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EX-32 - EXHIBIT 32.2 - Onstream Media CORPexhibit322.htm
EX-31 - EXHIBIT 31.2 - Onstream Media CORPexhibit312.htm
EX-32 - EXHIBIT 32.1 - Onstream Media CORPexhibit321.htm
EX-31 - EXHIBIT 31.1 - Onstream Media CORPexhibit311.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 June 30, 2012

 

                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 (X)   No (  )

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “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 August 10, 2012 the registrant had issued and outstanding 12,492,217 shares of common stock.

 

 

1


 
 

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

 

PAGE

Item 1 - Financial Statements

 

 

 

Unaudited Consolidated Balance Sheet at June 30, 2012

      and Consolidated Balance Sheet at September 30, 2011

 

4

 

 

        Unaudited Consolidated Statements of Operations for the Nine and Three

  Months Ended June 30, 2012 and 2011

 

5

 

 

Unaudited Consolidated Statement of Stockholders’ Equity for the Nine

     Months Ended June 30, 2012

 

6

 

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months

    Ended June 30, 2012 and 2011

 

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 – 72

 

 

Item 4 - Controls and Procedures

73

 

 

PART II – OTHER INFORMATION

 

 

Item 1 – Legal Proceedings

74

 

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

74

 

 

Item 3 – Defaults upon Senior Securities

74

 

 

Item 4 – Removed and Reserved

74

 

 

Item 5 – Other Information

74

 

 

Item 6 - Exhibits

75

 

 

Signatures

75

 

 

 

 

 

 

 

 

2


 
 

 

CERTAIN CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

 

 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 MP365 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 our 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. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of June 30, 2012, unless otherwise stated. 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.

 

When used in this Annual Report, the terms "we", "our", and "us” refers to Onstream Media Corporation, a Florida corporation, and its subsidiaries.

 

3


 
 

PART I – FINANCIAL INFORMATION

Item 1 - Financial Statements

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
 

 

 

June 30,

 

September 30,

 

2012

 

2011

 

(unaudited)

 

 

 

ASSETS

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

$

362,724

 

$

290,865

Accounts receivable, net of allowance for doubtful accounts

 

 

 

 

 

of $205,014 and $330,604, respectively

 

2,397,539

 

 

2,453,390

Prepaid expenses

 

367,487

 

 

580,185

Inventories and other current assets

 

143,928

 

 

139,099

Total current assets

 

3,271,678

 

 

3,463,539

PROPERTY AND EQUIPMENT, net

 

2,709,828

 

 

2,714,676

INTANGIBLE ASSETS, net

 

404,603

 

 

785,927

GOODWILL, net

 

10,696,948

 

 

10,696,948

OTHER NON-CURRENT ASSETS

 

146,215

 

 

104,274

Total assets

$

17,229,272

 

$

17,765,364

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

$

1,532,936

 

$

1,573,703

Accrued liabilities

 

1,359,212

 

 

1,193,473

Amounts due to directors and officers

 

624,859

 

 

396,392

Deferred revenue

 

60,025

 

 

96,437

Notes and leases payable – current portion, net of discount

 

1,837,984

 

 

1,533,966

Convertible debentures, net of discount

 

432,379

 

 

407,790

Total current liabilities

 

5,847,395

 

 

5,201,761

Notes and leases payable, net of current portion

 

4,465

 

 

11,962

Convertible debentures, net of discount

 

807,784

 

 

1,031,870

Detachable warrants, associated with sale of common shares

 

 

 

and Series A-14 Preferred

 

141,393

 

 

188,211

Total liabilities

 

6,801, 037

 

 

6,433,804

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

Series A-13 Convertible Preferred stock, par value $.0001 per share,

authorized 170,000 shares, 17,500 and 35,000 issued and outstanding,

respectively

 

 

 

 

2

 

 

3

Series A-14 Convertible Preferred stock, par value $.0001 per share,

 

 

 

authorized 420,000 shares, 420,000 issued and outstanding, respectively

 

42

 

 

42

Common stock, par value $.0001 per share; authorized 75,000,000 shares,

 

 

 

 

 

12,492,217 and 11,779,521 issued and outstanding, respectively

 

1,248

 

 

1,177

Additional paid-in capital

 

141,013,138

 

 

140,291,514

Unamortized discount

 

(62,536)

 

 

(146,418)

Accumulated deficit

 

(130,523,659)

 

 

(128,814,758)

Total stockholders’ equity

 

10,428,235

 

 

11,331,560

Total liabilities and stockholders’ equity

$

17,229,272

 

$

17,765,364

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


 
 
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

Nine Months Ended

 

Three Months Ended

 

June 30,

 

June 30,

 

 

2012

 

2011

 

2012

 

2011

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audio and web conferencing

$

6,393,755

 

$

5,598,118

 

$

2,131,118

 

$

1,947,602

Webcasting

 

4,539,336

 

 

4,694,866

 

 

1,601,266

 

 

1,686,296

DMSP and hosting

 

1,439,437

 

 

1,532,467

 

 

517,883

 

 

474,314

Network usage

 

1,472,305

 

 

1,442,542

 

 

523,190

 

 

495,432

Other

 

133,343

 

 

83,789

 

 

34,265

 

 

21,556

Total revenue

 

13,978,176

 

 

13,351,782

 

 

4,807,722

 

 

4,625,200

 

 

 

 

 

 

 

 

 

 

 

 

COSTS OF REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Audio and web conferencing

 

1,906,838

 

 

1,743,590

 

 

583,094

 

 

576,290

Webcasting

 

1,351,731

 

 

1,206,779

 

 

482,172

 

 

412,806

DMSP and hosting

 

758,965

 

 

727,251

 

 

297,231

 

 

210,651

Network usage

 

697,688

 

 

645,050

 

 

234,117

 

 

216,565

Other

 

41,970

 

 

71,367

 

 

7,235

 

 

17,430

Total costs of revenue

 

4,757,192

 

 

4,394,037

 

 

1,603,849

 

 

1,433,742

 

 

 

 

 

 

 

 

 

 

 

 

GROSS MARGIN

 

9,220,984

 

 

8,957,745

 

 

3,203,873

 

 

3,191,458

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

General and administrative:

 

 

 

 

 

 

 

 

 

 

 

Compensation

 

6,046,069

 

 

6,558,735

 

 

1,939,800

 

 

2,162,279

Professional fees

 

1,568,340

 

 

1,434,726

 

 

421,817

 

 

424,863

Other

 

1,692,581

 

 

1,629,460

 

 

610,145

 

 

571,877

Depreciation and amortization

 

1,054,721

 

 

1,117,425 

 

 

340,099

 

 

363,987

Total operating expenses

 

10,361,711

 

 

10,740,346

 

 

3,311,861

 

 

3,523,006

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(1,140,727)

 

 

(1,782,601)

 

 

(107,988)

 

 

(331,548)

 

 

 

 

 

 

 

 

 

 

 

 

OTHER EXPENSE, NET:

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(565,795)

 

 

(1,024,117)

 

 

(180,598)

 

 

(480,265)

Gain from adjustment of

 

 

 

 

 

 

 

 

 

 

 

derivative liability to fair value

 

46,818

 

 

81,138

 

 

31,867

 

 

283,144

Other income, net

 

42,210

 

 

51,627

 

 

12,657

 

 

42,958

 

 

 

 

 

 

 

 

 

 

 

 

Total other expense, net

 

(476,767)

 

 

(891,352)

 

 

(136,074) 

 

 

(154,163)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(1,617,494)

 

$

(2,673,953)

 

$

(244,062)

 

$

(485,711)

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share – basic and diluted:

 

 

 

 

 

 

 

 

 

 

 

Net loss per share

$

(0.13)

 

$

(0.28)

 

$

(0.02)

 

$

(0.05)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares of common

 stock outstanding – basic and diluted

 

12,064,398

 

 

9,514,683

 

 

12,344,727

 

 

10,307,645

 

 

5


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

NINE MONTHS ENDED JUNE 30, 2012

(unaudited)

 

 

 

Series A- 13

 

Series A- 14

 

 

 

Additional Paid-in

 

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Capital

 

Accumulated

 

 

 

 

Shares

 

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Gross

 

Discount

 

Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2011

35,000

 

$

3

 

420,000

 

$

42

 

11,779,521

 

$

1,177

 

$

140,291,514

 

$

(146,418)

 

$

(128,814,758)

 

$

11,331,560

Issuance of options for employee services

-

 

 

-

 

-

 

 

-

 

-

 

 

-

 

 

278,687

 

 

-

 

 

-

 

 

278,687

Issuance of common shares and options for consultant services

-

 

 

-

 

-

 

 

-

 

202,421

 

 

20

 

 

163,114

 

 

-

 

 

-

 

 

163,134

Sale of common shares

-

 

 

-

 

-

 

 

-

 

200,000

 

 

20

 

 

139,980

 

 

-

 

 

-

 

 

140,000

Issuance of common shares for interest and financing fees

-

 

 

-

 

-

 

 

-

 

201,531

 

 

20

 

 

135,828

 

 

-

 

 

-

 

 

135,848

Conversion of Series A-13 to common shares

(17,500)

 

 

(1)

 

-

 

 

-

 

101,744

 

 

10

 

 

(9)

 

 

-

 

 

-

 

 

-

Dividends on Series A-13

-

 

 

-

 

-

 

 

-

 

7,000

 

 

1

 

 

4,024

 

 

-

 

 

(7,525)

 

 

(3,500)

Dividends on Series A-14 – amortization of discount

-

 

 

-

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

83,882

 

 

(83,882)

 

 

-

Net loss

-

 

 

-

 

-

 

 

-

 

-

 

 

-

 

 

-

 

 

-

 

 

(1,617,494)

 

 

(1,617,494)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2012

17,500

 

$

2

 

420,000

 

$

42

 

12,492,217

 

$

1,248

 

$

141,013,138

 

$

(62,536)

 

$

(130,523,659)

 

$

10,428,235

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


 
 
ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

Nine Months Ended

 

June 30,

 

2012

 

2011

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

$

(1,617,494)

 

$

(2,673,953)

Adjustments to reconcile net loss to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,054,721

 

 

1,117,425

Professional fee expenses paid with equity, including amortization of

 

 

 

 

 

deferred expenses for prior period issuances

 

540,149

 

 

421,147

Compensation expenses paid with options and other equity

 

437,752

 

 

859,941

Other expenses paid with equity

 

-

 

 

42,218

Amortization of discount on convertible debentures

 

165,714

 

 

151,794

Amortization of discount on notes payable

 

31,150

 

 

158,162

Interest expense paid in common shares and options

 

-

 

 

322,106

(Gain) from adjustment of derivative liability to fair value

 

(46,818)

 

 

(81,138)

Bad debt expense and other

 

(12,922)

 

 

(33,928)

Net cash provided by operating activities, before changes

 

 

 

 

 

in current assets and liabilities other than cash

 

552,252

 

 

283,774

Changes in current assets and liabilities other than cash:

 

 

 

 

 

Decrease in accounts receivable

 

45,898

 

 

147,590

(Increase) in prepaid expenses

 

(92,649)

 

 

(11,182)

(Increase) in inventories and other current assets

 

(4,829)

 

 

(1,155)

Increase (Decrease) in accounts payable, accrued liabilities and

 

 

 

 

 

amounts due to directors and officers

 

138,788

 

 

(323,096)

(Decrease) in deferred revenue

 

(36,412)

 

 

(39,250)

Net cash provided by operating activities

 

603,048

 

 

56,681

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Acquisition of property and equipment

 

(668,549)

 

 

(740,074)

Net cash used in investing activities

 

(668,549)

 

 

(740,074)

 

 

 

 

 

 

 

(Continued)

7


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

(continued)

 

 

Nine Months Ended

 

June 30,

 

2012

 

2011

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Proceeds from notes payable, net of expenses

$

1,361,258

 

$

1,019,241

Proceeds from sale of common shares, net of expenses

 

140,000

 

 

740,522

Repayment of notes and leases payable

 

(1,047,687)

 

 

(1,094,254)

Repayment of convertible debentures

 

(316,211)

 

 

(436,755)

Net cash provided by financing activities

 

137,360

 

 

228,754

 

 

 

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

71,859

 

 

(454,639)

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, beginning of period

 

290,865

 

 

825,408

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, end of period

$

362,724

 

$

370,769

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

Cash payments for interest

$

386,372

 

$

392,055

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

 

Issuance of common shares and options for consultant services

$

163,134

 

$

584,409

Issuance of options for employee services

$

278,687

 

$

726,689

Issuance of common shares for interest and financing fees

$

135,848

 

$

121,525

Increase in value of common shares underlying Series A-13 preferred,

 

 

 

 

 

arising from adjustment of conversion rate in connection with

$

21,081

 

$

46,084

financing commitment letter and note refinancing, respectively

 

 

 

 

 

Declaration of dividends payable on A-13 preferred shares

$

17,500

 

$

21,000

Issuance of common shares for dividends payable on

 

 

 

 

 

A-13 preferred shares

$

4,025

 

$

19,949

Elimination of obligation for previously accrued or declared dividends

 

 

 

 

 

payable on A-13 preferred shares

$

9,975

 

$

15,051

Issuance of common shares upon Series A-13 conversion

$

175,000

 

$

-

Issuance of common shares upon debt conversion

$

-

 

$

989,220

 

 

The accompanying notes are an integral part of these consolidated financial statements.

8


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

Onstream Media Corporation (“we” or "Onstream" or "ONSM"), organized in 1993, is a leading online service provider of live and on-demand corporate audio and web communications, virtual event technology and social media marketing, provided primarily to corporate (including large as well as small to medium sized businesses), education and government customers.

 

The Digital Media Services Group consists primarily of our Webcasting division, our DMSP (“Digital Media Services Platform”) division and our MP365 (“MarketPlace365”) division. The DMSP division includes the related UGC (“User Generated Content”) and Smart Encoding divisions.

 

The Webcasting division, which operates primarily from Pompano Beach, Florida and has a sales and support facility in New York City, provides an array of corporate-oriented, web-based media services to the corporate market including live audio and video webcasting and on-demand audio and video streaming for any business, government or educational entity. The Webcasting division generates revenue primarily through production and distribution fees.

 

The DMSP division, which operates primarily from Colorado Springs, Colorado, provides an online, subscription based service that includes access to enabling technologies and features for our clients to acquire, store, index, secure, manage, distribute and transform these digital assets into saleable commodities. The DMSP division generates revenues primarily from monthly subscription fees, plus charges for hosting, storage and professional services. Our UGC division, which also operates as Auction Video (see note 2) and operates primarily from Colorado Springs, Colorado, provides a video ingestion and flash encoder that can be used by our clients on a stand-alone basis or in conjunction with the DMSP. The Smart Encoding division, which operates primarily from San Francisco, California, provides both automated and manual encoding and editorial services for processing digital media. This division also provides hosting, storage and streaming services for digital media, which are provided via the DMSP.

 

The MP365 division, which operates primarily from Pompano Beach, Florida with additional operations in San Francisco, California, enables publishers, associations, tradeshow promoters and entrepreneurs to self-deploy their own online virtual marketplaces using the MarketPlace365® platform. The MP365 division generates revenues primarily from monthly subscription fees, as well as booth fees, charged to MP365 promoters.

 

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 the New York City 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.

 

The EDNet division, which operates primarily from 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 generates revenues primarily from network access and usage fees as well as sale, rental and installation of equipment.

 

 

9


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Liquidity

 

Our consolidated financial statements have been presented on the basis that we are an ongoing concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred losses since our inception, and have an accumulated deficit of approximately $130.5 million as of June 30, 2012. Our operations have been financed primarily through the issuance of equity and debt. For the year ended September 30, 2011, we had a net loss of approximately $5.2 million, although cash provided by operating activities for that period was approximately $35,000. For the nine months ended June 30, 2012, we had a net loss of approximately $1.6 million, although cash provided by operating activities for that period was approximately $603,000. Although we had cash of approximately $363,000 at June 30, 2012, our working capital was a deficit of approximately $2.6 million at that date.

 

During the three months ended June 30, 2012, our revenues were sufficient to fund our operating cash expenditures plus all capital expenditures and debt service expenditures (monthly principal and interest payments on the Rockridge Note and interest payable in cash on the Line and other debts). 

 

On March 15, 2012, we terminated a consulting contract, which termination we expect will reduce our professional fee expense by approximately $80,000 per quarter, starting in the first quarter of fiscal 2013 – see note 5. During the third quarter of fiscal 2012, we renegotiated certain supplier contracts which we expect will reduce our cost of sales by approximately $50,000 in the fourth quarter of fiscal 2012, as compared to the third quarter of fiscal 2012.

 

Although we have historically experienced a seasonal decrease in our revenues and a corresponding increase in cash used by operations in the fourth fiscal quarter, which we expect will continue to be the case in the fourth quarter of fiscal 2012, we expect that by early fiscal 2013 our revenues will be comparable to the third quarter of fiscal 2012 and thus any potential cash shortfall arising from seasonality is expected to be manageable. However, in the event we are unable to achieve the expected recovery of revenues from the seasonal decrease, we believe that a combination of the already implemented cost savings discussed above, additional identified decreases in our current level of expenditures that we have already planned to implement or could 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 fund our operations for the next twelve months. We will closely monitor our revenue and other business activity to determine if and when further cost reductions, the raising of additional capital, or other activity is considered necessary.

 

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. On September 17, 2010, we entered into a Purchase Agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”), whereby LPC agreed to purchase our common and preferred shares, and 1.6 million common shares (including those issuable upon conversion of the preferred shares we sold to them) were included in a prospectus supplement filed by us with the SEC in connection with a takedown under the Shelf Registration. The Purchase Agreement was amended in April 2011 to increase the number of common shares that LPC agreed to purchase (at our option) and an additional 2.5 million common shares were included in a second prospectus supplement filed by us with the SEC in connection with a takedown under the Shelf Registration.

 

 

10


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Liquidity (continued)

 

On September 24, 2010, we received approximately $824,000 net proceeds (after deducting fees and out-of-pocket costs incurred by us) related to our issuance under that Purchase Agreement of the equivalent of 770,000 common shares (including those issuable upon conversion of preferred shares). During the year ended September 30, 2011, we sold LPC an additional 1,530,000 shares of our common stock under that Purchase Agreement for net proceeds of approximately $1.4 million.  LPC remains committed to purchase, at our sole discretion, up to an additional 1.8 million shares of our common stock in installments over the remaining term of the Purchase Agreement, generally at prevailing market prices, but subject to the specific restrictions and conditions in the Purchase Agreement, including but not limited to a minimum market price of $0.75 per share. Our most recent sale of shares to LPC under the Purchase Agreement was on August 30, 2011 – see note 6 with respect to a February 2012 sale of shares to LPC unrelated to the Purchase Agreement. The closing market price of our common stock has been less than $0.75 per share for a large majority of the trading days since August 30, 2011 and the closing market price was $0.71 per share on August 10, 2012. Accordingly, we are not currently able to sell additional common shares to LPC under that Purchase Agreement.

 

There is no assurance that we will sell additional shares to LPC under the Purchase Agreement or that we will sell additional shares to any other party under the Shelf Registration, or if we do make such sales what the timing or proceeds will be. 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, which in the case of LPC has been obtained but would need to be requested with respect to any other purchaser.

 

On January 10, 2012, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice given on or before December 31, 2012, aggregate cash funding of up to $550,000, which may be requested in multiple tranches. Mr. Charles Johnston, one of our directors, is the president of J&C. This Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available, but does not represent any obligation to accept such funding on these terms and is not expected by us to be exercised. Cash provided under the Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 1, 2013 and (b) our issuance of 2.3 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of an equivalent amount in dollars of investment from any other source after the date of this Funding Letter, other than funding received in connection with the LPC Purchase Agreement, this Funding Letter will be terminated. We have received an aggregate of $300,000 from three unrelated lenders during the period from March 9, 2012 through June 1, 2012 – see note 4.

 

 

11


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Liquidity (continued)

 

Our continued existence is dependent upon our ability to raise capital and to market and sell our services successfully. However, there are no assurances whatsoever that we will be able to sell additional common shares or other forms of equity under the LPC Purchase Agreement, the Shelf Registration or otherwise and/or that we will be able to borrow further funds under the Funding Letter or otherwise and/or that we will increase our revenues and/or control our expenses to a level sufficient to provide positive cash flow. The financial statements do not include any adjustments to reflect future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result if we are unsuccessful.

 

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 intra-entity accounts and transactions have been eliminated in consolidation. 

 

Cash and cash equivalents

 

Cash and cash equivalents consists of all highly liquid investments with original maturities of three months or less.

 

Concentration of Credit Risk

 

We at times have cash in banks in excess of FDIC insurance limits and place our temporary cash investments with high credit quality financial institutions. We perform ongoing credit evaluations of our customers' financial condition and do not require collateral from them. Reserves for credit losses are maintained at levels considered adequate by our management.

 

Bad Debt Reserves

 

Where we are aware of circumstances that may impair a specific customer's ability to meet its financial obligations, we record a specific allowance against amounts due from it, and thereby reduce the receivable to an amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, the current business environment and historical experience.

 

Inventories


Inventories are stated at the lower of cost (first-in, first-out method) or market by analyzing market conditions, current sales prices, inventory costs, and inventory balances.  We evaluate inventory balances for excess quantities and obsolescence on a regular basis by analyzing backlog, estimated demand, inventory on hand, sales levels and other information. Based on that analysis, our management estimates the amount of provisions made for obsolete or slow moving inventory.

 

 

12


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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. 

 

We have determined that the Rockridge Note, the CCJ Note, the Equipment Notes and the Subordinated Notes, discussed in note 4, meet the definition of a financial instrument as contained in the Financial Instruments topic of the Accounting Standards Codification (“ASC”), as this definition includes a contract that imposes a contractual obligation on us to exchange other financial instruments with the other party to the contract on potentially unfavorable terms. Accordingly, these items are (or were) financial liabilities subject to the accounting and disclosure requirements of the Fair Values Measurements and Disclosures topic of the ASC, whereby such liabilities are presented at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs.

 

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 Rockridge Note, the CCJ Note, the Equipment Notes or the Subordinated Note. However, we have determined that the fair value of the Rockridge Note, the CCJ Note, the Equipment Notes and the Subordinated Notes 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 Rockridge Note, the CCJ Note, the Equipment Notes and the Subordinated Notes 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.

 

 

 

13


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Fair Value Measurements (continued)

 

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 Rockridge Note, the CCJ Note, the Equipment Notes and the Subordinated Notes as of June 30 or March 31, 2012, as of September 30, June 30 or March 31, 2011 or as of September 30, 2010 and therefore no adjustment with respect to fair value was made to our financial statements as of those dates or for the nine or three months ended June 30, 2012 and 2011, respectively.

 

In accordance with the Financial Instruments topic of the ASC, we may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in earnings. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability, or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made. We have elected not to measure eligible financial assets and liabilities at fair value.

 

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. 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.

 

14


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Goodwill and other intangible assets (continued)

 

During our fourth fiscal quarter ended September 30, 2011, we elected early adoption of the provisions of a recent ASC update to the above accounting standards that allow us to forego the two step impairment process based on certain qualitative evaluation – see discussion in Effects of Recent Accounting Pronouncements below. Also see note 2 – Goodwill and other Acquisition-Related Intangible Assets.

 

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.

 

Revenue Recognition

 

Revenues from sales of goods and services are recognized when (i) persuasive evidence of an arrangement between us and the customer exists, (ii) the goods or service has been provided to the customer, (iii) the price to the customer is fixed or determinable and (iv) collectibility of the sales price is reasonably assured.

 

The 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 June 30, 2012 and as of September 30, 2011 was immaterial in relation to our recorded liabilities at those dates.

 

15


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue Recognition (continued)

 

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.

 

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.

 

We add to our customer billings for certain services an amount to recover USF contributions which we have determined that we will be obligated to pay to the FCC, related to those particular services. This additional billing to our customers is not reflected as revenue by us, but rather is recorded as a liability on our books at the time of such billing, which liability is relieved upon our remittance of USF contributions as they are billed to us by USAC, an administrative and collection agency of the FCC.

 

 

16


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Valuation of Derivatives

 

In accordance with ASC Topic 415, Derivatives and Hedging, we follow a two-step approach to evaluate an instrument’s contingent exercise provisions, if any, and to evaluate the instrument’s settlement provisions when determining whether an equity-linked financial instrument (or embedded feature) is indexed to our  own stock, which would in turn determine whether the instrument was treated as a liability to be recorded on our balance sheet at fair value and then adjusted to market in subsequent accounting periods. We have determined that this treatment did apply to a warrant issued by us in September 2010 – see note 8.

 

Income Taxes

 

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We then assess the likelihood that the deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or change this allowance in a period, we include an expense or a benefit within the tax provision in our statement of operations.

 

We have approximately $93 million in Federal net operating loss carryforwards as of June 30, 2012, approximately $6 million which expire in fiscal 2012 and approximately $87 million which expire in fiscal years 2018 through 2031.  Our utilization of approximately $20 million of the net operating loss carryforwards, acquired from the 2001 acquisition of EDNet and the 2002 acquisition of MOD and included in this $93 million total, against future taxable income may be limited as a result of ownership changes and other limitations.

 

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 $34.8 million as of June 30, 2012, 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 nine or three months ended June 30, 2012 and 2011.  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.

 

 

 

17


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Income Taxes (continued)

 

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 June 30, 2012 and as of September 30, 2011 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 nine or three months ended June 30, 2012 and 2011. The tax years ending September 30, 2007 and thereafter remain subject to examination by Federal and various state tax jurisdictions.

 

Net Loss per Share

 

For the nine and three months ended June 30, 2012 and 2011, net loss per share is based on the net loss divided by the weighted average number of shares of common stock outstanding. 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 3,313,702 and 3,322,539 at June 30, 2012 and 2011, respectively.

 

In addition, the potential dilutive effects of the following convertible securities outstanding at June 30, 2012 have been excluded from the calculation of weighted average shares outstanding: (i) 17,500 shares of Series A-13 Convertible Preferred Stock (“Series A-13”) which could potentially convert into 101,744 shares of ONSM common stock, (ii) 420,000 shares of Series A-14 Convertible Preferred Stock (“Series A-14”) which could potentially convert into 420,000 shares of ONSM common stock, (iii) the $973,858 outstanding balance of the Rockridge Note, which could have potentially converted into up to 405,774 shares of our common stock (iv) the right of Rockridge to receive 366,667 restricted shares of our common stock for an origination fee in connection with the Rockridge Note, issuable upon not less than sixty-one (61) days written notice to us, (v) $350,000 of Equipment Notes which in aggregate could potentially convert into up to 583,333 shares of our common stock, excluding interest and (vi) the $100,000 CCJ Note, which could potentially convert into up to 50,000 shares of our common stock.

 

The potential dilutive effects of the following convertible securities outstanding at June 30, 2011 have been excluded from the calculation of weighted average shares outstanding: (i) 35,000 shares of Series A-13 which could have potentially converted into 175,000 shares of ONSM common stock, (ii) 420,000 shares of Series A-14 which could potentially convert into 420,000 shares of ONSM common stock, (iii) $500,000 of Equipment Notes which in aggregate could have potentially converted into up to 104,167 shares of our common stock (excluding interest), (iv) the $914,967 convertible portion of the outstanding balance of the Rockridge Note, which could have potentially converted into up to 381,236 shares of our common stock, (v) the right of Rockridge to receive 366,667 restricted shares of our common stock for an origination fee in connection with the Rockridge Note, issuable upon not less than sixty-one (61) days written notice to us and (vi) the $200,000 CCJ Note, which could have potentially converted into up to 100,000 shares of our common stock.

 

 

 

18


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

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 $997,000 and $794,000 as of June 30, 2012 and September 30, 2011, respectively, related to salaries, commissions, taxes, vacation and other benefits earned but not paid as of those dates.

 

Equity Compensation to Employees and Consultants

 

We have a stock based compensation plan (the “Plan”) for our employees, directors and consultants. 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 nine and three months ended June 30, 2012 and 2011 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. For Plan options that were granted and thus valued under the Black-Scholes model during the nine months ended June 30, 2012, the expected volatility rates were approximately 97%, the risk-free interest rates were approximately 0.4% to 1.1% and the expected terms were 3 to 5 years. For  Plan options that were granted and thus valued under the Black-Scholes model during the nine months ended June 30, 2011, the expected volatility rate was approximately 94%, the risk-free interest rate was approximately 1.5% and the expected term was approximately 4 years.

 

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 nine months ended March 31, 2012. For Non-Plan options that were granted and thus valued under the Black-Scholes model during the nine months ended March 31, 2011, the expected volatility rate was approximately 94%, the risk-free interest rate was approximately 1.5% and the expected term was 4 years.

 

In all valuations above, expected dividends were $0 and the expected term was the full term of the related options (or in the case of extended options, the incremental increase in the option term as compared to the remaining term at the time of the extension). See Note 8 for additional information related to all stock option issuances.

 

 

19


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Advertising and marketing

 

Advertising and marketing costs, which are charged to operations as incurred and classified in our financial statements under Professional Fees or under Other General and Administrative Operating Expenses, were approximately $522,000 and $534,000 for the nine months ended June 30, 2012 and 2011, respectively and were approximately $167,000 and $183,000 for the three months ended June 30, 2012 and 2011, respectively. These amounts include third party marketing consultant fees and third party sales commissions, but do not include commissions or other compensation to our employee sales staff.

 

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.

 

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.

 

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 consolidated 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 consolidated financial statements as of September 30, 2011. 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 June 30, 2012 and the results of our operations and cash flows for the nine and three months ended June 30, 2012 and 2011. 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, 2012.

 

20


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Effects of Recent Accounting Pronouncements

 

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”). Per 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. Per Update 2009-13, ASC Topic 605 has been amended (i) to provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (ii) 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 (iii) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. These requirements were effective for our fiscal year ended September 30, 2011, were adopted by us on a prospective basis and did not have a material impact on our financial position or results of operations.

 

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures, which includes amendments that clarify the intent about the application of existing fair value measurements and disclosures, while other amendments change a principle or requirement for fair value measurements or disclosures.  This guidance is effective for our fiscal year ending September 30, 2013, is to be adopted prospectively and early adoption is not permitted.  We do not believe the adoption of this guidance will have a material impact on our consolidated financial statements.

 

In June 2011, the FASB issued authoritative guidance related to the presentation of comprehensive income.  The guidance requires that all non-owner changes in stockholders’ equity be presented in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  This guidance is effective for our fiscal year ending September 30, 2013, is to be applied retrospectively and early adoption is permitted.  We do not believe adoption of this guidance will have a material impact on our consolidated financial statements.

 

In September 2011, the FASB issued ASC update number 2011-08 - Software (Topic 350): Testing Goodwill for Impairment (“Update 2011-08”), which provides guidance setting forth the circumstances under which an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and to use such qualitative assessment as a basis of determining whether it would be necessary to perform the two-step goodwill impairment test described in Topic 350. Although the terms of Update 2011-08 did not require implementation before our fiscal year ending September 30, 2012, early adoption was permitted, which we elected in order to apply this guidance to our fiscal year ended September 30, 2011 and the related annual impairment tests – see note 2. We do not believe the adoption of this guidance had a material impact on our consolidated financial statements.

 

21


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS

 

Information regarding the Company’s goodwill and other acquisition-related intangible assets is as follows:

 

 

June 30, 2012

 

September 30, 2011

 

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

 

$

8,600,887

 

$

 -

 

$

8,600,887

EDNet

 

1,271,444

 

 

-

 

 

1,271,444

 

 

1,271,444

 

 

-

 

 

1,271,444

Acquired Onstream

 

821,401

 

 

-

 

 

821,401

 

 

821,401

 

 

-

 

 

821,401

Auction Video

 

3,216

 

 

-

 

 

3,216

 

 

3,216

 

 

-

 

 

3,216

Total goodwill

 

10,696,948

 

 

-

 

 

10,696,948

 

 

10,696,948

 

 

-

 

 

10,696,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Acquisition-related intangible assets (items listed are those remaining on our books as of June 30, 2012):

Infinite Conferencing -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

customer lists, trademarks

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

and URLs

 

3,181,197

 

 

(2,810,270)

 

 

370,927

 

 

3,181,197

 

 

(2,472,149)

 

 

709,048

Auction Video - patent pending

 

347,820

 

 

(314,144)

 

 

33,676

 

 

339,463

 

 

(262,584)

 

 

76,879

Total intangible assets

 

3,529,017

 

 

(3,124,414)

 

 

404,603

 

 

3,520,660

 

 

(2,734,733)

 

 

785,927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total goodwill and other acquisition-related intangible assets

$

14,225,965

 

$

(3,124,414)

 

$

11,101,551

 

$

14,217,608

 

$

(2,734,733)

 

$

11,482,875

 

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

JUNE 30, 2012

 

 

NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)

 

Infinite Conferencing – April 27, 2007 (continued)

 

The fair value of certain intangible assets (internally developed software, customer lists, trademarks, URLs (internet domain names), favorable contractual terms and employment and non-compete agreements) acquired as part of the Infinite Merger was determined by our management at the time of the merger. This fair value was primarily based on the discounted projected cash flows related to these assets for the three to six years immediately following the merger on a stand-alone basis without regard to the Infinite Merger, as projected by our management and Infinite’s management. The discount rate utilized considered equity risk factors (including small stock risk) as well as risks associated with profitability and working capital, competition, and intellectual property. The projections were adjusted for charges related to fixed assets, working capital and workforce retraining. We have been and are amortizing these assets over useful lives ranging from 3 to 6 years - as of September 30, 2010 the assets with a useful life of three years (favorable contractual terms and employment and non-compete agreements) had been fully amortized and removed from our balance sheet.

 

The approximately $18.2 million purchase price exceeded the fair values we assigned to Infinite’s tangible and intangible assets (net of liabilities at fair value) by approximately $12.0 million, which we recorded as goodwill as of the purchase date. As of December 31, 2008, this initially recorded goodwill was determined to be impaired and a $900,000 adjustment was made to reduce its carrying value to approximately $11.1 million.  A similar adjustment of $200,000 was made as of that date to reduce the carrying value of certain intangible assets acquired as part of the Infinite Merger. As of December 31, 2009, the Infinite goodwill was determined to be further impaired and a $2.5 million adjustment was made to reduce the carrying value of that goodwill to approximately $8.6 million. A similar adjustment of $600,000 was made as of that date to reduce the carrying value of certain intangible assets acquired as part of the Infinite Merger.

 

Auction Video – March 27, 2007

 

On March 27, 2007 we completed the acquisition of the assets, technology and patents pending of privately owned Auction Video, Inc., a Utah corporation, and Auction Video Japan, Inc., a Tokyo-Japan corporation (collectively, “Auction Video”). The acquisitions were made with a combination of restricted shares of our common stock valued at approximately $1.5 million issued to the stockholders of Auction Video Japan, Inc. and $500,000 cash paid to certain stockholders and creditors of Auction Video, Inc., for an aggregate purchase price of approximately $2.0 million, including transaction costs. On December 5, 2008 we entered into an agreement whereby one of the former owners of Auction Video Japan, Inc. agreed to shut down the Japan office of Auction Video as well as assume all of our outstanding assets and liabilities connected with that operation, in exchange for non-exclusive rights to sell our products in Japan and be compensated on a commission-only basis. It is the opinion of our management that any further developments with respect to this shut down or the above agreement will not have a material adverse effect on our financial position or results of operations.

 

 

23


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)

 

Auction Video – March 27, 2007 (continued)

 

We allocated the Auction Video purchase price to the identifiable tangible and intangible assets acquired, based on a determination of their reasonable fair value as of the date of the acquisition. The technology and patent pending related to the video ingestion and flash transcoder, the Auction Video customer lists, future cost savings for Auction Video services and the consulting and non-compete agreements entered into with the former executives and owners of Auction Video were valued in aggregate at $1,400,000 and have been and are being amortized over various lives between two to five years commencing April 2007 -  as of September 30, 2010 the assets with a useful life of two or three years (customer lists, future cost savings and the consulting and non-compete agreements) had been fully amortized and removed from our balance sheet. $600,000 was assigned as the value of the video ingestion and flash transcoder and added to the DMSP’s carrying cost for financial statement purposes – see note 3.

 

Subsequent to 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 final rejections in January 2010 and June 2010. Our responses to certain of these rejections included modifications to certain claims made in the original patent application. In response to the latest rejection we filed a Notice of Appeal with the USPO on November 22, 2010 and we filed an appeal brief with the USPO on February 9, 2011. The USPO filed an Examiner's Answer to the Appeal Brief on May 10, 2011, which repeated many of the previous reasons for rejection, and we filed a response to this filing on July 8, 2011. A decision will be made as to our appeal by a three member panel based on these filings, plus oral argument at a hearing which has been requested by us but a time not yet set. The expected timing of this decision is uncertain at this time, but generally would be expected to occur during the timeframe from late 2012 to mid 2013. 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.

 

With respect to the claims pending in the second of the two applications, the USPO issued a non-final rejection in June 2011 (which was reissued in January 2012) and a final rejection in June 2012. Our response to the June 2012 rejection is due on or before September 7, 2012, without the payment of extension fees. Our response due date may be extended by up to three months, with the payment of extension fees, for a final response deadline of December 7, 2012. 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.

 

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.

 

24


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

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. See note 3.

 

The approximately $10.0 million purchase price we paid for 100% of Acquired Onstream exceeded the fair values we assigned to Acquired Onstream’s tangible and intangible assets (net of liabilities at fair value) by approximately $8.4 million, which we recorded as goodwill as of the purchase date. As of December 31, 2008, this initially recorded goodwill was determined to be impaired and a $4.3 million adjustment was made to reduce the carrying value of that goodwill to approximately $4.1 million. As of September 30, 2010, the Acquired Onstream goodwill was determined to be further impaired and a $1.6 million adjustment was made to reduce the carrying value of that goodwill to approximately $2.5 million. As of September 30, 2011, the Acquired Onstream goodwill was determined to be further impaired and a $1.7 million adjustment was made to reduce the carrying value of that goodwill to approximately $821,000.

 

Testing for Impairment  

 

During our fourth fiscal quarter ended September 30, 2011, and with respect to our annual impairment review of our goodwill and other acquisition-related intangible assets, we elected early adoption of the provisions of ASU 2011-08, an ASC update that allows us to forego the two step impairment process based on certain qualitative evaluation. See note 1 - Effects of Recent Accounting Pronouncements.

 

25


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS (Continued)

 

Testing for Impairment (continued)

 

This qualitative evaluation included our assessment of relevant events and circumstances as listed in ASU 2011-08, some of which relate to the Onstream Media corporate entity (“ONSM”) as a whole, which includes reporting units with acquired goodwill and other intangible assets as well as other operations engaged in by ONSM, and some of which pertain to the individual reporting units. These relevant events and circumstances included certain macroeconomic conditions, including access to capital, which we believe to be affected by an entity-level condition - the recent decrease in the ONSM share price. Although this might result in decreased access to capital, we concluded that this would not affect the valuation of our individual reporting units, since (a) the decline in share price is related to factors which do not stem from the reporting units and (b) all of our significant reporting units would be able to obtain sufficient capital for their operations on an independent basis, based on their particular operating results.

 

In order to address whether any further consideration of ONSM’s share price was needed with respect to impairment testing, we performed an analysis to compare our book value to our market capitalization as of September 30, 2011, including adjustments for (i) paid-for but not issued common shares, such as those from non-redeemable preferred stock and (ii) an appropriate control premium. We also took into account the impact of the decline in our share price after September 30, 2011. Based on this analysis, we concluded that there was no shortfall in our adjusted market value as compared to our book value (after the impairment adjustment for Acquired Onstream/DMSP) as of September 30, 2011 and thus on that basis we would be eligible to employ qualitative evaluation with respect to our reporting units.

 

With respect to the Infinite and EDNet reporting units, we compared the results for the year ended September 30, 2011 to the projections on which the September 30, 2010 goodwill impairment analysis was primarily based. Based on this comparison and the related analysis, as well as our understanding of generally favorable expectations for business activity in the audio and web conferencing industry in general as well as our business activity in specific, we concluded that the Infinite and EDNet reporting unit projections for 2012-2015, on which the September 30, 2010 goodwill impairment analysis was based, continued to be reasonably achievable and indicative of our minimum expectations.

 

Based on this qualitative evaluation, we determined that it was more likely than not that the fair values of the Infinite and EDNet reporting units were more than their respective carrying amounts and accordingly it would not be necessary to perform the two-step goodwill impairment test with respect to those reporting units as of September 30, 2011. However, we were unable to arrive at the same conclusion as a result of our qualitative evaluation of the Acquired Onstream business unit. Accordingly, we performed impairment tests on Acquired Onstream as of September 30, 2011, using the two-step process described above and we determined that Acquired Onstream’s goodwill was impaired as of that date. Based on that condition, a $1.7 million adjustment was made to reduce the carrying value of goodwill as of that date.

 

Based on our review of certain factors through June 30, 2012, we have determined that no triggering event has occurred that would require an interim impairment review. Those factors include, but are not limited to, our management’s estimates of future sales and operating income, which in turn take into account specific company, product and customer factors, as well as general economic conditions and the market price of our common stock. However, the scheduled annual impairment review of our goodwill and other acquisition-related intangible assets will be performed as part of preparing our September 30, 2012 financial statements.

26


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 3:  PROPERTY AND EQUIPMENT

 

Property and equipment, including equipment acquired under capital leases, consists of:

 

 

June 30, 2012

 

September 30, 2011

 

 

 

 

 

Historical

Cost

 

Accumulated

Depreciation

and

Amortization

 

 

 

Net Book

Value

 

 

 

Historical

Cost

 

Accumulated Depreciation

and

Amortization

 

 

 

Net Book

 Value

 

 

Useful

Lives

(Yrs)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equipment and software

$

10,353,079

 

$

(    10,021,991)

 

$

331,088

 

$

10,284,342

 

$

(     9,815,233)

 

$

469,109

 

1-5

DMSP

 

5,838,804

 

 

(      5,286,153)

 

 

552,651

 

 

5,749,164

 

 

(     5,165,995)

 

 

583,169

 

5

Other capitalized internal use software

 

2,936,998

 

 

(      1,159,034)

 

 

1,777,964

 

 

2,482,440

 

 

(        869,267)

 

 

1,613,173

 

3-5

Travel video library

 

1,368,112

 

 

(      1,368,112)

 

 

-

 

 

1,368,112

 

 

(     1,368,112)

 

 

-

 

N/A

Furniture, fixtures and leasehold improvements

 

558,918

 

 

(         510,793)

 

 

48,125

 

 

545,470

 

 

(        496,245)

 

 

49,225

 

2-7

Totals

$

21,055,911

 

$

(   18,346,083)

 

$

2,709,828

 

$

20,429,528

 

$

(  17,714,852)

 

$

2,714,676

 

 

 

 

As part of the Onstream Merger (see note 2), we became obligated under a contract with SAIC, under which SAIC would build a platform that eventually, albeit after further extensive design and re-engineering by us, led to the DMSP. A partially completed version of this platform was the primary asset included in our purchase of Acquired Onstream, and was recorded at an initial amount of approximately $2.7 million. Subsequent to the Onstream Merger, we continued to develop the DMSP, making payments under the SAIC contract and to other vendors, as well as to our own development staff as discussed below, which were recorded as an increase in the DMSP’s carrying cost.

 

A limited version of the DMSP was first placed in service in November 2005. “Store and Stream” was the first version of the DMSP sold to the general public, starting in October 2006. The SAIC contract terminated by mutual agreement of the parties on June 30, 2008. Although cancellation of the contract released SAIC to offer what was identified as the “Onstream Media Solution” directly or indirectly to third parties, we do not expect this right to result in a material adverse impact on future DMSP sales.

 

In connection with development of “Streaming Publisher”, a second version of the DMSP with additional functionality, we have capitalized as part of the DMSP approximately $961,000 of employee compensation, payments to contract programmers and related costs as of June 30, 2012. As of June 30, 2012, approximately $781,000 of these Streaming Publisher costs had been placed in service and are being depreciated over five years. The remainder of the costs not in service relate primarily to new releases of the DMSP under development. Streaming Publisher is a stand-alone product based on a different architecture than Store and Stream and is a primary building block of the MP365 platform, discussed below.

 

 

27


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 3:  PROPERTY AND EQUIPMENT (Continued)

 

Other capitalized internal use software as of June 30, 2012 includes:

 

(i) approximately $1,309,000 of employee compensation and payments to contract programmers for development of the MP365 platform, which enables the creation of on-line virtual marketplaces and trade shows utilizing many of our other technologies such as DMSP, webcasting, UGC and conferencing. $297,000 of these costs, for phase one of MP365, were placed in service on August 1, 2010 and another $675,000 of these costs, for phase two of MP365, were placed in service on July 1, 2011. All costs placed in service are being depreciated over five years. The remaining costs, not placed in service, relate primarily to the next phase of MP365 under development. MP365 development costs exclude costs for development of Streaming Publisher, discussed separately above; and

 

(ii) approximately $1,049,000 of employee compensation and other costs for the development of webcasting applications, primarily iEncode software, which runs on a self-administered, webcasting appliance used to produce a live video webcast. As of June 30, 2012, $784,000 of these costs had been placed in service and are being depreciated over five years. The remainder of the costs have not been placed in service and relate primarily to new releases of iEncode and the webcasting platform, both under development.

 

The capitalized software development costs discussed above are summarized as follows:

 

Period             

 

DMSP

 

MP365

 

Webcasting

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended June 30, 2012

$

88,000

 

$

237,000

 

$

218,000

 

$

543,000

Year ended September 30, 2011

 

99,000

 

 

489,000

 

 

150,000

 

 

738,000

Year ended September 30, 2010

 

314,000

 

 

435,000

 

 

180,000

 

 

929,000

Year ended September 30, 2009

 

274,000

 

 

148,000

 

 

288,000

 

 

710,000

Year ended September 30, 2008

 

186,000

 

 

-

 

 

213,000

 

 

399,000

 

 

 

 

 

 

 

 

 

 

 

 

Totals through June 30, 2012

$

961,000

 

$

1,309,000

 

$

1,049,000

 

$

3,319,000

 

Depreciation and amortization expense for property and equipment was approximately $664,000 and $731,000 for the nine months ended June 30, 2012 and 2011, respectively and approximately $210,000 and $235,000 for the three months ended June 30, 2012 and 2011, respectively.

 

28


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 4: DEBT

 

Debt includes convertible debentures and notes payable (including capitalized lease obligations).

 

Convertible Debentures

 

Convertible debentures consist of the following:

 

June 30,

 

September 30,

 

2012

 

2011

Rockridge Note

$

973,858

 

$

1,245,069

Equipment Notes

 

350,000

 

 

385,000

CCJ Note

 

100,000

 

 

110,000

Total convertible debentures

 

1,423,858

 

 

1,740,069

Less: discount on convertible debentures

 

(    183,695)

 

 

(     300,409)

Convertible debentures, net of discount

 

1,240,163

 

 

1,439,660

Less: current portion, net of discount

 

(    432,379)

 

 

(     407,790)

Convertible debentures, net of current portion

$

807,784

 

$

1,031,870

 

Rockridge Note

 

In April and June 2009 we borrowed an aggregate $1.0 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 (the “Rockridge Agreement”) between Rockridge and us. 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”), under which we borrowed an additional aggregate $1.0 million, resulting in cumulative borrowings by us under the Rockridge Agreement, as amended, of $2.0 million.

 

In connection with this transaction, we issued a note (the “Rockridge Note”), 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 bears interest at 12% per annum and is repayable in equal monthly principal and interest installments of $41,409 extending through August 14, 2013, in addition to an approximately $500,000 balloon payment (plus approximately $5,000 interest) due on September 14, 2013 (the “Maturity Date”).

 

29


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Rockridge Note (continued)

 

Upon notice from Rockridge at any time and from time to time prior to the Maturity Date the outstanding principal balance may be converted into a number of restricted shares of our common stock. These conversions are subject to a minimum of one month between conversion notices (unless such conversion amount exceeds $25,000) and will use a conversion price of eighty percent (80%) of the fair market value of the average closing bid price for our common stock for the twenty (20) days of trading on The NASDAQ Capital Market (or such other exchange or market on which our common shares are trading) prior to such Rockridge notice, but such conversion price will not be less than $2.40 per share.  We will not effect any conversion of the Rockridge Note, to the extent Rockridge and Frederick Deluca, 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.

 

Furthermore, in the event of any conversions of principal to ONSM shares by Rockridge (i) they will first be applied to reduce the approximately $500,000 balloon payment and thereafter to reduce monthly payments starting with the latest and (ii) the interest portion of the monthly payments under the Rockridge Note for the remaining months after any such conversion will be adjusted to reflect the outstanding principal being immediately reduced for amount of the conversion. We may prepay the Rockridge Note at any time. The outstanding principal is due on demand in the event a payment default is uncured ten (10) business days after Rockridge’s written notice to us.

 

The Rockridge Agreement, as amended, provided 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”). The Rockridge Agreement, as amended, provides that on the Maturity Date we shall pay Rockridge up to a maximum of $75,000 (the “Shortfall Payment”), 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). We have recorded no accrual for this matter on our financial statements through June 30, 2012, since we believe that the variables affecting any eventual liability cannot be reasonably estimated at this time. However, if the closing ONSM share price of $0.71 per share on August 10, 2012 was used as a basis of calculation, the required payment would be approximately $75,000.

 

30


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Rockridge Note (continued)

 

The 366,667 origination fee Shares discussed above are considered earned by Rockridge 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 legal fees of $55,337 paid by us in connection with the Rockridge Agreement, 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 unamortized portion of this discount was $121,839 and $251,059 as of June 30, 2012 and September 30, 2011, respectively.

 

The effective interest rate of the Rockridge Note was approximately 44.3% per annum, until the September 2009 amendment, when it was reduced to approximately 28.0% per annum. These rates do not give effect to any difference between the sum of the value of the Shares at the time of issuance plus any Shortfall Payment, as compared to the assigned value of the Shares on our books, nor do they give effect to the discount from market prices that might be applicable if any portion of the principal is satisfied in common shares instead of cash.

 

Equipment Notes

 

In June and July 2008 we received an aggregate of $1.0 million from seven accredited individuals and other entities (the “Investors”), under a software and equipment financing arrangement. 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 had an original maturity date of June 3, 2011.

 

In various transactions from April 4, 2011 through July 20, 2011 certain of the Equipment Notes, including the note held by CCJ, were amended to allow the conversion of an aggregate $550,000 of the original note amount into common shares, using conversion prices from $0.90 to $1.20 per share. As a result, we issued an aggregate of 513,889 unregistered common shares. The aggregate market value of these 513,889 shares at the times of their respective issuances exceeded the carrying value of the related Equipment Notes by $218,361, which excess was recognized as non-cash interest expense for the year ended September 30, 2011. $50,000 of the remaining principal outstanding under the Equipment Notes was repaid by us with cash in July 2011 and another $15,000 was repaid with cash in September 2011.

 

 

31


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Equipment Notes (continued)

 

After the principal repayments in cash and conversions of principal to common shares, as discussed above, the outstanding principal balance under the Equipment Notes was $385,000 as of September 30, 2011. $350,000 (including $25,000 remaining due under the note held by CCJ) of this $385,000 was amended in July 2011 to provide for a September 3, 2011 maturity date and a $0.90 per common share conversion rate (at the Investors’ option). Effective October 1, 2011 these Equipment Notes in the aggregate amount of $350,000 were further amended to provide for an October 15, 2012 maturity date and a $0.70 per common share conversion rate (at the Investors’ option). In addition, the payment terms were amended so that 50% of the principal would be paid in eleven equal monthly installments commencing November 15, 2011 and 50% of the principal would be payable on the maturity date. These Equipment Notes were assigned by the applicable Investors to three accredited entities in October 2011 and that time it was agreed that the first six monthly payments would be deferred and added to the final balloon payment.

 

The remaining $35,000 of the $385,000 outstanding under the Equipment Notes as of September 30, 2011 was satisfied by our repayment of approximately $27,000 in February 2012 and the transfer of the approximately $8,000 balance to a liability as of June 30, 2012, based on a settlement agreement between us and the former noteholder, to be satisfied by our remittance at a later date to the noteholder or their designee, as set forth in that agreement.

 

Effective May 14, 2012 the terms of the Equipment Notes were modified, primarily to extend the principal repayment terms to a single balloon payment on July 15, 2013. In consideration of this modification, we agreed (i) to modify the conversion rate to $0.60 per share and (ii) to issue an aggregate of 70,000 unregistered ONSM common shares to the noteholders. As a result of this modification, we have classified this debt as non-current on our June 30, 2012 balance sheet.

 

Although the present value of the cash flows of the Equipment Notes after the modification was not materially different from the present value of the cash flows before the modification, under the provisions of ASC 470-50-40, "Derecognition"  if the conversion rate modification results in a change in the fair value of the conversion option 10% or greater than the carrying value of the Equipment Notes immediately before such change, it would be considered substantially different terms and therefore an extinguishment of debt, in which case a new debt instrument would be recorded at fair value and that amount used to determine a non-cash debt extinguishment gain or loss recognized in our statement of operations. We have determined that the fair value of the conversion option of the Equipment Notes as modified to $0.60 per share is zero, which represents no change in the value of the conversion option before such modification, and as a result this transaction is not being treated as a debt extinguishment. Although the closing market price on the effective date of the modification was $0.66 per share, since it is our policy that Board approval is required before our stock may be issued, and consistent with that policy we did not issue the 70,000 common shares to the noteholders that were part of this modification transaction until such Board approval was obtained, the  June 12, 2012 Board approval date of this transaction, when the closing market price was $0.56, should be used for purposes of valuing the modified conversion option. Accordingly, we assigned the modified conversion option a valuation of zero.

 

The Equipment Notes are collateralized by specifically designated software and equipment owned by us with a cost basis of approximately $1.2 million, plus 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. 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 Investors initially received 1,667 restricted ONSM common shares for each $100,000 lent to us, and also received interest at 12% per annum. Interest was 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. In some cases, the April though August 2011 amendments to the Equipment Notes set a minimum conversion rate of $1.20 per common share for subsequent interest payments.

 

 

32


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Equipment Notes (continued)

 

In lieu of cash payments for interest previously due on these Equipment Notes, we elected to issue the following unregistered common shares to the Investors, which were recorded based on the fair value of those shares on the issuance date.

 

 

Share issuance date

Number of unregistered common shares

 

Interest period

Interest if paid in cash

Fair value of shares at issuance

November 11, 2008

26,333

June - October 2008

$48,740

$69,520

May 21, 2009

49,098

Nov 2008 - April 2009

$60,000

$67,756

November 11, 2009

34,920

May - October 2009

$60,493

$67,040

April 30, 2010

44,369

Nov 2009 - April 2010

$59,507

$92,288

December 2, 2010

76,769

May - October 2010

$60,493

$71,395

April 28, 2011

28,810

Nov 2010 – March 2011

$24,986

$50,129

July 21, 2011

5,233

Nov 2010 – June 2011

$  6,279

$  5,076

October 11, 2011

51,531

Nov 2010 – Sept 2011

$48,883

$38,648

 

The April 28, July 11 and October 11, 2011 issuances in aggregate represent all interest from November 1, 2010 through September 30, 2011 on the Equipment Notes. In accordance with the October 1, 2011 amendments to the Equipment Notes and as further modified on May 12, 2012, interest, at 12% per annum, is payable in semi-annual installments on April 15, 2012, October 15, 2012, April 15, 2013 and July 15, 2013 and is payable 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. The interest due on April 15, 2012 was paid in cash.

 

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 was amortized as interest expense over the original three year term of the Equipment Notes. The effective interest rate of the Equipment Notes through September 30, 2011 was approximately 19.5% per annum, excluding (i) the effect of the net premium arising from our payment of interest in common shares instead of cash, based on the market prices of our common shares at the time of issuance and (ii) the excess of the market value of common shares, issued with respect to the conversion of certain Equipment Notes, over the carrying value of those Equipment Notes, as discussed above. From October 1, 2011 to May 12, 2012, the effective interest rate of the Equipment Notes was 12% per annum, excluding the effect of any premium or discount arising from our payment of principal or interest in common shares instead of cash, based on the market prices of our common shares at the time of issuance. The $49,000 fair value of the shares issued as part of the May 12, 2012 modification was recorded as a discount and is being amortized as interest expense over the remaining term of the Equipment Notes, resulting in a current effective interest rate of approximately 26% per annum. The unamortized portion of this discount was $42,875 as of June 30, 2012.

 

33


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

CCJ Note

 

On December 29, 2009, we entered into an agreement with CCJ converting a previously received $200,000 advance to an unsecured subordinated note (the “CCJ Note”) bearing 8% interest per annum and payable in equal monthly installments of principal and interest for 48 months plus a $100,000 principal balloon at maturity, although none of those payments were subsequently made by us. To resolve this payment default, the CCJ Note was amended in January 2011 to prospectively increase the interest rate to 10% per annum, payable quarterly, and to require two principal payments of $100,000 each on December 31, 2011 and 2012, respectively. In connection with this amendment, we paid $16,263 in cash for the previously accrued interest. On July 22, 2011, in order to reduce our near-term cash requirements, we agreed to convert $90,000 of the $100,000 December 31, 2011 principal payment to 100,000 restricted common shares. Although the market value of these shares at the time of the agreement exceeded the related principal amount by $38,000, we did not make the shares physically available to CCJ until two weeks later, by which time the market price had reduced to a level equal to the related principal amount. Accordingly, we have determined that there was not an effective conversion premium over market and therefore there was no recognition of additional non-cash interest expense other than the write-off of debt discount as discussed below. The remaining $10,000 principal, plus the interest due on the $90,000 from April 1, 2011 and the interest due on the $10,000 from July 22, 2011, was paid with cash in January 2012. Two quarterly interest payments since then have been made in cash.

 

The remaining $100,000 principal balance of the CCJ Note may be converted at any time by CCJ into our common shares at the greater of (i) the previous 30 day market value or (ii) $2.00 per share (which was $3.00 per share prior to the January 2011 renegotiation).

 

In conjunction with and in consideration of the December 29, 2009 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 29,167 ONSM common shares at $3.00 per share. In conjunction with and in consideration of the January 2011 note amendment, certain terms of the 35,000 shares of Series A-13 held by CCJ at that date were modified. See note 6.

 

The effective interest rate of the CCJ Note prior to the January 2011 amendment was 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, which total of $141,018 we recorded as a debt discount. The effective rate of 47.4% per annum also included 11.2% per annum related to dividends that would have accrued 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. Following the January 2011 amendment, the effective interest rate of the CCJ Note increased to approximately 78.5% per annum, reflecting the $46,084 value of the increased number of common shares underlying the Series A-13 shares as a result of the modified terms, which we recorded as a debt discount,  the increase in the periodic cash interest rate from 8% to 10% per annum and 9.3% per annum related to dividends that could accrue to CCJ as a result of the later mandatory conversion date of the Series A-13 shares as a result of the modified terms.

 

 

34


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

CCJ Note (continued)

 

The unamortized portion of the debt discount was $18,981 and $49,350 at June 30, 2012 and September 30, 2011, respectively. Through December 31, 2010, the discount was being amortized as interest expense over the original four-year term of the CCJ Note. Effective January 1, 2011, the remaining unamortized discount, plus additional discount arising from the modified terms, is being amortized as interest expense over the modified two-year term of the CCJ Note. Approximately $29,000 of the unamortized discount was written off to interest expense in July 2011 in connection with the conversion of $90,000 debt principal to common shares, as discussed above.

 

Notes and Leases Payable

 

Notes and leases payable consist of the following:

 

June 30,

2012

 

September 30,

2011

Line of Credit Arrangement

$

1,596,333

 

$

1,525,825

Subordinated Notes

 

300,000

 

 

-

Capitalized equipment leases

 

13,416

 

 

20,103

Total notes and leases payable

 

1,909,749

 

 

1,545,928

Less: discount on notes payable

 

(67,300)

 

 

Notes and leases payable, net of discount

 

1,842,449

 

 

1,545,928

Less: current portion, net of discount

 

(    1,837,984)

 

 

(      1,533,966)

Long term notes and leases payable, net of current portion

$

4,465

 

$

11,962

 

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 may presently borrow up to an aggregate of $2.0 million for working capital, collateralized by our accounts receivable and certain other related assets. Mr. Leon Nowalsky, a member of our Board of Directors, is also a founder and board member of the Lender.

 

The outstanding balance bears interest at 12.0% per annum (13.5% prior to December 27, 2011), adjustable based on changes in prime after December 28, 2009, payable monthly in arrears. We also incur a weekly monitoring fee of one twentieth of a percent (0.05%) of the borrowing limit, payable monthly in arrears.

 

The outstanding principal balance due under the Line may be repaid by us at any time, and the term may be extended by us past the current December 27, 2013 expiration date for an extra year, subject to compliance with all loan terms, including no material adverse change, as well as concurrence of the Lender. The outstanding principal is due on demand in the event a payment default is uncured one (1) day after written notice.

 

35


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

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 with a quarterly debt service coverage covenant (the “Covenant”), effective with the September 30, 2010 quarter. The Covenant, as defined in the applicable loan documents for quarterly periods through December 31, 2011, requires that our net income or loss, adjusted to remove all non-cash expenses as well as cash interest expense, be equal to or greater than that same cash interest expense. We were in compliance with this Covenant for the September 30, 2010 quarter. The Lender waived the Covenant requirement for the December 31, 2010 quarter, but charged us additional interest of 3% per annum from the March 16, 2011 waiver date through May 16, 2011, when we demonstrated that we were in compliance with the Covenant for the March 31, 2011 quarter. We were also in compliance with this Covenant for the June 30, September 30 and December 31, 2011 quarters. The Covenant, as defined in the applicable loan documents for quarterly periods after December 31, 2011, requires that the sum of (i) our net income or loss, adjusted to remove all non-cash expenses as well as cash interest expense and (ii) contributions to capital (less cash distributions and/or cash dividends paid during such period) and proceeds from subordinated unsecured debt, be equal to or greater than the sum of cash payments for interest and debt principal payments. We were in compliance with this Covenant for the March 31, 2012 and June 30, 2012 quarters.

 

Effective February 2012, the modified terms of the Line require that all funds remitted by our customers in payment of our receivables be deposited directly to a bank account owned by the Lender. Once those deposited funds become available, the Lender is then required to immediately remit them to our bank account, provided that we are not in default under the Line and to the extent those funds exceed any past due principal, interest or other payments due under the Line, which the Lender may offset before remitting the balance.

 

Commitment fees and other fees and expenses paid to the Lender are recorded by us as debt discount and amortized as interest expense over the remaining term of the Line. These amounts paid were approximately $44,757 and $25,897 for the nine months ended June 30, 2012 and 2011, respectively. The unamortized portion of the debt discount was $27,300 and zero as of June 30, 2012 and September 30, 2011, respectively. A commitment fee of $40,000, calculated as one percent (1%) per year of the maximum allowable borrowing amount, was incurred for the two-year renewal of the Line effective December 28, 2011, and such fee is payable in two installments- the first was paid in February 2012 and the second is due in December 2012.

 

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 Rockridge Note we issued for $1.0 million in April 2009 and amended to $2.0 million in September 2009, the $200,000 CCJ Note we issued in December 2009, all as discussed above, and the three $100,000 Subordinated Notes we issued in March, April and June 2012, as discussed below, as well as the $250,000 Greenberg Note we issued in January 2010, the $500,000 Wilmington Notes we issued in February 2010 and the $250,000 Lehmann Note we issued in May 2010.

 

36


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Subordinated Notes

 

During the period from March 9, 2012 through June 1, 2012, we received an aggregate of $300,000 from three unrelated lenders in exchange for our issuance of three unsecured subordinated promissory notes (“Subordinated Notes”), which are fully subordinated to the Credit Line and the Rockridge Note or any assignees or successors thereto. Details of each note are as follows:

 

On March 9, 2012 we received $100,000 for a note bearing interest at 15% per annum. The principal is payable in equal monthly installments of $8,333 starting October 9, 2012, with the balance of $58,333 payable on March 9, 2013. Interest for the first six months is payable on September 9, 2012 and is payable thereafter on a monthly basis. Finders and origination fees were paid by the issuance of an aggregate of 20,000 restricted ONSM common shares, which had a fair market value at issuance of approximately $12,800. This amount was reflected as a discount and will be amortized as interest expense over the one year term. Including this discount, the effective interest rate of this note is approximately 30% per annum.

 

On April 30, 2012 we received $100,000 for a note bearing interest at 15% per annum. The principal is payable in equal monthly installments of $8,333 starting November 30, 2012, with the balance of $58,333 payable on April 30, 2013. Interest for the first six months is payable on October 31, 2012 and is payable thereafter on a monthly basis. Finders and origination fees were paid by the issuance of an aggregate of 20,000 restricted ONSM common shares, which had a fair market value at issuance of approximately $11,800. This amount was reflected as a discount and will be amortized as interest expense over the one year term. Including this discount, the effective interest rate of this note is approximately 29% per annum.

 

On June 1, 2012 we received $100,000 for a note bearing interest at 12% per annum. The principal is payable in equal monthly installments of $8,333 starting January 1, 2013, with the balance of $58,333 payable on June 1, 2013. Interest for the first six months is payable on December 1, 2012 and is payable thereafter on a monthly basis. Finders and origination fees were paid by the issuance of an aggregate of 40,000 restricted ONSM common shares, which had a fair market value at issuance of approximately $23,600. This amount was reflected as a discount and will be amortized as interest expense over the one year term. Including this discount, the effective interest rate of this note is approximately 39% per annum.

 

The aggregate unamortized portion of the debt discount recorded against the Subordinated Notes was $40,000 as of June 30, 2012.

37


 
 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2012

 

 

NOTE 5:  COMMITMENTS AND CONTINGENCIES

 

NASDAQ listing issues

 

On October 21, 2011, we received a letter from NASDAQ stating that we had 180 calendar days, or until April 18, 2012, to regain compliance with Listing Rule 5550 (a) (2) (a) (the “Bid Price Rule”), for which compliance is necessary in order to be eligible for continued listing on The NASDAQ Capital Market. The letter from NASDAQ indicated that our non-compliance with the Bid Price Rule was as a result of the closing bid price for our common stock being below $1.00 per share for the thirty consecutive business days preceding that letter. Although we were not compliant by April 18, 2012, since as of that date we met the continued listing requirement for market value of publicly held shares and all other initial listing standards for The NASDAQ Capital Market, and since we provided the required written notice to NASDAQ of our intention to cure the deficiency during the second compliance period, including a reverse stock split if necessary, we were granted an additional 180 calendar day compliance period. We may be considered compliant with the Bid Price Rule, subject to the NASDAQ staff’s discretion, if our common stock closes at $1.00 per share or more for a minimum of ten consecutive business days before the October 15, 2012 extended deadline. During the compliance period(s), our stock will continue to be listed and eligible for trading on The NASDAQ Capital Market. Our closing share price was $0.71 per share on August 10, 2012.

 

We have incurred losses since our inception, and our operations have been financed primarily through the issuance of equity (publicly traded shares and convertible equivalents) and debt. Our access to funding under th