NOTE

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The Company

’s accounts include those of all its wholly-owned subsidiaries and have been prepared in conformity with (i) accounting principles generally accepted in the United States of America; and (ii) the rules and regulations of the United States Securities and Exchange Commission. All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.

ESTIMATES IN FINANCIAL STATEMENTS

The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto.

Significant estimates incorporated in our financial statements include the recorded allowance for doubtful accounts, the estimate of the appropriate amortization period of our intangible assets, the evaluation of whether our intangible assets have suffered any impairment, the allocation of revenues under multiple-element customer contracts, royalty-based patent liabilities, the value of derivatives associated with debt issued by the Company and the valuation of any corresponding discount to the issuance of our debt. Actual results

may

differ from those estimates.

RECLASSIFICATIONS

Certain reclassifications have been made in the

2015

financial statements to conform to the

2016

presentation. These reclassifications did not have any effect on our net income/(loss) or shareholders’ (deficit).

FOREIGN CURRENCY TRANSLATION

The financial statements of the Company

’s foreign subsidiaries are translated in accordance with ASC

830

30,

Foreign Currency Matters—Translation of Financial Statements

. The reporting currency for the Company is the U.S. dollar. The functional currency of the Company’s subsidiaries, OmniComm Europe GmbH in Germany, OmniComm Spain S.L. in Spain and OmniComm Systems B.V. in the Netherlands is the Euro. The functional currency of the Company's subsidiary, OmniComm Ltd. in the United Kingdom is the British Pound Sterling. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense accounts of the Company’s foreign subsidiaries are translated using an average rate of exchange during the period. Foreign currency translation adjustments are accumulated as a component of other comprehensive income/(loss) as a separate component of stockholders’ equity. Gains and losses arising from transactions denominated in foreign currencies are primarily related to intercompany accounts that have been determined to be temporary in nature and accordingly, are recorded directly to the statement of operations. We record translation gains and losses in accumulated other comprehensive income as a component of stockholders’ equity. We recorded a translation loss of

$44,150

for the year ended

December

31,

2016

and a translation loss of

$122,528

for the year ended

December

31,

2015.

REVENUE RECOGNITION POLICY

The Company derives revenues from software licenses and services of its EDC products and services which can be purchased on a stand-alone basis. License revenues are derived principally from the sale of term licenses for the following software products offered by the Company:

TrialMaster, TrialOne

, Promasys

and

eClinical Suite (

the

“EDC Software”).

Service revenues are derived principally from the Company's delivery of the hosted solutions of its

TrialMaster

and

eClinical Suite

software products, and consulting services and customer support, including training, for all of the Company's products.

The Company recognizes revenues when all of the following conditions are satisfied:

(1)

there is persuasive evidence of an arrangement;

(2)

the product or service has been provided to the customer;

(3)

the collection of fees is probable; and

(4)

the amount of fees to be paid by the customer is fixed or determinable.

The Company operates in

one

reportable segment which is the delivery of EDC Software and services to clinical trial sponsors.

The Company segregates its revenues based on the activity cycle used to generate its revenues. Accordingly, revenues are currently generated through

four

main activities. These activities include hosted applications, licensing, professional services and maintenance-related services.

Hosted Application Revenues

The Company offers its

TrialMaster

and

eClinical Suite

software products as hosted application solutions delivered through a standard web-browser, with customer support and training services.

Revenues resulting from

TrialMaster

and

eClinical Suite

application hosting services consist of

three

components of services for each clinical trial: the

first

component is comprised of application set up, including design of electronic case report forms and edit checks, installation and server configuration of the system. The

second

component involves application hosting and related support services as well as billable change orders which consist of amounts billed to customers for functionality changes made. The

third

stage involves services required to close out, or lock, the database for the clinical trial.

Fees charged and costs incurred for the trial system design, set up and implementation are amortized and recognized ratably over the estimated hosting period.

Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the remaining term of the hosting period. Fees for the

first

and

third

stages of the service are billed based upon milestones. Revenues earned upon completion of a contractual milestone are deferred and recognized over the estimated remaining hosting period. Fees for application hosting and related services in the

second

stage are generally billed quarterly in advance. Revenues resulting from hosting services for the

eClinical Suite

products consist of installation and server configuration, application hosting and related support services. Services for this offering are generally charged as a fixed fee payable on a quarterly or annual basis. Revenues are recognized ratably over the period of the service.

Licensing Revenues

The Company's software license revenues are earned from the sale of off-the-shelf software.

From time-to-time a client might require significant modification or customization subsequent to delivery to the customer. The Company generally enters into software term licenses for its EDC Software products with its customers for

year periods, although customers have entered into both longer and shorter term license agreements. These arrangements typically include multiple elements: software license, consulting services and customer support. The Company bills its customers in accordance with the terms of the underlying contract. Generally, the Company bills license fees in advance for each billing cycle of the license term which typically is either on a quarterly or annual basis. Payment terms are generally net

or net

days.

In the past the Company has sold perpetual licenses for EDC Software products in certain situations to existing customers with the option to purchase customer support, and

may

in the future do so for new customers based on customer requirements or market conditions. The Company has established vendor specific objective evidence of fair value for the customer support. Accordingly, license revenues are recognized upon delivery of the software and when all other revenue recognition criteria are met. Customer support revenues are recognized ratably over the term of the underlying support arrangement.

The Company generates customer support and maintenance revenues from its perpetual license customer base.

Professional Services

The Company

may

also enter into arrangements to provide consulting services separate from a license arrangement. In these situations, revenue is recognized on a time-and-materials basis. Professional services can be deemed to be as essential to the functionality of the software at inception and typically are for initial trial configuration, implementation planning, loading of software, building simple interfaces and running test data and documentation of procedures.

Subsequent additions or extensions to license terms do not generally include additional professional services.

Maintenance Revenues

Maintenance includes telephone-based help desk support and software maintenance. The Company generally bundles customer support with the software license for the entire term of the arrangement. As a result, the Company generally recognizes revenues for both maintenance and software licenses ratably over the term of the software license and support arrangement. The Company allocates the revenues recognized for these arrangements to the different elements based on management's estimate of the relative fair value of each element.

The Company generally invoices each of the elements based on separately quoted amounts and thus has a fairly accurate estimate of the relative fair values of each of the invoiced revenue elements.

The fees associated with each business activity for the years ended

December

31,

2016

and

December

31,

2015,

respectively are:

	For the year ended
Revenue activity	December 31, 2016		December 31, 2015
Set-up fees	$	6,658,987	$	6,649,762
Change orders		1,212,153		846,464
Maintenance		4,803,171		5,107,764
Software licenses		7,885,023		3,975,549
Professional services		3,843,641		3,145,883
Hosting		1,016,535		985,415
Total	$	25,419,510	$	20,710,837

COST OF GOODS SOLD

Cost of goods sold primarily consists of costs related to hosting, maintaining and supporting the Company

’s application suite and delivering professional services and support. These costs include salaries, benefits, bonuses and stock-based compensation for the Company’s professional services staff. Cost of goods sold also includes outside service provider costs

Cost of goods sold is expensed as incurred.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid, short-term investments with maturities of

days or less.

The carrying amount reported in the accompanying consolidated balance sheets approximates fair value.

ACCOUNTS RECEIVABLE

Accounts receivable are judged as to collectability by management and an allowance for bad debts is established as necessary. The allowance is based on an evaluation of the collectability of accounts receivable and prior bad debt experience.

The Company had recorded an allowance for uncollectible accounts receivable of

$179,813

as of

December

31,

2016

and

$116,834

as of

December

31,

2015.

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

	December 31, 2016			December 31, 2015
Beginning of period	$	116,834		$	186,085
Bad debt expense		132,767			14,939
Write-offs		(69,788	)		(84,190	)
End of period	$	179,813		$	116,834

CONCENTRATION OF CREDIT RISK

Cash and cash equivalents and restricted cash are deposited with major financial institutions and, at times, such balances with any

one

financial institution

may

be in excess of FDIC-insured limits. As of

December

31,

2016,

$1,237,118

was deposited in excess of FDIC-insured limits. Management believes the risk in these situations to be minimal.

Except as follows, the

Company has no significant off balance sheet risk or credit risk concentrations. Financial instruments that subject the Company to potential credit risks are principally cash equivalents and accounts receivable. Concentrated credit risk with respect to accounts receivable is limited to creditworthy customers. The Company's customers are principally located in the United States, Europe and East Asia. The Company is directly affected by the overall financial condition of the pharmaceutical, biotechnology and medical device industries and management believes that credit risk exists and that any credit risk the Company faces has been adequately reserved for as of

December

31,

2016.

The Company maintains an allowance for doubtful accounts based on accounts past due according to contractual terms and historical collection experience. Actual losses when incurred are charged to the allowance. The Company's losses related to collection of accounts receivable have consistently been within management's expectations. As of

December

31,

2016,

the Company believes no additional credit risk exists beyond the amounts provided for in our allowance for uncollectible accounts. The Company evaluates its allowance for uncollectable accounts on a monthly basis based on a specific review of receivable aging and the period that any receivables are beyond the standard payment terms. The Company does not require collateral from its customers in order to mitigate credit risk.

One customer accounted

for

16%

of our revenue during the year ended

December

31,

2016

or approximately

$4,167,000,

respectively. One customer accounted for

16%

of our revenues during the year ended

December

31,

2015

or approximately

$3,237,000.

The following table summarizes the number of customers who individually comprise greater than

10%

of total revenue and/or total accounts receivable and their aggregate percentage of the Company's total revenue and gross accounts receivable for the years presented.

Two customers each individually accounted for approximately

11%

of our accounts receivables as of

December

31,

2016.

One customer accounted for approximately

16%

of our accounts receivable as of

December

31,

2015.

	Revenues				Accounts receivable
For the year ended	Number of customers		Percentage of total revenues		Number of customers		Percentage of accounts receivable
December 31, 2016		1		16%		2		21%
December 31, 2015		1		16%		3		42%

The table below provides revenues from European customers for the years ended

December

31,

2016

and

December

31,

2015,

respectively.

European revenues
For the year ended
December 31, 2016				December 31, 2015
European revenues		% of Total revenues		European revenues		% of Total revenues
$	2,702,660		11%	$	2,150,096		10%

The Company serves all of its hosting customers from

third

-party web hosting facilities located in the United States. The Company does not control the operation of these facilities, and they are vulnerable to damage or interruption. The Company maintains redundant systems that can be used to provide service in the event the

third

-party web hosting facilities become unavailable, although in such circumstances, the Company's service

may

be interrupted during the transition.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost.

Additions and betterments are capitalized; maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the asset’s estimated useful life, which is

years for leasehold improvements, computers, equipment and furniture and

years for software. Gains or losses on disposal are charged to operations.

ASSET IMPAIRMENT

Acquisitions and Intangible Assets

We account for acquisitions in accordance with ASC

805,

Business Combinations

(“ASC

805”)

and ASC

350,

Intangibles- Goodwill and Other

(“ASC

350”).

The acquisition method of accounting requires that assets acquired and liabilities assumed be recorded at their fair values on the date of a business acquisition. Our consolidated financial statements and results of operations reflect an acquired business from the completion date of an acquisition.

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

Long-lived Assets

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts

may

not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset

’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use quoted market prices when available and independent appraisals and management estimates of future operating cash flows, as appropriate, to determine fair value.

DEFERRED REVENUE

Deferred revenue represents cash advances received in excess of revenue earned on on-going contracts.

Payment terms vary with each contract but

may

include an initial payment at the time the contract is executed, with future payments dependent upon the completion of certain contract phases or targeted milestones. In the event of contract cancellation, the Company is generally entitled to payment for all work performed through the point of cancellation. As of

December

31,

2016,

the Company had

$9,539,230

in deferred revenues relating to contracts for services to be performed over periods ranging from

month to

years. The Company had

$7,250,061

in deferred revenues that are expected to be recognized in the next

twelve

fiscal months.

ADVERTISING

Advertising costs are expensed as incurred.

Advertising costs were

$712,179

for the year ended

December

31,

2016

and

$635,267

for the year ended

December

31,

2015

and are included under selling, general and administrative expenses on our consolidated financial statements.

RESEARCH AND PRODUCT DEVELOPMENT EXPENSES

Software development costs are included in research and product development

and are expensed as incurred.

ASC

985.20,

Software Industry Costs of Software to Be Sold, Leased or Marketed

, requires the capitalization of certain development costs of software to be sold once technological feasibility is established, which the Company defines as completion to the point of marketability. The capitalized cost is then amortized on a straight-line basis over the estimated product life. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs under ASC

985.20.

During the year ended

December

31,

2016

we spent approximately

$2,598,962

and during the year ended

December

31,

2015

we spent approximately

$2,639,577,

research and product development

activities, which include costs associated with the development of our software products and services for our client’s projects and which are primarily comprised of salaries and related expenses for our software developers and consulting fees paid to

third

-party consultants. R

esearch and product development

costs are primarily included under Salaries, benefits and related taxes in our Statement of Operations.

EMPLOYEE EQUITY INCENTIVE PLANS

The OmniComm Systems, Inc.

2016

Equity Incentive Plan (the

“2016

Plan”) was approved at our Annual Meeting of Stockholders on

June

16,

2016.

The

2016

Plan provides for the issuance of up to

10,000,000

shares of our common stock. In addition, the number of shares of common stock available for issuance under the

2016

Plan shall automatically increase on

January

1st

of each year for a period of

nine

(9)

years commencing on

January

2017

and ending on (and including)

January

2025,

in an amount equal to

five

percent

(5%)

of the total number of shares authorized under the

2016

Plan.

The predecessor plan, the OmniComm Systems, Inc.

2009

Equity Incentive Plan (the

“2009

Plan”) was approved at our Annual Meeting of Stockholders on

July

10,

2009

and terminated on

June

16,

2016

upon the approval of the

2016

Plan.

The

2009

Plan provided for the issuance of up to

7.5

million shares to employees, directors and key consultants in accordance with the terms of the

2009

Plan documents.

Each plan is more fully described in “Note

13,

Employee Equity Incentive Plans.” The Company accounts for its employee equity incentive plans under

ASC

718,

Compensation – Stock Compensation

which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions.

ASC

718

requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company

’s consolidated statements of operations. The Company currently uses the Black Scholes option pricing model to determine grant date fair value.

EARNINGS/(LOSS)

PER SHARE

The Company accounts for Earnings/(loss) Per Share using ASC

260

– Earnings per Share. Unlike diluted earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities.

INCOME TAXES

The Company accounts for income taxes in accordance with

ASC

740,

Income Taxes.

ASC

740

has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that have been recognized in the financial statements as measured by the provisions of the enacted tax laws

Valuation allowances are established, when necessary, to reduce deferred tax assets to the estimated amount to be realized.

Income tax expense represents the tax payable for the current period and the change during the period in the deferred tax assets and liabilities.

IMPACT OF NEW ACCOUNTING STANDARDS

During fiscal

2016,

we adopted the following new accounting pronouncements:

February

2016,

the FASB issued accounting standard update (“

ASU”) No.

2016

02,

“Leases (Topic

842)”

, (“ASU

2016

02”).

This ASU requires that an entity should recognize assets and liabilities for leases with a maximum possible term of more than

months. A lessee would recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the leased asset (the underlying asset) for the lease term. This guidance also provides accounting updates with respect to lessor accounting under a lease arrangement. This new lease guidance is effective for fiscal years beginning after

December

15,

2019.

Entities have the option of using either a full retrospective or a modified approach (cumulative effect adjustment in period of adoption) to adopt the new guidance. Early adoption is permitted for all entities. We are currently evaluating the impact of the adoption of this guidance in our consolidated financial statements.

March

2016,

the FASB issued

ASU No.

2016

09,

“Compensation – Stock Compensation (Topic

718)”,

(“ASU

2016

09”).

This

guidance which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This guidance is effective for annual periods beginning after

December

15,

2016,

including interim periods within those annual reporting periods. Early adoption is permitted. We are currently evaluating the full impact of the new standard.

March

2016,

April

2016,

and

December

2016,

the FASB issued ASU

2016

08,

Revenue from Contracts with Customers - Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

", (“ASU

2016

08”),

ASU

2016

10,

Revenue from Contracts with Customers - Identifying Performance Obligations and Licensing

", (“ASU

2016

10”),

and ASU

2016

20,

Technical Corrections and Improvements to Topic

606,

Revenue from Contracts with Customers"

, (“ASU

2016

20”)

respectively, which further clarify the guidance for those specific topics within ASU

2014

09.

May

2016,

the FASB issued ASU

2016

12,

Revenue from Contracts with Customers - Narrow Scope Improvements and Practical Expedients

", to reduce the risk of diversity in practice for certain aspects in ASU

2014

09,

including collectability, noncash consideration, presentation of sales tax and transition. These updates permit the use of either the retrospective or cumulative effect transition method. Early application is permitted as of the original effective date for annual reporting periods beginning after

December

15,

2016,

including interim reporting periods within that reporting period. Based on current estimates, we do not expect these provisions of the ASUs to have a material impact on our financial statements. The Company is continuing to evaluate which transition approach it will utilize and the impact these standards will have on the Company's Consolidated Financial Statements upon adoption.

Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly

review all new pronouncements to determine their impact, if any, on our financial statements.