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EX-10.20 - EXHIBIT 10.20 - Onstream Media CORPexhibit10_20.htm
EX-32.2 - EXHIBIT 32.2 - Onstream Media CORPexhibit32_2.htm
EX-32.1 - EXHIBIT 32.1 - Onstream Media CORPexhibit32_1.htm
EX-31.2 - EXHIBIT 31.2 - Onstream Media CORPexhibit31_2.htm
EX-31.1 - EXHIBIT 31.1 - Onstream Media CORPexhibit31_1.htm
EX-10.42 - EXHIBIT 10.42 - Onstream Media CORPexhibit10_42.htm
EX-10.41 - EXHIBIT 10.41 - Onstream Media CORPexhibit10_41.htm
EX-10.40 - EXHIBIT 10.40 - Onstream Media CORPexhibit10_40.htm
EX-10.39 - EXHIBIT 10.39 - Onstream Media CORPexhibit10_39.htm
EX-10.25 - EXHIBIT 10.25 - Onstream Media CORPexhibit10_25.htm
EX-10.21 - EXHIBIT 10.21 - Onstream Media CORPexhibit10_21.htm
EX-4.24 - EXHIBIT 4.24 - Onstream Media CORPexhibit4_24.htm
EX-4.23 - EXHIBIT 4.23 - Onstream Media CORPexhibit4_23.htm
EX-4.22 - EXHIBIT 4.22 - Onstream Media CORPexhibit4_22.htm
EX-4.21 - EXHIBIT 4.21 - Onstream Media CORPexhibit4_21.htm
EX-4.10 - EXHIBIT 4.10 - Onstream Media CORPexhibit4_10.htm
EX-4.9 - EXHIBIT 4.9 - Onstream Media CORPexhibit4_9.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, 2015

 

[  ]                      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 [  ] No [X]

 

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, 2015 was approximately $3.4 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 October 7, 2016, 23,837,080 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, the potential for cybersecurity breaches and other risks of reliance on the Internet and telephone networks as integral parts of our business operations 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, 2015, 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 82 full time employees as of September 30, 2015, with operations organized in two main operating groups:

 

·                     Audio and Web Conferencing Services Group

·                     Digital Media Services Group

 

Products and services provided by each of the groups are:

 

Audio and Web Conferencing Services Group

 

Our Audio and Web Conferencing Services Group consists of our Infinite Conferencing (“Infinite”) division, our Onstream Conferencing Corporation (“OCC”) division and our EDNet division. This group represented approximately 66.8% and 67.3% of our revenues for the years ended September 30, 2015 and 2014, respectively. These revenues are comprised primarily of network access and usage fees as well as the sale and rental of communication equipment.

 

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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. We have recently introduced the following audio and web conferencing products: (i) Onstream Meetings and (ii) Onstream Webinars, both of which feature fully integrated audio conferencing, allowing customers to interact from land based, mobile or desktop headsets (VOIP) as well as high definition Dolby audio.

 

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

 

 Digital Media Services Group 

 

Our Digital Media Services Group consists primarily of our Webcasting division and our DMSP (“Digital Media Services Platform”) division. The DMSP division includes the related UGC (“User Generated Content”) and Smart Encoding divisions.  This group represented approximately 33.2% and 32.7% of our revenues for the years ended September 30, 2015 and 2014, respectively. These revenues are comprised primarily of fees for hosting/storage, search/retrieval and distribution/streaming of digital assets as well as encoding and production fees.

 

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

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

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

 

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

 

Sales and Marketing

 

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

 

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

 

No single customer has represented more than 10% of our consolidated revenues during the years ended September 30, 2015 or 2014.

 

Competition

 

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

 

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

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

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

·         traditional media, such as television, radio and print; and

·         end-user software products.

 

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

 

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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, DaCast, Wowza Media Services, Encoding.com, Vimeo, Kaltura Media Space, Netromedia,Wistia and others. Other companies that compete in some portion of the digital media services market targeted by us include Akamai, Ascent Media, BrightCove, Edgecast, Limelight, Neulion, PermissionTV, Sonic Foundry, Telestream,  Twistage, and VitalStream (Internap).

 

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

 

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

 

Government Regulation

 

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

 

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

 

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

 

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

 

Certain of our services are conducted primarily over telephone lines, which are heavily regulated by various Federal and other agencies. Although we believe that the responsibility for compliance with those regulations primarily falls on the local and long distance telephone service providers and not us, the Federal Communications Commission (FCC) issued an order in 2008 that requires conference calling companies to remit Universal Service Fund (USF) contribution payments on customer usage associated with audio conference calls. In addition, in 2011 the FCC announced its position that the 2008 order extended to audio bridging services provided using internet protocol (IP) technology and in April 2012 issued a “Further Notice of Proposed Rulemaking” (the “2012 FNPRM”), which if implemented might expand the types of business operations that are considered subject to USF contribution payments. The 2012 FNPRM sought comments from the public on four major areas: (i) clarifying and modifying the FCC’s rules on what services and service providers must contribute to the fund (ii) whether the FCC should reform the current revenues system or adopt an alternative system, (iii) how to improve administration of the contribution system and (iv) how to improve the contributions methodology with respect to the recovery mechanisms from end users (including changes with respect to our current practice of recovering our USF contributions from our customer end-users through a line-item (surcharge) on our invoices to them).  The period for submitting comments closed on August 6, 2012.  On August 7, 2014 the FCC asked the Federal-State Joint Board on Universal Service to provide its recommendations, on or before April 7, 2015, with respect to the 2012 FNPRM. To the best of our knowledge, no further action has been taken with respect to this matter as of October 28, 2016.

 

While we believe that we have registered our operations appropriately with the FCC, including the filing of both quarterly and annual reports regarding the revenues derived from audio conference calling, and the remittance of USF contributions thereon, it is possible that our determination of the extent to which our operations are subject to USF could be challenged or changed. It is also possible we would need to change our pricing structure in order to maintain our current margins, with our ability to do that possibly affected by the related actions of our competitors. However, we do not believe that the ultimate outcome of any such challenge or changes would have a material adverse effect on our financial position or results of operations.

 

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

 

Intellectual Property

 

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

 

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

 

With respect to the claims pending in the first of the two Original Applications (number 10/808,894), the USPTO issued various final and non-final rejections in August 2008, February 2009, May 2009, January 2010 and June 2010. Our responses to these rejections included modifications to certain claims made in the original patent application. In response to the June 2010 rejection we filed a Notice of Appeal with the USPTO on November 22, 2010 and we filed an appeal brief with the USPTO on February 9, 2011. The USPTO filed an Examiner's Answer to the Appeal Brief on May 10, 2011, which repeated many of the previous reasons for rejection, and we filed a response on July 8, 2011. On July 7, 2014, the USPTO issued a notice setting the hearing on this application before the Patent Trial and Appeal Board on September 18, 2014. As a result of that hearing, which we attended, on October 27, 2014 the Patent Trial and Appeal Board affirmed the Examiner’s rejection in part and reversed the Examiner’s rejection in part.  In response, the Examiner issued a new Office Action on March 5, 2015 rejecting the claims.  We conducted an interview with the Examiner on April 9, 2015 and filed a response to the Office Action on May 26, 2015, which contained certain proposed amendments to the claims. On June 19, 2015, the USPTO issued a Notice of Allowance and Fees Due, which granted the claims as submitted by us on May 26, 2015. On October 13, 2015, the USPTO issued to us U.S. Patent Number 9,161,068 (the “First Granted Patent”) with a Patent Term Adjustment of 2,377 days, resulting in a September 26, 2030 expiration date, provided all maintenance fees are paid.

 

On September 2, 2015, with reference to the First Granted Patent, we filed a Continuation Application with the USPTO and the USPTO issued a related Filing Receipt, establishing a September 2, 2015 filing date for a new patent application (number 14/843,457). On September 17, 2015, the USPTO issued a related Notice to File Missing Parts of Nonprovisional Application, which we filed our timely response to on January 19, 2016On January 28, 2016, the USPTO issued a related Notice of Incomplete Reply, which we filed our timely response to on February 17, 2016. The Continuation Application process, which has no set time frame or end date, may result in issuance of another patent to us which may include broader and/or additional claims as compared to the First Granted Patent, although this cannot be assured. We do not expect the Continuation Application process to affect the enforceability of the First Granted Patent, nor do we expect the result of the Continuation Application process to result in modifications, or adverse impact, to the First Granted Patent.

 

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With respect to the claims pending in the second of the two Original Applications (number 12/110,691), the USPTO issued a non-final rejection in June 2011 (which was reissued in January 2012) and a final rejection in June 2012. With respect to the June 2012 rejection, we filed a pre-appeal brief conference request on September 7, 2012 and the USPTO responded on September 27, 2012 with a decision to proceed to appeal. We filed a Request for Continuing Examination with the USPTO on April 5, 2013, which the USPTO responded to on June 12, 2013 with a non-final rejection. Our response to that non-final rejection was filed on November 12, 2013, which the USPTO responded to on January 10, 2014 with a final rejection.In response to this final rejection, we filed a Notice of Appeal on April 8, 2014 and the related Appeal Brief on June 9, 2014,which the USPTO responded to with an Examiner’s Answer on September 3, 2014.  On November 3, 2014 we filed a Reply Brief with the Patent Trial and Appeal Board and on June 16, 2016 the Patent Trial and Appeal Board issued their decision, which (i) reversed the Examiner’s previous rejection of the claims in Application 12/110,691 under 35 U.S.C. Section 112 (“lack of written description” and “enablement”) and (ii) affirmed the Examiner’s previous rejection of those claims under 35 U.S.C. Section 103 (“obviousness”).  On August 16, 2016, we filed a Request for Continued Examination with the USPTO, which included our response to the June 16, 2016 decision on appeal and a request that our application be reconsidered. Our response also included modifications to certain claims made in the original patent application. On August 25, 2016, the USPTO issued a Notice of Allowance and Fees Due, which granted the claims as submitted by us on August 16, 2016. On October 11, 2016, the USPTO issued to us U.S. Patent Number 9,467,728 (the “Second Granted Patent”) with a Patent Term Adjustment of 1,362 days, resulting in a December 16, 2027 expiration date, provided all maintenance fees are paid.

 

On September 2, 2016, with reference to the Second Granted Patent, we filed a Continuation Application with the USPTO and the USPTO issued a related Filing Receipt, establishing a September 2, 2016 filing date for a new patent application (number 15/255,416). The Continuation Application process, which has no set time frame or end date, may result in issuance of another patent to us which may include broader and/or additional claims as compared to the Second Granted Patent, although this cannot be assured. We do not expect the Continuation Application process to affect the enforceability of the Second Granted Patent, nor do we expect the result of the Continuation Application process to result in modifications, or adverse impact, to the Second Granted Patent.

 

Our management believes that the First and Second Granted Patents, as well as two other related patents still pending, may have significant value, although this cannot be assured, and is presently exploring the financial potential of the First and Second Granted Patents and the patents pending. Regardless of the ultimate outcome with respect to the results of this process and/or the eventual USPTO decision with respect to the pending patent applications, our management has determined that there is no material exposure to an adverse effect on our financial position or results of operations, since all of the previous costs incurred by us in connection with the patents have been amortized to expense as of September 30, 2013 and are being expensed as incurred subsequent to that date. Certain of the former owners of Auction Video, Inc. have an interest in proceeds that we may receive under certain circumstances in connection with the First and Second Granted Patents and the patents pending.

 

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

 

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

 

Employees

 

As of October 7, 2016 we had approximately 75 full time employees, of whom 42 were design, production and technical personnel, 13 were sales and marketing personnel and 20 were general, administrative and executive management personnel. None of the employees are covered by a collective bargaining agreement and our management considers relations with our employees to be good.

 

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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. Although we notified the landlord of our exercise of the renewal option, the landlord never confirmed that we have met the conditions for such renewal, and this renewal period expired September 15, 2015. As of October 28, 2016, we are in negotiations with the landlord with respect to the terms of our continuing tenancy at that location. The current monthly base rental is approximately $21,100 (including sales taxes and our share of property taxes, insurance and other operating expenses incurred under the lease but excluding operating expenses such as electricity paid by us directly).

 

·                 an approximately 10,800 square foot facility at 100 Morris Avenue in Springfield, New Jersey, which houses the Infinite Conferencing audio and web conferencing operations. Our lease expires on January 31, 2022 after considering the most recent lease amendment executed in October 2016 with an effective date of February 1, 2017. The monthly base rental is approximately $17,700 through January 31, 2017, then, based on a mutual agreement to a reduction in the square footage, is $10,000 per month for the next twelve months and then increases by $500 per month for each of the next four twelve-month lease periods. The lease provides for one five-year renewal option at no less than the base rental at the time of renewal ($12,000), but not to exceed fair market value at the time of renewal. The lease is also cancellable by us any time after November 1, 2016 in the event of the sale of Infinite Conferencing or Onstream Media Corporation, such cancellation effective six months after notice is given by us to landlord after such sale.

 

·                 approximately 1,200 square feet of office space of located at 545 Fifth Avenue, New York City, New York.  These offices serve primarily for webcasting sales activities and backup to Florida-based webcasting operations. Our lease expires January 24, 2018 and provides one two-year renewal option at the greater of the fifth year rental or fair market value. The monthly base rental is approximately $8,600 with annual increases up to 2.8%.

 

·                  an approximately 1,300 square foot facility at 901 Battery Street, Suite 210 in San Francisco, which serves as administrative headquarters for the EDNet division of the Audio and Web Conferencing Services Group, and houses the centralized network hub for electronically bridging affiliate studios. In addition, the facility operates as a backup to Florida for webcasting operations. Our lease expires on September 30, 2018. The monthly base rental is approximately $5,600 (excluding month-to-month parking) with annual increases of approximately 3.0%.

 

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

 

10


 

 

 

ITEM 3.                                LEGAL PROCEEDINGS

 

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

 

ITEM 4.                                MINE SAFETY DISCLOSURES

 

Not applicable.

 

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. 

 

                The following table sets forth the high and low closing sale prices for our common stock as reported on OTCQB or OTCP, as applicable, for the period from October 1, 2013 through October 7, 2016. These prices do not include retail mark-ups, markdowns or commissions, and may not necessarily represent actual transactions or may represent transactions involving a small number of shares.

 

High

Low

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

$

0.21

$

0.13

Fourth Quarter

$

0.23

$

0.14

FISCAL YEAR 2016

First Quarter

$

0.21

$

0.13

Second Quarter

$

0.19

$

0.10

Third Quarter

$

0.25

$

0.10

Fourth Quarter

$

0.20

 

$

0.11

 

FISCAL YEAR 2017

First Quarter (to October 7, 2016) $

0.18

$

0.18

 

11


 

 

 

On October 7, 2016, the last reported sale price of the common stock on OTCP was $0.18 per share.   As of October 7, 2016 there were approximately 551 shareholders of record of the common stock.

               

Dividend Policy

 

We have never declared or paid any cash dividends on our common stock.  We currently expect to retain future earnings, if any, to finance the growth and development of our business. As of October 28, 2016, there are no preferred shares outstanding.

 

On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”), which represented historical annual revenues of approximately $1.35 million. On December 16 and 18, 2015, we received aggregate gross proceeds of approximately $2.1 million for our sale, effective December 16, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“First Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $2.7 million. During March through June 2016, we received gross proceeds of approximately $0.8 million for our sale, effective June 30, 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Second Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $1.0 million, and were sold under the same terms as the accounts sold in December 2015. During September and October 2016, subscriptions for approximately $225,000 were received by Partners and funded against an anticipated total of  $1.5 million for our sale, which we expect will be effective during November 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Third Tranche of Additional Sold Accounts”) to Partners, will represent historical annual revenues of approximately $1.9 million, and will be sold under the same terms as the accounts sold in December 2015 and June 2016.

 

In connection with the February 28, 2015 sale, Infinite and Partners entered into a Management Services Agreement (“MSA”) that provides for Infinite to continue to invoice the Sold Accounts but the payments when received from those Sold Accounts will be deposited in a segregated Partners owned bank account. Partners will return those customer proceeds to Infinite on a weekly basis in the form of a Management Fee, after deducting a certain amount representing (i) Partners’ guaranteed return (which is 40% of the Purchase Price per annum with the first six months guaranteed regardless of whether we exercise our repurchase rights as set forth in a related option agreement or the MSA is otherwise terminated) and (ii) accounting fees payable to the third-party accounting firm as discussed below. Infinite will continue to service the Sold Accounts, incurring and absorbing all related costs of doing so – i.e., Partners will have no operating responsibilities and no operating costs related to the sold accounts other than to pay the Management Fee to Infinite. As part of the December 16, 2015 sale of additional Infinite customer accounts, the MSA was amended to reduce the Partners’ guaranteed return percentage to 30% per annum, with the first six months guaranteed regardless of whether we exercise our repurchase rights as set forth in a related amended option agreement or the amended MSA is otherwise terminated.

As a result of our determination that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, (i) the gross proceeds from this and subsequent transactions are reflected as an increase in our equity (noncontrolling owners’ interest in VIE), (ii) the gross revenues from the Sold Accounts, and accounts sold as part of our subsequent transactions with Partners, are included in our consolidated revenues and (iii) the payment of the Partners’ guaranteed return percentage, which is deducted from these gross revenues, is reflected as a decrease in our equity (distributions to owners of VIE).

12


 

 

Recent Sales of Unregistered Securities

 

During June and July 2016 we issued an aggregate of 300,000 unregistered common shares for professional IR and PR/marketing services valued at approximately $45,000, which will be recognized as professional fees expense over service periods of up to twelve months.

 

During June 2016 we issued 100,000 unregistered common shares for financial advisory services valued at approximately $14,000, which will be expensed at the time of issuance.

 

During August 2016 we issued 25,000 unregistered common shares for financial advisory services valued at approximately $3,000, which will be expensed at the time of issuance.

 

During September 2016 we issued 125,000 unregistered common shares as a finders fee valued at approximately $16,000, which will be expensed at the time of issuance.

 

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

13


 

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

                The following table sets forth securities authorized for issuance under our 2007 Equity Incentive Plan, individual compensation arrangements and any other compensation plans as of September 30, 2015.

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

Weighted average exercise price of outstanding options, warrants and rights

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

Plan Category

2007 Equity Incentive Plan (1)

50,000

$

2.95

822,237 (2)

 

 

 

 

 

 

 

Equity compensation plans approved by shareholders

None

  None

None

 

 

 

 

 

 

 

Equity compensation plans not approved by shareholders

None

  None

None

 

 

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

 

(2)  Based on the issuance of 3,627,763 common shares under the Plan (including the 2,875,000 Executive Incentive Shares issued plus the 375,000 Executive Incentive Shares expected to be issued as discussed in Item 11 – Executive Compensation) through September 30, 2015 and 50,000 outstanding financial consultant Plan Options as of September 30, 2015, there were 822,237 shares available for additional issuances under the Plan as of September 30, 2015.

 

14


 

 

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

 

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

 

Overview

 

We are a leading online service provider of live and on-demand corporate audio and web communications, virtual event technology and social media marketing, provided primarily to corporate (including large as well as small to medium sized businesses), education and government customers.  We had approximately 75 full time employees as of October 7, 2016, with operations organized in two main operating groups:

 

·                     Audio and Web Conferencing Services Group

·                     Digital Media Services Group

 

Our Audio and Web Conferencing Services Group consists of our Infinite Conferencing (“Infinite”) division, our Onstream Conferencing Corporation (“OCC”) division and our EDNet division. Our Infinite division, which operates primarily from the New York City area, and our OCC division, which operates primarily from San Diego, California, provide “reservationless” and operator-assisted audio and web conferencing services. Our EDNet division, which operates primarily from San Francisco, California, provides connectivity (in the form of high quality audio and multimedia data communications) within the entertainment and advertising industries through its managed network, which encompasses production and post-production companies, advertisers, producers, directors, and talent.

 

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

 

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

 

Recent Developments

 

As of September 30, 2014 we were obligated to Sigma Opportunity Fund II, LLC (“Sigma”) for principal and accrued interest aggregating $1,539,340. After our December 31, 2014 payment to Sigma of all accrued interest through that date, but no principal payments, we were obligated to Sigma under a secured note for $1,358,000, with future interest payable monthly at 21% per annum and the principal due on October 15, 2015 (the “New Sigma Note”). On September 21, 2015, Sigma loaned us an additional $225,000, which resulted in $192,500 cash proceeds net of certain fees and expenses charged by Sigma. The net proceeds were used to pay approximately $173,000 of outstanding principal on one of the Working Capital Notes plus approximately $20,000 of accrued interest on that note. Accordingly, the outstanding balance of the New Sigma Note increased to $1,583,000 and the maturity date was extended to April 15, 2016, which extension resulted in our obligation to pay Sigma up to $250,000 in additional fees (plus monthly interest and penalties for late SEC filings, as applicable). During December 2015 we repaid $1.0 million of the outstanding balance due on the New Sigma Note and entered into additional agreements with Sigma whereby the maturity date on the remaining balance was extended from April 15, 2016 to December 31, 2016 and the interest rate, as well as certain other fees, was reduced. In the event of our default on the New Sigma Note, on or before the maturity date, the outstanding balance, including accrued interest, is convertible into our common shares at a price of $0.30 per common share.

 

15


 

 

 

On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”), which represent historical annual revenues of approximately $1.35 million. The proceeds from this sale were used by us to pay (i) approximately $311,000 of outstanding principal and approximately $136,000 of accrued interest on certain notes payable and (ii) approximately $69,000 for the cash portion of legal and consulting fees related to this transaction. The remaining proceeds were used for fee obligations under the New Sigma Note and for other operating expenses. After giving effect to our determination that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, (i) the gross proceeds from this and subsequent transactions are reflected as an increase in our equity (noncontrolling owners’ interest in VIE), (ii) the revenues from the Sold Accounts, and accounts sold as part of our subsequent transactions with Partners, are included in our consolidated revenues and (iii) the payment of the Partners’ guaranteed return percentage, which is deducted from these gross revenues, is reflected as a decrease in our equity (distributions to owners of VIE).

 

During December 2015, we received gross proceeds of approximately $2.1 million for our sale, effective December 16, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“First Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $2.7 million which transaction resulted in an increase, as a percentage of revenues, of the management fee received by us with respect to the accounts sold by us in a similar transaction in February 2015 and which improved management fee also applied to the accounts sold in December 2015. From the December 2015 proceeds, we repaid an aggregate of $481,000 against the net outstanding balances of certain subordinated notes, in addition to the $1.0 million repayment against the New Sigma Note discussed above. During March through June 2016, we received gross proceeds of approximately $0.8 million for our sale, effective June 30, 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Second Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $1.0 million, and were sold under the same terms as the accounts sold in December 2015. During September and October 2016, subscriptions for approximately $225,000 were received by Partners and funded against an anticipated total of  $1.5 million for our sale, which we expect will be effective during November 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Third Tranche of Additional Sold Accounts”) to Partners, will represent historical annual revenues of approximately $1.9 million, and will be sold under the same terms as the accounts sold in December 2015 and June 2016.

 

Since December 2007, we have had a line of credit arrangement with a financial institution under which we could borrow up to an aggregate of $2.0 million for working capital, collateralized by our accounts receivable and certain other related assets and the amount of such borrowing being further subject to the amount, aging and concentration of such receivables. On February 10, 2016, we entered into a loan modification agreement which extended the term of this line of credit arrangement through December 31, 2017.

 

See Liquidity and Capital Resources for further details with respect to the above transactions with Sigma, Thermo and Partners.

 

16


 

 

 

On April 30, 2015, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. Such notice was not given by us, but on April 30, 2016, we exercised our option for a one year extension of the Funding Letter, including an extension of the notice deadline to January 5, 2017. The Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available, but does not represent any obligation to accept such funding on these terms and is not expected by us to be exercised. Cash provided under the Funding Letter, as extended, would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 15, 2017 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status.

On March 27, 2007 we acquired the assets, technology and patents pending of privately owned Auction Video, Inc., a Utah corporation, and Auction Video Japan, Inc., a Tokyo-Japan corporation (collectively, “Auction Video”). In connection with our subsequent pursuit of approval of these patents pending (i) on October 13, 2015, the USPTO issued to us U.S. Patent Number 9,161,068 (the “First Granted Patent”) with a Patent Term Adjustment of 2,377 days, resulting in a September 26, 2030 expiration date, provided all maintenance fees are paid and (ii) on October 11, 2016, the USPTO issued to us U.S. Patent Number 9,467,728 (the “Second Granted Patent”) with a Patent Term Adjustment of 1,362 days, resulting in a December 16, 2027 expiration date, provided all maintenance fees are paid. These patents address live streaming of audio and/or video from multiple devices to a storage location, such as the Internet or cloud, and the ability to access and retrieve the audio and/or video to multiple devices, whereby the content is not stored on the device. Our management believes that the First and Second Granted Patents, as well as two other related patents still pending, may have significant value, although this cannot be assured, and is presently exploring the financial potential of the First and Second Granted Patents and the patents pending.

 

Revenue Recognition

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

17


 

 

Results of Operations

 

Our consolidated net loss for the year ended September 30, 2015 was approximately $8.4 million, as compared to a net loss of approximately $1.7 million for the prior fiscal year, an increase in our net loss of approximately $6.7 million, or 404.4%. The increased net loss was due to (i) an approximately $5.6 million impairment loss on goodwill and other intangible assets recorded by us for the year ended September 30, 2015, for which there was no comparable transaction in fiscal 2014, (ii) an approximately $800,000 impairment loss on property and equipment recorded by us for the year ended September 30, 2015, for which there was no comparable transaction in fiscal 2014 and (iii) an approximately $744,000 gain from litigation settlement recorded by us for the year ended September 30, 2014, for which there was no comparable transaction in fiscal 2015 and (iv) an approximately $523,000, or 4.3%, decrease in gross margin for the year ended September 30, 2015, as compared to the prior fiscal year. These items are discussed in more detail below.

 

The impact of the above items for the year ended September 30, 2015 was partially offset by (i) an approximately $440,000, or 21.0%, decrease in interest expense, (ii) an approximately $270,000, or 28.2%, decrease in depreciation and amortization expense and (iii) an approximately $219,000, or 1.9%, decrease in general and administrative expenses (operating expenses other than the impairment loss on goodwill and other intangible assets, the impairment loss on property and equipment and depreciation and amortization expense), all as compared to the prior fiscal year and discussed in more detail below.

 

Our consolidated net loss for the year ended September 30, 2015 included approximately $233,000 net income attributable to noncontrolling owner's interest in the VIE Partners, versus no corresponding amount for the year ended September 30, 2014. Accordingly, the net loss attributable to the Onstream Media shareholders for the year ended September 30, 2015 was approximately $8.6 million, as compared to a net loss attributable to the Onstream Media shareholders of approximately $1.7 million for the prior fiscal year.

18


 

 

Year ended September 30, 2015 compared to the year ended September 30, 2014 - The following table shows, for the periods indicated, the percentage of total consolidated revenue represented by items on our consolidated statements of operations.

 

Years ended September 30,

2015

2014

Revenue:

    Audio and web conferencing

56.5%

56.0%

    Webcasting

28.2

26.6

    Network usage

10.2

11.0

    DMSP and hosting

4.8

5.5

    Other

0.3

0.9

Total revenue

100.0%

100.0%

Costs of revenue:

    Audio and web conferencing

14.6%

14.8%

    Webcasting

7.3

7.1

    Network usage

5.0

4.8

    DMSP and hosting

0.7

1.0

    Other

-

0.2

Total costs of revenue

27.6%

27.9%

Gross margin

72.4%

72.1%

Operating expenses:

    Compensation (excluding equity)

45.2%

42.6%

    Compensation (paid with equity)

1.3

3.4

    Professional fees

6.8

8.0

    Other general and administrative

16.2

13.6

Impairment loss on goodwill and other intangible assets

34.7

 

-

    Impairment loss on property and equipment

5.0

-

    Depreciation and amortization

4.2

5.6

Total operating expenses

113.4%

73.2%

  

Loss from operations

(41.0)%

(1.1)%

Other expense, net:

    Interest expense

(10.2)%

(12.3)%

    Debt extinguishment loss

-

(0.8)

    Gain from litigation settlement

-

4.4

Other (expense) income, net

(0.6)

 

-

Total other expense, net

(10.8)%

(8.7)%

Net loss

(51.8)%

(9.8)%

Net income attributable to noncontrolling

    owners' interest in Variable Interest Entity

 (1.4)%

-

Onstream Media shareholders' net loss

(53.2)%

(9.8)%

 

19


 

 

 

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)

2015

2014

 Amount

 Percent

Total revenue

$

16,143,306

$

16,933,194

$

(789,888)

(4.7)%

Total costs of revenue

 

4,455,229

4,722,221

 

(266,992)

(5.7)

Gross margin

 

11,688,077

12,210,973

 

(522,896)

(4.3)%

General and administrative expenses

11,216,498

11,435,174

(218,676)

(1.9)%

Impairment loss on goodwill and  other intangible assets

 

5,598,021

 

 

-

 

 

5,598,021

 

N/A

Impairment loss on property and  equipment

800,000

-

800,000

N/A

Depreciation and amortization

 

685,954

956,027

 

(270,073)

(28.2)

Total operating expenses

 

18,300,473

12,391,201

 

5,909,272

47.7%

Loss from operations

(6,612,396)

(180,228)

6,432,168

3,568.9%

Other expense, net

 

(1,751,280)

 

(1,477,927)

 

273,353

18.5

Net loss

(8,363,676)

(1,658,155)

6,705,521

404.4%

Net income attributable to

    noncontrolling owners' interest in VIE

(233,333)

-

233,333

N/A

Onstream Media shareholders' net loss

$

(8,597,009)

$

(1,658,155)

$

6,938,854

418.5%

 

Revenues and Gross Margin

 

Consolidated operating revenue was approximately $16.1 million for the year ended September 30, 2015, a decrease of approximately $790,000 (4.7%) from the prior fiscal year, primarily due to decreased revenues of the Audio and Web Conferencing Services Group, but also due to decreased revenues of the Digital Media Services Group.

 

Audio and Web Conferencing Services Group revenues were approximately $10.8 million for the year ended September 30, 2015, a decrease of approximately $620,000 (5.4%) from the prior fiscal year, which included decreases in audio and web conferencing revenues as well as a decrease in the network usage revenues from the EDNet division.

 

Combined revenues from audio and web conferencing (the Infinite and OCC divisions combined) were approximately $9.1 million for the year ended September 30, 2015, which represented a decrease of approximately $371,000 (3.9%) as compared to the prior fiscal year, with results for each of the two divisions reflecting similar declines (in absolute dollars).

 

The OCC division’s revenues were approximately $804,000 for the year ended September 30, 2015, which represented a decrease of approximately $201,000 (20.0%) as compared to the prior fiscal year. This was in turn primarily due to lower total free conferencing business (“TFCB”) revenue, which was approximately $153,000 for fiscal 2014, with no corresponding amount for the year ended September 30, 2015. We purchased the TFCB business as part of our November 30, 2012 acquisition of certain assets and operations of Intella2 Inc., a San Diego-based communications company Intella2. However, under the terms of the July 29, 2014 settlement of litigation with Intella2 and its owner Paul Cohen, we transferred all TFCB customers and all associated revenues and expenses to Mr. Cohen, effective July 1, 2014.

 

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The Infinite division’s revenues of approximately $8.3 million for the year ended September 30, 2015 represented a decrease of approximately $170,000 (3.1%) as compared to the prior fiscal year. This was primarily due to a decrease in average revenue per minute, which was approximately 5.5 cents for the year ended September 30, 2015, as compared to approximately 6.0 cents for the prior fiscal year. This decrease in average revenue per minute was partially offset by a 7.6% increase in the number of minutes billed by the Infinite division, which was approximately 159 million for the year ended September 30, 2015, as compared to approximately 148 million minutes for the prior fiscal year.  The average revenue per minute statistic includes auxiliary services and fees that are not billed to the customer on a per minute basis. The average revenue per minute statistic is also calculated including revenue billed by Infinite to its customers but purchased by Infinite from another Onstream division and thus included in that other division’s (and not Infinite’s) reported revenues. Although the decrease in average revenue per minute reflects our reactions to competitive pressures on the pricing side, we have been able to reduce our costs for the same reason.

 

The EDNet division’s network usage revenues were approximately $1.6 million for the year ended September 30, 2015, which represented a decrease of approximately $208,000 (11.2%) as compared to the prior fiscal year. This was in turn primarily due to lower usage of EDNet’s bridging services, with a corresponding decrease of approximately $131,000 in those billings for the year ended September 30, 2015 as compared to the prior fiscal year.

 

Digital Media Services Group revenues were approximately $5.4 million for the year ended September 30, 2015, a decrease of approximately $170,000 (3.1%) from the prior fiscal year, primarily due to a decrease in DMSP and hosting revenues.

 

DMSP and hosting revenues were approximately $773,000 for the year ended September 30, 2015, which represented a decrease of approximately $152,000 (16.4%) as compared to the prior fiscal year. This decrease reflects competitive pressures resulting in the continuing decline in the number of customers using these products and services.

 

Webcasting division revenues increased by approximately $55,000 (1.2%) for the year ended September 30, 2015 as compared to the prior fiscal year. We produced approximately 4,100 webcasts during the year ended September 30, 2015, which was approximately 200 greater than the number of webcasts produced in the prior fiscal year. The impact on revenue arising from the increased number of events was partially offset by a decrease in the average revenue per webcast event to $1,154 for the year ended September 30, 2015, which represented a decrease of $68, or 5.6%, as compared to the prior fiscal year. The average revenue per webcast includes revenue billed by the webcasting division to its customers but purchased by the webcasting division from another Onstream division and thus included in that other division’s (and not webcasting’s) reported revenues.

 

We expect to shortly introduce and begin marketing a “do it yourself” large audience webcasting product that can be run from the customer’s desktop and will be available on a fixed cost monthly subscription basis that can be purchased on-line. We have recently introduced the following audio and web conferencing products: (i) Onstream Meetings and (ii) Onstream Webinars, both of which feature fully integrated audio conferencing, allowing customers to interact from land based, mobile or desktop headsets (VOIP) as well as high definition Dolby audio.

 

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Consolidated gross margin was approximately $11.7 million for the year ended September 30, 2015, a decrease of approximately $523,000 (4.3%) from the prior fiscal year. This decrease generally corresponds to the approximately $790,000 (4.7%) decrease in revenues for the corresponding period, as discussed above. However, our consolidated gross margin percentage increased to 72.4% for the year ended September 30, 2015, versus 72.1% for the prior fiscal year. This increased percentage was primarily due to the percentage decrease in cost of sales for audio and web conferencing (the Infinite and OCC divisions combined) being larger than the percentage decrease in audio and web conferencing revenues.

 

Operating Expenses

 

Consolidated operating expenses were approximately $18.3 million for the year ended September 30, 2015, an increase of approximately $5.9 million (47.7%) from the prior fiscal year, due to (i) an approximately $5.6 million impairment loss on goodwill and other intangible assets recorded by us for the year ended September 30, 2015, for which there was no comparable transaction in fiscal 2014, (ii) an approximately $800,000 impairment loss on property and equipment recorded by us for the year ended September 30, 2015, for which there was no comparable transaction in fiscal 2014 and (iii) an approximately $317,000, or 13.8%, increase in other general and administrative expenses as compared to the prior fiscal year, such increases partially offset by (i) an approximately $366,000, or 63.6%, decrease in compensation paid with common shares and other equity, (ii) an approximately $270,000, or 28.2%, decrease in depreciation and amortization expense and (iii) an approximately $257,000, or 19.1%, decrease in professional fees, all decreases as compared to the prior fiscal year.

 

See “Goodwill and Other Intangible Assets”, which is part of the Critical Accounting Policies and Estimates section below, for details with respect to the approximately $5.6 million impairment loss on goodwill and other intangible assets and the $800,000 impairment loss on property and equipment, both as recorded by us for the year ended September 30, 2015.

 

The approximately $317,000 increase in other general and administrative expenses was primarily due to an increase in advertising and marketing costs, which are charged to operations as incurred and classified in our financial statements primarily under other general and administrative expenses but also under professional fees. These expenses were approximately $980,000 and $640,000 for the years ended September 30, 2015 and 2014, respectively, representing an increase of $340,000, or 53.1%. These amounts include third party marketing consultant fees and third party sales commissions, but do not include commissions or other compensation to our employee sales staff.

 

The approximately $366,000 decrease in compensation paid with common shares and other equity was primarily due to an approximately $272,000 decrease in the expense recorded for the year ended September 30, 2015, as compared to the prior fiscal year, with respect to our obligation to reimburse the Executives, upon their resale of 1,700,000 ONSM common shares that we agreed in January 2013 to issue to them in lieu of certain compensation, for any shortfall versus $0.29 per share. The closing ONSM price of $0.27 per share as of September 30, 2013 resulted in an approximately $34,000 liability on our financial statements. Based on the closing ONSM price of $0.16 per share as of September 30, 2014, we increased the liability to approximately $221,000, which resulted in an approximately $187,000 increase in non-cash compensation expense for the year ended September 30, 2014. Based on the closing ONSM price of $0.21 per share as of September 30, 2015, we decreased the liability to approximately $136,000, which resulted in an approximately $85,000 reduction of non-cash compensation expense for the year ended September 30, 2015. The difference between the $85,000 expense reduction for the year ended September 30, 2015 and the $187,000 expense increase for the year ended September 30, 2014 accounts for a $272,000 total decrease in the expense between the two years.

 

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This approximately $257,000 decrease in professional fees was primarily due to (i) an approximately $238,000 decrease in legal and consulting fees and (ii) an approximately $58,000 decrease in accounting fees, such decreases partially offset by an approximately $85,000 aggregate increase in financial consultant fees and due diligence expenses incurred in connection with negotiations for potential financing.

 

Legal and consulting fees were approximately $214,000 for the year ended September 30, 2015, as compared to approximately $452,000 for the prior fiscal year, representing a decrease of approximately $238,000, or 52.8%. Legal and consulting fees incurred during the year ended September 30, 2015 were primarily related to (i) legal fees and (ii) marketing consultant expenses. Legal, consulting and other professional fees incurred during the year ended September 30, 2014 were primarily related to (i) corporate development and investor relations consulting activities, which activities were substantially curtailed during the year ended September 30, 2015 and (ii) litigation with Intella2 and its owner Paul Cohen, which was settled on July 29, 2014.

 

Accounting fees were approximately $182,000 for the year ended September 30, 2015, as compared to approximately $240,000 for the prior fiscal year, representing a decrease of approximately $58,000, or 24.2%. Forms 10-Q for the first, second and third quarters of fiscal 2014 were filed on April 30, June 5 and August 19, 2014, respectively, and the related accounting fees were expensed during the year ended September 30, 2014. Fees for the review of our quarterly financial statements included in our quarterly reports on Form 10-Q for the second and third quarters of fiscal 2015 were incurred, invoiced and paid subsequent to September 30, 2015 (i.e., in fiscal 2016).

 

Other Expense

 

Other expense, which is primarily interest, of approximately $1.8 million for the year ended September 30, 2015 represented an approximately $273,000 (18.5%) increase as compared to the prior fiscal year. This increase was due to an approximately $744,000 gain from litigation settlement recorded by us for the year ended September 30, 2014, for which there was no comparable transaction in fiscal 2015, partially offset by an approximately $440,000, or 21.0%, decrease in interest expense for the year ended September 30, 2015 as compared to the prior fiscal year.

 

On November 26, 2013, Intella2 and its owner Paul Cohen filed a civil lawsuit in Florida naming Onstream Media Corporation, Onstream Conferencing Corporation and Infinite Conferencing as defendants. The action alleged breach of contract with respect to payment of certain components of the purchase price for the Intella2 acquisition and related commissions and sought money damages as well as declaratory relief declaring Mr. Cohen’s related non-compete agreement with us unenforceable. On December 31, 2013 we filed our response to this lawsuit, which contained various objections to the lawsuit allegations as well as a number of counterclaims. On July 29, 2014, the parties entered into a settlement agreement and on August 4, 2014, the lawsuit was dismissed with prejudice by the court. Based on the conditions of that settlement, we reduced the approximately $782,000 estimated liability for the unpaid portion of the purchase price to the $38,000 we ultimately paid under the settlement (in cash and equipment), which resulted in our recognition of other income of approximately $744,000 for the year ended September 30, 2014.

 

The approximately $440,000 decrease in interest expense was primarily due to (i) an approximately $183,000 aggregate net decrease in interest expense recognized for certain subordinated debt (the Working Capital Notes, the Intella2 Investor Notes, the Fuse Note and the Subordinated Notes) for fiscal 2015 as compared to fiscal 2014, (ii) an approximately $111,000 aggregate net decrease  in interest expense recognized for certain senior debt (the New Sigma Note, the Rockridge Note, the Line and the USAC Notes) for fiscal 2015 as compared to fiscal 2014 (iii) an approximately $84,000 aggregate net decrease in the expense paid and/or accrued by us for fiscal 2015 related to our obligation to reimburse the shortfall upon the resale of certain of our common shares as well as the accretion of interest on obligations to repurchase certain of our common shares, as compared to the aggregate net amount of such accruals for fiscal 2014 and (iv) $52,000 of interest accretion recorded by us in connection with the Intella2 purchase price during fiscal 2014, for which there was no corresponding item in fiscal 2015, since we no longer accrued accretion after the July 29, 2014 Intella2 litigation settlement, as discussed above.  

 

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As discussed above under “Recent Developments”, on March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) to Partners. The proceeds from this sale were used by us to pay (i) approximately $311,000 of outstanding principal and approximately $136,000 of accrued interest on certain notes payable and (ii) approximately $69,000 for the cash portion of legal and consulting fees related to this transaction. The remaining proceeds were used for fee obligations under the New Sigma Note and for other operating expenses. As a result of certain of the items we repaid using the proceeds from Partners, our interest expense decreased. As a result of our treatment of Partners as a VIE requiring consolidation in our financial statements, the $1.0 million gross proceeds from this transaction was reflected by us as an increase in our equity and the approximately $233,000 paid and/or accrued for the Partners’ guaranteed return related to those invested proceeds for the year ended September 30, 2015, was reflected as a distribution out of our equity, and not as interest expense.

 

Net Income Attributable to Noncontrolling Owners' Interest in VIE

Our consolidated net loss for the year ended September 30, 2015 included approximately $233,000 net income attributable to noncontrolling owner's interest in the VIE Partners, versus no corresponding amount for the year ended September 30, 2014.

 

On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of the Sold Accounts to Partners. Based on our determination that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, the revenues from the Sold Accounts are included in our consolidated revenues. The payment of the Partners' guaranteed return percentage, which is based on the cash proceeds received for this sale, is reflected as a decrease in our equity (distributions to owners of VIE) and also represents the portion of our consolidated results that are attributable to the VIE, with the balance of our consolidated results after deducting the VIE portion being the net loss attributable to the Onstream Media shareholders for the period.

 

Liquidity and Capital Resources

For the year ended September 30, 2015, we had a net loss of approximately $8.4 million, although cash provided by operating activities for that period was approximately $343,000. Cash provided by operating activities is calculated after adding back to our net loss the periodic amortization of the amount of other fees and expenses incurred in connection with obtaining or maintaining our debt, which fees and expenses are initially recorded by us as debt discount and presented by us on the balance sheet as a reduction of the outstanding principal balance. The other fees and expenses included in debt discount include amounts payable in cash and/or equity and may be payable to the lender, to third parties engaged by the lender or to third parties engaged by us.

 

Our cash balance decreased by approximately $72,000 during the year ended September 30, 2015. This was the result of approximately $320,000 used in investing activities and approximately $95,000 used in financing activities, partially offset by approximately $343,000 provided by operating activities. Although we had cash of approximately $317,000 at September 30, 2015, we had a working capital deficit of approximately $5.3 million at that date. This $5.3 million deficit includes the following items classified as current on our September 30, 2015 balance sheet: (i) approximately $1.5 million of net debt repaid by us from the proceeds of the Partners transaction in December 2015 and (ii) approximately $1.7 million of debt outstanding under the Line which we recently renewed through December 31, 2017, both as discussed in more detail below.

 

Cash provided by operating activities of approximately $343,000 for the year ended September 30, 2015, represents an approximately $114,000 decrease in cash provided by operating activities as compared to approximately $457,000 cash provided by operating activities for the prior fiscal year. The approximately $343,000 cash provided by operating activities for the year ended September 30, 2015 reflects (i) net cash used by operating activities before changes in current assets and liabilities other than cash of approximately $96,000, which in turn represents our net loss of approximately $8.4 million, offset by approximately $8.3 million non-cash expenses included in that net loss and (ii) an approximately $440,000 net decrease in working capital other than cash. The primary non-cash expenses included in our loss for the year ended September 30, 2015 were an approximately $5.6 million impairment loss on goodwill and other intangible assets, an $800,000 impairment loss on property and equipment, approximately $715,000 of amortization of discount on notes payable and convertible debentures and approximately $686,000 of depreciation and amortization. The approximately $440,000 net decrease in working capital other than cash for the year ended September 30, 2015 is primarily due to an approximately $414,000 increase in accounts payable, accrued liabilities and amounts due to directors and officers. The $440,000 net decrease in working capital other than cash represented approximately $511,000 more cash than the net increase in working capital other than cash of approximately $71,000 for the prior fiscal year. The primary sources of cash inflows from operations are from receivables collected from sales to customers. 

 

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Cash used in investing activities was approximately $320,000 for the year ended September 30, 2015 as compared to approximately $556,000 cash used in investing activities for the prior fiscal year. Current and prior period investing activities related to the acquisition of property and equipment, including capitalized software development costs.

 

Cash used in financing activities was approximately $95,000 for the year ended September 30, 2015 as compared to approximately $231,000 cash provided by financing activities for the prior fiscal year. The current year period financing activities primarily related to (i) the December 31, 2014 repayment to Sigma of all accrued interest due on Sigma Notes 1 and 2 through that date, which interest had been capitalized as part of the outstanding principal balance, after which Sigma Notes 1 and 2 were cancelled and replaced with a new note payable to Sigma, (ii) the March 2015 repayment of the outstanding principal on certain notes payable from the proceeds of the March 2015 sale to Partners and (iii) the recurring distributions to the owners of Partners, effective March 1, 2015 through September 30, 2015, such uses of cash partially offset by the net proceeds we received in March 2015 from our sale, effective February 28, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) to Partners. These transactions are all discussed in more detail below. Financing activities for the year ended September 30, 2014, excluding accounts receivable based borrowing and repayment activity under the Line, primarily related to proceeds from the Working Capital Notes and from Sigma Note 2 and the repayment of certain notes payable from the proceeds of those two financings.

 

In December 2007, we entered into a line of credit arrangement (the “Line”) with a financial institution (the “Lender”). The Lender was Thermo Credit LLC through February 10, 2016 and as a result of an assignment, Thermo Communications Funding LLC, an affiliated company, subsequent to that date. Mr. Leon Nowalsky, a member of our Board, is an investor and board member in both entities.

 

The Line has been renewed and modified from time to time, and under which we may presently borrow up to an aggregate of $2.0 million for working capital, collateralized by our accounts receivable and certain other related assets and the amount of such borrowing being further subject to the amount, aging and concentration of such receivables. Although the Line expired on December 27, 2013, we continued after that date to negotiate renewal terms with the Lender and to maintain an outstanding borrowing balance under the Line and on February 10, 2016 (the “Effective Date”), we entered into a Loan Modification Agreement (“Modification”) which extended the term of the Line through December 31, 2017 (the “Maturity Date”). Notwithstanding this renewal for a period ending more than one year after our September 30, 2015 balance sheet, since the outstanding balance at that date could, in the absence of continuing revenues generating eligible receivables with a sufficient dollar value, be fully repayable within one year, it is classified as a current liability on that balance sheet, as well as our September 30, 2014 balance sheet.

 

The Modification also provides that, if no Default or Event of Default, as defined in the Modification, shall have occurred and be continuing as of the Maturity Date, and upon our notice and request to Lender sent per the timing and other requirements in the Modification, Lender shall (in good faith) engage in, and conclude as quickly as commercially reasonable, negotiations with us to extend the Maturity Date by up to an additional twelve months (i.e., through December 31, 2018). The Modification also changed a number of the other terms of the Line, as discussed below.

 

Prior to the Effective Date, the outstanding balance (approximately $1.7 million as of September 30, 2015 and approximately $1.6 million as of October 24, 2016) bears interest at 12.0% per annum, adjustable based on changes in prime after December 28, 2009, payable monthly in arrears. The Modification provides that as of the Effective Date the interest rate will be the prime rate plus seven and one-half percent (7.5%) per annum, but no less than eleven percent (11.0%) per annum or any higher rate that might be allowed by the terms of the Line, including the Modification, arising from certain events such as default. Accordingly, as of the Effective Date, the outstanding balance bears interest at 11.0% per annum.

 

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Under the terms of the Line, we also incur a monitoring fee and a commitment fee, which fees were unchanged by the Modification. The monitoring fee is one twentieth of a percent (0.05%) of the borrowing limit per week, payable monthly in arrears, and the commitment fee is one percent (1%) per year of the maximum allowable borrowing amount, payable annually in advance.

 

The terms of the Line prior to the Effective Date required that all funds remitted by our customers in payment of receivables be deposited directly to a bank account owned by the Lender (the “Lockbox Account”), although this was never implemented. This requirement continues after the Effective Date, including the provision that such funds received in the Lockbox Account shall be immediately applied to any balance outstanding under the Line, or returned to us one day following clearance by the receiving bank, to the extent there is no balance outstanding under the Line. The Modification provides that we shall be responsible for the additional expenses related to the Lender-owned bank account, which we expect to be in the range of $12,000 to $18,000 per year.

 

The Modification provides that our failure to comply with these provisions shall be an immediate Event of Default, and although as of July 8, 2016  (the extended deadline granted by the Lender on June 8, 2016) these provisions had not been fully implemented, we were in substantial compliance with such provisions since August 1, 2016 and through October 28, 2016 and we have not received any notification from the Lender as to any Event of Default under these provisions, as of October 28, 2016. In a letter dated October 26, 2016, the Lender agreed that there was no default by us with respect to such lockbox provisions up to and including October 31, 2016, although this does not constitute authorization for any non-compliance with these provisions after October 31, 2016.

 

The Line is subject to us maintaining an adequate level of receivables, based on certain formulas. However, due to the lack of a formal renewal of the Line, in June 2014 the Lender determined that there would be no further advances under the Line, although no further repayments have been required either, and as a result the outstanding principal balance of the Line did not change from that time through June 24, 2016, regardless of weekly changes in the calculated borrowing availability based on the applicable formulas applied to our receivable levels. Effective June 24, 2016, the first deposit was made to the Lockbox Account and applied against the balance outstanding under the Line.

 

The Modification allows our receivable from any single party, including Partners, to be considered an Eligible Receivable to the extent that (i) the aggregate of all accounts receivable from such party and its affiliates does not exceed thirty percent (30%) of all Eligible Receivables (all Eligible Receivables for this purpose including the portion of the our accounts receivable from such party that is ultimately considered to be an Eligible Receivable) then owed by all of our account debtors and (ii) it meets all of the other requirements for eligibility as set forth in the Line.

 

As of the Effective Date, although the outstanding balance under the Line exceeded the maximum allowable borrowing amount under the Line (the “Borrowing Base”), the Modification provided that notwithstanding any other provisions of the Line or the Modification, such condition would not be considered a Default or an Event of Default, and Lender would agree to make advances to us thereunder based on the Borrowing Base plus an overadvance amount determined by a schedule which started at $300,000 through February 27, 2016 but declined to zero as of July 31, 2016 and thereafter. As of October 24, 2016, the outstanding balance under the Line was approximately $1,576,000, which exceeded the Borrowing Base by approximately $248,000. Although there is no formal obligation to do so, as of October 24, 2016 the Lender is allowing such overadvance condition to continue, under their expectation that we are seeking alternative funding to replace that overadvance. In a letter dated October 26, 2016, the Lender agreed that there was no default by us with respect to such overadvances up to and including October 31, 2016, although this does not constitute authorization for any non-compliance with these provisions after October 31, 2016.

 

The Line is also subject to our compliance with a quarterly debt service coverage covenant (the “Covenant”). Prior to the Modification, the Covenant requires that the sum of (i) our net income or loss, adjusted to remove all non-cash expenses as well as cash interest expense and (ii) contributions to capital (less cash distributions and/or cash dividends paid during such period) and proceeds from subordinated unsecured debt, be equal to or greater than the sum of cash payments for interest and debt principal payments. The Lender waived the requirement to comply with the Covenant for the quarter ended September 30, 2015. We have complied with the Covenant for all other applicable quarters through June 30, 2016.

 

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The Modification provides that effective January 1, 2016 and thereafter, the Covenant will require that our net income or loss, adjusted to (i) add back all non-cash expenses as well as cash interest expense and (ii) subtract cash distributions and/or cash dividends paid during such period, be equal to or greater than 1.2 times the sum of cash payments for interest and debt principal payments. The Modification also provides that we will not declare or pay any dividends or distributions on any equity interest, if before or after such event an Event of Default or Default, as defined in the Modification, would exist. Both before and after the Modification, the terms of the Line allow us to achieve compliance with the Covenant by (i) including any excess of adjusted net income over the amount of adjusted net income required to comply with the Covenant in the preceding two quarters or (ii) adding to adjusted net income the proceeds from subordinated debt or equity sales meeting defined conditions, and received within certain time frames extending prior to, and in some cases subsequent to, the relevant date of determination, all set forth in the Line and the Modification. The Modification also explicitly allows, subject to Lender’s prior consent, proceeds from our sales of revenues/customer accounts to a separate legal entity and received within a time frames extending six months prior to, and one month subsequent to, the relevant date of determination, to be added to adjusted net income for purposes of the Covenant. In a letter dated October 26, 2016, the Lender consented to the inclusion of proceeds from our December 2015 and June 2016 sales of revenue/customer accounts to Partners, as well as the proceeds from such sale in process that we expect to be effective during November 2016, and extended the carryback period for those proceeds from one month to three months.

 

Although we do not have final financial results for periods after June 30, 2016, our estimated calculations for the quarter ended September 30, 2016, including our expectations of additional financing proceeds after that date that would be allowable for inclusion in those calculations, indicate that we are in compliance with the Covenant.

 

The outstanding principal is due on demand in the event a payment default is uncured one (1) day after written notice. The Modification provides that, without limiting any other rights and remedies provided by the terms of the Line or otherwise available to the Lender, the Lender may exercise one or more of certain rights and remedies, as listed in the Amendment, during the existence of any uncured Default (upon not less than five days prior written notice by Lender) or Event of Default which has not been waived in writing by Lender. Lender’s rights to exercise such rights and remedies will end if and when all of Debtors’ obligations to Lender in connection with the Line have been satisfied. The rights and remedies listed in the Modification include, but are not limited to: (i) verify the validity and amount of, or any other matter relating to, the accounts by mail, telephone, telegraph or otherwise, (ii) notify all account debtors that the accounts have been assigned to Lender and that Lender has a security interest in the accounts, (iii) direct all account debtors to make payment of all accounts directly to Lender or the Lockbox Account (iv) in any case and for any reason, notify the United States Postal Service to change the addresses for delivery of mail addressed to us to such address as Lender may designate, as well as receive, open and dispose of all such mail, provided that Lender shall promptly forward to us any such items not related to the accounts, (v) exercise all of our rights and remedies with respect to the collection of accounts, (vi) settle, adjust, compromise, extend, renew, discharge or release accounts, for amounts and upon terms which Lender considers advisable and (vii) sell or assign accounts on such terms, for such amounts and at such times as Lender deems advisable.

 

As of September 30, 2015, in addition to the Line as discussed above, we were also obligated for the following term debt, discussed in more detail below:

 

New Sigma Note

$

1,583,000

Rockridge Note

400,000

Fuse Note

220,000

Working Capital Notes

465,000

Subordinated Notes

192,500

Intella2 Investor Notes

415,000

USAC Note and other

 

196,983

Total term debt

$

3,472,483

 

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Approximately $1.5 million, in aggregate, of the above debt was repaid by us from the proceeds of the Partners transaction in December 2015, as discussed in more detail below.

 

As of September 30, 2015 we were obligated to Sigma Opportunity Fund II, LLC (“Sigma”) under a secured note for $1,583,000, with interest payable monthly at 21% per annum and the principal due on April 15, 2016 (the “New Sigma Note”).

 

On December 17, 2015, we made a $1.0 million payment to Sigma against the outstanding principal balance of the New Sigma Note, reducing the remaining outstanding principal balance on the Note to $583,000. On December 22, 2015, we entered into certain agreements with Sigma and Sigma Capital, which included an amendment to the New Sigma Note. As a result of these agreements, the outstanding balance of the New Sigma Note was increased to $600,000, to reflect a one-time administrative fee of $17,000, and we also reimbursed $3,500 of Sigma’s legal expenses related to the transactions. In addition, the maturity date of the remaining balance due under the New Sigma Note was extended from April 15, 2016 to December 31, 2016.

 

As part of the December 22, 2015 agreements, the interest rate on the New Sigma Note was reduced from 21% to 17% per annum, the monthly advisory fee payable to Sigma Capital was reduced from $12,500 to $10,000 and the following obligations to Sigma Capital were eliminated – (i) future monthly damages payable for late SEC filings which were initiated as part of an April 30, 2015 agreement with Sigma and Sigma Capital and (ii) the third and final installment of the fee incurred by us as a result of a previous extension of the maturity date of the New Sigma Note to April 15, 2016, and which would have been $50,000 payable on December 15, 2015. We have agreed, regardless of the early repayment of the New Sigma Note, to pay a minimum aggregate amount of $100,000 of monthly advisory fee payments to Sigma Capital as scheduled, starting with the January 15, 2016 payment of $10,000. 

 

In connection with an Advisory Services Agreement dated December 31, 2014, entered into by us with Sigma Capital in connection with the issuance of the New Sigma Note, we agreed to (i) pay Sigma Capital an initial advisory fee of $100,000, (ii) issue 70,000 restricted common shares to Sigma and 30,000 restricted common shares to Sigma Capital, such shares having an aggregate fair value of approximately $20,000, (iii) pay Sigma approximately $20,000 as reimbursement of legal expenses and (iv) make additional advisory fee payments to Sigma Capital totaling $160,000 in monthly installments through June 30, 2015.  The value of the common shares issued plus the fees and expenses we agreed to pay in connection with the December 31, 2014 Sigma agreement (there was no remaining unamortized discount from previous Sigma transactions as of that date) were amortized as interest based on the initial six month the term of the New Sigma Note, resulting in an effective interest rate of approximately 65% per annum for the period from January 1, 2015 through April 30, 2015.

 

As part of the April 30, 2015 agreement with Sigma we (i) paid Sigma Capital a $25,000 transaction fee, (ii) paid Sigma $14,000 as reimbursement of legal expenses and (iii) agreed to make additional advisory fee payments to Sigma Capital aggregating $40,000 in monthly installments from July 15, 2015 through October 15, 2015. The April 30, 2015 agreement also required us to pay liquidated damages for late SEC filings and in accordance with that requirement we paid Sigma Capital an aggregate of $42,500 for such damages from April 30, 2015 through September 30, 2015 and another $25,000 for such damages after that date through November 27, 2015, the last payment date before the agreement to pay such damages was cancelled. When the amortization of the fees and expenses we agreed to pay in connection with the April 30, 2015 Sigma agreement, including the anticipated liquidated damages for late SEC filings, such items aggregating $121,500, were combined with the amortization of the remaining unamortized discount arising from the December 31, 2014 financing, the resulting effective interest rate of the New Sigma Note was approximately 57% per annum for the period from May 1, 2015 through September 30, 2015. Although this effective rate would be impacted by the September 21, 2015 transaction discussed below, we will not reflect that impact until October 1, 2015 and have determined that the impact of this delayed implementation is immaterial. This effective interest rate does not include the impact if an early repayment was required, as discussed above.

 

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As part of the September 21, 2015 agreement with Sigma we (i) paid Sigma Capital a $25,000 fee (added to the loan principal balance), (ii) paid Sigma $7,500 as reimbursement of legal expenses, (iii) agreed to make an additional advisory fee payment to Sigma Capital of $2,500 on October 15, 2015, and (iv) agreed, in consideration of the loan maturity date extension from October 15, 2015 to April 15, 2016, to pay fees to Sigma Capital aggregating $175,000 in three monthly installments from October 15, 2015 through December 15, 2015 (of which we paid $125,000, with the remaining $50,000 obligation cancelled as part of the December 22, 2015 agreement with Sigma as discussed above) and to make additional advisory fee payments to Sigma Capital aggregating $75,000 in monthly installments from November 15, 2015 through April 15, 2016 (of which we paid $25,000, with the remaining $50,000 obligation cancelled and replaced with a new advisory fee obligation as part of the December 22, 2015 agreement with Sigma as discussed above).

 

Upon our receipt of funds as a result of (i) the sale of any portion of our business, however structured, including, without limitation, sale of assets, subsidiaries, revenues or business units, and/or (ii) the issuance of additional equity, debt or convertible debt capital, and/or (iii) our consolidation or merger with or into another entity, all outstanding principal and interest with respect to the New Sigma Note will be due, but not to exceed the net proceeds of such funds received by us in any such transaction(s). However, this early repayment requirement did not apply to the $1.0 million proceeds we received in March 2015 from the sale of certain of Infinite’s audio conferencing customer accounts to Partners and does not apply to up to $800,000 in proceeds should we elect to exercise our rights under the Funding Letter, both as discussed below. Also, the December 22, 2015 transactions with Sigma and Sigma Capital include (i) their agreement to limit to $1.0 million the required principal repayment against the New Sigma Note arising from the $2.1 million proceeds we received in December 2015 from the sale of certain of Infinite’s audio conferencing customer accounts to Partners, and which $1.0 million we paid Sigma on December 17, 2015 and (ii) their consent to our receipt of future proceeds of up to an additional $772,500 from Revenue Sales without requiring further principal repayments against the New Sigma Note, which proceeds we received in June 2016. Revenue Sales are defined in our agreements with Sigma as “financing from a private placement structured in a separate legal entity collateralized by a portion of our Infinite operations”.

 

Sigma has the right to convert the New Sigma Note (including the accrued interest thereon) to common stock at a rate of $0.30 per share, which right Sigma may exercise after the maturity date, in its entirety or partially, at its option or it may exercise before the maturity date, but only if we are in default on the New Sigma Note or upon the sale of all or substantially all of our business, assets or capital stock. 

 

As of September 30, 2015 and as of October 28, 2016, we were obligated for an outstanding balance of $400,000 on a secured convertible note payable (the “Rockridge Note”) to Rockridge Capital Holdings LLC (“Rockridge”), with interest payable monthly at 12% per annum. On December 31, 2014, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from December 31, 2014 to June 30, 2015, in exchange for our agreement to increase the origination fee payable under such note by 50,000 restricted common shares. On April 30, 2015, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from June 30, 2015 to October 15, 2015, in exchange for our agreement to increase the origination fee payable under such note by 30,000 restricted common shares. On August 18, 2015, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from October 15, 2015 to April 15, 2016, in exchange for our agreement to increase the origination fee payable under such note by 50,000 restricted common shares. On December 16, 2015, we entered into an agreement with Rockridge whereby the maturity date of the Rockridge Note was extended from April 15, 2016 to December 31, 2016, in exchange for our agreement to increase the origination fee payable under such note by 70,000 restricted common shares.

 

In connection with the New Sigma Note, as amended, an agreement is in place between Sigma and Rockridge, which includes Rockridge’s agreement (along with our agreement) that Sigma has the right, but not the obligation, to repay the Rockridge Note at face value in case of our default on the New Sigma Note or the Rockridge Note. Such repayment amount would be added to the principal of the New Sigma Note, with the principal being payable and accruing interest under the terms of the New Sigma Note. Furthermore, the fees payable to Sigma in the event of such repayment would be $25,000 cash payable upon such early repayment plus $4,000 per month starting from the one-month anniversary of such repayment date through the date that all amounts we owe Sigma are repaid.

 

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

 

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

 

The Note and Stock Purchase Agreement with Rockridge calls for our issuance of an origination fee, upon not less than sixty-one (61) days written notice to us, of 816,667 restricted shares of our common stock (the “Shares”), which includes the increases noted above. The value of those Shares is subject to a limited guaranty of no more than an additional payment by us of $75,000 which will be effective in the event the Shares are sold for an average share price less than the minimum of $1.20 per share (the “Shortfall Payment”). If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, the required Shortfall Payment would be $75,000, which is equal to the liability reflected on our financial statements as of September 30, 2015.

 

Including the fair market value of the Shares at the time they were recorded on our books, plus legal fees paid by us, the effective interest rate of the Rockridge Note was approximately 44.3% per annum, until a September 2009 amendment, when it was reduced to approximately 28.0% per annum, the October 2012 Shortfall Payment accrual, which increased it to approximately 31.1% per annum and the December 2012 Allonge, which decreased it to approximately 29.1% per annum. Effective February 28, 2014, as a result of the inclusion of the remaining unamortized discount in a debt extinguishment loss, the effective rate was reduced to 12% per annum and, because of the expensing of the value of all subsequent increases in the number of origination fee Shares on the basis of immateriality, it is deemed to have remained at that level to date. These rates do not give effect to any difference between the sum of the value of the Shares at the time of issuance plus the Shortfall Payment, as compared to the recorded value of the Shares on our books, nor do they give effect to any variance between the conversion price versus market prices if principal is satisfied with common shares issued upon conversion instead of cash.

 

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

 

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Effective October 15, 2015 the Fuse Note was further amended, extending the maturity date to July 15, 2016. Effective December 16, 2015 a $100,000 principal payment was made and the Fuse Note was further amended to extend the maturity date to December 31, 2016. Effective June 6, 2016 the Fuse Note was further amended, extending the maturity date to January 15, 2017. Accordingly, the amount repaid in December 2015 is classified as current on our September 30, 2015 balance sheet and the remaining $120,000 balance is classified as non-current.

 

In connection with the original issuance of the Fuse Note, we issued Fuse 80,000 restricted common shares (the “Fuse Common Stock”), which we agreed to buy back, to the extent permitted by law, at $0.40 per share, if the fair market value of the Fuse Common Stock was not equal to at least $0.40 per share as of March 19, 2015 (two years after issuance). As of June 30, 2013 we determined that our share price had remained below $0.40 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, we recorded the $20,000 present value of this obligation as a liability on our financial statements as of June 30, 2013 (under the caption “Accrued liabilities” on our balance sheet) which increased to $22,000 as of September 30, 2013, as a result of the accretion of $2,000 as interest expense for the year then ended, increased again to $28,000 as of September 30, 2014 as a result of the accretion of $6,000 as interest expense for the year then ended and increased again to $32,000 as of September 30, 2015 as a result of the accretion of $4,000 as interest expense for the year then ended.

 

The closing ONSM share price was $0.16 per share as of March 19, 2015, which would trigger the above repurchase obligation, which would be $32,000 based on 80,000 shares at $0.30 per share. This only applies to the extent the Fuse Common Stock was still held by Fuse at the applicable date. Furthermore, as part of the February 28, 2015 amendment discussed above, it was agreed that Fuse would not request any payments by us under this commitment prior to the maturity date of the Fuse Note, which is currently January 15, 2017.

 

In connection with the original issuance of the Fuse Note, we also issued 40,000 restricted common shares to another third party for finder and other fees. Including the value of the Fuse Common Stock plus the value of the common stock issued for related financing fees (but excluding a portion of this amount written off as a debt extinguishment loss as a result of the modification, by virtue of its inclusion in the Fuse Note, of a predecessor note) results in an effective interest rate of approximately 19% per annum through March 19, 2015.

 

The $20,000 due diligence fee earned by the noteholder in connection with the February 28, 2015 amendment was recorded as a discount against the Fuse Note and is being amortized as interest expense over the approximately one year extension period, resulting in an effective interest rate of approximately 21% per annum.

 

As of September 30, 2015, we were obligated for $465,000 under partially secured promissory notes issued to two investors during October and November 2013 (the “Working Capital Notes”), bearing interest at 15% per annum. The Working Capital Notes originally provided that in the event that we receive funds in excess of $5 million as a result of a single transaction for the sale of all or a part of our operations or assets, they are payable in full within ten (10) days of our receipt of such funds, along with any interest due at that time.

Effective February 28, 2015 one of the Working Capital Notes with an original outstanding principal balance of $250,000 was amended, extending the maturity date to March 1, 2016. This amendment provided that interest would be paid quarterly, commencing June 30, 2015 and also increases the outstanding principal balance to $275,000, for the effect of a $25,000 due diligence fee earned by the noteholder in connection with the amendment. This amendment also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale. Although this Working Capital Note was further amended, effective October 15, 2015, to extend the maturity date to July 15, 2016, it was paid in full on December 30, 2015. Such repayment, in accordance with our December 29, 2015 agreement with J&C Resources, Inc. (“J&C”), was made in consideration of our receipt of $157,000 from J&C on December 30, 2015 for our issuance of an unsecured, subordinated note with a December 31, 2016 maturity date. Accordingly $157,000 of this Working Capital Note, the amount replaced by the proceeds of the J&C financing, is classified as non-current on our September 30, 2015 balance sheet and the remaining $118,000 balance is classified as current.

 

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Effective September 16, 2015 the other of these two Working Capital Notes, which had a remaining outstanding principal balance of $170,000, was amended to extend the maturity date to April 16, 2016. This amendment provided that interest accrued but unpaid as of the date of the amendment of approximately $36,000, plus interest from the date of the amendment, would be paid on the amended maturity date and also increased the outstanding principal balance to $190,000, for the effect of a $20,000 loan extension fee earned by the noteholder in connection with the amendment. Effective October 15, 2015 this Working Capital Note was further amended, extending the maturity date to July 15, 2016 and effective June 6, 2016 this Working Capital Note was further amended, extending the maturity date to January 15, 2017. Accordingly this Working Capital Note is classified as non-current on our September 30, 2015 balance sheet.

 

The Working Capital Notes are expressly subordinated to the following notes issued by us and outstanding at the time of the issuance of the Working Capital Notes: Thermo Credit LLC, Rockridge Capital Holdings LLC, Sigma Opportunity Fund II, LLC, USAC, and certain capital leases, or any assignees or successors thereto, subject to a cumulative maximum outstanding balance of $3.9 million. The Working Capital Notes are secured by a limited claim to our assets, pari passu with up to $775,000 of total indebtedness and related obligations raised and incurred by us during the first quarter of fiscal 2014, subject to all prior liens of the foregoing entities and limited to the extent such a lien is allowable by the terms of the loan documents executed between us and the foregoing entities. The Working Capital Note with an amended principal balance of $190,000 provides that we will be bound to a limit of $3.9 million in total debt senior to that Working Capital Note while that note is outstanding.

In connection with the above financing, we issued to the holders of Working Capital Notes an aggregate of 358,334 restricted common shares (the “Working Capital Shares”), which we have agreed to buy back, to the extent permitted by law, from the holder for $0.30 per share on the maturity dates of the Working Capital Notes, if the fair market value is less than that on that date. The above only applies to the extent the Working Capital Shares are still held by the noteholder on the applicable date and the buyback obligation only applies if the noteholder gives us notice and delivers the shares within fifteen days after the applicable maturity dates. The $108,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2015.

 

312,500 of the 358,334 Working Capital Shares were issued in connection with the Working Capital Note having an adjusted principal balance prior to its repayment on December 30, 2015 of $275,000. However since the terms of the buyback obligation reference the maturity date, and not the repayment date, we have determined that our buyback obligation with respect to those shares would be determined with reference to the July 15, 2016 maturity date. The present value of this obligation is included as a liability of approximately $94,000 on our September 30, 2015 balance sheet. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, a stock repurchase payment of $93,750 would be required.

 

The remaining 45,834 of the 358,334 Working Capital Shares were issued in connection with the Working Capital Note having an adjusted principal balance of $190,000 and a maturity date of January 15, 2017 which as discussed above would be the date based on which our buyback obligation with respect to those shares would be determined. The present value of this obligation is included as a liability of approximately $14,000 on our September 30, 2015 balance sheet. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, a stock repurchase payment of $13,750 would be required.

 

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

As of September 30, 2015, we were obligated for $192,500 under unsecured Subordinated Notes issued to various lenders from April 2012 through January 2013, which are fully subordinated to the Line and the Rockridge Note and bear cash interest at 12% per annum. Modifications made in January 2014 to the terms of these notes extended the maturity dates to October 2014. Although we did not make the October 2014 principal payments, in March 2015 we repaid $75,000 of the outstanding principal on these notes and also extended the maturity dates on the remaining notes to March 1, 2016. The amended terms also provided that interest would be paid quarterly, commencing June 30, 2015 and also increased the original outstanding balance on these remaining notes from $175,000 to $192,500, for the effect of $17,500 in aggregate due diligence fees earned by the noteholders in connection with the amendments. The amendments also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale. These notes were further amended, effective October 15, 2015, to extend the maturity dates to July 15, 2016, but an aggregate of $162,500 was paid against the outstanding balances on December 16, 2015. Effective December 16, 2015, the one note with a remaining outstanding balance was further amended to extend the maturity date on the remaining outstanding balance to December 31, 2016. Accordingly $162,500 of these note balances, the amount repaid in December 2015, is classified as current on our September 30, 2015 balance sheet and the remaining $30,000 balance is classified as non-current. 

As of September 30, 2015, we were obligated for $415,000 outstanding principal on unsecured subordinated notes issued in November 2012 to various lenders (the “Intella2 Investor Notes”), which are fully subordinated to the Line and the Rockridge Note and bear cash interest at 12% per annum. $200,000 of the total $220,000 outstanding principal balance of one of these notes held by Fuse (the “Intella2 Fuse Note”), is convertible into restricted common shares at Fuse’s option using a rate of $0.50 per share.

During April and May 2014, the Intella2 Fuse Note and Intella2 Investor Notes held by two of the other four investors were further amended to provide that the principal balances aggregating $290,000 would not be payable until the November 30, 2014 maturity date, although interest would continue to be payable on a monthly basis. We did not make the principal payments on the Intella2 Investor Notes when due on November 30, 2014, but we continued to accrue interest expense after that point on the outstanding balance at the stated interest rate. Effective February 28, 2015, we entered into an agreement with certain of the noteholders whereby (i) we paid all accrued interest through that date plus the aggregate outstanding principal of $60,000 on two of the Intella2 Investor Notes and (ii) we paid all accrued interest through that date related to the Intella2 Fuse Note and one of the two other Intella2 Investor Notes remaining unpaid. These two notes, representing aggregate outstanding principal of $250,000, were also amended at that time to extend the maturity date to March 1, 2016 and to increase the aggregate outstanding principal balance to $275,000, for the effect of due diligence fees aggregating $25,000 earned by the noteholders in connection with the amendments although the portion of the Intella2 Fuse Note convertible to common shares remained at $200,000.

 

The February 28, 2015 amendments also provided that future interest would be paid quarterly, commencing June 30, 2015, and further provided that in the event we received funds in excess of $5 million as a result of the sale of our assets, the outstanding principal and interest would be repaid within thirty days of the receipt of such proceeds.

 

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Effective October 15, 2015 the Intella2 Fuse Note, having an outstanding principal balance of $220,000, was further amended, extending the maturity date to July 15, 2016. Effective December 16, 2015 a $100,000 principal payment was made and the Intella2 Fuse Note was further amended to extend the maturity date to December 31, 2016. Effective June 6, 2016 the Intella2 Fuse Note was further amended, extending the maturity date to January 15, 2017.  Accordingly $100,000 of the Intella2 Fuse Note balance, the amount repaid in December 2015, is classified as current on our September 30, 2015 balance sheet and the remaining $120,000 balance is classified as non-current. 

 

Effective June 6, 2016, one of the two other Intella2 Investor Notes remaining unpaid, with an outstanding principal balance of $55,000 was further amended, extending the maturity date to January 15, 2017. Accordingly this balance is classified as non-current on our September 30, 2015 balance sheet. 

 

Effective June 1, 2016, the fifth Intella2 Investor Note, with an outstanding principal balance of $140,000, was amended, extending the maturity date to January 15, 2017. Accordingly this balance is classified as non-current on our September 30, 2015 balance sheet. This note had previously been due in full as of November 30, 2014, plus accrued but unpaid interest of approximately $27,000 through that date, none of which was paid prior to the June 1, 2016 amendment. We had continued to accrue interest expense after the maturity date through September 30, 2015 on the outstanding balance at the stated interest rate and as part of the June 1, 2016 amendment, we paid $25,200 of the $50,400 of interest accrued through the date of that amendment and agreed to pay the balance as follows: $10,000 on or before June 30, 2016, $7,600 on or before September 1, 2016 and $7,600 on or before December 1, 2016.

 

In connection with the initial issuance of the Intella2 Investor Notes, we issued to the holders of the certain of those notes having an initial outstanding balance of $450,000 an aggregate of 180,000 restricted common shares, which we agreed to buy back, to the extent permitted by law, at $0.40 per share, if the fair market value of those shares was not equal to at least $0.40 per share as of November 30, 2014 (two years after issuance). The $66,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2015. This approximately $66,000 liability is equal to the potential repurchase of 164,000 shares at $0.40 per share, since we satisfied our obligation with respect to 16,000 shares by our reimbursement of the shortfall upon a single holder’s resale of those shares in the market, which payment we recorded as interest expense in fiscal 2014.

 

In connection with the initial issuance of other subordinated notes repaid by us in March 2015, we issued to the holders of certain of those notes having an initial outstanding balance of $200,000 an aggregate of 240,000 restricted common shares, of which we agreed to buy back, to the extent permitted by law, up to 40,000 shares if the fair market value of the Investor Common Stock was not equal to at least $0.80 per share as of November 30, 2014 (two years after issuance). The $8,000 present value of this obligation is recorded as a liability on our financial statements as of September 30, 2015. This approximately $8,000 liability is equal to the potential repurchase of 10,000 shares at $0.80 per share, since we satisfied our obligation with respect to 30,000 shares by our reimbursement of the shortfall (i) upon a single holder’s resale of 5,000 of those shares in the market, which payment we recorded as interest expense of approximately $3,200 in fiscal 2014 and (ii) upon three holders;’ resale of an aggregate of 25,000 of those shares in the market, which payment we recorded as interest expense of approximately $16,000 in the year ended September 30, 2015.

 

The closing ONSM share price was $0.17 per share as of November 30, 2014, which would trigger the above repurchase obligations. However, these repurchase obligations are subject to the shares being still held by the investor(s) at such date and the investor giving us notice and delivering the shares within fifteen days after such date, as well as any other legal restrictions with respect to our repurchase of shares. It is possible that some or all of these repurchase obligations could be avoided by us due to the failure of the investor or investors to formally present the shares to us and/or provide notice by the specified date, or as a result of legal restrictions with respect to our repurchase of shares. However, because of our ongoing discussions with certain of these investors, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor these repurchase obligations for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible those investors could assert mitigating circumstances under which we might honor all or part of these repurchase obligations. Therefore, pending our further evaluation of our position with respect to these repurchase obligations, we are leaving the accrued liability on our financial statements as of September 30, 2015.

 

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On May 15, 2015 we executed a letter agreement promissory note with the Universal Service Administrative Company (“USAC”) for $220,616, payable in monthly installments of $10,463 (which include interest at 12.75% per annum) over twenty-four months starting June 15, 2015 through May 15, 2017 – the outstanding balance was $212,534 as of September 30, 2015. The May 15, 2015 letter agreement promissory note is related to our liability for Universal Service Fund (USF) contribution payments not made by us during the first and second quarters of fiscal 2015, but which were reflected as an accrued liability on our balance sheet as of those dates and therefore resulted in the May 2015 reclassification of a portion of that accrued liability to notes payable. USAC is a not-for-profit corporation designated by the Federal Communications Commission (“FCC”) as the administrator of the USF program.

 

Although they were repaid on March 21, 2013, the terms of the Equipment Notes still provided that on the maturity dates (as established in the December 12, 2012 modification), the Recognized Value of the shares issued as part of such repayment would be calculated as the sum of the following two items – (i) the gross proceeds to the Investors from the sales of the 583,334 shares issued per the December 12, 2012 modification plus (ii) the value of those shares issued and still held by the Noteholders and not sold, using the average ONSM closing bid price per share for the ten (10) trading days prior to the applicable maturity date. If the Recognized Value exceeded the Credited Value, then we would receive 50% (fifty percent) of such excess, although the amount received by us shall not exceed $175,000. If the Credited Value exceeded the Recognized Value, then we would be obligated to pay such excess to the Noteholders. With respect to Equipment Notes held by one of the three Noteholders, the Credited Value exceeded the Recognized Value for 166,667 common shares by approximately $16,000 as of the respective November 15, 2013 maturity date, which we have recognized as a liability on our September 30, 2015 balance sheet.

 

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

 

The closing ONSM share price was $0.14 and $0.16 per share on April 24 and May 4, 2015, respectively, which would trigger the above repurchase obligation in the gross amount of $125,000, based on 416,667 shares at $0.30 per share. However, this repurchase obligation is subject to the shares being still held by the Noteholder(s) at such date and the Noteholder giving us notice and delivering the shares within fifteen days after such date, as well as any other legal restrictions with respect to our repurchase of shares. It is possible that some or all of this repurchase obligation could be avoided by us due to the failure of the Noteholder or Noteholders to formally present the shares to us and/or provide notice by the specified date, or as a result of legal restrictions with respect to our repurchase of shares. However, because of our ongoing discussions with certain of these Noteholders, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this repurchase obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible those Noteholders could assert mitigating circumstances under which we might honor all or part of this repurchase obligation. Therefore, pending our further evaluation of our position with respect to this repurchase obligation, we are leaving the accrued liability on our financial statements as of September 30, 2015.

 

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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. The $109,000 present value of our estimate of this obligation is recorded as a liability on our financial statements as of September 30, 2015. If the closing ONSM share price of $0.21 per share on December 31, 2014 (the end of the period during which the shares must be sold to be eligible for reimbursement of any shortfall) was used as a basis of calculation, our obligation for this shortfall payment would be $83,000 plus brokerage commissions and other selling costs.

 

As a condition of the above shortfall reimbursement, CCJ agreed to sell the Conversion Shares in the open market between the December 21, 2013 conversion date and December 31, 2014 payment date, taking due care with respect to the timing and volume of those sales and the market conditions. As of April 5, 2016, CCJ has not formally requested this reimbursement nor have they provided proof that the above conditions of reimbursement have been met. However, because of our ongoing discussions with CCJ, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this shortfall reimbursement obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible that CCJ could assert mitigating circumstances, notwithstanding whether or not they met the conditions of reimbursement, under which we might honor all or part of this shortfall reimbursement obligation. Therefore, pending our further evaluation of our position with respect to this shortfall reimbursement obligation, we are leaving the accrued liability on our balance sheet as of September 30, 2015.

 

After annual increases in prior years as set forth in the employment agreements, the contractual annual base salaries for the five Executives in aggregate as of September 30, 2015 was approximately $1.8 million, subject to a five percent (5%) increase on September 27, 2016 and each year thereafter – a portion of these contractual salaries are presently not being paid to the Executives and we are accruing these unpaid amounts as non-cash compensation expense, with the unpaid portion reflected as an accrued liability under the balance sheet caption “Amounts due to executives and officers”. In addition, each of the Executives receives an auto allowance payment of $1,000 per month, a “retirement savings” payment of $1,500 per month and an annual reimbursement of dues or charitable donations up to $5,000.  We also pay insurance premiums for the Executives, including medical, life and disability coverage. Effective October 1, 2009, in response to our operating cash requirements, the base salary amounts being paid to the Executives were adjusted to be 10% less than the contractual amounts. In addition, until certain actions as discussed below, the amounts representing the subsequent contractual annual increases to those base salary amounts were not paid.  Effective September 16, 2012, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.8% of the contractual base salary at that time. Effective September 16, 2014, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 5.0% of the contractual base salary at that time. Effective May 1, 2015, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.4% of the contractual base salary at that time. Effective August 15, 2016, the base salary amounts being paid to the Executives were reduced by an amount representing approximately 3.0% of the contractual base salary at that time. As of October 7, 2016, the base salary payments to the Executives are approximately 21.5% less than the contractual base salaries (as adjusted through the September 27, 2016 raise), compared to the 10% reduction instituted in October 2009 and which reduction was initially company-wide but at this time affects very few of our other employees. The 21.5% shortfall cited above is before considering the impact of the two lump-sum payments made to the Executives in April and December 2015, as discussed below. Under the terms of the employment agreements, upon a termination subsequent to a change of control, termination without cause or constructive termination, each as defined in the agreements, we would be obligated to pay each of the Executives an amount equal to three (3) times the Executive’s base salary plus full benefits for a period of the lesser of (i) three (3) years from the date of termination or (ii) the date of termination until a date one (1) year after the end of the initial employment contract term.

 

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

 

$125,000 in cash ($25,000 per Executive) was paid in April 2015, which satisfied the above commitment to pay the $100,000 of pre December 31, 2012 compensation not covered by the Executive Shares (and also satisfied $25,000 of post December 31, 2012 compensation previously withheld by us and accrued as a liability).

 

Although, as of October 28, 2016, the Executive Shares have not been issued, due to certain administrative and documentation requirements, since the Executive Shares were committed to be issued by the January 22, 2013 action of the Board, that issuance was reflected in our financial statements as of the date of such commitment. To the extent there is any shortfall from the gross proceeds upon resale by the Executives of the Executive Shares as compared to twenty-nine cents ($0.29) per share, the shortfall will be reimbursed to the Executives by us in cash, or at our option, by the issuance of additional fully vested ONSM common shares (the “Additional Executive Shares”), with the Additional Executive Shares subject to reimbursement by us to the Executives of any shortfall from the gross proceeds upon resale as compared to the fair value used to determine the number of such Additional Executive Shares. All shortfall reimbursements shall be payable by us within ten (10) business days after presentation by reasonable supporting documentation of the shortfall to us by the Executives. The $136,000 value of this obligation is recorded as a liability on our financial statements as of September 30, 2015, based on the closing ONSM share price as of that date. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, our obligation for this shortfall payment would be $187,000, or the equivalent in common shares.

 

An additional $125,000 in cash compensation ($25,000 per Executive) was paid in December 2015, which will reduce the previously accrued liability for unpaid compensation and will also result in a corresponding reclassification between cash compensation and non-cash compensation expense.

 

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

 

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

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

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

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We recorded the issuance of 375,000 Executive Incentive Shares in our financial statements for the year ended September 30, 2015, based on our previous determinations that (i) the fiscal 2015 financial objective for EBITDA, as adjusted, was met and (ii) it was probable that the fiscal 2015 financial objective for positive operating cash flow, would be met. These shares were recorded at a value of $71,250, which was recognized as non-cash compensation expense of (i) $47,500 over the six months ended March 31, 2015 (with respect to the EBITDA objective) and (ii) $23,750 over the twelve months ended September 30, 2015 (with respect to the cash flow objective). Although our final fiscal 2015 financial statements indicate that the operating cash flow objective was not met, we have continued to recognize the related compensation expense in our September 30, 2015 financial statements, pending further review of this matter by the Board of Directors. Regardless of the results of this review, this amount is considered immaterial for adjustment prior to finalization of the fiscal 2015 financial results. The third fiscal 2015 financial objective, increased revenues, was not met. If accomplished, it would have resulted in an aggregate of 250,000 additional Executive Incentive Shares issued to the Executives as a group.

None of the shares recorded on our financial statements through September 30, 2015 and related to the financial objectives for fiscal 2015 have been issued as of October 28, 2016.

 

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

 

As of September 30, 2015, we were obligated under operating leases for five office locations (one each in Pompano Beach, Florida, San Francisco, California and Colorado Springs, Colorado and two in the New York City area), which call for monthly payments totaling approximately $54,000. The leases have expiration dates ranging from 2015 to 2022 (after considering our rights of termination) and in most cases provide for renewal options. The future minimum lease payments required under the non-cancelable operating leases total approximately $1.4 million through September 30, 2022, of which approximately $383,000 relates to the year ending September 30, 2016. Also, although approximately nine months of unpaid rent with respect to our Pompano Beach facility is included as a liability on our balance sheet as of September 30, 2015, these amounts are not included in the future minimum lease payments of approximately $1.4 million. As of October 28, 2016, our rent payments for that location remain in arrears, by approximately twelve months, and we are in negotiations with the landlord with respect to this obligation and the terms of our continuing tenancy.

 

We have entered into various agreements for our purchase of Internet, long distance and other connectivity as well as use of certain co-location facilities, for an aggregate remaining minimum purchase commitment of approximately $1.6 million, approximately $1.0 million of that commitment related to the one year period ending September 30, 2016 and the balance of such commitment related to the period from October 2016 through August 2017.

 

Projected capital expenditures for the year ending September 30, 2016 total approximately $240,000, which includes software and hardware upgrades to the webcasting platform, the DMSP and the audio and web conferencing infrastructure. Some of these projected capital expenditures may be financed, deferred past the twelve month period or cancelled entirely, depending on our other cash flow considerations.

 

On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). The Sold Accounts represented historical annual revenues of approximately $1.35 million. After giving effect to our determination that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, (i) the gross proceeds from this and our subsequent transactions with Partners are reflected as an increase in our equity (noncontrolling owners’ interest in VIE), (ii) the gross revenues from the Sold Accounts, and accounts sold as part of our subsequent transactions with Partners, are included in our consolidated revenues and (iii) the payment of the Partners’ guaranteed return percentage, which is deducted from these gross revenues, is reflected as a decrease in our equity (distributions to owners of VIE).

 

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In connection with the February 28, 2015 sale, Infinite and Partners entered into a Management Services Agreement (“MSA”) that provides for Infinite to continue to invoice the Sold Accounts but the payments when received from those Sold Accounts will be deposited in a segregated Partners owned bank account. Partners will return those customer proceeds to Infinite on a weekly basis in the form of a Management Fee, after deducting a certain amount representing (i) Partners’ guaranteed return (which is 40% of the Purchase Price per annum with the first six months guaranteed regardless of whether we exercise our rights under the Option Agreement or the MSA is otherwise terminated) and (ii) accounting fees payable to the third-party accounting firm as discussed below. Infinite will continue to service the Sold Accounts, incurring and absorbing all related costs of doing so – i.e., Partners will have no operating responsibilities and no operating costs related to the sold accounts other than to pay the Management Fee to Infinite. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the Partners’ guaranteed return percentage decreased. The MSA defines specific services, along with certain minimum standards of quality for such services, required to be provided by Infinite with respect to the Sold Accounts. The MSA contains provisions that prohibit (i) Infinite servicing the Sold Accounts for a period of two years after the termination of the MSA and (ii) Partners interfering in any way with Infinite’s performance of its duties thereunder or communicating with the Sold Accounts or with Infinite’s employees, vendors, consultants or agents during the term of the MSA.

The MSA initially had a two year term expiring on February 28, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights as follows. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the expiration date of the MSA was extended. Partners has the right to terminate the MSA, effective immediately upon written notice to Infinite, in the event of the following: (i) an Infinite Event of Default or (ii) the sale by Partners of the Sold Accounts subject to the terms of the Membership Interest Option Agreement. 

 

An Infinite Event of Default is (i) Bankruptcy of Infinite (as defined), (ii) a lack of compliance by Infinite with the provisions of the MSA which is continuing five (5) business days after receiving written notice from partners specifying such lack of compliance or (iii) a breach by Infinite or Onstream of any obligation under the Make Whole Agreement. Infinite has the right to terminate the MSA, effective immediately upon written notice to Partners, in the event of a Partners Event of Default. A Partners Event of Default is (i) a deliberate and material lack of compliance by Partners with the provisions of the MSA which is continuing five (5) business days after receiving written notice from Infinite specifying such lack of compliance or (ii) a breach by Partners of Partners’ obligations under the Membership Interest Option Agreement. Notwithstanding termination of the MSA, only for so long as the Infinite owns the Sold Accounts, Partners shall continue to pay the Management Fee, provided that Partners may deduct from such Management Fee Partners’ payment of all reasonable costs of providing the services to the Sold Accounts otherwise required to be provided by Infinite under the MSA.

 

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

 

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In connection with the February 28, 2015 sale, Infinite and Partners entered into a Make Whole Agreement which provides that if the revenues from the Sold Accounts falls below $1.0 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the revenues from the Sold Accounts back to $1.25 million (or the equivalent in cash flow). Onstream Media Corporation (“Onstream”) and Infinite have also committed that in the event there is any impediment, which directly or indirectly is caused by, or relates in any way to Infinite or Onstream, which would prevent more than 20% of the revenue from these sold accounts being earned or distributed to Partners, Infinite and Onstream would take all necessary steps to ensure that such impeded revenue or revenue shortfall is otherwise earned or distributed or shall pay the amount of such impeded revenue or revenue shortfall to Partners to the extent due on a quarterly basis.

 

In connection with the February 28, 2015 sale, Infinite and Partners entered into a Membership Interest Option Agreement (“Option Agreement”) whereby we have the right for the two-year period through February 28, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the Purchase Price plus a premium, which premium increases on a pro-rata basis to 20% of the Purchase Price over the two year period, subject to a minimum premium of 10%. Starting six months after the Effective Date, Partners may sell the Sold Accounts to a third party, provide that they must provide us four month written advance notice of such sale during which four month period we have the right to exercise our rights under the Option Agreement. In the event we do not exercise our rights under the Option Agreement, and Partners sells the Customer Accounts to a third party, we are entitled to receive 50% of any excess of the sales price to the third party over what would have been our option price under the Option Agreement. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the expiration date of the Option Agreement was extended and the premium percentage decreased.

 

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

 

On December 16 and 18, 2015, we received aggregate gross proceeds of approximately $2.1 million for our sale, effective December 16, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“First Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $2.7 million. The increase in the number of limited partners of Partners resulting from this transaction decreased the total related party ownership percentage to approximately 25% as of December 16, 2015.

 

In connection with the December 16, 2015 sale, Infinite and Partners entered into:

 

·        an Amended and Restated Make Whole Agreement (“Amended Make Whole Agreement”) which provides that if the combined revenues from the Sold Accounts and the First Tranche of Additional Sold Accounts (“Combined Revenues”) falls below approximately $3.2 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the Combined Revenues back to approximately $4.0 million (or the equivalent in cash flow). All other terms of the Amended Make Whole Agreement were substantially the same as the terms of the Make Whole Agreement as discussed above.

 

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·        an Amended and Restated Membership Interest Option Agreement (“Amended Option Agreement”) whereby we have the right for the two-year period through December 16, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the combined purchase price of the Sold Accounts and the First Tranche of Additional Sold Accounts plus $100,000 (“Purchase Price”), plus a premium, which premium increases on a pro-rata basis to 10% of the Purchase Price over the two year period, subject to a minimum premium of 5%. All other terms of the Amended Option Agreement were substantially the same as the terms of the Membership Interest Option Agreement as discussed above.

 

·        an Amended and Restated Management Services Agreement (“Amended MSA”) with a two year term expiring on December 16, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights. The Amended MSA provides that the Partners’ guaranteed return percentage be reduced to 30% per annum of the Purchase Price, with the first six months guaranteed regardless of whether we exercise our rights under the Amended Option Agreement or the Amended MSA is otherwise terminated. All other terms of the Amended MSA were substantially the same as the terms of the MSA as discussed above.

 

During the period from March 25, 2016 through June 30, 2016 we received aggregate gross proceeds of approximately $800,000 for our sale, effective June 30, 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Second Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $1.0 million. The increase in the number of limited partners of Partners resulting from this transaction decreased the total related party ownership percentage to approximately 21% as of June 30, 2016.

 

In connection with the June 30, 2016 sale, Infinite and Partners entered into:

 

·        an Amended and Restated Make Whole Agreement (“Second Amended Make Whole Agreement”) which provides that if the combined revenues from the Sold Accounts, the First Tranche of Additional Sold Accounts and the Second Tranche of Additional Sold Accounts (“Combined Revenues”) falls below approximately $3.9 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the Combined Revenues back to approximately $4.9 million (or the equivalent in cash flow). All other terms of the Second Amended Make Whole Agreement were substantially the same as the terms of the Amended Make Whole Agreement as discussed above.

 

·        an Amended and Restated Membership Interest Option Agreement (“Second Amended Option Agreement”) whereby we have the right for the two-year period through December 16, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the combined purchase price of the Sold Accounts, the First Tranche of Additional Sold Accounts and the Second Tranche of Additional Sold Accounts plus $100,000 (“Purchase Price”), plus a premium, which premium increases on a pro-rata basis to 10% of the Purchase Price over the two year period, subject to a minimum premium of 5%. All other terms of the Second Amended Option Agreement were substantially the same as the terms of the Amended Option Agreement as discussed above.

 

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·        an Amended and Restated Management Services Agreement (“Second Amended MSA”) with a two year term expiring on December 16, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights. The Second Amended MSA provides that the Partners’ return is guaranteed for the first six months regardless of whether we exercise our rights under the Second Amended Option Agreement or the Second Amended MSA is otherwise terminated. All other terms of the Second Amended MSA were substantially the same as the terms of the Amended MSA as discussed above.

 

During September and October 2016, subscriptions for approximately $225,000 were received by Partners and funded against an anticipated total of  $1.5 million for our sale, which we expect will be effective during November 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Third Tranche of Additional Sold Accounts”) to Partners, will represent historical annual revenues of approximately $1.9 million, and will be sold under the same terms as the accounts sold in December 2015 and June 2016.

 

We are responsible for legal, consulting, finders and other fees related to the initial closing of the above transactions, as well as ongoing fees to administer these transactions, including (i) the third-party accounting firm as discussed above, (ii) certain compensation and expense payments to the general partner and (iii) certain other financial transaction expenses. These expenses are included as part of non-operating expenses (other (expense) income, net) and were approximately $115,000 and none for the years ended September 30, 2015 and 2014, respectively.

 

In December 2015 we recorded the issuance of 200,000 unregistered common shares for professional management services rendered in connection with Partners, such shares having a fair value of approximately $38,000 and are being recognized as part of the above non-operating expenses over a service period of twelve months starting December 16, 2015.


On April 30, 2015, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. Such notice was not given by us, but on
April 30, 2016, we exercised our option for a one year extension of the Funding Letter, including an extension of the notice deadline to January 5, 2017. This Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available. Mr. Charles Johnston, a former ONSM director, is the president of J&C. Cash provided under the Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 15, 2017 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of funds in excess of $5.0 million as a result of a single transaction for the sale of all or a part of our operations or assets, this Funding Letter will be terminated. The consideration for the Funding Letter was $25,000, which we have paid, and the consideration for the Funding Letter extension is $25,000, to be withheld from any proceeds lent thereunder but in any event paid no later than September 1, 2016.

On March 27, 2007 we acquired the assets, technology and patents pending of privately owned Auction Video, Inc., a Utah corporation, and Auction Video Japan, Inc., a Tokyo-Japan corporation (collectively, “Auction Video”). In connection with our subsequent pursuit of approval of these patents pending (i) on October 13, 2015, the USPTO issued to us U.S. Patent Number 9,161,068 (the “First Granted Patent”) with a Patent Term Adjustment of 2,377 days, resulting in a September 26, 2030 expiration date, provided all maintenance fees are paid and (ii)on October 11, 2016, the USPTO issued to us U.S. Patent Number 9,467,728 (the “Second Granted Patent”) with a Patent Term Adjustment of 1,362 days, resulting in a December 16, 2027 expiration date, provided all maintenance fees are paid. These patents address live streaming of audio and/or video from multiple devices to a storage location, such as the Internet or cloud, and the ability to access and retrieve the audio and/or video to multiple devices, whereby the content is not stored on the device. Our management believes that the First and Second Granted Patents, as well as two other related patents still pending, may have significant value, although this cannot be assured, and is presently exploring the financial potential of the First and Second Granted Patents and the patents pending. Regardless of the ultimate outcome with respect to the results of this process and/or the eventual USPTO decision with respect to the pending patent applications, our management has determined that there is no material exposure to an adverse effect on our financial position or results of operations, since all of the previous costs incurred by us in connection with the patents have been amortized to expense as of September 30, 2013 and are being expensed as incurred subsequent to that date. Certain of the former owners of Auction Video, Inc. have an interest in proceeds that we may receive under certain circumstances in connection with the First and Second Granted Patents and the patents pending.

 

As of the October 28, 2016 filing of this 10-K, more than one year after the latest balance sheet date being presented, we are operating in the normal course of business. The liquidity discussion below includes information from our June 30, 2016 10-Q, which is also being filed on October 28, 2016.

 

We have incurred losses since our inception, and have an accumulated deficit of approximately $149.0 million as of September 30, 2015. Our operations have been financed primarily through the issuance of equity and debt, including convertible debt and debt combined with the issuance of equity.For the year ended September 30, 2015, our revenues were not sufficient to fund our total cash expenditures (for operating and investing activities plus scheduled debt principal repayments and distributions to the VIE owners, both classified as financing activities) for that period and as a result we obtained additional funding from the March 2015 sale of certain of our audio conferencing customers (and the related future business to those customers) to Partners as well as restructuring the payment terms of Sigma Notes 1 and 2, the New Sigma Note and certain other notes. For the nine months ended June 30, 2016, our revenues were not sufficient to fund our total cash expenditures (for operating and investing activities plus the scheduled debt principal payments and distributions to the VIE owners) for that period and as a result we obtained additional funding from the December 2015 and June 2016 sales of certain of our audio conferencing customers (and the related future business to those customers) to Partners as well as restructuring the payment terms of the New Sigma Note and certain other notes.

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During the period from July 2015 through October 2016 we made certain headcount reductions and other changes in compensation which we expect will reduce our compensation expenditures for the twelve months ended June 30, 2017 by approximately $540,000, as compared to the twelve months ended June 30, 2016. We have also taken other actions which we expect will reduce our cost of sales as well as our expenses for professional fees, insurance and advertising and marketing for the twelve months ended June 30, 2017, as compared to the twelve months ended June 30, 2016.

 

Based on historical results as well as results since September 30, 2015 to date, we do not expect that our fiscal 2016 revenues will be sufficient to fund our total cash expenditures (for operating and investing activities plus the scheduled debt principal payments and distributions to the VIE owners) for the twelve month period ended June 30, 2017, even after the anticipated impact of the expense reductions discussed above. However, we believe we will be able to cover this anticipated shortfall from the raising of additional capital in the form of debt and/or equity and/or the sales of assets or operations, including our transactions with Partners and the Funding Letter and/or the monetization of our patents, all sources of capital as discussed above. In the event that we are unable to cover this shortfall, including curing any potential defaults with respect to the Line, as discussed above, our auditors have advised us that a going concern qualification to their opinion on our September 30, 2016 financial statements may be necessary.

 

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

 

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

 

The resolution of debt and other obligations becoming due within a few months after the filing of this 10-K represent an imminent issue that will require significant cash resources in the near-term. These include (i) the New Sigma Note and the Rockridge Note, secured obligations which will require principal payments on December 31, 2016 aggregating $1.0 million and (ii) other notes payable, mostly unsecured, which will require principal payments of $187,000 on December 31, 2016 and $625,000 on January 15, 2017. In the event we exercised our rights under the extended Funding Letter, we would need to repay the proceeds borrowed thereunder on the earlier of a date twelve months from funding or July 15, 2017.

 

We are closely monitoring our revenue and other business activity to determine if and when further cost reductions, the raising of additional capital or other activity is considered necessary. The Executives have deferred a portion of their compensation in the past, to the extent we needed that cash to meet other operating expenses, and have agreed to defer a portion of their compensation to the extent we need that cash to enable us to be a going concern through September 30, 2017.

 

Our continued existence is dependent upon our ability to raise capital and to market and sell our services successfully. Based on our plan to continue our operations through September 30, 2017, we will need to raise the remaining $1.275 million from the sale of the Third Tranche of Additional Sold Accounts and borrow $800,000 per our option to do so under the Funding Letter, as discussed above, or from other funding sources, and we will also need to obtain extensions of the existing maturity dates past that date for certain identified notes payable representing aggregate principal of $640,000. In addition we will need to increase our gross margin and/or decrease our operating expenses by an aggregate of approximately $1.0 million per year, as compared to their current levels, for the year ended September 30, 2017 - our plan includes specific potential sources of new gross margin and expense reductions aggregating approximately $1.5 million. However, there are no assurances whatsoever that we will be able to sell additional common shares or other forms of equity and/or that we will be able to borrow further funds other than under the Funding Letter and/or that we will be able to sell assets or operations and/or that we will be able to increase our revenues and/or control our expenses to a level sufficient to provide positive cash flow. The financial statements do not include any adjustments to reflect future effects on the recoverability and classification of assets or amounts and classification of liabilities that may result if we are unsuccessful.

 

Critical Accounting Policies and Estimates

 

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

 

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Goodwill and Other Intangible Assets:

 

Our prior acquisitions of several businesses, including Infinite Conferencing, Intella2, EDNet and Acquired Onstream, have resulted in significant increases in goodwill and other intangible assets. Goodwill was approximately $3.2 million at September 30, 2015, representing approximately 48% of our total assets. Other intangible assets resulting from prior acquisitions have been fully amortized and/or written down as of September 30, 2015. In addition, property and equipment as of September 30, 2015 includes approximately $423,000 (net of depreciation) representing approximately 6% of our total assets and primarily related to the capitalized development costs of the DMSP platform. The book value of our equity (both excluding and including noncontrolling owners’ interest in VIE) was negative as of September 30, 2015.

 

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

 

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

 

The provisions of ASC 350-20-35-3 in certain cases would allow us to forego the two-step impairment testing process based on certain qualitative evaluation.  However, based on our assessment as of September 30, 2015 and 2014 of relevant events and circumstances as listed in ASC 350-20-35-3C, we determined that we were not eligible to employ qualitative evaluation to forego the two-step impairment testing process with respect to our reporting units as of those dates, as it was not more likely than not that impairment loss had not occurred. These relevant events and circumstances included our declining revenues as well as certain macroeconomic conditions, including access to capital and the ongoing decrease in the ONSM share price.

 

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

 

As part of the two-step process discussed above for the September 30, 2015 and 2014 evaluations, our management performed discounted cash flow (“DCF”) projections and market value (“MV”) analyses, to determine whether the goodwill of our reporting units was potentially impaired and the amount of such impairment. The results of these projections and analyses were weighted, and the weighted result reduced by the amount of associated allocable non-current debt, to come up with a single estimated fair value (“FV”) for each reporting unit. A third-party valuation services firm was engaged by us to assist with these projections and analyses, value calculations and weightings.

 

For the September 30, 2015 and 2014 evaluations, our management, with the assistance of the third-party valuation services firm, determined the rates and assumptions (including probability of future revenues and costs, tax shields and annual and terminal discount factors) used by it to prepare the DCF projections and also considered macroeconomic and other conditions such as: our credit rating, stock price and access to capital; industry growth projections; our historical sales trends and our technological accomplishments compared to our peer group.

 

As part of the DCF projections prepared for use in the September 30, 2015 and 2014 evaluations, we analyzed our corporate payroll and other general and administrative expenses to determine their relevance to the reporting units, and to the extent relevant, we allocated such costs when preparing those projections. For the years ended September 30, 2015 and 2014, we determined that approximately 82% and 83%, respectively, of our corporate payroll plus other general and administrative expenses (excluding non-cash expenses) were allocable to our reporting units, including those without goodwill or other intangible assets. The non-allocable corporate costs related to various public company related requirements, including D&O insurance and certain legal, accounting and other professional and consulting fees and expenses, as well as the costs of evaluating new business opportunities and products outside the existing divisions.

 

During the time period from February 2015 through June 2016, we received cash proceeds for our sales, in tranches, of defined subsets of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). In accordance with management fee agreements we entered into with Partners in connection with these sales, we are required to continue servicing the sold accounts and absorb all related costs of doing so but we also receive the Partners’ revenues from these sold accounts, less a deduction for the Partners’ guaranteed return - see Liquidity and Capital Resources above for a detailed discussion of these transactions. For purposes of the September 30, 2015 and 2014 evaluations, we included the Partners’ revenues and all related operating costs incurred by us in our DCF projections for the audio and web conferencing reporting unit, but considered the amount deducted for the Partners’ guaranteed return to not be specific to that unit’s operations but rather to be analogous to a corporate financing cost and thus this cash outflow was not included as part of our DCF projections for the audio and web conferencing reporting unit.

 

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For the September 30, 2015 and 2014 evaluations, our management, with the assistance of the third-party valuation services firm, determined the appropriately comparable publicly reporting companies and public market transactions used by it to perform the MV analyses. Factors taken into consideration in selecting the appropriately comparable companies included the relative size of the candidate company, measured by revenues and assets, as compared to our reporting units and the extent to which the stated business activities of the candidate company align with the primary business activities of our reporting units. Once comparable companies and transactions were identified, the valuation calculation was based on multiples of revenues and, to the extent applicable, EBITDA (earnings before interest, taxes, depreciation and amortization). In the case of the September 30, 2015 evaluation, we, based on the advice of the third-party valuations services firm, determined that the publicly reporting companies and public market transactions that we were able to identify as available for our analysis were not sufficiently comparable to the operating characteristics of most of our reporting units therefore these MV analyses were given a zero percent (0%) weighting - i.e., they were not considered - when determining FV.

 

Based on the above, as well as a report prepared by the third-party valuation services firm, we determined that the FVs of the Acquired Onstream, EDNet and audio and web conferencing reporting units, calculated as described above, were less than their respective net carrying amounts as of September 30, 2015 and that further evaluation under the second step of the two-step process described above was necessary.

 

As part of this second step, our management, with the assistance of the third-party valuation services firm, determined the fair value of all tangible and intangible assets and liabilities of each of our reporting units, including any material unrecorded assets or liabilities. This allocation process was performed only for purposes of testing goodwill for impairment, and did not result in the write up or write down of recognized assets or liabilities, or the recognition of previously unrecognized assets or liabilities. The carrying value of each reporting unit’s goodwill was then compared to the implied fair value of that reporting unit’s goodwill, such implied value being any excess of the FV of a reporting unit over the amounts assigned to its assets and liabilities, and the excess of the carrying value over the implied fair value was written off, as follows: approximately $4.1 million related to the audio and web conferencing reporting unit’s goodwill (of which we allocated approximately $3.9 million to Infinite and approximately $250,000 to Intella2), approximately $750,000 related to the EDNet reporting unit’s goodwill and approximately $271,000 related to the Acquired Onstream reporting unit’s goodwill. In addition, as a result of the above valuation, we recorded an approximately $446,000 write-off of the remaining Intella2 intangible assets, primarily the customer list. These write-offs were classified in our financial statements as impairment losses on goodwill and other intangible assets aggregating approximately $5.6 million for the year ended September 30, 2015.

 

Furthermore, in order to address whether any further consideration of ONSM’s share price was needed with respect to impairment testing, we, with the assistance of the third-party valuation services firm, performed an analysis to compare our book value to our market capitalization as of September 30, 2015, including adjustments for (i) paid-for but not issued common shares, such as the Rockridge Shares and the Executive Shares and (ii) an appropriate control premium. Based on this analysis, we concluded that there were no conditions with respect to our market capitalization as of September 30, 2015 which would require further evaluation with respect to the carrying values of our reporting units. The above analysis was performed based on a closing ONSM share price of $0.21 per share as of September 30, 2015.

 

However, as of September 30, 2014, based on the above, as well as a report prepared by the third-party valuation services firm, we determined that the FVs of the Acquired Onstream, EDNet and audio and web conferencing reporting units, calculated as described above, were more than their respective net carrying amounts. Furthermore, in order to address whether any further consideration of ONSM’s share price was needed with respect to impairment testing, we, with the assistance of the third-party valuation services firm, performed an analysis to compare our book value to our market capitalization as of September 30, 2014, including adjustments for (i) paid-for but not issued common shares, such as the Rockridge Shares and the Executive Shares and (ii) an appropriate control premium. Based on this analysis, we concluded that there were no conditions with respect to our market capitalization as of September 30, 2014 which would require further evaluation with respect to the carrying values of our reporting units. The above analysis was performed based on a closing ONSM share price of $0.17 per share as of September 30, 2014.

 

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An annual impairment review of our goodwill will be performed as part of preparing our September 30, 2016 financial statements. Until that time, we are reviewing certain factors to determine whether a triggering event has occurred that would require an interim impairment review. Those factors include, but are not limited to, our management’s estimates of future sales and operating income, which in turn take into account specific company, product and customer factors, as well as general economic conditions and the market price of our common stock.

 

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

As of September 30, 2015 we have capitalized as part of other internal use software approximately $2.0 million of employee compensation and other costs for the development of webcasting applications. As of September 30, 2015, substantially all of these costs have been placed in service, including approximately $444,000 placed in service in December 2009 for the initial release of iEncode software, which runs on a self-administered, webcasting appliance used to produce a live video webcast, approximately $352,000 placed in service in January 2013 for a new release of our basic webcasting platform and approximately $99,000, $251,000 and $96,000 placed in service in October 2013, July 2014 and July 2015, respectively, for enhancements to that new release. As of September 30, 2015, the approximately $262,000 of the total capitalized costs not yet placed in service relate to our development during the period from July 2013 through September 2015 of a “do it yourself” large audience webcasting product that can be run from the customer’s desktop and will be available on a fixed cost monthly subscription basis that can be purchased on-line. We expect to release this product in the fourth quarter of fiscal 2016. As part of our annual review of the carrying values of our long-lived assets for impairment as of September 30, 2015,  we evaluated the remaining carrying value of the webcasting division’s assets, primarily the unamortized software development costs, for impairment. We performed such an analysis by comparing the carrying value of those assets to the projected undiscounted future cash flows from the webcasting operations, as prescribed by applicable accounting literature for evaluating impairment of a depreciable asset with a fixed life. These projected future cash flows took into account (i) the webcasting revenues during fiscal 2015, which in spite of an increase for the nine months ended June 30, 2015 versus the corresponding prior year period, declined for the three months ended June 30, 2015, versus the corresponding prior year period, and were generally flat for the three months ended September 30, 2015, versus the corresponding prior year period (and which trend has continued through June 30, 2016) and (ii) information available to us with respect to backlog and potential future revenues as of September 30, 2015. Based on this information, we determined that it would not be appropriate to project growth in webcasting revenues for these purposes as of September 30, 2015. The initial decline in webcasting revenues that occurred for the quarter ended June 30, 2015 was not considered a “triggering event” that might require an interim evaluation, since we were unable to determine that such decline represented a trend that might result in impairment until we saw additional results for the quarter ended September 30, 2015, as well as evaluated the backlog and potential future revenues as of that date. Since there was a significant level of recently capitalized software development costs for webcasting products as of September 30, 2015, and we did not project growth in webcasting revenues for this purpose, as a result of our analysis, we recognized a net impairment loss of $800,000 for the year ended September 30, 2015. After the impairment loss, the carrying cost of the webcasting division’s capitalized internal software was reduced to approximately $35,000, which will be depreciated over the twelve months ending September 30, 2016. We will continue to evaluate any webcasting division development costs capitalized by us after September 30, 2015 for impairment on the same basis.

 

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ITEM 8.                FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

                Our financial statements are contained in pages F-1 through F-90, which appear at the end of this annual report.

 

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

 

 None.

 

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ITEM 9A (T).      CONTROLS AND PROCEDURES

 

Management’s report on disclosure controls and procedures:

 

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act, is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015, our disclosure controls and procedures were not effective at the reasonable assurance level. Furthermore, inadequate staffing of our financial accounting function has resulted in, among other things, at times our inability to issue financial statements on a timely basis and/or perform timely account reconciliations. As a result, including the need to perform additional analyses with respect to goodwill impairment, we did not timely file this Annual Report on Form 10-K.

 

                Management’s report on internal control over financial reporting:

    

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15 promulgated under the 1934 Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (“COSO”). Based on our evaluation under the COSO framework, management has concluded that, as of September 30, 2015, our internal control over financial reporting was not effective at the reasonable assurance level.

 

We identified a material weakness in our internal control over financial reporting surrounding the performance of our analysis to support and review goodwill impairment within a timely manner. Specifically, deficiencies were identified in our control environment which could have led to the improper valuation of certain intangible assets. Furthermore, inadequate staffing of our financial accounting function has resulted in, among other things, at times our inability to issue financial statements on a timely basis and/or perform timely account reconciliations. As a result, including the need to perform additional analyses with respect to goodwill impairment, we did not timely file this Annual Report on Form 10-K.

 

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

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

 

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Changes in Internal Control over Financial Reporting:

Except as noted above, there were no changes in our internal control over financial reporting during the most recent fiscal year ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B.             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

60

Chairman of the Board, President and Chief Executive Officer

 

 

 

Alan M. Saperstein

57

Director and Chief Operating Officer

 

 

 

Robert E. Tomlinson

59

Senior Vice President and Chief Financial Officer

 

 

 

Clifford Friedland

65

Director and Senior Vice President Business Development

 

 

 

David Glassman

65

Senior Vice President and Chief Marketing Officer

 

 

 

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

53

Director

 

 

 

Leon Nowalsky (2) (3)

55

Director

 

 

 

Robert D. (“RD”) Whitney (1)

47

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

 

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

 

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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 was the Executive Director of the Institute of Finance and Management (“IOFM”) since it was acquired in April 2013 by Diversified Business Communications (“DBC”), until January 2015, when he became a Group Vice President of DBC. From January 2011 through April 2013, Mr. Whitney was a partner with Greenhaven Partners (“Greenhaven”), a private-equity firm focusing on investments in specialty information and digital media oriented businesses, and in connection with that role was Chief Executive Officer of one Greenhaven owned entity - IOFM (part of Management Networks, LLC) which was sold to DBC as discussed above and a consultant to two others - Exchange Networks, LLC (a MarketPlace365 promoter) and Chief Executive Group, LLC. From 2008 through 2010, Mr. Whitney was CEO of the online media division of the Tarsus Group, PLC, a London-based B2B conference and event producer (TRS.L) and in this position he was also associated with Onstream in various roles during the development and commercial introduction phases of MarketPlace365. From 1997 through 2005, and again in 2006 through 2008, he served in various roles (including Vice President of Operations and General Manager) with Kennedy Information, a firm specializing in delivering market intelligence through multiple media. During this time, Mr. Whitney was instrumental in the sale of Kennedy Information to its current parent company, BNA, which was the largest independent publisher of information and analysis products for professionals in business and government. He also has held positions at Kluwer Law International (a division of Wolters Kluwer), the Thompson Publishing Group, Yankee Publishing, Vicon Publishing and Connell Communications (a division of IDG). Mr. Whitney holds an MBA from Fitchburg State College and a BS from Bentley University.

 

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

 

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

 

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Director Compensation Table

 

                The following table presents director compensation (excluding directors who are Named Executive Officers) for the year ended September 30, 2015:

 

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

 

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 2015, 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, 2015. No options granted in previous years were still held as of September 30, 2015 by members of our Board of Directors (excluding those who are Named Executive Officers).

      

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, as of October 28, 2016 it has not yet been determined what the replacement compensation program will be, if any, for the outside Directors and the other executive-level employee in lieu of the terminated program.

 

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, 2015, there were three meetings of the Board, and the Board took action five 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) four times in fiscal 2015.

 

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 2015 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 2015 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 2015 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.

 

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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, 2015 and Forms 5 and amendments thereto furnished to us with respect to the fiscal year ended September 30, 2015, 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, 2015, except to the extent the following represents non-compliance:

 

On June 12, 2015, we determined that the Executives were entitled to an aggregate of 125,000 ONSM common shares for meeting certain financial goals. We did not issue those shares to the Executives until June 19, 2015. Although the Executives did not file a Form 4 to report the June 12, 2015 grant of a right to receive such shares, the Executives each timely filed a Form 4 on June 22 or June 23, 2015 reporting the issuance of their respective portion of those shares.

 

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ITEM 11.              EXECUTIVE COMPENSATION       

SUMMARY COMPENSATION TABLE

 

STOCK

AWARDS

($)

OPTION

AWARDS

($)

ALL OTHER

COMPENSATION

($) (13)

TOTAL

COMPENSATION

($)

NAME AND

PRINCIPAL POSITION

FISCAL

YEAR

BONUS

($)

SALARY ($)

Randy S. Selman

2015

$354,174 (11)

 -0-

$      9,500 (12)

-0-

$57,627 (1)

$421,301

President, Chief

2014

$299,690 (11)

 -0-

$    15,000 (12)

-0-

$54,820 (2)

$369,510

Executive Officer

and Director

Alan Saperstein

2015

$324,250 (11)

 -0-

$     9,500 (12)

-0-

$59,152(3)

$392,902

Chief Operating

2014

$272,446 (11)

 -0-

$   15,000 (12)

-0-

$56,148(4)

$343,594

Officer and Director

Robert Tomlinson

2015

$304,409 (11)

 -0-

$    9,500 (12)

-0-

$57,146 (5)

$371,055

Chief Financial

2014

$254,383 (11)

 -0-

$  15,000 (12)

-0-

$54,365 (6)

$323,748

Officer

Clifford Friedland

2015

$290,924 (11)

 -0-

$    9,500 (12)

-0-

$68,580 (7)

$369,004

Senior VP - Busi-

2014

$242,105 (11)

 -0-

$  15,000 (12)

-0-

$63,869 (8)

$320,974

ness Development

and Director

David Glassman

2015

$290,924 (11)

 -0-

$     9,500 (12)

-0-

$58,972 (9)

$359,396

Senior VP -

2014

$242,105 (11)

 -0-

$   15,000 (12)

-0-

$55,745 (10)

$312,850

Marketing

 

(1)                 Includes $18,653 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,974 for retirement savings and 401(k) match.

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

(3)                 Includes $24,152 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $18,000 for retirement savings.

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

(5)                 Includes $18,653 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $21,493 for retirement savings and 401(k) match.

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

(7)                 Includes $28,261 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $23,319 for retirement savings and 401(k) match.

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

 

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(9)             Includes $18,653 for medical and other insurance; $12,000 for automobile allowance; $5,000 for dues allowance and $23,319 for retirement savings and 401(k) match.

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

(11)          Effective October 1, 2009, in response to our operating cash requirements, the base salary amounts being paid to the Executives were adjusted to be 10% less than the contractual amounts. In addition, until certain actions as discussed below, the amounts representing the subsequent contractual annual increases to those base salary amounts were not paid. No related modifications of the compensation as called for under their related employment agreements was made, as it was expected that this compensation withheld from the Executives would eventually be paid, although the Executives did agree that they would accept payment in equity of such shortfalls to a certain extent and under certain terms. Accordingly, except for the initial accrual in October 2010 as discussed below, we are accruing these unpaid amounts as non-cash compensation expense, with the unpaid portion reflected as an accrued liability under the balance sheet caption “Amounts due to directors and officers”. However, these accrued amounts will not be reflected as compensation in the above table until and unless additional payments are made to the Named Executive Officers in settlement of those amounts.

 

Effective September 16, 2012, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.8% of the contractual base salary at that time. Effective September 16, 2014, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 5.0% of the contractual base salary at that time. Effective May 1, 2015, the base salary amounts being paid to the Executives were reinstated by an amount representing approximately 7.4% of the contractual base salary at that time. Effective August 15, 2016, the base salary amounts being paid to the Executives were reduced by an amount representing approximately 3.0% of the contractual base salary at that time. As of October 7, 2016, the base salary payments to the Executives are approximately 21.5% less than the contractual base salaries (as adjusted through the September 27, 2016 raise), compared to the 10% reduction instituted in October 2009 and which reduction was initially company-wide but at this time affects very few of our other employees. The 21.5% shortfall cited above is before considering the impact of the two lump-sum payments made to the Executives in April and December 2015, as discussed below.


In consideration of the waiver and satisfaction of any remaining unpaid salary due to the Executives through December 31, 2012 under their employment agreements, as well as the waiver and satisfaction of any remaining unpaid amounts due to certain of those Executives, we (as authorized by our Board of Directors) and the Executives agreed, effective January 22, 2013, (i) to pay $100,000 ($20,000 per Executive) of the withheld compensation in cash and (ii) to issue 1,700,000 (340,000 per Executive) fully vested ONSM common shares, subject to certain trading restrictions (the “Executive Shares”). $125,000 in cash ($25,000 per Executive) was paid in April 2015, which satisfied the above commitment to pay the $100,000 of pre December 31, 2012 compensation not covered by the Executive Shares (and also satisfied $25,000 of post December 31, 2012 compensation previously withheld by us and accrued as a liability). Since none of the previous reductions of the executive compensation shortfall accrual through April 2015 resulted from a cash payment, we recorded the $125,000 cash payment in April 2015 against the accrued liability for the executive compensation shortfall without any impact on compensation expense for the year ended September 30, 2015. However, this $125,000 cash payment has been reflected in the above table as fiscal 2015 compensation.

 

An additional $125,000 in cash compensation ($25,000 per Executive) was paid in December 2015, which will reduce the previously accrued liability for unpaid compensation and will be reflected in the above table as fiscal 2016 compensation.

 

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Although, as of October 28, 2016, the Executive Shares have not been issued, due to certain administrative and documentation requirements, since the Executive Shares were committed to be issued by the January 22, 2013 action of the Board, that issuance was reflected in our financial statements as of the date of such commitment. Furthermore, to the extent there is any shortfall from the gross proceeds upon resale by the Executives of the Executive Shares versus twenty-nine cents ($0.29) per share, the shortfall will be reimbursed to the Executives by us in cash, or at our option, by the issuance of additional fully vested ONSM common shares (the “Additional Executive Shares”), with the Additional Executive Shares subject to reimbursement by us to the Executives of any shortfall from the gross proceeds upon resale as compared to the fair value used to determine the number of such Additional Executive Shares. However, neither the Executive Shares nor the Additional Executive Shares will be reflected as compensation in the above table until and unless the shares are issued and/or corresponding cash payments are made to the Named Executive Officers.

 

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

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

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

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

 

With respect to fiscal 2014, the Executives earned an aggregate of 375,000 Executive Incentive Shares for meeting the objective of achieving positive EBITDA, as adjusted, for at least two quarters as well as meeting the objective of achieving positive operating cash flow (both measures as defined in the Executive Incentive Plan) for the fiscal year. Accordingly, those 375,000 shares have been recorded on our financial statements and reflected as non-cash compensation expense of $75,000 for the year ended September 30, 2014 (the term of service) based on (i) the fair value of 250,000 shares at $0.21 per share as of May 20, 2014, the date it was conclusively determined that the EBITDA objective had been met and the shares had been earned plus (ii) the fair value of 125,000 shares at $0.18 per share as of May 8, 2015, the date it was conclusively determined that it was probable the cash flow objective would be met and the shares would be earned. Accomplishment of the other objective for fiscal 2014 would have resulted in an aggregate of 125,000 Executive Incentive Shares issued to the Executives as a group, but it was determined that these shares were not earned.

 

With respect to fiscal 2015, the Executives earned an aggregate of 250,000 Executive Incentive Shares for meeting the objective of achieving positive EBITDA, as adjusted, (as defined in the Executive Incentive Plan) for at least two quarters. Accordingly, those 250,000 shares have been recorded on our financial statements and reflected as non-cash compensation expense of $47,500 for the year ended September 30, 2015 (the term of service) based on the fair value of 250,000 shares at $0.19 per share as of June 30, 2015, the date it was conclusively determined that the EBITDA objective had been met and the shares had been earned. Accomplishment of the other objectives for fiscal 2015 would have resulted in an aggregate of 250,000 Executive Incentive Shares issued to the Executives as a group, but it was determined that these shares were not earned. However, the issuance of an aggregate of 125,000 of those 250,000 Executive Incentive Shares, related to the 2015 financial objective for cash flow and with a fair value of $23,750, is under review by the Board of Directors.

 

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

 

In the event that the termination of the Executive’s employment is the result of the Executive’s voluntary resignation, and such voluntary resignation is not due to the Company’s breach of the Executive’s employment agreement or is not due to constructive termination as outlined in the Executive’s employment agreement, such restrictions will be promptly lifted, provided that no bona-fide and legally defensible objection to such issuance has been raised by written notice provided by a majority of the other four Executives to the terminating Executive, within ninety (90) days after such termination date.

 

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

 

Employment Agreements

 

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

 

After annual increases in prior years as set forth in the employment agreements, the contractual annual base salaries for the five Executives in aggregate as of September 30, 2015 was approximately $1.8 million, subject to a five percent (5%) increase on September 27, 2016 and each year thereafter – a portion of these contractual salaries are presently not being paid to the Executives, as discussed below. In addition, each of the Executives receives an auto allowance payment of $1,000 per month, a “retirement savings” payment of $1,500 per month and an annual reimbursement of dues or charitable donations up to $5,000.  We also pay insurance premiums for the Executives, including medical, life and disability coverage. These agreements contain certain non-disclosure and non-competition provisions and we have agreed to indemnify the Executives in certain circumstances.

 

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

 

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

 

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

 

Outstanding Equity Awards at Fiscal Year-End Table

 

There were no outstanding stock options or stock awards held by the Named Executive Officers as of September 30, 2015.

 

2007 Equity Incentive Plan

 

              On September 18, 2007, our Board of Directors (the “Board”) and a majority of our shareholders adopted the 2007 Equity Incentive Plan (the “Plan”), which authorized the issuance of up to 1,000,000 shares of ONSM common stock pursuant to stock options, stock purchase rights, stock appreciation rights and/or stock awards for employees, directors and consultants. On March 25, 2010, our Board and a majority of our shareholders approved a 1,000,000 increase in the number of shares authorized for issuance under the Plan, for total authorization of 2,000,000 shares and on June 13, 2011 they authorized a further increase in authorized Plan shares by 2,500,000 to 4,500,000. Based on the issuance of 3,627,763 common shares under the Plan through September 30, 2015 (including 2,875,000 Executive Incentive Shares issued plus 375,000 Executive Incentive Shares accrued for potential issuance) and 50,000 outstanding financial consultant Plan Options, as of September 30, 2015, there are 822,237 shares available for additional issuances under the Plan.

 

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

 

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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. The outstanding Plan Options as of September 30, 2015 had exercise prices from $0.92 to $6.00 per share. On October 7, 2016, the closing price of our common stock as reported on OTCP was $0.18 per share.

 

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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 October 7, 2016 held by:

 

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

·                     our directors,

·                     named executive officers, and

·                     all of our directors and officers as a group.

 

                Unless otherwise indicated, the address of each of the listed beneficial owners identified is c/o Onstream Media Corporation, 1291 SW 29th Avenue, Pompano Beach, Florida 33069. Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all shares of our common stock beneficially owned by them. A person is deemed to be the beneficial owner of securities that can be acquired by such a person within 60 days from October 7, 2016 upon exercise of options, warrants, convertible securities or other rights to receive our common shares. Each beneficial owner's percentage of ownership is determined by assuming that options, warrants, convertible securities or other rights to receive our common shares that are held by such a person (but not those held by any other person) and are exercisable within 60 days from the date hereof (unless otherwise indicated below) have been exercised. All information is based upon a record list of stockholders received from our transfer agent as of October 7, 2016. At that date, approximately 57% of our outstanding shares were held by CEDE & Co., which is accounted for as a single shareholder of record for multiple beneficial owners. CEDE & Co. is a nominee of the Depository Trust Company (DTC), with respect to securities deposited by participants with DTC, e.g., mutual funds, brokerage firms, banks, and other financial organizations.  Shares held by CEDE & Co. are not reflected in the following table. For purposes of calculating beneficial ownership percentages in the following table, the number of total outstanding shares used as the denominator includes an aggregate of 3.125 million fully restricted common shares issued and or issuable to the named executive officers, but because of the nature of the restrictions those 3.125 million shares are not considered beneficially owned by those executives for purposes of the table.

 

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                                                   

-

-

All directors and officers as a group (eight persons) (6)

251,417

1.1%

Jeffrey Miller (7)

1,568,571

6.6%

 

 (1)         Includes 1,660 shares of our common stock presently outstanding. Excludes 678,000 common shares issued and outstanding, as well as 50,000 common shares earned but not issued as of October 7, 2016, but subject to restriction on the ability of Mr. Selman to access or transact in any way until such restrictions are lifted. See footnote 12 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 11 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Selman has the right/obligation to purchase from an independent third party and which have been partially paid for as of October 7, 2016 but none of these shares will be transferred to Mr. Selman until the full payment for all of the shares has been made.

 

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If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, Mr. Selman's beneficial ownership as presented in that table would be 5.7%. Furthermore, as of October 7, 2016, we owe Mr. Selman approximately $205,000 for previously earned but unpaid compensation, for which he has agreed to accept payment in equity under certain conditions - see Item 11 - Executive Compensation for further details of this agreement. If this amount owed were to be settled by our issuance of common shares, such settlement would result in the issuance of approximately 1,137,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016. Furthermore, in the event the 340,000 shares authorized for issuance to Mr. Selman by our Board of Directors in January 2013 but not yet issued were to be issued and were Mr. Selman to sell those shares at our closing share price of $0.18 as of October 7, 2016, we would be obligated to reimburse Mr. Selman a shortfall of approximately $37,000 in cash, or at our option, approximately 208,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016 - see Item 11 - Executive Compensation for further details of this obligation. Notwithstanding the foregoing, these potential share issuances are subject to evaluation and/or approval by our Board of Directors as well as any changes in the price per share or other terms that might result from that evaluation and/or approval. If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, and if the potential share issuances listed herein were also included in that table, Mr. Selman's beneficial ownership as presented in that table would be 10.7%.

 

(2)          Includes 1,973 shares of our common stock presently outstanding. Excludes 671,000 common shares issued and outstanding, as well as 50,000 common shares earned but not issued as of October 7, 2016, but subject to restriction on the ability of Mr. Saperstein to access or transact in any way until such restrictions are lifted. See footnote 12 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 11 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Saperstein has the right/obligation to purchase from an independent third party and which have been partially paid for as of October 7, 2016 but none of these shares will be transferred to Mr. Saperstein until the full payment for all of the shares has been made.

 

If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, Mr. Saperstein's beneficial ownership as presented in that table would be 5.7%. Furthermore, as of October 7, 2016, we owe Mr. Saperstein approximately $175,000 for previously earned but unpaid compensation, for which he has agreed to accept payment in equity under certain conditions - see Item 11 - Executive Compensation for further details of this agreement. If this amount owed were to be settled by our issuance of common shares, such settlement would result in the issuance of approximately 970,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016. Furthermore, in the event the 340,000 shares authorized for issuance to Mr. Saperstein by our Board of Directors in January 2013 but not yet issued were to be issued and were Mr. Saperstein to sell those shares at our closing share price of $0.18 as of October 7, 2016, we would be obligated to reimburse Mr. Saperstein a shortfall of approximately $37,000 in cash, or at our option, approximately 208,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016 - see Item 11 - Executive Compensation for further details of this obligation. Notwithstanding the foregoing, these potential share issuances are subject to evaluation and/or approval by our Board of Directors as well as any changes in the price per share or other terms that might result from that evaluation and/or approval. If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, and if the potential share issuances listed herein were also included in that table, Mr. Saperstein's beneficial ownership as presented in that table would be 10.1%.

 

 (3)         Includes 74,538 shares of our common stock presently outstanding, 24,684 shares of our common stock held by Titan Trust and 24,684 shares of our common stock held by Dorado Trust. Excludes 521,000 common shares issued and outstanding, as well as 50,000 common shares earned but not issued as of October 7, 2016, but subject to restriction on the ability of Mr. Friedland to access or transact in any way until such restrictions are lifted. See footnote 12 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 11 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Friedland has the right/obligation to purchase from an independent third party and which have been partially paid for as of October 7, 2016 but none of these shares will be transferred to Mr. Friedland until the full payment for all of the shares has been made. Mr. Friedland is the control person and beneficial owner of both Titan Trust and Dorado Trust and exercises sole voting and dispositive powers over these shares.

 

If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, Mr. Friedland's beneficial ownership as presented in that table would be 5.6%. Furthermore, as of October 7, 2016, we owe Mr. Friedland approximately $141,000 for previously earned but unpaid compensation, for which he has agreed to accept payment in equity under certain conditions - see Item 11 - Executive Compensation for further details of this agreement. If this amount owed were to be settled by our issuance of common shares, such settlement would result in the issuance of approximately 784,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016. Furthermore, in the event the 340,000 shares authorized for issuance to Mr. Friedland by our Board of Directors in January 2013 but not yet issued were to be issued and were Mr. Friedland to sell those shares at our closing share price of $0.18 as of October 7, 2016, we would be obligated to reimburse Mr. Friedland a shortfall of approximately $37,000 in cash, or at our option, approximately 208,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016 - see Item 11 - Executive Compensation for further details of this obligation. Notwithstanding the foregoing, these potential share issuances are subject to evaluation and/or approval by our Board of Directors as well as any changes in the price per share or other terms that might result from that evaluation and/or approval. If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, and if the potential share issuances listed herein were also included in that table, Mr. Friedland's beneficial ownership as presented in that table would be 9.3%.

 

 (4)         Includes 74,510 shares of our common stock presently outstanding, 24,684 shares of our common stock held by JMI Trust and 24,684 shares of our common stock held by Europa Trust. Excludes 521,000 common shares issued and outstanding, as well as 50,000 common shares earned but not issued as of October 7, 2016, but subject to restriction on the ability of Mr. Glassman to access or transact in any way until such restrictions are lifted. See footnote 12 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 11 to the table in Item 11 Executive Compensation for additional details. Also excludes 312,500 common shares Mr. Glassman has the right/obligation to purchase from an independent third party and which have been partially paid for as of October 7, 2016 but none of these shares will be transferred to Mr. Glassman until the full payment for all of the shares has been made. Mr. Glassman is the control person and beneficial owner of both JMI Trust and Europa Trust and exercises sole voting and dispositive powers over these shares.

 

If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, Mr. Glassman's beneficial ownership as presented in that table would be 5.6%. Furthermore, as of October 7, 2016, we owe Mr. Glassman approximately $141,000 for previously earned but unpaid compensation, for which he has agreed to accept payment in equity under certain conditions - see Item 11 - Executive Compensation for further details of this agreement. If this amount owed were to be settled by our issuance of common shares, such settlement would result in the issuance of approximately 784,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016. Furthermore, in the event the 340,000 shares authorized for issuance to Mr. Glassman by our Board of Directors in January 2013 but not yet issued were to be issued and were Mr. Glassman to sell those shares at our closing share price of $0.18 as of October 7, 2016, we would be obligated to reimburse Mr. Glassman a shortfall of approximately $37,000 in cash, or at our option, approximately 208,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016 - see Item 11 - Executive Compensation for further details of this obligation. Notwithstanding the foregoing, these potential share issuances are subject to evaluation and/or approval by our Board of Directors as well as any changes in the price per share or other terms that might result from that evaluation and/or approval. If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, and if the potential share issuances listed herein were also included in that table, Mr. Glassman's beneficial ownership as presented in that table would be 9.3%.

 

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 (5)         Excludes 484,000 common shares issued and outstanding, as well as 50,000 common shares earned but not issued as of October 7, 2016, but subject to restriction on the ability of Mr. Tomlinson to access or transact in any way until such restrictions are lifted. See footnote 12 to the table in Item 11 Executive Compensation for a full description of these restrictions and the conditions under which the restrictions could be lifted. Also excludes 340,000 common shares authorized for issuance by the Board effective January 22, 2013 in consideration of unpaid salary and other unpaid amounts, but not yet issued due to certain administrative and documentation requirements. See footnote 11 to the table in Item 11 Executive Compensation for additional details. Also excludes 41,073 restricted common shares that may not be transacted by Mr. Tomlinson for any reason whatsoever prior to Board approval, which has not been granted.

 

If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, Mr. Tomlinson's beneficial ownership as presented in that table would be 3.8%. Furthermore, as of October 7, 2016, we owe Mr. Tomlinson approximately $155,000 for previously earned but unpaid compensation, for which he has agreed to accept payment in equity under certain conditions - see Item 11 - Executive Compensation for further details of this agreement. If this amount owed were to be settled by our issuance of common shares, such settlement would result in the issuance of approximately 859,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016. Furthermore, in the event the 340,000 shares authorized for issuance to Mr. Tomlinson by our Board of Directors in January 2013 but not yet issued were to be issued and were Mr. Tomlinson to sell those shares at our closing share price of $0.18 as of October 7, 2016, we would be obligated to reimburse Mr. Tomlinson a shortfall of approximately $37,000 in cash, or at our option, approximately 208,000 common shares, if such issuance were to be based on our closing share price of $0.18 as of October 7, 2016 - see Item 11 - Executive Compensation for further details of this obligation. Notwithstanding the foregoing, these potential share issuances are subject to evaluation and/or approval by our Board of Directors as well as any changes in the price per share or other terms that might result from that evaluation and/or approval. If the shares listed herein as excluded from the beneficial ownership table were to be included in that table, and if the potential share issuances listed herein were also included in that table, Mr. Tomlinson's beneficial ownership as presented in that table would be 7.8%.

 

(6)          See footnotes (1) through (5) above.

 

(7)          Includes 825,000 shares of our common stock presently outstanding and 743,571 shares of our common stock held by 4J Consulting Corp. Mr. Miller is the control person and beneficial owner of 4J Consulting Corp and exercises sole voting and dispositive powers over these shares.

               

                The entities Sigma Opportunity Fund II, LLC (“Sigma”) and Sigma Capital Advisors, LLC (“Sigma Capital”) had no beneficial ownership of our common shares as of October 7, 2016. However, as of October 7, 2016 we were indebted for a note payable to Sigma in the principal amount of $600,000 (the “New Sigma Note”) with a maturity date of December 31, 2016. Sigma has the right to convert the New Sigma Note to common stock at a rate of $0.30 per share, which right Sigma may exercise only upon (i) the sale of all or substantially all of our business, assets or capital stock or (ii) our default on the New Sigma Note. Based on these limitations on conversion, the 2.0 million shares that would be issuable upon conversion of the New Sigma Note are not considered to be beneficially owned by Sigma as of October 7, 2016. Sigma Capital serves as the managing member of Sigma. Mr. Thom Waye is the sole member of Sigma Capital Partners, LLC, which in turn is the sole member of Sigma Capital, and as a result Mr. Waye, representing Sigma Capital Partners, LLC, is the control person and beneficial owner of Sigma and Sigma Capital and would exercise sole voting and dispositive powers over any shares issued upon conversion of the New Sigma Note. In the event these 2.0 million shares were issued or considered issuable as of October 7, 2016, they would represent approximately 7.7% beneficial ownership, greater than the 5% threshold for inclusion of Mr. Waye and/or Sigma Capital Partners, LLC in the beneficial ownership table above.

 

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

 

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

 

Certain relationships and related transactions

 

In December 2007, we entered into a line of credit arrangement (the “Line”) with a financial institution (the “Lender”) under which we could borrow up to an aggregate of $1.0 million for working capital, collateralized by our accounts receivable and certain other related assets and the amount of such borrowing being further subject to the amount, aging and concentration of such receivables. In August 2008 the maximum allowable borrowing amount under the Line was increased to $1.6 million and in December 2009 this amount was again increased to $2.0 million. The Lender was Thermo Credit LLC through February 10, 2016 and as a result of an assignment, Thermo Communications Funding LLC, an affiliated company, subsequent to that date. Mr. Leon Nowalsky, a member of our Board, is an investor and board member in both entities.

 

Although the Line expired on December 27, 2013, we continued after that date to negotiate renewal terms with the Lender and to maintain an outstanding borrowing balance under the Line and on February 10, 2016 (the “Effective Date”), we entered into a Loan Modification Agreement (“Modification”) which extended the term of the Line through December 31, 2017 (the “Maturity Date”).

 

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The Modification also provides that, if no Default or Event of Default, as defined in the Modification, shall have occurred and be continuing as of the Maturity Date, and upon our notice and request to Lender sent per the timing and other requirements in the Modification, Lender shall (in good faith) engage in, and conclude as quickly as commercially reasonable, negotiations with us to extend the Maturity Date by up to an additional twelve months (i.e., through December 31, 2018). The Modification also changed a number of the other terms of the Line, as discussed below.

 

Prior to the Effective Date, the outstanding balance (approximately $1.7 million as of September 30, 2015 and approximately $1.5 million as of October 7, 2016) bears interest at 12.0% per annum, adjustable based on changes in prime after December 28, 2009, payable monthly in arrears. The Modification provides that as of the Effective Date the interest rate will be the prime rate plus seven and one-half percent (7.5%) per annum, but no less than eleven percent (11.0%) per annum or any higher rate that might be allowed by the terms of the Line, including the Modification, arising from certain events such as default. Accordingly, as of the Effective Date, the outstanding balance bears interest at 11.0% per annum.

 

Under the terms of the Line, we also incur a monitoring fee and a commitment fee, which fees were unchanged by the Modification. The monitoring fee is one twentieth of a percent (0.05%) of the borrowing limit per week, payable monthly in arrears, and the commitment fee is one percent (1%) per year of the maximum allowable borrowing amount, payable annually in advance.

 

We paid the Lender origination and commitment fees in December 2007 aggregating $20,015, an additional commitment fee in August 2008 of $6,000 related to the increase in the lending limit for the remainder of the year, a commitment fee of $16,000 in December 2008 related to the continuation of the increased Line for an additional year, a commitment fee of $20,000 in December 2009 related to the continuation of the Line for an additional year as well as an increase in the lending limit, and commitment fees aggregating $60,000 related to the continuation of the Line for three additional years through December 27, 2013. Pending the formal renewal of the Line, we agreed in August 2014 to pay the commitment fee calculated on a pro-rata basis for eight months payable August 31, 2014 and a pro-rata monthly commitment fee thereafter through the Effective Date, at which time we paid the remaining balance due on a $20,000 annual commitment fee related to the continuation of the Line through December 31, 2016.

 

Starting at the inception of the Line, we have paid the Lender fees and expenses totaling up to approximately two to three thousand dollars per quarter related to their reviews of our receivable and other records related to the loan, although these payments have not been required in recent years.

 

The terms of the Line prior to the Effective Date required that all funds remitted by our customers in payment of receivables be deposited directly to a bank account owned by the Lender (the “Lockbox Account”), although this was never implemented. This requirement continues after the Effective Date, including the provision that such funds received in the Lockbox Account shall be immediately applied to any balance outstanding under the Line, or returned to us one day following clearance by the receiving bank, to the extent there is no balance outstanding under the Line. The Modification provides that we shall be responsible for the additional expenses related to the Lender-owned bank account, which we expect to be in the range of $12,000 to $18,000 per year.

 

The Modification provides that our failure to comply with these provisions shall be an immediate Event of Default, and although as of July 8, 2016  (the extended deadline granted by the Lender on June 8, 2016) these provisions had not been fully implemented, we were in substantial compliance with such provisions since August 1, 2016 and through October 28, 2016 and we have not received any notification from the Lender as to any Event of Default under these provisions, as of October 28, 2016.

 

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The Line is subject to us maintaining an adequate level of receivables, based on certain formulas. However, due to the lack of a formal renewal of the Line, in June 2014 the Lender determined that there would be no further advances under the Line, although no further repayments have been required either, and as a result the outstanding principal balance of the Line did not change from that time through June 24, 2016, regardless of weekly changes in the calculated borrowing availability based on the applicable formulas applied to our receivable levels. Effective June 24, 2016, the first deposit was made to the Lockbox Account and applied against the balance outstanding under the Line.

 

The Modification allows our receivable from any single party, including Partners, to be considered an Eligible Receivable to the extent that (i) the aggregate of all accounts receivable from such party and its affiliates does not exceed thirty percent (30%) of all Eligible Receivables (all Eligible Receivables for this purpose including the portion of the our accounts receivable from such party that is ultimately considered to be an Eligible Receivable) then owed by all of our account debtors and (ii) it meets all of the other requirements for eligibility as set forth in the Line.

 

                As of the Effective Date, although the outstanding balance under the Line exceeded the maximum allowable borrowing amount under the Line (the “Borrowing Base”), the Modification provided that notwithstanding any other provisions of the Line or the Modification, such condition would not be considered a Default or an Event of Default, and Lender would agree to make advances to us thereunder based on the Borrowing Base plus an overadvance amount determined by a schedule  which started at $300,000 through February 27, 2016  but declined to zero as of July 31, 2016 and thereafter. As of October 24, 2016, the outstanding balance under the Line was approximately $1,576,000, which exceeded the Borrowing Base  by approximately $248,000. Although there is no formal obligation to do so, as of October 24, 2016 the Lender is allowing such overadvance condition to continue, under their expectation that we are seeking alternative funding to replace that overadvance.

 

The Line is also subject to our compliance with a quarterly debt service coverage covenant (the “Covenant”). Prior to the Modification, the Covenant requires that the sum of (i) our net income or loss, adjusted to remove all non-cash expenses as well as cash interest expense and (ii) contributions to capital (less cash distributions and/or cash dividends paid during such period) and proceeds from subordinated unsecured debt, be equal to or greater than the sum of cash payments for interest and debt principal payments. The Lender waived the requirement to comply with the Covenant for the quarter ended September 30, 2015. We have complied with the Covenant for all other applicable quarters through June 30, 2016.

 

The Modification provides that effective January 1, 2016 and thereafter, the Covenant will require that our net income or loss, adjusted to (i) add back all non-cash expenses as well as cash interest expense and (ii) subtract cash distributions and/or cash dividends paid during such period, be equal to or greater than 1.2 times the sum of cash payments for interest and debt principal payments. The Modification also provides that we will not declare or pay any dividends or distributions on any equity interest, if before or after such event an Event of Default or Default, as defined in the Modification, would exist. Both before and after the Modification, the terms of the Line allow us to achieve compliance with the Covenant by (i) including any excess of adjusted net income over the amount of adjusted net income required to comply with the Covenant in the preceding two quarters or (ii) adding to adjusted net income the proceeds from subordinated debt or equity sales meeting defined conditions, and received within certain time frames extending prior to, and in some cases subsequent to, the relevant date of determination, all set forth in the Line and the Modification. The Modification also explicitly allows, subject to Lender’s prior consent, proceeds from our sales of revenues/customer accounts to a separate legal entity and received within a time frames extending six months prior to, and one month subsequent to, the relevant date of determination, to be added to adjusted net income for purposes of the Covenant. In a letter dated October 26, 2016, the Lender consented to the inclusion of proceeds from our December 2015 and June 2016 sales of revenue/customer accounts to Partners, as well as the proceeds from such sale in process that we expect to be effective during November 2016, and extended the carryback period for those proceeds from one month to three months.

 

                Although we do not have final financial results for periods after June 30, 2016, our estimated calculations for the quarters ended September 30, 2016, including our expectations of additional financing proceeds after that date that would be allowable for inclusion in those calculations, indicate that we are in compliance with the Covenant.

 

The outstanding principal is due on demand in the event a payment default is uncured one (1) day after written notice. The Modification provides that, without limiting any other rights and remedies provided by the terms of the Line or otherwise available to the Lender, the Lender may exercise one or more of certain rights and remedies, as listed in the Amendment, during the existence of any uncured Default (upon not less than five days prior written notice by Lender) or Event of Default which has not been waived in writing by Lender. Lender’s rights to exercise such rights and remedies will end if and when all of Debtors’ obligations to Lender in connection with the Line have been satisfied. The rights and remedies listed in the Modification include, but are not limited to: (i) verify the validity and amount of, or any other matter relating to, the accounts by mail, telephone, telegraph or otherwise, (ii) notify all account debtors that the accounts have been assigned to Lender and that Lender has a security interest in the accounts, (iii) direct all account debtors to make payment of all accounts directly to Lender or the Lockbox Account (iv) in any case and for any reason, notify the United States Postal Service to change the addresses for delivery of mail addressed to us to such address as Lender may designate, as well as receive, open and dispose of all such mail, provided that Lender shall promptly forward to us any such items not related to the accounts, (v) exercise all of our rights and remedies with respect to the collection of accounts, (vi) settle, adjust, compromise, extend, renew, discharge or release accounts, for amounts and upon terms which Lender considers advisable and (vii) sell or assign accounts on such terms, for such amounts and at such times as Lender deems advisable.

 

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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.

 

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

 

Effective February 28, 2015 the $250,000 note issued to CCJ was amended, extending the maturity date to March 1, 2016. This amendment provided that interest would be paid quarterly, commencing June 30, 2015 and also increased the outstanding principal balance to $275,000, for the effect of a $25,000 due diligence fee earned by the noteholder in connection with the amendment. This amendment also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale. Although this note was further amended, effective October 15, 2015, to extend the maturity date to July 15, 2016, it was paid in full on December 30, 2015. Such repayment, in accordance with our December 29, 2015 agreement with J&C Resources, Inc. (“J&C”), was made in consideration of our receipt of $157,000 from J&C on December 30, 2015 for our issuance of an unsecured, subordinated note with a December 31, 2016 maturity date.

 

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

 

On January 10, 2012, we received a funding commitment letter (the “January 2012 Funding Letter”) from J&C, agreeing to provide us, within twenty (20) days after our notice given on or before December 31, 2012, aggregate cash funding of up to $550,000, which may be requested in multiple tranches. Mr. Charles Johnston, one of our directors at that time, is the president of J&C. This January 2012 Funding Letter was obtained by us solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available, but did not represent any obligation on our part to accept such funding on these terms, was not expected by us to be exercised and was not exercised. The cash provided under the January 2012 Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 1, 2013 and (b) our issuance of 2.3 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of an equivalent amount in dollars of investment from any other source after the date of the January 2012 Funding Letter, other than funding received in connection with the LPC Facility, the January 2012  Funding Letter would be terminated. As part of the transaction under which J&C issued the January 2012 Funding Letter, we agreed to reimburse CCJ in cash the shortfall, as compared to minimum guaranteed net proceeds of $139,000, from their resale of 101,744 shares CCJ received upon their conversion of 17,500 shares of Series A-13 and after effecting our agreement as part of the same transaction to reduce the conversion rate on all Series A-13 shares from $2.00 per common share to $1.72 per common share. Based on the shortfall plus (i) the increased value of the underlying common stock related to this tranche as well as the second tranche of 17,500 shares of Series A-13 owned by CCJ and (ii) the Black-Scholes value of adjustments to warrants held by Lincoln Park Capital arising from certain anti-dilution provisions, the total economic cost of the January 2012 Funding Letter was approximately $130,000.

 

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

 

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On April 30, 2015, we received a funding commitment letter (the “April 2015 Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. Such notice was not given by us, but on April 30, 2016, we exercised our option for a one year extension of the April 2015 Funding Letter, including an extension of the notice deadline to January 5, 2017. The April 2015 Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available. Mr. Charles Johnston, a former ONSM director, is the president of J&C. Cash provided under the April 2015 Funding Letter would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 15, 2017 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of funds in excess of $5.0 million as a result of a single transaction for the sale of all or a part of our operations or assets, the April 2015 Funding Letter will be terminated. The consideration for the April 2015 Funding Letter was $25,000, which we have paid, and the consideration for the April 2015 Funding Letter extension is $25,000, to be withheld from any proceeds lent thereunder but in any event paid no later than September 1, 2016.

 

On March 5 and 6, 2015, we received aggregate gross cash proceeds of $1.0 million for our sale, effective February 28, 2015, of a defined subset of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) (“Sold Accounts”) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). The Sold Accounts represented historical annual revenues of approximately $1.35 million. After giving effect to our determination that Partners is a Variable Interest Entity (VIE) requiring consolidation in our financial statements, (i) the gross proceeds from this and our subsequent transactions with Partners are reflected as an increase in our equity (noncontrolling owners’ interest in VIE), (ii) the revenues from the Sold Accounts, and accounts sold as part of our subsequent transactions with Partners, are included in our consolidated revenues and (iii) the payment of the Partners’ guaranteed return percentage, which is deducted from these gross revenues, is reflected as a decrease in our equity (distributions to owners of VIE).

 

The limited partners of Partners include two Onstream directors (Cliff Friedland, who is also the executive officer primarily responsible for Infinite’s operations, and Alan Saperstein), two other officers of Onstream/Infinite who are not Onstream or Infinite directors (David Glassman and Eric Jacobs) and David Glassman’s sister and mother, for total related party ownership of 60% as of February 28, 2015. Jeffrey Miller (not considered to be a related party with respect to those limited partners, Onstream or Infinite until July 2015, when his beneficial ownership of our common stock exceeded 5% of our total outstanding shares and which condition continues as of October 28, 2016) serves as general partner, and is solely responsible for administering the activities of Partners as outlined below.

 

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In connection with the February 28, 2015 sale, Infinite and Partners entered into a Management Services Agreement (“MSA”) that provides for Infinite to continue to invoice the Sold Accounts but the payments when received from those Sold Accounts will be deposited in a segregated Partners owned bank account. Partners will return those customer proceeds to Infinite on a weekly basis in the form of a Management Fee, after deducting a certain amount representing (i) Partners’ guaranteed return (which is 40% of the Purchase Price per annum with the first six months guaranteed regardless of whether we exercise our rights under the Option Agreement or the MSA is otherwise terminated) and (ii) accounting fees payable to the third-party accounting firm as discussed below. Infinite will continue to service the Sold Accounts, incurring and absorbing all related costs of doing so – i.e., Partners will have no operating responsibilities and no operating costs related to the sold accounts other than to pay the Management Fee to Infinite. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the Partners’ guaranteed return percentage decreased. The MSA defines specific services, along with certain minimum standards of quality for such services, required to be provided by Infinite with respect to the Sold Accounts. The MSA contains provisions that prohibit (i) Infinite servicing the Sold Accounts for a period of two years after the termination of the MSA and (ii) Partners interfering in any way with Infinite’s performance of its duties thereunder or communicating with the Sold Accounts or with Infinite’s employees, vendors, consultants or agents during the term of the MSA.

The MSA initially had a two year term expiring on February 28, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights as follows. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the expiration date of the MSA was extended. Partners has the right to terminate the MSA, effective immediately upon written notice to Infinite, in the event of the following: (i) an Infinite Event of Default or (ii) the sale by Partners of the Sold Accounts subject to the terms of the Membership Interest Option Agreement. 

 

An Infinite Event of Default is (i) Bankruptcy of Infinite (as defined), (ii) a lack of compliance by Infinite with the provisions of the MSA which is continuing five (5) business days after receiving written notice from partners specifying such lack of compliance or (iii) a breach by Infinite or Onstream of any obligation under the Make Whole Agreement. Infinite has the right to terminate the MSA, effective immediately upon written notice to Partners, in the event of a Partners Event of Default. A Partners Event of Default is (i) a deliberate and material lack of compliance by Partners with the provisions of the MSA which is continuing five (5) business days after receiving written notice from Infinite specifying such lack of compliance or (ii) a breach by Partners of Partners’ obligations under the Membership Interest Option Agreement. Notwithstanding termination of the MSA, only for so long as the Infinite owns the Sold Accounts, Partners shall continue to pay the Management Fee, provided that Partners may deduct from such Management Fee Partners’ payment of all reasonable costs of providing the services to the Sold Accounts otherwise required to be provided by Infinite under the MSA.

 

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

 

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In connection with the February 28, 2015 sale, Infinite and Partners entered into a Make Whole Agreement which provides that if the revenues from the Sold Accounts falls below $1.0 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the revenues from the Sold Accounts back to $1.25 million (or the equivalent in cash flow). Onstream Media Corporation (“Onstream”) and Infinite have also committed that in the event there is any impediment, which directly or indirectly is caused by, or relates in any way to Infinite or Onstream, which would prevent more than 20% of the revenue from these sold accounts being earned or distributed to Partners, Infinite and Onstream would take all necessary steps to ensure that such impeded revenue or revenue shortfall is otherwise earned or distributed or shall pay the amount of such impeded revenue or revenue shortfall to Partners to the extent due on a quarterly basis.

 

In connection with the February 28, 2015 sale, Infinite and Partners entered into a Membership Interest Option Agreement (“Option Agreement”) whereby we have the right for the two-year period through February 28, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the Purchase Price plus a premium, which premium increases on a pro-rata basis to 20% of the Purchase Price over the two year period, subject to a minimum premium of 10%. Starting six months after the Effective Date, Partners may sell the Sold Accounts to a third party, provide that they must provide us four month written advance notice of such sale during which four month period we have the right to exercise our rights under the Option Agreement. In the event we do not exercise our rights under the Option Agreement, and Partners sells the Customer Accounts to a third party, we are entitled to receive 50% of any excess of the sales price to the third party over what would have been our option price under the Option Agreement. As part of the sale of additional Infinite customer accounts in a December 2015 transaction discussed in more detail below, the expiration date of the Option Agreement was extended and the premium percentage decreased.

 

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

 

On December 16 and 18, 2015, we received aggregate gross proceeds of approximately $2.1 million for our sale, effective December 16, 2015, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“First Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $2.7 million. The increase in the number of limited partners of Partners resulting from this transaction decreased the total related party ownership percentage to approximately 25% as of December 16, 2015.

 

In connection with the December 16, 2015 sale, Infinite and Partners entered into:

 

·       an Amended and Restated Make Whole Agreement (“Amended Make Whole Agreement”) which provides that if the combined revenues from the Sold Accounts and the First Tranche of Additional Sold Accounts (“Combined Revenues”) falls below approximately $3.2 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the Combined Revenues back to approximately $4.0 million (or the equivalent in cash flow). All other terms of the Amended Make Whole Agreement were substantially the same as the terms of the Make Whole Agreement as discussed above.

 

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·       an Amended and Restated Membership Interest Option Agreement (“Amended Option Agreement”) whereby we have the right for the two-year period through December 16, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the combined purchase price of the Sold Accounts and the First Tranche of Additional Sold Accounts plus $100,000 (“Purchase Price”), plus a premium, which premium increases on a pro-rata basis to 10% of the Purchase Price over the two year period, subject to a minimum premium of 5%. All other terms of the Amended Option Agreement were substantially the same as the terms of the Membership Interest Option Agreement as discussed above.

 

·       an Amended and Restated Management Services Agreement (“Amended MSA”) with a two year term expiring on December 16, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights. The Amended MSA provides that the Partners’ guaranteed return percentage be reduced to 30% per annum of the Purchase Price, with the first six months guaranteed regardless of whether we exercise our rights under the Amended Option Agreement or the Amended MSA is otherwise terminated. All other terms of the Amended MSA were substantially the same as the terms of the MSA as discussed above.

 

During the period from March 25, 2016 through June 30, 2016 we received aggregate gross proceeds of approximately $800,000 for our sale, effective June 30, 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Second Tranche of Additional Sold Accounts”) to Partners, which represented historical annual revenues of approximately $1.0 million. The increase in the number of limited partners of Partners resulting from this transaction decreased the total related party ownership percentage to approximately 21% as of June 30, 2016.

 

In connection with the June 30, 2016 sale, Infinite and Partners entered into:

 

·       an Amended and Restated Make Whole Agreement (“Second Amended Make Whole Agreement”) which provides that if the combined revenues from the Sold Accounts, the First Tranche of Additional Sold Accounts and the Second Tranche of Additional Sold Accounts (“Combined Revenues”) falls below approximately $3.9 million, Infinite will transfer additional customer accounts to Partners (which will become part of the Sold Accounts) sufficient to bring the Combined Revenues back to approximately $4.9 million (or the equivalent in cash flow). All other terms of the Second Amended Make Whole Agreement were substantially the same as the terms of the Amended Make Whole Agreement as discussed above.

 

·       an Amended and Restated Membership Interest Option Agreement (“Second Amended Option Agreement”) whereby we have the right for the two-year period through December 16, 2017 to buy 100% ownership (i.e., all of the membership interests) of Partners by payment of the combined purchase price of the Sold Accounts, the First Tranche of Additional Sold Accounts and the Second Tranche of Additional Sold Accounts plus $100,000 (“Purchase Price”), plus a premium, which premium increases on a pro-rata basis to 10% of the Purchase Price over the two year period, subject to a minimum premium of 5%. All other terms of the Second Amended Option Agreement were substantially the same as the terms of the Amended Option Agreement as discussed above.

 

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·       an Amended and Restated Management Services Agreement (“Second Amended MSA”) with a two year term expiring on December 16, 2017, unless and until terminated by mutual consent of the parties or pursuant to certain termination rights. The Second Amended MSA provides that the Partners’ return is guaranteed for the first six months regardless of whether we exercise our rights under the Second Amended Option Agreement or the Second Amended MSA is otherwise terminated. All other terms of the Second Amended MSA were substantially the same as the terms of the Amended MSA as discussed above.

 

During September and October 2016, subscriptions for approximately $225,000 were received by Partners and funded against an anticipated total of $1.5 million for our sale, which we expect will be effective during November 2016, of a defined subset of Infinite’s audio conferencing customers (and the related future business to those customers) (“Third Tranche of Additional Sold Accounts”) to Partners, will represent historical annual revenues of approximately $1.9 million, and will be sold under the same terms as the accounts sold in December 2015 and June 2016.

 

We are responsible for legal, consulting, finders and other fees related to the initial closing of the above transactions, as well as ongoing fees to administer these transactions, including (i) the third-party accounting firm as discussed above, (ii) certain compensation and expense payments to the general partner and (iii) certain other financial transaction expenses. These expenses are included as part of non-operating expenses (other (expense) income, net) and were approximately $115,000 and none for the years ended September 30, 2015 and 2014, respectively.

 

In December 2015 we recorded the issuance to Jeffrey Miller of 200,000 unregistered common shares for professional management services rendered in connection with Partners, such shares having a fair value of approximately $38,000 and are being recognized as part of the above non-operating expenses over a service period of twelve months starting December 16, 2015.

 

Review, approval or ratification of transactions with related persons

 

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

 

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

 

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

 

Director independence

 

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

 

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ITEM 14.              PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Audit Fees

 

The audit fees billed to us by Mayer Hoffman McCann P.C. (“MHM”) for professional services rendered during the fiscal year ended September 30, 2015 were $157,000 for the audit of our annual financial statements included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014 as well as the review of our quarterly financial statements included in our quarterly report on Form 10-Q for the quarter ended December 31, 2014. Fees for the review of our quarterly financial statements included in our quarterly reports on Form 10-Q for the quarters ended March 31 and June 30, 2015 were incurred, invoiced and paid subsequent to the fiscal year ended September 30, 2015.

 

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

 

Audit Related Fees

 

The aggregate fees billed to us by MHM for assurance and related services relating to the performance of the audit of our financial statements which are not reported under the caption "Audit Fees" above were none and $4,650 for the fiscal years ended September 30, 2015 and 2014, respectively. The $4,650 was paid for time spent answering inquiries from an accounting firm engaged by our potential lender, in connection with that accounting firm’s preparation of a “quality of earnings” report.

 

Tax Fees

 

The aggregate fees billed to us by MHM for tax related services were none and $2,600 for the fiscal years ended September 30, 2015 and 2014, respectively.

 

All Other Fees

 

                Other than fees relating to the services described above under “Audit Fees,” “Audit-Related Fees” and “Tax Fees,” there were no additional fees billed to us by MHM for services rendered for the fiscal years ended September 30, 2015 or 2014.

 

Audit Committee Policies

 

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

 

·       approved by our audit committee; or

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

 

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

 

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

 

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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)

 

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3.2                        By-laws (1)

 

4.1                        Specimen Common Stock Certificate (1)

 

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

 

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

 

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

 

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

 

4.6                        Allonge #4 dated September 10, 2014 to Convertible Promissory Note dated April 14, 2009 – Rockridge (35)

 

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

 

4.8                        Allonge #6 dated April 30, 2015 to Convertible Promissory Note dated April 14, 2009 – Rockridge (35)

 

4.9                        Allonge #7 dated August 18, 2015 to Convertible Promissory Note dated April 14, 2009 – Rockridge

 

4.10                      Allonge #8 dated December 16, 2015 to Convertible Promissory Note dated April 14, 2009 – Rockridge

 

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

 

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

 

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

 

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

 

4.15                      Third Amendment and Allonge dated September 15, 2014 to Senior Secured Note dated March 18, 2013 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries (35)

 

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

 

4.17                      First Amendment and Allonge dated September 15, 2014 to Senior Secured Note dated February 28, 2014 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries (35)

 

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

 

4.19                      Amendment Number 1 dated February 24, 2015 to Amended and Restated Senior Subordinated Secured Note dated December 31, 2014 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries (35)

 

4.20                      Amendment and Allonge (Number 2) dated April 30, 2015 to Amended and Restated Senior Subordinated Secured Note dated December 31, 2014 and issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries (35)

 

4.21                      Second Amended and Restated Senior Subordinated Secured Convertible Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated September 21, 2015

 

4.22                      Amendment and Allonge, dated November 16, 2015, to Second Amended and Restated Senior Subordinated Secured Convertible Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated September 21, 2015

 

4.23                      Second Amendment and Allonge, dated November 24, 2015, to Second Amended and Restated Senior Subordinated Secured Convertible Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated September 21, 2015

 

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4.24                     Third Amendment and Allonge, dated December 22, 2015, to Second Amended and Restated Senior Subordinated Secured Convertible Note issued to Sigma Opportunity Fund II, LLC by Onstream Media and its Subsidiaries, dated September 21, 2015

 

10.1                      Form of 2007 Equity Incentive Plan (29)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

10.12                    Loan Modification Agreement with Thermo Credit, LLC dated February 10, 2016 (37)

 

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

 

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

 

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

 

10.16                    Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated September 15, 2014 (35)

 

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

 

10.18                    Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated April 30, 2015 (35)

 

10.19                    Note Purchase Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated September 21, 2015

 

10.20                    Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated November 16, 2015

 

10.21                    Agreement between Sigma Opportunity Fund II, LLC and Onstream Media and its Subsidiaries, dated December 22, 2015

 

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

 

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

 

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