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On2 Technologies Announces Financial Results for Fourth Quarter of 2007 and First Quarter of 2008

TARRYTOWN, N.Y., July 2 /PRNewswire-FirstCall/ -- On2 Technologies, Inc. (Amex: ONT), a leader in video compression solutions, today announced that it has filed its Annual Report on Form 10-K for the fiscal year ending December 31, 2007, including a previously disclosed restatement of prior period results. In addition, the company has filed its Quarterly Report on Form 10-Q for the first quarter of fiscal 2008, ending March 31, 2008.

TARRYTOWN, N.Y., July 2 /PRNewswire-FirstCall/ — On2 Technologies, Inc. (Amex: ONT), a leader in video compression solutions, today announced that it has filed its Annual Report on Form 10-K for the fiscal year ending December 31, 2007, including a previously disclosed restatement of prior period results. In addition, the company has filed its Quarterly Report on Form 10-Q for the first quarter of fiscal 2008, ending March 31, 2008.

The 2007 10-K includes restated results for the second and third quarters of 2007, as previously disclosed. The effect of the restatement is a decrease in second and third quarter revenue of $185,000, and $631,000, respectively, and an increase in operating expenses of $383,000 in the third quarter of 2007, for a decrease in net income in the second and third quarter of 2007 of $185,000 and $1,014,000, respectively.

For the full year, 2007, revenue was $13.2 million, an increase of 101% from 2006. For the first quarter of 2008, revenue was $4.5 million, up 58% year-over-year. These figures include the impact of On2's Hantro acquisition, which was completed on November 1, 2007.

Matt Frost, Chief Operating Officer and interim Chief Executive Officer of On2 Technologies said, "We are pleased to have completed our financial review for 2007, and to have filed our 2007 Form 10-K and first quarter 10-Q with the SEC, bringing our filings up to date. Our review of 2007 accounts and resulting restatement of the second and third quarters of 2007 was a significant undertaking that delayed our quarterly filings in Q1. We nevertheless remained focused on our business during this process. That same focus, and the impact of our Hantro acquisition, resulted in significant year-over-year revenue growth in both the fourth quarter of 2007 and the first quarter of 2008. Our Hantro integration has gone smoothly and is making a meaningful contribution to revenue. In Q4 and in Q1 we introduced several new products and released enhanced versions of existing products. Coupled with our acquisition of Hantro, these product releases have helped On2 increase the size of its customer base. Further, our broadened product line continues to open doors to new potential customers, and we are experiencing the benefit of that in our current customer pipeline."

Fourth Quarter 2007 Results

Revenue in the fourth quarter of 2007 was $6.1 million, a 189% increase from the fourth quarter of 2006. The year-over-year revenue increase in Q4 was largely a result of the Hantro acquisition, which closed on November 1, 2007. Net loss in the fourth quarter of 2007 was $1.8 million, or $0.01 per share, compared with a net loss of $1.6 million, or $0.02 per share, in the fourth quarter of 2006.

For the year ended December 31, 2007, revenue was $13.2 million, a 101% increase from the prior year. Revenue increased due to growth in license and royalty revenue as well as from the Hantro acquisition. Net loss for the year ending December 31, 2007 was $7.0 million or $0.06 per share, compared to a net loss of $5.2 million, or $0.05 per share, in the prior year.

As previously disclosed, during the preparation of On2's annual 2007 financial statements, management uncovered evidence that certain documentation provided to the company relating to two sales accounts for which revenue had been recognized in the third quarter of 2007 had been falsified. That discovery gave rise to a review by the Audit Committee of the Board of Directors of certain transactions entered into in 2007 and the recognition of revenue that was previously recognized in the quarterly filings for the quarters ended June 30, 2007 and September 30, 2007. As a result of that review and management's review of other accounts, the company determined that its recognition of revenue arising from sales to four customers in 2007 did not comply with applicable accounting principles, resulting in a combined revenue adjustment of $816,000 for the first nine months of 2007. Additionally, the company determined that, in connection with a fifth account, the company should have established a reserve for bad debts in the amount of $383,000 during the third quarter of 2007. The corrections to our financial statements for the second and third quarters of 2007 increased our net loss by $185,000 and $1,014,000 respectively for those periods. The impact of these adjustments is reflected in the full year results for 2007 presented in this release.

First Quarter 2008 Results

For the first quarter of 2008, On2 reported revenue of $4.5 million, an increase of 58% from the first quarter of 2007. Revenue increased in the first quarter largely due to increased license and royalty revenue, as well as the Hantro acquisition. Net loss in the first quarter of 2008 was $4.7 million, or ($0.03) per share, compared to a net loss of $775,000 or ($0.01) in the first quarter of 2007.

Recent Business Highlights

— Royalties represented 11% of revenue in Q4 of 2007 and 15% for the full year 2007, compared to 12% and 9%, respectively for the same periods in 2006. Royalties represented 21% of revenue in the first quarter of 2008, compared to 14% in the first quarter of 2007.

— In 2007, revenues, excluding online sales, came from over four hundred transactions, 25 of which were valued at over $50,000, including several key customers in the use of online video such as Move Networks.

— In the first quarter of 2008 we had over 100 customers, excluding online sales, and we recognized revenues from 10 significant transactions sized at over $50,000, and announced agreements with customers such as Infineon, who plans to integrate On2 encoder and decoder RTL designs to chipsets targeting high-volume mobile handsets, and MediaTek, who will provide On2 codecs along with its baseband chipsets to mobile handset manufacturers.

— During 2007, On2's product suite continued to evolve, starting with the introduction of support for 3GPP output for mobile devices in the Flix(R) Engine, and including the addition of our TrueCore(TM) multi-core processing technology, and support for VP6-S for HD, and H.264 for Adobe(R) Flash(R) Player compatible video, all within the Flix Engine software development kit, and the introduction of Flix Publisher Live. In the first quarter of 2008, we announced support for Apple iPhone and iPod compatible video in the Flix Engine, and introduced Flix Publisher for Mac. We also released the Hantro 8190 multi-format configurable hardware RTL video decoder, supporting Adobe Flash and resolutions up to 1080p, as well as the Hantro 9100 software multi- decoder, optimized for ARM9 and ARM11 processors. Both of these products (8190 and 9100) showed successful integration of On2 and Hantro product lines and technologies.

— Entered a multi-year agreement with Sun Microsystems to add video capabilities to Sun's JavaFX family of products.

Conference Call

Management will hold a conference call to discuss its results for the fourth quarter of 2007 and first quarter of 2008 at 8:00am ET on July 3, 2008.

To access the live webcast, visit http://www.vcall.com/IC/CEPage.asp?ID=131719 The webcast replay will be available until July 3, 2009. If you prefer to dial-in to the call, the information is as follows: Live Call: (877) 407-9210, domestic (201) 689-8049, international Replay: (877) 660-6853 (201) 612-7415 Replay Passcodes: Account #: 286 Conference ID #: 290378

About On2

On2 creates advanced video compression technologies for desktop and wireless. Powering the video in many of today's leading web and mobile applications and devices, On2's customers include: Nokia, Infineon, MediaTek, Sony, Facebook, Brightcove, Move Networks, Adobe and Skype. On2 Technologies is headquartered in Tarrytown, NY USA. For more information please visit www.on2.com.

All trademarks mentioned in this document are the property of their respective owners.

Forward-Looking and Cautionary Statements

Except for the historical information and discussions contained herein, statements contained in this release may constitute 'forward-looking statements' within the meaning of the Private Securities Litigation Reform Act of 1995. Our forward-looking statements are subject to risks and uncertainties. These forward-looking statements that could cause actual results to differ materially, include, among others, longer than expected delays in On2's completion of its financial statements and Annual Report on Form 10-K, which could result in longer than expected delays in the filing of the Company's Annual Report on Form 10-K, changes in On2's results of operations which could result in changes to Safeguard's consolidated results of operations for 2007 as compared to 2006, and certain other factors described in the Company's filings with the Securities and Exchange Commission. Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. The Company does not assume any obligation to update any forward-looking statements or other information contained in this press release.

On2 Technologies, Inc. Condensed Consolidated Balance Sheets ASSETS March 31, 2008 Dec. 31, 2007 (unaudited) Current assets: Cash and cash equivalents $ 2,684,000 $ 9,573,000 Short-term investments 10,130,000 5,521,000 Accounts receivable 5,173,000 7,513,000 Prepaid expenses and other current assets 1,726,000 1,492,000 Total current assets 19,713,000 24,099,000 Acquired software, net 10,456,000 10,333,000 Other acquired intangibles, net 7,454,000 7,144,000 Goodwill 39,697,000 37,023,000 Property and equipment, net 807,000 751,000 Other assets 168,000 175,000 Total assets $ 78,295,000 $ 79,525,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,315,000 $ 1,433,000 Accrued expenses 4,780,000 4,820,000 Deferred revenue 3,498,000 1,887,000 Short-term borrowings 185,000 2,198,000 Current portion of long-term debt 392,000 491,000 Capital lease obligation 25,000 24,000 Total current liabilities 10,195,000 10,853,000 Capital lease obligation, excluding current portion 12,000 18,000 Long-term debt 3,306,000 3,082,000 Total liabilities 13,513,000 13,953,000 Commitments and contingencies Stockholders' equity: Common stock 1,705,000 1,705,000 Additional paid-in capital 194,922,000 194,453,000 Accumulated other comprehensive loss 4,386,000 906,000 Accumulated deficit (136,231,000) (131,492,000) Total stockholders' equity 64,782,000 65,572,000 Total liabilities and stockholders' equity $ 78,295,000 $ 79,525,000 On2 Technologies, Inc. Unaudited Condensed Consolidated Statements of Operations Three months ended March 31, 2008 2007 Revenue $ 4,452,000 $ 2,815,000 Operating expenses: Cost of revenue (1) 1,430,000 423,000 Research and development (2) 2,808,000 493,000 Sales and marketing (2) 1,889,000 596,000 General and administrative (2) 2,479,000 959,000 Equity-based compensation: Research and development 119,000 1,000 Sales and marketing 38,000 27,000 General and administrative 213,000 120,000 Total operating expenses 8,976,000 2,619,000 Income (loss) from operations (4,524,000) 196,000 Interest and other (expense) income, net (130,000) (913,000) Loss before provision for income taxes (4,654,000) (717,000) Provision for income taxes 85,000 4,000 Net loss $ (4,739,000) $ (721,000) Convertible preferred stock 8% dividend – 54,000 Net loss attributable to common stockholders $ (4,739,000) $ (775,000) Basic and diluted net loss per common share $ (0.03) $ (0.01) Weighted average basic and diluted common shares outstanding 170,487,000 103,599,000 (1) Includes equity-based compenastion of $83,000 and $1,000 for the three months ended March 31, 2007 and 2006, respectively (2) Excludes equity-based compensation, which is presented separately On2 Technologies, Inc. Condensed Consolidated Balance Sheets December 31, ASSETS 2007 2006 Current assets: Cash and cash equivalents $ 9,573,000 $ 4,961,000 Short-term investments 5,521,000 154,000 Accounts receivable, net 7,513,000 1,335,000 Prepaid expenses and other current assets 1,492,000 231,000 Total current assets 24,099,000 6,681,000 Intangible assets, net 54,500,000 819,000 Property and equipment, net 751,000 157,000 Other assets 175,000 230,000 Total assets $ 79,525,000 $ 7,887,000 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 6,253,000 $ 648,000 Deferred revenue 1,887,000 708,000 Short-term borrowings 2,198,000 33,000 Current portion of long-term debt 491,000 Capital lease obligation 24,000 24,000 Total current liabilities 10,853,000 1,413,000 Capital lease obligation, excluding current portion 18,000 29,000 Long-term debt 3,082,000 Warrant derivative liability 2,329,000 Total liabilities 13,953,000 3,771,000 Series D Preferred Stock 3,083,000 Stockholders' equity 65,572,000 1,033,000 Total liabilities and stockholders' equity $ 79,525,000 $ 7,887,000 On2 Technologies, Inc. Consolidated Statements of Operations Three months ended December 31, 2007 2006 2005 Revenue $6,118,000 $2,117,000 $1,002,000 Operating expenses: Cost of revenues (1) 1,134,000 511,000 670,000 Research and development (2) 2,333,000 272,000 280,000 Sales and marketing (2) 2,386,000 470,000 270,000 General and administrative (2) 1,732,000 1,001,000 882,000 Equity-based compensation: Research and development 81,000 16,000 Sales and marketing 69,000 (16,000) General and administrative 161,000 170,000 Total operating expenses 7,896,000 2,424,000 2,102,000 Loss from operations (1,778,000) (307,000) (1,100,000) Interest and other income (expense), net (3,000) (1,190,000) (11,000) Loss before provision for income taxes (1,781,000) (1,497,000) (1,111,000) Provision for income taxes 15,000 13,000 7,000 Net loss (1,796,000) (1,510,000) (1,118,000) Convertible preferred stock deemed dividend Convertible preferred stock 8% dividend 4,000 65,000 80,000 Accretion of costs associated with the Series D Preferred Stock Net loss attributable to common stockholders $(1,800,000) $(1,575,000) $(1,198,000) Basic and diluted net loss attributable to common stockholders per common share $(0.01) $(0.02) $(0.01) Weighted average basic and diluted common shares outstanding 154,347,000 100,603,000 91,581,000 Year ended December 31, 2007 2006 2005 Revenue $13,237,000 $6,572,000 $2,208,000 Operating expenses: Cost of revenues (1) 2,549,000 2,328,000 1,919,000 Research and development (2) 3,833,000 972,000 1,035,000 Sales and marketing (2) 4,272,000 1,093,000 794,000 General and administrative (2) 5,200,000 4,384,000 2,749,000 Equity-based compensation: Research and development 147,000 98,000 Sales and marketing 157,000 103,000 General and administrative 491,000 1,184,000 Total operating expenses 16,649,000 10,162,000 6,497,000 Loss from operations (3,412,000) (3,590,000) (4,289,000) Interest and other income (expense), net (3,467,000) (1,226,000) (284,000) Loss before provision for income taxes (6,879,000) (4,816,000) (4,573,000) Provision for income taxes 25,000 30,000 32,000 Net loss (6,904,000) (4,846,000) (4,605,000) Convertible preferred stock deemed dividend 68,000 2,844,000 Convertible preferred stock 8% dividend 82,000 285,000 325,000 Accretion of costs associated with the Series D Preferred Stock 175,000 Net loss attributable to common stockholders $(6,986,000) $(5,199,000) $(7,949,000) Basic and diluted net loss attributable to common stockholders per common share $(0.06) $(0.05) $(0.09) Weighted average basic and diluted common shares outstanding 121,561,000 96,642,000 89,183,000 (1) Includes equity-based compensation of $87,000 and $150,000 for the three months and year ended December 31, 2007, respectively. Includes equity-based compensation of $15,000 and $169,000 for the three months and year ended December 31, 2006, respectively. (2) Excludes equity-based compensation, which is presented separately.

SOURCE On2 Technologies, Inc.

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