of creditors;

 

·	Any default in its obligations under a mortgage or debt in excess of $100,000;

 

·	Any cessation in the eligibility of the Company’s 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 (NeoMedia is in default of this provision);

 

·	Any lapse in the effectiveness of the registration statement covering the shares related to the conversion option, the warrants as described and transacted in the securities purchase agreement and accompanying documents;

 

·	Any failure to deliver certificates within the specified time; and

 

·	Any failure, by the Company, to pay in full the amount of cash due pursuant to a buy-in or failure to pay any amounts owed on account on account of an event of default within 10 days of the date due.

 

Other provisions included in the Agreement include the following:

 

·	The 8% cumulative Series C convertible preferred stock is convertible into common stock, at the option of the Purchaser, at any time after the effective date;

 

·	Conversions can be made in increments and from time to time;

 

·

The 8% cumulative Series C convertible preferred stock has voting rights on an “as converted” basis, meaning the Purchaser 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;

 

F-38

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·

As promptly as practicable after any conversion date and subject to an effective registration statement or an exemption from registration, the Company shall cause its transfer agent to deliver a certificate representing the converted shares, free of any legends and trading restrictions for the number of shares converted;

 

·	The Company will reserve and keep available authorized and unissued registered shares available to be issued upon conversion;

 

·	Purchaser will not be responsible for any transfer taxes relative to issuance of shares;

 

·	If the Company offers, sells or grants stock at an effective per share price less than the then Conversion Price, then the Conversion Price shall be reduced to equal the effective conversion, exchange or purchase price for such common stock or common stock equivalents;

 

Due to the current default status, the Purchaser has certain material additional rights in this financing arrangement that did not exist prior to default. Specifically,

 

·	The full fair value of the Series C convertible preferred stock is now callable in the amount of $21,657,000;

 

·	The warrants can be exercised on a cashless basis as described above;

 

·	The requirement for the Purchaser to maintain an ownership interest in NeoMedia of less than 5% is waived;

 

·	NeoMedia is responsible for liquidated damages as described above.

 

In addition, the accounting for the Series C convertible preferred stock has been updated to take into account certain specific accounting rules and regulations that are now applicable under the default provision.

 

·

Prior to the default, NeoMedia was 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, NeoMedia has accreted dividends to the full fair value of the Series C convertible preferred stock, resulting in an additional charge of $18,204,000 to net loss attributable to common shareholders.

 

·	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 SFAS 150.

 

At the inception date of February 17, 2006, a summary of the allocation of the components of the transaction was as follows:

Instrument:
Convertible preferred stock (1)		$	1,711,000
Common stock warrants (2)			16,172,000
Embedded conversion feature			1,935,000
Debt extinguishment loss (3)			(1,964,000	)
Total gross proceeds		$	17,854,000

 

---

(1)

The discount to the face value of the 8% cumulative Series C convertible preferred stock that resulted from the allocation along with deferred costs was being accreted through periodic charges to additional paid-in capital using the effective interest method, prior to the accretion to full fair value due to NeoMedia’s being in default of the registration rights agreement

 

F-39

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(2)	The Company issued additional warrants to purchase aggregate 75,000,000 shares of common stock in connection with the 8% cumulative Series C convertible preferred stock. The Company also issued 2,000,000 warrants (valued at $447,000) as financing fees.

(3)	The financing arrangement settled face value $3,209,000 of preexisting indebtedness. The debt extinguishment loss was calculated as the amount that the fair value of securities issued (using a relative fair value basis) exceeded the Company’s carrying value.

 

In accordance with Statement of Financial Accounting Standards No. 133, ‘Accounting for Derivative Instruments and Hedging Activities’, (“FASB 133”), the Company determined that the conversion feature of the Series C convertible preferred stock met the criteria of an embedded derivative and therefore the conversion feature of the Series C convertible preferred stock needed to be bifurcated and accounted for as a derivative. The Series C convertible preferred stock does not meet the definition of “conventional convertible debt” because the number of shares which may be issued upon the conversion of the Series C convertible preferred stock is not fixed. Furthermore, 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.

 

The carrying value of the 8% cumulative Series C convertible preferred stock amounted to $21,657,000 at December 31, 2006. The face value of Series C convertible preferred stock at December 31, 2006 was also $21,657,000 as the instrument was written up to full fair value due to NeoMedia’s current default position. Derivative financial instruments arising from the issuance of Series C convertible preferred stock are initially recorded and continuously carried at fair values. 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. The following tabular presentation reflects the components of derivative financial instruments related to the Series C convertible preferred stock on the Company’s balance sheet at December 31, 2006:

(Assets) Liabilities:		Dec. 31, 2006
Common stock warrants		$	3,600,000
Embedded conversion feature			4,770,000
Other warrants (1)			977,000
		$	9,347,000

---

(1)

The fair values of certain other derivative financial instruments (warrants) that existed at the time of the issuance of Series C convertible preferred stock were reclassified from stockholders’ equity to liabilities when, in connection with the issuance of Series C convertible preferred stock, the Company no longer controlled its ability to share-settle these instruments. These derivative financial instruments had fair values of $13,883,000 and $977,000 on February 17, 2006 and December 31, 2006, respectively. The decrease in fair value of these other derivative financial instruments resulted from a decrease in NeoMedia’s share price between February 17, 2006 and December 31, 2006. The change in fair value of $9,174,000 is reported as “Gain on embedded conversion features of derivative financial instruments” in the accompanying consolidated statement of operations. These warrants will be reclassified to stockholders’ equity when the Company reacquires the ability to share-settle the instruments.

F-40

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The following tabular presentation reflects the number of common shares into which the aforementioned derivative financial instruments are convertible or excercisable into at December 31, 2006:

		Shares of common stock
Common stock warrants			75,000,000
Embedded conversion feature (1)			477,021,443
Other warrants			33,325,000
			585,346,443

 

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(1)

The terms of the embedded conversion features in the Series C convertible preferred stock provide for variable conversion rates that are indexed to the Company’s 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 was convertible as of December 31, 2006 was calculated as the face value of $21,622,000 plus assumed dividends of $1,514,000 if declared, divided by 97% of the lowest closing bid price for the 30 trading days preceding December 31, 2006, which was $0.053 per share.

Derivative income associated with adjustments recorded to reflect the aforementioned derivatives at fair value amounted to $19,103,000, $0 and $0 during the years ended December 31, 2006, 2005, and 2004, respectively. These amounts are reported as “Change in fair value from revaluation of warrants in derivative financial instruments” and “Gain on embedded conversion features of derivative financial instruments” in the accompanying consolidated statement of operations.

 

Fair value considerations for derivative financial instruments:

Freestanding derivative instruments, consisting of warrants that arose from the financing and those reclassified as described above 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 included in this model as of December 31, 2006 are as follows:

Holder		Cornell Capital Partners		Other
Instrument		Warrants		Warrants
Exercise price		$0.04		$0.01 - $3.45
Term (years)		4.13		0.5 - 4.13
Volatility		158.89%-165.86%		158.89%-165.86%
Risk-free rate		3.65%		3.65%

Embedded derivative financial instruments, arising from the Series C convertible preferred stock, consist of multiple individual features that were embedded in the instrument. The Company evaluated all significant features of the instruments as required under current accounting standards and aggregated such instruments into one compound derivative financial instrument for financial reporting purposes. 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.

 

F-41

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Assumptions included exercise estimates/behaviors and the following other significant estimates:

Instrument		Features
Conversion prices		$0.05
Remaining terms (years)		2.13
Equivalent volatility		143.22%
Equivalent interest-risk adjusted rate		8.17% - 8.58%
Equivalent credit-risk adjusted yield rate		14.50%

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.

The fair value of derivative financial instruments recorded as of December 31, 2006 and 2005 was:

		As of December 31,
		2006			2005
Warrants and embedded conversion features in preferred stock		$	9,217		$	—
Warrants and embedded conversion features in debentures			15,679			—
Fair value of future payment obligation			564			—
Special preference stock of Mobot			359			—
Total derivative financial instruments		$	25,819		$	—

 

$5 Million Secured Convertible Debenture - August 2006

 

The Company entered into a Securities Purchase Agreement, dated August 24, 2006, (the “Agreement”) with Cornell Capital Partners LP, an accredited investor (the “Purchaser”). Pursuant to the Agreement, the Purchaser agreed to purchase 10% secured convertible debentures maturing two years from the date of issuance in the aggregate amount of $5,000,000. The Agreement also provided for the issuance to the Purchaser, at no additional cost to the Purchaser, warrants to purchase shares of the Company's common stock. In connection with the Agreement, the Company also entered into a registration rights agreement with the Purchaser that required 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 warrants, (ii) achieve effectiveness within a stated period and (iii) maintain effectiveness of the registration statement. Failure to meet these requirements will require the Company to incur liquidated damages amounting to 2% of the principal per month, but in no event shall consideration paid as liquidated damages exceed $1,000,000. The debentures are secured by substantially all of the Company’s assets.

At any time from the closing date until August 24, 2008, the Purchaser has the right to convert the convertible debenture into common stock of the Company at the then effective conversion price, which varies relative to the Company’s trading stock price, as follows: $0.15 per share, or 90% of the lowest closing bid price (as reported by Bloomberg) of the common stock for the 30 trading days immediately preceding the conversion date. The conversion was limited such that the holder cannot exceed 4.99% ownership, unless the holders waive their right to such limitation. The limitation will terminate under any event of default.

The convertible debenture, at the option of the holder, affords the Purchaser anti-dilution protection should, at any time while the convertible debenture is outstanding, the Company offer, sell or grant any option to purchase or offer, sell or grant any right to re-price its securities, or otherwise dispose of or issue any common stock or common stock equivalents, 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), as calculated by the formula described above; then, in such instance, the conversion price for the convertible debenture shall be reduced to the lower price. In case of any such adjustment in the effective conversion price for the convertible debenture, this could significantly dilute existing investors.

 

F-42

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Under the Agreement, the Purchaser also received “A” warrants, “B” warrants, “C” warrants and “D” warrants to purchase an aggregate of up to 175,000,000 shares of common stock, exercisable in four separate traunches at a price of $0.15, $0.25, $0.20 and $0.05 respectively per share, subject to adjustment, included under anti-dilution protection similar to that described above. As an inducement to enter into a subsequent financing arrangement with the Purchaser, the warrants were repriced on December 29, 2006 to $0.04 per share, subject to all the original terms and conditions of the respective warrant agreements, resulting in a charge to income of $452,000. The warrants have a five-year contractual life. NeoMedia can force exercise of the warrants if the closing bid price of NeoMedia stock is more than $0.10 greater than the exercise price of any of the warrants for 15 consecutive trading days. It is important to note that the warrants held by Cornell Capital Partners contain a provision that, if at the time of exercise, NeoMedia is in default of the warrant agreement, the holder can perform a “cashless” exercise of the warrants and in lieu of making payment of the exercise price in cash, elect instead to withhold shares as consideration for the exercise price. In the event of such a “cashless” exercise, NeoMedia would not receive any cash proceeds upon the exercise of such warrants. NeoMedia is currently in default of the Investor Registration Rights Agreement entered into on August 24, 2006, in connection with the secured convertible debenture, which called for a registration statement containing the shares underlying the secured convertible debenture to be declared effective by November 22, 2006. Such a default of the Investor Registration Rights Agreement constitutes an event of default under the warrant agreements issued in connection with the secured convertible debenture. As a result, Cornell Capital Partners currently has the right to exercise on a cashless basis 175,000,000 of the warrants they hold that were issued in connection with the secured convertible debenture.

 

The convertible debenture contains consequences in case of default. Events of default which could subject the Company to penalties, liabilities, and foreclosure upon the assets of the Company as specified in the Agreement include:

 

·	Any case or action of bankruptcy or insolvency commenced by the Company or any subsidiary, against the Company or adjudicated by a court against the Company for the benefit of creditors;

 

·	Any default in its obligations under a mortgage or debt in excess of $100,000;

 

·	Any cessation in the eligibility of the Company’s 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 (NeoMedia is in default of this provision);

 

·	Any lapse in the effectiveness of the registration statement covering the shares related to the conversion option, the warrants as described and transacted in the securities purchase agreement and accompanying documents;

 

·	Any failure to deliver certificates within the specified time; and

 

·	Any failure, by the Company, to pay in full the amount of cash due pursuant to a buy-in or failure to pay any amounts owed on account on account of an event of default within 3 days of the date due.

 

Other provisions included in the Agreement include the following:

 

·	The convertible debenture is convertible into common stock, at the option of the Purchaser, at any time after the effective date;

 

F-43

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·

As promptly as practicable after any conversion date, and subject to an effective registration statement or an exemption from registration the Company shall cause its transfer agent to deliver a certificate representing the converted shares, free of any legends and trading restrictions for the number of shares converted;

 

·	The Company will reserve and keep available authorized and unissued registered shares available to be issued upon conversion;

 

·	Purchaser will not be responsible for any transfer taxes relative to issuance of shares;

 

·	If the Company offers, sells or grants stock at an effective per share price less than the then Conversion Price, then the Conversion Price shall be reduced to equal the effective conversion, exchange or purchase price for such common stock or common stock equivalents;

 

·	Pursuant to the terms of the convertible debenture agreement between NeoMedia and Cornell signed in connection with the convertible debenture sale, without Cornell’s consent NeoMedia cannot

 

·­	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,

 

·­	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,

 

·­	enter into any security instrument granting the holder a security interest in any of its assets of, or

 

·­	file any registration statements on Form S-8.

 

·	Pursuant to a security agreement between NeoMedia and the Purchaser signed in connection with the convertible debenture, the Purchaser has a security interest in all of NeoMedia’s assets.

 

NeoMedia is currently in default of the Investor Registration Rights Agreement entered into on August 24, 2006, in connection with the secured convertible debenture, because the registration statement to register the shares underlying the secured convertible debenture was not declared effective by the specified date. Due to the current default status, the Purchaser has certain material additional rights in this financing arrangement that did not previously exist. Specifically,

 

·	The full fair value of the secured convertible debenture is now callable in the amount of $5,000,000;

 

·	The warrants can be exercised on a cashless basis as described above;

 

·	NeoMedia is responsible for liquidated damages; NeoMedia has accrued $893,000 as the expected fair value of liquidated damages relating to the secured convertible debenture as of December 31, 2006;

 

·	The requirement for the Purchaser to maintain an ownership interest in NeoMedia of less than 5% is terminated;

 

F-44

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The accounting for the secured convertible debenture has been updated to take into account certain specific accounting rules and regulations that are now applicable under the default provision:

 

·

Prior to the default, NeoMedia was accreting the debt discount on the secured convertible debenture, using the effective interest method, through periodic charges to interest expense. Due to the default status, NeoMedia has accreted debt discount to the full fair value of the secured convertible debenture, resulting in an additional charge to income from continuing operations of $4,871,000.

 

·	The secured convertible debenture is now reported as debt in the current liabilities section of the balance sheet rather than long term.

 

At the inception date of August 24, 2006, a summary of the allocation of the components of the transaction was as follows:

Instrument:
Convertible debenture (1)		$	—
Common stock warrants (2)			18,507,000
Embedded conversion feature			970,000
Derivative loss			(14,477,000	)
Total gross proceeds		$	5,000,000

 

---

(1)	There were insufficient proceeds to allocate amounts to the host debentures. Accordingly, for purposes of application of the effective interest method, the company applied the 1% convention which provides for recognition of 1% of the future value as amortization.

(2)	The Company issued warrants to purchase aggregate 175,000,000 shares of common stock in connection with the convertible debenture, as described above.

 

In accordance with Statement of Financial Accounting Standards No. 133, ‘Accounting for Derivative Instruments and Hedging Activities’, (“FASB 133”), the Company determined that the conversion feature of the debenture met the criteria of an embedded derivative and therefore the conversion feature of the debenture needed to be bifurcated and accounted for as a derivative. The debenture does not meet the definition of “conventional convertible debt” because the number of shares which may be issued upon the conversion of the debenture is not fixed. Furthermore, 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.

 

Due to NeoMedia’s current default position, the debenture was written up to the full face value of $5,000,000 as of December 31, 2006, which was the carrying value of the convertible debenture as of that date. Derivative financial instruments arising from the issuance of a convertible debenture are initially recorded, and continuously carried, at fair values. 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. The following tabular presentation reflects the components of the derivative financial instruments related to this convertible debenture:

(Assets) Liabilities:		December 31, 2006
Common stock warrants		$	8,730,000
Embedded conversion feature			3,211,000
		$	11,941,000

 

The following tabular presentation reflects the number of common shares into which the aforementioned derivative financial instruments are convertible into at December 31, 2006:

 

		Shares of common stock
Common stock warrants			175,000,000
Embedded conversion feature (1)			111,111,111
			286,111,111

 

---

(1)

The terms of the embedded conversion features in the convertible debenture provide for variable conversion rates that are indexed to the Company’s 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 was convertible as of December 31, 2006 was calculated as the face value of $5,000,000, divided by 90% of the lowest closing bid price for the 30 trading days preceding December 31, 2006.

 

F-45

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Derivative loss for the year ended December31, 2006, 2005 and 2004 associated with adjustments recorded to reflect the aforementioned derivatives at fair value amounted to $6,941,000 and $0 and $0, respectively, and is reported as “Change in fair value from revaluation of warrants in derivative financial instruments” and “Gain on embedded conversion features of derivative financial instruments” in the accompanying consolidated statement of operations.

 

Fair value considerations for derivative financial instruments:

Freestanding derivative instruments, consisting of warrants that arose from the financing 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 included in this model as of December 31, 2006 are as follows:

Holder		Cornell Capital Partners
Instrument		Warrants
Exercise price		$0.04 - $0.05
Remaining Term (years)		4.3
Volatility		158.89%-165.86%
Risk-free rate		4.70%

 

Embedded derivative financial instruments, arising from the convertible debenture, consist of multiple individual features that were embedded in the instrument. The Company evaluated all significant features of the instruments as required under current accounting standards, and aggregated such instruments into one compound derivative financial instrument for financial reporting purposes. 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.

 

F-46

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Assumptions included exercise estimates/behaviors and the following other significant estimates:

Instrument:		Features
Conversion prices		$	0.045
Remaining terms (years)			1.3
Equivalent volatility			162.98	%
Equivalent interest-risk adjusted rate			9.11	%
Equivalent credit-risk adjusted yield rate			15.25	%

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.

F-47

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$2.5 Million Secured Convertible Debenture - December 2006

The Company entered into a Securities Purchase Agreement, dated December 29, 2006, (the “Agreement”) with Cornell Capital Partners LP, an accredited investor (the “Purchaser”). Pursuant to the Agreement, the Purchaser agreed to purchase 10% secured convertible debentures maturing two years from the date of issuance in the aggregate amount of $2,500,000. NeoMedia received cash proceeds from the transaction of $2,230,000 net of $270,000 fees paid to the Purchaser. The Agreement also provided for the issuance to the Purchaser, at no additional cost to the Purchaser, warrants to purchase shares of the Company's common stock. In connection with the Agreement, the Company also entered into a registration rights agreement with the Purchaser that 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 warrants by May 31, 2007, (ii) achieve effectiveness within 90 days of filing, and (iii) maintain effectiveness of the registration statement. Failure to meet these requirements will require the Company to incur liquidated damages amounting to 2% of the principal per month, but in no event shall consideration paid as liquidated damages exceed $500,000.

The Debentures are secured according to the terms of a Pledge and Security Agreement (the “Security Agreement”) dated August 23, 2006 and entered into in connection with a previous $5 million secured convertible debenture with the Purchaser, pursuant to which the Company agreed to provide to Purchaser a security interest in its assets to secure the Company's obligations under the financing transaction.

At any time from the closing date until December 29, 2008, the Purchaser has the right to convert the convertible debenture into common stock of the Company at the then effective conversion price, which varies relative to the Company’s trading stock price, as follows: $0.06 per share, or 90% of the lowest closing bid price (as reported by Bloomberg) of the common stock for the 30 trading days immediately preceding the conversion date. The conversion is limited such that the holder cannot exceed 4.99% ownership, unless the holders waive their right to such limitation. The limitation will terminate under any event of default.

The convertible debenture, at the option of the holder, affords the Purchaser anti-dilution protection should, at any time while the convertible debenture is outstanding, the Company offer, sell or grant any option to purchase or offer, sell or grant any right to re-price its securities, or otherwise dispose of or issue any common stock or common stock equivalents, 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), as calculated by the formula described above; then, in such instance, the conversion price for the convertible debenture shall be reduced to the lower price.

 

Under the terms of the agreement, the Purchaser also received warrants to purchase an aggregate of up to 42,000,000 shares of common stock. The warrants are exercisable at a price of $0.06 per share, subject to adjustment, included under anti-dilution protection similar to that described above. The warrants have a five-year contractual life. NeoMedia can force exercise of the warrants if the closing bid price of NeoMedia stock is more than $0.10 greater than the exercise price of any of the warrants for 15 consecutive trading days. It is important to note that the warrants held by Cornell Capital Partners contain a provision that, if at the time of exercise, NeoMedia is in default of the warrant agreement, the holder can perform a “cashless” exercise of the warrants and in lieu of making payment of the exercise price in cash, elect instead to withhold shares as consideration for the exercise price. In the event of such a “cashless” exercise, NeoMedia would not receive any cash proceeds upon the exercise of such warrants. NeoMedia is currently in default of the Investor Registration Rights Agreement entered into on December 29, 2006, in connection with the secured convertible debenture. Such a default of the Investor Registration Rights Agreement constitutes an event of default under the warrant agreements issued in connection with the secured convertible debenture. As a result, Cornell Capital Partners currently has the right to exercise on a cashless basis the 42,000,000 of warrants they hold that were issued in connection with the secured convertible debenture.

 

F-48

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The convertible debenture contains consequences in case of default. Events of default which could subject the Company to penalties, liabilities, and foreclosure upon the assets of the Company as specified in the Agreement include:

 

·	Any case or action of bankruptcy or insolvency commenced by the Company or any subsidiary, against the Company or adjudicated by a court against the Company for the benefit of creditors;

 

·	Any default in its obligations under a mortgage or debt in excess of $100,000;

 

·	Any cessation in the eligibility of the Company’s 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;

 

·	Any lapse in the effectiveness of the registration statement covering the shares related to the conversion option, the warrants as described and transacted in the securities purchase agreement and accompanying documents;

 

·	Any failure to deliver certificates within the specified time; and

 

·	Any failure, by the Company, to pay in full the amount of cash due pursuant to a buy-in or failure to pay any amounts owed on account on account of an event of default within 3 days of the date due.

 

Other provisions included in the Agreement include the following:

 

·	The convertible debenture is convertible into common stock, at the option of the Purchaser, at any time after the effective date;

 

·

As promptly as practicable after any conversion date, and subject to an effective registration statement or an exemption from registration the Company shall cause its transfer agent to deliver a certificate representing the converted shares, free of any legends and trading restrictions for the number of shares converted;

 

·	The Company will reserve and keep available authorized and unissued registered shares available to be issued upon conversion;

 

·	Purchaser will not be responsible for any transfer taxes relative to issuance of shares;

 

·	If the Company offers, sells or grants stock at an effective per share price less than the then Conversion Price, then the Conversion Price shall be reduced to equal the effective conversion, exchange or purchase price for such common stock or common stock equivalents;

 

·	Pursuant to the terms of the convertible debenture agreement between NeoMedia and Cornell signed in connection with the convertible debenture sale, without Cornell’s consent NeoMedia cannot

 

· ­	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,

 

F-49

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· ­	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,

 

· ­	enter into any security instrument granting the holder a security interest in any of its assets of, or

 

· ­	file any registration statements on Form S-8.

 

·	In addition, pursuant to a security agreement between NeoMedia and the Purchaser signed in connection with the convertible debenture, the Purchaser has a security interest in all of NeoMedia’s assets.

 

NeoMedia is currently in default of the Investor Registration Rights Agreement entered into on December 29, 2006, in connection with the secured convertible debenture, because the registration statement to register the shares underlying the secured convertible debenture issued on August 24, 2006 was not declared effective by the specified date. Due to the current default status, the Purchaser has certain material additional rights in this financing arrangement that did not previously exist. Specifically,

 

·	The full fair value of the secured convertible debenture is now callable in the amount of $2,500,000;

 

·	The warrants can be exercised on a cashless basis as described above;

 

·	NeoMedia is responsible for liquidated damages of 2% of the principal up to a maximum of $500,000;

 

·	The requirement for the Purchaser to maintain an ownership interest in NeoMedia of less than 5% is terminated;

 

The accounting for the secured convertible debenture has been updated to take into account certain specific accounting rules and regulations that are now applicable under the default provision.

 

·	NeoMedia incurred a charge to income from continuing operations on this secured convertible debenture to recognize the liability of the debenture at redemption value by fully writing off the debt discount.

 

·	The secured convertible debenture is 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.

 

F-50

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At the inception date of December 29, 2006, a summary of the allocation of the components of the transaction is as follows:

 

Instrument:
Convertible debenture		$	2,500,000
Common stock warrants (1)			2,159,000
Embedded conversion feature			1,579,000
Derivative loss			(1,238,000	)
Interest expense(2)			(2,770,000	)
Total gross proceeds		$	2,230,000

 

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(1)	The Company issued warrants to purchase aggregate 42,000,000 shares of common stock in connection with the convertible debenture, as described above.

(2)

Due to the default status, the debentures were accreted up to the full fair value of $2,500,000 at inception and the financing costs of $270,000 were expensed to interest expense. As a result of the default, NeoMedia recorded total charges to income in the amount of $4,008,000, which is more than the face value of the debenture of $2,500,000.

 

In accordance with Statement of Financial Accounting Standards No. 133, ‘Accounting for Derivative Instruments and Hedging Activities’, (“FASB 133”), the Company determined that the conversion feature of the debenture met the criteria of an embedded derivative and therefore the conversion feature of the debenture needed to be bifurcated and accounted for as a derivative. The debenture does not meet the definition of “conventional convertible debt” because the number of shares which may be issued upon the conversion of the debenture is not fixed. Furthermore, 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.

 

The following tabular presentation reflects the number of common shares into which the aforementioned derivative financial instruments are indexed at December 31, 2006:

		Shares of common stock
Common stock warrants			42,000,000
Embedded conversion feature (1)			55,555,556
			97,555,556

(1)

The terms of the embedded conversion features in the convertible debenture provide for variable conversion rates that are indexed to the Company’s 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 was convertible as of December 31, 2006 was calculated as the face value of $2,500,000, divided by 90% of the lowest closing bid price for the 30 trading days preceding December 31, 2006.

Derivative loss for the year ended December31, 2006, 2005 and 2004 associated with adjustments recorded to reflect the aforementioned derivatives at fair value amounted to $1,238,000 and $0 and $0, respectively, and is reported as “Change in fair value from revaluation of warrants in derivative financial instruments” and “Gain on embedded conversion features of derivative financial instruments” in the accompanying consolidated statement of operations.

Fair value considerations for derivative financial instruments:

Freestanding derivative instruments, consisting of warrants that arose from the financing 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 included in this model as of December 31, 2006 are as follows:

Holder		Cornell Capital Partners
Instrument		Warrants
Exercise price		$0.06
Remaining Term (years)		5.0
Volatility		158.89%-165.86%
Risk-free rate		4.70%

 

F-51

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Embedded derivative financial instruments, arising from the convertible debenture, consist of multiple individual features that were embedded in the instrument. The Company evaluated all significant features of the hybrid instruments and, where required under current accounting standards, bifurcated features for separate report classification. These features were aggregated into one compound derivative financial instrument for financial reporting purposes. 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 included exercise estimates/behaviors and the following other significant estimates:

Instrument:		Features
Conversion prices		$0.06
Remaining terms (years)		2.0
Equivalent volatility		163.66%
Equivalent interest-risk adjusted rate		9.08%
Equivalent credit-risk adjusted yield rate		15.25%

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.

The fair value of derivative financial instruments recorded as of December 31, 2006 and 2005 was:

		As of December 31,
		2006			2005
Warrants and embedded conversion features in preferred stock		$	9,217		$	—
Warrants and embedded conversion features in debentures			15,679			—
Fair value of future payment obligation			564			—
Special preference stock of Mobot			359			—
Total derivative financial instruments		$	25,819		$	—

F-52

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Standby Equity Distribution Agreements with Cornell

On October 27, 2003, NeoMedia and Cornell Capital Partners (“Cornell”) entered into a $20 million Standby Equity Distribution Agreement (the “2003 SEDA”). The agreement provided for a maximum “draw” of $280,000 per week, not to exceed $840,000 in any 30-day period, and Cornell was obligated to purchase up to $20 million of the Company’s common stock over a two-year period. The SEDA became effective during January 2004, and expired after a two-year term in January 2006. During the years ended December 31, 2006, 2005, and 2004, NeoMedia sold shares of its common stock to Cornell pursuant to the 2003 SEDA as follows:

		Years ended December 31,
		2006			2005			2004
Number of shares sold to Cornell			751,880			26,435,512			112,743,417
Gross Proceeds from sale of shares		$	234,000		$	9,527,000		$	10,123,000
Less: discounts and fees*			(24,000	)		(1,022,000	)		(1,967,000	)
Net Proceeds from sale of shares		$	210,000		$	8,505,000		$	8,156,000

* Pursuant to the terms of the 2003 SEDA, stock was valued at 98% of the lowest closing bid price during the week it was sold.

On March 30, 2005, NeoMedia and Cornell entered into a Standby Equity Distribution Agreement (the “2005 SEDA”) under which Cornell agreed to purchase up to $100 million of NeoMedia common stock over a two-year period, with the timing and amount of the purchase at NeoMedia’s discretion. The maximum amount of each purchase would be $2,000,000 with a minimum of five business days between advances. The shares would be valued at 98% of the lowest closing bid price during the five-day period following the delivery of a notice of purchase by NeoMedia, and NeoMedia would pay 5% of the gross proceeds of each purchase to Cornell. Based on NeoMedia’s current market capitalization and other outstanding securities, NeoMedia does not believe that the 2005 SEDA is currently a viable source of financing.

As a commitment fee for Cornell to enter into the 2005 SEDA, NeoMedia issued 50 million warrants to Cornell with an exercise price of $0.20 per share for a term of three (3) years, and also paid a cash commitment fee of $1 million. During the nine months ended September 30, 2006, Cornell exercised 40 million of the warrants, generating cash proceeds of $8 million to NeoMedia. During August 2006, in connection with the Convertible Debenture, NeoMedia repriced the remaining 2 million warrants to an exercise price of $0.10 per share. NeoMedia also issued 4 million warrants with an exercise price of $0.227 to a consultant as a fee in connection with the 2005 SEDA, which have not been exercised. NeoMedia recorded the $13,256,000 fair value of the warrants to “Deferred equity financing costs” at inception. This amount was written off during the three months ended September 30, 2006 because the Company believes that it can no longer consider the SEDA a viable financing source due to the utilization of the preferred stock financing and the debenture financing.

 

Promissory Note Payable to Cornell

On March 30, 2005, NeoMedia borrowed from Cornell the principal amount of $10,000,000 before discounts and fees in the form of a secured promissory note. Cornell withheld structuring and escrow fees of $68,000 related to the note. The note was originally scheduled to be repaid at a rate of $1,120,000 per month commencing May 1, 2005, which was subsequently changed to $840,000 per month, continuing until principal and interest were paid in full. The note accrued interest at a rate of 8% per annum on any unpaid principal. In connection with the note, NeoMedia and Cornell entered into a security agreement under which the note was secured by all of NeoMedia's assets other than its patents and patent applications. During the period from March 30, 2005 through January 9, 2006, NeoMedia made payments against the principal totaling $7,210,000. On February 17, 2006, NeoMedia retired the balance of the principal in the amount of $2,790,000, plus accrued interest of $419,000, from the proceeds of the Series C convertible preferred financing arrangement with Cornell. In connection with the payment and issuance of the Series C convertible preferred stock, NeoMedia recognized a loss on extinguishment of debt of $1,964,000 during the year ended December 31, 2006.

 

F-53

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On October 18, 2004, NeoMedia borrowed from Cornell the gross amount of $1,085,000 before discounts and fees. Cornell withheld a retention fee of $85,000 related to the issuance of stock to pay off the debt in the future. NeoMedia paid this note in full during the first quarter of 2005. NeoMedia invested the proceeds from the note in iPoint-media pursuant to the investment agreement between us and I-Point Media Ltd.

On August 6, 2004, NeoMedia borrowed from Cornell the gross amount of $2,000,000 before discounts and fees. Cornell withheld a retention fee of $153,000 related to the issuance of stock to pay off the debt in the future. NeoMedia paid this note in full during 2004.

On July 2, 2004, NeoMedia borrowed from Cornell the gross amount of $1,000,000 before discounts and fees. Cornell withheld a $76,000 retention fee related to the issuance of stock to pay off the debt in the future. NeoMedia paid this note in full during 2004.

On April 8, 2004, NeoMedia borrowed from Cornell the gross amount of $1,000,000 before discounts and fees. Cornell withheld a $76,000 retention fee related to the issuance of stock to pay off the debt in the future. NeoMedia paid this note in full during 2004.

On January 20, 2004, NeoMedia borrowed from Cornell the gross amount of $4,000,000 before discounts and fees. Of the $4,000,000 funding, $2,500,000 was used to fund the acquisition of CSI International, Inc. during February 2004. Cornell withheld a $315,000 retention fee related to the issuance of stock to pay off the debt in the future. NeoMedia paid this note in full during 2004.

NeoMedia also granted to Cornell 40,000,000 warrants to purchase shares of NeoMedia stock with an exercise price of $0.05 per share during January 2004. In April 2004, NeoMedia filed a Form SB-2 to register 40 million shares underlying warrants granted to Cornell (and subsequently transferred by Cornell to Stone Street Asset Management LLC) in connection with a promissory note issued by the Company to Cornell. In May 2004, the Form SB-2 was declared effective by the Securities and Exchange Commission. The fair value of the warrants using the Black-Scholes pricing model was $5,000,000. In accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”, NeoMedia compared the relative fair values of the warrants and the face value of the notes, and allocated a value of $2.5 million to the warrants. Of the $2.5 million, $2 million was allocated to the $4 million note issued in January 2004 and $0.5 million against the $1 million note in April 2004. The $2.5 million was recorded as a discount against the carrying value of the note. The $2.5 million that was allocated to the notes is considered a discount on the promissory notes, and therefore was amortized over the life of the notes using the effective interest method, in accordance with Staff Accounting Bulletin No. 77, Topic 2.A.6, “Debt Issue Costs” of SFAS 141, “Business Combinations”. Accordingly, NeoMedia recorded an amortization of discount of $2,500,000 related to the warrants during the year ended December31, 2004. Stone Street Asset Management LLC exercised the warrants during November 2004, resulting in net funds to NeoMedia of $2 million.

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6. PROPERTY AND EQUIPMENT

As of December 31, 2006 and 2005, property and equipment consisted of the following:

		As of December 31,
		2006			2005
		(US dollars in thousands)
Furniture and fixtures		$	426		$	264
Equipment			1,110			186
Autos			17			17
Leasehold improvements			74			2
Total			1,627			469
Less: Accumulated depreciation			(1,188	)		(359	)
Total property and equipment, net		$	439		$	110

Depreciation expense was $330,000, $92,000 and $63,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

 

As of December 31, 2006 and 2005, goodwill consisted of the following:

		As of December 31,
		2006			2005
		(US dollars in thousands)
Goodwill resulting from acquisition of Gavitec		$	3,418		$	—
Goodwill resulting from acquisition of BSD			4,402			—
Goodwill resulting from acquisition of 12Snap			62			—
Goodwill, net		$	7,882		$	—

 

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Goodwill activity for the years ended December 31, 2006 and 2005 was as follows:

		As of December 31,
		2006			2005
		(US dollars in thousands)
Beginning Balance		$	—		$	—
Additions (acquisitions of Gavitec, BSD, and 12Snap)			26,209			—
Impairment loss (Note 2)			(18,327	)		—
Ending Balance		$	7,882		$	—

 

Other Intangible Assets

As of December 31, 2006 and 2005, intangible assets consisted of the following:

		As of December 31,
		2006			2005
		(US dollars in thousands)
Customer Contracts, net		$	1,416		$	—
Proprietary Software, net			8,110			141
Patents, net			2,839			3,133
Brand Name and Copyrighted Materials, net			1,659			—
Other intangible assets, net		$	14,024		$	3,274

Customer contracts activity for the year ended December 31, 2006 and 2005 was as follows:

		As of December 31,
		2006			2005
		(US dollars in thousands)
Beginning Balance		$	—		$	—
Additions			1,700			—
Amortization			(284	)		—
Ending Balance		$	1,416		$	—

Amortization expense of customer contracts was $284,000, $0 and $0 for the years ended December 31, 2006, 2005 and 2004 respectively. The weighted-average amortization period of customer contracts as of December 31, 2006 was5.0 years. 

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Proprietary and purchased software activity for the year ended December 31, 2006 and 2005 was as follows:

		As of December 31,
		2006			2005
		(US dollars in thousands)
Beginning Balance		$	140		$	89
Additions			9,128			110
Amortization			(1,158	)		(59	)
Ending Balance		$	8,110		$	140

Amortization expense of proprietary and purchased software was $1,158,000, $59,000 and $82,000 for the years ended December 31, 2006, 2005 and 2004 respectively. The weighted-average amortization period of proprietary and purchased software as of December 31, 2006 was 4.3 years.

Capitalized patent activity for the year ended December 31, 2006 and 2005 was as follows:

		As of December 31,
		2006			2005
		(US dollars in thousands)
Beginning Balance		$	3,133		$	2,174
Additions			12			1,651
Impairment loss			—			(336	)
Amortization			(306	)		(356	)
Ending Balance		$	2,839		$	3,133

Amortization expense of capitalized patents was $307,000, $356,000 and $321,000 for the years ended December 31, 2006, 2005 and 2004 respectively. The weighted-average amortization period of capitalized patents as of December 31, 2006 was 2.4 years.

Brand name and copyrighted materials and other intangible assets activity for the year ended December 31, 2006 and 2005 was as follows:

		As of December 31,
		2006			2005
		(US dollars in thousands)
Beginning Balance		$	—		$	—
Additions			1,830			—
Amortization			(171	)		—
Ending Balance		$	1,659		$	—

Amortization expense of brand name and copyrighted materials and other intangible assets was $171,000, $0 and $0 for the years ended December 31, 2006, 2005 and 2004, respectively. The weighted-average amortization period of brand name and copyrighted materials and other intangible assets as of December 31, 2006 was 2.1 years.

As of December 31, 2006, the Company estimated future amortization expense of intangible assets for the next five years to be:  

2007		$	2,239
2008			2,183
2009			2,133
2010			2,102
2011			1,752

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8.  INVESTMENTS: MARKETABLE SECURITIES, AND OTHER LONG TERM ASSETS

 

On February 25, 2005, NeoMedia invested $250,000 in exchange for 8,333,333 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, NeoMedia received marketable securities with a fair value of $579,000, of which, $200,000 represented 20,000,000 shares of PUPS common stock and $379,000 in notes designated as held to maturity. PUPS is a retail operator and franchiser of retail automotive parts and accessories stores catering to the light truck market, and also provides new vehicle preparation, environmental protection packages, detailing and reconditioning products and services. In accordance with Statements of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” the investment in PUPS is being recorded as available-for-sale securities and reported at fair value. Accordingly, unrealized gains and losses on the equity securities are reflected in the condensed consolidated statement of operations and comprehensive income (loss). In the 4^th quarter of 2005, NeoMedia incurred a charge of $250,000 to impair its investment in Intactis Software.

The investments in marketable securities are summarized as follows:

		As of December 31, 2006
		Cost			Unrealized Holding Gains (Losses)			Impairment Amount Realized			Fair Value
Available-for-sale-PUPS		$	450,000			($393,333	)	$	—		$	56,667
Available-for-sale-Intactis			250,000			—			(250,000	)		—

Other long term assets, Investments:

Held to maturity securities consist of four notes receivable from PUPS with a face value of $1,611,000 and a fair value of $0. NeoMedia incurred an impairment charge in the 4th quarter of 2006 to write the notes receivable down to their expected realizable value. The notes are delinquent and accrue interest at rates between 12 - 24%. NeoMedia has not recorded any interest since the Company is using the cost recovery method.

Investment in Mobot consists of shares of FMS Group, representing NeoMedia’s 18% ownership of FMS Group, which will operate the Mobot business, after NeoMedia’s divestiture of Mobot.

Investment in Sponge consists of shares of Sponge, representing NeoMedia’s 7.5% ownership of Sponge, after NeoMedia’s divestiture of Sponge.

NeoMedia’s other long term investments are summarized as follows:

		As of December 31, 2006
		Cost			Unrealized Holding Gains (Losses)			Impairment Amount Realized			Fair Value
Held to maturity, notes receivable PUPS		$	379,000		$	—			($379,000	)	$	—
Investment in Mobot			1,926,180			—			—			1,926,180
Investment in Sponge			1,398,675			—			—			1,398,675

 

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9. ALLOWANCE FOR DOUBTFUL ACCOUNTS, INVENTORY RESERVE, AND CONCENTRATIONS OF CREDIT RISK

Allowance for doubtful accounts activity for the years ended December 31, 2006 and 2005 was as follows:

 

		As of December 31,
		2006			2005
		(US dollars in thousands)
Beginning balance			($14	)		($16	)
Bad debt expense			(137	)		(16	)
Write-off of uncollectible accounts			5			18
Ending balance			($146	)		($14	)

 

Inventory reserve for the year ended December 31, 2006 and 2005 was $53,000 and $0, respectively.

Financial instruments that potentially subject NeoMedia to concentrations of credit risk consist primarily of trade accounts receivable with customers. NeoMedia extends credit to its customers as determined on an individual basis and has recorded an allowance for doubtful accounts of $69,000 and $14,000 as of December 31, 2006 and 2005, respectively, on its consolidated balance sheet.

10. COMPREHENSIVE LOSS

Comprehensive loss consists of net income (loss) and other gains and losses affecting shareholders’ investment that, under accounting principles generally accepted in the United States, are excluded from net income. Changes in the components of other comprehensive loss are as follows:

		Unrealized gain/(loss) on marketable securities									Foreign currency translation adjustment									Total
		2006			2005			2004			2006			2005			2004			2006			2005			2004
Beginning balance			($146	)	$	—		$	—			($31	)		($60	)	$	—			($177	)		($60	)	$	—
Annual activity			(247	)		(146	)		—			(286	)		29			(60	)		(533	)		(117	)		(60	)
Ending balance			($393	)		($146	)	$	—			($317	)		($31	)		($60	)		($710	)		($177	)		($60	)

 

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11. INCOME TAXES

 

For the years ended December 31, 2006 and 2005, the components of income tax expense were as follows:

		2006			2005
		(in thousands)
Current		$	-		$	-
Deferred			-			-
Foreign			-			-
Income tax expense.(benefit)		$	-		$	-

 

As of December 31, 2006 and 2005, the types of temporary differences between the tax basis of assets and liabilities and their financial reporting amounts which gave rise to deferred taxes, and their tax effects were as follows:

		2006			2005
		(in thousands)
Net operating loss carryforwards (NOL)		$	39,967		$	33,157
Capital loss			3,689			-
Write-off of long-lived assets			3,012			2,516
Stock options compensation			1,930			140
Capitalized software development costs and fixed assets			709			881
Deferred revenue			236			-
Alternative minimum tax credit carryforward			45			45
Provisions for doubtful accounts			38			102
Accruals			-			598
State taxes			-			151
Total deferred tax assets			49,626			37,590
Valuation allowance			(49,626	)		(37,590	)
Net deferred tax asset		$	-		$	-

 

 

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For the years ended December 31, 2006 and 2005, the income tax benefit differed from the amount computed by applying the statutory federal rate of 34% as follows:

		2006			2005
		(in thousands)
Benefit at federal statutory rate		$	(22,929	)	$	(3,150	)
State income taxes, net of federal			(2,671	)		(367	)
Permanent and other, net			13,358			(166	)
Change in valuation allowanance			12,242			3,683

 

As of December 31, 2006, NeoMedia had net operating loss carry forwards for federal tax purposes totaling approximately $100,200,000 (excluding Mobot losses of $995,000 which were disposed of with the subsidiary) which may be used to offset future taxable income, or, if unused, expire between 2011 and 2020 and a capital loss carry forward of $9,200,000. As a result of certain of NeoMedia's equity activities, NeoMedia anticipates that the annual usage of its pre-1998 net operating loss carry forwards should be further restricted pursuant to the provisions of Section 382 of the Internal Revenue Code.

 

In addition to the above, NeoMedia owned the subsidiaries 12 Snap, Gavitec, and NeoMedia Telecom (Triton), with foreign operations that are not included with NeoMedia’s consolidated income tax noted above. These subsidiaries have income tax expense as follows: 

 

Provision for income taxes (in thousands)
		2006
12 Snap		$	—
Gavitec			—
Triton			—
Total		$	—

 

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These foreign subsidiaries have net operating loss carry forwards that are estimated to be as follows: 

 

		2006
12 Snap		$	46,857
Gavitec			2,277
Triton			2,034
Total		$	51,168

 

These foreign subsidiaries have estimated deferred tax assets and liabilities, not included in NeoMedia’s consolidated deferred tax assets stated above, that are fully offset with a valuation allowance as indicated in the following table. Due to the uncertainty of the utilization and recoverability of the loss carry forwards and other deferred tax assets, the Company has reserved for the deferred tax assets through a valuation allowance, as it is more likely than not that the deferred tax assets will not be realizable. The company has elected to recognize the benefit of acquired foreign-company NOLs and other deferred tax assets to offset approx $3,684 of deferred tax liabilities that otherwise would have been recorded as an adjustment to goodwill in connection with the intangible assets acquired. Any subsequent de-recognition of these deferred tax benefits should be reflected as a charge to earnings rather than as an adjustment to goodwill.

 

Estimated deferred tax asset/(liability) (thousands)
		2006
Net operating loss carry forward		$	17,758
Property Plant and equipment			103
Investment greater than book value			451
Deferred revenue			487
Accrued expenses			399
Intangible assets			(706	)
Total		$	18,492
Less valuation allowance			(18,492	)
Net deferred tax asset		$	—

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12. TRANSACTIONS WITH RELATED PARTIES

On November 1, 2005, NeoMedia acquired a used automobile for $17,000 from Charles T. Jensen, its President, Chief Executive Officer and a member of its board of directors.

 

During the fourth quarter of 2005 and first quarter of 2006, NeoMedia shipped and invoiced $759,000 of Micro Paint Repair products to Automart, Inc. In the third quarter of 2006, NeoMedia established a reserve for bad debt against the open accounts receivable, and wrote off the deferred revenue and deferred costs, incurring a net charge to its statement of operations of $653,000. NeoMedia will recognize revenue on these shipments if and when collectibility is reasonably assured. David A. Dodge, NeoMedia’s Chief Financial Officer, and Kevin Hunter, NeoMedia’s Chief Scientist, are each members of the board of directors of Automart, a publicly traded company trading in the Over-the-counter Bulletin Board.

13. COMMITMENTS AND CONTINGENCIES

NeoMedia leases its office facilities and certain office and computer equipment under various operating leases. These leases provide for minimum rents and generally include options to renew for additional periods. NeoMedia has incurred rent expense from continuing operations as follows:

 

		For the years ended December 31, (in thousands)
		2006			2005			2004
Total rent expense		$	652		$	233		$	106

 

NeoMedia is party to various commitments and contingencies, such as:

·	NeoMedia and its subsidiaries lease office facilities and certain office and computer equipment under various operating leases;

·	NeoMedia is party to various payment arrangements with its vendors that call for fixed payments on past due liabilities;

·	NeoMedia is party to various consulting agreements that carry payment obligations into future years;

·	NeoMedia issued Series C convertible preferred shares with face value of $21,567,000 and convertible debentures with a face value of $7,500,000 that are subject to conversion at future dates, plus liquidated damages of $2,093,000 relating to these convertible instruments;

·	NeoMedia holds notes payable to certain vendors and silent partners of an acquired subsidiary that mature at various dates in the future; and

·	Resulting from the acquisition of 12 Snap, NeoMedia has a commitment to pay approximately $1 million of remaining obligations to Silent Partners of 12Snap that come due by March 31, 2007. The payments have not been made as of the date of this filing.

 

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The following table sets forth NeoMedia’s future minimum payments due under operating leases, vendor and consulting agreements, convertible stock agreements, and debt agreements:

		(US dollars in thousands)
																	Series C
					Vendor &						Subsidiary						Convertible
		Operating			Consulting			Notes			Acquisition			Convertible			Preferred
		Leases			Agreements			Payable			Commitments			Debentures			Stock			Total
2007		$	693		$	1,069		$	2,155		$	22,367		$	7,500			25,514		$	59,299
2008			399			124			—			—			—			—			522
2009			85			—			—			—			—			—			85
2010			15			—			—			—			—			—			15
2011			—			—			—			—			—			—			—
Thereafter			—			—			—			—			—			—			—
Total		$	1,192		$	1,193		$	2,155		$	22,367		$	7,500		$	25,514		$	59,921

On June 15, 2006, the Company issued 3,721,698 shares of its common stock a an initial payment against debt and accrued interest owed to Wayside Solutions, Inc. (“Wayside”), a corporation that had provided financing to BSD prior to the acquisition of to BSD by the Company. Prior to the acquisition, the Company reached an agreement with Wayside to pay the outstanding debt due to Wayside subsequent to completion of the acquisition. The shares contain a make whole provision that calls for additional shares to be issued in the event the value of the original shares at the time of registration is less than the value at the time they were issued.

 

Legal Proceedings

The Company is involved in various legal actions arising in the normal course of business, both as claimant and defendant. While 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 the Company’s financial position or operating results.

 

Scanbuy, Inc.

 

On January 23, 2004, NeoMedia 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 NeoMedia’s 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, NeoMedia re-filed its suit against Scanbuy in the Southern District of New York alleging patent infringement. Scanbuy filed its answer on June 2, 2004. NeoMedia filed its answer and affirmative defenses on July 23, 2004. On January 20, 2007, the court dismissed Scanbuy's request for a summary judgment. Discovery is ongoing.

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14. DEFINED CONTRIBUTION SAVINGS PLAN

NeoMedia maintains a defined contribution 401(k) savings plan. Participants may make elective contributions up to established limits. All amounts contributed by participants and earnings on these contributions are fully vested at all times. The plan provides for matching and discretionary contributions by NeoMedia, although no such contributions to the plan have been made to date.

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15. STOCK BASED COMPENSATION

Equity-based Compensation Plans

Effective February 1, 1996, NeoMedia adopted the 1996 Stock Option Plan making available for grant to employees of NeoMedia options to purchase up to 1,500,000 shares of NeoMedia's common stock. A total of 1,046,048 shares were issued upon the exercise of options granted under the 1996 Stock Option Plan from its inception through December 31, 2006. Effective on February 1, 2006, the 1996 Stock Option Plan expired.

Effective March 27, 1998, NeoMedia adopted the 1998 Stock Option Plan making available for grant to employees of NeoMedia options to purchase up to 8,000,000 shares of NeoMedia's common stock. The stock option committee of the board of directors has the authority to determine to whom options will be granted, the number of options, the related term, and exercise price. The option exercise price may be less than the fair market value per share of NeoMedia's common stock on the date of grant. Options generally vest 20% upon grant and 20% per year thereafter. The options expire ten years from the date of grant. As of December 31, 2006, options to purchase 145,450 shares of common stock remained available for issuance under the 1998 Stock Option Plan.

Effective June 6, 2002, NeoMedia adopted its 2002 Stock Option Plan. The 2002 Stock Option Plan provides for authority for the stock option committee of the board of directors to grant non-qualified stock options with respect to a maximum of 10,000,000 shares of common stock. The option exercise price may be less than the fair market value per share of NeoMedia's common stock on the date of grant, and may be granted with any vesting schedule as approved by the stock option committee. As of December 31, 2006, options to purchase 20,000 shares of common stock remained available for issuance under the 2002 Stock Option Plan.

Effective September 24, 2003, NeoMedia adopted its 2003 Stock Option Plan. The 2003 Stock Option Plan provides for authority for the Board of Directors to the grant non-qualified stock options with respect to a maximum of 150,000,000 shares of common stock. The option exercise price may be less than the fair market value per share of NeoMedia's common stock on the date of grant, and may be granted with any vesting schedule as approved by the stock option committee. As of December 31, 2006, options to purchase 17,676,686 shares of common stock remained available for issuance under the 2003 Stock Option Plan.

 

Effective December 16, 2005, NeoMedia adopted its 2005 Stock Option Plan. The 2005 Stock Option Plan provides for authority for the Board of Directors to the grant non-qualified stock options with respect to a maximum of 60,000,000 shares of common stock. The option exercise price may be less than the fair market value per share of NeoMedia's common stock on the date of grant, and may be granted with any vesting schedule as approved by the stock option committee. As of December 31, 2006, NeoMedia has not registered the 60,000,000 shares underlying the options in the 2005 Stock Option Plan, and as a result options to purchase all 60,000,000 shares of common stock remained available for issuance under the 2003 Stock Option Plan.

 

Effective October 31, 2003, NeoMedia adopted the 2003 Stock Incentive Plan. Under the terms of the 2003 Stock Incentive Plan, NeoMedia has set aside up to 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 December 31, 2006, 1,725,408 shares of common stock remained available for issuance under the 2003 Stock Incentive Plan.

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Stock Option Plans

The following table summarizes the status of NeoMedia's 2003, 2002, 1998 and 1996 stock option plans as of and for the years ended December 31, 2006, 2005 and 2004:

		2006						2005						2004
					Weighted						Weighted						Weighted
					Average						Average						Average
					Exercise						Exercise						Exercise
		Shares			Price			Shares			Price			Shares			Price
		(In thousands)						(In thousands)						(In thousands)
Outstanding at beginning of year			100,041		$	0.18			52,804		$	0.06			33,512		$	0.23
Granted			28,297		$	0.33			58,510		$	0.28			32,752		$	0.10
Exercised			(2,931	)	$	0.12			(7,954	)	$	0.11			(12,860	)	$	0.23
Forfeited			(19,585	)	$	0.29			(3,319	)	$	0.22			(600	)	$	0.09
Outstanding at end of year			105,822		$	0.20			100,041		$	0.18			52,804		$	0.06
Options exercisable at year-end			77,920						53,952						34,680
Weighted-average fair value
of options granted during the year		$	0.10					$	0.28					$	0.10
Available for grant at the end of the year			17,970						26,682						81,873

 

The following table summarizes information about NeoMedia's stock options outstanding as of December 31, 2006:

 

Options Outstanding														Options Exercisable
					Weighted-						Weighted-						Weighted-
Range					Average						Average						Average
of Exercise		Number			Remaining						Exercise			Number			Exercise
Prices		Outstanding			Contractual Life						Price			Exercisable			Price
		(In thousands)												(In thousands)
$0.01 to $0.10			30,374			5.3			years		$	0.02			29,564		$	0.02
0.11 to 0.20			13,671			6.6			years		$	0.11			11,049		$	0.11
0.21 to 0.30			28,485			7.8			years		$	0.25			20,934		$	0.25
0.31 to 0.40			32,846			9.1			years		$	0.36			15,965		$	0.35
0.41 to 7.00			446			8.9			years		$	0.73			408		$	0.75
$0.01 to $7.00			105,822			7.3			years		$	0.20			77,920		$	0.17

 

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During the years ended December 31, 2006, 2005 and 2004, NeoMedia made the following option grants:

		2006						2005						2004
		Range of			Options			Range of			Options			Range of			Options
		Exercise			Granted			Exercise			Granted			Exercise			Granted
Recipients		Prices						Prices						Prices
					(In thousands)						(In thousands)						(In thousands)
Employees		$	0.01 to $0.414			27,672		$	0.227 to $0.516			51,010		$	0.062 to $0.128			23,290
Non-employee directors			—			—		$	0.239 to $0.328			6,500		$	0.01 to $0.075			3,357
Non-employees		$	0.285 to $0.295			625		$	0.239			1,000		$	0.025 to $0.10			6,105
Total		$	0.01 to $0.414			28,297		$	0.227 to $0.516			58,510		$	0.01 to $0.128			32,752

 

Adoption of FASB Statement No. 123

Prior to January 1, 2006, NeoMedia accounted for its stock option plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (“Statement 123(R)”). No stock-based employee compensation cost was recognized in the statement of operations for the fiscal years or interim periods ended prior to December 31, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, NeoMedia adopted the fair value recognition provisions of Statement 123(R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.

As a result of adopting Statement 123(R) on January 1, 2006, NeoMedia’s net loss for year ended December 31, 2006 is $4,822,000 higher (including $495,000 relating to discontinued operations) than if it had continued to account for share-based compensation under Opinion 25. Basic and diluted loss per share, as well as loss per share attributable to common shareholders, are each higher by $0.01 per share for the year ended December 31, 2006 than they would have been if NeoMedia had not adopted Statement 123(R). Estimated income tax benefits recognized during the year ended December 31, 2006 were offset by a valuation allowance since realization was not reasonably assured.

Prior to the adoption of Statement 123(R), it was NeoMedia’s policy to present all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in its statement of cash flows, however, due to NeoMedia’s tax loss carryforward, any such benefits were always fully offset by a valuation allowance. Statement 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. NeoMedia will use this presentation if and when it has exhausted its tax loss carryforward.

 

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The following table illustrates the effect on net loss and loss per share if NeoMedia had applied the fair value recognition provisions of Statement 123(R) to options granted under NeoMedia’s stock option plans in 2004 and 2005. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing formula and amortized to expense over the options’ vesting periods.

		Year Ended			Year Ended
		December 31,			December 31,
		2005			2004
Net Loss, as reported			($9,147	)		($7,230	)
Add: stock-based employee compensation
expense included in reported net income,
net of related tax effects			—			—
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effects			(4,124	)		(1,445	)
Pro-forma net loss			($13,271	)		($8,675	)
Net Loss per share:
Basic and diluted - as reported			($0.02	)		($0.02	)
Basic and diluted - pro-forma			($0.03	)		($0.03	)

Note that the above pro forma disclosures are provided for the years ended December 31, 2005 and 2004 because employee stock options were not accounted for using the fair-value method during those periods.

NeoMedia’s stock option plans permit the grant of share options and shares to NeoMedia’s employees, board of directors, and outside consultants. NeoMedia believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of NeoMedia’s stock at the date of grant; those option awards generally vest over a period of 3 years and have 10-year contractual terms. Shares granted upon the exercise of stock options are newly issued shares. The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model that uses the assumptions noted in the following table. Because the Black-Scholes valuation model incorporates ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on the expected impact on future stock price of expected future revenue and earnings, historical volatility of NeoMedia’s stock, and other factors. NeoMedia uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted represents the period of time that options granted are expected to be outstanding.

		Year ended December 31,
		2006			2005			2004
Volatility			56 - 117	%		385 - 434	%		438 - 451	%
Expected dividends			—			—			—
Expected term (in years)			3			3			3
Risk-free rate			4.35	%		4.50	%		4.50	%

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As of January 1, 2006, NeoMedia reevaluated its volatility calculation to take into consideration the guidance outlined in Statement 123(R). Prior to January 1, 2006, NeoMedia calculated volatility using only historical share price data. Under the provisions of Statement 123(R), from January 1, 2006 onward NeoMedia has considered historical volatility, as well expected future volatility. As a result, NeoMedia’s volatility decreased significantly for stock based compensation granted during the year ended December 31, 2006 as compared with stock based compensation granted prior to January 1, 2006. NeoMedia will evaluate its volatility on an ongoing basis using the most current information available.

A summary of option activity under the Plans as of December 31, 2006, and changes during the year then ended is presented below:

								Weighted
					Weighted			Average
					Average			Remaining			Aggregate
					Exercise			Contractual			Intrinsic
		Shares			Price			Term			Value
		(In thousands)						(in years)			(In thousands)
Outstanding at January 1, 2006			100,041		$	0.18
Granted			28,297		$	0.33
Exercised			(2,931	)	$	0.12
Forfeited			(19,585	)	$	0.29
Outstanding at December 31, 2006			105,822		$	0.20			7.3		$	1,125
Vested or expected to vest at December 31, 2006			77,920		$	0.17			6.7		$	1,125

The weighted-average grant-date fair value of options granted during the year ended December 31, 2006 was $0.10. The total intrinsic value of options exercised during the year ended December 31, 2006 was $450,000. Total cash received from options exercised was $355,000 for the year ended December 31, 2006.

A summary of the status of NeoMedia’s nonvested shares as of December 31, 2006, and changes during the year ended December 31, 2006, is presented below:

					Weighted
					Average
					Grant Date
Nonvested Shares		Shares			Fair Value
		(in thousands)
Nonvested at January 1, 2006			44,215		$	0.18
Granted			16,680		$	0.11
Vested			(16,385	)	$	0.33
Forfeited			(16,608	)	$	0.23
Nonvested at December 31, 2006			27,902		$	0.21

As of December 31, 2006, there was $5,122,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized over a weighted-average period of 1.1 years.

 

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Stock Incentive Plan

Under the shareholder-approved 2003 Stock Incentive Plan, NeoMedia has set aside up to 30,000,000 shares of common stock to be issued to pay compensation and other expenses related to employees, former employees, consultants, and non-employee directors. During the years ended December 31, 2006, 2005, and 2004, NeoMedia issued shares from the 2003 Stock Incentive Plan as follows:

		Year ended December 31,
		2006			2005			2004
		(in thousands)
Shares issued under 2003 Stock Incentive Plan			18,432			593			3,476
Aggregate grant date fair value of shares issued		$	2,211		$	220		$	359
Expense recognized (1)		$	2,244		$	194		$	133

 

---

(1) - $219,000 expense was recognized and accrued prior to January 1, 2004 for shares issued in 2004.

Other Stock Based Compensation Expense

On February 8, 2005, the Company issued 1,000,000 options to buy shares of the Company's common stock to two outside consultants with a strike price of $0.239 per share for consulting services to be rendered to the Company over a two-year period. The grant date fair value of the options was $239,000. The Company recognized $136,000, $103,000, and $0 in sales and marketing expense related to these grants during the years ended December 31, 2006, 2005 and 2004, respectively.

During the period January through June 2004, the Company issued 106,674 options to buy shares of the Company's common stock to James J. Keil, an outside director, with an exercise price of $0.01 per share for consulting services rendered to the Company during that time. The Company recognized the aggregate grant date fair value of $0, $0, and $9,000 in general and administrative expense during the years ended December 31, 2006, 2005 and 2004, respectively.

On February 8, 2004, the Company issued 5,555,556 options to buy shares of the Company's common stock to an outside consultant, with an exercise price of $0.01 per share for consulting services rendered to the Company’s Micro Paint Repair business over a period of three years from the date of issuance. The Company recorded the fair value of the options of $550,000 as deferred stock compensation at the time of issuance, and spread the expense over the service period. The contract was terminated during the second quarter of 2005, and the Company recognized expense to write off the remaining deferred stock compensation at that time. Accordingly, the Company recognized $0, $368,000 and $182,000 in sales and marketing expense related to this grant during the years ended December 31, 2006, 2005 and 2004, respectively.

On January 16, 2004, the Company issued 50,000 options to buy shares of the Company's common stock to an outside consultant with an exercise price of $0.025 per share for consulting services rendered to the Company. The Company recognized the grant date fair value of $0, $0, and $7,000 in general and administrative expense during the years ended December 31, 2006, 2005 and 2004, respectively.

 

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  Warrants

Warrant activity for the years ended December 31, 2006, 2005 and 2004 was as follows:

Warrants Outstanding as of December 31, 2003			26,195,000
Warrants issued			44,150,000
Warrants exercised			(51,510,000	)
Warrants expired			(10,000	)
Warrants Outstanding as of December 31, 2004			18,825,000
Warrants issued			54,000,000
Warrants exercised			(50,000	)
Warrants expired			(1,400,000	)
Warrants Outstanding as of December 31, 2005			71,375,000
Warrants issued (See Note 4)			294,000,000
Warrants exercised			(49,000,000	)
Warrants expired			(50,000	)
Warrants Outstanding as of December 31, 2006			316,325,000

The following table summarizes information about warrants outstanding at December 31, 2006, all of which are exercisable:

					Weighted-						Weighted-
					Average						Average
Range of		Warrants			Remaining						Exercise
Exercise Prices		Outstanding			Contractual Life						Price
		(In thousands)
$— to $0.03			2,550			1.5			years		$	0.01
0.04 to 0.06			303,500			4.4			years		$	0.04
0.07 to 3.56			10,275			3.0			years		$	0.25
$— to $6.00			316,325			4.4			years		$	0.05

Refer to Note 5 for discussion of warrants issued to Cornell Capital Partners during 2006.

On February 14, 2006, NeoMedia issued 2,000,000 warrants with an exercise price of $0.328 and a term of five years to an unrelated third party as a fee for negotiating and structuring the Series C convertible preferred stock sale.

During March 2005, in connection with the signing of the 2005 SEDA, NeoMedia issued 50,000,000 warrants to Cornell with an exercise price of $0.20 per share, and 4,000,000 warrants with an exercise price of $0.229 to an independent third party as a fee for negotiating and structuring the SEDA. The Company charged the fair value of the warrants of $12.3 million to “Deferred equity financing costs.” 20,000,000 warrants were exercised in February 2006, generating $4 million cash proceeds to NeoMedia.

 

During March 2004, the Company granted 4,000,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $0.11 per share to an outside consultant as a finder fee related to financing received by NeoMedia. The Company charged the fair value of the warrants of $440,000 as a reduction to capital accounts.

 

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During February 2004, the Company granted 150,000 warrants to purchase shares of NeoMedia common stock at an exercise price of $0.102 per share to an outside consultant. The Company recognized $0, $0, and $15,000 in general and administrative expense relating to the warrant issuance during the years ended December 31, 2006, 2005, and 2004, respectively. During February 2005, the holder exercised 50,000 of the warrants, resulting in proceeds of $5,100 to NeoMedia. The remaining 100,000 warrants were not exercised as of December 31, 2005.

During January 2004, the Company granted to Cornell 40,000,000 warrants to purchase shares of NeoMedia stock with an exercise price of $0.05 per share, as consideration for the issuance of two promissory notes by Cornell to NeoMedia. The first note was for a face amount of $4 million and was issued in January 2004; the second was for a face amount of $1 million issued in April 2004. The fair value of the warrants using the Black/Scholes pricing model was $5 million. In accordance with APB 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”, the Company compared the relative fair values of the warrants and the face value of the notes, and allocated a value of $2.5 million to the warrants. Of the $2.5 million, $2 million was allocated to the $4 million note issued in January 2004 and $0.5 million against the $1 million note in April 2004. The $2.5 million was recorded as a discount against the carrying value of the note. The $2.5 million that was allocated to the notes is considered a discount on the promissory notes, and therefore was amortized over the life of the notes using the effective interest method, in accordance with Staff Accounting Bulletin No. 77, Topic 2.A.6, “Debt Issue Costs” of SFAS 141, “Business Combinations”. Accordingly, the Company recorded an amortization of discount of $2,500,000 related to the warrants during the year ended December 31, 2004. The warrants were subsequently assigned by Cornell to Stone Street Asset Management LLC. Stone Street Asset Management LLC exercised the warrants during November 2004, resulting in net funds to NeoMedia of $2 million.

 

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16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table presents summarized unaudited quarterly results of operations for the Company for fiscal 2006 and 2005. NeoMedia believes all necessary adjustments have been included in the amounts stated below to present fairly the following selected information when read in conjunction with the consolidated financial statements and notes thereto included elsewhere herein. Future quarterly operating results may fluctuate depending on a number of factors. Results of operations for any particular quarter are not necessarily indicative of results of operations for a full year or any other quarter.

(in thousands, except per share data):

		2006
		First			Second			Third			Fourth			Total
		Quarter			Quarter			Quarter			Quarter			Year
Revenue		$	1,122		$	3,229		$	3,201		$	2,757		$	10,309
Gross profit			604			1,775			1,881			2,186			6,446
Net Income (loss) from continuing operations			(778	)		6,279			(28,482	)		(29,272	)		(52,252	)
Discontinued operations			(539	)		(1,147	)		(2,427	)		(11,072	)		(15,186	)
Net Income (loss)			($1,317	)	$	5,132			($30,909	)		($40,344	)		($67,438	)
Net loss per share - basic and diluted*			($0.00	)	$	0.01			($0.05	)		($0.06	)		($0.11	)

 

		2005
		First			Second			Third			Fourth			Total
		Quarter			Quarter			Quarter			Quarter			Year
Revenue		$	292		$	276		$	193		$	116		$	877
Gross profit			118			127			76			(27	)		294
Net Income (loss) from continuing operations			(958	)		(1,635	)		(1,569	)		(2,984	)		(7,146	)
Discontinued operations			(261	)		(665	)		(381	)		(694	)		(2,001	)
Net Income (loss)			($1,219	)		($2,300	)		($1,950	)		($3,678	)		($9,147	)
Net loss per share - basic and diluted*			($0.00	)		($0.01	)		($0.00	)		($0.01	)		($0.02	)

 

*	- The sum of the quarterly net loss per share will not necessarily equal the net loss per share for the year due to the effects of rounding

 

First, second, and third quarters of 2006 are restated for adjustment to NeoMedia Telecom Services revenue (See Note 20).

 

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17. SEGMENT AND GEOGRAPHICAL INFORMATION

As of December 31, 2006, NeoMedia was structured and evaluated by its Board of Directors and Management as two distinct business units:

 

·	NeoMedia Mobile (NMM) - encompassing NeoMedia’s physical-world-to-internet and mobile marketing technologies branded under qode®, 12Snap, and Gavitec; and

·	NeoMedia Telecom Services (NTS) - encompassing the billing, clearinghouse and information management services of BSD Software, acquired in March 2006.

 

NeoMedia’s reportable segments are strategic business units that offer different technology and marketing strategies. NMM is headquartered in Ft. Myers, Florida, and operates principally in the United States and in Europe through the 2006 acquisitions 12Snap (Germany) and Gavitec (Germany). NTS is headquartered in Calgary, Alberta, Canada and presently primarily operates within Canada.

 

On August 30, 2006, NeoMedia signed a non-binding letter of intent to sell its NMPR business unit. As a result of the letter of intent to sell NMPR, results of operations of NMPR are shown under the caption “Net loss from Micro Paint business to be sold” on the accompanying consolidated financial statements, and as such are no longer included in this segment reporting.

 

During the first quarter of 2007, NeoMedia decided to sell its 12Snap and NTS businesses as well. The results of operations for 12Snap and NTS are included in NeoMedia’s continuing operations for the year ended December 31, 2006. These businesses will be classified as held for sale and the corresponding results of operations will be shown as discontinued operations during 2007.

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Consolidated net sales and net loss from continuing operations for the years ended December 31, 2006, 2005, and 2004, and identifiable assets as of December 31, 2006 by geographic area were as follows:

 

		Year Ended December 31,
		2006			2005			2004
Net Sales(1):		(in thousands)
United States		$	663		$	877		$	973
Germany			5,084			—			—
United Kingdom			1,209			—			—
Canada			1,371			—			—
Italy			1,152			—			—
Other			830			—			—
		$	10,309		$	877		$	973
Net Loss from Continuing Operations(1):
United States			($29,158	)		($7,146	)		($6,272	)
Germany			(22,328	)		—			—
United Kingdom			194			—			—
Canada			(1,001	)		—			—
Italy			32			—			—
Other			9			—			—
			($52,252	)		($7,146	)		($6,272	)
Identifiable Assets(1)
United States		$	9,925		$	8,353
Germany			16,986			—
United Kingdom			295			—
Canada			7,302			—
Other			545			—
		$	35,053		$	8,353

 

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(1) - Segment reporting excludes the Micro Paint Repair, Mobot & Sponge business units discontinued operations and the assets and liabilities held for sale.

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Consolidated net sales, net operating losses for the years ended December 31, 2006, 2005, and 2004, and identifiable assets as of December 31, 2006 and 2005, by business unit were as follows:

 

		Year Ended December 31,
		2006			2005			2004
		(in thousands)
Net Sales from Continuing Operations: (4)
NeoMedia Mobile (1)		$	8,938		$	244		$	63
NeoMedia Telecom Services (2)			1,371			—			—
NeoMedia Consulting & Integration Services (3)			—			633			910
		$	10,309		$	877		$	973
Net Loss from Continuing Operations: (4)
NeoMedia Mobile (1)			(8,975	)		($2,020	)		($1,312	)
NeoMedia Telecom Services (2)			(1,001	)		—			—
NeoMedia Consulting & Integration Services (3)			—			(1,548	)		(343	)
Corporate overhead			(9,651	)		(2,463	)		(4,617	)
Impairment charge			(18,706	)		(1,115	)		—
Financing and other charges not associated with a particular segment			(13,919	)		—			—
			($52,252	)		($7,146	)		($6,272	)
Identifiable Assets (4)
NeoMedia Mobile (1)		$	25,448		$	3,056
NeoMedia Telecom Services (2)			1,709			—
Corporate			7,896			5,297
		$	35,053		$	8,353

 

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(1) - NeoMedia Mobile consists of NeoMedia's qode® and patent business, Gavitec, and 12Snap. Gavitec operations are included in NeoMedia's consolidated financial results for the period February 24, 2006 through December 31, 2006. 12Snap operations are included in NeoMedia's consolidated financial results for the period March 1, 2006 through December 31, 2006. Net loss includes $563,000 of stock based compensation recognized pursuant to SFAS 123

 

(2) - NeoMedia Telecom Services consists of the operations of BSD Software, Inc., acquired March 21, 2006, and included in NeoMedia's consolidated financial results for the period March 22, 2006 through December 31, 2006. Net loss includes $405,000 of stock based compensation recognized pursuant to SFAS 123

 

(3) - NeoMedia Consulting & Integration Services business unit was wound down during the first quarter of 2006 and combined with the NeoMedia Mobile business unit. Results from operations previously included in this business unit are now included in the NeoMedia Mobile business unit

 

(4) - Segment reporting excludes the Micro Paint Repair, Mobot & Sponge business units discontinued operations and the assets and liabilities held for sale.

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18. COMMON STOCK

Holders of common stock are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders. Holders of the common stock do not have cumulative voting rights, which means that the holders of more than one half of NeoMedia’s outstanding shares of common stock, subject to the rights of the holders of preferred stock, can elect all of NeoMedia’s directors, if they choose to do so. In this event, the holders of the remaining shares of common stock would not be able to elect any directors. Subject to the prior rights of any class or series of preferred stock which may from time to time be outstanding, if any, holders of common stock are entitled to receive ratably, dividends when, as, and if declared by the Board of Directors out of funds legally available for that purpose and, upon NeoMedia’s liquidation, dissolution, or winding up, are entitled to share ratably in all assets remaining after payment of liabilities and payment of accrued dividends and liquidation preferences on the preferred stock, if any. Holders of common stock have no preemptive rights and have no rights to convert their common stock into any other securities. The outstanding common stock is duly authorized and validly issued, fully-paid, and nonassessable. Except as otherwise required by Delaware law, and subject to the rights of the holders of preferred stock, all stockholder action is taken by the vote of a majority of the outstanding shares of common stock present at a meeting of stockholders at which a quorum consisting of a majority of the outstanding shares of common stock is present in person or proxy.

On September 24, 2003, the Company’s shareholders voted to increase the number of shares of common stock, par value $0.01 per share, that the Company is authorized to issue from 200,000,000 to 1,000,000,000. On June 28, 2006, the Company’s shareholders voted to increase the number of shares of authorized common stock, par value $0.01 per share, from 1,000,000,000 to 5,000,000,000

19. PREFERRED STOCK

NeoMedia is authorized to issue 25,000,000 shares of preferred stock, par value $0.01 per share. The Company may issue preferred stock in one or more series and having the rights, privileges, and limitations, including voting rights, conversion rights, liquidation preferences, dividend rights and preferences and redemption rights, as may, from time to time, be determined by the Board of Directors. Preferred stock may be issued in the future in connection with acquisitions, financings, or other matters, as the Board of Directors deems appropriate. In the event that the Company determines to issue any shares of preferred stock, a certificate of designation containing the rights, privileges, and limitations of this series of preferred stock shall be filed with the Secretary of State of the State of Delaware. The effect of this preferred stock designation power is that the Board of Directors alone, subject to Federal securities laws, applicable blue sky laws, and Delaware law, may be able to authorize the issuance of preferred stock which could have the effect of delaying, deferring, or preventing a change in control of NeoMedia without further action by its stockholders, and may adversely affect the voting and other rights of the holders of the Company’s common stock. The issuance of preferred stock with voting and conversion rights may also adversely affect the voting power of the holders of the Company’s common stock, including the loss of voting control to others.

 

Series A Preferred Stock. During December 1999, the Board of Directors approved a Certificate of Resolutions Designating Rights and Preferences of Preferred Stock, filed with the Secretary of State of the State of Delaware on December 20, 1999. By this approval and filing, 200,000 shares of Series A Preferred Stock were designated. Series A Preferred carries the following rights:

 

·

The right to receive mandatory cash dividends equal to the greater of $0.001 per share or 100 times the amount of all dividends (cash or non-cash, other than dividends of shares of common stock) paid to holders of the common stock, which dividend is payable 30 days after the conclusion of each calendar quarter and immediately following the declaration of a dividend on common stock;

 

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·	One hundred votes per each share of Series A Preferred on each matter submitted to a vote of the Company’s stockholders;

 

·	The right to elect two directors at any meeting at which directors are to be elected, and to fill any vacancy on the Board of Directors previously filled by a director appointed by the Series A Preferred holders;

 

·

The right to receive an amount, in preference to the holders of common stock, equal to the amount per share payable to holders of common stock, plus all accrued and unpaid dividends, and following payment of 1/100th of this liquidation preference to the holders of each share of common stock, an additional amount per share equal to 100 times the per share amount paid to the holders of common stock;

 

·

The right to exchange each share of Series A Preferred for 100 times the consideration received per share of common stock in connection with any merger, consolidation, combination or other transaction in which shares of common stock are exchanged for or converted into cash, securities or other property; and

 

·	The right to be redeemed in accordance with the Company’s stockholders rights plan.

 

While accrued mandatory dividends are unpaid, NeoMedia may not declare or pay dividends or distributions on, or redeem, repurchase or reacquire, shares of any class or series of junior or parity stock.

 

The Series A Preferred was created in connection with the Company’s stockholders rights plan. No shares of Series A Preferred were outstanding as of December 31, 2006.

 

Series A Convertible Preferred Stock. On June 19, 2001, the Board of Directors approved a Certificate of Designations to create 500,000 shares of a Class of Series A Convertible Preferred Stock for NeoMedia Technologies, Inc., filed with the Secretary of State of the State of Delaware on June 20, 2001. By this approval and filing, 47,511 shares are designated as Series A Convertible Preferred Stock and remain to be issued.. The Company’s Series A Convertible Preferred Stock, par value $0.01 per share, has the following rights:

 

·

Series A Convertible Preferred is convertible into shares of common stock at a one-to-one ratio, subject to proportional adjustments in the event of stock splits or combinations, and dividends or distributions of shares of common stock, at the option of the holder; shares are subject to automatic conversion as determined in each agreement relating to the purchase of shares of Series A Convertible Preferred;

 

·	Each share of Series A Convertible Preferred is entitled to receive a liquidation preference equal to the original purchase price of such share in the event of liquidation, dissolution, or winding up;

 

·

Upon merger or consolidation, or the sale, lease or other conveyance of all or substantially all of the Company’s assets, shares of Series A Convertible Preferred are automatically convertible into the number of shares of stock or other securities or property (including cash) to which the common stock into which it is convertible would have been entitled; and

 

·	Shares of Series A Convertible Preferred are entitled to one vote per share, and vote together with holders of common stock.

 

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In June 2001, 452,489 shares of Series A Convertible Preferred were issued to About.com, Inc. pursuant to a certain Agreement for Payment in Common Stock, in lieu of cash payment to About.com for online advertising services. On January 2, 2002, such shares were converted into 452,489 shares of common stock.

 

Series B Convertible Redeemable Preferred Stock. On January 16, 2002, the Board of Directors approved a Certificate of Designation, Preferences, Rights and Limitations of Series B 12% Convertible Redeemable Preferred Stock of NeoMedia Technologies, Inc., filed with the Secretary of State of the State of Delaware on February 28, 2002. By this approval and filing, 100,000 shares were designated as Series B 12% Convertible Redeemable Preferred Stock. The Company’s Series B 12% Convertible Redeemable Preferred Stock, par value $0.01 per share, has the following rights:

 

·	Series B Preferred shares accrue dividends at a rate of 12% per annum, or $1.20 per share, between the date of issuance and the first anniversary of issuance;

 

·	Series B Preferred is redeemed to the maximum extent permitted by law (based on funds legally available for redemption) at a price per share of $15.00, plus accrued dividends (a total of $16.20 per share) on the first anniversary of issuance;

 

·	Series B Preferred receive proceeds of $12.00 per share upon the Company’s liquidation, dissolution or winding up;

 

·

To the extent, not redeemed on the first anniversary of issuance, Series B Preferred is automatically convertible into then existing general class of common stock on the first anniversary of issuance at a price equal to $16.20 divided by the greater of $0.20 and the lowest publicly-sold share price during the 90 day period preceding the conversion date, but in no event more than 19.9% of the Company’s outstanding capital stock as of the date immediately prior to conversion.

 

·

Upon merger or consolidation, or the sale, lease or other conveyance of all or substantially all of the Company’s assets, shares of Series B Preferred are automatically convertible into the number of shares of stock or other securities or property (including cash) to which the common stock into which it is convertible would have been entitled; and

 

·

Shares of Series B Preferred are entitled to one vote per share and vote with common stock, except where the proposed action would adversely affect the Series B Preferred or where the non-waivable provisions of applicable law mandate that the Series B Preferred vote separately, in which case Series B Preferred vote separately as a class, with one vote per share.

 

No shares of the Series B Convertible Redeemable Preferred Stock have been issued or are currently outstanding.

 

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Series C Convertible Preferred Stock. On February 22, 2006, NeoMedia filed with the Secretary of State of the State of Delaware a Certificate of Designation of Series C Convertible Redeemable Preferred Stock of NeoMedia Technologies, Inc. By the approval and filing, 27,000 shares were designated as Series C Convertible Preferred Stock. The Company’s Series C Convertible Preferred Stock, par value $0.01 per share, has the following rights:

 

·	Series C Convertible Preferred shares accrue dividends at a rate of 8% per annum;

 

·	Series C Convertible Preferred receive proceeds of $1,000 per share upon the Company’s liquidation, dissolution or winding up;

 

·

Each share of Series C Convertible Preferred shares shall be convertible, at the option of the holder, into shares of the Company’s common stock at the lesser of (i) Fifty Cents ($0.50) or (ii) 97% of the lowest closing bid price of the Company’s common stock for the thirty (30) trading days immediately preceding the date of conversion; and

 

·	At the Option of the Holders, if there are outstanding Series C Convertible Preferred shares on February 17, 2009, each share of Series C Preferred stock shall convert into shares of common stock at the Conversion Price then in effect on February 17, 2009; and

 

·	Series C Convertible Preferred shares have voting rights on an as converted basis with the common stock.

 

As of December 31, 2006, 21,622 shares of Series C Convertible Preferred Stock are issued and outstanding. The Company has no present agreements relating to or requiring the designation or issuance of additional shares of preferred stock.

20. RESTATEMENT OF PREVIOUSLY REPORTED FINANCIAL INFORMATION

The Company, in reviewing its accounting practices with respect to revenue recognition of its subsidiary NeoMedia Telecom Services, became aware that it incorrectly applied the principles of EITF 99-19, “Reporting Revenue Gross as a Principal vs. Net as an Agent.” As a result, the company had overstated its net sales and its cost of goods sold during the year ended December 31, 2006. These amounts are reflected on the statement of operations. The adjustment does not affect net income (loss) during any period. The adjustment does not affect the statement of cash flows or balance sheet.

The NeoMedia Telecom Services business was acquired in March 2006 through the acquisition by the Company of BSD Software. Therefore the adjustment does not affect any results reported during the years ended December 31, 2005 or 2004, or any interim periods during 2005 or 2004.

As a result, the Company has restated certain financial information that was previously reported in its unaudited quarterly reports on Form 10-Q for the three month periods ended March 31, 2006, June 30, 2006, and September 30, 2006. The following tables provide a reconciliation of amounts previously reported by the Company.

 

		Previously			Restatement			Restated
		Reported			Adjustment			Total
Three months ended March 31, 2006
Net sales		$	232			($205	)	$	27
Cost of sales			205			(205	)		---
Three months ended June 30, 2006
Net sales		$	2,937			($2,422	)	$	515
Cost of sales			2,422			(2,422	)		---
Six months ended June 30, 2006
Net sales		$	3,169			($2,627	)	$	542
Cost of sales			2,627			(2,627	)		---
Three months ended September 30, 2006
Net sales		$	3,205			($2,658	)	$	547
Cost of sales			2,658			(2,658	)		---
Nine months ended September 30, 2006
Net sales		$	6,374			($5,285	)	$	1,089
Cost of sales			5,285			(5,285	)		---

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21. SUBSEQUENT EVENTS

 

Agreement to Sell 12Snap -March 2007

 

On March 20, 2007, NeoMedia reached an agreement with Bernd Michael (the “Buyer”), a private investor and former shareholder of 12Snap prior to NeoMedia’s acquisition of 12Snap, pursuant to which the Buyer will buy from NeoMedia 90% of the shares of 12Snap, subject to the following material terms and conditions:

 

·	$1,100,000 will be paid in cash at Closing, and $500,000 will be placed into escrow and released to NeoMedia 90 days after Closing, assuming no warranty claims;

 

·	Buyer will forgive purchase price obligation in the amount of $880,000, such obligation resulting from the sale and purchase agreement between NeoMedia and the former shareholders of 12Snap

 

·	12Snap management will waive their purchase price obligations in the amount of $880,000, and return to NeoMedia 2,525,818 shares of NeoMedia common stock issued previously;

 

·	Buyer will return to NeoMedia 2,525,818 NeoMedia shares issued previously;

 

·	NeoMedia will retain a 10% ownership of 12Snap, subject to an option agreement pursuant to which NeoMedia has the right to sell and Buyer has the right to acquire the remaining 10% stake held by NeoMedia for a purchase price of $750,000 after December 31;

 

·	12snap and NeoMedia will execute a cooperation agreement pursuant to which 12snap will remain NeoMedia preferred partner and enjoy most favored prices, and 12snap will perform certain research and development functions for NeoMedia; and

 

·	The transaction is subject to completion of a material definitive agreement

 

Financing - March 2007

 

NeoMedia entered into a Securities Purchase Agreement, dated March 27, 2007, with Cornell Capital Partners. Pursuant to the March Debenture Agreement, Cornell Capital Partners agreed to purchase 13% secured convertible debentures maturing two years from the date of issuance in the aggregate amount of $7,459,000. The March Debenture Agreement also provided for the issuance to the purchasers, at no additional cost to the purchasers, warrants to purchase 125,000,000 shares of NeoMedia common stock at an exercise price of $0.04 per share. In connection with the March Debenture Agreement, NeoMedia also entered into a registration rights agreement with the Purchasers that 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 warrants within 30 days of receiving a written notice from the purchasers requesting filing, (ii) achieve effectiveness within 120 days of receiving a notice to file the registration statement and (iii) maintain effectiveness of the registration statement. Failure to meet these requirements will require the Company to incur liquidating damages amounting to 2% of the principal per month. The debentures are secured by substantially all of the Company’s assets.

At any time from the closing date until December 29, 2008, the Purchasers have the right to convert the convertible debenture into NeoMedia common stock at the then effective conversion price, which varies relative to NeoMedia’s trading stock price, as follows: $0.05 per share, or 90% of the lowest closing bid price (as reported by Bloomberg) of the common stock for the 30 trading days immediately preceding the conversion date. The conversion is limited such that the holder cannot exceed 4.99% ownership, unless the holders waive their right to such limitation. The limitation will terminate under any event of default.

 

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In connection with the March Debenture Agreement, NeoMedia applied $1,312,000 of the gross proceeds toward payment of liquidated damages accrued on previous convertible instruments payable to the purchaser, and $366,000 toward accrued interest on previous convertible debentures. Cornell also retained fees of $781,000, resulting in net proceeds to the Company of $5,000,000.

 

HipCricket, Inc.

 

On August 24, 2006, NeoMedia terminated a previously announced non-binding letter of intent to acquire HipCricket, Inc. (“HipCricket”) of Essex, CT, due to an inability of the parties to come to terms on a definitive purchase price. On February 16, 2006, NeoMedia and HipCricket signed the letter of intent, under which NeoMedia intended to acquire all of the outstanding shares of HipCricket in exchange for $500,000 cash and $4,000,000 of NeoMedia common stock. The letter of intent was subject to due diligence and signing of a mutually agreeable definitive purchase agreement by both parties.

 

In addition to signing the letter of intent, NeoMedia loaned HipCricket the principal amount of $500,000 in the form of a) a promissory note, dated February 16, 2006, in the amount of $250,000 and (b) that certain promissory note, dated March 20, 2006, in the amount of $250,000. The notes accrue interest at a rate of 8% per annum. The notes were to be applied toward the cash portion of the purchase price upon signing of a definitive purchase agreement for the acquisition of all of the outstanding shares of HipCricket by NeoMedia, as contemplated in the letter of intent. In the event the notes were not repaid within 90 days of the termination, NeoMedia has the right to convert the notes into shares of HipCricket common stock assuming a valuation of $4.5 million for HipCricket. The notes matured during November 2006. On February 28, 2007, NeoMedia and HipCricket reached an agreement pursuant to which HipCricket will repay the amounts owing under the note in cash over the period of one year. HipCricket made payments of $300,000 on March 2, 2007; an additional $100,000 is due on August 28, 2007, and the final $100,000 plus any interest accrued thereon is due no later than February 28, 2008. In the event the remaining cash payments are not made, NeoMedia will have the right to convert any unpaid balances into shares of HipCricket common stock under the same terms as the original notes.

Appointment of George O’Leary to Board of Directors

On February 2, 2007, NeoMedia appointed George O’Leary to its board of directors as a replacement for William E. Fritz, who resigned from the board of directors on December 22, 2006. Mr. O’Leary is currently the President of SKS Consulting of South Florida Corp. Prior to assuming his duties with NeoMedia, he was and still is a consultant to NeoGenomics, Inc. and was acting Chief Operating Officer from October 2004 to April 2005 where he helped the turn-around of that organization. He is currently a member of the board of directors of NeoGenomics. Prior to becoming an officer of NeoGenomics, Mr. O’Leary was the President and CFO of Jet Partners, LLC from 2002 to 2004. From 1996 to 2000, Mr. O’Leary was CEO and President of Communication Resources Incorporated (CRI). Prior to CRI, Mr. O’Leary was Vice President of Operations of Cablevision Industries, where he ran $125 million of business for this major cable operator until it was sold to Time Warner.

Option Repricing and Grants

On February 1, 2007, the Company instituted a stock option repricing plan as a retention tool to align its employees with the new vision of the Company. Under the repricing plan, the Company repriced 50,178,750 stock options held by current employees, contractors, and directors as follows: (i) options that were vested as of February 1, 2007, were repriced to $0.045 per share, which was the last sale price on February 1, 2007, (ii) options that are scheduled to vest during the remainder of 2007 were repriced to $0.075, (iii) options that vest during 2008 were repriced to $0.125, (iv) options that vest during 2008 were repriced to $0.125, and (v) options that vest during 2009 were repriced to $0.175. Unvested options will continue to vest on their regular schedule, which generally is 25% upon grant and 25% on each subsequent anniversary date. In addition, NeoMedia granted new options and accelerated vesting rights for certain employees of held-for-sale business units such that options will be repriced or vest upon sale of the business.

 

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Also during February 2007, the Company issued 5,000,000 incentive-based stock options to key sales employees and consultants that will vest from 2007-2010 if certain sales targets are met. The exercise price of the first 25% of the options is $0.047, and the exercise price on the remaining 75% is set as the closing price on the first business day of each subsequent year through 2010.

 

Pending Sale of 12Snap and Telecom Services Businesses

 

During January 2007, NeoMedia made the strategic decision with respect to its corporate structure in 2007 and beyond, deciding to shed its remaining non-core 12Snap and NTS business units to focus on the area that management believes will deliver the most value - the core code-reading business consisting of qode®, Gavitec, and the related intellectual property.

Agreement with Former Shareholders of Gavitec

 

On January 23, 2007, NeoMedia entered into an Amendment Agreement I to the Sale and Purchase Agreement (the “Amendment Agreement”) with the former shareholders of Gavitec, a wholly owned subsidiary of NeoMedia acquired during February 2006. Pursuant to the terms of the original sale and purchase agreement, the number of shares of NeoMedia common stock issued as consideration for the acquisition of Gavitec was calculated using a share price of $0.389, which was the volume-weighted average closing price of NeoMedia common stock for the ten days up to and including February 16, 2006. The sale and purchase stipulated that, in the event that NeoMedia’s stock price at the time the original consideration shares became saleable (either upon effectiveness of a registration statement containing the shares, or under Rule 144) was less than $0.389, NeoMedia would be obligated to compensate the former Gavitec shareholders, in cash, for the difference between the price at the time the shares become saleable and $0.389. Assuming a stock price at the time the shares become saleable of $0.056, which was the last sale price on January 9, 2007, NeoMedia would have had a cash liability of $4.6 million resulting from this stipulation.

Pursuant to the terms of the Amendment Agreement, NeoMedia and the former Gavitec shareholders agreed that the entire purchase price obligation shall be satisfied through the payment by NeoMedia of (i) $1,800,000 in cash, payable no later than February 28, 2007, and (ii) 61,000,000 shares of NeoMedia common stock, to be issued no later than February 28, 2007. The Amendment Agreement stipulates that, in the event that the 61,000,000 shares are not registered for resale by August 31, 2007, interest shall accrue at a rate of 8% per annum on the agreed value of the shares of $1,900,000. NeoMedia also agreed to reimburse $213,000 of interest expense and $100,000 of costs related to the acquisition to the primary former shareholder of Gavitec no later than February 28, 2007 (subsequently extended to March 31, 2007). NeoMedia made payments of $2,113,000 during March 2007 in satisfaction of this obligation.

F-84

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Agreement with Certain Former Shareholders of 12Snap

On March 16, 2007, NeoMedia entered into an agreement with certain former shareholders of 12Snap, a wholly owned subsidiary of NeoMedia acquired during February 2006, pursuant to which NeoMedia satisfied its purchase price obligation to these shareholders through the issuance of restricted common stock. Pursuant to the terms of the original purchase agreement, in the event that NeoMedia’s stock price at the time the consideration shares are saleable (either upon effectiveness of a registration statement containing the shares, or under Rule 144) was less than $0.3956, NeoMedia was obligated to compensate 12Snap shareholders in cash for the difference between the price at the time the shares become saleable and $0.3956. On February 22, 2007, the shares became eligible for resale under Rule 144. The actual calculated purchase price obligation to NeoMedia based on the volume weighted average closing price of NeoMedia stock for the ten days up to and including February 22, 2007 was $16,233,000. Pursuant to the terms of the March 2007 agreement, NeoMedia issued 197,620,948 shares of restricted common stock to five separate parties, in satisfaction of purchase price obligation totaling $9,427,000. The remaining balance on the purchase price obligation after this payment was $6,806,000.

F-85

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

Item 9A. Controls and Procedures

a) Evaluation of Disclosure Controls and Procedures

 

The Company is required to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended (Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO) as appropriate, to allow timely decisions regarding required disclosure.

 

In connection with the preparation of this Form 10-K for the year ended December 31, 2006, management, under the supervision of the CEO and CFO, conducted an evaluation of disclosure controls and procedures. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2006 due to the material weaknesses discussed below under “Management’s Report on Internal Control over Financial Reporting.” Because the material weaknesses described below have not been remediated as of the filing date of this Form 10-K, the CEO and CFO conclude that the Company’s disclosure controls and procedures are not effective as of the filing date of this Form 10-K.

 

b) Management’s Report on Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control structure and procedures over financial reporting (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act. Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness in internal control over financial reporting is defined by the Public Company Accounting Oversight Board’s Audit Standard No. 2 as being a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements would not be prevented or detected. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the Company’s ability to initiate, authorize, record, process or report external financial data reliably in accordance with generally accepted accounting principles (GAAP) such that there is more than a remote likelihood that a misstatement of the Company’s annual or interim financial statements that is more than inconsequential will not be prevented or detected.

Management’s evaluation did not include assessing the effectiveness of internal controls over financial reporting at 12Snap AG , which was acquired on February 28, 2006, and whose financial statements reflect total assets and net sales of 9% and 43%, respectively, of the related consolidated financial statements as of and for the year ended December 31, 2006; Gavitec AG, which was acquired on February 23, 2006 and whose financial statements reflect total assets and net sales of 2% and 7%, respectively, of the related consolidated financial statements as of and for the year ended December 31, 2006; or BSD Software Inc., which was acquired on March 23, 2006, and whose financial statements reflect total assets and net sales of 5% and 48%, respectively, of the related consolidated financial statements as of and for the year ended December 31, 2006. Management has opted to exclude the entities based upon the SEC’s comments in “Management’s Report On Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, Frequently Asked Questions (revised October 6, 2004)”. Question number 3 states that the SEC “ would not object to management referring in the report to a discussion in the registrant’s Form 10-K or 10-KSB regarding the scope of the assessment and to such disclosure noting that management excluded the acquired business from management’s report on internal control over financial reporting .“

 

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Management identified the following material weaknesses as of December 31, 2006 to the Company’s internal control over financial reporting:

1. The Company did not maintain an effective control environment at the entity level. Specifically, the Company identified the following material weaknesses in its control environment:

·	Senior management did not establish and maintain a proper tone as to internal control over financial reporting. Specifically, senior management was unable, due to time and resource constraints, to promptly address control weaknesses brought to their attention throughout the audit;

·

The Company does not have a financial expert on the audit committee. The lack of a financial expert on the audit committee, combined with the complexity of certain financial transactions the Company engages in, raises the risk of a potential material misstatement to occur and go undetected in the financial statements.

·	The Company did not maintain sufficiently qualified accounting personnel with an appropriate level of knowledge, experience and training in the application of GAAP and other financial reporting requirements.

·

The Company, through Senior Management, failed to maintain formalized accounting policies and procedures. Once implemented, the polices and procedures should provide guidance to accounting personnel in the proper treatment and recording of financial transactions, as well as proper internal controls over financial reporting.

·

The external auditors identified several material accounting adjustments to the Company’s financial statements that were a direct result of the combination of the weaknesses previously cited regarding the lack of a financial expert on the audit committee, the inability to maintain sufficiently qualified accounting personnel, and the failure to maintain formalized accounting policies and procedures.

·	The Company did not develop and maintain a company wide risk assessment program. Failures to develop, communicate, and ensure compliance with such program increases the risk of financial statement errors either being prevented or detected.

·	The Company did not maintain effective controls over the Code of Conduct. Specifically, management failed to ensure all current employees annually acknowledge compliance with the code of conduct in writing.

F-87

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2. The Company did not maintain an effective control environment over information technology (IT) General Controls, and the following material weaknesses were noted:

·	The Company, through Senior Management, did not have effective information technology policies and procedures in place, which addresses financial reporting risks associated with the IT function. Additionally, the policies currently in place were not communicated with the appropriate personnel.

·

Senior management did not maintain sufficient oversight concerning the data back up and off site storage process. Specifically, there was insufficient evidence that the back up tapes were successful and properly reviewed, and the back up tapes were not stored in a secure environment when taken off site.

·

Senior Management did not maintain sufficient controls related to the establishing, maintaining, and assigning of user access security levels in the accounting software package used to initiate, process, record, and report financial transactions and financial statements. Specifically, controls were not designed and in place to ensure that access to certain financial applications was adequately restricted to only employees requiring access to complete their job functions.

·	The Company did not maintain sufficient controls over Excel spreadsheets used to compile and produce financial statements. Four critical spreadsheets failed to have all the required controls performed in accordance with Company policy.

3. The Company did not maintain an effective control environment over Anti-Fraud Controls. Specifically, the following weaknesses were identified when assessing the control environment:

·

The Company did not maintain an effective control environment over corporate bank accounts, including payment processing and establishing employees authorized to conduct wire transfers. Specifically, bank signature cards still contained former employees, and bank policy allowed for only one employee to establish authorized users to the wire transfer system.

·	The Company has failed to develop and maintain a company wide anti-fraud program over the initiating and processing of financial transactions, as well as other company wide procedures which may have an impact on internal controls over financial reporting.

4. The Company did not maintain effective controls to ensure that management oversight and review procedures were properly performed, and the following material weaknesses were noted:

·	The Company did not maintain effective controls over the recording of recurring and non-recurring journal entries. Specifically, controls over the supervisory review and approval of journal entries for the recording of these financial transactions failed.

·	The Company did not maintain effective controls over the issuing and review of MicroPaint Repair quotes and invoices. Specifically, controls over the supervisory review and approval of these documents failed.

·	The Company did not design and maintain effective controls over the evidence of management review of key financial transactions and reports. Sufficient evidence did not exist that the documents were reviewed for accuracy and completeness of information.

·	The Company did not maintain effective controls over the completion and payment of Travel and Entertainment expense reports. Specifically, certain items, although properly reviewed and approved, were paid even though they were not specifically allowed per Company policy.

5.

The Company did not design and maintain effective controls over the income tax provision, including deferred tax assets and net operating loss carry-forwards related to foreign acquisitions completed in 2006. Controls were also ineffective in the analysis of certain account balances, such as goodwill, which were impacted as a result of the control failure.

 

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6.

The Company did not maintain adequate controls over the accuracy, presentation and disclosure in recording revenue. Specifically, controls were not designed and in place to ensure that revenue transactions were analyzed for appropriate presentation and disclosure for recognition of revenue on a gross or net basis.

 

Because of the material weaknesses, the CEO and CFO concluded that the Company did not maintain effective internal control over financial reporting at a reasonable assurance level as of December 31, 2006 or at the date of this filing.

c) Remediation

In connection with the material weakness noted above regarding a lack of sufficient controls over corporate bank accounts, management would like to report that as of January 9, 2007, it has fully remediated the control deficiency by updating signature cards, online access authority, and wire transfer authority to all bank accounts. Management would also like to report that as of January 31, 2007, it has remediated the material weakness of ineffective controls over the review and approval of journal entries for the recording of financial transactions. The corporate controller is now reviewing and approving all recurring and non-recurring journal entries completed by accounting personnel, and the CFO is reviewing and approving all recurring and non-recurring journal entries completed by the controller.

The continued remediation of the material weaknesses described above is among our highest priorities. Our Audit Committee will continually assess the progress and sufficiency of these initiatives and make adjustments as and when necessary. As of the date of this report, our management believes that our efforts, when completed, will remediate the material weaknesses in internal control over financial reporting as described above. However, our management and the Audit Committee do not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. 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 gaps and instances of fraud have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions.

d) Subsequent Changes in Internal Control over Financial Reporting

      Except as disclosed above, there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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e)

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders of NeoMedia Technologies, Inc.

We have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting in Item 9A, that NeoMedia Technologies, Inc. (“NeoMedia”) did not maintain effective internal control over financial reporting as of December 31, 2006 because of the effect of the material weaknesses identified in management’s assessment, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). NeoMedia’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:

1. The Company did not maintain an effective control environment at the entity level. Specifically, the Company identified the following material weaknesses in its control environment:

·	Senior management did not establish and maintain a proper tone as to internal control over financial reporting. Specifically, senior management was unable, due to time and resource constraints, to promptly address control weaknesses brought to their attention throughout the audit;

·

The Company does not have a financial expert on the audit committee. The lack of a financial expert on the audit committee, combined with the complexity of certain financial transactions the Company engages in, raises the risk of a potential material misstatement to occur and go undetected in the financial statements.

 

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·	The Company did not maintain sufficiently qualified accounting personnel with an appropriate level of knowledge, experience and training in the application of GAAP and other financial reporting requirements.

·

The Company, through Senior Management, failed to maintain formalized accounting policies and procedures. Once implemented, the polices and procedures should provide guidance to accounting personnel in the proper treatment and recording of financial transactions, as well as proper internal controls over financial reporting.

·

The external auditors identified several material accounting adjustments to the Company’s financial statements that were a direct result of the combination of the weaknesses previously cited regarding the lack of a financial expert on the audit committee, the inability to maintain sufficiently qualified accounting personnel, and the failure to maintain formalized accounting policies and procedures.

·	The Company did not develop and maintain a company wide risk assessment program. Failures to develop, communicate, and ensure compliance with such program increases the risk of financial statement errors either being prevented or detected.

·	The Company did not maintain effective controls over the Code of Conduct. Specifically, management failed to ensure all current employees annually acknowledge compliance with the code of conduct in writing.

2. The Company did not maintain an effective control environment over information technology (IT) General Controls, and the following material weaknesses were noted:

·	The Company, through Senior Management, did not have effective information technology policies and procedures in place, which addresses financial reporting risks associated with the IT function. Additionally, the policies currently in place were not communicated with the appropriate personnel.

·

Senior management did not maintain sufficient oversight concerning the data back up and off site storage process. Specifically, there was insufficient evidence that the back up tapes were successful and properly reviewed, and the back up tapes were not stored in a secure environment when taken off site.

·

Senior Management did not maintain sufficient controls related to the establishing, maintaining, and assigning of user access security levels in the accounting software package used to initiate, process, record, and report financial transactions and financial statements. Specifically, controls were not designed and in place to ensure that access to certain financial applications was adequately restricted to only employees requiring access to complete their job functions.

·	The Company did not maintain sufficient controls over Excel spreadsheets used to compile and produce financial statements. Four critical spreadsheets failed to have all the required controls performed in accordance with Company policy.

 

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3. The Company did not maintain an effective control environment over Anti-Fraud Controls. Specifically, the following weaknesses were identified when assessing the control environment:

·

The Company did not maintain an effective control environment over corporate bank accounts, including payment processing and establishing employees authorized to conduct wire transfers. Specifically, bank signature cards still contained former employees, and bank policy allowed for only one employee to establish authorized users to the wire transfer system.

·	The Company has failed to develop and maintain a company wide anti-fraud program over the initiating and processing of financial transactions, as well as other company wide procedures which may have an impact on internal controls over financial reporting.

4. The Company did not maintain effective controls to ensure that management oversight and review procedures were properly performed, and the following material weaknesses were noted:

·	The Company did not maintain effective controls over the recording of recurring and non-recurring journal entries. Specifically, controls over the supervisory review and approval of journal entries for the recording of these financial transactions failed.

·	The Company did not maintain effective controls over the issuing and review of MicroPaint Repair quotes and invoices. Specifically, controls over the supervisory review and approval of these documents failed.

·	The Company did not design and maintain effective controls over the evidence of management review of key financial transactions and reports. Sufficient evidence did not exist that the documents were reviewed for accuracy and completeness of information.

·	The Company did not maintain effective controls over the completion and payment of Travel and Entertainment expense reports. Specifically, certain items, although properly reviewed and approved, were paid even though they were not specifically allowed per Company policy.

7.

The Company did not design and maintain effective controls over the income tax provision, including deferred tax assets and net operating loss carry-forwards related to foreign acquisitions completed in 2006. Controls were also ineffective in the analysis of certain account balances, such as goodwill, which were impacted as a result of the control failure.

8.

The Company did not maintain adequate controls over the accuracy, presentation and disclosure in recording revenue. Specifically, controls were not designed and in place to ensure that revenue transactions were analyzed for appropriate presentation and disclosure for recognition of revenue on a gross or net basis.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and this report does not affect our report dated April 2, 2007, on those financial statements.

 

As described in Management’s Report on Internal Control Over Financial Reporting appearing under item 9A, management has excluded 12Snap AG, Gavitec AG and BSD Software, Inc. from its assessment of internal control over financial reporting as of December 31, 2006 because they were acquired by the Company in purchase business combinations during 2006. We have also excluded 12Snap AG, whose financial statements reflect total assets and net sales of 24% and 71%, respectively, of the related consolidated financial statements as of and for the year ended December 31, 2006; Gavitec AG, whose financial statements reflect total assets and net sales of 21% and 9%, respectively, of the related consolidated financial statements as of and for the year ended December 31, 2006; and BSD Software, Inc., whose financial statements reflect total assets and net sales of 19% and 13%, respectively, of the related consolidated financial statements as of and for the year ended December 31, 2006, from our audit of internal control over financial reporting.

 

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In our opinion, management’s assessment that NeoMedia Technologies, Inc. did not maintain effective internal control over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, NeoMedia Technologies, Inc. has not maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of NeoMedia Technologies, Inc. as of December 31, 2006 and 2005 and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2006, and our report dated April 2, 2007, expressed an unqualified opinion on those consolidated financial statements, however contained an explanatory paragraph that raised substantial doubt about the Company’s ability to continue as a going concern on those consolidated financial statements.

/s/ Stonefield Josephson, Inc.

Los Angeles, California

April 2, 2007

ITEM 9B. OTHER INFORMATION.

None.

 

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PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

As of February 16, 2007, NeoMedia’s directors and executive officers were:

Name		Age		Position
Charles W. Fritz		50		Interim Chief Executive Officer and Chairman of the Board of Directors
David A. Dodge		31		Vice-President and Chief Financial Officer
James J. Keil		79		Director
A. Hayes Barclay		75		Director
George G. O’Leary		44		Director

The following is certain summary information with respect to the directors and executive officers of NeoMedia:

Charles W. Fritz is a founder of NeoMedia and has served as an officer and as a Director of NeoMedia since NeoMedia’s inception. On August 6, 1996, Mr. Fritz was appointed Chief Executive Officer and Chairman of the Board of Directors. On April 2, 2001, Mr. Fritz was appointed as President where he served until June 2002. On December 8, 2006, Mr. Fritz was named Interim Chief Executive Officer. Prior to founding NeoMedia, Mr. Fritz was an account executive with IBM Corporation from January 1986 to January 1988, and Director of Marketing and Strategic Alliances for the information consulting group from February 1988 to January 1989. Mr. Fritz holds an M.B.A. from Rollins College and a B.A. in finance from the University of Florida. Mr. Fritz is the son of William E. Fritz, a Director of NeoMedia.

 

David A. Dodge joined NeoMedia in 1999, and served as Financial Reporting Manager, Director of Financial Planning and Controller between 1999 and 2002. Mr. Dodge has acted as NeoMedia’s Vice President and Chief Financial Officer since June 2002. Prior to joining NeoMedia in 1999, Mr. Dodge was an auditor with Ernst & Young LLP for 2 years. Mr. Dodge holds a B.A. in economics from Yale University and an M.S. in accounting from the University of Hartford, and is also a Certified Public Accountant.

 

James J. Keil has been a Director of NeoMedia since August 6, 1996. Mr. Keil currently is a member of the Compensation Committee, the Stock Option Committee and the Audit Committee. He is founder and President of Keil & Keil Associates, a business and marketing consulting firm located in Washington, D.C., specializing in marketing, sales, document application strategies, recruiting and electronic commerce projects. Prior to forming Keil & Keil Associates in 1990, Mr. Keil worked for 38 years at IBM Corporation and Xerox Corporation in various marketing, sales and senior executive positions. From 1989-1995, Mr. Keil was on the Board of Directors of Elixir Technologies Corporation (a non-public corporation), and from 1990-1992 was the Chairman of its Board of Directors. From 1992-1996, Mr. Keil served on the Board of Directors of Document Sciences Corporation. Mr. Keil holds a B.S. degree from the University of Dayton and did Masters level studies at the Harvard Business School and the University of Chicago in 1961/62.

 

A. Hayes Barclay has been a Director of NeoMedia since August 6, 1996, and currently is a member of the Stock Option Committee and the Audit Committee. Mr. Barclay has practiced law for approximately 37 years and, since 1967, has been an officer, owner and employee of the law firm of Barclay & Damisch, Ltd. and its predecessor, with offices in Chicago, Wheaton and Arlington Heights, Illinois. Mr. Barclay holds a B.A. degree from Wheaton College, a B.S. from the University of Illinois and a J.D. from the Illinois Institute of Technology - Chicago Kent College of Law.

 

III-1

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George G. O’Leary was named to NeoMedia’s board of directors in February 2007, and is currently the President of SKS Consulting of South Florida Corp. Prior to assuming his duties with NeoMedia, he was and still is a consultant to NeoGenomics (OTCBB:NGNM) and was acting Chief Operating Officer from October 2004 to April 2005 were he helped the turn-around of that organization. He is currently a member the board of directors of NeoGenomics. Prior to becoming an officer of NeoGenomics, Mr. O’Leary was the President and CFO of Jet Partners, LLC from 2002 to 2004. From 1996 to 2000, Mr. O’Leary was CEO and President of Communication Resources Incorporated (CRI). Prior to CRI, Mr. O’Leary was Vice President of Operations of Cablevision Industries, where he ran $125 million of business for this major cable operator until it was sold to Time Warner.

 

Election Of Directors And Officers

Directors are elected at each annual meeting of shareholders and hold office until the next succeeding annual meeting and the election and qualification of their respective successors. Officers are elected annually by the Board of Directors and hold office at the discretion of the Board of Directors. NeoMedia’s By-Laws permit the Board of Directors to fill any vacancy and such director may serve until the next annual meeting of shareholders and the due election and qualification of his successor. As of December 31, 2006, there were two vacancies caused by the resignations from the Board of Directors of Charles T. Jensen and William E. Fritz during December 2006. During February 2007, one of the vacancies was filled through the appointment of George G. O’Leary to the Board of Directors. The remaining vacancy had not been filed as of the date of this filing.

Meetings Of The Board Of Directors

During the year ended December 31, 2006 NeoMedia held 4 directors’ meetings. The Board of Directors also acted 31 times by unanimous written consent during the year ended December 31, 2006. Each director attended more than seventy-five percent of the meetings of the Board of Directors and the Committees of which he is a member.

 

Committees Of The Board Of Directors

NeoMedia’s Board of Directors has an Audit Committee, Compensation Committee and a Stock Option Committee. The Board of Directors does not have a standing Nominating Committee.

 

Audit Committee. The purpose of the Audit Committee is to provide assistance to the Board of Directors in fulfilling their oversight responsibilities relating to the Company’s consolidated financial statements and financial reporting process and internal controls in consultation with the Company’s independent registered public accountants and internal auditors. The Audit Committee is also responsible for ensuring that the independent registered public accountants submit a formal written statement to the Company regarding relationships and services which may affect the auditors’ objectivity and independence.. During 2006, members of the Audit Committee were non-employee directors James J. Keil and A. Hayes Barclay. During 2006, the Audit Committee held 4 meetings and acted once by unanimous written consent. Due to financial constraints, the Company does not currently have an audit committee financial expert serving on its audit committee.

 

Compensation Committee. The Compensation Committee is responsible for recommending compensation and benefits for the executive officers of NeoMedia to the Board of Directors and for administering NeoMedia’s Incentive Plan for Management. Outside directors James J. Keil and A. Hayes Barclay were members of NeoMedia’s Compensation Committee during 2006. The Compensation Committee acted by unanimous written consent 6 times during 2006.

 

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Stock Option Committee. The Stock Option Committee, which is comprised of non-employee directors A. Hayes Barclay and James J. Keil, is responsible for administering NeoMedia’s Stock Option Plans. During 2006, the Stock Option Committee met once and acted by unanimous written consent 7 times.

Director Compensation

Outside directors are currently compensated through a combination of cash and stock options.

During August 2006, the Company’s board of directors approved cash compensation of $2,500 per month to each outside director, retroactive to January 1, 2006. Each outside director received payment of $7,500 in August 2006. The remaining payments of $22,500 per outside director have been accrued as of December 31, 2006 but have not been paid as of the date of this filing.

During February 2005, each outside director received 1,000,000 options with an exercise price of $0.239 per share (equal to the closing price on the date of issuance), and James J. Keil, the audit and compensation committee chairperson, received and additional 1,000,000 options with the same exercise price. During December 2005, each outside director received 750,000 options with an exercise price of $0.328 per share (equal to the closing price on the date of issuance), and James J. Keil, the audit and compensation committee chairperson, received and additional 250,000 options with the same exercise price. NeoMedia does not have a written compensation policy for its outside directors at this time. On February 1, 2007, NeoMedia repriced outstanding stock options for its employees, contractors, and outside directors. All options with an exercise price less than $0.24 were repriced to $0.045, and all options with an exercise price above $0.24 were repriced to $0.075.

On February 2, 2007, the Company appointed George O’Leary to its board of directors. Mr. O’Leary is currently the President of SKS Consulting of South Florida Corp. (“SKS”) and is working with the Company under a two year consulting agreement, under which he will lead the execution of the Company’s strategic plan. Pursuant to the terms of the Company’s consulting agreement with SKS, SKS will earn $1,000 per day for services actually performed, with a minimum of two weeks committed to the Company per month. The Company will also issue to SKS on a monthly basis 60,000 restricted shares of Company common stock, and a warrant to purchase an additional 60,000 shares of Company common stock at an exercise price of $0.04 per share with a contractual life of five years. SKS can earn up to an additional 500,000 warrants with an exercise price of $0.10 per share and a contractual life of five years, upon achievement of the following milestones: (i) warrant to purchase 100,000 shares after successful organizational restructuring by March 31, 2007, (ii) warrant to purchase 100,000 shares after successful handling of subsidiary repricing by March 31, 2007, (iii) warrant to purchase 100,000 shares after successful sale of all non-core business units by September 30, 2007, (iv) warrant to purchase 100,000 shares after the Company operates at monthly breakeven by January 1, 2008, and (v) warrant to purchase 100,000 shares after the Company’s stock price reaches $0.20/share for a consecutive 30-day period.

Code of Ethics

The Company has adopted a code of ethics, as required by the rules of the SEC (attached as exhibit 14.1 hereto). This code of ethics applies to all of the Company's directors, officers and employees. The code of ethics, and any amendments to, or waivers from, the code of ethics, is available in print, at no charge, to any shareholder who requests such information.

 

III-3

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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires NeoMedia's officers and directors, and persons who own more than ten percent of a registered class of NeoMedia's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Officers, directors and greater than ten-percent shareholders are required by SEC regulation to furnish NeoMedia with copies of all Section 16(a) forms they file.

Based solely on a review of the copies of such forms furnished to NeoMedia, NeoMedia believes that during 2006 all Section 16(a) filing requirements applicable to NeoMedia’s officers, directors and ten percent beneficial owners were complied with.

III-4

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ITEM 11. EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

This compensation discussion and analysis is designed to explain the Company’s policies and considerations used for determining compensation structure for the Company’s principal executive officer, principal financial officer, and other executive officers (collectively, “the Named Executive Officers”). Detailed quantitative disclosures of named executive officer compensation, equity awards, and equity positions relative to the Named Executive Officers follow this compensation discussion and analysis. The purpose of the compensation discussion and analysis is to put into context such compensation disclosures, and to present a qualitative discussion of the Company’s compensation matters through the eyes of management.

Objectives of compensation structure

The Company operates in an emerging and highly competitive industry. The primary objective of the Company’s executive compensation structure is to attract, motivate, and retain executives who drive the Company’s success and industry leadership, and thus create shareholder value. The Company seeks to align its executives’ compensation with performance goals that will create shareholder value through the creation of sales, net income, and increased stock price.

What the programs are designed to reward

The executive compensation structure is designed to reward executives for both near-term individual performance and long-term Company performance. Individual performance is generally evaluated through the completion of periodic performance reviews. Long term Company performance goals are measured primarily through financial indicators such as stock price, sales, and net income.

Elements of compensation

 

The components of the compensation program for executive officers are as follows:

Base Salary.    Base salaries are determined based on a variety of factors, including the executive’s scope of responsibilities, an assessment of similar roles at other companies, and a comparison of salaries paid to peers within the Company. Base salaries are set at levels that allow the Company to attract and retain executive employees that will enable the Company to deliver on its business goals. Base salaries are reviewed form time to time in connection with performance reviews and may be adjusted after considering performance along with the factors noted above. The Compensation Committee is responsible for setting and adjusting salaries of the Named Executive Officers. The Compensation Committee currently consists of independent directors James J. Keil, A. Hayes Barclay and outside director George G. O’Leary, who is compensated through a consulting agreement with NeoMedia.

Stock-based Compensation. Under the Company’s stock option plans, executives, employees, consultants and directors are eligible to receive stock option awards from time to time as determined by the Stock Option Committee, which currently consists of directors James J. Keil, A. Hayes Barclay and George G. O’Leary. A stock option award is a right to acquire shares of the Company’s common stock at a fixed exercise price that is generally equal to the stock price on the date of grant. Stock option awards can vest based on the passage of time, or based on achievement of specific performance goals. Historically, NeoMedia has primarily issued options to executives with time-based vesting, generally 25% upon grant and 25% on each subsequent anniversary date. The stock option awards guidelines vary by the level of responsibility of the executive. In 2007, new performance based options are being granted to certain executives that are tied to achievement of revenue and profit goals during the next four fiscal years.

 

III-5

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Additionally, the Company has a stock incentive plan under which unrestricted share-based awards are granted at the discretion of the Compensation Committee, or the board as a whole. These shares have historically been used to compensate non-executive employees and consultants, and the Company does not have any plan to issue any such new shares to executives during 2007.

Bonus.    Effective January 1, 1996, NeoMedia adopted an Annual Incentive Plan for Management ("Incentive Plan"), which provides for annual bonuses to eligible employees based upon the attainment of certain corporate and/or individual performance goals during the year. The Incentive Plan is designed to provide additional incentive to the Company’s executive management to achieve these growth and profitability goals. Participation in the Incentive Plan is limited to those employees holding positions assigned to incentive eligible salary grades and whose participation is authorized by the Compensation Committee which administers the Incentive Plan, including determination of employees eligible for participation or exclusion. The board of directors can amend, modify or terminate the Incentive Plan for the next plan year at any time prior to the commencement of such next plan year.

Performance goals under the Incentive Plan are determined by the Compensation Committee for both Company and/or the employee's individual performance prior to the beginning of each year. If performance goals are attained, eligible employees are entitled to an award based upon a specified percentage of their base salary. Historically, the primary performance goals have been financial metrics, specifically the Company’s net income.

The Company did not have a formal incentive plan for management in place for the years ended December 31, 2006, 2005, or 2004, and therefore did not pay any bonuses for those years. Additionally, the Company has not yet adopted an incentive plan for the year ended December 31, 2007. Any such plan adopted for fiscal year 2007 will be tied to specific revenue and net income goals for 2007 and beyond.

Benefits. During the year ended December 31, 2006, the Company’s executives were eligible for the same level and offering of benefits made available to other employees, including health insurance, and a non-matching 401(k) Plan.

Why NeoMedia chooses to pay each element

The Company operates in an emerging market, and has historically reported net operating losses on a year over year basis. As a result, executive compensation packages tend to be weighted more heavily with stock-based rather than cash-based compensation, since the Company’s cost of capital is relatively high. The Company believes that stock based compensation aligns the interest of its executives and employees with the goals of its shareholders, which is to drive shareholder value, primarily through increased stock price.

How NeoMedia determines the amount

The Company relies primarily on publicly available data to help benchmark levels of base salary, target annual incentives, and stock-based and other long-term incentives. The Compensation Committee and Stock Option Committee determine the appropriate executive salaries and stock-based awards based on available information, along with financial considerations such as the Company’s liquidity and the impact to shareholder dilution.

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How each element fits into NeoMedia’s overall compensation objectives

The overall goal of the Company’s compensation plan is to attract and retain skilled executives who will drive shareholder value. The Company believes its executives’ competitive base salaries are competitive enough to attract viable leaders committed to the Company’s vision. The Company believes that its stock based compensation plans align the goals of its executives with those of its shareholders.

NeoMedia Technologies, Inc.

Compensation Committee

James J. Keil (Chairman)

A. Hayes Barclay

George G. O’Leary

 

III-7

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Executive Compensation

The following table sets forth certain information with respect to the compensation paid to persons serving as NeoMedia’s principal executive officer during the last completed fiscal year, and persons serving as NeoMedia’s principal financial officer during the last completed fiscal year (collectively, “the Named Executive Officers”) during the years ended December 31, 2006, 2005 and 2004. NeoMedia did not employ any additional executive officers as of December 31, 2006.

																	Non-			Non-
																	equity			Qualified
																	Incentive			Deferred			(2)
														(1)			Plan			Compen-			All other
											Stock			Option			Compen-			sation			Compen-
Name and					Salary			Bonus			Awards			Awards			sation			Earnings			sation			Total
Principal Position		Year			($)			($)			($)			($)			($)			($)			($)			($)
Charles W. Fritz (3)			2006		$	206,334			—			—		$	—			—			—			—		$	206,334
Interim President and			2005			205,278			—			—			1,176,272			—			—			—			1,381,550
Chief Executive Officer			2004			175,355			—			—			321,171			—			—			355			496,881
Charles T. Jensen (3)			2006			206,339			—			—			77,159			—			—			—			283,498
Former President and			2005			197,500			—			—			1,176,272			—			—			—			1,373,772
Chief Executive Officer			2004			175,386			—			—			321,171			—			—			386			496,943
David A. Dodge			2006			159,296			—			—			—			—			—			—			159,296
Vice President and			2005			141,733			—			—			914,609			—			—			—			1,056,342
Chief Financial Officer			2004			122,396			—			—			160,585			—			—			—			282,981

 

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(1)	Dollar value of option awards is based on grant date fair value computed in accordance with SFAS 123R; reader should refer to footnote 15 to the accompanying financial statements for detailed description of the assumptions used to calculate fair value.

(2)	Includes automobile expenses attributable to personal use and the corresponding income tax effects.

(3)

Charles T. Jensen resigned as NeoMedia's President, Chief Executive Officer, and a member of the board of directors on December 8, 2006. Charles W. Fritz, the chairman of the board of directors, replaced Mr. Jensen as Interim Chief Executive Officer on December 8, 2006. Effective in January 2007, Mr. Fritz’s annual salary was reduced to $100,000.

 

III-8

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Grants of Plan-based Awards

The following table presents certain information relative to grants of plan-based awards for the Named Executive Officers for the year ended December 31, 206:

					Estimated future payouts under non-equity incentive plan awards									Estimated future payouts under equity incentive plan awards									All Other Stock Awards: Number of Shares of			All Other Option Awards: Number of Securities Underlying			Exercise or Base Price of Option
		Grant			Threshold			Target			Maximum			Threshold			Target			Maximum			Stock			Options			Awards
Name		Date			($)			($)			($)			($)			($)			($)			(#)			(#)			($/share)
Charles W. Fritz			—			—			—			—			—			—			—			—			—			—
Charles T. Jensen (1)			12/11/06			—			—			—			—			—			—			—			750,000		$	0.01
David A. Dodge			—			—			—			—			—			—			—			—			—			—

 

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(1)	Charles T. Jensen resigned as NeoMedia's President, Chief Executive Officer, and a member of the board of directors on December 8, 2006. 2006 award of options with an exercise price of $0.01 per share was issued in lieu of cash severance payments.

 

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Outstanding Equity Awards at Fiscal Year-end

The following table sets forth certain information relative to outstanding equity awards held by the Named Executive Officers as of December 31, 2006:  

  

Option Awards																				Stock Awards
		Number of Securities Underlying Unexercised Options (2)									Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned			Option Exercise			Option			Number of Shares or Units of Stock That Have Not			Market Value of Shares or Units of Stock That Have Not			Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not			Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not
		Exercisable			Unexercisable						Options			Price			Expiration			Vested			Vested			Vested			Vested
Name		(#)			(#)						(#)			($)			Date			(#)			($)			(#)			(#)
Charles W. Fritz			10,000,000			—						—		$	0.010			10/19/13			—			—			—			—
			3,000,000			1,000,000			(3)			—		$	0.110			03/08/14			—			—			—			—
			2,000,000			2,000,000			(4)			—		$	0.239			02/08/15			—			—			—			—
			1,000,000			1,000,000			(5)			—		$	0.328			12/16/15			—			—			—			—
Charles T. Jensen (1)			10,000,000			—						—		$	0.010			12/08/07			—			—			—			—
			3,000,000			—						—		$	0.110			12/08/08			—			—			—			—
			2,000,000			—						—		$	0.239			12/08/08			—			—			—			—
			1,000,000			—						—		$	0.328			12/08/08			—			—			—			—
			750,000			—						—		$	0.010			12/08/08			—			—			—			—
David A. Dodge			1,600,000			—						—		$	0.010			10/19/13			—			—			—			—
			1,500,000			500,000			(6)			—		$	0.110			03/08/14			—			—			—			—
			1,250,000			1,250,000			(7)			—		$	0.239			02/08/15			—			—			—			—
			1,000,000			1,000,000			(8)			—		$	0.328			12/16/15			—			—			—			—

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(1)	Charles T. Jensen resigned as NeoMedia's President, Chief Executive Officer, and a member of the board of directors on December 8, 2006.

 

(2)

Effective February 1, 2007, options held by NeoMedia employees, including Mr. Fritz and Mr. Dodge, were repriced as follows: all vested options were repriced to $0.045 per share; all unvested options vesting during 2007 were repriced to $0.075; all unvested options vesting during 2008 were repriced to $0.125; and all unvested options vesting during 2009 were repriced to $0.175.

 

(3)	1,000,000 options vest on March 8, 2007

 

(4)	1,000,000 options vest on February 8, 2007 and 1,000,000 vest on February 8, 2008

 

(5)	500,000 options vest on December 16, 2007 and 500,000 vest on December 16, 2008

 

(6)	500,000 options vest on March 8, 2007

 

(7)	625,000 options vest on February 8, 2007 and 625,000 vest on February 8, 2008

 

(8)	500,000 options vest on December 16, 2007 and 500,000 vest on December 16, 2008.

 

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Option Exercises and Stock Vested

The following table sets forth certain information relative to options exercises and stock vesting during the year ended December 31, 2006:

Option Awards

Stock Awards

Number of

Number of

Shares

Value

Shares

Value

Acquired on

Realized on

Acquired on

Realized on

Exercise

Exercise

Vesting

Vesting

Name

(#)

($)

(#)

($)

Charles W. Fritz

—

—

—

—

Charles T. Jensen

—

—

—

—

David A. Dodge

—

—

—

—

 

Pension Benefits

None.

 

Change in control Agreements

The Company is currently party to a change in control agreement with Charles W. Fritz, its Interim Chief Executive Officer and the chairman of the board of directors. The change in control agreement calls for severance payments of six months salary, or $50,000, to Mr. Fritz in the event his employment is involuntarily terminated following a change in control of the Company, defined as either (i) any person or group becoming the holder of more than 30% of the Company’s outstanding common stock, (ii) the Company’s board of directors consisting of more than half members not recommended for election by the current board of directors,(iii) valid proxies for at least 51% of the Company’s outstanding voting shares come under the control of one person or group, (iv) the licensing of at least 90% of the Company’s intellectual property under an exclusive licensing arrangement to one party, or (v) the approval by the Company’s shareholders of the sale of all, or substantially all, of the assets of the Company. The Company had a similar change control agreement in place with Charles T. Jensen that terminated upon his resignation in December 2006. The Company has one additional change in control agreement with an employee who is not a Named Executive Officer.

III-11

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Director Compensation

The following table sets forth certain information relative to compensation paid to outside directors for the year ended December 31, 2006:

														Change in
														Pension
														Value and
											Non-			Non-
		(1)									equity			Qualified
		Fees									Incentive			Deferred
		Earned or						(2)			Plan			Compen-			All other
		Paid in			Stock			Option			Compen-			sation			Compen-
		Cash			Awards			Awards			sation			Earnings			sation			Total
Name		($)			($)			($)			($)			($)			($)			($)
James J. Keil		$	30,000			—			—			—			—			—		$	30,000
A. Hayes Barclay		$	30,000			—			—			—			—			—		$	30,000
William E. Fritz (3)		$	30,000			—			—			—			—			—		$	30,000

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(1)	Total of $30,000 per outside director was earned during 2006, of which $7,500 per director was paid in cash and the remaining $22,500 per director was accrued but not paid as of December 3, 2006.

 

(2)

As of December 31, 2006, James J. Keil held 1,500,000 options with an exercise price of $0.239 and 1,000,000 options with an exercise price of $0.328; A. Hayes Barclay held 1,000,000 options with an exercise price of $0.075, 1,000,000 options with an exercise price of $0.239, and 750,000 options with an exercise price of $0.328; and William E. Fritz held 1,000,000 options with an exercise price of $0.01, 750,000 options with an exercise price of $0.075, 1,000,000 options with an exercise price of $0.239, and 750,000 options with an exercise price of $0.328. All options held by outside directors are fully vested. Effective February 1, 2007, options held by then-active directors Mr. Keil and Mr. Barclay were repriced as follows: all options with an exercise price less than $0.24 were repriced to $0.045, and all options with an exercise price greater than $0.24 were repriced to $0.075.

 

(3)	William E. Fritz resigned from the Company's board on December 22, 2006.

 

Compensation Committee Interlocks and Insider Participation

From January 1, 2006 through September 20, 2006, the members of the Compensation Committee were James J. Keil, Charles W. Fritz, and Charles T. Jensen. James J. Keil is an independent director. Charles W. Fritz and Charles T. Jensen were officers of the Company during this time period. Effective September 20, 2006, the board removed Charles W. Fritz and Charles T. Jensen from the Compensation Committee and replaced them with William E. Fritz and A. Hayes Barclay, both independent directors. Effective December 20, 2006, William E. Fritz resigned from the board of directors and the Compensation Committee.

During fiscal year 2006, none of the Company’s executive officers served on the compensation committee (or its equivalent) or board of directors of another entity whose executive officer(s) served on the Company’s Compensation Committee or board of directors.

 

III-12

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Compensation Committee Report

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis presented in Item 11 to this Annual Report on Form 10-K. Based on such review and discussion, the Compensation Committee has recommended to the board of directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

James J. Keil (Chairman)

A. Hayes Barclay

Ethical Behavior

The Company has adopted a code of ethics, as required by the rules of the SEC (attached as exhibit 14.1 hereto). This code of ethics applies to all of the Company's directors, officers and employees. The code of ethics, and any amendments to, or waivers from, the code of ethics, is available in print, at no charge, to any shareholder who requests such information.

 

III-13

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding beneficial ownership of NeoMedia's common stock as of February 16, 2007, (i) by each of NeoMedia's directors, (ii) by each Named Executive Officer of NeoMedia, (iii) by all executive officers and directors of NeoMedia as a group, and (iv) by each person or entity known by NeoMedia to own beneficially more than five percent of NeoMedia's common stock.

				Amount and
				Nature of
				Beneficial		Percent of
Class		Name and Address of Beneficial Owner (1)		Ownership (2)		Class (2)
Directors and Named Executive Officers
Common Stock		Charles W. Fritz (2)(3)		29,150,766		4.4%
Common Stock		David A. Dodge(2)(4)		6,475,000		1.0%
Common Stock		James J. Keil(2)(5)		4,942,619		*
Common Stock		A. Hayes Barclay(2)(6)		2,755,000		*
Common Stock		George G. O'Leary(2)(7)		—		*
		Officers and Directors as a Group (5 Persons) (8)		43,323,385		6.4%
Other Beneficial Owners
Common Stock		William Fritz(9)		53,150,944		8.3%

 

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*	- denotes ownership of less than one percent of issued and outstanding shares of NeoMedia’s common stock.

(1)	Address of the referenced individual is c/o NeoMedia Technologies, Inc., 2201 Second Street, Suite 600, Fort Myers, FL, 33901.

(2)

Applicable percentage of ownership is based on 638,004,340 shares of common stock outstanding as of February 16, 2007, together with securities exercisable or convertible into shares of common stock within 60 days of February 16, 2007, for each stockholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of February 16, 2007, are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The common stock is the only outstanding class of equity securities of NeoMedia.

(3)

Charles W. Fritz is the Company's founder and the Chairman of the Board of Directors. Shares beneficially owned include 100 shares owned by each of Mr. Fritz’s four children for an aggregate of 400 shares, 18,000,000 shares of common stock issuable upon exercise of stock options held by Mr. Fritz, 1,510,000 shares issuable upon exercise of stock warrants, 8,097,397 shares of common stock owned by Mr. Charles W. Fritz directly, and 1,542,969 shares of common stock held by the CW/LA II Family Limited Partnership, a family limited partnership for the benefit of Mr. Fritz’s family.

(4)	David A. Dodge is Vice President, Chief Financial Officer, and Controller. Beneficial ownership includes 6,475000 shares of common stock issuable upon exercise of options.

(5)	James J. Keil is a member of the Board of Directors. Ownership includes 2,500,000 shares of common stock issuable upon exercise of stock options, and 2,442,619 shares owned by Mr. Keil directly.

(6)	A. Hayes Barclay is a member of the Board of Directors. Ownership includes 2,750,000 shares of common stock issuable upon exercise of stock options, and 5,000 shares owned by Mr. Barclay directly.

(7)	George O'Leary is a member of the Board of Directors. No shares were beneficially owned as of February 16, 2007.

 

III-14

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(8)	Includes an aggregate of 29,725,000 currently exercisable options to purchase shares of common stock, 1,510,000 currently exercisable warrants to purchase shares of common stock, and 12,088,385 shares owned directly by NeoMedia's named executive officers and directors.

(9)

William E. Fritz, a former member of the Company's board of directors, and his wife, Edna Fritz, are the general partners of the Fritz Family Limited Partnership and therefore each are deemed to be the beneficial owners of the 1,511,742 shares held in the Fritz Family Partnership. As trustee of each of the Chandler R. Fritz 1994 Trust, Charles W. Fritz 1994 Trust and Debra F. Schiafone 1994 Trust, William E. Fritz is deemed to be the beneficial owner of the 165,467 shares of NeoMedia held in these trusts. Additionally, Mr. Fritz is deemed to own: 45,433,735 shares held directly by Mr. Fritz or his spouse, 2,540,000 shares to be issued upon the exercise of warrants held by Mr. Fritz or his spouse, and 3,500,000 shares to be issued upon the exercise of options held by Mr. Fritz or his spouse. Address of the referenced individual is 3134 Dahlia Way, Naples, FL 34105. Mr. Fritz beneficially owns greater than 5% of the Company's outstanding stock.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

On November 1, 2005, NeoMedia acquired a used automobile for $17,000 from Charles T. Jensen, its president, chief executive officer and a member of its board of directors. NeoMedia believes the transaction was completed at arm’s length.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

The aggregate fees billed by Stonefield Josephson, Inc., NeoMedia’s independent auditors, for the audit of NeoMedia’s annual consolidated financial statements and reviews of quarterly financial statements for the years ended December 31, 2006, 2005 and 2004 were $859,000, $151,000 and $137,000, respectively.

Audit-related Fees

The aggregate fees billed by Stonefield Josephson, Inc., NeoMedia’s independent auditors, for assurance and related services for the years ended December 31, 2006, 2005 and 2004 were $0, $0 and $0, respectively.

Tax Fees

The aggregate fees billed by Wiltshire, Whitley, Richardson & English, NeoMedia’s principal accountants for tax compliance, advice, and planning, were $14,000, $4,000 and $9,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

All Other Fees

The aggregate fees billed by Stonefield Josephson, Inc., for other products and services, primarily related to consents issued in connection with registration statements, during the years ended December 31, 2006, 2005 and 2004 were $132,000, $60,000 and $0, respectively.

Audit Committee Pre-approval

The audit committee of NeoMedia’s board of directors approves all non-audit services provided by NeoMedia’s primary accountants.

III-15

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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Financial Statements and Schedules

The financial statements are set forth under Item 8 of this Annual Report on Form 10-K. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.

(b) Exhibits

							Incorporated by Reference
Exhibit				Filed							Filing
Number		Description		Herewith			Form		Exhibit		Date
3.1		Articles of Incorporation of Dev-Tech Associates, Inc. and amendment thereto					SB-2		3.1		11/25/96
3.2		Bylaws of DevSys, Inc.					SB-2		3.2		11/25/96
3.3		Restated Certificate of Incorporation of DevSys, Inc.					SB-2		3.3		11/25/96
3.4		By-laws of DevSys, Inc.					SB-2		3.4		11/25/96
3.5		Articles of Merger and Agreement and Plan of Merger of DevSys, Inc and Dev-Tech Associates, Inc.					SB-2		3.5		11/25/96
3.6		Certificate of Merger of Dev-Tech Associates, Inc. into DevSys, Inc.					SB-2		3.6		11/25/96
3.7		Articles of Incorporation of Dev-Tech Migration, Inc. and amendment thereto					SB-2		3.7		11/25/96
3.8		By-laws of Dev-Tech Migration, Inc.					SB-2		3.8		11/25/96
3.9		Restated Certificate of Incorporation of DevSys Migration, Inc.					SB-2		3.90		11/25/96
3.1		Form of By-laws of DevSys Migration, Inc.					SB-2		3.10		11/25/96
3.11		Form of Agreement and Plan of Merger of Dev-Tech Migration, Inc. into DevSys Migration, Inc.					SB-2		3.11		11/25/96
3.12		Form of Certificate of Merger of Dev-Tech Migration, Inc. into DevSys Migration, Inc.					SB-2		3.12		11/25/96
3.13		Certificate of Amendment to Certificate of Incorporation of DevSys, Inc. changing its name to NeoMedia Technologies, Inc.					SB-2		3.13		11/25/96
3.14		Form of Certificate of Amendment to Certificate of Incorporation of NeoMedia Technologies, Inc. authorizing a reverse stock split					SB-2		3.14		11/25/96
3.15		Form of Certificate of Amendment to Restated Certificate of Incorporation of NeoMedia Technologies, Inc. increasing authorized capital and creating preferred stock					SB-2		3.15		11/25/96
10.1		Second Agreement and Amendment to Consulting Agreement between NeoMedia and Thornhill Capital, dated July 22, 2005					S-3/A		10.3		1/30/06
10.2		Standby Equity Distribution Agreement, dated March 30, 2005, between NeoMedia and Cornell Capital Partners					8-K		16.1		4/1/05
10.3		Placement Agent Agreement, dated March 30, 2005, between NeoMedia and Cornell Capital Partners					8-K		16.2		4/1/05
10.4		Escrow Agreement, dated March 30, 2005, between NeoMedia and Cornell Capital Partners					8-K		16.3		4/1/05
10.5		Registration Rights Agreement, dated March 30, 2005, between NeoMedia and Cornell Capital Partners					8-K		16.4		4/1/05
10.6		Promissory Note, dated March 30, 2005, between NeoMedia and Cornell Capital Partners					8-K		16.5		4/1/05
10.7		Security Agreement, dated March 30, 2005, between NeoMedia and Cornell					8-K		16.5		4/1/05

 

III-16

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							Incorporated by Reference
Exhibit				Filed							Filing
Number		Description		Herewith			Form		Exhibit		Date

10.8		Warrant dated March 30, 2005, granted by NeoMedia to Thornhill Capital LLC					S-3/A		10.12		7/18/05
10.9		Warrant dated March 30, 2005, granted by NeoMedia to Cornell Capital Partners LP					S-3/A		10.13		7/18/05
10.1		Definitive Merger Agreement between NeoMedia and Mobot					8-K		16.10		2/10/06
10.11		Definitive Sale and Purchase Agreement between NeoMedia and 12Snap					8-K		16.10		2/14/06
10.12		Definitive Sale and Purchase Agreement between NeoMedia and Gavitec					8-K		16.10		2/21/06
10.13		Definitive Sale and Purchase Agreement between NeoMedia and Sponge					8-K		16.10		2/22/06
10.14		Promissory Note, dated October 18, 2004, between NeoMedia and Cornell Capital Partners					S-3/A		10.26		1/30/06
10.15		Investment Agreement, dated February 17, 2006 between NeoMedia and Cornell Capital Partners					8-K		10.1		2/21/06
10.16		Investor Registration Rights Agreement, dated February 17, 2006 between NeoMedia and Cornell Capital Partners					8-K		10.2		2/21/06
10.17		Irrevocable Transfer Agent Instruction, dated February 17, 2006, by and among NeoMedia, Cornell Capital Partners and American Stock Transfer & Trust Co.					8-K		10.3		2/21/06
10.18		Warrant, dated February 17, 2006					8-K		10.4		2/21/06
10.19		Warrant, dated February 17, 2006					8-K		10.5		2/21/06
10.2		Warrant, dated February 17, 2006					8-K		10.6		2/21/06
10.21		Assignment Agreement, dated February 17, 2006 by NeoMedia and Cornell Capital Partners					8-K		10.7		2/21/06
10.22		Assignment of Common Stock, dated February 17, 2006 between NeoMedia and Cornell Capital Partners					8-K		10.8		2/21/06
10.23		Securities Purchase Agreement, dated August 24, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.1		8/30/06
10.24		Investor Registration Rights Agreement, dated August 24, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.2		8/30/06
10.25		Pledge and Security Agreement, dated August 24, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.30		8/30/06
10.26		Secured Convertible Debenture, dated August 24, 2006, issued by the Company to Cornell Capital Partners, LP					8-K		10.40		8/30/06
10.27		Irrevocable Transfer Agent Instructions, dated August 24, 2006, by and among the Company, Cornell Capital Partners, LP and American Stock Transfer & Trust Co.					8-K		10.50		8/30/06
10.28		A Warrant, dated August 24, 2006					8-K		10.60		8/30/06
10.29		B Warrant, dated August 24, 2006					8-K		10.70		8/30/06
10.3		C Warrant, dated August 24, 2006					8-K		10.80		8/30/06
10.31		D Warrant, dated August 24, 2006					8-K		10.9		8/30/06
10.32		Amendment to Warrant No. CCP-002, dated August 24, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.1		8/30/06
10.33		Amendment to “A” Warrant No. CCP-001, dated August 24, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.11		8/30/06
10.34		Amendment to “B” Warrant No. CCP-002, dated August 24, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.12		8/30/06
10.35		Amendment to “C” Warrant No. CCP-003, dated August 24, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.13		8/30/06

 

III-17

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							Incorporated by Reference
Exhibit				Filed							Filing
Number		Description		Herewith			Form		Exhibit		Date

10.36		Letter of intent amongst the Company, Global Emerging Markets, and Jose Sada					8-K		16.1		8/31/06
10.37		Termination Agreement between NeoMedia Technologies, Inc, and Cornell Capital Partners, LP					S-3/A		10.53		1/30/07
10.38		Definitive share purchase and settlement agreement between NeoMedia and Sponge, dated November 14, 2006					8-K		16.1		11/20/06
10.39		Agreement between NeoMedia and FMS					8-K		16.1		12/7/06
10.4		Escrow agreement amongst NeoMedia, Mobot, FMS, and Kirkpatrick and Lockhart Nicholson Graham					8-K		16.2		12/7/06
10.41		Description of Special Preference Stock					8-K		16.3		12/7/06
10.42		Promissory note payable from NeoMedia to FMS					8-K		16.4		12/7/06
10.43		License agreement between NeoMedia and Mobot					8-K		16.50		12/7/06
10.44		Securities Purchase Agreement, dated December 29, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.10		1/8/07
10.45		Investor Registration Rights Agreement, dated December 29, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.20		1/8/07
10.46		Secured Convertible Debenture, dated December 29, 2006, issued by the Company to Cornell Capital Partners, LP					8-K		10.30		1/8/07
10.47		Irrevocable Transfer Agent Instructions, dated December 29, 2006, by and among the Company, Cornell Capital Partners, LP and American Stock Transfer & Trust Co.					8-K		10.40		1/8/07
10.48		A Warrant, dated December 29, 2006					8-K		10.50		1/8/07
10.49		Amendment to Warrant No. CCP-002, dated December 29, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.6		1/8/07
10.5		Amendment to “A” Warrant No. CCP-001, dated December 29, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.7		1/8/07
10.51		Amendment to “B” Warrant No. CCP-002, dated December 29, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.8		1/8/07
10.52		Amendment to “C” Warrant No. CCP-003, dated December 29, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.9		1/8/07
10.53		Amendment to “A” Warrant No. CCP-001, dated December 29, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.1		1/8/07
10.54		Amendment to “B” Warrant No. CCP-001, dated December 29, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.11		1/8/07
10.55		Amendment to “C” Warrant No. CCP-001, dated December 29, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.12		1/8/07
10.56		Securities Purchase Agreement, dated December 29, 2006, between the Company and Cornell Capital Partners, LP					8-K		10.13		1/8/07
10.57		Amendment Agreement I to the Sale and Purchase Agreement between NeoMedia and certain former shareholders of Gavitec AG, dated January 23, 2007					8-K		10.1		1/29/07
10.58		Consulting Agreement between the Company and SKS Consulting of South Florida Corp.					8-K		10.1		2/6/07
10.59		Amendment Agreement III to Sale and Purchase Agreement between NeoMedia and certain former shareholders of 12Snap AG, dated March 16, 2007					8-K		10.1		3/22/07
14		Code of Ethics		X
21		Subsidiaries of registrant		X

 

III-18

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							Incorporated by Reference
Exhibit				Filed							Filing
Number		Description		Herewith			Form		Exhibit		Date

23.1		Consent of Stonefield Josephson, Inc., independent Registered Public Accounting Firm of NeoMedia Technologies, Inc.		X
31.1		Certification		X
31.2		Certification		X
31.3		Certification		X
31.4		Certification		X

 

III-19

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Fort Myers, State of Florida, on the 2nd day of April, 2007.

	NEOMEDIA TECHNOLOGIES, INC.
	By:	/s/ Charles W. Fritz
		Charles W. Fritz
		Interim Chief Executive Officer, Chairman of the Board of Directors, Principal Executive Officer

	By:	/s/ David A. Dodge
		David A. Dodge
		Vice-President, Chief Financial Officer, and Principal Accounting Officer

 

In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on April 2, 2007.

SIGNATURES		TITLE		DATE
/s/ Charles W. Fritz		Interim Chief Executive Officer and
Charles W. Fritz		Chairman of the Board of Directors		April 2, 2007
/s/ David A. Dodge		Vice-President, Chief Financial Officer,
David A. Dodge		and Principal Accounting Officer		April 2, 2007
/s/ Scott Womble		Controller
Scott Womble				April 2, 2007
/s/ Hayes Barclay		Director
Hayes Barclay				April 2, 2007
/s/ James J. Keil		Director
James J. Keil				April 2, 2007
/s/ George G. O’Leary		Director
James J. Keil				April 2, 2007

 

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