EX-99 2 0002.txt EXHIBIT 99 Exhibit 99 - Financial Statements I N D E X Page ---- REPORT OF CERTIFIED PUBLIC ACCOUNTANTS 32 CONSOLIDATED BALANCE SHEETS 33 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) 34-37 CONSOLIDATED STATEMENTS OF OPERATIONS 38 CONSOLIDATED STATEMENTS OF CASH FLOWS 39-40 NOTES TO THE FINANCIAL STATEMENTS 41-50 31 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors OMNICOMM SYSTEMS, INC. Miami, Florida We have audited the accompanying consolidated balance sheets of OMNICOMM SYSTEMS, INC. as of December 31, 2000 and 1999 and the related consolidated statements of operations, changes in shareholders' equity (deficit) and cash flows for each of the two years in the period ended December 31, 2000. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain resonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements' presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OMNICOMM SYSTEMS, INC. at December 31, 2000 and 1999, and the consolidated results of their operations and cash flows for each of the two years in the period ended December 31, 2000, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Corporation will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Corporation has incurred losses and negative cash flows from operations in recent years through December 31, 2000 and these conditions are expected to continue through 2001, raising substantial doubt about the Corporation's ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note 3. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. GREENBERG & COMPANY LLC Springfield, New Jersey February 2, 2001 32 OMNICOMM SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999 ----------- ----------- ASSETS CURRENT ASSETS Cash $ 90,958 $ 1,127,263 Accounts receivable 9,927 8,458 Inventory -0- 10,166 ----------- ----------- Total current assets 100,885 1,145,887 PROPERTY AND EQUIPMENT, Net 486,481 353,183 OTHER ASSETS Shareholder loans -0- 3,406 Intangible assets, net 53,071 169,629 Goodwill, net 79,277 237,832 Other assets 25,160 26,960 ----------- ----------- TOTAL ASSETS $ 744,874 $ 1,936,897 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses 1,079,506 $ 284,481 Notes payable - current 612,500 177,500 Notes payable related parties - current 660,000 -0- Sales tax payable -0- 1,818 Deferred revenue 26,861 -0- ----------- ----------- Total current liabilities 2,378,867 463,799 CONVERTIBLE DEBT 462,500 862,500 ----------- ----------- TOTAL LIABILITIES 2,841,367 1,326,299 ----------- ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT) 5% Series A convertible preferred stock, 5,000,000 shares authorized, 4,260,224 and 4,117,500 issued and outstanding, respectively, at par 3,857,179 3,872,843 Common stock - 20,000,000 shares authorized, 7,953,627 and 3,344,066 issued and outstanding, respectively, at $.001 par value 7,975 3,344 Additional paid in capital 3,260,500 238,007 Treasury Stock, cost method, 20,951 shares (293,312) -0- Retained deficit (8,927,695) (2,652,644) Subscriptions receivable 1,140 (850,952) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (2,096,493) 610,598 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 744,874 $ 1,936,897 =========== ===========
See accompanying summary of accounting policies and notes to financial statements. 33 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Period January 1, 1999 to December 31, 2000
5% Series A Convert Common Stock Additional Preferred Stock Number of $.001 Paid in Number Shares Value Capital of Shares $ No Par ----------- ----------- ----------- ----------- ----------- Balance at January 1, 1999 1,343,000 $ 1,343 $ 132,213 -0- $ -0- Issuance of common stock 250,000 250 Issuance of common stock for services 86,400 86 56,059 Issuance of common stock 300,000 300 2,700 Issuance of common stock for services 68,000 68 44,132 Issuance of common stock 1,296,666 1,297 2,903 Issuance of preferred stock, net of $134,590 issuance costs 4,117,500 3,872,843 Net loss for the year ended December 31, 1999 Balance at January 1, 2000 3,344,066 3,344 238,007 4,117,500 3,872,843 Total Retained Shareholders' Earnings Subscription Treasury Equity (Deficit) Receivable Stock (Deficit) ----------- ------------ ------------ ----------- Balance at January 1, 1999 $ (311,407) $ (952) $ -0- $ (178,803) Issuance of common stock 250 Issuance of common stock for services 56,145 Issuance of common stock 3,000 Issuance of common stock for services 44,200 Issuance of common stock 4,200 Issuance of preferred stock, net of $134,590 issuance costs (850,000) 3,022,843 Net loss for the year ended December 31, 1999 (2,341,237) (2,341,237) Balance at January 1, 2000 (2,652,644) (850,952) -0- 610,598
34 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Period January 1, 1999 to December 31, 2000
5% Series A Convert Common Stock Additional Preferred Stock Number of $.001 Paid in Number of Shares Value Capital Shares $ No Par ---------- ---------- ---------- ---------- ---------- Issuance of common stock for services 40,000 40 89,960 Issuance of common stock 284,166 284 Exercise of stock options 1,025,895 1,026 297,024 Purchase of treasury stock in connection with stock appreciation rights (20,951) Payment on subscription receivable Acquisition of WebIPA, Inc. 1,200,000 1,200 3,833 Issuance of preferred stock 146,000 146,000 Issuance costs on preferred stock (206,750) Total Retained Shareholders' Earnings Subscription Treasury Equity (Deficit) Receivable Stock (Deficit) ---------- ---------- ---------- ---------- Issuance of common stock for services 90,000 Issuance of common stock 284 Exercise of stock options 298,050 Purchase of treasury stock in connection with stock appreciation rights (293,312) (293,312) Payment on subscription receivable 850,000 850,000 Acquisition of WebIPA, Inc. 5,033 Issuance of preferred stock 146,000 Issuance costs on preferred stock (206,750)
35 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) For the Period January 1, 1999 to December 31, 2000
Common Stock Additional Preferred Stock Retained Shareholders' Number of $.001 Paid in Number of Earnings Subscription Treasury Equity Shares Value Capital Shares $ No Par (Deficit) Receivable Stock (Deficit) -------- -------- -------- -------- -------- -------- -------- -------- -------- Conversion of conv. notes payable, net of issuance costs of $33,287 320,000 320 366,393 366,713 Exercise of stock options 20,000 20 15,980 16,000 Exercise of stock warrants 481,834 482 963,186 963,668 Exercise of stock warrants 187,954 188 (188) -0- Conversion of preferred stock to common stock 66,667 67 99,933 (100,000) (100,000) -0- Conversion of notes payable to common stock 91,608 92 206,026 206,118 Issuance of common stock for services 70,990 71 188,784 188,855 Issuance of common stock, net of issuance costs of $66,833 668,334 668 600,833 601,501
36
Common Stock Additional Preferred Stock Number of $.001 Paid in Number of Shares Value Capital Shares $ No Par ----------- ----------- ----------- ----------- ----------- Issuance of preferred stock for services 126,781 190,172 Conversion of notes payable into preferred stock 66,667 100,000 Conversion of preferred stock to common stock 96,724 97 144,989 (96,724) (145,086) Issuance of common stock for services 76,340 76 45,552 Net (loss) for the year ended December 31, 2000 Balances at December 31, 2000 7,953,627 $ 7,975 $ 3,260,500 4,260,224 $ 3,857,179 =========== =========== =========== =========== =========== Retained Shareholders' Earnings Subscription Treasury Equity (Deficit) Receivable Stock (Deficit) ----------- ----------- ----------- ----------- Issuance of preferred stock for services 290,172 Conversion of notes payable into preferred stock 100,000 Conversion of preferred stock to common stock -0- Issuance of common stock for services 45,628 Net (loss) for the year ended December 31, 2000 (6,275,051) (6,275,051) Balances at December 31, 2000 $(8,927,695) $ (1,140) $ (293,312) $(2,096,493) =========== =========== =========== ===========
See accompanying summary of accounting policies and notes to financial statements. 37 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2000 1999 ----------- ----------- REVENUES - SALES, Net $ 70,976 $ 1,259,214 COST OF SALES 52,492 1,005,338 ----------- ----------- GROSS MARGIN 18,484 253,876 OTHER EXPENSES Salaries, employee benefits and related expenses 2,895,108 784,635 Rent 242,471 108,371 Consulting - marketing and sales 107,600 237,630 Consulting - medical advisory 93,033 210,503 Consulting - product development 69,365 109,618 Legal and professional fees 613,797 98,895 Travel 374,558 334,753 Telephone and internet 197,858 67,109 Factoring fees -0- 4,571 Selling, general and administrative 617,006 208,226 Impairment of equity investment 335,000 -0- Loss on subsidiary bankruptcy 78,131 -0- Interest expense, net 91,193 97,379 Depreciation and amortization 370,278 299,402 ----------- ----------- TOTAL OTHER EXPENSE 6,085,398 2,561,092 ----------- ----------- INCOME (LOSS) BEFORE TAXES AND PREFERRED DIVIDENDS (6,066,914) (2,307,216) INCOME TAX EXPENSE (BENEFIT) -0- -0- PREFERRED STOCK DIVIDENDS (208,137) (34,021) ----------- ----------- NET INCOME (LOSS) (6,275,051) $(2,341,237) =========== =========== BASIS AND DILUTED NET INCOME (LOSS) PER SHARE $ (.98) $ (1.27) =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED 6,408,634 1,840,550 =========== ===========
See accompanying summary of accounting policies and notes to financial statements. 38 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000 1999 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(6,275,051) $(2,341,237) Adjustment to reconcile net income to net cash provided by (used in) operating activities: Impairment of equity investment 335,000 -0- Loss subsidiary bankruptcy 78,131 -0- Depreciation and amortization 370,278 299,402 Common stock issued for services 324,482 104,545 Preferred stock issued for services 190,172 -0- Accrued placement agent fee (66,833) -0- Change in assets and liabilities: Accounts receivable (1,468) 68,730 Inventory 10,166 (5,926) Shareholder loans 3,406 Other assets 1,800 (17,660) Accounts payable and accrued expenses 795,026 (1,997) Sales tax payable (1,818) (38,018) Due to factoring agent -0- (139,012) Deferred revenue 26,861 -0- ----------- ----------- Net cash provided by (used in) operating activities (4,209,848) (2,071,173) CASH FLOWS FROM INVESTING ACTIVITIES Equity investment in EMN (335,000) -0- Purchase of WebIPA 5,033 -0- Purchase of property and equipment (333,765) (347,405) ----------- ----------- Net cash provided by (used in) operating activities (663,732) (347,405) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from convertible notes, net of issuance costs -0- 742,875 Payments on notes payable (45,000) (267,500) Proceeds from notes payable 1,440,000 -0- Issuance of 5% Series A convertible preferred stock, net of issuance costs 789,250 3,022,843 Issuance of common stock 668,618 3,250 Proceeds from stock warrant exercise 963,668 -0- Proceeds from stock option exercise 20,739 -0- ----------- ----------- Net cash provided by (used in) financing activities 3,837,275 3,501,468 ----------- ----------- Net increase (decrease) in cash and cash equivalents (1,036,305) 1,082,890 Cash and cash equivalents at beginning of period 1,127,263 44,373 ----------- ----------- Cash and cash equivalents at end of period $ 90,958 $ 1,127,263 =========== ===========
39 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the years ended December 31, 2000 1999 ----------- ----------- Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Income tax paid $ -0- $ -0- =========== =========== Interest paid $ 65,827 $ 67,297 =========== ===========
Non-Cash Investing and Financing Transactions; Acquisition of all of the outstanding common stock of WebIPA, Inc. during the quarter ended March 31, 2000. Assets acquired, fair value $ 5,033 Cash acquired 5,033 -------- Net cash paid for acquisition $ -0- ======== During the year ended December 31, 2000, $400,000 of convertible notes payable were converted into 320,000 shares of common stock. During the year ended December 31, 2000, 1,018,604 incentive stock options were exercised utilizing stock appreciation rights. The net proceeds to the company would have been $293,312. The company recorded a treasury stock transaction in the amount of $293,312 to account for the stock appreciation rights. During the year ended December 31, 2000, a promissory note with a face value of $100,000 was converted into 66,667 shares of the Company's preferred stock at a rate of $1.50 per share. During the year ended December 31, 2000, promissory notes totaling $206,118 of principal and interest were converted into 91,608 shares of the Company's preferred stock at a rate of $2.25 per share. During the year ended December 31, 2000, $245,086 of the Company's convertible Series A Preferred Stock totaling 196,724 shares were converted into 163,391 shares of common stock. See accompanying summary of accounting policies and notes to financial statements. 40 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS OmniComm Systems, Inc. (the "Company") was originally incorporated in Florida in February 1997. The Company provides Internet based database applications that integrate significant components of the clinical trial process, including the collection, compilation and validation of data over the Internet. The Company's primary products include TrialMaster(TM) and WebIPA(R). NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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 balance sheets approximates fair value. CONSOLIDATION The Company's accounts include those of its two wholly owned subsidiaries, OmniCommerce and OmniTrial B.V. All significant intercompany transactions have been eliminated in consolidation. ACCOUNTS RECEIVABLE Accounts receivable are judged as to collectibility by management and an allowance for bad debts is established as necessary. As of each balance sheet date, no reserve was considered necessary. EARNINGS PER SHARE The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. The diluted earnings per share calculation is very similar to the previously fully diluted earnings per share calculation method. SFAS 128 became effective December 31, 1997. Basic earnings per share were calculated using the weighted average number of shares outstanding of 6,408,364 and 1,840,550 for the years ended December 31, 2000 and 1999; respectively. There were no differences between basic and diluted earnings per share. Options to purchase 4,301,900 shares of common stock at prices ranging from $.60 to $6.50 per share were outstanding at December 31, 2000, but they were not included in the computation of diluted earnings per share because the options have an anti-dilutive effect. The effect of the convertible debt and convertible preferred stock are anti-dilutive. 5% SERIES A CONVERTIBLE PREFERRED STOCK During the year ended December 31, 1999, the Company designated 5,000,000 shares of its 10,000,000 authorized preferred shares as 5% Series A Convertible Preferred Stock. Each share is convertible into common stock at $1.50 per share. In the event of liquidation, these shareholders will be entitled to receive in preference to the holders of common stock an amount equal to their original purchase price plus all accrued but unpaid dividends. Dividends are payable at the rate of 5% per annum, payable semi-annually. ADVERTISING Advertising costs are expensed as incurred. Advertising costs were $127,175 and $7,599 for the years ended December 31, 2000 and 1999 respectively. 41 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Continued) Reclassifications Certain items from prior periods within the financial statements have been reclassified to conform to current period classifications. INTANGIBLE ASSETS AND GOODWILL Included in Intangible Assets are the following assets: December 31, 2000 Accumulated Cost Amortization -------- -------- Covenant not to compete $120,000 $120,000 Software development costs 87,500 72,917 Organization costs 539 539 Debt acquisition costs 119,625 81,137 -------- -------- $327,664 $274,593 ======== ======== December 31, 1999 Accumulated Cost Amortization -------- -------- Covenant not to compete $120,000 $ 90,000 Software development costs 87,500 43,750 Organization costs 539 360 Debt acquisition costs 119,625 23,925 -------- -------- $327,664 $158,035 ======== ======== The covenant not to compete and the software development costs were acquired as a result of the acquisition of Education Navigator, Inc. (EdNav) on June 26, 1998. The covenant is for a two-year period and is being amortized ratably over that time. The software development costs were capitalized and are being amortized ratably over a three-year period, as that is the expected life of the various products. Amortization expense was $30,000 on the covenant not to compete, and $29,167 for software development costs for the year ended December 31, 2000. During the first nine months of 1999, the Company issued Convertible Notes totaling $862,500. The fees of $119,625 associated with these notes are being amortized ratably over the term of the notes, which is five years. Amortization expense of the debt acquisition costs totaled $23,925 for the year ended December 31, 2000, and approximately $33,287 of the debt acquisition costs were reclassified as stock issuance costs in connection with the conversion of $400,000 (original cost) worth of the convertible notes into common stock of the Company. Included in Goodwill, as a result of the EdNav acquisition at December 31, 2000 and December 31, 1999 is the cost of $475,665 and accumulated amortization of $396,388 and $237,833 respectively. The goodwill is being amortized ratably over a period of three years. Goodwill amortization totaled $158,555 for the year ended December 31, 2000. 42 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Continued) PROPERTY AND EQUIPMENT, AT COST Property and equipment consists of the following: December 31, 2000 December 31, 1999 Accumulated Accumulated Cost Depreciation Cost Depreciation -------- -------- -------- -------- Computer and office equipment $387,862 $ 88,812 $195,340 $ 30,146 Leasehold improvements 1,699 201 0 0 Computer software 212,412 60,067 167,220 1,034 Office furniture 42,350 8,762 23,070 1,267 -------- -------- -------- -------- $644,323 $157,842 $385,630 $ 32,447 ======== ======== ======== ======== Renewals 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, equipment and furniture and 3 years for software. Depreciation expense for the years ended December 31, 2000 and 1999 was $128,454 and $20,307 respectively. Included in depreciation expense for 2000 is approximately $3,059 related to assets from the Company's European subsidiary. As described in Note 12 that subsidiary has filed for bankruptcy protection under the laws of the Netherlands and accordingly those assets have been excluded from the Company's balance sheet as of December 31, 2000 since the recoverability of any of those assets is considered unlikely. 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 entitled to payment for all work performed through the point of cancellation. The Company had $26,861 in deferred revenue relating to one contract for services to be performed over the next six months. REVENUE RECOGNITION POLICY The Company recognizes sales, for both financial statement and tax purposes, when its products are shipped and when services are provided. The Company had $26,861 in deferred revenue relating to one contract for services to be rendered over the next six months. ESTIMATES IN FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 43 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Continued) INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." SFAS 109 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. STOCK BASED COMPENSATION The Company adopted SFAS 123 to account for its stock based compensation plans. SFAS 123 defines the "fair value based method" of accounting for stock based compensation. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. EARNINGS PER SHARE Basic earnings per shares ("EPS") is computed by dividing income available to common shareholders (which for the Company equals its net loss) by the weighted average number of common shares outstanding, and dilutive EPS adds the dilutive effect of stock options and other common stock equivalents. Antidilutive shares aggregating 4,658,515 have been omitted from the calculation of dilutive EPS for the fiscal year ended December 31, 2000. A reconciliation between numerators and denominators of the basic and dilutive earnings per shares is as follows:
Year Ended December 31, 2000 Year Ended December 31, 1999 ---------------------------------------- ---------------------------------------- Net Income Net Income (Loss) Shares Per-Share (Loss) Shares Per-Share Numerator Denominator Amount Numerator Denominator Amount ----------- ----------- --------- ----------- ----------- --------- Basic EPS $(6,275,051) 6,408,634 $ (0.98) $(2,341,237) 1,840,550 $ (1.27) Effect of Dilutive Securities None -0- -0- -0- -0- -0- -0- ----------- ----------- --------- ----------- ----------- --------- Diluted EPS $(6,275,051) 6,408,634 $ (0.98) $(2,341,237) 1,840,550 $ (1.27) =========== =========== ========= =========== =========== =========
IMPACT OF NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which is effective for all fiscal quarter of all fiscals years beginning after June 15, 2000, as amended by SFAS No. 137. In June 2000, SFAS No. 138 was issued which amended certain provisions of SFAS No. 133. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments imbedded in other contracts, and for hedging activities. In accordance with SFAS No. 133, an entity is required to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet completed its evaluation of the impact of SFAS No. 133 on its consolidated financial statements. However, the Company does not believe that the implementation of SFAS No. 133 will have a significant effect on its results of operations. 44 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Continued) FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation" ("FIN No. 44"), provides guidance for applying APB Opinion No. 25, "Accounting for Stock Issued to Employees". With certain exceptions, FIN No. 44 applies prospectively to new awards, exchanges of awards in a business combination, modifications to outstanding awards and changes in grantee status on or after July 1, 2000. The Company does not believe that the implementation of FIN No. 44 will have a significant effect on its results of operations. In December 1999, The SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition Financial Statements" ("SAB No. 101"), which summarizes certain of the SEC staff's views in applying generally accounted principles to revenue recognition in financial statements. The Company will be required to adopt SAB No. 101 during fiscal year 2001. The Company does not believe that the implementation of SAB No. 101 will have a significant effect on its results of operations. NOTE 3: OPERATIONS AND LIQUIDITY The Company has incurred substantial losses in 1999 and 2000. Until such time that the Company's products and services can be successfully marketed the Company will continue to need to fulfill working capital requirements through the sale of stock and the issuance of debt. The inability of the company to continue its operations, as a going concern would impact the recoverability and classification of recorded asset amounts. 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 its significant losses, negative cash flows from operations, and accumulated deficits for the periods ending December 31, 2000, there is doubt about the Company's ability to continue as a going concern. Management believes that its current available working capital, anticipated contract revenues and subsequent sales of stock and or placement of debt instruments will be sufficient to meet its projected expenditures for a period of at least twelve months from December 31, 2000. However, any projections of future cash needs and cash flows are subject to substantial uncertainty. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. NOTE 4: ACQUISITION WebIPA, Inc. Acquisition On February 9, 2000, the Company acquired WebIPA, Inc., a Florida corporation pursuant to an Agreement and Plan of Acquisition dated January 26, 2000. In consideration of receiving all of the issued and outstanding shares of WebIPA Inc., OmniComm issued 1,200,000 restricted shares of common stock to the shareholders of WebIPA Inc. The Company accounted for its acquisition of WebIPA under the purchase method of accounting. At the time of the transaction WebIPA was a development stage company with approximately $5,033 in assets and no recorded liabilities. 45 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Continued) NOTE 5: EQUITY INVESTMENT European Medical Network (EMN) Investment, at cost On March 20, 2000 the Company entered into a stock purchase agreement under which it agreed to purchase a 25% interest in Medical Network AG EMN, a Swiss company ("EMN"). The agreement, set to close on April 20, 2000, provided that the purchase price for 25% of EMN's stock equity was $838,500 to be paid partly in cash and stock. Two cash payments totaling US $645,000 were to be paid in installments as follows: $335,000 on March 20, 2000, upon which EMN would deliver 10% of its stock equity, and $310,000 on April 20, 2000, upon which EMN would deliver the remaining 15% of its stock equity. In addition, the Company was to provide 41,883 shares of restricted common stock to EMN. Pursuant to the terms of the stock purchase agreement, on March 20, 2000, EMN's shareholders entered into an agreement that provided for the Company to have one seat on EMN's board of directors and the right to veto any sale of equity in excess of 49% of the total issued and outstanding equity of EMN. On March 20, 2000, the Company paid EMN $335,000, received 10% of EMN's equity and a seat on EMN's board. On April 20, 2000, the Company did not make the second payment of $310,000 or the stock payment of 41,883 shares to EMN and the stock purchase agreement did not close. On July 11, 2000, the Company and EMN agreed to renegotiate the terms of their agreement subject to the Company's success in finding adequate financing. As part of the renegotiation the Company has resigned its seat on EMN's board and offered to sell its 10% interest back to EMN. The Company accounts for its investment in EMN under the cost method of accounting. The Company has established a valuation allowance of $335,000 against its investment in EMN to reflect the uncertainty of the fair market value of the investment as of December 31, 2000. NOTE 6: NOTES PAYBLE Education Navigator As of December 31, 2000, the Company owed $157,500 to the selling stockholders of Education Navigator. The notes are payable over two years and bear interest at 5.51% annually. The amount payable during fiscal 2000 is $177,500. At March 31, 2001 the Company was in default under the terms of the promissory notes governing the debt. Short-term Borrowings At December 31, 2000 the Company owed $1,115,000 under short-term notes payable. The notes bear interest at rates ranging from 8% to 18%. The average original term of the promissory notes is 64 days. One of the notes is collateralized by common stock owned by an Officer of the Company, the other notes are not collateralized. The note holders were granted stock warrants in the Company at prices ranging from $.50 to $2.25 per share. As of December 31, 2000 the Company was in default on five of the notes with face value amounts of $380,000 and principal owed of approximately $355,000. Holders of notes totaling approximately $610,000 have agreed to participate in a private placement of the Company's debt. Accordingly, the notes representing that indebtedness will be converted into one-year 12% convertible notes. The notes are convertible into common stock of the Company at a rate of $0.50 per share. 46 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Continued) NOTE 7: CONVERTIBLE NOTES During the first quarter of 1999, the Company issued Convertible Notes Payable in the amount of $862,500 pursuant to a Confidential Private Placement Memorandum. There were costs of $119,625 associated with this offering. The Company also granted the agent the option to purchase 250,000 common shares at $.001. The agent exercised the option. The net proceeds to the Company were $742,875. The notes bear interest at ten percent annually, payable semi-annually. The notes are convertible after maturity, which is five years, into shares of common stock of the Company at $1.25 per share, including registration rights. As of December 31, 2000 approximately $400,000 of the Convertible Notes had been converted into 320,000 shares of common stock of the Company. NOTE 8: COMMITMENTS AND CONTINGENCIES The Company currently leases office space requiring minimum annual base rental payments for the fiscal periods shown as follows: 2001 $123,114 2002 103,576 2003 0 2004 0 2005 0 -------- Total $226,690 ======== In addition, to annual base rental payments, the company must pay an annual escalation for operating expenses as determined in the lease. CONTINGENT LIABILITIES On or about September 6, 2000, the Company's wholly owned subsidiary, OmniTrial B.V. ("OmniTrial") submitted a petition for bankruptcy protection from the bankruptcy court of the Netherlands. The court appointed a liquidating trustee and the case is still pending. The Company is claiming that certain assets of OmniTrial have been paid for by the Company and therefore should not be part of the liquidating assets of OmniTrial. The bankruptcy trustee has rejected that claim and has told the Company that the assets as part of the OmniTrial bankruptcy estate would be sold to diminish any deficiency of the estate. The Company would like to resolve its disputes with the trustee, but if unable to do so, intends to contest the outstanding matters in the bankruptcy court of the Netherlands. On January 26, 2001, a former employee of the Company, Eugene A. Gordon filed a lawsuit in the Circuit Court of the 11th Judicial Circuit in and for Dade County, Florida alleging breach of his employment contract with the Company. The plaintiff alleges the Company owes him more than $100,000 for back payment of salary per the terms of his employment contract. The Company disputes Mr. Gordon's allegations and is vigorously defending this lawsuit. On February 2, 2001, an advertising firm, Wray Ward Laseter filed a lawsuit in the Superior Court of North Carolina. The plaintiff alleges claims totaling approximately $84,160 against the Company for fees associated with advertising, marketing and public relations services provided between March and September 2000. The Company intends to vigorously defend this lawsuit. On February 16, 2001, a staffing agency, Temp Art, Inc. filed a lawsuit in the County Court in and for Miami-Dade County, Florida. The plaintiff alleges the Company breached its contract and owes approximately $13,126 for back payment of services rendered plus interest and costs. The Company disputes Temp Art's allegations and is vigorously defending this lawsuit. In December 2000, the Company received a demand letter from a former employee for fees owed relating to an advisers agreement between the him and the Company. The demand letter sought $37,500 in the form of past due fees. The former employee later increased his demand to $50,000. After its initial settlement offer was rejected, the Company advised the former employee that it intended to vigorously defend itself against any claims and assert its own claims against him. The Company disputes his allegations and intends to vigorously defend itself should a lawsuit be filed. 47 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Continued) NOTE 9: RELATED PARTY TRANSACTIONS The Company was owed $0 and $3,406 at December 30, 2000 and December 31, 1999, respectively, from a shareholder. The interest rate was 6% annually. On July 18, 2000 the Company borrowed $50,000 from Guus van Kesteren a Director of the Company. The promissory note carries an interest rate of 12% per annum and has a maturity date of September 30, 2000. In addition, the Company granted Mr. van Kesteren an option to purchase 20,000 shares of the Company's common stock at a price of $2.25. The promissory note is currently in default and continues to accrue interest at the rate of 12% per annum. On December 22, 2000 the Company borrowed $60,000 from Guus van Kesteren a Director of the Company. The promissory note carries an interest rate of 5% per annum and has a maturity date of January 1, 2001. At the Company's request Mr. van Kesteren elected to convert the promissory note as part of a private placement of debt of the Company. The private placement debt will accrue interest at 12% per annum and is convertible into common stock of the Company at a rate of $0.50 per share on January 31, 2002. On November 22, 2000 the Company borrowed $150,000 from Profrigo, N.V. The promissory note carries an interest rate of 18% per annum and has a maturity date of January 15, 2001. In addition, the Company granted Profrigo an option to purchase 150,000 shares of the Company's common stock at a price of $0.75. The promissory note is currently in default and continues to accrue interest at the rate of 18% per annum. On October 26, 2000 the Company borrowed $250,000 from Profrigo N.V. a shareholder of the Company. The promissory note carries an interest rate of 5% per annum and has a maturity date of January 1, 2001. At the Company's request Profrigo elected to convert the promissory note as part of a private placement of debt of the Company. The private placement debt will accrue interest at 12% per annum and is convertible into common stock of the Company at a rate of $0.50 per share on January 31, 2002. On December 22, 2000 the Company borrowed $50,000 from Profrigo N.V. a shareholder of the Company. The promissory note carries an interest rate of 5% per annum and has a maturity date of January 1, 2001. At the Company's request Profrigo elected to convert the promissory note as part of a private placement of debt of the Company. The private placement debt will accrue interest at 12% per annum and is convertible into common stock of the Company at a rate of $0.50 per share on January 31, 2002. On August 17, 2000 the Company borrowed $100,000 from Noesis N.V. a shareholder of the Company. The promissory note carries an interest rate of 8% per annum and has a maturity date of January 1, 2001. At the Company's request Noesis elected to convert the promissory note as part of a private placement of debt of the Company. The private placement debt will accrue interest at 12% per annum and is convertible into common stock of the Company at a rate of $0.50 per share on January 31, 2002. NOTE 10: POST-RETIREMENT EMPLOYEE BENEFITS The Company does not have a policy to cover employees for any health care or other welfare benefits that are incurred after employment (post-retirement). Therefore, no provision is required under SFAS's 106 or 112. 48 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Continued) NOTE 11: STOCK BASED COMPENSATION ACCOUNTING FOR STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", ("SFAS No. 123") requires that stock awards granted subsequent to January 1, 1995, be recognized as compensation expense based on their fair value at the date of grant. Alternatively, a company may use Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", ("APB 25") and disclose pro forma income amounts which would have resulted from recognizing such awards at their fair value. The Company has selected to account for stock-based compensation expense under SFAS No. 123. STOCK OPTION PLAN In 1998 the Company's Board of Directors approved the OmniComm Systems 1998 Stock Option Plan. (the "1998 Plan"). The Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Phantom Stock Unit Awards and Performance Share Units. Pursuant to the 1998 Plan the Company may grant options to purchase up to 3,000,000 shares of the Company's common stock. The term of each option may not exceed ten years from the date of grant, and options vest in accordance with a vesting schedule established by the plan administrator. The Company's share option activity and related information is summarized below: Year ended December 31, 1999 2000 -------------------- -------------------- Weighted Weighted Average Average Exercise Exercise Options Price Options Price --------- -------- --------- -------- Outstanding at beginning of period 50,000 $ 1.00 3,502,916 $ 1.00 Granted 3,512,916 $ 0.99 1,851,994 $ 3.46 Exercised -0- $ 0.00 1,045,894 $ 0.30 Cancelled 60,000 $ 0.60 1,053,010 $ 1.97 --------- -------- --------- -------- Outstanding at end of period 3,502,916 $ 1.00 4,301,900 $ 2.15 ========= ======== ========= ======== Exercisable at end of period 1,248,953 $ 0.40 1,512,848 $ 2.19 ========= ======== ========= ======== During the second and third quarters of 1999, the Company issued 86,377 and 68,000, respectively, common shares to employees and advisors under its stock bonus arrangement. The Company adopted SFAS 123 to account for its stock based compensation plans. SFAS 123 defines the "fair value based method" of accounting for stock based compensation. Under the fair value based method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period. In accordance with this method, the Company recognized expense of $56,145 and $44,200, respectively, during the second and third quarters of 1999, and $41,980 during the third quarter of 2000. During 2000 the Company issued an aggregate of 187,330 shares of common stock to employees and advisors with a fair market value as measured on the date of grant of $324,482 for services rendered under employment and consulting agreement. In addition, the Company issued 126,781 shares of preferred stock with a fair market value as measured on the date of grant of $190,172 to a financial advisor in accordance with a consulting agreement. NOTE 12: OMNITRIAL, B.V. BANKRUPTCY OmniTrial B.V., a wholly owned subsidiary of the Company, was incorporated on October 15, 1999, in The Netherlands. On August 28, 2000, the Board of Directors of the Company voted to authorize David Ginsberg, D.O., it's President and Chief Executive Officer, to vote on any resolution pertaining to OmniTrial, including approval of a bankruptcy filing. On August 30, 49 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (Continued) 2000, the Board of Directors of OmniTrial issued a written consent to apply for bankruptcy, which was instituted in The Netherlands on or about September 6, 2000. A liquidating trustee was appointed and the case is still pending as of this date. The Company requested that the bankruptcy trustee return to the Company several computer servers, which the Company claimed it owned separately from OmniTrial. The bankruptcy trustee refused to return the servers and alleged that the Company caused the bankruptcy due to its mismanagement of OmniTrial. The Company is currently attempting to negotiate a settlement with the trustee. If the Company is unable to settle the matter with the trustee, it intends to contest the outstanding matters in the bankruptcy court in The Netherlands. NOTE 13: INCOME TAXES Income taxes are accrued at statutory US and state income tax rates. Income tax expense is as follows: 12/31/00 12/31/99 ----------- ----------- Current tax expense (benefit): Income tax at statutory rates $-0- $-0- Deferred tax expense (benefit): Amortization of goodwill and covenant (70,640) (105,243) Operating loss carryforward (2,212,340) (864,806) ----------- ----------- (2,282,980) (970,049) Valuation allowance 2,282,980 970,049 ----------- ----------- Total tax expense (benefit) $ -0- $ -0- =========== =========== The tax effects of significant temporary differences, which comprise the deferred tax assets are as follows: 12/31/00 12/31/99 ----------- ----------- Deferred tax assets: Amortization of intangibles $ 224,302 $ 153,662 Operating loss carryforwards 3,136,089 923,749 Gross deferred tax assets 3,360,391 1,077,411 Valuation allowance (3,360,391) (1,077,411) ----------- ----------- Net deferred tax asset $ -0- $ -0- =========== =========== The Company has net operating loss carryforwards (NOL) for income tax purposes of approximately $8,322,000. This loss is allowed to be offset against future income until the year 2020 when the NOL's will expire. Other timing differences relate to depreciation and amortization for the stock acquisition of Education Navigator in 1998. The tax benefits relating to all timing differences have been fully reserved for in the valuation allowance account due to the lack of operating history and the substantial losses incurred in 2000. 50