-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FqI0OcL6LKvY391hkO0EaGkVVIREJnHLs2k98EvjW4o6YoDjEryTZiNesPdY6XN+ MNiQc2MCi2Vy71MLUL8eaA== 0000950170-01-000528.txt : 20010418 0000950170-01-000528.hdr.sgml : 20010418 ACCESSION NUMBER: 0000950170-01-000528 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OMNICOMM SYSTEMS INC CENTRAL INDEX KEY: 0001034592 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 113349762 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-25203 FILM NUMBER: 1604395 BUSINESS ADDRESS: STREET 1: 3250 MARY STREET STREET 2: SUITE 402 CITY: MIAMI STATE: FL ZIP: 33133 BUSINESS PHONE: 7184693132 MAIL ADDRESS: STREET 1: 3250 MARY STREET STREET 2: SUITE 307 CITY: MIAMI STATE: FL ZIP: 33133 FORMER COMPANY: FORMER CONFORMED NAME: CORAL DEVELOPMENT CORP DATE OF NAME CHANGE: 19970225 10KSB 1 0001.txt FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [Mark One] [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: December 31, 2000 or [ ] 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. ---------------------- (Name of small business issuer in its charter) Delaware 11-3349762 -------- ---------- (State of incorporation) (IRS employer Ident. No.) 3250 Mary Street, Suite 402, Miami, FL 33133 -------------------------------------- ----- (Address of principal office) (Zip Code) Issuer's telephone number: (305) 448-4700 Securities registered under Section 12(b) of the Exchange Act: None ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 ------------------- (Title of class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B not contained in this form, and no disclosure will be contained, to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or amendment to this Form 10-KSB. [ ] State issuer's revenues for its most recent fiscal year. $70,976 State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of a specified date within the past 60 days. $2,170,919 (based upon the closing price of $0.41 per common share on April 5, 2001). The number of shares outstanding of each of the issuer's classes of common equity, as of December 31, 2000: 7,953,627. The number of shares outstanding of the issuer's class of preferred equity (5% Series A Convertible Preferred), as of December 31, 2000: 4,260,224. FORWARD-LOOKING STATEMENTS Statements contained in this Form 10-KSB that are not historical fact are "forward looking statements". These statements can often be identified by the use of forward-looking terminology such as "estimate", "project", "believe", "expect", "may", "will", "should", "intends", or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, such as statements relating to timing, costs and of the acquisition of, or investments in, existing business, the revenue or profitability levels of such businesses, and other matters contained in this Form 10-KSB regarding matters that are not historical facts, are only predictions. No assurance can be given that plans for the future will be consummated or that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these plans and projections and other forward-looking statements are based upon a variety of assumptions, which we consider reasonable, but which nevertheless may not be realized. Because of the number and range of the assumptions underlying our projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond our reasonable control, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this Form 10-KSB. Therefore, our actual experience and results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward- looking statements should not be regarded as a representation by us or any other person that these plans will be consummated or that estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. The Company does not undertake any obligation to update or revise any forward-looking statement made by it or on its behalf, whether as a result of new information, future events or otherwise. 2 PART I ITEM 1. DESCRIPTION OF BUSINESS. BUSINESS DEVELOPMENT Coral Development Corp. ("Coral") was incorporated under the laws of the State of Delaware on November 16, 1996 as a wholly owned subsidiary of Modern Technology Corp. ("MTC") a Delaware corporation who received 403,000 shares of common stock of Coral in exchange for $30,000. In June of 1997, Coral registered 403,000 shares of common stock to be distributed to the shareholders of MTC as a shared dividend. The registration and issuance of the shares was subject to the provisions of Rule 419 ("Rule 419") of Regulation C of the Rules and Regulations of the Securities Act of 1933, as amended. Rule 419 sets forth the requirements that apply to every registration statement filed under the Act relating to an offering by a "blank check company". A "blank check company" is a company that is a development stage company that has no specific plan or purpose or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies, or other entity or person. At the time of filing the registration statement, Coral was a "blank check company". The main requirements of Rule 419 are: escrowing the securities that are subject to the registration statement prior to issuance of the securities and consummating a transaction within 18 months of filing the registration statement. Coral and OmniComm Systems, Inc. (the "Company" or "OmniComm") entered into an Agreement and Plan of Merger on July 22, 1998. The terms of the agreement provided that all of the issued and outstanding shares of OmniComm Systems, Inc. would be exchanged for 940,000 shares of common stock of Coral. The officers and directors of Coral would resign and the name of Coral would be changed to OmniComm Systems, Inc. Further, as part of the plan of merger, the five OmniComm shareholders would receive options representing an additional 2,687,000 shares of common stock of the Company. The options would vest in the event the Company generates $4,000,000 in gross revenue on a cumulative basis. The issuance of the shares subject to the options would cause substantial dilution to the existing shareholders. Coral had until December 5, 1998 (18 months from the filing date of the Form SB-2 - June 5, 1997) to finalize a transaction. Prior to entering into the Agreement and Plan of Merger, the Company acquired Education Navigator, Inc. on June 26, 1998. The closeness in time of these two transactions presented a logistical problem in completing due diligence and providing audited financial statements for OmniComm Systems, Inc. and especially Education Navigator, Inc. which did not have audited financial statements. To further complicate the matter, the financial statements when completed needed to be presented in such a way so as to show pro-forma information as if the mergers had occurred a year earlier. Coral received a comment letter from the Securities Exchange Commission concerning the Post-Effective amendment to the SB-2. It was clear from the comments that Coral and the Company would not make the deadline on December 5, 1998 so the SB-2 was withdrawn. Coral and the Company understood that if the SB-2 did not go effective by December 5, 1998, they would have to re-file the registration statement since it was very unlikely that an extension would be given. The shares that had been held in escrow pursuant to Rule 419 were returned to MTC. 3 Since the parties were specifically identified for purposes of an acquisition it was felt that the proscriptions of Rule 419 would not apply and the safeguards for issuance of the shares such as the escrow requirements would not have to be adhered to which would shorten the time period for completing the transactions. In addition, the Division of Corporate Finance had issued Staff Legal Bulletin No. 4, which gave specific guidance to the parties for the type of transaction that was contemplated. The Company and Coral continued with their plans to finalize the merger and to become a reporting company. The parties executed an Amended Agreement and Plan of Merger to include MTC, the parent of Coral, as a party for the sole purpose of issuing the shares in accordance with the Agreement and Plan of Merger. A Form 10-SB was filed on December 22, 1998 to register the common shares of Coral, pursuant to Section 12(g) of the Securities Exchange Act of 1934. The Company and Coral finalized the merger on February 17, 1999. 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, 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. BUSINESS OF ISSUER THE CLINICAL TRIALS OPPORTUNITY With increasing pressure to be first to market, sponsors of clinical studies have been undertaking a comprehensive re-examination of every phase of drug and medical device development. The process includes exploring new approaches to discovery, continues by identifying therapeutic targets that optimize core competencies, and finishes by moving compounds more quickly into and through better designed global clinical trials. Achieving this ambitious goal requires modifying many traditional approaches to drug and medical device development. Large pharmaceutical companies are using a combination of approaches at every step. To access new technologies that can lead to pipelines full with promising new therapies, sponsors are increasing the headcount in the Research and Development phase while continuing to make strategic alliances and licensing agreements with biotechnology firms. The need to conduct faster trials creates significant outsourcing opportunities for various types of contract services. 4 Even dollar-conscious sponsors see outside contractors as partners in shortening the clinical trials process. Outside contractors offer an attractive global infrastructure, allow sponsors to shift fixed costs, and provide a way for sponsors to manage peaks and valleys in the research pipeline. If the promise of technology results in the development of new chemical entities, sponsors need structured processes to send the successful ones through well-designed and efficient clinical trials to yield clean data. Although the pharmaceutical industry is very healthy, it is currently in flux. The requirements of sponsors are changing as technology evolves and competition increases. Since all dollars flow from the sponsors, contract service providers continue to reinvent themselves to suit the markets changing needs. Part of this process requires that stumbling blocks be acknowledged and addressed. Despite recent passage of the FDA Modernization Act that shortens FDA review time, studies are actually getting longer, more complex and more costly. Case report forms, remote data entry and remote data capture lack industry standards. Investigators and doctors who view conducting clinical trials as a way to make easy money typically underestimate the requisite effort and cost of studies. As an application software provider ("ASP"), OmniComm's portal technology, TrialMaster(TM), places the Company in a unique position to leverage the rapid transformation taking place in the market and become a market leader in the ownership and operation of proprietary software applications urgently needed to streamline and modernize the clinical trials industry. OmniComm Systems, Inc. is marketing and implementing TrialMaster and WebIPA(R). TrialMaster and WebIPA are Internet based approaches that integrate the significant components of the clinical trial process - trial management and doctor/patient recruitment - into a seamless connection between industry, doctors, and patients. The critical component in bringing a drug or medical device to market is the process by which approval is sought to market the drug or device. The amount of money and time spent on the process are enormous. The following points are illustrative of the business process: o It can cost as much as $600 million to bring a drug to market o 50% of clinical trials are delayed due to a lack of patients o For every day Viagra(R) was in clinical trials Pfizer lost approximately $5,000,000 a day o In the United States less than 4% of the doctors and less than 2% of the eligible patients are involved in clinical trial A fundamental way that the Internet is transforming business is the way in which it changes institutional business processes such as clinical trials. The Internet enables information to be easily and widely distributed and allows the users of the information to use tools - web-based applications - to benefit from and use the information. The Company's current business strategy focuses on the continued development, marketing and sale of its TrialMaster product. The Company believes the domestic clinical trial industry with its inherent inefficiencies, vast size and considerable growth afford the greatest opportunity for revenue growth. The Company expects to devote the majority of its human and capital resources to TrialMaster over the next 12 to 18 months 5 CLINICAL TRIAL INDUSTRY OVERVIEW Worldwide research and development expenditures by the pharmaceutical and biotechnology industries reached an estimated $50 billion in 1999 with $24 billion being spent by US based pharmaceutical and medical device companies. Further, research and development expenditures in 1999 for the top 50 pharmaceutical companies increased approximately 14% from the previous year. It is estimated that pre-clinical and clinical trial costs represent approximately one-third of the total spent on research and development. Preclinical and clinical trials historically were performed almost exclusively by in-house personnel at the major pharmaceutical companies. Over the last two decades pharmaceutical companies have transitioned to a model that includes the outsourcing of clinical trial management to clinical research organization's ("CRO"), which has resulted in significant growth in the outsource contract segment of the clinical trials industry. The Company believes that certain industry and regulatory trends have led pharmaceutical, biotechnology, cosmetic and medical device companies to increase research and development for proprietary new drugs, cosmetics and medical devices. These trends have required companies to conduct increasingly complex clinical trials, and develop multinational clinical trial capability, while seeking to control internal fixed costs. The trends driving the industry's growth can be summarized as follows: Increasing Cost Containment Pressures. The increasing pressure to control rising health care costs, and the penetration of managed health care and health care reform, have caused changes in the pharmaceutical industry. A number of pharmaceutical companies have publicly committed to hold net effective price increases in line with inflation. In the area of clinical development, many pharmaceutical and biotechnology companies are seeking to reduce the high fixed costs associated with peak-load staffing by reducing internal clinical staff and relying on a combination of internal resources and external resources thereby shifting fixed costs to variable costs. Managed Care. Managed care providers and insurance carriers have become major participants in the delivery of pharmaceuticals along with pharmacy benefits organizations. These companies limit the selection of drugs from which affiliated physicians may prescribe, thus increasing the competition to develop more effective products in a shorter time frame. Consolidation. As pharmaceutical companies seek to create economies of scale, there have been several large mergers within the industry, and as a result of these mergers, the pharmaceutical industry has experienced large scale employee lay-offs and cutbacks. Competitive And Regulatory Factors. Factors such as competition from generic drugs following patent expiration, more stringent regulatory requirements and the increasing complexity of clinical trials have resulted in increasing market pressure on profit margins. Globalization of Clinical Research and Development. Due to the increasing cost of new drug development, many projects that are not expected to achieve sufficient annual worldwide revenue are abandoned. Pharmaceutical companies are increasingly attempting to maximize returns from their drugs by pursuing regulatory approvals in multiple countries simultaneously rather than sequentially. A pharmaceutical company seeking approval in a country in which it lacks experience or internal resources will frequently turn to an outsource vendor for assistance in interacting with regulators or in organizing and conducting clinical trials. 6 Complex and Stringent Regulation; Need for Technology Capabilities. Increasingly complex and stringent regulatory requirements have increased the volume of data required for regulatory filings and escalated the demand for data collection and analysis during the drug development process. In recent years, the FDA and the corresponding regulatory agencies of Canada, Japan and Europe have commenced discussions to develop common standards for preclinical and clinical studies and the format and content of applications for new drug approvals. Further, the FDA encourages the use of computer-assisted filings in an effort to expedite the approval process. As regulatory requirements have become more complex, the pharmaceutical and biotechnology industries are increasingly outsourcing to leverage data management expertise, technological capabilities and global presence. Escalating Research and Development Expenditures. R&D expenditures in 1998 for the major pharmaceutical companies in the world increased approximately 14% from the previous year. Such expenditures have resulted from an increased emphasis on developing effective products for the treatment of chronic disorders and life threatening acute conditions such as infectious diseases. One of the reasons the cost of developing therapies for chronic disorders, such as arthritis, Alzheimer's disease and osteoporosis is higher is because the treatments must be studied for a longer period to demonstrate their effectiveness in curbing the chronic disorder and to determine any possible long-term side effects. Reducing Drug Development Time Requirements. Pharmaceutical and biotechnology companies face increased pressure to bring new drugs to market in the shortest time, thereby reducing costs, maintaining market share and speeding revenue production. Currently, total development of a new drug takes approximately 8 to 12 years, a significant portion of a drug's 20 year period for protection under U.S. patent laws. Pharmaceutical and biotechnology companies are attempting to increase the speed of new product development and maximize the period of marketing exclusivity and economic returns for their products, by outsourcing development activities. Some pharmaceutical companies are beginning to contract with organizations to conduct preclinical and all phases of clinical trials for new product programs rather than contracting phases of drug development to several different companies. New Drug Development Pressures. R&D expenditures have increased as a result of the constant pressure to develop and patent products, and to respond to the demand for products for an aging population and for the treatment of chronic disorders and life-threatening conditions. In response to this pressure, trial sponsors are outsourcing preclinical/clinical trials in order to use internal resources to develop additional drugs. Growth of Biotechnology Industry. The biotechnology industry and the number of drugs produced by it which require FDA approval have grown substantially over the past decade. Many biotechnology companies have chosen not to expend resources to develop sufficient staff or expertise to conduct clinical trials in-house, but rather have utilized outside providers to perform these services. These trends have created even greater competitive demands on the industry to bring products to market efficiently and quickly. 7 RECENT TRENDS IN THE PHARMACEUTICAL INDUSTRY The pharmaceutical and CRO industry is experiencing 11-20% annual growth. At this point, the industry seems to grow from its own momentum, fueled by the demographics of an aging population and the changing demands of pharmaceutical, biotech and medical device sponsors. Discovering and developing new chemical entities is the life-force of the pharmaceutical and biotechnology industries. Without them, Research and Development has no purpose. Currently, it is estimated that there are about 4,700 pharmaceutical compounds and 1,000 biotech compounds in pre-clinical studies, and 2,900 pharmaceutical and 1,000 biotech candidates in some phase of clinical development or regulatory review. Suddenly, technology has created the possibility that sponsors can dramatically increase the number of new chemical entities they discover and slate for development. This capability could not have come at a better time. Sponsors need many new chemical entities ("NCEs") in their pipelines so that a stream of innovative products can be generated to feed investors' demands for sustained double-digit earnings growth. The current thinking is that drug companies will have to become about three times as productive to grow 10% annually. PhRMA's March 1997 survey says that big pharmaceutical companies require three target NCEs annually, medium-sized companies require two, and small companies require at least one just to maintain revenue growth in a highly competitive environment. Some sponsors have set annual targets for the number of products to come to market. Bristol-Myers Squibb plans to double the number of drugs it has in early development, and then double that number again by 2003. Also, the company hopes to introduce two products a year through 2000, and three annually by 2003. Currently, Bristol-Myers Squibb launches approximately one new drug annually. Glaxo Wellcome Inc.'s goal is to introduce three new drugs per year. In December 1999, the company issued a statement that it expected eighteen NCEs to have entered exploratory development, compared to only six in 1994. The fact that Research and Development budgets are at all time highs suggests that companies are seriously exploring innovative high tech methods for the discovery process. According to a September 1997 article, "Their Growth Has Just Begun," pharmaceutical and biotechnology companies anticipated spending an $33 billion on R&D in 1997. Of that, $16.32 billion was spent on clinical development. The reality is that despite tremendous R&D expenditures, the industry has been slow to invest in new technologies. Industry observers estimate that the industry spends only about $600 million, or 3% of the $16.32 billion clinical development dollars on clinical information systems management. This is in sharp contrast to the aerospace and auto motive industries, in which technology purchases are estimated to be 5% of industry revenues. At present, the industry shows historic 10% annual growth in clinical spending, which has obvious implications for all phases of pre-clinical and clinical trial testing. According to UBS Securities LLC, about $3.14 billion was outsourced to CROs in 1997, an estimated $3.69 billion in 1998, $4.33 billion by 1999 and $5.09 billion by 2000, representing 17.4% annual growth in this four year period. A variety of outside contractors besides CROs stand to benefit from this positive trend, most notably site management organizations, technology vendors, individual sites and physician practice management organizations. 8 CLINICAL TRIAL OVERVIEW THE INDUSTRY In order for a drug or medical device to be marketed in the United States, Europe or Japan, the drug or device must undergo extensive testing and regulatory review to determine that it is safe and effective. To support an application for regulatory approval, clinical data must be collected, reviewed and compiled. Clinical data is collected from clinical report forms ("CRF") that are submitted to and filled out by an investigator, typically a doctor or research assistant who is participating in the clinical trial. These CRFs can be five to one hundred pages long and document a series of visits by patients over a period of time. Once information is collected about the patient by the investigator and the relevant portion of the CRF is filled out, it is then submitted to either the sponsor of the study or the CRO. The data is then inputted manually into a database. Typically, double data entry is used in order to resolve errors. TrialMaster allows participants in the clinical trial process such as a sponsor or CRO to perform data collection, handling and transmission via a direct, secure Internet connection. After the CRFs are Internet enabled and the validation criteria encoded, the CRF forms are distributed via the Internet from the Company's server to the sites where the clinical trials are to take place. In addition to installing the application, OmniComm provides the necessary infrastructure components including network consulting and implementation, hardware procurement, hosting and maintenance. The regulatory review process is time consuming and expensive. A new drug application (NDA) can take up to 2 years before it is approved. This is in addition to 3 to 5 years of studies required to provide the data to support the NDA. The following is an overview of the process that is generally undertaken to bring a drug or device to market: (1) Preclinical Research (1 to 3.5 years). In vitro ("test tube") and animal studies are used to establish the relative toxicity of the drug over a wide range of doses and to detect any potential to cause birth defects or cancer. If results warrant continuing development of the drug, the manufacturer will file an IND (Investigational New Drug Application), upon which the FDA may grant permission to begin human trials. (2) Clinical Trials (3.5 to 6 years) a. Phase I (6 months to 1 year). Basic safety and pharmacology testing is conducted in 20 to 100 human subjects, usually healthy volunteer testing includes studies to determine how the drug works, how it is affected by other drugs, where it goes in the body, how long it remains active, and how it is broken down and eliminated from the body. b. Phase II (1 to 2 years). Basic efficacy (effectiveness) and dose-range testing is conducted in 100 to 1,000 afflicted volunteers to help determine the best effective dose, confirm that the drug works as expected, and provide additional safety data. 9 c. Phase III (2 to 5 years). Efficacy and safety studies are conducted in 1,000 to 10,000 patients at multiple investigational sites (hospitals and clinics) which can be placebo-controlled trials, in which the new drug is compared with a placebo or studies comparing the new drug with one or more drugs with established safety and efficacy profiles in the same therapeutic category. d. Treatment Investigational New Drug ("TIND") (may span late Phase II, Phase III, and FDA review). When results from Phase II or Phase III show special promise in the treatment of a serious condition for which existing therapeutic options are limited or of minimal value, the FDA may allow the manufacturer to make the new drug available to a larger number of patients through the regulated mechanism of a TIND. Although less scientifically rigorous than a controlled clinical trial, a TIND may enroll and collect a substantial amount of data from tens of thousands of patients. e. New Drug Application ("NDA") Preparation and Submission. Upon completion of Phase III trials, the manufacturer assembles the statistically analyzed data from all phases of development into a single large document, the NDA, which comprises, on average, 100,000 pages. f. FDA Review and Approval (1 to 1.5 years). Careful scrutiny of data from all phases of development (including a TIND) is used to confirm that the manufacturer has complied with regulations and that the drug is safe and effective for the specific use (or "indication") under study. g. Post-Marketing Surveillance and Phase IV Studies. Federal regulation requires the manufacturer to collect and periodically report to the FDA additional safety and efficacy data on the drug for as long as the manufacturer markets the drug (post-marketing surveillance). An integral part of the clinical trial process is the monitoring of the clinical sites by monitors. These monitors visit sites throughout the clinical trial to confirm that the sites are acting in accordance with good clinical practices and filing out the documentation appropriately. GOVERNMENT REGULATION To alleviate the enormous amount of paperwork that is generated and submitted for purposes of receiving approval, the United States Food and Drug Administration ("FDA") promulgated regulations on March 20, 1997 concerning the electronic submission of data to the FDA: 21 CFR Part 11 "Electronic Records; Electronic Signatures; Final Rule". Essentially, this regulation provided for the voluntary submission of parts or all of regulatory records in electronic format without an accompanying paper copy. Also, the FDA promulgated "Providing Regulatory Submissions in Electronic Format- General Considerations". More recently, the FDA promulgated a guidance document "Computerized Systems Used In Clinical Trials" which provides guidance to industry when utilizing a computer system in a clinical trial. The FDA, however, does not regulate the TrialMaster system. 10 THE OMNICOMM SOLUTION TRIALMASTER OmniComm has developed and is marketing TrialMaster as an Application Service Provider. TrialMaster is a web-based B2B enterprise management system for conducting and managing clinical trials. The Company utilizes a trial-independent database to quickly generate the necessary trial data infrastructure to proceed with the clinical trial process. TrialMaster enables participants in the clinical trial process to utilize the inherent benefits of the Internet - pervasiveness, scalability, efficiency and security - to conduct and manage clinical trials in a real-time paperless electronic environment. In addition to its core activities, TrialMaster incorporates communications, time and financial management and outcomes tracking. TrialMaster is an open system that is fully integratable with existing legacy data systems such as Oracle(R) and Microsoft SQL(R). The application utilizes a standard browser such as Internet Explorer 4.0(R). The cost for implementing the application is based on a data point per page/per patient fee that will increase or decrease depending on the size of the trial in terms of patients/subjects and the length of time to conduct the trial. TrialMaster allows clinical data to be entered directly from a source document such as a patient record or doctor's notes via computer. The clinical data is transmitted via the Internet to a secure server where the data is validated and stored. TrialMaster significantly impacts the clinical trial process in the following three areas: Data Collection, Validation/Edit Queries, and Monitoring.
- ------------------------------------------------------------------------------------------------------------- A. Data Collection Comparison Clinical data is collected from the Clinical Report Forms ("CRF") that are submitted to and filled out by an investigator - a doctor or research assistant - who is participating in the clinical trial. These forms can be five to one hundred pages per patient and encompass a series of visits by patients over a period of time. - ------------------------------------------------------------------------------------------------------------- Current System TrialMaster System The cost to process data is approximately The cost to process the data is approximately five $7.00 to $25.00 per page per patient. to ten times less per page per patient. The time to process the data can take The time to process the data is approximately one anywhere from one to eight weeks. minute. - -------------------------------------------------------------------------------------------------------------
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- ------------------------------------------------------------------------------------------------------------- B. Validation and Edit Query Comparison Upon submission, data is reviewed to see whether the collected data is within certain parameters of the clinical trial, primary validation. If data is outside of the clinical trial parameters or there are typographical errors or similar data problems the data collection process will generate an edit query. This edit query must be submitted to the investigator for resolution and resubmitted for data processing. - ------------------------------------------------------------------------------------------------------------- Current System TrialMaster System The cost to process an edit query is The number of edit queries is significantly approximately $80-$115 per query. For a large reduced or even eliminated because the system does trial it is not be uncommon to generate 500-1,000 the validation when the data is inputted. edit queries a week. The time to process the data for each patient The time to process the data is approximately one can take anywhere from three to eight weeks. minute. - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- C. Monitoring Study monitors are an integral and necessary part of the clinical trial process. These individuals travel to clinical sites to ensure that the investigators are complying with good clinical practice ("GCP") standards. Essentially, their role is to make sure clinical data is being collected and submitted in a safe, timely and accurate manner. Monitoring and its associated costs such as travel can make up one quarter of the total costs of a clinical trial. - ------------------------------------------------------------------------------------------------------------- Current System TrialMaster System The cost for a monitoring visit can vary The number of visits can be reduced because the between $1,000 to $3,000 per visit per site. status of sites can be monitored remotely and in A trial can have as many as three to seven real time. visits. The time for each visit is usually one to two Monitoring hours can be reduced by 50%. In days. addition, monitoring visits can be more efficiently scheduled due to the availability of more accurate and complete information on the trials. - -------------------------------------------------------------------------------------------------------------
TRIALMASTER ENTERPRISE MANAGER Description With the use of the TrialMaster technology, OmniComm Enterprise Manager ("Enterprise Manager") incorporates management tools into the Internet-based system that allow the home office, field managers and project managers to track the activity of hundreds clinical trials, including principal investigator and sub-investigator financial data, patient accruals, budgeted patient accruals, payments and projected payments. 12 TrialMaster's Enterprise Manager significantly enhances the management of clinical trials through faster and more accurate communication, cleaner information and real-time reporting on hundreds of studies going on throughout the country and around the world. TrialMaster's robust standard features give the manager the capability to successfully manage hundreds of clinical trials from start to finish. Product Features As part of the TrialMaster design, our clients are provided with the tools for clinical trial creation and tracking technology as well as a robust milestone tracking and alert system. TrialMaster automatically monitors targets and exceptions, trial progression and verifications based on the clients requirements. Some of the Enterprise Manager features include: o Milestones / Payment Schedule o Document Transmittal o Study Maintenance o Drug Request Approval o Letter Templates: o Budget Maintenance o Archive Processing o Grant and Addenda Approval o Audit Sub-system o Alerts - Trial Duration, Email, Check Requests, Inactivity, Budgetary, Investigator, Grant Approval, Investigator/Institution and Payment o Data Export - Real time and on-demand SALES AND MARKETING OmniComm has adopted a "push/pull" marketing strategy. The essential components of the clinical trial industry are pharmaceutical/biotech/medical device, doctors/patients, and opinion leaders. OmniComm is marketing to all three components. The Company is focusing a large portion of its sales efforts at small and mid-size pharmaceutical, medical device and clinical research organizations. These types of clients are considered a prototypical client since TrialMaster is capable of providing both an operating efficiency to the clinical trial process as well as potential cost savings. Small and mid-size company's are unlikely to have the technological resources necessary to develop a product like TrialMaster. TrialMaster TrialMaster can be used within any segment of the pharmaceutical, biotech, and medical device industry, to date, OmniComm has taken a deliberative approach to marketing TrialMaster to the pharmaceutical and medical device industries. This is a $50 billion market, dominated by companies such as Pfizer, Johnson & Johnson, Medtronic, and Eli Lily. The following are the relevant factors for approaching these markets: 13 o Access to "validators" for the market. o Relatively standardized and advanced approach to clinical trial process. o A very competitive market with relatively short product cycles providing for a need to get products to market quickly. o A number of products within the interventional market segment - o A tight group of opinion leaders within the market segment with which we have direct relationships. The Company is also establishing relationships with "opinion leaders" and decision-makers in other specialties within the clinical trial industry. In this regard, the Company has created a Medical Advisory Board to advise the Company on the development and marketing of the TrialMaster system. The Medical Advisory Board will also provide a platform to contact these opinion leaders and to provide information about the application. OmniComm is also using traditional methods to market TrialMaster, including advertising in trade periodicals and attending a number of medical conventions including the, the American College of Cardiology, Drug Information Association and The American Heart Association. Current Implementation The Company is involved in conducting or developing multi-center, clinical trials for four clients. In addition, the Company completed in 2000 a multi-center, multi-nation clinical trial with a European based medical device company and a European based clinical research organization. The clinical trial encompassed 400 patients in 42 sites throughout Canada, Spain, Europe, and Scandinavia. The Company is in negotiations with several US based pharmaceutical and clinical research organization's to implement TrialMaster. The Company executed a Strategic Alliance Agreement with ClinARC in October 2000 providing for a joint effort at promoting ClinARC's CRO services and OmniComm's TrialMaster product. The agreement has a one year duration. COMPETITION The Company competes in the electronic data capture (EDC) market. This industry can be characterized as rapidly evolving, highly competitive and fragmented. There are other entities that compete with the Company's Internet based data collection system, TrialMaster. The principal competitors include Phase Forward Incorporated, CB Technologies, PHT Clinical Networks and eResearch Technology. Most of these competitors have significantly greater financial, technical and marketing resources, or name recognition than that of the Company. In addition, other companies could enter the EDC market due to the vast size of the market opportunity. The Company believes that the most significant competitive factors it faces are a lack of operating history and an attendant perception of a lack of experience in competing in such a changing and competitive environment. The Company believes, however, that its technical expertise, the knowledge and experience of its principals of the industry, quality of service and responsiveness to client needs and speed in delivering solutions will allow it to compete favorably within this environment. Further, the Company believes that none of the aforementioned companies have developed an approach to the clinical trial process that is as malleable and customizable as TrialMaster. 14 MEDICAL ADVISORY BOARD Given the Company's basic approach in developing and marketing the TrialMaster application as if it were a medical device, the Company has formed a Medical Advisory Board. The purpose of the Board is to advise and consult the Company on the development, implementation, and marketing of the TrialMaster application. Currently, there is one member on the Board: Dr. Gervasio Lamas: brings to OmniComm a wealth of practical and academic experience in the design and execution of clinical trials, and many years of experience and contacts in the pharmaceutical industry, device industry, and federal government. Dr. Lamas is a graduate of Harvard University (1974), and the NYU School of Medicine (1978). Dr. Lamas completed his medical and cardiology training at Harvard Medical School and Brigham and Women's Hospital in Boston, Massachusetts, where he was on the faculty until 1993. He has authored or co- authored over 100 publications and reports in numerous research areas in the cardiovascular field, with a particular focus on the treatment of patients with coronary disease and disorders of heart rhythm. His research has led to first author publications in medical journals such as the "New England Journal of Medicine" and "Circulation." At present, Dr. Lamas serves as Principal Investigator, Study Chairman, Co-Chairman, or National Leader in many ongoing national and international multi-center trials in the fields of coronary disease, congestive heart failure, cardiac pacing, and preventive cardiology. In these roles, he coordinates the activities of a network of over 200 clinical centers worldwide. INTELLECTUAL PROPERTY RIGHTS The Company relies upon a combination of nondisclosure and other contractual arrangements and trade secret, copyright and trademark laws to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property. The Company enters into confidentiality agreements with its employees and limits distribution of proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use and take appropriate steps to enforce its intellectual property rights. On May 18, 1999, the Company filed a provisional application and on May 17, 2000 the Company filed its follow up formal application for the patent on the TrialMaster product. (Described in the applications as the "Distributed System and Method for Collecting and Evaluating Clinical Data" Serial No. 60/134,671 for the provisional application, Serial No. 09/573,101 for the formal application.) The Company is in the process of registering a number of trademarks including "OMNICOMM SYSTEMS, INC.," and has registered "TRIALMASTER," as well as copyrights on a computer software applications produced by the Company. The Company intends to make such other state and federal registrations as the Company deems necessary and appropriate to protect its intellectual property rights. EMPLOYEES The Company currently has 14 full time employees and 1 part time employee. The Company believes that relations with its employees are good. None of its employees are represented by unions. The Company has employment agreements with its chief executive officer and chief technical officer. The loss of the services of any of its executive officers could have a materially adverse effect on the business or operations of the Company. The Company stresses the importance of attracting, retaining and motivating employees capable of advancing the Company's business goals. ITEM 2. DESCRIPTION OF PROPERTY The Company's facilities are located at 3250 Mary Street, Suite 402, Miami, Florida 33133 ("Miami Office"), and 5680 West Cypress Street, Suite I, Tampa, Florida 33607 ("Tampa 15 Office"). The Miami Office is the Company's headquarters, and costs $9,352 per month and comprises approximately 5,048 square feet. The Tampa Office is where the Company's software development activities were located through February 2001. The Tampa Office is rented for $2,449 per month and comprises approximately 1,540 square feet. The Company believes that these facilities are adequate for its current and reasonably foreseeable future needs. ITEM 3. LEGAL PROCEEDINGS 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. Other than the foregoing, neither the Company nor any of its subsidiaries is a party to, nor is any of their respective property subject to, any pending or, to its knowledge, threatened governmental, administrative or judicial proceedings that would have a materially adverse effect upon the Company's financial condition or such property. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 16 PART II ITEM 5. MARKET FOR COMMEN EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, $.001 par value, is traded on the over-the counter bulletin board market. The Company's preferred stock is not publicly traded. The ticker symbol for the Company's common stock is OMCM. - ------------------------------------- ------------ ----------- Quarter Ending/Fiscal Year Ending High Bid Low Bid - ------------------------------------- ------------ ----------- December/1999 $6.00 $3.50 - ------------------------------------- ------------ ----------- March/2000 $14.00 $2.00 - ------------------------------------- ------------ ----------- June/2000 $6.38 $2.00 - ------------------------------------- ------------ ----------- September/2000 $4.25 $1.50 - ------------------------------------- ------------ ----------- December/2000 $2.25 $0.63 - ------------------------------------- ------------ ----------- The bid price which states over-the -counter market quotations reflect inter-dealer prices without real mark-up, markdown or commissions and may not necessarily represent real actual transactions. The company has 408 shareholders of record of its common stock as of December 31, 2000. The Company has never declared or paid cash dividends on its Common Shares. Any determination to pay cash dividends in the future will be at the discretion of the Board of Directors after taking into account various factors, including the Company's financial conditions, its results of operations, and anticipated cash needs for operations and expansion. RECENT SALES OF UNREGISTERED SECURITIES Section 4(2) Transactions On or about February 1997 OmniComm Systems, Inc. formerly known as The Premisys Group, Inc. was incorporated. Contemporaneous with the incorporation of OmniComm Systems, Inc. common stock was issued to Randy Smith and Lawton Jackson totaling 1,875,000. On February 1, 1998, the Board of Directors of OmniComm Systems, Inc. authorized the issuance of 625,000 shares of common stock to Peter S. Knezevich. These shares were issued pursuant to Section 4(2) of the Securities Act of 1933 in exchange for services rendered and to be rendered as evidenced by a written employment agreement. On or about December 1996, Coral Development issued 403,000 shares of common stock to MTC, the Parent corporation of Coral Development, in exchange for $30,000. The shares were issued pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933. On June 26, 1998, prior to executing the merger agreement with Coral Development, the Company acquired Education Navigator, Inc. In exchange for all the issued and outstanding shares of Education Navigator, the Company issued 441,180 shares of common stock of the Company to the two shareholders of Education Navigator and issued promissory notes in the amount of $525,000. The shares and promissory notes were issued pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933. Subsequent to the acquisition of Education Navigator, the Company executed an employment agreement with Cliff Middleton, a shareholder of Education Navigator. In addition, pursuant to Section 422 of the Internal Revenue Code, the Company granted an incentive stock option to Cliff Middleton for 85,000 common shares at $.65 per share, vesting over 3 years beginning June 26, 1999. 17 On February 17, 1999, OmniComm Systems, Inc. and Coral Development finalized the merger pursuant to the terms and conditions set forth in the Agreement and Plan of Reorganization. All of the issued and outstanding shares of OmniComm Systems, Inc. were exchanged for 940,000 shares of common stock of Coral Development; or, 3.129 shares of OmniComm Systems for 1 share of Coral Development. The exchange and issuance of shares were issued pursuant to an exemption from registration contained in Section 4(2) of the Securities Act of 1933. Both of the foregoing issuances concerning the merger transactions dated June 26, 1998 (acquisition of Education Navigator), and February 17, 1999 (merger with Coral Development Corp.), relied on the exemption from registration afforded by Section 4(2) of the Securities Act of 1933 (the "Act"). The basis of the exemption is a transaction by an issuer that does not involve a public offering. Critical to the application of the exemption is the availability of information to the offeree and her sophistication. The availability of information can be provided in two ways: access to information or disclosure. In both transactions, the offerees were sophisticated; they have the financial and business experience to evaluate the offer. In the Education Navigator transaction the offerees were familiar with and professionals within the computer and Internet market and had experience with the risks associated with ventures involving start-up companies in the market. In the Coral/OmniComm transaction the offerees have a level of sophistication sufficient to appreciate the relative risks and benefits of being affiliated with a reporting company including the statutory obligations, both federal and state. In both transactions the offerees were provided with full disclosure pursuant to agreements including audited financial information and written legal opinions. Also, in both cases, counsel who had sufficient experience with transactions of the type consummated represented the offerees. The transaction involving Coral Development Corp. and MTC was a transaction involving a parent and a subsidiary where the parent had access to corporate information concerning the subsidiary. Rule 506 Transaction - 10% Convertible Note On January 18, 1999, Northeast Securities, Inc., as placement agent, began the distribution of a Confidential Private Placement Memorandum to accredited investors on behalf of the Company. Northeast received the following placement agent fees: 10% Commission (cash); 3% nonaccountable expense allowance (cash); $7,500 advance against non-accountable due diligence expense. The offering was closed on June 15, 1999 and as of August 1, 1999, the Company had received gross proceeds of $862,500 as a result of the private placement. The offer and sale of the notes were made in reliance upon Rule 506, Regulation D of the Securities Act of 1933. The offerees and purchasers were accredited investors who were provided with a private placement memorandum that met the requirements of Regulation D and who executed investor questionnaires. During 2000 notes totaling face value $400,000 were converted into 320,000 shares of the Company's common stock per the terms of the Private Placement. 18 Rule 701 Transactions Rule 701 of the Securities Act of 1933, as amended (the "Act") is an exemption from registration for offers and sales of securities pursuant to certain compensatory benefit plans and contracts relating to compensation provided bonafide services are rendered not related to capital raising or pursuant to a written contract relating to compensation. The Company granted an incentive stock option in accordance with Internal Revenue Code (IRC) Code Section 422 to Clifton Middleton to purchase 85,000 shares of common stock at $.65 a share over a three (3) year period. The options were granted pursuant to Rule 701 of the Act. The options were granted pursuant the Company's 1998 Incentive Stock Option Plan and pursuant to a contract relating to compensation and in accordance with Rule 701 of the Act. The Company appointed Dr. Warren S. Grundfest to the Company's Medical Advisory Board. Dr. Grundfest was granted stock options and a stock bonus. The options and bonus stock were granted pursuant to the Company's 1998 Incentive Stock Option Plan and in accordance with Rule 701 of the Act. The Company retained Mr. Lawrence Kronick to act as a consultant for the Company to assist in marketing the Company's TrialMaster system. Mr. Kronick was granted options pursuant to a written contract of compensation and pursuant to the Company's 1998 Incentive Stock Option Plan and in accordance with Rule 701 of the Act. The Company appointed Dr. Richard Murphy to the Company's Medical Advisory Board. Dr. Murphy was granted stock options and a stock bonus. The options and bonus stock were granted pursuant to the Company's 1998 Incentive Stock Option Plan and in accordance with Rule 701 of the Act. The Company appointed Dr. Sameer Mehta as its consulting Medical Director. Dr. Mehta was granted stock options and a stock bonus. The options and bonus stock were granted pursuant to the Company's 1998 Incentive Stock Option Plan and in accordance with Rule 701 of the Act. The Company granted stock option and bonuses to employees of the Company. The stock bonuses totaled 51,377 shares of common stock. The options and bonus stock were granted pursuant to the Company's 1998 Incentive Stock Option Plan and in accordance with Rule 701 of the Act. Regulation S and Section 4(2) - 5% Series A Convertible Preferred On June 4, 1999, the Company entered into a private placement agreement ("Agreement") with Noesis Capital Corp. ("Noesis") wherein Noesis would act as the placement agent for the offer and sale of the Company's 5% Series A Convertible Preferred stock pursuant to and in accordance with Regulation S of the Securities Act of 1933, as amended. Noesis received as a commission 10% of the gross proceeds received by the Company and a warrant to purchase at par value, $.001, 10% of the shares placed. The Company sold the preferred stock to foreign investors and to a small group of US based investors of which all were accredited investors. The offering was concluded on December 31, 1999. The Company received gross proceeds of $4,313,500 and incurred investment banking fees of $440,657. 19 Regulation D - Common Stock On July 24, 2000, the Company entered into a private placement agreement ("Agreement") with Noesis Capital Corp. ("Noesis") wherein Noesis would act as the placement agent for the offer and sale of the Company's common stock pursuant to and in accordance with Regulation D of the Securities Act of 1933, as amended. Noesis was entitled to receive as a commission 8% of the gross proceeds received by the Company and a warrant to purchase at $1.10 per share, 10% of the shares placed. In addition, Noesis was granted a 2% non-accountable expense allowance. The Company sold the common stock to foreign investors and to a small group of US based investors of which all were accredited investors. The offering was concluded on October 15, 2000. The Company had received gross proceeds of $635,000 and incurred investment banking fees of $66,833. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS The following information should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other information set forth as Exhibit 99 of this report. General The Company changed the focus of its core business during 1999. The company is a provider of Internet based database products that integrate significant components of the clinical trial process, including the collection, compilation and validation of clinical trial data. Prior to 1999 the Company was a computer systems integrator providing services and hardware sales for the installation of local and wide area networks. The Company expects to continue phasing out the systems integration segment of its business throughout 2001. Virtually all of the Company's personnel are involved in the development and marketing of the Company's TrialMaster product. Year Ended December 31, 2000 Compared With the Year Ended December 31, 1999 Results of Operations Revenues Revenues for the year ended December 31, 2000 were $70,976 compared to $1,259,214 for the same period in 1999. The substantial decrease is attributable to the Company significantly curtailing its systems integration business segment. Revenues associated with the Company's Internet based clinical trial products were approximately $17,825 and $0 for 2000 and 1999 respectively. Systems integration revenues in 2000 were approximately $53,151. The Company expects systems integration revenues in 2001 to parallel the results achieved in 2000 The Company's TrialMaster product is currently being sold as an application service provider ("ASP") that provides electronic data capture ("EDC") and other services such as an enterprise management suite which assists its clients in the pharmaceutical, biotechnology and medical device industries in accelerating the completion of clinical trials. TrialMaster contracts provide for pricing that is based on both the size and duration of the clinical trial. Size parameters include the number of patients participating in the trial and the number of data points being collected per patient. The client will pay a trial setup fee based on the previously 20 mentioned factors, and then pay an on-going maintenance fee for the duration of the clinical trial that provides software and network support during the trial. Generally, these contracts will range in duration from 12 months to several years. The maintenance fee revenues are earned and recognized monthly. Costs associated with contract revenues are recognized as incurred. Cost of Sales Cost of sales was $52,492 or 74.0% for the year ended December 31, 2000 versus $1,005,338 or 79.8% for the year ended December 31, 1999. The absolute decrease in cost of sales is attributable to the Company's curtailment of its systems integration business segment. The decrease in cost of sales on a percentage business is primarily the result of the Company providing more high margin installation services in 2000 than hardware sales. The Company does not anticipate that systems integration costs will be a significant source of expense in 2001. The Company's anticipates that the commercialization of its database product TrialMaster and its related components will be the source of most of its cost of sales. Other Expenses Salaries, Employee Benefits and Related Expenses Salaries and related expenses is the Company's biggest expense at 47.6% of total Other Expenses for 2000. Salaries and related expenses totaled $2,895,108 in 2000 compared to $784,635 in 1999. The marked increase is attributable to an increase in headcount from approximately 8 employees during 1999 to an average of 23 employees in 2000. In addition, two employees were accounted for as consultants in 1999 and subsequently converted to full-time employees in 2000. The Company increased its personnel in 2000 in anticipation of marketing both TrialMaster and WebIPA. The increase encompassed additional computer programmers, and increased sales and marketing personnel. The Company has reduced its sales and marketing personnel primarily through the closure of its European office based on its decision to focus on building its clinical trial clientele domestically in the US. In addition, the Company was able to reduce its research and development personnel through the consolidation of its Tampa, Florida and Miami, Florida offices. Rent Rent expense was $242,471 for the year ended December 31, 2000 compared with $108,371 for the comparable period in 1999. The increase can be attributed to approximately $32,728 in rent expense for the Company's office in Amsterdam and an increase of approximately $20,990 in rent expense for the Company's Tampa office. In addition, the Company relocated its corporate office in November 1999 to a larger facility within the same office building. The move created approximately $80,000 in additional rent expense in 2000. 21 Consulting Expenses Consulting expenses, which are comprised of medical advisory, product development and marketing and sales consultants were $269,998 for the year ended December 31, 2000 compared to $557,751 in fiscal 1999. The decrease of $287,753 was caused by several factors. There was a decrease in marketing and sales consulting expense of $130,030 caused by the conversion of two sales consultants into marketing executives of the Company. There was a decrease of $117,470 in medical advisory consulting expenses that is directly correlated to a curtailment of the Company's medical advisory board. In addition, there was medical advisory consulting expense recognized in connection the payment of stock bonuses to several members of the medical advisory board in 1999. Product development fees were reduced by $40,253 through the reduced use of temporary employees within the Company's research and development function. Legal and Professional Fees Legal and professional fees increased to $613,797 in the year ended December 31, 2000 compared to $98,895 in the same period in 1999. The increase can be attributed to investment banking and financial advisory fees totaling $496,889 in 2000. Legal and accounting fees were $116,908 in 2000 compared to $98,895 for the same period in fiscal 1999. Telephone and Internet Telephone and Internet related costs increased by $130,749 due to the increased telephone and Internet access costs associated with the Company's additional offices in Amsterdam, the Netherlands and Tampa, Florida. The Company anticipates a reduction in access charges due to the closure of its European offices and the recent closing of its Tampa office. Selling, General and Administrative Selling, general and administrative expenses ("SG&A") includes all office oriented expenses, advertising, public relations and marketing costs and all other expenses not directly chargeable to either cost of sales or specifically detailed income statement categories. These expenses were approximately $617,006 in fiscal 2000 compared to $208,226 in fiscal 1999. A portion of the increase is a result of increased expenditures for advertising ($160,000), marketing ($87,000) and public relations ($30,000) in comparison with fiscal 1999. In addition, the Company had SG & A expenses of approximately $79,000 in its European operation. Impairment of Equity Investment 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 was 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. 22 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. Loss on Subsidiary Bankruptcy As discussed in Item One of this filing the Company filed for bankruptcy protection on or about September 6, 2000 for its wholly owned subsidiary OmniTrial. In connection with the bankruptcy filing the Company has recognized a loss of approximately $78,131 which represents the value of the assets of OmniTrial immediately prior to the bankruptcy filing. The Company believes it is unlikely that any of the assets of OmniTrial will be recovered through the bankruptcy proceeding. The Company is currently attempting to negotiate a settlement with the trustee which would provide (i) settlement of all matters relating to the case, (ii) release the Company from further claims, and (iii) return the servers to the Company in exchange for an amount to be paid to the trustee. Depreciation and Amortization Depreciation and amortization expense was $370,278 for fiscal 2000 compared with $299,402 for fiscal 1999. The increase is a result of an increase in depreciation expense in 2000 of approximately $108,147 that is associated with additional computer and office equipment offset by a $30,000 decrease in the amortization of the non-compete covenant associated with the Education Navigator acquisition in 1998 Preferred Stock Dividends Preferred stock dividends increased to $208,137 in fiscal 2000 compared with $34,021 for the comparable period in 1999. The expense in fiscal 2000 represents a full year's worth of dividends payable to preferred shareholders versus an average period outstanding of approximately 50 days in 1999. Liquidity and Capital Resources The Company changed its primary focus to providing Internet based database applications to the clinical trial industry in mid 1998. At that time it began phasing out its systems integration business segment. Since the Company made TrialMaster and its related components its primary business the Company has relied primarily on the proceeds from the sale of debt and equity securities to fund its operations. 23 Cash and cash equivalents decreased by $1,036,305 to $90,958 at December 31, 2000. This was the result of cash provided by financing activities of $3.8 million offset by cash used in operating activities of approximately $4.2 million and $664 thousand in investing activities. The significant components of the activity include a loss from operations of approximately $6.3 million, cash used in an equity investment in EMN of $335,000, the purchase of property and equipment of approximately $333,765, offset by an increase in accounts payable and accrued expenses of approximately $795,000 and approximately $3.9 million the company raised through the sale of debt and equity securities. Because of the losses experienced in 1999 and 2000 the Company has needed to continue utilizing the proceeds from the sale of debt and equity securities to fund its working capital needs. The capital markets during the latter half of fiscal 2000 provided a difficult climate for the raising of capital because of the decline in value of publicly held technology stocks and the corresponding apprehension on the part of investors to invest in technology oriented firms. The softness in the capital markets coupled with the losses experienced caused working capital shortfalls. To compensate for its working capital needs the Company has used a combination of equity financing and short-term bridge loans. The Company's primary capital requirements are for daily operations and for the continued development and marketing of the TrialMaster system. The Company's Management believes that its current available working capital, anticipated and subsequent sales of stock and or debt financing will be sufficient to meet its projected expenditures for a period of at least twelve months from December 31, 2000. The Company's capital requirements, will need to be funded through debt and equity financing, of which there can be no assurance that such financing will be available or, if available, that it will be on terms favorable to the Company. Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998. RESULTS OF OPERATION Revenues: Total revenues decreased to $1,259,214 for year 1999 from $1,689,794 for year 1998. This decrease in revenue is attributed to a decision made by management to cease its systems integration business during the 3rd quarter of 1999. All of the Company's revenue is attributed to its systems integration business. The Company has earned no revenue from its TrialMaster(TM) system. Operating Expenses: Total operating expenses increased to $2,561,092 for the year 1999 from $762,143 for the year 1998. This substantial increase in operating expenses is attributed to a number of factors including the aggressive development and marketing of TrialMaster and the continuing financial obligations associated with the acquisition of Education Navigator in June of 1998 and the decision to focus the Company's resources on the development of the TrialMaster(TM) Internet system. Salaries and Wages Salaries and wages increased to $784,635 for the year 1999 from $239,108 for the year 1998. The increase in salaries and wages is attributed to an increase in the number of employees. The Company currently has 20 employees and 1 part time employee. 24 Independent Consultants. Fees to independent consultants increased to $557,751 for the year 1999 from $76,869 for the year 1998. The Company decided to outsource a number of areas during the initial phase of developing, marketing and implementing the TrialMaster(TM) system. These areas concern product development, marketing and sales, and medical/strategic consulting. ITEM 7. FINANCIAL STATEMENTS Attached as Exhibit 99. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT David Ginsberg, D.O, 53, Chief Executive Officer, President and Director. Dr. Ginsberg has served as a Director of the Company since October 2000 and shall serve until the next annual meeting. From 1998 to 2000 Dr. Ginsberg served as Vice President Operations of Wyeth-Ayerst Research. From 1997 to 1998 Dr. Ginsberg served as Executive Director of Covance, Inc. From 1994 to 1997 Dr. Ginsberg served as President of Concorde Clinical Research. Randall G. Smith, 43, Chief Technical Officer, Chairman of the Board and Director. Mr. Smith has been a Director of the Company since 1997 and shall serve until the next annual meeting. From 1997 until August 1, 2000 Mr. Smith was President of the Company. He is still an officer and director of OmniComm Systems, Inc. From December 1995 to May 1997 Mr. Smith was Director of Operations for Global Communications Group. Cornelis F. Wit, 54, Director. Mr. Wit has been a Director of the Company since 1999 and shall serve until the next annual meeting. Mr. Wit became interim Chief Executive Officer of the Company on May 29, 2000 and served in that capacity until August 2, 2000. Mr. Wit is President of Corporate Finance of Noesis Capital Corp. Mr. Wit was formerly President and CEO of DMV Inc., the North American subsidiary of Campina Melkunie. Guus van Kesteren, 59, Director. Mr. van Kesteren has been a Director of the Company since 1999 and shall serve until the next annual meeting. Mr. van Kesteren is a consultant to Noesis Capital Corp. Mr. van Kesteren was formerly Vice President of Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson, responsible for the pharmaceutical business in South East Asia, Australia, and New Zealand. Jan Vandamme, 40, Director. Mr. Vandamme has been a Director of the Company since 2000 and shall serve until the next annual meeting. Mr. Vandamme is CEO of Profrigo SA, an 110-year old investment company which invests primarily in Internet and communication technology companies in both Europe and the US. Prior to his involvement in Profrigo SA, Mr. Vandamme was the founder of United Callers, one of Europe's first Internet Access and Service Provider companies. 25 Ronald T. Linares, 38, Vice President of Finance, Chief Financial Officer and Chief Accounting Officer. Mr. Linares has served as an officer of the Company since April 2000. From 1996 to 1999 was the Chief Financial Officer or First Performance Corp. a consulting and outsource provider to the banking industry. From 1994 to 1996 Mr. Linares was the Chief Financial Officer of FOODQUEST, Inc. a restaurant operator and franchisor. Paige A. Harper, 36, General Counsel. Ms. Harper has served as an officer of the Company since April 2000. From 1997 to 2000 Ms. Harper served as Senior Counsel for the United States Securities and Exchange Commission. From 1989 to 1997 Ms. Harper was an associate with Greenberg Traurig, P.A. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Section 16(a) of the Securities and Exchange Act of 1934 (the "Exchange Act") requires our officers and directors, and persons who own more than 10% of the registered class of our equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than 10% shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based on our review of the copies of such forms received by us, or written representations from certain reporting persons that no Forms 5 were required for those persons, we believe that, during our fiscal year ended December 31, 2000, all filing requirements applicable to our officers and directors and greater than 10% beneficial owners were complied with. ITEM 10. EXECUTIVE COMPENSATION Information concerning executive compensation appears in the Company's Proxy Statement, under "Executive Compensation and Related Information." This portion of the Proxy Statement is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information concerning security ownership appears in the Company's Proxy Statement, under "Security Ownership of Principal Holders and Management". This portion of the Proxy Statement is incorporated herein by reference. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 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. 26 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. 27 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2 (a) Agreement and Plan of Reorganization dated July 22, 1998: Incorporated herein by reference to Form 8-K, dated March 3, 1999. File No. 0-25203 (b) Amendment to Agreement and Plan of Reorganization: Incorporated herein by reference to Form 10-SB dated December 20, 1998. (c) Plan of Merger: Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (d) Agreement and Plan of Acquisition dated January 26, 2000 of WebIPA: Incorporated herein by reference to Form 8K dated February 9, 2000. 3 (i) Certificate of Incorporation: Incorporated herein by reference to Form SB-2 #333-6410 (ii) By-Laws: Incorporated herein by reference to Form SB-2 #333-6410 4 (a) Amendment to Article of Inc. - Authorization to issue preferred shares. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (b) Certificate of Designation - 5% Series A Convertible Preferred. Incorporated herein by reference to Form 10- SB/A dated August 17, 1999. (c) Certificate of Increase - 5% Series A Convertible Preferred dated December 17, 1999. Incorporated herein by reference to Form SB-2/A dated November 14, 2000. 10 (a) Employment Contracts. (i) Clifton Middleton - Employment Agreement. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (ii) Peter S. Knezevich - Employment Agreement and Stock Option Agreement. Incorporated herein by reference to Form 10-KSB dated March 29, 2000. (iii) Randy Smith - Employment Agreement and Stock Option Agreement. Incorporated herein by reference to Form 10-KSB dated March 29, 2000. (iv) David Ginsberg, D.O. - Employment Agreement. Incorporated herein by reference to Form SB-2/A dated November 14, 2000. (b) Factor Agreement. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (c) 1998 Stock Incentive Plan. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (d) Consulting Contract - Larry Kronick. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (e) Medical Advisory Board Agreement. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (f) Standard Agreement - Proprietary Protection. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. 99 Audited Financials Statements for the Year and Periods ended December 31, 2000 and 1999. (b) Reports on Form 8-K None. 28 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OmniComm Systems, Inc. Registrant By: David Ginsberg, D.O., Director, Chief Executive Officer and President ----------------------------------------------------------------------------- Date: April 15, 2001 --------------------------------------------------------------------------- In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: David Ginsberg, D.O., Director, Chief Executive Officer and President ----------------------------------------------------------------------------- Date: April 15, 2001 --------------------------------------------------------------------------- By: Randall G. Smith, Director and Chief Technology Officer ----------------------------------------------------------------------------- Date: April 15, 2001 --------------------------------------------------------------------------- By: Cornelis F. Wit, Director ----------------------------------------------------------------------------- Date: April 15, 2001 --------------------------------------------------------------------------- By: Guus van Kesteren, Director ----------------------------------------------------------------------------- Date: April 15, 2001 --------------------------------------------------------------------------- By: Jan Vandamme, Director ----------------------------------------------------------------------------- Date: April 15, 2001 --------------------------------------------------------------------------- By: Ronald T. Linares, Vice President of Finance, ----------------------------------------------------------------------------- Chief Financial and Accounting Officer ----------------------------------------------------------------------------- Date: April 15, 2001 --------------------------------------------------------------------------- By: Paige A. Harper, General Counsel ----------------------------------------------------------------------------- Date: April 15, 2001 --------------------------------------------------------------------------- 29 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ----------- ----------- 2 (a) Agreement and Plan of Reorganization dated July 22, 1998: Incorporated herein by reference to Form 8-K, dated March 3, 1999. File No. 000-25203 (b) Amendment to Agreement and Plan of Reorganization: Incorporated herein by reference to Form 10-SB dated December 20, 1998. (c) Plan of Merger: Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (d) Agreement and Plan of Acquisition dated January 26, 2000 of WebIPA: Incorporated herein by reference to Form 8K dated February 9, 2000. 3 (i) Certificate of Incorporation: Incorporated herein by reference to Form SB-2 #333-6410 (ii) By-Laws: Incorporated herein by reference to Form SB-2 #333-6410 4 (a) Amendment to Article of Inc. - Authorization to issue preferred shares. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (b) Certificate of Designation - 5% Series A Convertible Preferred. Incorporated herein by reference to Form 10- SB/A dated August 17, 1999. (c) Certificate of Increase - 5% Series A Convertible Preferred dated December 17, 1999. Incorporated herein by reference to Form SB-2/A dated November 14, 2000. 10 (a) Employment Contracts. (i) Clifton Middleton - Employment Agreement. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (ii) Peter S. Knezevich - Employment Agreement and Stock Option Agreement. Incorporated herein by reference to Form 10-KSB dated March 29, 2000. (iii) Randy Smith - Employment Agreement and Stock Option Agreement. Incorporated herein by reference to Form 10-KSB dated March 29, 2000. (iv) David Ginsberg, D.O. - Employment Agreement. Incorporated herein by reference to Form SB-2/A dated November 14, 2000. (b) Factor Agreement. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (c) 1998 Stock Incentive Plan. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (d) Consulting Contract - Larry Kronick. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (e) Medical Advisory Board Agreement. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. (f) Standard Agreement - Proprietary Protection. Incorporated herein by reference to Form 10-SB/A dated August 17, 1999. 99 Audited Financials Statements for the Year and Periods ended December 31, 2000 and 1999. 30 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 -----END PRIVACY-ENHANCED MESSAGE-----