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, 2015

[   ]     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 [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 [√] 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 [√]

 

The number of shares outstanding of each of the issuer’s classes of common equity as of August 13, 2015: 92,845,102 common stock $.001 par value.

 

 

 

 Table of Contents to the Quarterly Report on Form 10-Q for the Six month period ended June 30, 2015

 

 

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	55
ITEM 4. CONTROLS AND PROCEDURES	55
PART II. OTHER INFORMATION	56
ITEM 1. LEGAL PROCEEDINGS	56
ITEM 1A. RISK FACTORS	56
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	56
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	56
ITEM 4. MINE SAFETY DISCLOSURES	56
ITEM 5. OTHER INFORMATION	57
ITEM 6. EXHIBITS	57
SIGNATURES	58
Exhibit 31.1*
Exhibit 31.2*
EXHIBIT 32.1**

 

Exhibit 101.INS	XBRL Instance
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

  

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30, 2015				December 31, 2014
		(unaudited)
ASSETS
CURRENT ASSETS
Cash		$	1,186,088			$	522,914
Accounts receivable, net of allowance for doubtful accounts of $99,083 and $186,085, respectively			3,003,338				3,416,151
Prepaid expenses			164,585				228,082
Prepaid stock compensation, current portion			219,275				153,500
Other current assets			12,647				18,305
Total current assets			4,585,933				4,338,952
Property and equipment, net			654,337				468,136
Other assets
Intangible assets, net			171,853				203,921
Goodwill			549,193				596,620
Prepaid stock compensation			235,215				146,653
Other assets			47,870				49,092
TOTAL ASSETS		$	6,244,401			$	5,803,374
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses		$	2,124,190			$	1,894,185
Deferred revenue, current portion			6,696,830				5,840,875
Line of credit			-0-				4,000,000
Convertible notes payable, current portion, net of discount of $-0- and $-0-, respectively			75,000				75,000
Patent settlement liability, current portion			962,500				962,500
Conversion feature liability, related parties			1,757,681				2,729,902
Conversion feature liability			196,474				214,500
Warrant liability, related parties			4,292,816				6,496,448
Warrant liability			187,821				198,612
Total current liabilities			16,293,312				22,412,022
LONG TERM LIABILITIES
Line of credit, long term			5,000,000				-0-
Notes payable, related parties, long term, net of current portion, net of discount of $1,106,070 and $568,209, respectively			5,832,930				5,700,791
Notes payable, long term, net of current portion			792,500				812,500
Deferred revenue, long term, net of current portion			1,867,099				2,393,068
Convertible notes payable, related parties, long term, net of current portion			8,810,000				8,815,000
Convertible notes payable, long term, net of current portion			775,000				775,000
Patent settlement liability, long term, net of current portion			509,648				669,825
TOTAL LIABILITIES			39,880,489				41,578,206
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, 92,845,102 and 91,561,802 issued and outstanding, respectively, at $0.001 par value			92,846				91,562
Additional paid in capital - preferred			4,717,804				4,717,804
Additional paid in capital - common			37,931,778				37,634,555
Accumulated other comprehensive (loss)			(327,358	)			(243,827	)
Accumulated deficit			(76,055,533	)			(77,979,301	)
TOTAL SHAREHOLDERS' (DEFICIT)			(33,636,088	)			(35,774,832	)
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT)		$	6,244,401			$	5,803,374

 

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

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		For the six months ended								For the three months ended
		June 30,								June 30,
		2015				2014				2015				2014
Revenues		$	9,175,614			$	6,611,538			$	4,788,160			$	3,465,491
Reimbursable revenues			497,412				179,486				46,739				143,258
Total revenues			9,673,026				6,791,024				4,834,899				3,608,749
Cost of goods sold			1,969,075				1,567,159				1,009,580				813,076
Reimbursable expenses-cost of goods sold			432,470				263,891				40,368				154,699
Total cost of sales			2,401,545				1,831,050				1,049,948				967,775
Gross margin			7,271,481				4,959,974				3,784,951				2,640,974
Operating expenses
Salaries, benefits and related taxes			5,542,217				5,228,311				2,764,113				2,538,236
Rent and occupancy expenses			482,711				443,987				227,480				219,403
Consulting services			176,740				50,558				81,311				30,111
Legal and professional fees			218,128				199,897				98,592				114,940
Travel			471,670				417,360				184,723				202,466
Telephone and internet			83,955				90,491				52,576				46,905
Selling, general and administrative			827,607				592,972				467,786				333,140
Bad debt expense			(5,402	)			76,002				14,972				55,648
Depreciation expense			108,505				122,433				56,343				60,023
Amortization expense			20,237				23,227				10,057				11,610
Total operating expenses			7,926,368				7,245,238				3,957,953				3,612,482
Operating (loss)			(654,887	)			(2,285,264	)			(173,002	)			(971,508	)
Other income/(expense)
Interest expense, related parties			(1,299,785	)			(1,240,176	)			(672,649	)			(573,558	)
Interest expense			(145,897	)			(106,732	)			(73,161	)			(55,387	)
Interest income			-0-				65				-0-				18
Change in derivative liabilities			4,072,798				2,802,571				5,590,517				2,257,688
Transaction gain/(loss)			(48,076	)			(13,319	)			7,248				(8,883	)
Income/(loss) before income taxes			1,924,153				(842,855	)			4,678,953				648,370
Income taxes (expense)			(385	)			(33,961	)			-0-				(16,306	)
Net income/(loss)			1,923,768				(876,816	)			4,678,953				632,064
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		$	1,821,485			$	(979,099	)		$	4,627,529			$	580,640
Net income/(loss) per share
Basic		$	0.02			$	(0.01	)		$	0.05			$	0.01
Diluted		$	0.01			$	(0.01	)		$	0.03			$	0.01
Weighted average number of shares outstanding
Basic			91,999,079				90,104,659				92,350,506				90,104,659
Diluted			103,712,786				90,104,659				120,664,362				90,722,106

 

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

 

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(unaudited)

 

		For the six months ended								For the three months ended
		June 30,								June 30,
		2015				2014				2015				2014
Net income/(loss) attributable to common stockholders		$	1,821,485			$	(979,099	)		$	4,627,529			$	580,640
Other comprehensive income/(loss)
Change in foreign currency translation adjustment			(83,531	)			(23,952	)			21,926				(16,289	)
Other comprehensive income/(loss)			(83,531	)			(23,952	)			21,926				(16,289	)
Comprehensive income/(loss)		$	1,737,954			$	(1,003,051	)		$	4,649,455			$	564,351

 

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

 

  

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)

FOR THE YEAR ENDED DECEMBER 31, 2014 AND THE SIX MONTHS ENDED JUNE 30, 2015

(unaudited)

 

		Preferred Stock																																				Common Stock
		5% Series A Convertible								8% Series B Convertible								8% Series C Convertible								Series D Preferred								Additional												Additional								Accumulated
						$0.001				Number				$0.001				Number				$0.001				Number				$0.001				paid in								$0.001				paid in								other				Total
		Number				Par				of				Par				of				Par				of				Par				capital				Number				Par				capital				Accumulated				comprehensive				shareholders'
		of shares				value				shares				value				shares				value				shares				value				preferred				of shares				value				common				deficit				income				(deficit)
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																																															63,654												63,654
Foreign currency translation adjustment																																																							(156,223	)			(156,223	)
Restricted stock issuance																																							1,400,000				1,400				236,600												238,000
Cashless issuance of common stock, stock option exercise																																							57,143				57				(57	)											-0-
Net loss for year ended December 31, 2014			-0-				-0-				-0-				-0-				-0-				-0-				-0-				-0-				-0-				-0-				-0-				-0-				(4,459,384	)			-0-				(4,459,384	)
Balances at December 31, 2014			4,125,224				4,125				-0-				-0-				-0-				-0-				250,000				250				4,717,804				91,561,802				91,562				37,634,555				(77,979,301	)			(243,827	)			(35,774,832	)
Employee stock option expense																																															23,307												23,307
Foreign currency translation adjustment																																																							(83,531	)			(83,531	)
Restricted stock issuance																																							1,025,000				1,025				246,925												247,950
Issuance of common stock, stock option exercise																																							252,500				253				26,997												27,250
Cashless issuance of common stock, stock option exercise																																							5,800				6				(6	)											-0-
Net income for period ended June 30, 2015			-0-				-0-				-0-				-0-				-0-				-0-				-0-				-0-				-0-				-0-				-0-				-0-				1,923,768				-0-				1,923,768
Balances at June 30, 2015			4,125,224			$	4,125				-0-			$	-0-				-0-			$	-0-				250,000			$	250			$	4,717,804				92,845,102			$	92,846			$	37,931,778			$	(76,055,533	)		$	(327,358	)		$	(33,636,088	)

  

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

 

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		For the six months ended
		June 30,
		2015				2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss)		$	1,923,768			$	(876,816	)
Adjustment to reconcile net income/(loss) to net cash provided by/(used in) operating activities
Change in derivative liabilities			(4,072,798	)			(2,802,571	)
Interest expense from derivative instruments			330,266				302,890
Employee stock compensation			116,920				77,540
Provision for doubtful accounts			(5,402	)			76,002
Depreciation and amortization			128,742				145,660
Changes in operating assets and liabilities
Accounts receivable			418,215				(2,896,378	)
Prepaid expenses			63,497				35,513
Other current assets			5,658				-0-
Other assets			1,222				(8,771	)
Accounts payable and accrued expenses			900,005				628,803
Patent settlement liability			(160,177	)			(142,316	)
Deferred revenue			329,986				4,721,369
Net cash (used in) operating activities			(20,098	)			(739,075	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment			(298,489	)			(26,214	)
Net cash (used in) investing activities			(298,489	)			(26,214	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable			(25,000	)			(20,925	)
Proceeds from revolving line of credit			1,000,000				500,000
Proceeds from exercise of stock options			27,250				-0-
Net cash provided by financing activities			1,002,250				479,075
Effect of exchange rate changes on fixed and intangible assets			63,042				-0-
Effect of exchange rate changes on cash and cash equivalents			(83,531	)			(23,952	)
Net increase/(decrease) in cash and cash equivalents			663,174				(310,166	)
Cash and cash equivalents at beginning of period			522,914				1,160,720
Cash and cash equivalents at end of period		$	1,186,088			$	850,554
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes		$	385			$	33,961
Interest		$	528,823			$	594,873
Non-cash transactions:
Notes payable issued in exchange for existing notes payable		$	14,874,000			$	1,902,500
Promissory notes issued for accrued interest		$	670,000			$	980,000
Restricted stock issuance		$	247,950			$	-0-

 

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

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(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, contract research organizations (“CROs”), and other clinical trial sponsors principally located in the United States, Europe and East Asia. Our proprietary EDC software applications; TrialMaster^®, TrialOne^®, eClinical Suite, and Promasys^® (the “EDC Software”) 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, 2015 and June 30, 2014 we spent approximately $1,355,783 and $1,417,358, 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 2014 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, 2015 are not necessarily indicative of the results that may be expected for the year-ended December 31, 2015. 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, 2014.

 

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.

 

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

Reclassifications

 

Certain reclassifications have been made in the 2014 financial statements to conform to the 2015 presentation. These reclassifications did not have any effect on our net income/(loss) or shareholders’ deficit.

 

foreign currency translation

 

The financial statements of the Company’s foreign subsidiaries are translated in accordance with Accounting Standards Codification (“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 $83,531 and $23,952 for the six month periods ended June 30, 2015 and June 30, 2014 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. 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.

 

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 component involves services required to close out, or lock, the database for the clinical trial.

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

Fees charged 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. 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 (“ASC 605-45”). In accordance with ASC 605-45 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.

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

The fees associated with each business activity for the periods ended June 30, 2015 and June 30, 2014, respectively are:

 

		For the six months ended
		June 30, 2015				June 30, 2014
Revenue activity
Set-up fees		$	2,882,153			$	1,943,854
Change orders			354,808				196,954
Maintenance			2,501,407				2,011,646
Software licenses			1,527,374				1,286,147
Professional services			1,924,967				952,805
Hosting			482,317				399,618
Total		$	9,673,026			$	6,791,024

 

		For the three months ended
		June 30, 2015				June 30, 2014
Revenue activity
Set-up fees		$	1,617,609			$	1,136,021
Change orders			212,767				83,866
Maintenance			1,269,530				1,052,015
Software licenses			786,437				618,830
Professional services			707,970				508,298
Hosting			240,586				209,719
Total		$	4,834,899			$	3,608,749

 

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 $99,083 as of June 30, 2015 and $186,085 as of December 31, 2014, respectively.

 

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

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

 

		June 30, 2015				December 31, 2014
Beginning of period		$	186,085			$	65,341
Bad debt expense			(5,402	)			147,543
Write-offs			(81,600	)			(26,875	)
Exchange rate impact			-0-				76
End of period		$	99,083			$	186,085

 

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, 2015, $795,717 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, Europe and East Asia. 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, 2015. 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, 2015, 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 quarterly 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, 2015 or approximately $1,249,000. One customer accounted for 13% of our revenues during the six month period ended June 30, 2014 or approximately $856,000. 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, 2015			1				13%				2				31%
December 31, 2014			1				15%				1				18%
June 30, 2014			1				13%				2				32%

 

The table below provides revenues from European customers for the six month periods ended June 30, 2015 and June 30, 2014, respectively.

 

	European revenues
	For the six months ended
	June 30, 2015								June 30, 2014
	European revenues				% of Total revenues				European revenues				% of Total revenues
	$	1,084,178				11%			$	1,296,534				19%

 

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

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”). 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 (“ASC 820”).

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(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, 2015, the Company had $8,563,929 in deferred revenues relating to contracts for services to be performed over periods ranging from one month to 5.8 years. The Company had $6,696,830 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 $406,502 and $228,530 for the six month periods ended June 30, 2015 and June 30, 2014, 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 (“ASC 985-20”), 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, 2015 and June 30, 2014 we spent approximately $1,355,783 and $1,417,358 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, (“ASC 718”) 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 (“ASC 260”). Unlike diluted earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities.

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

INCOME TAXES

 

The Company accounts for income taxes in accordance with ASC 740, Income Taxes (“ASC 740”). 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 2015, we adopted the following new accounting pronouncements:

 

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, (“ASU 2014-09”). 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.

 

In August 2014, FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, (“ASU 2014-15”), which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We believe the adoption of this guidance will not have a material effect on our 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.

 

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.

 

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

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, 2015 there is substantial doubt about the Company’s ability to continue as a going concern.

 

The unaudited condensed 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 91,999,079 and 90,104,659 for the six month periods ended June 30, 2015 and June 30, 2014, respectively.

 

The outstanding share balance as of June 30, 2015 and June 30, 2014, respectively, includes 2,866,681 and 850,007 restricted shares that have been issued but are still at risk of forfeiture as the restrictions have not lapsed.

 

Antidilutive shares of 71,302,468 and 82,066,327 have been omitted from the calculation of dilutive earnings/(loss) per share for the six month periods ended June 30, 2015 and June 30, 2014, respectively, as the shares were antidilutive. Provided below is the reconciliation between numerators and denominators of the basic and diluted earnings per shares. The table below provides a reconciliation of anti-dilutive securities outstanding as of June 30, 2015 and June 30, 2014, respectively.

 

Anti-dilutive security		June 30, 2015				June 30, 2014
Preferred stock			2,750,149				2,750,149
Employee stock options			1,563,793				5,275,000
Warrants			52,263,517				48,463,517
Convertible notes			13,850,000				24,620,000
Shares issuable for accrued interest			875,009				957,661
Total			71,302,468				82,066,327

 

The employee stock options are exercisable at prices ranging from $0.045 to $0.50 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.

 

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

Some of 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, 2015												June 30, 2014
		Income/(loss)				Shares				Per-share				Income/(loss)				Shares				Per-share
		numerator				denominator				amount				numerator				denominator				amount
Basic EPS		$	1,821,485				91,999,079			$	0.02			$	(979,099	)			90,104,659			$	(0.01	)
Effect of dilutive securities -			(387,828	)			11,713,707				(0.03	)			-0-				-0-				-0-
Diluted EPS		$	1,433,657				103,712,786			$	0.01			$	(979,099	)			90,104,659			$	(0.01	)

 

		For the three months ended
		June 30, 2015												June 30, 2014
		Income/(loss)				Shares				Per-share				Income/(loss)				Shares				Per-share
		numerator				denominator				amount				numerator				denominator				amount
Basic EPS		$	4,627,529				92,350,506			$	0.05			$	580,640				90,104,659			$	0.01
Effect of dilutive securities -			(1,460,161	)			28,313,856				(0.05	)			-0-				617,447				-0-
Diluted EPS		$	3,167,368				120,664,362			$	0.03			$	580,640				90,722,106			$	0.01

 

See Item 5. Other Information

 

NOTE 5:                 PROPERTY AND EQUIPMENT, NET

 

Property and equipment consists of the following:

 

		June 30, 2015												December 31, 2014
		Cost				Accumulated depreciation				Net book value				Cost				Accumulated depreciation				Net book value				Estimated useful life (years)
Computer & office equipment		$	1,903,386			$	1,546,029			$	357,357			$	1,880,183			$	1,482,737			$	397,446				5
Leasehold improvements			92,246				84,796				7,450				92,504				82,353				10,151				5
Computer software			1,852,482				1,569,680				282,802				1,580,640				1,528,418				52,222				3
Office furniture			112,034				105,306				6,728				113,365				105,048				8,317				5
Total		$	3,960,148			$	3,305,811			$	654,337			$	3,666,692			$	3,198,556			$	468,136

 

Depreciation expense for the six month periods ended June 30, 2015 and June 30, 2014 was $108,505 and $122,433, respectively.

 

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

NOTE 6:                 INTANGIBLE ASSETS, AT COST

 

Intangible assets consist of the following:

 

		June 30, 2015												December 31, 2014
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			110,742				12,305				98,437				120,305				9,357				110,948				15
Promasys B.V. software code			72,837				24,279				48,558				72,837				16,995				55,842				5
Promasys B.V. URLs/Website			55,930				31,072				24,858				60,760				23,629				37,131				3
Total		$	1,632,210			$	1,460,357			$	171,853			$	1,646,603			$	1,442,682			$	203,921

 

Amortization expense was $20,237 and $23,227 for the six month periods ended June 30, 2015 and June 30, 2014, respectively.

 

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

 

2015		$	20,297
2016			37,486
2017			21,950
2018			19,522
2019			7,383
Thereafter			65,215
Total		$	171,853

 

NOTE 7:                 ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following:

 

Account		June 30, 2015				December 31, 2014
Accounts payable		$	823,291			$	613,584
Accrued payroll and related costs			438,048				319,629
Other accrued expenses			79,159				85,248
Accrued interest			783,692				875,724
Total accounts payable and accrued expenses		$	2,124,190			$	1,894,185

 

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. On February 3, 2015 the Company renewed the Line of Credit and increased the available balance to $5,000,000. The Line of Credit matures on February 2, 2018 and carries a variable interest rate based on the prime rate. At June 30, 2015, $5,000,000 was outstanding on the Line of Credit at an interest rate of 2.25%.

 

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

At June 30, 2015, the Company owed $7,731,500 in notes payable all of which are unsecured. The table below provides details as to the terms and conditions of the notes payable.

 

										Ending				Non related party								Related party
Origination		Maturity				Interest				principal								Long								Long
date		date				rate				June 30, 2015				Current				term				Current				term
1/1/2014		4/1/2017					12%			$	980,000			$	-0-			$	-0-			$	-0-			$	980,000
4/4/2014		4/1/2017					12%				1,600,000				-0-				-0-				-0-				1,600,000
4/4/2014		4/1/2017					12%				45,000				-0-				45,000				-0-				-0-
4/4/2014		4/1/2017					12%				137,500				-0-				137,500				-0-				-0-
4/4/2014		4/1/2017					10%				120,000				-0-				120,000				-0-				-0-
12/1/2014		4/1/2017					10%				300,000				-0-				300,000				-0-				-0-
12/1/2014		4/1/2017					12%				90,000				-0-				90,000				-0-				-0-
12/1/2014		4/1/2017					12%				100,000				-0-				100,000				-0-				-0-
1/31/2015		4/1/2017					12%				2,860,000				-0-				-0-				-0-				2,860,000
1/31/2015		4/1/2017					12%				529,000				-0-				-0-				-0-				529,000
1/31/2015		4/1/2017					12%				950,000				-0-				-0-				-0-				950,000
4/1/2015		4/1/2018					12%				20,000				-0-				-0-				-0-				20,000
Discount on note payable															-0-				-0-				-0-				(1,106,070	)
Total										$	7,731,500			$	-0-			$	792,500			$	-0-			$	5,832,930

 

At December 31, 2014, the Company owed $7,081,500 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				2014				Current				term				Current				term
1/1/2013		1/1/2016					12%			$	529,000			$	-0-			$	-0-			$	-0-			$	529,000
2/22/2013		1/1/2016					12%				20,000				-0-				-0-				-0-				20,000
4/1/2013		3/31/2016					12%				2,860,000				-0-				-0-				-0-				2,860,000
1/1/2014		4/1/2017					12%				980,000				-0-				-0-				-0-				980,000
4/4/2014		4/1/2017					12%				1,600,000				-0-				-0-				-0-				1,600,000
4/4/2014		4/1/2017					12%				45,000				-0-				45,000				-0-				-0-
4/4/2014		4/1/2017					12%				137,500				-0-				137,500				-0-				-0-
4/4/2014		4/1/2017					10%				120,000				-0-				120,000				-0-				-0-
12/1/2014		4/1/2017					10%				300,000				-0-				300,000				-0-				-0-
12/1/2014		4/1/2017					12%				90,000				-0-				90,000				-0-				-0-
12/1/2014		4/1/2017					12%				100,000				-0-				100,000				-0-				-0-
12/17/2014		1/1/2016					12%				20,000				-0-				20,000				-0-				-0-
12/23/2014		4/1/2017					12%				280,000				-0-				-0-				-0-				280,000
Discount on note payable															-0-				-0-				-0-				(568,209	)
Total										$	7,081,500			$	-0-			$	812,500			$	-0-			$	5,700,791

 

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 quarterly 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.

 

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

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. The expiration date of the warrants associated with the prommissory note was also extended to 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 4, 2014 the Company issued a promissory note in the amount of $120,000 and paid $3,424 in principal in exchange for an existing promissory note in the amount of $123,424. The promissory note carries an interest rate of 10% and has a maturity date of April 1, 2017.

 

On December 1, 2014 the Company issued a promissory note in the amount of $300,000 and paid $8,562 in principal in exchange for an existing promissory note in the amount of $308,562. The promissory note carries an interest rate of 10% and has a maturity date of April 1, 2017.

 

On December 1, 2014 the Company issued a promissory note in the amount of $90,000 in exchange for accrued interest in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

On December 1, 2014 the Company issued a promissory note in the amount of $100,000 in exchange for accrued interest in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

On December 17, 2014 the Company issued a promissory note in the amount of $20,000 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, 2016. On June 15, 2015 the Company paid $20,000 in exchange for the outstanding note payable in the same amount.

 

On December 23, 2014, the Company issued a promissory note in the amount of $280,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note carries an interest rate of 12% per annum and is due on April 1, 2017.

 

On January 31, 2015 the Company issued a promissory note in the amount of $2,860,000 and paid $6,879 in principal to our Chief Executive Officer and Director, Cornelis F. Wit, in exchange for an existing promissory note in the amount of $2,866,879. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017. The expiration date of the warrants associated with the promissory note was also extended to April 1, 2017.

 

On January 31, 2015 the Company issued a promissory note in the amount of $529,000 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 April 1, 2017. The expiration date of the warrants associated with the promissory note was also extended to April 1, 2017.

 

On January 31, 2015, the Company issued a promissory note in the principal amount of $950,000 and warrants to purchase 3,800,000 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 an existing promissory note in the amount of $280,000 and accrued interest in the amount of $670,000. 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 $868,127 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 $81,873. The warrant liability (discount) will be amortized over the 26 month duration of the note payable. The Company will continue to perform a fair value calculation quarterly 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.

 

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

On April 1, 2015 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 April 1, 2018.

 

NOTE 9:                 CONVERTIBLE NOTES PAYABLE

 

The following table summarizes the convertible debt outstanding as of June 30, 2015.

 

												Principal												Discount				Carrying amount				Carrying amount
												at								Total				at				at				Short term								Long term
Date of issuance		Maturity date		Interest rate				Original principal				June 30,  2015				Allocated discount				discount amortized				June 30, 2015				June 30, 2015				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		4/1/2017			10%				150,000				150,000				135,600				135,600				-0-				150,000				-0-				-0-				-0-				150,000
8/29/2008		4/1/2017			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		4/1/2017			12%				260,000				260,000				70,200				70,200				-0-				260,000				-0-				-0-				-0-				260,000
12/16/2008		4/1/2017			12%				4,570,000				4,475,000				1,233,900				1,233,900				-0-				4,475,000				-0-				-0-				4,475,000				-0-
12/16/2008		4/1/2018			12%				215,000				215,000				58,050				58,050				-0-				215,000				-0-				-0-				-0-				215,000
12/16/2008		4/1/2018			12%				25,000				25,000				6,750				6,750				-0-				25,000				-0-				-0-				25,000				-0-
9/30/2009		4/1/2017			12%				1,300,000				1,100,000				488,800				488,800				-0-				1,100,000				-0-				-0-				1,100,000				-0-
9/30/2009		4/1/2018			12%				100,000				100,000				37,600				37,600				-0-				100,000				-0-				-0-				-0-				100,000
12/31/2009		4/1/2017			12%				1,440,000				1,440,000				904,320				904,320				-0-				1,440,000				-0-				-0-				1,440,000				-0-
12/31/2009		4/1/2018			12%				50,000				50,000				31,400				31,400				-0-				50,000				-0-				-0-				-0-				50,000
Total								$	11,092,500			$	9,660,000			$	4,883,100			$	4,883,100			$	-0-			$	9,660,000			$	0			$	75,000			$	8,810,000			$	775,000

 

The following table summarizes the convertible debt outstanding as of December 31, 2014.

 

												Principal												Discount				Carrying				Carrying amount
												at								Total				at				amount at				Short term								Long term
Date of issuance		Maturity date		Interest rate				Original principal				December  31, 2014				Allocated discount				discount amortized				December  31, 2014				December  31, 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		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-
8/29/2008		4/1/2016			10%				150,000				150,000				135,600				135,600				-0-				150,000				-0-				-0-				-0-				150,000
12/16/2008		1/1/2016			12%				375,000				375,000				101,250				101,250				-0-				375,000				-0-				-0-				-0-				375,000
12/16/2008		1/1/2016			12%				4,600,000				4,505,000				1,242,000				1,242,000				-0-				4,505,000				-0-				-0-				4,505,000				-0-
12/16/2008		4/1/2016			12%				100,000				100,000				27,000				27,000				-0-				100,000				-0-				-0-				-0-				100,000
9/30/2009		1/1/2016			12%				100,000				100,000				37,600				37,600				-0-				100,000				-0-				-0-				-0-				100,000
9/30/2009		1/1/2016			12%				1,300,000				1,100,000				488,800				488,800				-0-				1,100,000				-0-				-0-				1,100,000				-0-
12/31/2009		1/1/2016			12%				50,000				50,000				31,400				31,400				-0-				50,000				-0-				-0-				-0-				50,000
12/31/2009		1/1/2016			12%				1,440,000				1,440,000				904,320				904,320				-0-				1,440,000				-0-				-0-				1,440,000				-0-
Total								$	11,097,500			$	9,665,000			$	4,884,450			$	4,884,450			$	-0-			$	9,665,000			$	-0-			$	75,000			$	8,815,000			$	775,000

 

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, 2015, $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 $120,968 of accrued interest at June 30, 2015.

 

 

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. The debentures are secured by all of the assets of the Company. 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. As part of Amendment Number Two to Securities Purchase Agreement, Mr. Wit agreed to waive his rights to the granted Security Interest and for the release of the Collateral. On January 31, 2015 the Company and Mr. Wit extended the maturity date of the $1,100,000 of convertible debentures to April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017. On April 1, 2015 the Company and the lender extended the maturity date of $100,000 of convertible debentures, originally issued in September 2009. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2018. The expiration date of the warrants associated with the debentures was also extended to April 1, 2018.

 

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 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 July 31, 2014 Mr. van Kesteren’s term on the Board of Directors ended. Effective on the same date, his convertible note in the amount of $150,000 was reclassified from Related Party to Non-Related Party. 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 January 31, 2015 the Company and Mr. Wit extended the maturity date of $1,770,000 of the convertible debentures due to Mr. Wit to April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017. On June 30, 2015 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, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

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 lender 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 July 31, 2014 Mr. van Kesteren’s term on the Board of Directors ended. Effective on the same date, his convertible note in the amount of $160,000 was reclassified from Related Party to Non-Related Party. On January 31, 2015 the Company and Mr. Wit extended the maturity date of $4,475,000 of the convertible debentures due to Mr. Wit to April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017. On April 27, 2015, 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 April 1, 2018. The expiration date of the warrants associated with the debentures was also extended to April 1, 2018. On April 30, 2015 the Company and Mr. Johnson extended the maturity date of $25,000 of convertible debentures, due to our Chief Operating Officer and President, Stephen E. Johnson, originally issued in December 2008. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2018. The expiration date of the warrants associated with the debentures was also extended to April 1, 2018. On May 1, 2015 the Company paid $5,000 to our Chairman and Chief Technology Officer, Randall G. Smith in exchange for his outstanding convertible note in the same amount. On May 1, 2015 the Company and our former Director Guus van Kesteren extended the maturity date of $160,000 of convertible debentures to Mr. van Kesteren, originally issued in December 2008. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017. On May 7, 2015 the Company and our former Director, Matthew Veatch, extended the maturity date of $15,000 of convertible debentures originally issued to Mr. Veatch, in December 2008. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2018. The expiration date of the warrants associated with the debentures was also extended to April 1, 2018. On June 30, 2015, the Company and the lender agreed to extend the maturity date of $100,000 of convertible debentures to April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

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. On January 31, 2015 the Company and Mr. Wit extended the maturity date of $1,440,000 of the convertible debentures due to Mr. Wit to April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017. On April 1, 2015 the Company and the lenders extended the maturity date of $50,000 of convertible debentures, originally issued in December 2009. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2018. The expiration date of the warrants associated with the debentures was also extended to April 1, 2018.

 

The payments required at maturity under the Company’s outstanding convertible debt at June 30, 2015 are as follows:

 

2015		$	75,000
2016			-0-
2017			9,195,000
2018			390,000
Total		$	9,660,000

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

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 methods

 

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”). 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, 2015 and June 30, 2014.

 

The Company’s financial assets or liabilities subject to ASC 820 as of June 30, 2015 include the conversion feature and warrant liability associated with convertible debentures issued during 2008 and 2009 and the warrants issued during 2011, 2013, 2014 and 2015 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.

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(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, 2015 of the fair value of liabilities measured at fair value on a recurring basis follows:

 

		Fair value at				Quoted prices in active markets for identical assets/ liabilities				Significant other observable inputs				Significant unobservable inputs
		June 30, 2015				(Level 1)				(Level 2)				(Level 3)
Derivatives: (1) (2)
Conversion feature liability		$	1,954,155			$	-0-			$	-0-			$	1,954,155
Warrant liability			4,480,637				-0-				-0-				4,480,637
Total of derivative liabilities		$	6,434,792			$	-0-			$	-0-			$	6,434,792

 

(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 month period ended June 30, 2015

 

(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, 2015
Risk free interest rate			0.24%
Dividend yield			0.00%
Expected volatility			73.8% to 144.0%
Expected life (range in years)
Conversion feature liability			1.76 to 2.76
Warrant liability			0.51 to 2.76

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

A summary as of December 31, 2014 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
		2014				(Level 1)				(Level 2)				(Level 3)
Derivatives: (1) (2)
Conversion feature liability		$	2,944,402			$	-0-			$	-0-			$	2,944,402
Warrant liability			6,695,060				-0-				-0-				6,695,060
Total of derivative liabilities		$	9,639,462			$	-0-			$	-0-			$	9,639,462

 

(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, 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 December 31, 2014
Risk free interest rate			0.13%
Dividend yield			0.00%
Expected volatility			119.8% to 155.7%
Expected life (range in years)
Conversion feature liability			1.00 to 1.25
Warrant liability			1.00 to 2.25

 

A summary as of June 30, 2015 of the fair value of assets measured at fair value on a non-recurring basis follows:

 

		Carrying amount December 31,				Carrying amount				Quoted prices in active markets for identical assets/ liabilities				Significant other observable inputs				Significant unobservable inputs
		2014				June 30, 2015				(Level 1)				(Level 2)				(Level 3)
Acquired assets (3)
Promasys B.V. customer list (4)		$	110,948			$	98,437			$	-0-			$	-0-			$	136,253
Promasys B.V. software code (4)			55,842				48,558				-0-				-0-				72,943
Promasys B.V. URLs/website (4)			37,131				24,858				-0-				-0-				68,814
Total		$	203,921			$	171,853			$	-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.

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

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).

 

The table below presents the fair value of the Goodwill as of June 30, 2015 and December 31, 2014.

 

Fair Value Measurements
		June 30, 2015				December 31, 2014
(Level 3)
Goodwill		$	549,193			$	596,620

 

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 $47,427 change in the value of Goodwill during the six month period ended June 30, 2015 is the result of exchange rate variance.

 

The table below presents the unrealized gains for the six month periods ended June 30, 2015 and June 30, 2014.

 

		Other income
		For the six months ended
		June 30, 2015				June 30, 2014
The net amount of gains for the period included in earnings attributable to the unrealized gain from changes in derivative liabilities at the reporting date		$	4,072,798			$	2,802,571
Total unrealized gains included in earnings		$	4,072,798			$	2,802,571

 

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, 2015 and December 31, 2014. The tables reflect changes for all financial liabilities at fair value categorized as Level 3 as of June 30, 2015 and December 31, 2014.

 

		Level 3 financial liabilities at fair value
										Net unrealized
										gains/(losses)				Net
										relating to				purchases,
		Balance,								instruments				issuances				Net transfers				Balance,
For the six months ended		beginning				Net realized				held at the				and				in and/or out				end of
June 30, 2015		of year				gains/(losses)				reporting date				settlements				of Level 3				period
Derivatives:
Conversion feature liability		$	(2,944,402	)		$	-0-			$	990,247			$	-0-			$	-0-			$	(1,954,155	)
Warrant liability			(6,695,060	)			-0-				3,082,551				(868,128	)			-0-				(4,480,637	)
Total of derivative liabilities		$	(9,639,462	)		$	-0-			$	4,072,798			$	(868,128	)		$	-0-			$	(6,434,792	)

 

 

		Level 3 financial liabilities at fair value
										Net unrealized
										gains/(losses)				Net
										relating to				purchases,
		Balance,								instruments				issuances				Net transfers				Balance,
For the year ended		beginning				Net realized				held at the				and				in and/or out				end of
December 31, 2014		of year				gains/(losses)				reporting date				settlements				of Level 3				year
Derivatives:
Conversion feature liability		$	(3,126,206	)		$	-0-			$	181,804			$	-0-			$	-0-			$	(2,944,402	)
Warrant liability			(5,943,977	)			-0-				(122,997	)			(628,086	)			-0-				(6,695,060	)
Total of derivative liabilities		$	(9,070,183	)		$	-0-			$	58,807			$	(628,086	)		$	-0-			$	(9,639,462	)

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(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, 2015 are as follows:

 

2015		$	360,296
2016			504,222
2017			317,516
2018			244,026
2019			246,450
Thereafter			715,775
Total		$	2,388,285

 

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 $482,711 and $443,987 for the six month periods ended June 30, 2015 and June 30, 2014, respectively.

 

The Company’s Fort Lauderdale, Florida corporate office lease expires in 2022. 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 2016. 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, 2015, 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:

 

2015		$	337,500
2016			450,000
2017			450,000
Total		$	1,237,500

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

During the six month periods ended June 30, 2015 and June 30, 2014 the Company recorded a charge to earnings of $64,822 and $82,684 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, 2015 and June 30, 2014 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 May 1, 2015 the Company paid $5,000 to our Chairman and Chief Technology Officer, Randall G. Smith in exchange for an outstanding convertible note in the same amount. The note carried an interest rate of 12% and had a maturity date of 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 bear an interest rate of 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. On July 31, 2014 Mr. van Kesteren’s term on the Board of Directors ended. Effective on the same date, his convertible note in the amount of $150,000 was reclassified from Related Party to Non-Related Party.

 

As of June 30, 2015, we have an aggregate of $15,704,000 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. On January 31, 2015 the Company and Mr. Wit extended the maturity date of the $1,770,000 of convertible debentures to April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

●

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. As part of Amendment Number Two to Securities Purchase Agreement, Mr. Wit agreed to waive his rights to the granted Security Interest and for the release of the Collateral. On January 31, 2015 the Company and Mr. Wit extended the maturity date of the $4,475,000 of convertible debentures to April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

●

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. On January 31, 2015 the Company and Mr. Wit extended the maturity date of the $1,100,000 of convertible debentures to April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

●

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 January 31, 2015 the Company and Mr. Wit extended the maturity date of the $1,440,000 of convertible debentures to April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

  

●

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. The Promissory Note replaced the following Promissory Notes that had been previously issued:

 

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.

 

On April 1, 2013, the Company and Mr. Wit extended the maturity date of the promissory note to March 31, 2016. In December 2014, the outstanding principal was reduced by $6,879. On January 31, 2015 the Company and Mr. Wit extended the maturity date of the $2,860,000 promissory note to April 1, 2017. The expiration date of the warrants associated with the $2,860,000 promissory note was also extended to April 1, 2017.

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(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 carries an interest rate of 12% per annum and had a maturity date of January 1, 2015. On April 4, 2014, the Company and Mr. Wit extended the maturity date of the promissory note until April 1, 2017. The expiration date of the warrants associated with the promissory note was also extended to April 1, 2017. 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 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 had a maturity date of January 1, 2016. On January 31, 2015 the Company and Mr. Wit extended the maturity date of the promissory note until April 1, 2017. The expiration date of the warrants associated with the promissory note was also extended to April 1, 2017.

 

●

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 December 23, 2014, the Company issued a promissory note in the principal amount of $280,000 to Mr. Wit. The note carries an interest rate of 12% per annum and is due on April 1, 2017.

 

●

On January 31, 2015, the Company issued a promissory note in the principal amount of $950,000 and warrants to purchase 3,800,000 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 an existing promissory note in the amount of $280,000 and accrued interest in the amount of $670,000. 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 Cornelis F. Wit, our Chief Executive Officer and Director. On December 18, 2013 the Company renewed the line of credit and increased the available balance to $4,000,000. On February 3, 2015 the Company renewed the line of credit and increased the available balance to $5,000,000. Mr. Wit receives 2.0% interest on the assets pledged for the line of credit. The line of credit matures on February 2, 2018 and carries a variable interest rate based on the prime rate. At June 30, 2015, $5,000,000 was outstanding on the line of credit at an interest rate of 2.25%.

 

For the six month periods ended June 30, 2015 and June 30, 2014 we incurred $1,299,785 and $1,240,176, respectively, in interest expense payable to related parties.

 

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.

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited) 

 

As of June 30, 2015 we had the following outstanding securities:

 

o     92,845,102 shares of common stock issued and outstanding; 

o     52,263,517 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 share of our Series D Preferred Stock issued and outstanding; and 

o     $9,660,000 principal amount Convertible Debentures convertible into 24,610,000 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.

 

On July 31, 2014 we issued 1,400,000 restricted shares of our common stock to our senior management team and our Board of Directors under the 2009 Equity Incentive Plan of OmniComm Systems, Inc. (the “2009 Plan”). The restrictions on the shares lapse ratably over a 3 year period.

 

On October 31, 2014 a former director exercised stock options granted to the director during their term. As a result of the exercise, 57,143 common shares were issued to the individual.

 

On March 20, 2015 we issued 665,000 restricted shares of our common stock to our senior management team under the 2009 Plan. The restrictions on the shares lapse ratably over a 3 year period.

 

On March 31, 2015 a former employee exercised stock options granted to the employee during their employment. As a result of the exercise, 7,500 common shares were issued to the individual.

 

On April 29, 2015 an employee exercised stock options granted to the employee during their employment. As a result of the exercise, 5,800 common shares were issued to the individual.

 

On June 11, 2015 we issued 360,000 restricted shares of our common stock to our Board of Directors under the 2009 Plan. The restrictions on the shares lapse ratably over a 3 year period.

 

On June 15, 2015 an employee exercised stock options granted to the employee during their employment. As a result of the exercise, 225,000 common shares were issued to the individual.

 

On June 30, 2015 a former employee exercised stock options granted to the employee during their employment. As a result of the exercise, 20,000 common shares were issued to the individual.

 

The 2009 Plan is more fully described in “Note 14, Employee Equity Incentive Plans”.

 

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.

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited) 

 

The following table presents the cumulative arrearage of undeclared dividends by class of preferred stock as of June 30, 2015 and June 30, 2014, respectively, and the per share amount by class of preferred stock.

 

		Cumulative arrearage								Cumulative arrearage per share
		as of June 30,								as of June 30,
Series of preferred stock		2015				2014				2015				2014
Series A		$	2,688,984			$	2,482,722			$	0.65			$	0.60
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		$	4,770,964			$	4,564,702

 

The following table presents preferred dividends accreted for the six month periods ended June 30, 2015 and June 30, 2014, respectively, and the per share effect of the preferred dividends if their effect was not anti-dilutive.

 

		Dividends accreted								Dividends per share
		For the six months ended								For the six months ended
		June 30,								June 30,
		2015				2014				2015				2014
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, 2015 and December 31, 2014, and the related changes during these periods.

 

June 30, 2015

June 30, 2015

Warrants outstanding

Warrants exercisable

Number outstanding

Weighted average

Weighted average

Number exercisable

Weighted average

Range of exercise price

at June 30, 2015

remaining contractual life

exercise price

at June 30, 2015

exercise price

$0.25 – $0.60

52,263,517

1.78

$

0.34

52,263,517

$

0.34

 

 

December 31, 2014

December 31, 2014

Warrants outstanding

Warrants exercisable

Number outstanding

Weighted average

Weighted average

Number exercisable

Weighted average

Range of exercise price

at December 31, 2014

remaining contractual life

exercise price

at December 31, 2014

exercise price

$0.25 – $0.60

48,463,517

1.17

$

0.35

48,463,517

$

0.35

 

 

Warrants
Balance at December 31, 2013			44,728,873
Issued			3,920,000
Exercised			-0-
Expired/forfeited			(185,356	)
Balance at December 31, 2014			48,463,517
Issued			3,800,000
Exercised			-0-
Expired/forfeited			-0-
Balance at June 30, 2015			52,263,517
Warrants exercisable at June 30, 2015			52,263,517
Weighted average fair value of warrants granted during 2014		$	0.10
Weighted average fair value of warrants granted during 2015		$	0.10

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited) 

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, activity and ending balance of the components of accumulated other comprehensive (loss).

 

		Foreign currency translation				Accumulated other comprehensive (loss)
Balance at December 31, 2013		$	(87,604	)		$	(87,604	)
2014 Activity			(156,223	)			(156,223	)
Balance at December 31, 2014			(243,827	)			(243,827	)
2015 Activity			(83,531	)			(83,531	)
Balance at June 30, 2015		$	(327,358	)		$	(327,358	)

 

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. 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, 2015, there were 2,517,500 outstanding options and 3,650,000 restricted stock shares that have been granted under the 2009 Plan. At June 30, 2015, there were 931,057 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, 2015, there were 450,000 outstanding options that have been granted under the 1998 Plan.

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

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, 2013			5,745,000			$	0.29				1.70			$	93,945
Granted			150,000				0.16
Exercised			(150,000	)			0.13
Forfeited/cancelled/expired			(2,615,000	)			0.40
Outstanding at December 31, 2014			3,130,000				0.20				1.59			$	364,900
Granted			175,000				0.27
Exercised			(282,500	)			0.12
Forfeited/cancelled/expired			(505,000	)			0.25
Outstanding at June 30, 2015			2,517,500			$	0.21				1.59			$	125,800
Vested and exercisable at June 30, 2015			2,192,500			$	0.21				1.20			$	120,750

 

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, 2015.

 

The total number of shares vesting and the fair value of shares vesting for the six month periods ended June 30, 2015 and June 30, 2014, respectively, was:

 

Fair value of options vesting		Number of options vested				Fair value of options vested
For the six months ended June 30, 2015			125,000			$	22,235
For the six months ended June 30, 2014			433,334			$	50,845

 

Cash received from stock option exercises for the six month periods ended June 30, 2015 and June 30, 2014 was $27,250 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, 2015 and June 30, 2014.

 

The following table summarizes information concerning options outstanding at June 30, 2015:

 

Awards breakdown by price range at June 30, 2015
				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				1,792,500				1.57			$	0.13				1,642,500				1.37			$	0.13
	0.21 to 0.29				175,000				3.75				0.22				100,000				2.97				0.21
	0.30 to 0.49				100,000				4.68				0.30				-0-				0.00				0.00
	0.50 to 0.70				450,000				0.18				0.50				450,000				0.18				0.50
	0.00 to 0.70				2,517,500				1.59			$	0.21				2,192,500				1.20			$	0.21

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

The following table summarizes information concerning options outstanding at December 31, 2014:

 

Awards breakdown by price range at December 31, 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				2,080,000				1.98			$	0.13				1,855,000				1.72			$	0.12
	0.21 to 0.29				600,000				0.92				0.24				550,000				0.69				0.25
	0.30 to 0.49				-0-				0.00				0.00				-0-				0.00				0.00
	0.50 to 0.70				450,000				0.68				0.50				450,000				0.68				0.50
	0.00 to 0.70				3,130,000				1.59			$	0.20				2,855,000				1.35			$	0.21

 

The weighted average fair value (per share) of options granted during the six month period ended June 30, 2015 was $0.26 and $0.16 during the six month period ended June 30, 2014. 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.

 

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, 2015 and June 30, 2014.

 

		Stock option assumptions for the period ended
Stock option assumptions		June 30, 2015				December 31, 2014
Risk-free interest rate			0.98%				0.93%
Expected dividend yield			0.0%				0.0%
Expected volatility			192.2%				199.0%
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
For the six months ended June 30,		2015				2014
Stock options granted during the period		$	0.26			$	0.16
Stock options vested during the period		$	0.18			$	0.12
Stock options forfeited during the period		$	0.25			$	0.44

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2015 AND JUNE 30, 2014

(unaudited)

 

A summary of the status of the Company’s non-vested shares underlying stock options as of June 30, 2015, and changes during the six month period ended June 30, 2015 is as follows:

 

		Shares underlying stock options				Weighted average grant date fair value
Nonvested shares at January 1, 2015			275,000			$	0.17
Nonvested shares at June 30, 2015			325,000			$	0.22

 

As of June 30, 2015, approximately $51,910 of total unrecognized compensation cost related to unvested stock options is expected to be recognized over a weighted-average period of 1.4 years.

 

 

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 condensed 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 “EDC Software”), allow clinical trial sponsors and investigative sites to securely collect, validate, transmit and analyze clinical trial data.

 

In 2015, 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 and East Asia 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

  

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.  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 $1,355,783 and $1,417,358 on R&D activities during the six months ended June 30, 2015 and June 30, 2014, 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. Our R&D team is comprised of software programmers, engineers and related support personnel. 

 

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. 

 

 

We feel that the momentum established from new client acquisitions in 2014 and year to date 2015 and our ability to retain clients for repeat engagements provide a good operating base from which to build during the remainder of 2015.  We increased the marketing and business development budget for our TrialOne product during 2014 and the first six months of 2015 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. 

 

The six months ended June 30, 2015 compared with the six months ended June 30, 2014

 

Results of Operations

 

A summarized version of our results of operations for the six months ended June 30, 2015 and June 30, 2014 is included in the table below.

 

Summarized Statement of Operations
For the six months ended
June 30,
						% of								% of								%
		2015				Revenues				2014				Revenues				Change				Change
Total revenues		$	9,673,026							$	6,791,024							$	2,882,002				42.4	%
Cost of sales			2,401,545				24.8	%			1,831,050				27.0	%			570,495				31.2	%
Gross margin			7,271,481				75.2	%			4,959,974				73.0	%			2,311,507				46.6	%
Salaries, benefits and related taxes			5,542,217				57.3	%			5,228,311				77.0	%			313,906				6.0	%
Rent			482,711				5.0	%			443,987				6.5	%			38,724				8.7	%
Consulting			176,740				1.8	%			50,558				0.7	%			126,182				249.6	%
Legal and professional fees			218,128				2.3	%			199,897				2.9	%			18,231				9.1	%
Other expenses			678,965				7.0	%			729,513				10.7	%			(50,548	)			-6.9	%
Selling, general and administrative			827,607				8.6	%			592,972				8.7	%			234,635				39.6	%
Total operating expenses			7,926,368				82.0	%			7,245,238				106.5	%			681,130				9.4	%
Operating (loss)			(654,887	)			-6.8	%			(2,285,264	)			-33.7	%			1,630,377				-71.3	%
Interest expense			(1,445,682	)			-14.9	%			(1,346,908	)			-19.8	%			(98,774	)			7.3	%
Interest income			-0-				0.0	%			65				0.0	%			(65	)			-100.0	%
Change in derivatives			4,072,798				42.1	%			2,802,571				41.3	%			1,270,227				45.3	%
Transaction (loss)			(48,076	)			-0.5	%			(13,319	)			-0.2	%			(34,757	)			261.0	%
Income/(loss) before income taxes and dividends			1,924,153				19.9	%			(842,855	)			-12.4	%			2,767,008				-328.3	%
Income tax (expense)			(385	)			0.0	%			(33,961	)			-0.5	%			33,576				-98.9	%
Net Income/(loss)			1,923,768				19.9	%			(876,816	)			-12.9	%			2,800,584				-319.4	%
Total preferred stock dividends			(102,283	)			-1.1	%			(102,283	)			-1.5	%			-0-				0.0	%
Net Income/(loss) attributable to common stockholders		$	1,821,485				18.8	%		$	(979,099	)			-14.4	%		$	2,800,584				-286.0	%

 

 

The table below provides a comparison of our recognized revenues for the six months ended June 30, 2015 and June 30, 2014.

 

		For the six months ended
Revenue activity		June 30, 2015								June 30, 2014								$ Change				% Change
Set-up fees		$	2,882,153				29.7	%		$	1,943,854				28.6	%		$	938,299				48.3	%
Change orders			354,808				3.7	%			196,954				2.9	%			157,854				80.1	%
Maintenance			2,501,407				25.9	%			2,011,646				29.6	%			489,761				24.3	%
Software licenses			1,527,374				15.8	%			1,286,147				19.0	%			241,227				18.8	%
Professional services			1,924,967				19.9	%			952,805				14.0	%			972,162				102.0	%
Hosting			482,317				5.0	%			399,618				5.9	%			82,699				20.7	%
Total		$	9,673,026				100.0	%		$	6,791,024				100.0	%		$	2,882,002				42.4	%

 

Overall Revenue increased by $2,882,002 or 42.4%. This increase is primarily the result of increases in professional services, set-up fees and maintenance.

 

We recorded revenue of $6,560,021 including $2,882,153 from set-up fees and $1,569,012 from maintenance revenues associated with our TrialMaster suite during the six months ended June 30, 2015 compared with revenue of $4,735,464 that included $1,943,854 in set-up fees and $1,061,100 in maintenance revenues during the six months ended June 30, 2014.  

 

We recorded $936,943 in revenues associated with clients using the eClinical software application suite (“eClinical”) during the six months ended June 30, 2015 compared with $1,143,723 for the six months ended June 30, 2014.  eClinical revenues are primarily comprised of license subscriptions and revenues associated with our hosting and maintenance services.  

 

We recorded $130,217 in revenues from hosting activities and $91,850 in professional services associated with eClinical during the six months ended June 30, 2015 compared with $154,051 from hosting activities and $96,950 from professional services activities for the six months ended June 30, 2014.  Generally, these revenues are paid quarterly and are connected to hosting and client support for clients licensing that application. In addition we recorded $637,765 in revenues from maintenance relating to eClinical in the six months ending June 30, 2015 as compared to $717,072 for the six months ending June 30, 2014.

 

We recorded revenue of $1,832,597 including $698,729 from software licensing and $908,870 from professional services associated with clients utilizing our TrialOne EDC software for the six months ended June 30, 2015 compared with revenue of $377,610 including $79,167 from software licensing and $230,480 from professional services for the six months ended June 30, 2014.   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 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 $343,465 for the six months ended June 30, 2015 including $94,923 from software licensing and $179,832 from maintenance associated with clients utilizing the Promasys EDC solution as compared to revenue of $534,226 for the six months ended June 30, 2014 including $296,018 from software licensing and $211,062 from maintenance.

 

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 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 37% of our revenues during the six months ended June 30, 2015 and approximately 30% of our revenues during the six months ended June 30, 2014.  One customer accounted for approximately 13% of our revenues during the six months ended June 30, 2015.   One customer accounted for approximately 13% of our revenues the six months ended June 30, 2014. 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 31% or $570,495 for the six months ended June 30, 2015 as compared to the six months ended June 30, 2014.  Cost of goods sold were approximately 25% of revenues for the six months ended June 30, 2015 compared to approximately 27% for the six months ended June 30, 2014. 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, 2015 primarily 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.

 

Overall, total operating expenses increased approximately 9% for the six months ended June 30, 2015 when compared to the six months ended June 30, 2014.  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 and an increase in marketing expenses.

 

Salaries and related expenses were our biggest operating expense at 70% of total operating expenses for the six months ended June 30, 2015 compared to 72% of total operating expenses for the six months ended June 30, 2014.  Salaries and related expenses increased by 6% for the six months ended June 30, 2015 when compared to the same period ended June 30, 2014.  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, 2015				June 30, 2014				$ Change				% Change
OmniComm corporate operations		$	3,757,997			$	3,620,972			$	137,025				3.8	%
New Jersey operations office			502,225				289,850				212,375				73.3	%
OmniComm Europe, GmbH			350,828				404,340				(53,512	)			-13.2	%
OmniComm Ltd.			463,711				478,508				(14,797	)			-3.1	%
OmniComm Spain			73,008				74,764				(1,756	)			-2.3	%
OmniComm Promasys B.V.			277,528				282,337				(4,809	)			-1.7	%
Employee stock compensation			116,920				77,540				39,380				50.8	%
Total salaries and related expenses		$	5,542,217			$	5,228,311			$	313,906				6.0	%

 

As of June 30, 2015, we employed approximately 55 employees out of our Ft. Lauderdale, Florida Corporate Office (“Corporate Office”), 12 employees out of our New Jersey regional operating office, 20 out-of-state employees, 9 employees out of a wholly-owned subsidiary in the United Kingdom, 19 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, 2015 and the six months ended June 30, 2014 we incurred $116,920 and $77,540, 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 increased by approximately 9% during the six months ended June 30, 2015 when compared to the six months ended June 30, 2014.  The table below details the significant portions of our rent expense.  In particular, the increase in 2015 is primarily associated with an increase in our Co-location and disaster recovery facilities rent expense.  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 2016.  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 2022.  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, 2015 was a decrease in expense of $12,087 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 $5,443 for the six month period ending June 30, 2014.

 

For the six months ended
		June 30, 2015				June 30, 2014				$ Change				% Change
Corporate office		$	176,672			$	166,127			$	10,545				6.3	%
Co-location and disaster recovery facilities			212,188				164,369				47,819				29.1	%
New Jersey operations office			27,730				27,237				493				1.8	%
OmniComm Europe, GmbH			38,828				48,569				(9,741	)			-20.1	%
OmniComm Ltd.			32,534				34,661				(2,127	)			-6.1	%
OmniComm Spain			3,322				4,109				(787	)			-19.2	%
OmniComm Promasys B.V.			3,524				4,358				(834	)			-19.1	%
Straight-line rent expense			(12,087	)			(5,443	)			(6,644	)			-122.1	%
Total		$	482,711			$	443,987			$	38,724				8.7	%

 

 

Consulting services expense increased to $176,740 for the six months ended June 30, 2015 compared with $50,558 for the six months ended June 30, 2014. Consulting services are 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 six months of 2015 as we utilized the services of additional third-party sources for portions of our product development work.

 

For the six months ended
Expense Category		June 30, 2015				June 30, 2014				$ Change				% Change
Sales and marketing		$	-0-			$	-0-			$	-0-				n/a
Product development			176,740				50,558				126,182				249.6	%
Total		$	176,740			$	50,558			$	126,182				249.6	%

 

Legal and professional fees increased approximately 9% for the six months ended June 30, 2015 compared with the six months ended June 30, 2014. 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, 2015 and June 30, 2014, respectively.

 

For the six months ended
Expense Category		June 30, 2015				June 30, 2014				$ Change				% Change
Financial advisory		$	37,500			$	-0-			$	37,500			n/a
Audit and related			47,169				40,070				7,099				17.7	%
Accounting services			78,099				92,447				(14,348	)			-15.5	%
Legal-employment related			34,766				19,394				15,372				79.3	%
Legal-financial related			11,950				11,935				15				0.1	%
General legal			8,644				36,051				(27,407	)			-76.0	%
Total		$	218,128			$	199,897			$	18,231				9.1	%

 

 

Selling, general and administrative expenses (“SG&A”) increased by $234,635 or approximately 40% for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. 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 2014 we spent approximately $420,000 on marketing, sales and advertising. We expect that the 2015 marketing, sales and advertising expenses will be approximately $700,000 as we increase our attendance at tradeshows and our marketing efforts worldwide.

 

During the six month period ended June 30, 2015 we recognized a credit of $5,402 for bad debt as compared to $76,002 in bad debt expense for the six month period ended June 30, 2014.  This decrease was primarily the result of a decrease in aged receivable balances that enabled us to decrease our reserve. During the remainder of 2015 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 2015.

 

Interest expense was $1,445,682 during the six months ended June 30, 2015 compared to $1,346,908 for the six months ended June 30, 2014, an increase of $98,774.  Interest incurred to related parties was $1,299,785 during the six months ended June 30, 2015 and $1,240,176 for the six months ended June 30, 2014.  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 2008 and 2009 and relating to warrants issued during 2011, 2013, 2014 and 2015.  The table below provides detail on the significant components of interest expense for the six months ended June 30, 2015 and June 30, 2014.

 

Interest Expense
		For the six months ended
Debt Description		June 30, 2015				June 30, 2014				$ Change
Accretion of discount from derivatives		$	330,266			$	302,890			$	27,376
August 2008 convertible notes			95,211				95,211				-0-
December 2008 convertible notes			296,244				296,344				(100	)
September 2009 secured convertible debentures			71,408				71,408				-0-
December 2009 convertible debentures			88,665				88,665				-0-
General interest			104,330				79,062				25,268
Related party notes payable			459,558				413,328				46,230
Total		$	1,445,682			$	1,346,908			$	98,774

 

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 2014 and 2015 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 2008 and 2009 and warrants associated with promissory notes issued in 2011, 2013, 2014 and 2015.  We recorded a net unrealized gain of $4,072,798 during the six months ended June 30, 2015 compared with a net unrealized gain of $2,802,571 during the six months ended June 30, 2014.  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, 2015 and June 30, 2014 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, 2015, and June 30, 2014, respectively. The below table contains the cumulative arrearage for each series of preferred stock.

 

Series of Preferred Stock		Cumulative Arrearage
Series A		$	2,688,984
Series B			609,887
Series C			1,472,093
Total preferred stock arrearages		$	4,770,964

 

 

The three months ended June 30, 2015 compared with the three months ended June 30, 2014

 

Results of Operations

 

A summarized version of our results of operations for the three months ended June 30, 2015 and June 30, 2014 is included in the table below.

 

Summarized Statement of Operations
For the three months ended
June 30,
						% of								% of								%
		2015				Revenues				2014				Revenues				Change				Change
Total revenues		$	4,834,899							$	3,608,749							$	1,226,150				34.0%
Cost of sales			1,049,948				21.7%				967,775				26.8%				82,173				8.5%
Gross margin			3,784,951				78.3%				2,640,974				73.2%				1,143,977				43.3%
Salaries, benefits and related taxes			2,764,113				57.2%				2,538,236				70.3%				225,877				8.9%
Rent			227,480				4.7%				219,403				6.1%				8,077				3.7%
Consulting			81,311				1.7%				30,111				0.8%				51,200				170.0%
Legal and professional fees			98,592				2.0%				114,940				3.2%				(16,348	)			-14.2%
Other expenses			318,671				6.6%				376,652				10.4%				(57,981	)			-15.4%
Selling, general and administrative			467,786				9.7%				333,140				9.2%				134,646				40.4%
Total operating expenses			3,957,953				81.9%				3,612,482				100.0%				345,471				9.6%
Operating (loss)			(173,002	)			-3.6%				(971,508	)			-26.9%				798,506				-82.2%
Interest expense			(745,810	)			-15.4%				(628,945	)			-17.4%				(116,865	)			18.6%
Interest income			-0-				0.0%				18				0.0%				(18	)			-100.0%
Change in derivatives			5,590,517				115.6%				2,257,688				62.6%				3,332,829				147.6%
Transaction gain/(loss)			7,248				0.1%				(8,883	)			-0.2%				16,131				-181.6%
Income before income taxes and dividends			4,678,953				96.8%				648,370				18.0%				4,030,583				621.6%
Income tax (expense)			-0-				0.0%				(16,306	)			-0.5%				16,306				-100.0%
Net income			4,678,953				96.8%				632,064				17.5%				4,046,889				640.3%
Total preferred stock dividends			(51,424	)			-1.1%				(51,424	)			-1.4%				-0-				0.0%
Net income attributable to common stockholders		$	4,627,529				95.7%			$	580,640				16.1%			$	4,046,889				697.0%

 

 

The table below provides a comparison of our recognized revenues for the three months ended June 30, 2015 and June 30, 2014.

 

		For the three months ended
Revenue Activity		June 30, 2015								June 30, 2014								$ Change				% Change
Set-up fees		$	1,617,609				33.5	%		$	1,136,021				31.5	%		$	481,588				42.4	%
Change orders			212,767				4.4	%			83,866				2.3	%			128,901				153.7	%
Maintenance			1,269,530				26.3	%			1,052,015				29.2	%			217,515				20.7	%
Software licenses			786,437				16.3	%			618,830				17.1	%			167,607				27.1	%
Professional services			707,970				14.5	%			508,298				14.1	%			199,672				39.3	%
Hosting			240,586				5.0	%			209,719				5.8	%			30,867				14.7	%
Total		$	4,834,899				100.0	%		$	3,608,749				100.0	%		$	1,226,150				34.0	%

 

Overall Revenue increased by $1,226,150 or 34.0%. This increase is primarily the result of increases in professional services, set-up fees and maintenance.

 

We recorded revenue of $3,426,650 including $1,617,610 from set-up fees and $791,564 from maintenance revenues associated with our TrialMaster suite during the three months ended June 30, 2015 compared with revenue of $2,563,172 that included $1,136,020 in set-up fees and $559,749 in maintenance revenues during the three months ended June 30, 2014.  

 

We recorded $471,774 in revenues associated with clients using the eClinical software application suite (“eClinical”) during the three months ended June 30, 2015 compared with $523,527 for the three months ended June 30, 2014.  eClinical revenues are primarily comprised of license subscriptions and revenues associated with our hosting and maintenance services.  

 

We recorded $60,567 in revenues from hosting activities and $42,950 in professional services associated with eClinical during the three months ended June 30, 2015 compared with $68,652 from hosting activities and $42,000 from professional services activities for the three months ended June 30, 2014.  Generally, these revenues are paid quarterly and are connected to hosting and client support for clients licensing that application. In addition we recorded $334,161 in revenues from maintenance relating to eClinical in the three months ending June 30, 2015 as compared to $337,368 for the three months ending June 30, 2014.

 

We recorded revenue of $802,124 including $396,175 from software licensing and $293,205 from professional services associated with clients utilizing our TrialOne EDC software for the three months ended June 30, 2015 compared with revenue of $216,851 including $46,250 from software licensing and $134,100 from professional services for the three months ended June 30, 2014.   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 $134,351 for the three months ended June 30, 2015 including $41,648 from software licensing and $86,286 from maintenance associated with clients utilizing the Promasys EDC solution as compared to revenue of $305,199 for the three months ended June 30, 2014 including $136,080 from software licensing and $141,973 from maintenance.

 

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 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 36% of our revenues during the three months ended June 30, 2015 and approximately 30% of our revenues during the three months ended June 30, 2014.  One customer accounted for approximately 15% of our revenues during the three months ended June 30, 2015.   One customer accounted for approximately 14% of our revenues the three months ended June 30, 2014. 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 8.5% or $82,173 for the three months ended June 30, 2015 as compared to the three months ended June 30, 2014.  Cost of goods sold were approximately 22% of revenues for the three months ended June 30, 2015 compared to approximately 27% for the three months ended June 30, 2014. 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, 2015 primarily 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.

 

Overall, total operating expenses increased approximately 10% for the three months ended June 30, 2015 when compared to the three months ended June 30, 2014.  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 and an increase in marketing expenses.

 

Salaries and related expenses were our biggest operating expense at 70% of total operating expenses for the three months ended June 30, 2015 compared to 70% of total operating expenses for the three months ended June 30, 2014.  Salaries and related expenses increased by 9% for the three months ended June 30, 2015 when compared to the same period ended June 30, 2014.  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, 2015				June 30, 2014				$ Change				% Change
OmniComm corporate operations		$	1,866,269			$	1,712,626			$	153,643				9.0	%
New Jersey operations office			249,983				147,295				102,688				69.7	%
OmniComm Europe, GmbH			173,892				201,610				(27,718	)			-13.7	%
OmniComm Ltd.			232,035				249,131				(17,096	)			-6.9	%
OmniComm Spain			29,542				40,237				(10,695	)			-26.6	%
OmniComm Promasys B.V.			144,770				148,222				(3,452	)			-2.3	%
Employee stock compensation			67,622				39,115				28,507				72.9	%
Total salaries and related expenses		$	2,764,113			$	2,538,236			$	225,877				8.9	%

 

As of June 30, 2015, we employed approximately 55 employees out of our Ft. Lauderdale, Florida Corporate Office (“Corporate Office”), 12 employees out of our New Jersey regional operating office, 20 out-of-state employees, 9 employees out of a wholly-owned subsidiary in the United Kingdom, 19 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, 2015 and the three months ended June 30, 2014 we incurred $67,622 and $39,115, 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 increased by approximately 4% during the three months ended June 30, 2015 when compared to the three months ended June 30, 2014.  The table below details the significant portions of our rent expense.  In particular, the increase in 2015 is primarily associated with an increase in our Corporate office and Co-location and disaster recovery facilities rent expense.  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 2016.  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 2022.  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, 2015 was a decrease in expense of $5,902 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 $2,823 for the three month period ending June 30, 2014.

 

For the three months ended
		June 30, 2015				June 30, 2014				$ Change				% Change
Corporate office		$	90,562			$	81,068			$	9,494				11.7	%
Co-location and disaster recovery facilities			89,077				81,529				7,548				9.3	%
New Jersey operations office			13,969				13,865				104				0.8	%
OmniComm Europe, GmbH			19,388				23,646				(4,258	)			-18.0	%
OmniComm Ltd.			16,411				17,461				(1,050	)			-6.0	%
OmniComm Spain			2,197				2,056				141				6.9	%
OmniComm Promasys B.V.			1,778				2,601				(823	)			-31.6	%
Straight-line rent expense			(5,902	)			(2,823	)			(3,079	)			-109.1	%
Total		$	227,480			$	219,403			$	8,077				3.7	%

 

Consulting services expense increased to $81,311 for the three months ended June 30, 2015 compared with $30,111 for the three months ended June 30, 2014. Consulting services are 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 2015 as we utilized the services of additional third-party sources for portions of our product development work.

 

For the three months ended
Expense Category		June 30, 2015				June 30, 2014				$ Change				% Change
Sales and marketing		$	-0-			$	-0-			$	-0-			n/a
Product development			81,311				30,111				51,200				170.0	%
Total		$	81,311			$	30,111			$	51,200				170.0	%

 

Legal and professional fees decreased approximately 14% for the three months ended June 30, 2015 compared with the three months ended June 30, 2014. 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, 2015 and June 30, 2014, respectively.

 

 

For the three months ended
Expense Category		June 30, 2015				June 30, 2014				$ Change				% Change
Financial advisory		$	18,750			$	-0-			$	18,750			n/a
Audit and related			7,000				18,071				(11,071	)			-61.3	%
Accounting services			46,654				46,699				(45	)			-0.1	%
Legal-employment related			10,959				17,784				(6,825	)			-38.4	%
Legal-financial related			9,220				9,325				(105	)			-1.1	%
General legal			6,009				23,061				(17,052	)			-73.9	%
Total		$	98,592			$	114,940			$	(16,348	)			-14.2	%

 

Selling, general and administrative expenses (“SG&A”) increased by $134,646 or approximately 40% for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. 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 2014 we spent approximately $420,000 on marketing, sales and advertising. We expect that the 2015 marketing, sales and advertising expenses will be approximately $700,000 as we increase our attendance at tradeshows and our marketing efforts worldwide.

 

During the three month period ended June 30, 2015 we recognized bad debt expense of $14,972 as compared to $55,648 in bad debt expense for the three month period ended June 30, 2014.  This decrease was primarily the result of a decrease in aged receivable balances that enabled us to decrease our reserve. During the remainder of 2015 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 2015.

 

Interest expense was $745,810 during the three months ended June 30, 2015 compared to $628,945 for the three months ended June 30, 2014, an increase of $116,865.  Interest incurred to related parties was $672,649 during the three months ended June 30, 2015 and $573,558 for the three months ended June 30, 2014.  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 2008 and 2009 and relating to warrants issued during 2011, 2013, 2014 and 2015.  The table below provides detail on the significant components of interest expense for the three months ended June 30, 2015 and June 30, 2014.

 

Interest Expense
		For the three months ended
Debt Description		June 30, 2015				June 30, 2014				$ Change
Accretion of discount from derivatives		$	181,828			$	102,326			$	79,502
August 2008 convertible notes			47,869				47,869				-0-
December 2008 convertible notes			148,891				148,991				(100	)
September 2009 secured convertible debentures			35,901				35,901				-0-
December 2009 convertible debentures			44,577				44,577				-0-
General interest			53,785				41,475				12,310
Related party notes payable			232,959				207,806				25,153
Total		$	745,810			$	628,945			$	116,865

 

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 2014 and 2015 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 2008 and 2009 and warrants associated with promissory notes issued in 2011, 2013, 2014 and 2015.  We recorded a net unrealized gain of $5,590,517 during the three months ended June 30, 2015 compared with a net unrealized gain of $2,257,688 during the three months ended June 30, 2014.  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, 2015 and June 30, 2014 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, 2015, and June 30, 2014, respectively.

 

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, 2015, we had working capital deficit of approximately $11,707,379.

 

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

 

Liquidity and Capital Resources
Summarized Balance Sheet Disclosure
		June 30, 2015				December 31, 2014				$ Change
Cash		$	1,186,088			$	522,914			$	663,174
Accounts receivable, net of allowance for doubtful accounts			3,003,338				3,416,151				(412,813	)
Prepaid expenses			164,585				228,082				(63,497	)
Prepaid stock compensation, current portion			219,275				153,500				65,775
Other current assets			12,647				18,305				(5,658	)
Current assets			4,585,933				4,338,952				246,981
Accounts payable and accrued expenses			2,124,190				1,894,185				230,005
Patent litigation settlement liability, current portion			962,500				962,500				-0-
Deferred revenue, current portion			6,696,830				5,840,875				855,955
Line of credit			-0-				4,000,000				(4,000,000	)
Convertible notes payable, current portion, net of discount			75,000				75,000				-0-
Conversion feature liability, related parties			1,757,681				2,729,902				(972,221	)
Conversion feature liability			196,474				214,500				(18,026	)
Warrant liability, related parties			4,292,816				6,496,448				(2,203,632	)
Warrant liability			187,821				198,612				(10,791	)
Current liabilities			16,293,312				22,412,022				(6,118,710	)
Working capital (deficit)		$	(11,707,379	)		$	(18,073,070	)		$	6,365,691
Statement of Cash Flows Disclosure
		For the six months ended
		June 30, 2015				June 30, 2014
Net cash (used in) operating activities		$	(20,098	)		$	(739,075	)
Net cash (used in) investing activities			(298,489	)			(26,214	)
Net cash provided by financing activities			1,002,250				479,075
Net increase/(decrease) in cash and cash equivalents			663,174				(310,166	)
Changes in operating accounts			1,558,406				2,338,220
Effect of non-cash transactions on cash and cash equivalents		$	(3,502,272	)		$	(2,200,479	)

 

 

Cash and Cash Equivalents

 

Cash and cash equivalents increased by $663,174 to $1,186,088 at June 30, 2015. The increase is primarily comprised of a net gain of $1,923,768, changes in working capital accounts of $1,558,406 and a decrease from non-cash transactions of $3,502,272. During the six months ended June 30, 2015 we had investing activities comprised of net purchases of property and equipment of $298,489. For financing activities, we borrowed $1,000,000 against our revolving line of credit, paid off $25,000 of notes payable and received $27,250 from the exercise of stock options.

 

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 2015.  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, 2015:

 

Contractual obligation						Payments due by period
		Total				Less than 1 year				1-2 Years				2-3 Years				3+ Years
Promissory notes (1)		$	7,731,500			$	-0-			$	7,711,500	(2)		$	20,000	(3)		$	-0-
Convertible notes			9,660,000				75,000	(4)			9,195,000	(5)			390,000	(6)			-0-
Lines of credit (7)			5,000,000				-0-				-0-				5,000,000				-0-
Operating lease obligations (8)			2,388,285				684,904				344,920				273,808				1,084,653	(9)
Patent licensing fees (10)			1,637,500				962,500				450,000				225,000				-0-
Total		$	26,417,285			$	1,722,404			$	17,701,420			$	5,908,808			$	1,084,653

 

1.	Amounts do not include interest to be paid.
2.	Includes $420,000 of 10% notes payable that mature in April 2017 and $7,291,500 of 12% notes payable that mature in April 2017.
3.	Includes $20,000 of 12% notes payable that mature in April 2018.
4.	Includes $75,000 of 10% convertible notes currently in default and due that are convertible into shares of common stock at the option of of the holder at a conversion rate of $1.25 per share.
5.	Includes $1,920,000 in 10% convertible notes that mature in April 2017 and $7,275,000 in 12% convertible notes that mature in April 2017.
6.	Includes $390,000 in 12% convertible notes that mature in April 2018.
7.	Includes $5,000,000 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, Florida and Frankfurt, Germany, our R&D office in England, our office in Leiden, the Netherlands and our European headquarters in Bonn, Germany.
9.	Includes office lease obligations through 2022
10.	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 $195,968 on our 10% Convertible Notes that were issued in 1999. We were in default effective January 30, 2002.

 

On February 22, 2013 the Company and Mr. Smith extended the maturity date of $5,000 of convertible debentures, 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 May 1, 2015 the Company paid $5,000 to our Chairman and Chief Technology Officer, Randall G. Smith in exchange for his outstanding convertible note in the same amount.

  

On January 1, 2014, the Company issued a promissory note in the principal amount of $980,000 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.

 

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 the 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 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 April 4, 2014 the Company issued a promissory note in the amount of $137,500 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 April 21, 2014, the Company and our former Director, Guus van Kesteren, extended the maturity date of $150,000 of convertible debentures to April 1, 2016. The debentures bear interest at 10% per annum and were originally issued in August 2008. The expiration date of the warrants associated with the debentures was also extended to April 1, 2016. On July 31, 2014 Mr. van Kesteren’s term on the Board of Directors ended. Effective on the same date, his convertible note in the amount of $150,000 was reclassified from Related Party to Non-Related Party. On June 30, 2015 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, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

On April 28, 2014 the Company and the lender 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 April 1, 2016. The expiration date of the warrants associated with the debentures was also extended to April 1, 2016. On June 30, 2015, the Company and the lender extended the maturity date of the $100,000 of convertible debentures to April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

  

On December 1, 2014 the Company issued a promissory note in the amount of $300,000 and paid $8,561 in principal in exchange for the existing promissory note in the amount of $308,561. The promissory note carries an interest rate of 10% and has a maturity date of April 1, 2017.

 

On December 1, 2014 the Company issued a promissory note in the amount of $100,000 in exchange for accrued interest in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

On December 1, 2014 the Company issued a promissory note in the amount of $90,000 in exchange for accrued interest in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of April 1, 2017.

 

On December 17, 2014 the Company issued a promissory note in the amount of $20,000 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, 2016. On June 15, 2015 the Company paid $20,000 in exchange for the outstanding note payable.

 

On December 23, 2014, the Company issued a promissory note in the amount of $280,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note carries an interest rate of 12% per annum and is due on April 1, 2017.

 

On January 31, 2015 the Company and Mr. Wit extended the maturity date of $1,770,000 of convertible debentures, due 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 April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

On January 31, 2015 the Company and Mr. Wit extended the maturity date of $4,475,000 of convertible debentures, due to our Chief Executive Officer and Director, Cornelis F. Wit, originally issued in December 2008. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

On January 31, 2015 the Company and Mr. Wit extended the maturity date of $1,100,000 of convertible debentures, 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 April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

On January 31, 2015 the Company and Mr. Wit extended the maturity date of $1,440,000 of convertible debentures, 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 April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

On January 31, 2015 the Company issued a promissory note in the amount of $529,000 to our Chief Executive Officer and Director, Cornelis F. Wit, 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. The expiration date of the warrants associated with the promissory note was also extended to April 1, 2017.

 

On January 31, 2015 the Company issued a promissory note in the amount of $2,860,000 to Mr. 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 April 1, 2017. The expiration date of the warrants associated with the promissory note was also extended to April 1, 2017.

 

On January 31, 2015, the Company issued a promissory note in the principal amount of $950,000 to our Chief Executive Officer and Director, Cornelis F. Wit, in exchange for an existing promissory note in the amount of $280,000 and accrued interest in the amount of $670,000. The note carries an interest rate of 12% per annum and is due on April 1, 2017.

 

On April 1, 2015 the Company and the lender extended the maturity date of $100,000 of secured convertible debentures, originally issued in September 2009. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2018. The expiration date of the warrants associated with the debentures was also extended to April 1, 2018.

 

On April 1, 2015 the Company and the lenders extended the maturity date of $50,000 of convertible debentures, originally issued in December 2009. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2018. The expiration date of the warrants associated with the debentures was also extended to April 1, 2018.

 

On April 1, 2015 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 April 1, 2018.

 

On April 27, 2015, 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 April 1, 2018. The expiration date of the warrants associated with the debentures was also extended to April 1, 2018.

 

On April 30, 2015 the Company and Mr. Johnson extended the maturity date of $25,000 of convertible debentures, due to our Chief Operating Officer and President, Stephen E. Johnson, originally issued in December 2008. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2018. The expiration date of the warrants associated with the debentures was also extended to April 1, 2018.

 

On May 1, 2015 the Company and our former Director Guus van Kesteren extended the maturity date of $160,000 of convertible debentures, due to Mr. van Kesteren, originally issued in December 2008. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2017. The expiration date of the warrants associated with the debentures was also extended to April 1, 2017.

 

On May 7, 2015 the Company and our former Director, Matthew Veatch, extended the maturity date of $15,000 of convertible debentures originally issued to Mr. Veatch, in December 2008. The debentures carry an interest rate of 12% and have a maturity date of April 1, 2018. The expiration date of the warrants associated with the debentures was also extended to April 1, 2018.

 

During the next twelve months we expect debt in the aggregate amount of $75,000 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;

 

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.

 

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, 2015, 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, 2015 regarding our audited financial statements for the year ended December 31, 2014.

 

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.

 

 

 

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.

 

 

STOCK BASED COMPENSATION.

 

The Company accounts for its employee equity incentive plans under ASC 718, Compensation–Stock Compensation (“ASC 718”) 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 2015, we adopted the following new accounting pronouncements:

 

In May 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, (“ASU 2014-09”). 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.

 

In August 2014, FASB issued ASU No. 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”, (“ASU 2014-15”), which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. We believe the adoption of this guidance will not have a material effect on our 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, 2014 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, 2015, 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.

 

 

Changes in Internal Control 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, 2015 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, 2015, 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 

 

IF WE ARE REQUIRED TO REVISE OUR TREATMENT OF THE ANTI-DILUTION RIGHTS OF CERTAIN OF OUR PREFERRED STOCKHOLDERS, OUR OTHER STOCKHOLDERS MAY BE SUBJECT TO FURTHER DILUTION.

 

In connection with the potential conversion of certain shares of our 5% Series A Convertible Preferred Stock (“Series A Preferred Stock”) into shares of common stock, we, along with our independent registered public accountants, have been reviewing our financial records and corporate documents relating to our Series A Preferred Stock and later issuances of preferred stock, common stock, and derivative securities.  During the course of this review, it has come to our attention and the attention of our independent registered public accountants that the anti-dilution rights of the holders of our Series A Preferred Stock, as described in the Certificate of Designation for the Series A Preferred Stock (as amended), were triggered by past issuances of preferred stock, common stock, and derivative securities.  The nature and extent of those anti-dilution rights and the extent to which those anti-dilution rights may have been waived are, at the time of this filing, unclear.  Accordingly, we are engaging in further review and analysis of these issues and are working with our independent registered public accountants to determine the appropriate method of accounting for such issues in our future filings with the Securities and Exchange Commission.  While we believe that we have properly interpreted and accounted for these anti-dilution rights, it is possible that our further review and analysis of these issues could reveal that our interpretation or accounting treatment was incorrect and should be revised, which, in turn, could result in the issuance of a greater number of shares of common stock upon conversion of our Series A Preferred Stock than anticipated, a greater than anticipated dilutive effective on our existing stockholders, a decrease in the market price of our common stock, and other adverse consequences.  

 

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 

 

In connection with the potential conversion of certain shares of our 5% Series A Convertible Preferred Stock (“Series A Preferred Stock”) into shares of common stock, we, along with our independent registered public accountants, have been reviewing our financial records and corporate documents relating to our Series A Preferred Stock and later issuances of preferred stock, common stock, and derivative securities.  During the course of this review, it has come to our attention and the attention of our independent registered public accountants that the anti-dilution rights of the holders of our Series A Preferred Stock, as described in the Certificate of Designation for the Series A Preferred Stock (as amended), were triggered by past issuances of preferred stock, common stock, and derivative securities.  The nature and extent of those anti-dilution rights and the extent to which those anti-dilution rights may have been waived are, at the time of this filing, unclear.  Accordingly, we are engaging in further review and analysis of these issues and are working with our independent registered public accountants to determine the appropriate method of accounting for such issues in our future filings with the Securities and Exchange Commission.  

 

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
10.86*	August 2008 convertible note and warrants maturity date extension with Guus van Kesteren dated 6/30/2015
10.87*	December 2008 convertible note and warrants maturity date extension with Noesis International Holdings dated 6/30/2015
31.1*	Certification of Chief 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 Chief Financial 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 Chief Executive Officer and Chief 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

 

 

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, 2015

 

OMNICOMM SYSTEMS, INC.   By: /s/ Cornelis F. Wit Cornelis F. Wit, Chief Executive Officer (Principal Executive Officer)         By: /s/ Thomas E. Vickers Thomas E. Vickers, Chief Financial Officer (Principal Financial Officer)

 

 

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