10-Q 1 omnicomm_10q-063012.htm FORM 10-Q omnicomm_10q-063012.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, 2012
[  ]           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 2, 2012: 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, 2012
 
PART I. FINANCIAL INFORMATION
3
       
 
ITEM 1.
FINANCIAL STATEMENTS
3
       
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
37
       
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
54
       
 
ITEM 4.
CONTROLS AND PROCEDURES
54
   
PART II OTHER INFORMATION
55
       
 
ITEM 1.
LEGAL PROCEEDINGS
55
       
 
ITEM 1A.
RISK FACTORS
55
       
 
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
55
       
 
ITEM 3.
 DEFAULTS UPON SENIOR SECURITIES
55
       
 
ITEM 4.
MINE SAFETY DISCLOSURES
55
       
 
ITEM 5.
OTHER INFORMATION
55
       
 
ITEM 6.
EXHIBITS
55
     
SIGNATURES
 
56
   
Exhibit 31.1*
57
   
Exhibit 31.2*
58
   
EXHIBIT 32.1**
59
 
 
* Filed herewith
**Furnished herewith
 
 
2

 
 
PART I. FINANCIAL INFORMATION

ITEM1.  FINANCIAL STATEMENTS
 
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
   
June 30, 2012
   
December 31, 2011
 
   
(unaudited)
       
ASSETS
             
CURRENT ASSETS
           
Cash
  $ 969,293     $ 1,302,287  
Accounts receivable, net of allowance for doubtful accounts of $226,588 and $142,444, respectively
    2,101,636       1,283,944  
Prepaid expenses
    167,869       157,363  
Total current assets
    3,238,798       2,743,594  
Property and equipment, net
    503,338       766,207  
Other assets
               
Intangible assets, net
    -0-       232,117  
Other assets
    24,541       33,669  
                 
TOTAL ASSETS
  $ 3,766,677     $ 3,775,587  
                 
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
                 
CURRENT LIABILITIES
               
Accounts payable and accrued expenses
  $ 1,751,761     $ 1,460,835  
Notes payable, current portion
    746,286       214,300  
Notes payable - current - related party
    20,000       -0-  
Deferred revenue, current portion
    4,718,754       4,293,316  
Convertible notes payable, related parties, current portion, net of discount of $-0- and $-0-, respectively
    1,100,000       -0-  
Convertible notes payable, current portion
    175,000       75,000  
Patent settlement liability, current portion
    962,500       925,000  
Conversion feature liability, related parties
    907,860       740,218  
Conversion feature liability
    21,135       18,693  
Warrant liability, related parties
    2,012,478       1,506,287  
Warrant liability
    98,929       186,421  
Total current liabilities
    12,514,703       9,420,070  
                 
LONG TERM LIABILITIES
               
Notes payable - long term, net of current portion
    17,500       569,486  
Notes payable related parties, long term, net of discount of $894,334 and $1,132,144, respectively
    3,572,545       3,354,735  
Deferred revenue, long term, net of current portion
    928,275       584,608  
Convertible notes payable, related parties, net of current portion
    8,340,000       9,440,000  
Convertible notes payable, net of current portion
    50,000       150,000  
Patent settlement liability - long term, net of current portion
    1,342,903       1,455,247  
                 
TOTAL LIABILITIES
    26,765,926       24,974,146  
                 
COMMITMENTS AND CONTINGENCIES (See Note 11)
               
                 
SHAREHOLDERS' (DEFICIT)
               
Preferred stock, $0.001 par value, 10,000,000 shares 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 $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, 86,481,495 and 86,481,495 issued and outstanding, respectively, at $0.001 par value
    86,482       86,482  
Additional paid in capital - preferred
    4,717,804       4,717,804  
Additional paid in capital - common
    36,605,826       36,572,099  
Accumulated other comprehensive (loss)
    (60,902 )     (53,714 )
Accumulated deficit
    (64,352,834 )     (62,525,605 )
                 
TOTAL SHAREHOLDERS' (DEFICIT)
    (22,999,249 )     (21,198,559 )
                 
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT)
  $ 3,766,677     $ 3,775,587  
 
See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements
 
 
3

 
 
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 
   
For the six months ended
June 30,
   
For the three months ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues
  $ 7,422,934     $ 6,659,377     $ 3,889,295     $ 3,344,710  
Reimbursable revenues
    416,234       6,810       180,379       6,810  
Total revenues
    7,839,168       6,666,187       4,069,674       3,351,520  
                                 
Cost of goods sold
    1,329,744       901,546       639,428       455,776  
Reimbursable expenses - cost of goods sold
    347,528       42,426       190,405       42,141  
Total cost of sales
    1,677,272       943,972       829,833       497,917  
                                 
Gross margin
    6,161,896       5,722,215       3,239,841       2,853,603  
                                 
Operating expenses
                               
Salaries, benefits and related taxes
    4,288,407       4,188,364       2,159,768       2,089,623  
Rent and occupancy expenses
    422,445       451,017       223,807       225,980  
Consulting services
    67,436       152,855       5,091       102,676  
Legal and professional fees
    197,455       240,795       93,417       104,665  
Travel
    206,083       247,204       94,230       126,696  
Telephone and internet
    73,604       116,223       38,521       49,307  
Selling, general and administrative
    466,140       514,724       238,454       228,758  
Bad debt expense
    84,144       -0-       84,144       -0-  
Depreciation expense
    232,755       241,720       114,356       115,164  
Amortization expense
    232,117       232,117       116,058       116,058  
Total operating expenses
    6,270,586       6,385,019       3,167,846       3,158,927  
                                 
Operating income/(loss)
    (108,690 )     (662,804 )     71,995       (305,324 )
                                 
Other income/(expense)
                               
Interest expense
    (60,888 )     (548,005 )     (30,243 )     (276,391 )
Interest expense, related parties
    (1,046,003 )     (725,216 )     (523,001 )     (366,226 )
Interest income
    208       4,625       31       4,236  
Change in derivative liabilities
    (588,784 )     (2,964,751 )     2,056,132       (54,181 )
Loss on sale of fixed assets     (22,106 )     -0-       (22,106 )     -0-  
Other comprehensive income
    (966 )     4,915       (1,752 )     574  
Income/(loss) before income taxes and preferred dividends
    (1,827,229 )     (4,891,236 )     1,551,056       (997,312 )
Net income/(loss)
    (1,827,229 )     (4,891,236 )     1,551,056       (997,312 )
Preferred stock dividends
                               
Preferred stock dividends in arrears Series A preferred
    (125,539 )     (102,004 )     (51,424 )     (51,284 )
Total preferred stock dividends
    (125,539 )     (102,004 )     (51,424 )     (51,284 )
Net income/(loss) attributable to common stockholders
  $ (1,952,768 )   $ (4,993,240 )   $ 1,499,632     $ (1,048,596 )
                                 
Net income/(loss) per share
                               
Basic and diluted
  $ (0.02 )   $ (0.06 )   $ 0.02     $ (0.01 )
Weighted average number of shares outstanding
                               
Basic and diluted
    86,481,495       86,207,462       86,481,495       86,332,044  
 
See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements
 
 
4

 
 
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(unaudited)
 
   
For the six months ended June 30,
   
For the three months ended June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Net income/(loss) attributable to common stockholders
  $ (1,952,768 )   $ (4,993,240 )   $ 1,499,632     $ (1,048,596 )
Other comprehensive income/(loss):
                               
Change in foreign currency translation adjustment
    (7,188 )     (11,514 )     (5,966 )     (1,939 )
                                 
Other comprehensive income/(loss)
    (7,188 )     (11,514 )     (5,966 )     (1,939 )
                                 
Comprehensive income/(loss):
  $ (1,959,956 )   $ (5,004,754 )   $ 1,493,666     $ (1,050,535 )
 
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, 2011 AND THE SIX MONTHS ENDED JUNE 30, 2012
(unaudited)
 
   
Preferred Stock
   
Common Stock
                         
    5% Series A Convertible     8% Series B Convertible     8% Series C Convertible     Series D Preferred Stock                                                  
   
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
   
Additional
paid in
capital - preferred
   
Number
of shares
   
$ 0.001
Par value
   
Additional
paid in
capital - common
   
Accumulated
deficit
   
Accumulated other
comprehensive
income
   
Treasury
stock
   
Total
shareholders'
(deficit)
 
Balances at December 31, 2010
    4,125,224     $ 4,125       -0-     $ -0-       -0-     $ -0-       250,000     $ 250     $ 4,717,804       86,081,495     $ 86,082     $ 36,906,356     $ (59,001,262 )   $ (24,298 )   $ (503,086 )   $ (17,814,029 )
                                                                                                                                 
Employee stock option expense
                                                                                            129,229                               129,229  
                                                                                                                                 
Treasury stock retired                                                                                             (503,086 )                     503,086       -0-  
                                                                                                                                 
Foreign currency translation adjustment                                                                                                             (29,416 )             (29,416 )
                                                                                                                                 
Issuance of common stock in lieu of salary                                                                             400,000       400       39,600                               40,000  
                                                                                                                                 
Net loss for the year ended December 31, 2011
    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       (3,524,343 )     -0-       -0-       (3,524,343 )
                                                                                                                                 
Balances at December 31, 2011
    4,125,224       4,125       -0-       -0-       -0-       -0-       250,000       250       4,717,804       86,481,495       86,482       36,572,099       (62,525,605 )     (53,714 )     -       (21,198,559 )
                                                                                                                                 
Employee stock option expense
                                                                                            33,727                               33,727  
                                                                                                                                 
Foreign currency translation adjustment
                                                                                                            (7,188 )             (7,188 )
                                                                                                                                 
Net loss for the six months ended June 30, 2012
    -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       -0-       (1,827,229 )     -0-       -0-       (1,827,229 )
                                                                                                                                 
Balances at June 30, 2012
    4,125,224     $ 4,125       -0-     $ -0-       -0-     $ -0-       250,000     $ 250     $ 4,717,804       86,481,495     $ 86,482     $ 36,605,826     $ (64,352,834 )   $ (60,902 )   $ -0-     $ (22,999,249 )
 
See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements
 
 
6

 
 
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
   
For the six months ended June 30,
 
   
2012
   
2011
 
             
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  $ (1,827,229 )   $ (4,891,236 )
Adjustment to reconcile net loss to net cash (used in) operating activities
               
Change in derivative liabilities
    588,784       2,964,751  
Loss from sale of fixed assets, net
    14,606       -0-  
Interest expense from derivative instruments
    237,810       497,884  
Common stock issued in lieu of salary
    -0-       40,000  
Employee stock option expense
    33,727       90,119  
Depreciation and amortization
    464,872       473,837  
Changes in operating assets and liabilities
               
Accounts receivable
    (901,836 )     (159,358 )
Provision for doubtful accounts     84,144       -0-  
Prepaid expenses
    (10,506 )     (22,015 )
Other assets
    9,127       (1,490 )
Accounts payable and accrued expenses
    290,925       211,431  
Patent settlement liability
    (74,844 )     (17,944 )
Deferred revenue
    769,105       (84,415 )
Net cash used in operating activities
    (321,315 )     (898,436 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale of property and equipment
    50,000       -0-  
Purchase of property and equipment
    (34,491 )     (52,502 )
Net cash provided by/(used in) investing activities
    15,509       (52,502 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Repayments of notes payable
    (20,000 )     (212,500 )
Proceeds of notes payable, related parties
    -0-       96,000  
Net cash used in financing activities
    (20,000 )     (116,500 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (7,188 )     (11,514 )
Net decrease in cash and cash equivalent
    (332,994 )     (1,078,952 )
Cash and cash equivalents at beginning of period
    1,302,287       1,213,397  
                 
Cash and cash equivalents at end of period
  $ 969,293     $ 134,445  
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period for:
               
Income taxes
  $ -0-     $ -0-  
Interest
  $ 761,682     $ 525,731  
                 
                 
Non-cash transactions
               
Notes payable issued in exchange for existing notes payable
  $ -0-     $ 2,866,879  
Notes payable issued for matured convertible note payable
  $ -0-     $ 45,000  
 
See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements
 
 
7

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
NOTE 1:                ORGANIZATION AND NATURE OF OPERATIONS

OmniComm Systems, Inc. (“OmniComm” or the “Company”) is a healthcare technology company that provides Web-based electronic data capture (“EDC”) solutions and related value-added services to pharmaceutical and biotech companies, clinical research organizations, 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 (sometimes referred to as “R & D”) efforts are focused on developing new and complementary software solutions, as well as enhancing our existing software solutions through the addition of increased functionality.    During the six month periods ended June 30, 2012 and June 30, 2011 we spent approximately $1,224,769 and $1,280,630, respectively, on research and development activities, which is 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 2011 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 three and six month periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year-ended December 31, 2012. 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, 2011.

ESTIMATES IN FINANCIAL STATEMENTS

The preparation of the unaudited condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto.  Significant estimates incorporated in our financial statements include the recorded allowance for doubtful accounts, the estimate of the appropriate amortization period of our intangible assets, the evaluation of whether our intangible assets have suffered any impairment, the allocation of revenues under multiple-element customer contracts, royalty-based patent liabilities, the value of derivatives associated with debt issued by the Company and the valuation of any corresponding discount to the issuance of our debt.  Actual results may differ from those estimates.
 
 
8

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
RECLASSIFICATIONS

Certain reclassifications have been made in the 2011 financial statements to conform to the 2012 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 in Germany and OmniComm Ltd., in 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 translation losses of $7,188 and $11,514 for the six month periods ended June 30, 2012 and June 30, 2011.

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 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. These activities include 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 solution is presently available only on a licensed basis. To date, hosted applications revenues have been primarily related to TrialMaster.
 
 
9

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
Revenues resulting from TrialMaster and eClinical Suite application hosting services consist of three components of services for each clinical trial: the first component is comprised of application set up, including design of electronic case report forms and edit checks, installation and server configuration of the system.  The second component involves application hosting and related support services as well as billable change orders which consist of amounts billed to customers for functionality changes made. The third stage involves services required to close out, or lock, the database for the clinical trial.
 
Fees charged and costs incurred for the trial system design, set up and implementation are amortized and recognized ratably over the estimated hosting period.  Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the remaining term of the hosting period. Fees for the first and third stages of the service are 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 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 and running test data and documentation of procedures.  Subsequent additions or extensions to license terms do not generally include additional professional services.
 
Pass-through Revenue and Expense
 
The Company accounts for pass-through revenue and expense in accordance with ASC 605-45, Principal Agent Considerations. In accordance with ASC 605-45, Principal Agent Consideration, 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.
 
 
 
10

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
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.

The fees associated with each business activity for the six month periods ended June 30, 2012 and June 30, 2011, respectively are:
 
   
For the six months ended
 
Revenue activity
 
June 30, 2012
   
June 30, 2011
 
Set-up fees
  $ 2,627,133     $ 1,586,263  
Change orders
    154,081       160,902  
Maintenance
    2,620,531       2,707,453  
Software licenses
    1,678,637       1,617,406  
Professional services
    425,115       242,703  
Hosting
    333,671       351,460  
Total
  $ 7,839,168     $ 6,666,187  
 
   
For the three months ended
 
Revenue activity
 
June 30, 2012
   
June 30, 2011
 
Set-up fees
  $ 1,478,956     $ 830,708  
Change orders
    62,325       83,022  
Maintenance
    1,304,884       1,331,152  
Software licenses
    911,555       798,352  
Professional services
    139,958       145,696  
Hosting
    171,996       162,590  
Total
  $ 4,069,674     $ 3,351,520  
 
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 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 $226,588 as of June 30, 2012 and $142, 444 as of December 31, 2011, respectively.

The following table summarizes activity in the Company's allowance for doubtful accounts for the periods presented.
 
   
For the periods ended
 
   
June 30, 2012
   
December 31, 2011
 
Beginning of period
  $ 142,444     $ 269,869  
Bad debt expense
    84,144       (119,889 )
Write-offs
    -0-       (7,536 )
End of period
  $ 226,588     $ 142,444  
 
 
11

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
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, 2012, no funds were deposited in excess of FDIC-insured limits.  Management believes the risk in these situations to be minimal.

Except as follows, the Company has no significant off-balance-sheet risk or credit risk concentrations. Financial instruments that subject the Company to potential credit risks are principally cash equivalents and accounts receivable. Concentrated credit risk with respect to accounts receivable is limited to creditworthy customers. The Company's customers are principally located in the United States and Europe.   The Company is directly affected by the overall financial condition of the pharmaceutical, biotechnology and medical device industries and management believes that credit risk exists and that any credit risk the Company faces has been adequately reserved for as of June 30, 2012.  The Company maintains an allowance for doubtful accounts based on accounts past due according to contractual terms and historical collection experience. Actual losses when incurred are charged to the allowance. The Company's losses related to collection of accounts receivable have consistently been within management's expectations.  As of June 30, 2012, the Company believes no additional credit risk exists beyond the amounts provided for in our allowance for uncollectible accounts.  The Company evaluates its allowance for uncollectable accounts on a monthly basis based on a specific review of receivable agings 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 20% of our revenues during the six month period ended June 30, 2012 or approximately $1,575,000 and one accounted for 18% or approximately $1,390,000. One customer accounted for 20% of our revenues during the six month period ended June 30, 2011 or approximately $1,313,000.  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 six month periods presented.
 
   
Revenues
   
Accounts receivable
 
For the period ended
 
Number of customers
    Percentage of total revenues    
Number of customers
   
Percentage of accounts receivable
 
June 30, 2012
  2     38%     4     49%  
December 31, 2011
  1     21%     2     29%  
June 30, 2011
  1     20%     4     54%  
 
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, 2012 and June 30, 2011, respectively.
 
European revenues
For the six months ended
 
June 30, 2012
   
June 30, 2011
 
European revenues
   
% of Total revenues
   
European revenues
   
% of Total revenues
 
$ 783,659       10 %   $ 1,384,507       21 %
 
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.
 
 
12

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
PROPERTY AND EQUIPMENT

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

ASSET IMPAIRMENT

Acquisitions and Intangible Assets

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

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

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

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

Deferred revenue represents cash advances and amounts in accounts receivable as of the balance sheet date received in excess of revenue earned on on-going contracts.  Payment terms vary with each contract but may include an initial payment at the time the contract is executed, with future payments dependent upon the completion of certain contract phases or targeted milestones.  In the event of contract cancellation, the Company is generally entitled to payment for all work performed through the point of cancellation.  As of June 30, 2012, the Company had $5,647,029 in deferred revenues relating to contracts for services to be performed over periods ranging from one month to five years.  The Company had $4,718,754 in deferred revenues that are expected to be recognized in the next twelve fiscal months.
 
 
13

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
ADVERTISING

Advertising costs are expensed as incurred.  Advertising costs were $118,256 and $158,764 for the six month periods ended June 30, 2012 and June 30, 2011, respectively and are included under selling, general and administrative expenses on our consolidated financial statements.

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 periods ended June 30, 2012 and June 30, 2011 we spent approximately $1,224,769 and $1,280,630 respectively, on research and development 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.  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 7,500,000 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 12,500,000 shares in accordance with the terms of the 1998 Plan document.  Each plan is more fully described in “Note 14, Employee Equity Incentive Plans.”  The Company accounts for its employee equity incentive plans under ASC 718, Compensation – Stock Compensation which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions.
 
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. The Company currently uses the Black Scholes option pricing model to determine grant date fair value.

EARNINGS PER SHARE

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

INCOME TAXES

The Company accounts for income taxes in accordance with ASC 740, Income Taxes.  ASC 740 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that have been recognized in the financial statements as measured by the provisions of the enacted tax laws.
 
 
14

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(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 six months of 2012, we adopted the following new accounting pronouncements:

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”).  ASU 2011-04 amends ASC 820, Fair Value Measurements (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards.  ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements.  Our adoption of these new provisions of ASU 2011-04 on January 1, 2012 did not have an impact on our consolidated financial statements.
 
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”).  ASU 2011-05 requires the presentation of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements.  We adopted the provisions of ASU 2011-05 on January 1, 2012 and have elected to present two separate consecutive statements in our consolidated financial statements.
 
In December 2011, FASB issued Accounting Standards Update 2011-11, Balance Sheet - Disclosures about Offsetting Assets and Liabilities” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity's balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such, we do not expect that the adoption of this standard will have a material impact on our results of operations, cash flows or financial condition.
 
On January 1, 2012, FASB Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment ("ASU 2011-08") became effective. This standard gives an entity the option of either performing Step One of the goodwill impairment test or performing a qualitative assessment to determine whether performing Step One of the goodwill impairment test is necessary. An entity may choose to perform the qualitative assessment for some or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit in any period and proceed directly to Step One of the impairment test. Our adoption of ASU 2011-08 did not have an impact on our financial statements. 

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

NOTE 3:                GOING CONCERN

We have experienced net losses and negative cash flows from operations and have utilized debt and equity financings to help provide for our working capital, capital expenditure and R&D needs.  We will continue to require substantial funds to continue our 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.
 
 
15

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
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.

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, 2012 there is substantial doubt about the Company’s ability to continue as a going concern.

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

NOTE 4.                 EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share were calculated using the weighted average number of shares outstanding of 86,481,495 and 86,207,462 for the six month periods ended June 30, 2012 and June 30, 2011, respectively.

Basic earnings (loss) per share were calculated using the weighted average number of shares outstanding of 86,481,495 and 86,332,044 for the three month periods ended June 30, 2012 and June 30, 2011, respectively.

Antidilutive shares aggregating 87,055,227 and 93,647,034 have been omitted from the calculation of dilutive earnings (loss) per share for the six month periods ended June 30, 2012 and June 30, 2011, respectively, as the shares were antidilutive. Provided below is the reconciliation between numerators and denominators of the basic and diluted earnings per shares:  There were no differences between basic and diluted earnings per share for the six month periods ended June 30.  The table below provides a reconciliation of anti-dilutive securities outstanding as of June 30, 2012 and June 30, 2011, respectively.
 
Anti-dilutive security
 
June 30, 2012
   
June 30, 2011
 
Preferred stock
    2,750,149       2,750,149  
Employee stock options
    11,093,000       12,739,500  
Warrants
    48,009,582       52,195,758  
Convertible notes
    24,620,000       24,620,000  
Shares issuable for accrued interest
    582,496       1,341,627  
Total
    87,055,227       93,647,034  
 
The employee stock options are exercisable at prices ranging from $0.045 to $0.69 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.
 
 
16

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
The Company’s convertible debt and convertible preferred stock have an anti-dilutive effect on net income (loss) per share and were not included in the computation of diluted earnings per share.
 
For the six months ended
 
   
June 30, 2012
   
June 30, 2011
 
   
Income (loss)
numerator
   
Shares
denominator
   
Per-share
amount
   
Income (loss)
numerator
   
Shares
denominator
   
Per-share
amount
 
Basic EPS
  $ (1,952,768 )     86,481,495     $ (0.02 )   $ (4,993,240 )     86,207,462     $ (0.06 )
                                                 
Effect of dilutive securities
                                               
                                                 
None
    -0-       -0-       -0-       -0-       -0-       -0-  
                                                 
Diluted EPS
  $ (1,952,768 )     86,481,495     $ (0.02 )   $ (4,993,240 )     86,207,462     $ (0.06 )
 
For the three months ended
 
   
June 30, 2012
   
June 30, 2011
 
   
Income (loss)
numerator
   
Shares
denominator
   
Per-share
amount
   
Income (loss)
numerator
   
Shares
denominator
   
Per-share
amount
 
Basic EPS
  $ 1,499,632       86,481,495     $ 0.02     $ (1,048,596 )     86,332,044     $ (0.01 )
                                                 
Effect of dilutive securities
                                               
                                                 
None
    -0-       -0-       -0-       -0-       -0-       -0-  
                                                 
Diluted EPS
  $ 1,499,632       86,481,495     $ 0.02     $ (1,048,596 )     86,332,044     $ (0.01 )
 
NOTE 5:                PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:
 
   
June 30, 2012
   
December 31, 2011
   
   
Cost
   
Accumulated depreciation
   
Net book value
   
Cost
   
Accumulated depreciation
   
Net book value
 
Estimated useful life (Years)
Computer & office equipment
  $ 1,429,323     $ 1,101,228     $ 328,095     $ 1,550,907     $ 1,094,152     $ 456,755  
5
Leasehold improvements
    75,476       64,340       11,136       75,476       60,785       14,691  
5
Computer software
    1,484,786       1,341,550       143,236       1,477,539       1,207,662       269,877  
3
Office furniture
    107,067       86,196       20,871       107,389       82,505       24,884  
5
Total
  $ 3,096,652     $ 2,593,314     $ 503,338     $ 3,211,311     $ 2,445,104     $ 766,207    
 
Depreciation expense for the six month periods ended June 30, 2012 and June 30, 2011 was $232,755 and $241,720, respectively.

NOTE 6:                INTANGIBLE ASSETS, AT COST

Intangible assets consist of the following:
 
   
June 30, 2012
   
December 31, 2011
   
Asset
 
Cost
   
Accumulated amortization
 
Net book value
   
Cost
   
Accumulated amortization
 
Net book value
 
Estimated useful life (Years)
Customer lists
  $ 1,392,701     $ 1,392,701     $ -0-     $ 1,392,701     $ 1,160,584   $ 232,117  
3
    $ 1,392,701     $ 1,392,701     $ -0-     $ 1,392,701     $ 1,160,584   $ 232,117    
 
Amortization expense was $232,117 and $232,117 for the six month periods ended June 30, 2012 and June 30, 2011, respectively.
 
 
17

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
NOTE 7:                ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:
 
Account
 
June 30, 2012
   
December 31, 2011
 
Accounts payable
  $ 659,742     $ 672,516  
Accrued payroll and related costs
    271,203       176,900  
Other accrued expenses
    172,045       70,047  
Accrued interest
    648,771       541,372  
Total accounts payable and accrued expenses
  $ 1,751,761     $ 1,460,835  
 
NOTE 8:                NOTES PAYABLE

At June 30, 2012, the Company owed $5,250,665 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
 
Origination
date
Maturity
date
 
Interest
rate
   
Ending
principal
June 30, 2012
   
Current
   
Long
term
   
Current
   
Long
term
 
12/31/2010
7/1/2012
  12%     $ 51,800     $ 51,800     $ -0-     $ -0-     $ -0-  
12/31/2010
7/1/2012
  12%       60,000       60,000       -0-       -0-       -0-  
2/1/2011
4/1/2013
  12%       137,500       137,500       -0-       -0-       -0-  
4/1/2011
10/1/2012
  12%       45,000       45,000       -0-       -0-       -0-  
12/31/2011
4/1/2013
  12%       20,000       -0-       -0-       20,000       -0-  
4/1/2012
1/1/2014
  12%       17,500       -0-       17,500       -0-       -0-  
12/16/2010
12/16/2012
  12%       20,000       20,000       -0-       -0-       -0-  
12/31/2010
1/1/2013
  10%       308,561       308,561       -0-       -0-       -0-  
12/31/2010
1/1/2013
  10%       123,425       123,425       -0-       -0-       -0-  
3/31/2011
4/1/2014
  12%       2,866,879       -0-       -0-       -0-       2,866,879  
12/31/2011
1/1/2015
  12%       1,600,000       -0-       -0-       -0-       1,600,000  
Discount on note payable
                  -0-       -0-       -0-       (894,334 )
Total
          $ 5,250,665     $ 746,286     $ 17,500     $ 20,000     $ 3,572,545  
 
At December 31, 2011, the Company owed $5,270,665 in notes payable all of which were unsecured.  The table below provides details as to the terms and conditions of the notes payable.
 
                 
Non related party
   
Related party
 
Origination
date
Maturity
date
 
Interest
rate
   
Ending
principal
December 31, 2011
   
Current
   
Long
term
   
Current
   
Long
term
 
12/31/2010
7/1/2012
  12%     $ 51,800     $ 51,800     $ -0-     $ -0-     $ -0-  
12/31/2010
7/1/2012
  12%       60,000       60,000       -0-       -0-       -0-  
2/1/2011
4/1/2013
  12%       137,500       -0-       137,500       -0-       -0-  
4/1/2011
10/1/2012
  12%       45,000       45,000       -0-       -0-       -0-  
12/31/2011
4/1/2013
  12%       20,000       -0-       -0-       -0-       20,000  
12/31/2010
4/1/2012
  12%       37,500       37,500       -0-       -0-       -0-  
12/16/2010
12/16/2012
  12%       20,000       20,000       -0-       -0-       -0-  
12/31/2010
1/1/2013
  10%       308,561       -0-       308,561       -0-       -0-  
12/31/2010
1/1/2013
  10%       123,425       -0-       123,425       -0-       -0-  
3/31/2011
4/1/2014
  12%       2,866,879       -0-       -0-       -0-       2,866,879  
12/31/2011
1/1/2015
  12%       1,600,000       -0-       -0-       -0-       1,600,000  
Discount on note payable
                  -0-       -0-       -0-       (1,132,144 )
Total
          $ 5,270,665     $ 214,300     $ 569,486     $ -0-     $ 3,354,735  
 
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 and Director, 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 warrant liability.  The warrants were valued using the Black Scholes 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 liability we recorded a discount to the note payable.  The carrying amount of the note at the time of issuance was therefore $1,688,018.  The warrant liability (discount) will be amortized over the 36 month duration of the note payable.  The Company will continue to perform a fair value calculation periodically on the warrant liability and accordingly the warrant liability is increased or decreased based on the fair value calculation.  The resulting increase or decrease is reflected in operations as an unrealized gain or loss on changes in derivative liabilities.
 
18

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
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, 2010.
ii.          Promissory Note issued on June 29, 2010 for $115,000 with a maturity date of December 31, 2010.
iii.         Promissory Note issued on September 30, 2010 for $695,000 with a maturity date of December 31, 2010.
iv.         Promissory Note issued on December 31, 2010 for $1,197,500 with a maturity date of December 31, 2011.
v.          Promissory Note issued on December 31, 2010 for $409,379 with a maturity date of April 01, 2012.

On May 13, 2011, the Company issued a note payable in the principal amount of $96,000 to our Chief Executive Officer and Director, Cornelis F. Wit.  The note accrues interest at a rate of 12% per annum and has a maturity date of January 1, 2013.  This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.

On September 2, 2011, the Company issued a note payable in the principal amount of $50,000 to our Chief Executive Officer and Director, Cornelis F. Wit.  The note bore interest at a rate of 12% per annum and had a maturity date of January 1, 2013.  This note was repaid in full on September 7, 2011.

On September 30, 2011, the Company issued a promissory note in the principal amount of $342,000 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, 2014.  The promissory note consolidates the principal amounts owed under the following promissory notes originally issued during 2011.  This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.

i.           Promissory Note issued on August 16, 2011 for $80,000 with a maturity date of January 01, 2013.
ii.          Promissory Note issued on August 19, 2011 for $15,000 with a maturity date of January 01, 2013.
iii.         Promissory Note issued on August 25, 2011 for $35,000 with a maturity date of January 01, 2013.
iv.         Promissory Note issued on September 02, 2011 for $32,000 with a maturity date of January 01, 2013.
v.          Promissory Note issued on September 15, 2011 for $80,000 with a maturity date of January 01, 2013.
vi.         Promissory Note issued on September 28, 2011 for $100,000 with a maturity date of January 01, 2013.

On October 5, 2011, the Company issued a note payable in the principal amount of $130,000 to our Chief Executive Officer and Director, Cornelis F. Wit.  The note accrues interest at a rate of 12% per annum and had a maturity date of April 1, 2014.  This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.

On October 28, 2011, the Company issued a note payable in the principal amount of $123,000 to our Chief Executive Officer and Director, Cornelis F. Wit.  The note accrues interest at a rate of 12% per annum and had a maturity date of April 1, 2014.  This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.

On October 31, 2011, the Company issued a note payable in the principal amount of $82,000 to our Chief Executive Officer and Director, Cornelis F. Wit.  The note accrues interest at a rate of 12% per annum and had a maturity date of April 1, 2014.  This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
 
 
19

 
 
OMNICOMM SYSTEMS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2012 AND JUNE 30, 2011
(unaudited)
 
On November 23, 2011, the Company issued a note payable in the principal amount of $60,000 to our Chief Executive Officer and Director, Cornelis F. Wit.  The note accrues interest at a rate of 12% per annum and had a maturity date of January 1, 2013.  This was note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.

On December 1, 2011, the Company issued a note payable in the principal amount of $150,000 to our Chief Executive Officer and Director, Cornelis F. Wit.  The note bore interest at a rate of 12% per annum and had a maturity date of January 1, 2013.  This note was repaid in full on December 27, 2011.

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 our Chief Executive Officer and Director, Cornelis F. Wit.  The note carries an interest rate of 12% per annum and is due on January 1, 2015.  The promissory note consolidates the amounts owed as detailed below:

i.           Promissory Note issued on May 13, 2011 for $96,000 with a maturity date of January 01, 2013;
ii.          Promissory Note issued on September 30, 2011 for $342,000 with a maturity date of April 01, 2014;
iii.         Promissory Note issued on October 05, 2011 for $130,000 with a maturity date of April 01, 2014;
iv.         Promissory Note issued on October 28, 2011 for $123,000 with a maturity date of April 01, 2014;
v.          Promissory Note issued on October 31, 2011 for $82,000 with a maturity date of April 01, 2014;
vi.         Promissory Note issued on November 23, 2011 for $60,000 with a maturity date of January 1, 2013; and
vii.        Accrued and unpaid interest in the amount of $767,000.

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 $247,999 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 $1,352,001.  The warrant liability (discount) will be amortized over the 36 month duration of the note payable.  The Company will continue to perform a fair value calculation periodically on the warrant liability and accordingly the warrant liability is increased or decreased based on the fair value calculation.  The resulting increase or decrease is reflected in operations as an unrealized gain or loss on changes in derivative liabilities.

NOTE 9:                CONVERTIBLE NOTES PAYABLE

The following table summarizes the convertible debt outstanding as of June 30, 2012.
 
                Principal           Discount   Carrying   Carrying amount  
               
at
      Total  
at
 
amount at
 
Short term
 
Long term
 
Date of
 
Maturity
 
Interest
 
Original
  June 30,  
Allocated
 
discount
  June 30,   June 30,       Non       Non  
issuance
 
date
 
rate
 
principal
 
2012
 
discount
 
amortized
 
2012
 
2012
 
Related
 
related
 
Related
 
related
 
August 1, 1999
 
June 30, 2004
  10%   $ 862,500   $ 75,000   $ -0-   $ -0-   $ -0-   $ 75,000   $ -0-   $ 75,000   $ -0-   $ -0-  
August 29, 2008
 
August 29, 2013
  10%     2,270,000     1,920,000