Attached files
file | filename |
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EX-31.2 - Onstream Media CORP | v185159_ex31-2.htm |
EX-31.1 - Onstream Media CORP | v185159_ex31-1.htm |
EX-32.2 - Onstream Media CORP | v185159_ex32-2.htm |
EX-32.1 - Onstream Media CORP | v185159_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended March 31, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For the
transition period from _________ to _________
Commission
file number 000-22849
Onstream Media
Corporation
|
(Exact
name of registrant as specified in its charter)
65-0420146
|
(IRS
Employer Identification No.)
Florida
|
(State or
other jurisdiction of incorporation or organization)
1291 SW 29 Avenue, Pompano Beach, Florida
33069
|
(Address
of principal executive offices)
954-917-6655
|
(Registrant's
telephone number)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes ¨ No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer”,
“non-accelerated filer” and “smaller reporting company” defined in Rule 12b-2 of
the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
|
Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes ¨ No
x
Indicate the number of
shares outstanding of each of the issuer's classes of common stock, as of the
latest practicable date. As of May 7, 2010 the registrant had
issued and outstanding 7,739,626 shares of common stock (after giving effect to
a 1-for-6 reverse stock split that was effective on April 5,
2010).
TABLE
OF CONTENTS
|
PAGE
|
PART I – FINANCIAL
INFORMATION
|
|
Item
1 - Financial Statements
|
4
|
Unaudited
Consolidated Balance Sheet at March 31, 2010 and Consolidated Balance
Sheet at September 30, 2009
|
4
|
Unaudited
Consolidated Statements of Operations for the Six and Three Months Ended
March 31, 2010 and 2009
|
5
|
Unaudited
Consolidated Statement of Stockholders’ Equity for the Six Months Ended
March 31, 2010
|
6
|
Unaudited
Consolidated Statements of Cash Flows for the Six Months Ended March 31,
2010 and 2009
|
7
–8
|
Notes
to Unaudited Consolidated Financial Statements
|
9 –
54
|
Item
2 - Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
55
– 78
|
Item
4 - Controls and Procedures
|
79
|
PART
II – OTHER INFORMATION
|
|
Item
1 – Legal Proceedings
|
80
|
Item
2 – Unregistered Sales of Equity Securities and Use of
Proceeds
|
80
|
Item
3 – Defaults upon Senior Securities
|
82
|
Item
4 – Submission of Matters to a Vote of Security Holders
|
82
|
Item
5 – Other Information
|
82
|
Item
6 - Exhibits
|
82
|
Signatures
|
82
|
2
A 1-for-6
reverse stock split of the outstanding shares of our common stock was effective
on April 5, 2010. Except as otherwise indicated, all related
amounts reported in our consolidated financial statements and in this
10-Q, including common share quantities, convertible debenture conversion
prices and exercise prices of options and warrants, have been retroactively
adjusted for the effect of this reverse stock split.
FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISKS
Certain
statements in this quarterly report on Form 10-Q contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
risks, uncertainties and other factors include, but are not limited to, our
ability to implement our strategic initiatives (including our ability to
successfully complete, produce, market and/or sell the DMSP and/or our ability
to eliminate cash flow deficits by increasing our sales), economic, political
and market conditions and fluctuations, government and industry regulation,
interest rate risk, U.S. and global competition, and other factors affecting the
Company's operations and the fluctuation of our common stock price, and other
factors discussed elsewhere in this report and in other documents filed by us
with the Securities and Exchange Commission from time to time. Most
of these factors are difficult to predict accurately and are generally beyond
our control. You should consider the areas of risk described in connection with
any forward-looking statements that may be made herein. You are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
March 31, 2010. You should carefully review this Form 10-Q in its entirety,
including but not limited to our financial statements and the notes thereto, as
well as our most recently filed 10-K. Except for our ongoing obligations to
disclose material information under the Federal securities laws, we undertake no
obligation to release publicly any revisions to any forward-looking statements,
to report events or to report the occurrence of unanticipated events. Actual
results could differ materially from the forward-looking statements. In light of
these risks and uncertainties, there can be no assurance that the
forward-looking information contained in this report will, in fact, occur. For
any forward-looking statements contained in any document, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
3
PART
I – FINANCIAL INFORMATION
Item
1 - Financial Statements
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
March
31,
2010
|
September
30,
2009
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
CURRENT
ASSETS:
|
||||||||
Cash
and cash equivalents
|
$ | 710,485 | $ | 541,206 | ||||
Accounts
receivable, net of allowance for doubtful accounts of $291,035 and
$241,298, respectively
|
2,856,848 | 2,189,252 | ||||||
Prepaid
expenses
|
612,805 | 356,963 | ||||||
Inventories
and other current assets
|
118,200 | 198,960 | ||||||
Total
current assets
|
4,298,338 | 3,286,381 | ||||||
PROPERTY
AND EQUIPMENT, net
|
2,911,381 | 3,083,096 | ||||||
INTANGIBLE
ASSETS, net
|
1,545,935 | 2,499,150 | ||||||
GOODWILL,
net
|
13,996,948 | 16,496,948 | ||||||
OTHER
NON-CURRENT ASSETS
|
122,276 | 118,398 | ||||||
Total
assets
|
$ | 22,874,878 | $ | 25,483,973 | ||||
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
||||||||
CURRENT
LIABILITIES:
|
||||||||
Accounts
payable
|
$ | 2,776,935 | $ | 2,384,344 | ||||
Accrued
liabilities
|
1,176,480 | 1,199,843 | ||||||
Amounts
due to directors and officers
|
257,015 | 229,908 | ||||||
Deferred
revenue
|
159,014 | 163,198 | ||||||
Notes
and leases payable – current portion, net of
discount
|
1,940,719 | 1,615,891 | ||||||
Convertible
debentures, net of discount
|
541,651 | - | ||||||
Series
A-12 Convertible Preferred stock – redeemable portion, net of
discount
|
- | 98,000 | ||||||
Total
current liabilities
|
6,851,814 | 5,691,184 | ||||||
Notes
and leases payable, net of current portion
|
618,662 | 505,061 | ||||||
Convertible
debentures, net of discount
|
1,317,585 | 1,109,583 | ||||||
Total
liabilities
|
8,788,061 | 7,305,828 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS'
EQUITY:
|
||||||||
Series
A-12 Convertible Preferred stock, par value $.0001 per share, authorized
100,000 shares,
-0-
and 70,000 issued and outstanding, respectively
|
- | 7 | ||||||
Series
A-13 Convertible Preferred stock, par value $.0001 per share, authorized
170,000 shares,
35,000
and -0- issued and outstanding, respectively
|
3 | - | ||||||
Common
stock, par value $.0001 per share, authorized 75,000,000 shares, 7,739,626
and 7,388,783
issued
and outstanding, respectively
|
774 | 739 | ||||||
Additional
paid-in capital
|
133,825,182 | 132,299,589 | ||||||
Unamortized
discount
|
(6,747 | ) | (12,000 | ) | ||||
Accumulated
deficit
|
(119,732,395 | ) | (114,110,190 | ) | ||||
Total
stockholders’ equity
|
14,086,817 | 18,178,145 | ||||||
Total
liabilities and stockholders’ equity
|
$ | 22,874,878 | $ | 25,483,973 |
The
accompanying notes are an integral part of these consolidated financial
statements.
4
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
Six Months Ended
March 31,
|
Three Months Ended
March 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
REVENUE:
|
||||||||||||||||
DMSP
and hosting
|
$ | 1,067,373 | $ | 868,489 | $ | 515,148 | $ | 471,114 | ||||||||
Webcasting
|
2,873,542 | 2,913,536 | 1,463,535 | 1,349,348 | ||||||||||||
Audio
and web conferencing
|
3,242,522 | 3,653,021 | 1,652,561 | 1,896,052 | ||||||||||||
Network
usage
|
894,637 | 1,031,935 | 438,424 | 490,195 | ||||||||||||
Other
|
124,733 | 294,877 | 64,026 | 175,952 | ||||||||||||
Total
revenue
|
8,202,807 | 8,761,858 | 4,133,694 | 4,382,661 | ||||||||||||
COSTS
OF REVENUE:
|
||||||||||||||||
DMSP
and hosting
|
487,778 | 307,298 | 234,770 | 152,047 | ||||||||||||
Webcasting
|
791,914 | 905,646 | 465,003 | 444,352 | ||||||||||||
Audio
and web conferencing
|
994,816 | 863,486 | 459,119 | 433,447 | ||||||||||||
Network
usage
|
382,314 | 454,976 | 194,672 | 220,686 | ||||||||||||
Other
|
206,081 | 262,106 | 102,863 | 130,103 | ||||||||||||
Total
costs of revenue
|
2,862,903 | 2,793,512 | 1,456,427 | 1,380,635 | ||||||||||||
GROSS
MARGIN
|
5,339,904 | 5,968, 346 | 2,677,267 | 3,002,026 | ||||||||||||
OPERATING
EXPENSES:
|
||||||||||||||||
General
and administrative:
|
||||||||||||||||
Compensation
|
4,252,712 | 4,909,122 | 2,176,335 | 2,505,283 | ||||||||||||
Professional
fees
|
918,113 | 661,754 | 440,054 | 263,156 | ||||||||||||
Other
|
1,111,205 | 1,209,704 | 565,912 | 601,902 | ||||||||||||
Write
off deferred acquisition costs
|
- | 540,007 | - | 540,007 | ||||||||||||
Impairment
loss on goodwill and other intangible assets
|
3,100,000 | 5,500,000 | - | - | ||||||||||||
Depreciation
and amortization
|
1,116,161 | 2,011,451 | 548,800 | 918,075 | ||||||||||||
Total
operating expenses
|
10,498,191 | 14,832,038 | 3,731,101 | 4,828,423 | ||||||||||||
Loss
from operations
|
(5,158,287 | ) | (8,863,692 | ) | (1,053,834 | ) | (1,826,397 | ) | ||||||||
OTHER
EXPENSE, NET:
|
||||||||||||||||
Interest
expense
|
(537,929 | ) | (262,472 | ) | (302,529 | ) | (123,292 | ) | ||||||||
Other
income, net
|
95,011 | 33,599 | 96,199 | 2,521 | ||||||||||||
Total
other expense, net
|
(442,918 | ) | (228,873 | ) | (206,330 | ) | (120,771 | ) | ||||||||
Net
loss
|
$ | (5,601,205 | ) | $ | (9,092,565 | ) | $ | (1,260,164 | ) | $ | (1,947,168 | ) | ||||
Loss
per share – basic and diluted:
|
||||||||||||||||
Net
loss per share
|
$ | (0.75 | ) | $ | (1.27 | ) | $ | (0.17 | ) | $ | (0.27 | ) | ||||
Weighted
average shares of common stock outstanding – basic and
diluted
|
7,512,738 | 7,176,367 | 7,596,482 | 7,227,788 |
The
accompanying notes are an integral part of these consolidated financial
statements.
5
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS' EQUITY
SIX
MONTHS ENDED MARCH 31, 2010
(unaudited)
Series A- 12
Preferred Stock
|
Series A- 13
Preferred Stock
|
Common Stock*
|
Additional Paid-in
Capital
|
Accumulated
|
||||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Gross
|
Discount
|
Deficit
|
Total
|
|||||||||||||||||||||||||||||||
Balance,
September 30, 2009
|
70,000 | $ | 7 | - | $ | - | 7,388,783 | $ | 739 | $ | 132,299,589 | $ | (12,000 | ) | $ | (114,110,190 | ) | $ | 18,178,145 | |||||||||||||||||||||
Issuance
of shares, warrants and options for consultant services
|
- | - | - | - | 159,267 | 16 | 443,650 | - | - | 443,666 | ||||||||||||||||||||||||||||||
Issuance
of options for employee services
|
- | - | - | - | - | - | 444,458 | - | - | 444,458 | ||||||||||||||||||||||||||||||
Surrender
of Series A-12 preferred for Series A-13 preferred
|
(35,000 | ) | (4 | ) | 35,000 | 3 | - | - | 108,500 | (6,747 | ) | - | 101,752 | |||||||||||||||||||||||||||
Reclassification
of redeemable portion of Series A-12 preferred as equity
|
- | - | - | - | - | - | 100,000 | (2,000 | ) | - | 98,000 | |||||||||||||||||||||||||||||
Issuance
of common shares, or right to obtain common shares, for financing
fees
|
- | - | - | - | 12,500 | 1 | 116,249 | - | - | 116,250 | ||||||||||||||||||||||||||||||
Common
shares and warrants issued for interest and fees on convertible
debentures
|
- | - | - | - | 120,743 | 12 | 312,739 | - | - | 312,751 | ||||||||||||||||||||||||||||||
Conversion
of Series A-12 preferred to common shares
|
(35,000 | ) | (3 | ) | - | - | 58,333 | 6 | (3 | ) | - | - | - | |||||||||||||||||||||||||||
Dividends
accrued or paid on Series A-12 preferred
|
- | - | - | - | - | - | - | 14,000 | (14,000 | ) | - | |||||||||||||||||||||||||||||
Dividends
accrued or paid on Series A-13 preferred
|
- | - | - | - | - | - | - | - | (7,000 | ) | (7,000 | ) | ||||||||||||||||||||||||||||
Net
loss
|
- | - | - | - | - | - | - | - | (5,601,205 | ) | (5,601,205 | ) | ||||||||||||||||||||||||||||
Balance,
March 31, 2010
|
- | $ | - | 35,000 | $ | 3 | 7,739,626 | $ | 774 | $ | 133,825,182 | $ | (6,747 | ) | $ | (119,732,395 | ) | $ | 14,086,817 |
The
accompanying notes are an integral part of these consolidated financial
statements.
* A
1-for-6 reverse stock split of the outstanding shares of our common stock was
effective on April 5, 2010. Except as otherwise indicated, all related
amounts reported in these consolidated financial statements, including
common share quantities, convertible debenture conversion prices and
exercise prices of options and warrants, have been retroactively
adjusted for the effect of this reverse stock split.
6
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net
loss
|
$ | (5,601,205 | ) | $ | (9,092,565 | ) | ||
Adjustments
to reconcile net loss to net cash
(used
in) provided by operating activities:
|
||||||||
Impairment
loss on goodwill and other intangible assets
|
3,100,000 | 5,500,000 | ||||||
Depreciation
and amortization
|
1,116,161 | 2,011,451 | ||||||
Write
off deferred acquisition costs
|
- | 540,007 | ||||||
Amortization
of deferred professional fee expenses paid with equity
|
246,351 | 114,822 | ||||||
Compensation
expenses paid with equity
|
444,458 | 430,136 | ||||||
Amortization
of discount on convertible debentures
|
106,146 | 36,731 | ||||||
Amortization
of discount on notes payable
|
114,101 | 12,110 | ||||||
Interest
expense paid in common shares and options
|
67,040 | 31,103 | ||||||
Bad
debt expense
|
49,737 | 81,902 | ||||||
Gain
from settlements of obligations and sales of equipment
|
(86,352 | ) | (32,246 | ) | ||||
Net
cash (used in) operating activities, before changes in current assets and
liabilities
|
(443,563 | ) | (366,549 | ) | ||||
Changes
in current assets and liabilities:
|
||||||||
(Increase)
in accounts receivable
|
(746,577 | ) | (130,089 | ) | ||||
(Increase)
Decrease in prepaid expenses
|
(44,430 | ) | 17,140 | |||||
Decrease
(Increase) in inventories and other current assets
|
62,783 | (18,203 | ) | |||||
Increase
in accounts payable, accrued liabilities and amounts due
to directors and officers
|
820,050 | 852,430 | ||||||
(Decrease)
in deferred revenue
|
(4,184 | ) | (5,670 | ) | ||||
Net
cash (used in) provided by operating activities
|
(355,921 | ) | 349,059 | |||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Acquisition
of property and equipment
|
(593,350 | ) | (555,899 | ) | ||||
Narrowstep
acquisition costs (written off to expense in March 2009)
|
(115,000 | ) | (147,649 | ) | ||||
Net
cash (used in) investing activities
|
(708,350 | ) | (703,548 | ) |
(Continued)
7
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
(continued)
Six Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Proceeds
from notes payable, net of expenses
|
$ | 955,380 | $ | 443,378 | ||||
Proceeds
from convertible debentures
|
835,000 | - | ||||||
Proceeds
from sale of A-12 preferred shares, net of expenses
|
- | 200,000 | ||||||
Proceeds
from sale of A-13 preferred shares, net of expenses
|
(6,747 | ) | - | |||||
Repayment
of notes and leases payable
|
(537,083 | ) | (457,542 | ) | ||||
Repayment
of convertible debentures
|
(13,000 | ) | - | |||||
Net
cash provided by financing activities
|
1,233,550 | 185,836 | ||||||
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
169,279 | (168,653 | ) | |||||
CASH
AND CASH EQUIVALENTS, beginning of period
|
541,206 | 674,492 | ||||||
CASH
AND CASH EQUIVALENTS, end of period
|
$ | 710,485 | $ | 505,839 | ||||
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION:
|
||||||||
Cash
payments for interest
|
$ | 312,885 | $ | 144,637 | ||||
SUPPLEMENTAL
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Issuance
of shares, warrants and options for consultant services
|
$ | 443,666 | $ | 71,867 | ||||
Issuance
of shares and options for employee services
|
$ | 444,458 | $ | 430,136 | ||||
Issuance
of A-10 preferred shares for A-10 dividends
|
$ | - | $ | 29,938 | ||||
Issuance
of common shares for A-12 dividends
|
$ | - | $ | 64,000 | ||||
Issuance
of common shares and warrants for interest
|
$ | 312,751 | $ | 69,520 | ||||
Issuance
of common shares for A-10 preferred shares and dividends
|
$ | - | $ | 186,318 | ||||
Issuance
of common shares, or right to obtain common shares, for financing
fees
|
$ | 116,250 | $ | - | ||||
Issuance
of A-12 preferred shares for A-10 preferred shares
|
$ | - | $ | 600,000 | ||||
Issuance
of A-13 preferred shares for A-12 preferred shares
|
$ | 350,000 | $ | - | ||||
Issuance
of common shares for A-12 preferred shares
|
$ | 350,000 | $ | - | ||||
Conversion
of short-term advance to convertible debenture
|
$ | 200,000 | $ | - | ||||
Declaration
of dividends payable on A-13 preferred shares
|
$ | 7,000 | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
8
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
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 Internet video, corporate
web communications and content management applications, including digital media
services and webcasting services. Digital media services are provided primarily
to entertainment, advertising and financial industry customers. Webcasting
services are provided primarily to corporate, education, government and travel
industry customers.
The
Digital Media Services Group consists primarily of our Webcasting division, our
DMSP (“Digital Media Services Platform”) division, our UGC (“User Generated
Content”) division and our Smart Encoding division.
The
Webcasting division, which operates primarily from facilities in Pompano Beach,
Florida, provides an array of web-based media services to the corporate market
including live audio and video webcasting, packaged corporate announcements, and
rich media information storage and distribution for any business entity. The
Webcasting division generates revenue through production and distribution
fees.
The DMSP
division, which operates primarily from facilities in 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 UGC division, which
operates primarily from facilities in Colorado Springs, Colorado and also
operates as Auction Video (see note 2), 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.
The Smart
Encoding division, which operates primarily from facilities in San Francisco,
California, 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. This division also provides hosting, storage and streaming services
for digital media, which are provided via the DMSP.
The Audio
and Web Conferencing Services Group consists of our Infinite Conferencing
(“Infinite”) division and our EDNet division. Our Infinite division, which
operates primarily from facilities in the New York City metropolitan area,
generates 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.
Our EDNet
division, which operates primarily from facilities in San Francisco, California,
provides connectivity (in the form of high quality audio, compressed video 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
also provides systems integration and engineering services, application-specific
technical advice, audio equipment, proprietary and off-the-shelf codecs,
teleconferencing equipment, and other innovative products to facilitate its
broadcast and production applications. EDNet generates revenues from network
usage, sale, rental and installation of equipment, and other related
fees.
9
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity
The
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
$119.7 million as of March 31, 2010. Our operations have been financed primarily
through the issuance of equity and debt. For the year ended September 30, 2009,
we had a net loss of approximately $11.8 million, although cash provided by
operations for that period was approximately $322,000. For the six months ended
March 31, 2010, we had a net loss of approximately $5.6 million and cash used in
operations for that period was approximately $356,000. Although we had cash of
approximately $710,000 at March 31, 2010, our working capital was a deficit of
approximately $2.6 million at that date.
We are
constantly evaluating our cash needs, in order to make appropriate adjustments
to operating expenses. Depending on our actual future cash needs, we may need to
raise additional debt or equity capital to provide funding for ongoing future
operations, or to refinance existing indebtedness. No assurances can be given
that we will be successful in obtaining additional capital, or that such capital
will be available on terms acceptable to us. Our continued existence is
dependent upon our ability to raise capital and to market and sell our services
successfully. 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.
During
February 2009, we took actions to reduce our operating costs, primarily
personnel related, by approximately $65,000 per month. During October 2009, we
took additional actions to reduce our operating costs, primarily personnel
related, by another approximately $62,000 per month. We recently began to
identify and implement certain infrastructure related cost savings, which
actions have reduced our costs of revenue by approximately $34,000 per month as
of March 31, 2010 and we expect will reduce our costs of revenue by another
approximately $21,000 per month, once fully implemented by the end of fiscal
2010.
We have
estimated that, including the above reductions in our expenditure levels, we
would require an approximately 13-17% increase in our consolidated revenues for
the remainder of fiscal 2010, as compared to the corresponding period of fiscal
2009, in order to adequately fund our minimum anticipated expenditures
(including debt service and a basic level of capital expenditures) through
September 30, 2010. We have estimated that, in addition to this
ongoing revenue increase, we will also require additional near-term debt or
equity financing of approximately $250,000 (in addition to the $250,000 loan
proceeds we received in May 2010 – see note 9) to adequately address past due
liabilities we believe are necessary to pay to continue our operations. If we
were to obtain financing in excess of this $250,000, the required revenue
increase could be less than as stated above.
We have
implemented specific actions, including hiring additional sales personnel,
developing new products and initiating new marketing programs, geared towards
achieving the above revenue increases. The costs associated with these actions
were contemplated in the above calculations. However, in the event we
are unable to achieve these revenue increases, we believe that a combination of
identified decreases in our current level of expenditures that we would
implement and the raising of additional capital in the form of debt and/or
equity that we believe we could obtain from identified sources would be
sufficient to allow us to operate through September 30, 2010. We will closely
monitor our revenue and other business activity through the remainder of fiscal
2010 to determine if further cost reductions, the raising of additional capital
or other activity is considered necessary.
10
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Liquidity
(continued)
During
December 2009, we received funding commitment letters (“Letters”) executed by
three entities agreeing to provide us, within twenty days after our notice given
on or before December 31, 2010, aggregate cash funding of $750,000. Funding
under the Letters would be in exchange for our equity under mutually agreeable
terms to be negotiated at the time of funding, or in the event such terms could
not be reached, in the form of repayable debt. Terms of the repayable debt would
also be subject to negotiation at the time of funding, provided that the debt
(i) would be unsecured and subordinated to our other debts, (ii) would be
subject to approval by our other creditors having the right of such
pre-approval, (iii) would provide for no principal or interest payments in cash
prior to December 31, 2010, although, at our option, consideration may be given
in the form of equity issued before that date and (iv) would provide that any
cash repayment of principal after that date would be in equal monthly
installments over at least one year but no greater than four years. The rate of
return on such debt, including cash and equity consideration given, would be
negotiable based on market values at the time of funding but in any event would
be not be greater than (i) a cash coupon rate of fifteen percent (15%) per annum
and a (ii) total effective interest rate of thirty percent (30%) per annum (such
rate including the cash coupon rate plus the fair value of our shares given
and/or the Black-Scholes valuation of debt conversion features and/or issuance
of options and/or warrants). As consideration for these Letters, the
issuing entities received an aggregate of 12,500 unregistered shares. One of the
Letters, for $250,000, was executed by Mr. Charles Johnston, one of our
directors. Furthermore, certain principals of Triumph Small Cap Fund, which
provided one of the Letters, for $250,000, are also principals in Greenberg
Capital and required us to release Triumph Small Cap Fund from their commitment
under that Letter, as part of a February 2010 modification to the Greenberg Note
– see note 4.
A
prospectus allowing us to offer and sell up to $6.6 million of our registered
common shares (“Shelf Registration”) was declared effective by the SEC on April
30, 2010. Although there is no assurance that we will make sales under that
Shelf Registration, or if we do make such sales what the timing or proceeds will
be, we anticipate that the first approximately $900,000 of such proceeds will be
used to repay the outstanding balances due under the Greenberg Note, the
Wilmington Notes and the Lehmann Note – see notes 4 and 9. In addition, we may
incur fees in connection with such sales. Furthermore, sales under the Shelf
Registration that exceed in aggregate twenty percent (20%) of our outstanding
shares would be subject to prior shareholder approval.
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., AV Acquisition,
Inc., Auction Video Japan, Inc., HotelView Corporation and Media On Demand, Inc.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Reverse
stock split
A 1-for-6
reverse stock split of the outstanding shares of our common stock was effective
on April 5, 2010. Except as otherwise indicated, all related
amounts reported in these consolidated financial statements, including
common share quantities, convertible debenture conversion prices and
exercise prices of options and warrants, have been retroactively
adjusted for the effect of this reverse stock split.
11
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 reduces 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
The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, accrued liabilities and amounts due to directors and officers
approximate fair value due to the short maturity of the instruments. The
carrying amounts of the current portion of notes, debentures and leases payable
approximate fair value due to the short maturity of the instruments, as well as
the market value interest rates they carry.
Effective
October 1, 2008, we adopted the provisions of the Fair Values Measurements and
Disclosures topic of the Accounting Standards Codification (“ASC”), with respect
to our financial assets and liabilities, identified based on the definition of a
financial instrument contained in the Financial Instruments topic of the ASC.
This definition includes a contract that imposes a contractual obligation on us
to exchange other financial instruments with the other party to the contract on
potentially unfavorable terms. We have determined that the Wilmington Notes, the
Greenberg Note, the Rockridge Note, the CCJ Note and the Equipment Notes
discussed in note 4 and the redeemable portion of the Series A-12 (preferred
stock) discussed in note 6 are financial liabilities subject to the accounting
and disclosure requirements of the Fair Values Measurements and Disclosures
topic of the ASC. This is further discussed in “Effects of Recent Accounting
Pronouncements” below.
12
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair
Value Measurements (continued)
Under the
above accounting standards, fair value 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. 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 Wilmington Notes, the Greenberg Note, the Rockridge Note, the CCJ Note, the
Equipment Notes or the redeemable portion of the Series A-12. However, we have
determined that the fair value of the Wilmington Notes, the Greenberg Note, the
Rockridge Note, the CCJ Note, the Equipment Notes and the redeemable portion of
the Series A-12 may be determined using Level 2 inputs, as follows: the fair
market value interest rate paid by us under our line of credit arrangement (the
“Line”) as discussed in note 4 and the value of conversion rights contained in
those arrangements, based on the relevant aspects of the same Black Scholes
valuation model used by us to value our options and warrants. We have also
determined that the fair value of the Wilmington Notes, the Greenberg Note, the
Rockridge Note, the CCJ Note, the Equipment Notes and the redeemable portion of
the Series A-12 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.
Based on
the use of the inputs described above, we have determined that there was no
material difference between the carrying value and the fair value of the
Wilmington Notes, the Greenberg Note, the Rockridge Note, the CCJ Note, the
Equipment Notes and the redeemable portion of the Series A-12 as of October 1,
2008, March 31, 2009, September 30, 2009, or March 31, 2010 (to the extent each
of those liabilities were outstanding on each of those dates) and therefore no
adjustment with respect to fair value was made to our financial statements as of
those dates or for the six and three months ended March 31, 2010 and 2009,
respectively.
13
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property
and Equipment
Property
and equipment are recorded at cost, less accumulated
depreciation. 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
Included
in property and equipment is computer software developed for internal use,
including the Digital Media Services Platform (“DMSP”), the iEncode webcasting
software and the MarketPlace365 (“MP365”) platform – see notes 2 and
3. Such amounts have been accounted for in accordance with the
Intangibles – Goodwill and Other topic of the ASC and are 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.
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. 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.
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.
We follow
a two step process for impairment testing of goodwill. The first step of this
test, used to identify potential impairment and described above, 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. See note 2 – Goodwill and other
Acquisition-Related Intangible Assets.
14
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
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 good 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
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.
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 March 31, 2010 and September 30, 2009 was
immaterial in relation to our recorded liabilities at those dates.
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.
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.
15
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue
Recognition (continued)
The
Infinite division of the Audio and Web Conferencing Services Group generates
revenues from audio conferencing and web conferencing services, plus recording
and other ancillary services. Infinite owns telephone switches 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 telephone connections controlled by EDNet, as
well as bridging services and the sale and rental of equipment. EDNet
purchases digital phone lines from telephone companies (and resellers) and sells
access to the lines, as well as separate per-minute usage charges. Network usage
and bridging revenue is recognized based on the timing of the customer’s use of
those services.
EDNet
sells various audio codecs and video transport systems, 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 leases some
equipment to customers under terms that are accounted for as operating
leases. Rental revenue from leases is recognized ratably over the
life of the lease and the related equipment is depreciated over its estimated
useful life. All leases of the related equipment contain fixed
terms.
Deferred
revenue represents amounts billed to customers for webcasting, EDNet, smart
encoding 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.
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 equals comprehensive loss
for all periods presented.
Advertising
and marketing
Advertising
and marketing costs, which are charged to operations as incurred and included in
Professional Fees and Other General and Administrative Operating Expenses, were
approximately $148,000 and $169,000 for the six months ended March 31, 2010 and
2009, and approximately $84,000 and $65,000 for the three months ended March 31,
2010 and 2009, respectively.
16
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income
Taxes
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. We had a deferred tax asset of approximately $34.6 million
as of March 31, 2010, primarily resulting from net operating loss carryforwards.
A full valuation allowance has been recorded related to the deferred tax asset
due to the uncertainty of realizing the benefits of certain net operating loss
carryforwards 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.
Accordingly,
no income tax benefit was recorded in our consolidated statement of operations
as a result of the net tax losses for the six and three months ended March 31,
2010 and 2009. The primary differences between the net loss for book
and the net loss 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 certain acquired
intangible assets, and expenses for stock options and shares issued in payment
for consultant and employee services but not exercised by the recipients, or in
the case of shares, not registered for or eligible for resale.
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 March 31,
2010 or September 30, 2009, we have not taken, nor recognized the financial
statement impact of, any material tax positions, as defined above. Our policy is
to recognize, as non-operating expense, interest or penalties related to income
tax matters at the time such payments become probable, although we had not
recognized any such material items in our statement of operations for the six
and three months ended March 31, 2010 and 2009. The tax years ending September
30, 2006 and thereafter remain subject to examination by Federal and various
state tax jurisdictions.
Compensation
and related expenses
Compensation
costs for employees considered to be direct labor are included as part of
webcasting and smart encoding 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 $687,000 and
$661,000 as of March 31, 2010 and September 30, 2009, respectively, related to
salaries, commissions, taxes, vacation and other benefits earned but not paid as
of those dates.
17
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Equity
Compensation to Employees and Consultants
We have a
stock based compensation plan (the “2007 Plan”) for our employees. The
Compensation – Stock Compensation topic of the ASC requires all companies to
measure compensation cost for all share-based payments, including employee stock
options, at fair value, which we adopted as of October 1, 2006 (the required
date) and first applied during the year ended September 30, 2007, using the
modified-prospective-transition method. Under this method, compensation cost
recognized for the six and three months ended March 31, 2010 and 2009 includes
compensation cost for all share-based payments granted subsequent to September
30, 2006, calculated using the Black-Scholes model, based on the estimated
grant-date fair value and allocated over the applicable vesting and/or service
period. As of October 1, 2006, there were no outstanding share-based payments
granted prior to that date, but not yet vested. There were no 2007 Plan options
granted during the three months ended March 31, 2010. For 2007 Plan options that
were granted and thus valued under the Black-Scholes model during the three
months ended December 31, 2009, the expected volatility rate was 88%, the
risk-free interest rate was 2.5%, expected dividends were $0 and the expected
term was 5 years, the full term of the related options. There were no 2007 Plan
options granted during the six months ended March 31, 2009.
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 three months ended March 31, 2010. For Non-Plan options that were granted
and thus valued under the Black-Scholes model during the three months ended
December 31, 2009, the expected volatility rate was 91 to 99%, the risk-free
interest rate was 1.9 to 2.6%, expected dividends were $0 and the expected term
was 4 to 5 years, the full term of the related options. There were no Non-Plan
options granted during the six months ended March 31, 2009.
See Note
8 for additional information related to all stock option issuances.
Net Loss
Per Share
For the
six and three months ended March 31, 2010 and 2009, net loss per share is based
on the net loss divided by the weighted average number of shares of common stock
outstanding – see discussion of reverse stock split above. Since the
effect of common stock equivalents was anti-dilutive, all such equivalents were
excluded from the calculation of weighted average shares outstanding. The total
outstanding options and warrants, which have been excluded from the calculation
of weighted average shares outstanding, were 2,043,398 and 2,534,753 at March
31, 2010 and 2009, respectively.
18
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MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Loss
Per Share (continued)
In
addition, the potential dilutive effects of the following convertible securities
outstanding at March 31, 2010 have been excluded from the calculation of
weighted average shares outstanding: (i) 35,000 shares of Series A-13
Convertible Preferred Stock (“Series A-13”) which could potentially convert into
116,667 shares of ONSM common stock, (ii) $1,000,000 of convertible notes which
in aggregate could potentially convert into up to 208,333 shares of our common
stock (excluding interest), (iii) 366,667 restricted shares of our common stock
for the origination fee in connection with the Rockridge Note, issuable upon not
less than sixty-one (61) days written notice to us, (iv) the $500,000
convertible portion of the Rockridge Note which could potentially convert into
up to 208,333 shares of our common stock, (v) the $200,000 CCJ Note, which could
potentially convert into up to 66,667 shares of our common stock, (vi) the
$237,000 remaining outstanding balance of the Greenberg Note, which could
potentially convert into up to 98,750 shares of our common stock, and (vii) the
$500,000 outstanding balance of the Wilmington Notes, which could potentially
convert into up to 179,272 shares of our common stock.
Furthermore,
if we sell all or substantially all of our assets prior to the repayment of the
Rockridge Note, the remaining outstanding principal amount of the Rockridge Note
may be converted into restricted shares of our common stock, which would have
been 502,563 shares as of March 31, 2010 (in addition to the 208,333 shares
noted above).
The
potential dilutive effects of the following convertible securities previously
outstanding at March 31, 2009 were excluded from the calculation of weighted
average shares outstanding: (i) 80,000 shares of Series A-12 Redeemable
Convertible Preferred Stock (“Series A-12”) which could have potentially
converted into 133,333 shares of our common stock and (ii) $1,000,000 of
convertible notes which in aggregate could have potentially converted into up to
208,333 shares of our common stock (excluding interest).
Accounting
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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, revenue reserves, inventory reserves, depreciation and
amortization lives and methods, income taxes and related reserves, contingencies
and goodwill and other impairment allowances. Such estimates are reviewed on an
on-going basis and actual results could be materially affected by those
estimates.
Reclassifications
Certain
prior year amounts have been reclassified to conform to the current year
presentation, including inventories and other current asset balance sheet
groupings, property and equipment footnote category classifications and
classifications between accounts payable, accrued liabilities and amounts due to
directors and officers. Also see discussion of reverse stock split
above.
19
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interim
Financial Data
In the
opinion of our management, the accompanying unaudited interim financial
statements have been prepared by us pursuant to the rules and regulations of the
Securities and Exchange Commission. These interim financial statements do not
include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements and should be read in
conjunction with our annual financial statements as of September 30, 2009. These
interim financial statements have not been audited. However, our management
believes the accompanying unaudited interim financial statements contain all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly our consolidated financial position as of March 31, 2010, the
results of our operations for the six and three months ended March 31, 2010 and
2009 and our cash flows for the six months ended March 31, 2010 and 2009. The
results of operations and cash flows for the interim period are not necessarily
indicative of the results of operations or cash flows that can be expected for
the year ending September 30, 2010.
Effects
of Recent Accounting Pronouncements
The Fair
Value Measurements and Disclosures topic of the ASC includes certain concepts
first set forth in September 2006, which define the use of fair value measures
in financial statements, establish a framework for measuring fair value and
expand disclosure related to the use of fair value measures. In February 2008,
the FASB provided a one-year deferral of the effective date of those concepts
for non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually. The application of these concepts was effective for our fiscal year
beginning October 1, 2008, excluding the effect of the one-year deferral noted
above. See “Fair Value Measurements” above. We adopted these concepts with
respect to our non-financial assets and non-financial liabilities that are not
measured at fair value at least annually, effective October 1, 2009. The
adoption of these concepts did not have a material impact on our financial
position, results of operations or cash flows.
The
Financial Instruments topic of the ASC includes certain concepts first set forth
in February 2007, under which 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. The application of these concepts was effective for our fiscal
year beginning October 1, 2008 – however, we have elected not to measure
eligible financial assets and liabilities at fair value. Accordingly, the
adoption of these concepts did not have a material impact on our financial
position, results of operations or cash flows.
The
Business Combinations topic of the ASC establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in an acquiree, including the recognition and measurement of goodwill
acquired in a business combination. Certain provisions of this
guidance were first effective for our fiscal year beginning October 1, 2009. Had
these provisions been in effect prior to that date, the $540,007 currently
reflected as a write off of those costs for the six and three months ended March
31, 2009 would have been replaced by an expense of $121,948 and $77,917,
respectively, the amount of such costs incurred during each of those
periods.
20
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effects
of Recent Accounting Pronouncements (continued)
The
Intangibles – Goodwill and Other topic of the ASC states the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset, which requirements were
effective for our fiscal year beginning October 1, 2009. The objective of these
requirements is to improve the consistency between the useful life of a
recognized intangible asset under the Intangibles – Goodwill and Other topic of
the ASC and the period of expected cash flows used to measure the fair value of
the asset under the Business Combinations topic of the ASC. These requirements
apply to all intangible assets, whether acquired in a business combination or
otherwise, and will be applied prospectively to intangible assets acquired after
the effective date.
The Debt
topic of the ASC specifies that issuers of convertible debt instruments that may
be settled in cash upon conversion (including partial cash settlement) should
separately account for the liability and equity components in a manner that will
reflect the entity’s nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. These requirements were effective for our
fiscal year beginning October 1, 2009, although they did not have a material
impact on our financial position, results of operations or cash
flows.
In
October 2009, the Financial Accounting Standards Board (“FASB”) issued ASC
update number 2009-14 -Software (Topic 985): Certain Revenue Arrangements That
Include Software Elements (“Update 2009-14”) and ASC update number 2009-13 -
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements
(“Update 2009-13”). As summarized in Update 2009-14, ASC Topic 985 has been
amended to remove from the scope of industry specific revenue accounting
guidance for software and software related transactions, tangible products
containing software components and non-software components that function
together to deliver the product’s essential functionality. As summarized in
Update 2009-13, ASC Topic 605 has been amended (1) to provide updated
guidance on whether multiple deliverables exist, how the deliverables in an
arrangement should be separated, and the consideration allocated; (2) to
require an entity to allocate revenue in an arrangement using estimated selling
prices of deliverables if a vendor does not have vendor-specific objective
evidence (“VSOE”) or third-party evidence of selling price; and (3) to
eliminate the use of the residual method and require an entity to allocate
revenue using the relative selling price method. These requirements will be
effective for our fiscal year ended September 30, 2011 with early adoption
permitted. Adoption may either be on a prospective basis or by retrospective
application. We are currently assessing the impact of these requirements and at
this time we are unable to quantify their impact on our financial statements or
to determine the timing and/or method of their adoption.
In
January 2010, the FASB issued ASC update number 2010-06 - Fair Value
Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements (“Update 2010-06”). Update 2010-06 requires new and revised
disclosures for recurring or non-recurring fair value measurements, specifically
related to significant transfers into and out of Levels 1 and 2, and for
purchases, sales, issuances, and settlements in the rollforward of activity for
Level 3 fair value measurements. Update 2010-06 also clarifies existing
disclosures related to the level of disaggregation and the inputs and valuation
techniques used for fair value measurements. The new disclosures and
clarifications of existing disclosures about fair value measurements were
effective January 1, 2010. However, the disclosures about purchases, sales,
issuances, and settlements in the rollforward of activity for Level 3 fair value
measurements are not effective until our fiscal year ended September 30, 2012.
Our adoption of Update 2010-06 did not, and is not expected to, have a material
impact on our financial position, results of operations or cash
flows.
21
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 1:
NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
Effects
of Recent Accounting Pronouncements (continued)
In
February 2010, the FASB issued ASC update number 2010-09, which amended ASC
Topic 855 (Subsequent Events), effective upon issuance, to remove the
requirement that an SEC filer disclose the date through which subsequent events
have been evaluated. Our adoption of this guidance was limited to the form and
content of disclosures and did not have a material impact on our consolidated
financial statements.
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
Information
regarding the Company’s goodwill and other acquisition-related intangible assets
is as follows:
March 31, 2010
|
September 30, 2009
|
|||||||||||||||||||||||
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net Book
Value
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net Book
Value
|
|||||||||||||||||||
Goodwill:
|
||||||||||||||||||||||||
Infinite
Conferencing
|
$ | 8,600,887 | $ | - | $ | 8,600,887 | $ | 11,100,887 | $ | - | $ | 11,100,887 | ||||||||||||
Acquired
Onstream
|
4,121,401 | - | 4,121,401 | 4,121,401 | - | 4,121,401 | ||||||||||||||||||
EDNet
|
1,271,444 | - | 1,271,444 | 1,271,444 | - | 1,271,444 | ||||||||||||||||||
Auction
Video
|
3,216 | - | 3,216 | 3,216 | - | 3,216 | ||||||||||||||||||
Total
goodwill
|
13,996,948 | - | 13,996,948 | 16,496,948 | - | 16,496,948 | ||||||||||||||||||
Acquisition-related
intangible assets:
|
||||||||||||||||||||||||
Infinite Conferencing - customer
lists, trademarks, URLs, supplier terms
and Consulting/non- competes
|
3,783,604 | ( 2,390,082 | ) | 1,393,522 | 4,383,604 | ( 2,061,105 | ) | 2,322,499 | ||||||||||||||||
Auction
Video - customer lists,
patent pending and consulting/non-
competes
|
1,117,643 | ( 965,230 | ) | 152,413 | 1,110,671 | ( 934,020 | ) | 176,651 | ||||||||||||||||
Total
intangible assets
|
4,901,247 | ( 3,355,312 | ) | 1,545,935 | 5,494,275 | ( 2,995,125 | ) | 2,499,150 | ||||||||||||||||
Total
goodwill and other acquisition-related intangible assets
|
$ | 18,898,195 | $ | (3,355,312 | ) | $ | 15,542,883 | $ | 21,991,223 | $ | (2,995,125 | ) | $ | 18,996,098 |
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.
22
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
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 next 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 are amortizing these assets over useful
lives ranging from 3 to 6 years.
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 discussed in “Testing for Impairment” below, this initially recorded
goodwill was determined to be impaired as of December 31, 2008 and a $900,000
adjustment was made to reduce its carrying value to approximately $11.1 million
as of that date. 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. These adjustments, totaling $1.1 million, were included
in the aggregate $5.5 million charge for impairment of goodwill and other
intangible assets as reflected in our results of operations for the six months
ended March 31, 2009. Furthermore, the Infinite goodwill was determined to be
further impaired as of December 31, 2009 and a $2.5 million adjustment was made
to reduce the carrying value of that goodwill to approximately $8.6 million as
of that date. 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. These adjustments, totaling $3.1 million, were reflected in our
results of operations for the six months ended March 31, 2010, as a charge for
impairment of goodwill and other intangible assets.
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 Auction Video, Inc. transaction was structured as a purchase of assets and
the assumption of certain identified liabilities by our wholly-owned U.S.
subsidiary, AV Acquisition, Inc. The Auction Video Japan, Inc. transaction was
structured as a purchase of 100% of the issued and outstanding capital stock of
Auction Video Japan, Inc. 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.
23
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
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 and the consulting and non-compete agreements entered into with the former
executives and owners of Auction Video were valued in aggregate at $1,150,000
and are being amortized over various lives between two to five years commencing
April 2007. $600,000 was assigned as the value of the video ingestion and flash
transcoder, which was already integrated into our DMSP as of the date of the
acquisition and was added to that asset’s carrying cost for financial statement
purposes, with depreciation over a three-year life commencing April 2007 – see
note 3. Future cost savings for Auction Video services to be provided to our
customers existing prior to the acquisition were valued at $250,000 and were
amortized to cost of sales over a two-year period commencing April
2007.
Subsequent
to the Auction Video 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 our UGV (User Generated Video) technology. In April
2008, we revised the original patent application primarily for the purpose of
splitting it into two separate applications, which, while related, were being
evaluated separately by the U.S. Patent Office (“USPO”). With respect to the
claims pending in the first of the two applications, the USPO issued non-final
rejections in August 2008, February 2009 and May 2009, as well as a final
rejection in January 2010. On April 21, 2010 we filed a written response to this
final rejection with the USPO, along with a "Request for Continued Examination”.
Regardless of the ultimate outcome of this matter, our management has determined
that an adverse decision with respect to this patent application would not have
a material adverse effect on our financial position or results of operations.
The USPO has taken no formal action with regard to the second of the two
applications. Certain of the former owners of Auction Video, Inc. have an
interest in proceeds that we may receive under certain circumstances in
connection with these patents.
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. As a result, we
recognized other income of approximately $45,000 for the six months ended March
31, 2009, which is the difference between the assumed liabilities of
approximately $84,000 and the assumed assets of approximately $39,000. 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.
As
discussed in “Testing for Impairment” below, the carrying value of the initially
recorded identifiable intangible assets acquired as part of the Auction Video
Acquisition were determined to be impaired as of December 31, 2008 and an
adjustment was made to reduce the net carrying value of those intangible assets
by $100,000. This $100,000 adjustment was included in the aggregate
$5.5 million charge for impairment of goodwill and other intangible assets as
reflected in our results of operations for the six months ended March 31,
2009.
24
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
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 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 related to
fixed assets, working capital and workforce retraining.
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 discussed in
“Testing for Impairment” below, this initially recorded goodwill was determined
to be impaired as of December 31, 2008 and a $4.3 million adjustment was made to
reduce the carrying value of that goodwill to approximately $4.1 million as of
that date. This adjustment was included in the aggregate $5.5 million
charge for impairment of goodwill and other intangible assets as reflected in
our results of operations for the six months ended March 31,
2009.
25
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Testing for
Impairment
The
Intangibles – Goodwill and Other topic of the ASC, which addresses the financial
accounting and reporting standards for goodwill and other intangible assets
subsequent to their acquisition, requires that goodwill be tested for impairment
on a periodic basis. 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. 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. We performed impairment tests
on Infinite, EDNet and Acquired Onstream as of December 31, 2008. We assessed
the fair value of the net assets of these reporting units by considering the
projected cash flows and by analysis of comparable companies, including such
factors as the relationship of the comparable companies’ revenues to their
respective market values. Based on these factors, we concluded that
there was no impairment of the assets of EDNet as of that date. Although the
first step of the two step testing process of the assets of Acquired Onstream
and Infinite preliminarily indicated that the fair value of those intangible
assets exceeded their recorded carrying value as of December 31, 2008, it was
noted that as a result of the then recent substantial volatility in the capital
markets, the price of our common stock and our market value had decreased
significantly and as of December 31, 2008, our market capitalization, after
appropriate adjustments for control premium and other considerations, was
determined to be less than our net book value (i.e., stockholders’ equity as
reflected in our financial statements). Based on this condition, and in
accordance with the provisions of the Intangibles – Goodwill and Other topic of
the ASC, we recorded a non-cash expense, for the impairment of our goodwill and
other intangible assets, of $5.5 million for the six months ended March 31,
2009. As discussed above, this $5.5 million adjustment was determined to relate
to $1.1 million of goodwill and intangible assets of Infinite, $100,000 of
intangible assets of Auction Video and $4.3 million of goodwill of Acquired
Onstream.
We also
performed impairment tests on Infinite, EDNet and Acquired Onstream as of
December 31, 2009, using the same methodologies discussed
above. Based on these factors, we concluded that there was no
impairment of the assets of Acquired Onstream or EDNet as of that date. However,
we determined that Infinite’s goodwill and certain of its intangible assets were
impaired as of that date and based on that condition, and as discussed above, in
accordance with the provisions of the Intangibles – Goodwill and Other topic of
the ASC, we recorded a non-cash expense, for the impairment of our goodwill and
other intangible assets, of $3.1 million for the six months ended March 31,
2010.
Although
we determined that our market value (after certain adjustments as discussed
above) exceeded our net book value as of December 31, 2009, if the price of our
common stock and our market value were to decline, such condition could result
in future non-cash impairment charges to our results of operations related to
our goodwill and other intangible assets arising from our next scheduled
recurring annual impairment review, which will be as of December 31,
2010.
26
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 2:
GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS
(Continued)
Testing for
Impairment (continued)
The
valuations of Infinite, EDNet and Acquired Onstream incorporate our management’s
estimates of future sales and operating income, which estimates in the cases of
Infinite and Acquired Onstream are dependent on products (audio and web
conferencing and the DMSP, respectively) from which significant sales increases
may be required to support that valuation. Furthermore, even if our market value
continues to exceed our net book value, annual reviews for impairment in future
periods may result in future periodic write-downs. Tests for
impairment between annual tests may be required if events occur or circumstances
change that would more likely than not reduce the fair value of the net carrying
amount.
NOTE
3: PROPERTY AND EQUIPMENT
Property
and equipment, including equipment acquired under capital leases, consists
of:
March
31, 2010
|
September
30, 2009
|
|||||||||||||||||||||||||||
Historical
Cost
|
Accumulated
Depreciation
and
Amortization
|
Net
Book
Value
|
Historical
Cost
|
Accumulated
Depreciation
and
Amortization
|
Net
Book
Value
|
Useful
Lives
(Yrs)
|
||||||||||||||||||||||
Equipment
and software
|
$ | 10,553,293 | $ | (9,493,389 | ) | $ | 1,059,904 | $ | 10,442,539 | $ | (9,079,681 | ) | $ | 1,362,858 | 1-5 | |||||||||||||
DMSP
|
5,854,460 | (5,008,258 | ) | 846,202 | 5,719,979 | (4,791,517 | ) | 928,462 | 3-5 | |||||||||||||||||||
Travel
video library
|
1,368,112 | (1,368,112 | ) | - | 1,368,112 | (1,368,112 | ) | - | N/A | |||||||||||||||||||
Other
capitalized internal
use software
|
1,474,138 | (517,739 | ) | 956,399 | 1,215,401 | (448,218 | ) | 767,183 | 3-5 | |||||||||||||||||||
Furniture, fixtures
and leasehold improvements
|
510,334 | (461,458 | ) | 48,876 | 475,857 | (451,264 | ) | 24,593 | 2-7 | |||||||||||||||||||
Totals
|
$ | 19,760,337 | $ | (16,848,956 | ) | $ | 2,911,381 | $ | 19,221,888 | $ | (16,138,792 | ) | $ | 3,083,096 |
Depreciation
and amortization expense for property and equipment was approximately (i)
$756,000 and $1,446,000 for the six months ended March 31, 2010 and 2009,
respectively, and (ii) $391,000 and $704,000 for the three months ended March
31, 2010 and 2009, respectively.
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. This
platform was the primary asset included in our purchase of Acquired Onstream.
The SAIC contract terminated by mutual agreement of the parties on June 30,
2008. Although cancellation of the contract releases SAIC to offer what is
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.
27
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
3: PROPERTY AND EQUIPMENT (Continued)
The DMSP
is comprised of four separate “products”- transcoding, storage, search/retrieval
and distribution. A limited version of the DMSP, with three of the four
products, 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 the development of “Streaming Publisher”, a
second version of the DMSP with additional functionality, we have capitalized as
part of the DMSP approximately $740,000 of employee compensation, payments to
contract programmers and related costs as of March 31, 2010, including $132,000
capitalized during the six months ended March 31, 2010, $422,000 during the year
ended September 30, 2009 and $186,000 during the year ended September 30, 2008.
As of March 31, 2010, approximately $449,000 of these costs had been placed in
service and are being depreciated primarily over five years. The remainder of
the costs not in service relate primarily to new versions and/or releases of the
DMSP under development. Although Streaming Publisher is a stand-alone product,
it is based on a different architecture than “Store and Stream” and is a primary
building block of the MP365 platform, discussed below.
On March
27, 2007 we completed the acquisition of Auction Video – see note 2. The assets
acquired included a video ingestion and flash transcoder, which was already
integrated into the DMSP as of the date of the acquisition. Based on our
determination of the fair value of that transcoder at the date of the
acquisition, $600,000 was added to the DMSP’s carrying cost, which additional
cost is being depreciated over a three-year life commencing April
2007.
On March
31, 2008 we agreed to pay $300,000 for a perpetual license for certain digital
asset management software, which we currently utilize to provide our automatic
meta-tagging services, in addition to and in accordance with a limited term
license that we purchased in 2007 for $281,250 - see note 5 for additional terms
of this perpetual license and possible limits on its future use. At the time of
this purchase, in addition to continuing to use this software to provide our
automatic meta-tagging services, we expanded our use of this software in
providing our core DMSP services. Therefore, we recorded a portion of
this purchase, plus a portion of the remaining unamortized 2007 purchase amount,
as an aggregate $243,750 increase in the DMSP’s carrying cost, such additional
cost being depreciated over five years commencing April 2008.
Other
capitalized internal use software as of March 31, 2010 includes approximately
$615,000 of employee compensation and other costs related to the development of
iEncode software, which runs on a self-administered, webcasting appliance that
can be used anywhere to produce a live video webcast. $114,000 was capitalized
during the six months ended March 31, 2010, $288,000 during the year ended
September 30, 2009 and $213,000 during the year ended September 30, 2008. As of
March 31, 2010, $564,000 of these costs had been placed in service and are being
depreciated over a five-year life, with depreciation commencing on $509,000 of
these costs during the six and three months ended December 31,
2009.
Other
capitalized internal use software as of March 31, 2010 includes approximately
$300,000 of employee compensation and payments to contract programmers related
to the development of the MP365 platform, which will enable the creation of
on-line virtual marketplaces and trade shows utilizing many of our other
technologies such as DMSP, webcasting, UGC and conferencing. $144,000 was
capitalized during the six months ended March 31, 2010 and $156,000 during the
year ended September 30, 2009. This excludes related costs for the development
of Streaming Publisher, as discussed above.
28
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 4:
DEBT
Debt
includes convertible debentures, notes payable and capitalized lease
obligations.
Convertible
Debentures
Convertible
debentures consist of the following as of March 31, 2010 and September 30, 2009,
respectively:
March 31,
2010
|
September 30,
2009
|
|||||||
Equipment
Notes
|
$ | 1,000,000 | $ | 1,000,000 | ||||
CCJ
Note
|
200,000 | - | ||||||
Greenberg
Note
|
237,000 | - | ||||||
Wilmington
Notes
|
500,000 | - | ||||||
Rockridge
Note (excluding portion classified under notes payable)
|
500,000 | 375,000 | ||||||
Total
convertible debentures
|
2,437,000 | 1,375,000 | ||||||
Less:
discount on convertible debentures
|
(577,764 | ) | (265,417 | ) | ||||
Convertible
debentures, net of discount
|
1,859,236 | 1,109,583 | ||||||
Less:
current portion, net of discount
|
( 541,651 | ) | - | |||||
Convertible
debentures, net of current portion
|
$ | 1,317,585 | $ | 1,109,583 |
Equipment
Notes
During
the period from June 3, 2008 through July 8, 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. This
included $50,000 received from CCJ Trust (“CCJ”). CCJ is a trust for the adult
children of Mr. Charles Johnston, one of our directors, and he disclaims any
beneficial ownership interest in CCJ.
We issued
notes to those Investors (the “Equipment Notes”), which are collateralized by
specifically designated software and equipment owned by us with a cost basis of
approximately $1.5 million, as well as a subordinated lien on certain other of
our assets to the extent that the designated software and equipment, or other
software and equipment added to the collateral at a later date, is not
considered sufficient security for the loan. Under this arrangement, the
Investors received 1,667 restricted ONSM common shares for each $100,000 lent to
us, and also receive interest at 12% per annum. Interest is payable every 6
months in cash or, at our option, in restricted ONSM common shares, based on a
conversion price equal to seventy-five percent (75%) of the average ONSM closing
price for the thirty (30) trading days prior to the date the applicable payment
is due. On November 11, 2008, we elected to issue 26,333 unregistered common
shares to the Investors in lieu of $48,740 cash interest on these Equipment
Notes for June 2008 through October 2008, which was recorded as interest expense
of $69,520 on our books, based on the fair value of those shares on the issuance
date. On May 21, 2009, we elected to issue 49,098 unregistered common shares to
the Investors in lieu of $60,000 cash interest on these Equipment Notes for
November 2008 through April 2009, which was recorded as interest expense of
$67,756 on our books, based on the fair value of those shares on the issuance
date. On November 11, 2009, we elected to issue 34,917 unregistered common
shares to the Investors in lieu of $60,493 cash interest on these Equipment
Notes for May 2009 through October 2009, which was recorded as interest expense
of $77,515 on our books, based on the fair value of those shares on the issuance
date. On April 30, 2010, we elected to issue 44,369 unregistered common shares
to the Investors in lieu of $59,507 cash interest on these Equipment Notes for
November 2009 through April 2010, which was recorded as interest expense of
$92,288 on our books, based on the fair value of those shares on the issuance
date. The next interest due date is October 31, 2010.
29
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 4:
DEBT (Continued)
Convertible
Debentures (continued)
Equipment
Notes (continued)
We may
prepay the Equipment Notes, which mature June 3, 2011, at any time upon ten (10)
days' prior written notice to the Investors during which time any or all of the
Investors may choose to convert the Equipment Notes held by them. In
the event of such repayment, all interest accrued and due for the remaining
unexpired loan period is due and payable and may be paid in cash or restricted
ONSM common shares in accordance with the above formula.
The
outstanding principal is due on demand in the event a payment default is uncured
ten (10) business days after written notice. Investors holding in excess of 50%
of the outstanding principal amount of the Equipment Notes may declare a default
and may take steps to amend or otherwise modify the terms of the Equipment Notes
and related security agreement.
The
Equipment Notes may be converted to restricted ONSM common shares at any time
prior to their maturity date, at the Investors’ option, based on a conversion
price equal to seventy-five percent (75%) of the average ONSM closing price for
the thirty (30) trading days prior to the date of conversion, but in no event
may the conversion price be less than $4.80 per share. In the event the
Equipment Notes are converted prior to maturity, interest on the Equipment Notes
for the remaining unexpired loan period will be due and payable in additional
restricted ONSM common shares in accordance with the same formula for interest
payments as described above.
Fees were
paid to placement agents and finders for their services in connection with the
Equipment Notes in aggregate of 16,875 restricted ONSM common shares and $31,500
paid in cash. These 16,875 shares, plus the 16,667 shares issued to the
investors (as discussed above) had a fair market value of approximately
$186,513. The value of these 33,542 shares, plus the $31,500 cash fees and
$9,160 paid for legal fees and other issuance costs related to the Equipment
Notes, were reflected as a $227,173 discount against the Equipment Notes and are
being amortized as interest expense over the three year term of the Equipment
Notes. The effective interest rate of the Equipment Notes is approximately 19.5%
per annum, excluding the potential effect of a premium to market prices if
payment of interest is made in common shares instead of cash. The unamortized
portion of this discount was $93,875 and $130,607 at March 31, 2010 and
September 30, 2009, respectively.
Although
the minimum conversion price was established in the Equipment Notes at $4.80 per
ONSM share, the quoted market price was approximately $5.58 per ONSM share at
the time the material portion of the proceeds ($950,000 out of $1 million total)
were received by us (including releases of funds previously placed in escrow)
and the related Equipment Notes were issued (June 3-5, 2008). However, the
quoted market price per ONSM share was $4.86 on April 30, 2008, $5.04 on May 20,
2008 and back to $4.80 by June 27, 2008, less than one month after the issuance
of the related Equipment Notes. Therefore, we have determined that the $4.80 per
share conversion price in the Equipment Notes was materially equivalent to fair
value at the date of issuance, which was the intent of all parties when the deal
was originally discussed between them in late April and early May 2008.
Accordingly, we determined that there was not a beneficial conversion feature
included in the Equipment Notes and did not record additional discount in that
respect.
30
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 4:
DEBT (Continued)
Convertible
Debentures (continued)
CCJ
Note
During
August 2009, CCJ Trust (“CCJ”) remitted $200,000 to us as a short term advance
bearing interest at .022% per day (equivalent to approximately 8% per annum)
until the date of repayment or unless the parties mutually agreed to another
financing transaction(s) prior to repayment. This advance was included in
accounts payable on our September 30, 2009 balance sheet.
On
December 29, 2009, we entered into an agreement with CCJ whereby accrued
interest on the above 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, with the consent of CCJ, no payments had been
made as of May 7, 2010. The remaining principal balance of the CCJ Note may be
converted at any time into our common shares at the greater of (i) the previous
30 day market value or (ii) $3.00 per share. In conjunction with and in
consideration of this note transaction, the 35,000 shares of Series A-12
Redeemable Convertible Preferred Stock (“Series A-12”) held by CCJ at that date
were exchanged for 35,000 shares of Series A-13 Convertible Preferred Stock
(“Series A-13”) plus four-year warrants for the purchase of 29,167 ONSM common
shares at $3.00 per share.
The
effective interest rate of the CCJ Note is approximately 47.4% per annum,
including the Black-Scholes value of the warrants of $32,518 plus the $108,500
value of the increased number of common shares underlying the Series A-13 shares
versus the Series A-12 shares (see note 6), which total of $141,018 we recorded
as a debt discount. The effective rate of 47.4% per annum also includes 11.2%
per annum related to dividends that will accrue to CCJ as a result of the later
mandatory conversion date of the Series A-13 shares versus the mandatory
conversion date of the Series A-12 shares (see note 6). The unamortized portion
of the debt discount, which is being amortized as interest expense over the four
year term of the CCJ Note, was $132,204 at March 31, 2010.
Greenberg
Note
On
January 13, 2010 we borrowed $250,000 from Greenberg Capital (“Greenberg”) under
the terms of an unsecured subordinated convertible note (the
“Greenberg Note”), which is repayable in principal installments of $13,000 per
month beginning March 1, 2010, with the final payment on December 31, 2010,
including remaining principal and all accrued but unpaid interest (at 10% per
annum). The Greenberg Note is convertible into common stock at
Greenberg’s option at a price equal to 85% of the weighted average share price
for the five days prior to conversion, such conversion price to be no less than
$2.40 per share.
The
Greenberg Note provides for (i) our issuance of 20,833 unregistered common
shares upon receipt of the funds and our issuance of 20,833 unregistered common
shares if the loan is still outstanding after 6 months (ii) our payment of
$2,500 in legal fees incurred by Greenberg and (iii) the option to prepay up to
$12,500 of interest in the form of shares, based on the weighted average share
price for the five days prior, which we exercised by the issuance of 6,945
unregistered common shares.
31
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 4:
DEBT (Continued)
Convertible
Debentures (continued)
Greenberg
Note (continued)
Furthermore,
certain principals of Greenberg Capital are also principals in Triumph Small Cap
Fund, which provided us with one of the Letters for $250,000, and required us to
release Triumph Small Cap Fund from their commitment under that Letter as a
condition of a February 2010 modification to the Greenberg Note. This
modification also included Greenberg Capital’s agreement to allow up to $500,000
of subsequent subordinated financing to be issued on a pari passu basis with the
Greenberg Note, which was applied to the Wilmington Notes as discussed
below.
The value
of the 27,778 shares initially issued to Greenberg for fees and prepaid interest
and the value of the 4,167 common shares issued to Triumph Small Cap Fund in
consideration for the Letter, plus the $2,500 paid for legal fees, were
reflected as a $60,999 discount against the Greenberg Note and are being
amortized as interest expense primarily over the initial six month term of the
Greenberg Note. The effective rate of the Greenberg Note is approximately 50.7%
per annum, assuming a one year loan term. The unamortized portion of the debt
discount was $34,624 at March 31, 2010.
We may
prepay the Greenberg Note at any time with ten days notice, provided that
Greenberg may convert the outstanding balance to common shares during such ten
day period. In the event the Greenberg Note is prepaid during the first six
months, we shall incur a prepayment penalty of 20,833 unregistered common
shares. In the event of a default, we will be obligated to pay Greenberg an
additional 5% interest per month (based on the outstanding loan balance and
pro-rated on a daily basis) until the default has been cured, payable in cash or
unregistered common shares. If we successfully conclude a subsequent financing
of debt or equity in excess of $500,000 during the term of the Greenberg Note,
the proceeds of such financing will be used to pay off the remaining balance of
the Greenberg Note – see note 9 with respect to the Lehmann Note.
Wilmington
Notes
During
February 2010 we borrowed an aggregate of $500,000 from three entities (the
“Wilmington Investors”) under the terms of unsecured subordinated convertible
notes (the “Wilmington Notes”), which were issued on a pari passu basis with the
Greenberg Note and are repayable in aggregate principal installments of $26,000
per month beginning April 18, 2010, with the final payment on February 18, 2011,
including remaining principal and all accrued but unpaid interest (at 10% per
annum). The Wilmington Notes are convertible into common stock at the
option of each individual Wilmington Investor, based on our closing share price
on the funding date of the Wilmington Notes, which was $2.76 with respect to
$375,000 of the funding and $2.88 with respect to the balance.
32
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 4:
DEBT (Continued)
Convertible
Debentures (continued)
Wilmington
Notes (continued)
The
Wilmington Notes provide for (i) our issuance of an aggregate of 50,000
unregistered common shares upon receipt of the funds and our issuance of an
aggregate 50,000 unregistered common shares if the loans are still outstanding
after 6 months, (ii) our payment of $2,500 in legal fees incurred by the
Wilmington Investors and (iii) our prepayment of the first six months of
interest in the form of shares, based on our closing share price on the funding
date of the Wilmington Notes. In the event the Wilmington Notes are prepaid
after the first six months, the second tranche of 50,000 unregistered common
shares will be cancelled on a pro-rata basis, to the extent the second six month
time period has not elapsed at the time of such payoff.
We have
also incurred third party finder’s fees in connection with the Wilmington Notes,
such fees payable in cash equal to 7% of the borrowed amount
payable.
The value
of the 58,049 shares initially issued to the Wilmington Investors for fees and
prepaid interest plus the finder’s fees of $35,000 and the $2,500 obligation for
legal fees, were reflected as a $199,443 discount against the Wilmington Notes
and are being amortized as interest expense primarily over the initial six month
term of the Wilmington Notes. The effective rate of the Wilmington Notes is
approximately 83.9% per annum, assuming a six month loan term and excluding the
finder’s fees. The unamortized portion of the debt discount was $167,218 at
March 31, 2010.
We may
prepay the Wilmington Notes at any time with ten days notice, provided that the
Investor may convert the outstanding balance to common shares during such ten
day period. In the event of a default, we will be obligated to pay the
Wilmington Investors an additional 5% interest per month (based on the
outstanding loan balance and pro-rated on a daily basis) until the default has
been cured, payable in cash or unregistered common shares. If we successfully
conclude a subsequent financing of debt or equity in excess of $750,000 during
the term of the Wilmington Notes, the proceeds of such financing will be used to
pay off the remaining balance of the Wilmington Notes. The Lehmann Note was
issued in May 2010 to one of the Wilmington Investors – see note 9.
Rockridge
Note
A portion
of the Rockridge Note ($500,000 face value, which is $350,157 net, after
deducting the applicable discount) is also convertible into ONSM common shares,
as discussed below, and classified under the non-current portion of Convertible
Debentures, net of discount, on our March 31, 2010 balance sheet.
33
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 4:
DEBT (Continued)
Notes and Leases
Payable
Notes and
leases payable consist of the following as of March 31, 2010 and September 30,
2009, respectively:
March 31,
2010
|
September 30, 2009
|
|||||||
Line
of Credit Arrangement
|
$ | 1,674,090 | $ | 1,382,015 | ||||
Rockridge
Note (excluding portion classified under convertible
debentures)
|
1,206,152 | 989,187 | ||||||
Capitalized
equipment leases
|
80,873 | 142,924 | ||||||
Total
notes and leases payable
|
2,961,115 | 2,514,126 | ||||||
Less:
discount on notes payable
|
(387,734 | ) | (393,174 | ) | ||||
Less:
consideration for funding commitment letters
|
(14,000 | ) | - | |||||
Notes
and leases payable, net of discount
|
2,559,381 | 2,120,952 | ||||||
Less:
current portion, net of discount
|
( 1,940,719 | ) | ( 1,615,891 | ) | ||||
Long
term notes and leases payable, net of current portion
|
$ | 618,662 | $ | 505,061 |
Line
of Credit Arrangement
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. 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
outstanding balance bears interest at 13.5% per annum, adjustable based on
changes in prime after December 28, 2009 (was prime plus 8% per annum through
December 2, 2008 and prime plus 11% from that date through December 28, 2009),
payable monthly in arrears. Effective December 28, 2009, we also incur a weekly
monitoring fee of one twentieth of a percent (0.05%) of the borrowing limit,
payable monthly in arrears.
We paid
initial 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 and 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. An additional commitment fee of one percent (1%) of the maximum
allowable borrowing amount will be due for any subsequent annual renewal after
December 28, 2010. These origination and commitment fees (plus other fees paid
to Lender) are recorded by us as debt discount and amortized as interest expense
over the remaining term of the loan. The unamortized portion of this discount
was $28,134 and $37,082 as of March 31, 2010 and September 30, 2009,
respectively.
The
outstanding principal balance due under the Line may be repaid by us at any
time, but no later than December 28, 2011, which may be extended by us for an
extra year, subject to compliance with all loan terms, including no material
adverse change, as well as concurrence of the Lender. We will incur a charge
equal to two percent (2%) of the borrowing limit if we terminate the Line before
June 28, 2011 and a charge equal to one percent (1%) of the borrowing limit if
we terminate the Line after that date but before December 28, 2011. The
outstanding principal is due on demand in the event a payment default is uncured
five (5) days after written notice.
34
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 4:
DEBT (Continued)
Notes and Leases
Payable (continued)
Line
of Credit Arrangement (continued)
The Line
is also subject to us maintaining an adequate level of receivables, based on
certain formulas, as well as our compliance, starting with the quarter ending
September 30, 2010, with a quarterly debt service coverage covenant. The Lender
must approve any additional debt incurred by us, other than debt incurred in the
ordinary course of business (which includes equipment financing). Accordingly
the Lender has approved the $1.0 million Equipment Notes we issued in June and
July 2008, the $200,000 CCJ Note we issued in December 2009, the $250,000
Greenberg Note we issued in January 2010, and the $500,000 Wilmington Notes we
issued in February 2010, all as discussed above, and the $2.0 million Rockridge
Note we issued in April 2009 and amended in September 2009, as discussed below.
The Lender also approved the $250,000 Lehmann Note we issued in May 2010 - see
note 9.
Mr. Leon
Nowalsky, a member of our Board of Directors, is also a founder and board member
of the Lender.
Rockridge
Note
In April
2009 we received $750,000 from Rockridge Capital Holdings, LLC (“Rockridge”), an
entity controlled by one of our largest shareholders, in accordance with the
terms of a Note and Stock Purchase Agreement (the “Rockridge Agreement”) that we
entered into with Rockridge dated April 14, 2009. In June 2009, we received an
additional $250,000 from Rockridge in accordance with the Rockridge Agreement,
for total borrowings thereunder of $1.0 million. On September 14, 2009, we
entered into Amendment Number 1 to the Agreement (the “Amendment”), as well as
an Allonge to the Note (the “Allonge”), which allowed us to borrow up to an
additional $1.0 million from Rockridge, resulting in cumulative allowable
borrowings of up to $2.0 million. We borrowed $500,000 of the additional $1.0
million on September 18, 2009 and the remaining $500,000 on October 20,
2009.
In
connection with this transaction, we issued a Note (the “Rockridge Note”), which
is 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
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.
The
Rockridge Note, after giving effect to all borrowings under the Amendment and
the Allonge, is repayable in equal monthly installments of $45,202 extending
through August 14, 2013 (the “Maturity Date”), which installments include
principal (except for a $500,000 balloon payable on the Maturity Date) plus
interest (at 12% per annum) on the remaining unpaid balance. The Rockridge
Agreement, as amended, also provides that Rockridge may receive an origination
fee upon not less than sixty-one (61) days written notice to us, payable by our
issuance of 366,667 restricted shares of our common stock (the
“Shares”).
35
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 4:
DEBT (Continued)
Notes and Leases
Payable (continued)
Rockridge
Note (continued)
The
Rockridge Agreement provides that on the Maturity Date we shall pay Rockridge up
to a maximum of $75,000, based on 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 shortfall amount of $75,000 in the
aggregate for items (i) and (ii). The closing ONSM share price was $1.99 per
share on May 7, 2010.
Legal
fees totaling $55,337 were paid or accrued by us as of September 30, 2009 in
connection with the Rockridge Agreement. The 366,667 origination fee Shares
discussed above were earned by Rockridge as of September 30, 2009 and had a fair
market value of approximately $626,000 at the date of the Rockridge Agreement or
the Amendment, as applicable. The value of these Shares plus the legal fees paid
or accrued were reflected as a $681,337 discount against the Rockridge Note (as
well as a corresponding increase in additional paid-in capital for the value of
the Shares), which is being amortized as interest expense over the term of the
Rockridge Note.
The
effective interest rate of the Rockridge Note was approximately 44.3% per annum,
until the September 2009 amendment, at which time it was reduced to
approximately 28.0% per annum. These rates exclude the potential effect of a
premium to market prices if the balloon payment is satisfied in common shares
instead of cash as well as the potential effect of any appreciation in the value
of the Shares at the time of issuance beyond their value at the date of the
Rockridge Agreement or the Amendment, as applicable. The unamortized portion of
this discount was $509,443 and $490,902 as of March 31, 2010 and September 30,
2009, respectively.
Upon
notice from Rockridge at any time and from time to time prior to the Maturity
Date up to $500,000, (representing the current balloon payment of the
outstanding principal of the Rockridge Note and which balloon payment was
$375,000 as of September 30, 2009) may be converted into a number of restricted
shares of our common stock. Upon notice from Rockridge at any time after
September 4, 2010 and prior to the
Maturity Date, up to fifty percent (50%) of the outstanding principal amount of the Rockridge Note
(excluding the balloon payment subject to conversion per the previous sentence)
may be converted into a number of restricted shares of our common stock. If we
sell all or substantially all of our assets, or at any time after September 4,
2011 and prior to the Maturity Date, the remaining outstanding principal amount of the Rockridge Note
may be converted by Rockridge into a number of restricted shares of our common
stock.
36
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 4:
DEBT (Continued)
Notes and Leases
Payable (continued)
Rockridge
Note (continued)
The above
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, after giving
effect to such conversion, would beneficially own in excess of 9.9% of our
outstanding common stock (the “Beneficial Ownership Limitation”). The
Beneficial Ownership Limitation may be waived by Rockridge upon not less than
sixty-one (61) days prior written notice to us unless such waiver would result
in a violation of the NASDAQ shareholder approval rules. Since the market value
of an ONSM common share was $1.38 as of the date of the Rockridge Agreement and
$2.34 as of the date of the Amendment, we determined that the above provisions
did not constitute a beneficial conversion feature for purposes of calculating
the related discount recorded by us.
Furthermore,
in the event of any conversions of principal to ONSM shares by Rockridge (i) the
$500,000 balloon payment will be reduced by the amount of any such conversions
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.
Capitalized
Equipment Leases
During
July 2007, we entered into a capital lease for audio conferencing equipment,
which had an outstanding principal balance of $50,231 and $109,151 as of March
31, 2010 and September 30, 2009, respectively. The balance is payable in equal
monthly payments of $10,172 through August 2010, which includes interest at
approximately 5% per annum, plus an optional final payment based on fair value,
but not to exceed $16,974. During January 2009, we entered into a capital lease
for telephone equipment, which had an outstanding principal balance of $30,642
and $33,773 as of March 31, 2010 and September 30, 2009, respectively. The
balance is payable in equal monthly payments of $828 through January 2014, which
includes interest at approximately 11% per annum.
Funding
Commitment Letters
The value
of shares issued as consideration for Letters – see note 1 – is reflected on our
balance sheet as a reduction of the carrying value of notes payable and will be
included as part of the discount for any financing received in connection with
the related Letter and amortized as interest expense over the term of that
financing. In the event related financing is not received by the expiration date
of any particular Letter, the corresponding amount will be written off as
interest expense at that time. The balance of this item is $14,000 as of March
31, 2010.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
5: COMMITMENTS AND CONTINGENCIES
Narrowstep acquisition
termination and litigation – On May 29, 2008, we entered into an
Agreement and Plan of Merger (the “Merger Agreement”) to acquire Narrowstep,
Inc. (“Narrowstep”), which Merger Agreement was amended twice (on August 13,
2008 and on September 15, 2008). The terms of the Merger Agreement, as amended,
allowed that if the acquisition did not close on or prior to November 30, 2008,
the Merger Agreement could be terminated by either us or Narrowstep at any time
after that date provided that the terminating party was not responsible for the
delay. On March 18, 2009, we terminated the Merger Agreement and the acquisition
of Narrowstep.
On
December 1, 2009, Narrowstep filed a complaint against us in the Court of
Chancery of the State of Delaware, alleging breach of contract, fraud and three
additional counts and is seeking (i) $14 million in damages, (ii) reimbursement
of an unspecified amount for all of its costs associated with the negotiation
and drafting of the Merger Agreement, including but not limited to attorney and
consulting fees, (iii) the return of Narrowstep’s equipment alleged to be in our
possession, (iv) reimbursement of an unspecified amount for all of its attorneys
fees, costs and interest associated with this action and (v) any further relief
determined as fair by the court. After reviewing the complaint document, we have
determined that Narrowstep has no basis in fact or in law for any claim and
accordingly, this matter has not been reflected as a liability on our financial
statements. On December 18, 2009, we were served with a summons and on February
1, 2010 we filed a motion requesting dismissal of the breach of contract and
fraud counts as well as two of the other three counts, as well as our brief in
support of the motion filed on February 18, 2010. Narrowstep’s response was
filed on March 29, 2010 and we filed our reply on April 13, 2010. The Court’s
decision, which may be preceded by a hearing at the Court’s discretion, is
pending. Regardless of the ultimate decision with regard to the motion to
dismiss, we intend to vigorously defend against all claims. Furthermore, we do
not expect the ultimate resolution of this matter to have a material adverse
impact on our financial position or results of operations.
Other legal
proceedings – We are involved in other litigation and regulatory
investigations arising 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.
Registration payment
arrangements – We included the 8% Subordinated Convertible Debentures and
the related $9.00 warrants on a registration statement which was declared
effective by the SEC on July 26, 2006. We are only required to expend
commercially reasonable efforts to keep the registration statement continuously
effective. However, in the event the registration statement or the ability to
sell shares thereunder lapses for any reason for 30 or more consecutive days in
any 12 month period or more than twice in any 12 month period, the purchasers of
the 8% Subordinated Convertible Debentures may require us to redeem any shares
obtained from the conversion of those notes and still held, for 115% of the
market value for the previous five days. The same penalty provisions apply if
our common stock is not listed or quoted, or is suspended from trading on an
eligible market for a period of 20 or more trading days (which need not be
consecutive). Due to the fact that that there is no established mechanism for
reporting to us changes in the ownership of these shares after they
are originally issued, we are unable to quantify how many of these shares are
still held by the original recipient and thus subject to the above provisions.
Regardless of the above, we believe that the applicability of these provisions
would be limited by equity and/or by statute to a certain timeframe after the
original security purchase. All of these debentures were converted to common
shares on or before March 31, 2007 and the related $9.00 warrants have all
expired.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Registration payment
arrangements (continued) – We included the common shares underlying the
8% Senior Convertible Debentures, including the Additional 8% Convertible
Debentures (AIR), and the related $9.90 warrants, on a registration statement
declared effective by the SEC on June 29, 2005. These debentures provide cash
penalties of 1% of the original purchase price for each month that (a) our
common shares are not listed on the NASDAQ Capital Market for a period of 3
trading days (which need not be consecutive) or (b) the common shares underlying
those securities and the related warrants are not saleable subject to an S-3 or
other registration statement then effective with the SEC. The latter penalty
only applies for a five-year period beginning with the June 29, 2005
registration statement effective date and does not apply to shares saleable
under Rule 144(k). Regardless of the above, we believe that the applicability of
these provisions would be limited by equity and/or by statute to a certain
timeframe after the original security purchase - all of these debentures were
converted to common shares on or before March 31, 2007 and the related $9.90
warrants have all expired.
During
March and April 2007, we sold an aggregate of 814,815 restricted common shares
for total gross proceeds of approximately $11.0 million. These shares were
included in a registration statement declared effective by the SEC on June 15,
2007. We are required to maintain the effectiveness of this
registration statement until the earlier of the date that (i) all of the shares
have been sold, (ii) all the shares have been transferred to persons who may
trade such shares without restriction (including our delivery of a new
certificate or other evidence of ownership for such securities not bearing a
restrictive legend) or (iii) all of the shares may be sold at any time, without
volume or manner of sale limitations pursuant to Rule 144(k) or any similar
provision (in the opinion of our counsel). In the event such effectiveness is
not maintained or trading in the shares is suspended or if the shares are
delisted for more than five (5) consecutive trading days then we are liable for
a compensatory payment (pro rated on a daily basis) of one and one-half percent
(1.5%) per month until the situation is cured, such payment based on the
purchase price of the shares still held and provided that such payments may not
exceed ten percent (10%) of the initial purchase price of the shares with
respect to any one purchaser. Regardless of the above, we believe that the
applicability of these provisions would be limited by equity and/or by statute
to a certain timeframe after the original security purchase.
We have
concluded that the arrangements discussed in the preceding three paragraphs are
registration payment arrangements, as that term is defined in the Derivatives
and Hedging topic (Contracts in Entity’s own Equity subtopic) of the ASC. Based
on our satisfactory recent history of maintaining the effectiveness of our
registration statements and our NASDAQ listing, as well as stockholders’ equity
in excess of the NASDAQ listing standards as of March 31, 2010, we have
concluded that material payments under these registration payment arrangements
are not probable and that no accrual related to them is necessary under the
requirements of the Contingencies topic of the ASC.
Registration rights -
We granted demand registration rights, effective six months from the date of a
certain October 2006 convertible note, for any unregistered common shares
issuable thereunder. Upon such demand, we would have 60 days to file a
registration statement, using our best efforts to promptly obtain the
effectiveness of such registration statement. 166,667 of the 282,416 total
principal and interest shares issued in November and December 2006 and subject
to these rights were included in a registration statement declared effective by
the SEC on June 15, 2007 and as of May 7, 2010 we have not received any demand
for the registration of the balance.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Registration rights
(continued) – We granted a major shareholder demand registration rights,
effective six months from the January 2007 modification date of a certain
convertible note, for any unregistered common shares issuable thereunder. Upon
such demand, we would have 60 days to file a registration statement, using our
best efforts to promptly obtain the effectiveness of such registration
statement. 130,765 of the 464,932 shares issued in March 2007 and subject to
these rights were included in a registration statement declared effective by the
SEC on June 15, 2007 and as of May 7, 2010 we have not received any demand for
the registration of the balance.
As the
two notes discussed above do not provide for damages or penalties if we do not
comply with these registration rights, we have concluded that these rights do
not constitute registration payment arrangements. Furthermore, since the
unregistered shares were originally issued in March 2007 or before, they may be
saleable, in whole or in part, under Rule 144. In any event, we have determined
that material payments in relation to these rights are not probable and
therefore no accrual related to them is necessary under the requirements of the
Contingencies topic of the ASC.
We
granted piggyback registration rights in connection with 16,667 shares and
36,667 options issued to consultants prior to June 15, 2007, which shares and
options were not included on the registration statement declared effective by
the SEC on that date, nor were they include on the subsequent Shelf Registration
declared effective by the SEC on April 30, 2010 – see note 1. As these options
and shares do not provide for damages or penalties in the event we do not comply
with these registration rights, we have concluded that these rights do not
constitute registration payment arrangements. In any event, we have determined
that material payments in relation to these rights are not probable and
therefore no accrual related to them is necessary under the requirements of the
Contingencies topic of the ASC.
We
granted piggyback registration rights in connection with 47,500 shares and
25,000 options issued to consultants, as well as 29,167 warrants issued in
connection with a financing prior to April 30, 2010, which shares and options
were not included on the Shelf Registration declared effective by the SEC on
that date – see note 1. As the 47,500 shares and the 29,167 warrants do not
provide for damages or penalties in the event we do not comply with these
registration rights, we have concluded that these rights do not constitute
registration payment arrangements. Although the 25,000 options include cashless
exercise rights until they are registered, and therefore do constitute
registration payment arrangements, since the exercise price of $10.38 per share
was significantly in excess of the market price of $1.86 per share as of March
31, 2010, we have concluded that no accrual related to these rights is necessary
as of that date under the requirements of the Contingencies topic of the
ASC.
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 and Treasurer), 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”. On May 15, 2008 and August 11, 2009 our
Compensation Committee and Board approved certain corrections and modifications
to those agreements, which are reflected in the discussion of the terms of those
agreements below. The 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.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment contracts and
severance (continued) – The agreements provide initial annual base
salaries of $253,000 for Mr. Selman, $230,000 for Mr. Saperstein, $207,230 for
Mr. Tomlinson and $197,230 for Messrs. Friedland and Glassman, plus 10% annual
increases through December 27, 2008 and 5% per year thereafter. 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.
As part
of the above employment agreements, and in accordance with the terms of the
“2007 Equity Incentive Plan” approved by our shareholders in their September 18,
2007 annual meeting, we granted Plan Options to each of the Executives to
purchase an aggregate of 66,667 shares of our common stock at an exercise price
of $10.38 per share, the fair market value at the date of the grant, which shall
be exercisable for a period of four (4) years from the date of vesting. The
options vest in installments of 16,667 per year, starting on September 27, 2008,
and they automatically vest upon the happening of the following events: (i)
change of control (ii) constructive termination, and (iii) termination other
than for cause, each as defined in the employment agreements. Unvested options
automatically terminate upon (i) termination for cause or (ii) voluntary
termination. In the event the agreement is not renewed or the
Executive is terminated other than for cause, the Executives shall be entitled
to require us to register the vested options.
As part
of the above employment agreements, the Executives were eligible for a
performance bonus, based on meeting revenue and cash flow objectives over a two
year period ended September 30, 2009. Accordingly, we granted Plan Options to
each of the Executives to purchase an aggregate of 36,667 shares of ONSM common
stock at an exercise price of $10.38 per share, the fair market value at the
date of the grant, exercisable for a period of four (4) years from the date of
vesting. The performance objectives were met for the quarter ended December 31,
2007 but they were not met for the remaining three quarters of fiscal 2008 nor
were they met for the fiscal year ended September 30, 2008. The performance
objectives were met for the quarter ended June 30, 2009 but they were not met
for the remaining three quarters of fiscal 2009 nor were they met for the fiscal
year ended September 30, 2009. Therefore, an aggregate of 4,583 options out of a
potential 36,667 performance options vested for each Executive during fiscal
year 2008 and 2009, with the remainder expiring. In the event the
agreement is not renewed or the Executive is terminated other than for cause,
the Executive shall be entitled to require us to register the vested
options.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment contracts and
severance (continued) – On August 11, 2009, our Compensation Committee
agreed to a new performance bonus program for the Executives under the following
terms: Up to one-half of the shares will be eligible for vesting on a quarterly
basis and the rest annually, with the total grant allocable over a two-year
period ending September 30, 2011. Vesting of the quarterly portion will be
subject to achievement of increased revenues over the prior quarter as well as
positive and increased net cash flow per share (defined as cash provided by
operating activities per our statement of cash flow, measured before changes in
working capital components and not including investing or financing activities)
for that quarter. We will negotiate with the Executives in good faith as to how
revenue increases from specific acquisitions are measured. Vesting of the annual
portion will be subject to meeting the above cash flow requirements on a
year-over-year basis, plus a revenue growth rate of at least 20% for the fiscal
year over the prior year. In the event of quarter to quarter decreases in
revenues and cash flow, the options will not vest for that quarter but the
unvested quarterly options will be added to the available options for the year,
vested subject to achievement of the applicable annual goal. One-half of the
applicable quarterly or annual bonus options will be earned/vested if the cash
flow target is met but the revenue target is not met In the event options did
not vest based on the quarterly or annual goals, they will immediately expire.
In the event the agreement is not renewed or the Executive is terminated other
than for cause, the Executive shall be entitled to require us to register the
vested options. The Compensation Committee has also agreed that a performance
bonus program will continue after this two-year period, with the specific bonus
parameters to be negotiated in good faith between the parties at least ninety
(90) days before the expiration of the program then in place.
This
program was subject only to the approval by our shareholders of a sufficient
increase in the number of authorized 2007 Plan options, which occurred in the
March 25, 2010 shareholder meeting. However, the granting and pricing of the
above performance bonus options by the Board is still pending, subject to
further discussions between the Board and the
Executives. Furthermore, the performance objectives were not met for
the first two quarters of fiscal 2010.
Under the
terms of the above 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 times the Executive’s base salary plus full
benefits for a period of the lesser of (i) three years from the date of
termination or (ii) the date of termination until a date one 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 months, to the extent required by Internal
Revenue Code Section 409A. In addition, if the five day average closing price of
the common stock is greater than or equal to $6.00 per share on the date of any
termination or change in control, all options previously granted the
Executive(s) will be cancelled, with all underlying shares (vested or unvested)
issued to the executive, and we will pay all related taxes for the
Executive(s). If the five-day average closing price of the common
stock is less than $6.00 per share on the date of any termination or change in
control, the options will remain exercisable under the original
terms.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Employment contracts and
severance (continued) – Under the terms of the above employment
agreements, we may terminate an Executive’s employment upon his death or
disability or with or without cause. To the extent that 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
employment agreements also provide that in the event we are sold for a Company
Sale Price that represents at least $6.00 per share (adjusted for
recapitalization including but not limited to splits and reverse splits), the
Executives will receive, as a group, cash compensation of twelve percent (12.0%)
of the Company Sale Price, payable in immediately available funds at the time of
closing such transaction. The Company Sale Price is defined as the number of
Equivalent Common Shares outstanding at the time we are sold multiplied by the
price per share paid in such Company Sale transaction. The Equivalent Common
Shares are defined as the sum of (i) the number of common shares issued and
outstanding, (ii) the common stock equivalent shares related to paid for but not
converted preferred shares or other convertible securities and (iii) the number
of common shares underlying “in-the-money” warrants and options, such sum
multiplied by the market price per share and then reduced by the proceeds
payable upon exercise of the “in-the-money” warrants and options, all determined
as of the date of the above employment agreements but the market price per share
used for this purpose to be no less than $6.00. The 12.0% is allocated in the
employment agreements as two and one-half percent (2.5%) each to Messrs. Selman,
Saperstein, Friedland and Glassman and two percent (2.0%) to Mr.
Tomlinson.
Our
general policy is to not include severance or minimum employment periods in
employment contracts, with the exception of the above employment contracts with
the Executives. However, as of March 31, 2010, we have arrangements with three
(3) employees requiring minimum payments of approximately $160,000 for wages,
taxes and benefits over the approximately eight month period after that
date.
Other compensation –
In addition to the 12% allocation of the Company Sale Price to the Executives,
as discussed above, on August 11, 2009 our Compensation Committee determined
that an additional three percent (3.0%) of the Company Sale Price would be
allocated, on the same terms, with two percent (2.0%) allocated to the four
outside Directors (0.5% each), as a supplement to provide appropriate
compensation for ongoing services as a director and as a termination fee,
one-half percent (0.5%) allocated to one additional executive-level employee and
the remaining one-half percent (0.5%) to be allocated by the Board and our
management at a later date, which will be primarily to compensate other
executives not having employment contracts, but may also include additional
allocation to some or all of these five senior
Executives.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Consultant contracts
– We entered into a consulting contract, effective June 1, 2009, with an
individual for executive management services to be performed for our Infinite
division. This contract calls for base compensation of $175,000 per year, plus
$25,000 commission per year provided certain current revenue levels are
maintained. In addition we will pay a travel allowance of $5,000 per month for
up to the first thirteen months and a one-time $15,000 moving expenses
reimbursement. As part of the contract, we also granted a four-year term (from
vesting) option to purchase 66,667 common ONSM shares, vesting over four years
at 16,667 per year and exercisable at $3.00 per share - see note 8. The contract
is renewable by mutual agreement of the parties with six months notice to the
other. Termination of the contract without cause after the end of the two-year
contract term requires six months notice (which includes a three month severance
period) from the terminating party, although termination with cause requires no
notice.
We have
entered into various agreements for financial consulting and advisory services
which, if not terminated as allowed by the terms of such agreements, will
require the issuance after March 31, 2010 of approximately 70,000 unregistered
shares. The services related to these shares will be provided over periods up to
12 months, and will result in a professional fees expense of approximately
$139,000 over that service period, based on the current $1.99 market value of an
ONSM common share as of May 7, 2010.
Lease commitments –
We are obligated under operating leases for our five offices (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 $58,700. The leases have expiration dates ranging from 2010 to
2013 (after considering our rights of termination) and in most cases provide for
renewal options. Most of the leases have annual rent escalation provisions.
Future minimum lease payments required under these non-cancelable leases
(including the tentatively agreed on Pompano lease terms) as of March 31, 2010,
excluding the capital lease obligations discussed in note 4, total approximately
$1.6 million. Total rental expense (including executory costs) for all operating
leases was approximately $423,000 and $440,000 for the six months ended March
31, 2010 and 2009 and (ii) $220,000 and $207,000 for the three months ended
March 31, 2010 and 2009, respectively.
The
three-year operating lease for our principal executive offices in Pompano Beach,
Florida expires September 15, 2010. The monthly base rental is currently
approximately $22,500 (including our share of property taxes and common area
expenses). We are currently in negotiations to extend this lease for an
additional three years, and have tentatively agreed to a starting monthly base
rental of approximately $20,200 (including our share of property taxes and
common area expenses), which would also be retroactive to the lease year ending
September 15, 2010, plus two percent (2%) annual increases. The proposed
extension would provide one two-year renewal option, with a three percent (3%)
rent increase in year one.
The
five-year operating lease for our office space in San Francisco expires April
30, 2014. The monthly base rental (including month-to-month parking)
is approximately $16,800 with annual increases up to 4.4%. The lease provides
one five-year renewal option at 95% of fair market value and also provides for
early cancellation at any time after April 30, 2010, at our option, with six (6)
months notice and a payment of no more than approximately $44,000.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
5: COMMITMENTS AND CONTINGENCIES (Continued)
Lease commitments
(continued) – The three-year operating lease for our Infinite Conferencing
location in New Jersey expires October 31, 2012. The monthly base rental is
approximately $10,800 with five percent (5%) annual increases. The lease
provides one two-year renewal option, with no rent increase.
The
three-year operating lease for office space in New York City expires January 31,
2013, although both we and the landlord have the right to terminate the lease
without penalty, upon nine (9) months notice given any time after February 1,
2011. The monthly base rental is approximately $10,000, with no
increases.
Bandwidth and co-location
facilities purchase commitments - We are a party to a bandwidth services
agreement with a national CDN (content delivery network) provider, which expires
on December 31, 2010, includes a minimum purchase commitment of approximately
$200,000 per year (based on June 30 anniversary dates) and requires us to use
that provider for at least 80% of our content delivery needs. We are in
compliance with this agreement, based on comparing our purchases through March
31, 2010 to the corresponding pro-rata share of that commitment. We have also
entered into various agreements for our purchase of bandwidth and use of
co-location facilities, for an aggregate minimum purchase commitment of
approximately $372,000, such agreements expiring at various times through
December 2011.
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NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
6: CAPITAL STOCK
Common
Stock
A 1-for-6
reverse stock split of the outstanding shares of our common stock was effective
on April 5, 2010. Except as otherwise indicated, all related
amounts reported in these consolidated financial statements, including
common share quantities, convertible debenture conversion prices and
exercise prices of options and warrants, have been retroactively
adjusted for the effect of this reverse stock split.
During
the six months ended March 31, 2010, we issued 159,267 unregistered common
shares valued at approximately $341,505 and which will be recognized as
professional fees expense for financial consulting and advisory services over
various service periods of up to 12 months. None of the shares were issued to
our directors or officers.
During
the six months ended March 31, 2010, we issued options to purchase our common
shares, in exchange for financial consulting and advisory services, such options
valued at approximately $102,000. Other than options to purchase 19,982 shares
at $9.42 per share issued to certain of our directors to replace expired options
and valued at approximately $12,000 (see note 8), none of the other options 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 (i) $246,000 and $115,000 for the six
months ended March 31, 2010 and 2009 and (ii) $77,000 and $5,000 for the three
months ended March 31, 2010 and 2009, respectively.
As a
result of previously issued shares and options for financial consulting and
advisory services, we have recorded approximately $367,000 in deferred equity
compensation expense at March 31, 2010, to be amortized over the remaining
periods of service of up to 10 months. The deferred equity compensation expense
is included in the balance sheet captions prepaid expenses and other non-current
assets.
During
the six months ended March 31, 2010, we issued shares and options for interest
and fees on convertible debentures as follows - (i) 34,917 unregistered common
shares valued at $67,040 for interest on the Equipment Notes, (ii) 85,826
unregistered common shares valued at $213,194 for prepaid interest and financing
fees on the Greenberg Note and the Wilmington Notes and (iii) warrants having a
Black-Scholes value of approximately $33,000 in connection with the CCJ Note.
See note 4.
During
the six months ended March 31, 2010, we issued 12,500 unregistered common shares
valued at $21,250 in connection with funding commitment letters (“Letters”) –
see note 1. 41,667 of the 366,667 restricted shares payable to Rockridge as an
origination fee (see note 4) related to borrowings during the six months ended
March 31, 2010 and were reflected as a $95,000 increase in paid in capital for
that period.
During
the six months ended March 31, 2010, we issued 58,333 unregistered common shares
in connection with the conversion of Series A-12, as discussed in more detail
below.
46
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
6: CAPITAL STOCK (continued)
Preferred
Stock
As of
September 30, 2009, the only preferred stock outstanding was Series A-12
Redeemable Convertible Preferred Stock (“Series A-12”). As of March 31, 2010,
the only preferred stock outstanding was Series A-13 Convertible Preferred Stock
(“Series A-13”).
Series
A-12 Redeemable Convertible Preferred Stock
Effective
December 31, 2008, our Board of Directors authorized the sale and issuance of up
to 100,000 shares of Series A-12 Redeemable Convertible Preferred Stock (“Series
A-12”). On January 7, 2009, we filed a Certificate of Designation, Preferences
and Rights for the Series A-12 with the Florida Secretary of State. The Series
A-12 had a coupon of 8% per annum, a stated value of $10.00 per preferred share
and a conversion rate of $6.00 per common share. Dividends were paid in advance,
in the form of our common shares. The holders of Series A-12 could require
redemption by us under certain circumstances, as outlined below, but any shares
of Series A-12 that were still outstanding as of December 31, 2009 automatically
converted into our common shares. Holders of Series A-12 were not entitled to
registration rights.
Effective
December 31, 2008, we sold two (2) investors an aggregate of 80,000 shares of
Series A-12, with the purchase price paid via (i) the surrender of an aggregate
of 60,000 shares of Series A-10 held by those two investors and having a stated
value of $10.00 per A-10 share in exchange for an aggregate of 60,000 shares of
Series A-12 plus (ii) the payment of additional cash aggregating $200,000 for an
aggregate of 20,000 shares of Series A-12 (“Additional Shares”). One of the
investors was CCJ Trust.
In
accordance with the terms of the Series A-12, dividends were payable in advance
in the form of ONSM common shares, using the average closing bid price of those
shares for the five trading days immediately preceding the Series A-12 purchase
closing date. Accordingly, we issued 39,216 common shares as payment of $64,000
dividends for the one year period ending December 31, 2009, which was recorded
on our balance sheet as additional paid-in capital and discount and amortized as
a dividend over the one-year term of the Series A-12.
In
accordance with the terms of the Series A-12, after six months the holders could
require us, to the extent legally permitted, to redeem any or all Series A-12
shares purchased as Additional Shares at the additional purchase price of $10.00
per share. Shares of Series A-12 acquired in exchange for shares of
Series A-10 had no redemption rights. On April 14, 2009, we entered into a
Redemption Agreement with one of the holders of the Series A-12, CCJ Trust,
under which the holder redeemed 10,000 shares of Series A-12 in exchange for our
payment of $100,000 on April 16, 2009. The remaining potentially redeemable
10,000 shares of Series A-12 was reflected as a $98,000 current liability on our
September 30, 2009 balance sheet ($100,000 stated value, net of a pro-rata share
of the total unamortized discount), which was reclassified to equity as of
December 31, 2009 when it was converted into common shares, along with the
remaining shares of Series A-12 owned by the same holder and having a stated
value of $250,000.
In
conjunction with and in consideration of a December 29, 2009 note transaction
entered into by us with CCJ Trust, the 35,000 shares of Series A-12 held by CCJ
Trust at that date were exchanged for 35,000 shares of Series A-13. See note
4.
47
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
6: CAPITAL STOCK (continued)
Preferred Stock
(continued)
Series
A-13 Convertible Preferred Stock
Effective
December 17, 2009, our Board of Directors authorized the sale and issuance of up
to 170,000 shares of Series A-13 Convertible Preferred Stock (“Series A-13”). On
December 23, 2009, we filed a Certificate of Designation, Preferences and Rights
for the Series A-13 with the Florida Secretary of State. The Series A-13 has a
coupon of 8% per annum, an assigned value of $10.00 per preferred share and a
conversion rate of $3.00 per common share. Series A-13 dividends are cumulative
and must be fully paid by us prior to the payment of any dividend on our common
shares. Series A-13 dividends are declared quarterly but are payable at the time
of any conversion of A-13, in cash or at our option in the form of our common
shares, using the greater of (i) $3.00 per share or (ii) the average closing bid
price of a common share for the five trading days immediately preceding the
conversion.
Any
shares of Series A-13 that are still outstanding as of December 31, 2011 will
automatically convert into our common shares. Series A-13 may also be converted
before that date at our option, provided that the closing bid price of our
common shares has been at least $9.00 per share, on each of the twenty (20)
trading days ending on the third business day prior to the date on which the
notice of conversion is given. Series A-13 is subordinate to Series A-12 but is
senior to all other preferred share classes that may be issued by us. Except as
explicitly required by applicable law, the holders of Series A-13 shall not be
entitled to vote on any matters as to which holders of our common shares are
entitled to vote. Holders of Series A-13 are not entitled to registration
rights.
35,000
shares of Series A-13 were outstanding as of March 31, 2010. We incurred $6,747
of legal fees and other expenses in connection with the issuance of these
shares, which was recorded on our balance sheet as a discount and will be
amortized as a dividend over the remaining term of the Series A-13.
NOTE
7: SEGMENT INFORMATION
Our
operations are comprised within two groups, Digital Media Services and Audio and
Web Conferencing Services. The primary operating activities of the Webcasting
division of the Digital Media Services Group, as well as our corporate
headquarters, are in Pompano Beach, Florida. The primary operating activities of
the Smart Encoding division of the Digital Media Services Group and the EDNet
division of the Audio and Web Conferencing Services Group are in San Francisco,
California. The primary operating activities of the DMSP and UGC divisions of
the Digital Media Services Group are in Colorado Springs, Colorado. The primary
operating activities of the Infinite division of the Audio and Web Conferencing
Services Group are in the New York City metropolitan area. All material sales,
as well as property and equipment, are within the United
States.
48
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
7: SEGMENT INFORMATION (continued)
Below are
the results of our operations by segment for the six and three months ended
March 31, 2010 and 2009, and total assets by segment as of March 31, 2010 and
September 30, 2009.
For the six months ended
March 31
|
For the three months ended
March 31
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Revenue:
|
||||||||||||||||
Digital
Media Services Group
|
$ | 3,997,837 | $ | 4,024,131 | $ | 2,003,274 | $ | 1,983,660 | ||||||||
Audio
and Web Conferencing Services Group
|
4,204,970 | 4,737,727 | 2,130,420 | 2,399,001 | ||||||||||||
Total
consolidated revenue
|
$ | 8,202,807 | $ | 8,761,858 | $ | 4,133,694 | $ | 4,382,661 | ||||||||
Segment
operating income:
|
||||||||||||||||
Digital
Media Services Group
|
920,985 | 420,700 | 352,491 | 227,885 | ||||||||||||
Audio
and Web Conferencing Services Group
|
1,014,638 | 1,551,169 | 553,878 | 817,762 | ||||||||||||
Total
segment operating income
|
1,935,623 | 1,971,869 | 906,369 | 1,045,647 | ||||||||||||
Depreciation
and amortization
|
(1,116,161 | ) | (2,011,451 | ) | (548,800 | ) | (918,075 | ) | ||||||||
Corporate
and unallocated shared expenses
|
(2,877,749 | ) | (2,784,103 | ) | (1,411,403 | ) | (1,413,962 | ) | ||||||||
Write
off deferred acquisition costs
|
- | (540,007 | ) | - | (540,007 | ) | ||||||||||
Impairment
loss on goodwill and other intangible assets
|
(3,100,000 | ) | (5,500,000 | ) | - | - | ||||||||||
Other
expense, net
|
( 442,918 | ) | (228,873 | ) | (206,330 | ) | (120,771 | ) | ||||||||
Net
loss
|
$ | (5,601,205 | ) | $ | (9,092,565 | ) | $ | (1,260,164 | ) | $ | (1,947,168 | ) |
March 31,
2010
|
September 30,
2009
|
|||||||
Assets:
|
||||||||
Digital
Media Services Group
|
$ | 8,315,582 | $ | 7,747,921 | ||||
Audio
and Web Conferencing Services Group
|
13,342,065 | 16,796,925 | ||||||
Corporate
and unallocated
|
1,217,231 | 939,127 | ||||||
Total
assets
|
$ | 22,874,878 | $ | 25,483,973 |
Depreciation
and amortization, as well as write off of deferred acquisition costs and
impairment losses on goodwill and other intangible assets, are not utilized by
our primary decision makers for making decisions with regard to resource
allocation or performance evaluation.
49
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
8: STOCK OPTIONS AND WARRANTS
As of
March 31, 2010, we had issued options and warrants still outstanding to purchase
up to 2,043,398 ONSM common shares, including 1,564,676 Plan Options; 41,962
Non-Plan Options to employees and directors; 276,156 Non-Plan Options to
financial consultants; and 160,604 warrants issued in connection with various
financings and other transactions.
On
February 9, 1997, our Board of Directors and a majority of our shareholders
adopted the 1996 Stock Option Plan (the "1996 Plan"), which, including the
effect of subsequent amendments to the 1996 Plan, authorized up to 750,000
shares available for issuance as options and up to another 333,333 shares
available for stock grants. On September 18, 2007, our Board of Directors and a
majority of our shareholders adopted the 2007 Equity Incentive Plan (the “2007
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. The options
and stock grants authorized for issuance under the 2007 Plan were in addition to
those already issued under the 1996 Plan, although we may no longer issue
additional options or stock grants under the 1996 Plan, which expired on
February 9, 2007. 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 2007 Equity Incentive Plan (the “2007 Plan”),
for total authorization of 2,000,000 shares.
Detail of
Plan Option activity under the 1996 Plan and the 2007 Plan for the six months
ended March 31, 2010 is as follows:
Number of
Shares
|
Weighted
Average
Exercise Price
|
|||||||
Balance,
beginning of period
|
1,506,458 |
$
|
7.92 | |||||
Granted
during the period
|
124,884 |
$
|
9.42 | |||||
Expired
or forfeited during the period
|
(66,666 | ) |
$
|
5.25 | ||||
Balance,
end of the period
|
1,564,676 |
$
|
8.13 | |||||
Exercisable
at end of the period
|
1,274,120 |
$
|
8.27 |
We
recognized compensation expense of approximately (i) $444,000 and $430,000 for
the six months ended March 31, 2010 and 2009 and (ii) $182,000 and $251,000 for
the three months ended March 31, 2010 and 2009, respectively, related to Plan
Options granted to employees and vesting during those periods. The unvested
portion of Plan Options outstanding as of March 31, 2010 (and granted on or
after our October 1, 2006 adoption of the requirements of the Compensation -
Stock Compensation topic of the ASC) represents approximately $1,056,000 of
potential future compensation expense, which excludes approximately $364,000
related to the ratable portion of those unvested options allocable to past
service periods and recognized as compensation expense as of March 31,
2010.
50
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
8: STOCK OPTIONS AND WARRANTS (Continued)
The
1,564,676 outstanding Plan Options all have exercise prices equal to or greater
than the fair market value at the date of grant, the exercisable portion has a
weighted-average remaining life of approximately 2.1 years and are further
described below.
Grant
date
|
Description
|
Total
number
of
options
outstanding
|
Vested
portion
of
options
outstanding
|
Exercise
price
per
share
|
Expiration
date
|
||||||||||
Dec
2004
|
Senior
management
|
25,000 | 25,000 |
$
|
7.26 |
Aug
2014
|
|||||||||
July
2005
|
Directors
and senior management
|
233,333 | 233,333 |
$
|
6.72 |
July
2010
|
|||||||||
July
2005
|
Employees
excluding senior management
|
147,333 | 147,333 |
$
|
6.72 |
July
2010
|
|||||||||
July
2006
|
Carl
Silva – new director
|
8,333 | 8,333 |
$
|
5.28 |
July
2010
|
|||||||||
Sept
2006
|
Directors
and senior management
|
108,333 | 108,333 |
$
|
4.26 |
Sept
2011
|
|||||||||
Sept
2006
|
Employees
excluding senior management
|
101,000 | 101,000 |
$
|
4.26 |
Sept
2011
|
|||||||||
March
2007
|
Employees
excluding senior management
|
4,167 | 4,167 |
$
|
13.68 |
March
2011
|
|||||||||
April
2007
|
Infinite
Merger – see note 2
|
25,000 | 25,000 |
$
|
15.00 |
April
2012
|
|||||||||
Sept
2007
|
Senior
management employment contracts – see note 5
|
356,250 | 189,583 |
$
|
10.38 |
Sept
2012 –
Sept
2016
|
|||||||||
Dec
2007
|
Leon
Nowalsky – new director
|
8,333 | 8,333 |
$
|
6.00 |
Dec
2011
|
|||||||||
Dec
2007
|
Employees
excluding senior management
|
1,667 | 1,111 |
$
|
6.00 |
Dec
2011
|
|||||||||
April
2008
|
Employees
excluding senior management
|
2,500 | 833 |
$
|
6.00 |
April
2012
|
|||||||||
May
2008
|
Infinite
management consultant – see note 5
|
16,667 | 16,667 |
$
|
6.00 |
May
2013
|
|||||||||
Aug
2008
|
Employees
excluding senior management
|
67,500 | 45,833 |
$
|
6.00 |
Aug
2012
|
|||||||||
May
2009
|
Infinite
management consultant – see note 5
|
66,667 |
None
|
$
|
3.00 |
Jun
2014 –
Jun
2018
|
|||||||||
May
2009
|
Employees
excluding senior management
|
50,000 | 16,668 |
$
|
3.00 |
May
2013 –
Jul
2015
|
|||||||||
Aug
2009
|
Directors
and senior management
|
133,334 | 133,334 |
$
|
15.00 |
Aug
2014
|
|||||||||
Aug
2009
|
Directors
and senior management
|
83,449 | 83,449 |
$
|
9.42 |
Aug
2014
|
|||||||||
Aug
2009
|
Director
|
926 | 926 |
$
|
20.256 |
Aug
2014
|
|||||||||
Dec
2009
|
Directors
and senior management
|
124,884 | 124,884 |
$
|
9.42 |
Dec
2014
|
|||||||||
Total
Plan Options as of March 31, 2010
|
1,564,676 | 1,274,120 |
On
December 17, 2009, our Compensation Committee granted 124,884 fully vested
five-year Plan Options to certain executives, directors and other management in
exchange for the cancellation of an equivalent number of fully vested Non Plan
Options held by those individuals and expiring in December 2009, with no change
in the $9.42 exercise price, which was in excess of the market value of an ONSM
share as of December 17, 2009. As a result of this cancellation and the
corresponding issuance, we recognized non-cash compensation and professional fee
expense aggregating approximately $77,000 for the six months ended March 31,
2010, of which $65,000 was included as part of the total non-cash compensation
expense of $444,000 discussed above and the remaining $12,000 was recognized as
professional fees expense.
51
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
8: STOCK OPTIONS AND WARRANTS (Continued)
As of
March 31, 2010, there were 41,962 outstanding Non-Plan Options issued to
employees and directors, which were issued during fiscal 2005 in conjunction
with the Onstream Merger (see note 2). These options are immediately exercisable
at $20.256 per share and expire at various times from July 2012 to May
2013.
As of
March 31, 2010, there were 276,156 outstanding and fully vested Non-Plan Options
issued to financial consultants, as follows:
Issuance period
|
Number
of options
|
Exercise price
per share
|
Expiration
Date
|
||||||
October
2009
|
75,000 |
$
|
3.00 |
Oct
2013
|
|||||
Six
months ended Dec 31, 2009
|
75,000 | ||||||||
August
2009
|
16,667 |
$
|
3.00 |
Aug
2013
|
|||||
September
2009
|
8,333 |
$
|
3.00 |
Sept
2013
|
|||||
Year
ended September 30, 2009
|
25,000 | ||||||||
October
2007
|
25,000 |
$
|
10.38 |
Oct
2011
|
|||||
October
2007
|
16,667 |
$
|
10.98 |
Oct
2011
|
|||||
Year
ended September 30, 2008
|
41,667 | ||||||||
October
- December 2006
|
12,500 |
$
|
6.00 |
Oct
- Dec 2010
|
|||||
December
2006
|
6,667 |
$
|
9.00 |
December
2010
|
|||||
January
– December 2007
|
81,666 |
$
|
14.76 |
Oct
2010 - Dec 2011
|
|||||
March
2007
|
3,531 |
$
|
14.88 |
March
2012
|
|||||
Year
ended September 30, 2007
|
104,364 | ||||||||
April
– August 2006
|
15,833 |
$
|
6.00 |
Apr
– Aug 2010
|
|||||
March
– September 2006
|
14,292 |
$
|
6.30 |
March
2011
|
|||||
Year
ended September 30, 2006
|
30,125 | ||||||||
Total
Non-Plan consultant options as
of March 31, 2010
|
276,156 |
52
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE
8: STOCK OPTIONS AND WARRANTS (Continued)
As of
March 31, 2010, there were outstanding vested warrants, issued in connection
with various financings, to purchase an aggregate of 160,604 shares of common
stock, as follows:
Description of transaction
|
Number of
warrants
|
Exercise price
per share
|
Expiration
Date
|
||||||
CCJ
Note – December 2009 – see note 4
|
29,167 |
$
|
3.00 |
December
2013
|
|||||
Placement
fees – common share offering – March and April 2007
|
57,037 |
$
|
16.20 |
March
and April 2012
|
|||||
8%
Subordinated Convertible Debentures – March and April
2006
|
67,275 |
$
|
9.00 |
March
and April 2011
|
|||||
Additional
8% Convertible Debentures - April
2005
|
7,125 |
$
|
9.90 |
April
2010
|
|||||
Total
warrants as of March 31, 2010
|
160,604 |
With
respect to the warrants issued in connection with the sale of 8% Subordinated
Convertible Debentures, the number of shares of ONSM common stock that can be
issued upon the exercise of these $9.00 warrants 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 4.999% of our
issued and outstanding common stock.
With
respect to the warrants issued in connection with the sale of Additional 8%
Convertible Debentures, the number of shares of ONSM common stock that can be
issued upon the exercise of these $9.90 warrants 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 9.999% of our
issued and outstanding common stock.
The
exercise prices of all of the above warrants 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.
See note 5 related to certain registration payment arrangements and related
provisions contained in certain of the above warrants.
53
ONSTREAM
MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2010
NOTE 9:
SUBSEQUENT EVENTS
Notes 1
(Liquidity – Shelf Registration, Reverse stock split, Effects of Recent
Accounting Pronouncements), 2 (Auction Video patent application), 4 (Equipment
Notes interest payment with shares, Lender approval of Lehmann Note) and 5
(Narrowstep acquisition termination and litigation, Registration rights – Shelf
Registration) contain disclosure with respect to transactions occurring after
March 31, 2010.
On April
21, 2010, we received a letter from The NASDAQ Stock Market (“NASDAQ”) stating
that we were as of that date in compliance with all applicable requirements for
continued listing and that, accordingly, NASDAQ has determined to continue the
listing of our securities on The NASDAQ Capital Market.
On May 3,
2010 we closed on the borrowing of $250,000 from an individual (“Lehmann”) under
the terms of an unsecured subordinated convertible note (the “Lehmann Note”),
which is repayable in principal installments of $13,000 per month beginning July
3, 2010, with the final payment on May 3, 2011, including remaining principal
and all accrued but unpaid interest (at 10% per annum). The Lehmann
Note is convertible into common stock at Lehmann’s option based on our closing
share price on the funding date of the Lehmann Note, which was $2.04. $250,000
of the amount we borrowed under the Wilmington Notes in February 2010 came from
Lehmann.
The
Lehmann Note provides for (i) our issuance of 37,500 unregistered common shares
upon receipt of the funds and our issuance of 25,000 unregistered common shares
if the loan is still outstanding after 6 months and (ii) our prepayment of the
first six months of interest in the form of shares, based on our closing share
price on the funding date of the Lehmann Note. In the event the Lehmann Note is
prepaid after the first six months, the second tranche of 25,000 unregistered
common shares will be cancelled on a pro-rata basis, to the extent the second
six month time period has not elapsed at the time of such payoff.
We have
also incurred third party finder’s fees in connection with the Lehmann Note,
such fees payable in cash equal to 7% of the borrowed amount. The effective rate
of the Lehmann Note is approximately 77.0% per annum, assuming a six month loan
term and excluding the finder’s fees.
We may
prepay the Lehmann Note at any time with ten days notice, provided that Lehmann
may convert the outstanding balance to common shares during such ten day period.
If we successfully conclude a financing of debt or equity in excess of
$1,000,000 during the term of the Lehmann Note, the proceeds of such financing
will be used to pay off the remaining balance of the Lehmann Note. In the event
of a default, we will be obligated to pay Lehmann an additional 5% interest per
month (based on the outstanding loan balance and pro-rated on a daily basis)
until the default has been cured, payable in cash or unregistered common
shares.
The
Greenberg Note, which was issued in January 2010, provides that if we
successfully conclude a financing of debt or equity in excess of $500,000 during
the term of the Greenberg Note, the proceeds of such financing will be used to
pay off the remaining balance of the Greenberg Note – see note 4. Although the
aggregate proceeds from the Wilmington Notes in February 2010 plus the Lehmann
Note in May 2010 were $750,000, our position is that the Lehmann Note was a
separate financing from the Wilmington Notes and since neither of those
financings was in excess of $500,000, early repayment of the Greenberg Note is
not required. The Greenberg Note had a remaining outstanding balance of $211,000
as of May 7, 2010.
54
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The
following discussion should be read together with the information contained in
the Consolidated Financial Statements and related Notes included in the
quarterly report.
Overview
We are a
leading online service provider of live and on-demand Internet video, corporate
web communications and content management applications. We had
approximately 95 full time employees as of May 7, 2010, with operations
organized in two main operating groups:
|
·
|
Digital
Media Services Group
|
|
·
|
Web
and Audio Conferencing Services
Group
|
Our
Digital Media Services Group consists primarily of our Webcasting division, our
DMSP (“Digital Media Services Platform”) division, our UGC (“User Generated
Content”) division and our Smart Encoding division.
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, 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, 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.
Our Web
and Audio Conferencing Services Group includes our Infinite Conferencing
(“Infinite”) division, which operates primarily from the New York City area and
provides “reservationless” and operator-assisted audio and web conferencing
services and our EDNet division, which operates primarily from San Francisco,
California and provides connectivity within the entertainment and advertising
industries through its managed network, which encompasses production and
post-production companies, advertisers, producers, directors, and
talent.
For
segment information related to the revenue and operating income of these groups,
see Note 7 to the Consolidated Financial Statements.
Recent
Developments
A 1-for-6
reverse stock split of the outstanding shares of our common stock was effective
on April 5, 2010. Except as otherwise indicated, all related amounts reported in
our consolidated financial statements and in this 10-Q, including common
share quantities, convertible debenture conversion prices and exercise prices of
options and warrants, have been retroactively adjusted for the effect of this
reverse stock split.
On April
21, 2010, we received a letter from The NASDAQ Stock Market (“NASDAQ”) stating
that we were as of that date in compliance with all applicable requirements for
continued listing and that, accordingly, NASDAQ has determined to continue the
listing of our securities on The NASDAQ Capital Market.
55
During
January 2010 we borrowed $250,000 from Greenberg Capital under the terms of
an unsecured subordinated convertible note (the “Greenberg Note”),
which is repayable in principal installments of $13,000 per month beginning
March 1, 2010, with the final payment on December 31, 2010.
During
February 2010 we borrowed an aggregate of $500,000 from three entities under the
terms of unsecured subordinated convertible notes (the “Wilmington Notes”),
which were issued on a pari passu basis with the Greenberg Note and are
repayable in aggregate principal installments of $26,000 per month beginning
April 18, 2010, with the final payment on February 18, 2011.
On May 3,
2010 we closed on the borrowing of $250,000 from an individual under the terms
of an unsecured subordinated convertible note (the “Lehmann Note”), which is
repayable in principal installments of $13,000 per month beginning July 3, 2010,
with the final payment on May 3, 2011.
Revenue
Recognition
Revenues
from recurring service are recognized when (i) persuasive evidence of an
arrangement exists between us and the customer, (ii) the good 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
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.
Our Audio
and Web Conferencing Services Group recognizes revenue from audio and web
conferencing as well as customer usage of digital telephone
connections.
The
Infinite division generally charges 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 telephone connections
controlled by them. EDNet purchases digital phone lines from telephone companies
and sells access to the lines, as well as separate per-minute usage charges.
Network usage and bridging revenue is recognized based on the timing of the
customer’s usage of those services.
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.
56
Results
of Operations
Our
consolidated net loss for the six months ended March 31, 2010 was approximately
$5.6 million ($0.75 loss per share) as compared to a loss of approximately $9.1
million ($1.27 loss per share) for the comparable period of the prior fiscal
year, a decrease in our loss of approximately $3.5 million (38%). The decreased
net loss was primarily due to the $3.1 million charge for impairment of goodwill
and other intangible assets in the current fiscal year quarter being $2.4
million lower than the $5.5 million charge for such item in the comparable
period of the prior fiscal year. In addition, depreciation and amortization
expense for the six months ended March 31, 2010 was approximately $895,000 lower
than such expense for the comparable period of the prior fiscal
year.
Our
consolidated net loss for the three months ended March 31, 2010 was
approximately $1.3 million ($0.17 loss per share) as compared to a loss of
approximately $1.9 million ($0.27 loss per share) for the comparable period of
the prior fiscal year, a decrease in our loss of approximately $687,000 (35%).
This decrease was primarily the result of us recording an approximately $540,000
charge for the write off of deferred acquisition costs for the three months
ended March 31, 2009 versus no such expense in the comparable period of the
current fiscal year.
57
Six
months ended March 31, 2010 compared to the six months ended March 31,
2009 - The following table shows, for the periods presented, the
percentage of revenue represented by items on our consolidated statements of
operations.
Six Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenue:
|
||||||||
DMSP
and hosting
|
13.0 | % | 9.9 | % | ||||
Webcasting
|
35.0 | 33.3 | ||||||
Audio
and web conferencing
|
39.5 | 41.7 | ||||||
Network
usage
|
10.9 | 11.8 | ||||||
Other
|
1.6 | 3.3 | ||||||
Total
revenue
|
100.0 | % | 100.0 | % | ||||
Cost
of revenue:
|
||||||||
DMSP
and hosting
|
5.9 | % | 3.5 | % | ||||
Webcasting
|
9.7 | 10.3 | ||||||
Audio
and web conferencing
|
12.1 | 9.9 | ||||||
Network
usage
|
4.7 | 5.2 | ||||||
Other
|
2.5 | 3.0 | ||||||
Total
costs of revenue
|
34.9 | % | 31.9 | % | ||||
Gross
margin
|
65.1 | % | 68.1 | % | ||||
Operating
expenses:
|
||||||||
Compensation
|
51.8 | % | 56.0 | % | ||||
Professional
fees
|
11.2 | 7.6 | ||||||
Other
general and administrative
|
13.6 | 13.8 | ||||||
Write
off deferred acquisition costs
|
- | 6.2 | ||||||
Impairment
loss on goodwill and other intangible
assets
|
37.8 | 62.8 | ||||||
Depreciation
and amortization
|
13.6 | 22.9 | ||||||
Total
operating expenses
|
128.0 | % | 169.3 | % | ||||
Loss
from operations
|
(62.9 | )% | (101.2 | )% | ||||
Other
expense, net:
|
||||||||
Interest
expense
|
(6.6 | ) % | (3.0 | ) % | ||||
Other
(expense) income, net
|
1.2 | 0.4 | ||||||
Total
other expense, net
|
(5.4 | )% | (2.6 | )% | ||||
Net
loss
|
(68.3 | )% | (103.8 | )% |
58
The
following table is presented to illustrate our discussion and analysis of our
results of operations and financial condition. This table should be
read in conjunction with the consolidated financial statements and the notes
therein.
For the six months ended
March 31,
|
Increase (Decrease)
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
Total
revenue
|
$ | 8,202,807 | $ | 8,761,858 | $ | (559,051 | ) | (6.4 | )% | |||||||
Total
costs of revenue
|
2,862,903 | 2,793,512 | 69,391 | (2.5 | % | |||||||||||
Gross
margin
|
5,339,904 | 5,968,346 | (628,442 | ) | (10.5 | )% | ||||||||||
General
and administrative expenses
|
6,282,030 | 6,780,580 | (498,550 | ) | (7.4 | )% | ||||||||||
Impairment
loss on goodwill and other intangible
assets
|
3,100,000 | 5,500,000 | (2,400,000 | ) | (43.6 | )% | ||||||||||
Write
off deferred acquisition costs
|
- | 540,007 | (540,007 | ) | (100.0 | )% | ||||||||||
Depreciation
and amortization
|
1,116,161 | 2,011,451 | (895,290 | ) | (44.5 | )% | ||||||||||
Total
operating expenses
|
10,498,191 | 14,832,038 | (4,333,847 | ) | (29.2 | )% | ||||||||||
Loss
from operations
|
(5,158,287 | ) | (8,863,692 | ) | (3,705,405 | ) | (41.8 | )% | ||||||||
Other
expense, net
|
(442,918 | ) | (228,873 | ) | 214,045 | 93.5 | % | |||||||||
Net
loss
|
$ | (5,601,205 | ) | $ | (9,092,565 | ) | $ | (3,491,360 | ) | (38.4 | )% |
Revenues
and Gross Margin
Consolidated
operating revenue was approximately $8.2 million for the six months ended March
31, 2010, a decrease of approximately $559,000 (6.4%) from the corresponding
period of the prior fiscal year, primarily due to decreased revenues of the
Audio and Web Conferencing Services Group, although revenues of the Digital
Media Services Group also decreased during this period.
Audio and
Web Conferencing Services Group revenues were approximately $4.2 million for the
six months ended March 31, 2010, a decrease of approximately $533,000 (11.2%)
from the corresponding period of the prior fiscal year. This decrease was
primarily a result of decreased Infinite division revenues arising from the loss
of a major customer during the fourth quarter of fiscal 2009, as well as
decreased network usage service fees and decreased network equipment sales and
rental revenues from the EDNet division, which decreases we believe resulted
from a reduction in television and movie production activity in the current
fiscal year in response to a general economic slow-down.
For some
time the Infinite division sales force has been focusing on entering into
agreements with organizations with resources to provide Infinite’s audio and web
conferencing services to certain targeted groups. This included agreements with
Proforma, a leading provider of graphic communications solutions, a reseller
agreement with Copper Conferencing, a leading, carrier-class conferencing
services provider for small and medium-sized businesses, a master agency
agreement with Presidio Networked Solutions, a systems integrator,
a collaboration with PeerPort to launch WebMeet Community, an
integrated suite of virtual collaboration services. In March 2010 we announced the
expansion of Infinite’s alliance with BT Conferencing by providing a jointly
developed conferencing platform to Infinite’s reservationless client base.
Although these relationships and initiatives are important as a basis for
building future sales, in some cases there will be a lead time of a year or
longer before they are reflected in actual recorded sales. Furthermore, we
recently began a reorganization of the Infinite management and sales staff,
which included the hiring of a new divisional president in June 2009. Therefore,
due to the expected effects of the recent Infinite reorganization still in
process, as well as the EDNet trends discussed above which we expect will
continue for the foreseeable future, we do not expect the fiscal 2010 revenues
of the Audio and Web Conferencing Services Group (for the year as a whole) to
exceed the fiscal 2009 amounts.
59
Digital
Media Services Group revenues were approximately $4.0 million for the six months
ended March 31, 2010, a decrease of approximately $26,000 (0.7%) from the
corresponding period of the prior fiscal year. This decrease was primarily due
to an approximately $155,000 (77.7%) decrease in Smart Encoding division
revenues other than hosting revenues, which decrease arose primarily because of
a one-time encoding engagement occurring during the six months ended March 31,
2009 that did not recur during the six months ended March 31, 2010, plus smaller
decreases in certain other divisions. However we recorded an approximately
$199,000 (22.9%) net increase in DMSP and hosting division revenues over the
corresponding period of the prior fiscal year. This increase in DMSP and hosting
division revenues included (i) an approximately $79,000 increase in DMSP “Store
and Stream” and “Streaming Publisher” revenues and (ii) an approximately
$120,000 increase in hosting and bandwidth charges to certain larger DMSP
customers serviced by our Smart Encoding division.
As of
March 31, 2010, we had 336 monthly recurring subscribers to the “Store and
Stream” and/or “Streaming Publisher” applications of the DMSP, which
applications were developed as a focused interface for small to medium business
(SMB) clients, as compared to 293 subscribers as of March 31, 2009. Including
large DMSP hosting customers supported by our Smart Encoding Division, these
customer counts were 353 and 314, respectively. We expect this DMSP customer
base to continue to grow, especially as a result of our recent launch of version
2 of “Streaming Publisher”. Streaming Publisher is designed to provide enhanced
capabilities for advanced users such as publishers, media companies and other
content developers. The Streaming Publisher upgrade to the DMSP is a key step in
our objective to address the developing online video advertising market and
includes features such as automated transcoding (the ability to convert media
files into multiple file formats), player gallery (the ability to create various
video players and detailed usage reports), as well as advanced permissions,
security and syndication features. Users of the basic Store and Stream version
of the DMSP may easily upgrade to the Streaming Publisher version for a higher
monthly fee.
In
addition to the “Store and Stream” and “Streaming Publisher” applications of the
DMSP, we are continuing to work with several entities assisting us in the
deployment via the DMSP of enabling technologies necessary to create social
networks with integrated professional and user generated multimedia
content.
We
recently introduced our high quality, live mobile video streaming service
enabled for iPhone and BlackBerry users. This service, developed with our DMSP
technology, is device agnostic, enabling adaptive and segmented streaming to
popular mobile devices using Akamai’s network to deliver video in HD or standard
definition as well as many popular formats including Adobe Flash, H.264, VP6 and
Windows Media/VC-1.
One of
the key components of our March 2007 acquisition of Auction Video was the video
ingestion and flash transcoder, already integrated into the DMSP as an integral
component of the services offered to social network providers and other User
Generated Video (UGV) applications. Auction Video’s technology is being used in
various applications such as online Yellow Pages listings, delivering video to
mobile phones, multi-level marketing and online newspaper classified
advertisements, and can also provide for direct input from webcams and other
imaging equipment. In addition, our Auction Video service was approved by eBay
to provide video hosting services for eBay users and PowerSellers (high volume
users of eBay). The Auction Video acquisition is another strategic step in
providing a complete range of enabling, turnkey technologies for our clients to
facilitate “video on the web” applications, which we believe will make the DMSP
a more competitive option as an increasing number of companies look to enhance
their web presence with digital rich media and social
applications.
60
In
addition to the beneficial effect of the Auction Video technology on DMSP
revenues, we believe that our ownership of that technology will provide us with
other revenue opportunities, including software sales and licensing fees,
although the timing and amount of these revenues cannot be assured. In March
2008 we retained the law firm of Hunton & Williams to assist in expediting
the patent approval process and helping protect our rights related to our patent
pending UGV technology. In April 2008, we revised the original patent
application primarily for the purpose of splitting it into two separate
applications, which, while related, are being evaluated separately by the U.S.
Patent Office (“USPO”). With respect to the claims pending in the first of the
two applications, the USPO issued non-final rejections in August 2008, February
2009 and May 2009, as well as a final rejection in January 2010. On April 21,
2010 we filed a written response to this final rejection with the USPO, along
with a "Request for Continued Examination”. Regardless of the ultimate outcome
of this matter, our management has determined that an adverse decision with
respect to this patent application would not have a material adverse effect on
our financial position or results of operations. The USPO has taken no formal
action with regard to the second of the two applications. Certain of the former
owners of Auction Video, Inc. have an interest in proceeds that we may receive
under certain circumstances in connection with these patents. As a result of
this technology, plus other enhancements to the DMSP as noted above and our
increased sales and marketing focus on opportunities with social networks and
other high-volume users of digital rich media, as well as a result of sales of
the recently launched version of Streaming Publisher, we expect the fiscal 2010
DMSP and hosting revenues (for the year as a whole) to exceed the corresponding
fiscal 2009 amounts, although such increase cannot be assured.
Webcasting
revenues decreased by 1.4% for the six months ended March 31, 2010 as compared
to the corresponding period of the prior fiscal year. However, the number of
webcasts produced, approximately 3,700 for the six months ended March 31, 2010,
was approximately equal to the number of webcasts for the corresponding period
of the prior fiscal year and the average revenue per webcast event of
approximately $802 for the six months ended March 31, 2010 was approximately
equal to the corresponding period of the prior fiscal year. The number of
webcasts reported, as well as the resulting calculation of the average revenue
per webcast event, does not include any webcast events attributed with $100 or
less revenue, based on our determination that excluding such low-priced or even
no-charge events increases the usefulness of this statistic.
Although
webcasting revenues declined during the fourth quarter of fiscal 2009 from the
revenue levels for the first three quarters of that fiscal year, we believe that
the increased revenue for the first quarter of fiscal 2010 (compared to the
fourth quarter of fiscal 2009) and for the second quarter of fiscal 2010
(compared to the first quarter of fiscal 2010) represent the start of a return
to those revenue levels we experienced before the fourth quarter of fiscal 2009.
Furthermore, we are optimistic with respect to seeing an increase in the level
of webcasting revenues during the remainder of fiscal 2010, based on order flow
and other sales activity thus far for the second quarter of fiscal 2010, as well
as the following factors which we believe will favorably impact our webcasting
revenues for the remainder of fiscal 2010:
·
|
BT
reseller agreement - In October 2009, we announced an expansion of our
business relationship with BT Conferencing, a division of BT Group plc,
one of the world's leading providers of communications solutions and
services, via the signing of a new webcasting, iEncode, and digital media
services reseller agreement. Under the strategic global reseller
agreement, BT Conferencing will now be offering our webcasting, iEncode
and digital media services to its new and existing clients worldwide. In
addition, we will be using BT Conferencing infrastructure and services to
support our operations.
|
61
·
|
Expanding
government business - In November 2007 we announced that we had been
awarded a stake in a three-year Master Services Agreement (MSA) by the
State of California to provide video and audio streaming services to the
state and participating local governments. In August 2008 we announced
that we had been awarded three new multi-year public sector webcasting
services contracts with the United States Nuclear Regulatory Commission
(NRC), California State Department of
Technology Services (DTS), and California State Board of Equalization
(BOE). In April 2009 we announced that, in addition to the extension of
the NRC contract for the first full year after a successful initial test
period, we were engaged to perform webcasting services for use by the U.S.
Department of Interior, Minerals Management Service, via a strategic
partner relationship.
|
In
November 2009, we announced that we were engaged to perform webcasting services
for the Department of the Treasury’s Internal Revenue Service (IRS) and to
provide webinar services for use by the U.S. Department of Housing and Urban
Development’s Federal Housing Administration (FHA) Philadelphia Homeownership
Center (HOC), via a strategic partner relationship. We also announced the
extension of the NRC contract, discussed above, for the second full
year.
We
recognized related revenues for all of the above government-related contracts of
approximately $322,000 for the year ended September 30, 2009 and related
revenues of approximately $234,000 for the six months ended March 31,
2010.
|
·
|
New
products and technology - We recently launched iEncode™, a full-featured,
turnkey, standalone webcasting solution, designed to operate inside a
corporate LAN environment with multicast capabilities. Although we
recorded some iEncode revenue during fiscal 2009 and we introduced version
2 (V2) of iEncode™ in June 2009, V2 was not available for delivery to our
customers until December 2009 and we continued to make some technical
improvements after that date. Although iEncode™ sales have been limited to
date, we expect them to start to increase to more meaningful levels during
the remainder of fiscal 2010.
|
We have
recently completed several feature enhancements to our proprietary webcasting
platform, including embedded Flash video and animations as well as a webinar
service providing the means to hold a virtual seminar online in real time and
both audio and video editing capabilities. In addition, we recently announced an
upgrade to our webcasting service, featuring broadcast quality video using the
industry standard 16:9 aspect ratio, which we named Visual Webcaster HD™. The
new upgrade includes the ability to use high definition cameras and other HD
sources input via SDI (Serial Digital Interface) into our encoders, providing a
broadcast-quality experience.
During
fiscal 2009, we began the development of the MarketPlace365™ (MP365) platform,
which will enable the creation of on-line virtual marketplaces, trade shows and
social communities. We will charge each promoter a monthly fee based on the
number of exhibitors within their MP365 marketplace, as well as a share of the
revenue from advertising in their MP365 marketplace, but we also expect to
recognize additional revenue beyond these exhibitor and advertising fees since
MP365 will integrate with and utilize almost all of our other technologies
including DMSP, webcasting, UGC and conferencing. We already have several
commitments for MP365 marketplaces from the existing publishers and trade show
companies that we have already introduced the product to, as
follows:
|
·
|
In
December 2009, we announced an agreement with the Tarsus Group plc
(“Tarsus”) for them to implement and market MP365 to Tarsus' more than
19,000 trade shows and 2,000 suppliers that are part of their Trade Show
News Network, a leading online resource for the trade show, exhibition and
event industry.
|
62
|
·
|
In
February 2010, we announced an agreement with the Trade Show Exhibitors
Association (“TSEA”) for them to market MP365 to TSEA’s members, vendors
and sponsors, as well as an agreement with eConventions365, LLC, developer
of the Commercial Design, Architecture and Construction (CDAC) Trade Show,
for them to develop a virtual tradeshow for the commercial design and
building industry worldwide, using MP365 and expected to launch in the
summer of 2010.
|
|
·
|
In
March 2010, we announced that Specialized Publications Corporation (“SPC”)
had signed both MP365 agent and promoter agreements. Under the promoter
agreements, SPC, a multi-faceted business including long-time publisher of
targeted consumer, business and association magazines, plans to develop
three virtual marketplaces using MP365 and focused on the consumer and
commercial aviation, restaurant and scuba diving industries. In March
2010, we also announced that HomeDecShow, LLC has signed a MP365 agreement
to develop a virtual tradeshow and business community for the home,
textiles, gifts and decorative accessory industry worldwide, which is
planning to launch by late summer
2010.
|
|
·
|
In
April 2010, we announced that we have partnered with AMC Institute, to
provide MP365, as well as our full suite of digital media and
communications services, to the organization’s 150 association management
company members who represent over 1500 associations throughout the U.S.,
Canada, Europe and Asia.
|
|
·
|
In
May 2010, we announced NewGen Broadcasting, Inc. (“New Gen”) has signed
both MP365 agent and promoter agreements to promote the MP365 platform and
develop its own virtual tradeshow. NewGen will assist us in creating a
best of breed list of preferred Search Engine Marketing (SEM)
professionals to help MP365 promoters maximize their lead generation
efforts and, through its Webmaster Radio service, will provide online
radio and relevant content syndication for use by other MP365 promoters to
enhance the attendee experience. In May 2010, we also announced
Conventions.net has signed an MP365 agent agreement. Conventions.net,
which has thousands of industry suppliers in over 150 categories, plans to
showcase the MP365 platform through its website and other marketing
vehicles.
|
Including
the above, we have obtained signed promoter contracts representing at least
nine MP365 marketplaces. The initial MP365 marketplaces are expected to
launch in July or August 2010.
Due to
the revenue potential from a single MP365 marketplace, we expect this product
could have a significant impact on our future revenues. However, the attainment
of any revenue from a MP365 marketplace will be subject to various factors,
including the implementation of the MP365 product by the promoter/purchaser,
including the sales of booths to exhibitors and related advertising, which
amount and timing cannot be assured.
Due to
the anticipated increases in webcasting revenues, the anticipated increases in
DMSP and hosting revenues and revenues upon the launch of MarketPlace365™, all as discussed
above, we expect the fiscal 2010 revenues of the Digital Media Services Group
(for the year as a whole) to exceed the corresponding fiscal 2009 amounts,
although such increase cannot be assured.
Consolidated
gross margin was approximately $5.3 million for the six months ended March 31,
2010, a decrease of approximately $628,000 (10.5%) from the corresponding period
of the prior fiscal year. This decrease was due to approximately $606,000 less
gross margin from the Audio and Web Conferencing Services Group, corresponding
to the $533,000 decrease in Audio and Web Conferencing Services Group revenues
as discussed above, as well as decreased gross margin percentage on those
revenues from 71.7% to 66.4%. Primary reasons for this decreased gross margin
percentage were (i) certain costs related to providing webconferencing services
that are generally fixed to us and do not vary with utilization (ii) increased
costs from purchasing additional “overflow” operating capacity from third
parties and (iii) decreases in our per minute charges to certain customers
deemed necessary in order to respond to competition. The consolidated gross
margin percentage was 65.1% for the six months ended March 31, 2010, versus
68.1% for the corresponding period of the prior fiscal
year.
63
The
consolidations of two of our co-location facilities into two other existing
locations were completed as scheduled during the second fiscal 2010 quarter.
During the third fiscal 2010 quarter, we are planning to discontinue the use of
a third-party software application incorporated as part of our DMSP and hosting
services in favor of a less costly application. During the fourth fiscal 2010
quarter, we are also planning to reduce the number of telephone switches and/or
switch locations used by our Infinite division. These consolidations, as well as
recently negotiated reductions in our bandwidth and telephone line and usage
rates, are expected to reduce our cost of sales by approximately $275,000 during
the last six months of fiscal 2010, as compared to those costs for the
corresponding period of fiscal 2009, although such results cannot be
assured.
Although
we expect increases in Digital Media Services Group sales during the remainder
of fiscal 2010 and we expect continued savings with respect to certain costs of
sales items during the remainder of fiscal 2010, both as discussed above, as a
result of the past and ongoing decreased gross margin from the Audio and Web
Conferencing Services Group, we expect consolidated gross margin (in dollars)
for fiscal year 2010 (for the year as a whole) to be less than the prior fiscal
year.
Operating
Expenses
Consolidated
operating expenses were approximately $10.5 million for the six months ended
March 31, 2010, a decrease of approximately $4.3 million (29.2%) from the
corresponding period of the prior fiscal year, primarily due to the $3.1 million
charge for impairment of goodwill and other intangible assets in the current
fiscal year quarter being $2.4 million lower than the $5.5 million charge for
such item in the comparable period of the prior fiscal year. In addition,
depreciation and amortization expense and compensation expense each also
decreased by approximately $895,000 and $656,000, respectively, in the six
months ended March 31, 2010, as compared to those expenses for the corresponding
period of the prior fiscal year. In addition, we recorded an approximately
$540,000 charge for the write off of deferred acquisition costs for the six
months ended March 31, 2009 versus no such expense in the comparable period of
the current fiscal year. This write-off related to the terminated Narrowstep
acquisition, which is discussed in more detail in Item 1 of Part II of this
10-Q.
The
Intangibles – Goodwill and Other topic of the ASC, which addresses the financial
accounting and reporting standards for goodwill and other intangible assets
subsequent to their acquisition, requires that goodwill be tested for impairment
on a periodic basis. 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. 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. We performed impairment tests
on Infinite, EDNet and Acquired Onstream as of December 31, 2008. We assessed
the fair value of the net assets of these reporting units by considering the
projected cash flows and by analysis of comparable companies, including such
factors as the relationship of the comparable companies’ revenues to their
respective market values. Based on these factors, we concluded that
there was no impairment of the assets of EDNet as of that date. Although the
first step of the two step testing process of the assets of Acquired Onstream
and Infinite preliminarily indicated that the fair value of those intangible
assets exceeded their recorded carrying value as of December 31, 2008, it was
noted that as a result of the then recent substantial volatility in the capital
markets, the price of our common stock and our market value had decreased
significantly and as of December 31, 2008, our market capitalization, after
appropriate adjustments for control premium and other considerations, was
determined to be less than our net book value (i.e., stockholders’ equity as
reflected in our financial statements). Based on this condition, and in
accordance with the provisions of the Intangibles – Goodwill and Other topic of
the ASC, we recorded a non-cash expense, for the impairment of our goodwill and
other intangible assets, of $5.5 million for the six months ended March 31,
2009. This $5.5 million adjustment was determined to relate to $1.1 million of
goodwill and intangible assets of Infinite, $100,000 of intangible assets of
Auction Video and $4.3 million of goodwill of Acquired
Onstream.
64
We also
performed impairment tests on Infinite, EDNet and Acquired Onstream as of
December 31, 2009, using the same methodologies discussed
above. Based on these factors, we concluded that there was no
impairment of the assets of Acquired Onstream or EDNet as of that date. However,
we determined that Infinite’s goodwill and certain of its intangible assets were
impaired as of that date and based on that condition, and in accordance with the
provisions of the Intangibles – Goodwill and Other topic of the ASC, we recorded
a non-cash expense, for the impairment of our goodwill and other intangible
assets, of $3.1 million for the six months ended March 31, 2010.
Although
we determined that our market value (after certain adjustments as discussed
above) exceeded our net book value as of December 31, 2009, if the price of our
common stock and our market value were to decline, such condition could result
in future non-cash impairment charges to our results of operations related to
our goodwill and other intangible assets arising from our next scheduled
recurring annual impairment review, which will be as of December 31,
2010.
The
valuations of Infinite, EDNet and Acquired Onstream incorporate our management’s
estimates of future sales and operating income, which estimates in the cases of
Infinite and Acquired Onstream are dependent on products (audio and web
conferencing and the DMSP, respectively) from which significant sales increases
may be required to support that valuation. Furthermore, even if our market value
continues to exceed our net book value, annual reviews for impairment in future
periods may result in future periodic write-downs. Tests for
impairment between annual tests may be required if events occur or circumstances
change that would more likely than not reduce the fair value of the net carrying
amount.
The
decrease in depreciation and amortization expense for the six months ended March
31, 2010 of approximately $895,000 was 44.5% of that expense for the
corresponding period of the prior fiscal year. This decrease is primarily due to
(i) reduced depreciation expense related to the DMSP as a result of certain DMSP
components reaching the end of the useful lives assigned to them for book
depreciation purposes and (ii) reduced amortization expense related to certain
intangible assets as a result of the impairment losses we recorded during the
six months ended March 31, 2010 and the six months ended March 31, 2009, which
were recorded as a reduction of the historical depreciable cost basis of those
assets as of those dates.
The
decrease in compensation expense for the six months ended March 31, 2010 of
approximately $656,000 was 13.4% of that expense for the corresponding period of
the prior fiscal year. Effective October 1, 2009, a significant portion of our
workforce, including all of management, took a 10% payroll reduction, which we
expect will be maintained until increased revenue levels result in positive cash
flow. This action, as well as payroll cost reduction actions we took primarily
during February and March 2009, represent anticipated compensation expense
reductions of approximately $1.3 million for fiscal 2010, as compared to fiscal
2009, and are the primary reason for the decreased compensation expense for the
first six months of fiscal 2010. Regardless of the above, it is
possible that some or all of the future portion of these savings (approximately
$550,000 for the remaining two quarters of fiscal 2010, as compared to the
corresponding fiscal 2009 period) will be offset by compensation cost increases
as a result of other actions we may deem necessary during the remainder of
fiscal 2010.
Based
primarily on expected reductions in depreciation and amortization expense and in
compensation expense for fiscal 2010 compared to fiscal 2009 as discussed above,
we expect our consolidated operating expenses for fiscal year 2010 to be less
than the corresponding prior year amounts (excluding any reduction arising from
fiscal 2010 reductions in goodwill impairment charges or acquisition cost
write-offs as compared to those costs in fiscal 2009), although this cannot be
assured.
65
Other
Expense
Other
expense of approximately $443,000 for the six months ended March 31, 2010
represented an approximately $214,000 (93.5%) increase as compared to the
corresponding period of the prior fiscal year. This additional expense was
primarily related to an increase in interest expense of approximately $275,000,
arising from a much higher level of interest bearing debt, as well as increased
effective interest rates, for the six months ended March 31, 2010 as compared to
the six months ended March 31, 2009. As of September 30, 2009, we had
outstanding interest bearing debt with a total face amount of approximately $3.8
million, which was primarily comprised of (i) approximately $1.4 million in
borrowings outstanding for working capital under a line of credit arrangement
with a financial institution, collateralized by our accounts receivable and
bearing interest at prime plus 11% (14.25%) as of September 30, 2009, (ii)
convertible debentures for financing software and equipment purchases with a
balance of $1.0 million and bearing interest expense at 12% per annum and (iii)
the Rockridge Note balance of approximately $1.4 million and incurring interest
expense at 12% per annum. In addition to these stated interest amounts, we are
also recognizing interest expense as a result of amortizing discount on these
debts. As compared to the approximately $3.8 million of interest bearing debt as
of September 30, 2009, the total was approximately $2.9 million as of September
30, 2008. In addition to this debt increase of approximately $900,000 during
fiscal 2009, the interest rate on our working capital line of credit increased
from prime plus 8% (13.0%) as of September 30, 2008 to 14.25% as of September
30, 2009 and the Rockridge Note, which did not exist until April 2009, carries
an effective interest rate of approximately 28.0% per annum (after the September
2009 amendment).
Our
collateralized line of credit arrangement (the “Line”) was amended in December
2009 and as a result the borrowing limit was increased to $2.0 million and the
interest rate modified to be 13.5% per annum, adjusted for future changes in the
prime rate, plus a weekly monitoring fee of one twentieth of a percent (0.05%)
of the borrowing limit. The interest rate at the time of the amendment was
14.25% per annum (prime rate plus 11%) but there was no monitoring fee. Based on
the outstanding balance of approximately $1.7 million under the Line as of March
31, 2010, the amended terms would represent increased interest expense,
including the monitoring fee, of approximately $40,000 per year.
Based on
the increased outstanding balance as well as the increased interest rate on the
Line effective in December 2009, the Rockridge note being outstanding for a full
year in fiscal 2010 as compared to a portion of fiscal 2009, an additional
borrowing of $500,000 under the Rockridge Note on October 29, 2009, an
additional borrowing under the CCJ Note on December 29, 2009, an additional
borrowing of $250,000 under the Greenberg Note in January 2010, additional
borrowings of $500,000 under the Wilmington Notes in February 2010, an
additional borrowing of $250,000 under the Lehmann Note in May 2010 and
potential further borrowings in fiscal 2010 in order to address our working
capital deficit, we anticipate our interest expense during fiscal 2010 to be
greater than it was in fiscal 2009.
66
Three
months ended March 31, 2010 compared to the three months ended March 31,
2009 - The following table shows, for the periods presented, the
percentage of revenue represented by items on our consolidated statements of
operations.
Three Months Ended
March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenue:
|
||||||||
DMSP
and hosting
|
12.5 | % | 10.7 | % | ||||
Webcasting
|
35.4 | 30.8 | ||||||
Audio
and web conferencing
|
40.0 | 43.3 | ||||||
Network
usage
|
10.6 | 11.2 | ||||||
Other
|
1.5 | 4.0 | ||||||
Total
revenue
|
100.0 | % | 100.0 | % | ||||
Cost
of revenue:
|
||||||||
DMSP
and hosting
|
5.7 | % | 3.5 | % | ||||
Webcasting
|
11.2 | 10.1 | ||||||
Audio
and web conferencing
|
11.1 | 9.9 | ||||||
Network
usage
|
4.7 | 5.0 | ||||||
Other
|
2.5 | 3.0 | ||||||
Total
costs of revenue
|
35.2 | % | 31.5 | % | ||||
Gross
margin
|
64.8 | % | 68.5 | % | ||||
Operating
expenses:
|
||||||||
Compensation
|
52.6 | % | 57.2 | % | ||||
Professional
fees
|
10.6 | 6.0 | ||||||
Other
general and administrative
|
13.8 | 13.7 | ||||||
Write
off deferred acquisition costs
|
- | 12.3 | ||||||
Depreciation
and amortization
|
13.3 | 21.0 | ||||||
Total
operating expenses
|
90.3 | % | 110.2 | % | ||||
Loss
from operations
|
(25.5 | )% | (41.7 | )% | ||||
Other
expense, net:
|
||||||||
Interest
expense
|
(7.3 | )% | (2.8 | ) % | ||||
Other
(expense) income, net
|
2.3 | 0.1 | ||||||
Total
other expense, net
|
(5.0 | )% | (2.7 | )% | ||||
Net
loss
|
(30.5 | )% | (44.4 | )% |
67
The
following table is presented to illustrate our discussion and analysis of our
results of operations and financial condition. This table should be
read in conjunction with the consolidated financial statements and the notes
therein.
For the three months ended
March 31,
|
Increase (Decrease)
|
|||||||||||||||
2010
|
2009
|
Amount
|
Percent
|
|||||||||||||
Total
revenue
|
$ | 4,133,694 | $ | 4,382,661 | $ | (248,967 | ) | (5.7 | )% | |||||||
Total
costs of revenue
|
1,456,427 | 1,380,635 | 75,792 | 5.5 | % | |||||||||||
Gross
margin
|
2,677,267 | 3,002,026 | (324,759 | ) | (10.8 | )% | ||||||||||
General
and administrative expenses
|
3,182,301 | 3,370,341 | (188,040 | ) | (5.6 | )% | ||||||||||
Write
off deferred acquisition costs
|
- | 540,007 | (540,007 | ) | (100.0 | )% | ||||||||||
Depreciation
and amortization
|
548,800 | 918,075 | (369,275 | ) | (40.2 | )% | ||||||||||
Total
operating expenses
|
3,731,101 | 4,828,423 | (1,097,322 | ) | (22.7 | )% | ||||||||||
Loss
from operations
|
(1,053,834 | ) | (1,826,397 | ) | (772,563 | ) | (42.3 | )% | ||||||||
Other
expense, net
|
(206,330 | ) | (120,771 | ) | 85,559 | 70.8 | % | |||||||||
Net
loss
|
$ | (1,260,164 | ) | $ | (1,947,168 | ) | $ | (687,004 | ) | (35.3 | )% |
Revenues
and Gross Margin
Consolidated
operating revenue was approximately $4.1 million for the three months ended
March 31, 2010, a decrease of approximately $249,000 (5.7%) from the
corresponding period of the prior fiscal year, due to decreased revenues of the
Audio and Web Conferencing Services Group. Revenues of the Digital Media
Services Group increased during this period.
Audio and
Web Conferencing Services Group revenues were approximately $2.1 million for the
three months ended March 31, 2010, a decrease of approximately $269,000 (11.2%)
from the corresponding period of the prior fiscal year. This decrease was
primarily a result of decreased Infinite division revenues arising from the loss
of a major customer during the fourth quarter of fiscal 2009, as well as
decreased network usage service fees and decreased network equipment sales and
rental revenues from the EDNet division, which decreases we believe resulted
from a reduction in television and movie production activity in the current
quarter in response to a general economic slow-down.
Digital
Media Services Group revenues were approximately $2.0 million for the three
months ended March 31, 2010, an increase of approximately $20,000 (1.0%) from
the corresponding period of the prior fiscal year. This increase was primarily
due to an approximately $114,000 (8.5%) increase in Webcasting division revenues
plus smaller increases in certain other divisions. including an approximately
$44,000 (9.3%) net increase in DMSP and hosting division revenues. This increase
in DMSP and hosting division revenues included (i) an approximately $27,000
increase in DMSP “Store and Stream” and “Streaming Publisher” revenues and (ii)
an approximately $17,000 increase in hosting and bandwidth charges to certain
larger DMSP customers serviced by our Smart Encoding division.
The above
Webcasting division and DMSP and hosting division revenue increases were offset
by an approximately $132,000 (88.1%) decrease in Smart Encoding division
revenues other than hosting revenues, which decrease arose primarily because of
a one-time encoding/streaming engagement occurring during the three months ended
March 31, 2009 that did not recur during the three months ended March 31,
2010.
68
As
mentioned above, webcasting revenues increased by 8.5% for the three months
ended March 31, 2010 as compared to the corresponding period of the prior fiscal
year. Furthermore, the number of webcasts produced, approximately 1,800 for the
three months ended March 31, 2010, was approximately 100 more than the
approximately 1,700 webcasts for the corresponding period of the prior fiscal
year. The average revenue per webcast event also increased to approximately $838
for the current fiscal year quarter as compared to approximately $772 for the
corresponding period of the prior fiscal year. The number of webcasts reported,
as well as the resulting calculation of the average revenue per webcast event,
does not include any webcast events attributed with $100 or less revenue, based
on our determination that excluding such low-priced or even no-charge events
increases the usefulness of this statistic.
Consolidated
gross margin was approximately $2.7 million for the three months ended March 31,
2010, a decrease of approximately $325,000 (10.8%) from the corresponding period
of the prior fiscal year. This decrease was due to approximately $288,000 less
gross margin from the Audio and Web Conferencing Services Group, corresponding
to the $267,000 decrease in Audio and Web Conferencing Services Group revenues
as discussed above, as well as decreased gross margin percentage on those
revenues from 72.6% to 68.2%. Primary reasons for this decreased gross margin
percentage were (i) certain costs related to providing webconferencing services
that are generally fixed to us and do not vary with utilization (ii) increased
costs from purchasing additional “overflow” operating capacity from third
parties and (iii) decreases in our per minute charges to certain customers
deemed necessary in order to respond to competition. The consolidated gross
margin percentage was 64.8% for the three months ended March 31, 2010, versus
68.5% for the corresponding period of the prior fiscal year.
Operating
Expenses
Consolidated
operating expenses were approximately $3.7 million for the three months ended
March 31, 2010, a decrease of approximately $1.1 million (22.7%) from the
corresponding period of the prior fiscal year, primarily the result of us
recording an approximately $540,000 charge for the write off of deferred
acquisition costs for the three months ended March 31, 2009 versus no such
expense in the comparable period of the current fiscal year. This write-off
related to the terminated Narrowstep acquisition, which is discussed in more
detail in Item 1 of Part II of this 10-Q. In addition, depreciation and
amortization expense and compensation expense each also decreased by
approximately $369,000 and $329,000, respectively, in the three months ended
March 31, 2010, as compared to those expenses for the corresponding period of
the prior fiscal year.
The
decrease in depreciation and amortization expense for the three months ended
March 31, 2010 of approximately $369,000 was 40.2% of that expense for the
corresponding period of the prior fiscal year. This decrease is primarily due to
(i) reduced depreciation expense related to the DMSP as a result of certain DMSP
components reaching the end of the useful lives assigned to them for book
depreciation purposes and (ii) reduced amortization expense related to certain
intangible assets as a result of the impairment loss we recorded during the six
months ended March 31, 2010, which was recorded as a reduction of the historical
depreciable cost basis of those assets as of December 31, 2009.
The
decrease in compensation expense for the three months ended March 31, 2010 of
approximately $329,000 was 13.1% of that expense for the corresponding period of
the prior fiscal year. Effective October 1, 2009, a significant portion of our
workforce, including all of management, took a 10% payroll reduction, which we
expect will be maintained until increased revenue levels result in positive cash
flow. This action, as well as payroll cost reduction actions we took primarily
during February and March 2009, represent anticipated compensation expense
reductions of approximately $1.3 million for fiscal 2010, as compared to fiscal
2009, and are the primary reason for the decreased compensation expense for the
second quarter of fiscal 2010. Regardless of the above, it is
possible that some or all of the future portion of these savings (approximately
$500,000 for the remaining two quarters of fiscal 2010, as compared to the
corresponding fiscal 2009 period) will be offset by compensation cost increases
as a result of other actions we may deem necessary during the remainder of
fiscal 2010.
69
Other
Expense
Other
expense of approximately $206,000 for the three months ended March 31, 2010
represented an approximately $86,000 (70.8%) increase as compared to the
corresponding period of the prior fiscal year. This additional expense was
primarily related to an increase in interest expense of approximately $179,000,
arising from a much higher level of interest bearing debt, as well as increased
effective interest rates, for the three months ended March 31, 2010 as compared
to the three months ended March 31, 2009. As of December 31, 2009, we had
outstanding interest bearing debt with a total face amount of approximately $4.7
million, which was primarily comprised of (i) approximately $1.6 million in
borrowings outstanding for working capital under a line of credit arrangement
with a financial institution, collateralized by our accounts receivable and
bearing interest at an effective rate of approximately 16.0% per annum (13.5%
plus a 2% monitoring fee on the maximum borrowing limit) as of December 31,
2009, (ii) convertible debentures for financing software and equipment purchases
with a balance of $1.0 million and bearing interest expense at 12% per annum and
(iii) the Rockridge Note balance of approximately $1.8 million and incurring
interest expense at 12% per annum. In addition to these stated interest amounts,
we are also recognizing interest expense as a result of amortizing discount on
these debts. As compared to the approximately $4.7 million of interest bearing
debt as of December 31, 2009, the total was approximately $3.1 million as of
December 31, 2008. In addition to this approximately $1.6 million increase in
our debt over this one-year period, the interest rate on our working capital
line of credit increased from 14.25% per annum (prime plus 11%) as of December
31, 2008 to 16.0% per annum as of December 31, 2009 and the Rockridge Note,
which did not exist until April 2009, carries an effective interest rate of
approximately 28.0% per annum (after the September 2009 amendment). In addition
to the above, we incurred $750,000 of additional debt during the three months
ended March 31, 2010, arising from the Greenberg Note and the Wilmington Notes,
which have a stated interest rate of 10% per annum.
Liquidity
and Capital Resources
Our
financial statements for the six months ended March 31, 2010 reflect a net loss
of approximately $5.6 million and cash used in operations for that period of
approximately $355,000. Although we had cash of approximately $710,000 at March
31, 2010, our working capital was a deficit of approximately $2.6 million at
that date.
During
the six months ended March 31, 2010, we obtained financing from three primary
sources – (i) the unsecured subordinated convertible Greenberg Note and
Wilmington Notes, under which we borrowed an aggregate of $737,000 (net of
repayments) during the period, (ii) the Line, collateralized by our accounts
receivable, under which we borrowed approximately $292,000 (net of repayments)
during the period and (iii) the Rockridge Note, collateralized by all our assets
not pledged under the Line, under which we borrowed approximately $342,000 (net
of repayments) during the period. We also borrowed $250,000 on May 3, 2010 under
the terms of the unsecured subordinated convertible Lehmann Note.
On
January 13, 2010 we borrowed $250,000 from Greenberg Capital (“Greenberg”) under
the terms of an unsecured subordinated convertible note (the
“Greenberg Note”), which is repayable in principal installments of $13,000 per
month beginning March 1, 2010, with the final payment on December 31, 2010,
including remaining principal and all accrued but unpaid interest (at 10% per
annum). The Greenberg Note is convertible into common stock at
Greenberg’s option at a price equal to 85% of the weighted average share price
for the five days prior to conversion, such conversion price to be no less than
$2.40 per share.
The
Greenberg Note provides for (i) our issuance of 20,833 unregistered common
shares upon receipt of the funds and our issuance of 20,833 unregistered common
shares if the loan is still outstanding after 6 months (ii) our payment of
$2,500 in legal fees incurred by Greenberg and (iii) the option to prepay up to
$12,500 of interest in the form of shares, based on the weighted average share
price for the five days prior, which we exercised by the issuance of 6,945
unregistered common shares. The effective rate of the Greenberg Note is
approximately 50.7% per annum, assuming a one year loan term.
70
We may
prepay the Greenberg Note at any time with ten days notice, provided that
Greenberg may convert the outstanding balance to common shares during such ten
day period. In the event the Greenberg Note is prepaid during the first six
months, we shall incur a prepayment penalty of 20,833 unregistered common
shares. In the event of a default, we will be obligated to pay Greenberg an
additional 5% interest per month (based on the outstanding loan balance and
pro-rated on a daily basis) until the default has been cured, payable in cash or
unregistered common shares. If we successfully conclude a subsequent financing
of debt or equity in excess of $500,000 during the term of the Greenberg Note,
the proceeds of such financing will be used to pay off the remaining balance of
the Greenberg Note.
During
February 2010 we borrowed an aggregate of $500,000 from three entities (the
“Wilmington Investors”) under the terms of unsecured subordinated convertible
notes (the “Wilmington Notes”), which were issued on a pari passu basis with the
Greenberg Note and are repayable in aggregate principal installments of $26,000
per month beginning April 18, 2010, with the final payment on February 18, 2011,
including remaining principal and all accrued but unpaid interest (at 10% per
annum). The Wilmington Notes are convertible into common stock at the
option of each individual Wilmington Investor, based on our closing share price
on the funding date of the Wilmington Notes, which was $2.76 with respect to
$375,000 of the funding and $2.88 with respect to the balance.
The
Wilmington Notes provide for (i) our issuance of an aggregate of 50,000
unregistered common shares upon receipt of the funds and our issuance of an
aggregate 50,000 unregistered common shares if the loans are still outstanding
after 6 months, (ii) our payment of $2,500 in legal fees incurred by the
Wilmington Investors and (iii) our prepayment of the first six months of
interest in the form of shares, based on our closing share price on the funding
date of the Wilmington Notes. In the event the Wilmington Notes are prepaid
after the first six months, the second tranche of 50,000 unregistered common
shares will be cancelled on a pro-rata basis, to the extent the second six month
time period has not elapsed at the time of such payoff.
We have
also incurred third party finder’s fees in connection with the Wilmington Notes,
such fees payable in cash equal to 7% of the borrowed amount payable. The
effective rate of the Wilmington Notes is approximately 83.9% per annum,
assuming a six month loan term and excluding the finder’s fees.
We may
prepay the Wilmington Notes at any time with ten days notice, provided that the
Investor may convert the outstanding balance to common shares during such ten
day period. In the event of a default, we will be obligated to pay the
Wilmington Investors an additional 5% interest per month (based on the
outstanding loan balance and pro-rated on a daily basis) until the default has
been cured, payable in cash or unregistered common shares. If we successfully
conclude a subsequent financing of debt or equity in excess of $750,000 during
the term of the Wilmington Notes, the proceeds of such financing will be used to
pay off the remaining balance of the Wilmington Notes.
On May 3,
2010 we closed on the borrowing of $250,000 from an individual (“Lehmann”) under
the terms of an unsecured subordinated convertible note (the “Lehmann Note”),
which is repayable in principal installments of $13,000 per month beginning July
3, 2010, with the final payment on May 3, 2011, including remaining principal
and all accrued but unpaid interest (at 10% per annum). The Lehmann
Note is convertible into common stock at Lehmann’s option based on our closing
share price on the funding date of the Lehmann Note, which was $2.04. $250,000
of the amount we borrowed under the Wilmington Notes in February 2010 came from
Lehmann.
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The
Lehmann Note provides for (i) our issuance of 37,500 unregistered common shares
upon receipt of the funds and our issuance of 25,000 unregistered common shares
if the loan is still outstanding after 6 months and (ii) our prepayment of the
first six months of interest in the form of shares, based on our closing share
price on the funding date of the Lehmann Note. In the event the Lehmann Note is
prepaid after the first six months, the second tranche of 25,000 unregistered
common shares will be cancelled on a pro-rata basis, to the extent the second
six month time period has not elapsed at the time of such payoff.
We have
also incurred third party finder’s fees in connection with the Lehmann Note,
such fees payable in cash equal to 7% of the borrowed amount. The effective rate
of the Lehmann Note is approximately 77.0% per annum, assuming a six month loan
term and excluding the finder’s fees.
We may
prepay the Lehmann Note at any time with ten days notice, provided that Lehmann
may convert the outstanding balance to common shares during such ten day period.
If we successfully conclude a financing of debt or equity in excess of
$1,000,000 during the term of the Lehmann Note, the proceeds of such financing
will be used to pay off the remaining balance of the Lehmann Note. In the event
of a default, we will be obligated to pay Lehmann an additional 5% interest per
month (based on the outstanding loan balance and pro-rated on a daily basis)
until the default has been cured, payable in cash or unregistered common
shares.
The
Greenberg Note, which was issued in January 2010, provides that if we
successfully conclude a financing of debt or equity in excess of $500,000 during
the term of the Greenberg Note, the proceeds of such financing will be used to
pay off the remaining balance of the Greenberg Note. Although the aggregate
proceeds from the Wilmington Notes in February 2010 plus the Lehmann Note in May
2010 were $750,000, our position is that the Lehmann Note was a separate
financing from the Wilmington Notes and since neither of those financings was in
excess of $500,000, early repayment of the Greenberg Note is not required. The
Greenberg Note had a remaining outstanding balance of $211,000 as of May 7,
2010.
The
maximum allowable borrowing amount under the Line is now $2.0 million, subject
to certain formulas with respect to the amount and aging of the underlying
receivables. The outstanding balance (approximately $1.8 million as of May 7,
2010) bears interest at 13.5% per annum, adjustable based on changes in prime
after December 28, 2009, plus a weekly monitoring fee of one twentieth of a
percent (0.05%) of the borrowing limit. The outstanding principal under the Line
may be repaid at any time, but no later than December 2011, which term may be
extended by us for an extra year, subject to compliance with all loan terms,
including no material adverse change, as well as concurrence of the Lender. We
have not been in compliance with certain loan covenants through June 30, 2009,
although the Lender has granted waivers through that date. In December 2009 the
Lender agreed that (i) we
are not required to comply with the debt service coverage covenant for
the quarter ended September 30, 2009 and the next compliance date for this
covenant will be September 30, 2010 and (ii) effective for the quarter ended
September 30, 2009, we are no longer required to comply with the minimum
tangible net worth covenant. Based on the outstanding balance of approximately
$1.7 million under the Line as of March 31, 2010, the amended terms would
represent increased interest expense, including the monitoring fee, of
approximately $39,000 per year.
During
fiscal 2009 we borrowed $1.5 million from Rockridge Capital Holdings, LLC
(“Rockridge”), an entity controlled by one of our largest shareholders, in
accordance with the terms of a Note and Stock Purchase Agreement that we entered
into with Rockridge dated April 14, 2009 and amended on September 14, 2009. We
received another $500,000 under the Note and Stock Purchase Agreement on October
20, 2009, resulting in cumulative allowable borrowings of $2.0 million. In
connection with this transaction, we issued a Note (the “Rockridge Note”), which
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.
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The
Rockridge Note is repayable in equal monthly installments of $45,202 extending
through August 14, 2013 (the “Maturity Date”), which installments include
principal (except for a $500,000 balloon payable at the Maturity Date and which
balloon payment is also convertible into restricted ONSM common shares under
certain circumstances) plus interest (at 12% per annum) on the remaining unpaid
balance. Upon notice from Rockridge at any time after September 4, 2010 and prior to the
Maturity Date, up to fifty percent (50%) of the outstanding principal amount of the Rockridge Note
(excluding the balloon payment subject to conversion per the previous sentence)
may be converted into a number of restricted shares of ONSM common stock. If we
sell all or substantially all of our assets, or at any time after September 4,
2011 and prior to the Maturity Date, the remaining outstanding principal amount of the Rockridge Note
may be converted by Rockridge into a number of restricted shares of ONSM common
stock. The Note and Stock Purchase Agreement also provides that Rockridge may
receive an origination fee of 366,667 restricted shares of our common stock (the
“Shares”). 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 above
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 NASDAQ
Capital Market (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
effective interest rate of the Rockridge Note was approximately 44.3% per annum,
until the September 2009 amendment, at which time it was reduced to
approximately 28.0% per annum. These rates exclude the potential effect of a
premium to market prices if the balloon payment is satisfied in common shares
instead of cash as well as the potential effect of any appreciation in the value
of the Shares at the time of issuance beyond their value at the date of the
Rockridge Agreement or the Amendment, as applicable.
We are
currently obligated under convertible Equipment Notes with a face value of $1.0
million which are collateralized by specifically designated software and
equipment owned by us with a cost basis of approximately $1.5 million, as well
as a subordinated lien on certain other of our assets to the extent that the
designated software and equipment, or other software and equipment added to the
collateral at a later date, is not considered sufficient security for the loan.
Interest is payable every 6 months in cash or, at our option, in restricted ONSM
common shares, based on a conversion price equal to seventy-five percent (75%)
of the average ONSM closing price for the thirty (30) trading days prior to the
date the applicable payment is due. On November 11, 2009, we elected to issue
34,917 unregistered shares of our common stock to the Investors in lieu of
$60,493 cash interest on these Equipment Notes for the period from May 2009
through October 2009, which was recorded as interest expense of $77,515 on our
books, based on the fair value of those shares on the issuance date. On April
30, 2010, we elected to issue 44,369 unregistered common shares to the Investors
in lieu of $59,507 cash interest on these Equipment Notes for November 2009
through April 2010, which was recorded as interest expense of $92,288 on our
books, based on the fair value of those shares on the issuance date. The next
interest due date is October 31, 2010 and the principal is not due before June
2011. The Equipment Notes may be converted to restricted ONSM common shares at
any time prior to their maturity date, at the holder’s option, based on a
conversion price equal to seventy-five percent (75%) of the average ONSM closing
price for the thirty (30) trading days prior to the date of conversion, but in
no event may the conversion price be less than $4.80 per share. In the event the
Notes are converted prior to maturity (June 3, 2011), interest on the Equipment
Notes for the remaining unexpired loan period will be due and payable in
additional restricted ONSM common shares in accordance with the same formula for
interest as described above.
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During
August 2009, CCJ Trust (“CCJ”) remitted $200,000 to us as a short term advance
bearing interest at .022% per day (equivalent to approximately 8% per annum)
until the date of repayment or unless the parties mutually agreed to another
financing transaction(s) prior to repayment. This advance was included in
accounts payable on our September 30, 2009 balance sheet. On December 29, 2009,
we entered into an agreement with CCJ whereby accrued interest 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 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, with the consent of CCJ, no payments had
been made as of May 7, 2010. The remaining principal balance of this note may be
converted at any time into our common shares at the greater of (i) the previous
30 day market value or (ii) $0.50 per share. In conjunction with and in
consideration of this note transaction, the 35,000 shares of Series A-12 held by
CCJ at that date were exchanged for 35,000 shares of Series A-13 plus four-year
warrants for the purchase of 175,000 ONSM common shares at $3.00 per
share.
The
effective interest rate of the CCJ Note is approximately 47.4% per annum,
including the Black-Scholes value of the warrants plus the value of the
increased number of common shares underlying the Series A-13 shares versus the
Series A-12 shares. The effective rate of 47.4% per annum also includes 11.2%
per annum related to dividends that will accrue to CCJ as a result of the later
mandatory conversion date of the Series A-13 shares versus the mandatory
conversion date of the Series A-12 shares.
Projected
capital expenditures for the twelve months ended March 31, 2011 total
approximately $1.6 million which includes software and hardware upgrades to the
DMSP, the webcasting system (including iEncode) and the audio and web
conferencing infrastructure, as well as costs of software development and
hardware costs in connection with the introduction and establishment of the
MarketPlace365 platform. This total includes approximately $346,000 reflected by
us as accounts payable at March 31, 2010 (which will not be reflected as capital
expenditures in our cash flow statement until paid and of which $282,000 is
currently disputed by us based on service and utility issues). This
total also includes at least $570,000 of projected capital expenditures which we
have determined may be financed, deferred past the twelve month period or
cancelled entirely, depending on our other cash flow
considerations.
On March
18, 2009, we terminated the Merger Agreement for the acquisition of Narrowstep,
which Merger Agreement we had first entered into on May 29, 2008 and then was
amended twice (on August 13, 2008 and on September 15, 2008). The Merger
Agreement could be terminated by either Onstream or Narrowstep at any time after
November 30, 2008 provided that the terminating party was not responsible for
the delay. On March 18, 2009, we terminated the Merger Agreement and the
acquisition of Narrowstep. On December 1, 2009, Narrowstep filed a complaint
against us in the Court of Chancery of the State of Delaware, alleging breach of
contract, fraud and three additional counts and seeking (i) $14 million in
damages, (ii) reimbursement of an unspecified amount for all of its costs
associated with the negotiation and drafting of the Merger Agreement, including
but not limited to attorney and consulting fees, (iii) the return of
Narrowstep’s equipment alleged to be in our possession, (iv) reimbursement of an
unspecified amount for all of its attorneys fees, costs and interest associated
with this action and (v) any further relief determined as fair by the court.
After reviewing the complaint document, we determined that Narrowstep has no
basis in fact or in law for any claim and accordingly, this matter has not been
reflected as a liability on our financial statements. On December 18, 2009, we
were served with a summons and on February 1, 2010 we filed a motion requesting
dismissal of the breach of contract and fraud counts as well as two of the other
three counts, as well as our brief in support of the motion filed on February
18, 2010. Narrowstep’s response was filed on March 29, 2010 and we filed our
reply on April 13, 2010. The Court’s decision, which may be preceded by a
hearing at the Court’s discretion, is pending. Regardless of the ultimate
decision with regard to the motion to dismiss, we intend to vigorously defend
against all claims. Furthermore, we do not expect the ultimate resolution of
this matter to have a material adverse impact on our financial position or
results of operations.
During
February 2009, we took actions to reduce our operating costs, primarily
personnel related, by approximately $65,000 per month. During October 2009, we
took additional actions to reduce our operating costs, primarily personnel
related, by another approximately $62,000 per month. We recently began to
identify and implement certain infrastructure related cost savings, which
actions have reduced our costs of revenue by approximately $34,000 per month as
of March 31, 2010 and we expect will reduce our cost of revenue by another
approximately $21,000 per month, once fully implemented by the end of fiscal
2010.
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We have
estimated that, including the above reductions in our expenditure levels, we
will require an approximately 13-17% increase in our consolidated revenues for
the remainder of fiscal 2010, as compared to corresponding period of fiscal
2009, in order to adequately fund our minimum anticipated expenditures
(including debt service and a basic level of capital expenditures) through
September 30, 2010. We have estimated that, in addition to this
ongoing revenue increase, we will also require additional near-term debt or
equity financing of approximately $250,000 (in addition to the $250,000 loan
proceeds we received in May 2010) to adequately address past due liabilities we
believe are necessary to pay to continue our operations. If we were to obtain
financing in excess of this $250,000, the required revenue increase could be
less than as stated above.
We have
implemented specific actions, including hiring additional sales personnel,
developing new products and initiating new marketing programs, geared towards
achieving the above revenue increases. The costs associated with these actions
were contemplated in the above calculations. However, in the event we
are unable to achieve these revenue increases, we believe that a combination of
identified decreases in our current level of expenditures that we would
implement and the raising of additional capital in the form of debt and/or
equity that we believe we could obtain from identified sources (including but
not limited to the issuers of the funding commitment letters discussed above)
would be sufficient to allow us to operate through September 30, 2010. We will
closely monitor our revenue and other business activity through the remainder of
fiscal 2010 to determine if further cost reductions, the raising of additional
capital or other activity is considered necessary.
Effective
December 17, 2009, our Board of Directors authorized the sale and issuance of up
to 170,000 shares of Series A-13 Convertible Preferred Stock (“Series A-13”). On
December 23, 2009, we filed a Certificate of Designation, Preferences and Rights
for the Series A-13 with the Florida Secretary of State. The Series A-13 has a
coupon of 8% per annum, an assigned value of $10.00 per preferred share and a
conversion rate of $3.00 per common share. Series A-13 dividends are cumulative
and must be fully paid by us prior to the payment of any dividend on our common
shares. Series A-13 dividends are declared quarterly but are payable at the time
of any conversion of A-13, in cash or at our option in the form of our common
shares, using the greater of (i) $3.00 per share or (ii) the average closing bid
price of a common share for the five trading days immediately preceding the
conversion.
As of
February 5, 2010, we have issued 35,000 shares of Series A-13. Any shares of
Series A-13 that are still outstanding as of December 31, 2011 will
automatically convert into our common shares. Series A-13 may also be converted
before that date at our option, provided that the closing bid price of our
common shares has been at least $9.00 per share, on each of the twenty (20)
trading days ending on the third business day prior to the date on which the
notice of conversion is given. Series A-13 is subordinate to Series A-12 but is
senior to all other preferred share classes that may be issued by us. Except as
explicitly required by applicable law, the holders of Series A-13 shall not be
entitled to vote on any matters as to which holders of our common shares are
entitled to vote. Holders of Series A-13 are not entitled to registration
rights.
During
December 2009, we received funding commitment letters (“Letters”) executed by
three entities agreeing to provide us, within twenty days after our notice given
on or before December 31, 2010, aggregate cash funding of $750,000. Funding
under the Letters would be in exchange for our equity under mutually agreeable
terms to be negotiated at the time of funding, or in the event such terms could
not be reached, in the form of repayable debt. Terms of the repayable debt would
also be subject to negotiation at the time of funding, provided that the debt
(i) would be unsecured and subordinated to our other debts, (ii) would be
subject to approval by our other creditors having the right of such
pre-approval, (iii) would provide for no principal or interest payments in cash
prior to December 31, 2010, although, at our option, consideration may be given
in the form of equity issued before that date and (iv) would provide that any
cash repayment of principal after that date would be in equal monthly
installments over at least one year but no greater than four years. The rate of
return on such debt, including cash and equity consideration given, would be
negotiable based on market values at the time of funding but in any event would
be not be greater than (i) a cash coupon rate of fifteen percent (15%) per annum
and a (ii) total effective interest rate of thirty percent (30%) per annum (such
rate including the cash coupon rate plus the fair value of our shares given
and/or the Black-Scholes valuation of debt conversion features and/or issuance
of options and/or warrants). As consideration for these Letters, the
issuing entities received an aggregate of 12,500 unregistered shares. One of the
Letters, for $250,000, was executed by Mr. Charles Johnston, one of our
directors. Furthermore, certain principals of Triumph Small Cap Fund, which
provided one of the Letters, for $250,000, are also principals in Greenberg
Capital and required us to release Triumph Small Cap Fund from their commitment
under that Letter, as part of a February 2010 modification to the Greenberg
Note.
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A
prospectus allowing us to offer and sell up to $6.6 million of our registered
common shares (“Shelf Registration”) was declared effective by the SEC on April
30, 2010. Although there is no assurance that we will make sales under that
Shelf Registration, or if do make such sales what the timing or proceeds will
be, we anticipate that the first approximately $900,000 of such proceeds will be
used to repay the outstanding balances due under the Greenberg Note, the
Wilmington Notes and the Lehmann Note. In addition, we may incur fees in
connection with such sales. Furthermore, sales under the Shelf Registration that
exceed in aggregate twenty percent (20%) of our outstanding shares would be
subject to prior shareholder approval.
Our
accumulated deficit was approximately $119.7 million at March 31, 2010. We have
incurred losses since our inception and our operations have been financed
primarily through the issuance of equity and debt. Cash used for operations will
be affected by numerous known and unknown risks and uncertainties including, but
not limited to, our ability to successfully market and sell the DMSP, iEncode
and MarketPlace365, market our other existing products and services, the degree
to which competitive products and services are introduced to the market, and our
ability to control overhead expenses as we grow.
Other
than working capital which may become available to us from further borrowing or
sales of equity (including but not limited to proceeds from Series A-13, the
Letters and/or the Shelf Registration, all 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. There are no assurances whatsoever
that the issuers of the Letters will be willing and/or able to provide cash upon
our request and/or that we will be able to borrow further funds and/or sell the
unissued portion of the authorized Series A-13 or common shares under the Shelf
Registration or other forms of equity or that we will increase our revenues
and/or control our expenses to a level sufficient to provide positive cash flow.
We cannot assure that our revenues will continue at their present levels, nor
can we assure that they will not decrease.
As long
as our cash flow from sales remains insufficient to completely fund operating
expenses, financing costs and capital expenditures, we will continue depleting
our cash and other financial resources. 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. 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.
There can
be no assurance that acceptable financing, if needed to fund our ongoing
operations, can be obtained on suitable terms, if at all. Our ability to
continue our existing operations and/or to continue to implement our growth
strategy could suffer if we are unable to raise additional funds on acceptable
terms, which will have an adverse impact on our financial condition and results
of operations.
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Cash used
in operating activities was approximately $356,000 for the six months ended
March 31, 2010, as compared to approximately $349,000 provided by operations for
corresponding period of the prior fiscal year. The $356,000 reflects our net
loss of approximately $5.6 million, reduced by approximately $5.2 million of
non-cash expenses included in that loss and reduced by approximately $88,000
arising from a net decrease in non-cash working capital items during the period.
The net decrease in non-cash working capital items for the six months ended
March 31, 2010 is primarily due to an approximately $820,000 increase in
accounts payable and accrued liabilities, offset by an approximately $747,000
increase in accounts receivable. This compares to a net decrease in non-cash
working capital items of approximately $716,000 for the corresponding period of
the prior fiscal year, primarily due to an approximately $852,000 increase in
accounts payable and accrued liabilities. The primary non-cash expenses included
in our loss for the six months ended March 31, 2010 were $3.1 million arising
from a charge for impairment of goodwill and other intangible assets,
approximately $1.1 million of depreciation and amortization, approximately
$444,000 of employee compensation expense arising from the issuance of stock and
options and approximately $246,000 of amortization of deferred professional fee
expenses paid for by issuing stock and options. The primary sources of cash
inflows from operations are from receivables collected from sales to
customers. Future cash inflows from sales are subject to our pricing
and ability to procure business at existing market
conditions.
Cash used
in investing activities was approximately $708,000 for the six months ended
March 31, 2010 as compared to approximately $704,000 for the corresponding
period of the prior fiscal year. Current and prior period investing activities
primarily related to the acquisition of property and
equipment.
Cash
provided by financing activities was approximately $1.2 million for the six
months ended March 31, 2010 as compared to approximately $186,000 for the
corresponding period of the prior fiscal year. Current and prior period
financing activities primarily related to net proceeds from notes payable and
convertible debentures, net of repayments. The prior year period also included
proceeds from the sale of A-12 preferred shares.
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 both most important to the
management’s most subjective judgments. Our most critical accounting
policies and estimates are described as follows.
Our prior
acquisitions of several businesses, including the Onstream Merger and the
Infinite Merger, have resulted in significant increases in goodwill and other
intangible assets. Goodwill and other unamortized intangible assets, which
include acquired customer lists, were approximately $15.5 million at March 31,
2010, representing approximately 68% of our total assets and approximately 110%
of the book value of shareholder equity. In addition, property and equipment as
of March 31, 2010 includes approximately $1.8 million (net of depreciation)
related to the DMSP and other capitalized internal use software, representing
approximately 8% of our total assets and approximately 13% of the book value of
shareholder equity.
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 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 intangible assets, including those of our DMSP or Infinite
divisions, could decrease significantly. In the event that it is determined that
we will be unable to successfully market or sell our DMSP or audio and web
conferencing services, an impairment charge to our statement of operations could
result. Any future determination requiring the write-off of a significant
portion of unamortized intangible assets, although not requiring any additional
cash outlay, could have a material adverse effect on our financial condition and
results of operations.
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We follow
a two step process for impairment testing of goodwill. The first step of this
test, used to identify potential impairment and described above, 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. If our market capitalization, after
appropriate adjustments for control premium and other considerations, is
determined to be less than our net book value (i.e., stockholders’ equity as
reflected in our financial statements), that condition might indicate an
impairment requiring the write-off of a significant portion of unamortized
intangible assets, although not requiring any additional cash outlay, could have
a material adverse effect on our financial condition and results of operations.
We will closely monitor and evaluate all such factors as of June 30, 2010 and
subsequent periods, in order to determine whether to record future non-cash
impairment charges.
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ITEM
4. CONTROLS AND PROCEDURES
Limitations on the
effectiveness of controls
We are
responsible for establishing and maintaining adequate disclosure controls and
procedures and internal control over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of external
financial statements in accordance with generally accepted accounting
principles. However, all control systems, no matter how well designed, have
inherent limitations. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Therefore, even those systems determined to
be effective can provide only reasonable, not absolute, assurance with respect
to financial statement preparation and presentation. Because of inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements, omissions, errors or even fraud. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
Management’s report on
disclosure controls and procedures:
As
required by Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of
1934, as of the end of the period covered by the quarterly report, being March
31, 2010, we have carried out an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Chief Financial Officer.
Based upon that evaluation, our Chief Executive Officer along with our Chief
Financial Officer concluded that our disclosure controls and procedures are
effective.
Changes in internal control
over financial reporting:
As
required by Rules 13a-15(d) and 15d-15(d) under the Securities Exchange Act of
1934, we have carried out an evaluation of changes in our internal control over
financial reporting during the period covered by this Quarterly Report. This
evaluation was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer along with our Chief
Financial Officer. Based upon that evaluation, our Chief Executive Officer along
with our Chief Financial Officer concluded that there was no change in our
internal control over financial reporting that occurred during the period
covered by this Quarterly Report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
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PART
II - OTHER INFORMATION
Item 1.
Legal Proceedings.
On May
29, 2008, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) to acquire Narrowstep, Inc. (“Narrowstep”), which Merger Agreement
was amended twice (on August 13, 2008 and on September 15, 2008). The terms of
the Merger Agreement, as amended, allowed that if the acquisition did not close
on or prior to November 30, 2008, the Merger Agreement could be terminated by
either us or Narrowstep at any time after that date provided that the
terminating party was not responsible for the delay. On March 18, 2009, we
terminated the Merger Agreement and the acquisition of Narrowstep.
On
December 1, 2009, Narrowstep filed a complaint against us in the Court of
Chancery of the State of Delaware, alleging breach of contract, fraud and three
additional counts and is seeking (i) $14 million in damages, (ii) reimbursement
of an unspecified amount for all of its costs associated with the negotiation
and drafting of the Merger Agreement, including but not limited to attorney and
consulting fees, (iii) the return of Narrowstep’s equipment alleged to be in our
possession, (iv) reimbursement of an unspecified amount for all of its attorneys
fees, costs and interest associated with this action and (v) any further relief
determined as fair by the court. After reviewing the complaint document, we have
determined that Narrowstep has no basis in fact or in law for any claim and
accordingly, this matter has not been reflected as a liability on our financial
statements. On December 18, 2009, we were served with a summons and on February
1, 2010 we filed a motion requesting dismissal of the breach of contract and
fraud counts as well as two of the other three counts, as well as our brief in
support of the motion filed on February 18, 2010. Narrowstep’s response was
filed on March 29, 2010 and we filed our reply on April 13, 2010. The Court’s
decision, which may be preceded by a hearing at the Court’s discretion, is
pending. Regardless of the ultimate decision with regard to the motion to
dismiss, we intend to vigorously defend against all claims. Furthermore, we do
not expect the ultimate resolution of this matter to have a material adverse
impact on our financial position or results of operations.
On May
26, 2009, we were served with a complaint filed in Broward County, Florida, for
a breach of contract claim against us by a firm seeking compensation for legal
services allegedly rendered to us, plus court costs, in the amount of
approximately $383,000. In January 2010, we settled this complaint for the
$115,000 we had accrued for this matter on our financial statements as of
December 31 and September 30, 2009. All amounts due under this settlement were
paid by us as agreed on or before March 31, 2010 and accordingly we have no
further potential liability in connection with this matter.
We are
involved in other litigation and regulatory investigations arising 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
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
During
February 2010 we borrowed an aggregate of $500,000 from three entities (the
“Wilmington Investors”) under the terms of unsecured subordinated convertible
notes (the “Wilmington Notes”), which were issued on a pari passu basis with the
Greenberg Note and are repayable in aggregate principal installments of $26,000
per month beginning April 18, 2010, with the final payment on February 18, 2011,
including remaining principal and all accrued but unpaid interest (at 10% per
annum). The Wilmington Notes are convertible into common stock at the
option of each individual Wilmington Investor, based on our closing share price
on the funding date of the Wilmington Notes, which was $2.76 with respect to
$375,000 of the funding and $2.88 with respect to the balance.
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The
Wilmington Notes provide for (i) our issuance of an aggregate of 50,000
unregistered common shares upon receipt of the funds and our issuance of an
aggregate 50,000 unregistered common shares if the loans are still outstanding
after 6 months, (ii) our payment of $2,500 in legal fees incurred by the
Wilmington Investors and (iii) our prepayment of the first six months of
interest in the form of shares, based on our closing share price on the funding
date of the Wilmington Notes. In the event the Wilmington Notes are prepaid
after the first six months, the second tranche of 50,000 unregistered common
shares will be cancelled on a pro-rata basis, to the extent the second six month
time period has not elapsed at the time of such payoff.
We have
also incurred third party finder’s fees in connection with the Wilmington Notes,
such fees payable in cash equal to 7% of the borrowed amount
payable.
We may
prepay the Wilmington Notes at any time with ten days notice, provided that the
Investor may convert the outstanding balance to common shares during such ten
day period. In the event of a default, we will be obligated to pay the
Wilmington Investors an additional 5% interest per month (based on the
outstanding loan balance and pro-rated on a daily basis) until the default has
been cured, payable in cash or unregistered common shares. If we successfully
conclude a subsequent financing of debt or equity in excess of $750,000 during
the term of the Wilmington Notes, the proceeds of such financing will be used to
pay off the remaining balance of the Wilmington Notes. The $250,000 Lehmann
Note, which we reported as an unregistered sale of equity securities on our
report on Form 8-K filed with the SEC on May 7, 2010, was issued to one of the
Wilmington Investors.
During
the period from June 3, 2008 through July 8, 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. We issued
notes to those Investors (the “Equipment Notes”), which are collateralized by
specifically designated software and equipment owned by us. Under this
arrangement, the Investors receive interest at 12% per annum, payable every 6
months in cash or, at our option, in restricted ONSM common shares, based on a
conversion price equal to seventy-five percent (75%) of the average ONSM closing
price for the thirty (30) trading days prior to the date the applicable payment
is due. On April 30, 2010, we elected to issue 44,369 unregistered common shares
to the Investors in lieu of $59,507 cash interest on these Equipment Notes for
November 2009 through April 2010, which was recorded as interest expense of
$92,288 on our books, based on the fair value of those shares on the issuance
date.
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) and Regulation D of the Securities Act of
1933, for securities issued in private transactions. The recipients were either
accredited or otherwise sophisticated 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.
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Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Submission of Matters to a Vote of Security Holders.
None.
Item 5.
Other Information.
None.
Item 6.
Exhibits
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
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Onstream
Media Corporation,
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a
Florida corporation
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Date:
May 17, 2010
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/s/ Randy S. Selman
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Randy
S. Selman,
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President
and Chief Executive Officer
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/s/ Robert E. Tomlinson
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Chief
Financial Officer
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And
Principal Accounting Officer
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