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EX-31.2 - EXHIBIT 31.2 - Onstream Media CORPexhibit31_2.htm
EX-32.2 - EXHIBIT 32.2 - Onstream Media CORPexhibit32_2.htm
EX-32.1 - EXHIBIT 32.1 - Onstream Media CORPexhibit32_1.htm
EX-31.1 - EXHIBIT 31.1 - Onstream Media CORPexhibit31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

(x)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2016

 

OR           

( )

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to _________

 

Commission file number 000-22849

 

Onstream Media Corporation

(Exact name of registrant as specified in its charter)

 

65-0420146

(IRS Employer Identification No.)

 

Florida

(State or other jurisdiction of incorporation or organization)

 

1291 SW 29 Avenue, Pompano Beach, Florida 33069

(Address of principal executive offices)

 


954-917-6655

(Registrant's telephone number)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                           Yes ( )   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 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes (X)   No (  )

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “non-accelerated filer” and “smaller reporting company” defined in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    (   ) 

Accelerated filer   (   )

Non-accelerated filer      (   )   (Do not check if a smaller reporting company)                         

Smaller reporting company   (X)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes (  )   No (X)  

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of October 7, 2016 the registrant had issued and outstanding 23,837,080 shares of common stock.

 

1


 

 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

PAGE

Item 1 - Financial Statements

Unaudited Consolidated Balance Sheet at March 31, 2016 and Consolidated Balance Sheet at September 30, 2015

4

Unaudited Consolidated Statements of Operations for the Six and Three Months Ended March 31, 2016 and 2015

5

Unaudited Consolidated Statement of Equity for the Six Months Ended March 31, 2016

6

Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2016 and 2015

7 – 8

Notes to Unaudited Consolidated Financial Statements

9 – 76

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

77 – 106

Item 4T - Controls and Procedures

107

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

108

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

108

Item 3 – Defaults upon Senior Securities

108

Item 4 – Mine Safety Disclosures

108

Item 5 – Other Information

108

Item 6 - Exhibits 

108

Signatures

109

 

2


 

 

 

 

CERTAIN CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION

 

 Certain statements in this quarterly report on Form 10-Q contain or may contain forward-looking statements that are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These risks, uncertainties and other factors include, but are not limited to, our ability to implement our strategic initiatives (including our ability to successfully complete, produce, market and/or sell 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 March 31, 2016, unless otherwise stated. You should carefully review this Form 10-Q in its entirety, including but not limited to our financial statements and the notes thereto, as well as our 10-K for the year ended September 30, 2015. 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 Quarterly Report, the terms "we", "our", and "us” refers to Onstream Media Corporation, a Florida corporation, and its subsidiaries.

 

3


 

 

PART I – FINANCIAL INFORMATION

Item 1 - Financial Statements

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31,

2016

September 30,

2015

(unaudited)

ASSETS

ASSETS:

Cash and cash equivalents (including $126,138 and $53,503, respectively,
     for cash of Variable Interest Entity)

$

285,396

$

316,887

Accounts receivable (including $466,560 and $152,481, respectively,

for accounts receivable of Variable Interest Entity), net of allowance

             

             

for doubtful accounts of $289,974 and $245,375, respectively

1,953,933

2,051,477

Prepaid expenses

109,732

97,275

Inventories and other current assets

 

58,364

 

47,708

Total current assets

2,407,425

2,513,347

PROPERTY AND EQUIPMENT, net

585,729

704,825

GOODWILL, net

3,207,314

3,207,314

OTHER NON-CURRENT ASSETS

 

220,407

 

212,794

Total assets

$

6,420,875

$

6,638,280

LIABILITIES AND EQUITY (DEFICIT)

LIABILITIES:

Accounts payable

$

2,105,004

$

2,185,462

Accrued liabilities (including $82,688 and $34,673, respectively,

for accrued liabilities of Variable Interest Entity)

1,838,452

1,404,959

Amounts due to directors and officers

1,092,070

936,132

Deferred revenue

86,172

127,220

Notes and leases payable –  current portion, net of discount

2,360,661

2,032,183

Convertible debentures –  current portion, net of discount

 

1,114,393

 

1,167,899

Total current liabilities

8,596,752

7,853,855

Notes and leases payable, net of current portion and discount

20,607

676,075

Convertible debentures, net of discount

 

-

 

1,156,925

Total liabilities

 

8,617,359

 

9,686,855

COMMITMENTS AND CONTINGENCIES

EQUITY (DEFICIT):

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

shares, 23,287,080 and 22,869,580 issued and outstanding, respectively

2,327

2,285

Common stock committed for issue – 2,891,667 and 2,771,667 shares,

                      

                      

respectively

268

268

     Additional paid-in capital

145,290,314 

145,188,932 

     Obligation to repurchase common shares

(221,804)

(221,804)

     Accumulated deficit

(150,395,089)

(149,018,256)

Total Onstream Media stockholders’ (deficit) equity

(5,323,984)

(4,048,575)

Noncontrolling owners’ interest in Variable Interest Entity

 

3,127,500

 

1,000,000

Total deficit

 

(2,196,484)

 

(3,048,575)

Total liabilities and deficit

$

6,420,875

$

6,638,280

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

 

4


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

Six Months Ended

 March 31,

Three Months Ended

 March 31,

2016

2015

2016

2015

REVENUE:

Audio and web conferencing

$

4,107,893

$

4,638,494

$

2,108,053

$

2,323,710

Webcasting

2,326,962

2,365,351

1,061,178

1,128,149

Network usage

828,973

849,492

407,561

419,928

DMSP and hosting

335,756

427,963

172,623

214,075

Other

 

8,352

 

40,554

 

5,729

 

25,411

Total revenue

 

7,607,936

 

8,321,854

 

3,755,144

 

4,111,273

COSTS OF REVENUE:

Audio and web conferencing

1,084,898

1,185,680

545,285

606,417

Webcasting

603,239

582,762

300,032

295,118

Network usage

392,544

408,964

195,663

208,629

DMSP and hosting

80,088

85,396

44,065

40,218

Other

 

-

 

-

 

-

 

-

Total costs of revenue

 

2,160,769

 

2,262,802

 

1,085,045

 

1,150,382

GROSS MARGIN

 

5,447,167

 

6,059,052

 

2,670,099

 

2,960,891

OPERATING EXPENSES:

General and administrative:

Compensation (excluding equity)

3,817,287

3,691,633

1,878,874

1,883,858

Compensation paid with common 

shares and other equity

139,593

202,776

64,297

121,138

Professional fees

364,856

486,723

192,174

183,871

Other

1,173,861

1,281,323

566,471

650,790

Depreciation and amortization

 

171,592

 

381,406

 

82,634

 

178,438

Total operating expenses

 

5,667,189

 

6,043,861

 

2,784,450

 

3,018,095

(Loss) income from operations

 

(220,022)

 

15,191

 

(114,351)

 

(57,204)

 

 

 

 

INTEREST AND OTHER EXPENSE, NET:

Interest expense

(650,792)

(920,594)

(217,941)

(439,649)

Other expense, net

 

(141,043)

 

(97,969)

 

(17,598)

 

(91,935)

Total interest and other expense, net

 

(791,835)

 

(1,018,563)

 

(235,539)

 

(531,584)

Net loss

(1,011,857)

(1,003,372)

(349,890)

(588,788)

Net income attributable to noncontrolling

                 

owners’ interest in Variable Interest Entity

 

(364,976)

 

(33,333)

 

(242,062)

 

(33,333)

Onstream Media shareholders’ net loss

$

(1,376,833)

$

(1,036,705)

$

(591,952)

$

(622,121)

Onstream Media shareholders’ net loss

per share – basic and diluted

$

(0.05)

$

(0.04)

$

(0.02)

$

(0.02)

Weighted average shares of common stock

outstanding – basic and diluted

 

26,032,093

 

24,974,214

 

26,178, 747

 

25,375,691

 

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

 

5


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

SIX MONTHS ENDED MARCH 31, 2016

(unaudited)

 

Obligation  to

Repurchase

Common

Shares

   

Noncontrolling 

owners’ interest

 in Variable

Interest Entity

Common Stock

Committed for Issue

Additional

Paid-In

Capital

Common Stock

Accumulated

Shares

 

Par

Shares

 

Par

Deficit

Total

Balance, September 30, 2015

22,869,580

$

2,285

2,771,667

$

268

$

145,188,932

$

(221,804)

$

(149,018,256)

$

1,000,000

$

(3,048,575)

Issuance of common shares for
     consultant services

200,000

20

-

-

37,979

-

-

-

37,999

Issuance of common shares

 

 

 

     for financing fees

217,500

22

120,000

63,403

-

-

-

63,425

Proceeds from sale of

     ownership interests in  

     Variable Interest Entity

-

-

-

-

-

-

-

2,127,500

2,127,500

Distributions to owners of

 

     Variable Interest Entity

-

-

-

-

-

  

-

-

(364,976)

(364,976)

Net (loss) income

 -

-

-

-

 -

-

-

364,976

(1,011,857)

Balance, March 31, 2016

23,287,080

$

2,327

2,891,667

$

268

$

145,290,314

$

(221,804)

$

(150,395,089)

$

3,127,500

$

(2,196,484)

 

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

 

6


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

Six Months  Ended

March  31,

2016

 2015

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

$

(1,011,857)

$

(1,003,372)

Adjustments to reconcile net loss to net cash

provided by operating activities:

Depreciation and amortization

171,592

381,406

Professional fee expenses paid with equity, including amortization

of deferred expenses for prior period issuances

19,000

41,342

Compensation expenses paid with common shares and other equity

139,593

202,776

Amortization of discount on convertible debentures

248,204

274,755

Amortization of discount on notes payable

46,862

145,229

Bad debt and other expenses

 

186,556

 

112,642

Net cash (used in) provided by operating activities, before changes

in current assets and liabilities other than cash

(200,050)

154,778

Changes in current assets and liabilities other than cash:

Decrease (increase) in accounts receivable

52,870

(168,009)

Decrease (increase) in prepaid expenses

11,531

(19,455)

(Increase) decrease in inventories and other current assets

(10,657)

5,322

Increase in accounts payable, accrued liabilities

    and amounts due to directors and officers

193,132

405,873

(Decrease) increase in deferred revenue

 

(41,050)

 

29,661

Net cash provided by operating activities

 

5,776

 

408,170

CASH FLOWS FROM INVESTING ACTIVITIES:

Acquisition of property and equipment

 

(52,496)

 

(201,504)

Net cash (used in) investing activities

 

(52,496)

 

(201,504)

(Continued)

 

7

 


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(Continued)

 

Six Months Ended

March  31,

2016

 2015

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from sale of ownership interests in

Variable Interest Entity, net of expenses

$

2,161,867

$

931,110

Proceeds from notes payable, net of expenses

157,000

42,570

Proceeds from convertible debentures, net of expenses

17,000

23,783

Distributions to owners of Variable Interest Entity

(364,976)

(33,333)

Repayment of notes and leases payable

(517,662)

(450,236)

Repayment of convertible debentures

 

(1,438,000)

 

(421,746)

Net cash provided by financing activities

 

15,229

 

92,148

NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

(31,491)

298,814

CASH AND CASH EQUIVALENTS, beginning of period

 

316,887 

 

389,015

CASH AND CASH EQUIVALENTS, end of period

$

285,396

$

687,829

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Cash payments for interest

$

355,726

$

500,610

      

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Issuance of common shares for consultant services

$

37,999

$

75,600

Issuance of common shares for employee services

$

-

$

48,750

Issuance of common shares for financing fees

$

63,425

$

30,500

Issuance of Sigma Note upon cancellation of Sigma Notes 1 and 2

$

-

$

1,358,000

 

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

 

8

 


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 1: NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business

 

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

 

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

 

The EDNet division, which operates primarily from San Francisco, California, provides connectivity (in the form of high quality audio and multimedia data communications) within the entertainment and advertising industries through its managed network, which encompasses production and post-production companies, advertisers, producers, directors, and talent. EDNet generates revenues primarily from network access and usage fees as well as sale, rental and installation of equipment.

 

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

 

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

 

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

 

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Liquidity

 

Our consolidated financial statements have been presented on the basis that we are an ongoing concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have incurred losses since our inception, and have an accumulated deficit of approximately $150.4 million as of March 31, 2016. 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, we had a net loss of approximately $8.4 million, although cash provided by operating activities for that period was approximately $343,000. For the six months ended March 31, 2016, we had a net loss of approximately $1.0 million, although cash provided by operating activities for that period was approximately $6,000. Although we had cash of approximately $285,000 at March 31, 2016, we had a working capital deficit of approximately $6.2 million at that date. This $6.2 million deficit includes approximately $1.7 million of debt outstanding under the Line which we recently renewed through December 31, 2017, as discussed in more detail below. This deficit also includes certain liabilities which may be settled with equity, may be subject to reduction through negotiation and/or may be subject to extension of payments due past March 31, 2017.

 

For the year ended September 30, 2015, our revenues were not sufficient to fund our total cash expenditures (for operating and investing activities plus the scheduled debt principal payments and distributions to the VIE owners, both classified as financing activities) for that period and as a result we obtained additional funding from the March 2015 sale of certain of our audio conferencing customers (and the related future business to those customers) to Partners – see note 6 - as well as restructuring the payment terms of the Sigma Notes 1 and 2, the Sigma Note and certain other notes – see note 4. For the six months ended March 31, 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 sale of certain of our audio conferencing customers (and the related future business to those customers) to Partners – see note 6 - as well as restructuring the payment terms of the Sigma Note and certain other notes – see note 4.

 

During the period from April 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 March 31, 2017 by approximately $580,000, as compared to the twelve months ended March 31, 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 March 31, 2017, as compared to the twelve months ended March 31, 2016.

 

Based on historical results as well as results since March 31, 2016 to date, we do not expect that our revenues will be sufficient to fund our total cash expenditures (for operating and investing activities plus the scheduled debt principal payments and distributions to the VIE owners) for the twelve month period ended March 31, 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, the Funding Letter and/or the monetization of our patents, all sources of capital as discussed below. In the event that we are unable to cover this shortfall, including curing any potential defaults with respect to the Line, as discussed in note 4, our auditors have advised us that a going concern qualification to their opinion on our September 30, 2016 financial statements may be necessary.

 

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Liquidity (continued)

 

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.

 

On April 30, 2015, we received a funding commitment letter (the “Funding Letter”) from J&C Resources, Inc. (“J&C”), agreeing to provide us, within twenty (20) days after our notice on or before January 5, 2016, aggregate cash funding of up to $800,000. Such notice was not given by us, but on April 30, 2016, we exercised our option for a one year extension of the Funding Letter, including an extension of the notice deadline to January 5, 2017. This Funding Letter was obtained solely to demonstrate our ability to obtain short-term funds in the event other funding sources are not available. Mr. Charles Johnston, a former ONSM director, is the president of J&C. Cash provided under the Funding Letter, as extended, would be in exchange for our issuance of (a) a note or notes with interest payable monthly at 15% per annum and principal payable on the earlier of a date twelve months from funding or July 15, 2017 and (b) 10.0 million unregistered common shares, which shares would be prorated in the case of partial funding. The note or notes would be unsecured and subordinated to all of our other debts, except to the extent such the terms of such debts would allow pari passu status. Furthermore, the note or notes would not be subject to any provisions, other than with respect to priority of payments or collateral, of our other debts. Upon receipt by us of funds in excess of $5.0 million as a result of a single transaction for the sale of all or a part of our operations or assets, this Funding Letter will be terminated. The consideration for the Funding Letter was $25,000, which we have paid, and the consideration for the Funding Letter extension is $25,000, to be withheld from any proceeds lent thereunder but in any event due no later than September 1, 2016 (although we have not paid this amount as of October 28, 2016).

 

On March 27, 2007 we acquired the assets, technology and patents pending of privately owned Auction Video, Inc., a Utah corporation, and Auction Video Japan, Inc., a Tokyo-Japan corporation (collectively, “Auction Video”). In connection with our subsequent pursuit of approval of these patents pending (i) on October 13, 2015, the USPTO issued to us U.S. Patent Number 9,161,068 (the “First Granted Patent”) with a Patent Term Adjustment of 2,377 days, resulting in a September 26, 2030 expiration date, provided all maintenance fees are paid and (ii) on October 11, 2016, the USPTO issued to us U.S. Patent Number 9,467,728 (the “Second Granted Patent”) with a Patent Term Adjustment of 1,362 days, resulting in a December 16, 2027 expiration date, provided all maintenance fees are paid – see note 2 for details. Our management believes that the First and Second Granted Patents, as well as two other related patents still pending, may have significant value, although this cannot be assured, and is presently exploring the financial potential of the First and Second Granted Patents and the patents pending.

 

Since December 2007, we have had a line of credit arrangement with a financial institution under which we could borrow up to an aggregate of $2.0 million for working capital, collateralized by our accounts receivable and certain other related assets and the amount of such borrowing being further subject to the amount, aging and concentration of such receivables. On February 10, 2016, we entered into a loan modification agreement  which extended the term of this line of credit arrangement through December 31, 2017– see note 4 for further details of this arrangement.

 

11


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Liquidity (continued)

 

The resolution of debt and other obligations becoming due within a few months after the issuance of these financial statements represent an imminent issue that will require significant cash resources in the near-term. These include (i) the Sigma Note and the Rockridge Note, secured obligations which will require principal payments on December 31, 2016 aggregating $1.0 million and (ii) other notes payable, mostly unsecured, which will require principal payments of $187,000 on December 31, 2016 and $625,000 on January 15, 2017. See note 4 for further details of these obligations. In the event we exercised our rights under the extended Funding Letter, we would need to repay the proceeds borrowed thereunder on the earlier of a date twelve months from funding or July 15, 2017.

 

We are closely monitoring our revenue and other business activity to determine if and when further cost reductions, the raising of additional capital or other activity is considered necessary. The Executives have deferred a portion of their compensation in the past, to the extent we needed that cash to meet other operating expenses – see note 5 for details – and have agreed to defer a portion of their compensation to the extent we need that cash to enable us to be a going concern through September 30, 2017.

 

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

 

Basis of Consolidation

 

The accompanying consolidated financial statements include the accounts of Onstream Media Corporation and its subsidiaries - Infinite Conferencing, Inc., Entertainment Digital Network, Inc., OSM Acquisition, Inc., Onstream Conferencing Corporation, AV Acquisition, Inc., Auction Video Japan, Inc., HotelView Corporation and Media On Demand, Inc. They also include the accounts of Infinite Conferencing Partners LLC (“Partners”), a variable interest entity (VIE) – see note 6. All significant intra-entity accounts and transactions have been eliminated in consolidation.  

 

Cash and Cash Equivalents

 

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

 

Concentration of Credit Risk

 

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

 

12


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Bad Debt Reserves

 

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

 

Inventories


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

 

Fair Value Measurements

 

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

 

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

 

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

 

13


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Fair Value Measurements (continued)

 

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

 

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

 

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

 

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

 

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

 

The carrying values and the estimated fair values of the Instruments are as follows as of March 31, 2016 and September 30, 2015:

 

March 31, 2016

            September 30, 2015

Carrying

Value

Estimated

Fair Value

Carrying

Value

Estimated

Fair Value

Sigma Note

$

524,000

$

478,000

$

1,540,377

$

1,345,000

Rockridge Note

400,000

346,000

400,000

352,000

Fuse Note 

121,873

87,000

211,225

185,000

Working Capital Notes

188,538

171,000

434,502

389,000

J&C Note

157,000

135,000

-

-

Subordinated Notes

30,000

22,000

192,500

162,000

Intella2 Investor Notes

301,599

282,000

406,667

371,000

USAC Note

 

135,466

 

125,000

 

187,650

 

160,000

Total Instruments

$

1,858,476

$

1,646,000

$

3,372,921

$

2,964,000

 

14


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Goodwill and other intangible assets

 

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

 

Long-lived assets

 

Property and equipment

 

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

 

Software

 

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

 

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

 

15


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Revenue Recognition

 

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

 

The Infinite and OCC divisions of the Audio and Web Conferencing Services Group generate revenues from audio conferencing and web conferencing services, plus recording and other ancillary services.  Infinite and OCC own telephone bridges used for audio conference calls by its customers, which are generally charged for those calls based on a per-minute usage rate. Infinite provides online webconferencing services to its customers, charging either a per-minute rate or a monthly subscription fee allowing a certain level of usage. Audio conferencing and web conferencing revenue is recognized based on the timing of the customer’s use of those services.

 

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

 

EDNet sells various audio codecs and equipment which enables its customers to collaborate with other companies or with other locations.  As such, revenue is recognized for the sale of equipment when the equipment is installed or upon signing of a contract after the equipment is installed and successfully operating.  All sales are final and there are no refund rights or rights of return. EDNet rents some equipment to customers under agreements with fixed terms that are accounted for as operating leases.  The rental revenue is recognized ratably over the life of the lease and the related equipment is depreciated over its estimated useful life.

 

The Webcasting division of the Digital Media Services Group recognizes revenue from live and on-demand webcasts at the time an event is accessible for streaming over the Internet.  Webcasting services are provided to customers using our proprietary streaming media software, tools and processes. Customer billings are typically based on (i) the volume of data streamed at rates agreed upon in the customer contract or (ii) a set monthly fee. Since the primary deliverable for the webcasting group is a webcast, returns are inapplicable.  If we have difficulty in producing the webcast, we may reduce the fee charged to the customer.  Historically these reductions have been immaterial, and are recorded in the month the event occurs.

 

Services for live webcast events are usually sold for a single price that includes on-demand webcasting services in which we host an archive of the webcast event for future access on an on-demand basis for periods ranging from one month to one year. However, on-demand webcasting services are sometimes sold separately without the live event component and we have referred to these separately billed transactions as verifiable and objective evidence of the amount of our revenues related to on-demand services.  In addition, we have determined that the material portion of all views of archived webcasts take place within the first ten days after the live webcast.

 

16

 


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Revenue Recognition (continued)

 

Based on our review of the above data, we have determined that the material portion of our revenues for on-demand webcasting services are recognized during the period in which those services are provided, which complies with the provisions of the Revenue Recognition topic of the ASC. Furthermore, we have determined that the maximum potentially deferrable revenue from on-demand webcasting services charged for but not provided as of March 31, 2016 and September 30, 2015 was immaterial in relation to our recorded liabilities at those dates.

 

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

 

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

 

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

 

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

 

Income Taxes

 

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

 

17


 

 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Income Taxes (continued)

 

We have approximately $86.8 million in Federal net operating loss carryforwards (NOLs) as of March 31, 2016, which expire in fiscal years 2018 through 2035, but also may be limited as to our future use as the result of previous or future ownership changes and other limitations. We had a deferred tax asset of approximately $32.6 million and $32.9 million as of March 31, 2016 and September 30, 2015, respectively, primarily resulting from these NOLs. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against those deferred tax assets. A full valuation allowance has been recorded related to the deferred tax asset due to the uncertainty of realizing the benefits of certain NOLs before they expire. Our management will continue to assess the likelihood that the deferred tax asset will be realizable and the valuation allowance will be adjusted accordingly. As a result of the NOLs discussed above, no income tax benefit was recorded in our consolidated statement of operations as a result of the net tax losses, calculated on a book basis, for the six and three months ended March 31, 2016 and 2015.  

 

The primary differences between the net loss or income for book versus for tax purposes are the following items expensed for book versus for tax purposes – amortization of certain loan discounts, amortization and/or impairment adjustments of goodwill and certain acquired intangible assets, expenses for stock options issued for consultant and employee services but not exercised by the recipients, expenses related to shares issued or committed to be issued for consultant and employee services, until such shares are issued and eligible for resale by the recipient, and interest accretion expense related to liabilities such as share repurchases and asset purchases. In addition, proceeds from sales of ownership interests in Partners, as well as distributions in connection with those interests, while reflected on our books as equity transactions are treated as current income and expense items for income tax purposes - see note 6 for details.

 

The Income Taxes topic of the ASC prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. However, as of March 31, 2016 and September 30, 2015 we have not taken, nor recognized the financial statement impact of, any material tax positions, as defined above. Although our policy is to recognize, as non-operating expense, interest or penalties related to income taxes when such payments become probable, we had not recognized any such material items in our statement of operations for the six and three months ended March 31, 2016 and 2015. The tax years ended September 30, 2012 and thereafter remain subject to examination by Federal and various state tax jurisdictions.

 

In July 2013, the FASB issued ASU 2013-11 (Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists), which provides that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward (i) is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position or (ii) the applicable tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, in which case the unrecognized tax benefit should be presented in the financial statements as a liability. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted.  Our implementation of this guidance effective with our fiscal year ended September 30, 2015 has had no material impact on our consolidated financial statements.

 

18


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Net Loss per Share

 

For the six and three months ended March 31, 2016 and 2015, basic net loss per share is based on the net loss divided by the basic weighted average number of shares of common stock outstanding, including the impact of common shares committed to be, but not yet, issued for compensation to certain Executives and for a loan origination fee - 2,891,667 and 2,866,667 as of March 31, 2016 and 2015, respectively – see notes 4 and 5.

 

Since our statement of operations for the six and three months ended March 31, 2016 and 2015 reflect net losses, the effect of common stock equivalents for those periods would be anti-dilutive and thus all such equivalents were excluded from the calculation of basic weighted average shares outstanding for those periods. The total outstanding options and warrants excluded from the calculation of weighted average shares outstanding represented underlying common shares of 100,000 and 375,000 as of March 31, 2016 and 2015, respectively.

 

The convertible securities outstanding at March 31, 2016 but excluded from the calculation of weighted average shares outstanding for the six and three months then ended are as follows: (i) the $600,000 outstanding balance of the Sigma Note, which could potentially convert into up to 2.0 million shares of our common stock, subject to certain conditions – see note 4, (ii) the $400,000 outstanding balance of the Rockridge Note, which could potentially convert into up to 166,667 shares of our common stock, (iii) the $100,000 portion of the outstanding balance of the Fuse Note, which could potentially convert into up to 200,000 shares of our common stock and (iv)  the $100,000 portion of the outstanding balance of the Intella2 Fuse Note, which could potentially convert into up to 200,000 shares of our common stock.

 

In addition, the convertible securities outstanding at March 31, 2015 but excluded from the calculation of weighted average shares outstanding for the six and three months then ended are as follows: (i) the $1,358,000 outstanding balance of the Sigma Note, which could have potentially converted into up to 4,526,667 shares of our common stock, subject to certain conditions – see note 4, (ii) the $400,000 outstanding balance of the Rockridge Note, which could potentially convert into up to 166,667 shares of our common stock, (iii) the $200,000 portion of the outstanding balance of the Fuse Note, which could have potentially converted into up to 400,000 shares of our common stock and (iv)  the $200,000 portion of the outstanding balance of the Intella2 Fuse Note, which could have potentially converted into up to 400,000 shares of our common stock.

 

Compensation and related expenses

 

Compensation costs for employees considered to be direct labor are included as part of webcasting costs of revenue. Certain compensation costs for employees involved in development of software for internal use, as discussed under Software above, are capitalized. Accrued liabilities and amounts due to directors and officers includes, in aggregate, approximately $1.4 million and $1.3 million as of March 31, 2016 and September 30, 2015, respectively, related to salaries, commissions, taxes, vacation and other benefits earned but not paid as of those dates. Certain of the amounts due to directors and officers may be satisfied with equity – see note 5.

 

19


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Equity Compensation to Employees, Directors and Consultants

 

We have a stock based compensation plan (the “Plan”) for our employees, directors and consultants. In accordance with the Compensation – Stock Compensation topic of the ASC, we measure compensation cost for all share-based payments at fair value, using the modified-prospective-transition method. Under this method, compensation cost recognized for the years ended September 30, 2015 and 2014 include compensation cost for all share-based payments granted subsequent to September 30, 2006, as follows: for stock options, calculated using the Black-Scholes model, based on the estimated grant-date fair value and for common shares, calculated based on fair value on the date such shares were authorized and/or determined to be earned. Such compensation cost is allocated over the applicable vesting and/or service period. There were no Plan options granted during the six and three months ended March 31, 2016 and 2015.

 

We have granted Non-Plan options to consultants and other third parties. These options have been accounted for under the Equity topic (Equity-Based Payments to Non-Employees subtopic) of the ASC, under which the fair value of the options at the time of their issuance, calculated using the Black-Scholes model, is reflected as a prepaid expense in our consolidated balance sheet at that time and expensed as professional fees during the time the services contemplated by the options are provided to us. There were no Non-Plan options granted during the six and three months ended March 31, 2016 and 2015.

 

See note 8 for additional information related to share issuances under the Plan and additional information related to all stock option issuances.

 

Advertising and marketing

 

Advertising and marketing costs, which are charged to operations as incurred and classified in our financial statements under Professional Fees or under Other General and Administrative Operating Expenses, were approximately $363,000 and $444,000 for the six months ended March 31, 2016 and 2015, respectively, and approximately $166,000 and $227,000 for the three months ended March 31, 2016 and 2015, respectively. These amounts include third party marketing consultant fees and third party sales commissions, but do not include commissions or other compensation to our employee sales staff.

 

Interest expense and amortization of debt discount

 

Interest expense is primarily comprised of (i) the interest earned by our lenders calculated based on applying the stated interest rates, on a pro-rata periodic basis, to the applicable outstanding principal balances plus (ii) the periodic amortization of the amount of other fees and expenses incurred in connection with obtaining or maintaining our debt, which fees and expenses are initially recorded by us as debt discount and presented by us on the balance sheet as a reduction of the outstanding principal balance. The amortization of discount is based on the effective percentage rate required to fully amortize the discount over the applicable remaining term of the debt. Periodic interest, as well as the other fees and expenses included in debt discount as discussed above, include amounts payable in cash and/or equity. The other fees and expenses may be payable to the lender, to third parties engaged by the lender or to third parties engaged by us.

 

20


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Comprehensive Income or Loss

 

We have recognized no transactions generating comprehensive income or loss that are not included in our net loss, and accordingly, net loss or income equals comprehensive loss or income for all periods presented.

 

Accounting Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates are used when accounting for allowances for doubtful accounts, inventory reserves, depreciation and amortization lives and methods, goodwill and other impairment allowances, income taxes and related reserves and contingent liabilities, including contingent purchase prices for acquisitions, contingent compensation arrangements and USF contributions. Such estimates are reviewed on an ongoing basis and actual results could be materially affected by those estimates.

 

Interim Financial Data

 

In the opinion of our management, the accompanying unaudited interim financial statements have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission. These interim financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with our annual financial statements as of September 30, 2015. These interim financial statements have not been audited. However, our management believes the accompanying unaudited interim financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary to present fairly our consolidated financial position as of March 31, 2016, the results of our operations for the six and three months ended March 31, 2016 and 2015 and our cash flows for the six months ended March 31, 2016 and 2015. The results of operations and cash flows for the interim periods are not necessarily indicative of the results of operations or cash flows that can be expected for the year ending September 30, 2016.

 

Effects of Recent Accounting Pronouncements

 

In May 2014, the FASB issued ASU 2014-09 (Revenue from Contracts with Customers (Topic 606)), which requires an entity to recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance addresses in particular contracts with more than one performance obligation as well as the accounting for some costs to obtain or fulfill a contract with a customer and provides for additional disclosures with respect to revenues and cash flows arising from contracts with customers. In May 2016, the FASB issued ASU 2016-12, to clarify what the FASB called “certain narrow aspects of Topic 606”, such pronouncement having the same effective date as ASU 2014-09. In August 2015, the FASB issued ASU 2015-14, primarily for the purpose of deferring by one year the effective dates set forth in ASU 2014-09. After giving effect to that deferral, with respect to public entities, this update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, although early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. We believe that our implementation of this guidance for our fiscal year ended September 30, 2019, and interim periods within that fiscal year, will have no material impact on our consolidated financial statements.

 

21


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Effects of Recent Accounting Pronouncements (continued)

 

In June 2014, the FASB issued ASU 2014-12 (Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period), which requires that a performance target which affects vesting and which could be achieved after the requisite service period be treated as a performance condition. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted.  In March 2016, the FASB issued ASU 2016-09 (Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting), intended to simplify income tax reporting, classification as either equity or liabilities and classification on the cash flow statement for employee share-based payment transactions. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, with early adoption permitted. We are currently evaluating the impact of the implementation of the above guidance on our consolidated financial statements.

 

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

 

In February 2015, the FASB issued ASU 2015-02 (Consolidation (Topic 810): Amendment to the Consolidation Analysis) – see note 6.

 

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

 

22


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Effects of Recent Accounting Pronouncements (continued)

 

In February 2016, the FASB issued ASU 2016-02 (Leases (Topic 842)), which requires that the assets and liabilities arising from leases, including operating leases, be recognized on the balance sheet. For operating leases, a lessee is required to do the following: (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet, (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis and (iii) classify all cash payments within operating activities in the statement of cash flows. However, for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted.  Although we are currently evaluating the impact of the implementation of this guidance, we expect that such implementation could have a material impact on our consolidated financial statements – see note 4 with respect to our current obligations under operating leases.

 

In June 2016, the FASB issued ASU 2016-13 (Financial Instruments – Credit Losses (Topic 326)), which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of information to inform credit loss estimates, including not only historical experience and current conditions, but reasonable and supportable forecasts. The financial assets affected by this pronouncement include trade receivables. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted as of fiscal years beginning after December 15, 2018. This update is to be first applied via a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). We are currently evaluating the impact of the implementation of the above guidance on our consolidated financial statements.

 

23

 


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 2: GOODWILL AND OTHER ACQUISITION-RELATED INTANGIBLE ASSETS

 

Information regarding the Company’s goodwill is as follows:

 

March 31,

September 30,

2016

2015

Infinite Conferencing

$

2,520,887

$

2,520,887

Intella2

 

161,767

 

161,767

    Audio/web conferencing

      reporting unit

2,682,654

2,682,654

EDNet

521,444

521,444

Auction Video

 

3,216

 

3,216

    Total goodwill

$

3,207,314

$

3,207,314

 

Since all other acquisition-related intangible assets had been fully amortized or written off as of September 30, 2015, they are not presented in the above table, but they are addressed as applicable in the discussion of each acquisition below.

 

Infinite Conferencing – April 27, 2007

 

On April 27, 2007 we completed the acquisition of Infinite Conferencing LLC (“Infinite”), a Georgia limited liability company. The transaction, by which we acquired 100% of the membership interests of Infinite, was structured as a merger by and between Infinite and our wholly-owned subsidiary, Infinite Conferencing, Inc. (the “Infinite Merger”). The primary assets acquired, in addition to Infinite’s ongoing audio and web conferencing operations, were accounts receivable, equipment, internally developed software, customer lists, trademarks, URLs (internet domain names), favorable supplier terms and employment and non-compete agreements. The consideration for the Infinite Merger was a combination of $14 million in cash and restricted shares of our common stock valued at approximately $4.0 million, for an aggregate purchase price of approximately $18.2 million, including transaction costs.

 

The fair value of certain intangible assets (internally developed software, customer lists, trademarks, URLs (internet domain names), favorable contractual terms and employment and non-compete agreements) acquired as part of the Infinite Merger was determined by our management at the time of the merger. This fair value was primarily based on the discounted projected cash flows related to these assets for the three to six years immediately following the merger on a stand-alone basis without regard to the Infinite Merger, as projected by our management and Infinite’s management. The discount rate utilized considered equity risk factors (including small stock risk) as well as risks associated with profitability and working capital, competition, and intellectual property. The projections were adjusted for charges related to fixed assets, working capital and workforce retraining. We have amortized these assets over useful lives ranging from 3 to 6 years - as of September 30, 2013 all of these assets had been fully amortized and removed from our balance sheet.

 

24

 


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Infinite Conferencing – April 27, 2007 (continued)

 

The approximately $18.2 million purchase price exceeded the fair values we assigned to Infinite’s tangible and intangible assets (net of liabilities at fair value) by approximately $12.0 million, which we recorded as goodwill as of the purchase date. As of December 31, 2008, this initially recorded goodwill was determined to be impaired and a $900,000 adjustment was made to reduce its carrying value to approximately $11.1 million.  A similar adjustment of $200,000 was made as of that date to reduce the carrying value of certain intangible assets acquired as part of the Infinite Merger. As of December 31, 2009, the Infinite goodwill was determined to be further impaired and a $2.5 million adjustment was made to reduce the carrying value of that goodwill to approximately $8.6 million. A similar adjustment of $600,000 was made as of that date to reduce the carrying value of certain intangible assets acquired as part of the Infinite Merger. The Infinite goodwill was determined to be further impaired as of September 30, 2013 and a $2.2 million adjustment was made to reduce the carrying value of that goodwill to approximately $6.4 million as of that date. As a result of our interim evaluation performed as of June 30, 2015, and further adjustments made based on our annual evaluation performed as of September 30, 2015, the Infinite goodwill was determined to be further impaired and an approximately $3.9 million adjustment was made to reduce the carrying value of that goodwill to approximately $2.5 million as of September 30, 2015 and March 31, 2016 – see “Testing for Impairment” below.

 

Intella2 – November 30, 2012

 

On November 30, 2012 we acquired certain assets and operations of Intella2 Inc., a San Diego-based communications company (“Intella2”). The acquisition included a list of over 2,500 customers as well as software licenses, equipment and network infrastructure and a non-compete. The service capabilities acquired from Intella2 included audio conferencing, web conferencing, text messaging, and voicemail. The Intella2 assets and operations were purchased by Onstream Conferencing Corporation, our wholly owned subsidiary, and are being managed by our Infinite Conferencing division, which specializes in audio and web conferencing.

 

The approximately $1.4 million purchase price exceeded the fair values we assigned to Intella2’s tangible and intangible assets (net of liabilities at fair value) by approximately $412,000, which we recorded as goodwill. As a result of our interim evaluation performed as of June 30, 2015, and further adjustments made based on our annual evaluation performed as of September 30, 2015, an approximately $250,000 adjustment was made to reduce the carrying value of that goodwill to approximately $162,000 as of September 30, 2015 and March 31, 2016 – see “Testing for Impairment” below.

 

25


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Intella2 – November 30, 2012 (continued)

 

The fair value of certain intangible assets (customer list, trade names, URLs (internet domain names) and employment and non-compete agreements) acquired from Intella2 was determined by our management to be approximately $760,000 at the time of the acquisition. This fair value was primarily based on the discounted projected cash flows related to these assets for the three to seven years immediately following the acquisition on a stand-alone basis without regard to the Intella2 acquisition, as projected by our management and Intella2’s former management. The fair value of certain tangible assets (primarily equipment) acquired as part of the Intella2 acquisition was determined by our management to be approximately $246,000 at the time of the acquisition. This fair value was primarily based on management’s inspection of and evaluation of the condition and utility of the equipment, as well as comparable market values of similar used equipment when available. We were depreciating and amortizing these tangible and intangible assets over useful lives ranging from three to seven years through June 30, 2015 and then as a result of our interim evaluation performed as of June 30, 2015, and further adjustments made based on our annual evaluation performed as of September 30, 2015, an approximately $446,000 write-down of the remaining balance of the Intella2 intangible assets, primarily the customer list, was recorded – see “Testing for Impairment” below.

 

Auction Video – March 27, 2007

 

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

 

We allocated the Auction Video purchase price to the identifiable tangible and intangible assets acquired, based on a determination of their reasonable fair value as of the date of the acquisition. The technology and patent pending related to the video ingestion and flash transcoder, the Auction Video customer lists, future cost savings for Auction Video services and the consulting and non-compete agreements entered into with the former executives and owners of Auction Video were valued in aggregate at $1.4 million and were amortized over various lives between two to five years commencing April 2007 -  as of September 30, 2013 all of these assets had been fully amortized and removed from our balance sheet. $600,000 was assigned as the value of the video ingestion and flash transcoder and added to the DMSP’s carrying cost for financial statement purposes – see note 3.

 

26


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Auction Video – March 27, 2007 (continued)

 

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”). The patents address live streaming of audio and/or video from multiple devices to a storage location, such as the Internet or cloud, and the ability to access and retrieve the audio and/or video to multiple devices, whereby the content is not stored on the device.

 

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

 

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

 

27


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Auction Video – March 27, 2007 (continued)

 

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.

 

28


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Acquired Onstream – December 23, 2004

 

On December 23, 2004, privately held Onstream Media Corporation (“Acquired Onstream”) was merged with and into our wholly owned subsidiary OSM Acquisition, Inc. (the “Onstream Merger”). At that time, all outstanding shares of Acquired Onstream capital stock and options not already owned by us (representing 74% ownership interest) were converted into restricted shares of our common stock plus options and warrants to purchase our common stock. We also issued common stock options to directors and management as additional compensation at the time of and for the Onstream Merger, accounted for at the time in accordance with Accounting Principles Board Opinion 25 (which accounting pronouncement has since been superseded by the ASC).

 

Acquired Onstream was a development stage company founded in 2001 that began working on a feature rich digital asset management service offered on an application service provider (“ASP”) basis, to allow corporations to better manage their digital rich media without the major capital expense for the hardware, software and additional staff necessary to build their own digital asset management solution. This service was intended to be offered via the Digital Media Services Platform (“DMSP”), which was initially designed and managed by Science Applications International Corporation (“SAIC”), one of the country's foremost IT security firms, providing services to all branches of the federal government as well as leading corporations.

 

The primary asset acquired in the Onstream Merger was the partially completed DMSP, recorded at fair value as of the December 23, 2004 closing, in accordance with the Business Combinations topic of the ASC. The fair value was primarily based on the discounted projected cash flows related to this asset for the five years immediately following the acquisition on a stand-alone basis without regard to the Onstream Merger, as projected at the time of the acquisition by our management and Acquired Onstream’s management. The discount rate we utilized considered equity risk factors (including small stock risk and bridge/IPO stage risk) plus risks associated with profitability/working capital, competition, and intellectual property. The projections were adjusted for charges for fixed assets, working capital and workforce retraining. See note 3.

 

The approximately $10.0 million purchase price we paid for 100% of Acquired Onstream exceeded the fair values we assigned to Acquired Onstream’s tangible and intangible assets (net of liabilities at fair value) by approximately $8.4 million, which we recorded as goodwill as of the purchase date. As of December 31, 2008, this initially recorded goodwill was determined to be impaired and a $4.3 million adjustment was made to reduce the carrying value of that goodwill to approximately $4.1 million. As of September 30, 2010, the Acquired Onstream goodwill was determined to be further impaired and a $1.6 million adjustment was made to reduce the carrying value of that goodwill to approximately $2.5 million. As of September 30, 2011, the Acquired Onstream goodwill was determined to be further impaired and a $1.7 million adjustment was made to reduce the carrying value of that goodwill to approximately $821,000. As of September 30, 2012, the Acquired Onstream goodwill was determined to be further impaired and a $550,000 adjustment was made to reduce the carrying value of that goodwill to approximately $271,000. As a result of our interim evaluation performed as of June 30, 2015, and further adjustments made based on our annual evaluation performed as of September 30, 2015, the Acquired Onstream goodwill was determined to be further impaired and the remaining carrying value of that goodwill, approximately $271,000, was written off as of that date – see “Testing for Impairment” below.

 

29


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

EDNet – July 25, 2001

 

Prior to 2001, we recorded goodwill of approximately $750,000 resulting from the acquisition of 51% of EDNet, which we were initially amortizing on a straight-line basis over 15 years. As of July 1, 2001, we adopted SFAS 142, Goodwill and Other Intangible Assets, which addressed the financial accounting and reporting standards for goodwill and other intangible assets subsequent to their acquisition. This standard required that goodwill no longer be amortized, and instead be tested for impairment on a periodic basis. When we acquired the remaining 49% of EDNet on July 25, 2001 the transaction generated approximately $2.3 million in goodwill which when combined with the unamortized portion of the initial goodwill resulted in total EDNet goodwill of approximately $2.8 million. Based on our goodwill impairment tests as of September 30, 2002 we determined that the EDNet goodwill was impaired by approximately $728,000 and therefore the goodwill was written down to approximately $2.1 million. Based on our goodwill impairment tests as of September 30, 2004 we determined that the EDNet goodwill was impaired by approximately $470,000 and therefore the goodwill was written down to approximately $1.6 million. Based on our goodwill impairment tests as of September 30, 2005 we determined that the EDNet goodwill was impaired by approximately $330,000 and therefore the goodwill was written down to approximately $1.3 million. As a result of our interim evaluation performed as of June 30, 2015, as well as our annual evaluation performed as of September 30, 2015, the EDNet goodwill was determined to be further impaired and an approximately $750,000 adjustment was made to reduce the carrying value of that goodwill to approximately $521,000 as of that date and as of March 31, 2016 – see “Testing for Impairment” below.

 

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

 

Testing for Impairment

 

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

 

30


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Testing for Impairment (continued)

 

The provisions of ASC 350-20-35-3 in certain cases would allow us to forego the two-step impairment testing process based on certain qualitative evaluation.  However, based on our assessment as of September 30, 2015 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.

 

Prior to the June 30, 2015 interim evaluation and the September 30, 2015 annual evaluation, 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 evaluation, 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 evaluation, 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.

 

31


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Testing for Impairment (continued)

 

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

 

During the time period from February 2015 through June 2016, we received cash proceeds for our sales, in tranches, of defined subsets of Infinite Conferencing’s (“Infinite”) audio conferencing customers (and the related future business to those customers) to Infinite Conferencing Partners LLC, a Florida limited liability company (“Partners”). In accordance with management fee agreements we entered into with Partners in connection with these sales, we are required to continue servicing the sold accounts and absorb all related costs of doing so but we also receive the Partners’ revenues from these sold accounts, less a deduction for the Partners’ guaranteed return - see note 6 for a detailed discussion of these transactions. For purposes of the September 30, 2015 evaluation, we included the Partners’ revenues and all related operating costs incurred by us in our DCF projections for the audio and web conferencing reporting unit, but considered the amount deducted for the Partners’ guaranteed return to not be specific to that unit’s operations but rather to be analogous to a corporate financing cost and thus this cash outflow was not included as part of our DCF projections for the audio and web conferencing reporting unit.

 

For the September 30, 2015 evaluation, our management, with the assistance of the third-party valuation services firm, determined the appropriately comparable publicly reporting companies and public market transactions used by it to perform the MV analyses. Factors taken into consideration in selecting the appropriately comparable companies included the relative size of the candidate company, measured by revenues and assets, as compared to our reporting units and the extent to which the stated business activities of the candidate company align with the primary business activities of our reporting units. Once comparable companies and transactions were identified, the valuation calculation was based on multiples of revenues and, to the extent applicable, EBITDA (earnings before interest, taxes, depreciation and amortization). 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.

 

32


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

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

 

Testing for Impairment (continued)

 

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

 

As part of this second step, our management, with the assistance of the third-party valuation services firm, determined the fair value of all tangible and intangible assets and liabilities of each of our reporting units, including any material unrecorded assets or liabilities. This allocation process was performed only for purposes of testing goodwill for impairment, and did not result in the write up or write down of recognized assets or liabilities, or the recognition of previously unrecognized assets or liabilities. The carrying value of each reporting unit’s goodwill was then compared to the implied fair value of that reporting unit’s goodwill, such implied value being any excess of the FV of a reporting unit over the amounts assigned to its assets and liabilities, and the excess of the carrying value over the implied fair value was written off, as follows: approximately $4.1 million related to the audio and web conferencing reporting unit’s goodwill (of which we allocated approximately $3.9 million to Infinite and approximately $250,000 to Intella2), approximately $750,000 related to the EDNet reporting unit’s goodwill and approximately $271,000 related to the Acquired Onstream reporting unit’s goodwill. In addition, as a result of the above valuation, we recorded an approximately $446,000 write-off of the remaining Intella2 intangible assets, primarily the customer list. These write-offs were classified in our financial statements as impairment losses on goodwill and other intangible assets aggregating approximately $5.6 million for the year ended September 30, 2015 (zero for the six and three months ended March 31, 2015).

 

Furthermore, in order to address whether any further consideration of ONSM’s share price was needed with respect to impairment testing, we, with the assistance of the third-party valuation services firm, performed an analysis to compare our book value to our market capitalization as of September 30, 2015, including adjustments for (i) paid-for but not issued common shares, such as the Rockridge Shares (see note 4) and the Executive Shares (see note 5) and (ii) an appropriate control premium. Based on this analysis, we concluded that there were no conditions with respect to our market capitalization as of September 30, 2015 which would require further evaluation with respect to the carrying values of our reporting units. The above analysis was performed based on a closing ONSM share price of $0.21 per share as of September 30, 2015.

 

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. Based on our review of these and other factors, we have determined that no such triggering events have occurred as of March 31, 2016.

 

33


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 3:  PROPERTY AND EQUIPMENT

 

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

 

March 31, 2016

September 30, 2015

Accumulated

Depreciation

and Amortization

Accumulated

Depreciation

and Amortization

Net Book

 Value

Net Book

 Value

Useful Lives

(Yrs)

Historical Cost

Historical Cost

 

Equipment and software

$

11,171,948

$

(10,964,039)

$

207,909

$

11,128,003

$

(10,882,859)

$

245,144

1-5

DMSP

6,222,869

(5,923,678)

299,191

6,220,419

(5,859,304)

361,115

5

Other capitalized internal use software

656,721

(610,828)

45,893

654,272

(592,128)

62,144

3-5

Travel video library

1,368,112

(1,368,112)

-

1,368,112

(1,368,112)

-

N/A

Furniture, fixtures and leasehold     improvements

 

629,102

 

(596,366)

 

32,736

 

625,433

 

(589,011)

 

36,422

2-7

Totals

$

20,048,752

$

(19,463,023)

$

585,729

$

19,996,239

$

(19,291,414)

$

704,825

 

As part of the Onstream Merger (see note 2), we became obligated under a contract with SAIC, under which SAIC would build a platform that eventually, albeit after further extensive design and re-engineering by us, led to the DMSP. A partially completed version of this platform was the primary asset included in our purchase of Acquired Onstream, and was recorded at an initial amount of approximately $2.7 million. Subsequently, we continued to develop the DMSP, making payments under the SAIC contract and to other vendors, as well as to our own development staff as discussed below, which were recorded as an increase in the DMSP’s carrying cost. A limited version of the DMSP was first placed in service in November 2005. “Store and Stream” was the first version of the DMSP sold to the general public, starting in October 2006. In connection with our purchase of Auction Video in March 2007 (see note 2), $600,000 of the purchase price was attributed to a video ingestion and flash transcoder and added to the DMSP’s carrying cost. The SAIC contract terminated by mutual agreement of the parties on June 30, 2008 and although this released SAIC to offer the “Onstream Media Solution” directly or indirectly to third parties, we do not expect this to result in a material adverse impact on future DMSP sales.

 

As of March 31, 2016 we capitalized as part of the DMSP approximately $1.3 million of employee compensation, payments to contract programmers and related costs for development of “Streaming Publisher”, a second version of the DMSP with additional functionality although it also is a stand-alone product based on a different architecture than Store and Stream. As of March 31, 2016, substantially all of these costs had been placed in service, including approximately $410,000 for the initial release in September/October 2009, approximately $231,000 for an April/May 2010 release, approximately $109,000 for storefront applications placed in service between August 2013 and January 2014, approximately $52,000 for a January 2014 release and approximately $125,000 for a May 2014 release. All capitalized development costs in service are being depreciated over five years.

 

Depreciation and amortization expense for property and equipment was approximately $172,000 and $328,000 for the six months ended March 31, 2016 and 2015, respectively, and was approximately $83,000 and $152,000 for the three months ended March 31, 2016 and 2015, respectively.

 

34

 


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT

 

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

 

Convertible Debentures

 

Convertible debentures consist of the following:

 

March 31,

2016

September 30,

2015

Sigma Note

$

600,000

$

1,583,000

Rockridge Note

400,000

400,000

Fuse Note (excluding portion in notes payable)

100,000

200,000

Intella2 Investor Notes (excluding portion in notes payable)

 

100,000

 

200,000

Total convertible debentures

1,200,000

2,383,000

Less: discount on convertible debentures

 

(85,607)

 

(58,176)

Convertible debentures, net of discount

1,114,393

2,324,824

Less: current portion, net of discount

 

(1,114,393)

 

(1,167,899)

Convertible debentures, net of current portion and discount

$

-

$

1,156,925

 

Sigma Note

 

We are obligated to Sigma Opportunity Fund II, LLC (“Sigma”), pursuant to a senior secured note (“Sigma Note”) collateralized by all of our assets, subordinated only to security interests already held in connection with outstanding financings with Thermo Credit and Rockridge. Interest on the Sigma Note, payable in cash monthly, was initially 21% per annum but was reduced to 17% per annum in December 2015, in connection with an amendment to the note and other related agreements discussed in more detail below.

 

Sigma has the right to convert the 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 Sigma Note or upon the sale of all or substantially all of our business, assets or capital stock.

 

On September 21, 2015, Sigma loaned us an additional $225,000 and accordingly, the outstanding balance of the Sigma Note increased to $1,583,000 and the maturity date was extended to April 15, 2016, which extension resulted in our obligation to pay Sigma Capital Advisors, LLC (“Sigma Capital”) up to $250,000 in additional fees (plus monthly interest and penalties for late SEC filings, as applicable).

 

On December 17, 2015, we made a $1.0 million payment to Sigma against the outstanding principal balance of the 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 Sigma Note. As a result of these agreements, the outstanding balance of the Sigma Note was increased to $600,000, to reflect a one-time administrative fee of $17,000, and we also reimbursed $3,500 of Sigma’s legal expenses related to the transactions. The maturity date of the remaining balance due under the Sigma Note was extended from April 15, 2016 to December 31, 2016 and as a result $583,000 of the Sigma Note is classified as non-current on our September 30, 2015 balance sheet, with the remaining amount classified as current. The $600,000 outstanding balance as of March 31, 2016 is classified as current on our balance sheet as of that date.

 

35


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Sigma Note (continued)

 

As part of the December 22, 2015 agreements, the interest rate on the 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 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 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.  

 

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 Sigma Note will be due, but not to exceed the net proceeds of such funds received by us in any such transaction(s). However, this early repayment requirement did not apply to the $1.0 million proceeds we received in March 2015 from the sale of certain of Infinite’s audio conferencing customer accounts to Partners – see note 6 - and does not apply to up to $800,000 in proceeds should we elect to exercise our rights under the Funding Letter - see note 1. Also, the December 22, 2015 transactions with Sigma and Sigma Capital include (i) their agreement to limit to $1.0 million the required principal repayment against the 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 Sigma Note, which proceeds we received in June 2016 – see note 6. 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”.

 

There was no remaining unamortized discount from previous Sigma transactions as of December 31, 2014. 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 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, aggregating $299,578, were amortized as interest based on the initial six month term of the Sigma Note, resulting in an effective interest rate of approximately 65% per annum for the period from January 1, 2015 through April 30, 2015.

 

36


 

 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Sigma Note (continued)

 

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 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 did not reflect that impact until October 1, 2015 and have determined that the impact of this delayed implementation is immaterial.

 

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).

 

Including the amortization of the fees and expenses we agreed to pay in connection with the September 21, 2015 agreement with Sigma, including the anticipated liquidated damages for late SEC filings, the resulting effective interest rate of the Sigma Note was approximately 60% per annum for the period from October 1, 2015 through December 31, 2015. After giving effect to the December 22, 2015 agreement with Sigma, including the adjustment of the fees and expenses we had previously agreed to pay in connection with the September 21, 2015 agreement with Sigma, such fees and expenses aggregating $350,000 for the period from October 15, 2015 through December 31, 2016, after adjustment, and after allowing for the amounts previously amortized through December 31, 2015, the resulting effective interest rate of the Sigma Note was approximately 53% per annum for the period from January 1, 2016 through March 31, 2016 and absent any further changes in the terms of our agreement with Sigma, will remain at that rate through the December 31, 2016 maturity. This effective interest rate does not include the impact if an early repayment was required, as discussed above.

 

The unamortized portion of the debt discount recorded against the Sigma Note was $76,000 and $42,623 as of March 31, 2016 and September 30, 2015, respectively.

 

37


 

 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Sigma Note (continued)

 

We concluded that there was less than a 10% difference between the present value of the cash flows of the Sigma Note after its September 2015 modification versus the present value of the cash flows under the payment terms in place one year earlier. Since the provisions of ASC 470-50-40 require that if a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms should be to the terms existing one year prior to the current modification, which in this case was as of September 15, 2014 for Sigma Notes 1 and 2, the predecessor indebtedness to the Sigma Note, as discussed above. ASC 470-50-40 also provides that if a substantive conversion feature is added to an instrument, the modified terms are considered substantially different and extinguishment accounting is required. However, since the conversion right deemed to be modified as part of the September 2015 transaction is not exercisable prior to the maturity date of the Sigma Note unless we are in default on the Sigma Note or upon the sale of all or substantially all of our business, assets or capital stock, and since the ONSM closing price of $0.23 per share at the time of the deemed modification of the conversion rights (and the $0.18 per share the following day) was significantly less than the $0.30 per share modified conversion price, we determined that it was not reasonably possible that the modified conversion feature would be exercised and thus determined the conversion feature to not be substantive. Accordingly, accounting for this modification as an extinguishment of debt was not required.

 

We concluded that there was less than a 10% difference between the present value of the cash flows of the Sigma Note after its December 2015 modification versus the present value of the cash flows under the payment terms in place one year earlier. Since the provisions of ASC 470-50-40 require that if a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms should be to the terms existing one year prior to the current modification, which in this case was as of September 15, 2014 for Sigma Notes 1 and 2, the predecessor indebtedness to the Sigma Note, as discussed above. ASC 470-50-40 also provides that if a substantive conversion feature is added to an instrument, the modified terms are considered substantially different and extinguishment accounting is required. However, since the conversion right deemed to be modified as part of the December 2015 transaction is not exercisable prior to the maturity date of the Sigma Note unless we are in default on the Sigma Note or upon the sale of all or substantially all of our business, assets or capital stock, and since the ONSM closing price of $0.14 per share at the time of the deemed modification of the conversion rights was significantly less than the $0.30 per share modified conversion price, we determined that it was not reasonably possible that the modified conversion feature would be exercised and thus determined the conversion feature to not be substantive. Accordingly, accounting for this modification as an extinguishment of debt was not required.

 

In connection with the above financing, an agreement is in place between Sigma and Rockridge, which includes Rockridge’s agreement (along with our agreement) that Sigma has the right, but not the obligation, to repay the Rockridge Note at face value in case of our default on the Sigma Note or the Rockridge Note. Such repayment amount would be added to the principal of the Sigma Note, with the principal being payable and accruing interest under the terms of the 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.

 

38


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Rockridge Note

 

We are obligated to Rockridge Capital Holdings, LLC (“Rockridge”), an entity controlled by one of our larger shareholders, in accordance with the terms of a Note and Stock Purchase Agreement (the “Rockridge Agreement”) between Rockridge and us. In connection with this transaction, we issued a note (the “Rockridge Note”) bearing interest at 12% per annum (which is currently being paid on a monthly basis) and collateralized by a first priority lien on all of our assets, such lien subordinated only to the extent higher priority liens on assets, primarily accounts receivable and certain designated software and equipment, are held by other lenders. We also entered into a Security Agreement with Rockridge containing covenants and restrictions with respect to the collateral. The Rockridge Note also provides that we will pay the outstanding principal plus any accrued interest upon our receipt of proceeds in excess of $5 million related to the sale of any of our business units or subsidiaries.

 

The remaining balance of $400,000, per our latest agreement with Rockridge dated December 16, 2015, has a Maturity Date of December 31, 2016 and so is classified as non-current on our September 30, 2015 balance sheet and current on our March 31, 2016 balance sheet.

 

The Rockridge Agreement, as amended through December 16, 2015, provides that (i) Rockridge may receive an origination fee upon not less than sixty-one (61) days written notice to us, payable by our issuance of 816,667 restricted shares of our common stock (the “Shares”) and (ii) on the Maturity Date we shall pay Rockridge up to a maximum of $75,000 valuation adjustment (the “Shortfall Payment”) related to the Shares. The Shortfall Payment would be calculated as the sum of (i) the cash difference between the per share value of $1.20 (the “Minimum Per Share Value”) and the average sale price for all previously sold Shares (whether such number is positive or negative) multiplied by the number of sold Shares and (ii) for the Shares which were not previously sold by Rockridge, the cash difference between the Minimum Per Share Value and the market value of the Shares at the Maturity Date (whether such number is positive or negative) multiplied by the number of unsold Shares, up to a maximum of $75,000 in the aggregate.

 

As of October 1, 2012, we determined that our share price had remained below $1.20 per share for a sufficient period that accrual of a liability for the Shortfall Payment was appropriate.  Therefore, we recorded the $32,000 present value of this obligation as a liability (and corresponding increase in debt discount) as of October 1, 2012, which increased to $61,000 as of September 30, 2013, as a result of the accretion of $29,000 as interest expense for the year then ended and increased further to the maximum obligation of $75,000 as of September 30, 2014, as a result of the accretion of $14,000 as interest expense for the year then ended. The carrying amount of this liability, classified as part of the caption “Accrued liabilities” on our balance sheet, was also $75,000 as of September 30, 2015 and March 31, 2016. Although as a result of the latest extension of the Maturity Date, the Shortfall Payment is not due until December 31, 2016, the difference between the present value of that obligation and the carrying amount is considered to be immaterial to our financial statements taken as a whole and so no adjustment to that carrying amount was made. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, the required Shortfall Payment would be $75,000.

 

39


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Rockridge Note (continued)

 

Below is a table showing the tranches of Shares granted in accordance with the initial Rockridge Agreement and subsequent amendments and the fair values assigned to them at the time of each of such grants, which amounts were recorded as an increase in our additional paid-in capital:

 

Number of

shares

Fair Value

April/June 2009

366,667

$

626,000

December  2012

225,000

79,000

September 2014

25,000

5,250

December 2014

50,000

10,500

April 2015

30,000

4,200

August 2015

50,000

9,500

December 2015

 

70,000

 

12,600

Total

 

816,667

$

747,050

 

 

The above amounts were reflected as debt discount and amortized to interest expense until February 2014, when the remaining unamortized discount was written off as part of a debt extinguishment loss. Since the fair value of subsequent increases in the number of Shares was determined to be immaterial, those values were recognized directly to interest expense. The fair market value of the 50,000 origination fee Shares arising from the August 2015 Allonge was inadvertently not recorded as of September 30, 2015 but was recorded during the six months ended March 31, 2016.

 

Our agreements with Rockridge dated December 31, 2014, April 30, 2015, August 18, 2015 and December 16, 2015 increased the origination fee by the number of Shares shown above, in exchange for extensions of the Maturity Date. As noted above, since we recorded the value of the Shares directly to interest expense at the time of each agreement, there was no remaining unamortized discount with respect to the Rockridge Note as of each of the above dates. Therefore, we concluded that no further evaluation of those modifications with respect to loan extinguishment accounting would be required.

 

As a result of the February 2014 debt extinguishment loss, discussed above, the effective interest rate was reduced to 12% per annum and, because of the expensing of the value of all subsequent increases in the number of origination fee Shares on the basis of immateriality, it is deemed to have remained at that level to date. These rates do not give effect to any difference between the sum of the value of the Shares at the time of issuance plus the Shortfall Payment, as compared to the recorded value of the Shares on our books, nor do they give effect to any variance between the conversion price versus market prices if principal is satisfied with common shares issued upon conversion instead of cash.

 

40


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Rockridge Note (continued)

 

Upon notice from Rockridge at any time and from time to time prior to the Maturity Date the outstanding principal balance may be converted into a number of restricted shares of our common stock. These conversions are subject to a minimum of one month between conversion notices (unless such conversion amount exceeds $25,000) and will use a conversion price of eighty percent (80%) of the fair market value of the average closing bid price for our common stock for the twenty (20) days of trading on The NASDAQ Capital Market (or such other exchange or market on which our common shares are trading) prior to such Rockridge notice, but such conversion price will not be less than $2.40 per share.  We will not effect any conversion of the Rockridge Note, to the extent Rockridge and Frederick Deluca (who died on September 14, 2015), after giving effect to such conversion, would beneficially own in excess of 9.9% of our outstanding common stock, although such limitation may be waived by Rockridge upon not less than sixty-one (61) days prior written notice to us and provided such waiver would not result in a violation of the NASDAQ shareholder approval rules.

 

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

 

Fuse Note

 

Effective March 19, 2013 we issued an unsecured subordinated note to Fuse Capital LLC (“Fuse”) in the amount of $200,000 (the “Fuse Note”) in consideration of $100,000 of additional cash proceeds to us plus the cancellation of a previously issued note with a still outstanding balance of $100,000. The Fuse Note, which is convertible into restricted common shares at Fuse’s option using a rate of $0.50 per share, was initially payable as follows: interest only (at 12% per annum) during the first year, approximately 30% of the principal plus interest during the second year and the remaining principal balance at the end of the second year.

 

Effective April 1, 2014 the Fuse Note was amended to provide that the $200,000 principal balance would not be payable until the March 19, 2015 maturity date, although interest would continue to be payable on a monthly basis. Effective February 28, 2015 the Fuse Note was further 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 $220,000, for the effect of a $20,000 due diligence fee earned by the noteholder in connection with the amendment, although the portion of the principal balance convertible to common shares remained at $200,000. This amendment also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale.

 

41


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Fuse Note (continued)

 

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. The remaining $120,000 balance is classified as current on the March 31, 2016 balance sheet.

 

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 (and as of March 31, 2016) as a result of the accretion of $4,000 as interest expense for the year then ended.

 

The closing ONSM share price was $0.16 per share as of March 19, 2015, which would trigger the above repurchase obligation, which would be $32,000 based on 80,000 shares at $0.40 per share. This only applies to the extent the Fuse Common Stock was still held by Fuse at the applicable date. Furthermore, as part of the February 28, 2015 amendment discussed above, it was agreed that Fuse would not request any payments from us under this commitment prior to the maturity date of the Fuse Note, which is currently January 15, 2017.

 

In connection with the original issuance of the Fuse Note, we also issued 40,000 restricted common shares to another third party for finder and other fees. The value of the Fuse Common Stock plus the value of the common stock issued for related financing fees was approximately $52,000, which was reflected as an increase in additional paid-in capital, with one half included in a debt extinguishment loss recognized in fiscal 2013 and the other half recorded as a discount against the Fuse Note. The discount portion of approximately $26,000 was amortized as interest expense over the original term of the note, resulting in an effective interest rate of approximately 19% per annum through March 19, 2015.

 

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

 

The aggregate unamortized portion of the debt discount recorded against the Fuse Note was none and $8,775 as of March 31, 2016 and September 30, 2015, respectively. As of September 30, 2015, $798 of this unamortized discount relates to the $20,000 portion of the Fuse Note included in the “Notes and Leases Payable” section below.

 

42


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Fuse Note (continued)

 

We concluded that there was less than a 10% difference between the present value of the cash flows of the Fuse Note after its February 28, 2015 modification versus the present value of the cash flows under the payment terms in place one year earlier, which 10% is the threshold over which extinguishment accounting is required under the provisions of ASC 470-50-40. Accordingly, accounting for this modification as an extinguishment of debt was not required. The comparison of the present value of cash flows under the modified terms is normally done using the present value of cash flows under the terms existing immediately before the modification. However, under the provisions of ASC 470-50-40, if a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms should be to the terms existing one year prior to the current modification. Since the April 2014 modification of this note was not considered to be an extinguishment, we utilized the terms in the original March 19, 2013 note.

 

Intella2 Investor Notes

 

In connection with the issuance of the Fuse Note as discussed above, we modified the terms on another note issued to Fuse on November 30, 2012, to allow conversion of the principal balance into restricted common shares at Fuse’s option using a rate of $0.50 per share. This other note, with an original principal balance of $200,000 which increased to $220,000 as a result of a February 28, 2015 amendment, although still only $200,000 is convertible, is discussed in more detail under “Intella2 Investor Notes” in the “Notes and Leases Payable” section below.

 

43


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Equipment Notes

 

In June and July 2008 we received an aggregate of $1.0 million from seven accredited individuals and other entities (the “Investors”), under a software and equipment financing arrangement (the “Equipment Notes”). The principal balance outstanding under the Equipment Notes was eventually reduced to $350,000 and effective October 2011, the Equipment Notes were assigned by the applicable Investors to three accredited entities (the “Noteholders”). These Equipment Notes were repaid with cash payments to the Noteholders in March 2013 aggregating $175,000, as well as the issuance of an aggregate of 583,334 restricted common shares (“Equipment Note Shares”) to the Noteholders during the period from December 2012 to March 2013, credited upon issuance as a reduction of the outstanding Equipment Notes balance using a price of $0.30 per share. However, the terms of the Equipment Notes provided that on the maturity dates of the Equipment Notes, the Recognized Value of the Equipment Note Shares would be calculated as the sum of the following two items – (i) the gross proceeds to the Investors from the sales of the 583,334 Equipment Note Shares plus (ii) the value of those Equipment Note Shares issued and still held by the Noteholders and not sold, using the average ONSM closing bid price per share for the ten (10) trading days prior to the applicable maturity date. If the Recognized Value exceeded the Credited Value, then we would receive 50% (fifty percent) of such excess, although the amount received by us shall not exceed $175,000. If the Credited Value exceeded the Recognized Value, then we would be obligated to pay such excess to the Noteholders. With respect to Equipment Note Shares held by one of the three Noteholders, the Credited Value exceeded the Recognized Value for 166,667 common shares by approximately $16,000 as of the respective November 15, 2013 maturity date, which excess we recorded as interest expense in fiscal 2014 and is included under the caption “Accrued liabilities” on our March 31, 2016 and September 30, 2015 balance sheets.

 

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

 

As of September 30, 2013, we determined that our share price had remained below $0.30 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, we recorded the $80,000 present value of this obligation as a liability on our financial statements as of that date (under the caption “Accrued liabilities” on our balance sheet), which increased to approximately $108,000 as of September 30, 2014 as a result of the accretion of approximately $28,000 as interest expense for the year then ended and which increased to approximately $125,000 as of September 30, 2015 as a result of the accretion of approximately $17,000 as interest expense for the year then ended. Further accretion was not recorded after that date, since the liability had been accreted to the maximum potential obligation.

 

44


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Convertible Debentures (continued)

 

Equipment Notes (continued)

 

The closing ONSM share price was $0.14 and $0.16 per share on April 24 and May 4, 2015, respectively, which would trigger the above repurchase obligation in the gross amount of $125,000, based on 416,667 Equipment Note Shares at $0.30 per share. However, this repurchase obligation is subject to the Equipment Note Shares being still held by the Noteholder(s) at such date and the Noteholder giving us notice and delivering the shares within fifteen days after such date, as well as any other legal restrictions with respect to our repurchase of shares. It is possible that some or all of this repurchase obligation could be avoided by us due to the failure of the Noteholder or Noteholders to formally present the shares to us and/or provide notice by the specified date, or as a result of legal restrictions with respect to our repurchase of shares. However, because of our ongoing discussions with certain of these Noteholders, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this repurchase obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible those Noteholders could assert mitigating circumstances under which we might honor all or part of this repurchase obligation. Therefore, pending our further evaluation of our position with respect to this repurchase obligation, we are leaving the $125,000 accrued liability on our financial statements as of September 30, 2015 and March 31, 2016.

 

In addition, we agreed that to the extent the number of outstanding shares of our common stock exceeds 22 million shares, we would issue the Noteholders additional shares of common stock in aggregate equal to approximately 1.9% of the excess over 22 million, times the percentage of the original 416,667 common shares still held by the Noteholders on the six and twelve month anniversary dates of the October and November 2013 financings, as well as the eighteen month maturity date. For clarity, additional issuances based on any particular increase in the number of our outstanding shares over the stated limit will only be made once and so additional issuances on the second and third dates will be limited and related to increases since the first and second dates, respectively. The number of outstanding shares was less than 22 million as of September 30, 2014, and thus we had no potential liability under the above provision as of that date. Furthermore, the number of outstanding shares as of April 24, 2015 and May 4, 2015 (the eighteen month maturity dates) was approximately 22.5 million, resulting in a liability under the above provision as of that date to issue approximately 10,300 additional common shares, which is considered immaterial.

 

45


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable

 

Notes and leases payable consist of the following:

 

March 31,

2016

September 30,

2015

Line of Credit Arrangement

$

1,650,829

$

1,650,829

Working Capital Notes

190,000

465,000

J&C Note

157,000

-

Subordinated Notes

30,000

192,500

Intella2 Investor Notes (excluding portion in convertible debentures)

215,000

215,000

Fuse Note (excluding portion in convertible debentures)

20,000

20,000

USAC Note

135,466

187,650

Equipment lease

 

1,356

 

9,333

Total notes and leases payable

2,399,651

2,740,312

Less: discount on notes payable

 

(18,383)

 

(32,054)

Notes and leases payable, net of discount

2,381,268

2,708,258

Less: current portion, net of discount

 

(2,360,661)

 

(2,032,183)

Notes and leases payable, net of current portion and discount

$

20,607

$

676,075

 

Line of Credit Arrangement

 

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

 

The Line has been renewed and modified from time to time, and under which we may presently borrow up to an aggregate of $2.0 million for working capital, collateralized by our accounts receivable and certain other related assets and the amount of such borrowing being further subject to the amount, aging and concentration of such receivables. Although the Line expired on December 27, 2013, we continued after that date to negotiate renewal terms with the Lender and to maintain an outstanding borrowing balance under the Line and on February 10, 2016 (the “Effective Date”), we entered into a Loan Modification Agreement (“Modification”) which extended the term of the Line through December 31, 2017 (the “Maturity Date”). Notwithstanding this renewal for a period ending more than one year after our March 31, 2016 and September 30, 2015 balance sheets, since the outstanding balance at those dates 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 those balance sheets.

 

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.

 

46


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Line of Credit Arrangement (continued)

 

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

 

Under the terms of the Line, we also incur a monitoring fee and a commitment fee, which fees were unchanged by the Modification. The monitoring fee is one twentieth of a percent (0.05%) of the borrowing limit per week, payable monthly in arrears, and the commitment fee is one percent (1%) per year of the maximum allowable borrowing amount, payable annually in advance. The commitment fee was recorded as debt discount and is being amortized as interest expense on a monthly pro-rata basis. The unamortized portion of this discount was $15,000 as of March 31, 2016.

 

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”), and although this was never implemented we were in ongoing discussions with the Lender as to the reasons for that non-compliance and accordingly the Lender did not declare us in default. 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.

 

47


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Line of Credit Arrangement (continued)

 

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 was allowing such overadvance condition to continue, under their expectation that we are seeking alternative funding to replace that overadvance. In a letter dated October 26, 2016, the Lender agreed that there was no default by us with respect to such overadvances up to and including October 31, 2016, although this does not constitute authorization for any non-compliance with these provisions after October 31, 2016.

 

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

 

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

 

48


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Line of Credit Arrangement (continued)

 

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

 

The Lender must approve any additional debt incurred by us, other than debt subordinated to the Line and debt incurred in the ordinary course of business (which includes equipment financing). The Lender approved the Equipment Notes, the Rockridge Note, the USAC Note and the Sigma Note. All other debt entered into by us subsequent to the December 2007 inception of the Line has been appropriately approved by the Lender and/or was allowable under one of the exceptions noted above.

 

Working Capital Notes and J&C Note

 

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

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

 

49


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Working Capital Notes and J&C Note (continued)

 

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 increased the outstanding principal balance to $275,000, for the effect of a $25,000 due diligence fee earned by the noteholder in connection with the amendment. This amendment also provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale. Although this Working Capital Note was further amended, effective October 15, 2015, to extend the maturity date to July 15, 2016, it was paid in full on December 30, 2015. Such repayment, in accordance with our December 29, 2015 agreement with J&C Resources, Inc. (“J&C”), was made in consideration of our receipt of $157,000 from J&C on December 30, 2015 for our issuance of an unsecured, subordinated note with a December 31, 2016 maturity date and bearing interest at 12% per annum also due at maturity (the “J&C Note”). Accordingly $157,000 of this Working Capital Note, the amount replaced by the proceeds of the J&C financing, is classified as non-current on our September 30, 2015 balance sheet and the remaining $118,000 balance is classified as current. The J&C Note was classified as current on our March 31, 2016 balance sheet.

 

The remaining outstanding principal balance of the other two Working Capital Notes, aggregating $342,727, was due in full as of May 4, 2015, as well as accrued but unpaid interest of approximately $46,000 through that date. We did not make these principal or interest payments when due on May 4, 2015, but we continued to accrue interest expense after that point on the outstanding note balances at the stated interest rate through the repayment or amendment of these notes in September 2015, as discussed below, at which time that accrued interest was paid.

 

One of the other two Working Capital Notes having an outstanding principal balance of approximately $172,727 was repaid in September 2015. As discussed in more detail above, Sigma loaned us $225,000 in September 2015, which was the primary funding source to make this payment plus related interest and legal fees aggregating approximately $33,000.

 

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 and as current on our March 31, 2016 balance sheet.

 

50


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Working Capital Notes and J&C Note (continued)

 

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

 

In connection with the above financing, we issued to the holders of Working Capital Notes an aggregate of 358,334 restricted common shares (the “Working Capital Shares”), which we have agreed to buy back, to the extent permitted by law, from the holder at $0.30 per share on the maturity dates of the Working Capital Notes, if the fair market value is less than that on that date. The above only applies to the extent the Working Capital Shares are still held by the noteholder on the applicable date and the buyback obligation only applies if the noteholder gives us notice and delivers the shares within fifteen days after the applicable maturity dates. As of March 31, 2014, we determined that our share price had remained below $0.30 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, we recorded the approximately $74,000 present value of this obligation as a liability on our financial statements as of that date (under the caption “Accrued liabilities” on our balance sheet), which increased to approximately $88,000 as of September 30, 2014 as a result of the accretion of approximately $14,000 as interest expense for the year then ended and increased to approximately $108,000 as of September 30, 2015 (and as of March 31, 2016) as a result of the accretion of approximately $20,000 as interest expense for the year then ended.

 

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 March 31, 2016 and September 30, 2015 balance sheets. If the closing ONSM share price of $0.12 per share on July 15, 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 March 31, 2016 and September 30, 2015 balance sheets. 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.

 

51


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Working Capital Notes and J&C Note (continued)

 

In addition, we agreed that to the extent the number of outstanding shares of our common stock exceeds 22 million shares, we would issue to the holder of one of the Working Capital Notes additional shares of common stock in aggregate equal to approximately 0.21% of the excess over 22 million, times the percentage of the 45,834 common shares originally issued to the noteholder (part of the 358,334 shares discussed above), and still held by the noteholder on the six, twelve and eighteen month anniversary dates of the October 2013 financing. For clarity, additional issuances based on any particular increase in the number of our outstanding shares over the stated limit will only be made once and so additional issuances on the second and third dates will be limited and related to increases since the first and second dates, respectively. The number of outstanding shares as of April 24, 2015 (the eighteen month maturity date) was approximately 22.5 million, resulting in a liability under the above provision as of that date to issue approximately 1,100 additional common shares, which is considered immaterial.

 

The fair market value at the time of issuance of the Working Capital Shares plus another 100,000 restricted common shares in connection with a finders agreement related to this financing, plus the cash deducted from the proceeds for related origination fees, was $258,260. $88,807 of this amount was reflected as a non-cash debt extinguishment loss (as well as a corresponding increase in additional paid-in capital for the shares) for the year ended September 30, 2014, in connection with the use of a portion of the proceeds to repay previously outstanding debt, as discussed above. The remainder of $169,453 was reflected as a discount against the Working Capital Notes (as well as a corresponding increase in additional paid-in capital for the shares) and that amount was amortized as interest expense over the initial term of the Working Capital Notes, resulting in a weighted average effective interest rate of approximately 33.2% per annum.

 

The $25,000 due diligence fee earned in connection with the February 28, 2015 amendment of the Working Capital Note with an amended principal balance of $275,000 was recorded as a discount. This amount, combined with the remaining unamortized discount arising from the initial November 2013 financing and related to this Working Capital Note, was being amortized as interest expense over the approximately one year extension period ending March 2016, resulting in an effective interest rate of approximately 22% per annum, until the remaining unamortized discount was written off as interest expense in December 2015 as a result of the early repayment of that note.

 

Since no additional consideration was paid from the end of their initial terms in April and May 2015, until they were repaid and/or renegotiated in September 2015, the effective interest rate on the other two Working Capital Notes during that period was the stated interest rate of 15.0% per annum.

 

We concluded that there was less than a 10% difference between the present value of the cash flows of the Working Capital Note after its February 28, 2015 modification versus the present value of the cash flows under the terms existing immediately before the modification, which 10% is the threshold over which extinguishment accounting is required under the provisions of ASC 470-50-40. Accordingly, accounting for this modification as an extinguishment of debt was not required.

 

52


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Working Capital Notes and J&C Note (continued)

 

We concluded that there was less than a 10% difference between the present value of the cash flows of one of the other two Working Capital Notes after its September 16, 2015 modification versus the present value of the cash flows under the terms existing immediately before the modification, which 10% is the threshold over which extinguishment accounting is required under the provisions of ASC 470-50-40. Accordingly, accounting for this modification as an extinguishment of debt was not required.

 

The aggregate unamortized portion of the debt discount recorded against the Working Capital Notes was $1,462 and $30,499 as of March 31, 2016 and September 30, 2015 respectively.

 

In connection with the October 15, 2015 agreements extending the maturity date of two of the Working Capital Notes with amended principal balances aggregating $465,000 to July 15, 2016, we agreed to issue an aggregate of 55,000 restricted common shares to the noteholders, such shares having a fair value of approximately $10,000. 30,000 of those shares have not been recorded on our books or issued as of October 28,  2016.

 

Subordinated Notes

 

Since April 30, 2012, we have received funding from various lenders, of which $30,000 and $192,500 was outstanding as of March 31, 2016 and September 30, 2015, respectively, in exchange for our issuance of unsecured subordinated promissory notes (“Subordinated Notes”), fully subordinated to the Line and the Rockridge Note or assignees or successors thereto. Details of the notes making up these totals are as follows:

 

On April 30, 2012 we received $100,000 for an unsecured subordinated note bearing interest at 15% per annum, with the principal payable in equal monthly installments of $8,333 starting November 30, 2012 plus $58,333 balance payable on April 30, 2013, although we made none of these payments. Effective November 1, 2012 this note was amended to reduce the interest rate from 15% to 12% per annum and to modify the principal payment schedule to a single payment of $100,000 due on October 31, 2014, in exchange for our issuance of an additional 35,000 common shares to the noteholder. The $12,600 value of these common shares was reflected as a discount against this note (as well as a corresponding increase in additional paid-in capital for the value of the shares on the date of issuance) and that amount, as well as the unamortized portion of previously recorded discount, was amortized as interest expense over two years (the remaining term of the note, as modified), resulting in an effective interest rate of approximately 21% per annum through October 31, 2014, at which point it reduced to 12% per annum.

 

Interest for the first six months was paid on October 31, 2012, with subsequent interest payments due every three months thereafter through October 31, 2014.  We did not make the principal payment when it was due on October 31, 2014, but we continued to accrue interest expense after that point on the outstanding balance at the stated interest rate. This note was amended effective February 28, 2015 to extend the maturity date to March 1, 2016.

 

53


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Subordinated Notes (continued)

 

The February 28, 2015 amendment also provided that interest would be paid quarterly, commencing June 30, 2015 and also increased the outstanding principal balance to $110,000, for the effect of a $10,000 due diligence fee earned by the noteholder in connection with the amendment. We determined this fee to be immaterial for recording as additional discount and subsequent periodic amortization and thus we expensed as interest as of the date of the amendment. Since there was no remaining unamortized discount with respect to this note as of February 28, 2015, we also concluded that no further evaluation of this modification with respect to loan extinguishment accounting would be required.

 

This note was further amended, effective October 15, 2015, to extend the maturity date to July 15, 2016, but since it was paid in full on December 16, 2015, it is classified as current on our September 30, 2015 balance sheet. In connection with the October 15, 2015 amendment, we issued 20,000 restricted common shares to the noteholder, such shares having a fair value of approximately $4,000.

 

During January 2013 we received an aggregate of $150,000 pursuant to our issuance of two unsecured subordinated notes, bearing interest at 20% per annum. In January 2014 the maturity date of these notes, as well as the due date of the aggregate of $15,000 earned but unpaid interest, was extended to October 2014. An aggregate of 240,000 restricted ONSM common shares with a fair market value at issuance of approximately $60,000 was issued to the lenders as an extension fee. This amount was reflected as a discount and amortized as interest expense over approximately nine and one half months, resulting in an effective interest rate of approximately 71% per annum through October 31, 2014, at which point it reduced to 20% per annum.

 

We concluded that there was less than a 10% difference between the present value of the cash flows of these notes after the January 2014 modification versus the present value of the cash flows under the payment terms in place one year earlier, under the provisions of ASC 470-50-40, the modified terms were not considered substantially different and therefore accounting for these modifications as extinguishment of debt was not required. The comparison of the present value of cash flows under the modified terms is normally done using the present value of cash flows under the terms existing immediately before the modification. However, under the provisions of ASC 470-50-40, since a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms was to the terms existing one year prior to the current modification.

 

We did not make the principal payments when due in October 2014, but we continued to accrue interest expense after that point on the outstanding balance at the stated interest rate. Effective February 28, 2015, we entered into an agreement with the noteholders whereby (i) we paid all accrued interest, late fees aggregating $6,300 and principal payments aggregating $75,000 and (ii) the notes were amended to extend the maturity date of the remaining principal to March 1, 2016. The amendments increased the aggregate outstanding principal balance to $82,500, for the effect of due diligence fees aggregating $7,500 earned by the noteholders in connection with the amendments. We determined these fees to be immaterial for recording as additional discount and subsequent periodic amortization and thus we expensed as interest as of the date of the amendments. Since there was no remaining unamortized discount with respect to these notes as of February 28, 2015, we also concluded that no further evaluation of this modification with respect to loan extinguishment accounting would be required.

 

54


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Subordinated Notes (continued)

 

The February 28, 2015 amendments also reduced the interest rate to 18% per annum, provide us with a one-time credit to make the change effective with the inception of the note and establish that future interest would be paid quarterly, at 12% per annum, commencing June 30, 2015. The amendments further provided that in the event we receive funds in excess of $5 million as a result of the sale of our assets, that the outstanding principal and interest will be repaid within thirty days of the receipt of the proceeds from the asset sale.

 

These notes were further amended, effective October 15, 2015, to extend the maturity date to July 15, 2016, but an aggregate of $52,500 was paid against the outstanding balances on December 16, 2015. In connection with the October 15, 2015 amendments, we issued an aggregate of 22,500 restricted common shares to the noteholders, such shares having a fair value of approximately $4,000.

 

Effective December 16, 2015, the one note with a remaining outstanding balance was further amended to extend the maturity date on the remaining outstanding balance to December 31, 2016. Accordingly $52,500 of these note balances, the amount repaid in December 2015, is classified as current on our September 30, 2015 balance sheet and the remaining $30,000 balance is classified as non-current. The remaining Subordinated Note was classified as current on our March 31, 2016 balance sheet.

 

Intella2 Investor Notes

 

On November 30, 2012 we issued unsecured promissory notes to five investors (the “Intella2 Investor Notes”), with an initial aggregate outstanding balance of $450,000 bearing interest at 12% per annum and which are fully subordinated to the Line and the Rockridge Note or any assignees or successors thereto. These notes were issued in exchange for $350,000 cash proceeds plus the satisfaction of the $100,000 outstanding principal balance due on a previously issued subordinated note. Note payments were to be interest only during the first year, approximately 30% of the principal plus interest during the second year and the remaining principal balance at the end of the second year. In connection with the issuance of the Fuse Note on March 19, 2013 (discussed in more detail above), we modified the terms on one of the Intella2 Investor Notes, held by Fuse and having a $200,000 outstanding principal balance (the “Intella2 Fuse Note”), to allow conversion of the principal balance into restricted common shares at Fuse’s option using a rate of $0.50 per share.

 

During April and May 2014, the Intella2 Fuse Note and the Intella2 Investor Notes held by two of the other four investors were further amended to provide that the principal balances aggregating $290,000 would not be payable until the November 30, 2014 maturity date, although interest would continue to be payable on a monthly basis. In exchange for this amendment, we issued an aggregate of 29,000 common shares having a fair market value of approximately $6,100, which we determined to be immaterial for recording as additional discount and subsequent periodic amortization and thus we expensed as interest at that time. We also determined that the remaining unamortized discount as of June 30, 2014 was immaterial for purposes of evaluating these modifications as to whether loan extinguishment accounting would be required.

 

55


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Intella2 Investor Notes (continued)

 

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

 

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

 

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

 

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 and as current on our March 31, 2016 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 and as current on our March 31, 2016 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 March 31, 2016 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.

 

56


 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

Intella2 Investor Notes (continued)

 

In connection with the initial issuance of the Intella2 Investor Notes, we issued to the holders an aggregate of 180,000 restricted common shares (the “Intella2 Common Stock”), which we agreed to buy back, to the extent permitted by law, at $0.40 per share, if the fair market value of the Intella2 Common Stock was not equal to at least $0.40 per share as of November 30, 2014 (two years after issuance). As of June 30, 2013 we determined that our share price had remained below $0.40 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, we recorded the $48,000 present value of this obligation as a liability on our financial statements as of June 30, 2013 (under the caption “Accrued liabilities” on our balance sheet) which increased to $52,000 as of September 30, 2013, as a result of the accretion of $4,000 as interest expense for the year then ended, increased again to approximately $63,000 as of September 30, 2014 as a result of the accretion of approximately $11,000 as interest expense for the year then ended and increased again to approximately $66,000 as of September 30, 2015 as a result of the accretion of approximately $3,000 as interest expense for the year then ended. Additional accretion after that date was not necessary since this approximately $66,000 liability is equal to the potential repurchase of 164,000 shares at $0.40 per share - we satisfied our obligation with respect to 16,000 shares by our reimbursement of the shortfall upon a single holder’s resale of those shares in the market, which payment we recorded as interest expense in fiscal 2014.

 

The closing ONSM share price was $0.17 per share as of November 30, 2014, which would trigger the above repurchase obligation. However, this repurchase obligation is subject to the Intella2 Common Stock being still held by the investor(s) at such date and the investor giving us notice and delivering the shares within fifteen days after such date, as well as any other legal restrictions with respect to our repurchase of shares. It is possible that some or all of this repurchase obligation could be avoided by us due to the failure of the investor or investors to formally present the shares to us and/or provide notice by the specified date, or as a result of legal restrictions with respect to our repurchase of shares. However, because of our ongoing discussions with certain of these investors, including past discussions with respect to debt principal and/or interest payments in arrears to them and our communications to them at the time that we would not be in a position to honor this repurchase obligation for some of the same reasons we were in arrears on debt principal and/or interest payments, it is possible those investors could assert mitigating circumstances under which we might honor all or part of this repurchase obligation. Therefore, pending our further evaluation of our position with respect to this repurchase obligation, we are leaving the $66,000 accrued liability on our financial statements as of September 30, 2015 and March 31, 2016.

 

We paid (i) financing fees in cash of $16,000 to a third-party agent, related to $200,000 of this financing, and (ii) a commission of 100,000 unrestricted common shares to another third-party agent, which is related to the entire $350,000 cash portion of the financing as well as to potential additional financing which may be raised under these terms. The value of the Intella2 Common Stock, plus the value of common stock issued and cash paid for related financing fees and commissions, was reflected as a $117,400 discount against the Intella2 Investor Notes (as well as a corresponding increase in additional paid-in capital for the shares) and that amount was partially amortized as interest expense over the term of the notes through June 30, 2013, resulting in an effective interest rate of approximately 26% per annum.

 

57


 

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)


Intella2 Investor Notes (continued)

 

We wrote-off the remaining unamortized discount related to the Intella2 Fuse Note as a non-cash debt extinguishment loss as of March 31, 2013 and as a result, the effective interest rate of the Intella2 Fuse Note after that date was 12% per annum, with the effective interest rate for the other Intella2 Investor Notes remaining at approximately 26% per annum through November 30, 2014, at which point it also reduced to 12% per annum.

 

With respect to the Intella2 Investor Note held by Fuse, we concluded that there was less than a 10% difference between the present value of the cash flows of Intella2 Investor Note held by Fuse after its February 28, 2015 modification versus the present value of the cash flows under the payment terms in place one year earlier, which 10% is the threshold over which extinguishment accounting is required under the provisions of ASC 470-50-40. Accordingly, accounting for this modification as an extinguishment of debt was not required. The comparison of the present value of cash flows under the modified terms is normally done using the present value of cash flows under the terms existing immediately before the modification. However, under the provisions of ASC 470-50-40, if a modification was done less than a year ago that was not considered substantially different, then the comparison of current terms should be to the terms existing one year prior to the current modification. Since the April 2014 modification of this note was not considered to be an extinguishment, we utilized the terms established as a result of the March 2013 modification. With respect to the other Intella2 Investor Note, since there was no remaining unamortized discount with respect to this note as of February 28, 2015, we concluded that no further evaluation of the February 28, 2015 modification with respect to loan extinguishment accounting would be required.

 

With respect to the due diligence fees earned by the certain holders of Intella2 Investor Notes in connection with  February 28, 2015 amendments (i) we determined one of these due diligence fees for $5,000 to be immaterial for recording as additional discount and subsequent periodic amortization and thus we expensed as interest as of the date of the amendment and (ii) the other due diligence fee for $20,000 was recorded as a discount against the Intella2 Fuse Note and is being amortized as interest expense over the approximately one year extension period, resulting in an effective interest rate of approximately 21% per annum.

 

The aggregate unamortized portion of the debt discount recorded against the Intella2 Investor Notes was $13,401 and $8,333 as of March 31, 2016 and September 30, 2015, respectively. The portion of this unamortized discount which related to the portion of this debt classified as a convertible debenture was $11,168 and $7,576 as of March 31, 2016 and September 30, 2015, respectively.

 

In connection with the October 15, 2015 agreement extending the maturity date of the Intella2 Fuse Note to July 15, 2016, we issued 75,000 restricted common shares to Fuse, such shares having a fair value of approximately $14,000.

 
58

 

 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 4: DEBT (Continued)

 

Notes and Leases Payable (continued)

 

USAC Note

 

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 “USAC Note”). This letter agreement promissory note is related to our liability for USF contribution payments previously reflected as an accrued liability on our balance sheet and therefore resulted in the May 2015 reclassification of a portion of that accrued liability to notes payable. USAC is a not-for-profit corporation designated by the Federal Communications Commission (“FCC”) as the administrator of the USF program. See notes 1 and 5.

 

Minimum Cash Payments

 

The minimum cash payments required for the convertible debentures, notes payable and capitalized lease obligations listed above, before deducting unamortized discount and excluding interest, are as follows:

 

Year Ending March 31:

2017

$

3,579,044

2018

 

20,607

Total minimum debt payments

$

3,599,651

 

The Line is included in the table above as a $1,650,829 payment during the year ending March 31, 2017, based on its balance sheet classification as a current liability, although we have renewed the Line through December 31, 2017, with an option to extend it through December 31, 2018, as discussed in more detail under “Line of Credit Arrangement” above.


59


 

ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 5:  COMMITMENTS AND CONTINGENCIES

 

Employment contracts and severance

 

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

 

After annual increases in prior years as set forth in the employment agreements, the contractual annual base salaries for the five Executives in aggregate as of September 30, 2015 was approximately $1.8 million, subject to a five percent (5%) increase on September 27, 2016 and each year thereafter – a portion of these contractual salaries are presently not being paid to the Executives 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” – the liability is approximately $677,000 and $681,000 as of September 30, 2015 and March 31, 2016, respectively. 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. In addition, each of the Executives receives an auto allowance payment of $1,000 per month, a “retirement savings” payment of $1,500 per month and an annual reimbursement of dues or charitable donations up to $5,000.  We also pay insurance premiums for the Executives, including medical, life and disability coverage. These agreements contain certain non-disclosure and non-competition provisions and we have agreed to indemnify the Executives in certain circumstances.

 

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

 

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

 

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2016

 

 

NOTE 5:  COMMITMENTS AND CONTINGENCIES (Continued)

 

Employment contracts and severance (continued)

 

In connection with the settlement of certain unpaid salary and other amounts due to the Executives, we (as authorized by our Board of Directors) and the Executives agreed, effective January 22, 2013 to issue 1,700,000 (340,000 per Executive) fully vested ONSM common shares, subject to certain trading restrictions (the “Executive Shares”).  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.

 

As of September 30, 2013, we determined that our share price had remained below $0.29 per share for a sufficient period that it was appropriate to record a liability for this repurchase commitment. Therefore, based on the $0.27 closing ONSM share price as of September 30, 2013, we recorded this $34,000 obligation as a liability on our financial statements as of that date (under the caption “Amounts due to directors and officers” on our balance sheet), which was reflected as non-cash compensation expense for the year then ended. Based on the closing ONSM price of $0.16 per share as of September 30, 2014, we increased the $34,000 liability initially recorded by us by recognizing approximately $187,000 of non-cash compensation expense for the year ended September 30, 2014, which resulted in an approximately $221,000 liability on our financial statements as of that date. Based on the closing ONSM price of $0.21 per share as of September 30, 2015, we recognized an approximately $85,000 reduction of non-cash compensation expense for the year ended September 30, 2015, which resulted in an approximately $136,000 liability on our financial statements as of that date. Based on the closing ONSM price of $0.13 per share as of March 31, 2016, we recognized approximately $136,000 of non-cash compensation expense for the six months ended March 31, 2016 (zero for the three months then ended), which resulted in an approximately $272,000 liability on our financial statements as of that date. If the closing ONSM share price of $0.18 per share on October 7, 2016 was used as a basis of calculation, our obligation for this shortfall payment would be $187,000, or the equivalent in common shares.

 

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016

 

 

NOTE 5:  COMMITMENTS AND CONTINGENCIES (Continued)

 

Other compensation

 

On August 11, 2009 our Compensation Committee determined that in the event we were sold for a company sale price (as defined) that represented at least $6.00 per share (adjusted for recapitalization including but not limited to splits and reverse splits), cash compensation of two and one-half percent (2.5%) of the company sale price would be allocated equally between the then four outside Directors, as a supplement to provide appropriate compensation for ongoing services as a Director and as a termination fee, as well as one additional executive-level employee other than the Executives. In June 2010, one of the four outside Directors passed away (and was replaced in April 2011) and in January 2013 another one of the four outside Directors resigned (who is not expected to be replaced). In January 2013 the Board voted to terminate this compensation program, in conjunction with the termination of a similar compensation program for the Executives. Although the termination of the program for the Executives was in consideration of a new Executive Incentive Plan agreed on between the Company and the Executives, as of October 28, 2016 it has not yet been determined what the replacement compensation program will be, if any, for the outside Directors and the other executive-level employee in lieu of the terminated program.

 

Lease commitments

 

As of March 31, 2016, we were obligated under operating leases for five office locations (one each in Pompano Beach, Florida, San Francisco, California and Colorado Springs, Colorado and two in the New York City area), which called for monthly payments totaling approximately $54,000. The leases have expiration dates ranging from 2016 to 2022 (after considering our rights of termination) and in most cases provide for renewal options.

 

The operating lease for our principal executive offices in Pompano Beach, Florida expired September 15, 2013. The monthly base rental is currently approximately $21,100 (including sales taxes and our share of property taxes, insurance and other operating expenses incurred under the lease but excluding operating expenses such as electricity paid by us directly). The lease provided for two percent (2%) annual increases, as well as one two-year renewal option, with a three percent (3%) rent increase in year one. Although we notified the landlord of our exercise of the renewal option, the landlord never confirmed that we have met the conditions for such renewal, and this renewal period expired September 15, 2015. Accordingly, payments for this lease, which we have considered to be on month-to-month status since September 15, 2015, do not appear in the table of future minimum lease payments as presented below. Also, although approximately eleven months of unpaid rent is included as a liability on our balance sheet as of March 31, 2016, these amounts also do not appear in the table of future minimum lease payments as presented below. As of October 28, 2016, our rent payments remain in arrears, by approximately twelve months, and we are in negotiations with the landlord with respect to this obligation and the terms of our continuing tenancy at that location.

 

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

 

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ONSTREAM MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2016

 

 

NOTE 5:  COMMITMENTS AND CONTINGENCIES (Continued)

 

Lease commitments (continued)

 

The operating lease for our office space in New York City expires January 24, 2018.  The monthly base rental is approximately $8,600 with annual increases up to 2.8%. The lease provides one two-year renewal option at the greater of the fifth year rental or fair market value.

 

The operating lease for our office space in San Francisco expires September 30, 2018. The monthly base rental is approximately $5,600 (excluding month-to-month parking) with annual increases of approximately 3.0%. We are also responsible for a pro-rata portion of any increase in the building real estate taxes and operating expenses, both as defined in the lease, as compared to calendar 2014.

 

The operating lease for our office space in Colorado Springs, Colorado, a short-term lease with a remaining maturity of less than one year, has a monthly base rental of approximately $1,100.

 

Total rental expense (including executory costs) for all operating leases was approximately $403,000 and $404,000 for the six months ended March 31, 2016 and 2015, respectively and was approximately $200,000 and $204,000 for the three months ended March 31, 2016 and 2015, respectively. Rental expense is classified in our financial statements under Other General and Administrative Operating Expenses.

 

The future minimum lease payments required under the non-cancelable operating leases are as follows: