Exhibit 99.2 - Financial Statements
-----------------------------------
OmniComm Systems, Inc. Financial Statements for the Period Ended June 30, 2001
OMNICOMM SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2001 December 31,
------------- ----------
(unaudited) 2000
--------- ----
ASSETS
CURRENT ASSETS
Cash $ 7,898 $ 90,958
Accounts receivable 28,251 9,927
Prepaid expenses 2,458 -0-
---------- ----------
Total current assets 38,607 100,885
PROPERTY AND EQUIPMENT, Net 438,296 486,481
OTHER ASSETS
Intangible assets, net 82,968 53,071
Goodwill, net -0- 79,277
Other assets 100,160 25,160
---------- ----------
TOTAL ASSETS $ 660,031 $ 744,874
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $1,304,601 $1,079,506
Notes payable - current 446,500 612,500
Notes payable related parties - current 380,000 660,000
Deferred revenue 30,474 26,861
---------- ----------
Total current liabilities 2,161,575 2,378,867
CONVERTIBLE DEBT 1,980,000 462,500
---------- ----------
TOTAL LIABILITIES 4,141,575 2,841,367
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY (DEFICIT)
5% Series A convertible preferred stock, 5,000,000 shares 3,812,179 3,857,179
authorized, 4,215,224 and 4,260,224 issued and outstanding,
respectively, at par
Common stock - 20,000,000 shares authorized, 8,510,079 and 8,510 7,975
7,974,578 issued, respectively, at $.001 par value
Additional paid in capital 3,645,562 3,261,100
Less cost of treasury stock: Common - 620,951 and 620,951 (293,912) (293,912)
shares, respectively
Retained deficit (10,652,743) (8,927,695)
Subscriptions receivable (1,140) (1,140)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (3,481,544) (2,096,493)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 660,031 $ 744,874
========== ==========
See accompanying summary of accounting policies and notes to financial
statements.
OMNICOMM SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Period January 1, 2000 to June 30, 2001
(unaudited)
5% Series A Convert. Total
Common Stock Additional Preferred Stock Retained Shareholders'
Number of $.001 Paid in Number Earnings Subscription Treasury Equity
Shares Value Capital Of Shares $ No Par (Deficit) Receivable Stock (Deficit)
------ ----- ------- --------- -------- --------- ---------- ----- ---------
Balance at
January 1, 2000 3,344,066 $3,344 $238,007 4,117,500 $3,872,843 $(2,652,644) $(850,952) $ -0- $ 610,598
Issuance of common
stock for services 40,000 40 89,960 90,000
Issuance of common
stock 284,166 284 284
Exercise of stock
options 1,025,895 1,026 297,024 298,050
Purchase of
treasury stock in
connection with
stock appreciation
rights (20,951) (293,312) (293,312)
Payment on subscription
receivable 850,000 850,000
Acquisition
of WebIPA, Inc. 1,200,000 1,200 3,833 5,033
Common stock reacquired
in the acquisition of
WebIPA (600,000) (600) (600)
Issuance of
preferred stock 146,000 146,000 146,000
Issuance costs on
preferred stock (206,750) (206,750)
F-2
OMNICOMM SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Period January 1, 2000 to June 30, 2001
(unaudited)
Common Stock Additional Preferred Stock Retained Shareholders'
Number of $.001 Paid In Number of Earnings Subscription Treasury Equity
---------
Shares Value Capital Shares $ No Par (Deficit) Receivable Stock (Deficit)
------ ----- ------- ------ -------- --------- ---------- ----- --------
Conversion of conv.
notes payable, net of
issuance costs of
$33,287 320,000 320 366,393 366,713
Exercise of stock
options 20,000 20 15,980 16,000
Exercise of stock
warrants 481,834 482 963,186 963,668
Exercise of stock
warrants 187,954 188 (188) -0-
Conversion of
preferred stock to
common stock 66,667 67 99,933 (100,000) (100,000) -0-
Conversion of notes
payable to common 91,608 92 206,026 206,118
stock
Issuance of common
stock for services 70,990 71 188,784 188,855
Issuance of common
stock, net of
issuance costs of
$66,833 668,334 668 600,833 601,501
F-3
OMNICOMM SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the Period January 1, 2000 to June 30, 2000
(unaudited)
Common Stock Additional Preferred Stock Retained Total
Number of $.001 Paid In Number of Earnings Subscription Treasury Shareholders'
---------
Shares Value Capital Shares $ No Par (Deficit) Receivable Stock (Deficit)
------ ----- ------- ------ -------- --------- ---------- ----- ---------
Issuance of preferred
stock for services 126,781 190,172 190,172
Conversion of notes
payable into
preferred stock 66,667 100,000 100,000
Conversion of
preferred stock to
common stock 96,724 97 144,989 (96,724) (145,086) -0-
Issuance of common
stock for services 76,340 76 45,552 45,628
Net (loss) for the
year ended December
31, 2000 (6,275,051) (6,275,051)
---------- ----------
Balances at December
31, 2000 7,353,627 $7,975 $3,261,100 4,260,224 3,857,179 (8,927,695) (1,140) (293,912) (2,096,493)
Issuance of common
stock 90,000 90 74,910 75,000
Conversion of
preferred stock to
common stock 30,000 30 44,970 (45,000) (45,000) -0-
F-4
OMNICOMM SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Period January 1, 2000 to June 30, 2001
(unaudited)
5% Series A Total
Common Stock Additional Preferred Stock Retained Shareholders
Number of $.001 Paid in Number Earnings Subscription Treasury Equity
Shares Value Capital Of Shares $ No Par (Deficit) Receivable Stock (Deficit)
Conversion of
convertible Notes
payable to common
stock, net of
issuance costs
of $2,890 30,000 30 34,580 34,610
Exercise of stock
options 20,000 20 15,980 16,000
Stock issued in lieu
of pay and in
satisfaction of
trade payables 126,338 126 97,732 97,858
Conversion of notes
payable to common
stock 226,038 226 112,103 112,329
Issuance of common
stock 13,125 13 4,187 4,200
Net loss for the
six months ended
June 30, 2001 (1,725,048) (1,725,048)
------------ -----------
Balances at June
30, 2001 7,889,128 $8,510 $3,645,562 4,215,224 $3,812,179 $(10,652,743) $(1,140) $(293,912) $(3,481,544)
========= ====== ========== ========= ========== ============ ======= ========= ===========
See accompanying summary of accounting policies and notes to financial
statements
F-5
OMNICOMM SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the six months ended For the three months ended
June 30, June 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 57,179 $ 40,760 $ 16,084 $ 15,782
Cost of sales 38,198 46,524 21,713 11,404
----------- ----------- ---------- -----------
Gross margin(loss) 18,981 (5,764) (5,629) 4,378
Other expenses
Salaries, benefits and related taxes 993,116 1,511,329 431,264 938,396
Rent 77,986 162,408 36,610 101,476
Consulting - medical advisory -0- 89,000 -0- 47,000
Consulting - marketing sales -0- 77,033 -0- 29,033
Consulting - product development -0- 36,420 -0- 7,985
Legal and professional fees 100,917 405,978 58,419 206,731
Travel 42,210 310,443 (980) 140,724
Telephone and internet 57,256 141,347 22,817 77,313
Selling, general and administrative 51,874 407,521 25,967 192,325
Interest expense, net 135,678 41,979 79,176 24,956
Depreciation and amortization 182,933 194,470 95,605 101,854
----------- ----------- ---------- -----------
Total other expenses 1,641,970 3,377,928 748,878 1,867,793
----------- ----------- ---------- -----------
(Loss) before taxes and (1,622,989) (3,383,692) (754,507) (1,863,415)
preferred dividends
Income tax expense (benefit) -0- -0- -0- -0-
Preferred stock dividends (102,059) (101,569) (51,200) (52,155)
----------- ----------- ---------- -----------
Net (loss) $(1,725,048) $(3,485,261) $ (805,707) $(1,915,530)
=========== =========== ========== ===========
Net (loss) per share $ (0.22) $ (0.70) $ (0.10) $ (0.35)
=========== =========== ========= ==========
Weighted average number of
shares outstanding
7,739,214 5,000,089 7,883,732 5,549,470
============ =========== ========== ===========
The accompanying notes are an integral part of these financial statements.
6
OMNICOMM SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the six months ended
June 30,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,725,048) $(3,485,261)
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 182,933 194,470
Common stock issued for services 97,858 90,000
Change in assets and liabilities:
Accounts receivable (18,324) (27,301)
Inventory -0- 5,120
Prepaid expenses (2,458) (22,260)
Other assets -0- (13,892)
Intangible assets (66,750) -0-
Accounts payable and accrued expenses 237,524 1,118,544
Sales tax payable -0- (1,487)
Deferred revenue 3,613 -0-
----------- -----------
Net cash provided by (used in) operating activities (1,290,652) (2,142,067)
CASH FLOWS FROM INVESTING ACTIVITIES
Equity investment in EMN -0- (335,000)
Purchase of WebIPA -0- 5,033
Purchase of property and equipment (21,508) (272,900)
----------- -----------
Net cash provided by (used in) operating activities (21,508) (602,867)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from convertible notes 794,900 -0-
Payments on notes payable (16,000) -0-
Proceeds from notes payable 430,000 530,000
Proceeds from stock warrant exercise -0- 492,000
Issuance of 5% Series A convertible preferred stock, net of issuance costs -0- 789,250
Issuance of common stock 4,200 284
Proceeds from stock option exercise 16,000 20,739
----------- -----------
Net cash provided by (used in) financing activities 1,229,100 1,832,273
----------- -----------
Net increase (decrease) in cash and cash equivalents (83,060) (912,661)
Cash and cash equivalents at beginning of period 90,958 1,127,263
----------- -----------
Cash and cash equivalents at end of period $ 7,898 $ 214,602
=========== ===========
F-7
OMNICOMM SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Continued)
For the six month ended
June 30,
2001 2000
---- ----
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Income tax paid $ -0- $ -0-
======= =======
Interest paid $23,657 $44,728
======= =======
Non-Cash Investing and Financing Transactions;
Acquisition of all of the outstanding common stock of WebIPA, Inc. during the
quarter ended June 31, 2000.
Assets acquired, fair value $ 5,033
Cash acquired 5,033
--------
Net cash paid for acquisition $ -0-
========
During the year ended December 31, 2000, $400,000 of convertible notes payable
were converted into 320,000 shares of common stock.
During the year ended December 31, 2000, 1,018,604 incentive stock options were
exercised utilizing stock appreciation rights. The net proceeds to the company
would have been $293,312. The company recorded a treasury stock transaction in
the amount of $293,312 to account for the stock appreciation rights.
During the year ended December 31, 2000, a promissory note with a face value of
$100,000 was converted into 66,667 shares of the Company's preferred stock at a
rate of $1.50 per share.
During the year ended December 31, 2000, promissory notes totaling $206,118 of
principal and interest were converted into 91,608 shares of the Company's
preferred stock at a rate of $2.25 per share.
During the year ended December 31, 2000, $245,086 of the Company's convertible
Series A Preferred Stock totaling 196,724 preferred shares were converted into
163,391 shares of common stock.
During the period ended June 30, 2001, the Company issued 90,000 shares as
collateral for a bridge loan with a principal amount due of $75,000.
During the period ended June 30, 2001, $37,500 of convertible notes payable were
converted into 30,000 shares of common stock, net of issuance costs of $2,890.
During the period ended June 30, 2001, a promissory note with a face value of
$100,000 with $12,329 in accrued interest was converted into 226,003 shares of
the Company's common stock.
During the period ended June 30, 2001, $45,000 of the Company's convertible
Series A Preferred Stock totaling 45,000 preferred shares were converted into
30,000 shares of common stock.
During the period ended June 30, 2001, $760,000 in notes payables were converted
into 12% convertible notes of the Company.
See accompanying summary of accounting policies and notes to financial
statements
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
NOTE 1: ORGANIZATION AND NATURE OF OPERATIONS
-------------------------------------
OmniComm Systems, Inc. (the "Company") was originally incorporated in
Florida in February 1997. The Company provides Internet based
database applications that integrate significant components of the
clinical trial process, including the collection, compilation and
validation of data over the Internet. The Company's primary products
include TrialMaster(TM) and WebIPA(R).
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
CASH AND CASH EQUIVALENTS
-------------------------
Cash equivalents consist of highly liquid, short-term investments with
maturities of 90 days or less. The carrying amount reported in the
accompanying balance sheets approximates fair value.
CONSOLIDATION
-------------
The Company's accounts include those of its two wholly owned
subsidiaries, OmniCommerce and OmniTrial B.V. All significant
intercompany transactions have been eliminated in consolidation.
ACCOUNTS RECEIVABLE
-------------------
Accounts receivable are judged as to collectibility by management and
an allowance for bad debts is established as necessary. As of each
balance sheet date, no reserve was considered necessary.
EARNINGS PER SHARE
------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS 128
replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants, and convertible securities. The diluted
earnings per share calculation is very similar to the previously fully
diluted earnings per share calculation method. SFAS 128 became
effective December 31, 1997.
Basic earnings per share were calculated using the weighted average
number of shares outstanding of 7,739,214 and 5,000,089 for the six
months ended June 30, 2001 and 2000; and 7,883,732 and 5,549,470 for
the three months ended June 30, 2001 and 2000 respectively. There were
no differences between basic and diluted earnings per share. Options to
purchase 2,750,039 shares of common stock at prices ranging from $.25
to $5.50 per share were outstanding at June 30, 2001, but they were not
included in the computation of diluted earnings per share because the
options have an anti-dilutive effect. The effect of the convertible
debt and convertible preferred stock are anti-dilutive.
5% SERIES A CONVERTIBLE PREFERRED STOCK
---------------------------------------
During the year ended December 31, 1999, the Company designated
5,000,000 shares of its 10,000,000 authorized preferred shares as 5%
Series A Convertible Preferred Stock. Each share is convertible into
common stock at $1.50 per share. In the event of liquidation, these
shareholders will be entitled to receive in preference to the holders
of common stock an
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIOM FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
amount equal to their original purchase price plus all accrued but
unpaid dividends. Dividends are payable at the rate of 5% per annum,
payable semi-annually.
ADVERTISING
-----------
Advertising costs are expensed as incurred. Advertising costs were
$1,600 and $113,049 for the periods ended June 30, 2001 and 2000
respectively.
Reclassifications
-----------------
Certain items from prior periods within the financial statements have
been reclassified to conform to current period classifications.
INTANGIBLE ASSETS AND GOODWILL
------------------------------
Included in Intangible Assets are the following assets:
June 30, 2001
Accumulated
Cost Amortization
---- ------------
Covenant not to compete $120,000 $120,000
Software development costs 87,500 87,500
Organization costs 539 539
Debt acquisition costs 150,198 67,230
-------- --------
$358,237 $275,269
======== ========
December 31, 2000
Accumulated
Cost Amortization
---- ------------
Covenant not to compete $120,000 $120,000
Software development costs 87,500 72,917
Organization costs 539 539
Debt acquisition costs 86,338 47,850
-------- --------
$294,377 $241,306
======== ========
The covenant not to compete and the software development costs were
acquired as a result of the acquisition of Education Navigator, Inc.
(EdNav) on June 26, 1998. The covenant is for a two-year period and
is being amortized ratably over that time. The software development
costs were capitalized and are being amortized ratably over a three-
year period, as that is the expected life of the various products.
Amortization expense was $14,583 for software development costs for
the period ended June 30, 2001.
During the first six months of 2001, the Company issued Convertible
Notes totaling $1,555,000. The fees of $66,750 associated with these
notes will be amortized ratably over the term of the notes, which is
through January 31, 2002. Amortization expense of debt acquisition
costs totaled $19,380 for the period ended June 30, 2001, and
approximately $2,890 of the debt acquisition costs were reclassified
as stock issuance costs in connection with the conversion of $37,500
(original cost) worth of the convertible notes into common stock of
the Company during the period ended June 30, 2001.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
Included in Goodwill, as a result of the EdNav acquisition at June 30,
2001 and December 31, 2000 is the cost of $475,665 and accumulated
amortization of $475,665 and $396,388 respectively. The goodwill is
being amortized ratably over a period of three years. Goodwill
amortization totaled $79,277 for the period ended June 30, 2001.
PROPERTY AND EQUIPMENT, AT COST
-------------------------------
Property and equipment consists of the following:
June 30, 2001 December 31, 2000
Accumulated Accumulated
Cost Depreciation Cost Depreciation
---- ------------ ----- ------------
Computer and $391,477 $127,719 $387,862 $ 88,812
office equipment
Leasehold 2,549 440 1,699 201
improvements
Computer software 229,453 86,378 212,412 60,067
Office furniture 42,350 12,996 42,350 8,762
-------- -------- -------- --------
$665,829 $227,533 $644,323 $157,842
======== ======== ======== ========
Renewals and betterments are capitalized; maintenance and repairs are
expensed as incurred.
Depreciation is calculated using the straight-line method over the
asset's estimated useful life, which is 5 years for leasehold
improvements, equipment and furniture and 3 years for software.
Depreciation expense for the periods ended June 30, 2001 and 2000 was
$69,693 and $58,557 respectively.
DEFERRED REVENUE
----------------
Deferred revenue represents cash advances received in excess of
revenue earned on on-going contracts. Payment terms vary with each
contract but may include an initial payment at the time the contract
is executed, with future payments dependent upon the completion of
certain contract phases or targeted milestones. In the event of
contract cancellation, the Company is entitled to payment for all work
performed through the point of cancellation. The Company had $30,474
in deferred revenue relating to one contract for services to be
performed over the next three months.
REVENUE RECOGNITION POLICY
--------------------------
The Company recognizes sales, for both financial statement and tax
purposes, when its products are shipped and when services are
provided. The Company had $30,474 in deferred revenue relating to one
contract for services to be rendered over the next three months.
ESTIMATES IN FINANCIAL STATEMENTS
---------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATMENETS
June 30, 2001
(unaudited)
INCOME TAXES
------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
SFAS 109 has as its basic objective the recognition of current and
deferred income tax assets and liabilities based upon all events that
have been recognized in the financial statements as measured by the
provisions of the enacted tax laws.
Valuation allowances are established when necessary to reduce deferred
tax assets to the estimated amount to be realized. Income tax expense
represents the tax payable for the current period and the change
during the period in the deferred tax assets and liabilities.
STOCK BASED COMPENSATION
------------------------
The Company adopted SFAS 123 to account for its stock based
compensation plans. SFAS 123 defines the "fair value based method" of
accounting for stock based compensation. Under the fair value based
method, compensation cost is measured at the grant date based on the
value of the award and is recognized over the service period.
EARNINGS PER SHARE
------------------
Basic earnings per shares ("EPS") is computed by dividing income
available to common shareholders (which for the Company equals its net
loss) by the weighted average number of common shares outstanding, and
dilutive EPS adds the dilutive effect of stock options and other
common stock equivalents. Antidilutive shares aggregating 3,784,000
have been omitted from the calculation of dilutive EPS for the period
ended June 30, 2001. A reconciliation between numerators and
denominators of the basic and dilutive earnings per shares is as
follows:
Period Ended June 30, 2001 Period Ended June 30, 2000
-------------------------- --------------------------
Net Income Shares Per- Net Income Shares Per-
(Loss) Share (Loss) Share
Numerator Denominator Amount Numerator Denominator Amount
-------- ---------- ------ --------- ----------- ------
Basic EPS $(1,726,048) 7,739,214 $(0.22) $(3,485,261) 5,000,089 $(0.70)
Effect of Dilutive
Securities
None. -0- -0- -0- -0- -0- -0-
----------- --------- ------ ----------- ---------- ------
Diluted EPS $(1,726,048) 7,739,214 $(0.22) $(3,485,261) 5,000,089 $(0.70)
=========== ========= ====== =========== ========= ======
IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), which
is effective for all fiscal quarter of all fiscals years beginning
after June 15, 2000, as amended by SFAS No. 137. In June 2000, SFAS
No. 138 was issued which amended certain provisions of SFAS No. 133.
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities. In
accordance with SFAS No. 133, an entity is required to recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS
No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
formally document, designate and assess the effectiveness of
transactions that receive hedge accounting.
The Company has not yet completed its evaluation of the impact of SFAS
No. 133 on its consolidated financial statements. However, the Company
does not believe that the implementation of SFAS No. 133 will have a
significant effect on its results of operations.
FASB Interpretation No. 44 "Accounting for Certain Transactions
Involving Stock Compensation" ("FIN No. 44"), provides guidance for
applying APB Opinion No. 25, "Accounting for Stock Issued to
Employees". With certain exceptions, FIN No. 44 applies prospectively
to new awards, exchanges of awards in a business combination,
modifications to outstanding awards and changes in grantee status on
or after July 1, 2000. The Company does not believe that the
implementation of FIN No. 44 will have a significant effect on its
results of operations.
In December 1999, The SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB No. 101"), which
summarizes certain of the SEC staff's views in applying generally
accounted principles to revenue recognition in financial statements.
The Company will be required to adopt SAB No. 101 during fiscal year
2001. The Company has reviewed SAB No. 101 and expects the
pronouncement to have an effect on its method of recognizing revenues.
The Company's typical engagement will last from 4 months to several
years, and the revenue generated from those engagements will be
ratably recognized over the life of the engagement.
NOTE 3: OPERATIONS AND LIQUIDITY
------------------------
The Company incurred substantial losses in 1999, 2000 and during the
first six months of fiscal 2001. Until such time that the Company's
products and services can be successfully marketed the Company will
continue to need to fulfill working capital requirements through the
sale of stock and the issuance of debt. The inability of the company
to continue its operations, as a going concern would impact the
recoverability and classification of recorded asset amounts.
The ability of the Company to continue in existence is dependent on
its having sufficient financial resources to bring products and
services to market for marketplace acceptance. As a result of its
significant losses, negative cash flows from operations, and
accumulated deficits for the period ending June 30, 2001, there is
doubt about the Company's ability to continue as a going concern.
Management believes that its current available working capital,
anticipated contract revenues and subsequent sales of stock and or
placement of debt instruments will be sufficient to meet its projected
expenditures for a period of at least twelve months from June 30,
2001. However, any projections of future cash needs and cash flows are
subject to substantial uncertainty. There can be no assurance that
financing will be available in amounts or on terms acceptable to us,
if at all.
NOTE 4: ACQUISITION
-----------
WebIPA, Inc. Acquisition
On February 9, 2000, the Company acquired WebIPA, Inc., a Florida
corporation pursuant to an Agreement and Plan of Acquisition dated
January 26, 2000. In consideration of receiving
13
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
all of the issued and outstanding shares of WebIPA Inc., OmniComm
issued 1,200,000 restricted shares of common stock to the shareholders
of WebIPA Inc.
The Company accounted for its acquisition of WebIPA under the purchase
method of accounting. At the time of the transaction WebIPA was a
development stage company with approximately $5,033 in assets and no
recorded liabilities.
NOTE 5: EQUITY INVESTMENT
-----------------
European Medical Network (EMN) Investment, at cost
On June 20, 2000 the Company entered into a stock purchase agreement
under which it agreed to purchase a 25% interest in Medical Network AG
EMN, a Swiss company ("EMN"). The agreement, set to close on April 20,
2000, provided that the purchase price for 25% of EMN's stock equity
was $838,500 to be paid partly in cash and stock. Two cash payments
totaling US $645,000 were to be paid in installments as follows:
$335,000 on March 20, 2000, upon which EMN would deliver 10% of its
stock equity, and $310,000 on April 20, 2000, upon which EMN would
deliver the remaining 15% of its stock equity. In addition, the
Company was to provide 41,883 shares of restricted common stock to
EMN. Pursuant to the terms of the stock purchase agreement, on March
20, 2000, EMN's shareholders entered into an agreement that provided
for the Company to have one seat on EMN's board of directors and the
right to veto any sale of equity in excess of 49% of the total issued
and outstanding equity of EMN.
On March 20, 2000, the Company paid EMN $335,000, received 10% of
EMN's equity and a seat on EMN's board. On April 20, 2000, the Company
did not make the second payment of $310,000 or the stock payment of
41,883 shares to EMN and the stock purchase agreement did not close.
On July 11, 2000, the Company and EMN agreed to renegotiate the terms
of their agreement subject to the Company's success in finding
adequate financing. As part of the renegotiation the Company has
resigned its seat on EMN's board and offered to sell its 10% interest
back to EMN. The Company accounts for its investment in EMN under the
cost method of accounting. The Company has established a valuation
allowance of $335,000 against its investment in EMN to reflect the
uncertainty of the fair market value of the investment as of June 30,
2001 and December 31, 2000.
NOTE 6: NOTES PAYBLE
------------
Education Navigator
-------------------
As of June 30, 2001, the Company owed $141,500 to the selling
stockholders of Education Navigator. The notes are payable over two
years and bear interest at 5.51% annually. The amount payable during
fiscal 2001 is $157,500. At June 30, 2001 the Company was in default
under the terms of the promissory notes governing the debt.
Short-term Borrowings
---------------------
At June 30, 2001 the Company owed $685,000 under short-term notes
payable. The notes bear interest at rates ranging from 9.5% to 18%.
The average term of the promissory notes is 201 days. One of the notes
is collateralized by common stock, the other notes are not
collateralized. The note holders were granted stock warrants in the
Company at prices ranging from $.50 to $2.25 per share. As of June 30,
2001 the Company was in default on three of the notes with principal
owed of approximately $255,000.
14
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
NOTE 7: CONVERTIBLE NOTES
-----------------
During the first quarter of 1999, the Company issued Convertible Notes
Payable in the amount of $862,500 pursuant to a Confidential Private
Placement Memorandum. There were costs of $119,625 associated with
this offering. The notes bear interest at ten percent annually,
payable semi-annually. The notes are convertible after maturity, which
is five years, into shares of common stock of the Company at $1.25 per
share, including registration rights. As of June 30, 2001
approximately $437,500 of the Convertible Notes had been converted
into 350,000 shares of common stock of the Company.
During the first half of 2001, the Company issued Convertible Notes
Payable in the amount of $1,555,000 pursuant to a Confidential Private
Placement Memorandum. There were costs of $66,750 associated with this
offering. The net proceeds to the Company were $1,488,250, with the
costs of $66,750 accrued at June 30, 2001. The notes bear interest at
twelve percent annually, payable at maturity. The notes are
convertible after maturity, which is January 31, 2002, into shares of
common stock of the Company at $0.50 per share, including registration
rights.
NOTE 8: COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company currently leases office space requiring minimum annual
base rental payments for the fiscal periods shown as follows:
2001 $ 54,418
2002 116,125
2003 0
2004 0
2005 0
--------
Total $170,543
========
In addition, to annual base rental payments, the company must pay an
annual escalation for operating expenses as determined in the lease.
CONTINGENT LIABILITIES
----------------------
On or about September 6, 2000, the Company's wholly owned subsidiary,
OmniTrial B.V. ("OmniTrial") submitted a petition for bankruptcy protection from
the bankruptcy court of the Netherlands. The court appointed a liquidating
trustee and the case is still pending. The Company claimed that certain assets
of OmniTrial were paid for by the Company and therefore should not be part of
the liquidating assets of OmniTrial. The bankruptcy trustee rejected that claim
and told the Company that as part of the OmniTrial bankruptcy estate the assets
would be sold to diminish any deficiency of the estate. On July 5, 2001 the
Company signed a settlement agreement providing for the return of the assets to
the Company in exchange for the payment of $10,000.
On January 26, 2001, a former employee of the Company, Eugene A. Gordon
filed a lawsuit in the Circuit Court of the 11th Judicial Circuit in and for
Dade County, Florida alleging breach of his employment contract with the
Company. The plaintiff alleges the Company owes him more than $100,000 for back
payment of salary per the terms of his employment contract. The Company disputes
Mr. Gordon's allegations and is vigorously defending this lawsuit.
On February 2, 2001, an advertising firm, Wray Ward Laseter filed a lawsuit
in the Superior Court of North Carolina against the Company. The plaintiff
alleges claims totaling approximately $84,160 against the Company for fees
associated with advertising, marketing and public relations services provided
between June
15
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
and September 2000. On or about April 27, 2001, the Company and Wray Ward
Laseter entered into a settlement agreement which provides that the plaintiff
dismiss the lawsuit with prejudice and release its claims against the Company in
return for a series of payments totaling $66,000. To date the Company has made
two payments totaling $25,200 under the settlement agreement.
On February 16, 2001, a staffing agency, Temp Art, Inc. filed a lawsuit in the
County Court in and for Miami-Dade County, Florida. The plaintiff alleges the
Company breached its contract and owes approximately $13,126 for back payment of
services rendered plus interest and costs. The Company disputes Temp Art's
allegations and is vigorously defending this lawsuit.
In December 2000, the Company received a demand letter from a former employee
for fees owed relating to an advisers agreement between him and the Company. The
demand letter sought $37,500 in the form of past due fees. The former employee
later increased his demand to $50,000. After its initial settlement offer was
rejected, the Company advised the former employee that it intended to vigorously
defend itself against any claims and assert its own claims against him. The
Company disputes his allegations and intends to vigorously defend itself should
a lawsuit be filed.
NOTE 9: RELATED PARTY TRANSACTIONS
--------------------------
On July 18, 2000 the Company borrowed $50,000 from Guus van Kesteren a
Director of the Company. The promissory note carried an interest rate
of 12% per annum and had a maturity date of September 30, 2000. In
addition, the Company granted Mr. van Kesteren an option to purchase
20,000 shares of the Company's common stock at a price of $2.25. At
the Company's request Mr. van Kesteren elected to convert the
promissory note as part of a private placement of debt of the Company.
The private placement debt will accrue interest at 12% per annum and
is convertible into common stock of the Company at a rate of $0.50 per
share on January 31, 2002.
On August 17, 2000 the Company borrowed $100,000 from Noesis N.V. a
shareholder of the Company. The promissory note carried an interest
rate of 8% per annum and had a maturity date of January 1, 2001. At
the Company's request Noesis elected to convert the promissory note as
part of a private placement of debt of the Company. The private
placement debt will accrue interest at 12% per annum and is
convertible into common stock of the Company at a rate of $0.50 per
share on January 31, 2002.
On October 26, 2000 the Company borrowed $250,000 from Profrigo N.V. a
shareholder of the Company. The promissory note carried an interest
rate of 5% per annum and had a maturity date of January 1, 2001. At
the Company's request Profrigo elected to convert the promissory note
as part of a private placement of debt of the Company. The private
placement debt will accrue interest at 12% per annum and is
convertible into common stock of the Company at a rate of $0.50 per
share on January 31, 2002.
On November 22, 2000 the Company borrowed $150,000 from Profrigo, N.V,
a shareholder of the Company. The promissory note carries an interest
rate of 18% per annum and has a maturity date of January 15, 2001. In
addition, the Company granted Profrigo an option to purchase 150,000
shares of the Company's common stock at a price of $0.75. The
promissory note is currently in default and continues to accrue
interest at the rate of 18% per annum.
On December 22, 2000 the Company borrowed $60,000 from Guus van
Kesteren a Director of the Company. The promissory note carried an
interest rate of 5% per annum and had a maturity date of January 1,
2001. At the Company's request Mr. van Kesteren elected to convert the
promissory note as part of a private placement of debt of the Company.
The private placement debt will accrue interest at 12% per annum and
is convertible into common stock of the Company at a rate of $0.50 per
share on January 31, 2002.
16
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
On December 22, 2000 the Company borrowed $50,000 from Profrigo N.V. a
shareholder of the Company. The promissory note carried an interest
rate of 5% per annum and had a maturity date of January 1, 2001. At
the Company's request Profrigo elected to convert the promissory note
as part of a private placement of debt of the Company. The private
placement debt will accrue interest at 12% per annum and is
convertible into common stock of the Company at a rate of $0.50 per
share on January 31, 2002.
On February 20, 2001 the Company borrowed $60,000 from Guus van
Kesteren a Director of the Company. The promissory note carries an
interest rate of 12% per annum and has a maturity date of August 20,
2001. In addition, the Company granted Mr. van Kesteren an option to
purchase 20,000 shares of the Company's common stock at a price of
$0.30.
On March 19, 2001 the Company borrowed $100,000 from Profrigo N.V a
shareholder of the Company. The promissory note carries an interest
rate of 12% per annum and has a maturity date of September 19, 2001.
On April 24, 2001 the Company borrowed $20,000 from Guus van Kesteren
a Director of the Company. The promissory note carries an interest
rate of 12% per annum and has a maturity date of August 26, 2001. In
addition, the Company granted Mr. van Kesteren an option to purchase
6,700 shares of the Company's common stock at a price of $0.30.
On June 22, 2001 the Company borrowed $25,000 from Guus van Kesteren a
Director of the Company. The promissory note carries an interest rate
of 12% per annum and has a maturity date of December 22, 2001. The
note is convertible into common stock prior to maturity solely at the
noteholders option at a price equivalent to that offered in any
financing closed by the Company exceeding $1,000,000 prior to the
notes maturity.
On June 22, 2001 the Company borrowed $25,000 from Cornelis Wit a
Director of the Company. The promissory note carries an interest rate
of 12% per annum and has a maturity date of December 22, 2001. The
note is convertible into common stock prior to maturity solely at the
noteholders option at a price equivalent to that offered in any
financing closed by the Company exceeding $1,000,000 prior to the
notes maturity.
NOTE 10: POST-RETIREMENT EMPLOYEE BENEFITS
---------------------------------
The Company does not have a policy to cover employees for any health
care or other welfare benefits that are incurred after employment
(post-retirement). Therefore, no provision is required under SFAS Nos.
106 or 112.
NOTE 11: STOCK BASED COMPENSATION
------------------------
ACCOUNTING FOR STOCK-BASED COMPENSATION
---------------------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", ("SFAS No. 123") requires that stock awards
granted subsequent to January 1, 1995, be recognized as compensation
expense based on their fair value at the date of grant. Alternatively,
a company may use Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", ("APB 25") and disclose
pro forma income amounts which would have resulted from recognizing
such awards at their fair value. The Company has selected to account
for stock-based compensation expense under APB 25.
17
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
STOCK OPTION PLAN
-----------------
In 1998 the Company's Board of Directors approved the OmniComm Systems
1998 Stock Option Plan. (the "1998 Plan"). The Plan provides for
granting Incentive Stock Options, Nonqualified Stock Options, Stock
Appreciation Rights, Restricted Stock Awards, Phantom Stock Unit
Awards and Performance Share Units. Pursuant to the 1998 Plan the
Company may grant options to purchase up to 3,000,000 shares of the
Company's common stock. The term of each option may not exceed ten
years from the date of grant, and options vest in accordance with a
vesting schedule established by the plan administrator.
The Company's share option activity and related information is
summarized below:
Period ended June 30,
June 30, 2001 December 31, 2000
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
Outstanding at beginning of period 3,316,006 $ 2.28 3,562,916 $ 1.00
Granted 595,000 $ 0.64 1,851,994 $ 3.46
Exercised 20,000 $ 0.80 1,045,894 $ 0.30
Cancelled 1,140,467 $ 2.00 1,053,010 $ 1.97
---------- ---------- ---------- ----------
Outstanding at end of period 2,750,539 $ 1.79 3,316,006 $ 2.28
========== ========== ========== ==========
Exercisable at end of period 1,556,000 $ 1.79 1,512,848 $ 2.19
========== ========== ========== ==========
During the second and third quarters of 1999, the Company issued
86,377 and 68,000, respectively, common shares to employees and
advisors under its stock bonus arrangement. The Company adopted SFAS
123 to account for its stock based compensation plans. SFAS 123
defines the "fair value based method" of accounting for stock based
compensation. Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period. In accordance with this method,
the Company recognized expense of $56,145 and $44,200, respectively,
during the second and third quarters of 1999, and $41,980 during the
third quarter of 2000.
During 2000 the Company issued an aggregate of 187,330 shares of
common stock to employees and advisors with a fair market value as
measured on the date of issuance of $324,482 for services rendered
under employment and consulting agreement. In addition, the Company
issued 126,781 shares of preferred stock with a fair market value as
measured on the date of grant of $190,172 to a financial advisor in
accordance with a consulting agreement.
During 2001 the Company issued an aggregate of 126,338 shares of
common stock to employees and advisors with a fair market value as
measured on the date of issuance of $97,732 for services rendered
under employment and consulting agreement.
NOTE 12: OMNITRIAL, B.V. BANKRUPTCY
--------------------------
On or about September 6, 2000, the Company's wholly owned subsidiary,
OmniTrial B.V. ("OmniTrial") submitted a petition for bankruptcy
protection from the bankruptcy court of the Netherlands. The court
appointed a liquidating trustee and the case is still pending. The
Company claimed that certain assets of OmniTrial were paid for by the
Company and therefore should not be part of the liquidating assets of
OmniTrial. The bankruptcy trustee rejected that claim and told the
Company that as part of the OmniTrial bankruptcy estate the
18
OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
June 30, 2001
(unaudited)
assets would be sold to diminish any deficiency of the estate. On July
5, 2001 the Company signed a settlement agreement providing for the
return of the assets to the Company in exchange for the payment of
$10,000.
NOTE 13: INCOME TAXES
------------
Income taxes are accrued at statutory US and state income tax rates.
Income tax expense is as follows:
6/30/01 6/30/00
======= =======
Current tax expense (benefit):
Income tax at statutory rates $ -0- $ -0-
Deferred tax expense (benefit):
Amortization of goodwill (35,320) (48,306)
and covenant
Operating loss carryforward (575,411) (1,310,946)
--------- ------------
(610,731) (1,359,252)
Valuation allowance 610,731 1,359,252
--------- ------------
Total tax expense (benefit) $ -0- $ -0-
========= ============
The tax effects of significant temporary differences, which comprise
the deferred tax assets are as follows:
6/30/01 12/31/00
======= ========
Deferred tax assets:
Amortization of intangibles $ 259,622 $ 224,302
Operating loss carryforwards 3,711,500 3,136,089
----------- -----------
Gross deferred tax assets 3,971,122 3,360,391
Valuation allowance (3,971,122) (3,360,391)
----------- -----------
Net deferred tax asset $ -0- $ -0-
=========== ===========
The Company has net operating loss carryforwards (NOL) for income tax
purposes of approximately $9,851,000. This loss is allowed to be
offset against future income until the year 2021 when the NOL's will
expire. Other timing differences relate to depreciation and
amortization for the stock acquisition of Education Navigator in 1998.
The tax benefits relating to all timing differences have been fully
reserved for in the valuation allowance account due to the lack of
operating history and the substantial losses incurred in 2000.
NOTE 14: INTERIM FINANCIAL REPORTING
The unaudited financial statements of the Company for the period from
January 1, 2001 to June 30, 2001 have been prepared by management from
the books and records of the Company, and reflect, in the opinion of
management, all adjustments necessary for a fair presentation of the
financial position and operations of the Company as of the period
indicated herein, and are of a normal recurring nature.
19