Omnicomm Systems (OMCM) 10-Q 2013 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________

FORM 10-Q

[Mark One]

[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period endedJune 30, 2013

[ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _______ to ________

Commission File Number: 0-25203
OmniCommSystems, Inc.
(Exact name of registrant as specified in its Charter)
Delaware	11-3349762
(State or other jurisdiction of Incorporation or organization)	(IRS Employer Identification Number)
2101 W. Commercial Blvd.Suite 3500, Fort Lauderdale, FL	33309
Address of principal executive offices	Zip Code
954.473.1254
(Registrant’s Telephone Number including area code)

No Changes

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [X] No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer (Do not check if smaller reporting company)	[ ]	Smaller reporting company	[√]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

The number of shares outstanding of each of the issuer’s classes of common equity as of August 6, 2013: 87,834,659 common stock $.001 par value.

1

Table of Contents to the Quarterly Report on Form 10-Q for the SIX MONTH pERIOD Ended JUNE 30, 2013

PART I. FINANCIAL INFORMATION		3
ITEM 1.	FINANCIAL STATEMENTS	3
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	35
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	54
ITEM 4.	CONTROLS AND PROCEDURES	54
PART II	OTHER INFORMATION	54
ITEM 1.	LEGAL PROCEEDINGS.	54
ITEM 1A.	RISK FACTORS.	54
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	54
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	54
ITEM 4.	MINE SAFETY DISCLOSURES.	54
ITEM 5.	OTHER INFORMATION.	54
ITEM 6.	EXHIBITS	55
SIGNATURES		56
EXHIBIT 10.68*		57
EXHIBIT 10.69*		75
EXHIBIT 10.70*		84
Exhibit 31.1*		86
Exhibit 31.2*		87
EXHIBIT 32.1**		88

Exhibit 101.INSXBRL Instance Document***

Exhibit 101.SCHXBRL Taxonomy Extension Schema Document***  

Exhibit 101.CALXBRL Taxonomy Extension Calculation Document***

Exhibit 101.DEFXBRL Taxonomy Extension Definition Document***

Exhibit 101.LABXBRL Taxonomy Extension Label Document***

Exhibit 101.PREXBRL Taxonomy Extension Presentation Document***

* 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.

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2013			December 31, 2012
	(unaudited)
ASSETS
CURRENT ASSETS
Cash	$	530,325		$	873,315
Accounts receivable, net of allowance for doubtful accounts of $41,189 and $84,210, respectively		1,797,503			1,240,898
Prepaid expenses		136,744			131,942
Total current assets		2,464,572			2,246,155
Property and equipment, net		448,877			481,803
Other assets
Prepaid stock compensation		202,125			-0-
Other assets		49,932			51,153
TOTAL ASSETS	$	3,165,506		$	2,779,111
LIABILITIES AND SHAREHOLDERS' (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses	$	1,569,403		$	2,124,365
Notes payable, current portion		17,500			-0-
Deferred revenue, current portion		4,264,653			3,732,240
Line of credit		650,000			-0-
Convertible notes payable, related parties, current portion, net of discount		160,000			160,000
Convertible notes payable, current portion, net of discount		275,000			75,000
Patent settlement liability, current portion		962,500			962,500
Conversion feature liability, related parties		4,673,268			2,240,782
Conversion feature liability		197,298			46,541
Warrant liability, related parties		8,785,379			6,095,153
Warrant liability		262,401			192,445
Total current liabilities		21,817,402			15,629,026
LONG TERM LIABILITIES
Notes payable, long term, net of current portion		634,486			651,987
Notes payable, related parties, long term, net of current portion, net of discount of $752,166 and $656,524, respectively		4,263,713			3,830,355
Deferred revenue, long term, net of current portion		1,061,733			987,328
Convertible notes payable, related parties, net of current portion		8,965,000			8,965,000
Convertible notes payable, net of current portion		265,000			465,000
Patent settlement liability, long term, net of current portion		1,097,270			1,223,715
TOTAL LIABILITIES		38,104,604			31,752,411
COMMITMENTS AND CONTINGENCIES (See Note 11)
SHAREHOLDERS' (DEFICIT)
Preferred stock, $0.001 par value, 10,000,000 shares authorized 3,772,500 shares undesignated		-0-			-0-
Series B convertible preferred stock - 230,000 shares authorized, -0- and -0- issued and outstanding, respectively at $0.001 par value;liquidation preference $-0- and $-0-, respectively		-0-			-0-
Series C convertible preferred stock - 747,500 shares authorized, -0- and -0- issued and outstanding, respectively at $0.001 par value;liquidation preference $-0- and $-0-, respectively		-0-			-0-
Series A convertible preferred stock - 5,000,000 shares authorized, 4,125,224 and 4,125,224 issued and outstanding, respectively at $0.001par value; liquidation preference $4,125,224 and $4,125,224, respectively		4,125			4,125
Series D preferred stock - 250,000 shares authorized, 250,000 and 250,000 issued and outstanding, respectively at $0.001 par value		250			250
Common stock - 250,000,000 shares authorized, 87,834,659 and 86,598,659 issued and outstanding, respectively, at $0.001 par value		87,835			86,599
Additional paid in capital - preferred		4,717,804			4,717,804
Additional paid in capital - common		36,905,629			36,645,589
Accumulated other comprehensive (loss)		(96,571	)		(69,092	)
Accumulated deficit		(76,558,170	)		(70,358,575	)
TOTAL SHAREHOLDERS' (DEFICIT)		(34,939,098	)		(28,973,300	)
TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT)	$	3,165,506		$	2,779,111

 

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements

3

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the six months ended						For the three months ended
	June 30,						June 30,
	2013			2012			2013			2012
Revenues	$	7,093,536		$	7,422,934		$	3,552,287		$	3,889,295
Reimbursable revenues		384,987			416,234			177,413			180,379
Total revenues		7,478,523			7,839,168			3,729,700			4,069,674
Cost of goods sold		1,293,757			1,329,744			647,177			639,428
Reimbursable expenses - cost of goods sold		233,218			347,528			212,300			190,405
Total cost of sales		1,526,975			1,677,272			859,477			829,833
Gross margin		5,951,548			6,161,896			2,870,223			3,239,841
Operating expenses
Salaries, benefits and related taxes		4,366,143			4,288,407			2,154,057			2,159,768
Rent and occupancy expenses		466,440			422,445			250,422			223,807
Consulting services		102,914			67,436			53,611			5,091
Legal and professional fees		152,455			197,455			56,702			93,417
Travel		225,718			206,083			81,848			94,230
Telephone and internet		92,858			73,604			46,403			38,521
Selling, general and administrative		436,716			466,140			244,036			238,454
Bad debt expense		(13,021	)		84,144			(102,141	)		84,144
Depreciation expense		119,542			232,755			56,839			114,356
Amortization expense		-0-			232,117			-0-			116,058
Total operating expenses		5,949,765			6,270,586			2,841,777			3,167,846
Operating income/(loss)		1,783			(108,690	)		28,446			71,995
Other income/(expense)
Interest expense		(70,192	)		(60,888	)		(37,866	)		(30,243	)
Interest expense, related parties		(1,161,902	)		(1,046,003	)		(600,262	)		(523,001	)
Interest income		6			208			6			31
Change in derivative liabilities		(4,943,283	)		(588,784	)		(1,038,084	)		2,056,132
Loss on sale of fixed assets		-0-			(22,106	)		-0-			(22,106	)
Transaction (loss)		(8,277	)		(966	)		(1,562	)		(1,752	)
Income/(loss) before income taxes and preferred dividends		(6,181,865	)		(1,827,229	)		(1,649,322	)		1,551,056
Income taxes		(17,730	)		-0-			(8,865	)		-0-
Net income/(loss)		(6,199,595	)		(1,827,229	)		(1,658,187	)		1,551,056
Preferred stock dividends
Preferred stock dividends in arrears
Series A preferred		(102,283	)		(125,539	)		(51,424	)		(51,424	)
Total preferred stock dividends		(102,283	)		(125,539	)		(51,424	)		(51,424	)
Net income/(loss) attributable to common stockholders	$	(6,301,878	)	$	(1,952,768	)	$	(1,709,611	)	$	1,499,632
Net income/(loss) per share
Basic and diluted	$	(0.07	)	$	(0.02	)	$	(0.02	)	$	0.02
Weighted average number of shares outstanding
Basic and diluted		87,336,914			86,481,495			87,824,747			86,481,495

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements

4

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(unaudited)

	For the six months ended June 30,						For the three months ended June 30,
	2013			2012			2013			2012
Net income/(loss) attributable to common stockholders	$	(6,301,878	)	$	(1,952,768	)	$	(1,709,611	)	$	1,499,632
Other comprehensive income/(loss)
Change in foreign currency translation adjustment		(27,479	)		(7,188	)		(11,966	)		(5,966	)
Other comprehensive income/(loss)		(27,479	)		(7,188	)		(11,966	)		(5,966	)
Comprehensive income/(loss)	$	(6,329,357	)	$	(1,959,956	)	$	(1,721,577	)	$	1,493,666

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements

5

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)

FOR THE YEAR ENDED DECEMBER 31, 2012 AND THE SIX MONTHS ENDED JUNE 30, 2013

(unaudited)

	Preferred Stock																		Common Stock
	5% Series A Convertible				8% Series B Convertible				8% Series C Convertible				Series D Preferred Stock				Additional						Additional						Accumulated
	Number of shares		$0.001 Par value		Number of shares		$0.001 Par value		Number of shares		$0.001 Par value		Number of shares		$0.001 Par value		paid in capital preferred		Number of shares		$0.001 Par value		paid in capital common			Accumulated deficit			other comprehensive income			Total shareholders' (deficit)
Balances atDecember 31, 2011		4,125,224	$	4,125		-0-	$	-0-		-0-	$	-0-		250,000	$	250	$	4,717,804		86,481,495	$	86,482	$	36,572,099		$	(62,525,605	)	$	(53,714	)	$	(21,198,559	)
Employee stock optionexpense																								65,744									65,744
Foreign currencytranslation adjustment																														(15,378	)		(15,378	)
Issuance of commonstock in lieu of accrued interest																				42,164		42		7,821									7,863
Employee stock optionexercise																				75,000		75		(75	)								-0-
Net loss for the twelve monthsended December 31, 2012		-0-		-0-		-0-		-0-		-0-		-0-		-0-		-0-		-0-		-0-		-0-		-0-			(7,832,970	)		-0-			(7,832,970	)
Balances atDecember 31, 2012		4,125,224		4,125		-0-		-0-		-0-		-0-		250,000		250		4,717,804		86,598,659		86,599		36,645,589			(70,358,575	)		(69,092	)		(28,973,300	)
Employee stock optionexpense																								40,776									40,776
Foreign currencytranslation adjustment																														(27,479	)		(27,479	)
Restricted stock issuance																				1,225,000		1,225		219,275									220,500
Employee stock optionexercise																				11,000		11		(11	)								-0-
Net loss for the six monthsended June 30, 2013		-0-		-0-		-0-		-0-		-0-		-0-		-0-		-0-		-0-		-0-		-0-		-0-			(6,199,595	)		-0-			(6,199,595	)
Balances atJune 30, 2013		4,125,224	$	4,125		-0-	$	-0-		-0-	$	-0-		250,000	$	250	$	4,717,804		87,834,659	$	87,835	$	36,905,629		$	(76,558,170	)	$	(96,571	)	$	(34,939,098	)

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements

6

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the six months ended June 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(6,199,595	)	$	(1,827,229	)
Adjustment to reconcile net loss to net cash (used in) operating activities
Change in derivative liabilities		4,943,283			588,784
Interest expense from derivative instruments		304,500			237,810
Loss from sale of fixed assets, net		-0-			14,606
Employee stock option expense		40,776			33,727
Amortization of prepaid compensation		18,375			-0-
Provision for doubtful accounts		(13,021	)		84,144
Depreciation and amortization		119,542			464,872
Changes in operating assets and liabilities
Accounts receivable		(543,584	)		(901,836	)
Prepaid expenses		(4,802	)		(10,506	)
Other assets		1,221			9,127
Accounts payable and accrued expenses		(25,964	)		290,925
Patent settlement liability		(126,445	)		(74,844	)
Deferred revenue		606,818			769,105
Net cash (used in) operating activities		(878,896	)		(321,315	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property and equipment		-0-			50,000
Purchase of property and equipment		(86,615	)		(34,491	)
Net cash provided by/(used in) investing activities		(86,615	)		15,509
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of notes payable		-0-			(20,000	)
Proceeds from revolving line of credit		650,000			-0-
Net cash provided by/(used in) financing activities		650,000			(20,000	)
Effect of exchange rate changes on cash and cash equivalents		(27,479	)		(7,188	)
Net decrease in cash and cash equivalent		(342,990	)		(332,994	)
Cash and cash equivalents at beginning of period		873,315			1,302,287
Cash and cash equivalents at end of period	$	530,325		$	969,293
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes	$	17,730		$	-0-
Interest	$	602,822		$	761,682
Non-cash transactions
Notes payable issued in exchange for existing notes payable	$	2,866,879		$	-0-
Promissory notes issued for accrued interest	$	529,000		$	-0-

See accompanying summary of accounting policies and notes to unaudited condensed consolidated financial statements

7

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012 

(unaudited) 

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 six month periods ended June 30, 2013 and June 30, 2012 we spent approximately $1,181,853 and $1,224,769, 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’s 2012 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.

UNAUDITED FINANCIAL STATEMENTS

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, pursuant to the rules and regulations of the Securities and Exchange Commission. Pursuant to such rules and regulations, certain financial information and footnote disclosures normally included in the consolidated financial statements have been condensed or omitted. The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normally recurring adjustments) which management considers necessary for a fair presentation of operating results.

The operating results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year-ended December 31, 2013. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year-ended December 31, 2012.

ESTIMATES IN FINANCIAL STATEMENTS

The preparation of the unaudited condensed 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.

8

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

Reclassifications

Certain reclassifications have been made in the 2012 financial statements to conform to the 2013 presentation. These reclassifications did not have any effect on our net loss or shareholders’ deficit.

foreign currency translation

The financial statements of the Company’s foreign subsidiaries are translated in accordance with ASC 830-30, Foreign Currency Matters—Translation of Financial Statements. The reporting currency for the Company is the U.S. dollar. The functional currency of the Company’s subsidiaries, OmniComm Europe GmbH in Germany and OmniComm Spain S.L. in Spain is the Euro. The functional currency of the Company’s subsidiary OmniComm Ltd., in the United Kingdom, is the British Pound Sterling. Accordingly, the assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars using the exchange rate in effect at each balance sheet date. Revenue and expense accounts of the Company’s foreign subsidiaries are translated using an average rate of exchange during the period. Foreign currency translation adjustments are accumulated as a component of other comprehensive income/(loss) as a separate component of stockholders’ equity. Gains and losses arising from transactions denominated in foreign currencies are primarily related to intercompany accounts that have been determined to be temporary in nature and accordingly, are recorded directly to the statement of operations. We record translation gains and losses in accumulated other comprehensive income as a component of stockholders’ equity. We recorded translation losses of $27,479 and $7,188 for the six month periods ended June 30, 2013 and June 30, 2012 respectively.

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, TrialOneand eClinical Suite (the “EDC Software”).Service revenues are derived principally from the Company's delivery of the hosted solutions of itsTrialMasterand 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 itsTrialMasterand eClinical Suitesoftware products as hosted application solutions delivered through a standard Web-browser, with customer support and training services. The Company'sTrialOnesolution is presently available only on a licensed basis. To date, hosted applications revenues have been primarily related toTrialMaster.

Revenues resulting fromTrialMaster andeClinical 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.

9

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

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

Licensing Revenues

The Company's software license revenues are earned from the sale of off-the-shelf software. From time-to-time a client might require significant modification or customization subsequent to delivery to the customer. The Company generally enters into software term licenses for its EDC Software products with its customers for three to five 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, running test data and documentation of procedures. Subsequent additions or extensions to license terms do not generally include additional professional services.

Pass-through Revenue and Expense

The Company accounts for pass-through revenue and expense in accordance with ASC 605-45,Principal Agent Considerations. In accordance with ASC 605-45, Principal Agent Consideration, these amounts are recorded as revenue in the statement of operations with a corresponding expense recorded in cost of goods sold. Pass-through revenues and expenses include amounts associated with third-party services provided to our customers by our service and product partners. These third-party services are primarily comprised of Interactive Voice and Web Response software services (IVR and IWR), travel and shipping that are incurred on our clients’ behalf.

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.

10

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)  

The fees associated with each business activity for the periods ended June 30, 2013 and June 30, 2012, respectively are:

	For the six months ended
Revenue activity	June 30, 2013		June 30, 2012
Set-up fees	$	1,595,295	$	2,627,133
Change orders		224,530		154,081
Maintenance		2,309,885		2,620,531
Software licenses		1,902,693		1,678,637
Professional services		1,072,881		425,115
Hosting		373,239		333,671
Total	$	7,478,523	$	7,839,168

	For the three months ended
Revenue activity	June 30, 2013		June 30, 2012
Set-up fees	$	778,105	$	1,478,956
Change orders		129,748		62,325
Maintenance		1,102,042		1,304,884
Software licenses		941,540		911,555
Professional services		581,166		139,958
Hosting		197,099		171,996
Total	$	3,729,700	$	4,069,674

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 staff. Cost of revenues also includes outside service provider costs.Cost of revenues is 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 collectability of accounts receivable and prior bad debt experience. The Company had recorded an allowance for uncollectible accounts receivable of $41,189 as of June 30, 2013 and $84,210 as of December 31, 2012, respectively.

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

	June 30, 2013			December 31, 2012
Beginning of period	$	84,210		$	142,444
Bad debt expense		(13,021	)		(58,234	)
Write-offs		(30,000	)		-0-
End of period	$	41,189		$	84,210

11

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

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 June 30, 2013, $221,400 was deposited in excess of FDIC-insured limits. Management believes the risk in these situations to be minimal.

Except as follows, the Company has no significant off-balance-sheet risk or credit risk concentrations. Financial instruments that subject the Company to potential credit risks are principally cash equivalents and accounts receivable. Concentrated credit risk with respect to accounts receivable is limited to creditworthy customers. The Company's customers are principally located in the United States 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 June 30, 2013. 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 June 30, 2013, 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 12% of our revenues during the six month period ended June 30, 2013 or approximately $871,000 and another customer accounted for 10% or approximately $776,000. One customer accounted for 20% of our revenues during the six month period ended June 30, 2012 or approximately $1,575,000 and another customer accounted for 18% or approximately $1,390,000. The following table summarizes the number of customers who individually comprise greater than 10% of total revenue and/or total accounts receivable and their aggregate percentage of the Company's total revenue and gross accounts receivable for the periods presented.

	Revenues				Accounts receivable
							Percentage of
	Number of		Percentage of		Number of		accounts
For the period ended	customers		total revenues		customers		receivable
June 30, 2013		2		22%		3		55%
December 31, 2012		2		35%		3		54%
June 30, 2012		2		38%		4		49%

The table below provides revenues from European customers for the six month periods ended June 30, 2013 and June 30, 2012, respectively.

European revenues
For the six months ended
June 30, 2013				June 30, 2012
European revenues		% of Total revenues		European revenues		% of Total revenues
$	816,344		11%	$	783,659		10%

 

The Company serves all of its hosting customers from third-party web hosting facilities located in the United States. The Company does not control the operation of these facilities, and they are vulnerable to damage or interruption. The Company maintains redundant systems that can be used to provide service in the event the third-party web hosting facilities become unavailable, although in such circumstances, the Company's service may be interrupted during the transition.

12

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

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”) andASC 350,Intangibles- Goodwill and Other (“ASC 350”). The acquisition method of accounting requires that assets acquired and liabilities assumed be recorded at their fair values on the date of a business acquisition. Our consolidated financial statements and results of operations reflect an acquired business from the completion date of an acquisition.

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

Long-lived Assets 

We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether an impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use quoted market prices when available and independent appraisals and management estimates of future operating cash flows, as appropriate, to determine fair value.

FAIR VALUE MEASUREMENT

OmniComm’s capital structure includes the use of warrants and convertible debt features that are classified as derivative financial instruments. Derivative financial instruments are recognized as either assets or liabilities and are measured at fair value under ASC 815Derivatives and Hedging. ASC 815 requires that changes in the fair value of derivative financial instruments with no hedging designation be recognized as gains/(losses) in the earnings statement. The fair value measurement is determined in accordance with ASC 820Fair Value Measurements and Disclosures.

DEFERRED REVENUE

Deferred revenue represents cash advances and amounts in accounts receivable as of the balance sheet date 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 June 30, 2013, the Company had $5,326,386 in deferred revenues relating to contracts for services to be performed over periods ranging from one month to five years. The Company had $4,264,653 in deferred revenues that are expected to be recognized in the next twelve fiscal months.

13

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

ADVERTISING

Advertising costs are expensed as incurred. Advertising costs were $124,139 and $118,256 for the six month periods ended June 30, 2013 and June 30, 2012, 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 six month periods ended June 30, 2013 and June 30, 2012 we spent approximately $1,181,853 and $1,224,769 respectively, on research and development activities, which include costs associated with the development of our software products and services for our clients’ 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.

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 7,500,000 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 12,500,000 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 withASC 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.

14

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)  

IMPACT OF NEW ACCOUNTING STANDARDS

During the first six months of 2013, we adopted the following new accounting pronouncements:

In July 2012, FASB issued Accounting Standards Update 2012-02, Balance Sheet- Intangibles- Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-002 is an Amendment to FASB Accounting Standards Update 2011-08. The objective of the amendments in this Update is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company adopted ASU 2012-02 on January 1, 2013, and the adoption did not have a material impact on its consolidated financial position or results of operations.

In February 2013, FASB issued Accounting Standards Update 2013-02, Comprehensive Income (Topic 220) (“ASU 2013-02”). ASU 2013-002 provides guidance on the presentation of amounts reclassified out of accumulated other comprehensive income. This update requires an entity to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement or in the notes, significant amounts reclassified from accumulated other comprehensive income by the net income line item. The Company adopted ASU 2013-02 as of January 1, 2013, and the adoption did not have a material impact on its consolidated financial position or results of operations.

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 June 30, 2013 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.

15

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)  

NOTE 4.                EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share were calculated using the weighted average number of shares outstanding of 87,336,914 and 86,481,495 for the six month periods ended June 30, 2013 and June 30, 2012, respectively.

Basic earnings (loss) per share were calculated using the weighted average number of shares outstanding of 87,824,747 and 86,481,495 for the three month periods ended June 30, 2013 and June 30, 2012, respectively.

Antidilutive shares aggregating 80,097,329 and 87,055,227 have been omitted from the calculation of dilutive earnings (loss) per share for the six month periods ended June 30, 2013 and June 30, 2012, 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 for the six month periods ended June 30. The table below provides a reconciliation of anti-dilutive securities outstanding as of June 30, 2013 and June 30, 2012, respectively.

Anti-dilutive security	June 30, 2013		June 30, 2012
Preferred stock		2,750,149		2,750,149
Employee stock options		6,445,000		11,093,000
Warrants		45,528,873		48,009,582
Convertible notes		24,620,000		24,620,000
Shares issuable for accrued interest		753,307		582,496
Total		80,097,329		87,055,227

 

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.

16

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

For the six months ended
	June 30, 2013								June 30, 2012
	Income (loss)			Shares		Per-share			Income (loss)			Shares		Per-share
	numerator			denominator		amount			numerator			denominator		amount
Basic EPS	$	(6,301,878	)		87,336,914	$	(0.07	)	$	(1,952,768	)		86,481,495	$	(0.02	)
Effect of dilutive securities
None		-0-			-0-		-0-			-0-			-0-		-0-
Diluted EPS	$	(6,301,878	)		87,336,914	$	(0.07	)	$	(1,952,768	)		86,481,495	$	(0.02	)

 

For the three months ended
	June 30, 2013								June 30, 2012
	Income (loss)			Shares		Per-share			Income (loss)		Shares		Per-share
	numerator			denominator		amount			numerator		denominator		amount
Basic EPS	$	(1,709,611	)		87,824,747	$	(0.02	)	$	1,499,632		86,481,495	$	0.02
Effect of dilutive securities
None		-0-			-0-		-0-			-0-		-0-		-0-
Diluted EPS	$	(1,709,611	)		87,824,747	$	(0.02	)	$	1,499,632		86,481,495	$	0.02

NOTE 5:     PROPERTY AND EQUIPMENT, NET

Property and equipment consists of the following:

	June 30, 2013						December 31, 2012
	Cost		Accumulated depreciation		Net book value		Cost		Accumulated depreciation		Net book value		Estimated useful life (Years)
Computer & office equipment	$	1,559,321	$	1,251,790	$	307,531	$	1,519,617	$	1,181,451	$	338,166	5
Leasehold improvements		91,893		71,795		20,098		92,686		68,044		24,642	5
Computer software		1,538,295		1,435,663		102,632		1,502,524		1,403,705		98,819	3
Office furniture		113,336		94,720		18,616		110,780		90,604		20,176	5
Total	$	3,302,845	$	2,853,968	$	448,877	$	3,225,607	$	2,743,804	$	481,803

Depreciation expense for the six month periods ended June 30, 2013 and June 30, 2012 was $119,542 and $232,755, respectively.

17

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)  

NOTE 6:     INTANGIBLE ASSETS, AT COST

Intangible assets consist of the following:

	June 30, 2013						December 31, 2012
Asset	Cost		Accumulated amortization		Net book value		Cost		Accumulated amortization		Net book value		Estimated useful life (Years)
Customer lists	$	1,392,701	$	1,392,701	$	-0-	$	1,392,701	$	1,392,701	$	-0-	3
	$	1,392,701	$	1,392,701	$	-0-	$	1,392,701	$	1,392,701	$	-0-

Amortization expense was $-0- and $232,117 for the six month periods ended June 30, 2013 and June 30, 2012, respectively.

NOTE 7:     ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:

Account	June 30, 2013		December 31, 2012
Accounts payable	$	362,111	$	665,139
Accrued payroll and related costs		324,620		383,859
Other accrued expenses		135,688		124,154
Accrued interest		746,984		951,213
Total accounts payable and accrued expenses	$	1,569,403	$	2,124,365

NOTE 8:     LINES OF CREDIT AND NOTES PAYABLE

On March 18, 2013, the Company entered into a $2,000,000 revolving line of credit with The Northern Trust Company guaranteed by Cornelis F. Wit, Chief Executive Officer and Director. The line of credit matures on March 17, 2014 and carries a variable interest rate based on the prime rate. At June 30, 2013, $650,000 was outstanding on the line of credit at an interest rate of 2.75%.

At June 30, 2013, the Company owed $5,667,865 in notes payable all of which are unsecured. The table below provides details as to the terms and conditions of the notes payable.

					Ending
					principal		Non related party				Related party
Origination	Maturity	Interest			June 30,				Long				Long
date	date	rate			2013		Current		term		Current		term
12/31/2011	1/1/2015		12	%	$	1,600,000	$	-0-	$	-0-	$	-0-	$	1,600,000
4/1/2012	1/1/2014		12	%		17,500		17,500		-0-		-0-		-0-
12/17/2012	12/16/2014		12	%		20,000		-0-		20,000		-0-		-0-
1/1/2013	1/1/2016		12	%		529,000		-0-		-0-		-0-		529,000
1/1/2013	1/1/2015		10	%		308,561		-0-		308,561		-0-		-0-
1/1/2013	1/1/2015		10	%		123,425		-0-		123,425		-0-		-0-
1/1/2013	1/1/2015		12	%		45,000		-0-		45,000		-0-		-0-
2/1/2013	1/1/2016		12	%		20,000		-0-		-0-		-0-		20,000
3/5/2013	1/1/2015		12	%		137,500		-0-		137,500		-0-		-0-
4/1/2013	3/31/2016		12	%		2,866,879		-0-		-0-		-0-		2,866,879
Discount on note payable								-0-		-0-		-0-		(752,166	)
Total					$	5,667,865	$	17,500	$	634,486	$	-0-	$	4,263,713

 

18

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited) 

At December 31, 2012, the Company owed $5,138,866 in notes payable all of which were unsecured. The table below provides details as to the terms and conditions of the notes payable.

					Ending
					principal		Non related party				Related party
Origination	Maturity	Interest			December 31,				Long				Long
date	date	rate			2012		Current		term		Current		term
12/31/2010	1/1/2015		10	%	$	308,562	$	-0-	$	308,562	$	-0-	$	-0-
12/31/2010	1/1/2015		10	%		123,425		-0-		123,425		-0-		-0-
2/1/2011	1/1/2015		12	%		137,500		-0-		137,500		-0-		-0-
3/31/2011	4/1/2014		12	%		2,866,879		-0-		-0-		-0-		2,866,879
12/31/2011	1/1/2015		12	%		1,600,000		-0-		-0-		-0-		1,600,000
12/31/2011	1/1/2016		12	%		20,000		-0-		-0-		-0-		20,000
4/1/2012	1/1/2014		12	%		17,500		-0-		17,500		-0-		-0-
10/1/2012	1/1/2015		12	%		45,000		-0-		45,000		-0-		-0-
12/17/2012	12/16/2014		12	%		20,000		-0-		20,000		-0-		-0-
Discount on note payable								-0-		-0-		-0-		(656,524	)
Total					$	5,138,866	$	-0-	$	651,987	$	-0-	$	3,830,355

On January 1, 2013, the Company issued a promissory note in the principal amount of $529,000 and warrants to purchase 2,116,000 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of January 31, 2016 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, 2016.

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 $400,142 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 $128,858. 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.

On January 1, 2013 the Company issued promissory notes in the amount of $431,986 in exchange for existing promissory notes in the same amount. The promissory notes carry an interest rate of 10% and have a maturity date of January 1, 2015.

On January 1, 2013 the Company issued a promissory note in the amount of $45,000 in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2015.

On February 1, 2013 the Company issued a promissory note in the amount of $20,000 to our Chairman and Chief Technology Officer Randall G. Smith in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2016.

On March 5, 2013 the Company issued a promissory note in the amount of $137,500 in exchange for a promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2015.

On April 1, 2013 the Company issued a promissory note in the amount of $2,866,879 to our Chief Executive Officer Cornelis F. Wit in exchange for an existing promissory note in the same amount. The promissory note carries an interest rate of 12% and has a maturity date of March 31, 2016.

19

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

NOTE 9:     CONVERTIBLE NOTES PAYABLE

The following table summarizes the convertible debt outstanding as of June 30, 2013.

							Principal						Discount		Carrying		Carrying amount
							at				Total		at		amount at		Short term				Long term
Date of	Maturity	Interest			Original		June 30,		Allocated		discount		June 30,		June 30,				Non				Non
issuance	date	rate			principal		2013		discount		amortized		2013		2013		Related		related		Related		related
8/1/1999	6/30/2004		10	%	$	862,500	$	75,000	$	-0-	$	-0-	$	-0-	$	75,000	$	-0-	$	75,000	$	-0-	$	-0-
8/29/2008	1/1/2015		10	%		150,000		150,000		135,600		135,600		-0-		150,000		-0-		-0-		150,000		-0-
8/29/2008	1/1/2016		10	%		2,120,000		1,770,000		1,916,480		1,916,480		-0-		1,770,000		-0-		-0-		1,770,000		-0-
12/16/2008	12/16/2013		12	%		160,000		160,000		44,024		44,024		-0-		160,000		160,000		-0-		-0-		-0-
12/16/2008	1/1/2014		12	%		200,000		200,000		55,030		55,030		-0-		200,000		-0-		200,000		-0-		-0-
12/16/2008	1/1/2015		12	%		100,000		100,000		27,515		27,515		-0-		100,000		-0-		-0-		-0-		100,000
12/16/2008	1/1/2016		12	%		4,615,000		4,520,000		1,243,681		1,243,681		-0-		4,520,000		-0-		-0-		4,505,000		15,000
9/30/2009	1/1/2016		12	%		1,400,000		1,200,000		526,400		526,400		-0-		1,200,000		-0-		-0-		1,100,000		100,000
12/31/2009	1/1/2016		12	%		1,490,000		1,490,000		935,720		935,720		-0-		1,490,000		-0-		-0-		1,440,000		50,000
Total					$	11,097,500	$	9,665,000	$	4,884,450	$	4,884,450	$	-0-	$	9,665,000	$	160,000	$	275,000	$	8,965,000	$	265,000

 

The following table summarizes the convertible debt outstanding as of December 31, 2012.

							Principal at						Discount at		Carrying amount at		Carrying amount
							December				Total		December		December		Short term				Long term
Date of	Maturity	Interest			Original		31,		Allocated		discount		31,		31,				Non				Non
issuance	date	rate			principal		2012		discount		amortized		2012		2012		Related		related		Related		related
8/1/1999	6/30/2004		10	%	$	862,500	$	75,000	$	-0-	$	-0-	$	-0-	$	75,000	$	-0-	$	75,000	$	-0-	$	-0-
8/29/2008	1/1/2015		10	%		150,000		150,000		135,600		135,600		-0-		150,000		-0-		-0-		150,000		-0-
8/29/2008	1/1/2016		10	%		2,120,000		1,770,000		1,916,480		1,916,480		-0-		1,770,000		-0-		-0-		1,770,000		-0-
12/16/2008	12/16/2013		12	%		160,000		160,000		44,024		44,024		-0-		160,000		160,000		-0-		-0-		-0-
12/16/2008	1/1/2014		12	%		200,000		200,000		55,030		55,030		-0-		200,000		-0-		-0-		-0-		200,000
12/16/2008	1/1/2015		12	%		100,000		100,000		27,515		27,515		-0-		100,000		-0-		-0-		-0-		100,000
12/16/2008	1/1/2016		12	%		4,615,000		4,520,000		1,243,681		1,243,681		-0-		4,520,000		-0-		-0-		4,505,000		15,000
9/30/2009	1/1/2016		12	%		1,400,000		1,200,000		526,400		526,400		-0-		1,200,000		-0-		-0-		1,100,000		100,000
12/31/2009	1/1/2016		12	%		1,490,000		1,490,000		935,720		935,720		-0-		1,490,000		-0-		-0-		1,440,000		50,000
Total					$	11,097,500	$	9,665,000	$	4,884,450	$	4,884,450	$	-0-	$	9,665,000	$	160,000	$	75,000	$	8,965,000	$	465,000

 

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 June 30, 2013, $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 that is in default. There was $105,968 of accrued interest at June 30, 2013.

Secured Convertible Debentures

On September 30, 2009, the Company 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. 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 debentures until April 1, 2013, including $1,100,000 in convertible debentures held by our Chief Executive Officer and Director, Cornelis F. Wit. The Company also extended the expiration date of the warrants associated with the offering until September 30, 2015. On February 22, 2013 the Company and the lenders agreed to extend the maturity date of $1,200,000 of the convertible debentures including $1,100,000 due to our Chief Executive Officer and Director, Cornelis F. Wit to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

Convertible Debentures

On August 29, 2008, the Company sold $2,270,000 of convertible debentures and warrants to purchase an aggregate of 4,540,000 shares of our common stock to four accredited investors including our Chief Executive Officer and one of our Directors. The convertible debentures, which bear interest at 10% per annum, were due on August 29, 2010. The convertible debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.50 per share. On September 30, 2009, two Affiliates of the Company extended $1,920,000 of the convertible debentures until August 29, 2013 in accordance with the terms of a Secured Convertible Debenture issued on that date. On February 22, 2013 the Company and Mr. van Kesteren extended the maturity date of $150,000 of the convertible debentures due to our Director, Guus van Kesteren to January 1, 2015. The expiration date of the warrants associated with the debentures was also extended to January 1, 2015. On February 22, 2013 the Company and Mr. Wit extended the maturity date of $1,770,000 of the convertible debentures due to our Chief Executive Officer and Director, Cornelis F. Wit to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

20

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

On December 16, 2008, we sold $5,075,000 of convertible debentures and warrants to purchase an aggregate of 10,150,000 shares of our common stock to eleven accredited investors including our Chief Executive Officer, Chief Operating Officer, Chief Technology Officer, Chief Financial Officer and four of our Directors. The convertible debentures, which bear interest at 12% per annum, were due on December 16, 2010. The convertible debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.50 per share. On September 30, 2009 Affiliates of the Company extended $4,980,000 of Convertible Notes until December 16, 2013 in accordance with the terms of a Secured Convertible Debenture issued on that date. On February 22, 2013 the Company and the lenders agreed to extend the maturity date of $4,505,000 of the convertible debentures including $4,475,000 due to our Chief Executive Officer and Director Cornelis F. Wit, $25,000 due to our Chief Operating Officer and President Stephen E. Johnson and $5,000 due to our Chairman and Chief Technology Officer Randall G. Smith to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016. On February 27, 2013 the Company and Mr. Veatch extended the maturity date of $15,000 of convertible debentures issued to our former Director Matthew Veatch to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016. On March 6, 2013, the Company and the lenders agreed to extend the maturity date of $200,000 of convertible debentures to January 1, 2014. The expiration date of the warrants associated with the debentures was also extended to January 1, 2014. On March 12, 2013, the Company and the lenders agreed to extend the maturity date of $100,000 of convertible debentures to January 1, 2015. The expiration date of the warrants associated with the debentures was also extended to January 1, 2015.

On December 31, 2009, the Company sold an aggregate of $1,490,000 principal amount 12% convertible debentures and 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. 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 June 30, 2011, the Company and the lenders agreed to extend all $1,490,000 of the convertible debentures until October 1, 2013, including $1,440,000 of the Debentures 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 until December 31, 2015. On February 22, 2013 the Company and the lenders agreed to extend the maturity date of all $1,490,000 of the convertible debentures, including $1,440,000 due to our Chief Executive Officer and Director Cornelis F. Wit, to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

The payments required at maturity under the Company’s outstanding convertible debt at June 30, 2013 are as follows:

2013	$	235,000
2014		200,000
2015		250,000
2016		8,980,000
Total	$	9,665,000

NOTE 10:     FAIR VALUE MEASUREMENT

The Company measures the fair value of its assets and liabilities under the guidance ofASC 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.

21

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

ASC 820 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. ASC 820 requires the Company to use valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

●  Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;

●  Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly such as quoted prices for similar assets or liabilities or market-corroborated inputs; and

●  Level 3: Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions about how market participants would price the assets or liabilities.

The valuation techniques that may be used to measure fair value are as follows:

A.   Market approach - Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities

B.  Income approach - Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about those future amounts, including present value techniques, option-pricing models and excess earnings method

C.  Cost approach - Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost)

The Company also adopted the provisions ofASC 825, Financial Instruments.ASC 825allows 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 six month periods ended June 30, 2013 and June 30, 2012.

The Company’s financial assets or liabilities subject to ASC 820 as of June 30, 2013 include the conversion feature and warrant liability associated with convertible debentures issued during fiscal 2008 and 2009 and the warrants issued during 2011 and 2013 that are associated with 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 815Disclosures about Derivative Instruments and Hedging Activities. See Note 9 – Convertible Notes Payable.

22

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)  

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:

	Fair value at June 30,		Quoted prices in active markets for identical assets/ liabilities		Significant other observable inputs		Significant unobservable inputs
	2013		(Level 1)		(Level 2)		(Level 3)
Derivatives: (1) (2)
Conversion feature liability	$	4,870,566	$	-0-	$	-0-	$	4,870,566
Warrant liability		9,047,780		-0-		-0-		9,047,780
Total of derivative liabilities	$	13,918,346	$	-0-	$	-0-	$	13,918,346

(1) The fair value of the derivative instruments was estimated using the Income Approach and the Black Scholes option pricing model with the following assumptions for the six months ended June 30, 2013 

(2) The fair value at the measurement date is equal to their carrying value on the balance sheet

Significant valuation assumptions of derivative instruments at June 30, 2013
Risk free interest rate		0.12%
Dividend yield		0.00%
Expected volatility	218.6%	to	240.1%
Expected life (range in years)
Conversion feature liability	0.46	to	2.51
Warrant liability	0.25	to	2.75

 

A summary of the fair value of liabilities measured at fair value on a recurring basis follows:

	Fair value at December 31,		Quoted prices in active markets for identical assets/ liabilities		Significant other observable inputs		Significant unobservable inputs
	2012		(Level 1)		(Level 2)		(Level 3)
Derivatives: (1) (2)
Conversion feature liability	$	2,287,323	$	-0-	$	-0-	$	2,287,323
Warrant liability		6,287,598		-0-		-0-		6,287,598
Total of derivative liabilties	$	8,574,921	$	-0-	$	-0-	$	8,574,921

(1) The fair value of the derivative instruments was estimated using the Black Scholes option pricing model with the following assumptions for the year ended December 31, 2012

(2) The fair value at the measurement date is equal to their carrying value on the balance sheet

Significant valuation assumptions of derivative instruments at December 31, 2012
Risk free interest rate	0.18%	to	0.36%
Dividend yield		0.00%
Expected volatility	218.2%	to	259.1%
Expected life (range in years)
Conversion feature liability	0.25	to	0.96
Warrant liability	0.66	to	3.25

23

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

	Other income
	for the six months ended
	June 30, 2013			June 30, 2012
The net amount of (losses) for the period included in earnings attributable to the unrealized loss from changes in derivative liabilities at the reporting date	$	(4,943,283	)	$	(588,784	)
Total unrealized (losses) included in earnings	$	(4,943,283	)	$	(588,784	)

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 periods ended June 30, 2013 and December 31, 2012. The tables reflect changes for all financial liabilities at fair value categorized as Level 3 as of June 30, 2013 and December 31, 2012. 

	Level 3 financial assets and financial liabilities at fair value
					Net unrealized
					(gains)/losses
					relating to		Net
					instruments		purchases,
	Balance,				still		issuances		Net transfers		Balance,
	beginning		Net realized		held at the		and		in and/or out		end of
	of year		gains/(losses)		reporting date		settlements		of Level 3		period
Period ended June 30, 2013
Derivatives:
Conversion feature liability	$	2,287,323	$	-0-	$	2,583,243	$	-0-	$	-0-	$	4,870,566
Warrant liability		6,287,598		-0-		2,360,040		400,142		-0-		9,047,780
Total of derivative liabilties	$	8,574,921	$	-0-	$	4,943,283	$	400,142	$	-0-	$	13,918,346

	Level 3 financial assets and financial liabilities at fair value
					Net unrealized
					(gains)/losses
					relating to		Net
					instruments		purchases,
	Balance,				still		issuances		Net transfers		Balance,
	beginning		Net realized		held at the		and		in and/or out		end of
	of year		gains/(losses)		reporting date		settlements		of Level 3		year
Year ended December 31, 2012
Derivatives:
Conversion feature liability	$	758,911	$	-0-	$	1,528,412	$	-0-	$	-0-	$	2,287,323
Warrant liability		1,692,708		-0-		4,594,890		-0-		-0-		6,287,598
Total of derivative liabilties	$	2,451,619	$	-0-	$	6,123,302	$	-0-	$	-0-	$	8,574,921

 

24

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited) 

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 June 30, 2013 are as follows:

2013	$	287,417
2014		522,679
2015		488,474
2016		267,379
2017		43,018
Total	$	1,608,967

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 $466,440 and $422,445 for the six month periods ended June 30, 2013 and June 30, 2012, respectively.

The Company’s corporate office lease expires in September 2016. The Company’s lease on its New Jersey field office expires in February 2016. The Company currently operates its wholly-owned subsidiary, OmniComm Ltd., in the United Kingdom under the terms of a lease that expires in September 2017. The Company currently operates its wholly-owned subsidiary, OmniComm Europe, GmbH, in Germany under the terms of a lease that expires in July 2015.

LEGAL PROCEEDINGS

None.

PATENT LITIGATION SETTLEMENT

On April 9, 2009, we entered into a Settlement and License Agreement with DataSci, LLC (“DataSci”). DataSci granted us a worldwide, non-exclusive non-transferable right and license under the Licensed Patent and the right to sublicense TrialMaster on a Technology Transfer and Technology Transition basis. 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:

2013	$	737,500
2014		450,000
2015		450,000
2016		450,000
2017		450,000
Total	$	2,537,500

 

During the six month periods ended June 30, 2013 and June 30, 2012 the Company recorded a charge to earnings of $98,554 and $112,655 respectively, which amounts represent (1) the amount of additional license expense incurred above the stipulated minimum in the DataSci License Agreement during the six month periods ended June 30, 2013 and June 30, 2012 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.

EMPLOYMENT AGREEMENTS

We have employment agreements in place with the following members of our executive management team:

Cornelis F. Wit, Chief Executive Officer

Randall G. Smith, Chief Technology Officer

Stephen E. Johnson, President and Chief Operating Officer

The agreements provide, among other things, for participation in employee benefits available to employees and executives. Each of the agreements will renew for successive one-year terms unless the agreement is expressly cancelled by either the employee or the Company ninety days prior to the end of the term. Under the terms of the agreement, we may terminate the employee’s employment upon 30 days notice of a material breach and the employee may terminate the agreement under the same terms and conditions. The employment agreements contain customary non-disclosure and severance provisions, as well as non-compete clauses.

25

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)  

NOTE 12:     RELATED PARTY TRANSACTIONS

On February 1, 2013, our Chairman and Chief Technology Officer, Randall Smith extended the maturity date of his $20,000 promissory note until January 1, 2016. The promissory note bears interest at 12% per annum. The note was originally issued on December 16, 2010 with a maturity date of December 31, 2011. On December 31, 2011, Mr. Smith extended the maturity date of his promissory note until April 1, 2013.    

On February 22, 2013, our Director Guus van Kesteren, extended the maturity date of $150,000 of convertible debentures to January 1, 2015. The convertible debentures were originally issued in August 2008. The expiration date of the warrants associated with the debentures was also extended to January 1, 2015.

On February 22, 2013, our Chief Operating Officer and President, Stephen Johnson extended the maturity date of $25,000 of convertible debentures to January 1, 2016. The convertible debentures were originally issued in December 2008. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

On February 22, 2013, our Chairman and Chief Technology Officer, Randall Smith extended the maturity date of $5,000 of convertible debentures to January 1, 2016. The convertible debentures were originally issued in December 2008. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

As of June 30, 2013, we have an aggregate of $13,780,879 principal amount of convertible debentures and promissory notes outstanding to Cornelis Wit, our Chief Executive Officer and Director, and have issued certain warrants to Mr. Wit, as follows:

● In June 2008, Mr. Wit invested $510,000 in convertible notes. On August 29, 2008, Mr. Wit converted the $510,000 and invested an additional $1,260,000 in a private placement of convertible debentures and warrants to purchase 3,540,000 shares of our common stock. The convertible debentures, which bear interest at 10% per annum, were due on August 29, 2010. The convertible debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.50 per share. On September 30, 2009, the Company and Mr. Wit extended the $1,770,000 of convertible debentures until August 29, 2013 in accordance with the terms of a Secured Convertible Debenture issued on that date. On February 22, 2013, the Company and Mr. Wit extended the maturity date of the $1,770,000 of convertible debentures to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

● In February 2008, Mr. Wit invested $150,000 in promissory notes and from September 2008 to December 2008, Mr. Wit invested $4,200,000 in convertible notes. On December 16, 2008, Mr. Wit converted the $4,350,000 into a private placement of convertible debentures and warrants to purchase 8,700,000 shares of our common stock. The convertible debentures, which bear interest at 12% per annum, were due on December 16, 2010. The convertible debentures are convertible at any time at the option of the holder into shares of our common stock based upon a conversion rate of $0.50 per share. On September 30, 2009, the Company and Mr. Wit extended the $4,350,000 of convertible debentures until December 16, 2013 in accordance with the terms of a Secured Convertible Debenture issued on that date. In a private transaction on October 16, 2012, Mr. Wit purchased $125,000 of the December 2008 convertible debentures and the related 250,000 warrants from Mr. Ronald Linares, the Company’s former Chief Financial Officer. On February 22, 2013, the Company and Mr. Wit extended the maturity date of the $4,475,000 of convertible debentures to January 1, 2016. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

●  From July 2009 to September 2009, Mr. Wit invested $1,100,000 which amount was aggregated under the terms of one convertible note dated September 30, 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 with a maturity date of March 30, 2011. The convertible debentures were convertible into 4,400,000 shares of common stock and Mr. Wit received 4,400,000 warrants to purchase common stock of the Company at a price of $0.25. On March 30, 2011, the Company and 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. On February 22, 2013, the Company and Mr. Wit extended the maturity date of his convertible debentures to January 1, 2016 in accordance with the terms of Amendment Number Two To Securities Purchase Agreement. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

26

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)  

● From October 2009 to December 2009, Mr. Wit invested $1,440,000, which amount was aggregated under the terms of one convertible note dated 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. The Company and 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 February 22, 2013, the Company and Mr. Wit extended the maturity date of his convertible debentures to January 1, 2016 in accordance with the terms of Amendment Number Two To Securities Purchase Agreement. The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

● 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 had a maturity date of April 1, 2014. On April 1, 2013, the Company and Mr. Wit extended the maturity date of the promissory note to March 31, 2016.The Promissory Note replaced the following Promissory Notes that had been previously issued:

i.	Promissory Note issued on April 13, 2010 for $450,000 with a maturity date of December 31, 2011;
ii.	Promissory Note issued on June 29, 2010 for $115,000 with a maturity date of December 31, 2011;
iii.	Promissory Note issued on September 30, 2010 for $695,000 with a maturity date of December 31, 2011;
iv.	Promissory Note issued on December 31, 2010 for $1,197,500 with a maturity date of December 31, 2011; and
v.	Promissory Note issued on December 31, 2010 for $409,379 with a maturity date of April 01, 2012.

● 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.

● On January 1, 2013, the Company issued a promissory note in the principal amount of $529,000 and warrants to purchase 2,116,000 shares of common stock of the Company at an exercise price of $0.25 per share with an expiration date of January 31, 2016 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, 2016.

  

On March 18, 2013, the Company entered into a $2,000,000 revolving line of credit with The Northern Trust Company guaranteed by Cornelis F. Wit, Chief Executive Officer and Director. The line of credit matures on March 17, 2014 and carries a variable interest rate based on the prime rate.

For the six months ended June 30, 2013 and June 30, 2012 we incurred $1,161,902 and $1,046,003, respectively, in interest expense payable to related parties. 

27

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)  

NOTE 13:     STOCKHOLDERS’ (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 Stock, 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 June 30, 2013 we had the following outstanding securities:

o  87,834,659 shares of common stock issued and outstanding; 

o  45,528,873 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.

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. 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.

 

Our Board of Directors may authorize the issuance of preferred stock which ranks senior to our common stock for the payment of dividends and the distribution of assets on liquidation. In addition, our Board of Directors can fix limitations and restrictions, if any, upon the payment of dividends on our common stock to be effective while any shares of preferred stock are outstanding.

The following table presents the cumulative arrearage of undeclared dividends by class of preferred stock as of June 30, 2013 and June 30, 2012, respectively, and the per share amount by class of preferred stock.

28

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited) 

	Cumulative arrearage as of June 30,				Cumulative arrearage as of June 30,
Series of preferred stock	2013		2012		2013		2012
Series A	$	2,276,461	$	2,070,200	$	0.55	$	0.50
Series B		609,887		609,887	$	3.05	$	3.05
Series C		1,472,093		1,472,093	$	4.37	$	4.37
Total preferred stock arrearage	$	4,358,441	$	4,152,180

The following table presents preferred dividends accreted for the six month periods ended June 30, 2013 and June 30, 2012, respectively, and the per share effect of the preferred dividends if their effect was not anti-dilutive.

	Dividends accreted				Dividends per share
	six months ended June 30,				six months ended June 30,
	2013		2012		2013		2012
Preferred stock dividends in arrears Series A	$	102,283	$	125,539	$	0.025	$	0.030
Preferred stock dividends in arrears Series B	$	-0-	$	-0-	$	-0-	$	-0-
Preferred stock dividends in arrears Series C	$	-0-	$	-0-	$	-0-	$	-0-

Warrants Issued for Services and in Capital Transactions

The following tables summarize all outstanding warrants for the six month periods endedJune 30, 2013 and June 30, 2012, and the related changes during these periods.

June 30, 2013 warrants outstanding									June 30, 2013 warrants exercisable
Range of exercise price			Number outstanding at June 30, 2013		Weighted average remaining contractual life		Weighted average exercise price		Number exercisable at June 30, 2013		Weighted average exercise price
$0.25	–	0.60		45,528,873		2.48	$	0.36		45,528,873	$	0.36

December 31, 2012 warrants outstanding									December 31, 2012 warrants exercisable
Range of exercise price			Number outstanding at December 31, 2012		Weighted average remaining contractual life		Weighted average exercise price		Number exercisable at December 31, 2012		Weighted average exercise price
$0.25	–	0.60		43,412,873		2.32	$	0.36		43,412,873	$	0.36

Warrants
Balance at December 31, 2012		43,412,873
Issued		2,116,000
Exercised		-0-
Expired/forfeited		-0-
Balance at June 30, 2013		45,528,873
Warrants exercisable at June 30, 2013		45,528,873
Weighted average fair value of warrants granted during 2013	$	0.21

29

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)  

Other Comprehensive (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 (loss). The following table lists the beginning balance, quarterly activity and ending balance of the components of accumulated other comprehensive (loss). 

	Foreign currency translation			Accumulated other comprehensive (loss)
Balance December 31, 2011	$	(53,714	)	$	(53,714	)
2012 Activity		(15,378	)		(15,378	)
Balance at December 31, 2012		(69,092	)		(69,092	)
2013 Activity		(27,479	)		(27,479	)
Balance at June 30, 2013	$	(96,571	)	$	(96,571	)

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.

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.The restrictions on restricted shares granted to employees generally lapse in three equal annual installments on the anniversary of the date of grant.  Any unvested stock options or restricted shares with restrictions that have not lapsed that are granted under the 2009 Plan are forfeited and expire upon termination of employment.

As of June 30, 2013, there were 4,001,000 outstanding options and 1,225,000 restricted stock shares that have been granted under the 2009 Plan. At June 30, 2013, there were 2,274,000 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 June 30, 2013, there were 2,444,000 outstanding options that have been granted under the 1998 Plan.

30

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

The following table summarizes the stock option activity for the Company’s equity incentive plans:

	Number of shares			Weighted average exercise price (per share)		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2011		11,158,000		$	0.37		2.52	$	-0-
Granted		425,000			0.12
Exercised		(265,000	)		0.20
Forfeited/cancelled/expired		(865,500	)		0.43
Outstanding at December 31, 2012		10,452,500			0.36		1.68	$	149,598
Granted		200,000			0.18
Exercised		(100,000	)		0.18
Forfeited/cancelled/expired		(4,107,500	)		0.44
Outstanding at June 30, 2013		6,445,000		$	0.30		1.98	$	242,470
Vested and exercisable at June 30, 2013		5,377,416		$	0.34		1.63	$	139,860

 

The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company’s closing stock price at quarter-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 June 30, 2013.

The total number of shares vesting and the fair value of shares vesting for the six month periods ended June 30, 2013 and June 30, 2012, respectively, was:

	Number of options vested		Fair value of options vested
Fair value of options vesting during the six months ended June 30, 2013		447,083	$	45,860
Fair value of options vesting during the six months ended June 30, 2012		592,083	$	62,934

Cash received from stock option exercises for the six month periods ended June 30, 2013 and June 30, 2012 was $-0- and $-0-, respectively. Due to the Company’s net loss position, no income tax benefit has been realized during the six month periods ended June 30, 2013 and June 30, 2012.

31

OMNICOMM SYSTEMS, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013 AND JUNE 30, 2012

(unaudited)

The following table summarizes information concerning options outstanding at June 30, 2013:  

Awards breakdown by price range at June 30, 2013
			Outstanding						Vested
Strike price range ($)			Outstanding stock options		Weighted average remaining contractual life		Weighted average outstanding strike price		Vested stock options		Weighted average remaining vested contractual life		Weighted average vested strike price
0.00	to	0.20		3,261,000		2.59	$	0.15		2,293,416		2.15	$	0.16
0.21	to	0.29		1,025,000		1.69		0.25		925,000		1.34		0.25
0.30	to	0.49		445,000		0.71		0.46		445,000		0.71		0.46
0.50	to	0.70		1,714,000		1.32		0.59		1,714,000		1.32		0.59
0.00	to	0.70		6,445,000		1.98	$	0.30		5,377,416		1.63	$	0.34

The following table summarizes information concerning options outstanding at December 31, 2012:

Awards breakdown by price range at December 31, 2012
			Outstanding						Vested
Strike price range ($)			Outstanding stock options		Weighted average remaining contractual life		Weighted average outstanding strike price		Vested stock options		Weighted average remaining vested contractual life		Weighted average vested strike price
0.00	to	0.20		3,428,500		3.02	$	0.15		2,035,083		2.50	$	0.17
0.21	to	0.29		2,550,000		1.18		0.26		2,550,000		1.18		0.26
0.30	to	0.49		755,000		0.79		0.45		755,000		0.79		0.45
0.50	to	0.70		3,719,000		0.97		0.60		3,719,000		0.97		0.60
0.00	to	0.70		10,452,500		1.68	$	0.36		9,059,083		1.36	$	0.39

      

The weighted average fair value (per share) of options granted during the six month period ended June 30, 2013 was $0.17 and n/a during the six month period ended June 30, 2012 as no options were granted in the first half of 2012. The Black Scholes option-pricing model was utilized to calculate these values.

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 that have been granted. 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.

32

Below are the assumptions for the fair value of share-based payments for the six month periods ended June 30, 2013 and June 30, 2012.

	Stock option assumptions for the six months ended
Stock option assumptions	June 30, 2013		June 30, 2012
Risk-free interest rate		0.40%	n/a
Expected dividend yield		0.0%	n/a
Expected volatility		203.0%	n/a
Expected life of options (in years)		5	n/a

The following table summarizes weighted average grant date fair value activity for the Company's incentive stock plans:

	Weighted average grant date fair value
	2013		2012
Stock options granted during the six month period ended June 30,	$	0.17	n/a
Stock options vested during the six month period ended June 30,	$	0.10	$	0.11
Stock options forfeited during the six month period ended June 30,	$	0.29	$	0.11

A summary of the status of the Company’s non-vested shares underlying stock options as of June 30, 2013, and changes during the six month period ended June 30, 2013 is as follows:

	Shares underlying stock options		Weighted average grant date fair value
Nonvested shares at January 1, 2013		1,393,417	$	0.10
Nonvested shares at June 30, 2013		1,067,584	$	0.11

As of June 30, 2013, approximately $90,347 of total unrecognized compensation cost related to unvested stock options is expected to be recognized over a weighted-average period of 1.00 year.

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:

	June 30, 2013			June 30, 2012
Federal statutory rate applied to loss before income taxes	$	(2,326,236	)	$	(672,257	)
Increase/(decrease) in income taxes results from:
Current tax expense		17,730			-0-
Non deductible expenses		1,990,344			323,739
Change in deferred assets		37,086			42,392
Change in valuation allowance		298,806			306,126
Income tax expense	$	17,730		$	-0-

33

The components of income tax expense (benefit) for the six month periods ended:

	June 30, 2013			June 30, 2012
Current tax expense	$	17,730		$	-0-
Deferred tax expense/(benefit):
Bad debt allowance		16,189			(31,664	)
Operating loss carryforward		(352,081	)		(316,854	)
Patent litigation settlement		37,086			42,392
		(298,806	)		(306,126	)
Valuation allowance		298,806			306,126
Total tax expense	$	17,730		$	-0-

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:

	June 30, 2013		June 30, 2012
Amortization of intangibles	$	283,698	$	283,698
Bad debt allowance		14,526		84,292
Patent litigation liability accrual		349,596		426,499
Operating loss carryforwards		17,708,050		17,236,909
Gross deferred tax assets		18,355,870		18,031,398
Valuation allowance		18,355,870		(18,031,398	)
Net deferred tax liability/(asset)	$	-0-	$	-0-

The Company has net operating loss carryforwards (NOL) for income tax purposes of approximately $49,304,433. This loss is allowed to be offset against future income until the year 2032 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 June 30, 2013. The change in the valuation allowance for the six month period ended June 30, 2013 was an increase of $298,806.

 

34

ITEM 2. 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 unaudited consolidated financial statements and notes thereto appearing elsewhere herein and other information set forth in this report.

Forward-Looking Statements

Statements contained in this Form 10-Q that are not historical fact are "forward-looking statements". These statements can often be identified by the use of forward-looking terminology such as "estimate", "project", "believe", "expect", "may", "will", "should", "intends", or "anticipates" or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. We wish to caution the reader that these forward-looking statements, contained in this Form 10-Q regarding matters that are not historical facts, are only predictions. No assurance can be given that plans for the future will be consummated or that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these plans and projections and other forward-looking statements are based upon a variety of assumptions, which we consider reasonable, but which nevertheless may not be realized. Because of the number and range of the assumptions underlying our projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond our reasonable control, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this Form 10-Q. Therefore, our actual experience and results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by us or any other person that these plans will be consummated or that estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. The Company does not undertake any obligation to update or revise any forward-looking statement made by it or on its behalf, whether as a result of new information, future events or otherwise.

Overview

We are a healthcare technology company that provides Web-based electronic data capture (“EDC”) solutions and related value-added services to pharmaceutical and biotech companies, clinical research organizations, and other clinical trial sponsors worldwide. Our proprietary EDC software applications: TrialMaster^®; TrialOne^®; and eClinical Suite^™ (the “eClinical Software Products”), allow clinical trial sponsors and investigative sites to securely collect, validate, transmit and analyze clinical trial data.

In 2013, the primary focus of our strategy includes:

● Stimulating demand by providing clinical trial sponsors with high value eClinical applications and services;

● An emphasis on penetrating the Phase I trial market with our dedicated Phase I solution, TrialOne;

● Expanding our penetration of the large pharmaceutical sponsor market;

● Broadening our eClinical suite of services and software applications on an organic R & D basis and on a selective basis via the acquisition or licensing of complementary solutions;

● Expanding our business development efforts in Europe to capitalize on our operational and clinical capabilities vis-à-vis our competition in that geographic market;

● Providing our services to small and midsize pharmaceutical, biotechnology, medical device companies and CROs; and

● 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 2012, 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.  We will seek to expand the scope of our sales and marketing efforts both domestically and in Europe during the second half of 2013.

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 $1,181,853 and $1,224,769 on R & D activities during the six months ended June 30, 2013 and June 30, 2012, respectively.  The majority of these expenses represent salaries and related benefits to our developers which include the costs associated with the continued development of our EDC software applications to meet current customer requirements and with our efforts at enhancing our suite of products by incorporating new features and services we believe will improve the products and consequently improve our market position. As our industry matures a critical success factor will be the ability of eClinical service providers to offer robust, end-to-end solutions than can either provide a comprehensive eClinical solution for our clients or that will allow us the ability to seamlessly integrate with complementary partnered products and services.  Our R&D team is comprised of software programmers, engineers and related support personnel. 

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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 success in broadening our client roster over the past several fiscal years, via both organic growth and through acquisitions. 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 2012, we emphasized commercializing our products on a licensed basis.  During 2012 we experienced positive strides towards achieving this goal.  We successfully increased the number of clients utilizing our 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 the first six months of 2013 we added five new clients to our base of installed licenses.  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 the remainder of 2013.

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.  Additionally, we continue to focus on adding CROs as strategic and marketing partners. 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 expand the scope of our sales and marketing operations there.  In 2012 we expanded our presence in Europe with the establishment of a wholly owned subsidiary in Spain, OmniComm Spain S.L. The European market accounted for approximately 11% of total revenues for the six months ended June 30, 2013.

We feel that the momentum established from new client acquisitions and our ability to retain clients for repeat engagements provide a good operating base from which to build during the remainder of 2013.  We increased the marketing and business development budget for our TrialOne product during 2012 and the first six months of 2013 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 through the addition of sales personnel and by increasing the number of industry tradeshows and conferences that we attend. 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. 

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The six months ended June 30, 2013 compared with the six months ended June 30, 2012

Results of Operations

A summarized version of our results of operations for the six months ended June 30, 2013 and June 30, 2012 is included in the table below.

Summarized Statement of Operations For the six months ended June 30,
	2013			% of Revenues			2012			% of Revenues			$ Change			% Change
Total revenues	$	7,478,523					$	7,839,168					$	(360,645	)		-4.6	%
Cost of sales		1,526,975			20.4	%		1,677,272			21.4	%		(150,297	)		-9.0	%
Gross margin		5,951,548			79.6	%		6,161,896			78.6	%		(210,348	)		-3.4	%
Salaries, benefits and related taxes		4,366,143			58.4	%		4,288,407			54.7	%		77,736			1.8	%
Rent		466,440			6.2	%		422,445			5.4	%		43,995			10.4	%
Consulting		102,914			1.4	%		67,436			0.9	%		35,478			52.6	%
Legal and professional fees		152,455			2.0	%		197,455			2.5	%		(45,000	)		-22.8	%
Other expenses		425,097			5.7	%		828,703			10.6	%		(403,606	)		-48.7	%
Selling, general and administrative		436,716			5.8	%		466,140			5.9	%		(29,424	)		-6.3	%
Total operating expenses		5,949,765			79.6	%		6,270,586			80.0	%		(320,821	)		-5.1	%
Operating income/(loss)		1,783			0.0	%		(108,690	)		-1.4	%		110,473			-101.6	%
Interest expense		(1,232,094	)		-16.5	%		(1,106,891	)		-14.1	%		(125,203	)		11.3	%
Interest income		6			0.0	%		208			0.0	%		(202	)		-97.1	%
Other comprehensive (loss)		(8,277	)		-0.1	%		(966	)		0.0	%		(7,311	)		756.8	%
Loss on sale of fixed assets		-0-			0.0	%		(22,106	)		-0.3	%		22,106			-100.0	%
Change in derivatives		(4,943,283	)		-66.1	%		(588,784	)		-7.5	%		(4,354,499	)		739.6	%
(Loss) before income taxes and dividends		(6,181,865	)		-82.7	%		(1,827,229	)		-23.3	%		(4,354,636	)		238.3	%
Income tax (expense)		(17,730	)		-0.2	%		-0-			0.0	%		(17,730	)	n/a
Net (loss)		(6,199,595	)		-82.9	%		(1,827,229	)		-23.3	%		(4,372,366	)		239.3	%
Total preferred stock dividends		(102,283	)		-1.4	%		(125,539	)		-1.6	%		23,256			-18.5	%
Net loss attributable tocommon stockholders	$	(6,301,878	)		-84.3	%	$	(1,952,768	)		-24.9	%	$	(4,349,110	)		222.7	%
Net loss per share	$	(0.07	)				$	(0.02	)
Weighted average number ofshares outstanding		87,336,914						86,481,495

Revenues for the six months ended June 30, 2013 decreased 4.6% as compared to the six months ended June 30, 2012. The table below provides a comparison of our recognized revenues for the six months ended June 30, 2013 and June 30, 2012.

	For the six months ended
Revenue activity	June 30, 2013				June 30, 2012				$ Change			% Change
Set-up fees	$	1,595,295	21.3	%	$	2,627,133	33.5	%	$	(1,031,838	)		-39.3	%
Change orders		224,530	3.0	%		154,081	2.0	%		70,449			45.7	%
Maintenance		2,309,885	31.0	%		2,620,531	33.4	%		(310,646	)		-11.9	%
Software licenses		1,902,693	25.4	%		1,678,637	21.4	%		224,056			13.3	%
Professional services		1,072,881	14.3	%		425,115	5.4	%		647,766			152.4	%
Hosting		373,239	5.0	%		333,671	4.3	%		39,568			11.9	%
Total	$	7,478,523	100.0	%	$	7,839,168	100.0	%	$	(360,645	)		-4.6	%

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Overall Revenue decreased by $360,645 or 4.6%. This is primarily the result of a decrease in Set-up fees. This was partially offset by an increase in Professional services of $647,766 or 152.4%. Professional services were $1,072,881 and $425,115 for the six months ended June 30, 2013 and June 30, 2012 respectively.

We recorded Revenue of $4,801,353, including $934,746 from licensing and $1,377,209 from maintenance associated with our TrialMaster suite during the six months ended June 30, 2013 compared with Revenue of $5,491,581 that included $877,447 in licensing revenues and $1,539,891 in maintenance revenues during the six months ended June 30, 2012.  

We recorded $1,691,540 in revenues associated with clients using the eClinical software application suite (“eClinical”) during the six months ended June 30, 2013 compared with $2,290,484 for the six months ended June 30, 2012.  eClinical revenues are primarily comprised of license subscriptions and revenues associated with our hosting and maintenance services.  The 2012 results included a non-recurring order for additional licenses from a long time client.

We recorded $225,042 in revenues from hosting activities and $222,336 in consulting services associated with the eClinical suite during the six months ended June 30, 2013 compared with $298,421 from hosting activities and $167,336 from consulting activities for the six months ended June 30, 2012.  Generally, these revenues are paid quarterly and are connected to hosting and client support for clients licensing that application.

We recorded $985,630 in revenues associated with clients of our TrialOne EDC software for the six months ended June 30, 2013 compared with $57,103 for the six months ended June 30, 2012.  The 2013 results included $661,728 in licensing revenue and $321,570 in consulting revenues. We are continuing our efforts at commercializing and developing our sales and marketing campaign for the TrialOne application.  TrialOne revenues are primarily comprised of license subscriptions and maintenance services since the software is currently only sold under a technology transfer basis.

We recorded $384,987 in Reimbursable revenues for the six months ended June 30, 2013 and $416,234 for the six months ended June 30, 2012. These amounts represent amounts associated with third-party services provided to our customers by our service and product partners. Although the services or products are provided by these third-party partners, we have a primary contractual obligation to our customers. These third-party services are primarily comprised of Interactive Voice and Web Response software services (IVR and IWR), travel and shipping that are incurred on our clients’ behalf. In accordance with ASC 605-45, Principal Agent Consideration, these amounts are recorded as revenue in the statement of operations with a corresponding expense recorded in cost of goods sold. While these relationships are an important part of our service offering we do not expect these amounts to grow.

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 Set-up fees are generally recognized in accordance withAccounting 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 software and solutions.  Licensed contracts of the eClinical suite have historically been sold both on a term and on a perpetual license basis with hosting and maintenance charges being paid quarterly.  The Company expects any licenses it sells of its software products to be sold under three to five year term licenses.

Our top five customers accounted for approximately 40.0% of our revenues during the six months ended June 30, 2013 and approximately 52.3% of our revenues during the six months ended June 30, 2012.  One customer accounted for approximately 11.6% and another accounted for approximately 10.4% of our revenues during the six months ended June 30, 2013.   One customer accounted for approximately 20.1% and another accounted for approximately 17.7% during the six months ended June 30, 2012. The loss of any of these contracts or these customers in the future could adversely affect our results of operations. 

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Cost of goods sold decreased approximately 9% or $150,297 for the six months ended June 30, 2013 as compared to the six months ended June 30, 2012.  Cost of goods sold were approximately 20.4% of revenues for the six months ended June 30, 2013 compared to approximately 21.4% for the six months ended June 30, 2012. 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 and the costs associated with pass-through revenues. Cost of goods sold decreased during the six months ended June 30, 2013 primarily due to a decrease in volume relating to pass-through expenses for a third-party service that is classified under cost of goods sold.  The pass-through revenue and expense primarily relate to specific work being performed for a single client. At this time we do not expect the volume of the pass-through revenue and expense to grow significantly and therefore we do not expect any significant degradation of our gross margin. 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 to approximate 20% of revenues associated with those engagements.

We expect to increase development programming and support labor costs, the key components of our cost of goods sold, on an absolute basis as our trial revenues increase. We expect our cost of goods sold to remain in 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 5.1% for the six months ended June 30, 2013 when compared to the six months ended June 30, 2012.  We are maintaining our focus on keeping our cost structure in line with our revenue.  Total operating expenses were approximately 79.6% of revenues during the six months ended June 30, 2013 compared to approximately 80.0% of revenues for the six months ended June 30, 2012. We expect operating expenses to continue to decrease as a percentage of revenues. We believe we are currently achieving operating and administrative efficiencies at the operating expense level that will provide us leverage as our client and revenue base increase.

Salaries and related expenses were our biggest operating expense at 73.4% of total operating expenses for the six months ended June 30, 2013 compared to 68.4% of total operating expenses for the six months ended June 30, 2012.  Salaries and related expenses increased approximately 1.8% for the six months ended June 30, 2013 when compared to the same period ended June 30, 2012.  The increase in salary expense is related to the additional staff required to support our increased workload resulting from the successful acquisition of new business coupled with cost of living and merit increases that occurred during the 4th quarter of 2012.  The table below provides a summary of the significant components of salary and related expenses by primary cost category for the six month periods ended June 30.

For the six months ended
	June 30, 2013		June 30, 2012		$ Change			% Change
OmniComm corporate operations	$	3,385,908	$	3,306,064	$	79,844			2.4	%
New Jersey operations office		166,804		167,652		(848	)		-0.5	%
OmniComm Europe, GmbH		425,385		505,911		(80,526	)		-15.9	%
OmniComm Ltd.		274,306		275,053		(747	)		-0.3	%
OmniComm Spain		72,274		-0-		72,274		n/a
Employee stock option expense		41,466		33,727		7,739			22.9	%
Total salaries and related expenses	$	4,366,143	$	4,288,407	$	77,736			1.8	%

We currently employ approximately 54 employees out of our Ft. Lauderdale, Florida corporate office, ten employees out of our New Jersey regional operating office, ten out-of-state employees, eight employees out of a wholly-owned subsidiary in the United Kingdom, one employee out of a wholly-owned subsidiary in Spain and 20 employees out of a wholly-owned subsidiary in Bonn, Germany.  We expect to continue to selectively add experienced sales and marketing personnel 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 six months ended June 30, 2013 and the six months ended June 30, 2012 we incurred $59,151 and $33,727, respectively, in salary expense in connection with ASC 718Compensation – 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.

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Rent and related expenses increased by approximately 10.4% during the six months ended June 30, 2013 when compared to the six months ended June 30, 2012.  The table below details the significant portions of our rent expense.  In particular, the increase in 2013 is primarily associated with increases in our Corporate office, Co-location and disaster recovery facilities and German office rent expense offset by decreases in our New Jersey and U.K. 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 April 2016.  We currently lease office space in Bonn, Germany for our European subsidiary, OmniComm Europe, GmbH under a lease that expires in July 2015.  We currently lease office space for a regional operating office in New Jersey under a lease that expires in February 2016.  The staff at this location is primarily focused on the development and integration of the eResearch EDC Assets.  Our OmniComm Ltd. subsidiary leases office space in Southampton, UK under a lease that expires in September 2017.  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 the first six months of 2013 was a reduction in expense of $4,191 in non-cash, straight line rent recorded to give effect to contractual, inflation-based rent increases in our leases compared to a reduction in expense of $1,979 in the first six months of 2012.

For the six months ended
	June 30, 2013			June 30, 2012			$ Change			% Change
Corporate office	$	183,271		$	156,607		$	26,664			17.0	%
Co-location and disaster recovery facilities		184,818			158,586			26,232			16.5	%
New Jersey operations office		24,915			39,404			(14,489	)		-36.8	%
OmniComm Europe, GmbH		42,839			19,059			23,780			124.8	%
OmniComm Ltd.		30,850			50,768			(19,918	)		-39.2	%
OmniComm Spain		3,938			-0-			3,938		n/a
Straight-line rent expense		(4,191	)		(1,979	)		(2,212	)		111.8	%
Total	$	466,440		$	422,445		$	43,995			10.4	%

Consulting services expense increased to $102,914 for the six months ended June 30, 2013 compared with $67,436 for the six months ended June 30, 2012, an increase of $35,479 or 52.6%. Consulting services were comprised of fees paid to consultants for help with developing our computer applications 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 the first six months of 2013 as we utilized the services of additional third-party sources for portions of our product development work.

For the six months ended
Expense Category	June 30, 2013		June 30, 2012		$ Change		% Change
Sales and marketing	$	18,760	$	10,174	$	8,586		84.4	%
Product development		84,154		57,262		26,892		47.0	%
Total	$	102,914	$	67,436	$	35,478		52.6	%

Legal and professional fees decreased approximately 22.8% for the six months ended June 30, 2013 compared with the six months ended June 30, 2012. Professional fees include fees paid to our auditors for services rendered on a quarterly and annual basis in connection with our SEC filings and fees paid to our attorneys in connection with representation in matters involving litigation or for services rendered to us related to securities and SEC related matters. During 2013 legal and professional fees decreased primarily due to decreases in Legal–employment related and General legal expense. The table below compares the significant components of our legal and professional fees for the six months ended June 30, 2013 and June 30, 2012, respectively.

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For the six months ended
Expense Category	June 30, 2013		June 30, 2012		$ Change			% Change
Audit and related	$	51,998	$	46,179	$	5,819			12.6	%
Accounting services		70,685		76,180		(5,495	)		-7.2	%
Legal-employment related		7,441		52,633		(45,192	)		-85.9	%
Legal-financial related		9,667		4,475		5,192			116.0	%
General legal		12,664		17,988		(5,324	)		-30.1	%
Total	$	152,455	$	197,455	$	(45,000	)		-22.8	%

Selling, general and administrative expenses (“SGA”) decreased by approximately $29,424 or 6.3% for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. This decrease is primarily due to decreases in our License expense as well as our Miscellaneous expenses. During the six months ended June 30, 2013 we recorded $98,554 in license fees associated with our license agreement with DataSci, LLC compared to $112,655 during the six months ended June 30, 2012. In addition, SGA expenses relate primarily to costs incurred in running our offices in Fort Lauderdale, FL, Monmouth Junction, New Jersey, Southampton, England, Barcelona, Spain 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 2012 the company spent approximately $270,000 on marketing, sales and advertising. We expect that the 2013 marketing, sales and advertising expenses will be in line with the prior year’s expenditures.

During the six month period ended June 30, 2013 we recognized a reversal of $13,021 of bad debt expense as compared to an expense of $84,144 for the six month period ended June 30, 2012.   During the remainder of 2013 we will continue to carefully and actively manage our potential exposure to bad debt by closely monitoring our accounts receivable and proactively taking the action necessary to limit our exposure.  We have been 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 the remainder of fiscal 2013.

Interest expense was $1,232,094 during the six months ended June 30, 2013 compared to $1,106,891 for the six months ended June 30, 2012, an increase of $125,203 or 11.3%.  Interest incurred to related parties was $1,161,902 during the six months ended June 30, 2013 and $1,046,003 for the six months ended June 30, 2012.  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 and relating to warrants issued during 2011 and 2013.  The table below provides detail on the significant components of interest expense for the six months ended June 30, 2013 and June 30, 2012.

Interest Expense
	For the six months ended
Debt Description	June 30, 2013		June 30, 2012		$ Change
Accretion of discount from derivatives	$	304,500	$	237,810	$	66,690
August 2008 convertible notes		95,211		95,737		(526	)
December 2008 convertible notes		296,344		297,982		(1,638	)
Sept 2009 secured convertible debentures		71,408		71,803		(395	)
Dec 2009 convertible debentures		88,665		89,155		(490	)
General interest		42,966		45,929		(2,963	)
Related party notes payable		333,000		268,475		64,525
Total	$	1,232,094	$	1,106,891	$	125,203

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 2013 were obtained at the best terms available to the Company.

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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 and warrants associated with promissory notes issued in 2011 and 2013.  We recorded a net unrealized loss of $4,943,283 during the six months ended June 30, 2013 compared with a net unrealized loss of $588,784 during the six months ended June 30, 2012.  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 and promissory notes were 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 six months ended June 30, 2013 and June 30, 2012 and can be reasonably anticipated to materially affect our net loss or net income in future periods. The fair value calculations are heavily reliant on the value of our common stock and on the calculated volatility of the price of our common stock on the OTC Bulletin Board. Accordingly, significant changes in our stock price will create large unrealized gains and losses on our financial statements. 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 $102,283 and $125,539 in its 5% Series A Preferred Stock dividends for the six month periods ended June 30, 2013, and June 30, 2012, respectively.  As of June 30, 2013, the Company had cumulative arrearages for preferred stock dividends as follows:

Series of Preferred Stock	Cumulative Arrearage
Series A	$	2,276,461
Series B		609,887
Series C		1,472,093
Total preferred stock arrearages	$	4,358,441

The three months ended June 30, 2013 compared with the three months ended June 30, 2012

Results of Operations

A summarized version of our results of operations for the three months ended June 30, 2013 and June 30, 2012 is included in the table below.

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Summarized Statement of Operations

For the three months ended

June 30,

				% of						% of				$		%
	2013			Revenues			2012			Revenues			Change			Change
Total revenues	$	3,729,700					$	4,069,674					$	(339,974	)		-8.4	%
Cost of sales		859,477			23.0	%		829,833			20.4	%		29,644			3.6	%
Gross margin		2,870,223			77.0	%		3,239,841			79.6	%		(369,618	)		-11.4	%
Salaries, benefits and related taxes		2,154,057			57.8	%		2,159,768			53.1	%		(5,711	)		-0.3	%
Rent		250,422			6.7	%		223,807			5.5	%		26,615			11.9	%
Consulting		53,611			1.4	%		5,091			0.1	%		48,520			953.1	%
Legal and professional fees		56,702			1.5	%		93,417			2.3	%		(36,715	)		-39.3	%
Other expenses		82,949			2.2	%		447,309			11.0	%		(364,360	)		-81.5	%
Selling, general and administrative		244,036			6.5	%		238,454			5.9	%		5,582			2.3	%
Total operating expenses		2,841,777			76.2	%		3,167,846			77.8	%		(326,069	)		-10.3	%
Operating income/(loss)		28,446			0.8	%		71,995			1.8	%		(43,549	)		-60.5	%
Interest expense		(638,128	)		-17.1	%		(553,244	)		-13.6	%		(84,884	)		15.3	%
Interest income		6			0.0	%		31			0.0	%		(25	)		-80.6	%
Loss on sale of fixed assets		-0-			0.0	%		(22,106	)		-0.5	%		22,106			-100.0	%
Other comprehensive (loss)		(1,562	)		0.0	%		(1,752	)		0.0	%		190			-10.7	%
Change in derivatives		(1,038,084	)		-27.8	%		2,056,132			50.5	%		(3,094,216	)		-150.5	%
Net income/(loss)		(1,649,322	)		-44.2	%		1,551,056			38.1	%		(3,200,378	)		-206.3	%
Income tax (expense)		(8,865	)		-0.2	%		-0-			0.0	%		(8,865	)	n/a
Net income/(loss)		(1,658,187	)		-44.5	%		1,551,056			38.1	%		(3,209,243	)		-206.9	%
Total preferred stock dividends		(51,424	)		-1.4	%		(51,424	)		-1.3	%		-0-			0.0	%
Net income/(loss) attributable to common stockholders	$	(1,709,611	)		-45.8	%	$	1,499,632			36.8	%	$	(3,209,243	)		-214.0	%
Net income/(loss) per share	$	(0.02	)				$	0.02
Weighted average number of shares outstanding		87,824,747						86,481,495

The table below provides a comparison of our recognized revenues for the three months ended June 30, 2013 and June 30, 2012.

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	For the three months ended
Revenue Activity	June 30, 2013				June 30, 2012				$ Change			% Change
Set-up fees	$	778,105	20.9	%	$	1,478,956	36.3	%	$	(700,851	)		-47.4	%
Change orders		129,748	3.5	%		62,325	1.5	%		67,423			108.2	%
Maintenance		1,102,042	29.5	%		1,304,884	32.2	%		(202,842	)		-15.5	%
Software licenses		941,540	25.2	%		911,555	22.4	%		29,985			3.3	%
Professional services		581,166	15.6	%		139,958	3.4	%		441,208			315.2	%
Hosting		197,099	5.3	%		171,996	4.2	%		25,103			14.6	%
Total	$	3,729,700	100.0	%	$	4,069,674	100.0	%	$	(339,974	)		-8.4	%

Overall Revenue decreased by $339,974 or 8.4%. This is primarily the result of a decrease in Set-up fees partially offset by an increase in Professional services.

We recorded revenue of $2,289,849 including $376,801 from licensing and $676,335 from maintenance associated with our TrialMaster suite during the three months ended June 30, 2013 compared with revenue of $2,861,546 that included $455,214 in licensing revenues and $764,547 in maintenance revenues during the three months ended June 30, 2012.  

We recorded $785,301 in revenues associated with clients using the eClinical software application suite (“eClinical”) during the three months ended June 30, 2013 compared with $1,186,950 for the three months ended June 30, 2012.  eClinical revenues are primarily comprised of license subscriptions and revenues associated with our hosting and maintenance services.  The 2012 results included a non-recurring order for additional licenses from a long time client.

We recorded $107,342 in revenues from hosting activities and $114,125 in consulting services associated with the eClinical suite during the three months ended June 30, 2013 compared with $155,799 from hosting activities and $56,970 from consulting activities for the three months ended June 30, 2012.  Generally, these revenues are paid quarterly and are connected to hosting and client support for clients licensing that application. In addition we recorded $435,623 in revenues from maintenance relating to eClinical in the three months ending June 30, 2013 as compared to $517,841 for the three months ending June 30, 2012.

We recorded revenue of $654,549 including $436,527 from licensing and $224,937 from consulting associated with clients on our TrialOne EDC software for the three months ended June 30, 2013 compared with revenue of $22,496 for the three months ended June 30, 2012.   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 withAccounting 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 both on a term and on a perpetual license basis with hosting and maintenance charges being paid quarterly.  The Company expects any licenses it sells of its software products to be sold under three to five year term licenses.

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Our top five customers accounted for approximately 43.3% of our revenues during the three months ended June 30, 2013 and approximately 53.5% of our revenues during the three months ended June 30, 2012.  One customer accounted for approximately 16.1% and another accounted for approximately 9.7% of our revenues during the three months ended June 30, 2013.   One customer accounted for approximately 23.1% of our revenues and another accounted for approximately 16.7% during the three months ended June 30, 2012. 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 3.6% or $29,644 for the three months ended June 30, 2013 as compared to the three months ended June 30, 2012.  Cost of goods sold were approximately 23.0% of revenues for the three months ended June 30, 2013 compared to approximately 20.4% for the three months ended June 30, 2012. 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 and the costs associated with pass-through revenues. Cost of goods sold increased during the three months ended June 30, 2013 primarily due to an increase in volume relating to pass-through expenses for third-party services that are classified under cost of goods sold.  The pass-through revenue and expense primarily relate to specific work being performed for a single client. At this time we do not expect the volume of the pass-through revenue and expense to grow significantly and therefore we do not expect any significant degradation of our gross margin. 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 maintain 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 10.3% for the three months ended June 30, 2013 when compared to the three months ended June 30, 2012.  The decrease in operating expenses is primarily the result of decreases in our Bad debt, Amortization and Depreciation expenses. In the second quarter of 2013 our Bad debt expense decreased due to improved collections of aged receivables. Total operating expenses were approximately 76.2% of revenues during the three months ended June 30, 2013 compared to approximately 77.8% of revenues for the three months ended June 30, 2012.

Salaries and related expenses were our biggest operating expense at 75.8% of total operating expenses for the three months ended June 30, 2013 compared to 68.2% of total operating expenses for the three months ended June 30, 2012.  Salaries and related expenses decreased slightly by approximately 0.3% for the three months ended June 30, 2013 when compared to the same period that ended June 30, 2012.  The table below provides a summary of the significant components of salary and related expenses by primary cost category.

For the three months ended
	June 30, 2013		June 30, 2012		$ Change			% Change
OmniComm corporate operations	$	1,663,334	$	1,643,021	$	20,313			1.2	%
New Jersey operations office		93,544		98,517		(4,973	)		-5.0	%
OmniComm Europe, GmbH		189,746		227,974		(38,228	)		-16.8	%
OmniComm Ltd.		148,513		174,190		(25,677	)		-14.7	%
OmniComm Spain		36,710		-0-		36,710		n/a
Employee stock option expense		22,210		16,066		6,144			38.2	%
Total salaries and related expenses	$	2,154,057	$	2,159,768	$	(5,711	)		-0.3	%

 

During the three months ended June 30, 2013 and the three months ended June 30, 2012 we incurred $22,210 and $16,066, respectively, in salary expense in connection with ASC 718Compensation – 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 increased by approximately 11.9% during the three months ended June 30, 2013 when compared to the three months ended June 30, 2012.  The table below details the significant portions of our rent expense.  In particular, the increase in 2013 is primarily associated with increases in our Corporate, Co-location and disaster recovery facilities and German office rent expenses offset by reductions in our UK and New Jersey office rent expenses.  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 April 2016.  We currently lease office space in Bonn, Germany for our European subsidiary, OmniComm Europe, GmbH under a lease that expires in July 2015.  We currently lease office space for a regional operating office in New Jersey.  The staff at this location is primarily focused on the development and integration of the eResearch EDC Assets.  That lease was renewed in the first quarter of 2013 and now expires in February 2016.  Our OmniComm Ltd. subsidiary leases office space in Southampton, UK under a lease that expires in September 2017.  Our corporate office lease expires in September 2016.  The table below provides the significant components of our rent related expenses by location or subsidiary.  Included in rent during the three months ending June 30, 2013 was a decrease in expense of $1,518 in non-cash, straight line rent recorded to give effect to contractual, inflation-based rent increases in our leases compared to an increase in expense of $2,983 for the three month period ending June 30, 2012.

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For the three months ended
	June 30, 2013			June 30, 2012		$ Change			% Change
Corporate office	$	92,042		$	82,538	$	9,504			11.5	%
Co-location and disaster recovery facilities		110,548			84,717		25,831			30.5	%
New Jersey operations office		10,522			19,967		(9,445	)		-47.3	%
OmniComm Europe, GmbH		21,517			8,178		13,338			163.1	%
OmniComm Ltd.		15,355			25,424		(10,069	)		-39.6	%
OmniComm Spain		1,957			-0-		1,957		n/a
Straight-line rent expense		(1,519	)		2,983		(4,501	)		-150.9	%
Total	$	250,422		$	223,807	$	26,615			11.9	%

Consulting services expense increased to $53,611 for the three months ended June 30, 2013 compared with $5,091 for the three months ended June 30, 2012. Consulting services were comprised of fees paid to consultants for help with developing our computer applications 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 the three months of 2013 as we utilized the services of additional third-party sources for portions of our product development work.

For the three months ended
Expense Category	June 30, 2013		June 30, 2012			$ Change		% Change
Sales and marketing	$	8,140	$	7,532		$	608		8.1	%
Product development		45,471		(2,441	)		47,912		1962.8	%
Total	$	53,611	$	5,091		$	48,520		953.1	%

 

Legal and professional fees decreased approximately 39.3% for the three months ended June 30, 2013 compared with the three months ended June 30, 2012. 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 the second quarter of 2013 legal and professional fees decreased primarily due to decreases in Legal–employment related and General legal expenses. These decreases were partially offset by an increase in Legal–financial related. The table below compares the significant components of our legal and professional fees for the three months ended June 30, 2013 and June 30, 2012, respectively.

For the three months ended
Expense Category	June 30, 2013			June 30, 2012		$ Change			% Change
Audit and related	$	19,055		$	15,578	$	3,477			22.3	%
Accounting services		30,388			29,178		1,210			4.1	%
Legal-employment related		(1,725	)		41,754		(43,479	)		-104.1	%
Legal-financial related		4,176			3,750		426			11.3	%
General legal		4,808			3,157		1,651			51.8	%
Total	$	56,702		$	93,417	$	(36,715	)		-39.3	%

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Selling, general and administrative expenses (“SGA”) increased by $5,582 or approximately 2.3% for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The increase is primarily due to increases in Marketing and related expenses and Insurance expense offset by a decrease in Miscellaneous expenses. In addition, SGA expenses relate primarily to costs incurred in running our offices in Fort Lauderdale, FL, Monmouth Junction, New Jersey, Southampton, England, Barcelona, Spain 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 2012 the company spent approximately $270,000 on marketing, sales and advertising. We expect that the 2013 marketing, sales and advertising expenses will be in line with the prior year’s expenditures.

During the three month period ended June 30, 2013 we recognized a reversal of $102,142 for bad debt expense as compared to an expense of $84,144 for the three month period ended June 30, 2012.  This was the primarily the result of an increase in collections for aged receivable balances that had required us to increase our reserve in prior periods. During 2013 we will continue to carefully and actively manage our potential exposure to bad debt by closely monitoring our accounts receivable and proactively taking the action necessary to limit our exposure.  We have been very successful in managing and collecting our outstanding accounts receivable.  We believe that our current allowance for uncollectible accounts accurately reflects any accounts which may prove uncollectible during the remainder of fiscal 2013.

Interest expense was $638,128 during the three months ended June 30, 2013 compared to $553,244 for the three months ended June 30, 2012, an increase of $84,884.  Interest incurred to related parties was $600,261 during the three months ended June 30, 2013 and $523,001 for the three months ended June 30, 2012.  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 and relating to warrants issued during 2011 and 2013.  The table below provides detail on the significant components of interest expense for the three months ended June 30, 2013 and June 30, 2012.

Interest Expense
	For the three months ended
Debt Description	June 30, 2013		June 30, 2012		$ Change
Accretion of discount from derivatives	$	152,250	$	118,905	$	33,345
August 2008 convertible notes		47,868		47,868		-0-
December 2008 convertible notes		148,991		148,991		-0-
Sept 2009 secured convertible debentures		35,901		35,901		-0-
Dec 2009 convertible debentures		44,578		44,578		-0-
General interest		23,955		22,763		1,192
Related party notes payable		184,585		134,238		50,347
Total	$	638,128	$	553,244	$	84,884

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 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 2013 were obtained at the best terms available to the Company.

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 and warrants associated with promissory notes issued in 2011 and 2013.  We recorded a net unrealized loss of $1,038,083 during the three months ended June 30, 2013 compared with a net unrealized gain of $2,056,132 during the three months ended June 30, 2012.  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 and promissory notes were 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 three months ended June 30, 2013 and June 30, 2012 and can be reasonably anticipated to materially affect our net loss or net income in future periods. The fair value calculations are heavily reliant on the value of our common stock and on the calculated volatility of the price of our common stock on the OTC Bulletin Board. Accordingly, significant changes in our stock price will create large unrealized gains and losses on our financial statements. 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.

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The Company recorded arrearages of $51,424 and $51,424 in its 5% Series A Preferred Stock dividends for the three month periods ended June 30, 2013, and June 30, 2012, respectively. The below table contains the cumulative arrearage for each series of preferred stock.

Series of Preferred Stock	Cumulative Arrearage
Series A	$	2,276,461
Series B		609,887
Series C		1,472,093
Total preferred stock arrearages	$	4,358,441

Liquidity and Capital Resources

Liquidity is the ability of a company to generate adequate amounts of cash to meet its operating, investing and financing 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 June 30, 2013, we had working capital deficit of approximately $19,352,830.

The table provided below summarizes key measures of our liquidity and capital resources:

Liquidity and Capital Resources
Summarized Balance Sheet Disclosure
		June 30, 2013			December 31, 2012			$ Change
Cash		$	530,325		$	873,315		$	(342,990	)
Accounts receivable, net of allowance for doubtful accounts			1,797,503			1,240,898			556,605
Prepaids			136,744			131,942			4,802
Current assets			2,464,572			2,246,155			218,417
Accounts payable and accrued expenses			1,569,403			2,124,365			(554,962	)
Notes payable, current portion			17,500			-0-			17,500
Patent litigation settlement liability, current portion			962,500			962,500			-0-
Deferred revenue, current portion			4,264,653			3,732,240			532,413
Line of Credit			650,000			-0-			650,000
Convertible notes payable, current portion, net of discount			275,000			75,000			200,000
Convertible notes payable, related parties, current portion, net of discount			160,000			160,000			-0-
Conversion feature liability, related parties			4,673,268			2,240,782			2,432,486
Conversion feature liability			197,298			46,541			150,757
Warrant liability			262,401			192,445			69,956
Warrant liability, related parties			8,785,379			6,095,153			2,690,226
Current liabilities			21,817,402			15,629,026			6,188,376
Working capital (deficit)	��	$	(19,352,830	)	$	(13,382,871	)	$	(5,969,959	)

Statement of Cash Flows Disclosure
	For the six months ended
	June 30, 2013			June 30, 2012
Net cash (used in) operating activities	$	(878,896	)	$	(321,315	)
Net cash provided by/(used in) investing activities		(86,615	)		15,509
Net cash provided by/(used in) financing activities		650,000			(20,000	)
Net (decrease) in cash and cash equivalents		(342,990	)		(332,994	)
Changes in working capital accounts		(92,755	)		81,971
Effect of non-cash transactions on cash and cash equivalents	$	5,413,455		$	1,423,943

48

Cash and Cash Equivalents

Cash and cash equivalents decreased by $342,990 to $530,325 at June 30, 2013. The decrease is primarily comprised of a net loss of $6,199,595 and changes in working capital accounts of $92,755 offset an increase from non-cash transactions of $5,413,455. During the six months ended June 30, 2013 we had investing activities comprised of net purchases of property and equipment of $86,615. For financing activities, we borrowed $650,000 against our revolving line of credit.

During 2012 and the first six months of 2013, our ability to collect on trade receivables improved as compared to fiscal 2011 and prior periods.  Our expectation is that during the remainder of 2013 we will continue to see improved trade receivables collections and will not experience any material customer defaults.

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 $200,000 planned for capital expenditures to further develop the Company’s infrastructure to allow for growth in our operations during the remainder of 2013.  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 June 30, 2013:

Contractual obligations			Payments due by period
	Total			Less than 1 year			1-2 Years			2-3 Years			3-5 Years
Promissory notes (1)	$	5,667,865	$	17,500	(2)	$	2,234,486	(3)	$	3,415,879	(4)	$	-0-
Convertible notes		9,665,000		435,000	(5)		250,000	(6)		8,980,000	(7)		-0-
Lines of credit (8)		650,000		650,000			-0-			-0-			-0-
Operating lease obligations (9)		1,608,967		557,491			507,901			421,493			122,082
Patent licensing fees (10)		2,537,500		962,500			450,000			450,000			675,000
Total	$	20,129,332	$	2,622,491		$	3,442,387		$	13,267,372		$	797,082

1. Amounts do not include interest to be paid.

2. Includes $17,500 of 12% notes payable that mature in January 2014.

3. Includes $20,000 of 12% notes payable that mature in December 2014; $431,986 of 10% notes payable that mature in January 2015;

    and $1,782,500 of 12% notes payable that mature in January 2015.

4. Includes $549,000 of 12% notes payable that mature in January 2016 and $2,866,879 of 12% notes payable that mature in April 2016.

5. Includes $75,000 of 10% convertible notes currently in default and due that are convertible into shares of common stock at the option of

    of the holder at a conversion rate of $1.25 per share; $160,000 of 12% convertible notes that mature in December 2013 and $200,000 of

    convertible notes that mature in January 2014.

6. Includes $150,000 in 10% convertible notes that mature in January 2015 and $100,000 in 12% convertible notes that mature in January 2015.

7. Includes $1,770,000 in 10% convertible notes that mature in January 2016 and $7,210,000 in 12% convertible notes that mature in January 2016.

8. Includes $650,000 due on the revolving line of credit with The Northern Trust Company.

9. Includes office lease obligations for our headquarters in Fort Lauderdale, our regional operating office in New Jersey, our R & D office in

    England and our European headquarters in Bonn, Germany.

10. 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 $180,968 on our 10% Convertible Notes that were issued in 1998. We were in default effective January 30, 2002.

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On January 1, 2013, the Company issued a promissory note in the amount of $529,000 and 2,116,000 warrants to purchase shares of our common stock at $0.25 per share to our Chief Executive Officer and Director, Cornelis F. Wit in exchange for accrued interest in the amount of $529,000. The note carries an interest rate of 12% per annum and matures on January 1, 2016. The warrants have an expiration date of January 1, 2016.

On January 1, 2013 the Company issued promissory notes in the amount of $431,986 in exchange for existing promissory notes in the same amount.  The promissory notes carry an interest rate of 10% and have a maturity date of January 1, 2015.

On January 1, 2013 the Company issued a promissory note in the amount of $45,000 in exchange for an existing promissory note in the same amount.  The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2015.

On February 1, 2013 the Company issued a promissory note in the amount of $20,000 to our Chairman and Chief Technology Officer Randall G. Smith in exchange for an existing promissory note in the same amount.  The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2016.

On February 22, 2013 the Company and Mr. van Kesteren extended the maturity date of $150,000 of convertible debentures to our Director, Guus van Kesteren originally issued in August 2008.  The debentures carry an interest rate of 10% and have a maturity date of January 1, 2015.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2015.

On February 22, 2013 the Company and Mr. Wit extended the maturity date of $1,770,000 of convertible debentures to our Chief Executive Officer and Director, Cornelis F. Wit originally issued in August 2008.  The debentures carry an interest rate of 10% and have a maturity date of January 1, 2016.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

On February 22, 2013 the Company and the lenders extended the maturity date of $4,505,000 of convertible debentures, including $4,475,000 due to our Chief Executive Officer and Director Cornelis F. Wit, $25,000 due to our Chief Operating Officer and President Stephen E. Johnson and $5,000 due to our Chairman and Chief Technology Officer Randall G. Smith, originally issued in December 2008.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2016.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

On February 22, 2013 the Company and the lenders extended the maturity date of $1,200,000 of convertible debentures, including $1,100,000 due to our Chief Executive Officer and Director Cornelis F. Wit, originally issued in September 2009.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2016.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

On February 22, 2013 the Company and the lenders extended the maturity date of $1,490,000 of convertible debentures including $1,440,000 due to our Chief Executive Officer and Director Cornelis F. Wit originally issued in December 2009.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2016.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

On February 27, 2013 the Company and Mr. Veatch extended the maturity date of $15,000 of convertible debentures originally issued to our former Director Matthew Veatch in December 2008.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2016.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2016.

On March 5, 2013 the Company issued a promissory note in the amount of $137,500 in exchange for a promissory note in the same amount.  The promissory note carries an interest rate of 12% and has a maturity date of January 1, 2015.

On March 6, 2013, the Company and the lenders extended the maturity date of $200,000 of convertible debentures originally issued in December 2008.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2014.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2014.

On March 12, 2013, the Company and the lenders extended the maturity date of $100,000 of convertible debentures originally issued in December 2008.  The debentures carry an interest rate of 12% and have a maturity date of January 1, 2015.  The expiration date of the warrants associated with the debentures was also extended to January 1, 2015.

On March 18, 2013 the Company entered into a $2,000,000 revolving line of credit with The Northern Trust Company guaranteed by Cornelis F. Wit, Chief Executive Officer and Director.  The line of credit matures on March 17, 2014 and carries a variable interest rate based on the prime rate.

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On April 1, 2013 the Company and Mr. Wit extended the maturity date of $2,866,879 of promissory notes due to our Chief Executive Officer and Director, Cornelis F. Wit originally issued in March 2011.  The notes carry an interest rate of 12% and have a maturity date of March 31, 2016.

During the next twelve months we expect debt in the aggregate amount of $1,102,500 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;

● $160,000 of 12% convertible notes that mature in December 2013 that are convertible into shares of common stock at the option of the debenture holder at a conversion rate of $0.50 per share;

● $200,000 of 12% convertible notes that mature in January 2014 that are convertible into shares of common stock at the option of the debenture holder at a conversion rate of $0.50 per share;

● $17,500 of 12% notes payable that mature in January 2014; and

● $650,000 due on our line of credit that matures in March 2014.

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.

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.

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 June 30, 2013, there is substantial doubt about our ability to continue as a going concern. In addition, our auditors Liggett, Vogt & Webb P.A., included language which qualified their opinion regarding our ability to continue as a going concern in their report dated March 27, 2013 regarding our audited financial statements for the year ended December 31, 2012.

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 Condensed Consolidated Financial Statements describes the significant accounting policies used in the preparation of the condensed consolidated financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

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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 condensed 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 withASC 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.

FAIR VALUE MEASUREMENT

OmniComm’s capital structure includes the use of warrants and convertible debt features that are classified as derivative financial instruments. Derivative financial instruments are recognized as either assets or liabilities and are measured at fair value under ASC 815Derivatives and Hedging. ASC 815 requires that changes in the fair value of derivative financial instruments with no hedging designation be recognized as gains/(losses) in the earnings statement. The fair value measurement is determined in accordance with ASC 820Fair Value Measurements and Disclosures.

DEFERRED REVENUE

Deferred revenue represents cash advances and accounts receivable 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.

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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; and 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 withSEC 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 ofPosition 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 the first six months of 2013, we adopted the following new accounting pronouncements:

In July 2012, FASB issued Accounting Standards Update 2012-02, Balance Sheet-Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-002 is an Amendment to FASB Accounting Standards Update 2011-08. The objective of the amendments in this Update is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other than Goodwill. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance.

In February 2013, FASB issued Accounting Standards Update 2013-02, Comprehensive Income (Topic 220) (“ASU 2013-02”). ASU 2013-002 provides guidance on the presentation of amounts reclassified out of accumulated other comprehensive income. This update requires an entity to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement or in the notes, significant amounts reclassified from accumulated other comprehensive income by the net income line item. The Company adopted ASU 2013-02 as of January 1, 2013, and the adoption did not have a material impact on its consolidated financial position or results of operations.

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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 10-K for the year ended December 31, 2012 to determine their impact, if any, on our financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, being June 30, 2013, 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.

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 quarterly report on Form 10-Q. 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.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

None.

ITEM 1A. RISK FACTORS.

Not applicable for a smaller reporting company.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURES.

Not Applicable.

ITEM 5. OTHER INFORMATION.

None.

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ITEM 6. EXHIBITS 

The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:

EXHIBIT NO.	DESCRIPTION
10.68*	Pledge Agreement between Northern Trust and Cornelis F. Wit.
10.69*	Securities Account Control Agreement between Northern Trust and Cornelis F. Wit.
10.70*	Promissory note payable to Cornelis F. Wit dated April 1, 2013.
31.1*	Certification of Principal Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial and Accounting Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Principal Executive Officer and Principal Financial Officer 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 Document
101.DEF***	XBRL Taxonomy Extension Definition Document
101.LAB***	XBRL Taxonomy Extension Label Document
101.PRE***	XBRL Taxonomy Extension Presentation Document

* 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.

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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: August 12, 2013

OMNICOMM SYSTEMS, INC.
By:	/s/Cornelis F. Wit
Cornelis F. Wit, Chief Executive Officer

By:	/s/Thomas E. Vickers
Thomas E. Vickers, Chief Accounting and Financial Officer

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