ITEM 1. BUSINESS
Our Business, Products and Services
We are a leading online service provider of live and on-demand Internet video, corporate audio and web communications and content management applications. We had approximately 82 full time employees as of September 30, 2015, with operations organized in two main operating groups:
· Audio and Web Conferencing Services Group
· Digital Media Services Group
Products and services provided by each of the groups are:
Audio and Web Conferencing Services Group
Our Audio and Web Conferencing Services Group consists of our Infinite Conferencing (“Infinite”) division, our Onstream Conferencing Corporation (“OCC”) division and our EDNet division. This group represented approximately 66.8% and 67.3% of our revenues for the years ended September 30, 2015 and 2014, respectively. These revenues are comprised primarily of network access and usage fees as well as the sale and rental of communication equipment.
Our Infinite division, which operates primarily from the New York City area, and our OCC division, which operates primarily from San Diego, California, provide “reservationless” and operator-assisted audio and web conferencing services. We have recently introduced the following audio and web conferencing products: (i) Onstream Meetings and (ii) Onstream Webinars, both of which feature fully integrated audio conferencing, allowing customers to interact from land based, mobile or desktop headsets (VOIP) as well as high definition Dolby audio.
Our EDNet division, which operates primarily from San Francisco, California, provides connectivity within the entertainment and advertising industries through its managed network, which encompasses production and post-production companies, advertisers, producers, directors, and talent.
Digital Media Services Group
Our Digital Media Services Group consists primarily of our Webcasting division and our DMSP (“Digital Media Services Platform”) division. The DMSP division includes the related UGC (“User Generated Content”) and Smart Encoding divisions. This group represented approximately 33.2% and 32.7% of our revenues for the years ended September 30, 2015 and 2014, respectively. These revenues are comprised primarily of fees for hosting/storage, search/retrieval and distribution/streaming of digital assets as well as encoding and production fees.
Our Webcasting division, which operates primarily from Pompano Beach, Florida, provides an array of corporate-oriented, web-based media services to the corporate market including live audio and video webcasting and on-demand audio and video streaming for any business, government or educational entity. This includes online webcasting services, a cost effective means for corporations to broadcast conference calls live, making them available to the investing public, the media and to anyone worldwide with Internet access. The Webcasting division also has a sales and production support office in New York City as well as additional production and back-up webcasting facilities in our San Francisco office. We market the webcasting services through a direct sales force and through channel partners, also known as resellers. Each webcast can be heard and/or viewed live, and then archived for replay, with an option for accessing the archived material through a company's own web site. These webcasts primarily communicate corporate earnings and other financial information; product launches and other marketing information; training, emergency or other information directed to employees; and corporate or other special events. The Webcasting division’s products include the MarketPlace365 service, which provides its customers with a Virtual Conference Center, which is a multiple event conference solution with integrated webcasting. We expect to shortly introduce and begin marketing a “do it yourself” large audience webcasting product that can be run from the customer’s desktop and will be available on a fixed cost monthly subscription basis that can be purchased on-line.
Our DMSP division, which operates primarily from Colorado Springs, Colorado provides an online, subscription based service that includes access to enabling technologies and features for our clients to acquire, store, index, secure, manage, distribute and transform these digital assets into saleable commodities. In December 2004 we completed our acquisition of an entity formerly named Onstream Media Corporation that we now identify as Acquired Onstream. Acquired Onstream was a development stage company founded in 2001 with the business objective of developing a feature rich digital asset management service and offering the service on a subscription basis over the Internet. This service was the initial version of what became the DMSP, which is comprised of four separate products - encoding, storage, search/retrieval and distribution. Although a limited version of the DMSP was released in November 2005, the first complete version of the DMSP, known as “Store and Stream”, was offered for sale to the general public since October 2006. In February 2009, we launched “Streaming Publisher”, a second version of the DMSP with additional functionality. Streaming Publisher is a stand-alone product based on a different architecture than Store and Stream and is a primary building block of the MarketPlace365 platform.
Our UGC division, which also operates as Auction Video, provides a video ingestion and flash encoder that can be used by our clients on a stand-alone basis or in conjunction with the DMSP. In March 2007 we completed the acquisition of Auction Video. The primary assets acquired included the video ingestion and flash transcoder as well as related technology and patents pending.
Our Smart Encoding division provides both automated and manual encoding and editorial services for processing digital media, using a set of coordinated technologies and processes that allow the quick and efficient online search, retrieval and streaming of this media, which can include photos, videos, audio, engineering specs, architectural plans, web pages, and many other pieces of business collateral.
Sales and Marketing
We use a variety of marketing methods, including our internal sales force, independent agents and channel partners, also known as resellers or distributors, to market our products and services. One key element of our marketing strategy has been to enter into distribution agreements with recognized leaders in each of the markets for our products and services. By offering our products and services in conjunction with the distributors’ products, we believe these distribution agreements enable us to take advantage of the particular distributors' existing marketing programs, sales forces and business relationships. Contracts with these distributors generally range from one to two years and may be terminable earlier based on certain contractual provisions.
We have expanded our marketing efforts during recent years to include: targeted e-mail campaigns, trade show participation, advanced search engine optimization, pay-per-click, a public relations byline program and selected trade magazine advertising. We intend to continue these actions during the coming year.
No single customer has represented more than 10% of our consolidated revenues during the years ended September 30, 2015 or 2014.
Competition
We operate in highly competitive and rapidly changing business segments. Our competition includes:
· other web sites, Internet portals and Internet broadcasters to acquire and provide content to attract users;
· video and audio conferencing companies and Internet business service broadcasters;
· online services, other web site operators and advertising networks;
· traditional media, such as television, radio and print; and
· end-user software products.
Our webcasting products and services fall into two competitive areas: live or archived financial and fair-disclosure related conferences, and all other live or archived webcast productions for the corporate, financial, educational and government segments. In the financial conferences area, we compete with Accordent Technologies (Polycom), BT Conferencing, Intercall, Kaltura, Livestream, MediaPlatform, Netbriefings, ON24, Premiere Global Services (PGi), PTEK Holdings, Qumu, Shareholder.com, Sonic Foundry, Thomson Financial Group, VBrick, ViaVid, Viewcast, Wall Street Transcripts, WILink, Ustream and others that offer live webcasts of quarterly earnings conference calls. This list includes entities that are currently active resellers of our services and not in significant competition with us, but could compete with us under certain circumstances. For other webcast production, we compete with other smaller geographically local entities. Our production services, however, have been in demand by some of our competitors, and from time to time we have provided services to these companies. The nature of the streaming media sector of the Internet market is highly interdependent while being competitive.
The Digital Media Services Group provides a live streaming and publishing platform to multiple players, including mobile devices. While there is competition for the provision of these digital media services, our strategic offering of integrated webcasting, multi-screen encoding, intelligent syndication with broad spectrum video indexing services, all as part of a unified and scalable digital media platform (the DMSP), provides significant differentiation from our competitors. Furthermore, most of our competitors focus on the media and entertainment industry, while we primarily target corporate, enterprise, government and education clients. Our platform competes with other online video platforms such as ExtendMedia, LiveStream, Move Networks, Ooyala (Telstra), thePlatform (Comcast), Ustream, DaCast, Wowza Media Services, Encoding.com, Vimeo, Kaltura Media Space, Netromedia,Wistia and others. Other companies that compete in some portion of the digital media services market targeted by us include Akamai, Ascent Media, BrightCove, Edgecast, Limelight, Neulion, PermissionTV, Sonic Foundry, Telestream, Twistage, and VitalStream (Internap).
Competition for audio and web conferencing is primarily segregated between the low-cost, low-service offerings such as FreeConference.Com and other more high-end providers such as Arkadin, BT Conferencing, GoToMeeting, IBM SmartCloud, Intercall Conferencing, Microsoft Lync, Premiere Global Services (PGi), ReadyTalk and WebEx (Cisco). Our Infinite division services a niche market for audio and web conferencing services primarily for SMB (small to medium size) companies looking for superior customer service at an affordable rate. This division's niche also includes a growing demand for lead generation “webinars” (seminars presented via the Internet), which it addresses by offering a dedicated account manager to coordinate a customized solution for each event.
Competition for the multimedia networking services provided by our EDNet division is based upon the ability to provide equipment, connectivity and technical support for disparate audio communications systems and to provide interoperable compatibility for proprietary and off-the-shelf codecs. Due to the difficulty and expense of developing and maintaining private digital networks, bridging services, engineering availability and service quality, we believe that the number of multimedia networking competitors is small and will remain so. This division's advantage is the provision of a total solution including system design, isochronous (a data flow type used for streaming audio and video) connection or broadband connection sourcing, and custom software connectivity applications that include a comprehensive digital path for cinema, radio and television production transport. However, companies that compete in some portion of the multimedia products and services market targeted by us include Broadcast Supply Worldwide, DigiFon, Out of Hear, Source Elements and Telos Systems.
Government Regulation
Although existing laws governing issues such as property ownership, export or import restrictions, content, taxation, defamation and privacy may apply to Internet based activities, the majority of such laws was adopted before the widespread use and commercialization of the Internet and, as a result, may not contemplate or address the unique issues of the Internet and related technologies. Laws and regulations directly applicable to providers of Internet and related technologies cover issues such as broadcast license fees, copyrights, privacy, pricing, sales and other taxes and characteristics and quality of Internet services, but are in many instances unclear or unsettled. Furthermore, it is likely that new laws and regulations will be adopted in the United States and elsewhere that may be applicable to us in the above areas as well as the areas of content, network security, encryption and the use of key escrow, data and privacy protection, electronic authentication or "digital" signatures, illegal and harmful content, access charges and retransmission activities. Any new legislation or regulation or increased governmental enforcement of existing regulations may limit the growth of the Internet, increase our cost of doing business or increase our legal exposure, which could have a material adverse effect on our business, financial condition and results of operations.
A number of U.S. federal laws, including those referenced below, impact our business. The Digital Millennium Copyright Act (“DMCA”) is intended, in part, to limit the liability of eligible online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights of others. Portions of the Communications Decency Act (“CDA”) are intended to provide statutory protections to online service providers who distribute third-party content. We rely on the protections provided by both the DMCA and the CDA in conducting our business. If these laws or judicial interpretations are changed to narrow their protections, we will be subject to greater risk of liability, our costs of compliance with these regulations or to defend litigation may increase, or our ability to operate certain lines of business may be limited.
Federal, state and international laws and regulations (including “Red Flag” regulations issued by the U.S. Federal Trade Commission in 2007 to curb identity theft) govern the collection, use, retention, sharing and security of data that we receive from and about our customers (and in some cases, their customers). Any failure, or perceived failure, by us to comply with these laws and regulations could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business. Further, failure or perceived failure by us to comply with these laws and regulations could result in a loss of customer confidence in us which could adversely affect our business. In addition, various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention and data-protection issues which could adversely impact our business.
By distributing content over the Internet, we face potential liability for claims based on the nature and content of the materials that we distribute, including claims for defamation, negligence or copyright, patent or trademark infringement, which claims have been brought, and sometimes successfully litigated, against Internet companies.
Certain of our services are conducted primarily over telephone lines, which are heavily regulated by various Federal and other agencies. Although we believe that the responsibility for compliance with those regulations primarily falls on the local and long distance telephone service providers and not us, the Federal Communications Commission (FCC) issued an order in 2008 that requires conference calling companies to remit Universal Service Fund (USF) contribution payments on customer usage associated with audio conference calls. In addition, in 2011 the FCC announced its position that the 2008 order extended to audio bridging services provided using internet protocol (IP) technology and in April 2012 issued a “Further Notice of Proposed Rulemaking” (the “2012 FNPRM”), which if implemented might expand the types of business operations that are considered subject to USF contribution payments. The 2012 FNPRM sought comments from the public on four major areas: (i) clarifying and modifying the FCC’s rules on what services and service providers must contribute to the fund (ii) whether the FCC should reform the current revenues system or adopt an alternative system, (iii) how to improve administration of the contribution system and (iv) how to improve the contributions methodology with respect to the recovery mechanisms from end users (including changes with respect to our current practice of recovering our USF contributions from our customer end-users through a line-item (surcharge) on our invoices to them). The period for submitting comments closed on August 6, 2012. On August 7, 2014 the FCC asked the Federal-State Joint Board on Universal Service to provide its recommendations, on or before April 7, 2015, with respect to the 2012 FNPRM. To the best of our knowledge, no further action has been taken with respect to this matter as of October 28, 2016.
While we believe that we have registered our operations appropriately with the FCC, including the filing of both quarterly and annual reports regarding the revenues derived from audio conference calling, and the remittance of USF contributions thereon, it is possible that our determination of the extent to which our operations are subject to USF could be challenged or changed. It is also possible we would need to change our pricing structure in order to maintain our current margins, with our ability to do that possibly affected by the related actions of our competitors. However, we do not believe that the ultimate outcome of any such challenge or changes would have a material adverse effect on our financial position or results of operations.
To protect our company from certain claims that may relate to the above matters, we maintain general liability (including umbrella coverage), professional liability and employment practices liability insurance. These insurances may not cover all potential claims of this type or may not be adequate to indemnify us for any liability to which we may be exposed. Any liability not covered by insurance or in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition.
Intellectual Property
Our success depends in part on our ability to protect our intellectual property. To protect our proprietary rights, we rely generally on copyright, trademark and trade secret laws, confidentiality agreements with employees and third parties, and agreements with consultants, vendors and customers, although we have not signed such agreements in every case.
As part of our March 2007 acquisition of Auction Video, a pending United States patent was assigned to us covering certain aspects of uploading live webcam images. Subsequent to this acquisition, we began pursuing the final approval of the patent pending application and in March 2008 retained the law firm of Hunton & Williams to assist in expediting the patent approval process and to help protect rights related to proprietary Onstream technology. In April 2008, we revised the original patent application primarily for the purpose of splitting it into two separate applications (the “Original Applications”), which, while related, would be evaluated separately by the U.S. Patent and Trademark Office (“USPTO”).
With respect to the claims pending in the first of the two Original Applications (number 10/808,894), the USPTO issued various final and non-final rejections in August 2008, February 2009, May 2009, January 2010 and June 2010. Our responses to these rejections included modifications to certain claims made in the original patent application. In response to the June 2010 rejection we filed a Notice of Appeal with the USPTO on November 22, 2010 and we filed an appeal brief with the USPTO on February 9, 2011. The USPTO filed an Examiner's Answer to the Appeal Brief on May 10, 2011, which repeated many of the previous reasons for rejection, and we filed a response on July 8, 2011. On July 7, 2014, the USPTO issued a notice setting the hearing on this application before the Patent Trial and Appeal Board on September 18, 2014. As a result of that hearing, which we attended, on October 27, 2014 the Patent Trial and Appeal Board affirmed the Examiner’s rejection in part and reversed the Examiner’s rejection in part. In response, the Examiner issued a new Office Action on March 5, 2015 rejecting the claims. We conducted an interview with the Examiner on April 9, 2015 and filed a response to the Office Action on May 26, 2015, which contained certain proposed amendments to the claims. On June 19, 2015, the USPTO issued a Notice of Allowance and Fees Due, which granted the claims as submitted by us on May 26, 2015. On October 13, 2015, the USPTO issued to us U.S. Patent Number 9,161,068 (the “First Granted Patent”) with a Patent Term Adjustment of 2,377 days, resulting in a September 26, 2030 expiration date, provided all maintenance fees are paid.
On September 2, 2015, with reference to the First Granted Patent, we filed a Continuation Application with the USPTO and the USPTO issued a related Filing Receipt, establishing a September 2, 2015 filing date for a new patent application (number 14/843,457). On September 17, 2015, the USPTO issued a related Notice to File Missing Parts of Nonprovisional Application, which we filed our timely response to on January 19, 2016. On January 28, 2016, the USPTO issued a related Notice of Incomplete Reply, which we filed our timely response to on February 17, 2016. The Continuation Application process, which has no set time frame or end date, may result in issuance of another patent to us which may include broader and/or additional claims as compared to the First Granted Patent, although this cannot be assured. We do not expect the Continuation Application process to affect the enforceability of the First Granted Patent, nor do we expect the result of the Continuation Application process to result in modifications, or adverse impact, to the First Granted Patent.
With respect to the claims pending in the second of the two Original Applications (number 12/110,691), the USPTO issued a non-final rejection in June 2011 (which was reissued in January 2012) and a final rejection in June 2012. With respect to the June 2012 rejection, we filed a pre-appeal brief conference request on September 7, 2012 and the USPTO responded on September 27, 2012 with a decision to proceed to appeal. We filed a Request for Continuing Examination with the USPTO on April 5, 2013, which the USPTO responded to on June 12, 2013 with a non-final rejection. Our response to that non-final rejection was filed on November 12, 2013, which the USPTO responded to on January 10, 2014 with a final rejection.In response to this final rejection, we filed a Notice of Appeal on April 8, 2014 and the related Appeal Brief on June 9, 2014,which the USPTO responded to with an Examiner’s Answer on September 3, 2014. On November 3, 2014 we filed a Reply Brief with the Patent Trial and Appeal Board and on June 16, 2016 the Patent Trial and Appeal Board issued their decision, which (i) reversed the Examiner’s previous rejection of the claims in Application 12/110,691 under 35 U.S.C. Section 112 (“lack of written description” and “enablement”) and (ii) affirmed the Examiner’s previous rejection of those claims under 35 U.S.C. Section 103 (“obviousness”). On August 16, 2016, we filed a Request for Continued Examination with the USPTO, which included our response to the June 16, 2016 decision on appeal and a request that our application be reconsidered. Our response also included modifications to certain claims made in the original patent application. On August 25, 2016, the USPTO issued a Notice of Allowance and Fees Due, which granted the claims as submitted by us on August 16, 2016. On October 11, 2016, the USPTO issued to us U.S. Patent Number 9,467,728 (the “Second Granted Patent”) with a Patent Term Adjustment of 1,362 days, resulting in a December 16, 2027 expiration date, provided all maintenance fees are paid.
On September 2, 2016, with reference to the Second Granted Patent, we filed a Continuation Application with the USPTO and the USPTO issued a related Filing Receipt, establishing a September 2, 2016 filing date for a new patent application (number 15/255,416). The Continuation Application process, which has no set time frame or end date, may result in issuance of another patent to us which may include broader and/or additional claims as compared to the Second Granted Patent, although this cannot be assured. We do not expect the Continuation Application process to affect the enforceability of the Second Granted Patent, nor do we expect the result of the Continuation Application process to result in modifications, or adverse impact, to the Second Granted Patent.
Our management believes that the First and Second Granted Patents, as well as two other related patents still pending, may have significant value, although this cannot be assured, and is presently exploring the financial potential of the First and Second Granted Patents and the patents pending. Regardless of the ultimate outcome with respect to the results of this process and/or the eventual USPTO decision with respect to the pending patent applications, our management has determined that there is no material exposure to an adverse effect on our financial position or results of operations, since all of the previous costs incurred by us in connection with the patents have been amortized to expense as of September 30, 2013 and are being expensed as incurred subsequent to that date. Certain of the former owners of Auction Video, Inc. have an interest in proceeds that we may receive under certain circumstances in connection with the First and Second Granted Patents and the patents pending.
Despite such protections, a third party could, without authorization, copy or otherwise obtain and use our intellectual property and/or the trade secrets that are part of such intellectual property. We can give no assurance that our agreements with employees, consultants and others who participate in development activities will not be breached, or that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors.
We may pursue the registration of certain of our trademarks and service marks in the United States, although we have not secured registration of all our marks. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and effective copyright, trademark and trade secret protection may not be available in such jurisdictions. In general, there can be no assurance that our efforts to protect our intellectual property rights through copyright, trademark and trade secret laws will be effective to prevent misappropriation of our content. Our failure or inability to protect our proprietary rights could materially adversely affect our business, financial condition and results of operations.
Employees
As of October 7, 2016 we had approximately 75 full time employees, of whom 42 were design, production and technical personnel, 13 were sales and marketing personnel and 20 were general, administrative and executive management personnel. None of the employees are covered by a collective bargaining agreement and our management considers relations with our employees to be good.
General
We were formed under the laws of the State of Florida in May 1993. Our executive offices are located at 1291 SW 29th Avenue, Pompano Beach, Florida 33069. Our telephone number at that location is (954) 917-6655.
ITEM 2.
ITEM 2. PROPERTIES
We lease:
· an approximately 16,500 square foot facility at 1291 SW 29th Street in Pompano Beach, Florida, which serves as our corporate headquarters and houses the majority of our webcasting activities. Our lease, which expired on September 15, 2013, provided for two percent (2%) annual increases, as well as one two-year renewal option, with a three percent (3%) rent increase in year one. Although we notified the landlord of our exercise of the renewal option, the landlord never confirmed that we have met the conditions for such renewal, and this renewal period expired September 15, 2015. As of October 28, 2016, we are in negotiations with the landlord with respect to the terms of our continuing tenancy at that location. The current monthly base rental is approximately $21,100 (including sales taxes and our share of property taxes, insurance and other operating expenses incurred under the lease but excluding operating expenses such as electricity paid by us directly).
· an approximately 10,800 square foot facility at 100 Morris Avenue in Springfield, New Jersey, which houses the Infinite Conferencing audio and web conferencing operations. Our lease expires on January 31, 2022 after considering the most recent lease amendment executed in October 2016 with an effective date of February 1, 2017. The monthly base rental is approximately $17,700 through January 31, 2017, then, based on a mutual agreement to a reduction in the square footage, is $10,000 per month for the next twelve months and then increases by $500 per month for each of the next four twelve-month lease periods. The lease provides for one five-year renewal option at no less than the base rental at the time of renewal ($12,000), but not to exceed fair market value at the time of renewal. The lease is also cancellable by us any time after November 1, 2016 in the event of the sale of Infinite Conferencing or Onstream Media Corporation, such cancellation effective six months after notice is given by us to landlord after such sale.
· approximately 1,200 square feet of office space of located at 545 Fifth Avenue, New York City, New York. These offices serve primarily for webcasting sales activities and backup to Florida-based webcasting operations. Our lease expires January 24, 2018 and provides one two-year renewal option at the greater of the fifth year rental or fair market value. The monthly base rental is approximately $8,600 with annual increases up to 2.8%.
· an approximately 1,300 square foot facility at 901 Battery Street, Suite 210 in San Francisco, which serves as administrative headquarters for the EDNet division of the Audio and Web Conferencing Services Group, and houses the centralized network hub for electronically bridging affiliate studios. In addition, the facility operates as a backup to Florida for webcasting operations. Our lease expires on September 30, 2018. The monthly base rental is approximately $5,600 (excluding month-to-month parking) with annual increases of approximately 3.0%.
· small limited purpose office space in Colorado Springs, Colorado on a short-term lease with a remaining maturity of less than one year, as well as equipment space at co-location or other equipment housing facilities in South Florida, Georgia, New Jersey, Colorado, Texas and Minnesota.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We are involved in legal and regulatory matters of the type arising from time to time in the ordinary course of business. While the ultimate outcome of these matters is not presently determinable, it is the opinion of our management that the resolution of these outstanding claims will not have a material adverse effect on our financial position or results of operations.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed for trading on OTC Markets' OTC Pink marketplace ("OTCP"), under the symbol "ONSM." Effective January 29, 2015, OTC Markets notified us that because we were not current in our reporting obligations with the SEC at that time that they had determined that we did not comply with the OTC Markets' OTCQB marketplace ("OTCQB") eligibility standards as required within 120 days after our fiscal year end date and accordingly the listing of our common stock was moved from OTCQB to OTCP.
The following table sets forth the high and low closing sale prices for our common stock as reported on OTCQB or OTCP, as applicable, for the period from October 1, 2013 through October 7, 2016. These prices do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions or may represent transactions involving a small number of shares.
On October 7, 2016, the last reported sale price of the common stock on OTCP was $0.18 per share. As of October 7, 2016 there were approximately 551 shareholders of record of the common stock.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently expect to retain future earnings, if any, to finance the growth and development of our business. As of October 28, 2016, there are no preferred shares outstanding.
On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”), which represented historical annual revenues of approximately $1.35 million. On December 16 and 18, 2015, we received aggregate gross proceeds of approximately $2.1 million for our sale, effective December 16, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“First Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $2.7 million. During March through June 2016, we received gross proceeds of approximately $0.8 million for our sale, effective June 30, 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Second Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $1.0 million, and were sold under the same terms as the accounts sold in December 2015. During September and October 2016, subscriptions for approximately $225,000 were received by Partners and funded against an anticipated total of $1.5 million for our sale, which we expect will be effective during November 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Third Tranche of Additional Sold Accounts”) to Partners, will represent historical annual revenues of approximately $1.9 million, and will be sold under the same terms as the accounts sold in December 2015 and June 2016.
In connection with the February 28, 2015 sale, Infinite and Partners entered into a Management Services Agreement (“MSA”) that provides for Infinite to continue to invoice the Sold Accounts but the payments when received from those Sold Accounts will be deposited in a segregated Partners owned bank account. Partners will return those customer proceeds to Infinite on a weekly basis in the form of a Management Fee, after deducting a certain amount representing (i) Partners’ guaranteed return (which is 40% of the Purchase Price per annum with the first six months guaranteed regardless of whether we exercise our repurchase rights as set forth in a related option agreement or the MSA is otherwise terminated) and (ii) accounting fees payable to the third-party accounting firm as discussed below. Infinite will continue to service the Sold Accounts, incurring and absorbing all related costs of doing so - i.e., Partners will have no operating responsibilities and no operating costs related to the sold accounts other than to pay the Management Fee to Infinite. As part of the December 16, 2015 sale of additional Infinite customer accounts, the MSA was amended to reduce the Partners’ guaranteed return percentage to 30% per annum, with the first six months guaranteed regardless of whether we exercise our repurchase rights as set forth in a related amended option agreement or the amended MSA is otherwise terminated.
As a result of our determination that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, (i) the gross proceeds from this and subsequent transactions are reflected as an increase in our equity (noncontrolling owners’ interest in VIE), (ii) the gross revenues from the Sold Accounts, and accounts sold as part of our subsequent transactions with Partners, are included in our consolidated revenues and (iii) the payment of the Partners’ guaranteed return percentage, which is deducted from these gross revenues, is reflected as a decrease in our equity (distributions to owners of VIE).
Recent Sales of Unregistered Securities
During June and July 2016 we issued an aggregate of 300,000 unregistered common shares for professional IR and PR/marketing services valued at approximately $45,000, which will be recognized as professional fees expense over service periods of up to twelve months.
During June 2016 we issued 100,000 unregistered common shares for financial advisory services valued at approximately $14,000, which will be expensed at the time of issuance.
During August 2016 we issued 25,000 unregistered common shares for financial advisory services valued at approximately $3,000, which will be expensed at the time of issuance.
During September 2016 we issued 125,000 unregistered common shares as a finders fee valued at approximately $16,000, which will be expensed at the time of issuance.
All of the above securities were offered and sold without such offers and sales being registered under the Securities Act of 1933, as amended (together with the rules and regulations of the Securities and Exchange Commission (the "SEC") promulgated thereunder, the "Securities Act"), in reliance on exemptions therefrom as provided by Section 4(2) of the Securities Act of 1933, for securities issued in private transactions. The recipients were accredited investors and the certificates evidencing the shares that were issued contained a legend restricting their transferability absent registration under the Securities Act of 1933 or the availability of an applicable exemption therefrom. The purchasers had access to business and financial information concerning our company. Each purchaser represented that he or she was acquiring the shares for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth securities authorized for issuance under our 2007 Equity Incentive Plan, individual compensation arrangements and any other compensation plans as of September 30, 2015.
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column)
Plan Category
2007 Equity Incentive Plan (1)
50,000
$
2.95
822,237 (2)
Equity compensation plans approved by shareholders
None
None
None
Equity compensation plans not approved by shareholders
None
None
None
(1) On September 18, 2007, our Board of Directors and a majority of our shareholders adopted the 2007 Equity Incentive Plan (the “Plan”), which authorized the issuance of up to 1,000,000 shares of ONSM common stock pursuant to stock options, stock purchase rights, stock appreciation rights and/or stock awards for employees, directors and consultants. On March 25, 2010, our Board of Directors and a majority of our shareholders approved a 1,000,000 increase in the number of shares authorized for issuance under the Plan, for total authorization of 2,000,000 shares and on June 13, 2011 they authorized a further increase in authorized Plan shares by 2,500,000 to 4,500,000.
(2) Based on the issuance of 3,627,763 common shares under the Plan (including the 2,875,000 Executive Incentive Shares issued plus the 375,000 Executive Incentive Shares expected to be issued as discussed in Item 11 - Executive Compensation) through September 30, 2015 and 50,000 outstanding financial consultant Plan Options as of September 30, 2015, there were 822,237 shares available for additional issuances under the Plan as of September 30, 2015.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the information contained in the Consolidated Financial Statements and related Notes included in the annual report.
Overview
We are a leading online service provider of live and on-demand corporate audio and web communications, virtual event technology and social media marketing, provided primarily to corporate (including large as well as small to medium sized businesses), education and government customers. We had approximately 75 full time employees as of October 7, 2016, with operations organized in two main operating groups:
· Audio and Web Conferencing Services Group
· Digital Media Services Group
Our Audio and Web Conferencing Services Group consists of our Infinite Conferencing (“Infinite”) division, our Onstream Conferencing Corporation (“OCC”) division and our EDNet division. Our Infinite division, which operates primarily from the New York City area, and our OCC division, which operates primarily from San Diego, California, provide “reservationless” and operator-assisted audio and web conferencing services. Our EDNet division, which operates primarily from San Francisco, California, provides connectivity (in the form of high quality audio and multimedia data communications) within the entertainment and advertising industries through its managed network, which encompasses production and post-production companies, advertisers, producers, directors, and talent.
Our Digital Media Services Group consists primarily of our Webcasting division and our DMSP (“Digital Media Services Platform”) division. The DMSP division includes the related UGC (“User Generated Content”) and Smart Encoding divisions. Our Webcasting division, which operates primarily from Pompano Beach, Florida and has a sales and support facility in New York City, provides an array of corporate-oriented, web-based media services to the corporate market including live audio and video webcasting and on-demand audio and video streaming for any business, government or educational entity. Our DMSP division, which operates primarily from Colorado Springs, Colorado, provides an online, subscription based service that includes access to enabling technologies and features for our clients to acquire, store, index, secure, manage, distribute and transform these digital assets into saleable commodities. Our UGC division, which also operates as Auction Video and operates primarily from Colorado Springs, Colorado, provides a video ingestion and flash encoder that can be used by our clients on a stand-alone basis or in conjunction with the DMSP. Our Smart Encoding division, which operates primarily from San Francisco, California, provides both automated and manual encoding and editorial services for processing digital media. This division also provides hosting, storage and streaming services for digital media, which are provided via the DMSP.
For segment information related to the revenue and operating income of these groups, see Note 7 to the Consolidated Financial Statements.
Recent Developments
As of September 30, 2014 we were obligated to Sigma Opportunity Fund II, LLC (“Sigma”) for principal and accrued interest aggregating $1,539,340. After our December 31, 2014 payment to Sigma of all accrued interest through that date, but no principal payments, we were obligated to Sigma under a secured note for $1,358,000, with future interest payable monthly at 21% per annum and the principal due on October 15, 2015 (the “New Sigma Note”). On September 21, 2015, Sigma loaned us an additional $225,000, which resulted in $192,500 cash proceeds net of certain fees and expenses charged by Sigma. The net proceeds were used to pay approximately $173,000 of outstanding principal on one of the Working Capital Notes plus approximately $20,000 of accrued interest on that note. Accordingly, the outstanding balance of the New Sigma Note increased to $1,583,000 and the maturity date was extended to April 15, 2016, which extension resulted in our obligation to pay Sigma up to $250,000 in additional fees (plus monthly interest and penalties for late SEC filings, as applicable). During December 2015 we repaid $1.0 million of the outstanding balance due on the New Sigma Note and entered into additional agreements with Sigma whereby the maturity date on the remaining balance was extended from April 15, 2016 to December 31, 2016 and the interest rate, as well as certain other fees, was reduced. In the event of our default on the New Sigma Note, on or before the maturity date, the outstanding balance, including accrued interest, is convertible into our common shares at a price of $0.30 per common share.
On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”), which represent historical annual revenues of approximately $1.35 million. The proceeds from this sale were used by us to pay (i) approximately $311,000 of outstanding principal and approximately $136,000 of accrued interest on certain notes payable and (ii) approximately $69,000 for the cash portion of legal and consulting fees related to this transaction. The remaining proceeds were used for fee obligations under the New Sigma Note and for other operating expenses. After giving effect to our determination that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, (i) the gross proceeds from this and subsequent transactions are reflected as an increase in our equity (noncontrolling owners’ interest in VIE), (ii) the revenues from the Sold Accounts, and accounts sold as part of our subsequent transactions with Partners, are included in our consolidated revenues and (iii) the payment of the Partners’ guaranteed return percentage, which is deducted from these gross revenues, is reflected as a decrease in our equity (distributions to owners of VIE).
During December 2015, we received gross proceeds of approximately $2.1 million for our sale, effective December 16, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“First Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $2.7 million which transaction resulted in an increase, as a percentage of revenues, of the management fee received by us with respect to the accounts sold by us in a similar transaction in February 2015 and which improved management fee also applied to the accounts sold in December 2015. From the December 2015 proceeds, we repaid an aggregate of $481,000 against the net outstanding balances of certain subordinated notes, in addition to the $1.0 million repayment against the New Sigma Note discussed above. During March through June 2016, we received gross proceeds of approximately $0.8 million for our sale, effective June 30, 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Second Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $1.0 million, and were sold under the same terms as the accounts sold in December 2015. During September and October 2016, subscriptions for approximately $225,000 were received by Partners and funded against an anticipated total of $1.5 million for our sale, which we expect will be effective during November 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Third Tranche of Additional Sold Accounts”) to Partners, will represent historical annual revenues of approximately $1.9 million, and will be sold under the same terms as the accounts sold in December 2015 and June 2016.
Since December 2007, we have had a line of credit arrangement with a financial institution under which we could borrow up to an aggregate of $2.0 million for working capital, collateralized by our accounts receivable and certain other related assets and the amount of such borrowing being further subject to the amount, aging and concentration of such receivables. On February 10, 2016, we entered into a loan modification agreement which extended the term of this line of credit arrangement through December 31, 2017.
See Liquidity and Capital Resources for further details with respect to the above transactions with Sigma, Thermo and Partners.
On April 30, 2015, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. Such notice was not given by us, but on April 30, 2016, we exercised our option for a one year extension of the Funding Letter, including an extension of the notice deadline to January 5, 2017. The Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available, but does not represent any obligation to accept such funding on these terms and is not expected by us to be exercised. Cash provided under the Funding Letter, as extended, would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 15, 2017 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status.
On March 27, 2007 we acquired the assets, technology and patents pending of privately owned Auction Video, Inc., a Utah corporation, and Auction Video Japan, Inc., a Tokyo-Japan corporation (collectively, “Auction Video”). In connection with our subsequent pursuit of approval of these patents pending (i) on October 13, 2015, the USPTO issued to us U.S. Patent Number 9,161,068 (the “First Granted Patent”) with a Patent Term Adjustment of 2,377 days, resulting in a September 26, 2030 expiration date, provided all maintenance fees are paid and (ii) on October 11, 2016, the USPTO issued to us U.S. Patent Number 9,467,728 (the “Second Granted Patent”) with a Patent Term Adjustment of 1,362 days, resulting in a December 16, 2027 expiration date, provided all maintenance fees are paid. These patents address live streaming of audio and/or video from multiple devices to a storage location, such as the Internet or cloud, and the ability to access and retrieve the audio and/or video to multiple devices, whereby the content is not stored on the device. Our management believes that the First and Second Granted Patents, as well as two other related patents still pending, may have significant value, although this cannot be assured, and is presently exploring the financial potential of the First and Second Granted Patents and the patents pending.
Revenue Recognition
Revenues from recurring service are recognized when (i) persuasive evidence of an arrangement exists between us and the customer, (ii) the goods or service has been provided to the customer, (iii) the price to the customer is fixed or determinable and (iv) collectibility of the sales price is reasonably assured.
Our Audio and Web Conferencing Services Group recognizes revenue from audio and web conferencing as well as customer usage of digital network connections.
The Infinite and OCC divisions generally charge for audio conferencing and web conferencing services on a per-minute usage rate, although webconferencing services are also available for a monthly subscription fee allowing a certain level of usage. Audio conferencing and web conferencing revenue is recognized based on the timing of the customer’s use of those services. The EDNet division primarily generates revenue from customer usage of digital network connections. EDNet purchases the rights to access digital network connections from national communications companies and resells such access to its customers for a fixed monthly fee plus separate per-minute usage charges. Network usage and bridging (managed transcoding and multipoint sessions) revenue is recognized based on the timing of the customer’s usage of those services.
Our Digital Media Services Group recognizes revenues from the acquisition, editing, transcoding, indexing, storage and distribution of its customers’ digital media, as well as from live and on-demand internet webcasting and internet distribution of travel information.
The Webcasting division charges for live and on-demand webcasting at the time an event is accessible for streaming over the Internet. Charges to customers by the DMSP division are generally based on a monthly subscription fee, as well as charges for hosting, storage and professional services. Fees charged to customers for customized applications or set-up are recognized as revenue at the time the application or set-up is completed. Charges to customers by the Smart Encoding and UGC divisions are generally based on the activity or volumes of such media, expressed in megabytes or similar terms, and are recognized at the time the service is performed. This division also provides hosting, storage and streaming services for digital media, which are provided via the DMSP.
We include the DMSP and UGC divisions’ revenues, along with the Smart Encoding division’s revenues from hosting, storage and streaming, in the DMSP and Hosting revenue caption. We include the EDNet division’s revenues from equipment sales and rentals and the Smart Encoding division’s revenues from encoding and editorial services in the Other Revenue caption.
We add to our customer billings for certain services an amount to recover USF contributions which we have determined that we will be obligated to pay to the FCC, related to those particular services. This additional billing to our customers is not reflected as revenue by us, but rather is recorded as a liability on our books, which liability is relieved upon our remittance of USF contributions as they are billed to us by USAC, an administrative and collection agency of the FCC.
Results of Operations
Our consolidated net loss for the year ended September 30, 2015 was approximately $8.4 million, as compared to a net loss of approximately $1.7 million for the prior fiscal year, an increase in our net loss of approximately $6.7 million, or 404.4%. The increased net loss was due to (i) an approximately $5.6 million impairment loss on goodwill and other intangible assets recorded by us for the year ended September 30, 2015, for which there was no comparable transaction in fiscal 2014, (ii) an approximately $800,000 impairment loss on property and equipment recorded by us for the year ended September 30, 2015, for which there was no comparable transaction in fiscal 2014 and (iii) an approximately $744,000 gain from litigation settlement recorded by us for the year ended September 30, 2014, for which there was no comparable transaction in fiscal 2015 and (iv) an approximately $523,000, or 4.3%, decrease in gross margin for the year ended September 30, 2015, as compared to the prior fiscal year. These items are discussed in more detail below.
The impact of the above items for the year ended September 30, 2015 was partially offset by (i) an approximately $440,000, or 21.0%, decrease in interest expense, (ii) an approximately $270,000, or 28.2%, decrease in depreciation and amortization expense and (iii) an approximately $219,000, or 1.9%, decrease in general and administrative expenses (operating expenses other than the impairment loss on goodwill and other intangible assets, the impairment loss on property and equipment and depreciation and amortization expense), all as compared to the prior fiscal year and discussed in more detail below.
Our consolidated net loss for the year ended September 30, 2015 included approximately $233,000 net income attributable to noncontrolling owner's interest in the VIE Partners, versus no corresponding amount for the year ended September 30, 2014. Accordingly, the net loss attributable to the Onstream Media shareholders for the year ended September 30, 2015 was approximately $8.6 million, as compared to a net loss attributable to the Onstream Media shareholders of approximately $1.7 million for the prior fiscal year.
Year ended September 30, 2015 compared to the year ended September 30, 2014 - The following table shows, for the periods indicated, the percentage of total consolidated revenue represented by items on our consolidated statements of operations.
The following table is presented to illustrate our discussion and analysis of our results of operations. This table should be read in conjunction with the consolidated financial statements and the notes thereto.
Revenues and Gross Margin
Consolidated operating revenue was approximately $16.1 million for the year ended September 30, 2015, a decrease of approximately $790,000 (4.7%) from the prior fiscal year, primarily due to decreased revenues of the Audio and Web Conferencing Services Group, but also due to decreased revenues of the Digital Media Services Group.
Audio and Web Conferencing Services Group revenues were approximately $10.8 million for the year ended September 30, 2015, a decrease of approximately $620,000 (5.4%) from the prior fiscal year, which included decreases in audio and web conferencing revenues as well as a decrease in the network usage revenues from the EDNet division.
Combined revenues from audio and web conferencing (the Infinite and OCC divisions combined) were approximately $9.1 million for the year ended September 30, 2015, which represented a decrease of approximately $371,000 (3.9%) as compared to the prior fiscal year, with results for each of the two divisions reflecting similar declines (in absolute dollars).
The OCC division’s revenues were approximately $804,000 for the year ended September 30, 2015, which represented a decrease of approximately $201,000 (20.0%) as compared to the prior fiscal year. This was in turn primarily due to lower total free conferencing business (“TFCB”) revenue, which was approximately $153,000 for fiscal 2014, with no corresponding amount for the year ended September 30, 2015. We purchased the TFCB business as part of our November 30, 2012 acquisition of certain assets and operations of Intella2 Inc., a San Diego-based communications company Intella2. However, under the terms of the July 29, 2014 settlement of litigation with Intella2 and its owner Paul Cohen, we transferred all TFCB customers and all associated revenues and expenses to Mr. Cohen, effective July 1, 2014.
The Infinite division’s revenues of approximately $8.3 million for the year ended September 30, 2015 represented a decrease of approximately $170,000 (3.1%) as compared to the prior fiscal year. This was primarily due to a decrease in average revenue per minute, which was approximately 5.5 cents for the year ended September 30, 2015, as compared to approximately 6.0 cents for the prior fiscal year. This decrease in average revenue per minute was partially offset by a 7.6% increase in the number of minutes billed by the Infinite division, which was approximately 159 million for the year ended September 30, 2015, as compared to approximately 148 million minutes for the prior fiscal year. The average revenue per minute statistic includes auxiliary services and fees that are not billed to the customer on a per minute basis. The average revenue per minute statistic is also calculated including revenue billed by Infinite to its customers but purchased by Infinite from another Onstream division and thus included in that other division’s (and not Infinite’s) reported revenues. Although the decrease in average revenue per minute reflects our reactions to competitive pressures on the pricing side, we have been able to reduce our costs for the same reason.
The EDNet division’s network usage revenues were approximately $1.6 million for the year ended September 30, 2015, which represented a decrease of approximately $208,000 (11.2%) as compared to the prior fiscal year. This was in turn primarily due to lower usage of EDNet’s bridging services, with a corresponding decrease of approximately $131,000 in those billings for the year ended September 30, 2015 as compared to the prior fiscal year.
Digital Media Services Group revenues were approximately $5.4 million for the year ended September 30, 2015, a decrease of approximately $170,000 (3.1%) from the prior fiscal year, primarily due to a decrease in DMSP and hosting revenues.
DMSP and hosting revenues were approximately $773,000 for the year ended September 30, 2015, which represented a decrease of approximately $152,000 (16.4%) as compared to the prior fiscal year. This decrease reflects competitive pressures resulting in the continuing decline in the number of customers using these products and services.
Webcasting division revenues increased by approximately $55,000 (1.2%) for the year ended September 30, 2015 as compared to the prior fiscal year. We produced approximately 4,100 webcasts during the year ended September 30, 2015, which was approximately 200 greater than the number of webcasts produced in the prior fiscal year. The impact on revenue arising from the increased number of events was partially offset by a decrease in the average revenue per webcast event to $1,154 for the year ended September 30, 2015, which represented a decrease of $68, or 5.6%, as compared to the prior fiscal year. The average revenue per webcast includes revenue billed by the webcasting division to its customers but purchased by the webcasting division from another Onstream division and thus included in that other division’s (and not webcasting’s) reported revenues.
We expect to shortly introduce and begin marketing a “do it yourself” large audience webcasting product that can be run from the customer’s desktop and will be available on a fixed cost monthly subscription basis that can be purchased on-line. We have recently introduced the following audio and web conferencing products: (i) Onstream Meetings and (ii) Onstream Webinars, both of which feature fully integrated audio conferencing, allowing customers to interact from land based, mobile or desktop headsets (VOIP) as well as high definition Dolby audio.
Consolidated gross margin was approximately $11.7 million for the year ended September 30, 2015, a decrease of approximately $523,000 (4.3%) from the prior fiscal year. This decrease generally corresponds to the approximately $790,000 (4.7%) decrease in revenues for the corresponding period, as discussed above. However, our consolidated gross margin percentage increased to 72.4% for the year ended September 30, 2015, versus 72.1% for the prior fiscal year. This increased percentage was primarily due to the percentage decrease in cost of sales for audio and web conferencing (the Infinite and OCC divisions combined) being larger than the percentage decrease in audio and web conferencing revenues.
Operating Expenses
Consolidated operating expenses were approximately $18.3 million for the year ended September 30, 2015, an increase of approximately $5.9 million (47.7%) from the prior fiscal year, due to (i) an approximately $5.6 million impairment loss on goodwill and other intangible assets recorded by us for the year ended September 30, 2015, for which there was no comparable transaction in fiscal 2014, (ii) an approximately $800,000 impairment loss on property and equipment recorded by us for the year ended September 30, 2015, for which there was no comparable transaction in fiscal 2014 and (iii) an approximately $317,000, or 13.8%, increase in other general and administrative expenses as compared to the prior fiscal year, such increases partially offset by (i) an approximately $366,000, or 63.6%, decrease in compensation paid with common shares and other equity, (ii) an approximately $270,000, or 28.2%, decrease in depreciation and amortization expense and (iii) an approximately $257,000, or 19.1%, decrease in professional fees, all decreases as compared to the prior fiscal year.
See “Goodwill and Other Intangible Assets”, which is part of the Critical Accounting Policies and Estimates section below, for details with respect to the approximately $5.6 million impairment loss on goodwill and other intangible assets and the $800,000 impairment loss on property and equipment, both as recorded by us for the year ended September 30, 2015.
The approximately $317,000 increase in other general and administrative expenses was primarily due to an increase in advertising and marketing costs, which are charged to operations as incurred and classified in our financial statements primarily under other general and administrative expenses but also under professional fees. These expenses were approximately $980,000 and $640,000 for the years ended September 30, 2015 and 2014, respectively, representing an increase of $340,000, or 53.1%. These amounts include third party marketing consultant fees and third party sales commissions, but do not include commissions or other compensation to our employee sales staff.
The approximately $366,000 decrease in compensation paid with common shares and other equity was primarily due to an approximately $272,000 decrease in the expense recorded for the year ended September 30, 2015, as compared to the prior fiscal year, with respect to our obligation to reimburse the Executives, upon their resale of 1,700,000 ONSM common shares that we agreed in January 2013 to issue to them in lieu of certain compensation, for any shortfall versus $0.29 per share. The closing ONSM price of $0.27 per share as of September 30, 2013 resulted in an approximately $34,000 liability on our financial statements. Based on the closing ONSM price of $0.16 per share as of September 30, 2014, we increased the liability to approximately $221,000, which resulted in an approximately $187,000 increase in non-cash compensation expense for the year ended September 30, 2014. Based on the closing ONSM price of $0.21 per share as of September 30, 2015, we decreased the liability to approximately $136,000, which resulted in an approximately $85,000 reduction of non-cash compensation expense for the year ended September 30, 2015. The difference between the $85,000 expense reduction for the year ended September 30, 2015 and the $187,000 expense increase for the year ended September 30, 2014 accounts for a $272,000 total decrease in the expense between the two years.
This approximately $257,000 decrease in professional fees was primarily due to (i) an approximately $238,000 decrease in legal and consulting fees and (ii) an approximately $58,000 decrease in accounting fees, such decreases partially offset by an approximately $85,000 aggregate increase in financial consultant fees and due diligence expenses incurred in connection with negotiations for potential financing.
Legal and consulting fees were approximately $214,000 for the year ended September 30, 2015, as compared to approximately $452,000 for the prior fiscal year, representing a decrease of approximately $238,000, or 52.8%. Legal and consulting fees incurred during the year ended September 30, 2015 were primarily related to (i) legal fees and (ii) marketing consultant expenses. Legal, consulting and other professional fees incurred during the year ended September 30, 2014 were primarily related to (i) corporate development and investor relations consulting activities, which activities were substantially curtailed during the year ended September 30, 2015 and (ii) litigation with Intella2 and its owner Paul Cohen, which was settled on July 29, 2014.
Accounting fees were approximately $182,000 for the year ended September 30, 2015, as compared to approximately $240,000 for the prior fiscal year, representing a decrease of approximately $58,000, or 24.2%. Forms 10-Q for the first, second and third quarters of fiscal 2014 were filed on April 30, June 5 and August 19, 2014, respectively, and the related accounting fees were expensed during the year ended September 30, 2014. Fees for the review of our quarterly financial statements included in our quarterly reports on Form 10-Q for the second and third quarters of fiscal 2015 were incurred, invoiced and paid subsequent to September 30, 2015 (i.e., in fiscal 2016).
Other Expense
Other expense, which is primarily interest, of approximately $1.8 million for the year ended September 30, 2015 represented an approximately $273,000 (18.5%) increase as compared to the prior fiscal year. This increase was due to an approximately $744,000 gain from litigation settlement recorded by us for the year ended September 30, 2014, for which there was no comparable transaction in fiscal 2015, partially offset by an approximately $440,000, or 21.0%, decrease in interest expense for the year ended September 30, 2015 as compared to the prior fiscal year.
On November 26, 2013, Intella2 and its owner Paul Cohen filed a civil lawsuit in Florida naming Onstream Media Corporation, Onstream Conferencing Corporation and Infinite Conferencing as defendants. The action alleged breach of contract with respect to payment of certain components of the purchase price for the Intella2 acquisition and related commissions and sought money damages as well as declaratory relief declaring Mr. Cohen’s related non-compete agreement with us unenforceable. On December 31, 2013 we filed our response to this lawsuit, which contained various objections to the lawsuit allegations as well as a number of counterclaims. On July 29, 2014, the parties entered into a settlement agreement and on August 4, 2014, the lawsuit was dismissed with prejudice by the court. Based on the conditions of that settlement, we reduced the approximately $782,000 estimated liability for the unpaid portion of the purchase price to the $38,000 we ultimately paid under the settlement (in cash and equipment), which resulted in our recognition of other income of approximately $744,000 for the year ended September 30, 2014.
The approximately $440,000 decrease in interest expense was primarily due to (i) an approximately $183,000 aggregate net decrease in interest expense recognized for certain subordinated debt (the Working Capital Notes, the Intella2 Investor Notes, the Fuse Note and the Subordinated Notes) for fiscal 2015 as compared to fiscal 2014, (ii) an approximately $111,000 aggregate net decrease in interest expense recognized for certain senior debt (the New Sigma Note, the Rockridge Note, the Line and the USAC Notes) for fiscal 2015 as compared to fiscal 2014 (iii) an approximately $84,000 aggregate net decrease in the expense paid and/or accrued by us for fiscal 2015 related to our obligation to reimburse the shortfall upon the resale of certain of our common shares as well as the accretion of interest on obligations to repurchase certain of our common shares, as compared to the aggregate net amount of such accruals for fiscal 2014 and (iv) $52,000 of interest accretion recorded by us in connection with the Intella2 purchase price during fiscal 2014, for which there was no corresponding item in fiscal 2015, since we no longer accrued accretion after the July 29, 2014 Intella2 litigation settlement, as discussed above.
As discussed above under “Recent Developments”, on March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) to Partners. The proceeds from this sale were used by us to pay (i) approximately $311,000 of outstanding principal and approximately $136,000 of accrued interest on certain notes payable and (ii) approximately $69,000 for the cash portion of legal and consulting fees related to this transaction. The remaining proceeds were used for fee obligations under the New Sigma Note and for other operating expenses. As a result of certain of the items we repaid using the proceeds from Partners, our interest expense decreased. As a result of our treatment of Partners as a VIE requiring consolidation in our financial statements, the $1.0 million gross proceeds from this transaction was reflected by us as an increase in our equity and the approximately $233,000 paid and/or accrued for the Partners’ guaranteed return related to those invested proceeds for the year ended September 30, 2015, was reflected as a distribution out of our equity, and not as interest expense.
Net Income Attributable to Noncontrolling Owners' Interest in VIE
Our consolidated net loss for the year ended September 30, 2015 included approximately $233,000 net income attributable to noncontrolling owner's interest in the VIE Partners, versus no corresponding amount for the year ended September 30, 2014.
On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of the Sold Accounts to Partners. Based on our determination that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, the revenues from the Sold Accounts are included in our consolidated revenues. The payment of the Partners' guaranteed return percentage, which is based on the cash proceeds received for this sale, is reflected as a decrease in our equity (distributions to owners of VIE) and also represents the portion of our consolidated results that are attributable to the VIE, with the balance of our consolidated results after deducting the VIE portion being the net loss attributable to the Onstream Media shareholders for the period.
Liquidity and Capital Resources
For the year ended September 30, 2015, we had a net loss of approximately $8.4 million, although cash provided by operating activities for that period was approximately $343,000. Cash provided by operating activities is calculated after adding back to our net loss the periodic amortization of the amount of other fees and expenses incurred in connection with obtaining or maintaining our debt, which fees and expenses are initially recorded by us as debt discount and presented by us on the balance sheet as a reduction of the outstanding principal balance. The other fees and expenses included in debt discount include amounts payable in cash and/or equity and may be payable to the lender, to third parties engaged by the lender or to third parties engaged by us.
Our cash balance decreased by approximately $72,000 during the year ended September 30, 2015. This was the result of approximately $320,000 used in investing activities and approximately $95,000 used in financing activities, partially offset by approximately $343,000 provided by operating activities. Although we had cash of approximately $317,000 at September 30, 2015, we had a working capital deficit of approximately $5.3 million at that date. This $5.3 million deficit includes the following items classified as current on our September 30, 2015 balance sheet: (i) approximately $1.5 million of net debt repaid by us from the proceeds of the Partners transaction in December 2015 and (ii) approximately $1.7 million of debt outstanding under the Line which we recently renewed through December 31, 2017, both as discussed in more detail below.
Cash provided by operating activities of approximately $343,000 for the year ended September 30, 2015, represents an approximately $114,000 decrease in cash provided by operating activities as compared to approximately $457,000 cash provided by operating activities for the prior fiscal year. The approximately $343,000 cash provided by operating activities for the year ended September 30, 2015 reflects (i) net cash used by operating activities before changes in current assets and liabilities other than cash of approximately $96,000, which in turn represents our net loss of approximately $8.4 million, offset by approximately $8.3 million non-cash expenses included in that net loss and (ii) an approximately $440,000 net decrease in working capital other than cash. The primary non-cash expenses included in our loss for the year ended September 30, 2015 were an approximately $5.6 million impairment loss on goodwill and other intangible assets, an $800,000 impairment loss on property and equipment, approximately $715,000 of amortization of discount on notes payable and convertible debentures and approximately $686,000 of depreciation and amortization. The approximately $440,000 net decrease in working capital other than cash for the year ended September 30, 2015 is primarily due to an approximately $414,000 increase in accounts payable, accrued liabilities and amounts due to directors and officers. The $440,000 net decrease in working capital other than cash represented approximately $511,000 more cash than the net increase in working capital other than cash of approximately $71,000 for the prior fiscal year. The primary sources of cash inflows from operations are from receivables collected from sales to customers.
Cash used in investing activities was approximately $320,000 for the year ended September 30, 2015 as compared to approximately $556,000 cash used in investing activities for the prior fiscal year. Current and prior period investing activities related to the acquisition of property and equipment, including capitalized software development costs.
Cash used in financing activities was approximately $95,000 for the year ended September 30, 2015 as compared to approximately $231,000 cash provided by financing activities for the prior fiscal year. The current year period financing activities primarily related to (i) the December 31, 2014 repayment to Sigma of all accrued interest due on Sigma Notes 1 and 2 through that date, which interest had been capitalized as part of the outstanding principal balance, after which Sigma Notes 1 and 2 were cancelled and replaced with a new note payable to Sigma, (ii) the March 2015 repayment of the outstanding principal on certain notes payable from the proceeds of the March 2015 sale to Partners and (iii) the recurring distributions to the owners of Partners, effective March 1, 2015 through September 30, 2015, such uses of cash partially offset by the net proceeds we received in March 2015 from our sale, effective February 28, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) to Partners. These transactions are all discussed in more detail below. Financing activities for the year ended September 30, 2014, excluding accounts receivable based borrowing and repayment activity under the Line, primarily related to proceeds from the Working Capital Notes and from Sigma Note 2 and the repayment of certain notes payable from the proceeds of those two financings.
In December 2007, we entered into a line of credit arrangement (the “Line”) with a financial institution (the “Lender”). The Lender was Thermo Credit LLC through February 10, 2016 and as a result of an assignment, Thermo Communications Funding LLC, an affiliated company, subsequent to that date. Mr. Leon Nowalsky, a member of our Board, is an investor and board member in both entities.
The Line has been renewed and modified from time to time, and under which we may presently borrow up to an aggregate of $2.0 million for working capital, collateralized by our accounts receivable and certain other related assets and the amount of such borrowing being further subject to the amount, aging and concentration of such receivables. Although the Line expired on December 27, 2013, we continued after that date to negotiate renewal terms with the Lender and to maintain an outstanding borrowing balance under the Line and on February 10, 2016 (the “Effective Date”), we entered into a Loan Modification Agreement (“Modification”) which extended the term of the Line through December 31, 2017 (the “Maturity Date”). Notwithstanding this renewal for a period ending more than one year after our September 30, 2015 balance sheet, since the outstanding balance at that date could, in the absence of continuing revenues generating eligible receivables with a sufficient dollar value, be fully repayable within one year, it is classified as a current liability on that balance sheet, as well as our September 30, 2014 balance sheet.
The Modification also provides that, if no Default or Event of Default, as defined in the Modification, shall have occurred and be continuing as of the Maturity Date, and upon our notice and request to Lender sent per the timing and other requirements in the Modification, Lender shall (in good faith) engage in, and conclude as quickly as commercially reasonable, negotiations with us to extend the Maturity Date by up to an additional twelve months (i.e., through December 31, 2018). The Modification also changed a number of the other terms of the Line, as discussed below.
Prior to the Effective Date, the outstanding balance (approximately $1.7 million as of September 30, 2015 and approximately $1.6 million as of October 24, 2016) bears interest at 12.0% per annum, adjustable based on changes in prime after December 28, 2009, payable monthly in arrears. The Modification provides that as of the Effective Date the interest rate will be the prime rate plus seven and one-half percent (7.5%) per annum, but no less than eleven percent (11.0%) per annum or any higher rate that might be allowed by the terms of the Line, including the Modification, arising from certain events such as default. Accordingly, as of the Effective Date, the outstanding balance bears interest at 11.0% per annum.
Under the terms of the Line, we also incur a monitoring fee and a commitment fee, which fees were unchanged by the Modification. The monitoring fee is one twentieth of a percent (0.05%) of the borrowing limit per week, payable monthly in arrears, and the commitment fee is one percent (1%) per year of the maximum allowable borrowing amount, payable annually in advance.
The terms of the Line prior to the Effective Date required that all funds remitted by our customers in payment of receivables be deposited directly to a bank account owned by the Lender (the “Lockbox Account”), although this was never implemented. This requirement continues after the Effective Date, including the provision that such funds received in the Lockbox Account shall be immediately applied to any balance outstanding under the Line, or returned to us one day following clearance by the receiving bank, to the extent there is no balance outstanding under the Line. The Modification provides that we shall be responsible for the additional expenses related to the Lender-owned bank account, which we expect to be in the range of $12,000 to $18,000 per year.
The Modification provides that our failure to comply with these provisions shall be an immediate Event of Default, and although as of July 8, 2016 (the extended deadline granted by the Lender on June 8, 2016) these provisions had not been fully implemented, we were in substantial compliance with such provisions since August 1, 2016 and through October 28, 2016 and we have not received any notification from the Lender as to any Event of Default under these provisions, as of October 28, 2016. In a letter dated October 26, 2016, the Lender agreed that there was no default by us with respect to such lockbox provisions up to and including October 31, 2016, although this does not constitute authorization for any non-compliance with these provisions after October 31, 2016.
The Line is subject to us maintaining an adequate level of receivables, based on certain formulas. However, due to the lack of a formal renewal of the Line, in June 2014 the Lender determined that there would be no further advances under the Line, although no further repayments have been required either, and as a result the outstanding principal balance of the Line did not change from that time through June 24, 2016, regardless of weekly changes in the calculated borrowing availability based on the applicable formulas applied to our receivable levels. Effective June 24, 2016, the first deposit was made to the Lockbox Account and applied against the balance outstanding under the Line.
The Modification allows our receivable from any single party, including Partners, to be considered an Eligible Receivable to the extent that (i) the aggregate of all accounts receivable from such party and its affiliates does not exceed thirty percent (30%) of all Eligible Receivables (all Eligible Receivables for this purpose including the portion of the our accounts receivable from such party that is ultimately considered to be an Eligible Receivable) then owed by all of our account debtors and (ii) it meets all of the other requirements for eligibility as set forth in the Line.
As of the Effective Date, although the outstanding balance under the Line exceeded the maximum allowable borrowing amount under the Line (the “Borrowing Base”), the Modification provided that notwithstanding any other provisions of the Line or the Modification, such condition would not be considered a Default or an Event of Default, and Lender would agree to make advances to us thereunder based on the Borrowing Base plus an overadvance amount determined by a schedule which started at $300,000 through February 27, 2016 but declined to zero as of July 31, 2016 and thereafter. As of October 24, 2016, the outstanding balance under the Line was approximately $1,576,000, which exceeded the Borrowing Base by approximately $248,000. Although there is no formal obligation to do so, as of October 24, 2016 the Lender is allowing such overadvance condition to continue, under their expectation that we are seeking alternative funding to replace that overadvance. In a letter dated October 26, 2016, the Lender agreed that there was no default by us with respect to such overadvances up to and including October 31, 2016, although this does not constitute authorization for any non-compliance with these provisions after October 31, 2016.
The Line is also subject to our compliance with a quarterly debt service coverage covenant (the “Covenant”). Prior to the Modification, the Covenant requires that the sum of (i) our net income or loss, adjusted to remove all non-cash expenses as well as cash interest expense and (ii) contributions to capital (less cash distributions and/or cash dividends paid during such period) and proceeds from subordinated unsecured debt, be equal to or greater than the sum of cash payments for interest and debt principal payments. The Lender waived the requirement to comply with the Covenant for the quarter ended September 30, 2015. We have complied with the Covenant for all other applicable quarters through June 30, 2016.
The Modification provides that effective January 1, 2016 and thereafter, the Covenant will require that our net income or loss, adjusted to (i) add back all non-cash expenses as well as cash interest expense and (ii) subtract cash distributions and/or cash dividends paid during such period, be equal to or greater than 1.2 times the sum of cash payments for interest and debt principal payments. The Modification also provides that we will not declare or pay any dividends or distributions on any equity interest, if before or after such event an Event of Default or Default, as defined in the Modification, would exist. Both before and after the Modification, the terms of the Line allow us to achieve compliance with the Covenant by (i) including any excess of adjusted net income over the amount of adjusted net income required to comply with the Covenant in the preceding two quarters or (ii) adding to adjusted net income the proceeds from subordinated debt or equity sales meeting defined conditions, and received within certain time frames extending prior to, and in some cases subsequent to, the relevant date of determination, all set forth in the Line and the Modification. The Modification also explicitly allows, subject to Lender’s prior consent, proceeds from our sales of revenues/customer accounts to a separate legal entity and received within a time frames extending six months prior to, and one month subsequent to, the relevant date of determination, to be added to adjusted net income for purposes of the Covenant. In a letter dated October 26, 2016, the Lender consented to the inclusion of proceeds from our December 2015 and June 2016 sales of revenue/customer accounts to Partners, as well as the proceeds from such sale in process that we expect to be effective during November 2016, and extended the carryback period for those proceeds from one month to three months.
Although we do not have final financial results for periods after June 30, 2016, our estimated calculations for the quarter ended September 30, 2016, including our expectations of additional financing proceeds after that date that would be allowable for inclusion in those calculations, indicate that we are in compliance with the Covenant.
The outstanding principal is due on demand in the event a payment default is uncured one (1) day after written notice. The Modification provides that, without limiting any other rights and remedies provided by the terms of the Line or otherwise available to the Lender, the Lender may exercise one or more of certain rights and remedies, as listed in the Amendment, during the existence of any uncured Default (upon not less than five days prior written notice by Lender) or Event of Default which has not been waived in writing by Lender. Lender’s rights to exercise such rights and remedies will end if and when all of Debtors’ obligations to Lender in connection with the Line have been satisfied. The rights and remedies listed in the Modification include, but are not limited to: (i) verify the validity and amount of, or any other matter relating to, the accounts by mail, telephone, telegraph or otherwise, (ii) notify all account debtors that the accounts have been assigned to Lender and that Lender has a security interest in the accounts, (iii) direct all account debtors to make payment of all accounts directly to Lender or the Lockbox Account (iv) in any case and for any reason, notify the United States Postal Service to change the addresses for delivery of mail addressed to us to such address as Lender may designate, as well as receive, open and dispose of all such mail, provided that Lender shall promptly forward to us any such items not related to the accounts, (v) exercise all of our rights and remedies with respect to the collection of accounts, (vi) settle, adjust, compromise, extend, renew, discharge or release accounts, for amounts and upon terms which Lender considers advisable and (vii) sell or assign accounts on such terms, for such amounts and at such times as Lender deems advisable.
As of September 30, 2015, in addition to the Line as discussed above, we were also obligated for the following term debt, discussed in more detail below:
New Sigma Note
$
1,583,000
Rockridge Note
400,000
Fuse Note
220,000
Working Capital Notes
465,000
Subordinated Notes
192,500
Intella2 Investor Notes
415,000
USAC Note and other
196,983
Total term debt
$
3,472,483
Approximately $1.5 million, in aggregate, of the above debt was repaid by us from the proceeds of the Partners transaction in December 2015, as discussed in more detail below.
As of September 30, 2015 we were obligated to Sigma Opportunity Fund II, LLC (“Sigma”) under a secured note for $1,583,000, with interest payable monthly at 21% per annum and the principal due on April 15, 2016 (the “New Sigma Note”).
On December 17, 2015, we made a $1.0 million payment to Sigma against the outstanding principal balance of the New Sigma Note, reducing the remaining outstanding principal balance on the Note to $583,000. On December 22, 2015, we entered into certain agreements with Sigma and Sigma Capital, which included an amendment to the New Sigma Note. As a result of these agreements, the outstanding balance of the New Sigma Note was increased to $600,000, to reflect a one-time administrative fee of $17,000, and we also reimbursed $3,500 of Sigma’s legal expenses related to the transactions. In addition, the maturity date of the remaining balance due under the New Sigma Note was extended from April 15, 2016 to December 31, 2016.
As part of the December 22, 2015 agreements, the interest rate on the New Sigma Note was reduced from 21% to 17% per annum, the monthly advisory fee payable to Sigma Capital was reduced from $12,500 to $10,000 and the following obligations to Sigma Capital were eliminated - (i) future monthly damages payable for late SEC filings which were initiated as part of an April 30, 2015 agreement with Sigma and Sigma Capital and (ii) the third and final installment of the fee incurred by us as a result of a previous extension of the maturity date of the New Sigma Note to April 15, 2016, and which would have been $50,000 payable on December 15, 2015. We have agreed, regardless of the early repayment of the New Sigma Note, to pay a minimum aggregate amount of $100,000 of monthly advisory fee payments to Sigma Capital as scheduled, starting with the January 15, 2016 payment of $10,000.
In connection with an Advisory Services Agreement dated December 31, 2014, entered into by us with Sigma Capital in connection with the issuance of the New Sigma Note, we agreed to (i) pay Sigma Capital an initial advisory fee of $100,000, (ii) issue 70,000 restricted common shares to Sigma and 30,000 restricted common shares to Sigma Capital, such shares having an aggregate fair value of approximately $20,000, (iii) pay Sigma approximately $20,000 as reimbursement of legal expenses and (iv) make additional advisory fee payments to Sigma Capital totaling $160,000 in monthly installments through June 30, 2015. The value of the common shares issued plus the fees and expenses we agreed to pay in connection with the December 31, 2014 Sigma agreement (there was no remaining unamortized discount from previous Sigma transactions as of that date) were amortized as interest based on the initial six month the term of the New Sigma Note, resulting in an effective interest rate of approximately 65% per annum for the period from January 1, 2015 through April 30, 2015.
As part of the April 30, 2015 agreement with Sigma we (i) paid Sigma Capital a $25,000 transaction fee, (ii) paid Sigma $14,000 as reimbursement of legal expenses and (iii) agreed to make additional advisory fee payments to Sigma Capital aggregating $40,000 in monthly installments from July 15, 2015 through October 15, 2015. The April 30, 2015 agreement also required us to pay liquidated damages for late SEC filings and in accordance with that requirement we paid Sigma Capital an aggregate of $42,500 for such damages from April 30, 2015 through September 30, 2015 and another $25,000 for such damages after that date through November 27, 2015, the last payment date before the agreement to pay such damages was cancelled. When the amortization of the fees and expenses we agreed to pay in connection with the April 30, 2015 Sigma agreement, including the anticipated liquidated damages for late SEC filings, such items aggregating $121,500, were combined with the amortization of the remaining unamortized discount arising from the December 31, 2014 financing, the resulting effective interest rate of the New Sigma Note was approximately 57% per annum for the period from May 1, 2015 through September 30, 2015. Although this effective rate would be impacted by the September 21, 2015 transaction discussed below, we will not reflect that impact until October 1, 2015 and have determined that the impact of this delayed implementation is immaterial. This effective interest rate does not include the impact if an early repayment was required, as discussed above.
As part of the September 21, 2015 agreement with Sigma we (i) paid Sigma Capital a $25,000 fee (added to the loan principal balance), (ii) paid Sigma $7,500 as reimbursement of legal expenses, (iii) agreed to make an additional advisory fee payment to Sigma Capital of $2,500 on October 15, 2015, and (iv) agreed, in consideration of the loan maturity date extension from October 15, 2015 to April 15, 2016, to pay fees to Sigma Capital aggregating $175,000 in three monthly installments from October 15, 2015 through December 15, 2015 (of which we paid $125,000, with the remaining $50,000 obligation cancelled as part of the December 22, 2015 agreement with Sigma as discussed above) and to make additional advisory fee payments to Sigma Capital aggregating $75,000 in monthly installments from November 15, 2015 through April 15, 2016 (of which we paid $25,000, with the remaining $50,000 obligation cancelled and replaced with a new advisory fee obligation as part of the December 22, 2015 agreement with Sigma as discussed above).
Upon our receipt of funds as a result of (i) the sale of any portion of our business, however structured, including, without limitation, sale of assets, subsidiaries, revenues or business units, and/or (ii) the issuance of additional equity, debt or convertible debt capital, and/or (iii) our consolidation or merger with or into another entity, all outstanding principal and interest with respect to the New Sigma Note will be due, but not to exceed the net proceeds of such funds received by us in any such transaction(s). However, this early repayment requirement did not apply to the $1.0 million proceeds we received in March 2015 from the sale of certain of Infinite’s audio conferencing customer accounts to Partners and does not apply to up to $800,000 in proceeds should we elect to exercise our rights under the Funding Letter, both as discussed below. Also, the December 22, 2015 transactions with Sigma and Sigma Capital include (i) their agreement to limit to $1.0 million the required principal repayment against the New Sigma Note arising from the $2.1 million proceeds we received in December 2015 from the sale of certain of Infinite’s audio conferencing customer accounts to Partners, and which $1.0 million we paid Sigma on December 17, 2015 and (ii) their consent to our receipt of future proceeds of up to an additional $772,500 from Revenue Sales without requiring further principal repayments against the New Sigma Note, which proceeds we received in June 2016. Revenue Sales are defined in our agreements with Sigma as “financing from a private placement structured in a separate legal entity collateralized by a portion of our Infinite operations”.
Sigma has the right to convert the New Sigma Note (including the accrued interest thereon) to common stock at a rate of $0.30 per share, which right Sigma may exercise after the maturity date, in its entirety or partially, at its option or it may exercise before the maturity date, but only if we are in default on the New Sigma Note or upon the sale of all or substantially all of our business, assets or capital stock.
As of September 30, 2015 and as of October 28, 2016, we were obligated for an outstanding balance of $400,000 on a secured convertible note payable (the “Rockridge Note”) to Rockridge Capital Holdings LLC (“Rockridge”), with interest payable monthly at 12% per annum. On December 31, 2014, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from December 31, 2014 to June 30, 2015, in exchange for our agreement to increase the origination fee payable under such note by 50,000 restricted common shares. On April 30, 2015, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from June 30, 2015 to October 15, 2015, in exchange for our agreement to increase the origination fee payable under such note by 30,000 restricted common shares. On August 18, 2015, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from October 15, 2015 to April 15, 2016, in exchange for our agreement to increase the origination fee payable under such note by 50,000 restricted common shares. On December 16, 2015, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from April 15, 2016 to December 31, 2016, in exchange for our agreement to increase the origination fee payable under such note by 70,000 restricted common shares.
In connection with the New Sigma Note, as amended, an agreement is in place between Sigma and Rockridge, which includes Rockridge’s agreement (along with our agreement) that Sigma has the right, but not the obligation, to repay the Rockridge Note at face value in case of our default on the New Sigma Note or the Rockridge Note. Such repayment amount would be added to the principal of the New Sigma Note, with the principal being payable and accruing interest under the terms of the New Sigma Note. Furthermore, the fees payable to Sigma in the event of such repayment would be $25,000 cash payable upon such early repayment plus $4,000 per month starting from the one-month anniversary of such repayment date through the date that all amounts we owe Sigma are repaid.
The Rockridge Note is secured by a first priority lien on all of our assets, such lien subordinated only to the extent higher priority liens on assets, primarily accounts receivable and certain designated software and equipment, are held by certain of our other lenders. We also entered into a Security Agreement with Rockridge that contains certain covenants and other restrictions with respect to the collateral.
Upon notice from Rockridge at any time and from time to time prior to the Maturity Date, all or part of the outstanding principal amount of the Rockridge Note may be converted into a number of restricted shares of ONSM common stock. These conversions are subject to a minimum of one month between conversion notices (unless such conversion amount exceeds $25,000) and will use a conversion price of eighty percent (80%) of the fair market value of the average closing bid price for ONSM common stock for the twenty (20) days of trading on the OTCQB (or such other exchange or market on which ONSM common shares are trading) prior to such Rockridge notice, but such conversion price will not be less than $2.40 per share.
The Note and Stock Purchase Agreement with Rockridge calls for our issuance of an origination fee, upon not less than sixty-one (61) days written notice to us, of 816,667 restricted shares of our common stock (the “Shares”), which includes the increases noted above. The value of those Shares is subject to a limited guaranty of no more than an additional payment by us of $75,000 which will be effective in the event the Shares are sold for an average share price less than the minimum of $1.20 per share (the “Shortfall Payment”). If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, the required Shortfall Payment would be $75,000, which is equal to the liability reflected on our financial statements as of September 30, 2015.
Including the fair market value of the Shares at the time they were recorded on our books, plus legal fees paid by us, the effective interest rate of the Rockridge Note was approximately 44.3% per annum, until a September 2009 amendment, when it was reduced to approximately 28.0% per annum, the October 2012 Shortfall Payment accrual, which increased it to approximately 31.1% per annum and the December 2012 Allonge, which decreased it to approximately 29.1% per annum. Effective February 28, 2014, as a result of the inclusion of the remaining unamortized discount in a debt extinguishment loss, the effective rate was reduced to 12% per annum and, because of the expensing of the value of all subsequent increases in the number of origination fee Shares on the basis of immateriality, it is deemed to have remained at that level to date. These rates do not give effect to any difference between the sum of the value of the Shares at the time of issuance plus the Shortfall Payment, as compared to the recorded value of the Shares on our books, nor do they give effect to any variance between the conversion price versus market prices if principal is satisfied with common shares issued upon conversion instead of cash.
As of September 30, 2015, we were obligated for $220,000 under an unsecured subordinated note issued on March 19, 2013 to Fuse Capital LLC (“Fuse”) (the “Fuse Note”). The Fuse Note, which is convertible into restricted common shares at Fuse’s option using a rate of $0.50 per share, was payable on March 19, 2015, with interest at 12% per annum payable on a monthly basis. Effective February 28, 2015 the Fuse Note was amended, extending the maturity date to March 1, 2016. This amendment provided that interest would be paid quarterly, commencing June 30, 2015 and also increased the outstanding principal balance from the original $200,000, to $220,000, for the effect of a $20,000 due diligence fee earned by the noteholder in connection with the amendment, although the portion of the principal balance convertible to common shares remains at $200,000. This amendment also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale.
Effective October 15, 2015 the Fuse Note was further amended, extending the maturity date to July 15, 2016. Effective December 16, 2015 a $100,000 principal payment was made and the Fuse Note was further amended to extend the maturity date to December 31, 2016. Effective June 6, 2016 the Fuse Note was further amended, extending the maturity date to January 15, 2017. Accordingly, the amount repaid in December 2015 is classified as current on our September 30, 2015 balance sheet and the remaining $120,000 balance is classified as non-current.
In connection with the original issuance of the Fuse Note, we issued Fuse 80,000 restricted common shares (the “Fuse Common Stock”), which we agreed to buy back, to the extent permitted by law, at $0.40 per share, if the fair market value of the Fuse Common Stock was not equal to at least $0.40 per share as of March 19, 2015 (two years after issuance). As of June 30, 2013 we determined that our share price had remained below $0.40 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, we recorded the $20,000 present value of this obligation as a liability on our financial statements as of June 30, 2013 (under the caption “Accrued liabilities” on our balance sheet) which increased to $22,000 as of September 30, 2013, as a result of the accretion of $2,000 as interest expense for the year then ended, increased again to $28,000 as of September 30, 2014 as a result of the accretion of $6,000 as interest expense for the year then ended and increased again to $32,000 as of September 30, 2015 as a result of the accretion of $4,000 as interest expense for the year then ended.
The closing ONSM share price was $0.16 per share as of March 19, 2015, which would trigger the above repurchase obligation, which would be $32,000 based on 80,000 shares at $0.30 per share. This only applies to the extent the Fuse Common Stock was still held by Fuse at the applicable date. Furthermore, as part of the February 28, 2015 amendment discussed above, it was agreed that Fuse would not request any payments by us under this commitment prior to the maturity date of the Fuse Note, which is currently January 15, 2017.
In connection with the original issuance of the Fuse Note, we also issued 40,000 restricted common shares to another third party for finder and other fees. Including the value of the Fuse Common Stock plus the value of the common stock issued for related financing fees (but excluding a portion of this amount written off as a debt extinguishment loss as a result of the modification, by virtue of its inclusion in the Fuse Note, of a predecessor note) results in an effective interest rate of approximately 19% per annum through March 19, 2015.
The $20,000 due diligence fee earned by the noteholder in connection with the February 28, 2015 amendment was recorded as a discount against the Fuse Note and is being amortized as interest expense over the approximately one year extension period, resulting in an effective interest rate of approximately 21% per annum.
As of September 30, 2015, we were obligated for $465,000 under partially secured promissory notes issued to two investors during October and November 2013 (the “Working Capital Notes”), bearing interest at 15% per annum. The Working Capital Notes originally provided that in the event that we receive funds in excess of $5 million as a result of a single transaction for the sale of all or a part of our operations or assets, they are payable in full within ten (10) days of our receipt of such funds, along with any interest due at that time.
Effective February 28, 2015 one of the Working Capital Notes with an original outstanding principal balance of $250,000 was amended, extending the maturity date to March 1, 2016. This amendment provided that interest would be paid quarterly, commencing June 30, 2015 and also increases the outstanding principal balance to $275,000, for the effect of a $25,000 due diligence fee earned by the noteholder in connection with the amendment. This amendment also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale. Although this Working Capital Note was further amended, effective October 15, 2015, to extend the maturity date to July 15, 2016, it was paid in full on December 30, 2015. Such repayment, in accordance with our December 29, 2015 agreement with J&C Resources, Inc. (“J&C”), was made in consideration of our receipt of $157,000 from J&C on December 30, 2015 for our issuance of an unsecured, subordinated note with a December 31, 2016 maturity date. Accordingly $157,000 of this Working Capital Note, the amount replaced by the proceeds of the J&C financing, is classified as non-current on our September 30, 2015 balance sheet and the remaining $118,000 balance is classified as current.
Effective September 16, 2015 the other of these two Working Capital Notes, which had a remaining outstanding principal balance of $170,000, was amended to extend the maturity date to April 16, 2016. This amendment provided that interest accrued but unpaid as of the date of the amendment of approximately $36,000, plus interest from the date of the amendment, would be paid on the amended maturity date and also increased the outstanding principal balance to $190,000, for the effect of a $20,000 loan extension fee earned by the noteholder in connection with the amendment. Effective October 15, 2015 this Working Capital Note was further amended, extending the maturity date to July 15, 2016 and effective June 6, 2016 this Working Capital Note was further amended, extending the maturity date to January 15, 2017. Accordingly this Working Capital Note is classified as non-current on our September 30, 2015 balance sheet.
The Working Capital Notes are expressly subordinated to the following notes issued by us and outstanding at the time of the issuance of the Working Capital Notes: Thermo Credit LLC, Rockridge Capital Holdings LLC, Sigma Opportunity Fund II, LLC, USAC, and certain capital leases, or any assignees or successors thereto, subject to a cumulative maximum outstanding balance of $3.9 million. The Working Capital Notes are secured by a limited claim to our assets, pari passu with up to $775,000 of total indebtedness and related obligations raised and incurred by us during the first quarter of fiscal 2014, subject to all prior liens of the foregoing entities and limited to the extent such a lien is allowable by the terms of the loan documents executed between us and the foregoing entities. The Working Capital Note with an amended principal balance of $190,000 provides that we will be bound to a limit of $3.9 million in total debt senior to that Working Capital Note while that note is outstanding.
In connection with the above financing, we issued to the holders of Working Capital Notes an aggregate of 358,334 restricted common shares (the “Working Capital Shares”), which we have agreed to buy back, to the extent permitted by law, from the holder for $0.30 per share on the maturity dates of the Working Capital Notes, if the fair market value is less than that on that date. The above only applies to the extent the Working Capital Shares are still held by the noteholder on the applicable date and the buyback obligation only applies if the noteholder gives us notice and delivers the shares within fifteen days after the applicable maturity dates. The $108,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2015.
312,500 of the 358,334 Working Capital Shares were issued in connection with the Working Capital Note having an adjusted principal balance prior to its repayment on December 30, 2015 of $275,000. However since the terms of the buyback obligation reference the maturity date, and not the repayment date, we have determined that our buyback obligation with respect to those shares would be determined with reference to the July 15, 2016 maturity date. The present value of this obligation is included as a liability of approximately $94,000 on our September 30, 2015 balance sheet. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, a stock repurchase payment of $93,750 would be required.
The remaining 45,834 of the 358,334 Working Capital Shares were issued in connection with the Working Capital Note having an adjusted principal balance of $190,000 and a maturity date of January 15, 2017 which as discussed above would be the date based on which our buyback obligation with respect to those shares would be determined. The present value of this obligation is included as a liability of approximately $14,000 on our September 30, 2015 balance sheet. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, a stock repurchase payment of $13,750 would be required.
The fair market value at the time of issuance of the Working Capital Shares, plus 100,000 finders agreement shares we also issued, plus the cash deducted from the proceeds for related origination fees, was $258,260. $88,807 of this amount was reflected as a non-cash debt extinguishment loss. The remainder of $169,453 was reflected as a discount against the Working Capital Notes (as well as a corresponding increase in additional paid-in capital for the shares) and that amount was amortized as interest expense over the term of the initial term of the Working Capital Notes, resulting in a weighted average effective interest rate of approximately 33.2% per annum.
As of September 30, 2015, we were obligated for $192,500 under unsecured Subordinated Notes issued to various lenders from April 2012 through January 2013, which are fully subordinated to the Line and the Rockridge Note and bear cash interest at 12% per annum. Modifications made in January 2014 to the terms of these notes extended the maturity dates to October 2014. Although we did not make the October 2014 principal payments, in March 2015 we repaid $75,000 of the outstanding principal on these notes and also extended the maturity dates on the remaining notes to March 1, 2016. The amended terms also provided that interest would be paid quarterly, commencing June 30, 2015 and also increased the original outstanding balance on these remaining notes from $175,000 to $192,500, for the effect of $17,500 in aggregate due diligence fees earned by the noteholders in connection with the amendments. The amendments also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale. These notes were further amended, effective October 15, 2015, to extend the maturity dates to July 15, 2016, but an aggregate of $162,500 was paid against the outstanding balances on December 16, 2015. Effective December 16, 2015, the one note with a remaining outstanding balance was further amended to extend the maturity date on the remaining outstanding balance to December 31, 2016. Accordingly $162,500 of these note balances, the amount repaid in December 2015, is classified as current on our September 30, 2015 balance sheet and the remaining $30,000 balance is classified as non-current.
As of September 30, 2015, we were obligated for $415,000 outstanding principal on unsecured subordinated notes issued in November 2012 to various lenders (the “Intella2 Investor Notes”), which are fully subordinated to the Line and the Rockridge Note and bear cash interest at 12% per annum. $200,000 of the total $220,000 outstanding principal balance of one of these notes held by Fuse (the “Intella2 Fuse Note”), is convertible into restricted common shares at Fuse’s option using a rate of $0.50 per share.
During April and May 2014, the Intella2 Fuse Note and Intella2 Investor Notes held by two of the other four investors were further amended to provide that the principal balances aggregating $290,000 would not be payable until the November 30, 2014 maturity date, although interest would continue to be payable on a monthly basis. We did not make the principal payments on the Intella2 Investor Notes when due on November 30, 2014, but we continued to accrue interest expense after that point on the outstanding balance at the stated interest rate. Effective February 28, 2015, we entered into an agreement with certain of the noteholders whereby (i) we paid all accrued interest through that date plus the aggregate outstanding principal of $60,000 on two of the Intella2 Investor Notes and (ii) we paid all accrued interest through that date related to the Intella2 Fuse Note and one of the two other Intella2 Investor Notes remaining unpaid. These two notes, representing aggregate outstanding principal of $250,000, were also amended at that time to extend the maturity date to March 1, 2016 and to increase the aggregate outstanding principal balance to $275,000, for the effect of due diligence fees aggregating $25,000 earned by the noteholders in connection with the amendments although the portion of the Intella2 Fuse Note convertible to common shares remained at $200,000.
The February 28, 2015 amendments also provided that future interest would be paid quarterly, commencing June 30, 2015, and further provided that in the event we received funds in excess of $5 million as a result of the sale of our assets, the outstanding principal and interest would be repaid within thirty days of the receipt of such proceeds.
Effective October 15, 2015 the Intella2 Fuse Note, having an outstanding principal balance of $220,000, was further amended, extending the maturity date to July 15, 2016. Effective December 16, 2015 a $100,000 principal payment was made and the Intella2 Fuse Note was further amended to extend the maturity date to December 31, 2016. Effective June 6, 2016 the Intella2 Fuse Note was further amended, extending the maturity date to January 15, 2017. Accordingly $100,000 of the Intella2 Fuse Note balance, the amount repaid in December 2015, is classified as current on our September 30, 2015 balance sheet and the remaining $120,000 balance is classified as non-current.
Effective June 6, 2016, one of the two other Intella2 Investor Notes remaining unpaid, with an outstanding principal balance of $55,000 was further amended, extending the maturity date to January 15, 2017. Accordingly this balance is classified as non-current on our September 30, 2015 balance sheet.
Effective June 1, 2016, the fifth Intella2 Investor Note, with an outstanding principal balance of $140,000, was amended, extending the maturity date to January 15, 2017. Accordingly this balance is classified as non-current on our September 30, 2015 balance sheet. This note had previously been due in full as of November 30, 2014, plus accrued but unpaid interest of approximately $27,000 through that date, none of which was paid prior to the June 1, 2016 amendment. We had continued to accrue interest expense after the maturity date through September 30, 2015 on the outstanding balance at the stated interest rate and as part of the June 1, 2016 amendment, we paid $25,200 of the $50,400 of interest accrued through the date of that amendment and agreed to pay the balance as follows: $10,000 on or before June 30, 2016, $7,600 on or before September 1, 2016 and $7,600 on or before December 1, 2016.
In connection with the initial issuance of the Intella2 Investor Notes, we issued to the holders of the certain of those notes having an initial outstanding balance of $450,000 an aggregate of 180,000 restricted common shares, which we agreed to buy back, to the extent permitted by law, at $0.40 per share, if the fair market value of those shares was not equal to at least $0.40 per share as of November 30, 2014 (two years after issuance). The $66,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2015. This approximately $66,000 liability is equal to the potential repurchase of 164,000 shares at $0.40 per share, since we satisfied our obligation with respect to 16,000 shares by our reimbursement of the shortfall upon a single holder’s resale of those shares in the market, which payment we recorded as interest expense in fiscal 2014.
In connection with the initial issuance of other subordinated notes repaid by us in March 2015, we issued to the holders of certain of those notes having an initial outstanding balance of $200,000 an aggregate of 240,000 restricted common shares, of which we agreed to buy back, to the extent permitted by law, up to 40,000 shares if the fair market value of the Investor Common Stock was not equal to at least $0.80 per share as of November 30, 2014 (two years after issuance). The $8,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2015. This approximately $8,000 liability is equal to the potential repurchase of 10,000 shares at $0.80 per share, since we satisfied our obligation with respect to 30,000 shares by our reimbursement of the shortfall (i) upon a single holder’s resale of 5,000 of those shares in the market, which payment we recorded as interest expense of approximately $3,200 in fiscal 2014 and (ii) upon three holders;’ resale of an aggregate of 25,000 of those shares in the market, which payment we recorded as interest expense of approximately $16,000 in the year ended September 30, 2015.
The closing ONSM share price was $0.17 per share as of November 30, 2014, which would trigger the above repurchase obligations. However, these repurchase obligations are subject to the shares being still held by the investor(s) at such date and the investor giving us notice and delivering the shares within fifteen days after such date, as well as any other legal restrictions with respect to our repurchase of shares. It is possible that some or all of these repurchase obligations could be avoided by us due to the failure of the investor or investors to formally present the shares to us and/or provide notice by the specified date, or as a result of legal restrictions with respect to our repurchase of shares. However, because of our ongoing discussions with certain of these investors, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor these repurchase obligations for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible those investors could assert mitigating circumstances under which we might honor all or part of these repurchase obligations. Therefore, pending our further evaluation of our position with respect to these repurchase obligations, we are leaving the accrued liability on our financial statements as of September 30, 2015.
On May 15, 2015 we executed a letter agreement promissory note with the Universal Service Administrative Company (“USAC”) for $220,616, payable in monthly installments of $10,463 (which include interest at 12.75% per annum) over twenty-four months starting June 15, 2015 through May 15, 2017 - the outstanding balance was $212,534 as of September 30, 2015. The May 15, 2015 letter agreement promissory note is related to our liability for Universal Service Fund (USF) contribution payments not made by us during the first and second quarters of fiscal 2015, but which were reflected as an accrued liability on our balance sheet as of those dates and therefore resulted in the May 2015 reclassification of a portion of that accrued liability to notes payable. USAC is a not-for-profit corporation designated by the Federal Communications Commission (“FCC”) as the administrator of the USF program.
Although they were repaid on March 21, 2013, the terms of the Equipment Notes still provided that on the maturity dates (as established in the December 12, 2012 modification), the Recognized Value of the shares issued as part of such repayment would be calculated as the sum of the following two items - (i) the gross proceeds to the Investors from the sales of the 583,334 shares issued per the December 12, 2012 modification plus (ii) the value of those shares issued and still held by the Noteholders and not sold, using the average ONSM closing bid price per share for the ten (10) trading days prior to the applicable maturity date. If the Recognized Value exceeded the Credited Value, then we would receive 50% (fifty percent) of such excess, although the amount received by us shall not exceed $175,000. If the Credited Value exceeded the Recognized Value, then we would be obligated to pay such excess to the Noteholders. With respect to Equipment Notes held by one of the three Noteholders, the Credited Value exceeded the Recognized Value for 166,667 common shares by approximately $16,000 as of the respective November 15, 2013 maturity date, which we have recognized as a liability on our September 30, 2015 balance sheet.
In connection with financing obtained by us in October and November 2013 from the other two Noteholders (see “Working Capital Notes” above), the above terms with respect to settlement of differences between the Credited Value and the Recognized Value were replaced with our agreement to buy back, to the extent permitted by law, the 416,667 common shares issued to those Noteholders, if the fair market value of the shares are not equal to at least $0.30 per share on the maturity dates of the October and November 2013 financing, which were April 24 and May 4, 2015, respectively. The $125,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2015. Furthermore, we have agreed that in the event we receive funds in excess of $5 million as a result of a single transaction for the sale of all or a part of our operations or assets, that those funds will be available to satisfy the above buyback obligation, such availability subject only to prior satisfaction of any claims held by Thermo Credit LLC, Rockridge Capital Holdings LLC, Sigma Opportunity Fund II, LLC, USAC, and certain capital leases (HP Financial and Tamco), or any assignees or successors thereto and pari passu with up to $775,000 of total indebtedness and related obligations raised and incurred by us during the first quarter of fiscal 2014.
The closing ONSM share price was $0.14 and $0.16 per share on April 24 and May 4, 2015, respectively, which would trigger the above repurchase obligation in the gross amount of $125,000, based on 416,667 shares at $0.30 per share. However, this repurchase obligation is subject to the shares being still held by the Noteholder(s) at such date and the Noteholder giving us notice and delivering the shares within fifteen days after such date, as well as any other legal restrictions with respect to our repurchase of shares. It is possible that some or all of this repurchase obligation could be avoided by us due to the failure of the Noteholder or Noteholders to formally present the shares to us and/or provide notice by the specified date, or as a result of legal restrictions with respect to our repurchase of shares. However, because of our ongoing discussions with certain of these Noteholders, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this repurchase obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible those Noteholders could assert mitigating circumstances under which we might honor all or part of this repurchase obligation. Therefore, pending our further evaluation of our position with respect to this repurchase obligation, we are leaving the accrued liability on our financial statements as of September 30, 2015.
In December 2012, as part of a transaction under which J&C Resources issued us a funding commitment letter, we agreed to reimburse CCJ in cash the shortfall, payable on December 31, 2014, as compared to minimum guaranteed net proceeds of $175,000, from their resale of 437,500 common shares CCJ received on December 31, 2012 upon their conversion of 17,500 shares of Series A-13 and after effecting our agreement as part of the same transaction to reduce the conversion rate on all Series A-13 shares from $1.72 per common share to $0.40 per common share. The $109,000 present value of our estimate of this obligation is recorded as a liability on our financial statements as of September 30, 2015. If the closing ONSM share price of $0.21 per share on December 31, 2014 (the end of the period during which the shares must be sold to be eligible for reimbursement of any shortfall) was used as a basis of calculation, our obligation for this shortfall payment would be $83,000 plus brokerage commissions and other selling costs.
As a condition of the above shortfall reimbursement, CCJ agreed to sell the Conversion Shares in the open market between the December 21, 2013 conversion date and December 31, 2014 payment date, taking due care with respect to the timing and volume of those sales and the market conditions. As of April 5, 2016, CCJ has not formally requested this reimbursement nor have they provided proof that the above conditions of reimbursement have been met. However, because of our ongoing discussions with CCJ, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this shortfall reimbursement obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible that CCJ could assert mitigating circumstances, notwithstanding whether or not they met the conditions of reimbursement, under which we might honor all or part of this shortfall reimbursement obligation. Therefore, pending our further evaluation of our position with respect to this shortfall reimbursement obligation, we are leaving the accrued liability on our balance sheet as of September 30, 2015.
After annual increases in prior years as set forth in the employment agreements, the contractual annual base salaries for the five Executives in aggregate as of September 30, 2015 was approximately $1.8 million, subject to a five percent (5%) increase on September 27, 2016 and each year thereafter - a portion of these contractual salaries are presently not being paid to the Executives and we are accruing these unpaid amounts as non-cash compensation expense, with the unpaid portion reflected as an accrued liability under the balance sheet caption “Amounts due to executives and officers”. In addition, each of the Executives receives an auto allowance payment of $1,000 per month, a “retirement savings” payment of $1,500 per month and an annual reimbursement of dues or charitable donations up to $5,000. We also pay insurance premiums for the Executives, including medical, life and disability coverage. Effective October 1, 2009, in response to our operating cash requirements, the base salary amounts being paid to the Executives were adjusted to be 10% less than the contractual amounts. In addition, until certain actions as discussed below, the amounts representing the subsequent contractual annual increases to those base salary amounts were not paid. Effective September 16, 2012, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.8% of the contractual base salary at that time. Effective September 16, 2014, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 5.0% of the contractual base salary at that time. Effective May 1, 2015, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.4% of the contractual base salary at that time. Effective August 15, 2016, the base salary amounts being paid to the Executives were reduced by an amount representing approximately 3.0% of the contractual base salary at that time. As of October 7, 2016, the base salary payments to the Executives are approximately 21.5% less than the contractual base salaries (as adjusted through the September 27, 2016 raise), compared to the 10% reduction instituted in October 2009 and which reduction was initially company-wide but at this time affects very few of our other employees. The 21.5% shortfall cited above is before considering the impact of the two lump-sum payments made to the Executives in April and December 2015, as discussed below. Under the terms of the employment agreements, upon a termination subsequent to a change of control, termination without cause or constructive termination, each as defined in the agreements, we would be obligated to pay each of the Executives an amount equal to three (3) times the Executive’s base salary plus full benefits for a period of the lesser of (i) three (3) years from the date of termination or (ii) the date of termination until a date one (1) year after the end of the initial employment contract term.
In consideration of the waiver and satisfaction of any remaining unpaid salary due to the Executives through December 31, 2012 under their employment agreements, as well as the waiver and satisfaction of any remaining unpaid amounts due to certain of those Executives in connection with the acquisition of Acquired Onstream, we (as authorized by our Board of Directors) and the Executives agreed, effective January 22, 2013, (i) to pay $100,000 ($20,000 per Executive) of the withheld compensation in cash and (ii) to issue 1,700,000 (340,000 per Executive) fully vested ONSM common shares, subject to certain trading restrictions (the “Executive Shares”).
$125,000 in cash ($25,000 per Executive) was paid in April 2015, which satisfied the above commitment to pay the $100,000 of pre December 31, 2012 compensation not covered by the Executive Shares (and also satisfied $25,000 of post December 31, 2012 compensation previously withheld by us and accrued as a liability).
Although, as of October 28, 2016, the Executive Shares have not been issued, due to certain administrative and documentation requirements, since the Executive Shares were committed to be issued by the January 22, 2013 action of the Board, that issuance was reflected in our financial statements as of the date of such commitment. To the extent there is any shortfall from the gross proceeds upon resale by the Executives of the Executive Shares as compared to twenty-nine cents ($0.29) per share, the shortfall will be reimbursed to the Executives by us in cash, or at our option, by the issuance of additional fully vested ONSM common shares (the “Additional Executive Shares”), with the Additional Executive Shares subject to reimbursement by us to the Executives of any shortfall from the gross proceeds upon resale as compared to the fair value used to determine the number of such Additional Executive Shares. All shortfall reimbursements shall be payable by us within ten (10) business days after presentation by reasonable supporting documentation of the shortfall to us by the Executives. The $136,000 value of this obligation is recorded as a liability on our financial statements as of September 30, 2015, based on the closing ONSM share price as of that date. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, our obligation for this shortfall payment would be $187,000, or the equivalent in common shares.
An additional $125,000 in cash compensation ($25,000 per Executive) was paid in December 2015, which will reduce the previously accrued liability for unpaid compensation and will also result in a corresponding reclassification between cash compensation and non-cash compensation expense.
On February 20, 2013, we (as authorized by our Board of Directors) and the Executives agreed to certain changes in the Executives’ employment agreements, which among other things included the implementation of an executive incentive compensation plan (the “Executive Incentive Plan”). Compensation under the Executive Incentive Plan would be in the form of Fully Restricted (as defined below) ONSM common Plan shares (“Executive Incentive Shares”) and is based on the Company achieving certain financial objectives as follows for fiscal year 2015:
· Increased revenues (as compared to the respective prior year).
· Positive operating cash flow (as defined in the Executive Incentive Plan).
· EBITDA, as adjusted, (as defined in the Executive Incentive Plan) for at least two quarters.
We recorded the issuance of 375,000 Executive Incentive Shares in our financial statements for the year ended September 30, 2015, based on our previous determinations that (i) the fiscal 2015 financial objective for EBITDA, as adjusted, was met and (ii) it was probable that the fiscal 2015 financial objective for positive operating cash flow, would be met. These shares were recorded at a value of $71,250, which was recognized as non-cash compensation expense of (i) $47,500 over the six months ended March 31, 2015 (with respect to the EBITDA objective) and (ii) $23,750 over the twelve months ended September 30, 2015 (with respect to the cash flow objective). Although our final fiscal 2015 financial statements indicate that the operating cash flow objective was not met, we have continued to recognize the related compensation expense in our September 30, 2015 financial statements, pending further review of this matter by the Board of Directors. Regardless of the results of this review, this amount is considered immaterial for adjustment prior to finalization of the fiscal 2015 financial results. The third fiscal 2015 financial objective, increased revenues, was not met. If accomplished, it would have resulted in an aggregate of 250,000 additional Executive Incentive Shares issued to the Executives as a group.
None of the shares recorded on our financial statements through September 30, 2015 and related to the financial objectives for fiscal 2015 have been issued as of October 28, 2016.
The Executive Incentive Shares are subject to a complete restriction on the Executive’s ability to access or transact in any way such shares until the restriction is lifted. Upon a change of control, termination of the Executive’s employment or the imminently proposed and/or anticipated sale of the Company at a price of $1.00 per common share or more, all restrictions on the Executive Incentive Shares and any other common shares held by the Executives will be lifted. In the case of a sale, all restrictions will be lifted in time for those previously restricted shares to participate in all voting with respect to the proposed sale and will be eligible, at the Executive’s option, for inclusion as part of the shares sold in that transaction. Due to the restrictions on the Executive Incentive Shares, we have determined that the issuance thereof will not result in taxable compensation income to the Executives (or tax deductible compensation expense to the Company) until such restrictions have been lifted.
As of September 30, 2015, we were obligated under operating leases for five office locations (one each in Pompano Beach, Florida, San Francisco, California and Colorado Springs, Colorado and two in the New York City area), which call for monthly payments totaling approximately $54,000. The leases have expiration dates ranging from 2015 to 2022 (after considering our rights of termination) and in most cases provide for renewal options. The future minimum lease payments required under the non-cancelable operating leases total approximately $1.4 million through September 30, 2022, of which approximately $383,000 relates to the year ending September 30, 2016. Also, although approximately nine months of unpaid rent with respect to our Pompano Beach facility is included as a liability on our balance sheet as of September 30, 2015, these amounts are not included in the future minimum lease payments of approximately $1.4 million. As of October 28, 2016, our rent payments for that location remain in arrears, by approximately twelve months, and we are in negotiations with the landlord with respect to this obligation and the terms of our continuing tenancy.
We have entered into various agreements for our purchase of Internet, long distance and other connectivity as well as use of certain co-location facilities, for an aggregate remaining minimum purchase commitment of approximately $1.6 million, approximately $1.0 million of that commitment related to the one year period ending September 30, 2016 and the balance of such commitment related to the period from October 2016 through August 2017.
Projected capital expenditures for the year ending September 30, 2016 total approximately $240,000, which includes software and hardware upgrades to the webcasting platform, the DMSP and the audio and web conferencing infrastructure. Some of these projected capital expenditures may be financed, deferred past the twelve month period or cancelled entirely, depending on our other cash flow considerations.
On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). The Sold Accounts represented historical annual revenues of approximately $1.35 million. After giving effect to our determination that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, (i) the gross proceeds from this and our subsequent transactions with Partners are reflected as an increase in our equity (noncontrolling owners’ interest in VIE), (ii) the gross revenues from the Sold Accounts, and accounts sold as part of our subsequent transactions with Partners, are included in our consolidated revenues and (iii) the payment of the Partners’ guaranteed return percentage, which is deducted from these gross revenues, is reflected as a decrease in our equity (distributions to owners of VIE).
In connection with the February 28, 2015 sale, Infinite and Partners entered into a Management Services Agreement (“MSA”) that provides for Infinite to continue to invoice the Sold Accounts but the payments when received from those Sold Accounts will be deposited in a segregated Partners owned bank account. Partners will return those customer proceeds to Infinite on a weekly basis in the form of a Management Fee, after deducting a certain amount representing (i) Partners’ guaranteed return (which is 40% of the Purchase Price per annum with the first six months guaranteed regardless of whether we exercise our rights under the Option Agreement or the MSA is otherwise terminated) and (ii) accounting fees payable to the third-party accounting firm as discussed below. Infinite will continue to service the Sold Accounts, incurring and absorbing all related costs of doing so - i.e., Partners will have no operating responsibilities and no operating costs related to the sold accounts other than to pay the Management Fee to Infinite. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the Partners’ guaranteed return percentage decreased. The MSA defines specific services, along with certain minimum standards of quality for such services, required to be provided by Infinite with respect to the Sold Accounts. The MSA contains provisions that prohibit (i) Infinite servicing the Sold Accounts for a period of two years after the termination of the MSA and (ii) Partners interfering in any way with Infinite’s performance of its duties thereunder or communicating with the Sold Accounts or with Infinite’s employees, vendors, consultants or agents during the term of the MSA.
The MSA initially had a two year term expiring on February 28, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights as follows. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the expiration date of the MSA was extended. Partners has the right to terminate the MSA, effective immediately upon written notice to Infinite, in the event of the following: (i) an Infinite Event of Default or (ii) the sale by Partners of the Sold Accounts subject to the terms of the Membership Interest Option Agreement.
An Infinite Event of Default is (i) Bankruptcy of Infinite (as defined), (ii) a lack of compliance by Infinite with the provisions of the MSA which is continuing five (5) business days after receiving written notice from partners specifying such lack of compliance or (iii) a breach by Infinite or Onstream of any obligation under the Make Whole Agreement. Infinite has the right to terminate the MSA, effective immediately upon written notice to Partners, in the event of a Partners Event of Default. A Partners Event of Default is (i) a deliberate and material lack of compliance by Partners with the provisions of the MSA which is continuing five (5) business days after receiving written notice from Infinite specifying such lack of compliance or (ii) a breach by Partners of Partners’ obligations under the Membership Interest Option Agreement. Notwithstanding termination of the MSA, only for so long as the Infinite owns the Sold Accounts, Partners shall continue to pay the Management Fee, provided that Partners may deduct from such Management Fee Partners’ payment of all reasonable costs of providing the services to the Sold Accounts otherwise required to be provided by Infinite under the MSA.
Partners has engaged a third-party accounting firm to manage all cash transactions under the MSA and Infinite, Partners and the accounting firm have entered into a separate agreement (Agreement Re Distributions) whereby the accounting firm has explicitly agreed to carry out the terms of the MSA and other related documents executed between Infinite and Partners, particularly with respect to distributions of funds and to not vary from that except upon joint written instructions from Infinite and Partners. We have agreed to be responsible for the fees of the third-party accounting firm.
In connection with the February 28, 2015 sale, Infinite and Partners entered into a Make Whole Agreement which provides that if the revenues from the Sold Accounts falls below $1.0 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the revenues from the Sold Accounts back to $1.25 million (or the equivalent in cash flow). Onstream Media Corporation (“Onstream”) and Infinite have also committed that in the event there is any impediment, which directly or indirectly is caused by, or relates in any way to Infinite or Onstream, which would prevent more than 20% of the revenue from these sold accounts being earned or distributed to Partners, Infinite and Onstream would take all necessary steps to ensure that such impeded revenue or revenue shortfall is otherwise earned or distributed or shall pay the amount of such impeded revenue or revenue shortfall to Partners to the extent due on a quarterly basis.
In connection with the February 28, 2015 sale, Infinite and Partners entered into a Membership Interest Option Agreement (“Option Agreement”) whereby we have the right for the two-year period through February 28, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the Purchase Price plus a premium, which premium increases on a pro-rata basis to 20% of the Purchase Price over the two year period, subject to a minimum premium of 10%. Starting six months after the Effective Date, Partners may sell the Sold Accounts to a third party, provide that they must provide us four month written advance notice of such sale during which four month period we have the right to exercise our rights under the Option Agreement. In the event we do not exercise our rights under the Option Agreement, and Partners sells the Customer Accounts to a third party, we are entitled to receive 50% of any excess of the sales price to the third party over what would have been our option price under the Option Agreement. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the expiration date of the Option Agreement was extended and the premium percentage decreased.
The Option Agreement provides that during the two-year option term, and until the option closing in the event of a timely exercise of the option thereunder, neither Partners nor its members will (i) encumber any of Partners’ assets or membership interests to any party, other than Infinite, (ii) incur any liability whatsoever, whether actual or contingent, other than per the terms and provisions of the partnership operating agreement and the MSA or (iii) place a lien on the Sold Accounts.
On December 16 and 18, 2015, we received aggregate gross proceeds of approximately $2.1 million for our sale, effective December 16, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“First Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $2.7 million. The increase in the number of limited partners of Partners resulting from this transaction decreased the total related party ownership percentage to approximately 25% as of December 16, 2015.
In connection with the December 16, 2015 sale, Infinite and Partners entered into:
· an Amended and Restated Make Whole Agreement (“Amended Make Whole Agreement”) which provides that if the combined revenues from the Sold Accounts and the First Tranche of Additional Sold Accounts (“Combined Revenues”) falls below approximately $3.2 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the Combined Revenues back to approximately $4.0 million (or the equivalent in cash flow). All other terms of the Amended Make Whole Agreement were substantially the same as the terms of the Make Whole Agreement as discussed above.
· an Amended and Restated Membership Interest Option Agreement (“Amended Option Agreement”) whereby we have the right for the two-year period through December 16, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the combined purchase price of the Sold Accounts and the First Tranche of Additional Sold Accounts plus $100,000 (“Purchase Price”), plus a premium, which premium increases on a pro-rata basis to 10% of the Purchase Price over the two year period, subject to a minimum premium of 5%. All other terms of the Amended Option Agreement were substantially the same as the terms of the Membership Interest Option Agreement as discussed above.
· an Amended and Restated Management Services Agreement (“Amended MSA”) with a two year term expiring on December 16, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights. The Amended MSA provides that the Partners’ guaranteed return percentage be reduced to 30% per annum of the Purchase Price, with the first six months guaranteed regardless of whether we exercise our rights under the Amended Option Agreement or the Amended MSA is otherwise terminated. All other terms of the Amended MSA were substantially the same as the terms of the MSA as discussed above.
During the period from March 25, 2016 through June 30, 2016 we received aggregate gross proceeds of approximately $800,000 for our sale, effective June 30, 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Second Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $1.0 million. The increase in the number of limited partners of Partners resulting from this transaction decreased the total related party ownership percentage to approximately 21% as of June 30, 2016.
In connection with the June 30, 2016 sale, Infinite and Partners entered into:
· an Amended and Restated Make Whole Agreement (“Second Amended Make Whole Agreement”) which provides that if the combined revenues from the Sold Accounts, the First Tranche of Additional Sold Accounts and the Second Tranche of Additional Sold Accounts (“Combined Revenues”) falls below approximately $3.9 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the Combined Revenues back to approximately $4.9 million (or the equivalent in cash flow). All other terms of the Second Amended Make Whole Agreement were substantially the same as the terms of the Amended Make Whole Agreement as discussed above.
· an Amended and Restated Membership Interest Option Agreement (“Second Amended Option Agreement”) whereby we have the right for the two-year period through December 16, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the combined purchase price of the Sold Accounts, the First Tranche of Additional Sold Accounts and the Second Tranche of Additional Sold Accounts plus $100,000 (“Purchase Price”), plus a premium, which premium increases on a pro-rata basis to 10% of the Purchase Price over the two year period, subject to a minimum premium of 5%. All other terms of the Second Amended Option Agreement were substantially the same as the terms of the Amended Option Agreement as discussed above.
· an Amended and Restated Management Services Agreement (“Second Amended MSA”) with a two year term expiring on December 16, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights. The Second Amended MSA provides that the Partners’ return is guaranteed for the first six months regardless of whether we exercise our rights under the Second Amended Option Agreement or the Second Amended MSA is otherwise terminated. All other terms of the Second Amended MSA were substantially the same as the terms of the Amended MSA as discussed above.
During September and October 2016, subscriptions for approximately $225,000 were received by Partners and funded against an anticipated total of $1.5 million for our sale, which we expect will be effective during November 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Third Tranche of Additional Sold Accounts”) to Partners, will represent historical annual revenues of approximately $1.9 million, and will be sold under the same terms as the accounts sold in December 2015 and June 2016.
We are responsible for legal, consulting, finders and other fees related to the initial closing of the above transactions, as well as ongoing fees to administer these transactions, including (i) the third-party accounting firm as discussed above, (ii) certain compensation and expense payments to the general partner and (iii) certain other financial transaction expenses. These expenses are included as part of non-operating expenses (other (expense) income, net) and were approximately $115,000 and none for the years ended September 30, 2015 and 2014, respectively.
In December 2015 we recorded the issuance of 200,000 unregistered common shares for professional management services rendered in connection with Partners, such shares having a fair value of approximately $38,000 and are being recognized as part of the above non-operating expenses over a service period of twelve months starting December 16, 2015.
On April 30, 2015, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. Such notice was not given by us, but on
April 30, 2016, we exercised our option for a one year extension of the Funding Letter, including an extension of the notice deadline to January 5, 2017. This Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available. Mr. Charles Johnston, a former ONSM director, is the president of J&C. Cash provided under the Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 15, 2017 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of funds in excess of $5.0 million as a result of a single transaction for the sale of all or a part of our operations or assets, this Funding Letter will be terminated. The consideration for the Funding Letter was $25,000, which we have paid, and the consideration for the Funding Letter extension is $25,000, to be withheld from any proceeds lent thereunder but in any event paid no later than September 1, 2016. On March 27, 2007 we acquired the assets, technology and patents pending of privately owned Auction Video, Inc., a Utah corporation, and Auction Video Japan, Inc., a Tokyo-Japan corporation (collectively, “Auction Video”). In connection with our subsequent pursuit of approval of these patents pending (i) on October 13, 2015, the USPTO issued to us U.S. Patent Number 9,161,068 (the “First Granted Patent”) with a Patent Term Adjustment of 2,377 days, resulting in a September 26, 2030 expiration date, provided all maintenance fees are paid and (ii)on October 11, 2016, the USPTO issued to us U.S. Patent Number 9,467,728 (the “Second Granted Patent”) with a Patent Term Adjustment of 1,362 days, resulting in a December 16, 2027 expiration date, provided all maintenance fees are paid. These patents address live streaming of audio and/or video from multiple devices to a storage location, such as the Internet or cloud, and the ability to access and retrieve the audio and/or video to multiple devices, whereby the content is not stored on the device. Our management believes that the First and Second Granted Patents, as well as two other related patents still pending, may have significant value, although this cannot be assured, and is presently exploring the financial potential of the First and Second Granted Patents and the patents pending. Regardless of the ultimate outcome with respect to the results of this process and/or the eventual USPTO decision with respect to the pending patent applications, our management has determined that there is no material exposure to an adverse effect on our financial position or results of operations, since all of the previous costs incurred by us in connection with the patents have been amortized to expense as of September 30, 2013 and are being expensed as incurred subsequent to that date. Certain of the former owners of Auction Video, Inc. have an interest in proceeds that we may receive under certain circumstances in connection with the First and Second Granted Patents and the patents pending.
As of the October 28, 2016 filing of this 10-K, more than one year after the latest balance sheet date being presented, we are operating in the normal course of business. The liquidity discussion below includes information from our June 30, 2016 10-Q, which is also being filed on October 28, 2016.
We have incurred losses since our inception, and have an accumulated deficit of approximately $149.0 million as of September 30, 2015. Our operations have been financed primarily through the issuance of equity and debt, including convertible debt and debt combined with the issuance of equity.For the year ended September 30, 2015, our revenues were not sufficient to fund our total cash expenditures (for operating and investing activities plus scheduled debt principal repayments and distributions to the VIE owners, both classified as financing activities) for that period and as a result we obtained additional funding from the March 2015 sale of certain of our audio conferencing customers (and the related future business to those customers) to Partners as well as restructuring the payment terms of Sigma Notes 1 and 2, the New Sigma Note and certain other notes. For the nine months ended June 30, 2016, our revenues were not sufficient to fund our total cash expenditures (for operating and investing activities plus the scheduled debt principal payments and distributions to the VIE owners) for that period and as a result we obtained additional funding from the December 2015 and June 2016 sales of certain of our audio conferencing customers (and the related future business to those customers) to Partners as well as restructuring the payment terms of the New Sigma Note and certain other notes.
During the period from July 2015 through October 2016 we made certain headcount reductions and other changes in compensation which we expect will reduce our compensation expenditures for the twelve months ended June 30, 2017 by approximately $540,000, as compared to the twelve months ended June 30, 2016. We have also taken other actions which we expect will reduce our cost of sales as well as our expenses for professional fees, insurance and advertising and marketing for the twelve months ended June 30, 2017, as compared to the twelve months ended June 30, 2016.
Based on historical results as well as results since September 30, 2015 to date, we do not expect that our fiscal 2016 revenues will be sufficient to fund our total cash expenditures (for operating and investing activities plus the scheduled debt principal payments and distributions to the VIE owners) for the twelve month period ended June 30, 2017, even after the anticipated impact of the expense reductions discussed above. However, we believe we will be able to cover this anticipated shortfall from the raising of additional capital in the form of debt and/or equity and/or the sales of assets or operations, including our transactions with Partners and the Funding Letter and/or the monetization of our patents, all sources of capital as discussed above. In the event that we are unable to cover this shortfall, including curing any potential defaults with respect to the Line, as discussed above, our auditors have advised us that a going concern qualification to their opinion on our September 30, 2016 financial statements may be necessary.
Cash required to fund our continued operations will be affected by numerous known and unknown risks and uncertainties including, but not limited to, our ability to successfully market and sell our products and services, the degree to which competitive products and services are introduced to the market, our ability to control and/or reduce expenses, our need to invest in new equipment and/or technology, and our ability to service and/or refinance our existing debt and accounts payable. We cannot assure that our revenues will continue at their present levels, nor can we assure that they will not decrease.
To the extent our cash flow from sales is insufficient to completely fund operating expenses, financing costs (including principal repayments) and capital expenditures, as well as any acceleration of our repayments of accounts payable and/or accrued liabilities, we will continue depleting our cash and other financial resources. Other than working capital which may become available to us from further borrowing or sales of equity or assets or operations (including but not limited to proceeds from the Line or the Funding Letter, as discussed above), we do not presently have any additional sources of working capital other than cash on hand and cash, if any, generated from operations. As a result of the uncertainty as to our available working capital over the upcoming months, we may be required to delay or cancel certain of the projected capital expenditures, some of the planned marketing expenditures, or other planned expenses. In addition, it is possible that we will need to seek additional capital through equity and/or debt financing or through other activities. If we raise additional capital through the issuance of debt, this will result in increased interest expense. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing shareholders will be reduced and those shareholders may experience significant dilution.
The resolution of debt and other obligations becoming due within a few months after the filing of this 10-K represent an imminent issue that will require significant cash resources in the near-term. These include (i) the New Sigma Note and the Rockridge Note, secured obligations which will require principal payments on December 31, 2016 aggregating $1.0 million and (ii) other notes payable, mostly unsecured, which will require principal payments of $187,000 on December 31, 2016 and $625,000 on January 15, 2017. In the event we exercised our rights under the extended Funding Letter, we would need to repay the proceeds borrowed thereunder on the earlier of a date twelve months from funding or July 15, 2017.
We are closely monitoring our revenue and other business activity to determine if and when further cost reductions, the raising of additional capital or other activity is considered necessary. The Executives have deferred a portion of their compensation in the past, to the extent we needed that cash to meet other operating expenses, and have agreed to defer a portion of their compensation to the extent we need that cash to enable us to be a going concern through September 30, 2017.
Our continued existence is dependent upon our ability to raise capital and to market and sell our services successfully. Based on our plan to continue our operations through September 30, 2017, we will need to raise the remaining $1.275 million from the sale of the Third Tranche of Additional Sold Accounts and borrow $800,000 per our option to do so under the Funding Letter, as discussed above, or from other funding sources, and we will also need to obtain extensions of the existing maturity dates past that date for certain identified notes payable representing aggregate principal of $640,000. In addition we will need to increase our gross margin and/or decrease our operating expenses by an aggregate of approximately $1.0 million per year, as compared to their current levels, for the year ended September 30, 2017 - our plan includes specific potential sources of new gross margin and expense reductions aggregating approximately $1.5 million. However, there are no assurances whatsoever that we will be able to sell additional common shares or other forms of equity and/or that we will be able to borrow further funds other than under the Funding Letter and/or that we will be able to sell assets or operations and/or that we will be able to increase our revenues and/or control our expenses to a level sufficient to provide positive cash flow. The financial statements do not include any adjustments to reflect future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result if we are unsuccessful.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and our significant accounting policies are described in Note 1 to those statements. The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes. Our assumptions are based on historical experiences and changes in the business environment. However, actual results may differ from estimates under different conditions, sometimes materially. Critical accounting policies and estimates are defined as those that are most important to the management’s most subjective judgments. Our most critical accounting policies and estimates are described below.
Goodwill and Other Intangible Assets:
Our prior acquisitions of several businesses, including Infinite Conferencing, Intella2, EDNet and Acquired Onstream, have resulted in significant increases in goodwill and other intangible assets. Goodwill was approximately $3.2 million at September 30, 2015, representing approximately 48% of our total assets. Other intangible assets resulting from prior acquisitions have been fully amortized and/or written down as of September 30, 2015. In addition, property and equipment as of September 30, 2015 includes approximately $423,000 (net of depreciation) representing approximately 6% of our total assets and primarily related to the capitalized development costs of the DMSP platform. The book value of our equity (both excluding and including noncontrolling owners’ interest in VIE) was negative as of September 30, 2015.
In accordance with GAAP, we periodically test these assets for potential impairment. As part of our testing, we rely on both historical operating performance as well as anticipated future operating performance of the entities that have generated these intangibles. Factors that could indicate potential impairment include a significant change in projected operating results and cash flow, a new technology developed and other external market factors that may affect our customer base. We will continue to monitor our goodwill and other intangible assets and our overall business environment. If there is a material adverse and ongoing change in our business operations (or if an adverse change initially considered temporary is determined to be ongoing), the value of our goodwill and other intangible assets could decrease significantly. In the event that it is determined that we will be unable to successfully market or sell any of our services, an impairment charge to our statement of operations could result. Any future determination requiring the write-off of a significant portion of goodwill or unamortized intangible assets, although not requiring any additional cash outlay, could have a material adverse effect on our financial condition and results of operations.
In accordance with ASC Topic 350, Intangibles - Goodwill and Other, which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition, goodwill must be tested for impairment on a periodic basis, at a level of reporting referred to as a reporting unit. Although other intangible assets are being amortized to expense over their estimated useful lives, the unamortized balances are still subject to review and adjustment for impairment. There is a two-step process for impairment testing of goodwill and other intangible assets. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment, including a comparison and reconciliation of the carrying value of all of our reporting units to our market capitalization, after appropriate adjustments for control premium and other considerations.
The provisions of ASC 350-20-35-3 in certain cases would allow us to forego the two-step impairment testing process based on certain qualitative evaluation. However, based on our assessment as of September 30, 2015 and 2014 of relevant events and circumstances as listed in ASC 350-20-35-3C, we determined that we were not eligible to employ qualitative evaluation to forego the two-step impairment testing process with respect to our reporting units as of those dates, as it was not more likely than not that impairment loss had not occurred. These relevant events and circumstances included our declining revenues as well as certain macroeconomic conditions, including access to capital and the ongoing decrease in the ONSM share price.
The material portion of our goodwill and other intangible assets are contained in the EDNet reporting unit, the Acquired Onstream/DMSP reporting unit and the audio and web conferencing reporting unit, which includes the Infinite Conferencing and the OCC/Intella2 divisions. Our reporting units were identified based on the requirements of ASC 350-20-35-33 through 350-20-35-46. According to ASC 350-20-35-34, a component of an operating segment is a reporting unit if that component represents a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. This is the case for the EDNet division, the Acquired Onstream/DMSP division, the Infinite Conferencing division, the OCC/Intella2 division and the Webcasting division. However, ASC 350-20-35-35 provides that two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. This is the case for the Infinite Conferencing division and the OCC/Intella2 division, since they are both in the business of audio and web conferencing sold primarily to business customers. Although EDNet is in the same operating segment as the Infinite Conferencing division and the OCC/Intella2 division, it is not considered to be part of the audio and web conferencing reporting unit since EDNet offers a specialized service to the entertainment industry (movies, television, advertising) that uses a specific type of network connection (integrated services digital network or “ISDN”) to transport its clients’ multimedia content. ISDN is a significantly different technology from the standard telephone lines used by the Infinite Conferencing division and the OCC/Intella2 division.
As part of the two-step process discussed above for the September 30, 2015 and 2014 evaluations, our management performed discounted cash flow (“DCF”) projections and market value (“MV”) analyses, to determine whether the goodwill of our reporting units was potentially impaired and the amount of such impairment. The results of these projections and analyses were weighted, and the weighted result reduced by the amount of associated allocable non-current debt, to come up with a single estimated fair value (“FV”) for each reporting unit. A third-party valuation services firm was engaged by us to assist with these projections and analyses, value calculations and weightings.
For the September 30, 2015 and 2014 evaluations, our management, with the assistance of the third-party valuation services firm, determined the rates and assumptions (including probability of future revenues and costs, tax shields and annual and terminal discount factors) used by it to prepare the DCF projections and also considered macroeconomic and other conditions such as: our credit rating, stock price and access to capital; industry growth projections; our historical sales trends and our technological accomplishments compared to our peer group.
As part of the DCF projections prepared for use in the September 30, 2015 and 2014 evaluations, we analyzed our corporate payroll and other general and administrative expenses to determine their relevance to the reporting units, and to the extent relevant, we allocated such costs when preparing those projections. For the years ended September 30, 2015 and 2014, we determined that approximately 82% and 83%, respectively, of our corporate payroll plus other general and administrative expenses (excluding non-cash expenses) were allocable to our reporting units, including those without goodwill or other intangible assets. The non-allocable corporate costs related to various public company related requirements, including D&O insurance and certain legal, accounting and other professional and consulting fees and expenses, as well as the costs of evaluating new business opportunities and products outside the existing divisions.
During the time period from February 2015 through June 2016, we received cash proceeds for our sales, in tranches, of defined subsets of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). In accordance with management fee agreements we entered into with Partners in connection with these sales, we are required to continue servicing the sold accounts and absorb all related costs of doing so but we also receive the Partners’ revenues from these sold accounts, less a deduction for the Partners’ guaranteed return - see Liquidity and Capital Resources above for a detailed discussion of these transactions. For purposes of the September 30, 2015 and 2014 evaluations, we included the Partners’ revenues and all related operating costs incurred by us in our DCF projections for the audio and web conferencing reporting unit, but considered the amount deducted for the Partners’ guaranteed return to not be specific to that unit’s operations but rather to be analogous to a corporate financing cost and thus this cash outflow was not included as part of our DCF projections for the audio and web conferencing reporting unit.
For the September 30, 2015 and 2014 evaluations, our management, with the assistance of the third-party valuation services firm, determined the appropriately comparable publicly reporting companies and public market transactions used by it to perform the MV analyses. Factors taken into consideration in selecting the appropriately comparable companies included the relative size of the candidate company, measured by revenues and assets, as compared to our reporting units and the extent to which the stated business activities of the candidate company align with the primary business activities of our reporting units. Once comparable companies and transactions were identified, the valuation calculation was based on multiples of revenues and, to the extent applicable, EBITDA (earnings before interest, taxes, depreciation and amortization). In the case of the September 30, 2015 evaluation, we, based on the advice of the third-party valuations services firm, determined that the publicly reporting companies and public market transactions that we were able to identify as available for our analysis were not sufficiently comparable to the operating characteristics of most of our reporting units therefore these MV analyses were given a zero percent (0%) weighting - i.e., they were not considered - when determining FV.
Based on the above, as well as a report prepared by the third-party valuation services firm, we determined that the FVs of the Acquired Onstream, EDNet and audio and web conferencing reporting units, calculated as described above, were less than their respective net carrying amounts as of September 30, 2015 and that further evaluation under the second step of the two-step process described above was necessary.
As part of this second step, our management, with the assistance of the third-party valuation services firm, determined the fair value of all tangible and intangible assets and liabilities of each of our reporting units, including any material unrecorded assets or liabilities. This allocation process was performed only for purposes of testing goodwill for impairment, and did not result in the write up or write down of recognized assets or liabilities, or the recognition of previously unrecognized assets or liabilities. The carrying value of each reporting unit’s goodwill was then compared to the implied fair value of that reporting unit’s goodwill, such implied value being any excess of the FV of a reporting unit over the amounts assigned to its assets and liabilities, and the excess of the carrying value over the implied fair value was written off, as follows: approximately $4.1 million related to the audio and web conferencing reporting unit’s goodwill (of which we allocated approximately $3.9 million to Infinite and approximately $250,000 to Intella2), approximately $750,000 related to the EDNet reporting unit’s goodwill and approximately $271,000 related to the Acquired Onstream reporting unit’s goodwill. In addition, as a result of the above valuation, we recorded an approximately $446,000 write-off of the remaining Intella2 intangible assets, primarily the customer list. These write-offs were classified in our financial statements as impairment losses on goodwill and other intangible assets aggregating approximately $5.6 million for the year ended September 30, 2015.
Furthermore, in order to address whether any further consideration of ONSM’s share price was needed with respect to impairment testing, we, with the assistance of the third-party valuation services firm, performed an analysis to compare our book value to our market capitalization as of September 30, 2015, including adjustments for (i) paid-for but not issued common shares, such as the Rockridge Shares and the Executive Shares and (ii) an appropriate control premium. Based on this analysis, we concluded that there were no conditions with respect to our market capitalization as of September 30, 2015 which would require further evaluation with respect to the carrying values of our reporting units. The above analysis was performed based on a closing ONSM share price of $0.21 per share as of September 30, 2015.
However, as of September 30, 2014, based on the above, as well as a report prepared by the third-party valuation services firm, we determined that the FVs of the Acquired Onstream, EDNet and audio and web conferencing reporting units, calculated as described above, were more than their respective net carrying amounts. Furthermore, in order to address whether any further consideration of ONSM’s share price was needed with respect to impairment testing, we, with the assistance of the third-party valuation services firm, performed an analysis to compare our book value to our market capitalization as of September 30, 2014, including adjustments for (i) paid-for but not issued common shares, such as the Rockridge Shares and the Executive Shares and (ii) an appropriate control premium. Based on this analysis, we concluded that there were no conditions with respect to our market capitalization as of September 30, 2014 which would require further evaluation with respect to the carrying values of our reporting units. The above analysis was performed based on a closing ONSM share price of $0.17 per share as of September 30, 2014.
An annual impairment review of our goodwill will be performed as part of preparing our September 30, 2016 financial statements. Until that time, we are reviewing certain factors to determine whether a triggering event has occurred that would require an interim impairment review. Those factors include, but are not limited to, our management’s estimates of future sales and operating income, which in turn take into account specific company, product and customer factors, as well as general economic conditions and the market price of our common stock.
EDNet’s operations are heavily dependent on the use of ISDN connections, which are only available from a limited number of suppliers. The two companies which are the primary suppliers of ISDN to EDNet have made recent public indications of intentions to restrict, or even eventually eliminate, their provision of ISDN. Such actions could have a significant adverse impact on our future evaluations of the carrying value of EDNet goodwill, especially if alternative ISDN suppliers cannot be identified or if an alternative such as Internet based technology is not available or economically feasible as a basis to continue the EDNet operations. However, these two companies have not announced definitive timetables for taking any extensive actions with regard to restricting ISDN and therefore we have not assumed any such actions would take place within the timeframe of our discounted cash flow analyses used by us for these evaluations to date.
As of September 30, 2015 we have capitalized as part of other internal use software approximately $2.0 million of employee compensation and other costs for the development of webcasting applications. As of September 30, 2015, substantially all of these costs have been placed in service, including approximately $444,000 placed in service in December 2009 for the initial release of iEncode software, which runs on a self-administered, webcasting appliance used to produce a live video webcast, approximately $352,000 placed in service in January 2013 for a new release of our basic webcasting platform and approximately $99,000, $251,000 and $96,000 placed in service in October 2013, July 2014 and July 2015, respectively, for enhancements to that new release. As of September 30, 2015, the approximately $262,000 of the total capitalized costs not yet placed in service relate to our development during the period from July 2013 through September 2015 of a “do it yourself” large audience webcasting product that can be run from the customer’s desktop and will be available on a fixed cost monthly subscription basis that can be purchased on-line. We expect to release this product in the fourth quarter of fiscal 2016. As part of our annual review of the carrying values of our long-lived assets for impairment as of September 30, 2015, we evaluated the remaining carrying value of the webcasting division’s assets, primarily the unamortized software development costs, for impairment. We performed such an analysis by comparing the carrying value of those assets to the projected undiscounted future cash flows from the webcasting operations, as prescribed by applicable accounting literature for evaluating impairment of a depreciable asset with a fixed life. These projected future cash flows took into account (i) the webcasting revenues during fiscal 2015, which in spite of an increase for the nine months ended June 30, 2015 versus the corresponding prior year period, declined for the three months ended June 30, 2015, versus the corresponding prior year period, and were generally flat for the three months ended September 30, 2015, versus the corresponding prior year period (and which trend has continued through June 30, 2016) and (ii) information available to us with respect to backlog and potential future revenues as of September 30, 2015. Based on this information, we determined that it would not be appropriate to project growth in webcasting revenues for these purposes as of September 30, 2015. The initial decline in webcasting revenues that occurred for the quarter ended June 30, 2015 was not considered a “triggering event” that might require an interim evaluation, since we were unable to determine that such decline represented a trend that might result in impairment until we saw additional results for the quarter ended September 30, 2015, as well as evaluated the backlog and potential future revenues as of that date. Since there was a significant level of recently capitalized software development costs for webcasting products as of September 30, 2015, and we did not project growth in webcasting revenues for this purpose, as a result of our analysis, we recognized a net impairment loss of $800,000 for the year ended September 30, 2015. After the impairment loss, the carrying cost of the webcasting division’s capitalized internal software was reduced to approximately $35,000, which will be depreciated over the twelve months ending September 30, 2016. We will continue to evaluate any webcasting division development costs capitalized by us after September 30, 2015 for impairment on the same basis.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements are contained in pages through, which appear at the end of this annual report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A
ITEM 9A (T). CONTROLS AND PROCEDURES
Management’s report on disclosure controls and procedures:
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a - 15(e) and 15d - 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015, our disclosure controls and procedures were not effective at the reasonable assurance level. Furthermore, inadequate staffing of our financial accounting function has resulted in, among other things, at times our inability to issue financial statements on a timely basis and/or perform timely account reconciliations. As a result, including the need to perform additional analyses with respect to goodwill impairment, we did not timely file this Annual Report on Form 10-K.
Management’s report on internal control over financial reporting:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15 promulgated under the 1934 Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (“COSO”). Based on our evaluation under the COSO framework, management has concluded that, as of September 30, 2015, our internal control over financial reporting was not effective at the reasonable assurance level.
We identified a material weakness in our internal control over financial reporting surrounding the performance of our analysis to support and review goodwill impairment within a timely manner. Specifically, deficiencies were identified in our control environment which could have led to the improper valuation of certain intangible assets. Furthermore, inadequate staffing of our financial accounting function has resulted in, among other things, at times our inability to issue financial statements on a timely basis and/or perform timely account reconciliations. As a result, including the need to perform additional analyses with respect to goodwill impairment, we did not timely file this Annual Report on Form 10-K.
Our internal control system is designated to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Our management has worked, and continues to work, to strengthen our internal control over financial reporting. We are committed to ensuring that such controls are operating effectively. Since identifying the material weakness in our internal control over financial reporting, we are working to enhance the design and operation of our controls related to goodwill impairment testing by improving our controls and documentation related to our accounting policies and practices to identify, document and periodically assess whether all key judgments, conventions and estimates used in computing the goodwill impairment analyses conform to U.S. GAAP.
Changes in Internal Control over Financial Reporting:
Except as noted above, there were no changes in our internal control over financial reporting during the most recent fiscal year ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers and Directors
Our executive officers and directors, and their ages are as follows:
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Governance and Nominating Committee.
(4) Member of the Finance Committee.
Randy S. Selman. Mr. Selman has served as our Chairman of the Board, President and Chief Executive Officer since our inception in May 1993 and, from September 1996 through June 1999 and from August 1, 2004 through December 15, 2004, has also been our Chief Financial Officer. From March 1985 through May 1993, Mr. Selman was Chairman of the Board, President and Chief Executive Officer of SK Technologies Corporation (NASDAQ:SKTC), a software development company. SKTC developed and marketed software for point-of-sale with complete back office functions such as inventory, sales analysis and communications. Mr. Selman founded SKTC in 1985 and was involved in their initial public offering in 1989. Mr. Selman's responsibilities included management of SKTC, public and investor relations, finance, high level sales and general overall administration.
The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Selman should currently serve as a director, in light of our business and structure, are as follows: executive management, sales and software development industry experience with SKTC and executive management and public and investor relations experience with Onstream.
Alan M. Saperstein. Mr. Saperstein has served as our Executive Vice President and a director since our inception in May 1993, and has also been our Chief Operating Officer since December 2004. From March 1989 until May 1993, Mr. Saperstein was a free-lance producer of video film projects. Mr. Saperstein has provided consulting services for corporations that have set up their own sales and training video departments. From 1983 through 1989, Mr. Saperstein was the Executive Director/Entertainment Division of NFL Films where he was responsible for supervision of all projects, budgets, screenings and staffing.
The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Saperstein should currently serve as a director, in light of our business and structure, are as follows: video and film industry experience with NFL Films and executive management and webcasting and digital media operations experience with Onstream.
Robert E. Tomlinson. On December 15, 2004 Mr. Tomlinson was appointed as our Chief Financial Officer. Mr. Tomlinson joined us as Vice President-Finance in September 2004. Mr. Tomlinson started his financial and accounting career in 1977 with the international accounting firm of Price Waterhouse. In 1982 he left that firm to join Embraer, an international aircraft manufacturing and support firm, at their U.S. subsidiary in Fort Lauderdale, Florida, where he managed all financial functions and eventually was named Senior Vice President-Finance and a member of the U.S. firm’s Board of Directors. Mr. Tomlinson left Embraer in 1994 and joined staffing and human resource firm OutSource International, serving as its Chief Financial Officer and helping to take the company public in 1997. Mr. Tomlinson's areas of responsibility at OutSource International included corporate accounting, treasury and risk management. From when he left OutSource International in February 2000 until 2002 he worked as an independent certified public accountant, focusing on accounting and tax services to corporations. From 2002 until joining us, Mr. Tomlinson served as CFO for Total Travel and Tickets, a Fort Lauderdale based ticket broker. Mr. Tomlinson has held an active Certified Public Accountant license since 1978.
Clifford Friedland. Mr. Friedland was re-appointed as a member of our Board of Directors in April 2011. His initial appointment was in December 2004 and he continued as a board member until his resignation from the board in June 2010, although he continued as Senior Vice President, Business Development. Mr. Friedland’s voluntary resignation was to restore our board to the required majority of independent members, following the death of another board member. He served as Chairman, CEO and co-founder of Acquired Onstream from June 2001 until joining our company. Mr. Friedland was Vice President of Business Development and co-founder of TelePlace, Inc., a developer and owner of Internet data centers and central offices from December 1999 to May 2001. Mr. Friedland was co-founder, Chairman and co-CEO of Long Distance International, Inc., one of the first competitive European telephone operators from May 1993 to December 1999. Mr. Friedland was President of Clifford Friedland Inc., a technology consulting firm, from January 1991 to April 1993. Mr. Friedland was a Director and co-founder of Action Pay-Per-View, a pay per view cable channel from January 1988 to December 1990. Mr. Friedland was President and co-founder of Long Distance America, one of the first competitive long distance operators after the breakup of AT&T from June 1984 to December 1987. Mr. Friedland was Vice President and co-founder of United States Satellite Systems, Inc., an FCC licensed builder and operator of geosynchronous communications satellites from April 1981 until December 1983. Mr. Friedland was Director and co-founder of United Satellite Communications, Inc., the world’s first direct-to-home satellite network from April 1981 until May 1984.
The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Friedland should currently serve as a director, in light of our business and structure, are as follows: Internet and digital media industry experience (Acquired Onstream, TelePlace, Inc., and Action Pay-Per-View), telecommunications industry experience (Long Distance International, Inc., Long Distance America, United States Satellite Systems, Inc. and United Satellite Communications, Inc.) and executive management experience with Onstream.
David Glassman. Mr. Glassman has served as our Chief Marketing Officer since December 2004. He served as Vice Chairman, President and co-founder of Acquired Onstream from June 2001 until joining our company. Mr. Glassman was Vice President of Marketing and co-founder of TelePlace, Inc., a developer and owner of internet data centers and central offices from December 1999 to May 2001. Mr. Glassman was co-founder, Vice Chairman and Co-CEO of Long Distance International, Inc., one of the first competitive European telephone operators from May 1993 to December 1999. Mr. Glassman was an independent technology consultant from January 1988 to April 1993, with a client list that included Action Pay Per View. Mr. Glassman was President and co-founder of Long Distance America, one of the first competitive long distance operators after the breakup of AT&T from January 1984 to December 1987. Mr. Glassman was a communications consultant from January 1981 to January 1984 providing services to United States Satellite Systems Inc. and United Satellite Communications Inc. Mr. Glassman was co-founder and director of All American Hero, Inc., a fast food franchisor, from January 1981 until December 1986.
Carl Silva. Mr. Silva, who has been a member of our Board of Directors since July 2006, serves on our Audit (as Chairman), Compensation (as Chairman), Governance and Nominating and Finance Committees. Mr. Silva has over 25 years of experience in the telecommunications and high tech industry, and he has held a variety of positions in business development, sales, marketing, software engineering, and systems engineering during this time. During 2013, Mr. Silva cofounded Sphinx Medical Technologies, a managed service provider for healthcare mobile applications, as their Chief Scientist. Prior to that, Mr. Silva was with ANXeBusiness Corp. as their Chief Scientist, responsible for developing a new nationwide credit card protection system. Mr. Silva cofounded Smalltell, which focuses on social commerce solutions, such as mobile payment technologies, user-generated content, wireless broadband devices, and nationwide data plans. Also, Mr. Silva was Chief Scientist and VP of Technology for Nexaira Wireless, Inc. (NXWI.OB), a 3G/4G Router company. Prior to this Mr. Silva was CEO of Cognigen Business Systems, Inc. (NASDAQ: CNGW), a managed service provider for small to mid-size businesses for VoIP and high speed Internet. Mr. Silva started Anza Borrego Partners as a management consulting firm designed to support entrepreneurs in the growth of their businesses. Mr. Silva was Senior Vice-President for SAIC’s Converged Network Professional services organization from July 1998 to May 2003. From September 1994 to June 1998, he was with Telcordia Technologies (formerly Bell Communications Research, or Bellcore), where he implemented the first VoIP softswitch in the cable industry.
The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Silva should currently serve as a director, in light of our business and structure, are as follows: over 25 years of experience in the telecommunications and high tech industry, most notably at ANX, Nexaira, Cognigen, SAIC and Telcordia.
Leon Nowalsky. Mr. Nowalsky was appointed a member of our Board of Directors in December 2007 and serves on our Compensation and Governance and Nominating (as Chairman) Committees. Mr. Nowalsky, a partner in the New Orleans-based law firm of Nowalsky & Gothard APLLC, possesses over twenty years of experience in the field of telecommunications law and regulation. Mr. Nowalsky presently is an investor and board member of Thermo Credit, LLC and Thermo Communications Funding, LLC, specialty finance companies for the telecommunications industry and J.C. Dupont, Inc., a Louisiana based oil and gas concern. Mr. Nowalsky has been general counsel for Telemarketing Communications of America, Inc., (“TMC”), as well as lead counsel in TMC’s mergers and acquisitions program, and following TMC’s acquisition by a wholly owned subsidiary of Advanced Telecommunications Corporation (“ATC”), Mr. Nowalsky served as ATC’s chief regulatory counsel as well as interim general counsel. In 1990, Mr. Nowalsky left ATC to set up a private law practice specializing in telecommunications regulatory matters, mergers and acquisitions and corporate law, which later expanded to become Nowalsky, Bronston & Gothard APLLC and then subsequently became Nowalsky & Gothard APLLC. Mr. Nowalsky has previously served as a director of the following companies: Network Long Distance, Inc., a long distance company which was acquired by IXC Communications; RFC Capital Corp., a specialty finance company dedicated exclusively to the telecommunications industry which was purchased in 1999 by TFC Financial Corp., a division of Textron (NYSE:TXT); and New South Communications, a facilities-based competitive local exchange carrier which merged to form NUVOX, which was subsequently acquired by Windstream; W2Com, LLC, a video conferencing and distance learning provider which was acquired by Arel Communications & Software, Ltd. (NASDAQ: ARLC).
The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Nowalsky should currently serve as a director, in light of our business and structure, are as follows: over twenty years of experience in the field of telecommunications law and regulation, most notably at TMC and ATC, as well his currently active private law practice specializing in telecommunications regulatory matters, mergers and acquisitions and corporate law.
Robert D. (“RD”) Whitney. Mr. Whitney was appointed a member of our Board of Directors in April 2011 and serves on our Audit Committee. Mr. Whitney was the Executive Director of the Institute of Finance and Management (“IOFM”) since it was acquired in April 2013 by Diversified Business Communications (“DBC”), until January 2015, when he became a Group Vice President of DBC. From January 2011 through April 2013, Mr. Whitney was a partner with Greenhaven Partners (“Greenhaven”), a private-equity firm focusing on investments in specialty information and digital media oriented businesses, and in connection with that role was Chief Executive Officer of one Greenhaven owned entity - IOFM (part of Management Networks, LLC) which was sold to DBC as discussed above and a consultant to two others - Exchange Networks, LLC (a MarketPlace365 promoter) and Chief Executive Group, LLC. From 2008 through 2010, Mr. Whitney was CEO of the online media division of the Tarsus Group, PLC, a London-based B2B conference and event producer (TRS.L) and in this position he was also associated with Onstream in various roles during the development and commercial introduction phases of MarketPlace365. From 1997 through 2005, and again in 2006 through 2008, he served in various roles (including Vice President of Operations and General Manager) with Kennedy Information, a firm specializing in delivering market intelligence through multiple media. During this time, Mr. Whitney was instrumental in the sale of Kennedy Information to its current parent company, BNA, which was the largest independent publisher of information and analysis products for professionals in business and government. He also has held positions at Kluwer Law International (a division of Wolters Kluwer), the Thompson Publishing Group, Yankee Publishing, Vicon Publishing and Connell Communications (a division of IDG). Mr. Whitney holds an MBA from Fitchburg State College and a BS from Bentley University.
The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Whitney should currently serve as a director, in light of our business and structure, are as follows: over 20 years management-level experience in marketing and publishing (including Tarsus Group and Kennedy Information) as well as extensive experience in creating strategy for both B2B and B2C marketplaces and in management of major conferences, executive forums, and events (Tarsus Group), all of which we believe will provide valuable insight with respect to the proper focus of our development and sales efforts with respect to webcasting, webinars and our other products and services.
There is no family relationship between any of the executive officers and directors. Each director is elected at our annual meeting of shareholders and holds office until the next annual meeting of shareholders, or until his successor is elected and qualified. The bylaws permit the board of directors to fill any vacancy and such director may serve until the next annual meeting of shareholders or until his successor is elected and qualified. Our most recent shareholders meeting was held on September 28, 2012. The board of directors elects officers annually and their terms of office are at the discretion of the Board although certain officers have employment contracts which are as discussed in Item 11
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information relating to the compensation of (i) our Chief Executive Officer; and (ii) each of our executive officers who earned more than $100,000 in total compensation during the most recent fiscal year (collectively, the “Named Executive Officers”) for the years ended September 30, 2015 and 2014:
SUMMARY COMPENSATION TABLE
(1) Includes $18,653 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,974 for retirement savings and 401(k) match.
(2) Includes $16,185 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,635 for retirement savings and 401(k) match.
(3) Includes $24,152 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $18,000 for retirement savings.
(4) Includes $21,148 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $18,000 for retirement savings.
(5) Includes $18,653 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,493 for retirement savings and 401(k) match.
(6) Includes $16,185 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,180 for retirement savings and 401(k) match.
(7) Includes $28,261 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $23,319 for retirement savings and 401(k) match.
(8) Includes $24,027 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $22,842 for retirement savings and 401(k) match.
(9) Includes $18,653 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $23,319 for retirement savings and 401(k) match.
(10) Includes $16,185 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $22,560 for retirement savings and 401(k) match.
(11) Effective October 1, 2009, in response to our operating cash requirements, the base salary amounts being paid to the Executives were adjusted to be 10% less than the contractual amounts. In addition, until certain actions as discussed below, the amounts representing the subsequent contractual annual increases to those base salary amounts were not paid. No related modifications of the compensation as called for under their related employment agreements was made, as it was expected that this compensation withheld from the Executives would eventually be paid, although the Executives did agree that they would accept payment in equity of such shortfalls to a certain extent and under certain terms. Accordingly, except for the initial accrual in October 2010 as discussed below, we are accruing these unpaid amounts as non-cash compensation expense, with the unpaid portion reflected as an accrued liability under the balance sheet caption “Amounts due to directors and officers”. However, these accrued amounts will not be reflected as compensation in the above table until and unless additional payments are made to the Named Executive Officers in settlement of those amounts.
Effective September 16, 2012, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.8% of the contractual base salary at that time. Effective September 16, 2014, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 5.0% of the contractual base salary at that time. Effective May 1, 2015, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.4% of the contractual base salary at that time. Effective August 15, 2016, the base salary amounts being paid to the Executives were reduced by an amount representing approximately 3.0% of the contractual base salary at that time. As of October 7, 2016, the base salary payments to the Executives are approximately 21.5% less than the contractual base salaries (as adjusted through the September 27, 2016 raise), compared to the 10% reduction instituted in October 2009 and which reduction was initially company-wide but at this time affects very few of our other employees. The 21.5% shortfall cited above is before considering the impact of the two lump-sum payments made to the Executives in April and December 2015, as discussed below.
In consideration of the waiver and satisfaction of any remaining unpaid salary due to the Executives through December 31, 2012 under their employment agreements, as well as the waiver and satisfaction of any remaining unpaid amounts due to certain of those Executives, we (as authorized by our Board of Directors) and the Executives agreed, effective January 22, 2013, (i) to pay $100,000 ($20,000 per Executive) of the withheld compensation in cash and (ii) to issue 1,700,000 (340,000 per Executive) fully vested ONSM common shares, subject to certain trading restrictions (the “Executive Shares”). $125,000 in cash ($25,000 per Executive) was paid in April 2015, which satisfied the above commitment to pay the $100,000 of pre December 31, 2012 compensation not covered by the Executive Shares (and also satisfied $25,000 of post December 31, 2012 compensation previously withheld by us and accrued as a liability). Since none of the previous reductions of the executive compensation shortfall accrual through April 2015 resulted from a cash payment, we recorded the $125,000 cash payment in April 2015 against the accrued liability for the executive compensation shortfall without any impact on compensation expense for the year ended September 30, 2015. However, this $125,000 cash payment has been reflected in the above table as fiscal 2015 compensation.
An additional $125,000 in cash compensation ($25,000 per Executive) was paid in December 2015, which will reduce the previously accrued liability for unpaid compensation and will be reflected in the above table as fiscal 2016 compensation.
Although, as of October 28, 2016, the Executive Shares have not been issued, due to certain administrative and documentation requirements, since the Executive Shares were committed to be issued by the January 22, 2013 action of the Board, that issuance was reflected in our financial statements as of the date of such commitment. Furthermore, to the extent there is any shortfall from the gross proceeds upon resale by the Executives of the Executive Shares versus twenty-nine cents ($0.29) per share, the shortfall will be reimbursed to the Executives by us in cash, or at our option, by the issuance of additional fully vested ONSM common shares (the “Additional Executive Shares”), with the Additional Executive Shares subject to reimbursement by us to the Executives of any shortfall from the gross proceeds upon resale as compared to the fair value used to determine the number of such Additional Executive Shares. However, neither the Executive Shares nor the Additional Executive Shares will be reflected as compensation in the above table until and unless the shares are issued and/or corresponding cash payments are made to the Named Executive Officers.
(12) On February 20, 2013, we (as authorized by our Board of Directors) and the Executives agreed to certain changes in the Executives’ employment agreements, including the implementation of an executive incentive compensation plan (the “Executive Incentive Plan”). Compensation under the Executive Incentive Plan is to be in the form of Fully Restricted (as defined below) ONSM common Plan shares (“Executive Incentive Shares”) and is based on the Company achieving certain financial objectives, as follows:
· Increased revenues in each of fiscal years 2011 through 2015 (as compared to the respective prior year).
· Positive operating cash flow (as defined in the Executive Incentive Plan) in each of fiscal years 2011 through 2015.
· EBITDA, as adjusted, (as defined in the Executive Incentive Plan) for at least two quarters of each of fiscal years 2013 through 2015.
With respect to fiscal 2014, the Executives earned an aggregate of 375,000 Executive Incentive Shares for meeting the objective of achieving positive EBITDA, as adjusted, for at least two quarters as well as meeting the objective of achieving positive operating cash flow (both measures as defined in the Executive Incentive Plan) for the fiscal year. Accordingly, those 375,000 shares have been recorded on our financial statements and reflected as non-cash compensation expense of $75,000 for the year ended September 30, 2014 (the term of service) based on (i) the fair value of 250,000 shares at $0.21 per share as of May 20, 2014, the date it was conclusively determined that the EBITDA objective had been met and the shares had been earned plus (ii) the fair value of 125,000 shares at $0.18 per share as of May 8, 2015, the date it was conclusively determined that it was probable the cash flow objective would be met and the shares would be earned. Accomplishment of the other objective for fiscal 2014 would have resulted in an aggregate of 125,000 Executive Incentive Shares issued to the Executives as a group, but it was determined that these shares were not earned.
With respect to fiscal 2015, the Executives earned an aggregate of 250,000 Executive Incentive Shares for meeting the objective of achieving positive EBITDA, as adjusted, (as defined in the Executive Incentive Plan) for at least two quarters. Accordingly, those 250,000 shares have been recorded on our financial statements and reflected as non-cash compensation expense of $47,500 for the year ended September 30, 2015 (the term of service) based on the fair value of 250,000 shares at $0.19 per share as of June 30, 2015, the date it was conclusively determined that the EBITDA objective had been met and the shares had been earned. Accomplishment of the other objectives for fiscal 2015 would have resulted in an aggregate of 250,000 Executive Incentive Shares issued to the Executives as a group, but it was determined that these shares were not earned. However, the issuance of an aggregate of 125,000 of those 250,000 Executive Incentive Shares, related to the 2015 financial objective for cash flow and with a fair value of $23,750, is under review by the Board of Directors.
The Executive Incentive Shares are being issued in accordance with the terms of the 2007 Equity Incentive Plan (the “Plan”) which our Board of Directors and a majority of our shareholders adopted on September 18, 2007 and they amended on March 25, 2010 and on June 13, 2011, and to the extent these and other issuances under the Plan do not exceed the number of authorized Plan shares - see “2007 Equity Incentive Plan” below. The Executive Incentive Shares are subject to a complete restriction on the Executive’s ability to access or transact in any way such shares until the restriction is lifted. Upon a change of control, termination of the Executive’s employment or the imminently proposed and/or anticipated sale of the Company at a price of $1.00 per common share or more, all restrictions on the Executive Incentive Shares and any other common shares held by the Executives will be lifted. In the case of a sale, all restrictions will be lifted in time for those previously restricted shares to participate in all voting with respect to the proposed sale and will be eligible, at the Executive’s option, for inclusion as part of the shares sold in that transaction. Due to the restrictions on the Executive Incentive Shares, we have determined that the issuance thereof will not result in taxable compensation income to the Executives (or tax deductible compensation expense to the Company) until such restrictions have been lifted.
In the event that the termination of the Executive’s employment is the result of the Executive’s voluntary resignation, and such voluntary resignation is not due to the Company’s breach of the Executive’s employment agreement or is not due to constructive termination as outlined in the Executive’s employment agreement, such restrictions will be promptly lifted, provided that no bona-fide and legally defensible objection to such issuance has been raised by written notice provided by a majority of the other four Executives to the terminating Executive, within ninety (90) days after such termination date.
(13) The Named Executive Officers did not receive non-equity incentive plan compensation or compensation from changes in pension value and nonqualified deferred compensation earnings during the periods covered by the above table.
Employment Agreements
On September 27, 2007, our Compensation Committee and Board of Directors approved three-year employment agreements with Messrs. Randy Selman (President and CEO), Alan Saperstein (COO), Robert Tomlinson (Chief Financial Officer), Clifford Friedland (Senior Vice President Business Development) and David Glassman (Senior Vice President Marketing), collectively referred to as “the Executives”. In addition, our Compensation Committee and Board have approved certain corrections and modifications to those agreements from time to time, which are reflected in the discussion below. The employment agreements provide that the initial term shall automatically be extended for successive one (1) year terms thereafter unless (a) the parties mutually agree in writing to alter the terms of the agreement; or (b) one or both of the parties exercises their right, pursuant to various provisions of the agreement, to terminate the employment relationship.
After annual increases in prior years as set forth in the employment agreements, the contractual annual base salaries for the five Executives in aggregate as of September 30, 2015 was approximately $1.8 million, subject to a five percent (5%) increase on September 27, 2016 and each year thereafter - a portion of these contractual salaries are presently not being paid to the Executives, as discussed below. In addition, each of the Executives receives an auto allowance payment of $1,000 per month, a “retirement savings” payment of $1,500 per month and an annual reimbursement of dues or charitable donations up to $5,000. We also pay insurance premiums for the Executives, including medical, life and disability coverage. These agreements contain certain non-disclosure and non-competition provisions and we have agreed to indemnify the Executives in certain circumstances.
Under the terms of the employment agreements, upon a termination subsequent to a change of control, termination without cause or constructive termination, each as defined in the agreements, we would be obligated to pay each of the Executives an amount equal to three (3) times the Executive’s base salary plus full benefits for a period of the lesser of (i) three (3) years from the date of termination or (ii) the date of termination until a date one (1) year after the end of the initial employment contract term. We may defer the payment of all or part of this obligation for up to six (6) months, to the extent required by Internal Revenue Code Section 409A.
Under the terms of the employment agreements, we may terminate an Executive’s employment upon his death or disability or with or without cause. If an Executive is terminated for cause, no severance benefits are due him. If an employment agreement is terminated as a result of the Executive’s death, his estate will receive one year base salary plus any bonus or other compensation amount or benefit then payable or that would have been otherwise considered vested or earned under the agreement during the one-year period subsequent to the time of his death. If an employment agreement is terminated as a result of the Executive’s disability, as defined in the agreement, he is entitled to compensation in accordance with our disability compensation for senior executives to include compensation for at least 180 days, plus any bonus or other compensation amount or benefit then payable or that would have been otherwise considered vested or earned under the agreement during the one-year period subsequent to the time of his disability.
The above description is qualified in its entirety by the terms and conditions of the employment agreements.
Outstanding Equity Awards at Fiscal Year-End Table
There were no outstanding stock options or stock awards held by the Named Executive Officers as of September 30, 2015.
2007 Equity Incentive Plan
On September 18, 2007, our Board of Directors (the “Board”) and a majority of our shareholders adopted the 2007 Equity Incentive Plan (the “Plan”), which authorized the issuance of up to 1,000,000 shares of ONSM common stock pursuant to stock options, stock purchase rights, stock appreciation rights and/or stock awards for employees, directors and consultants. On March 25, 2010, our Board and a majority of our shareholders approved a 1,000,000 increase in the number of shares authorized for issuance under the Plan, for total authorization of 2,000,000 shares and on June 13, 2011 they authorized a further increase in authorized Plan shares by 2,500,000 to 4,500,000. Based on the issuance of 3,627,763 common shares under the Plan through September 30, 2015 (including 2,875,000 Executive Incentive Shares issued plus 375,000 Executive Incentive Shares accrued for potential issuance) and 50,000 outstanding financial consultant Plan Options, as of September 30, 2015, there are 822,237 shares available for additional issuances under the Plan.
The stated purpose of the Plan is to increase our employees', advisors', consultants' and non-employee directors' proprietary interest in our company, and to align more closely their interests with the interests of our shareholders, as well as to enable us to attract and retain the services of experienced and highly qualified employees and non-employee directors. The Plan is administered by the Compensation Committee of our Board (“the Committee"). The Committee determines, from time to time, those of our officers, directors, employees and consultants to whom Stock Grants and Plan Options will be granted, the terms and provisions of the respective Grants and Plan Options, the dates such Plan Options will become exercisable, the number of shares subject to each Plan Option, the purchase price of such shares and the form of payment of such purchase price. Stock Grants may be issued by the Committee at up to a 10% discount to market at the time of grant. All other questions relating to the administration of the Plan, and the interpretation of the provisions thereof, are to be resolved at the sole discretion of our Board or the Committee.
Plan Options granted under the Plan may either be options qualifying as incentive stock options ("Incentive Options") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options that do not so qualify ("Non-Qualified Options"). The exercise price of any Incentive Option granted to an eligible employee owning more than 10% of our common stock must be at least 110% of such fair market value as determined on the date of the grant.
The term of each Plan Option and the manner in which it may be exercised is determined by our Board or the Committee, provided that no Plan Option may be exercisable more than 10 years after the date of its grant and, in the case of an Incentive Option granted to an eligible employee owning more than 10% of our common stock, no more than five years after the date of the grant. In any case, the exercise price of any stock option granted under the Plan will not be less than 85% of the fair market value of the common stock on the date of grant. The exercise price of Non-Qualified Options is determined by the Committee.
The per share purchase price of shares subject to Plan Options granted under the Plan may be adjusted in the event of certain changes in our capitalization, but any such adjustment shall not change the total purchase price payable upon the exercise in full of Plan Options granted under the Plan. Officers, directors and employees of and consultants to us and our subsidiaries are eligible to receive Non-Qualified Options under the Plan. Only such individuals who are employed by us or by any of our subsidiaries thereof are eligible to receive Incentive Options.
All Plan Options are nonassignable and nontransferable, except by will or by the laws of descent and distribution and, during the lifetime of the optionee, may be exercised only by such optionee. If an optionee's employment is terminated for any reason, other than his death or disability or termination for cause, or if an optionee is not our employee but is a member of our Board and his service as a Director is terminated for any reason, other than death or disability, the Plan Option granted may be exercised on the earlier of the expiration date or 90 days following the date of termination. If the optionee dies during the term of his employment, the Plan Option granted to him shall lapse to the extent unexercised on the earlier of the expiration date of the Plan Option or the date one year following the date of the optionee's death. If the optionee is permanently and totally disabled within the meaning of Section 22(c)(3) of the Code, the Plan Option granted to him lapses to the extent unexercised on the earlier of the expiration date of the option or one year following the date of such disability.
The Board may amend, suspend or terminate the Plan at any time, except that no amendment shall be made which (i) increases the total number of shares subject to the Plan or changes the minimum purchase price therefore (except in either case in the event of adjustments due to changes in our capitalization) without shareholder consent, (ii) affects outstanding Plan Options or any exercise right thereunder, (iii) extends the term of any Plan Option beyond ten years, or (iv) extends the termination date of the Plan.
Unless the Plan has been earlier suspended or terminated by the Board, the Plan shall terminate 10 years from the date of the Plan’s adoption. Any such termination of the Plan shall not affect the validity of any Plan Options previously granted thereunder.
The potential benefit to be received from a Plan Option is dependent on increases in the market price of the common stock. The ultimate dollar value of the Plan Options that have been or may be granted under the Plan are therefore not ascertainable. The outstanding Plan Options as of September 30, 2015 had exercise prices from $0.92 to $6.00 per share. On October 7, 2016, the closing price of our common stock as reported on OTCP was $0.18 per share.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table contains information regarding beneficial ownership of our common stock as of October 7, 2016 held by:
· persons who own beneficially more than 5% of our outstanding common stock,
· our directors,
· named executive officers, and
· all of our directors and officers as a group.
Unless otherwise indicated, the address of each of the listed beneficial owners identified is c/o Onstream Media Corporation, 1291 SW 29th Avenue, Pompano Beach, Florida 33069. Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all shares of our common stock beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such a person within 60 days from October 7, 2016 upon exercise of options, warrants, convertible securities or other rights to receive our common shares. Each beneficial owner's percentage of ownership is determined by assuming that options, warrants, convertible securities or other rights to receive our common shares that are held by such a person (but not those held by any other person) and are exercisable within 60 days from the date hereof (unless otherwise indicated below) have been exercised. All information is based upon a record list of stockholders received from our transfer agent as of October 7, 2016. At that date, approximately 57% of our outstanding shares were held by CEDE & Co., which is accounted for as a single shareholder of record for multiple beneficial owners. CEDE & Co. is a nominee of the Depository Trust Company (DTC), with respect to securities deposited by participants with DTC, e.g., mutual funds, brokerage firms, banks, and other financial organizations. Shares held by CEDE & Co. are not reflected in the following table. For purposes of calculating beneficial ownership percentages in the following table, the number of total outstanding shares used as the denominator includes an aggregate of 3.125 million fully restricted common shares issued and or issuable to the named executive officers, but because of the nature of the restrictions those 3.125 million shares are not considered beneficially owned by those executives for purposes of the table.
(1) Includes 1,660 shares of our common stock presently outstanding. Excludes 678,000 common shares issued and outstanding, as well as 50,000 common shares earned but not issued as of October 7, 2016, but subject to restriction on the ability of Mr. Selman to access or transact in any way until such restrictions are lifted. See footnote 12 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 11 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Selman has the right/obligation to purchase from an independent third party and which have been partially paid for as of October 7, 2016 but none of these shares will be transferred to Mr. Selman until the full payment for all of the shares has been made.
If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, Mr. Selman's beneficial ownership as presented in that table would be 5.7%. Furthermore, as of October 7, 2016, we owe Mr. Selman approximately $205,000 for previously earned but unpaid compensation, for which he has agreed to accept payment in equity under certain conditions - see Item 11 - Executive Compensation for further details of this agreement. If this amount owed were to be settled by our issuance of common shares, such settlement would result in the issuance of approximately 1,137,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016. Furthermore, in the event the 340,000 shares authorized for issuance to Mr. Selman by our Board of Directors in January 2013 but not yet issued were to be issued and were Mr. Selman to sell those shares at our closing share price of $0.18 as of October 7, 2016, we would be obligated to reimburse Mr. Selman a shortfall of approximately $37,000 in cash, or at our option, approximately 208,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016 - see Item 11 - Executive Compensation for further details of this obligation. Notwithstanding the foregoing, these potential share issuances are subject to evaluation and/or approval by our Board of Directors as well as any changes in the price per share or other terms that might result from that evaluation and/or approval. If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, and if the potential share issuances listed herein were also included in that table, Mr. Selman's beneficial ownership as presented in that table would be 10.7%.
(2) Includes 1,973 shares of our common stock presently outstanding. Excludes 671,000 common shares issued and outstanding, as well as 50,000 common shares earned but not issued as of October 7, 2016, but subject to restriction on the ability of Mr. Saperstein to access or transact in any way until such restrictions are lifted. See footnote 12 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 11 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Saperstein has the right/obligation to purchase from an independent third party and which have been partially paid for as of October 7, 2016 but none of these shares will be transferred to Mr. Saperstein until the full payment for all of the shares has been made.
If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, Mr. Saperstein's beneficial ownership as presented in that table would be 5.7%. Furthermore, as of October 7, 2016, we owe Mr. Saperstein approximately $175,000 for previously earned but unpaid compensation, for which he has agreed to accept payment in equity under certain conditions - see Item 11 - Executive Compensation for further details of this agreement. If this amount owed were to be settled by our issuance of common shares, such settlement would result in the issuance of approximately 970,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016. Furthermore, in the event the 340,000 shares authorized for issuance to Mr. Saperstein by our Board of Directors in January 2013 but not yet issued were to be issued and were Mr. Saperstein to sell those shares at our closing share price of $0.18 as of October 7, 2016, we would be obligated to reimburse Mr. Saperstein a shortfall of approximately $37,000 in cash, or at our option, approximately 208,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016 - see Item 11 - Executive Compensation for further details of this obligation. Notwithstanding the foregoing, these potential share issuances are subject to evaluation and/or approval by our Board of Directors as well as any changes in the price per share or other terms that might result from that evaluation and/or approval. If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, and if the potential share issuances listed herein were also included in that table, Mr. Saperstein's beneficial ownership as presented in that table would be 10.1%.
(3) Includes 74,538 shares of our common stock presently outstanding, 24,684 shares of our common stock held by Titan Trust and 24,684 shares of our common stock held by Dorado Trust. Excludes 521,000 common shares issued and outstanding, as well as 50,000 common shares earned but not issued as of October 7, 2016, but subject to restriction on the ability of Mr. Friedland to access or transact in any way until such restrictions are lifted. See footnote 12 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 11 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Friedland has the right/obligation to purchase from an independent third party and which have been partially paid for as of October 7, 2016 but none of these shares will be transferred to Mr. Friedland until the full payment for all of the shares has been made. Mr. Friedland is the control person and beneficial owner of both Titan Trust and Dorado Trust and exercises sole voting and dispositive powers over these shares.
If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, Mr. Friedland's beneficial ownership as presented in that table would be 5.6%. Furthermore, as of October 7, 2016, we owe Mr. Friedland approximately $141,000 for previously earned but unpaid compensation, for which he has agreed to accept payment in equity under certain conditions - see Item 11 - Executive Compensation for further details of this agreement. If this amount owed were to be settled by our issuance of common shares, such settlement would result in the issuance of approximately 784,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016. Furthermore, in the event the 340,000 shares authorized for issuance to Mr. Friedland by our Board of Directors in January 2013 but not yet issued were to be issued and were Mr. Friedland to sell those shares at our closing share price of $0.18 as of October 7, 2016, we would be obligated to reimburse Mr. Friedland a shortfall of approximately $37,000 in cash, or at our option, approximately 208,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016 - see Item 11 - Executive Compensation for further details of this obligation. Notwithstanding the foregoing, these potential share issuances are subject to evaluation and/or approval by our Board of Directors as well as any changes in the price per share or other terms that might result from that evaluation and/or approval. If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, and if the potential share issuances listed herein were also included in that table, Mr. Friedland's beneficial ownership as presented in that table would be 9.3%.
(4) Includes 74,510 shares of our common stock presently outstanding, 24,684 shares of our common stock held by JMI Trust and 24,684 shares of our common stock held by Europa Trust. Excludes 521,000 common shares issued and outstanding, as well as 50,000 common shares earned but not issued as of October 7, 2016, but subject to restriction on the ability of Mr. Glassman to access or transact in any way until such restrictions are lifted. See footnote 12 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 11 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Glassman has the right/obligation to purchase from an independent third party and which have been partially paid for as of October 7, 2016 but none of these shares will be transferred to Mr. Glassman until the full payment for all of the shares has been made. Mr. Glassman is the control person and beneficial owner of both JMI Trust and Europa Trust and exercises sole voting and dispositive powers over these shares.
If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, Mr. Glassman's beneficial ownership as presented in that table would be 5.6%. Furthermore, as of October 7, 2016, we owe Mr. Glassman approximately $141,000 for previously earned but unpaid compensation, for which he has agreed to accept payment in equity under certain conditions - see Item 11 - Executive Compensation for further details of this agreement. If this amount owed were to be settled by our issuance of common shares, such settlement would result in the issuance of approximately 784,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016. Furthermore, in the event the 340,000 shares authorized for issuance to Mr. Glassman by our Board of Directors in January 2013 but not yet issued were to be issued and were Mr. Glassman to sell those shares at our closing share price of $0.18 as of October 7, 2016, we would be obligated to reimburse Mr. Glassman a shortfall of approximately $37,000 in cash, or at our option, approximately 208,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016 - see Item 11 - Executive Compensation for further details of this obligation. Notwithstanding the foregoing, these potential share issuances are subject to evaluation and/or approval by our Board of Directors as well as any changes in the price per share or other terms that might result from that evaluation and/or approval. If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, and if the potential share issuances listed herein were also included in that table, Mr. Glassman's beneficial ownership as presented in that table would be 9.3%.
(5) Excludes 484,000 common shares issued and outstanding, as well as 50,000 common shares earned but not issued as of October 7, 2016, but subject to restriction on the ability of Mr. Tomlinson to access or transact in any way until such restrictions are lifted. See footnote 12 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 11 to the table in Item 11 Executive Compensation for additional details. Also excludes 41,073 restricted common shares that may not be transacted by Mr. Tomlinson for any reason whatsoever prior to Board approval, which has not been granted.
If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, Mr. Tomlinson's beneficial ownership as presented in that table would be 3.8%. Furthermore, as of October 7, 2016, we owe Mr. Tomlinson approximately $155,000 for previously earned but unpaid compensation, for which he has agreed to accept payment in equity under certain conditions - see Item 11 - Executive Compensation for further details of this agreement. If this amount owed were to be settled by our issuance of common shares, such settlement would result in the issuance of approximately 859,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016. Furthermore, in the event the 340,000 shares authorized for issuance to Mr. Tomlinson by our Board of Directors in January 2013 but not yet issued were to be issued and were Mr. Tomlinson to sell those shares at our closing share price of $0.18 as of October 7, 2016, we would be obligated to reimburse Mr. Tomlinson a shortfall of approximately $37,000 in cash, or at our option, approximately 208,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016 - see Item 11 - Executive Compensation for further details of this obligation. Notwithstanding the foregoing, these potential share issuances are subject to evaluation and/or approval by our Board of Directors as well as any changes in the price per share or other terms that might result from that evaluation and/or approval. If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, and if the potential share issuances listed herein were also included in that table, Mr. Tomlinson's beneficial ownership as presented in that table would be 7.8%.
(6) See footnotes (1) through (5) above.
(7) Includes 825,000 shares of our common stock presently outstanding and 743,571 shares of our common stock held by 4J Consulting Corp. Mr. Miller is the control person and beneficial owner of 4J Consulting Corp and exercises sole voting and dispositive powers over these shares.
The entities Sigma Opportunity Fund II, LLC (“Sigma”) and Sigma Capital Advisors, LLC (“Sigma Capital”) had no beneficial ownership of our common shares as of October 7, 2016. However, as of October 7, 2016 we were indebted for a note payable to Sigma in the principal amount of $600,000 (the “New Sigma Note”) with a maturity date of December 31, 2016. Sigma has the right to convert the New Sigma Note to common stock at a rate of $0.30 per share, which right Sigma may exercise only upon (i) the sale of all or substantially all of our business, assets or capital stock or (ii) our default on the New Sigma Note. Based on these limitations on conversion, the 2.0 million shares that would be issuable upon conversion of the New Sigma Note are not considered to be beneficially owned by Sigma as of October 7, 2016. Sigma Capital serves as the managing member of Sigma. Mr. Thom Waye is the sole member of Sigma Capital Partners, LLC, which in turn is the sole member of Sigma Capital, and as a result Mr. Waye, representing Sigma Capital Partners, LLC, is the control person and beneficial owner of Sigma and Sigma Capital and would exercise sole voting and dispositive powers over any shares issued upon conversion of the New Sigma Note. In the event these 2.0 million shares were issued or considered issuable as of October 7, 2016, they would represent approximately 7.7% beneficial ownership, greater than the 5% threshold for inclusion of Mr. Waye and/or Sigma Capital Partners, LLC in the beneficial ownership table above.
Securities Authorized for Issuance Under Equity Compensation Plans - See Item 5 - Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Certain relationships and related transactions
In December 2007, we entered into a line of credit arrangement (the “Line”) with a financial institution (the “Lender”) under which we could borrow up to an aggregate of $1.0 million for working capital, collateralized by our accounts receivable and certain other related assets and the amount of such borrowing being further subject to the amount, aging and concentration of such receivables. In August 2008 the maximum allowable borrowing amount under the Line was increased to $1.6 million and in December 2009 this amount was again increased to $2.0 million. The Lender was Thermo Credit LLC through February 10, 2016 and as a result of an assignment, Thermo Communications Funding LLC, an affiliated company, subsequent to that date. Mr. Leon Nowalsky, a member of our Board, is an investor and board member in both entities.
Although the Line expired on December 27, 2013, we continued after that date to negotiate renewal terms with the Lender and to maintain an outstanding borrowing balance under the Line and on February 10, 2016 (the “Effective Date”), we entered into a Loan Modification Agreement (“Modification”) which extended the term of the Line through December 31, 2017 (the “Maturity Date”).
The Modification also provides that, if no Default or Event of Default, as defined in the Modification, shall have occurred and be continuing as of the Maturity Date, and upon our notice and request to Lender sent per the timing and other requirements in the Modification, Lender shall (in good faith) engage in, and conclude as quickly as commercially reasonable, negotiations with us to extend the Maturity Date by up to an additional twelve months (i.e., through December 31, 2018). The Modification also changed a number of the other terms of the Line, as discussed below.
Prior to the Effective Date, the outstanding balance (approximately $1.7 million as of September 30, 2015 and approximately $1.5 million as of October 7, 2016) bears interest at 12.0% per annum, adjustable based on changes in prime after December 28, 2009, payable monthly in arrears. The Modification provides that as of the Effective Date the interest rate will be the prime rate plus seven and one-half percent (7.5%) per annum, but no less than eleven percent (11.0%) per annum or any higher rate that might be allowed by the terms of the Line, including the Modification, arising from certain events such as default. Accordingly, as of the Effective Date, the outstanding balance bears interest at 11.0% per annum.
Under the terms of the Line, we also incur a monitoring fee and a commitment fee, which fees were unchanged by the Modification. The monitoring fee is one twentieth of a percent (0.05%) of the borrowing limit per week, payable monthly in arrears, and the commitment fee is one percent (1%) per year of the maximum allowable borrowing amount, payable annually in advance.
We paid the Lender origination and commitment fees in December 2007 aggregating $20,015, an additional commitment fee in August 2008 of $6,000 related to the increase in the lending limit for the remainder of the year, a commitment fee of $16,000 in December 2008 related to the continuation of the increased Line for an additional year, a commitment fee of $20,000 in December 2009 related to the continuation of the Line for an additional year as well as an increase in the lending limit, and commitment fees aggregating $60,000 related to the continuation of the Line for three additional years through December 27, 2013. Pending the formal renewal of the Line, we agreed in August 2014 to pay the commitment fee calculated on a pro-rata basis for eight months payable August 31, 2014 and a pro-rata monthly commitment fee thereafter through the Effective Date, at which time we paid the remaining balance due on a $20,000 annual commitment fee related to the continuation of the Line through December 31, 2016.
Starting at the inception of the Line, we have paid the Lender fees and expenses totaling up to approximately two to three thousand dollars per quarter related to their reviews of our receivable and other records related to the loan, although these payments have not been required in recent years.
The terms of the Line prior to the Effective Date required that all funds remitted by our customers in payment of receivables be deposited directly to a bank account owned by the Lender (the “Lockbox Account”), although this was never implemented. This requirement continues after the Effective Date, including the provision that such funds received in the Lockbox Account shall be immediately applied to any balance outstanding under the Line, or returned to us one day following clearance by the receiving bank, to the extent there is no balance outstanding under the Line. The Modification provides that we shall be responsible for the additional expenses related to the Lender-owned bank account, which we expect to be in the range of $12,000 to $18,000 per year.
The Modification provides that our failure to comply with these provisions shall be an immediate Event of Default, and although as of July 8, 2016 (the extended deadline granted by the Lender on June 8, 2016) these provisions had not been fully implemented, we were in substantial compliance with such provisions since August 1, 2016 and through October 28, 2016 and we have not received any notification from the Lender as to any Event of Default under these provisions, as of October 28, 2016.
The Line is subject to us maintaining an adequate level of receivables, based on certain formulas. However, due to the lack of a formal renewal of the Line, in June 2014 the Lender determined that there would be no further advances under the Line, although no further repayments have been required either, and as a result the outstanding principal balance of the Line did not change from that time through June 24, 2016, regardless of weekly changes in the calculated borrowing availability based on the applicable formulas applied to our receivable levels. Effective June 24, 2016, the first deposit was made to the Lockbox Account and applied against the balance outstanding under the Line.
The Modification allows our receivable from any single party, including Partners, to be considered an Eligible Receivable to the extent that (i) the aggregate of all accounts receivable from such party and its affiliates does not exceed thirty percent (30%) of all Eligible Receivables (all Eligible Receivables for this purpose including the portion of the our accounts receivable from such party that is ultimately considered to be an Eligible Receivable) then owed by all of our account debtors and (ii) it meets all of the other requirements for eligibility as set forth in the Line.
As of the Effective Date, although the outstanding balance under the Line exceeded the maximum allowable borrowing amount under the Line (the “Borrowing Base”), the Modification provided that notwithstanding any other provisions of the Line or the Modification, such condition would not be considered a Default or an Event of Default, and Lender would agree to make advances to us thereunder based on the Borrowing Base plus an overadvance amount determined by a schedule which started at $300,000 through February 27, 2016 but declined to zero as of July 31, 2016 and thereafter. As of October 24, 2016, the outstanding balance under the Line was approximately $1,576,000, which exceeded the Borrowing Base by approximately $248,000. Although there is no formal obligation to do so, as of October 24, 2016 the Lender is allowing such overadvance condition to continue, under their expectation that we are seeking alternative funding to replace that overadvance.
The Line is also subject to our compliance with a quarterly debt service coverage covenant (the “Covenant”). Prior to the Modification, the Covenant requires that the sum of (i) our net income or loss, adjusted to remove all non-cash expenses as well as cash interest expense and (ii) contributions to capital (less cash distributions and/or cash dividends paid during such period) and proceeds from subordinated unsecured debt, be equal to or greater than the sum of cash payments for interest and debt principal payments. The Lender waived the requirement to comply with the Covenant for the quarter ended September 30, 2015. We have complied with the Covenant for all other applicable quarters through June 30, 2016.
The Modification provides that effective January 1, 2016 and thereafter, the Covenant will require that our net income or loss, adjusted to (i) add back all non-cash expenses as well as cash interest expense and (ii) subtract cash distributions and/or cash dividends paid during such period, be equal to or greater than 1.2 times the sum of cash payments for interest and debt principal payments. The Modification also provides that we will not declare or pay any dividends or distributions on any equity interest, if before or after such event an Event of Default or Default, as defined in the Modification, would exist. Both before and after the Modification, the terms of the Line allow us to achieve compliance with the Covenant by (i) including any excess of adjusted net income over the amount of adjusted net income required to comply with the Covenant in the preceding two quarters or (ii) adding to adjusted net income the proceeds from subordinated debt or equity sales meeting defined conditions, and received within certain time frames extending prior to, and in some cases subsequent to, the relevant date of determination, all set forth in the Line and the Modification. The Modification also explicitly allows, subject to Lender’s prior consent, proceeds from our sales of revenues/customer accounts to a separate legal entity and received within a time frames extending six months prior to, and one month subsequent to, the relevant date of determination, to be added to adjusted net income for purposes of the Covenant. In a letter dated October 26, 2016, the Lender consented to the inclusion of proceeds from our December 2015 and June 2016 sales of revenue/customer accounts to Partners, as well as the proceeds from such sale in process that we expect to be effective during November 2016, and extended the carryback period for those proceeds from one month to three months.
Although we do not have final financial results for periods after June 30, 2016, our estimated calculations for the quarters ended September 30, 2016, including our expectations of additional financing proceeds after that date that would be allowable for inclusion in those calculations, indicate that we are in compliance with the Covenant.
The outstanding principal is due on demand in the event a payment default is uncured one (1) day after written notice. The Modification provides that, without limiting any other rights and remedies provided by the terms of the Line or otherwise available to the Lender, the Lender may exercise one or more of certain rights and remedies, as listed in the Amendment, during the existence of any uncured Default (upon not less than five days prior written notice by Lender) or Event of Default which has not been waived in writing by Lender. Lender’s rights to exercise such rights and remedies will end if and when all of Debtors’ obligations to Lender in connection with the Line have been satisfied. The rights and remedies listed in the Modification include, but are not limited to: (i) verify the validity and amount of, or any other matter relating to, the accounts by mail, telephone, telegraph or otherwise, (ii) notify all account debtors that the accounts have been assigned to Lender and that Lender has a security interest in the accounts, (iii) direct all account debtors to make payment of all accounts directly to Lender or the Lockbox Account (iv) in any case and for any reason, notify the United States Postal Service to change the addresses for delivery of mail addressed to us to such address as Lender may designate, as well as receive, open and dispose of all such mail, provided that Lender shall promptly forward to us any such items not related to the accounts, (v) exercise all of our rights and remedies with respect to the collection of accounts, (vi) settle, adjust, compromise, extend, renew, discharge or release accounts, for amounts and upon terms which Lender considers advisable and (vii) sell or assign accounts on such terms, for such amounts and at such times as Lender deems advisable.
On December 29, 2009, we entered into an agreement with CCJ Trust (“CCJ”) whereby accrued interest on a previous $200,000 cash advance through that date of $5,808 was paid by us in cash and the $200,000 advance was converted to an unsecured subordinated note payable (the “CCJ Note”) at a rate of 8% interest per annum in equal monthly installments of principal and interest for 48 months plus a $100,000 principal balloon at maturity, although none of those payments were subsequently made by us. CCJ is a trust for the adult children of Mr. Charles Johnston, one of our directors at that time, and he disclaims any beneficial ownership interest in CCJ. To resolve the payment default, the CCJ Note was amended in January 2011 to prospectively increase the interest rate to 10% per annum, payable quarterly, and to require two principal payments of $100,000 each on December 31, 2011 and December 31, 2012, respectively. This amendment also called for our cash payment of the previously accrued interest in the amount of $16,263 on or before January 31, 2011. On July 22, 2011, in order to reduce our near-term cash requirements, we agreed to convert $90,000 of the $100,000 December 31, 2011 principal payment to 100,000 common shares, leaving a remaining balance outstanding under the CCJ Note of $110,000, of which $10,000 was paid in January 2012. Three quarterly interest payments on the remaining outstanding $100,000 balance were subsequently made in cash and as of December 31, 2012 we would have owed the $100,000 principal plus the final quarterly interest payment of $2,500. However, we agreed with CCJ to combine that $102,500 obligation with another unpaid obligation of $43,279. The combined obligation of $145,779 was the principal amount of a replacement subordinated note issued to CCJ dated December 31, 2011 and payable in 24 monthly principal and interest installments of $6,862.32 starting January 31, 2013 and which payment amount included interest at 12% per annum. Prior to the issuance of the December 31, 2012 replacement note, the CCJ Note was convertible by CCJ into our common shares at the greater of (i) the previous 30 day market value or (ii) $2.00 per share (which was $3.00 per share prior to the January 2011 renegotiation). The December 31, 2012 replacement note had no conversion rights. On November 4, 2013, the outstanding principal balance of the CCJ Note, as well as accrued but unpaid interest, in the aggregate amount of $125,000 was satisfied from the gross proceeds of a $250,000 note issued by us to the same lender. However, Mr. Johnston was no longer an ONSM director at the time the $250,000 note was negotiated.
On January 2, 2013 we received $25,000 pursuant to an unsecured promissory note issued to CCJ (the “New CCJ Note”), bearing interest at 12% per annum and subordinated to our secured debts to Thermo Credit and Rockridge Capital. New CCJ Note payments are interest only during the first year, approximately 30% of the principal plus interest during the second year and the remaining principal balance at the end of the twenty-fifth month. In connection with this financing, we issued 30,000 restricted common shares (the “CCJ Common Stock”) to CCJ, of which we have agreed to buy back up to 5,000 shares, under certain terms. The buy-back terms are as follows: If the fair market value of the CCJ Common Stock is not equal to at least $0.80 per share on the date one (1) year after issuance, we will buy back, to the extent permitted by law, up to 2,500 shares of the originally issued CCJ Common Stock from CCJ at $0.80 per share. If the fair market value of the CCJ Common Stock is not equal to at least $0.80 per share on the date two (2) years after issuance, we will buy back, to the extent permitted by law, up to 5,000 shares of the originally issued CCJ Common Stock, less the amount of any shares already bought back at the one year point, from CCJ at $0.80 per share. The above only applies to the extent the CCJ Common Stock is still held by CCJ at the applicable dates. On November 4, 2013, the outstanding principal balance of the $25,000 note issued to CCJ, as well as accrued but unpaid interest, in the aggregate amount of $26,000 was satisfied from the gross proceeds of a $250,000 note issued by us to the same lender. However, Mr. Johnston was no longer an ONSM director at the time the $250,000 note was negotiated.
Effective February 28, 2015 the $250,000 note issued to CCJ was amended, extending the maturity date to March 1, 2016. This amendment provided that interest would be paid quarterly, commencing June 30, 2015 and also increased the outstanding principal balance to $275,000, for the effect of a $25,000 due diligence fee earned by the noteholder in connection with the amendment. This amendment also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale. Although this note was further amended, effective October 15, 2015, to extend the maturity date to July 15, 2016, it was paid in full on December 30, 2015. Such repayment, in accordance with our December 29, 2015 agreement with J&C Resources, Inc. (“J&C”), was made in consideration of our receipt of $157,000 from J&C on December 30, 2015 for our issuance of an unsecured, subordinated note with a December 31, 2016 maturity date.
In conjunction with and in consideration of the December 2009 note transaction, the 35,000 shares of Series A-12 (with a stated value of $10.00 per share and convertible into common at $6.00 per share) held by CCJ at that date were exchanged for 35,000 shares of Series A-13 (with a stated value of $10.00 per share and convertible into common at $3.00 per share) plus four-year warrants for the purchase of 29,167 Onstream common shares at $3.00 per share. In conjunction with and in consideration of January 2011 note transaction entered into by us with CCJ, it was agreed that certain terms of the 35,000 shares of Series A-13 held by CCJ at that date would be modified as follows - the conversion rate to common shares, as well as the minimum conversion rate for payment of dividends in common shares, will be $2.00 per share, the maturity date will be December 31, 2012 and dividends will be paid quarterly, in cash or, at our option, in unregistered shares. In addition it was agreed that $28,000 in A-13 dividends for calendar 2010 would be immediately paid by issuance of 14,000 unregistered common shares, using the minimum conversion rate of $2.00 per share.
On January 10, 2012, we received a funding commitment letter (the “January 2012 Funding Letter”) from J&C, agreeing to provide us, within twenty (20) days after our notice given on or before December 31, 2012, aggregate cash funding of up to $550,000, which may be requested in multiple tranches. Mr. Charles Johnston, one of our directors at that time, is the president of J&C. This January 2012 Funding Letter was obtained by us solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available, but did not represent any obligation on our part to accept such funding on these terms, was not expected by us to be exercised and was not exercised. The cash provided under the January 2012 Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 1, 2013 and (b) our issuance of 2.3 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of an equivalent amount in dollars of investment from any other source after the date of the January 2012 Funding Letter, other than funding received in connection with the LPC Facility, the January 2012 Funding Letter would be terminated. As part of the transaction under which J&C issued the January 2012 Funding Letter, we agreed to reimburse CCJ in cash the shortfall, as compared to minimum guaranteed net proceeds of $139,000, from their resale of 101,744 shares CCJ received upon their conversion of 17,500 shares of Series A-13 and after effecting our agreement as part of the same transaction to reduce the conversion rate on all Series A-13 shares from $2.00 per common share to $1.72 per common share. Based on the shortfall plus (i) the increased value of the underlying common stock related to this tranche as well as the second tranche of 17,500 shares of Series A-13 owned by CCJ and (ii) the Black-Scholes value of adjustments to warrants held by Lincoln Park Capital arising from certain anti-dilution provisions, the total economic cost of the January 2012 Funding Letter was approximately $130,000.
On December 21, 2012, we received a funding commitment letter (the “December 2012 Funding Letter”) from J&C, agreeing to provide us, within twenty (20) days after our notice given on or before December 31, 2013, aggregate cash funding of up to $550,000, which may be requested in multiple tranches. The December 2012 Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available, but did not represent any obligation to accept such funding on these terms, was not expected by us to be exercised and was not exercised. Cash provided under the Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 1, 2013 and (b) our issuance of 2.3 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of an equivalent amount in dollars of investment from any other source after the date of the December 2012 Funding Letter, other than funding received in connection with the LPC Purchase Agreement, to refinance existing debt and up to $500,000 funding for general working capital or other business uses, the December 2012 Funding Letter would be terminated. As provided in the A-13 Designation, any shares of Series A-13 still outstanding as of December 31, 2012 would automatically convert into our common shares. In December 2012, as part of a transaction under which J&C Resources issued us the December 2012 Funding Letter, we agreed to reimburse CCJ in cash the shortfall, payable on December 31, 2014, as compared to minimum guaranteed net proceeds of $175,000, from their resale of 437,500 common shares CCJ received on December 31, 2012 upon their conversion of 17,500 shares of Series A-13 and after effecting our agreement as part of the same transaction to reduce the conversion rate on all Series A-13 shares from $1.72 per common share to $0.40 per common share. Based on the estimated shortfall calculated based on the closing ONSM share price on the date of the agreement with J&C Resources, plus the increased value of the underlying common stock related to this tranche of Series A-13 shares owned by CCJ, the total economic cost of the December 2012 Funding Letter was approximately $151,000.
On April 30, 2015, we received a funding commitment letter (the “April 2015 Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. Such notice was not given by us, but on April 30, 2016, we exercised our option for a one year extension of the April 2015 Funding Letter, including an extension of the notice deadline to January 5, 2017. The April 2015 Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available. Mr. Charles Johnston, a former ONSM director, is the president of J&C. Cash provided under the April 2015 Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 15, 2017 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of funds in excess of $5.0 million as a result of a single transaction for the sale of all or a part of our operations or assets, the April 2015 Funding Letter will be terminated. The consideration for the April 2015 Funding Letter was $25,000, which we have paid, and the consideration for the April 2015 Funding Letter extension is $25,000, to be withheld from any proceeds lent thereunder but in any event paid no later than September 1, 2016.
On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). The Sold Accounts represented historical annual revenues of approximately $1.35 million. After giving effect to our determination that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, (i) the gross proceeds from this and our subsequent transactions with Partners are reflected as an increase in our equity (noncontrolling owners’ interest in VIE), (ii) the revenues from the Sold Accounts, and accounts sold as part of our subsequent transactions with Partners, are included in our consolidated revenues and (iii) the payment of the Partners’ guaranteed return percentage, which is deducted from these gross revenues, is reflected as a decrease in our equity (distributions to owners of VIE).
The limited partners of Partners include two Onstream directors (Cliff Friedland, who is also the executive officer primarily responsible for Infinite’s operations, and Alan Saperstein), two other officers of Onstream/Infinite who are not Onstream or Infinite directors (David Glassman and Eric Jacobs) and David Glassman’s sister and mother, for total related party ownership of 60% as of February 28, 2015. Jeffrey Miller (not considered to be a related party with respect to those limited partners, Onstream or Infinite until July 2015, when his beneficial ownership of our common stock exceeded 5% of our total outstanding shares and which condition continues as of October 28, 2016) serves as general partner, and is solely responsible for administering the activities of Partners as outlined below.
In connection with the February 28, 2015 sale, Infinite and Partners entered into a Management Services Agreement (“MSA”) that provides for Infinite to continue to invoice the Sold Accounts but the payments when received from those Sold Accounts will be deposited in a segregated Partners owned bank account. Partners will return those customer proceeds to Infinite on a weekly basis in the form of a Management Fee, after deducting a certain amount representing (i) Partners’ guaranteed return (which is 40% of the Purchase Price per annum with the first six months guaranteed regardless of whether we exercise our rights under the Option Agreement or the MSA is otherwise terminated) and (ii) accounting fees payable to the third-party accounting firm as discussed below. Infinite will continue to service the Sold Accounts, incurring and absorbing all related costs of doing so - i.e., Partners will have no operating responsibilities and no operating costs related to the sold accounts other than to pay the Management Fee to Infinite. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the Partners’ guaranteed return percentage decreased. The MSA defines specific services, along with certain minimum standards of quality for such services, required to be provided by Infinite with respect to the Sold Accounts. The MSA contains provisions that prohibit (i) Infinite servicing the Sold Accounts for a period of two years after the termination of the MSA and (ii) Partners interfering in any way with Infinite’s performance of its duties thereunder or communicating with the Sold Accounts or with Infinite’s employees, vendors, consultants or agents during the term of the MSA.
The MSA initially had a two year term expiring on February 28, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights as follows. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the expiration date of the MSA was extended. Partners has the right to terminate the MSA, effective immediately upon written notice to Infinite, in the event of the following: (i) an Infinite Event of Default or (ii) the sale by Partners of the Sold Accounts subject to the terms of the Membership Interest Option Agreement.
An Infinite Event of Default is (i) Bankruptcy of Infinite (as defined), (ii) a lack of compliance by Infinite with the provisions of the MSA which is continuing five (5) business days after receiving written notice from partners specifying such lack of compliance or (iii) a breach by Infinite or Onstream of any obligation under the Make Whole Agreement. Infinite has the right to terminate the MSA, effective immediately upon written notice to Partners, in the event of a Partners Event of Default. A Partners Event of Default is (i) a deliberate and material lack of compliance by Partners with the provisions of the MSA which is continuing five (5) business days after receiving written notice from Infinite specifying such lack of compliance or (ii) a breach by Partners of Partners’ obligations under the Membership Interest Option Agreement. Notwithstanding termination of the MSA, only for so long as the Infinite owns the Sold Accounts, Partners shall continue to pay the Management Fee, provided that Partners may deduct from such Management Fee Partners’ payment of all reasonable costs of providing the services to the Sold Accounts otherwise required to be provided by Infinite under the MSA.
Partners has engaged a third-party accounting firm to manage all cash transactions under the MSA and Infinite, Partners and the accounting firm have entered into a separate agreement (Agreement Re Distributions) whereby the accounting firm has explicitly agreed to carry out the terms of the MSA and other related documents executed between Infinite and Partners, particularly with respect to distributions of funds and to not vary from that except upon joint written instructions from Infinite and Partners. We have agreed to be responsible for the fees of the third-party accounting firm.
In connection with the February 28, 2015 sale, Infinite and Partners entered into a Make Whole Agreement which provides that if the revenues from the Sold Accounts falls below $1.0 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the revenues from the Sold Accounts back to $1.25 million (or the equivalent in cash flow). Onstream Media Corporation (“Onstream”) and Infinite have also committed that in the event there is any impediment, which directly or indirectly is caused by, or relates in any way to Infinite or Onstream, which would prevent more than 20% of the revenue from these sold accounts being earned or distributed to Partners, Infinite and Onstream would take all necessary steps to ensure that such impeded revenue or revenue shortfall is otherwise earned or distributed or shall pay the amount of such impeded revenue or revenue shortfall to Partners to the extent due on a quarterly basis.
In connection with the February 28, 2015 sale, Infinite and Partners entered into a Membership Interest Option Agreement (“Option Agreement”) whereby we have the right for the two-year period through February 28, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the Purchase Price plus a premium, which premium increases on a pro-rata basis to 20% of the Purchase Price over the two year period, subject to a minimum premium of 10%. Starting six months after the Effective Date, Partners may sell the Sold Accounts to a third party, provide that they must provide us four month written advance notice of such sale during which four month period we have the right to exercise our rights under the Option Agreement. In the event we do not exercise our rights under the Option Agreement, and Partners sells the Customer Accounts to a third party, we are entitled to receive 50% of any excess of the sales price to the third party over what would have been our option price under the Option Agreement. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the expiration date of the Option Agreement was extended and the premium percentage decreased.
The Option Agreement provides that during the two-year option term, and until the option closing in the event of a timely exercise of the option thereunder, neither Partners nor its members will (i) encumber any of Partners’ assets or membership interests to any party, other than Infinite, (ii) incur any liability whatsoever, whether actual or contingent, other than per the terms and provisions of the partnership operating agreement and the MSA or (iii) place a lien on the Sold Accounts.
On December 16 and 18, 2015, we received aggregate gross proceeds of approximately $2.1 million for our sale, effective December 16, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“First Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $2.7 million. The increase in the number of limited partners of Partners resulting from this transaction decreased the total related party ownership percentage to approximately 25% as of December 16, 2015.
In connection with the December 16, 2015 sale, Infinite and Partners entered into:
· an Amended and Restated Make Whole Agreement (“Amended Make Whole Agreement”) which provides that if the combined revenues from the Sold Accounts and the First Tranche of Additional Sold Accounts (“Combined Revenues”) falls below approximately $3.2 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the Combined Revenues back to approximately $4.0 million (or the equivalent in cash flow). All other terms of the Amended Make Whole Agreement were substantially the same as the terms of the Make Whole Agreement as discussed above.
· an Amended and Restated Membership Interest Option Agreement (“Amended Option Agreement”) whereby we have the right for the two-year period through December 16, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the combined purchase price of the Sold Accounts and the First Tranche of Additional Sold Accounts plus $100,000 (“Purchase Price”), plus a premium, which premium increases on a pro-rata basis to 10% of the Purchase Price over the two year period, subject to a minimum premium of 5%. All other terms of the Amended Option Agreement were substantially the same as the terms of the Membership Interest Option Agreement as discussed above.
· an Amended and Restated Management Services Agreement (“Amended MSA”) with a two year term expiring on December 16, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights. The Amended MSA provides that the Partners’ guaranteed return percentage be reduced to 30% per annum of the Purchase Price, with the first six months guaranteed regardless of whether we exercise our rights under the Amended Option Agreement or the Amended MSA is otherwise terminated. All other terms of the Amended MSA were substantially the same as the terms of the MSA as discussed above.
During the period from March 25, 2016 through June 30, 2016 we received aggregate gross proceeds of approximately $800,000 for our sale, effective June 30, 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Second Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $1.0 million. The increase in the number of limited partners of Partners resulting from this transaction decreased the total related party ownership percentage to approximately 21% as of June 30, 2016.
In connection with the June 30, 2016 sale, Infinite and Partners entered into:
· an Amended and Restated Make Whole Agreement (“Second Amended Make Whole Agreement”) which provides that if the combined revenues from the Sold Accounts, the First Tranche of Additional Sold Accounts and the Second Tranche of Additional Sold Accounts (“Combined Revenues”) falls below approximately $3.9 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the Combined Revenues back to approximately $4.9 million (or the equivalent in cash flow). All other terms of the Second Amended Make Whole Agreement were substantially the same as the terms of the Amended Make Whole Agreement as discussed above.
· an Amended and Restated Membership Interest Option Agreement (“Second Amended Option Agreement”) whereby we have the right for the two-year period through December 16, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the combined purchase price of the Sold Accounts, the First Tranche of Additional Sold Accounts and the Second Tranche of Additional Sold Accounts plus $100,000 (“Purchase Price”), plus a premium, which premium increases on a pro-rata basis to 10% of the Purchase Price over the two year period, subject to a minimum premium of 5%. All other terms of the Second Amended Option Agreement were substantially the same as the terms of the Amended Option Agreement as discussed above.
· an Amended and Restated Management Services Agreement (“Second Amended MSA”) with a two year term expiring on December 16, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights. The Second Amended MSA provides that the Partners’ return is guaranteed for the first six months regardless of whether we exercise our rights under the Second Amended Option Agreement or the Second Amended MSA is otherwise terminated. All other terms of the Second Amended MSA were substantially the same as the terms of the Amended MSA as discussed above.
During September and October 2016, subscriptions for approximately $225,000 were received by Partners and funded against an anticipated total of $1.5 million for our sale, which we expect will be effective during November 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Third Tranche of Additional Sold Accounts”) to Partners, will represent historical annual revenues of approximately $1.9 million, and will be sold under the same terms as the accounts sold in December 2015 and June 2016.
We are responsible for legal, consulting, finders and other fees related to the initial closing of the above transactions, as well as ongoing fees to administer these transactions, including (i) the third-party accounting firm as discussed above, (ii) certain compensation and expense payments to the general partner and (iii) certain other financial transaction expenses. These expenses are included as part of non-operating expenses (other (expense) income, net) and were approximately $115,000 and none for the years ended September 30, 2015 and 2014, respectively.
In December 2015 we recorded the issuance to Jeffrey Miller of 200,000 unregistered common shares for professional management services rendered in connection with Partners, such shares having a fair value of approximately $38,000 and are being recognized as part of the above non-operating expenses over a service period of twelve months starting December 16, 2015.
Review, approval or ratification of transactions with related persons
Prior to us entering into any related person transaction, our Board of Directors reviews the terms of the proposed transaction to ensure that they are fair and reasonable, on market terms and on an arms-length basis. Legal or other counsel is consulted as appropriate.
If a related party transaction involves compensation or is otherwise related to an employment relationship with us, the related party transaction will be reviewed by the Compensation Committee. Related party transactions are reported to the Audit Committee for their review and approval of the related disclosure.
With respect to transactions in which a director or executive officer or immediate family member may have a direct or indirect material interest, only disinterested members of the Board of Directors, the Compensation Committee and/or the Audit Committee may vote on whether to approve the transaction.
Director independence
Our independent directors are Messrs. Silva, Nowalsky and Whitney.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The audit fees billed to us by Mayer Hoffman McCann P.C. (“MHM”) for professional services rendered during the fiscal year ended September 30, 2015 were $157,000 for the audit of our annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014 as well as the review of our quarterly financial statements included in our quarterly report on Form 10-Q for the quarter ended December 31, 2014. Fees for the review of our quarterly financial statements included in our quarterly reports on Form 10-Q for the quarters ended March 31 and June 30, 2015 were incurred, invoiced and paid subsequent to the fiscal year ended September 30, 2015.
The audit fees billed to us by MHM for professional services rendered during the fiscal year ended September 30, 2014 were $233,000 for the audit of our annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 as well as the review of our quarterly financial statements included in our quarterly reports on Form 10-Q for the quarters ended December 31, 2013, and March 31 and June 30, 2014.
Audit Related Fees
The aggregate fees billed to us by MHM for assurance and related services relating to the performance of the audit of our financial statements which are not reported under the caption "Audit Fees" above were none and $4,650 for the fiscal years ended September 30, 2015 and 2014, respectively. The $4,650 was paid for time spent answering inquiries from an accounting firm engaged by our potential lender, in connection with that accounting firm’s preparation of a “quality of earnings” report.
Tax Fees
The aggregate fees billed to us by MHM for tax related services were none and $2,600 for the fiscal years ended September 30, 2015 and 2014, respectively.
All Other Fees
Other than fees relating to the services described above under “Audit Fees,” “Audit-Related Fees” and “Tax Fees,” there were no additional fees billed to us by MHM for services rendered for the fiscal years ended September 30, 2015 or 2014.
Audit Committee Policies
Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our independent auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:
· approved by our audit committee; or
· entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.
The audit committee pre-approves all services provided by our independent auditors, including those set forth above. The audit committee has considered the nature and amount of fees billed by MHM and believes that the provision of services for activities unrelated to the audit is compatible with maintaining MHM’s independence.
MHM leases substantially all its personnel, who work under the control of MHM shareholders, from wholly-owned subsidiaries of CBIZ, Inc., in an alternative practice structure.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:
Number Description
2.1 Agreement and Plan of Merger dated as of October 22, 2003 by and between Visual Data Corporation, OSM, Inc., a subsidiary of Visual Data Corporation, and Onstream Media Corporation (Acquired Onstream) (11)
2.2 Amendment #1 dated as of October 15, 2004 to Agreement and Plan of Merger dated as of October 22, 2003 by and between Visual Data Corporation, OSM, Inc., a subsidiary of Visual Data Corporation, and Onstream Media Corporation (Acquired Onstream) (13)
2.3 Agreement and Plan of Merger dated June 4, 2001 among Visual Data Corporation, Visual Data San Francisco, Inc. and Entertainment Digital Network, Inc. (6)
2.4 Infinite Conferencing Merger Agreement dated March 26, 2007 (17)
3.1.1 Articles of Incorporation (1)
3.1.2 Articles of Amendment dated July 26, 1993 (1)
3.1.3 Articles of Amendment dated January 17, 1994 (1)
3.1.4 Articles of Amendment dated October 11, 1994 (1)
3.1.5 Articles of Amendment dated March 25, 1995 (1)
3.1.6 Articles of Amendment dated October 31, 1995 (1)
3.1.7 Articles of Amendment dated May 23, 1996 (1)
3.1.8 Articles of Amendment dated May 5, 1998 (2)
3.1.9 Articles of Amendment dated August 7, 1998 (3)
3.1.10 Articles of Amendment dated May 22, 2000 (4)
3.1.11 Articles of Amendment dated April 11, 2002 (7)
3.1.12 Articles of Amendment dated June 24, 2003, with regard to Series A-9 Convertible Preferred Stock (8)
3.1.13 Articles of Amendment dated June 20, 2003, with regard to reverse stock split (9)
3.1.14 Articles of Amendment dated December 23, 2004, with regard to the designations for Series A-10 Convertible Preferred Stock (14)
3.1.15 Articles of Amendment dated December 30, 2004, with regard to corporate name change (13)
3.1.16 Articles of Amendment dated February 7, 2005 with regard to the designations for Series A-10 Convertible Preferred Stock (15)
3.1.17 Articles of Amendment dated January 7, 2009 with regard to the designations for Series A-12 Redeemable Convertible Preferred Stock (18)
3.1.18 Articles of Amendment dated December 23, 2009 with regard to the designations for Series A-13 Convertible Preferred Stock (19)
3.1.19 Articles of Amendment dated April 5, 2010 with regard to reverse stock split (23)
3.1.20 Articles of Amendment dated June 17, 2010 with regard to the number of authorized shares (24)
3.1.21 Articles of Amendment dated September 22, 2010 with regard to the designations for Series A-14 Convertible Preferred Stock (25)
3.1.22 Articles of Amendment dated March 2, 2011 with regard to the designations for Series A-13 Convertible Preferred Stock (20)
3.1.23 Articles of Amendment dated January 20, 2012 with regard to the designations for Series A-13 Convertible Preferred Stock (26)
3.1.24 Articles of Amendment dated December 21, 2012 with regard to the designations for Series A-13 Convertible Preferred Stock (27)
3.2 By-laws (1)
4.1 Specimen Common Stock Certificate (1)
4.2 Convertible Promissory Note dated April 14, 2009 - Rockridge (16)
4.3 Allonge dated September 11, 2009 to Convertible Promissory Note dated April 14, 2009 - Rockridge (22)
4.4 Allonge #2 dated December 11, 2012 to Convertible Promissory Note dated April 14, 2009 - Rockridge (31)
4.5 Allonge #3 dated February 28, 2014 to Convertible Promissory Note dated April 14, 2009 - Rockridge (32)
4.6 Allonge #4 dated September 10, 2014 to Convertible Promissory Note dated April 14, 2009 - Rockridge (35)
4.7 Allonge #5 dated December 31, 2014 to Convertible Promissory Note dated April 14, 2009 - Rockridge (33)
4.8 Allonge #6 dated April 30, 2015 to Convertible Promissory Note dated April 14, 2009 - Rockridge (35)
4.9 Allonge #7 dated August 18, 2015 to Convertible Promissory Note dated April 14, 2009 - Rockridge
4.10 Allonge #8 dated December 16, 2015 to Convertible Promissory Note dated April 14, 2009 - Rockridge
4.11 Amended and Restated Promissory Note dated December 27, 2011 - Thermo Credit (28)
4.12 Senior Secured Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated March 18, 2013 (30)
4.13 First Amendment and Allonge dated June 14, 2013 to Senior Secured Note dated March 18, 2013 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, (31)
4.14 Second Amendment and Allonge dated February 28, 2014 to Senior Secured Note dated March 18, 2013 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries (32)
4.15 Third Amendment and Allonge dated September 15, 2014 to Senior Secured Note dated March 18, 2013 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries (35)
4.16 Senior Secured Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated February 28, 2014 (32)
4.17 First Amendment and Allonge dated September 15, 2014 to Senior Secured Note dated February 28, 2014 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries (35)
4.18 Amended and Restated Senior Subordinated Secured Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated December 31, 2014 (33)
4.19 Amendment Number 1 dated February 24, 2015 to Amended and Restated Senior Subordinated Secured Note dated December 31, 2014 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries (35)
4.20 Amendment and Allonge (Number 2) dated April 30, 2015 to Amended and Restated Senior Subordinated Secured Note dated December 31, 2014 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries (35)
4.21 Second Amended and Restated Senior Subordinated Secured Convertible Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated September 21, 2015
4.22 Amendment and Allonge, dated November 16, 2015, to Second Amended and Restated Senior Subordinated Secured Convertible Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated September 21, 2015
4.23 Second Amendment and Allonge, dated November 24, 2015, to Second Amended and Restated Senior Subordinated Secured Convertible Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated September 21, 2015
4.24 Third Amendment and Allonge, dated December 22, 2015, to Second Amended and Restated Senior Subordinated Secured Convertible Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated September 21, 2015
10.1 Form of 2007 Equity Incentive Plan (29)
10.2 Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Randy S. Selman (19)
10.3 Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Alan Saperstein (19)
10.4 Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Clifford Friedland (19)
10.5 Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and David Glassman (19)
10.6 Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Robert Tomlinson (19)
10.7 Note and Stock Purchase Agreement for 12% Convertible Secured Note - Rockridge (16)
10.8 Security Agreement for 12% Convertible Secured Note - Rockridge (16)
10.9 First Amendment to Note and Stock Purchase Agreement for 12% Convertible Secured Note - Rockridge (22)
10.10 Amended and Restated Loan Agreement dated December 27, 2011 - Thermo Credit (28)
10.11 Amended and Restated Security Agreement dated December 27, 2011 - Thermo Credit (28)
10.12 Loan Modification Agreement with Thermo Credit, LLC dated February 10, 2016 (37)
10.13 Note Purchase Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated March 18, 2013 (30)
10.14 Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated June 14, 2013 with respect to March 18, 2013 Note Purchase Agreement (31)
10.15 Note Purchase Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated February 28, 2014 (32)
10.16 Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated September 15, 2014 (35)
10.17 Note Purchase Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated December 31, 2014 (33)
10.18 Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated April 30, 2015 (35)
10.19 Note Purchase Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated September 21, 2015
10.20 Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated November 16, 2015
10.21 Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated December 22, 2015
10.22 Security Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated March 18, 2013 (30)
10.23 Security Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated February 28, 2014 (32)
10.24 Amendment, dated December 31, 2014, to March 18, 2013 and February 28, 2014 Security Agreements between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries (33)
10.25 Second Amendment, dated September 21, 2015, to March 18, 2013 and February 28, 2014 Security Agreements between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries
10.26 Advisory Services Agreement between Sigma Capital Advisors, LLC and Onstream Media, dated March 18, 2013 (30)
10.27 Advisory Services Agreement between Sigma Capital Advisors, LLC and Onstream Media, dated February 28, 2014 (32)
10.28 Advisory Services Agreement between Sigma Capital Advisors, LLC and Onstream Media, dated December 31, 2014 (33)
10.29 Office Lease with 100 Morris Avenue Partners dated August 6, 2012 (31)
10.30 Addendum dated July 8, 2013 to Office Lease with 100 Morris Avenue Partners (31)
10.31 Management Services Agreement between Infinite Conferencing Partners LLC and Infinite Conferencing, Inc., dated February 28, 2015 (34)
10.32 Make Whole Agreement between Infinite Conferencing Partners LLC, Onstream Media Corporation and Infinite Conferencing, Inc., dated February 28, 2015 (34)
10.33 Membership Interest Option Agreement between Infinite Conferencing Partners LLC and Infinite Conferencing, Inc., dated February 28, 2015 (34)
10.34 Agreement Re Distributions between Infinite Conferencing Partners LLC, Infinite Conferencing, Inc. and Kaufman, Rossin & Co, dated February 28, 2015 (34)
10.35 Amended and Restated Management Services Agreement between Infinite Conferencing Partners LLC and Infinite Conferencing, Inc., dated December 16, 2015 (36)
10.36 Amended and Restated Make Whole Agreement between Infinite Conferencing Partners LLC, Onstream Media Corporation and Infinite Conferencing, Inc., dated December 16, 2015 (36)
10.37 Amended and Restated Membership Interest Option Agreement between Infinite Conferencing Partners LLC and Infinite Conferencing, Inc., dated December 16, 2015 (36)
10.38 Agreement Re Distributions between Infinite Conferencing Partners LLC, Infinite Conferencing, Inc. and Kaufman, Rossin & Co, dated December 16, 2015 (36)
10.39 Amended and Restated Management Services Agreement between Infinite Conferencing Partners LLC and Infinite Conferencing, Inc., dated June 30, 2016
10.40 Amended and Restated Make Whole Agreement between Infinite Conferencing Partners LLC, Onstream Media Corporation and Infinite Conferencing, Inc., dated June 30, 2016
10.41 Amended and Restated Membership Interest Option Agreement between Infinite Conferencing Partners LLC and Infinite Conferencing, Inc., dated June 30, 2016
10.42 Agreement Re Distributions between Infinite Conferencing Partners LLC, Infinite Conferencing, Inc. and Kaufman, Rossin & Co, dated June 30, 2016
14.1 Code of Business Conduct and Ethics (11)
14.2 Corporate Governance and Nominating Committee Principles (23)
14.3 Audit Committee Charter (31)
14.4 Compensation Committee Charter (31)
21.1 Subsidiaries of the Registrant (31)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
101 Interactive data files pursuant to Rule 405 of Regulation S-T, as follows:
101.INS - XBRL Instance Document
101.SCH - XBRL Taxonomy Extension Schema Document
101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF - XBRL Taxonomy Extension Definition Linkbase Document
101.LAB - XBRL Taxonomy Extension Label Linkbase Document
101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document
(1) Incorporated by reference to the exhibit of the same number filed with the registrant's registration statement on Form SB-2, registration number 333-18819, as amended and declared effective by the SEC on July 30, 1997.
(2) Incorporated by reference to the registrant's current report on Form 8-K dated May 19, 1998.
(3) Incorporated by reference to the registrant's current report on Form 8-K dated August 21, 1998.
(4) Incorporated by reference to the registrant's Quarterly Report on Form 10-QSB for the period ended June 30, 2000.
(5) Incorporated by reference to the registrant’s current report on Form 8-K filed on June 12, 2001.
(6) Incorporated by reference to the registrant’s current report on Form 8-K filed on February 5, 2002.
(7) Incorporated by reference to the registrant's registration statement on Form S-3, file number 333-89042, filed on May 24, 2002.
(8) Incorporated by reference to the registrant's current report on Form 8-K filed July 2, 2003.
(9) Incorporated by reference to the registrant's Quarterly Report on Form 10-QSB for the period ended June 30, 2003 and filed on August 13, 2003.
(10) Incorporated by reference to the registrant's current report on Form 8-K filed October 28, 2003.
(11) Incorporated by reference to the registrant’s Annual Report on Form 10-KSB for the year ended September 30, 2003 and filed on December 22, 2003.
(12) Incorporated by reference to the registrant’s Annual Report on Form 10-KSB for the year ended September 30, 2004 and filed on January 13, 2005.
(13) Incorporated by reference to the registrant’s current report on Form 8-K filed on January 4, 2005.
(14) Incorporated by reference to the registrant’s current report on Form 8-K/A filed on January 4, 2005.
(15) Incorporated by reference to the registrant's current report on Form 8-K filed February 11, 2005.
(16) Incorporated by reference to the registrant's current report on Form 8-K filed April 20, 2009.
(17) Incorporated by reference to the registrant's current report on Form 8-K filed March 28, 2007.
(18) Incorporated by reference to the registrant's current report on Form 8-K filed January 7, 2009.
(19) Incorporated by reference to the registrant's Annual Report on Form 10-K for the period ended September 30, 2009 filed on December 29, 2009.
(20) Incorporated by reference to the registrant's current report on Form 8-K filed March 4, 2011.
(21) Incorporated by reference to the registrant's Proxy Statement for the 2008 and 2009 Annual Shareholders Meeting filed on January 28, 2009.
(22) Incorporated by reference to the registrant's current report on Form 8-K filed September 18, 2009.
(23) Incorporated by reference to the registrant's current report on Form 8-K filed April 6, 2010.
(24) Incorporated by reference to the registrant's current report on Form 8-K filed June 18, 2010.
(25) Incorporated by reference to the registrant's current report on Form 8-K filed September 23, 2010.
(26) Incorporated by reference to the registrant's current report on Form 8-K filed January 24, 2012.
(27) Incorporated by reference to the registrant's current report on Form 8-K filed December 26, 2012.
(28) Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the period ended December 31, 2011 and filed on February 21, 2012.
(29) Incorporated by reference to the registrant's Annual Report on Form 10-K for the period ended September 30, 2011 and filed on January 13, 2012.
(30) Incorporated by reference to the registrant's current report on Form 8-K filed March 22, 2013.
(31) Incorporated by reference to the registrant's Annual Report on Form 10-K for the period ended September 30, 2013 and filed on February 19, 2014.
(32) Incorporated by reference to the registrant’s current report on Form 8-K filed on March 4, 2014.
(33) Incorporated by reference to the registrant’s current report on Form 8-K filed on January 7, 2015.
(34) Incorporated by reference to the registrant’s current report on Form 8-K filed on March 11, 2015.
(35) Incorporated by reference to the registrant's Annual Report on Form 10-K for the period ended September 30, 2014 and filed on June 12, 2015.
(36) Incorporated by reference to the registrant’s current report on Form 8-K filed on December 22, 2015.
(37) Incorporated by reference to the registrant’s current report on Form 8-K filed on February 11, 2016.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
and Stockholders of
Onstream Media Corporation
We have audited the accompanying consolidated balance sheets of Onstream Media Corporation and Subsidiaries (the "Company") as of September 30, 2015 and 2014 and the related consolidated statements of operations, equity (deficit) and cash flows for each of the years in the two-year period ended September 30, 2015. Onstream Media Corporation and Subsidiaries’ management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Onstream Media Corporation and Subsidiaries as of September 30, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Mayer Hoffman McCann P.C.
MAYER HOFFMAN MCCANN P.C.
Boca Raton, Florida
October 28, 2016
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 2014 AND 2015
(Continued)
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
YEARS ENDED SEPTEMBER 30, 2014 AND 2015
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
The accompanying notes are an integral part of these consolidated financial statements.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Onstream Media Corporation (“we” or "Onstream" or "ONSM"), organized in 1993, is a leading online service provider of live and on-demand corporate audio and web communications, virtual event technology and social media marketing, provided primarily to corporate (including large as well as small to medium sized businesses), education and government customers.
The Audio and Web Conferencing Services Group consists of our Infinite Conferencing (“Infinite”) division, our Onstream Conferencing Corporation (“OCC”) division and our EDNet division. Our Infinite division, which operates primarily from the New York City area, and our OCC division, which operates primarily from San Diego, California, generate revenues from usage charges and fees for other services provided in connection with “reservationless” and operator-assisted audio and web conferencing services - see note 2.
The EDNet division, which operates primarily from San Francisco, California, provides connectivity (in the form of high quality audio and multimedia data communications) within the entertainment and advertising industries through its managed network, which encompasses production and post-production companies, advertisers, producers, directors, and talent. EDNet generates revenues primarily from network access and usage fees as well as sale, rental and installation of equipment.
The Digital Media Services Group consists primarily of our Webcasting division and our DMSP (“Digital Media Services Platform”) division. The DMSP division includes the related Smart Encoding and UGC (“User Generated Content”) divisions.
The Webcasting division, which operates primarily from Pompano Beach, Florida and has a sales and support facility in New York City, provides an array of corporate-oriented, web-based media services to the corporate market including live audio and video webcasting and on-demand audio and video streaming for any business, government or educational entity. As of October 1, 2013, the Webcasting division became responsible for sales of the MarketPlace365 service. The Webcasting division generates revenue primarily through production and distribution fees.
The DMSP division, which operates primarily from Colorado Springs, Colorado, provides an online, subscription based service that includes access to enabling technologies and features for our clients to acquire, store, index, secure, manage, distribute and transform these digital assets into saleable commodities. The DMSP division generates revenues primarily from monthly subscription fees, plus charges for hosting, storage and professional services. The Smart Encoding division, which operates primarily from San Francisco, California, provides both automated and manual encoding and editorial services for processing digital media. This division also provides hosting, storage and streaming services for digital media, which are provided via the DMSP. Our UGC division, which also operates as Auction Video (see note 2) and operates primarily from Colorado Springs, Colorado, provides a video ingestion and flash encoder that can be used by our clients on a stand-alone basis or in conjunction with the DMSP.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity
Our consolidated financial statements have been presented on the basis that we are an ongoing concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred losses since our inception, and have an accumulated deficit of approximately $149.0 million as of September 30, 2015. Our operations have been financed primarily through the issuance of equity and debt, including convertible debt and debt combined with the issuance of equity. As of the October 28, 2016 issuance of these financial statements, more than one year after the latest balance sheet date being presented, we are operating in the normal course of business. The liquidity discussion below includes information from our June 30, 2016 interim financial statements, which are also being issued on October 28, 2016.
For the year ended September 30, 2015, we had a net loss of approximately $8.4 million, although cash provided by operating activities for that period was approximately $343,000. Although we had cash of approximately $317,000 at September 30, 2015, we had a working capital deficit of approximately $5.3 million at that date. This $5.3 million deficit includes the following items classified as current on our September 30, 2015 balance sheet: (i) approximately $1.5 million of net debt repaid by us from the proceeds of the Partners transaction in December 2015 and (ii) approximately $1.7 million of debt outstanding under the Line which we recently renewed through December 31, 2017, both as discussed in more detail below. Although we had cash of approximately $477,000 at June 30, 2016, we had a working capital deficit of approximately $5.7 million at that date. This $5.7 million deficit includes approximately $1.6 million of debt outstanding under the Line. This deficit also includes certain liabilities which may be settled with equity, may be subject to reduction through negotiation and/or may be subject to extension of payments past June 30, 2017.
For the year ended September 30, 2015, our revenues were not sufficient to fund our total cash expenditures (for operating and investing activities plus scheduled debt principal repayments and distributions to the VIE owners, both classified as financing activities) for that period and as a result we obtained additional funding from the March 2015 sale of certain of our audio conferencing customers (and the related future business to those customers) to Partners - see note 6 - as well as restructuring the payment terms of Sigma Notes 1 and 2, the New Sigma Note and certain other notes - see note 4. For the nine months ended June 30, 2016, our revenues were not sufficient to fund our total cash expenditures (for operating and investing activities plus the scheduled debt principal payments and distributions to the VIE owners) for that period and as a result we obtained additional funding from the December 2015 and June 2016 sales of certain of our audio conferencing customers (and the related future business to those customers) to Partners - see note 6 - as well as restructuring the payment terms of the New Sigma Note and certain other notes - see note 4.
During the period from July 2015 through October 2016 we made certain headcount reductions and other changes in compensation which we expect will reduce our compensation expenditures for the twelve months ended June 30, 2017 by approximately $540,000, as compared to the twelve months ended June 30, 2016. We have also taken other actions which we expect will reduce our cost of sales as well as our expenses for professional fees, insurance and advertising and marketing for the twelve months ended June 30, 2017, as compared to the twelve months ended June 30, 2016.
Based on historical results as well as results since September 30, 2015 to date, we do not expect that our revenues will be sufficient to fund our total cash expenditures (for operating and investing activities plus the scheduled debt principal payments and distributions to the VIE owners) for the twelve month period ended June 30, 2017, even after the anticipated impact of the expense reductions discussed above. However, we believe we will be able to cover this anticipated shortfall from the raising of additional capital in the form of debt and/or equity and/or the sales of assets or operations, including our transactions with Partners and the Funding Letter and/or the monetization of our patents, all sources of capital as discussed below. In the event that we are unable to cover this shortfall, including curing any potential defaults with respect to the Line, as discussed in note 4, our auditors have advised us that a going concern qualification to their opinion on our September 30, 2016 financial statements may be necessary.
During December 2015, we received gross proceeds of approximately $2.1 million for our sale, effective December 16, 2015, of a defined subset of Infinite Conferencing’s (“Infinite’) audio conferencing customers (and the related future business to those customers) (“First Tranche of Additional Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”), which represented historical annual revenues of approximately $2.7 million. See note 6 for further details of this transaction, which resulted in an increase, as a percentage of revenues, of the management fee received by us with respect to the accounts sold by us in a similar transaction in February 2015 and which improved management fee also applied to the accounts sold in December 2015. From the December 2015 proceeds, we repaid an aggregate of $481,000 against the net outstanding balances of certain subordinated notes, in addition to a $1.0 million repayment against the outstanding balance due on the New Sigma Note. In December 2015, we also entered into additional agreements with Sigma whereby the maturity date on the remaining balance due under the New Sigma Note was extended from April 15, 2016 to December 31, 2016 and the interest rate, as well as certain other fees, was reduced - see note 4 for further details of these agreements. During March through June 2016, we received gross proceeds of approximately $0.8 million for our sale, effective June 30, 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Second Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $1.0 million, and were sold under the same terms as the accounts sold in December 2015.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity (continued)
During September and October 2016, subscriptions for approximately $225,000 were received by Partners and funded against an anticipated total of $1.5 million for our sale, which we expect will be effective during November 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Third Tranche of Additional Sold Accounts”) to Partners, will represent historical annual revenues of approximately $1.9 million, and will be sold under the same terms as the accounts sold in December 2015 and June 2016.
On April 30, 2015, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. Such notice was not given by us, but on April 30, 2016, we exercised our option for a one year extension of the Funding Letter, including an extension of the notice deadline to January 5, 2017. This Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available. Mr. Charles Johnston, a former ONSM director, is the president of J&C. Cash provided under the Funding Letter, as extended, would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 15, 2017 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of funds in excess of $5.0 million as a result of a single transaction for the sale of all or a part of our operations or assets, this Funding Letter will be terminated. The consideration for the Funding Letter was $25,000, which we have paid, and the consideration for the Funding Letter extension is $25,000, to be withheld from any proceeds lent thereunder but in any event paid no later than September 1, 2016.
On March 27, 2007 we acquired the assets, technology and patents pending of privately owned Auction Video, Inc., a Utah corporation, and Auction Video Japan, Inc., a Tokyo-Japan corporation (collectively, “Auction Video”). In connection with our subsequent pursuit of approval of these patents pending (i) on October 13, 2015, the USPTO issued to us U.S. Patent Number 9,161,068 (the “First Granted Patent”) with a Patent Term Adjustment of 2,377 days, resulting in a September 26, 2030 expiration date, provided all maintenance fees are paid and (ii)on October 11, 2016, the USPTO issued to us U.S. Patent Number 9,467,728 (the “Second Granted Patent”) with a Patent Term Adjustment of 1,362 days, resulting in a December 16, 2027 expiration date, provided all maintenance fees are paid - see note 2 for details. Our management believes that the First and Second Granted Patents, as well as two other related patents still pending, may have significant value, although this cannot be assured, and is presently exploring the financial potential of the First and Second Granted Patents and the patents pending.
Since December 2007, we have had a line of credit arrangement with a financial institution under which we could borrow up to an aggregate of $2.0 million for working capital, collateralized by our accounts receivable and certain other related assets and the amount of such borrowing being further subject to the amount, aging and concentration of such receivables. On February 10, 2016, we entered into a loan modification agreement which extended the term of this line of credit arrangement through December 31, 2017- see note 4 for further details of this arrangement.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity (continued)
The resolution of debt and other obligations becoming due within a few months after the issuance of these financial statements represent an imminent issue that will require significant cash resources in the near-term. These include (i) the New Sigma Note and the Rockridge Note, secured obligations which will require principal payments on December 31, 2016 aggregating $1.0 million and (ii) other notes payable, mostly unsecured, which will require principal payments of $187,000 on December 31, 2016 and $625,000 on January 15, 2017. See note 4 for further details of these obligations. In the event we exercised our rights under the extended Funding Letter, we would need to repay the proceeds borrowed thereunder on the earlier of a date twelve months from funding or July 15, 2017.
We are closely monitoring our revenue and other business activity to determine if and when further cost reductions, the raising of additional capital or other activity is considered necessary. The Executives have deferred a portion of their compensation in the past, to the extent we needed that cash to meet other operating expenses - see note 5 for details - and have agreed to defer a portion of their compensation to the extent we need that cash to enable us to be a going concern through September 30, 2017.
Our continued existence is dependent upon our ability to raise capital and to market and sell our services successfully. Based on our plan to continue our operations through September 30, 2017, we will need to raise the remaining $1.275 million from the sale of the Third Tranche of Additional Sold Accounts and borrow $800,000 per our option to do so under the Funding Letter, as discussed above, or from other funding sources, and we will also need to obtain extensions of the existing maturity dates past that date for certain identified notes payable representing aggregate principal of $640,000. In addition we will need to increase our gross margin and/or decrease our operating expenses by an aggregate of approximately $1.0 million per year, as compared to their current levels, for the year ended September 30, 2017 - our plan includes specific potential sources of new gross margin and expense reductions aggregating approximately $1.5 million. However, there are no assurances whatsoever that we will be able to sell additional common shares or other forms of equity and/or that we will be able to borrow further funds other than under the Funding Letter and/or that we will be able to sell assets or operations and/or that we will be able to increase our revenues and/or control our expenses to a level sufficient to provide positive cash flow. The consolidated financial statements do not include any adjustments to reflect future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result if we are unsuccessful.
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Onstream Media Corporation and its subsidiaries - Infinite Conferencing, Inc., Entertainment Digital Network, Inc., OSM Acquisition, Inc., Onstream Conferencing Corporation, AV Acquisition, Inc., Auction Video Japan, Inc., HotelView Corporation and Media On Demand, Inc. They also include the accounts of Infinite Conferencing Partners LLC (“Partners”), a variable interest entity (VIE) - see note 6. All significant intra-entity accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents consists of all highly liquid investments with original maturities of three months or less.
Concentration of Credit Risk
We at times have cash in banks in excess of FDIC insurance limits and place our temporary cash investments with high credit quality financial institutions. We perform ongoing credit evaluations of our customers' financial condition and do not require collateral from them. Reserves for credit losses are maintained at levels considered adequate by our management.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Bad Debt Reserves
Where we are aware of circumstances that may impair a specific customer's ability to meet its financial obligations, we record a specific allowance against amounts due from it, and thereby reduce the receivable to an amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and historical experience.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market by analyzing market conditions, current sales prices, inventory costs, and inventory balances. We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing backlog, estimated demand, inventory on hand, sales levels and other information. Based on that analysis, our management estimates the amount of provisions made for obsolete or slow moving inventory.
Fair Value Measurements
In accordance with the Financial Instruments topic of the ASC, we may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made. We have elected not to measure eligible financial assets and liabilities at fair value.
We have determined that the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, amounts due to directors and officers and deferred revenue approximate fair value due to the short maturity of the instruments. We have also determined that the carrying amounts of certain notes and other debt approximate fair value due to the short maturity of the instruments, as well as the market value interest rates they carry - these include the Line and the equipment lease.
We have determined that the Rockridge Note, the CCJ Note, the Equipment Notes, the Subordinated Notes, the Intella2 Investor Notes, the Investor Notes, the Fuse Note, Sigma Note 1, Sigma Note 2, the New Sigma Note, the Working Capital Notes and the USAC Note (the “Instruments”), discussed in note 4, meet the definition of a financial instrument as contained in the Financial Instruments topic of the Accounting Standards Codification (“ASC”), as this definition includes a contract that imposes a contractual obligation on us to deliver cash to the other party to the contract and/or exchange other financial instruments with the other party to the contract on potentially unfavorable terms. Accordingly, these items are (or were) financial liabilities subject to the accounting and disclosure requirements of the Fair Values Measurements and Disclosures topic of the ASC, whereby such liabilities are presented at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Value Measurements (continued)
The accounting standards describe a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
We have determined that there are no Level 1 inputs for determining the fair value of the Instruments. However, we have determined that the fair value of the Instruments may be determined using Level 2 inputs, as follows: the fair market value interest rate paid by us under the Line, as discussed in note 4. We have also determined that the fair value of the Instruments may be determined using Level 3 inputs, as follows: third party studies arriving at recommended discount factors for valuing payments made in unregistered restricted stock instead of cash, interest rates and other related expenses such as finders and origination fees observed in our ongoing and active negotiations with various financing sources, including the terms of our transactions that are not eligible to be Level 2 inputs because of the non-comparable duration of the transaction as compared to the transaction being valued. Level 3 inputs currently used by us in our fair value calculations with respect to the Instruments include finders and origination fees ranging between 10% and 14% per annum and periodic interest rate premiums arising from less favorable collateral and/or payment priority, as compared to the Line, ranging between 6% and 21% per annum. Our calculation of estimated fair values is based on market and credit conditions, as well as the financing terms, existing as of the valuation date.
Using the inputs described above, we have determined that there were no material differences between the carrying values and the estimated fair values of the Instruments as of September 30, 2014. Those amounts as of September 30, 2015 are as follows:
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Goodwill and other intangible assets
In accordance with the Intangibles - Goodwill and Other topic of the ASC, goodwill is reviewed annually (or more frequently if impairment indicators arise) for impairment. As provided by ASC 350-20-35 (“Intangibles - Goodwill and Other - Goodwill - Subsequent Measurement”), we follow a two-step process for impairment testing of goodwill. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment, including a comparison and reconciliation of the carrying value of all of our reporting units to our market capitalization, after appropriate adjustments for control premium and other considerations. As allowed by ASC 350-20-35-3, we first assess the qualitative factors set forth in that authoritative guidance to determine whether it is more likely than not that the fair value of a reporting unit is more or less than its carrying amount and to use such qualitative assessment as a basis of determining whether it would be necessary to perform the two-step goodwill impairment testing process described above. Other intangible assets, such as customer lists, are amortized to expense over their estimated useful lives, although they are still subject to review and adjustment for impairment at least annually.
Long-lived assets
Property and equipment
Property and equipment are recorded at cost, less accumulated depreciation. Leases, including those for office space as well as those for computers and equipment, are evaluated for capitalization in accordance with the four criteria set forth in ASC 840-10-25-1 (“Leases - Overall - Recognition”). Property and equipment under capital leases are stated at the lower of the present value of the minimum lease payments at the beginning of the lease term or the fair value at the inception of the lease. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Amortization expense on assets acquired under capital leases is included in depreciation expense. The costs of leasehold improvements are amortized over the lesser of the lease term or the life of the improvement.
Software
Software developed for internal use, including the Digital Media Services Platform (“DMSP”) and iEncode and other webcasting software, is included in property and equipment - see notes 2 and 3. Such amounts are accounted for in accordance with the Intangibles - Goodwill and Other topic of the ASC and amortized on a straight-line basis over three to five years, commencing when the related asset (or major upgrade release thereof) has been substantially placed in service.
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess the recoverability of such assets by comparing the estimated undiscounted cash flows associated with the related asset or group of assets against their respective carrying amounts. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those assets.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
Revenues from sales of goods and services are recognized when (i) persuasive evidence of an arrangement between us and the customer exists, (ii) the goods or service has been provided to the customer, (iii) the price to the customer is fixed or determinable and (iv) collectibility of the sales price is reasonably assured.
The Infinite and OCC divisions of the Audio and Web Conferencing Services Group generate revenues from audio conferencing and web conferencing services, plus recording and other ancillary services. Infinite and OCC own telephone bridges used for audio conference calls by its customers, which are generally charged for those calls based on a per-minute usage rate. Infinite provides online webconferencing services to its customers, charging either a per-minute rate or a monthly subscription fee allowing a certain level of usage. Audio conferencing and web conferencing revenue is recognized based on the timing of the customer’s use of those services.
The EDNet division of the Audio and Web Conferencing Services Group generates revenues from customer usage of digital network connections, as well as bridging services and the sale and rental of equipment. EDNet purchases the rights to access digital network connections from national communications companies (and resellers) and resells such access to its customers for a fixed monthly fee plus separate per-minute usage charges. Network usage and bridging (managed transcoding and multipoint sessions) revenue is recognized based on the timing of the customer’s use of those services.
EDNet sells various audio codecs and equipment which enables its customers to collaborate with other companies or with other locations. As such, revenue is recognized for the sale of equipment when the equipment is installed or upon signing of a contract after the equipment is installed and successfully operating. All sales are final and there are no refund rights or rights of return. EDNet rents some equipment to customers under agreements with fixed terms that are accounted for as operating leases. The rental revenue is recognized ratably over the life of the lease and the related equipment is depreciated over its estimated useful life.
The Webcasting division of the Digital Media Services Group recognizes revenue from live and on-demand webcasts at the time an event is accessible for streaming over the Internet. Webcasting services are provided to customers using our proprietary streaming media software, tools and processes. Customer billings are typically based on (i) the volume of data streamed at rates agreed upon in the customer contract or (ii) a set monthly fee. Since the primary deliverable for the webcasting group is a webcast, returns are inapplicable. If we have difficulty in producing the webcast, we may reduce the fee charged to the customer. Historically these reductions have been immaterial, and are recorded in the month the event occurs.
Services for live webcast events are usually sold for a single price that includes on-demand webcasting services in which we host an archive of the webcast event for future access on an on-demand basis for periods ranging from one month to one year. However, on-demand webcasting services are sometimes sold separately without the live event component and we have referred to these separately billed transactions as verifiable and objective evidence of the amount of our revenues related to on-demand services. In addition, we have determined that the material portion of all views of archived webcasts take place within the first ten days after the live webcast.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (continued)
Based on our review of the above data, we have determined that the material portion of our revenues for on-demand webcasting services are recognized during the period in which those services are provided, which complies with the provisions of the Revenue Recognition topic of the ASC. Furthermore, we have determined that the maximum potentially deferrable revenue from on-demand webcasting services charged for but not provided as of September 30, 2015 and 2014 was immaterial in relation to our recorded liabilities at those dates.
The DMSP, UGC and Smart Encoding divisions of the Digital Media Services Group recognize revenues from the acquisition, editing, transcoding, indexing, storage and distribution of their customers’ digital media. Charges to customers by these divisions generally include a monthly subscription or hosting fee. Additional charges based on the activity or volumes of media processed, streamed or stored by us, expressed in megabytes or similar terms, are recognized at the time the service is performed. Fees charged for customized applications or set-up are recognized as revenue at the time the application or set-up is completed.
We include the DMSP and UGC divisions’ revenues, along with the Smart Encoding division’s revenues from hosting, storage and streaming, in the DMSP and hosting revenue caption. We include the EDNet division’s revenues from equipment sales and rentals and the Smart Encoding division’s revenues from encoding and editorial services in the Other Revenue caption.
Deferred revenue represents amounts billed to or received from customers for audio and web conferencing, webcasting or DMSP services to be provided in future accounting periods. As projects or events are completed and/or the services provided, the revenue is recognized.
We add to our customer billings for certain services an amount to recover Universal Service Fund (“USF”) contributions which we have determined that we will be obligated to pay to the Federal Communications Commission (“FCC”), related to those particular services. This additional billing to our customers is not reflected as revenue by us, but rather is recorded as a liability on our books at the time of such billing, which liability is relieved upon our remittance of USF contributions as they are billed to us by USAC, an administrative and collection agency of the FCC - see notes 4 and 5.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This involves estimating current tax exposure and assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities included in our consolidated balance sheet. We then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or change this allowance in a period, we include an expense or benefit in our statement of operations.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes (continued)
We have approximately $87.5 million in Federal net operating loss carryforwards (NOLs) as of September 30, 2015, which expire in fiscal years 2018 through 2035, but also may be limited as to our future use as the result of previous or future ownership changes and other limitations. We had a deferred tax asset of approximately $32.9 and $32.5 million as of September 30, 2015 and 2014, respectively, primarily resulting from these NOLs. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against those deferred tax assets. A full valuation allowance has been recorded related to the deferred tax asset due to the uncertainty of realizing the benefits of certain NOLs before they expire. Our management will continue to assess the likelihood that the deferred tax asset will be realizable and the valuation allowance will be adjusted accordingly. As a result of the NOLs as discussed above, no income tax benefit was recorded in our consolidated statement of operations as a result of the net tax losses, calculated on a book basis, for the years ended September 30, 2015 and 2014.
The primary differences between the net loss or income for book versus for tax purposes are the following items expensed for book purposes but not deductible for tax purposes - amortization of certain loan discounts, amortization and/or impairment adjustments of goodwill and certain acquired intangible assets, expenses for stock options issued for consultant and employee services but not exercised by the recipients, expenses related to shares issued or committed to be issued for consultant and employee services, until such shares are issued and eligible for resale by the recipient, and interest accretion expense related to liabilities such as share repurchases and asset purchases. In addition, proceeds from sales of ownership interests in Partners, as well as distributions in connection with those interests, while reflected on our books as equity transactions are treated as current income and expense items for income tax purposes - see note 6 for details.
The Income Taxes topic of the ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. However, as of September 30, 2015 and 2014 we have not taken, nor recognized the financial statement impact of, any material tax positions, as defined above. Although our policy is to recognize, as non-operating expense, interest or penalties related to income taxes when such payments become probable, we had not recognized any such material items in our statement of operations for the years ended September 30, 2015 and 2014. The tax years ended September 30, 2012 and thereafter remain subject to examination by Federal and various state tax jurisdictions.
In July 2013, the FASB issued ASU 2013-11 (Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists), which provides that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward (i) is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position or (ii) the applicable tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, in which case the unrecognized tax benefit should be presented in the financial statements as a liability. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. Our implementation of this guidance effective with the first interim period of our fiscal year ended September 30, 2015, the three month period ended December 31, 2014, has had no material impact on our consolidated financial statements for the year ended September 30, 2015.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss per Share
For the years ended September 30, 2015 and 2014, basic net loss per share is based on the net loss divided by the basic weighted average number of shares of common stock outstanding, including the impact of common shares committed to be, but not yet, issued for compensation to certain Executives and for a loan origination fee - 2,771,667 and 2,566,667 as of September 30, 2015 and 2014, respectively - see notes 4 and 5.
Since our statement of operations for the years ended September 30, 2015 and 2014 reflect net losses, the effect of common stock equivalents for those periods would be anti-dilutive and thus all such equivalents were excluded from the calculation of basic weighted average shares outstanding for those periods. The total outstanding options and warrants excluded from the calculation of weighted average shares outstanding represented underlying common shares of 350,000 and 1,156,185 as of September 30, 2015 and 2014, respectively.
The convertible securities outstanding at September 30, 2015 but excluded from the calculation of weighted average shares outstanding for the year then ended are as follows: (i) the $1,583,000 outstanding balance of the New Sigma Note, which could have potentially converted into up to 5,276,667 shares of our common stock, subject to certain conditions - see note 4, (ii) the $400,000 outstanding balance of the Rockridge Note, which could potentially convert into up to 166,667 shares of our common stock, (iii) the $200,000 portion of the outstanding balance of the Fuse Note, which could have potentially converted into up to 400,000 shares of our common stock and (iv) the $200,000 portion of the outstanding balance of the Intella2 Fuse Note, which could have potentially converted into up to 400,000 shares of our common stock.
In addition, the convertible securities outstanding at September 30, 2014 but excluded from the calculation of weighted average shares outstanding for the year then ended are as follows: (i) the $395,000 portion of the outstanding balance of Sigma Note 1, which could have potentially converted into up to 395,000 shares of our common stock, (ii) the $551,741 outstanding balance of Sigma Note 2, which could have potentially converted into up to 551,741 shares of our common stock (iii) the $400,000 outstanding balance of the Rockridge Note, which could potentially convert into up to 166,667 shares of our common stock, (iv) the $200,000 outstanding balance of the Fuse Note, which could have potentially converted into up to 400,000 shares of our common stock and (v) the $200,000 portion of the outstanding balance of the Intella2 Fuse Note, which could have potentially converted into up to 400,000 shares of our common stock.
Compensation and related expenses
Compensation costs for employees considered to be direct labor are included as part of webcasting costs of revenue. Certain compensation costs for employees involved in development of software for internal use, as discussed under Software above, are capitalized. Accrued liabilities and amounts due to directors and officers includes, in aggregate, approximately $1.3 million as of September 30, 2015 and 2014, related to salaries, commissions, taxes, vacation and other benefits earned but not paid as of those dates. Certain of the amounts due to directors and officers may be satisfied with equity - see note 5.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equity Compensation to Employees, Directors and Consultants
We have a stock based compensation plan (the “Plan”) for our employees, directors and consultants. In accordance with the Compensation - Stock Compensation topic of the ASC, we measure compensation cost for all share-based payments at fair value, using the modified-prospective-transition method. Under this method, compensation cost recognized for the years ended September 30, 2015 and 2014 include compensation cost for all share-based payments granted subsequent to September 30, 2006, as follows: for stock options, calculated using the Black-Scholes model, based on the estimated grant-date fair value and for common shares, calculated based on fair value on the date such shares were authorized and/or determined to be earned. Such compensation cost is allocated over the applicable vesting and/or service period. There were no Plan options granted during the years ended September 30, 2015 or 2014.
We have granted Non-Plan options to consultants and other third parties. These options have been accounted for under the Equity topic (Equity-Based Payments to Non-Employees subtopic) of the ASC, under which the fair value of the options at the time of their issuance, calculated using the Black-Scholes model, is reflected as a prepaid expense in our consolidated balance sheet at that time and expensed as professional fees during the time the services contemplated by the options are provided to us. There were no Non-Plan options granted during the years ended September 30, 2015 or 2014.
See notes 5 and 6 for additional information related to share issuances under the Plan and note 8 for additional information related to all stock option issuances.
Advertising and marketing
Advertising and marketing costs, which are charged to operations as incurred and classified in our financial statements under Professional Fees or under Other General and Administrative Operating Expenses, were approximately $980,000 and $640,000 for the years ended September 30, 2015 and 2014, respectively. These amounts include third party marketing consultant fees and third party sales commissions, but do not include commissions or other compensation to our employee sales staff.
Interest expense and amortization of debt discount
Interest expense is primarily comprised of (i) the interest earned by our lenders calculated based on applying the stated interest rates, on a pro-rata periodic basis, to the applicable outstanding principal balances plus (ii) the periodic amortization of the amount of other fees and expenses incurred in connection with obtaining or maintaining our debt, which fees and expenses are initially recorded by us as debt discount and presented by us on the balance sheet as a reduction of the outstanding principal balance. The amortization of discount is based on the effective percentage rate required to fully amortize the discount over the applicable remaining term of the debt. Periodic interest, as well as the other fees and expenses included in debt discount as discussed above, include amounts payable in cash and/or equity. The other fees and expenses may be payable to the lender, to third parties engaged by the lender or to third parties engaged by us.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income or Loss
We have recognized no transactions generating comprehensive income or loss that are not included in our net loss, and accordingly, net loss or income equals comprehensive loss or income for all periods presented.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used when accounting for allowances for doubtful accounts, inventory reserves, depreciation and amortization lives and methods, goodwill and other impairment allowances, income taxes and related reserves and contingent liabilities, including contingent purchase prices for acquisitions, contingent compensation arrangements and USF contributions. Such estimates are reviewed on an ongoing basis and actual results could be materially affected by those estimates.
Effects of Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09 (Revenue from Contracts with Customers (Topic 606)), which requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses in particular contracts with more than one performance obligation as well as the accounting for some costs to obtain or fulfill a contract with a customer and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. In May 2016, the FASB issued ASU 2016-12, to clarify what the FASB called “certain narrow aspects of Topic 606”, such pronouncement having the same effective date as ASU 2014-09. In August 2015, the FASB issued ASU 2015-14, primarily for the purpose of deferring by one year the effective dates set forth in ASU 2014-09. After giving effect to that deferral, with respect to public entities, this update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, although early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. We believe that our implementation of this guidance for our fiscal year ended September 30, 2019, and interim periods within that fiscal year, will have no material impact on our consolidated financial statements.
In June 2014, the FASB issued ASU 2014-12 (Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period), which requires that a performance target which affects vesting and which could be achieved after the requisite service period be treated as a performance condition. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. In March 2016, the FASB issued ASU 2016-09 (Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting), intended to simplify income tax reporting, classification as either equity or liabilities and classification on the cash flow statement for employee share-based payment transactions. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of the implementation of the above guidance on our consolidated financial statements.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effects of Recent Accounting Pronouncements (continued)
In August 2014, the FASB issued ASU 2014-15 (Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern), which provides that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). This pronouncement also provides that management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Depending on the results of this evaluation, the pronouncement sets forth certain required disclosures with respect to such evaluation. This update is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter, with early adoption permitted. We believe that our evaluation and the related disclosures are substantially in compliance with this guidance, with the exception that our evaluation is currently based on the one-year period after the date of the latest financial statement being presented, instead of extending through a date one year after the financial statement issuance date as required in this new guidance. We believe that our implementation of this guidance for our fiscal year ended September 30, 2017 could have a material impact on our consolidated financial statements, although that cannot be determined at this time.
In February 2015, the FASB issued ASU 2015-02 (Consolidation (Topic 810): Amendment to the Consolidation Analysis) - see note 6.
In April 2015, the FASB issued ASU 2015-03 (Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs), which provides that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted for financial statements that have not been previously issued. We are currently in compliance with this guidance and thus it will have no material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02 (Leases (Topic 842)), which requires that the assets and liabilities arising from leases, including operating leases, be recognized on the balance sheet. For operating leases, a lessee is required to do the following: (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet, (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (iii) classify all cash payments within operating activities in the statement of cash flows. However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. Although we are currently evaluating the impact of the implementation of this guidance, we expect that such implementation could have a material impact on our consolidated financial statements - see note 4 with respect to our current obligations under operating leases.
In June 2016, the FASB issued ASU 2016-13 (Financial Instruments - Credit Losses (Topic 326)), which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of information to inform credit loss estimates, including not only historical experience and current conditions, but reasonable and supportable forecasts. The financial assets affected by this pronouncement include trade receivables. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted as of fiscal years beginning after December 15, 2018. This update is to be first applied via a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). We are currently evaluating the impact of the implementation of the above guidance on our consolidated financial statements.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
Information regarding the Company’s goodwill and other acquisition-related intangible assets is as follows:
Intella2 - November 30, 2012
On November 30, 2012 we acquired certain assets and operations of Intella2 Inc., a San Diego-based communications company (“Intella2”). The acquisition included a list of over 2,500 customers as well as software licenses, equipment and network infrastructure and a non-compete. The service capabilities acquired from Intella2 included audio conferencing, web conferencing, text messaging, and voicemail. The Intella2 assets and operations were purchased by Onstream Conferencing Corporation, our wholly owned subsidiary, and are being managed by our Infinite Conferencing division, which specializes in audio and web conferencing.
The approximately $1.4 million purchase price exceeded the fair values we assigned to Intella2’s tangible and intangible assets (net of liabilities at fair value) by approximately $412,000, which we recorded as goodwill. We evaluated the carrying value of the Intella2 goodwill as part of our annual review performed as of September 30, 2014, and no write-down was required. However, as a result of our annual review performed as of September 30, 2015, an approximately $250,000 write-down was recorded - see “Testing for Impairment” below.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)
Intella2 - November 30, 2012 (continued)
The fair value of certain intangible assets (customer list, trade names, URLs (internet domain names) and employment and non-compete agreements) acquired from Intella2 was determined by our management to be approximately $760,000 at the time of the acquisition. This fair value was primarily based on the discounted projected cash flows related to these assets for the three to seven years immediately following the acquisition on a stand-alone basis without regard to the Intella2 acquisition, as projected by our management and Intella2’s former management. The discount rate utilized considered equity risk factors (including small stock risk) as well as risks associated with profitability and working capital, competition, and intellectual property. The projections were adjusted for charges related to fixed assets, working capital and workforce retraining. The fair value of certain tangible assets (primarily equipment) acquired as part of the Intella2 acquisition was determined by our management to be approximately $246,000 at the time of the acquisition. This fair value was primarily based on management’s inspection of and evaluation of the condition and utility of the equipment, as well as comparable market values of similar used equipment when available. We are depreciating and amortizing these tangible and intangible assets over useful lives ranging from three to seven years. Furthermore, as a result of our annual review performed as of September 30, 2015, an approximately $446,000 write-down of the Intella2 intangible assets, primarily the customer list, was recorded - see “Testing for Impairment” below.
Through June 30, 2014, we paid Intella2 (i) approximately $713,000 of the approximately $1.4 million purchase price and (ii) approximately $50,000, which we considered to be payment of accretion (i.e., interest) instead of the purchase price (i.e., principal). As a result of the July 29, 2014 settlement of litigation with Intella2 and its owner Paul Cohen, we agreed to satisfy all remaining liabilities to Intella2 with the payment of another $38,000 in cash and equipment (which we also considered to be payment of accretion). Accordingly, we reversed the remaining liability of approximately $744,000, for the unpaid portion of the purchase price plus subsequent accretion, and recognized it as other income for the year ended September 30, 2014.
Under the terms of the litigation settlement, (i) Mr. Cohen’s non-compete agreement was cancelled and replaced by mutual agreements as to non-disparagement and non-solicitation and (ii) we transferred all free conferencing customers and all associated revenues and expenses to Mr. Cohen, effective July 1, 2014. Our free conferencing revenues were approximately $173,000 for the year ended September 30, 2014.
Infinite Conferencing - April 27, 2007
On April 27, 2007 we completed the acquisition of Infinite Conferencing LLC (“Infinite”), a Georgia limited liability company. The transaction, by which we acquired 100% of the membership interests of Infinite, was structured as a merger by and between Infinite and our wholly-owned subsidiary, Infinite Conferencing, Inc. (the “Infinite Merger”). The primary assets acquired, in addition to Infinite’s ongoing audio and web conferencing operations, were accounts receivable, equipment, internally developed software, customer lists, trademarks, URLs (internet domain names), favorable supplier terms and employment and non-compete agreements. The consideration for the Infinite Merger was a combination of $14 million in cash and restricted shares of our common stock valued at approximately $4.0 million, for an aggregate purchase price of approximately $18.2 million, including transaction costs.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)
Infinite Conferencing - April 27, 2007 (continued)
The fair value of certain intangible assets (internally developed software, customer lists, trademarks, URLs (internet domain names), favorable contractual terms and employment and non-compete agreements) acquired as part of the Infinite Merger was determined by our management at the time of the merger. This fair value was primarily based on the discounted projected cash flows related to these assets for the three to six years immediately following the merger on a stand-alone basis without regard to the Infinite Merger, as projected by our management and Infinite’s management. The discount rate utilized considered equity risk factors (including small stock risk) as well as risks associated with profitability and working capital, competition, and intellectual property. The projections were adjusted for charges related to fixed assets, working capital and workforce retraining. We have amortized these assets over useful lives ranging from 3 to 6 years - as of September 30, 2013 all of these assets had been fully amortized and removed from our balance sheet.
The approximately $18.2 million purchase price exceeded the fair values we assigned to Infinite’s tangible and intangible assets (net of liabilities at fair value) by approximately $12.0 million, which we recorded as goodwill as of the purchase date. As of December 31, 2008, this initially recorded goodwill was determined to be impaired and a $900,000 adjustment was made to reduce its carrying value to approximately $11.1 million. A similar adjustment of $200,000 was made as of that date to reduce the carrying value of certain intangible assets acquired as part of the Infinite Merger. As of December 31, 2009, the Infinite goodwill was determined to be further impaired and a $2.5 million adjustment was made to reduce the carrying value of that goodwill to approximately $8.6 million. A similar adjustment of $600,000 was made as of that date to reduce the carrying value of certain intangible assets acquired as part of the Infinite Merger. The Infinite goodwill was determined to be further impaired as of September 30, 2013 and a $2.2 million adjustment was made to reduce the carrying value of that goodwill to approximately $6.4 million as of that date. We evaluated the carrying value of the Infinite goodwill as part of our annual review performed as of September 30, 2014, and no write-down was required. However, as a result of our annual review performed as of September 30, 2015, the Infinite goodwill was determined to be further impaired and an approximately $3.9 million adjustment was made to reduce the carrying value of that goodwill to approximately $2.5 million as of that date - see “Testing for Impairment” below.
Auction Video - March 27, 2007
On March 27, 2007 we completed the acquisition of the assets, technology and patents pending of privately owned Auction Video, Inc., a Utah corporation, and Auction Video Japan, Inc., a Tokyo-Japan corporation (collectively, “Auction Video”). The acquisitions were made with a combination of restricted shares of our common stock valued at approximately $1.5 million issued to the stockholders of Auction Video Japan, Inc. and $500,000 cash paid to certain stockholders and creditors of Auction Video, Inc., for an aggregate purchase price of approximately $2.0 million, including transaction costs. On December 5, 2008 we entered into an agreement whereby one of the former owners of Auction Video Japan, Inc. agreed to shut down the Japan office of Auction Video as well as assume all of our outstanding assets and liabilities connected with that operation, in exchange for non-exclusive rights to sell our products in Japan and be compensated on a commission-only basis. It is the opinion of our management that any further developments with respect to this shut down or the above agreement will not have a material adverse effect on our financial position or results of operations.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)
Auction Video - March 27, 2007 (continued)
We allocated the Auction Video purchase price to the identifiable tangible and intangible assets acquired, based on a determination of their reasonable fair value as of the date of the acquisition. The technology and patent pending related to the video ingestion and flash transcoder, the Auction Video customer lists, future cost savings for Auction Video services and the consulting and non-compete agreements entered into with the former executives and owners of Auction Video were valued in aggregate at $1.4 million and were amortized over various lives between two to five years commencing April 2007 - as of September 30, 2013 all of these assets had been fully amortized and removed from our balance sheet. $600,000 was assigned as the value of the video ingestion and flash transcoder and added to the DMSP’s carrying cost for financial statement purposes - see note 3.
Subsequent to this acquisition, we began pursuing the final approval of the patent pending application and in March 2008 retained the law firm of Hunton & Williams to assist in expediting the patent approval process and to help protect rights related to proprietary Onstream technology. In April 2008, we revised the original patent application primarily for the purpose of splitting it into two separate applications (the “Original Applications”), which, while related, would be evaluated separately by the U.S. Patent and Trademark Office (“USPTO”). These patents address live streaming of audio and/or video from multiple devices to a storage location, such as the Internet or cloud, and the ability to access and retrieve the audio and/or video to multiple devices, whereby the content is not stored on the device.
With respect to the claims pending in the first of the two Original Applications (number 10/808,894), the USPTO issued various final and non-final rejections in August 2008, February 2009, May 2009, January 2010 and June 2010. Our responses to these rejections included modifications to certain claims made in the original patent application. In response to the June 2010 rejection we filed a Notice of Appeal with the USPTO on November 22, 2010 and we filed an appeal brief with the USPTO on February 9, 2011. The USPTO filed an Examiner's Answer to the Appeal Brief on May 10, 2011, which repeated many of the previous reasons for rejection, and we filed a response on July 8, 2011. On July 7, 2014, the USPTO issued a notice setting the hearing on this application before the Patent Trial and Appeal Board on September 18, 2014. As a result of that hearing, which we attended, on October 27, 2014 the Patent Trial and Appeal Board affirmed the Examiner’s rejection in part and reversed the Examiner’s rejection in part. In response, the Examiner issued a new Office Action on March 5, 2015 rejecting the claims. We conducted an interview with the Examiner on April 9, 2015 and filed a response to the Office Action on May 26, 2015, which contained certain proposed amendments to the claims. On June 19, 2015, the USPTO issued a Notice of Allowance and Fees Due, which granted the claims as submitted by us on May 26, 2015. On October 13, 2015, the USPTO issued to us U.S. Patent Number 9,161,068 (the “First Granted Patent”) with a Patent Term Adjustment of 2,377 days, resulting in a September 26, 2030 expiration date, provided all maintenance fees are paid.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)
Auction Video - March 27, 2007 (continued)
On September 2, 2015, with reference to the First Granted Patent, we filed a Continuation Application with the USPTO and the USPTO issued a related Filing Receipt, establishing a September 2, 2015 filing date for a new patent application (number 14/843,457). On September 17, 2015, the USPTO issued a related Notice to File Missing Parts of Nonprovisional Application, which we filed our timely response to on January 19, 2016. On January 28, 2016, the USPTO issued a related Notice of Incomplete Reply, which we filed our timely response to on February 17, 2016. The Continuation Application process, which has no set time frame or end date, may result in issuance of another patent to us which may include broader and/or additional claims as compared to the First Granted Patent, although this cannot be assured. We do not expect the Continuation Application process to affect the enforceability of the First Granted Patent, nor do we expect the result of the Continuation Application process to result in modifications, or adverse impact, to the First Granted Patent.
With respect to the claims pending in the second of the two Original Applications (number 12/110,691), the USPTO issued a non-final rejection in June 2011 (which was reissued in January 2012) and a final rejection in June 2012. With respect to the June 2012 rejection, we filed a pre-appeal brief conference request on September 7, 2012 and the USPTO responded on September 27, 2012 with a decision to proceed to appeal. We filed a Request for Continuing Examination with the USPTO on April 5, 2013, which the USPTO responded to on June 12, 2013 with a non-final rejection. Our response to that non-final rejection was filed on November 12, 2013, which the USPTO responded to on January 10, 2014 with a final rejection. In response to this final rejection, we filed a Notice of Appeal on April 8, 2014 and the related Appeal Brief on June 9, 2014, which the USPTO responded to with an Examiner’s Answer on September 3, 2014. On November 3, 2014 we filed a Reply Brief with the Patent Trial and Appeal Board and on June 16, 2016 the Patent Trial and Appeal Board issued their decision, which (i) reversed the Examiner’s previous rejection of the claims in Application 12/110,691 under 35 U.S.C. Section 112 (“lack of written description” and “enablement”) and (ii) affirmed the Examiner’s previous rejection of those claims under 35 U.S.C. Section 103 (“obviousness”). On August 16, 2016, we filed a Request for Continued Examination with the USPTO, which included our response to the June 16, 2016 decision on appeal and a request that our application be reconsidered. Our response also included modifications to certain claims made in the original patent application. On August 25, 2016, the USPTO issued a Notice of Allowance and Fees Due, which granted the claims as submitted by us on August 16, 2016. On October 11, 2016, the USPTO issued to us U.S. Patent Number 9,467,728 (the “Second Granted Patent”) with a Patent Term Adjustment of 1,362 days, resulting in a December 16, 2027 expiration date, provided all maintenance fees are paid. On September 2, 2016, with reference to the Second Granted Patent, we filed a Continuation Application with the USPTO and the USPTO issued a related Filing Receipt, establishing a September 2, 2016 filing date for a new patent application (number 15/255,416). The Continuation Application process, which has no set time frame or end date, may result in issuance of another patent to us which may include broader and/or additional claims as compared to the Second Granted Patent, although this cannot be assured. We do not expect the Continuation Application process to affect the enforceability of the Second Granted Patent, nor do we expect the result of the Continuation Application process to result in modifications, or adverse impact, to the Second Granted Patent.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)
Auction Video - March 27, 2007 (continued)
Our management believes that the First and Second Granted Patents, as well as two other related patents still pending, may have significant value, although this cannot be assured, and is presently exploring the financial potential of the First and Second Granted Patents and the patents pending. Regardless of the ultimate outcome with respect to the results of this process and/or the eventual USPTO decision with respect to the pending patent applications, our management has determined that there is no material exposure to an adverse effect on our financial position or results of operations, since all of the previous costs incurred by us in connection with the patents have been amortized to expense as of September 30, 2013 and are being expensed as incurred subsequent to that date. Certain of the former owners of Auction Video, Inc. have an interest in proceeds that we may receive under certain circumstances in connection with the First and Second Granted Patents and the patents pending.
Acquired Onstream - December 23, 2004
On December 23, 2004, privately held Onstream Media Corporation (“Acquired Onstream”) was merged with and into our wholly owned subsidiary OSM Acquisition, Inc. (the “Onstream Merger”). At that time, all outstanding shares of Acquired Onstream capital stock and options not already owned by us (representing 74% ownership interest) were converted into restricted shares of our common stock plus options and warrants to purchase our common stock. We also issued common stock options to directors and management as additional compensation at the time of and for the Onstream Merger, accounted for at the time in accordance with Accounting Principles Board Opinion 25 (which accounting pronouncement has since been superseded by the ASC).
Acquired Onstream was a development stage company founded in 2001 that began working on a feature rich digital asset management service offered on an application service provider (“ASP”) basis, to allow corporations to better manage their digital rich media without the major capital expense for the hardware, software and additional staff necessary to build their own digital asset management solution. This service was intended to be offered via the Digital Media Services Platform (“DMSP”), which was initially designed and managed by Science Applications International Corporation (“SAIC”), one of the country's foremost IT security firms, providing services to all branches of the federal government as well as leading corporations.
The primary asset acquired in the Onstream Merger was the partially completed DMSP, recorded at fair value as of the December 23, 2004 closing, in accordance with the Business Combinations topic of the ASC. The fair value was primarily based on the discounted projected cash flows related to this asset for the five years immediately following the acquisition on a stand-alone basis without regard to the Onstream Merger, as projected at the time of the acquisition by our management and Acquired Onstream’s management. The discount rate we utilized considered equity risk factors (including small stock risk and bridge/IPO stage risk) plus risks associated with profitability/working capital, competition, and intellectual property. The projections were adjusted for charges for fixed assets, working capital and workforce retraining. See note 3.
The approximately $10.0 million purchase price we paid for 100% of Acquired Onstream exceeded the fair values we assigned to Acquired Onstream’s tangible and intangible assets (net of liabilities at fair value) by approximately $8.4 million, which we recorded as goodwill as of the purchase date. As of December 31, 2008, this initially recorded goodwill was determined to be impaired and a $4.3 million adjustment was made to reduce the carrying value of that goodwill to approximately $4.1 million. As of September 30, 2010, the Acquired Onstream goodwill was determined to be further impaired and a $1.6 million adjustment was made to reduce the carrying value of that goodwill to approximately $2.5 million. As of September 30, 2011, the Acquired Onstream goodwill was determined to be further impaired and a $1.7 million adjustment was made to reduce the carrying value of that goodwill to approximately $821,000. As of September 30, 2012, the Acquired Onstream goodwill was determined to be further impaired and a $550,000 adjustment was made to reduce the carrying value of that goodwill to approximately $271,000. We evaluated the carrying value of the Acquired Onstream goodwill as part of our annual review performed as of September 30, 2014, and no write-down was required. However, as a result of our annual review performed as of September 30, 2015, the Acquired Onstream goodwill was determined to be further impaired and the remaining carrying value of that goodwill, approximately $271,000, was written off as of that date - see “Testing for Impairment” below.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)
EDNet - July 25, 2001
Prior to 2001, we recorded goodwill of approximately $750,000 resulting from the acquisition of 51% of EDNet, which we were initially amortizing on a straight-line basis over 15 years. As of July 1, 2001, we adopted SFAS 142, Goodwill and Other Intangible Assets, which addressed the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. This standard required that goodwill no longer be amortized, and instead be tested for impairment on a periodic basis. When we acquired the remaining 49% of EDNet on July 25, 2001 the transaction generated approximately $2.3 million in goodwill which when combined with the unamortized portion of the initial goodwill resulted in total EDNet goodwill of approximately $2.8 million. Based on our goodwill impairment tests as of September 30, 2002 we determined that the EDNet goodwill was impaired by approximately $728,000 and therefore the goodwill was written down to approximately $2.1 million. Based on our goodwill impairment tests as of September 30, 2004 we determined that the EDNet goodwill was impaired by approximately $470,000 and therefore the goodwill was written down to approximately $1.6 million. Based on our goodwill impairment tests as of September 30, 2005 we determined that the EDNet goodwill was impaired by approximately $330,000 and therefore the goodwill was written down to approximately $1.3 million. We evaluated the carrying value of the EDNet goodwill as part of our annual review performed as of September 30, 2014, and no write-down was required. However, as a result of our annual review performed as of September 30, 2015, the EDNet goodwill was determined to be further impaired and an approximately $750,000 adjustment was made to reduce the carrying value of that goodwill to approximately $521,000 as of that date - see “Testing for Impairment” below.
EDNet’s operations are heavily dependent on the use of Integrated Services Digital Network (“ISDN") connections, which are only available from a limited number of suppliers. The two companies which are the primary suppliers of ISDN to EDNet have made public indications of intentions to restrict, or even eventually eliminate, their provision of ISDN. Such actions could have a significant adverse impact on our future evaluations of the carrying value of EDNet goodwill, especially if alternative ISDN suppliers cannot be identified or if an alternative such as Internet based technology is not available or economically feasible as a basis to continue the EDNet operations. However, to the best of our knowledge, these two companies have not announced definitive timetables for taking any extensive actions with regard to restricting ISDN and therefore we have not assumed any such actions would take place within the timeframe of our discounted cash flow analyses used by us for these evaluations to date.
Testing for Impairment
In accordance with ASC Topic 350, Intangibles - Goodwill and Other, which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition, goodwill must be tested for impairment on a periodic basis, at a level of reporting referred to as a reporting unit. Although other intangible assets are being amortized to expense over their estimated useful lives, the unamortized balances are still subject to review and adjustment for impairment. There is a two-step process for impairment testing of goodwill and other intangible assets. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment, including a comparison and reconciliation of the carrying value of all of our reporting units to our market capitalization, after appropriate adjustments for control premium and other considerations.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)
Testing for Impairment (continued)
The provisions of ASC 350-20-35-3 in certain cases would allow us to forego the two-step impairment testing process based on certain qualitative evaluation. However, based on our assessment as of September 30, 2015 and 2014 of relevant events and circumstances as listed in ASC 350-20-35-3C, we determined that we were not eligible to employ qualitative evaluation to forego the two-step impairment testing process with respect to our reporting units as of those dates, as it was not more likely than not that impairment loss had not occurred. These relevant events and circumstances included our declining revenues as well as certain macroeconomic conditions, including access to capital and the ongoing decrease in the ONSM share price.
The material portion of our goodwill and other intangible assets are contained in the EDNet reporting unit, the Acquired Onstream/DMSP reporting unit and the audio and web conferencing reporting unit, which includes the Infinite Conferencing and the OCC/Intella2 divisions. Our reporting units were identified based on the requirements of ASC 350-20-35-33 through 350-20-35-46. According to ASC 350-20-35-34, a component of an operating segment is a reporting unit if that component represents a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. This is the case for the EDNet division, the Acquired Onstream/DMSP division, the Infinite Conferencing division, the OCC/Intella2 division and the Webcasting division. However, ASC 350-20-35-35 provides that two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. This is the case for the Infinite Conferencing division and the OCC/Intella2 division, since they are both in the business of audio and web conferencing sold primarily to business customers. Although EDNet is in the same operating segment as the Infinite Conferencing division and the OCC/Intella2 division, it is not considered to be part of the audio and web conferencing reporting unit since EDNet offers a specialized service to the entertainment industry (movies, television, advertising) that uses a specific type of network connection (integrated services digital network or “ISDN”) to transport its clients’ multimedia content. ISDN is a significantly different technology from the standard telephone lines used by the Infinite Conferencing division and the OCC/Intella2 division.
As part of the two-step process discussed above for the September 30, 2015 and 2014 evaluations, our management performed discounted cash flow (“DCF”) projections and market value (“MV”) analyses, to determine whether the goodwill of our reporting units was potentially impaired and the amount of such impairment. The results of these projections and analyses were weighted, and the weighted result reduced by the amount of associated allocable non-current debt, to come up with a single estimated fair value (“FV”) for each reporting unit. A third-party valuation services firm was engaged by us to assist with these projections and analyses, value calculations and weightings.
For the September 30, 2015 and 2014 evaluations, our management, with the assistance of the third-party valuation services firm, determined the rates and assumptions (including probability of future revenues and costs, tax shields and annual and terminal discount factors) used by it to prepare the DCF projections and also considered macroeconomic and other conditions such as: our credit rating, stock price and access to capital; industry growth projections; our historical sales trends and our technological accomplishments compared to our peer group.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)
Testing for Impairment (continued)
As part of the DCF projections prepared for use in the September 30, 2015 and 2014 evaluations, we analyzed our corporate payroll and other general and administrative expenses to determine their relevance to the reporting units, and to the extent relevant, we allocated such costs when preparing those projections. For the years ended September 30, 2015 and 2014, we determined that approximately 82% and 83%, respectively, of our corporate payroll plus other general and administrative expenses (excluding non-cash expenses) were allocable to our reporting units, including those without goodwill or other intangible assets. The non-allocable corporate costs related to various public company related requirements, including D&O insurance and certain legal, accounting and other professional and consulting fees and expenses, as well as the costs of evaluating new business opportunities and products outside the existing divisions.
During the time period from February 2015 through June 2016, we received cash proceeds for our sales, in tranches, of defined subsets of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). In accordance with management fee agreements we entered into with Partners in connection with these sales, we are required to continue servicing the sold accounts and absorb all related costs of doing so but we also receive the Partners’ revenues from these sold accounts, less a deduction for the Partners’ guaranteed return - see note 6 for a detailed discussion of these transactions. For purposes of the September 30, 2015 and 2014 evaluations, we included the Partners’ revenues and all related operating costs incurred by us in our DCF projections for the audio and web conferencing reporting unit, but considered the amount deducted for the Partners’ guaranteed return to not be specific to that unit’s operations but rather to be analogous to a corporate financing cost and thus this cash outflow was not included as part of our DCF projections for the audio and web conferencing reporting unit.
For the September 30, 2015 and 2014 evaluations, our management, with the assistance of the third-party valuation services firm, determined the appropriately comparable publicly reporting companies and public market transactions used by it to perform the MV analyses. Factors taken into consideration in selecting the appropriately comparable companies included the relative size of the candidate company, measured by revenues and assets, as compared to our reporting units and the extent to which the stated business activities of the candidate company align with the primary business activities of our reporting units. Once comparable companies and transactions were identified, the valuation calculation was based on multiples of revenues and, to the extent applicable, EBITDA (earnings before interest, taxes, depreciation and amortization). In the case of the September 30, 2015 evaluation, we, based on the advice of the third-party valuations services firm, determined that the publicly reporting companies and public market transactions that we were able to identify as available for our analysis were not sufficiently comparable to the operating characteristics of most of our reporting units therefore these MV analyses were given a zero percent (0%) weighting - i.e., they were not considered - when determining FV.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)
Testing for Impairment (continued)
Based on the above, as well as a report prepared by the third-party valuation services firm, we determined that the FVs of the Acquired Onstream, EDNet and audio and web conferencing reporting units, calculated as described above, were less than their respective net carrying amounts as of September 30, 2015 and that further evaluation under the second step of the two-step process described above was necessary.
As part of this second step, our management, with the assistance of the third-party valuation services firm, determined the fair value of all tangible and intangible assets and liabilities of each of our reporting units, including any material unrecorded assets or liabilities. This allocation process was performed only for purposes of testing goodwill for impairment, and did not result in the write up or write down of recognized assets or liabilities, or the recognition of previously unrecognized assets or liabilities. The carrying value of each reporting unit’s goodwill was then compared to the implied fair value of that reporting unit’s goodwill, such implied value being any excess of the FV of a reporting unit over the amounts assigned to its assets and liabilities, and the excess of the carrying value over the implied fair value was written off, as follows: approximately $4.1 million related to the audio and web conferencing reporting unit’s goodwill (of which we allocated approximately $3.9 million to Infinite and approximately $250,000 to Intella2), approximately $750,000 related to the EDNet reporting unit’s goodwill and approximately $271,000 related to the Acquired Onstream reporting unit’s goodwill. In addition, as a result of the above valuation, we recorded an approximately $446,000 write-off of the remaining Intella2 intangible assets, primarily the customer list. These write-offs were classified in our financial statements as impairment losses on goodwill and other intangible assets aggregating approximately $5.6 million for the year ended September 30, 2015.
Furthermore, in order to address whether any further consideration of ONSM’s share price was needed with respect to impairment testing, we, with the assistance of the third-party valuation services firm, performed an analysis to compare our book value to our market capitalization as of September 30, 2015, including adjustments for (i) paid-for but not issued common shares, such as the Rockridge Shares (see note 4) and the Executive Shares (see note 5) and (ii) an appropriate control premium. Based on this analysis, we concluded that there were no conditions with respect to our market capitalization as of September 30, 2015 which would require further evaluation with respect to the carrying values of our reporting units. The above analysis was performed based on a closing ONSM share price of $0.21 per share as of September 30, 2015.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)
Testing for Impairment (continued)
However, as of September 30, 2014, based on the above, as well as a report prepared by the third-party valuation services firm, we determined that the FVs of the Acquired Onstream, EDNet and audio and web conferencing reporting units, calculated as described above, were more than their respective net carrying amounts. Furthermore, in order to address whether any further consideration of ONSM’s share price was needed with respect to impairment testing, we, with the assistance of the third-party valuation services firm, performed an analysis to compare our book value to our market capitalization as of September 30, 2014, including adjustments for (i) paid-for but not issued common shares, such as the Rockridge Shares (see note 4) and the Executive Shares (see note 5) and (ii) an appropriate control premium. Based on this analysis, we concluded that there were no conditions with respect to our market capitalization as of September 30, 2014 which would require further evaluation with respect to the carrying values of our reporting units. The above analysis was performed based on a closing ONSM share price of $0.17 per share as of September 30, 2014.
An annual impairment review of our goodwill will be performed as part of preparing our September 30, 2016 financial statements. Until that time, we are reviewing certain factors to determine whether a triggering event has occurred that would require an interim impairment review. Those factors include, but are not limited to, our management’s estimates of future sales and operating income, which in turn take into account specific company, product and customer factors, as well as general economic conditions and the market price of our common stock.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 3: PROPERTY AND EQUIPMENT
Property and equipment, including equipment acquired under capital leases, consists of:
As part of the Onstream Merger (see note 2), we became obligated under a contract with SAIC, under which SAIC would build a platform that eventually, albeit after further extensive design and re-engineering by us, led to the DMSP. A partially completed version of this platform was the primary asset included in our purchase of Acquired Onstream, and was recorded at an initial amount of approximately $2.7 million. Subsequently, we continued to develop the DMSP, making payments under the SAIC contract and to other vendors, as well as to our own development staff as discussed below, which were recorded as an increase in the DMSP’s carrying cost. A limited version of the DMSP was first placed in service in November 2005. “Store and Stream” was the first version of the DMSP sold to the general public, starting in October 2006. In connection with our purchase of Auction Video in March 2007 (see note 2), $600,000 of the purchase price was attributed to a video ingestion and flash transcoder and added to the DMSP’s carrying cost.
The SAIC contract terminated by mutual agreement of the parties on June 30, 2008. Although cancellation of the contract released SAIC to offer what was identified as the “Onstream Media Solution” directly or indirectly to third parties, we do not expect this right to result in a material adverse impact on future DMSP sales.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 3: PROPERTY AND EQUIPMENT (Continued)
As of September 30, 2015 we have capitalized as part of the DMSP approximately $1.3 million of employee compensation, payments to contract programmers and related costs for development of “Streaming Publisher”, a second version of the DMSP with additional functionality although it also is a stand-alone product based on a different architecture than Store and Stream. As of September 30, 2015, substantially all of these costs had been placed in service, including approximately $410,000 for the initial release in September/October 2009, approximately $231,000 for an April/May 2010 release, approximately $109,000 for storefront applications placed in service between August 2013 and January 2014, approximately $52,000 for a January 2014 release and approximately $125,000 for a May 2014 release.
As of September 30, 2015 we have capitalized as part of other internal use software approximately $2.0 million of employee compensation and other costs for the development of webcasting applications. As of September 30, 2015, substantially all of these costs have been placed in service, including approximately $444,000 placed in service in December 2009 for the initial release of iEncode software, which runs on a self-administered, webcasting appliance used to produce a live video webcast, approximately $352,000 placed in service in January 2013 for a new release of our basic webcasting platform and approximately $99,000, $251,000 and $96,000 placed in service in October 2013, July 2014 and July 2015, respectively, for enhancements to that new release. As of September 30, 2015, the approximately $262,000 of the total capitalized costs not yet placed in service relate to our development during the period from July 2013 through September 2015 of a “do it yourself” large audience webcasting product that can be run from the customer’s desktop and will be available on a fixed cost monthly subscription basis that can be purchased on-line. We expect to release this product in the fourth quarter of fiscal 2016. As part of our annual review of the carrying values of our long-lived assets for impairment as of September 30, 2015, we evaluated the remaining carrying value of the webcasting division’s assets, primarily the unamortized software development costs, for impairment. We performed such an analysis by comparing the carrying value of those assets to the projected undiscounted future cash flows from the webcasting operations, as prescribed by applicable accounting literature for evaluating impairment of a depreciable asset with a fixed life. These projected future cash flows took into account (i) the webcasting revenues during fiscal 2015, which in spite of an increase for the nine months ended June 30, 2015 versus the corresponding prior year period, declined for the three months ended June 30, 2015, versus the corresponding prior year period, and were generally flat for the three months ended September 30, 2015, versus the corresponding prior year period (and which trend has continued through June 30, 2016) and (ii) information available to us with respect to backlog and potential future revenues as of September 30, 2015. Based on this information, we determined that it would not be appropriate to project growth in webcasting revenues for these purposes as of September 30, 2015. The initial decline in webcasting revenues that occurred for the quarter ended June 30, 2015 was not considered a “triggering event” that might require an interim evaluation, since we were unable to determine that such decline represented a trend that might result in impairment until we saw additional results for the quarter ended September 30, 2015, as well as evaluated the backlog and potential future revenues as of that date. Since there was a significant level of recently capitalized software development costs for webcasting products as of September 30, 2015, and we did not project growth in webcasting revenues for this purpose, as a result of our analysis, we recognized a net impairment loss of $800,000 for the year ended September 30, 2015. After the impairment loss, the carrying cost of the webcasting division’s capitalized internal software was reduced to approximately $35,000, which will be depreciated over the twelve months ending September 30, 2016. We will continue to evaluate any webcasting division development costs capitalized by us after September 30, 2015 for impairment on the same basis.
All capitalized development costs placed in service are being depreciated over five years. Depreciation and amortization expense for property and equipment was approximately $606,000 and $813,000 for the years ended September 30, 2015 and 2014, respectively.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT
Debt includes convertible debentures and notes payable (including capitalized lease obligations).
Convertible Debentures
Convertible debentures consist of the following:
New Sigma Note and Sigma Note 1
On March 21, 2013 (the “Sigma Closing”) we closed a transaction with Sigma Opportunity Fund II, LLC (“Sigma”), under which Sigma remitted $600,000 (net of fees and expenses discussed below) pursuant to a senior secured note (“Sigma Note 1”) issued to Sigma and collateralized by all of our assets, subordinated only to security interests already held in connection with outstanding financings with Thermo Credit and Rockridge. On June 14, 2013, Sigma Note 1 was amended to provide that we would receive immediate additional funding of $345,000, repayable as a balloon payment due on December 18, 2014, which when added to the previous balloon payment of $50,000 resulted in a total amended balloon payment of $395,000. Such amended balloon payment would be convertible into restricted common shares, at Sigma’s option, using a conversion rate of $1.00 per share. After the amendment the total gross proceeds received under Sigma Note 1 was $945,000. Interest, computed at 17% per annum on the outstanding principal balance, was payable in monthly installments commencing April 30, 2013 and principal was payable in monthly installments commencing June 30, 2013. The required payments were made through November 30, 2013.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
New Sigma Note and Sigma Note 1 (continued)
On February 28, 2014, the terms of Sigma Note 1 were amended so that principal and interest payments otherwise due on Sigma Note 1, starting with the December 31, 2013 payment and ending with the September 30, 2014 payment, were eliminated and replaced with monthly principal and interest payments on the last day of October and November 2014 plus a final principal and interest payment on the December 18, 2014 maturity date of Sigma Note 1. As part of a September 15, 2014 agreement with Sigma, this payment schedule was replaced by our agreement to pay Sigma all principal plus accrued interest on December 31, 2014. On December 31, 2014, we entered into an agreement with Sigma whereby we paid Sigma all accrued interest due on Sigma Notes 1 and 2 through that date, which were then cancelled and replaced with a new note payable to Sigma in the principal amount of $1,358,000 (the “New Sigma Note”) and having a maturity date of June 30, 2015. Interest on the New Sigma Note, payable in cash monthly, was initially 21% per annum, reduced to 17% per annum in December 2015, in connection with an amendment to the note and other related agreements discussed in more detail below.
On April 30, 2015, prior to the issuance of our September 30, 2014 financial statements, we entered into an agreement with Sigma extending the maturity date of the New Sigma Note to October 15, 2015 and as a result Sigma Notes 1 and 2 are classified as non-current on our September 30, 2014 balance sheet.
On September 21, 2015, Sigma loaned us an additional $225,000, which resulted in $192,500 cash proceeds net of certain fees and expenses charged by Sigma. The net proceeds were used to pay the approximately $173,000 of outstanding principal balance on one of the Working Capital Notes plus approximately $20,000 of the accrued interest on that note. Accordingly, the outstanding balance of the New Sigma Note increased to $1,583,000 and the maturity date was extended to April 15, 2016, which extension resulted in our obligation to pay Sigma Capital Advisors, LLC (“Sigma Capital”) up to $250,000 in additional fees (plus monthly interest and penalties for late SEC filings, as applicable).
On December 17, 2015, we made a $1.0 million payment to Sigma against the outstanding principal balance of the New Sigma Note, reducing the remaining outstanding principal balance on the Note to $583,000. On December 22, 2015, we entered into certain agreements with Sigma and Sigma Capital, which included an amendment to the New Sigma Note. As a result of these agreements, the outstanding balance of the New Sigma Note was increased to $600,000, to reflect a one-time administrative fee of $17,000, and we also reimbursed $3,500 of Sigma’s legal expenses related to the transactions. The maturity date of the remaining balance due under the New Sigma Note was extended from April 15, 2016 to December 31, 2016 and as a result $583,000 of the New Sigma Note is classified as non-current on our September 30, 2015 balance sheet, with the remaining amount classified as current.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
New Sigma Note and Sigma Note 1 (continued)
As part of the December 22, 2015 agreements, the interest rate on the New Sigma Note was reduced from 21% to 17% per annum, the monthly advisory fee payable to Sigma Capital was reduced from $12,500 to $10,000 and the following obligations to Sigma Capital were eliminated - (i) future monthly damages payable for late SEC filings which were initiated as part of an April 30, 2015 agreement with Sigma and Sigma Capital and (ii) the third and final installment of the fee incurred by us as a result of a previous extension of the maturity date of the New Sigma Note to April 15, 2016, and which would have been $50,000 payable on December 15, 2015. We have agreed, regardless of the early repayment of the New Sigma Note, to pay a minimum aggregate amount of $100,000 of monthly advisory fee payments to Sigma Capital as scheduled, starting with the January 15, 2016 payment of $10,000.
Sigma has the right to convert the New Sigma Note (including the accrued interest thereon) to common stock at a rate of $0.30 per share (reduced from $1.00 per share for Sigma Notes 1 and 2), which right Sigma may exercise after the maturity date, in its entirety or partially, at its option or it may exercise before the maturity date, but only if we are in default on the New Sigma Note or upon the sale of all or substantially all of our business, assets or capital stock.
The collateral and payment priority for the New Sigma Note are unchanged from Sigma Notes 1 and 2. Upon our receipt of funds as a result of (i) the sale of any portion of our business, however structured, including, without limitation, sale of assets, subsidiaries, revenues or business units, and/or (ii) the issuance of additional equity, debt or convertible debt capital, and/or (iii) our consolidation or merger with or into another entity, all outstanding principal and interest with respect to the New Sigma Note will be due, but not to exceed the net proceeds of such funds received by us in any such transaction(s). However, this early repayment requirement did not apply to the $1.0 million proceeds we received in March 2015 from the sale of certain of Infinite’s audio conferencing customer accounts to Partners - see note 6 - and does not apply to up to $800,000 in proceeds should we elect to exercise our rights under the Funding Letter - see note 1. Also, the December 22, 2015 transactions with Sigma and Sigma Capital include (i) their agreement to limit to $1.0 million the required principal repayment against the New Sigma Note arising from the $2.1 million proceeds we received in December 2015 from the sale of certain of Infinite’s audio conferencing customer accounts to Partners, and which $1.0 million we paid Sigma on December 17, 2015 and (ii) their consent to our receipt of future proceeds of up to an additional $772,500 from Revenue Sales without requiring further principal repayments against the New Sigma Note. Revenue Sales are defined in our agreements with Sigma as “financing from a private placement structured in a separate legal entity collateralized by a portion of our Infinite operations”.
In connection with the initial March 2013 financing, we issued 300,000 restricted common shares to Sigma and agreed to reimburse up to $30,000 of Sigma’s legal and other expenses related to that financing, $27,500 of which was paid by us at the Sigma Closing. We also issued 60,000 restricted common shares to Sigma Capital Advisors, LLC (“Sigma Capital”) and paid them a $75,000 advisory fee, in connection with an Advisory Services Agreement we entered into with Sigma Capital effective March 18, 2013. We also paid finders and other fees to other third parties in connection with that transaction, which totaled 60,000 restricted common shares and $12,000 cash.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
New Sigma Note and Sigma Note 1 (continued)
In connection with the June 2013 amendment, we issued 325,000 restricted common shares to Sigma and made payments aggregating $45,000 to Sigma and Sigma Capital, representing an administrative fee plus reimbursement of Sigma’s other cost and expenses related to that financing. We also issued 125,000 restricted common shares to Sigma Capital.
The value of the common stock issued, plus the amount of cash paid for related financing fees and expenses, in connection with the initial March 2013 financing and the June 2013 amendment, was reflected as a $511,188 discount against Sigma Note 1 (as well as a corresponding increase in additional paid-in capital for the shares) and that amount was amortized as interest expense over the term of the note, resulting in an effective interest rate of approximately 56% per annum through February 28, 2014 (which was 60% per annum for the period prior to the June 2013 amendment).
Effective February 28, 2014, a portion of the value of the common shares issued and the fees paid in connection with Sigma Note 2, aggregating $124,655, was allocated to Sigma Note 1 and that amount was amortized as interest over the remaining term of Sigma Note 1. When the amortization of the allocated portion of the common shares issued and the fees paid in connection with the February 28, 2014 Sigma Note 2 agreement were combined with the amortization of the remaining unamortized discount arising from the initial March 2013 Sigma Note 1 financing and the June 2013 amendment, the resulting effective interest rate of Sigma Note 1 as of February 28, 2014 was approximately 66% per annum.
In connection with the September 15, 2014 agreement we issued 53,000 restricted common shares to Sigma and 22,000 restricted common shares to Sigma Capital and we also paid Sigma Capital a $15,000 cash fee and paid Sigma $4,000 as reimbursement of legal expenses. A portion of the value of the common shares issued and the fees paid in connection with the September 15, 2014 agreement with Sigma, aggregating $12,355, was allocated to Sigma Note 1 and that amount was amortized as interest over the remaining term of Sigma Note 1. When the amortization of the common shares issued and the fees paid in connection with the September 15, 2014 Sigma agreement were combined with the amortization of the remaining unamortized discount arising from the initial March 2013 Sigma Note 1 financing, the June 2013 amendment and the February 2014 amendment, the resulting effective interest rate of Sigma Note 1 as of September 15, 2014 was approximately 63% per annum.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
New Sigma Note and Sigma Note 1 (continued)
In connection with an Advisory Services Agreement dated December 31, 2014, entered into by us with Sigma Capital in connection with the issuance of the New Sigma Note, we agreed to (i) pay Sigma Capital an initial advisory fee of $100,000, (ii) issue 70,000 restricted common shares to Sigma and 30,000 restricted common shares to Sigma Capital, such shares having an aggregate fair value of approximately $20,000, (iii) pay Sigma approximately $20,000 as reimbursement of legal expenses and (iv) make additional advisory fee payments to Sigma Capital totaling $160,000 in monthly installments through June 30, 2015. There was no remaining unamortized discount from previous Sigma transactions as of December 31, 2014. The value of the common shares issued plus the fees and expenses we agreed to pay in connection with the December 31, 2014 Sigma agreement, aggregating $299,578, were amortized as interest based on the initial six month term of the New Sigma Note, resulting in an effective interest rate of approximately 65% per annum for the period from January 1, 2015 through April 30, 2015.
As part of the April 30, 2015 agreement with Sigma we (i) paid Sigma Capital a $25,000 transaction fee, (ii) paid Sigma $14,000 as reimbursement of legal expenses and (iii) agreed to make additional advisory fee payments to Sigma Capital aggregating $40,000 in monthly installments from July 15, 2015 through October 15, 2015. The April 30, 2015 agreement also required us to pay liquidated damages for late SEC filings and in accordance with that requirement we paid Sigma Capital an aggregate of $42,500 for such damages from April 30, 2015 through September 30, 2015 and another $25,000 for such damages after that date through November 27, 2015, the last payment date before the agreement to pay such damages was cancelled. When the amortization of the fees and expenses we agreed to pay in connection with the April 30, 2015 Sigma agreement, including the anticipated liquidated damages for late SEC filings, such items aggregating $121,500, were combined with the amortization of the remaining unamortized discount arising from the December 31, 2014 financing, the resulting effective interest rate of the New Sigma Note was approximately 57% per annum for the period from May 1, 2015 through September 30, 2015. Although this effective rate would be impacted by the September 21, 2015 transaction discussed below, we will not reflect that impact until October 1, 2015 and have determined that the impact of this delayed implementation is immaterial. This effective interest rate does not include the impact if an early repayment was required, as discussed above.
As part of the September 21, 2015 agreement with Sigma we (i) paid Sigma Capital a $25,000 fee (added to the loan principal balance), (ii) paid Sigma $7,500 as reimbursement of legal expenses, (iii) agreed to make an additional advisory fee payment to Sigma Capital of $2,500 on October 15, 2015, and (iv) agreed, in consideration of the loan maturity date extension from October 15, 2015 to April 15, 2016, to pay fees to Sigma Capital aggregating $175,000 in three monthly installments from October 15, 2015 through December 15, 2015 (of which we paid $125,000, with the remaining $50,000 obligation cancelled as part of the December 22, 2015 agreement with Sigma as discussed above) and to make additional advisory fee payments to Sigma Capital aggregating $75,000 in monthly installments from November 15, 2015 through April 15, 2016 (of which we paid $25,000, with the remaining $50,000 obligation cancelled and replaced with a new advisory fee obligation as part of the December 22, 2015 agreement with Sigma as discussed above).
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
New Sigma Note and Sigma Note 1 (continued)
The unamortized portion of the debt discount recorded against the New Sigma Note was $42,623 as of September 30, 2015. The unamortized portion of the debt discount recorded against Sigma Note 1 was $98,494 (including $53,150 related to the portion of that debt classified as a note payable) as of September 30, 2014.
We concluded that there was less than a 10% difference between the present value of the cash flows of Sigma Note 1 after its February 2014 and September 2014 modifications (including an allocation of a portion of the common shares issued and fees paid in connection with the February 2014 Sigma Note 2 transaction) versus the present value of the cash flows before the modifications, which 10% is the threshold over which extinguishment accounting is required under the provisions of ASC 470-50-40, and accordingly, accounting for those modifications as extinguishments of debt was not required.
We concluded that there was less than a 10% difference between the present value of the cash flows of Sigma Note 1 after its December 2014 modification (via cancellation and replacement with the New Sigma Note) versus the present value of the cash flows under the payment terms in place one year earlier. The comparison of the present value of cash flows under the modified terms is normally done using the present value of cash flows under the terms existing immediately before the modification. However, under the provisions of ASC 470-50-40, if a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms should be to the terms existing one year prior to the current modification, which in this case would be the terms in place as of June 14, 2013 (with respect to the portion of the New Sigma Note issued to cancel Sigma Note 1) and February 28, 2014 (with respect to the portion of the New Sigma Note issued to cancel Sigma Note 2, and in which case the inception date of Sigma Note 2 was used). ASC 470-50-40 also provides that if a substantive conversion feature is added to an instrument, the modified terms are considered substantially different and extinguishment accounting is required. However, since the conversion right as modified effective December 31, 2014 is not exercisable prior to the maturity date of the New Sigma Note unless we are in default on the New Sigma Note or upon the sale of all or substantially all of our business, assets or capital stock, and since the ONSM closing price of $0.21 per share at the time of the modification of the conversion rights was significantly less than the $0.30 per share modified conversion price, we determined that it was not reasonably possible that the modified conversion feature would be exercised and thus determined the conversion feature to not be substantive. Accordingly, accounting for this modification as an extinguishment of debt was not required.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
New Sigma Note and Sigma Note 1 (continued)
We concluded that there was less than a 10% difference between the present value of the cash flows of the New Sigma Note after its April 2015 modification versus the present value of the cash flows under the payment terms in place one year earlier. Since the provisions of ASC 470-50-40 require that if a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms should be to the terms existing one year prior to the current modification, which in this case was as of February 28, 2014 for Sigma Notes 1 and 2, the predecessor indebtedness to the New Sigma Note, as discussed above. ASC 470-50-40 also provides that if a substantive conversion feature is added to an instrument, the modified terms are considered substantially different and extinguishment accounting is required. However, since the conversion right deemed to be modified as part of the April 2015 transaction is not exercisable prior to the maturity date of the New Sigma Note unless we are in default on the New Sigma Note or upon the sale of all or substantially all of our business, assets or capital stock, and since the ONSM closing price of $0.14 per share at the time of the deemed modification of the conversion rights was significantly less than the $0.30 per share modified conversion price, we determined that it was not reasonably possible that the modified conversion feature would be exercised and thus determined the conversion feature to not be substantive. Accordingly, accounting for this modification as an extinguishment of debt was not required.
We concluded that there was less than a 10% difference between the present value of the cash flows of the New Sigma Note after its September 2015 modification versus the present value of the cash flows under the payment terms in place one year earlier. Since the provisions of ASC 470-50-40 require that if a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms should be to the terms existing one year prior to the current modification, which in this case was as of September 15, 2014 for Sigma Notes 1 and 2, the predecessor indebtedness to the New Sigma Note, as discussed above. ASC 470-50-40 also provides that if a substantive conversion feature is added to an instrument, the modified terms are considered substantially different and extinguishment accounting is required. However, since the conversion right deemed to be modified as part of the September 2015 transaction is not exercisable prior to the maturity date of the New Sigma Note unless we are in default on the New Sigma Note or upon the sale of all or substantially all of our business, assets or capital stock, and since the ONSM closing price of $0.23 per share at the time of the deemed modification of the conversion rights (and the $0.18 per share the following day) was significantly less than the $0.30 per share modified conversion price, we determined that it was not reasonably possible that the modified conversion feature would be exercised and thus determined the conversion feature to not be substantive. Accordingly, accounting for this modification as an extinguishment of debt was not required.
In connection with the above financing, an agreement is in place between Sigma and Rockridge, which includes Rockridge’s agreement (along with our agreement) that Sigma has the right, but not the obligation, to repay the Rockridge Note at face value in case of our default on the New Sigma Note or the Rockridge Note. Such repayment amount would be added to the principal of the New Sigma Note, with the principal being payable and accruing interest under the terms of the New Sigma Note. Furthermore, the fees payable to Sigma in the event of such repayment would be $25,000 cash payable upon such early repayment plus $4,000 per month starting from the one-month anniversary of such repayment date through the date that all amounts we owe Sigma are repaid.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
Sigma Note 2
In addition to the February 28, 2014 amendment to Sigma Note 1 as discussed above, we completed a second transaction with Sigma on that date, under which we borrowed $500,000 (from which were deducted certain fees and we repaid certain debt as discussed below) pursuant to a senior secured note (“Sigma Note 2”) issued to Sigma and collateralized by all of our assets, subordinated only to security interests already held in connection with outstanding financings with Rockridge and Thermo Credit LLC. The $500,000 principal, plus $59,447 interest (based on 17% per annum compounding monthly), was due on October 31, 2014 and the principal (including the accrued interest thereon) would be convertible into restricted common shares, at Sigma’s option, using a conversion rate of $1.00 per share. As part of a September 15, 2014 agreement with Sigma, this payment schedule was replaced by our agreement to pay Sigma all principal plus accrued interest on December 31, 2014. On December 31, 2014, we entered into an agreement with Sigma whereby we paid Sigma all accrued interest due on Sigma Notes 1 and 2 through that date, which were then cancelled and replaced the New Sigma Note. On April 30, 2015 we entered into an agreement with Sigma extending the maturity date of the New Sigma Note to October 15, 2015 and as a result Sigma Notes 1 and 2 are classified as non-current on our September 30, 2014 balance sheet. The terms of the New Sigma Note and the April 30, 2015 agreement with Sigma are discussed under “New Sigma Note and Sigma Note 1” above.
In connection with the February 28, 2014 closing and funding of Sigma Note 2, we issued 350,000 restricted common shares to Sigma as well as reimbursed $11,354 of Sigma’s legal and other expenses related to this financing. In connection with a February 28, 2014 Advisory Services Agreement, we also issued 450,000 restricted common shares to Sigma Capital Advisors, LLC (“Sigma Capital”) and paid them a $267,857 advisory fee. The value of the common stock issued, plus the amount of cash paid for related financing fees and expenses, was reflected as a $124,655 discount against Sigma Note 1 and a $329,556 discount against Sigma Note 2 (as well as a corresponding increase in additional paid-in capital for the shares) and that amount was amortized as interest expense over the term of the note, resulting in an effective interest rate of approximately 115% per annum.
A portion of the value of the common shares issued and the fees paid in connection with the September 15, 2014 agreement with Sigma, aggregating $21,645, was allocated to Sigma Note 2 and that amount was amortized as interest over the remaining term of Sigma Note 2. When the allocated portion of the common shares issued and the fees paid in connection with the September 15, 2014 Sigma agreement were combined with the amortization of the remaining unamortized discount arising from the initial February 2014 Sigma Note 2 financing, the resulting effective interest rate of Sigma Note 2 as of September 15, 2014 was approximately 66% per annum.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
Sigma Note 2 (continued)
The aggregate unamortized portion of the debt discount recorded against Sigma Note 2 was $61,999 as of September 30, 2014.
We concluded that there was less than a 10% difference between the present value of the cash flows of Sigma Note 2 after its September 2014 modification (including an allocation of a portion of the common shares issued and fees paid in connection with the September 15, 2014 agreement with Sigma) versus the present value of the cash flows before the modification, and accordingly, accounting for that modification as an extinguishment of debt was not required.
We concluded that there was less than a 10% difference between the present value of the cash flows of Sigma Note 2 after its December 2014 modification (via cancellation and replacement with the New Sigma Note) versus the present value of the cash flows under the payment terms in place upon the original issuance of Sigma Note 2. The comparison of the present value of cash flows under the modified terms is normally done using the present value of cash flows under the terms existing immediately before the modification. However, under the provisions of ASC 470-50-40, if a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms should be to the terms existing one year prior to the current modification, or in the case of a note issued less than one year prior, existing as of the original note issuance date. ASC 470-50-40 also provides that if a substantive conversion feature is added to an instrument, the modified terms are considered substantially different and extinguishment accounting is required. However, since the conversion right as modified effective December 31, 2014 is not exercisable prior to the maturity date of the New Sigma Note unless we are in default on the New Sigma Note or we are sold, and since the ONSM closing price of $0.21 per share at the time of the modification of the conversion rights was significantly less than the $0.30 per share modified conversion price, we determined that it was not reasonably possible that the modified conversion feature would be exercised and thus determined the conversion feature to not be substantive. Accordingly, accounting for this modification as an extinguishment of debt was not required.
Rockridge Note
In April and June 2009 we borrowed $1.0 million from Rockridge Capital Holdings, LLC (“Rockridge”), an entity controlled by one of our larger shareholders, in accordance with the terms of a Note and Stock Purchase Agreement (the “Rockridge Agreement”) between Rockridge and us. In September 2009, we borrowed an additional $1.0 million from Rockridge, resulting in cumulative borrowings by us under the Rockridge Agreement, as amended, of $2.0 million. In connection with this transaction, we issued a note (the “Rockridge Note”) bearing interest at 12% per annum (which is currently being paid on a monthly basis) and collateralized by a first priority lien on all of our assets, such lien subordinated only to the extent higher priority liens on assets, primarily accounts receivable and certain designated software and equipment, are held by other lenders. We also entered into a Security Agreement with Rockridge containing covenants and restrictions with respect to the collateral.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
Rockridge Note (continued)
We made subsequent principal and interest payments, primarily on a monthly basis, which reduced the outstanding balance of the Rockridge Note to $400,000 as of September 30, 2015 and 2014. This remaining balance, per our latest agreement with Rockridge dated December 16, 2015, has a Maturity Date of December 31, 2016 and as a result is classified as non-current on our September 30, 2015 balance sheet. On April 30, 2015, prior to the issuance of our September 30, 2014 financial statements, we entered into an agreement with Rockridge whereby the Maturity Date of the Rockridge Note was extended to October 15, 2015 and as a result the Rockridge Note is classified as non-current on our September 30, 2014 balance sheet. The Rockridge Note also provides that we will pay the outstanding principal plus any accrued interest upon our receipt of proceeds in excess of $5 million related to the sale of any of our business units or subsidiaries.
The Rockridge Agreement, as amended through December 31, 2014, provided that (i) Rockridge may receive an origination fee upon not less than sixty-one (61) days written notice to us, payable by our issuance of 666,667 restricted shares of our common stock (the “Shares”) and (ii) on the Maturity Date we shall pay Rockridge up to a maximum of $75,000 valuation adjustment (the “Shortfall Payment”) related to the Shares. The Shortfall Payment would be calculated as the sum of (i) the cash difference between the per share value of $1.20 (the “Minimum Per Share Value”) and the average sale price for all previously sold Shares (whether such number is positive or negative) multiplied by the number of sold Shares and (ii) for the Shares which were not previously sold by Rockridge, the cash difference between the Minimum Per Share Value and the market value of the Shares at the Maturity Date (whether such number is positive or negative) multiplied by the number of unsold Shares, up to a maximum of $75,000 in the aggregate.
Our December 31, 2014 agreement with Rockridge, in exchange for an extension of the Maturity Date, increased the origination fee by 50,000 Shares (to the 666,667 Shares as discussed above). This increase had a fair market value of approximately $10,500, which we determined to be immaterial for recording as additional discount and subsequent periodic amortization and thus we recorded as interest expense (as well as a corresponding increase in additional paid-in capital) for the year ended September 30, 2015 . Since there was no remaining unamortized discount with respect to the Rockridge Note as of December 31, 2014, we also concluded that no further evaluation of this modification with respect to loan extinguishment accounting would be required.
Our April 30, 2015 agreement with Rockridge, in exchange for an extension of the Maturity Date to October 15, 2015, increased the origination fee by 30,000 Shares, for an aggregate adjusted total of 696,667 Shares. Our August 18, 2015 agreement with Rockridge, in exchange for an extension of the Maturity Date to April 15, 2016 increased the origination fee by 50,000 Shares, for an aggregate adjusted total of 746,667 Shares. Our December 16, 2015 agreement with Rockridge, in exchange for the most recent extension of the Maturity Date to December 31, 2016, increased the origination fee by 70,000 Shares, for an aggregate adjusted total of 816,667 Shares.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
Rockridge Note (continued)
As of October 1, 2012, we determined that our share price had remained below $1.20 per share for a sufficient period that accrual of a liability for the Shortfall Payment was appropriate. Therefore, we recorded the $32,000 present value of this obligation as a liability as of October 1, 2012, which increased to $61,000 as of September 30, 2013, as a result of the accretion of $29,000 as interest expense for the year then ended and increased further to the maximum obligation of $75,000 as of September 30, 2014, as a result of the accretion of $14,000 as interest expense for the year then ended. The carrying amount of this liability, classified as part of the caption “Accrued liabilities” on our balance sheet, was also $75,000 as of September 30, 2015. Although as a result of the latest extension of the Maturity Date discussed above, the Shortfall Payment is not due until December 31, 2016, the difference between the present value of that obligation and the carrying amount is considered to be immaterial to our financial statements taken as a whole and so no adjustment to that carrying amount was made. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, the required Shortfall Payment would be $75,000.
The fair market value of the first 366,667 Shares, determined to be approximately $626,000 at the date of the Rockridge Agreement under which Rockridge became entitled to such shares, plus legal fees of $55,337 we paid in connection with the Rockridge Agreement, were reflected as the initial $681,337 discount against the Rockridge Note and amortized as interest expense over the term of the Rockridge Note through the date of the December 2012 Allonge. The fair market value of the second tranche of 225,000 origination fee Shares arising from the December 2012 Allonge was recorded as additional discount of approximately $79,000 and, along with the unamortized portion of the initial discount, was amortized as interest expense over the remaining term of the Rockridge Note, commencing in January 2013. The $32,000 present value of the anticipated Shortfall Payment was recorded as additional discount and, along with the other components of discount discussed above, was amortized as interest expense over the remaining term of the Rockridge Note, commencing in October 2012 and ending when the remaining unamortized discount of $43,620 was written off as a debt extinguishment loss in February 2014. The fair market value of the third tranche of 25,000 origination fee Shares arising from the September 2014 Allonge was not recorded as additional discount due to immateriality but rather was recognized as interest expense of $5,250 during the year ended September 30, 2014. The fair market value of the fourth and fifth tranches aggregating 80,000 origination fee Shares arising from the December 2014 and April 2015 Allonges was not recorded as additional discount due to immateriality but rather was recognized as interest expense of $14,700 during the year ended September 30, 2015. Corresponding increases in additional paid-in capital were also recorded for the value of the Shares.
The fair market value of the sixth tranche of 50,000 origination fee Shares arising from the August 2015 Allonge was inadvertently not recorded as of September 30, 2015. We have concluded that this omission is immaterial for adjustment to those financial statements and therefore, the issuance will be recognized as interest expense of $9,500 during the three months ended December 31, 2015.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
Rockridge Note (continued)
The initial effective interest rate of the Rockridge Note was approximately 44.3% per annum, until the September 2009 amendment, which reduced it to approximately 28.0% per annum, the October 2012 Shortfall Payment accrual, which increased it to approximately 31.1% per annum and the December 2012 Allonge, which decreased it to approximately 29.1% per annum. As a result of the February 2014 debt extinguishment loss, discussed above, the effective interest rate was reduced to 12% per annum and, because of the expensing of the value of all subsequent increases in the number of origination fee Shares on the basis of immateriality, it is deemed to have remained at that level to date. These rates do not give effect to any difference between the sum of the value of the Shares at the time of issuance plus the Shortfall Payment, as compared to the recorded value of the Shares on our books, nor do they give effect to any variance between the conversion price versus market prices if principal is satisfied with common shares issued upon conversion instead of cash.
Upon notice from Rockridge at any time and from time to time prior to the Maturity Date the outstanding principal balance may be converted into a number of restricted shares of our common stock. These conversions are subject to a minimum of one month between conversion notices (unless such conversion amount exceeds $25,000) and will use a conversion price of eighty percent (80%) of the fair market value of the average closing bid price for our common stock for the twenty (20) days of trading on The NASDAQ Capital Market (or such other exchange or market on which our common shares are trading) prior to such Rockridge notice, but such conversion price will not be less than $2.40 per share. We will not effect any conversion of the Rockridge Note, to the extent Rockridge and Frederick Deluca (who died on September 14, 2015), after giving effect to such conversion, would beneficially own in excess of 9.9% of our outstanding common stock, although such limitation may be waived by Rockridge upon not less than sixty-one (61) days prior written notice to us and provided such waiver would not result in a violation of the NASDAQ shareholder approval rules.
Furthermore, in the event of any conversions of principal to ONSM shares by Rockridge (i) they will first be applied to reduce monthly payments starting with the latest and (ii) the interest portion of the monthly payments under the Rockridge Note for the remaining months after any such conversion will be adjusted to reflect the outstanding principal being immediately reduced for amount of the conversion. We may prepay the Rockridge Note at any time. The outstanding principal is due on demand in the event a payment default is uncured ten (10) business days after Rockridge’s written notice to us.
Fuse Note
Effective March 19, 2013 we issued an unsecured subordinated note to Fuse Capital LLC (“Fuse”) in the amount of $200,000 (the “Fuse Note”) in consideration of $100,000 of additional cash proceeds to us plus the cancellation of a previously issued note with a still outstanding balance of $100,000. The Fuse Note, which is convertible into restricted common shares at Fuse’s option using a rate of $0.50 per share, was initially payable as follows: interest only (at 12% per annum) during the first year, approximately 30% of the principal plus interest during the second year and the remaining principal balance at the end of the second year.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
Fuse Note (continued)
Effective April 1, 2014 the Fuse Note was amended to provide that the $200,000 principal balance would not be payable until the March 19, 2015 maturity date, although interest would continue to be payable on a monthly basis. Effective February 28, 2015, prior to the issuance of our September 30, 2014 financial statements, the Fuse Note was further amended, extending the maturity date to March 1, 2016 and as a result the Fuse Note is classified as non-current on our September 30, 2014 balance sheet. This amendment provided that interest would be paid quarterly, commencing June 30, 2015 and also increased the outstanding principal balance to $220,000, for the effect of a $20,000 due diligence fee earned by the noteholder in connection with the amendment, although the portion of the principal balance convertible to common shares remained at $200,000. This amendment also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale.
Effective October 15, 2015 the Fuse Note was further amended, extending the maturity date to July 15, 2016. Effective December 16, 2015 a $100,000 principal payment was made and the Fuse Note was further amended to extend the maturity date to December 31, 2016. Effective June 6, 2016 the Fuse Note was further amended, extending the maturity date to January 15, 2017. Accordingly, the amount repaid in December 2015 is classified as current on our September 30, 2015 balance sheet and the remaining $120,000 balance is classified as non-current.
In connection with the original issuance of the Fuse Note, we issued Fuse 80,000 restricted common shares (the “Fuse Common Stock”), which we agreed to buy back, to the extent permitted by law, at $0.40 per share, if the fair market value of the Fuse Common Stock was not equal to at least $0.40 per share as of March 19, 2015 (two years after issuance). As of June 30, 2013 we determined that our share price had remained below $0.40 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, we recorded the $20,000 present value of this obligation as a liability on our financial statements as of June 30, 2013 (under the caption “Accrued liabilities” on our balance sheet) which increased to $22,000 as of September 30, 2013, as a result of the accretion of $2,000 as interest expense for the year then ended, increased again to $28,000 as of September 30, 2014 as a result of the accretion of $6,000 as interest expense for the year then ended and increased again to $32,000 as of September 30, 2015 as a result of the accretion of $4,000 as interest expense for the year then ended.
The closing ONSM share price was $0.16 per share as of March 19, 2015, which would trigger the above repurchase obligation, which would be $32,000 based on 80,000 shares at $0.40 per share. This only applies to the extent the Fuse Common Stock was still held by Fuse at the applicable date. Furthermore, as part of the February 28, 2015 amendment discussed above, it was agreed that Fuse would not request any payments from us under this commitment prior to the maturity date of the Fuse Note, which is currently January 15, 2017.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
Fuse Note (continued)
In connection with the original issuance of the Fuse Note, we also issued 40,000 restricted common shares to another third party for finder and other fees. The value of the Fuse Common Stock plus the value of the common stock issued for related financing fees was approximately $52,000, which was reflected as an increase in additional paid-in capital, with one half included in a debt extinguishment loss recognized in fiscal 2013 and the other half recorded as a discount against the Fuse Note. The discount portion of approximately $26,000 was amortized as interest expense over the original term of the note, resulting in an effective interest rate of approximately 19% per annum through March 19, 2015.
The $20,000 due diligence fee earned by the noteholder in connection with the February 28, 2015 amendment was recorded as a discount against the Fuse Note and is being amortized as interest expense over the approximately one year extension period, resulting in an effective interest rate of approximately 21% per annum.
The aggregate unamortized portion of the debt discount recorded against the Fuse Note was $8,775 (of which $798 relates to the $20,000 portion of the Fuse Note included in the “Notes and Leases Payable” section below) and $6,446 as of September 30, 2015 and 2014, respectively.
We concluded that there was less than a 10% difference between the present value of the cash flows of the Fuse Note after its February 28, 2015 modification versus the present value of the cash flows under the payment terms in place one year earlier, which 10% is the threshold over which extinguishment accounting is required under the provisions of ASC 470-50-40. Accordingly, accounting for this modification as an extinguishment of debt was not required. The comparison of the present value of cash flows under the modified terms is normally done using the present value of cash flows under the terms existing immediately before the modification. However, under the provisions of ASC 470-50-40, if a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms should be to the terms existing one year prior to the current modification. Since the April 2014 modification of this note was not considered to be an extinguishment, we utilized the terms in the original March 19, 2013 note.
In connection with the October 15, 2015 agreement extending the maturity date of the Fuse Note to July 15, 2016, we issued 75,000 restricted common shares to Fuse, such shares having a fair value of approximately $14,000.
Intella2 Investor Notes
In connection with the issuance of the Fuse Note as discussed above, we modified the terms on another note issued to Fuse on November 30, 2012, to allow conversion of the principal balance into restricted common shares at Fuse’s option using a rate of $0.50 per share. This other note, with an original principal balance of $200,000 which increased to $220,000 as a result of a February 28, 2015 amendment, although still only $200,000 is convertible, is discussed in more detail under “Intella2 Investor Notes” in the “Notes and Leases Payable” section below.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
Equipment Notes
In June and July 2008 we received an aggregate of $1.0 million from seven accredited individuals and other entities (the “Investors”), under a software and equipment financing arrangement (the “Equipment Notes”). The principal balance outstanding under the Equipment Notes was eventually reduced to $350,000 and effective October 2011, the Equipment Notes were assigned by the applicable Investors to three accredited entities (the “Noteholders”). These Equipment Notes were repaid with cash payments to the Noteholders in March 2013 aggregating $175,000, as well as the issuance of an aggregate of 583,334 restricted common shares (“Equipment Note Shares”) to the Noteholders during the period from December 2012 to March 2013, credited upon issuance as a reduction of the outstanding Equipment Notes balance using a price of $0.30 per share. However, the terms of the Equipment Notes provided that on the maturity dates of the Equipment Notes, the Recognized Value of the Equipment Note Shares would be calculated as the sum of the following two items - (i) the gross proceeds to the Investors from the sales of the 583,334 Equipment Note Shares plus (ii) the value of those Equipment Note Shares issued and still held by the Noteholders and not sold, using the average ONSM closing bid price per share for the ten (10) trading days prior to the applicable maturity date. If the Recognized Value exceeded the Credited Value, then we would receive 50% (fifty percent) of such excess, although the amount received by us shall not exceed $175,000. If the Credited Value exceeded the Recognized Value, then we would be obligated to pay such excess to the Noteholders. With respect to Equipment Note Shares held by one of the three Noteholders, the Credited Value exceeded the Recognized Value for 166,667 common shares by approximately $16,000 as of the respective November 15, 2013 maturity date, which excess we recorded as interest expense in fiscal 2014 and is included under the caption “Accrued liabilities” on our September 30, 2015 and 2014 balance sheets.
In connection with financing obtained by us in October and November 2013 from the other two Noteholders (see “Working Capital Notes” below), the above terms with respect to settlement of differences between the Credited Value and the Recognized Value were replaced with our agreement to buy back the 416,667 Equipment Note Shares issued to those Noteholders, to the extent permitted by law, at $0.30 per share, if the fair market value of the Equipment Note Shares was not equal to at least $0.30 per share on the maturity dates of the October and November 2013 financings, which were April 24 and May 4, 2015, respectively. Furthermore, we agreed that in the event we receive funds in excess of $5 million as a result of a single transaction for the sale of all or a part of our operations or assets, that those funds will be available to satisfy the above buyback obligation, such availability subject only to prior satisfaction of any claims held by Thermo Credit LLC, Rockridge Capital Holdings LLC, Sigma Opportunity Fund II, LLC, USAC, and certain capital leases (HP Financial and Tamco), or any assignees or successors thereto and pari passu with up to $775,000 of total indebtedness and related obligations raised and incurred by us during the first quarter of fiscal 2014.
As of September 30, 2013, we determined that our share price had remained below $0.30 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, we recorded the $80,000 present value of this obligation as a liability on our financial statements as of that date (under the caption “Accrued liabilities” on our balance sheet), which increased to approximately $108,000 as of September 30, 2014 as a result of the accretion of approximately $28,000 as interest expense for the year then ended and which increased to approximately $125,000 as of September 30, 2015 as a result of the accretion of approximately $17,000 as interest expense for the year then ended.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Convertible Debentures (continued)
Equipment Notes (continued)
The closing ONSM share price was $0.14 and $0.16 per share on April 24 and May 4, 2015, respectively, which would trigger the above repurchase obligation in the gross amount of $125,000, based on 416,667 Equipment Note Shares at $0.30 per share. However, this repurchase obligation is subject to the Equipment Note Shares being still held by the Noteholder(s) at such date and the Noteholder giving us notice and delivering the shares within fifteen days after such date, as well as any other legal restrictions with respect to our repurchase of shares. It is possible that some or all of this repurchase obligation could be avoided by us due to the failure of the Noteholder or Noteholders to formally present the shares to us and/or provide notice by the specified date, or as a result of legal restrictions with respect to our repurchase of shares. However, because of our ongoing discussions with certain of these Noteholders, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this repurchase obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible those Noteholders could assert mitigating circumstances under which we might honor all or part of this repurchase obligation. Therefore, pending our further evaluation of our position with respect to this repurchase obligation, we are leaving the accrued liability on our financial statements as of September 30, 2015.
In addition, we agreed that to the extent the number of outstanding shares of our common stock exceeds 22 million shares, we would issue the Noteholders additional shares of common stock in aggregate equal to approximately 1.9% of the excess over 22 million, times the percentage of the original 416,667 common shares still held by the Noteholders on the six and twelve month anniversary dates of the October and November 2013 financings, as well as the eighteen month maturity date. For clarity, additional issuances based on any particular increase in the number of our outstanding shares over the stated limit will only be made once and so additional issuances on the second and third dates will be limited and related to increases since the first and second dates, respectively. The number of outstanding shares was less than 22 million as of September 30, 2014, and thus we had no potential liability under the above provision as of that date. Furthermore, the number of outstanding shares as of April 24, 2015 and May 4, 2015 (the eighteen month maturity dates) was approximately 22.5 million, resulting in a liability under the above provision as of that date to issue approximately 10,300 additional common shares, which is considered immaterial.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable
Notes and leases payable consist of the following:
Line of Credit Arrangement
In December 2007, we entered into a line of credit arrangement (the “Line”) with a financial institution (the “Lender”). The Lender was Thermo Credit LLC through February 10, 2016 and as a result of an assignment, Thermo Communications Funding LLC, an affiliated company, subsequent to that date. Mr. Leon Nowalsky, a member of our Board, is an investor and board member in both entities.
The Line has been renewed and modified from time to time, and under which we may presently borrow up to an aggregate of $2.0 million for working capital, collateralized by our accounts receivable and certain other related assets and the amount of such borrowing being further subject to the amount, aging and concentration of such receivables. Although the Line expired on December 27, 2013, we continued after that date to negotiate renewal terms with the Lender and to maintain an outstanding borrowing balance under the Line and on February 10, 2016 (the “Effective Date”), we entered into a Loan Modification Agreement (“Modification”) which extended the term of the Line through December 31, 2017 (the “Maturity Date”). Notwithstanding this renewal for a period ending more than one year after our September 30, 2015 balance sheet, since the outstanding balance at that date could, in the absence of continuing revenues generating eligible receivables with a sufficient dollar value, be fully repayable within one year, it is classified as a current liability on that balance sheet, as well as our September 30, 2014 balance sheet.
The Modification also provides that, if no Default or Event of Default, as defined in the Modification, shall have occurred and be continuing as of the Maturity Date, and upon our notice and request to Lender sent per the timing and other requirements in the Modification, Lender shall (in good faith) engage in, and conclude as quickly as commercially reasonable, negotiations with us to extend the Maturity Date by up to an additional twelve months (i.e., through December 31, 2018). The Modification also changed a number of the other terms of the Line, as discussed below.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Line of Credit Arrangement (continued)
Prior to the Effective Date, the outstanding balance bears interest at 12.0% per annum, adjustable based on changes in prime after December 28, 2009, payable monthly in arrears. The Modification provides that as of the Effective Date the interest rate will be the prime rate plus seven and one-half percent (7.5%) per annum, but no less than eleven percent (11.0%) per annum or any higher rate that might be allowed by the terms of the Line, including the Modification, arising from certain events such as default. Accordingly, as of the Effective Date, the outstanding balance bears interest at 11.0% per annum.
Under the terms of the Line, we also incur a monitoring fee and a commitment fee, which fees were unchanged by the Modification. The monitoring fee is one twentieth of a percent (0.05%) of the borrowing limit per week, payable monthly in arrears, and the commitment fee is one percent (1%) per year of the maximum allowable borrowing amount, payable annually in advance.
The terms of the Line prior to the Effective Date required that all funds remitted by our customers in payment of receivables be deposited directly to a bank account owned by the Lender (the “Lockbox Account”), although this was never implemented. This requirement continues after the Effective Date, including the provision that such funds received in the Lockbox Account shall be immediately applied to any balance outstanding under the Line, or returned to us one day following clearance by the receiving bank, to the extent there is no balance outstanding under the Line. The Modification provides that we shall be responsible for the additional expenses related to the Lender-owned bank account, which we expect to be in the range of $12,000 to $18,000 per year.
The Modification provides that our failure to comply with these provisions shall be an immediate Event of Default, and although as of July 8, 2016 (the extended deadline granted by the Lender on June 8, 2016) these provisions had not been fully implemented, we were in substantial compliance with such provisions since August 1, 2016 and through October 28, 2016 and we have not received any notification from the Lender as to any Event of Default under these provisions as of October 28, 2016. In a letter dated October 26, 2016, the Lender agreed that there was no default by us with respect to such lockbox provisions up to and including October 31, 2016, although this does not constitute authorization for any non-compliance with these provisions after October 31, 2016.
The Line is subject to us maintaining an adequate level of receivables, based on certain formulas. However, due to the lack of a formal renewal of the Line, in June 2014 the Lender determined that there would be no further advances under the Line, although no further repayments have been required either, and as a result the outstanding principal balance of the Line did not change from that time through June 24, 2016, regardless of weekly changes in the calculated borrowing availability based on the applicable formulas applied to our receivable levels. Effective June 24, 2016, the first deposit was made to the Lockbox Account and applied against the balance outstanding under the Line.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Line of Credit Arrangement (continued)
The Modification allows our receivable from any single party, including Partners, to be considered an Eligible Receivable to the extent that (i) the aggregate of all accounts receivable from such party and its affiliates does not exceed thirty percent (30%) of all Eligible Receivables (all Eligible Receivables for this purpose including the portion of the our accounts receivable from such party that is ultimately considered to be an Eligible Receivable) then owed by all of our account debtors and (ii) it meets all of the other requirements for eligibility as set forth in the Line.
As of the Effective Date, although the outstanding balance under the Line exceeded the maximum allowable borrowing amount under the Line (the “Borrowing Base”), the Modification provided that notwithstanding any other provisions of the Line or the Modification, such condition would not be considered a Default or an Event of Default, and Lender would agree to make advances to us thereunder based on the Borrowing Base plus an overadvance amount determined by a schedule which started at $300,000 through February 27, 2016 but declined to zero as of July 31, 2016 and thereafter. As of October 24, 2016, the outstanding balance under the Line was approximately $1,576,000, which exceeded the Borrowing Base by approximately $248,000. Although there is no formal obligation to do so, as of October 24, 2016 the Lender is allowing such overadvance condition to continue, under their expectation that we are seeking alternative funding to replace that overadvance. In a letter dated October 26, 2016, the Lender agreed that there was no default by us with respect to such overadvances up to and including October 31, 2016, although this does not constitute authorization for any non-compliance with these provisions after October 31, 2016.
The Line is also subject to our compliance with a quarterly debt service coverage covenant (the “Covenant”). Prior to the Modification, the Covenant requires that the sum of (i) our net income or loss, adjusted to remove all non-cash expenses as well as cash interest expense and (ii) contributions to capital (less cash distributions and/or cash dividends paid during such period) and proceeds from subordinated unsecured debt, be equal to or greater than the sum of cash payments for interest and debt principal payments. The Lender waived the requirement to comply with the Covenant for the quarter ended September 30, 2015. We have complied with the Covenant for all applicable quarters through June 30, 2016.
The Modification provides that effective January 1, 2016 and thereafter, the Covenant will require that our net income or loss, adjusted to (i) add back all non-cash expenses as well as cash interest expense and (ii) subtract cash distributions and/or cash dividends paid during such period, be equal to or greater than 1.2 times the sum of cash payments for interest and debt principal payments. The Modification also provides that we will not declare or pay any dividends or distributions on any equity interest, if before or after such event an Event of Default or Default, as defined in the Modification, would exist. Both before and after the Modification, the terms of the Line allow us to achieve compliance with the Covenant by (i) including any excess of adjusted net income over the amount of adjusted net income required to comply with the Covenant in the preceding two quarters or (ii) adding to adjusted net income the proceeds from subordinated debt or equity sales meeting defined conditions, and received within certain time frames extending prior to, and in some cases subsequent to, the relevant date of determination, all as set forth in the Line and the Modification. The Modification also explicitly allows, subject to Lender’s prior consent, proceeds from our sales of revenues/customer accounts to a separate legal entity and received within a time frames extending six months prior to, and one month subsequent to, the relevant date of determination, to be added to adjusted net income for purposes of the Covenant.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Line of Credit Arrangement (continued)
In a letter dated October 26, 2016, the Lender consented to the inclusion of proceeds from our December 2015 and June 2016 sales of revenue/customer accounts to Partners, as well as the proceeds from such sale in process that we expect to be effective during November 2016, and extended the carryback period for those proceeds from one month to three months.
The outstanding principal is due on demand in the event a payment default is uncured one (1) day after written notice. The Modification provides that, without limiting any other rights and remedies provided by the terms of the Line or otherwise available to the Lender, the Lender may exercise one or more of certain rights and remedies, as listed in the Amendment, during the existence of any uncured Default (upon not less than five days prior written notice by Lender) or Event of Default which has not been waived in writing by Lender. Lender’s rights to exercise such rights and remedies will end if and when all of Debtors’ obligations to Lender in connection with the Line have been satisfied. The rights and remedies listed in the Modification include, but are not limited to: (i) verify the validity and amount of, or any other matter relating to, the accounts by mail, telephone, telegraph or otherwise, (ii) notify all account debtors that the accounts have been assigned to Lender and that Lender has a security interest in the accounts, (iii) direct all account debtors to make payment of all accounts directly to Lender or the Lockbox Account (iv) in any case and for any reason, notify the United States Postal Service to change the addresses for delivery of mail addressed to us to such address as Lender may designate, as well as receive, open and dispose of all such mail, provided that Lender shall promptly forward to us any such items not related to the accounts, (v) exercise all of our rights and remedies with respect to the collection of accounts, (vi) settle, adjust, compromise, extend, renew, discharge or release accounts, for amounts and upon terms which Lender considers advisable and (vii) sell or assign accounts on such terms, for such amounts and at such times as Lender deems advisable.
The Lender must approve any additional debt incurred by us, other than debt subordinated to the Line and debt incurred in the ordinary course of business (which includes equipment financing). The Lender approved the Equipment Notes, the Rockridge Note, the USAC Note, USAC Note 2, Sigma Note 1, Sigma Note 2 and the New Sigma Note. All other debt entered into by us subsequent to the December 2007 inception of the Line has been appropriately approved by the Lender and/or was allowable under one of the exceptions noted above.
Sigma Note 1
Sigma Note 1, of which $395,000 was convertible into common stock as of September 30, 2014, is discussed in the “Convertible Debentures” section above.
Working Capital Notes
During October and November 2013 we obtained aggregate net financing proceeds of approximately $246,000 from the issuance of partially secured promissory notes to three investors (the “Working Capital Notes”), with an initial aggregate outstanding balance of $620,000 bearing interest at 15% per annum. The proceeds of the three Working Capital Notes were used to repay (i) $126,000 outstanding principal and interest due on the CCJ Note issued by us on December 31, 2012, (ii) $71,812 outstanding principal and interest due on a Subordinated Note issued by us on June 1, 2012 and (iii) $26,000 outstanding principal and interest due on an Investor Note issued by us on January 2, 2013. In addition, $125,000 in origination fees and $25,000 for a funding commitment letter were deducted from the proceeds of the Working Capital Notes.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Working Capital Notes (continued)
The three Working Capital Notes originally called for payments of interest only during the first six months (in two quarterly payments), approximately 50% of the principal in equal monthly payments plus interest during the next eleven months and the remaining 50% of the principal balance due eighteen months after the Working Capital Note issuance date. They also provided that in the event that we receive funds in excess of $5 million as a result of a single transaction for the sale of all or a part of our operations or assets, the Working Capital Notes are payable in full within ten (10) days of our receipt of such funds, along with any interest due at that time.
Effective February 28, 2015, prior to the issuance of our September 30, 2014 financial statements, one of the Working Capital Notes with an original outstanding principal balance of $250,000 was amended, extending the maturity date to March 1, 2016 and as a result this Working Capital Note is classified as non-current on our September 30, 2014 balance sheet. This amendment provided that interest would be paid quarterly, commencing June 30, 2015 and also increased the outstanding principal balance to $275,000, for the effect of a $25,000 due diligence fee earned by the noteholder in connection with the amendment. This amendment also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale. Although this Working Capital Note was further amended, effective October 15, 2015, to extend the maturity date to July 15, 2016, it was paid in full on December 30, 2015. Such repayment, in accordance with our December 29, 2015 agreement with J&C Resources, Inc. (“J&C”), was made in consideration of our receipt of $157,000 from J&C on December 30, 2015 for our issuance of an unsecured, subordinated note with a December 31, 2016 maturity date. Accordingly $157,000 of this Working Capital Note, the amount replaced by the proceeds of the J&C financing, is classified as non-current on our September 30, 2015 balance sheet and the remaining $118,000 balance is classified as current.
The remaining outstanding principal balance of the other two Working Capital Notes, aggregating $342,727, was due in full as of May 4, 2015, as well as accrued but unpaid interest of approximately $46,000 through that date. We did not make these principal or interest payments when due on May 4, 2015, but we continued to accrue interest expense after that point on the outstanding note balances at the stated interest rate through September 30, 2015.
One of the other two Working Capital Notes having an outstanding principal balance of approximately $172,727 was repaid in September 2015. As discussed in more detail above, Sigma loaned us $225,000 in September 2015, which was the primary funding source to make this payment plus related interest and legal fees aggregating approximately $33,000. Although this additional loan had an April 15, 2016 maturity date, the loan was made after the issuance of our September 30, 2014 financial statements, and therefore this Working Capital Note is classified as current on our September 30, 2014 balance sheet.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Working Capital Notes (continued)
Effective September 16, 2015 the other of these two Working Capital Notes, which had a remaining outstanding principal balance of $170,000, was amended to extend the maturity date to April 16, 2016. This amendment provided that interest accrued but unpaid as of the date of the amendment of approximately $36,000, plus interest from the date of the amendment, would be paid on the amended maturity date and also increased the outstanding principal balance to $190,000, for the effect of a $20,000 loan extension fee earned by the noteholder in connection with the amendment. Since this extension was not negotiated until after the issuance of our September 30, 2014 financial statements, this Working Capital Note is classified as current on our September 30, 2014 balance sheet. Effective October 15, 2015 this Working Capital Note was further amended, extending the maturity date to July 15, 2016 and effective June 6, 2016 this Working Capital Note was further amended, extending the maturity date to January 15, 2017. Accordingly this Working Capital Note is classified as non-current on our September 30, 2015 balance sheet.
The Working Capital Notes are expressly subordinated to the following notes issued by us and outstanding at the time of the issuance of the Working Capital Notes: Thermo Credit LLC, Rockridge Capital Holdings LLC, Sigma Opportunity Fund II, LLC, USAC, and certain capital leases, or any assignees or successors thereto, subject to a cumulative maximum outstanding balance of $3.9 million. The Working Capital Notes are secured by a limited claim to our assets, pari passu with up to $775,000 of total indebtedness and related obligations raised and incurred by us during the first quarter of fiscal 2014, subject to all prior liens of the foregoing entities and limited to the extent such a lien is allowable by the terms of the loan documents executed between us and the foregoing entities. The Working Capital Note with an amended principal balance of $190,000 provides that we will be bound to a limit of $3.9 million in total debt senior to that Working Capital Note while that note is outstanding.
In connection with the above financing, we issued to the holders of Working Capital Notes an aggregate of 358,334 restricted common shares (the “Working Capital Shares”), which we have agreed to buy back, to the extent permitted by law, from the holder at $0.30 per share on the maturity dates of the Working Capital Notes, if the fair market value is less than that on that date. The above only applies to the extent the Working Capital Shares are still held by the noteholder on the applicable date and the buyback obligation only applies if the noteholder gives us notice and delivers the shares within fifteen days after the applicable maturity dates. As of March 31, 2014, we determined that our share price had remained below $0.30 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, we recorded the approximately $74,000 present value of this obligation as a liability on our financial statements as of that date (under the caption “Accrued liabilities” on our balance sheet), which increased to approximately $88,000 as of September 30, 2014 as a result of the accretion of approximately $14,000 as interest expense for the year then ended and increased to approximately $108,000 as of September 30, 2015 as a result of the accretion of approximately $20,000 as interest expense for the year then ended.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Working Capital Notes (continued)
312,500 of the 358,334 Working Capital Shares were issued in connection with the Working Capital Note having an adjusted principal balance prior to its repayment on December 30, 2015 of $275,000. However since the terms of the buyback obligation reference the maturity date, and not the repayment date, we have determined that our buyback obligation with respect to those shares would be determined with reference to the July 15, 2016 maturity date. The present value of this obligation is included as a liability of approximately $94,000 on our September 30, 2015 balance sheet. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, a stock repurchase payment of $93,750 would be required.
The remaining 45,834 of the 358,334 Working Capital Shares were issued in connection with the Working Capital Note having an adjusted principal balance of $190,000 and a maturity date of January 15, 2017, which as discussed above would be the date based on which our buyback obligation with respect to those shares would be determined. The present value of this obligation is included as a liability of approximately $14,000 on our September 30, 2015 balance sheet. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, a stock repurchase payment of $13,750 would be required.
In addition, we agreed that to the extent the number of outstanding shares of our common stock exceeds 22 million shares, we would issue to the holder of one of the Working Capital Notes additional shares of common stock in aggregate equal to approximately 0.21% of the excess over 22 million, times the percentage of the 45,834 common shares originally issued to the noteholder (part of the 358,334 shares discussed above), and still held by the noteholder on the six, twelve and eighteen month anniversary dates of the October 2013 financing. For clarity, additional issuances based on any particular increase in the number of our outstanding shares over the stated limit will only be made once and so additional issuances on the second and third dates will be limited and related to increases since the first and second dates, respectively. The number of outstanding shares was less than 22 million as of September 30, 2014, and thus we had no potential liability under the above provision as of that date. Furthermore, the number of outstanding shares as of April 24, 2015 (the eighteen month maturity date) was approximately 22.5 million, resulting in a liability under the above provision as of that date to issue approximately 1,100 additional common shares, which is considered immaterial.
The fair market value at the time of issuance of the Working Capital Shares plus another 100,000 restricted common shares in connection with a finders agreement related to this financing, plus the cash deducted from the proceeds for related origination fees, was $258,260. $88,807 of this amount was reflected as a non-cash debt extinguishment loss (as well as a corresponding increase in additional paid-in capital for the shares) for the year ended September 30, 2014, in connection with the use of a portion of the proceeds to repay previously outstanding debt, as discussed above. The remainder of $169,453 was reflected as a discount against the Working Capital Notes (as well as a corresponding increase in additional paid-in capital for the shares) and that amount was amortized as interest expense over the initial term of the Working Capital Notes, resulting in a weighted average effective interest rate of approximately 33.2% per annum.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Working Capital Notes (continued)
The $25,000 due diligence fee earned in connection with the February 28, 2015 amendment of the Working Capital Note with an amended principal balance of $275,000 was recorded as a discount. This amount, combined with the remaining unamortized discount arising from the initial November 2013 financing and related to this Working Capital Note, is being amortized as interest expense over the approximately one year extension period, resulting in an effective interest rate of approximately 22% per annum.
We concluded that there was less than a 10% difference between the present value of the cash flows of the Working Capital Note after its February 28, 2015 modification versus the present value of the cash flows under the terms existing immediately before the modification, which 10% is the threshold over which extinguishment accounting is required under the provisions of ASC 470-50-40. Accordingly, accounting for this modification as an extinguishment of debt was not required.
Since no additional consideration was paid from the end of their initial terms in April and May 2015, until they were repaid and/or renegotiated in September 2015, the effective interest rate on the other two Working Capital Notes during that period was the stated interest rate of 15.0% per annum.
We concluded that there was less than a 10% difference between the present value of the cash flows of one of the other two Working Capital Notes after its September 16, 2015 modification versus the present value of the cash flows under the terms existing immediately before the modification, which 10% is the threshold over which extinguishment accounting is required under the provisions of ASC 470-50-40. Accordingly, accounting for this modification as an extinguishment of debt was not required.
The aggregate unamortized portion of the debt discount recorded against the Working Capital Notes was $30,499 and $50,624 as of September 30, 2015 and 2014, respectively.
In connection with the October 15, 2015 agreements extending the maturity date of two of the Working Capital Notes with amended principal balances aggregating $465,000 to July 15, 2016, we agreed to issue an aggregate of 55,000 restricted common shares to the noteholders, such shares having a fair value of approximately $10,000. 30,000 of those shares have not been recorded on our books or issued as of October 28, 2016.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Subordinated Notes
Since April 30, 2012, we have received funding from various lenders, of which $192,500 and $250,000 was outstanding as of September 30, 2015 and 2014, respectively, in exchange for our issuance of unsecured subordinated promissory notes (“Subordinated Notes”), fully subordinated to the Line and the Rockridge Note or assignees or successors thereto. Details of the notes making up these totals are as follows:
On April 30, 2012 we received $100,000 for an unsecured subordinated note bearing interest at 15% per annum, with the principal payable in equal monthly installments of $8,333 starting November 30, 2012 plus $58,333 balance payable on April 30, 2013, although we made none of these payments. Effective November 1, 2012 this note was amended to reduce the interest rate from 15% to 12% per annum and to modify the principal payment schedule to a single payment of $100,000 due on October 31, 2014, in exchange for our issuance of an additional 35,000 common shares to the noteholder. The $12,600 value of these common shares was reflected as a discount against this note (as well as a corresponding increase in additional paid-in capital for the value of the shares on the date of issuance) and that amount, as well as the unamortized portion of previously recorded discount, was amortized as interest expense over two years (the remaining term of the note, as modified), resulting in an effective interest rate of approximately 21% per annum through October 31, 2014, at which point it reduced to 12% per annum.
Interest for the first six months was paid on October 31, 2012, with subsequent interest payments due every three months thereafter through October 31, 2014. We did not make the principal payment when it was due on October 31, 2014, but we continued to accrue interest expense after that point on the outstanding balance at the stated interest rate. This note was amended effective February 28, 2015 to extend the maturity date to March 1, 2016 and as a result this note is classified as non-current on our September 30, 2014 balance sheet.
The February 28, 2015 amendment also provided that interest would be paid quarterly, commencing June 30, 2015 and also increased the outstanding principal balance to $110,000, for the effect of a $10,000 due diligence fee earned by the noteholder in connection with the amendment. We determined this fee to be immaterial for recording as additional discount and subsequent periodic amortization and thus we expensed as interest as of the date of the amendment. Since there was no remaining unamortized discount with respect to this note as of February 28, 2015, we also concluded that no further evaluation of this modification with respect to loan extinguishment accounting would be required.
This note was further amended, effective October 15, 2015, to extend the maturity date to July 15, 2016, but since it was paid in full on December 16, 2015, it is classified as current on our September 30, 2015 balance sheet. In connection with the October 15, 2015 amendment, we issued 20,000 restricted common shares to the noteholder, such shares having a fair value of approximately $4,000.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Subordinated Notes (continued)
During January 2013 we received an aggregate of $150,000 pursuant to our issuance of two unsecured subordinated notes, bearing interest at 20% per annum. In January 2014 the maturity date of these notes, as well as the due date of the aggregate of $15,000 earned but unpaid interest, was extended to October 2014. An aggregate of 240,000 restricted ONSM common shares with a fair market value at issuance of approximately $60,000 was issued to the lenders as an extension fee. This amount was reflected as a discount and amortized as interest expense over approximately nine and one half months, resulting in an effective interest rate of approximately 71% per annum through October 31, 2014, at which point it reduced to 20% per annum.
We concluded that there was less than a 10% difference between the present value of the cash flows of these notes after the January 2014 modification versus the present value of the cash flows under the payment terms in place one year earlier, under the provisions of ASC 470-50-40, the modified terms were not considered substantially different and therefore accounting for these modifications as extinguishment of debt was not required. The comparison of the present value of cash flows under the modified terms is normally done using the present value of cash flows under the terms existing immediately before the modification. However, under the provisions of ASC 470-50-40, since a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms was to the terms existing one year prior to the current modification.
We did not make the principal payments when due in October 2014, but we continued to accrue interest expense after that point on the outstanding balance at the stated interest rate. Effective February 28, 2015, prior to the issuance of our September 30, 2014 financial statements, we entered into an agreement with the noteholders whereby (i) we paid all accrued interest, late fees aggregating $6,300 and principal payments aggregating $75,000 and (ii) the notes were amended to extend the maturity date of the remaining principal to March 1, 2016. As a result such remaining principal is classified as non-current on our September 30, 2014 balance sheet. The amendments increased the aggregate outstanding principal balance to $82,500, for the effect of due diligence fees aggregating $7,500 earned by the noteholders in connection with the amendments. We determined these fees to be immaterial for recording as additional discount and subsequent periodic amortization and thus we expensed as interest as of the date of the amendments. Since there was no remaining unamortized discount with respect to these notes as of February 28, 2015, we also concluded that no further evaluation of this modification with respect to loan extinguishment accounting would be required.
The February 28, 2015 amendments also reduced the interest rate to 18% per annum, provide us with a one-time credit to make the change effective with the inception of the note and establish that future interest would be paid quarterly, at 12% per annum, commencing June 30, 2015. The amendments further provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Subordinated Notes (continued)
These notes were further amended, effective October 15, 2015, to extend the maturity date to July 15, 2016, but an aggregate of $52,500 was paid against the outstanding balances on December 16, 2015. Effective December 16, 2015, the one note with a remaining outstanding balance was further amended to extend the maturity date on the remaining outstanding balance to December 31, 2016. Accordingly $52,500 of these note balances, the amount repaid in December 2015, is classified as current on our September 30, 2015 balance sheet and the remaining $30,000 balance is classified as non-current. In connection with the October 15, 2015 amendments, we issued an aggregate of 22,500 restricted common shares to the noteholders, such shares having a fair value of approximately $4,000.
The aggregate unamortized portion of the debt discount recorded against the Subordinated Notes was none and $4,166 as of September 30, 2015 and 2014, respectively.
Intella2 Investor Notes
On November 30, 2012 we issued unsecured promissory notes to five investors (the “Intella2 Investor Notes”), with an initial aggregate outstanding balance of $450,000 bearing interest at 12% per annum and which are fully subordinated to the Line and the Rockridge Note or any assignees or successors thereto. These notes were issued in exchange for $350,000 cash proceeds plus the satisfaction of the $100,000 outstanding principal balance due on a previously issued subordinated note. Note payments were to be interest only during the first year, approximately 30% of the principal plus interest during the second year and the remaining principal balance at the end of the second year. In connection with the issuance of the Fuse Note on March 19, 2013 (discussed in more detail above), we modified the terms on one of the Intella2 Investor Notes, held by Fuse and having a $200,000 outstanding principal balance (the “Intella2 Fuse Note”), to allow conversion of the principal balance into restricted common shares at Fuse’s option using a rate of $0.50 per share.
During April and May 2014, the Intella2 Fuse Note and the Intella2 Investor Notes held by two of the other four investors were further amended to provide that the principal balances aggregating $290,000 would not be payable until the November 30, 2014 maturity date, although interest would continue to be payable on a monthly basis. In exchange for this amendment, we issued an aggregate of 29,000 common shares having a fair market value of approximately $6,100, which we determined to be immaterial for recording as additional discount and subsequent periodic amortization and thus we expensed as interest at that time. We also determined that the remaining unamortized discount as of June 30, 2014 was immaterial for purposes of evaluating these modifications as to whether loan extinguishment accounting would be required.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Intella2 Investor Notes (continued)
We did not make the principal payments on the Intella2 Investor Notes when due on November 30, 2014, but we continued to accrue interest expense after that point on the outstanding balance at the stated interest rate. Effective February 28, 2015, prior to the issuance of our September 30, 2014 financial statements, we entered into an agreement with certain of the noteholders whereby (i) we paid all accrued interest through that date plus the aggregate outstanding principal of $60,000 on two of the Intella2 Investor Notes and (ii) we paid all accrued interest through that date related to the Intella2 Fuse Note and one of the two other Intella2 Investor Notes remaining unpaid. These two notes, representing aggregate outstanding principal of $250,000, were also amended at that time to extend the maturity date to March 1, 2016 and to increase the aggregate outstanding principal balance to $275,000, for the effect of due diligence fees aggregating $25,000 earned by the noteholders in connection with the amendments although the portion of the Intella2 Fuse Note convertible to common shares remained at $200,000. Accordingly, that increased principal balance is classified as non-current on our September 30, 2014 balance sheet.
The February 28, 2015 amendments also provided that future interest would be paid quarterly, commencing June 30, 2015, and further provided that in the event we received funds in excess of $5 million as a result of the sale of our assets, the outstanding principal and interest would be repaid within thirty days of the receipt of such proceeds.
Effective October 15, 2015 the Intella2 Fuse Note, having an outstanding principal balance of $220,000, was further amended, extending the maturity date to July 15, 2016. Effective December 16, 2015 a $100,000 principal payment was made and the Intella2 Fuse Note was further amended to extend the maturity date to December 31, 2016. Effective June 6, 2016 the Intella2 Fuse Note was further amended, extending the maturity date to January 15, 2017. Accordingly $100,000 of the Intella2 Fuse Note balance, the amount repaid in December 2015, is classified as current on our September 30, 2015 balance sheet and the remaining $120,000 balance is classified as non-current.
Effective June 6, 2016, one of the two other Intella2 Investor Notes remaining unpaid, with an outstanding principal balance of $55,000 was further amended, extending the maturity date to January 15, 2017. Accordingly this balance is classified as non-current on our September 30, 2015 balance sheet.
Effective June 1, 2016, the fifth Intella2 Investor Note, with an outstanding principal balance of $140,000, was amended, extending the maturity date to January 15, 2017. Accordingly this balance is classified as non-current on our September 30, 2015 balance sheet. This note had previously been due in full as of November 30, 2014, plus accrued but unpaid interest of approximately $27,000 through that date, none of which was paid prior to the June 1, 2016 amendment. We had continued to accrue interest expense after the maturity date through September 30, 2015 on the outstanding balance at the stated interest rate and as part of the June 1, 2016 amendment, we paid $25,200 of the $50,400 of interest accrued through the date of that amendment and agreed to pay the balance as follows: $10,000 on or before June 30, 2016, $7,600 on or before September 1, 2016 and $7,600 on or before December 1, 2016.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Intella2 Investor Notes (continued)
In connection with the initial issuance of the Intella2 Investor Notes, we issued to the holders an aggregate of 180,000 restricted common shares (the “Intella2 Common Stock”), which we agreed to buy back, to the extent permitted by law, at $0.40 per share, if the fair market value of the Intella2 Common Stock was not equal to at least $0.40 per share as of November 30, 2014 (two years after issuance). As of June 30, 2013 we determined that our share price had remained below $0.40 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, we recorded the $48,000 present value of this obligation as a liability on our financial statements as of June 30, 2013 (under the caption “Accrued liabilities” on our balance sheet) which increased to $52,000 as of September 30, 2013, as a result of the accretion of $4,000 as interest expense for the year then ended, increased again to approximately $63,000 as of September 30, 2014 as a result of the accretion of approximately $11,000 as interest expense for the year then ended and increased again to approximately $66,000 as of September 30, 2015 as a result of the accretion of approximately $3,000 as interest expense for the year then ended. This approximately $66,000 liability is equal to the potential repurchase of 164,000 shares at $0.40 per share, since we satisfied our obligation with respect to 16,000 shares by our reimbursement of the shortfall upon a single holder’s resale of those shares in the market, which payment we recorded as interest expense in fiscal 2014.
The closing ONSM share price was $0.17 per share as of November 30, 2014, which would trigger the above repurchase obligation. However, this repurchase obligation is subject to the Intella2 Common Stock being still held by the investor(s) at such date and the investor giving us notice and delivering the shares within fifteen days after such date, as well as any other legal restrictions with respect to our repurchase of shares. It is possible that some or all of this repurchase obligation could be avoided by us due to the failure of the investor or investors to formally present the shares to us and/or provide notice by the specified date, or as a result of legal restrictions with respect to our repurchase of shares. However, because of our ongoing discussions with certain of these investors, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this repurchase obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible those investors could assert mitigating circumstances under which we might honor all or part of this repurchase obligation. Therefore, pending our further evaluation of our position with respect to this repurchase obligation, we are leaving the accrued liability on our financial statements as of September 30, 2015.
We paid (i) financing fees in cash of $16,000 to a third-party agent, related to $200,000 of this financing, and (ii) a commission of 100,000 unrestricted common shares to another third-party agent, which is related to the entire $350,000 cash portion of the financing as well as to potential additional financing which may be raised under these terms. The value of the Intella2 Common Stock, plus the value of common stock issued and cash paid for related financing fees and commissions, was reflected as a $117,400 discount against the Intella2 Investor Notes (as well as a corresponding increase in additional paid-in capital for the shares) and that amount was partially amortized as interest expense over the term of the notes through June 30, 2013, resulting in an effective interest rate of approximately 26% per annum.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Intella2 Investor Notes (continued)
We wrote-off the remaining unamortized discount related to the Intella2 Fuse Note as a non-cash debt extinguishment loss as of March 31, 2013 and as a result, the effective interest rate of the Intella2 Fuse Note after that date was 12% per annum, with the effective interest rate for the other Intella2 Investor Notes remaining at approximately 26% per annum through November 30, 2014, at which point it also reduced to 12% per annum.
With respect to the Intella2 Investor Note held by Fuse, we concluded that there was less than a 10% difference between the present value of the cash flows of Intella2 Investor Note held by Fuse after its February 28, 2015 modification versus the present value of the cash flows under the payment terms in place one year earlier, which 10% is the threshold over which extinguishment accounting is required under the provisions of ASC 470-50-40. Accordingly, accounting for this modification as an extinguishment of debt was not required. The comparison of the present value of cash flows under the modified terms is normally done using the present value of cash flows under the terms existing immediately before the modification. However, under the provisions of ASC 470-50-40, if a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms should be to the terms existing one year prior to the current modification. Since the April 2014 modification of this note was not considered to be an extinguishment, we utilized the terms established as a result of the March 2013 modification. With respect to the other Intella2 Investor Note, since there was no remaining unamortized discount with respect to this note as of February 28, 2015, we concluded that no further evaluation of the February 28, 2015 modification with respect to loan extinguishment accounting would be required.
With respect to the due diligence fees earned by the certain holders of Intella2 Investor Notes in connection with February 28, 2015 amendments (i) we determined one of these due diligence fees for $5,000 to be immaterial for recording as additional discount and subsequent periodic amortization and thus we expensed as interest as of the date of the amendment and (ii) the other due diligence fee for $20,000 was recorded as a discount against the Intella2 Fuse Note and is being amortized as interest expense over the approximately one year extension period, resulting in an effective interest rate of approximately 21% per annum.
The aggregate unamortized portion of the debt discount recorded against the Intella2 Investor Notes was $8,333 and $5,415 as of September 30, 2015 and 2014, respectively. The portion of this unamortized discount which related to the portion of this debt classified as a convertible debenture was $7,576 and none as of September 30, 2015 and 2014, respectively.
In connection with the October 15, 2015 agreement extending the maturity date of the Intella2 Fuse Note to July 15, 2016, we issued 75,000 restricted common shares to Fuse, such shares having a fair value of approximately $14,000.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Investor Notes
On November 30, 2012 we received $175,000, and on January 2, 2013 we received $25,000, such amounts aggregating $200,000 pursuant to unsecured promissory notes issued to five investors (in aggregate, the “Investor Notes”), bearing interest at 12% per annum and which were fully subordinated to the Line and the Rockridge Note or any assignees or successors thereto. Note payments were to be interest only during the first year, approximately 30% of the principal plus interest during the second year and the remaining principal balance at the end of the twenty-fifth month. We did not make the principal payments on the Investor Notes when due on November 30, 2014, but we continued to accrue interest expense after that point on the outstanding balance at the stated interest rate through the date such notes were repaid, per the following. During November 2013 we paid the $25,000 outstanding principal on one of the Investor Notes plus all accrued interest through that date. During March 2015 we paid the $175,000 aggregate outstanding principal on the four remaining Investor Notes plus all accrued interest through that date.
In connection with the above financing, we issued to the holders of the Investor Notes an aggregate of 240,000 restricted common shares (the “Investor Common Stock”), of which we agreed to buy back, to the extent permitted by law, up to 40,000 shares if the fair market value of the Investor Common Stock was not equal to at least $0.80 per share as of November 30, 2014 (two years after issuance). As of November 30, 2012 we determined that our share price had remained below $0.80 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, we recorded the $16,000 present value of this obligation as a liability on our financial statements as of November 30, 2012 (under the caption “Accrued liabilities” on our balance sheet) which increased to $21,000 as of September 30, 2013, as a result of the accretion of $5,000 as interest expense for the year then ended.
This repurchase liability increased by approximately $6,000 to approximately $27,000 as of September 30, 2014, as a result of the following transactions recorded for the year then ended: (i) the accretion of $10,000 as net interest expense, including the reversal of previously accreted interest as a result of the shortfall reimbursement described in the following item and (ii) the reversal of approximately $4,000 of the obligation initially accrued on November 30, 2012 to repurchase 5,000 shares of the Investor Common Stock, such reversal resulting from our reimbursement of the shortfall upon the holder’s documentation of its resale of those shares in the market, which reimbursement we recorded as interest expense aggregating approximately $3,200 for the year ended September 30, 2014.
The repurchase liability decreased by approximately $19,000 to approximately $8,000 as of September 30, 2015, as a result of the following transactions recorded for the year then ended: (i) the net reduction of accreted interest expense by $8,000, primarily the reversal of previously accreted interest as a result of the shortfall reimbursement described in the following item and (ii) the reversal of approximately $11,000 of the obligation initially accrued on November 30, 2012 to repurchase 25,000 shares of the Investor Common Stock, such reversal resulting from our reimbursement of the shortfall upon the holders’ documentation of their resale of those shares in the market, which reimbursements we recorded as interest expense aggregating approximately $16,000 for the year ended September 30, 2015.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
Investor Notes (continued)
This approximately $8,000 liability is equal to the potential repurchase of the remaining 10,000 shares of Investor Common Stock at $0.80 per share. The closing ONSM share price was $0.17 per share as of November 30, 2014, which would trigger the above repurchase obligation. However, this repurchase obligation is subject to the Investor Common Stock being still held by the investor(s) at such date and the investor giving us notice and delivering the shares within fifteen days after such date, as well as any other legal restrictions with respect to our repurchase of shares. It is possible that some or all of this repurchase obligation could be avoided by us due to the failure of the investor or investors to formally present the shares to us and/or provide notice by the specified date, or as a result of legal restrictions with respect to our repurchase of shares. However, because of our ongoing discussions with certain of these investors, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this repurchase obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible those investors could assert mitigating circumstances under which we might honor all or part of this repurchase obligation. Therefore, pending our further evaluation of our position with respect to this repurchase obligation, we are leaving the accrued liability on our financial statements as of September 30, 2015.
We paid a third-party agent financing fees of $14,000 plus 35,000 unrestricted common shares related to this financing. The value of the Investor Common Stock, plus the value of common stock issued and cash paid for related financing fees, was reflected as a $113,700 discount against the Investor Notes (as well as a corresponding increase in additional paid-in capital for the shares) and that amount was amortized as interest expense over the term of the notes, resulting in an effective interest rate of approximately 43% per annum through November 30, 2014, at which point it reduced to 12% per annum until the notes were repaid in March 2015. The aggregate unamortized portion of the debt discount recorded against the Investor Notes was $12,492 as of September 30, 2014.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 4: DEBT (Continued)
Notes and Leases Payable (continued)
USAC Notes
On February 15, 2013 we executed a letter agreement promissory note with the Universal Service Administrative Company (“USAC”) for $372,453, payable in monthly installments of $19,075 (which include interest at 12.75% per annum) over twenty-two months starting March 15, 2013 through December 15, 2014 (the “USAC Note”). The final payment due in December 2014 was made in January 2015. This letter agreement promissory note is related to our liability for Universal Service Fund (USF) contribution payments previously reflected as an accrued liability on our balance sheet and therefore resulted in the February 2013 reclassification of a portion of that accrued liability to notes payable. USAC is a not-for-profit corporation designated by the Federal Communications Commission (“FCC”) as the administrator of the USF program. See notes 1 and 5.
On May 15, 2015 we executed a letter agreement promissory note with USAC for $220,616, payable in monthly installments of $10,463 (which include interest at 12.75% per annum) over twenty-four months starting June 15, 2015 through May 15, 2017 (“USAC Note 2”). This letter agreement promissory note is related to our liability for USF contribution payments previously reflected as an accrued liability on our balance sheet and therefore resulted in the May 2015 reclassification of a portion of that accrued liability to notes payable.
Minimum Cash Payments
The minimum cash payments required for the convertible debentures, notes payable and capitalized lease obligations listed above, before deducting unamortized discount and excluding interest, are as follows:
Year Ending September 30:
$
3,248,340
1,874,972
Total minimum debt payments
$
5,123,312
The Line is included in the table above as a $1,650,829 payment during the year ending September 30, 2016, based on its balance sheet classification as a current liability, although we have renewed the Line through December 31, 2017, with an option to extend it through December 31, 2018, as discussed in more detail under “Line of Credit Arrangement” above.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 5: COMMITMENTS AND CONTINGENCIES
Employment contracts and severance
On September 27, 2007, our Compensation Committee and Board of Directors approved three-year employment agreements with Messrs. Randy Selman (President and CEO), Alan Saperstein (COO), Robert Tomlinson (Chief Financial Officer), Clifford Friedland (Senior Vice President Business Development) and David Glassman (Senior Vice President Marketing), collectively referred to as “the Executives”. In addition, our Compensation Committee and Board have approved certain corrections and modifications to those agreements from time to time, which are reflected in the discussion below. The employment agreements provide that the initial term shall automatically be extended for successive one (1) year terms thereafter unless (a) the parties mutually agree in writing to alter the terms of the agreement; or (b) one or both of the parties exercises their right, pursuant to various provisions of the agreement, to terminate the employment relationship.
After annual increases in prior years as set forth in the employment agreements, the contractual annual base salaries for the five Executives in aggregate as of September 30, 2015 was approximately $1.8 million, subject to a five percent (5%) increase on September 27, 2016 and each year thereafter - a portion of these contractual salaries are presently not being paid to the Executives, as discussed below. In addition, each of the Executives receives an auto allowance payment of $1,000 per month, a “retirement savings” payment of $1,500 per month and an annual reimbursement of dues or charitable donations up to $5,000. We also pay insurance premiums for the Executives, including medical, life and disability coverage. These agreements contain certain non-disclosure and non-competition provisions and we have agreed to indemnify the Executives in certain circumstances.
Under the terms of the employment agreements, upon a termination subsequent to a change of control, termination without cause or constructive termination, each as defined in the agreements, we would be obligated to pay each of the Executives an amount equal to three (3) times the Executive’s base salary plus full benefits for a period of the lesser of (i) three (3) years from the date of termination or (ii) the date of termination until a date one (1) year after the end of the initial employment contract term. We may defer the payment of all or part of this obligation for up to six (6) months, to the extent required by Internal Revenue Code Section 409A.
Under the terms of the employment agreements, we may terminate an Executive’s employment upon his death or disability or with or without cause. If an Executive is terminated for cause, no severance benefits are due him. If an employment agreement is terminated as a result of the Executive’s death, his estate will receive one year base salary plus any bonus or other compensation amount or benefit then payable or that would have been otherwise considered vested or earned under the agreement during the one-year period subsequent to the time of his death. If an employment agreement is terminated as a result of the Executive’s disability, as defined in the agreement, he is entitled to compensation in accordance with our disability compensation for senior executives to include compensation for at least 180 days, plus any bonus or other compensation amount or benefit then payable or that would have been otherwise considered vested or earned under the agreement during the one-year period subsequent to the time of his disability.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment contracts and severance (continued)
Effective October 1, 2009, in response to our operating cash requirements, the base salary amounts being paid to the Executives were adjusted to be 10% less than the contractual amounts. In addition, until certain actions as discussed below, the amounts representing the subsequent contractual annual increases to those base salary amounts were not paid. No related modifications of the compensation as called for under their related employment agreements was made, as it was expected that this compensation withheld from the Executives would eventually be paid, although the Executives did agree that they would accept payment in equity of such shortfalls to a certain extent and under certain terms. Accordingly, except for the initial accrual in October 2010 as discussed below, we are accruing these unpaid amounts as non-cash compensation expense, with the unpaid portion reflected as an accrued liability under the balance sheet caption “Amounts due to directors and officers”. This accrued liability has been reduced for the following actions:
1. Based on approval by our Compensation Committee effective September 29, 2011, 41,073 restricted common Plan shares and four-year Plan options to purchase 266,074 common shares for $0.97 per share (greater than fair market value on the date of issuance) were issued to the Executives as partial consideration for this unpaid compensation. The common shares are restricted from trading unless Board approval is given. The options were never vested and they were subsequently replaced with Executive Incentive Shares as discussed below.
2. Effective September 16, 2012, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.8% of the contractual base salary at that time. Effective September 16, 2014, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 5.0% of the contractual base salary at that time. Effective May 1, 2015, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.4% of the contractual base salary at that time. Effective August 15, 2016, the base salary amounts being paid to the Executives were reduced by an amount representing approximately 3.0% of the contractual base salary at that time. As of October 7, 2016, the base salary payments to the Executives are approximately 21.5% less than the contractual base salaries (as adjusted through the September 27, 2016 raise), compared to the 10% reduction instituted in October 2009 and which reduction was initially company-wide but at this time affects very few of our other employees. The 21.5% shortfall cited above is before considering the impact of the two lump-sum payments made to the Executives in April and December 2015, as discussed below.
3. In consideration of the waiver and satisfaction of any remaining unpaid salary due to the Executives through December 31, 2012 under their employment agreements, as well as the waiver and satisfaction of any remaining unpaid amounts due to certain of those Executives in connection with the acquisition of Acquired Onstream (see note 2), we (as authorized by our Board of Directors) and the Executives agreed, effective January 22, 2013, (i) to pay $100,000 ($20,000 per Executive) of the withheld compensation in cash and (ii) to issue 1,700,000 (340,000 per Executive) fully vested ONSM common shares, subject to certain trading restrictions (the “Executive Shares”).
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment contracts and severance (continued)
$125,000 in cash ($25,000 per Executive) was paid in April 2015, which satisfied the above commitment to pay the $100,000 of pre December 31, 2012 compensation not covered by the Executive Shares (and also satisfied $25,000 of post December 31, 2012 compensation previously withheld by us and accrued as a liability). Although as noted above we are presently classifying the accrual for the shortfall of the cash payments for compensation to the Executives versus the contractual compensation amounts as a non-cash expense, the October 2010 accrual for the initial shortfall of $147,000 was not classified as a non-cash expense. Since none of the previous reductions of the executive compensation shortfall accrual through April 2015 resulted from a cash payment, we recorded the $125,000 cash payment in April 2015 against the accrued liability for the executive compensation shortfall without any further impact on cash or non-cash compensation expense for the year ended September 30, 2015.
An additional $125,000 in cash compensation ($25,000 per Executive) was paid in December 2015, which will reduce the previously accrued liability for unpaid compensation and will also result in a corresponding reclassification between cash compensation and non-cash compensation expense.
Although, as of October 28, 2016, the Executive Shares have not been issued, due to certain administrative and documentation requirements, since the Executive Shares were committed to be issued by the January 22, 2013 action of the Board, that issuance was reflected in our financial statements as of the date of such commitment. The number of Executive Shares committed for issuance was based on the average of the closing bid prices for the three trading days prior to the approval by our Board of Directors in their January 22, 2013 meeting, which was approximately $0.29 per share. However, the Executive Shares have been recorded on our financial statements as common stock committed for issue (at par value) and additional paid-in capital, based on their fair value at the time of the January 22, 2013 agreement, which was $578,000 ($0.34 per share), with the approximately $86,000 excess of that fair value over the amount of the previously recorded liability being satisfied by such issuance reflected as non-cash compensation expense for the year ended September 30, 2013.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment contracts and severance (continued)
To the extent there is any shortfall from the gross proceeds upon resale by the Executives of the Executive Shares versus $0.29 per share, we will reimburse the shortfall to the Executives in cash, or at our option, by the issuance of additional fully vested ONSM common shares (the “Additional Executive Shares”), with the Additional Executive Shares subject to reimbursement by us to the Executives of any shortfall from the gross proceeds upon resale as compared to the fair value used to determine the number of such Additional Executive Shares. All shortfall reimbursements shall be payable by us within ten (10) business days after presentation by reasonable supporting documentation of the shortfall to us by the Executives.As of September 30, 2013, we determined that our share price had remained below $0.29 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, based on the $0.27 closing ONSM share price as of September 30, 2013, we recorded this $34,000 obligation as a liability on our financial statements as of that date (under the caption “Amounts due to directors and officers” on our balance sheet), which was reflected as non-cash compensation expense for the year then ended. Based on the closing ONSM price of $0.16 per share as of September 30, 2014, we increased the $34,000 liability initially recorded by us by recognizing approximately $187,000 of non-cash compensation expense for the year ended September 30, 2014, which resulted in an approximately $221,000 liability on our financial statements as of that date. Based on the closing ONSM price of $0.21 per share as of September 30, 2015, we recognized an approximately $85,000 reduction of non-cash compensation expense for the year ended September 30, 2015, which resulted in an approximately $136,000 liability on our financial statements as of that date. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, our obligation for this shortfall payment would be $187,000, or the equivalent in common shares.
On February 20, 2013, we (as authorized by our Board of Directors) and the Executives agreed to certain changes in the Executives’ employment agreements, including implementation of an executive incentive compensation plan (the “Executive Incentive Plan”). Compensation under the Executive Incentive Plan is to be in the form of Fully Restricted (as defined below) ONSM common Plan shares (“Executive Incentive Shares”) and is based on the Company achieving certain financial objectives, as follows:
· Increased revenues in each of fiscal years 2011 through 2015 (as compared to the respective prior year).
· Positive operating cash flow (as defined in the Executive Incentive Plan) in each of fiscal years 2011 through 2015.
· EBITDA, as adjusted, (as defined in the Executive Incentive Plan) for at least two quarters of each of fiscal years 2013 through 2015.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment contracts and severance (continued)
With respect to fiscal 2014, the Executives earned an aggregate of 375,000 Executive Incentive Shares for meeting the objective of achieving positive EBITDA, as adjusted, for at least two quarters as well as meeting the objective of achieving positive operating cash flow (as defined in the Executive Incentive Plan) for fiscal 2014. Accordingly, those 375,000 shares were recorded on our financial statements and reflected as non-cash compensation expense of $75,000 for the year ended September 30, 2014 (the term of service) based on (i) the fair value of 250,000 shares at $0.21 per share as of May 20, 2014, the date it was conclusively determined that the EBITDA objective had been met and the shares had been earned plus (ii) the fair value of 125,000 shares at $0.18 per share as of May 8, 2015, the date it was conclusively determined that it was probable the cash flow objective would be met and the shares would be earned. 250,000 of these shares related to the fiscal 2014 objectives had not been issued as of September 30, 2014 and so are reflected on our balance sheet as shares committed for issuance as of that date. All shares issuable for meeting fiscal 2014 objectives had been issued as of September 30, 2015.
With respect to fiscal 2015, we recorded the issuance of 375,000 Executive Incentive Shares, based on our previous determinations that (i) the fiscal 2015 financial objective for EBITDA, as adjusted, was met and (ii) it was probable that the fiscal 2015 financial objective for positive operating cash flow, would be met. These shares were recorded at a value of $71,250, which was recognized as non-cash compensation expense of (i) $47,500 over the six months ended March 31, 2015 (with respect to the EBITDA objective) and (ii) $23,750 over the twelve months ended September 30, 2015 (with respect to the cash flow objective). Although our final fiscal 2015 financial statements indicate that the operating cash flow objective was not met, we have continued to recognize the related compensation expense in our September 30, 2015 financial statements, pending further review of this matter by the Board of Directors. Regardless of the results of this review, this amount is considered immaterial for adjustment prior to finalization of the fiscal 2015 financial results. The third fiscal 2015 financial objective, increased revenues, was not met. If accomplished, it would have resulted in an aggregate of 250,000 additional Executive Incentive Shares issued to the Executives as a group. None of the 375,000 shares related to the financial objectives for fiscal 2015 had been issued as of September 30, 2015 and so are reflected on our balance sheet as shares committed for issuance as of that date. These shares have not been issued as of October 28, 2016.
The Executive Incentive Shares are being issued in accordance with the terms of the 2007 Equity Incentive Plan (the “Plan”) which our Board of Directors and a majority of our shareholders adopted on September 18, 2007 and they amended on March 25, 2010 and on June 13, 2011, and to the extent these and other issuances under the Plan do not exceed the number of authorized Plan shares - see note 8. The Executive Incentive Shares are subject to a complete restriction on the Executive’s ability to access or transact in any way such shares until the restriction is lifted. Upon a change of control, termination of the Executive’s employment or the imminently proposed and/or anticipated sale of the Company at a price of $1.00 per common share or more, all restrictions on the Executive Incentive Shares and any other common shares held by the Executives will be lifted. In the case of a sale, all restrictions will be lifted in time for those previously restricted shares to participate in all voting with respect to the proposed sale and will be eligible, at the Executive’s option, for inclusion as part of the shares sold in that transaction. Due to the restrictions on the Executive Incentive Shares, we have determined that the issuance thereof will not result in taxable compensation income to the Executives (or tax deductible compensation expense to the Company) until such restrictions have been lifted.
In the event that termination of the Executive’s employment is the result of the Executive’s voluntary resignation, and such voluntary resignation is not due to the Company’s breach of the Executive’s employment agreement or is not due to constructive termination as outlined in the Executive’s employment agreement, such restrictions will be promptly lifted, provided that no bona-fide and legally defensible objection to such issuance has been raised by written notice provided by a majority of the other four Executives to the terminating Executive, within ninety (90) days after such termination date.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)
Other compensation
On August 11, 2009 our Compensation Committee determined that in the event we were sold for a company sale price (as defined) that represented at least $6.00 per share (adjusted for recapitalization including but not limited to splits and reverse splits), cash compensation of two and one-half percent (2.5%) of the company sale price would be allocated equally between the then four outside Directors, as a supplement to provide appropriate compensation for ongoing services as a Director and as a termination fee, as well as one additional executive-level employee other than the Executives. In June 2010, one of the four outside Directors passed away (and was replaced in April 2011) and in January 2013 another one of the four outside Directors resigned (who is not expected to be replaced). In January 2013 the Board voted to terminate this compensation program, in conjunction with the termination of a similar compensation program for the Executives. Although the termination of the program for the Executives was in consideration of a new Executive Incentive Plan agreed on between the Company and the Executives, as of October 28, 2016 it has not yet been determined what the replacement compensation program will be, if any, for the outside Directors and the other executive-level employee in lieu of the terminated program.
Lease commitments
As of September 30, 2015, we were obligated under operating leases for five office locations (one each in Pompano Beach, Florida, San Francisco, California and Colorado Springs, Colorado and two in the New York City area), which called for monthly payments totaling approximately $54,000. The leases have expiration dates ranging from 2016 to 2022 (after considering our rights of termination) and in most cases provide for renewal options.
The operating lease for our principal executive offices in Pompano Beach, Florida expired September 15, 2013. The monthly base rental is currently approximately $21,100 (including sales taxes and our share of property taxes, insurance and other operating expenses incurred under the lease but excluding operating expenses such as electricity paid by us directly). The lease provided for two percent (2%) annual increases, as well as one two-year renewal option, with a three percent (3%) rent increase in year one. Although we notified the landlord of our exercise of the renewal option, the landlord never confirmed that we have met the conditions for such renewal, and this renewal period expired September 15, 2015. Accordingly, payments for this lease, which we consider to be on month-to-month status as of September 15, 2015, do not appear in the table of future minimum lease payments as presented below. Also, although approximately nine months of unpaid rent is included as a liability on our balance sheet as of September 30, 2015, these amounts also do not appear in the table of future minimum lease payments as presented below. As of October 28, 2016, our rent payments remain in arrears, by approximately twelve months, and we are in negotiations with the landlord with respect to this obligation and the terms of our continuing tenancy at that location.
The operating lease for our Infinite Conferencing location in New Jersey expires January 31, 2022, after considering the most recent lease amendment executed in October 2016 with an effective date of February 1, 2017. The monthly base rental is approximately $17,700 through January 31, 2017, then, based on a mutual agreement to a reduction in the square footage, is $10,000 per month for the next twelve months and then increases by $500 per month for each of the next four twelve-month lease periods. The lease provides for one five-year renewal option at no less than the base rental at the time of renewal ($12,000), but not to exceed fair market value at the time of renewal. The lease is also cancellable by us any time after November 1, 2016 in the event of the sale of Infinite Conferencing or Onstream Media Corporation, such cancellation effective six months after cancellation notice is given by us to landlord after such sale.
The operating lease for our office space in New York City expires January 24, 2018. The monthly base rental is approximately $8,600 with annual increases up to 2.8%. The lease provides one two-year renewal option at the greater of the fifth year rental or fair market value.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)
Lease commitments (continued)
The operating lease for our office space in San Francisco expires September 30, 2018. The monthly base rental is approximately $5,600 (excluding month-to-month parking) with annual increases of approximately 3.0%. We are also responsible for a pro-rata portion of any increase in the building real estate taxes and operating expenses, both as defined in the lease, as compared to calendar 2014.
The operating lease for our office space in Colorado Springs, Colorado, a short-term lease with a remaining maturity of less than one year, has a monthly base rental of approximately $1,100.
Total rental expense (including executory costs) for all operating leases was approximately $823,000 and $787,000 for the years ended September 30, 2015 and 2014, respectively.
The future minimum lease payments required under the non-cancelable operating leases are as follows:
Year Ending September 30:
$
382,921
326,091
231,257
130,000
136,000
142,000
48,000
Total minimum lease payments
$
1,396,269
The capital leases included in Notes Payable (see note 4) were immaterial for inclusion in the above table.
In addition to the commitments listed above, we have commitments not included in the above table for leasing equipment space at co-location or other equipment housing facilities in South Florida, Georgia, New Jersey, Colorado, Texas and Minnesota. Approximately $9,000 in aggregate per month of our payments to these facilities is classified by us as rental expense with the approximately $22,000 per month remaining balance classified as cost of revenues - see discussion of bandwidth and co-location facilities purchase commitments below.
Purchase commitments
We have entered into various agreements for our purchase of Internet, long distance and other connectivity as well as use of the co-location facilities discussed above, for an aggregate remaining minimum purchase commitment of approximately $1.6 million, approximately $1.0 million of that commitment related to the one year period ending September 30, 2016 and the balance of such commitment related to the period from October 2016 through August 2017.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 5: COMMITMENTS AND CONTINGENCIES (Continued)
Legal and regulatory proceedings
Certain of our services are conducted primarily over telephone lines, which are heavily regulated by various Federal and other agencies. Although we believe that the responsibility for compliance with those regulations primarily falls on the local and long distance telephone service providers and not us, the Federal Communications Commission (FCC) issued an order in 2008 that requires conference calling companies to remit Universal Service Fund (USF) contribution payments on customer usage associated with audio conference calls. In addition, in 2011 the FCC announced its position that the 2008 order extended to audio bridging services provided using internet protocol (IP) technology and in April 2012 issued a “Further Notice of Proposed Rulemaking” (the “2012 FNPRM”), which if implemented might expand the types of business operations that are considered subject to USF contribution payments. The 2012 FNPRM sought comments from the public on four major areas: (i) clarifying and modifying the FCC’s rules on what services and service providers must contribute to the fund (ii) whether the FCC should reform the current revenues system or adopt an alternative system, (iii) how to improve administration of the contribution system and (iv) how to improve the contributions methodology with respect to the recovery mechanisms from end users (including changes with respect to our current practice of recovering our USF contributions from our customer end-users through a line-item (surcharge) on our invoices to them). The period for submitting comments closed on August 6, 2012. On August 7, 2014 the FCC asked the Federal-State Joint Board on Universal Service to provide its recommendations, on or before April 7, 2015, with respect to the 2012 FNPRM. To the best of our knowledge, no further action has been taken with respect to this matter as of October 28, 2016.
While we believe that we have registered our operations appropriately with the FCC, including the filing of both quarterly and annual reports regarding the revenues derived from audio conference calling, and the remittance of USF contributions thereon, it is possible that our determination of the extent to which our operations are subject to USF could be challenged or changed. It is also possible we would need to change our pricing structure in order to maintain our current margins, with our ability to do that possibly affected by the related actions of our competitors. However, we do not believe that the ultimate outcome of any such challenge or changes would have a material adverse effect on our financial position or results of operations. See notes 1 and 4.
We are involved in legal and regulatory matters of the type arising from time to time in the ordinary course of business. While the ultimate outcome of these matters is not presently determinable, it is the opinion of our management that the resolution of these outstanding claims will not have a material adverse effect on our financial position or results of operations.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 6: CAPITAL STOCK AND EQUITY
Common Stock
During the year ended September 30, 2014 we recorded the issuance to the Executives of an aggregate of 375,000 fully restricted ONSM common shares (“Executive Incentive Shares”), related to achievement of two of the financial objectives related to fiscal 2014. The value of these shares was recognized as compensation expense paid with common shares and other equity over the relevant service period, which was fiscal 2014. See note 5 for details. The 375,000 shares is excluding 125,000 Executive Incentive Shares also recorded by us in fiscal 2014 but then reversed in fiscal 2015, as discussed below.
During the year ended September 30, 2015 we recorded the issuance to the Executives of an aggregate of 375,000 Executive Incentive Shares, related to achievement of two of the financial objectives related to fiscal 2015. The value of these shares was recognized as compensation expense paid with common shares and other equity over the relevant service period, which was fiscal 2015. See note 5 for details. In addition to recording the 375,000 shares, during the year ended September 30, 2015 we reversed our entry of 125,000 Executive Incentive Shares that were recorded in our financial statements for the year ended September 30, 2014. This represented a financial statement matter only, as these shares were never issued to the Executives, and the recorded value of $22,000 was considered to be immaterial for a prior period adjustment.
During the year ended September 30, 2014 we issued 746,502 unregistered common shares for consultant services valued at approximately $151,000, which were recognized as professional fees expense over various service periods of up to twelve months. During the year ended September 30, 2015 we issued 680,000 unregistered common shares for consultant services valued at approximately $114,000, which are being recognized as professional fees expense over various service periods of up to twelve months. None of these shares were issued to our directors or officers.
Professional fee expenses arising from these and prior issuances of shares and options for financial consulting and advisory services were approximately $63,000 and $155,000 for the years ended September 30, 2015 and 2014, respectively. As a result of previously recorded shares for financial consulting and advisory services, there remained approximately $29,000 and $54,000 in deferred equity compensation expense at September 30, 2015 and 2014, respectively, to be amortized over the remaining periods of service. The deferred equity compensation expense is included in the balance sheet caption prepaid expenses.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 6: CAPITAL STOCK AND EQUITY (Continued)
Common Stock (continued)
During the year ended September 30, 2014, we recorded the issuance of 1,647,334 common shares for interest and financing fees, which were valued at approximately $393,000 and are being recognized as interest expense over the various respective financing periods. See summary below and note 4 for details.
In accordance with an Allonge to the Rockridge Note dated September 10, 2014, we agreed to increase the loan origination fee by 25,000 common shares. Since these shares were committed to be issued by us as of September 10, 2014 and Rockridge may require us to issue them solely by providing us with written notice of not less than sixty-one (61) days, the issuance was reflected in our financial statements for the year ended September 30, 2014 and is accordingly included in the above table.
In accordance with the December 31, 2014 issuance of the New Sigma Note, we issued an aggregate of 100,000 common shares to Sigma and Sigma Capital, which were valued at approximately $20,000 and recorded as loan discount, which is being amortized as interest expense over the applicable financing period - see note 4.
In accordance with the December 31, 2014 and April 30, 2015 extensions of the Rockridge Note, we agreed to increase the loan origination fee by an aggregate of 80,000 common shares. Since these shares were committed to be issued by us as of September 30, 2015 and Rockridge may require us to issue them solely by providing us with written notice of not less than sixty-one (61) days, the issuance was reflected in our financial statements as interest expense of approximately $14,700 for the year ended September 30, 2015 - see note 4.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 6: CAPITAL STOCK AND EQUITY (Continued)
Common Stock (continued)
In December 2012, as part of a transaction under which J&C Resources issued us a funding commitment letter, we agreed to reimburse CCJ in cash the shortfall, payable on December 31, 2014, as compared to minimum guaranteed net proceeds of $175,000, from their resale of 437,500 common shares (“Conversion Shares”) CCJ received on December 31, 2012 upon their conversion of 17,500 shares of Series A-13 Convertible Preferred Stock (“Series A-13”). We accrued an estimated shortfall liability of $43,750, which we amortized to interest expense over the one-year funding commitment term ended December 31, 2013. Based on the closing ONSM price of $0.30 per share on December 31, 2013, we determined that there would be no material difference between the present value of the obligation and that accrual. However, based on the September 30, 2014 closing ONSM price of $0.16 per share, we increased that accrual by recognizing approximately $54,000 of interest expense for the year ended September 30, 2014, which resulted in an approximately $98,000 liability under the caption “Accrued liabilities” on our balance sheet as of that date. We recognized another approximately $11,000 of interest expense for the year ended September 30, 2015, which resulted in an approximately $109,000 liability as of that date. If the closing ONSM share price of $0.21 per share on December 31, 2014 (the end of the period during which the shares must be sold to be eligible for reimbursement of any shortfall) was used as a basis of calculation, our obligation for this shortfall payment would be $83,000 plus brokerage commissions and other selling costs.
As a condition of the above shortfall reimbursement, CCJ agreed to sell the Conversion Shares in the open market between the December 21, 2013 conversion date and December 31, 2014 payment date, taking due care with respect to the timing and volume of those sales and the market conditions. As of October 28, 2016, CCJ has not formally requested this reimbursement nor have they provided proof that the above conditions of reimbursement have been met. However, because of our ongoing discussions with CCJ, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this shortfall reimbursement obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible that CCJ could assert mitigating circumstances, notwithstanding whether or not they met the conditions of reimbursement, under which we might honor all or part of this shortfall reimbursement obligation. Therefore, pending our further evaluation of our position with respect to this shortfall reimbursement obligation, we are leaving the accrued liability on our balance sheet as of September 30, 2015.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 6: CAPITAL STOCK AND EQUITY (Continued)
Variable Interest Entity (VIE)
On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). The Sold Accounts represented historical annual revenues of approximately $1.35 million. After giving effect to our determination, as discussed below, that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, (i) the gross proceeds from this and our subsequent transactions with Partners are reflected as an increase in our equity (noncontrolling owners’ interest in VIE), (ii) the gross revenues from the Sold Accounts, and accounts sold as part of our subsequent transactions with Partners, are included in our consolidated revenues and (iii) the payment of the Partners’ guaranteed return percentage, which is deducted from these gross revenues, is reflected as a decrease in our equity (distributions to owners of VIE).
In connection with the February 28, 2015 sale, Infinite and Partners entered into a Management Services Agreement (“MSA”) that provides for Infinite to continue to invoice the Sold Accounts but the payments when received from those Sold Accounts will be deposited in a segregated Partners owned bank account. Partners will return those customer proceeds to Infinite on a weekly basis in the form of a Management Fee, after deducting a certain amount representing (i) Partners’ guaranteed return (which is 40% of the Purchase Price per annum with the first six months guaranteed regardless of whether we exercise our rights under the Option Agreement or the MSA is otherwise terminated) and (ii) accounting fees payable to the third-party accounting firm as discussed below. Infinite will continue to service the Sold Accounts, incurring and absorbing all related costs of doing so - i.e., Partners will have no operating responsibilities and no operating costs related to the sold accounts other than to pay the Management Fee to Infinite. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the Partners’ guaranteed return percentage decreased. The MSA defines specific services, along with certain minimum standards of quality for such services, required to be provided by Infinite with respect to the Sold Accounts. The MSA contains provisions that prohibit (i) Infinite servicing the Sold Accounts for a period of two years after the termination of the MSA and (ii) Partners interfering in any way with Infinite’s performance of its duties thereunder or communicating with the Sold Accounts or with Infinite’s employees, vendors, consultants or agents during the term of the MSA.
The MSA initially had a two year term expiring on February 28, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights as follows. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the expiration date of the MSA was extended. Partners has the right to terminate the MSA, effective immediately upon written notice to Infinite, in the event of the following: (i) an Infinite Event of Default or (ii) the sale by Partners of the Sold Accounts subject to the terms of the Membership Interest Option Agreement.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 6: CAPITAL STOCK AND EQUITY (Continued)
Variable Interest Entity (VIE) (continued)
An Infinite Event of Default is (i) Bankruptcy of Infinite (as defined), (ii) a lack of compliance by Infinite with the provisions of the MSA which is continuing five (5) business days after receiving written notice from partners specifying such lack of compliance or (iii) a breach by Infinite or Onstream of any obligation under the Make Whole Agreement. Infinite has the right to terminate the MSA, effective immediately upon written notice to Partners, in the event of a Partners Event of Default. A Partners Event of Default is (i) a deliberate and material lack of compliance by Partners with the provisions of the MSA which is continuing five (5) business days after receiving written notice from Infinite specifying such lack of compliance or (ii) a breach by Partners of Partners’ obligations under the Membership Interest Option Agreement. Notwithstanding termination of the MSA, only for so long as the Infinite owns the Sold Accounts, Partners shall continue to pay the Management Fee, provided that Partners may deduct from such Management Fee Partners’ payment of all reasonable costs of providing the services to the Sold Accounts otherwise required to be provided by Infinite under the MSA.
Partners has engaged a third-party accounting firm to manage all cash transactions under the MSA and Infinite, Partners and the accounting firm have entered into a separate agreement (Agreement Re Distributions) whereby the accounting firm has explicitly agreed to carry out the terms of the MSA and other related documents executed between Infinite and Partners, particularly with respect to distributions of funds and to not vary from that except upon joint written instructions from Infinite and Partners. We have agreed to be responsible for the fees of the third-party accounting firm.
ASC 810-10-15-14 provides that a legal entity shall be determined to be a Variable Interest Entity (“VIE”) subject to consolidation if, by design, any one of certain enumerated conditions exist. The Partners entity was created in 2015 solely to transact the above transactions as well as the other related transactions described below and has no other business activity. Infinite, and its parent company Onstream, were significantly involved in determining the structure of the Partners entity as well as the structure of these transactions. Based on the foregoing, we concluded that the “by design” prerequisite was met. Furthermore, we concluded, based on the specific terms of the MSA as set forth above, as well as other related transactions discussed below, that out of the enumerated conditions, the following would cause Partners to be classified as a VIE and therefore be subject to consolidation:
· The total equity investment at risk is not sufficient to permit the legal entity (Partners) to finance its activities without additional subordinated financial support provided by any parties, including equity holders. Since the capital contribution of the equity investors in Partners was used entirely to purchase the Sold Accounts, none of that capital remained available to (i) carry accounts receivable from the Sold Accounts or (ii) provide the necessary infrastructure to service, invoice and collect the Sold Accounts. Such accounts receivable are being carried, and such infrastructure and services are being provided to the Sold Accounts, by Infinite as part of its contractual arrangements with Partners.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 6: CAPITAL STOCK AND EQUITY (Continued)
Variable Interest Entity (VIE) (continued)
· As a group the holders of the equity investment at risk lack the power, through voting rights or similar rights, to direct the activities that most significantly impact the entity’s economic performance. The activities that most significantly impact Partners’ economic performance are the provision of conferencing services to the Sold Accounts, the billing of the Sold Accounts for those services and the collection of the amounts charged the Sold Accounts for those services. As noted above, such services are being provided to the Sold Accounts by Infinite as part of its contractual arrangements with Partners and furthermore those contractual arrangements significantly limit the extent to which Partners may interfere with Infinite’s provision of such services.
Once it is determined that an entity is a VIE, and therefore is subject to consolidation, it must be determined whether we (the “reporting entity”) would be required to consolidate the VIE. ASC 810-10-25-38 provides that a reporting entity shall consolidate a VIE when the following reporting entity characteristics exist that establish that it has a controlling financial interest in the VIE:
· The reporting entity has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. The provisions of paragraphs ASC 810-10-25-38B through 25-38G contain guidance with respect to determining the activities of a VIE that most significantly impact the VIE’s economic performance and whether a reporting entity has the power to direct those activities. After considering this guidance, we determined that (i) the activities of the VIE (Partners) that most significantly impact such VIE’s economic performance are the provision of conferencing services to the Sold Accounts, the billing of the Sold Accounts for those services and the collection of the amounts charged the Sold Accounts for those services and (ii) based on the contractual identification of those activities as the responsibility of Infinite and the related contractual restrictions on Partners’ interference with those activities, as discussed above, we concluded that Infinite has the power to direct those activities.
· The reporting entity has the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Although the equity investors in Partners receive a minimum guaranteed return of their investment, they have no rights to receive any profits of the entity in excess of that amount. Such profits, through the mechanics of the contractual management fee in the MSA, as discussed above, are remitted to us. Furthermore, in connection with the February 28, 2015 sale Infinite and Partners entered into a Make Whole Agreement which provides that if the revenues from the Sold Accounts falls below $1.0 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the revenues from the Sold Accounts back to $1.25 million (or the equivalent in cash flow). Onstream and Infinite have also committed that in the event there is any impediment, which directly or indirectly is caused by, or relates in any way to Infinite or Onstream, which would prevent more than 20% of the revenue from these sold accounts being earned or distributed to Partners, Infinite and Onstream would take all necessary steps to ensure that such impeded revenue or revenue shortfall is otherwise earned or distributed or shall pay the amount of such impeded revenue or revenue shortfall to Partners to the extent due on a quarterly basis. As evidenced by the terms of these agreements, it is not intended or expected that the equity investors in Partners would participate in any losses of the entity.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 6: CAPITAL STOCK AND EQUITY (Continued)
Variable Interest Entity (VIE) (continued)
As required by ASC 810-10-25-38A, our evaluation of the two reporting entity characteristics listed above included an assessment of the reporting entity’s variable interest(s) and other involvements (including involvement of related parties and de facto agents), if any, in the VIE, as well as the involvement of other variable interest holders. The de facto agents of a reporting entity include the following parties: (i) an officer, employee, or member of the governing board of the reporting entity, (ii) a party that has an agreement that it cannot sell, transfer, or encumber its interests in the VIE without the prior approval of the reporting entity and/or (iii) a party that has a close business relationship like the relationship between a professional service provider and one of its significant clients. In accordance with the above, we considered the following as additional support for our determination that the reporting entity characteristics listed above exist:
· The limited partners of Partners include two Onstream directors (one of whom is also the executive officer primarily responsible for Infinite’s operations) and two other officers of Onstream/Infinite (who are not Onstream or Infinite directors), resulting in total related party ownership of approximately 60%for the period from February 28, 2015 through December 15, 2015. As part of the sale of additional Infinite customer accounts in December 2015 and June 2016 transactions discussed in more detail below, the number of limited partners increased and the related party ownership percentage decreased to approximately 25%, and then 21%, respectively. Another individual (not considered to be a related party with respect to those limited partners, Onstream or Infinite until July 2015, when his beneficial ownership of our common stock exceeded 5% of our total outstanding shares and which condition continues as of October 28, 2016) serves as general partner, and is solely responsible for administering the activities of Partners as outlined above.
· In connection with the February 28, 2015 sale, Infinite and Partners entered into a Membership Interest Option Agreement (“Option Agreement”) whereby we have the right for the two-year period through February 28, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the Purchase Price plus a premium, which premium increases on a pro-rata basis to 20% of the Purchase Price over the two year period, subject to a minimum premium of 10%. Starting six months after the Effective Date, Partners may sell the Sold Accounts to a third party, provide that they must provide us four month written advance notice of such sale during which four month period we have the right to exercise our rights under the Option Agreement. In the event we do not exercise our rights under the Option Agreement, and Partners sells the Customer Accounts to a third party, we are entitled to receive 50% of any excess of the sales price to the third party over what would have been our option price under the Option Agreement. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the expiration date of the Option Agreement was extended and the premium percentage decreased.
· The Option Agreement provides that during the two-year option term, and until the option closing in the event of a timely exercise of the option thereunder, neither Partners nor its members will (i) encumber any of Partners’ assets or membership interests to any party, other than Infinite, (ii) incur any liability whatsoever, whether actual or contingent, other than per the terms and provisions of the partnership operating agreement and the MSA or (iii) place a lien on the Sold Accounts.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 6: CAPITAL STOCK AND EQUITY (Continued)
Variable Interest Entity (VIE) (continued)
Based on our determination that, for the period from February 28, 2015 through December 15, 2015, we exhibit the two reporting entity characteristics listed above, but prior to considering the impact of ASU 2015-02, we preliminarily concluded that we had a controlling financial interest in the VIE Partners during that period. In February 2015, the FASB issued ASU 2015-02 (Consolidation (Topic 810): Amendment to the Consolidation Analysis), which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted, including adoption in an interim period. We elected to apply the provisions of ASU 2015-02 effective January 1, 2015. As a result of ASU 2015-02 (i) certain factors, focusing on fee arrangements between the VIE and the reporting entity, were added to those factors already required to be considered in evaluating the second of the two reporting entity characteristics listed above and (ii) such additional factors are allowed to be relied on as the basis of a conclusion that the second of the two reporting entity characteristics listed above is not present. However, ASU 2015-02 also provides that if the fee arrangements (i) are designed in a manner such that the fee is inconsistent with the reporting entity’s role or the type of service and (ii) contain fees or payments that expose a reporting entity to risk of loss in the VIE, including those related to guarantees of the value of the assets or liabilities of a VIE and obligations to fund operating losses, then the additional factors identified in ASU 2015-02 may not be relied on as the basis of a conclusion that the second of the two reporting entity characteristics listed above is not present. We concluded that since the terms of the MSA and the Make Whole Agreement, as described above for the period from February 28, 2015 through December 15, 2015, are consistent with the characteristics in the preceding sentence, the application of ASU 2015-02 would not change our preliminary conclusion that the second of the two reporting entity characteristics listed above is present and thus would not change our conclusion that we had a controlling financial interest in the VIE Partners during that period. Accordingly, we have concluded that in accordance with ASC 810-10-25-38, we are required to consolidate the VIE Partners as of September 30, 2015 and for the year then ended.
The assets of the VIE Partners, which after consolidation elimination entries are primarily accounts receivable from the Sold Accounts, can only be used to settle the obligations of the VIE Partners, including the obligation for the Management Fee payable to us in accordance with the MSA as discussed above. The liabilities of the VIE Partners, which after consolidation elimination entries do not include the Management Fee obligation but are primarily accrued distributions payable to the noncontrolling owners of Partners, are non-recourse to us, except that we are indirectly responsible for such liabilities as a result of our obligations under the Make Whole Agreement, as discussed above.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 6: CAPITAL STOCK AND EQUITY (Continued)
Variable Interest Entity (VIE) (continued)
On December 16 and 18, 2015, we received aggregate gross proceeds of approximately $2.1 million for our sale, effective December 16, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“First Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $2.7 million. The increase in the number of limited partners of Partners resulting from this transaction decreased the total related party ownership percentage to approximately 25% as of December 16, 2015.
In connection with the December 16, 2015 sale, Infinite and Partners entered into:
· an Amended and Restated Make Whole Agreement (“Amended Make Whole Agreement”) which provides that if the combined revenues from the Sold Accounts and the First Tranche of Additional Sold Accounts (“Combined Revenues”) falls below approximately $3.2 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the Combined Revenues back to approximately $4.0 million (or the equivalent in cash flow). All other terms of the Amended Make Whole Agreement were substantially the same as the terms of the Make Whole Agreement as discussed above.
· an Amended and Restated Membership Interest Option Agreement (“Amended Option Agreement”) whereby we have the right for the two-year period through December 16, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the combined purchase price of the Sold Accounts and the First Tranche of Additional Sold Accounts plus $100,000 (“Purchase Price”), plus a premium, which premium increases on a pro-rata basis to 10% of the Purchase Price over the two year period, subject to a minimum premium of 5%. All other terms of the Amended Option Agreement were substantially the same as the terms of the Membership Interest Option Agreement as discussed above.
· an Amended and Restated Management Services Agreement (“Amended MSA”) with a two year term expiring on December 16, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights. The Amended MSA provides that the Partners’ guaranteed return percentage be reduced to 30% per annum of the Purchase Price, with the first six months guaranteed regardless of whether we exercise our rights under the Amended Option Agreement or the Amended MSA is otherwise terminated. All other terms of the Amended MSA were substantially the same as the terms of the MSA as discussed above.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 6: CAPITAL STOCK AND EQUITY (Continued)
Variable Interest Entity (VIE) (continued)
During the period from March 25, 2016 through June 30, 2016 we received aggregate gross proceeds of approximately $800,000 for our sale, effective June 30, 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Second Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $1.0 million. The increase in the number of limited partners of Partners resulting from this transaction decreased the total related party ownership percentage to approximately 21% as of June 30, 2016.
In connection with the June 30, 2016 sale, Infinite and Partners entered into:
· an Amended and Restated Make Whole Agreement (“Second Amended Make Whole Agreement”) which provides that if the combined revenues from the Sold Accounts, the First Tranche of Additional Sold Accounts and the Second Tranche of Additional Sold Accounts (“Combined Revenues”) falls below approximately $3.9 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the Combined Revenues back to approximately $4.9 million (or the equivalent in cash flow). All other terms of the Second Amended Make Whole Agreement were substantially the same as the terms of the Amended Make Whole Agreement as discussed above.
· an Amended and Restated Membership Interest Option Agreement (“Second Amended Option Agreement”) whereby we have the right for the two-year period through December 16, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the combined purchase price of the Sold Accounts, the First Tranche of Additional Sold Accounts and the Second Tranche of Additional Sold Accounts plus $100,000 (“Purchase Price”), plus a premium, which premium increases on a pro-rata basis to 10% of the Purchase Price over the two year period, subject to a minimum premium of 5%. All other terms of the Second Amended Option Agreement were substantially the same as the terms of the Amended Option Agreement as discussed above.
· an Amended and Restated Management Services Agreement (“Second Amended MSA”) with a two year term expiring on December 16, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights. The Second Amended MSA provides that the Partners’ return is guaranteed for the first six months regardless of whether we exercise our rights under the Second Amended Option Agreement or the Second Amended MSA is otherwise terminated. All other terms of the Second Amended MSA were substantially the same as the terms of the Amended MSA as discussed above.
During September and October 2016, subscriptions for approximately $225,000 were received by Partners and funded against an anticipated total of $1.5 million for our sale, which we expect will be effective during November 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Third Tranche of Additional Sold Accounts”) to Partners, will represent historical annual revenues of approximately $1.9 million, and will be sold under the same terms as the accounts sold in December 2015 and June 2016.
We are responsible for legal, consulting, finders and other fees related to the initial closing of the above transactions, as well as ongoing fees to administer these transactions, including (i) the third-party accounting firm as discussed above, (ii) certain compensation and expense payments to the general partner and (iii) certain other financial transaction expenses. These expenses are included as part of non-operating expenses (other (expense) income, net) and were approximately $115,000 and none for the years ended September 30, 2015 and 2014, respectively. In December 2015, we recorded the issuance of 200,000 unregistered common shares for professional management services rendered in connection with Partners, such shares having a fair value of approximately $38,000 and which will be recognized as other non-operating expense over a service period of twelve months.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 7: SEGMENT INFORMATION
Our operations are comprised within two groups, Audio and Web Conferencing Services and Digital Media Services, determined in accordance with ASC 280-10-50-1 (“Segment Reporting - Overall - Disclosure”). The business activities of our Audio and Web Conferencing Services Group are primarily selling telephone related services to business customers, such as conference calling, voicemail, text messaging and network collaboration and consists of our Infinite, OCC and EDNet divisions. The primary operating activities of the Infinite division are in the New York City area and the primary operating activities of the OCC and EDNet divisions are in California. The business activities of our Digital Media Services Group are primarily selling Internet related services to business customers, such as webcasting, date storage and data streaming and consists primarily of our Webcasting and DMSP divisions. The primary operating activities of the Webcasting division, as well as our corporate headquarters, are in Florida. The Webcasting division has a sales and support facility in New York City. The primary operating activities of the DMSP division are in Colorado. All material sales, and property and equipment, are in the United States. Below are the results of operations by segment for the years ended September 30, 2015 and 2014 and total assets by segment as of September 30, 2015 and 2014.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 7: SEGMENT INFORMATION (Continued)
Depreciation and amortization, as well as corporate and unallocated shared expenses, impairment loss on goodwill and other intangible assets, impairment loss on property and equipment, other expense, net, and gain from litigation settlement are not utilized by our primary decision makers for making decisions with regard to resource allocation or performance evaluation of the segments.
NOTE 8: STOCK OPTIONS AND WARRANTS
As of September 30, 2015, we had issued options and warrants still outstanding to purchase up to 350,000 ONSM common shares, including 50,000 shares under Plan Options to financial and other consultants and 300,000 shares under warrants issued in connection with various financings and other transactions.
On September 18, 2007, our Board of Directors and a majority of our shareholders adopted the 2007 Equity Incentive Plan (the “Plan”), which authorized the issuance of up to 1,000,000 shares of ONSM common stock pursuant to stock options, stock purchase rights, stock appreciation rights and/or stock awards for employees, directors and consultants. On March 25, 2010, our Board of Directors and a majority of our shareholders approved a 1,000,000 increase in the number of shares authorized for issuance under the Plan, for total authorization of 2,000,000 shares and on June 13, 2011 they authorized a further increase in authorized Plan shares by 2,500,000 to 4,500,000. Based on the issuance of 3,627,763 common shares under the Plan (including 2,875,000 Executive Incentive Shares issued plus 375,000 Executive Incentive Shares accrued for potential issuance, both as discussed in note 5) through September 30, 2015 and 50,000 outstanding financial consultant Plan Options as of September 30, 2015, there are 822,237 shares available for additional issuances under the Plan.
Details of employee, consultant, and director Plan Option activity under the Plan for the year ended September 30, 2015 are as follows:
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 8: STOCK OPTIONS AND WARRANTS (Continued)
As of September 30, 2015, there were outstanding and fully vested Plan Options issued to financial and other consultants for the purchase of 50,000 common shares, as follows:
As of September 30, 2015, there were outstanding vested warrants, issued in connection with various financings, to purchase an aggregate of 300,000 shares of common stock, as follows:
On September 17, 2010, we entered into a purchase agreement (the “LPC Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), whereby LPC agreed to purchase, and did purchase, a certain number of our common and preferred shares during the term of the LPC Purchase Agreement, which term expired on September 17, 2013. In connection with the LPC Purchase Agreement, we also issued LPC a five-year warrant to purchase 540,000 unregistered common shares at an exercise price of $2.00 per share, which due to certain anti-dilution provisions was eventually adjusted to allow purchase of 627,907 shares at $1.72 per share (“LPC Warrant 1”). Effective October 25, 2012, LPC Warrant 1 was cancelled and replaced with New LPC Warrant 1, with 250,000 underlying common shares exercisable at $0.38 per share, with such amounts only adjustable in accordance with standard anti-dilution provisions - certain price-based anti-dilution provisions that were in LPC Warrant 1 are not included in New LPC Warrant 1.
On February 15, 2012, in exchange for $140,000 cash proceeds, we issued LPC 200,000 unregistered common shares and a five-year warrant to purchase 100,000 unregistered common shares at an exercise price of $1.00 per share (“LPC Warrant 2”). This transaction was unrelated to the LPC Purchase Agreement. Effective October 25, 2012, LPC Warrant 2 was cancelled and replaced with New LPC Warrant 2, which was issued with 50,000 underlying common shares exercisable at $0.38 per share, with such amounts only adjustable in accordance with standard anti-dilution provisions.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 8: STOCK OPTIONS AND WARRANTS (Continued)
New LPC Warrant 1 and New LPC Warrant 2 contain certain cashless exercise rights, as did the predecessor warrants. The number of shares of ONSM common stock that can be issued upon the exercise of New LPC Warrant 1 or New LPC Warrant 2 is limited to the extent necessary to ensure that following the exercise the total number of shares of ONSM common stock beneficially owned by the holder does not exceed 4.99% of our issued and outstanding common stock, although this percentage may be changed at the holder’s option upon not less than 61 days advance notice to us and provided the changed limitation does not exceed 9.99%.
The exercise prices of New LPC Warrant 1 and New LPC Warrant 2 are subject to adjustment for various factors, including in the event of stock splits, stock dividends, pro rata distributions of equity securities, evidences of indebtedness, rights or warrants to purchase common stock or cash or any other asset or mergers or consolidations. Such adjustment of the exercise price would in most cases result in a corresponding adjustment in the number of shares underlying the warrant.
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2015
NOTE 9: SUBSEQUENT EVENTS
During June and July 2016 we issued an aggregate of 300,000 unregistered common shares for professional IR and PR/marketing services valued at approximately $45,000, which will be recognized as professional fees expense over service periods of up to twelve months.
During June 2016 we issued 100,000 unregistered common shares for financial advisory services valued at approximately $14,000, which will be expensed at the time of issuance.
During August 2016 we issued 25,000 unregistered common shares for financial advisory services valued at approximately $3,000, which will be expensed at the time of issuance.
During September 2016 we issued 125,000 unregistered common shares as a finders fee valued at approximately $16,000, which will be expensed at the time of issuance.
The following notes to the consolidated financial statements contain disclosures as noted with respect to transactions occurring after September 30, 2015:
Note 1 (compensation and other cost reductions after September 30, 2015; impact of certain debt and other obligations coming due after September 30, 2015 and after the issuance of these financial statements; funding commitment letter received after September 30, 2015; December 2015 agreement with Sigma to repay portion of New Sigma Note and to extend the maturity date on the balance; actual and anticipated sales of Infinite customer accounts to Partners after September 30, 2015; liquidity information as of June 30, 2016 and for the nine months then ended; management’s post September 30, 2015 exploration of the financial potential of the granted patents and the patents pending)
Note 2 (patent application and issuance activity after September 30, 2015; management’s post September 30, 2015 exploration of the financial potential of the granted patents and the patents pending; actual and anticipated sales of Infinite customer accounts to Partners after September 30, 2015; impact of change in ONSM common share price through October 7, 2016)
Note 4 (renewal of the Line in February 2016 and status of the Line after September 30, 2015 and after such renewal; extensions and other modifications to various notes after September 30, 2015 including payment of fees in cash and shares; early repayment of certain notes after September 30, 2015; borrowings from J&C after September 30, 2015; impact of change in ONSM common share price through October 7, 2016)
Note 5 (status of issuance of Executive Shares and payment of cash compensation to the Executives through October 28, 2016; issuance of Executive Incentive Shares after September 30, 2015; status of office lease renewal negotiations in Florida as of October 28, 2016; October 2016 amendment to New Jersey office lease; impact of change in ONSM common share price through October 7, 2016; status of recommended changes to USF through October 28, 2016)
Note 6 (status through October 28, 2016 of communications with respect to September 30, 2015 shortfall reimbursement obligation; actual and anticipated sales of Infinite customer accounts to Partners after September 30, 2015 and related transactions, including issuance of common shares for management services)