U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-21743
NEOMEDIA TECHNOLOGIES, INC.
(Exact Name of Small Business Issuer as Specified In Its Charter)
DELAWARE 36-3680347
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2201 SECOND STREET, SUITE 600, FORT MYERS, FLORIDA 33901
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number (Including Area Code) 941-337-3434
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
As of April 30, 1999, there were outstanding 10,054,857 shares of the
issuer's Common Stock (excluding 375,000 shares held in escrow as security for
loans).
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
(Unaudited)
(Dollars in thousands
except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents, including restricted amounts of $900 in 1999
and $750 in 1998 .................................................. $ 1,190 $ 1,350
Trade accounts receivable, net of allowance for doubtful
accounts of $323 in 1999 and $225 in 1998 ......................... 6,326 5,912
Amounts due from related parties ...................................... 4 4
Inventories ........................................................... 111 --
Prepaid expenses and other current assets ............................. 856 849
-------- --------
Total current assets .............................................. 8,487 8,115
-------- --------
Property and equipment, net ................................................ 739 786
Intangible assets, net ..................................................... 3,781 3,729
-------- --------
Total assets ............................................................... $ 13,007 $ 12,630
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 5,832 $ 5,898
Accrued expenses ...................................................... 1,112 1,000
Current portion of long-term debt ..................................... 1,580 577
Sales taxes payable ................................................... 578 430
Deferred revenues ..................................................... 651 656
Other ................................................................. 42 7
-------- --------
Total current liabilities ......................................... 9,795 8,568
-------- --------
Long-term debt, net of current portion ..................................... 771 801
-------- --------
Total liabilities ................................................. 10,566 9,369
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized,
none issued or outstanding ........................................ -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
9,388,215 shares issued in 1999 (9,013,215 outstanding) and
9,074,080 shares issued in 1998 (8,699,080 outstanding) ........... 90 87
Additional paid-in capital ............................................ 26,111 25,168
Accumulated deficit ................................................... (23,760) (21,994)
-------- --------
Total shareholders' equity ........................................ 2,441 3,261
-------- --------
Total liabilities and shareholders' equity ................................. $ 13,007 $ 12,630
======== ========
</TABLE>
The accompanying unaudited notes are an integral part of these
unaudited condensed consolidated financial statements.
2
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------------
1999 1998
----------- -----------
(Dollars in thousands,
except per share data)
<S> <C> <C>
NET SALES:
License fees ............................................. $ 1,033 $ 795
Resales of software and technology equipment ............. 5,405 3,966
Service fees ............................................. 1,366 1,241
----------- -----------
Total net sales ...................................... 7,804 6,002
----------- -----------
COST OF SALES:
License fees ............................................. 234 59
Resales of software and technology equipment ............. 4,472 3,309
Service fees ............................................. 1,249 511
Amortization of capitalized software costs ............... 165 103
----------- -----------
Total cost of sales .................................. 6,120 3,982
----------- -----------
GROSS PROFIT .................................................. 1,684 2,020
Sales and marketing expenses .................................. 1,815 1,816
General and administrative expenses ........................... 1,343 1,323
Research and development costs ................................ 220 229
----------- -----------
Loss from operations .......................................... (1,694) (1,348)
Interest expense (income), net ................................ 72 (72)
----------- -----------
LOSS BEFORE INCOME TAXES ...................................... (1,766) (1,276)
Income tax (benefit) .......................................... -- --
----------- -----------
NET LOSS ...................................................... $ (1,766) $ (1,276)
=========== ===========
NET LOSS PER SHARE - BASIC AND DILUTED ........................ $ (.20) $ (0.15)
=========== ===========
Weighted average number of common shares - basic and diluted... 8,848,340 8,310,850
=========== ===========
</TABLE>
The accompanying unaudited notes are an integral part of these
unaudited condensed consolidated financial statements.
3
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-----------------------
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................... $ (1,766) $ (1,276)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................ 376 175
Provision for doubtful accounts .......................................... 90 80
Changes in operating assets and liabilities:
Trade accounts receivable ............................................ (504) 1,469
Other current assets ................................................. (118) 367
Accounts payable and accrued expenses ................................ 46 (1,933)
Other current liabilities ............................................ 179 147
-------- --------
Net cash used in operating activities ................................ (1,697) (971)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalization of software development costs and purchased intangible assets... (341) (110)
Acquisition of property and equipment ......................................... (40) (121)
-------- --------
Net cash used in investing activities ................................ (381) (231)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock options ................................... 41 75
Borrowings under long term debt ............................................... 1,000 --
Repayments on long term debt .................................................. (28) (59)
Net proceeds from the issuance of stock ....................................... 905 --
-------- --------
Net cash provided by financing activities ............................ 1,918 16
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ..................................... (160) (1,186)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ................................ 1,350 10,283
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD ...................................... $ 1,190 $ 9,097
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ............................................................ $ 78 $ 54
======== ========
</TABLE>
The accompanying unaudited notes are an integral part of these
unaudited condensed consolidated financial statements.
4
<PAGE>
NEOMEDIA TECHNOLOGIES, INC. AND SUBSIDIARIES
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS
BASIS OF PRESENTATION
The condensed consolidated financial statements include the financial
statements of NeoMedia Technologies, Inc. and its wholly-owned subsidiaries. The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB and do not include
all of the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, these condensed consolidated financial statements reflect all
adjustments which are of a normal recurring nature and which are necessary to
present fairly the consolidated financial position of NeoMedia as of March 31,
1999 and December 31, 1998, and the results of operations for the three months
ended March 31, 1999 and 1998, and cash flows for the three months ended March
31, 1999 and 1998. The results of operations for the three months ended March
31, 1999 are not necessarily indicative of the results which may be expected for
the entire fiscal year. All significant intercompany accounts and transactions
have been eliminated in preparation of the condensed consolidated financial
statements.
2. LIQUIDITY AND SUBSEQUENT EVENTS
During the years ended December 31, 1998 and 1997 the Company's net loss
totaled approximately $11,495,000 and $5,973,000, respectively. As of March 31,
1999 the Company had accumulated losses from operations of approximately
$23,760,000, had a working capital deficit of approximately $1,308,000, and
approximately $290,000 in unrestricted cash balances.
Management believes it will need to raise additional capital as well as
reduce expenses to sustain the Company's operations in 1999. The failure of
management to accomplish these initiatives will adversely effect the Company's
business, financial conditions, and results of operations and its ability to
continue as a going concern.
Subsequent to March 31, 1999, the Company issued approximately 975,000
previously unissued shares of its common stock at a price of $3.45 per share.
Gross proceeds from these transactions were approximately $3,400,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Through the three months ended March 31, 1999, a substantial part of
NeoMedia's revenue was derived from resales of software and technology
equipment. NeoMedia couples its proprietary software products with independent
vendor products it resells, enabling it to provide a complete "turn-key" service
for its customers. Currently, NeoMedia's revenue consists of (i) software
license fees, (ii) resales of software and technology equipment from independent
vendors and (iii) service fees, including consulting and post contract software
support.
As of March 31, 1999 the Company had accumulated losses from operations of
$23,766,000, had a working capital deficit of approximately $1,308,000 and
approximately $290,000 in unrestricted cash balances. In order to sustain
operations, the Company will need to continue to raise additional capital.
License fees for the three months ended March 31, 1999 increased 29.9% from
the three months ended March 31, 1998, and, as a percentage of total sales,
remained unchanged at 13.2% of total sales during those periods. NeoMedia's
strategy is to increase licenses of its proprietary Intelligent DocumentsTM
software as a percentage of total sales. NeoMedia has built and intends to
continue to build an infrastructure that assumes this strategy will succeed.
Therefore, failure to achieve this strategy could have a material adverse effect
on NeoMedia's business, financial condition and results of operations.
5
<PAGE>
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 MARCH 31, 1999 AS COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1998
NET SALES. Total net sales for the three months ended March 31, 1999 were
$7.8 million, which represented a $1.8 million, or 30.0%, increase from $6.0
million for the three months ended March 31, 1998. This increase primarily
resulted from a $1.6 million increase in equipment resales to a NeoMedia
customer in the telecommunications industry.
LICENSE FEES. License fees for the three months ended March 31, 1999 were
$1,033,000 compared to $795,000 for the three months ended March 31, 1998, an
increase of $238,000 or 29.9%. This increase resulted primarily from the
increase in sales of licenses of NeoMedia's Year 2000 software. Cost of sales as
a percentage of related sales was 22.6% during 1999 compared to 1.6% during
1998. This increase in the cost of sales as a percentage of related sales was
primarily due to the increased sales of software with royalties.
RESALES OF SOFTWARE AND TECHNOLOGY EQUIPMENT. Resales of software and
technology equipment increased by $1.4 million, or 36.3%, to $5.4 million for
the three months ended March 31, 1999, as compared to $4.0 million for the three
months ended March 31, 1998. This increase primarily resulted from equipment
resales to NeoMedia's largest customer. Cost of sales as a percentage of related
sales was 82.7% during 1999, compared to 83.4% during 1998.
SERVICE FEES. NeoMedia's service fees increased by $125,000, or 10.1%, to
$1.4 million for the three months ended March 31, 1999, compared to $1.2 million
for the three months ended March 31, 1998. This increase was primarily due to an
increase in the Year 2000 services. Cost of service fees as a percentage of
related sales increased to 103.5% during 1999 from 41.2% during 1998 primarily
due to lower margins on Year 2000 services and an increase in subcontractor
costs.
SALES AND MARKETING. A portion of the compensation to the sales and
marketing staff constitutes salary and is fixed in nature and the remainder of
this compensation, which is paid as a commission, is directly related to sales
volume. Sales and marketing expenses remained unchanged at $1.8 million.
GENERAL AND ADMINISTRATIVE. General and administrative expenses remained
unchanged at $1.3 million for the three months ended March 31, 1999 and 1998.
RESEARCH AND DEVELOPMENT. Research and development expense remained
relatively unchanged at $220,000 for the three months ended March 31, 1999, and
$229,000 for the three months ended March 31, 1998. These expenditures are
primarily attributable to the cost of employees involved in the further
development and enhancement of the IDOCs(TM) product line. To the extent the
Company can obtain additional capital, it will continue to make significant
investments in research and development.
INTEREST EXPENSE(INCOME), NET. Interest expense consists primarily of
interest paid to creditors as part of financed purchases, capitalized leases,
notes payable and NeoMedia's asset-based collateralized line of credit net of
interest earned on cash equivalent investments. Interest (income)/expense
increased by $144,000, or 200.0%, to $72,000 for the three months ended March
31, 1999 from $(72,000) for the three months ended March 31, 1998, due to the
interest expense incurred on new debt issued during the last quarter of 1998 and
lower cash balances in 1999, from which less interest income was received.
NET LOSS. The net loss for the quarter ended March 31, 1999, was $1.8
million, which represented a $500,000, or 38.4% increase from a $1.3 million
loss for the three months ended March 31, 1998. The increase in net loss
primarily resulted from a decrease in Document Factory service revenue of
$380,000 as well as an increase in interest expense of $144,000 due to a
decrease in the amount of cash available in 1999 as compared to 1998.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
NeoMedia anticipates that its existing cash balances and funds available
from borrowings under its existing financing agreement will have to be
supplemented with additional funds, through loans and / or capital
contributions, to finance NeoMedia's operations in 1999. During the first
quarter of 1999, the Company has successfully obtained approximately $900,000 of
equity financing and approximately $1,000,000 of convertible debt financing. The
Company has obtained an additional $3,400,000 of equity financing and expects to
obtain $1,000,000 of convertible debt financing in the second quarter of 1999.
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.
The report of KPMG LLP, covering the December 31, 1998 consolidated
financial statements, contains an explanatory paragraph that states that our
recurring losses from operations and accumulated deficit raise substantial
doubts about our ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
Net cash used in operating activities for the three months ended March 31,
1999 and 1998, was $1.7 million and $1.0 million, respectively. During 1999,
trade accounts receivable decreased $504,000, while accounts payable and accrued
expenses and other current liabilities increased $225,000. During 1998, trade
accounts receivables increased $1.5 million, while accounts payable and accrued
expenses and other current liabilities decreased $1.8 million. NeoMedia's net
cash flow used in investing activities for the three months ended March 31, 1999
and 1998, was $381,000 and $231,000, respectively. This increase resulted from
the increase in purchases of intangible assets and capitalized development
costs.
Net cash provided by financing activities for the three months ended March
31, 1999 and 1998, was $1.9 million and $16,000, respectively. The increase was
due to a $1.0 million convertible promissory note issued and $900,000 from the
issuance of previously unissued common stock.
The Company has entered into a migration contract (specifically Year 2000
remediation) with a Colombian customer related to the remediation of certain of
the customer's computer systems to be Year 2000 compliant. The total contact is
approximately $1 million, of which approximately $525,000 has been recognized as
revenue by the Company as of March 31, 1999. As an element to the contract the
Company has guaranteed its work product and resulting Year 2000 compliance of
the customer. To this end, during 1999 the Company established bank guarantees
in the form of certificates of deposit totaling approximately $150,000 in favor
of the customer. The Company believes that it has the ability and intent to
complete such remediation in a satisfactory manner and is accounting for this
project on a percentage of completion basis.
YEAR 2000 ISSUES
In the next year, many companies, including NeoMedia, will face potentially
serious issues associated with the inability of existing data processing
hardware and software to appropriately recognize calendar dates beginning in the
year 2000. Many computer programs that can only distinguish the final two digits
of the year entered may read entries for the year 2000 as the year 1900. In
1996, NeoMedia began the process of identifying the many software applications
and hardware devices used internally expected to be impacted by this issue.
NeoMedia's analysis encompasses its (i) applications software; (ii) hardware and
(iii) data residing in programs. The software programs used internally by
NeoMedia (primarily its general ledger accounting package) were purchased from
third party vendors. In assessing its risk of non-compliance, the Company=s
internal systems department classified vital and non-vital production systems.
NeoMedia has completed the analysis of over 70% of all production systems
software (representing virtually all of the Avital@ systems comprising the
corporate backbone), including verification by third party vendors that the
programs are Year 2000 compliant, as well as internal testing which confirms
readiness of those programs. NeoMedia incurred costs of approximately $1,000 in
upgrading the operating system, and about $3,500 in upgrading the application
program, for its existing accounting general ledger program. In addition, the
Company has purchased a new general ledger accounting package, which is Year
2000 compliant according to the vendor. The Company is currently developing the
environment for this new system, and plans to begin installation in 1999. The
Company expects to maintain the existing accounting package for archival and
contingency purposes. As an additional measure of security, routine back-ups of
data are
7
<PAGE>
performed to preserve information in various vital systems, and manual or paper
files are maintained if other measures fail with regard to the most vital
accounting functions. The remaining 30% of the application software is
considered either non-vital or capable of compliance with a vendor-provided
Apatch@ on an as-needed basis. NeoMedia expects to test virtually all remaining
application programs in 1999. NeoMedia believes that the hardware devices
supporting production systems which were not year 2000 compliant have been
replaced with those which are year 2000 compliant. The few remaining PC=s which
are not now compliant are scheduled for routine replacement during 1999 with
compliant hardware, thereby eliminating the year 2000 concern. Although prudent
measures have been taken, there can be no assurance that NeoMedia will not be
adversely affected by the failure of the upgraded package to be fully year 2000
compliant as represented by the vendor. With hardware and software matters
nearing completion in 1999, NeoMedia plans to utilize its proprietary software
tools to analyze vital data residing in application programs, such as accounting
spreadsheets, for non-complaint data. Vital data will be remediated. NeoMedia
believes that its proprietary software, for which it is currently selling
licenses, is year 2000 compliant. Remaining year 2000 remediation costs are
anticipated to be insignificant.
8
<PAGE>
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
On January 20, 1999, the Company filed a Form 8-K Current
Report to disclose that it acquired its first patent for the Company's
Intelligent DocumentsTM (IDOCsTM) technology, which includes products
such as NeoLinkTM. The Company also announced that it acquired a body
of domestic and international patent filings from Solar Communications
of Naperville, Illinois.
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEOMEDIA TECHNOLOGIES, INC.
Registrant
Date MAY 13, 1999 By: /s/ CHARLES W. FRITZ
------------ ------------------------------------------------
Charles W. Fritz, President, Chief Executive
Officer and Chairman of the Board
Date MAY 13, 1999 By: /s/ CHARLES T. JENSEN
------------ -----------------------------------------------
Charles T. Jensen, Vice President, Chief
Financial Officer, Treasurer and Director
10
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27.1 Article 5 Financial Data Schedule for March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,190
<SECURITIES> 0
<RECEIVABLES> 6,649
<ALLOWANCES> 323
<INVENTORY> 0
<CURRENT-ASSETS> 8,487
<PP&E> 8,372
<DEPRECIATION> 3,852
<TOTAL-ASSETS> 13,007
<CURRENT-LIABILITIES> 9,795
<BONDS> 0
0
0
<COMMON> 26,201
<OTHER-SE> (23,760)
<TOTAL-LIABILITY-AND-EQUITY> 13,007
<SALES> 7,804
<TOTAL-REVENUES> 7,804
<CGS> 6,120
<TOTAL-COSTS> 6,120
<OTHER-EXPENSES> 3,378
<LOSS-PROVISION> 90
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> (1,766)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,766)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,766)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
