SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended September 30, 2010
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to
Commission File Number: 0-25203
OmniComm Systems, Inc.
(Exact name of registrant as specified in its Charter)
Delaware | 11-3349762 | |
(State or other jurisdiction of Incorporation or organization) |
(IRS Employer Identification Number) | |
2101 W. Commercial Blvd. Suite 3500, Ft. Lauderdale, FL | 33309 | |
Address of principal executive offices | Zip Code |
954.473.1254
(Registrants Telephone Number including area code)
No Changes
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨ (Not required)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuers classes of common equity as of November 14, 2010: 85,507,699 common stock $.001 par value.
TABLE OF CONTENTS TO THE QUARTERLY REPORT ON FORM 10-Q FOR THE NINE
MONTH PERIOD ENDED SEPTEMBER 30, 2010
Page No. |
||||||
PART I. - FINANCIAL INFORMATION | ||||||
Item 1. | Financial Statements (unaudited) | 1 | ||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. | 28 | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. | 53 | ||||
Item 4T | Controls and Procedures. | 53 | ||||
PART II - OTHER INFORMATION | ||||||
Item 1. | Legal Proceedings. | 54 | ||||
Item 1A. | Risk Factors. | 54 | ||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 54 | ||||
Item 3. | Defaults Upon Senior Securities. | 54 | ||||
Item 4. | Removed and Reserved. | 54 | ||||
Item 5. | Other Information. | 54 | ||||
Item 6. | Exhibits. | 54 | ||||
SIGNATURES | ||||||
Exhibit 31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 CEO Cornelis F. Wit | ||||||
Exhibit 31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 CFO Ronald T. Linares | ||||||
Exhibit 32.1 Certification of Principal Executive Officers Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002- CEO Cornelis F. Wit and CFO Ronald T. Linares |
2
Item. 1. Financial Statements (unaudited)
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2010 (unaudited) |
December
31, 2009 (restated) |
|||||||
ASSETS | ||||||||
CURRENT ASSETS |
||||||||
Cash |
$ | 29,942 | $ | 60,352 | ||||
Accounts receivable, net of allowance for doubtful accounts of $281,480 and $267,526 in 2010 and 2009, respectively |
729,906 | 587,119 | ||||||
Prepaid expenses |
152,464 | 239,064 | ||||||
Total current assets |
912,312 | 886,535 | ||||||
PROPERTY AND EQUIPMENT, net |
1,135,961 | 1,240,697 | ||||||
OTHER ASSETS |
||||||||
Intangible assets, net |
812,409 | 1,160,581 | ||||||
Other assets |
16,232 | 25,882 | ||||||
TOTAL ASSETS |
$ | 2,876,914 | $ | 3,313,695 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
| |||||||
CURRENT LIABILITIES |
||||||||
Accounts payable and accrued expenses |
$ | 1,976,598 | $ | 1,548,215 | ||||
Bank overdraft |
125,926 | -0- | ||||||
Notes payable, current portion |
111,800 | 111,800 | ||||||
Notes payable related parties, current portion |
137,500 | -0- | ||||||
Deferred revenue, current portion |
3,448,472 | 2,048,305 | ||||||
Conversion feature liability, related parties, current portion |
28,885 | -0- | ||||||
Conversion feature liability, current portion |
6,051 | 64,622 | ||||||
Convertible notes payable, current portion, net of discount |
814,562 | 402,777 | ||||||
Convertible notes payable, related parties, current portion, net of discount |
3,869,969 | -0- | ||||||
Patent settlement liability, current portion |
736,837 | 627,810 | ||||||
Warrant liability, related parties |
234,917 | 1,977,402 | ||||||
Warrant liability |
73,941 | 760,791 | ||||||
Total current liabilities |
11,565,458 | 7,541,722 | ||||||
Notes payable related parties, long term |
2,260,000 | 137,500 | ||||||
Deferred revenue, long term |
687,546 | 980,642 | ||||||
Convertible notes payable, related parties, net of current portion |
4,867,950 | 6,996,178 | ||||||
Convertible notes payable, net of current portion |
-0- | 224,600 | ||||||
Conversion feature liability, related parties, net of current portion |
79,245 | 1,809,418 | ||||||
Conversion feature liability, net of current portion |
-0- | 71,400 | ||||||
Patent settlement liability - long term |
1,661,983 | 1,835,463 | ||||||
TOTAL LIABILITIES |
21,122,182 | 19,596,923 | ||||||
COMMITMENTS AND CONTINGENCIES (See Note 11) |
||||||||
SHAREHOLDERS EQUITY (DEFICIT) |
||||||||
Series A preferred stock - 5,000,000 shares authorized, 4,125,224 and 4,125,224 issued and outstanding, respectively at $.001 par value |
4,125 | 4,125 | ||||||
Series B preferred stock - 230,000 shares authorized, -0- and -0- issued and outstanding, respectively at par |
-0- | -0- | ||||||
Series C preferred stock - 747,500 shares authorized, -0- and -0- issued and outstanding, respectively at par |
-0- | -0- | ||||||
Common stock - 250,000,000 shares authorized, 85,507,699 and 85,507,699 issued and outstanding, respectively, at $.001 par value |
85,508 | 85,508 | ||||||
Additional paid in capital - preferred |
3,718,054 | 3,718,054 | ||||||
Additional paid in capital - common |
36,745,960 | 36,279,764 | ||||||
Less cost of treasury stock: Common - 1,014,830 and 1,014,830- shares, respectively |
(503,086 | ) | (503,086 | ) | ||||
Accumulated other comprehensive income (expense) |
(30,546 | ) | 2,934 | |||||
Accumulated deficit |
(58,265,283 | ) | (55,870,527 | ) | ||||
TOTAL SHAREHOLDERS EQUITY (DEFICIT) |
(18,245,268 | ) | (16,283,228 | ) | ||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
$ | 2,876,914 | $ | 3,313,695 | ||||
See accompanying summary of accounting policies and notes to the unaudited financial statements
3
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the nine months ended September 30, |
For the three months ended September 30, |
|||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Total revenues |
$ | 9,076,158 | $ | 6,692,440 | $ | 3,168,806 | $ | 2,461,464 | ||||||||
Cost of sales |
1,288,472 | 1,396,935 | 475,069 | 450,690 | ||||||||||||
Gross margin |
7,787,686 | 5,295,505 | 2,693,737 | 2,010,774 | ||||||||||||
Operating expenses |
||||||||||||||||
Salaries, benefits and related taxes |
7,917,389 | 6,785,888 | 2,495,741 | 2,497,681 | ||||||||||||
Rent |
708,376 | 514,168 | 273,567 | 239,337 | ||||||||||||
Consulting services |
404,848 | 124,455 | 112,471 | 35,124 | ||||||||||||
Legal and professional fees |
263,379 | 474,237 | 79,314 | 237,358 | ||||||||||||
Travel |
380,740 | 289,725 | 141,785 | 110,425 | ||||||||||||
Telephone and internet |
207,617 | 104,645 | 64,310 | 39,001 | ||||||||||||
Selling, general and administrative |
925,747 | 883,061 | 216,674 | 253,614 | ||||||||||||
Bad debt expense |
13,954 | 143,794 | -0- | 128,053 | ||||||||||||
Depreciation Expense |
386,116 | 239,476 | 130,774 | 108,424 | ||||||||||||
Amortization Expense |
348,175 | 116,058 | 116,058 | 116,058 | ||||||||||||
Total operating expenses |
11,556,341 | 9,675,507 | 3,630,694 | 3,765,075 | ||||||||||||
Operating income (loss) |
(3,768,655 | ) | (4,380,002 | ) | (936,957 | ) | (1,754,301 | ) | ||||||||
Interest expense |
(2,007,044 | ) | (1,338,617 | ) | (612,227 | ) | (445,018 | ) | ||||||||
Interest expense, related parties |
(879,699 | ) | (612,104 | ) | (318,415 | ) | (213,528 | ) | ||||||||
Interest income |
48 | 4,395 | -0- | 96 | ||||||||||||
Gain on extinguishment of debt |
-0- | 432 | -0- | -0- | ||||||||||||
Change in derivative liabilities |
4,260,594 | 2,349,194 | 776,945 | (605,399 | ) | |||||||||||
Income (loss) before income taxes and preferred dividends |
(2,394,756 | ) | (3,976,702 | ) | (1,090,654 | ) | (3,018,150 | ) | ||||||||
Net income (loss) |
(2,394,756 | ) | (3,976,702 | ) | (1,090,654 | ) | (3,018,150 | ) | ||||||||
Preferred stock dividends |
||||||||||||||||
Preferred stock dividends in arrears Series A Preferred |
(153,850 | ) | (153,850 | ) | (51,847 | ) | (51,847 | ) | ||||||||
Total preferred stock dividends |
(153,850 | ) | (153,850 | ) | (51,847 | ) | (51,847 | ) | ||||||||
Net income (loss) attributable to common stockholders |
$ | (2,548,606 | ) | $ | (4,130,552 | ) | $ | (1,142,501 | ) | $ | (3,069,997 | ) | ||||
Net income (loss) per share |
||||||||||||||||
Basic and Diluted |
$ | (0.03 | ) | $ | (0.05 | ) | $ | (0.01 | ) | $ | (0.04 | ) | ||||
Weighted average number of shares outstanding Basic and Diluted |
85,507,699 | 79,787,889 | 85,507,699 | 85,252,194 | ||||||||||||
4
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the nine months ended September 30, |
||||||||
2010 | 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | (2,394,756 | ) | $ | (3,976,701 | ) | ||
Adjustment to reconcile net income (loss) to net cash (used in) operating activities |
||||||||
Gain on extinguishment of debt |
-0- | (432 | ) | |||||
Common stock issued in lieu of salary |
-0- | 109,178 | ||||||
Change in derivative liabilities |
(4,260,594 | ) | (2,349,194 | ) | ||||
Interest expense from derivative instruments |
1,928,926 | 1,286,831 | ||||||
Employee stock option expense |
466,196 | 630,969 | ||||||
Depreciation and amortization |
734,291 | 355,534 | ||||||
Bad debt expense |
13,954 | 143,794 | ||||||
Common stock issued for services |
-0- | 62,250 | ||||||
Changes in operating assets and liabilities |
||||||||
Accounts receivable |
(156,741 | ) | 1,449,462 | |||||
Prepaid expenses |
86,600 | (45,926 | ) | |||||
Other assets |
9,650 | (1,354 | ) | |||||
Accounts payable and accrued expenses |
428,381 | (135,988 | ) | |||||
Patent settlement liability |
(64,453 | ) | (21,019 | ) | ||||
Deferred revenue |
1,107,070 | (1,143,062 | ) | |||||
Net cash provided by (used in) operating activities |
(2,101,476 | ) | (3,635,658 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Cash received in acquisition of eResearch Technology assets |
-0- | 1,150,000 | ||||||
Purchase of Logos Technologies, Ltd. Assets |
-0- | (152,628 | ) | |||||
Purchase of property and equipment |
(281,380 | ) | (145,615 | ) | ||||
Net cash provided by (used in) investing activities |
(281,380 | ) | 851,757 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Bank overdrafts |
125,926 | -0- | ||||||
Repayments of notes payable |
-0- | (360,000 | ) | |||||
Repayments of convertible notes payable |
-0- | (12,500 | ) | |||||
Proceeds from issuances of convertible notes payable |
-0- | 1,400,000 | ||||||
Proceeds from issuances of notes payable |
2,260,000 | -0- | ||||||
Net cash provided by (used in) financing activities |
2,385,926 | 1,027,500 | ||||||
Effect of exchange rate changes on cash |
(33,480 | ) | 2,061 | |||||
Net increase (decrease) in cash and cash equivalents |
(30,410 | ) | (1,754,340 | ) | ||||
Cash and cash equivalents at beginning of period |
60,352 | 2,035,818 | ||||||
Cash and cash equivalents at end of period |
$ | 29,942 | $ | 281,478 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Income taxes |
$ | -0- | $ | -0- | ||||
Interest |
$ | 703,005 | $ | 602,809 | ||||
Non-cash transactions |
||||||||
Common stock issued in lieu of salary |
$ | -0- | $ | 109,178 | ||||
Common stock issued for services |
$ | -0- | $ | 62,250 | ||||
Common stock for the acquisition of assets and liabilities assumed: |
||||||||
Fixed assets |
$ | -0- | $ | 36,006 | ||||
Prepaid expenses |
$ | -0- | $ | 44,707 | ||||
Customer list |
$ | -0- | $ | 1,392,701 | ||||
Software application code |
$ | -0- | $ | 324,964 | ||||
Present value of assumed patent liability |
$ | -0- | $ | 267,790 | ||||
Deferred Revenue |
$ | -0- | $ | 954,588 |
5
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (DEFICIT)
FOR THE PERIOD JANUARY 1, 2009 TO SEPTEMBER 30, 2010
Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||||||
5% Series A Convertible | 8% Series B Convertible | 8% Series C Convertible | ||||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional Paid In Capital |
Additional Paid In Capital |
Additional Paid In Capital |
Additional Paid In Capital |
||||||||||||||||||||||||||||||||||||||||||||
Number of Shares |
$ 0.001 Par Value |
Number of Shares |
$ 0.001 Par Value |
Number of Shares |
$ 0.001 Par Value |
Number of Shares |
$ 0.001 Par Value |
|||||||||||||||||||||||||||||||||||||||||
Balances at December 31, 2008 |
76,579,951 | $ | 76,580 | $ | 33,431,236 | 4,125,224 | $ | 4,125 | $ | 3,718,054 | | $ | | $ | | | $ | 0 | $ | 0 | ||||||||||||||||||||||||||||
Common stock issued in lieu of wages |
405,055 | 405 | 108,777 | |||||||||||||||||||||||||||||||||||||||||||||
Employee stock option expense |
960,024 | |||||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for services |
415,000 | 415 | 61,835 | |||||||||||||||||||||||||||||||||||||||||||||
Common stock issued in asset acquisition |
8,100,000 | 8,100 | 1,717,900 | |||||||||||||||||||||||||||||||||||||||||||||
Common stock issued for cashless exercise of warrants |
7,693 | 8 | (8 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
||||||||||||||||||||||||||||||||||||||||||||||||
Net loss for the period ended December 31, 2009 |
| | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||
Balances at December 31, 2009 |
85,507,699 | 85,508 | 36,279,764 | 4,125,224 | 4,125 | 3,718,054 | | | | | 0 | 0 | ||||||||||||||||||||||||||||||||||||
Employee stock option expense |
466,196 | |||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment |
||||||||||||||||||||||||||||||||||||||||||||||||
Net loss for the period ended September 30, 2010 |
| | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||
Balances at September 30, 2010 |
85,507,699 | $ | 85,508 | $ | 36,745,960 | 4,125,224 | $ | 4,125 | $ | 3,718,054 | | $ | | $ | | | 0 | $ | 0 | |||||||||||||||||||||||||||||
Total Shareholders Equity (Deficit) |
||||||||||||||||||||||||
Accumulated Other Comprehensive Income |
||||||||||||||||||||||||
Accumulated Deficit |
Deferred Compensation |
Subscription Receivable |
Treasury Stock |
|||||||||||||||||||||
Balances at December 31, 2008 |
$ | (47,800,180 | ) | $ | (0 | ) | $ | (0 | ) | $ | 989 | $ | (503,086 | ) | $ | (11,072,282 | ) | |||||||
Common stock issued in lieu of wages |
109,182 | |||||||||||||||||||||||
Employee stock option expense |
960,024 | |||||||||||||||||||||||
Common stock issued for services |
62,250 | |||||||||||||||||||||||
Common stock issued in asset acquisition |
1,726,000 | |||||||||||||||||||||||
Common stock issued for cashless exercise of warrants |
| |||||||||||||||||||||||
Foreign currency translation adjustment |
1,945 | 1,945 | ||||||||||||||||||||||
Net loss for the period ended December 31, 2009 |
(8,070,347 | ) | | | | | (8,070,347 | ) | ||||||||||||||||
Balances at December 31, 2009 |
(55,870,527 | ) | (0 | ) | (0 | ) | 2,934 | (503,086 | ) | (16,283,228 | ) | |||||||||||||
Employee stock option expense |
466,196 | |||||||||||||||||||||||
Foreign currency translation adjustment |
(33,480 | ) | (33,480 | ) | ||||||||||||||||||||
Net loss for the period ended September 30, 2010 |
(2,394,756 | ) | | | | | (2,394,756 | ) | ||||||||||||||||
Balances at September 30, 2010 |
$ | (58,265,283 | ) | $ | (0 | ) | $ | (0 | ) | $ | (30,546 | ) | $ | (503,086 | ) | $ | (18,245,267 | ) | ||||||
6
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
NOTE 1: | ORGANIZATION AND NATURE OF OPERATIONS |
OmniComm Systems, Inc. and subsidiaries (the OmniComm, Company, we, us, or our) is a healthcare technology company that provides Web-based electronic data capture (EDC) solutions and related value-added services to pharmaceutical and biotech companies, clinical research organizations, and other clinical trial sponsors worldwide. Our proprietary EDC software applications: TrialMaster®; TrialOne®; and eClinical Suite, allow clinical trial sponsors and investigative sites to securely collect, validate, transmit and analyze clinical trial data.
Our ability to compete within the EDC industry is predicated on our ability to continue enhancing and broadening the scope of solutions offered through our EDC software applications and services. Our research and development efforts are focused on developing new, complementary software solutions, as well as enhancing our existing software solutions through the addition of increased functionality. The majority of our research and development activities represent salaries to our software developers. During the nine month period ended September 30, 2010 and September 30, 2009 we spent $2,779,262 and $1,271,211 respectively, on research and development activities, which include costs associated with customization of our software products.
NOTE 2: | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The Companys 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.
UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the consolidated financial statements have been condensed or omitted. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normally recurring adjustments) which management considers necessary for a fair presentation of operating results.
The operating results for the nine month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year-ended December 31, 2010. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K/A for the year-ended December 31, 2009.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid, short-term investments with maturities of 90 days or less. The carrying amount reported in the accompanying consolidated balance sheets approximates fair value.
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. Actual results may differ from those estimates.
7
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
RECLASSIFICATIONS
Certain reclassifications have been made in the 2009 financial statements to conform to the 2010 presentation. These reclassifications did not have any effect on our net loss or shareholders deficit.
REVENUES
The Company operates in one reportable segment which is the delivery of EDC services and products 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 five main activities. These activities include:
| the initial setup activities associated with building, implementing and initiating clinical trial projects by our clinical development team; |
| change orders or change requests made by the clinical trial sponsor that require changes to the scope of the clinical trial project; |
| the maintenance fees paid by our customers for clinical trial projects that have been implemented. The services provided include application hosting and related support services. Services for this offering are charged monthly as a fixed fee. Revenues are recognized ratably over the period of the service. |
| the sale and transfer of our software products on a licensed basis and the associated installation, validation and training, professional and consulting services we provide licensees; and |
| the hosting and subscription fees paid by our customers for hosting our ASP application in our servers and also for hosting their data collected during their clinical trial projects. |
The fees associated with each business activity for the nine month periods ended September 30, 2010 and September 30, 2009, respectively are:
For the nine months ended | ||||||||
Business Activity |
September 30, 2010 | September 30, 2009 | ||||||
Set-up Fees |
$ | 3,240,774 | $ | 3,515,380 | ||||
Change Orders |
125,632 | 341,388 | ||||||
Maintenance |
3,269,537 | 1,562,797 | ||||||
Software Licenses |
1,014,973 | 515,157 | ||||||
Professional Services |
566,141 | 431,370 | ||||||
Hosting & Subscriptions |
859,101 | 326,348 | ||||||
Totals |
$ | 9,076,158 | $ | 6,692,440 | ||||
ACCOUNTS RECEIVABLE
Accounts receivable are judged as to collectability by management and an allowance for bad debts is established as necessary. The Company had recorded an allowance for uncollectible accounts receivable of $281,480 and $267,526 as of September 30, 2010 and, December 31, 2009 respectively.
CONCENTRATION OF CREDIT RISK
Except as follows, the Company has no significant off-balance-sheet risk or credit risk concentrations.
8
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
Financial instruments that subject the Company to potential credit risks are principally cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with credit worthy financial institutions, however, the Company does maintain cash in its accounts from time-to-time that exceed the maximum federally insured limits. Concentrated credit risk with respect to accounts receivable is limited to creditworthy customers. The Companys customers are principally located in the United States and Europe. The Company is directly affected by the overall financial condition of the pharmaceutical, biotechnology and medical device industries. Management believes that credit risk exists but that any credit risk the Company faces has been adequately reserved for as of September 30, 2010. Prior to 2008, the Company had not historically experienced significant losses related to receivables from individual customers or groups of customers in any specific industry or geographic area. Beginning in the second half of fiscal 2008 and continuing through the first half of 2010, the biotechnology industry has experienced liquidity and funding difficulties. Several of the Companys clients operate in this segment. 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 Companys losses related to collection of accounts receivable have consistently been within managements expectations. The overall downturn in the global economy impacted several of the Companys clients beginning in late 2008. The Companys collection periods have extended during the recent economic downturn and the Company has experienced some instances of uncollectible accounts. Due to these factors, the Company believes that at September 30, 2010, no additional credit risk beyond the amounts provided for in our allowance for uncollectible accounts exists. The Company reevaluates the allowance on a monthly basis based on a specific review of receivable agings and the period that any receivables are beyond the standard payment terms. The Company does not require collateral from its customers in order to mitigate credit risk.
One customer accounted for approximately 21% of our revenues during the first nine months of 2010 or $1,900,198. One customer accounted for approximately 28% of our revenues during the nine month period ended September 30, 2009 or $1,870,670. The following table summarizes the number of customers who individually comprise greater than 10% of total revenue and accounts receivable and their aggregate percentage of the Companys total revenue and gross accounts receivable for the periods presented.
Revenues | Accounts Receivable | |||||||||||
For the periods ended |
# of Customers |
Percentage of Total Revenues |
# of Customers |
Percentage of Total Revenues |
||||||||
September 30, 2010 |
1 | 21 | % | 2 | 27 | % | ||||||
December 31, 2009 |
1 | 26 | % | 2 | 22 | % | ||||||
September 30, 2009 |
1 | 28 | % | 3 | 34 | % |
The following table summarizes activity in the Companys allowance for doubtful accounts for the periods presented.
For the periods ended | ||||||||
September 30, 2010 | December 31, 2009 | |||||||
Beginning of period |
$ | 267,526 | $ | 150,933 | ||||
Bad debt expense |
13,954 | 235,160 | ||||||
Write-offs |
-0- | (118,567 | ) | |||||
End of period |
$ | 281,480 | $ | 267,526 | ||||
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 third-party web hosting facilities become unavailable, although in such circumstances, the Companys service may be interrupted during the transition.
9
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
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 assets estimated useful life, which is 5 years for leasehold improvements, computers, equipment and furniture and 3 years for software. Gains or losses on disposal are charged to operations.
ASSET IMPAIRMENT
Asset Acquisitions and Intangible Assets
We account for asset acquisitions in accordance with ASC 350, Intangibles- Goodwill and Other. The acquisition method of accounting requires that assets acquired and liabilities assumed be recorded at their fair values on the date of an asset 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 (loss) 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 assets 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, 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 September 30, 2010, the Company had $4,136,018 in deferred revenues relating to contracts for services to be performed over periods ranging from 1 month to 5 years. The Company had $3,448,472 in deferred revenues that are expected to be recognized in the next twelve months.
10
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
REVENUE RECOGNITION POLICY
OmniComms revenue model is transaction-based and can be implemented either as an ASP (application service provider) or licensed for implementation by a customer such as a pharmaceutical company. Revenues are derived from the set-up of clinical trial engagements; licensing arrangements, fees earned for hosting our clients data and projects, on-going maintenance fees incurred throughout the duration of an engagement; and project change orders. The clinical trials that are conducted using our EDC applications can last from a few months to several years. Most of the fees associated with our product including post-setup customer support in the form of maintenance charges are recognized ratably over the term of clinical trial projects. Cost of sales is primarily comprised of programmer salaries and payroll-related taxes and is expensed as incurred.
The Company recognizes sales, for both financial statement and tax purposes in accordance with SEC Staff Accounting Bulletin No. 104 Revenue Recognition in Financial Statements (SAB 104) (Codified within Accounting Standards Codification (ASC) Revenue Recognition, ASC 605) and AICPA Statement of Position 97-2 (SOP 97-2) Software Revenue Recognition as amended by SOP 98-9 (Codified within ASC 605.985, Software Industry Revenue Recognition). SAB 104 requires that revenues be recognized ratably over the life of a contract. The Company will periodically record deferred revenues relating to advance payments in contracts. Under its licensing arrangement the Company recognizes revenue pursuant to SOP 97-2. Under these arrangements, the Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer and/or delivery has occurred; (3) the collection of fees is probable; and (4) the fee is fixed or determinable. SOP 97-2, as amended, requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. We have analyzed each element in our multiple element arrangements and determined that we have sufficient vendor-specific objective evidence (VSOE) to allocate revenues to license updates and product support. License revenues are recognized on delivery if the other conditions of SOP 97-2 are satisfied. License updates and product support revenue is recognized ratably over the term of the arrangement. In arrangements where term licenses are bundled with license updates and product support and such revenue is recognized ratably over the term of the arrangement, we allocate the revenue to license revenue and to license updates and product support revenue based on the VSOE of fair value for license updates and product support revenue on perpetual licenses of similar products.
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs were $184,360 and $207,538 for the nine month period ended September 30, 2010 and September 30, 2009, respectively.
RESEARCH AND DEVELOPMENT EXPENSES
Software development costs are included in research and development and are expensed as incurred. Statement of Financial Accounting Standards No. 86 Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed, (SFAS 86) (Codified within 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 SFAS 86. During the nine month periods ended
11
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
September 30, 2010 and September 30, 2009 we spent $2,779,262 and $1,271,211 respectively, on research and development activities, which include costs associated with customization of our software products and services for our clients projects and which are primarily comprised of salaries and related expenses for our software developers.
EMPLOYEE EQUITY INCENTIVE PLANS
The company has an employee equity incentive plan, the OmniComm Systems, Inc. 2009 Equity Incentive Plan (the 2009 Plan), which was approved at our Annual Meeting of Shareholders on July 10, 2009. The 2009 Plan provides for the issuance of up to 7.5 million shares to employees under the terms of the plan documents. The predecessor plan, the OmniComm Systems, 1998 Stock Incentive Plan (the 1998 Plan) expired on December 31, 2008. The 1998 Plan provided for the issuance of up to 12.5 million shares in accordance with the terms of the plan document. On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, (Codified within 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. SFAS No. 123(R) is a revision to SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123(R) requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). Incremental compensation costs arising from subsequent modifications of awards after the grant date must be recognized. The Companys Unaudited Consolidated Financial Statements as of and for the ninemonth periods ended September 30, 2010 and September 30, 2009, respectively, reflect the impact of SFAS No. 123(R).
Stock-based compensation recognized in the Companys Unaudited Consolidated Statements of Operations for the nine month periods ended September 30, 2010 and September 30, 2009 includes compensation expense for share-based awards granted prior to, but not fully vested as of January 1, 2006 based on the grant date fair value estimated in accordance with SFAS No. 123 as well as compensation expense for share-based awards granted from January 1, 2006 to September 30, 2010 in accordance with SFAS No. 123(R). The Company currently uses the American Binomial option pricing model to determine grant date fair value.
EARNINGS PER SHARE
The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, Earnings per Share, (SFAS 128) (Codified with ASC 260, 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 utilized fully diluted earnings per share calculation method. Basic earnings per share were calculated using the weighted average number of shares outstanding of 85,507,699 and 79,787,889 for the nine month periods ended September 30, 2010 and September 30, 2009, respectively. There were no differences between basic and diluted earnings per share for the nine month period ended September 30, 2010 and September 30, 2009. The Companys stock options, convertible debt and convertible preferred stock have an anti-dilutive effect on net loss per share and were not included in the computation of diluted earnings per share. Options to purchase 13,627,000 shares of common stock at prices ranging from $0.12 to $0.70 per share were outstanding at September 30, 2010. Stock warrants to purchase 40,808,241 shares of common stock at exercise prices ranging from $0.25 to $0.60 per share were outstanding at September 30, 2010. These shares were excluded from diluted earnings per share because their effect would have been antidilutive. The Company has 27,200,000 shares underlying convertible debt as of September 30, 2010. The Company has 4,125,224
12
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
shares of its Series A Preferred Stock outstanding as of September 30, 2010 which is convertible into 2,750,149 shares of its common stock as of September 30, 2010. Basic earnings per share were calculated using the weighted average number of shares outstanding of 85,507,699 and 85,252,194 for the three-month periods ended September 30, 2010 and September 30, 2009, respectively.
IMPACT OF NEW ACCOUNTING STANDARDS
During fiscal 2010, we adopted the following new accounting pronouncements:
On January 1, 2010, the Company implemented certain provisions of Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) Topic 810, Consolidation. The new provisions (a) require a qualitative rather than a quantitative approach to determining the primary beneficiary of a variable interest entity (VIE); (b) amend certain guidance pertaining to the determination of the primary beneficiary when related parties are involved; (c) amend certain guidance for determining whether an entity is a VIE; and (d) require continuous assessments of whether an enterprise is the primary beneficiary of a VIE. The implementation of this standard did not have an impact on the Companys results of operations or financial condition.
On January 1, 2010, the Company implemented certain provisions of Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)Improving Disclosures about Fair Value Measurements (Update 2010-06). Update 2010-06 requires the Company to (a) provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy; (b) provide a reconciliation of purchases, sales, issuance, and settlements of financial instruments valued with a Level 3 method; and (c) provide fair value measurement disclosures for each class of financial assets and liabilities. The implementation did not have an impact on the Companys results of operations or financial condition. Required disclosures for the reconciliation of purchases, sales, issuance and settlements of financial instruments valued with a Level 3 method are effective for the Company beginning on January 1, 2011 and the Company does not expect the implementation to have a material impact on the Companys results of operations or financial condition.
In the second quarter of 2010, we adopted the following new accounting pronouncements:
In February 2010, the FASB issued Accounting Standards Update No. 2010-09. Amendments to Certain Recognition and Disclosure Requirements (ASU No. 2010-09). ASU No. 2010-09 amends FASB ASC Topic 855-10, Subsequent Events, to remove the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in both issued and revised financial statements. This change alleviates potential conflicts between ASC 855-10 and SECs requirements. The update did not have a material impact on the Companys consolidated results of operations or financial position.
In April 2010, FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition (ASU 2010-17), which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The amendments in this ASU provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. ASU 2010-17 is effective for fiscal years and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. This ASU is effective for the Company on January 1, 2011. The Company is currently evaluating the impact, if any, ASU 2010-17 will have on its consolidated results of operations, financial position or liquidity.
13
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, (SFAS 109) (Codified within ASC 740, 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.
NOTE 3: | GOING CONCERN |
We have experienced negative cash flow from operations and have funded our activities to date primarily from debt and equity financings. We will continue to require substantial funds to continue our research and development activities and to market, sell and commercialize our technology. We may need to raise substantial additional capital to fund our future operations. Our capital requirements will depend on many factors, including the problems, delays, expenses and complications frequently encountered by companies developing and commercializing new technologies; the progress of our research and development activities; the rate of technological advances; determinations as to the commercial potential of our technology under development; the status of competitive technology; the establishment of collaborative relationships; the success of our sales and marketing programs; and other changes in economic, regulatory or competitive conditions in our planned business.
The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
Estimates about the adequacy of funding for our activities are based upon certain assumptions, including assumptions that the research and development programs relating to our technology can be conducted at projected costs and that progress towards the commercialization of our technology will be timely and successful. There can be no assurance that changes in our research and development plans, acquisitions or other events will not result in accelerated or unexpected expenditures.
To satisfy our capital requirements, we may seek additional financing through debt and equity financings. There can be no assurance that any such funding will be available to us on favorable terms or at all. If adequate funds are not available when needed, we may be required to delay, scale back or eliminate some or all of our research and product development and marketing programs. If we are successful in obtaining additional financings, the terms of such financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our common and preferred stock or result in increased interest expense in future periods.
The ability of the Company to continue in existence is dependent on its having sufficient financial resources to bring products and services to market for marketplace acceptance. As a result of our historical operating losses, negative cash flows and accumulated deficits for the period-ending September 30, 2010 there is substantial doubt about the Companys ability to continue as a going concern. In addition, our former auditors Greenberg & Company, LLC, included language which qualified their opinion regarding our ability to continue as a going concern in their report dated February 12, 2010 regarding our audited financial statements for the year ended December 31, 2009.
NOTE 4 | EARNINGS PER SHARE |
Basic earnings per share (EPS) is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding and dilutive EPS adds the dilutive effect of stock options and other common stock equivalents. According to ASC-260-10-45-19 Earnings per Share, Other Presentation Matters, our loss attributable to continuing operations negates the need to include any potential dilutive shares that may have otherwise
14
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
needed to be included. Potentially antidilutive shares aggregating 85,457,739 and 73,995,897 have been omitted from the calculation of dilutive EPS for the nine and three month periods ended September 30, 2010 and September 30, 2009, respectively. Provided below is reconciliation between numerators and denominators of the basic and diluted earnings per shares:
For the Nine months Ended |
||||||||||||||||||||||||
September 30,2010 | September 30,2009 | |||||||||||||||||||||||
Income (loss) | Shares | Per-Share | Income (loss) | Shares | Per-Share | |||||||||||||||||||
Numerator | Denominator | Amount | Numerator | Denominator | Amount | |||||||||||||||||||
Basic EPS |
($ | 2,548,606 | ) | 85,507,699 | ($ | 0.03 | ) | ($ | 4,130,552 | ) | 79,787,889 | ($ | 0.05 | ) | ||||||||||
Effect of Dilutive Securities |
||||||||||||||||||||||||
None |
-0- | -0- | -0- | -0- | -0- | -0- | ||||||||||||||||||
Diluted EPS |
($ | 2,548,606 | ) | 85,507,699 | ($ | 0.03 | ) | ($ | 4,130,552 | ) | 79,787,889 | ($ | 0.05 | ) | ||||||||||
15
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
For the Three Months Ended |
||||||||||||||||||||||||
September 30,2010 | September 30,2009 | |||||||||||||||||||||||
Income (loss) | Shares | Per-Share | Income (loss) | Shares | Per-Share | |||||||||||||||||||
Numerator | Denominator | Amount | Numerator | Denominator | Amount | |||||||||||||||||||
Basic EPS |
($ | 1,142,501 | ) | 85,507,699 | ($ | 0.01 | ) | ($ | 3,069,997 | ) | 85,252,194 | ($ | 0.04 | ) | ||||||||||
Effect of Dilutive Securities |
||||||||||||||||||||||||
None |
-0- | -0- | -0- | -0- | -0- | -0- | ||||||||||||||||||
Diluted EPS |
($ | 1,142,501 | ) | $ | 85,507,699 | ($ | 0.01 | ) | ($ | 3,069,997 | ) | $ | 85,252,194 | ($ | 0.04 | ) | ||||||||
NOTE 5: | PROPERTY AND EQUIPMENT, AT COST |
Property and equipment consists of the following:
September 30, 2010 | December 31, 2009 | |||||||||||||||||||
Cost | Accumulated Depreciation |
Cost | Accumulated Depreciation |
Estimated Useful Lives |
||||||||||||||||
Computer & Office Equipment |
$ | 1,459,935 | $ | 867,528 | $ | 1,309,329 | $ | 719,222 | 5 Years | |||||||||||
Leasehold Improvements |
81,651 | 47,223 | 64,110 | 37,592 | 5 Years | |||||||||||||||
Computer Software |
1,344,834 | 864,424 | 1,230,989 | 642,042 | 3 Years | |||||||||||||||
Office Furniture |
102,159 | 73,443 | 102,159 | 67,034 | 5 Years | |||||||||||||||
$ | 2,988,579 | $ | 1,852,618 | $ | 2,706,587 | $ | 1,465,890 | |||||||||||||
Depreciation expense for the periods ended September 30, 2010 and September 30, 2009 was $386,116 and $239,476 respectively.
NOTE 6: | INTANGIBLE ASSETS, AT COST |
Intangible assets consist of the following:
September 30, 2010 | December 31, 2009 | |||||||||||||||||||||||||||
Accumulated | Net Book | Accumulated | Net Book | Estimated | ||||||||||||||||||||||||
Cost | Amortization | Value | Cost | Amortization | Value | Useful Life | ||||||||||||||||||||||
Customer lists |
$ | 1,392,701 | $ | 580,292 | $ | 812,409 | $ | 1,392,701 | $ | 232,116 | $ | 1,160,585 | 3 years | |||||||||||||||
$ | 1,392,701 | $ | 580,292 | $ | 812,409 | $ | 1,392,701 | $ | 232,116 | $ | 1,160,585 | |||||||||||||||||
Amortization expense for the periods ended September 30, 2010 and September 30, 2009 was $348,175 and $116,058 respectively.
16
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
The remaining annual amortization expense for the Companys intangible assets is as follows:
2010 |
$ | 116,058 | ||
2011 |
464,233 | |||
2012 |
232,118 | |||
2013 |
-0- | |||
2014 |
-0- | |||
Total |
$ | 812,409 | ||
NOTE 7: | ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
Accounts payable and accrued expenses consist of the following:
Account |
September 30, 2010 | December 31, 2009 | ||||||
Accounts payable |
$ | 789,286 | $ | 1,200,674 | ||||
Accrued payroll and related costs |
448,641 | 119,137 | ||||||
Other accrued expenses |
146,640 | 11,821 | ||||||
Accrued interest |
592,031 | 216,583 | ||||||
Total Accounts Payable and Accrued Expenses |
$ | 1,976,598 | $ | 1,548,215 | ||||
NOTE 8: | NOTES PAYABLE AND NOTES PAYABLE, RELATED PARTIES |
At September 30, 2010, the Company owed $2,509,300 in notes payable. The table below provides details as to the terms and conditions of the notes payable.
Origination Date |
Due Date |
Related Party |
Interest Rate |
Amount | Short Term |
Long Term |
||||||||||||||||
January 1, 2009 | October 1, 2010 | No | 9.00 | % | $ | 51,800 | $ | 51,800 | $ | -0- | ||||||||||||
January 1, 2009 | October 1, 2010 | No | 9.00 | % | 60,000 | 60,000 | -0- | |||||||||||||||
December 31, 2008 | January 31, 2011 | Yes | 9.00 | % | 137,500 | 137,500 | -0- | |||||||||||||||
April 13, 2010 | December 31, 2011 | Yes | 12.00 | % | 450,000 | -0- | 450,000 | |||||||||||||||
June 30, 2010 | December 31, 2011 | Yes | 12.00 | % | 115,000 | -0- | 115,000 | |||||||||||||||
September 30, 2010 | December 31, 2011 | Yes | 12.00 | % | 1,695,000 | -0- | 1,695,000 | |||||||||||||||
$ | 2,509,300 | $ | 249,300 | $ | 2,260,000 | |||||||||||||||||
17
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
NOTE 9: | CONVERTIBLE DEBT |
The following table summarizes the convertible debt activity the Company undertook during fiscal 2008 and 2009 and which is still outstanding as of September 30, 2010.
Origination Date |
Interest Rate |
Original Principal |
Allocated Discount |
Total Discount Amortized |
Discount at September 30, 2010 |
Carrying Amount at September 30, 2010 |
||||||||||||||||||
8/29/08 | 10 | % | $ | 2,270,000 | $ | 2,052,080 | $ | 2,052,080 | $ | -0- | $ | 2,270,000 | ||||||||||||
12/16/08 | 12 | % | 5,075,000 | 1,370,250 | 1,256,063 | 114,188 | 4,960,813 | |||||||||||||||||
9/30/09 | 12 | % | 1,400,000 | 526,400 | 350,933 | 175,467 | 1,224,533 | |||||||||||||||||
12/31/09 | 12 | % | 1,490,000 | 935,720 | 467,860 | 467,860 | 1,022,136 | |||||||||||||||||
Totals |
$ | 10,235,000 | $ | 4,884,450 | $ | 4,126,936 | $ | 757,514 | $ | 9,477,482 | ||||||||||||||
On September 30, 2009, we sold an aggregate of $1,400,000 principal amount 12% Secured Convertible Debentures (the Debentures) and common stock purchase warrants to three accredited investors, including our Chief Executive Officer. We granted the holders a security interest in all of our assets to secure performance of our obligations under the Debentures and the other transaction agreements.
Effective August 30, 2010 the Company defaulted on principal payments totaling $350,000 on two Convertible Debentures originally issued in August 2008 with a maturity date of August 29, 2010 . The two investors holding the outstanding convertible notes are long time investors in the Company and we are currently in negotiations to extend the maturity of the notes although there can be no assurance that the extension will be granted. We are currently in arrears on principal and interest payments owed totaling $423,164 on the Convertible Debentures.
The payments required at maturity under the Companys outstanding convertible debt at September 30, 2010 by year are as follows:
2010 |
$ | 520,000 | ||
2011 |
2,890,000 | |||
2012 |
-0- | |||
2013 |
6,900,000 | |||
2014 |
-0- | |||
Total |
$ | 10,310,000 | ||
NOTE 10: | FAIR VALUE MEASUREMENT |
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (Codified within ASC 820, Fair Value Measurements and Disclosures), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement. SFAS No. 157 was effective for the Companys fiscal year beginning January 1, 2008 and for interim periods
18
OMNICOMM SYSTEMS, INC. AND SUBSIDARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
within that year. In February 2008, the FASB issued FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157 (Codified within ASC 820, Fair Value Measurements and Disclosures), which delayed for one year the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). As required, the Company adopted ASC 820 for its financial assets on January 1, 2008. Adoption did not have a material impact on the Companys financial position or results of operations.
ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:
| Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets; |
| Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and |
| Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities. |
The valuation techniques that may be used to measure fair value are as follows:
A. | Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities |
B. | Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method |
C. | Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost) |
The Company also adopted the provisions of Statement of Financial Accounting Standards No. 159 (SFAS 159) (Codified within ASC 825, Financial Instruments) in the first quarter of 2008. SFAS No. 159 allows companies to choose to measure eligible assets and liabilities at fair value with changes in value recognized in earnings. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. The Company did not elect to re-measure any of its existing financial assets or liabilities under the provisions of this Statement and did not elect the fair value option for any financial assets and liabilities transacted during the periods-ended September 30, 2010 and September 30, 2009, respectively.
The Companys financial assets or liabilities subject to ASC 820 as of September 30, 2010 include the conversion feature and warrant liability associated with convertible debentures issued during fiscal 2008 and 2009. The conversion feature and warrants were deemed to be derivatives (the Derivative Instruments) since a fixed conversion price cannot be determined for either of the Derivative Instruments due to anti-dilution provisions embedded in the offering documents for the convertible debentures. The derivative instruments were not issued for risk management purposes and as such are not designated as hedging instruments under the provisions of ASC 815.
19
OMNICOMM SYSTEMS, INC. AND SUBSIDARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
Following is a description of the valuation methodologies used to determine the fair value of the Companys financial assets including the general classification of such instruments pursuant to the valuation hierarchy.
20
OMNICOMM SYSTEMS, INC. AND SUBSIDARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
Carrying Amount at 12/31/09 |
Carrying Amount at 09/30/10 |
Quoted prices in active markets for identical assets/ liabilities (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
||||||||||||||||
Derivatives: (2) |
||||||||||||||||||||
Conversion feature liability |
$ | 1,945,440 | $ | 114,181 | $ | -0- | $ | -0- | $ | 114,181 | ||||||||||
Warrant liability |
2,738,193 | 308,858 | -0- | -0- | 308,858 | |||||||||||||||
Total of Derivatives |
$ | 4,683,633 | $ | 423,039 | $ | -0- | $ | -0- | $ | 423,039 | ||||||||||
(1) | The Income approach was used as a valuation technique. |
(2) | The fair value of the Derivative Instruments was estimated using the American Binomial option pricing model with the following assumptions for the nine month period ended September 30, 2010. |
Significant Valuation Assumptions of Derivative Instruments
Risk free interest rate convertible notes | 0.16% to 0.64% | |
Risk free interest rate convertible warrants | 0.27% to 0.64% | |
Dividend yield | 0.00% | |
Expected volatility | 72.2% | |
Expected life (range in years): | ||
Conversion feature liability |
0.00 to 3.21 | |
Warrant liability |
1.41 to 3.25 |
For the nine months ended Change in derivative liabilities |
||||||||
September 30, 2010 |
September 30, 2009 |
|||||||
The net amount of total gains for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains relating to derivative liabilities still held at the reporting date |
$ | 4,260,594 | $ | 2,349,194 | ||||
Total gains included in earnings |
$ | 4,260,594 | $ | 2,349,194 | ||||
21
OMNICOMM SYSTEMS, INC. AND SUBSIDARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
NOTE 11: | COMMITMENTS AND CONTINGENCIES |
The Company currently leases office space under an operating lease. The minimum future lease payments required under the Companys operating leases at September 30, 2010 are as follows:
2010 |
$ | 182,926 | ||
2011 |
564,310 | |||
2012 |
297,061 | |||
2013 |
343,135 | |||
2014 |
353,212 | |||
Total |
$ | 1,740,644 | ||
In addition to annual base rental payments the Company pays for the operating expenses associated with its leased office space and is responsible for any escalation in operating expenses as determined in the lease. Rent expense was $708,376 and $514,168 for the nine month periods ended September 30, 2010 and September 30, 2009, respectively.
The Companys corporate office lease expires in September 2016. The Companys lease on its New Jersey field office expires in February 2013. The Company currently operates its wholly-owned subsidiary, OmniComm Ltd., in the United Kingdom under the terms of a lease that expires in October 2012. The Company currently operates its wholly-owned subsidiary, OmniComm Europe, GmbH, in Bonn, Germany under the terms of a lease that expires in June 2011.
PATENT LITIGATION SETTLEMENT
On April 9, 2009, we entered into a Settlement and License Agreement with DataSci, LLC (DataSci) which relates to a lawsuit filed on September 18, 2008 in the United States District Court for the District of Maryland by DataSci against OmniComm alleging infringement of a U.S. Patent No. 6,496,827 B2 entitled Methods and Apparatus for the Centralized Collection and Validation of Geographically Distributed Clinical Study Data with Verification of Input Data to the Distributed System (Licensed Patent) claimed to be owned by DataSci. Pursuant to the agreement, the parties entered into a Stipulated Order of Dismissal of the lawsuit filed by DataSci and DataSci granted us a worldwide, non-exclusive non-transferable right and license under the Licensed Patent, the subject of the claim, and the right to sublicense TrialMaster on a Technology Transfer and Technology Transition basis. The license expressly excludes the right to make, use, sell, import, market, distribute, oversee the operation of, or service systems covered by, a claim (if any) of the Licensed Patent to the extent such systems are used for creating and managing source documentation and conducting remote data validation in clinical trial studies using a tablet PC with stylus, touch screen device, digitizing tablet, digitizer pen, or similar mobile processing device (Digitizing Device), wherein the source documentation is electronic and is completed using a Digitizing Device. Under the terms of the license, we are obligated to pay royalties quarterly for sales of Licensed Products, as defined therein, from January 1, 2009 until the expiration of the Licensed Patent equal to two percent (2%) of OmniComms annual Gross Revenues or, alternatively, the annual minimum royalty payment(s), whichever is greater. The remaining minimum royalty payments per year are as follows:
2010 |
$ | 111,837 | ||
2011 |
700,000 | |||
2012 |
450,000 | |||
2013 |
450,000 | |||
2014 |
450,000 | |||
2015-2017 |
1,350,000 | |||
Total |
$ | 3,511,837 | ||
In conjunction with the acquisition of the eResearch Technology, Inc. EDC assets, the Company entered into the First Amendment to Settlement and Licensing Agreement with DataSci, LLC in June 2009 to provide for license payments totaling $300,000 to DataSci over the next three years for the EDC assets acquired in that transaction. The Company began making annual payments of $100,000 to DataSci in July 2009.
22
OMNICOMM SYSTEMS, INC. AND SUBSIDARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
During the nine month period ended September 30, 2010, the Company recorded a an additional expense in the amount of $374,782 which amount represents (1) the amount of additional license expense incurred above the stipulated minimum in the DataSci License Agreement during the nine month period ended September 30, 2010 and (2) the accretion of the difference between the total stipulated annual minimum royalty payments and the recorded present value accrual of the annual minimum royalty payments.
ALPHADAS LICENSING AGREEMENT
Effective September 30, 2010 the Company and Logos Holdings, Ltd. ( a UK limited company) entered into an agreement delineating the ownership rights of the Alphadas EDC system owned by Logos Holdings and the Companys TrialOne EDC system. Pursuant to the agreement the Company agreed to pay Logos Holdings a license fee of 15% on certain clients utilizing the Alphadas system that were being serviced by the Company beginning with August 3, 2009, the date of the Companys acquisition of Logos Technologies. The license limits the total license fee payable by the Company to $200,000. The license terminates upon the termination or expiration of any Alphadas contracts serviced by the Company. The Company has recorded an accrual of $44,987 as of September 30, 2010 for this liability.
NOTE 12: | Stockholders Equity |
Stock Options Issued for Services
The following tables summarize all stock options to employees and consultants for the nine months ended September 30, 2010, and the related changes during these periods are presented below.
Stock Options |
Number of Options | Weighted Average Exercise Price |
||||||
Balance at December 31, 2009 |
12,061,500 | |||||||
Granted |
1,865,000 | |||||||
Exercised |
| |||||||
Forfeited |
(924,500 | ) | ||||||
Balance at September 30, 2010 |
13,002,000 | $ | 0.30 | |||||
Options Exercisable at September 30, 2010 |
11,157,000 | $ | 0.31 | |||||
Weighted average fair value of options granted during 2010 |
$ | 0.10 |
Of the total options granted, 11,157,000 are fully vested, exercisable and non-forfeitable.
During 2010, the Company has granted 1,865,000 options to employees and directors of the Company under the Companys 2009 Equity Incentive Plan. The calculated fair value of those option grants total $186,040. The calculated fair value will be amortized as expense ratably over the vesting periods of the specific options. The typical vesting period for options granted to employees is two years with vesting occurring evenly on the first and second anniversary of the option grant.
23
OMNICOMM SYSTEMS, INC. AND SUBSIDARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
The following table summarizes information about stock options for the Company as of September 30, 2010:
2010 Options Outstanding | 2010 Options Exercisable | |||||||||||||||||||
Range of Exercise Price |
Number Outstanding at September 30, 2010 |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Number Exercisable at September 30, 2010 |
Weighted Average Exercise Price |
|||||||||||||||
$ 0.00 -0.20 |
1,955,000 | 4.31 | $ | 0.19 | 1,330,000 | $ | 0.20 | |||||||||||||
$ 0.25 -0.29 |
5,398,000 | 3.03 | $ | 0.26 | 4,808,000 | $ | 0.26 | |||||||||||||
$ 0.31 -0.49 |
1,115,000 | 3.15 | $ | 0.45 | 1,110,000 | $ | 0.45 | |||||||||||||
$ 0.50 -0.70 |
4,534,000 | 3.04 | $ | 0.60 | 3,909,000 | $ | 0.60 |
The fair value of share-based payments was estimated using the American Binomial option pricing model with the following assumptions and weighted average fair values for grants made during the periods indicated.
Stock Option Assumptions |
||||
Risk-free interest rate |
2.1 | % | ||
Expected dividend yield |
0.0 | % | ||
Expected volatility |
72.7 | % | ||
Expected life of options (in years) |
5 |
Warrants Issued for Services and in Capital Transactions
The following tables summarize all warrants issued to consultants and warrants issued as part of convertible debt transactions for the nine months ended September 30, 2010 and September 30, 2009, and the related changes during these periods are presented below.
September 30, 2010 Warrants Outstanding |
September 30, 2010 Warrants Exercisable |
|||||||||||||||||||
Range of Exercise Price |
Number Outstanding at 30-Sep-10 |
Weighted Average Remaining Contractual Life |
Weighted Average Exercise Price |
Number Exercisable at 30-Sep-10 |
Weighted Average Exercise Price |
|||||||||||||||
$ 0.25 0.60 |
40,808,241 | 2.21 | $ | 0.44 | 40,808,241 | $ | 0.44 |
24
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
Warrants |
||||
Balance at December 31, 2009 |
40,808,241 | |||
Issued |
-0- | |||
Exercised |
-0- | |||
Forfeited |
-0- | |||
Balance at September 30, 2010 |
40,808,241 | |||
Warrants Exercisable at September 30, 2010 |
40,808,241 | |||
Weighted Average Fair Value of Warrants Granted During 2010 |
$ | -0.00- | ||
NOTE 13: | RELATED PARTY TRANSACTIONS |
For the nine month period ended September 30, 2010 we have incurred $879,699 in interest expense payable to related parties, and we incurred $612,104 in interest expense to related parties for the nine month period ended September 30, 2009.
On April 13, 2010, we issued a promissory note with a principal amount of $450,000 to Cornelis Wit, our Chief Executive Officer and a Director. The promissory note bears interest at 12% per annum and is due on December 31, 2011.
On June 29, 2010, we issued a promissory note with a principal amount of $115,000 to Cornelis Wit, our Chief Executive Officer and a Director. The promissory note bears interest at 12% per annum and is due on December 31, 2011.
During the quarter ended September 30, 2010 we issued a promissory note with a principal amount of $1,695,000 to Cornelis Wit, our Chief Executive Officer and a Director. The promissory note bears interest at 12% per annum and is due on December 31, 2011.
NOTE 14: | RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS |
On August 30, 2010, the Companys Board of Directors concluded that the Companys consolidated financial statements for the year ended December 31, 2009 and for the quarter ended March 31, 2010 should be restated because we incorrectly recorded accounts receivables from certain client contracts from invoices sent to clients during December 2009 and March 31, 2010. The Companys Management concluded that the invoices should have not been reported and that the associated transactions were incorrectly accounted for under generally accepted accounting principles (GAAP).
The Company has concluded that there were material accounting errors with respect to certain customer accounts receivable issued during December 2009 and March 31, 2010. Subsequent to filing our financial statements for the year ended December 31, 2009 and for the quarter ended March 31, 2010 we have determined that certain customer receivables totaling $2,425,423 that were recorded at December 31, 2009 should instead have been recorded in January 2010. In addition, we determined that certain customer receivables totaling $687,970 that were recorded at March 31, 2010 should instead have been recorded in April 2010. The receivables in question relate to client contracts for on-going projects that, although long-term in nature, are considered executory contracts under GAAP since the services are expected to be rendered on a go-forward basis. Given this accounting treatment, the client billings should have been recorded as a receivable and in turn a deferred revenue obligation in the month the obligations are expected to be collected. As a result of this error, we have restated our consolidated balance sheets at December 31, 2009 and March 31, 2010 and our consolidated statements of cash flows for the year ended December 31, 2009 and for the quarters ended March 31, 2010 and June 30, 2010.
The following tables set forth the effects of the restatement on certain line items within the Companys consolidated balance sheet at December 31, 2009 and March 31, 2010 and the Companys consolidated statement of cash flows for the year ended December 31, 2009, the three months ended March 31, 2010 and six months ended June 30, 2010.
25
OMNICOMM SYSTEMS, INC. AND SUBSIDARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
Balance Sheet | ||||||||
December 31, 2009 | ||||||||
As Restated | As Previously Filed | |||||||
Accounts receivable, net of allowance for doubtful accounts of $267,526 and $150,933 in 2009 and 2008, respectively |
$ | 587,119 | $ | 733,931 | ||||
Total current assets |
886,535 | 1,033,347 | ||||||
TOTAL ASSETS |
3,313,695 | 3,460,507 | ||||||
Deferred revenue, current portion |
2,048,305 | 2,195,117 | ||||||
Total current liabilities |
7,541,722 | 7,688,534 | ||||||
TOTAL LIABILITIES |
19,596,923 | 19,753,735 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
$ | 3,313,695 | $ | 3,460,507 | ||||
Balance Sheet | ||||||||
March 31, 2010 | ||||||||
As Restated | As Previously Filed | |||||||
Accounts receivable, net of allowance for doubtful accounts of $267,526 and $150,933 in 2009 and 2008, respectively |
$ | 1,345,602 | $ | 2,033,573 | ||||
Total current assets |
1,756,121 | 2,444,092 | ||||||
TOTAL ASSETS |
4,107,309 | 4,795,280 | ||||||
Deferred revenue, current portion |
4,628,883 | 5,241,474 | ||||||
Total current liabilities |
8,900,732 | 9,513,323 | ||||||
Deferred revenue, long term |
916,863 | 992,243 | ||||||
TOTAL LIABILITIES |
21,796,400 | 22,484,371 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT) |
$ | 4,107,309 | $ | 4,795,280 | ||||
Statement of Cash Flows | ||||||||
For the Year Ended December 31, 2009 | ||||||||
As Restated | As Previously Filed | |||||||
Change in assets and liabilities: |
||||||||
Accounts receivable |
$ | 2,020,774 | $ | (513,290 | ) | |||
Deferred revenue |
$ | (2,359,900 | ) | $ | 174,165 | |||
Statement of Cash Flows | ||||||||
For the Three Months Ended March 31, 2010 | ||||||||
As Restated | As Previously Filed | |||||||
Change in assets and liabilities: |
||||||||
Accounts receivable |
$ | (758,483 | ) | $ | 1,087,611 | |||
Deferred revenue |
$ | 2,516,799 | $ | 670,705 | ||||
Statement of Cash Flows | ||||||||
For the Six Months Ended June 30, 2010 | ||||||||
As Restated | As Previously Filed | |||||||
Change in assets and liabilities: |
||||||||
Accounts receivable |
$ | (428,084 | ) | $ | (281,272 | ) | ||
Deferred revenue |
$ | 2,451,436 | $ | 2,304,624 |
26
OMNICOMM SYSTEMS, INC. AND SUBSIDARIES
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2010
(Continued)
NOTE 15: | SUBSEQUENT EVENTS |
The Company has issued promissory notes to our Chief Executive Officer and Director, Cornelis F. Wit. The promissory notes bear interest at a rate of 12% per annum with interest paid monthly. The maturity date of the five promissory notes is December 31, 2011. The table below provides the dates and amounts of each of the promissory notes.
Date |
Amount | |||||
October 15, 2010 |
$ | 150,000 | ||||
October 26, 2010 |
140,000 | |||||
October 28, 2010 |
200,000 | |||||
November 3, 2010 |
43,500 | |||||
November 10, 2010 |
200,000 | |||||
Total |
$ | 733,500 | ||||
On October 15, 2010 the Company entered into a settlement agreement with the Business Software Alliance regarding licensing of certain Microsoft software products. Based on the terms of the agreement the Company has agreed to pay $50,000, in ten installments of $5,000 each to the BSA to resolve their dispute. The Company has recorded an accrual of $50,000 in this matter as of September 30, 2010.
On November 12, 2010 the Company extended promissory notes in the principal amount of $51,800 to Noesis NV and $60,000 to Noesis LLC. The notes originally matured on October 1, 2010. The terms of the extended promissory notes include interest at 12% per annum with a maturity date of January 1, 2012.
27
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
General
The following information should be read in conjunction with the information contained in our unaudited consolidated financial statements and notes thereto appearing elsewhere herein and other information set forth in this report.
Forward-Looking Statements
Statements contained in this Form 10-Q 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, contained in this Form 10-Q 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-Q. 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.
Overview
We are a healthcare technology company that provides Web-based electronic data capture (EDC) solutions and related value-added services to pharmaceutical and biotech companies, clinical research organizations, and other clinical trial sponsors worldwide. Our proprietary EDC software applications: TrialMaster®; TrialOne®; and eClinical Suite, allow clinical trial sponsors and investigative sites to securely collect, validate, transmit, and analyze clinical trial data.
During the first nine months of fiscal 2010 we have sought to build and expand on our strategic efforts. The primary focus of our strategy includes:
| Stimulating demand by providing clinical trial sponsors with high value eClinical applications and services; |
| Emphasizing low operating costs; |
| Continued emphasis on expanding our business model by offering our software solutions on a licensed basis in addition to our existing hosted-services solutions; |
| Broadening our eClinical suite of services and software applications on an organic R & D basis and on a selective basis via the acquisition or licensing of complementary solutions; |
| Expanding our business development efforts in Europe to capitalize on our operational and clinical capabilities vis-à-vis our competition in that geographic market; |
| Providing our services to small and midsize pharmaceutical, biotechnology, medical device companies and CROs ; and |
28
| Expanding our penetration of the large pharmaceutical sponsor market by leveraging the client contracts we assumed in our acquisitions of the EDC assets of eResearch Technology, Inc. (eRT or eResearch Technology) and Logos Technologies, Ltd. (Logos Technologies) during 2009. |
Our operating focus is first, to increase our sales and marketing capabilities, and penetration rate and secondly, to continue developing and improving our software solutions and services to ensure our services and products remain an attractive, high-value EDC choice. During the first nine months of 2010, we increased our marketing and sales personnel both in the U.S. and European markets and aggressively expanded the scope of our CRO Preferred Program in order to increase our penetration of the domestic CRO market. The CRO Preferred Program offers fixed pricing and pay-as-you-go hosted services. Additionally, we believe we have established an effective presence in the European clinical trial market by expanding the number of clients we service in the European market after the acquisition of the EDC assets of eResearch Technology, Inc., (eRT or eResearch Technologies) and Logos Technologies Ltd. (Logos Technologies) and will seek to aggressively expand the scope of our sales and marketing operations there.
Our ability to compete within the EDC and eClinical industries is predicated on our ability to continue enhancing and broadening the scope of solutions we offer. Our R & D efforts are focused on developing new, complementary software solutions, as well as enhancing our existing software solutions through the addition of increased functionality. We have spent $2,779,262 and $1,271,211 on R & D activities during the nine month periods ended September 30, 2010 and September 30, 2009, respectively. The majority of these expenses represent salaries to our developers which include costs associated with the customization of our EDC software applications for our clients projects.
Our selling efforts include marketing our products to several Fortune 1000 pharmaceutical and medical device manufacturers and several of the largest CROs. We have experienced, both via organic growth and through our 2009 acquisitions, success in broadening our client roster over the past several fiscal years. Continued success in broadening our existing client relationships and forging new relationships should provide us the opportunity to limit our need for funding our operations via debt and equity capital. Continuing to obtain contracts with clients of this size and reputation will also increase the credibility of the Company to the clinical trial market.
Our business development focus continues to include increasing our penetration of all phases of the clinical trial market with a continued emphasis on becoming the market leader in Phase I EDC services. We believe this market is an operating and strategic strength of the Company due to the inherent flexibility of our solutions including the solutions provided by our TrialOne products and services. We believe we have the ability to produce trials more quickly and economically than our competitors for this specialized and large market. During the remainder of fiscal 2010, we will continue commercializing our products on a licensed basis and expect to experience increased success in penetrating the market for larger pharmaceutical, biotechnology and medical device clinical trial sponsors. Our clients will be able to partially or completely license our EDC solutions. The licensing business model provides our clients a more cost effective means of deploying our EDC solutions on a large-scale basis. Our licensed products, falling under the auspices of either a Tech Transition (partial transfer with some services performed by OmniComm) or Tech Transfer, allows us to broaden our potential client base, provides us with a high-margin revenue source and affords us the ability to improve our competitive position within the EDC industry. The acquisitions completed during fiscal 2009 (the eResearch EDC Assets and the Logos EDC Assets) have historically been sold on a licensed basis and have allowed us to broaden our base of licensed customers. Additionally, we continue to focus on adding CROs as strategic and marketing partners. There is an industry-wide emphasis in establishing strategic relationships with CROs. These relationships provide marketing leverage in the form of joint marketing and sales efforts and provide an installed base of trained users for our EDC and eClinical software applications. This installed base of users increases our ability to provide rapidly developed, cost effective solutions for our clients. Additionally, we believe we have established an effective presence in the European clinical trial market and will seek to aggressively expand the scope of our sales and marketing operations there. Through September 30, 2010 the European market accounts for approximately 15% of total revenues.
29
We feel that the momentum established from new client acquisitions and our ability to retain clients for repeat engagements provide a good operating base from which to build during the remainder of fiscal 2010 and during fiscal 2011. We expect to continue increasing the level of resources deployed in our sales and marketing efforts. We feel that a combination of our existing infrastructure, broadened array of eClinical products and services, and increased success in new client acquisition, coupled with our ability to retain our existing clients will allow us to compete effectively within the EDC market.
Fiscal 2009 Acquisitions
eResearch Technology, Inc. Asset Acquisition:
On June 23, 2009, we acquired certain tangible and intangible EDC assets, formerly owned by eResearch Technology, Inc. (eResearch Technology) (eResearch EDC Assets), pursuant to an Asset Purchase Agreement. Our purpose in acquiring these assets, which included employment rights to eResearch Technologys EDC operating and business development team, was to increase our presence in the EDC industry through the eResearch Technology client list and increase our revenues in order to leverage our existing administrative and technical corporate infrastructure.
The Company purchased from eResearch Technology, the eResearch EDC Assets including equipment, devices, computer hardware and other computer systems, certain intellectual property, contracts, customer lists, and other assets specifically identified in schedules to the Agreement, and $1,150,000 in cash. The Company also assumed certain liabilities associated with these assets, including deferred revenues under certain assumed contracts in the amount of approximately $954,000, and concurrent with the consummation of the transactions entered into the First Amendment to Settlement and Licensing Agreement with DataSci, LLC to provide for license payments of $300,000 to DataSci over the next three years for the EDC assets acquired in the Agreement. Consideration for the acquisition consisted of 8,100,000 shares of our common stock.
Logos Technologies, Ltd. (In Administration) Asset Acquisition:
On August 3, 2009, we acquired certain tangible and intangible EDC assets, formerly owned by Logos Technologies, Ltd. (Logos Technologies) (Logos EDC Assets), pursuant to a Sale Agreement related to the Administration process in the United Kingdom. Our purpose in acquiring these assets, which included employment rights to the research and development personnel of Logos Technologies, was to increase our presence in the EDC industry through the Logos Technologies client list and the acquisition of the intellectual property associated with the Logos EDC Assets which we view as a strategically important facet of our software and service portfolio since it can allow us increase our revenues in order to leverage our existing administrative and technical corporate infrastructure by competing in what we view as an under-serviced segment of the EDC industry.
The Company purchased from Logos Technologies (in Administration), the Logos EDC Assets including equipment, devices, computer hardware and other computer systems, certain intellectual property, contracts, customer lists and other assets specifically identified in schedules to the Sale Agreement. We also assumed certain liabilities associated with these assets which includes a short-term office lease obligation. Consideration for the acquisition consisted of £92,000, which approximated $152,628.
Effective September 30, 2010 the Company and Logos Holdings, Ltd. ( a UK limited company) entered into an agreement delineating the ownership rights of the Alphadas EDC system owned by Logos Holdings and the Companys TrialOne EDC system. Pursuant to the agreement the Company agreed to pay Logos Holdings a license fee of 15% on certain clients utilizing the Alphadas system that were being serviced by the Company beginning with August 3, 2009, the date of the Companys acquisition of Logos Technologies. The license limits the total license fee payable by the Company to $200,000. The license terminates upon the termination or expiration of any Alphadas contracts serviced by the Company.
30
The Nine month Period-ended September 30, 2010 Compared with the Nine month Period ended September 30, 2009
Results of Operations
A summarized version of our results of operations for the nine month periods ended September 30, 2010 and September 30, 2009 is included in the table below.
Summarized Statement of Operations
For the nine months ended | ||||||||||||||||||||||||
September 30, | ||||||||||||||||||||||||
% of | % of | $ | % | |||||||||||||||||||||
2010 | Revenues | 2009 | Revenues | Change | Change | |||||||||||||||||||
Total revenues |
$ | 9,076,158 | $ | 6,692,440 | $ | 2,383,718 | 35.6 | % | ||||||||||||||||
Cost of sales |
1,288,472 | 14.2 | % | 1,396,935 | 20.9 | % | (108,463 | ) | -7.8 | % | ||||||||||||||
Gross margin |
7,787,686 | 85.8 | % | 5,295,505 | 79.1 | % | 2,492,181 | 47.1 | % | |||||||||||||||
Salaries, benefits and related taxes |
7,917,389 | 87.2 | % | 6,785,888 | 101.4 | % | 1,131,501 | 16.7 | % | |||||||||||||||
Rent |
708,376 | 7.8 | % | 514,168 | 7.7 | % | 194,208 | 37.8 | % | |||||||||||||||
Consulting |
404,848 | 4.5 | % | 124,455 | 1.9 | % | 280,393 | 225.3 | % | |||||||||||||||
Legal and professional fees |
263,379 | 2.9 | % | 474,237 | 7.1 | % | (210,858 | ) | -44.5 | % | ||||||||||||||
Other expenses |
1,336,602 | 14.7 | % | 893,698 | 13.4 | % | 442,904 | 49.6 | % | |||||||||||||||
Selling, general and administrative |
925,747 | 10.2 | % | 883,061 | 13.2 | % | 42,686 | 4.8 | % | |||||||||||||||
Total operating expenses |
11,556,341 | 127.3 | % | 9,675,507 | 144.6 | % | 1,880,834 | 19.4 | % | |||||||||||||||
Operating (loss) |
(3,768,655 | ) | -41.5 | % | (4,380,002 | ) | -65.4 | % | 611,347 | -14.0 | % | |||||||||||||
Interest expense |
(2,886,743 | ) | -31.8 | % | (1,950,721 | ) | -29.1 | % | (936,022 | ) | 48.0 | % | ||||||||||||
Interest income |
48 | 0.0 | % | 4,395 | 0.1 | % | (4,347 | ) | -98.9 | % | ||||||||||||||
Gain (Loss) on extinguishment of debt |
-0- | 0.0 | % | 432 | 0.0 | % | (432 | ) | -100.0 | % | ||||||||||||||
Change in derivatives |
4,260,594 | 46.9 | % | 2,349,194 | 35.1 | % | 1,911,400 | 81.4 | % | |||||||||||||||
Net (loss) |
(2,394,756 | ) | -26.4 | % | (3,976,702 | ) | -59.4 | % | 1,581,946 | -39.8 | % | |||||||||||||
Total preferred stock dividends |
(153,850 | ) | -1.7 | % | (153,850 | ) | -2.3 | % | 0 | 0.0 | % | |||||||||||||
Net (loss) attributable to common stockholders |
$ | (2,548,606 | ) | -28.1 | % | $ | (4,130,552 | ) | -61.7 | % | $ | 1,581,946 | -38.3 | % | ||||||||||
Net (loss) per share |
$ | (0.03 | ) | $ | (0.05 | ) | ||||||||||||||||||
Weighted average number of shares outstanding |
85,507,699 | 79,787,889 | ||||||||||||||||||||||
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Revenues for the nine month period ended September 30, 2010 increased approximately 35.6% from the nine month period ended September 30, 2009. The table below provides a comparison of our recognized revenues for the nine month periods ended September 30, 2010 and September 30, 2009.
For the nine months ended | ||||||||||||||||||||||||
Business Activity | September 30, 2010 | September 30, 2009 | Increase $ | Increase % | ||||||||||||||||||||
Set-up Fees |
$ | 3,240,774 | 35.7 | % | $ | 3,515,380 | 52.5 | % | $ | (274,606 | ) | -7.8 | % | |||||||||||
Change Orders |
125,632 | 1.4 | % | 341,388 | 5.1 | % | (215,756 | ) | -63.2 | % | ||||||||||||||
Maintenance |
3,269,537 | 36.0 | % | 1,562,797 | 23.4 | % | 1,706,740 | 109.2 | % | |||||||||||||||
Software Licenses |
1,014,973 | 11.2 | % | 515,157 | 7.7 | % | 499,816 | 97.0 | % | |||||||||||||||
Professional Services |
566,141 | 6.2 | % | 431,370 | 6.4 | % | 134,771 | 31.2 | % | |||||||||||||||
Hosting & Subscriptions |
859,101 | 9.5 | % | 326,348 | 4.9 | % | 532,753 | 163.2 | % | |||||||||||||||
Totals |
$ | 9,076,158 | 100.0 | % | $ | 6,692,440 | 100.0 | % | $ | 2,383,718 | 35.6 | % | ||||||||||||
We recorded $3,616,658 in revenues associated with clients with our acquisition of the eResearch Technology eClinical software application suite (eClinical) during the nine month period ended September 30, 2010.
We recorded $225,262 in revenues associated with clients with our acquisition of the Logos EDC Assets during the nine month period ended September 30, 2010. We have rebranded these assets under the TrialOne tradename. We are still in the process of commercializing and developing our sales and marketing campaign for the TrialOne application.
Revenues from our TrialMaster ASP fees and maintenance from existing TrialMaster clients decreased by $578,893 or 10.0%. During 2009 our primary customer base which consisted primarily of small, U.S.-based biotechnology firms, dramatically reduced the level of clinical trials they were conducting. Many of these firms are pre-revenue and as we understand are reliant on the capital markets for working capital and R & D funding. With the difficult economic climate experienced beginning in late 2008 and continuing through the present we believe that many of these firms either reduced or completely curtailed their R & D activities either because of a lack of capital or in order to conserve their cash reserves. We saw evidence during late 2009 and during the first half of 2010 of increased activity from these clients but have not seen a complete recovery of this market segments R & D spending.
32
We recorded $658,382 in revenues from our licensing activity and $195,807 from professional services associated with TrialMaster suite during the nine month period ended September 30, 2010 compared with $515,157 and $301,305, respectively, during the nine month period ended September 30, 2009. The amounts relating to fiscal 2009 activity are associated with the sale and installation of the TrialMaster application suite to one client. We expect revenues from both activities to increase for several reasons. First, we see significant activity in the CRO market relating to infrastructure investing. Second, we have entered into a contract with Kendle International for them to license our TrialMaster application. Third, most new sales of our eClinical application and all future sales of the TrialOne application will be made on a licensed basis.
We recorded $829,433 in revenues from hosting and subscriptions activities and $370,334 in consulting services associated with the eClinical suite during the nine month period ended September 30, 2010 compared with $326,348 and $130,064, respectively, for the nine month period ended September 30, 2009. Generally, these revenues are paid quarterly and are connected to hosting, maintenance and client support for clients licensing that application.
Our TrialMaster EDC application has historically been sold on an application service provider (ASP) basis that provides EDC and other services such as an enterprise management suite which assists our clients in the pharmaceutical, biotechnology and medical device industries in accelerating the completion of clinical trials. During 2009, as discussed earlier, we completed the acquisition of the eResearch EDC Assets and the Logos EDC Assets (the Acquired Software). Both software applications have historically been sold on a licensed or technology transfer basis. As we continue developing our software applications and our client relationships mature, we expect some of our clients to deploy TrialMaster on a licensed, rather than ASP hosted basis. We expect both Acquired Software applications to continue to be sold primarily on a licensed basis.
TrialMaster contracts for ASP services provide for pricing that is based on both the size and duration of the clinical trial. Size parameters include the number of case report forms used to collect data and the number of sites utilizing TrialMaster. 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, ASP contracts will range in duration from one month to several years. ASP Setup fees are generally earned prior to the inception of a trial, however, the revenues will be recognized in accordance with Accounting Standards Codification 605 (ASC 605) Revenue Recognition, which requires that the revenues be recognized ratably over the life of the contract. ASP maintenance fee revenues are earned and recognized monthly. Costs associated with contract revenues are recognized as incurred.
Beginning in late 2008 we began selling our core TrialMaster product on a licensed basis. Beginning with the third fiscal quarter of 2009 we have experienced greater success in selling that TrialMaster on a licensed basis. The EDC assets acquired from eResearch Technology and Logos Technologies are primarily sold on a licensed basis. License contracts are typically sold on a subscription basis that takes into account system usage both on a data volume and system user basis. Pricing includes additional charges for deployment of our eClinical software and solutions. Licensed contracts of the eClinical suite have historically been sold on a perpetual license basis with hosting and maintenance charges being paid annually. The Company expects any licenses it sells of its software products to be sold in three to five year term licenses.
Our top five customers accounted for approximately 38.9% of our revenues during the nine month period ended September 30, 2010 and approximately 52.9% of our revenues during the nine month period ended September 30, 2009. One customer accounted for 21% of our revenues during the nine month period ended September 30, 2010. One customer accounted for 28% of our revenues during the nine month period ended September 30, 2009. The loss of any of these contracts or these customers in the future could adversely affect our results of operations.
Cost of goods sold decreased approximately 7.8% or $108,463 for the nine month period ended September 30, 2010 as compared to the nine month period ended September 30, 2009. Cost of goods sold were approximately 14.2% of revenues for the nine month period ended September 30, 2010 compared to approximately 20.9% for the nine month period ended September 30, 2009. Cost of goods sold relates primarily to salaries and related benefits associated
33
with the programmers, developers and systems analysts producing clinical trials on behalf of our clients. Cost of goods sold decreased during the nine month period ended September 30, 2010 due to a decrease in salary related costs associated with the delivery of TrialMaster ASP projects of $405,867 and a decrease of $70,264 in costs from third-party services which help us with the delivery of our application to customers offset by an increase of approximately $368,028 for costs associated with salary and related costs associated with the delivery and support of our eClinical suite. Although our experience to-date in licensing and deploying TrialMaster on a technology transfer or licensed basis has been limited, we expect our cost of goods sold related to these types of engagements to approximate 20% of revenues associated with those engagements.
We expect to increase development programming and support labor costs on an absolute basis as our trial revenues increase. We expect our cost of goods sold to return to the 20% to 22% range we have historically experienced as we expand the number of licenses we deploy and service since we expect cost of sales from licensed engagements to fall in the 20% range as that business model matures. We expect to continue to increase follow-on engagements from existing clients and expect to increase the phase I and CRO portions of our client base. TrialMaster (V4.0) increased the efficiency of our trial building operations by approximately 20% through the use of additional automated tools, the ability to use our library of pre-existing CRFs and through the use of our drag and drop clinical trial building tool. We have begun our business development efforts in commercializing the Acquired Software. We expect to primarily sell those products as licensed products providing further basis to our cost of goods sold estimates. At least initially we expect the costs to deploy TrialOne to exceed our long-term estimates as we develop and refine our installation, validation, and training procedures.
Overall, total operating expenses increased approximately 20.2% for the nine month period ended September 30, 2010 when compared to the nine month period ended September 30, 2009. The increase in operating expenses can be attributed to managing the operations associated with our acquisitions of the EDC assets of eResearch Technology, Inc. and Logos Technologies, Ltd. during 2009. Total operating expenses were approximately 128.2% of revenues during the nine month period ended September 30, 2010 compared to approximately 144.6% of revenues for the nine month period ended September 30, 2009.
Salaries and related expenses were our biggest operating expense at 68.1% of total operating expenses for the nine month period ended September 30, 2010 and 70.1% of total operating expenses for the nine month period ended September 30, 2009. Salaries and related expenses increased approximately 16.7% for the nine month period ended September 30, 2010 when compared to the same period that ended September 30, 2009. The table below provides a summary of the significant components of salary and related expenses by primary cost category.
for the nine months ended | ||||||||||||||||
September 30, 2010 | September 30, 2009 | Change | % Change | |||||||||||||
OmniComm Corporate Operations |
$ | 5,089,212 | $ | 4,982,306 | $ | 106,906 | 2.1 | % | ||||||||
New Jersey Operations Office |
1,028,646 | 378,552 | 650,093 | 171.7 | % | |||||||||||
OmniComm Europe, GmbH |
944,785 | 729,299 | 215,486 | 29.5 | % | |||||||||||
OmniComm Ltd. |
388,550 | 64,762 | 323,788 | 500.0 | % | |||||||||||
Employee Stock Option Expense |
466,196 | 630,969 | (164,773 | ) | -26.1 | % | ||||||||||
Total Salaries and related expenses |
$ | 7,917,389 | $ | 6,785,888 | $ | 1,131,500 | 16.7 | % | ||||||||
We currently employ approximately 54 employees out of our Ft. Lauderdale, Florida corporate office, 14 employees out of our New Jersey field office, seven out-of-state employees, five employees out of a wholly-owned subsidiary in the United Kingdom and 15 employees out of a wholly-owned subsidiary in Bonn, Germany. We expect to continue to selectively add, experienced sales and marketing personnel over the next 6 months in an effort to increase our market penetration, particularly as it relates to the largest pharmaceutical, biotechnology and CRO
34
customers and to continue broadening our client base domestically as well as in Europe. In addition we expect to increase R & D personnel as we continue our efforts to integrate an end-to-end solution comprised of our three primary eClinical solutions: TrialMaster; TrialOne; and eClinical Suite.
During the nine month period ended September 30, 2010 and the nine month period ended September 30, 2009 we incurred $466,196 and $630,969, respectively, in salary expense in connection with our adoption of SFAS No. 123(R), Share-Based Payment as codified in Accounting Standard Codification 718 Compensation Stock Compensation, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.
Rent and related expenses increased by approximately 37.8% during the nine month period ended September 30, 2010 when compared to the nine month period ended September 30, 2009. The table below details the significant portions of our rent expense. In particular the increase in 2010 is associated with the additions of our offices in New Jersey and in the UK from our 2009 acquisitions. We established a disaster recovery site at a Cincinnati Bell owned Co-Location facility in Cincinnati, Ohio and will continue utilizing this facility for the foreseeable future since it is designed to ensure 100% production system up-time and to provide system redundancy. We lease a co-location and disaster recovery space in the Ft. Lauderdale, Florida area. This facility provides us with disaster recovery and business continuity services for our operations. This lease expires in August 2011. We currently lease office space in Bonn, Germany for our European subsidiary, OmniComm Europe, GmbH. That lease expires in June 2011. We entered into a lease for office space in New Jersey in order to integrate our acquisition of the eResearch Assets during the third quarter of fiscal 2009. That office lease expires in February 2013. Our OmniComm Ltd. subsidiary entered into a lease for office space during the fourth quarter of 2009. That office lease expires in October 2012. During September 2010 we renewed our home office lease. That lease now extends through September 2016. The table below provides the significant components of our rent related expenses by location or subsidiary.
For the nine months ended |
||||||||||||||||
September 30, 2010 | September 30, 2009 | Change | % Change | |||||||||||||
Corporate Office |
$ | 212,487 | $ | 218,040 | ($ | 5,552 | ) | -2.5 | % | |||||||
Co location and disaster recovery facilities |
277,451 | 151,239 | 126,212 | 83.5 | % | |||||||||||
New Jersey Operations Office |
52,849 | 81,666 | (28,817 | ) | -35.3 | % | ||||||||||
OmniComm Europe, GmbH |
64,724 | 48,380 | 16,344 | 33.8 | % | |||||||||||
OmniComm Ltd. |
52,734 | 14,843 | 37,891 | 255.28 | % | |||||||||||
Straight-line rent expense |
48,131 | 0 | 48,131 | n/m | ||||||||||||
Total |
$ | 708,376 | $ | 514,168 | $ | 146,077 | 28.4 | % | ||||||||
Consulting services expense increased to $404,848 for the nine month period ended September 30, 2010 compared with $124,455 for the nine month period ended September 30, 2009. Consulting services were comprised of fees paid to consultants for help with developing our computer applications, fees incurred as part of our employee recruiting programs and for services related to our sales and marketing efforts. The table provided below provides the significant components of the expenses incurred related to consulting services. Consulting fees were higher during the first nine months of fiscal 2010 as we contracted with third-party sources for portions of our product development work. We do not expect this trend to continue during fiscal 2011.
35
For the nine months ended |
||||||||||||||||
Expense Category |
September 30, 2010 | September 30, 2009 | Change | % Change | ||||||||||||
Employee Recruitment |
$ | 30,000 | $ | 65,970 | $ | (35,970 | ) | -54.5 | % | |||||||
Sales & Marketing |
174,460 | 17,406 | 157,054 | N/M | ||||||||||||
Product Development |
200,388 | 41,079 | 159,305 | 287.8 | % | |||||||||||
$ | 404,848 | $ | 124,455 | $ | 280,389 | 225.3 | % | |||||||||
Legal and professional fees decreased approximately 44.5% for the nine month period ended September 30, 2010 compared with the nine month period ended September 30, 2009. Professional fees include fees paid to our auditors for services rendered on a quarterly and annual basis in connection with our SEC filings and fees paid to our attorneys in connection with representation in matters involving litigation or for services rendered to us related to securities and SEC related matters. During 2010 legal and professional fees decreased. This is due to significant legal fees we incurred during 2009 on acquisition related legal fees. The table below compares the significant components of our legal and professional fees for the nine month periods ended September 30, 2010 and September 30, 2009, respectively.
For the nine months ended |
||||||||||||||||
Expense Category |
September 30, 2010 | September 30, 2009 | Change | % Change | ||||||||||||
Financial Advisory |
$ | 63,736 | $ | 129,813 | $ | (66,077 | ) | -50.9 | % | |||||||
Audit and Related |
80,142 | 64,665 | 15,477 | 23.9 | % | |||||||||||
Accounting Services |
50,857 | 40,668 | 10,189 | 25.1 | % | |||||||||||
HR Consulting |
-0- | 22,100 | (22,100 | ) | -100.0 | % | ||||||||||
Acquisition Related |
-0- | 53,160 | (53,160 | ) | -100.0 | % | ||||||||||
Miscellaneous |
22,865 | 56,412 | (33,547 | ) | -59.5 | % | ||||||||||
General Legal |
45,779 | 107,419 | (61,640 | ) | -57.4 | % | ||||||||||
$ | 263,379 | $ | 474,237 | $ | (210,858 | ) | -44.5 | % | ||||||||
Selling, general and administrative expenses (SGA) increased approximately 4.8% for the nine month period ended September 30, 2010 compared to the nine month period ended September 30, 2009. During the nine month period ended September 30, 2010 we recorded $207,121 in license fees associated with our license agreement with DataSci, LLC compared to $288,988 during the nine month period ended September 30, 2009. We accrued $50,000 in conjunction with a software licensing matter with the Business Software Alliance related to our use of several Microsoft® software products. We recorded a license fee of $44,987 relating to a license agreement with Logos Holdings, Ltd. Relating to certain clients we acquired as part of our acquisition of Logos Technologies, Ltd. In August 2009. In addition, SGA expenses relate primarily to costs incurred in running our offices in Fort Lauderdale, New Jersey, Lymington, England and Bonn, Germany on a day-to-day basis and other costs not directly related to other captioned items in our income statement. SGA include the cost of office equipment and supplies, the costs of attending conferences and seminars and other expenses incurred in the normal course of business. The Company decreased its marketing, sales and advertising expenditures by approximately 11.2% or $23,179 for the nine month period ended September 30, 2010 compared to the nine month period ended September 30, 2009. The decrease relates primarily to amounts spent on our participation in industry trade shows and conferences. During 2010 we expect the amount spent on general corporate marketing to roughly approximate the amounts spent during fiscal 2009. We expect to have expenditures related to our corporate website, customer marketing materials, branding related activities and for materials related to the commercialization of our TrialOne software application.
36
During the nine month period ended September 30, 2010 we incurred $13,954 in bad debt expense compared to $143,794 for the nine month period ended September 30, 2009. We understand that during 2009, our existing base of TrialMaster clients, which is primarily comprised of small, U.S.-based biotechnology firms, experienced significant problems in obtaining working capital and R & D funding. During the year ended December 31, 2009 seven of our clients either ceased operations or severely curtailed their work with us. We have seen evidence during late 2009 of increased activity in general and believe that our current allowance for uncollectible accounts accurately reflects any accounts which may prove uncollectible during fiscal 2010.
Interest expense was $2,886,743 during the nine month period ended September 30, 2010 compared to $1,950,721 for the nine month period ended September 30, 2009, an increase of $936,022. Interest incurred to related parties was $879,699 during the nine month period ended September 30, 2010 and $612,104 for the nine month period ended September 30, 2009. Included in interest expense for both periods is the accretion of discounts recorded related to financial instrument derivatives that were deemed a part of the financings we undertook in fiscal 2008 and 2009. The table below provides detail on the significant components of interest expense for the nine month periods ended September 30, 2010 and September 30, 2009.
Interest Expense for the Nine Months Ended
Debt Description | September 30, 2010 | September 30, 2009 | Change $ | |||||||||
Accretion of Discount from Derivatives |
$ | 1,928,926 | $ | 1,283,374 | $ | 645,552 | ||||||
August 2008 Convertible Notes |
169,783 | 169,784 | (1 | ) | ||||||||
December 2008 Convertible Notes |
455,244 | 455,499 | (255 | ) | ||||||||
Sept 2009 Secured Convertible Debentures |
125,656 | -0- | 125,656 | |||||||||
Dec 2009 Convertible Debentures |
133,733 | -0- | 133,733 | |||||||||
General Interest |
22,646 | 42,065 | (19,419 | ) | ||||||||
Related Party Notes from fiscal 2010 |
50,755 | -0- | 50,755 | |||||||||
Total |
$ | 2,886,743 | $ | 1,950,721 | $ | 936,022 | ||||||
We evaluate the cost of capital available to us in combination with our overall capital structure and the prevailing market conditions in deciding what financing best fulfills our short and long-term capital needs. Given the difficult overall economic climate and in particular the difficulties nano-cap companies have experienced in obtaining financing, we believe the structure and terms of the transactions we entered into during 2008 and 2009 were obtained at the best terms available to the Company. During the nine month period ended September 30, 2010 we issued $2,260,000 in Promissory Notes to our Chief Executive Officer and Director, Mr. Cornelis Wit.
We recorded unrealized gains on derivative liabilities associated with the issuance of convertible debt that occurred during fiscal 2008 and 2009. We recorded a net unrealized gain of $4,260,594 during the nine month period ended September 30, 2010 compared with a net unrealized gain of $2,349,194 during the nine month period ended September 30, 2009. The unrealized gains can be attributed to fair value calculations undertaken periodically on the warrant and conversion feature liabilities (discounts) recorded by us at the time the convertible debt was issued. Accordingly the warrant and conversion feature liabilities are increased or decreased based on the fair value calculations made at each balance sheet date. These non-cash gains have materially impacted our results of operations during the nine month period ended September 30, 2010 and during fiscal 2009 and 2008 and can be reasonably anticipated to materially affect our net loss or net income in future periods. We are, however, unable to estimate the amount of such income/expense in future periods as the income/expense is partly based on the market price of our common stock at the end of a future measurement date. In addition, in the future if we issue securities which are classified as derivatives we will incur expense and income items in future periods. Investors are cautioned to consider the impact of this non-cash accounting treatment on our financial statements.
37
There were arrearages of $153,851 in 5% Series A Preferred Stock dividends for the nine month period ended September 30, 2010, compared with arrearages of $153,850 in 5% Series A Preferred Stock dividends for the nine month period ended September 30, 2009.
The Three-Month Period-ended September 30, 2010 compared with the Three-Month Period ended September 30, 2009
Results of Operations
A summarized version of our results of operations for the three-month periods ended September 30, 2010 and September 30, 2009 is included in the table below.
38
Summarized Statement of Operations
For the three months ended September 30, | ||||||||||||||||||||||||
2010 | % of Revenues |
2009 | % of Revenues |
$ Change | % Change |
|||||||||||||||||||
Total revenues |
$ | 3,168,806 | $ | 2,461,464 | $ | 707,342 | 28.7 | % | ||||||||||||||||
Cost of sales |
475,069 | 15.0 | % | 450,690 | 18.3 | % | 24,379 | 5.4 | % | |||||||||||||||
Gross margin |
2,693,737 | 85.0 | % | 2,010,774 | 81.7 | % | 682,963 | 34.0 | % | |||||||||||||||
Salaries, benefits and related taxes |
2,495,741 | 78.8 | % | 2,497,681 | 101.5 | % | (1,940 | ) | -0.1 | % | ||||||||||||||
Rent |
273,567 | 8.6 | % | 239,337 | 9.7 | % | 34,230 | 14.3 | % | |||||||||||||||
Consulting |
112,471 | 3.5 | % | 35,124 | 1.4 | % | 77,347 | 220.2 | % | |||||||||||||||
Legal and professional fees |
79,314 | 2.5 | % | 237,358 | 9.6 | % | (158,044 | ) | -66.6 | % | ||||||||||||||
Other expenses |
452,926 | 14.3 | % | 501,961 | 20.4 | % | (49,035 | ) | -9.8 | % | ||||||||||||||
Selling, general and administrative |
216,674 | 6.8 | % | 253,614 | 10.3 | % | (36,940 | ) | -14.6 | % | ||||||||||||||
Total operating expenses |
3,630,694 | 114.6 | % | 3,765,075 | 153.0 | % | (134,381 | ) | -3.6 | % | ||||||||||||||
Operating (loss) |
(936,957 | ) | -29.6 | % | (1,754,301 | ) | -71.3 | % | 817,344 | -46.6 | % | |||||||||||||
Interest expense |
(930,642 | ) | -29.4 | % | (658,546 | ) | -26.8 | % | (272,096 | ) | 41.3 | % | ||||||||||||
Interest income |
0 | 0.0 | % | 96 | 0.0 | % | (96 | ) | -99.5 | % | ||||||||||||||
Unrealized gain on derivatives |
776,945 | 24.5 | % | (605,399 | ) | -24.6 | % | 1,382,344 | -228.3 | % | ||||||||||||||
Net income (loss) |
(1,090,654 | ) | -34.4 | % | (3,018,150 | ) | -122.6 | % | 1,927,495 | -63.9 | % | |||||||||||||
Total preferred stock dividends |
(51,847 | ) | -1.6 | % | (51,847 | ) | -2.1 | % | | 0.0 | % | |||||||||||||
Net income (loss) attributable to common stockholders |
$ | (1,142,501 | ) | -36.1 | % | $ | (3,069,997 | ) | -124.7 | % | $ | 1,927,495 | -62.8 | % | ||||||||||
Net income (loss) per share |
$ | (0.01 | ) | $ | (0.04 | ) | ||||||||||||||||||
Weighted average number of shares outstanding |
85,507,699 | 85,252,194 | ||||||||||||||||||||||
Revenues for the three-month period ended September 30, 2010 increased approximately 28.7% from the three-month period ended September 30, 2009. The table below provides a comparison of our recognized revenues for the three-month periods ended September 30, 2010 and September 30, 2009.
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For the three months ended | ||||||||||||||||||||||||
Business Activity | September 30, 2010 | September 30, 2009 | Increase $ | Increase % | ||||||||||||||||||||
Set-up Fees |
$ | 1,125,005 | 35.5 | % | $ | 1,052,566 | 42.8 | % | $ | 72,439 | 6.9 | % | ||||||||||||
Change Orders |
44,086 | 1.4 | % | 47,460 | 1.9 | % | (3,374 | ) | -7.1 | % | ||||||||||||||
Maintenance |
1,119,923 | 35.3 | % | 771,648 | 31.3 | % | 348,275 | 45.1 | % | |||||||||||||||
Software Licenses |
513,307 | 16.2 | % | 83,267 | 3.4 | % | 430,040 | 516.5 | % | |||||||||||||||
Professional Services |
109,643 | 3.5 | % | 185,123 | 7.5 | % | (75,480 | ) | -40.8 | % | ||||||||||||||
Hosting & Subscriptions |
256,842 | 8.1 | % | 321,400 | 13.1 | % | (64,558 | ) | -20.1 | % | ||||||||||||||
Totals |
3,168,806 | 100.0 | % | $ | 2,461,464 | 100.0 | % | $ | 707,342 | 28.7 | % | |||||||||||||
We recorded $1,115,706 in revenues associated with clients with our acquisition of the eResearch Technology eClinical software application suite (eClinical) during the three-month period ended September 30, 2010. We recorded $76,954 in revenues associated with clients with our acquisition of the Logos Technologies EDC assets during the three-month period ended September 30, 2010. We have rebranded these assets under the TrialOne tradename. We are still in the process of commercializing and developing our sales and marketing campaign for the TrialOne application.
Revenues from our TrialMaster ASP service fees and maintenance from existing TrialMaster clients increased by $398,633 or 25.2%. During 2009 our primary customer base prior to our acquisitions, which consisted primarily of small, U.S.-based biotechnology firms, dramatically reduced the level of clinical trials they were conducting. Many of these firms are pre-revenue and as we understand are reliant on the capital markets for working capital and R & D funding. With the difficult economic climate experienced beginning in late 2008 and continuing through the present we believe that many of these firms either reduced or completely curtailed their R & D activities either because of a lack of capital or in order to conserve their cash reserves. We saw evidence during late 2009 and during the first half of 2010 of increased activity from these clients but have not seen a complete recovery of this market segments R & D spending.
We recorded $408,911 in revenues from our licensing activity and $83,862 from professional services associated with TrialMaster suite during the three-month period ended September 30, 2010 compared with $83,267 and $65,233, respectively, during the three-month period ended September 30, 2009. The amounts relating to fiscal 2009 activity are associated with the sale and installation of the TrialMaster application suite to one client. We expect revenues from both activities to increase for several reasons. First, we see significant activity in the CRO market relating to infrastructure investing. Second, we have entered into a contract with Kendle International for them to license our TrialMaster application. Third, new sales of our eClinical application and all future sales of the TrialOne application will be made on a licensed basis.
We recorded $236,425 in revenues from hosting and subscriptions activities and $25,779 in consulting services associated with the eClinical suite for the three-month period ended June30, 2010 compared with $321,400 and $119,890, respectively during the three-month period ended September 30, 2009. Generally, these revenues are paid quarterly and are connected to hosting, maintenance and client support for clients licensing that application.
Our TrialMaster EDC application has historically been sold on an application service provider (ASP) basis that provides EDC and other services such as an enterprise management suite which assists our clients in the pharmaceutical, biotechnology and medical device industries in accelerating the completion of clinical trials. During 2009, as discussed earlier, we completed the acquisition of the eResearch EDC Assets and the Logos EDC Assets (the Acquired Software). Both software applications have historically been sold on a licensed or technology transfer basis. As we continue developing our software applications and our client relationships mature, we expect
40
some of our clients to deploy TrialMaster on a licensed, rather than ASP hosted basis. We expect both Acquired Software applications to continue to be sold primarily on a licensed basis. TrialMaster contracts for ASP services provide for pricing that is based on both the size and duration of the clinical trial. Size parameters include the number of case report forms used to collect data and the number of sites utilizing TrialMaster. 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, ASP contracts will range in duration from one month to several years. ASP Setup fees are generally earned prior to the inception of a trial, however, the revenues will be recognized in accordance with Accounting Standards Codification 605 (ASC 605) Revenue Recognition, which requires that the revenues be recognized ratably over the life of the contract. ASP maintenance fee revenues are earned and recognized monthly. Costs associated with contract revenues are recognized as incurred.
Beginning in late 2008 we began selling our core TrialMaster product on a licensed basis. Beginning with the third fiscal quarter of 2009 we have experienced greater success in selling that product on a licensed basis. The EDC assets acquired from eResearch Technology and Logos Technologies are primarily sold on a licensed basis. License contracts are typically sold on a subscription basis that takes into account system usage both on a data volume and system user basis. Pricing includes additional charges for deployment of our eClincial software and solutions. Licensed contracts of the eClinical suite have historically been sold on a perpetual license basis with hosting and maintenance charges being paid annually. The Company expects any licenses it sells of its software products to be sold in three to five year term licenses.
Our top five customers accounted for approximately 40.6% of our revenues during the three-month period ended September 30, 2010 and approximately 47.4% of our revenues during the three-month period ended September 30, 2009. One customer accounted for 19.1% of our revenues during the three-month period ended September 30, 2010. One customer accounted for 27.5% of our revenues during the three-month period ended September 30, 2009. The loss of any of these contracts or these customers in the future could adversely affect our results of operations.
Cost of goods sold increased approximately 5.4% or $24,379 for the three-month period ended September 30, 2010 as compared to the three-month period ended September 30, 2009. Cost of goods sold were approximately 15.0% of revenues for the three-month period ended September 30, 2010 compared to approximately 18.3% for the three-month period ended September 30, 2009. Cost of goods sold relates primarily to salaries and related benefits associated with the programmers, developers and systems analysts producing clinical trials on behalf of our clients. Cost of goods sold decreased during the three-month period ended September 30, 2010 due to a decrease in salary related costs associated with the delivery of TrialMaster ASP projects of $50,507 offset by an increase of approximately $118,501 for costs associated with salary and related costs associated with the delivery and support of our eClinical suite and a decrease of $13,618 in costs associated with third-party services associated with the delivery of our application to customers. Although our experience to-date in licensing and deploying TrialMaster on a technology transfer or licensed basis has been limited, we expect our cost of goods sold related to these types of engagements to approximate 20% of revenues associated with those engagements.
We expect to increase development programming and support labor costs on an absolute basis as our trial revenues increase. We expect our cost of goods sold to stabilize to the 20% to 22% range as we expand the number of licenses we deploy and service since we expect cost of sales from licensed engagements to fall in the 20% range as that business model matures. We expect to continue to increase follow-on engagements from existing clients and expect to increase the phase I and CRO portions of our client base. TrialMaster (V4.0) increased the efficiency of our trial building operations by approximately 20% through the use of additional automated tools, the ability to use our library of pre-existing CRFs and through the use of our drag and drop clinical trial building tool. We have begun our business development efforts in commercializing the Acquired Software. We expect to primarily sell those products as licensed products providing further basis to our cost of goods sold estimates.
Overall, total operating expenses decreased approximately 1.5% for the three-month period ended September 30, 2010 when compared to the three-month period ended September 30, 2009. The increase in operating expenses can
41
be attributed to managing the operations associated with our acquisitions of the EDC assets of eResearch Technology, Inc. and Logos Technologies, Ltd. during 2009. Total operating expenses were approximately 117.0% of revenues during the three-month period ended September 30, 2010 compared to approximately 153.0% of revenues for the three-month period ended September 30, 2009.
Salaries and related expenses were our biggest operating expense at 67.3% of total operating expenses for the three-month period ended September 30, 2010 and 66.3% of total operating expenses for the three-month period ended September 30, 2009. Salaries and related expenses decreased approximately 0.1% for the three-month period ended September 30, 2010 when compared to the same period that ended September 30, 2009. The table below provides a summary of the significant components of salary and related expenses by primary cost category.
for the three months ended | ||||||||||||||||
September 30, 2010 | September 30, 2009 | Change | % Change | |||||||||||||
OmniComm Corporate Operations |
$ | 1,621,885 | $ | 1,580,969 | $ | 40,915 | 2.6 | % | ||||||||
New Jersey Operations Office |
311,863 | 344,293 | (32,431 | ) | -9.4 | % | ||||||||||
OmniComm Europe, GmbH |
312,435 | 265,055 | 47,380 | 17.9 | % | |||||||||||
OmniComm Ltd. |
141,043 | 64,762 | 76,281 | 117.8 | % | |||||||||||
Employee Stock Option Expense |
108,516 | 242,602 | (134,086 | ) | -55.3 | % | ||||||||||
Total Salaries and related expenses |
$ | 2,495,741 | $ | 2,497,681 | $ | (1,940 | ) | -0.1 | % | |||||||
During the three-month period ended September 30, 2009 and the three-month period ended September 30, 2010 we incurred $242,602 and $108,512, respectively, in salary expense in connection with our adoption of SFAS No. 123(R), Share-Based Payment as codified in Accounting Standard Codification 718 Compensation Stock Compensation, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.
Rent and related expenses increased by approximately 14.3% during the three-month period ended September 30, 2010 when compared to the three-month period ended September 30, 2009. The table below details the significant portions of our rent expense. In particular the increase in 2010 is associated with the additions of our offices in New Jersey and in the UK from our 2009 acquisitions. We established a disaster recovery site at a Cincinnati Bell owned Co-Location facility in Cincinnati, Ohio and will continue utilizing this facility for the foreseeable future since it is designed to ensure 100% production system up-time and to provide system redundancy. We lease a co-location and disaster recovery space in the Ft. Lauderdale, Florida area. This facility provides us with disaster recovery and business continuity services for our operations. This lease expires in August 2011. We currently lease office space in Bonn, Germany for our European subsidiary, OmniComm Europe, GmbH. That lease expires in June 2011. We entered into a lease for office space in New Jersey in order to integrate our acquisition of the eResearch Assets during the third quarter of fiscal 2009. That office lease expires in February 2013. Our OmniComm Ltd. subsidiary entered into a lease for office space during the fourth quarter of 2009. That office lease expires in October 2012. In September 2010 we extended our home office lease through September 2016. The table below provides the significant components of our rent related expenses by location or subsidiary.
42
For the three months ended |
||||||||||||||||
September 30, 2010 | September 30, 2009 | Change | % Change | |||||||||||||
Corporate Office |
$ | 75,889 | $ | 77,230 | ($ | 1,341 | ) | -1.7 | % | |||||||
Co location and disaster recovery facilities |
86,707 | 41,330 | 45,377 | 109.8 | % | |||||||||||
New Jersey Operations Office |
18,997 | 81,666 | -62,669 | -76.7 | % | |||||||||||
OmniComm Europe, GmbH |
21,488 | 24,268 | 2,780 | -11.5 | % | |||||||||||
OmniComm Ltd. |
22,355 | 14,843 | 7,513 | 50.61 | % | |||||||||||
Straight-line rent expense |
48,131 | 0 | 48,131 | n/m | ||||||||||||
Total |
$ | 273,567 | $ | 239,338 | $ | 34,230 | 14.3 | % | ||||||||
Consulting services expense increased to $112,471 for the three-month period ended September 30, 2010 compared with $35,214 for the three-month period ended September 30, 2009. Consulting services were comprised of fees paid to consultants for help with developing our computer applications, fees incurred as part of our employee recruiting programs and for services related to our sales and marketing efforts. The table provided below provides the significant components of the expenses incurred related to consulting services. Consulting fees were higher during the fiscal 2010 period as compared with fiscal 2009 as we contracted with third-party sources for portions of our product development work. We do not expect this trend to continue during fiscal 2011.
For the three months ended |
||||||||||||||||
Expense Category |
September 30, 2010 | September 30, 2009 | Change | % Change | ||||||||||||
Employee Recruitment |
$ | -0- | $ | 8,970 | $ | (8,970 | ) | -100.0 | % | |||||||
Sales & Marketing |
64,438 | 17,406 | 47,032 | 270.2 | % | |||||||||||
Product Development |
48,033 | 8,748 | 39,282 | 349.0 | % | |||||||||||
$ | 112,471 | $ | 35,124 | $ | 77,344 | 220.2 | % | |||||||||
Legal and professional fees decreased approximately 66.6% for the three-month period ended September 30, 2010 compared with the three-month period ended September 30, 2009. Professional fees include fees paid to our auditors for services rendered on a quarterly and annual basis in connection with our SEC filings and fees paid to our attorneys in connection with representation in matters involving litigation or for services rendered to us related to securities and SEC related matters. The table below compares the significant components of our legal and professional fees for the three-month periods ended September 30, 2010 and September 30, 2009, respectively.
For the three months ended |
||||||||||||||||
Expense Category | September 30, 2010 | September 30, 2009 | Change | % Change | ||||||||||||
Financial Advisory |
$ | -0- | $ | 84,814 | $ | (84,814 | ) | 100.0 | % | |||||||
Audit and Related |
49,658 | $ | 36,324 | 13,334 | 36.7 | % | ||||||||||
Accounting Services |
14,558 | $ | 531 | 14,027 | 2643.7 | % | ||||||||||
HR Consulting |
-0- | 22,100 | (22,100 | ) | -100.0 | % | ||||||||||
Acquisition Related |
-0- | 53,160 | (53,160 | ) | -100.0 | % | ||||||||||
Miscellaneous |
12,627 | $ | 43,988 | (31,361 | ) | -71.3 | % | |||||||||
General Legal |
2,471 | (3,559 | ) | 6,030 | -169.4 | % | ||||||||||
$ | 79,314 | $ | 237,358 | $ | (158,044 | ) | -66.6 | % | ||||||||
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Selling, general and administrative expenses (SGA) decreased approximately 14.6% for the three-month period ended September 30, 2010 compared to the three-month period ended September 30, 2009. During the three-month period ended September 30, 2010 we recorded $81,342 in license fees associated with our license agreement with DataSci, LLC compared to $86,365 during the three-month period ended September 30, 2009. We incurred $50,000 in conjunction with a software licensing matter with the Business Software Alliance. We recorded a license fee of $44,987 relating to a license agreement with Logos Holdings, Ltd. Relating to certain clients we acquired as part of our acquisition of Logos Technologies, Ltd. In August 2009. In addition, SGA expenses relate primarily to costs incurred in running our offices in Fort Lauderdale, New Jersey, Lymington, England and Bonn, Germany on a day-to-day basis and other costs not directly related to other captioned items in our income statement. SGA include the cost of office equipment and supplies, the costs of attending conferences and seminars and other expenses incurred in the normal course of business. The Company decreased its marketing, sales and advertising expenditures by approximately 61.5% for the three-month period ended September 30, 2010 compared to the three-month period ended September 30, 2009. This decrease was primarily related to industry and trade conference spending. During 2010 we expect to increase the aggregate amount spent on general corporate marketing as compared to fiscal 2009. We expect to have expenditures related to our corporate website, customer marketing materials, branding related activities and for materials related to the commercialization of our TrialOne software application.
During the three-month period ended September 30, 2010 we did not record any bad debt expense compared to $128,053 for the three-month period ended September 30, 2009. We understand that during 2009, our existing base of TrialMaster clients, which is primarily comprised of small, U.S.-based biotechnology firms, experienced significant problems in obtaining working capital and R & D funding. During the year ended December 31, 2009 seven of our clients either ceased operations or severely curtailed their work with us. We have seen evidence during late 2009 of increased activity in general and believe that our current allowance for uncollectible accounts accurately reflects any accounts which may prove uncollectible during fiscal 2010.
Interest expense was $930,602 during the three-month period ended September 30, 2010 compared to $651,082 for the three-month period ended September 30, 2009, an increase of $272,096. Interest incurred to related parties was $318,415 during the three-month period ended September 30, 2010 and $213,528 for the three-month period ended September 30, 2009. Included in interest expense for both periods is the accretion of discounts recorded related to financial instrument derivatives that were deemed a part of the financings we undertook in fiscal 2008 and 2009. The table below provides detail on the significant components of interest expense for the three month periods ended September 30, 2010 and September 30, 2009.
Interest Expense For the Three Months Ended |
||||||||||||
Debt Description |
September 30, 2010 | September 30, 2009 | Change $ | |||||||||
Accretion of Discount from Derivatives |
$ | 585,973 | $ | 427,791 | $ | 158,182 | ||||||
August 2008 Convertible Notes |
57,216 | 57,216 | 0 | |||||||||
December 2008 Convertible Notes |
153,247 | 153,501 | -254 | |||||||||
Sept 2009 Secured Convertible Debentures |
42,345 | -0- | 42,345 | |||||||||
Dec 2009 Convertible Debentures |
45,067 | -0- | 45,067 | |||||||||
General Interest |
7,801 | 12,574 | -4,773 | |||||||||
Related Party Debt From 2010 |
38,992 | -0- | 38,992 | |||||||||
Total |
$ | 930,642 | $ | 651,082 | $ | 279,559 | ||||||
We evaluate the cost of capital available to us in combination with our overall capital structure and the prevailing market conditions in deciding what financing best fulfills our short and long-term capital needs. Given the difficult overall economic climate and in particular the difficulties nano-cap companies have experienced in obtaining financing, we believe the structure and terms of the transactions we entered into during 2008 and 2009 were obtained at the best terms available to the Company. During the three-month period ended September 30, 2010 we issued $2,260,000 in Promissory Notes to our Chief Executive Officer and Director, Mr. Cornelis Wit.
44
We recorded unrealized gains on derivative liabilities associated with the issuance of convertible debt that occurred during fiscal 2008 and 2009. We recorded a net unrealized gain of $776,945 during the three-month period ended September 30, 2010 compared with a net unrealized loss of $605,399 during the three-month period ended September 30, 2009. The unrealized gains can be attributed to fair value calculations undertaken periodically on the warrant and conversion feature liabilities (discounts) recorded by us at the time the convertible debt was issued. Accordingly the warrant and conversion feature liabilities are increased or decreased based on the fair value calculations made at each balance sheet date. These non-cash gains have materially impacted our results of operations during the three-month period ended September 30, 2010 and during fiscal 2009 and 2008 and can be reasonably anticipated to materially affect our net loss or net income in future periods. We are, however, unable to estimate the amount of such income/expense in future periods as the income/expense is partly based on the market price of our common stock at the end of a future measurement date. In addition, in the future if we issue securities which are classified as derivatives we will incur expense and income items in future periods. Investors are cautioned to consider the impact of this non-cash accounting treatment on our financial statements.
There were arrearages of $51,847 in 5% Series A Preferred Stock dividends for the three-month period ended September 30, 2010, compared with arrearages of $51,847 in 5% Series A Preferred Stock dividends for the three-month period ended September 30, 2009. We deducted $51,847 and $51,847 from Net Income (Loss) Attributable to Common Stockholders for the three-month periods that ended September 30, 2010 and September 30, 2009, respectively, relating to undeclared Series A Convertible Preferred Stock dividends.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash. We have historically experienced negative cash flows and have relied on the proceeds from the sale of debt and equity securities to fund our operations. In addition, we have utilized stock-based compensation as a means of paying for consulting and salary related expenses.
The table provided below summarizes key measures of our liquidity and capital resources:
Liquidity and Capital Resources |
||||||||||||
(all amounts in USD $) | ||||||||||||
Summarized Balance Sheet Disclosure | ||||||||||||
September 30, 2010 | December 31, 2009 | Change | ||||||||||
Cash |
$ | 29,942 | $ | 60,352 | $ | (30,410 | ) | |||||
Accounts Receivable, net of allowance for doubtful accounts |
729,906 | 587,119 | 142,787 | |||||||||
Current Assets |
912,312 | 886,535 | 25,777 | |||||||||
Accounts Payable and accrued expenses |
1,976,598 | 1,548,215 | 428,382 | |||||||||
Bank overdraft |
125,926 | -0- | 125,926 | |||||||||
Notes payable, current portion |
111,800 | 111,800 | -0- | |||||||||
Notes payable, related parties, current portion |
137,500 | -0- | 137,500 | |||||||||
Patent litigation settlement liability, current portion |
736,837 | 627,810 | 109,027 | |||||||||
Deferred revenue, current portion |
3,448,472 | 2,048,305 | 1,400,167 | |||||||||
Convertible notes payable, current portion, net of discount |
814,562 | 402,777 | 411,785 | |||||||||
Convertible notes payable, related parties, current portion, net of discount |
3,869,969 | -0- | 3,869,969 | |||||||||
Warrant liability, related parties |
234,917 | 1,977,402 | (1,742,485 | ) | ||||||||
Warrant liability |
73,941 | 760,791 | (686,850 | ) | ||||||||
Current liabilities |
11,565,458 | 7,541,722 | 4,023,736 | |||||||||
Working Capital (Deficit) |
$ | (10,653,146 | ) | $ | (6,655,186 | ) | $ | (3,997,959 | ) |
45
Statement of Cash Flows Disclosure for the nine months ended |
||||||||
September 30, 2010 | September 30, 2009 | |||||||
Net cash (used in) operating activities |
$ | (2,101,476 | ) | $ | (3,635,658 | ) | ||
Net cash (used in) provided by investing activities |
(281,380 | ) | 851,757 | |||||
Net cash provided by financing activities |
2,385,926 | 1,027,500 |
Cash and Cash Equivalents
Cash and cash equivalents decreased by $30,410 at September 30, 2010. The decrease is comprised of an operating loss of $2,394,756, and a decrease from non-cash transactions of $1,117,226 offset by changes in working capital accounts of $1,410,506. We had investing activities comprised of purchases of property and equipment of $281,380. During the nine month period ended September 30, 2010 we raised $2,260,000 in promissory notes and a had a bank overdraft of $125,926.
Capital Expenditures
We are not currently bound by any long or short-term agreements for the purchase or lease of capital expenditures. Any amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately service any increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future.
Presently, we have approximately $250,000 planned for capital expenditures to further develop the Companys infrastructure to allow for growth in our operations over the next 12 months. We expect to fund these capital expenditure needs through a combination of vendor-provided financing, the use of operating or capital equipment leases and cash provided from operations.
46
Contractual Obligations
The following table sets forth our contractual obligations during the next five years as of September 30, 2010:
Contractual Obligations |
Payments Due by Period | |||||||||||||||||||
Total | Less than 1 year |
1-2 Years | 2-3 Years | 3-5 Years | ||||||||||||||||
Promissory Notes (1) |
$ | 2,509,300 | $ | 249,300 | (2) | $ | 2,260,000 | (3) | $ | -0- | $ | -0- | ||||||||
Convertible Notes |
10,310,000 | 3,410,000 | (4) | -0- | -0- | 6,900,000 | (5) | |||||||||||||
Operating Lease Obligations (6) |
2,009,780 | 653,369 | 325,623 | 320,607 | 710,181 | |||||||||||||||
Patent Licensing Fees (7) |
2,949,337 | 736,837 | 412,500 | 450,000 | 1,350,000 | |||||||||||||||
Total |
$ | 17,778,417 | $ | 5,049,506 | $ | 2,998,123 | $ | 770,607 | $ | 8,960,181 | ||||||||||
1. | Amounts do not include interest to be paid. |
2. | Includes $111,800 of 9% notes payable that mature in October 2010, $137,500 of 9% notes payable that mature in January 2011. |
3. | Includes $2,260,000 of 12% notes payable that mature in December 2011. |
4. | Includes $75,000 of 10% convertible notes currently in default and due that are convertible into shares of common stock at the option of the debenture holder at a conversion rate of $1.25 per share; $350,000 in 10% Convertible Notes that matures in August 2010 and $95,000 in 12% Convertible Notes that mature in December 2010; $1,400,000 in 12% Convertible Notes that mature in March 2011; and $1,490,000 in Convertible Notes that mature in June 2011. |
5. | Includes $1,920,000 in 10% Convertible Notes that mature in August 2013 and $4,980,000 in 12% Convertible Notes that mature in December 2013. |
6. | Includes office lease obligations for our headquarters in Fort Lauderdale, for our regional operating office in New Jersey, and R & D office in England and our European headquarters in Bonn, Germany and lease obligations for co-location and disaster recovery computer service centers in Cincinnati, Ohio and Fort Lauderdale, Florida. |
7. | Relates to guaranteed minimum payments owed in connection with our settlement of a patent infringement lawsuit brought against the Company by DataSci, LLC. |
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Debt Obligations
We are currently in arrears on principal and interest payments owed totaling $160,337 on our 10% Convertible Notes that were issued in 1998. We were in default effective January 30, 2002.
Effective August 30, 2010, the Company defaulted on principal payments totaling $350,000 on two Convertible Debentures originally issued in August 2008 with a maturity date of August 29, 2010. Unless the default is cured or waived by the investors, the defaulted notes will bear interest at the contractual default rate of 18% per annum. The two investors holding the outstanding convertible notes are long time investors in the Company and we are currently
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in negotiations to extend the maturity of the notes although there can be no assurance that the extension will be granted. We are currently in arrears on principal and interest payments owed totaling $423,164 on the Convertible Debentures.
During fiscal 2010, $111,800 in promissory notes and $445,000 in convertible notes originally issued in fiscal 2008 and 2009 will mature. The convertible notes are held by two long-term investors of the Company and by several officers or ex-senior managers of the Company. We expect to satisfy the convertible notes from working capital or will attempt to find funding at terms favorable to the Company to satisfy the convertible notes. There can be no assurance that any such funding will be available to us on favorable terms or at all. If adequate funds are not available when needed, we may be required to delay, scale back or eliminate some or all of our research and product development programs, and our business operations. If we are successful in obtaining additional financings, the terms of such financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our common and preferred stock or result in increased interest expense in future periods. Further, there can be no assurance that even if such additional capital is obtained or the planned cost reductions are implemented, that we will achieve positive cash flow or profitability or be able to continue as a business.
During the next twelve months we expect the following debt to mature: $75,000 of 10% convertible notes currently in default and due that are convertible into shares of common stock at the option of the debenture holder at a conversion rate of $1.25 per share; $350,000 in 10% Convertible Notes that matures in August 2010; $95,000 in 12% Convertible Notes that mature in December 2010; $1,400,000 in 12% Convertible Notes that mature in March 2011; and $1,490,000 in Convertible Notes that mature in June 2011.
Sources of Liquidity and Capital Resources
Because of the losses we have experienced from operations we have needed to continue utilizing the proceeds from the sale of debt and equity securities to fund our working capital needs. We have used a combination of equity financing, short-term bridge loans and long-term loans to fund our working capital needs, if any. Other than our current capital and capital we may raise from future debt or equity offerings or short-term bridge loans, we do not have any additional sources of working capital.
Since 2008 the Company has utilized the proceeds of convertible debentures and promissory notes to satisfy its working capital and capital expenditure needs. During 2008 and 2009 we issued $10,235,000 in convertible debentures that remain outstanding. Approximately 96% of those debentures were issued to officers, directors or significant senior managers of the Company, including debentures totaling $8,660,000 to our Chief Executive Officer. During 2010 we have issued $2,260,000 in promissory notes to our Chief Executive Officer.
We may continue to require substantial funds to continue our research and development activities and to market, sell and commercialize our technology. We may need to raise substantial additional capital to fund our future operations. Our capital requirements will depend on many factors, including the problems, delays, expenses and complications frequently encountered by companies developing and commercializing new technologies; the progress of our research and development activities; the rate of technological advances; determinations as to the commercial potential of our technology under development; the status of competitive technology; the establishment of collaborative relationships; the success of our sales and marketing programs; the cost of filing, prosecuting, defending and enforcing intellectual property rights; and other changes in economic, regulatory or competitive conditions in our planned business. Estimates about the adequacy of funding for our activities are based upon certain assumptions, including assumptions that the research and development programs relating to our technology can be conducted at projected costs and that progress towards broader commercialization of our technology will be timely and successful. There can be no assurance that changes in our research and development plans or other events will not result in accelerated or unexpected expenditures.
During the second half of 2010, the Company has made material changes to its cost structure including commitments for financial advisory and product development consulting arrangements. We have looked closely at staffing costs and attempted to ensure that our overall salary levels are structured around the current and projected business development and contract levels expected for the next 12 months.
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While the Company has not sought capital from venture capital or private equity sources we believe that those sources of capital remain available although possibly under terms and conditions that might be disadvantegous to existing investors.
To satisfy our capital requirements, including ongoing future operations, we may seek to raise additional financing through debt and equity financings. There can be no assurance that any such funding will be available to us on favorable terms or at all. If adequate funds are not available when needed, we may be required to delay, scale back or eliminate some or all of our research and product development programs, and our business operations. If we are successful in obtaining additional financings, the terms of such financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of our common and preferred stock. Further, there can be no assurance that even if such additional capital is obtained or the planned cost reductions are implemented, that we will achieve positive cash flow or profitability or be able to continue as a business.
During the nine month period ended September 30, 2010 we issued $2,260,000 in Promissory Notes to our Chief Executive Officer and Director, Mr. Cornelis Wit. The Notes bear interest at 12% per annum and mature on December 31, 2011. While several of our directors have historically, either personally or through funds with which they are affiliated, provided substantial capital either in the form of debt or equity financing there can be no assurance that they will continue to provide any such funding to us on favorable terms or at all.
Our ability to continue in existence is dependent on our having sufficient financial resources to bring products and services to market. As a result of our historical operating losses, negative cash flows and accumulated deficits for the periods ending September 30, 2010, there is substantial doubt about our ability to continue as a going concern. In addition, our former auditors Greenberg & Company, LLC, included language which qualified their opinion regarding our ability to continue as a going concern in their report dated February 12, 2010 regarding our audited financial statements for the year ended December 31, 2009.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. Note 2 of Notes to the Consolidated Financial Statements describes the significant accounting policies used in the preparation of the consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: 1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. In addition, our Management is periodically faced with uncertainties, the outcomes of which are not within our control and will not be known for prolonged periods of time. Based on a critical assessment of its accounting policies and the underlying judgments and uncertainties affecting the application of those policies, our Management believes that our consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States (GAAP), and present a meaningful presentation of our financial condition and results of operations.
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Our Management believes that the following are our critical accounting policies:
ASSET IMPAIRMENT
Asset Acquisitions and Intangible Assets
We account for asset acquisitions in accordance with ASC 350, Intangibles- Goodwill and Other. The acquisition method of accounting requires that assets acquired and liabilities assumed be recorded at their fair values on the date of an asset 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 assets 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, 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.
REVENUE RECOGNITION POLICY
OmniComms revenue model is transaction-based and can be implemented either as an ASP (application service provider) or licensed for implementation by a customer such as a pharmaceutical company. Revenues are derived from the set-up of clinical trial engagements; licensing arrangements, fees earned for hosting our clients data and projects, on-going maintenance fees incurred throughout the duration of an engagement; fees for report writing and project change orders. The clinical trials that are conducted using our EDC Applications can last from a few months to several years. Most of the fees associated with our product including post-setup customer support in the form of maintenance charges are recognized ratably over the term of clinical trial projects. Cost of sales is primarily comprised of programmer salaries and taxes and is expensed as incurred.
The Company recognizes sales, for both financial statement and tax purposes in accordance with SEC Staff Accounting Bulletin No. 104 Revenue Recognition in Financial Statements (SAB 104) (Codified within
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Accounting Standards Codification (ASC) Revenue Recognition ASC 605) and AICPA Statement of Position 97-2 (SOP 97-2) Software Revenue Recognition as amended by SOP 98-9 (Codified within ASC 605.985, Software Industry Revenue Recognition). SAB 104 requires that revenues be recognized ratably over the life of a contract. The Company will periodically record deferred revenues relating to advance payments in contracts. Under its licensing arrangement the Company recognizes revenue pursuant to SOP 97-2. Under these arrangements the Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer and/or delivery has occurred; (3) the collection of fees is probable; and (4) the fee is fixed or determinable. SOP 97-2, as amended, requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. We have analyzed each element in our multiple element arrangements and determined that we have sufficient vendor-specific objective evidence (VSOE) to allocate revenues to license updates and product support. License revenues are recognized on delivery if the other conditions of SOP 97-2 are satisfied. License updates and product support revenue is recognized ratably over the term of the arrangement. In arrangements where term licenses are bundled with license updates and product support and such revenue is recognized ratably over the term of the arrangement, we allocate the revenue to license revenue and to license updates and product support revenue based on the VSOE of fair value for license updates and product support revenue on perpetual licenses of similar products.
STOCK BASED COMPENSATION.
Beginning on January 1, 2006 we began accounting for stock options under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payments (SFAS 123(R)), (Codified within ASC 718, Compensation Stock Compensation) which requires the recognition of the fair value of equity-based compensation. The fair value of stock options on the date of grant was estimated using a Binomial option valuation model. This model requires the input of subjective assumptions in implementing SFAS 123(R), including expected stock price volatility, estimated life and estimated forfeitures of each award. The fair value of equity-based awards is amortized over the vesting period of the award, and we have elected to use the straight-line method of amortization. Prior to the implementation of SFAS 123(R), we accounted for stock options and ESPP shares under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In the first quarter of 2010, we adopted the following new accounting pronouncements:
On January 1, 2010, the Company implemented certain provisions of Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) Topic 810, Consolidation. The new provisions (a) require a qualitative rather than a quantitative approach to determining the primary beneficiary of a variable interest entity (VIE); (b) amend certain guidance pertaining to the determination of the primary beneficiary when related parties are involved; (c) amend certain guidance for determining whether an entity is a VIE; and (d) require continuous assessments of whether an enterprise is the primary beneficiary of a VIE. The implementation of this standard did not have an impact on the Companys results of operations or financial condition.
On January 1, 2010, the Company implemented certain provisions of Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820)Improving Disclosures about Fair Value Measurements (Update 2010-06). Update 2010-06 requires the Company to (a) provide information about movements of assets among Levels 1 and 2 of the three-tier fair value hierarchy; (b) provide a reconciliation of purchases, sales, issuance, and settlements of financial instruments valued with a Level 3 method; and (c) provide fair value measurement disclosures for each class of financial assets and liabilities. The implementation did not have an impact on the Companys results of operations or financial condition. Required disclosures for the reconciliation of purchases, sales, issuance and settlements of financial instruments valued with a Level 3 method are effective for the Company beginning on January 1, 2011 and the Company does not expect the implementation to have a material impact on the Companys results of operations or financial condition.
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In February 2010, the FASB issued Accounting Standards Update No. 2010-09. Amendments to Certain Recognition and Disclosure Requirements (ASU No. 2010-09). ASU No. 2010-09 amends FASB ASC Topic 855-10, Subsequent Events, to remove the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in both issued and revised financial statements. This change alleviates potential conflicts between ASC 855-10 and SECs requirements. The update did not have a material impact on the Companys consolidated results of operations or financial position.
In April 2010, FASB issued ASU No. 2010-17, Milestone Method of Revenue Recognition (ASU 2010-17), which provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. Research or development arrangements frequently include payment provisions whereby a portion or all of the consideration is contingent upon milestone events such as successful completion of phases in a study or achieving a specific result from the research or development efforts. The amendments in this ASU provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. ASU 2010-17 is effective for fiscal years and interim periods within those years beginning on or after June 15, 2010, with early adoption permitted. This ASU is effective for the Company on January 1, 2011. The Company is currently evaluating the impact, if any, ASU 2010-17 will have on its consolidated results of operations, financial position or liquidity.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Not applicable to smaller reporting companies.
ITEM 4T. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, for the period ended September 30, 2010, the Companys principal executive officer and principal financial officer concluded that the Companys disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act) were effective such that the information relating to the Company, including our consolidating subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act (1) was recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) was accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
As described in our Current Report filed on Form 8-K dated August 31, 2010, in August 2010 we determined that our financial statements for the year ended December 31, 2009 could not be relied upon because we determined that certain amounts recorded as customer receivables and deferred revenue, totaling $2,387,252, that were recorded at December 31, 2009 should instead have been recorded in January 2010. The receivables in question related to client contracts for on-going projects that, although long-term in nature, are considered executory contracts under existing generally accepted accounting principles (GAAP) since services are expected to be rendered on a go-forward basis. Given that this accounting treatment, the client billings should have been recorded as a receivable of the Company and in turn a deferred revenue obligation in the month the obligations are expected to be collected. Accordingly, our consolidated balance sheet at December 31, 2009 and our consolidated statement of cash flows for the year ended December 31, 2009 were restated to correct ending balances in accounts receivable and deferred revenue as of December 31, 2009. These corrections were included in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2009 which was filed with the Securities and Exchange Commission on October 5, 2010. In addition, the beginning balances on certain of our 2010 financial statements were also incorrect. These corrections were included in our Quarterly Report on Form 10-Q, as amended, for the quarter ended March 31, 2010 which was filed on November 3, 2010 and in our Quarterly Report on Form 10-Q, as amended, for the quarter ended June 30, 2010 which was filed on October 27, 2010.
During the period covered by this report, we enhanced our internal control procedures to ensure that our client receivables are properly recorded in accordance with GAAP. These changes include the deployment of a more sophisticated accounting and accounts receivable management software system that allows us to record invoices in our system in accordance with our normal billing practices while allowing us to record and recognize receivable with the applicable standards established under GAAP. In addition, our internal control policies, systems and tools all explicitly discuss the method under which client billings are to be recorded. These changes specifically addressed our internal control over the recording of accounts receivable and deferred revenues and the proper application of GAAP on the timing of the recording of these amounts. As a result of these enhanced internal control procedures, we have corrected the material weaknesses in our internal control over financial reporting which led to the restatements of our consolidated financial statements at December 31, 2009. Other than this change in our internal control over financial reporting, there have been no other changes in our internal control over financial reporting during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 1. | LEGAL PROCEEDINGS. |
None.
ITEM 1A. | RISK FACTORS. |
Not applicable for a smaller reporting company.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
Effective August 30, 2010, the Company defaulted on principal payments totaling $350,000 on two Convertible Debentures originally issued in August 2008 with a maturity date of August 29, 2010. Unless the default is cured or waived by the investors, the defaulted notes will bear interest at the contractual default rate of 18% per annum. The two investors holding the outstanding convertible notes are long time investors in the Company and we are currently in negotiations to extend the maturity of the notes although there can be no assurance that the extension will be granted. We are currently in arrears on principal and interest payments owed totaling $423,164 on the Convertible Debentures.
ITEM 4. | REMOVED AND RESERVED. |
ITEM 5. | OTHER INFORMATION. |
None.
ITEM 6. | EXHIBITS |
The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:
EXHIBIT NO. |
DESCRIPTION | |
31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended. | |
31.2 | Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended. | |
32.1 | Certification of Principal Executive Officers Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OmniComm Systems, Inc. |
||||
By: |
/s/ Cornelis F. Wit | |||
Cornelis F. Wit, Director, Chief Executive Officer and President (Principal Executive Officer) | ||||
Date: |
November 15, 2010 | |||
By: |
/s/ Ronald T. Linares | |||
Ronald T. Linares, Executive Vice President of Finance, Chief Financial and Accounting Officer (Principal Financial and Accounting Officer) | ||||
Date: |
November 15, 2010 |
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Exhibit Index
EXHIBIT NO. |
DESCRIPTION | |
31.1 | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended. | |
31.2 | Certification of Principal Financial and Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange Act of 1934, as amended. | |
32.1 | Certification of Principal Executive Officers Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002. |
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