10-Q 1 omcm20140630_10q.htm FORM 10-Q omcm20140630_10q.htm

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________

FORM 10-Q

[Mark One]

 

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2014

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _______ to ________

 

Commission File Number: 0-25203

 

OmniComm Systems, Inc.

(Exact name of registrant as specified in its Charter)

   
   

Delaware

11-3349762

(State or other jurisdiction of Incorporation or organization)

(IRS Employer Identification Number)

   

2101 W. Commercial Blvd. Suite 3500, Fort Lauderdale, FL

33309

Address of principal executive offices

Zip Code

   

954.473.1254

(Registrant’s Telephone Number including area code)

 

No Changes

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [ ] No [X]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

 

  Large accelerated filer

  [ ]

  Accelerated filer

  [ ]

  Non-accelerated filer

  (Do not check if smaller reporting company)

  [ ]

  Smaller reporting company

  [√]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

 

The number of shares outstanding of each of the issuer’s classes of common equity as of August 12, 2014: 91,504,659 common stock $.001 par value.

  

 
1

 

 

 TABLE OF CONTENTS TO THE QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2014

 

 

PART I. FINANCIAL INFORMATION

  3

ITEM 1. FINANCIAL STATEMENTS

  3

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

  38

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

  56

ITEM 4. CONTROLS AND PROCEDURES

  56

PART II OTHER INFORMATION

  57

ITEM 1. LEGAL PROCEEDINGS

  57

ITEM 1A. RISK FACTORS

  57

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  57

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

  57

ITEM 4. MINE SAFETY DISCLOSURES

  57

ITEM 5. OTHER INFORMATION

  57

ITEM 6. EXHIBITS

  58

SIGNATURES

  59

EXHIBIT 31.1*

 

EXHIBIT 31.2*

 

EXHIBIT 32.1**

 

 

Exhibit 101.SCH     XBRL Taxonomy Extension Schema Document***

Exhibit 101.CAL     XBRL Taxonomy Extension Calculation Document***

Exhibit 101.DEF     XBRL Taxonomy Extension Definition Document***

Exhibit 101.LAB     XBRL Taxonomy Extension Label Document***

Exhibit 101.PRE     XBRL Taxonomy Extension Presentation Document***

 

* Filed herewith

**Furnished herewith

*** In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

  

 
 

 

 PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

June 30, 2014

   

December 31, 2013

 
   

(unaudited)

         

ASSETS

               
                 

CURRENT ASSETS

               

Cash

  $ 850,554     $ 1,160,720  

Accounts receivable, net of allowance for doubtful accounts of $141,419 and $65,341, respectively

    4,419,944       1,599,568  

Prepaid expenses

    111,395       146,907  

Total current assets

    5,381,893       2,907,195  

Property and equipment, net

    518,185       607,433  

Other assets

               

Intangible assets, net

    245,391       270,242  

Goodwill

    670,363       675,710  

Prepaid stock compensation

    132,292       169,375  

Other assets

    91,272       82,501  
                 

TOTAL ASSETS

  $ 7,039,396     $ 4,712,456  
                 

LIABILITIES AND SHAREHOLDERS' (DEFICIT)

               
                 

CURRENT LIABILITIES

               

Accounts payable and accrued expenses

  $ 2,189,758     $ 2,540,956  

Notes payable, current portion

    328,562       37,500  

Deferred revenue, current portion

    6,398,407       2,866,356  

Line of credit

    4,000,000       3,500,000  

Convertible notes payable, current portion, net of discount

    75,000       75,000  

Patent settlement liability, current portion

    962,500       962,500  

Conversion feature liability, related parties

    2,041,042       2,979,392  

Conversion feature liability

    111,402       146,814  

Warrant liability, related parties

    4,635,006       5,799,946  

Warrant liability

    108,248       144,031  

Total current liabilities

    20,849,925       19,052,495  
                 

LONG TERM LIABILITIES

               

Notes payable, related parties, long term, net of current portion, net of discount of $772,861 and $447,666, respectively

    5,223,018       4,568,213  

Notes payable, long term, net of current portion

    302,500       614,486  

Deferred revenue, long term, net of current portion

    2,574,335       1,385,017  

Convertible notes payable, related parties, long term, net of current portion

    9,125,000       9,125,000  

Convertible notes payable, long term, net of current portion

    465,000       465,000  

Patent settlement liability, long term, net of current portion

    820,808       963,124  
                 

TOTAL LIABILITIES

    39,360,586       36,173,335  
                 

COMMITMENTS AND CONTINGENCIES (See Note 11)

               
                 

SHAREHOLDERS' (DEFICIT)

               

Preferred stock, $0.001 par value, 10,000,000 shares authorized, 3,772,500 shares undesignated

    -0-       -0-  

Series B convertible preferred stock, 230,000 shares authorized, -0- and -0- issued and outstanding, respectively at $0.001 par value; liquidation preference $-0- and $-0-, respectively

    -0-       -0-  

Series C convertible preferred stock, 747,500 shares authorized, -0- and -0- issued and outstanding, respectively at $0.001 par value; liquidation preference $-0- and $-0-, respectively

    -0-       -0-  

Series A convertible preferred stock, 5,000,000 shares authorized, 4,125,224 and 4,125,224 issued and outstanding, respectively at $0.001 par value; liquidation preference $4,125,224 and $4,125,224, respectively

    4,125       4,125  

Series D preferred stock, 250,000 shares authorized, 250,000 and 250,000 issued and outstanding, respectively at $0.001 par value

    250       250  

Common stock, 250,000,000 shares authorized, 90,104,659 and 90,104,659 issued and outstanding, respectively, at $0.001 par value

    90,105       90,105  

Additional paid in capital - preferred

    4,717,804       4,717,804  

Additional paid in capital - common

    37,374,815       37,334,358  

Accumulated other comprehensive (loss)

    (111,556 )     (87,604 )

Accumulated deficit

    (74,396,733 )     (73,519,917 )
                 

TOTAL SHAREHOLDERS' (DEFICIT)

    (32,321,190 )     (31,460,879 )
                 

TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT)

  $ 7,039,396     $ 4,712,456  

 

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements 

 
3

 

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   

For the six months ended

June 30,

   

For the three months ended

June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Revenues

  $ 6,611,538     $ 7,093,536     $ 3,465,491     $ 3,552,287  

Reimbursable revenues

    179,486       384,987       143,258       177,413  

Total revenues

    6,791,024       7,478,523       3,608,749       3,729,700  
                                 

Cost of goods sold

    1,567,159       1,293,757       813,076       647,177  

Reimbursable expenses-cost of goods sold

    263,891       233,218       154,699       212,300  

Total cost of sales

    1,831,050       1,526,975       967,775       859,477  
                                 

Gross margin

    4,959,974       5,951,548       2,640,974       2,870,223  
                                 

Operating expenses

                               

Salaries, benefits and related taxes

    5,228,311       4,366,143       2,538,236       2,154,057  

Rent and occupancy expenses

    443,987       466,440       219,403       250,422  

Consulting services

    50,558       102,914       30,111       53,611  

Legal and professional fees

    199,897       152,455       114,940       56,702  

Travel

    417,360       225,718       202,466       81,848  

Telephone and internet

    90,491       92,858       46,905       46,403  

Selling, general and administrative

    592,972       436,716       333,140       244,036  

Bad debt expense

    76,002       (13,021 )     55,648       (102,141 )

Depreciation expense

    122,433       119,542       60,023       56,839  

Amortization expense

    23,227       -0-       11,610       -0-  

Total operating expenses

    7,245,238       5,949,765       3,612,482       2,841,777  
                                 

Operating income/(loss)

    (2,285,264 )     1,783       (971,508 )     28,446  
                                 

Other income/(expense)

                               

Interest expense, related parties

    (1,240,176 )     (1,161,902 )     (573,558 )     (600,262 )

Interest expense

    (106,732 )     (70,192 )     (55,387 )     (37,866 )

Interest income

    65       6       18       6  

Change in derivative liabilities

    2,802,571       (4,943,283 )     2,257,688       (1,038,084 )

Transaction (loss)

    (13,319 )     (8,277 )     (8,883 )     (1,562 )

Income/(loss) before income taxes

    (842,855 )     (6,181,865 )     648,370       (1,649,322 )

Income taxes

    (33,961 )     (17,730 )     (16,306 )     (8,865 )

Net income/(loss)

    (876,816 )     (6,199,595 )     632,064       (1,658,187 )

Preferred stock dividends

                               

Preferred stock dividends in arrears

                               

Series A preferred

    (102,283 )     (102,283 )     (51,424 )     (51,424 )

Total preferred stock dividends

    (102,283 )     (102,283 )     (51,424 )     (51,424 )

Net income/(loss) attributable to common stockholders

  $ (979,099 )   $ (6,301,878 )   $ 580,640     $ (1,709,611 )
                                 

Net income/(loss) per share

                               

Basic and diluted

  $ (0.01 )   $ (0.07 )   $ 0.01     $ (0.02 )

Weighted average number of shares outstanding

                               

Basic and diluted

    90,104,659       87,336,914       90,104,659       87,824,747  

 

  

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements

 

 
4

 

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(unaudited)

 

   

For the six months ended

June 30,

   

For the three months ended

June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Net income/(loss) attributable to common stockholders

  $ (979,099 )   $ (6,301,878 )   $ 580,640     $ (1,709,611 )

Other comprehensive (loss)

                               

Change in foreign currency translation adjustment

    (23,952 )     (27,479 )     (16,289 )     (11,966 )
                                 

Other comprehensive (loss)

    (23,952 )     (27,479 )     (16,289 )     (11,966 )
                                 

Comprehensive income/(loss)

  $ (1,003,051 )   $ (6,329,357 )   $ 564,351     $ (1,721,577 )

 

 

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements

 

 
5

 

 OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)

FOR THE YEAR ENDED DECEMBER 31, 2013 AND THE SIX MONTHS ENDED JUNE 30, 2014

(unaudited)

 

   

Preferred Stock

   

Common Stock

                         
   

5% Series A Convertible

   

8% Series B Convertible

   

8% Series C Convertible

   

Series D Preferred

   

Additional

                   

Additional

           

Accumulated

         
   

Number

of

shares

   

$0.001 Par value

   

Number

of

shares

   

$0.001 Par value

   

Number

of

shares

   

$0.001 Par value

   

Number

of

shares

   

$0.001 Par value

   

paid in capital

preferred

   

Number

of

shares

   

$0.001 Par value

   

paid in capital

common

   

Accumulated deficit

   

other comprehensive income

   

Total shareholders' (deficit)

 
                                                                                                                         

Balances at December 31, 2012

    4,125,224     $ 4,125       -0-     $ -0-       -0-     $ -0-       250,000     $ 250     $ 4,717,804       86,598,659     $ 86,599     $ 36,645,589     $ (70,358,575 )   $ (69,092 )   $ (28,973,300 )
                                                                                                                         

Employee stock option expense

                                                                                            83,875                       83,875  
                                                                                                                         

Foreign currency translation adjustment

                                                                                                            (18,512 )     (18,512 )
                                                                                                                         

Restricted stock issuance

                                                                            1,225,000       1,225       221,275                       222,500  
                                                                                                                         

Employee stock option exercise

                                                                            11,000       11       (11 )                     -0-  
                                                                                                                         

Shares issued for purchase of Promasys

                                                                            2,270,000       2,270       383,630                       385,900  
                                                                                                                         

Net loss for period ended December 31, 2013

    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       (3,161,342 )     -0-       (3,161,342 )
                                                                                                                         

Balances at December 31, 2013

    4,125,224       4,125       -0-       -0-       -0-       -0-       250,000       250       4,717,804       90,104,659       90,105       37,334,358       (73,519,917 )     (87,604 )     (31,460,879 )
                                                                                                                         

Employee stock option expense

                                                                                            40,457                       40,457  
                                                                                                                         

Foreign currency translation adjustment

                                                                                                            (23,952 )     (23,952 )
                                                                                                                         

Net loss for period ended June 30, 2014

    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       (876,816 )     -0-       (876,816 )
                                                                                                                         

Balances at June 30, 2014

    4,125,224     $ 4,125       -0-     $ -0-       -0-     $ -0-       250,000     $ 250     $ 4,717,804       90,104,659     $ 90,105     $ 37,374,815     $ (74,396,733 )   $ (111,556 )   $ (32,321,190 )

  

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements 

 
6

 

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   

For the six months ended June 30,

 
   

2014

   

2013

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net loss

  $ (876,816 )   $ (6,199,595 )

Adjustment to reconcile net loss to net cash (used in) operating activities

               

Change in derivative liabilities

    (2,802,571 )     4,943,283  

Interest expense from derivative instruments

    302,890       304,500  

Employee stock compensation

    77,540       59,151  

Provision for doubtful accounts

    76,002       (13,021 )

Depreciation and amortization

    145,660       119,542  

Changes in operating assets and liabilities

               

Accounts receivable

    (2,896,378 )     (543,584 )

Prepaid expenses

    35,513       (4,802 )

Other assets

    (8,771 )     1,221  

Accounts payable and accrued expenses

    628,803       (25,964 )

Patent settlement liability

    (142,316 )     (126,445 )

Deferred revenue

    4,721,369       606,818  

Net cash (used in) operating activities

    (739,075 )     (878,896 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Purchase of property and equipment

    (26,214 )     (86,615 )

Net cash (used in) investing activities

    (26,214 )     (86,615 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Repayments of notes payable

    (20,925 )     -0-  

Proceeds from revolving line of credit

    500,000       650,000  

Net cash provided by financing activities

    479,075       650,000  
                 

Effect of exchange rate changes on cash and cash equivalents

    (23,952 )     (27,479 )

Net decrease in cash and cash equivalents

    (310,166 )     (342,990 )

Cash and cash equivalents at beginning of period

    1,160,720       873,315  
                 

Cash and cash equivalents at end of period

  $ 850,554     $ 530,325  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for:

               

Income taxes

  $ 33,961     $ 17,730  

Interest

  $ 594,873     $ 602,822  
                 

Non-cash transactions

               

Notes payable issued in exchange for existing notes payable

  $ 1,902,500     $ 2,866,879  

Promissory notes issued for accrued interest

  $ 980,000     $ 529,000  

 

 

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements

 

 
7

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

NOTE 1:

ORGANIZATION AND NATURE OF OPERATIONS

 

OmniComm Systems, Inc. (“OmniComm” or the “Company”) is a healthcare technology company that provides Web-based electronic data capture (“EDC”) solutions and related value-added services to pharmaceutical and biotech companies, clinical research organizations (“CROs”), and other clinical trial sponsors principally located in the United States and Europe. Our proprietary EDC software applications; TrialMaster®, TrialOne®, eClinical Suite, and Promasys® allow clinical trial sponsors and investigative sites to securely collect, validate, transmit, and analyze clinical trial data.

 

Our ability to compete within the EDC industry is predicated on our ability to continue enhancing and broadening the scope of solutions offered through our EDC software and services. Our research and development (“R&D”) efforts are focused on developing new and complementary software solutions, as well as enhancing our existing software solutions through the addition of increased functionality. During the six month periods ended June 30, 2014 and June 30, 2013 we spent approximately $1,417,358 and $1,181,853, respectively, on R&D activities, which are primarily comprised of salaries to our developers and other R&D personnel and related costs associated with the development of our software products.

 

NOTE 2:

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

 

The Company’s accounts include those of all its wholly-owned subsidiaries, which are more fully described in the Company’s 2013 Annual Report filed on Form 10-K with the Securities and Exchange Commission, and have been prepared in conformity with (i) accounting principles generally accepted in the United States of America; and (ii) the rules and regulations of the United States Securities and Exchange Commission. All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.

 

UNAUDITED FINANCIAL STATEMENTS

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the consolidated financial statements have been condensed or omitted. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normally recurring adjustments) which management considers necessary for a fair presentation of operating results.

 

The operating results for the six month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year-ended December 31, 2014. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2013.

 

ESTIMATES IN FINANCIAL STATEMENTS

 

The preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Significant estimates incorporated in our financial statements include the recorded allowance for doubtful accounts, the estimate of the appropriate amortization period of our intangible assets, the evaluation of whether our intangible assets have suffered any impairment, the allocation of revenues under multiple-element customer contracts, royalty-based patent liabilities, the value of derivatives associated with debt issued by the Company and the valuation of any corresponding discount to the issuance of our debt. Actual results may differ from those estimates.

 

 
8

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

RECLASSIFICATIONS

 

Certain reclassifications have been made in the 2013 financial statements to conform to the 2014 presentation. These reclassifications did not have any effect on our net loss or shareholders’ deficit.

 

FOREIGN CURRENCY TRANSLATION

 

The financial statements of the Company’s foreign subsidiaries are translated in accordance with ASC 830-30, Foreign Currency Matters—Translation of Financial Statements. The reporting currency for the Company is the U.S. dollar. The functional currency of the Company’s subsidiaries, OmniComm Europe GmbH in Germany, OmniComm Spain S.L. in Spain and OmniComm Promasys B.V. in the Netherlands is the Euro. The functional currency of the Company’s subsidiary OmniComm Ltd., in the United Kingdom, is the British Pound Sterling. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense accounts of the Company’s foreign subsidiaries are translated using an average rate of exchange during the period. Foreign currency translation adjustments are accumulated as a component of other comprehensive income/(loss) as a separate component of stockholders’ equity. Gains and losses arising from transactions denominated in foreign currencies are primarily related to intercompany accounts that have been determined to be temporary in nature and accordingly, are recorded directly to the statement of operations. We record translation gains and losses in accumulated other comprehensive income as a component of stockholders’ equity. We recorded translation losses of $23,952 and $27,479 for the six month periods ended June 30, 2014 and June 30, 2013 respectively.

 

REVENUE RECOGNITION POLICY 

 

The Company derives revenues from software licenses and services of its EDC products and services which can be purchased on a stand-alone basis. License revenues are derived principally from the sale of term licenses for the following software products offered by the Company: TrialMaster, TrialOne, eClinical Suite and Promasys (the “EDC Software”). Service revenues are derived principally from the Company's delivery of the hosted solutions of its TrialMaster and eClinical Suite software products, and consulting services and customer support, including training, for all of the Company's products.

 

The Company recognizes revenues when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.

 

The Company operates in one reportable segment which is the delivery of EDC Software and services to clinical trial sponsors. The Company segregates its revenues based on the activity cycle used to generate its revenues. Accordingly, revenues are currently generated through four main activities, including hosted applications, licensing, professional services and maintenance-related services.

 

Hosted Application Revenues

 

The Company offers its TrialMaster and eClinical Suite software products as hosted application solutions delivered through a standard Web-browser, with customer support and training services. The Company's TrialOne and Promasys solutions are presently available on a licensed basis. To date, hosted applications revenues have been primarily related to TrialMaster and eClinical Suite.

 

 
9

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

Revenues resulting from TrialMaster and eClinical Suite application hosting services consist of three components of services for each clinical trial. The first component is comprised of application set up, including design of electronic case report forms and edit checks, installation and server configuration of the system. The second component involves application hosting and related support services as well as billable change orders which consist of amounts billed to customers for functionality changes made. The third stage involves services required to close out, or lock, the database for the clinical trial.

 

Fees charged and costs incurred for the trial system design, set up and implementation are amortized and recognized ratably over the estimated hosting period. Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the remaining term of the hosting period. Fees for the first and third stages of the service are typically billed based upon milestones. Revenues earned upon completion of a contractual milestone are deferred and recognized over the estimated remaining hosting period. Fees for application hosting and related services in the second stage are generally billed monthly or quarterly in advance. Revenues resulting from hosting services for the eClinical Suite products consist of installation and server configuration, application hosting and related support services. Services for this offering are generally charged as a fixed fee payable on a quarterly or annual basis. Revenues are recognized ratably over the period of the service.

 

Licensing Revenues

 

The Company's software license revenues are earned from the sale of off-the-shelf software. From time-to-time a client might require significant modification or customization subsequent to delivery to the customer. The Company generally enters into software term licenses for its EDC Software products with its customers for three to five year periods, although customers have entered into both longer and shorter term license agreements. These arrangements typically include multiple elements: software license, consulting services and customer support. The Company bills its customers in accordance with the terms of the underlying contract. Generally, the Company bills license fees in advance for each billing cycle of the license term, which typically is either on a quarterly or annual basis. Payment terms are generally net 30 days.

 

In the past the Company has sold perpetual licenses for EDC Software products in certain situations to existing customers with the option to purchase customer support, and may, in the future, do so for new customers based on customer requirements or market conditions. The Company has established vendor specific objective evidence of fair value for the customer support. Accordingly, license revenues are recognized upon delivery of the software and when all other revenue recognition criteria are met. Customer support revenues are recognized ratably over the term of the underlying support arrangement. The Company generates customer support and maintenance revenues from its perpetual license customer base.

 

Professional Services

 

The Company may also enter into arrangements to provide consulting services separate from a license arrangement. In these situations, revenue is recognized on a time-and-materials basis. Professional services can be deemed to be as essential to the functionality of the software at inception and typically are for initial trial configuration, implementation planning, loading of software, building simple interfaces, running test data and documentation of procedures. Subsequent additions or extensions to license terms do not generally include additional professional services.

 

Pass-through Revenue and Expense

 

The Company accounts for pass-through revenue and expense in accordance with ASC 605-45, Principal Agent Considerations. In accordance with ASC 605-45, Principal Agent Considerations, these amounts are recorded as revenue in the statement of operations with a corresponding expense recorded in cost of goods sold. Pass-through revenues and expenses include amounts associated with third-party services provided to our customers by our service and product partners. These third-party services are primarily comprised of Interactive Voice and Web Response software services (IVR and IWR), travel and shipping that are incurred on our clients’ behalf.

 

Maintenance Revenues

 

Maintenance includes telephone-based help desk support and software maintenance. The Company generally bundles customer support with the software license for the entire term of the arrangement. As a result, the Company generally recognizes revenues for both maintenance and software licenses ratably over the term of the software license and support arrangement. The Company allocates the revenues recognized for these arrangements to the different elements based on management's estimate of the relative fair value of each element. The Company generally invoices each of the elements based on separately quoted amounts and thus has a fairly accurate estimate of the relative fair values of each of the invoiced revenue elements.

 

 
10

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

The fees associated with each business activity for the periods ended June 30, 2014 and June 30, 2013, respectively are:

 

   

For the six months ended

 

Revenue activity

 

June 30, 2014

   

June 30, 2013

 

Set-up fees

  $ 1,943,854     $ 1,595,295  

Change orders

    196,954       224,530  

Maintenance

    2,011,646       2,309,885  

Software licenses

    1,286,147       1,902,693  

Professional services

    952,805       1,072,881  

Hosting

    399,618       373,239  

Total

  $ 6,791,024     $ 7,478,523  

 

   

For the three months ended

 

Revenue activity

 

June 30, 2014

   

June 30, 2013

 

Set-up fees

  $ 1,136,021     $ 778,105  

Change orders

    83,866       129,748  

Maintenance

    1,052,015       1,102,042  

Software licenses

    618,830       941,540  

Professional services

    508,298       581,166  

Hosting

    209,719       197,099  

Total

  $ 3,608,749     $ 3,729,700  

 

 

COST OF REVENUES

 

Cost of revenues primarily consists of costs related to hosting, maintaining and supporting the Company’s application suite and delivering professional services and support. These costs include salaries, benefits, and bonuses for the Company’s professional services staff. Cost of revenues also includes outside service provider costs. Cost of revenues is expensed as incurred.

 

CASH AND CASH EQUIVALENTS

 

Cash equivalents consist of highly liquid, short-term investments with maturities of 90 days or less. The carrying amount reported in the accompanying consolidated balance sheets approximates fair value.

 

ACCOUNTS RECEIVABLE

 

Accounts receivable are judged as to collectability by management and an allowance for bad debts is established as necessary. The allowance is based on an evaluation of the collectability of accounts receivable and prior bad debt experience. The Company had recorded an allowance for uncollectible accounts receivable of $141,419 as of June 30, 2014 and $65,341 as of December 31, 2013, respectively.

 

 
11

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

The following table summarizes activity in the Company's allowance for doubtful accounts for the periods presented.

  

   

June 30, 2014

   

December 31, 2013

 

Beginning of period

  $ 65,341     $ 84,210  

Bad debt expense

    76,002       11,131  

Write-offs

    -0-       (30,000 )

Exchange rate impact

    76       -0-  

End of period

  $ 141,419     $ 65,341  

 

CONCENTRATION OF CREDIT RISK

 

Cash and cash equivalents and restricted cash are deposited with major financial institutions and, at times, such balances with any one financial institution may be in excess of FDIC-insured limits. As of June 30, 2014, $521,386 was deposited in excess of FDIC-insured limits. Management believes the risk in these situations to be minimal.

 

Except as follows, the Company has no significant off-balance-sheet risk or credit risk concentrations. Financial instruments that subject the Company to potential credit risks are principally cash equivalents and accounts receivable. Concentrated credit risk with respect to accounts receivable is limited to creditworthy customers. The Company's customers are principally located in the United States and Europe. The Company is directly affected by the overall financial condition of the pharmaceutical, biotechnology and medical device industries and management believes that credit risk exists and that any credit risk the Company faces has been adequately reserved for as of June 30, 2014. The Company maintains an allowance for doubtful accounts based on accounts past due according to contractual terms and historical collection experience. Actual losses when incurred are charged to the allowance. The Company's losses related to collection of accounts receivable have consistently been within management's expectations. As of June 30, 2014, the Company believes no additional credit risk exists beyond the amounts provided for in our allowance for uncollectible accounts. The Company evaluates its allowance for uncollectable accounts on a monthly basis based on a specific review of receivable aging and the period that any receivables are beyond the standard payment terms. The Company does not require collateral from its customers in order to mitigate credit risk.

 

One customer accounted for 13% of our revenues during the six month period ended June 30, 2014 or approximately $856,000. One customer accounted for 12% of our revenues during the six month period ended June 30, 2013 or approximately $871,000 and another customer accounted for 10% or approximately $776,000. The following table summarizes the number of customers who individually comprise greater than 10% of total revenue and/or total accounts receivable and their aggregate percentage of the Company's total revenue and gross accounts receivable for the periods presented.

  

   

Revenues

   

Accounts Receivable

 

For the period ended

 

Number of customers

   

Percentage of

total revenues

   

Number of customers

   

Percentage of accounts receivable

 

June 30, 2014

  1     13%     2     32%  

December 31, 2013

  1     11%     2     23%  

June 30, 2013

  2     22%     3     55%  

 

 
12

 

  

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

The table below provides revenues from European customers for the six month periods ended June 30, 2014 and June 30, 2013, respectively.  

 

 

European revenues

 
 

For the six months ended

 
 

June 30, 2014

   

June 30, 2013

 
 

European revenues

   

% of Total revenues

   

European revenues

   

% of Total revenues

 
  $1,296,534        19.1%     $816,344        10.9%  

  

The Company serves all of its hosting customers from third-party web hosting facilities located in the United States. The Company does not control the operation of these facilities, and they are vulnerable to damage or interruption. The Company maintains redundant systems that can be used to provide service in the event the third-party web hosting facilities become unavailable, although in such circumstances, the Company's service may be interrupted during the transition.

 

PROPERTY AND EQUIPMENT

 

Property and equipment are recorded at cost. Additions and betterments are capitalized; maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the asset’s estimated useful life, which is 5 years for leasehold improvements, computers, equipment and furniture and 3 years for software. Gains or losses on disposal are charged to operations.

 

ASSET IMPAIRMENT

 

Acquisitions and Intangible Assets 

 

We account for acquisitions in accordance with ASC 805, Business Combinations (“ASC 805”) and ASC 350, Intangibles- Goodwill and Other (“ASC 350”). The acquisition method of accounting requires that assets acquired and liabilities assumed be recorded at their fair values on the date of a business acquisition. Our consolidated financial statements and results of operations reflect an acquired business from the completion date of an acquisition.

 

The judgments that we make in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income in periods following an asset acquisition. We generally use either the income, cost or market approach to aid in our conclusions of such fair values and asset lives. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its replacement or reproduction cost. The market approach estimates value based on what other participants in the market have paid for reasonably similar assets. Although each valuation approach is considered in valuing the assets acquired, the approach ultimately selected is based on the characteristics of the asset and the availability of information.

 

Long-lived Assets 

 

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use quoted market prices when available and independent appraisals and management estimates of future operating cash flows, as appropriate, to determine fair value.

 

FAIR VALUE MEASUREMENT

 

OmniComm’s capital structure includes the use of warrants and convertible debt features that are classified as derivative financial instruments. Derivative financial instruments are recognized as either assets or liabilities and are measured at fair value under ASC 815 Derivatives and Hedging. ASC 815 requires that changes in the fair value of derivative financial instruments with no hedging designation be recognized as gains/(losses) in the earnings statement. The fair value measurement is determined in accordance with ASC 820 Fair Value Measurements and Disclosures.

 

 
13

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

DEFERRED REVENUE

 

Deferred revenue represents cash advances and amounts in accounts receivable as of the balance sheet date received in excess of revenue earned on on-going contracts. Payment terms vary with each contract but may include an initial payment at the time the contract is executed, with future payments dependent upon the completion of certain contract phases or targeted milestones. In the event of contract cancellation, the Company is generally entitled to payment for all work performed through the point of cancellation. As of June 30, 2014, the Company had $8,972,742 in deferred revenues relating to contracts for services to be performed over periods ranging from one month to five years. The Company had $6,398,407 in deferred revenues that are expected to be recognized in the next twelve fiscal months.

 

ADVERTISING

 

Advertising costs are expensed as incurred. Advertising costs were $228,530 and $124,139 for the six month periods ended June 30, 2014 and June 30, 2013, respectively and are included under selling, general and administrative expenses in our unaudited condensed consolidated financial statements.

 

RESEARCH AND DEVELOPMENT EXPENSES

 

Software development costs are included in R&D and are expensed as incurred. ASC 985-20, Software Industry Costs of Software to Be Sold, Leased or Marketed, requires the capitalization of certain development costs of software to be sold once technological feasibility is established, which the Company defines as completion to the point of marketability. The capitalized cost is then amortized on a straight-line basis over the estimated product life. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs under ASC 985-20. During the six month periods ended June 30, 2014 and June 30, 2013 we spent approximately $1,417,358 and $1,181,853 respectively, on R&D activities, which include costs associated with the development of our software products and services for our clients’ projects and which are primarily comprised of salaries and related expenses for our software developers and consulting fees paid to third-party consultants. R&D costs are primarily included under Salaries, benefits and related taxes in our Statement of Operations.

 

EMPLOYEE EQUITY INCENTIVE PLANS

 

The OmniComm Systems, Inc. 2009 Equity Incentive Plan (the “2009 Plan”) was approved at our Annual Meeting of Shareholders on July 10, 2009. The 2009 Plan provides for the issuance of up to 7,500,000 shares to employees, directors and key consultants. The predecessor plan, the OmniComm Systems, Inc., 1998 Stock Incentive Plan (the “1998 Plan”) expired on December 31, 2008. The 1998 Plan provided for the issuance of up to 12,500,000 shares in accordance with the terms of the 1998 Plan document. Each plan is more fully described in “Note 14, Employee Equity Incentive Plans.” The Company accounts for its employee equity incentive plans under ASC 718, Compensation – Stock Compensation which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions.

 

 ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. The Company currently uses the Black Scholes option pricing model to determine grant date fair value.

 

EARNINGS PER SHARE

 

The Company accounts for Earnings per Share using ASC 260, Earnings per Share. Unlike diluted earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities.

 

 
14

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

INCOME TAXES

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. ASC 740 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that have been recognized in the financial statements as measured by the provisions of the enacted tax laws.

 

Valuation allowances are established when necessary to reduce deferred tax assets to the estimated amount to be realized. Income tax expense represents the tax payable for the current period and the change during the period in the deferred tax assets and liabilities.

 

IMPACT OF NEW ACCOUNTING STANDARDS

 

During the first six months of 2014, we adopted the following new accounting pronouncements:

 

In July 2013, the Financial Accounting Board (“FASB”) issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU amends ASC 740, Income Taxes, to require that an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward; to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward does not exist at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and not combined with deferred tax assets. ASU No. 2013-11 is effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. Our adoption of this standard on January 1, 2014 did not have a material impact on our consolidated financial statements.

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this ASU on January 1, 2017. Management is currently evaluating which transition approach to use and the impact of the adoption of this ASU on the Company's consolidated financial statements.

 

Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements to determine their impact, if any, on our financial statements.

 

NOTE 3:

GOING CONCERN

 

We have experienced net losses and negative cash flows from operations and have utilized debt and equity financings to help provide for our working capital, capital expenditure and R&D needs. We will continue to require substantial funds to continue our R&D activities and to market, sell and commercialize our technology. We may need to raise substantial additional capital to fund our future operations. Our capital requirements will depend on many factors, including the following: problems, delays, expenses and complications frequently encountered by companies developing and commercializing new technologies; the progress of our R&D activities; the rate of technological advances; determinations as to the commercial potential of our technology under development; the status of competitive technology; the establishment of collaborative relationships; the success of our sales and marketing programs; and other changes in economic, regulatory or competitive conditions in our planned business.

 

Estimates about the adequacy of funding for our activities are based upon certain assumptions, including assumptions that the R&D programs relating to our technology can be conducted at projected costs and that progress towards the commercialization of our technology will be timely and successful. There can be no assurance that changes in our R&D plans, acquisitions or other events will not result in accelerated or unexpected expenditures.

 

 
15

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

To satisfy our capital requirements, we may seek additional financing through debt and equity financings. There can be no assurance that any such funding will be available to us on favorable terms or at all. If adequate funds are not available when needed, we may be required to delay, scale back or eliminate some or all of our research and product development and marketing programs. If we are successful in obtaining additional financings, the terms of such financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our common and preferred stock or result in increased interest expense in future periods.

 

The ability of the Company to continue in existence is dependent on its having sufficient financial resources to bring products and services to market for marketplace acceptance. As a result of our historical operating losses, negative cash flows and accumulated deficits for the period ending June 30, 2014 there is substantial doubt about the Company’s ability to continue as a going concern.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

NOTE 4.

EARNINGS (LOSS) PER SHARE

 

Basic earnings (loss) per share were calculated using the weighted average number of shares outstanding of 90,104,659 and 87,336,914 for the six month periods ended June 30, 2014 and June 30, 2013, respectively.

 

Antidilutive shares of 82,066,327 and 80,097,329 have been omitted from the calculation of dilutive earnings (loss) per share for the six month periods ended June 30, 2014 and June 30, 2013, respectively, as the shares were antidilutive. Provided below is the reconciliation between numerators and denominators of the basic and diluted earnings per shares. There were no differences between basic and diluted earnings per share for the six month periods ended June 30, 2014 and June 30, 2013. The table below provides a reconciliation of anti-dilutive securities outstanding as of June 30, 2014 and June 30, 2013, respectively.

  

Anti-Dilutive Security

 

June 30, 2014

   

June 30, 2013

 

Preferred stock

    2,750,149       2,750,149  

Employee stock options

    5,275,000       6,445,000  

Warrants

    48,463,517       45,528,873  

Convertible notes

    24,620,000       24,620,000  

Shares issuable for accrued interest

    957,661       753,307  

Total

    82,066,327       80,097,329  

 

The employee stock options are exercisable at prices ranging from $0.045 to $0.69 per share. The exercise prices on the warrants range from $0.25 to $0.60 per share. Shares issuable upon conversion of Convertible Debentures have conversion prices ranging from $0.25 to $0.50 per share.

 

 

 
16

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

The Company’s convertible debt and convertible preferred stock have an anti-dilutive effect on net income/(loss) per share and were not included in the computation of diluted earnings per share 

 

For the six months ended

 
   

June 30, 2014

   

June 30, 2013

 
   

Income/(loss)

   

Shares

   

Per-share

   

Income/(loss)

   

Shares

   

Per-share

 
   

numerator

   

denominator

   

amount

   

numerator

   

denominator

   

amount

 

Basic EPS

  $ (979,099 )     90,104,659     $ (0.01 )   $ (6,301,878 )     87,336,914     $ (0.07 )
                                                 

Effect of dilutive securities - none

    -0-       -0-       -0-       -0-       -0-       -0-  
                                                 

Diluted EPS

  $ (979,099 )     90,104,659     $ (0.01 )   $ (6,301,878 )     87,336,914     $ (0.07 )

 

For the three months ended

 
   

June 30, 2014

   

June 30, 2013

 
   

Income/(loss)

   

Shares

   

Per-share

   

Income/(loss)

   

Shares

   

Per-share

 
   

numerator

   

denominator

   

amount

   

numerator

   

denominator

   

amount

 

Basic EPS

  $ 580,640       90,104,659     $ 0.01     $ (1,709,611 )     87,824,747     $ (0.02 )
                                                 

Effect of dilutive securities - none

    -0-       -0-       -0-       -0-       -0-       -0-  
                                                 

Diluted EPS

  $ 580,640       90,104,659     $ 0.01     $ (1,709,611 )     87,824,747     $ (0.02 )

   

NOTE 5.

PROPERTY AND EQUIPMENT, NET

 

Property and equipment consists of the following: 

 

   

June 30, 2014

   

December 31, 2013

         
   

Cost

   

Accumulated depreciation

   

Net book value

   

Cost

   

Accumulated depreciation

   

Net book value

   

Estimated useful life (years)

 

Computer & office equipment

  $ 1,837,403     $ 1,412,474     $ 424,929     $ 1,822,098     $ 1,326,256     $ 495,842       5  

Leasehold improvements

    94,156       79,654       14,502       93,812       75,735       18,077       5  

Computer software

    1,579,238       1,511,126       68,112       1,556,497       1,477,801       78,696       3  

Office furniture

    114,223       103,581       10,642       114,373       99,555       14,818       5  

Total

  $ 3,625,020     $ 3,106,835     $ 518,185     $ 3,586,780     $ 2,979,347     $ 607,433          

 

Depreciation expense for the six month periods ended June 30, 2014 and June 30, 2013 was $122,433 and $119,542, respectively.

 

 
17

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

NOTE 6.

INTANGIBLE ASSETS, AT COST

 

Intangible assets consist of the following: 

 

   

June 30, 2014

   

December 31, 2013

         

Asset

 

Cost

   

Accumulated amortization

   

Net book value

   

Cost

   

Accumulated amortization

   

Net book value

   

Estimated useful life (years)

 

eClinical customer lists

  $ 1,392,701     $ 1,392,701     $ -0-     $ 1,392,701     $ 1,392,701     $ -0-       3  

Promasys B.V. customer lists

    135,174       6,008       129,166       136,253       1,514       134,739       15  

Promasys B.V. software code

    72,838       9,712       63,126       72,943       2,431       70,512       5  

Promasys B.V. URLs/Website

    68,270       15,171       53,099       68,814       3,823       64,991       3  
    $ 1,668,983     $ 1,423,592     $ 245,391     $ 1,670,711     $ 1,400,469     $ 270,242          

 

Amortization expense was $23,227 and $-0- for the six month periods ended June 30, 2014 and June 30, 2013, respectively.

 

Remaining amortization expense for the Company’s intangible assets is as follows:

  

2014

  $ 23,168  

2015

    46,336  

2016

    42,543  

2017

    23,579  

2018

    21,151  

Thereafter

    88,614  

Total

  $ 245,391  

  

NOTE 7.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following:

  

Account

 

June 30, 2014

   

December 31, 2013

 

Accounts payable

  $ 641,641     $ 724,421  

Accrued payroll and related costs

    464,000       260,072  

Other accrued expenses

    146,802       88,292  

Accrued interest

    937,315       1,468,171  

Total accounts payable and accrued expenses

  $ 2,189,758     $ 2,540,956  

 

NOTE 8.

LINES OF CREDIT AND NOTES PAYABLE

 

On March 18, 2013, the Company entered into a $2,000,000 revolving Line of Credit (“Line of Credit”) with The Northern Trust Company guaranteed by our Chief Executive Officer and Director, Cornelis F. Wit. Mr. Wit receives 2.0% interest (approximately $9,500 per month) from the Company on the assets pledged for the Line of Credit. On December 18, 2013 the Company renewed the Line of Credit and increased the available balance to $4,000,000. The Line of Credit matures on December 17, 2014 and carries a variable interest rate based on the prime rate. At June 30, 2014, $4,000,000 was outstanding on the Line of Credit at an interest rate of 2.25%.

 

 
18

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

At June 30, 2014, the Company owed $6,626,941 in notes payable all of which are unsecured. The table below provides details as to the terms and conditions of the notes payable.

  

                 

Ending

                                 
                 

principal

   

Non related party

   

Related party

 

Origination

   

Maturity

 

 

Interest    

June 30,

           

Long

           

Long

 

date

   

date

 

 

rate    

2014

   

Current

   

term

   

Current

   

term

 

12/17/2012

   

12/16/2014

    12%     $ 20,000     $ 20,000     $ -0-     $ -0-     $ -0-  

1/1/2013

   

1/1/2015

    10%       308,562       308,562       -0-       -0-       -0-  

1/1/2013

   

1/1/2016

    12%       529,000       -0-       -0-       -0-       529,000  

2/1/2013

   

1/1/2016

    12%       20,000       -0-       -0-       -0-       20,000  

4/1/2013

   

3/31/2016

    12%       2,866,879       -0-       -0-       -0-       2,866,879  

1/1/2013

   

4/1/2017

    12%       45,000       -0-       45,000       -0-       -0-  

3/5/2013

   

4/1/2017

    12%       137,500       -0-       137,500       -0-       -0-  

1/1/2013

   

4/1/2017

    10%       120,000       -0-       120,000       -0-       -0-  

12/31/2011

   

4/1/2017

    12%       1,600,000       -0-       -0-       -0-       1,600,000  

1/1/2014

   

4/1/2017

    12%       980,000       -0-       -0-       -0-       980,000  

Discount on note payable

                    -0-       -0-       -0-       (772,861 )

Total

          $ 6,626,941     $ 328,562     $ 302,500     $ -0-     $ 5,223,018  

 

At December 31, 2013, the Company owed $5,667,865 in notes payable all of which were unsecured. The table below provides details as to the terms and conditions of the notes payable. 

 

                 

Ending

                                 
                 

principal

   

Non related party

   

Related party

 

Origination

   

Maturity

    Interest    

December 31,

           

Long

           

Long

 

date

   

date

    rate    

2013

   

Current

   

term

   

Current

   

term

 

12/31/2011

   

1/1/2015

    12%     $ 1,600,000     $ -0-     $ -0-     $ -0-     $ 1,600,000  

4/1/2012

   

1/1/2014

    12%       17,500       17,500       -0-       -0-       -0-  

12/17/2012

   

12/16/2014

    12%       20,000       20,000       -0-       -0-       -0-  

1/1/2013

   

1/1/2016

    12%       529,000       -0-       -0-       -0-       529,000  

1/1/2013

   

1/1/2015

    10%       308,562       -0-       308,562       -0-       -0-  

1/1/2013

   

1/1/2015

    10%       123,424       -0-       123,424       -0-       -0-  

1/1/2013

   

1/1/2015

    12%       45,000       -0-       45,000       -0-       -0-  

2/1/2013

   

1/1/2016

    12%       20,000       -0-       -0-       -0-       20,000  

3/5/2013

   

1/1/2015

    12%       137,500       -0-       137,500       -0-       -0-  

4/1/2013

   

3/31/2016

    12%       2,866,879       -0-       -0-       -0-       2,866,879  

Discount on note payable

                    -0-       -0-       -0-       (447,666 )

Total

          $ 5,667,865     $ 37,500     $ 614,486     $ -0-     $ 4,568,213  

 

On January 1, 2013, the Company issued a promissory note in the principal amount of $529,000 and warrants to purchase 2,116,000 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of January 31, 2016 to our Chief Executive Officer and Director, Cornelis F. Wit, in exchange for accrued interest in the amount of $529,000. The note carries an interest rate of 12% per annum and is due on January 1, 2016.

 

This issuance caused us to calculate and record a derivative liability for the warrant liability. The warrants were valued using the Black Scholes option pricing model. A value of $400,141 was calculated and allocated to the warrants and recorded as a liability to the issuance of the note payable. As a result of the liability we recorded a discount to the note payable. The carrying amount of the note at the time of issuance was therefore $128,859. The warrant liability (discount) will be amortized over the 36 month duration of the note payable. The Company will continue to perform a fair value calculation periodically on the warrant liability and accordingly the warrant liability is increased or decreased based on the fair value calculation. The resulting increase or decrease is reflected in operations as an unrealized gain or loss on changes in derivative liabilities.

 

On January 1, 2013, the Company issued a promissory note in the amount of $308,562 in exchange for an existing promissory note in the same amount. The note carries an interest rate of 10% per annum and matures on January 1, 2015.

 

On January 1, 2013, the Company issued a promissory note in the amount of $123,425 in exchange for an existing promissory note in the same amount. The note carries an interest rate of 10% per annum and matures on January 1, 2015.

 

 
19

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

On January 1, 2013 the Company issued a promissory note in the amount of $45,000 in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2015.

 

On February 1, 2013 the Company issued a promissory note in the amount of $20,000 to our Chairman and Chief Technology Officer, Randall G. Smith, in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2016.

 

On March 5, 2013 the Company issued a promissory note in the amount of $137,500 in exchange for a promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2015.

 

On April 1, 2013 the Company issued a promissory note in the amount of $2,866,879 to our Chief Executive Officer and Director, Cornelis F. Wit, in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of March 31, 2016.

 

On January 1, 2014, the Company issued a promissory note in the principal amount of $980,000 and warrants to purchase 3,920,000 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of April 1, 2017 to our Chief Executive Officer and Director, Cornelis F. Wit, in exchange for accrued interest in the amount of $980,000. The note carries an interest rate of 12% per annum and is due on April 1, 2017.

 

This issuance caused us to calculate and record a derivative liability for the warrant liability. The warrants were valued using the Black Scholes option pricing model. A value of $628,086 was calculated and allocated to the warrants and recorded as a liability to the issuance of the note payable. As a result of the liability we recorded a discount to the note payable. The carrying amount of the note at the time of issuance was therefore $351,914. The warrant liability (discount) will be amortized over the 39 month duration of the note payable. The Company will continue to perform a fair value calculation periodically on the warrant liability and accordingly the warrant liability is increased or decreased based on the fair value calculation. The resulting increase or decrease is reflected in operations as an unrealized gain or loss on changes in derivative liabilities.

 

On April 4, 2014 the Company issued a promissory note payable to our Chief Executive Officer and Director, Cornelis F. Wit, in the amount of $1,600,000 in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

On April 4, 2014 the Company issued a promissory note in the amount of $120,000 and paid $3,425 in principal in exchange for an existing promissory note in the amount of $123,425. The promissory note carries an interest rate of 10% and has a maturity date of April 1, 2017.

 

On April 4, 2014 the Company issued a promissory note in the amount of $45,000 in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

On April 4, 2014 the Company issued a promissory note in the amount of $137,500 in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

 
20

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

NOTE 9:                CONVERTIBLE NOTES PAYABLE

 

The following table summarizes the convertible debt outstanding as of June 30, 2014.

  

                         

Principal

           

 

   

Discount

   

Carrying

   

Carrying amount

 

 

   

 

 

 

     

 

   

at

   

 

   

Total

   

at

   

amount at

   

Short term

   

Long term

 

Date of

issuance

   

Maturity

date

 

 

Interest rate

   

Original

principal

   

June 30,

2014

   

Allocated

discount

   

discount

amortized

   

June 30,

2014

   

June 30,

2014

   

Related

   

Non

related

   

Related

   

Non related

 

8/1/1999

   

6/30/2004

    10%     $ 862,500     $ 75,000     $ -0-     $ -0-     $ -0-     $ 75,000     $ -0-     $ 75,000     $ -0-     $ -0-  

8/29/2008

   

4/1/2016

    10%       150,000       150,000       135,600       135,600       -0-       150,000       -0-       -0-       150,000       -0-  

8/29/2008

   

1/1/2016

    10%       2,120,000       1,770,000       1,916,480       1,916,480       -0-       1,770,000       -0-       -0-       1,770,000       -0-  

12/16/2008

   

1/1/2016

    12%       160,000       160,000       44,024       44,024       -0-       160,000       -0-       -0-       160,000       -0-  

12/16/2008

   

1/1/2016

    12%       200,000       200,000       55,030       55,030       -0-       200,000       -0-       -0-       -0-       200,000  

12/16/2008

   

4/1/2016

    12%       100,000       100,000       27,515       27,515       -0-       100,000       -0-       -0-       -0-       100,000  

12/16/2008

   

1/1/2016

    12%       4,615,000       4,520,000       1,243,681       1,243,681       -0-       4,520,000       -0-       -0-       4,505,000       15,000  

9/30/2009

   

1/1/2016

    12%       1,400,000       1,200,000       526,400       526,400       -0-       1,200,000       -0-       -0-       1,100,000       100,000  

12/31/2009

   

1/1/2016

    12%       1,490,000       1,490,000       935,720       935,720       -0-       1,490,000       -0-       -0-       1,440,000       50,000  

Total

          $ 11,097,500     $ 9,665,000     $ 4,884,450     $ 4,884,450     $ -0-     $ 9,665,000     $ -0-     $ 75,000     $ 9,125,000     $ 465,000  

 

The following table summarizes the convertible debt outstanding as of December 31, 2013.

  

                         

Principal

at

           

 

   

Discount

at

   

Carrying

amount at

   

Carrying amount

 

 

   

 

 

 

     

 

   

December

   

 

   

Total

   

December

   

December

   

Short term

   

Long term

 

Date of

issuance

   

Maturity

date

 

 

Interest rate

   

Original

principal

   

31,

2013

   

Allocated

discount

   

discount

amortized

   

31,

2013

   

31,

2013

   

Related

   

Non related

   

Related

   

Non related

 

8/1/1999

   

6/30/2004

    10%     $ 862,500     $ 75,000     $ -0-     $ -0-     $ -0-     $ 75,000     $ -0-     $ 75,000     $ -0-     $ -0-  

8/29/2008

   

1/1/2015

    10%       150,000       150,000       135,600       135,600       -0-       150,000       -0-       -0-       150,000       -0-  

8/29/2008

   

1/1/2016

    10%       2,120,000       1,770,000       1,916,480       1,916,480       -0-       1,770,000       -0-       -0-       1,770,000       -0-  

12/16/2008

   

1/1/2015

    12%       100,000       100,000       27,515       27,515       -0-       100,000       -0-       -0-       -0-       100,000  

12/16/2008

   

1/1/2016

    12%       160,000       160,000       44,024       44,024       -0-       160,000       -0-       -0-       160,000       -0-  

12/16/2008

   

1/1/2016

    12%       200,000       200,000       55,030       55,030       -0-       200,000       -0-       -0-       -0-       200,000  

12/16/2008

   

1/1/2016

    12%       4,615,000       4,520,000       1,243,681       1,243,681       -0-       4,520,000       -0-       -0-       4,505,000       15,000  

9/30/2009

   

1/1/2016

    12%       1,400,000       1,200,000       526,400       526,400       -0-       1,200,000       -0-       -0-       1,100,000       100,000  

12/31/2009

   

1/1/2016

    12%       1,490,000       1,490,000       935,720       935,720       -0-       1,490,000       -0-       -0-       1,440,000       50,000  

Total

          $ 11,097,500     $ 9,665,000     $ 4,884,450     $ 4,884,450     $ -0-     $ 9,665,000     $ -0-     $ 75,000     $ 9,125,000     $ 465,000  

 

10% Convertible Notes

 

During 1999, the Company issued 10% Convertible Notes payable in the amount of $862,500 pursuant to a private offering. There were costs of $119,625 associated with this offering. The net proceeds to the Company were $742,875. The notes bear interest at ten percent annually, payable semi-annually. The notes were convertible after maturity, which was June 30, 2004, into shares of common stock of the Company at $1.25 per share. As of June 30, 2014, $787,500 of the Convertible Notes had been repaid in cash or converted into 1,495,179 shares of common stock of the Company leaving an outstanding principal balance of $75,000 that is in default. There was $113,468 of accrued interest at June 30, 2014.

 

Secured Convertible Debentures

 

On September 30, 2009, the Company sold an aggregate of $1,400,000 principal amount 12% Secured Convertible Debentures (the “Debentures”) and common stock purchase warrants (the “Warrants”) to purchase an aggregate of 5,600,000 shares of our common stock exercisable at a price of $0.25 per share for four years subsequent to the closing of the transaction to four accredited investors including our Chief Executive Officer and Director, Cornelis F. Wit. The Debentures, which bear interest at 12% per annum, matured on March 30, 2011. The Debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.25 per share. On March 30, 2011, the Company repaid $200,000 of the outstanding principal amounts owed and extended $1,200,000 of the convertible debentures until April 1, 2013, including $1,100,000 in convertible debentures held by our Chief Executive Officer and Director, Cornelis F. Wit. The Company also extended the expiration date of the warrants associated with the offering until September 30, 2015. On February 22, 2013 the Company and the lenders agreed to extend the maturity date of $1,200,000 of the convertible debentures including $1,100,000 due to our Chief Executive Officer and Director, Cornelis F. Wit to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

 
21

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

Convertible Debentures

 

On August 29, 2008, the Company sold $2,270,000 of convertible debentures and warrants to purchase an aggregate of 4,540,000 shares of our common stock to four accredited investors including our Chief Executive Officer and Director, Cornelis F. Wit, and Guus van Kesteren, a Director of the Company. The convertible debentures, which bear interest at 10% per annum, were due on August 29, 2010. The convertible debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.50 per share. On September 30, 2009, Mr. Wit and Mr. van Kesteren extended $1,920,000 of the convertible debentures until August 29, 2013 in accordance with the terms of a Secured Convertible Debenture issued on that date. On February 22, 2013 the Company and Mr. van Kesteren extended the maturity date of $150,000 of the convertible debentures due to Mr. van Kesteren to January 1, 2015. The expiration date of the warrants associated with the debentures was also extended to January 1, 2015. On February 22, 2013 the Company and Mr. Wit extended the maturity date of $1,770,000 of the convertible debentures due to Mr. Wit to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016. On April 21, 2014 the Company and Mr. van Kesteren extended the maturity date of $150,000 of the convertible debentures due to Mr. van Kesteren to April 1, 2016. The expiration date of the warrants associated with the debentures was also extended to April 1, 2016.

 

On December 16, 2008, we sold $5,075,000 of convertible debentures and warrants to purchase an aggregate of 10,150,000 shares of our common stock to eleven accredited investors including our Chief Executive Officer and Director, Chief Operating Officer, Chairman and Chief Technology Officer, Chief Financial Officer and three of our Directors. The convertible debentures, which bear interest at 12% per annum, were due on December 16, 2010. The convertible debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.50 per share. On September 30, 2009 the officers, directors and an affiliate of the Company extended $4,980,000 of Convertible Notes until December 16, 2013 in accordance with the terms of a Secured Convertible Debenture issued on that date. On February 22, 2013 the Company and the lenders agreed to extend the maturity date of $4,505,000 of the convertible debentures including $4,475,000 due to our Chief Executive Officer and Director, Cornelis F. Wit, $25,000 due to our Chief Operating Officer and President, Stephen E. Johnson, and $5,000 due to our Chairman and Chief Technology Officer, Randall G. Smith, to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016. On February 27, 2013 the Company and Matthew Veatch, a former director of the Company, extended the maturity date of $15,000 of convertible debentures issued to Mr. Veatch to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016. On March 6, 2013, the Company and the lender agreed to extend the maturity date of $200,000 of convertible debentures to January 1, 2014. The expiration date of the warrants associated with the debentures was also extended to January 1, 2014. On March 12, 2013, the Company and the lenders agreed to extend the maturity date of $100,000 of convertible debentures to January 1, 2015. The expiration date of the warrants associated with the debentures was also extended to January 1, 2015. On December 5, 2013 the Company and Guus van Kesteren, a Director of the Company, extended the maturity date of $160,000 of the convertible debentures due to Mr. van Kesteren to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016. On December 9, 2013, the Company and the lender agreed to extend the maturity date of $200,000 of convertible debentures to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016. On April 28, 2014, the Company and the lender agreed to extend the maturity date of $100,000 of convertible debentures to April 1, 2016. The expiration date of the warrants associated with the debentures was also extended to April 1, 2016.

 

On December 31, 2009, the Company sold an aggregate of $1,490,000 principal amount 12% convertible debentures and warrants to purchase an aggregate of 5,960,000 shares of our common stock exercisable at a price of $0.25 per share for four years subsequent to the closing of the transaction to three accredited investors including our Chief Executive Officer and Director, Cornelis F. Wit. The debentures, which bear interest at 12% per annum, matured on June 30, 2011. The debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.25 per share. On June 30, 2011, the Company and the lenders agreed to extend all $1,490,000 of the convertible debentures until October 1, 2013, including $1,440,000 of the Debentures held by Mr. Wit. The Company also extended the expiration date of the warrants associated with the December 2009 offering until December 31, 2015. On February 22, 2013 the Company and the lenders agreed to extend the maturity date of $1,490,000 of the convertible debentures, including $1,440,000 due to Mr. Wit, to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

 
22

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

The payments required at maturity under the Company’s outstanding convertible debt at June 30, 2014 are as follows:

  

2014

  $ 75,000  

2015

    -0-  

2016

    9,590,000  

Total

  $ 9,665,000  

 

NOTE 10:              FAIR VALUE MEASUREMENT

 

The Company measures the fair value of its assets and liabilities under the guidance of ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.

 

ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

 

 

·

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;

 

 

·

Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and

 

 

·

Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.

 

The valuation techniques that may be used to measure fair value are as follows:

 

 

A.

Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

 

 

B.

Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method

 

 

C.

Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

 

The Company also adopted the provisions of ASC 825, Financial Instruments. ASC 825 allows companies to choose to measure eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities under the provisions of this Statement. The Company elected the fair value option for the issuance of warrants associated with the new promissory notes issued in the six month periods ended June 30, 2014 and June 30, 2013.

 

The Company’s financial assets or liabilities subject to ASC 820 as of June 30, 2014 include the conversion feature and warrant liability associated with convertible debentures issued during fiscal 2008 and 2009 and the warrants issued during 2011, 2013 and 2014 that are associated with notes payable that were issued to our Chief Executive Officer and Director, Cornelis F. Wit. The conversion feature and warrants were deemed to be derivatives (the “Derivative Instruments”) since a fixed conversion price cannot be determined for either of the Derivative Instruments due to anti-dilution provisions embedded in the offering documents for the convertible debentures. The derivative instruments were not issued for risk management purposes and as such are not designated as hedging instruments under the provisions of ASC 815 Disclosures about Derivative Instruments and Hedging Activities. See Note 9 – Convertible Notes Payable.

 

 
23

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

Following is a description of the valuation methodologies used to determine the fair value of the Company’s financial assets including the general classification of such instruments pursuant to the valuation hierarchy.

 

A summary as of June 30, 2014 of the fair value of liabilities measured at fair value on a recurring basis follows:

 

   

Fair value at

June 30,

   

Quoted prices in active markets for identical assets/ liabilities

   

Significant other observable inputs

   

Significant unobservable inputs

 
   

2014

   

(Level 1)

   

(Level 2)

   

(Level 3)

 
                                 

Derivatives: (1) (2)

                               

Conversion feature liability

  $ 2,152,444     $ -0-     $ -0-     $ 2,152,444  

Warrant liability

    4,743,254       -0-       -0-       4,743,254  

Total of derivative liabilities

  $ 6,895,698     $ -0-     $ -0-     $ 6,895,698  

 

(1) The fair value of the derivative instruments was estimated using the Income Approach and the Black Scholes option pricing model with the following assumptions for the six months ended June 30, 2014

(2) The fair value at the measurement date is equal to their carrying value on the balance sheet

 

Significant valuation assumptions of derivative instruments at June 30, 2014

Risk free interest rate

    0.10%    

Dividend yield

    0.00%    

Expected volatility

    165.7% to 212.4%    

Expected life (range in years)

         

Conversion feature liability

    1.51 to 1.76    

Warrant liability

    1.50 to 2.76    

  

 
24

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

A summary as of December 31, 2013 of the fair value of liabilities measured at fair value on a recurring basis follows:

 

   

Fair value at December 31,

   

Quoted prices in active markets for identical assets/ liabilities

   

Significant other observable inputs

   

Significant unobservable inputs

 
   

2013

   

(Level 1)

   

(Level 2)

   

(Level 3)

 
                                 

Derivatives: (1) (2)

                               

Conversion feature liability

  $ 3,126,206     $ -0-     $ -0-     $ 3,126,206  

Warrant liability

    5,943,977       -0-       -0-       5,943,977  

Total of derivative liabilities

  $ 9,070,183     $ -0-     $ -0-     $ 9,070,183  

 

(1) The fair value of the derivative instruments was estimated using the Income Approach and the Black Scholes option pricing model with the following assumptions for the year ended December 31, 2013

(2) The fair value at the measurement date is equal to their carrying value on the balance sheet

 

Significant valuation assumptions of derivative instruments at December 31, 2013

Risk free interest rate

    0.12% to 0.13%    

Dividend yield

    0.00%    

Expected volatility

    166.7% to 217.1%    

Expected life (range in years)

         

Conversion feature liability

    1.00 to 2.00    

Warrant liability

    1.00 to 2.25    

 

A summary as of June 30, 2014 of the fair value of assets measured at fair value on a non-recurring basis follows:

 

   

Carrying amount December 31,

   

Carrying amount 

June 30,

   

Quoted prices in active markets for identical assets/ liabilities

   

Significant other observable inputs

   

Significant unobservable inputs

 
   

2013

   

2014

   

(Level 1)

   

(Level 2)

   

(Level 3)

 
                                         

Acquired assets (3)

                                       

Promasys B.V. customer lists (4)

  $ 134,739     $ 129,166     $ -0-     $ -0-     $ 136,253  

Promasys B.V. software code (4)

    70,512       63,126       -0-       -0-       72,943  

Promasys B.V. URLs/website (4)

    64,991       53,099       -0-       -0-       68,814  
    $ 270,242     $ 245,391     $ -0-     $ -0-     $ 278,010  

 

(3) The fair value of the acquired assets was estimated using the Income Approach with a discounted cash flow valuation methodology applied.
(4) The acquired Promasys B.V. software code, customer list and URLs/website are not measured on a recurring basis since their initial fair value has been deemed to have a finite life and is being amortized periodically. Instead the Company performs an impairment analysis on a quarterly basis in order to determine whether the carrying value of the assets reflects the fair value of the assets in a market based transaction.

 

Other identifiable intangible assets, which are subject to amortization, are being amortized using the straight-line method over their estimated useful lives ranging from 3 to 15 years. The Impairment or Disposal of Long-Lived Asset subsection of ASC 360, Property, Plant and Equipment, requires us to test the recoverability of long-lived assets, including identifiable intangible assets with definite lives, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In testing for potential impairment, if the carrying value of the asset group exceeds the expected undiscounted cash flows, we must then determine the amount by which the fair value of those assets exceeds the carrying value and determine the amount of impairment, if any.

 

The Company’s goodwill and other identifiable intangible assets with indefinite lives are measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3).

 

 
25

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

The table below presents the fair value of the Goodwill as of June 30, 2014 and December 31, 2013.

 

Fair Value Measurements

 
                 
   

June 30, 2014

   

December 31, 2013

 

(Level 3)

               

Goodwill

  $ 670,363     $ 675,710  

 

Goodwill and other identifiable intangible assets with indefinite lives are reviewed for impairment annually, and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Long-lived assets and identifiable intangible assets are also reviewed for impairment whenever events or changes in circumstances indicate that amounts may not be recoverable. If the testing performed indicates that impairment has occurred, the Company will record a noncash impairment charge for the difference between the carrying amount of the goodwill or other intangible assets and the implied fair value of the goodwill or other intangible assets in the period the determination is made.

  

The table below presents the unrealized gains/losses for the six month periods ended June 30, 2014 and June 30, 2013.

 

   

Other income

 
   

for the six months ended

 
   

June 30, 2014

   

June 30, 2013

 

The net amount of gains/(losses) for the period included in earnings attributable to the unrealized gain/(loss) from changes in derivative liabilities at the reporting date

  $ 2,802,571     $ (4,943,283 )
                 

Total unrealized gains/(losses) included in earnings

  $ 2,802,571     $ (4,943,283 )

 

The tables below set forth a summary of changes in fair value of the Company’s Level 3 financial liabilities at fair value for the periods ended June 30, 2014 and December 31, 2013. The tables reflect changes for all financial liabilities at fair value categorized as Level 3 as of June 30, 2014 and December 31, 2013.

 

   

Level 3 financial assets and financial liabilities at fair value

 
                   

Net unrealized

                         
                   

(gains)/losses

   

 

                 
                   

relating to

   

Net

                 
                    instruments     purchases,                  
   

Balance,

           

 still

   

issuances

   

Net transfers

   

Balance,

 
   

beginning

   

Net realized

   

held at the

   

and

   

in and/or out

   

end of

 
   

of year

   

gains/(losses)

   

reporting date

   

settlements

   

of Level 3

   

period

 

Period ended June 30, 2014

                                               

Derivatives:

                                               

Conversion feature liability

  $ 3,126,206     $ -0-     $ (973,762 )   $ -0-     $ -0-     $ 2,152,444  

Warrant liability

    5,943,977       -0-       (1,828,809 )     628,086       -0-       4,743,254  

Total of derivative liabilties

  $ 9,070,183     $ -0-     $ (2,802,571 )   $ 628,086     $ -0-     $ 6,895,698  

 

 

   

Level 3 financial assets and financial liabilities at fair value

 
                   

Net unrealized

                         
                   

(gains)/losses

   

 

                 
                   

relating to

   

Net

                 
                  instruments     purchases,              
   

Balance,

           

 still

   

issuances

   

Net transfers

   

Balance,

 
   

beginning

   

Net realized

   

held at the

   

and

   

in and/or out

   

end of

 
   

of year

   

gains/(losses)

   

reporting date

   

settlements

   

of Level 3

   

year

 

Year ended December 31, 2013

                                               

Derivatives:

                                               

Conversion feature liability

  $ 2,287,323     $ -0-     $ 838,883     $ -0-     $ -0-     $ 3,126,206  

Warrant liability

    6,287,598       -0-       (743,762 )     400,141       -0-       5,943,977  

Total of derivative liabilties

  $ 8,574,921     $ -0-     $ 95,121     $ 400,141     $ -0-     $ 9,070,183  

 

 
26

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

NOTE 11:              COMMITMENTS AND CONTINGENCIES

 

The Company currently leases office space under operating leases for its office locations and has operating leases related to server and network co-location and disaster recovery for its operations. The minimum future lease payments required under the Company’s operating leases at June 30, 2014 are as follows:

 

2014

  $ 339,684  

2015

    664,025  

2016

    373,382  

2017

    55,087  

2018

    5,803  

Total

  $ 1,437,981  

  

In addition to annual base rental payments, the Company pays for the operating expenses associated with its leased office space and is responsible for any escalation in operating expenses as determined in the leases. Rent expense was $443,987 and $466,440 for the six month periods ended June 30, 2014 and June 30, 2013, respectively.

 

The Company’s Fort Lauderdale, Florida Corporate Office lease expires in September 2016. The Company’s lease on its New Jersey field office expires in February 2016. The Company currently operates its wholly-owned subsidiary, OmniComm Ltd., in the United Kingdom under the terms of a lease that expires in September 2017. The Company currently operates its wholly-owned subsidiary, OmniComm Europe, GmbH, in Germany under the terms of a lease that expires in July 2015. The Company currently operates its wholly-owned subsidiary, OmniComm Promasys B.V, in the Netherlands under the terms of a lease that expires in October 2018.

 

LEGAL PROCEEDINGS

 

From time to time the Company may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of June 30, 2014, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.

 

PATENT LITIGATION SETTLEMENT

 

On April 9, 2009, we entered into a Settlement and License Agreement with DataSci, LLC (“DataSci”). DataSci granted us a worldwide, non-exclusive non-transferable right and license under the Licensed Patent and the right to sublicense TrialMaster on a Technology Transfer and Technology Transition basis. Under the terms of the license, we are obligated to pay royalties quarterly for sales of Licensed Products, as defined therein, from January 1, 2009 until the expiration of the Licensed Patent equal to two percent (2%) of OmniComm’s annual Gross Revenues or, alternatively, the annual minimum royalty payment(s), whichever is greater. The remaining minimum royalty payments per year are as follows:

 

2014

  $ 737,500  

2015

    450,000  

2016

    450,000  

2017

    450,000  

Total

  $ 2,087,500  

 

 
27

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

During the six month periods ended June 30, 2014 and June 30, 2013 the Company recorded a charge to earnings of $82,684 and $98,554 respectively, which amounts represent (i) the amount of additional license expense incurred above the stipulated minimum in the DataSci License Agreement during the six month periods ended June 30, 2014 and June 30, 2013 and (ii) the accretion of the difference between the total stipulated annual minimum royalty payments and the recorded present value accrual of the annual minimum royalty payments.

 

EMPLOYMENT AGREEMENTS

 

We have employment agreements in place with the following members of our executive management team:

 

Cornelis F. Wit, Chief Executive Officer

 

Randall G. Smith, Chief Technology Officer

 

Stephen E. Johnson, President and Chief Operating Officer

 

The employment agreements provide, among other things, for participation in employee benefits available to employees and executives. Each of the agreements will renew for successive one-year terms unless the agreement is expressly cancelled by either the employee or the Company ninety days prior to the end of the term. Under the terms of the agreement, we may terminate the employee’s employment upon 30 days notice of a material breach and the employee may terminate the agreement under the same terms and conditions. The employment agreements contain non-disclosure and severance provisions, as well as non-compete clauses.

 

NOTE 12:              RELATED PARTY TRANSACTIONS

 

On February 1, 2013, our Chairman and Chief Technology Officer, Randall G. Smith extended the maturity date of his $20,000 promissory note until January 1, 2016. The promissory note bears interest at 12% per annum. On December 31, 2011, Mr. Smith extended the maturity date of his promissory note until April 1, 2013. The note was originally issued on December 16, 2010 with a maturity date of December 31, 2011.     

 

On February 22, 2013, our Director, Guus van Kesteren, extended the maturity date of his $150,000 of convertible debentures to January 1, 2015. The debentures bear interest at 10% per annum. The convertible debentures were originally issued in August 2008. The expiration date of the warrants associated with the debentures was also extended to January 1, 2015.     

 

On February 22, 2013, our Chief Operating Officer and President, Stephen E. Johnson extended the maturity date of his $25,000 of convertible debentures to January 1, 2016. The debentures bear interest at 12% per annum. The convertible debentures were originally issued in December 2008. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

On February 22, 2013, our Chairman and Chief Technology Officer, Randall G. Smith extended the maturity date of his $5,000 of convertible debentures to January 1, 2016. The debentures bear interest at 12% per annum. The convertible debentures were originally issued in December 2008. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

On December 5, 2013, our Director, Guus van Kesteren, extended the maturity date of his $160,000 of convertible debentures to January 1, 2016. The debentures bear interest at 12% per annum. The convertible debentures were originally issued in December 2008. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

On April 21, 2014 our Director, Guus van Kesteren, extended the maturity date of his $150,000 of convertible debentures to April 1, 2016. The debentures beat interest at 10% per annum. The convertible debentures were originally issued in August 2008. The expiration date of the warrants associated with the debentures was also extended to April 1, 2016.

 

 
28

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

As of June 30, 2014, we have an aggregate of $14,760,879 principal amount of convertible debentures and promissory notes outstanding to Cornelis F. Wit, our Chief Executive Officer and Director, and have issued certain warrants to Mr. Wit, as follows:

 

 

In June 2008, Mr. Wit invested $510,000 in convertible notes. On August 29, 2008, Mr. Wit converted the $510,000 and invested an additional $1,260,000 in a private placement of convertible debentures and warrants to purchase 3,540,000 shares of our common stock. The convertible debentures, which bear interest at 10% per annum, were due on August 29, 2010. The convertible debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.50 per share. On September 30, 2009, the Company and Mr. Wit extended the $1,770,000 of convertible debentures until August 29, 2013 in accordance with the terms of a Secured Convertible Debenture issued on that date. On February 22, 2013, the Company and Mr. Wit extended the maturity date of the $1,770,000 of convertible debentures to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

 

In February 2008, Mr. Wit invested $150,000 in promissory notes and from September 2008 to December 2008, Mr. Wit invested $4,200,000 in convertible notes. On December 16, 2008, Mr. Wit converted the $4,350,000 into a private placement of convertible debentures and warrants to purchase 8,700,000 shares of our common stock. The convertible debentures, which bear interest at 12% per annum, were due on December 16, 2010. The convertible debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.50 per share. On September 30, 2009, the Company and Mr. Wit extended the $4,350,000 of convertible debentures until December 16, 2013 in accordance with the terms of a Secured Convertible Debenture issued on that date. In a private transaction on October 16, 2012, Mr. Wit purchased $125,000 of the December 2008 convertible debentures and the related 250,000 warrants from Mr. Ronald Linares, the Company’s former Chief Financial Officer. On February 22, 2013, the Company and Mr. Wit extended the maturity date of the $4,475,000 of convertible debentures to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

 

From July 2009 to September 2009, Mr. Wit invested $1,100,000 which amount was aggregated under the terms of one convertible note dated September 30, 2009.  On September 30, 2009, Mr. Wit agreed to convert this convertible note into a private placement of secured convertible debentures bearing interest at a rate of 12% per annum with a maturity date of March 30, 2011. The convertible debentures were convertible into 4,400,000 shares of common stock and Mr. Wit received 4,400,000 warrants to purchase common stock of the Company at a price of $0.25. On March 30, 2011, the Company and Mr. Wit extended the maturity date of his convertible note until April 1, 2013 in accordance with the terms of Amendment Number One To Securities Purchase Agreement. The Company also extended the expiration date of the 4,400,000 warrants issued with convertible note by two years to September 30, 2015. On February 22, 2013, the Company and Mr. Wit extended the maturity date of his convertible debentures to January 1, 2016 in accordance with the terms of Amendment Number Two To Securities Purchase Agreement. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

 

From October 2009 to December 2009, Mr. Wit invested $1,440,000, which amount was aggregated under the terms of one convertible note dated December 31, 2009. On December 31, 2009, Mr. Wit agreed to convert this Convertible Note into a private placement of unsecured convertible debentures bearing interest at a rate of 12% per annum, which Convertible Debentures were due on June 30, 2011. The Company and Mr. Wit extended the maturity date of his convertible note until October 1, 2013 in accordance with the terms of Amendment Number One To Securities Purchase Agreement. The Company also extended the expiration date of the 5,760,000 warrants issued with convertible note by two years to December 31, 2015. On February 22, 2013, the Company and Mr. Wit extended the maturity date of his convertible debentures to January 1, 2016 in accordance with the terms of Amendment Number Two To Securities Purchase Agreement. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

 

On March 31, 2011, the Company issued a note payable in the principal amount of $2,866,879 and warrants to purchase 11,467,517 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of March 31, 2016 to Mr. Wit. The note accrues interest at a rate of 12% per annum and had a maturity date of April 1, 2014. On April 1, 2013, the Company and Mr. Wit extended the maturity date of the promissory note to March 31, 2016.

 

  The Promissory Note consolidates the amounts owed as detailed below:
 

i.

 

Promissory Note issued on April 13, 2010 for $450,000 with a maturity date of December 31, 2011;

 

ii.

 

Promissory Note issued on June 29, 2010 for $115,000 with a maturity date of December 31, 2011;

 

iii.

 

Promissory Note issued on September 30, 2010 for $695,000 with a maturity date of December 31, 2011;

 

iv.

 

Promissory Note issued on December 31, 2010 for $1,197,500 with a maturity date of December 31, 2011; and

 

v.

 

Promissory Note issued on December 31, 2010 for $409,379 with a maturity date of April 01, 2012.

 

 
29

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

 

On December 31, 2011, the Company issued a promissory note in the principal amount of $1,600,000 and warrants to purchase 6,400,000 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of December 31, 2015 to Mr. Wit. The note carried an interest rate of 12% per annum and had a maturity date of January 1, 2015.

 

  The promissory note consolidates the amounts owed as detailed below: 
 

i.

 

Promissory Note issued on May 13, 2011 for $96,000 with a maturity date of January 01, 2013;

 

ii.

 

Promissory Note issued on September 30, 2011 for $342,000 with a maturity date of April 01, 2014;

 

iii.

 

Promissory Note issued on October 05, 2011 for $130,000 with a maturity date of April 01, 2014;

 

iv.

 

Promissory Note issued on October 28, 2011 for $123,000 with a maturity date of April 01, 2014;

 

v.

 

Promissory Note issued on October 31, 2011 for $82,000 with a maturity date of April 01, 2014;

 

vi.

 

Promissory Note issued on November 23, 2011 for $60,000 with a maturity date of January 1, 2013; and

 

vii.

 

Accrued and unpaid interest in the amount of $767,000.

 

  On April 4, 2014 the Company issued a promissory note payable to Mr. Wit, in the amount of $1,600,000 in exchange for the existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

 

On January 1, 2013, the Company issued a promissory note in the principal amount of $529,000 and warrants to purchase 2,116,000 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of January 31, 2016 to Mr. Wit. The note carries an interest rate of 12% per annum and is due on January 1, 2016.

 

 

On January 1, 2014, the Company issued a promissory note in the principal amount of $980,000 and warrants to purchase 3,920,000 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of April 1, 2017 to Mr. Wit in exchange for accrued interest in the amount of $980,000. The note carries an interest rate of 12% per annum and is due on April 1, 2017.

 

On March 18, 2013, the Company entered into a $2,000,000 revolving Line of Credit with The Northern Trust Company guaranteed by our Chief Executive Officer and Director, Cornelis F. Wit. Mr. Wit receives 2.0% interest (approximately $9,500 per month) from the Company on the assets pledged for the Line of Credit. On December 18, 2013 the Company renewed the Line of Credit and increased the available balance to $4,000,000. The Line of Credit matures on December 17, 2014 and carries a variable interest rate based on the prime rate. At June 30, 2014, $4,000,000 was outstanding on the Line of Credit at an interest rate of 2.25%.

 

For the six months ended June 30, 2014 and June 30, 2013 we incurred $1,240,176 and $1,161,902, respectively, in interest expense payable to related parties. 

 

 
30

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

NOTE 13:             STOCKHOLDERS’ (DEFICIT)

 

Our authorized capital stock consists of 250,000,000 shares of common stock, $.001 par value per share, and 10,000,000 shares of preferred stock, par value $.001 per share, of which 5,000,000 shares have been designated as 5% Series A Preferred Stock, 230,000 shares have been designated as Series B Preferred Stock, 747,500 shares have been designated as Series C Preferred Stock and 250,000 shares have been designated as Series D Preferred Stock.

 

As of June 30, 2014 we had the following outstanding securities:

 

 

o

90,104,659 shares of common stock issued and outstanding;

 

o

48,463,517 warrants issued and outstanding to purchase shares of our common stock;

 

o

4,125,224 shares of our Series A Preferred Stock issued and outstanding,

 

o

-0- shares of our Series B Preferred Stock issued and outstanding;

 

o

-0- shares of our Series C Preferred Stock issued and outstanding;

 

o

250,000 Series D Preferred Stock issued and outstanding; and

 

o

$9,665,000 principal amount Convertible Debentures convertible into 24,620,000 shares of common stock.

 

Common Stock

 

Holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of our voting securities do not have cumulative voting rights. Holders of common stock are entitled to share in all dividends that the Board of Directors, in its discretion, declares from legally available funds. In the event of our liquidation, dissolution or winding up, subject to the preferences of the Series A Preferred Stockholders, each outstanding share of common stock entitles its holder to participate in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.

 

Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions for the common stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is outstanding. All outstanding shares of common stock are duly authorized, validly issued, fully paid and non-assessable.

 

Preferred Stock

 

Our Board of Directors, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. In addition, the Board of Directors may fix and determine all privileges and rights of the authorized preferred stock series including:

 

 

o

dividend and liquidation preferences,

 

o

voting rights,

 

o

conversion privileges, and

 

o

redemption terms.

 

Our Board of Directors may authorize the issuance of preferred stock which ranks senior to our common stock for the payment of dividends and the distribution of assets on liquidation. In addition, our Board of Directors can fix limitations and restrictions, if any, upon the payment of dividends on our common stock to be effective while any shares of preferred stock are outstanding.

 

The following table presents the cumulative arrearage of undeclared dividends by class of preferred stock as of June 30, 2014 and June 30, 2013, respectively, and the per share amount by class of preferred stock.

 

   

Cumulative arrearage

as of June 30,

   

Cumulative arrearage per share

as of June 30,

 

Series of preferred stock

 

2014

   

2013

   

2014

   

2013

 
                                 

Series A

  $ 2,482,722     $ 2,276,461     $ 0.60     $ 0.55  

Series B

    609,887       609,887     $ 3.05     $ 3.05  

Series C

    1,472,093       1,472,093     $ 4.37     $ 4.37  

Total preferred stock arrearage

  $ 4,564,702     $ 4,358,441                  

 

 
31

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

The following table presents preferred dividends accreted for the six month periods ended June 30, 2014 and June 30, 2013, respectively, and the per share effect of the preferred dividends if their effect was not anti-dilutive.

 

   

Dividends accreted

   

Dividends per share

 
   

six months ended June 30,

   

six months ended June 30,

 
   

2014

   

2013

   

2014

   

2013

 

Preferred stock dividends in arrears Series A

  $ 102,283     $ 102,283     $ 0.025     $ 0.025  

Preferred stock dividends in arrears Series B

  $ -0-     $ -0-     $ -0-     $ -0-  

Preferred stock dividends in arrears Series C

  $ -0-     $ -0-     $ -0-     $ -0-  

 

 

Warrants Issued for Services and in Capital Transactions

 

The following tables summarize all outstanding warrants for the periods ended June 30, 2014 and December 31, 2013, and the related changes during these periods.

 

June 30, 2014 warrants outstanding

   

June 30, 2014 warrants exercisable

 
       

Number

   

Weighted average

   

 

   

Number

   

 

 

Range of exercise price

 

outstanding at

June 30, 2014

   

remaining

contractual life

   

Weighted average

exercise price

   

exercisable at

June 30, 2014

   

Weighted average

exercise price

 
$0.25

$0.60

    48,463,517       1.67     $ 0.35       48,463,517     $ 0.35  

 

 

December 31, 2013 warrants outstanding

   

December 31, 2013 warrants exercisable

 
       

Number

   

Weighted average

   

 

   

Number

   

 

 

Range of exercise price

 

outstanding at

December 31, 2013

   

remaining

contractual life

   

Weighted average

exercise price

   

exercisable at

December 31, 2013

   

Weighted average

exercise price

 
$0.25

$0.60

    44,728,873       2.05     $ 0.36       44,728,873     $ 0.36  

 

 

Warrants

       

Balance at December 31, 2013

    44,728,873  

Issued

    3,920,000  

Exercised

    -0-  

Expired/forfeited

    (185,356 )

Balance at June 30, 2014

    48,463,517  

Warrants exercisable at June 30, 2014

    48,463,517  

Weighted average fair value of warrants granted during 2014

  $ 0.14  

 

Other Comprehensive (Loss)

 

Due to the availability of net operating losses and related deferred tax valuations, there is no tax effect associated with any component of other comprehensive (loss). The following table lists the beginning balance, quarterly activity and ending balance of the components of accumulated other comprehensive (loss).

 

   

Foreign currency translation

   

Accumulated other comprehensive (loss)

 

Balance at December 31, 2012

  $ (69,092 )   $ (69,092 )

2013 Activity

    (18,512 )     (18,512 )

Balance at December 31, 2013

    (87,604 )     (87,604 )

2014 Activity

    (23,952 )     (23,952 )

Balance at June 30, 2014

  $ (111,556 )   $ (111,556 )

 

 
32

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

NOTE 14:              EMPLOYEE EQUITY INCENTIVE PLANS

 

Stock Option Plan

 

Description of 2009 Equity Incentive Plan

 

In 2009, the Company’s Board of Directors and shareholders approved the 2009 Equity Incentive Plan of OmniComm Systems, Inc. (the “2009 Plan”). The 2009 Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Phantom Stock Unit Awards and Performance Share Units. Pursuant to the 2009 Plan, 7,500,000 shares of the Company’s common stock are authorized for issuance.

 

The maximum term for any option grant under the 2009 Plan is ten years from the date of the grant; however, options granted under the 2009 Plan will generally expire five years from the date of grant for most employees, officers and directors of the Company. Options granted to employees generally vest either upon grant or in two installments. The first vesting, which is equal to 50% of the granted stock options, occurs upon completion of one full year of employment from the date of grant and the second vesting occurs on the second anniversary of the date of grant. The vesting period typically begins on the date of hire for new employees and on the date of grant for existing employees. The restrictions on restricted shares granted to employees generally lapse in three equal annual installments on the anniversary of the date of grant.  Any unvested stock options or restricted shares with restrictions that have not lapsed that are granted under the 2009 Plan are forfeited and expire upon termination of employment.

 

As of June 30, 2014, there were 4,036,000 outstanding options and 1,225,000 restricted stock shares that have been granted under the 2009 Plan. At June 30, 2014, there were 2,239,000 shares available for grant as options or other forms of share-based compensation under the 2009 Plan.

 

Description of 1998 Stock Incentive Plan

 

In 1998, the Company’s Board of Directors and shareholders approved the 1998 Stock Incentive Plan of OmniComm Systems, Inc. (the “1998 Plan”). The 1998 Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Phantom Stock Unit Awards and Performance Share Units. Pursuant to the 1998 Plan, 12,500,000 shares of the Company’s common stock were authorized for issuance. The 1998 Plan expired as of December 31, 2008. As of June 30, 2014, there were 1,239,000 outstanding options that have been granted under the 1998 Plan.

 

The following table summarizes the stock option activity for the Company’s equity incentive plans:

 

   

Number of shares

   

Weighted average exercise price

(per share)

   

Weighted average remaining contractual term

(in years)

   

Aggregate intrinsic value

 
                                 

Outstanding at December 31, 2012

    10,452,500     $ 0.36     1.68     $ 149,598  

Granted

    350,000       0.17                  

Exercised

    (100,000 )     0.18                  

Forfeited/cancelled/expired

    (4,957,500 )     0.42                  
                                 

Outstanding at December 31, 2013

    5,745,000       0.29     1.70     $ 93,945  

Granted

    100,000       0.16                  

Exercised

    -0-       -0-                  

Forfeited/cancelled/expired

    (570,000 )     0.52                  
                                 

Outstanding at June 30, 2014

    5,275,000     $ 0.27     1.38     $ 72,567  
                                 
                                 

Vested and exercisable at June 30, 2014

    4,787,500     $ 0.28     1.13     $ 64,704  

 

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price at quarter-end and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2014.

 

 
33

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

The total number of shares vesting and the fair value of shares vesting for the six month periods ended June 30, 2014 and June 30, 2013, respectively, was:

 

   

Number of

options vested

   

Fair value of

options vested

 

Fair value of options vesting during the six months ended June 30, 2014

  433,334     $ 50,845  

Fair value of options vesting during the six months ended June 30, 2013

  447,083     $ 45,860  

 

Cash received from stock option exercises for the six month periods ended June 30, 2014 and June 30, 2013 was $-0- and $-0-, respectively. Due to the Company’s net loss position, no income tax benefit has been realized during the six month periods ended June 30, 2014 and June 30, 2013.

 

The following table summarizes information concerning options outstanding at June 30, 2014:

 

Awards breakdown by price range at June 30, 2014  
       

Outstanding

   

Vested

 

Strike price range ($)

 

Outstanding stock options

   

Weighted average remaining contractual life

   

Weighted average outstanding

strike price

   

Vested stock options

   

Weighted average remaining vested contractual life

   

Weighted average vested strike price

 

0.00

to 0.20     3,301,000       1.72     $ 0.15       2,863,500       1.41     $ 0.15  

0.21

to 0.29     735,000       1.17       0.25       685,000       0.97       0.25  

0.30

to 0.49     80,000       0.48       0.38       80,000       0.48       0.38  

0.50

to 0.70     1,159,000       0.60       0.60       1,159,000       0.60       0.60  

0.00

to 0.70     5,275,000       1.38     $ 0.27       4,787,500       1.13     $ 0.28  

 

 

The following table summarizes information concerning options outstanding at December 31, 2013:

 

Awards breakdown by price range at December 31, 2013

 
       

Outstanding

   

Vested

 

Strike price range ($)

 

Outstanding stock options

   

Weighted average remaining contractual life

   

Weighted average outstanding

strike price

   

Vested stock options

   

Weighted average remaining vested contractual life

   

Weighted average vested strike price

 

0.00

to 0.20     3,251,000       2.16     $ 0.15       2,530,166       1.86     $ 0.16  

0.21

to 0.29     750,000       1.64       0.25       650,000       1.20       0.25  

0.30

to 0.49     110,000       0.98       0.38       110,000       0.98       0.38  

0.50

to 0.70     1,634,000       0.87       0.59       1,634,000       0.87       0.59  

0.00

to 0.70     5,745,000       1.70     $ 0.29       4,924,166       1.42     $ 0.32  

 

 

The weighted average fair value (per share) of options granted during the six month period ended June 30, 2014 was $0.16 and $0.17 during the six month period ended June 30, 2013. The Black Scholes option-pricing model was utilized to calculate these values.

 

Basis for Fair Value Estimate of Share-Based Payments

 

Based on analysis of its historical volatility, the Company expects that the future volatility of its share price is likely to be similar to the historical volatility the Company experienced since the Company’s commercialization activities were initiated during the second half of 2000. The Company used a volatility calculation utilizing the Company’s own historical volatility to estimate its future volatility for purposes of valuing the share-based payments that have been granted. Actual volatility, and future changes in estimated volatility, may differ substantially from the Company’s current estimates.

  

 
34

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

The Company utilizes the historical data available regarding employee and director exercise activity to calculate an expected life of the options. The table below presents the weighted average expected life in years of options granted under the Plan as described above. The risk-free rate of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds with the expected term of the option granted.

 

Below are the assumptions for the fair value of share-based payments for the six month periods ended June 30, 2014 and June 30, 2013.

 

   

Stock option assumptions for the six months ended

 

Stock option assumptions

 

June 30, 2014

   

June 30, 2013

 

Risk-free interest rate

    0.83 %     0.40 %

Expected dividend yield

    0.0 %     0.0 %

Expected volatility

    205.2 %     203.0 %

Expected life of options (in years)

    5       5  

 

 

The following table summarizes weighted average grant date fair value activity for the Company’s incentive stock plans:

 

   

Weighted average grant date fair value

 
   

2014

   

2013

 

Stock options granted during the six month period ended June 30,

  $ 0.16     $ 0.17  
                 

Stock options vested during the six month period ended June 30,

  $ 0.12     $ 0.10  
                 

Stock options forfeited during the six month period ended June 30,

  $ 0.44     $ 0.29  

 

 

A summary of the status of the Company’s non-vested shares underlying stock options as of June 30, 2014, and changes during the six month period ended June 30, 2014 is as follows:

 

   

Shares underlying stock options

   

Weighted average grant date fair value

 

Nonvested shares at January 1, 2014

    820,834     $ 0.13  
                 

Nonvested shares at June 30, 2014

    845,834     $ 0.15  

 

As of June 30, 2014, approximately $44,777 of total unrecognized compensation cost related to unvested stock options is expected to be recognized over a weighted-average period of 1.1 years.

 

 
35

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

NOTE 15:             INCOME TAXES

 

A reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate to the income before provision for income taxes is as follows:

 

   

June 30, 2014

   

June 30, 2013

 

Federal statutory rate applied to loss before income taxes

  $ (317,167 )   $ (2,326,236 )

Increase/(decrease) in income taxes results from:

               

Current tax expense

    33,961       17,730  

Non deductible expenses

    (922,665 )     1,990,344  

Change in deferred assets

    33,855       37,086  

Change in valuation allowance

    1,205,977       298,806  
                 

Income tax expense

  $ 33,961     $ 17,730  

 

 

The components of income tax expense/(benefit) for the six month periods ended:

 

   

June 30, 2014

   

June 30, 2013

 

Current tax expense:

  $ 33,961     $ 17,730  

Deferred tax expense/(benefit):

               

Bad debt allowance

    (28,600 )     16,189  

Operating loss carryforward

    (1,211,232 )     (352,081 )

Amortization of intangibles

    2,741       -0-  

Patent litigation settlement

    31,114       37,086  
      (1,205,977 )     (298,806 )

Valuation allowance

    1,205,977       298,806  
                 

Total tax expense

  $ 33,961     $ 17,730  

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:

 

   

June 30, 2014

   

June 30, 2013

 

Amortization of intangibles

  $ 280,957     $ 283,698  

Bad debt allowance

    52,214       14,526  

Patent litigation liability accrual

    284,294       349,596  

Operating loss carryforwards

    19,431,714       17,708,050  

Gross deferred tax assets

    20,049,179       18,355,870  

Valuation allowance

    (20,049,179 )     (18,355,870 )
                 

Net deferred tax liability/(asset)

  $ -0-     $ -0-  

 

 

The Company has net operating loss carry forwards (NOL) for income tax purposes of approximately $53,884,989. This loss is allowed to be offset against future income until the year 2034 when the NOLs will expire. Other timing differences relate to depreciation and amortization for the stock acquisition of Education Navigator in 1998. The tax benefits relating to all timing differences have been fully reserved for in the valuation allowance account due to the substantial losses incurred through June 30, 2014. The change in the valuation allowance for the six month period ended June 30, 2014 was an increase of $1,205,977.

  

 
36

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014 AND JUNE 30, 2013

(unaudited)

 

NOTE 16:              SUBSEQUENT EVENTS

 

On July 30, 2014 the Company paid down $350,000 in principal on the Line of Credit.  As of July 30, 2014 the outstanding balance on the Line of Credit was $3,650,000.

 

On July 31, 2014 the Company issued 1,400,000 restricted shares under the 2009 Equity Incentive Plan to 17 individuals consisting of board members, an advisor and employees, all shares of which were issued subject to a forfeiture period which lapses ratably over three years on the anniversary of the grant date.  

 

 
37

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

General 

 

The following information should be read in conjunction with the information contained in our unaudited consolidated financial statements and notes thereto appearing elsewhere herein and other information set forth in this report.

 

Forward-Looking Statements

 

Statements contained in this Form 10-Q that are not historical fact are "forward-looking statements". These statements can often be identified by the use of forward-looking terminology such as "estimate", "project", "believe", "expect", "may", "will", "should", "intends", or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, contained in this Form 10-Q regarding matters that are not historical facts, are only predictions. No assurance can be given that plans for the future will be consummated or that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these plans and projections and other forward-looking statements are based upon a variety of assumptions, which we consider reasonable, but which nevertheless may not be realized. Because of the number and range of the assumptions underlying our projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond our reasonable control, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this Form 10-Q. Therefore, our actual experience and results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by us or any other person that these plans will be consummated or that estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. The Company does not undertake any obligation to update or revise any forward-looking statement made by it or on its behalf, whether as a result of new information, future events or otherwise.

 

Overview

 

We are a healthcare technology company that provides Web-based electronic data capture (“EDC”) solutions and related value-added services to pharmaceutical and biotech companies, clinical research organizations (“CROs”), and other clinical trial sponsors worldwide. Our proprietary EDC software applications: TrialMaster®; TrialOne®; eClinical Suite, and Promasys® (the “eClinical Software Products”), allow clinical trial sponsors and investigative sites to securely collect, validate, transmit and analyze clinical trial data.

 

In 2014, the primary focus of our strategy includes:

 

 

Increasing our penetration of the Phase I trial market with our dedicated Phase I solution, TrialOne;

 

Stimulating demand by providing clinical trial sponsors with high value eClinical applications and services;

 

Expanding our penetration of the large pharmaceutical sponsor market;

 

Broadening our suite of services and software applications on an organic R&D basis and on a selective basis via the acquisition or licensing of complementary solutions;

 

Expanding our business development efforts in Europe to capitalize on our operational and clinical capabilities vis-à-vis our competition in that geographic market;

 

Providing our services to small and midsize pharmaceutical, biotechnology, medical device companies and CROs; and

 

Emphasizing our low operating costs.

 

Our operating focus is first, to increase our sales and marketing capabilities and penetration rate and secondly, to continue developing and improving our software solutions and services to ensure our services and products remain an attractive, high-value EDC choice.  During 2013 and the first half of 2014, we increased our marketing and sales efforts and expanded the scope of our CRO Preferred Program in order to increase our penetration of the domestic CRO market. CROs are organizations that provide support and services to pharmaceutical, biotech, medical devices and other clinical trial sponsors. CROs can range from small specialty niche service providers to very large global service providers. According to a Tufts CSDD study published in late 2012, the overall US market for the 15 highest CRO-concentration geographic areas is estimated at between $32.5 and $39.5 billion. A single CRO could be managing clinical trials for one or more trial sponsors. Our CRO Preferred Program is designed to help the CRO service their existing clients and win new business. By building our relationship with the CRO, we gain access to trial sponsors that we might not be able to reach through other sales channels. The CRO Preferred Program offers our suite of EDC solutions to the CROs with a number of advantages including fixed pricing with no upfront fees, product demonstration support to trial sponsors, sales support, and integrated eLearning. We will seek to expand the scope of our sales and marketing efforts both domestically and in Europe during the remainder of 2014.

 

Our ability to compete within the EDC and eClinical industries is predicated on our ability to continue enhancing and broadening the scope of solutions we offer. Our R&D efforts are focused on developing new, complementary software solutions, as well as enhancing our existing software solutions through the addition of increased functionality. We spent approximately $1,417,358 and $1,181,853 on R&D activities during the six months ended June 30, 2014 and June 30, 2013, respectively.  The majority of these expenses represent salaries and related benefits to our developers which include the costs associated with the continued development of our EDC software applications to meet current customer requirements and with our efforts at enhancing our suite of products by incorporating new features and services we believe will improve the products and consequently improve our market position. As our industry matures a critical success factor will be the ability of eClinical service providers to offer robust, end-to-end solutions than can either provide a comprehensive eClinical solution for our clients or that will allow us the ability to seamlessly integrate with complementary partnered products and services.  Our R&D team is comprised of software programmers, engineers and related support personnel. 

 

 
38

 

 

Our selling efforts include marketing our products to several Fortune 1000 pharmaceutical and medical device manufacturers and several of the largest CROs. We have experienced success in broadening our client roster over the past several quarters, via both organic growth and through acquisitions. Continued success in broadening our existing client relationships and forging new relationships should provide us the opportunity to limit our need for funding our operations via debt and equity capital. Continuing to obtain contracts with clients of this size and reputation will also increase the credibility of the Company to the clinical trial market.  We believe that strengthening our reputation and broadening the scope of our brand recognition will serve to improve the effectiveness of our sales and marketing efforts.

 

Our business development focus continues to include increasing our penetration of all phases of the clinical trial market with a particular emphasis on becoming the market leader in Phase I EDC services. We believe this market is an operating and strategic strength of the Company due to the inherent flexibility of our solutions including the solutions provided by our TrialOne products and services. We believe we have the ability to produce trials more quickly and economically than our competitors for this specialized and large market. During 2013 and the first half of 2014 we experienced positive strides towards achieving this goal.  We successfully increased the number of clients utilizing our software on a licensed basis as well as increasing the scope of licenses existing clients had deployed in our eClinical and TrialMaster product lines.  In the first six months of 2014 we added thirteen new clients to our base of installed licenses and ten existing clients expanded their licenses.  We expect to experience continued success in penetrating the market for larger pharmaceutical, biotechnology and medical device clinical trial sponsors as we continue expanding our marketing and sales efforts during the remainder of 2014.

 

Our clients are able to partially or completely license our EDC solutions. The licensing business model provides our clients with a more cost effective means of deploying our EDC solutions on a large-scale basis. Our licensed products, falling under the auspices of either a Tech Transition (partial transfer with some services performed by OmniComm) or Tech Transfer, allows us to broaden our potential client base, provides us with a high-margin revenue source and affords us the ability to improve our competitive position within the EDC industry.  Additionally, we continue to focus on adding CROs as strategic and marketing partners. These relationships provide marketing leverage in the form of joint marketing and sales efforts and provide an installed base of trained users for our EDC and eClinical software applications. This installed base of users increases our ability to provide rapidly developed, cost effective solutions for our clients.  Additionally, we believe we have established an effective presence in the European clinical trial market and will seek to expand the scope of our sales and marketing operations there.  In 2013 we expanded our presence in Europe with the acquisition of Promasys B.V. Our acquisition of Promasys B.V., which is located in the Netherlands, afforded us the opportunity to expand our product line. Promasys’ EDC solution is focused on academic and investigator initiated trials. It provides these unique users with a robust, feature rich solution that is quickly deployed and easy to operate. The European market accounted for approximately 19% of total revenues for the six months ended June 30, 2014.

 

We feel that the momentum established from new client acquisitions and our ability to retain clients for repeat engagements provide a good operating base from which to build during the remainder of 2014.  We increased the marketing and business development budget for our TrialOne product during 2013 and the first six months of 2014 as we place increased emphasis on increasing our penetration of the Phase I market both in the U.S. and in Europe. We believe that segment of the EDC market is the least penetrated and allows for the greatest potential increases in market share and in sales volumes.  We expect to continue increasing the level of resources deployed in our sales and marketing efforts through the addition of sales personnel and by increasing the number of industry tradeshows and conferences that we attend. We feel that a combination of our existing infrastructure, broadened array of eClinical products and services, and increased success in new client acquisition, coupled with our ability to retain our existing clients will allow us to compete effectively within the EDC market. 

  

 
39 

 

 

The six months ended June 30, 2014 compared with the six months ended June 30, 2013

 

Results of Operations

 

A summarized version of our results of operations for the six months ended June 30, 2014 and June 30, 2013 is included in the table below.

 

Summarized Statement of Operations

For the six months ended

June 30,

 
           

% of

           

% of

           

%

 
   

2014

   

Revenues

   

2013

   

Revenues

   

Change

   

Change

 

Total revenues

  $ 6,791,024             $ 7,478,523             $ (687,499 )     -9.2 %
                                                 

Cost of sales

    1,831,050       27.0 %     1,526,975       20.4 %     304,075       19.9 %
                                                 

Gross margin

    4,959,974       73.0 %     5,951,548       79.6 %     (991,574 )     -16.7 %
                                                 

Salaries, benefits and related taxes

    5,228,311       77.0 %     4,366,143       58.4 %     862,168       19.7 %

Rent

    443,987       6.5 %     466,440       6.2 %     (22,453 )     -4.8 %

Consulting

    50,558       0.7 %     102,914       1.4 %     (52,356 )     -50.9 %

Legal and professional fees

    199,897       2.9 %     152,455       2.0 %     47,442       31.1 %

Other expenses

    729,513       10.7 %     425,097       5.7 %     304,416       71.6 %

Selling, general and administrative

    592,972       8.7 %     436,716       5.8 %     156,256       35.8 %

Total operating expenses

    7,245,238       106.5 %     5,949,765       79.5 %     1,295,473       21.8 %
                                                 

Operating income/(loss)

    (2,285,264 )     -33.7 %     1,783       0.0 %     (2,287,047 )  

n/a

 
                                                 

Interest expense

    (1,346,908 )     -19.8 %     (1,232,094 )     -16.5 %     (114,814 )     9.3 %

Interest income

    65       0.0 %     6       0.0 %     59       983.3 %

Change in derivatives

    2,802,571       41.3 %     (4,943,283 )     -66.1 %     7,745,854    

n/a

 

Transaction gain/(loss)

    (13,319 )     -0.2 %     (8,277 )     -0.1 %     (5,042 )     60.9 %
                                                 

(Loss) before income taxes and dividends

    (842,855 )     -12.4 %     (6,181,865 )     -82.7 %     5,339,010       -86.4 %

Income tax (expense)

    (33,961 )     -0.5 %     (17,730 )     -0.2 %     (16,231 )     91.5 %

Net (loss)

    (876,816 )     -12.9 %     (6,199,595 )     -82.9 %     5,322,779       -85.9 %
                                                 

Total preferred stock dividends

    (102,283 )     -1.5 %     (102,283 )     -1.4 %     -0-       0.0 %
                                                 

Net (loss) attributable to common stockholders

  $ (979,099 )     -14.4 %   $ (6,301,878 )     -84.3 %   $ 5,322,779       -84.5 %
                                                 

Net (loss) per share

  $ (0.01 )           $ (0.07 )                        
                                                 

Weighted average number of shares outstanding

    90,104,659               87,336,914                          

 

 

The table below provides a comparison of our recognized revenues for the six months ended June 30, 2014 and June 30, 2013.

 

   

For the six months ended

                 

Revenue activity

 

June 30, 2014

   

June 30, 2013

   

$ Change

   

% Change

 

Set-up fees

  $ 1,943,854       28.6 %   $ 1,595,295       21.3 %   $ 348,559       21.8 %

Change orders

    196,954       2.9 %     224,530       3.0 %     (27,576 )     -12.3 %

Maintenance

    2,011,646       29.6 %     2,309,885       31.0 %     (298,239 )     -12.9 %

Software licenses

    1,286,147       19.0 %     1,902,693       25.4 %     (616,546 )     -32.4 %

Professional services

    952,805       14.0 %     1,072,881       14.3 %     (120,076 )     -11.2 %

Hosting

    399,618       5.9 %     373,239       5.0 %     26,379       7.1 %

Total

  $ 6,791,024       100.0 %   $ 7,478,523       100.0 %   $ (687,499 )     -9.2 %

 

Overall Revenue decreased by $687,499 or 9.2%. This decrease is primarily the result of decreases in maintenance and software licenses offset by an increase in set-up fees.

 

 
40 

 

 

We recorded revenue of $4,735,465 including $1,943,854 from set-up fees and $1,061,100 from maintenance associated with our TrialMaster suite during the six months ended June 30, 2014 compared with revenue of $4,801,352 that included $1,595,295 in set-up fees and $1,377,209 in maintenance revenues during the six months ended June 30, 2013.  

 

We recorded $1,143,723 in revenues associated with clients using the eClinical software application suite (“eClinical”) during the six months ended June 30, 2014 compared with $1,691,540 for the six months ended June 30, 2013.  eClinical revenues are primarily comprised of license subscriptions and revenues associated with our hosting and maintenance services.  

 

We recorded $154,051 in revenues from hosting activities and $96,950 in professional services associated with the eClinical suite during the six months ended June 30, 2014 compared with $225,042 from hosting activities and $222,336 from professional services for the six months ended June 30, 2013.  Generally, these revenues are paid quarterly and are connected to hosting and client support for clients licensing that application. In addition we recorded $717,072 in revenues from maintenance relating to eClinical in the six months ending June 30, 2014 as compared to $936,343 for the six months ending June 30, 2013.

 

We recorded revenue of $377,610 including $79,167 from licensing and $230,480 from professional services associated with clients utilizing our TrialOne EDC software for the six months ended June 30, 2014 compared with revenue of $985,630 including $661,728 from licensing and $321,570 from professional services for the six months ended June 30, 2013.   We are continuing our efforts at enhancing our sales and marketing campaign for the TrialOne application.  We expect to increase our participation in industry trade shows and conferences and are in the process of expanding our dedicated sales force for the TrialOne software.  TrialOne revenues are comprised of license subscriptions and maintenance services since the software is currently only sold on a technology transfer basis.

 

We recorded revenue of $534,226 for the six months ended June 30, 2014 including $296,018 from licensing and $211,062 from maintenance associated with clients utilizing the Promasys EDC solution that we acquired in the 4th quarter of 2013.

 

Our TrialMaster EDC application has historically been sold on an application service provider (“ASP”) basis that provides EDC and other services such as an enterprise management suite which assists our clients in the pharmaceutical, biotechnology and medical device industries in accelerating the completion of clinical trials. During 2009 we completed the acquisition of the eResearch EDC Assets and TrialOne and in 2013 we acquired Promasys (collectively the “Acquired Software”).  These software applications have historically been sold on a licensed or technology transfer basis.  As we continue developing our software applications and our client relationships mature, we expect some of our clients to deploy TrialMaster on a licensed, rather than ASP hosted basis. We expect the Acquired Software applications to continue to be sold primarily on a licensed basis.

 

TrialMaster contracts for ASP services provide for pricing that is based on both the size and duration of the clinical trial. Size parameters include the number of case report forms used to collect data and the number of sites utilizing TrialMaster. The client will pay a trial setup fee at the beginning of a project based on the previously mentioned factors and then pay an on-going maintenance fee for the duration of the clinical trial that provides software, network and site support during the trial.

 

Generally, ASP contracts will range in duration from one month to several years. ASP setup fees are generally recognized in accordance with Accounting Standards Codification 605 (“ASC 605”) “Revenue Recognition”, which requires that the revenues be recognized ratably over the life of the contract. ASP maintenance fee revenues are earned and recognized monthly. Costs associated with contract revenues are recognized as incurred.

 

License contracts are typically sold on a subscription basis that takes into account system usage both on a data volume and system user basis.  Pricing includes additional charges for consulting services associated with the installation, validation, training and deployment of our eClinical software and solutions.  Licensed contracts of the eClinical suite have historically been sold both on a term and on a perpetual license basis with hosting and maintenance charges being paid quarterly.  The Company expects any licenses it sells of its software products to be sold under three to five year term licenses.

 

Our top five customers accounted for approximately 29.6% of our revenues during the six months ended June 30, 2014 and approximately 40.0% of our revenues during the six months ended June 30, 2013.  One customer accounted for approximately 12.6% of our revenues during the six months ended June 30, 2014.   One customer accounted for approximately 11.6% of our revenues and another accounted for approximately 10.4% during the six months ended June 30, 2013. The loss of any of these contracts or these customers in the future could adversely affect our results of operations. 

 

Cost of goods sold increased approximately 19.9% or $304,075 for the six months ended June 30, 2014 as compared to the six months ended June 30, 2013.  Cost of goods sold were approximately 27.0% of revenues for the six months ended June 30, 2014 compared to approximately 20.4% for the six months ended June 30, 2013. Cost of goods sold relates primarily to (i) salaries and related benefits associated with the programmers, developers and systems analysts producing clinical trials on behalf of our clients and (ii) the costs associated with pass-through revenues. Cost of goods sold increased during the six months ended June 30, 2014 due to increases in both of these categories. We added additional headcount in order to properly service both new clients and additional work from existing clients.  The costs associated with the headcount are recognized as incurred, but the revenue from the trials is recognized over the life of the trial. The pass-through revenue and expense primarily relate to specific work being performed for a few clients. At this time we do not expect the volume of the pass-through revenue and expense to grow significantly and therefore we do not expect any significant degradation of our gross margin.

 

 
41

 

 

Overall, total operating expenses increased approximately 21.8% for the six months ended June 30, 2014 when compared to the six months ended June 30, 2013.  The increase in operating expenses is primarily the result of an increase in headcount to support trials from new clients and additional work from existing clients.

 

Salaries and related expenses were our biggest operating expense at 72.2% of total operating expenses for the six months ended June 30, 2014 compared to 73.4% of total operating expenses for the six months ended June 30, 2013.  Salaries and related expenses increased by 19.7% for the six months ended June 30, 2014 when compared to the same period ended June 30, 2013.  The table below provides a summary of the significant components of salary and related expenses by primary cost category.

 

For the six months ended

 
   

June 30, 2014

   

June 30, 2013

   

$ Change

   

% Change

 

OmniComm corporate operations

  $ 3,620,972     $ 3,368,223     $ 252,749       7.5%  

New Jersey operations office

    289,850       166,804       123,046       73.8%  

OmniComm Europe, GmbH

    404,340       425,385       (21,045 )     -4.9%  

OmniComm Ltd.

    478,508       274,306       204,202       74.4%  

OmniComm Spain

    74,764       72,274       2,490       3.4%  

OmniComm Promasys B.V.

    282,337       -0-       282,337       n/a  

Employee stock compensation

    77,540       59,151       18,389       31.1%  

Total salaries and related expenses

  $ 5,228,311     $ 4,366,143     $ 862,168       19.7%  

 

We currently employ approximately 58 employees out of our Ft. Lauderdale, Florida Corporate Office (“Corporate Office”), 13 employees out of our New Jersey regional operating office, 14 out-of-state employees, 12 employees out of a wholly-owned subsidiary in the United Kingdom, 17 employees out of a wholly-owned subsidiary in Bonn, Germany, 4 employees out of a wholly-owned subsidiary in Leiden, the Netherlands and 1 employee out of a wholly-owned subsidiary in Spain.  We expect to continue to selectively add experienced sales and marketing personnel in an effort to increase our market penetration, particularly as it relates to the largest pharmaceutical, biotechnology and CRO customers and to continue broadening our client base domestically as well as in Europe.  

 

During the six months ended June 30, 2014 and the six months ended June 30, 2013 we incurred $77,540 and $59,151, respectively, in salary expense in connection with ASC 718 Compensation – Stock Compensation, which establishes standards for transactions in which an entity exchanges its equity instruments services from employees. This standard requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.

 

Rent and related expenses decreased by approximately 4.8% during the six months ended June 30, 2014 when compared to the six months ended June 30, 2013.  The table below details the significant portions of our rent expense.  In particular, the decrease in 2014 is primarily associated with decreases in our Corporate Office and Co-location and disaster recovery facilities rent expenses offset by increases in our other facilities’ rent expenses.  Our primary data site is located at a Cincinnati Bell owned Co-location facility in Cincinnati, Ohio and we will continue utilizing this facility for the foreseeable future since it is designed to ensure 100% production system up-time and to provide system redundancy. We lease Co-location and disaster recovery space in the Ft. Lauderdale, Florida area. This facility provides us with disaster recovery and business continuity services for our operations. This lease expires in April 2016.  We currently lease office space in Bonn, Germany for our European subsidiary, OmniComm Europe, GmbH under a lease that expires in July 2015.  We currently lease office space for a regional operating office in New Jersey under a lease that expires in February 2016.  Our OmniComm Ltd. subsidiary leases office space in Southampton, UK under a lease that expires in September 2017.  Our OmniComm Promasys B.V. subsidiary leases office space in Leiden, the Netherlands under a lease that expires in October 2018.  Our Corporate Office lease expires in September 2016.  The table below provides the significant components of our rent related expenses by location or subsidiary.  Included in rent during the six months ending June 30, 2014 was a decrease in expense of $5,443 in non-cash, straight line rent recorded to give effect to contractual, inflation-based rent increases in our leases compared to a decrease in expense of $4,191 for the six month period ending June 30, 2013.

 

 
42

 

 

For the six months ended  
   

June 30, 2014

   

June 30, 2013

   

$ Change

   

% Change

 

Corporate office

  $ 166,127     $ 183,271     $ (17,144 )     -9.4%  

Co-location and disaster recovery facilities

    164,369       184,818       (20,449 )     -11.1%  

New Jersey operations office

    27,237       24,915       2,322       9.3%  

OmniComm Europe, GmbH

    48,569       42,839       5,730       13.4%  

OmniComm Ltd.

    34,661       30,850       3,811       12.4%  

OmniComm Spain

    4,109       3,938       171       4.3%  

OmniComm Promasys B.V.

    4,358       -0-       4,358       n/a  

Straight-line rent expense

    (5,443 )     (4,191 )     (1,252 )     -29.9%  

Total

  $ 443,987     $ 466,440     $ (22,453 )     -4.8%  

 

 

Consulting services expense decreased to $50,558 for the six months ended June 30, 2014 compared with $102,914 for the six months ended June 30, 2013. Consulting services were comprised of fees paid to consultants for help with product development and for services related to our sales and marketing efforts. The table provided below provides the significant components of the expenses incurred related to consulting services. Consulting fees for both product development and sales and marketing were higher during the six months of 2013 as we utilized the services of additional third-party sources for portions of this work.

 

For the six months ended  

Expense Category

 

June 30, 2014

   

June 30, 2013

   

$ Change

   

% Change

 

Sales and marketing

  $ -0-     $ 18,760     $ (18,760 )     -100.0%  

Product development

    50,558       84,154       (33,596 )     -39.9%  

Total

  $ 50,558     $ 102,914     $ (52,356 )     -50.9%  

 

 

Legal and professional fees increased approximately 31.1% for the six months ended June 30, 2014 compared with the six months ended June 30, 2013. Professional fees include fees paid to our auditors for services rendered on a quarterly and annual basis in connection with our filings with the Securities and Exchange Commission (“SEC”) and fees paid to our attorneys in connection with representation in matters involving litigation and acquisitions or for services rendered to us related to securities and SEC related matters. The table below compares the significant components of our legal and professional fees for the six months ended June 30, 2014 and June 30, 2013, respectively.

 

For the six months ended  

Expense Category

 

June 30, 2014

   

June 30, 2013

   

$ Change

   

% Change

 

Audit and related

  $ 40,070     $ 51,998     $ (11,928 )     -22.9 %

Accounting services

    92,447       70,685       21,762       30.8 %

Legal-employment related

    19,394       7,441       11,953       160.6 %

Legal-financial related

    11,935       9,667       2,268       23.5 %

General legal

    36,051       12,664       23,387       184.7 %

Total

  $ 199,897     $ 152,455     $ 47,442       31.1 %

 

 

Selling, general and administrative expenses (“SG&A”) increased by $156,256 or approximately 35.8% for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase is primarily due to increases in marketing and insurance expenses offset by a reduction in miscellaneous expenses. SG&A expenses relate primarily to costs incurred in running our offices in Fort Lauderdale, Florida, Monmouth Junction, New Jersey, Southampton, England, Barcelona, Spain, Bonn, Germany and Leiden, the Netherlands on a day-to-day basis and other costs not directly related to other captioned items in our income statement. SG&A includes the cost of office equipment and supplies, the costs of attending conferences and seminars and other expenses incurred in the normal course of business. In 2013 we spent approximately $226,000 on marketing, sales and advertising. We expect that the 2014 marketing, sales and advertising expenses will be approximately $750,000 as we increase our attendance at tradeshows and our marketing efforts worldwide.

 

 

During the six month period ended June 30, 2014 we recognized $76,002 for bad debt expense as compared to a credit of $13,021 for the six month period ended June 30, 2013.  This increase was primarily the result of an increase in aged receivable balances that required us to increase our reserve in the period. During 2014 we will continue to carefully and actively manage our potential exposure to bad debt by closely monitoring our accounts receivable and proactively taking the action necessary to limit our exposure.  We have been very successful in managing and collecting our outstanding accounts receivable.  We believe that our current allowance for uncollectible accounts accurately reflects any accounts which may prove uncollectible during the remainder of fiscal 2014.

 

 
43

 

 

Interest expense was $1,346,908 during the six months ended June 30, 2014 compared to $1,232,094 for the six months ended June 30, 2013, an increase of $114,814.  Interest incurred to related parties was $1,240,176 during the six months ended June 30, 2014 and $1,161,902 for the six months ended June 30, 2013.  Included in interest expense is the accretion of discounts recorded related to financial instrument derivatives that were deemed a part of the financings we undertook in fiscal 2008 and 2009 and relating to warrants issued during 2011, 2013 and 2014.  The table below provides detail on the significant components of interest expense for the six months ended June 30, 2014 and June 30, 2013.

 

Interest Expense   
               
   

For the six months ended 

         

Debt Description

 

June 30, 2014

   

June 30, 2013

   

$ Change

 

Accretion of discount from derivatives

  $ 302,890     $ 304,500     $ (1,610 )

August 2008 convertible notes

    95,211       95,211       -0-  

December 2008 convertible notes

    296,344       296,344       -0-  

Sept 2009 secured convertible debentures

    71,408       71,408       -0-  

Dec 2009 convertible debentures

    88,665       88,665       -0-  

General interest

    79,062       42,966       36,096  

Related party notes payable

    413,328       333,000       80,328  

Total

  $ 1,346,908     $ 1,232,094     $ 114,814  

 

 

We evaluate the cost of capital available to us in combination with our overall capital structure and the prevailing market conditions in deciding what financing best fulfills our short and long-term capital needs. Given the overall economic climate and in particular the difficulties nano-cap companies have experienced in obtaining financing, we believe the structure and terms of the transactions we entered into during 2013 and 2014 were obtained at the best terms available to the Company.

 

We record unrealized gains/losses related to changes in our derivative liabilities associated with the issuance of convertible debt that occurred during fiscal 2008 and 2009 and warrants associated with promissory notes issued in 2011, 2013 and 2014.  We recorded a net unrealized gain of $2,802,571 during the six months ended June 30, 2014 compared with a net unrealized loss of $4,943,283 during the six months ended June 30, 2013.  The unrealized gains/losses can be attributed to fair value calculations undertaken periodically on the warrant and conversion feature liabilities recorded by us at the time the convertible debt and promissory notes were issued.  Accordingly the warrant and conversion feature liabilities are increased or decreased based on the fair value calculations made at each balance sheet date.  These non-cash gains and losses have materially impacted our results of operations during the six months ended June 30, 2014 and June 30, 2013 and can be reasonably anticipated to materially affect our net loss or net income in future periods. The fair value calculations are heavily reliant on the value of our common stock and on the calculated volatility of the price of our common stock on the OTC Bulletin Board. Accordingly, significant changes in our stock price will create large unrealized gains and losses on our financial statements. We are, however, unable to estimate the amount of such income/expense in future periods as the income/expense is partly based on the market price of our common stock at the end of a future measurement date. In addition, in the future if we issue securities which are classified as derivatives we will incur expense and income items in future periods. Investors are cautioned to consider the impact of this non-cash accounting treatment on our financial statements.

 

The Company recorded arrearages of $102,283 and $102,283 in its 5% Series A Preferred Stock dividends for the six month periods ended June 30, 2014, and June 30, 2013, respectively. The below table contains the cumulative arrearage for each series of preferred stock.

 

Series of Preferred Stock

 

Cumulative Arrearage

 
         

Series A

  $ 2,482,722  

Series B

    609,887  

Series C

    1,472,093  

Total preferred stock arrearages

  $ 4,564,702  

 

 
44

 

  

The three months ended June 30, 2014 compared with the three months ended June 30, 2013

 

Results of Operations

 

A summarized version of our results of operations for the three months ended June 30, 2014 and June 30, 2013 is included in the table below.

 

Summarized Statement of Operations  
For the three months ended  
June 30,   
           

% of

           

% of

           

%

 
   

2014

   

Revenues

   

2013

   

Revenues

   

Change

   

Change

 

Total revenues

  $ 3,608,749             $ 3,729,700             $ (120,951 )     -3.2%  
                                                 

Cost of sales

    967,775       26.8 %     859,477       23.0 %     108,298       12.6%  
                                                 

Gross margin

    2,640,974       73.2 %     2,870,223       77.0 %     (229,249 )     -8.0%  
                                                 

Salaries, benefits and related taxes

    2,538,236       70.3 %     2,154,057       57.8 %     384,179       17.8%  

Rent

    219,403       6.1 %     250,422       6.7 %     (31,019 )     -12.4%  

Consulting

    30,111       0.8 %     53,611       1.4 %     (23,500 )     -43.8%  

Legal and professional fees

    114,940       3.2 %     56,702       1.5 %     58,238       102.7%

 

Other expenses

    376,652       10.4 %     82,949       2.2 %     293,703       354.1%  

Selling, general and administrative

    333,140       9.2 %     244,036       6.5 %     89,104       36.5%  

Total operating expenses

    3,612,482       100.0 %     2,841,777       76.2 %     770,705       27.1%  
                                                 

Operating income/(loss)

    (971,508 )     -26.9 %     28,446       0.8 %     (999,954 )     n/a  
                                                 

Interest expense

    (628,945 )     -17.4 %     (638,128 )     -17.1 %     9,183       -1.4%  

Interest income

    18       0.0 %     6       0.0 %     12       200.0%  

Change in derivatives

    2,257,688       62.6 %     (1,038,084 )     -27.8 %     3,295,772       n/a  

Transaction gain/(loss)

    (8,883 )     -0.2 %     (1,562 )     0.0 %     (7,321 )     468.7%  
                                                 

Income/(loss) before income taxes and dividends

    648,370       18.0 %     (1,649,322 )     -44.2 %     2,297,692       n/a  

Income tax (expense)

    (16,306 )     -0.5 %     (8,865 )     -0.2 %     (7,441 )     83.9%  

Net income/(loss)

    632,064       17.5 %     (1,658,187 )     -44.5 %     2,290,251       n/a  
                                                 

Total preferred stock dividends

    (51,424 )     -1.4 %     (51,424 )     -1.4 %     -0-       0.0%  
                                                 

Net income/(loss) attributable to common stockholders

  $ 580,640       16.1 %   $ (1,709,611 )     -45.8 %   $ 2,290,251       n/a  
                                                 

Net income/(loss) per share

  $ 0.01             $ (0.02 )                        
                                                 

Weighted average number of shares outstanding

    90,104,659               87,824,747                          

 

 
45

 

 

 

The table below provides a comparison of our recognized revenues for the three months ended June 30, 2014 and June 30, 2013.

 

   

For the three months ended

                 

Revenue Activity

 

June 30, 2014

   

June 30, 2013

   

$ Change

   

% Change

 

Set-up fees

  $ 1,136,021       31.5%     $ 778,105       20.9%     $ 357,916       46.0%  

Change orders

    83,866       2.3%       129,748       3.5%       (45,882 )     -35.4%  

Maintenance

    1,052,015       29.2%       1,102,042       29.5%       (50,027 )     -4.5%  

Software licenses

    618,830       17.1%       941,540       25.2%       (322,710 )     -34.3%  

Professional services

    508,298       14.1%       581,166       15.6%       (72,868 )     -12.5%  

Hosting

    209,719       5.8%       197,099       5.3%       12,620       6.4%  

Total

  $ 3,608,749       100.0%     $ 3,729,700       100.0%     $ (120,951 )     -3.2%  

 

Overall Revenue decreased by $120,951 or 3.2%. This decrease is primarily the result of decreases in software licenses and professional services offset by an increase in set-up fees.

 

We recorded revenue of $2,563,172 including $1,136,020 from set-up fees and $559,749 from maintenance associated with our TrialMaster suite during the three months ended June 30, 2014 compared with revenue of $2,289,849 that included $778,104 in set-up fees and $676,335 in maintenance revenues during the three months ended June 30, 2013.  

 

We recorded $523,527 in revenues associated with clients using the eClinical software application suite (“eClinical”) during the three months ended June 30, 2014 compared with $785,301 for the three months ended June 30, 2013.  eClinical revenues are primarily comprised of license subscriptions and revenues associated with our hosting and maintenance services.  

 

We recorded $68,652 in revenues from hosting activities and $42,000 in professional services associated with the eClinical suite during the three months ended June 30, 2014 compared with $107,342 from hosting activities and $114,125 from professional services for the three months ended June 30, 2013.  Generally, these revenues are paid quarterly and are connected to hosting and client support for clients licensing that application. In addition we recorded $337,368 in revenues from maintenance relating to eClinical in the three months ending June 30, 2014 as compared to $435,623 for the three months ending June 30, 2013.

 

We recorded revenue of $216,851 including $46,250 from software licensing and $134,100 from professional services associated with clients utilizing our TrialOne EDC software for the three months ended June 30, 2014 compared with revenue of $654,549 including $436,527 from software licensing and $224,937 from professional services for the three months ended June 30, 2013.   We are enhancing our efforts at developing our sales and marketing campaign for the TrialOne application.  We expect to increase our participation in industry trade shows and conferences and are in the process of expanding our dedicated sales force for the TrialOne software.  TrialOne revenues are comprised of license subscriptions and maintenance services since the software is currently only sold on a technology transfer basis.

 

We recorded revenue of $305,199 for the three months ended June 30, 2014 including $136,080 from software licensing and $141,973 from maintenance associated with clients utilizing the Promasys EDC solution that we acquired in the 4th quarter of 2013.

 

Our TrialMaster EDC application has historically been sold on an application service provider (“ASP”) basis that provides EDC and other services such as an enterprise management suite which assists our clients in the pharmaceutical, biotechnology and medical device industries in accelerating the completion of clinical trials. During 2009 we completed the acquisition of the eResearch EDC Assets and TrialOne and in 2013 we acquired Promasys (collectively the “Acquired Software”).  These software applications have historically been sold on a licensed or technology transfer basis.  As we continue developing our software applications and our client relationships mature, we expect some of our clients to deploy TrialMaster on a licensed, rather than ASP hosted basis. We expect the Acquired Software applications to continue to be sold primarily on a licensed basis.

 

TrialMaster contracts for ASP services provide for pricing that is based on both the size and duration of the clinical trial. Size parameters include the number of case report forms used to collect data and the number of sites utilizing TrialMaster. The client will pay a trial setup fee at the beginning of a project based on the previously mentioned factors and then pay an on-going maintenance fee for the duration of the clinical trial that provides software, network and site support during the trial.

 

Generally, ASP contracts will range in duration from one month to several years. ASP Setup fees are generally recognized in accordance with Accounting Standards Codification 605 (“ASC 605”) “Revenue Recognition”, which requires that the revenues be recognized ratably over the life of the contract. ASP maintenance fee revenues are earned and recognized monthly. Costs associated with contract revenues are recognized as incurred.

 

 
46

 

 

License contracts are typically sold on a subscription basis that takes into account system usage both on a data volume and system user basis.  Pricing includes additional charges for consulting services associated with the installation, validation, training and deployment of our eClinical software and solutions.  Licensed contracts of the eClinical suite have historically been sold both on a term and on a perpetual license basis with hosting and maintenance charges being paid quarterly.  The Company expects any licenses it sells of its software products to be sold under three to five year term licenses.

 

Our top five customers accounted for approximately 29.7% of our revenues during the three months ended June 30, 2014 and approximately 43.3% of our revenues during the three months ended June 30, 2013.  One customer accounted for approximately 13.7% of our revenues during the three months ended June 30, 2014.   One customer accounted for approximately 16.1% of our revenues and another accounted for approximately 9.7% during the three months ended June 30, 2013. The loss of any of these contracts or these customers in the future could adversely affect our results of operations. 

 

Cost of goods sold increased approximately 12.6% or $108,298 for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.  Cost of goods sold were approximately 26.8% of revenues for the three months ended June 30, 2014 compared to approximately 23.0% for the three months ended June 30, 2013. Cost of goods sold relates primarily to (i) salaries and related benefits associated with the programmers, developers and systems analysts producing clinical trials on behalf of our clients and (ii) the costs associated with pass-through revenues. Cost of goods sold increased during the three months ended June 30, 2014 primarily due to an increase in salaries and related costs. We added additional headcount in order to properly service both new clients and additional work from existing clients.  The costs associated with the headcount are recognized as incurred, but the revenue from the trials is recognized over the life of the trial. The pass-through revenue and expense primarily relate to specific work being performed for a few clients. At this time we do not expect the volume of the pass-through revenue and expense to grow significantly and therefore we do not expect any significant degradation of our gross margin.

 

Overall, total operating expenses increased approximately 27.1% for the three months ended June 30, 2014 when compared to the three months ended June 30, 2013.  The increase in operating expenses is primarily the result of an increase in headcount to support trials from new clients and additional work from existing clients.

 

Salaries and related expenses were our biggest operating expense at 70.3% of total operating expenses for the three months ended June 30, 2014 compared to 75.8% of total operating expenses for the three months ended June 30, 2013.  Salaries and related expenses increased by 17.8% for the three months ended June 30, 2014 when compared to the same period ended June 30, 2013.  The table below provides a summary of the significant components of salary and related expenses by primary cost category.

 

For the three months ended

 
   

June 30, 2014

   

June 30, 2013

   

$ Change

   

% Change

 

OmniComm corporate operations

  $ 1,712,626     $ 1,645,649     $ 66,977       4.1%  

New Jersey operations office

    147,295       93,544       53,751       57.5%  

OmniComm Europe, GmbH

    201,610       189,746       11,864       6.3%  

OmniComm Ltd.

    249,131       148,513       100,618       67.8%  

OmniComm Spain

    40,237       36,710       3,527       9.6%  

OmniComm Promasys B.V.

    148,222       -0-       148,222       n/a  

Employee stock compensation

    39,115       39,895       (780 )     -2.0%  

Total salaries and related expenses

  $ 2,538,236     $ 2,154,057     $ 384,179       17.8%  

 

We currently employ approximately 58 employees out of our Ft. Lauderdale, Florida Corporate Office (“Corporate Office”), 13 employees out of our New Jersey regional operating office, 14 out-of-state employees, 12 employees out of a wholly-owned subsidiary in the United Kingdom, 17 employees out of a wholly-owned subsidiary in Bonn, Germany, 4 employees out of a wholly-owned subsidiary in Leiden, the Netherlands and 1 employee out of a wholly-owned subsidiary in Spain.  We expect to continue to selectively add experienced sales and marketing personnel in an effort to increase our market penetration, particularly as it relates to the largest pharmaceutical, biotechnology and CRO customers and to continue broadening our client base domestically as well as in Europe.  

 

During the three months ended June 30, 2014 and the three months ended June 30, 2013 we incurred $39,115 and $39,895, respectively, in salary expense in connection with ASC 718 Compensation – Stock Compensation, which establishes standards for transactions in which an entity exchanges its equity instruments services from employees. This standard requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.

 

 
47

 

 

Rent and related expenses decreased by approximately 12.4% during the three months ended June 30, 2014 when compared to the three months ended June 30, 2013.  The table below details the significant portions of our rent expense.  In particular, the decrease in 2014 is primarily associated with decreases in our Corporate Office and Co-location and disaster recovery facilities rent expenses offset by increases for our other facilities’ rent expenses.  Our primary data site is located at a Cincinnati Bell owned Co-location facility in Cincinnati, Ohio and we will continue utilizing this facility for the foreseeable future since it is designed to ensure 100% production system up-time and to provide system redundancy. We lease Co-location and disaster recovery space in the Ft. Lauderdale, Florida area. This facility provides us with disaster recovery and business continuity services for our operations. This lease expires in April 2016.  We currently lease office space in Bonn, Germany for our European subsidiary, OmniComm Europe, GmbH under a lease that expires in July 2015.  We currently lease office space for a regional operating office in New Jersey under a lease that expires in February 2016.  Our OmniComm Ltd. subsidiary leases office space in Southampton, UK under a lease that expires in September 2017.  Our OmniComm Promasys B.V. subsidiary leases office space in Leiden, the Netherlands under a lease that expires in October 2018.  Our Corporate Office lease expires in September 2016.  The table below provides the significant components of our rent related expenses by location or subsidiary.  Included in rent during the three months ending June 30, 2014 was a decrease in expense of $2,823 in non-cash, straight line rent recorded to give effect to contractual, inflation-based rent increases in our leases compared to a decrease in expense of $1,519 for the three month period ending June 30, 2013.

 

For the three months ended  
   

June 30, 2014

   

June 30, 2013

   

$ Change

   

% Change

 

Corporate office

  $ 81,068     $ 92,042     $ (10,974 )     -11.9%  

Co-location and disaster recovery facilities

    81,529       110,548       (29,019 )     -26.3%  

New Jersey operations office

    13,865       10,522       3,343       31.8%  

OmniComm Europe, GmbH

    23,646       21,517       2,129       9.9%  

OmniComm Ltd.

    17,461       15,355       2,106       13.7%  

OmniComm Spain

    2,056       1,957       99       5.1%  

OmniComm Promasys B.V.

    2,601       -0-       2,601       n/a  

Straight-line rent expense

    (2,823 )     (1,519 )     (1,304 )     -85.8%  

Total

  $ 219,403     $ 250,422     $ (31,019 )     -12.4%  

 

 

Consulting services expense decreased to $30,111 for the three months ended June 30, 2014 compared with $53,611 for the three months ended June 30, 2013. Consulting services were comprised of fees paid to consultants for help with product development and for services related to our sales and marketing efforts. The table provided below provides the significant components of the expenses incurred related to consulting services. Consulting fees for product development were higher during the three months of 2013 as we utilized the services of additional third-party sources for portions of our product development and sales and marketing work.

 

For the three months ended  

Expense Category

 

June 30, 2014

   

June 30, 2013

   

$ Change

   

% Change

 

Sales and marketing

  $ -0-     $ 8,140     $ (8,140 )     -100.0%  

Product development

    30,111       45,471       (15,360 )     -33.8%  

Total

  $ 30,111     $ 53,611     $ (23,500 )     -43.8%  

 

 
48

 

 

Legal and professional fees increased approximately 102.7% for the three months ended June 30, 2014 compared with the three months ended June 30, 2013. Professional fees include fees paid to our auditors for services rendered on a quarterly and annual basis in connection with our filings with the Securities and Exchange Commission (“SEC”) and fees paid to our attorneys in connection with representation in matters involving litigation and acquisitions or for services rendered to us related to securities and SEC related matters. The table below compares the significant components of our legal and professional fees for the three months ended June 30, 2014 and June 30, 2013, respectively.

 

For the three months ended  

Expense Category

 

June 30, 2014

   

June 30, 2013

   

$ Change

   

% Change

 

Audit and related

  $ 18,071     $ 19,055     $ (984 )     -5.2%  

Accounting services

    46,699       30,388       16,311       53.7%  

Legal-employment related

    17,784       (1,725 )     19,509       n/a  

Legal-financial related

    9,325       4,176       5,149       123.3%  

General legal

    23,061       4,808       18,253       379.6%  

Total

  $ 114,940     $ 56,702     $ 58,238       102.7%  

 

 

Selling, general and administrative expenses (“SG&A”) increased by $89,104 or approximately 36.5% for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The increase is primarily due to an increase in marketing expenses. SG&A expenses relate primarily to costs incurred in running our offices in Fort Lauderdale, Florida, Monmouth Junction, New Jersey, Southampton, England, Barcelona, Spain, Bonn, Germany and Leiden, the Netherlands on a day-to-day basis and other costs not directly related to other captioned items in our income statement. SG&A includes the cost of office equipment and supplies, the costs of attending conferences and seminars and other expenses incurred in the normal course of business. In 2013 we spent approximately $226,000 on marketing, sales and advertising. We expect that the 2014 marketing, sales and advertising expenses will be approximately $750,000 as we increase our attendance at tradeshows and our marketing efforts worldwide.

 

During the three month period ended June 30, 2014 we recognized $55,648 for bad debt expense as compared to a credit of $102,141 for the three month period ended June 30, 2013.  This increase was primarily the result of an increase in aged receivable balances that required us to increase our reserve. During 2014 we will continue to carefully and actively manage our potential exposure to bad debt by closely monitoring our accounts receivable and proactively taking the action necessary to limit our exposure.  We have been very successful in managing and collecting our outstanding accounts receivable.  We believe that our current allowance for uncollectible accounts accurately reflects any accounts which may prove uncollectible during the remainder of fiscal 2014.

 

Interest expense was $628,945 during the three months ended June 30, 2014 compared to $638,128 for the three months ended June 30, 2013, a decrease of $9,183.  Interest incurred to related parties was $573,558 during the three months ended June 30, 2014 and $600,262 for the three months ended June 30, 2013.  Included in interest expense is the accretion of discounts recorded related to financial instrument derivatives that were deemed a part of the financings we undertook in fiscal 2008 and 2009 and relating to warrants issued during 2011, 2013 and 2014.  The table below provides detail on the significant components of interest expense for the three months ended June 30, 2014 and June 30, 2013.

 

Interest Expense   
                         
   

For the three months ended 

         

Debt Description

 

June 30, 2014

   

June 30, 2013

   

$ Change

 

Accretion of discount from derivatives

  $ 102,326     $ 152,250     $ (49,924 )

August 2008 convertible notes

    47,869       47,869       -0-  

December 2008 convertible notes

    148,991       148,991       -0-  

Sept 2009 secured convertible debentures

    35,901       35,901       -0-  

Dec 2009 convertible debentures

    44,577       44,577       -0-  

General interest

    41,475       23,955       17,520  

Related party notes payable

    207,806       184,585       23,221  

Total

  $ 628,945     $ 638,128     $ (9,183 )

 

We evaluate the cost of capital available to us in combination with our overall capital structure and the prevailing market conditions in deciding what financing best fulfills our short and long-term capital needs. Given the overall economic climate and in particular the difficulties nano-cap companies have experienced in obtaining financing, we believe the structure and terms of the transactions we entered into during 2013 and 2014 were obtained at the best terms available to the Company.

 

We record unrealized gains/losses related to changes in our derivative liabilities associated with the issuance of convertible debt that occurred during fiscal 2008 and 2009 and warrants associated with promissory notes issued in 2011, 2013 and 2014.  We recorded a net unrealized gain of $2,257,688 during the three months ended June 30, 2014 compared with a net unrealized loss of $1,038,084 during the three months ended June 30, 2013.  The unrealized gains/losses can be attributed to fair value calculations undertaken periodically on the warrant and conversion feature liabilities recorded by us at the time the convertible debt and promissory notes were issued.  Accordingly the warrant and conversion feature liabilities are increased or decreased based on the fair value calculations made at each balance sheet date.  These non-cash gains and losses have materially impacted our results of operations during the three months ended June 30, 2014 and June 30, 2013 and can be reasonably anticipated to materially affect our net loss or net income in future periods. The fair value calculations are heavily reliant on the value of our common stock and on the calculated volatility of the price of our common stock on the OTC Bulletin Board. Accordingly, significant changes in our stock price will create large unrealized gains and losses on our financial statements. We are, however, unable to estimate the amount of such income/expense in future periods as the income/expense is partly based on the market price of our common stock at the end of a future measurement date. In addition, in the future if we issue securities which are classified as derivatives we will incur expense and income items in future periods. Investors are cautioned to consider the impact of this non-cash accounting treatment on our financial statements.

 

The Company recorded arrearages of $51,424 and $51,424 in its 5% Series A Preferred Stock dividends for the three month periods ended June 30, 2014, and June 30, 2013, respectively.

 

 
49

 

 

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate adequate amounts of cash to meet its operating, investing and financing needs for cash.   We have historically experienced negative cash flows and have relied on the proceeds from the sale of debt and equity securities to fund our operations. In addition, we have utilized stock-based compensation as a means of paying for consulting and salary related expenses. At June 30, 2014, we had working capital deficit of approximately $15,468,032.

 

The table provided below summarizes key measures of our liquidity and capital resources:

 

Liquidity and Capital Resources   
                         
Summarized Balance Sheet Disclosure   
   

June 30, 2014

   

December 31, 2013

   

$ Change

 

Cash

  $ 850,554     $ 1,160,720     $ (310,166 )

Accounts receivable, net of allowance for doubtful accounts

    4,419,944       1,599,568       2,820,376  

Prepaids

    111,395       146,907       (35,512 )

Current assets

    5,381,893       2,907,195       2,474,698  
                         

Accounts payable and accrued expenses

    2,189,758       2,540,956       (351,198 )

Notes payable, current portion

    328,562       37,500       291,062  

Patent litigation settlement liability, current portion

    962,500       962,500       -0-  

Deferred revenue, current portion

    6,398,407       2,866,356       3,532,051  

Line of Credit

    4,000,000       3,500,000       500,000  

Convertible notes payable, current portion, net of discount

    75,000       75,000       -0-  

Conversion feature liability, related parties

    2,041,042       2,979,392       (938,350 )

Conversion feature liability

    111,402       146,814       (35,412 )

Warrant liability, related parties

    4,635,006       5,799,946       (1,164,940 )

Warrant liability

    108,248       144,031       (35,783 )

Current liabilities

    20,849,925       19,052,495       1,797,430  
                         

Working capital (deficit)

  $ (15,468,032 )   $ (16,145,300 )   $ 677,268  

 

Statement of Cash Flows Disclosure      
   

For the six months ended

         
   

June 30, 2014

   

June 30, 2013

         

Net cash (used in) operating activities

  $ (739,075 )   $ (878,896 )  

Net cash (used in) investing activities

    (26,214 )     (86,615 )        

Net cash provided by financing activities

    479,075       650,000    
                         

Net (decrease) in cash and cash equivalents

    (310,166 )     (342,990 )  
                         

Changes in operating accounts

    2,338,220       (92,756 )  
                         

Effect of non-cash transactions on cash and cash equivalents

  $ (2,200,479 )   $ 5,413,455    

 

 
50

 

  

Cash and Cash Equivalents

 

Cash and cash equivalents decreased by $310,166 to $850,554 at June 30, 2014. The decrease is primarily comprised of a net loss of $876,816, changes in working capital accounts of $2,338,220 and a decrease from non-cash transactions of $2,200,479. During the six months ended June 30, 2014 we had investing activities comprised of net purchases of property and equipment of $26,214. For financing activities, we borrowed $500,000 against our revolving line of credit and paid off $20,925 of promissory notes.

 

Capital Expenditures

 

We are not currently bound by any long or short-term agreements for the purchase or lease of capital expenditures. Any amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately service any increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future.

 

Presently, we have approximately $150,000 planned for capital expenditures to further develop our infrastructure to allow for growth in our operations during the remainder of 2014.  We expect to fund these capital expenditure needs through a combination of vendor-provided financing, the use of operating or capital equipment leases and cash provided from operations.

 

Contractual Obligations

 

The following table sets forth our contractual obligations during the next five years as of June 30, 2014:

 

Contractual obligations     Payments due by period  
                                         
    Total    

Less than 1 year

   

1-2 Years

   

2-3 Years

   

3-5 Years

 

Promissory notes (1)

  $ 6,626,941     $ 328,562  (2)   $ 3,415,879  (3)   $ 2,882,500  (4)   $ -0-  

Convertible notes

    9,665,000       75,000  (5)     9,590,000  (6)     -0-       -0-  

Lines of credit (7)

    4,000,000       4,000,000       -0-       -0-       -0-  

Operating lease obligations (8)

    1,437,981       682,419       596,089       134,147       25,326  

Patent licensing fees (9)

    2,087,500       962,500       450,000       450,000       225,000  

Total

  $ 23,817,422     $ 6,048,481     $ 14,051,968     $ 3,466,647     $ 250,326  

 

1.

Amounts do not include interest to be paid.

2.

Includes $20,000 of 12% notes payable that mature in December 2014; and $308,562 of 10% notes payable that mature in January 2015.

3.

Includes $549,000 of 12% notes payable that mature in January 2016; and $2,866,879 of 12% notes payable that mature in March 2016.

4.

Includes $120,000 of 10% notes payable that mature in April 2017; and $2,762,500 of 12% notes payable that mature in April 2017.

5.

Includes $75,000 of 10% convertible notes currently in default and due that are convertible into shares of common stock at the option of the holder at a conversion rate of $1.25 per share.

6.

Includes $1,770,000 in 10% convertible notes that mature in January 2016; and $7,570,000 in 12% convertible notes that mature in January 2016; and $150,000 in 10% convertible notes that mature in April 2016; and $100,000 in 12% convertible notes that mature in April 2016.

7.

Includes $4,000,000 due on the revolving Line of Credit with The Northern Trust Company.

8.

Includes office lease obligations for our Corporate Office in Florida, our regional operating office in New Jersey, our Co-location and disaster recovery locations in Ohio and Florida, our R&D office in England, our office in Leiden, the Netherlands and our European headquarters in Bonn, Germany.

9.

Relates to guaranteed minimum payments owed in connection with our settlement of a patent infringement lawsuit brought against the  Company by DataSci, LLC.

 

Off Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Debt Obligations

 

We are currently in arrears on principal and interest payments owed totaling $188,468 on our 10% Convertible Notes that were issued in 1999. We were in default effective January 30, 2002.

 

 
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On December 31, 2011, the Company issued a promissory note in the amount of $1,600,000 and 6,400,000 warrants to purchase shares of our common stock at $0.25 per share to our Chief Executive Officer and Director, Cornelis F. Wit, in exchange for existing promissory notes in the amount of $833,000 and accrued interest in the amount of $767,000. The note carries an interest rate of 12% per annum and matures on January 1, 2015. The warrants have an expiration date of December 31, 2015.

 

On December 17, 2012, the Company issued a promissory note in the amount of $20,000 in exchange for an existing promissory note in the same amount. The note carries an interest rate of 12% per annum and matures on December 16, 2014.

 

On January 1, 2013, the Company issued a promissory note in the amount of $529,000 and 2,116,000 warrants to purchase shares of our common stock at $0.25 per share to our Chief Executive Officer and Director, Cornelis F. Wit in exchange for accrued interest in the amount of $529,000. The note carries an interest rate of 12% per annum and matures on January 1, 2016. The warrants have an expiration date of January 31, 2016.

 

On January 1, 2013 the Company issued promissory notes in the amount of $431,986 in exchange for existing promissory notes in the same amount.  The promissory notes carry an interest rate of 10% and have a maturity date of January 1, 2015.

 

On January 1, 2013 the Company issued a promissory note in the amount of $45,000 in exchange for an existing promissory note in the same amount.  The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2015.

 

On February 1, 2013 the Company issued a promissory note in the amount of $20,000 to our Chairman and Chief Technology Officer, Randall G. Smith, in exchange for an existing promissory note in the same amount.  The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2016.

 

On February 22, 2013 the Company and Mr. van Kesteren extended the maturity date of $150,000 of convertible debentures to our Director, Guus van Kesteren, originally issued in August 2008.  The debentures carry an interest rate of 10% and have a maturity date of January 1, 2015.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2015.

 

On February 22, 2013 the Company and Mr. Wit extended the maturity date of $1,770,000 of convertible debentures to our Chief Executive Officer and Director, Cornelis F. Wit, originally issued in August 2008.  The debentures carry an interest rate of 10% and have a maturity date of January 1, 2016.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

On February 22, 2013 the Company and the lenders extended the maturity date of $4,505,000 of convertible debentures, including $4,475,000 due to our Chief Executive Officer and Director, Cornelis F. Wit, $25,000 due to our Chief Operating Officer and President, Stephen E. Johnson, and $5,000 due to our Chairman and Chief Technology Officer, Randall G. Smith, originally issued in December 2008.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2016.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

On February 22, 2013 the Company and the lenders extended the maturity date of $1,200,000 of convertible debentures, including $1,100,000 due to our Chief Executive Officer and Director, Cornelis F. Wit, originally issued in September 2009.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2016.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

On February 22, 2013 the Company and the lenders extended the maturity date of $1,490,000 of convertible debentures including $1,440,000 due to our Chief Executive Officer and Director, Cornelis F. Wit, originally issued in December 2009.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2016.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

On February 27, 2013 the Company and Mr. Veatch extended the maturity date of $15,000 of convertible debentures originally issued to our former Director, Matthew Veatch in December 2008.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2016.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

On March 5, 2013 the Company issued a promissory note in the amount of $137,500 in exchange for a promissory note in the same amount.  The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2015.

 

On March 6, 2013, the Company and the lender extended the maturity date of $200,000 of convertible debentures originally issued in December 2008.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2014.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2014. On December 9, 2013, the Company extended the maturity date of $200,000 of convertible debentures originally issued in December 2008. The debentures carry an interest rate of 12% and have a maturity date of January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

  

 
52

 

 

On March 12, 2013, the Company and the lenders extended the maturity date of $100,000 of convertible debentures originally issued in December 2008.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2015.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2015.

 

On March 18, 2013, the Company entered into a $2,000,000 revolving Line of Credit (“Line of Credit”) with The Northern Trust Company guaranteed by our Chief Executive Officer and Director, Cornelis F. Wit. Mr. Wit receives 2.0% interest ($9,500 per month) on the assets pledged for the Line of Credit. On December 18, 2013 the Company renewed the Line of Credit and increased the available balance to $4,000,000. The Line of Credit matures on December 17, 2014 and carries a variable interest rate based on the prime rate. At June 30, 2014, $4,000,000 was outstanding on the Line of Credit at an interest rate of 2.25%.

 

On April 1, 2013 the Company and Mr. Wit extended the maturity date of $2,866,879 of promissory notes due to our Chief Executive Officer and Director, Cornelis F. Wit originally issued in March 2011.  The notes carry an interest rate of 12% and have a maturity date of March 31, 2016.

 

On December 5, 2013 the Company and Mr. van Kesteren extended the maturity date of $160,000 of convertible debentures to our Director, Guus van Kesteren, originally issued in December 2008. The debentures carry an interest rate of 12% and have a maturity date of January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

 

On January 1, 2014, the Company issued a promissory note in the amount of $980,000 and 3,920,000 warrants to purchase shares of our common stock at $0.25 per share to our Chief Executive Officer and Director, Cornelis F. Wit in exchange for accrued interest in the amount of $980,000. The note carries an interest rate of 12% per annum and matures on April 1, 2017. The warrants have an expiration date of April 1, 2017.

 

On April 4, 2014 the Company issued a promissory note payable to our Chief Executive Officer and Director, Cornelis F. Wit, in the amount of $1,600,000 in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

On April 4, 2014 the Company issued a promissory note in the amount of $120,000 and paid $3,425 in principal in exchange for an existing promissory note in the amount of $123,425. The promissory note carries an interest rate of 10% and has a maturity date of April 1, 2017.

 

On April 4, 2014 the Company issued a promissory note in the amount of $45,000 in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

On April 4, 2014 the Company issued a promissory note in the amount of $137,500 in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

On April 21, 2014, the Company extended the maturity date of $150,000 of convertible debentures to our Director, Guus van Kesteren originally issued in August 2008. The debentures carry an interest rate of 10% and have a maturity date of April 1, 2016. The expiration date of the warrants associated with the debentures was also extended to April 1, 2016.

 

On April 28, 2014, the Company and the lender agreed to extend the maturity date of $100,000 of convertible debentures. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2016. The expiration date of the warrants associated with the debentures was also extended to April 1, 2016.

 

During the next twelve months we expect debt in the aggregate amount of $4,403,562 to mature as follows:  

 

 

$75,000 of 10% convertible notes currently in default and due that are convertible into shares of common stock at the option of the debenture holder at a conversion rate of $1.25 per share;

 

$20,000 of 12% promissory notes that mature in December 2014;

 

$308,562 of 10% promissory notes that mature in January 2015; and

 

$4,000,000 due on our line of credit that matures in December 2014.

 

Sources of Liquidity and Capital Resources

 

Because of the losses we have experienced from operations we have needed to continue utilizing the proceeds from the issuance of debt and the sale of equity securities to fund our working capital needs. We have used a combination of equity financing, short-term bridge loans and long-term loans to fund our working capital needs. Other than our revenues, current capital and capital we may raise from future debt or equity offerings or short-term bridge loans, we do not have any additional sources of working capital.

 

 
53

 

 

We may continue to require substantial funds to continue our R&D activities and to market, sell and commercialize our technology. We may need to raise substantial additional capital to fund our future operations. Our capital requirements will depend on many factors, including the problems, delays, expenses and complications frequently encountered by companies developing and commercializing new technologies; the progress of our R&D activities; the rate of technological advances; determinations as to the commercial potential of our technology under development; the status of competitive technology; the establishment of collaborative relationships; the success of our sales and marketing programs; the cost of filing, prosecuting, defending and enforcing intellectual property rights; and other changes in economic, regulatory or competitive conditions in our planned business.  Estimates about the adequacy of funding for our activities are based upon certain assumptions, including assumptions that our R&D programs relating to our technology can be conducted at projected costs and that progress towards broader commercialization of our technology will be timely and successful. There can be no assurance that changes in our R&D plans or other events will not result in accelerated or unexpected expenditures.

 

While we have not sought capital from venture capital or private equity sources we believe that those sources of capital remain available although possibly under terms and conditions that might be disadvantageous to existing investors.

 

To satisfy our capital requirements, including ongoing future operations, we may seek to raise additional financing through debt and equity financings. There can be no assurance that any such funding will be available to us on favorable terms or at all. If adequate funds are not available when needed, we may be required to delay, scale back or eliminate some or all of our research and product development programs, and our business operations. If we are successful in obtaining additional financings, the terms of such financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our common and preferred stock. Further, there can be no assurance that even if such additional capital is obtained or the planned cost reductions are implemented, that we will achieve positive cash flow or profitability or be able to continue as a business.

 

While several of our directors have historically, either personally or through funds with which they are affiliated, provided substantial capital either in the form of debt or equity financing there can be no assurance that they will continue to provide any such funding to us on favorable terms or at all.

 

Our ability to continue in existence is dependent on our having sufficient financial resources to bring products and services to market. As a result of our historical operating losses, negative cash flows and accumulated deficits for the periods ending June 30, 2014, there is substantial doubt about our ability to continue as a going concern. In addition, our auditors Liggett, Vogt & Webb P.A., included language which qualified their opinion regarding our ability to continue as a going concern in their report dated March 31, 2014 regarding our audited financial statements for the year ended December 31, 2013.

 

CRITICAL ACCOUNTING POLICIES

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 2 of Notes to the Condensed Consolidated Financial Statements describes the significant accounting policies used in the preparation of the condensed consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

 

A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

 

Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, our Management is periodically faced with uncertainties, the outcomes of which are not within our control and will not be known for prolonged periods of time.  Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, our Management believes that our condensed consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States (GAAP), and present a meaningful presentation of our financial condition and results of operations.

 

 
54

 

 

Our Management believes that the following are our critical accounting policies:

 

ASSET IMPAIRMENT

 

Asset Acquisitions and Intangible Assets

 

We account for asset acquisitions in accordance with ASC 350, Intangibles-Goodwill and Other. The acquisition method of accounting requires that assets acquired and liabilities assumed be recorded at their fair values on the date of an asset acquisition.

 

The judgments that we make in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income in periods following an asset acquisition. We generally use either the income, cost or market approach to aid in our conclusions of such fair values and asset lives. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its replacement or reproduction cost. The market approach estimates value based on what other participants in the market have paid for reasonably similar assets. Although each valuation approach is considered in valuing the assets acquired, the approach ultimately selected is based on the characteristics of the asset and the availability of information.

 

Long Lived Assets

 

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use quoted market prices when available and independent appraisals, as appropriate, to determine fair value.

 

FAIR VALUE MEASUREMENT

 

OmniComm’s capital structure includes the use of warrants and convertible debt features that are classified as derivative financial instruments. Derivative financial instruments are recognized as either assets or liabilities and are measured at fair value under ASC 815 Derivatives and Hedging. ASC 815 requires that changes in the fair value of derivative financial instruments with no hedging designation be recognized as gains/(losses) in the earnings statement. The fair value measurement is determined in accordance with ASC 820 Fair Value Measurements and Disclosures.

 

DEFERRED REVENUE

 

Deferred revenue represents cash advances and accounts receivable in excess of revenue earned on on-going contracts.  Payment terms vary with each contract but may include an initial payment at the time the contract is executed, with future payments dependent upon the completion of certain contract phases or targeted milestones.  In the event of contract cancellation, the Company is generally entitled to payment for all work performed through the point of cancellation.

 

REVENUE RECOGNITION POLICY

 

OmniComm’s revenue model is transaction-based and can be implemented either as an ASP (application service provider) or licensed for implementation by a customer such as a pharmaceutical company.  Revenues are derived from the set-up of clinical trial engagements; licensing arrangements, fees earned for hosting our clients’ data and projects, on-going maintenance fees incurred throughout the duration of an engagement; and fees for report writing and project change orders.  The clinical trials that are conducted using our EDC applications can last from a few months to several years.  Most of the fees associated with our product including post-setup customer support in the form of maintenance charges are recognized ratably over the term of clinical trial projects.  Cost of sales is primarily comprised of programmer salaries and taxes and is expensed as incurred.

 

The Company recognizes revenues, for both financial statement and tax purposes in accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition in Financial Statements (SAB 104)” (Codified within Accounting Standards Codification (ASC) Revenue Recognition ASC 605) and AICPA Statement of Position 97-2 (SOP 97-2) “Software Revenue Recognition” as amended by SOP 98-9 (Codified within ASC 605.985, Software Industry Revenue Recognition). SAB 104 requires that revenues be recognized ratably over the life of a contract.  The Company will periodically record deferred revenues relating to advance payments in contracts.  Under its licensing arrangements, the Company recognizes revenue pursuant to SOP 97-2.  Under these arrangements, the Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer and/or delivery has occurred; (3) the collection of fees is probable; and (4) the fee is fixed or determinable.  SOP 97-2, as amended, requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements.  We have analyzed each element in our multiple element arrangements and determined that we have sufficient vendor-specific objective evidence (“VSOE”) to allocate revenues to license updates and product support.  License revenues are recognized on delivery if the other conditions of SOP 97-2 are satisfied.  License updates and product support revenue is recognized ratably over the term of the arrangement. In arrangements where term licenses are bundled with license updates and product support and such revenue is recognized ratably over the term of the arrangement, we allocate the revenue to license revenue and to license updates and product support revenue based on the VSOE of fair value for license updates and product support revenue on perpetual licenses of similar products.

 

 
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STOCK BASED COMPENSATION.

 

The Company accounts for its employee equity incentive plans under ASC 718, Compensation–Stock Compensation which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions.

 

ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Income. The Company currently uses the Black-Scholes option pricing model to determine grant date fair value.

 

EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

During the first six months of 2014, we adopted the following new accounting pronouncements:

 

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU amends ASC 740, Income Taxes, to require that an unrecognized tax benefit be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward; to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward does not exist at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and not combined with deferred tax assets. ASU No. 2013-11 is effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. Our adoption of this standard on January 1, 2014 did not have a material impact on our consolidated financial statements.

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this ASU on January 1, 2017. Management is currently evaluating which transition approach to use and the impact of the adoption of this ASU on the Company's consolidated financial statements.

 

Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements that have been issued since the filing of our Form 10-K for the year ended December 31, 2013 to determine their impact, if any, on our financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable to smaller reporting companies.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, being June 30, 2014, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures, as such term is defined in  Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) are effective such that the information relating to OmniComm, including our consolidating subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

However, subsequent to the closing date of our acquisition of Promasys BV (“Promasys”), and continuing thereafter, we determined that we incorrectly applied the provisions of Item 9 of Form 8-K and Article 8 of Regulation S-X under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as a result of which, (a) we concluded, incorrectly, that our acquisition of Promasys was not a “significant acquisition” within the meaning of Regulation S-X, and (b) we did not timely file a periodic report containing the audited financial statements, unaudited interim financial statements or pro-forma financial information required under Rules 8-04 and 8-05 of Regulation S-X to be filed in connection with our acquisition of Promasys. The Securities and Exchange Commission (“SEC”) has indicated that a company’s failure to file a report required to be filed under the Exchange Act may be evidence of a weakness in disclosure controls. Moreover, our incorrect application of Item 9 of Form 8-K and Article 8 of Regulation S-X could be indicative of a deficiency in our internal control over financial reporting.

 

We believe that our incorrect application of Item 9 of Form 8-K and Article 8 of Regulation S-X, and the resulting failure to timely file a required report under the Exchange Act, was caused by a lack of full familiarization on the part of our financial officers with the SEC’s accounting rules relating to acquisition transactions. However, the assets, liabilities and results of operations of Promasys have been consolidated in our financial statements since the effective date of acquisition, and our late filing of the required audited financial statements, interim financial statements and pro-forma financial statements are not expected to have any impact on our financial statements or results of operations. In order to reduce the likelihood that a similar event will occur in the future, we have taken remedial action including (a) establishing a policy that all proposed acquisitions be discussed with both our SEC counsel and our independent auditors prior to their consummation and (b) devoting resources to bolstering our financial officers’ knowledge of SEC accounting requirements, particularly those associated with acquisition transactions.

 

While we believe the remedial steps we have taken will reduce the likelihood of a similar occurrence in the future, there is no assurance that a significant deficiency or material weakness will not be identified in the future as a result of this or other circumstances.

 

 
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Changes in Internal Controls over Financial Reporting

 

There have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during the second quarter ended June 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

From time to time the Company may be involved in litigation relating to claims arising out of our operations in the normal course of business. As of June 30, 2014, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations

 

ITEM 1A. RISK FACTORS.

 

The following risk factors should be read in conjunction with the other risk factors identified in our annual report on Form 10-K for the year ended December 31, 2013 and the other filings we make, from time to time, with the Securities and Exchange Commission.

 

We have not filed certain information required to be filed by us under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and until we do so, we will not be in compliance with our reporting obligations under the Exchange Act.

 

Subsequent to the closing date of our acquisition of Promasys BV (“Promasys”) and continuing until recently, we determined that we incorrectly applied the provisions of Item 9 of Form 8-K and Article 8 of Regulation S-X under the Exchange Act, as a result of which, (a) we concluded, incorrectly, that our acquisition of Promasys was not a “significant acquisition” within the meaning of Regulation S-X, and (b) we did not timely file a periodic report containing the audited financial statements, unaudited interim financial statements or pro-forma financial information required under Rules 8-04 and 8-05 of Regulation S-X to be filed in connection with our acquisition of Promasys.  We have filed the required audited financial statements as an exhibit to our Current Report on Form 8-K filed August 14, 2014 (“Current Report”); however, we do not anticipate that we will receive the necessary information from our Dutch subsidiary to enable us to complete the required unaudited interim financial statements or pro-forma financial information until on or about September 30, 2014 and we will file the unaudited interim financial statements and pro-forma financial information by amendment to the Current Report as soon as practicable following the receipt of the necessary information.

 

The assets, liabilities and results of operations of Promasys have been consolidated in our financial statements since the effective date of acquisition, and our late filing of the required audited financial statements, interim financial statements and pro-forma financial statements are not expected to have any impact on our financial statements or results of operations. However, until such time as we file the interim financial statements and pro-forma financial information, (a) we will not be considered in compliance with our reporting obligations under the Exchange Act and (b) Form S-8 will not be available to us for the registration or resale of shares issued under our equity compensation plan. Our continued non-compliance with our Exchange Act reporting requirements could subject us to regulatory scrutiny and the imposition of sanctions including the revocation of our registration under Section 12(g) of the Exchange Act.

 

Our failure to properly apply certain financial tests and the resulting failure to file certain information with the SEC may be indicative of weaknesses in our internal control over financial reporting and our disclosure controls and procedures.

 

The Securities and Exchange Commission (“SEC”) has indicated that the failure to file a report required to be filed under the Exchange Act may be evidence of a weakness in disclosure controls. Moreover, our incorrect application of Item 9 of Form 8-K and Article 8 of Regulation S-X in connection with our acquisition of Promasys could be indicative of a deficiency in our internal control over financial reporting. In order to reduce the likelihood that a similar event will occur in the future, we have taken remedial action. While we believe the remedial steps we have taken will reduce the likelihood of a similar occurrence in the future, there is no assurance that a significant deficiency or material weakness will not be identified in the future as a result of this or other circumstances.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

 
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ITEM 6. EXHIBITS 

 

The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:

 

EXHIBIT NO.

DESCRIPTION

 

31.1*

Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2*

Certification of Principal Financial and Accounting Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1**

Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS***

XBRL Instance Document

 

101.SCH***

XBRL Taxonomy Extension Schema Document

 

101.CAL***

XBRL Taxonomy Extension Calculation Document

 

101.DEF***

XBRL Taxonomy Extension Definition Document

 

101.LAB***

XBRL Taxonomy Extension Label Document

 

101.PRE***

XBRL Taxonomy Extension Presentation Document

 

 

 

* Filed herewith

**

Furnished herewith

***

In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.

 

 
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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Dated: August 14, 2014

 

 

 

 

OMNICOMM SYSTEMS, INC.

   

 

By:   /s/ Cornelis F. Wit

 

Cornelis F. Wit, Chief Executive Officer

   
   
   
  By:   /s/ Thomas E. Vickers
  Thomas E. Vickers, Chief Accounting and Financial Officer

 

 

59