10QSB 1 d10qsb.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMISSION Washington, D.C. 20549 FORM 10-QSB [Mark One} [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended JUNE 30, 2001 ------------- [_] 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, #402, Miami, FL 33133 --------------------------------- ----- (Address of principal office) (Zip Code) Registrant's telephone number: (305) 448-4700 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 ____ - The number of shares outstanding of each of the issuer's classes of equity as of June 30, 2001: 7,889,128 common stock $.001 par value, 4,215,224 preferred stock no par value. 1 OMNICOMM SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS
June 30, December 31, -------- ------------ 2001 2000 ---- ---- (unaudited) ----------- ASSETS CURRENT ASSETS Cash $ 7,898 $ 90,958 Accounts receivable 28,251 9,927 Prepaid expenses 2,458 -0- ------------ ----------- Total current assets 38,607 100,885 PROPERTY AND EQUIPMENT, Net 438,296 486,481 OTHER ASSETS Intangible assets, net 82,968 53,071 Goodwill, net -0- 79,277 Other assets 100,160 25,160 ------------ ----------- TOTAL ASSETS $ 660,031 $744,874 ============ =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued expenses $ 1,304,601 $ 1,079,506 Notes payable - current 446,500 612,500 Notes payable related parties - current 380,000 660,000 Deferred revenue 30,474 26,861 ------------ ----------- Total current liabilities 2,161,575 2,378,867 CONVERTIBLE DEBT 1,980,000 462,500 ------------ ----------- TOTAL LIABILITIES 4,141,575 2,841,367 ------------ ----------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY (DEFICIT) 5% Series A convertible preferred stock, 5,000,000 shares authorized, 3,812,179 3,857,179 4,215,224 and 4,260,224 issued and outstanding, respectively, at par Common stock - 20,000,000 shares authorized, 8,510,079 and 7,974,578 8,510 7,975 issued, respectively, at $.001 par value Additional paid in capital 3,645,562 3,261,100 Less cost of treasury stock: Common - 620,951 and 620,951 shares, (293,912) (293,912) respectively Retained deficit (10,652,743) (8,927,695) Subscriptions receivable (1,140) (1,140) ------------ ----------- TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (3,481,544) (2,096,493) ------------ ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 660,031 $ 744,874 ============ ===========
See accompanying summary of accounting policies and notes to financial statements. 2 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Period January 1, 2000 to June 30, 2001 (unaudited)
5% Series A Convert. Total Common Stock Additional Preferred Stock Retained Shareholders' Number of $.001 Paid in Number Earnings Subscription Treasury Equity Shares Value Capital Of Shares $ No Par (Deficit) Receivable Stock (Deficit) ----------- ------- --------- ------------ ------------- ----------- ------------- --------- -------------- Balance at 3,344,066 $3,344 $238,007 4,117,500 $3,872,843 $(2,652,644) $(850,952) $-0- $610,598 January 1, 2000 Issuance of 40,000 40 89,960 90,000 common stock for services Issuance 284,166 284 284 of common stock Exercise of 1,025,895 1,026 297,024 298,050 stock options Purchase (20,951) (293,312) (293,312) of treasury stock in connection with stock appreciation rights Payment on 850,000 850,000 subscription receivable Acquisition of 1,200,000 1,200 3,833 5,033 WebIPA, Inc. Common stock (600,000) (600) (600) reacquired in the acquisition of WebIPA Issuance of 146,000 146,000 146,000 preferred stock Issuance costs (206,750) (206,750) on preferred stock
3 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) For the Period January 1, 2000 to June 30, 2001 (unaudited)
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 320,000 320 366,393 366,713 conv. notes payable, net of issuance costs of $33,287 Exercise of 20,000 20 15,980 16,000 stock options Exercise of 481,834 482 963,186 963,668 stock warrants Exercise of 187,954 188 (188) -0- stock warrants Conversion of 66,667 67 99,933 (100,000) (100,000) -0- preferred stock to common stock Conversion of 91,608 92 206,026 206,118 notes payable to common stock Issuance of 70,990 71 188,784 188,855 common stock for services Issuance of 668,334 668 600,833 601,501 common stock, net of issuance costs of $66,833
4 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) For the Period January 1, 2000 to June 30, 2001 (unaudited)
Common Stock Additional Preferred Stock Retained Shareholders' Number $.001 Paid in Number of Earnings Subscription Treasury Equity of --------- Shares Value Capital Shares $ No Par (Deficit) Receivable Stock (Deficit) ------ ----- ------- ------ -------- --------- ---------- ----- ------- Issuance of 126,781 190,172 190,172 preferred stock for services Conversion of 66,667 100,000 100,000 notes payable into preferred stock Conversion of 96,724 97 144,989 (96,724) (145,086) -0- preferred stock to common stock Issuance of 76,340 76 45,552 45,628 common stock for services Net (loss) for the (6,275,051) (6,275,051) --------- --------- year ended December 31, 2000 Balances at 7,353,627 7,975 3,261,100 4,260,224 3,857,179 (8,927,695) (1,140) (293,912) (2,096,493) December 31, 2000 Issuance of 90,000 90 74,910 75,000 common stock Conversion of 30,000 30 44,970 (45,000) (45,000) -0- preferred stock to common stock
5 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) For the Period January 1, 2000 to June 30, 2001 (unaudited)
5% Series A Common Stock Additional Preferred Stock Retained Number of $.001 Paid in Number Earnings Subscription Treasury Shares Value Capital Of Shares $ No Par (Deficit) Receivable Stock Conversion of 30,000 30 34,580 convertible notes payable to common stock, net of issuance costs of $2,890 Exercise of 20,000 20 15,980 stock options Stock issued in 126,338 126 97,732 lieu of pay and in satisfaction of trade payables Conversion of 226,038 226 112,103 notes payable to common stock Issuance of 13,125 13 4,187 common stock Net loss for the (1,725,048) six months ------------ ended June 30, 2001 Balances at June 7,889,128 $8,510 $3,645,562 4,215,224 $3,812,179 $(10,652,743) $ (1,140) $(293,912) 30, 2001 ========= ====== ========== ========= ========== ============ ========= ========= Total Shareholders Equity (Deficit) Conversion of 34,610 convertible notes payable to common stock, net of issuance costs of $2,890 Exercise of 16,000 stock options Stock issued in 97,858 lieu of pay and in satisfaction of trade payables Conversion of 112,329 notes payable to common stock Issuance of 4,200 common stock Net loss for the (1,725,048) six months ---------- ended June 30, 2001 Balances at June $(3,481,544) 30, 2001 ===========
See accompanying summary of accounting policies and notes to financial statements 6 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the six months ended For the three months ended June 30, June 30, 2001 2000 2001 2000 ----------- ----------- ---------- ----------- Revenues $ 57,179 $ 40,760 $ 16,084 $ 15,782 Cost of sales 38,198 46,524 21,713 11,404 ----------- ----------- ---------- ----------- Gross margin 18,981 (5,764) (5,629) 4,378 Other expenses Salaries, benefits and related taxes 993,116 1,511,329 431,264 938,396 Rent 77,986 162,408 36,610 101,476 Consulting - medical advisory -0- 89,000 -0- 47,000 Consulting - marketing sales -0- 77,033 -0- 29,033 Consulting - product development -0- 36,420 -0- 7,985 Legal and professional fees 100,917 405,978 58,419 206,731 Travel 42,210 310,443 (980) 140,724 Telephone and internet 57,256 141,347 22,817 77,313 Selling, general and administrative 51,874 407,521 25,967 192,325 Interest expense, net 135,678 41,979 79,176 24,956 Depreciation and amortization 182,933 194,470 95,605 101,854 ----------- ----------- ---------- ----------- Total other expenses 1,641,970 3,377,928 748,878 1,867,793 ----------- ----------- ---------- ----------- (Loss) before taxes and preferred (1,622,989) (3,383,692) (754,507) (1,863,415) dividends Income tax expense (benefit) -0- -0- -0- -0- Preferred stock dividends (102,059) (101,569) (51,200) (52,155) ----------- ----------- ---------- ----------- Net(loss) $(1,725,048) $(3,485,261) $ (805,707) $(1,915,530) =========== =========== ========== =========== Net (loss) per share $ (0.22) $ (0.70) $ (0.10) $ (0.35) =========== =========== ========== =========== Weighted average number of shares outstanding 7,739,214 5,000,089 7,883,732 5,549,470 =========== =========== ========== ===========
The accompanying notes are an integral part of these financial statements. 7 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
For the six months ended June 30, 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(1,725,048) $(3,485,261) Adjustment to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 182,933 194,470 Common stock issued for services 97,858 90,000 Change in assets and liabilities: Accounts receivable (18,324) (27,301) Inventory -0- 5,120 Prepaid expenses (2,458) (22,260) Other assets -0- (13,892) Intangible assets (66,750) -0- Accounts payable and accrued expenses 237,524 1,118,544 Sales tax payable -0- (1,487) Deferred revenue 3,613 -0- ----------- ----------- Net cash provided by (used in) operating activities (1,290,652) (2,142,067) CASH FLOWS FROM INVESTING ACTIVITIES Equity investment in EMN -0- (335,000) Purchase of WebIPA -0- 5,033 Purchase of property and equipment (21,508) (272,900) ----------- ----------- Net cash provided by (used in) operating activities (21,508) (602,867) CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from convertible notes 794,900 -0- Payments on notes payable (16,000) -0- Proceeds from notes payable 430,000 530,000 Proceeds from stock warrant exercise -0- 492,000 Issuance of 5% Series A convertible preferred stock, net of issuance costs -0- 789,250 Issuance of common stock 4,200 284 Proceeds from stock option exercise 16,000 20,739 ----------- ----------- Net cash provided by (used in) financing activities 1,229,100 1,832,273 ----------- ----------- Net increase (decrease) in cash and cash equivalents (83,060) (912,661) Cash and cash equivalents at beginning of period 90,958 1,127,263 ----------- ----------- Cash and cash equivalents at end of period $ 7,898 $ 214,602 =========== ===========
8 OMNICOMM SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Continued)
For the six month ended June 30, 2001 2000 ---- ---- Supplemental Disclosure of Cash Flow Information: Cash paid during the period for: Income tax paid $ -0- $ -0- ======= ======= Interest paid $23,657 $44,728 ======= =======
Non-Cash Investing and Financing Transactions; Acquisition of all of the outstanding common stock of WebIPA, Inc. during the quarter ended June 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 preferred shares were converted into 163,391 shares of common stock. During the period ended June 30, 2001, the Company issued 90,000 shares as collateral for a bridge loan with a principal amount due of $75,000. During the period ended June 30, 2001, $37,500 of convertible notes payable were converted into 30,000 shares of common stock, net of issuance costs of $2,890. During the period ended June 30, 2001, a promissory note with a face value of $100,000 with $12,329 in accrued interest was converted into 226,003 shares of the Company's common stock . During the period ended June 30, 2001, $45,000 of the Company's convertible Series A Preferred Stock totaling 45,000 preferred shares were converted into 30,000 shares of common stock. During the period ended June 30, 2001, $760,000 in notes payables were converted into 12% convertible notes of the Company. See accompanying summary of accounting policies and notes to financial statements 9 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) 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 7,739,214 and 5,000,089 for the six months ended June 30, 2001 and 2000; and 7,883,732 and 5,549,470 for the three months ended June 30, 2001 and 2000 respectively. There were no differences between basic and diluted earnings per share. Options to purchase 2,750,039 shares of common stock at prices ranging from $.25 to $5.50 per share were outstanding at June 30, 2001, 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. 10 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) ADVERTISING ----------- Advertising costs are expensed as incurred. Advertising costs were $1,600 and $113,049 for the periods ended June 30, 2001 and 2000 respectively. 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: June 30, 2001 Accumulated Cost Amortization ---- ------------ Covenant not to compete $120,000 $120,000 Software development costs 87,500 87,500 Organization costs 539 539 Debt acquisition costs 150,198 67,230 -------- -------- $358,237 $275,269 ======== ======== 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 86,338 47,850 -------- -------- $294,377 $241,306 ======== ======== 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 $14,583 for software development costs for the period ended June 30, 2001. During the first six months of 2001, the Company issued Convertible Notes totaling $1,555,000. The fees of $66,750 associated with these notes will be amortized ratably over the term of the notes, which is through January 31, 2002. Amortization expense of debt acquisition costs totaled $19,380 for the period ended June 30, 2001, and approximately $2,890 of the debt acquisition costs were reclassified as stock issuance costs in connection with the conversion of $37,500 (original cost) worth of the convertible notes into common stock of the Company during the period ended June 30, 2001. Included in Goodwill, as a result of the EdNav acquisition at June 30, 2001 and December 31, 2000 is the cost of $475,665 and accumulated amortization of $475,665 and $396,388 respectively. The goodwill is being amortized ratably over a period of three years. Goodwill amortization totaled $79,277 for the period ended June 30, 2001. 11 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) PROPERTY AND EQUIPMENT, AT COST ------------------------------- Property and equipment consists of the following:
June 30, 2001 December 31, 2000 Accumulated Accumulated Cost Depreciation Cost Depreciation ---- ------------ ---- ------------- Computer and office equipment $391,477 $127,719 $387,862 $ 88,812 Leasehold improvements 2,549 440 1,699 201 Computer software 229,453 86,378 212,412 60,067 Office furniture 42,350 12,996 42,350 8,762 -------- -------- -------- -------- $665,829 $227,533 $644,323 $157,842 ======== ======== ======== ========
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 periods ended June 30, 2001 and 2000 was $69,693 and $58,557 respectively. 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 $30,474 in deferred revenue relating to one contract for services to be performed over the next three months. REVENUE RECOGNITION POLICY -------------------------- The Company recognizes sales, for both financial statement and tax purposes, in accordance with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 requires that revenues be recognized ratably over the life of a contract. In accordance with SAB 101, The Company will periodically record deferred revenues relating to advance payments in contracts. The Company had $30,474 in deferred revenue relating to one contract for services to be rendered over the next three 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. 12 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) 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 APB 25 to account for its stock based compensation plans. APB 25 discloses pro forma income amounts which result from recognizing stock awards at their fair value. 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 3,784,000 have been omitted from the calculation of dilutive EPS for the period ended June 30, 2001. A reconciliation between numerators and denominators of the basic and dilutive earnings per shares is as follows:
Period Ended June 30, 2001 Period Ended June 30, 2000 -------------------------- -------------------------- Net Income Net Income (Loss) Shares Per-Share (Loss) Shares Per-Share Numerator Denominator Amount Numerator Denominator Amount --------- ----------- ------ --------- ----------- ------ Basic EPS $ (1,726,048) 7,739,214 $ (0.22) $ (3,485,261) 5,000,089 $ (0.70) Effect of Dilutive Securities None. -0- -0- -0- -0- -0- -0- ------------- ------------- --------- ------------ -------------- ---------- Diluted EPS $ (1,726,048) 7,739,214 $ (0.22) $ (3,485,261) 5,000,089 $ (0.70) ============= ============= ========= ============ ============== ==========
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. 13 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) 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. 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 in 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 has reviewed SAB No. 101 and expects the pronouncement to have an effect on its method of recognizing revenues. The Company's typical engagement will last from 4 months to several years, and the revenue generated from those engagements will be ratably recognized over the life of the engagement. NOTE 3: OPERATIONS AND LIQUIDITY -------------------------- The Company incurred substantial losses in 1999, 2000 and during the first six months of fiscal 2001. 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 period ending June 30, 2001, 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 June 30, 2001. 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. 14 OMNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) NOTE 5: EQUITY INVESTMENT ----------------- European Medical Network (EMN) Investment, at cost On June 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 June 30, 2001 and December 31, 2000. NOTE 6: NOTES PAYBLE ------------ Education Navigator -------------------- As of June 30, 2001, the Company owed $141,500 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 2001 is $157,500. At June 30, 2001 the Company was in default under the terms of the promissory notes governing the debt. Short-term Borrowings --------------------- At June 30, 2001 the Company owed $685,000 under short-term notes payable. The notes bear interest at rates ranging from 9.5% to 18%. The average term of the promissory notes is 201 days. One of the notes is collateralized by common stock, 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 June 30, 2001 the Company was in default on three of the notes with principal owed of approximately $255,000. 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 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 June 30, 2001 approximately $437,500 of the Convertible Notes had been converted into 350,000 shares of common stock of the Company. 15 OMNNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) During the first half of 2001, the Company issued Convertible Notes Payable in the amount of $1,555,000 pursuant to a Confidential Private Placement Memorandum. There were costs of $66,750 associated with this offering. The net proceeds to the Company were $1,488,250, with the costs of $66,750 accrued at June 30, 2001. The notes bear interest at twelve percent annually, payable at maturity. The notes are convertible after maturity, which is January 31, 2002, into shares of common stock of the Company at $0.50 per share, including registration rights. 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 $ 54,418 2002 116,125 2003 0 2004 0 2005 0 -------- Total $170,543 ======== 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 claimed that certain assets in the possession of OmniTrial were paid for by the Company and therefore should not be part of the liquidating assets of OmniTrial. The bankruptcy trustee rejected that claim and told the Company that as part of the OmniTrial bankruptcy estate the assets would be sold to diminish any deficiency of the estate. On July 5, 2001 the Company signed a settlement agreement providing for the return of the assets to the Company in exchange for a payment of $10,000. 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 against the Company. The plaintiff alleged claims totaling approximately $84,160 against the Company for fees associated with advertising, marketing and public relations services provided between June and September 2000. On or about April 27, 2001, the Company and Wray Ward Laseter entered into a settlement agreement which provides that the plaintiff dismiss the lawsuit with prejudice and release its claims against the Company in return for a series of payments totaling $66,000. To date the Company has made two payments totaling $25,200 under the settlement agreement. 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. 16 OMNNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) In December 2000, the Company received a demand letter from a former employee for fees owed relating to an advisers agreement between 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. NOTE 9: RELATED PARTY TRANSACTIONS -------------------------- On July 18, 2000 the Company borrowed $50,000 from Guus van Kesteren a Director of the Company. The promissory note carried an interest rate of 12% per annum and had 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. 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 August 17, 2000 the Company borrowed $100,000 from Noesis N.V. a shareholder of the Company. The promissory note carried an interest rate of 8% per annum and had 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. On October 26, 2000 the Company borrowed $250,000 from Profrigo N.V. a shareholder of the Company. The promissory note carried an interest rate of 5% per annum and had 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 November 22, 2000 the Company borrowed $150,000 from Profrigo, N.V, a shareholder of the Company. 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 December 22, 2000 the Company borrowed $60,000 from Guus van Kesteren a Director of the Company. The promissory note carried an interest rate of 5% per annum and had 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 December 22, 2000 the Company borrowed $50,000 from Profrigo N.V. a shareholder of the Company. The promissory note carried an interest rate of 5% per annum and had 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 February 20, 2001 the Company borrowed $60,000 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 August 20, 2001. 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 $0.30. 17 OMNNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) On March 19, 2001 the Company borrowed $100,000 from Profrigo N.V a shareholder of the Company. The promissory note carries an interest rate of 12% per annum and has a maturity date of September 19, 2001. On April 24, 2001 the Company borrowed $20,000 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 August 26, 2001. In addition, the Company granted Mr. van Kesteren an option to purchase 6,700 shares of the Company's common stock at a price of $0.30. On June 22, 2001 the Company borrowed $25,000 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 December 22, 2001. The note is convertible into common stock prior to maturity solely at the noteholders option at a price equivalent to that offered in any financing closed by the Company exceeding $1,000,000 prior to the notes maturity. On June 22, 2001 the Company borrowed $25,000 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 December 22, 2001. The note is convertible into common stock prior to maturity solely at the noteholders option at a price equivalent to that offered in any financing closed by the Company exceeding $1,000,000 prior to the notes maturity. 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 Nos. 106 or 112. 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 elected to account for stock-based compensation expense under APB 25. 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. 18 OMNNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) The Company's share option activity and related information is summarized below:
Period ended June 30, June 30, 2001 December 31, 2000 Weighted Weighted Average Average Exercise Exercise Options Price Options Price Outstanding at beginning of period 3,316,006 $ 2.28 3,562,916 $ 1.00 Granted 595,000 $ 0.64 1,851,994 $ 3.46 Exercised 20,000 $ 0.80 1,045,894 $ 0.30 Cancelled 1,140,467 $ 2.00 1,053,010 $ 1.97 --------- ------ --------- ------ Outstanding at end of period 2,750,539 $ 1.79 3,316,006 $ 2.28 ========= ====== ========= ====== Exercisable at end of period 1,556,000 $ 1.79 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 issuance 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. During 2001 the Company issued an aggregate of 126,338 shares of common stock to employees and advisors with a fair market value as measured on the date of issuance of $97,732 for services rendered under employment and consulting agreement. NOTE 12: OMNITRIAL, B.V. BANKRUPTCY -------------------------- 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 claimed that certain assets in the possession of OmniTrial were paid for by the Company and therefore should not be part of the liquidating assets of OmniTrial. The bankruptcy trustee rejected that claim and told the Company that as part of the OmniTrial bankruptcy estate the assets would be sold to diminish any deficiency of the estate. On July 5, 2001 the Company signed a settlement agreement providing for the return of the assets to the Company in exchange for a payment of $10,000. 19 OMNNICOMM SYSTEMS, INC. NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS June 30, 2001 (unaudited) NOTE 13: INCOME TAXES ------------ Income taxes are accrued at statutory US and state income tax rates. Income tax expense is as follows:
6/30/01 6/30/00 ======= ======= Current tax expense (benefit): Income tax at statutory rates $ -0- $ -0- Deferred tax expense (benefit): Amortization of goodwill and covenant (35,320) (48,306) Operating loss carryforward (575,411) (1,310,946) --------- ----------- (610,731) (1,359,252) Valuation allowance 610,731 1,359,252 --------- ----------- Total tax expense (benefit) $ -0- $ -0- ========= ===========
The tax effects of significant temporary differences, which comprise the deferred tax assets are as follows:
6/30/01 12/31/00 ======= ======== Deferred tax assets: Amortization of intangibles $ 259,622 $ 224,302 Operating loss carryforwards 3,711,500 3,136,089 ----------- ---------- Gross deferred tax assets 3,971,122 3,360,391 Valuation allowance (3,971,122) (3,360,391) ----------- ---------- Net deferred tax asset $ -0- $ -0- =========== ===========
The Company has net operating loss carryforwards (NOL) for income tax purposes of approximately $9,851,000. This loss is allowed to be offset against future income until the year 2021 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. NOTE 14: INTERIM FINANCIAL REPORTING The unaudited financial statements of the Company for the period from January 1, 2001 to June 30, 2001 have been prepared by management from the books and records of the Company, and reflect, in the opinion of management, all adjustments necessary for a fair presentation of the financial position and operations of the Company as of the period indicated herein, and are of a normal recurring nature. 20 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. 21 ITEM 2. 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 in 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. Six Months Ended June 30, 2001 Compared With the Period Ended June 30, 2000 Results of Operations Revenues Revenues for the period ended June 30, 2001 were $57,179 compared to $40,760 for the same period in 2000. Revenues associated with the Company's Internet based clinical trial products were approximately $33,981 and $0 for 2001 and 2000 respectively. Systems integration revenues in 2001 were approximately $23,198 versus $40,760 in fiscal 2000. 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 mentioned factors, and then pay an on-going maintenance fee for the duration of the clinical trial that provides software, network and site support during the trial. Generally, these contracts will range in duration from 4 months to several years. Setup fees are generally earned prior to the inception of a trial, however, the revenues will be recognized in accordance with SEC Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" which requires that the revenues be recognized ratably over the life of the contract. The maintenance fee revenues are earned and recognized monthly. Costs associated with contract revenues are recognized as incurred. 22 Cost of Sales Cost of sales was $38,198 for the period ended June 30, 2001 versus $46,524 for the period ended June 30, 2000. The decrease in cost of sales is attributable to the Company's curtailment of its systems integration business segment. Included in cost of sales is $21,950 in labor costs associated with clinical trial production and support in 2001 compared with $0 in 2000. The Company anticipates increasing production labor costs on an absolute basis as its trial revenues increase. We expect labor costs to decrease on a relative percentage basis as we increase our trial base and develop economies of scale with regard to trial production. The Company does not anticipate that systems integration costs will be a significant source of expense in 2001. The Company 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 60.5% of total Other Expenses for 2001. Salaries and related expenses totaled $993,116 in 2001 compared to $1,511,329 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. The Company currently employs approximately 17 employees out of its Miami corporate office. The Company expects to increase headcount within its technology and sales & marketing based functions in concert with anticipated increases in TrialMaster clients during fiscal 2001. Rent Rent expense was $77,986 for the period ended June 30, 2001 compared with $162,408 for the comparable period in fiscal 2000. The decrease can be attributed to $36,989 paid as a lease settlement in 2000 and approximately $29,117 in rent expense for the Company's office in Amsterdam incurred in fiscal 2000 which did not recur in 2001 due to the closure of the Amsterdam office in connection with the bankruptcy filing of the Company's European subsidiary, OmniTrial B.V. 23 Consulting Expenses Consulting expenses, which are comprised of medical advisory, product development and marketing and sales consultants were $0 for the period ended June 31, 2001 compared to $202,453 in fiscal 2000. The decrease can be attributed to several factors. There was a decrease in marketing and sales consulting expense of $77,033 caused by the conversion of two sales consultants into marketing executives of the Company. There was a decrease of $89,000 in medical advisory consulting expenses that is directly correlated to a restructuring of the Company's medical advisory board. Product development fees were reduced by $36,420 through the discontinued use of temporary employees within the Company's research and development function. Legal and Professional Fees Legal and professional fees decreased to $100,917 in the period ended June 30, 2001 compared to $405,978 in the same period in 2000. The decrease can be attributed to investment banking and financial advisory fees totaling $334,766 in 2000 versus $45,000 in fiscal 2001. Legal and accounting fees were $55,917 in 2001 compared to $71,212 for the same period in fiscal 2000. Telephone and Internet Telephone and Internet related costs were reduced by $84,091 due to decreased telephone and Internet access costs associated with the closing of the Company's offices in Amsterdam, the Netherlands and Tampa, Florida, and a decrease in overall long-distance charges associated with the closed facilities. In addition, there were credits due which were not recognized during the first six months of 2000 totaling approximately $37,200 for excess charges by the Company's long distance and network access provider. The Company does not anticipate increasing in access charges during fiscal 2001 based on its own existing communications infrastructure and its projected 2001 clinical trial workload. 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 $51,874 in fiscal 2001 compared to $407,521 in fiscal 2000. A portion of the decrease is a result of expenditures for advertising ($111,449), conferences and seminars ($56,056), marketing ($40,252) and general office related costs ($100,129) in comparison with fiscal 2000. In addition, the Company had SG & A expenses of approximately $47,761 in its European operation. Depreciation and Amortization Depreciation and amortization expense was $182,933 for fiscal 2001 compared with $194,470 for fiscal 2000. The decrease is a result of an increase in depreciation expense in 2001 of approximately $11,136 that is associated with additional computer and office equipment and in amortization expense from debt acquisition costs of $7,417 offset by a $30,000 decrease in the 24 amortization of the non-compete covenant associated with the Education Navigator acquisition in 1998 Three Months Ended June 30, 2001 Compared With the Period Ended June 30, 2000 Results of Operations Revenues Revenues for the period ended June 30, 2001 were $16,084 compared to $15,782 for the same period in 2000. Revenues associated with the Company's Internet based clinical trial products were approximately $15,633 and $0 for 2001 and 2000 respectively. Systems integration revenues in 2001 were approximately $451 versus $15,782 in fiscal 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 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 $21,713 for the period ended June 31, 2001 versus $11,404 for the period ended June 30, 2000. The increase in cost of sales is attributable to increased labor costs for clinical trial production and support. The Company does not anticipate that systems integration costs will be a significant source of expense in 2001. The Company 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 57.6% of total Other Expenses for 2001. Salaries and related expenses totaled $431,264 in 2001 compared to $938,396 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 25 and Miami, Florida offices. The Company currently employs approximately 17 employees out of its Miami corporate office. The Company expects to increase headcount within its technology based functions in concert with anticipated increases in TrialMaster clients during fiscal 2001 and is likely to increase its sales and marketing force in an effort Rent Rent expense was $36,610 for the period ended June 30, 2001 compared with $101,476 for the comparable period in fiscal 2000. The decrease can be attributed to $36,989 paid for a lease cancellation in 2000 and approximately $14,842 in rent expense for the Company's office in Amsterdam incurred in fiscal 2000 which did not recur in 2001 due to the closure of the Amsterdam office in connection with the bankruptcy filing of the Company's European subsidiary, OmniTrial B.V. Consulting Expenses Consulting expenses, which are comprised of medical advisory, product development and marketing and sales consultants were $0 for the period ended June 30, 2001 compared to $84,018 in fiscal 2000. The decrease can be attributed to several factors. There was a decrease in marketing and sales consulting expense of $29,033 caused by the conversion of two sales consultants into marketing executives of the Company. There was a decrease of $47,000 in medical advisory consulting expenses that is directly correlated to a restructuring of the Company's medical advisory board. Product development fees were reduced by $7,985 through the discontinued use of temporary employees within the Company's research and development function. The Company may incur marketing and sales consulting expense over the next 6 to 18 months as we seek to increase our market penetration. We view the additional consulting expense as a cost effective means of stepping up our sales efforts without incurring additional fixed salary costs. Legal and Professional Fees Legal and professional fees decreased to $58,419 in the period ended June 30, 2001 compared to $206,731 in the same period in 2000. The decrease can be attributed to investment banking and financial advisory fees totaling $189,766 in 2000 versus $45,000 in fiscal 2001. Legal and accounting fees were $13,419 in 2001 compared to $13,870 for the same period in fiscal 2000. Telephone and Internet Telephone and Internet related costs decreased by $54,496 due to the decreased telephone and Internet access costs associated with the closing of the Company's offices in Amsterdam, the Netherlands and Tampa, Florida. The Company does not anticipate an increase in access charges during fiscal 2001 based on its own existing communications infrastructure and its projected 2001 workload. 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 26 approximately $25,967 in fiscal 2001 compared to $192,325 in fiscal 2000. The significant components of the decrease are a result of decreased expenditures for advertising ($99,632), and general office related costs ($18,965) in comparison with fiscal 2000. In addition, the Company had SG & A expenses of approximately $47,761 in its European operation during fiscal 2000. Depreciation and Amortization Depreciation and amortization expense was $95,605 for fiscal 2001 compared with $101,854 for fiscal 2000. The decrease are a result of increased in depreciation expense in 2001 of approximately $3,433 that is associated with additional computer and office equipment, and amortization of debt acquisition costs of $7,417 offset by a $15,000 decrease in the amortization of the non- compete covenant associated with the Education Navigator acquisition in 1998. 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. Cash and cash equivalents decreased by $83,060 to $7,898 at June 30, 2001. This was the result of cash provided by financing activities of $1,229,100 offset by cash used in operating activities of approximately $1,290,652 and $21,508 in investing activities. The significant components of the activity include a loss from operations of approximately $1,725,048, an increase in debt acquisition costs of $66,750 related to a private placement of the Company's debt, the purchase of property and equipment of approximately $21,508, offset by an increase in accounts payable and accrued expenses of approximately $237,524 and approximately $1,229,100 the company raised through the sale of debt and equity securities. Because of the losses experienced in 1999, 2000 and the first six months of 2001, 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 continuing through the present 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 June 30, 2001. 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. 27 PART II - OTHER INFORMATION ITEM 5. OTHER INFORMATION Private Placement ----------------- On January 1, 2001, Noesis Capital Corp., as placement agent, began the distribution of a Confidential Private Placement Memorandum to accredited investors on behalf of the Company. The terms of the offering are as follows: Amount: $2,500,000, Best Efforts. Offering: 50 Units Maximum. Each Unit consists of a one (1) year convertible note (the "Note") in the principal amount of $50,000, bearing 12% annual interest, payable at maturity (January 31, 2002) with the principal convertible into shares of common stock, $.001 par value, of the Company ("Common Stock" or "Shares") at $0.50 per Share, subject to customary anti-dilution provisions. Price: $50,000 per Unit. The Company will accept subscriptions for partial Units. Registration Rights: Demand (so long as 50% of the aggregate amount of the total offering files notices) and PiggyBack registration rights. Use of Proceeds: Operating and Marketing Expenses Conditions: (1) Regulation D of the Securities Act of 1933, as amended. (2) Suitability Standards; Accredited Investors Only. (3) Termination Date: March 31, 2001, unless earlier terminated or extended by the Company. (4) Placement Fee: 5% Commission (cash); warrants to purchase a number of shares equal to 10% of the number of shares issuable upon conversion of the Notes sold in the offering, at an exercise price of $.50 per share, exercisable for a period of five (5) years, commencing on the final closing date of the offering. The private placement has been extended for an additional one hundred and twenty (120) days. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. None. (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: July 30, 2001 ------------- By: Ronald T. Linares, Vice President of Finance, Chief Financial and ----------------------------------------------------------------- Accounting Officer ------------------ Date: July 30, 2001 ------------- 29