ITEM 1. BUSINESS
This business section and other parts of this Annual Report on Form 10-K (“Annual Report”) contain forward-looking statements that involve risk and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Certain Factors That May Affect Future Results” and elsewhere in this Annual Report. Reference to “us” “we” “our” the “Company” means OmniComm Systems, Inc.®. and our wholly owned subsidiaries OmniComm USA, Inc., OmniComm Ltd., and OmniComm Europe GmbH.
Overview
OmniComm Systems, Inc. provides Web-based electronic data capture (“EDC”) and eClinical (“eClinical”) software and services that streamline the clinical research process. Our eClinical software and service offerings (“eClinical Products” or “eClinical Solutions”) include TrialMaster®, TrialOne® and eClinical Suite™. Our eClinical Products are designed to allow clinical trial sponsors and investigative sites to easily and securely collect, validate, transmit, and analyze clinical study data. Our eClinical Products are 21 CFR Part 11 compliant solutions and are designed to offer clinical trial sponsors the ability to conduct clinical trials under multiple platforms, with significant flexibility, ease-of-use and with complete control over collected data.
Our eClinical Products offer significant business benefits to our customers and are designed to help clinical trial sponsors more efficiently conduct their clinical trials. This efficiency can translate into more rapid initiation of data collection, less cost incurred in the data collection process and the ability to make more timely Go/No-Go decisions. We also provide business process consulting services that focus on more effectively integrating EDC and the broader array of eClinical Solutions and processes into the clinical trial process. Our goal is to provide our clients a data collection process that is streamlined, efficient and cost-effective. We believe that our eClinical Solutions are significantly more efficient than the traditional paper collection methods employed by the clinical trial industry in the past. TrialMaster has been designed to make the trial building process more efficient than the technologies deployed by our competitors. We are in the process of integrating the TrialOne and the eClinical Suites with TrialMaster in order to provide an end-to-end eClinical solution for our clients.
The benefits of managing a clinical trial using our eClinical products include:
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Real-Time Access to the Data. Our eClinical products are designed to provide all interested parties with real-time access to study data over the Internet as it is generated. This allows for the monitoring of patient enrollments and study outcome related clinical trial metrics in a time-frame that allows study sponsors the ability to make effective study conduct related decisions.
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Faster Study Completion: We believe our eClinical products and services save time at the back-end of a clinical trial by eliminating most of the time it takes for database "clean-up" when compared with studies completed by paper-based Case Report Forms (“CRF”s). This is done by eliminating most incorrect or incomplete entries at the time of entry. This may be critical if there are any unanticipated future delays in either the commencement or conduct of the study.
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Cost Savings: EDC involves fixed upfront system development costs. The use of EDC can be even more cost effective when applied to multiple studies, which we believe is relatively easy to do in certain therapeutic areas, in which there are a few primary indications and the studies are relatively simple and similar in terms of the type of data captured. A 2009 report by Contemporary Clinical Trials estimates that EDC users can expect a cost reduction of approximately 55% via the adoption of EDC when compared to traditional paper-based methods.
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Improved quality and visibility of results. Our eClinical software applications allow users engaged in clinical trials to enhance the quality and completeness of their data earlier in the clinical trial process by providing real-time data cleansing and eliminating duplicative manual entry of data. We believe decision making is enhanced through consistent access to reliable data, including allowing for adaptive trial design, the early identification and termination of unsuccessful trials and timely access to trial data that may identify significant safety concerns.
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Comprehensive clinical development solution. We have designed our comprehensive solutions to provide support throughout the clinical development process, from providing consulting services in the protocol authoring process to preparing data for regulatory analysis and submission. We provide third-party technology providers with access to our application programming interface, or API, and developer tools, which facilitates integration with complementary business systems. Our eClinical Products can be integrated easily with auxiliary clinical and operational data systems, making it the core for a complete end-to-end solution.
According to a February 2012 study by PhRMA, developing a new medicine or therapy takes an average of 10 to 15 years. The process begins with the identification of 5,000 to 10,000 potential compounds. 250 of these compounds will make it to the Preclinical stage after 3 to 6 years. Then after 6 to 7 years of Phase 1, Phase 2 and Phase 3 Trials, each with potentially hundreds or thousands of volunteers, the FDA might grant approval to a single new drug. All of the trials for the approved drug as well as the trials for all of the compounds that were abandoned during the research and development process require extensive data capture and tracking. The effective use of EDC can help reduce the timeline to approval and help ensure data integrity. The need for EDC does not end with FDA approval. Post marketing surveillance and the related data capture goes on for years after the drug is approved and marketed. According to a 2010 Applied Clinical Trials report the costs associated with drug development are increasing at an annual rate of 11.8% which can be compared with sales that are growing in the range of 4.5% to 5.5% globally, and 2% to 5% in the United States. The report authors suggest that the use of electronic solutions, such as EDC, are essential for achieving the efficiencies needed to speed development and better align development costs with product revenues.
Our Strategy
Our primary goal is to establish ourselves as a leading EDC and eClinical software and services provider by offering our customers the highest quality service with a differentiated, user-friendly product. Our eClinical Solutions are priced to provide a solid value, which we believe will stimulate customer demand. In addition, we believe that through the natural evolution of our products and via the additional functionality we have added through our two fiscal 2009 acquisitions that we have increased the scope and quality of products and services we offer. We maintain a continuous focus on cost-containment and operating efficiencies. We intend to follow a controlled growth plan designed to take advantage of our competitive strengths. Historically, our growth has occurred through a combination of continued high-quality service to our existing clients and by adding new clients, often served by higher-cost EDC competitors or less effective “home-grown” EDC systems. During 2011 we continued to update our products and increase their functionality to offer new solutions to our clients’ challenges.
Our business strategy is based upon leveraging the experience of our operations, business development and marketing teams; on building programs and services around our learned best practices; and on building on our existing business model by expanding our relationships and resources. Key facets of our strategy include:
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Scope Expansion - We plan on expanding the scope of services and products offered within the eClinical product spectrum via organic product and service development, through strategic partnerships and relationships or through the selective use of acquisitions;
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Customer Base Expansion - We will seek to expand the customer base for our existing set of eClinical Solutions and we will design complementary solutions that will allow us to expand the universe of clients that we service; and
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Diversification - We will continue to diversify our revenue and customer base in order to avoid over-concentration of our business on any solution/product set or client-base.
We believe the following factors play a key role in the development of our strategic goals and in the implementation of the corresponding programs and services aimed at helping us achieve our strategic goals and operational objectives:
Expand our global customer base. We expect global EDC adoption to increase, resulting in significant growth in spending on EDC solutions. We will continue to pursue new relationships with large global pharmaceutical and biotechnology companies by leveraging our support infrastructure, unique language translation capabilities and industry expertise. In addition, we have marketing, sales and services resources dedicated to small- and middle-market life sciences companies, since we believe this market represents an under-penetrated opportunity for customer expansion.
Stimulate Demand by providing Clinical Trial Sponsors with High Value eClinical Services and Products. Deploying eClinical services and products can be an expensive proposition. Each trial is considered a stand-alone project and can incur data collection costs that are according to a CenterWatch report approximately 8.5% of total drug development costs. Our eClinical solutions have been designed to make the trial building process more efficient than the technologies deployed by our competitors and we have been able to provide pricing that is in many cases substantially lower than that of the competition. We believe we provide a broad array of eClinical solutions, excellent customer service, including full project management and process improvement consulting - while maintaining significant gross margins. The combination of our cost structure and use of technology allows us to compete both on quality and price.
Increase Sales to our Existing Customers. We intend to increase the share of eClinical spending we receive from our existing customers by continuing to increase the scope of services and eClinical Products we offer. The two acquisitions completed in 2009 allowed us to add a dedicated Phase One solution, TrialOne, and a broad set of eClinical solutions including an enhanced reporting tool, a clinical trial management system (“CTMS”), a clinical data management system (“CDMS”) and a client portal that provides user dashboard functionality. By offering end-to-end eClinical solutions to our customers we believe we afford them the opportunity to experience seamless integration of the services and software products needed to bring their therapies to market. We believe a suite of integrated eClinical Products and Services will diminish the total cost of ownership; increase the efficiency of the solutions we provide; and will allow us to capture revenues that are currently being spent with other eClinical solution providers.
Emphasize Low Operating Costs. We are committed to keeping our operating and general and administrative costs low. We have achieved our high gross margins primarily by designing a flexible, customizable EDC product that does not require numerous hours of configuration time. We believe that we use advanced technologies and employ a well incentivized, productive and highly professional workforce. We are continually focused on developing and implementing improvements that increase our efficiency and we believe that as we continue to integrate our three existing software platforms and services that we will enhance our ability to broaden our product line. We have already derived benefit from economies of scale by leveraging our current infrastructure over an expanded operation.
Provide EDC Services to Small and Midsize Pharmaceutical, Bio-Technology and Medical Device Companies. In considering new markets, we focus on service to markets that we believe are underserved. In determining which markets to select, we have analyzed the size of our potential markets and concluded that providing service to small and mid-sized firms provides a substantial marketing opportunity. These firms conduct many thousands of clinical trials annually. Most do not have the technological or financial wherewithal to develop eClinical products such as eClinical Suite, TrialOne or TrialMaster and often prefer working with small companies themselves. Yet, the advantages of eClinical services, such as quick trial deployment, cost-savings and more rapid Go/No-Go decisions are just as crucial to this size firm as to their Fortune 500 competitors.
Continue Expansion of Indirect Sales Through CRO Partnerships. Penetrating the CRO market is an important component of our strategic plan. CROs now employ more R & D personnel worldwide than the major pharmaceutical companies according to a February 2012 report by the Tufts Center for the Study of Drug Development. By emphasizing CRO partnerships through our CRO Preferred Program™ we have been able to add a significant number of potential users for our products and services since outsourcing clinical trials in the US market is an established practice. During 2011, the percentage of revenues from our CRO clients totaled approximately 27%. We initiated the marketing of our CRO Preferred Program in early 2007 and as of December 31, 2011 we had entered into approximately 50 CRO Partner relationships. CRO partnerships allow us to leverage the selling and marketing capabilities of the CRO itself. Our CRO strategy has allowed us to augment our selling efforts in a cost-effective manner by forging long-term strategic relationships with our CRO partners and their existing client base. Our CRO partners gain the ability to manage the EDC decision making process proactively and add an extension to their line of products. The CRO Preferred Program offers fixed pricing and pay-as-you-go Hosted Services.
Develop New Consulting Services. Organizations are continually seeking advice and assistance in the implementation of tools and processes to better manage their clinical business and meet regulatory requirements. Our experience working with many different sizes and types of organizations allows us to assist organizations with business strategy, business requirements, and customer software and integration solutions, all using tools, methods, and operating processes required for regulated data and applications.
Increase Public Relations and Marketing Activities. We believe that targeted marketing efforts using web advertising campaigns, social networking tools, and industry publications and presentations will raise awareness and significantly increase sales opportunities.
Differentiate Through Service. We believe that a key to our initial and long-term success is that we offer customers a robust EDC product and a distinctive experience that includes highly efficient integration with data imports and exports, quick set-up times and a growing list of eClinical enhancements. Based on customer feedback, we believe our service is an important reason why our customers choose us over other EDC providers.
Penetrate the Large Pharma Market. Historically, we have had difficulty penetrating this market due to the size and scope of our operations. Our long-term success in the eClinical market is predicated on leveraging the R & D, clinical and G & A investments we have made over as large a group of clients and projects as possible. It is typically more cost efficient, both to us and our clients, to deploy EDC and eClinical Solutions over a broader array of projects since EDC and eClinical solutions provide significant economies of scale from a human resources perspective when compared with traditional paper-based data collection methods. The largest pharmaceutical companies have R & D budgets encompassing a significantly larger number of therapies and projects than others in the clinical trial space and are therefore in a position to spend more on EDC and eClinical Solutions.
Our Business Model
The scope of client clinical trial support service needs can vary from trial to trial. Experience with EDC and other eClinical trial management solutions can also vary based on such factor as client size and sophistication. Our approach to satisfying the diverse needs of our customers is a “crawl, walk, run” approach to Web-based EDC solutions. We offer our eClinical Products under several business models including- ASP and under Technology Transition and Technology Transfer models (both of which are considered licensed) which constituted 52%, and 43% respectively of our revenues for 2011.
We offer a fully hosted ASP model designed to let the client bring study administration and set-up services in-house yet continue to host the solution with us, as well as a complete Technology Transfer model for clients that want to bring their eClinical technology solution in-house. This methodology allows our customers to use our services at their own pace, given the logistics of their human resource, infrastructure and capital constraints. This model allows us the flexibility to deliver eClinical solutions to a broader array of clinical trial sponsors.
Under our ASP and Technology Transition models, critical data is housed in Cincinnati Bell’s e-business center in Cincinnati, Ohio. For Technology Transfer engagements, OmniComm provides an array of implementation services such as installation, configuration, training, and validation support to assist our customers during the migration of the eClinical software and services to client owned facilities.
ASP contracts provide for flexible pricing that is based on both the size and duration of the clinical trial. Size parameters for ASP engagements include the number of case report forms (“CRF”) used to collect data and the number of sites utilizing our eClinical Products. The client pays a trial setup fee based on the previously mentioned factors and then pays an on-going maintenance fee for the duration of the clinical trial that provides software updates, network and site support during the trial. Generally, these contracts will range in duration from three months to five years. Setup fees are generally earned prior to the inception of a trial; however, the revenues are recognized in accordance with SEC Staff Accounting Bulletin No. 104 “Revenue Recognition” codified within Accounting Standards Codification 605 - Revenue Recognition, which requires that the revenues be recognized ratably over the life of the contract. The maintenance fee revenues are earned and recognized monthly. Costs associated with contract revenues are recognized as incurred. In the short-run this method of revenue recognition diminishes the revenues recognized on a periodic basis on our financial statements and obliges us to record a liability. In the long-run, we believe this backlog of “unrecognized” revenue, which is recorded as deferred revenues on our balance sheet, will provide our customers and investors revenue visibility and provide meaningful information on the size and scope of our selling efforts.
Pricing for Technology Transition and Technology Transfer is based on the transfer of a license for one of our eClinical solutions either on a perpetual or term license basis. Pricing for the license is determined by the number of named users of the licensee and the volume of CRF pages collected annually. Under our Technology Transition model there is also an annual maintenance charge incurred for hosting and hosting related services. As part of our licensing model we offer professional and consulting services. The scope of services includes installation, implementation, validation and training services related to the purchase of an eClinical software application license. In addition, our professional services team provides consulting services aimed at helping our clients adopt “best practices” related to eClinical use within their existing operations. Professional and consulting services are generally offered on a time-and-materials basis.
Both the TrialOne software application and eClinical Suites have historically been, and are expected to be sold in the future, under Technology Transfer arrangements. Technology Transfer and Technology Transition relationships afford our clients with the ability to license eClinical solutions on a more cost-effective basis. However, these relationships are normally predicated on the client having the internal infrastructure needed to effectively deploy EDC and eClinical products and services. Consequently, we have found and continue to expect the typical client that licenses our eClinical applications to be a mid-sized or larger CRO; biotechnology or pharmaceutical client that is testing multiple therapies over a significant number of projects.
The advantage to us of having the licensing business model is that it allows us to significantly increase our installed base of EDC clients with a concomitant increase in revenues; however, we are able to make smaller investments in incremental cost of goods sold. We expect our gross margins under licensing arrangements to exceed those we have historically experienced under our ASP model and are expected to be approximately 80% of revenues.
Our Software Products and Services
TrialMaster Solution for Electronic Data Capture
Our core product is TrialMaster, which allows organizations conducting clinical trials to collect and manage their clinical trial data over the internet. Users at investigative sites such as hospitals and doctor’s offices can enter data into electronic forms that represent the study protocol, and the data is immediately validated against a set of protocol-specific rules. For example, a rule could check that a medication start date is earlier than the medication stop date, and prompt the user to correct this before proceeding. Compared to paper studies such real-time feedback dramatically improves the initial data quality. This in turn decreases the time it takes to analyze the study results, helping pharmaceutical, biotech and medical device companies bring their products to market sooner.
TrialMaster has a number of competitive strengths when compared to other EDC products. A key differentiator is that the rule checks described above are implemented using JavaScript, giving a highly-responsive user experience. For example, if a medication is marked as “continuing”, the stop date field can be immediately disabled, preventing inconsistent data from being entered. Other products would allow inconsistent data to be entered and only catch the problem after the user saves the whole form, which is less friendly and considerably more time-consuming. Additionally, TrialMaster has an intuitive user interface, easy navigation, and robust tools for monitoring and tracking the state of the data at any time. Finally, TrialMaster has open Application Programming Interfaces (APIs) that allow other clinical trial applications to send and receive data over the internet. For example, laboratory data can be transmitted and loaded automatically, while an external project management system could inquire about how many patients were enrolled in a particular TrialMaster study and update a summary table accordingly.
TrialMaster has an integrated electronic learning system, a comprehensive set of standard reports and integrated ad-hoc reporting using a sophisticated business intelligence tool called LogiXML®. TrialMaster allows the collected data to be extracted in a variety of standard formats, such as database tables, comma-delimited files, and SAS® datasets. The latest release also allows the data to be extracted in an industry-standard format called SDTM (Study Data Tabulation Model), simply by defining mappings between the input and output data structures. We believe this feature can save our customers considerable programming time.
TrialBuilder®. TrialBuilder is the tool our customers and professional services staff use to model a clinical study. This includes the data collection forms, the data consistency rules and the visit schedule, as well as the workflow and security rules for accessing and managing the data. TrialBuilder is a sophisticated multi-window application with a productive user interface that utilizes drag-and-drop functionality. For example, to program the rule that a medication start date must be before the stop date, the user would simply drag the start and stop date fields into an expression window, and insert a “less than” sign between them. Our experience indicates that the TrialBuilder tool can be used to model a clinical study far more quickly than is possible with competitive products. This means our customers can get their studies enrolling patients more rapidly, and at lower cost.
TrialMaster Archive allows us to provide human and machine-readable copies of the data when a clinical study has been completed. The human-readable format consists of PDF files that represent the data exactly as it was displayed on the interactive web pages. These are delivered to the client via CD in a read-only format, which affords our clients and the FDA the ability to review clinical trial data by: trial; site; patient; visit and by form. The trial sponsor receives a CD with data for all sites, including final data exports in the formats their TrialMaster study used. Each site is provided with a CD with just their site specific data. The program is self-contained, so no software is needed to view the CD, there are no minimum system requirements and an Internet connection is not required. The TrialMaster Archive also includes an optional Submission Module, which creates a casebook containing PDF formatted copies of all CRFs in FDA submission format. This casebook is fully tabbed and bookmarked making it easy to find and view particular CRFs.
TrialMaster SafetyLink allows data about serious adverse events to be automatically collated and transmitted to an external safety reporting system. When a serious and unexpected adverse event is recorded during a clinical trial, the sponsor has a maximum of 15 calendar days to report the incident to the regulatory authorities in each country where the trial is being conducted. Historically, the practice has been for staff at the investigative site to fill in the adverse event information on a paper form and fax this to the sponsor company conducting the trial. With SafetyLink, this information can now be transmitted automatically from the data stored in TrialMaster. This saves time and effort, not to mention improving patient safety by alerting the appropriate staff more quickly.
Hosting. Substantially all of our customers use our hosting services for TrialMaster at our dedicated data center in Cincinnati, Ohio, which is designed specifically to optimize the delivery of our application services and to ensure the availability and security of our customers’ research data. Our state of the art facility includes 24 by 7 staffing, enterprise class security, redundant power and cooling systems, large-scale data back-up capabilities and multiple Internet access points and providers. In addition, we maintain back-up facilities and disaster recovery services out of a location in Fort Lauderdale, Florida. We use Iron Mountain for offsite data storage.
Our hosting operations incorporate industry-standard hardware, databases and application servers in a flexible, scalable architecture. Elements of our applications’ infrastructure can be replaced or added with minimal interruption in service in order to reduce the likelihood that the failure of any single device will cause a broad service outage. We can scale to increasing numbers of customers by adding additional capacity in the form of servers and disk space. We have invested heavily in our data center operations to expand our storage capacity to meet increasing customer demands. Our storage architecture helps to ensure the safe, secure archiving of customers’ data and to deliver the speed and performance required to enable customers to access and manage their clinical study data in real-time.
Support. We have a multi-national organization to support our applications worldwide. We also offer 24 by 7 support to our customers’ investigator sites through multi-lingual help desks located in our US offices and in Bonn, Germany.
Consulting and Professional Services
Our services include delivery of our hosted solutions and consulting services, customer support and training and the delivery of implementation services for Technology Transfer engagements, including installation, configuration, validation and training. The primary consulting services we offer for both ASP and Technology Transfer engagements include:
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Project Management - We assign a project manager to oversee every project and provide up-to-date communications on the status of the project. We use a methodology called OmniAdvance, to ensure that all deliverables are standard and of high quality.
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Clinical Services - We have expertise in translating a clinical protocol into an electronic Case Report Form format. We ensure that CRF design, Visit Schedule, Site and Patient Definitions, Edit Checks, Derivations, and Code Lists are all optimized to use industry best practices, and, where applicable, CDISC/CDASH standards.
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Training. We provide extensive hands-on and eLearning-based EDC training classes. Training classes can be conducted at a sponsor location, at an investigator meeting or at an investigator site and via Web-cast.
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Custom Configuration. Our EDC and eClinical platforms are flexible and allow for major reconfiguration. Each trial can be designed to suit specific client workflows and trial design. Our eClinical includes a clinical trial management system (CTMS), Drug Supply, Safety and Randomization options that can simplify the trial management experience.
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System Integration. We help our clients integrate our EDC solutions with existing systems or external systems (Patient Diaries, Medical Devices and Labs, etc.). We analyze the client’s legacy systems and data management needs in order to decide how to most efficiently integrate EDC.
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SOPs and implementation assistance. Our client services and support personnel can be engaged to write an implementation plan designed to effectively integrate with our EDC solutions. We can also write standard operating procedures (“SOP”s) to help client staff clearly understand their roles in using TrialMaster to conduct trial activities. We can also analyze and document business processes to determine where greater operating efficiency may be gained.
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Installation. There are various architectures for deploying a secure EDC solution to remote investigator sites. These services explore different security, performance and system management alternatives and help the client design and install an optimal solution to meet their unique needs.
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Validation. We offer a test kit that includes test cases and documentation to validate the installation of our EDC applications against regulatory requirements.
TrialOne Phase I EDC Software
The Pharma and Biotech Industries are responding to growing pressure to reduce development time and increase the number of new medicines. According to a October 2010 Advanced Pharma Report, the number of total compounds in active clinical trials has increased from 3,987 in 2004 to 5,605 in 2009. At the same time the total procedures per protocol have increased from an average of 105.9 during the 4 year period prior to 2004 to an average of 158.1 post 2004. The majority of EDC vendors cannot support the unique way Phase I trials are conducted. Often clinical trial sponsors will conduct numerous small studies that require frequent last minute changes. Those changes can be both time consuming and costly to implement. Typically, this has caused pharmaceutical companies to continue using traditional paper-based data collection methods. Typically, Phase I trials are conducted on small subject populations and often only at one site. Studies can be broken down into multiple cohorts where the majority of data is collected in the first 48 hours.
TrialOne has been designed for real-time source-based data collection. Where this is not possible, data is collected through customizable data collection forms that are designed to match the source paper collection forms in order to reduce the errors inherent to data entry.
We believe TrialOne can help dramatically reduce queries through the use of real time edit checks and direct data capture from source medical instrumentation (e.g., ECG, vital sign monitors). The schedule-driven system, which is automated via the TrialOne application, assists investigators and their staff to collect accurate data at the point of patient collection, thus reducing errors inherent with manual operations in a clinical trial.
TrialOne is a web-based application which provides secure real-time access to all study information, in particular trial sponsors and investigators are provided with information that allows for faster decision making. Mid-study data provides trial sponsors with information useful in determining a drug’s safety and efficacy. More rapid access to clinical trial data will also allow trial sponsors to stop unsuccessful compounds sooner and to bring the successful therapies to market more quickly.
The key benefits of TrialOne for our customers include:
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Faster data collection which leads to the ability to get to a quicker database lock allowing for a timelier analysis of study data;
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An ability for clinical trial sponsors to reduce their total cost throughout the entire Phase I process by streamlining the patient recruitment process, improving error rates through the use of edit queries and through the effective use of integration with medical instrumentation;
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Access to valid data earlier provides more visibility for “Go/No Go” decisions;
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Increase trial subject safety-review data (e.g. vital sign trends) in real-time;
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Trial sponsors can manage or run more studies with less human resources; and
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The use of bar-coded samples reduces laboratory errors thereby increasing patient safety.
TrialOne Phase I Application Suite
TrialOne is a comprehensive software application suite that provides clinical trial site sponsors, study investigators and study monitors with several tools designed at making the overall Phase I operation more efficient. Phase I studies are used to conduct the first tests of new drugs or medical devices in humans. They are often held in dedicated Phase I clinics, where volunteers follow a strict timed schedule of dosing followed by measurements such as vital signs, electrocardiograms and repeated blood draws. TrialOne is designed to manage the automation of Phase I clinics. It allows the specification of the schedule and the corresponding dosing and required measurements, then supports the real-time collection of data according to that schedule. Much of the data collection is automated via direct entry from instruments, such as barcode scanners that read barcodes on both the patients and the vials of blood being filled. In short, TrialOne brings tried and tested production-line technology to the process of Phase I clinical trials.
The key components of the TrialOne application include:
Sample Tracking. TrialOne allows customers to completely automate their site’s laboratory. Samples can be tracked and batched while alarms and information can be configured specific to each sample. Dispatch lists and labels are automatically produced for shipment of samples to the central laboratory. Data is then received back electronically into the TrialOne database.
Subject Recruitment and Screening. According to Kenneth Getz with the Tufts CSDD at least 90% of clinical trials are extended by at least 6 weeks due to the failing to enroll patients on schedule and only approximately one-third of the sites in multisite trials successfully enroll the requisite number of patients. The TrialOne subject recruitment module provides essential functionality for automating the collection and tracking of information involved in finding, screening and scheduling subject candidates for an early phase study. The use of TrialOne for subject recruitment allows customers to access a comprehensive volunteer record management system with ease and efficiency. The customized database can be searched for volunteers based on specific demographics, medical history and concomitant medications. Trial sponsors can define study-specific screening test panels and record volunteer screening test results. Outbound communications can be managed allowing for the scheduling of calls, sending e-mail blasts, printing mailing labels or exporting flexible CSV files.
The process of screening and interviewing study volunteers can be a time-consuming and expensive proposition. TrialOne provides staff with an easy-to-use, scripted interface for interviewing volunteers that allows staff to automatically evaluate study volunteers based on configurable inclusion and exclusion requirements. Finally, the TrialOne recruitment module seamlessly integrates data with the TrialOne EDC solution when a volunteer is accepted into a study
Scheduler. The scheduler module provides a mechanism for defining the study structure including a time and events schedule. The module optimizes study build times using a wizard-driven design tool creating database efficiencies using object libraries and templates. This can quickly produce clear, easy to use, schedule driven electronic case report forms suitable for complex and adaptive clinical trials including study alarms and real time validation criteria with edits. Additionally, the Scheduler can define actions or events to be automatically offset relative to the study drug and rapidly address mid-study changes.
Web-based EDC. The EDC module allows capture of real-time data for screening or study at data collection stations, bed-side or roaming. The system allows for the collection of data online, over an intranet or internet using a desktop, notebook, or tablet PC. Using a library of custom drivers the EDC module can collect vital signs or other biologic data directly from device and/or instrumentation (DDC). As with later phase applications the system can clean data at the point of collection with real-time validation edit checks while enhancing protocol compliance via schedule-driven workflow. Working with the Subject Recruitment and Screening module the system seamlessly maps data to the recruitment database for future criteria searches. Automation and authentication checks are maintained using a full array of barcode and scanner support for all aspects of the clinic including subject ID’s, sample labeling and event tracking.
AdHoc Reporting. An integrated Ad-Hoc reporting tool is available with wizard-driven report generation with drill-down reports that include interactive charts and graphs. The AdHoc module supports aggregate data and advanced calculations, an advanced and easy to use export feature, and distributable system reports by configurable schedules. Data is protected by event configurable security and role-based security. The AdHoc module allows for real-time data access to important trends such as vital signs and adverse events.
eClinical Suite
The eClinical Suite is comprised of a number of highly configurable modules that can be combined to provide a robust solution for capturing and managing clinical trial data based on client needs. The modules are:
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eClinical Portal - the gateway to all functions, data and reports. It provides the means to create an environment specific to any Protocol and User needs.
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eClinical Data Management - where protocols are defined using libraries of reusable standard objects (Codelists, Data Items, Data Modules, Pages, Edit Checks, etc.).
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eClinical Data Capture - is the (EDC) module used by Investigator Sites and client Personnel such as Data Managers, Statisticians, Safety, etc. In this module data can be entered and reviewed; queries resolved, etc. The interface is highly intuitive and easy to use thereby minimizing end-user training times. High performance is maintained to keep page turn wait times to a minimum.
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eClinical Study Conduct - proactively allows the clinical operations organization to manage the timelines, resources, budget, payments, clinical supplies, and key study milestones and metrics.
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eClinical Adverse Event Reporting - based on industry standards for safety reporting, this module allows for the capture, review, reporting and global submission of both serious and non-serious adverse event cases.
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eClinical Autoencoder - delivers both automated and manual coding of adverse event and drug medication terminology using standard and custom dictionaries and configurable coding algorithms.
The eClinical suite is a robust and proven platform with a loyal customer base. There is some functional overlap with TrialMaster, in that both offer an EDC capability. We continue to progressively integrate the features of the eClinical and TrialMaster tools and have offered those eClinical customers that solely use EDC the option to transition to TrialMaster.
To date, our software has been used to run over 3,000 clinical trials at approximately 40,000 clinical investigative sites worldwide.
Industry Background
The eClinical industry is poised for widespread adoption over the next few years in both the domestic and international clinical trial market. Our research indicates that industry experts anticipate an enormous transition towards EDC in the next 5 years with estimates from firms such as William Blair and Company placing studies initiated using EDC use above 85% by the end of 2013.
Furthermore, we believe that industry and regulatory trends summarized below have led pharmaceutical, biotechnology and medical device companies to increase R & D for proprietary new drugs and medical devices. We believe these trends have required companies to conduct increasingly complex clinical trials and develop multinational clinical trial capability, while seeking to control costs. We believe demand for simplified integration and improved collaboration has driven EDC vendors to develop broader eClinical trial suites to give sponsors shorter, less costly trials and give investigators easier ways to execute and manage them.
Government Health Care Reform. There has been significant pressure in the U.S. to enact health care reform. During 2010 new legislation was enacted which is likely to alter the dynamic of how prescription drugs are reimbursed by both private insurers and government-sponsored agencies. These pressures which may mandate significant cost containment measures including government sponsored health care and regulation over the cost of therapies may increase the pressure on drug and device manufacturers to expedite the approval of their products and services.
Generic Drug Effect. Competition from generic drugs following patent expiration has resulted in increasing market pressure on profit margins. A 2011 EvaluatePharma report estimated that medicines now generating approximately $133 billion in revenues will be subject to generic competition by 2016. In 2011 Lipitor, the top selling pharmaceutical medicine in the world came off patent and is now competing with generic versions. Over the next several years, more drugs will come off patent. The major pharmaceutical companies will need to increase R&D in order to identify new drugs that can replace the revenue lost to generic versions of their previously protected drugs.
Increasingly Complex and Stringent Regulation. Increasingly complex and stringent regulatory requirements have increased the volume and quality of data required for regulatory filings and escalated the demand for real-time, high- accuracy data collection and analysis during the drug development process.
Reducing Drug Development Time Requirements. To reduce costs, maintain market share and speed revenue production, pharmaceutical, medical device and biotechnology companies face increasing pressure to bring new drugs to market in the shortest possible time.
New Drug Development Pressures. To respond to the demand for products for an aging population and for the treatment of chronic disorders and life-threatening conditions, research and development expenditures have increased as a result of the constant pressure to develop and patent new therapies.
Expansion of Approved Treatment Indications. There is substantial incentive on the part of the pharmaceutical and biotechnology drug and therapy owners to expand the scope of FDA approved treatment indications for their already approved therapies. A significant benefit of developing new indications is the ability to extend patent protection for products already approved by the FDA.
These trends have created even greater competitive demands on the industry to bring products to market efficiently and quickly.
Market Opportunity
Clinical trials are a critical component in bringing a drug or medical device to market. All prescription drug and medical device therapies must undergo extensive testing as part of the regulatory approval process. We believe many clinical trials continue to be conducted in an antiquated manner and fail to optimize the resources available for a successful clinical trial. We believe that our solutions significantly reduce costs, improve data quality and expedite results. We believe the data integrity, system reliability, management control and auditable quality of our eClinical applications will aid clinical trial sponsors that want to improve clinical trial efficiencies, speed-up results and ensure regulatory compliance.
In order for a drug or medical device to be marketed in the United States, Europe or Japan, the drug or device must undergo extensive testing and regulatory review to determine that it is safe and effective. The regulatory review process for new drugs and devices is time consuming and expensive. For example, a new drug application (“NDA”) can take up to two years before the FDA approves it. This is in addition to approximately five to nine years of studies required to provide the data to support the NDA. The amount of money and time currently spent on clinical trials is enormous. The following points are illustrative of clinical trial industry dynamics:
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Drug companies can lose as much as $35.6 million in potential revenue for each day a trial is delayed on a blockbuster drug such as Lipitor®. Source: Pfizer, Inc. website.
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In 2009, over 5,000 compounds were in active clinical trials and the FDA approved 83 drugs for sale. Source: 2011 Tufts Center for the Study of Drug Development report..
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According to a 2011 Tufts Center for the Study of Drug Development report, the average drug approved for sale by the FDA costs over $1.3 Billion to bring to market.
Included in the above cost analysis of bringing a new medicine to market are expenses of project failures and the impact that long development times have on investment costs. The estimate also accounts for out-of-pocket discovery and preclinical development costs, post-approval marketing studies and the cost of capital. Lengthening development times caused by complex disease targets and a more intensive regulatory process have more than tripled the cost of developing a drug over the past 15 years. The estimates which were published as part of a 2010 Tufts University study cite that drug companies are under great pressure to reduce costs and to increase the pace of drug development.
We believe that success in the EDC market is predicated on several criteria. As the industry grows and matures the ability of participants to fulfill the varied needs of clinical trial sponsors becomes more critical to achieving operational and financial success. We believe these success criteria include:
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Deployment options. Successful EDC vendors provide clinical trial sponsors flexibility in choosing whether to deploy EDC on an ASP, Technology Transfer or Technology Transition basis. The ultimate criteria for selection of the type of technology delivery methodology selected is often predicated on the size of the clinical trial sponsor. Since this will often determine first the financial resources available for the deployment of new technologies and second, will help determine the sophistication of the company’s technology infrastructure and therefor their ability to bring in-house their EDC operations.
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Interoperability. Most clinical trial sponsors have invested in other technology platforms to run their trials. These include clinical data management systems, interactive voice response systems and Central Labs. The ability for an eClinical solution to integrate with existing technology platforms is a key decision making factor.
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Scalability. The ability to scale the eClinical solutions to absorb additional projects seamlessly is important to trial sponsors. Scalable solutions will retain their speed and performance metrics as projects and engagements increase in size.
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Migration from hosted to technology transfer solutions. When clinical trial sponsors decide to bring the eClinical services and solutions in-house it is vital that they do not experience a degradation of speed, performance or system reliability.
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Flexibility. The more robust eClinical systems will be designed to provide the ability to increase functionality and guarantee interoperability with other industry technology solutions. As the industry and technology matures clinical trial sponsors will demand new functionality without loss of performance or reliability.
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Vendor stability. eClinical vendors should be able to demonstrate a viable business model and financial structure that can sustain a long-term relationship with clinical trial sponsors.
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Systematic adoption of best practices. eClinical vendors will be expected to assimilate best-practice workflows and process tools.
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Professional services. The adoption and implementation of eClinical solutions into a clinical trial environment requires significant financial, technical and human resource investment on the part of clinical trial sponsors. A robust offering of professional services that fully integrate with the technological eClinical offerings will be considered an integral part of any eClinical purchase.
License Agreements
DataSci, LLC
On April 9, 2009, we entered into a Settlement and License Agreement with DataSci, LLC (“DataSci”) which relates to a lawsuit filed on June 18, 2008 in the United States District Court for the District of Maryland by DataSci against OmniComm alleging infringement of 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”) owned by DataSci. Pursuant to the Settlement and License Agreement, the parties agreed to enter 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. which we anticipate will approximate the annual minimum royalty payment(s) during any calendar year as follows: 2012 - until expiration of the Licensed Patent - $450,000 per year. In addition to the cash consideration the Company has issued a warrant for 1,000,000 shares of our common stock with an exercise price of $.01 per share. The warrant has been granted for past use of the Licensed Patent. The warrant can be exercised by DataSci in month 24 or later or upon its sole discretion require the Company to pay $300,000 in cash in lieu of exercising the warrant.
On June 23, 2009, we entered into an agreement to acquire the EDC assets of eResearch Technology. Concurrent with the consummation of that transaction we 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.
Alphadas Licensing Agreement
Effective September 30, 2010, the Company and Logos Holdings, Ltd. (“Logos Holdings”) (a UK limited company) entered into an agreement delineating the ownership rights of the Alphadas EDC system owned by Logos Holdings and the Company’s 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 on August 3, 2009, the date of the Company’s acquisition of Logos Technologies. The license limits the total license fee payable by the Company to Holdings to $200,000. The license terminates upon the termination or expiration of any Alphadas contracts serviced by the Company. The Company incurred $13,921 in license fees under this arrangement during 2011.
Our Customers
We are committed to developing long-term, partnering relationships with our clients and adapting our products and services to meet the unique and challenging needs of their trials. Our customers include leading pharmaceutical, biotechnology, medical device companies, academic institutions, clinical research organizations and other entities engaged in clinical trials. As of December 31, 2011, we had approximately 100 customers, including 3 of the top 10 global pharmaceutical companies measured by revenue, the second largest medical device company and the second largest biotechnology company. Our representative customers by sponsor type include:
Sales and Marketing
We sell our products through a direct sales force, relationships with CRO Partners, and through co-marketing agreements with Vendor Partners. Our marketing efforts to-date have focused on increasing market awareness of our firm and products. These efforts have primarily been comprised of attendance and participation in industry conferences and seminars. A primary focus of our future marketing efforts will be to continue increasing our market penetration and market awareness. As of December 31, 2011, we had 14 employees in sales and marketing.
Our efforts during 2012 will include increasing the number of sales personnel employed in the U.S. and Europe, increasing our attendance and marketing efforts at industry conferences and increasing the number of Company sponsored events including webinars, symposiums and other marketing events. Three additional sales personnel, one additional sales support person, and one inside sales person will be added in the U.S. Also, two third-party contractors have been added to supplement the inside sales force for lead generation, one in the U.S. and one in Europe.
Our marketing strategy is to generate qualified sales leads, enhance the global recognition of our brand and products and establish OmniComm as a provider of high value eClinical solutions. Our principal marketing initiatives target key executives and decision makers within our existing and prospective customer base. We sponsor and participate in industry events including user conferences, trade shows and webinars. During 2012 we expect to increase the number of articles authored by OmniComm employees and to increase our efforts at participating in cooperative marketing efforts with our CRO partners and other providers of complementary services or technology, including joint press announcements, joint trade show activities and joint seminars and webinars.
Clinical trial sponsors have historically outsourced their clinical research activities in an attempt to control costs and expand capacity. Our CRO relationships help us position our software solutions as the core platform for their outsourced client trial management services. Through our CRO Preferred Program, we partner with CROs to deliver our eClinical technologies along with the CRO’s project and data management expertise. We also train, certify and support our CRO and other clinical services partners which enables them to quickly and cost-effectively implement our technology in sponsors’ studies. A critical aspect of the program is our ability to deliver our eClinical solutions on a fixed cost basis to our partners. Because of the economics intrinsic to the CRO industry a fixed cost solution affords the partner a stronger ability to manage their costs and deliver cost-effective solutions to their clinical trial sponsor clients.
We have been able to obtain valuable insight into our customers’ needs through the following customer specific initiatives:
User Group Meeting: In 2011, we successfully hosted our first annual Users Group Meeting. The feedback from the customers in attendance resulted in several product enhancements that are in process of being implemented. We will continue to host this forum every year and look forward to fostering a more collaborative relationship with our customers through this annual event.
eClinical webinars: We host periodic web-based seminars for current and prospective customers, which are typically focused on our products or current developments in the eClinical industry.
Online Customer Forum: OmniComm has created an online blog via LinkedIn that allows us to have constant communication with our customers. This interactive forum allows us to post questions, solicit feedback, and share information with our customers on a daily basis. It also allows our customers to share their opinions with us and other customers as well. This feedback is invaluable to OmniComm as we strive to produce cutting-edge technology to keep pace with our customers’ needs.
Research and Development
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 eClinical solutions. 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. Our development of TrialMaster and its subsequent improvements and refinements have been handled by our in-house staff of developers. In the past, our philosophy towards software development has been to design and implement all of our solutions through in-house development. As of December 31, 2011, we had approximately 25 employees involved in our research and development efforts.
We currently partner with several eClinical applications in an effort to expand the scope of products and services we offer our customers. In the past, integrating these platforms has required R & D time, effort and expenditures. We anticipate expending R & D funds on these efforts as we expand these relationships to include more formalized relationships which could include revenue sharing or private label arrangements.
We expect our R & D efforts over the next two to three years to be aimed at first, effectively integrating the broad array of functionality that exists in our current product base (TrialMaster, TrialOne and eClinical Suite), and second, broadening the scope of our eClinical functionality and services by selectively developing or acquiring new complementary products and services. These efforts may include select strategic alliances with software and service partners possessing clinical trial industry experience.
When developing our technical solutions to manage clinical data, industry regulatory requirements also dictate that substantial documentation be created to demonstrate the integrity of the solution, known in the industry as a validation package. Our software development lifecycle practices include streamlined methodologies for generating and maintaining validation packages during the software release process. These methodologies include a validated path for upgrading existing installations and data. We currently release major updates to our software applications approximately twice per year. We believe that the completeness of our validation packages provide our customers with an ability to stay on current technology, allowing us to minimize the number of legacy releases that require maintenance and support.
Our research and development department includes a product management team that works with both internal and customer experts to create new features and functionality, a technical documentation team, as well as product engineering and software quality assurance functions. We also have a dedicated research and development team building integration software and APIs on top of our platform. During fiscal 2011, we spent approximately $2,479,000 on R & D activities, the majority of which represented the salaries of our programmers and developers. In fiscal 2010 we spent approximately $3,304,000 on R & D activities, the majority of which represents salaries to our programmers and developers.
Intellectual Property
Our success and ability to compete are dependent on our efforts to develop and maintain the proprietary aspects of our technology. We rely upon a combination of trademark, trade secret, copyright and unfair competition laws, as well as license agreements and other contractual provisions, to protect our intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property and proprietary information by requiring our employees and consultants to enter into confidentiality, non-competition and assignment of inventions agreements. We have registered trademarks and service marks in the United States and abroad, and have filed applications for the registration of additional trademarks and service marks. Our principal trademarks are “OmniComm Systems,” “TrialMaster,” “TrialBuilder,” “TrialExplorer” and “TrialOne”. These legal protections afford only limited protection for our technology. Our agreements with employees, consultants and others who participate in development activities could be breached. However, due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product and service developments and enhancements to existing products and services are more important than the various legal protections of our technology to establish and maintain a technology leadership position.
We currently hold several domain names, including the domain names “omnicomm.com” and “trialmaster.com”. Additionally, legislative proposals have been made by the U.S. federal government that would afford broad protection to owners of databases of information. The protection of databases already exists in the European Union. The adoption of legislation protecting database owners could have a material adverse effect on our business, requiring us to develop additional, complex data protection features for our software products.
Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our software solutions or to obtain and use information that we regard as proprietary. The laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States. Litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Any such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on our business, operating results or financial condition. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. Any failure to meaningfully protect our intellectual property and other proprietary rights could have a material adverse effect on our business, operating results or financial condition.
In addition, since the software and Internet-based industries are characterized by the existence of a large number of patents, trademarks and copyrights it also involves frequent litigation based on allegations of infringement or other violations of intellectual property rights. We, and other companies in our industry, have entered into a settlement and obtained a license from a patent holder to license third-party technology and other intellectual property rights that are incorporated into some elements of our services and solutions. Our technologies may not be able to withstand third-party claims or rights against their use. Any intellectual property claims against us, with or without merit, could be time-consuming and expensive to litigate or settle, could divert management attention from executing our business plan or require us to enter into royalty or licensing agreements with third parties. Such royalty or licensing agreements, if required, might not be available on terms acceptable to us or at all, which could have a material adverse effect upon our business and financial position. There is no assurance that we will not become subject to infringement claims as the number of products and competitors in our industry segment grows and the functionality of products in different industry segments overlaps. An adverse determination on such a claim would increase our costs and could also prevent us from offering our technologies and services to others.
We have licensed in the past, and expect that we may license in the future, certain of our proprietary rights, such as trademarks, technology or copyrighted material, to third parties. We generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer.
Competition
The market for electronic data collection, data management and adverse event reporting systems is highly competitive, rapidly evolving, fragmented and is subject to changing technology, shifting customer needs and frequent introductions of new products and services. We compete with systems and paper-based processes utilized by existing or prospective customers, as well as other commercial vendors of EDC and eClinical applications, clinical data management systems and adverse event reporting software, including:
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systems developed internally by existing or prospective customers;
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vendors of EDC, eClinical, clinical trial management systems and adverse event reporting product suites, including Oracle Clinical and PhaseForward, Inc., business units of Oracle Corporation and Medidata Solutions;
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vendors of stand-alone EDC, data management and adverse event reporting products; and
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CROs with internally developed EDC, clinical data management systems or adverse event reporting systems.
Our ability to remain competitive will depend to a great extent upon our ongoing performance in the areas of product development, customer support and service delivery. We believe that the principal competitive factors in our market include the following:
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product functionality and breadth of integration among the EDC, eClinical, clinical trial management systems and adverse event reporting solutions;
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reputation and financial stability of the vendor;
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low total cost of ownership and demonstrable benefits for customers;
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depth of expertise and quality of consulting and training services;
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performance, security, scalability, flexibility and reliability of the solutions;
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speed and ease of implementation and integration; and
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sales and marketing capabilities and the quality of customer support.
We believe that our technical expertise, the knowledge and experience of our principals in the industry, quality of service, responsiveness to client needs and speed in delivering solutions will allow us to compete favorably within this market. Many of our competitors and potential competitors have greater name recognition, longer operating histories and significantly greater resources. There can be no assurance that our current or prospective competitors will not offer or develop products or services that are superior to, or that achieve greater market acceptance than, our products and services.
Government Regulation
The conduct of clinical trials is subject to regulation and regulatory guidance associated with the approval of new drugs, biological products and medical devices imposed upon the clinical trial process by the U.S. federal government and related regulatory authorities such as the U.S. Food and Drug Administration, or FDA, and by foreign governments. Use of our software products, services and hosted solutions by entities engaged in clinical trials must be done in a manner that is compliant with these regulations and regulatory guidance. Failure to do so could have an adverse impact on a clinical trial sponsor’s ability to obtain regulatory approval of new drugs, biological products or medical devices. If our product and service offerings fail to allow our customers and potential customers to operate in a manner that is compliant with applicable regulations and regulatory guidance, clinical trial sponsors and other entities conducting clinical research may be unwilling to use our software products, services and hosted solutions. Accordingly, we design our product and service offerings to allow our customers and potential customers to operate in a manner that is compliant with applicable regulations and regulatory guidance. We also expend considerable time and effort monitoring regulatory developments that could impact the use of our products and services by our customers and use this information in designing or modifying our product and service offerings.
The following is an overview of some of the regulations that our customers and potential customers are required to comply with in the conduct of clinical trials.
The clinical testing of drugs, biologics and medical devices is subject to regulation by the FDA and other governmental authorities worldwide. The use of software during the clinical trial process must adhere to the regulations and regulatory guidance known as Good Clinical Practices, other various codified FDA regulations, the Consolidated Guidance for Industry from the International Conference on Harmonization regarding Good Clinical Practice for Europe, Japan and the United States and other guidance documents. Our products, services and hosted solutions are developed using our domain expertise and are designed to allow compliance with applicable rules or regulations.
In addition to the aforementioned regulations and regulatory guidance, the FDA has developed regulations and regulatory guidance concerning electronic records and electronic signatures. The regulations, codified as 21 CFR Part 11, are interpreted for clinical trials in a guidance document titled Computerized Systems Used in Clinical Trials. This regulatory guidance stipulates that computerized systems used to capture or manage clinical trial data must meet certain standards for attributability, accuracy, retrievability, traceability, inspectability, validity, security and dependability. Other guidance documents have been issued that also help in the interpretation of 21 CFR Part 11.
Regulation of the use and disclosure of personal medical information is complex and growing. Federal legislation in the United States, known as the Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes a number of requirements on the use and disclosure of “protected health information” which is individually identifiable, including standards for the use and disclosure by the health care facilities and providers who are involved in clinical trials. HIPAA also imposes on these healthcare facilities and providers standards to assure the confidentiality of health information stored or processed electronically, including a series of administrative, technical and physical security procedures. This may affect us in several ways. Many users of our products and services are directly regulated under HIPAA and, to the extent our products cannot be utilized in a manner that is consistent with the users’ HIPAA compliance requirements, our products will likely not be selected. In addition, we may be directly affected by HIPAA and similar state privacy laws. Under HIPAA, to the extent we perform functions or activities on behalf of customers that are directly regulated by such medical privacy laws, such customers may be required to obtain satisfactory assurance, in the form of a written agreement, that we will comply with a number of the same HIPAA requirements.
Business Segments and Geographic Information
We view our operations and manage our business as one operating segment. Our revenues prior to 2009 had been generated almost exclusively from U.S. based clients. Our 2009 acquisitions allowed us to increase the number of clients we service in the European market. TrialMaster has been deployed in clinical trials conducted both domestically in the U.S. and internationally in Europe, Asia, Africa and Australia. We began operations in Europe through our wholly owned subsidiary OmniComm Europe BV which has ceased operations. During 2007, we expanded our European operations by creating a subsidiary in Germany, OmniComm Europe, GmbH and merged the operations of OmniComm Europe BV into that unit. Our European subsidiary, OmniComm Europe, GmbH, operates out of an office in Bonn, Germany. We currently employ 14 FTEs in that office spanning all areas of our operation including study development, project management, quality assurance and clinical support and services. Our European sales and business development efforts are managed out of this location as well.
In August 2009 we acquired the EDC assets of Logos Technologies Ltd. out of administration (similar to a U.S. Chapter 11 bankruptcy proceeding) in the U.K. As part of that transaction we opened an R & D office for our newly acquired phase one product, TrialOne. We currently employ seven software developers and engineers out of that office.
During 2009 we also completed the acquisition of the EDC assets of eResearch Technology. One of the results of our two acquisitions was to increase the number of clients serviced in the European market to approximately 23 clients. We expect the percentage of revenues generated from our European operations to continue to increase. In 2011 approximately 17% of total revenues was generated in the European market.
Background and History
OmniComm Systems, Inc. was originally organized as Coral Development Corp., under the laws of the State of Delaware, on November 19, 1996, by Modern Technology Corp. (“Modern”). Modern originally completed a “blind pool/blank check” offer pursuant to Rule 419 by having Modern distribute Coral Development shares as a dividend to Modern shareholders. On February 17, 1999, OmniComm Systems, Inc., a company organized under the laws of the State of Florida as the Premisys Group, Inc. on March 4, 1997, merged with Coral Development. Coral Development was the surviving entity post-merger. The merged entity changed its name to OmniComm Systems, Inc.
Employees
We currently have 90 full time employees of which four are executives, four are administrative, 26 are programmers, engineers or technology specialists, 40 work in clinical operations, three are technology and systems managers and 13 are in sales and marketing. We employ 53 employees out of our headquarters in Fort Lauderdale, Florida, seven employees out of a regional operating office in Monmouth Junction, New Jersey and nine field sales and marketing employees located in California, Missouri, Massachusetts, New York, Illinois, Tennessee, Pennsylvania, Louisiana, and North Carolina. Our wholly-owned subsidiary, OmniComm Europe, GmbH, employs 14 FTEs in Bonn, Germany. Our wholly-owned subsidiary, OmniComm Ltd., employs seven employees in Lymington, England. We believe that relations with our employees are good. None of our employees are represented by a collective bargaining agreement.
Available Information
We were incorporated in Delaware in 1997. We currently have operating subsidiaries in Bonn, Germany and Lymington, England and a wholly-owned U.S. subsidiary, OmniComm USA, Inc. Our Internet website address is http://www.omnicomm.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available either via a link on our website or on the Securities and Exchange Commission website, http://www.sec.gov.
ITEM 1A.
ITEM 1A. Risk Factors
RISK FACTORS
An investment in our securities is speculative in nature and involves a high degree of risk. In addition to the other information contained in this Annual Report on Form 10-K, the following material risk factors should be considered carefully in evaluating us and our business before purchasing our securities.
WE HAVE A HISTORY OF LOSSES AND ANTICIPATE FUTURE LOSSES. WE MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY.
We incurred net losses attributable to common stockholders of $3,728,830 and $3,335,869 in fiscal 2011 and 2010, respectively. At December 31, 2011, we had an accumulated deficit of approximately $62,525,605 and a working capital deficit of approximately $6,676,476. We expect net losses and negative cash flow for the foreseeable future until such time as we can generate sufficient revenues to achieve profitability. We expect our operating cash flows to improve in fiscal 2012, but we have little control over the timing of contracted projects. We expect our client and contract base to expand and diversify to the point where it meets our on-going operating needs, but this may not happen in the short-term or at all. While we expect to achieve additional revenue through the growth of our business, we cannot assure you that we will generate sufficient revenue to fund our expenses and achieve and maintain profitability in any period.
OUR ABILITY TO CONDUCT OUR BUSINESS WOULD BE MATERIALLY AFFECTED IF WE WERE UNABLE TO PAY OUR OUTSTANDING INDEBTEDNESS.
At December 31, 2011, we had outstanding borrowings of approximately $14,935,665 of which:
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approximately $75,000, at 10% interest, was due June 2004. We are in default in the payment of principal and interest;
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approximately $37,500 at 12% is due in April 2012;
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approximately $111,800 at 12% interest is due in July 2012;
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approximately $45,000 at 12% is due in October 2012;
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approximately $20,000 at 12% is due in December 2012;
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approximately $431,986 at 10% is due in January 2013;
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approximately $1,200,000 at 12% interest is due in March 2013;
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approximately $157,500 at 12% interest, is due in April 2013;
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approximately $1,920,000 at 10% interest is due in August 2013;
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approximately $1,490,000 at 12% interest is due in October 2013;
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approximately $4,980,000 at 12% interest is due in December 2013;
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approximately $2,866,879 at 12% interest is due in April 2014, and
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approximately $1,600,000 at 12% is due in January 2015.
No assurance can be given that the holders of the $75,000 in principal amount 10% Convertible Notes will not seek immediate collection of the amounts due and owing. Further, no assurance can be given that faced with future principal repayment and interest obligations, our cash flow from operations or external financing will be available or sufficient to enable us to meet our financial obligations. If we are unable to meet our financial obligations, the lenders could obtain a judgment against us in the amount of the notes and foreclose on our assets. Such foreclosure would materially and adversely affect our ability to conduct our business.
WE HAVE HISTORICALLY NEEDED AND POTENTIALLY WILL LIKELY NEED ADDITIONAL FINANCING, THE TERMS OF WHICH MAY BE UNFAVORABLE TO OUR THEN EXISTING STOCKHOLDERS.
During the years ended December 31, 2011 and 2010 we were required to raise working capital to meet operating expenses in the amount of approximately $1,033,000 and $3,477,500. Our plan of operations going forward may require us to raise additional working capital if our revenue projections are not realized, and even if our projections are realized, we may need to raise additional financing to meet our ongoing obligations, including the repayment of existing debt obligations currently in the amount of $14,935,665. In addition, we may also need to raise additional funds to meet known needs or to respond to future business contingencies, which may include the need to:
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fund more rapid expansion;
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fund additional capital or marketing expenditures;
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develop new or enhanced features, services and products;
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enhance our operating infrastructure;
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respond to competitive pressures; or
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acquire complementary businesses or necessary technologies.
If we raise additional capital through the issuance of debt, this will result in increased interest expenses. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders or debt holders. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, repay our outstanding debt obligations and remain in business may be significantly limited.
IF WE ARE NOT ABLE TO RELIABLY MEET OUR DATA STORAGE AND MANAGEMENT REQUIREMENTS, OR IF WE EXPERIENCE ANY FAILURE OR INTERRUPTION IN THE DELIVERY OF OUR SERVICES OVER THE INTERNET, CUSTOMER SATISFACTION AND OUR REPUTATION COULD BE HARMED AND CUSTOMER CONTRACTS MAY BE TERMINATED.
As part of our current business model, we store and manage in excess of ten terabytes of data for our customers, resulting in substantial information technology infrastructure and ongoing technological challenges, which we expect to continue to increase over time. If we do not reliably meet these data storage and management requirements, or if we experience any failure or interruption in the delivery of our services over the Internet, customer satisfaction and our reputation could be harmed and this could lead to reduced revenues and increased expenses. Our hosting services are subject to service level agreements and, in the event that we fail to meet guaranteed service or performance levels, we could be subject to customer credits or termination of these customer contracts. If the cost of meeting these data storage and management requirements increases, our results of operations could be harmed.
A SYSTEM FAILURE COULD RESULT IN SIGNIFICANTLY REDUCED REVENUES.
Any system failure, including network, software or hardware failure that causes an interruption in our service could affect the performance of our software and result in reduced revenues. The servers that host our software are backed-up by remote servers, but we cannot be certain that the back-up servers will not fail or cause an interruption in our service. Clinical trial data could also be affected by computer viruses, electronic break-ins or other similar disruptions. Our users will depend on Internet service providers, online service providers and other web site operators for access to our products. Each of these providers may have experienced significant outages in the past and could experience outages, delays and other difficulties due to system failures unrelated to our systems. Further, our systems are vulnerable to damage or interruption from fire, flood, power loss, telecommunications and/or power failure, break-ins, hurricanes, earthquake and similar events. Regionalized power loss caused by hurricanes or other storms if occurring over a long period of time could adversely impact our ability to service our clients. Our insurance policies have low coverage limits and may not adequately compensate us for any such losses that may occur due to interruptions in our service.
OUR REVENUES DERIVED FROM INTERNATIONAL OPERATIONS ARE SUBJECT TO RISK, INCLUDING RISKS RELATING TO UNFAVORABLE ECONOMIC, POLITICAL, LEGAL, REGULATORY, TAX, LABOR AND TRADE CONDITIONS IN THE FOREIGN COUNTRIES IN WHICH WE OPERATE, THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
During fiscal 2010 international customers began to account for a substantial percentage of our revenues. International customers accounted for 17% and 13% of total revenues in fiscal 2011 and fiscal 2010, respectively. International operations are subject to inherent risks. These risks include:
·
the economic conditions in these various foreign countries and their trading partners, including conditions resulting from disruptions in the world credit and equity markets;
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political instability;
·
greater difficulty in accounts receivable collection and enforcement of agreements and longer payment cycles;
·
compliance with foreign laws;
·
changes in regulatory requirements;
·
fewer legal protections for intellectual property and contract rights;
·
tariffs or other trade barriers;
·
staffing and managing foreign operations;
·
exposure to currency exchange and interest rate fluctuations;
·
potentially adverse tax consequences; and
·
recently proposed changes to taxation of offshore earnings.
EXTENSIVE GOVERNMENTAL REGULATION OF THE CLINICAL TRIAL PROCESS AND OUR PRODUCTS AND SERVICES COULD REQUIRE SIGNIFICANT COMPLIANCE COSTS AND HAVE A MATERIAL ADVERSE EFFECT ON THE DEMAND FOR OUR SOLUTIONS.
The clinical trial process is subject to extensive and strict regulation by the U.S. Food and Drug Administration and other regulatory authorities worldwide. Our software products, services and hosted solutions are also subject to state, federal and foreign regulations. Demand for our solutions is largely a function of such government regulation, which is generally increasing at the state and federal levels in the United States and elsewhere, and subject to change at any time. Changes in the level of regulation, including a relaxation in regulatory requirements or the introduction of simplified drug approval procedures, could have a material adverse effect on the demand for our solutions. For example, proposals to place caps on drug prices could limit the profitability of existing or planned drug development programs, making investment in new drugs and therapies less attractive to pharmaceutical companies. Similarly, the requirements in the United States, the European Union and elsewhere to create a detailed registry of all clinical trials could have an impact on customers’ willingness to perform certain clinical studies. Likewise, a proposal for government-funded universal health care could subject expenditures for health care to governmental budget constraints and limits on spending. In addition, the uncertainty surrounding the possible adoption and impact on health care of any Good Clinical Practice reforms could cause our customers to delay planned research and development until some of these uncertainties are resolved. Until the new legislative agenda is finalized and enacted, it is not possible to determine the impact of any such changes.
Modifying our software products and services to comply with changes in regulations or regulatory guidance could require us to incur substantial costs. Further, changing regulatory requirements may render our solutions obsolete or make new products or services more costly or time consuming than we currently anticipate. Failure by us, our customers, or our competitors to comply with applicable regulations could result in increased regulatory scrutiny and enforcement. If our solutions fail to comply with government regulations or guidelines, we could incur significant liability or be forced to cease offering our applicable products or services. If our solutions fail to allow our customers to comply with applicable regulations or guidelines, customers may be unwilling to use our solutions and any such non-compliance could result in the termination of or additional costs arising from contracts with our customers.
IF OUR LICENSE TO USE THIRD-PARTY TECHNOLOGIES IN OUR PRODUCTS IS TERMINATED, WE MAY BE UNABLE TO DEVELOP, MARKET OR SELL OUR PRODUCTS.
We are dependent on a license agreement relating to our current and possibly proposed products that give us rights under intellectual property rights of a third party. This agreement can be terminated on short notice by the licensor if we default on our obligations under the license and fail to cure such default after notice is provided. The license imposes commercialization, certain sublicensing, royalty, insurance and other obligations on us. Our failure, or any third party's failure, to comply with the terms of this license could result in our losing our rights to the license, which could result in our being unable to develop or sell our products.
WE DEPEND PRIMARILY ON THE PHARMACEUTICAL, BIOTECHNOLOGY AND MEDICAL DEVICE INDUSTRIES AND ARE THEREFORE SUBJECT TO RISKS RELATING TO CHANGES IN THESE INDUSTRIES.
Our business depends on the clinical trials conducted or sponsored by pharmaceutical, biotechnology and medical device companies and other entities conducting clinical research. General economic downturns, increased consolidation or decreased competition in the industries in which these companies operate could result in fewer products under development or decreased pressure to accelerate product approval which, in turn, could materially adversely impact our revenues. Our operating results may also be adversely impacted by other developments that affect these industries generally, including:
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the introduction or adoption of new technologies or products;
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changes in third-party reimbursement practices;
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changes in government regulation or governmental price controls;
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changes in medical practices;
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the assertion of product liability claims; and
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changes in general business conditions.
Any decrease in R & D expenditures or in the size, scope or frequency of clinical trials conducted or sponsored by pharmaceutical, biotechnology or medical device companies or other entities as a result of the foregoing or other factors could materially adversely affect our operations or financial condition.
WE MAY BE REQUIRED TO SPEND SUBSTANTIAL TIME AND EXPENSE BEFORE WE RECOGNIZE A SIGNIFICANT PORTION OF THE REVENUES, IF ANY, ATTRIBUTABLE TO OUR CUSTOMER CONTRACTS.
The sales cycle for some of our software solutions frequently takes six months to a year or longer from initial customer contact to contract execution. During this time, we may expend substantial time, effort and financial resources without realizing any revenue with respect to the potential sale. In addition, in the case of our hosted EDC solutions, we do not begin recognizing revenue until implementation cycles are complete. Moreover, while we begin recognizing revenue upon completion of the scope of work detailed in our contracts, it may be difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers is recognized over the applicable contract term, typically three months to five years. As a result, we may not recognize significant revenues, if any, from some customers despite incurring considerable expense related to our sales and implementation process. Even if we do realize revenues from a contract, our pricing model may keep us from recognizing a significant portion of these revenues during the same period in which sales and implementation expenses were incurred. Those timing differences could cause our gross margins and profitability to fluctuate significantly from quarter to quarter. Similarly, a decline in new or renewed client contracts in any one quarter will not necessarily be fully reflected in the revenue in that quarter and may negatively affect our revenue in future quarters. This could cause our operating results to fluctuate significantly from quarter to quarter.
THE LOSS OF ONE OR MORE MAJOR CUSTOMERS COULD MATERIALLY AND ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Our top five customers accounted for approximately 42% of our revenues during 2011 and approximately 38% of our revenues during 2010. One customer accounted for 21% of our revenues during 2011 or approximately $2,850,000. One customer accounted for 20% of our revenues during 2010, or approximately $2,466,000. These customers can terminate our services at any time. The loss of any of our major customers could have a material adverse effect on our results of operations or financial condition. We may not be able to maintain our customer relationships, and our customers may not renew their agreements with us, which could adversely affect our results of operations or financial condition. A significant change in the liquidity or financial position of any of these customers could also have a material adverse effect on the collectability of our accounts receivables, our liquidity and our future operating results.
WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS RELATING TO OUR PRODUCTS OR SERVICES OR OUR CUSTOMERS’ USE OF OUR PRODUCTS OR SERVICES.
Any failure or errors in a customer’s clinical trial or adverse event reporting obligations caused or allegedly caused by our products or services could result in a claim for substantial damages against us by our customers or the clinical trial participants, regardless of our responsibility for the failure. Although we are entitled to indemnification under our customer contracts against claims brought against us by third parties arising out of our customers’ use of our products, we might find ourselves entangled in lawsuits against us that, even if unsuccessful, divert our resources and energy and adversely affect our business. Further, in the event we seek indemnification from a customer, we cannot assure you that a court will enforce our indemnification right if challenged by the customer obligated to indemnify us or that the customer will be able to fund any amounts for indemnification owed to us. We also cannot assure you that our existing general liability or professional liability insurance coverage will continue to be available on reasonable terms or will be available in amounts sufficient to cover one or more large claims, or that the insurer will not disclaim coverage as to any future claim.
WE FACE INTENSE COMPETITION AND WILL HAVE TO COMPETE FOR MARKET SHARE.
There can be no assurance that our products will achieve or maintain a competitive advantage. There are currently a number of companies who market services and products for Web-based clinical trial data collection. Barriers to entry on the Internet are relatively low, and we expect competition to increase significantly in the future. We face competitive pressures from numerous actual and potential competitors, both online and offline, many of which have longer operating histories, greater brand name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. We cannot assure you that the Web-based clinical trials maintained by our existing and potential competitors will not be perceived by clinical trial sponsors as being superior to ours.
WE MAY BE UNABLE TO PREVENT COMPETITORS FROM USING OUR INTELLECTUAL PROPERTY, AND WE COULD FACE POTENTIALLY EXPENSIVE LITIGATION TO ASSERT OUR RIGHTS. IF WE CANNOT PROTECT OUR PROPRIETARY INFORMATION, WE MAY LOSE A COMPETITIVE ADVANTAGE AND SUFFER DECREASED REVENUES AND CASH FLOW.
We are dependent, in part, on proprietary data, analytical computer programs and methods and related know-how for our day-to-day operations. We rely on a combination of confidentiality agreements, contract provisions, license agreements, trademarks and trade secret laws to protect our proprietary rights. Although we intend to protect our rights vigorously, to the extent that our intellectual property and other proprietary rights are not adequately protected, third parties might gain access to our proprietary information, develop and market products or services similar to ours, or use trademarks similar to ours, each of which could materially harm our business. If we resort to legal proceedings to enforce our intellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. There can be no assurance we will be successful in protecting our proprietary rights. If we are unable to protect our proprietary rights, or if our proprietary information and methods become widely available, we may lose our ability to obtain or maintain a competitive advantage within our market niche, which may have a material adverse effect on our business, results of operations or financial condition.
CLAIMS THAT WE OR OUR TECHNOLOGIES INFRINGE UPON THE INTELLECTUAL PROPERTY OR OTHER PROPRIETARY RIGHTS OF A THIRD PARTY MAY REQUIRE US TO INCUR SIGNIFICANT COSTS, TO ENTER INTO ROYALTY OR LICENSING AGREEMENTS OR TO DEVELOP OR LICENSE SUBSTITUTE TECHNOLOGY.
We have been, and may in the future be, subject to claims that our technologies infringe upon the intellectual property or other proprietary rights of a third party. For instance, in April 2009, we settled a lawsuit against us which alleged that we infringed a patent claimed to be owned by the plaintiff. We incurred substantial professional fees in connection with this claim and agreed to enter into a license for the patent pursuant to which we issued warrants and agreed to pay royalties and future royalties in order to settle this litigation. In addition, this licensor could become subject to similar infringement claims. Although we believe that our software solutions do not infringe the patents or other intellectual property rights of any third party, we cannot assure you that our technology does not infringe patents or other intellectual property rights held or owned by others or that they will not in the future. Any future claims of infringement could cause us to incur substantial costs defending against such claims, even if the claims are without merit, and could distract our management from our business. Moreover, any settlement or adverse judgment resulting from such claims could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. There can be no assurance that we would be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all, that we would be able to successfully develop alternative technology on a timely basis, if at all, or that we would be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering, and our customers to continue using, the applicable technology. In addition, we generally provide in our customer agreements that we will indemnify our customers against third-party infringement claims relating to our technology provided to the customer, which could obligate us to fund significant amounts. Infringement claims asserted against us or our licensor may have a material adverse effect on our business, results of operations or financial condition
FAILURE TO ADAPT TO EVOLVING TECHNOLOGIES AND USER DEMANDS COULD RESULT IN THE LOSS OF USERS.
To be successful, we must adapt to rapidly changing technologies and user demands by continuously enhancing our products and services and introducing new products and services. If we need to modify our products and services or infrastructure to adapt to changes affecting clinical trials, we could incur substantial development or acquisition costs. As described below, we will be dependent upon the availability of additional financing to fund these development and acquisition costs. If these funds are not available to us, and if we cannot adapt to these changes, or do not sufficiently increase the features and functionality of our products and services, our users may switch to the product and service offerings of our competitors.
WE MAY BE UNABLE TO ADEQUATELY DEVELOP OUR SYSTEMS, PROCESSES AND SUPPORT IN A MANNER THAT WILL ENABLE US TO MEET THE DEMAND FOR OUR SERVICES.
Our future success will depend on our ability to develop effectively the infrastructure, including additional hardware and software, and implement the services, including customer support, necessary to meet the demand for our services. In the event we are not successful in developing the necessary systems and implementing the necessary services on a timely basis, our revenues could be adversely affected, which would have a material adverse effect on our financial condition.
FAILURE TO MANAGE RAPID GROWTH EFFECTIVELY COULD HARM OUR BUSINESS.
To manage our current and anticipated future growth effectively, we must continue to maintain and may need to enhance our information technology infrastructure, financial and accounting systems and controls and manage expanded operations in geographically distributed locations. Our failure to manage our rapid growth effectively could have a material adverse effect on our business, operating results or financial condition.
IN THE COURSE OF CONDUCTING OUR BUSINESS, WE POSSESS OR COULD BE DEEMED TO POSSESS PERSONAL MEDICAL INFORMATION IN CONNECTION WITH THE CONDUCT OF CLINICAL TRIALS, WHICH IF WE FAIL TO KEEP PROPERLY PROTECTED, COULD SUBJECT US TO SIGNIFICANT LIABILITY.
Our software solutions are used to collect, manage and report information in connection with the conduct of clinical trials. This information is or could be considered to be personal medical information of the clinical trial participants. Regulation of the use and disclosure of personal medical information is complex and growing. Increased focus on individuals’ rights to confidentiality of their personal information, including personal medical information, could lead to an increase of existing and future legislative or regulatory initiatives giving direct legal remedies to individuals, including rights to damages, against entities deemed responsible for not adequately securing such personal information. In addition, courts may look to regulatory standards in identifying or applying a common law theory of liability, whether or not that law affords a private right of action. Since we receive and process personal information of clinical trial participants from our customers, there is a risk that we could be liable if there were a breach of any obligation to a protected person under contract, standard of practice or regulatory requirement. If we fail to properly protect this personal information that is in our possession or deemed to be in our possession, we could be subjected to significant liability.
OUR FINANCIAL STATEMENTS CONTAIN A GOING CONCERN QUALIFICATION.
Because of our significant operating losses, accumulated deficit, negative cash flows and the uncertainty as to our ability to secure additional financing, the report of our independent auditors on our consolidated financial statements for the year ended December 31, 2011 contained an explanatory paragraph indicating there is substantial doubt about our ability to continue as a going concern.
FUTURE SALES OF SHARES BY EXISTING STOCKHOLDERS AS WELL AS THE ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK COULD RESULT IN A DECLINE IN THE MARKET PRICE OF THE STOCK.
At March 22, 2012, we had 86,481,495 shares of common stock issued and outstanding and 97,123,908 shares issuable upon the conversion of preferred stock, convertible debt or exercise of warrants or options. Of the issued shares, 21,533,508 are eligible for resale pursuant to Rule 144. In general, Rule 144 permits a shareholder who has owned restricted shares for at least six months, to sell without registration, within a three-month period, up to one percent of our then outstanding common stock. In addition, shareholders other than our officers, directors or 5% or greater shareholders who have owned their shares for at least two years may sell them without volume limitation or the need for our reports to be current.
We cannot predict the effect, if any, that market sales of common stock or the availability of these shares for sale will have on the market price of the shares from time to time. Nevertheless, the possibility that substantial amounts of common stock may be sold in the public market could adversely affect market prices for the common stock and could damage our ability to raise capital through the sale of our equity securities.
THE EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS AND THE CONVERSION OF OUTSTANDING SHARES OF PREFERRED STOCK AND CONVERTIBLE PROMISSORY NOTES WILL BE DILUTIVE TO OUR EXISTING STOCKHOLDERS.
As of March 22, 2012, we had a total of 94,373,759 shares of our common stock underlying options, warrants and other convertible securities and 2,750,149 shares of common stock underlying convertible preferred stock. The exercise of these warrants and options and/or the conversion of these convertible securities will have a dilutive effect on our existing stockholders.
THE 250,000 SHARES OF SERIES D PREFERRED STOCK ISSUED IN 2010 PROVIDE SUPER-VOTING RIGHTS THAT RESULTED IN A CHANGE OF CONTROL OF THE CORPORATION
Each share of the Series D Preferred Stock entitles the holder to 400 votes at any meeting of our stockholders and such shares of Series D Preferred Stock will vote together with the common stockholders, provided for the election or removal of directors the shares of Series D Preferred Stock will be voted in the same percentage as all voting shares of common stock voted for each director. As a result of the change in control, the holder of the Series D Preferred Shares could vote the shares in a manner that could be contrary to the interests of the holders of our common stock.
THERE IS ONLY A LIMITED TRADING MARKET FOR OUR COMMON STOCK.
There is a limited trading market for our common stock. We cannot predict the extent to which investor interest in us will lead to the development of an active trading market or how liquid that trading market might become. If a liquid trading market does not develop or is not sustained, investors may find it difficult to dispose of shares of our common stock and may suffer a loss of all or a substantial portion of their investment in our common stock.
BECAUSE OUR STOCK CURRENTLY TRADES BELOW $5.00 PER SHARE, AND IS QUOTED ON THE OTC BULLETIN BOARD, OUR COMMON STOCK IS CONSIDERED A "PENNY STOCK" WHICH CAN ADVERSELY EFFECT ITS LIQUIDITY.
If our common stock continues to be quoted on the OTC Bulletin Board, and the trading price of our common stock remains less than $5.00 per share, our common stock is considered a "penny stock," and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser's written consent prior to the transaction.
The Securities and Exchange Commission regulations also require additional disclosure in connection with any trades involving a "penny stock," including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BY-LAWS MAY DELAY OR PREVENT A TAKE-OVER WHICH MAY NOT BE IN THE BEST INTERESTS OF OUR COMMON STOCKHOLDERS.
Provisions of our articles of incorporation and by-laws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, our articles of incorporation authorize the issuance of up to 10,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our Board of Directors, of which 4,375,224 shares are currently issued and outstanding. Our board of directors may, without stockholder approval, issue additional series of preferred stock with dividends, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of our common stock.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
Our corporate headquarters and other material leased real property as of December 31, 2011 are shown in the following table. We do not own any real property.
Our principal executive offices are located in approximately 11,500 square feet of commercial office space at 2101 West Commercial Blvd, Fort Lauderdale, Florida, and our telephone number is (954) 473-1254. We lease these offices under the terms of a lease expiring in September 2016. Our annual rental payment under this lease is $173,706 plus sales tax.
We have a regional operating office located at 1100 Cornwall Road, Monmouth Junction, New Jersey. This office is located in approximately 3,900 square feet of commercial office space. We lease this office under the terms of a lease expiring in February 2013 and our annual rental payment under this lease is $73,340 plus sales tax.
Our European headquarters are located in approximately 2,100 square feet of commercial office space at Graurheindorfer Strasse 35-39, Bonn, Germany. We lease these offices under the terms of a lease expiring in December 2012. Our annual rental payment under this lease is 28,000 Euros or approximately $38,800.
We have an R & D office in Europe for our TrialOne software application. The office is located at The Shipyard, Bath Road, Lymington, Hampshire, UK. The office has an area of approximately 1,500 square feet. We lease these offices under the terms of a lease expiring in October 2012. Our annual rental payment under this lease is 51,000 British Pounds or approximately $81,600.
We currently have one data site, which serves as our primary network and data hosting location, it is located in Cincinnati, Ohio and is leased from Cincinnati Bell Technology Solutions. We lease this space under the terms of a lease expiring in March 2013. We expect our annual lease payment to be approximately $82,200 plus sales tax.
We maintain a business-continuity site for disaster recovery purposes in Ft. Lauderdale, Florida. We lease from our landlord, rack space for our SG&A servers and redundant data hosting, an office suite and cubicles that will allow us to maintain operations in the event of a disaster. Our annual rental payment is $223,406 plus sales tax. This lease expires in August 2012.
We believe these facilities and additional or alternative space available to us will be adequate to meet our needs for the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On January 9, 2012, Simon Kemp, a former employee in the UK of our OmniComm Ltd. subsidiary, filed a claim with the Southampton Employment Tribunal alleging unfair dismissal, failure to provide a written statement of particulars of employment and breach of contract. The company disagrees with the allegations and filed a response with the Employment Tribunal in February 2012. This matter is ongoing and we are prepared to vigorously defend against the claim.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on a limited basis on the OTC Bulletin Board under the symbol OMCM. The following table sets forth the range of high and low bid prices for our common stock as reported by the OTC Bulletin Board for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. The quotation of our common stock on the OTC Bulletin Board does not assure that a meaningful, consistent and liquid market for such securities currently exists.
On March 20, 2012 the closing price of our common stock as reported on the OTC Bulletin Board was $0.07. At March 20, 2012 we had approximately 454 shareholders of record; however, we believe that we have in excess of 1,000 beneficial owners of our common stock.
Dividend Policy
Holders of our common stock are entitled to cash dividends when, and as may be declared by the board of directors. We have never declared or paid any cash dividends on our common stock. We currently expect to retain future earnings, if any, to finance the growth and development of our business and we do not anticipate that any cash dividends will be paid in the foreseeable future. Our future payment of dividends will be subject to the discretion of our Board of Directors and will depend on our earnings, capital requirements, expansion plans, financial condition and other relevant factors. We are currently restricted under Delaware corporate law from declaring any cash dividends due to our current working capital and stockholders’ deficit. There can be no assurance that cash dividends of any kind will ever be paid.
A special note about penny stock rules
The Securities and Exchange Commission has adopted regulations which generally define a “penny stock” to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Our common stock should be considered to be a penny stock. A penny stock is subject to rules that impose additional sales practice requirements on broker/dealers who sell these securities to persons other than established customers and accredited investors. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of these securities. In addition, he must receive the purchaser’s written consent to the transaction prior to the purchase. He must also provide certain written disclosures to the purchaser. Consequently, the penny stock rules may restrict the ability of broker-dealers to sell our securities and may negatively affect the ability of holders of shares of our common stock to sell them.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to a smaller reporting company.
ITEM 7.
ITEM 7. MANAGEMENT’S 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 audited 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-K 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-K 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-K. 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™ (the “eClinical Software Products”), allow clinical trial sponsors and investigative sites to securely collect, validate, transmit and analyze clinical trial data.
During fiscal 2011 we sought to build and expand on our strategic efforts. The primary focus of our strategy includes:
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Stimulating demand by providing clinical trial sponsors with high value eClinical applications and services;
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Continued emphasis on expanding our business model by offering our software solutions on a licensed basis in addition to our existing hosted-services solutions;
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An emphasis on penetrating the Phase I trial market with our dedicated Phase I solution, TrialOne;
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Expanding our penetration of the large pharmaceutical sponsor market by leveraging the client contracts we assumed in our 2009 acquisitions;
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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;
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Expanding our business development efforts in Europe to capitalize on our operational and clinical capabilities vis-à-vis our competition in that geographic market;
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Providing our services to small and midsize pharmaceutical, biotechnology, medical device companies and CROs; and
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Emphasizing low operating costs.
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 2011, we increased our marketing and sales personnel both in the U.S. and European markets and 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”). We will seek to aggressively expand the scope of our sales and marketing operations in Europe during 2012.
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 spent approximately $2,479,000 and $3,304,000 on R & D activities during years ended December 31, 2011 and December 31, 2010, respectively. The majority of these expenses represent salaries and related benefits to our developers which include costs associated with the customization of our EDC software applications for our clients’ projects. We currently employ software programmers, engineers and related support personnel.
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. We believe that strengthening our reputation and broadening the scope of our brand recognition will serve to improve the effectiveness of our sales and marketing efforts.
Our business development focus continues to include increasing our penetration of all phases of the clinical trial market with a particular 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 fiscal 2011, we emphasized commercializing our products on a licensed basis. During 2011 we experienced positive strides towards achieving this goal. We successfully increased the number of clients utilizing the software on a licensed basis as well as increasing the scope of licenses existing clients had deployed in our eClinical and TrialMaster product lines. In 2011 we added nine new clients to our license install base and expanded the number of licenses held by 21 exisiting clients. We expect to experience increased success in penetrating the market for larger pharmaceutical, biotechnology and medical device clinical trial sponsors as we continue expanding our marketing and sales efforts during 2012.
Our clients are able to partially or completely license our EDC solutions. The licensing business model provides our clients with 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 TrialOne) 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. The European market accounted for approximately 17% of total revenues for the year ended December 31, 2011.
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 fiscal 2012. We have increased the marketing and business development budget for our TrialOne product during 2012 as we place increased emphasis on increasing our penetration of the Phase I market both in the U.S. and in Europe since we believe that segment of the EDC market is the least penetrated and allows for the greatest potential increases in market share and in sales volumes. 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.
The Year ended December 31, 2011 compared with the Year ended December 31, 2010
Results of Operations
A summarized version of our results of operations for the years ended December 31, 2011 and December 31, 2010 is included in the table below.
Revenues for the year ended December 31, 2011 increased 9.4% from the year ended December 31, 2010. The table below provides a comparison of our recognized revenues for the years ended December 31, 2011 and December 31, 2010.
Overall Revenue increased by $1.2 Million or 9.4%. This is primarily the result of our continuing efforts to expand the number of clients who utilize our EDC products on a license basis rather than under an ASP model. Revenue from licensing was $2,809,629 and $1,605,099 for the years ended December 31, 2011 and December 31, 2010 respectively, a 75% increase.
We recorded revenue of $8,867,296, including $1,565,962 from licensing and $2,988,403 from maintenance associated with our TrialMaster suite during the year ended December 31, 2011 compared with Revenue of $6,895,299 that included $743,358 and $1,328,033, respectively, during the year ended December 31, 2010. The increase in revenue is the result of maintaining and expanding our relationships with our existing clients while also expanding our installed client base with the addition of new clients.
We recorded $3,564,795 in revenues associated with clients with our acquisition of the eResearch Technology eClinical software application suite (“eClinical”) during the year ended December 31, 2011 compared with $5,291,993 for the year ended December 31, 2010. eClinical revenues are primarily comprised of license subscriptions and revenues associated with our hosting and maintenance services. The 2010 Revenue results include a number of one-time transactions that were not replicated in 2011. The 2011 revenue is in line with the pre-2010 revenue run rate.
We recorded $595,293 in revenues from hosting activities and $215,595 in consulting services associated with the eClinical suite during the year ended December 31, 2011 compared with $792,533 and $588,161 respectively, for the year ended December 31, 2010. Generally, these revenues are paid quarterly and are connected to hosting and client support for clients licensing that application.
We recorded $979,252 in revenues associated with clients on our TrialOne EDC software for the year ended December 31, 2011 compared with $240,289 for the year ended December 31, 2010. We are continuing our efforts at commercializing and developing our sales and marketing campaign for the TrialOne application. We expect to significantly increase our participation in industry trade shows and conferences and are in the process of developing a dedicated sales force for the TrialOne software. TrialOne revenues are comprised of license subscriptions and maintenance services since the software is currently only sold under a technology transfer basis.
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 we completed the acquisition of the eResearch EDC Assets and TrialOne (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 at the beginning of a project 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 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.
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 consulting services associated with the installation, validation, training and 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 41.7% of our revenues during the year ended December 31, 2011 and approximately 37.6% of our revenues during the year ended December 31, 2010. One customer accounted for approximately 21% of our revenues during the year ended December 31, 2011. One customer accounted for approximately 20% of our revenues during the year ended December 31, 2010. 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 27.0% or $478,246 for the year ended December 31, 2011 as compared to the year ended December 31, 2010. Cost of goods sold were approximately 16.8% of revenues for the year ended December 31, 2011 compared to approximately 14.5% for the year ended December 31, 2010. 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 increased during the year ended December 31, 2011 primarily due to an increase in volume relating to a pass-thru expense for a third-party service that is classified under cost of goods sold. 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. 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 decreased approximately 17.7% for the year ended December 31, 2011 when compared to the year ended December 31, 2010. The decrease in operating expenses can be attributed to the restructuring that occurred in 2010, coupled with our continued focus to maintain our cost structure in line with our revenue. Total operating expenses were approximately 87.5% of revenues during the year ended December 31, 2011 compared to approximately 116.4% of revenues for the year ended December 31, 2010.
Salaries and related expenses were our biggest operating expense at 65.7% of total operating expenses for the year ended December 31, 2011 compared to 67.9% of total operating expenses for the year ended December 31, 2010. Salaries and related expenses decreased approximately 20.4% for the year ended December 31, 2011 when compared to the same period that ended December 31, 2010. The decrease in salary expense is primarily related to the full year impact of our 2010 cost reduction initiatives. The table below provides a summary of the significant components of salary and related expenses by primary cost category.
We currently employ approximately 53 employees out of our Ft. Lauderdale, Florida corporate office, seven employees out of our New Jersey regional operating office, nine out-of-state employees, seven employees out of a wholly-owned subsidiary in the United Kingdom and 21 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 six to nine months in an effort to increase our market penetration, particularly as it relates to the largest pharmaceutical, biotechnology and CRO 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 year ended December 31, 2011 and the year ended December 31, 2010 we incurred $129,229 and $584,061, respectively, in salary expense in connection with ASC 718 Compensation - Stock Compensation, which establishes standards for transactions in which an entity exchanges its equity instruments services from employees. This standard requires companies 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 decreased by approximately 1.5% during the year ended December 31, 2011 when compared to the year ended December 31, 2010. The table below details the significant portions of our rent expense. In particular, the decrease in 2011 is associated with reductions in our straight-line rent expense offset by an increase in our corporate office rent expense. Our primary data site is located at a Cincinnati Bell owned co-Location facility in Cincinnati, Ohio and we 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 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 2012. We currently lease office space in Bonn, Germany for our European subsidiary, OmniComm Europe, GmbH. That lease expires in December 2012. We currently lease office space for a regional operating office in New Jersey. The staff at this location is primarily focused on the integration of the eResearch EDC Assets. That lease expires in February 2013. Our OmniComm Ltd. subsidiary leases office space in Lymington, UK. That office lease expires in October 2012. In September 2010 we renewed our corporate 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. Included in rent during 2011 was $9,216 in non-cash, straight line rent expense recorded to give effect to contractual, inflation-based rent increases in our leases.
Consulting services expense decreased to $326,738 for the year ended December 31, 2011 compared with $429,240 for the year ended December 31, 2010, a decrease of $102,502 or 23.9%. 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 for Product Development were higher during fiscal 2011 as we utilized the services of additional third-party sources for portions of our product development work. The increase in Product Development consulting expense was offset by the elimination of consulting expenses relating to Sales and Marketing.
Legal and professional fees increased approximately 6.7% for the year ended December 31, 2011 compared with the year ended December 31, 2010. 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 and acquisitions or for services rendered to us related to securities and SEC related matters. During 2011 legal and professional fees increased primarily due to an increase in Accounting Services relating to our implementation of a new integrated business management software package that includes General Ledger/Accounting, CRM and ERP modules and an increase in Employment Related Legal Expenses relating to new and existing employees. These increases were partially offset by a decrease in Financial Advisory expenses that relate to our 2010 cost restructuring efforts. The table below compares the significant components of our legal and professional fees for the years ended December 31, 2011 and December 31, 2010, respectively.
Selling, general and administrative expenses (“SGA”) decreased approximately 13.4% for the year ended December 31, 2011 compared to the year ended December 31, 2010. This decrease is primarily due to a decrease in our insurance expenses and the ongoing reduction in expenses resulting from the restructuring that occurred in 2010. During the year ended December 31, 2011 we recorded $316,809 in license fees associated with our license agreement with DataSci, LLC compared to $223,667 during the year ended December 31, 2010. In 2010 we incurred $50,000 in software licensing expense 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 $13,921 during the year ended December 31, 2011 as compared to an expense of $54,642 for the year ended December 31, 2010, 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, FL, Monmouth Junction, 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 includes the cost of office equipment and supplies, the costs of attending conferences and seminars and other expenses incurred in the normal course of business. In 2011 and 2010 the company spent approximately $250,000 per year on marketing, sales and advertising. We expect that the 2012 marketing, sales and advertising expenses will be in line with the prior years expenditures.
During the year ended December 31, 2011 we recognized a credit of $119,889 in bad debt expense compared to an expense of $13,954 for the year ended December 31, 2010. During 2011, we carefully and actively managed our potential exposure to bad debt by closely monitoring our accounts receivable and proactively taking the action necessary to limit our exposure. We were very successful in managing and collecting our outstanding A/R. We believe that our current allowance for uncollectible accounts accurately reflects any accounts which may prove uncollectible during fiscal 2012.
Interest expense was $2,281,029 during the year ended December 31, 2011 compared to $3,628,230 for the year ended December 31, 2010, a decrease of $1,347,201. Interest incurred to related parties was $1,459,456 during the year ended December 31, 2011 and $1,236,843 for the year ended December 31, 2010. 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 years ended December 31, 2011 and December 31, 2010.
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 2010 and 2011 were obtained at the best terms available to the Company. During the years ended December 31, 2011 and December 31, 2010 we issued $1,600,000 and $2,866,879, respectively, in Promissory Notes to our Chief Executive Officer and Director, Cornelis Wit
We record unrealized gains/losses related to changes in our derivative liabilities associated with the issuance of convertible debt that occurred during fiscal 2008 and 2009. We recorded a net unrealized loss of $671,405 during the year ended December 31, 2011 compared with a net unrealized gain of $4,330,279 during the year ended December 31, 2010. The unrealized gains/losses can be attributed to fair value calculations undertaken periodically on the warrant and conversion feature liabilities 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 and losses have materially impacted our results of operations during the years ended December 31, 2011 and December 31, 2010 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.
The Company recorded arrearages of $204,487 and $205,134 in its 5% Series A Preferred Stock dividends for the years ended December 31, 2011, and December 31, 2010, respectively. As of December 31, 2011, the Company had cumulative arrearages for preferred stock dividends as follows:
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. At December 31, 2011, we had working capital deficit of approximately $6,676,476.
The table provided below summarizes key measures of our liquidity and capital resources:
Cash and Cash Equivalents
Cash and cash equivalents increased by $88,890 to $1,302,287 at December 31, 2011. The increase is comprised of an operating loss of $3,524,343, offset by an increase from non-cash transactions of $2,351,049 and changes in working capital accounts of $862,330. During the year ended December 31, 2011 we had investing activities comprised of purchases of property and equipment of $191,230. During the year ended December 31, 2011 we raised a gross amount of $1,033,000 in promissory notes, repaid $200,000 in convertible notes and repaid $212,500 in notes payable.
During 2011 our ability to collect on trade receivables improved as compared to fiscal 2009 and 2010. We saw decreased incidence of customers discontinuing operations and experienced a small amount of uncollectable receivables. Our expectation is that during 2012 we will continue to see improved trade receivables collections and will not experience any material customer defaults.
In the past, the Company has through extending payments on trade payables managed to improve its working capital and cash position. Additionally, the amounts expended on payroll and operating expenses were decreased during fiscal 2010 in connection with a 2010 restructuring of our costs. The Company has experienced a commensurate decrease in payables and payroll related expenses and expects these trends to continue during fiscal 2012.
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 $550,000 planned for capital expenditures to further develop the Company’s 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.
Contractual Obligations
The following table sets forth our contractual obligations during the next five years as of December 31, 2011:
1.
Amounts do not include interest to be paid.
2.
Includes $37,500 of 12% notes payable that mature in April 2012; $111,800 of notes payable that mature in July 2012; $45,000 of 12% notes payable that mature in October 2012 and $20,000 of notes payable that mature in December 2012.
3.
Includes $431,986 of 10% notes payable that mature in January 2013 and $157,500 of 12% notes payable that mature in April 2013.
4.
Includes $2,866,879 of 12% notes payable that mature in April 2014.
5.
Includes $1,600,000 of 12% notes payable that mature in January 2015.
6.
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 holder at a conversion rate of $1.25 per share.
7.
Includes $1,200,000 in 12% Convertible Notes that mature in March 2013; $1,920,000 in 10% Convertible Notes that mature in August 2013; $1,490,000 in 12% Convertible Notes that mature in October 2013 and $4,980,000 in 12% Convertible Notes that mature in December 2013.
8.
Includes office lease obligations for our headquarters in Fort Lauderdale, our regional operating office in New Jersey, our R & D office in England, 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.
9.
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 $169,728 on our 10% Convertible Notes that were issued in 1998. We were in default effective January 30, 2002.
On February 1, 2011, the Company issued a promissory note payable totaling $137,500 in exchange for a promissory note payable in the same amount originally issued in fiscal 2008 with a maturity date in 2011. The promissory note bears interest at 12% and matures in April 2013.
On March 31, 2011, the Company issued a promissory note payable totaling $2,866,879 to our Chief Executive Officer in exchange for promissory notes totaling $2,866,879 that matured in 2011 and 2012. The new promissory note bears interest at 12% per annum and matures in April 2013.
On April 1, 2011, the Company issued a promissory note payable totaling $45,000 in exchange for outstanding professional fees. The promissory note bears interest at 12% and matures in October 2012.
On December 31, 2011, the Company issued a promissory note payable totaling $1,600,000 to our Chief Executive Officer in exchange for $833,000 in promissory notes that matured in 2013 and 2014 along with $767,000 in accrued interest outstanding. The new promissory note bears interest at 12% per annum and matures in January 2015.
On December 31, 2011, the Company issued a promissory note payable totaling $20,000 to our Chairman and Chief Technology Officer in exchange for a promissory note that matured in 2011. The new promissory note bears interest at 12% per annum and matures in April 2013.
On December 31, 2010, the Company issued promissory notes payable totaling $431,986 in exchange for two Convertible Debentures originally issued in August 2008 with a maturity date of August 29, 2010 with principal payments totaling $350,000 and accrued interest of 81,986. The promissory notes bear interest at 10% per annum and mature in January 2013.
During fiscal 2010, $111,800 in promissory notes and $70,000 in convertible notes originally issued in fiscal 2008 and 2009 matured. The convertible notes are held by two senior managers of the Company. The convertible notes were extended utilizing promissory note with $12,500 of the notes payable in January 2011, $37,500 payable in April 2012 and $20,000 payable in December 2012. The new promissory notes bear interest at 12% per annum. The $111,800 in promissory notes were held by two long term investors and were extended to July 2012. The notes bear interest at 12% per annum.
During the next twelve months we expect debt in the aggregate amount of $289,300 to mature as follows: $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; $37,500 of 12% notes payable that mature in April 2012; $111,800 of notes payable that mature in July 2012; $45,000 of 12% notes payable that mature in October 2012 and $20,000 of notes payable that mature in December 2012.
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. Other than our revenues, 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 raised $9,665,000 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. We raised $1,600,000 and $2,886,879 in 2011 and 2010 respectively from promissory notes to our Chief Executive Officer. In addition, in 2011 we extended a $20,000 promissory note to our Chairman and Chief Technology Officer that was originally issued in 2010.
In November 2010, the Company issued 250,000 shares of its Series D Preferred Stock to its CEO, Cornelis F. Wit in exchange for the cancellation of $1,000,000 of the Company’s convertible debentures.
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 made material changes to its cost structure including reducing 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.
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 disadvantageous 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.
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 December 31, 2011, there is substantial doubt about our ability to continue as a going concern. In addition, our auditors Webb & Company, P.A., included language which qualified their opinion regarding our ability to continue as a going concern in their report dated March 22, 2012 regarding our audited financial statements for the year ended December 31, 2011.
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.
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 asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use quoted market prices when available and independent appraisals, 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
OmniComm’s 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 revenues, 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 arrangements 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.
The Company accounts for its employee equity incentive plans under ASC 718, Compensation - Stock Compensation which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions.
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Consolidated Statements of Income. The Company currently uses the Black-Scholes option pricing model to determine grant date fair value.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During fiscal 2011, we adopted the following new accounting pronouncements:
In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of supplementary pro forma information for business combinations.” This update changes the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. These changes became effective for the Company beginning January 1, 2011. The Company’s adoption of this update did not have an impact on the Company’s financial condition or results of operations.
In December 2010, the FASB issued ASU 2010-28, “Intangible -Goodwill and Other (Topic 350): When to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.” This update requires an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. These changes became effective for the Company beginning January 1, 2011. The adoption of this ASU did not have a material impact on our financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which clarifies the wording and disclosures required in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), to converge with those used (to be used) in International Financial Reporting Standards (“IFRS”). The update explains how to measure and disclose fair value under ASC 820. However, the FASB does not expect the changes in this standards update to alter the current application of the requirements in ASC 820. The provisions of ASU 2011-04 are effective for public entities prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is prohibited. Therefore, ASU 2011-04 is effective for the Company during the first quarter of fiscal 2012. The Company does not expect ASU 2011-04 to have a material effect on the Company’s results of operations, financial condition, and cash flows.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, (“ASU 2011-05”). ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 will be effective for the Company’s quarter ending June 30, 2012. The adoption of ASU 2011-05 is not expected to have a material effect on the Company’s condensed consolidated financial statements, but will require a change in the presentation of the Company’s comprehensive income from the notes of the condensed consolidated financial statements, where it is currently disclosed, to the face of the condensed consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, (“ASU 2011-08”), which amends the guidance in ASC 350-20, Intangibles - Goodwill and Other - Goodwill. Under ASU 2011-08, entities have the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, then entities are required to perform the two-step goodwill impairment test. ASU 2011-08 will be effective for the Company’s fiscal year beginning January 1, 2012, with early adoption permitted. The adoption of ASU 2011-08 is not expected to have a material effect on the Company’s consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.” ASU 2011-12 indefinitely defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement, while still requiring companies to adopt the other requirements contained in ASU 2011-05, the new standard on comprehensive income. ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not expect the adoption of ASU 2011-05 to have a material impact on the consolidated financial statements.In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, (“ASU 2011-08”), which amends the guidance in ASC 350-20, Intangibles - Goodwill and Other - Goodwill. Under ASU 2011-08, entities have the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, then entities are required to perform the two-step goodwill impairment test. ASU 2011-08 will be effective for the Company’s fiscal year beginning January 1, 2013, with early adoption permitted. The adoption of ASU 2011-08 is not expected to have a material effect on the Company’s condensed consolidated financial statements.
Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements that have been issued since the filing of our Form 10K for the year ended December 31, 2010 to determine their impact, if any, on our financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable to smaller reporting companies.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements are set forth on Pages through attached hereto.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 12, 2010, Greenberg and Company, LLC (“Greenberg”) resigned as the independent registered public accounting firm for the Company and on August 2, 2010 we engaged Webb & Company, P.A. as our independent registered public accounting firm. The change of our independent registered public accounting firm and engagement of Webb & Company, P.A. was approved by our Board of Directors on August 2, 2010.
Greenberg’s audit reports on our financial statements for the fiscal years ended December 31, 2008 and 2009 did not contain an adverse opinion or a disclaimer of opinion. Their opinion for the fiscal years ended December 31, 2008 and 2009 were not qualified or modified as to audit scope or accounting principles except that each such audit report for the fiscal years ended December 31, 2008 and 2009 contained a qualification regarding uncertainty regarding the Company’s ability to continue as a going concern.
During the fiscal years ended December 31, 2009 and 2008 and the subsequent interim period preceding the date Greenberg resigned as our independent registered public accounting firm (i) there were no disagreements between the Company and Greenberg on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreement, if not resolved to the satisfaction of Greenberg, would have caused it to make a reference to the subject matter of the disagreement in connection with its reports and (ii) there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
During our two most recent fiscal years and the subsequent interim period prior to retaining Webb & Company, P.A. (1) neither we nor anyone on our behalf consulted Webb & Company, P.A. regarding (a) either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements or (b) any matter that was the subject of a disagreement or a reportable event as set forth in Item 304(a)(1)(iv) and (v), respectively, of Regulation S-K, and (2) Webb & Company, P.A. did not provide us with a written report or oral advice that they concluded was an important factor considered by us in reaching a decision as to accounting, auditing or financial reporting issue.
We provided Greenberg with a copy of the disclosure contained in our Current Report on Form 8-K filed July 14, 2010 reporting the resignation (“Form 8-K”) and contained in an amendment to the 8-K filed August 2, 2010 (Form 8-K/A”), prior to each filing with the Securities and Exchange Commission (“SEC”), and requested that the firm furnish us with a letter addressed to the SEC stating whether they agree with the statements made in that Current Report on Form 8-K, and if not, stating the aspects with which they do not agree. Greenberg furnished us with a letter addressed to the SEC stating their agreement with the above statements. The letters provided by Greenberg were filed as Exhibit 16.1 to the Form 8-K and as Exhibit 16.1(a) to the Form 8-K/A and are incorporated herein by reference.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, being December 31, 2011, the Company’s principal executive officer and principal financial officer have concluded that the Company’s 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”) are effective such that the information relating to OmniComm, including our consolidating subsidiaries, required to be disclosed by the Company in reports that it files or submits under the Exchange Act (1) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of OmniComm’s internal control over financial reporting as of December 31, 2011. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on the assessment using those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2011 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Changes in Internal Controls over Financial Reporting
There were no significant changes in the Company’s internal controls over financial reporting or in other factors that could significantly affect these controls over financial reporting that occurred subsequent to the date of their evaluation and up to the filing date of this annual report on Form 10-K. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required in response to this item is incorporated by reference from the information contained in the sections “Nominees for the Board of Directors”, “Management”, “Compliance with Section 16(a) of the Exchange Act “, and “Stock Option Plan”, in our Proxy Statement for our 2012 Annual Meeting of Stockholders to be held on August 4, 2012 (the “Proxy Statement”).
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by reference from the information contained in the section captioned “Executive Compensation” in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required in response to this item is incorporated by reference from the information contained in the section captioned “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement. The information required by Item 201(d) of Regulation S-K is incorporated by reference from the information contained in the section captioned “Executive Compensation Equity Compensation Plan Information” in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS; AND DIRECTOR INDEPENDENCE
The information required in response to this item is incorporated by reference from the information contained in the section captioned “Management” - “Certain Relationships and Related Transactions” in the Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required in response to this item is incorporated by reference from the information contained in the section captioned “Ratification of the Appointment of Webb & Company, P.A. as independent auditors of OmniComm Systems” in the Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:
(a) Exhibits
EXHIBIT NO.
DESCRIPTION
2.1
Agreement and Plan of Reorganization dated July 22, 1998 (1)
2.2
Amendment to Agreement and Plan of Reorganization (2)
2.3
Plan of Merger (3)
2.4
Agreement and Plan of Acquisition of WebIPA dated January 26, 2000 (4)
3.1
Certificate of Incorporation (5)
3.2
Certificate of Designation - Series A Preferred Stock (6)
3.3
Certificate of Increase - Series A Preferred Stock (7)
3.4
Certificate of Designation -Series B Preferred Stock (8)
3.5
Amendment to Certificate of Incorporation (9)
3.6
By-laws (10)
3.7
Certificate of Amendment - Certificate of Designation - Series A Preferred Stock (11)
3.8
Certificate of Amendment - Certificate of Incorporation (12)
3.9
Certificate of Designation - Series C Preferred Stock (13)
3.10
Certificate of Designation - Series D Preferred Stock (14)
4.1
Form of Warrant Agreement including the Form of Warrant issued in connection with the Series B Preferred Stock offering (15)
4.2
Form of Warrant Agreement including the Form of Warrant issued in connection with the Series C Preferred Stock offering (16)
4.3
Form of 10% Convertible Note (17)
4.4
Form of Placement Agent Unit Option issued to Commonwealth Associates, LP in connection with the Series B Preferred Stock offering (18)
4.5
Form of Placement Agent Unit Option issued to Noesis Capital Corp. in connection with the Series C Preferred Stock offering (19)
10.1
Employment Agreement and Stock Option Agreement between the Company and Randall G. Smith (20)
10.2
Employment Agreement and Stock Option Agreement between the Company and Ronald T. Linares (21)
10.3
1998 Stock Incentive Plan (22)
10.4
Standard Agreement - Proprietary Protection (23)
10.6
Employment Agreement and Stock Option Agreement between the Company and Cornelis F. Wit (24)
10.7
Amendment to Employment Agreement between the Company and Cornelis F. Wit (25)
10.9
Amendment to Employment Agreement between the Company and Randall G. Smith (26)
10.10
Amendment to Employment Agreement between the Company and Ronald T. Linares (27)
10.20
Lease Agreement for principal offices dated March 24, 2006 between OmniComm Systems, Inc. and RFP Mainstreet 2101 Commercial, LLC (28)
10.21
Employment Agreement and Stock Option Agreement between the Company and Stephen E. Johnson dated September 4, 2006 (29)
10.23
Form of Debenture dated February 29, 2008 (30)
10.24
Form of Warrant February 29, 2008 (31)
10.27
Form of Debenture dated August 29, 2008 (32)
10.28
Form of Warrant dated August 29, 2008(33)
10.29
Securities Purchase Agreement dated December 16, 2008 by and between OmniComm Systems, Inc. and each individual or entity named on an executed counterpart of the signature page thereto(34)
10.30
Form of Debenture dated December 16, 2008(35)
10.31
Form of Warrant December 16, 2008(36)
10.32
Asset Purchase Agreement with eResearch Technology, Inc. dated June 23, 2009 (37)
10.33
Transition Service Agreement with eResearch Technology, Inc. dated June 23, 2009(38)
10.34
Lock-up and Registration Rights Agreement with eResearch Technology, Inc. dated June 23, 2009(39)
10.35
Agreement by and between OmniComm, Ltd. and Logos Technologies, Ltd dated August 3, 2009(40)
10.36
Securities Purchase Agreement dated September 30, 2009 by and between OmniComm Systems, Inc. and each individual or entity named on an executed counterpart of the signature page thereto(41)
10.37
Form of Debenture dated September 30, 20(42)
10.38
Form of Warrant dated September 30, 2009(43)
10.40
Subscription Agreement for the Series D Preferred Stock dated November 30, 2010 by and between OmniComm Systems, Inc. and Cornelis F. Wit (44)
10.41
Promissory note payable to Cornelis F. Wit dated September 30, 2010(45)
10.42
Promissory note payable to Cornelis F. Wit dated December 31, 2010(46)
10.43
Promissory note payable to Cornelis F. Wit dated December 31, 2010(47)
10.44
Promissory note payable to Cornelis F. Wit dated March 31, 2011*
10.45
Promissory note payable to Cornelis F. Wit dated December 31, 2011*
10.46
Promissory note payable to Randall Smith dated December 31, 2011*
OmniComm Systems, Inc. Code of Ethics (48)
Subsidiaries of the Company*
31.1
Certification of Chief 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 Chief Financial 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 pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS XBRL Instance Document***
101.SCH XBRL Taxonomy Extension Schema Document***
101.CAL XBRL Taxonomy Extension Calculation***
101.DEF XBRL Taxonomy Extension Definition***
101.LAB XBRL Taxonomy Extension Label***
101.PRE XBRL Taxonomy Extension Presentation***
Incorporated by reference to Exhibit 2 filed with our Report on Form 8-K dated March 3, 1999.
Incorporated by reference to Exhibit 2(c) filed with our Registration Statement on Form 10-SB dated December 22, 1998.
Incorporated by reference to Exhibit 2(c) filed with our amended Registration Statement on Form 10-SB dated July 27, 1999.
Incorporated by reference to Exhibit 2 filed with our Report on Form 8-K dated February 9, 2000.
Incorporated by reference to Exhibit 3(a) filed with our Registration Statement on Form SB-2 dated February 6, 1997.
Incorporated by reference to Exhibit 4(b) filed with our amended Registration Statement on Form 10-SB dated August 25, 1999.
Incorporated by reference to Exhibit 4(c) filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 1999.
Incorporated by reference to Exhibit 4(D) filed with our amended Registration Statement on Form SB-2 dated September 17, 2001.
Incorporated by reference to Exhibit 4(E) filed with our Registration Statement on Form SB-2 dated December 27, 2001.
Incorporated by reference to Exhibit 3(b) filed with our Registration Statement on Form SB-2 dated February 6, 1997.
Incorporated by reference to Exhibit 3.7 filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
Incorporated by reference to Exhibit 3.8 filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
Incorporated by reference to Exhibit 3.9 filed with our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
Incorporated by reference to Exhibit 3.10 filed with our Form 8-K dated November 30, 2010
Incorporated by reference to Exhibit 4.1 filed with our Registration Statement filed on Form SB-2 dated September 29, 2003
Incorporated by reference to Exhibit 4.2 filed with our Registration Statement filed on Form SB-2 dated September 29, 2003
Incorporated by reference to Exhibit 4.3 filed with our Registration Statement filed on Form SB-2 dated September 29, 2003
Incorporated by reference to Exhibit 4.4 filed with our Registration Statement filed on Form SB-2 dated September 29, 2003
Incorporated by reference to Exhibit 4.5 filed with our Registration Statement filed on Form SB-2 dated September 29, 2003
Incorporated by reference to Exhibit 10(a)(i) filed with our amended Registration Statement on Form SB-2 dated September 17, 2001.
Incorporated by reference to Exhibit 10(a)(iii) filed with our amended Registration Statement on Form SB-2 dated September 17, 2001.
Incorporated by reference to Exhibit 10(c) filed with our amended Registration Statement on Form 10-SB dated July 27, 1999.
Incorporated by reference to Exhibit 10(f) filed with our amended Registration Statement on Form 10-SB dated August 25, 1999.
Incorporated by reference to Exhibit 10.7 filed with our Form 10-Q for the period ended June 30, 2002.
Incorporated by reference to Exhibit 10.8 filed with our Registration Statement filed on Form SB-2 dated September 29, 2003
Incorporated by reference to Exhibit 10.9 filed with our Form 10-Q for the period ended September 30, 2004.
Incorporated by reference to Exhibit 10.10 filed with our Form 10-Q for the period ended September 30, 2004.
Incorporated by reference to Exhibit 10.1 filed with our Form 10-Q for the period ended June 30, 2006.
Incorporated by reference to Exhibit 10.1 filed with our Form 10-Q for the period ended September 30, 2006.
Incorporated by reference to Exhibit 10.2 filed with our Form 8-K dated March 5, 2008.
Incorporated by reference to Exhibit 10.3 filed with our Form 8-K dated March 5, 2008.
Incorporated by reference to Exhibit 4.8 filed with our Form 10-K dated December 31, 2009
Incorporated by reference to Exhibit 4.9 filed with our Form 10-K dated December 31, 2009
Incorporated by reference to Exhibit 10.1 filed with our Form 8-K dated December 17, 2008
Incorporated by reference to Exhibit 10.2 filed with our Form 8-K dated December 17, 2008
Incorporated by reference to Exhibit 10.3 filed with our Form 8-K dated December 17, 2008
Incorporated by reference to Exhibit 10.26 filed with our Form 8-K dated June 26, 2009
Incorporated by reference to Exhibit 10.27 filed with our Form 8-K dated June 26, 2009
Incorporated by reference to Exhibit 10.28 filed with our Form 8-K dated June 26, 2009
Incorporated by reference to Exhibit 10.29 filed with our Form 8-K dated August 4, 2009
Incorporated by reference to Exhibit 10.1 filed with our Form 8-K dated October 5, 2009
Incorporated by reference to Exhibit 10.2 filed with our Form 8-K dated October 5, 2009
Incorporated by reference to Exhibit 10.3 filed with our Form 8-K dated October 5, 2009
Incorporated by reference to Exhibit 10.32 filed with our Form 8-K dated November 30, 2010
Incorporated by reference to Exhibit 10.41 filed with our Form 10-K dated December 31, 2010
Incorporated by reference to Exhibit 10.42 filed with our Form 10-K dated December 31, 2010
Incorporated by reference to Exhibit 10.43 filed with our Form 10-K dated December 31, 2010
Incorporated by reference to our Proxy Statement filed on June 9 2003.
* Filed herewith
**Furnished herewith
***In accordance with Rule 406T of Regulation S-T, the information in Exhibit 101 is furnished and deemed not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Exchange Act of 1934, and otherwise is not subject to liability under these sections and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, except as expressly set forth by specific reference in such filing.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 22, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Cornelis F. Wit
Chief (Principal) Executive Officer and Director
March 22, 2012
Cornelis F. Wit
/s/ Randall G. Smith
Chairman, Chief Technology Officer
March 22, 2012
Randall G. Smith
/s/ Ronald T. Linares
Chief (Principal) Accounting and Financial Officer
March 22, 2012
Ronald T. Linares
/s/ Guus van Kesteren
Director
March 22, 2012
Guus van Kesteren
/s/ Matthew D. Veatch
Director
March 22, 2012
Matthew D. Veatch
/s/ Jonathan Seltzer
Director
March 22, 2012
Jonathan Seltzer
OMNICOMM SYSTEMS, INC.
Financial Reporting Package
Form 10-K
for the Year Ended December 31, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of:
OmniComm Systems, Inc.
We have audited the accompanying balance sheets of OmniComm Systems, Inc. (the “Company”) as of December 31, 2011 and 2010, and the related statements of operations and comprehensive income, changes in stockholders’ equity and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of OmniComm Systems, Inc. as of December 31, 2011 and 2010 and the results of its operations and its cash flows for the years then ended December 31, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has a net loss attributable to common shareholders of $3,728,830, a negative cash flow from operations of $310,964, a working capital deficiency of $6,676,476 and a stockholders' deficiency of $21,198,559. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
WEBB & COMPANY, P.A.
Certified Public Accountants
Boynton Beach, Florida
March 22, 2012
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
See accompanying summary of accounting policies and notes to consolidated financial statements
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying summary of accounting policies and notes to consolidated financial statements
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
FOR THE PERIOD JANUARY 1, 2010 TO DECEMBER 31, 2011
See accompanying summary of accounting policies and notes to consolidated financial statements
OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying summary of accounting policies and notes to consolidated financial statements
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS
OmniComm Systems, Inc. (“OmniComm” or the “Company”) 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 principally located in the United States and Europe. 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 and services. Our research and development (sometimes referred to as “R & D”) efforts are focused on developing new and complementary software solutions, as well as enhancing our existing software solutions through the addition of increased functionality. During the years ended December 31, 2011 and December 31, 2010 we spent approximately $2,478,704 and $3,304,075, respectively, on research and development activities, which is primarily comprised of salaries to our developers and other R & D personnel and related costs associated with the development of our software products.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The Company’s accounts include those of all its wholly-owned subsidiaries, which are more fully described in the Company’ Annual Report filed on Form 10-K with the Securities and Exchange Commission, and have been prepared in conformity with (i) accounting principles generally accepted in the United States of America; and (ii) the rules and regulations of the United States Securities and Exchange Commission. All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated in consolidation.
ESTIMATES IN FINANCIAL STATEMENTS
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes thereto. Significant estimates incorporated in our financial statements include the recorded allowance for doubtful accounts, the estimate of the appropriate amortization period of our intangible assets, the evaluation of whether our intangible assets have suffered any impairment, the allocation of revenues under multiple-element customer contracts, royalty-based patent liabilities, the value of derivatives associated with debt issued by the Company and the valuation of any corresponding discount to the issuance of our debt. Actual results may differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made in the 2010 financial statements to conform to the 2011 presentation. These reclassifications did not have any effect on our net loss or shareholders’ deficit.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company’s foreign subsidiaries are translated in accordance with ASC 830-30, Foreign Currency Matters-Translation of Financial Statements. The reporting currency for the Company is the U.S. dollar. The functional currencies of the Company’s subsidiaries, OmniComm Europe GmbH in Germany and OmniComm Ltd., in the United Kingdom, are the Euro and British Pound Sterling, respectively. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense accounts of the Company’s foreign subsidiaries are translated using an average rate of exchange during the period. Foreign currency translation adjustments are accumulated as a component of other comprehensive income (loss) as a separate component of stockholders’ equity. Gains and losses arising from transactions denominated in foreign currencies are primarily related to intercompany accounts that have been determined to be temporary in nature and accordingly, are recorded directly to the statement of operations. We record translation gains and losses in accumulated other comprehensive income as a component of stockholders’ equity. We recorded a translation loss of $29,416 for the year ended December 31, 2011 and a translation loss of $27,232 for the year ended December 31, 2010.
REVENUE RECOGNITION POLICY
The Company derives revenues from software licenses and services of its EDC products and services which can be purchased on a stand-alone basis. License revenues are derived principally from the sale of term licenses for the following software products offered by the Company: TrialMaster, TrialOne and eClinical Suite (the “EDC Software”). Service revenues are derived principally from the Company's delivery of the hosted solutions of its TrialMaster and eClinical Suite software products, and consulting services and customer support, including training, for all of the Company's products.
The Company recognizes revenues when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable.
The Company operates in one reportable segment which is the delivery of EDC Software and services to clinical trial sponsors. The Company segregates its revenues based on the activity cycle used to generate its revenues. Accordingly, revenues are currently generated through four main activities. These activities include hosted applications, licensing, professional services and maintenance-related services.
Hosted Application Revenues
The Company offers its TrialMaster and eClinical Suite software products as hosted application solutions delivered through a standard Web-browser, with customer support and training services. The Company's TrialOne solution is presently available only on a licensed basis. To date, hosted applications revenues have been primarily related to TrialMaster.
Revenues resulting from TrialMaster and eClinical Suite application hosting services consist of three components of services for each clinical trial: the first component is comprised of application set up, including design of electronic case report forms and edit checks, installation and server configuration of the system. The second component involves application hosting and related support services as well as billable change orders which consist of amounts billed to customers for functionality changes made. The third stage involves services required to close out, or lock, the database for the clinical trial.
Fees charged and costs incurred for the trial system design, set up and implementation are amortized and recognized ratably over the estimated hosting period. Work performed outside the original scope of work is contracted for separately as an additional fee and is generally recognized ratably over the remaining term of the hosting period. Fees for the first and third stages of the service are billed based upon milestones. Revenues earned upon completion of a contractual milestone are deferred and recognized over the estimated remaining hosting period. Fees for application hosting and related services in the second stage are generally billed quarterly in advance. Revenues resulting from hosting services for the eClinical Suite products consist of installation and server configuration, application hosting and related support services. Services for this offering are generally charged as a fixed fee payable on a quarterly or annual basis. Revenues are recognized ratably over the period of the service.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
Licensing Revenues
The Company's software license revenues are earned from the sale of off-the-shelf software. From time-to-time a client might require significant modification or customization subsequent to delivery to the customer. The Company generally enters into software term licenses for its EDC Software products with its customers for 3 to 5 year periods, although customers have entered into both longer and shorter term license agreements. These arrangements typically include multiple elements: software license, consulting services and customer support. The Company bills its customers in accordance with the terms of the underlying contract. Generally, the Company bills license fees in advance for each billing cycle of the license term which typically is either on a quarterly or annual basis. Payment terms are generally net 30 days.
In the past the Company has sold perpetual licenses for EDC Software products in certain situations to existing customers with the option to purchase customer support, and may in the future do so for new customers based on customer requirements or market conditions. The Company has established vendor specific objective evidence of fair value for the customer support. Accordingly, license revenues are recognized upon delivery of the software and when all other revenue recognition criteria are met. Customer support revenues are recognized ratably over the term of the underlying support arrangement. The Company generates customer support and maintenance revenues from its perpetual license customer base.
Professional Services
The Company may also enter into arrangements to provide consulting services separate from a license arrangement. In these situations, revenue is recognized on a time-and-materials basis. Professional services can be deemed to be as essential to the functionality of the software at inception and typically are for initial trial configuration, implementation planning, loading of software, building simple interfaces and running test data and documentation of procedures. Subsequent additions or extensions to license terms do not generally include additional professional services.
Maintenance Revenues
Maintenance includes telephone-based help desk support and software maintenance. The Company generally bundles customer support with the software license for the entire term of the arrangement. As a result, the Company generally recognizes revenues for both maintenance and software licenses ratably over the term of the software license and support arrangement. The Company allocates the revenues recognized for these arrangements to the different elements based on management's estimate of the relative fair value of each element. The Company generally invoices each of the elements based on separately quoted amounts and thus has a fairly accurate estimate of the relative fair values of each of the invoiced revenue elements.
The fees associated with each business activity for the years ended December 31, 2011 and December 31, 2010, respectively are:
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
COST OF REVENUES
Cost of revenues primarily consists of costs related to hosting, maintaining and supporting the Company’s application suite and delivering professional services and support. These costs include salaries, benefits, bonuses and stock-based compensation for the Company’s professional services staffs. Cost of revenues also includes outside service provider costs. Cost of revenues are expensed as incurred.
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.
ACCOUNTS RECEIVABLE
Accounts receivable are judged as to collectability by management and an allowance for bad debts is established as necessary. The allowance is based on an evaluation of the collectibility of accounts receivable and prior bad debt experience. The Company had recorded an allowance for uncollectible accounts receivable of $142,444 and $269,869 as of December 31, 2011 and December 31, 2010, respectively.
The following table summarizes activity in the Company's allowance for doubtful accounts for the years presented.
CONCENTRATION OF CREDIT RISK
Cash and cash equivalents and restricted cash are deposited with major financial institutions and, at times, such balances with any one financial institution may be in excess of FDIC-insured limits. As of December 31, 2011, $1,038,456 in cash and cash equivalents were deposited in excess of FDIC-insured limits. Management believes the risk in these situations to be minimal.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
Except as follows, the Company has no significant off-balance-sheet risk or credit risk concentrations. Financial instruments that subject the Company to potential credit risks are principally cash equivalents and accounts receivable. Concentrated credit risk with respect to accounts receivable is limited to creditworthy customers. The Company's customers are principally located in the United States and Europe. The Company is directly affected by the overall financial condition of the pharmaceutical, biotechnology and medical device industries and management believes that credit risk exists and that any credit risk the Company faces has been adequately reserved for as of December 31, 2011. The Company maintains an allowance for doubtful accounts based on accounts past due according to contractual terms and historical collection experience. Actual losses when incurred are charged to the allowance. The Company's losses related to collection of accounts receivable have consistently been within management's expectations. As of December 31, 2011, the Company believes no additional credit risk exists beyond the amounts provided for in our allowance for uncollectible accounts. The Company evaluates its allowance for uncollectable accounts on a monthly basis based on a specific review of receivable 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 21% of our revenues during the year ended December 31, 2011 or approximately $2,850,275. One customer accounted for 20% of our revenues during the year ended December 31, 2010 or approximately $2,466,120. The following table summarizes the number of customers who individually comprise greater than 10% of total revenue and/or total accounts receivable and their aggregate percentage of the Company's total revenue and gross accounts receivable for the years presented.
Subsequent to two acquisitions completed in fiscal 2009, the Company’s European operations have become a more material portion of its overall revenues. The table below provides revenues from European customers for the years ended December 31, 2011 and December 31, 2010, respectively.
The Company serves all of its hosting customers from third-party web hosting facilities located in the United States. The Company does not control the operation of these facilities, and they are vulnerable to damage or interruption. The Company maintains redundant systems that can be used to provide service in the event the third-party web hosting facilities become unavailable, although in such circumstances, the Company's service may be interrupted during the transition.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Additions and betterments are capitalized; maintenance and repairs are expensed as incurred. Depreciation is calculated using the straight-line method over the asset’s estimated useful life, which is 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
Acquisitions and Intangible Assets
We account for acquisitions in accordance with ASC 805, Business Combinations (“ASC 805”) and ASC 350, Intangibles- Goodwill and Other (“ASC 350”). The acquisition method of accounting requires that assets acquired and liabilities assumed be recorded at their fair values on the date of a business acquisition. Our consolidated financial statements and results of operations reflect an acquired business from the completion date of an acquisition.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
The judgments that we make in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income in periods following an asset acquisition. We generally use either the income, cost or market approach to aid in our conclusions of such fair values and asset lives. The income approach presumes that the value of an asset can be estimated by the net economic benefit to be received over the life of the asset, discounted to present value. The cost approach presumes that an investor would pay no more for an asset than its replacement or reproduction cost. The market approach estimates value based on what other participants in the market have paid for reasonably similar assets. Although each valuation approach is considered in valuing the assets acquired, the approach ultimately selected is based on the characteristics of the asset and the availability of information.
Long-lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use quoted market prices when available and independent appraisals and management estimates of future operating cash flows, as appropriate, to determine fair value.
DEFERRED REVENUE
Deferred revenue represents cash advances received in excess of revenue earned on on-going contracts. Payment terms vary with each contract but may include an initial payment at the time the contract is executed, with future payments dependent upon the completion of certain contract phases or targeted milestones. In the event of contract cancellation, the Company is generally entitled to payment for all work performed through the point of cancellation. As of December 31, 2011, the Company had $4,877,924 in deferred revenues relating to contracts for services to be performed over periods ranging from 1 month to 5 years. The Company had $4,293,316 in deferred revenues that are expected to be recognized in the next twelve fiscal months.
ADVERTISING
Advertising costs are expensed as incurred. Advertising costs were $238,902 and $242,168 for the years ended December 31, 2011 and December 31, 2010, respectively and are included under selling, general and administrative expenses on our consolidated financial statements.
RESEARCH AND DEVELOPMENT EXPENSES
Software development costs are included in research and development and are expensed as incurred. ASC 985.20, Software Industry Costs of Software to Be Sold, Leased or Marketed, requires the capitalization of certain development costs of software to be sold once technological feasibility is established, which the Company defines as completion to the point of marketability. The capitalized cost is then amortized on a straight-line basis over the estimated product life. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs under ASC 985.20. During the years ended December 31, 2011 and December 31, 2010 we spent approximately $2,478,704 and $3,304,075 respectively, on research and development activities, which include costs associated with the development of our software products and services for our client’s projects and which are primarily comprised of salaries and related expenses for our software developers and consulting fees paid to third-party consultants. Research and development costs are primarily included under Salaries, benefits and related taxes in our Statement of Operations.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
EMPLOYEE EQUITY INCENTIVE PLANS
The OmniComm Systems, Inc. 2009 Equity Incentive Plan (the “2009 Plan”) 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, directors and key consultants in accordance with the terms of the 2009 Plan documents. The predecessor plan, the OmniComm Systems, Inc., 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 1998 Plan document. Each plan is more fully described in “Note 14, Employee Equity Incentive Plans.” The Company accounts for its employee equity incentive plans under ASC 718, Compensation - Stock Compensation which addresses the accounting for transactions in which an entity exchanges its equity instruments for goods or services, with a primary focus on transactions in which an entity obtains employee services in share-based payment transactions.
ASC 718 requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. The Company currently uses the Black Scholes option pricing model to determine grant date fair value.
EARNINGS PER SHARE
The Company accounts for Earnings Per Share using ASC 260 - Earnings per Share. Unlike diluted earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities.
INCOME TAXES
The Company accounts for income taxes in accordance ASC 740, Income Taxes. ASC 740 has as its basic objective the recognition of current and deferred income tax assets and liabilities based upon all events that have been recognized in the financial statements as measured by the provisions of the enacted tax laws.
Valuation allowances are established when necessary to reduce deferred tax assets to the estimated amount to be realized. Income tax expense represents the tax payable for the current period and the change during the period in the deferred tax assets and liabilities.
IMPACT OF NEW ACCOUNTING STANDARDS
During fiscal 2011, we adopted the following new accounting pronouncements:
In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of supplementary pro forma information for business combinations.” This update changes the disclosure of pro forma information for business combinations. These changes clarify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. Also, the existing supplemental pro forma disclosures were expanded to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. These changes became effective for the Company beginning January 1, 2011. The Company’s adoption of this update did not have an impact on the Company’s financial condition or results of operations.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
In December 2010, the FASB issued ASU 2010-28, “Intangible -Goodwill and Other (Topic 350): When to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts.” This update requires an entity to perform all steps in the test for a reporting unit whose carrying value is zero or negative if it is more likely than not (more than 50%) that a goodwill impairment exists based on qualitative factors, resulting in the elimination of an entity’s ability to assert that such a reporting unit’s goodwill is not impaired and additional testing is not necessary despite the existence of qualitative factors that indicate otherwise. These changes became effective for the Company beginning January 1, 2011. The adoption of this ASU did not have a material impact on our financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which clarifies the wording and disclosures required in Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), to converge with those used (to be used) in International Financial Reporting Standards (“IFRS”). The update explains how to measure and disclose fair value under ASC 820. However, the FASB does not expect the changes in this standards update to alter the current application of the requirements in ASC 820. The provisions of ASU 2011-04 are effective for public entities prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is prohibited. Therefore, ASU 2011-04 is effective for the Company during the first quarter of fiscal 2012. The Company does not expect ASU 2011-04 to have a material effect on the Company’s results of operations, financial condition, and cash flows.
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, (“ASU 2011-05”). ASU 2011-05 requires the presentation of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 will be effective for the Company’s quarter ending June 30, 2012, however, the Company will adopt this pronouncement early. The adoption of ASU 2011-05 did not have a material effect on the Company’s consolidated financial statements, but has required a change in the presentation of the Company’s comprehensive income from the notes of the consolidated financial statements, where it has been previously disclosed, to the face of the consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, (“ASU 2011-08”), which amends the guidance in ASC 350-20, Intangibles - Goodwill and Other - Goodwill. Under ASU 2011-08, entities have the option of performing a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, then entities are required to perform the two-step goodwill impairment test. ASU 2011-08 will be effective for the Company’s fiscal year beginning January 1, 2012, with early adoption permitted. The adoption of ASU 2011-08 is not expected to have a material effect on the Company’s consolidated financial statements.
In December 2011, the FASB issued ASU No. 2011-12 “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05.” ASU 2011-12 indefinitely defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement, while still requiring companies to adopt the other requirements contained in ASU 2011-05, the new standard on comprehensive income. ASU 2011-05 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. We do not expect the adoption of ASU 2011-05 to have a material impact on the consolidated financial statements.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements to determine their impact, if any, on our financial statements.
NOTE 3: GOING CONCERN
We have experienced net losses and negative cash flows from operations and have utilized debt and equity financings to help provide for our working capital, capital expenditure and R&D needs. 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.
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 December 31, 2011 there is substantial doubt about the Company’s ability to continue as a going concern.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 4 EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share were calculated using the weighted average number of shares outstanding of 86,345,605 and 85,606,706 for the years ended December 31, 2011 and December 31, 2010, respectively.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
Antidilutive shares aggregating 97,669,227 and 83,207,557 have been omitted from the calculation of dilutive earnings (loss) per share for the years ended December 31, 2011 and December 31, 2010 respectively as the shares were antidilutive. Provided below is the reconciliation between numerators and denominators of the basic and diluted earnings per shares: There were no differences between basic and diluted earnings per share. The table below provides a reconciliation of anti-dilutive securities outstanding as of December 31, 2011 and December 31, 2010, respectively.
The employee stock options are exercisable at prices ranging from $0.045 to $0.69 per share. The exercise price on the stock warrants range from $0.25 to $0.60 per share. Shares issuable upon conversion of Convertible Debentures have conversion prices ranging from $0.25 to $0.50 per share.
The Company’s convertible debt and convertible preferred stock have an anti-dilutive effect on net income (loss) per share and were not included in the computation of diluted earnings per share.
NOTE 5: PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
Depreciation expense for the years ended December 31, 2011 and December 31, 2010 was $471,709 and $512,311, respectively.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
NOTE 6: INTANGIBLE ASSETS, AT COST
Intangible assets consists of the following:
Amortization expense was $464,234 and $464,234 for the years ended December 31, 2011 and December 31, 2010, respectively.
Annual amortization expense for the Company’s intangible assets is as follows:
NOTE 7: ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consist of the following:
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
NOTE 8: NOTES PAYABLE
At December 31, 2011, the Company owed $5,270,665 in notes payable all of which are unsecured. The table below provides details as to the terms and conditions of the notes payable.
At December 31, 2010, the Company owed $3,638,165 in notes payable all of which are unsecured. The table below provides details as to the terms and conditions of the notes payable.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
On March 31, 2011, the Company issued a note payable in the principal amount of $2,866,879 and warrants to purchase 11,467,517 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of March 31, 2016 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and has a maturity date of April 1, 2014. This issuance caused us to calculate and record a derivative liability for the warrant liability. The warrants were valued using the Black Scholes option pricing model. A value of $1,178,861 was calculated and allocated to the warrants and recorded as a liability to the issuance of the note payable. As a result of the liability we recorded a discount to the note payable. The carrying amount of the note at the time of issuance was therefore $1,688,018. The warrant liability (discount) will be amortized over the 36 month duration of the note payable. The Company will continue to perform a fair value calculation periodically on the warrant liability and accordingly the warrant liability is increased or decreased based on the fair value calculation. The resulting increase or decrease is reflected in operations as an unrealized gain or loss on changes in derivative liabilities.
The Promissory Note replaced the following Promissory Notes that had been previously issued:
i.
Promissory Note issued on April 13, 2010 for $450,000.00 with a maturity date of December 31, 2010.
ii.
Promissory Note issued on June 29, 2010 for $115,000.00 with a maturity date of December 31, 2010.
iii.
Promissory Note issued on September 30, 2010 for $695,000.00 with a maturity date of December 31, 2010.
iv.
Promissory Note issued on December 31, 2010 for $1,197,500.00 with a maturity date of December 31, 2010.
v.
Promissory Note issued on December 31, 2010 for $409,379.18 with a maturity date of April 01, 2012.
On May 13, 2011, the Company issued a note payable in the principal amount of $96,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and has a maturity date of January 1, 2013. This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
On September 2, 2011, the Company issued a note payable in the principal amount of $50,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note bore interest at a rate of 12% per annum and had a maturity date of January 1, 2013. This note was repaid in full on September 7, 2011.
On September 30, 2011, the Company issued a promissory note in the principal amount of $342,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note carries an interest rate of 12% per annum and is due on April 1, 2014. The promissory note consolidates the principal amounts owed under the following promissory notes originally issued during 2011. This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
i.
Promissory Note issued on August 16, 2011 for $80,000 with a maturity date of January 01, 2013.
ii.
Promissory Note issued on August 19, 2011 for $15,000 with a maturity date of January 01, 2013.
iii.
Promissory Note issued on August 25, 2011 for $35,000 with a maturity date of January 01, 2013.
iv.
Promissory Note issued on September 02, 2011 for $32,000 with a maturity date of January 01, 2013.
v.
Promissory Note issued on September 15, 2011 for $80,000 with a maturity date of January 01, 2013.
vi.
Promissory Note issued on September 28, 2011 for $100,000 with a maturity date of January 01, 2013.
On October 5, 2011, the Company issued a note payable in the principal amount of $130,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and had a maturity date of April 1, 2014. This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
On October 28, 2011, the Company issued a note payable in the principal amount of $123,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and had a maturity date of April 1, 2014. This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
On October 31, 2011, the Company issued a note payable in the principal amount of $82,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and had a maturity date of April 1, 2014. This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
On November 23, 2011, the Company issued a note payable in the principal amount of $60,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and had a maturity date of January 1, 2013. This was note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
On December 1, 2011, the Company issued a note payable in the principal amount of $150,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note bore interest at a rate of 12% per annum and had a maturity date of January 1, 2013. This note was repaid in full on December 27, 2011.
On December 31, 2011, the Company issued a promissory note in the principal amount of $1,600,000 and warrants to purchase 6,400,000 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of December 31, 2015 to our Chief Executive Officer and Director, Cornelis F. Wit. The note carries an interest rate of 12% per annum and is due on January 1, 2015. The promissory note consolidates the amounts owed as detailed below:
i.
Promissory Note issued on May 13, 2011 for $96,000.00 with a maturity date of January 01, 2013;
ii.
Promissory Note issued on September 30, 2011 for $342,000.00 with a maturity date of April 01, 2014;
iii.
Promissory Note issued on October 05, 2011 for $130,000.00 with a maturity date of April 01, 2014;
iv.
Promissory Note issued on October 28, 2011 for $123,000.00 with a maturity date of April 01, 2014;
v.
Promissory Note issued on October 31, 2011 for $82,000.00 with a maturity date of April 01, 2014;
vi.
Promissory Note issued on November 23, 2011 for $60,000 with a maturity date of January 1, 2013; and
vii.
Accrued and unpaid interest in the amount of $767,000.
This issuance caused us to calculate and record a derivative liability for the warrant liability. The warrants were valued using the Black Scholes option pricing model. A value of $247,999 was calculated and allocated to the warrants and recorded as a liability to the issuance of the note payable. As a result of the liability we recorded a discount to the note payable. The carrying amount of the note at the time of issuance was therefore $1,352,001. The warrant liability (discount) will be amortized over the 36 month duration of the note payable. The Company will continue to perform a fair value calculation periodically on the warrant liability and accordingly the warrant liability is increased or decreased based on the fair value calculation. The resulting increase or decrease is reflected in operations as an unrealized gain or loss on changes in derivative liabilities.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
NOTE 9: CONVERTIBLE NOTES PAYABLE
The following table summarizes the convertible debt outstanding as of December 31, 2011.
The following table summarizes the convertible debt outstanding as of December 31, 2010.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
10% Convertible Notes
During 1999, the Company issued 10% Convertible Notes payable in the amount of $862,500 pursuant to a Confidential Private Placement Memorandum. There were costs of $119,625 associated with this offering. The net proceeds to the Company were $742,875. The notes bear interest at ten percent annually, payable semi-annually. The notes were convertible after maturity, which was June 30, 2004, into shares of common stock of the Company at $1.25 per share. As of December 31, 2011, approximately $787,500 of the Convertible Notes had been repaid in cash or converted into 1,495,179 shares of common stock of the Company leaving an outstanding principal balance of $75,000. There was $94,728 of accrued interest at December 31, 2011.
Secured Convertible Debentures
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 (the “Warrants”) to purchase an aggregate of 5,600,000 shares of our common stock exercisable at a price of $0.25 per share for four years subsequent to the closing of the transaction to four accredited investors including our Chief Executive Officer. We received net proceeds of $1,400,000. The Debentures, which bear interest at 12% per annum, matured on March 30, 2011. The Debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.25 per share. On March 30, 2011, the Company repaid $200,000 of the outstanding principal amounts owed and extended $1,200,000 of the convertible notes until April 1, 2013, including $1,100,000 in convertible notes held by our Chief Executive Officer and Director, Cornelis F. Wit. The Company also extended the expiration date of the warrants associated with the September 2009 offering. The warrants are now exercisable until September 30, 2015 at an exercise price of $0.25 per share.
Convertible Debentures
On December 31, 2009, we sold an aggregate of $1,490,000 principal amount 12% Convertible Debentures (the “Debentures”) and common stock purchase warrants (the “Warrants”) to purchase an aggregate of 5,960,000 shares of our common stock exercisable at a price of $0.25 per share for four years subsequent to the closing of the transaction to three accredited investors including our Chief Executive Officer. We received net proceeds of $1,490,000. The Debentures, which bear interest at 12% per annum, matured on June 30, 2011. The Debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.25 per share. On September 30, 2011, the Company extended all $1,490,000 of the convertible notes until October 1, 2013, including $1,440,000 in convertible notes held by our Chief Executive Officer and Director, Cornelis F. Wit. The Company also extended the expiration date of the warrants associated with the December 2009 offering. The warrants are now exercisable until December 31, 2015 at an exercise price of $0.25 per share.
The payments required at maturity under the Company’s outstanding convertible debt at December 31, 2011 are as follows:
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
NOTE 10: FAIR VALUE MEASUREMENT
The Company measures the fair value of its assets and liabilities under the guidance of 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. ASC 820 does not require any new fair value measurements, but its provisions apply to all other accounting pronouncements that require or permit fair value measurement.
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.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
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 ASC 825, Financial Instruments. ASC 825 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 in the years ended December 31, 2011 and December 31, 2010.
The Company’s financial assets or liabilities subject to ASC 820 as of December 31, 2011 include the conversion feature and warrant liability associated with convertible debentures issued during fiscal 2008 and 2009 and the warrants issued during 2011 that are associated with two notes payable that were issued to our Chief Executive Officer and Director, Cornelis F. Wit. 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 Disclosures about Derivative Instruments and Hedging Activities. See Note 9 - Convertible Notes Payable.
Following is a description of the valuation methodologies used to determine the fair value of the Company’s financial assets including the general classification of such instruments pursuant to the valuation hierarchy.
A summary of the fair value of liabilities measured at fair value on a recurring basis follows:
(1)
The fair value of the Derivative Instruments was estimated using the Income Approach and using the Black Scholes option pricing model with the following assumptions for the year
ended December 31, 2011
(2)
The fair value at the measurement date is equal to their carrying value on the balance sheet
A summary of the fair value of liabilities measured at fair value on a recurring basis follows:
(1)
The fair value of the Derivative Instruments was estimated using the Income Approach and using the Black Scholes option pricing model with the following assumptions for the year
ended December 31, 2010
(2)
The fair value at the measurement date is equal to their carrying value on the balance sheet
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
The tables below set forth a summary of changes in fair value of the Company’s Level 3 financial liabilities at fair value for the years ended December 31, 2011 and December 31, 2010. The tables reflect gains and losses for all financial liabilities at fair value categorized as Level 3 as of December 31, 2011 and December 31, 2010.
NOTE 11: COMMITMENTS AND CONTINGENCIES
The Company currently leases office space under operating leases for its office locations and has several operating leases related to server and network co-location and disaster recovery for its operations. The minimum future lease payments required under the Company’s operating leases at December 31, 2011 are as follows:
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 leases. Rent expense was $904,682 and $918,711 for the years ended December 31, 2011 and December 31, 2010, respectively.
The Company’s corporate office lease expires in September 2016. The Company’s 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 Germany under the terms of a lease that expires in December 2012. The Company is presently reviewing its options in relation to its office lease in the German office but believes that suitable office space is available at market rates similar to those it currently has.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
LEGAL PROCEEDINGS
On November 24, 2010, Achyut Dhakal, a former employee, filed suit in the United States District Court for the Southern District of Fort Lauderdale, Florida, Miami Division, alleging racial and national discrimination, retaliation for a requested FMLA leave, retaliation under state whistleblower provisions and monies owed for overtime pay under the Fair Labor Standards Act (FLSA). The Company disagreed with the allegations and submitted its response on February 1, 2011. On March 3, 2011, the Company and Mr. Dhakal, subject to the terms agreed to during a court mandated settlement conference, entered into a Settlement Agreement and Full Release subject to mutual non-disclosure provisions. On March 3, 2011, the Court entered an Order of Dismissal with Prejudice approving the settlement.
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 OmniComm’s annual Gross Revenues or, alternatively, the annual minimum royalty payment(s), whichever is greater. The remaining minimum royalty payments per year are as follows:
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 beginning in July 2009 and has to-date made payments totaling $200,000.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
During the years ended December 31, 2011 and December 31, 2010, respectively, the Company recorded a charge to earnings of $316,809 and $223,667 respectively, which amounts represent (1) the amount of additional license expense incurred above the stipulated minimum in the DataSci License Agreement during the years ended December 31, 2011 and December 31, 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.
During the year ended December 31, 2010 we accrued $167,661 in software licensing expense related to our use of several Microsoft® software products. The final recorded expense was $50,000.
EMPLOYMENT AGREEMENTS
In December 2011, we renewed an employment agreement with Mr. Cornelis F. Wit to serve as our Chief Executive Officer through December 31, 2012. As part of the renewal the employment agreement will renew for successive one-year terms unless the employment agreement is expressly cancelled by either Mr. Wit or the Company ninety days prior to the end of the term. Mr. Wit receives an annual salary of $183,600 payable in cash and/or stock plus a bonus tied to our operating results. As part of the agreement incentive options are awardable under the agreement based upon sales and cash flow objectives. In the event that we consummate a transaction with a third party resulting in the sale, merger, consolidation, reorganization or other business combination involving all or a majority of our business, assets or stock, whether effected in one transaction or a series of transactions due to the initiative of Mr. Wit (whether or not during the term of the agreement), Mr. Wit will receive a fee equal to 2% of the aggregate consideration. The agreement also provides, among other things, for participation in employee benefits available to employees and executives. Under the terms of the agreement, we may terminate Mr. Wit’s employment upon 30 days notice of a material breach and Mr. Wit may terminate the agreement under the same terms and conditions. The employment agreement contains customary non-disclosure provisions, as well as a one year non-compete clause if Mr. Wit leaves the company voluntarily or a six month non-compete clause following his termination by us.
In December 2011, we renewed our employment agreement with Mr. Randall Smith to serve as our Chief Technology Officer. As part of the renewal the employment agreement will renew for successive one-year terms unless the employment agreement is expressly cancelled by either Mr. Smith or the Company ninety days prior to the end of the term. Under the terms of the agreement, as compensation for his services, Mr. Smith receives an annual salary of $270,300 to be paid in the form of cash and/or stock, as agreed upon by the parties, and he is eligible to receive a bonus based upon achieving technology related milestones. The agreement also provides, among other things, for participation in employee benefit plans or programs applicable to employees and executives. Under the terms of the agreement, we may terminate the employment of Mr. Smith upon 30 days notice of a material breach and Mr. Smith may terminate the agreement under the same terms and conditions. If Mr. Smith is terminated by us for any reason other than for cause, we must pay him severance benefits equal to six months salary. The employment agreement contains customary non-disclosure provisions, as well as a one year non-competition restriction following the termination of the agreement.
In December 2011, we entered into a consulting agreement with Mr. Ronald Linares to serve as our Chief Financial Officer. The consulting agreement commences January 1, 2012 and may be terminated by either party at any time and for any reason upon thirty (30) days prior written notice. Under the terms of this agreement, Mr. Linares receives monthly compensation of $15,000. The agreement also provides, among other things, for participation in employee benefit plans or programs applicable to employees and executives. The consulting agreement contains customary non-disclosure provisions, as well as a one year non-competition restriction following the termination of the agreement.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
In September 2011, we renewed our employment agreement with Mr. Stephen Johnson to serve as our President and Chief Operating Officer. As part of the renewal the employment agreement will renew for successive one-year terms unless the employment agreement is expressly cancelled by either Mr. Johnson or the Company ninety days prior to the end of the term. Under the terms of this agreement, Mr. Johnson receives an annual salary of $290,700 subject to annual adjustment for cost of living increases. Mr. Johnson is eligible for a bonus, payable on an annual basis, equal to 5% of the Company’s earnings before interest, taxes, depreciation and amortization (EBITDA). The agreement also provides, among other things, for participation in employee benefit plans or programs applicable to employees and executives. Under the terms of the agreement, we may terminate the employment of Mr. Johnson upon 30 days notice of a material breach and Mr. Johnson may terminate the agreement under the same terms and conditions. If Mr. Johnson is terminated by us for any reason other than for cause, we must pay him severance benefits equal to three months salary for every year of service up to a maximum of twelve months salary. The employment agreement contains customary non-disclosure provisions as well as a one year non-compete clause if Mr. Johnson leaves the company voluntarily or a six month non-compete clause following his termination by us.
NOTE 12: RELATED PARTY TRANSACTIONS
Guus van Kesteren, a member of our Board of Directors, is a consultant to Noesis Capital Corp. Noesis Capital Corp. has acted as a placement agent for the sale of our securities in various offerings since 1999. Mr. van Kesteren is a holder of greater than 5% of our securities on a fully diluted basis as measured under Section 13 of the Securities Act of 1934.
Fernando Montero. a member of our Board of Directors, is president, director and sole shareholder of Mentor Capital Corporation (“Mentor Capital ”). Mentor Capital is the fund manager for Atlantic Balanced Fund (“ABF”) having voting and dispositive control of the shares in OmniComm Systems, Inc. held by ABF and therefore Mr. Montero may be deemed to beneficially own the shares held by ABF. Mr. Montero also has voting and dispositive control of the shares in OmniComm Systems, Inc. held by Atlantic Security Bank (“ASB”) and therefore may be deemed to beneficially own the shares held by ASB. Mr. Montero may be deemed to beneficially own an aggregate of 7,873,411 shares of the Common Stock (as described below), which constitute approximately 9.1% of the outstanding shares of our Common Stock
In December 2008, the Company issued a promissory note for $197,500 that included $112,500 in accrued expenses associated with financial services provided by Noesis Capital Corp., the Company’s Placement Agent for several equity and debt transactions since 1999. The amount was borrowed under a promissory note bearing interest at 9% per annum payable with a maturity date of January 31, 2011. Included in the principal amount due under this promissory note is $85,000 that was originally owed under a $185,000 principal amount promissory note with a maturity date of January 1, 2009. The remaining $100,000 in principal amount owed was converted into a Convertible Note dated December 16, 2008. The Company repaid $60,000 in principal on this promissory note during the year ended December 31, 2010. The promissory note was extended and now has a maturity date of April 1, 2013. We incurred $12,375 in interest expense on the note payable to Noesis Capital Corp., the Placement Agent for the Company during the year ended December 31, 2010 and $16,149 for the year ended December 31, 2011.
On December 16, 2010, we issued a promissory note with a principal amount of $20,000 to our Chairman and Chief Technolgy Officer, Randall G. Smith. On December 31, 2011, the Company extended the promissory note that had matured on that date. The promissory note bears interest at 12% per annum with interest payable monthly. Mr. Smith extended the maturity date of his promissory note until April 1, 2013
During the year ended December 31, 2010, the Company issued 573,796 shares of common stock to eleven employees of the Company including our Chief Executive Office, Chief Operating Officer, Chief Technology Officer and Chief Financial Officer. The shares of common stock were issued in lieu of salary. The shares were valued at prices ranging from $0.05 to $0.18 per share based on the closing share price of our common stock on the OTC Bulletin Board on the date of several payrolls during the year ended December 31, 2010 for salaries totaling $43,105.
As of December 31, 2011, we have an aggregate of $13,126,879 principal amount of convertible debentures and promissory notes outstanding to Cornelis Wit, our Chief Executive Officer and a director, and have issued certain warrants to Mr. Wit, as follows:
·
On February 14, 2008, $150,000 principal amount promissory note. This note was convertible at the option of the holder into any New Securities (“New Securities”) we issue before maturity of this promissory note on the same terms and conditions of the sale of the New Securities. This convertible note carried an interest rate of 10% per annum and was due on December 31, 2009. On December 16, 2008, Mr. Wit agreed to convert this convertible note into a private placement of convertible debentures, which convertible debentures were due on December 16, 2010. Mr. Wit waived his anti-dilution rights relating to the outstanding debenture and warrants issued in this transaction as part of the terms and conditions of a secured convertible debenture financing the Company completed in September 2009. In addition, Mr. Wit agreed to extend the maturity date of the convertible debenture he was issued by three years to December 16, 2013.
·
On June 10, 2008, $210,000 principal amount convertible note and common stock purchase warrants to purchase an aggregate of 264,706 shares of our common stock. We received net proceeds of $210,000. This note was convertible at the option of the holder into any securities we issue (“New Securities”) before maturity of the convertible debenture on the same terms and conditions of the sale of the New Securities. This convertible debenture, which carried an interest rate of 10% per annum, was due on June 10, 2009. On August 29, 2008, Mr. Wit agreed to convert this convertible debenture into a private placement of convertible debentures that originally matured on August 29, 2010. Mr. Wit waived his anti-dilution rights relating to the outstanding debenture and warrants issued in this transaction as part of the terms and conditions of a secured convertible debenture financing the Company completed in September 2009. In addition, Mr. Wit agreed to extend the maturity date of convertible debenture he was issued by three years to August 29, 2013.
·
On June 10, 2008, $300,000 principal amount convertible note. This note was convertible at the option of the holder into any New Securities (“New Securities”) we issue before maturity of this promissory note on the same terms and conditions of the sale of the New Securities. This convertible note carried an interest rate of 10% per annum and was originally due on June 30, 2010. On August 29, 2008, Mr. Wit agreed to convert this convertible note into a private placement of convertible debentures, which convertible debentures that originally matured on August 29, 2010. Mr. Wit waived his anti-dilution rights relating to the outstanding debenture and warrants issued in this transaction as part of the terms and conditions of a secured convertible debenture financing the Company completed in September 2009. In addition, Mr. Wit agreed to extend the maturity date of convertible debenture he was issued by three years to August 29, 2013.
·
During August 2008, $1,260,000 principal amount convertible note that is part of a private placement of Convertible Debentures that originally matured in August 29, 2010. Mr. Wit waived his anti-dilution rights relating to the outstanding debenture and warrants issued in this transaction as part of the terms and conditions of a Secured Convertible Debenture financing the Company completed in September 2009. In addition, Mr. Wit agreed to extend the maturity date of convertible debenture he was issued by three years to August 29, 2013.
·
From September 2008 to December 2008, $4,200,000 principal amount convertible notes. These notes were convertible at the option of the holder into any New Securities (“New Securities”) we issue before maturity of the Convertible Note on the same terms and conditions of the sale of the New Securities. These convertible notes carried an interest rate of 12% per annum and were due on December 31, 2009. On December 16, 2008, Mr. Wit agreed to convert these convertible notes into a private placement of convertible debentures, which convertible debentures originally matured on December 16, 2010. Mr. Wit waived his anti-dilution rights relating to the outstanding debenture and warrants issued in this transaction as part of the terms and conditions of a secured convertible debenture financing the Company completed in September 2009. In addition, Mr. Wit agreed to extend the maturity date of convertible debenture he was issued by three years to December 16, 2013.
·
From July to September 2009, Mr. Wit invested $1,100,000 which amount was aggregated under the terms of one convertible note dated September 30, 2009. This note was convertible at the option of the holder into any new securities we issue before maturity of this promissory note on the same terms and conditions of the sale of any new securities issued. This convertible note carried an interest rate of 12% per annum and was due on December 31, 2009. On September 30, 2009, Mr. Wit agreed to convert this Convertible Note into a private placement of secured convertible debentures bearing interest at a rate of 12% per annum, which Secured Convertible Debentures were due on March 30, 2011 which were convertible into 4,400,000 shares of common stock and received 4,400,000 warrants to purchase common stock of the Company. On March 30, 2011, Mr. Wit extended the maturity date of his convertible note until April 1, 2013 in accordance with the terms of Amendment Number One To Securities Purchase Agreement. The Company also extended the expiration date of the 4,400,000 warrants issued with convertible note by two years to September 30, 2015.
·
From October to December 2009, Mr. Wit invested $1,440,000 which amount was aggregated under the terms of one convertible note dated December 31, 2009. This note was convertible at the option of the holder into any new securities we issued before the maturity of this promissory note on the same terms and conditions of the sale of any new securities issued. This convertible note carried an interest rate of 12% per annum and was due on December 31, 2009. On December 31, 2009, Mr. Wit agreed to convert this Convertible Note into a private placement of unsecured convertible debentures bearing interest at a rate of 12% per annum, which Convertible Debentures were due on June 30, 2011. Mr. Wit extended the maturity date of his convertible note until October 1, 2013 in accordance with the terms of Amendment Number One To Securities Purchase Agreement. The Company also extended the expiration date of the 5,760,000 warrants issued with convertible note by two years to December 31, 2015.
·
On April 13, 2010, $450,000 principal amount promissory note. This note carries an interest rate of 12% per annum and is due on December 31, 2011.
·
On September 30, 2010, $1,000,000 principal amount promissory note. This note carries an interest rate of 12% per annum and was due on December 31, 2011. The promissory note was comprised of the following amounts received on the following dates: (i) principal amount of $50,000 received on July 6, 2010, (ii) principal amount of $65,000 received on July 14, 2010, (iii) principal amount of $175,000 received on July 15, 2010, (iv) principal amount of $140,000 received on July 30, 2010, (v) principal amount of $400,000 received on August 12, 2010, (vi) principal amount of $90,000 received on August 27, 2010, and (vii) principal amount of $80,000 received on August 31, 2010. On November 30, 2010, the note was converted by Mr. Wit into 250,000 shares of the Company’s Series D Preferred Stock.
·
On September 30, 2010, $695,000 principal amount promissory note. This note carries an interest rate of 12% per annum and is due on December 31, 2011. The promissory note was comprised of the following amounts received on the following dates: (i) principal amount of $120,000 received on August 31, 2010, (ii) principal amount of $50,000 received on September 7, 2010, (iii) principal amount of $200,000 received on September 15, 2010, (iv) principal amount of $90,000 received on September 22, 2010, (v) principal amount of $200,000 received on September 29, 2010, and (vi) principal amount of $35,000 received on September 30, 2010.
·
On December 31, 2010, $1,197,500 principal amount promissory note. The note carries and interest rate of 12% per annum and is due on December 31, 2011. The promissory note is comprised of the following amounts received on the following dates: (i) principal amount of $150,000 received on October 15, 2010, (ii) principal amount of $140,000 received on October 26, 2010, (iii) principal amount of $200,000 received on October 28, 2010, (iv) principal amount of $43,500 received on November 2, 2010, (v) principal amount of $200,000 received on November 10, 2010, (vi) principal amount of $32,000 received on November 22, 2010, (vii) principal amount of $37,000 received on November 29, 2010, (viii) principal amount of $160,000 received on November 30, 2010, (ix) principal amount of $25,000 received on December 2, 2010, (x) principal amount of $50,000 received on December 8, 2010, (xi) principal amount of $10,000 received on December 9, 2010, (xii) principal amount of $40,000 received on December 15, 2010, and (xiii) principal amount of $110,000 received on December 16, 2010.
·
On December 31, 2010, $409,721 principal amount promissory note. The note carries and interest rate of 12% per annum and is due on December 31, 2011. The note is comprised of accrued and unpaid interest owed as of December 31, 2010 on various notes held by Mr. Wit that were converted into the principal amount owed under this note payable.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
On March 31, 2011, the Company issued a note payable in the principal amount of $2,866,879 and warrants to purchase 11,467,517 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of March 31, 2016 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and has a maturity date of April 1, 2014.
The Promissory Note replaced the following Promissory Notes that had been previously issued:
i.
Promissory Note issued on April 13, 2010 for $450,000.00 with a maturity date of December 31, 2010.
ii.
Promissory Note issued on June 29, 2010 for $115,000.00 with a maturity date of December 31, 2010.
iii.
Promissory Note issued on September 30, 2010 for $695,000.00 with a maturity date of December 31, 2010.
iv.
Promissory Note issued on December 31, 2010 for $1,197,500.00 with a maturity date of December 31, 2010.
v.
Promissory Note issued on December 31, 2010 for $409,379.18 with a maturity date of April 01, 2012.
On March 30, 2011, the Company extended a convertible note in the principal amount of $1,100,000 held by our Chief Executive Officer and Director, Cornelis F. Wit that had matured on that date. The convertible note which was originally issued on September 30, 2009, bears interest at 12% per annum with interest payable monthly. Mr. Wit extended the maturity date of his convertible note until April 1, 2013 in accordance with the terms of Amendment Number One To Securities Purchase Agreement. We also extended the expiration date of the 4,400,000 warrants issued with convertible note by two years to September 30, 2015.
On May 13, 2011, the Company issued a note payable in the principal amount of $96,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and has a maturity date of January 1, 2013. This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
On June 30, 2011, the Company extended a convertible note in the principal amount of $1,440,000 held by our Chief Executive Officer and Director, Cornelis F. Wit that had matured on that date. The convertible note which was originally issued on December 31, 2009, bears interest at 12% per annum with interest payable monthly. Mr. Wit extended the maturity date of his convertible note until October 1, 2013 in accordance with the terms of Amendment Number One To Securities Purchase Agreement. We also extended the expiration date of the 5,760,000 warrants issued with convertible note by two years to December 31, 2015.
On September 2, 2011, the Company issued a note payable in the principal amount of $50,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note bore interest at a rate of 12% per annum and had a maturity date of January 1, 2013. This note was repaid in full on September 7, 2011.
On September 30, 2011, the Company issued a promissory note in the principal amount of $342,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note carries an interest rate of 12% per annum and is due on April 1, 2014. The promissory note consolidates the principal amounts owed under the following promissory notes originally issued during 2011.
i.
Promissory Note issued on August 16, 2011 for $80,000 with a maturity date of January 01, 2013.
ii.
Promissory Note issued on August 19, 2011 for $15,000 with a maturity date of January 01, 2013.
iii.
Promissory Note issued on August 25, 2011 for $35,000 with a maturity date of January 01, 2013.
iv.
Promissory Note issued on September 02, 2011 for $32,000 with a maturity date of January 01, 2013.
v.
Promissory Note issued on September 15, 2011 for $80,000 with a maturity date of January 01, 2013.
vi.
Promissory Note issued on September 28, 2011 for $100,000 with a maturity date of January 01, 2013.
On October 5, 2011, the Company issued a note payable in the principal amount of $130,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and had a maturity date of April 1, 2014. This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
On October 28, 2011, the Company issued a note payable in the principal amount of $123,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and had a maturity date of April 1, 2014. This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
On October 31, 2011, the Company issued a note payable in the principal amount of $82,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and had a maturity date of April 1, 2014. This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
On November 23, 2011, the Company issued a note payable in the principal amount of $60,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note accrues interest at a rate of 12% per annum and had a maturity date of January 1, 2013. This note was consolidated on December 31, 2011 into a new note with a principal amount of $1,600,000.
On December 1, 2011, the Company issued a note payable in the principal amount of $150,000 to our Chief Executive Officer and Director, Cornelis F. Wit. The note bore interest at a rate of 12% per annum and had a maturity date of January 1, 2013. This note was repaid in full on December 27, 2011.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
On December 31, 2011, the Company issued a promissory note in the principal amount of $1,600,000 and warrants to purchase 6,400,000 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of December 31, 2015 to our Chief Executive Officer and Director, Cornelis F. Wit. The note carries an interest rate of 12% per annum and is due on January 1, 2015. The promissory note consolidates the amounts owed as detailed below:
i.
Promissory Note issued on May 13, 2011 for $96,000 with a maturity date of January 01, 2013;
ii.
Promissory Note issued on September 30, 2011 for $342,000 with a maturity date of April 01, 2014;
iii.
Promissory Note issued on October 05, 2011 for $130,000 with a maturity date of April 01, 2014;
iv.
Promissory Note issued on October 28, 2011 for $123,000 with a maturity date of April 01, 2014;
v.
Promissory Note issued on October 31, 2011 for $82,000 with a maturity date of April 01, 2014;
vi.
Promissory Note issued on November 23, 2011 for $60,000 with a maturity date of January 1, 2013; and
vii.
Accrued and unpaid interest in the amount of $767,000.
For the years ended December 31, 2011 and December 31, 2010 we incurred $1,459,456, and $1,236,843, respectively, in interest expense payable to related parties.
NOTE 13: STOCKHOLDERS’ EQUITY (DEFICIT)
Our authorized capital stock consists of 250,000,000 shares of common stock, $.001 par value per share, and 10,000,000 shares of preferred stock, par value $.001 per share, of which 5,000,000 shares have been designated as 5% Series A Preferred, 230,000 shares have been designated as Series B Preferred Stock, 747,500 shares have been designated as Series C Preferred Stock and 250,000 shares have been designated as Series D Preferred Stock.
As of December 31, 2011 we had the following outstanding securities:
o
86,481,495 shares of common stock issued and outstanding;
o
58,595,758 warrants issued and outstanding to purchase shares of our common stock;
o
4,125,224 shares of our Series A Preferred Stock issued and outstanding,
o
-0- shares of our Series B Preferred Stock issued and outstanding;
o
-0- shares of our Series C Preferred Stock issued and outstanding;
o
250,000 Series D Preferred Stock issued and outstanding; and
o
$9,665,000 principal amount Convertible Debentures convertible into 24,620,000 shares of common stock.
Common Stock
Holders of common stock are entitled to one vote for each share on all matters submitted to a stockholder vote. Holders of our voting securities do not have cumulative voting rights. Holders of common stock are entitled to share in all dividends that the Board of Directors, in its discretion, declares from legally available funds. In the event of our liquidation, dissolution or winding up, subject to the preferences of the Series A Preferred Stockholders, each outstanding share of common stock entitles its holder to participate in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption provisions for the common stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is outstanding. All outstanding shares of common stock are duly authorized, validly issued, fully paid and non-assessable.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
Preferred stock
Our Board of Directors, without further stockholder approval, may issue preferred stock in one or more series from time to time and fix or alter the designations, relative rights, priorities, preferences, qualifications, limitations and restrictions of the shares of each series. The preferred stock will rank senior to our common stock for the payment of dividends and the distribution of assets on liquidation. In addition, the Board of Directors may fix and determine all privileges and rights of the authorized preferred stock series including:
o
dividend and liquidation preferences,
o
voting rights,
o
conversion privileges, and
o
redemption terms.
Series A Preferred Stock
In 1999, our Board of Directors designated 5,000,000 shares of our preferred stock as 5% Series A Convertible Preferred Stock (“Series A Preferred Stock”), of which 4,125,224 shares are issued and outstanding.
The designations, rights and preferences of the Series A Preferred include:
o the shares are not redeemable,
o each share of Series A Preferred Stock is convertible into shares of our common stock at any time at the option of the holder at a conversion price of $1.50 per share, or if not so converted after one year from issuance, at any time at our option if the closing bid price of our common stock has exceeded $3.00 for 20 consecutive trading days, our common stock is listed on The NASDAQ Stock Market or other national stock exchange, and the shares of common stock issuable upon conversion of the Series A Preferred Stock are registered under a registration statement,
o the conversion price has certain anti-dilution protections for any stock splits, stock dividends, and corporate reorganizations, and certain other corporate transactions and issuances of securities at below the applicable conversion price per share. The Series A Preferred Stockholders have waived their rights to an anti-dilution adjustment reducing their conversion price as a result of the issuance of the Series B Preferred Stock and Series C Preferred Stock,
o the shares of Series A Preferred Stock pay a cumulative dividend at a rate of 5% per annum based on the stated value of $1.00 per share, payable when and as declared by the Board of Directors, or upon conversion or liquidation. Dividends on the Series A Preferred Stock have priority to our common stock and are junior to Series B Preferred Stock and Series C Preferred Stock. At our option, dividends can be paid in cash or shares of common stock valued at the conversion price of the Series A Preferred Stock,
o in the event of our liquidation or winding up, each share of Series A Preferred Stock has a liquidation preference equal to $1.00 per share,
o the holders of the Series A Preferred Stock are entitled to vote together with the holders of our common stock, on the basis of one vote for each share of common stock issuable upon the conversion of the Series A Preferred Stock.
There were cumulative arrearages of $1,944,461 and $1,740,174, or $0.47 and $0.42 per share, on the Series A Preferred Stock for undeclared dividends as of December 31, 2011 and December 31, 2010, respectively.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
The Company has 235,000 shares of its 5% Series A Preferred stock that have been converted by the shareholders into shares of our common stock. Pursuant to Delaware General Corporate Law, once the Company has a positive net worth, the cumulative dividends would be payable in either cash or in shares of our common stock upon the declaration of dividends by our board of directors.
In addition, the holders of the Series A Preferred Stock were granted certain demand and piggy-back registration rights for the shares of our common stock issuable upon the conversion of the Series A Preferred Stock.
Series B Preferred Stock
In August 2001, our Board of Directors designated 200,000 shares of our preferred stock as Series B Convertible Preferred Stock (“Series B Preferred Stock”). A Corrected Certificate of Designations was filed on February 7, 2002 with the Delaware Secretary of State increasing the number of shares authorized as Series B Preferred Stock to 230,000 shares, of which -0- shares are issued and outstanding.
The designations, rights and preferences of the Series B Preferred Stock include:
o the stated value of each share is $10.00 per share,
o the shares are not redeemable,
o each share of Series B Preferred Stock is convertible into shares of our common stock at the option of the holder at any time commencing January 31, 2002 at the option of the holder at $0.25 per share, as adjusted, and the shares automatically convert, subject to limitations based on trading volume, into shares of our common stock at $0.25 per share at such time as we complete a public offering raising proceeds in excess of $25 million at an offering price of at least $0.75 per share. We may require all outstanding shares of the Series B Preferred Stock to convert in the event the closing bid price of our common stock exceeds $0.50 for 20 consecutive trading days, and our common stock has been listed on The NASDAQ Stock Market or other comparable national stock exchange or the OTC Bulletin board and a registration statement registering the shares of common stock issuable upon conversion of the Series B Preferred Stock has been declared effective,
o the conversion price has certain anti-dilution protections for any stock splits, stock dividends, and corporate reorganizations, and certain other corporate transactions and issuances of securities at below the applicable conversion price per share or market value of the common stock,
o the shares of Series B Preferred Stock pay a cumulative dividend at a rate of 8% per annum based on the stated value of $10.00 per share, payable when and as declared by the Board of Directors, or upon conversion or liquidation. At our option, dividends can be paid in cash or shares of common stock valued at the conversion price of the Series B Preferred Stock,
o each share of Series B Preferred Stock will rank senior to our Series A Preferred and pari passu with our Series C Preferred Stock,
o in the event of our liquidation or winding up, each share of Series B Preferred Stock has a liquidation preference equal to $10.00 per share plus accrued and unpaid dividends, and
o the holders of the Series B Preferred Stock are entitled to vote, together with the holders of our common stock, on the basis of one vote for each share of common stock issuable upon the conversion of the Series B Preferred Stock,
There were cumulative arrearages of $609,887 and $609,887, or $3.05 and $3.05 per share, on the Series B Preferred Stock dividends as of December 31, 2011 and December 31, 2010, respectively.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
The Company has 200,000 shares of its Series B Preferred stock that have been converted by the shareholders into shares of our common stock. Pursuant to Delaware General Corporate Law, once the Company has a positive net worth, the cumulative dividends would be payable in either cash or in shares of our common stock upon the declaration of dividends by our board of directors.
In addition, the holders of the Series B Preferred Stock were granted certain mandatory and piggy-back registration rights for the shares of our common stock issuable upon the conversion of the Series B Preferred Stock and are entitled to vote one member to our Board of Directors.
Series C Preferred Stock
In March 2002, our Board of Directors designated 747,500 shares of our preferred stock as Series C Convertible Preferred Stock of which -0- shares are issued and outstanding.
The designations, rights and preferences of the Series C Preferred Stock include:
o the stated value of each share is $10.00 per share,
o the shares are not redeemable,
o each share of Series C Preferred Stock is convertible at any time, at the option of the holder, into a number of shares of common stock determined by dividing the stated value per share of the Series C Preferred Stock by $0.25, which is the Series C Conversion Price. The Series C Preferred Stock will automatically convert, subject to limitations based on trading volume, into shares of our common stock upon a public offering of our securities raising gross proceeds in excess of $25,000,000 at a per share price greater than 2.5 times the Series C Conversion Price per share, as adjusted for any stock split, stock dividend, recapitalization, or other similar transaction. In addition, the Series C Preferred Stock will automatically convert into shares of our common stock at the Series C Conversion Price at such time as the closing bid price for our common stock has traded at two times the then prevailing Series C Conversion Price for a period of 20 consecutive trading days, provided that (i) a public trading market exists for our common stock on a national securities exchange, the NASDAQ Stock Market, or the over the counter market; and (ii) the Conversion Shares have been registered for resale and are not subject to any lock-up and the number of shares of the Series C Preferred Stock which can be converted in any 30-day period will be limited to the number of shares of common stock underlying the Series C Preferred Stock equal to 10 times the average daily trading volume during the 20-day look-back period set forth above,
o the conversion price has certain anti-dilution protections for any stock splits, stock dividends, and corporate reorganizations, and certain other corporate transactions and issuances of securities at below the applicable conversion price per share or market value of the common stock,
o the shares of Series C Preferred Stock pay a cumulative dividend at a rate of 8% per annum based on the stated value of $10.00 per share, payable when and as declared by the Board of Directors, or upon conversion or liquidation. At our option, dividends can be paid in cash or shares of common stock valued at the conversion price of the Series C Preferred Stock.
o each share of Series C Preferred Stock will rank pari passu with our Series B Preferred Stock and senior to our Series A Preferred Stock,
o in the event of our liquidation or winding up, each share of Series C Preferred Stock has a liquidation preference equal to $10.00 per share plus accrued and unpaid dividends, and
o the holders of the Series C Preferred Stock are entitled to vote, together with the holders of our common stock, on the basis of one vote for each share of common stock issuable upon the conversion of the Series C Preferred Stock.
There were cumulative arrearages of $1,472,093 and $1,472,093, or $4.36 and $4.36 per share, on the Series C Preferred Stock for undeclared dividends as of December 31, 2011 and December 31, 2010, respectively.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
The Company has 337,150 shares of its Series C Preferred stock that have been converted by the shareholders into shares of our common stock. Pursuant to Delaware General Corporate Law, once the Company has a positive net worth, the cumulative dividends would be payable in either cash or in shares of our common stock upon the declaration of dividends by our board of directors.
In addition, the holders of the Series C Preferred Stock were granted certain mandatory and piggy-back registration rights covering the shares of our common stock issuable upon the conversion of the Series C Preferred Stock and are entitled to vote two members to our Board of Directors.
Series D Preferred Stock
In November 2010, our Board of Directors designated 250,000 shares of our preferred stock as Series D Convertible Preferred Stock of which 250,000 shares are issued and outstanding.
The designations, rights and preferences of the Series D Preferred Stock include:
o the stated value of the Series D Preferred is $0.001 per share.
o the Series D Preferred has no rights to receive dividend distributions or to participate in any dividends declared by the Corporation to or for the benefit of the holders of its common stock.
o the shares of Series D Preferred are not convertible into or exchangeable for any other security of the Corporation.
o except as provided in Series D Preferred Designation, in the case of the death or disability of Series D Preferred holder, the Series D Preferred is not redeemable without the prior express written consent of the holders of the majority of the voting power of all then outstanding shares of such Series D Preferred. In the event any shares of Series D Preferred are redeemed pursuant, the shares redeemed will automatically be canceled and returned to the status of authorized but unissued shares of preferred stock.
o each share of Series D Preferred entitles the holder to Four Hundred (400) votes. With respect to such vote, the holder is entitled to notice of any stockholders' meeting in accordance with the bylaws of the Company, and is entitled to vote, together as a single class with holders of common stock and any other series of preferred stock then outstanding, with respect to any question or matter upon which holders of common stock have the right to vote. The Series D Preferred will also entitle the holders to vote the shares as a separate class as set forth herein and as required by law. In the event of any stock split, stock dividend or reclassification of the Corporation's common stock, the number of votes which attach to each share of Series D Preferred shall be adjusted in the same proportion as any adjustment to the number of outstanding shares of common stock. The shares of Series D Preferred present at a meeting of the Company’s shareholders shall vote in the same percentage as all voting shares voted for each director at the Company’s shareholder meeting in connection with the election or removal of directors to or from the Corporation’s Board of Directors,
o in the event of the liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, the holders of shares of the Series D Preferred then outstanding are entitled to receive before holders of shares of common stock receive any amounts, out of the remaining assets of the Corporation available for distribution to its stockholders, an amount equal to $0.001 per share.
o so long as any shares of Series D Preferred are outstanding, the Company cannot without first obtaining the written approval of the holders of at least a majority of the voting power of the then outstanding shares of such Series D Preferred Stock (i) alter or change the rights, preferences or privileges of the Series D Preferred, or (ii) increase or decrease the total number of authorized shares of Series D Preferred Stock.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
o the holders of the Series D Preferred are not entitled to rights to subscribe for, purchase or receive any part of any new or additional shares of any class, whether now or hereinafter authorized, or of bonds or debentures, or other evidences of indebtedness convertible into or exchangeable for shares of any class.
o the Company has a thirty (30) day “right of first refusal” in which to match the terms and conditions set forth in any bona fide offer received by holders of the Series D Preferred Stock. The Company must purchase all of those shares of Series D Preferred offered by the holder of the Series D Preferred Stock.
o the holders of Series D Preferred cannot, directly or indirectly, transfer any shares of Series D Preferred. Any such purported transfer shall be of no force or effect and shall not be recognized by the Company.
The following table presents preferred dividends accreted for the years ended December 31, 2011 and December 31, 2010, respectively, and the per share effect of the preferred dividends if their effect was not anti-dilutive.
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 year ended December 31, 2011 and December 31, 2010, and the related changes during these years.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
Other Comprehensive Gain (Loss)
Due to the availability of net operating losses and related deferred tax valuations, there is no tax effect associated with any component of other comprehensive gain (loss). The following table lists the beginning balance, yearly activity and ending balance of the components of accumulated other comprehensive gain (loss).
NOTE 14: EMPLOYEE EQUITY INCENTIVE PLANS
Stock Option Plan
Description of 2009 Equity Incentive Plan
In 2009, the Company’s Board of Directors and shareholders approved the 2009 Equity Incentive Plan of OmniComm Systems, Inc. (the “2009 Plan”). The 2009 Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Phantom Stock Unit Awards and Performance Share Units. Pursuant to the 2009 Plan, 7,500,000 shares of the Company’s common stock are authorized for issuance.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
The maximum term for any option grant under the 2009 Plan is ten years from the date of the grant; however, options granted under the 2009 Plan will generally expire five years from the date of grant for most employees, officers and directors of the Company. Options granted to employees generally vest either upon grant or in two installments. The first vesting, which is equal to 50% of the granted stock options, occurs upon completion of one full year of employment from the date of grant and the second vesting occurs on the second anniversary of the employee’s employment. The vesting period typically begins on the date of hire for new employees and on the date of grant for existing employees.
As of December 31, 2011, there were 4,516,000 outstanding options that have been granted under the 2009 Plan. At December 31, 2011, there were 2,984,000 shares available for grant as options or other forms of share-based compensation under the 2009 Plan.
Description of 1998 Stock Incentive Plan
In 1998, the Company’s Board of Directors and shareholders approved the 1998 Stock Incentive Plan of OmniComm Systems, Inc. (the “1998 Plan”). The 1998 Plan provides for granting Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Phantom Stock Unit Awards and Performance Share Units. Pursuant to the 1998 Plan, 12,500,000 shares of the Company’s common stock were authorized for issuance. The 1998 Plan expired as of December 31, 2008. As of December 31, 2011, there were 6,642,000 outstanding options that have been granted under the 1998 Plan.
The following table summarizes the stock option activity for the Company’s equity incentive plans:
The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price at fiscal year-end and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2011.
The total number of shares vested and the fair value of shares vested for the years ended December 31, 2011 and December 31, 2010, respectively, was:
Cash received from stock option exercises for the years ended December 31, 2011 and December 31, 2010 was $-0- and $-0-, respectively. Due to the Company’s net loss position, no income tax benefit has been realized during the years ended December 31, 2011 and December 31, 2010.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
The following table summarizes information concerning options outstanding at December 31, 2011:
The following table summarizes information concerning options outstanding at December 31, 2010:
The weighted average fair value (per share) of options granted during the years ended December 31, 2011, and December 31, 2010 using the Black Scholes option-pricing model was $0.10 and $0.10, respectively.
Basis for Fair Value Estimate of Share-Based Payments
Based on analysis of its historical volatility, the Company expects that the future volatility of its share price is likely to be similar to the historical volatility the Company experienced since the Company’s commercialization activities were initiated during the second half of 2000. The Company used a volatility calculation utilizing the Company’s own historical volatility to estimate its future volatility for purposes of valuing the share-based payments granted during fiscal 2011 and 2010. Actual volatility, and future changes in estimated volatility, may differ substantially from the Company’s current estimates.
The Company utilizes the historical data available regarding employee and director exercise activity to calculate an expected life of the options. The table below presents the weighted average expected life in years of options granted under the Plan as described above. The risk-free rate of the stock options is based on the U.S. Treasury yield curve in effect at the time of grant, which corresponds with the expected term of the option granted.
The fair value of share-based payments was estimated using the Black Scholes option pricing model with the following assumptions for grants made during the periods indicated.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2011 AND DECEMBER 31, 2010
The following table summarizes weighted average grant date fair value activity for the Company incentive stock plans:
A summary of the status of the Company’s non-vested shares underlying stock options as of December 31, 2011, and changes during the year ended December 31, 2011 is as follows:
As of December 31, 2011, approximately $126,260 of total unrecognized compensation cost related to unvested stock options is expected to be recognized over a weighted-average period of 1.28 years.
NOTE 15: INCOME TAXES
A reconciliation of income tax expense and the amount computed by applying the statutory federal income tax rate to the income before provision for income taxes is as follows
The components of income tax expense (benefit) for the years ended:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows:
The Company has net operating loss carryforwards (NOL) for income tax purposes of approximately $47,210,372. This loss is allowed to be offset against future income until the year 2031 when the NOL’s will expire. Other timing differences relate to depreciation and amortization for the stock acquisition of Education Navigator in 1998. The tax benefits relating to all timing differences have been fully reserved for in the valuation allowance account due to the substantial losses incurred through December 31, 2011. The change in the valuation allowance for the year ended December 31, 2011 was an increase of $681,396.
NOTE 16: SUBSEQUENT EVENTS
On January 9, 2012, Simon Kemp, a former employee in the UK of our OmniComm Ltd. subsidiary, filed a claim with the Southampton Employment Tribunal alleging unfair dismissal, failure to provide a written statement of particulars of employment and breach of contract. The company disagrees with the allegations and filed a response with the Employment Tribunal in February 2012. This matter is ongoing and we are prepared to vigorously defend against the claim.