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SECURITIES AND EXCHANGE COMISSION Washington, D.C. 20549
 FORM 10-QSB [Mark One] þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended MARCH 31, 2004
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _______ to ________
 Commission File Number: 0-25203 OmniComm Systems, Inc.  Delaware
    
    11-3349762State of Incorporation
    
    IRS Federal Employer Identification Number
 2555 Davie Road, Suite 110-B, Davie, Florida
    
    33317Address of Principal Office
    
    Zip Code
 Registrants Telephone Number: 954.473.1254 Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act
during the past 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 o The number of shares outstanding of each of the issuers classes of
equity as of March 31, 2004: 18,979,277 common stock $.001 par value,
4,215,224 Series A Preferred stock, $.001 par value, 131,250 Series B
Preferred Stock, $.001 par value, 337,150 Series C Preferred Stock, $.001
par value.




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FINANCIAL STATEMENTS Table of Contents PART I. FINANCIAL INFORMATIONItem 1. Unaudited Consolidated Financial StatementsConsolidated Balance SheetsConsolidated Income StatementsConsolidated Statement of Cash FlowsNotes to Consolidated Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Controls and ProceduresPART II. OTHER INFORMATIONItem 6. Exhibits and Reports on Form 8-KSIGNATURESCERTIFICATIONSExhibit 99.1 Certification Under Section 906 of Sarbanes-Oxley  CEO Cornelis F. WitExhibit 99.1 Certification Under Section 906 of Sarbanes-Oxley  CFO Ronald T. LinaresSECTION 302 CEO CERTIFICATIONSECTION 302 CFO CERTIFICATIONSECTION 906 CEO CERTIFICATIONSECTION 906 CFO CERTIFICATION
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PART I. FINANCIAL INFORMATION 
 ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OMNICOMM SYSTEMS, INC. 
 CONSOLIDATED BALANCE SHEETS
 March 31,
    
    December 31,2004
    
    2003(unaudited)ASSETSCURRENT ASSETSCash
    
    $
    5,641
    
    
    $
    1,977Accounts receivable
    
    
    46,406
    
    
    
    112,026Prepaid expenses
    
    
    24,176
    
    
    
    20,799Total current assets
    
    
    76,223
    
    
    
    134,802PROPERTY AND EQUIPMENT, net
    
    
    103,867
    
    
    
    139,830OTHER ASSETSOther assets
    
    
    12,997
    
    
    
    12,997TOTAL ASSETS
    
    $
    193,087
    
    
    $
    287,629LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIESAccounts payable and accrued expenses
    
    $
    1,020,724
    
    
    $
    854,150Accrued payroll taxes
    
    
    134,116
    
    
    
    111,15910% Convertible Notes
    
    
    375,000
    
    
    
    375,000Notes payable  current portion
    
    
    375,000
    
    
    
    -0-Notes payable, related party  current portion
    
    
    122,000
    
    
    
    -0-Deferred revenue
    
    
    309,655
    
    
    
    416,592Total current liabilities
    
    
    2,336,495
    
    
    
    1,756,901NOTES PAYABLE, net of current portion
    
    
    605,926
    
    
    
    880,926NOTES PAYABLE RELATED PARTY, net of current portion
    
    
    605,644
    
    
    
    551,644TOTAL LIABILITIES
    
    
    3,548,065
    
    
    
    3,189,471COMMITMENTS AND CONTINGENCIESSHAREHOLDERS EQUITY (DEFICIT)
Undesignated preferred stock  $.001 par value. 4,022,500 shares authorized, no shares issued and outstanding
    
    
    -0-
    
    
    
    -0-Series B convertible preferred stock,  $.001 par value. 230,000 sharesauthorized, 131,250 and 157,500 issued and outstanding, respectively;
liquidation preference $1,312,500 and $1,575,000, respectively
    
    
    132
    
    
    
    158Series C convertible preferred stock,  $.001 par value. 747,500 sharesauthorized, 337,150 and 337,150 issued and outstanding, respectively;
liquidation preference $3,371,500 and $3,076,500, respectively
    
    
    337
    
    
    
    3375% Series A convertible preferred stock  $0.001 par value, 5,000,000shares authorized; 4,215,224 and 4,215,224 issued and outstanding,
respectively; liquidation preference $4,215,224 and $4,215,224,
respectively
    
    
    4,215
    
    
    
    4,215Common stock  150,000,000 shares authorized, 18,979,277 and 17,929,277issued and outstanding, after deducting 669,777 and 669,777 shares of
treasury stock, at $.001 par value, respectively
    
    
    19,604
    
    
    
    18,554Additional paid in capital  preferred
    
    
    8,515,920
    
    
    
    8,778,394Additional paid in capital  common
    
    
    12,932,945
    
    
    
    12,671,495Less: Treasury stock, cost method, 669,777 and 669,777 shares, respectively
    
    
    (299,861
    )
    
    
    (299,861
    )Accumulated deficit
    
    
    (24,494,398
    )
    
    
    (24,032,562
    )Deferred compensation
    
    
    (33,872
    )
    
    
    (42,572
    )TOTAL SHAREHOLDERS EQUITY (DEFICIT)
    
    
    (3,354,978
    )
    
    
    (2,901,842
    )TOTAL LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)
    
    $
    193,087
    
    
    $
    287,629
 See accompanying summary of accounting policies and notes to financial statements. 3




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OMNICOMM SYSTEMS, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003
 (Unaudited)
 2004
    
    2003Revenues
    
    $
    266,561
    
    
    $
    201,130Cost of sales
    
    
    70,188
    
    
    
    47,107Gross margin
    
    
    196,373
    
    
    
    154,023Other expensesSalaries, benefits and related taxes
    
    
    441,980
    
    
    
    451,087Rent & occupancy expenses
    
    
    37,936
    
    
    
    36,758Consulting  medical advisory
    
    
    -0-
    
    
    
    67,308Legal and professional fees
    
    
    34,254
    
    
    
    24,753Travel
    
    
    10,992
    
    
    
    9,755Telephone and internet
    
    
    15,536
    
    
    
    15,608Selling, general and administrative
    
    
    38,961
    
    
    
    33,191Interest expense, net
    
    
    42,587
    
    
    
    29,111Depreciation and amortization
    
    
    35,963
    
    
    
    39,919Total other expenses
    
    
    658,209
    
    
    
    707,489(Loss) before taxes and preferred dividends
    
    
    (461,836
    )
    
    
    (553,466
    )Income tax expense (benefit)
    
    
    -0-
    
    
    
    -0-Net income (loss)
    
    
    (461,836
    )
    
    
    (553,466
    )Preferred stock dividends in arrears Series A Preferred
    
    
    (51,200
    )
    
    
    (50,637
    )Preferred stock dividends in arrears Series B Preferred
    
    
    (27,674
    )
    
    
    (39,452
    )Preferred stock dividends in arrears Series C Preferred
    
    
    (67,245
    )
    
    
    (62,711
    )Preferred stock dividends- deemed dividends
    
    
    -0-
    
    
    
    (135,344
    )Total preferred stock dividends
    
    
    (146,119
    )
    
    
    (288,144
    )Net income (loss) attributable to common stockholders
    
    $
    (607,955
    )
    
    $
    (841,610
    )Net (loss) per share
    
    $
    (0.03
    )
    
    $
    (0.07
    )Weighted average number of shares outstanding
    
    
    18,699,277
    
    
    
    12,018,719
 See accompanying summary of accounting policies and notes to financial statements 4




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OMNICOMM SYSTEMS, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND MARCH 31, 2003
 (unaudited)
 2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)
    
    $
    (461,836
    )
    
    $
    (553,466
    )Adjustment to reconcile net income to net cash provided by (used in)
operating activities:Depreciation and amortization
    
    
    35,963
    
    
    
    39,919Amortization of deferred compensation
    
    
    8,700
    
    
    
    7,379Change in assets and liabilities:Accounts receivable
    
    
    65,620
    
    
    
    93,776Prepaid expenses
    
    
    (3,377
    )
    
    
    1,244Accounts payable and accrued expenses
    
    
    189,531
    
    
    
    (33,803
    )Deferred revenue
    
    
    (106,937
    )
    
    
    (2,305
    )Net cash provided by (used in) operating activities
    
    
    (272,336
    )
    
    
    (447,256
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchase of property and equipment
    
    
    -0-
    
    
    
    -0-Net cash provided by (used in) investing activities
    
    
    -0-
    
    
    
    -0-CASH FLOWS FROM FINANCING ACTIVITIESProceeds from notes payable
    
    
    276,000
    
    
    
    2,600Issuance of Series C convertible preferred stock, net of issuance costs
    
    
    -0-
    
    
    
    265,279Net cash provided by (used in) financing activities
    
    
    276,000
    
    
    
    267,879Net increase (decrease) in cash and cash equivalents
    
    
    3,664
    
    
    
    (179,377
    )Cash and cash equivalents at beginning of period
    
    
    1,977
    
    
    
    194,677Cash and cash equivalents at end of period
    
    $
    5,641
    
    
    $
    15,300
 For the three months endedMarch 31,2004
    
    2003Supplemental Disclosure of Cash Flow Information:Cash paid during the period for:Income tax
    
    $
    -0-
    
    
    $
    -0-Interest
    
    $
    -0-
    
    
    $
    -0-Non-cash TransactionsConversion of Series B Preferred Stock into shares of common stock
    
    $
    262,500
    
    
    $
    -0-
 See accompanying summary of accounting policies and notes to financial statements 5




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OMNICOMM SYSTEMS, INC. 
 NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 MARCH 31, 2004
 (unaudited)
 NOTE 1:
    
    ORGANIZATION AND NATURE OF OPERATIONSOmniComm Systems, Inc. is a healthcare technology company that
provides Internet-based electronic data capture (EDC) solutions
and related value-added services to pharmaceutical and biotech
companies, clinical research organizations, and other clinical
trial sponsors. TrialMaster® allows clinical trial sponsors and
investigative sites to securely collect, validate, transmit, and
analyze clinical trial data. The Medical Event Reporting System
(MERS-TH) is an event reporting system developed for hospitals and
medical centers to collect, classify, and analyze events that could
potentially compromise patient safety. MERS-TH provides the
opportunity to study and monitor both actual and near-miss events
to facilitate process improvement efforts. MERS-TH was developed
in conjunction with Columbia University and will be marketed by
both of us to hospital and medical centers in the U.S. and Europe
initially.NOTE 2:
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATIONThe Companys accounts include those of its two wholly owned
subsidiaries, OmniCommerce and OmniTrial B.V and have been prepared
in conformity with (i) generally accepted accounting principles;
and (ii) the rules and regulations of the United States Securities
and Exchange Commission. All significant intercompany accounts and
transactions between the Company and its subsidiaries have been
eliminated in consolidation.ESTIMATES IN FINANCIAL STATEMENTSThe preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and footnotes thereto. Actual results may
differ from those estimates.RECLASSIFICATIONSCertain reclassifications have been made in the 2003 financial
statements to conform to the 2004 presentation. These
reclassifications did not have any effect on net income (loss) or
shareholders equity.SEGMENT INFORMATIONThe Company operates in one reportable segment.CASH AND CASH EQUIVALENTSCash 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.ACCOUNTS RECEIVABLEAccounts 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.
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OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) CONCENTRATION OF CREDIT RISKAccounts receivable subject the Company to its highest potential
concentration of credit risk. The Company reserves for credit
losses based on historical losses and performs on-going
evaluations of its receivables and clients. To date the Company
has not incurred any losses from receivables related to TrialMaster
sales. The Company does not require collateral on trade accounts
receivables. Four clients accounted for more than 10% of sales
individually for the year ended December 31, 2003.PROPERTY AND EQUIPMENTProperty 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, equipment and furniture and 3 years for
software. Gains or losses on disposal are charged to operations.INTANGIBLE AND OTHER ASSETSIntangible assets are amortized on a straight-line basis over
periods ranging from one to five years. The Company continually
reviews the recoverability of the carrying value of these assets
using the methodology prescribed in SFAS 121. The Company also
reviews long-lived assets and the related intangible assets for
impairment whenever events or changes in circumstances indicate the
carrying amounts of such assets may not be recoverable. If it is
determined the carrying amount of the assets is permanently
impaired then intangible assets are written down to fair value and
the useful life of the asset may be changed prospectively. Fair
value is determined based on discounted cash flows, appraised
values or managements estimates, depending upon the nature of the
assets. As of March 31, 2004, management believes no revision to
the remaining useful lives or write-down of intangible assets is
required.DEFERRED REVENUEDeferred 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.
As of March 31, 2004 the Company had $309,655 in deferred revenues
relating to contracts for services to be performed over periods
ranging from 1 month to 5 years.REVENUE RECOGNITION POLICYOmniComm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; on-going maintenance fees incurred throughout the
duration of an engagement; fees for report writing and change
orders. The clinical trials that are conducted using TrialMaster
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 the clinical trial. Cost of sales is primarily comprised
of programmer salaries and payroll taxes and is expensed as incurred.
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OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) The Company recognizes sales, for both financial statement and tax
purposes in accordance with SEC Staff Accounting Bulletin No. 104
Revenue Recognition (SAB 104). SAB 104
requires that revenues be recognized ratably over the life of a
contract. In accordance with SAB 104 the Company will periodically
record deferred revenues relating to advance payments in contracts.
As of March 31, 2004 the Company had $309,655 in deferred revenue
relating to contracts for services to be performed over periods
ranging from 1 month to 5 years.ADVERTISINGAdvertising costs are expensed as incurred. Advertising costs were
$(1,015) and $3,175 for the quarters ended March 31, 2004 and 2003,
respectively.RESEARCH AND DEVELOPMENT EXPENSESSoftware development costs are included in research and development
and are expensed as incurred. Statement of Financial Accounting
Standards No. 86 (SFAS 86) requires the capitalization of certain
development costs of software to be sold once technological
feasibility is established, which the Company defines as completion
to the point of marketability. The capitalized cost is then
amortized on a straight-line basis over the estimated product life.
To date, the period between achieving technological feasibility
and the general availability of such software has been short and
software development costs qualifying for capitalization have been
immaterial. Accordingly, the Company has not capitalized any
software development costs under SFAS 86. Research and development
expense was approximately $182,385 in 2004 and $152,458 in 2003 for
the quarters ended March 31, respectively.STOCK BASED COMPENSATIONStock-based compensation is recognized using the intrinsic value
method in accordance with the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees
and, accordingly, does not recognize compensation expense for its
stock-based awards to employees in the Consolidated Statements of
Income. For disclosure purposes, pro forma net loss and loss per
common share are provided in accordance with Statement of Financial
Accounting Standards No. 123, Accounting for Stock Based
Compensation, as if the fair value method had been applied. See
Note 13 for pro forma information on the impact of the fair-value
method of accounting for stock options.EARNINGS PER SHAREThe 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 utilized fully diluted earnings
per share calculation method.
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OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) Basic earnings per share were calculated using the weighted average
number of shares outstanding of 18,699,277 and 12,018,719 for the
quarters ended March 31, 2004 and 2003, respectively. There were
no differences between basic and diluted earnings per share.
Options to purchase 3,593,500 shares of common stock at prices
ranging from $.15 to $2.75 per share were outstanding at March 31,
2004. Stock warrants to purchase 16,751,296 shares of common stock
at prices ranging from $0.25 to $10.00 per share were outstanding
at March 31 2004. The Company granted a Unit Purchase Option
(Agent Option) to the Placement Agent of its Series B Convertible
Preferred Stock that provides the Placement Agent the ability to
purchase 27,000 Series B Preferred Shares with 1,080,000 detachable
common stock warrants. The exercise of the Agent Option would
result in the issuance of an aggregate of 2,160,000 shares of common stock at an exercise price of $0.25 per share. The options,
warrants and Agent Options were not included in the computation of
diluted earnings per share because they have an anti-dilutive
effect on net loss per share. The Companys convertible debt and
convertible preferred stock have an anti-dilutive effect on net
loss per share.The Company granted a Unit Purchase Option (Agent Option) to the
Placement Agent of its Series C Convertible Preferred Stock that
provides the Placement Agent the ability to purchase 24,848 Series
C Preferred Shares with 496,950 detachable common stock warrants.
The exercise of the Agent Option would result in the issuance of an
aggregate of 1,490,850 shares of common stock at an exercise price
of $0.25 per share. The warrants and Agent Options were not
included in the computation of diluted earnings per share because
they have an anti-dilutive effect on net loss per share.INCOME TAXESThe 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.IMPACT OF NEW ACCOUNTING STANDARDSIn November 2003, the Emerging Issues Task Force or EITF of the
FASB reached a consensus on one issue with respect to EITF Issue
03-1, The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments, thereby requiring certain
quantitative and qualitative disclosures for securities accounted
for under SFAS No. 115, Accounting for Certain Investments in Debt
and Equity Securities, that are impaired at the balance sheet
date but for which an other-than-temporary impairment has not been
recognized. Adoption of EITF Issue 03-1, which was effective for us
on December 31, 2003, did not have a material impact on the
Companys financial position, results of operations or cash
flows.
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OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) In December 2003, the Staff of the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition, which supersedes SAB No. 101. The primary
purpose of SAB No. 104 is to rescind accounting guidance contained
in SAB No. 101 and the SECs Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers (the FAQ)
related to multiple element revenue arrangements in order to make
this interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations. The
Company does not expect the adoption of SAB No. 104 to
significantly impact its current revenue recognition policies.NOTE 3:
    
    OPERATIONS AND LIQUIDITYWe have experienced negative cash flow from operations since 1999
and have funded our activities to date primarily from debt and
equity financings. We will continue to require substantial funds
to continue our research and development activities and to market,
sell and commercialize our technology. We will 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.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 periods ending March 31, 2004 there is
doubt about the Companys ability to continue as a going concern.
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OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) NOTE 4:
    
    PROPERTY AND EQUIPMENT, AT COSTProperty and equipment consists of the following:
 March 31, 2004
    
    December 31, 2003Accumulated
    
    
    
    
    
    Accumulated
    
    EstimatedCost
    
    Depreciation
    
    Cost
    
    Depreciation
    
    Useful LivesComputer and office
equipment
    
    $
    423,177
    
    
    $
    358,763
    
    
    $
    423,177
    
    
    $
    337,604
    
    
    5 yearsLeasehold
improvements
    
    
    3,299
    
    
    
    2,217
    
    
    
    3,299
    
    
    
    2,052
    
    
    5 yearsComputer software
    
    
    269,869
    
    
    
    247,188
    
    
    
    269,869
    
    
    
    235,196
    
    
    3 yearsOffice furniture
    
    
    52,950
    
    
    
    37,260
    
    
    
    52,950
    
    
    
    34,613
    
    
    5 years$
    749,295
    
    
    $
    645,428
    
    
    $
    749,295
    
    
    $
    609,465
 Depreciation expense for the periods ended March 31, 2004 and 2003
was $35,963 and $39,919 respectively.NOTE 5:
    
    ACCOUNTS PAYABLE AND ACCRUED EXPENSESAccounts payable and accrued expenses consist of the following at
March 31, 2004 and December 31, 2003:
 3/31/04
    
    12/31/03Accounts payable
    
    $
    350,334
    
    
    $
    255,890Accrued payroll and related costs
    
    
    45,265
    
    
    
    15,479Other accrued expenses
    
    
    236,927
    
    
    
    236,927Accrued interest
    
    
    260,679
    
    
    
    218,335Accrued expenses of OmniTrial BV
    
    
    127,519
    
    
    
    127,519Total accounts payable and accrued expenses
    
    $
    1,020,724
    
    
    $
    854,150
 Other accrued expenses consist primarily of placement agent fees
and expenses due on private placements of our debt and equity
securities that occurred during 2000 to 2003 and accrued legal fees
associated with the sale of Series C Convertible Preferred Stock.NOTE 6:
    
    EARNINGS PER SHAREBasic 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 46,891,795 have been omitted from the calculation of
dilutive EPS for the quarter ended March 31, 2004. A
reconciliation between numerators and denominators of the basic and
diluted earnings per shares is as follows:
 11




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) The Quarter Ended March 31, 2004
    
    The Quarter Ended March 31, 2003Income
    
    Shares
    
    Per-Share
    
    Income
    
    Shares
    
    Per-ShareNumerator
    
    Denominator
    
    Amount
    
    Numerator
    
    Denominator
    
    AmountBasic EPS
    
    $
    (607,955
    )
    
    
    18,699,277
    
    
    $
    (0.03
    )
    
    $
    (841,610
    )
    
    
    12,018,719
    
    
    $
    (0.07
    )Effect of Dilutive
Securities
None.
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    -0-Diluted EPS
    
    $
    (607,955
    )
    
    
    18,699,277
    
    
    $
    (0.03
    )
    
    $
    (841,610
    )
    
    
    12,018,719
    
    
    $
    (0.07
    )
 NOTE 7:
    
    NOTES PAYABLEAt March 31 2004, the Company owed $1,708,570 in notes payable. The table
below provides details as to the terms and conditions of the notes payable.
 Origination
    
    Due
    
    Interest
    
    
    
    
    
    Short
    
    LongNote Holder
    
    Date
    
    Date
    
    Rate
    
    Amount
    
    Term
    
    TermGuus van Kesteren
    
    
    8/30/2001
    
    
    
    4/1/2006
    
    
    
    8.0
    %
    
    $
    196,644
    
    
    $
    0
    
    
    $
    196,644Magnolia Private Fnd.
    
    
    8/30/2001
    
    
    
    4/1/2006
    
    
    
    8.0
    %
    
    
    209,534
    
    
    
    0
    
    
    
    209,534Magnolia Private Fnd.
    
    
    8/30/2001
    
    
    
    4/1/2006
    
    
    
    8.0
    %
    
    
    276,392
    
    
    
    0
    
    
    
    276,392Nico Letschert
    
    
    7/31/2002
    
    
    
    10/31/2005
    
    
    
    9.0
    %
    
    
    10,000
    
    
    
    0
    
    
    
    10,000Nico Letschert
    
    
    9/3/2002
    
    
    
    10/31/2005
    
    
    
    9.0
    %
    
    
    10,000
    
    
    
    0
    
    
    
    10,000Randall Smith
    
    
    11/25/2002
    
    
    
    1/31/2005
    
    
    
    9.0
    %
    
    
    6,000
    
    
    
    6,000
    
    
    
    0Guus van Kesteren
    
    
    12/26/2002
    
    
    
    10/31/2005
    
    
    
    9.0
    %
    
    
    50,000
    
    
    
    0
    
    
    
    50,000Cornelis Wit
    
    
    12/30/2002
    
    
    
    10/31/2005
    
    
    
    9.0
    %
    
    
    50,000
    
    
    
    0
    
    
    
    50,000Guy Brissette
    
    
    12/30/2002
    
    
    
    1/31/2005
    
    
    
    9.0
    %
    
    
    100,000
    
    
    
    100,000
    
    
    
    0Cornelis Wit
    
    
    6/30/2003
    
    
    
    10/31/2005
    
    
    
    9.0
    %
    
    
    100,000
    
    
    
    0
    
    
    
    100,000Noesis Capital
    
    
    6/30/2003
    
    
    
    1/31/2005
    
    
    
    9.0
    %
    
    
    250,000
    
    
    
    250,000
    
    
    
    0Cornelis Wit
    
    
    7/18/2003
    
    
    
    1/31/2005
    
    
    
    9.0
    %
    
    
    60,000
    
    
    
    60,000
    
    
    
    0Cornelis Wit
    
    
    8/18/2003
    
    
    
    1/31/2005
    
    
    
    9.0
    %
    
    
    56,000
    
    
    
    56,000
    
    
    
    0Cornelis Wit
    
    
    11/21/2003
    
    
    
    10/31/2005
    
    
    
    9.0
    %
    
    
    3,000
    
    
    
    0
    
    
    
    3,000Cornelis Wit
    
    
    10/13/2003
    
    
    
    10/31/2005
    
    
    
    9.0
    %
    
    
    30,000
    
    
    
    0
    
    
    
    30,000Carel Letschert
    
    
    11/7/2003
    
    
    
    1/31/2005
    
    
    
    9.0
    %
    
    
    25,000
    
    
    
    25,000
    
    
    
    0Noesis NV
    
    
    1/30/2004
    
    
    
    1/31/2006
    
    
    
    9.0
    %
    
    
    100,000
    
    
    
    0
    
    
    
    100,000Guus van Kesteren
    
    
    3/25/2004
    
    
    
    1/31/2006
    
    
    
    9.0
    %
    
    
    71,000
    
    
    
    0
    
    
    
    71,000Cornelis Wit
    
    
    3/31/2004
    
    
    
    1/31/2006
    
    
    
    9.0
    %
    
    
    105,000
    
    
    
    0
    
    
    
    105,000$
    1,708,570
    
    
    $
    497,000
    
    
    $
    1,211,570
 Promissory notes totaling $682,570 were amended and restated on
December 31, 2002, with new terms which included an extension of
the maturity date to October 31, 2004 with one half of the
principal payable upon the closing of any financing by the Company
resulting in gross proceeds in excess of $2,000,000.
 12




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) Promissory notes totaling $120,000 were amended and restated on
March 31, 2003, with new terms which included an extension of the
maturity date to October 31, 2005.A promissory note in the amount of $250,000 was issued to Noesis
Capital Corp. on June 30, 2003 in exchange for accounts payable and
accrued expenses owed in connection with financial advisory
services rendered and for placement agent fees earned in four
private placements of the Companys debt and equity securities.Promissory notes totaling $100,000 were amended and restated on
August 15, 2003, with new terms which included an extension of the
maturity date to January 31, 2005.Related Party Notes PayableIncluded in related party notes payables is a $196,644 promissory
note that was amended and restated on December 31, 2002 with new
terms which include an extension of the maturity date to December
31, 2004 with one half of the principal payable upon the closing of
any financing by the Company resulting in gross proceeds in excess
of $2,000,000. These notes were amended again in December 2003
extending the maturity date to April 2006.During March 2002, the Company borrowed $2,341 from Randall Smith,
the Companys Chairman and Chief Technology Officer. This amount
was repaid without interest on April 12, 2002. In addition, the
Company borrowed $6,000 from Mr. Smith on November 25, 2002 and
this amount remained outstanding as of March 31, 2004.During December 2002, the Company borrowed $50,000 from Cornelis
Wit, the Companys President and Chief Executive Officer and a
Director. This amount was borrowed under a promissory note bearing
interest at a rate of 9% per annum, payable on March 31, 2003.
This note was amended and restated on March 31, 2003 extending the
maturity date of the note to October 31, 2005.During December 2002, the Company borrowed $50,000 from Guus van
Kesteren, a Director of the Company. This amount was borrowed
under a promissory note bearing interest at a rate of 9% per annum,
payable on March 31, 2003. This note was amended and restated on
March 31, 2003 extending the maturity date of the note to October
31, 2005.During March 2003, the Company borrowed $2,600 from Cornelis Wit,
the Companys President and Chief Executive Officer and a Director.
This amount was repaid without interest on April 3, 2003.During June 2003, the Company borrowed $100,000 from Cornelis Wit,
the Companys President and Chief Executive Officer and a Director.
This amount was borrowed under a promissory note bearing interest
at a rate of 9% per annum, payable on October 31, 2005.During July and August 2003, the Company borrowed $116,000 from
Cornelis Wit, the Companys President and Chief Executive Officer
and a Director. This amount was borrowed under two promissory
notes bearing interest at a rate of 9% per annum, payable on
January 31, 2005.
 13




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) During October 2003, the Company borrowed $16,000 from Cornelis
Wit, the Companys President and Chief Executive Officer and a
Director. The Company repaid $13,000 of this amount during
November and December 2003 and issued a promissory note in the
amount of $3,000 bearing interest at a rate of 9% per annum,
payable on October 31, 2005.During October and November 2003, the Company borrowed $30,000 from
Cornelis Wit, the Companys President and Chief Executive Officer
and a Director. This amount was borrowed under promissory notes
bearing interest at a rate of 9% per annum, payable on October 31,
2005.During October 2003, the Company borrowed $16,000 from Guus van
Kesteren, a Company Director. This amount was borrowed under a
promissory note bearing interest at a rate of 9% per annum, payable
on October 31, 2005. On December 31, 2003, Mr. van Kesteren
elected to convert this note payable into common stock of the
Company at a conversion price of $0.25 per share. The Company
issued 64,000 shares of restricted common stock. in connection with
this conversion.During February and March 2004, the Company borrowed $71,000 from
Guus van Kesteren, a Company Director. This amount was borrowed
under a promissory note bearing interest at a rate of 9% per annum,
payable on January 31, 2006.From January to March 2004, the Company borrowed $105,000 from
Cornelis Wit, the Companys President and Chief Executive Officer
and a Director. This amount was borrowed under two promissory
notes bearing interest at a rate of 9% per annum, payable on
January 31, 2006.NOTE 8:
    
    CONVERTIBLE NOTESDuring the first quarter of 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 Company also granted
the agent the option to purchase 250,000 common shares at $.001 per
share. The agent exercised the option. The net proceeds to the
Company were $742,875. 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. As of March 31, 2004 approximately
$487,500 of the Convertible Notes had been converted into 390,000
shares of common stock of the Company leaving an outstanding
principal balance of $375,000.The Company is currently in default on interest payments owed
totaling $89,004 on its 10% Convertible Notes. The terms of the
notes provide a payment grace period of thirty days in which to
make required semi-annual interest payments. The company has been
in default since January 30, 2002. At the option of the note
holders the full amount of the convertible notes could be declared
in default.NOTE 9:
    
    COMMITMENTS AND CONTINGENCIESThe Company currently leases office space under an operating lease.
The minimum future lease payments required under the Companys
operating leases at March 31, 2004 are as follows:
 2004
    
    $
    85,7072005
    
    
    54,5222006
    
    
    02007
    
    
    02008
    
    
    0Total
    
    $
    140,229
 14




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) In addition, to annual base rental payments, the Company pays for
the operating expenses associated with its leased office space and
is responsible for any escalation in operating expenses as
determined in the lease. Rental expense was $20,273 and $19,264
for the quarters ended March 31, 2004 and 2003.CONTINGENT LIABILITIESOn 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. The Company claimed
that certain assets in the possession 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 a payment of $10,000 that was made on or about July 5, 2001.
The Company does not expect to incur any additional liability in
this bankruptcy proceeding.EMPLOYMENT AGREEMENTSIn August 2003, we entered into an employment agreement with
Cornelis F. Wit to serve as our Chief Executive Officer and
President through December 31, 2004. Mr. Wit receives an annual
salary of $175,000 payable in cash and/or stock plus a bonus tied
to our operating results. As part of the agreement incentive
options are awardable under the agreement based upon sales and cash
flow objectives. In the event that the we consummate a transaction
with a third party resulting in the sale, merger, consolidation,
reorganization or other business combination involving all or a
majority of our business, assets or stock, whether effected in one
transaction or a series of transactions due to the initiative of
Mr. Wit (whether or not during the term of the agreement), Mr. Wit
will receive a fee equal to 2% of the aggregate consideration.
The agreement also provides, among other things, for participation
in employee benefits available to employees and executives. Under
the terms of the agreement, we may terminate Mr. Wits employment
upon 30 days notice of a material breach and Mr. Wit may terminate
the agreement under the same terms and conditions. The employment
agreement contains customary non-disclosure provisions, as well as
a one year non-compete clause if Mr. Wit leaves the company
voluntarily or a six month non-compete clause following his
termination by us.In September 2001, we entered into a three-year employment
agreement with Mr. Randall Smith to serve as our Chief Technology
Officer. Under the terms of the agreement, as compensation for his
services, Mr. Smith receives an annual salary of $181,500 as of
January 1, 2004 to be paid in the form of cash and/or stock, as
agreed upon by the parties, and he is eligible to receive a bonus
based upon achieving technology related milestones. Mr. Smith was
granted an aggregate of 210,000 options under our 1998 Stock
Incentive Plan. The options, which vest 70,000 on the date of the
employment agreement, 70,000 on September 30, 2002, and 70,000 on
September 30, 2003, are exercisable at the market price plus 10%
per share, or $0.43 per share for five years from the date of
vesting. The agreement also provides, among other things, for
participation in employee benefit plans or programs applicable to
employees and executives. Under the terms of the agreement, we may
terminate the employment of Mr. Smith upon 30 days notice of a
material breach and Mr. Smith may terminate the agreement under the
same terms and conditions. If Mr. Smith is terminated by us for
any reason other than for cause, we must pay him severance benefits
equal to six months salary. The employment agreement contains
customary non-disclosure provisions, as well as a one year
non-competition restriction following the termination of the
agreement.
 15




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) In September 2001, we entered into a three-year employment
agreement with Mr. Ronald Linares to serve as our Chief Financial
Officer. Under the terms of this agreement, Mr. Linares receives
an annual salary of $161,000 as of January 1, 2004 to be paid in
the form of cash and/or stock, as agreed upon by the parties, and
he is eligible to receive additional incentive compensation based
upon achieving financial milestones. Mr. Linares was granted an
aggregate of 210,000 options under our 1998 Stock Incentive Plan.
The options, which vest 70,000 on the date of the employment
agreement, 70,000 on September 30, 2002, and 70,000 on September
30, 2003, are exercisable at the market price plus 10% per share or
$0.43 per share, for five years from the date of vesting. The
agreement also provides, among other things, for participation in
employee benefit plans or programs applicable to employees and
executives. Under the terms of the agreement, we may terminate the
employment of Mr. Linares upon 30 days notice of a material breach
and Mr. Linares may terminate the agreement under the same terms
and conditions. If Mr. Linares is terminated by us for any reason
other than for cause, we must pay him severance benefits equal to
six months salary. The employment agreement contains customary
non-disclosure provisions, as well as a one year non-competition
restriction following the termination of the agreement.In January 2003, we entered into a three-year employment agreement
with Mr. Charles Beardsley to serve as our Senior Vice President
for Sales and Marketing. Under the terms of this agreement, Mr.
Beardsley currently receives an annual salary of $165,000 to be paid in the
form of cash and/or stock, as agreed upon by the parties, and he is
eligible to receive additional incentive compensation based upon
achieving financial milestones. Mr. Beardsley is eligible for a
commission, payable on a quarterly basis, equal to 2% of the
Companys Net Operating Income as defined in an exhibit to his
employment contract. Mr. Beardsley was granted an aggregate of
150,000 options under our 1998 Stock Incentive Plan. The options,
which vest 50,000 annually beginning with January 2, 2004, are
exercisable at a price of $0.25 per share, for five years from the
date of vesting. Mr. Beardsley received a grant of 100,000 shares
of restricted common stock upon execution of his employment
agreement. The agreement also provides, among other things, for
participation in employee benefit plans or programs applicable to
employees and executives. Under the terms of the agreement, we may
terminate the employment of Mr. Beardsley upon 30 days notice of a
material breach and Mr. Beardsley may terminate the agreement under
the same terms and conditions. If Mr. Beardsley is terminated by
us for any reason other than for cause, we must pay him severance
benefits equal to twelve months salary. The employment agreement
contains customary non-disclosure provisions.FINANCIAL ADVISORY AGREEMENTDuring March 2002, the Company entered into a one-year financial
advisory agreement with Noesis Capital to assist the Company in
performing certain financial advisory services including the sale
of securities, and the possible sale, merger or other business
combination involving the Company. Pursuant to this agreement, the
Company is obligated to pay $90,000 in professional fees during the
one-year term of the agreement. The advisory agreement was
extended for a twelve month term effective June 15, 2003.NOTE 10:
    
    RELATED PARTY TRANSACTIONSCornelis F. Wit, our President and Chief Executive Officer and a
member of our board of directors served as President of Corporate
Finance of Noesis Capital Corp. from March 1995 to September 2000.
Noesis Capital Corp., a NASD member firm, has served as placement
agent for us in six private placements of securities which occurred
between September 1999 and December 2003 Guus van Kesteren, a
member of our board of directors, is a consultant to Noesis Capital
Corp.
 16




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) Between February 2001 and July 2001, we borrowed an aggregate of
$190,000 from him under promissory notes which bore interest of 12%
per annum. These promissory notes were amended and restated on
August 30, 2001 in the amount of $196,644 with new terms which
included an interest rate of 8% per annum, and with one half of the
principal payable upon the closing of any financing by us resulting
in gross proceeds in excess of $2,000,000, and the balance of the
principal together with accrued interest payable no later than
August 30, 2003. These notes were amended and restated on December
31, 2002 extending the maturity date of the notes to October 31,
2004. These notes were amended again in December 2003 extending
the maturity date to April 2006.During March 2002, we borrowed $2,341 from Randall G. Smith, our
Chairman of the board and Chief Technology Officer. This amount
was repaid without interest on April 12, 2002. In addition, we
borrowed $6,000 without interest from Mr. Smith on November 25,
2002. In March 2003 this note was amended and restated extending
the maturity date to January 31, 2005.In September and July of 2002, we borrowed an aggregate of $20,000
without interest from Nico Letschert, an officer, director and
principal shareholder of Noesis Capital Corp., one of our principal
stockholders. This amount is due and payable January 31, 2005.In December 2002, we borrowed $50,000 from Cornelis Wit, our
President and Chief Executive Officer and a member of our board of
directors. This amount was borrowed under a promissory note
bearing interest at a rate of 9% per annum, payable on March 31,
2003. This note was amended and restated on March 31, 2003
extending the maturity date of the note to October 31, 2005.In December 2002, we borrowed $50,000 from Guus van Kesteren a
member of our board of directors. This amount was borrowed under a
promissory note bearing interest at a rate of 9% per annum, payable
on March 31, 2003. This note was amended and restated on March 31,
2003 extending the maturity date of the note to October 31, 2005.In March 2003, we borrowed $2,600 from Cornelis Wit, our Chief
Executive Officer and President and a member of our board of
directors. This amount was repaid without interest on April 3,
2003.In June 2003, we borrowed $100,000 from Cornelis Wit, our President
and Chief Executive Officer and a member of our board of directors.
This amount was borrowed under a promissory note bearing interest
at a rate of 9% per annum, payable on October 31, 2005.In July and August 2003, we borrowed $116,000 from Cornelis Wit,
our President and Chief Executive Officer and a member of our board
of directors. This amount was borrowed under two promissory notes
bearing interest at a rate of 9% per annum, payable on January 31,
2005.During October 2003, the Company borrowed $16,000 from Cornelis
Wit, the Companys President and Chief Executive Officer and a
Director. The Company repaid $13,000 of this amount during
November and December 2003 and issued a promissory note in the
amount of $3,000 bearing interest at a rate of 9% per annum,
payable on October 31, 2005.During October and November 2003, the Company borrowed $30,000 from
Cornelis Wit, the Companys President and Chief Executive Officer
and a Director. This amount was borrowed under promissory notes
bearing interest at a rate of 9% per annum, payable on October 31,
2005.
 17




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) During October 2003, the Company borrowed $16,000 from Guus van
Kesteren, a Company Director. This amount was borrowed under a
promissory note bearing interest at a rate of 9% per annum, payable
on October 31, 2005. On December 31, 2003, Mr. van Kesteren
elected to convert this note payable into common stock of the
Company at a conversion price of $0.25 per share. The Company
issued 64,000 shares of restricted common stock in connection with
this conversion.During February and March 2004, the Company borrowed $71,000 from
Guus van Kesteren, a Company Director. This amount was borrowed
under a promissory note bearing interest at a rate of 9% per annum,
payable on January 31, 2006.From January to March 2004, the Company borrowed $105,000 from
Cornelis Wit, the Companys President and Chief Executive Officer
and a Director. This amount was borrowed under two promissory
notes bearing interest at a rate of 9% per annum, payable on
January 31, 2006.NOTE 11:
    
    POST-RETIREMENT EMPLOYEE BENEFITSThe 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s 106 or 112.NOTE 12:
    
    STOCKHOLDERS EQUITY (DEFICIT)Our authorized capital stock consists of 150,000,000 shares of
common stock, $.001 par value per share, and 10,000,000 shares of
preferred stock, par value $.001 per share, of which 5,000,000
shares have been designated as 5% Series A Preferred, 230,000
shares have been designated as Series B Preferred Stock and 747,500
shares have been designated as Series C Preferred Stock.As of March 31, 2004 we had the following outstanding securities:
 o
    
    18,929,277 shares of common stock issued and outstanding;o
    
    16,751,296 warrants issued and outstanding to purchase shares of our common stock;o
    
    4,215,224 shares of our Series A Preferred Stock issued and outstanding,o
    
    131,250 shares of our Series B Preferred Stock issued and outstanding;o
    
    337,150 shares of our Series C Preferred Stock issued and outstanding;o
    
    a Series B Placement Agent Unit Option;o
    
    a Series C Placement Agent Unit Option; ando
    
    10% Convertible Notes.
 Common StockHolders 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,
Series B Preferred Stock holders and Series C 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.
 18




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) 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.From April 2003 through May, 2003, we sold an aggregate of
1,400,000 shares of our common stock and warrants to purchase
700,000 shares of our common stock to accredited investors
resulting in gross proceeds of $350,000. The warrants are
exercisable at an exercise price of $0.25 per share expiring May
2008. None of these investors were our affiliates. Noesis Capital
Corp., an NASD member firm, acted as placement agent in the
offering and as compensation therefore received a commission equal
to 8% of the sales made by it, or an aggregate of $28,000, a
non-accountable expense allowance equal to 2% of the sales made by
it, or an aggregate of $7,000 and a warrant to purchase at $0.25
per share, 10% of the shares sold, or 140,000 shares of our common
stock. An estimated fair value of $32,115 of the warrants granted
to Noesis Capital was calculated using the Black-Scholes pricing
model.From July 2003 through December 2003, we sold an aggregate of
2,484,000 shares of our common stock resulting in gross proceeds of
$621,000. None of these investors, other than Guus van Kesteren, a
Director, were our affiliates. Noesis Capital Corp., an NASD member
firm, acted as placement agent in the offering and as compensation
therefore received a commission equal to 8% of the sales made by
it, or an aggregate of $48,400, a non-accountable expense allowance
equal to 2% of the sales made by it, or an aggregate of $12,100 and
a warrant to purchase at $0.25 per share, 10% of the shares sold,
or 248,400 shares of our common stock. An estimated fair value of $56,982 was calculated
for the warrants granted to Noesis Capital using the Black-Scholes option pricing model.Preferred stockOur 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, ando
    
    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.
 19




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) Series A Preferred StockIn 1999, our board of directors designated 5,000,000 shares of our
preferred stock as 5% Series A Convertible Preferred Stock (Series
A Preferred Stock), of which 4,215,224 shares are issued and
outstanding.The designations, rights and preferences of the Series A Preferred
include:
 o
    
    the shares are not redeemable,o
    
    each share of Series A Preferred Stock is
convertible into shares of our common stock at any time at
the option of the holder at a conversion price of $1.50 per
share, or if not so converted after one year from issuance,
at any time at our option if the closing bid price of our
common stock has exceeded $3.00 for 20 consecutive trading
days, our common stock is listed on The Nasdaq Stock Market
or other national stock exchange, and the shares of common
stock issuable upon conversion of the Series A Preferred
Stock are registered under a registration statement,o
    
    the conversion price has certain
anti-dilution protections for any stock splits, stock
dividends, and corporate reorganizations, and certain other
corporate transactions and issuances of securities at below
the applicable conversion price per share. The Series A
Preferred Stockholders have waived their rights to an
anti-dilution adjustment reducing their conversion price as
a result of the issuance of the Series B Preferred Stock
and Series C Preferred Stock,o
    
    the shares of Series A Preferred Stock pay
a cumulative dividend at a rate of 5% per annum based on
the stated value of $1.00 per share, payable when and as
declared by the board of directors, or upon conversion or
liquidation. Dividends on the Series A Preferred Stock
have priority to our common stock and junior to Series B
Preferred Stock and Series C Preferred Stock. At our
option, dividends can be paid in cash or shares of common
stock valued at the conversion price of the Series A
Preferred Stock,o
    
    in the event of our liquidation or winding
up, each share of Series A Preferred Stock has a
liquidation preference equal to $1.00 per share,o
    
    the holders of the Series A Preferred Stock
are entitled to vote together with the holders of our
common stock, on the basis of one vote for each share of
common stock issuable upon the conversion of the Series A
Preferred Stock.
 There were arrearages of $341,522 and $290,322 on the Series A
Preferred Stock for undeclared dividends as of March 31, 2004 and
December 31, 2003.In addition, the holders of the Series A Preferred Stock were
granted certain demand and piggy-back registration rights for the
shares of our common stock issuable upon the conversion of the
Series A Preferred Stock.Series B Preferred StockIn August 2001, our board of directors designated 200,000 shares of
our preferred stock as Series B Convertible Preferred Stock
(Series B Preferred Stock). A Corrected Certificate of
Designations was filed on February 7, 2002 with the Delaware
Secretary of State increasing the number of shares authorized as
Series B Preferred Stock to 230,000 shares, of which 131,250 shares
are issued and outstanding.
 20




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) The designations, rights and preferences of the Series B Preferred
Stock include:
 o
    
    the stated value of each share is $10.00 per share,o
    
    the shares are not redeemable,o
    
    each share of Series B Preferred Stock is
convertible into shares of our common stock at the option
of the holder at any time commencing January 31, 2002 at
the option of the holder at $0.25 per share, as adjusted,
and the shares automatically convert, subject to
limitations based on trading volume, into shares of our
common stock at $0.25 per share at such time as we complete
a public offering raising proceeds in excess of $25 million
at an offering price of at least $0.75 per share. We may
require all outstanding shares of the Series B Preferred
Stock to convert in the event the closing bid price of our
common stock exceeds $0.50 for 20 consecutive trading days,
and our common stock has been listed on The Nasdaq Stock
Market or other comparable national stock exchange or the
OTC Bulletin board and a registration statement registering
the shares of common stock issuable upon conversion of the
Series B Preferred Stock has been declared effective,o
    
    the conversion price has certain
anti-dilution protections for any stock splits, stock
dividends, and corporate reorganizations, and certain other
corporate transactions and issuances of securities at below
the applicable conversion price per share or market value
of the common stock,o
    
    the shares of Series B Preferred Stock pay
a cumulative dividend at a rate of 8% per annum based on
the stated value of $10.00 per share, payable when and as
declared by the board of directors, or upon conversion or
liquidation. At our option, dividends can be paid in cash
or shares of common stock valued at the conversion price of
the Series B Preferred Stock,o
    
    each share of Series B Preferred Stock will
rank senior to our Series A Preferred and pari passu with
our Series C Preferred Stock,o
    
    in the event of our liquidation or winding
up, each share of Series B Preferred Stock has a
liquidation preference equal to $10.00 per share plus
accrued and unpaid dividends, ando
    
    the holders of the Series B Preferred Stock
are entitled to vote, together with the holders of our
common stock, on the basis of one vote for each share of
common stock issuable upon the conversion of the Series B
Preferred Stock,
 There were arrearages of $393,604 and $365,930 on the Series B
Preferred Stock for undeclared dividends as of March 31, 2004 and
December 31, 2003.In addition, the holders of the Series B Preferred Stock were
granted certain mandatory and piggy-back registration rights for
the shares of our common stock issuable upon the conversion of the
Series B Preferred Stock and are entitled to vote one member to our
board of directors.Series C Preferred StockIn March 2002, our board of directors designated 747,500 shares of
our preferred stock as Series C Convertible Preferred Stock, of
which 337,150 shares are issued and outstanding.The designations, rights and preferences of the Series C Preferred
Stock include:
 o
    
    the stated value of each share is $10.00 per share,o
    
    the shares are not redeemable,
 21




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OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) o
    
    each share of Series C Preferred Stock is
convertible at any time, at the option of the holder, into
a number of shares of common stock determined by dividing
the stated value per share of the Series C Preferred Stock
by $0.25, which is the Series C Conversion Price. The
Series C Preferred Stock will automatically convert,
subject to limitations based on trading volume, into shares
of our common stock upon a public offering of our
securities raising gross proceeds in excess of $25,000,000
at a per share price greater than 2.5 times the Series C
Conversion Price per share, as adjusted for any stock
split, stock dividend, recapitalization, or other similar
transaction. In addition, the Series C Preferred Stock
will automatically convert into shares of our common stock
at the Series C Conversion Price at such time as the
closing bid price for our common stock has traded at two
times the then prevailing Series C Conversion Price for a
period of 20 consecutive trading days, provided that (i) a
public trading market exists for our common stock on a
national securities exchange, the Nasdaq Stock Market, or
the over the counter market; and (ii) the Conversion Shares
have been registered for resale and are not subject to any
lock-up and the number of shares of the Series C Preferred
Stock which can be converted in any 30-day period will be
limited to the number of shares of common stock underlying
the Series C Preferred Stock equal to 10 times the average
daily trading volume during the 20-day look-back period set
forth above,o
    
    the conversion price has certain
anti-dilution protections for any stock splits, stock
dividends, and corporate reorganizations, and certain other
corporate transactions and issuances of securities at below
the applicable conversion price per share or market value
of the common stock,o
    
    the shares of Series C Preferred Stock pay
a cumulative dividend at a rate of 8% per annum based on
the stated value of $10.00 per share, payable when and as
declared by the board of directors, or upon conversion or
liquidation. At our option, dividends can be paid in cash
or shares of common stock valued at the conversion price of
the Series C Preferred Stock.o
    
    each share of Series C Preferred Stock will
rank pari passu with our Series B Preferred Stock and
senior to our Series A Preferred Stock,o
    
    in the event of our liquidation or winding
up, each share of Series C Preferred Stock has a
liquidation preference equal to $10.00 per share plus
accrued and unpaid dividends, ando
    
    the holders of the Series C Preferred Stock
are entitled to vote, together with the holders of our
common stock, on the basis of one vote for each share of
common stock issuable upon the conversion of the Series C
Preferred Stock.
 There were arrearages of $389,975 and $322,730 on the Series C
Preferred Stock for undeclared dividends as of March 31, 2004 and
December 31, 2003.In addition, the holders of the Series C Preferred Stock were
granted certain mandatory and piggy-back registration rights
covering the shares of our common stock issuable upon the
conversion of the Series C Preferred Stock.WarrantsWe have issued and outstanding warrants to purchase a total of
16,751,296 shares of our common stock, including:
 o
    
    warrants to purchase 8,000,000 shares of
our common stock at an exercise price of $.25 per share
expiring September 2006 which were issued by us in
connection with the Series B Preferred Stock offering,
which warrants contain a cashless exercise provision. The
holders of the warrants were granted certain mandatory and
piggy-back registration rights covering the shares of our
common stock issuable upon the exercise of the warrants.
 22




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) o
    
    warrants to purchase 919,896 shares of our
common stock at exercise prices ranging from $.50 to $10.00
per share expiring periodically through July 2006.o
    
    warrants to purchase 6,743,000 shares of
our common stock at an exercise price of $.25 per share
expiring May 2007 which were issued by us in connection
with the Series C Preferred Stock offering, which warrants
contain a cashless exercise provision. The holders of the
warrants were granted certain mandatory and piggy-back
registration rights covering the shares of our common stock
issuable upon the exercise of the warrants.o
    
    warrants to purchase 700,000 shares of our
common stock at an exercise price of $.25 per share
expiring May 2008 which were issued by us in connection
with a private placement of common stock, which warrants
contain a cashless exercise provision.o
    
    warrants to purchase 388,400 shares of our
common stock at an exercise price of $.25 per share
expiring December 2008 which were issued by us to the
placement agent of two offerings of our common stock that
were conducted during 2003.
 Series B Placement Agent Unit OptionIn connection with our September 2001 private placement of Series B
Preferred Stock, we issued the placement agent an option to
purchase 2.7 units. Each unit is exercisable at $100,000 per unit
and consists of 10,000 shares of Series B Preferred Stock and
5-year warrants to purchase 400,000 shares of common stock at an
exercise price of $0.25 per share. The Placement Agent Unit Option
contains a cashless exercise provision. The holder of the
Placement Agent Unit Option was granted certain mandatory and
piggy-back registration rights covering the shares of our common
stock issuable upon conversion of the Series B Preferred Stock and
exercise of the warrants underlying the Placement Agent Unit
Option. The Placement Agent Unit Option expires August 31, 2006.Series C Placement Agent Unit OptionIn connection with our March 2002 to March 2003 private placement
of Series C Preferred Stock, we issued the placement agent an
option to purchase 2.48 units. Each unit is exercisable at
$100,000 per unit and consists of 10,000 shares of Series C
Preferred Stock and 5-year warrants to purchase 200,000 shares of
common stock at an exercise price of $0.25 per share. The Placement
Agent Unit Option contains a cashless exercise provision. The
holder of the Placement Agent Unit Option was granted certain
mandatory and piggy-back registration rights covering the shares of
our common stock issuable upon conversion of the Series C Preferred
Stock and exercise of the warrants underlying Placement Agent Unit
Option. The Placement Agent Unit Option expires March 31, 2008.10% Convertible NoteFrom February 1999 to May 1999, we issued 10% convertible notes
(10% Convertible Notes) in the aggregate principal amount of
$862,500. The 10% Convertible Notes pay 10.00% interest and are due
and payable on June 2004. The holders have the right to convert
the principal and interest amount into shares of our common stock
at a rate of $1.25 per share. We have the right to prepay the
principal amount at any time with 60 days prior written notice.
During 2000 and 2001, certain of the note holders converted an
aggregate of $487,500 principal amount of the notes according to
their terms into 390,000 shares of our common stock at a conversion
price of $1.25 per share. In addition, the holders of the 10%
Convertible Notes were granted certain demand and piggy-back
registration rights for the shares of our common stock issuable
upon the conversion of the 10% Convertible Notes.
 23




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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) Stock Option PlanIn 1998, the Companys Board of Directors approved the OmniComm
Systems 1998 Stock Option Plan, (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 the Company may grant options to purchase up to
5,000,000 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:
 Quarter ended March 31,
    
    Year ended December 31,2004
    
    2003Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Options
    
    PriceOutstanding at beginning of period
    
    
    3,593,500
    
    
    $
    0.83
    
    
    
    2,785,039
    
    
    $
    1.00Granted
    
    
    -0-
    
    
    $
    0.00
    
    
    
    1,471,000
    
    
    $
    0.25Exercised
    
    
    -0-
    
    
    $
    0.00
    
    
    
    40,000
    
    
    $
    0.25Cancelled
    
    
    223,000
    
    
    $
    0.29
    
    
    
    622,539
    
    
    $
    0.27Outstanding at end of period
    
    
    3,370,500
    
    
    $
    0.72
    
    
    
    3,593,500
    
    
    $
    0.83Exercisable at end of period
    
    
    2,973,500
    
    
    $
    0.59
    
    
    
    3,099,500
    
    
    $
    0.53
 The following table summarizes information about stock options
outstanding at March 31, 2004:
 Outstanding
    ExercisableWeightedAverageRemaining
    
    Weighted
    
    
    
    
    
    WeightedYears of
    
    Average
    
    
    
    
    
    AverageRange of
    
    Number of
    
    Contractual
    
    Exercise
    
    Number of
    
    ExerciseExercise Prices
    
    Options
    
    Life
    
    Price
    
    Options
    
    Price$0.25 - $0.47
    
    
    2,785,500
    
    
    
    4.84
    
    
    $
    0.30
    
    
    
    2,388,500
    
    
    $
    0.31$0.50 - $0.80
    
    
    257,000
    
    
    
    6.02
    
    
    $
    0.54
    
    
    
    257,000
    
    
    $
    0.54$1.00 - $2.75
    
    
    328,000
    
    
    
    1.36
    
    
    $
    2.09
    
    
    
    328,000
    
    
    $
    2.09
 Accounting for Stock Based CompensationAt March 31, 2004, the Company has one stock-based compensation
plan which is described more fully above. The Company accounts for
its plan under the recognition and measurement principles of APB
Opinion No 25, Accounting for Stock Issued to Employees, (APB
25) and related interpretations. No stock-based employee
compensation cost is reflected in net income, as all options
granted under the plan had an exercise price equal to or above the
market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and
earnings per share if the company had applied the fair value
recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensationto stock-based employee compensation.
 24




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OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued)

Quarters EndedMarch 31,(in thousands, except for per share
data)
    
    2004
    
    2003Net loss available to common stockholdersAs reported
    
    $
    (608
    )
    
    $
    (842
    )Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (9,623
    )
    
    
    (9,135
    )Pro forma net loss available to common stockholders
    
    $
    (10,231
    )
    
    $
    (9,977
    )Weighted average number of common shares
outstanding used to compute net income (loss) per
common sharebasic and diluted
    
    
    18,699
    
    
    
    12,019Basic and diluted net loss per shareAs reported
    
    $
    (0.03
    )
    
    $
    (0.07
    )Pro forma
    
    $
    (0.55
    )
    
    $
    (0.83
    )


The estimated fair value of each OmniComm option granted is
calculated using the Black-Scholes pricing model. The weighted
average assumptions used in the model were as follows:


Quarters EndedMarch 31,2004
    
    2003Risk-free interest rate
    
    
    2.90
    %
    
    
    5.00
    %Expected years until exercise
    
    6 Years
    
    6 YearsExpected stock volatility
    
    
    117.0
    %
    
    
    150.0
    %Dividend yield
    
    
    0
    %
    
    
    0
    %


Other Stock Based CompensationDuring 2003, the Company issued an aggregate of 100,000 shares of
restricted common stock to employees. The stock issued had a fair
market value of $25,000 and was issued under the terms of an
employment contract.NOTE 13:
    
    OMNITRIAL B.V. BANKRUPTCYOn 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. The Company claimed
that certain assets in the possession 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 a payment of $10,000.


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##### Table of Contents



OMNICOMM SYSTEMS, INC.
NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)
(continued) NOTE 14:
    
    INCOME TAXESThe tax expense (benefit) for income taxes differs from the amount
computed by applying the statutory federal income tax rate of 34%
to income (loss) before provision (benefit) for income taxes as
follows:
 3/31/04
    
    3/31/03Current tax expense (benefit):Income tax at statutory rates
    
    $
    -0-
    
    
    $
    -0-Deferred tax expense (benefit):Amortization
of goodwill and covenant
    
    
    -0-
    
    
    
    -0-Operating loss carryforward
    
    
    (173,789
    )
    
    
    (208,269
    )(173,789
    )
    
    
    (208,269
    )Valuation allowance
    
    
    173,789
    
    
    
    208,269Total tax expense (benefit)
    
    $
    -0-
    
    
    $
    -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:
 3/31/04
    
    12/31/03Deferred tax assets:Amortization of intangibles
    
    $
    283,698
    
    
    $
    283,698Operating loss carryforwards
    
    
    6,415,335
    
    
    
    6,241,546Gross deferred tax assets
    
    
    6,699,033
    
    
    
    6,525,244Valuation allowance
    
    
    (6,699,033
    )
    
    
    (6,525,244
    )Net deferred tax asset
    
    $
    -0-
    
    
    $
    -0-
 The Company has net operating loss carryforwards (NOL) for income
tax purposes of approximately $17,036,366. This loss is allowed to
be offset against future income until the year 2023 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
through March 31, 2004.NOTE 15:
    
    SUBSEQUENT EVENTSThe Company had a recorded liability of $134,116 at March 31, 2004
for federal employment taxes. The Company had fully satisfied the
liability as of April 30, 2004.The Company is currently in arrears on interest payments owed
totaling $98,365 on 10% Convertible Notes. The terms of the notes
provide a payment grace period of thirty days in which to make the
required semi-annual interest payments. The Company has been in
default since January 30, 2002 in the payment of accrued interest
and at the option of the note holder the full amount of the
convertible notes could be declared in default.
 26




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS General The following information should be read in conjunction with the Consolidated
Interim Financial Statements and Notes thereto and other information set forth
in this report. Forward-Looking Statements Statements contained in this Form 10-QSB 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, such as statements
relating to timing, costs and of the acquisition of, or investments in,
existing business, the revenue or profitability levels of such businesses, and
other matters contained in this Form 10-QSB 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-QSB. 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 biotechnology companies, clinical research organizations, and other
clinical trial sponsors via our Internet-based software, TrialMaster.
TrialMaster allows clinical trial sponsors and investigative sites to securely
collect, validate, transmit, and analyze clinical study data including patient
histories, patient dosing, adverse events, and other clinical trial
information. Medical Error Reporting System (MERS-TH) was co-developed with
Columbia University during 2002. MERS-TH has been designed to provide U.S. and
European hospitals and medical centers, a standardized system for collecting
data on medical errors, adverse events and near misses. Medical errors lead to
between 40,000 and 90,000 deaths annually and cost the U.S. health care system
over $33 billion annually. All of our personnel are involved in the development
and marketing of TrialMaster and MERS-TH. The Quarter Ended March 31, 2004 Compared With the Quarter Ended March 31, 2003 Results of Operations Revenues for the quarter ended March 31, 2004 were $266,561 compared to
$201,130 for the same period in 2003, an increase of 32.5%. The revenue
increase can be attributed to an increase in the number of on-going projects in
2004 (21) versus 2003 (14) and to the increase in pricing power we have
developed. The market has accepted EDC services as an efficient means of
collecting clinical trial data. At this point our segment is being evaluated
on a company-by-company basis. EDC use has become more prevalent and trial
sponsors are now analyzing the merits of each EDC providers package of
products and services. We have found EDC users receptive to our products and
believe our mix of technology and customer oriented design approach allow us to
compete
favorably. The combination of a flexible design architecture, robust features
and competitive pricing of TrialMaster provide an attractive alternative to
potential clients when compared to the products offered by our competitors. 27




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##### Table of Contents



We are building upon the momentum from fiscal 2003 through the acquisition of
new clients and via repeat engagements with existing clients. We are placing
emphasis on broadening the market segments that we market our products to. We
are continuing to seek strategic partnerships with CROs. Working with CROs
brings our services to their built-in client base and allows us to leverage
their sales efforts by bundling TrialMaster as part of their service offerings.
Conversely, we can provide the CRO potential new clients for their non-data
collection services. CROs became more receptive to the EDC process
during 2003 and we expect their adoption rate to continue increasing. We
believe that the adoption of EDC by CROs is a significant factor to the
overall success of EDC as a data collection tool. We believe the broadened
marketing horizon provides us some insulation from downturns in any specific
segment for clinical trial services and also affords us some ability to
cross-market services between our different clients. We expect the adoption
rate to increase as clinical trial sponsors continue seeking methods to reduce
their R & D costs and more importantly as they continue seeking a way to make
the clinical trial process more efficient. The general weakness exhibited in the economy from 2001 to the present has not
diminished the level of activity in new drug therapy research since the drug
and medical device manufacturers are continuously forced to find replacements
for therapies coming under the pressures exerted by the loss of patent
protection. We do believe, however, that the broad perception that small,
high-technology firms are operating under severe financial constraints has
caused slower adoption of EDC. More specifically, we have found that potential
clients are apprehensive of doing business with us because of our going-concern
issues. We believe we have had some success in addressing this issue and that
our recent success in securing new clients in conjunction with the resulting
improved financial results will lessen the effect this has on our sales
efforts. TrialMaster is currently being sold as an application service provider (ASP)
that provides EDC and other services such as an enterprise management suite
which assists its clients in the pharmaceutical, biotechnology and medical
device industries in accelerating the completion of clinical trials. TrialMaster contracts provide for pricing that is based on both the size and
duration of the clinical trial. Size parameters include the number of case
report forms used to collect data and the number of sites utilizing
TrialMaster. The client will pay a trial setup fee based on the previously
mentioned factors, and then pay an on-going maintenance fee for the duration of
the clinical trial that provides software, network and site support during the
trial. Generally, these contracts will range in duration from four months to
several years. Setup fees are generally earned prior to the inception of a
trial, however, the revenues will be recognized in accordance with SEC Staff
Accounting Bulletin No. 104 Revenue Recognition which
requires that the revenues be recognized ratably over the life of the contract.
The maintenance fee revenues are earned and recognized monthly. Costs
associated with contract revenues are recognized as incurred. We expect to begin marketing our new EDC product, MERS-TH, during 2004 in
concert with InCHOIR, Columbia Universitys academic research organization.
The Medical Event Reporting System (MERS-TH) is an event reporting system
developed for hospitals and medical centers to collect, classify, and analyze
events that could potentially compromise patient safety. MERS-TH provides the
opportunity to study and monitor both actual and near-miss events to facilitate
process improvement efforts. MERS-TH was developed in conjunction with
Columbia University and will be marketed by both of us to hospital and medical
centers in the U.S. and Europe initially. Cost of goods sold increased to $70,188 in 2004 compared to $47,107 in 2003.
Cost of goods sold were approximately 26.3% of sales in 2004 compared to 23.4%
in fiscal 2003. The increase in expense can be attributed to the use of two
more programmers in our production function. We also used the services of a
third party vendor on a European project. 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. We expect to increase development programming labor costs on an absolute basis
as our trial revenues increase. We expect labor costs to remain at
approximately 25% of sales. TrialMaster V3.0, the latest release of our
trial-building software has improved our ability to reduce trial production
related costs since it automates many of the trial building functions that were
manually performed in prior releases of our software. We expect the next
release of TrialMaster, V4.0, to increase the efficiency of trial building
operations by 20 to 25%. V4.0 has been designed using Microsofts .Net®
framework. Microsoft® .NET is described by Microsoft as a set of software
technologies 28




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for connecting information, people, systems, and devices. This new generation
of technology is based on Web servicessmall building-block applications that
can connect to each other as well as to other, larger applications over the
Internet. The first module from V4.0, an import module, was successfully
deployed during the first quarter of 2004. In addition, MERS-TH will provide a
sales platform with high gross margins since we expect few client specific
alterations to the basic software platform. Salaries and related expenses are our biggest expense at 67.2% of total Other
Expenses for the first quarter of 2004. Salaries and related expenses totaled
$441,980 in 2004 compared to $451,087 in 2003, a decrease of $9,107. We
currently employ approximately 16 employees out of our Davie, Florida corporate
office and have two out-of-state employees. We expect to increase headcount by
about 25% within our production function in concert with anticipated increases
in TrialMaster clients during fiscal 2004. We will look to selectively add
experienced sales and marketing personnel in 2004 in an effort to increase our
market penetration and to continue broadening our client base. Rent expense increased by $1,178 in 2004. Our corporate office lease was
extended through September 2005 with our total occupancy costs increasing by
approximately 3.2%. In December 2001, we established a disaster recovery site
at an IBM owned Co-Location facility in Atlanta, Georgia and will continue
utilizing this facility for the foreseeable future since it is designed to
ensure 100% system up-time and to provide system redundancy. Legal and professional fees totaled $34,254 in 2004 compared with $24,753
during the first quarter of 2004 and fiscal 2003, an increase of approximately
$9,501. We expect on-going legal and professional fees to approximate what was
experienced during 2003. Selling, general and administrative expenses (SGA) were $38,961 during 2004
compared to $33,191 in 2003, an increase of 17.4%. These expenses relate
primarily to costs incurred in running our office day-to-day and other costs
not directly related to other captioned items in our income statement, and
include the cost of office equipment and supplies, the costs of attending
conferences and seminars and other expenses incurred in the normal course of
business. We do expect to increase the overall dollar volume spent on SGA as
we increase our revenue base and step-up our overall activity marketing,
selling, public relations and advertising activities. Net interest expense was $42,587 during 2004 versus $29,111 in fiscal 2003 an
increase of $13,476 or 46.3%. We have used debt financing during late 2003 and
early 2004 to satisfy our working capital needs. During this period we entered
into $309,000 in promissory notes. When evaluating the cost of capital
available to us in combination with our overall capital structure we concluded
that this financing best fulfilled our short and long-term capital needs. We sold additional Series C Convertible Preferred Stock during the first
quarter of 2003 and we issued an additional 590,000 warrants to investors of
our Series C Convertible Preferred Stock. The warrants were valued at $135,344
utilizing the Black-Scholes model. The net proceeds received in the Series C
Convertible Preferred Stock Unit offering were allocated to the Series C
Preferred Stock and we recognized a deemed dividend on preferred stock of
$135,344 resulting in a charge to retained earnings and a credit to additional
paid-in capital within our stockholders equity as of March 31, 2003. There were arrearages of $51,200 in 5% Series A Preferred Stock dividends,
$27,674 in Series B Preferred Stock dividends and $67,245 in Series C Preferred
Stock dividends at March 31, 2004, compared with arrearages of $50,637 in 5%
Series A Preferred Stock dividends, $39,452 in Series B Preferred Stock
dividends and $62,711 in Series C Preferred Stock dividends at March 31, 2003.
We deducted $146,119 and $152,800 from Net Income (Loss) Attributable to Common
Stockholders for the quarters ended March 31, 2004 and March 31 2003,
respectively, relating to undeclared Series A, B and C Convertible Preferred
Stock dividends. 29




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Liquidity and Capital Resources We have historically experienced negative cash flows and have relied primarily
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. Cash and cash equivalents increased by $3,664 from $1,977 to $5,641 at March
31, 2004. This was the result of cash provided by financing activities of
$276,000 offset by cash used in operating activities of approximately $272,334.
The significant components of the activity include a loss from operations of
approximately $461,836 offset by non-cash expenses of $44,663, increases in
cash of $144,837 from changes in working capital accounts and approximately
$276,000 we raised through the issuance of debt. 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. We do not presently
have any commitments for capital expenditures. We are currently in arrears on interest payments owed totaling $98,365 on our
10% Convertible Notes. The terms of the notes provide a payment grace period
of thirty days in which to make required semi-annual interest payments. We were
in default effective January 30, 2002. The Company had a recorded liability of $134,116 at March 31, 2004 for federal
employment taxes. The Company had fully satisfied the liability as of April
30, 2004. We have been operating with a cash burn rate since beginning our EDC operations. In order to manage cash flows, we
have issued preferred stock and common stock to satisfy operating expenses and
obligations. Between March 28, 2002 and March 2003 we sold 165,650 shares of
our Series C Preferred Stock and warrants to purchase 3,513,000 shares of our
common stock. Gross cash proceeds from this offering totaled $1,656,500. We
accrued $333,092 in transaction related fees leaving net proceeds of
approximately $1,423,409 of which $100,000 originally had been received as a
bridge loan which was later converted at the shareholders request into shares
of our Series C Preferred Stock. From April 2003 through May 31, 2003 we sold an aggregate of 1,400,000 shares
of our Common Stock and warrants to purchase 700,000 shares of our common stock
for gross proceeds of $350,000. We accrued $35,000 in transaction fees leaving
net proceeds to us of $315,000. From July 2003 through December 31, 2003 we sold an aggregate of 2,484,000
shares of our common stock for gross proceeds of $621,000. We accrued $60,500
in transaction fees leaving net proceeds to us of $560,500. Our selling efforts include marketing our products to several Fortune 500
pharmaceutical and medical device manufacturers and two of the largest CROs.
We began providing services to some of these entities during the first half of
2003. These contracts should provide us the opportunity to limit our need for
funding our operations via debt and equity capital. Obtaining contracts with
clients of this size and reputation will also increase the credibility of the
company. We feel that the momentum established from new client acquisitions; the
development of a new EDC product  MERS-TH; and our ability to retain clients
for repeat engagements provide a good operating base from which to build during
2004. We improved our sales staff during the latter half of fiscal 2002 and
expect to increase the level of resources utilized in the sales and marketing
areas. We embarked on a cost cutting program during fiscal 2000. That program
became part of our organizations identity and remains ingrained in our culture
today. We feel that a combination of our lean operating environment 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. 30




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Because of the losses experienced since 1999 we have needed to continue
utilizing the proceeds from the sale of debt and equity securities to fund our
working capital needs. The capital markets since mid-2000 have provided a
difficult climate for raising capital due to the decline in value of publicly
held technology stocks and the resultant apprehension on the part of investors
to invest in technology oriented firms. In addition, when available, capital
has been expensive relative to the valuations that were afforded during the
expansion of the Internet sector in 1999 and 2000. The softness in the capital
markets coupled with the losses experienced have caused working capital
shortfalls. We have used a combination of equity financing and short-term
bridge loans to fund our working capital needs. Other than our current capital
and capital we may raise from future debt or equity offerings or short-term
bridge loans, we do not have any additional sources of working capital. We will continue to require substantial funds to continue our research and
development activities and to market, sell and commercialize our technology. We
will 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 and defending and enforcing patents and
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. To satisfy our capital requirements, including ongoing future operations, we
will seek to raise additional financing through debt and equity financings.
There can be no assurance that any such fundings 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. 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 significant losses, negative cash flows from operations, and accumulated
deficits for the periods ending March 31, 2004, there is doubt about our
ability to continue as a going concern. In addition, our auditors Greenberg
and Company, included language which qualified their report regarding our
ability to continue as a going concern in their report dated February 6, 2004. IMPACT OF NEW ACCOUNTING STANDARDS In November 2003, the Emerging Issues Task Force or EITF of the FASB reached a
consensus on one issue with respect to EITF Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments,
thereby requiring certain quantitative and qualitative disclosures for
securities accounted for under SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, that are impaired at the balance
sheet date but for which an other-than-temporary impairment has not been
recognized. Adoption of EITF Issue 03-1, which was effective for us on December
31, 2003, did not have a material impact on the Companys financial position,
results of operations or cash flows. In December 2003, the Staff of the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, which
supersedes SAB No. 101. The primary purpose of SAB No. 104 is to rescind
accounting guidance contained in SAB No. 101 and the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions and Answers
(the FAQ) related to multiple element revenue arrangements in order to make
this interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The Company does not expect
the issuance of SAB No. 104 to significantly impact its current revenue
recognition policies. 31




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CRITICAL ACCOUNTING POLICIES The preparation of financial statements and related disclosures in conformity
with accounting principles generally accepted in the United States requires
management to make judgments, assumptions and estimates that affect the amounts
reported. Note 2 of Notes to the Consolidated Financial Statements describes
the significant accounting policies used in the preparation of the consolidated
financial statements. Certain of these significant accounting policies are
considered to be critical accounting policies, as defined below. A critical accounting policy is defined as one that is both material to the
presentation of our financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on
our financial condition and results of operations. Specifically, critical
accounting estimates have the following attributes: 1) we are required to make
assumptions about matters that are highly uncertain at the time of the
estimate; and 2) different estimates we could reasonably have used, or changes
in the estimate that are reasonably likely to occur, would have a material
effect on our financial condition or results of operations. Estimates and assumptions about future events and their effects cannot be
determined with certainty. We base our estimates on historical experience and
on various other assumptions believed to be applicable and reasonable under the
circumstances. These estimates may change as new events occur, as additional
information is obtained and as our operating environment changes. These changes
have historically been minor and have been included in the consolidated
financial statements as soon as they became known. In addition, our Management
is periodically faced with uncertainties, the outcomes of which are not within
our control and will not be known for prolonged periods of time. Based on a
critical assessment of its accounting policies and the underlying judgments and
uncertainties affecting the application of those policies, our Management
believes that our consolidated financial statements are fairly stated in
accordance with accounting principles generally accepted in the United States
(GAAP), and present a meaningful presentation of our financial condition and
results of operations. Our Management believes that the following are our critical accounting
policies: 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, we are entitled to payment
for all work performed through the point of cancellation. REVENUE RECOGNITION POLICY OmniComms revenue model is transaction-based and can be implemented either as
an ASP (application service provider) or licensed for implementation by a
customer such as a pharmaceutical company. Revenues are derived from the
set-up of clinical trial engagements; on-going maintenance fees incurred
throughout the duration of an engagement; fees for report writing and change
orders. The clinical trials that are conducted using TrialMaster 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 the clinical trial. Cost of sales is
primarily comprised of programmer salaries and taxes and is expensed as
incurred. The Company recognizes sales, for both financial statement and tax purposes in
accordance with SEC Staff Accounting Bulletin No. 104 Revenue Recognition 
(SAB 104). SAB 104 requires that revenues be recognized ratably over the life
of a contract. In accordance with SAB 104 the Company will periodically record
deferred revenues relating to advance payments in contracts. 32




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STOCK BASED COMPENSATION. Options granted to employees under our Stock Option Plan are accounted for by
using the intrinsic value method under APB Opinion 25, Accounting for Stock
Issued to Employees (APB 25). In October 1995, the Financial Accounting
Standards Board issued Statement No.123, Accounting for Stock-Based
Compensation (SFAS 123), which defines a fair value based method of accounting
for stock options. All stock based compensation issued to individuals, other
than employees and directors such compensation which is accounted for in
accordance with APB 25, are accounted for in accordance with SFAS 123, as
amended by SFAS 148. 
 ITEM 3. CONTROLS AND PROCEDURES Based on their evaluation as of the end of the period covered by this Quarterly
Report on Form 10-QSB, being March 31, 2004, the Companys principal executive
officer and principal financial officer have concluded that the Companys
disclosure controls and procedures as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934 (the Exchange Act) are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange
Commission rules and forms. There were no significant changes in the Companys internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation and up to the filing date of this Quarterly Report on
Form 10-QSB. 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) 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.
    
    DESCRIPTION31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange
Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, promulgated under the Securities and Exchange
Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of
2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as adopted Pursuant to Section 906 of the Sarbanes Oxley Act of
2002.
 (b) Reports onForm 8-K. None. 33




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SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. OmniComm Systems, Inc. Registrant
 By:
    /s/ Cornelis F. WitCornelis F. Wit, Director, Chief Executive
Officer and President Date: May 14, 2004 By:
    /s/ Ronald T. LinaresRonald T. Linares, Vice President of Finance,
Chief Financial and Accounting Officer Date: May 14, 2004 34