U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
AMENDMENT NO. 2 TO
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): February 23, 2006
NEOMEDIA TECHNOLOGIES, INC.
---------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 0-21743 36-3680347
---------------------------- ------------------------ -------------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
Incorporation) Identification No.)
2201 Second Street, Suite 600,
Fort Myers, Florida 33901
------------------------------------ ------------------
(Address of Principal Executive (Zip Code)
Offices)
(239) - 337-3434
-----------------------------------
(Registrant's Telephone
Number, including Area Code)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act
(17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the
Exchange Act (17 CFR 240.13e-4(c))
ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
Completion of Acquisition of Sponge Limited
On February 20, 2006, NeoMedia Technologies, Inc. ("NeoMedia) and
Sponge Limited ("Sponge") of London (www.spongegroup.com) signed a definitive
share purchase agreement, subject to closing conditions, under which NeoMedia
acquired all of the outstanding shares of Sponge in exchange for
(pound)3,450,000 (approximately $6 million) cash and (pound)6,550,000
(approximately $11.4 million) in shares of NeoMedia common stock. The
(pound)6,550,000 stock portion of the purchase price is represented by
33,097,135 shares of NeoMedia common stock, calculated by dividing
(pound)6,550,000 by the volume-weighted average closing price of NeoMedia common
stock for the ten days up to and including February 8, 2006. The agreement also
calls for Sponge to earn an additional (pound)2,500,000 (approximately $4.4
million) in the form of NeoMedia common stock if, during the two-year period
beginning at closing, the Sponge business earns in excess of (pound)1,300,000
(approximately $2.3 million) in net profits. Pursuant to the terms of the merger
agreement, the number of shares of NeoMedia common stock to be issued as
consideration was calculated using a share price of $0.384. In the event that
NeoMedia's stock price at the time the consideration shares are saleable is less
than $0.384, NeoMedia is obligated to compensate Sponge shareholders in cash for
the difference between the price at the time the shares become saleable and
$0.384
On February 23, 2006, NeoMedia and Sponge completed the closing
requirements and the acquisition became effective.
Founded in 2001, Sponge has grown to become a U.K. market leader in
providing mobile applications to agencies and media groups, and gain recognition
as one of Europe's top independent developers of mobile applications and
content. Today, Sponge counts more than 40 agencies, including WPP, Aegis and
BBH, as clients, and supplies services for over 100 world-class brands,
including Coca Cola(R), Heineken(R) and Diageo. Sponge also supplies a range of
mobile services to media groups, including News International, Trinity Mirror,
Endemol and IPC.
On February 24, 2006, NeoMedia filed a Form 8-K with respect to Item
2.01, disclosing the completion of the acquisition of Sponge. On May 9, 2006,
NeoMedia filed Amendment No. 1 to the Form 8-K, which included Sponge's
financial statements required by Items 7(a) and (b) of Form 8-K. This Amendment
No. 2 to Form 8-K is being filed in order to provide restated financial
statements of Sponge.
2
ITEM 9.01. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
(a) Financial Statements of Acquired Businesses - Sponge Ltd.
Interim Financial Statements for the three months ended December 31, 2005
and 2004 (unaudited): Balance sheet as of December 31, 2005 Statements of
income for the three months ended December 31, 2005 and 2004 Statements of
cash flows for the three months ended December 31, 2005 and 2004 Notes to
financial statements
Audited Financial Statements for the years ended September 30, 2005 and
2004: Report of Independent Auditors Balance sheet as of September 30,
2005 Statements of income for the years ended September 30, 2005 and 2004
Statements of changes in stockholders' deficit for the years ended
September 30, 2005 and 2004 Statements of cash flows for the years ended
September 30, 2005 and 2004 Notes to financial statements
(b) Pro Forma Financial Information
Notes to pro forma combined financial statements Pro forma combined
balance sheet as of December 31, 2005 (unaudited) Pro forma combined
statement of operations for the twelve months ended December 31, 2005
(unaudited)
(c) Exhibits
23.1 - Consent of Brebner Allen & Trapp, Independent Auditors of Sponge
Ltd.
EXPLANATORY NOTE: A portion of Sponge's sales for the periods presented in
Amendment No. 1 to Form 8-K filed on May 9, 2006 were presented gross with an
accompanying cost of goods sold. In connection with its first quarter 2006
review, NeoMedia evaluated the technical aspects of the revenue recognition
treatment as it relates to Sponge's sales and cost of sales. Based on that
review, NeoMedia concluded that the sales in question should be recognized on a
net basis. The financial statements presented herein reflect the sales on a net
basis. The effect of the adjustment is to reduce sales and cost of sales, and
does not affect gross profit, operating expenses or net income. The adjustment
also does not affect any balance sheet accounts or cashflow disclosures. Please
see footnote 9 of the enclosed interim financial statements and footnote 15 of
the enclosed audited financial statements for additional discussion.
3
(a) Financial Statements of Acquired Business - Sponge Ltd.
Interim Financial Statements for the
three months ended December 31, 2005 and 2004 (unaudited)
4
Supplementary Financial Information
The following information presents Sponge Ltd.'s unaudited quarterly operating
results for the three months ended December 31, 2005 and 2004. The data has been
prepared by Sponge Ltd. on a basis consistent with the consolidated financial
statements included elsewhere in this Form 8-K/A, and includes all adjustments,
consisting of normal recurring accruals, that we consider necessary for a fair
presentation thereof. These operating results are not necessarily indicative of
our future performance.
--------------------------------------------------------------------------------
SPONGE LIMITED
BALANCE SHEETS
AS AT DECEMBER 31, 2005 AND SEPTEMBER 30, 2005
----------------------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
2005 2005
$ $
ASSETS (unaudited)
Current assets
Cash and cash equivalents 439,210 1,077,138
Accounts receivable 223,210 254,373
Accrued income 238,756 563,471
Other receivables 26,487 41,737
Prepaid expenses 47,978 36,592
------------ -------------
Total current assets 975,641 1,973,311
------- ---------
Property and equipment
Equipment and furniture 96,957 99,680
Accumulated depreciation (48,611) (44,123)
-------- --------
Total property and equipment 48,346 55,557
---------- ----------
Total assets $1,023,987 $2,028,868
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 298,010 1,255,479
Accrued expenses 266,444 317,320
Taxes payable 89,693 87,685
Other current liabilities 22,742 21,695
Customer deposits 50,390 39,009
Deferred taxes --- 1,744
------------- ------------
Total current liabilities 727,279 1,722,932
------- ---------
Long-term debt 104,969 107,915
------- -------
Total long-term liabilities 104,969 107,915
------- -------
Shareholders' equity
Common stock 631 631
Additional paid in capital 10,781 10,781
Accumulated earnings/(deficit) 220,536 221,425
Accumulated foreign exchange (40,209) (34,816)
--------- ---------
Total shareholders' equity/(deficit) 191,739 198,021
======= =======
Total liabilities and shareholders' equity $1,023,987 $2,028,868
========= =========
These financial statements were approved by the directors on 5th May 2006,
except for Note 15, which is as of June 20, 2006, and are signed on their behalf
by:
...................................
/s/ A T J Meisl
Director
The accompanying notes are an integral part of these statements.
5
SPONGE LIMITED
STATEMENT OF INCOME, AS RESTATED
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 (UNAUDITED)
--------------------------------------------------------------------------------
2005 2004
$ $
Sales 622,969 415,852
Cost of sales (260,544) (54,610)
--------- ---------
Gross Profit 362,425 361,242
General and administrative expenses (389,371) (252,343)
--------- ---------
Operating income (26,946) 108,899
--------- ---------
Other income 21,400 --
Interest 4,657 1,317
--------- ---------
Total Other Income 26,057 1,317
--------- ---------
(Loss)/income before taxes (889) 110,216
Tax expense -- --
--------- ---------
Net (loss)/income $ (889) $ 110,216
========= =========
The accompanying notes are an integral part of these statements.
6
SPONGE LIMITED
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2005 AND 2004 (UNAUDITED)
-------------------------------------------------------------------------------------
2005 2004
$ $
Operating Activities
Net (loss)/income (889) 110,216
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 4,488 3,720
Changes in operating assets and liabilities:
Accounts receivable 31,163 (21,025)
Other current assets 328,579 (39,420)
Accounts payable (957,469) (204,572)
Accrued expenses and other current liabilities (38,184) 60,731
----------- -----------
Net cash used by operating activities (632,312) (90,350)
=========== ===========
Investing activities:
(Purchase) disposal of equipment 2,723 (6,670)
----------- -----------
Net cash used in investing activities 2,723 (6,670)
=========== ===========
Financing activities:
Issuance (payment) of long-term debt (2,946) 7,137
----------- -----------
Net cash provided by financing activities (2,946) 7,137
=========== ===========
Net decrease in cash (632,535) (89,883)
Foreign currency adjustment (5,393) (1,149)
Cash at beginning of year 1,077,138 541,660
----------- -----------
Cash at end of period $ 439,210 $ 450,628
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest received 4,657 1,317
Taxes paid 97,035 67,861
=========== ===========
The accompanying notes are an integral part of these statements.
7
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004 (UNAUDITED)
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Nature of Business
Sponge Limited (the Company) was incorporated on September 12, 1995. The
company is engaged in the provision of marketing services via the
telecommunications industry.
Basis of Presentation
These condensed consolidated financial statements and related notes
should be read in conjunction with the Company's audited financial
statements and related footnotes for the fiscal years ended September 30,
2005 and 2004. In the opinion of management, these financial statements
reflect all adjustments which are of a normal recurring nature and which
are necessary to present fairly the financial position of the Company as
of December 31, 2005, the results of operations for the three-month
periods ended December 31, 2005 and 2004, and cash flows for the
three-month periods ended December 31, 2005 and 2004. The results of
operations for the three-month periods ended December 31, 2005 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
Revenue Recognition
The company records sales for services provided as a principal when the
service has been provided to the customer, the sales price is fixed and
determinable, and the collection is reasonably assured.
Revenue can be divided into two main sources:-
(i) Media - a premium rate text promotional service
(ii) Brand - a standard rate promotional text service
In both cases Revenue is dependent on message volumes and recognised
according to the date of the message. Premium rate text services are
recognized net of any fees paid back to the customer.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
8
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS (cont'd)
DECEMBER 31, 2005 AND 2004 (UNAUDITED)
--------------------------------------------------------------------------------
Credit Concentrations
The company's customers are concentrated in the telecommunications
industry. Concentrations of credit risk with respect to trade receivables
are limited to major network providers within the industry.
Foreign Currencies
The functional currency of the company's operations is sterling. The
financial statements are reported in United States dollars and are
translated to United States dollars at the exchange rates in effect at
the balance sheet date for assets and liabilities and at average rates
for the period for revenues and expenses. Resulting exchange
differences are accumulated as a component of accumulated other
comprehensive income. Transaction foreign exchange gains and losses are
included in the income statement.
Financial Instruments
The carrying amount of the Company's cash equivalents, accounts
receivable, prepaid expenses, other current assets, cash surrender
value of life insurance policy, accounts payable and accrued expenses,
accrued salaries and benefits, and payables to merchants approximates
their estimated fair values due to the short-term maturities of those
financial instruments.
Rates currently available to the Company for debt with similar terms
and remaining maturities are used to estimate fair value of existing
debt.
2. Sales
The sales and profit before tax are attributable to the one principal
activity of the company. An analysis of sales is given below:
3 Months Ended December 31
----------------------------
2005 2004
$ $
United Kingdom 694,476 506,646
USA 1,780 231,784
Other 108,018 -
------- -----------
804,274 738,430
======= =======
3. Taxes Payable
December 2005 September 2005
------------- --------------
$ $
Employment taxes 33,819 31,989
Corporation tax 55,874 55,696
------ ------
89,693 87,685
====== ======
4. Lease Commitments
The company's office space lease commenced May 27, 2005 and expires on
May 26, 2015. Rental expense in respect of this lease totalled $32,698
and $Nil for the three months ended December 31, 2005 and 2004,
respectively. The company is obligated to pay (pound)59,025 in the
first year of the lease and (pound)78,700 thereafter until the first
review date on the fifth anniversary.
9
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS (cont'd)
DECEMBER 31, 2005 AND 2004 (UNAUDITED)
--------------------------------------------------------------------------------
5. Related Party Transactions
Included in Other Receivables is an amount of $Nil (September 2005:
$8,846) due from A Meisl (Director) in respect of a loan made. The maximum
balance outstanding during the period was $8,846.
Included in Other Receivables is an amount of $Nil (September 2005:
$8,846) due from D Parker (Director) in respect of a loan made. The
maximum balance outstanding during the period was $8,846.
Included in Accrued Expenses is an amount of $2,323 (September 2005:
$1,592) due to A Meisl (Director) in respect of business expenses incurred
but not reimbursed.
Included in Accrued Expenses is an amount of $2,323 (September 2005
$1,592) due to D Parker (Director) in respect of business expenses
incurred but not reimbursed.
Included in Cost of Sales is an amount of $6,560 (September 2005: $6,996)
paid to P Trelease (Director) in respect of consultancy services rendered.
P. Trelease resigned as a director of Sponge Limited on February 23, 2006.
There are no set interest or repayment terms in respect of outstanding
balances.
Control
Control of the company rested with A Meisl and D Parker, directors, during
the three months ended December 31, 2005 and 2004.
6. Long-term Debt
On December 16, 2004 the company issued 61,000, out of an authorised
100,000, non-voting 1% preference shares of (pound)1 each. These
preference shares were allotted at par via conversion of an existing long
term loan.
10
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS (cont'd)
DECEMBER 31, 2005 AND 2004 (UNAUDITED)
--------------------------------------------------------------------------------
7. Common Stock
Authorised Common Stock
As of December 31,
2005
(pound)
1,000,000 Ordinary shares of (pound)1 each 1,000,000
=========
Allotted, called up and fully paid:
As of December 31,
2005
No. $
Ordinary shares of (pound)1 each 423 631
=== ===
Issued share capital is recorded at the historic rate. There were no
changes in the authorised or issued share capital during the three
months ended December 31, 2005.
8. Post Balance Sheet Events
In March 2006 the directors paid a final dividend on the Ordinary Shares
for the year ended 30th September 2005 of (pound)105,000 (2004: Nil).
In February 2006 the company's Issued Common Stock was purchased by
Neomedia Technologies Inc, a company incorporated and operating in the
United States of America.
11
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS (cont'd)
DECEMBER 31, 2005 AND 2004 (UNAUDITED)
--------------------------------------------------------------------------------
9. Restatement of previously reported financial information
The company, in reviewing its accounting practices, became aware that a
net, rather than gross, revenue recognition of its premium rate text
promotional services would give a fairer presentation of results. As a
result, the company has overstated its sales as well as overstated its
cost of sales on its statement of income. The treatment did not affect net
income, nor any balance sheet or equity accounts, or cashflow disclosures.
As a result, the company has restated certain financial information that
was previously reported in its financial statements for the three months
ended December 31, 2005 and 2004. The following tables provide a
reconciliation of amounts previously reported by the company:
Three Months Ended December 31, 2005 Three Months Ended December 31, 2004
------------------------------------------------ -----------------------------------------------
Previously Restatement Restated Previously Restatement Restated
Reported Adjustment Total Reported Adjustment Total
------------- ---------------- ----------- ------------- ---------------- -----------
$ $ $ $ $ $
Sales 804,274 (181,305) 622,969 738,430 (322,578) 415,852
Cost of sales 441,849 (181,305) 260,544 377,188 (322,578) 54,610
------------- ---------------- ----------- ------------- ---------------- -----------
Gross profit 362,425 --- 362,425 361,242 --- 361,242
============= ================ =========== ============= ================ ===========
12
Audited Financial Statements for the
years ended September 30, 2005 and 2004
13
SPONGE LIMITED
INDEPENDENT AUDITOR'S REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
--------------------------------------------------------------------------------
We have audited the accompanying balance sheets of Sponge Limited as at
September 30 2005 and 2004 and the related statements of income, retained
earnings, and cash flows for the years then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
This report is made solely to the company's directors, as a body and its
shareholders. Our audit work has been undertaken so that we might state to them
those matters we are required to state to them in an auditor's report and for no
other purpose. To the fullest extent permitted by law, we do not accept or
assume responsibility to anyone other than the addresses, for our audit work,
for this report, or for the opinions we have formed.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provide a reasonable
basis for our opinion.
The consolidated financial statements described above have been restated from
those previously issued as described in note 15.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sponge Limited as at September
30 2005 and 2004, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Brebner, Allen & Trapp
Chartered Accountants and Registered Auditors
The Quadrangle
180 Wardour Street
London W1F 8LB
5th May 2006, except for Note 15, which is as of June 20, 2006.
14
SPONGE LIMITED
BALANCE SHEETS
AS AT SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------------------------------------
2005 2004
$ $
ASSETS
Current assets
Cash and cash equivalents 1,077,138 541,660
Accounts receivable 254,373 268,863
Accrued income 563,471 179,643
Other receivables 41,737 28,612
Prepaid expenses 36,592 4,205
----------- -----------
Total current assets 1,973,311 1,022,983
----------- -----------
Property and equipment
Equipment and furniture 99,680 41,780
Accumulated depreciation (44,123) (28,888)
----------- -----------
Total property and equipment 55,557 12,892
----------- -----------
Total assets $ 2,028,868 $ 1,035,875
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable 1,255,479 755,029
Accrued expenses 317,320 212,960
Taxes payable 87,685 18,584
Other current liabilities 21,695 12,048
Customer deposits 39,009 --
Deferred taxes 1,744 --
----------- -----------
Total current liabilities 1,722,932 998,621
----------- -----------
Long-term debt 107,915 110,386
----------- -----------
Total long-term liabilities 107,915 110,386
----------- -----------
Shareholders' equity
Common stock 631 631
Additional paid in capital 10,781 10,781
Accumulated earnings/(deficit) 221,425 (60,156)
Accumulated foreign exchange (34,816) (24,388)
----------- -----------
Total shareholders' equity/(deficit) 198,021 (73,132)
=========== ===========
Total liabilities and shareholders' equity $ 2,028,868 $ 1,038,875
=========== ===========
These financial statements were approved by the directors on 5th May 2006,
except for Note 15, which is as of June 20, 2006 and are signed on their behalf
by:
...................................
/s/ A T J Meisl
Director
The accompanying notes are an integral part of these statements.
15
SPONGE LIMITED
STATEMENT OF INCOME, AS RESTATED
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------------------------------------
2005 2004
$ $
Sales 1,959,599 782,403
Cost of sales (1,008,662) (390,268)
----------- -----------
Gross Profit 950,937 392,135
General and administrative expenses (659,107) (345,260)
----------- -----------
Operating income 291,830 46,875
----------- -----------
Other income 35,764 --
Interest 13,999 2,145
----------- -----------
Total Other Income 49,763 2,145
----------- -----------
Income before taxes 341,593 49,020
Tax expense (60,012) --
----------- -----------
Net income $ 281,581 $ 49,020
=========== ===========
The accompanying notes are an integral part of these statements.
16
SPONGE LIMITED
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------------------------------------
2005 2004
$ $
Operating Activities
Net income 281,581 49,020
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 16,592 11,770
Changes in operating assets and liabilities:
Accounts receivable 8,852 (141,232)
Other current assets (393,178) (79,486)
Accounts payable 540,509 597,438
Accrued expenses and other current liabilities 179,228 (29,759)
----------- -----------
Net cash provided by operating activities 633,584 407,751
=========== ===========
Investing activities:
Purchase of equipment (58,835) (8,905)
----------- -----------
Net cash used in investing activities (58,835) (8,905)
=========== ===========
Financing activities:
Net proceeds from issuance of common stock -- 10,792
----------- -----------
Net cash provided by financing activities -- 10,792
=========== ===========
Net increase in cash 574,749 409,638
Foreign currency adjustment (39,271) 15,631
Cash at beginning of year 541,660 116,391
----------- -----------
Cash at end of year $ 1,077,138 $ 541,660
=========== ===========
Supplemental Cash Flow Information:
Interest received 13,999 2,144
Taxes paid 323,523 77,238
=========== ===========
The accompanying notes are an integral part of these statements.
17
SPONGE LIMITED
STATEMENT OF SHAREHOLDERS' EQUITY/(DEFICIT)
--------------------------------------------------------------------------------
Common Total
Stock Additional Accumulated Accumulated Shareholders'
Shares of Paid in Foreign Earnings/ Equity/
(pound)1 each Capital Exchange (Deficit) (Deficit)
$ $ $ $ $
Balance September 30, 2003 620 -- (14,132) (109,176) (122,688)
Issuance of common stock 11 10,781 -- -- 10,792
Comprehensive income:
Net income -- -- -- 49,020 49,020
Foreign currency adjustment -- -- (10,256) -- (10,256)
--------- --------- --------- --------- ---------
Balance September 30, 2004 631 10,781 (24,388) (60,156) (73,132)
Comprehensive income:
Net income -- -- -- 281,581 281,581
Foreign currency adjustment -- -- (10,428) -- (10,428)
--------- --------- --------- --------- ---------
Balance September 30, 2005 $ 631 $ 10,781 $ (34,816) $ 221,425 $ 198,021
========= ========= ========= ========= =========
The accompanying notes are an integral part of these statements.
18
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies
Nature of Business
Sponge Limited (the Company) was incorporated on September 12, 1995. The
company is engaged in the provision of marketing services via the
telecommunications industry.
Revenue Recognition
The company records sales for services provided as a principal when the
service has been provided to the customer, the sales price is fixed and
determinable, and the collection is reasonably assured.
Revenue can be divided into two main sources:-
(i) Media - a premium rate text promotional service
(ii) Brand - a standard rate promotional text service
In both cases Revenue is dependent on message volumes and recognised
according to the date of the message. Premium rate text services are
recognized net of any fees paid back to the customer.
Equipment and Furniture
Equipment and furniture are recorded at cost. Provisions for depreciation
are computed using the straight-line method over the estimated useful
lives of the assets of three years.
Income Taxes
The company accounts for income taxes under the liability method.
Deferred Taxes
Deferred tax is recognised in respect of all timing differences between
the financial statements carrying amounts of assets and liabilities and
their respective tax basis that have originated but not reversed at the
balance sheet date where transactions or events have occurred at that
date that will result in an obligation to pay more, or a right to pay
less or to receive more tax.
Deferred tax assets are also recognised for operating losses for which the
directors consider that it is more likely than not that there will be
suitable taxable profits from which the future reversal of the underlying
timing differences can be deducted.
Deferred tax assets and liabilities are measured at the tax rates that
are expected to apply in the periods in which timing differences
reverse, based on tax rates and laws enacted or substantively enacted
at the balance sheet date.
Advertising
The company has elected to expense all advertising costs, as incurred.
Advertising costs charged to expense totalled $8,354 and $4,335 for the
years ended September 30, 2005 and 2004 respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
19
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS (cont'd)
SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------------------------------------
Credit Concentrations
The company's customers are concentrated in the telecommunications
industry. Concentrations of credit risk with respect to trade
receivables are limited to major network providers within the industry.
Foreign Currencies
The functional currency of the company's operations is sterling. The
financial statements are reported in United States dollars and are
translated to United States dollars at the exchange rates in effect at
the balance sheet date for assets and liabilities and at average rates
for the period for revenues and expenses. Resulting exchange
differences are accumulated as a component of accumulated other
comprehensive income. Transaction foreign exchange gains and losses are
included in the income statement.
Financial Instruments
The carrying amount of the Company's cash equivalents, accounts
receivable, prepaid expenses, other current assets, cash surrender
value of life insurance policy, accounts payable and accrued expenses,
accrued salaries and benefits, and payables to merchants approximates
their estimated fair values due to the short-term maturities of those
financial instruments.
Rates currently available to the Company for debt with similar terms
and remaining maturities are used to estimate fair value of existing
debt.
2. Sales
The sales and profit before tax are attributable to the one principal
activity of the company. An analysis of sales is given below:
2005 2004
$ $
United Kingdom 4,299,713 2,138,885
USA 294,541 104,295
Other 5,915 -
--------- ---------
4,600,169 2,243,180
========= =========
3. Other Income
2005 2004
$ $
Rent 35,764 -
====== ===========
20
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS (cont'd)
SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------------------------------------
4. Particulars of Employees
The average number of staff employed by the company during the financial
year amounted to:
2005 2004
No No
Number of commercial staff 4 2
Number of technical staff 4 2
Number of administrative staff 2 1
Number of management staff 3 3
--- ---
13 8
== ===
The aggregate payroll costs of the above were:
2005 2004
$ $
Wages and salaries 824,961 375,321
Social security costs 91,960 40,550
------- -------
916,921 415,871
======= =======
5. Directors' Emoluments
The directors' aggregate emoluments in respect of qualifying services
were:
2005 2004
$ $
Emoluments receivable 266,155 166,457
======= =======
6. Interest
2005 2004
$ $
Bank interest 13,999 2,145
====== =====
7. Tax Expense
2005 2004
$ $
Current tax:
In respect of the year:
UK Corporation tax based on the results for the year
at 19% (2004 - 19%) 58,190 -
------ --------
Total current tax 58,190 -
Deferred tax
Deferred tax:
Origination and reversal of timing differences 1,822 -
----- --------
Tax on income 60,012 -
====== ========
21
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS (cont'd)
SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------------------------------------
8. Taxes Payable
2005 2004
$ $
Employment taxes 31,989 18,584
Corporation tax 55,696 -
------ -------
87,685 18,584
====== ======
9. Lease Commitments
The company's office space lease commenced May 27, 2005 and expires on
May 26, 2015. Rental expense in respect of this lease totalled $46,063
and $Nil for the years ended September 30, 2005 and 2004, respectively.
The company is obligated to pay (pound)59,025 in the first year of the
lease and (pound)78,700 thereafter until the first review date on the
fifth anniversary.
10. Related Party Transactions
Included in Other Receivables is an amount of $8,846 (2004: $10,858) due
from A Meisl (Director) in respect of a loan made. The maximum balance
outstanding during the year was $10,858.
Included in Other Receivables is an amount of $8,846 (2004: $5,429) due
from D Parker (Director) in respect of a loan made. The maximum balance
outstanding during the year was $8,846.
Included in Accrued Expenses is an amount of $1,592 (2004: $4,343) due to
A Meisl (Director) in respect of business expenses incurred but not
reimbursed.
Included in Accrued Expenses is an amount of $1,592 (2004: $4,343) due to
D Parker (Director) in respect of business expenses incurred but not
reimbursed.
Included in Cost of Sales is an amount of $34,009 (2004: $5,807) paid to P
Trelease (Director) in respect of consultancy services rendered. P.
Trelease resigned as a director of Sponge Limited on February 23, 2006.
During the previous year the company paid $10,721 in respect of server
hosting costs to Jingo Digital Limited, a company of which M Gibbons is a
director. M Gibbons resigned as a director of Sponge Limited on May 4,
2004.
There are no set interest or repayment terms in respect of outstanding
balances.
Control
Control of the company rested with A Meisl and D Parker, directors, during
the year.
11. Long-term Debt
On December 16, 2004 the company issued 61,000, out of an authorised
100,000, non-voting 1% preference shares of (pound)1 each. These
preference shares were allotted at par via conversion of an existing long
term loan.
22
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS (cont'd)
SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------------------------------------
12. Deferred Taxation
The movement in the deferred taxation provision during the year was:
2005 2004
$ $
Charge arising during the year 1,822 -
Foreign currency adjustment (78) -
------- ----------
Liability carried forward 1,744 -
===== ==========
The deferred taxation liability consists of the tax effect of timing
differences in respect of:
2005 2004
$ $
Excess of taxation allowances over
depreciation on property and equipment 1,744 -
===== ======
13. Common Stock
Authorised Common Stock
2005 2004
(pound) (pound)
1,000,000 Ordinary shares of
(pound)1 each 1,000,000 1,000,000
========= =========
Allotted, called up and fully paid:
2005 2004
No. $ No. $
Ordinary shares of (pound)1 each 423 631 423 631
=== === === ===
Issued share capital is recorded at the historic rate. There have been no
changes in the authorised or issued share capital in the year. In the
previous year six Ordinary Shares of (pound)1 each were issued for a total
cash consideration of (pound)6,000.
14. Post Balance Sheet Events
In March 2006 the directors paid a final dividend on the Ordinary Shares
for the year ended 30th September 2005 of (pound)105,000 (2004: Nil).
In February 2006 the company's Issued Common Stock was purchased by
Neomedia Technologies Inc, a company incorporated and operating in the
United States of America.
23
SPONGE LIMITED
NOTES TO THE FINANCIAL STATEMENTS (cont'd)
SEPTEMBER 30, 2005 AND 2004
--------------------------------------------------------------------------------
15. Restatement of previously reported financial information
The company, in reviewing its accounting practices, became aware that a
net, rather than gross, revenue recognition of its premium rate text
promotional services would give a fairer presentation of results. As a
result, the company has overstated its sales as well as overstated its
cost of sales on its statement of income. The treatment did not affect net
income, nor any balance sheet or equity accounts, or cashflow disclosures.
As a result, the company has restated certain financial information that
was previously reported in its audited financial statements for the fiscal
years ended September 30, 2005 and 2004. The following tables provide a
reconciliation of amounts previously reported by the company:
Year Ended September 30, 2005 Year Ended September 30, 2004
------------------------------------------------ -----------------------------------------------
Previously Restatement Restated Previously Restatement Restated
Reported Adjustment Total Reported Adjustment Total
------------- --------------- ------------ ------------- ---------------- -----------
$ $ $ $ $ $
Sales 4,600,169 (2,640,570) 1,959,599 2,243,180 (1,460,777) 782,403
Cost of sales 3,649,232 (2,640,570) 1,008,662 1,851,045 (1,460,777) 390,268
------------- --------------- ------------ ------------- ---------------- -----------
Gross profit 950,937 --- 950,937 392,135 --- 392,135
============= =============== ============ ============= ================ ===========
24
(b) Pro Forma Financial Information
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
1. Basis of Presentation
Acquisition of Sponge Ltd.
On February 20, 2006, NeoMedia and Sponge signed a definitive share
purchase agreement, subject to closing conditions, under which NeoMedia acquired
all of the outstanding shares of Sponge in exchange for (pound)3,450,000
(approximately $6 million) cash and 33,097,135 shares of NeoMedia common stock.
The agreement also calls for Sponge to earn an additional (pound)2,500,000
(approximately $4.4 million) in the form of NeoMedia common stock if, during the
two-year period beginning at closing, the Sponge business earns in excess of
(pound)1,300,000 (approximately $2.3 million) in net profits. On February 23,
2006, NeoMedia and Sponge completed the closing requirements and the acquisition
became effective. Pursuant to the terms of the merger agreement, the number of
shares of NeoMedia common stock to be issued as consideration was calculated
using a share price of $0.384. In the event that NeoMedia's stock price at the
time the consideration shares are saleable is less than $0.384, NeoMedia is
obligated to compensate Sponge shareholders in cash for the difference between
the price at the time the shares become saleable and $0.384
Acquisition of BSD Software, Inc.
On March 21, 2006, NeoMedia acquired all of the outstanding common shares of
BSD. Pursuant to the terms of the merger, BSD was merged with and into NeoMedia
Telecom Services, Inc., a wholly-owned subsidiary of NeoMedia. The separate
corporate existence of BSD ceased as of the effective time of the merger, and
NeoMedia Telecom Services, Inc. continues as the surviving corporation. In
exchange for all of the outstanding shares of BSD, NeoMedia issued 7,123,698
shares of its common stock, valued at $0.3467, which is the volume-weighted
average closing price of NeoMedia stock for the five days prior to the effective
time of the merger. Each BSD shareholder received approximately 0.2019 share of
NeoMedia common stock for each share of BSD common stock held.
Acquisition of Gavitec AG
On February 17, 2006, NeoMedia and Gavitec signed a definitive sale and purchase
agreement, subject to closing conditions, under which NeoMedia acquired all of
the outstanding shares of Gavitec in exchange for $1,800,000 cash and 13,660,511
shares of NeoMedia common stock, calculated by dividing $5,400,000 by the
volume-weighted average closing price of NeoMedia common stock for the ten days
up to and including February 16, 2006. On February 23, 2006, NeoMedia and
Gavitec completed the closing requirements and the acquisition became effective.
In the event that NeoMedia's stock price at the time the consideration shares
are saleable is less than $0.389, NeoMedia is obligated to compensate Gavitec
shareholders in cash for the difference between the price at the time the shares
become saleable and $0.389.
Acquisition of 12Snap AG
On February 10, 2006, NeoMedia and 12Snap signed a definitive sale and purchase
agreement, subject to closing conditions, under which NeoMedia acquired all of
the outstanding shares of 12Snap in exchange for $2,500,000 cash and 49,294,581
shares of NeoMedia common stock. On February 28, 2006, NeoMedia and 12Snap
completed the closing requirements and the acquisition became effective.
Pursuant to the terms of the merger agreement, the number of shares of NeoMedia
common stock to be issued as consideration was calculated using a share price of
$0.3956. In the event that NeoMedia's stock price at the time the consideration
shares are saleable is less than $0.3956, NeoMedia is obligated to compensate
12Snap shareholders in cash for the difference between the price at the time the
shares become saleable and $0.3956.
25
Acquisition of Mobot, Inc.
On February 17, 2006, NeoMedia Technologies, Inc. ("NeoMedia) acquired all of
the outstanding shares of Mobot, Inc. (www.mobot.com) ("Mobot") in exchange for
$3,500,000 cash and $6,500,000 in shares of NeoMedia common stock. The
$6,500,000 stock portion of the purchase price is represented by 16,931,493
shares of NeoMedia common stock. Pursuant to the terms of the merger agreement,
the number of shares of NeoMedia common stock to be issued as stock
consideration was calculated using a share price of $0.3839. In the event that
NeoMedia's stock price at the time the consideration shares are saleable is less
than $0.3839, NeoMedia is obligated to compensate Mobot shareholders in cash for
the difference between the price at the time the shares become saleable and
$0.3839. In addition to cash and stock, at closing NeoMedia forgave notes
payable totaling $1,500,000 due from Mobot. This amount is considered other
additional consideration in the purchase price allocation.
Audited financials statements for Mobot were included in amendment no. 1 to form
8-K filed with SEC on May 3, 2006. Audited financials statements for 12Snap were
included in amendment no. 1 to form 8-K filed with SEC on May 8, 2006. Audited
financials statements for Gavitec were included in amendment no. 1 to form 8-K
filed with SEC on May 8, 2006. Audited financials statements for BSD were
included in amendment no. 1 to form 8-K filed with SEC on June 2, 2006. BSD,
Gavitec, Mobot and 12Snap balance sheets as of December 31, 2005 and statements
of operations for the year ended December 31, 2005 are shown for pro forma
purposes only.
26
Presentation
The unaudited pro forma condensed combined historical statement of operations
for the year ended December 31, 2005 gives effect to the acquisitions of BSD,
Sponge, Gavitec, 12Snap and Mobot as if they had occurred as of January 1, 2005,
combining the historical results of NeoMedia for the year ended December 31,
2005 with the historical results of BSD, Sponge, Gavitec, 12Snap and Mobot for
the year ended December 31, 2005. The unaudited pro forma condensed combined
balance sheet as of December 31, 2005 gives effect to the acquisitions of BSD,
Sponge, Gavitec, 12Snap and Mobot as if they had occurred as of December 31,
2005.
The unaudited pro forma combined financial statements included in this filing
have been prepared by the managements of BSD, NeoMedia, Sponge, Gavitec, 12Snap,
and Mobot without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, the
managements of NeoMedia, BSD, Sponge, Gavitec, 12Snap, and Mobot believe that
the disclosures are adequate to make the information not misleading.
The pro forma adjustments are based on currently available information and upon
estimates and assumptions that we believe are reasonable under the
circumstances. The unaudited pro forma financial data do not purport to
represent what NeoMedia's financial position or results of operations would
actually have been if such transactions had occurred on those dates and are not
necessarily representative of NeoMedia's financial position or results of
operations for any future period. The unaudited pro forma financial statements
should be read in conjunction with the separate historical financial statements
and footnotes of NeoMedia included in Form 10-KSB for the year ended December
31, 2005, and with the separate historical financial statements and footnotes of
Sponge for the years ended September 30, 2005 and 2004 (included herein), with
the separate historical financial statements and footnotes of BSD for the years
ended December 31, 2005 and 2004 (included in Form 8-K/A filed with the SEC on
June 2, 2006), with the separate historical financial statements and footnotes
of Gavitec for the years ended December 31, 2005 and 2004 (in Form 8-K/A filed
with the SEC on May 8, 2006), with the separate historical financial statements
and footnotes of 12Snap for the years ended December 31, 2005 and 2004 (included
in Form 8-K/A filed with the SEC on May 8, 2006), and with the separate
historical financial statements and footnotes of Mobot for the years ended
December 31, 2005 and 2004 (included in Form 8-K/A filed with the SEC on May 3,
2006).
2. Preliminary Purchase Price Allocation
A final determination of the allocation of the purchase price to the assets
acquired and liabilities assumed has not been made for BSD, Sponge, Gavitec,
12Snap and Mobot. The allocation reflected in the unaudited pro forma combined
financial statements is based on management's best judgment and estimate of the
fair values of intangible assets being acquired, and should be considered
preliminary and is subject to the completion of a comprehensive independent
valuation of the assets acquired and liabilities assumed. The final allocation
of purchase price could differ materially from the pro forma allocation included
herein. NeoMedia expects to obtain the final independent valuation, currently in
process, prior to the filing of the 2nd quarter Form 10 Q in August 2006.
Any additional consideration issued pursuant to the stock purchase price
protection clause would also change the purchase price allocation.
3. Pro forma Net Loss Per Share
The pro forma basic and dilutive net loss per share are based on the weighted
average number of shares of pro forma NeoMedia's common stock as if the shares
issued to acquire BSD, Sponge, Gavitec, 12Snap and Mobot had been issued at the
beginning of the period shown. Dilutive shares are not included in the
computation of pro forma dilutive net loss per share as their effect would be
anti-dilutive.
27
NeoMedia Technologies, Inc.
Unaudited Pro-forma Condensed Combined Balance Sheet
December 31, 2005
(In thousands of US Dollars)
(A) (A)
ASSETS NeoMedia Mobot Sponge Gavitec 12Snap
--------- --------- --------- --------- ---------
Current assets: * * (unaudited)** * *
Cash and cash equivalents $ 2,291 $ 909 $ 439 $ 95 $ 1,341
Trade accounts receivable, net 341 78 223 172 2,117
Inventories, net 423 -- -- 182 --
Investment in marketable securities 104 -- -- -- 52
Prepaid expenses and other current
assets 151 8 314 64 751
--------- --------- --------- --------- ---------
Total current assets 3,310 995 976 513 4,261
Property and equipment, net 236 22 48 17 224
Capitalized patents, net 3,134 -- -- -- --
Micro paint repair chemical
formulations and proprietary -- -- -- -- --
process 1,450 -- 1,450
Customer contracts and relationships -- -- -- -- --
Capitalized software platform -- -- -- -- --
Other intangible assets 246 20 -- 3 98
Goodwill 1,099 -- -- -- --
Advances to Mobot, Inc. 1,500 -- -- -- --
Cash surrender value of life -- -- -- -- --
insurance policy 769 -- 769
Other long-term assets 667 -- -- -- --
--------- --------- --------- --------- ---------
Total assets $ 12,411 $ 1,037 $ 1,024 $ 533 $ 4,583
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,574 $ 344 $ 298 $ 160 $ 775
Accrued expenses 1,844 148 266 50 2,153
Amounts payable under settlement
agreements 97 -- 97 -- --
Taxes payable 80 -- 90 -- --
Deferred revenues and other 898 236 73 362 1,780
Liabilities of discontinued
business unit 676 -- -- 676 --
Notes and loans payable 3,015 1,500 -- -- 4,145
--------- --------- --------- --------- ---------
Total current liabilities 8,184 2,228 727 572 8,853
--------- --------- --------- --------- ---------
Long-term debt and convertible
debentures 500 105 -- (500) --
Minority Interest -- -- -- -- 7
Shareholders' deficit:
Preferred stock -- -- -- -- --
Common stock (B) 4,676 -- 1 263 5,825
Additional paid-in capital 106,456 1 11 1,180 49,675
Deferred equity financing costs (13,256) -- -- -- --
Deferred stock-based compensation (169) -- -- -- --
Accumulated other comprehensive
income (loss) (177) -- (40) -- 946
Retained earnings (accumulated
deficit) (92,524) (1,692) 220 (1,482) (60,158)
Treasury stock (779) -- -- -- (565)
--------- --------- --------- --------- ---------
Total shareholders' deficit 4,227 (1,691) 192 (39) (4,277)
--------- --------- --------- --------- ---------
Total liabilities and
shareholders' deficit $ 12,411 $ 1,037 $ 1,024 $ 533 $ 4,583
========= ========= ========= ========= =========
Pro Pro
Forma Forma
Adjust- Consol-
ASSETS BSD ments idated
--------- --------- ---------
Current assets: (unaudited)*** (unaudited) (unaudited)
Cash and cash equivalents $ 52 ($ 13,941) (G) ($ 8,814)
Trade accounts receivable, net 1,567 -- 4,498
Inventories, net -- -- 605
Investment in marketable securities -- -- 156
Prepaid expenses and other current
assets 13 -- 1,301
--------- --------- ---------
Total current assets 1,632 (13,941) (2,254)
Property and equipment, net 69 -- 616
Capitalized patents, net -- -- 3,134
Micro paint repair chemical
formulations and proprietary
process
Customer contracts and relationships -- 2,800 (C) 2,800
Capitalized software platform -- 16,300 (C) 16,300
Other intangible assets -- 2,900 (C) 3,267
Goodwill -- 45,906 (C) 47,005
Advances to Mobot, Inc. -- (1,500) --
Cash surrender value of life
insurance policy
Other long-term assets -- (229) (D) 438
--------- --------- ---------
Total assets $ 1,701 $ 52,236 $ 73,525
========= ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 3,328 $ -- $ 6,479
Accrued expenses -- -- 4,461
Amounts payable under settlement
agreements -- -- --
Taxes payable -- -- 170
Deferred revenues and other -- -- 3,349
Liabilities of discontinued
business unit -- -- --
Notes and loans payable 1,715 (1,500) (E) 8,875
--------- --------- ---------
Total current liabilities 5,043 (1,500) 24,107
--------- --------- ---------
Long-term debt and convertible
debentures -- -- (F) 105
Minority Interest -- -- 7
Shareholders' deficit:
Preferred stock -- -- --
Common stock (B) 32 (4,567) (C) 6,230
Additional paid-in capital 3,194 (10,535) (C) 149,982
Deferred equity financing costs -- -- (13,256)
Deferred stock-based compensation -- -- (169)
Accumulated other comprehensive
income (loss) (873) (33) (C) (177)
Retained earnings (accumulated
deficit) (5,695) 68,806 (C) (92,525)
Treasury stock -- 565 (779)
--------- --------- ---------
Total shareholders' deficit (3,342) 54,236 49,306
--------- --------- ---------
Total liabilities and
shareholders' deficit $ 1,701 $ 52,236 $ 73,525
========= ========= =========
* - Derived from audited financial statements
** - Sponge balances taken from December 31, 2005 interim unaudited
balance sheet
*** - BSD balances taken from January 31, 2006 interim unaudited balance
sheet
Pro-forma Adjustments
(A) - For pro forma presentation purposes, Gavitec and 12Snap balances are
converted from Euro to US Dollars at a rate of 0.8444 Euros/US Dollar,
which was the exchange rate as of December 31, 2005.
(B) - As of December 31, 2005, NeoMedia's $0.01 par value common stock consists
of 1,000,000,000 authorized shares, 475,387,910 historical shares and
622,974,117 pro forma shares issued; and 467,601,717 historical shares
and 615,187,924 pro forma shares outstanding
(C) - Adjustment for stock and cash issued to acquire Mobot, Sponge, Gavitec,
12Snap, and BSD, assuming acquisitions occurred as of December 31, 2005.
Adjustment includes the elimination of $1,554 common stock and $43,525
paid-in capital of the subsidiaries. The purchase price for each
acquisition was calculated as follows:
28
Mobot Sponge Gavitec 12Snap BSD
----- ------ ------- ------ ---
Pro forma number of shares of NeoMedia to be
treated as purchase price consideration 22,413,793 39,310,345 18,620,690 67,241,379 7,859,527
x NeoMedia closing stock price around
December 31, 2005 (measurement date) $ 0.290 $ 0.290 $ 0.290 $ 0.290 $ 0.290
----------- ----------- ----------- ----------- -----------
Total stock consideration $ 6,500,000 $11,400,000 $ 5,400,000 $19,500,000 $ 2,279,263
Plus cash consideration $ 3,500,000 $ 6,141,000 $ 1,800,000 $ 2,500,000 $---
----------- ----------- ----------- ----------- -----------
Pro forma purchase price $10,000,000 $17,541,000 $ 7,200,000 $22,000,000 $ 2,279,263
=========== =========== =========== =========== ===========
In accordance with SFAS 141 and EITF 99-12, for the purposes of this
unaudited pro forma balance sheet, the fair value of the stock to be
issued as purchase price consideration is assumed to be $0.29 per share,
which was the average closing price of NeoMedia common stock for the three
days up to and including December 31, 2005 (the measurement date). There
are no additional options, warrants, or other stock-based consideration
expected to be issued as part of the purchase price for either
acquisition. Each of the above transactions was completed in the first
quarter of 2006. The actual number of shares issued as stock consideration
is shown in the following table:
Mobot Sponge Gavitec 12Snap BSD
----- ------ ------- ------ ---
Actual Shares Issued as Stock 16,931,493 33,097,135 13,660,511 49,294,581 7,123,698
Consideration
29
Based on NeoMedia's stock price around the measurement date of December 31,
2005, and the balance sheets of NeoMedia, Mobot, Sponge, Gavitec, 12Snap,
and BSD as of December 31, 2005, the pro forma purchase price for each
acquisition would be allocated as follows:
(in thousands of US dollars, except share amounts
Mobot Sponge Gavitec 12Snap BSD
----- ------ ------- ------ ---
Purchase Price Consideration
Cash $ 3,500 $ 6,141 $ 1,800 $ 2,500 $ --
Pro forma number of shares of NeoMedia common stock issued 22,413,793 39,310,345 18,620,690 67,241,379 7,859,527
/ NeoMedia closing stock price around December 31, 2005
(measurement date) $ 0.29 $ 0.29 $ 0.29 $ 0.29 $ 0.29
----------- ----------- ----------- ----------- -----------
Pro forma fair value of shares issued as purchase price $ 6,500 $ 11,400 $ 5,400 $ 19,500 $ 2,279
consideration
Purchase-related costs 8 73 26 113 8
Other purchase consideration 1,500 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total fair value expected to be treated as purchase price
consideration $ 11,508 $ 17,614 $ 7,226 $ 22,113 $ 2,287
=========== =========== =========== =========== ===========
Assets Purchased
Cash and cash equivalents $ 909 $ 439 $ 95 $ 1,341 $ 52
Investment in marketable securities -- -- -- 52 --
Trade accounts receivable, net 78 223 172 2,117 1,566
Inventory -- -- 182 -- --
Prepaid expenses and other current assets 8 314 64 751 13
Property and equipment, net 22 48 17 224 70
Customer contracts and relationships (i)(ii) 400 400 -- 400 1,600
Capitalized software platform (i)(iii) 5,000 1,300 5,600 4,400 --
Other intangible assets (i)(iv) 220 550 553 1,548 150
Goodwill (i)(v) 5,599 15,172 1,116 20,140 3,879
----------- ----------- ----------- ----------- -----------
12,236 18,446 7,798 30,973 7,330
----------- ----------- ----------- ----------- -----------
Liabilities Assumed
Accounts payable 344 298 160 775 3,328
Accrued expenses 148 266 50 2,153 --
Taxes payable -- 90 -- -- --
Deferred revenues and other current liabilities 236 73 362 1,780 --
Notes payable -- -- -- 4,145 1,715
Long-term debt -- 105 -- 7 --
----------- ----------- ----------- ----------- -----------
728 832 572 8,860 5,043
----------- ----------- ----------- ----------- -----------
(i) - For purposes of these unaudited pro forma financial
statements, the excess of fair value of consideration paid
over net book value for Mobot, Sponge, Gavitec, 12Snap, and
BSD is allocated to the following intangible asset categories:
customer contracts and relationships, capitalized software
platform, other intangible assets, and goodwill. The
allocation is made based on NeoMedia management's judgment and
best estimate of the value of each category for each business.
As of this filing, NeoMedia has not completed an independent
valuation of such intangible assets. NeoMedia is in the
process of performing an independent valuation of the
intangible assets, and a final allocation of the purchase
price of each entity will be made based on the results of such
valuation, to be completed no more than one year from closing.
It is important to note that the final independent valuation,
could vary materially from the pro forma allocation presented
above. NeoMedia expects to obtain the final independent
valuation, currently in process, prior to the filing of the
2nd quarter Form 10 Q in August 2006.
(ii) - Customer contracts and relationships consist of the
customers of each business that are under contract, as well as
prospects identified for potential future business, the fair
value of which is calculated as the discounted after-tax
expected earnings from current and identified customers.
NeoMedia expects to assign an amortization period of 5 years
to this class of assets.
(iii) - Capitalized software platforms consist of proprietary
software systems acquired. NeoMedia expects to assign an
amortization period of 7 years to this class of assets.
(iv) - Other intangible assets consist of brand names and other
proprietary copyrighted materials. NeoMedia expects to assign
an amortization period of 7-10 years to this class of assets.
30
(v) - The remaining excess of purchase price paid over fair value
of assets and liabilities assumed is allocated to goodwill,
and as such, is not assigned a depreciable life. Goodwill will
be tested for impairment as defined by Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
(D) - Adjustment to eliminate acquisition-related costs paid by NeoMedia in
2005 that are included in the purchase price allocation.
(E) - Adjustment to eliminate note payable from Mobot to NeoMedia that was
forgiven at closing.
(F) - Adjustment to eliminate Mobot convertible debentures that were converted
prior to closing. As a result, the above unaudited condensed consolidated
pro forma balance sheet is shown assuming the debentures are converted
prior to the pro forma closing date.
(G) - Negative cash balance is shown for pro forma purposes only. During
February 2006, NeoMedia obtained $22 million gross financing in the form
of a convertible preferred stock sale, a portion of the proceeds of
which were used to acquire Mobot, Gavitec, 12Snap, and Sponge.
31
NeoMedia Technologies, Inc.
Unaudited Pro-forma Combined Condensed Statement of Operations
For the Year Ended December 31, 2005
(In thousands of US Dollars, except per share data)
(B) (A) (A)
NeoMedia Mobot Sponge Gavitec 12Snap
-------- -------- -------- -------- --------
NET SALES: * * (unaudited)** * *
Technology license, service and
products $ 877 $ 300 $ 2,248 $ 772 $ 7,396
Micro paint repair products and
services 1,279 -- -- -- --
-------- -------- -------- -------- --------
Total net sales 2,156 300 2,248 772 7,396
-------- -------- -------- -------- --------
COST OF SALES:
Technology license, service and
products 659 -- 1,296 722 --
Micro paint repair products and
services 913 -- -- -- --
-------- -------- -------- -------- --------
Total cost of sales 1,572 -- 1,296 722 --
-------- -------- -------- -------- --------
GROSS PROFIT 584 300 952 50 7,396
Selling, general and
administrative expenses 7,561 1,180 796 972 7,147
Impairment charge 335 -- -- -- --
Research and development costs 934 552 -- 503 1,515
-------- -------- -------- -------- --------
Income (loss) from operations (8,246) (1,432) 156 (1,425) (1,266)
Loss on extinguishment of debt, net 172 -- -- -- --
Other income (loss) -- -- 57 296 230
Impairment charge on investments (780) -- -- -- --
Interest income (expense), net (293) (42) 18 -- (515)
-------- -------- -------- -------- --------
Income before provision for income taxes (9,147) (1,474) 231 (1,129) (1,551)
Provision for income taxes -- -- (60) -- --
-------- -------- -------- -------- --------
Net income (loss) (9,147) (1,474) 171 (1,129) (1,551)
Other comprehensive income (loss):
Unrealized loss on marketable
securities (146) -- -- -- --
Foreign currency translation
adjustment 29 -- -- -- --
-------- -------- -------- -------- --------
Comprehensive income (loss) ($ 9,264) ($ 1,474) $ 171 ($ 1,129) ($ 1,551)
======== ======== ======== ======== ========
NET INCOME (LOSS) PER
SHARE--BASIC AND DILUTED ($0.02)
========
COMPREHENSIVE INCOME (LOSS)
PER SHARE--BASIC AND DILUTED ($0.02)
========
Weighted average number
of common shares-basic and diluted 451,857,851
===========
Pro Pro
Forma Forma
Adjust- Consol-
ments idated
-------- --------
NET SALES: ** (unaudited) (unaudited)
Technology license, service and
products $ -- $ 20,030
Micro paint repair products and
services -- 1,279
-------- --------
Total net sales -- 21,309
-------- --------
COST OF SALES:
Technology license, service and
products 2,329 (B) 11,979
Micro paint repair products and
services -- 913
-------- --------
Total cost of sales 2,329 12,892
-------- --------
GROSS PROFIT (2,329) 8,417
Selling, general and
administrative expenses 992 (B) 19,832
Impairment charge -- 335
Research and development costs -- 3,504
-------- --------
Income (loss) from operations (3,321) (15,254)
Loss on extinguishment of debt, net -- 172
Other income (loss) -- 583
Impairment charge on investments -- (780)
Interest income (expense), net -- (982)
-------- --------
Income before provision for income taxes (3,321) (16,261)
Provision for income taxes -- --
-------- --------
Net income (loss) (3,321) (16,261)
Other comprehensive income (loss):
Unrealized loss on marketable
securities -- (146)
Foreign currency translation
adjustment -- (248)
-------- --------
Comprehensive income (loss) ($ 3,321) ($16,655)
======== ========
NET INCOME (LOSS) PER
SHARE--BASIC AND DILUTED ($0.03)
========
COMPREHENSIVE INCOME (LOSS)
PER SHARE--BASIC AND DILUTED ($0.03)
========
Weighted average number
of common shares-basic and diluted 172,717,482(C) 624,575,333
=========== ===========
* - Derived from audited financial statements
** - Sponge fiscal year end is September 30. Results shown are for the year
ended December 31, 2005, compiled from Sponge's audited financial
statements for the year ended September 30, 2005 and interim financial
statements for the three months ended December 31, 2005 and 2004.
*** - BSD fiscal year end is July 31. Results shown are for the year ended
January 31, 2006, compiled from BSD's audited financial statements for
the year ended July 31, 2005 and interim financial statements for the
six months ended January 31, 2006 and 2005
32
Pro-forma Adjustments
(A) - For pro forma presentation purposes, Gavitec and 12Snap results are
converted from Euro to US Dollars at a rate of 0.80844 Euro/US Dollar,
which was the average exchange rate for the period January 1, 2005 -
December 31, 2005.
(B) - A portion of Sponge's sales are shown net of payments made to customers.
(C) - Adjustment to reflect amortization of acquired intangible assets for the
year ended December 31, 2005, as if the acquisitions had occurred on
January 1, 2005. It is important to note that the actual allocation
and estimated useful lives of intangible assets acquired that will
be adopted based on an independent valuation could vary from the
estimates presented herein (see note C(i) to the pro forma balance
sheet for a discussion on useful lives). Such a difference could
cause a material difference between the actual periodic amortization
charges that NeoMedia will record in its statement of operations,
and the amortization amount shown above. Estimated useful lives are
based on management's best estimate of the purchase price
allocation, and have not been finalized based on the results of an
independent valuation.
(D) - Adjustment for shares that would have been issued in connection with
acquisitions if they had occurred on January 1, 2005, calculated as
follows:
Mobot Sponge Gavitec 12Snap BSD Total
------------ ------------ ------------ ------------ ------------ ------------
NeoMedia stock price around January 1, 2005 $ 0.261 $ 0.261 $ 0.261 $ 0.261 $ 0.261
(measurement date)
Total stock consideration $ 6,500,000 $ 11,400,000 $ 5,400,000 $ 19,500,000 $ 2,279,263 $ 45,079,263
------------ ------------ ------------ ------------ ------------ ------------
Pro forma number of shares of NeoMedia
to be treated as purchase price
consideration 24,904,215 43,678,161 20,689,655 74,712,644 8,732,808 172,717,482
============ ============ ============ ============ ============ ============
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NeoMedia Technologies, Inc.
--------------------------------------------
(Registrant)
Date: June 20, 2006 By: /s/ Charles T. Jensen
------------- ----------------------------------------
Charles T. Jensen, President,
Chief Executive Officer and Director
34
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
23.1 Consent of Brebner Allen & Trapp, Independent Auditors of
Sponge Ltd.
35