18-Nov-2003
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Over the past several years, NeoMedia Technologies, Inc.'s ("NeoMedia") focus has been aimed toward the intellectual property commercialization unit of its Internet Switching Systems (NISS, formerly NAS) business. NISS consists of the patented PaperClickTM technology that enables users to link directly from the physical to the digital world, as well as the patents surrounding certain physical-world-to-web linking processes. NeoMedia's mission is to invent, develop, and commercialize technologies and products that effectively leverage the integration of the physical and electronic to provide clear functional value for NeoMedia's end-users, competitive advantage for their business partners and return-on-investment for their investors. To this end, NeoMedia has signed four intellectual property licenses since its inception, and also recently acquired eight additional patents as part of its acquisition of Secure Source Technologies, Inc. On September 8, 2003, NeoMedia announced its PaperClick for Camera Cell Phones product, which reads and decodes UPC/EAN or other bar codes to link users to the Internet, providing information and enabling e-commerce on a compatible camera cell phone, such as the Nokia 3650 model. On October 30, 2003, NeoMedia unveiled its go-to-market strategy for the product. NeoMedia has already established relationships with several key partners outlined in the strategy, including agents Big Gig Strategies and SRP Consulting, European advertising agency 12Snap, and worldwide brand communication company Seven.
NeoMedia's quarterly operating results have been subject to variation and will continue to be subject to variation, depending upon factors, such as the mix of business among NeoMedia's services and products, the cost of material, labor and technology, particularly in connection with the delivery of business services, the costs associated with initiating new contracts, the economic condition of NeoMedia's target markets, and the cost of acquiring and integrating new businesses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED
TO THE THREE MONTHS ENDED SEPTEMBER 30, 2002
NET SALES. Total net sales for the three months ended September 30, 2003 were $461,000, which represented a $2,943,000, or 86%, decrease from $3,404,000 for the three months ended September 30, 2002. This decrease primarily resulted from reduced resales of Sun Microsystems equipment due to increased competition and general economic conditions. NeoMedia intends to continue to pursue additional resales of equipment, software and services, and to the extent that such sales can be made, NeoMedia expects resales to more closely resemble the results for the three months ended September 30, 2003, rather than the three months ended September 30, 2002.
LICENSE FEES. License fees were $69,000 for the three months ended September 30, 2003, compared with $150,000, for the three months ended September 30, 2002, a decrease of $81,000, or 54%. NeoMedia will continue to attempt to increase license sales. NeoMedia expects license fees to remain materially constant over the next 12 months.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of software and technology equipment and service fees decreased by $2,862,000, or 88%, to $392,000 for the three months ended September 30, 2003, as compared to $3,254,000 for the three months ended September 30, 2002. This decrease primarily resulted from increased competition and general economic conditions. NeoMedia intends to continue to pursue additional resales of equipment, software and services, and to the extent that such sales can be made, NeoMedia expects resales to more closely resemble the results for the three months ended September 30, 2003, rather than the three months ended September 30, 2002.
COST OF SALES. Cost of license fees was $76,000 for the three months ended September 30, 2003, a decrease of $4,000, or 0.5%, compared with $80,000 for the three months ended September 30, 2002. The decrease is consistent with 2003 and NeoMedia expects license fees will not fluctuate materially over the next 12 months. Cost of resales was $378,000 for the three months ended September 30, 2003, a decrease of $2,364,000, or 86%, compared with $2,742,000 for the three months ended September 30, 2002. The decrease resulted from decreased resales for the three months ended September 30, 2003 compared with the same period in 2002. Cost of resales as a percentage of related resales was 96% in 2003, compared to 84% in 2002. This increase is due to an increased sales mix of lower-margin equipment products sold in 2003 compared to 2002, combined with the general erosion
of margins in the resale sector. NeoMedia expects costs of resales to fluctuate with the sales of its equipment, software, and services over the next 12 months.
GROSS PROFIT. Gross profit was $7,000 for the three months ended September 30, 2003, compared with $582,000 for the three months ended September 30, 2002. This decrease of $575,000, or 99%, was the result of lower resales of, and lower margins on, computer equipment, software, and services in 2003 relative to 2002.
SALES AND MARKETING. Sales and marketing expenses were $146,000 for the three months ended September 30, 2003, a decrease of $61,000, or 29%, compared with $207,000 for the three months ended September 30, 2002. This decrease resulted primarily from reduced sales commissions earned on lower sales in 2003 as compared with 2002, as well as a smaller sales force in 2003. NeoMedia expects sales and marketing expense to fluctuate with sales of it proprietary and resold products over the next 12 months.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by $944,000, or 95%, to $1,940,000 for the three months ended September 30, 2003, compared to $996,000 for the three months ended September 30, 2002. The increase resulted primarily from non-cash expenses relating to the Company's option repricing program, expense for stock options issued with exercise prices below market price, and stock-based professional service expense. NeoMedia expects general and administrative expense to remain materially constant over the next 12 months.
RESEARCH AND DEVELOPMENT. During the three months ended September 30, 2003, NeoMedia charged to expense $78,000 of research and development costs, a decrease of $72,000 or 48% compared to $150,000 charged to expense for the three months ended September 30, 2002. The decrease is primarily due to a continued reduction in research and development overhead since the first quarter of 2002. NeoMedia expects research and development costs will not fluctuate materially over the next 12 months.
(GAIN) LOSS ON EXTINGUISHMENT OF DEBT. During the three months ended September 30, 2003, the Company recognized a net loss from extinguishment of debt of $24,000 due to the difference between the cash or market value of stock issued to settle debt and the carrying value of the debt at the time of settlement.
INTEREST EXPENSE/(INCOME), NET. Interest expense/(income) consists primarily of interest accrued for creditors as part of financed purchases, past due balances, notes payable and interest earned on cash equivalent investments. Interest expense/(income) increased by $22,000 to $24,000 for the three months ended September 30, 2003 from $2,000 for the three months ended September 30, 2002, due to interest expense during the third quarter of 2003 associated with notes payable and past due trade accounts payable.
NET LOSS. The net loss for the three months ended September 30, 2003 was $2,205,000, which represented a $1,432,000, or 185% increase from a loss of $773,000 for the three months ended September 30, 2002. The increase resulted primarily from non-cash expenses in 2003 relating to the company's option repricing program, expense for stock options issued with exercise prices below market price, and stock-based professional service expense, as well as lower sales and gross profit in 2003 compared to 2002.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AS COMPARED
TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002
NET SALES. Total net sales for the nine months ended September 30, 2003 were $2,009,000, which represented a $6,443,000, or 76%, decrease from $8,452,000 for the nine months ended September 30, 2002. This decrease primarily resulted from reduced resales of Sun Microsystems equipment due to increased competition and general economic conditions. NeoMedia intends to continue to pursue additional resales of equipment, software and services, and to the extent that such sales can be made, NeoMedia expects resales to more closely resemble the results for the nine months ended September 30, 2003, rather than the nine months ended September 30, 2002.
LICENSE FEES. License fees were $338,000 for the nine months ended September 30, 2003, compared with $303,000, for the nine months ended September 30, 2002, an increase of $35,000, or 12%. NeoMedia will continue to attempt to increase sales of these high-margin products. NeoMedia expects license fees to remain materially constant over the next 12 months.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT AND SERVICE FEES. Resales of software and technology equipment and service fees decreased by $6,478,000, or 79%, to $1,671,000 for the nine months ended September 30, 2003, as compared to $8,149,000 for the nine months ended September 30, 2002. This decrease primarily resulted from increased competition and general economic conditions. NeoMedia intends to continue to pursue additional resales of equipment, software and services, and to the extent that such sales can be made, NeoMedia expects resales to more closely resemble the results for the nine months ended September 30, 2003, rather than the nine months ended September 30, 2002.
COST OF SALES. Cost of license fees was $227,000 for the nine months ended September 30, 2003, a decrease of $537,000, or 70%, compared with $764,000 for the nine months ended September 30, 2002. The decrease resulted from reduced amortization expense in 2003 of capitalized development costs relating to the PaperClick, MLM/Affinity, and Qode products that were written off during 2002. Cost of resales was $1,566,000 for the nine months ended September 30, 2003, a decrease of $5,041,000, or 76%, compared with $6,607,000 for the nine months ended September 30, 2002. The decrease resulted from decreased resales in 2003 compared with 2002. Cost of resales as a percentage of related resales was 94% for the nine months ended September 30, 2003, compared to 82% for the same period in 2002. This increase is due to an increased sales mix of lower-margin equipment products sold in 2003 compared to 2002, combined with the general erosion of margins in the resale sector. NeoMedia expects costs of resales to fluctuate with the sales of its equipment, software, and services over the next 12 months.
GROSS PROFIT. Gross profit was $216,000 for the nine months ended September 30, 2003, compared with $1,081,000 for the nine months ended September 30, 2002. This decrease of $865,000, or 80%, was primarily the result of lower resales of, and lower margin on, computer equipment, software, and services in 2003 relative to 2002.
SALES AND MARKETING. Sales and marketing expenses were $407,000 for the nine months ended September 30, 2003, a decrease of $312,000, or 43%, compared with $719,000 for the nine months ended September 30, 2002. This decrease resulted primarily from reduced sales commissions earned on lower sales in 2003 as compared with 2002, as well as a smaller sales force in 2003. NeoMedia expects sales and marketing expense to fluctuate with sales of it proprietary and resold products over the next 12 months.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased by $147,000, or 4%, to $3,409,000 for the nine months ended September 30, 2003, compared to $3,556,000 for the nine months ended September 30, 2002. The increase resulted primarily from non-cash expenses relating to the company's option repricing program, expense for stock options issued with exercise prices below market price, and stock-based professional service expense. NeoMedia expects general and administrative expense to remain materially constant over the next 12 months.
RESEARCH AND DEVELOPMENT. During the nine months ended September 30, 2003, NeoMedia charged to expense $243,000 of research and development costs, a decrease of $440,000 or 64% compared to $683,000 charged to expense for the nine months ended September 30, 2002. The decrease is primarily due to a continued reduction in research and development overhead since first quarter 2002. NeoMedia expects research and development costs will not fluctuate materially over the next 12 months.
LOSS ON IMPAIRMENT OF ASSETS. During the nine months ended September 30, 2002, NeoMedia recognized a loss on impairment of assets of $1,003,000 for the write-off capitalized development costs relating to its PaperClick physical-world-to-internet software. NeoMedia did not take an impairment charge during the nine months ended September 30, 2003.
(GAIN) LOSS ON EXTINGUISHMENT OF DEBT. During the three months ended September 30, 2003, the Company recognized a net loss from extinguishment of debt of $24,000, due to the difference between the cash or market value of stock issued to settle debt and the carrying value of the debt at the time of settlement.
INTEREST EXPENSE (INCOME), NET. Interest expense/(income) consists primarily of interest accrued for creditors as part of financed purchases, past due balances, notes payable and interest earned on cash equivalent investments. Interest expense/(income) increased by $94,000, or 95%, to $193,000 for the nine months ended September 30, 2003 from $99,000 for the nine months ended September 30, 2002, due to interest expense during the third quarter of 2003 associated with notes payable and past due trade accounts payable.
LOSS ON DISPOSAL OF DISCONTINUED BUSINESS UNIT. During the nine months ended September 30, 2002, the Company recognized a loss on disposal of discontinued business unit of $1,523,000 to write off the remaining Qode-related assets. No disposal loss was recognized in 2003.
NET LOSS. The net loss for the nine months ended September 30, 2003 was $4,060,000, which represented a $2,442,000, or 38% decrease from a loss of $6,502,000 for the nine months ended September 30, 2002. The decrease resulted primarily from an impairment charge of $1,003,000 relating to NeoMedia's PaperClick assets and a loss on disposal of the Company's Qode business unit of $1,523,000 in 2002. The decrease was offset by higher non-cash expenses in 2003 relating to the company's option repricing program, expense for stock options issued with exercise prices below market price, and stock-based professional service expense, as well as lower sales and gross profit in 2003 compared to 2002.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying unaudited financial statements have been prepared assuming NeoMedia will continue as a going concern. Accordingly, the financial statements do not include any adjustments that might result from NeoMedia's inability to continue as a going concern. NeoMedia may obtain up to $20 million over the next two years through its Standby Equity Distribution Agreement with Cornell Capital Partners LP. As of October 31, 2003, NeoMedia had obtained gross funding of $3.6 million under its previous Equity Line of Credit Agreement with Cornell Capital Partners. Management believes that this additional financing will be sufficient to sustain operations through December 31, 2003, however, there can be no assurances that the market for NeoMedia's stock will support the sale of sufficient shares of NeoMedia's common stock to raise sufficient capital to sustain operations beyond that date. If necessary funds are not available, NeoMedia's business and operations would be materially adversely affected and in such event, NeoMedia would attempt to reduce costs and adjust its business plan.
Net cash used in operating activities was approximately $2,057,000 for the nine-month period ended September 30, 2003, compared with $589,000 for the nine-month period ended September 30, 2002. During the nine months ended September 30, 2003, trade accounts receivable inclusive of costs in excess of billings decreased $149,000, while accounts payable, amounts due under financing arrangements, accrued expenses, and deferred revenue decreased $698,000. During the nine months ended September 30, 2002, trade accounts receivable increased $610,000, while accounts payable, amounts due under financing arrangements, accrued expenses, and deferred revenue increased $2,067,000. NeoMedia's net cash flow from/(used in) investing activities for the nine months ended September 30, 2003 and 2002, was ($64,000) and ($24,000), respectively. Net cash provided by financing activities for the nine months ended September 30, 2003 and 2002, was $3,099,000 and $488,000, respectively.
During the nine months ended September 30, 2003 and 2002 NeoMedia's net loss totaled approximately $4,060,000 and $6,502,000, respectively. As of September 30, 2003 NeoMedia had accumulated losses from operations of approximately $74,825,000, had a working capital deficit of approximately $8,134,000, and approximately $1,048,000 in cash balances. As of September 30, 2003, the Company also had $600,000 of restricted cash that was used in October to pay off the majority of the AirClic promissory note and accrued interest (see "Legal Proceedings").
Management believes it will need to have access to capital from the Cornell Standby Equity Distribution Agreement or other financing sources, or NeoMedia will need to generate additional cash from its current operations to sustain NeoMedia's operations in the fourth quarter of 2003. The failure of management to accomplish these initiatives will adversely affect NeoMedia's business, financial conditions, and results of operations and its ability to continue as a going concern.
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