Attached files

file filename
EX-3.11 - EXHIBIT 3.11 - OMNICOMM SYSTEMS INCex3-11.htm
EX-10.90 - EXHIBIT 10.90 - OMNICOMM SYSTEMS INCex10-90.htm
EX-10.89 - EXHIBIT 10.89 - OMNICOMM SYSTEMS INCex10-89.htm
EX-10.88 - EXHIBIT 10.88 - OMNICOMM SYSTEMS INCex10-88.htm
EX-10.96 - EXHIBIT 10.96 - OMNICOMM SYSTEMS INCex10-96.htm
EX-10.97 - EXHIBIT 10.97 - OMNICOMM SYSTEMS INCex10-97.htm
EX-10.93 - EXHIBIT 10.93 - OMNICOMM SYSTEMS INCex10-93.htm
EX-10.92 - EXHIBIT 10.92 - OMNICOMM SYSTEMS INCex10-92.htm
EX-10.94 - EXHIBIT 10.94 - OMNICOMM SYSTEMS INCex10-94.htm
EX-10.91 - EXHIBIT 10.91 - OMNICOMM SYSTEMS INCex10-91.htm
EX-10.98 - EXHIBIT 10.98 - OMNICOMM SYSTEMS INCex10-98.htm
EX-31.2 - EXHIBIT 31.2 - OMNICOMM SYSTEMS INCex31-2.htm
EX-32.1 - EXHIBIT 32.1 - OMNICOMM SYSTEMS INCex32-1.htm
EX-31.1 - EXHIBIT 31.1 - OMNICOMM SYSTEMS INCex31-1.htm
EX-10.95 - EXHIBIT 10.95 - OMNICOMM SYSTEMS INCex10-95.htm

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________

FORM 10-Q

[Mark One]

 

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 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 November 12, 2015: 92,730,060 common stock $.001 par value.

 

 
1

 

 

Table of Contents to the Quarterly Report on Form 10-Q for the Nine month period ended September 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

56

   

ITEM 4. CONTROLS AND PROCEDURES

57

   

PART II. OTHER INFORMATION

57

   

ITEM 1. LEGAL PROCEEDINGS

57

   

ITEM 1A. RISK FACTORS

57

   

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

57

   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

57

   

ITEM 4. MINE SAFETY DISCLOSURES

57

   

ITEM 5. OTHER INFORMATION

57

   

ITEM 6. EXHIBITS

58

   

SIGNATURES

59

Exhibit 31.1*

 

Exhibit 31.2*

 

EXHIBIT 32.1**

 

   

Exhibit 101.SCH     

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

Exhibit 101.DEF     

XBRL Taxonomy Extension Definition Document*  

Exhibit 101.LAB     

XBRL Taxonomy Extension Label Document*  

Exhibit 101.PRE     

XBRL Taxonomy Extension Presentation Document*  

 

* Filed herewith

** Furnished herewith

 

 
2

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

September 30, 2015

   

December 31, 2014

 
   

(unaudited)

         

ASSETS

               
                 

CURRENT ASSETS

               

Cash

  $ 800,386     $ 522,914  

Accounts receivable, net of allowance for doubtful accounts of $89,447 and $186,085, respectively

    3,715,510       3,416,151  

Prepaid expenses

    494,864       228,082  

Prepaid stock compensation, current portion

    197,233       153,500  

Other current assets

    15,485       18,305  

Total current assets

    5,223,478       4,338,952  

Property and equipment, net

    622,499       468,136  

Other assets

               

Intangible assets, net

    161,951       203,921  

Goodwill

    550,352       596,620  

Prepaid stock compensation

    191,525       146,653  

Other assets

    47,358       49,092  
                 

TOTAL ASSETS

  $ 6,797,163     $ 5,803,374  
                 

LIABILITIES AND SHAREHOLDERS' (DEFICIT)

               
                 

CURRENT LIABILITIES

               

Accounts payable and accrued expenses

  $ 2,251,058     $ 1,894,185  

Deferred revenue, current portion

    6,670,335       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

    1,089,106       2,729,902  

Conversion feature liability

    138,559       214,500  

Warrant liability, related parties

    2,859,288       6,496,448  

Warrant liability

    129,841       198,612  

Total current liabilities

    14,175,687       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 $924,242 and $568,209, respectively

    6,014,758       5,700,791  

Notes payable, long term, net of current portion

    792,500       812,500  

Deferred revenue, long term, net of current portion

    1,913,984       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

    425,937       669,825  
                 

TOTAL LIABILITIES

    37,907,866       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, 92,780,062 and 91,561,802 issued and outstanding, respectively, at $0.001 par value

    92,780       91,562  

Additional paid in capital - preferred

    4,717,804       4,717,804  

Additional paid in capital - common

    37,930,809       37,634,555  

Accumulated other comprehensive (loss)

    (331,797 )     (243,827 )

Accumulated deficit

    (73,524,674 )     (77,979,301 )
                 

TOTAL SHAREHOLDERS' (DEFICIT)

    (31,110,703 )     (35,774,832 )
                 

TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT)

  $ 6,797,163     $ 5,803,374  

 

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

 

 
3

 

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   

For the nine months ended

   

For the three months ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Revenues

  $ 14,691,082     $ 11,554,553     $ 5,515,468     $ 4,943,015  

Reimbursable revenues

    579,813       361,160       82,401       181,674  

Total revenues

    15,270,895       11,915,713       5,597,869       5,124,689  
                                 

Cost of goods sold

    2,916,171       2,341,107       947,096       773,948  

Reimbursable expenses-cost of goods sold

    505,747       629,344       73,277       365,453  

Total cost of sales

    3,421,918       2,970,451       1,020,373       1,139,401  
                                 

Gross margin

    11,848,977       8,945,262       4,577,496       3,985,288  
                                 

Operating expenses

                               

Salaries, benefits and related taxes

    8,138,709       7,954,833       2,596,492       2,726,522  

Rent and occupancy expenses

    723,712       663,961       241,001       219,974  

Consulting services

    226,094       60,669       49,354       10,111  

Legal and professional fees

    329,664       277,262       111,536       77,365  

Travel

    616,199       595,571       144,529       178,211  

Telephone and internet

    124,571       142,554       40,616       52,063  

Selling, general and administrative

    1,084,103       892,912       256,496       299,940  

Bad debt expense

    (15,038 )     76,634       (9,636 )     632  

Depreciation expense

    171,535       181,520       63,030       59,087  

Amortization expense

    30,376       34,549       10,139       11,322  

Total operating expenses

    11,429,925       10,880,465       3,503,557       3,635,227  
                                 

Operating income/(loss)

    419,052       (1,935,203 )     1,073,939       350,061  
                                 

Other income/(expense)

                               

Interest expense, related parties

    (1,977,778 )     (1,818,911 )     (677,993 )     (578,735 )

Interest expense

    (220,472 )     (160,968 )     (74,575 )     (54,236 )

Interest income

    3       77       3       12  

Change in derivative liabilities

    6,290,796       4,410,241       2,217,998       1,607,670  

Transaction (loss)

    (53,019 )     (54,915 )     (4,943 )     (41,596 )

Income before income taxes

    4,458,582       440,321       2,534,429       1,283,176  

Income tax (expense)

    (3,955 )     (35,407 )     (3,570 )     (1,446 )

Net income

    4,454,627       404,914       2,530,859       1,281,730  

Preferred stock dividends

                               

Preferred stock dividends in arrears

                               

Series A preferred

    (154,272 )     (154,272 )     (51,989 )     (51,989 )

Total preferred stock dividends

    (154,272 )     (154,272 )     (51,989 )     (51,989 )
                                 

Net income attributable to common stockholders

  $ 4,300,355     $ 250,642     $ 2,478,870     $ 1,229,741  
                                 

Net income per share

                               

Basic

  $ 0.05     $ 0.00     $ 0.03     $ 0.01  

Diluted

  $ 0.03     $ 0.00     $ 0.02     $ 0.01  

Weighted average number of shares outstanding

                               

Basic

    92,226,109       90,417,480       92,791,461       91,032,920  

Diluted

    117,887,057       115,588,656       118,022,461       116,069,694  

  

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

 

 
4

 

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(unaudited)

 

   

For the nine months ended

   

For the three months ended

 
   

September 30,

   

September 30,

 
                         
   

2015

   

2014

   

2015

   

2014

 
                                 

Net income attributable to common stockholders

  $ 4,300,355     $ 250,642     $ 2,478,870     $ 1,229,741  
                                 

Other comprehensive (loss)

                               

Change in foreign currency translation adjustment

    (87,970 )     (110,839 )     (4,439 )     (86,887 )
                                 

Other comprehensive (loss)

    (87,970 )     (110,839 )     (4,439 )     (86,887 )
                                 

Comprehensive income

  $ 4,212,385     $ 139,803     $ 2,474,431     $ 1,142,854  

 

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

 

 
5

 

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)

FOR THE YEAR ENDED DECEMBER 31, 2014 AND THE NINE MONTHS ENDED SEPTEMBER 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

         
   

Number

of shares

   

$0.001

Par value

   

Number

of shares

   

$0.001

Par value

   

Number

of shares

   

$0.001

Par value

   

Number

of shares

   

$0.001

Par value

   

paid in

capital

preferred

   

Number

of shares

   

$0.001

Par value

   

paid in

capital

common

   

Accumulated

deficit

   

other

comprehensive

income

   

Total

shareholders'

(deficit)

 
                                                                                                                         

Balances at December 31, 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

                                                                                            33,772                       33,772  
                                                                                                                         

Foreign currency translation adjustment

                                                                                                            (87,970 )     (87,970 )
                                                                                                                         

Restricted stock issuance/forfeiture

                                                                            958,332       958       235,492                       236,450  
                                                                                                                         

Issuance of common stock, stock option exercise

                                                                            252,500       253       26,997                       27,250  
                                                                                                                         

Cashless issuance of common stock, stock option exercise

                                                                            7,428       7       (7 )                     -0-  
                                                                                                                         

Net income for period ended September 30, 2015

    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       4,454,627       -0-       4,454,627  
                                                                                                                         

Balances at September 30, 2015

    4,125,224     $ 4,125       -0-     $ -0-       -0-     $ -0-       250,000     $ 250     $ 4,717,804       92,780,062     $ 92,780     $ 37,930,809     $ (73,524,674 )   $ (331,797 )   $ (31,110,703 )

 

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

 

 
6

 

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   

For the nine months ended

 
   

September 30,

 
   

2015

   

2014

 
                 

CASH FLOWS FROM OPERATING ACTIVITIES

               

Net income

  $ 4,454,627     $ 404,914  

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

               

Change in derivative liabilities

    (6,290,796 )     (4,410,241 )

Interest expense from derivative instruments

    512,094       405,216  

Employee stock compensation

    181,617       122,630  

Provision for doubtful accounts

    (15,038 )     76,634  

Depreciation and amortization

    201,911       216,069  

Changes in operating assets and liabilities

               

Accounts receivable

    (284,321 )     (1,364,149 )

Prepaid expenses

    (266,782 )     (69,257 )

Other current assets

    2,820       (16,138 )

Other assets

    1,734       32,159  

Accounts payable and accrued expenses

    1,026,873       695,548  

Patent settlement liability

    (243,888 )     (216,692 )

Deferred revenue

    350,376       3,981,425  

Net cash (used in) operating activities

    (368,773 )     (141,882 )
                 

CASH FLOWS FROM INVESTING ACTIVITIES

               

Purchase of property and equipment

    (330,094 )     (67,674 )

Net cash (used in) investing activities

    (330,094 )     (67,674 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES

               

Repayments of notes payable

    (25,000 )     (20,925 )

Proceeds from revolving line of credit

    1,000,000       200,000  

Proceeds from exercise of stock options

    27,250       -0-  

Net cash provided by financing activities

    1,002,250       179,075  
                 

Effect of exchange rate changes on fixed and intangible assets

    62,059       -0-  

Effect of exchange rate changes on cash and cash equivalents

    (87,970 )     (36,557 )

Net increase/(decrease) in cash and cash equivalents

    277,472       (67,038 )

Cash and cash equivalents at beginning of period

    522,914       1,160,720  
                 

Cash and cash equivalents at end of period

  $ 800,386     $ 1,093,682  
                 

Supplemental disclosures of cash flow information:

               

Cash paid during the period for:

               

Income taxes

  $ 899     $ 35,264  

Interest

  $ 957,120     $ 1,114,666  
                 

Non-cash transactions:

               

Notes payable issued in exchange for existing notes payable

  $ 13,274,000     $ 1,902,500  

Promissory notes issued for accrued interest

  $ 670,000     $ 980,000  

Restricted stock issuance

  $ 236,450     $ 238,000  

 

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

 

 
7

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 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 and Europe as well as in 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 nine month periods ended September 30, 2015 and September 30, 2014 we spent approximately $2,018,638 and $2,092,125, 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 nine month period ended September 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.

 

 
8

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 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 $87,970 and $110,839 for the nine month periods ended September 30, 2015 and September 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.

 

 
9

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 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.

 

 
10

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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

 

   

For the nine months ended

 

Revenue activity

 

September 30, 2015

   

September 30, 2014

 

Set-up fees

  $ 4,930,454     $ 3,363,576  

Change orders

    592,283       337,903  

Maintenance

    3,859,908       3,187,173  

Software licenses

    2,782,117       2,730,770  

Professional services

    2,369,062       1,700,498  

Hosting

    737,071       595,793  

Total

  $ 15,270,895     $ 11,915,713  


   

For the three months ended

 

Revenue activity

 

September 30, 2015

   

September 30, 2014

 

Set-up fees

  $ 2,048,301     $ 1,419,722  

Change orders

    237,475       140,949  

Maintenance

    1,358,501       1,175,527  

Software licenses

    1,254,743       1,444,623  

Professional services

    444,095       747,693  

Hosting

    254,754       196,175  

Total

  $ 5,597,869     $ 5,124,689  
 

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 $89,447 as of September 30, 2015 and $186,085 as of December 31, 2014, respectively.

 

 
11

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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

 

   

September 30, 2015

   

December 31, 2014

 

Beginning of period

  $ 186,085     $ 65,341  

Bad debt expense

    (15,038 )     147,543  

Write-offs

    (81,600 )     (26,875 )

Exchange rate impact

    -0-       76  

End of period

  $ 89,447     $ 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 September 30, 2015, $503,022 was deposited in excess of FDIC-insured limits. Management believes the risk in these situations to be minimal.

 

Except as follows, the Company has no significant off-balance-sheet risk or credit risk concentrations. Financial instruments that subject the Company to potential credit risks are principally cash equivalents and accounts receivable. Concentrated credit risk with respect to accounts receivable is limited to creditworthy customers. The Company's customers are principally located in the United States and Europe as well as in 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 September 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 September 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 15% of our revenues during the nine month period ended September 30, 2015 or approximately $2,232,000. One customer accounted for 13% of our revenues during the nine month period ended September 30, 2014 or approximately $1,585,000. 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

 

September 30, 2015

    1       15 %     2       30 %

December 31, 2014

    1       15 %     1       18 %

September 30, 2014

    1       13 %     0       0 %

 

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

 

 

European revenues

 
 

For the nine months ended

 
 

September 30, 2015

   

September 30, 2014

 
 

European revenues

   

% of Total revenues

   

European revenues

   

% of Total revenues

 
  $1,546,945     10%     $1,750,331     15%  

 

 
12

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 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”).

 

 
13

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 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 September 30, 2015, the Company had $8,584,319 in deferred revenues relating to contracts for services to be performed over periods ranging from one month to 5.6 years. The Company had $6,670,335 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 $513,754 and $338,486 for the nine month periods ended September 30, 2015 and September 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 nine month periods ended September 30, 2015 and September 30, 2014 we spent approximately $2,018,638 and $2,092,125 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.

 

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.

 

 
14

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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 nine months of 2015, we adopted the following new accounting pronouncements:

 

In May 2014, FASB issued Accounting Standards Update (“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 was to be effective for annual reporting periods beginning after December 15, 2016 and early adoption was not permitted. In August 2015, FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”, (“ASU 2015-14”), which defers the effective date by one year while providing the option to adopt the standard on the original effective date. Accordingly, the Company may adopt the standard either in its first quarter of 2017 or its first quarter of 2018 and it can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoptionManagement is currently evaluating the timing for the adoption of ASU 2014-09, which transition approach to use and the impact of the adoption of ASU 2014-09 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.

 

In June 2015, FASB issued ASU No. 2015-10, “Technical Corrections and Improvements”, (“ASU 2015-10”). This ASU covers a wide range of Topics in the Codification.  The amendments represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, some of the amendments will make the Codification easier to understand and easier to apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. Transition guidance varies based on the amendments in this ASU. The amendments in this ASU that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this ASU. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

In September 2015, FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”, (“ASU 2015-16”). This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not been issued. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not yet been made available for issuance. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

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.

 

 
15

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 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 September 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 92,266,109 and 90,417,480 for the nine month periods ended September 30, 2015 and September 30, 2014, respectively.

 

The outstanding share balance as of September 30, 2015 and September 30, 2014, respectively, includes 2,316,688 and 2,216,674 restricted shares that have been issued but are still at risk of forfeiture as the restrictions have not lapsed.

 

Antidilutive shares of 57,202,465 and 55,012,649 have been omitted from the calculation of dilutive earnings/(loss) per share for the nine month periods ended September 30, 2015 and September 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 September 30, 2015 and September 30, 2014, respectively.

 

Anti-dilutive security

 

September 30, 2015

   

September 30, 2014

 

Preferred stock

    3,716,418       2,750,149  

Employee stock options

    175,000       2,741,500  

Warrants

    52,263,517       48,463,517  

Shares issuable for accrued interest

    1,047,530       1,057,483  

Total

    57,202,465       55,012,649  

 

The employee stock options are exercisable at prices ranging from $0.17 to $0.64 per share. The exercise prices on the warrants range from $0.25 to $0.60 per share. Shares issuable upon conversion of Convertible Debentures or accrued interest have conversion prices ranging from $0.25 to $0.50 per share.

 

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.

 

 
16

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

   

For the nine months ended

 
   

September 30, 2015

   

September 30, 2014

 
   

Income/(loss)

   

Shares

   

Per-share

   

Income/(loss)

   

Shares

   

Per-share

 
   

numerator

   

denominator

   

amount

   

numerator

   

denominator

   

amount

 

Basic EPS

  $ 4,300,355       92,266,109     $ 0.05     $ 250,642       90,417,480     $ 0.00  
                                                 

Effect of dilutive securities

    (878,593 )     25,620,948       (0.03 )     (755,221 )     25,171,176       (0.03 )
                                                 

Diluted EPS

  $ 3,421,762       117,887,057     $ 0.03     $ (504,579 )     115,588,656     $ 0.00  

 

   

For the three months ended

 
   

September 30, 2015

   

September 30, 2014

 
   

Income/(loss)

   

Shares

   

Per-share

   

Income/(loss)

   

Shares

   

Per-share

 
   

numerator

   

denominator

   

amount

   

numerator

   

denominator

   

amount

 

Basic EPS

  $ 2,478,870       92,791,461     $ 0.03     $ 1,229,741       91,032,920     $ 0.01  
                                                 

Effect of dilutive securities

    (444,365 )     25,231,000       (0.02 )     (336,805 )     25,036,774       (0.01 )
                                                 

Diluted EPS

  $ 2,034,505       118,022,461     $ 0.02     $ 892,936       116,069,694     $ 0.01  

 

NOTE 5:

PROPERTY AND EQUIPMENT, NET

 

Property and equipment consists of the following:

 

   

September 30, 2015

   

December 31, 2014

         
   

Cost

   

Accumulated depreciation

   

Net book value

   

Cost

   

Accumulated depreciation

   

Net book value

   

Estimated useful life (years)

 

Computer & office equipment

  $ 1,932,768     $ 1,575,441     $ 357,327     $ 1,880,183     $ 1,482,737     $ 397,446       5  

Leasehold improvements

    91,846       85,710       6,136       92,504       82,353       10,151       5  

Computer software

    1,848,773       1,595,967       252,806       1,580,640       1,528,418       52,222       3  

Office furniture

    112,067       105,837       6,230       113,365       105,048       8,317       5  

Total

  $ 3,985,454     $ 3,362,955     $ 622,499     $ 3,666,692     $ 3,198,556     $ 468,136          

 

Depreciation expense for the nine month periods ended September 30, 2015 and September 30, 2014 was $171,535 and $181,520, respectively.

 

 
17

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

NOTE 6:

INTANGIBLE ASSETS, AT COST

 

Intangible assets consist of the following:

 

   

September 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

    110,975       14,180       96,795       120,305       9,357       110,948       15  

Promasys B.V. software code

    72,837       27,921       44,916       72,837       16,995       55,842       5  

Promasys B.V. URLs/Website

    56,048       35,808       20,240       60,760       23,629       37,131       3  

Total

  $ 1,632,561     $ 1,470,610     $ 161,951     $ 1,646,603     $ 1,442,682     $ 203,921          

 

Amortization expense was $30,376 and $34,549 for the nine month periods ended September 30, 2015 and September 30, 2014, respectively.

 

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

 

2015

  $ 10,162  

2016

    37,535  

2017

    21,966  

2018

    19,538  

2019

    7,398  

Thereafter

    65,352  

Total

  $ 161,951  

 

NOTE 7:

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consist of the following:

 

Account

 

September 30, 2015

   

December 31, 2014

 

Accounts payable

  $ 508,457     $ 613,584  

Accrued payroll and related costs

    739,431       319,629  

Other accrued expenses

    77,107       85,248  

Accrued interest

    926,063       875,724  

Total accounts payable and accrued expenses

  $ 2,251,058     $ 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 September 30, 2015, $5,000,000 was outstanding on the Line of Credit at an interest rate of 2.25%.

 

 
18

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

At September 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

   

September 30, 2015

   

Current

   

term

   

Current

   

term

 

1/1/2014

 

1/1/2019

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

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-  

4/4/2014

 

1/1/2019

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

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

 

1/1/2019

    12%       2,860,000       -0-       -0-       -0-       2,860,000  

1/31/2015

 

1/1/2019

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

1/31/2015

 

1/1/2019

    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-       (924,242 )

Total

          $ 7,731,500     $ -0-     $ 792,500     $ -0-     $ 6,014,758  

 

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

   

Non related party

   

Related party

 

Origination

 

Maturity

 

Interest

   

principal

           

Long

           

Long

 

date

 

date

 

rate

   

December 31, 2014

   

Current

   

term

   

Current

   

term

 

1/1/2013

 

1/1/2016

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

2/1/2013

 

1/1/2016

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

4/1/2013

 

3/31/2016

    12%       2,860,000       -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 has a maturity date of 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.

 

 
19

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 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 promissory 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.

 

 
20

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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.

 

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.

 

See Note 15: Subsequent Events

 

NOTE 9:

CONVERTIBLE NOTES PAYABLE

 

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

 

                                      Discount     Carrying     Carrying amount  
                    Principal at           Total     at     amount at     Short term     Long term  

Date of issuance

 

Maturity 

date

 

Interest rate

   

Original

principal

   

September 30, 2015

   

Allocated

 discount

   

discount

amortized

   

September 30, 2015

   

September 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.

 

                                             

Discount

   

Carrying

   

Carrying amount

 
                   

Principal 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  

 

 
21

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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 September 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 $122,858 of accrued interest at September 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, to 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.

 

 
22

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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

 

 
23

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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

 

2015

  $ 75,000  

2016

    -0-  

2017

    9,195,000  

2018

    390,000  

Total

  $ 9,660,000  

 

 

NOTE 10:

FAIR VALUE MEASUREMENT

 

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

 

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

 

 

·

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

 

 

·

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

 

 

·

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

 

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

 

 

A.

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

 

 

B.

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

 

 

C.

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

 

 
24

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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 nine month periods ended September 30, 2015 and September 30, 2014.

 

The Company’s financial assets or liabilities subject to ASC 820 as of September 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.

 

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 September 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

 
   

September 30, 2015

   

(Level 1)

   

(Level 2)

   

(Level 3)

 
                                 

Derivatives: (1) (2)

                               

Conversion feature liability

  $ 1,227,665     $ -0-     $ -0-     $ 1,227,665  

Warrant liability

    2,989,129       -0-       -0-       2,989,129  

Total of derivative liabilities

  $ 4,216,794     $ -0-     $ -0-     $ 4,216,794  

 

(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 nine month period ended September 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 September 30, 2015

 

Risk free interest rate

    0.38%    

Dividend yield

    0.00%     

Expected volatility

  84.5% to 115.6 %

Expected life (range in years)

         

Conversion feature liability

  1.50 to 2.50  

Warrant liability

  0.25 to 2.50  

 

 
25

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 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

   

Quoted prices in active markets for identical assets/ liabilities

   

Significant other observable inputs

   

Significant unobservable inputs

 
   

December 31, 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 September 30, 2015 of the fair value of assets measured at fair value on a non-recurring basis follows:

 

   

Carrying amount

   

Carrying amount

   

Quoted prices in active markets for identical assets/ liabilities

   

Significant other observable inputs

   

Significant unobservable inputs

 
   

December 31, 2014

   

September 30, 2015

   

(Level 1)

   

(Level 2)

   

(Level 3)

 
                                         

Acquired assets (3)

                                       

Promasys B.V. customer list (4)

  $ 110,948     $ 96,795     $ -0-     $ -0-     $ 136,253  

Promasys B.V. software code (4)

    55,842       44,916       -0-       -0-       72,943  

Promasys B.V. URLs/website (4)

    37,131       20,240       -0-       -0-       68,814  

Total

  $ 203,921     $ 161,951     $ -0-     $ -0-     $ 278,010  

 

(3) The fair value of the acquired assets was estimated using the Income Approach with a discounted cash flow valuation methodology applied.

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

 

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

 

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

 

 
26

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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

 

Fair Value Measurements

 
                 
   

September 30, 2015

   

December 31, 2014

 

(Level 3)

               

Goodwill

  $ 550,352     $ 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 $46,268 change in the value of Goodwill during the nine month period ended September 30, 2015 is the result of exchange rate variance.

 

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

 

   

Other income

 
   

For the nine months ended

 
   

September 30, 2015

   

September 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

  $ 6,290,796     $ 4,410,241  
                 

Total unrealized gains included in earnings

  $ 6,290,796     $ 4,410,241  

 

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

 

beginning

   

Net realized

   

held at the

   

and

   

in and/or out

   

end of

 

September 30, 2015

 

of year

   

gains/(losses)

   

reporting date

   

settlements

   

of Level 3

   

period

 

Derivatives:

                                               

Conversion feature liability

  $ (2,944,402 )   $ -0-     $ 1,716,737     $ -0-     $ -0-     $ (1,227,665 )

Warrant liability

    (6,695,060 )     -0-       4,574,059       (868,128 )     -0-       (2,989,129 )

Total of derivative liabilities

  $ (9,639,462 )   $ -0-     $ 6,290,796     $ (868,128 )   $ -0-     $ (4,216,794 )

 

 
27

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

   

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 )
 

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 September 30, 2015 are as follows:

 

2015

  $ 183,651  

2016

    502,369  

2017

    316,069  

2018

    244,035  

2019

    246,450  

Thereafter

    715,775  

Total

  $ 2,208,349  

  

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 $723,712 and $663,961 for the nine month periods ended September 30, 2015 and September 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 September 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

  $ 225,000  

2016

    450,000  

2017

    450,000  

Total

  $ 1,125,000  

 

 
28

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

During the nine month periods ended September 30, 2015 and September 30, 2014 the Company recorded a charge to earnings of $93,612 and $120,809 respectively, which amounts represent (i) the amount of additional license expense incurred above the stipulated minimum in the DataSci License Agreement during the nine month periods ended September 30, 2015 and September 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 September 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.

 

 
29

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

 

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.

 

 

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.

  

 
30

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

 

 

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.

 

 

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.

     
    See Note 15: Subsequent Events

  

 
31

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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 September 30, 2015, $5,000,000 was outstanding on the line of credit at an interest rate of 2.25%.

 

For the nine month periods ended September 30, 2015 and September 30, 2014 we incurred $1,977,778 and $1,818,911, 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.

 

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

 

 

o

92,780,062 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 executive 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.

 

 
32

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

On April 29, 2015 an employee exercised stock options granted to the employee. 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. 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.

 

On July 17, 2015 66,668 restricted shares were forfeited by a former employee as the restrictions had not lapsed prior to the end of the employee’s service.

 

On August 21, 2015 an employee exercised stock options granted to the employee. As a result of the exercise, 1,628 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.

 

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

 

   

Cumulative arrearage

as of

   

Cumulative arrearage per share

as of

 
   

September 30,

   

September 30,

 

Series of preferred stock

 

2015

   

2014

   

2015

   

2014

 
                                 

Series A

  $ 2,740,973     $ 2,534,712     $ 0.66     $ 0.61  

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

  $ 4,822,953     $ 4,616,692                  

 

 
33

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

The following table presents preferred dividends accreted for the nine month periods ended September 30, 2015 and September 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 nine months ended

   

For the nine months ended

 
   

September 30,

   

September 30,

 
   

2015

   

2014

   

2015

   

2014

 

Preferred stock dividends in arrears Series A

  $ 154,272     $ 154,272     $ 0.037     $ 0.037  

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 September 30, 2015 and December 31, 2014, and the related changes during these periods.

 

September 30, 2015    

September 30, 2015

 

Warrants outstanding

   

Warrants exercisable

 
Range of exercise price  

Number outstanding

   

Weighted average

remaining contractual life

   

Weighted average

exercise price

   

Number exercisable

   

Weighted average

exercise price

 
$0.25 

$0.60     52,263,517       1.52     $ 0.34       52,263,517     $ 0.34  

 

December 31, 2014    

December 31, 2014

 

Warrants outstanding

   

Warrants exercisable

 
Range of exercise price  

Number outstanding

   

Weighted average

remaining contractual life

   

Weighted average

exercise price

   

Number exercisable

   

Weighted average

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 September 30, 2015

    52,263,517  

Warrants exercisable at September 30, 2015

    52,263,517  
         

Weighted average fair value of warrants granted during 2014

  $ 0.07  

Weighted average fair value of warrants granted during 2015

  $ 0.07  

 

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

    (87,970 )     (87,970 )

Balance at September 30, 2015

  $ (331,797 )   $ (331,797 )

 

 
34

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

NOTE 14:

EMPLOYEE EQUITY INCENTIVE PLANS

 

Stock Option Plan

 

Description of 2009 Equity Incentive Plan

 

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

 

The maximum term for any option grant under the 2009 Plan is ten years from the date of the grant; however, options granted under the 2009 Plan will generally expire five years from the date of grant. 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 September 30, 2015, there were 2,102,500 outstanding options and 3,583,332 restricted stock shares that have been granted under the 2009 Plan. At September 30, 2015, there were 1,006,668 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 September 30, 2015, there were no remaining outstanding options that have been granted under the 1998 Plan.

 

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

 

   

Number of shares

   

Weighted average exercise price

(per share)

   

Weighted average remaining contractual term

(in years)

   

Aggregate intrinsic value

 
                                 

Outstanding at December 31, 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

    225,000       0.25                  

Exercised

    (292,500 )     0.12                  

Forfeited/cancelled/expired

    (960,000 )     0.37                  
                                 

Outstanding at September 30, 2015

    2,102,500     $ 0.15       1.74     $ 126,200  
                                 

Vested and exercisable at September 30, 2015

    1,752,500     $ 0.13       1.26     $ 120,925  

 

 
35

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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 September 30, 2015.

 

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

 

Fair value of options vesting

   

Number of options vested

   

Fair value of options vested

 

For the nine months ended

September 30, 2015

    150,000     $ 26,358  

For the nine months ended

September 30, 2014

    570,834     $ 66,389  

 

Cash received from stock option exercises for the nine month periods ended September 30, 2015 and September 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 nine month periods ended September 30, 2015 and September 30, 2014.

 

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

 

 

Awards breakdown by price range at September 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       1,827,500       1.43     $ 0.13       1,652,500       1.37     $ 0.13  
  0.21 to 0.29       175,000       3.49       0.22       100,000       2.72       0.21  
  0.30 to 0.49       100,000       4.42       0.30       -0-       0.00       0.00  
  0.50 to 0.70       -0-       0.00       0.00       -0-       0.00       0.00  
  0.00 to 0.70       2,102,500       1.74     $ 0.15       1,752,500       1.26     $ 0.13  

 

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 nine month period ended September 30, 2015 was $0.24 and $0.16 during the nine month period ended September 30, 2014. The Black Scholes option-pricing model was utilized to calculate these values.

 

 
36

 

 

OMNICOMM SYSTEMS, INC.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2015 AND SEPTEMBER 30, 2014

(unaudited)

 

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 nine month periods ended September 30, 2015 and September 30, 2014.

 

    Stock option assumptions for the period ended  

Stock option assumptions

 

September 30, 2015

   

December 31, 2014

 

Risk-free interest rate

    1.03 %     0.93 %

Expected dividend yield

    0.0 %     0.0 %

Expected volatility

    188.5 %     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 nine months ended September 30,

 

2015

   

2014

 

Stock options granted during the period

  $ 0.24     $ 0.16  
                 

Stock options vested during the period

  $ 0.18     $ 0.12  
                 

Stock options forfeited during the period

  $ 0.37     $ 0.43  

 

A summary of the status of the Company’s non-vested shares underlying stock options as of September 30, 2015, and changes during the nine month period ended September 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 September 30, 2015

    350,000     $ 0.21  

 

As of September 30, 2015, approximately $50,047 of total unrecognized compensation cost related to unvested stock options is expected to be recognized over a weighted-average period of 1.3 years.

 

NOTE 15:

SUBSEQUENT EVENTS

 

Subsequent to September 30, 2015 the Company repaid $700,000 on its revolving Line of Credit.

 

On October 15, 2015 the Company and Mr. Wit extended the maturity date of $6,919,000 of promissory notes to January 1, 2019. The promissory notes bear interest at 12% per annum. The expiration date of the warrants associated with the promissory notes was also extended to January 1, 2019.

 

On Oct 16, 2015 50,002 restricted shares were forfeited by a former employee as the restrictions had not lapsed prior to the end of the employee’s service.

 

 
37

 

 

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

 

General 

 

The following information should be read in conjunction with the information contained in our unaudited 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.

 

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 $2,018,638 and $2,092,125 on R&D activities during the nine months ended September 30, 2015 and September 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.  

 

 
38

 

 

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 nine months of 2015 as we place increased emphasis on increasing our penetration of the Phase I market in the U.S. and Europe as well as in East Asia. 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 nine months ended September 30, 2015 compared with the nine months ended September 30, 2014

 

Results of Operations

 

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

 

Summarized Statement of Operations

For the nine months ended

September 30,

           

% of

           

% of

           

%

 
   

2015

   

Revenues

   

2014

   

Revenues

   

Change

   

Change

 

Total revenues

  $ 15,270,895             $ 11,915,713             $ 3,355,182       28.2 %
                                                 

Cost of sales

    3,421,918       22.4 %     2,970,451       24.9 %     451,467       15.2 %
                                                 

Gross margin

    11,848,977       77.6 %     8,945,262       75.1 %     2,903,715       32.5 %
                                                 

Salaries, benefits and related taxes

    8,138,709       53.3 %     7,954,833       66.8 %     183,876       2.3 %

Rent

    723,712       4.7 %     663,961       5.6 %     59,751       9.0 %

Consulting

    226,094       1.5 %     60,669       0.5 %     165,425       272.7 %

Legal and professional fees

    329,664       2.2 %     277,262       2.3 %     52,402       18.9 %

Other expenses

    927,643       6.1 %     1,030,828       8.7 %     (103,185 )     -10.0 %

Selling, general and administrative

    1,084,103       7.1 %     892,912       7.5 %     191,191       21.4 %

Total operating expenses

    11,429,925       74.9 %     10,880,465       91.4 %     549,460       5.0 %
                                                 

Operating income/(loss)

    419,052       2.7 %     (1,935,203 )     -16.2 %     2,354,255       -121.7 %
                                                 

Interest expense

    (2,198,250 )     -14.4 %     (1,979,879 )     -16.6 %     (218,371 )     11.0 %

Interest income

    3       0.0 %     77       0.0 %     (74 )     -96.1 %

Change in derivatives

    6,290,796       41.2 %     4,410,241       37.0 %     1,880,555       42.6 %

Transaction (loss)

    (53,019 )     -0.3 %     (54,915 )     -0.5 %     1,896       -3.5 %
                                                 

Income before income taxes and dividends

    4,458,582       29.2 %     440,321       3.7 %     4,018,261       912.6 %

Income tax (expense)

    (3,955 )     0.0 %     (35,407 )     -0.3 %     31,452       -88.8 %

Net Income

    4,454,627       29.2 %     404,914       3.4 %     4,049,713       1000.1 %
                                                 

Total preferred stock dividends

    (154,272 )     -1.0 %     (154,272 )     -1.3 %     -0-       0.0 %
                                                 

Net Income attributable to common stockholders

  $ 4,300,355       28.2 %   $ 250,642       2.1 %   $ 4,049,713       1615.7 %

 

 
39

 

 

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

  

   

For the nine months ended

                 

Revenue activity

 

September 30, 2015

   

September 30, 2014

   

$ Change

   

% Change

 

Set-up fees

  $ 4,930,454       32.3 %   $ 3,363,576       28.2 %   $ 1,566,878       46.6 %

Change orders

    592,283       3.9 %     337,903       2.8 %     254,380       75.3 %

Maintenance

    3,859,908       25.3 %     3,187,173       26.7 %     672,735       21.1 %

Software licenses

    2,782,117       18.2 %     2,730,770       23.0 %     51,347       1.9 %

Professional services

    2,369,062       15.5 %     1,700,498       14.3 %     668,564       39.3 %

Hosting

    737,071       4.8 %     595,793       5.0 %     141,278       23.7 %

Total

  $ 15,270,895       100.0 %   $ 11,915,713       100.0 %   $ 3,355,182       28.2 %

 

Overall Revenue increased by $3,355,182 or 28.2%. This increase is primarily the result of increases in set-up fees, maintenance and professional services fees.

 

We recorded revenue of $10,495,035 including $4,930,454 from set-up fees and $2,384,000 from maintenance revenues associated with our TrialMaster suite during the nine months ended September 30, 2015 compared with revenue of $8,509,671 that included $3,363,576 in set-up fees and $1,770,228 in maintenance revenues during the nine months ended September 30, 2014.  

 

We recorded $1,352,585 in revenues associated with clients using the eClinical software application suite (“eClinical”) during the nine months ended September 30, 2015 compared with $1,618,564 for the nine months ended September 30, 2014.  eClinical revenues are primarily comprised of license subscriptions and revenues associated with our hosting and maintenance services.  

 

We recorded $194,117 in revenues from hosting activities and $106,400 in professional services associated with eClinical during the nine months ended September 30, 2015 compared with $214,602 from hosting activities and $124,920 from professional services activities for the nine months ended September 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 $941,336 in revenues from maintenance relating to eClinical in the nine months ending September 30, 2015 as compared to $1,033,184 for the nine months ending September 30, 2014.

 

We recorded revenue of $2,861,890 including $1,496,453 from software licensing and $948,595 from professional services associated with clients utilizing our TrialOne EDC software for the nine months ended September 30, 2015 compared with revenue of $990,253 including $366,743 from software licensing and $493,235 from professional services for the nine months ended September 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 $561,385 for the nine months ended September 30, 2015 including $178,883 from software licensing and $272,582 from maintenance associated with clients utilizing the Promasys EDC solution as compared to revenue of $797,225 for the nine months ended September 30, 2014 including $401,412 from software licensing and $321,010 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.

 

 
40

 

 

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 35% of our revenues during the nine months ended September 30, 2015 and approximately 30% of our revenues during the nine months ended September 30, 2014.  One customer accounted for approximately 15% of our revenues during the nine months ended September 30, 2015.   One customer accounted for approximately 13% of our revenues the nine months ended September 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 15% or $451,467 for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014.  Cost of goods sold were approximately 22% of revenues for the nine months ended September 30, 2015 compared to approximately 25% for the nine months ended September 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 nine months ended September 30, 2015 primarily due to increases in salaries and related expenses for programmers and developers. 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 5% for the nine months ended September 30, 2015 when compared to the nine months ended September 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 consulting and marketing expenses.

 

Salaries and related expenses were our biggest operating expense at 71% of total operating expenses for the nine months ended September 30, 2015 compared to 73% of total operating expenses for the nine months ended September 30, 2014.  Salaries and related expenses increased by 2% for the nine months ended September 30, 2015 when compared to the same period ended September 30, 2014.  The table below provides a summary of the significant components of salary and related expenses by primary cost category.

 

For the nine months ended

 
   

September 30, 2015

   

September 30, 2014

   

$ Change

   

% Change

 

OmniComm corporate operations

  $ 5,542,663     $ 5,483,810     $ 58,853       1.1 %

New Jersey operations office

    702,113       477,032       225,081       47.2 %

OmniComm Europe, GmbH

    522,430       601,072       (78,642 )     -13.1 %

OmniComm Ltd.

    677,341       726,033       (48,692 )     -6.7 %

OmniComm Spain

    109,129       116,578       (7,449 )     -6.4 %

OmniComm Promasys B.V.

    403,416       427,678       (24,262 )     -5.7 %

Employee stock compensation

    181,617       122,630       58,987       48.1 %

Total salaries and related expenses

  $ 8,138,709     $ 7,954,833     $ 183,876       2.3 %

 

As of September 30, 2015, we employed approximately 53 employees out of our Ft. Lauderdale, Florida Corporate Office (“Corporate Office”), 10 employees out of our New Jersey regional operating office, 21 out-of-state employees, 8 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.  

 

During the nine months ended September 30, 2015 and the nine months ended September 30, 2014 we incurred $181,617 and $122,630, 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.

 

 
41

 

 

Rent and related expenses increased by approximately 9% during the nine months ended September 30, 2015 when compared to the nine months ended September 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 lease Co-location space in Frankfurt, Germany under a lease that expires in December 2017. 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 nine months ending September 30, 2015 was a decrease in expense of $18,969 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 $8,898 for the nine month period ending September 30, 2014.

 

For the nine months ended  
   

September 30, 2015

   

September 30, 2014

   

$ Change

   

% Change

 

Corporate office

  $ 263,717     $ 250,438     $ 13,279       5.3 %

Co-location and disaster recovery facilities

    320,535       246,449       74,086       30.1 %

New Jersey operations office

    41,700       40,684       1,016       2.5 %

OmniComm Europe, GmbH

    57,400       70,884       (13,484 )     -19.0 %

OmniComm Ltd.

    49,015       51,912       (2,897 )     -5.6 %

OmniComm Spain

    5,005       6,082       (1,077 )     -17.7 %

OmniComm Promasys B.V.

    5,309       6,410       (1,101 )     -17.2 %

Straight-line rent expense

    (18,969 )     (8,898 )     (10,071 )     -113.2 %

Total

  $ 723,712     $ 663,961     $ 59,751       9.0 %

 

Consulting services expense increased to $226,094 for the nine months ended September 30, 2015 compared with $60,669 for the nine months ended September 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 nine months of 2015 as we utilized the services of additional third-party sources for portions of our product development work.

 

For the nine months ended  

Expense Category

 

September 30, 2015

   

September 30, 2014

   

$ Change

   

% Change

 

Sales and marketing

  $ 5,108     $ -0-     $ 5,108    

n/a

 

Product development

    220,986       60,669       160,317       264.2 %

Total

  $ 226,094     $ 60,669     $ 165,425       272.7 %

 

Legal and professional fees increased approximately 19% for the nine months ended September 30, 2015 compared with the nine months ended September 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 nine months ended September 30, 2015 and September 30, 2014, respectively.

 

 
42

 

 

For the nine months ended  

Expense Category

 

September 30, 2015

   

September 30, 2014

   

$ Change

   

% Change

 

Financial advisory

  $ 53,530     $ 6,250     $ 47,280       756.5 %

Audit and related

    56,465       48,850       7,615       15.6 %

Accounting services

    126,389       136,359       (9,970 )     -7.3 %

Legal-employment related

    35,283       30,291       4,992       16.5 %

Legal-financial related

    36,367       15,801       20,566       130.2 %

General legal

    21,630       39,711       (18,081 )     -45.5 %

Total

  $ 329,664     $ 277,262     $ 52,402       18.9 %

 

Selling, general and administrative expenses (“SG&A”) increased by $191,191 or approximately 21% for the nine months ended September 30, 2015 compared to the nine months ended September 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 nine month period ended September 30, 2015 we recognized a credit of $15,038 for bad debt as compared to $76,634 in bad debt expense for the nine month period ended September 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 $2,198,250 during the nine months ended September 30, 2015 compared to $1,979,879 for the nine months ended September 30, 2014, an increase of $218,371.  Interest incurred to related parties was $1,977,778 during the nine months ended September 30, 2015 and $1,818,911 for the nine months ended September 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 nine months ended September 30, 2015 and September 30, 2014.

 

Interest Expense

 
   

For the nine months ended

         

Debt Description

 

September 30, 2015

   

September 30, 2014

   

$ Change

 

Accretion of discount from derivatives

  $ 512,094     $ 405,216     $ 106,878  

August 2008 convertible notes

    143,605       143,605       -0-  

December 2008 convertible notes

    446,721       446,972       (251 )

September 2009 secured convertible debentures

    107,704       107,704       -0-  

December 2009 convertible debentures

    133,733       133,733       -0-  

General interest

    153,157       119,233       33,924  

Related party notes payable

    701,236       623,416       77,820  

Total

  $ 2,198,250     $ 1,979,879     $ 218,371  

 

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.

 

 
43

 

 

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 $6,290,796 during the nine months ended September 30, 2015 compared with a net unrealized gain of $4,410,241 during the nine months ended September 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 quarterly balance sheet date.  These non-cash gains and losses have materially impacted our results of operations during the nine months ended September 30, 2015 and September 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 $154,272 and $154,272 in its 5% Series A Preferred Stock dividends for the nine month periods ended September 30, 2015, and September 30, 2014, respectively. The below table contains the cumulative arrearage for each series of preferred stock.

 

Series of Preferred Stock

 

Cumulative Arrearage

 

Series A

  $ 2,740,973  

Series B

    609,887  

Series C

    1,472,093  

Total preferred stock arrearages

  $ 4,822,953  

 

 
44

 

 

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

 

Results of Operations

 

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

 

Summarized Statement of Operations

For the three months ended

September 30,

           

% of

           

% of

           

%

 
   

2015

   

Revenues

   

2014

   

Revenues

   

Change

   

Change

 

Total revenues

  $ 5,597,869             $ 5,124,689             $ 473,180       9.2 %
                                                 

Cost of sales

    1,020,373       18.2 %     1,139,401       22.2 %     (119,028 )     -10.4 %
                                                 

Gross margin

    4,577,496       81.8 %     3,985,288       77.8 %     592,208       14.9 %
                                                 

Salaries, benefits and related taxes

    2,596,492       46.4 %     2,726,522       53.2 %     (130,030 )     -4.8 %

Rent

    241,001       4.3 %     219,974       4.3 %     21,027       9.6 %

Consulting

    49,354       0.9 %     10,111       0.2 %     39,243       388.1 %

Legal and professional fees

    111,536       2.0 %     77,365       1.5 %     34,171       44.2 %

Other expenses

    248,678       4.4 %     301,315       5.9 %     (52,637 )     -17.5 %

Selling, general and administrative

    256,496       4.6 %     299,940       5.9 %     (43,444 )     -14.5 %

Total operating expenses

    3,503,557       62.6 %     3,635,227       71.0 %     (131,670 )     -3.6 %
                                                 

Operating income

    1,073,939       19.2 %     350,061       6.8 %     723,878       206.8 %
                                                 

Interest expense

    (752,568 )     -13.4 %     (632,971 )     -12.4 %     (119,597 )     18.9 %

Interest income

    3       0.0 %     12       0.0 %     (9 )     -75.0 %

Change in derivatives

    2,217,998       39.6 %     1,607,670       31.4 %     610,328       38.0 %

Transaction (loss)

    (4,943 )     -0.1 %     (41,596 )     -0.8 %     36,653       -88.1 %
                                                 

Income before income taxes and dividends

    2,534,429       45.3 %     1,283,176       25.0 %     1,251,253       97.5 %

Income tax (expense)

    (3,570 )     -0.1 %     (1,446 )     0.0 %     (2,124 )     146.9 %

Net income

    2,530,859       45.2 %     1,281,730       25.0 %     1,249,129       97.5 %
                                                 

Total preferred stock dividends

    (51,989 )     -0.9 %     (51,989 )     -1.0 %     -0-       0.0 %
                                                 

Net income attributable to common stockholders

  $ 2,478,870       44.3 %   $ 1,229,741       24.0 %   $ 1,249,129       101.6 %

 

 
45

 

 

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

 

   

For the three months ended

         

Revenue Activity

 

September 30, 2015

   

September 30, 2014

   

$ Change

   

% Change

 

Set-up fees

  $ 2,048,301       36.6 %   $ 1,419,722       27.7 %   $ 628,579       44.3 %

Change orders

    237,475       4.2 %     140,949       2.8 %     96,526       68.5 %

Maintenance

    1,358,501       24.3 %     1,175,527       22.9 %     182,974       15.6 %

Software licenses

    1,254,743       22.4 %     1,444,623       28.2 %     (189,880 )     -13.1 %

Professional services

    444,095       7.9 %     747,693       14.6 %     (303,598 )     -40.6 %

Hosting

    254,754       4.6 %     196,175       3.8 %     58,579       29.9 %

Total

  $ 5,597,869       100.0 %   $ 5,124,689       100.0 %   $ 473,180       9.2 %

 

Overall Revenue increased by $473,180 or 9.2%. This increase is primarily the result of increases in set-up fees and maintenance.

 

We recorded revenue of $3,935,014 including $2,048,301 from set-up fees and $814,988 from maintenance revenues associated with our TrialMaster suite during the three months ended September 30, 2015 compared with revenue of $3,774,206 that included $1,419,722 in set-up fees and $709,128 in maintenance revenues during the three months ended September 30, 2014.  

 

We recorded $415,642 in revenues associated with clients using the eClinical software application suite (“eClinical”) during the three months ended September 30, 2015 compared with $474,840 for the three months ended September 30, 2014.  eClinical revenues are primarily comprised of license subscriptions and revenues associated with our hosting and maintenance services.  

 

We recorded $63,900 in revenues from hosting activities and $14,550 in professional services associated with eClinical during the three months ended September 30, 2015 compared with $60,551 from hosting activities and $27,970 from professional services activities for the three months ended September 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 $303,570 in revenues from maintenance relating to eClinical in the three months ending September 30, 2015 as compared to $316,113 for the three months ending September 30, 2014.

 

We recorded revenue of $1,029,293 including $797,724 from software licensing and $39,725 from professional services associated with clients utilizing our TrialOne EDC software for the three months ended September 30, 2015 compared with revenue of $612,643 including $287,576 from software licensing and $262,755 from professional services for the three months ended September 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 $217,920 for the three months ended September 30, 2015 including $83,960 from software licensing and $92,750 from maintenance associated with clients utilizing the Promasys EDC solution as compared to revenue of $262,999 for the three months ended September 30, 2014 including $105,393 from software licensing and $109,948 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.

 

 
46

 

 

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 38% of our revenues during the three months ended September 30, 2015 and approximately 37% of our revenues during the three months ended September 30, 2014.  One customer accounted for approximately 18% of our revenues during the three months ended September 30, 2015.   One customer accounted for approximately 14% of our revenues and another accounted for approximately 11% of our revenues during the three months ended September 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 decreased approximately 10% or $119,029 for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014.  Cost of goods sold were approximately 18% of revenues for the three months ended September 30, 2015 compared to approximately 22% for the three months ended September 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 decreased during the three months ended September 30, 2015 primarily due to a decrease in costs associated with pass-through revenues. 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 decreased approximately 4% for the three months ended September 30, 2015 when compared to the three months ended September 30, 2014.  The decrease in operating expenses is primarily the result of a decrease in salary and related expenses.

 

Salaries and related expenses were our biggest operating expense at 74% of total operating expenses for the three months ended September 30, 2015 compared to 75% of total operating expenses for the three months ended September 30, 2014.  Salaries and related expenses decreased by 5% for the three months ended September 30, 2015 when compared to the same period ended September 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

 
   

September 30, 2015

   

September 30, 2014

   

$ Change

   

% Change

 

OmniComm corporate operations

  $ 1,784,666     $ 1,862,838     $ (78,172 )     -4.2 %

New Jersey operations office

    199,888       187,182       12,706       6.8 %

OmniComm Europe, GmbH

    171,602       196,732       (25,130 )     -12.8 %

OmniComm Ltd.

    213,630       247,525       (33,895 )     -13.7 %

OmniComm Spain

    36,121       41,814       (5,693 )     -13.6 %

OmniComm Promasys B.V.

    125,888       145,341       (19,453 )     -13.4 %

Employee stock compensation

    64,697       45,090       19,607       43.5 %

Total salaries and related expenses

  $ 2,596,492     $ 2,726,522     $ (130,030 )     -4.8 %

 

As of September 30, 2015, we employed approximately 53 employees out of our Ft. Lauderdale, Florida Corporate Office (“Corporate Office”), 10 employees out of our New Jersey regional operating office, 21 out-of-state employees, 8 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.  

 

During the three months ended September 30, 2015 and the three months ended September 30, 2014 we incurred $64,697 and $45,090, respectively, in salary expense in connection with ASC 718, Compensation – Stock Compensation, which establishes standards for transactions in which an entity exchanges its equity instruments services from employees. This standard requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.

 

 
47

 

 

Rent and related expenses increased by approximately 10% during the three months ended September 30, 2015 when compared to the three months ended September 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 lease Co-location space in Frankfurt, Germany under a lease that expires in December 2017. 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 September 30, 2015 was a decrease in expense of $6,882 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 $3,455 for the three month period ending September 30, 2014.

 

For the three months ended  
   

September 30, 2015

   

September 30, 2014

   

$ Change

   

% Change

 

Corporate office

  $ 87,045     $ 84,311     $ 2,734       3.2 %

Co-location and disaster recovery facilities

    108,347       82,080       26,267       32.0 %

New Jersey operations office

    13,970       13,447       523       3.9 %

OmniComm Europe, GmbH

    18,572       22,315       (3,743 )     -16.8 %

OmniComm Ltd.

    16,481       17,251       (770 )     -4.5 %

OmniComm Spain

    1,683       1,973       (290 )     -14.7 %

OmniComm Promasys B.V.

    1,785       2,052       (267 )     -13.0 %

Straight-line rent expense

    (6,882 )     (3,455 )     (3,427 )     -99.2 %

Total

  $ 241,001     $ 219,974     $ 21,027       9.6 %

 

Consulting services expense increased to $49,354 for the three months ended September 30, 2015 compared with $10,111 for the three months ended September 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

 

September 30, 2015

   

September 30, 2014

   

$ Change

   

% Change

 

Sales and marketing

  $ 5,108     $ -0-     $ 5,108    

n/a

 

Product development

    44,246       10,111       34,135       337.6 %

Total

  $ 49,354     $ 10,111     $ 39,243       388.1 %

 

Legal and professional fees increased approximately 44% for the three months ended September 30, 2015 compared with the three months ended September 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 September 30, 2015 and September 30, 2014, respectively.

 

 
48

 

 

For the three months ended  

Expense Category

 

September 30, 2015

   

September 30, 2014

   

$ Change

   

% Change

 

Financial advisory

  $ 16,030     $ 6,250     $ 9,780       156.5 %

Audit and related

    9,296       8,780       516       5.9 %

Accounting services

    48,290       43,912       4,378       10.0 %

Legal-employment related

    517       10,897       (10,380 )     -95.3 %

Legal-financial related

    24,417       3,866       20,551       531.6 %

General legal

    12,986       3,660       9,326       254.8 %

Total

  $ 111,536     $ 77,365     $ 34,171       44.2 %

 

Selling, general and administrative expenses (“SG&A”) decreased by $43,444 or approximately 15% for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The decrease is primarily due to decreases in license, office software and subscription 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 September 30, 2015 we recognized a credit to bad debt expense of $9,636 as compared to $632 in bad debt expense for the three month period ended September 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 $752,568 during the three months ended September 30, 2015 compared to $632,971 for the three months ended September 30, 2014, an increase of $119,597.  Interest incurred to related parties was $677,993 during the three months ended September 30, 2015 and $578,735 for the three months ended September 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 September 30, 2015 and September 30, 2014.

 

Interest Expense

 
   

For the three months ended

         

Debt Description

 

September 30, 2015

   

September 30, 2014

   

$ Change

 

Accretion of discount from derivatives

  $ 181,828     $ 102,326     $ 79,502  

August 2008 convertible notes

    48,394       48,394       -0-  

December 2008 convertible notes

    150,477       150,628       (151 )

September 2009 secured convertible debentures

    36,296       36,296       -0-  

December 2009 convertible debentures

    45,068       45,068       -0-  

General interest

    51,890       40,171       11,719  

Related party notes payable

    238,615       210,088       28,527  

Total

  $ 752,568     $ 632,971     $ 119,597  

 

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.

 

 
49

 

 

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 $2,217,999 during the three months ended September 30, 2015 compared with a net unrealized gain of $1,607,670 during the three months ended September 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 September 30, 2015 and September 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 $51,989 and $51,989 in its 5% Series A Preferred Stock dividends for the three month periods ended September 30, 2015, and September 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 September 30, 2015, we had working capital deficit of approximately $8,952,209.

 

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

 

Liquidity and Capital Resources

 

Summarized Balance Sheet Disclosure

   

September 30, 2015

   

December 31, 2014

   

$ Change

 

Cash

  $ 800,386     $ 522,914     $ 277,472  

Accounts receivable, net of allowance for doubtful accounts

    3,715,510       3,416,151       299,359  

Prepaid expenses

    494,864       228,082       266,782  

Prepaid stock compensation, current portion

    197,233       153,500       43,733  

Other current assets

    15,485       18,305       (2,820 )

Current assets

    5,223,478       4,338,952       884,526  
                         

Accounts payable and accrued expenses

    2,251,058       1,894,185       356,873  

Patent litigation settlement liability, current portion

    962,500       962,500       -0-  

Deferred revenue, current portion

    6,670,335       5,840,875       829,460  

Line of credit, current portion

    -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

    1,089,106       2,729,902       (1,640,796 )

Conversion feature liability

    138,559       214,500       (75,941 )

Warrant liability, related parties

    2,859,288       6,496,448       (3,637,160 )

Warrant liability

    129,841       198,612       (68,771 )

Current liabilities

    14,175,687       22,412,022       (8,236,335 )
                         

Working capital (deficit)

  $ (8,952,209 )   $ (18,073,070 )   $ 9,120,861  

 

Statement of Cash Flows Disclosure

   

For the nine months ended

 
   

September 30, 2015

   

September 30, 2014

 

Net cash (used in) operating activities

  $ (368,773 )   $ (141,882 )

Net cash (used in) investing activities

    (330,094 )     (67,674 )

Net cash provided by financing activities

    1,002,250       179,075  
                 

Net increase/(decrease) in cash and cash equivalents

    277,472       (67,038 )
                 

Changes in operating accounts

    586,812       3,042,896  
                 

Effect of non-cash transactions on cash and cash equivalents

  $ (5,410,212 )   $ (3,589,692 )

 

 
50

 

 

Cash and Cash Equivalents

 

Cash and cash equivalents increased by $277,472 to $800,386 at September 30, 2015. The increase is primarily comprised of a net gain of $4,454,627, changes in working capital accounts of $586,812 and a decrease from non-cash transactions of $5,410,212. During the nine months ended September 30, 2015 we had investing activities comprised of net purchases of property and equipment of $330,094. 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 $100,000 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 as of September 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-     $ 792,500 (2)   $ 20,000 (3)   $ 6,919,000 (4)

Convertible notes

    9,660,000       75,000 (5)     9,195,000 (6)     390,000 (7)     -0-  

Lines of credit (8)

    5,000,000       -0-       -0-       5,000,000       -0-  

Operating lease obligations (9)

    2,208,349       604,112       328,399       251,984       1,023,854 (10)

Patent licensing fees (11)

    1,525,000       962,500       450,000       112,500       -0-  

Total

  $ 26,124,849     $ 1,641,612     $ 10,765,899     $ 5,774,484     $ 7,942,854  

 

 

1.

Amounts do not include interest to be paid.

 

2.

Includes $420,000 of 10% notes payable that mature in April 2017 and $372,500 of 12% notes payable that mature in April 2017.

 

3.

Includes $20,000 of 12% notes payable that mature in April 2018.

 

4.

Includes $6,919,000 of 12% notes payable that mature in January 2019.

 

5.

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

 

6.

Includes $1,920,000 in 10% convertible notes that mature in April 2017 and $7,275,000 in 12% convertible notes that mature in April 2017.

 

7.

Includes $390,000 in 12% convertible notes that mature in April 2018.

 

8.

Includes $5,000,000 due on the revolving Line of Credit with The Northern Trust Company.

 

9.

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.

 

10.

Includes office lease obligations through 2022

 

11.

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 $197,858 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.

 

 
51

 

 

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.

 

 
52

 

 

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;

  

 
53

 

 

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 our stockholders or impose restrictive covenants that may adversely impact our business. 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 September 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.

 

 
54

 

 

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

 

ASSET IMPAIRMENT

 

Asset Acquisitions and Intangible Assets

 

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

 

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

 

Long Lived Assets

 

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

 

FAIR VALUE MEASUREMENT

 

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

 

DEFERRED REVENUE

 

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

 

REVENUE RECOGNITION POLICY

 

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

 

 
55

 

 

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 nine months of 2015, we adopted the following new accounting pronouncements:

 

In May 2014, FASB issued Accounting Standards Update (“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 was to be effective for annual reporting periods beginning after December 15, 2016 and early adoption was not permitted. In August 2015, FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”, (“ASU 2015-14”), which defers the effective date by one year while providing the option to adopt the standard on the original effective date. Accordingly, the Company may adopt the standard either in its first quarter of 2017 or its first quarter of 2018 and it can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoptionManagement is currently evaluating the timing for the adoption of ASU 2014-09, which transition approach to use and the impact of the adoption of ASU 2014-09 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.

 

In June 2015, FASB issued ASU No. 2015-10, “Technical Corrections and Improvements”, (“ASU 2015-10”). This ASU covers a wide range of Topics in the Codification.  The amendments represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. Additionally, some of the amendments will make the Codification easier to understand and easier to apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. Transition guidance varies based on the amendments in this ASU. The amendments in this ASU that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this ASU. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

In September 2015, FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”, (“ASU 2015-16”). This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not been issued. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this Update with earlier application permitted for financial statements that have not yet been made available for issuance. We are currently reviewing the provisions of this ASU to determine if there will be any impact on our results of operations, cash flows or financial condition.

 

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.

 

 
56

 

 

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 September 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 third quarter ended September 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 September 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

 

None.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 
57

 

 

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

3.11*

Certificate of Amendment to the Certificate of Designation of the 5% Series A Convertible Preferred Stock

 

10.88*

Pledgor Fee and Reimbursement Agreement with Cornelis F. Wit

 

10.89*

$2,860,000 Promissory note payable to Cornelis F. Wit dated October 15, 2015

 

10.90*

$2,860,000 Warrant agreement with Cornelis F. Wit dated October 15, 2015

 

10.91*

$1,600,000 Promissory note payable to Cornelis F. Wit dated October 15, 2015

 

10.92*

$1,600,000 Warrant agreement with Cornelis F. Wit dated October 15, 2015

 

10.93*

$529,000 Promissory note payable to Cornelis F. Wit dated October 15, 2015

 

10.94*

$529,000 Warrant agreement with Cornelis F. Wit dated October 15, 2015

 

10.95*

$980,000 Promissory note payable to Cornelis F. Wit dated October 15, 2015

 

10.96*

$980,000 Warrant agreement with Cornelis F. Wit dated October 15, 2015

 

10.97*

$950,000 Promissory note payable to Cornelis F. Wit dated October 15, 2015

 

10.98*

$950,000 Warrant agreement with Cornelis F. Wit dated October 15, 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

  

 
58

 

 

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: November 13, 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)

 

 

 59