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EX-23.1 - EXHIBIT 23.1 - Onstream Media CORPexhibit23_1.htm
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EX-10.17 - EXHIBIT 10.17 - Onstream Media CORPexhibit10_17.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

Form 10-K

(Mark One)

[x]              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2014

[ ]                TRANSITION REPORT UNDER 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)


                                                    Florida                                                                                                                                         65-0420146      
                    (State or other jurisdiction of incorporation or organization)                                                        (I.R.S. Employer Identification No.)

1291 SW 29 Avenue

 

Pompano Beach, Florida    

     33069    

(Address of principal executive offices) 

(Zip Code)

                   Registrant's telephone number, including area code   954-917-6655           

 

Securities registered under Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
       None               not applicable      

Securities registered under Section 12(g) of the Act:    Common Stock  
                                                                                              
(Title of class)

                   Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act     [   ]  Yes    [X]  No

                   Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act     [   ]  Yes    [X]  No

 

 



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the 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 232.05 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

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”, “accelerated filer”, “non-accelerated filer” and “smaller reporting company” 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 Act).            Yes [   ] No [  X ]

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the averaged bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. The aggregate market value of the common equity held by non-affiliates computed at the closing price of the registrant’s common stock on March 31, 2014 was approximately $4.3 million.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. As of May 8, 2015, 22,544,580 shares of common stock were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Not Applicable.

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CERTAIN CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

Certain statements in this annual report on Form 10-K 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 our products and services and/or our ability to obtain financing or other investment), 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 September 30, 2014, unless otherwise stated. Readers should carefully review this Form 10-K in its entirety, including but not limited to our financial statements and the notes thereto. 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.


PART I

ITEM 1.   BUSINESS

Our Business, Products and Services

We are a leading online service provider of live and on-demand Internet video, corporate audio and web communications and content management applications.  We had approximately 88 full time employees as of September 30, 2014, with operations organized in two main operating groups:

·         Audio and Web Conferencing Services Group

·         Digital Media Services Group

Products and services provided by each of the groups are:

Audio and Web Conferencing Services Group

Our Audio and Web Conferencing Services Group consists of our Infinite Conferencing (“Infinite”) division, our Onstream Conferencing Corporation (“OCC”) division and our EDNet division. This group represented approximately 67.3% and 64.9% of our revenues for the years ended September 30, 2014 and 2013, respectively. These revenues are comprised primarily of network access and usage fees as well as the sale and rental of communication equipment.

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Our Infinite division, which operates primarily from the New York City area, and our OCC division, which operates primarily from San Diego, California, provide “reservationless” and operator-assisted audio and web conferencing services.

Our EDNet division, which operates primarily from San Francisco, California, provides connectivity within the entertainment and advertising industries through its managed network, which encompasses production and post-production companies, advertisers, producers, directors, and talent. 

 Digital Media Services Group 

Our Digital Media Services Group consists primarily of our Webcasting division and our DMSP (“Digital Media Services Platform”) division. The DMSP division includes the related UGC (“User Generated Content”) and Smart Encoding divisions.  This group represented approximately 32.7% and 35.1% of our revenues for the years ended September 30, 2014 and 2013, respectively. These revenues are comprised primarily of fees for hosting/storage, search/retrieval and distribution/streaming of digital assets as well as encoding and production fees.

Our Webcasting division, which operates primarily from Pompano Beach, Florida, provides an array of corporate-oriented, web-based media services to the corporate market including live audio and video webcasting and on-demand audio and video streaming for any business, government or educational entity. This includes online webcasting services, a cost effective means for corporations to broadcast conference calls live, making them available to the investing public, the media and to anyone worldwide with Internet access. The Webcasting division also has a sales and production support office in New York City as well as additional production and back-up webcasting facilities in our San Francisco office. We market the webcasting services through a direct sales force and through channel partners, also known as resellers.  Each webcast can be heard and/or viewed live, and then archived for replay, with an option for accessing the archived material through a company's own web site. These webcasts primarily communicate corporate earnings and other financial information; product launches and other marketing information; training, emergency or other information directed to employees; and corporate or other special events. As of October 1, 2013, the Webcasting division became responsible for sales of the MarketPlace365 service, which provides its customers with a Virtual Conference Center, which is a multiple event conference solution with integrated webcasting.

Our DMSP division, which operates primarily from Colorado Springs, Colorado provides an online, subscription based service that includes access to enabling technologies and features for our clients to acquire, store, index, secure, manage, distribute and transform these digital assets into saleable commodities. In December 2004 we completed our acquisition of an entity formerly named Onstream Media Corporation that we now identify as Acquired Onstream. Acquired Onstream was a development stage company founded in 2001 with the business objective of developing a feature rich digital asset management service and offering the service on a subscription basis over the Internet. This service was the initial version of what became the DMSP, which is comprised of four separate products - encoding, storage, search/retrieval and distribution. Although a limited version of the DMSP was released in November 2005, the first complete version of the DMSP, known as “Store and Stream”, was offered for sale to the general public since October 2006.  In February 2009, we launched “Streaming Publisher”, a second version of the DMSP with additional functionality. Streaming Publisher is a stand-alone product based on a different architecture than Store and Stream and is a primary building block of the MarketPlace365 platform.

Our UGC division, which also operates as Auction Video, provides a video ingestion and flash encoder that can be used by our clients on a stand-alone basis or in conjunction with the DMSP. In March 2007 we completed the acquisition of Auction Video. The primary assets acquired included the video ingestion and flash transcoder as well as related technology and patents pending.

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Our Smart Encoding division, which operates primarily from San Francisco, California, provides both automated and manual encoding and editorial services for processing digital media, using a set of coordinated technologies and processes that allow the quick and efficient online search, retrieval and streaming of this media, which can include photos, videos, audio, engineering specs, architectural plans, web pages, and many other pieces of business collateral.

Sales and Marketing

We use a variety of marketing methods, including our internal sales force, independent agents and channel partners, also known as resellers or distributors, to market our products and services. One key element of our marketing strategy has been to enter into distribution agreements with recognized leaders in each of the markets for our products and services. By offering our products and services in conjunction with the distributors’ products, we believe these distribution agreements enable us to take advantage of the particular distributors' existing marketing programs, sales forces and business relationships. Contracts with these distributors generally range from one to two years and may be terminable earlier based on certain contractual provisions.

We have expanded our marketing efforts during recent years to include: targeted e-mail campaigns, trade show participation, advanced search engine optimization, pay-per-click, a public relations byline program and selected trade magazine advertising. We intend to continue these actions during the coming year.

No single customer has represented more than 10% of our consolidated revenues during the years ended September 30, 2014 or 2013.

Competition

We operate in highly competitive and rapidly changing business segments. Our competition includes:

·         other web sites, Internet portals and Internet broadcasters to acquire and provide content to attract users;

·         video and audio conferencing companies and Internet business service broadcasters;

·         online services, other web site operators and advertising networks;

·         traditional media, such as television, radio and print; and 
·         end-user software products.

Our webcasting products and services fall into two competitive areas: live or archived financial and fair-disclosure related conferences, and all other live or archived webcast productions for the corporate, financial, educational and government segments.  In the financial conferences area, we compete with Accordent Technologies (Polycom), BT Conferencing, Intercall, Kaltura, Livestream, MediaPlatform, Netbriefings, ON24, Premiere Global Services (PGi), PTEK Holdings, Qumu, Shareholder.com, Sonic Foundry, Thomson Financial Group, VBrick, ViaVid, Viewcast, Wall Street Transcripts, WILink, Ustream and others that offer live webcasts of quarterly earnings conference calls. This list includes entities that are currently active resellers of our services and not in significant competition with us, but could compete with us under certain circumstances. For other webcast production, we compete with other smaller geographically local entities.  Our production services, however, have been in demand by some of our competitors, and from time to time we have provided services to these companies.  The nature of the streaming media sector of the Internet market is highly interdependent while being competitive.

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The Digital Media Services Group provides a live streaming and publishing platform to multiple players, including mobile devices. While there is competition for the provision of these digital media services, our strategic offering of integrated webcasting, multi-screen encoding, intelligent syndication with broad spectrum video indexing services, all as part of a unified and scalable digital media platform (the DMSP), provides significant differentiation from our competitors. Furthermore, most of our competitors focus on the media and entertainment industry, while we primarily target corporate, enterprise, government and education clients. Our platform competes with other online video platforms such as ExtendMedia, LiveStream, Move Networks, Ooyala (Telstra), thePlatform (Comcast), Ustream and others. Other companies that compete in some portion of the digital media services market targeted by us include Akamai, Ascent Media, BrightCove, Edgecast, Limelight, Neulion, PermissionTV, Sonic Foundry, Telestream,  Twistage, and VitalStream (Internap).

Competition for audio and web conferencing is primarily segregated between the low-cost, low-service offerings such as FreeConference.Com and other more high-end providers such as Arkadin, BT Conferencing, GoToMeeting, IBM SmartCloud, Intercall Conferencing, Microsoft Lync, Premiere Global Services (PGi), ReadyTalk and WebEx (Cisco). Our Infinite division services a niche market for audio and web conferencing services primarily for SMB (small to medium size) companies looking for superior customer service at an affordable rate. This division's niche also includes a growing demand for lead generation “webinars” (seminars presented via the Internet), which it addresses by offering a dedicated account manager to coordinate a customized solution for each event.

Competition for the multimedia networking services provided by our EDNet division is based upon the ability to provide equipment, connectivity and technical support for disparate audio communications systems and to provide interoperable compatibility for proprietary and off-the-shelf codecs. Due to the difficulty and expense of developing and maintaining private digital networks, bridging services, engineering availability and service quality, we believe that the number of multimedia networking competitors is small and will remain so. This division's advantage is the provision of a total solution including system design, isochronous (a data flow type used for streaming audio and video) connection or broadband connection sourcing, and custom software connectivity applications that include a comprehensive digital path for cinema, radio and television production transport. However, companies that compete in some portion of the multimedia products and services market targeted by us include Broadcast Supply Worldwide, DigiFon, Out of Hear, Source Elements and Telos Systems.

Government Regulation

Although existing laws governing issues such as property ownership, export or import restrictions, content, taxation, defamation and privacy may apply to Internet based activities, the majority of such laws was adopted before the widespread use and commercialization of the Internet and, as a result, may not contemplate or address the unique issues of the Internet and related technologies.  Laws and regulations directly applicable to providers of Internet and related technologies cover issues such as broadcast license fees, copyrights, privacy, pricing, sales and other taxes and characteristics and quality of Internet services, but are in many instances unclear or unsettled. Furthermore, it is likely that new laws and regulations will be adopted in the United States and elsewhere that may be applicable to us in the above areas as well as the areas of content, network security, encryption and the use of key escrow, data and privacy protection, electronic authentication or "digital" signatures, illegal and harmful content, access charges and retransmission activities. Any new legislation or regulation or increased governmental enforcement of existing regulations may limit the growth of the Internet, increase our cost of doing business or increase our legal exposure, which could have a material adverse effect on our business, financial condition and results of operations.

A number of U.S. federal laws, including those referenced below, impact our business. The Digital Millennium Copyright Act (“DMCA”) is intended, in part, to limit the liability of eligible online service providers for listing or linking to third-party websites that include materials that infringe copyrights or other rights of others. Portions of the Communications Decency Act (“CDA”) are intended to provide statutory protections to online service providers who distribute third-party content. We rely on the protections provided by both the DMCA and the CDA in conducting our business. If these laws or judicial interpretations are changed to narrow their protections, we will be subject to greater risk of liability, our costs of compliance with these regulations or to defend litigation may increase, or our ability to operate certain lines of business may be limited.

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Federal, state and international laws and regulations (including “Red Flag” regulations issued by the U.S. Federal Trade Commission in 2007 to curb identity theft) govern the collection, use, retention, sharing and security of data that we receive from and about our customers (and in some cases, their customers). Any failure, or perceived failure, by us to comply with these laws and regulations could result in proceedings or actions against us by governmental entities or others, which could potentially have an adverse effect on our business. Further, failure or perceived failure by us to comply with these laws and regulations could result in a loss of customer confidence in us which could adversely affect our business. In addition, various federal, state and foreign legislative or regulatory bodies may enact new or additional laws and regulations concerning privacy, data-retention and data-protection issues which could adversely impact our business.

By distributing content over the Internet, we face potential liability for claims based on the nature and content of the materials that we distribute, including claims for defamation, negligence or copyright, patent or trademark infringement, which claims have been brought, and sometimes successfully litigated, against Internet companies.

Certain of our services are conducted primarily over telephone lines, which are heavily regulated by various Federal and other agencies. Although we believe that the responsibility for compliance with those regulations primarily falls on the local and long distance telephone service providers and not us, the Federal Communications Commission (FCC) issued an order in 2008 that requires conference calling companies to remit Universal Service Fund (USF) contribution payments on customer usage associated with audio conference calls. In addition, in 2011 the FCC announced its position that the 2008 order extended to audio bridging services provided using internet protocol (IP) technology and in April 2012 issued a “Further Notice of Proposed Rulemaking” (the “2012 FNPRM”), which if implemented might expand the types of business operations that are considered subject to USF contribution payments.  The 2012 FNPRM sought comments from the public on four major areas: (i) clarifying and modifying the FCC’s rules on what services and service providers must contribute to the fund (ii) whether the FCC should reform the current revenues system or adopt an alternative system, (iii) how to improve administration of the contribution system and (iv) how to improve the contributions methodology with respect to the recovery mechanisms from end users (including changes with respect to our current practice of recovering our USF contributions from our customer end-users through a line-item (surcharge) on our invoices to them).  The period for submitting comments closed on August 6, 2012.  On August 7, 2014 the FCC asked the Federal-State Joint Board on Universal Service to provide its recommendations, on or before April 7, 2015, with respect to the 2012 FNPRM. While we believe that we have registered our operations appropriately with the FCC, including the filing of both quarterly and annual reports regarding the revenues derived from audio conference calling, and the remittance of USF contributions thereon, it is possible that our determination of the extent to which our operations are subject to USF could be challenged or changed. It is also possible we would need to change our pricing structure in order to maintain our current margins, with our ability to do that possibly affected by the related actions of our competitors. However, we do not believe that the ultimate outcome of any such challenge or changes would have a material adverse effect on our financial position or results of operations.

To protect our company from certain claims that may relate to the above matters, we maintain general liability (including umbrella coverage), professional liability and employment practices liability insurance. These insurances may not cover all potential claims of this type or may not be adequate to indemnify us for any liability to which we may be exposed. Any liability not covered by insurance or in excess of insurance coverage could have a material adverse effect on our business, results of operations and financial condition.

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Intellectual Property

Our success depends in part on our ability to protect our intellectual property. To protect our proprietary rights, we rely generally on copyright, trademark and trade secret laws, confidentiality agreements with employees and third parties, and agreements with consultants, vendors and customers, although we have not signed such agreements in every case.

As part of our March 2007 acquisition of Auction Video, a pending United States patent was assigned to us covering certain aspects of uploading live webcam images. We are currently pursuing the final approval of this patent application and in March 2008 retained the law firm of Hunton & Williams to assist in expediting the patent approval process and to help protect rights related to proprietary Onstream technology. In April 2008, we revised the original patent application primarily for the purpose of splitting it into two separate applications, which, while related, were being evaluated separately by the U.S. Patent and Trademark Office (“USPTO”).

With respect to the claims pending in the first of the two applications, the USPTO 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 USPTO on November 22, 2010 and we filed an appeal brief with the USPTO on February 9, 2011. The USPTO filed an Examiner's Answer to the Appeal Brief on May 10, 2011, which repeated many of the previous reasons for rejection, and we filed a response to this filing on July 8, 2011. On July 7, 2014, the USPTO issued a notice setting the hearing on this application before the Patent Trial and Appeal Board on September 18, 2014. As a result of that hearing, which we attended, the Patent Trial and Appeal Board affirmed the Examiner’s rejection in part and reversed the Examiner’s rejection in part on October 27, 2014.  In response, on March 5, 2015 the Examiner issued a new Office Action rejecting the claims.  We conducted an interview with the Examiner on April 9, 2015 and filed a response to the Office Action on May 26, 2015. 

With respect to the claims pending in the second of the two applications, the USPTO issued a non-final rejection in June 2011 (which was reissued in January 2012) and a final rejection in June 2012. With respect to the June 2012 rejection, we filed a pre-appeal brief conference request on September 7, 2012 and the USPTO responded on September 27, 2012 with a decision to proceed to appeal. We filed a Request for Continuing Examination with the USPTO on April 5, 2013, which the USPTO responded to on June 12, 2013 with a non-final rejection. Our response to that non-final rejection was filed on November 12, 2013, which the USPTO responded to on January 10, 2014 with a final rejection. In response to this final rejection, we filed a Notice of Appeal on April 8, 2014 and we filed the related appeal brief on June 9, 2014, which the USPTO responded to with an Examiner’s Answer on September 3, 2014.  On November 3, 2014 we filed a reply brief with the Patent Trial and Appeal Board, where it is awaiting review. 

Regardless of the ultimate outcome, our management has determined that an adverse decision with respect to these patent applications 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.

Despite such protections, a third party could, without authorization, copy or otherwise obtain and use our content. We can give no assurance that our agreements with employees, consultants and others who participate in development activities will not be breached, or that we will have adequate remedies for any breach, or that our trade secrets will not otherwise become known or independently developed by competitors.

We may pursue the registration of certain of our trademarks and service marks in the United States, although we have not secured registration of all our marks. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States, and effective copyright, trademark and trade secret protection may not be available in such jurisdictions. In general, there can be no assurance that our efforts to protect our intellectual property rights through copyright, trademark and trade secret laws will be effective to prevent misappropriation of our content. Our failure or inability to protect our proprietary rights could materially adversely affect our business, financial condition and results of operations.

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Employees

As of May 8, 2015 we had approximately 86 full time employees, of whom 52 were design, production and technical personnel, 16 were sales and marketing personnel and 18 were general, administrative and executive management personnel. None of the employees are covered by a collective bargaining agreement and our management considers relations with our employees to be good.

General

We were formed under the laws of the State of Florida in May 1993.  Our executive offices are located at 1291 SW 29th Avenue, Pompano Beach, Florida 33069. Our telephone number at that location is (954) 917-6655. 

ITEM 2.   PROPERTIES

                We lease:

·             an approximately 16,500 square foot facility at 1291 SW 29th Street in Pompano Beach, Florida, which serves as our corporate headquarters and houses the majority of our webcasting activities.  Our lease, which expired on September 15, 2013, provided for two percent (2%) annual increases, as well as one two-year renewal option, with a three percent (3%) rent increase in year one. We have notified the landlord of our exercise of the renewal option, although the landlord has not yet confirmed that we have met the conditions for such renewal. The current monthly base rental is approximately $21,100 (including sales taxes and our share of property taxes, insurance and other operating expenses incurred under the lease but excluding operating expenses such as electricity paid by us directly).

 

·             an approximately 1,300 square foot facility at 901 Battery Street, Suite 210 in San Francisco, which serves as administrative headquarters for the Smart Encoding division of the Digital Media Services Group, as well as the EDNet division of the Audio and Web Conferencing Services Group, and houses the centralized network hub for electronically bridging affiliate studios. In addition, the facility operates as a backup to Florida for webcasting operations. Our lease expires on September 30, 2018. The monthly base rental is approximately $5,400 (excluding month-to-month parking) with annual increases of approximately 3.0%.

 

·             an approximately 10,800 square foot facility at 100 Morris Avenue in Springfield, New Jersey, which houses the Infinite Conferencing audio and web conferencing operations. Our lease expires on October 31, 2018 and provides one five-year renewal option, with a rent increase of up to 10% but not to exceed fair market value at the time of renewal. The monthly base rental is approximately $17,700.

 

·             business offices located at 545 Fifth Avenue, New York City, New York.  These offices total approximately 1,200 square feet and serve primarily for webcasting sales activities and backup to Florida-based webcasting operations. Our lease expires January 24, 2018 and provides one two-year renewal option at the greater of the fifth year rental or fair market value. The lease also provides for early cancellation at any time after forty-two months, at our option, with notice of no more than nine months and no less than six months plus a cancellation payment of approximately $22,000. The monthly base rental is approximately $8,400 with annual increases up to 2.8%.

 

·             small limited purpose office space in San Diego, California and Colorado Springs, Colorado on short-term leases with remaining maturities of less than one year, as well as equipment space at co-location or other equipment housing facilities in South Florida, Georgia, New Jersey, Colorado, Texas, Iowa and Minnesota.

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ITEM 3.   LEGAL PROCEEDINGS

We are involved in litigation and regulatory investigations of the type arising from time to time in the ordinary course of business. While the ultimate outcome of these matters is not presently determinable, it is the opinion of our management that the resolution of these outstanding claims will not have a material adverse effect on our future financial position or results of operations.

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed for trading on OTC Markets' OTC Pink marketplace ("OTCP"), under the symbol "ONSM."  Effective January 29, 2015, OTC Markets notified us that because we were not current in our reporting obligations with the SEC at that time that they had determined that we did not comply with the OTC Markets' OTCQB marketplace ("OTCQB") eligibility standards as required within 120 days after our fiscal year end date and accordingly the listing of our common stock was moved from OTCQB to OTCP. 

On October 21, 2011, we received a letter from NASDAQ advising us that for the 30 consecutive trading days preceding the date of the notice, the bid price of our common stock had closed below the $1.00 per share minimum bid price required for continued listing on The NASDAQ Capital Market ("NASDAQ"), pursuant to NASDAQ Listing Rule 5550(a)(2)(a) (the “Bid Price Rule”). The letter stated that we would be provided 180 calendar days, or until April 18th, 2012, to regain compliance with the Bid Price Rule, which deadline was subsequently extended on a one-time basis to October 15, 2012. To regain compliance, the closing bid price of our common stock would need to be at least $1.00 per share for a minimum of ten consecutive business days prior to that date. Effective October 22, 2012, our Board of Directors voluntarily decided to move the listing of our common stock from NASDAQ to OTCQB. 

The following table sets forth the high and low closing sale prices for our common stock as reported on NASDAQ, OTCQB or OTCP, as applicable, for the period from October 1, 2012 through May 8, 2015. These prices do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions.

High 

     

Low

FISCAL YEAR 2013
First Quarter $ 0.48 $ 0.27
Second Quarter $ 0.55 $ 0.29
Third Quarter $  0.49 $  0.27
Fourth Quarter $ 0.35 $ 0.26
 
FISCAL YEAR 2014
First Quarter $ 0.30 $ 0.17
Second Quarter $ 0.30 $ 0.18
Third Quarter $  0.24 $ 0.18
Fourth Quarter $ 0.22 $  0.16
 
FISCAL YEAR 2015
First Quarter $ 0.21 $ 0.15
Second Quarter $ 0.21 $ 0.13
Third Quarter (to May 8, 2015) $ 0.21 $ 0.13

On May 8, 2015, the last reported sale price of the common stock on OTCP was $0.20 per share.   As of May 8, 2015 there were approximately 546 shareholders of record of the common stock.

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Dividend Policy

We have never declared or paid any cash dividends on our common stock.  We currently expect to retain future earnings, if any, to finance the growth and development of our business. As of May 8, 2015, there are no preferred shares outstanding.

Recent Sales of Unregistered Securities

During September 2014 we issued 45,000 unregistered common shares for investor relations and financial consulting services valued at approximately $9,000, which will be recognized as professional fees expense over service periods of up to eight months.

During December 2014 we issued 480,000 unregistered common shares for investor relations and financial consulting services valued at approximately $83,000, which will be recognized as professional fees expense over service periods of up to ten months.

All of the above securities were offered and sold without such offers and sales being registered under the Securities Act of 1933, as amended (together with the rules and regulations of the Securities and Exchange Commission (the "SEC") promulgated thereunder, the "Securities Act"), in reliance on exemptions therefrom as provided by Section 4(a)(2) of the Securities Act of 1933, for securities issued in private transactions. The recipients were accredited investors and the certificates evidencing the shares that were issued contained a legend restricting their transferability absent registration under the Securities Act of 1933 or the availability of an applicable exemption therefrom. The purchasers had access to business and financial information concerning our company. Each purchaser represented that he or she was acquiring the shares for investment purposes only, and not with a view towards distribution or resale except in compliance with applicable securities laws.

12



Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth securities authorized for issuance under our 2007 Equity Incentive Plan, individual compensation arrangements and any other compensation plans as of September 30, 2014.

Plan Category

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights

    

Weighted average
exercise price of
outstanding
options, warrants
and rights

    

Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the first column)

 
2007 Equity Incentive Plan (1)

556,185

 

$     1.82

 

566,052 (2)

 

 

 

 

 

Equity compensation plans
approved by shareholders

None

 

None

 

None

 
Equity compensation plans not
approved by shareholders (3)

300,000

 

$     1.50

 

None

(1)   On September 18, 2007, our Board of Directors and a majority of our shareholders adopted the 2007 Equity Incentive Plan (the “Plan”), which authorized the issuance of up to 1,000,000 shares of ONSM common stock pursuant to stock options, stock purchase rights, stock appreciation rights and/or stock awards for employees, directors and consultants. On March 25, 2010, our Board of Directors and a majority of our shareholders approved a 1,000,000 increase in the number of shares authorized for issuance under the Plan, for total authorization of 2,000,000 shares and on June 13, 2011 they authorized a further increase in authorized Plan shares by 2,500,000 to 4,500,000.

(2)   Based on the issuance of 3,377,763 common shares under the Plan (including the 3,000,000 Executive Incentive Shares issued or issuable during fiscal years 2013 and 2014 as discussed in Item 11 – Executive Compensation) through September 30, 2014, 481,185 outstanding employee, consultant and director Plan Options as of September 30, 2014 and 75,000 outstanding financial consultant Plan Options as of September 30, 2014, there were 566,052 shares available for additional issuances under the Plan as of September 30, 2014. After considering the 481,185 outstanding employee, consultant and director Plan Options, and 25,000 of the outstanding financial consultant Plan Options, as of September 30, 2014 that expired without being exercised at various dates through March 2015, there were 1,072,237 shares available for additional issuances under the Plan as of May 8, 2015.

On February 20, 2013, we (as authorized by our Board of Directors) and the Executives agreed to implementation of an executive incentive compensation plan (the “Executive Incentive Plan”). Compensation under the Executive Incentive Plan would be in the form of Fully Restricted (as defined in the Executive Incentive Plan) ONSM common Plan shares (“Executive Incentive Shares”) and is based on the Company achieving certain financial objectives. Accomplishment of the objectives for fiscal 2015 would result in an aggregate of 625,000 Executive Incentive Shares issued to the Executives as a group. A lesser amount of Executive Incentive Shares would be issuable for achievement of only one or two of the three objectives set for that year.

(3)   During the fiscal year ended 2011, we issued Non-Plan options to consultants in exchange for financial consulting and advisory services, 300,000 of which were still outstanding and fully vested as of September 30, 2014, but which expired without being exercised in March 2015.

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ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read together with the information contained in the Consolidated Financial Statements and related Notes included in the annual report.

Overview

We are a leading online service provider of live and on-demand corporate audio and web communications, virtual event technology and social media marketing, provided primarily to corporate (including large as well as small to medium sized businesses), education and government customers.  We had approximately 86 full time employees as of May 8, 2015, with operations organized in two main operating groups:

·         Audio and Web Conferencing Services Group

·         Digital Media Services Group

Our Audio and Web Conferencing Services Group consists of our Infinite Conferencing (“Infinite”) division, our Onstream Conferencing Corporation (“OCC”) division and our EDNet division. Our Infinite division, which operates primarily from the New York City area, and our OCC division, which operates primarily from San Diego, California, provide “reservationless” and operator-assisted audio and web conferencing services. Our EDNet division, which operates primarily from San Francisco, California, provides connectivity (in the form of high quality audio, 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.

Our Digital Media Services Group consists primarily of our Webcasting division and our DMSP (“Digital Media Services Platform”) division. The DMSP division includes the related UGC (“User Generated Content”) and Smart Encoding divisions. Our Webcasting division, which operates primarily from Pompano Beach, Florida and has a sales and support facility in New York City, provides an array of corporate-oriented, web-based media services to the corporate market including live audio and video webcasting and on-demand audio and video streaming for any business, government or educational entity.  As of October 1, 2013, the Webcasting division became responsible for sales of the MarketPlace365 service. Our DMSP division, which operates primarily from Colorado Springs, Colorado, provides an online, subscription based service that includes access to enabling technologies and features for our clients to acquire, store, index, secure, manage, distribute and transform these digital assets into saleable commodities. Our UGC division, which also operates as Auction Video and operates primarily from Colorado Springs, Colorado, provides a video ingestion and flash encoder that can be used by our clients on a stand-alone basis or in conjunction with the DMSP. Our Smart Encoding division, which operates primarily from San Francisco, California, provides both automated and manual encoding and editorial services for processing digital media. This division also provides hosting, storage and streaming services for digital media, which are provided via the DMSP.

For segment information related to the revenue and operating income of these groups, see Note 7 to the Consolidated Financial Statements.

Recent Developments

As of September 30, 2014 we were obligated to Sigma Opportunity Fund II, LLC (“Sigma”) for principal and accrued interest aggregating $1,539,340. After our December 31, 2014 payment to Sigma of all accrued interest through that date, plus regular monthly interest payments after that date, but no principal payments, we are currently obligated to Sigma under an outstanding secured note for $1,358,000, with interest payable monthly at 21% per annum and the principal due on October 15, 2015 (the “New Sigma Note”).  In the event of our default on the New Sigma Note, on or before the maturity date, the outstanding balance, including accrued interest, is convertible into our common shares at a price of $0.30 per common share. An April 30, 2015 financing agreement with Sigma provides that if our SEC filings are current and the auditor’s report given in connection with the 2014 Form 10-K does not contain a going concern qualification, and Sigma, at its own and sole discretion, has determined that there has been no adverse change in our business since September 30, 2013 (other than items disclosed as specified), Sigma will loan us an additional $200,000 (net), to be used for the repayment of certain of the Working Capital Notes. See Liquidity and Capital Resources for further details with respect to our financing transactions with Sigma.

14


On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale of a defined subset of Infinite Conferencing’s (“Infinite’) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). The Sold Accounts represent historical annual revenues of approximately $1.35 million. The proceeds from this sale were used by us to pay (i) approximately $311,000 of outstanding principal and approximately $136,000 of accrued interest on certain notes payable and (ii) approximately $62,000 for all legal fees related to this transaction for which we were obligated. The remaining proceeds were used for fee obligations under the New Sigma Note and for other operating expenses. Also, as a result of the reduction of our eligible accounts receivable arising from this sale, we expect the borrowing availability under our credit line with Thermo Credit LLC will decrease by up to approximately $155,000, which depending on other transactions affecting our eligible accounts receivable, may result in additional payments by us to reduce the outstanding principal balance of that credit line. See Liquidity and Capital Resources for the details of this and related transactions.

On April 30, 2015, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. 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 March 1, 2016 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status.

On July 29, 2014, we entered into a settlement agreement with respect to litigation with Intella2 and its owner, Paul Cohen, that commenced in November 2013 in connection with our November 2012 acquisition of Intella2’s operations, and on August 4, 2014, the lawsuit was dismissed with prejudice by the court. Under the terms of the settlement agreement, we agreed to transfer all free conferencing customers and all associated revenues and expenses to Mr. Cohen, effective July 1, 2014. Based on the litigation settlement, we reduced the approximately $782,000 estimated liability for the unpaid portion of the purchase price to the $38,000 we ultimately paid under the settlement (in cash and equipment), which resulted in our recognition of other income of approximately $744,000 for the year ended September 30, 2014.

Revenue Recognition

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

Our Audio and Web Conferencing Services Group recognizes revenue from audio and web conferencing as well as customer usage of digital network connections.

15


The Infinite and OCC divisions generally charge for audio conferencing and web conferencing services on a per-minute usage rate, although webconferencing services are also available for a monthly subscription fee allowing a certain level of usage. Audio conferencing and web conferencing revenue is recognized based on the timing of the customer’s use of those services. The EDNet division primarily generates revenue from customer usage of digital network connections. EDNet purchases the rights to access digital network connections from national communications companies and resells such access to its customers for a fixed monthly fee plus separate per-minute usage charges. Network usage and bridging (managed transcoding and multipoint sessions) revenue is recognized based on the timing of the customer’s usage of those services.

Our Digital Media Services Group recognizes revenues from the acquisition, editing, transcoding, indexing, storage and distribution of its customers’ digital media, as well as from live and on-demand internet webcasting and internet distribution of travel information.

The Webcasting division charges for live and on-demand webcasting at the time an event is accessible for streaming over the Internet. Charges to customers by the DMSP division are generally based on a monthly subscription fee, as well as charges for hosting, storage and professional services. Fees charged to customers for customized applications or set-up are recognized as revenue at the time the application or set-up is completed. Charges to customers by the Smart Encoding and UGC divisions are generally based on the activity or volumes of such media, expressed in megabytes or similar terms, and are recognized at the time the service is performed. This division also provides hosting, storage and streaming services for digital media, which are provided via the DMSP.

We include the DMSP and UGC divisions’ revenues, along with the Smart Encoding division’s revenues from hosting, storage and streaming, in the DMSP and Hosting revenue caption. We include the EDNet division’s revenues from equipment sales and rentals and the Smart Encoding division’s revenues from encoding and editorial services in the Other Revenue caption.

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

Results of Operations

Our consolidated net loss for the year ended September 30, 2014 was approximately $1.7 million ($0.07 loss per share) as compared to a net loss of approximately $7.2 million ($0.39 loss per share) for the prior fiscal year, a decrease in our net loss of approximately $5.5 million (76.9%). The decreased net loss was primarily due to an approximately $3.2 million aggregate decrease in impairment losses on goodwill and property and equipment recognized in fiscal 2013, versus no corresponding amounts recognized in fiscal 2014 and an approximately $1.8 million, or 18.8%, decrease in compensation, including compensation paid with equity, as compared to the prior fiscal year, as the fiscal 2013 compensation expense included the expense for initial share issuances under the Executive Incentive Plan partially made for service previous to fiscal 2013.

16


Year ended September 30, 2014 compared to the year ended September 30, 2013 - The following table shows, for the periods indicated, the percentage of revenue represented by items on our consolidated statements of operations.

 

  Years ended September 30,

 

2014

  

2013

Revenue:

 

 

    Audio and web conferencing

         56.0%

         53.0%

    Webcasting

      26.6

       28.8

    Network usage

      11.0

      11.3

    DMSP and hosting

    5.5

    5.6

    Other

        0.9

        1.3

Total revenue

    100.0%  

    100.0

 

 

 

Costs of revenue:

 

 

    Audio and web conferencing

         14.8%

        14.6%

    Webcasting

        7.1

       7.9

    Network usage

        4.8

       5.5

    DMSP and hosting

    1.0

   0.8

    Other

        0.2

       0.4

Total costs of revenue

     27.9%

     29.2

 

 

 

Gross margin

      72.1

    70.8%

 

 

 

Operating expenses:

 

 

    Compensation (excluding equity)

      42.6% 

      46.2% 

    Compensation (paid with equity)

    3.4

     9.5 

    Professional fees

        8.0

        6.9

    Other general and administrative

      13.6

      14.8

    Impairment loss on goodwill

          -

      12.8

    Impairment loss on property and equipment

          -

        5.8

    Depreciation and amortization

        5.6

        7.4

Total operating expenses

        73.2%

      103.4%

  

 

 

Loss from operations

         (1.1)%

       (32.6)%

 

 

 

Other expense, net:

 

 

    Interest expense

    (12.3)%

      (8.2)%

    Debt extinguishment loss

   (0.8)

   (0.8) 

    Gain from litigation settlement

              4.4

         -

Total other expense, net

        (8.7)%

        (9.0)%

 

 

 

Net loss

        (9.8)%

       (41.6)% 

17


The following table is presented to illustrate our discussion and analysis of our results of operations.  This table should be read in conjunction with the consolidated financial statements and the notes thereto.


 

For the years ended
 September 30,

  

Increase (Decrease)

 

2014

  

2013

 

Amount

  

Percent

 

 

 

 

 

Total revenue

$

   16,933,194 

 

$

    17,217,998 

 

$

      (284,804)

 

 (1.7)%

Total costs of revenue

 

        4,722,221 

 

 

      5,029,377 

 

 

         (307,156

 

 

(6.1)   

Gross margin

 

      12,210,973 

 

 

      12,188,621 

 

 

            22,352 

 

 

0.2

 

 

 

 

 

General and administrative expenses

11,435,174 

 

 

13,332,513 

 

 

(1,897,339) 

 

 

(14.2)%

Impairment loss on goodwill

2,200,000 

(2,200,000) 

       (100.0)    

Impairment loss on property and equipment

1,000,000 

(1,000,000) 

(100.0)    

Depreciation and amortization

 

           956,027 

 

      1,274,168 

 

       (318,141

 

 (25.0)    

Total operating expenses

 

      12,391,201 

 

    17,806,681 

 

    (5,415,480) 

 

  (30.4)%

 

 

 

 

 

Loss from operations

(180,228)

(5,618,060) 

     (5,437,832) 

(96.8)%

 

 

 

 

 

Other expense, net

 

     (1,477,927)

 

    (1,551,442)

 

( 73,515) 

 

  (4.7)    

 

 

 

 

 

Net loss

$

   (1,658,155)

$

  (7,169,502)

$

(5,511,347) 

 

 (76.9)%

Revenues and Gross Margin

Consolidated operating revenue was approximately $16.9 million for the year ended September 30, 2014, a decrease of approximately $285,000 (1.7%) from the prior fiscal year, due to decreased revenues of the Digital Media Services Group, partially offset by increased revenues of the Audio and Web Conferencing Services Group.

Digital Media Services Group revenues were approximately $5.5 million for the year ended September 30, 2014, a decrease of approximately $513,000 (8.5%) from the prior fiscal year, primarily due to a decrease in webcasting division revenues.

Webcasting division revenues decreased by approximately $455,000 (9.2%) for the year ended September 30, 2014 as compared to the prior fiscal year. We produced approximately 3,900 webcasts during the year ended September 30, 2014, which was approximately 900, or 18.8%, less than the number of webcasts produced in the prior fiscal year. The impact on revenue arising from the decreased number of events was partially offset by an increase in the average revenue per webcast event to $1,222 for the year ended September 30, 2014, which represented an increase of $152, or 14.2%, from the prior fiscal year. The number of webcasts reported, as well as the resulting calculation of the average revenue per webcast event, does not include any webcast events attributed with $100 or less revenue, based on our determination that excluding such low-priced or even no-charge events increases the usefulness of this statistic. The average revenue per webcast also includes revenue billed by the webcasting division to its customers but purchased by the webcasting division from another Onstream division and thus included in that other division’s reported revenues.

We believe that our webcasting division revenues will be favorably impacted during fiscal 2015 by the effect of new products as well as improvements to existing products as well as increased sales to government entities. New and improved products include (i) a comprehensive update to our Visual Webcaster webcasting platform (VW4), which we released in January 2013 and have been updating with new features since then, (ii) our Virtual Conference Center which is a multiple event conference venue with integrated webcasting (and based on our MP365 technology), (iii) iEncode, a service that allows our customers to self-encode their live professional video and attach the streams to the Visual Webcaster system in the cloud, allowing our customers to take advantage of using their internal staff and facilities while still utilizing all of the Visual Webcaster features and (iv) a “do it yourself” large audience webcasting product currently in development that can be run from the customer’s desktop and will be available on a fixed cost monthly subscription basis that can be purchased on-line.

18


Audio and Web Conferencing Services Group revenues were approximately $11.4 million for the year ended September 30, 2014, an increase of approximately $229,000 (2.0%) from the prior fiscal year. This increase arose primarily from the revenues of the Infinite division of approximately $8.5 million for the year ended September 30, 2014, which represented an increase of approximately $437,000 (5.4%) as compared to the prior fiscal year. This was in turn due to a 12.4% increase in the number of minutes billed which was approximately 148.2 million for the year ended September 30, 2014, as compared to approximately 131.8 million minutes for the prior fiscal year.  This increase in the number of minutes billed was partially offset by a decrease in average revenue per minute, which was approximately 6.0 cents for the year ended September 30, 2014, as compared to approximately 6.3 cents for the prior fiscal year. The average revenue per minute statistic includes auxiliary services and fees that are not billed to the customer on a per minute basis. The average revenue per minute also includes revenue billed by Infinite to its customers but purchased by Infinite from another Onstream division and thus included in that other division’s reported revenues. Although the decrease in average revenue per minute reflects our reactions to competitive pressures on the pricing side, we have been able to reduce our costs for the same reason.

We believe that Infinite’s alliances with existing and new third party conferencing providers, anticipated internal software development and other sales and marketing initiatives, should continue to favorably impact Infinite division revenues during fiscal 2015.

The revenues of our OCC division, which is included in the Audio and Web Conferencing Services Group, were approximately $1.0 million for the year ended September 30, 2014, which represented a decrease of approximately $70,000 (6.5%) as compared to the prior fiscal year. The OCC division is being managed by our Infinite Conferencing division, which specializes in audio and web conferencing. The OCC division acquired Intella2 Inc., a San Diego-based communications company (“Intella2”) on November 30, 2012. Accordingly, twelve months of Intella2 revenues were recognized during the year ended September 30, 2014 versus just ten months of Intella2 revenues during the prior fiscal year. The Intella2 acquisition included a list of over 2,500 customers as well as software licenses, equipment and network infrastructure and a non-compete. The service capabilities acquired from Intella2 include audio conferencing, web conferencing, text messaging, and voicemail.

The OCC division revenues included approximately $172,000 of free conferencing business revenues for the year ended September 30, 2014, as compared to approximately $225,000 for the prior fiscal year. Since November 2013, we have been involved in litigation with Intella2 and its owner, Paul Cohen, in connection with the Intella2 acquisition. On July 29, 2014, the parties entered into a settlement agreement and on August 4, 2014, the lawsuit was dismissed with prejudice by the court. Under the terms of the settlement agreement, we agreed to transfer all free conferencing customers and all associated revenues and expenses to Mr. Cohen, effective July 1, 2014.

Based on information compiled thus far, our revenues for the first six months of fiscal 2015 are expected to be approximately equal to the revenues for the corresponding fiscal 2014 period. However, primarily because of our expectations with respect to our recent and anticipated introductions of several new or enhanced products, we expect to achieve revenue growth during the remainder of fiscal 2015, as compared to the corresponding prior year period, although this cannot be assured. The preceding statements are before considering the impact on our reported revenues, if any, related to our March 2015 sale of certain of Infinite’s audio conferencing customer accounts to a third party, representing historical annual revenues of approximately $1.35 million and as discussed in more detail under Liquidity and Capital Resources below.

19


Consolidated gross margin was approximately $12.2 million for the year ended September 30, 2014, an increase of approximately $22,000 (0.2%) from the prior fiscal year. However, our consolidated gross margin percentage was 72.1% for the year ended September 30, 2014, versus 70.8% for the prior fiscal year. This increase in percentage was primarily due to a reduction in network usage cost of sales (proportionally greater than the reduction in revenues) and a reduction in audio and web conferencing cost of sales, in absolute dollars, even though audio and web conferencing revenues increased.

Effective June 2014, we renegotiated a supplier contract representing approximately $263,000 in annualized savings, which we expect will reduce our cost of sales by approximately $202,000 in aggregate for the first eight months of fiscal 2015 as compared to the corresponding prior year period. Effective June 2015, we again renegotiated the same supplier contract representing approximately $220,000 in annualized savings, which we expect will reduce our cost of sales by approximately $73,000 in aggregate for the last four months of fiscal 2015 as compared to the corresponding prior year period.

Primarily because of these anticipated cost savings as well as our expectations for revenue growth arising from our recent and anticipated introductions of several new or enhanced products, we expect our consolidated fiscal 2015 gross margin will exceed our consolidated fiscal 2014 gross margin, although this cannot be assured. The preceding statement is before considering the impact on our reported revenues, if any, related to our March 2015 sale of certain of Infinite’s audio conferencing customer accounts to a third party, representing historical annual revenues of approximately $1.35 million and as discussed in more detail under Liquidity and Capital Resources below.

Operating Expenses

Consolidated operating expenses were approximately $12.4 million for the year ended September 30, 2014, a decrease of approximately $5.4 million (30.4%) from the prior fiscal year, primarily due to an approximately $3.2 million aggregate decrease in impairment losses on goodwill and property and equipment recognized in fiscal 2013, versus no corresponding amounts recognized in fiscal 2014 and an approximately $1.8 million, or 18.8%, decrease in compensation, including compensation paid with equity, as compared to the prior fiscal year. This decrease in total compensation was comprised of an approximately $1.1 million, or 64.9%, decrease in compensation paid with equity, and an approximately $737,000, or 9.3%, decrease in compensation other than amounts paid with equity, both as compared to the prior fiscal year.

The $3.2 million aggregate impairment losses on goodwill and property and equipment recognized in fiscal 2013 was comprised of a $2.2 million impairment loss on goodwill and a $1.0 million impairment loss on property and equipment. The $2.2 million impairment loss on goodwill is discussed in detail under Critical Accounting Policies and Estimates below. With respect to the $1.0 million impairment loss on property and equipment, as of September 30, 2013 we had capitalized as part of other internal use software approximately $1.5 million of employee compensation and payments to contract programmers for development of the MP365 platform. Based on the very limited revenues from MP365 during the year ended September 30, 2013, as well as our decisions that as of September 30, 2013 future development of MP365 would be very limited and that the MP365 division would be discontinued, with MP365 becoming a product offered by the webcasting division, we determined that it would be appropriate to evaluate the remaining carrying value of the former MP365 division’s assets, primarily the unamortized software development costs, for impairment. We performed such an analysis by comparing the carrying value of those assets to the projected undiscounted future cash flows from the MP365 product, as prescribed by applicable accounting literature for evaluating impairment of a depreciable asset with a fixed life. As a result of our analysis, we recognized a net impairment loss of $1.0 million for the year ended September 30, 2013, resulting from our write-off of approximately $1.5 million of capitalized development costs having a net book value of approximately $1.0 million net of the accumulated depreciation of those costs prior to the write-off. After the recognition of the impairment loss, the carrying cost of the MP365 capitalized internal software was reduced to approximately $13,000, which was depreciated over the twelve months ending September 30, 2014.

In February 2013, we (as authorized by our Board of Directors) established an Executive Incentive Plan, under which the five Executives could receive fully restricted (as defined in the Executive Incentive Plan) common shares (“Executive Incentive Shares”), issued based on the Company achieving certain financial objectives (as defined in the Executive Incentive Plan). The non-cash compensation expense recognized by us related to the Executive Incentive Shares issued during fiscal 2014 was approximately $97,500 versus the expense related to the Executive Incentive Shares issued during fiscal 2013 of approximately $1.2 million, representing a net decrease of approximately $1.1 million in fiscal 2014 as compared to fiscal 2013. These issuances are detailed as follows:

o    In February 2013, the initial issuance authorized under the Executive Incentive Plan was an aggregate of 2,250,000 Executive Incentive Shares, which were issued in connection with meeting certain financial objectives related to fiscal 2011 and fiscal 2012 as well as earned compensation for past service and in recognition that all options previously held by, or promised to, the Executives had been cancelled. These 2,250,000 Executive Incentive Shares were recorded on our financial statements based on their fair value at the time of the February 2013 authorization, which was $1,237,500 (based on $0.55 per share), less the approximately $100,000 Black-Scholes value of the cancelled stock options as calculated immediately before their cancellation, for a net expense of approximately $1,137,000. In September 2013, the Executives as a group were issued an aggregate of 250,000 Executive Incentive Shares for meeting one of the fiscal 2013 objectives - achieving positive EBITDA, as adjusted, for at least two quarters of fiscal 2013. Accordingly, those shares were recorded on our financial statements and reflected as non-cash compensation expense of $77,500 for the year ended September 30, 2013, based on their fair value of $0.31 per share as of August 9, 2013, the date it was conclusively determined that the objective had been met and the shares had been earned.

o    With respect to fiscal 2014, the Executives have earned an aggregate of 500,000 Executive Incentive Shares for meeting the objective of achieving positive EBITDA, as adjusted, for at least two quarters as well as meeting the objective of achieving positive operating cash flow (as defined in the Executive Incentive Plan) for fiscal 2014. Accordingly, those 500,000 shares have been recorded on our financial statements and reflected as non-cash compensation expense of $97,500 for the year ended September 30, 2014 (the term of service) based on (i) the fair value of 250,000 shares at $0.21 per share as of May 20, 2014, the date it was conclusively determined that the EBITDA objective had been met and the shares had been earned plus (ii) the fair value of 250,000 shares at $0.18 per share as of May 8, 2015, the date it was conclusively determined that it was probable the cash flow objective would be met and the shares would be earned.

20


During the period from June 2013 through January 2014 we made certain headcount reductions representing approximately $1.0 million in annualized savings, which accounted for an approximately $711,000 reduction in cash compensation expense for the year ended September 30, 2014, as compared to the corresponding prior year period. We expect these headcount reductions will also reduce our compensation expenditures by approximately $159,000 in aggregate for the first seven months of fiscal 2015 as compared to the corresponding prior year period.

Professional fee expenses were approximately $1.3 million for the year ended September 30, 2014, an increase of approximately $154,000 (12.9%) from the prior fiscal year, primarily due to legal fees related to the Intella2 litigation in fiscal 2014 as well as legal and consulting expenses associated with certain other one-time financing and business development projects undertaken by us in fiscal 2014. While it is possible that there could be other litigation or financing and business development projects during fiscal 2015, we currently expect such professional fees expenses for fiscal 2015 to be less than the corresponding prior year amounts.

Excluding the impact, if any, arising from any goodwill impairment charges, as well as increased general and administrative expenses related to any increased revenues, we expect our consolidated operating expenses for fiscal 2015 to be less than the corresponding prior year amounts, although this cannot be assured.

Other Expense

Other expense of approximately $1.5 million for the year ended September 30, 2014 represented an approximately $74,000 (4.7%) decrease as compared to the prior fiscal year. This decrease was primarily due to an approximately $744,000 gain from litigation settlement, for which there was no comparable transaction in the prior fiscal year, partially offset by an approximately $679,000, or 48.1%, increase in interest expense for the year ended September 30, 2014, as compared to the prior fiscal year.

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On July 29, 2014, we entered into a settlement agreement with respect to litigation with Intella2 and its owner, Paul Cohen, that commenced in November 2013 in connection with our November 2012 acquisition of Intella2’s operations, and on August 4, 2014, the lawsuit was dismissed with prejudice by the court. Under the terms of the settlement agreement, we transferred all free conferencing customers and all associated revenues and expenses to Mr. Cohen, effective July 1, 2014, and we also paid him $20,000 ($10,000 per month in July and August) with respect to such activity before July 1, 2014. We also transferred certain computer equipment already owned by us and used to support the free conferencing business, with an estimated net book value of $14,000, to Mr. Cohen and incurred other transition expenses of approximately $4,000. No further purchase price or other amounts will be payable by us under the agreements entered into at the time of the November 2012 acquisition. Based on the litigation settlement, we reduced the approximately $782,000 estimated liability for the unpaid portion of the purchase price to the $38,000 we ultimately paid under the settlement (in cash and equipment), which resulted in our recognition of other income of approximately $744,000 for the year ended September 30, 2014.

The approximately $679,000 increase in interest expense was primarily attributable to (i) an approximately $309,000 increase for the aggregate of cash and non-cash interest expense recognized for Sigma Note 1 (which was initially funded in March 2013 and funded additionally in June 2013), which was approximately $542,000 for the year ended September 30, 2014 and approximately $233,000 for the prior fiscal year and (ii) approximately $341,000 for the aggregate of cash and non-cash interest expense recognized during the year ended September 30, 2014 for Sigma Note 2 (which was funded in February 2014) and for which we recognized no interest expense during the prior fiscal year.

Liquidity and Capital Resources

For the year ended September 30, 2014, we had a net loss of approximately $1.7 million, although cash provided by operating activities for that period was approximately $457,000. Although we had cash of approximately $389,000 at September 30, 2014, we had a working capital deficit of approximately $3.9 million at that date.

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. Borrowings under the Line are subject to certain formulas with respect to the amount and aging of the underlying receivables. The outstanding balance (approximately $1.7 million as of September 30, 2014 and as of May 8, 2015) bears interest at 12.0% per annum, adjustable based on changes in prime, plus a weekly monitoring fee of one twentieth of a percent (0.05%) of the borrowing limit.

Although the Line expired on December 27, 2013, on January 13, 2014 we received a letter from the Lender confirming that they would renew the Line through December 31, 2015, with terms materially equivalent to the expired Line. Those terms include a commitment fee calculated as one percent (1%) per year of the maximum allowable borrowing amount and paid in annual installments. However, pending the formal renewal of the Line, the fee was only paid on an annual basis through December 27, 2013, as we agreed in August 2014 to pay a commitment fee calculated on a pro-rata basis for eight months payable August 31, 2014 and a pro-rata monthly commitment fee thereafter.

The terms of the Line require that all funds remitted by our customers in payment of 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. The delay in the formal renewal of the Line is primarily related to discussions between the Lender and us as to how these direct deposit provisions could be implemented and administered in a mutually acceptable manner.

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

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”). The Covenant requires that the sum of (i) our net income or loss, adjusted to remove all non-cash expenses as well as cash interest expense and (ii) contributions to capital (less cash distributions and/or cash dividends paid during such period) and proceeds from subordinated unsecured debt, be equal to or greater than the sum of cash payments for interest and debt principal payments. We have complied with this Covenant for all applicable quarters through September 30, 2014.

As discussed below, in March 2015 we sold certain of Infinite’s audio conferencing customer accounts to a third party, representing historical annual revenues of approximately $1.35 million. As a result of the reduction of our eligible accounts receivable arising from this sale, we expect the borrowing availability under our credit line with Thermo Credit LLC will decrease by up to approximately $155,000, which depending on other transactions affecting our eligible accounts receivable, may result in additional payments by us to reduce the outstanding principal balance of that credit line.

On March 21, 2013 we closed our initial transaction with Sigma Opportunity Fund II, LLC (“Sigma”), under which we received $600,000 pursuant to a senior secured note collateralized by all of our assets, subordinated only to security interests already held in connection with outstanding financings with Thermo Credit and Rockridge (“Sigma Note 1”). On June 14, 2013, Sigma Note 1 was amended for our receipt of immediate additional funding of $345,000. On February 28, 2014, Sigma Note 1 was further amended so that interest would continue to accrue at 17% per annum but the monthly principal and interest payments otherwise due on Sigma Note 1, starting with the December 31, 2013 payment and ending with the September 30, 2014 payment, were eliminated and replaced with monthly principal and interest payments on the last day of October and November 2014 plus a final principal and interest payment on the December 18, 2014 maturity date of Sigma Note 1. We completed another transaction with Sigma on February 28, 2014, under which we borrowed $500,000 pursuant to a senior secured note having the same collateral and payment priority as Sigma Note 1 (“Sigma Note 2”). The $500,000 principal, plus $59,447 interest (based on 17% per annum compounding monthly), was due on October 31, 2014. As part of a September 15, 2014 agreement with Sigma, the above principal and interest payments, totaling $1,581,870 for Sigma Notes 1 and 2, were replaced by our agreement to pay Sigma an approximate total of $1,605,693 on December 31, 2014, which total included interest accrued through that date.

Including the value of the common stock issued as part of the above transactions plus the amount of cash paid for related financing fees and expenses, the effective interest rates for Sigma Note 1 ranged from approximately 56% to 66% per annum, and for Sigma Note 2 ranged from approximately 66% to 115% per annum, from the inception of the respective notes through September 30, 2014.

On December 31, 2014, we entered into an agreement with Sigma whereby we paid Sigma approximately $248,000 accrued interest on Sigma Notes 1 and 2, which were then cancelled and replaced with a new note payable to Sigma in the principal amount of $1,358,000 (the “New Sigma Note”) and having a maturity date of October 15, 2015 (after giving effect to an April 30, 2015 agreement with Sigma). The New Sigma Note earns interest at 21% per annum until paid, which interest is payable in cash monthly. The collateral and payment priority for the New Sigma Note are unchanged from Sigma Notes 1 and 2. After October 15, 2015, Sigma shall have the right to convert the New Sigma Note (including the accrued interest thereon), in its entirety or partially, and at its option, into our common shares at a price of $0.30 per share and such conversion right is also exercisable before October 15, 2015, but only if (i) we are in default on the New Sigma Note or (ii) we are sold.

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The April 30, 2015 agreement with Sigma provides that if we file our September 30, 2014 Form 10-K with the SEC on or before June 30, 2015 and the auditor’s report given in connection with the September 30, 2014 Form 10-K does not contain a going concern qualification, and Sigma, at its own and sole discretion, has determined that there has been no adverse change in our business since September 30, 2013 (other than items disclosed in our June 30, 2014 Form 10-Q and/or updates in a schedule to the April 30, 2015 financing agreement), Sigma will loan us an additional $225,000 ($200,000 net cash to us, after deducting a $25,000 fee for such loan) (the “Additional Sigma Loan”), which will be payable on the same terms as the New Sigma Note. The April 30, 2015 financing agreement provides that the proceeds of the Additional Sigma Loan will be used for the repayment of certain of the Working Capital Notes, as discussed below in this note 4. Notwithstanding the foregoing, in no event shall Sigma be required to make the Additional Sigma Loan if we are not current in all of our SEC filings at the time of them making the Additional Loan, including, without limitation, our annual reports on Form 10-K and quarterly reports on Form 10-Q.  Our September 30, 2014 Form 10-K was filed with the SEC on June 12, 2015 and the related auditor’s report had no going concern qualification. However, our December 31, 2014 10-Q, due on February 14, 2015 and our March 31, 2015 10-Q, due on May 14, 2015, have not been filed as of June 12, 2015.

In connection with an Advisory Services Agreement dated December 31, 2014, entered into by us with Sigma Capital in connection with the issuance of the New Sigma Note, we (i) paid Sigma Capital an initial advisory fee of $100,000, (ii) issued 70,000 restricted common shares to Sigma and 30,000 restricted common shares to Sigma Capital, (iii) paid Sigma approximately $20,000 as reimbursement of legal expenses and (iv) agreed to make additional advisory fee payments to Sigma Capital totaling $160,000 in monthly installments through June 30, 2015. As part of the April 30, 2015 agreement with Sigma we (i) paid Sigma Capital a $25,000 transaction fee, (ii) paid Sigma $14,000 as reimbursement of legal expenses and (iii) agreed to make additional advisory fee payments to Sigma Capital totaling $40,000 in monthly installments from July 15, 2015 through October 15, 2015. We also agreed that in the event the Additional Sigma Loan discussed above is made we will pay Sigma Capital a $25,000 transaction fee and an additional $2,500 per month advisory fee, commencing from the date of the Additional Sigma Loan.

The April 30, 2015 Agreement also requires us to pay liquidated damages for late SEC filings. We paid Sigma Capital  an aggregate of $17,500 for such damages through June 12, 2015 and have agreed that if we have not filed all required reports with the SEC on or before July 27, 2015 (the “SEC Reporting Date”) we shall pay additional damages of (i) $7,500 on each of the SEC Reporting Date and the one month anniversary of the SEC Reporting Date, (ii) $10,000 on each of the two month and three month anniversaries of the SEC Reporting Date, (iii) $15,000 on each of the four month and five month anniversaries of the SEC Reporting Date and (iv) $25,000 on each monthly anniversary of the SEC Reporting Date commencing on the six month anniversary of the SEC Reporting Date until we are current in all of our SEC filings, or all outstanding amounts under the New Sigma Note are repaid in full, whichever occurs first.

Upon our receipt of funds as a result of (i) the sale of any portion of our business, however structured, including, without limitation, sale of assets, subsidiaries, revenues or business units, and/or (ii) the issuance of additional equity, debt or convertible debt capital, and/or (iii) our consolidation or merger with or into another entity, all outstanding principal and interest with respect to the New Sigma Note will be due, but not to exceed the net proceeds of such funds received by us in any such transaction(s).

As of September 30, 2014 and as of May 8, 2015, we were obligated for an outstanding balance of $400,000 on a secured convertible note payable (the “Rockridge Note”) to Rockridge Capital Holdings LLC (“Rockridge”), with interest payable monthly at 12% per annum. On September 10, 2014, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from October 15, 2014 to December 31, 2014, in exchange for our agreement to increase the origination fee payable under such note by 25,000 restricted common shares. On December 31, 2014, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from December 31, 2014 to June 30, 2015, in exchange for our agreement to increase the origination fee payable under such note by 50,000 restricted common shares. On April 30, 2015, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from June 30, 2015 to October 15, 2015, in exchange for our agreement to increase the origination fee payable under such note by 30,000 restricted common shares.

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In connection with the New Sigma Note, as amended, an agreement was executed between Sigma and Rockridge, which included Rockridge’s agreement (along with our agreement) that Sigma has the right, but not the obligation, to repay the Rockridge Note at face value at any point after October 15, 2015, and always in case of our default on the New Sigma Note or the Rockridge Note, with such repayment being added to the principal of the New Sigma Note, accruing interest at 21% per annum payable monthly and the principal being due on the New Sigma Note maturity date. Furthermore, the fees payable to Sigma in the event of such repayment would be $25,000 cash payable upon such early repayment plus $4,000 per month starting from the one-month anniversary of such repayment date through October 15, 2015, up to a maximum of $45,000 in total fees.

The Rockridge Note is secured by a first priority lien on all of our  assets, such lien subordinated only to the extent higher priority liens on assets, primarily accounts receivable and certain designated software and equipment, are held by certain of our other lenders. We also entered into a Security Agreement with Rockridge that contains certain covenants and other restrictions with respect to the collateral.

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

The Note and Stock Purchase Agreement with Rockridge calls for our issuance of an origination fee, upon not less than sixty-one (61) days written notice to us, of 696,667 restricted shares of our common stock (the “Shares”), which includes the increases noted above. The value of those Shares is subject to a limited guaranty of no more than an additional payment by us of $75,000 which will be effective in the event the Shares are sold for an average share price less than the minimum of $1.20 per share (the “Shortfall Payment”). If the closing ONSM share price of $0.20 per share on May 8, 2015 was used as a basis of calculation, the required Shortfall Payment would be $75,000, which is equal to the liability reflected on our financial statements as of September 30, 2014.

Including the fair market value of the Shares at the time they were recorded on our books, plus legal fees paid by us, the effective interest rate of the Rockridge Note was approximately 44.3% per annum, until a September 2009 amendment, when it was reduced to approximately 28.0% per annum, a December 2012 amendment, when it was increased to approximately 29.1% per annum, and the accrual of the Shortfall Payment, which increased it to approximately 31.1% per annum. Effective February 28, 2014, as a result of the inclusion of the remaining unamortized discount in a debt extinguishment loss, the effective rate was reduced to approximately 12% 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 the Shortfall Payment, as compared to the recorded value of the Shares on our books, nor do they give effect to the variance between the conversion price versus market prices that might be applicable if any portion of the principal is satisfied with common shares issued upon conversion instead of cash.

As of September 30, 2014, we were obligated for $200,000 under an unsecured subordinated note issued on March 19, 2013 to Fuse Capital LLC (“Fuse”) (the “Fuse Note”). The Fuse Note, which is convertible into restricted common shares at Fuse’s option using a rate of $0.50 per share, was payable on March 19, 2015, with interest at 12% per annum payable on a monthly basis. Effective February 28, 2015 the Fuse Note was amended, extending the maturity date to March 1, 2016. This amendment also provides that interest would be paid quarterly, commencing June 30, 2015 and also increases the outstanding principal balance to $220,000, for the effect of a $20,000 due diligence fee earned by the noteholder in connection with the amendment, although the portion of the principal balance convertible to common shares remains at $200,000. This amendment also provides that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale.

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In connection with the original issuance of the Fuse Note, we issued Fuse 80,000 restricted common shares (the “Fuse Common Stock”), which we agreed to buy back under the following terms: If the fair market value of the Fuse Common Stock is not equal to at least $0.40 per share on the date one (1) year after issuance, we will buy back, to the extent permitted by law, up to 40,000 shares of the originally issued Fuse Common Stock from Fuse at $0.40 per share. If the fair market value of the Fuse Common Stock is not equal to at least $0.40 per share on the date two (2) years after issuance, we will buy back, to the extent permitted by law, up to 80,000 shares of the originally issued Fuse Common Stock, less the amount of any shares already bought back at the one year point, from Fuse at $0.40 per share. The above only applies to the extent the Fuse Common Stock is still held by Fuse at the applicable dates. The $28,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2014. If the closing ONSM share price of $0.20 per share on May 8, 2015 was used as a basis of calculation, a stock repurchase payment of $32,000 would be required.

In connection with the original issuance of the Fuse Note, we also issued 40,000 restricted common shares to another third party for finder and other fees. Including the value of the Fuse Common Stock plus the value of the common stock issued for related financing fees (but excluding a portion of this amount written off as a debt extinguishment loss as a result of the modification, by virtue of its inclusion in the Fuse Note, of a predecessor note) results in an effective interest rate of approximately 19% per annum.

During October and November 2013 we obtained aggregate net financing proceeds of approximately $246,000 from the issuance of partially secured promissory notes to three investors (the “Working Capital Notes”), with an initial aggregate outstanding balance of $620,000 bearing interest at 15% per annum. The proceeds of the Working Capital Notes were used to repay (i) $126,000 outstanding principal and interest due on the CCJ Note issued by us on December 31, 2012, (ii) $71,812 outstanding principal and interest due on a Subordinated Note issued by us on June 1, 2012 and (iii) $26,000 outstanding principal and interest due on an Investor Note issued by us on January 2, 2013. In addition, $125,000 in origination fees and $25,000 for a Funding Commitment Letter (discussed below) were deducted from the proceeds of the Working Capital Notes.

The Working Capital Notes originally called for payments of interest only during the first six months (in two quarterly payments), approximately 50% of the principal in equal monthly payments plus interest during the next eleven months and the remaining 50% of the principal balance due eighteen months after the Working Capital Note issuance date. They also provided that in the event that we receive funds in excess of $5 million as a result of a single transaction for the sale of all or a part of our operations or assets, the Working Capital Notes are payable in full within ten (10) days of our receipt of such funds, along with any interest due at that time.

Effective February 28, 2015 one of the Working Capital Notes with an outstanding principal balance of $250,000 was amended, extending the maturity date to March 1, 2016 and as a result that portion of the Working Capital Notes is classified as non-current on our September 30, 2014 balance sheet. This amendment provides that interest would be paid quarterly, commencing June 30, 2015 and also increases the outstanding principal balance to $275,000, for the effect of a $25,000 due diligence fee earned by the noteholder in connection with the amendment. This amendment also provides that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale.

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The remaining outstanding principal balance of the other two Working Capital Notes as of September 30, 2014, aggregating $342,727, was due in full as of May 4, 2015, as well as accrued but unpaid interest of approximately $46,000 through that date, none of which has been paid as of June 12, 2015. As discussed in more detail above, the April 30, 2015 agreement with Sigma provides that under certain conditions, Sigma will loan us an additional $225,000 ($200,000 net cash to us, after deducting a $25,000 fee for such loan) to be used for the repayment of these two Working Capital Notes.

The Working Capital Notes are expressly subordinated to the following notes issued by us and outstanding at the time of the issuance of the Working Capital Notes: Thermo Credit LLC, Rockridge Capital Holdings LLC, Sigma Opportunity Fund II, LLC, USAC, and certain capital leases (HP Financial and Tamco), or any assignees or successors thereto, subject to a cumulative maximum outstanding balance of $3.9 million. The Working Capital Notes are secured by a limited claim to our assets, pari passu with up to $775,000 of total indebtedness and related obligations raised and incurred by us during the first quarter of fiscal 2014, subject to all prior liens of the foregoing entities and limited to the extent such a lien is allowable by the terms of the loan documents executed between us and the foregoing entities.

In connection with the above financing, we issued to the holders of Working Capital Notes an aggregate of 358,334 restricted common shares (the “Working Capital Shares”), which we have agreed to buy back, to the extent permitted by law, from the holder for $0.30 per share on the maturity dates of the Working Capital Notes, if the fair market value is less than that on that date. The above only applies to the extent the Working Capital Shares are still held by the noteholder on the applicable date and the buyback obligation only applies if the noteholder gives us notice and delivers the shares within fifteen days after the applicable maturity dates. The $88,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2014. If the closing ONSM share price of $0.20 per share on May 8, 2015 was used as a basis of calculation, a stock repurchase payment of $107,500 would be required.

The fair market value at the time of issuance of the Working Capital Shares, plus 100,000 finders agreement shares we also issued, plus the cash deducted from the proceeds for related origination fees, was $258,260. $88,807 of this amount was reflected as a non-cash debt extinguishment loss. The remainder of $169,453 was reflected as a discount against the Working Capital Notes (as well as a corresponding increase in additional paid-in capital for the shares) and that amount is being amortized as interest expense over the term of the notes, resulting in a weighted average effective interest rate of approximately 33.2% per annum. This effective rate would increase in the event an early repayment was required, as discussed above.

As of September 30, 2014, we were obligated for $250,000 under unsecured subordinated notes issued to various lenders from April 2012 through January 2013, which are fully subordinated to the Line and the Rockridge Note. These notes bear cash interest at rates ranging from 12% to 20% per annum and, including the value of common shares issued to the various lenders in connection with these notes, had effective interest rates ranging from approximately 21% to 71% per annum. Modifications made in January 2014 to the terms of these notes extended the maturity dates to October 2014. Although we did not make the October 2014 principal payments, in March 2015 we repaid $75,000 of the outstanding principal on these notes and also extended the maturity date on the remaining $175,000 to March 1, 2016. The amended terms also provide that interest would be paid quarterly, commencing June 30, 2015 and also increases the outstanding principal balance to $192,500, for the effect of $17,500 in aggregate due diligence fees earned by the noteholders in connection with the amendments. The amendments also provide that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale.

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As of September 30, 2014, we were obligated for $625,000 outstanding principal on unsecured subordinated notes issued in November 2012 to various lenders, which are fully subordinated to the Line and the Rockridge Note. These notes bear cash interest at 12% per annum. Note payments were to be interest only during the first year, approximately 30% of the principal plus interest during the second year and the remaining principal balance at the end of the second year. One of the above notes, held by Fuse and having a $200,000 outstanding principal balance, is convertible into restricted common shares at Fuse’s option using a rate of $0.50 per share.

During the third quarter of fiscal 2014, three of these notes representing an aggregate of $290,000 principal and which included the note held by Fuse, were amended to provide that the principal balance would not be payable until the November 30, 2014 maturity date, although interest would continue to be payable on a monthly basis. We paid interest on the renegotiated notes but did not pay principal or interest on the other notes. We also did not make the principal payments on any of these notes when due on November 30, 2014, but effective February 28, 2015 we entered into an agreement with certain of the noteholders whereby (i) we paid all accrued interest through that date plus $235,000 representing the aggregate outstanding principal on certain notes and (ii) we paid all accrued interest through that date related to certain other of the notes and those notes, which included the note held by Fuse, were amended to extend the maturity date of the $250,000 of aggregate outstanding principal to March 1, 2016. The amendments increase the aggregate outstanding principal balance on those two notes to $275,000, for the effect of a $25,000 due diligence fee earned by the noteholders in connection with the amendments. The amendments also provide that future interest would be paid quarterly, commencing June 30, 2015. The amendments further provide that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale. One of the notes, with an outstanding principal balance of $140,000, was due in full as of November 30, 2014, as well as accrued but unpaid interest of approximately $27,000 through that date, none of which has been paid as of June 12, 2015.

Including the value of common shares issued to the various holders in connection with these notes results in effective interest rates through September 30, 2014 ranging from approximately 26% to 43% per annum, except that the effective interest rate of the note held by Fuse is 12% per annum, after the write-off of a portion of the value of these common shares as a debt extinguishment loss, arising from the March 2013 modification of the note held by Fuse to add the conversion feature.

In connection with the initial issuance of the above notes, we issued to the holders of the certain of those notes having an initial outstanding balance of $450,000 an aggregate of 180,000 restricted common shares, which we have agreed to buy back, under certain terms. If the fair market value of the stock is not equal to at least $0.40 per share on the final maturity date two (2) years after issuance, we will buy back, to the extent permitted by law, those shares of the originally issued common stock from the investor at $0.40 per share. This only applies to the extent the stock is still held by the investor(s) at the applicable date and only if the investor gives us notice and delivers the shares within fifteen days after the final maturity date. The $63,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2014. If the closing ONSM share price of $0.20 per share as of May 8, 2015 was used as a basis of calculation, a stock repurchase payment of $72,000 would be required.

In connection with the initial issuance of the above notes, we issued to the holders of certain of those notes having an initial outstanding balance of $200,000 an aggregate of 240,000 restricted common shares, of which we have agreed to buy back up to 35,000 shares, under certain terms. If the fair market value of the stock is not equal to at least $0.80 per share on the final maturity date two (2) years after issuance, we will buy back, to the extent permitted by law, up to 35,000 shares of the originally issued stock from the investor at $0.80 per share. The above only applies to the extent the stock is still held by the investor(s) at the applicable date and only if the investor gives us notice and delivers the shares within fifteen days after the final maturity date. The $27,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2014. If the closing ONSM share price of $0.20 per share as of May 8, 2015 was used as a basis of calculation, a stock repurchase payment of $28,000 would be required.

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On September 30, 2014 we were obligated for $56,229 under a letter agreement promissory note with the Universal Service Administrative Company (“USAC”), payable in monthly installments of $19,075 through December 15, 2014 (the “USAC Note”). These payments include interest at 12.75% per annum. This letter agreement promissory note is related to our liability for Universal Service Fund (USF) contribution payments previously reflected as an accrued liability on our balance sheet and therefore resulted in the reclassification of a portion of that accrued liability to notes payable. USAC is a not-for-profit corporation designated by the Federal Communications Commission (“FCC”) as the administrator of the USF program.

On May 15, 2015 we executed a letter agreement promissory note with USAC for $220,616, payable in monthly installments of $10,463 over twenty-four months starting June 15, 2015 through May 15, 2017. These payments include interest at 12.75% per annum. This letter agreement promissory note is related to our liability for USF contribution payments not made by us during the first and second quarters of fiscal 2015.

Although they were repaid on March 21, 2013, the terms of the Equipment Notes still provided that on the maturity dates (as established in the December 12, 2012 modification), the Recognized Value of the shares issued as part of such repayment would be calculated as the sum of the following two items – (i) the gross proceeds to the Investors from the sales of the 583,334 shares issued per the December 12, 2012 modification plus (ii) the value of those shares issued and still held by the Noteholders and not sold, using the average ONSM closing bid price per share for the ten (10) trading days prior to the applicable maturity date. If the Recognized Value exceeded the Credited Value, then we would receive 50% (fifty percent) of such excess, although the amount received by us shall not exceed $175,000. If the Credited Value exceeded the Recognized Value, then we would be obligated to pay such excess to the Noteholders. With respect to Equipment Notes held by one of the three Noteholders, the Credited Value exceeded the Recognized Value for 166,667 common shares by approximately $16,000 as of the respective November 15, 2013 maturity date. We recorded no accrual for this matter on our financial statements as of September 30, 2013, based on the immateriality of a $5,000 liability, if calculated based on the September 30, 2013 ONSM closing price of $0.27 per share. However, we recognized the actual liability of approximately $16,000 as of September 30, 2014 and as interest expense for the year then ended.

In connection with financing obtained by us in October and November 2013 from the other two Noteholders (see “Working Capital Notes” above), the above terms with respect to settlement of differences between the Credited Value and the Recognized Value were replaced with our agreement to buy back, to the extent permitted by law, the 416,667 common shares issued to those Noteholders, if the fair market value of the shares are not equal to at least $0.30 per share on the maturity dates of the October and November 2013 financing, which are April 24 and May 4, 2015, respectively. The above only applies to the extent the shares are still held by the Noteholders on the applicable date and the buyback obligation only applies if the Noteholders give us notice within fifteen days after the applicable maturity dates of the October and November 2013 financing. The $108,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2014. If the closing ONSM share price of $0.20 per share as of May 8, 2015 was used as a basis of calculation, a stock repurchase payment of $125,000 would be required. Furthermore, we have agreed that in the event we receive funds in excess of $5 million as a result of a single transaction for the sale of all or a part of our operations or assets, that those funds will be available to satisfy the above buyback obligation, such availability subject only to prior satisfaction of any claims held by Thermo Credit LLC, Rockridge Capital Holdings LLC, Sigma Opportunity Fund II, LLC, USAC, and certain capital leases (HP Financial and Tamco), or any assignees or successors thereto and pari passu with up to $775,000 of total indebtedness and related obligations raised and incurred by us during the first quarter of fiscal 2014.

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In December 2012, as part of a transaction under which J&C Resources issued us a funding commitment letter, we agreed to reimburse CCJ in cash the shortfall, payable on December 31, 2014, as compared to minimum guaranteed net proceeds of $175,000, from their resale of 437,500 common shares CCJ received on December 31, 2012 upon their conversion of 17,500 shares of Series A-13 and after effecting our agreement as part of the same transaction to reduce the conversion rate on all Series A-13 shares from $1.72 per common share to $0.40 per common share. We recorded an estimated shortfall liability of $43,750 and amortized that amount to interest expense over the one-year term of the funding commitment ending December 31, 2013. Based on the closing ONSM price of $0.30 per share on December 31, 2013, we determined that there was no material difference between the present value of this obligation and the accrued liability recorded by us. However, based on the closing ONSM price of $0.20 per share as of September 30, 2014, the gross proceeds would be approximately $87,500 and the shortfall would be approximately $87,500. Therefore, we increased the approximately $44,000 liability initially recorded by us by recognizing approximately $54,000 of interest expense for the year ended September 30, 2014 which resulted in an approximately $98,000 liability on our financial statements as of that date, representing the present value of this obligation. If the closing ONSM share price of $0.20 per share on May 8, 2015 was used as a basis of calculation, the gross proceeds would be approximately $87,500 and the shortfall would be approximately $87,500.

After annual increases in prior years as set forth in the employment agreements, the contractual annual base salaries for the five Executives in aggregate as of September 30, 2014 are approximately $1.7 million, subject to a five percent (5%)  increase on September 27, 2015 and each year thereafter – a portion of these contractual salaries are presently not being paid to the Executives and we are accruing these unpaid amounts as non-cash compensation expense, with the unpaid portion reflected as an accrued liability under the balance sheet caption “Amounts due to executives and officers”. In addition, each of the Executives receives an auto allowance payment of $1,000 per month, a “retirement savings” payment of $1,500 per month and an annual reimbursement of dues or charitable donations up to $5,000.  We also pay insurance premiums for the Executives, including medical, life and disability coverage. Effective October 1, 2009, in response to our operating cash requirements, the base salary amounts being paid to the Executives were adjusted to be 10% less than the contractual amounts. In addition, until certain actions as discussed below, the amounts representing the subsequent contractual annual increases to those base salary amounts were not paid.  Effective September 16, 2012, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.8% of the contractual base salary at that time. Effective September 16, 2014, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 5.0% of the contractual base salary at that time. Effective May 1, 2015, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.4% of the contractual base salary at that time. As of May 8, 2015, the base salary payments to the Executives are 10.3% less than the contractual base salaries, compared to the 10% reduction instituted in October 2009 and which reduction was initially company-wide but no longer affects a majority of our other employees. Under the terms of the employment agreements, upon a termination subsequent to a change of control, termination without cause or constructive termination, each as defined in the agreements, we would be obligated to pay each of the Executives an amount equal to three (3) times the Executive’s base salary plus full benefits for a period of the lesser of (i) three (3) years from the date of termination or (ii) the date of termination until a date one (1) year after the end of the initial employment contract term.

In consideration of the waiver and satisfaction of any remaining unpaid salary due to the Executives through December 31, 2012 under their employment agreements, as well as the waiver and satisfaction of any remaining unpaid amounts due to certain of those Executives in connection with the acquisition of Acquired Onstream, we (as authorized by our Board of Directors) and the Executives agreed, effective January 22, 2013, (i) to pay $100,000 ($20,000 per Executive) of the withheld compensation in cash and (ii) to issue 1,700,000 (340,000 per Executive) fully vested ONSM common shares, subject to certain trading restrictions (the “Executive Shares”).

$125,000 in cash ($25,000 per Executive) was paid in April 2015, which satisfied the above commitment to pay the $100,000 of pre December 31, 2012 compensation not covered by the Executive Shares. Although, as of June 12, 2015, the Executive Shares have not been issued, due to certain administrative and documentation requirements, since the Executive Shares were committed to be issued by the January 22, 2013 action of the Board, that issuance was reflected in our financial statements as of the date of such commitment.

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To the extent there is any shortfall from the gross proceeds upon resale by the Executives of the Executive Shares as compared to twenty-nine cents ($0.29) per share, the shortfall will be reimbursed to the Executives by us in cash, or at our option, by the issuance of additional fully vested ONSM common shares (the “Additional Executive Shares”), with the Additional Executive Shares subject to reimbursement by us to the Executives of any shortfall from the gross proceeds upon resale as compared to the fair value used to determine the number of such Additional Executive Shares. All shortfall reimbursements shall be payable by us within ten (10) business days after presentation by reasonable supporting documentation of the shortfall to us by the Executives. The $221,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2014. If the closing ONSM share price of $0.20 per share on May 8, 2015 was used as a basis of calculation, our obligation for this shortfall payment would be $153,000, or the equivalent in common shares.

On February 20, 2013, we (as authorized by our Board of Directors) and the Executives agreed to certain changes in the Executives’ employment agreements, which among other things included the implementation of an executive incentive compensation plan (the “Executive Incentive Plan”). Compensation under the Executive Incentive Plan would be in the form of Fully Restricted (as defined below) ONSM common Plan shares (“Executive Incentive Shares”) and is based on the Company achieving certain financial objectives as follows for fiscal year 2015:

·         Increased revenues (as compared to the respective prior year).

·         Positive operating cash flow (as defined in the Executive Incentive Plan).

·         EBITDA, as adjusted, (as defined in the Executive Incentive Plan) for at least two quarters.

Accomplishment of the objectives for fiscal 2015 would result in an aggregate of 625,000 Executive Incentive Shares issued to the Executives as a group. A lesser amount of Executive Incentive Shares would be issuable for achievement of only one or two of the three objectives set for that year.

With respect to fiscal 2014, the Executives have earned an aggregate of 500,000 Executive Incentive Shares for meeting the objective of achieving positive EBITDA, as adjusted, for at least two quarters as well as meeting the objective of achieving positive operating cash flow (as defined in the Executive Incentive Plan) for fiscal 2014. Accordingly, those 500,000 shares have been recorded on our financial statements and reflected as non-cash compensation expense of $97,500 for the year ended September 30, 2014 (the term of service) based on (i) the fair value of 250,000 shares at $0.21 per share as of May 20, 2014, the date it was conclusively determined that the EBITDA objective had been met and the shares had been earned plus (ii) the fair value of 250,000 shares at $0.18 per share as of May 8, 2015, the date it was conclusively determined that it was probable the cash flow objective would be met and the shares would be earned. Since the second tranche of 250,000 shares earned in fiscal 2014 has not been issued to the Executives as of May 8, 2015, it is reflected on our September 30, 2014 balance sheet as shares committed for issuance.  We expected to issue these shares shortly after the September 30, 2014 10-K is filed. Accomplishment of the other objective for fiscal 2014 would have resulted in an aggregate of 125,000 Executive Incentive Shares issued to the Executives as a group, but it was determined that these shares were not earned.

The Executive Incentive Shares are subject to a complete restriction on the Executive’s ability to access or transact in any way such shares until the restriction is lifted. Upon a change of control, termination of the Executive’s employment or the imminently proposed and/or anticipated sale of the Company at a price of $1.00 per common share or more, all restrictions on the Executive Incentive Shares and any other common shares held by the Executives will be lifted. In the case of a sale, all restrictions will be lifted in time for those previously restricted shares to participate in all voting with respect to the proposed sale and will be eligible, at the Executive’s option, for inclusion as part of the shares sold in that transaction. Due to the restrictions on the Executive Incentive Shares, we have determined that the issuance thereof will not result in taxable compensation income to the Executives (or tax deductible compensation expense to the Company) until such restrictions have been lifted.

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As of September 30, 2014, we were obligated under operating leases for six office locations (one each in Pompano Beach, Florida, San Francisco, California, San Diego, California and Colorado Springs, Colorado and two in the New York City area), which call for monthly payments totaling approximately $56,000. The leases have expiration dates ranging from 2015 to 2018 (after considering our rights of termination) and in most cases provide for renewal options. The future minimum lease payments required under the non-cancelable operating leases total approximately $1.7 million through September 30, 2019, of which approximately $632,000 relates to the year ending September 30, 2015.

We have entered into various agreements for our purchase of Internet, long distance and other connectivity as well as use of certain co-location facilities, for an aggregate remaining minimum purchase commitment of approximately $3.1 million, approximately $1.7 million of that commitment related to the one year period ending September 30, 2015 and the balance of such commitment related to the period from October 2015 through August 2017.

Projected capital expenditures for the year ending September 30, 2015 total approximately $600,000, which includes software and hardware upgrades to the webcasting platform (including VW4 and iEncode), the DMSP and the audio and web conferencing infrastructure. Some of these projected capital expenditures may be financed, deferred past the twelve month period or cancelled entirely, depending on our other cash flow considerations.

During the period from June 2013 through January 2014 we made certain headcount reductions representing approximately $1.0 million in annualized savings, which we expect will reduce our compensation expenditures by approximately $159,000 in aggregate for the first seven months of fiscal 2015 as compared to the corresponding prior year period. Effective June 2014, we also renegotiated a supplier contract representing approximately $263,000 in annualized savings, which we expect will reduce our cost of sales by approximately $202,000 in aggregate for the first eight months of fiscal 2015 as compared to the corresponding prior year period. Effective June 2015, we again renegotiated the same supplier contract representing approximately $220,000 in annualized savings, which we expect will reduce our cost of sales by approximately $73,000 in aggregate for the last four months of fiscal 2015 as compared to the corresponding prior year period.

Professional fee expenses were approximately $1.3 million for the year ended September 30, 2014, an increase of approximately $154,000 (12.9%) from the prior fiscal year, primarily due to legal fees related to the Intella2 litigation in fiscal 2014 as well as legal and consulting expenses associated with certain other one-time financing and business development projects undertaken by us in fiscal 2014. While it is possible that there could be other litigation or financing and business development projects during fiscal 2015, we currently expect such professional fees expenses for fiscal 2015 to be less than the corresponding prior year amounts.

On April 30, 2015, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. Mr. Charles Johnston, a former ONSM director, 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. 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 March 1, 2016 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of funds in excess of $5.0 million as a result of a single transaction for the sale of all or a part of our operations or assets, this Funding Letter will be terminated. The consideration for the Funding Letter is $25,000 to be withheld from any proceeds lent thereunder but in any event paid no later than September 1, 2015.

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On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale of a defined subset of Infinite Conferencing’s (“Infinite’) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). The Sold Accounts represent historical annual revenues of approximately $1.35 million. The proceeds from this sale were used by us to pay (i) approximately $311,000 of outstanding principal and approximately $136,000 of accrued interest on certain notes payable, as discussed above, and (ii) approximately $62,000 for all legal fees related to this transaction for which we were obligated. The remaining proceeds were used for fee obligations under the New Sigma Note and for other operating expenses.

In connection with this sale, Infinite and Partners entered into a Make Whole Agreement which provides that if the revenues from the Sold Accounts falls below $1.0 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the revenues from the Sold Accounts back to $1.25 million (or the equivalent in cash flow). Onstream Media Corporation (“Onstream”) and Infinite have also committed that in the event there is any impediment, which directly or indirectly is caused by, or relates in any way to Infinite or Onstream, which would prevent more than 20% of the revenue from these sold accounts being earned or distributed to Partners, Infinite and Onstream would take all necessary steps to ensure that such impeded revenue or revenue shortfall is otherwise earned or distributed or shall pay the amount of such impeded revenue or revenue shortfall to Partners to the extent due on a quarterly basis.

In connection with this sale, Infinite and Partners entered into a Membership Interest Option Agreement (“Option Agreement”) whereby we have the right for the two-year period through February 28, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the Purchase Price plus a premium, which premium increases on a pro-rata basis to 20% of the Purchase Price over the two year period, subject to a minimum premium of 10%. Starting six months after the Effective Date, Partners may sell the Sold Accounts to a third party, provide that they must provide us four month written advance notice of such sale during which four month period we have the right to exercise our rights under the Option Agreement. In the event we do not exercise our rights under the Option Agreement, and Partners sells the Customer Accounts to a third party, we are entitled to receive 50% of any excess of the sales price to the third party over what would have been our option price under the Option Agreement.

The Option Agreement provides that during the two-year option term, and until the option closing in the event of a timely exercise of the option thereunder, neither Partners nor its members will (i) encumber any of Partners’ assets or membership interests to any party, other than Infinite, (ii) incur any liability whatsoever, whether actual or contingent, other than per the terms and provisions of the partnership operating agreement and the MSA or (iii) place a lien on the Sold Accounts.

In connection with this sale, Infinite and Partners entered into a Management Services Agreement (“MSA”) that provides for Infinite to continue to invoice the Sold Accounts but the payments when received from those Sold Accounts will be deposited in a segregated Partners owned bank account. Partners will return those customer proceeds to Infinite on a weekly basis in the form of a Management Fee, after deducting a certain amount representing (i) Partners’ guaranteed return (which is 40% of the Purchase Price per annum with the first six months guaranteed regardless of whether we exercise our rights under the Option Agreement or the MSA is otherwise terminated) and (ii) accounting fees payable to the third-party accounting firm as discussed below. Infinite will continue to service the Sold Accounts, incurring and absorbing all related costs of doing so – i.e., Partners will have no operating responsibilities and no operating costs related to the sold accounts other than to pay the Management Fee to Infinite. The MSA defines specific services, along with certain minimum standards of quality for such services, required to be provided by Infinite with respect to the Sold Accounts.

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Partners has engaged a third-party accounting firm to manage all cash transactions under the MSA and Infinite, Partners and the accounting firm have entered into a separate agreement (Agreement Re Distributions) whereby the accounting firm has explicitly agreed to carry out the terms of the MSA and other related documents executed between Infinite and Partners, particularly with respect to distributions of funds and to not vary from that except upon joint written instructions from Infinite and Partners. We have agreed to be responsible for the fees of the third-party accounting firm, which we expect will be approximately $25,000 to $30,000 per year.

The MSA has a two year term expiring on February 28, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights as follows. Partners has the right to terminate the MSA, effective immediately upon written notice to Infinite, in the event of the following: (i) an Infinite Event of Default or (ii) the sale by Partners of the Sold Accounts subject to the terms of the Membership Interest Option Agreement.  An Infinite Event of Default is (i) Bankruptcy of Infinite (as defined), (ii) a lack of compliance by Infinite with the provisions of the MSA which is continuing five (5) business days after receiving written notice from partners specifying such lack of compliance or (iii) a breach by Infinite or Onstream of any obligation under the Make Whole Agreement. Infinite has the right to terminate the MSA, effective immediately upon written notice to Partners, in the event of a Partners Event of Default. A Partners Event of Default is (i) a deliberate and material lack of compliance by Partners with the provisions of the MSA which is continuing five (5) business days after receiving written notice from Infinite specifying such lack of compliance or (ii) a breach by Partners of Partners’ obligations under the Membership Interest Option Agreement. 

Notwithstanding termination of the MSA, only for so long as the Infinite owns the Sold Accounts, Partners shall continue to pay the Management Fee, provided that Partners may deduct from such Management Fee Partners’ payment of all reasonable costs of providing the services to the Sold Accounts otherwise required to be provided by Infinite under the MSA.

The MSA contains provisions that prohibit (i) Infinite servicing the Sold Accounts for a period of two years after the termination of the MSA and (ii) Partners communicating with the Sold Accounts or with Infinite’s employees, vendors, consultants or agents during the term of the MSA.

We have incurred losses since our inception, and have an accumulated deficit of approximately $140.4 million as of September 30, 2014. Our operations have been financed primarily through the issuance of equity and debt, including convertible debt and debt combined with the issuance of equity. During the year ended September 30, 2014, our revenues were not sufficient to fund our total cash expenditures (operating, capital and debt service) and as a result we obtained additional funding from the Working Capital Notes and Sigma Note 2 and we also restructured the payment terms of Sigma Note 1 and certain other notes, as discussed above. However, primarily because of our expectations with respect to our recent and anticipated introductions of several new or enhanced products, we expect to achieve revenue growth in fiscal 2015, as compared to fiscal 2014 and excluding the impact of a fiscal 2015 transaction with Infinite Conferencing Partners LLC as discussed above. However, in the event we are unable to achieve the necessary revenue increases to fund our total cash expenditures, we believe that identified decreases in our current level of expenditures that we have already planned to implement or could implement (in addition to the already implemented cost savings discussed above and including a significant reduction in our software development costs and capital equipment purchases) and the raising of additional capital in the form of debt and/or equity and/or the sales of assets or operations would be sufficient to fund our operations through September 30, 2015. 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. The Executives have agreed to defer a portion of their compensation in the past, to the extent we needed that cash to meet other operating expenses and, in the event of extremely critical or urgent requirements in the future, are expected to continue to do so.

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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 and/or that we will be able to borrow further funds other than under the Line or the Funding Letter and/or that we will be able to sell assets or operations and/or that we will be able to increase our revenues and/or control our expenses to a level sufficient to provide positive cash flow. The financial statements do not include any adjustments to reflect future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result if we are unsuccessful.

Cash required to fund our continued operations will be affected by numerous known and unknown risks and uncertainties including, but not limited to, our ability to successfully market and sell our products and services, the degree to which competitive products and services are introduced to the market, our ability to control and/or reduce expenses, our need to invest in new equipment and/or technology, and our ability to service and/or refinance our existing debt and accounts payable. We cannot assure that our revenues will continue at their present levels, nor can we assure that they will not decrease.

To the extent our cash flow from sales is insufficient to completely fund operating expenses, financing costs (including principal repayments) and capital expenditures, as well as any acceleration of our repayments of accounts payable and/or accrued liabilities, we will continue depleting our cash and other financial resources. Other than working capital which may become available to us from further borrowing or sales of equity or assets or operations (including but not limited to proceeds from the Line or the Funding Letter, as discussed above), we do not presently have any additional sources of working capital other than cash on hand and cash, if any, generated from operations. As a result of the uncertainty as to our available working capital over the upcoming months, we may be required to delay or cancel certain of the projected capital expenditures, some of the planned marketing expenditures, or other planned expenses. In addition, it is possible that we will need to seek additional capital through equity and/or debt financing or through other activities.  If we raise additional capital through the issuance of debt, this will result in increased interest expense. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our company held by existing shareholders will be reduced and those shareholders may experience significant dilution.

The resolution of debt and other obligations becoming due after September 30, 2015 (the end of the one year time frame on which our liquidity analysis and conclusions above were based), and in particular those becoming due during October 2015, represents a future unknown contingency. These include Sigma Notes 1 and 2, and the Rockridge Note, which require principal payments on October 15, 2015 aggregating $1,758,000, as well as the Line which has a current outstanding principal balance of approximately $1,650,000.

Our cash balance increased by approximately $132,000 during the year ended September 30, 2014. This was the result of approximately $457,000 provided by operating activities and approximately $231,000 provided by financing activities, partially offset by approximately $556,000 used in investing activities.

Cash provided by operating activities of approximately $457,000 for the year ended September 30, 2014, represents an approximately $47,000 decrease in cash provided as compared to approximately $504,000 cash provided by operating activities for the prior fiscal year. The approximately $457,000 cash provided by operating activities for the year ended September 30, 2014 reflects (i) net cash provided by operating activities before changes in current assets and liabilities other than cash of approximately $529,000, primarily representing our net loss of approximately $1.7 million, reduced by approximately $2.9 million of non-cash expenses included in that loss, but partially increased for a non-cash gain on litigation settlement of approximately $744,000 and (ii) an approximately $72,000 net increase in non-cash working capital items. The primary non-cash expenses included in our loss for the year ended September 30, 2014 were approximately $1.0 million of amortization of discount on notes payable and convertible debentures, approximately $1.0 million of depreciation and amortization and approximately $576,000 of compensation expenses paid with common shares and other equity. The approximately $72,000 net increase in non-cash working capital items for the year ended September 30, 2014 is primarily due to an approximately $75,000 decrease in deferred revenue and an approximately $62,000 decrease in accounts payable, accrued liabilities and amounts due to directors and officers, partially offset by an approximately $67,000 decrease in inventories and other assets. The approximately $72,000 net increase in non-cash working capital items represented approximately $622,000 less cash than the net decrease in non-cash working capital items of approximately $550,000 for the prior fiscal year. The primary sources of cash inflows from operations are from receivables collected from sales to customers. 

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Cash used in investing activities was approximately $556,000 for the year ended September 30, 2014 as compared to approximately $1.5 million cash used in investing activities for the prior fiscal year. Current period investing activities related to the acquisition of property and equipment, including capitalized software development costs. Prior period investing activities related primarily to the November 30, 2012 Intella2 acquisition as well as the acquisition of property and equipment, including capitalized software development costs.

Cash provided by financing activities was approximately $231,000 for the year ended September 30, 2014 as compared to approximately $929,000 cash provided by financing activities for the prior fiscal year. Current year period financing activities, as well as those in the comparable prior year period, primarily related to proceeds from notes payable, partially offset by repayments of notes and leases payable. Most of the cash provided by financing activities for the year ended September 30, 2013, excluding accounts receivable based borrowing and repayment activity under the Line, was associated specifically or generally with the November 30, 2012 Intella2 acquisition.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and our significant accounting policies are described in Note 1 to those statements.  The preparation of financial statements in accordance with GAAP requires that we make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes.  Our assumptions are based on historical experiences and changes in the business environment.  However, actual results may differ from estimates under different conditions, sometimes materially.  Critical accounting policies and estimates are defined as those that are most important to the management’s most subjective judgments. Our most critical accounting policies and estimates are described below.

Goodwill and Other Intangible Assets:

Our prior acquisitions of several businesses, including Infinite Conferencing, Intella2, EDNet and Acquired Onstream, have resulted in significant increases in goodwill and other intangible assets. Goodwill and other unamortized intangible assets, which include acquired customer lists, were approximately $8.9 million at September 30, 2014, representing approximately 66% of our total assets and approximately 205% of the book value of shareholder equity. In addition, property and equipment as of September 30, 2014 includes approximately $1.3 million (net of depreciation) primarily related to the capitalized development costs of the DMSP and Webcasting/iEncode platforms, representing approximately 10% of our total assets and approximately 31% of the book value of shareholder equity.

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In accordance with GAAP, we periodically test these assets for potential impairment.  As part of our testing, we rely on both historical operating performance as well as anticipated future operating performance of the entities that have generated these intangibles.  Factors that could indicate potential impairment include a significant change in projected operating results and cash flow, a new technology developed and other external market factors that may affect our customer base.  We will continue to monitor our intangible assets and our overall business environment. If there is a material adverse and ongoing change in our business operations (or if an adverse change initially considered temporary is determined to be ongoing), the value of our intangible assets could decrease significantly. In the event that it is determined that we will be unable to successfully market or sell any of our services, an impairment charge to our statement of operations could result. Any future determination requiring the write-off of a significant portion of unamortized intangible assets, although not requiring any additional cash outlay, could have a material adverse effect on our financial condition and results of operations.

In accordance with ASC Topic 350, Intangibles – Goodwill and Other, which addresses the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition, goodwill must be tested for impairment on a periodic basis, at a level of reporting referred to as a reporting unit. Although other intangible assets are being amortized to expense over their estimated useful lives, the unamortized balances are still subject to review and adjustment for impairment. There is a two-step process for impairment testing of goodwill and other intangible assets. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment.

The provisions of ASC 350-20-35-3 in certain cases would allow us to forego the two-step impairment testing process based on certain qualitative evaluation.  However, based on our assessment as of September 30, 2014 and 2013 of relevant events and circumstances as listed in ASC 350-20-35-3C, we determined that we were not eligible to employ qualitative evaluation to forego the two-step impairment testing process with respect to our reporting units as of those dates, as it was not more likely than not that impairment loss had not occurred. These relevant events and circumstances included certain macroeconomic conditions, including access to capital and the ongoing decrease in the ONSM share price.

The material portion of our goodwill and other intangible assets are contained in the EDNet reporting unit, the Acquired Onstream/DMSP reporting unit and the audio and web conferencing reporting unit, which includes the Infinite Conferencing and the OCC/Intella2 divisions. Our reporting units were identified based on the requirements of ASC 350-20-35-33 through 350-20-35-46. According to ASC 350-20-35-34, a component of an operating segment is a reporting unit if that component represents a business for which discrete financial information is available and segment management regularly reviews the operating results of that component. This is the case for the EDNet division, the Acquired Onstream/DMSP division, the Infinite Conferencing division and the OCC/Intella2 division. However, ASC 350-20-35-35 provides that two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics. This is the case for the Infinite Conferencing division and the OCC/Intella2 division, since they are both in the business of audio and web conferencing sold primarily to business customers. Although EDNet is in the same operating segment as the Infinite Conferencing division and the OCC/Intella2 division, it is not considered to be part of the audio and web conferencing reporting unit since EDNet offers a specialized service to the entertainment industry (movies, television, advertising) that uses a specific type of network connection (integrated services digital network or “ISDN”) to transport its clients’ multimedia content. ISDN is a significantly different technology from the standard telephone lines used by the Infinite Conferencing division and the OCC/Intella2 division.

As part of the two-step process discussed above, our management performed discounted cash flow (“DCF”) analyses and, as part of the September 30, 2014 evaluation, market value (“MV”) analyses to determine whether the goodwill of our reporting units was potentially impaired and the amount of such impairment. The results of these analyses were weighted, and the weighted result reduced by the amount of associated allocable non-current debt, to come up with a single estimated fair value (“FV”) for each reporting unit. For the September 30, 2014 evaluations, a third-party valuation services firm was engaged by us to assist with these analyses, value calculations and weightings.

 

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Our management, with the assistance of the third-party valuation services firm for the September 30, 2014 evalution, determined the rates and assumptions ( including probability of future revenues and costs, tax shields and annual and terminal discount factors) used by it to perform the DCF analyses and also considered macroeconomic and other conditions such as: our credit rating, stock price and access to capital; a decline in market-dependent multiples in absolute terms; telecommunications industry growth projections; internet industry growth projections; entertainment industry growth projections (re EDNet customer base); our historical sales trends and our technological accomplishments compared to our peer group. As part of the DCF analyses, we analyzed our corporate payroll and other costs to determine their relevance to the reporting units, and to the extent relevant, we allocated such costs when preparing the projections used by us in the above analyses. For the years ended September 30, 2014 and 2013, we determined that approximately 83% and 72%, respectively, of our corporate costs (excluding non-cash expenses) were allocable to our reporting units, including those without goodwill or other intangible assets. The non-allocable corporate costs related to various public company related requirements, including D&O insurance and certain legal, accounting and other professional and consulting fees and expenses, as well as the costs of evaluating new business opportunities and products outside the existing divisions.

For the September 30, 2014 evaluation, our management, with the assistance of the third-party valuation services firm, determined the appropriately comparable publicly reporting companies and public market transactions used by it to perform the MV analyses. Factors taken into consideration in selecting the appropriately comparable companies included the relative size of the candidate company, measured by revenues and assets, as compared to our reporting units and the extent to which the stated business activities of the candidate company align with the primary business activities of our reporting units. Once comparable companies and transactions were identified, the valuation calculation was based on multiples of revenues and, to the extent applicable, EBITDA (earnings before interest, taxes, depreciation and amortization).

Based on the above, as well as a report prepared by the third-party valuation services firm, we determined that the FVs of the Acquired Onstream, EDNet and audio and web conferencing reporting units, calculated as described above, were more than their respective net carrying amounts as of September 30, 2014. Furthermore, in order to address whether any further consideration of ONSM’s share price was needed with respect to impairment testing, we, with the assistance of the third-party valuation services firm, performed an analysis to compare our book value to our market capitalization as of September 30, 2014, including adjustments for (i) paid-for but not issued common shares, such as the Rockridge Shares (see note 4) and the Executive Shares (see note 5) and (ii) an appropriate control premium. Based on this analysis, we concluded that there were no conditions with respect to our market capitalization as of September 30, 2014 which would require further evaluation with respect to the carrying values of our reporting units. The above analysis was performed based on a closing ONSM share price of $0.16 per share as of September 30, 2014 - the closing ONSM share price was $0.20 per share on May 8, 2015.

 

Based on the above, we determined that it was more likely than not that the FVs of the Acquired Onstream, EDNet and audio and web conferencing reporting units were more than their respective carrying amounts as of September 30, 2014 and that further evaluation under the second step of the two-step process described above was not necessary.

 

With respect to September 30, 2013, based on the above, we determined that the FVs of the Acquired Onstream and EDNet reporting units, calculated as described above, were more than their respective net carrying amounts as of that date. However, we were unable to arrive at the same conclusion as a result of our evaluation of the audio and web conferencing reporting unit.

                                                                

Accordingly, we performed further calculations in order to determine the amount of the impairment of the goodwill of the audio and web conferencing reporting unit and determined that the carrying value of the audio and web conferencing reporting unit exceeded the results of the DCF analysis (after reductions for interest bearing debt and for an allocation of that amount to recognize an increase in the recorded value of the audio and web conferencing reporting unit customer lists to an updated fair value) for that reporting unit by approximately $2.2 million. Accordingly, this difference was the amount by which the goodwill of the audio and web conferencing reporting unit was impaired as of September 30, 2013, and a $2.2 million adjustment was made to reduce the carrying value of the audio and web conferencing reporting unit’s goodwill as of that date. This adjustment was further allocated to our Infinite division. The increase in the recorded value of the audio and web conferencing reporting unit customer lists to an updated fair value as discussed above was not reflected on our books, since in accordance with GAAP that calculation is solely for purposes of determining impairment of goodwill and is not for the purpose of adjusting the carrying value of other intangible assets.

 

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 (after the impairment adjustment for the audio and web conferencing reporting unit discussed above) to our market capitalization as of September 30, 2013, including adjustments for (i) paid-for but not issued common shares, such as the Rockridge Shares (see note 4) and the Executive Shares (see note 5) and (ii) an appropriate control premium. Based on this analysis, we concluded that there were no conditions with respect to our market capitalization as of September 30, 2013 which would require further evaluation with respect to the carrying values of our reporting units.   

 

An annual impairment review of our goodwill and other acquisition-related intangible assets will be performed as part of preparing our September 30, 2015 financial statements. Until that time, we are reviewing certain factors to determine whether a triggering event has occurred that would require an interim impairment review. Those factors include, but are not limited to, our management’s estimates of future sales and operating income, which in turn take into account specific company, product and customer factors, as well as general economic conditions and the market price of our common stock.

 

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EDNet’s operations are heavily dependent on the use of ISDN network connections, which are only available from a limited number of suppliers. The two companies which are the primary suppliers of ISDN to EDNet have made recent public indications of intentions to restrict, or even eventually eliminate, their provision of ISDN. Such actions could have a significant adverse impact on our future evaluations of the carrying value of EDNet goodwill, especially if alternative ISDN suppliers cannot be identified or if an alternative such as Internet based technology is not available or economically feasible as a basis to continue the EDNet operations. However, these two companies have not announced definitive timetables for taking any extensive actions with regard to restricting ISDN and therefore we have not assumed any such actions would take place within the timeframe of our discounted cash flow analyses used by us for these evaluations to date.

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements are contained in pages F-1 through F-81, which appear at the end of this annual report.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 None.

ITEM 9A (T).      CONTROLS AND PROCEDURES              

Management’s report on disclosure controls and procedures:

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014. The term “disclosure controls and procedures,” as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2014, our disclosure controls and procedures were not effective at the reasonable assurance level. As a result of having to perform additional analyses with respect to goodwill impairment, we did not timely file this Annual Report on Form 10-K. 

 Management’s report on internal control over financial reporting:

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15 promulgated under the 1934 Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (“COSO”). Based on our evaluation under the COSO framework, management has concluded that, as of September 30, 2014, our internal control over financial reporting was not effective at the reasonable assurance level.

Our independent registered public accounting firm identified a material weakness in our internal control over financial reporting surrounding the performance of our analysis to support and review goodwill impairment within a timely manner. Specifically, deficiencies were identified in our control environment which could have led to the improper valuation of certain intangible assets. As a result of having to perform additional analyses with respect to goodwill impairment, we did not timely file this Annual Report on Form 10-K.

Our internal control system is designated to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

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Our management has worked, and continues to work, to strengthen our internal control over financial reporting. We are committed to ensuring that such controls are operating effectively. Since identifying the material weakness in our internal control over financial reporting, we are working to enhance the design and operation of our controls related to goodwill impairment testing by improving our controls and documentation related to our accounting policies and practices to identify, document and periodically assess whether all key judgments, conventions and estimates used in computing the goodwill impairment analyses conform to U.S. GAAP.

Changes in Internal Control over Financial Reporting:

Except as noted above, there were no changes in our internal control over financial reporting during the most recent fiscal year ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.    OTHER INFORMATION

None.

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PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Executive Officers and Directors

Our executive officers and directors, and their ages are as follows:

Name                                                              Age                                               Position

Randy S. Selman                                                            59                     Chairman of the Board, President and Chief Executive Officer

Alan M. Saperstein                                                        56                     Director and Chief Operating Officer

Robert E. Tomlinson                                                     58                     Senior Vice President and Chief Financial Officer

Clifford Friedland                                                         64                     Director and Senior Vice President Business Development

David Glassman                                                            64                     Senior Vice President and Chief Marketing Officer

Carl L. Silva (1) (2) (3) (4)                                             51                     Director

Leon Nowalsky (2) (3)                                                  53                     Director

Robert D. (“RD”) Whitney (1)                                     46                     Director

(1)           Member of the Audit Committee.
(2)           Member of the Compensation Committee.
(3)           Member of the Governance and Nominating Committee.
(4)           Member of the Finance Committee.

Randy S. Selman. Mr. Selman has served as our Chairman of the Board, President and Chief Executive Officer since our inception in May 1993 and, from September 1996 through June 1999 and from August 1, 2004 through December 15, 2004, has also been our Chief Financial Officer.  From March 1985 through May 1993, Mr. Selman was Chairman of the Board, President and Chief Executive Officer of SK Technologies Corporation (NASDAQ:SKTC), a software development company. SKTC developed and marketed software for point-of-sale with complete back office functions such as inventory, sales analysis and communications.  Mr. Selman founded SKTC in 1985 and was involved in their initial public offering in 1989.  Mr. Selman's responsibilities included management of SKTC, public and investor relations, finance, high level sales and general overall administration.

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Selman should currently serve as a director, in light of our business and structure, are as follows: executive management, sales and software development industry experience with SKTC and executive management and public and investor relations experience with Onstream.

Alan M. Saperstein.  Mr. Saperstein has served as our Executive Vice President and a director since our inception in May 1993, and has also been our Chief Operating Officer since December 2004. From March 1989 until May 1993, Mr. Saperstein was a free-lance producer of video film projects.  Mr. Saperstein has provided consulting services for corporations that have set up their own sales and training video departments.  From 1983 through 1989, Mr. Saperstein was the Executive Director/Entertainment Division of NFL Films where he was responsible for supervision of all projects, budgets, screenings and staffing.

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Saperstein should currently serve as a director, in light of our business and structure, are as follows: video and film industry experience with NFL Films and executive management and webcasting and digital media operations experience with Onstream.

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Robert E. Tomlinson. On December 15, 2004 Mr. Tomlinson was appointed as our Chief Financial Officer.  Mr. Tomlinson joined us as Vice President-Finance in September 2004. Mr. Tomlinson started his financial and accounting career in 1977 with the international accounting firm of Price Waterhouse. In 1982 he left that firm to join Embraer, an international aircraft manufacturing and support firm, at their U.S. subsidiary in Fort Lauderdale, Florida, where he managed all financial functions and eventually was named Senior Vice President-Finance and a member of the U.S. firm’s Board of Directors. Mr. Tomlinson left Embraer in 1994 and joined staffing and human resource firm OutSource International, serving as its Chief Financial Officer and helping to take the company public in 1997. Mr. Tomlinson's areas of responsibility at OutSource International included corporate accounting, treasury and risk management. From when he left OutSource International in February 2000 until 2002 he worked as an independent certified public accountant, focusing on accounting and tax services to corporations. From 2002 until joining us, Mr. Tomlinson served as CFO for Total Travel and Tickets, a Fort Lauderdale based ticket broker.  Mr. Tomlinson has held an active Certified Public Accountant license since 1978.

Clifford Friedland. Mr. Friedland was re-appointed as a member of our Board of Directors in April 2011. His initial appointment was in December 2004 and he continued as a board member until his resignation from the board in June 2010, although he continued as Senior Vice President, Business Development. Mr. Friedland’s voluntary resignation was to restore our board to the required majority of independent members, following the death of another board member. He served as Chairman, CEO and co-founder of Acquired Onstream from June 2001 until joining our company. Mr. Friedland was Vice President of Business Development and co-founder of TelePlace, Inc., a developer and owner of Internet data centers and central offices from December 1999 to May 2001. Mr. Friedland was co-founder, Chairman and co-CEO of Long Distance International, Inc., one of the first competitive European telephone operators from May 1993 to December 1999. Mr. Friedland was President of Clifford Friedland Inc., a technology consulting firm, from January 1991 to April 1993. Mr. Friedland was a Director and co-founder of Action Pay-Per-View, a pay per view cable channel from January 1988 to December 1990. Mr. Friedland was President and co-founder of Long Distance America, one of the first competitive long distance operators after the breakup of AT&T from June 1984 to December 1987. Mr. Friedland was Vice President and co-founder of United States Satellite Systems, Inc., an FCC licensed builder and operator of geosynchronous communications satellites from April 1981 until December 1983. Mr. Friedland was Director and co-founder of United Satellite Communications, Inc., the world’s first direct-to-home satellite network from April 1981 until May 1984.

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Friedland should currently serve as a director, in light of our business and structure, are as follows: Internet and digital media industry experience (Acquired Onstream, TelePlace, Inc., and Action Pay-Per-View), telecommunications industry experience (Long Distance International, Inc., Long Distance America, United States Satellite Systems, Inc. and United Satellite Communications, Inc.) and executive management experience with Onstream.

David Glassman. Mr. Glassman has served as our Chief Marketing Officer since December 2004. He served as Vice Chairman, President and co-founder of Acquired Onstream from June 2001 until joining our company. Mr. Glassman was Vice President of Marketing and co-founder of TelePlace, Inc., a developer and owner of internet data centers and central offices from December 1999 to May 2001. Mr. Glassman was co-founder, Vice Chairman and Co-CEO of Long Distance International, Inc., one of the first competitive European telephone operators from May 1993 to December 1999. Mr. Glassman was an independent technology consultant from January 1988 to April 1993, with a client list that included Action Pay Per View. Mr. Glassman was President and co-founder of Long Distance America, one of the first competitive long distance operators after the breakup of AT&T from January 1984 to December 1987. Mr. Glassman was a communications consultant from January 1981 to January 1984 providing services to United States Satellite Systems Inc. and United Satellite Communications Inc. Mr. Glassman was co-founder and director of All American Hero, Inc., a fast food franchisor, from January 1981 until December 1986.

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Carl Silva.  Mr. Silva, who has been a member of our Board of Directors since July 2006, serves on our Audit (as Chairman), Compensation (as Chairman), Governance and Nominating and Finance Committees. Mr. Silva has over 25 years of experience in the telecommunications and high tech industry, and he has held a variety of positions in business development, sales, marketing, software engineering, and systems engineering during this time. During 2013, Mr. Silva cofounded Sphinx Medical Technologies, a managed service provider for healthcare mobile applications, as their Chief Scientist. Prior to that, Mr. Silva was with ANXeBusiness Corp. as their Chief Scientist, responsible for developing a new nationwide credit card protection system.  Mr. Silva cofounded Smalltell, which focuses on social commerce solutions, such as mobile payment technologies, user-generated content, wireless broadband devices, and nationwide data plans.  Also, Mr. Silva was Chief Scientist and VP of Technology for Nexaira Wireless, Inc. (NXWI.OB), a 3G/4G Router company. Prior to this Mr. Silva was CEO of Cognigen Business Systems, Inc. (NASDAQ: CNGW), a managed service provider for small to mid-size businesses for VoIP and high speed Internet. Mr. Silva started Anza Borrego Partners as a management consulting firm designed to support entrepreneurs in the growth of their businesses.  Mr. Silva was Senior Vice-President for SAIC’s Converged Network Professional services organization from July 1998 to May 2003.  From September 1994 to June 1998, he was with Telcordia Technologies (formerly Bell Communications Research, or Bellcore), where he implemented the first VoIP softswitch in the cable industry.

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Silva should currently serve as a director, in light of our business and structure, are as follows: over 25 years of experience in the telecommunications and high tech industry, most notably at ANX, Nexaira, Cognigen, SAIC and Telcordia.

Leon Nowalsky.  Mr. Nowalsky was appointed a member of our Board of Directors in December 2007 and serves on our Compensation and Governance and Nominating (as Chairman) Committees. Mr. Nowalsky, a partner in the New Orleans-based law firm of Nowalsky & Gothard APLLC (formerly Nowalsky, Bronston & Gothard APLLC), possesses over twenty years of experience in the field of telecommunications law and regulation. Mr. Nowalsky presently is a founder and board member of Thermo Credit, LLC, a specialty finance company for the telecommunications industry and J.C. Dupont, Inc., a Louisiana based oil and gas concern. Mr. Nowalsky has been general counsel for Telemarketing Communications of America, Inc., (“TMC”), as well as lead counsel in TMC’s mergers and acquisitions program, and following TMC’s acquisition by a wholly owned subsidiary of Advanced Telecommunications Corporation, Mr. Nowalsky served as ATC’s chief regulatory counsel as well as interim general counsel.  In 1990, Mr. Nowalsky left ATC to set up a private law practice specializing in telecommunications regulatory matters, mergers and acquisitions and corporate law, which later expanded to become Nowalsky, Bronston & Gothard APLLC. Mr. Nowalsky has previously served as a director of the following companies: Network Long Distance, Inc., a long distance company which was acquired by IXC Communications; RFC Capital Corp., a specialty finance company dedicated exclusively to the telecommunications industry which was purchased in 1999 by TFC Financial Corp., a division of Textron (NYSE:TXT); and New South Communications, a facilities-based competitive local exchange carrier which merged to form NUVOX, which was subsequently acquired by Windstream; W2Com, LLC, a video conferencing and distance learning provider which was acquired by Arel Communications & Software, Ltd. (NASDAQ: ARLC).

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Nowalsky should currently serve as a director, in light of our business and structure, are as follows: over twenty years of experience in the field of telecommunications law and regulation, most notably at TMC and ATC, as well his currently active private law practice specializing in telecommunications regulatory matters, mergers and acquisitions and corporate law.

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Robert D. (“RD”) Whitney.  Mr. Whitney was appointed a member of our Board of Directors in April 2011 and serves on our Audit Committee. Mr. Whitney has been the Executive Director of the Institute of Finance and Management (“IOFM”) since it was acquired in April 2013 by Diversified Business Communications (“DBC”). From January 2011 through April 2013, Mr. Whitney was a partner with Greenhaven Partners (“Greenhaven”), a private-equity firm focusing on investments in specialty information and digital media oriented businesses, and in connection with that role was Chief Executive Officer of two Greenhaven owned entities - Management Networks, LLC (which included IOFM and was sold to DBC as discussed above) and Exchange Networks, LLC (a MarketPlace365 promoter) and Chief Operating Officer of a third - Chief Executive Group, LLC. From 2008 through 2010, Mr. Whitney was CEO of the online media division of the Tarsus Group, PLC, a London-based B2B conference and event producer (TRS.L) and in this position he was also associated with Onstream in various roles during the development and commercial introduction phases of MarketPlace365. From 1997 through 2005, and again in 2006 through 2008, he served in various roles (including Vice President of Operations and General Manager) with Kennedy Information, a firm specializing in delivering market intelligence through multiple media. During this time, Mr. Whitney was instrumental in the sale of Kennedy Information to its current parent company, BNA, which was the largest independent publisher of information and analysis products for professionals in business and government. He also has held positions at Kluwer Law International (a division of Wolters Kluwer), the Thompson Publishing Group, Yankee Publishing, Vicon Publishing and Connell Communications (a division of IDG). Mr. Whitney holds an MBA from Fitchburg State College and a BS from Bentley University.

The primary experience, qualifications, attributes and skills that led us to conclude that Mr. Whitney should currently serve as a director, in light of our business and structure, are as follows: over 20 years management-level experience in marketing and publishing (including Tarsus Group and Kennedy Information) as well as extensive experience in creating strategy for both B2B and B2C marketplaces and in management of major conferences, executive forums, and events (Tarsus Group), all of which we believe will provide valuable insight with respect to the proper focus of our development and sales efforts with respect to webcasting, webinars and our other products and services.

There is no family relationship between any of the executive officers and directors.  Each director is elected at our annual meeting of shareholders and holds office until the next annual meeting of shareholders, or until his successor is elected and qualified.  The bylaws permit the board of directors to fill any vacancy and such director may serve until the next annual meeting of shareholders or until his successor is elected and qualified. Our most recent shareholders meeting was held on September 28, 2012. The board of directors elects officers annually and their terms of office are at the discretion of the Board although certain officers have employment contracts which are as discussed in Item 11 – Executive Compensation. Our officers devote full time to our business.

Expansion of our Board of Directors

Our bylaws provide that the number of directors shall be no less than two and no more than nine. Our Board of Directors currently consists of six directors.

Director Compensation Table

The following table presents director compensation (excluding directors who are Named Executive Officers) for the year ended September 30, 2014:

NAME

 

FEES EARNED
OR PAID IN
CASH
($) (1)

 

STOCK
AWARDS
($) (2)

 

OPTION
AWARDS
($) (2)

 

NON-EQUITY
INCENTIVE PLAN
COMPENSATION
($)

 

CHANGE IN
PENSION VALUE
AND NONQUALIFIED
DEFERRED
COMPENSATION
EARNINGS ($)

 

ALL OTHER
COMPENSATION
($)(3)

 

TOTAL
COMPENSATION
($)

Carl L. Silva

$ 15,000

-0-

 

 -0-

 

 -0-

 

-0-

 

-0-

$ 15,000

Leon Nowalsky

$ 15,000

-0-

 

 -0-

 

 -0-

 

-0-

 

-0-

$ 15,000

Robert D. Whitney

$ 15,000

-0-

 

 -0-

 

 -0-

 

-0-

 

-0-

$ 15,000

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1)     Directors who are not our employees received $3,750 per quarter ($15,000 per year) as compensation for serving on the Board of Directors during fiscal 2014, as well as reimbursement of reasonable out-of-pocket expenses incurred in connection with their attendance at Board of Directors meetings.

2)     No shares or options were issued to the directors who were not also Named Executive Officers during the year ended September 30, 2014. Options granted in previous years were still held as of September 30, 2014 by members of our Board of Directors (excluding those who are Named Executive Officers), as follows:

Messrs. Silva and Nowalsky each held four-year Plan options to purchase 25,000 shares of our common stock with an exercise price of $1.23 per share (fair market value on the date of issuance), issued to them on January 14, 2011 as part of a company-wide grant. These fully vested options were exercisable at $1.23 per share, fair market value on the date of the grant, but expired unexercised on January 14, 2015.

Mr. Whitney holds immediately exercisable four-year Plan options to purchase 25,000 shares of our common stock with an exercise price of $1.00 per share (above fair market value on the date of issuance), issued to him on June 13, 2011 upon his initial appointment to our Board of Directors. This option will expire if not exercised by June 13, 2015.

3)     On August 11, 2009 our Compensation Committee determined that in the event we were sold for a company sale price (as defined) that represented at least $6.00 per share (adjusted for recapitalization including but not limited to splits and reverse splits), cash compensation of two and one-half percent (2.5%) of the company sale price would be allocated equally between the then four outside Directors, as a supplement to provide appropriate compensation for ongoing services as a Director and as a termination fee, as well as one additional executive-level employee other than the Executives. In June 2010, one of the four outside Directors passed away (and was replaced in April 2011) and in January 2013 another one of the four outside Directors resigned (who is not expected to be replaced). In January 2013 the Board voted to terminate this compensation program, in conjunction with the termination of a similar compensation program for the Executives. Although the termination of the program for the Executives was in consideration of a new Executive Incentive Plan agreed on between the Company and the Executives, it has not yet been determined what the replacement compensation program will be, if any, for the outside Directors and the other executive-level employee in lieu of the terminated program.

Board of Directors Meetings and Committees

The Board of Directors meets regularly (in-person and/or by telephone conference) during the year to review matters affecting us and to act on matters requiring Board approval and it also holds special meetings whenever circumstances require. In addition, it may act by written consent. During the fiscal year ended September 30, 2014, there were four meetings of the Board, and the Board took action ten times by written consent. The Board of Directors has four standing committees as discussed below and may, from time to time, establish additional committees.

Board leadership structure and role in risk oversight

The Board’s leadership structure combines the positions of chairman and CEO, which we have determined to be appropriate, given our specific characteristics and circumstances. In particular, our chairman and CEO is able to utilize the in-depth focus and perspective as a company co-founder and his practical experience gained during several years of running the company since its founding to effectively and efficiently guide the Board. The Board has not designated a lead independent director, since it has determined that our chairman closely interacts with the other members of the Board, particularly the independent directors, in fulfilling his responsibilities as chairman and CEO. Although it is management’s responsibility to assess and manage the various risks we face, it is the Board’s responsibility to oversee management in this effort. The Board administers its risk oversight function by appropriate discussions with the CEO, CFO and other members of management during meetings of the Board and at other times.

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Audit Committee

The Audit Committee of the Board of Directors is responsible for the engagement of our independent public accountants, approves services rendered by our accountants, reviews the activities and recommendations of our internal audit department, and reviews and evaluates our accounting systems, financial controls and financial personnel. The Board has previously adopted a charter for the Audit Committee. Pursuant to the requirements of the Securities and Exchange Commission which requires that we provide our shareholders with a copy of the Audit Committee Charter at least once every three years, we have included a copy of the Audit Committee Charter as Exhibit 14.3 to our Form 10-K for fiscal 2013.

The Audit Committee is presently composed of Messrs. Silva (chairman) and Whitney. The Audit Committee met (in-person and/or by telephone conference) five times in fiscal 2014.

Compensation Committee

The Compensation Committee establishes and administers our executive and director compensation practices and policies, including the review of the individual elements of total compensation for executive officers and directors and recommendation of adjustments to the Board of Directors.  In addition, the Compensation Committee administers our 2007 Equity Incentive Plan and determines the number of performance shares and other equity incentives awarded to executives and directors (as well as all other employees) and the terms and conditions of which they are granted and  recommends plans and plan amendments to the Board.  The Compensation Committee is presently composed of Messrs. Silva (chairman) and Nowalsky. The Compensation Committee met in fiscal 2014 in conjunction with meetings of the full Board of Directors.

The Compensation Committee has the responsibility to review, recommend, and approve all executive officer compensation arrangements. The Compensation Committee has the specific responsibility and authority to (i) review and approve corporate goals and objectives relevant to the compensation of our Chief Executive Officer (“CEO”), (ii) evaluate the performance of our CEO in light of those goals and objectives, and (iii) determine and approve the compensation level of our CEO based upon that evaluation. The Compensation Committee also has the responsibility to annually review the compensation of our other executive officers and to determine whether such compensation is reasonable under existing facts and circumstances. In making such determinations, the Compensation Committee seeks to ensure that the compensation of our executive officers aligns the executives’ interests with the interests of our shareholders. The Compensation Committee must also review and approve all forms of incentive compensation, including stock option grants, stock grants, and other forms of incentive compensation granted to our executive officers. The Compensation Committee takes into account the recommendations of our CEO in reviewing and approving the overall compensation of the other executive officers.

We believe that the quality, skills, and dedication of our executive officers are critical factors affecting our long-term value and success. Thus, one of our primary executive compensation goals is to attract, motivate, and retain qualified executive officers. We seek to accomplish this goal by rewarding past performance, providing an incentive for future performance, and aligning our executive officers’ long-term interests with those of our shareholders. Our compensation program is specifically designed to reward our executive officers for individual performance, years of experience, contributions to our financial success, and creation of shareholder value. Our compensation philosophy is to provide overall compensation levels that (i) attract and retain talented executives and motivate those executives to achieve superior results, (ii) align executives’ interests with our corporate strategies, our business objectives, and the long-term interests of our shareholders, and (iii) enhance executives’ incentives to increase our stock price and maximize shareholder value. In addition, we strive to ensure that our compensation, particularly salary compensation, is consistent with our constant focus on controlling costs. Our primary strategy for building senior management depth is to develop personnel from within our company to ensure that our executive team as a whole remains dedicated to our customs, practices, and culture, recognizing, however, that we may gain talent and new perspectives from external sources.

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Our compensation program for executive officers generally consists of the following five elements: (i) base salary, (ii) performance-based annual bonus (currently equity based) determined primarily by reference to objective financial and operating criteria, (iii) long-term equity incentives in the form of stock options and other stock-based awards or grants, (iv) specified perquisites and (v) benefits that are generally available to all of our employees.

The Compensation Committee has the responsibility to make and approve changes in the total compensation of our executive officers, including the mix of compensation elements. In making decisions regarding an executive’s total compensation, the Compensation Committee considers whether the total compensation is (i) fair and reasonable, (ii) internally appropriate based upon our culture and the compensation of our other employees, and (iii) within a reasonable range of the compensation afforded by other opportunities. The Compensation Committee also bases its decisions regarding compensation upon its assessment of the executive’s leadership, individual performance, years of experience, skill set, level of commitment and responsibility required in the position, contributions to our financial success, the creation of shareholder value, and current and past compensation. In determining the mix of compensation elements, the Compensation Committee considers the effect of each element in relation to total compensation. Consistent with our desired culture of industry leading performance and cost control, the Compensation Committee has attempted to keep base salaries at moderate levels for companies within our market and total capitalization and weight overall compensation toward incentive cash and equity-based compensation. The Compensation Committee specifically considers whether each particular element provides an appropriate incentive and reward for performance that sustains and enhances long-term shareholder value. In determining whether to increase or decrease an element of compensation, we rely upon the Compensation Committee’s judgment concerning the contributions of each executive and, with respect to executives other than the CEO, we consider the recommendations of the CEO. We generally do not rely on rigid formulas (other than performance measures under our annual cash bonus program) or short-term changes in business performance when setting compensation.

Pursuant to the requirements of the Securities and Exchange Commission which requires that we provide our shareholders with a copy of the Compensation Committee Charter at least once every three years, we have included a copy of the Committee Charter as Exhibit 14.4 to our Form 10-K for fiscal 2013.

Finance Committee

The Finance Committee reviews and makes recommendations concerning:

·       proposed dividend actions, stock splits and repurchases,

·       current and projected capital requirements,

·       issuance of debt or equity securities,

·       strategic plans and transactions, including mergers, acquisitions, divestitures, joint ventures and other equity investments,

·       customer financing activities, business and related customer finance business and funding plans of Onstream and its subsidiaries,

·        overall company risk management program and major insurance programs, and

·       investment policies, administration and performance of the trust investments of our employee benefit plans.

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Mr. Silva is currently the sole member of the Finance Committee. The Finance Committee met in fiscal 2014 in conjunction with meetings of the full Board of Directors.

Governance and Nominating Committee

While we have not adopted a formal charter for the Governance and Nominating Committee, in June 2003 our Board of Directors adopted Corporate Governance and Nominating Committee Principles.  An updated copy of our Corporate Governance and Nominating Committee Principles was included as Appendix A to the proxy statement for our 2008 and 2009 Annual Meeting of Stockholders filed with the SEC on January 28, 2009. 

                The Governance and Nominating Committee reviews and makes recommendations to the Board of Directors with respect to:

·     the responsibilities and functions of the Board and Board committees and with respect to Board compensation,

·     the composition and governance of the Board, including recommending candidates to fill vacancies on, or to be elected or re-elected to, the Board,

·     candidates for election as Chief Executive Officer and other corporate officers, and

·     monitoring the performance of the Chief Executive Officer and our plans for senior management succession.

The Governance and Nominating Committee has not yet had the occasion to, but will, consider properly submitted proposed nominations by stockholders who are not one of our directors, officers, or employees. These nominations will be evaluated on the same basis as candidates proposed by any other person. A stockholder may nominate a person for election as a director at an annual meeting of the stockholders only if such stockholder gives written notice to our Corporate Secretary as described in the applicable proxy statement for the previous year’s annual meeting of stockholders. Each written notice must set forth, as to each person whom the stockholder proposes to nominate for election as a director, (i) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or that is otherwise required, in each case pursuant to and in accordance with Regulation 14A under the Securities Exchange Act of 1934, as amended, and (ii) such person’s written consent to being named in the proxy statement as a nominee and to serve as a director if elected. Each written notice must also set forth, as to the stockholder making such nomination, (i) the name and address of such stockholder, as they appear on our books, (ii) the class and number of shares of our stock which are owned by such stockholder, (iii) a representation that the stockholder is a holder of record of our stock entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such nomination, and (iv) a representation whether the stockholder intends or is a part of a group which intends (y) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of our outstanding capital stock required to elect the nominee and/or (z) otherwise to solicit proxies from stockholders in support of such nomination. We will evaluate the suitability of potential candidates nominated by stockholders in the same manner as other candidates identified to the Governance and Nominating Committee, including the specific minimum qualifications described below.

The procedures for identifying candidates include a review of Onstream's current directors, soliciting input from existing directors and executive officers, and a review of submissions from stockholders, if any. Onstream’s management believes that the Board should be composed of:

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·     directors chosen with a view to bringing to the Board a variety of experiences and backgrounds,

·     directors who have high level managerial experience or are accustomed to dealing with complex problems, and

·     directors who will represent the balanced, best interests of the stockholders as a whole rather than special interest groups or constituencies, while also taking into consideration the overall composition and needs of the Board.

In considering possible candidates for election as an outside director, the Governance and Nominating Committee and other directors should be guided by the foregoing general guidelines and by the following criteria:

·     Each director should be an individual of the highest character and integrity, have experience at (or demonstrated understanding of) strategy/policy-setting and a reputation for working constructively with others.

·     Each director should have sufficient time available to devote to our affairs in order to carry out the responsibilities of a director.

·     Each director should be free of any conflict of interest, which would interfere with the proper performance of the responsibilities of a director.

·     The Chief Executive Officer is expected to be a director. Other members of senior management may be considered, but Board membership is not necessary or a prerequisite to a higher management position.

The Governance and Nominating Committee is presently composed of Messrs. Nowalsky (chairman) and Silva. The Governance and Nominating Committee met in fiscal 2014 in conjunction with meetings of the full Board of Directors.

Code of Business Conduct and Ethics

Effective December 18, 2003, our Board of Directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, our President (being our principal executive officer) and our Chief Financial Officer (being our principal financial and accounting officer), as well as persons performing similar functions. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:

·     honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships,

·     full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us,

·     compliance with applicable governmental laws, rules and regulations,

·     the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics, and

·     accountability for adherence to the Code of Business Conduct and Ethics.

Our Code of Business Conduct and Ethics requires, among other things, that all of our personnel shall be accorded full access to our President and to our Chief Financial Officer, with respect to any matter that may arise relating to the Code of Business Conduct and Ethics. Further, all of our personnel are to be accorded full access to our Board of Directors if any such matter involves an alleged breach of the Code of Business Conduct and Ethics by our President or by our Chief Financial Officer.

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In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly managers and/or supervisors, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal, provincial and state securities laws.  Any employee who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to his or her immediate supervisor or to our President or our Chief Financial Officer.  If the incident involves an alleged breach of the Code of Business Conduct and Ethics by our President or by our Chief Financial Officer, the incident must be reported to any member of our Board of Directors.  Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our policy to retaliate against any individual who reports in good faith the violation or potential violation of our Code of Business Conduct and Ethics by another.

Our Code of Business Conduct and Ethics was included as an exhibit to our fiscal 2003 annual report filed on Form 10-K. We will provide a copy of our Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to: Onstream Media Corporation, 1291 SW 29 Avenue, Pompano Beach, Florida 33069.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Securities Exchange Act of 1934, as amended, during the fiscal year ended September 30, 2014 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended September 30, 2014, as well as any written representation from a reporting person that no Form 5 is required, we are not aware of any person that failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year ended September 30, 2014, except to the extent the following represents non-compliance:

On May 20, 2014, we determined that the Executives were entitled to an aggregate of 250,000 ONSM common shares for meeting certain financial goals. We did not issue those shares to the Executives until June 10, 2014. Although the Executives did not file a Form 4 to report the May 20, 2014 grant of a right to receive such shares, the Executives each timely filed a Form 4 on June 11 or June 12, 2014 reporting the issuance of their respective portion of those shares.

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ITEM 11.   EXECUTIVE COMPENSATION       

Summary Compensation Table

                The following table sets forth certain information relating to the compensation of (i) our Chief Executive Officer; and (ii) each of our executive officers who earned more than $100,000 in total compensation during the most recent fiscal year (collectively, the “Named Executive Officers”):

Total compensation as presented in the following table includes cash and non-cash elements. However, the value of stock awards during fiscal 2013 and 2014, based on our closing share price on May 8, 2015, is only 45.7% of the amount shown as compensation in this table and discussed in footnote 13 below, and furthermore these shares are prohibited to be traded until all restrictions are removed by the Board. See footnote 1 below for a table that presents the cash and non-cash elements of compensation for the years ended September 30, 2014 and 2013:

 

SUMMARY COMPENSATION TABLE

STOCK OPTION ALL OTHER TOTAL
NAME AND FISCAL BONUS AWARDS AWARDS COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) ($) ($) ($) ($) (14)     ($)­­­(1)        
Randy S. Selman 2014 $299,690 (12) -0- $   19,500 (13)  -0- $54,820 (2) $374,010
President, Chief 2013 $298,926 (12) -0- $ 295,086 (13)  -0- $52,220 (3) $646,332
Executive Officer
and Director
Alan Saperstein 2014 $272,446 (12) -0- $   19,500 (13)  -0- $56,148(4) $348,094
Chief Operating 2013 $271,751 (12) -0- $ 291,547 (13)  -0- $54,859(5) $618,157
Officer and Director
Robert Tomlinson 2014 $254,383 (12) -0- $  19,500 (13)  -0- $54,365 (6) $328,248
Chief Financial 2013 $256,271 (12) -0- $ 197,003 (13)  -0- $51,767 (7) $505,041
Officer
Clifford Friedland 2014 $242,105 (12)  -0- $  19,500 (13)  -0- $63,869 (8) $325,474
Senior VP - Busi- 2013 $241,487 (12) -0- $ 215,710 (13)  -0- $58,242 (9) $515,439
ness Development
and Director
David Glassman 2014 $242,105 (12) -0- $  19,500 (13)  -0- $55,745(10) $317,350
Senior VP - 2013 $241,487 (12) -0- $ 215,710 (13)  -0- $52,821(11) $510,018
Marketing

(1)          Below is a table that presents the cash and non-cash elements of compensation for the years ended September 30, 2014 and 2013 - the value of stock awards comprising non-cash compensation during fiscal 2013 and 2014, based on our closing share price on May 8, 2015, is only 45.7% of the amount shown as compensation in this table, and furthermore these shares are prohibited to be traded until all restrictions are removed by the Board:

For the year ended September 30, 2014:
  Cash Compensation Non-Cash Compensation
Randy S. Selman $354,510 $19,500
Alan Saperstein $328,594 $19,500
Robert Tomlinson $308,748 $19,500
Clifford Friedland $305,974 $19,500
David Glassman $297,850 $19,500

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For the year ended September 30, 2013:
  Cash Compensation Non-Cash Compensation
Randy S. Selman $351,146 $295,086
Alan Saperstein $326,610 $291,547
Robert Tomlinson $308,038 $197,003
Clifford Friedland $299,729 $215,710
David Glassman $294,308 $215,710

 

(2)          Includes $16,185 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,635 for retirement savings and 401(k) match.

(3)          Includes $13,595 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,625 for retirement savings and 401(k) match.

(4)          Includes $21,148 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $18,000 for retirement savings.

(5)          Includes $19,859 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $18,000 for retirement savings.

(6)          Includes $16,185 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,180 for retirement savings and 401(k) match.

(7)          Includes $13,595 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,172 for retirement savings and 401(k) match.

(8)          Includes $24,027 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $22,842 for retirement savings and 401(k) match.

(9)          Includes $19,620 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,622 for retirement savings and 401(k) match.

(10)        Includes $16,185 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $22,560 for retirement savings and 401(k) match.

(11)        Includes $13,595 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $22,226 for retirement savings and 401(k) match.

(12)        Effective October 1, 2009, in response to our operating cash requirements, the base salary amounts being paid to the Executives were adjusted to be 10% less than the contractual amounts. In addition, until certain actions as discussed below, the amounts representing the subsequent contractual annual increases to those base salary amounts were not paid. No related modifications of the compensation as called for under their related employment agreements was made, as it was expected that this compensation withheld from the Executives would eventually be paid, although the Executives did agree that they would accept payment in equity of such shortfalls to a certain extent and under certain terms. Accordingly, we accrued these unpaid amounts as non-cash compensation expense, with the unpaid portion reflected as an accrued liability under the balance sheet caption “Amounts due to executives and officers”. However, these accrued amounts will not be reflected as compensation in the above table until and unless additional payments are made to the Named Executive Officers in settlement of those amounts.

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Effective September 16, 2012, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.8% of the contractual base salary at that time. Effective September 16, 2014, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 5.0% of the contractual base salary at that time. Effective May 1, 2015, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.4% of the contractual base salary at that time. As of May 8, 2015, the base salary payments to the Executives are 10.3% less than the contractual base salaries, compared to the 10% reduction instituted in October 2009 and which reduction was initially company-wide but no longer affects a majority of our other employees.

In consideration of the waiver and satisfaction of any remaining unpaid salary due to the Executives through December 31, 2012 under their employment agreements, as well as the waiver and satisfaction of any remaining unpaid amounts due to certain of those Executives, we (as authorized by our Board of Directors) and the Executives agreed, effective January 22, 2013, (i) to pay $100,000 ($20,000 per Executive) of the withheld compensation in cash and (ii) to issue 1,700,000 (340,000 per Executive) fully vested ONSM common shares, subject to certain trading restrictions (the “Executive Shares”). $125,000 in cash ($25,000 per Executive) was paid in April 2015, which satisfied the above commitment to pay the $100,000 of pre December 31, 2012 compensation not covered by the Executive Shares. This $125,000 cash payment will be reflected in the above table as fiscal 2015 compensation. Although, as of June 12, 2015, the Executive Shares have not been issued, due to certain administrative and documentation requirements, since the Executive Shares were committed to be issued by the January 22, 2013 action of the Board, that issuance was reflected in our financial statements as of the date of such commitment. Furthermore, to the extent there is any shortfall from the gross proceeds upon resale by the Executives of the Executive Shares versus twenty-nine cents ($0.29) per share, the shortfall will be reimbursed to the Executives by us in cash, or at our option, by the issuance of additional fully vested ONSM common shares (the “Additional Executive Shares”), with the Additional Executive Shares subject to reimbursement by us to the Executives of any shortfall from the gross proceeds upon resale as compared to the fair value used to determine the number of such Additional Executive Shares. However, neither the Executive Shares nor the Additional Executive Shares will be reflected as compensation in the above table until and unless the shares are issued and/or corresponding cash payments are made to the Named Executive Officers.

(13)        On February 20, 2013, we (as authorized by our Board of Directors) and the Executives agreed to certain changes in the Executives’ employment agreements, as follows: (i) cancellation of the previous compensation program allowing for cash compensation aggregating to 15% of the sales price of the Company payable to the Executives as well as other employees and certain directors, (ii) cancellation of all stock options held by the Executives, including the previous employment agreement provision that would have allowed for the conversion of those options into approximately 1.3 million paid-up common shares (plus compensation for the tax effect) under certain circumstances and (iii) implementation of an executive incentive compensation plan (the “Executive Incentive Plan”).

Compensation under the Executive Incentive Plan would be in the form of Fully Restricted (as defined below) ONSM common Plan shares (“Executive Incentive Shares”) and is based on the Company achieving certain financial objectives, as follows:

·         Increased revenues in each of fiscal years 2011 through 2015 (as compared to the respective prior year).

·         Positive operating cash flow (as defined in the Executive Incentive Plan) in each of fiscal years 2011 through 2015.

·         EBITDA, as adjusted, (as defined in the Executive Incentive Plan) for at least two quarters of each of fiscal years 2013 through 2015.

The objectives related to fiscal 2011 and fiscal 2012 were based on discussions between the Board and the Executives that had been going on for some time as part of the process of agreeing on the Executive Incentive Plan. In addition, as disclosed in our previous public filings, the Compensation Committee had already indicated their intent as of January 14, 2011 to issue options to purchase an aggregate of at least 450,000 underlying common shares to the Executives as a group, for which the issuance and vesting would have required no performance and which would have been convertible into paid-up shares (including tax effect) under certain circumstances. Accordingly, the Board determined that the objectives for fiscal 2011 and fiscal 2012 were a reasonable basis for the issuance of an aggregate of 950,000 Executive Incentive Shares to the Executives as a group for the accomplishment of those goals for that two-year period. In addition, we agreed to issue an aggregate of 1.3 million Executive Incentive Shares to the Executives (as a group) as earned compensation for past service and in recognition that all options previously held by, or promised to, the Executives have been cancelled.

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The 2,250,000 Executive Incentive Shares that were earned as of the date the Executive Incentive Plan was established were issued in May 2013 and recorded on our financial statements based on their fair value at the time of the February 20, 2013 agreement, which was $1,237,500 ($0.55 per share), less the approximately $100,000 Black-Scholes value of the cancelled stock options as calculated immediately before their cancellation. The net amount of approximately $1,137,500 is included in the amounts reflected as non-cash compensation expense for the year ended September 30, 2013 in the above table.

In September 2013, the Executives as a group were issued an aggregate of 250,000 Executive Incentive Shares for meeting one of the fiscal 2013 objectives - achieving positive EBITDA, as adjusted, for at least two quarters of fiscal 2013. Accordingly, those shares have been recorded on our financial statements and reflected in the amounts in the above table as non-cash compensation expense of $77,500 for the year ended September 30, 2013, based on their fair value of $0.31 per share as of August 9, 2013, the date it was conclusively determined that the objective had been met and the shares had been earned. Accomplishment of the other objectives for fiscal 2013 would have resulted in an aggregate of 375,000 Executive Incentive Shares issued to the Executives as a group, but it was determined that these shares were not earned.

With respect to fiscal 2014, the Executives have earned an aggregate of 500,000 Executive Incentive Shares for meeting the objective of achieving positive EBITDA, as adjusted, for at least two quarters as well as meeting the objective of achieving positive operating cash flow (as defined in the Executive Incentive Plan) for fiscal 2014. Accordingly, those 500,000 shares have been recorded on our financial statements and reflected as non-cash compensation expense of $97,500 for the year ended September 30, 2014 (the term of service) based on (i) the fair value of 250,000 shares at $0.21 per share as of May 20, 2014, the date it was conclusively determined that the EBITDA objective had been met and the shares had been earned plus (ii) the fair value of 250,000 shares at $0.18 per share as of May 8, 2015, the date it was conclusively determined that it was probable the cash flow objective would be met and the shares would be earned. Accomplishment of the other objective for fiscal 2014 would have resulted in an aggregate of 125,000 Executive Incentive Shares issued to the Executives as a group, but it was determined that these shares were not earned.

Accomplishment of the objectives for fiscal 2015 would result in an aggregate of 625,000 Executive Incentive Shares issued to the Executives as a group. A lesser amount of Executive Incentive Shares would be issuable for achievement of only one or two of the three objectives set for that year.

The Executive Incentive Shares are being issued in accordance with the terms of the 2007 Equity Incentive Plan (the “Plan”) which our Board of Directors and a majority of our shareholders adopted on September 18, 2007 and they amended on March 25, 2010 and on June 13, 2011, and to the extent these and other issuances under the Plan do not exceed the number of authorized Plan shares – see “2007 Equity Incentive Plan” below. The Executive Incentive Shares are subject to a complete restriction on the Executive’s ability to access or transact in any way such shares until the restriction is lifted. Upon a change of control, termination of the Executive’s employment or the imminently proposed and/or anticipated sale of the Company at a price of $1.00 per common share or more, all restrictions on the Executive Incentive Shares and any other common shares held by the Executives will be lifted. In the case of a sale, all restrictions will be lifted in time for those previously restricted shares to participate in all voting with respect to the proposed sale and will be eligible, at the Executive’s option, for inclusion as part of the shares sold in that transaction. Due to the restrictions on the Executive Incentive Shares, we have determined that the issuance thereof will not result in taxable compensation income to the Executives (or tax deductible compensation expense to the Company) until such restrictions have been lifted.

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Upon a change of control, termination of the Executive’s employment or the imminently proposed and/or anticipated sale of the Company at a price of $1.00 per common share or more before September 30, 2015, the Executive Incentive Shares still potentially issuable for future fiscal years will be considered earned and will be issued to the Executives on an unrestricted basis. In the case of a sale, all such accelerated shares shall be issued in time for those previously unissued shares to participate in all voting with respect to the proposed sale and will be eligible, at the Executive’s option, for inclusion as part of the shares sold in that transaction. Notwithstanding the above, in the event that the termination of the Executive’s employment is the result of the Executive’s voluntary resignation, and such voluntary resignation is not due to the Company’s breach of the Executive’s employment agreement or is not due to constructive termination as outlined in the Executive’s employment agreement, such restrictions will be promptly lifted, provided that no bona-fide and legally defensible objection to such issuance has been raised by written notice provided by a majority of the other four Executives to the terminating Executive, within ninety (90) days after such termination date.

(14)        The Named Executive Officers did not receive non-equity incentive plan compensation or compensation from changes in pension value and nonqualified deferred compensation earnings during the periods covered by the above table.

Employment Agreements

On September 27, 2007, our Compensation Committee and Board of Directors approved three-year employment agreements with Messrs. Randy Selman (President and CEO), Alan Saperstein (COO), Robert Tomlinson (Chief Financial Officer), Clifford Friedland (Senior Vice President Business Development) and David Glassman (Senior Vice President Marketing), collectively referred to as “the Executives”. In addition, our Compensation Committee and Board have approved certain corrections and modifications to those agreements from time to time, which are reflected in the discussion below. The employment agreements provide that the initial term shall automatically be extended for successive one (1) year terms thereafter unless (a) the parties mutually agree in writing to alter the terms of the agreement; or (b) one or both of the parties exercises their right, pursuant to various provisions of the agreement, to terminate the employment relationship. 

After annual increases in prior years as set forth in the employment agreements, the contractual annual base salaries for the five Executives in aggregate as of September 30, 2014 are approximately $1.7 million, subject to a five percent (5%) increase on September 27, 2015 and each year thereafter – a portion of these contractual salaries are presently not being paid to the Executives, as discussed below. In addition, each of the Executives receives an auto allowance payment of $1,000 per month, a “retirement savings” payment of $1,500 per month and an annual reimbursement of dues or charitable donations up to $5,000.  We also pay insurance premiums for the Executives, including medical, life and disability coverage. These agreements contain certain non-disclosure and non-competition provisions and we have agreed to indemnify the Executives in certain circumstances.

Under the terms of the employment agreements, upon a termination subsequent to a change of control, termination without cause or constructive termination, each as defined in the agreements, we would be obligated to pay each of the Executives an amount equal to three (3) times the Executive’s base salary plus full benefits for a period of the lesser of (i) three (3) years from the date of termination or (ii) the date of termination until a date one (1) year after the end of the initial employment contract term. We may defer the payment of all or part of this obligation for up to six (6) months, to the extent required by Internal Revenue Code Section 409A.

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Under the terms of the employment agreements, we may terminate an Executive’s employment upon his death or disability or with or without cause. If an Executive is terminated for cause, no severance benefits are due him. If an employment agreement is terminated as a result of the Executive’s death, his estate will receive one year base salary plus any bonus or other compensation amount or benefit then payable or that would have been otherwise considered vested or earned under the agreement during the one-year period subsequent to the time of his death. If an employment agreement is terminated as a result of the Executive’s disability, as defined in the agreement, he is entitled to compensation in accordance with our disability compensation for senior executives to include compensation for at least 180 days, plus any bonus or other compensation amount or benefit then payable or that would have been otherwise considered vested or earned under the agreement during the one-year period subsequent to the time of his disability.

The above description is qualified in its entirety by the terms and conditions of the employment agreements.

Outstanding Equity Awards at Fiscal Year-End Table

There were no outstanding stock options or stock awards held by the Named Executive Officers as of September 30, 2014.

2007 Equity Incentive Plan

On September 18, 2007, our Board of Directors (the “Board”) and a majority of our shareholders adopted the 2007 Equity Incentive Plan (the “Plan”), which authorized the issuance of up to 1,000,000 shares of ONSM common stock pursuant to stock options, stock purchase rights, stock appreciation rights and/or stock awards for employees, directors and consultants. On March 25, 2010, our Board and a majority of our shareholders approved a 1,000,000 increase in the number of shares authorized for issuance under the Plan, for total authorization of 2,000,000 shares and on June 13, 2011 they authorized a further increase in authorized Plan shares by 2,500,000 to 4,500,000. Based on the issuance of 3,377,763 common shares under the Plan, including the 3,000,000 Executive Incentive Shares issued as discussed above, through September 30, 2014, as well as 481,185 outstanding employee, consultant and director Plan Options, and 75,000 outstanding financial consultant Plan Options, as of September 30, 2014, 566,052 shares were available for additional issuances under the Plan as of September 30, 2014. The outstanding Plan Options as of September 30, 2014 had exercise prices from $1.00 to $9.42 per share. After considering the 481,185 outstanding employee, consultant and director Plan Options, and 25,000 of the outstanding financial consultant Plan Options, as of September 30, 2014 that expired without being exercised at various dates through March 2015, 1,072,237 shares were available for additional issuances under the Plan as of May 8, 2015.

The stated purpose of the Plan is to increase our employees', advisors', consultants' and non-employee directors' proprietary interest in our company, and to align more closely their interests with the interests of our shareholders, as well as to enable us to attract and retain the services of experienced and highly qualified employees and non-employee directors. The Plan is administered by the Compensation Committee of our Board (“the Committee"). The Committee determines, from time to time, those of our officers, directors, employees and consultants to whom Stock Grants and Plan Options will be granted, the terms and provisions of the respective Grants and Plan Options, the dates such Plan Options will become exercisable, the number of shares subject to each Plan Option, the purchase price of such shares and the form of payment of such purchase price. Stock Grants may be issued by the Committee at up to a 10% discount to market at the time of grant. All other questions relating to the administration of the Plan, and the interpretation of the provisions thereof, are to be resolved at the sole discretion of our Board or the Committee.

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Plan Options granted under the Plan may either be options qualifying as incentive stock options ("Incentive Options") under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or options that do not so qualify ("Non-Qualified Options"). The exercise price of any Incentive Option granted to an eligible employee owning more than 10% of our common stock must be at least 110% of such fair market value as determined on the date of the grant.

The term of each Plan Option and the manner in which it may be exercised is determined by our Board or the Committee, provided that no Plan Option may be exercisable more than 10 years after the date of its grant and, in the case of an Incentive Option granted to an eligible employee owning more than 10% of our common stock, no more than five years after the date of the grant.  In any case, the exercise price of any stock option granted under the Plan will not be less than 85% of the fair market value of the common stock on the date of grant. The exercise price of Non-Qualified Options is determined by the Committee.

The per share purchase price of shares subject to Plan Options granted under the Plan may be adjusted in the event of certain changes in our capitalization, but any such adjustment shall not change the total purchase price payable upon the exercise in full of Plan Options granted under the Plan. Officers, directors and employees of and consultants to us and our subsidiaries are eligible to receive Non-Qualified Options under the Plan. Only such individuals who are employed by us or by any of our subsidiaries thereof are eligible to receive Incentive Options.

All Plan Options are nonassignable and nontransferable, except by will or by the laws of descent and distribution and, during the lifetime of the optionee, may be exercised only by such optionee. If an optionee's employment is terminated for any reason, other than his death or disability or termination for cause, or if an optionee is not our employee but is a member of our Board and his service as a Director is terminated for any reason, other than death or disability, the Plan Option granted may be exercised on the earlier of the expiration date or 90 days following the date of termination. If the optionee dies during the term of his employment, the Plan Option granted to him shall lapse to the extent unexercised on the earlier of the expiration date of the Plan Option or the date one year following the date of the optionee's death. If the optionee is permanently and totally disabled within the meaning of Section 22(c)(3) of the Code, the Plan Option granted to him lapses to the extent unexercised on the earlier of the expiration date of the option or one year following the date of such disability.

The Board may amend, suspend or terminate the Plan at any time, except that no amendment shall be made which (i) increases the total number of shares subject to the Plan or changes the minimum purchase price therefore (except in either case in the event of adjustments due to changes in our capitalization) without shareholder consent, (ii) affects outstanding Plan Options or any exercise right thereunder, (iii) extends the term of any Plan Option beyond ten years, or (iv) extends the termination date of the Plan.

Unless the Plan has been earlier suspended or terminated by the Board, the Plan shall terminate 10 years from the date of the Plan’s adoption. Any such termination of the Plan shall not affect the validity of any Plan Options previously granted thereunder.

The potential benefit to be received from a Plan Option is dependent on increases in the market price of the common stock. The ultimate dollar value of the Plan Options that have been or may be granted under the Plan are therefore not ascertainable. On May 8, 2015, the closing price of our common stock as reported on OTCP was $0.20 per share.

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ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table contains information regarding beneficial ownership of our common stock as of May 8, 2015 held by:

·         persons who own beneficially more than 5% of our outstanding common stock,

·         our directors,

·         named executive officers, and

·         all of our directors and officers as a group.

                Unless otherwise indicated, the address of each of the listed beneficial owners identified is c/o Onstream Media Corporation, 1291 SW 29th Avenue, Pompano Beach, Florida 33069. Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all shares of our common stock beneficially owned by them.  A person is deemed to be the beneficial owner of securities that can be acquired by such a person within 60 days from May 8, 2015 upon exercise of options, warrants, convertible securities or other rights to receive our common shares. Each beneficial owner's percentage of ownership is determined by assuming that options, warrants, convertible securities or other rights to receive our common shares that are held by such a person (but not those held by any other person) and are exercisable within 60 days from the date hereof (unless otherwise indicated below) have been exercised. All information is based upon a record list of stockholders received from our transfer agent as of May 8, 2015. At that date, approximately 58% of our outstanding shares were held by CEDE & Co., which is accounted for as a single shareholder of record for multiple beneficial owners. CEDE & Co. is a nominee of the Depository Trust Company (DTC), with respect to securities deposited by participants with DTC, e.g., mutual funds, brokerage firms, banks, and other financial organizations.  Shares held by CEDE & Co. are not reflected in the following table. For purposes of calculating beneficial ownership percentages in the following table, the number of total outstanding shares used as the denominator includes an aggregate of 2.75 million fully restricted common shares issued to the named executive officers, but because of the nature of the restrictions those 2.75 million shares are not considered beneficially owned by those executives for purposes of the table.

Shares of Common Stock Beneficially Owned

Name and Address of Beneficial Owner

Number

     Percentage
Randy S. Selman (1)                                                                             1,660 -
Alan M. Saperstein (2)                                                                1,973 -
Clifford Friedland (3)                                                    123,906 0.5%
David Glassman (4)                                                                123,878 0.5%
Robert E. Tomlinson (5)                                                                  - -
Carl L. Silva                                                                           -  -
Leon Nowalsky                                                                            - -
Robert D. (“RD”) Whitney (6)                                                               25,000 0.1%
All directors and officers as a group (eight persons) (7)                                         276,417 1.2%

 

 (1)         Includes 1,660 shares of our common stock presently outstanding. Excludes 653,000 common shares issued and outstanding, as well as 100,000 common shares earned but not issued as of May 8, 2015, but subject to restriction on the ability of Mr. Selman to access or transact in any way until such restrictions are lifted. See footnote 13 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 12 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Selman has the right/obligation to purchase from an independent third party and which have been partially paid for as of May 8, 2015 but none of these shares will be transferred to Mr. Selman until the full payment for all of the shares has been made.

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 (2)         Includes 1,973 shares of our common stock presently outstanding. Excludes 646,000 common shares issued and outstanding, as well as 100,000 common shares earned but not issued as of May 8, 2015, but subject to restriction on the ability of Mr. Saperstein to access or transact in any way until such restrictions are lifted. See footnote 13 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 12 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Saperstein has the right/obligation to purchase from an independent third party and which have been partially paid for as of May 8, 2015 but none of these shares will be transferred to Mr. Saperstein until the full payment for all of the shares has been made.

 (3)         Includes 74,538 shares of our common stock presently outstanding, 24,684 shares of our common stock held by Titan Trust and 24,684 shares of our common stock held by Dorado Trust. Excludes 496,000 common shares issued and outstanding, as well as 100,000 common shares earned but not issued as of May 8, 2015, but subject to restriction on the ability of Mr. Friedland to access or transact in any way until such restrictions are lifted. See footnote 13 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 12 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Friedland has the right/obligation to purchase from an independent third party and which have been partially paid for as of May 8, 2015 but none of these shares will be transferred to Mr. Friedland until the full payment for all of the shares has been made. Mr. Friedland is the control person and beneficial owner of both Titan Trust and Dorado Trust and exercises sole voting and dispositive powers over these shares.

 (4)         Includes 74,510 shares of our common stock presently outstanding, 24,684 shares of our common stock held by JMI Trust and 24,684 shares of our common stock held by Europa Trust. Excludes 496,000 common shares issued and outstanding, as well as 100,000 common shares earned but not issued as of May 8, 2015, but subject to restriction on the ability of Mr. Glassman to access or transact in any way until such restrictions are lifted. See footnote 13 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 12 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Glassman has the right/obligation to purchase from an independent third party and which have been partially paid for as of May 8, 2015 but none of these shares will be transferred to Mr. Glassman until the full payment for all of the shares has been made. Mr. Glassman is the control person and beneficial owner of both JMI Trust and Europa Trust and exercises sole voting and dispositive powers over these shares.

 (5)         Excludes 459,000 common shares issued and outstanding, as well as 100,000 common shares earned but not issued as of May 8, 2015, but subject to restriction on the ability of Mr. Tomlinson to access or transact in any way until such restrictions are lifted. See footnote 13 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 12 to the table in Item 11 Executive Compensation for additional details. Also excludes 41,073 restricted common shares that may not be transacted by Mr. Tomlinson for any reason whatsoever prior to Board approval, which has not been granted.

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 (6)         Includes vested options to acquire 25,000 common shares at $1.00 per share.

 (7)         See footnotes (1) through (6) above.

The entities Sigma Opportunity Fund II, LLC (“Sigma”) and Sigma Capital Advisors, LLC (“Sigma Capital”) had beneficial ownership of 175,000 shares in aggregate as of May 8, 2015. Sigma Capital serves as the managing member of Sigma. Mr. Thom Waye is the sole member of Sigma Capital Partners, LLC, which in turn is the sole member of Sigma Capital, and as a result Mr. Waye, representing Sigma Capital Partners, LLC, is the control person and beneficial owner of Sigma and Sigma Capital and exercises sole voting and dispositive powers over these 175,000 shares, which represent approximately 0.8% beneficial ownership, less than the 5% threshold for inclusion of Mr. Waye and/or Sigma Capital Partners, LLC in the beneficial ownership table above. As of May 8, 2015 we were indebted for a note payable to Sigma in the principal amount of $1,358,000 (the “New Sigma Note”) and having a maturity date of October 15, 2015. Sigma has the right to convert the New Sigma Note to common stock at a rate of $0.30 per share, which right Sigma may exercise after October 15, 2015, in its entirety or partially, at its option or it may exercise before October 15, 2015, but only if we are in default on the New Sigma Note or we are sold. Based on these limitations on conversion, the 4,526,667 shares that would be issuable upon conversion of the New Sigma Note are not considered to be beneficially owned by Sigma as of May 8, 2015. However, if these 4,526,667 shares were added to the 175,000 shares which are considered beneficially owned by Mr. Waye and/or Sigma Capital Partners, LLC as of that date, the combined total of 4,701,667 shares would represent 17.4% beneficial ownership.

Securities Authorized for Issuance Under Equity Compensation Plans - See Item 5 - Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 

Certain relationships and related transactions

In December 2007, we entered into a line of credit arrangement (the “Line”) with a financial institution (the “Lender”) under which we could borrow up to an aggregate of $1.0 million for working capital, collateralized by our accounts receivable and certain other related assets. In August 2008 the maximum allowable borrowing amount under the Line was increased to $1.6 million and in December 2009 this amount was again increased to $2.0 million. The outstanding balance bears interest at 12.0% per annum, adjustable based on changes in prime after December 27, 2011 (was prime plus 8% per annum through December 2, 2008, prime plus 11% per annum from that date through December 28, 2009 and 13.5% per annum from that date to December 27, 2011), payable monthly in arrears. Effective December 28, 2009, we also incur a weekly monitoring fee of one twentieth of a percent (0.05%) of the borrowing limit, payable monthly in arrears. We paid the Lender initial origination and commitment fees in December 2007 aggregating $20,015, an additional commitment fee in August 2008 of $6,000 related to the increase in the lending limit for the remainder of the year, a commitment fee of $16,000 in December 2008 related to the continuation of the increased Line for an additional year, a commitment fee of $20,000 in December 2009 related to the continuation of the Line for an additional year as well as an increase in the lending limit, and commitment fees aggregating $60,000 related to the continuation of the Line for three additional years through December 2013. We also pay the Lender fees and expenses totaling approximately two to three thousand dollars per quarter related to their reviews of our receivable and other records related to the loan. Although the Line expired on December 27, 2013, on January 13, 2014 we received a letter from the Lender confirming that they will be renewing the Line through December 31, 2015, with terms materially equivalent to the just expired Line. Those terms include a commitment fee, which is calculated as one percent (1%) per year of the maximum allowable borrowing amount and paid in annual installments. However, pending the formal renewal of the Line, we agreed in August 2014 to pay a commitment fee calculated on a pro-rata basis for eight months payable August 31, 2014 and a pro-rata monthly commitment fee thereafter. The delay in the formal renewal of the Line is primarily related to discussions between the Lender and us as to how certain direct deposit provisions could be implemented and administered in a mutually acceptable manner. The outstanding balance due under the Line was approximately $1.7 million as of May 8, 2015. Mr. Leon Nowalsky, a member of our Board of Directors, is also a founder and board member of the Lender.

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On December 29, 2009, we entered into an agreement with CCJ Trust (“CCJ”) whereby accrued interest on a previous $200,000 cash advance through that date of $5,808 was paid by us in cash and the $200,000 advance was converted to an unsecured subordinated note payable (the “CCJ Note”) at a rate of 8% interest per annum in equal monthly installments of principal and interest for 48 months plus a $100,000 principal balloon at maturity, although none of those payments were subsequently made by us. CCJ is a trust for the adult children of Mr. Charles Johnston, one of our directors at that time, and he disclaims any beneficial ownership interest in CCJ. To resolve the payment default, the CCJ Note was amended in January 2011 to prospectively increase the interest rate to 10% per annum, payable quarterly, and to require two principal payments of $100,000 each on December 31, 2011 and December 31, 2012, respectively. This amendment also called for our cash payment of the previously accrued interest in the amount of $16,263 on or before January 31, 2011. On July 22, 2011, in order to reduce our near-term cash requirements, we agreed to convert $90,000 of the $100,000 December 31, 2011 principal payment to 100,000 common shares, leaving a remaining balance outstanding under the CCJ Note of $110,000, of which $10,000 was paid in January 2012. Three quarterly interest payments on the remaining outstanding $100,000 balance were subsequently made in cash and as of December 31, 2012 we would have owed the $100,000 principal plus the final quarterly interest payment of $2,500. However, we agreed with CCJ to combine that $102,500 obligation with another unpaid obligation of $43,279. The combined obligation of $145,779 was the principal amount of a replacement subordinated note issued to CCJ dated December 31, 2011 and payable in 24 monthly principal and interest installments of $6,862.32 starting January 31, 2013 and which payment amount included interest at 12% per annum. Prior to the issuance of the December 31, 2012 replacement note, the CCJ Note was convertible by CCJ into our common shares at the greater of (i) the previous 30 day market value or (ii) $2.00 per share (which was $3.00 per share prior to the January 2011 renegotiation). The December 31, 2012 replacement note had no conversion rights. On November 4, 2013, the outstanding principal balance of the CCJ Note, as well as accrued but unpaid interest, in the aggregate amount of $125,000 was satisfied from the gross proceeds of a $250,000 note issued by us to the same lender. However, Mr. Johnston was no longer an ONSM director at the time the $250,000 note was negotiated.

In conjunction with and in consideration of the December 2009 note transaction, the 35,000 shares of Series A-12 (with a stated value of $10.00 per share and convertible into common at $6.00 per share) held by CCJ at that date were exchanged for 35,000 shares of Series A-13 (with a stated value of $10.00 per share and convertible into common at $3.00 per share) plus four-year warrants for the purchase of 29,167 Onstream common shares at $3.00 per share. In conjunction with and in consideration of January 2011 note transaction entered into by us with CCJ, it was agreed that certain terms of the 35,000 shares of Series A-13 held by CCJ at that date would be modified as follows -  the conversion rate to common shares, as well as the minimum conversion rate for payment of dividends in common shares, will be $2.00 per share, the maturity date will be December 31, 2012 and dividends will be paid quarterly, in cash or, at our option, in unregistered shares. In addition it was agreed that $28,000 in A-13 dividends for calendar 2010 would be immediately paid by issuance of 14,000 unregistered common shares, using the minimum conversion rate of $2.00 per share.

On January 10, 2012, we received a funding commitment letter (the “January 2012 Funding Letter”) from J&C 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 at that time, is the president of J&C. This January 2012 Funding Letter was obtained by us solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available, but did not represent any obligation on our part to accept such funding on these terms, was not expected by us to be exercised and was not exercised. The cash provided under the January 2012 Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 1, 2013 and (b) our issuance of 2.3 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of an equivalent amount in dollars of investment from any other source after the date of the January 2012 Funding Letter, other than funding received in connection with the LPC Facility, the January 2012  Funding Letter would be terminated. As part of the transaction under which J&C issued the January 2012 Funding Letter, we agreed to reimburse CCJ in cash the shortfall, as compared to minimum guaranteed net proceeds of $139,000, from their resale of 101,744 shares CCJ received upon their conversion of 17,500 shares of Series A-13 and after effecting our agreement as part of the same transaction to reduce the conversion rate on all Series A-13 shares from $2.00 per common share to $1.72 per common share. Based on the shortfall plus (i) the increased value of the underlying common stock related to this tranche as well as the second tranche of 17,500 shares of Series A-13 owned by CCJ and (ii) the Black-Scholes value of adjustments to warrants held by Lincoln Park Capital arising from certain anti-dilution provisions, the total economic cost of the January 2012 Funding Letter was approximately $130,000.

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On December 21, 2012, we received a funding commitment letter (the “December 2012 Funding Letter”) from J&C, agreeing to provide us, within twenty (20) days after our notice given on or before December 31, 2013, aggregate cash funding of up to $550,000, which may be requested in multiple tranches. The December 2012 Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available, but did not represent any obligation to accept such funding on these terms, was not expected by us to be exercised and was not exercised. Cash provided under the Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 1, 2013 and (b) our issuance of 2.3 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of an equivalent amount in dollars of investment from any other source after the date of the December 2012 Funding Letter, other than funding received in connection with the LPC Purchase Agreement, to refinance existing debt and up to $500,000 funding for general working capital or other business uses, the December 2012 Funding Letter would be terminated. As provided in the A-13 Designation, any shares of Series A-13 still outstanding as of December 31, 2012 would automatically convert into our common shares. In December 2012, as part of a transaction under which J&C Resources issued us the December 2012 Funding Letter, we agreed to reimburse CCJ in cash the shortfall, payable on December 31, 2014, as compared to minimum guaranteed net proceeds of $175,000, from their resale of 437,500 common shares CCJ received on December 31, 2012 upon their conversion of 17,500 shares of Series A-13 and after effecting our agreement as part of the same transaction to reduce the conversion rate on all Series A-13 shares from $1.72 per common share to $0.40 per common share. Based on the estimated shortfall calculated based on the closing ONSM share price on the date of the agreement with J&C Resources, plus the increased value of the underlying common stock related to this tranche of Series A-13 shares owned by CCJ, the total economic cost of the December 2012 Funding Letter was approximately $151,000.

On January 2, 2013 we received $25,000 pursuant to an unsecured promissory note issued to CCJ (the “New CCJ Note”), bearing interest at 12% per annum and subordinated to our secured debts to Thermo Credit and Rockridge Capital. New CCJ Note payments are interest only during the first year, approximately 30% of the principal plus interest during the second year and the remaining principal balance at the end of the twenty-fifth month. In connection with this financing, we issued 30,000 restricted common shares (the “CCJ Common Stock”) to CCJ, of which we have agreed to buy back up to 5,000 shares, under certain terms. The buy-back terms are as follows: If the fair market value of the CCJ Common Stock is not equal to at least $0.80 per share on the date one (1) year after issuance, we will buy back, to the extent permitted by law, up to 2,500 shares of the originally issued CCJ Common Stock from CCJ at $0.80 per share. If the fair market value of the CCJ Common Stock is not equal to at least $0.80 per share on the date two (2) years after issuance, we will buy back, to the extent permitted by law, up to 5,000 shares of the originally issued CCJ Common Stock, less the amount of any shares already bought back at the one year point, from CCJ at $0.80 per share. The above only applies to the extent the CCJ Common Stock is still held by CCJ at the applicable dates. On November 4, 2013, the outstanding principal balance of the $25,000 note issued to CCJ, as well as accrued but unpaid interest, in the aggregate amount of $26,000 was satisfied from the gross proceeds of a $250,000 note issued by us to the same lender. However, Mr. Johnston was no longer an ONSM director at the time the $250,000 note was negotiated.

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On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale of a defined subset of Infinite Conferencing’s (“Infinite’) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). The Sold Accounts represent historical annual revenues of approximately $1.35 million. We agreed to be responsible for all legal fees related to this transaction, which were approximately $62,000, $5,000 which we paid in advance and the $57,000 balance which was deducted from the gross proceeds of the sale. The limited partners of Partners include two Onstream directors (Cliff Friedland, who is also the executive officer primarily responsible for Infinite’s operations, and Alan Saperstein), two other officers of Onstream/Infinite who are not Onstream or Infinite directors (David Glassman and Eric Jacobs) and David Glassman’s sister, for total related party ownership of 60%. Another individual (not considered to be a related party with respect to those limited partners, Onstream or Infinite) serves as general partner, and is solely responsible for administering the activities of Partners as outlined below.

In connection with this sale, Infinite and Partners entered into a Make Whole Agreement which provides that if the revenues from the Sold Accounts falls below $1.0 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the revenues from the Sold Accounts back to $1.25 million (or the equivalent in cash flow). Onstream Media Corporation (“Onstream”) and Infinite have also committed that in the event there is any impediment, which directly or indirectly is caused by, or relates in any way to Infinite or Onstream, which would prevent more than 20% of the revenue from these sold accounts being earned or distributed to Partners, Infinite and Onstream would take all necessary steps to ensure that such impeded revenue or revenue shortfall is otherwise earned or distributed or shall pay the amount of such impeded revenue or revenue shortfall to Partners to the extent due on a quarterly basis.

In connection with this sale, Infinite and Partners entered into a Membership Interest Option Agreement (“Option Agreement”) whereby we have the right for the two-year period through February 28, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the Purchase Price plus a premium, which premium increases on a pro-rata basis to 20% of the Purchase Price over the two year period, subject to a minimum premium of 10%. Starting six months after the Effective Date, Partners may sell the Sold Accounts to a third party, provide that they must provide us four month written advance notice of such sale during which four month period we have the right to exercise our rights under the Option Agreement. In the event we do not exercise our rights under the Option Agreement, and Partners sells the Customer Accounts to a third party, we are entitled to receive 50% of any excess of the sales price to the third party over what would have been our option price under the Option Agreement.

The Option Agreement provides that during the two-year option term, and until the option closing in the event of a timely exercise of the option thereunder, neither Partners nor its members will (i) encumber any of Partners’ assets or membership interests to any party, other than Infinite, (ii) incur any liability whatsoever, whether actual or contingent, other than per the terms and provisions of the partnership operating agreement and the MSA or (iii) place a lien on the Sold Accounts.

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In connection with this sale, Infinite and Partners entered into a Management Services Agreement (“MSA”) that provides for Infinite to continue to invoice the Sold Accounts but the payments when received from those Sold Accounts will be deposited in a segregated Partners owned bank account. Partners will return those customer proceeds to Infinite on a weekly basis in the form of a Management Fee, after deducting a certain amount representing (i) Partners’ guaranteed return (which is 40% of the Purchase Price per annum with the first six months guaranteed regardless of whether we exercise our rights under the Option Agreement or the MSA is otherwise terminated) and (ii) accounting fees payable to the third-party accounting firm as discussed below. Infinite will continue to service the Sold Accounts, incurring and absorbing all related costs of doing so – i.e., Partners will have no operating responsibilities and no operating costs related to the sold accounts other than to pay the Management Fee to Infinite. The MSA defines specific services, along with certain minimum standards of quality for such services, required to be provided by Infinite with respect to the Sold Accounts.

Partners has engaged a third-party accounting firm to manage all cash transactions under the MSA and Infinite, Partners and the accounting firm have entered into a separate agreement (Agreement Re Distributions) whereby the accounting firm has explicitly agreed to carry out the terms of the MSA and other related documents executed between Infinite and Partners, particularly with respect to distributions of funds and to not vary from that except upon joint written instructions from Infinite and Partners. We have agreed to be responsible for the fees of the third-party accounting firm, which we expect will be approximately $25,000 to $30,000 per year.

The MSA has a two year term expiring on February 28, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights as follows. Partners has the right to terminate the MSA, effective immediately upon written notice to Infinite, in the event of the following: (i) an Infinite Event of Default or (ii) the sale by Partners of the Sold Accounts subject to the terms of the Membership Interest Option Agreement.  An Infinite Event of Default is (i) Bankruptcy of Infinite (as defined), (ii) a lack of compliance by Infinite with the provisions of the MSA which is continuing five (5) business days after receiving written notice from partners specifying such lack of compliance or (iii) a breach by Infinite or Onstream of any obligation under the Make Whole Agreement. Infinite has the right to terminate the MSA, effective immediately upon written notice to Partners, in the event of a Partners Event of Default. A Partners Event of Default is (i) a deliberate and material lack of compliance by Partners with the provisions of the MSA which is continuing five (5) business days after receiving written notice from Infinite specifying such lack of compliance or (ii) a breach by Partners of Partners’ obligations under the Membership Interest Option Agreement. 

Notwithstanding termination of the MSA, only for so long as the Infinite owns the Sold Accounts, Partners shall continue to pay the Management Fee, provided that Partners may deduct from such Management Fee Partners’ payment of all reasonable costs of providing the services to the Sold Accounts otherwise required to be provided by Infinite under the MSA.

The MSA contains provisions that prohibit (i) Infinite servicing the Sold Accounts for a period of two years after the termination of the MSA and (ii) Partners communicating with the Sold Accounts or with Infinite’s employees, vendors, consultants or agents during the term of the MSA.

Review, approval or ratification of transactions with related persons

Prior to us entering into any related person transaction, our Board of Directors reviews the terms of the proposed transaction to ensure that they are fair and reasonable, on market terms and on an arms-length basis. Legal or other counsel is consulted as appropriate.

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If a related party transaction involves compensation or is otherwise related to an employment relationship with us, the related party transaction will be reviewed by the Compensation Committee. Related party transactions are reported to the Audit Committee for their review and approval of the related disclosure.

With respect to transactions in which a director or executive officer or immediate family member may have a direct or indirect material interest, only disinterested members of the Board of Directors, the Compensation Committee and/or the Audit Committee may vote on whether to approve the transaction.

Director independence

Our independent directors are Messrs. Silva, Nowalsky and Whitney.

ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit Fees

The audit fees billed to us by Mayer Hoffman McCann P.C. (“MHM”) for professional services rendered during the fiscal year ended September 30, 2014 were $233,000 for the audit of our annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2013 as well as the review of our quarterly financial statements included in our quarterly reports on Form 10-Q for the quarters ended December 31, 2013, and March 31 and June 30, 2014.

The audit fees billed to us by MHM for professional services rendered during the fiscal year ended September 30, 2013 were $229,100 for the audit of our annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 as well as the review of our quarterly financial statements included in our quarterly reports on Form 10-Q for the quarters ended December 31, 2012, and March 31 and June 30, 2013.

Audit Related Fees

The aggregate fees billed to us by MHM for assurance and related services relating to the performance of the audit of our financial statements which are not reported under the caption "Audit Fees" above were none and $8,509 for the fiscal years ended September 30, 2014 and 2013, respectively.

Tax Fees

The aggregate fees billed to us by MHM for tax related services were $2,600 and $750 for the fiscal years ended September 30, 2014 and 2013, respectively.

All Other Fees

Other than fees relating to the services described above under “Audit Fees,” “Audit-Related Fees” and “Tax Fees,” there were no additional fees billed to us by MHM for services rendered for the fiscal years ended September 30, 2014 or 2013.

Audit Committee Policies

Effective May 6, 2003, the Securities and Exchange Commission adopted rules that require that before our independent auditor is engaged by us to render any auditing or permitted non-audit related service, the engagement be:

66


 

·     approved by our audit committee; or

·     entered into pursuant to pre-approval policies and procedures established by the audit committee, provided the policies and procedures are detailed as to the particular service, the audit committee is informed of each service, and such policies and procedures do not include delegation of the audit committee's responsibilities to management.

The audit committee pre-approves all services provided by our independent auditors, including those set forth above. The audit committee has considered the nature and amount of fees billed by MHM and believes that the provision of services for activities unrelated to the audit is compatible with maintaining MHM’s independence.

MHM leases substantially all its personnel, who work under the control of MHM shareholders, from wholly-owned subsidiaries of CBIZ, Inc., in an alternative practice structure.

67


PART IV

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES  

The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:

Number                                Description

2.1         Agreement and Plan of Merger dated as of October 22, 2003 by and between Visual Data Corporation, OSM, Inc., a subsidiary of Visual Data Corporation, and Onstream Media Corporation (Acquired Onstream) (11)

2.2         Amendment #1 dated as of October 15, 2004 to Agreement and Plan of Merger dated as of October 22, 2003 by and between Visual Data Corporation, OSM, Inc., a subsidiary of Visual Data Corporation, and Onstream Media Corporation (Acquired Onstream) (13)

2.3         Agreement and Plan of Merger dated June 4, 2001 among Visual Data Corporation, Visual Data San Francisco, Inc. and Entertainment Digital Network, Inc. (6)

2.4         Infinite Conferencing Merger Agreement dated March 26, 2007 (17)

3.1.1      Articles of Incorporation (1)

3.1.2      Articles of Amendment dated July 26, 1993 (1)

3.1.3      Articles of Amendment dated January 17, 1994 (1)

3.1.4      Articles of Amendment dated October 11, 1994 (1)

3.1.5      Articles of Amendment dated March 25, 1995 (1)

3.1.6      Articles of Amendment dated October 31, 1995 (1)

3.1.7      Articles of Amendment dated May 23, 1996 (1)

3.1.8      Articles of Amendment dated May 5, 1998 (2)

3.1.9      Articles of Amendment dated August 7, 1998 (3)

3.1.10     Articles of Amendment dated May 22, 2000 (4)

3.1.11     Articles of Amendment dated April 11, 2002 (7)

3.1.12     Articles of Amendment dated June 24, 2003, with regard to Series A-9 Convertible Preferred Stock (8)

3.1.13     Articles of Amendment dated June 20, 2003, with regard to reverse stock split (9)

3.1.14     Articles of Amendment dated December 23, 2004, with regard to the designations for Series A-10 Convertible Preferred Stock (14)

3.1.15     Articles of Amendment dated December 30, 2004, with regard to corporate name change (13)

3.1.16     Articles of Amendment dated February 7, 2005 with regard to the designations for Series A-10 Convertible Preferred Stock (15)

3.1.17     Articles of Amendment dated January 7, 2009 with regard to the designations for Series A-12 Redeemable Convertible Preferred Stock (18)

3.1.18     Articles of Amendment dated December 23, 2009 with regard to the designations for Series A-13 Convertible Preferred Stock (19)

3.1.19     Articles of Amendment dated April 5, 2010 with regard to reverse stock split (23)

3.1.20     Articles of Amendment dated June 17, 2010 with regard to the number of authorized shares (24)

3.1.21     Articles of Amendment dated September 22, 2010 with regard to the designations for Series A-14 Convertible Preferred Stock (25)

3.1.22     Articles of Amendment dated March 2, 2011 with regard to the designations for Series A-13 Convertible Preferred Stock (20)

3.1.23     Articles of Amendment dated January 20, 2012 with regard to the designations for Series A-13 Convertible Preferred Stock (26)

3.1.24     Articles of Amendment dated December 21, 2012 with regard to the designations for Series A-13 Convertible Preferred Stock (27)

68


3.2         By-laws (1)

4.1         Specimen Common Stock Certificate (1)

4.2         Convertible Promissory Note dated April 14, 2009 - Rockridge (16)

4.3         Allonge dated September 11, 2009 to Convertible Promissory Note dated April 14, 2009 – Rockridge (22)

4.4         Allonge #2 dated December 11, 2012 to Convertible Promissory Note dated April 14, 2009 – Rockridge (31)

4.5         Allonge #3 dated February 28, 2014 to Convertible Promissory Note dated April 14, 2009 – Rockridge (32)

4.6         Allonge #4 dated September 10, 2014 to Convertible Promissory Note dated April 14, 2009 – Rockridge

4.7         Allonge #5 dated December 31, 2014 to Convertible Promissory Note dated April 14, 2009 – Rockridge (33)

4.8         Allonge #6 dated April 30, 2015 to Convertible Promissory Note dated April 14, 2009 – Rockridge

4.9         Amended and Restated Promissory Note dated December 27, 2011 – Thermo Credit (28)

4.10        Senior Secured Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated March 18, 2013 (30)

4.11        First Amendment and Allonge dated June 14, 2013  to Senior Secured Note dated March 18, 2013 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, (31)

4.12        Second Amendment and Allonge dated February 28, 2014 to Senior Secured Note dated March 18, 2013 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries (32)

4.13        Third Amendment and Allonge dated September 15, 2014 to Senior Secured Note dated March 18, 2013 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries

4.14        Senior Secured Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated February 28, 2014 (32)

4.15        First Amendment and Allonge dated September 15, 2014 to Senior Secured Note dated February 28, 2014 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries

4.16        Amended and Restated Senior Subordinated Secured Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated December 31, 2014 (33)

4.17        Amendment Number 1 dated February 24, 2015 to Amended and Restated Senior Subordinated Secured Note dated December 31, 2014 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries

4.18        Amendment and Allonge (Number 2) dated April 30, 2015 to Amended and Restated Senior Subordinated Secured Note dated December 31, 2014 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries

10.1        Form of 2007 Equity Incentive Plan (29)

10.2        Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Randy S. Selman (19)

10.3        Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Alan Saperstein (19)

10.4        Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Clifford Friedland (19)

10.5        Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and David Glassman (19)

10.6        Employment Agreement (Amended) dated August 11, 2009 between Onstream Media Corporation and Robert Tomlinson (19)

10.7        Note and Stock Purchase Agreement for 12% Convertible Secured Note - Rockridge (16)

10.8        Security Agreement for 12% Convertible Secured Note - Rockridge (16)

10.9        First Amendment to Note and Stock Purchase Agreement for 12% Convertible Secured Note - Rockridge (22)

69


10.10      Amended and Restated Loan Agreement dated December 27, 2011 – Thermo Credit (28)

10.11      Amended and Restated Security Agreement dated December 27, 2011 – Thermo Credit (28)

10.12      Note Purchase Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated March 18, 2013 (30)

10.13      Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated June 14, 2013 with respect to March 18, 2013 Note Purchase Agreement (31)

10.14      Note Purchase Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated February 28, 2014 (32)

10.15      Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated September 15, 2014

10.16      Note Purchase Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated December 31, 2014 (33)

10.17      Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated April 30, 2015

10.18      Security Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated March 18, 2013 (30)

10.19       Security Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated February 28, 2014 (32)

10.20      Amendment, dated December 31, 2014, to March 18, 2013 and February 28, 2014 Security Agreements between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries (33)

10.21      Advisory Services Agreement between Sigma Capital Advisors, LLC and Onstream Media, dated March 18, 2013 (30)

10.22      Advisory Services Agreement between Sigma Capital Advisors, LLC and Onstream Media, dated February 28, 2014 (32)

10.23      Advisory Services Agreement between Sigma Capital Advisors, LLC and Onstream Media, dated December 31, 2014 (33)

10.24      Office Lease with 100 Morris Avenue Partners dated August 6, 2012 (31)

10.25      Addendum dated July 8, 2013 to Office Lease with 100 Morris Avenue Partners (31)

10.26      Management Services Agreement between Infinite Conferencing Partners LLC and Infinite Conferencing, Inc., dated February 28, 2015 (34)

10.27      Make Whole Agreement between Infinite Conferencing Partners LLC, Onstream Media Corporation and Infinite Conferencing, Inc., dated February 28, 2015 (34)

10.28      Membership Interest Option Agreement between Infinite Conferencing Partners LLC and Infinite Conferencing, Inc., dated February 28, 2015 (34)

10.29      Agreement Re Distributions between Infinite Conferencing Partners LLC, Infinite Conferencing, Inc. and Kaufman, Rossin & Co, dated February 28, 2015 (34)

14.1        Code of Business Conduct and Ethics (11)

14.2        Corporate Governance and Nominating Committee Principles (23)

14.3        Audit Committee Charter (31)

14.4        Compensation Committee Charter (31)

21.1        Subsidiaries of the Registrant (31)

23.1        Consent of Independent Registered Public Accounting Firm

31.1        Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2        Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.1        Section 906 Certification of Chief Executive Officer

70

 
32.2         Section 906 Certification of Chief Financial Officer 

101                        Interactive data files pursuant to Rule 405 of Regulation S-T, as follows:

101.INS - XBRL Instance Document

101.SCH - XBRL Taxonomy Extension Schema Document

101.CAL - XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF - XBRL Taxonomy Extension Definition Linkbase Document

101.LAB - XBRL Taxonomy Extension Label Linkbase Document

101.PRE - XBRL Taxonomy Extension Presentation Linkbase Document

(1)         Incorporated by reference to the exhibit of the same number filed with the registrant's registration statement on Form SB-2, registration number 333-18819, as amended and declared effective by the SEC on July 30, 1997.

(2)         Incorporated by reference to the registrant's current report on Form 8-K dated May 19, 1998.

(3)         Incorporated by reference to the registrant's current report on Form 8-K dated August 21, 1998.

(4)         Incorporated by reference to the registrant's Quarterly Report on Form 10-QSB for the period ended June 30, 2000.

(5)         Incorporated by reference to the registrant’s current report on Form 8-K filed on June 12, 2001.

(6)         Incorporated by reference to the registrant’s current report on Form 8-K filed on February 5, 2002.

(7)         Incorporated by reference to the registrant's registration statement on Form S-3, file number 333-89042, filed on May 24, 2002.

(8)         Incorporated by reference to the registrant's current report on Form 8-K filed July 2, 2003.

(9)         Incorporated by reference to the registrant's Quarterly Report on Form 10-QSB for the period ended June 30, 2003 and filed on August 13, 2003.

(10)       Incorporated by reference to the registrant's current report on Form 8-K filed October 28, 2003.

(11)       Incorporated by reference to the registrant’s Annual Report on Form 10-KSB for the year ended September 30, 2003 and filed on December 22, 2003.

(12)       Incorporated by reference to the registrant’s Annual Report on Form 10-KSB for the year ended September 30, 2004 and filed on January 13, 2005.

(13)       Incorporated by reference to the registrant’s current report on Form 8-K filed on January 4, 2005.

(14)       Incorporated by reference to the registrant’s current report on Form 8-K/A filed on January 4, 2005.

(15)       Incorporated by reference to the registrant's current report on Form 8-K filed February 11, 2005.

(16)       Incorporated by reference to the registrant's current report on Form 8-K filed April 20, 2009.

(17)       Incorporated by reference to the registrant's current report on Form 8-K filed March 28, 2007.

(18)       Incorporated by reference to the registrant's current report on Form 8-K filed January 7, 2009.

(19)       Incorporated by reference to the registrant's Annual Report on Form 10-K for the period ended September 30, 2009 filed on December 29, 2009.

(20)       Incorporated by reference to the registrant's current report on Form 8-K filed March 4, 2011.

(21)       Incorporated by reference to the registrant's Proxy Statement for the 2008 and 2009 Annual Shareholders Meeting filed on January 28, 2009.

(22)       Incorporated by reference to the registrant's current report on Form 8-K filed September 18, 2009.

(23)       Incorporated by reference to the registrant's current report on Form 8-K filed April 6, 2010.

71


 

(24)       Incorporated by reference to the registrant's current report on Form 8-K filed June 18, 2010.

(25)       Incorporated by reference to the registrant's current report on Form 8-K filed September 23, 2010.

(26)       Incorporated by reference to the registrant's current report on Form 8-K filed January 24, 2012.

(27)       Incorporated by reference to the registrant's current report on Form 8-K filed December 26, 2012.

(28)       Incorporated by reference to the registrant's Quarterly Report on Form 10-Q for the period ended December 31, 2011 and filed on February 21, 2012.

(29)       Incorporated by reference to the registrant's Annual Report on Form 10-K for the period ended September 30, 2011 and filed on January 13, 2012.

(30)       Incorporated by reference to the registrant's current report on Form 8-K filed March 22, 2013.

(31)       Incorporated by reference to the registrant's Annual Report on Form 10-K for the period ended September 30, 2013 and filed on February 19, 2014.

(32)       Incorporated by reference to the registrant’s current report on Form 8-K filed on March 4, 2014.

(33)       Incorporated by reference to the registrant’s current report on Form 8-K filed on January 7, 2015.

(34)       Incorporated by reference to the registrant’s current report on Form 8-K filed on March 11, 2015.

72


 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Onstream Media Corporation (Registrant)

 

By: /s/ Randy S. Selman

Randy S. Selman

President, Chief Executive Officer

 

Date: June 12, 2015

 

By: /s/ Robert E. Tomlinson

Robert E. Tomlinson

Chief Financial Officer and

Principal Accounting Officer

 

Date: June 12, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature

 

Title

 

Date

By: /s/ Randy S. Selman

Director, President, June 12, 2015
Randy S. Selman Chief Executive Officer
By: /s/ Robert E. Tomlinson Chief Financial Officer and  June 12, 2015
Robert E. Tomlinson Principal Accounting Officer
By: /s/ Alan Saperstein Director and Chief June 12, 2015
Alan Saperstein Operating Officer
By: /s/ Clifford Friedland Director and Senior Vice June 12, 2015
Clifford Friedland President Business Development
By: /s/ Carl Silva  Director June 12, 2015
Carl Silva
 
By: /s/ Leon Nowalsky Director June 12, 2015
Leon Nowalsky
By: /s/ Robert D. (“RD”) Whitney Director June 12, 2015
Robert D. (“RD”) Whitney

73


 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors
Onstream Media Corporation
Pompano Beach, Florida

We have audited the accompanying consolidated balance sheets of Onstream Media Corporation and subsidiaries as of September 30, 2014 and 2013 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the two-year period ended September 30, 2014. Onstream Media Corporation and subsidiaries’ management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits. 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Onstream Media Corporation and subsidiaries as of September 30, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 2014, in conformity with accounting principles generally accepted in the United States of America.

/s/ Mayer Hoffman McCann P.C.

MAYER HOFFMAN MCCANN P.C.
Certified Public Accountants
Boca Raton, Florida
June 12, 2015

F-1


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 

September 30,

 

2014

 

2013

ASSETS

CURRENT ASSETS:

    Cash and cash equivalents  $ 389,015      $ 257,018 
    Accounts receivable, net of allowance for doubtful accounts
          of $171,821 and $234,879, respectively
2,082,379  2,175,505 
    Prepaid expenses 124,826  142,307 
    Inventories and other current assets   37,935    140,585 
Total current assets 2,634,155  2,715,415 
PROPERTY AND EQUIPMENT, net 1,790,498  2,047,633 
INTANGIBLE ASSETS, net 526,917  669,543 
GOODWILL, net 8,358,604  8,358,604 
OTHER NON-CURRENT ASSETS   201,609    136,215 
Total assets $ 13,511,783  $ 13,927,410 

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
    Accounts payable  $ 1,697,202  $ 1,927,430 
    Accrued liabilities 1,414,424  1,527,435 
    Amounts due to directors and officers 882,566  409,410 
    Deferred revenue 77,624  152,696 
    Notes and leases payable –  current portion, net of discount  2,451,681  2,198,858 
    Convertible debentures – current portion,  net of discount       587,198 
Total current liabilities 6,523,497  6,803,027 
Accrued liabilities – non-current portion 354,813 
Notes and leases payable, net of current portion and discount 1,015,379  759,932 
Convertible debentures, net of current portion and discount   1,632,952    548,796 
Total liabilities   9,171,828    8,466,568 


COMMITMENTS AND CONTINGENCIES
 

STOCKHOLDERS' EQUITY:
Common stock, par value $.0001 per share; authorized 75,000,000 shares, 
         
21,964,580 and 19,345,744  issued and outstanding, respectively
2,194  1,933 
Common stock committed for issue – 2,566,667 and 2,291,667 shares, respectively 256  229 
Additional paid-in capital 144,991,985  144,385,772 
Obligation to repurchase common shares (233,233) (164,000)
Accumulated deficit   (140,421,247)   (138,763,092)
Total stockholders’ equity   4,339,955    5,460,842 
Total liabilities and stockholders’ equity $ 13,511,783  $ 13,927,410 

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

F-2


ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended

 

September  30,

2014

 

2013

REVENUE:   
    Audio and web conferencing $ 9,488,089  $ 9,121,228 
    Webcasting 4,498,232  4,953,184 
    DMSP and hosting 925,084  960,187 
    Network usage  1,857,535  1,950,252 
    Other   164,254    233,147 
Total revenue   16,933,194    17,217,998 
COSTS OF REVENUE:
    Audio and web conferencing 2,502,161  2,516,451 
    Webcasting 1,202,160  1,369,189 
    DMSP and hosting 167,936  141,264 
    Network usage  813,811  939,250 
    Other   36,153    63,223 
Total costs of revenue   4,722,221    5,029,377 
GROSS MARGIN   12,210,973    12,188,621 
OPERATING EXPENSES:
    General and administrative:
        Compensation (excluding equity) 7,208,530  7,945,565 
        Compensation paid with common shares and other equity 575,613  1,639,994 
        Professional fees 1,348,302  1,194,587 
        Other  2,302,729  2,552,367 
    Impairment loss on goodwill     2,200,000 
    Impairment loss on property and equipment     1,000,000 
    Depreciation and amortization   956,027    1,274,168 
Total operating expenses   12,391,201    17,806,681 
Loss from operations   (180,228)   (5,618,060)
OTHER EXPENSE, NET:
     Interest expense (2,090,379) (1,411,289)
     Debt extinguishment loss (132,427) (143,251)
     Gain from litigation settlement 743,943       -  
     Other income, net   936    3,098 
Total other expense, net   (1,477,927)   (1,551,442)
Net loss $ (1,658,155) $ (7,169,502)
Loss per share – basic and diluted:
Net loss per share $ (0.07) $ (0.39)
Weighted average shares of common stock outstanding – basic and diluted   23,172,634    18,496,064 

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

F-3



 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED SEPTEMBER 30, 2013 AND 2014

Common
Stock 

 

 

 

 

Obligation  to

 

 

    

 

 

 

 

Series A- 13

 

Series A- 14

 

 

 

 

 

 

Committed

 

 

Additional

 

Repurchase 

 

 

 

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock 

 

for Issue

 

Paid-In

 

Common 

 

Accumulated 

   

 

Shares

 

Par

 

Shares

 

Par

 

Shares

 

Par

 

Shares

 

Par

 

Capital

 

Shares

 

Deficit

 

Total

Balance, September 30, 2012 17,500  $ 160,000  $ 16 12,902,217 $ 1,289 366,667 $ 37 $ 141,199,589  $ - $ (131,604,877) $ 9,596,056 
Issuance of common shares and options
      for employee services
- 2,500,000 250 1,700,000 170 1,884,170  - - 1,884,590 
Issuance of common shares for 
      consultant services
- 713,943 71 - - 229,483  - - 229,554 
Issuance of common shares for interest 
      and financing fees
- 2,040,000 204 225,000 22 841,024  - - 841,250 
Reclassification from liability -
      modification of detachable warrant
      associated with sale of common 
      shares and Series A-14 preferred
- - - - - 53,894  - - 53,894 
Conversion of debt to common shares - 583,334 58 - - 174,942  - - 175,000 
Conversion of Series A-13 to common
      shares
(17,500) (2) - 437,500 44 - - (42) - -
Conversion of Series A-14 to common
      shares
(160,000) (16) 160,000 16 - - - - -
Obligation to repurchase common 
      shares
- - - - - - (164,000) - (164,000)
Dividends on Series A-13  - 8,750 1 - - 2,712  - 11,287  14,000
Net loss              -      -   -  - -       -   -   (7,169,502)   (7,169,502)
Balance, September 30, 2013            -  $              -  $ - 19,345,744 $ 1,933 2,291,667 $ 229 $ 144,385,772  $ (164,000) $ (138,763,092) $ 5,460,842 

(Continued)

F-4


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED SEPTEMBER 30, 2013 AND 2014

(Continued)

Common 

 

 

 

 

Obligation 

 

 

    

 

 

 

 

 

 

 

 

 

Stock 
Committed

 

Additional 

 

to
Repurchase
  

 

 

 

 

 

 

 

Common Stock 

 

for Issue

 

Paid-In

 

Common

 

Accumulated 

 

 

 

 

Shares

 

Par

 

Shares

 

Par

 

Capital

 

Shares

 

Deficit

 

Total

Balance, September 30, 2013 19,345,744 $ 1,933 2,291,667 $ 229 $ 144,385,772 $ (164,000) $ (138,763,092) $ 5,460,842 
Issuance of common shares for employee
      services
250,000 25 250,000 25 97,450 - - 97,500 
Issuance of common shares for consultant
      services
746,502 75 - - 150,446 - - 150,521 
Issuance of common shares for interest,
      financing fees and finders fees
1,622,334 161 25,000 2 392,917 - - 393,080 
Obligation to repurchase  common shares - - - - (34,600) (69,233)    - (103,833)
Net loss   -     -  -   -    -   -   (1,658,155)   (1,658,155)
Balance, September 30, 2014 21,964,580 $ 2,194 2,566,667 $ 256 $ 144,991,985 $ (233,233) $ (140,421,247) $ 4,339,955 

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

F-5



 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Years  Ended

 

September  30,

 

2014

 

2013

CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss $ (1,658,155)     $ (7,169,502)
    Adjustments to reconcile net loss to net cash provided by operating activities:
        Depreciation and amortization 956,027  1,274,168 
        Impairment loss on goodwill  2,200,000 
        Impairment loss on property and equipment 1,000,000 
        Professional fee expenses paid with equity, including amortization 
           of deferred expenses for prior period issuances
155,398  241,348 
        Compensation expenses paid with common shares and other equity 575,613  1,639,994 
        Amortization of discount on convertible debentures 523,268  188,160 
        Amortization of discount on notes payable 511,843  327,412 
        Interest expense paid in common shares and options 11,100 
        Debt extinguishment loss 132,427  143,251 
        Gain on litigation settlement (743,943)  - 
        Bad debt expense and other   76,787    97,975 
        Net cash provided by (used in) operating activities, before changes 
           in current assets and liabilities other than cash
529,265  (46,094)
        Changes in current assets and liabilities other than cash:
          Decrease in accounts receivable 16,338  124,177 
         (Increase) decrease in prepaid expenses (17,213) 3,744 
         Decrease in inventories and other current assets 67,071  5,573 
        (Decrease) increase in accounts payable, accrued liabilities and 
           amounts due to directors and officers
(62,898) 403,031 
        (Decrease) increase in deferred revenue   (75,071)   13,840 
Net cash provided by operating activities   457,492    504,271 
CASH FLOWS FROM INVESTING ACTIVITIES:
    Intella2 acquisition (see note 2) (713,477)
    Acquisition of property and equipment   (556,266)   (822,424)
Net cash (used in) investing activities   (556,266)   (1,535,901)

 

(Continued)

F-6



ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(Continued)

Years Ended

 

September  30,

 

2014

 

2013

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from notes payable, net of expenses $ 1,559,778      $ 2,560,137 
    Proceeds from convertible debentures, net of expenses 489,508  680,503 
    Repayment of notes and leases payable (1,566,553) (1,831,550)
    Repayment of convertible debentures   (251,962)   (480,237)
Net cash provided by financing activities   230,771    928,853 
NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 131,997  (102,777)
CASH AND CASH EQUIVALENTS, beginning of year   257,018    359,795 
CASH AND CASH EQUIVALENTS, end of year  $ 389,015   $ 257,018 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash payments for interest  $ 1,055,268   $ 884,617 
       
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
    Issuance of common shares for consultant services  $ 150,521  $ 229,554 
    Issuance of shares and options for employee services  $ 97,500  $ 1,884,590 
    Issuance of common shares for interest and financing fees $ 393,080  $ 841,250 
    Increase in value of common shares underlying Series A-13 preferred, arising from
        adjustment of conversion rate in connection with financing commitment letter and 
        note refinancing, respectively
$          $ 107,442 
    Declaration of dividends payable on A-13 preferred shares $        $ 3,500 
    Issuance of common shares for dividends payable on A-13 preferred shares $          $ 2,713 
    Elimination of obligation for previously accrued or declared dividends payable on 
        A-13 preferred shares
 
$           $ 14,787 
    Issuance of common shares upon conversion of debt  $         $ 175,000 
    Issuance of common shares upon conversion of Series A-13 preferred $       $ 175,000 
    Issuance of common shares upon conversion of Series A-14 preferred  $           $ 200,000 
    Reclassification from liability to additional paid-in capital arising from modification 
        of detachable warrant associated with sale of common shares and Series A-14 
        preferred
$          $ 53,894 
    Initial estimated present value of future obligations for cash payments in connection 
        with the Intella2 acquisition (see note 2)
$           $ 704,449 
    Agreement to repurchase common shares $ 103,833 $ 164,000 
    Satisfaction of short-term obligations with note payable issuances $            $ 418,233 
    Issuance of note for equipment purchase $         $ 43,953 

 

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

F-7


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

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

The Audio and Web Conferencing Services Group consists of our Infinite Conferencing (“Infinite”) division, our Onstream Conferencing Corporation (“OCC”) division and our EDNet division. Our Infinite division, which operates primarily from the New York City area, and our OCC division, which operates primarily from San Diego, California, generate revenues from usage charges and fees for other services provided in connection with “reservationless” and operator-assisted audio and web conferencing services – see note 2.

The EDNet division, which operates primarily from San Francisco, California, provides connectivity (in the form of high quality audio, 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.

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

The Webcasting division, which operates primarily from Pompano Beach, Florida and has a sales and support facility in New York City, provides an array of corporate-oriented, web-based media services to the corporate market including live audio and video webcasting and on-demand audio and video streaming for any business, government or educational entity. As of October 1, 2013, the Webcasting division became responsible for sales of the MarketPlace365 service. The Webcasting division generates revenue primarily through production and distribution fees.

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

F-8


ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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 $140.4 million as of September 30, 2014. Our operations have been financed primarily through the issuance of equity and debt, including convertible debt and debt combined with the issuance of equity.

For the year ended September 30, 2014, we had a net loss of approximately $1.7 million, although cash provided by operating activities for that period was approximately $457,000. Although we had cash of approximately $389,000 at September 30, 2014, we had a working capital deficit of approximately $3.9 million at that date.

During the period from June 2013 through January 2014 we made certain headcount reductions representing approximately $1.0 million in annualized savings, which we expect will reduce our compensation expenditures by approximately $159,000 in aggregate for the first seven months of fiscal 2015 as compared to the corresponding prior year period. Effective June 2014, we also renegotiated a supplier contract representing approximately $263,000 in annualized savings, which we expect will reduce our cost of sales by approximately $202,000 in aggregate for the first eight months of fiscal 2015 as compared to the corresponding prior year period. Effective June 2015, we again renegotiated the same supplier contract representing approximately $220,000 in annualized savings, which we expect will reduce our cost of sales by approximately $73,000 in aggregate for the last four months of fiscal 2015 as compared to the corresponding prior year period. Professional fee expenses were approximately $1.3 million for the year ended September 30, 2014, an increase of approximately $154,000 (12.9%) from the prior fiscal year, primarily due to legal fees related to the Intella2 litigation in fiscal 2014 as well as legal and consulting expenses associated with certain other one-time financing and business development projects undertaken by us in fiscal 2014. While it is possible that there could be other litigation or financing and business development projects during fiscal 2015, we currently expect such professional fees expenses for fiscal 2015 to be less than the corresponding prior year amounts.

During the year ended September 30, 2014, our revenues were not sufficient to fund our total cash expenditures (operating, capital and debt service) and as a result we obtained additional funding from the Working Capital Notes and Sigma Note 2 and we also restructured the payment terms of Sigma Note 1 and certain other notes – see note 4. However, primarily because of our expectations with respect to our recent and anticipated introductions of several new or enhanced products, we expect to achieve revenue growth in fiscal 2015, as compared to fiscal 2014 and excluding the impact of a fiscal 2015 transaction with Infinite Conferencing Partners LLC as discussed below. However, in the event we are unable to achieve the necessary revenue increases to fund our total cash expenditures, we believe that identified decreases in our current level of expenditures that we have already planned to implement or could implement (in addition to the already implemented cost savings discussed above and including a significant reduction in our software development costs and capital equipment purchases) and the raising of additional capital in the form of debt and/or equity and/or the sales of assets or operations would be sufficient to fund our operations through September 30, 2015.

F-9


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

Liquidity (continued)

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. The Executives have agreed to defer a portion of their compensation in the past, to the extent we needed that cash to meet other operating expenses – see note 5 for details – and, in the event of extremely critical or urgent requirements in the future, are expected to continue to do so.

On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale of a defined subset of Infinite Conferencing’s (“Infinite’) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). The Sold Accounts represent historical annual revenues of approximately $1.35 million. We agreed to be responsible for all legal fees related to this transaction, which were approximately $62,000, $5,000 which we paid in advance and the $57,000 balance which was deducted from the gross proceeds of the sale. See note 9 for the details of this and related transactions.

The proceeds from this sale were used by us to pay (i) approximately $311,000 of outstanding principal and approximately $136,000 of accrued interest on certain notes payable and (ii) approximately $62,000 for all legal fees related to this transaction for which we were obligated. The remaining proceeds were used for fee obligations under the New Sigma Note and for other operating expenses. Also, as a result of the reduction of our eligible accounts receivable arising from this sale, we expect the borrowing availability under our credit line with Thermo Credit LLC to ultimately decrease by up to approximately $155,000, which depending on other transactions affecting our eligible accounts receivable, may result in additional payments by us to reduce the outstanding principal balance of that credit line.

An April 30, 2015 financing agreement with Sigma provides that if our SEC filings are current and the auditor’s report given in connection with the 2014 Form 10-K does not contain a going concern qualification, and Sigma, at its own and sole discretion, has determined that there has been no adverse change in our business since September 30, 2013 (other than items disclosed as specified), Sigma will loan us an additional $200,000 (net), to be used for the repayment of certain debts – see note 4 for the details of this agreement.

On April 30, 2015, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. Mr. Charles Johnston, a former ONSM director, 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. 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 March 1, 2016 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of funds in excess of $5.0 million as a result of a single transaction for the sale of all or a part of our operations or assets, this Funding Letter will be terminated. The consideration for the Funding Letter is $25,000 to be withheld from any proceeds lent thereunder but in any event paid no later than September 1, 2015.

F-10


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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 and/or that we will be able to borrow further funds other than under the Line or the Funding Letter and/or that we will be able to sell assets or operations and/or that we will be able to increase our revenues and/or control our expenses to a level sufficient to provide positive cash flow. The financial statements do not include any adjustments to reflect future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result if we are unsuccessful.

The resolution of debt and other obligations becoming due after September 30, 2015 (the end of the one year time frame on which our liquidity analysis and conclusions above were based), and in particular those becoming due during October 2015, represents a future unknown contingency. These include Sigma Notes 1 and 2, and the Rockridge Note, which require principal payments on October 15, 2015 aggregating $1,758,000, as well as the Line which has a current outstanding principal balance of approximately $1,650,000. See note 4 for further details of these and other obligations payable during that period.

Basis of Consolidation

The accompanying consolidated financial statements include the accounts of Onstream Media Corporation and its subsidiaries - Infinite Conferencing, Inc., Entertainment Digital Network, Inc., OSM Acquisition, Inc., Onstream Conferencing Corporation, AV Acquisition, Inc., Auction Video Japan, Inc., HotelView Corporation and Media On Demand, Inc. 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.

F-11


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

Inventories

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

Fair Value Measurements

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

We have determined that the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, amounts due to directors and officers and deferred revenue approximate fair value due to the short maturity of the instruments. We have also determined that the carrying amounts of certain notes and other debt approximate fair value due to the short maturity of the instruments, as well as the market value interest rates they carry – these include the Line and the equipment lease.

We have determined that the Rockridge Note, the CCJ Note, the Equipment Notes, the Subordinated Notes, the Intella2 Investor Notes, the Investor Notes, the Fuse Note, Sigma Note 1, Sigma Note 2, the Working Capital Notes and the USAC Note (the “Instruments”), discussed in note 4, meet the definition of a financial instrument as contained in the Financial Instruments topic of the Accounting Standards Codification (“ASC”), as this definition includes a contract that imposes a contractual obligation on us to deliver cash to the other party to the contract and/or exchange other financial instruments with the other party to the contract on potentially unfavorable terms. Accordingly, these items are (or were) financial liabilities subject to the accounting and disclosure requirements of the Fair Values Measurements and Disclosures topic of the ASC, whereby such liabilities are presented at fair value, which is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs.

F-12


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

Fair Value Measurements (continued)

The accounting standards describe a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We have determined that there are no Level 1 inputs for determining the fair value of the Instruments. However, we have determined that the fair value of the Instruments may be determined using Level 2 inputs, as follows: the fair market value interest rate paid by us under the Line, as discussed in note 4. We have also determined that the fair value of the Instruments may be determined using Level 3 inputs, as follows: third party studies arriving at recommended discount factors for valuing payments made in unregistered restricted stock instead of cash, interest rates and other related expenses such as finders and origination fees observed in our ongoing and active negotiations with various financing sources, including the terms of our transactions that are not eligible to be Level 2 inputs because of the non-comparable duration of the transaction as compared to the transaction being valued. Level 3 inputs currently used by us in our fair value calculations with respect to the Instruments include finders and origination fees ranging between 10% and 14% per annum and periodic interest rate premiums arising from less favorable collateral and/or payment priority, as compared to the Line, ranging between 6% and 21% per annum.

Using the inputs described above, we have determined that there was no material difference between the carrying value and the fair value of the Instruments as of September 30, 2014, September 30, 2013 or September 30, 2012 and therefore no adjustment with respect to fair value was made to our consolidated financial statements as of those dates or for years ended September 30, 2014 and 2013.

Goodwill and other intangible assets

In accordance with the Intangibles – Goodwill and Other topic of the ASC, goodwill is reviewed annually (or more frequently if impairment indicators arise) for impairment. As provided by ASC 350-20-35 (“Intangibles – Goodwill and Other – Goodwill - Subsequent Measurement”), we follow a two-step process for impairment testing of goodwill. The first step of this test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. The second step, if necessary, measures the amount of the impairment, including a comparison and reconciliation of the carrying value of all of our reporting units to our market capitalization, after appropriate adjustments for control premium and other considerations. As allowed by ASC 350-20-35-3, we first assess the qualitative factors set forth in that authoritative guidance to determine whether it is more likely than not that the fair value of a reporting unit is more or less than its carrying amount and to use such qualitative assessment as a basis of determining whether it would be necessary to perform the two-step goodwill impairment testing process described above.

F-13


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

Goodwill and other intangible assets (continued)

Other intangible assets, such as customer lists, are amortized to expense over their estimated useful lives, although they are still subject to review and adjustment for impairment at least annually.

Long-lived assets

Property and equipment

Property and equipment are recorded at cost, less accumulated depreciation. Leases, including those for office space as well as those for computers and equipment, are evaluated for capitalization in accordance with the four criteria set forth in ASC 840-10-25-1 (“Leases – Overall – Recognition”). Property and equipment under capital leases are stated at the lower of the present value of the minimum lease payments at the beginning of the lease term or the fair value at the inception of the lease. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Amortization expense on assets acquired under capital leases is included in depreciation expense. The costs of leasehold improvements are amortized over the lesser of the lease term or the life of the improvement.

Software

Software developed for internal use, including the Digital Media Services Platform (“DMSP”) and iEncode and other webcasting software, is included in property and equipment – see notes 2 and 3.  Such amounts are accounted for in accordance with the Intangibles – Goodwill and Other topic of the ASC and amortized on a straight-line basis over three to five years, commencing when the related asset (or major upgrade release thereof) has been substantially placed in service.

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We assess the recoverability of such assets by comparing the estimated undiscounted cash flows associated with the related asset or group of assets against their respective carrying amounts. The impairment amount, if any, is calculated based on the excess of the carrying amount over the fair value of those assets.

Revenue Recognition

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

The Infinite and OCC divisions of the Audio and Web Conferencing Services Group generate revenues from audio conferencing and web conferencing services, plus recording and other ancillary services.  Infinite and OCC own telephone 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.

F-14


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

Revenue Recognition (continued)

The EDNet division of the Audio and Web Conferencing Services Group generates revenues from customer usage of digital network connections, as well as bridging services and the sale and rental of equipment.  EDNet purchases the rights to access digital network connections from national communications companies (and resellers) and resells such access to its customers for a fixed monthly fee plus separate per-minute usage charges. Network usage and bridging (managed transcoding and multipoint sessions) revenue is recognized based on the timing of the customer’s use of those services.

EDNet sells various audio codecs and 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.

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 September 30, 2014 and 2013 was immaterial in relation to our recorded liabilities at those dates.

F-15


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

Revenue Recognition (continued)

The DMSP, UGC and Smart Encoding divisions of the Digital Media Services Group recognize revenues from the acquisition, editing, transcoding, indexing, storage and distribution of their customers’ digital media. Charges to customers by these divisions generally include a monthly subscription or hosting fee. Additional charges based on the activity or volumes of media processed, streamed or stored by us, expressed in megabytes or similar terms, are recognized at the time the service is performed. Fees charged for customized applications or set-up are recognized as revenue at the time the application or set-up is completed.

We include the DMSP and UGC divisions’ revenues, along with the Smart Encoding division’s revenues from hosting, storage and streaming, in the DMSP and hosting revenue caption. We include the EDNet division’s revenues from equipment sales and rentals and the Smart Encoding division’s revenues from encoding and editorial services in the Other Revenue caption.

Deferred revenue represents amounts billed to or received from customers for audio and web conferencing, webcasting or DMSP services to be provided in future accounting periods.  As projects or events are completed and/or the services provided, the revenue is recognized.

We add to our customer billings for certain services an amount to recover Universal Service Fund (“USF”) contributions which we have determined that we will be obligated to pay to the Federal Communications Commission (“FCC”), related to those particular services. This additional billing to our customers is not reflected as revenue by us, but rather is recorded as a liability on our books at the time of such billing, which liability is relieved upon our remittance of USF contributions as they are billed to us by USAC, an administrative and collection agency of the FCC - see notes 4 and 5.

Income Taxes

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This 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.

F-16


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

Income Taxes (continued)

We have approximately $86 million in Federal net operating loss carryforwards (NOLs) as of September 30, 2014, which expire in fiscal years 2018 through 2034, but also may be limited as to our future use as the result of previous or future ownership changes and other limitations. We had a deferred tax asset of approximately $32.5 and $32.2 million as of September 30, 2014 and 2013, respectively, primarily resulting from these NOLs. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against those deferred tax assets. A full valuation allowance has been recorded related to the deferred tax asset due to the uncertainty of realizing the benefits of certain NOLs before they expire. Our management will continue to assess the likelihood that the deferred tax asset will be realizable and the valuation allowance will be adjusted accordingly. As a result of the NOLs as discussed above, no income tax benefit was recorded in our consolidated statement of operations as a result of the net tax losses for the years ended September 30, 2014 and 2013. 

The primary differences between the net loss or income for book and the net loss or income 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, expenses for stock options issued in payment for consultant and employee services but not exercised by the recipients, expenses related to shares issued or committed to be issued in payment for consultant and employee services, until such shares are issued and eligible for resale by the recipient, and interest accretion expense when related to liabilities for capital transactions such as share repurchases and asset purchases.

The Income Taxes topic of the ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. However, as of September 30, 2014 and 2013 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 years ended September 30, 2014 and 2013. The tax years ending September 30, 2012 and thereafter remain subject to examination by Federal and various state tax jurisdictions.

Net Loss per Share

For the years ended September 30, 2014 and 2013, basic net loss per share is based on the net loss divided by the basic weighted average number of shares of common stock outstanding, including the impact of common shares committed to be, but not yet, issued for compensation to certain Executives and for a loan origination fee - 2,566,667 as of September 30, 2014 and 2,291,667 as of September 30, 2013 – see notes 4 and 5.

F-17


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

Net Loss per Share (continued)

Since our statement of operations for the years ended September 30, 2014 and 2013 reflect net losses, the effect of common stock equivalents for those periods would be anti-dilutive and thus all such equivalents were excluded from the calculation of basic weighted average shares outstanding for those periods. The total outstanding options and warrants thus excluded from the calculation of weighted average shares outstanding represented underlying common shares of 1,156,185 and 1,300,999 at September 30, 2014 and 2013, respectively.

In addition, the convertible securities outstanding at September 30, 2014 but excluded from the calculation of weighted average shares outstanding for the year then ended are as follows: (i) the $395,000 portion of the outstanding balance of Sigma Note 1, which could potentially convert into up to 395,000 shares of our common stock, (ii) the $551,741 outstanding balance of Sigma Note 2, which could potentially convert into up to 551,741 shares of our common stock, (iii) the $400,000 outstanding balance of the Rockridge Note, which could potentially convert into up to 166,667 shares of our common stock, (iv) the $200,000 outstanding balance of the Fuse Note, which could potentially convert into up to 400,000 shares of our common stock and (v)  the $200,000 portion of the outstanding balance of the Intella2 Investor Notes issued to Fuse Capital LLC, which could potentially convert into up to 400,000 shares of our common stock.

In addition, the convertible securities outstanding at September 30, 2013 but excluded from the calculation of weighted average shares outstanding for the year then ended are as follows: (i) the $395,000 portion of the outstanding balance of Sigma Note 1, which could potentially convert into up to 395,000 shares of our common stock, (ii) the $590,381 outstanding balance of the Rockridge Note, which could have potentially converted into up to 245,992 shares of our common stock, (iii) the $200,000 outstanding balance of the Fuse Note, which could potentially convert into up to 400,000 shares of our common stock and (iv)  the $200,000 portion of the outstanding balance of the Intella2 Investor Notes issued to Fuse Capital LLC, which could potentially convert into up to 400,000 shares of our common stock.

Compensation and related expenses

Compensation costs for employees considered to be direct labor are included as part of webcasting costs of revenue. Certain compensation costs for employees involved in development of software for internal use, as discussed under Software above, are capitalized. Accrued liabilities and amounts due to directors and officers includes, in aggregate, approximately $1.3 million and $818,000 as of September 30, 2014 and 2013, respectively, related to salaries, commissions, taxes, vacation and other benefits earned but not paid as of those dates.

F-18


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

Equity Compensation to Employees and Consultants

We have a stock based compensation plan (the “Plan”) for our employees, directors and consultants. In accordance with the Compensation – Stock Compensation topic of the ASC, we measure compensation cost for all share-based payments, including employee stock options, at fair value, using the modified-prospective-transition method. Under this method, compensation cost recognized for the years ended September 30, 2014 and 2013 include 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. There were no Plan options granted during the years ended September 30, 2014 or 2013.

We have granted Non-Plan Options to consultants and other third parties. These options have been accounted for under the Equity topic (Equity-Based Payments to Non-Employees subtopic) of the ASC, under which the fair value of the options at the time of their issuance, calculated using the Black-Scholes model, is reflected as a prepaid expense in our consolidated balance sheet at that time and expensed as professional fees during the time the services contemplated by the options are provided to us. There were no Non-Plan options granted during the years ended September 30, 2014 or 2013.

See Note 8 for additional information related to all stock option issuances.

Advertising and marketing

Advertising and marketing costs, which are charged to operations as incurred and classified in our financial statements under Professional Fees or under Other General and Administrative Operating Expenses, were approximately $640,000 and $724,000 for the years ended September 30, 2014 and 2013. 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 or income equals comprehensive loss or income for all periods presented.

Valuation of Derivatives

In accordance with ASC Topic 815, 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. We have determined that this treatment was applicable to a warrant issued by us in September 2010 – see note 8.

F-19


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

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, inventory reserves, depreciation and amortization lives and methods, goodwill and other impairment allowances, income taxes and related reserves and contingent liabilities, including contingent purchase prices for acquisitions, contingent compensation arrangements and USF contributions. Such estimates are reviewed on an ongoing basis and actual results could be materially affected by those estimates.

Effects of Recent Accounting Pronouncements

In July 2013, the FASB issued ASU 2013-11 (Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists), which provides that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available, in which case the unrecognized tax benefit should be presented in the financial statements as a liability. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted.  We believe that our implementation of this guidance for our fiscal year ended September 30, 2015, and interim periods within that fiscal year, will have no material impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09 (Revenue from Contracts with Customers (Topic 606)), which requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses in particular contracts with more than one performance obligation as well as the accounting for some costs to obtain or fulfill a contract with a customer and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. With respect to public entities, this update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and early adoption is not permitted. We believe that our implementation of this guidance for our fiscal year ended September 30, 2018, and interim periods within that fiscal year, will have no material impact on our consolidated financial statements.

In June 2014, the FASB issued ASU 2014-12 (Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period), which requires that a performance target which affects vesting and which could be achieved after the requisite service period be treated as a performance condition. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted.  We are currently evaluating the impact of the implementation of this guidance on our consolidated financial statements.

F-20


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

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

Effects of Recent Accounting Pronouncements (continued)

In August 2014, the FASB issued ASU 2014-13 (Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity). Prior to this guidance, we would be required to consolidate in our financial statements a collateralized financing entity, such as a collateralized debt obligation (CDO) or collateralized loan obligation (CLO) entity, if we are the primary beneficiary of the collateralized financing entity, in accordance with the guidance in Topic 810 on consolidation. ASU 2014-13 provides that when consolidating a collateralized financing entity, we may elect to measure the financial assets and liabilities of that collateralized financing entity using either the measurement alternative included in the update or Topic 820 on fair value measurement. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted as of the beginning on an annual period. In February 2015, the FASB issued ASU 2015-02 (Consolidation (Topic 810): Amendment to the Consolidation Analysis), which limits the conditions indicating that an entity is the primary beneficiary of a collateralized financing entity. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted, including adoption in an interim period.  We are currently evaluating the impact of the implementation of this guidance on our consolidated financial statements, particularly with respect to our February 2015 transaction with Infinite Conferencing Partners LLC, as discussed in note 9.

In August 2014, the FASB issued ASU 2014-15 (Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern), which provides that in connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). This pronouncement also provides that management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Depending on the results of this evaluation, the pronouncement sets forth certain required disclosures with respect to such evaluation. This update is effective for the annual period ending after December 15, 2016 and for annual and interim periods thereafter, with early adoption permitted.  We believe that our evaluation and the related disclosures are substantially in compliance with this guidance, with the exception that our evaluation is currently based on the one-year period after the date of the latest financial statement being presented, instead of extending through a date one year after the financial statement issuance date as required in this new guidance. We believe that our implementation of this guidance for our fiscal year ended September 30, 2017 could have a material impact on our consolidated financial statements, although that cannot be determined at this time.

In April 2015, the FASB issued ASU 2015-03 (Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs), which provides that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted for financial statements that have not been previously issued. We are currently in compliance with this guidance and thus it will have no material impact on our consolidated financial statements.

F-21



 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014

 

NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS 

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

September 30, 2014

 

September 30, 2013

 

Gross Carrying Amount

 

           

Accumulated Amortization

 

Net Book Value

 

Gross Carrying Amount

  

    

Accumulated Amortization

 

Net Book Value

Goodwill:
     Infinite Conferencing $ 6,400,887 $                 - $ 6,400,887 $ 6,400,887 $                 - $ 6,400,887
     Intella2 411,656                    - 411,656 411,656                    - 411,656
     Audio/web conferencing reporting unit 6,812,543                   - 6,812,543 6,812,543                   - 6,812,543
     EDNet 1,271,444                   - 1,271,444 1,271,444                   - 1,271,444
     Acquired Onstream 271,401                   - 271,401 271,401                   - 271,401
     Auction Video   3,216                     -   3,216   3,216                     -   3,216
Total goodwill   8,358,604                     -   8,358,604   8,358,604                     -   8,358,604
Acquisition-related intangible assets (items listed are those that were not fully amortized as of September 30, 2013):
   Intella2 - customer list, trade names,
        URLs and non-compete
  759,848   (232,931)   526,917   759,848   (90,305)   669,543
Total intangible assets   759,848   (232,931)   526,917   759,848   (90,305)   669,543
 Total goodwill and other acquisition-
        related intangible assets
$ 9,118,452 $ (232,931) $ 8,885,521 $ 9,118,452 $ (90,305) $ 9,028,147

Intella2 – November 30, 2012

On November 30, 2012 we acquired certain assets and operations of Intella2 Inc., a San Diego-based communications company (“Intella2”). The acquisition included a list of over 2,500 customers as well as software licenses, equipment and network infrastructure and a non-compete. The