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NEOMEDIA TECHNOLOGIES INC - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Overview NeoMedia has positioned itself to lead the world in mobile barcode technology and solutions that enable the mobile ecosystem. NeoMedia harnesses the power of the mobile device in innovative ways with state-of-the-art mobile barcode technology. With this technology, mobile devices with cameras become barcode scanners, enabling a range of practical applications including mobile marketing and mobile commerce. In addition, we offer licensing of our extensive intellectual property portfolio. We are focusing our activities primarily in the United States and Europe, although we are also active in other markets via partners or our self service products. Our key focus areas are to: 1) maximize our patent portfolio through IP licensing monetization and enforcement; 2) provide service to enterprises, brands and retailers to maximize the reach of our barcode creation and reader solutions; and, 3) partner with key mobile marketing entities to expand the depth of our offering to provide full end-to-end solutions for our customers. NeoMedia has been active in, and strives to be an innovator in, the mobile barcode field since the mid-1990s, and during that time has spearheaded the development of a robust IP portfolio. In September 2011, we announced an agreement with Global IP Law Group to help further monetize our patent portfolio, focusing on the US market. During the first quarter of 2014, we closed nine (9) new IP agreements bringing the total quantity of deals closed to approximately fifty (50). On the product side of our business, our barcode management solutions include our barcode reader (NeoReader) as well as our barcode creation solutions (NeoSphere and QodeScan). Mobile barcodes continue to be an increasingly important activation element for brands and marketers and we continue to see growth in terms of new customer additions and traffic across our network. We believe that NeoMedia remains strong and consistent in its approach to market and that we will continue to differentiate ourselves on the basis of our high quality product and service offerings, our responsive customer service and support organization, our customizable and full service solutions and our robust intellectual property portfolio. NeoReader has experienced continued growth particularly in enterprise implementations. NeoReader continues to be pre-installed on Sony Mobile devices and is available for download from the key "app stores" including Apple App Store™, Google Play™, Nokia Ovi Store, BlackBerry App World™, Windows® Marketplace, Facebook and Amazon. Our barcode reader now has approximately 50+ million installations world-wide. Our reader is offered to consumers free of charge, leveraging an ad supported model, and we anticipate the growth in consumer utilization will continue as barcodes continue to be utilized for a wide variety of vertical applications. We also offer NeoReader SDK for enterprise opportunities. Our research suggests that we are one of the few providers in the global ecosystem to offer Aztec code support, in addition to QR, Data Matrix, Code 39, PDF417 and a variety of 1D symbologies. In 2013, we launched QodeScan, our low cost self-service barcode creation product. QodeScan is for those users who don't have high scan volumes but would like the insight into analytics that a managed service provides. In addition to QodeScan, we continue to offer our NeoSphere product intended for enterprises, agencies and other large volume users. We have many Fortune 500 brands using our NeoSphere product in their global barcode operations. Our QR creation services utilize an indirect methodology for our customer, which is also embodied in our intellectual property. Legal costs continue to be high for us. The costs to maintain our public company status, our IP licensing initiatives, satisfy our investor obligations as well as participate in an unexpected arbitration catapulted our legal fees to approximately thirty percent (30%) of total operating expenses for us in 2013. We expect the significant legal expenditures to continue in 2014. Unfortunately, this has meant that funds earmarked for sales and marketing investment were spent on legal fees. Page 22 Results of Operations Income (Loss) from Operations The following table sets forth certain data derived from our condensed consolidated statements of operations (in thousands): Three Months Ended March 31, 2014 2013 Revenues $ 1,003 $ 602 Cost of revenues 158 31 Gross profit 845 571 Sales and marketing expenses 15 61General and administrative expenses 603 857 Research and development costs 177 212 Income (loss) from operations $ 50 $ (559 ) Revenues - Revenues for the three months ended March 31, 2014 and 2013 were $1,003,000 and $602,000, respectively, an increase of $401,000, or 67%. The increase in revenue was primarily attributable to an increase in the quantity of IP licensing agreements executed in the current quarter as compared to the same prior year quarter. Cost of Revenues - Cost of revenues was $158,000 for the three months ended March 31, 2014 compared with $31,000 for the three months ended March 31, 2013, an increase of $127,000 or 410%. Cost of revenues primarily relate to third-party professional fees incurred in connection with the sale of our IP licenses. The increase in the costs are due to the corresponding increase in IP licensing revenues. Sales and Marketing - Sales and marketing expenses were $15,000 compared to $61,000 for the three months ended March 31, 2014 and 2013, respectively, representing a decline of approximately $46,000 or 75%. The decline in costs was primarily due to less press and investor relations activities associated with cost reduction efforts. General and Administrative -General and administrative expenses were $603,000 and $857,000 for the three months ended March 31, 2014 and 2013, respectively, reflecting a decrease of $254,000 or 30%. The decline in expenses was primarily due to lower general legal expenses as well as a decline in amortization expenses associated with certain intangible assets that became fully amortized in the prior year. Research and Development- Research and development costs were $177,000 and $212,000 for the three months ended March 31, 2014 and 2013, respectively, reflecting a decrease of approximately $35,000, or 17%. Research and development expenses decreased due to cost containment efforts and were primarily focused on the research and development activities in Germany. Other Income (Expense) The following table sets forth certain data derived from our condensed consolidated statements of operations (in thousands): Three Months Ended March 31, 2014 2013 (Restated) (Restated)Gain (loss) from change in fair value of hybrid financial instruments $ (545 ) $ 24,487 Gain from change in fair value of derivative liability - warrants 373 3,166 Gain from change in fair value of derivative liability - Series C and D preferred stock and debentures 137 1,943 Total other income $ (35 ) $ 29,596 Page 23 Gain (loss) from Change in Fair Value of Hybrid Financial Instruments - We record our debentures at fair value, in accordance with FASB ASC 815-15-25, and do not separately account for the embedded conversion feature. The change in the fair value of these liabilities includes changes in the value of the accrued interest due under these instruments, as well as changes in the fair value of the common stock underlying the instruments. For the three months ended March 31, 2014 and 2013, the liability related to these hybrid instruments fluctuated, resulting in wloss of $.5 million and a gain of $24.5 million, respectively. The loss for the three months ended March 31, 2014 was primarily due to fluctuations in our stock price and the impact of those fluctuations on the fair value determination of the hybrid financial instruments. The gain for the three months ended March 31, 2013 was primarily due to a change in our valuation technique used to estimate the liability. See the Change in Estimates discussion within Note 2 - Summary of Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements for additional description. Gain from Change in Fair Value of Derivative Liabilities - Warrants - We account for our outstanding common stock warrants that were issued in connection with our preferred stock and our debentures, at fair value. For the three months ended March 31, 2014 and 2013, the liability related to the securities fluctuated resulting in a gain of $0.4 million and $3.2million, respectively. The increase during the three months ended March 31, 2014 was primarily due to fluctuations in our stock price and the impact of those fluctuations on the fair value determination of the hybrid financial instruments. The gain during the three months ended March 31, 2013 was primarily the result of the cancellation of approximately 1.5 billion warrants in February 2013. Gain from Change in Fair Value of Derivative Liabilities - Series C and D Convertible Preferred Stock and Debentures - For our Series C and D Convertible Preferred Stock, and certain of our historical debentures, we account for the embedded conversion feature separately as a derivative financial instrument. We carry these derivative financial instruments at fair value. For the three months ended March 31, 2014 and 2013, the liability related to these hybrid instruments fluctuated, resulting in a gain of $0.1 million as compared to a gain of $1.9 million, respectively. The gain for the three months ended March 31, 2014 was primarily due to fluctuations in our stock price and the impact of those fluctuations on the fair value determination of the hybrid financial instruments. The gain for the three months ended March 31, 2013 was primarily due to a change in our valuation technique used to estimate the liability. See the Change in Estimates discussion within Note 2 - Summary of Significant Accounting Policies in the Notes to the Condensed Consolidated Financial Statements for additional description. Liquidity and Capital Resources As of March 31, 2014, we had $266,000 in cash and cash equivalents compared with $267,000 as of December 31, 2013. Cash provided by operating activities was $27,000 for the three months ended March 31, 2014 compared with $547,000 used in operations for the three months ended March 31, 2013. The improvement in cash flows from operations is primarily due to improved operating results from higher revenues and reduced expenses. Payments on short-term notes payable within cash flows from financing activities reflects disbursements for opportunistic low interest rate borrowings that occurred in 2013 in order to pay annual insurance premiums. Going Concern - We have historically incurred operating losses, and we may continue to generate negative cash flows as we implement our business plan. There can be no assurance that our continuing efforts to execute on our business plan will be successful and that we will be able to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared in conformity with US GAAP, which contemplates our continuation as a going concern given fair value accounting related to our debentures. Our net income for the three months ended March 31, 2014 and 2013 was $15,000 and $29.0 million, respectively, including $35,000 and $29.6 million, respectively, of net gains related to our financing instruments. Net cash provided by operations during the three months ended March 31, 2014 was $27,000 as compared to net cash used in operations of $0.5 million during the three months ended March 31, 2013. As of March 31, 2014, we have an accumulated deficit of $236.9 million. We also have a working capital deficit of $41.3 million, including $39.2 million in current liabilities for our derivative and debenture financing instruments. Page 24 We currently do not have sufficient cash or commitments for financing to sustain our operations for the next twelve months if we are unable to generate sufficient cash flows from operations. Our plan is to develop new client and customer relationships and substantially increase our revenue derived from our products/services and IP licensing. If our revenues do not reach the level anticipated in our plan, we may require additional financing in order to execute our operating plan. If additional financing is required, we cannot predict whether this additional financing will be in the form of equity, debt, or another form, and we may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In the event that financing sources are not available, or that we are unsuccessful in increasing our revenues and profits, we may be unable to implement our current plans for expansion, repay our debt obligations or respond to competitive pressures, any of which would have a material adverse effect on our business, prospects, financial condition and results of operations. The convertible debentures and preferred stock used to finance the Company, which may be converted into common stock at the sole option of the holders, have a highly dilutive impact when they are converted, greatly increasing the number of shares of common stock outstanding. During 2013, there were 2,879 million shares of common stock issued for these conversions. We cannot predict if or when each holder may or may not elect to convert into shares of common stock. Our financial statements do not include any adjustments relating to the recoverability and reclassification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Critical Accounting Policies and Estimates The significant accounting policies set forth in Note 2 to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, as updated by Note 2 to the Unaudited Condensed Consolidated Financial Statements included herein, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013, appropriately represent, in all material respects, the current status of our critical accounting policies and estimates, the disclosure with respect to which is incorporated herein by reference. |