10-Q 1 omcm_10q-063011.htm FORM 10-Q omcm_10q-063011.htm
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
[Mark One]

[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2011
[  ]            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, Ft. 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 [X]  No [ ]

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

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

Large accelerated filer
[ ]
Accelerated filer
[ ]
Non-accelerated filer
(Do not check if smaller reporting company)
[ ]
Smaller reporting company
[√]

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

The number of shares outstanding of each of the issuer’s classes of common equity as of August 5, 2011: 86,481,495 common stock $.001 par value.
 
 
1

 
 
TABLE OF CONTENTS TO THE QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2011

 
   
Page
No.
PART I. - FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
3
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
29
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
47
Item 4T
Controls and Procedures.
47
PART II - OTHER INFORMATION
Item 1.
Legal Proceedings.
48
Item 1A.
Risk Factors.
48
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
48
Item 3.
Defaults Upon Senior Securities.
48
Item 4.
Removed and Reserved.
48
Item 5.
Other Information.
48
Item 6.
Exhibits.
48
SIGNATURES    
     
Exhibit 10.45  Promissory Note dated May 13, 2011 to Cornelis F. Wit  
Exhibit 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002– CEO Cornelis F. Wit  
Exhibit 31.2   Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002– CFO Ronald T. Linares  
 

 
2

 
PART I. FINANCIAL INFORMATION
Item. 1.  Financial Statements (unaudited)
 
 
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
             
   
June 30, 2011
   
December 31, 2010
 
   
(unaudited)
     
             
ASSETS  
CURRENT ASSETS
           
Cash
  $ 134,445     $ 1,213,397  
Accounts receivable, net of allowance for doubtful accounts of $269,869 and $269,869 in 2011 and 2010, respectively
    1,191,103       1,031,745  
Prepaid expenses
    119,349       97,337  
Total current assets
    1,444,897       2,342,479  
                 
PROPERTY AND EQUIPMENT, net
    857,470       1,046,688  
                 
OTHER ASSETS
               
Intangible assets, net
    464,234       696,350  
Other assets
    35,708       34,218  
                 
TOTAL ASSETS
  $ 2,802,309     $ 4,119,735  
                 
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)  
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
  $ 1,538,134     $ 1,371,703  
Notes payable, current portion
    20,000       12,500  
Notes payable related parties, current portion
    37,500       2,615,000  
Deferred revenue, current portion
    4,182,449       4,060,425  
Conversion feature liability, related parties, current portion
    1,457,230       92,134  
Conversion feature liability, current portion
    36,546       72  
Convertible notes payable,  current portion, net of discount
    75,000       395,733  
Convertible notes payable, related parties, current portion, net of discount of $-0- and $399,645, respectively
    -0-       2,169,622  
Patent settlement liability, current portion
    737,499       765,089  
Warrant liability, related parties
    2,454,194       206,760  
Warrant liability
    548,996       54,388  
Total current liabilities
    11,087,548       11,743,426  
                 
Notes payable - long term, net of current portion
    563,786       601,286  
Notes payable related parties, long term, net of current portion, net of discount of $1,080,622 and $-0-, respectively
    2,064,757       409,379  
Deferred revenue, long term, net of current portion
    484,794       691,234  
Convertible notes payable, related parties, net of current portion
    9,440,000       6,900,000  
Convertible notes payable, net of current portion
    150,000       -0-  
Patent settlement liability - long term, net of current portion
    1,598,084       1,588,439  
                 
TOTAL LIABILITIES
    25,388,969       21,933,764  
                 
COMMITMENTS AND CONTINGENCIES (See Note 11)
 
                 
SHAREHOLDERS' EQUITY (DEFICIT)
         
   
Preferred stock, $0.001 par value, 10,000,000 share authorized 3,722,500 shares undesignated
    -0-       -0-  
Series B convertible preferred stock - 230,000 shares authorized, -0- and -0- issued and outstanding, respectively at $.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 $.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 $.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 $.001 par value
    250       250  
Common stock - 250,000,000 shares authorized, 86,481,495 and 86,081,495 issued and outstanding, respectively, at $.001 par value
    86,482       86,082  
Additional paid in capital - preferred
    4,717,804       4,717,804  
Additional paid in capital - common
    36,532,989       36,906,356  
Less cost of treasury stock: Common - -0- and 1,014,830 shares, respectively
    -0-       (503,086 )
Accumulated other comprehensive income (loss)
    (35,812 )     (24,298 )
Accumulated deficit
    (63,892,498 )     (59,001,262 )
Deferred compensation
    -       -  
Stock subscriptions receivable
    (0 )     (0 )
                 
TOTAL SHAREHOLDERS' (DEFICIT)
    (22,586,660 )     (17,814,029 )
                 
TOTAL LIABILITIES AND SHAREHOLDERS'(DEFICIT)
  $ 2,802,309     $ 4,119,735  
 
See accompanying summary of accounting policies and notes to financial statements
 
 
3

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
 
                         
   
For the six months ended
   
For the three months ended
 
   
June 30,
   
June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Total revenues
  $ 6,666,187     $ 5,907,352     $ 3,351,520     $ 3,209,989  
                                 
Cost of sales
    943,972       813,403       497,917       378,532  
                                 
Gross margin
    5,722,215       5,093,949       2,853,603       2,831,457  
                                 
Operating expenses
                               
Salaries, benefits and related taxes
    4,188,364       5,421,648       2,089,623       2,735,898  
Rent  & occupancy expenses
    451,017       434,809       225,980       234,074  
Consulting services
    152,855       292,377       102,676       81,652  
Legal and professional fees
    240,795       184,065       104,665       98,549  
Travel
    247,204       238,955       126,696       113,701  
Telephone and internet
    116,223       143,307       49,307       60,103  
Selling, general and administrative
    514,724       709,073       228,758       468,056  
Bad debt expense
    -0-       13,954       -0-       -0-  
Depreciation Expense
    241,720       255,342       115,164       129,414  
Amortization Expense
    232,117       232,117       116,058       116,059  
Total operating expenses
    6,385,019       7,925,647       3,158,927       4,037,506  
                                 
Operating loss
    (662,804 )     (2,831,698 )     (305,324 )     (1,206,049 )
Other income (expense)
                               
Interest expense
    (548,005 )     (1,394,817 )     (276,391 )     (697,552 )
Interest expense, related parties
    (725,216 )     (561,284 )     (366,226 )     (288,041 )
Interest income
    4,625       48       4,236       1  
Change in derivative liabilities
    (2,964,751 )     3,483,649       (54,181 )     2,407,655  
Other Comprehensive Income (Loss)
    4,915       -0-       574       -0-  
Income (loss) before income taxes and preferred dividends
    (4,891,236 )     (1,304,102 )     (997,312 )     216,014  
Net income (loss)
    (4,891,236 )     (1,304,102 )     (997,312 )     216,014  
Preferred stock dividends
                               
Preferred stock dividends in arrears
                               
      Series A Preferred
    (102,004 )     (102,004 )     (51,284 )     (51,284 )
Total preferred stock dividends
    (102,004 )     (102,004 )     (51,284 )     (51,284 )
Net income (loss) attributable to common stockholders
  $ (4,993,240 )   $ (1,406,106 )   $ (1,048,596 )   $ 164,730  
                                 
Net income (loss) per share
                               
Basic and Diluted
  $ (0.06 )   $ (0.02 )   $ (0.01 )   $ 0.00  
Weighted average number of shares outstanding
                               
Basic and Diluted
    86,207,462       85,507,699       86,332,044       85,507,699  

  See accompanying summary of accounting policies and notes to financial statements
 
 
4

 
 
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
 
FOR THE PERIOD JANUARY 1, 2010 TO JUNE 30, 2011
 
(unaudited)
 
                 
Preferred Stock
                     
                 
5% Series A Convertible
 
8% Series B Convertible
 
8% Series C Convertible
 
Series D Preferred Stock
                     
     
Common Stock
     
Additional
             
Additional
             
Additional
             
Additional
             
Additional
         
Accumulated Other
          Total
Shareholders'
 
   
Number
  $ 0.001    
Paid In
 
Number
  $ 0.001  
Paid In
 
Number
  $ 0.001  
Paid In
 
Number
  $ 0.001  
Paid In
 
Number
  $ 0.001  
Paid In
 
Accumulated
   
Comprehensive
 
Treasury
   
Equity
 
   
of Shares
 
Par Value
   
Capital
 
of Shares
 
Par Value
 
Capital
 
of Shares
 
Par Value
 
Capital
 
of Shares
 
Par Value
 
Capital
 
of Shares
 
Par Value
 
Capital
 
Deficit
   
Income
 
Stock
   
(Deficit)
 
                                                                                               
Balances at December 31, 2009
  85,507,699   $ 86,474     $ 36,278,798   4,125,224   $ 4,125   $ 3,718,054   -0-   $ -0-   $ -0-   -0-   $ -0-   $ -0-   -0-   $ -0-   $ -0-   $ (55,870,527 )   $ 2,934   $ (503,086 )   $ (16,283,228 )
                                                                                                                 
 
Employee stock option
expense
                584,061                                                                                           584,061  
                                                                                                                 
Common stock issued in lieu of salaries
  573,796     574       42,531                                                                                           43,105  
                                                                                                                 
Adjustment for treasury
stock transactions
        (966     966                                                                                           -0-  
                                                                                                                 
Foreign currency translation adjustment                                                                                               (27,232           (27,232
                                                                                                                 
Issuance of Series D preferred stock
                                                                    250,000      250      999,750                            1,000,000   
                                                                                                                 
Correcting entry to retained earnings
                                                                                                            -0-  
                                                                                                                 
Net loss for the period ended December 31, 2010
  -     -       -   -     -     -   -     -     -   -     -     -   -     -     -     (3,130,735 )     -     -       (3,130,735 )
                                                                                                                 
Balances at December 31, 2010
  86,081,495     86,082       36,906,356   4,125,224     4,125     3,718,054   -     -     -   -     -     -   250,000     250     999,750     (59,001,262 )     (24,298   (503,086 )     (17,814,029 )
                                                                                                                 
Employee stock option expense
                90,119                                                                                           90,119  
                                                                                                                 
Treasury stock retired                 (503,086 )                                                                                 503,086        -0-  
                                                                                                                 
Foreign currency
translation adjustment
                                                                                              (11,514 )           (11,514
                                                                                                                 
Issuance of common
stock in lieu of salary
  400,000     400       39,600                                                                                           40,000  
                                                                                                                 
Net loss for the period ended June 30, 2011
  -     -       -   -     -     -   -     -     -   -     -     -   -     -     -     (4,891,236 )     -     -       (4,891,236 )
                                                                                                                 
Balances at
June 30, 2011
  86,481,495   $ 86,482     $ 36,532,989   4,125,224   $ 4,125   $ 3,718,054   -0-   $ -0-   $ -0-   -0-   $ -0-   $ -0-   250,000   $ 250   $ 999,750   $ (63,892,498 )   $ (35,812 $ -0-     $ (22,586,660 )


 
See accompanying summary of accounting policies and notes to financial statements
 
 
5

 

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited)
 
   
For the six months ended
 
   
June 30,
 
   
2011
   
2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
       
Net loss
  $ (4,891,236 )   $ (1,304,102 )
Adjustment to reconcile net loss to net cash (used in) operating activities
 
Change in derivative liabilities
    2,964,751       (3,483,649 )
Interest expense from derivative instruments
    497,884       1,342,953  
Common stock issued in lieu of salary
    40,000       -0-  
Employee stock option expense
    90,119       357,684  
Depreciation and amortization
    473,837       487,459  
Bad debt expense
    -0-       13,954  
Changes in operating assets and liabilities
         
Accounts receivable
    (159,358 )     (428,084 )
Prepaid expenses
    (22,015 )     (15,462 )
Other assets
    (1,490 )     (28,122 )
Accounts payable and accrued expenses
    211,431       247,213  
Patent settlement liability
    (17,944 )     16,842  
Deferred revenue
    (84,415 )     2,451,436  
Net cash (used in) operating activities
    (898,436 )     (341,878 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
         
Purchase of property and equipment
    (52,502 )     (218,218 )
Net cash used in investing activities
    (52,502 )     (218,218 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
         
Proceeds from notes payable, related parties
    96,000       565,000  
Repayments of notes payable
    (212,500 )     -0-  
Net cash provided by (used in) financing activities
    (116,500 )     565,000  
                 
Effect of exchange rate changes on cash and cash equivalents
    (11,514 )     (22,778 )
Net (decrease) in cash and cash equivalents
    (1,078,952 )     (17,874 )
Cash and cash equivalents at beginning of period
    1,213,397       60,352  
                 
Cash and cash equivalents at end of period
  $ 134,445     $ 42,478  
                 
Supplemental disclosures of cash flow information:
         
Cash paid during the period for:
               
Income taxes
  $ -0-     $ -0-  
Interest
  $ 525,731     $ 570,242  
                 
Non-cash transactions                
Notes payable issued in exchange for existing  notes payable
   $ 2,866,879       $ -0-   
Notes payable issued for accounts payable
   $ 45,000       $ -0-   
 
See accompanying summary of accounting policies and notes to financial statements
 
 
6

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
NOTE 1:
ORGANIZATION AND NATURE OF OPERATIONS

OmniComm Systems, Inc. (“OmniComm” or the “Company”) is a healthcare technology company that provides Web-based electronic data capture (“EDC”) solutions and related value-added services to pharmaceutical and biotech companies, clinical research organizations, and other clinical trial sponsors principally located in the United States and Europe. Our proprietary EDC software applications: TrialMaster®; TrialOne®; and eClinical Suite, 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 efforts are focused on developing new, complementary software solutions, as well as enhancing our existing software solutions through the addition of increased functionality.  The majority of our research and development activities represent salaries to our software developers.  During the six months ended June 30, 2011 and June 30, 2010 we spent approximately $1,280,630 and $1,844,866, respectively, on research and development activities, which is primarily comprised of payroll 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’ Annual Report filed on Form 10-K with the Securities and Exchange Commission, and have been prepared in conformity with (i) accounting principles generally accepted in the United States of America; and (ii) the rules and regulations of the United States Securities and Exchange Commission.  All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.

UNAUDITED FINANCIAL STATEMENTS

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

The operating results for the six month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year-ended December 31, 2011. 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, 2010.

ESTIMATES IN FINANCIAL STATEMENTS

The preparation of the 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 and 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.
 
 
7

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
RECLASSIFICATIONS

Certain reclassifications have been made in the 2010 financial statements to conform to the 2011 presentation.  These reclassifications did not have any effect on our net loss or shareholders’ deficit.

FOREIGN CURRENCY TRANSLATION
 
The financial statements of the Company’s foreign subsidiaries are translated in accordance with ASC 830-30, Foreign Currency Matters—Translation of Financial Statements. The reporting currency for the Company is the U.S. dollar. The functional currencies of the Company’s subsidiaries, OmniComm Europe GmbH and OmniComm Ltd., in Germany and the United Kingdom, are the Euro and British Pound Sterling, respectively. 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 $11,514 and $20,466 of net translation losses for the six months ended June 30, 2011 and June 30, 2010, 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 and eClinical Suite (the “EDC Software”). Service revenues are derived principally from the Company's delivery of the hosted solutions of its TrialMaster and eClinical Suite software products, and consulting services and customer support, including training, for all of the Company's products.
 
The Company recognizes revenues when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.
 
The Company operates in one reportable segment which is the delivery of EDC services and products 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. These activities include hosted applications, licensing, professional services and maintenance.

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 solution is presently available only on a licensed basis. To date, hosted solutions have been related primarily to TrialMaster.
 
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 billing change orders which consist of amounts billed to customers for functionality changes made; and the third stage involves services required to close out, or lock, the database for the clinical trial.
 
 
8

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
Fees charged and costs incurred for the trial system design, set up and implementation are amortized and recognized ratably over the estimated hosting period.  Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the remaining term of the hosting period. Fees for the first and third stages of the service are 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 quarterly in advance.  Revenues resulting from hosting services for the eClinical Suite products consist of installation and server configuration, application hosting and related support services. Services for this offering are generally charged as a fixed fee payable on a quarterly or annual basis. Revenues are recognized ratably over the period of the service.
 
Licensing Revenues
 
The Company's software license revenues are earned from the sale of off-the-shelf software.  From time-to-time a client might require significant modification or customization subsequent to delivery to the customer.  The Company generally enters into software term licenses for its EDC Software products with its customers for 3 to 5 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.
 
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.

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 and running test data and documentation of procedures.  Subsequent additions or extensions to license terms do not generally include additional professional services.
 
 
9

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
The fees associated with each business activity for the six months ended June 30, 2011 and June 30, 2010, respectively are:
 
   
For the six months ended
 
Business Activity
 
June 30, 2011
   
June 30, 2010
 
Set-up Fees
  $ 1,586,262     $ 2,115,769  
Change Orders
    160,902       81,546  
Maintenance
    2,764,632       2,149,614  
Software Licenses
    1,617,406       742,202  
Professional Services
    242,703       456,499  
Hosting
    294,282       361,722  
Totals
  $ 6,666,187     $ 5,907,352  
 
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, bonuses and stock-based compensation for the Company’s professional services staffs. Cost of revenues also includes outside service provider costs, data center and networking expenses, and allocated overhead. These costs are 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 collectibility of accounts receivable and prior bad debt experience.  The Company had recorded an allowance for uncollectible accounts receivable of $269,869 as of June 30, 2011 and December 31, 2010, respectively.

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

   
For the periods ended
 
   
June 30, 2011
   
December 31, 2010
 
Beginning of period
  $ 269,869     $ 267,526  
Bad debt expense
    -0-       13,954  
Write-offs
    -0-       (11,611 )
End of period
  $ 269,869     $ 269,869  

CONCENTRATION OF CREDIT RISK
 
Cash and cash equivalents and restricted cash are deposited with major financial institutions and, at times, such balances with any one financial institution may be in excess of FDIC-insured limits. As of June 30, 2011, there were no balances of cash and cash equivalents which were deposited in excess of FDIC-insured limits.

Except as follows, the Company has no significant off-balance-sheet risk or credit risk concentrations. Financial instruments that subject the Company to potential credit risks are principally cash equivalents and accounts receivable. Concentrated credit risk with respect to accounts receivable is limited to creditworthy customers. The Company's customers are principally located in the United States and Europe.   The Company is directly affected by the overall financial condition of the pharmaceutical, biotechnology and medical device industries and management believes that credit risk exists and that any credit risk the Company faces has been adequately reserved for as of June 30, 2011. Prior to 2008 the Company had not historically experienced significant losses related to receivables from individual customers or groups of customers in any specific industry or geographic area.  During the second half of fiscal 2008 and continuing during 2009, the biotechnology industry experienced liquidity and funding difficulties.  Several of the Company’s clients operate in this segment.  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 prior to fiscal 2008 were consistently within management's expectations. The overall downturn in the Global economy impacted several of the Company’s clients beginning in late 2008.  During 2011 the Company has seen increased activity in the biotechnology sector and believes that some of the credit and financial constraints that were limiting R & D activity have begun to decrease.   Due to these factors, the Company believes no additional credit risk beyond the amounts provided for in our allowance for uncollectible accounts, which the Company reevaluates on a monthly basis based on specific review of receivable agings and the period that any receivables are beyond the standard payment terms, is believed by management to be probable in the Company's accounts receivable. The Company does not require collateral from its customers in order to mitigate credit risk.
 
 
10

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

One customer accounted for 20% of our revenues during the six months ended June 30, 2011 or approximately $1,312,808. One customer accounted for 22% of our revenues during the six months ended June 30, 2010 or approximately $1,298,531.  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 six month periods presented.
 
   
Revenues
   
Accounts Receivable
 
For the Period ended
 
# of Customers
   
Percentage of Total Revenues
   
# of Customers
   
Percentage of Accounts Receivable
 
June 30, 2011
    1       20 %     4       54 %
December 31, 2010
    1       20 %     3       44 %
June 30, 2010
    1       22 %     3       34 %

Subsequent to two acquisitions completed in fiscal 2009, the Company’s European operations have become a more material portion of its overall revenues.  The table below provides revenues from European customers for the six month periods ended June 30, 2011 and June 30, 2010, respectively.

European Revenues
for the six months ended
June 30, 2011
   
June 30, 2010
European Revenues
   
% of Total Revenues
   
European Revenues
   
% of Total Revenues
 
$ 1,384,507       20.8 %   $ 745,718       12.6 %
 
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 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.
 
 
11

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
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 unaudited condensed 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.

DEFERRED REVENUE

Deferred revenue represents cash advances received in excess of revenue earned on on-going contracts.  Payment terms vary with each contract but may include an initial payment at the time the contract is executed, with future payments dependent upon the completion of certain contract phases or targeted milestones.  In the event of contract cancellation, the Company is generally entitled to payment for all work performed through the point of cancellation.  As of June 30, 2011, the Company had $4,667,243 in deferred revenues relating to contracts for services to be performed over periods ranging from 1 month to 5 years.  The Company had $4,182,449 in deferred revenues that are expected to be recognized in the next twelve months.

ADVERTISING

Advertising costs are expensed as incurred.  Advertising costs were $158,764 and $161,516 for the six months ended June 30, 2011 and June 30, 2010, respectively and are included under selling, general and administrative expenses on our Unaudited Condensed Consolidated Statements of Operations.
 
 
12

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
RESEARCH AND DEVELOPMENT EXPENSES

Software development costs are included in research and development and are expensed as incurred.  ASC 985.20, Software Industry Costs of Software to Be Sold, Leased or Marketed, requires the capitalization of certain development costs of software to be sold once technological feasibility is established, which the Company defines as completion to the point of marketability.  The capitalized cost is then amortized on a straight-line basis over the estimated product life.  To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been immaterial.  Accordingly, the Company has not capitalized any software development costs under ASC 985.20.  During the six month ended June 30, 2011 and June 30, 2010 we spent approximately $1,280,630 and $1,844,866 respectively, on research and development activities, which include costs associated with the development of our software products and services for our client’s projects and which are primarily comprised of salaries and related expenses for our software developers and consulting fees paid to third-party consultants.  Research and development 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 7.5 million shares to employees, directors and key consultants in accordance with the terms of the 2009 Plan documents.  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 12.5 million shares in accordance with the terms of the 1998 Plan document.  Each plan is more fully described in “Note 13, Employee Equity Incentive Plans.”  The Company accounts for its employee equity incentive plans under ASC 718, Compensation – Stock Compensation which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions.
 
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Unaudited Condensed Consolidated Statements of Operations. The Company currently uses the American Binomial option pricing model to determine grant date fair value.

EARNINGS PER SHARE

The Company accounts for Earnings Per Share using ASC 260 – Earnings per Share.  Unlike primary 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 ASC 740, Income Taxes.  ASC 740 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that have been recognized in the financial statements as measured by the provisions of the enacted tax laws.

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

IMPACT OF NEW ACCOUNTING STANDARDS
During fiscal 2011, we adopted the following new accounting pronouncements:

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of supplementary pro forma information for business combinations.” This update changes the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. These changes became effective for the Company beginning January 1, 2011. The Company’s adoption of this update did not have an impact on the Company’s financial condition or results of operations.
 
 
13

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
In December 2010, the FASB issued ASU 2010-28, “Intangible –Goodwill and Other (Topic 350): When to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.” This update requires an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. These changes became effective for the Company beginning January 1, 2011. The adoption of this ASU did not have a material impact on our financial statements.
 
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which clarifies the wording and disclosures required in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), to converge with those used (to be used) in International Financial Reporting Standards (“IFRS”). The update explains how to measure and disclose fair value under ASC 820. However, the FASB does not expect the changes in this standards update to alter the current application of the requirements in ASC 820. The provisions of ASU 2011-04 are effective for public entities prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is prohibited. Therefore, ASU 2011-04 is effective for the Company during the first quarter of fiscal 2012. The Company does not expect ASU 2011-04 to have a material effect on the Company’s results of operations, financial condition, and cash flows.

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, 2010 to determine their impact, if any, on our financial statements.

NOTE 3:                GOING CONCERN

We have experienced net losses and negative cash flow from operations and have funded our activities to-date primarily from debt and equity financings.  We will continue to require substantial funds to continue our research and development 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 research and development 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 research and development 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 research and development 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.
 
 
14

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

The ability of the Company to continue in existence is dependent on its having sufficient financial resources to bring products and services to market for marketplace acceptance.  As a result of our historical operating losses, negative cash flows and accumulated deficits for the period ending June 30, 2011 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.
 
15

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011

NOTE 4:                EARNINGS PER SHARE

Basic earnings (loss) per share were calculated using the weighted average number of shares outstanding of 86,207,462 and 85,507,699 for the six months ended June 30, 2011 and June 30, 2010, respectively.

Basic earnings (loss) per share were calculated using the weighted average number of shares outstanding of 86,332,044 and 85,507,699 for the three months ended June 30, 2011 and June 30, 2010, respectively.

Antidilutive shares aggregating 93,647,034 and 83,671,745 have been omitted from the calculation of dilutive EPS for the six month and three months ended June 30, 2011 and June 30, 2010, respectively as the shares were antidilutive. Provided below is reconciliation between numerators and denominators of the basic and diluted earnings per shares:  There were no differences between basic and diluted earnings per share.  The table below provides a reconciliation of anti-dilutive securities outstanding as of June 30, 2011 and June 30, 2010, respectively.
 
Anti-Dilutive Security
 
June 30, 2011
   
June 30, 2010
 
Preferred stock
    2,750,149       2,750,149  
Employee stock options
    12,739,500       12,286,500  
Warrants
    52,195,758       40,808,241  
Convertible notes
    24,620,000       27,200,000  
Shares issuable for accrued interest
    1,341,627       626,855  
                 
Total
    93,647,034       83,671,745  
 
The employee stock options are exercisable at prices ranging from $0.10 to $0.70 per share.  The exercise price on the stock warrants range from $0.25 to $0.60 per share.  Shares issuable upon conversion of Convertible Debentures have conversion prices ranging from $0.25 to $0.50 per share.

The Company’s convertible debt and convertible preferred stock have an anti-dilutive effect on net loss per share and were not included in the computation of diluted earnings per share.
 
For the six months ended
 
   
June 30, 2011
 
June 30, 2010
 
   
Income (loss)
   
Shares
   
Per-Share
 
Income (loss)
   
Shares
   
Per-Share
 
   
Numerator
   
Denominator
   
Amount
   
Numerator
   
Denominator
   
Amount
 
Basic EPS
  $ (4,993,240 )     86,207,462     $ (0.06 )   $ (1,406,106 )     85,507,699     $ (0.02 )
                                                 
Effect of Dilutive Securities                                                
None.
    -0-       -0-       -0-       -0-       -0-       -0-  
Diluted EPS
  $ (4,993,240 )     86,207,462     $ (0.06 )   $ (1,406,106 )     85,507,699     $ (0.02 )
                                                 
                                                 
For the three months ended
 
   
June 30, 2011
   
June 30, 2010
 
   
Income (loss)
   
Shares
   
Per-Share
 
Income (loss)
   
Shares
   
Per-Share
 
   
Numerator
   
Denominator
   
Amount
   
Numerator
   
Denominator
   
Amount
 
Basic EPS
  $ (1,048,596 )     86,332,044     $ (0.01 )   $ 164,730       85,507,699     $ 0.00  
                                                 
Effect of Dilutive Securities                                                
None.
    -0-       -0-       -0-       -0-       -0-       -0-  
Diluted EPS
  $ (1,048,596 )     86,332,044     $ (0.01 )   $ 164,730       85,507,699     $ 0.00  

 
16

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
NOTE 5:                PROPERTY AND EQUIPMENT, NET

 
Property and equipment consists of the following:
 
   
June 30, 2011
   
December 31, 2010
   
   
Cost
   
Accumulated Depreciation
   
Net Book Value
   
Cost
   
Accumulated Depreciation
   
Net Book Value
 
Estimated Useful Lives
Computer & Office Equipment
   $ 1,504,549     $ 1,006,356      $ 498,193     $ 1,466,187     $ 914,016     $ 552,171  
5 Years
Leasehold Improvements
    75,476       56,738       18,738       84,313       51,212       33,101  
5 Years
Computer Software
    1,393,501       1,080,764       312,737       1,366,955       937,141       429,814  
3 Years
Office Furniture
    107,687       79,885       27,802       106,759       75,157       31,602  
5 Years
    $ 3,081,213     $ 2,223,743     $ 857,470     $ 3,024,214     $ 1,977,526     $ 1,046,688    
 
Depreciation expense for the six months ended June 30, 2011 and June 30, 2010 was $241,720 and $255,342 respectively.

NOTE 6:                INTANGIBLE ASSETS, AT COST

 
Intangible assets consists of the following:
 
   
June 30, 2011
   
December 31, 2010
   
 Asset
 
Cost
   
Accumulated Amortization
   
Net Book Value
   
Cost
   
Accumulated Depreciation
   
Net Book Value
 
Estimated Useful Lives
Customer lists
  $ 1,392,701     $ 928,467     $ 464,234     $ 1,392,701     $ 696,351     $ 696,350  
3 Years
    $ 1,392,701     $ 928,467     $ 464,234     $ 1,392,701     $ 696,351     $ 696,350    
 
Amortization expense was $232,117 and $232,117 for the six months ended June 30, 2011 and June 30, 2010, respectively.

Annual amortization expense for the Company’s intangible assets is as follows:
 
2011
  $ 232,117  
2012
    232,117  
2013
    -0-  
2014
    -0-  
2015
    -0-  
         
Total
  $ 464,234  


NOTE 7:                ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

Account
 
June 30, 2011
   
December 31, 2010
 
Accounts payable
  $ 561,342     $ 629,775  
Accrued payroll and related costs
    271,409       179,331  
Other accrued expenses
    52,463       159,294  
Accrued interest
    652,920       403,303  
                 
Total Accounts Payable and Accrued Expenses
  $ 1,538,134     $ 1,371,703  
 
 
17

 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011
 
NOTE 8:                NOTES PAYABLE

At June 30, 2011, the Company owed $3,766,665 in notes payable all of which are unsecured.  The table below provides details as to the terms and conditions of the notes payable.
 
                                                         
                 
Non-Related Party
   
Related Party
                   
            Ending          
 
               
 
   
Total
   
Discount at
 
Origination
Date
Maturity
Date
 
Interest
Rate
   
Principal
6/30/2011
   
Current
   
Long
Term
   
Current
   
Long
Term
   
Allocated Discount
   
Discount
Amortized
   
June 30, 2011
 
12/31/2010
7/1/2012
    12 %   $ 51,800     $ -0-     $ 51,800     $ -0-     $ -0-     $ -0-     $ -0-     $ -0-  
12/31/2010
7/1/2012
    12 %     60,000       -0-       60,000       -0-       -0-       -0-       -0-       -0-  
2/1/2011
4/1/2013
    12 %     137,500       -0-       -0-       -0-       137,500       -0-       -0-       -0-  
4/1/2011
10/1/2012
    12 %     45,000       -0-       -0-       -0-       45,000       -0-       -0-       -0-  
12/31/2010
12/31/2011
    12 %     20,000       -0-       -0-       20,000       -0-       -0-       -0-       -0-  
12/31/2010
4/1/2012
    12 %     37,500       37,500       -0-       -0-       -0-       -0-       -0-       -0-  
12/16/2010
12/16/2012
    12 %     20,000       -0-       20,000       -0-       -0-       -0-       -0-       -0-  
12/31/2010
1/1/2013
    10 %     308,561       -0-       308,561       -0-       -0-       -0-       -0-       -0-  
12/31/2010
1/1/2013
    10 %     123,425       -0-       123,425       -0-       -0-       -0-       -0-       -0-  
3/31/2011
4/1/2014
    12 %     2,866,879       -0-       -0-       -0-       2,866,879       1,178,861       98,239       1,080,622  
5/13/2011
1/1/2013
    12 %     96,000       -0-       -0-       -0-       96,000       -0-       -0-       -0-  
                                                                           
              $ 3,766,665     $ 37,500     $ 563,786     $ 20,000     $ 3,145,379     $ 1,178,861     $ 98,239     $ 1,080,622  
 
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 our Chief Executive Officer, Cornelis F. Wit.  The note accrues interest at a rate of 12% per annum and has a maturity date of April 1, 2014.  This issuance caused us to calculate and record a derivative liability for the extension of the derivative liability.  The warrants were valued using a Binomial option pricing model.  A value of $1,178,861 was calculated and allocated to the warrants and recorded as a liability to the issuance of the note payable.  As a result of the recorded discount, the carrying amount of the note at  June 30, 2011 was $1,786,257.   The warrant liability (discount) will be amortized over the 36 month exercise period of the note payable.  The Company will continue to perform a fair value calculation periodically on the warrant liability and accordingly the warrant liability is increased or decreased based on the fair value calculation.  The resulting increase or decrease is reflected in operations as an unrealized gain or loss on changes in derivative liabilities.

On May 13, 2011, the Company issued a note payable in the principal amount of $96,000 to our Chief Executive Officer, Cornelis F. Wit.  The note accrues interest at a rate of 12% per annum and has a maturity date of January 1, 2013.

NOTE 9:                CONVERTIBLE NOTES PAYABLE

The following table summarizes the convertible debt outstanding as of June 30, 2011.

                                             
Carrying Amount
 
               
Principal at
         
Total
   
Discount at
   
Carrying Amount at
   
Short Term
   
Long Term
 
Date of Issuance
 
Interest
Rate
   
Original
Principal
   
June 30,
2011
   
Allocated
Discount
   
Discount
Amortized
   
June 30,
2011
   
June 30,
2011
   
Related
   
Non Related
   
Related